AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 1996
REGISTRATION NO. 333-12135
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 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>
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>
--------------------
105 W. Broad Street, Suite 301
Falls Church, Virginia 22046
(703) 533-7500
(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.
105 W. Broad Street, Suite 301
Falls Church, Virginia 22046
(703) 533-7500
(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. [ ]
CALCULATION OF REGISTRATION FEE
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====================================================================================================================================
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 ....... 1,534,100 shares $16.00 $24,545,600 $ 8,464
====================================================================================================================================
</TABLE>
- ----------
(1) Includes 200,100 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>
<PAGE>
SUBJECT TO COMPLETION
DATED OCTOBER 30, 1996
1,334,000 SHARES
[LOGO]
COMMON STOCK
--------------------
All of the 1,334,000 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 $14.00 and $16.00 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 $850,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to 200,100 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 October 30, 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-11.68159232 reverse stock split
of the Company's outstanding Common Stock, Series A Preferred Stock and Series B
Preferred Stock (collectively the "Preferred Stock") to be effected prior to the
consummation of this offering; (ii) reflects the conversion of the Company's
outstanding Preferred Stock into an aggregate of 846,883 shares of Common Stock
upon the consummation of this offering; (iii) reflects the mandatory exercise of
warrants to purchase 68,481 shares of Common Stock at an exercise price of $8.76
per share, the issuance of warrants to purchase an aggregate of 15,801 shares of
Common Stock at an exercise price per share equal to the initial public offering
price per share and repayment 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 15,048 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 of 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 University, The George Washington University, George Mason
University and University of Toledo,
3
<PAGE>
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 similar acquisitions which management believes will provide
critical additions to the Company's courseware library and user base. 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 education and training based
web-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.
During Fall (August through December) 1996, through three of its six existing
academic partners and one business partner, UOL introduced nine new Web-based
accredited or certified courses. During 1997, the Company plans to introduce
approximately 40-50 additional courses through its current and potential new
academic and business partners. During the first nine months of 1996, CTA
modules have been made 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 105 W. Broad Street, Suite 301, Falls Church, Virginia
22046, its telephone number at that address is (703) 533-7500, 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
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by the Company................... 1,334,000 shares
Common Stock to be outstanding after this offering ... 3,101,397 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 846,883 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 15, 1996, except with respect to the
Furst Transactions and the Jones Transactions. As of October 15, 1996,
there were: (i) outstanding options to purchase an aggregate of 380,840
shares of Common Stock under the Company's stock plans at a weighted
average exercise price of $9.46 per share; and (ii) warrants to purchase an
aggregate of 479,893 shares of Common Stock, at a weighted average exercise
price of $10.08 per share. See "Capitalization," "Management--Stock Plans,"
"Certain Transactions," and "Description of Capital Stock."
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 $ 408 $ 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) ................... (1.72) (2.24)
Pro forma weighted average shares
outstanding (1) .................................... 1,406 1,650
</TABLE>
At September 30, 1996 (unaudited)
-----------------------------------
Pro Forma
Pro As
Actual Forma (2) Adjusted (3)
------ --------- ------------
Balance Sheet Data:
Working capital (deficit)............... $ (337) 393 18,152
Total assets ........................... 3,945 4,245 21,105
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 19,286
- ----------
(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 1,334,000 shares
of Common Stock offered hereby at an assumed initial public offering price
of $15.00 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 $3,448,000 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. 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 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
6
<PAGE>
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 the Company's products and services
is highly competitive and the Company expects that competition will continue to
intensify. 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 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
7
<PAGE>
could have a material adverse effect on the Company. The Company maintains "key
man" life insurance in the amount of $1,000,000 on Narasimhan P. Kannan,
Chairman of the Board of Directors and Chief Executive Officer, and has applied
for such coverage for 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%. 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. 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."
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
8
<PAGE>
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."
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
9
<PAGE>
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 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
10
<PAGE>
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 $15.00 per share, investors participating in this offering will incur
immediate, substantial dilution in pro forma net tangible book value of $9.00
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 1,334,000 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 Exchange Commission
thereunder and "lock-up" agreements by which certain stockholders are bound, (i)
approximately 47,520 additional shares will be eligible for immediate sale as of
the date of the final prospectus relating to this offering, (ii) approximately
3,252 additional shares will be eligible for sale beginning 90 days after the
date of the final prospectus relating to this offering, (iii) approximately
27,536 shares will be eligible for sale beginning as early as March and May 1997
pursuant to Rule 144 under the
11
<PAGE>
Securities Act; and (iv) approximately 1,005,933 additional shares will be
eligible for sale beginning one year after the date of the final prospectus
relating to this offering. Approximately 683,156 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 15, 1996, an additional 860,733 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
252,735 additional shares will be eligible for sale beginning one year after the
date of the final prospectus relating to this offering; (ii) approximately
479,893 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 125,105 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 496,507 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."
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
12
<PAGE>
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
1,334,000 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 1,334,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$17,759,300 ($20,550,695 if the Underwriters' over-allotment option is exercised
in full), at an assumed initial public offering price of $15.00 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 stockholders 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
1,334,000 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, 187,254 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, 405,946 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,
836,985 shares issued and outstanding on an actual basis; 1,767,397
shares issued and outstanding, on a pro forma basis; 3,101,397 shares
issued and outstanding, on a pro forma as adjusted basis(1) .......... 8 18 31
Additional paid-in capital ............................................. 7,633 11,704 29,450
Accumulated deficit..................................................... (10,191) (10,195) (10,195)
Total stockholders' equity (deficit).................................... (2,546) 1,527 19,286
Total capitalization................................................... $ 2,034 $ 2,334 $ 19,732
======= ======== =========
</TABLE>
- ----------
(1) Actual capitalization excludes (i) 291,056 shares reserved for issuance
under the Company's Amended and Restated Stock Option Plan (the "Option
Plan") and 136,967 shares reserved for issuance under the Company's 1996
Stock Plan (the "1996 Plan"), (ii) 525,169 shares issuable upon exercise of
warrants at a weighted average exercise price of $10.57 per share, and
(iii) 14,838 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 380,840 shares outstanding
under the Option Plan and the 1996 Plan at a weighted average exercise
price of $9.46 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 1,334,000 shares of Common Stock offered by the
Company hereby (at an assumed initial public offering price per share of $15.00)
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 $18,600,000 or $6.00 per share, representing an immediate
increase in such net tangible book value of $5.52 per share to existing
stockholders and an immediate dilution of $9.00 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........................... $15.00
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................................... $5.52
Pro forma as adjusted net tangible book value per share after
this offering.................................................... $ 6.00
Pro forma dilution per share to new investors..................... $ 9.00
</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 $15.00
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 1,430,185 46.1% $10,353,720 33.3% $ 7.24
Pro Forma Investors .. 337,212 10.9% 736,240 2.4% 2.18
New investors......... 1,334,000 43.0% 20,010,000 64.3% 15.00
--------- ----- ----------- ----- -----
Total.............. 3,101,397 100.0% $31,099,960 100.0%
========= ===== =========== =====
</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 380,840 shares of
Common Stock under the Company's stock plans at a weighted average exercise
price of $9.46 per share and warrants to purchase an aggregate of 479,893 shares
of Common Stock, at a weighted average exercise price of $10.08 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 $ 326 $ 326
Online revenues .................... -- -- 14 14 56 42 63
Development and other revenues...... 899 404 274 82 76 40 54
------ ------ ------ ------- ------- ----- -------
Total net revenues .................. 899 404 288 806 548 408 443
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.......... 303 268 207 890 927 548 1,980
Depreciation and amortization....... 10 9 1 298 309 228 67
------ ------ ------ ------- ------- ----- -------
Total costs and expenses............. 1,252 733 553 1,836 2,839 1,808 4,047
Loss from operations................. (353) (329) (265) (1,030) (2,291) (1,400) (3,604)
Other income (expense) .............. -- -- 6 (6) 96 94 206
Gain on debt forgiveness............. -- -- -- 609 30 30 --
Interest expense..................... (97) (91) (155) (260) (75) (54) (50)
------ ------ ------ ------- ------- ----- -------
Net loss............................. $ (450) $ (420) $ (414) $ (687) $(2,240) $(1,330) $(3,448)
====== ====== ====== ======= ======= ====== =======
Net loss per share (1) .............. $(0.62) $(0.58) $(0.57) $ (0.90) $ (2.16) $ (1.30) $ (3.22)
====== ====== ====== ======= ======= ====== =======
Weighted average shares
outstanding (1) .................... 727 727 727 763 1,120 1,116 1,145
====== ====== ====== ======= ======= ===== =======
Pro forma net loss per share (1) .... $ (1.72) $ (2.24)
Pro forma weighted average shares ======= =======
outstanding (1) .................... 1,406 1,650
======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30,
------------------------------------------------------- -------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit) ...... $ (1,776) $(1,377) $(2,724) $(2,587) $(1,402) $ (337)
Total assets..................... 117 254 352 879 613 3,945
Total liabilities................ 1,989 2,554 3,075 3,158 1,887 3,148
Redeemable convertible Preferred
Stock............................ -- -- -- -- -- 3,343
Accumulated deficit ............. (2,957) (3,385) (3,807) (4,503) (6,742) (10,191)
Total stockholders' deficit .... (1,872) (2,300) (2,722) (2,279) (1,274) (2,546)
</TABLE>
- ----------
(1) Computed on the basis described in Note 2 of Notes to UOL Financial
Statements.
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.
<PAGE>
PRO FORMA STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Historical Historical Acquisition Pro Forma
UOL(a) CTA(a) 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 (b) 1,771,354
----------- -------- ------------ -----------
Loss from operations........................... (2,290,722) (44,833) (297,177) (2,632,732)
Other income (expense):
Other income (expense)........................ 96,348 4,097 (4,097) 96,348
Gain on debt forgiveness ..................... 30,303 -- -- 30,303
Interest expense.............................. (75,570) (40,703) 26,800 (c) (89,473)
----------- -------- ------------ -----------
Income (loss) before income taxes.............. (2,239,641) (81,439) (274,474) (2,595,554)
Income tax expense (benefit)................... -- (36,377) -- (36,377)
----------- -------- ------------ -----------
Net loss....................................... (2,239,641) (45,062) (274,474) (2,559,177)
Accrued dividends to preferred stockholders ... (174,830) -- -- (174,830)
----------- -------- ------------ -----------
Net loss available to common stockholders ..... $(2,414,471) $(45,062) $ (274,474) $(2,734,007)
=========== ======== ============ ===========
Net loss per share(d).......................... $ (2.16) $ (2.35)
=========== ===========
Weighted average shares outstanding(d) ........ 1,119,642 1,162,444 (e)
=========== ===========
Pro forma net loss per share(d)................ $ (1.72) $ (1.89)
=========== ===========
Pro forma weighted average shares
outstanding(d)................................ 1,406,178 1,448,980 (e)
=========== ===========
18
</TABLE>
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Historical Historical Acquisition Pro Forma
UOL(f) CTA(f) 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)(g) 2,296,120
----------- -------- ------------ -----------
Loss from operations............................ (3,604,693) (36,873) (76,796) (3,718,362)
Other income (expense):
Other income (expense)......................... 205,529 -- -- 205,529
Interest expense............................... (49,541) (22,479) 16,750 (h) (55,270)
----------- -------- ------------ -----------
Income (loss) before income taxes............... (3,448,705) (59,352) (60,046) (3,568,103)
Income tax expense (benefit).................... -- (3,859) -- (3,859)
----------- -------- ------------ -----------
Net income (loss)............................... (3,448,705) (55,493) (60,046) (3,564,244)
Accrued dividends to preferred stockholders .... (241,958) -- -- (241,958)
----------- -------- ------------ -----------
Net loss available to common stockholders ...... $(3,690,663) $(55,493) $ (60,046) $(3,806,202)
=========== ======== ============ ===========
Net loss per share(d)........................... $ (3.22) $ (3.21)
=========== ===========
Weighted average shares outstanding(d) ......... 1,144,694 1,187,496 (e)
=========== ===========
Pro forma net loss per share(d)................. $ (2.24) $ (2.25)
=========== ===========
Pro forma weighted average shares
outstanding(d)................................. 1,649,900 1,692,702 (e)
=========== ===========
</TABLE>
- ----------
(a) Statement of operations for the year ended December 31, 1995.
(b) 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.
(c) Adjustment to eliminate $26,800 of interest expense related to the notes
payable associated with the building and vehicle.
(d) 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.
(e) Represents shares of Common Stock issued in connection with the CTA
acquisition as if the acquisition had occurred on January 1, 1995.
(f) 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.
(g) 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.
(h) 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. 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 42,802 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
22,256 shares of Common Stock (of which options to purchase 5,136 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. 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>
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
21
<PAGE>
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>
Year Ended December 31, Nine Months Ended 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.... 191.9 227.8 518.3 442.6 914.0
------ ----- ------ ------ ------
Loss from operations........... (91.9) (127.8) (418.3) (342.6) (814)
Other income (expense):
Other income (expense)........ 2.2 (0.8) 17.6 23.1 46.4
Gain on debt forgiveness ..... 0.0 75.6 5.5 7.4 0.0
Interest expense.............. (53.7) (32.3) (13.7) (13.2) (11.2)
------ ----- ------ ------ ------
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 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
22
<PAGE>
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.
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.
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
23
<PAGE>
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, Other Income (Expense), and Gain on Debt Forgiveness. 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 and gain on debt forgiveness was $124,667
for the nine months ended September 30, 1995 and $205,529 for the nine months
ended September 30, 1996. These gains were primarily due to debt forgiveness.
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.
24
<PAGE>
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, Other Income (Expense), and Gain on Debt Forgiveness. 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 and gain
on debt forgiveness decreased from $602,809 in 1994 to $126,651 in 1995, a
decrease of $476,158, or 79.0%. The decrease was primarily due to the debt
forgiveness.
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.
25
<PAGE>
Interest, Other Income (Expense), and Gain on Debt Forgiveness. 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. Other income and
gain on debt forgiveness increased from $6,241 in 1993 to $602,809 in 1994, an
increase of $596,568, or 9558.9%. The increase was primarily due to debt
forgiveness.
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 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>
<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
Ended
Years Ended December 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
<PAGE>
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..... 26.7 35.6 31.0 37.2
Total costs and expenses...... 85.9% 95.0 105.8 108.0
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 .............. (0.6) (3.9) (5.3) (4.9)
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)%
---- ---- ---- -----
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, 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.
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.
28
<PAGE>
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 major 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 0.2%. General and administrative
expense decreased as a percentage of net revenues from 35.6% 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 3.9% 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.
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 9.8%. General and
administrative expense increased as a percentage of net revenues from 26.7% in
1993 to 35.6% 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 0.6% and 3.9% 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.
29
<PAGE>
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.
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 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 their 49 million 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.
31
<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 change in the way
content can be managed, delivered and consumed that was 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.
32
<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 September 30, 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.
33
<PAGE>
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, a
total of 57 students have enrolled 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 29, 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>
<S> <C> <C>
COURSE/MODULE TARGET AUDIENCE PRIMARY PARTNER
- ------------- --------------- ---------------
DIALOG (1 course)................................... Professional Dun & Bradstreet, Inc.
Event Management Certificate Program
(3 courses) ...................................... Professional Educational Services Institute/The George Washington
University.
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.
34
<PAGE>
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>
<S> <C> <C> <C>
ANTICIPATED
COURSE TARGET AUDIENCE PRIMARY PARTNER RELEASE
- ------ --------------- --------------- -------
Statistical Analysis (1 course)........... Professional/Technical American Chemical Society Spring 1997
Autodesk Product Training
(6 courses) ........................... Professional At a Glance Software, Inc. Spring 1997
Autodesk Press
CAD CAM Center
CAD Institute
Republic Research Training, Inc.
Technical Software, Inc.
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 Educational 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
Management Fundamentals Extension Services
(2 courses) ........................... Professional American Society of Association Fall 1997
Executives
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 Fall 1997
George Washington University
</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,
35
<PAGE>
and that the Company obtains a similar share of tuition revenues as it has in
the past with its existing 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--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
36
<PAGE>
partners. The Company believes that its online distribution system will provide
its partners with access to students who otherwise would not take their courses.
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. See "Risk
Factors--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 company holding rights to
deliver off-campus versions of certain George Washington courses. The
37
<PAGE>
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. 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.
