AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 25, 1996
REGISTRATION NO. 333-12135
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 4 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------------
UOL PUBLISHING, INC.
(Exact name of registrant as specified in its charter)
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<CAPTION>
<S> <C> <C>
Delaware 8299 54-1290319
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
--------------------
8251 Greensboro Drive, Suite 500
McLean, Virginia 22102
(703) 893-7800
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
--------------------
Narasimhan P. Kannan, Chief Executive Officer
UOL Publishing, Inc.
8251 Greensboro Drive, Suite 500
McLean, Virginia 22102
(703) 893-7800
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
Copies to:
Larry E. Robbins, Esq. Eric A. Stern, Esq.
Donald R. Reynolds, Esq. Latham & Watkins
Wyrick, Robbins, Yates & Ponton L.L.P. 1001 Pennsylvania Avenue, N.W.
4101 Lake Boone Trail, Suite 300 Suite 1300
Raleigh, North Carolina 27607 Washington, D.C. 20004
(919) 781-4000 (202) 637-2200
--------------------
Approximate date of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
--------------------
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<PAGE>
CALCULATION OF REGISTRATION FEE
=====================================================================================================================
Proposed maximum Proposed maximum
Title of each class of Amount to be offering price aggregate Amount of
securities to be registered registered(1) per share(2) offering price (2) registration fee (3)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value per
share............................. 1,644,500 shares $ 15.00 $24,667,500 $ 8,501
====================================================================================================================
</TABLE>
- ----------
(1) Includes 214,500 shares issuable upon exercise of an option granted to the
Underwriters solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Previously paid.
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.
================================================================================
<PAGE>
SUBJECT TO COMPLETION
DATED NOVEMBER 25, 1996
1,430,000 SHARES
UOL
PUBLISHING, INC.
[LOGO]
COMMON STOCK
--------------------
All of the 1,430,000 shares of Common Stock offered hereby are being sold by
UOL Publishing, Inc., a Delaware corporation (the "Company"). Prior to this
offering, there has been no public market for the Common Stock of the Company.
It is currently anticipated that the initial public offering price will be
between $13.00 and $15.00 per share. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price.
The Company has applied to have the Common Stock approved for quotation and
trading on the Nasdaq National Market under the symbol "UOLP."
The Common Stock offered hereby involves a high degree of risk. See
"Risk Factors" beginning on page 6.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
- --------------------------------------------------------------------------------
Per Share ................. $ $ $
Total(3) .................. $ $ $
================================================================================
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of the offering payable by the Company estimated
at $950,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to 214,500 additional shares of
Common Stock for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
--------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, subject to
their right to withdraw, cancel or reject orders in whole or in part and subject
to certain other conditions. It is expected that delivery of the certificates
representing the shares will be made against payment at the office of Friedman,
Billings, Ramsey & Co., Inc. at 1001 19th Street North, 10th Floor, Arlington,
Virginia 22209 or through the facilities of The Depository Trust Company, on or
about , 1996.
--------------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is , 1996
<PAGE>
http://www.uol.com
UOL Publishing, Inc. is a
provider of on-demand
and interactive web-
based courseware.
[LOGO]
UOL serves the academic
and corporate education
markets through the World
Wide Web or corporate
intranets.
[The above graphics display the Company's logo beneath a brown triangle and
surrounded by six green globes detailing the following components of the
Company's business: students, instructors, authors, content providers, academic
partners and business partners, superimposed upon a three-dimensional floor
plan]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BEEFFECTED IN THE OVER-THE-COUNTER MARKET
(INCLUDING THE NASDAQ NATIONAL MARKET) OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Except as otherwise noted herein, all information
in this Prospectus: (i) gives effect to a 1-for-11.76812037 reverse stock split
of the Company's outstanding Common Stock, Series A Preferred Stock and Series B
Preferred Stock (collectively the "Preferred Stock") effected on November 20,
1996 (ii) reflects the conversion of the Company's outstanding Preferred Stock
into an aggregate of 840,667 shares of Common Stock upon the consummation of
this offering; (iii) reflects the mandatory exercise of warrants to purchase
67,980 shares of Common Stock at an exercise price of $8.83 per share, the
issuance of warrants to purchase an aggregate of 15,687 shares of Common Stock
at an exercise price per share equal to the initial public offering price per
share and repayment, out of the proceeds of such mandatory warrant exercise, by
the Company of convertible debt in the aggregate principal amount of $300,000
upon consummation of this offering pursuant to the Furst Transactions (see
"Certain Transactions"); (iv) reflects conversion of additional convertible debt
in the aggregate principal amount of $130,000 into an aggregate of 14,938 shares
of Common Stock upon consummation of this offering pursuant to the Jones
Transactions (see "Certain Transactions"); and (v) assumes that the
Underwriters' over-allotment option is not exercised. Investors should carefully
consider the information set forth under the heading "Risk Factors."
THE COMPANY
UOL Publishing, Inc. ("UOL" or the "Company") believes it is a leading
publisher of high quality, interactive and on-demand educational courseware for
the online education and training market through the World Wide Web ("Web"). The
Company introduced its first Web-based demonstration course in November 1995,
and its first revenue-generating Web-based course in Spring 1996. The Company is
building its courseware library through a combination of strategic acquisitions
and partnering with academic institutions and business partners. The Company's
existing courseware library includes approximately 60 academic and professional
courses in subject matter areas such as business, management, finance,
accounting and technology, and approximately 145 training modules for
industry-specific employee training in subject matter areas such as basic
technical and development skills. The Company converts courses and training
modules that it believes are proven and popular in these diverse subject matter
areas to the Company's interactive, online format. The Company offers its
courseware primarily to part-time students and working adults in partnerships
with academic institutions and business partners. The Company plans to develop
and expand its network of academic and business partners, its portfolio of
courseware and related products, and its distribution system as rapidly as
possible.
The Company's courseware benefits from the structural changes in the way
content can be managed, delivered and consumed that were caused by the advent of
the Web and online technologies. The Company believes that its online courseware
combines convenience, affordability, self-pacing, standardized curricula,
individualized tailoring of courses, immediate performance measurement and a
high degree of student-teacher interaction. These characteristics are designed
to address the educational needs of part-time students and working adults, which
constitute a rapidly growing segment of the education market, primarily as a
result of rising tuition for full-time programs and the demand for increasing
skills required by employers.
The Company's strategy involves the following key elements: building the
Company's content library of high quality, high demand courseware; leveraging
strategic partnerships; expanding through acquisitions; developing brand
recognition and proprietary technology; and capitalizing on cross-marketing
opportunities. The Company plans to expand its existing courseware library with
market-tested, high quality products focused on subject areas in high demand by
part-time students and working adults. Part of the Company's strategy is to
enter into strategic partnerships to develop online courseware and offer it to
partners' students. The Company believes that by pursuing this strategy with a
network of academic partners, such as Park College, California State University
Institute, New York
3
<PAGE>
University, The George Washington University, George Mason University and
University of Toledo, and business partners, such as Autodesk, Inc.
("Autodesk"), Graybar Electric Company, Inc. and Thomas & Betts Corporation, it
will be able to leverage its partners' strengths and accelerate awareness and
acceptance of its online educational content, which could provide opportunities
for increased Company revenue from student fees. In addition to the Company's
acquisitions of the CYBIS division of Control Data Systems, Inc., formerly
Control Data Corporation ("Control Data"), and Cognitive Training Associates,
Inc. ("CTA"), the Company plans to make additional acquisitions which management
believes will provide critical additions to the Company's courseware library and
user audience. The Company believes that establishing and maintaining brand
recognition is critical to its strategy and plans to achieve brand recognition
through marketing efforts and the creation of a proprietary user interface,
which incorporates audio, animation, graphics and text as appropriate to create
a stimulating learning experience. The Company's approach of developing
Web-based education and training sites for institutions and businesses provides
it with cross-marketing opportunities.
Under the current business model, UOL's revenues are derived from three
primary sources: licensing and support revenues; online revenues; and
development and other revenues. Licensing and support revenues consist primarily
of monthly fees generated by the licensing and maintenance of the CYBIS
courseware and CTA licensing and support fees. Online revenues consist primarily
of the Company's percentage of the revenues paid by students to enroll in the
Company's online courses through its academic and business partners. Online
revenues are also expected to include the Company's percentage of the revenues
derived from the sale of products and services at commercial web-sites managed
by the Company. Development and other revenues consist primarily of fees paid to
the Company for developing courseware.
In Fall (August through December) 1996, the Company introduced nine new
Web-based courses that are accredited or certified through three of its academic
partners and one business partner. During 1997, the Company plans to introduce
approximately 40-50 additional courses through its current and potential new
academic and/or business partners. During the first nine months of 1996
applications produced and managed by CTA have been available on intranets, or
private networks, through CTA's strategic partners to a potential audience of
approximately 25,000 students. An average of approximately 2,000 students
complete CTA modules each month. The Company anticipates that the number of
modules offered by CTA and the number of business partners of CTA will increase
in 1997.
The Company has entered into an agreement with Autodesk, a personal computer
("PC") software company with more than three million users and total sales of
software and related products for the fiscal year ended January 31, 1996 in
excess of $546,000,000, to build a "virtual campus" system. The virtual campus
is expected to consist of a "bookstore" which will offer products, services and
online courseware developed by Autodesk-authorized training centers, authorized
educational resellers and developers (sometimes with the assistance of the
Company). In addition, the virtual campus will provide users access to new
software product demonstrations, new software product releases and an
opportunity to participate in software certificate and assessment programs. In
1995, one million students took Autodesk courses through various institutions,
including 50,000 Autodesk users who attended courses at authorized training
centers. In 1997, the Company anticipates that a portion of these courses will
be taken by Autodesk users online, and other Autodesk software and related
products will be purchased through the virtual campus.
UOL Publishing, Inc. was incorporated in Virginia in July 1984 and
reincorporated in Delaware in March 1985. The Company's principal executive
offices are located at 8251 Greensboro Drive, Suite 500, McLean, Virginia 22102,
its telephone number at that address is (703) 893-7800, and its web-site is
located at http://www.uol.com. Unless the context otherwise requires, "UOL" and
the "Company," as used in this Prospectus, refer to UOL Publishing, Inc. and its
wholly owned subsidiary, Cognitive Training Associates, Inc., a Texas
corporation.
4
<PAGE>
THE OFFERING
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<S> <C>
Common Stock offered by the Company................... 1,430,000 shares
Common Stock to be outstanding after this offering ... 3,184,415 shares(1)
Use of Net Proceeds................................... Repayment of debt, working capital and
other general corporate purposes.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol................ "UOLP."
</TABLE>
- ----------
(1) Reflects the conversion of the Company's outstanding Preferred Stock into
an aggregate of 840,667 shares of Common Stock upon consummation of this
offering and assumes no exercise of stock options or warrants or conversion
of convertible debt after October 31, 1996, except with respect to the
Furst Transactions and the Jones Transactions. As of October 31, 1996,
there were: (i) outstanding options to purchase an aggregate of 378,036
shares of Common Stock under the Company's stock plans at a weighted
average exercise price of $9.53 per share; and (ii) warrants to purchase an
aggregate of 476,369 shares of Common Stock, at a weighted average exercise
price of $9.80 per share. See "Capitalization," "Management--Stock Plans,"
"Certain Transactions" and "Description of Capital Stock." After giving
effect to the (a) exercise of all such options and warrants, and (b)
issuance and exercise of warrants to purchase 73,172 shares of Common Stock
issuable to InternetU, Inc. (see "Business--Strategic Partners--Autodesk
and Other Business Partners"), the fully diluted number of shares of Common
Stock to be outstanding after this offering would be 4,111,992.
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ --------------------
1993 1994 1995 1995 1996
-------- ---------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues ..................... $ 288 $ 806 $ 548 $ 409 $ 443
Loss from operations ............. (265) (1,030) (2,291) (1,400) (3,605)
Net loss.......................... (414) (687) (2,240) (1,330) (3,449)
Pro forma net loss per share(1) (1.77) (2.30)
Pro forma weighted average shares
outstanding(1).................. 1,363 1,605
</TABLE>
AT SEPTEMBER 30, 1996 (UNAUDITED)
---------------------------------
PRO FORMA
PRO AS
ACTUAL FORMA(2) ADJUSTED(3)
---------- ---------- -----------
Balance Sheet Data:
Working capital (deficit)............. $ (337) 393 18,061
Total assets ......................... 3,945 4,245 21,014
Total liabilities..................... 3,148 2,718 1,819
Redeemable convertible Preferred
Stock................................. 3,343 -- --
Accumulated deficit................... (10,191) (10,195) (10,195)
Total stockholders' equity (deficit) . (2,546) 1,527 19,195
- ----------
(1) See Note 2 of Notes to UOL Financial Statements.
(2) Gives effect to (i) the conversion of all shares of Preferred Stock into
Common Stock upon completion of this offering, (ii) the declaration,
issuance and conversion of Preferred Stock dividends, (iii) the Furst
Transactions, and (iv) the Jones Transactions.
(3) Adjusted to give effect to the sale by the Company of the 1,430,000 shares
of Common Stock offered hereby at an assumed initial public offering price
of $14.00 per share, and the application of the net proceeds therefrom. See
"Use of Proceeds."
--------------------
UOL, Chalkboard, the Virtual Workforce and the slogan "What you think...is
our business" are registered trademarks of the Company and UOL Publishing,
University Online, Courseware Construction Set, Registrar Architect, Test
Architect and the Company logo are trademarks of the Company. This Prospectus
may also include trade names and trademarks of other companies.
5
<PAGE>
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS,
INCLUDING WITHOUT LIMITATION THE RISK FACTORS SET FORTH BELOW AND THE MATTERS
SET FORTH IN THIS PROSPECTUS GENERALLY.
RISK FACTORS
An investment in the Common Stock offered hereby is speculative in nature and
involves a high degree of risk. In addition to the other information contained
in this Prospectus, the following factors should be considered carefully in
evaluating the Company and its business before purchasing the Common Stock
offered hereby.
Limited Operating History in Targeted Market; Anticipation of Continued
Losses. The Company has achieved only limited revenues to date, and its ability
to generate significant revenues is subject to substantial uncertainty. Although
the Company has been in existence since 1984, it changed its business focus in
1993 in response to, among other things, perceived market opportunities for
online education as a result of recent technological developments relating to
the Internet. The Company has incurred significant net losses since inception,
including net losses of $414,000, $687,000, $2,240,000 and $3,449,000 for the
years ended December 31, 1993, 1994 and 1995 and the nine months ended September
30, 1996, respectively. The Company expects to continue to incur significant
losses on a quarterly and annual basis at least through 1997. As of September
30, 1996, the Company had an accumulated deficit of $10,191,004 and a working
capital deficiency of $337,353. There can be no assurance that the Company will
achieve revenue growth or profitability. See "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Substantial Dependence on Third Party Relationships. The Company is
substantially dependent on relationships with its partners with respect to
acquisition of content and distribution of the Company's products and services.
To date, various content providers, including academic institutions and business
partners, have entered into agreements with the Company. Certain of these
agreements contain limits on the use of the courseware, do not address future
content and may be terminated by either party upon breach of any material
obligation or upon a bankruptcy, insolvency or similar filing. In addition, the
Company believes that it will be necessary in the future to license additional
courseware. There can be no assurance that the Company will be able to maintain
and modify, if necessary, its existing agreements or enter into agreements with
prospective content providers, or that the content providers will be satisfied
with the revenues received through arrangements with the Company. In particular,
the Company's planned introduction of additional courses depends upon its
relationships with current and anticipated future strategic partners. The
Company has no current understandings, commitments or agreements with any new
strategic partners, and it may not be successful in negotiating agreements with
new strategic partners in the future. Moreover, if the Company is required to
pay increased fees to its content providers, such increased payments will have
an adverse effect on the Company's results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Strategic Partners."
Distribution and positioning of the Company's products and services is
dependent upon their compatibility with web browsers provided by Netscape
Communications Corporation ("Netscape") and Microsoft Corporation ("Microsoft"),
and access to online networks through arrangements with Internet service
providers such as NETCOM On-Line Communications Services, Inc., PSI Net Inc. and
UUNET Technologies, Inc. The Company is also dependent on web-site operators
that provide links to the Company's web-sites. Although the Company views these
relationships as important direct and indirect factors in the generation of
revenues, most of the Company's arrangements do not require future commitments
to provide access or links to the Company's products or services, are not
exclusive and may be terminated at the convenience of the other party. Moreover,
the Company does not have agreements with web-site operators who provide links
to the Company's sites, and such web-site operators may terminate such links at
any time without notice to the Company. In addition, there can be no assurance
that the Company's partners regard their relationship with the Company as
important to their own respective businesses and operations, that they will not
reassess their commitment to the Company's
6
<PAGE>
products or services at any time in the future or that they will not develop
their own competitive products or services, that the products or services of
those companies that provide access or links to the Company's products or
services will achieve market acceptance or commercial success or that the
Company's existing relationships will result in successful product or service
offerings or the generation of significant revenues for the Company. Failure of
one or more of these entities to achieve or maintain market acceptance or
commercial success or the termination of one or more successful relationships
could have a material adverse effect on the Company. In addition, the
termination of the Company's position on a web browser or the grant to a
competitor of an exclusive arrangement with respect to positioning on a web
browser would significantly reduce traffic on the Company's web-sites which
would have a material adverse effect on the Company.
The Company's distribution strategy is to develop multiple distribution
channels. The Company sells its products through direct sales, the Internet and
its strategic partners. There can be no assurance that the Company will be able
to attract resellers and partners that will be able to market the Company's
products effectively and will be qualified to provide timely and cost-effective
customer support and service. In addition, certain of UOL's resellers and
partners may compete with one another and the Company, and the Company may also
be required to manage conflicts among its resellers and partners. For example,
certain of UOL's partners have required UOL 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 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 the Company.
Risks Associated with Acquisitions; Integration of Acquired Operations. As a
key component of its business strategy, the Company expects to make acquisitions
of, or significant investments in, complementary companies, products or
technologies, although no such acquisitions or investments are currently
pending. The Company, for example, recently acquired CTA. See
"Business--Acquisitions" and "Certain Transactions." 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. In addition, paying
for any future acquisitions with Company Common Stock or cash could result in
potential dilution to the value of the Company's Common Stock, require the
Company to raise additional financing, which may not be available on terms
favorable to the Company (see "Risk Factors--Future Capital Needs; Uncertainty
of Additional Funding"), and/or have an adverse effect on the Company's
liquidity. In pursuing this strategy, there can be no assurance that the Company
will 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 or any other problems encountered in connection with
acquisitions. See "Business--Growth Strategy" and "Business--Acquisitions."
Highly Competitive Market. 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 its competitors do not
currently offer Web-based, interactive, on-demand courseware, there are no
substantial barriers to entry in the online education and training market. A
number of the Company's existing competitors, as well as a number of potential
new competitors (including the Company's partners), have significantly greater
financial, technical and/or marketing resources than the Company. In addition,
the Company's partners could use information obtained from the Company to gain
an additional competitive advantage over the Company. There can be no assurance
that the Company's competitors will not 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. Moreover, there can be no assurance that
the Company will be able to compete successfully against its current or future
competitors or that competition will not have a material adverse effect on the
Company. See "Business--Competition."
Difficulties in Managing Rapid Growth; Dependence on Key Personnel. The
Company has experienced rapid growth and expansion which has placed a
significant strain on its administrative, operational and financial resources.
The Company's performance is substantially dependent on the
7
<PAGE>
performance of its executive officers and key employees, some of whom have
worked together for only a short period of time. 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 each on Narasimhan P. Kannan, Chairman of the Board of
Directors and Chief Executive Officer, and Carl N. Tyson, President and Chief
Operating Officer, and has employment agreements with certain of its executive
officers. See "Management--Executive Compensation--Employment Agreements."
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, train and retain a substantial number of new
technical, managerial, sales and marketing personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will be
able to attract, assimilate and retain such personnel. The Company's ability to
manage its growth successfully will also require the Company to expand its
administrative, operational, management and financial systems and controls. Such
expansion is expected to result in significantly increased operating expenses.
To the extent that such expenses precede any increase in revenues, the Company
will be materially adversely affected. There can be no assurance that such
expansion will be successfully completed or that the cost of such expansion will
not exceed the revenues, if any, generated. See "Business--Employees" and
"Management."
Significant Fluctuations in Quarterly Results; Economic Conditions. The
Company's expense levels are based in part on its expectations as to future
revenues. Quarterly sales and operating results generally depend on the
licensing and support revenues, online revenues and development and other
revenues recognized, which are difficult to forecast. The Company may not be
able to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall. Accordingly, any significant shortfall in relation to the
Company's expectations would have an immediate adverse impact on the Company.
The Company's operating results may fluctuate significantly in the future as
a result of a variety of factors, some of which are outside of the Company's
control. These factors include general economic conditions, 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 the Company or its competitors, the
mix of the products and services sold and the channels through which those
products and services are sold, and pricing changes. As a strategic response to
a changing competitive environment, the Company may elect from time to time to
make certain pricing, service or marketing decisions that could have a material
adverse effect on the Company. The Company believes that period-to-period
comparisons of its operating results should not be relied upon for an indication
of future performance. Due to all of the foregoing factors, it is possible that
in some future quarter, the Company's operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock would likely be materially adversely affected. See
"Risk Factors--No Prior Public Market; Possible Volatility of Stock Price" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Dependence on a Limited Number of Customers. A significant portion of the
Company's revenues to date have been derived from sales to a limited number of
customers. For example, in 1995, three Company customers, all of which were
users of CYBIS courseware, accounted for more than 10% of its revenues: the
Joint Committee on Computer-Based Instruction, 54%; Redstone Arsenal, 14%; and
the University of Massachusetts, 10%. In addition, substantially all of the
Company's revenues since January 1994 have been generated through the licensing
of CYBIS courseware. The Company currently anticipates that future revenues may
continue to be derived from sales to a limited number of customers, although the
Company's largest customers in the future may not be users of CYBIS courseware
because the Company believes that CYBIS revenues will not be substantial
compared to the Company's expected future revenues (although there can be no
assurance that the Company will be successful in generating significant revenues
from other sources). Accordingly, the cancellation or deferral of a small number
of contracts or license agreements would have a material adverse effect on the
Company. See "Business--Customers."
8
<PAGE>
Dependence on Online Distribution. 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. Such
networks have experienced, and are expected to continue to experience,
significant growth in the number of users and amount of traffic. There can be no
assurance that the infrastructures of such networks will continue to 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. There can be no assurance that the infrastructure
or complementary services necessary to make such networks viable commercial
marketplaces will be developed, or that if developed, such networks will become
viable commercial marketplaces for products and services such as those offered
by the Company. In particular, such networks are an unproven medium for
education. In the event such networks fail to become a viable education medium,
there can be no assurance the Company will 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. See "Business--Industry Background."
Capacity Constraints and System Failure. A key element of the Company's
strategy is to generate a high volume of online traffic to its products and
services. Accordingly, the performance of the Company's products and services is
critical to the Company's reputation, its ability to attract customers and
market acceptance of these products and services. Any system failure that causes
interruptions in the availability or increases response time of the Company's
products and services would result in less traffic to the Company's web-sites
and, if sustained or repeated, would reduce the attractiveness of the Company's
products and services. An increase in the volume of use of the Company's
products and services could strain the capacity of the software or hardware
deployed by the Company or the capacity of the Company's network infrastructure,
which could lead to slower response time. Any failure to expand the capacity of
the Company's hardware or network infrastructure on a timely basis or on
commercially reasonably terms would have a material adverse effect on the
Company. The Company is also dependent upon web browsers and Internet and online
service providers for access to its products and services and users may
experience difficulties due to system failures unrelated to the Company's
systems, products and services.
Security Risks. The Company has included in its products certain security
protocols which operate in conjunction with encryption and authentication
technology. Despite the existence of these technologies, the Company's 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 the Company's computer
systems and the computer systems of end-users, which may result in significant
liability to the Company and may also deter potential customers. For example,
computer "hackers" could remove or alter portions of the Company's 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 significant expenditures of capital and resources by
the Company and may cause interruptions, delays or cessation of service to the
Company and its customers. Moreover, the security and privacy concerns of the
Company and of existing and potential customers, as well as concerns related to
computer viruses, may inhibit the growth of the online marketplace generally,
and the Company's customer base and revenues in particular. The Company attempts
to limit its liability to customers, including liability arising from a failure
of the security features contained in the Company's products, through
contractual provisions limiting warranties and disallowing damages in excess of
the price paid for the products and services purchased. However, there can be no
assurance that such limitations will be enforceable. The Company currently does
not have product liability insurance to protect against these risks and there
can be no assurance that such insurance will be available to the Company on
commercially reasonable terms or at all. See "Business--Products and Services."
9
<PAGE>
Developing Market; Rapid Technological Changes and New Products. The market
for the Company's products and services is rapidly evolving in response to
recent developments relating to online technology and 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, there can be no assurance these trends will
continue. Furthermore, the rapid growth in the use of online networks has led to
cases of system overload and other failures. Therefore, reliability and quality
of service continue to be particularly critical issues for this developing
market. The Company's future success will depend in significant part on its
ability to continue to improve the performance, features and reliability of its
products and services in response to both evolving demands of the marketplace
and competitive product offerings, and there can be no assurance that the
Company will be successful in developing, integrating or marketing such products
or services. In addition, new product releases by the Company may contain
undetected errors that require significant design modifications, resulting in a
loss of customer confidence and adversely affecting the Company.
Limited Marketing Experience. The Company changed its business focus in 1993,
and therefore has limited marketing experience in its current industry. The
Company's direct marketing and sales staff consists of only seven full-time and
two part-time employees, none of whom have significant experience marketing in
the Company's developing industry. There can be no assurance that the Company
will be able to recruit or retain skilled marketing and sales personnel. In
addition to direct sales, the Company markets its products and services through
a variety of means, including the Internet, strategic marketing partners,
resellers and other arrangements. The Company relies to a large extent on its
academic and business partners to market its courseware to students. As such,
the Company's marketing will be dependent in part upon the efforts of third
parties, such as Internet service providers and the Company's partners and
resellers. There can be no assurance that such efforts will be successful or
that such parties will not reassess their commitment to the Company. See
"Business--Sales and Marketing."
Risks Related to 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 trademark and
copyright law, trade secret protection and confidentiality and/or license
agreements with its employees, customers, partners and others to protect its
proprietary rights. The Company has obtained registered trademarks in the United
States for UOL, Chalkboard, the Virtual Workforce and the slogan "What you
think...is our business" and has applied for the registration of certain of its
other trademarks, including University Online, Courseware Construction Set,
Registrar Architect, Test Architect and the UOL logo. The Company intends to
apply for registration of UOL Publishing. The Company will continue to evaluate
the registration of additional service marks and trademarks 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 technology. Any such litigation may be
time-consuming and costly, 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 upon
the Company. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company or at all. There can be no
assurance that the Company's means of protecting its proprietary rights will be
adequate or that the Company's competitors will not independently develop
similar technology or duplicate the Company's products or services or design
around patents or other 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
10
<PAGE>
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 plans to allow users to download 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. See "Risk Factors--Government Regulation and
Legal Uncertainties" and "Business--Trademarks and Proprietary Rights."
Future Capital Needs; Uncertainty of Additional Funding. The Company has
financed its operating cash flow needs primarily through private placements of
equity securities and, to a lesser extent, borrowings from stockholders. Through
September 30, 1996, net proceeds from the sale of the Company's equity
securities aggregated approximately $8,907,891. The Company may require
substantial additional capital to finance its future growth and fund its ongoing
operations beyond the next 12 months. The Company's capital requirements will
depend on many factors, including, but not limited to, acceptance of and demand
for the Company's products and services, the types of arrangements that the
Company may enter into with its partners and customers, and the extent to which
the Company engages in acquisitions or invests in new technology and research
and development projects. To the extent that the Company's existing sources of
liquidity and cash flow from operations are insufficient to fund the Company's
activities, the Company may need to raise additional funds. If additional funds
are raised through the issuance of equity securities, which can be done without
stockholder approval, the percentage ownership of the Company's stockholders
would be reduced. No assurance can be given that additional financing will be
available or that, if available, it will be available on terms favorable to the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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, and 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 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 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. See
"Business--Governmental Regulation and Legal Uncertainties."
Immediate and Substantial Dilution. At an assumed initial public offering
price of $14.00 per share, investors participating in this offering will incur
immediate, substantial dilution in pro forma net tangible book value of $8.19
per share. To the extent options and warrants to purchase the Company's Common
Stock are exercised, there may be further dilution to the new public investors.
See "Dilution."
Shares Eligible for Future Sale. The 1,430,000 shares of Common Stock offered
hereby will be freely tradeable without restriction in the public market. Taking
into account restrictions imposed by the Securities Act of 1933, as amended (the
"Securities Act"), rules promulgated by the Securities and
11
<PAGE>
Exchange Commission thereunder and "lock-up" agreements by which certain
stockholders are bound, (i) approximately 47,168 additional shares will be
eligible for immediate sale as of the date of the final prospectus relating to
this offering, (ii) approximately 3,229 additional shares will be eligible for
sale beginning 90 days after the date of the final prospectus relating to this
offering, (iii) approximately 27,336 shares will be eligible for sale beginning
as early as March and May 1997 pursuant to Rule 144 under the Securities Act;
and (iv) approximately 998,545 additional shares will be eligible for sale
beginning one year after the date of the final prospectus relating to this
offering. Approximately 678,137 remaining shares will not be eligible for sale
pursuant to Rule 144 until the expiration of their applicable two-year holding
periods, which will expire at various times through September 1998.
As of October 31, 1996, an additional 854,405 shares of Common Stock were
subject to outstanding options and warrants. Taking into account the lock-up
agreements, the number of shares that will be available for sale in the public
market upon exercise of these warrants or options, subject in some cases to the
volume and other restrictions of Rule 144, will be as follows: (i) approximately
250,155 additional shares will be eligible for sale beginning one year after the
date of the final prospectus relating to this offering; (ii) approximately
476,369 remaining shares issuable upon exercise of warrants will not be eligible
for sale pursuant to Rule 144 until the expiration of their applicable holding
periods, which will expire two years from their exercise dates; and (iii)
approximately 127,881 remaining shares issuable upon exercise of options will be
eligible for sale pursuant to Rule 701 upon the ratable vesting of such shares
at various times through August 1999. Friedman, Billings, Ramsey & Co., Inc.
may, in its sole discretion and at any time without notice, release all or any
portion of the shares subject to such lock-up agreements. The Company intends to
file a registration statement on Form S-8 under the Securities Act approximately
one year after the date of the final prospectus relating to this offering to
register an aggregate of up to 492,856 shares of Common Stock issued or reserved
for issuance to employees and consultants. Sales of substantial amounts of the
Company's Common Stock in the public market after this offering could adversely
affect prevailing market prices for the Common Stock and the Company's ability
to raise capital. See "Shares Eligible for Future Sale."
Potential Issuance of Preferred Stock; Anti-Takeover Provisions. The
Company's 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. The rights of the holders of the Common Stock 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. The issuance of the Preferred Stock
could have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company, thereby delaying,
deferring or preventing a change in control of the Company. Furthermore, such
Preferred Stock may have other rights, including economic rights, senior to the
Common Stock, and as a result, the issuance of such stock could have a material
adverse effect on the market value of the Common Stock.
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation and Bylaws could make it more difficult for a third party to
acquire, and could discourage a third party from attempting to acquire, control
of the Company. Certain of these provisions 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 effect certain corporate
actions. Such provisions could limit the price that certain investors might be
willing to pay in the future for shares of the Company's Common Stock and may
have the effect of delaying or preventing a change in control of the Company.
The Company may in the future adopt other measures that may have the effect of
delaying, deferring or preventing a change in control of the Company. Certain of
such measures may be adopted without any further vote or action by the
stockholders, although the Company has no present plans to adopt any such
measures. The Company is also afforded the protections of Section 203 of the
Delaware General Corporation Law, which could delay or prevent a change in
control of the Company, impede a merger, consolidation or other business
combination involving the Company or discourage a potential acquiror from making
a tender offer or otherwise attempting to obtain control of the Company. See
"Description of Capital Stock--Preferred Stock" and "--Delaware Law and
Limitations on Changes in Control."
12
<PAGE>
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. For example, in October 1996, The Roach Organization,
Inc. ("TRO"), from which Control Data received its license with respect to the
CYBIS courseware (which license was assigned to the Company in January 1994),
alleged unspecified violations by the Company of the terms of such license. TRO
demanded that the Company cease such alleged violations and compensate TRO for
unspecified alleged damages in connection therewith. This or any other claim,
even if not meritorious, could result in the expenditure of significant
financial and managerial resources. See "Business--Legal Proceedings."
Risk Associated With Use of Net Operating Loss Carryforwards. As of September
30, 1996, the Company had net operating loss carryforwards for federal income
tax purposes of approximately $7,814,000, which expire at various dates through
2011. The Company's ability to utilize its net operating loss and credit
carryforwards to offset future tax obligations, if any, may be limited by
changes in ownership. Any such limitation on the utilization of such net
operating loss carryforwards, to the extent it increases the amount of federal
income tax that the Company must actually pay, may have an adverse impact on the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--UOL Publishing, Inc.--Liquidity and Capital Resources."
No Prior Public Market; Possible Volatility of Stock Price. Prior to this
offering there has been no public market for the Common Stock. The initial
public offering price was determined by negotiations among the Company and the
representatives of the Underwriters. See "Underwriting." There can be no
assurance that an active public market will develop or be sustained after this
offering or that the market price of the Common Stock will not decline below the
initial public offering price. The market price of the Common Stock could be
subject to significant fluctuations in response to future announcements
concerning the Company or its partners or competitors, the introduction of new
products or changes in product pricing policies by the Company or its
competitors, proprietary rights or other litigation, changes in analysts'
earnings estimates, general conditions in the online distribution market,
developments in the financial markets and other factors. In addition, the stock
market has, from time to time, experienced extreme price and volume fluctuations
that have particularly affected the market prices for technology companies and
which have often been unrelated to the operating performance of the affected
companies. Broad market fluctuations of this type may adversely affect the
future market price of the Common Stock.
Broad Discretion in Allocation of Proceeds. The Company has not designated
any specific use for the majority of the net proceeds of this offering of
1,430,000 shares of Common Stock. Rather, the Company intends to use the
majority of the net proceeds for general corporate purposes, which may include
acquisitions. Accordingly, management will have significant flexibility in
applying the net proceeds of this offering. See "Use of Proceeds."
Absence of Dividends. The Company has never paid any cash dividends and does
not anticipate paying cash dividends in the foreseeable future. See "Dividend
Policy."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,430,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$17,668,600 ($20,461,390 if the Underwriters' over-allotment option is exercised
in full), at an assumed initial public offering price of $14.00 per share and
after deducting underwriter discounts and estimated offering expenses payable by
the Company.
The Company intends to use a portion of the net proceeds to repay debt of the
Company, including two notes payable to securityholders in the aggregate
principal amount of approximately $285,000, plus accrued interest, and accrued
wages to current and former officers and employees of the Company in the net
amount of approximately $290,000. Such remaining net proceeds will be used for
general corporate purposes, including working capital.
Portions of such remaining net proceeds may also be used to acquire or invest
in businesses or products or to acquire complementary technologies. While from
time to time the Company evaluates potential acquisitions of such businesses,
products or technologies, there are no understandings, commitments or agreements
with respect to any acquisition of other businesses, products or technologies.
Pending such uses, the Company may invest such net proceeds in short-term,
investment-grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. It is the present policy of the Company to retain earnings to finance the
growth and development of its business and, therefore, the Company does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
In addition, certain provisions of the Company's existing indebtedness prohibit
or limit the Company's ability to pay cash dividends on its Common Stock.
14
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1996, (i) the Company's
actual short-term debt and capitalization, (ii) the Company's pro forma
short-term debt and capitalization after giving effect to (A) the conversion of
all outstanding shares of Preferred Stock into Common Stock, (B) the Furst
Transactions, (C) the Jones Transactions, and (D) the declaration, issuance and
conversion of Preferred Stock dividends, all of which are to occur upon
completion of this offering, and (iii) the Company's pro forma short-term debt
and capitalization, as adjusted to give effect to the sale by the Company of the
1,430,000 shares of Common Stock offered hereby (after deducting estimated
underwriting discount and offering expenses payable by the Company) and the
application of the net proceeds thereof. See "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA ADJUSTED
---------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Loans payable to related parties .................................... $ 715 $ 285 $ --
Notes payable........................................................ 228 228 228
Short-term borrowings................................................ 112 112 112
Accrued interest..................................................... 182 182 106
---------- ----------- -----------
Total short-term debt................................................ 1,237 807 446
Redeemable convertible Preferred Stock, $0.01 par value:
Series B, 6,000,000 shares authorized, 185,877 shares issued and
outstanding (1).................................................... 3,343 -- --
Series B-1, 6,000,000 shares authorized, no shares issued and
outstanding........................................................ -- -- --
Stockholders' equity (deficit):
Series A convertible Preferred Stock, $0.01 par value; 12,000,000
shares authorized, 402,960 shares issued and outstanding on an
actual basis; no shares issued and outstanding, on a pro forma or
pro forma as adjusted basis ....................................... 4 -- --
Undesignated Preferred Stock, $0.01 par value; 10,000,000 shares
authorized, no shares issued or outstanding........................ -- -- --
Common Stock, $0.01 par value; 36,000,000 shares authorized, 830,830
shares issued and outstanding on an actual basis; 1,754,415 shares
issued and outstanding, on a pro forma basis; 3,184,415 shares
issued and outstanding, on a pro forma as adjusted basis(1) ........ 8 18 32
Additional paid-in capital ........................................... 7,633 11,704 29,358
Accumulated deficit................................................... (10,191) (10,195) (10,195)
---------- ----------- -----------
Total stockholders' equity (deficit).................................. (2,546) 1,527 19,195
---------- ----------- -----------
Total capitalization.................................................$ 2,034 $ 2,334 $ 19,641
========== =========== ===========
</TABLE>
- ----------
(1) Actual capitalization excludes (i) 288,916 shares reserved for issuance
under the Company's Amended and Restated Stock Option Plan (the "Option
Plan") and 135,960 shares reserved for issuance under the Company's 1996
Stock Plan (the "1996 Plan"), (ii) 521,313 shares issuable upon exercise of
warrants at a weighted average exercise price of $10.65 per share, and
(iii) 14,729 shares issuable upon conversion of $130,000 in convertible
debt of the Company upon consummation of the offering. As of the date of
this Prospectus, there were options to purchase 378,036 shares outstanding
under the Option Plan and the 1996 Plan at a weighted average exercise
price of $9.53 per share. See "Management--Stock Plans," "Certain
Transactions," "Description of Capital Stock--Warrants" and Note 10 of
Notes to UOL Financial Statements.
15
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of September 30, 1996
was $841,000 or $0.48 per share of Common Stock. Net tangible book value per
share represents total tangible assets less total liabilities divided by the
number of shares of Common Stock outstanding after giving effect to (A) the
conversion of all outstanding shares of Preferred Stock into Common Stock, (B)
the Furst Transactions, (C) the Jones Transactions, and (D) the declaration,
issuance and conversion of Preferred Stock dividends, all of which are to occur
upon completion of this offering (collectively, the "IPO Transactions"). After
giving effect to the sale of the 1,430,000 shares of Common Stock offered by the
Company hereby (at an assumed initial public offering price per share of $14.00)
and after deducting underwriting discount and estimated offering expenses, the
pro forma as adjusted net tangible book value of the Company as of September 30,
1996 would have been $18,509,000 or $5.81 per share, representing an immediate
increase in such net tangible book value of $5.33 per share to existing
stockholders and an immediate dilution of $8.19 per share to the new investors.
The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price per share........................... $14.00
Pro forma net tangible book value per share as of September 30,
1996............................................................ $0.48
Pro forma increase in net tangible book value per share
attributable to new investors................................... $5.33
Pro forma as adjusted net tangible book value per share after
this offering.................................................... $ 5.81
Pro forma dilution per share to new investors..................... $ 8.19
</TABLE>
The following table summarizes, as of September 30, 1996, the differences
between the number of shares of Common Stock purchased from the Company, the
total consideration and the average price per share paid by: (i) existing
stockholders; (ii) pro forma investors (the "Pro Forma Investors") in the IPO
Transactions; and (iii) the new investors purchasing shares of Common Stock in
this offering (at an assumed initial public offering price per share of $14.00
and before deducting underwriting discount and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------- -------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
Existing stockholders 1,419,667 44.6% $10,353,720 33.3% $ 7.29
Pro Forma Investors .. 334,748 10.5% 736,240 2.4% 2.20
New investors......... 1,430,000 44.9% 20,020,000 64.3% 14.00
------------ --------- -------------- --------- ---------------
Total.............. 3,184,415 100.0% $31,109,960 100.0%
============ ========= ============== =========
</TABLE>
The foregoing tables assume no exercise of stock options or warrants or
conversion of convertible debt after September 30, 1996, except with respect to
the Furst Transactions and the Jones Transactions. As of September 30, 1996,
there were outstanding options to purchase an aggregate of 378,036 shares of
Common Stock under the Company's stock plans at a weighted average exercise
price of $9.53 per share and warrants to purchase an aggregate of 476,369 shares
of Common Stock, at a weighted average exercise price of $9.80 per share. To the
extent options or warrants are exercised, there may be further dilution to the
new investors. See "Capitalization," "Management--Stock Plans," "Certain
Transactions," "Description of Capital Stock--Warrants" and Note 10 of Notes to
UOL Financial Statements.
16
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
financial statements and the notes thereto included elsewhere herein. The
statement of operations data set forth below with respect to the years ended
December 31, 1993, 1994 and 1995 and the balance sheet data as of December 31,
1994 and 1995, is derived from and is referenced to, the audited financial
statements of the Company included elsewhere in this Prospectus. The statement
of operations data set forth below with respect to the years ended December 31,
1991 and 1992 and the balance sheet data as of December 31, 1991, 1992 and 1993
is derived from financial statements not included in this Prospectus. The
statement of operations data set forth below with respect to the nine month
periods ended September 30, 1995 and 1996 and the balance sheet data as of
September 30, 1996 is derived from, and is referenced to, the unaudited
financial statements of the Company included elsewhere in this Prospectus. The
unaudited financial statements include all normal recurring adjustments that the
Company considers necessary for a fair presentation of its financial position
and results of operations. The results of operations for the nine month period
ended September 30, 1996 are not necessarily indicative of the results that may
be expected for the full year ending December 31, 1996, or any other future
period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------ -----------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- ---------- ----------- ----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues:
Licensing and support revenues........ $ -- $ -- $ -- $ 710 $ 416 $ 327 $ 326
Online revenues ...................... -- -- 14 14 56 42 63
Development and other revenues........ 899 404 274 82 76 40 54
--------- --------- --------- ---------- ----------- ----------- -----------
Total net revenues .................... 899 404 288 806 548 409 443
Costs and expenses:
Cost of revenues ..................... 534 146 64 146 94 69 112
Sales and marketing................... 230 178 130 296 933 551 1,048
Product development................... 175 132 151 206 576 412 840
General and administrative............ 303 268 207 890 927 549 1,981
Depreciation and amortization......... 10 9 1 298 309 228 67
--------- --------- --------- ---------- ----------- ----------- -----------
Total costs and expenses............... 1,252 733 553 1,836 2,839 1,809 4,048
Loss from operations................... (353) (329) (265) (1,030) (2,291) (1,400) (3,605)
Other income (expense) ................ -- -- 6 (6) 126 124 206
Interest expense....................... (97) (91) (155) (260) (75) (54) (50)
--------- --------- --------- ---------- ----------- ----------- -----------
Loss before extraordinary gain on debt
forgiveness........................... (450) (420) (414) (1,296) (2,240) (1,330) (3,449)
Extraordinary gain on debt
forgiveness........................... -- -- -- 609 -- -- --
Net loss............................... $ (450) $ (420) $ (414) $ (687) $(2,240) $(1,330) $(3,449)
========= ========= ========= ========== =========== =========== ===========
Net loss per share(1):
Loss before extraordinary gain on debt
forgiveness(1)..................... (0.65) (0.61) (0.60) (1.79) (2.24) (1.34) (3.34)
Extraordinary gain on debt
forgiveness(1)..................... -- -- -- 0.84 -- -- --
Net loss per share(1)............... $(0.65) $(0.61) $(0.60) $ (0.95) $ (2.24) $ (1.34) $ (3.34)
========= ========= ========= ========== =========== =========== ===========
Weighted average shares
outstanding(1)...................... 689 689 689 725 1,079 1,075 1,104
========= ========= ========= ========== =========== =========== ===========
Pro forma net loss per share(1) .... $ (1.77) $ (2.30)
=========== ===========
Pro forma weighted average shares
outstanding(1) ..................... 1,363 1,605
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1996
---------------------------------------------- ---------------------
PRO
1991 1992 1993 1994 1995 ACTUAL FORMA(2)
----------- ----------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit) ............ $(1,776) $(1,377) $(2,724) $(2,587) $(1,402) $ (337) $ 393
Total assets.......................... 117 254 352 879 613 3,945 4,245
Total liabilities..................... 1,989 2,554 3,075 3,158 1,887 3,148 2,718
Redeemable convertible Preferred
Stock................................. -- -- -- -- -- 3,343 --
Accumulated deficit .................. (2,957) (3,385) (3,807) (4,503) (6,742) (10,191) (10,195)
Total stockholders' deficit .......... (1,872) (2,300) (2,722) (2,279) (1,274) (2,546) 1,527
</TABLE>
- ----------
(1) Computed on the basis described in Note 2 of Notes to UOL Financial
Statements.
(2) Gives effect to (i) the conversion of all shares of Preferred Stock into
Common Stock upon completion of this offering, (ii) the declaration,
issuance and conversion of Preferred Stock dividends, (iii) the Furst
Transactions, and (iv) the Jones Transactions.
17
<PAGE>
UNAUDITED PRO FORMA COMBINED
STATEMENTS OF OPERATIONS
The pro forma combined statements of operations are based on available
information and on certain assumptions and adjustments described in the
accompanying notes which the Company believes are reasonable. The pro forma
combined statements of operations are provided for informational purposes only
and do not purport to present the results of operations of the Company had the
transactions assumed therein occurred on or as of the dates indicated, nor are
they necessarily indicative of the results of operations which may be achieved
in the future. The unaudited pro forma combined statements of operations should
be read in conjunction with "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" and the financial statements of the
Company, including the notes thereto, included elsewhere in this Prospectus.
PRO FORMA STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL ACQUISITION PRO FORMA
UOL(1) CTA(1) ADJUSTMENTS COMBINED
-------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Net revenues................................... $ 547,679 $770,064 $ -- $ 1,317,743
Operating expenses:
Cost of revenues.............................. 93,630 427,466 -- 521,096
Sales and marketing........................... 932,898 25,396 -- 958,294
Product development........................... 576,470 123,261 -- 699,731
General and administrative.................... 1,235,403 238,774 297,177 (2) 1,771,354
-------------- ------------ ------------- ---------------
Loss from operations........................... (2,290,722) (44,833) (297,177) (2,632,732)
Other income (expense):
Other income (expense)........................ 126,651 4,097 (4,097) 126,651
Interest expense.............................. (75,570) (40,703) 26,800 (3) (89,473)
-------------- ------------ ------------- ---------------
Loss before income taxes....................... (2,239,641) (81,439) (274,474) (2,595,554)
Income tax benefit............................. -- (36,377) -- (36,377)
-------------- ------------ ------------- ---------------
Net loss....................................... (2,239,641) (45,062) (274,474) (2,559,177)
Accrued dividends to preferred stockholders ... (174,889) -- -- (174,889)
-------------- ------------ ------------- ---------------
Net loss available to common stockholders ..... $(2,414,530) $(45,062) $(274,474) $(2,734,066)
============== ============ ============= ===============
Net loss per share(4)........................ $ (2.24) $ (2.44)
============== ===============
Weighted average shares outstanding(4) ...... 1,079,032 1,121,519 (5)
============== ===============
Pro forma net loss per share(4).............. $ (1.77) $ (1.94)
============== ===============
Pro forma weighted average shares
outstanding(4).............................. 1,363,459 1,405,946 (5)
============== ===============
</TABLE>
18
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL ACQUISITION PRO FORMA
UOL(6) CTA(6) ADJUSTMENTS COMBINED
-------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Net revenues................................... $ 442,875 $463,112 $ -- $ 905,987
Operating expenses:
Cost of revenues.............................. 112,451 175,929 -- 288,380
Sales and marketing........................... 1,048,284 20,482 -- 1,068,766
Product development........................... 839,762 131,321 -- 971,083
General and administrative.................... 2,047,071 172,253 76,796 (7) 2,296,120
-------------- ------------ ------------- ---------------
Loss from operations........................... (3,604,693) (36,873) (76,796) (3,718,362)
Other income (expense):
Other income ................................. 205,529 -- -- 205,529
Interest expense.............................. (49,541) (22,479) 16,750 (8) (55,270)
-------------- ------------ ------------- ---------------
Loss before income taxes....................... (3,448,705) (59,352) (60,046) (3,568,103)
Income tax benefit............................. -- (3,859) -- (3,859)
-------------- ------------ ------------- ---------------
Net loss....................................... (3,448,705) (55,493) (60,046) (3,564,244)
Accrued dividends to preferred stockholders ... (241,915) -- -- (241,915)
-------------- ------------ ------------- ---------------
Net loss available to common stockholders ..... $(3,690,620) $(55,493) $(60,046) $(3,806,159)
============== ============ ============= ===============
Net loss per share(4)........................ $ (3.34) $ (3.32)
============== ===============
Weighted average shares outstanding(4) ...... 1,103,899 1,146,386 (5)
============== ===============
Pro forma net loss per share(4).............. $ (2.30) $ (2.31)
============== ===============
Pro forma weighted average shares
outstanding(4).............................. 1,605,389 1,647,876 (5)
============== ===============
</TABLE>
- ----------
(1) Statement of operations for the year ended December 31, 1995.
(2) Adjustments to reflect (i) $122,371 of amortization expense related to
goodwill and other intangible assets (ii) $150,000 of bonus expense related
to the employment agreement with the former stockholder, and (iii) $60,000
of rent expense related to the building, pursuant to a lease agreement
executed with the owner of the building, who is also the former, sole
stockholder of CTA, and eliminates $35,194 of depreciation expense related
to the building, vehicles and certain equipment, which was not acquired by
the Company.
(3) Adjustment to eliminate $26,800 of interest expense related to the notes
payable associated with the building and vehicle.
(4) See Note 2 of Notes to UOL Financial Statements for a description of the
computation of the net loss per share and the weighted average shares
outstanding.
(5) Represents shares of Common Stock issued in connection with the CTA
acquisition as if the acquisition had occurred on January 1, 1995.
(6) Statement of operations for UOL Publishing, Inc. for the nine months ended
September 30, 1996 and Statement of Operations for CTA for the six months
ended June 30, 1996.
(7) Adjustments to reflect (i) $61,186 of amortization expense related to
goodwill and other intangible assets and (ii) $30,000 of rent expense
related to the building, pursuant to a lease agreement executed with the
owner of the building, who is also the former, sole stockholder of CTA and
eliminates $14,390 of depreciation expense related to the building, vehicle
and certain equipment, which was not acquired by the Company.
(8) Adjustment to eliminate $16,750 of interest expense related to the notes
payable associated with the building and vehicle.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
UOL PUBLISHING, INC.
The following presentation of management's discussion and analysis of the
Company's financial condition and results of operation should be read in
conjunction with the Company's financial statements, accompanying notes thereto
and other financial information appearing elsewhere in this Prospectus.
OVERVIEW
The Company believes it is a leading publisher of high quality educational
courseware for the online education and training market through the Web. The
Company offers its courseware to part-time students and working adults in
partnerships with academic institutions and business partners. The Company plans
to develop and expand its network of academic and business partners, its
portfolio of courseware and related products and its distribution system as
rapidly as possible.
The Company was formed in 1984 as IMSATT Corporation, a multimedia research
and development company. Through 1989, the Company developed and marketed
multimedia tools and services. In 1989, the Company began developing multimedia
courseware for the academic and business markets, and 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.
Since 1993, the Company has 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.
The Company introduced its first Web-based demonstration course in November
1995. Having demonstrated its ability to deliver online courseware through the
Web and recognizing the opportunity to be a leader in this market, the Company
began forming strategic partnerships with key academic institutions and business
partners to develop and market its online products and services. Under the
current business model, UOL's revenues are derived from three primary sources:
licensing and support revenues; online revenues; and development and other
revenues. Licensing and support revenues consist primarily of monthly fees
generated by the licensing and maintenance of the CYBIS courseware under the
Control Data subcontracts and CTA licensing and support fees. Online revenues
consist primarily of the Company's percentage of the revenues paid by students
to enroll in the Company's online courses through its academic and business
partners. Online revenues are also expected to include the Company's percentage
of the revenues derived from the sale of products and services at commercial
web-sites managed by the Company. Development and other revenues consist
primarily of fees paid to the Company for developing courseware. While
historically licensing and support revenues have represented a substantial
majority of the Company's revenues, the Company expects online revenues to
become the primary source of its revenues in the future.
In 1994, the Company acquired the CYBIS division of Control Data, together
with a perpetual non-exclusive license for the CYBIS courseware, for an
aggregate purchase price of $594,000 (as adjusted in August 1996, see Note 14 of
Notes to UOL Financial Statements), payable in cash and notes payable. As part
of this transaction, Control Data retained the hardware and proprietary
mainframe operating system used to deliver the CYBIS courseware and in other
aspects of Control Data's ongoing business, and the Company agreed to act as
subcontractor to Control Data to support CYBIS customers. This transaction was
accounted for under the purchase method of accounting. Since 1994, substantially
all of the Company's revenues have been generated through the licensing and
support of the CYBIS courseware. The revenues from servicing the CYBIS customer
base have been declining due to budgetary constraints of government agencies and
the continued migration of CYBIS customers away from mainframe applications.
While the Company expects to continue to derive CYBIS revenues for the next two
to three years, the Company believes such revenues will not be substantial
compared to the Company's expected future revenues. The Company believes that
Web-based courseware developed from the CYBIS courseware, to the extent not
restricted as to delivery method, may contribute to revenues in the future. See
"Business--CYBIS Business."
20
<PAGE>
In August 1996, the Company acquired, by merger, CTA, a provider of
technology-based online training products and services to academic institutions,
corporations and governmental agencies, in exchange for 42,487 shares of the
Company's Common Stock. Immediately prior to the merger, CTA transferred a
building, a vehicle, certain equipment and certain notes payable to its sole
stockholder. In addition, the Company issued options to purchase an aggregate of
22,091 shares of Common Stock (of which options to purchase 5,096 shares are
fully vested) to certain employees of CTA, including its former stockholder.
This transaction was accounted for as a purchase, and accordingly, the operating
results of CTA are included in the Company's financial statements from August 1,
1996. For a discussion of CTA's results of operations prior to July 1, 1996, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Cognitive Training Associates, Inc." The Company has recorded
goodwill and other intangibles in the amount of approximately $705,000 in
connection with the acquisition of CTA and is amortizing such goodwill and other
intangibles over ten and three years, respectively, beginning in 1996. Quarterly
amortization of such goodwill and other intangibles will be approximately
$13,000 and approximately $17,000, respectively. The Company believes that CTA
provides not only an established customer base, but also a critical addition of
content, particularly in the electrical, medical and scientific equipment
subject areas, which has enhanced the Company's courseware library. See
"Business--CTA Business."
The Company believes that its future financial performance will depend
substantially on its success in developing and distributing, on behalf of its
strategic partners, proprietary online courseware. The Company's ability
continually to add courses and students to its offerings, to attract and retain
accredited educational institutions and to enter into alliances with business
partners such as Autodesk will be material factors in determining the success of
the Company.
QUARTERLY RESULTS
The following table presents unaudited quarterly financial data for each of
the five quarters in the period ended September 30, 1996. This data has been
prepared on the same basis as the audited financial statements appearing
elsewhere in this Prospectus and, in the opinion of management, includes all
necessary adjustments (consisting only of normal recurring adjustments) to
present fairly the unaudited quarterly results, when read in conjunction with
the Company's audited financial statements and the notes thereto appearing
elsewhere in this Prospectus. The operating results for any quarter are not
necessarily indicative of the results of any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1995 1995 1996 1996 1996
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues:
Licensing and support
revenues.................... $ 70 $ 89 $ 84 $ 89 $ 152
Online revenues.............. 14 14 18 20 26
Development and other
revenues.................... 36 36 12 9 33
------------ ----------- ----------- ----------- ------------
Total net revenues.......... 120 139 114 118 211
Costs and expenses:
Cost of revenues ............ 24 24 24 22 66
Sales and marketing ......... 225 382 240 356 452
Product development ......... 183 165 202 173 465
General and administrative .. 246 377 195 318 1,468
Depreciation and
amortization................ 78 81 9 9 49
------------ ----------- ----------- ----------- ------------
Total costs and expenses.... 756 1,029 670 878 2,500
Loss from operations.......... (636) (890) (556) (760) (2,289)
Other income (expense):
Other income ................ -- 2 120 86 --
Interest income (expense).... (12) (22) (14) (20) (16)
------------ ----------- ----------- ----------- ------------
Net loss...................... $ (648) $ (910) $(450) $(694) $(2,305)
============ =========== =========== =========== ============
</TABLE>
21
<PAGE>
The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors. These factors
include, among others, the timing or introduction of, or enhancement to, the
Company's products and services, the demand for such products and services, the
timing of the introduction of products or services by the Company's competitors,
the extent and timing of market acceptance of online networks as an education
medium, the timing and rate at which the Company increases its expenses to
support projected growth, seasonality, competitive conditions in the industry
and general economic conditions. The Company believes that period-to-period
comparisons of its operating results are not meaningful and should not be relied
upon as any indication of future performance. Due to the foregoing factors,
among others, it is likely that the Company's future quarterly operating results
from time to time will not meet the expectations of market analysts or
investors, which may have an adverse effect on the price of the Company's Common
Stock.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of net revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ---------------------
1993 1994 1995 1995 1996
---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues:
Licensing and support revenues .. 0.0% 88.1% 75.9% 79.8% 73.5%
Online revenues.................. 4.9 1.8 10.2 10.3 14.2
Development and other revenues... 95.1 10.1 13.9 9.9 12.3
---------- --------- ---------- ---------- ----------
Total net revenues............. 100.0 100.0 100.0 100.0 100.0
---------- --------- ---------- ---------- ----------
Costs and expenses:
Cost of revenues ................ 22.4 18.1 17.1 16.9 25.4
Sales and marketing ............. 45.2 36.7 170.3 134.8 236.7
Product development ............. 52.4 25.6 105.3 100.8 189.6
General and administrative ...... 71.6 110.4 169.1 134.2 447.2
Depreciation and amortization.... 0.3 37.0 56.4 55.9 15.1
---------- --------- ---------- ---------- ----------
Total costs and expenses....... 191.9 227.8 518.2 442.6 914.0
---------- --------- ---------- ---------- ----------
Loss from operations.............. (91.9) (127.8) (418.2) (342.6) (814.0)
Other income (expense):
Other income (expense)........... 2.2 (0.8) 23.0 30.5 46.4
Interest expense................. (53.8) (32.3) (13.7) (13.2) (11.2)
---------- --------- ---------- ---------- ----------
Loss before extraordinary gain on
debt forgiveness................. (143.5) (160.9) (408.9) (325.3) (778.8)
Extraordinary gain on debt
foregiveness..................... -- 75.6 -- -- --
---------- --------- ---------- ---------- ----------
Net loss.......................... (143.5)% (85.3)% (408.9)% (325.3)% (778.8)%
========== ========= ========== ========== ==========
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
NET REVENUES
Net revenues increased from $408,733 for the nine months ended September 30,
1995 to $442,875 for the nine months ended September 30, 1996, an increase of
$34,142, or 8.4%. For the nine months ended September 30, 1995, 79.8% of
revenues was derived from licensing and support of Control Data subcontracts,
10.3% was derived from online revenues, and 9.9% was derived from development
and other revenues. For the nine months ended September 30, 1996, 73.5% of net
revenues was derived from the Control Data subcontracts and maintenance and
support contracts from CTA customers, 14.2% was derived from online revenues,
and 12.3% was derived from development and other revenues. Online revenues
increased from $42,195 for the nine months ended September 30, 1995 to $63,034
for the nine months ended September 30, 1996, an increase of $20,839, or 49.4%.
Licensing and support revenues from CYBIS customers decreased
22
<PAGE>
from $326,302 from the nine months ended September 30, 1995, to $276,432 for the
nine months ended September 30, 1996. The decrease in CYBIS revenues was a
result of budgetary constraints of government agencies and the continued
migration of CYBIS customers away from mainframe applications. The CYBIS net
revenues have been declining in absolute terms since the Company's acquisition
of the CYBIS division of Control Data in 1994. CTA contributed $49,187 to
licensing and support revenues, $9,836 to online revenues and $27,993 to
development and other revenues for the nine months ended September 30, 1996.
These amounts represent revenues from August 1, 1996, the date of the
acquisition of CTA.