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.
38
<PAGE>
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. Six Autodesk business partners
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.
Certain Autodesk business partners have established and plan to invest in a
company, InternetU, to fund costs of the Autodesk virtual campus. The Company
entered into an agreement with 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 73,714 shares of Common Stock in the Company. InternetU has also
purchased 12,481 shares of the Company's Common Stock.
In summary, the Company will be responsible for all development and
operation costs of the virtual campus, and will provide marketing and support
for the virtual campus. In exchange for its commitment, the Company receives a
percentage of revenues from three primary sources through the virtual campus:
Autodesk courseware revenues; product and service revenues; and advertising
revenues.
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.
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.
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<PAGE>
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, Northern
States Power/PacifiCorp and the Autodesk Press publishing imprint, a global
partnership between International Thomson Publishers and Autodesk. 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 42,802 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 22,256 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.
See "Risk Factors--Risks Associated with Acquisitions; Integration of Acquired
Operations."
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
40
<PAGE>
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 online educational products and services is highly
competitive, rapidly changing and has no substantial barriers to entry. The
Company expects that competition will continue to intensify. 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 "--Subtantial 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.
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
41
<PAGE>
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 42,802 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
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."
EMPLOYEES
As of October 15, 1996, the Company had 44 employees, including 23 full-time
and three 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 4,000 square feet of leased
space in Falls Church, Virginia under a month-to-month lease. The Company plans
to relocate its operations to approximately 7,000 square feet of leased space in
McLean, Virginia during the month of November 1996 pursuant to a lease agreement
that expires in March 2000. The Company also leases approximately 4,000 square
feet, including 1,300 square feet of warehouse space, in Burnsville, Minnesota
(the location of its mainframe server) 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 rent for
the McLean facility will be approximately $12,000 per month and the rent for the
Waxahachie facility is $5,000 per month. 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
September 30, 1996 were as follows:
Name Age Positions
- ---- --- ---------
Chairman of the Board of Directors and Chief
Narasimhan P. Kannan .... 48 Executive Officer
Carl N. Tyson............ 47 President, Chief Operating Officer and Director
Vice President of Strategic Ventures and
W. Braun Jones, Jr. .... 51 Director
Michael W. Anderson...... 42 Vice President of Technology and Operations
Diana S. Farrell......... 32 Vice President of Sales and Marketing
Vice President, Chief Financial Officer and
Leonard P. Kurtzman...... 36 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.
43
<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
44
<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
------------
Name and Principal All Other
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
45
<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 8,560 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 net revenues are first generated (2.25% in
respect of revenues generated in 1997). Mr. Jones will receive a nonrefundable
advance against this additional compensation in January 1997. 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.
46
<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 Value of Unexercised
Underlying Unexercised Options In-the-Money Options
at December 31, 1995 at December 31, 1995(1)
------------------------------ --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Narasimhan P. Kannan 68,483 -- $0 --
- ----------
(1) Calculated on the basis of $5.84, 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 291,056 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 136,967 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 15, 1996, no shares of Common Stock had been issued upon
exercise of options granted under the Plans, options to purchase 251,837 and
129,003 shares of Common Stock, at weighted average exercise prices of $6.83 and
$14.60 per share, were outstanding under the Option Plan and the 1996 Plan,
respectively, and 39,219 and 7,964 shares remained available for future option
grants under the Option Plan and the 1996 Plan, respectively.
47
<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 451,035 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 18,456 and
25,218 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 37,793 shares of Common Stock. All of these warrants are
exercisable until May 2002 at a weighted average exercise price of $8.92 per
share. In September 1996, contingent upon an initial public offering price per
share of $12.85 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
$8.76 per share.
In March 1995, the Company issued 25,019 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 $1.46 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 6,955 shares of
Common Stock at a conversion price of $18.69 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 6,955
shares of Common Stock at an exercise price of $18.69 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 $9.05 per share upon
consummation of the offering made hereby, would be entitled to convert the
principal and accrued interest under Jones Note into 15,048 shares of Common
Stock and to exercise the Jones Warrants for 14,359 shares of Common Stock at a
conversion price and exercise price, respectively, of $9.05 per share. Mr. Jones
entered into an agreement in September 1996 to convert the principal and accrued
interest under the Jones Note into 15,048 shares of Common Stock at a conversion
price of $9.05 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 12,840 shares
of Common Stock at an exercise price of $6.13 per share in connection with their
loans to the Company of $50,000, which indebtedness was converted into an
aggregate of 11,413 shares of Common Stock in March 1995 at a conversion price
of $4.38 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 $18.69 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 102,723 shares of Company Common Stock
at an exercise price of $17.52 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 102,723 shares
of Company Common Stock at an exercise price of $8.76 per share (the "$8.76
Warrants"). The Trusts entered into an agreement in September 1996 to eliminate
their contractual rights to price-based anti-dilution adjustments to the
48
<PAGE>
number of shares underlying the IPO Price Warrants except with respect to
issuances below $8.76. Upon consummation of the offering made hereby and
contingent upon an initial public offering price per share of $12.85 or greater,
the Trusts are required to purchase 68,481 shares underlying the $8.76 Warrants.
In consideration thereof, the Company has agreed to issue to Mr. Furst a warrant
to purchase 15,801 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 by the Company in
full upon consummation of the offering made hereby.
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
187,254 shares of Series B redeemable convertible Preferred Stock (which is
convertible into 395,848 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 42,802 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
5,136 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 17,120 shares of the Company's Common Stock at an exercise price of
$14.60 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 6,848
shares of Common Stock at an exercise price of $1.46 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.
49
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of October 15, 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 15, 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 After the
Name Beneficially Owned to the Offering Offering (1)
---- ------------------ --------------- ------------
<S> <C> <C> <C>
Austin O. Furst, Jr. (2) ...................... 328,833 17.0% 10.1%
138 Frogtown Road
New Canaan, CT 06840
Narasimhan P. Kannan (3) ...................... 317,385 17.3% 10.0%
Barry K. Fingerhut (4) ........................ 301,442 17.1% 9.7%
Wheatley Partners, L.P. ....................... 282,762 16.0% 9.1%
80 Cutler Mill Road, Suite 311
Great Neck, NY 11021
Kevin Kimberlin (5) ........................... 136,007 7.3% 4.3%
c/o Spencer Trask Securities Incorporated
535 Madison Avenue, 18th Floor
New York, NY 10022
Kimberlin Family Partners, L.P. (6) ........... 130,975 7.1% 4.1%
c/o Spencer Trask Securities Incorported
535 Madison Avenue, 18th Floor
New York, NY 10022
W. Braun Jones, Jr. (7) ....................... 112,293 6.1% 3.5%
Intersouth Partners .......................... 106,136 6.0% 3.4%
P.O. Box 13546
Research Triangle Park, NC 27709
Dennis J. Dougherty (8) ....................... 106,136 6.0% 3.4%
William E. Kimberly (9) ....................... 54,026 3.0% 1.7%
D. Wayne Silby (10) ........................... 46,456 2.6% 1.5%
Carl N. Tyson (11) ............................ 10,701 * *
Edson D. deCastro (11) ........................ 4,564 * *
All directors and executive officers as a
group
(13 persons) (12) ........................... 1,025,346 52.0% 30.0%
</TABLE>
- ----------
*Less than 1 percent
(1) Assumes the sale of 1,334,000 shares by the Company pursuant to this
offering and no exercise of the Underwriters' over-allotment option.
(2) Includes 153,622 shares underlying warrants held by trusts for which Mr.
Furst is the trustee and which are currently exercisable.
50
<PAGE>
(3) Includes 68,483 shares underlying a warrant held by Mr. Kannan that is
currently exercisable.
(4) Consists of 18,660 shares held by Mr. Fingerhut and 282,762 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 79,750 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 5,032 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 79,750 shares underlying warrants which are currently
exercisable.
(7) Includes 40,747 vested shares underlying options, 31,479 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 10,272 shares underlying a warrant held by Mr. Kimberly that is
currently exercisable, 2,282 vested shares underlying options, as well as
5,384 outstanding shares of Common Stock and 2,568 shares underlying a
currently exercisable warrant, both held by Elena Kimberly, Mr. Kimberly's
wife.
(10) Consists of 2,282 vested shares underlying options and 18,956 and 25,218
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 42,802 outstanding shares and 29,562 vested shares underlying
options held by other executive officers.
51
<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 1,767,397 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 846,883 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 479,893 shares of Common
Stock at a weighted average exercise price of $10.08 per share, all of which are
currently exercisable. Warrants to purchase 152,766 of these shares expire in
March 2001; warrants to purchase 37,793 of these shares expire in May 2002; and
warrants to purchase the remaining 289,334 shares, which were granted at various
times between July 1994 and August 1996, expire three to eight years from the
date of grant.
52
<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."
53
<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 3,101,397
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 1,334,000 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 1,767,397 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 1,684,294 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 47,520 shares will be eligible for
immediate sale as of the date of the final prospectus relating to this offering;
(ii) approximately 3,252 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 27,536 shares will be
eligible for sale beginning as early as March and May 1997 pursuant to Rule 144;
and (iv) approximately 1,005,923 additional shares will be eligible for sale
beginning one year after the date of the final prospectus relating to this
offering. Approximately 683,156 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 15, 1996, an additional 860,733 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
252,735 additional shares will be eligible for sale beginning one year after the
date of the final prospectus relating to this offering; (ii) approximately
479,893 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 125,105 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 31,014 shares immediately
after this
54
<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 841,421 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 513,445 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 1,134,565 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 479,461 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 428,023 shares of Common Stock for
issuance pursuant to the Company's stock option plans, 27,393 of which either
have expired or have been forfeited. As of October 15, 1996, options to purchase
a total of 380,840 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 68,483 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.
55
<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.
Underwriters Number of Shares
------------ ----------------
Friedman, Billings, Ramsey & Co., Inc. ...
Total................................
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 1,684,294 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
200,100 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 1,334,000 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."
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
56
<PAGE>
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.
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.
57
<PAGE>
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.
58
<PAGE>
<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's 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.
Ernst & Young LLP
Vienna, Virginia
July 10, 1996, except Note 14, as to which the date is
, 1996
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion of
the restatement of the capital accounts for the reverse stock split as described
in Note 14 to the financial statements.
Vienna, Virginia
October 29, 1996 /s/ Ernst & Young LLP
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, 187,254 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|Al 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 384,162
and 405,946 shares issued and outstanding at
December 31, 1995 and September 30, 1996,
respectively ................................ -- 3,842 4,059 --
Undesignated Preferred Stock, $.01 par value;
10,000,000 shares authorized ................ -- -- -- --
Common Stock, $0.01 par value; 36,000,000
shares authorized; 709,774, 789,048 and
836,985 shares issued and outstanding
at December 31, 1994 and 1995 and
September 30, 1996, respectively
(1,767,397 pro forma shares)................. 7,098 7,890 8,370 17,674
Additional paid-in capital.................... 2,216,556 5,456,238 7,632,393 11,704,152
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) 96,348 94,364 205,529
Gain on debt forgiveness ................... -- 609,270 30,303 30,303 --
Interest expense............................ (154,850) (259,994) (75,570) (53,914) (49,541)
------------ ------------- -------------- -------------- --------------
Net loss..................................... $(413,503) $ (687,258) $(2,239,641) $(1,329,533) $(3,448,705)
Accrued dividends to preferred stockholders . -- -- (174,830) (115,595) (241,958)
------------ ------------- -------------- -------------- --------------
Net loss available to common stockholders ... $(413,503) $ (687,258) $(2,414,471) $(1,445,128) $(3,690,663)
============ ============= ============== ============== ==============
Net loss per share........................... $ (.57) $ (.90) $ (2.16) $ (1.30) $ (3.22)
============ ============= ============== ============== ==============
Weighted average shares outstanding.......... 727,131 762,903 1,119,642 1,115,542 1,144,694
============ ============= ============== ============== ==============
Pro forma net loss per share................. $ (1.72) $ (2.24)
============== ==============
Pro forma weighted average shares
outstanding................................. 1,406,178 1,649,900
============== ==============
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
UOL PUBLISHING, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
SERIES A
SERIES A CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
------------------- ------------------
SHARES AMOUNT SHARES AMOUNT
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1992................. 4,602 $ 46 -- $ --
Preferred Stock dividends payable........... -- -- -- --
Net loss.................................... -- -- -- --
--------- -------- --------- --------
Balance at December 31, 1993................. 4,602 46 -- --
Preferred Stock dividends payable........... -- -- -- --
Conversion of debt to equity................ -- -- -- --
Series A Preferred Stock conversion......... (4,602) (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................ -- -- 1,813 18
Issuance of Series A convertible Preferred
Stock...................................... -- -- 382,349 3,824
Issuance of compensatory stock and stock
options.................................... -- -- -- --
Net loss.................................... -- -- -- --
--------- -------- --------- --------
Balance at December 31, 1995................. -- -- 384,162 3,842
Issuance of Common Stock primarily in
connection with the CTA acquisition........ -- -- -- --
Issuance of Series A convertible Preferred
Stock ..................................... -- -- 21,784 217
Issuance of compensatory stock options...... -- -- -- --
Issuance of stock options in connection with
CTA acquisition............................ -- -- -- --
Net loss for the nine months ended September
30, 1996 (unaudited)....................... -- -- -- --
--------- -------- --------- --------
Balance at September 30, 1996 (unaudited) ... -- $ -- 405,946 $4,059
========= ======== ========= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Common Stock Additional Total
----------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992................. 384,371 $ 3,844 $1,080,883 $ (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................. 384,371 3,844 1,080,883 (3,807,378) (2,722,605)
Preferred Stock dividends payable........... -- -- -- (8,022) (8,022)
Conversion of debt to equity................ 79,687 797 521,797 -- 522,594
Series A Preferred Stock conversion......... 92,047 920 (874) -- --
Issuance of Common Stock.................... 149,630 1,496 413,268 -- 414,764
Conversion of Preferred Stock dividends
payable to Common Stock.................... 4,039 41 24,732 -- 24,773
Issuance of compensatory stock and stock
options.................................... -- -- 176,750 -- 176,750
Net loss.................................... -- -- -- (687,258) (687,258)
------- ----- --------- ---------- ----------
Balance at December 31, 1994................. 709,774 7,098 2,216,556 (4,502,658) (2,279,004)
Conversion of debt to equity................ 79,274 792 325,272 -- 326,082
Issuance of Series A convertible Preferred
Stock...................................... -- -- 2,728,610 -- 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................. 789,048 7,890 5,456,238 (6,742,299) (1,274,329)
Issuance of Common Stock primarily in
connection with the CTA acquisition........ 47,937 480 666,520 -- 667,000
Issuance of Series A convertible Preferred
Stock ..................................... -- -- 412,583 -- 412,800
Issuance of compensatory stock options...... -- -- 1,022,052 -- 1,022,052
Issuance of stock options in connection with
CTA acquisition............................ -- -- 75,000 -- 75,000
Net loss for the nine months ended September
30, 1996 (unaudited)....................... -- -- -- (3,448,705) (3,448,705)
------- ----- --------- ---------- ----------
Balance at September 30, 1996 (unaudited) ... 836,985 $ 8,370 $7,632,393 $(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 ............... -- (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.
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)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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 42,802 shares of the Company's Common Stock. The
Company also issued fully vested options to purchase 5,136 shares of the
Company's Common Stock, at an exercise price of $0.12 per share, to four
employees of CTA; these fully vested options are considered as part of the total
purchase price. 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 .
Additionally, the Company granted an option to purchase 17,120 shares of the
Company's Common Stock, at an exercise price of $21.03 per share, to the former
stockholder of CTA in conjunction with a two-year employment agreement.
Management subsequently repriced the option to $14.60 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).
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. 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 79,687 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.
F-9
<PAGE>
UOL PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. LOANS PAYABLE TO (RECEIVABLE FROM) RELATED PARTIES (CONTINUED)
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
79,274 shares of Common Stock and 1,813 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 $18.69 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 6,955 shares
of the Company's Common Stock at an exercise price of $18.69 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 $18.69 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.
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 a 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.
F-10
<PAGE>
UOL PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. NOTES PAYABLE (CONTINUED)
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 $18.69 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:
Three months ended December 31,
1996............................... $ 50,897
1997............................... 228,283
1998............................... 221,580
----------
$500,760
==========
F-11
<PAGE>
UOL PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. COMMITMENTS (CONTINUED)
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 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 4,602 then-outstanding shares of
Series A convertible Preferred Stock into 92,047 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 4,039 shares of Common Stock.