COST OF REVENUES
Cost of revenues increased from $69,194 for the nine months ended September
30, 1995 to $112,451 for the nine months ended September 30, 1996, an increase
of $43,257, or 62.5%. The majority of the increase in cost of revenues is
attributable to the inclusion of the results of CTA for August and September
1996. These amounts represent 16.9% and 25.4% of net revenues in the 1995 and
1996 periods, respectively. Cost of revenues consisted primarily of certain
personnel costs directly related to the Control Data subcontracts,
administration fees payable to Control Data, costs associated with the
conversion and sale of CTA's courseware and services, as well as communication
costs related to online revenues. In the future, cost of revenues is expected to
include royalties incurred to content providers. In the future, because the
Company expects online revenues to increase, cost of revenues will consist
primarily of costs directly related to such online revenues.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expense increased from $550,903 for
the nine months ended September 30, 1995 to $1,048,284 for the nine months ended
September 30, 1996, an increase of $497,381, or 90.3%. Sales and marketing
expense increased as a percentage of net revenues from 134.8% in the 1995 period
to 236.7% in the comparable period in 1996. Sales and marketing expense
consisted primarily of costs related to personnel, travel, advertising, and
conference and trade show attendance. The increase was primarily due to
increased staffing and marketing campaigns to secure contracts and strategic
partnerships. During the second and third quarters of 1996, the Company expanded
its sales and marketing organization in order to build an infrastructure to
support the anticipated revenue opportunities for online courseware. The Company
expects sales and marketing expense to increase substantially in the future as
the Company expands its sales and marketing efforts.
Product Development. Product development expense increased from $411,860 for
the nine months ended September 30, 1995 to $839,762 for the nine months ended
September 30, 1996, an increase of $427,902, or 103.9%. Product and development
expense increased as a percentage of net revenues from 100.8% in the 1995 period
to 189.6% in the comparable period in 1996. Product development expense
consisted primarily of costs associated with the design, programming, testing,
documenting and support of the Company's new and existing courseware and
software. The increase was primarily due to a major development effort aimed at
migrating the Company's then-existing courseware to courseware compatible with
the Web. The Company expects that product development expense will substantially
increase in the future as the Company expands its courseware library. Through
September 30, 1996, the Company has expensed its product development costs and
expects to continue to expense such costs until such time as the realizability
of the Company's software is established.
General and Administrative. General and administrative expense increased from
$548,739 for the nine months ended September 30, 1995 to $1,980,349 for the nine
months ended September 30, 1996, an increase of $1,431,610, or 260.9%. General
and administrative expense increased as a percentage of net revenues from 134.2%
in the 1995 period to 447.2% in the comparable period in 1996. The increase in
general and administrative expense was attributable primarily to the recording
of compensation expense of $1,022,000, the amount by which the fair market value
of the Common Stock exceeded the exercise price of certain options as of the
date the Board granted such options or extended their exercise period. Such
compensation was expensed at the date of Board approval because the options were
fully vested at that time. General and administrative costs also increased due
to costs associated with additional personnel, network operations, and legal and
accounting services to support anticipated growth of the Company.
23
<PAGE>
Depreciation and Amortization. Depreciation and amortization expense
decreased from $228,323 for the nine months ended September 30, 1995 to $66,722
for the nine months ended September 30, 1996, a decrease of $161,601, or 70.8%.
Depreciation and amortization expense decreased as a percentage of net revenues
from 55.9% in the 1995 period to 15.1% in the comparable period in 1996.
Substantially all of the $228,323 depreciation and amortization expense recorded
in the 1995 period was attributable to goodwill amortization. On January 1,
1994, the Company recorded goodwill in the amount of $575,825 in connection with
the CYBIS acquisition, which goodwill was amortized over a period of two years
ended December 31, 1995. The Company has recorded additional goodwill and other
intangibles in the amount of approximately $705,000 in connection with the
acquisition of CTA and is amortizing such goodwill and other intangibles over
ten and three years, respectively, beginning in 1996. Amortization expense
related to the CTA acquisition included in the nine months ended September 30,
1996 was $19,533.
Interest and Other Income (Expense). Interest expense decreased from $53,914
for the nine months ended September 30, 1995 to $49,541 for the nine months
ended September 30, 1996, a decrease of $4,373, or 8.1%. These amounts represent
13.2% and 11.2% of net revenues for the 1995 and 1996 periods, respectively.
Interest expense consisted of interest expense on debt and loans from officers
and other affiliates. The decrease in interest expense was primarily due to the
conversion of $326,082 of debt to equity in the first quarter of 1995. Other
income was $124,667 for the nine months ended September 30, 1995 and $205,529
for the nine months ended September 30, 1996. This increase was primarily due to
the settlement of a certain trade payable obligation with a former vendor.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
NET REVENUES
Net revenues decreased from $805,935 in 1994 to $547,679 in 1995, a decrease
of $258,256, or 32.0%. In 1994, 88.1% of revenues was derived from licensing and
support of the Control Data subcontracts, 1.8% was derived from online revenues,
and approximately 10.1% was derived from development and other revenues. In
1995, 75.9% of net revenues was derived from the Control Data subcontracts,
10.2% was derived from online revenues and 13.9% was derived from development
and other revenues. The decrease in net revenues was a result of budgetary
constraints of government agencies and the continued migration of CYBIS
customers away from mainframe applications.
COST OF REVENUES
Cost of revenues decreased from $146,002 in 1994 to $93,630 in 1995, a
decrease of $52,372, or 35.9%. These amounts represent 18.1% and 17.1% of net
revenues in 1994 and 1995, respectively. In 1994, cost of revenues consisted
primarily of certain personnel costs directly related to the Control Data
subcontracts, costs of print materials and other items sold by the Company and,
in the last quarter of the year, communication costs related to online revenues.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expense increased from $295,839 in
1994 to $932,898 in 1995, an increase of $637,059, or 215.3%. Sales and
marketing expense increased as a percentage of net revenues from 36.7% in 1994
to 170.3% in 1995. The increase was attributable primarily to additional
personnel, advertising and promotion and travel expenses, as the Company
increased its marketing efforts in preparation for the introduction of
courseware beginning in Fall 1996.
Product Development. Product development expense increased from $205,975 in
1994 to $576,470 in 1995, an increase of $370,495, or 179.9%. Product
development expense increased as a percentage of net revenues from 25.6% in 1994
to 105.3% in 1995. The increase was primarily due to an increase in the
Company's payroll costs attributable to its efforts to convert courses to the
Company's interactive Web format in preparation for the launch of its first Web
course in November 1995.
General and Administrative. General and administrative expense increased from
$890,145 in 1994 to $926,345 in 1995, an increase of $36,200, or 4.1%. General
and administrative expense increased as a percentage of net revenues from 110.4%
in 1994 to 169.2% in 1995.
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Depreciation and Amortization. Depreciation and amortization expense
increased from $298,047 in 1994 to $309,058 in 1995, an increase of $11,011, or
3.7%. Depreciation and amortization expense increased as a percentage of net
revenues from 37.0% in 1994 to 56.4% in 1995. The Company recorded $288,273 and
$287,552 as goodwill amortization expense in 1994 and 1995, respectively.
Interest and Other Income (Expense). Interest expense decreased from $259,994
in 1994 to $75,570 in 1995, a decrease of $184,424, or 70.9%. These amounts
represent 32.3% and 13.7% of net revenues for 1994 and 1995, respectively. The
decrease was attributable primarily to lower aggregate debt outstanding in 1995,
primarily as a result of the conversion of $522,594 of debt into equity in the
last quarter of 1994. Other income increased to $126,651 in 1995. The increase
was primarily due to the settlement of a certain trade payable obligation with a
former vendor.
Extraordinary Gain on Debt Forgiveness. The extraordinary gain on debt
forgiveness of $609,270 in 1994 was a result of two transactions in which the
Company settled outstanding debt obligations for significantly less than the
debt balance plus accrued interest. See Note 7 of Notes to UOL Financial
Statements.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
NET REVENUES
Net revenues increased from $288,193 in 1993 to $805,935 in 1994, an increase
of $517,742, or 179.7%. In 1993, 95.1% of net revenues was derived from
development contracts and 4.9% was derived from online revenues. In 1994, 88.1%
of net revenues was derived from licensing and support of the Control Data
subcontracts, 1.8% was derived from online revenues and 10.1% was derived from
development and other revenues. The increase in net revenues from 1993 to 1994
was primarily due to licensing and support revenues derived from the Control
Data subcontracts, which were acquired in January 1994.
COST OF REVENUES
Cost of revenues increased from $64,486 in 1993 to $146,002 in 1994, an
increase of $81,516, or 126.4%. These amounts represent 22.4% and 18.1% of net
revenues in 1993 and 1994, respectively. In 1993, cost of revenues consisted
primarily of network service costs related to the development and sale of the
Company's courseware and services. In 1994, cost of revenues consisted primarily
of certain personnel costs directly related to the Control Data subcontracts,
costs of print materials and other items sold by the Company and, in the last
quarter of the year, communication costs related to online revenues.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expense increased from $130,203 in
1993 to $295,839 in 1994, an increase of $165,636, or 127.2%. Sales and
marketing expense decreased as a percentage of net revenues from 45.2% in 1993
to 36.7% in 1994. The increase was primarily due to the addition of marketing
personnel, travel, advertising and promotion expenses that were incurred
following the CYBIS acquisition.
Product Development. Product development expense increased from $151,132 in
1993 to $205,975 in 1994, an increase of $54,843, or 36.3%. Product development
expense decreased as a percentage of net revenues from 52.4% in 1993 to 25.6% in
1994. The increase was primarily due to expenses incurred in enhancing the CYBIS
courseware library acquired from Control Data.
General and Administrative. General and administrative expense increased from
$206,432 in 1993 to $890,145 in 1994, an increase of $683,713, or 331.2%.
General and administrative expense increased as a percentage of net revenues
from 71.6% in 1993 to 110.4% in 1994. The increase in general and administrative
costs was attributable primarily to additional personnel, technical operations
and rent expenses incurred by the Company as a result of and following the CYBIS
acquisition.
Depreciation and Amortization. Depreciation and amortization expense
increased from $834 in 1993 to $298,047 in 1994, an increase of $297,213. The
increase was primarily due to goodwill amortization expense of $288,273 recorded
in 1994 and additional depreciation expense for office equipment purchased or
obtained in connection with the CYBIS acquisition.
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<PAGE>
Interest and Other Income (Expense). Interest expense increased from $154,850
in 1993 to $259,994 in 1994, an increase of $105,144, or 67.9%. These amounts
represent 53.8% and 32.3% of net revenues for 1993 and 1994, respectively. The
increase was attributable primarily to additional debt incurred in financing the
CYBIS acquisition.
Extraordinary Gain on Debt Forgiveness. The extraordinary gain on debt
forgiveness of $609,270 in 1994 was a result of two transactions in which the
Company settled outstanding debt obligations for significantly less than the
debt balance plus accrued interest. See Note 7 of Notes to UOL Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had $1,912,323 in cash. Since its
inception, the Company has financed its operating cash flow needs primarily
through private placements of equity securities and, to a lesser extent,
borrowings from stockholders. Cash utilized in operating activities was
$2,151,336 for the nine months ended September 30, 1996, $2,178,492 in 1995 and
$461,158 in 1994. Cash provided by operating activities was $101,434 in 1993.
Use of cash was attributable primarily to net losses in 1994, 1995 and the nine
months ended September 30, 1996. Although the Company experienced net losses in
1993, increases in accrued expenses offset such losses, resulting in the
$101,434 of cash provided by operating activities. Cash utilized in investing
activities was $179,579 for the nine months ended September 30, 1996, $34,450 in
1995, $185,460 in 1994 and $101,467 in 1993. The use of cash for investing
activities was attributable primarily to purchases of equipment and, in 1994, a
cash payment of $150,000 in connection with the CYBIS acquisition. Cash provided
by financing activities was $4,139,060 for the nine months ended September 30,
1996, $2,296,521 for 1995 and $667,217 for 1994. Financing activities consisted
primarily of the sale of Preferred Stock and Common Stock and borrowings from
stockholders. Through September 30, 1996, net proceeds from the sale of the
Company's equity securities aggregated $8,907,891.
At September 30, 1996, the Company had outstanding approximately $543,000 of
accrued payroll in arrears, including accrued interest thereon, to the Company's
Chief Executive Officer and three other executive officers and related payroll
taxes (which payroll taxes are not due until the associated accrued payroll is
actually paid). The Company intends to apply the proceeds paid on a loan
receivable to pay down this outstanding liability. The remaining portion will be
paid with proceeds of the offering. See "Certain Transactions."
The Company expects negative cash flow from operations to continue for at
least the next 12 months, as it continues product development activities and
expands its sales and marketing and administrative capabilities. The Company
believes that the net proceeds from this offering, together with existing
sources of liquidity, will satisfy its anticipated working capital and capital
equipment requirements for at least one year following the offering. See "Use of
Proceeds." 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 partners and customers, cash used for acquisitions and the extent to which
the Company invests in new technology and research and development projects.
The Company and its bank lender have entered into a secured lending
arrangement in the aggregate principal amount of $50,340. Amounts borrowed under
this arrangement will bear interest at the lender's prime rate plus 1% and are
collateralized by the assets purchased with the amounts so borrowed. Amounts
borrowed under the arrangement are payable in equal monthly installments of
principal and interest between November 1996 and October 1999.
Depending on its rate of growth and profitability, if any, the Company may
require additional equity or debt financings to meet its working capital
requirements or capital equipment needs in the future or to fund and provide
working capital for its acquisitions. If additional funds are raised through the
issuance of equity securities, the percentage ownership of the Company's
stockholders would be reduced. There can be no assurance that additional
financing will be available when required or, if available, will be on terms
satisfactory to the Company. See "Risk Factors--Future Capital Needs;
Uncertainty of Additional Funding."
As of September 30, 1996, the Company had net operating loss carryforwards of
approximately $7,814,000 for federal income tax purposes, which will expire at
various dates through 2011. The Company's ability to utilize all of its net
operating loss and credit carryforwards may be limited by changes in ownership.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS COGNITIVE TRAINING ASSOCIATES, INC.
The following presentation of management's discussion and analysis of CTA's
financial condition and results of operations should be read in conjunction with
its financial statements, accompanying notes thereto and other financial
information appearing elsewhere in this Prospectus.
OVERVIEW
CTA was incorporated in Texas in 1989 and engages in the development of
technology based applications via distributed networks for educational
institutions, corporations and government agencies. CTA customers can access
these applications from remote locations using the Internet or their
organizations' intranets. CTA also provides consulting services related to
training systems, distance learning networks, and systems integration. During
the first nine months of 1996, applications produced and managed by CTA have
been available on intranets of CTA's strategic partners which have a potential
population of 25,000 students. An average of approximately 2,000 students
complete CTA modules each month. In 1996, CTA introduced a new service of
providing Internet access to individual subscribers and businesses.
Effective August 1, 1996, UOL Publishing, Inc. acquired by merger
substantially all of CTA's assets and liabilities with the exception of certain
fixed assets and related liabilities.
RESULTS OF OPERATIONS
The following tables set forth certain statement of operations data in
absolute dollars as well as a percentage of net revenues for the periods
indicated. The operating results for any period, particularly periods prior to
the acquisition of CTA by the Company, are not necessarily indicative of the
results of any future period.
SIX MONTHS
YEARS ENDED DECEMBER ENDED
31, JUNE 30,
--------------------- ------------
1993 1994 1995 1996
------ ------ ------- ------------
(IN THOUSANDS)
Statement of Operations Data
Net revenues:
Licensing and support revenues.. $195 $263 $374 $171
Courseware conversion revenues.. 240 240 189 150
Other contract revenues ........ 379 167 207 142
------ ------ ------- ------------
Total net revenues............. 814 670 770 463
------ ------ ------- ------------
Costs and expenses:
Cost of revenues................ 371 306 427 176
Sales and marketing............. 40 16 25 20
Product development............. 70 76 123 131
General and administrative...... 217 238 239 173
------ ------ ------- ------------
Total costs and expenses....... 698 636 814 500
------ ------ ------- ------------
Income (loss) from operations ... 116 34 (44) (37)
Other income (expense):
Other income.................... 0 0 4 0
Interest expense ............... (5) (26) (41) (22)
------ ------ ------- ------------
Income (loss) before income
taxes.......................... 111 8 (81) (59)
Income tax expense (benefit).... 32 (10) (36) (4)
------ ------ ------- ------------
Net income (loss)............... $ 79 $ 18 $(45) $ (55)
====== ====== ======= ============
27
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SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------- ------------
1993 1994 1995 1996
-------- -------- --------- ------------
(IN THOUSANDS)
Statement of Operations Data
Net revenues:
Licensing and support revenues.. 24.0% 39.3% 48.6% 37.0%
Courseware conversion revenues.. 29.4 35.8 24.5 32.4
Other contract revenues ........ 46.6 24.9 26.9 30.6
-------- -------- --------- ------------
Total net revenues............. 100.0 100.0 100.0 100.0
-------- -------- --------- ------------
Costs and expenses:
Cost of revenues................ 45.6 45.7 55.5 38.0
Sales and marketing............. 5.0 2.4 3.3 4.4
Product development............. 8.7 11.3 16.0 28.4
General and administrative...... 26.6 35.5 31.0 37.2
-------- -------- --------- ------------
Total costs and expenses....... 85.9 94.9 105.8 108.0
-------- -------- --------- ------------
Income (loss) from operations ... 14.1 5.1 (5.8) (8.0)
Other income (expense):
Other income.................... 0.0 0.0 0.5 0.0
Interest expense ............... (0.5) (4.0) (5.3) (4.8)
-------- -------- --------- ------------
Income (loss) before income
taxes.......................... 13.6 1.1 (10.6) (12.8)
Income tax expense (benefit).... 3.9 (1.5) (4.7) (0.8)
-------- -------- --------- ------------
Net income (loss)............... 9.7% 2.6% (5.9)% (12.0)%
======== ======== ========= ============
SIX MONTHS ENDED JUNE 30, 1996
Net revenues were $463,112 for the six months ended June 30, 1996. Of these,
37.0% was derived from licensing and support contracts, 32.4% was derived from
courseware conversion revenues, and the remaining 30.6% was derived from other
contract revenues. CTA has been experiencing relatively steady revenue growth
trends with a slight shift from licensing and support revenues to courseware
conversion and other contract revenues for the six months ended June 30, 1996.
The Company believes that this shift is mostly due to increased demand for
developing corporate intranets and courseware. CTA's total cost of revenues and
operating expenses were $499,985 for the six months ended June 30, 1996, which
were in line with the revenue trend. In 1996, there was a shift from cost of
revenues to development expenses primarily due to the shift in revenues from
licensing and support to courseware conversion.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
NET REVENUES
Net revenues increased from $669,943 in 1994 to $770,064 in 1995, an increase
of $100,121, or 14.9%. In 1994, 39.3% of revenues was derived from licensing and
supporting CTA's courseware, 35.8% was derived from couseware conversion for
clients and 24.9% was derived from consulting services relating to training
systems, distance learning networks and systems integration, and other revenues.
In 1995, 48.6% of net revenues was derived from licensing and supporting
courseware, 24.5% was derived from developing courseware and 26.9% was derived
from consulting services and other revenues. The increase in net revenues was
primarily attributable to additional licensing and support revenues, derived
from both new and existing customers as well as additional consulting revenues,
partially offset by a decrease in courseware conversion revenues.
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<PAGE>
COST OF REVENUES
Cost of revenues increased from $305,913 in 1994 to $427,466 in 1995, an
increase of $121,553, or 39.7%. These amounts represent 45.7% and 55.5% of net
revenues in 1994 and 1995, respectively. Cost of revenues consisted primarily of
personnel costs and communication costs related to the conversion and sale of
CTA's courseware and services, network service costs and contract labor to
support consulting contracts. The increase in cost of revenues from 1994 to 1995
was primarily attributable to additional personnel and support costs relating to
the growth in licensing and support revenues.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expense increased from $15,904 in
1994 to $25,396 in 1995 an increase of $9,492, or 59.7%. Sales and marketing
expense increased as a percentage of net revenues from 2.4% in 1994 to 3.3% in
1995. Sales and marketing expense consisted primarily of personnel and travel
costs relating to sales and marketing activities.
Product Development. Product development expense increased from $76,028 in
1994 to $123,261 in 1995, an increase of $47,233, or 62.1%. Product development
expense increased as a percentage of net revenues from 11.3% in 1994 to 16.0% in
1995. Product development expense consisted primarily of costs associated with
the design, converting, testing, documentation and support of CTA's courseware.
The increase was primarily due to development efforts to build products and
course offerings to satisfy the contracts secured by CTA.
General and Administrative. General and administrative expense increased from
$238,209 in 1994 to $238,774, an increase of $565, or 0.2%. General and
administrative expense decreased as a percentage of net revenues from 35.5% in
1994 to 31.0% due to the increase in revenues in the respective periods. General
and administrative expense consisted primarily of overhead-related personnel
costs, rent, legal, accounting and depreciation expenses.
Interest Expense and Other Income (Expense). Interest expense increased from
$26,361 in 1994 to $40,703 in 1995, an increase of $14,342, or 54.4%. These
amounts represent 4.0% and 5.3% of net revenues for 1994 and 1995, respectively.
Interest expense consisted primarily of interest related to short term notes
payable and bank borrowings. The increase in interest expense was primarily due
to the increased level of short-term bank borrowings and notes payable that had
been outstanding during the year to finance the growth CTA had been
experiencing.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
NET REVENUES
Net revenues decreased from $813,527 in 1993 to $669,943 in 1994, a decrease
of $143,584, or 17.6%. In 1993, 24.0% of revenues was derived from licensing and
supporting CTA's courseware, 29.4% was derived from developing courseware for
clients and 46.6% was derived from consulting services and other revenues. In
1994, 39.3% of net revenues was derived from licensing and supporting
courseware, 35.8% was derived from developing courseware and 24.9% was derived
from consulting services and other revenues. The decrease in net revenues was a
result of a decrease in consulting services revenues, partially offset by an
increase in licensing and support revenues.
COST OF REVENUES
Cost of revenues decreased from $370,714 in 1993 to $305,913 in 1994, a
decrease of $64,801, or 17.5%. These amounts represent 45.6% and 45.7% of net
revenues in 1993 and 1994, respectively. The decrease in cost of revenues from
1993 to 1994 was primarily attributable to lower contract labor costs due to
reduced consulting revenues.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expense decreased from $40,271 in
1993 to $15,904 in 1994, a decrease of $24,367, or 60.5%. Sales and marketing
expense decreased as a percentage of net revenues from 5.0% in 1993 to 2.4% in
1994. The decrease was primarily due to lower personnel and travel costs.
29
<PAGE>
Product Development. Product development expense increased from $70,486 in
1993 to $76,028 in 1994, an increase of $5,542, or 7.9%. Product development
expense increased as a percentage of net revenues from 8.7% in 1993 to 11.3% in
1994.
General and Administrative. General and administrative expense increased from
$216,990 in 1993 to $238,209 in 1994, an increase of $21,219, or 9.8%. General
and administrative expense increased as a percentage of net revenues from 26.6%
in 1993 to 35.5% in 1994.
Interest Expense and Other Income (Expense). Interest expense increased from
$4,624 in 1993 to $26,361 in 1994, an increase of $21,737, or 470.1%. These
amounts represent 0.5% and 4.0% of net revenues for 1993 and 1994 respectively.
The increase was primarily attributable to interest expense in connection with a
loan obtained to finance the construction of CTA's new facilities.
30
<PAGE>
BUSINESS
UOL Publishing, Inc. believes it is a leading publisher of high quality,
interactive and on-demand educational courseware for the online education and
training market through the Web. The Company introduced its first Web-based
demonstration course in November 1995, and its first revenue-generating
Web-based course in Spring 1996. The Company is building its courseware library
through a combination of strategic acquisitions and partnering with academic
institutions and business partners. The Company's existing courseware library
includes approximately 60 academic and professional courses in subject matter
areas such as business, management, finance, accounting and technology, and
approximately 145 training modules for industry-specific employee training in
subject matter areas such as basic technical and development skills. The Company
converts courses and training modules that it believes are proven and popular in
these diverse subject matter areas to the Company's interactive, online format.
The Company offers its courseware primarily to part-time students and working
adults in partnerships with academic institutions and business partners. The
Company plans to develop and expand its network of academic and business
partners, its portfolio of courseware and related products, and its distribution
system as rapidly as possible.
The Company plans to grow through internal courseware development and through
acquisition of educational and training products with significant existing
customer bases. The Company expects that acquisition and partnering strategies
will enable it to expand the depth and breadth of its courseware library and
augment its customer base. The Company believes that acquisitions and partnering
will provide cross-marketing opportunities to introduce new courses to its
existing customers and to offer its existing courseware library to new customers
in 1997 and beyond.
INDUSTRY BACKGROUND
TRADITIONAL HIGHER EDUCATION MARKET
Education for part-time students and working adults is a rapidly growing
segment of the education market, primarily as a result of rising tuition for
full-time programs and 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 education and
training of their employees. In 1995, over 76 million adults, or 40% of all
Americans over the age of 16, participated in some form of part-time educational
program. According to an International Foundation of Employee Benefits survey,
more than 90% of companies surveyed currently offer continuing education as an
employee benefit and 97% plan to offer this benefit by the year 2000. In
addition, during 1995, approximately 134,000 organizations in the United States
with more than 100 employees spent $52 billion to provide education and training
to 49 million of their employees.
The Company believes that the education and training market for part-time
students and working adults will continue to expand, for the following reasons:
o Increasing Need for Education. Rapid technological and business
change and increased competition are forcing more people to continue
education or training throughout their careers. Additionally, employers
often require and are willing to pay for continuing education for career
advancement.
o Rising Education Costs. Full-time education has become expensive for
many students as tuition costs of higher education have undergone an
eight-fold increase since 1965. Between 1970 and 1995, the number of
part-time students enrolled in higher education programs has grown from
approximately 3.0 million to approximately 6.7 million, or 139%, while
full-time enrollment has grown only 44% over the same period.
o Cost-effective Communication Technology. Approximately 25% of
education and training costs are related to travel. Online delivery of
education and training significantly reduces such travel expenses and
permits resources to be concentrated directly on the educational process.
In addition, online delivery of education and training permits education to
be delivered on-demand, thereby reducing or eliminating costs associated
with students' time away from work.
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<PAGE>
USE OF TECHNOLOGY IN HIGHER EDUCATION
Historically, academic institutions, training organizations and corporations
have provided education through the traditional classroom and traditional
distance learning methods (satellite-based delivery, mail exchanges, voice mail,
CD-ROMs). Academic institutions may face fiscal constraints that prevent them
from expanding their facilities to meet the demands created by rising
enrollments. Time and space constraints inherent in traditional classroom
methods make classroom education inconvenient and inefficient, especially for
part-time students and working adults. Distance learning addresses the space
limitation by allowing students to take courses at remote locations. The
Company's Web-based delivery system enables academic institutions, training
organizations and corporations to extend their reach more cost-effectively than
other distance learning methods due to its scalability. In addition, Web-based
delivery can provide students a significant degree of time and place
independence.
The Company's courseware benefits from the structural changes in the way
content can be managed, delivered and consumed that were caused by the advent of
the Web and online technologies. 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 use of new
technology is so pervasive that nearly 25% of all educational institutions (15%
of public institutions and 33% of private institutions) plan to use the Internet
for instruction. According to the American Internet User Survey, education will
be one of the major uses of the Internet in the future. The Company believes
that its online courseware combines convenience, affordability, self-pacing,
standardized curricula, individualized tailoring of courses, immediate
performance measurement and a high degree of student-teacher interaction.
ONLINE TECHNOLOGIES AND THE WORLD WIDE WEB
Since the advent of the Web portion of the Internet and graphical Web
browsers in the early 1990's, the popularity of the Internet has increased
dramatically. Web-based intranet usage is predicted to overtake Internet usage
before the year 2000. Intranets, which run on open transmission control
protocol/internet protocol ("TCP/IP") networks, enable companies to utilize
servers and browsers designed to be used for the Web in their own applications
distributed over an internal network. International Data Corporation ("IDC") has
estimated that approximately 200 million people worldwide will have access to
the Internet by the end of 1999, up from approximately 38 million at the end of
1995. In addition, according to IDC, the market for intranet software products
and services in the year 2000 will exceed $3 billion, up from approximately $276
million in 1995 and the estimated expenditures for Internet software products
and services will exceed $6 billion in the year 2000, up from approximately $259
million in 1995. Growth in the number of Internet users has been fueled by a
number of factors, including: the existing and increasing numbers of PC's in the
workplace and at home; improvements in the performance and speed of PC's and
modems; improvements in network infrastructure; enhanced ease of access to the
Internet provided by Internet service providers; consumer-oriented online
services and long distance telephone companies; emergence of standards for
Internet navigation and information access; declining costs of Internet service
due to increased competition among access providers; and increased awareness of
the Internet among businesses and consumers. Further, the Company believes that
the emergence of online technologies, such as those embodied in the Internet and
the Web, are economical and effective methods of distribution of digital
information and that such methods present a significant opportunity to
publishers of educational and training content.
The Company believes that over the next several years, the speed and
commercial use of the Internet will increase with the development of higher
bandwidth communication and online access through affordable devices in addition
to PC's, such as online access terminals, cable modems, televisions, video
phones and personal digital assistants. The Company expects that it will offer
its courseware through these online technologies to the extent that they evolve
and gain popular acceptance for the delivery of education and training to
part-time students and working adults.
COMPANY STRATEGY
The Company's strategy is to be a leading publisher of online Web-based
courseware for the education and training market. The Company plans to develop
and expand its network of academic and business partners, its portfolio of
courseware and related products, and its distribution systems.
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<PAGE>
o Build Content Library. The Company's goal is to be the publisher of
the largest library of Web-based courseware for online education and
training. The Company plans to expand its existing courseware library
through acquisitions, strategic alliances with partners and internal
development. See "Business--Products and Services."
o Publish High Quality, High Demand Courseware. The Company's strategy
involves publishing market-tested, high quality products focused on subject
areas in high demand by part-time students and working adults, such as
business, management, finance, accounting, technology, basic technical and
developmental skills and industry-specific subjects. See
"Business--Products and Services."
o Leverage Strategic Partnerships. The Company's strategic
partnerships generally combine the Company's online publishing expertise,
marketing abilities and distinctive Web-based environment with its
partners' course content, student base, accreditation and certification.
The Company believes that by developing such strategic partnerships with a
network of academic institutions and corporations, it will be able to
leverage its partners' strengths and accelerate awareness and acceptance of
its online educational content. As of October 31, 1996, the Company had
entered into contractual arrangements with six academic institutions and 13
strategic business partners. See "Business--Strategic Partners."
o Expand through Acquisitions. The Company believes that it can
rapidly and cost-effectively build its courseware library and customer base
through strategic acquisitions of complementary businesses, products,
services and technologies. The Company is presently examining a variety of
acquisition strategies designed to enhance and to expand the Company's
library of courseware. See "Business--Acquisitions."
o Develop Brand Recognition. The Company believes that establishing
and maintaining brand recognition is critical to its strategy of becoming
the leading publisher for online education and training. The Company plans
to achieve brand recognition through marketing efforts and the creation of
a proprietary user interface, which incorporates audio, animation, graphics
and text as appropriate to create a stimulating learning experience. See
"Business--Products and Services--Interactive System Tools."
o Develop Proprietary Technology. The Company intends to continue to
develop and enhance the features and functionality of its proprietary
technology, and to develop courseware internally in certain circumstances.