During 1994, a total of 149,630 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 382,349 shares of Series A convertible Preferred
Stock for net proceeds of approximately $2,732,000 at a price of $8.76 per
share.
During 1996, the Company issued 5,135 shares of Common Stock as payment for
certain accounts payable amounting to $42,000. The shares were issued at a price
per share of $8.76. The non-cash portion of this transaction has been excluded
from the statements of cash flows.
During 1996, the Company issued an aggregate of 20,685 shares of Series A
convertible Preferred Stock for net proceeds of approximately $413,000 at a
price of $21.03 per share. Additionally, the Company issued 1,099 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.
PREFERRED STOCK
On July 19, 1996, the Company issued 187,254 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 $18.69 per share, subject to adjustment for certain
F-12
<PAGE>
UOL PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. STOCKHOLDERS' DEFICIT (CONTINUED)
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
$8.76 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 19,955,
13,194 and 54,348, shares of Preferred Stock, respectively, which represented a
total value of $174,830, $115,595 and $241,958, 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 PLAN
The Company has adopted a stock option plan which permits the Company to grant
up to 291,056 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 136,967 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............................ 45,884
Granted........................ 48,448
Exercised...................... --
Canceled or expired............ --
------------
Outstanding at December 31,
1994........................... 94,332
Granted........................ 13,696
Exercised...................... --
Canceled or expired............ (6,848)
------------
Outstanding at December 31,
1995........................... 101,180
Granted........................ 300,205
Exercised...................... --
Canceled or expired............ (20,545)
Outstanding at September 30,
1996........................... 380,840
Exercisable at September 30,
1996........................... 170,427
============
Exercise prices on the outstanding options range from $0.88 to $14.60 per share.
As of September 30, 1996, there were 47,183 options available for future grants.
Included in outstanding options are options to purchase 25,339 shares of Common
Stock which were issued during 1994 with an exercise price of the lesser of
$2.92 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 88,687 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 383,499 shares of Common Stock at prices ranging from $2.92 to
$17.52 per share. In 1995, the Company issued warrants to purchase 120,689
shares of Common Stock at prices ranging from $6.13 to $8.76 per share. In 1996,
the Company issued warrants to purchase 12,840 shares of Common Stock to a
placement agent at an exercise price of $21.03 per share. In addition, the
Company issued warrants to purchase 6,955 shares of Common Stock in connection
with the issuance of debt (see Note 6). Of the total warrants outstanding at
September 30, 1996, 338,624 Common Stock warrants were issued in connection with
equity transactions and 186,545 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
1,212,794 and 1,601,532, 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 financing 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 73,714 shares of Common Stock at an exercise price of
$21.03 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 over the term of the development period. 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. 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 A convertible Preferred Stock into shares of
Common Stock on a one-for-one basis, 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 54,348
shares of Preferred Stock to holders of Preferred Stock and the conversion
thereof to Common Stock, in accordance with the
F-15
<PAGE>
UOL PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
13. UNAUDITED PRO FORMA FINANCIAL INFORMATION (CONTINUED)
applicable conversion rate, the exercise of warrants to purchase 68,481 shares
of Common Stock and the repayment of the $300,000 convertible loan 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 68,481 shares of Common Stock at an exercise price of $8.76
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 15,801 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 102,723
shares of Common Stock at $17.52 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 $8.76 per share.
In addition, upon consummation of the Company's IPO the exercise prices of
warrants to purchase 35,247 shares of Common Stock will reduce from $17.52 or
$18.69 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 $8.76 per share.
The above two transactions are contingent upon the initial public offering price
being greater than $12.85 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 14,838 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 7,404 shares and the
exercise price thereof reduced to $9.05 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
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
F-16
<PAGE>
UOL PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
14. SUBSEQUENT EVENTS (CONTINUED)
bonuses, as well as the issuance of options to purchase 8,560 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 October 30, 1996 the Board of Directors approved a 1-for-11.68159232 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 ____________. 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 October 30, 1996 the Board of Directors approved a 1-for-11.68159232 reverse
stock split of the Company's $.01 par value Common Stock, which became effective
on ____________. 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.
15. PRO FORMA STATEMENTS OF OPERATIONS
On August 1, 1996, the Company acquired Cognitive Training Associates, Inc.
("CTA") by merger in exchange for 42,802 shares of the Company's Common Stock
issued to CTA's sole stockholder and 5,136 fully vested options to purchase the
Company's Common Stock granted to four CTA employees. The transaction was
accounted for using the purchase method. Accordingly, the financial statements
will include the accounts of CTA subsequent to the acquisition date. 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.
NINE MONTHS
YEAR ENDED ENDED SEPTEMBER
DECEMBER 31, 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............................... (174,830) (241,958)
--------------- -------------------
Net loss available to common stockholders . $(2,734,007) $(3,806,202)
=============== ===================
Net loss per share......................... $ (2.35) $ (3.21)
=============== ===================
Weighted average shares outstanding ....... 1,162,444 1,187,496
=============== ===================
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.
Ernst & Young LLP
Vienna, Virginia
July 17, 1996, except Note 9, as to which the date is
August 1, 1996
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion of
the restatement of the capital amounts in Note 9 for the reverse stock split
described in Note 14 of UOL Publishing, Inc.'s financial statements.
Vienna, Virginia
October 29, 1996 /s/ Ernst & Young LLP
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
------------------- TOTAL
NUMBER RETAINED STOCKHOLDER'S
OF 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
=========== =========== =========== ===========
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
5,136 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 17,120 shares of the UOL's Common Stock at purchase price of $21.03 per
share, subsequently repriced to $14.60 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
*Autodesk Press (8 modules)*
*Technical Software, Inc. Electric Circuits (32 modules)*
*At a Glance Software, Inc. Graybar Electrical Education
*CAD CAM Center (34 modules)*
*CAD Institute Scientific Products (6 modules)*
*Republic Research Training, Inc. 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 New Mexico Non-Financial Managers
State of North Dakota Autodesk Product Training (6 courses)
United States Army 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
offering other than those contained in 1,334,000 SHARES
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
Prospectus does not constitute an
offer to sell or a solicitation of an
offer to buy any securities other than
the shares of Common Stock to which it [LOGO]
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
Unaudited Pro Forma Combined
Statements of Operations......... 18 PROSPECTUS
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 20
Business.......................... 31 --------------
Management........................ 43
Certain Transactions.............. 48
Principal Stockholders............ 50
Description of Capital Stock...... 52
Shares Eligible for Future Sale... 54
Underwriting...................... 56 FRIEDMAN, BILLINGS, RAMSEY
Legal Matters..................... 57 & CO., INC.
Experts........................... 57
Additional Information............ 57
Reports to Stockholders........... 58
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 ................................ 450,000
Accounting fees and expenses ........................... 200,000
Blue sky fees and expenses ............................. 10,000
Stock certificates and transfer agent and custodian
fees.................................................... 10,000
Miscellaneous........................................... 33,125
Total................................................. $850,000
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,
II-1
<PAGE>
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, or (iv) for any transaction
from which the director derived an improper personal benefit.
Article VII of the Company's Certificate of Incorporation provides for the
elimination of personal liability of a director for breach 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 476,715 shares of Common
Stock to employees and directors of and consultants to the Company, 27,393 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 warrants to
purchase an aggregate of 205,446 shares of Common Stock.
3. In November 1994, the Company issued an aggregate of approximately: (i)
96,086 shares of Common Stock in exchange for all of its then outstanding shares
of preferred stock and dividends accrued thereupon; (ii) 149,630 shares of
Common Stock to eight investors for aggregate consideration of $443,500; and
(iii) 79,687 shares of Common Stock to nine investors upon conversion of
outstanding indebtedness in the amount of $522,594.
4. From July 1994 to August 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 463,725 shares of Common Stock upon
consummation of the offering made hereby. Spencer Trask Securities Incorporated
served as placement agent for this financing and received for itself and its
designees warrants to purchase 37,793 shares of Common Stock.
5. From July 1994 to August 1996, the Company issued warrants to purchase an
aggregate of 208,011 shares of Common Stock, as adjusted to give effect to the
Jones Transactions, to a total of eleven investors.
6. During 1995, the Company issued an aggregate of approximately: (i) 18,627
shares of Common Stock to four individuals, consisting of a consultant and three
service providers, as consideration for services rendered; and (ii) 60,647
shares of Common Stock, and 1,813 shares of Series A Preferred Stock to six
investors upon conversion of outstanding indebtedness.
7. During 1996, the Company issued an aggregate of 5,135 shares of Common
Stock to three service providers for services rendered in 1995.
II-2
<PAGE>
8. In July 1996, the Company issued and sold 187,254 shares of Series B
Preferred Stock convertible into 395,848 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 42,802 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 12,840 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 an existing
securityholder to issue to such securityholder, upon consummation of the
offering made hereby, a warrant to purchase 15,801 shares of Common Stock in
consideration of such securityholder'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>
<S> <C>
Exhibit No Description
- ---------- -----------
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.
II-3
<PAGE>
10.17+ Form of Online Educational Services Agreement.
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>
- ----------
* To be filed by amendment.
** 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. 1
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 29th day of October, 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. 1 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 October 29, 1996
- ------------------------------ Officer (Principal Executive
Narasimhan P. Kannan Officer)
/s/ LEONARD P. KURTZMAN* Chief Financial Officer October 29, 1996
- ------------------------------ Principal Financial and
Leonard P. Kurtzman Accounting Officer)
/s/ CARL N. TYSON* Director October 29, 1996
- ------------------------------
Carl N. Tyson
/s/ EDSON D. DECASTRO* Director October 29, 1996
- ------------------------------
Edson D. deCastro
/s/ DENNIS J. DOUGHERTY* Director October 29, 1996
- ------------------------------
Dennis J. Dougherty
/s/ BARRY K. FINGERHUT* Director October 29, 1996
- ------------------------------
Barry K. Fingerhut
/s/ W. BRAUN JONES, JR.* Director October 29, 1996
- ------------------------------
W. Braun Jones, Jr
/s/ WILLIAM E. KIMBERLY* Director October 29, 1996
- ------------------------------
William E. Kimberly
/s/ D. WAYNE SILBY* Director October 29, 1996
- ------------------------------
D. Wayne Silby
*By: /s/ NARASIMHAN P. KANNAN
- ------------------------------
Narasimhan P. Kannan, October 29, 1996
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
UOL PUBLISHING, INC.
_________ SHARES
COMMON STOCK
PURCHASE AGREEMENT
October ___, 1996
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
as Representative of the several Underwriters
Friedman, Billings, Ramsey & Co., Inc.
1001 Nineteenth Street North
Arlington, Virginia 22209
Dear Sirs:
UOL Publishing, Inc., a Delaware corporation (the "Company"), confirms its
agreement with Friedman, Billings, Ramsey & Co., Inc. ("FBR"), and each of the
other Underwriters named in Schedule A hereto (collectively, the "Underwriters,"
which term shall also include any underwriter substituted as provided in Section
9 hereof), for whom FBR is acting as Representative and is hereinafter referred
to as the "Representative", subject to the terms and conditions stated herein,
with respect to the sale by the Company to the Underwriters, acting severally
and not jointly, of _________ shares (the "Firm Shares") of the Company's Common
Stock, par value $0.01 per share (the "Common Stock"), as set forth in Schedule
A hereto, and with respect to the grant by the Company to the Underwriters of
the option described in Section 2(b) hereof to purchase all or any part of an
additional ________ shares of Common Stock (the "Option Shares") to cover
over-allotments. The Firm Shares and the Option Shares are collectively
hereinafter called the "Shares".
Prior to the purchase and public offering of the Shares by the Underwriters
("the Offering"), the Company, and the Representative, acting on behalf of the
Underwriters, shall enter into an agreement substantially in the form of Exhibit
A hereto (the "Pricing Agreement"). The Pricing Agreement may take the form of
an exchange of any standard form of written telecommunication between the
Company and the Representative and shall specify such applicable information as
is indicated in Exhibit A hereto. The offering of the Shares will be governed by
this Agreement, as supplemented by the Pricing Agreement. From and after the
date of the execution and delivery of the Pricing Agreement, this Agreement
shall be deemed to incorporate the Pricing Agreement.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (No. 333____)
and a related preliminary prospectus for the registration of the Shares
1
<PAGE>
under the Securities Act of 1933, as amended (the "1933 Act"), and has prepared
and filed such amendments thereto and such amended prospectuses as may have been
required to the date hereof, and will prepare and file such additional
amendments thereto and such amended prospectuses as may hereafter be required.
Each prospectus used before the time such prospectus is declared effective by
the Commission and prior to the date hereof shall be referred to as a
"Preliminary Prospectus." Such registration statement when it becomes effective
(as amended, if applicable) and the prospectus constituting a part thereof
(including in each case the information, if any, deemed to be a part thereof
pursuant to Rule 430A(b) of the rules and regulations under the 1933 Act (the
"1933 Act Regulations")), as from time to time amended or supplemented pursuant
to the 1933 Act or otherwise, are hereinafter referred to as the "Registration
Statement" and the "Prospectus," respectively, except that if any revised
prospectus shall be provided to the Underwriters by the Company for use in
connection with the offering of the Shares which differs from the Prospectus on
file at the Commission at the time the Registration Statement becomes effective
(whether or not such revised prospectus is required to be filed by the Company
pursuant to Rule 424(b) of the 1933 Act Regulations), the term "Prospectus"
shall refer to such revised prospectus from and after the time it is first
provided to the Underwriters for such use. The Company understands that the
Underwriters propose to make a public offering of the Shares as soon as the
Representative deems advisable after the Registration Statement becomes
effective and the Pricing Agreement has been executed and delivered.
I. Representations and Warranties of the Company
(a) The Company represents and warrants to, and agrees with, each
Underwriter as of the date hereof and as of the date of the Pricing Agreement
(such later date being hereinafter referred to as the "Representation Date") as
follows:
1. At the time the Registration Statement becomes effective and at the
Representation Date, the Registration Statement will comply in all
material respects with the requirements of the 1933 Act and the 1933
Act Regulations and will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and the
Prospectus, at the Representation Date (unless the term "Prospectus"
refers to a prospectus that has been provided to the Underwriters by
the Company for use in connection with the offering of the Shares
which differs from the Prospectus on file at the Commission at the
time the Registration Statement becomes effective, in which case at
the same time it is first provided to the Underwriters for such use)
and at the Closing Time referred to in Section 2(c) hereof, will
comply in all material respects with the requirements of the 1933 Act
and the 1933 Act Regulations and will not contain an untrue statement
of a material fact or omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
2. No stop order suspending the effectiveness of the Registration
Statement or any part thereof has been issued and no proceeding for
that purpose has been instituted or, to the knowledge of the Company,
threatened by the Commission or by the state securities authority of
any jurisdiction. No order preventing or suspending the use of the
Prospectus has been issued and
2
<PAGE>
no proceeding for that purpose has been instituted or, to the
knowledge of the Company, threatened by the Commission or by the state
securities authority of any jurisdiction.
3. Ernst & Young LLP, who have certified the financial statements and
financial statement schedules included in the Registration Statement,
are and were at all relevant times, with respect to the Company,
independent public accountants within the meaning of Rule 101 of the
Code of Professional Conduct of the American Institute of Certified
Public Accountants and as required by the 1933 Act and the 1933 Act
Regulations.
4. The financial statements (including the notes thereto) included in the
Registration Statement, any Preliminary Prospectus and the Prospectus
comply in all material respects with the requirements of the Rules and
Regulations and present fairly the financial position of the Company
and its consolidated Subsidiaries, at the dates indicated and the
results of their operations for the periods specified, and except as
otherwise stated in the Registration Statement, such financial
statements have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis. The financial
statement schedules included in the Registration Statement presents
fairly the information required to be stated therein. The financial
information and data included in the Registration Statement and the
Prospectus conform in all material respects with the requirements of
the 1983 Act and the 1933 Act Regulations and present fairly the
information included therein and have been prepared on a basis
consistent with that of the financial statements included in the
Registration Statement and the Prospectus and the books and records of
the Company and its consolidated subsidiaries, as presented therein.
Other than the historical financial statements (and schedules)
included therein, no other historical or pro forma financial
statements (or schedules) are required by the 1933 Act or the 1933 Act
Regulations to be included in the Registration Statement. Except as
reflected or disclosed in the financial statements included in the
Registration Statement of otherwise set forth in the Prospectus,
neither the Company, nor any of the Subsidiaries, is subject to any
material indebtedness, obligation, or liability, contingent or
otherwise known to the Company.
5. Since the latest respective dates as of which information is given in
the Registration Statement and the Prospectus, except as otherwise
stated therein, (A) there has been no material adverse change in the
condition, financial or otherwise, or in the earnings, assets,
business affairs or business prospects of the Company, of the
Subsidiaries (as defined below) considered as a single enterprise,
whether or not arising in the ordinary course of business, (B) there
have been no acquisitions or other transactions entered into by the
Company, or any subsidiary that are material with respect to such
entities, considered as a single enterprise, or would result in any
inaccuracy
3
<PAGE>
in the representations contained in Section 1(a)(iv) above (C) there
has been no dividend or distribution of any kind declared, paid, or
made by the Company on any class of its capital stock (D) there has
been no change in the capital stock of the Company or any Subsidiary,
(E) there has been no increase in the indebtedness of the Company, or
any Subsidiary and (F) there have been no transactions entered into by
the Company which are material to the Company, other than those in the
ordinary course of business.
6. The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware,
with corporate power and authority to own, lease and operate its
properties, conduct its business as described in the Prospectus and to
enter into and perform its obligations under this Agreement. The
Company is duly qualified as a foreign corporation for the transaction
of business and is in good standing under the laws of each other
jurisdiction in which such qualification is required, except where the
failure to so qualify would not have a material adverse effect on the
condition, financial or otherwise, or the earnings, assets, business
affairs or business prospects of the Company, or the Subsidiaries,
considered as a single enterprise.
7. Each subsidiary of the Company ("Subsidiary") has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has corporate
power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus and is duly
qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction under the laws of such jurisdiction in
which such qualification is required, except where the failure to so
qualify would not have a material adverse effect on the condition,
financial or otherwise, or the earnings, assets, business affairs or
business prospects of the Company and its subsidiaries considered as
one enterprise; all of the issued and outstanding capital stock of
each Subsidiary has been duly authorized and validly issued, is fully
paid and non-assessable and is owned by the Company, directly or
through subsidiaries, free and clear of any security interest,
mortgage, pledge, lien, encumbrance, claim or equity.
8. The authorized, issued and outstanding Capital Stock and any
short-term debt and Capital lease obligations of the Company conform
in all material respects to all statements relating thereto contained
in the Prospectus. All such shares of Common Stock, Series A Preferred
Stock and Series B Preferred Stock have been duly and validly
authorized and issued, are fully paid and non-assessable, are not
subject to preemptive or other rights, and have been offered and sold
in compliance with all applicable laws (including federal and state
securities laws). No shares of capital stock of the Company are
reserved for any purpose except in connection with (i) the stock
4
<PAGE>
option plans of the Company as described in the Prospectus, (ii) the
issuance of Common Stock upon the exercise of warrants to subscribe
for shares of Common Stock as described in the Prospectus. Except as
described in the Prospectus, there are no outstanding securities
convertible into or exchangeable for any capital stock of the Company
and no outstanding options, rights (preemptive or otherwise) or
warrants to purchase or to subscribe for such shares or any other
securities of the Company.
9. The Shares to be issued and sold by the Company to the Underwriters
hereunder have been duly and validly authorized and reserved for
issuance and sale to the Underwriters pursuant to this Agreement by
all necessary corporate action on the part of the Company, and when
issued and delivered by the Company pursuant to this Agreement against
payment of the consideration set forth in the Pricing Agreement, will
be duly and validly issued and fully paid and non-assessable. The
terms of the Shares conform to all statements and descriptions related
thereto contained in the Prospectus and comply with all applicable
legal requirements. The issuance of the Shares is not subject to
preemptive or other rights. The Shares conform to the provisions of
the Charter (as defined below). The form of share certificate to be
used to evidence the Shares is in due and proper form and complies
with all applicable legal requirements.
10. Neither the Company nor any Subsidiary is in violation of its charter
or by-laws (the "Charter"). Neither the Company nor any Subsidiary is
in default in the performance or observance of any obligation,
agreement, covenant. or condition contained in any contract,
indenture, mortgage, deed of trust, loan agreement, note, lease or
other agreement or instrument to which the Company, or any Subsidiary
is, or at the Closing Time will be, a party or by which the Company or
any Subsidiary is, or at the Closing Time will be, bound or to which
any of the property or assets of the Company or any Subsidiary is, or
at the Closing Time will be, subject, except where a default there
under would not have a material adverse effect on the condition,
financial or otherwise, or the earnings, assets, or business affairs
of the Company, and the Subsidiaries, considered as a single
enterprise.
11. (A) This Agreement has been duly authorized, executed, and delivered
by the Company, and is a valid and binding agreement of the Company,
enforceable against the Company, in accordance with its terms; and (B)
at the Representation Date, the Pricing Agreement will have been duly
authorized, executed, and delivered by the Company and will be a valid
and binding agreement of the Company, enforceable against the Company
in accordance with its terms.
12. The issuance and sale of the Firm Shares and the Option Shares by the
Company, the performance by the Company of its obligations under this
Agreement, the Pricing Agreement, and the consummation of the
5
<PAGE>
transactions herein and therein contemplated, including the
application of the net proceeds from the sale of the Firm Shares and
the Option Shares as described in the Prospectus will not (A) conflict
with or result in a breach or violation of any of the terms or
provisions of, constitute a default under, or result in the
acceleration of the maturity of any indebtedness under, any contract,
indenture, mortgage, deed of trust, loan agreement or other agreement
or instrument to which the Company or any Subsidiary is a party or by
which the Company or any Subsidiary is bound or to which any of the
property or assets of the Company or any Subsidiary is subject, or (B)
result in any violation of the provisions of the certificate of
incorporation or by-laws of the Company or any Subsidiary, or any
statute or any order, rule or regulation of any court or governmental
agency or body having jurisdiction over the Company or any Subsidiary
or any of their respective properties.
13. Except to the extent obtained prior to the Closing Time, no consent,
approval, authorization, order, registration or qualification of or
with any court or governmental agency or body, or any other person is
required for the issue and sale of the Shares or the consummation by
the Company of the transactions contemplated by this Agreement and the
Pricing Agreement except the registration under the 1933 Act of the
Shares and such consents, approvals authorizations, registrations, or
qualifications as may be required under state or foreign securities or
Blue Sky laws in connection with the purchase and distribution of the
Shares by the Underwriters.
14. There is no action, suit or proceeding before or by any court or
governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the Company, threatened, against or affecting the
Company or any Subsidiary, which is required to be disclosed in the
Registration Statement (other than as disclosed therein), or which
might result in any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its subsidiaries considered as
one enterprise, or which might materially and adversely affect the
properties or assets thereof or which might materially and adversely
affect the consummation of this Agreement; all pending legal or
governmental proceedings to which the Company or any Subsidiary is a
party or of which any of their respective property or assets is the
subject which are not described in the Registration Statement,
including ordinary routine litigation incidental to the business, are,
considered in the aggregate, not material; and there are no contracts
or documents of the Company or any Subsidiary which are required to be
filed as exhibits to the Registration Statement by the 1933 Act or by
the 1933 Act Regulations which have not been so filed.
15. The Company and the Subsidiaries have good and marketable
6
<PAGE>
title to all of the properties and assets reflected in the financial
statements included in the Prospectus (or as described in the
Prospectus), subject to no lien, mortgage, pledge, charge or
encumbrance of any kind except those reflected in such financial
statements (or as described in the Prospectus) or which are not
material in amount. The Company and the Subsidiaries occupy their
leased properties, if any, under valid and binding leases conforming
to the description thereof set forth in the Prospectus.
16. Except as set forth in the Prospectus, no holder of any securities of
the Company has any rights to require the Company to register any
securities of the Company under the 1933 Act.
17. Other than this Agreement and the Pricing Agreement, the Company is
not a party to any contract, agreement or understanding with any
person that would give rise to a valid claim against the Company for a
brokerage commission, finder's fee or like payment in connection with
the sale of the Shares.
18. The Shares have been authorized for inclusion in the Nasdaq National
Market.
19. No statement, representation, warranty or covenant made by the Company
in any certificate or document required by this Agreement to be
delivered to the Underwriters was or will be, when made, inaccurate,
untrue or incorrect in any material respect.
20. Neither of the Company, nor any of its directors, officers or
controlling persons, has taken and will take, directly or indirectly,
any action resulting in a violation of Rule 10b-6 under the 1934 Act,
or designed to cause or result in or that has constituted or
reasonably might be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of the Shares.
21. The Company and the Subsidiaries own or possess, or can acquire on
reasonable terms, the patents, patent rights, licenses, inventions,
copyrights, know-how (including trade secrets and other unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks and trade names presently employed by them
in connection with the business now operated by them, and neither the
Company nor any of the Subsidiaries has received any notice of
infringement of or conflict with asserted rights of others with
respect to any of the foregoing which, singly or in the aggregate, if
the subject of an unfavorable decision, ruling or finding, would
result in any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects
of the Company and the Subsidiaries considered as one enterprise.
22. The Company has obtained and delivered to the Underwriters the
agreements of the persons and entities named in Schedule B annexed
hereto to the effect that each such person or entity will not, for a
period of
7
<PAGE>
365 days from the date hereof, without FBR's prior written consent,
directly or indirectly, offer to sell, sell, grant any option for the
sale of, or otherwise dispose of, any Common Stock of the Company or
any securities convertible into or exercisable for Common Stock of the
Company owned by such person or with respect to which such person has
the power of disposition.
(b) Any certificate signed by any officer or attorney-in-fact of the
Company, and delivered to the Representative or to counsel for the Underwriters
shall be deemed a representation and warranty by such entity to each Underwriter
as to the matters covered thereby.
I. Sale and Delivery to Underwriters; Closing; Reservation of Shares.
(a) On the basis of the representations and warranties herein contained and
subject to the terms and conditions herein set forth, the Company agrees to sell
the Firm Shares to each Underwriter, severally and not jointly, and each
Underwriter, severally and not jointly, agrees to purchase from the Company, at
the price per share set forth in the Pricing Agreement, the number of Firm
Shares set forth in Schedule A hereto opposite the name of such Underwriter
(except as otherwise provided in the Pricing Agreement), plus any additional
number of Firm Shares which such Underwriter may become obligated to purchase
pursuant to Section 9 hereof.
If the Company has elected not to rely upon Rule 430A under the 1933 Act
Regulations, the public offering price and the purchase price per share to be
paid by the Underwriter for the Shares have each been determined and set forth
in the Pricing Agreement, dated the date hereof, and an amendment to the
Registration Statement and the Prospectus reflecting such information will be
filed before the Registration Statement becomes effective.
If the Company has elected to rely upon Rule 430A under the 1933 Act
Regulations, the purchase price per share to be paid by the Underwriters for the
Shares shall be an amount equal to the initial public offering price, less an
amount per share to be determined by agreement between the Representative and
the Company. The initial public offering price per share of the Shares shall be
a fixed price to be determined by agreement between the Representative and the
Company. The public offering price and the purchase price, when so determined,
shall be set forth in the Pricing Agreement. In the event that such prices have
not been agreed upon and the Pricing Agreement has not been executed and
delivered by all parties thereto by the close of business on the fourth business
day following the date of this Agreement, this Agreement shall terminate
forthwith, without liability of any party to any other party hereunder other
than pursuant to Section 6 hereof, unless otherwise agreed to by the Company and
the Representative.
(b) In addition, on the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Company
hereby grants an option to the Underwriters to purchase up to an additional
________ shares of Common Stock, as Option Shares, at the price per share set
forth in the Pricing Agreement. The option hereby granted will expire 30 days
after the date hereof (or, if the Company has elected to rely upon Rule 430A
under the 1933 Act Regulations, 30 days after the Representation Date) and may
be exercised in whole or in part from time to time only for the purpose of
covering over-allotments which may be made in connection with the offering and
distribution of the Firm Shares upon notice by the Representative to the Company
setting forth the number of Option Shares as to which the Underwriters are then
exercising the option and the time, date and place of payment and delivery for
such Option Shares. Any such time and date of delivery (a "Date of Delivery")
shall be
8
<PAGE>
determined by the Representative but shall not be later than seven full business
days after the exercise of said option nor in any event prior to Closing Time,
as hereinafter defined, unless otherwise agreed upon by the Representative and
the Company. If the option is exercised as to all or any portion of the Option
Shares, the Option Shares shall be purchased by the Underwriters, severally and
not jointly, in proportion to their respective Firm Share underwriting
obligations as set forth in Schedule A hereto (except as may be otherwise
provided in the Pricing Agreement).
(c) Payment of the purchase price for and delivery of certificates for the
Firm Shares shall be made at the offices of Latham & Watkins, 1001 Pennsylvania
Avenue, N.W., Suite 1300, Washington, D.C., or at such other place as shall be
agreed upon by the Representative and the Company, at 10:00 a.m. Washington,
D.C. time, on the ____ business day following the date the Registration
Statement becomes effective if the sale of the Shares is priced before 4:30 p.m.
Eastern time or on the ____ business day following the date the Registration
Statement becomes effective if the sale of the Shares is priced after 4:30 p.m.
Eastern time (or, if the Company has elected to rely upon Rule 430A, the ____
business day after the Representation Date or the ____ business day after the
Representation Date if the sale of the Shares is priced after 4:30 p.m. Eastern
time) or such other time not later than 10 business days after such date as
shall be agreed upon by the Representative and the Company (such time and date
of payment and delivery being herein called "Closing Time"). In addition, in the
event that any or all of the Option Shares are purchased by the Underwriters,
payment of the purchase price for and the delivery of such Option Shares shall
be made at the above-mentioned offices of Latham & Watkins, or at such other
place as shall be mutually agreed upon by the Representative and the Company, on
each Date of Delivery as specified in the notice from the Representative to the
Company. Payment shall be made to the Company by certified or official bank
check or checks in New York Clearing House or similar next day funds payable to
the order of the Company against delivery to the Representative for the
respective accounts of the Underwriters of certificates for the Shares to be
purchased by the Underwriters. The certificates for the Firm Shares and the
Option Shares shall be in such authorized denominations and registered in such
names as the Representative may request in writing at least two business days
before Closing Time or each Date of Delivery, as the case may be. It is
understood that each Underwriter has authorized FBR, for its account, to accept
delivery of, receipt for, and make payment of the purchase price for, the Shares
which it has agreed to purchase. FBR, individually and not as a Representative
of the Underwriters, may (but shall not be obligated to) make payment of the
purchase price for the Shares to be purchased by any Underwriter whose check has
not been received by Closing Time, but such payment shall not relieve such
Underwriter from its obligations hereunder. The certificates for the Firm Shares
and the Option Shares will be made available for examination and packaging by
the Underwriters not later than 10:00 a.m., Washington, D.C. time, on the last
business day prior to Closing Time or each Date of Delivery, as the case may be.
I. Covenants of the Company, the Operating Partnership and the Selling
Stockholder.
9
<PAGE>
(a) The Company covenants with each Underwriter as follows:
1. The Company will (i) prepare the Prospectus in a form approved by the
Representative and file such Prospectus pursuant to Rule 424(b) of the
1933 Act Regulations not later than the Commission's close of business
on the second business day following the execution and delivery of
this Agreement, or, if applicable, such earlier time as may be
required by Rule 430A(a)(3) of the 1933 Act Regulations; (ii) advise
the Representative, promptly after it receives notice thereof, of the
time when the Registration Statement, or any amendment thereto, has
been filed or becomes effective or any supplement to the Prospectus or
any amended Prospectus has been filed; (iii) advise the
Representative, promptly after it receives notice thereof, of (A) the
receipt of any comments from the Commission, (B) the issuance by the
Commission of any stop order or of any order preventing or suspending
the use of any preliminary prospectus or the Prospectus, (C) the
suspension of the qualification of the shares for offering or sale in
any jurisdiction, (D) the initiation or threatening of any proceeding
for any such purpose, or (E) any request by the Commission for the
amending or supplementing of the Registration Statement or Prospectus
or for additional information; and, (iv) in the event of the issuance
of any stop order or any order preventing or suspending the use of any
Preliminary Prospectus or prospectus or suspending any such
qualification, to obtain its withdrawal at the earliest possible
moment.