Current technology development efforts include completion of its
proprietary Lesson Management and Class Management systems, as well as
development of the Courseware Construction Set, which is designed to allow
customization of courses. See "Business--Products and Services--Interactive
System Tools."
o Capitalize on Cross-Marketing Opportunities. The Company's approach
of developing Web-based education and training sites for institutions and
businesses provides it with cross-marketing opportunities. UOL's web-site
promotes the courses offered by its academic and business partners to
students currently using its system, as well as potential students through
the Web. For example, a student enrolled in one of the Company's online
courses will be made aware of courses offered by other UOL strategic
partners. In addition, UOL intends to have links to its web-site from the
web-sites of its partners. See "Business--Sales and Marketing."
PRODUCTS AND SERVICES
Generally a student can enroll in the Company's courses either through
traditional in-person, telephone or mail enrollment, or via the Internet, Web or
other online technology. The student typically pays tuition directly to the
Company's relevant business or academic partner, which then pays the Company a
portion thereof. The student can then access the courseware online, typically
through a PC with a modem. Once the student has completed the course online, the
Company's relevant partner will provide the student with credit or
certification, if appropriate.
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EXISTING COURSEWARE LIBRARY
The Company's existing courseware library includes approximately 60 academic
and professional courses in what it believes to be high-demand subject matter
areas such as business, management, finance, accounting and technology, and
approximately 145 training modules for industry-specific employee training in
subject matter areas such as basic technical and development skills. Although
the Company does not provide accreditation or certification itself, the majority
of its current courses and training modules provide either accreditation or
certification through its strategic partners. The current library was built from
a combination of the acquisition of CYBIS courseware from Control Data, the CTA
acquisition and strategic partnerships with academic institutions and business
partners.
In Spring 1996, the Company introduced Event Management I, the first of a
series of seven planned Event Management courses. In Fall 1996, the Company
introduced nine new Web-based courses that are accredited or certified through
three of its academic partners and one business partner. During Fall 1996, there
have been a total of 57 enrollments in Managerial Statistics and Event
Management I, II and III. The Company's average share of tuition revenue per
student for these courses is approximately $100. As of October 31, 1996, the
enrollment period for the other five recently introduced academic Web-based
courses had not concluded. These courses are expected to also generate an
average share of tuition revenue per student of approximately $100. The Company
has also developed and introduced two of its own non-accredited courses (Windows
on the Web--Netscape Navigator Edition and Windows on the Web--Microsoft
Explorer Edition). These courses are currently being offered on the Company's
web-site at no charge. The Company expects to begin charging a fee of
approximately $80 per course for these courses by the end of 1996.
A listing of the Company's existing Web-based courseware is provided below.
<TABLE>
<CAPTION>
COURSE/MODULE TARGET AUDIENCE PRIMARY PARTNER
- --------------------------------------------------- ---------------------- ----------------------------------------------------
<S> <C> <C>
DIALOG (1 course).................................. Professional Dun & Bradstreet, Inc.
Event Management Certificate Program
(3 courses)........................................ Professional Educational Services Institute/The George
WashingtonUniverstiy.
Business and Mathematics (29 courses).............. Higher Education Joint Committee on Computer-Based Instruction/
Federal Aviation Administration
Electric Power Utilities (20 courses).............. Technical Northern States Power/PacifiCorp
Advanced Expository Writing (1 course)............. Higher Education Park College
American Literature (1 course)..................... Higher Education Park College
Business Communications (1 course)................. Higher Education Park College
Business Writing (1 course)........................ Higher Education Park College
Complex Organizations (1 course)................... Higher Education Park College
Technical Writing (1 course)....................... Higher Education Park College
Income Tax Preparation (1 course).................. Professional People's Income Tax, Inc.
Managerial Statistics (1 course)................... Higher Education George Mason University Institute of Graduate
and Professional Studies
Windows on the Web--Netscape Navigator Edition
(1 course)....................................... Professional *
Windows on the Web--Microsoft Explorer Edition
(1 course)....................................... Professional *
Personal Development (24 modules).................. Professional Crisp Publications, Inc.
Performance Appraisals (1 module).................. Professional Dun & Bradstreet, Inc.
Graybar Electrical Education (34 modules) ......... Professional/Technical Graybar Electric Company, Inc.
Electric Circuits (32 modules)..................... Technical International Thomson Publishers/Delmar
Product Application (40 modules)................... Professional/Technical National Association of Electrical Distributors,
Inc. ("NAED")
Thomas & Betts Signature Series (8 modules) ....... Professional/Technical Thomas & Betts Corporation, NAED
Scientific Products (6 modules).................... Professional/Technical VWR Corporation
</TABLE>
- ----------
* Developed and distributed by the Company.
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PLANNED NEW COURSEWARE SELECTIONS
In addition to the Company's existing library of Web-based courses, as listed
in the table above, the Company plans to introduce approximately 40-50
additional courses in 1997 through its current and potential new academic and/or
business partners, including those set forth in the table below.
<TABLE>
<CAPTION>
ANTICIPATED
COURSE TARGET AUDIENCE PRIMARY PARTNER RELEASE
- ------------------------------------------ -------------------------- ------------------------------------- ---------------------
<S> <C> <C> <C>
Statistical Analysis (1 course)........... Professional/Technical American Chemical Society Spring 1997
Autodesk Product Training At a Glance Software, Inc.
(6 courses)............................ Professional CAD CAM Center
CAD Institute
Republic Research Training, Inc.
Technical Software, Inc. Spring 1997
Financial Accounting (1 course)........... Higher Education George Mason University Spring 1997
Institute of Graduate and
Professional Studies
Accounting Tutorial (1 course)............ Higher Education John Wiley & Sons, Inc. Spring 1997
Financial Statement Analysis for
Non-Financial Managers (1 course) ..... Higher Education New York University Spring 1997
Data Communications and Networks
(1 course)............................. Higher Education Park College Spring 1997
Financial Management (1 course)........... Higher Education Park College Spring 1997
Introduction to Programming
(1 course)............................. Higher Education Park College Spring 1997
Personal Financial Management
(1 course)............................. Higher Education Park College Spring 1997
Principles of Management (1 course) ...... Higher Education Park College Spring 1997
Lab Safety (1 course)..................... Higher Education University of Toledo Spring 1997
Event Management (4 courses).............. Professional Educational Services Institute/ Spring/Fall 1997
The George Washington
University
Project Management Certificate Program
(7 courses)............................ Professional Education Services Institute/ Spring/Fall 1997
The George Washington
University
Planned Giving (6 courses)................ Professional California State University-Long Spring/Fall 1997
Beach, University College and
Extension Services
Management Fundamentals
(2 courses)............................ Professional American Society of Association
Executives Fall 1997
Purchasing Certificate Program
(4 courses)............................ Professional California State University-Long Fall 1997
Beach, University College and
Extension Services
Accounting (1 course)..................... Higher Education Educational Services Institute/The
George Washington University Fall 1997
</TABLE>
The Company believes that the convenience and cost-savings offered by its
online versions of these courses will attract a portion of the students who
would enroll in classroom-based versions of these courses, as such online
versions become available. The Company also believes that its online
distribution system will provide its partners with access to students who
otherwise would not take their courses.
Based on discussions with current and potential academic partners regarding,
among other things, potential enrollment levels, and assuming that such partners
will charge similar tuition for the Company's proposed online courses through
academic partners as for existing equivalent classroom-based courses, and that
the Company obtains a similar share of tuition revenues as it has in the past
with its existing
35
<PAGE>
academic partners, the Company believes that it could receive an average share
of tuition revenue per student per academic course in excess of $100. The
Company anticipates that the number of modules offered by CTA and the number of
business partners of CTA will increase in 1997. There can be no assurance,
however, that the Company will achieve these goals. See "Risk
Factors--Substantial Dependence on Third Party Relationships" and "--Developing
Market; Rapid Technological Changes and New Products."
INTERACTIVE SYSTEM TOOLS
The Company has designed a platform-independent delivery system that is
capable of operating on virtually any PC. The Company's delivery system supports
a wide variety of tools and utilities supplied by third parties, such as
Netscape's or Microsoft's Web browser, Macromedia's Shockwave or Apple
Computer's Quicktime viewer. In addition, the Company is designing the following
proprietary software tools that it expects to create brand recognition for the
Company as a leading publisher of online education and training:
Lesson Management System. To allow electronic guidance, monitoring and
management of students through the courseware, the Company is developing
the Lesson Management System, which pre-tests students on learning
objectives defined by the course author or instructor, and then creates a
personalized study plan based on the level and breadth of the student's
knowledge. The Lesson Management System, intended primarily for use by
students, tracks each student's progress through a course's assigned
lessons, measures mastery of the learning objectives through the Test
Architect System, and, if necessary, offers alternative paths and methods
of instruction. The beta version of the Lesson Management System was
completed and tested in August 1996 and the Company believes that the final
version will be available in December 1996.
Class Management System. To allow the system to handle courseware
written by any party under an open architecture standard, the Company is
developing a database manager which allows instructors to give direction to
students in the online classroom. The Class Manager, compliant with ODBC
standards (a nonproprietary industry protocol), handles remote enrollment
and payment processing, test creation and administration, and automatic
course progress tracking and reporting (a gradebook). The beta version of
the Class Management System was completed and tested in August 1996 and the
Company believes that the final version will be available in December 1996.
Courseware Construction Set. To allow instructors to create a
customized online course, the Company developed a visual building block
facility to produce courses from small, individual lessons or "courselets."
Using a natural language pattern-matching and semantic processing
technology, the Courseware Construction Set allows instructors to search
the Company's library of courselets, retrieve the appropriate instructional
materials, and then build a customized course through a familiar drag and
drop interface. Courselets are authored as discrete units of instruction
and are presented through a series of proprietary, format-specific
templates called PointPages. PointPages can range from text screens to
digital videos and from plain graphical images to complex software
simulations, all within the same course. PointPages are designed to allow
instructors with no knowledge of programming to construct multimedia-rich
interactive Web-based courses. The Company is currently beta-testing the
Courseware Construction Set and anticipates that the final version will be
available in early 1997.
The Company designs its tools in order to create brand recognition for the
Company as a leading supplier of online education in content, as well as in
systems. In addition, the Company believes that its tools render the Company's
courseware affordable, convenient, easy to use and administer, and provides the
Company with a competitive edge in attracting additional strategic partners. See
"Risk Factors--Developing Market; Rapid Technological Changes and New Products."
STRATEGIC PARTNERS
A critical part of the Company's strategy to rapidly and cost-effectively
build a library of quality courseware is the establishment of strategic
alliances with academic institutions and other business partners. The Company
believes that its online distribution system will provide its partners with
access to students who otherwise would not take their courses.
36
<PAGE>
ACADEMIC INSTITUTIONS
The Company currently has strategic relationships with six academic
institutions that have significant enrollments, offer broad curricula and
provide the Company an opportunity to publish online courseware developed by
such institutions. With the exception of the Company's agreement with New York
University, all of the Company's agreements with these academic institutions
provide the Company exclusive rights to, or limit the partner's right to, for
itself or in conjunction with others, develop and/or distribute the online
courseware subject to the agreements. The academic institutions will market
these courses in the same manner as their existing, traditional course
offerings, including through direct mail, course catalogs, print advertising and
through web-sites. The Company plans to enter into strategic relationships with
additional academic institutions by the end of 1997. However, the Company has no
current understandings, commitments or agreements with any new academic
partners, and it may not be successful in negotiating agreements with new
academic partners in the future. See "Risk Factors--Substantial Dependence on
Third Party Relationships."
Park College. After successful completion of a pilot course in Business
Communications with Park College in Spring 1996, the Company and Park College
entered into an agreement in June 1996, pursuant to which the Company is
developing 11 additional courses for Park College. The additional courses
include Business Writing, Technical Writing, American Literature and Expository
Writing. Under the terms of this agreement, Park College granted the Company the
exclusive license to distribute the 11 online courses for the duration of the
copyright terms applicable to such courses. Park College agreed to pay the
Company a percentage of gross tuition revenues it receives from its students
enrolled in such courses and the Company agreed to pay Park College a royalty
equal to a percentage of the net tuition revenues received by the Company from
students enrolled in these courses at other institutions. The terms of this
agreement is five years and is automatically renewable for successive one-year
terms thereafter. Park College is a four-year private liberal arts,
co-educational college. The Park College School for Extended Learning Military
Resident Center System is one of the nation's largest specialized higher
education programs for military personnel, consisting of approximately 26,000
enrolled students.
California State University Institute. The Company entered into an agreement
in June 1996 to permit it to provide services to the 22 campuses in this
statewide university system. The Company plans to launch the first two of a
six-course Planned Giving certificate program during Spring 1997 with the
California State University--Long Beach. The Company plans to offer additional
courses in 1997 in such areas as telecommunications, healthcare, engineering and
business. Under the terms of this agreement, the Company was granted the
exclusive worldwide license to distribute certain online courses to be
identified and selected by the parties. This license survives termination of the
agreement for the duration of the copyright terms applicable to the online
courses developed under the agreement. The Company is entitled to receive a
percentage of the total tuition paid by all students enrolled in these online
courses. The term of this agreement is five years and is automatically renewable
for successive one-year terms thereafter. The California State University system
currently serves over 300,000 students throughout California.
New York University. The Company entered into an agreement with New York
University's School of Continuing Education ("NYU") in September 1996 to
develop, promote and distribute an online course entitled Financial Statement
Analysis for Non-Financial Managers. This course is scheduled for release to
NYU's students in Spring 1997. Subject to the Company's payment of royalties to
NYU based on the tuition actually received from students taking the course at
other academic institutions, NYU has granted the Company a non-exclusive
worldwide license to distribute the course for educational purposes. In
consideration for developing, promoting and distributing the course to NYU
students, NYU has agreed to pay the Company a distribution fee equal to a
percentage of the tuition received by NYU from its students registered for the
course. The term of this agreement is for one year following NYU's first
delivery of course materials to the Company and is automatically renewable for
four successive one-year terms thereafter. NYU has a continuing education
enrollment of approximately 60,000 students.
The George Washington University. The Company entered into an agreement with
Educational Services Institute ("ESI") in August 1995, as amended in September
1996, to jointly develop courses to be marketed with The George Washington
University ("George Washington"). ESI is a seminar
37
<PAGE>
company holding rights to deliver off-campus versions of certain George
Washington courses. The agreement provides that ESI, in association with George
Washington, will license to the Company selected course materials owned by or
licensed to ESI, and make available to the Company the authors or subject matter
experts relating to such materials, for the purpose of allowing the Company to
develop and distribute online versions of such courses to students at George
Washington and other academic institutions with which the Company has a
relationship. Each of ESI and the Company are entitled to receive a portion of
the revenues received from the sale of these online courses. ESI and the Company
share copyright and full distribution rights to the courses developed under the
agreement and ESI is bound by a noncompetition covenant for a period of three
years following termination of the agreement prohibiting ESI, for itself or in
conjunction with others, from developing or distributing any online products
relating to the courses. The term of this agreement is five years and is
automatically renewable for successive one-year terms thereafter. The Company
currently offers three courses of a seven-course Event Management program
providing online instruction and resources in the fundamentals of event
management. The online version was developed from the seminar-based Event
Management program that ESI currently conducts throughout the United States.
Total enrollment in Event Management, which was and will continue to be offered
in a seminar-based format, has been approximately 300 students since the program
was initiated in 1995. In addition to Event Management, the Company plans to
offer courses in Project Management and Accounting in 1997. George Washington
has a total enrollment of approximately 20,000 students.
George Mason University. The Company entered into a five-year agreement with
George Mason University's ("GMU") Institute of Graduate and Professional
Business Studies in February 1996 to develop certain core MBA requirement
courses. Managerial Statistics was released in Fall 1996 and Financial
Accounting is scheduled to be offered in Spring 1997. UOL plans to release
additional business courses with GMU in 1997. The Company and GMU are evaluating
other GMU programs and courses for development and implementation in 1997
including Non-Profit Management and a variety of liberal arts courses. Under the
terms of this agreement, GMU granted the Company the exclusive worldwide right
to distribute the online courses developed under this agreement for a period of
time to be negotiated in good faith by the parties. GMU will pay the Company a
fee based on the number of students registered for the online course. GMU has
total enrollment of approximately 22,000 students.
University of Toledo. The Company entered into an agreement with the
University of Toledo in June 1996 to develop professional development online
courses through the University of Toledo's University College division. Some of
the disciplines under consideration for development include business management,
marketing, communication skills, production and manufacturing operations, safety
and regulatory compliance, criminal justice and healthcare. The Company and the
University of Toledo are planning to deliver the first online course, Lab
Safety, in January 1997 and the Company expects that at least three additional
courses will be added during 1997. Under the terms of this agreement, the
University of Toledo granted the Company the exclusive worldwide license to
sell, license and distribute the online courses developed under this agreement,
such license to survive termination of the agreement for a period of ten years
following completion of online course development. The University of Toledo
agreed to pay the Company a percentage of gross tuition revenues it received
from its students enrolled in such courses and the Company agreed to pay the
University of Toledo a royalty equal to a percentage of the revenues received by
the Company from the sale of these courses to other students. The term of this
agreement is five years and is automatically renewable for successive one-year
terms thereafter. The University of Toledo has an enrollment of approximately
22,000 students.
The Company also has entered into a letter of intent to develop Web-based
courseware for the University of California, Berkeley.
38
<PAGE>
AUTODESK AND OTHER BUSINESS PARTNERS
The Company currently has strategic relationships with Autodesk and 12 other
business partners. It plans to continue to establish relationships with
additional business partners, in particular those which offer access to large
numbers of users (including the prospective partner's employees or customers),
vendors and resellers, as well as significant amounts of content. Under these
arrangements, the Company's partner generally agrees to use its best efforts 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
partner's end-users.
Autodesk. The Company entered into an agreement with Autodesk, a PC software
company with more than three million users and total sales of software and
related products for the fiscal year ended January 31, 1996 in excess of
$546,000,000, to build a "virtual campus" system. The virtual campus is expected
to consist of a "bookstore" which will offer products, services and online
courseware. The products, services and courseware will be developed and/or
offered by Autodesk business partners, such as Autodesk-authorized training
centers, educational resellers and developers (sometimes with development
assistance from the Company) pursuant to agreements with the Company, which is
responsible for development and operation of the virtual campus. In addition,
the virtual campus will provide users access to new software product
demonstrations, new software product releases and an opportunity to participate
in software certificate and assessment programs. Five Autodesk business partners
(At a Glance Software, Inc., CAD CAM Center, CAD Institute, Republic Research
Training, Inc. and Technical Software, Inc.) have already entered into
agreements with the Company to work with the Company to prepare courseware,
products and services on the virtual campus for its introduction in late 1996.
In 1995, one million students took Autodesk courses through various
institutions, including 50,000 Autodesk users who attended courses at authorized
training centers. In 1997, the Company anticipates that a portion of these
courses will be taken by Autodesk users online, and other Autodesk software and
related products will be purchased through the virtual campus.
The Company entered into an agreement with InternetU, Inc. ("InternetU") in
September 1996, as amended in October 1996, pursuant to which InternetU has the
right to pay the Company up to $1,550,000 over time based upon the achievement
of certain development milestones, subject to acceleration of one-half of the
payments on the later of (i) December 15, 1996 and (ii) the closing of the
offering made hereby, and the remainder within four months of the closing of
this offering, in return for a share of the revenues received by UOL through the
virtual campus. In connection with this agreement InternetU will also have the
right to receive warrants to purchase up to 73,172 shares of Common Stock in the
Company. InternetU has also purchased 12,390 shares of the Company's Common
Stock.
In summary, the Company will be responsible for all development and operation
costs of the Autodesk virtual campus, and will provide marketing and support for
the virtual campus. In exchange for its commitment, the Company will receive a
percentage of revenues from three primary sources through the virtual campus:
Autodesk courseware revenues; product and service revenues; and advertising
revenues. Although the Company believes that it will be able to fund the
remaining costs of the Autodesk virtual campus through InternetU or otherwise,
if it is unable to do so, the Company will not receive revenues from the virtual
campus.
Graybar Electric Company, Inc. CTA entered into an agreement with Graybar
Electric Company, Inc. ("Graybar") in June 1994 to develop and distribute
electrical, telecommunications and data training modules to Graybar's employees
via a company-based intranet system developed by CTA. CTA procures and converts
training modules for delivery over the intranet and grants to Graybar a license
to the modules, together with a perpetual, worldwide, exclusive license to use
CTA's proprietary Chalkboard software to access the network. CTA receives site
license fees for each employee accessing the network, a development fee for each
training module converted by CTA for distribution on the network, monthly
maintenance and support fees, and hourly online network fees. The term of this
agreement is three years and may be renewed by Graybar for successive one-year
terms thereafter. CTA's training modules are available over the network to more
than 6,000 Graybar employees.
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<PAGE>
Thomas & Betts Corporation. CTA entered into an agreement in March 1996 with
Thomas & Betts Corporation ("Thomas & Betts") to develop and distribute
proprietary training modules to employees of Thomas & Betts in a variety of
subject areas, including management, finance, word processing, computer training
and personal development, via either Thomas & Betts' intranet or CTA's
proprietary online operating system. Licensing and royalty rights to modules
developed under this agreement are to be determined on a case-by-case basis.
Under the agreement, CTA is entitled to receive a network and linkage set-up
fee, site access fees for each employee taking a training module, a monthly
service and support fee, a fee for CTA's construction of an operating system
that will warehouse specified applications (as well as an annual fee for
maintaining such system) and hourly online network fees. The term of this
agreement is five years and it may be renewed by Thomas & Betts for successive
one-year terms thereafter. Thomas & Betts has more than 10,000 employees.
Other Business Partners. The Company has entered into agreements with several
other business partners, such as Dun & Bradstreet, Inc., People's Income Tax,
Inc., the American Society of Association Executives, the American Chemical
Society, John Wiley & Sons, Inc., VWR Corporation, National Association of
Electrical Distributors, Inc., International Telecommunications Union and
Northern States Power/PacifiCorp. Pursuant to these agreements, the Company is
developing or converting courseware for online distribution and use. The Company
has also recently entered into letters of intent with Cheyenne Software, Inc.,
Digital Equipment Corporation and America Online, Inc.
As academic institutions and businesses expand their online education and
training efforts, the Company believes that its strategic relationships with
publishers will enable it to deliver online courseware that is based on proven
and popular textbooks or other publications and is supported by the Company's
proprietary system tools for enrolling, instructing, testing and managing
students. See "Risk Factors--Substantial Dependence on Third Party
Relationships."
ACQUISITIONS
The Company believes that acceptance of its products and services in the
marketplace depends upon, among other things, breadth and depth of courseware in
high demand subject areas. The Company's core library of courseware originally
was acquired from Control Data in January 1994. See Note 5 of Notes to UOL
Financial Statements.
In August 1996, in exchange for 42,487 shares of the Company's Common Stock,
the Company acquired Cognitive Training Associates, Inc., a Texas corporation
providing technology-based online training products and services to academic
institutions, corporations and governmental agencies. In connection with this
transaction, the Company issued options to purchase 22,091 shares of Common
Stock of the Company and entered into an employment contract with its founder,
Michael L. Brown. See "Management--Executive Compensation--Employment
Agreements." During the first nine months of 1996, CTA modules have been made
available on intranets through CTA's strategic partners to a potential audience
of approximately 25,000 students. An average of approximately 2,000 students
complete CTA modules each month.
Management believes that the acquisition of the CYBIS division of Control
Data, the purchase of CTA and other future acquisitions, if any have provided
and will provide critical additions to the Company's courseware library and that
by increasing the volume and diversity of its courseware, the potential for
strategic relationships will be enhanced. The Company plans to make additional
acquisitions designed to enhance and expand its courseware library and user
audience, although no such acquisitions or investments are currently pending and
the Company has no current understandings, commitments or agreements with
respect to any acquisition. See "Risk Factors--Risks Associated with
Acquisitions; Integration of Acquired Operations."
40
<PAGE>
SALES AND MARKETING
The Company's primary marketing goals are to create a strong brand identity
as a leading educational courseware publisher for corporations, academic
institutions and other business partners, and to establish its core technology
as an affordable option for continuing education and training needs. The Company
has seven full-time and two part-time employees in marketing and sales. The
Company markets its products and services through a variety of means, including
the Internet, direct sales, strategic marketing partners, resellers and other
arrangements. The Company intends to use cross-marketing opportunities available
through partners with web-sites or "home pages" to promote its products and
services and to recruit students. The Company believes that continuing to form
strategic marketing alliances with partners who will sell, promote and market
the Company's products and services, will be important for rapid market
penetration. See "Risk Factors--Substantial Dependence on Third Party
Relationships" and "--Limited Marketing Experience."
CUSTOMERS
The Company's customers consist of its academic institution and business
partners, through which it offers its products and services to part-time
students and working adults. In 1995, three Company customers, all of which were
users of CYBIS courseware, accounted for more than 10% of its revenues: the
Joint Committee on Computer-Based Instruction, 54%; Redstone Arsenal, 14%; and
the University of Massachusetts, 10%. See "Risk Factors--Dependence on a Limited
Number of Customers."
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 its competitors do not currently offer
Web-based, interactive, on-demand courseware, there are no substantial barriers
to entry in the online education and training market. Many institutions and
businesses provide accredited and/or certified continuing education or training
that is taught on a part-time basis. In addition to traditional classroom and
distance learning providers, other institutions such as Apollo Group, Inc.
through University of Phoenix and Jones Intercable Inc. through Mind Extension
University 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 other methods, such as satellite communications and audio and video
tapes.
Many of the Company's existing competitors, as well as a number of potential
new competitors, have significantly greater financial, technical and marketing
resources than the Company. In addition, any of these competitors may be able to
respond more quickly to new or emerging technologies, and to devote greater
resources to the development, promotion and sale of their services than the
Company. 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. See "Risk
Factors--Highly Competitive Market" and "--Substantial Dependence on Third Party
Relationships."
CYBIS BUSINESS
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 1994, the Company acquired the CYBIS division of Control Data,
together with a perpetual non-exclusive license for the CYBIS courseware, and
agreed to act as subcontractor to Control Data (which retained its hardware and
proprietary mainframe operating system that is used to deliver the CYBIS
courseware and is used in other aspects of Control Data's ongoing business) to
support CYBIS customers. The Company's ability to distribute a portion of the
CYBIS courseware is limited by the terms of its license.
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<PAGE>
Since 1994, substantially all of the Company's revenues have been generated
through the licensing of the CYBIS courseware to employees of various federal
government agencies, including the Joint Committee on Computer-Based Instruction
and the Redstone Arsenal, as well as to students at various academic
institutions, including the University of Massachusetts. 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 receives from Control Data all
revenue attributable to portions of these contracts, less a 5% administration
fee. The Company's CYBIS revenues have been declining due to budgetary
constraints of government agencies and the continued migration of CYBIS
customers away from mainframe applications. While the Company expects to
continue to receive CYBIS revenues for the next two to three years, the Company
believes that such revenues will not be substantial compared to the Company's
expected future revenues. The Company believes that Web-based courseware
developed from the CYBIS courseware, to the extent not restricted as to delivery
method, may contribute to revenues in the future.
CTA BUSINESS
CTA was incorporated in Texas in 1989 and engages in the development of
technology based applications 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. CTA also provides consulting services related to
training systems, distance learning networks and systems integration. During the
first nine months of 1996, applications produced and managed by CTA have been
available on intranets of CTA's strategic partners which have a potential
population of 25,000 students. An average of approximately 2,000 students
complete CTA modules each month. In 1996, CTA introduced a new service of
providing Internet access to individual subscribers and businesses.
In August 1996, the Company acquired CTA in exchange for 42,487 shares of the
Company's Common Stock. The Company believes that CTA provides not only an
established customer base, but also a critical addition of content, particularly
in the electrical, medical and scientific equipment subject areas, which has
enhanced the Company's courseware library.
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 trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, customers,
partners and others to protect its proprietary rights. The Company has obtained
registered trademarks in the United States for UOL, Chalkboard, the Virtual
Workforce and "What you think...is our business" and has applied for the
registration of certain of its other trademarks, including University Online,
Courseware Construction Set, Registrar Architect, Test Architect and the UOL
logo. The Company intends to apply for registration of UOL Publishing. See "Risk
Factors--Risks Related to Trademarks and Proprietary Rights."
LEGAL PROCEEDINGS
The Company is not currently involved in any material pending legal
proceedings. In October 1996, The Roach Organization, Inc. ("TRO"), from which
Control Data received its license with respect to the CYBIS courseware (which
license was assigned to the Company in January 1994), alleged unspecified
violations by the Company of the terms of such license. TRO demanded that the
Company cease such alleged violation and compensate TRO for unspecified alleged
damages in connection therewith. The Company believes that it is in compliance
with the terms of the license and intends to vigorously dispute these
allegations. The Company also believes that it would not be materially adversely
affected by an adverse result of this dispute. See "Risk Factors--Legal
Proceedings" and "--Government Regulation and Legal Uncertainties."
42
<PAGE>
EMPLOYEES
As of October 31, 1996, the Company had 46 employees, including 23 full-time
and five part-time employees primarily involved in product development
activities, seven full-time and two part-time in marketing and sales, and nine
in finance and administration. The Company believes that its employee relations
are good. See "Risk Factors--Dependence on Key Personnel."
FACILITIES
The Company's executive offices and its principal administration, marketing
and sales operations are located in approximately 7,000 square feet of leased
space in McLean, Virginia pursuant to a lease agreement that expires in March
2000. The Company relocated to this facility in November 1996 from its prior
facility in Falls Church, Virginia. The Company also leases approximately 4,000
square feet, including 1,300 square feet of warehouse space, in Burnsville,
Minnesota under a lease that expires in August 1998. In connection with its
acquisition of CTA, the Company assumed CTA's existing lease for approximately
11,000 square feet of office space in Waxahachie, Texas that expires in July
2001. The aggregate annual gross rent for the Company's facilities in Falls
Church and Burnsville was approximately $99,000 in 1995. See Note 8 of Notes to
UOL Financial Statements. The rents for the McLean facility and the Waxahachie
facility are approximately $12,000 and $5,000 per month, respectively. The
Company believes that its current facilities are adequate for its needs for the
foreseeable future and that, should it be needed, suitable additional space will
be available to accommodate expansion of the Company's operations on
commercially reasonable terms.