2. The Company will (i) give the Representative notice of its intention
to prepare or file any amendment to the Registration Statement
(including any post-effective amendment) or any amendment or
supplement to the Prospectus (including any revised prospectus that
the Company proposes for use by the Underwriters in connection with
the offering of the Shares that differs from the prospectus on file at
the Commission at the time the Registration Statement becomes
effective, whether or not such revised prospectus is required to be
filed pursuant to Rule 424(b) of the 1933 Act Regulations), (ii)
furnish the Underwriters with copies of any such amendments or
supplements a reasonable time prior to the proposed filing or use
thereof, and (iii) not file any such amendment or any supplement or
use any such prospectus to which the Representative shall object.
3. Promptly from time to time, the Company will take such action as the
Representative may reasonably request to qualify the Shares for
offering and sale under the securities laws of such jurisdictions as
the Representative may request and to comply with such laws so as to
permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the
distribution of the Shares, provided that in
10
<PAGE>
connection therewith the Company shall not be required to qualify as a
foreign correspondent in any jurisdiction.
4. The Company will furnish each Underwriter with copies of the
Prospectus in such quantities as such Underwriter may from time to
time request. If the delivery of a prospectus is required at any time,
prior to the expiration of nine months after the time of issue of the
Prospectus in connection with the offering or sale of the Shares, and
if at such time. any event shall have occurred as a result of which
the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such Prospectus is
delivered, not misleading, or, if for any other reason it shall be
necessary during such period to amend or supplement the Prospectus in
order to comply with the 1933 Act and the 1933 Act Regulations, the
Company will notify the Representative and upon the Representative'
request will prepare and furnish without charge to the Underwriters
and to any dealer in securities as many copies as the Underwriters may
from time to time reasonably request of an amended Prospectus or a
supplement to the Prospectus which will correct such statement or
omission or effect such compliance. In case the Underwriters are
required to deliver a prospectus in connection with sales of any of
the Shares at any time nine months or more after the time of issue of
the Prospectus, upon the Underwriter's request but at the
Underwriter's expense, the Company will prepare and deliver to the
Underwriters as many copies as the Underwriters may request of an
amended or supplemented Prospectus complying with Section 10(a)(3) of
the 1933 Act.
5. The Company will make generally available to its security holders as
soon as practicable, but not later than 60 days after the close of the
period covered thereby, an earnings statement (in form complying with
the provisions of Rule 158 of the 1933 Act Regulations) covering a
twelve month period beginning not later than the first day of the
Company's fiscal quarter next following the "effective date" (as
defined in said Rule 158) of the Registration Statement.
6. The Company will furnish to its stockholders, as soon as practicable
after the end of each fiscal year, an annual report (including a
balance sheet and statements of income, stockholders' equity and cash
flow of the Company and its consolidated subsidiaries certified by
independent public accountants) and, as soon as practicable after the
end of each of the first three quarters of each fiscal year (beginning
with the fiscal quarter ending after the effective date of the
Registration Statement), consolidated summary financial information of
the Company and its subsidiaries for such quarter in reasonable
detail.
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7. During a period of five years from the effective date of the
Registration Statement, the Company will furnish to the Representative
copies of all reports or other communications (financial or other)
furnished to stockholders, and deliver to the Representative, as soon
as they are available, copies of any reports and financial statements
furnished to or filed with the Commission or any national securities
exchange or quotation system on which any class of securities of the
Company is listed.
8. The Company will use the net proceeds of the sale of the Firm Shares
and Option Shares for the purposes described in the Prospectus under
"Use of Proceeds."
9. The Company will take all action to ensure that the Common Stock
continues to be listed on the Nasdaq National Market or any national
securities exchange.
10. Except for the authorization of actions permitted to be taken by the
Underwriters as contemplated herein or in the Prospectus, the Company
will not (A) take, directly or indirectly, any action designed to
cause or to result in, or that might reasonably be expected to
constitute, the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Shares, (B) sell, bid for or purchase the Shares or pay any person any
compensation for soliciting purchases of the Shares, or (C) pay or
agree to pay to any person any compensation for soliciting another to
purchase any other securities of the Company.
11. During the period from the date of the Pricing Agreement until 365
days after Closing Time, the Company will not, without the prior
written consent of FBR, directly or indirectly, sell, offer to sell,
grant any option for the sale of, or otherwise dispose of, any Common
Stock or any other security convertible into or exchangeable into or
exercisable for Common Stock, otherwise than (A) in accordance with
this Agreement, (B) in connection with the Company's stock option plan
as presently in effect, (C) upon exercise of the Warrants or (D) as
otherwise contemplated in the Prospectus.
12. The Company confirms as of the date hereof that it is in compliance
with all provisions of Section 1 of Laws of Florida, Chapter 92- 198.
13. The Company will file with the Commission such reports on Form SR as
may be required pursuant to Rule 463 under the 1933 Act.
I. Payments of Fees and Expenses.
The Company covenants and agree with the Underwriters that the Company will
pay all expenses incident to the performance of its obligations under this
Agreement, including: (i) the printing and filing of the Registration Statement
as originally filed and of each amendment thereto, (ii) the preparation,
issuance and delivery of the certificates for the Shares to the Underwriters,
(iii)
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the fees and other charges of the Company's counsel and accountants, (iv) the
qualification of the Shares under securities laws in accordance with the
provisions of Section 3(a)(iii) hereof, including filing fees and the fees and
other charges of counsel for the Underwriters in connection therewith and in
connection with the preparation of the Blue Sky Memorandum, (v) the printing and
delivery to the Underwriters of copies of the Registration Statement as
originally filed and of each amendment thereto, of the preliminary prospectuses,
and of the Prospectus and any amendments or supplements thereto, (vi) the
printing and delivery to the Underwriters of copies of the Blue Sky Memorandum;
(vii) the fee of the NASD, including the reasonable fees and other charges of
counsel for the Underwriters in connection with the NASD's review of the terms
of the proposed public offering of the Shares, (viii) the fees and expenses
incurred in connection with the listing of the Common Stock on the Nasdaq
National Market, including filing and listing fees, and (ix) all out-of-pocket
expenses of the Underwriters, including fees and disbursements of counsel,
incurred by the Underwriter in making preparations for the offering, purchase,
sale and delivery of the Shares and in connection with their services rendered
pursuant to the Engagement Letter (as defined below).
If this Agreement is canceled or terminated by the Representative in
accordance with the provisions of Sections 5 or 8 hereof, the Company also shall
reimburse the Underwriters for its out-of-pocket expenses, including the fees
and other charges of counsel for the Underwriters.
I. Conditions of Underwriters' Obligations
The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Date of Delivery, shall be subject to the condition that all
representations and warranties and other statements of the Company, herein are,
at and as of such Date of Delivery, true and correct, the condition that the
Company, shall have performed all of its obligations hereunder theretofore to be
performed, and the following additional conditions:
(a) The Registration Statement shall have become effective not later than
10:00 a.m. Eastern time on the first business day following the date hereof, no
stop order suspending the effectiveness of the Registration Statement or any
part thereof shall have been issued and no proceeding for that purpose shall
have been initiated or threatened by the Commission; and all requests for
additional information on the part of the Commission shall have been complied
with to the Representative' reasonable satisfaction. If the Company has elected
to rely upon Rule 430A of the 1933 Act Regulations, the price of the Shares and
any price-related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) of the 1933 Act Regulations within
the applicable time period prescribed for such filing by the 1933 Act
Regulations and in accordance with Section 3(a) hereof, or a post-effective
amendment providing such information shall have been promptly filed and declared
effective in accordance with the requirements of Rule 430A of the 1933 Act
Regulations.
(b) At Closing Time the Representative shall have received:
(1) The favorable opinion, dated as of Closing Time, of Wyrick,
Robbins, Yates & Ponton, L.L.P., counsel for the Company, in form and substance
satisfactory to counsel for the Underwriters, to the effect that:
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1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of State of Delaware.
2. The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Registration Statement.
3. The Company is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required.
4. The authorized, issued and outstanding capital stock of the Company is
as set forth in the Prospectus under "Capitalization", and the shares
of issued and outstanding Common Stock have been duly authorized and
validly issued and are fully paid and non-assessable.
5. The Shares have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and, when issued and delivered
by the Company pursuant to this Agreement against payment of the
consideration set forth in the Pricing Agreement, will be validly
issued and fully paid and non-assessable.
6. The issuance of the Shares is not subject to preemptive or other
similar rights arising by operation of law or to the best of their
knowledge and information, otherwise.
7. Each subsidiary of the Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and, to the best
of their knowledge and information, is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required; all of the
issued and outstanding capital stock of each such subsidiary has been
duly authorized and validly issued, is fully paid and non-assessable
and, to the best of their knowledge and information, is owned by the
Company, directly or through subsidiaries, free and clear of any
security interest, mortgage, pledge, lien, encumbrance, claim or
equity.
8. This Agreement and the Pricing Agreement have been duly authorized,
executed and delivered by the Company.
9. The Registration Statement is effective under the 1933 Act and, to the
best of their knowledge and information, no stop order suspending the
effectiveness of the Registration Statement has been issued under the
1933 Act or proceedings therefor initiated or threatened by the
Commission.
10. At the time the Registration Statement became effective and
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at the Representation Date, the Registration Statement (other than the
financial statements and supporting schedules included therein, as to
which no opinion need be rendered) complied as to form in all material
respects with the requirements of the 1933 Act and the 1933 Act
Regulations.
11. The Common Stock conforms to the description thereof contained in the
Prospectus, and the form of certificate used to evidence the Common
Stock is in due and proper form and complies with all applicable
statutory requirements.
12. To the best of their knowledge and information, there are no legal or
governmental proceedings pending or threatened which are required to
be disclosed in the Registration Statement, other than those disclosed
therein, and all pending legal or governmental proceedings to which
the Company or any subsidiary is a party or to which any of their
property is subject which are not described in the Registration
Statement, including ordinary routine litigation incidental to the
business, are, considered in the aggregate, not material.
13. The information in the Prospectus to the extent that it constitutes
matters of law, summaries of legal matters, documents or proceedings,
or legal conclusions, has been reviewed by them and is correct in all
material respects.
14. To the best of their knowledge and information, there are no
contracts, indentures, mortgages, loan agreements, notes, leases or
other instruments required to be described or referred to in the
Registration Statement or to be filed as exhibits thereto other than
those described or referred to therein or filed as exhibits thereto,
the descriptions thereof or references thereto are correct, and no
default exists in the due performance or observance of any material
obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, loan agreement, note, lease or other
instrument so described, referred to, or filed.
No authorization, approval, consent or order of any court or governmental
authority or agency is required in connection with the sale of the Shares to the
Underwriters, except such as may be required under the 1933 Act, the 1933 Act
Regulations or state securities law; and, to the best of their knowledge and
information, the execution and delivery of the Agreement and the Pricing
Agreement and the consummation of the transactions contemplated herein and
therein will not conflict with or constitute a breach of, or default under,
result in the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of its subsidiaries pursuant to, any
contract, indenture, mortgage, loan agreement, note, lease or other instrument
to which the Company or any of its subsidiaries is a party by which it or any of
them may be bound, or to which any of the property or assets of the Company or
any of its subsidiaries is subject, nor will such action result in any violation
of the provisions of the charter or by-laws of the Company, or any applicable
law, administrative regulation or court decree.
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In rendering such opinions, such counsel may set forth the scope of the
factual investigation conducted (which may be reasonable limited to the extent
acceptable to counsel to the Underwriters) and may state as to matters of fact
that such counsel is relying exclusively, without independent investigation or
review, on one or more certificates of public officials, governmental agencies
or departments or officers of the Company provided that counsel shall state that
it knows of no reason why such reliance is not reasonable.
In giving the opinion required by this Section 5(b), Wyrick, Robbins, Yates
& Ponton L.L.P. shall additionally state they have participated in the
preparation of the Registration Statement and the Prospectus, and in conferences
with officers and other representatives of the Company, and representatives of
the independent public accountants for the Company, and that, while they have
not undertaken to determine independently, and do not assume any responsibility
for, the accuracy, completeness, or fairness of the statements in the
Registration Statement or Prospectus, on the basis of the foregoing no facts
have come to their attention which causes them to believe that (i) the
Registration Statement (except for the financial statements and schedules
thereto and other financial and statistical information and data included
therein or omitted therefrom, as to which such counsel need express no opinion),
at the time the Registration Statement became effective, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein in light of the
circumstances under which they were made, not misleading, or that the
Prospectus, as of the date of such opinion (except as aforesaid), contained an
untrue statement of a material fact or omits to state a material fact necessary
in order to make, not misleading, (ii) there are any legal or governmental
proceedings pending or threatened against the Company that are required to be
disclosed in the Registration Statement or the Prospectus (except for the
financial statements and schedules thereto, as to which such counsel need
express no opinion), other than those disclosed therein or (iii) there are any
contracts or documents of a character required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or referred to therein or so
filled.
In basing their opinion and other matters set forth therein on "knowledge"
or other words to that effect, such phrase shall mean the actual knowledge
(i.e., the conscious awareness of facts or other information) of lawyers in the
firm who have given substantive legal attention to representing the Company or
its affiliates in connection with this Agreement and the transactions
contemplated thereunder.
(2) The favorable opinion, dated as of Closing Time, of Latham & Watkins,
counsel for the Underwriters, with respect to such matters as the Representative
may reasonably request.
(c) At Closing Time there shall have been, since the date hereof or since
the respective dates as of which information is given in the Registration
Statement and the Prospectus, any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its
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subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, and the Representative shall have received a
certificate of the President or a Vice President of the Company, dated as of
Closing Time, to the effect that (i) there has been no such material adverse
change, (ii) the representations and warranties in Section 1 are true and
correct with the same force and effect as though expressly made at and as of
Closing Time, (iii) the Company has complied with all agreements and satisfied
all conditions on its part to be performed or satisfied at or prior to Closing
Time, and (iv) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
initiated or threatened by the Commission.
(d) At the time of the execution of this Agreement and on the effective
date of the most recently filed post-effective amendment to the Registration
Statement and also at each Date of Delivery, Ernst & Young LLP shall have
furnished to the Representative a letter or letters, dated the respective date
of delivery thereof, in form and substance satisfactory to the Representative,
to the effect set forth in Annex I hereto and, if the Company has elected to
rely upon Rule 430A of the 1933 Act Regulations, to the further effect that they
have carried out procedures specified in paragraph (v) of Annex I with respect
to certain amounts, percentages, and financial information specified by the
Representative and deemed to be part of the Registration Statement pursuant to
Rule 430A(b) and have found such amounts, percentages and financial information
to be in agreement with the records specified in such paragraph (v).
(e) At Closing Time and at each Date of Delivery, if any, counsel for the
Underwriters shall have been furnished with such documents and opinions as they
may require for the purpose of enabling them to pass upon the issuance and sale
of the Shares as herein contemplated and related proceedings, or in order to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the Shares as
herein contemplated shall be satisfactory in form and substance to the
Representative and counsel for the Underwriters.
(f) In the event that the Underwriters exercise their option provided in
Section 2(b) hereof to purchase all or any portion of the Option Shares, the
representations and warranties of the Company contained herein and the
statements in any certificates furnished by the Company hereunder shall be true
and correct as of each Date of Delivery and, at the relevant Date of Delivery,
the Representative shall have received:
(1) A certificate, dated such Date of Delivery, of the President or a Vice
President of the Company and of the chief financial or chief accounting officer
of the Company confirming that the certificate delivered at the Closing Time
pursuant to Section 5(c) hereof remains true and correct as of such Date of
Delivery.
(2) The favorable opinion of Wyrick, Robbins, Yates & Ponton, L.L.P.,
counsel for the Company, in form and substance satisfactory to counsel for the
Underwriters, dated such Date of Delivery, relating to the Option Securities to
be purchased on such Date of Delivery and otherwise to the same effect as the
opinion required by Sections 5(b)(1) and 5(b)(3) hereof.
(3) The favorable opinion of Latham & Watkins, counsel for the
Underwriters, dated such Date
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of Delivery, relating to the Option Securities to be purchased on such Date of
Delivery and otherwise to the same effect as the opinion required by Sections
5(b)(2) and 5(b)(3) hereof.