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The executive officers, key employees and directors of the Company as of
October 31, 1996 were as follows:
NAME AGE POSITIONS
- ------------------------- ----- -----------------------------------------------
Narasimhan P. Kannan .... 48 Chairman of The Board of Directors and Chief
Executive Officer
Carl N. Tyson............ 47 President, Chief Operating Officer and Director
W. Braun Jones, Jr. .... 51 Vice President of Strategic Ventures and
Director
Michael W. Anderson...... 42 Vice President of Technology and Operations
Diana S. Farrell......... 32 Vice President of Sales and Marketing
Leonard P. Kurtzman...... 36 Vice President, Chief Financial Officer and
Secretary
Michael L. Brown......... 47 Executive Vice President of Corporate Training
and President of CTA
Barry R. Fetterolf....... 54 Vice President of Publishing
Edson D. deCastro(1) .... 58 Director
Dennis J. Dougherty(1)(2) 48 Director
William E. Kimberly(2)... 63 Director
D. Wayne Silby(2)........ 47 Director
Barry K. Fingerhut(1) ... 51 Director
- ----------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
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.
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 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.
Carl N. Tyson joined the Company as President and Chief Operating Officer in
November 1995. From 1992 to 1995, Mr. Tyson served as President, College
Publishers, at Harcourt General Corporation. From 1988 to 1992 he was employed
by McGraw-Hill Inc., most recently as President, College Division. Mr. Tyson
holds a B.A. and M.A. in history from Wichita State University and a Ph.D. in
history from Oklahoma State University.
W. Braun Jones, Jr., Vice President of Strategic Ventures, has been
associated with the Company since 1992 and is co-developer of the Company's
current business strategy. Mr. Jones has served as a director of the Company
since 1994. From 1980 to 1992, Mr. Jones served as Chairman of the Board and
Chief Executive Officer of Carlyn Computer Systems, Inc., a computer dealer and
leasing company. From 1985 to 1991, he served as the Vice Chairman of the Board
of Directors of Suburban Bank, a commercial bank founded by him. Mr. Jones also
serves as a director of Micro-Integration Corp., a publicly held corporation
that manufactures mid-range computer hardware and software, and Globalink, Inc.,
a publicly held corporation that develops language translation software, and
several private companies. Mr. Jones holds a B.A.
and M.B.A. from The George Washington University.
44
<PAGE>
Michael W. Anderson joined the Company as Vice President of Technology and
Operations in 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.
Diana S. Farrell joined the Company as Vice President of Sales and Marketing
in June 1996. From December 1992 to June 1996, Ms. Farrell was employed by
Harcourt Brace College Publishers, a division of Harcourt General Corporation,
most recently as Senior Vice President of Marketing. From September 1990 to
December 1992, she served as a Senior Editor at Prentice Hall College Publishing
Group, a division of Paramount Communications, Inc. Ms. Farrell holds a B.A. in
Communications Arts/Marketing from Long Island University.
Leonard P. Kurtzman joined the Company in August 1996 as Vice President,
Chief Financial Officer and Secretary. From August 1986 to August 1996, Mr.
Kurtzman was employed by Systems Center, Inc. and its successor, Sterling
Software, Inc., a computer software company based in Dallas, Texas ("Sterling"),
most recently as Vice President of Finance and Administration of the System
Management Group, a division of Sterling . He holds a B.S. in Accounting from
the University of Maryland and is a Certified Public Accountant.
Michael L. Brown joined the Company as Executive Vice President of Corporate
Training and President of its wholly owned subsidiary, CTA, in August 1996. Mr.
Brown served as the President and Chief Executive Officer of CTA from 1988 until
the Company's acquisition of CTA in August 1996. He is a member of the Advisory
Board of the Distance Learning Association.
Barry R. Fetterolf joined the Company as Vice President of Publishing in
August 1996. From June 1993 to August 1996, Mr. Fetterolf served as Vice
President and Publisher of Saunders College Publishing, a division of Harcourt
Brace College Publishers. From November 1988 to June 1993, Mr. Fetterolf served
as Social Science & Economics Publisher of the Education Group of McGraw-Hill
Publishing Company. Mr. Fetterolf holds a B.S. in Business Administration from
Pennsylvania State University.
Edson D. deCastro has been a director of the Company since 1994. Since June
1995 Mr. deCastro has been Chief Executive Officer of Xenometrix, Inc. 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 also serves on the boards
of directors of several early-stage technology companies. He holds a B.S. in
Electrical Engineering from the University of Lowell.
Dennis J. Dougherty has been a director of the Company since 1986. Mr.
Dougherty has been a General Partner of Intersouth Partners, L.P., a North
Carolina-based venture capital firm since 1984. Mr. Dougherty also serves as a
director of Cardiovascular Diagnostics, Inc., a publicly held medical device
corporation, and several other private companies. In 1994, Microwave
Laboratories, Inc., a venture capital portfolio company of which Mr. Dougherty
had been a director until December 1993, filed a petition for bankruptcy. Mr.
Dougherty holds a B.A. in Marketing from Oklahoma City University.
Barry K. Fingerhut has been a director of the Company since August 1996.
Since 1981 he has been employed by Geo Capital, a registered investment advisor,
and has served as its Portfolio Manager and President since 1991. Mr. Fingerhut
is a General Partner of the General Partner of Wheatley Partners, L.P., an
investment company, and is a co-founder and principal of Applewood Associates,
L.P. and 21st Century Communications Partners, L.P., both investment
partnerships. Mr. Fingerhut serves as a director of Carriage Services, Inc., a
publicly-held corporation, and several private companies, including Milbrook
Press, Inc., a publisher of children's books, Glasser Legal Works, Inc., a niche
publisher of legal texts, journals and seminars, and Online Resources, Inc. 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.
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 1992, and as Chairman of NAZTEC
International Group, Inc., its successor, since 1994. Prior thereto, Mr.
Kimberly
45
<PAGE>
served in various senior executive capacities for 23 years for Kimberly Clark
Corporation. Mr. Kimberly also serves as a director of Globalink, Inc., a
publicly held corporation that develops language translation software, and
several other private emerging growth companies. He is a member of the Board of
Trustees of The Asheville School and the Pan American Development Foundation and
is a member of the Leadership Council on the Americas of the Center for
Strategic and International Studies.
D. Wayne Silby has been a director of the Company since October 1995. Mr.
Silby has been the Chairman of the General Partner of Calvert Social Venture
Partners, L.P. and the President of Calvert Social Investment Fund, both
investment companies, since 1985. Mr. Silby holds a B.S. in Economics from the
Wharton School of Finance and a J.D. from Georgetown University Law School.
Directors and officers are elected annually and hold office until their
successors are elected and qualified, or until their earlier removal or
resignation. The Company currently does not pay directors' fees, but does
reimburse non-employee directors for reasonable out-of-pocket expenses in
connection with attending Board or committee meetings. There are no family
relationships among any of the directors, executive officers or key employees of
the Company. In connection with the Company's issuance of Series B Preferred
Stock to certain investors in July 1996, Mr. Kannan executed a voting agreement
(the "Kannan Voting Agreement") obligating Mr. Kannan to vote his shares at any
meeting of stockholders for the election of a representative of the holders of
the Series B Preferred Stock to the Company's Board of Directors. The current
Board of Directors designee of the holders of the Series B Preferred Stock is
Barry K. Fingerhut. The Kannan Voting Agreement terminates upon the consummation
of this offering.
BOARD COMMITTEES
The Board of Directors has an Audit Committee which reviews the results and
scope of the audit and other services provided by the Company's independent
auditors, and a Compensation Committee which makes recommendations regarding
salaries and incentive compensation for officers of the Company and determines
the amount and type of equity incentives to be granted to participants in the
Company's stock plans.
EXECUTIVE COMPENSATION
Summary Compensation Information
The following table sets forth information concerning the compensation
received for services rendered to the Company during the fiscal year ended
December 31, 1995 by the Chief Executive Officer of the Company (the "Named
Executive Officer"). No other executive officer of the Company received total
salary and bonus for such fiscal year in excess of $100,000.
SUMMARY COMPENSATION TABLE
ANNUAL
COMPENSATION
--------------
ALL OTHER
NAME AND PRINCIPAL POSITION SALARY COMPENSATION
---------------------------- -------- ------------
Narasimhan P. Kannan ....... $119,792 $ 840
Chief Executive Officer
EMPLOYMENT AGREEMENTS
In July 1996, the Company entered into an employment agreement with each of
Messrs. Kannan and Tyson. The agreements provide for an annual base salary of
$160,000 (increasing to $180,000 if the Company successfully completes an
initial public offering of its stock) for Mr. Kannan and of $210,000 for Mr.
Tyson, and annual incentive-based bonus compensation of up to 50% of such base
salary. The exact amount of such bonus compensation is determined by the
Company's Board of Directors, based upon the annual growth rate in revenues and
earnings of the Company. Under the agreements, Messrs. Kannan and Tyson are also
eligible to participate in all employee benefit plans and programs that the
46
<PAGE>
Company offers to its executive employees and are entitled to reimbursement for
all documented reasonable business expenses they incur. The initial term of the
agreements expires in June 1998, but the agreements are subject to automatic
one-year renewal terms. Consistent with Company policies, in the event that Mr.
Kannan or Mr. Tyson is terminated by the Board without cause, or in the event
that Mr. Kannan or Mr. Tyson resigns for good reason, the Company is required to
continue paying his salary for nine months as severance pay. 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 such 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.
In connection with the Company's acquisition of CTA in August 1996, the
Company entered into an employment and noncompetition agreement with Michael
Brown. The agreement provides for an annual base salary of $150,000 and annual
incentive-based bonus compensation of up to 50% of such base salary. The exact
amount of such bonus compensation is determined by the Company's Board of
Directors, based upon Mr. Brown's performance. Mr. Brown is entitled to receive
an additional bonus of $150,000 in connection with the completion of the
Company's acquisition of CTA, which was consummated in August 1996, and
transition of control of CTA's operations to the Company, which bonus must, in
any event be paid on or before December 31, 1996. Under the agreement, Mr. Brown
is also eligible to participate in all employee benefit plans and programs that
the Company offers to its executive employees and is entitled to reimbursement
for all documented reasonable business expenses he incurs. The term of the
agreement is two years. In the event Mr. Brown is terminated by the Board
without cause, the Company is required to continue paying Mr. Brown's base
salary and providing certain other benefits for the period of time prescribed
under the Company's standard severance plan (which is currently six months).
In August 1996, the Company entered into an employment agreement with Mr.
Kurtzman. The agreement provides for an annual base salary of $150,000 and
annual incentive-based bonus compensation of up to 50% of such base salary. The
exact amount of such bonus compensation is determined by the Company's Board of
Directors, based upon the achievement of specified performance goals established
by the Board. Under the agreement, Mr. Kurtzman is also eligible to participate
in all employee benefit plans and programs that the Company offers to its
executive employees and is entitled to reimbursement for all documented
reasonable business expenses he incurs. The initial term of the agreement
expires in August 1998, but the agreement is subject to automatic one-year
renewal terms. Consistent with Company policies, in the event that Mr. Kurtzman
is terminated by the Board without cause, or in the event that Mr. Kurtzman
resigns for good reason, the Company is required to continue paying Mr.
Kurtzman's salary for six months as severance pay.
In October 1996, the Company and Mr. Jones executed a letter agreement,
effective upon consummation of the offering made hereby, pursuant to which Mr.
Jones will be employed by the Company as a senior advisor. The agreement
provides for an annual base salary of $100,000 and the issuance to Mr. Jones of
options to purchase 8,497 shares of Common Stock, vesting one-third upon
consummation of the offering and one-third upon each of the next two anniversary
dates thereafter, at an exercise price per share equal to the price per share to
the public in this offering. Mr. Jones is entitled to receive as additional
compensation $10,000 for each approved strategic partnership he closes for the
Company and 1.5% of the net revenues generated in connection therewith for a
period of three years from the date revenues are first generated (2.25% in
respect of revenues generated in 1997). In January 1997, Mr. Jones will receive
a $100,000 nonrefundable advance against this additional compensation. This
additional compensation will cease to be paid after two years from the date of
termination of Mr. Jones' employment. Mr. Jones will also receive a $100,000
bonus upon his execution of a two-year non-compete agreement in January 1997.
Mr. Jones will continue to be covered under the Company's insurance plan.
OPTION GRANTS
No grants of options to purchase the Company's Common Stock were made during
the year ended December 31, 1995 to the Named Executive Officer.
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<PAGE>
OPTION EXERCISES AND HOLDINGS
The Named Executive Officer did not exercise any options during 1995. The
following table sets forth information concerning stock options held as of such
date by the Named Executive Officer:
AGGREGATE OPTION EXERCISES IN FISCAL
YEAR AND YEAR-END OPTION VALUES
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1995 AT DECEMBER 31, 1995(1)
----------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------- ------------- --------------- ------------- --------------
Narasimhan P. Kannan 67,980 -- $0 --
- ----------
(1) Calculated on the basis of $5.88, the estimated fair market value per share
of the Common Stock as of December 31, 1995, as determined by the Company's
Board of Directors, less the exercise price.
STOCK PLANS
The Company's Amended and Restated Stock Option Plan (the "Option Plan") was
adopted by the Board of Directors of the Company and approved by the Company's
stockholders in November 1994. A total of 288,916 shares of Common Stock have
been reserved for issuance under the Option Plan. The Company's 1996 Stock Plan
(the "1996 Plan"; together with the Option Plan, the "Plans") was adopted by the
Board of Directors in August 1996 and approved by the Company's stockholders in
September 1996. A total of 135,960 shares of Common Stock have been reserved for
issuance under the 1996 Plan. The Plans provide for grants of "incentive stock
options," within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), to employees (including officers and employee
directors), and for grants of nonstatutory options to employees and consultants.
The 1996 Plan also allows for the grant of purchase rights, but none have been
granted to date. The Plans are currently being administered by the Board of
Directors of the Company, which determines the optionees and the terms of the
options granted, including the exercise price, number of shares subject to the
option and the exercisability thereof. Following the closing of this offering,
the Plans will be administered by the Compensation Committee of the Board of
Directors. The Option Plan and the 1996 Plan will terminate in November 1996 and
August 2006, respectively, unless sooner terminated by the Board of Directors.
The exercise price of incentive stock options granted under the Plans must be
not less than the fair market value of the Common Stock on the date of grant,
and the exercise price of nonstatutory options under the Option Plan must be not
less than 85% of the fair market value of the Common Stock on the date of grant.
With respect to any optionee who owns stock representing more than 10% of the
voting power of all classes of the Company's outstanding capital stock, the
exercise price of any incentive stock option must be equal to at least 110% of
the fair market value of the Common Stock on the date of grant, and the term of
the option must not exceed five years. The terms of all other options may not
exceed ten years. 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.
As of October 31, 1996, no shares of Common Stock had been issued upon
exercise of options granted under the Plans, options to purchase 249,983 and
128,053 shares of Common Stock, at weighted average exercise prices of $6.88 and
$14.71 per share, were outstanding under the Option Plan and the 1996 Plan,
respectively, and 38,933 and 7,907 shares remained available for future option
grants under the Option Plan and the 1996 Plan, respectively.
48
<PAGE>
CERTAIN TRANSACTIONS
From November 1994 to April 1996, the Company entered into Subscription
Agreements with certain investors, pursuant to which the Company issued and sold
shares of convertible Preferred Stock, par value $0.01 per share ("Series A
Preferred Stock"), for total consideration of $3,800,889, which shares will
convert into a total of 447,733 shares of Common Stock upon consummation of the
offering made hereby. Calvert Social Venture Partners, L.P. and Calvert Social
Investment Fund, two investment companies of which D. Wayne Silby, a director of
the Company, serves as the Chairman of the General Partner and President,
respectively, purchased Series A Preferred Stock convertible into 18,816 and
25,032 shares of Common Stock, respectively, upon consummation of the offering
made hereby. Spencer Trask Securities Incorporated ("Spencer Trask") acted as
Placement Agent for the Company's Series A Preferred Stock financing. Kevin
Kimberlin, a principal stockholder of the Company, is the Chairman of the Board
of Spencer Trask Holdings, Inc., the parent company of Spencer Trask. In
connection with the financing, Spencer Trask received placement fees aggregating
$391,000 and designees of Spencer Trask received warrants to purchase an
aggregate of 37,506 shares of Common Stock. All of these warrants are
exercisable until May 2002 at a weighted average exercise price of $8.98 per
share. In September 1996, contingent upon an initial public offering price per
share of $12.94 or greater, the holders of these warrants agreed to eliminate
their contractual rights to price-based anti-dilution adjustments to the number
of shares underlying these warrants, except with respect to issuances below
$8.83 per share.
In March 1995, the Company issued 24,835 shares of Common Stock to W. Braun
Jones, Jr., a director and executive officer of the Company, upon conversion of
indebtedness in the amount of $36,533 at a conversion rate of $1.47 per share.
In December 1995, the Company also repaid indebtedness owed to Mr. Jones in the
principal amount of $70,000, plus accrued interest thereon. The Company also
borrowed $130,000 from Mr. Jones in May 1996 pursuant to a subordinated
promissory note, the principal of which was convertible into 6,904 shares of
Common Stock at a conversion price of $18.83 per share prior to the Jones
Transactions, as defined below (the "Jones Note"). In connection therewith, the
Company also issued to Mr. Jones warrants to purchase an aggregate of 6,904
shares of Common Stock at an exercise price of $18.83 per share prior to the
Jones Transactions (the "Jones Warrants"). Under the terms of both the Jones
Note and the Jones Warrants, Mr. Jones, prior to the Jones Transactions, was
entitled to price-based anti-dilution protection with respect to the conversion
price under the Jones Note and the exercise price under the Jones Warrants, such
that Mr. Jones, upon the conversion of the Company's Series B Preferred Stock
into Common Stock at an effective conversion price of $9.12 per share upon
consummation of the offering made hereby, would be entitled to convert the
principal and accrued interest under Jones Note into 14,938 shares of Common
Stock and to exercise the Jones Warrants for 14,253 shares of Common Stock at a
conversion price and exercise price, respectively, of $9.12 per share. Mr. Jones
entered into an agreement in September 1996 to convert the principal and accrued
interest under the Jones Note into 14,938 shares of Common Stock at a conversion
price of $9.12 per share upon consummation of the offering made hereby (the
"Jones Transactions").
In February 1995, the Company issued to William E. Kimberly, a director of
the Company, and his wife warrants exercisable for an aggregate of 12,746 shares
of Common Stock at an exercise price of $6.18 per share in connection with their
loans to the Company of $50,000, which indebtedness was converted into an
aggregate of 11,328 shares of Common Stock in March 1995 at a conversion price
of $4.47 per share.
In March 1996, the Company borrowed $300,000 from Frogtown Holdings, Inc.
("Frogtown"), a corporation controlled by Austin O. Furst, Jr., a principal
stockholder of the Company, in exchange for which the Company issued to Frogtown
a Senior Convertible Promissory Note convertible into shares of Common Stock at
a conversion rate of $18.83 per share prior to the Furst Transactions (the
"Frogtown Note"). Certain trusts for the benefit of Mr. Furst's daughters (the
"Trusts") also hold warrants to purchase 101,970 shares of Company Common Stock
at an exercise price of $17.65 per share, which will adjust to the initial
public offering price (the "IPO Price") upon the consummation of the offering
made hereby (the "IPO Price Warrants") and warrants to purchase 101,970 shares
of Company Common Stock at an exercise price of $8.83 per share (the "$8.83
Warrants"). The Trusts entered into an agreement in September 1996 to eliminate
their contractual rights to price-based anti-dilution adjustments to the
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<PAGE>
number of shares underlying the IPO Price Warrants except with respect to
issuances below $8.83. Upon consummation of the offering made hereby and
contingent upon an initial public offering price per share of $12.94 or greater,
the Trusts are required to purchase 67,980 shares underlying the $8.83 Warrants.
In consideration thereof, the Company has agreed to issue to Mr. Furst a warrant
to purchase 15,687 shares of Common Stock at a per share exercise price equal to
the IPO Price. In addition, the Company and Frogtown agreed that the Frogtown
Note, together with interest accrued thereon, will be repaid, out of the
proceeds of the warrant exercise described above, by the Company in full upon
consummation of the offering made hereby. The foregoing transactions, agreed to
in September 1996 and to automatically take place upon consummation of the
offering made hereby, are sometimes referred to herein as the "Furst
Transactions."
In July 1996, the Company entered into the Series B Preferred Stock Purchase
Agreement with Wheatley Partners, L.P., a principal stockholder of the Company,
and certain other investors, including Barry K. Fingerhut, a General Partner of
the General Partner of Wheatley and a director of the Company (the "Series B
Investors"), pursuant to which the Company issued and sold an aggregate of
185,877 shares of Series B redeemable convertible Preferred Stock (which is
convertible into 392,934 shares of Common Stock upon consummation of the
offering made hereby) for aggregate cash consideration of $3,500,000.
In August 1996, the Company completed its acquisition of CTA, pursuant to an
Agreement and Plan of Merger among CTA, the Company and a wholly-owned
subsidiary of the Company (the "Merger Agreement"). Pursuant to the Merger
Agreement, the Company acquired all of the outstanding capital stock of CTA in
exchange for 42,487 shares of Common Stock, which were issued to Michael Brown,
CTA's President, Chief Executive Officer and sole stockholder. In connection
with the acquisition, the Company also issued fully vested options to purchase
5,096 shares of the Company's Common Stock at an exercise price of $0.12 per
share to four employees of CTA. In addition, the Company granted an option to
purchase 16,995 shares of the Company's Common Stock at an exercise price of
$14.71 per share to Mr. Brown. Mr. Brown entered into a two-year, renewable
employment agreement with the Company to serve as the Company's Executive Vice
President of Corporate Training and to remain President of CTA. See
"Management--Executive Compensation--Employment Agreements."
In connection with the resignation of John D. Phillips from the Board of
Directors in August 1996, the Board of Directors accelerated the vesting of
options granted to Mr. Phillips in November 1994 for the purchase of 6,798
shares of Common Stock at an exercise price of $1.47 per share.
From 1992 through 1995, a the Company loaned to Nat Kannan, the Company's
founder and Chief Executive Officer, funds in the principal amount, together
with interest accrued thereon through the date of this Prospectus, of
approximately $251,000. Pursuant to the terms of Mr. Kannan's employment
agreement, Mr. Kannan is obligated to apply the entire amount of back wages owed
to Mr. Kannan by the Company of approximately $392,450 to satisfy his debt
obligation and the Company's income tax withholding obligations upon
consummation of the offering made hereby.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of October 31, 1996, and as adjusted
to reflect the sale of the shares of Common Stock offered hereby, by: (i) each
person known by the Company to own beneficially more than five percent of the
Company's outstanding shares of the Common Stock; (ii) the Named Executive
Officer; (iii) each of the Company's directors; and (iv) all directors and
executive officers as a group. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission. In computing the
number of shares beneficially owned by a person and the percentage ownership of
that person, shares of Common Stock subject to options, warrants or convertible
debt held by that person that are currently exercisable or convertible, or will
become exercisable or convertible within 60 days after October 31, 1996, are
deemed outstanding. Such shares, however, are not deemed outstanding for
purposes of computing the percentage ownership of any other person. Unless
otherwise indicated in the footnotes to this table, the persons and entities
named in the table have sole voting and sole investment power with respect to
all shares beneficially owned, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
PERCENTAGE
----------------------
NUMBER OF SHARES PRIOR
BENEFICIALLY TO THE AFTER THE
NAME OWNED OFFERING OFFERING(1)
- ----------------------------------------------- ------------------ ---------- -----------
<S> <C> <C> <C>
Austin O. Furst, Jr.(2)
138 Frogtown Road
New Canaan, CT 06840 326,422 17.1% 9.8%
Narasimhan P. Kannan(3)........................ 315,052 17.3% 9.7%
Barry K. Fingerhut(4).......................... 299,207 17.1% 9.4%
Wheatley Partners, L.P.
80 Cutler Mill Road, Suite 311
Great Neck, NY 11021 280,683 16.0% 8.8%
Kevin Kimberlin(5)
c/o Spencer Trask Securities Incorporated
535 Madison Avenue, 18th Floor
New York, NY 10022 135,008 7.4% 4.2%
Kimberlin Family Partners, L.P.(6)
c/o Spencer Trask Securities Incorported
535 Madison Avenue, 18th Floor
New York, NY 10022 130,014 7.1% 4.0%
W. Braun Jones, Jr.(7)....................... 111,468 6.1% 3.4%
Intersouth Partners
P.O. Box 13546
Research Triangle Park, NC 27709 105,356 6.0% 3.3%
Dennis J. Dougherty(8)....................... 105,356 6.0% 3.3%
William E. Kimberly(9)....................... 53,628 3.0% 1.7%
D. Wayne Silby(10)........................... 46,114 2.6% 1.5%
Carl N. Tyson(11)............................ 10,622 * *
Edson D. deCastro(11)........................ 4,532 * *
All directors and executive officers as a
group
(13 persons)(12) ........................... 1,017,811 52.0% 30.1%
</TABLE>
- ----------
* Less than 1 percent
(1) Assumes the sale of 1,430,000 shares by the Company pursuant to this
offering and no exercise of the Underwriters' over-allotment option.
(2) Includes 152,496 shares underlying warrants held by trusts for which Mr.
Furst is the trustee and which are currently exercisable.
51
<PAGE>
(3) Includes 67,980 shares underlying a warrant held by Mr. Kannan that is
currently exercisable.
(4) Consists of 18,524 shares held by Mr. Fingerhut and 280,683 shares held by
Wheatley Partners, L.P., an investment company of which Mr. Fingerhut
serves as a General Partner of the General Partner. Mr. Fingerhut disclaims
beneficial ownership of the shares held by Wheatley Partners, L.P.
(5) Includes 79,165 shares underlying currently exercisable warrants held by
Kimberlin Family Partners, L.P., a limited partnership of which Mr.
Kimberlin serves as the General Partner, and 4,994 shares underlying
currently exercisable warrants held by Spencer Trask Holdings, Inc., of
which Mr. Kimberlin is the Chairman of the Board of Directors. Mr.
Kimberlin disclaims beneficial ownership of the shares held by Spencer
Trask Holdings, Inc.
(6) Includes 79,165 shares underlying warrants which are currently exercisable.
(7) Includes 40,447 vested shares underlying options and 31,248 shares
underlying warrants held by Mr. Jones that are currently exercisable.
(8) Consists of shares held by Intersouth Partners, L.P., a venture capital
fund of which Mr. Dougherty serves as a General Partner of the General
Partner. Mr. Dougherty disclaims beneficial ownership of such shares.
(9) Includes 10,197 shares underlying a warrant held by Mr. Kimberly that is
currently exercisable, 2,266 vested shares underlying options, as well as
5,344 outstanding shares of Common Stock and 2,549 shares underlying a
currently exercisable warrant, both held by Elena Kimberly, Mr. Kimberly's
wife.
(10) Consists of 2,266 vested shares underlying options and 18,816 and 25,032
shares held by Calvert Social Venture Partners, L.P. and Calvert Social
Investment Fund, respectively, two investment companies of which Mr. Silby
serves as Chairman of the General Partner and President, respectively. Mr.
Silby disclaims beneficial ownership of such shares.
(11) Consists of vested shares underlying options.
(12) Includes the shares discussed in footnotes (3), (4) and (7)-(11). Also
includes 42,487 outstanding shares and 29,345 vested shares underlying
options held by other executive officers.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company will consist 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 following summary of certain provisions of the Common Stock and Preferred
Stock and outstanding warrants does not purport to be complete and is subject
to, and qualified in its entirety by, the provisions of the Company's
Certificate of Incorporation and Bylaws, each as amended, and the warrants,
which are included as exhibits to the Registration Statement of which this
Prospectus is a part.
COMMON STOCK
After giving effect to the conversion of all of the Company's outstanding
Preferred Stock, effective immediately prior to the consummation of the offering
made hereby, there were 1,754,415 shares of Common Stock outstanding held of
record by 105 stockholders. The holders of Common Stock are entitled to one vote
for each share held of record on all matters submitted to a vote of
stockholders. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Subject to preferences that may be applicable to any
outstanding Preferred Stock, holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in the assets remaining after payment of
liabilities and the liquidation preference of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, conversion or redemption rights. All
of the outstanding shares of Common Stock are, and the shares to be sold in this
offering when issued and paid for will be, fully paid and non-assessable.
PREFERRED STOCK
The holders of the Company's Series A Preferred Stock and Series B Preferred
Stock are entitled to receive cumulative dividends at a rate of 7% per year, to
be paid immediately prior to consummation of the offering made hereby in shares
of the Company's Series A and Series B Preferred Stock, respectively. Upon the
consummation of this offering, the outstanding shares of Series A and Series B
Preferred Stock, including those issuable as dividends, will be converted into
an aggregate of 840,667 shares of Common Stock, and 10,000,000 shares of
undesignated Preferred Stock will be authorized for issuance. The Company's
Board of Directors has the authority, without further action by the
stockholders, to issue such Preferred Stock in one or more series and to fix the
designations, powers, preferences, privileges and relative participating,
optional or special rights and the qualifications, limitations or restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences of each such series, any or all of which
may be greater than the rights of the Common Stock. The Board of Directors,
without stockholder approval, can issue Preferred Stock with voting, conversion
or other rights that could adversely affect the voting power and other rights of
the holders of Common Stock. Preferred Stock could thus be issued quickly with
terms that could have the effect of delaying or preventing a change in control
of the Company or make removal of management more difficult. Additionally, the
issuance of Preferred Stock may have the effect of decreasing the market price
of the Common Stock. The Company currently has no plans to issue any of the
Preferred Stock subsequent to the closing of this offering.
WARRANTS
As of immediately prior to the consummation of the offering made hereby, the
Company had issued warrants to purchase an aggregate of 476,369 shares of Common
Stock at a weighted average exercise price of $9.80 per share, all of which are
currently exercisable. Warrants to purchase 135,960 of these shares expire in
March 2001; warrants to purchase 37,506 of these shares expire in May 2002; and
warrants to purchase the remaining 302,903 shares, which were granted at various
times between July 1994 and August 1996, expire three to eight years from the
date of grant.
53
<PAGE>
STOCK OPTIONS
See "Management--Stock Plans" for a discussion of the Company's outstanding
stock options.
DELAWARE LAW AND LIMITATIONS ON CHANGES IN CONTROL
Section 203 of the Delaware General Corporation Law (the "DGCL") prevents an
"interested stockholder" (defined in Section 203, generally, as a person owning
15% or more of a corporation's outstanding voting stock) from engaging in a
"business combination" (as defined in Section 203) with a publicly held Delaware
corporation for three years following the date such person became an interested
stockholder unless (i) before such person became an interested stockholder, the
board of directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
interested stockholder's becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock of the corporation outstanding
at the time the transaction commenced (excluding stock held by directors who are
also officers of the corporation and by employee stock plans that do not provide
employees with the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer); or (iii) following
the transaction in which such person became an interested stockholder, the
business combination is approved by the board of directors of the corporation
and authorized at a meeting of stockholders by the affirmative vote of the
holders of 66-2/3% of the outstanding voting stock of the corporation not owned
by the interested stockholder.
The Company's Bylaws generally require at least 50 days advance notice of any
action to be proposed by a stockholder at any meeting of stockholders and set
forth other specific procedures that a stockholder must follow. In addition, the
Bylaws provide that a special meeting of the Company's stockholders may only be
called by the Board of Directors; no such meeting may be called by the
stockholders. Further, the Bylaws eliminate the ability of stockholders to act
by written consent after this offering, and consequently stockholders may only
act at meetings thereof.
These Bylaws provisions, the provisions authorizing the Board of Directors to
issue preferred stock without stockholder approval and the provisions of Section
203 of the DGCL could have the effect of delaying, deferring or preventing a
change in control of the Company or the removal of existing management. See
"Risk Factors--Potential Issuance of Preferred Stock; Anti-Takeover Provisions."
LIMITATION ON DIRECTORS' AND OFFICERS' LIABILITY
The Certificate of Incorporation provides that a director of the Company will
not be personally liable to the Company or its stockholders for monetary damages
for any breach of fiduciary duty as a director, except in certain cases where
liability is mandated by the DGCL. The provision has no effect on any
non-monetary remedies that may be available to the Company or its stockholders,
nor does it relieve the Company or its directors from compliance with federal or
state securities laws. The Bylaws of the Company generally provide that the
Company shall indemnify, to the fullest extent permitted by law, any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit, investigation, administrative hearing or any other
proceeding (each, a "Proceeding") by reason of the fact that he is or was a
director or officer of the Company, or is or was serving at the request of the
Company as a director, officer, employee or agent of another entity, against
expenses (including attorneys' fees) and losses, claims, liabilities, judgments,
fines and amounts paid in settlement actually incurred by him in connection with
such Proceeding.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is First
National Bank of Boston.
LISTING
The Company has applied to list the Common Stock on the Nasdaq National
Market under the trading symbol "UOLP."
54
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for the Common
Stock of the Company. Sales of substantial amounts of Common Stock in the public
market could adversely affect the trading price of the Common Stock. See "Risk
Factors--Shares Eligible for Future Sale."
Upon completion of this offering, the Company will have outstanding 3,184,415
shares of Common Stock, assuming no exercise of the Underwriters' over-allotment
option and no exercise of outstanding options or warrants, except for the Furst
Transactions and the Jones Transactions. Of these, the 1,430,000 shares offered
hereby will be freely tradeable without restriction under the Securities Act,
unless such shares are held by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act.
The remaining 1,754,415 shares of Common Stock outstanding upon completion of
this offering will be "restricted securities" as that term is defined in Rule
144 ("Restricted Shares"). Restricted Shares may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rules 144 or 701 under the Securities Act, which are summarized below. Sales of
Restricted Shares in the public market, or the availability of such shares for
sale, could adversely affect the market price of the Common Stock.
The executive officers, directors and certain other holders of Common Stock
are bound by contractual "lock-up" agreements providing that they will not
offer, pledge, sell, contract to sell or grant any option to purchase or
otherwise dispose of an aggregate of 1,671,916 outstanding shares of Common
Stock beneficially owned by them for a period of one year after the date of the
final prospectus relating to this offering without the prior written consent of
Friedman, Billings, Ramsey & Co., Inc. Taking into account the lock-up
agreements, the number of shares that will be available for sale in the public
market, subject in some cases to the volume and other restrictions of Rule 144,
will be as follows: (i) approximately 47,168 shares will be eligible for
immediate sale as of the date of the final prospectus relating to this offering;
(ii) approximately 3,229 additional shares will be eligible for sale beginning
90 days after the date of the final prospectus relating to this offering
pursuant to Rules 144 and 701; (iii) approximately 27,336 shares will be
eligible for sale beginning as early as March and May 1997 pursuant to Rule 144;
and (iv) approximately 998,545 additional shares will be eligible for sale
beginning one year after the date of the final prospectus relating to this
offering. Approximately 678,137 remaining Restricted Shares will not be eligible
for sale pursuant to Rule 144 until the expiration of their applicable two-year
holding periods, which will expire at various times through September 1998.
As of October 31, 1996, an additional 854,405 shares of Common Stock were
subject to outstanding options and warrants. Taking into account the lock-up
agreements, the number of shares that will be available for sale in the public
market upon exercise of these warrants or options, subject in some cases to the
volume and other restrictions of Rule 144, will be as follows: (i) approximately
250,155 additional shares will be eligible for sale beginning one year after the
date of the final prospectus relating to this offering; (ii) approximately
476,369 remaining shares issuable upon exercise of warrants will not be eligible
for sale pursuant to Rule 144 until the expiration of their applicable holding
periods, which will expire two years from their exercise dates; and (iii)
approximately 127,881 remaining shares issuable upon exercise of options will be
eligible for sale pursuant to Rule 701 upon the ratable vesting of such shares
at various times through August 1999.
Subject to lock-up provisions or agreements, certain of the shares issued
upon exercise of options and warrants granted by the Company prior to the date
of the final prospectus relating to this offering will be available for sale in
the public market pursuant to Rule 701 under the Securities Act. Rule 701
permits resales of such shares in reliance upon Rule 144 but without compliance
with certain restrictions, including the holding period requirement, imposed
under Rule 144. In general, under Rule 144 as currently in effect, beginning 90
days after the date of the final prospectus relating to this offering, a person
(or persons whose shares are aggregated) who has beneficially owned Restricted
Shares for at least two years (including the holding period of any prior owner
except an affiliate) would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of (i) one percent of the then
outstanding shares of Common Stock (approximately 31,184 shares immediately
after this
55
<PAGE>
offering) or (ii) the average weekly trading volume of the Common Stock during
the four calendar weeks preceding the filing of a Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain manner-of-sale and notice
requirements and to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least three years
(including the holding period of any prior owner except an affiliate of the
Company) is entitled to sell such shares without complying with the
manner-of-sale, public information, volume limitation or notice provisions of
Rule 144. Unless otherwise restricted, such "144(k) shares" may therefore be
sold immediately upon the completion of this offering.
The Securities and Exchange Commission has recently proposed amendments to
Rule 144 and Rule 144(k) that would permit resale of restricted shares under
Rule 144 after a one-year, rather than a two-year holding period, subject to
compliance with the other provisions of Rule 144, and would permit resale of
restricted shares by non-affiliates under Rule 144(k) after a two-year, rather
than a three-year holding period. Adoption of such amendments could result in
resale of restricted shares sooner than would be the case under Rule 144 and
Rule 144(k) as currently in effect.
Upon completion of this offering and at specified times thereafter, certain
holders of the Company's securities will be entitled to certain rights with
respect to the registration under the Securities Act of the shares underlying
such securities. Registration of such shares under the Securities Act would
result in such shares becoming freely tradeable without restriction under the
Securities Act (except shares purchased by affiliates) immediately upon the
effectiveness of such registration. Specifically, holders of an aggregate of
approximately 835,232 shares of Common Stock, including shares issuable upon the
exercise of warrants and conversion of Preferred Stock and stock dividends
accrued thereon, have the right, subject to certain conditions and limitations,
to require the Company to register such securities under the Securities Act. A
total of approximately 509,659 of such shares have demand registration rights
exercisable after 90 days following completion of this offering; provided,
however that such rights cannot be exercised at that time because of the
execution of lock-up agreements waiving such rights for a period of one year, as
discussed above. The holders of the remaining shares with demand registration
rights may require the Company to register one-half of such shares after each of
the next two anniversary dates following completion of this offering. In
addition, holders of an aggregate of approximately 1,126,226 shares of Common
Stock, including shares issuable upon the exercise of warrants and conversion of
Preferred Stock and convertible debt, have the right, subject to certain
conditions and limitations, to require that such shares be included in any
registration of the Company's securities; provided, however, that in the case of
a registration for an underwritten public offering, the managing underwriter
may, under certain circumstances, exclude for marketing reasons some or all of
such securities from such registration. No such piggyback registration rights
are being exercised in connection with this offering. Finally, the holders of an
aggregate of approximately 475,932 shares of Common Stock, including shares
issuable upon the exercise of warrants and conversion of Preferred Stock and
convertible debt, have the right to demand from the Company an unlimited number
of registrations of such securities on Form S-3 following the date upon which
such form becomes available to the Company, subject to certain conditions and
limitations.
The Company has reserved an aggregate of 424,876 shares of Common Stock for
issuance pursuant to the Company's stock option plans, 27,192 of which either
have expired or have been forfeited. As of October 31, 1996, options to purchase
a total of 378,036 shares of Common Stock were outstanding. The Company intends
to file, approximately one year after the effective date of this offering, a
registration statement on Form S-8 to register the shares of Common Stock
reserved for issuance under the option plans, including shares subject to
outstanding options, together with 67,980 shares issuable upon exercise of a
warrant granted to an employee of the Company. Shares of Common Stock issued
under the foregoing plans or upon exercise of such warrant after the filing of
this registration statement will be freely tradeable in the public market,
subject in the case of certain holders to the Rule 144 limitations applicable to
affiliates, the above-referenced lock-up agreements with the Underwriters and
vesting restrictions imposed by the Company.
56
<PAGE>
UNDERWRITING
The Underwriters named below, represented by Friedman, Billings, Ramsey &
Co., Inc. (the "Representative"), have severally agreed to purchase, subject to
the terms and conditions of the underwriting agreement (the "Underwriting
Agreement"), and the Company has agreed to sell, the number of shares of Common
Stock set forth opposite the name of each Underwriter.
NUMBER OF
UNDERWRITERS SHARES
-------------------------------------- ----------------
Friedman, Billings, Ramsey & Co.,Inc..
----------------
Total............................... 1,430,000
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will be
obligated to purchase all of the shares of Common Stock if any shares are
purchased.
The Representative has advised the Company that the Underwriters propose
initially to offer the Common Stock to the public on the terms set forth on the
cover page of this Prospectus, and to certain dealers at such price less a
concession not in excess of $ per share. After the shares of Common Stock have
been released for sale to the public, the offering price and concession may be
changed. The Common Stock is offered subject to receipt and acceptance by the
Underwriters, and to certain other conditions, including the right to reject
orders in whole or in part.
The Company's executive officers, directors and certain stockholders who
beneficially own an aggregate of approximately 1,671,916 outstanding shares of
Common Stock have agreed not to offer, sell, contract to sell, pledge or grant
any option to purchase or otherwise dispose of Common Stock of the Company for a
period of one year from the date of the final prospectus relating to this
offering without the prior written consent of the Representative. The Company
has also agreed not to offer, sell, contract to sell, or otherwise dispose of
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or any rights to acquire Common Stock for a period
of one year from the date of the final prospectus relating to this offering,
without the prior written consent of the Representative, except that the Company
may grant stock options and sell shares of its Common Stock reserved for
issuance under the Plans, or issue shares upon the exercise of outstanding
options or warrants previously granted. See "Shares Eligible for Future Sale."
The Company has granted an option to the Underwriters, exercisable during the
30-day period after the date of this Prospectus, to purchase up to a maximum of
214,500 additional shares of the Common Stock at the public offering price less
underwriting discounts and commissions shown on the cover of this Prospectus.
The Underwriters may exercise this option only to cover overallotments made in
connection with the sale of the Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares of Common Stock on the same terms
as those on which the 1,430,000 shares of Common Stock are being offered.
Prior to this offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price has been determined by
negotiations among the Company and the Representative. Among the factors
considered in such negotiations were the history of, and prospects for, the
Company and the industry in which it competes, an assessment of management, the
Company's past and present operations, its past and present revenues and the
trend of such revenues, the prospects for future earnings of the Company, the
present state of its development, the general condition for the securities
markets at the time of the offering and the market prices of publicly traded
common stock of comparable companies in recent periods. See "Risk Factors--No
Prior Public Market; Possible Volatility of Stock Price."
57
<PAGE>
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make with respect thereto. The
Company has agreed to reimburse the Representative for its reasonable
out-of-pocket expenses incurred in connection with the performance of its
activities under the Underwriting Agreement, including but not limited to the
fees and expenses of the Representative's outside legal counsel and accountants
(which are currently estimated to be $200,000 in legal fees and expenses and
$10,000 in "blue sky" fees and expenses).
The Underwriters do not intend to confirm sales of the Common Stock offered
hereby to any account over which they exercise discretionary authority.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wyrick, Robbins, Yates & Ponton L.L.P., Raleigh, North Carolina.
Certain legal matters relating to the offering will be passed upon for the
Underwriters by Latham & Watkins, Washington, D.C.
EXPERTS
The financial statements of UOL Publishing, Inc. (formerly University Online,
Inc.) at December 31, 1994 and 1995, and for each of the three years in the
period ended December 31, 1995, 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 are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of Cognitive Training Associates, Inc. at December
31, 1994 and 1995 and June 30, 1996, and for the each of the three years in the
period ended December 31, 1995 and for the six months ended June 30, 1996
appearing in UOL Publishing, Inc.'s Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The Statement of Operating Revenues and Direct Operating Expenses of CYBIS (a
division of Control Data Systems, Inc.) for the year ended December 31, 1993,
appearing in UOL Publishing, Inc.'s Prospectus and Registration Statement has
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and is included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1, including amendments
thereto, under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock offered hereby,
reference is hereby made to such Registration Statement and to the exhibits and
schedules filed therewith. Statements contained in this Prospectus regarding 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 such contract
or other document filed as an exhibit to the Registration Statement, each such
statement is qualified in all respects by such reference to such exhibit. The
Registration Statement, including the exhibits and schedules thereto, may be
inspected without charge at the Public Reference Section of the Commission
located at the principal office of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of all or any part thereof may be obtained
from such facility upon payment of the prescribed fees.
58
<PAGE>
The Commission maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's web-site is
http://www.sec.gov.
REPORTS TO STOCKHOLDERS
The Company intends to furnish to its stockholders annual reports containing
financial statements audited by an independent public accounting firm and
quarterly reports for the first three quarters of each fiscal year containing
unaudited interim financial information.
59
<PAGE>
UOL PUBLISHING, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
UOL PUBLISHING, INC.
Report of Ernst & Young LLP, Independent Auditors................................... F-2
Balance Sheets...................................................................... F-3
Statements of Operations............................................................ F-4
Statements of Stockholders' Deficit................................................. F-5
Statements of Cash Flows............................................................ F-6
Notes to Financial Statements....................................................... F-7
COGNITIVE TRAINING ASSOCIATES, INC.
Report of Ernst & Young LLP, Independent Auditors................................... F-18
Balance Sheets...................................................................... F-19
Statements of Operations............................................................ F-20
Statements of Stockholder's Equity.................................................. F-21
Statements of Cash Flows............................................................ F-22
Notes to Financial Statements....................................................... F-23
CYBIS (A DIVISION OF CONTROL DATA SYSTEMS, INC.)
Report of Ernst & Young LLP, Independent Auditors................................... F-27
Statement of Operating Revenues and Direct Operating Expenses for the year ended
December 31, 1993................................................................. F-28
Notes to Financial Statement........................................................ F-29
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
UOL Publishing, Inc.
We have audited the accompanying balance sheets of UOL Publishing, Inc.
(formerly University Online, Inc.) as of December 31, 1994 and 1995 and the
related statements of operations, stockholders' deficit, and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of UOL Publishing, Inc. (formerly
University Online, Inc.) at December 31, 1994 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
July 10, 1996, except Note 14, as to which the date is
November 20, 1996
F-2
<PAGE>
UOL PUBLISHING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
SEPTEMBER 30,
DECEMBER 31, SEPTEMBER 30, 1996
1994 1995 1996 (SEE NOTE 13)
------------- ------------- --------------- ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 20,599 $ 104,178 $ 1,912,323 $ 2,212,323
Accounts receivable, less allowance of $19,950
at December 31, 1995 and $45,000 at September
30, 1996, respectively ........................ 5,122 67,364 151,738 151,738
Loans receivable from related parties .......... 381,666 286,948 252,225 252,225
Prepaid expenses and other current assets....... 163,537 26,050 490,964 490,964
------------- ------------- --------------- ------------------
Total current assets............................. 570,924 484,540 2,807,250 3,107,250
Property and equipment, net ..................... 20,471 128,133 398,890 398,890
Other assets..................................... -- -- 52,994 52,994
Goodwill and other intangible assets, net ...... 287,552 -- 685,803 685,803
------------- ------------- --------------- ------------------
Total assets..................................... $ 878,947 $ 612,673 $ 3,944,937 $ 4,244,937
============= ============= =============== ==================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses .......... $ 1,572,105 $ 1,088,435 $ 1,897,508 $ 1,897,508
Loans payable to related parties ............... 729,717 285,300 715,300 285,300
Notes payable .................................. 501,762 293,366 227,545 227,545
Accrued interest ............................... 239,307 133,651 181,697 181,697
Deferred revenues............................... 115,060 86,250 10,199 10,199
Short-term borrowings........................... -- -- 112,354 112,354
------------- ------------- --------------- ------------------
Total current liabilities........................ 3,157,951 1,887,002 3,144,603 2,714,603
Commitments
Long-term debt................................... -- -- 3,845 3,845
Redeemable convertible Preferred Stock, $0.01
par value:
Series B; 6,000,000 shares authorized; no shares
issued and outstanding at December 31, 1994 and
1995, 185,877 shares issued and outstanding at
September 30, 1996, respectively .............. -- -- 3,342,671 --
Series B-1; 6,000,000 shares authorized; no
shares issued and outstanding.................. -- -- -- --
Stockholders' deficit:
Series A convertible Preferred Stock, $0.01
par value; 12,000,000 shares authorized; no
shares issued and outstanding at December 31,
1994 and 381,335 and 402,960 shares issued and
outstanding at December 31, 1995 and September
30, 1996, respectively ........................ -- 3,813 4,030 --
Undesignated Preferred Stock, $0.01 par value;
10,000,000 shares authorized .................. -- -- -- --
Common Stock, $0.01 par value; 36,000,000 shares
authorized; 704,557, 783,246 and 830,830 shares
issued and outstanding at December 31, 1994 and
1995 and September 30, 1996, respectively
(1,754,415 pro forma shares)................... 7,046 7,832 8,308 17,544
Additional paid-in capital...................... 2,216,608 5,456,325 7,632,484 11,704,282
Accumulated deficit............................. (4,502,658) (6,742,299) (10,191,004) (10,195,337)
------------- ------------- --------------- ------------------
Total stockholders' deficit...................... (2,279,004) (1,274,329) (2,546,182) 1,526,489
------------- ------------- --------------- ------------------
Total liabilities and stockholders' deficit...... $ 878,947 $ 612,673 $ 3,944,937 $ 4,244,937
============= ============= =============== ==================
</TABLE>
See accompanying notes.
F-3
<PAGE>
UOL PUBLISHING, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
1993 1994 1995 1995 1996
------------ ------------- -------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Licensing and support revenues............... $ -- $ 710,274 $ 415,532 $ 326,302 $ 325,619
Online revenues.............................. 14,093 14,128 55,995 42,195 63,034
Development and other revenues............... 274,100 81,533 76,152 40,236 54,222
------------ ------------- -------------- -------------- --------------
Net revenues................................. 288,193 805,935 547,679 408,733 442,875
Costs and expenses:
Cost of licensing and support revenues...... -- 94,657 78,918 58,655 85,252
Cost of online revenues..................... 4,486 6,966 11,281 8,702 17,525
Cost of development and other revenues...... 60,000 44,379 3,431 1,837 9,674
Sales and marketing......................... 130,203 295,839 932,898 550,903 1,048,284
Product development......................... 151,132 205,975 576,470 411,860 839,762
General and administrative.................. 206,432 890,145 926,345 548,739 1,980,349
Depreciation and amortization............... 834 298,047 309,058 228,323 66,722
------------ ------------- -------------- -------------- --------------
Total costs and expenses .................... 553,087 1,836,008 2,838,401 1,809,019 (4,047,568)
Loss from operations......................... (264,894) (1,030,073) (2,290,722) (1,400,286) (3,604,693)
Other income (expense):
Other income (expense)...................... 6,241 (6,461) 126,651 124,667 205,529
Interest expense............................ (154,850) (259,994) (75,570) (53,914) (49,541)
------------ ------------- -------------- -------------- --------------
Loss before extraordinary gain on debt
forgiveness................................. (413,503) (1,296,528) (2,239,641) (1,329,533) (3,448,705)
Extraordinary gain on debt forgiveness ...... -- 609,270 -- -- --
------------ ------------- -------------- -------------- --------------
Net loss..................................... $(413,503) $ (687,258) $(2,239,641) $(1,329,533) $(3,448,705)
Accrued dividends to preferred stockholders . -- -- (174,889) (115,472) (241,915)
------------ ------------- -------------- -------------- --------------
Net loss available to common stockholders ... $(413,503) $ (687,258) $(2,414,530) $(1,445,005) $(3,690,620)
============ ============= ============== ============== ==============
Net loss per share: .........................
Loss before extraordinary gain on debt
forgiveness................................ (0.60) (1.79) (2.24) (1.34) (3.34)
Extraordinary gain on debt forgiveness...... -- 0.84 -- -- --
------------ ------------- -------------- -------------- --------------
Net loss per share.......................... $ (0.60) $ (0.95) $ (2.24) $ (1.34) $ (3.34)
============ ============= ============== ============== ==============
Weighted average shares outstanding.......... 689,406 724,916 1,079,032 1,074,962 1,103,899
============ ============= ============== ============== ==============
Pro forma net loss per share................. $ (1.77) $ (2.30)
============== ==============
Pro forma weighted average shares
outstanding................................. 1,363,459 1,605,389
============== ==============
</TABLE>
See accompanying notes.
F-4
<PAGE>
UOL PUBLISHING, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
SERIES A
CONVERTIBLE
SERIES A PREFERRED
PREFERRED STOCK STOCK
------------------ -----------
SHARES AMOUNT SHARES
--------- -------- -----------
Balance at December 31, 1992................. 4,568 $ 46 --
Preferred Stock dividends payable........... -- -- --
Net loss.................................... -- -- --
--------- -------- ---------
Balance at December 31, 1993................. 4,568 46 --
Preferred Stock dividends payable........... -- -- --
Conversion of debt to equity................ -- -- --
Series A Preferred Stock conversion......... (4,568) (46) --
Issuance of Common Stock.................... -- -- --
Conversion of Preferred Stock dividends
payable to Common Stock.................... -- -- --
Issuance of compensatory stock and stock
options.................................... -- -- --
Net loss.................................... -- -- --
--------- -------- ---------
Balance at December 31, 1994................. -- -- --
Conversion of debt to equity................ -- -- 1,800
Issuance of Series A convertible Preferred
Stock...................................... -- -- 379,535
Issuance of compensatory stock and stock
options.................................... -- -- --
Net loss.................................... -- -- --
--------- -------- ---------
Balance at December 31, 1995................. -- -- 381,335
Issuance of Common Stock primarily in
connection with the CTA acquisition........ -- -- --
Issuance of Series A convertible Preferred
Stock ..................................... -- -- 21,625
Issuance of compensatory stock options...... -- -- --
Net loss for the nine months ended September
30, 1996 (unaudited)....................... -- -- --
--------- -------- ---------
Balance at September 30, 1996 (unaudited) ... -- $ -- 402,960
========= ======== =========
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE
PREFERRED
STOCK COMMON STOCK ADDITIONAL TOTAL
--------- ------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
AMOUNT SHARES AMOUNT CAPITAL DEFICIT DEFICIT
-------- --------- -------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $ -- 381,545 $3,816 $1,080,911 $(3,384,573) $(2,299,800)
Preferred Stock dividends payable...... -- -- -- -- (9,302) (9,302)
Net loss................................... -- -- -- -- (413,503) (413,503)
-------- --------- -------- ------------ --------------- ---------------
Balance at December 31, 1993................. -- 381,545 3,816 1,080,911 (3,807,378) (2,722,605)
Preferred Stock dividends payable........... -- -- -- -- (8,022) (8,022)
Conversion of debt to equity................ -- 79,102 791 521,803 -- 522,594
Series A Preferred Stock conversion......... -- 91,368 914 (868) -- --
Issuance of Common Stock.................... -- 148,534 1,485 413,279 -- 414,764
Conversion of Preferred Stock dividends
payable to Common Stock.................... -- 4,008 40 24,733 -- 24,773
Issuance of compensatory stock and stock
options.................................... -- -- -- 176,750 -- 176,750
Net loss.................................... -- -- -- -- (687,258) (687,258)
-------- --------- -------- ------------ --------------- ---------------
Balance at December 31, 1994................. -- 704,557 7,046 2,216,608 (4,502,658) (2,279,004)
Conversion of debt to equity................ 18 78,689 786 325,278 -- 326,082
Issuance of Series A convertible Preferred
Stock...................................... 3,795 -- -- 2,728,639 -- 2,732,434
Issuance of compensatory stock and stock
options.................................... -- -- -- 185,800 -- 185,800
Net loss.................................... -- -- -- -- (2,239,641) (2,239,641)
-------- --------- -------- ------------ --------------- ---------------
Balance at December 31, 1995................. 3,813 783,246 7,832 5,456,325 (6,742,299) (1,274,329)
Issuance of Common Stock primarily in
connection with the CTA acquisition........ -- 47,584 476 741,524 -- 742,000
Issuance of Series A convertible Preferred
Stock ..................................... 217 -- -- 412,583 -- 412,800
Issuance of compensatory stock options...... -- -- -- 1,022,052 -- 1,022,052
Net loss for the nine months ended September
30, 1996 (unaudited)....................... -- -- -- -- (3,448,705) (3,448,705)
-------- --------- -------- ------------ --------------- ---------------
Balance at September 30, 1996 (unaudited) ... $4,030 830,830 $8,308 $7,632,484 $(10,191,004) $(2,546,182)
======== ========= ======== ============ =============== ===============
</TABLE>
See accompanying notes.
F-5
<PAGE>
UOL PUBLISHING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
1993 1994 1995 1995 1996
------------ ------------ -------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating Activities
Net loss................................. $(413,503) $(687,258) $(2,239,641) $(1,329,533) $(3,448,705)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization........... 834 298,047 309,058 229,323 66,722
Stock and stock option compensation
expense................................ -- 176,750 185,800 -- 1,022,052
Gain on debt forgiveness and other
settlements............................ -- (609,270) (30,303) (30,303) --
Loss on inventory write-off............. -- 46,488 -- --
Changes in operating assets and
liabilities:
Accounts receivable.................... 2,613 (1,647) (62,242) (35,572) 44,308
Prepaid expenses and other current
assets................................ -- (119,586) 137,487 48,534 (427,989)
Accounts payable and accrued
expenses.............................. 362,544 233,879 (386,670) (561,055) 636,281
Accrued interest....................... 125,206 229,439 (63,171) (75,762) 48,046
Deferred revenues...................... 23,740 (28,000) (28,810) (28,810) (92,051)
------------ ------------ -------------- -------------- --------------
Net cash provided by (used in) operating
activities.............................. 101,434 (461,158) (2,178,492) (1,783,178) (2,151,336)
Investing Activities
Acquisition of CYBIS division............ -- (150,000) -- -- --
Purchases of property and equipment ..... (797) (1,430) (129,168) (85,936) (215,462)
Proceeds from loans receivable from
related parties......................... -- -- 94,718 97,472 44,966
Advances under loans receivable from
related parties......................... (100,670) (34,030) -- -- (9,083)
------------ ------------ -------------- -------------- --------------
Net cash provided by (used in) investing
activities.............................. (101,467) (185,460) (34,450) 11,536 (179,579)
Financing Activities
Proceeds from issuance of Common Stock .. -- 414,764 -- --
Proceeds from issuance of Series A
convertible Preferred Stock............. -- -- 2,732,434 2,732,434 412,800
Proceeds from the issuance of Series B
redeemable convertible Preferred Stock.. -- -- -- -- 3,042,671
Proceeds from loans payable to related
parties................................. -- 492,000 252,836 252,836 430,000
Proceeds from notes payable.............. -- -- -- -- 300,000
Proceeds from short-term borrowings ..... -- -- -- -- 19,410
Repayments of loans payable to related
parties................................. -- (34,000) (480,353) (407,998) --
Repayments of notes payable.............. -- (205,547) (208,396) (171,287) (65,821)
------------ ------------ -------------- -------------- --------------
Net cash provided by financing
activities.............................. -- 667,217 2,296,521 2,405,985 4,139,060
------------ ------------ -------------- -------------- --------------
Net increase (decrease) in cash ........ (33) 20,599 83,579 634,343 1,808,145
Cash at beginning of period.............. 33 -- 20,599 20,599 104,178
------------ ------------ -------------- -------------- --------------
Cash at end of period.................... $ -- $ 20,599 $ 104,178 $ 654,942 $ 1,912,323
============ ============ ============== ============== ==============
Supplemental cash flow information:
Interest paid............................ $ 1,477 $ 3,841 $ 181,009 $ 169,628 $ 24,517
============ ============ ============== ============== ==============
</TABLE>
See accompanying notes.
F-6
<PAGE>
UOL PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the nine months ended September 30, 1995
and 1996 is unaudited.)
1. ORGANIZATION AND NATURE OF OPERATIONS
UOL Publishing, Inc., formerly University Online, Inc. (the "Company"), was
incorporated in Virginia in 1984 and reincorporated in Delaware in 1985. The
Company believes it is a leading publisher of high quality, interactive and
on-demand educational courseware for the online education and training market
through the World Wide Web.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Cash equivalents, which are stated at cost, consist of highly liquid investments
with original maturities of three months or less.
REVENUE RECOGNITION
A majority of the Company's revenues are fixed monthly payments derived from
licensing and support agreements. The Company recognizes licensing and support
revenues as services are performed pursuant to the Company's contracts.
Development revenues earned under courseware conversion contracts are recognized
using the percentage-of-completion or completed contract method, depending on
the length of the contract. For percentage-of-completion 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.
Online revenues are recognized from two different sources. For a corporate
online course, revenue is recognized upon the online sign-up, after which the
student can no longer obtain a refund. For a college online course, revenue is
recognized upon the expiration of the drop-add period, after which the student
can no longer obtain a refund. The Company recognizes online revenues in
accordance with Statement of Position 91-1 "Software Revenue Recognition", and
at the time that the Company recognizes such revenues, the Company has completed
substantially all of its continuing obligations with respect to the associated
revenue, and the Company is not obligated to refund any of the cash.
In 1993, two customers individually represented 42% and 49% of total revenues.
In 1994, two customers individually represented 51% and 13% of total revenues.