(4) A letter from Ernst & Young, L.L.P., in form and substance satisfactory
to the Representative and dated such Date of Delivery, substantially the same in
form and substance as the letter furnished to the Representative pursuant to
Section 5(d) hereof, except that the "specified date" in the letter furnished
pursuant to this Section 5(f)(4) shall be a date not more than five days prior
to such Date of Delivery.
If any condition specified in this Section shall not have been fulfilled
when and as required to be fulfilled, this Agreement may be terminated by the
Representative by notice to the Company at any time at or prior to Closing Time,
and such termination shall be without liability of any party to any other party
except as provided in Section 4.
I. Indemnification.
(a) The Company hereby indemnifies and will hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of
Section 15 of the 1933 Act, against any losses, claims, damages, or liabilities
(or actions in respect thereof) to which any Underwriter or such controlling
person may become subject, under the 1933 Act or otherwise, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus, the Registration
Statement, or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse the Underwriters and such controlling
persons for any legal or other expenses reasonably incurred by the Underwriters
or such controlling persons in connection with investigating or defending any
such action or claim as such expenses are incurred.
(b) Each Underwriter severally agrees to indemnify and hold harmless the
Company, against any losses, claims, damages or liabilities to which the Company
may become subject insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon an untrue statement
or alleged untrue statement of a material fact contained in any part of the
Registration Statement or the Prospectus when such part became effective or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made therein in reliance upon and in conformity with
written information relating to such Underwriter and furnished to the Company by
such Underwriter, specifically for use in the preparation thereof.
(c) Promptly after receipt by an indemnified party under subsection 6(a) or
(b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof, but the omission so to notify the indemnifying party shall
not relieve the indemnifying party of its obligations thereunder unless the
failure to give such notice materially prejudices the indemnifying party's
ability to defend such matter. In case any such action shall be brought against
any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party (who shall not, except
with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof other
than reasonable costs of investigation, unless such indemnified party reasonably
objects to such assumption on the ground that the named parties to any such
action
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(including any impleaded parties) include both such indemnified party and an
indemnifying party and such indemnified party reasonably believes that there may
be legal defenses available to it that are different from or in addition to
those available to such indemnifying party. In no event shall the indemnifying
parties be liable for fees and expenses of more than one counsel (in addition to
local counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar related actions in the
same jurisdiction arising out of the same general allegations or circumstances.
(d) If the indemnification provided for in this Section 6 is unavailable
to, or insufficient to hold harmless, an indemnified party under subsection 6(a)
or (b) above in respect of any losses, claims, damages or liabilities (or
actions in respect thereof referred to therein, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect the relative benefits
received by the Company, on the one hand and the Underwriters on the other from
the offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law or if the
indemnified party failed to give the notice required under subsection 6(c)
above, then each indemnifying party shall contribute to such amount paid or
payable by such indemnified party in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company, on the one hand and the Underwriters on the other in connection with
the statements or omissions which resulted in such losses , claims, damages or
liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company, on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Shares purchased
under this Agreement (before deducting expenses) received by the Company, bear
to the total underwriting discounts and commissions received by the Underwriters
with respect to the Shares purchased under this Agreement, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company, on the one hand
or the Underwriters on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company, and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this subsection 6(d) were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this subsection 6(d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
in this subsection 6(d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation.
(e) The obligations of the Company, under this Section 6 shall be in
addition to any liability which the Company, may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who controls
the Underwriters within the meaning of the 1933 Act; and the obligations of the
Underwriters under this Section 6 shall be in addition to any liability which
the Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each officer and director of the Company (including any person
who, with his or her consent, is named in the Registration Statement as about to
become a director of the Company) and to each person, if any, who controls the
Company, within the meaning of the 1933 Act.
(f) The provisions of this Section 6 shall supersede the indemnification
provisions included in the letter agreement dated July ___, 1996 among the
Underwriters, on the one hand, and the Company, on the other hand (the
"Engagement Letter"), insofar, but only insofar, as such indemnification
provisions relate to any such loss, claim, damage or liability that arises out
of is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any preliminary prospectus, the Registration Statement
or the Prospectus or any amendment or supplement thereto. In all other respects,
the provisions of the Engagement Letter shall remain in full force and
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effect.
I. Representations, Warranties and Agreements to Survive Delivery.
The respective indemnities, agreements, representations, warranties and
other statements of the Company, and the Underwriters, as set forth in this
Agreement and the Pricing Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof)
made by or on behalf of the Underwriters or any controlling person of the
Underwriters, or the Company or any officer or director or controlling person of
the Company and shall survive delivery of and payment for the Shares.
I. Termination of Agreement.
(a) The Representative may terminate this Agreement, by notice to the
Company and the Selling Shareholders at any time at or prior to Closing Time (i)
if there has been, since the date of this Agreement or since the respective
dates as of which information is given the Registration Statement, any material
adverse change in the condition, financial or otherwise, or in the earnings,
business affairs or business prospects of the Company and its subsidiaries
considered as one enterprise, whether or not arising in the ordinary course of
business, or (ii) if there has occurred any outbreak of hostilities or
escalation thereof or other calamity or crisis, the effect of which on the
financial markets of the United States is such as to make it, in the judgment of
the Representative, impracticable to market the Shares or to enforce contracts
for the sale of the Shares, or (iii) if trading generally on either the American
Stock Exchange or the New York Stock Exchange has been suspended, or minimum or
maximum prices for trading have been fixed, or maximum ranges for prices for
securities have been required, by either of said Exchanges or by order of the
Commission or any other governmental authority, or if banking moratorium has
been declared by either Federal, New York or Virginia authorities.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party except as
provided in Section 4. Notwithstanding any such termination, the provisions of
Section 6 shall remain in effect.
I. Default by One or More of the Underwriters.
If one or more of the Underwriters shall fail at Closing Time to purchase
the Shares which it or they are obligated to purchase under this Agreement and
the Pricing Agreement (the "Defaulted Shares"), the Representative shall have
the right, within 24 hours thereafter, to make arrangements for one or more of
the non-defaulting Underwriters, or any other underwriters, to purchase all, but
not less than all, of the Defaulted Shares in such amounts as may be agreed upon
and upon the terms herein set forth; if, however, the Representative shall not
have completed such arrangements within such 24-hour period, then: (a) if the
number of Defaulted Shares does not exceed ten percent (10%) of the Shares, the
non-defaulting Underwriters shall be obliged to purchase the full amount thereof
in the proportions that their respective underwriting obligations hereunder bear
to the underwriting obligations of all non-defaulting Underwriters; or (b) if
the number of Defaulted Shares exceeds ten percent (10%) of the Shares, this
Agreement shall terminate without liability on the part
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of any non-defaulting Underwriter.
No action taken pursuant to this Section 9 shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement, the Representative and the Company each shall have the right to
postpone the Closing Time for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements.
I. Notices.
All statements, requests, notices and agreements hereunder shall be in
writing, and, if to the Underwriters, shall be delivered or sent by mail or
facsimile transmission to Friedman, Billings, Ramsey & Co., Inc., 1001
Nineteenth Street North, Arlington, Virginia 22209, Attention: Richard Trutanic;
if to the Company, shall be delivered or sent by mail or facsimile transmission
to the address of the Company set forth in the Registration Statement,
Attention: Nat P. Kannan. Any such statements, requests, notices or agreements
shall take effect at the time of receipt thereof.
I. Parties.
This Agreement and the Pricing Agreement shall be binding upon, and inure
solely to the benefit of, (i) the Underwriters and the Company and (ii) to the
extent provided in Sections 6 and 7 hereof, the officers and directors of the
Company, and each person who controls the Company or the Underwriters, and their
respective heirs, executors, administrators, successors and assigns, and no
other person shall acquire or have any right under or by virtue of this
Agreement or the Pricing Agreement. No purchaser of any of the Shares from the
Underwriters shall be deemed a successor or assign merely by reason of such
purchase.
I. Time of Essence.
Time shall be of the essence of this Agreement and the Pricing Agreement.
As used herein, the term "business day" shall mean any day when the Commission's
office in Washington, D.C. is open for business.
I. Choice of Law.
This Agreement and the Pricing Agreement shall be governed by and construed
in accordance with the laws of the State of New York.
I. Counterparts.
21
<PAGE>
This Agreement may be executed by any one or more of the parties hereto in
any number of counterparts, each of which shall be deemed to be an original, but
all such counterparts shall together constitute one and the same instrument.
22
<PAGE>
If the foregoing is in accordance with your understanding, please sign and
return to us four counterparts hereof, and, upon the acceptance hereof by the
Underwriters, this letter and such acceptance hereof shall constitute a binding
agreement between the Underwriters and the Company.
Very truly yours,
UOL PUBLISHING, INC.
CONFIRMED AND ACCEPTED,
as of the date first above written: By: ___________________________
Name:
FRIEDMAN, BILLINGS, RAMSEY Title:
& CO., INC.
By: __________________________
Name:
Title:
For itself and as Representative of the
other Underwriters named in Schedule
A hereto.
<PAGE>
SCHEDULE A
Number of Shares
Underwriter to be Purchased
- ----------- ------------------
Friedman, Billings, Ramsey & Co., Inc...................
------------------
Total................................................... -
==================
<PAGE>
ANNEX I
Pursuant to Section 5(d) of the Purchase Agreement, the accountants shall
furnish letters to the Representative to the effect that:
1. They are independent certified public accountants with respect to
the Company and its subsidiaries within the meaning of the 1933 Act and the
applicable rules and regulations thereunder.
2. In their opinion, the financial statements and any supplemental
financial information and schedules audited (and, if applicable, and/or pro
forma financial information examined) by them and included in the
Prospectus or the Registration Statement comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act and
the related published rules and regulations thereunder; and, if applicable,
they have made a review in accordance with standards established by the
American Institute of Certified Public Accountants of the unaudited
consolidated interim financial statements as indicated in their reports
thereon, copies of which have been furnished to the Underwriters;
3. The unaudited selected financial information with respect to the
consolidated results of operations and financial position of the Company
for the five recent fiscal years included in the Prospectus agrees with the
corresponding amounts (after restatements where applicable) in the audited
consolidated financial statements for such five fiscal years for such
fiscal years;
4. On the basis of limited procedures, not constituting an audit in
accordance with generally accepted auditing standards, consisting of a
reading of the unaudited financial statements and other information
referred to below, a reading of the latest available interim financial
statements of the Company and its subsidiaries, inspection of the minute
books of the Company and its subsidiaries, inspection of the minute books
of the Company and its subsidiaries since the date of the latest audited
financial statements included in the Prospectus, inquiries of officials of
the Company and its subsidiaries responsible for financial and accounting
matters and such other inquiries and procedures as may be specified in such
letter, nothing came to their attention that caused them to believe that:
a. the unaudited consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows included in
the Prospectus do not comply as to form in all material respects with
the applicable accounting requirements of the 1933 Act and the related
published rules and regulations thereunder, or are not
1
<PAGE>
in conformity with generally accepted accounting principles applied on
a basis substantially consistent with the basis for the audited
consolidated statements of income, consolidated balance sheets and
consolidated statements of cash flows included in the Prospectus;
b. any other unaudited income statement data and balance sheet
items included in the Prospectus do not agree with the corresponding
items in the unaudited consolidated financial statements from which
such data and items were derived, and any such unaudited data and
items were not determined on a basis substantially consistent with the
basis for the corresponding amounts in the audited consolidated
financial statements included in the Prospectus;
c. the unaudited financial statements which were not included in
the Prospectus but from which were derived any unaudited condensed
financial statements referred to in Clause (A) and any unaudited
income statement data and balance sheet items included in the
Prospectus and referred to in Clause (B) were not determined on a
basis substantially consistent with the basis for the audited
consolidated financial statements included in the Prospectus;
d. as of a specified date not more than five days prior to the
date of such letter, there have been any changes in the consolidated
capital stock (other than issuances of capital stock upon exercise of
options and stock appreciation rights, upon earn-outs of performance
shares and upon conversions of convertible securities, in each case
which were outstanding on the date of the latest financial statements
included in the Prospectus) or any increase in the consolidated
long-term debt of the Company and its subsidiaries, or any decreases
in consolidated net current assets or other items specified by the
Underwriters or any increases in any items specified by the
Underwriters, in each case as compared with amounts shown in the
latest balance sheet included in the Prospectus, except in each case
for changes, increases or decreases which the Prospectus discloses
have occurred or may occur or which are described in such letter; and
e. for the period from the date of the latest financial
statements included in the Prospectus to the specified date referred
to in Clause (D) there were any decreases in consolidated net revenues
2
<PAGE>
or operating profit or the total or per share amounts of consolidated
net income or other items specified by the Underwriters, or any
increases in any items specified by the Underwriters, in each case as
compared with the comparable period of the preceding year and with any
other period of corresponding length specified by the Underwriters,
except in each case for decreases or increases which the Prospectus
discloses have occurred or may occur or which are described in such
letter; and
5. In addition to the audit referred to in their report(s) included in the
Prospectus and the limited procedures, inspection of minute books, inquiries and
other procedures referred to in paragraphs (iii) and (iv) above, they have
carried out certain specified procedures, not constituting an audit in
accordance with generally accepted auditing standards, with respect to certain
amounts, percentages and financial information specified by the Underwriters,
which are derived from the general accounting records of the Company and its
subsidiaries, which appear in the Prospectus, or in Part II of, or in exhibits
and schedules to the Registration Statement specified by the Underwriters, and
have compared certain of such amounts, percentages and financial information
with the accounting records of the Company and its subsidiaries and have found
them to be in agreement.
3
<PAGE>
UOL PUBLISHING, INC.
_________ SHARES
COMMON STOCK
PRICING AGREEMENT
October ___, 1996
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
as Representative of the several Underwriters
c/o Friedman, Billings, Ramsey & Co., Inc.
1001 Nineteenth Street North
Arlington, Virginia 22209
Dear Sirs:
Reference is made to the Purchase Agreement, dated ______________, 1996
(the "Purchase Agreement"), relating to the purchase by the several Underwriters
named in Schedule A thereto, for whom FBR is acting as Representative (the
"Shares"), of UOL Publishing, Inc. (the "Company"). Capitalized terms not
otherwise defined herein shall bear the same meanings as given to them in the
Purchase Agreement.
Pursuant to Section 2 of the Purchase Agreement, the Company agrees with
each Underwriter as follows:
(1) The initial public offering price per share for the Shares, determined
as provided in Section 2, shall be $_________________.
(2) The purchase price per share for the Shares to be paid by the several
Underwriters shall be $___________, being an amount equal to the initial public
offering price set forth above less $__________ per Share; provided that the
purchase price per Share for any Option Share (as defined in the Purchase
Agreement) purchased upon exercise of the over-allotment option described in
Section 2(b) of the Purchase Agreement shall be reduced by an amount per share
equal to any dividends declared by the Company and payable on the Firm Shares
(as defined in the Purchase Agreement) but not payable on the Option Shares.
1
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement among
the Underwriters and the Company in accordance with its terms.
Very truly yours,
UOL PUBLISHING, INC.
CONFIRMED AND ACCEPTED,
as of the date first above written: By: ______________________________
Name:
FRIEDMAN, BILLINGS, RAMSEY Title:
& CO., INC.
By: __________________________
Name:
Title:
For itself and as Representative of the other Underwriters named in Schedule A
to the Purchase Agreement.
EXHIBIT 5.1
-----------
October 30, 1996
UOL Publishing, Inc.
105 W. Broad Street
Suite 301
Falls Church, VA 22046
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No.
333-12135) filed by you with the Securities and Exchange Commission on September
17, 1996 and amended on October 30, 1996 (the "Registration Statement"), in
connection with the registration under the Securities Act of 1933, as amended,
of 1,534,100 shares of your Common Stock (the "Shares") including an
over-allotment option granted to the Underwriters to purchase 200,100 shares. We
understand that the Shares are to be sold to the Underwriters for resale to the
public as described in the Registration Statement. In our examination, we have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as originals and the conformity with the original of all
documents submitted to us as copies thereof.
As your legal counsel, we have examined the proceedings taken, and are
familiar with the proceedings proposed to be taken, by you in connection with
the sale and issuance of the Shares.