In 1995, three customers individually represented 54%, 14% and 10% of total
revenues. For the nine months ended September 30, 1995, three customers
individually represented 62%, 17% and 11% of total revenues . For the nine
months ended September 30, 1996, two customers individually represented 46% and
10% of total revenues.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill which resulted from the acquisition by merger of Cognitive Training
Associates, Inc. ("CTA") in August 1996, is being amortized on a straight-line
basis over 10 years. Other intangible assets are being amortized on a
straight-line basis over three years. At September 30, 1996, goodwill and other
intangible assets were comprised of:
Goodwill ......................... $ 505,336
Contracts ........................ 200,000
---------
705,336
Less accumulated
amortization ..................... (19,533)
---------
$ 685,803
=========
ROYALTIES
The Company has royalty arrangements with certain entities that have provided
development funding. Royalties will become due and payable by the Company upon
the completion and sale of products currently under development. No significant
royalties have been incurred to date.
F-7
<PAGE>
UOL PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
PRODUCT DEVELOPMENT
Through September 30, 1996, the Company had expensed its product development
costs as development costs. It will continue to expense such costs until such
time as the realizability of the Company's software is established.
USE OF ESTIMATES
The preparation of the 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENT PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which is effective for the Company's
1996 financial statements. SFAS No. 123 allows companies to either account for
stock-based compensation under the new provisions of SFAS No. 123 or under the
provisions of APB No. 25, but requires pro forma disclosures in the footnotes to
the financial statements as if the measurement provisions of SFAS No. 123 had
been adopted. The Company intends to continue accounting for its stock-based
compensation in accordance with the provisions of APB No. 25. As such, the
adoption of SFAS No. 123 will not impact the financial condition or the results
of operations of the Company. The disclosures required by SFAS No. 123 are
considered immaterial to the Company's financial statements.
INCOME TAXES
The Company provides for income taxes in accordance with the liability method.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
NET LOSS PER SHARE
The Company's net loss per share calculations are based upon the weighted
average number of shares of Common Stock outstanding. Pursuant to the
requirements of the Securities and Exchange Commission Staff Accounting Bulletin
No. 83, convertible Preferred Stock, Common Stock, debt convertible into shares
of Common Stock, Common Stock purchase warrants and options to purchase Common
Stock issued at prices below the estimated initial public offering price during
the 12 months immediately preceding the initial filing of the registration
statement relating to the initial public offering ("IPO"), have been included in
the computation of net loss per share as if they were outstanding for all
periods presented (using the treasury method assuming repurchase of Common Stock
at the estimated IPO price). Other shares issuable upon the exercise of stock
options and warrants, conversion of debt into shares of Common Stock and
conversion of Preferred Stock have been excluded from the computation because
the effect of their inclusion would be antidilutive due to the Company's net
losses. Subsequent to the Company's IPO, convertible Preferred Stock, Common
Stock purchase warrants, options to purchase Common Stock and debt convertible
into shares of Common Stock under the treasury stock method will be included to
the extent they are dilutive. Weighted average shares used to calculate the pro
forma net loss per share for the year ended December 31, 1995 and for the nine
months ended September 30, 1996 differs from the weighted average on a
historical basis due to the inclusion of shares of Common Stock resulting from
the assumed conversion of Preferred Stock as contemplated by the IPO.
F-8
<PAGE>
UOL PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
3. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using the
straight-line method over an estimated useful life of three to five years.
Property and equipment consisted of the following:
DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
--------- ---------- ---------------
Equipment...................... $36,326 $165,465 $470,340
Computer software.............. -- -- 80,952
Furniture and fixtures......... 31,628 31,628 63,917
--------- ---------- ---------------
67,954 197,093 615,209
Less accumulated depreciation.. 47,483 68,960 216,319
--------- ---------- ---------------
$20,471 $128,133 $398,890
========= ========== ===============
4. ACQUISITION OF COGNITIVE TRAINING ASSOCIATES, INC.
On August 1, 1996, the Company acquired by merger substantially all of the
assets and liabilities (with the exception of the building, vehicle, certain
equipment, and certain notes payable) of Cognitive Training Associates, Inc., a
Texas corporation ("CTA"), for 42,487 shares of the Company's Common Stock. In
conjunction with the acquisition, the Company recorded goodwill in the amount of
$505,336 and other intangible assets (contracts and underlying modules) in the
amount of $200,000.
The Company also issued fully vested options to purchase 5,096 shares of the
Company's Common Stock, at an exercise price of $0.12 per share, to four
employees of CTA. Additionally, the Company granted an option to purchase 16,995
shares of the Company's Common Stock, at an exercise price of $21.18 per share,
to the former stockholder of CTA in conjunction with a two-year employment
agreement. Management subsequently repriced the option to $14.71 per share.
Management believes that this new grant price approximates the fair market value
on the date of repricing. The option will vest over a two-year period.
Additionally, pursuant to the employee agreement, the former stockholder of CTA
will be paid $150,000 by the Company upon successful integration of CTA into the
Company. The Company also agreed to lease the building owned by the former
stockholder of CTA for $5,000 per month (see Note 8). Following is a summary of
selected pro forma information for the year ended December 31, 1995 and the nine
months ended September 30, 1996 as if the transaction occurred on January 1,
1995.
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
1995 1996
--------------- --------------------
(UNAUDITED) (UNAUDITED)
--------------- --------------------
Net revenues.............................. $ 1,317,743 $ 905,987
=============== ====================
Net loss.................................. $(2,559,177) $(3,564,244)
Accrued dividends to preferred
stockholders.............................. (174,889) (241,915)
--------------- --------------------
Net loss available to common
stockholders.............................. $(2,734,066) $(3,806,159)
=============== ====================
Net loss per share........................ $ (2.44) $ (3.32)
=============== ====================
Weighted average shares outstanding ...... 1,121,519 1,146,386
=============== ====================
5. ACQUISITION OF CYBIS (A DIVISION OF CONTROL DATA SYSTEMS, INC.)
On January 1, 1994, the Company acquired substantially all of the assets,
properties and rights of the CYBIS division of Control Data Systems, Inc.
("Control Data"), for approximately $694,000. The Company paid $150,000 in cash
and the remaining amount in the form of two promissory notes (see Note 7). The
non-cash portion of this transaction (debt of approximately $544,000) was
excluded from the statements of cash flows.
F-9
<PAGE>
UOL PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
The transaction was accounted for using the purchase method. Accordingly, the
purchase price was allocated to the assets acquired based on their estimated
fair values. This treatment resulted in approximately $576,000 of cost in excess
of net assets acquired as of January 1, 1994.
Goodwill acquired has been amortized on a straight-line basis over an estimated
useful life of two years. The amortization period was determined based on a cash
flow analysis of the estimated future revenue stream of contracts assumed in the
acquisition. Goodwill consisted of $575,825, less accumulated amortization of
$288,273, $575,825, and $575,825 at December 31, 1994 and 1995 and September 30,
1996, respectively.
6. LOANS PAYABLE TO (RECEIVABLE FROM) RELATED PARTIES
During 1994, loans payable to various officers, directors and investors,
consisting of outstanding principal and accrued interest in the amount of
$522,594, were converted into 79,102 shares of the Company's Common Stock. The
remaining accrued interest of $89,748 was forgiven and recognized as a gain as a
result of the transaction. The non-cash portion of this transaction has been
excluded from the statements of cash flows.
At December 31, 1994, the Company had loans payable due to various officers,
directors and investors in the amount of $349,717. During 1995, the remaining
outstanding principal and accrued interest totaling $216,900 and $12,182,
respectively, as well as accounts payable totaling $97,000, were converted into
78,689 shares of Common Stock and 1,800 shares of Series A convertible Preferred
Stock. The remaining accrued interest of $30,303 was forgiven and recognized as
a gain as a result of this transaction. The non-cash portion of this transaction
has been excluded from the statements of cash flows.
At December 31, 1994 and 1995 and September 30, 1996, the Company owed $380,000,
$285,300 and $285,300, respectively, in 12% interest bearing notes payable to
various officers. The notes are secured by the Company's net revenues and
property and equipment and are to be repaid in monthly installments depending on
the Company's operating results.
Additionally, in March 1996, the Company issued a convertible promissory note
for $300,000 to an entity controlled by a stockholder. The note bears interest
at 10.5% per annum and matures with principal and interest payable on the
earlier of March 4, 1997 or on the consummation of a public offering of the
Company's Common Stock. The holder of the note has the option on or any time
after the maturity date and until one full business day after payment of the
note is tendered, to convert all or any portion of the outstanding principal and
accrued interest into shares of the Company's Common Stock. The initial
conversion price is $18.83 per share, subject to adjustment for certain events,
such as stock splits, dividends on Common Stock or sale of the Company's Common
Stock or Preferred Stock at a price less than the conversion price (see Note
13).
In May 1996, the Company issued a convertible subordinated unsecured promissory
note for $130,000 to an officer of the Company. The note bears interest at a
rate of 10% per annum and is payable upon a private round of financing or a
public offering of the Company's Common Stock, but in no event, later than May
31, 1997. In addition, the officer was issued warrants to purchase 6,904 shares
of the Company's Common Stock at an exercise price of $18.83 per share. These
warrants are exercisable for eight years. The Company believes that any value
associated with the warrants is deemed immaterial. The note payable is
convertible to shares of Common Stock at a rate of $18.83 per share, and the
conversion price and the warrant exercise price are subject to adjustment for
certain events, such as stock splits, dividends on Common Stock or sale of the
Company's Common Stock or Preferred Stock at a price less than the conversion
price (see Note 13).
At December 31, 1994 and 1995 and September 30, 1996, accrued interest on loans
payable to related parties totaled $172,865, $27,434 and $75,480, respectively.
F-10
<PAGE>
UOL PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Loans receivable from the Company's officers and employees amounted to $381,666,
$286,948 and $252,225 as of December 31, 1994 and 1995 and September 30, 1996,
respectively. The Company accrues interest on the loans receivable at a rate of
5% per annum. Interest income related to the loans receivable amounted to
$18,122, $14,347, $10,268 and $8,565 during the years ended December 31, 1994
and 1995 and during the nine months ended September 30, 1995 and 1996,
respectively.
7. NOTES PAYABLE
A note payable in the amount of $250,000 plus accrued interest of $369,522 due
to a former customer was settled during 1994 for a cash payment of $100,000. The
Company recognized an extraordinary gain of $519,522 as a result of this
transaction. The non-cash portion of this transaction has been excluded from the
statements of cash flows.
At December 31, 1994 and 1995 and September 30, 1996, the Company owed $351,762,
$293,366 and $227,545, respectively, in a non-interest bearing note payable to
Control Data (see Note 5). The note was discounted at a rate of 12% per annum.
The note was secured by the assets purchased from Control Data. During 1995, the
Company also repaid the $150,000 note payable balance to Control Data.
In June 1996, the Company borrowed $300,000 from an investor in exchange for a
convertible promissory note. The note bore interest at a rate of 10% per annum,
and any unpaid principal and interest is convertible into shares of the
Company's Series B redeemable convertible Preferred Stock at a conversion rate
of $18.83 per share, subject to adjustments for certain events, such as the sale
of the Company's Common or Preferred Stock at a price less than the conversion
price. In July 1996, principal and accrued interest were converted into shares
of Series B redeemable convertible Preferred Stock (see Note 10).
As of December 31, 1994 and 1995 and September 30, 1996, accrued interest on
notes payable totaled $66,442, $106,217, and $106,217, respectively.
8. COMMITMENTS
NETWORK SERVICES AGREEMENT
During 1993, the Company entered into a three-year agreement with CompuServe,
Inc. ("CompuServe") whereby CompuServe was to provide network services to the
Company. The Company ceased making payments under the agreement in 1993 due to
dissatisfaction with the services provided by CompuServe.
As a result, CompuServe asserted that the Company was liable for unpaid fees and
lost profits totaling $300,000 due to breach of contract. In October 1994, the
Company reached a conditional settlement with CompuServe whereby the Company was
required to purchase approximately $98,000 of advertising services from
CompuServe. During 1996, the Company fully satisfied its commitment to purchase
such advertising services from CompuServe. In 1996, the Company recognized a
gain of $119,274 relating to the settlement of amounts owed by the Company to
CompuServe; the gain is included in other income in the statements of
operations.
LEASES
The Company leases office space under noncancellable operating lease agreements.
One of these noncancellable lease agreements for office space expired August 31,
1996. Rent expense for the years ended December 31, 1993, 1994 and 1995 and for
the nine months ended September 30, 1995 and 1996 was $82,196, $96,266, $98,761,
$76,333 and $79,053, respectively.
As of September 30, 1996, payments due under noncancellable operating leases
were as follows:
F-11
<PAGE>
UOL PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
8. COMMITMENTS (CONTINUED)
Three months ended December 31,
1996................................ $ 50,895
1997................................ 217,410
1998................................ 227,547
1999................................ 218,772
2000................................ 100,479
Thereafter.......................... 35,000
----------
$850,103
==========
EMPLOYMENT AGREEMENTS
During 1996, the Company executed employment agreements with certain key
executives under which the Company is required to pay an aggregate of
approximately $670,000 in base salary annually over the next two years, as well
as certain performance incentives limited to 50% of such base salary.
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
------------ ------------ ---------------
<S> <C> <C> <C>
Accounts payable and accrued expenses ...... $ 394,386 $ 292,511 $1,264,015
Accrued payroll in arrears and payroll
taxes....................................... 1,116,159 628,249 543,457
Accrued payroll and payroll taxes........... 25,480 119,669 --
Accrued vacation............................ 36,080 48,006 90,036
------------ ------------ ---------------
$1,572,105 $1,088,435 $1,897,508
============ ============ ===============
</TABLE>
The Company accrues interest on the accrued payroll in arrears to the Chief
Executive Officer and three other officers of the Company at a rate of 5% per
annum. Interest expense related to the accrued payroll in arrears amounted to
$21,597, $45,158, $29,180, $23,408 and $30,618 during the years ended December
31, 1993, 1994 and 1995 and the nine months ended September 30, 1995 and 1996,
respectively.
10. STOCKHOLDERS' DEFICIT
EQUITY TRANSACTIONS
On November 11, 1994, the Company converted all 4,568 then-outstanding shares of
Series A convertible Preferred Stock into 91,368 shares of Common Stock to
effect the Series A convertible Preferred Stock conversion. In addition, the
cumulative Preferred Stock dividends declared up to that date were converted
into 4,008 shares of Common Stock.
During 1994, a total of 148,534 shares of Common Stock were issued to existing
and new investors at various prices per share for total proceeds of
approximately $415,000.
During 1995, the Company issued 379,535 shares of Series A convertible Preferred
Stock for net proceeds of approximately $2,732,000 at a price of $8.83 per
share.
During 1996, the Company issued 5,097 shares of Common Stock as payment for
certain accounts payable amounting to $42,000. The shares were issued at a price
per share of $8.83. The non-cash portion of this transaction has been excluded
from the statements of cash flows.
During 1996, the Company issued an aggregate of 20,534 shares of Series A
convertible Preferred Stock for net proceeds of approximately $413,000 at a
price of $21.18 per share. Additionally, the Company issued 1,091 shares of a
Series A convertible Preferred Stock to holders of the Series A convertible
Preferred Stock to satisfy contractual anti-dilution provisions pursuant to
certain 1996 stock transactions.
F-12
<PAGE>
UOL PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
10. STOCKHOLDERS' DEFICIT (CONTINUED)
PREFERRED STOCK
On July 19, 1996, the Company issued 185,877 shares of Series B redeemable
convertible Preferred Stock for total proceeds of $3,500,000, including
conversion of a $300,000 convertible promissory note (see Note 7). The holders
of shares of the Series B redeemable convertible Preferred Stock receive
cumulative dividends at a rate of seven percent per annum, payable in shares of
the Series B redeemable convertible Preferred Stock, as well as dividends
equivalent to any declared on the Common Stock, as if the Series B redeemable
convertible Preferred Stock was converted. Shares of Series B redeemable
convertible Preferred Stock are convertible on a one-for-one basis at a
conversion rate of $18.83 per share, subject to adjustment for certain events,
such as the sale of Common or Preferred Stock at a price less than the
conversion price. Shares of the Company's Series B redeemable convertible
Preferred Stock have a liquidation preference over all classes of capital stock
with the exception of the Series A convertible Preferred Stock at a preference
of the stated value (i.e. conversion price) plus declared, but unpaid, dividends
on the Company's Common Stock and the amount they would have received had they
converted to Common Stock just prior to the liquidation. The holders of Series B
redeemable convertible Preferred Stock also have the right to vote the number of
shares into which each share of Series B redeemable convertible Preferred Stock
is convertible and are entitled to have a designee elected to the Board of
Directors of the Company. The Series B redeemable convertible Preferred Stock
also contains certain anti-dilution and preemptive rights and is redeemable
solely at the option of the stockholder at the stated value at any time after
five years from the closing date . Each share of Series B redeemable convertible
Preferred Stock, plus all declared but unpaid dividends, will be automatically
converted into shares of Common Stock upon the consummation of an underwritten
public offering of the Company's Common Stock that raises gross proceeds for the
Company of at least $20,000,000 at a price per share of 175% or more of the
conversion price. This price per share requirement has been waived in connection
with the Company's anticipated IPO and therefore will allow the Company to
convert the Series B redeemable convertible Preferred Stock to Common Stock.
The holders of the Company's Series A convertible Preferred Stock are entitled
to receive cumulative dividends at a rate of seven percent per year, to be paid
in shares of the Company's Series A convertible Preferred Stock. Shares of
Series A convertible Preferred Stock have a liquidation preference equal to
$8.83 per share, plus all declared but unpaid dividends, and have the right to
vote the number of shares of Common Stock into which each share of Series A
convertible Preferred Stock is convertible. Shares of Series A convertible
Preferred Stock are convertible on a one-for-one basis, subject to adjustment,
into shares of Common Stock. Each share of Series A convertible Preferred Stock,
plus all declared but unpaid dividends, will be automatically converted into
Common Stock upon the consummation of a qualifying underwritten public offering
(if proceeds exceed a certain amount) or immediately prior to the consummation
of a consolidation, merger, or sale or transfer of all or substantially all of
the Company's assets.
During the year ended December 31, 1995 and during the nine months ended
September 30, 1995 and 1996, the Company owed dividends in arrears of 13,083,
19,815 and 45,947, shares of Preferred Stock, respectively, which represented a
total value of $174,889, $115,472 and $241,915, respectively. Debt to certain
related parties and third parties prohibit the payment of dividends to holders
of Common Stock until such debt is paid off.
STOCK OPTION PLANS
The Company has adopted a stock option plan which permits the Company to grant
up to 288,916 options to employees, board members and others who contribute
materially to the success of the Company. Stock options are generally granted at
prices which the Board of Directors of the Company believes approximates the
fair market value of its Common Stock.
During 1996, the Company's Board of Directors approved a new stock option plan,
which provides for the grant of 135,960 options.
F-13
<PAGE>
UOL PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
10. STOCKHOLDERS' DEFICIT (CONTINUED)
Common stock option activity was as follows:
NUMBER OF
SHARES
------------
Outstanding at December 31,
1993............................. 45,546
Granted......................... 48,094
Exercised....................... --
Canceled or expired............. --
------------
Outstanding at December 31,
1994............................ 93,640
Granted......................... 13,596
Exercised....................... --
Canceled or expired............. (6,798)
------------
Outstanding at December 31,
1995............................ 100,438
Granted......................... 297,992
Exercised....................... --
Canceled or expired............. (20,394)
------------
Outstanding at September 30,
1996............................ 378,036
============
Exercisable at September 30,
1996............................ 170,427
============
Exercise prices on the outstanding options range from $0.12 to $14.71 per share.
As of September 30, 1996, there were 46,840 options available for future grants.
Included in outstanding options are options to purchase 25,152 shares of Common
Stock which were issued during 1994 with an exercise price of the lesser of
$2.94 or 10% of the stock price achieved in the next equity financing subsequent
to the option grant in which the net proceeds to the Company exceeded
$2,500,000. The exercise price for these options was fixed, as a result of the
financing during 1995, at $0.88 per share. Accordingly, the Company recorded a
charge of $125,800 of expense related to these options during 1995.
The Company's Board of Directors extended the exercise period of 88,032 fully
vested options to August 31, 1999. This extension of exercise period created a
new measurement date for these options. As such, the Company recognized
compensation expense of $877,782 during 1996 for the difference between the
deemed fair value of the Company's Common Stock on the new measurement date and
the grant price of such options.
WARRANTS
The Company has also granted warrants to purchase Common Stock to various
investors, employees and outside vendors. In 1994, the Company issued warrants
to purchase 380,688 shares of Common Stock at prices ranging from $2.94 to
$17.65 per share. In 1995, the Company issued warrants to purchase 119,796
shares of Common Stock at prices ranging from $6.18 to $8.83 per share. In 1996,
the Company issued warrants to purchase 12,746 shares of Common Stock to a
placement agent at an exercise price of $21.18 per share. In addition, the
Company issued warrants to purchase 6,904 shares of Common Stock in connection
with the issuance of debt (see Note 6). Of the total warrants outstanding at
September 30, 1996, 348,880 Common Stock warrants were issued in connection with
equity transactions and 172,433 Common Stock warrants were issued in connection
with convertible related party debt and short-term debt. These warrants were
granted at prices which the Board of Directors of the Company believes
approximates fair value at the time of issuance, and as such the Company
believes that any value allocable to the warrant is immaterial to the financial
statements. There are certain anti-dilution rights associated with these
warrants, which are effective upon the occurrence of certain events (see Note
13).
F-14
<PAGE>
UOL PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
10. STOCKHOLDERS' DEFICIT (CONTINUED)
RESERVE FOR ISSUANCE
As of December 31, 1995 and September 30, 1996, the Company had reserved
1,003,251 and 1,581,965, respectively, shares of Common Stock issuable upon the
conversion of Preferred Stock into Common Stock, conversion of debt into Common
Stock and the exercise of outstanding options and warrants.
11. 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. 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 will grant InternetU Common Stock warrants to
purchase 73,172 shares of Common Stock at an exercise price of $21.18 per share.
In addition, InternetU will receive royalties on future revenues generated by
the project. Upon the consummation of a public offering by the Company, these
payments and issuance of the warrants are accelerated. The cash received by the
Company is restricted to costs solely associated with 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. 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. Additionally, the Company has no further obligation to incur costs to
develop this project should the funding from InternetU not occur. As such this
event is not included in the pro forma balance sheet.
12. 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:
DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
------------- ------------- ---------------
Net operating losses .... $ 748,000 $ 1,645,000 $ 3,126,000
Accrued payroll.......... 339,000 229,000 217,000
Other.................... 179,000 254,000 232,000
------------- ------------- ---------------
Total deferred tax
assets................... 1,266,000 2,128,000 3,575,000
Valuation allowance...... (1,266,000) (2,128,000) (3,575,000)
------------- ------------- ---------------
Net deferred tax assets . $ -- $ -- $ --
============= ============= ===============
As of December 31, 1995 and September 30, 1996, the Company had net operating
loss carryforwards for federal income tax purposes of approximately $4,112,000
and $7,814,000, respectively, which will expire at various dates through 2011.
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.
13. UNAUDITED PRO FORMA FINANCIAL INFORMATION
The financial statements include unaudited pro forma information as of September
30, 1996 to reflect, upon the consummation of the Company's IPO, the conversion
of all outstanding shares of Series B redeemable convertible Preferred Stock
into shares of Common Stock on a 1-for-2.06 basis, the declaration of accrued
dividends in arrears of 9,186 shares of Series B redeemable convertible
Preferred Stock to holders of Series B redeemable convertible Preferred Stock
and the conversion thereof to
F-15
<PAGE>
UOL PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Common Stock, in accordance with the applicable conversion rate, the conversion
of all outstanding shares of Series A convertible Preferred Stock into shares of
Common Stock on a one-for-one basis, the declaration of accrued dividends in
arrears of 44,773 shares of Series A convertible Preferred Stock to holders of
Series A convertible Preferred Stock and the conversion thereof to Common Stock,
the exercise of warrants to purchase 67,980 shares of Common Stock and the
repayment of the $300,000 convertible note payable balance with the proceeds
therefrom, and the conversion of the $130,000 note payable into shares of Common
Stock.
In September 1996, the Company and a certain stockholder executed an agreement,
whereby upon consummation of the Company's IPO, the stockholder will exercise
warrants to purchase 67,980 shares of Common Stock at an exercise price of $8.83
which will result in proceeds to the Company of $600,000. Additionally, at that
time the Company will repay the $300,000 convertible note payable balance to a
corporation controlled by this stockholder, and the Company will issue to the
stockholder warrants to purchase 15,687 shares of Common Stock at an exercise
price equal to the IPO price per share. These warrants will be exercisable for a
period of five years. The stockholder currently has warrants to purchase 101,970
shares of Common Stock at $17.65 per share, which will, upon the consummation of
the IPO, be repriced to equal to the IPO price per share to satisfy certain
anti-dilution rights previously granted. In addition, the stockholder has waived
all price-based anti-dilution rights as related to these repriced warrants,
except with respect to issuances below $8.83 per share.
In addition, upon consummation of the Company's IPO, the exercise prices of
warrants to purchase 35,167 shares of Common Stock will reduce from $17.65 or
$18.83 per share to be equal to the IPO price 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 below $8.83 per share.
The above two transactions are contingent upon the initial public offering price
being at least $12.94 per share and gross proceeds from the IPO being at least
$20,000,000.
In September 1996, an officer agreed to convert his outstanding note payable
balance plus accrued interest of $134,433 to 14,938 shares of Common Stock upon
consummation of the Company's IPO. The number of shares reflect the
anti-dilution provisions previously granted, which will be triggered by the IPO.
In addition, the number of shares of Common Stock underlying warrants, held by
such officer, to purchase Common Stock will be increased by 7,349 shares and the
exercise price thereof reduced to $9.12 per share upon consummation of the IPO,
pursuant to certain anti-dilution rights previously granted.
14. SUBSEQUENT EVENTS
In October 1996, the Company paid $250,000 to settle the outstanding debt
balance of approximately $350,000 to Control Data pursuant to a settlement
agreement. This resulted in a gain to the Company of approximately $100,000.
During October 1996, the Company and a bank entered into a secured lending
arrangement in the aggregate principal amount of $50,340. Amounts borrowed under
this arrangement will bear interest at the bank's prime rate plus 1% and are
collateralized by the assets purchased with the amounts borrowed. Amounts
borrowed under the arrangement are payable in equal monthly installments of
principal and interest between November 1996 and October 1999.
In October 1996, The Roach Organization, Inc. ("TRO"), from which Control Data
received its license with respect to the CYBIS courseware (which license was
assigned to the Company in January 1994), alleged unspecified violations by the
Company of the terms of such license. TRO demanded that the Company cease such
alleged violation and compensate TRO for unspecified alleged damages in
F-16
<PAGE>
UOL PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
14. SUBSEQUENT EVENTS (CONTINUED)
connection therewith. The Company believes that it is in compliance with the
terms of the license and therefore the Company intends to vigorously dispute
these allegations. The Company also believes that it would not be materially
adversely affected by an adverse result of this dispute.
In October 1996, the Company and an officer executed a letter agreement, to be
effective upon consummation of the offering. The agreement provides for an
annual base salary of $100,000 plus bonuses, as well as the issuance of options
to purchase 8,497 shares of Common Stock, vesting one-third upon consummation of
the offering and one-third upon each of the next two anniversary dates
thereafter, at an exercise price per share equal to the price per share to the
public in this offering.
On November 18, 1996 the Board of Directors approved a 1-for-11.76812037 reverse
stock split of the Company's $.01 par value Series A, Series B and Series B-1
convertible Preferred Stock, which became effective on November 20, 1996. All
references in the accompanying financial statements to the number of shares of
convertible Preferred Stock and per share amounts have been restated to reflect
the split.
On November 18, 1996 the Board of Directors approved a 1-for-11.76812037 reverse
stock split of the Company's $.01 par value Common Stock, which became effective
on November 20, 1996. All references in the accompanying financial statements to
the number of shares of Common Stock and per share amounts have been restated to
reflect the split.
F-17
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Cognitive Training Associates, Inc.
We have audited the accompanying balance sheets of Cognitive Training
Associates, Inc. as of December 31, 1994 and 1995 and June 30, 1996 and the
related statements of operations, stockholder's equity, and cash flows for the
three years in the period ended December 31, 1995 and for the six month period
ended June 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cognitive Training Associates,
Inc. at December 31, 1994 and 1995 and June 30, 1996, and the results of its
operations and its cash flows for the three years in the period ended December
31, 1995 and for the six month period ended June 30, 1996 in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
July 17, 1996, except Note 9, as to which the date is
August 1, 1996
F-18
<PAGE>
COGNITIVE TRAINING ASSOCIATES, INC.
BALANCE SHEETS
DECEMBER 31, JUNE 30,
1994 1995 1996
---------- ---------- -----------
ASSETS
Current assets:
Cash...................................... $ 18,966 $ 2,000 $ 14,486
Accounts receivable ...................... 48,294 143,870 70,676
Deferred income taxes .................... -- 31,788 34,350
---------- ---------- -----------
Total current assets....................... 67,260 177,658 119,512
Property and equipment, net ............... 552,184 564,306 564,198
Other assets............................... 6,235 6,273 39,109
---------- ---------- -----------
Total assets............................... $625,679 $748,237 $722,819
========== ========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................... $ 19,929 $133,658 $193,734
Deferred revenue.......................... -- 85,300 16,000
Short-term borrowings .................... -- 28,322 74,271
Notes payable to related party ........... 98,948 54,016 55,086
Notes payable - current portion .......... 27,637 43,484 52,751
Deferred income taxes .................... 5,763 -- --
---------- ---------- -----------
Total current liabilities.................. 152,277 344,780 391,842
Notes payable, net of current portion .... 298,284 273,401 256,414
Stockholder's equity:
Common stock, no par value, 100,000 shares
authorized, 1,000 shares issued and
outstanding.............................. 2,000 2,000 2,000
Retained earnings......................... 173,118 128,056 72,563
---------- ---------- -----------
Total stockholder's equity................. 175,118 130,056 74,563
---------- ---------- -----------
Total liabilities and stockholder's equity. $625,679 $748,237 $722,819
========== ========== ===========
See accompanying notes.
F-19
<PAGE>
COGNITIVE TRAINING ASSOCIATES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1993 1994 1995 1996
---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Licensing and support revenues ...... $195,060 $263,062 $374,215 $171,227
Courseware conversion revenues ....... 239,526 240,159 188,969 149,935
Other contract revenues............... 378,941 166,722 206,880 141,950
---------- ---------- ----------- -------------
813,527 669,943 770,064 463,112
Costs and expenses:
Cost of licensing and support
revenues............................ 144,515 158,155 273,322 89,371
Cost of courseware conversion
revenues............................ 70,457 73,363 67,021 37,593
Cost of other contract revenues...... 155,742 74,395 87,123 48,965
Sales and marketing.................. 40,271 15,904 25,396 20,482
Product development.................. 70,486 76,028 123,261 131,321
General and administrative........... 216,990 238,209 238,774 172,253
---------- ---------- ----------- -------------
Income (loss) from operations......... 115,066 33,889 (44,833) (36,873)
Other income (expense):
Other income......................... -- -- 4,097 --
Interest expense..................... (4,624) (26,361) (40,703) (22,479)
---------- ---------- ----------- -------------
Income (loss) before income taxes .... 110,442 7,528 (81,439) (59,352)
Income tax expense (benefit) ......... 31,529 (10,061) (36,377) (3,859)
---------- ---------- ----------- -------------
Net income (loss)..................... $ 78,913 $ 17,589 $(45,062) $(55,493)
========== ========== =========== =============
Net income (loss) per share........... $ 78.91 $ 17.59 $ (45.06) $ (55.49)
========== ========== =========== =============
</TABLE>
See accompanying notes.