It is our opinion that, upon completion of the proceedings being taken
or contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, including the proceedings being taken in order to permit such
transaction to be carried out in accordance with applicable state securities
laws, the Shares when issued and sold in the manner referred to in the
Registration Statement and in accordance with the resolutions adopted by the
Board of Directors of the Company, will be legally and validly issued, fully
paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospesctus constituting a part thereof,
and any amendments thereto.
Very truly yours,
Wyrick, Robbins, Yates & Ponton L.L.P.
EXHIBIT 10.14
Agreement
This agreement, dated August 14. 1995. is between Educational Services Institute
(ESI) and University Online (UOL).
Recitals
1. UOL is in the business of providing training online via its own computer
network (the "UOL Network").
2. ESI currently offers traditional classroom training and would like to expand
its scope to offer courses online.
3. UOL and ESI desire to form a business relationship to of or a number of ESI's
courses online.
Agreement
Course Content
ESI, in association with The George Washington University, will license to UOL
particular ESI-owned or controlled course materials (including course manuals.
exams, and handouts) (collectively referred to as the "Works") and make
available to UOL subject matter experts and the authors of such course materials
(if available) on a project specific basis.
Course Content Conversion
UOL will design, develop and otherwise "convert" Works selected jointly by UOL
and ESI into high quality online courses and products ("Courses"), using its
in-house instructional design and programming experts.
Course "Presentation"
ESI hereby grants UOL the right to maintain and distribute or "present" the
Courses on its online network, and wherever reasonably possible. offer as an
adjunct to the Courses hard copy versions of the Works as a licensed
distributor. It is understood that the Works are to be sold to the public and
not to other training providers.
UOL will be responsible for maintaining and presenting the Courses on its
Network, which includes making or maintaining all necessary arrangements with
communications carriers, computer software and hardware suppliers, as necessary.
- ----------
* [ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SEC.
<PAGE>
Marketing
UOL will promote the Courses to its distribution partners and client base.
Specific terms of such distribution are subject to approval by ESI. The Courses
will be promoted using the names of UOL, ESI, and The George Washington
University to achieve maximum recognition.
ESI will promote and market the Courses in connection with its traditional Works
offerings through its normal channels to its client base. In addition to its
normal channels, ESI can market in conjunction with UOL over the UOL Network.
ESI will make reasonable space available for descriptions of the Courses in its
catalogs, product lists, and marketing materials.
Pricing
UOL and ESI will jointly determine the prices at which the Courses in the online
format are offered. At this point, it is conceived that customers will pay a
premium for ESI's traditional classroom-taught course offerings and that the
Courses, in their online format will be priced lower. The exact pricing will be
determined later.
Course Registration
Ultimately, the parties expect that students will register and pay for an
Courses on an online basis. Until that time, ESI will be responsible for
registering students and taking payment from students who call, fax, or mail in
their registrations. UOL will be responsible for registering students who chose
to do so online.
Revenue Sharing and Accounting
Gross revenues earned from the Courses and online sale of the Works will be
split using the following formula: ESI [ ]% and UOL [ ]%.* ESI is responsible
for paying royalties from its portion of the revenues to content, accreditation,
and certification providers based on established agreements between them and
ESI.
Ultimately, UOL will be responsible for collecting all revenues, keeping
accounts of revenues earned, and remitting to ESI its share of such revenues.
Until such time that all tuition payments are made and collected on an online
basis, ESI will be responsible for collecting and accounting for payments made
by telephone, fax, or mail. ESI will forward registration information to UOL,
and will remit to UOL, on a monthly, basis its share of revenues collected by
ESI.
UOL will collect and keep account of revenues from students who register online,
and remit to ESI, on a monthly basis, its share of such revenues. Each party
will be responsible for collecting delinquent payments owed them. The parties
expect to bill individual students on a per course basis, however, if deemed
more appropriate later, billing could be on an hourly basis, tracked by the
online server. Corporate clients will be billed monthly.
Approval Rights
ESI has the right to participate in the final decision of how the Works are used
in UOL's Courses (i.e., editorial, design, graphics and creative input).
- ----------
* [ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SEC.
<PAGE>
User Support Service
UOL will provide support services and respond to user questions using its
standard operating procedures.
Intellectual Property Rights
UOL and ESI will share copyrights and full distribution rights to the Courses
and any derivative online or interactive versions of the Courses developed under
the partnership.
ESI will own or control the copyrights to all the Works from which the online
Course version will be derived.
Mutual Non-compete
After the termination or expiration of this agreement, UOL may not develop or
distribute online courses based on or incorporating Works without a license from
ESI.
During the term of this agreement and for three years thereafter, ESI and its
affiliates will not themselves or with others develop, distribute any online
product that incorporates, builds upon, or contemplates content and
instructional design from the Courses developed under the partnership and where
online distribution rights are licensed to UOL by ESI.
Governing Law
This agreement is governed by the laws of the Commonwealth of Virginia.
In witness whereof, the parties have signed this agreement this day of August,
1995.
Educational Services Institute University Online
- --------------------------------- -----------------------------
By: By:
<PAGE>
Agreement
This Agreement is between University Online, Inc. (UOL), a company having
offices at 105 West Broad Street, Suite 301, Falls Church, VA 22046, and
Educational Services Institute (ESI), a company having offices at 4301 North
Fairfax Drive, Suite 800, Arlington, VA 22203. UOL and ESI hereby agree as
follows:
ARTICLE 1--INTENT
UOL is in the business of developing, publishing, and distributing multimedia
educational software for distance learning, including providing online resources
and technology to institutions of higher learning in order to facilitate their
provision of online courses and programs. UOL desires to promote and offer
ESI-owned or -controlled courses as "Online Courses" (distance learning course
offerings) via the Internet. ESI desires to deliver certain ESI-owned or
controlled courses as UOL Online Courses. The parties desire to work together to
develop, deliver, and market such Online Courses. The parties recognize that
opportunities may evolve where UOL can offer ESI owned or controlled courses
through UOL clients intranets. The parties agree to pursue such opportunities as
long as they do not conflict with other ESI contracts and/or agreements.
ARTICLE 2-IDENTIFICATION OF COURSES FOR ONLINE DEVELOPMENT AND DELIVERY
ESI, with input from and concurrence by UOL, will identify the courses owned or
controlled by ESI to be delivered as Online Courses. Such courses will be
specifically set forth in Addenda to this Agreement. The initial courses to be
developed and delivered as Online Courses are set forth in Addendum 1.
Each such Addendum to this Agreement may contain terms and conditions specific
to the development, delivery, licensing, or ownership rights and/or marketing of
the Online Courses covered by the Addendum. In the case of any conflict between
those terms and conditions and the terms and conditions set forth in this
Agreement, the specific terms and conditions in the Addendum shall govern.
ARTICLE 3-ROLES IN THE DEVELOPMENT OF ONLINE COURSES
For each course set forth by Addendum to this Agreement, UOL will be responsible
for designing and developing, or engaging third parties to design and develop,
an effective, interactive Online Course that meets course objectives mutually
agreed upon by the parties and complies with an agreed upon written development
plan. This plan will be developed mutually, or by or at the direction of UOL. It
will be signed by both parties and any third parties and will incorporate a
development and production schedule.
For each Online Course, ESI will be responsible for providing UOL the most
current print or digital version of the classroom training course materials, to
serve as the basis for development of the Online Course. In addition, ESI will
assign a subject matter expert or experts to work with UOL on each Online Course
and will assist UOL as necessary in arranging any interviews with or surveys of
ESI students or clients. ESI will also provide
* [ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SEC.
<PAGE>
access to its training facilities and administrative support should UOL desire
to video or audio record any ESI-owned or controlled course to be delivered as
an Online Course.
For each course being developed as an Online Course, UOL will be responsible for
providing to ESI in writing, for its review and approval, a preliminary product
description, final product description, and storyboards and/or scripts in
accordance with the development plan. UOL will also be responsible for
developing an online prototype of a representative Online Course module, for
review and beta testing prior to online development of the remainder of the
modules. ESI will be responsible for the timely review of each such deliverable,
in accordance with the schedule set forth in the product development plan, as
well as for working closely with UOL to arrange beta test sites.
ESI will have the right to review and finally approve all OnLine Course modules,
in adherence with the schedule contained in the development plan.
ARTICLE 4-COST SHARING FOR DEVELOPMENT OF ONLINE COURSES
ESI will be fully responsible for the compensation of all ESI employees who
serve as subject matter experts or play any other role in the development of
Online Courses under this Agreement. UOL will be responsible for all other
Online Course development costs, including the compensation of subject matter
experts who are not ESI employees and of any third-party course developers.
ARTICLE 5-ROLES IN ONLINE COURSE DELIVERY, MAINTENANCE, AND MANAGEMENT
UOL will be responsible for creating and maintaining a connection to the
Internet that can be accessed by students and prospective students to inquire
about, register for, and complete all Online Courses, as well as otherwise
interact via computer with UOL and ESI. UOL will facilitate online and other
communication between students and ESI staff, including passing along inquiries
and queries. UOL will work with ESI staff as necessary to accurately track all
registrations and corresponding payments.
ESI staff will handle all student registrations received by phone, fax, or mail,
as opposed to online. Until such time as UOL's network can accept tuition
payment online, ESI will collect and account for all tuition payments. ESI will
also make available instructors or other staff to respond to students' course
content-related inquiries, grade exams online, moderate online discussions, or
otherwise interact with students via computer as agreed upon by the parties in
the product description or product development plan for the Online Course in
question.
The parties will jointly, develop an online evaluation form that elicits student
feedback on each Online Course developed and delivered. UOL will be responsible
for maintaining these forms on its network as part of the Online Course
materials. for tabulating any numerical scores elicited by the forms, and for
providing, ESI, in a timely manner, these tabulations and any other feedback
received. UOL and ESI will jointly determine any changes, upgrades, or updates
to be made to an Online Course based on student feedback or other input, and UOL
will be responsible for the online implementation of those changes.
<PAGE>
ARTICLE 6-COST SHARING FOR ONLINE COURSE DELIVERY, MAINTENANCE, AND MANAGEMENT
Each party will be responsible for the costs it incurs in carrying out the
responsibilities set forth in Article 5.
ARTICLE 7-ROLES IN PROMOTING AND ADVERTISING ONLINE COURSES
UOL will maintain up-to-date information on all Online Courses at its web site
and will create links to and from other web sites as mutuallv agreed in writing
by the parties. UOL will also actively market the Online Courses to its
distribution partners as appropriate.
ESI will actively market the Online Courses to its client base through course
catalogs, brochures, and other print pieces and at trade shows and conferences.
Should the parties elect to engage a third party to help market the Online
Courses, that third party will be compensated at a rate agreed upon by the
parties in writing and the parties will share equally in the cost of such
compensation.
ESI will be notified in advance and must approve in writing any marketing
through a third party.
ARTICLE 8-COST SHARING FOR PROMOTING AND ADVERTISING ONLINE COURSES
Each party will be responsible for the costs it incurs in carrying out the
responsibilities set forth in Article 7.
ARTICLE 9-USE OF NAMES
UOL agrees to obtain written approval from ESI before using "Educational
Services Institute, ESI, ESI International," "The George Washington University,"
the name of any George Washington University School, or any derivative or
abbreviated form of the names of these entities (such as "ESI," "GW," or
official logos), or of any other college or university with which ESI
establishes a relationship in any promotional or financial presentation or in
any other format, written or otherwise, that will be publicly disseminated by
UOL.
ESI agrees to obtain written approval before using "Universitv Online," "UOL,"
or any derivative or abbreviated form in any promotional or financial
presentation or in any other format, written or otherwise, that will be publicly
disseminated by ESI.
UOL's name will appear in connection with the Online Courses as a conduit rather
than as the courses' official sponsor.
ARTICLE 10-COPYRIGHTS AND LICENSES
ESI owns or controls the copyright to the course materials for all courses to be
developed, delivered, and marketed as Online Courses under this Agreement. ESI
will own the copyright for the CD-ROM developed for the Managing Project in
Organizations course and UOL will have a royalty-free license for use in support
of internet based course offerings. Copyright ownership for other CD-ROMs will
be negotiated on a case-by-case basis. ESI is solely responsible for obtaining
and paying for any third-party copyright
<PAGE>
licenses for ESI-controlled course materials where ESI does not own the
copyright. ESI grants UOL a no-cost license to use ESI-owned or controlled
course materials in developing, and delivering Online Courses. This license is
valid during the life of this Agreement and may not be transferred, assigned, or
sold to a third party.
ARTICLE 11-PROTECTION OF ONLINE COURSE CONTENT
UOL agrees to provide and maintain the most effective security technology
reasonably available to UOL in order to protect Online Course content. UOL will
keep ESI apprised quarterly in writing of the security technology being used and
of any known or suspected breaches of security regarding Online Course content.
ARTICLE 12-PROPRIETARY RIGHTS
ESI will own the mailing lists, student rosters, advertising and promotional
materials, and any other ancillary products or assets created or generated in
connection with the delivery and marketing of the Online Courses. Customer lists
generated at the effort and expense of UOL from outside sources will be owned by
UOL.
ARTICLE 13-CERTIFICATION OR ACCREDITATION OF ONLINE COURSES
ESI will use reasonable efforts to obtain certification and/or accreditation for
each Online Course based on a classroom course for which ESI has previously
obtained certification or accreditation.
ARTICLE 14-PRICING
ESI and UOL will jointly determine in writing the prices at which Online Courses
are offered. Such prices will take into account the prices charged for classroom
delivery of the courses.
ARTICLE 15-REVENUE COLLECTION, REVENUE SHARING, AND ROYALTY PAYMENTS
ESI will be responsible for accounting for all tuition payments received by mail
or fax. UOL will be responsible for accounting for all tuition payments received
online. Each party will be responsible for remitting to the other party, on the
first of each month, the other party's share of the Gross Revenues received.
Such remittances will be based on Gross Revenues received during the month prior
to the month just ended (e.g., March 1 remittances will be based on Gross
Revenues received during January).
Gross revenues for each Online Course will be shared as follows:
Gross Revenues attributable to the first 100 [ ]% to UOL [ ]% to ESI
registrations
Gross Revenues attributable to registrations [ ]% to UOL [ ]% to ESI
after the first 100
UOL's will receive an additional [ ]% of Gross Revenues ([ ]% for the first 100
registrations, [ ]% for registrations above 100) for each participant brought
into the Online Courses as a direct result of UOL's own marketing efforts.* UOL
shall provide written data (contracts, purchase orders, etc.) as evidence of
their marketing efforts.
* [ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SEC.
<PAGE>
ESI will be responsible for paying royalties from its portion of the Gross
Revenues to content, accreditation, or certification providers, based on
existing and newly obtained agreements between those providers and ESI.
ARTICLE 16-RIGHT TO AUDIT
Each party will have the right to audit, at any time during the life of this
Agreement, the other party's records of Online course tuition payments received.
ARTICLE 17-EXCLUSIVITY OF RELATIONSHIPS
UOL agrees not to take any action that could deteriorate the long-term
relationship ESI enjoys with The George Washington University and its Schools.
ESI agrees that it shall develop, deliver, and market Online Courses exclusively
with UOL for the term of this Agreement.
UOL agrees that it shall develop, deliver, and market the Online Courses
exclusively with ESI for the term of this Agreement.
ARTICLE 18-AMENDMENTS TO THIS AGREEMENT
This Agreement may be amended by mutual agreement of the parties. All amendments
to the agreement will be made in writing.
ARTICLE 19-DURATION OF THIS AGREEMENT
This Agreement will be in effect for five years from the date hereof, unless
terminated sooner pursuant to the terms set forth in Article 20. At the
expiration of this initial five-year term, the Agreement will renew
automatically for one-year terms unless terminated pursuant to the terms set
forth in Article 20.
ARTICLE 20-TERMINATION OF THIS AGREEMENT
This Agreement may be terminated as follows:
a. Either party may terminate the Agreement by giving 90 days' notice of its
intent to terminate at the end of the initial five-year term or at the end
of any successive one-year term.
b. The agreement may be terminated by either party upon written notice to the
other party that a material provision of this Agreement has been breached,
and the other party's failure to cure that breach within 90 days of receipt
of such notice.
c. Any party affected by an event of bankruptcy will immediately give notice of
this event to the other party, and the other party may, at its option,
terminate this agreement upon written notice. For purposes of this
Agreement, an event of bankruptcy is defined as the adjudging of the
affected party to be insolvent or bankrupt; the institution of any,
proceedings seeking relief, reorganization, or arrangement under any laws
relating to insolvency; the filing of any involuntary
<PAGE>
petition in bankruptcy that is not discharged within 60 days after filing;
the assignment for the benefit of the party's creditors, or the appointment
of a receiver, liquidator, or trustee of any of the party's assets; or the
liquidation, dissolution, or winding up of the party's business.
d. The agreement may be terminated at any time by the mutual agreement of the
parties, expressed in a written document signed by both parties.