F-20
<PAGE>
COGNITIVE TRAINING ASSOCIATES, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
COMMON STOCK
---------------------
NUMBER TOTAL
OF RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
------------ -------- ----------- ---------------
Balance at December 31, 1992 $ 1,000 $ 2,000 $ 212,632 $ 214,632
Dividends.................. -- -- (136,016) (136,016)
Net income................. -- -- 78,913 78,913
Balance at December 31, 1993 1,000 2,000 155,529 157,529
Net income................. -- -- 17,589 17,589
------------ -------- ----------- ---------------
Balance at December 31, 1994 1,000 2,000 173,118 175,118
Net loss .................. -- -- (45,062) (45,062)
------------ -------- ----------- ---------------
Balance at December 31, 1995 1,000 2,000 128,056 130,056
Net loss................... -- -- (55,493) (55,493)
------------ -------- ----------- ---------------
Balance at June 30, 1996 ... 1,000 $2,000 $ 72,563 $ 74,563
============ ======== =========== ===============
See accompanying notes.
F-21
<PAGE>
COGNITIVE TRAINING ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1993 1994 1995 1996
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Operating Activities
Net income (loss)................................. $ 78,913 $ 17,589 $ (45,062) $(55,493)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................... 52,137 58,184 64,125 32,961
Gain on sale of vehicle.......................... -- -- (4,097) --
Deferred income taxes............................ (4,185) (11,412) (37,551) (2,562)
Changes in operating assets and liabilities:.....
Accounts receivable............................. 11,411 12,465 (95,576) 73,194
Other assets.................................... (296) (3,190) (38) (32,836)
Accounts payable................................ 4,846 (6,384) 113,729 60,076
Deferred revenue................................ -- -- 85,300 (69,300)
----------- ----------- ----------- ------------
Net cash provided by operating activities ........ 142,826 67,252 80,830 6,040
Investing Activities
Proceeds from the sale of vehicle................. -- -- 13,500 --
Purchases of property and equipment............... (92,927) (401,028) (85,650) (32,853)
----------- ----------- ----------- ------------
Net cash used in investing activities............. (92,927) (401,028) (72,150) (32,853)
Financing Activities
Net proceeds from short-term borrowings........... -- -- 28,322 45,949
Proceeds from the issuance of notes payable ...... 27,691 300,000 326,071 17,584
Repayments of notes payable....................... (18,854) (50,219) (335,107) (25,304)
Proceeds from related party notes................. -- 108,192 6,289 32,000
Repayments to related party notes................. -- (9,244) (51,221) (30,930)
Dividends paid of stockholder..................... (136,016) -- -- --
----------- ----------- ----------- ------------
Net cash provided by (used in) financing
activities....................................... (127,179) 348,729 (25,646) 39,299
Net increase (decrease) in cash................... (77,280) 14,953 (16,966) 12,486
Cash at beginning of period....................... 81,293 4,013 18,966 2,000
----------- ----------- ----------- ------------
Cash at end of period............................. $ 4,013 $ 18,966 $ 2,000 $ 14,486
=========== =========== =========== ============
Supplemental Information
Interest paid..................................... $ 5,810 $ 25,724 $ 40,113 $ 21,115
=========== =========== =========== ============
</TABLE>
See accompanying notes.
F-22
<PAGE>
COGNITIVE TRAINING ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
Cognitive Training Associates, Inc. ("CTA") was incorporated in Texas in 1989.
CTA is a provider of technology-based online training products and services.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues earned under courseware conversion contracts, applications development
and consulting services are recognized subsequent to the completion of
assignments. Revenues relating to licensing and support services are recognized
in the month services are performed. All unearned revenues resulting from
advance payments are deferred until services are performed.
One customer represented approximately 74%, 86%, 58% and 46% of net revenues
during the years ended December 31, 1993, 1994, 1995 and during the six-month
period ended June 30, 1996, respectively. An additional customer represented
25%, 17% and 21% of net revenues during the years ended December 31, 1993, 1995
and during the six-month period ended June 30, 1996, respectively.
NET INCOME (LOSS) PER SHARE
CTA's net income (loss) per share calculations are based upon 1,000 shares of
Common Stock, which have been issued and outstanding for all periods presented.
USE OF ESTIMATES
The preparation of the 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
ROYALTIES
CTA has royalty arrangements with certain entities that have provided rights
related to the distribution of courseware products through online services.
Royalties are due and payable by CTA on a monthly basis.
DIVIDENDS
During 1993, dividends were declared by the Board of Directors for the sole
stockholder of CTA.
INCOME TAXES
CTA provides for income taxes in accordance with the liability method. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
F-23
<PAGE>
COGNITIVE TRAINING ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
3. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated using the straight-line
method over the estimated useful lives (39 years for the building, three to
seven years for furniture and equipment, and five years for vehicles). Property
and equipment consisted of the following:
DECEMBER 31, JUNE 30,
1994 1995 1996
----------- ----------- -----------
Building..................... $ 433,033 $ 437,750 $ 437,750
Furniture and equipment ..... 166,488 235,363 268,216
Vehicles..................... 129,061 108,877 93,909
----------- ----------- -----------
728,582 781,990 799,875
Less accumulated
depreciation................. (176,398) (217,684) (235,677)
----------- ----------- -----------
$ 552,184 $ 564,306 $ 564,198
=========== =========== ===========
4. SHORT-TERM BORROWINGS
At June 30, 1996, CTA had a short-term line of credit arrangement with a bank
which allowed for aggregate borrowings up to $100,000. At December 31, 1995 and
June 30, 1996, $28,322 and $74,271, respectively, were outstanding under this
arrangement. Borrowings under this arrangement are payable upon demand and bear
interest at the bank's prime rate plus 2.0% per annum (10.25% at June 30, 1996).
The line of credit is secured by certain of CTA's assets and is guaranteed by
CTA's sole stockholder.
5. NOTES PAYABLE TO RELATED PARTY
As of December 31, 1994 and 1995 and June 30, 1996, the CTA owed $98,948,
$54,016 and $55,086, respectively, to its sole stockholder, pursuant to 12.0%
interest bearing notes. These notes, which are subordinated to CTA's other notes
payable, are secured by CTA's assets and are payable on demand. During the years
ended December 31, 1994 and 1995 and the six months ended June 30, 1996,
interest expense related to these notes amounted to $1,380, $7,991 and $3,085,
respectively.
6. NOTES PAYABLE
As of December 31, 1994 and 1995 and June 30, 1996, CTA had an outstanding note
payable in the amount of $297,663, $282,148 and $272,250, respectively, to a
bank. The note bears interest at the bank's prime rate plus 1.5% per annum.
Borrowings from this note served as the primary source of funds for the
reconstruction and rehabilitation of CTA's current office building. The
principal is due in equal monthly installments of $1,650 through March 2010 and
is collateralized by the building. The note is also guaranteed by the sole
stockholder of CTA.
As of December 31, 1994 and 1995 and June 30, 1996, CTA had outstanding a note
payable totaling $28,258, $15,192 and $11,873, respectively, bearing interest at
2.9% per annum. The note is payable in monthly installments of $864 and is
secured by a vehicle of CTA.
In addition, as of December 31, 1995 and June 30, 1996, CTA owed $19,545 and
$25,042, respectively, to the bank, pursuant to various note payable agreements.
These balances consisted of several notes payable bearing interest at the bank's
prime rate plus 1.25% to 1.5% per annum. The notes are payable in monthly
installments ranging from $124 to $1,104 and are secured by certain of CTA's
equipment and vehicles. These notes mature at various times through August 1998.
F-24
<PAGE>
COGNITIVE TRAINING ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
6. NOTES PAYABLE (CONTINUED)
Aggregate maturities of the notes payable at June 30, 1996 were as follows:
Six months ending December 31,
1996............................... $ 28,695
1997............................... 36,515
1998............................... 21,205
1999............................... 19,800
2000............................... 19,800
Thereafter......................... 183,150
----------
$309,165
==========
7. INCOME TAXES
Significant components of CTA's net deferred tax assets and liabilities were as
follows:
DECEMBER 31, JUNE 30,
1994 1995 1996
---------- --------- -----------
Deferred tax assets:
Difference between accrual and cash basis of
accounting................................. $ -- $27,840 $ 42,842
Property and equipment...................... -- 2,829 5,847
Other....................................... 1,188 1,119 661
---------- --------- -----------
Total deferred tax assets ................... 1,188 31,788 49,350
Deferred tax liabilities:
Difference between accrual and cash basis of
accounting................................. 5,260 -- --
Other....................................... 1,691 -- --
---------- --------- -----------
Total deferred tax liabilities............... 6,951 -- --
Valuation allowance.......................... -- -- (15,000)
---------- --------- -----------
Net deferred tax assets (liabilities) ....... $(5,763) $31,788 $ 34,350
========== ========= ===========
CTA had recorded a $15,000 valuation allowance as of June 30, 1996 due to
uncertainties associated with the realization of $15,000 of the net deferred tax
assets. The income tax expense (benefit) consisted of the following:
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1993 1994 1995 1996
--------- ----------- ----------- -------------
Current .................... $35,714 $ 1,351 $ 1,174 $(1,297)
Deferred.................... (4,185) (11,412) (37,551) (2,562)
--------- ----------- ----------- -------------
Income tax expense
(benefit)................... $31,529 $(10,061) $(36,377) $(3,859)
========= =========== =========== =============
F-25
<PAGE>
COGNITIVE TRAINING ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
7. INCOME TAXES (CONTINUED)
CTA's income tax expense (benefit) resulted in effective tax rates that varied
from the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1993 1994 1995 1996
--------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Expected federal income tax provision at
graduated rates................................. $26,322 $ 1,129 $(15,939) $ (9,843)
State income taxes.............................. 5,367 1,351 1,174 --
Use of rehabilitation credit on building ....... -- (4,596) (4,294) --
Difference between graduated rates and expected
rates of reversal............................... (2,576) (6,597) (16,564) (10,807)
Change in valuation allowance................... -- -- -- 15,000
Other........................................... 2,416 (1,348) (754) 1,791
--------- ----------- ----------- -------------
$31,529 $(10,061) $(36,377) $ (3,859)
========= =========== =========== =============
</TABLE>
8. COMMITMENTS
During 1996, CTA entered into a three-year agreement with CompuServe, Inc.
("CompuServe") whereby CompuServe will provide network services to CTA.
Beginning on May 1, 1996, CTA is obligated to make monthly payments of $7,500
for the above services through April 1999. In addition, CTA was required to pay
a one-time implementation fee of $35,000, which CTA has recorded as Other Assets
in the Balance Sheet and will amortize over the three-year period of services.
9. SUBSEQUENT EVENT
Effective August 1, 1996, substantially all of the assets and liabilities of
CTA, with the exception of the building, vehicle, certain equipment and certain
notes payable, were acquired by UOL Publishing, Inc. (formerly University
Online, Inc.) in a stock for stock exchange. The acquisition will be accounted
for under the purchase method. Additionally, fully vested options to purchase
5,096 shares of UOL's Common Stock at $0.12 per share were granted to four
employees of CTA. Pursuant to the executed employment agreement with UOL, the
former sole stockholder of CTA will also be given a $150,000 bonus upon
successful completion of CTA's integration into UOL and was issued options to
purchase 16,995 shares of the UOL's Common Stock at purchase price of $21.03 per
share, subsequently repriced to $14.71 per share. The options vest over a
two-year term. The Company also agreed to pay $5,000 per month to lease the
building, owned by CTA's former stockholder.
F-26
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
UOL Publishing, Inc. (formerly University Online, Inc.)
We have audited the accompanying statement of operating revenues and direct
operating expenses of CYBIS (a division of Control Data Systems, Inc.) for the
year ended December 31, 1993. This financial statement is the responsibility of
the UOL Publishing, Inc.'s management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, the
operating revenues and direct operating expenses of CYBIS's (a division of
Control Data Systems, Inc.) operations for the year ended December 31, 1993 in
conformity with generally accepted accounting principles.
/s/Ernst & Young LLP
Vienna, Virginia
August 23, 1996
F-27
<PAGE>
CYBIS
(A DIVISION OF CONTROL DATA SYSTEMS, INC.)
STATEMENT OF OPERATING REVENUES AND DIRECT OPERATING EXPENSES
YEAR ENDED
DECEMBER 31,
1993
--------------
Licensing and support revenues............... $ 795,948
Cost of revenues............................. 181,096
--------------
Gross profit................................. 614,852
Selling, general, and administrative
expenses.................................... 1,134,859
--------------
Operating loss............................... $ (520,007)
==============
F-28
<PAGE>
CYBIS
(A DIVISION OF CONTROL DATA SYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENT
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The CYBIS division of Control Data Systems, Inc. ("Control Data") is engaged in,
among other things, the marketing and support of certain computer courseware and
software programs in the area of computer-based education.
Effective January 1, 1994, UOL Publishing, Inc. (formerly University Online,
Inc.), entered into an Asset Purchase Agreement with Control Data. Pursuant to
this Asset Purchase Agreement, UOL acquired substantially all of the assets and
assumed all of the liabilities of the CYBIS division for approximately $694,000.
The accompanying statement of operating revenues and direct operating expenses
of the CYBIS division for the year ended December 31, 1993 has been prepared
from the historical books and records of Control Data and includes only those
operating revenues and operating expenses directly attributable to the CYBIS
division. Some additional indirect expenses related to the physical operating
costs of the CYBIS division, primarily personnel-related costs, finance, legal
and professional, human resources, and management information services to the
CYBIS division were incurred. These costs have been omitted from the
accompanying statement of operating revenues and direct operating expenses.
It is impractical to provide a full statement of operations reflecting the
historical results of the CYBIS division since (1) assets acquired represent
only a portion of the operations of Control Data, and do not constitute a
separate entity, and (2) the financial records specific to the assets acquired
and related operations, exclusive of direct operating revenues and expenses,
include certain expenses incurred for all of Control Data not readily
attributable to the CYBIS division.
REVENUE RECOGNITION
Revenues are recognized in the month in which the licensing and support services
are performed.
USE OF ESTIMATES
The preparation of the financial statement in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of operating revenues and direct
operating expenses during the reporting period. Actual results could differ from
those estimates.
2. INCOME TAXES
The accompanying statement of operating revenues and direct operating expenses
does not include charges for income taxes because income taxes are considered to
be corporate expenses of Control Data.
F-29
<PAGE>
[LOGO] COURSEWARE LIBRARY+
STRATEGIC PARTNERS EXISTING WEB-BASED COURSEWARE LIBRARY
ACADEMIC INSTITUTIONS Managerial Statistics
Business Communications
Park College Advanced Expository Writing
California State University Institute American Literature
The Georgetown Washington University/ Technical Writing
Educational Services Institute Event Management Certificate
George Mason University Program I-III
University of Toledo Business Writing
New York University Complex Organizations
Income Tax Preparation
Windows on the Web
*The Netscape Navigator Edition
CORPORATIONS AND ASSOCIATIONS *Microsoft Explorer Edition
DIALOG
Autodesk, Inc. Product Application (24 modules)*
Autodesk Business Partners Thomas & Betts Signature Series
*Technical Software, Inc. (8 modules)*
*At a Glance Software, Inc. Electric Circuits (32 modules)*
*CAD CAM Center Graybar Electrical Education
*CAD Institute (34 modules)*
*Republic Research Training, Inc. Scientific Products (6 modules)*
Performance Appraisals
Electric Power Utilities (20 courses)
John Wiley & Sons Personal Development (24 modules)*
International Thomson Publishers
Dun & Bradstreet, Inc.
People's Income Tax, Inc.
Graybar Electric Company, Inc. EXISTING CYBIS COURSEWARE
Thomas & Betts Corporation
VWR Corporation Basic Academic (7 courses)**
Northern States Power/PacifiCorp Information Systems (10 courses)**
American Society of Association Personal Development (10 courses)**
Executives Management (20 courses)**
American Chemical Society
National Association of Electrical
Distributors
International Telecommunications Union WEB-BASED COURSES
PLANNED OR UNDER DEVELOPMENT
Financial Accounting
GOVERNMENT Project Management Certificate
Program
Federal Aviation Administration Financial Statement Analysis for
State of North Dakota Non-Financial Managers
United States Army Autodesk Product Training (6 courses)
Management Fundamentals
Accounting Tutorial
Planned Giving Certificate Program
Statistical Analysis
Financial Management
Purchasing Certificate Program
Personal Financial Management
Principles of Management
Data Communications/Networks
Introduction to Programming
Lab Safety
Accounting
Event Management Certificate
Program IV-VII
A PROVIDER OF WEB-BASED COURSEWARE
+ Note: This list contains a representative listing of the UOL courseware
library, including UOL Publishing Inc., CTA and CYBIS courseware.
* CTA Modules
** Recommended for college credit equivalency by the American Council on
Education. The Company's distribution rights are limited in certain
respects.
[The Company's graphical display of its Courseware library appears beneath its
logo and is framed with a taupe arc in the upper right corner. The Company's
World Wide Web-site address is superimposed vertically on the right side of the
display]
<PAGE>
====================================== ======================================
No dealer, salesperson or other
person has been authorized to give any
information or to make any
representation in connection with the 1,430,000 SHARES
offering other than those contained in
this Prospectus, and, if given or
made, such information or
representation must not be relied upon
as having been authorized by the
Company or the Underwriters. This UOL
Prospectus does not constitute an PUBLISHING, INC.
offer to sell or a solicitation of an
offer to buy any securities other than [LOGO]
the shares of Common Stock to which it
relates or an offer to, or a
solicitation of, any person or by
anyone in any jurisdiction in which it
would be unlawful to make such offer
or solicitation. Neither the delivery
of this Prospectus nor any sale made
hereunder shall, under any
circumstances, create any implication
that the information contained herein
is correct as of any time subsequent
to the date hereof or that there has
been no change in the affairs of the
Company since the date hereof.
COMMON STOCK
--------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary................ 3
Risk Factors...................... 6
Use of Proceeds................... 14
Dividend Policy................... 14
Capitalization.................... 15 ----------------------
Dilution.......................... 16
Selected Financial Data........... 17 PROSPECTUS
Unaudited Pro Forma Combined
Statements of Operations......... 18
Management's Discussion and ----------------------
Analysis of Financial Condition
and Results of Operations........ 20
Business.......................... 31
Management........................ 44
Certain Transactions.............. 49
Principal Stockholders............ 51
Description of Capital Stock...... 53
Shares Eligible for Future Sale... 55
Underwriting...................... 57
Legal Matters..................... 58 FRIEDMAN, BILLINGS, RAMSEY
Experts........................... 58 & CO., INC.
Additional Information............ 58
Reports to Stockholders........... 59
Index to Financial Statements..... F-1
--------------
Until , 1996 (25 days after the
date of this Prospectus), all dealers
effecting transactions in the Common
Stock offered hereby whether or not
participating in this distribution,
may be required to deliver a
Prospectus. This is in addition to the
obligation of dealers to deliver a
Prospectus when acting as Underwriters
and with respect to their unsold
allotments or subscriptions. , 1996
====================================== ======================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated costs and expenses, other than
underwriting discounts and commissions, incurred in connection with the sale of
Common Stock being registered (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
being registered hereby.
SEC registration fee ................................... $ 8,464
NASD filing fee ........................................ 2,955
The Nasdaq Stock Market listing fee .................... 20,456
Printing fees and expenses ............................. 115,000
Legal fees and expenses ................................ 500,000
Accounting fees and expenses ........................... 250,000
Blue sky fees and expenses ............................. 10,000
Stock certificates and transfer agent and custodian
fees................................................... 10,000
Miscellaneous........................................... 33,125
----------
Total................................................. $950,000
==========
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
II-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
(Continued)
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 of fiduciary duty, as
permitted by Section 102(b)(7) of the Delaware General Corporation Law.
The Underwriting Agreement provides for indemnification by the Underwriters
of the Company against any losses to which it may become subject insofar as they
arise out of, or are based upon, any untrue statement or omission of a material
fact contained in this Registration Statement, to the extent that such untrue
statement or omission arose as a result of written information relating to, and
furnished to the Company by, the Underwriters specifically for use in the
preparation of this Registration Statement.
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
Since June 30, 1993, the registrant has issued and sold the following
unregistered securities:
1. From June 1993 through August 1996, the Company issued options and
warrants to purchase an aggregate of approximately 473,208 shares of Common
Stock to employees and directors of and consultants to the Company, 27,192 of
which have either expired in accordance with their terms or have been forfeited.
2. In October 1994, the Company issued to three family trusts, for each of
which Austin O. Furst, Jr. ("Mr. Furst") is the trustee, warrants to purchase
an aggregate of 203,940 shares of Common Stock.
3. In November 1994, the Company issued an aggregate of approximately: (i)
95,376 shares of Common Stock in exchange for all of its then outstanding shares
of preferred stock and dividends accrued thereupon; (ii) 148,534 shares of
Common Stock to eight investors (including a director of the Company, his
spouse, a trust for which Mr. Furst is the trustee and four existing and one new
investor) for aggregate consideration of $443,500; and (iii) 79,102 shares of
Common Stock to nine investors (including a director, his spouse, five existing
and two new investors) upon conversion of outstanding indebtedness in the amount
of $522,594.
4. From July 1994 to July 1996, the Company issued and sold shares of
convertible preferred stock (since redesignated Series A Preferred Stock) to
approximately 70 accredited investors for aggregate consideration of $3,800,889,
which shares will convert into a total of 447,733 shares of Common Stock upon
consummation of the offering made hereby. Spencer Trask Securities Incorporated
("Spencer Trask Securities") served as placement agent for this financing and
received for itself and its designees warrants to purchase 37,506 shares of
Common Stock.
5. From July 1994 to August 1996, the Company issued warrants to purchase an
aggregate of 206,490 shares of Common Stock, as adjusted to give effect to the
Jones Transactions, to a total of eleven investors (including two directors of
the Company, the spouse of one such director, the parent company of Spencer
Trask Securities, its Chairman and six new investors).
6. During 1995, the Company issued an aggregate of approximately: (i) 18,489
shares of Common Stock to four individuals, consisting of a consultant and three
service providers, as consideration for services rendered; and (ii) 60,200
shares of Common Stock and 1,800 shares of Series A Preferred Stock to six
investors (including two directors of the Company, the spouse of one such
director, a former director and one existing and one new investor) upon
conversion of outstanding indebtedness.
7. During 1996, the Company issued an aggregate of 5,097 shares of Common
Stock to three service providers for services rendered in 1995.
II-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
(Continued)
8. In July 1996, the Company issued and sold 185,877 shares of Series B
Preferred Stock convertible into 392,934 shares of Common Stock upon
consummation of this offering to 11 accredited investors for an aggregate
investment of $3,500,000.
9. In August 1996, the Company issued an aggregate of 42,487 shares of Common
Stock in connection with the acquisition of CTA, all of which shares were issued
to CTA's sole stockholder, Michael Brown, and issued a warrant to purchase an
aggregate of 12,746 shares of Common Stock to Oppenheimer & Co., Inc. as
consideration for certain investment banking services.
10. In September 1996, the Company entered into an agreement with Mr. Furst
to issue to Mr. Furst, upon consummation of the offering made hereby, a warrant
to purchase 15,687 shares of Common Stock in consideration of Mr. Furst's waiver
of certain anti-dilution rights and agreement to exercise certain warrants to
purchase Common 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 AND FINANCIAL STATEMENTS SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------- ----------------------------------------------------------------------------------------------
<S> <C>
1.1+ Form of Underwriting Agreement.
2.1+ Agreement and Plan of Merger, dated as of July 31, 1996, relating to the acquisition of
Cognitive Training Associates, Inc.
3.1+ Amended and Restated Certificate of Incorporation.
3.2+ Amended and Restated Bylaws.
4.1+ Form of Common Stock Certificate.
5.1+ Opinion of Wyrick, Robbins, Yates & Ponton L.L.P.
10.1+ Investment Agreement, dated as of October 8, 1986, with Intersouth Partners.
10.2+ Warrant Agreement, dated as of March 22, 1995, with Spencer Trask Securities Incorporated and
Forms of Warrant Certificates.
10.3+ Form of Promissory Note.
10.4+ Registration Rights Agreement relating to Series A Preferred Stock, as amended.
10.5+ Registration Rights Agreement, dated July 19, 1996, relating to Series B Preferred Stock.
10.6+ Warrant, dated July 23, 1996, granted to Oppenheimer & Co., Inc.
10.7+ Letter Agreement, dated as of September 12, 1996, with Austin O. Furst and certain related
entities.
10.8+ Amended and Restated Stock Option Plan.
10.9+ 1996 Stock Plan.
10.10+ Employment Agreement, dated July 1, 1996, with Narasimhan P. Kannan.
10.11+ Employment Agreement, dated July 1, 1996, with Carl N. Tyson.
10.12+ Employment Agreement, dated July 31, 1996, with Michael L. Brown.
10.13+ Employment Agreement, dated August 15, 1996, with Leonard P. Kurtzman.
10.14+** Agreement, dated August 14, 1995, as amended, with Educational Services Institute.
10.15+ Form of Online Educational Services Distribution Agreement.
10.16+ Form of University Master Agreement for Online Education Services.
10.17+ Form of Online Educational Services Agreement.
II-3
<PAGE>
<CAPTION>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
(Continued)
EXHIBIT NO. DESCRIPTION
- --------------- ----------------------------------------------------------------------------------------------
10.18+ Form of Inner Circle Online Educational Services Development and Distribution
Agreement.
10.19+** Agreement, dated April 15, 1996, with Autodesk, Inc.
10.20+** Project Financing and Development Agreement with InternetU, Inc., as amended
10.21+ Employment letter agreement, dated October 29, 1996, with W. Braun Jones, Jr.
11.1+ Statement Re: Computation of Per Share Loss.
21.1+ List of Subsidiaries.
23.1 Consents of Ernst & Young LLP.
23.2+ Consent of Wyrick, Robbins, Yates & Ponton L.L.P. (contained in Exhibit 5.1).
24.1+ Power of Attorney (see page II-5).
27.1+ Financial Data Schedule.
</TABLE>
- ----------
** Confidential treatment requested.
+ Previously filed
(b) Financial Statement Schedule.
Schedule I--Valuation and Qualifying Account and Reserve
No other schedules have been included because the information required to be
set forth therein is not applicable.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted for directors, officers, and controlling persons of the
registrant pursuant to provisions described in Item 14 above, 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 of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of 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.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the Offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, UOL Publishing,
Inc. 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 Amendment No. 4
to registration statement 333-12135 to be signed on its behalf by the
undersigned, hereunto duly authorized, in the City of Falls Church, State of
Virginia on this 25th day of November, 1996.
UOL PUBLISHING, INC.
By: /s/ NARASIMHAN P. KANNAN
----------------------------------------
Narasimhan P. Kannan, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 4 to registration statement 333-12135 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 Director And Chief Executive November 25, 1996
- ---------------------------------- Officer (Principal Executive
Narasimhan P. Kannan Officer)
/s/ LEONARD P. KURTZMAN* Chief Financial Officer (Principal November 25, 1996
- ---------------------------------- Financial and Accounting
Leonard P. Kurtzman Officer)
/s/ CARL N. TYSON*
- ---------------------------------- Director November 25, 1996
Carl N. Tyson
/s/ EDSON D. DECASTRO*
- ---------------------------------- Director November 25, 1996
Edson D. deCastro
/s/ DENNIS J. DOUGHERTY*
- ---------------------------------- Director November 25, 1996
Dennis J. Dougherty
/s/ BARRY K. FINGERHUT*
- ---------------------------------- Director November 25, 1996
Barry K. Fingerhut
/s/ W. BRAUN JONES, JR.*
- ---------------------------------- Director November 25, 1996
W. Braun Jones, Jr.
/s/ WILLIAM E. KIMBERLY*
- ---------------------------------- Director November 25, 1996
William E. Kimberly
/s/ D. WAYNE SILBY*
- ---------------------------------- Director November 25, 1996
D. Wayne Silby
*By: /s/ NARASIMHAN P. KANNAN
- ---------------------------------- November 25, 1996
Narasimhan P. Kannan,
Attorney-in-Fact
</TABLE>
II-5
<PAGE>
SCHEDULE I - VALUATION AND QUALIFYING ACCOUNT AND RESERVE
(IN THOUSANDS)
<TABLE>
<CAPTION>
UOL PUBLISHING, INC.
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, 1994.................... $ -- $ -- $ -- $ --
Year ended December 31, 1995.................... -- 20 -- 20
Nine months ended September 30, 1996 (unaudited) 20 25 -- 45
</TABLE>
S-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
UOL Publishing, Inc.
We have audited the financial statements of UOL Publishing, Inc. (formerly
University Online, Inc.) as of December 31, 1994 and 1995 and for each of the
three years in the period ended December 31, 1995 and have issued our report
theron dated 10, 1996 (included elsewhere in this Registration Statement). Our
audits also included the financial statement schedule listed in Item 16(b) of
this Registration Statement. The schedule is the responsibility of the Company's
management. Our responsibilty is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Vienna, Virginia
July 10, 1996, except Note 14, as to which date is
November 20, 1996
S-2
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report of CYBIS (a division of Control Data Systems, Inc.) dated
August 23, 1996, in UOL Publishing, Inc.'s Registration Statement (Amendment No.
4 on Form S-1 No. 333-12135) and related Prospectus of UOL Publishing, Inc. for
the registration of 1,430,000 shares of its common stock.
Vienna, Virginia
November 22, 1996 /s/ Ernst & Young LLP
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports of UOL Publishing, Inc. (formerly University Online, Inc.)
dated July 10, 1996 (except Note 14, as to which the date is November 20, 1996),
in the Registration Statement (Amendment No. 4 on Form S-1 No. 333-12135) and
related Prospectus of UOL Publishing, Inc. for the registration of 1,430,000
shares of its common stock.
Vienna, Virginia /s/ Ernst & Young LLP
November 22, 1996
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report of Cognitive Training Associates, Inc. dated July 17, 1996
(except Note 9, as to which the date is November 19, 1996), in the UOL
Publishing, Inc. Registration Statement (Amendment No. 4 on Form S-1 No.
333-12135) and related Prospectus of UOL Publishing, Inc. (formerly University
Online, Inc.) for the registration of 1,430,000 shares of its common stock.
Vienna, Virginia /s/ Ernst & Young LLP
November 22, 1996