ARTICLE 21-NOTICES
All notices hereunder will be given in writing at the addresses set forth above.
The parties will promptly notify each other in writing of any change of address.
Notice given by express courier requiring signature upon delivery will be deemed
delivered on the day of receipt by someone who signs on behalf of the notified
party.
ARTICLE 22-ARBITRATION
Any claim, dispute, or controversy arising out of or in connection with or
relating to this Agreement or the breach or alleged breach of this Agreement,
will be solely and finally settled by arbitration as herein provided. Except as
they may be modified by the parties' mutual agreement, the commercial
arbitration rules of the American Arbitration Association (the "Rules") will
govern any arbitration contemplated by this article. The arbitration shall be
conducted where best suited for the resolution of the dispute in light of the
convenience of the parties and their documents and witnesses. The arbitration
will be conducted by one arbitrator who will be selected in accordance with the
Rules. Nothing herein limit the right of either party to seek to obtain in any
court of competent jurisdiction any interim relief or provisional remedy,
including injunctive relief. Seeking or obtaining such interim relief or
provisional remedy in a court will not be deemed a waiver of this agreement to
arbitrate. Any award rendered by the arbitrator shall be final and not subject
to judicial review. Judgment on the award of the panel may be entered, and the
prevailing party may seek enforcement thereof, in any court having jurisdiction
over the parties or their assets.
ARTICLE 23-INDEMNIFICATION AND INFRINGEMENT
Each party agrees to indemnify, defend, and save harmless the other party, its
respective subsidiaries, other affiliates, its direct and indirect customers,
and the officers, directors, employees, successors, and assigns of any of them
from and against claims, losses, damages, expenses, liabilities, suits, demands,
or liens that arise out of or result from:
a. Any failure by the other party to perform its obligations under this
Agreement; and,
b. Any, alleged act of infringement of any patent, trademark, copyright, or
other right or any misappropriation (including misuse) of any trade secret
or other proprietary interest, except where such infringement or
misappropriation arises solelv from the other party's adherence to the one
party's written instructions which are so specific as to directly cause such
infringement or misappropriation, in which case the one party shall so
indemnify the other party.
<PAGE>
c. Each party shall notify the other promptly of any claim for which the other
is responsible hereunder, and shall cooperate with the other in every
reasonable way to facilitate the defense of any such claim.
ARTICLE 24 EXPRESS WRITTEN APPROVAL
UOL agrees to obtain express written approval from ESI prior to offering any
ESI-owned or controlled course materials or any derivative Online Course as part
of an agreement with another university, college, or other educational
institution or with any other UOL customer or partner.
ARTICLE 25-ASSIGNABILITY
This Agreement may not be assigned, sublicensed, or transferred by either party
without the prior written consent of the other party.
ARTICLE 26-GOVERNING LAW
This Agreement shall be interpreted, construed, and enforced in accordance with
the laws of the Commonwealth of Virginia, without regard to the choice of law
rules of that state.
IN WITNESS WHEREOF, the duly authorized representatives of the parties hereto
have executed this Agreement in duplicate on the day and year written below.
Educational Services Institute University Online, Inc.
By: /s/ By: /s/
------------------- -------------------------
James C. Duncan Carl Tyson
Vice President President
Date: 9-11-96 Date: 9-4-96
---------------- -------------------------
EXHIBIT 10.19
AGREEMENT BETWEEN AUTODESK, INC.
AND UNIVERSITY ONLINE, INC.
This Agreement made and effective as of April 15, 1996, (the "Effective
Date") by and between Autodesk, Inc. ("Autodesk"), a Delaware corporation, with
its principal place of business at 111 McInnis Parkway, San Rafael, CA 94903,
and University Online, Inc. ("UOL") with its principal place of business at 105
West Broad Street, Suite 301, Falls Church, Virginia 22046.
RECITALS
WHEREAS, Autodesk is a producer of computer-aided design, multimedia,
and other software; and
WHEREAS, UOL is in the business of developing, publishing, and
distributing multimedia educational software through local area networks and
wide area networks, such as the Internet and the World Wide Web; and
WHEREAS, Autodesk desires to grant to UOL certain rights to use certain
Autodesk trademarks and to render certain other assistance in connection with
UOL's Internet activities; and
NOW, THEREFORE, in consideration of the mutual covenants herein, the
parties agree as follows:
1. Definitions
1.1 "Autodesk Virtual Campus" shall mean a campus-like graphical user
interface located on the Internet which a student or learning professional may
access to obtain information about about Autodesk products and other related
subject areas through the Internet.
1.2 "Student Management System" shall mean a system acquired or
developed by UOL to track and record enrollment, testing, grading,
recordkeeping, maintenance, registration and reporting necessary to provide
proper information to students, faculty, and Content Providers on the Autodesk
Virtual Campus. The Student Management System incorporates courseware that was
built using the development guidelines and templates of the Autodesk Virtual
Campus.
1.3 "Net Revenues" shall mean revenues to UOL derived from (i)
interactive courseware that runs on the Student Management System; (ii) revenues
derived from Products and Services that are downloaded from the Autodesk Virtual
Campus or ordered and shipped to customers through the Autodesk Virtual Campus
less costs paid by UOL to Content Providers, resellers, distributors,
individuals, credit card issuers, and consultants for such Products and Services
and (iii) Fees collected by UOL that are derived from advertising, promotion,
promotional links to other Internet addresses, or other revenue-generating
activities related to activities on the Autodesk Virtual Campus.
1.4 Products and Services, shall mean all items, except courseware
delivered through the Student Management System, including but not limited to
books, CD ROM's, and images.
1.5 Content Provider shall mean individuals, institutions, and
organizations that provide Productsand Services or courseware.
*[]CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SEC.
<PAGE>
2. License Grant
2.1 Autodesk hereby grants to UOL a non-exclusive right and license to
use the Autodesk name and registered logo in connection with the operation,
advertising and marketing of the Autodesk Virtual Campus. Either separately or
in conjunction with any UOL trademark or trade name, UOL agrees to include any
notices that Autodesk may reasonably request and to use the Autodesk name and
logo in accordance with guidelines as set forth in the Guidelines for Design
Corporate Identity Manual dated Summer 1995 provided by Autodesk, which Autodesk
may update, revise, or replace from time to time and shall provide to UOL. All
Autodesk trademarks and tradenames and shall remain the exclusive property of
Autodesk.
2.2 UOL agrees that any use by UOL of the Autodesk name and logo shall
be subject to review and approval in advance by Autodesk, in Autodesk's sole
discretion. Autodesk shall retain the right to demand immediate modification,
revision or cessation of use of the Autodesk name and logo in the event Autodesk
determines that the licensed trademarks are being used improperly or that the
content of the Autodesk Virtual Campus is of unacceptable quality such that it
is no longer in Autodesk's best interests to be associated with the Autodesk
Virtual Campus. Without limiting the generality of the foregoing, UOL shall not
use the Autodesk name or logo in any manner that, in Autodesk's determination,
may cause embarrassment to Autodesk or may damage Autodesk's reputation.
2.3 The right to use the Autodesk name and logo may not be licensed,
sold or assigned by UOL.
3. Competitive Accounts Restriction
3.1 UOL shall maintain the technical capability to prevent certain UOL
accounts, specified in Exhibit A ("Competitive Accounts"), from linking to the
Autodesk Virtual Campus. These technical security requirements shall include
separate hardware servers and communications lines. The Autodesk Virtual Campus
shall have its own unique Internet domain and shall allow UOL to prevent users
of the site from seeing UOL's other servers. Each server included under the
Autodesk Virtual Campus shall have its own unique TCP/IP address and shall be
addressable by means of a central server with a URL such as "www.xxx.com." The
on-line display of UOL's name on any of the server's pages shall be agreed upon
by both parties.
3.2 UOL shall not link or allow to be linked products that are
competitive to Autodesk's computer-aided design, imaging, or animation products.
Autodesk shall have the right to add additional accounts that are directly
competitive with Autodesk products to Exhibit A by written notice to UOL.
3.3 Autodesk confirms, that during the term of the Agreement,
Autodesk's Education Department in the Americas, and only that department, shall
not enter into a similar business relationship concerning the development of a
virtual campus for the Internet. The territory covered by Autodesk's Education
Department in the Americas is the U.S., Canada, Mexico, Central America, and
South America.
Notwithstanding the above, nothing in this Section 3 shall be
construed to prevent Autodesk, or any subdivision or department thereof, except
the Education Department in the Americas from (i) providing products and
services whether through a virtual campus or otherwise, through the Internet or
other channels; or (ii) licensing or acquiring products and services for the
purpose of providing such products and services through the Internet or other
channels.
UOL agrees that during the term of the Agreement it shall not
enter into a similar business relationship concerning the development of a
virtual campus for the Internet with the companies then-current version of
Exhibit A in the United States, Canada, Mexico, Central America, and South
America.
4. Development
4.1 UOL shall be responsible for all costs related to the development
and operation of the Autodesk Virtual Campus, including but not limited to
software, hardware, and telecommunications.
2
<PAGE>
4.2 Autodesk shall provide staff support to review and approve the
Autodesk Virtual Campus design specification on an ongoing basis. Revision One
of the specification shall be completed as set forth in Exhibit B, ("Milestone
Schedule"). Milestone dates are subject to the execution of this Agreement by
April 15, 1996. If the execution of the Agreement occurs after April 15, 1996
the milestone dates will be changed as agreed upon by both parties.
5. Support
UOL shall be solely responsible for providing support to Content
Providers and customers but shall not be obligated to provide support services
free of charge and shall have the option to subcontract such support services.
6. Marketing
6.1 UOL shall be responsible for all "directed" marketing costs for the
Autodesk Virtual Campus, as set forth in Exhibit C. UOL must have Autodesk's
prior written approval to make changes to Exhibit C, which shall not be
unreasonably withheld.
6.2 UOL shall also fund marketing and promotional activities to Content
Providers and potential customers and provide a summary on a quarterly basis of
marketing and promotional activities to Autodesk.
6.3 Autodesk shall perform certain marketing activities related to
promoting the Autodesk Virtual Campus, as set forth in Exhibit D.
6.4 Autodesk may, as appropriate, provide to UOL evaluation,
demonstration, and training disks and documentation for use in promotion of the
Autodesk Virtual Campus. An initial list of these materials are set forth in
Exhibit E. UOL shall electronically distribute such materials free of charge.
Autodesk shall have the right to update Exhibit E by written notice. All such
materials shall remain the exclusive property of Autodesk. UOL shall not remove
any copyright or trademark notices contained in such materials.
6.5 Autodesk shall provide UOL with a designated contact on an ongoing
basis to insure that the Autodesk Virtual Campus has the most current education
marketing information and is properly linked to the Autodesk Education Internet
site.
6.6 Autodesk shall assist UOL in linking where appropriate to
Autodesk's Internet web pages and shall provide promotional Internet links where
appropriate to the Autodesk Virtual Campus on the Internet. UOL shall reimburse
Autodesk for all costs incurred from the development of the link or the
development of a UOL promotional presence on Autodesk's Internet web page but
shall not be required to pay marketing, advertising or other fees to Autodesk
for providing the web link during the term of this Agreement.
7. Royalties
7.1 In consideration of the trademark rights granted hereunder and of
the other obligations assumed by Autodesk, UOL shall pay Autodesk a royalty of
[ ] percent ([ ]%) of Net Revenues.*
7.2 Royalties shall not be owed for the Autodesk documentation or
Autodesk demonstration, evaluation, or training disks distributed through the
Autodesk Virtual Campus. These materials are identified in Exhibit E. Autodesk
may by notification to UOL change, add, or delete materials.
7.3 Royalties shall be due and payable within twenty (20) days after
the close of each calendar quarter.
7.4 UOL shall provide Autodesk a royalty report identifying the Net
Revenue, the number of transactions , a description of the transaction, the
selling price, the number of demonstration, evaluation, and training disks
distributed within thirty (30) days after the close of each calendar quarter. If
the royalty report is provided
*[]CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SEC.
3
<PAGE>
through electronic communication, Autodesk shall provide UOL with a designated
contact in the Autodesk Finance department.
7.5 Autodesk shall have the right upon reasonable notice to inspect and
audit UOL's records no more than twice annually for purposes of verification of
royalty reports. Any such audit shall be conducted by Autodesk or its
representatives during normal business hours at UOL's location and UOL shall
cooperate fully in such audit. Autodesk shall be responsible for all fees and
expenses for any such audits, provided, however, that, if the result of the
audit identifies an underpayment of 10% or more to Autodesk, the audit fees and
expenses shall be paid by UOL.
8. Disclaimers
8.1 Autodesk makes no endorsement of the products or courseware that
are the subject of this Agreement. UOL agrees that UOL shall be solely
responsible for the content of the Autodesk Virtual Campus and any products sold
by UOL.
8.2 Autodesk does not warrant the Autodesk documentation or Autodesk
demonstration, evaluation, or training disks that may be provided under
Paragraph 6.4. UOL SHALL NOT MAKE OR PASS ON TO ANY PARTY ANY WARRANTY OR
REPRESENTATION ON BEHALF OF AUTODESK. AUTODESK EXPRESSLY DISCLAIMS ANY IMPLIED
WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, MERCHANTABILITY OR
NON-INFRINGEMENT.
8.3 EXCEPT AS EXPRESSLY STATED HEREIN, NEITHER PARTY HAS MADE ANY
WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED BY OPERATION OF LAW OR
OTHERWISE, CONCERNING THE SOFTWARE TO BE PROVIDED HEREUNDER, THE SCOPE OR
DURATION OF ANY MARKETING EFFORT WHICH AUTODESK MAY UNDERTAKE, OR THE SUCCESS OF
ANY SUCH MARKETING EFFORT. NEITHER PARTY HAS RELIED ON ANY EXPRESS OR IMPLIED
REPRESENTATION OF THE OTHER PARTY, WRITTEN OR ORAL, AS AN INDUCEMENT TO ENTERING
INTO THIS AGREEMENT.
8.4 UOL shall ensure that the following statement is prominently
displayed on the Autodesk Virtual Campus prior to customer purchase of any
Product or Service:
"The Autodesk Virtual Campus is independently operated by
Univesity Online, Inc. Autodesk makes no endorsement of the products or services
provided hereunder and does not guarantee the performance of such products and
services.Responsibility or liability for the performance (or failure to perform)
of any product or service shall remain solely with University Online, Inc."
9. Indemnity
UOL shall defend and hold Autodesk harmless from any action, claim,
lawsuit or proceeding of whatever nature related to or arising from the Autodesk
Virtual Campus and any sales, marketing, or distribution activities connected
with the Autodesk Virtual Campus.
10. Termination
10.1 Term. The term of the Agreement shall commence upon the Effective
Date and shall continue for three years and four months unless terminated
earlier in accordance with the terms of this Agreement. Autodesk shall have the
option to renew the term for an additional two (2) years upon thirty (30) days
written notice to UOL before the expiration of the initial term.
10.2 Termination for Cause. Subject to Autodesk's right of immediate
termination set forth in Paragraph 10, either party may terminate this Agreement
upon thirty (30) days written notice of a breach if such breach is not cured
within sixty (60) days from notification, provided however that, Autodesk may
terminate this Agreement upon ten (10) days' written notice for UOL's failure to
remit royalty payments when due.
4
<PAGE>
10.3 Termination for Insolvency. Autodesk may terminate this Agreement
immediately upon written notice (i) upon the institution by or against UOL of
insolvency, receivership or bankruptcy proceedings or any other proceedings for
the settlement of UOL's debts, (ii) upon UOL making an assignment for the
benefit of creditors or (iii) upon UOL' dissolution or ceasing to conduct
business in the normal course.
10.4 Return of Materials. All Autodesk information, data, photographs,
samples, literature, and sales aids of every kind shall remain the property of
Autodesk. Within thirty (30) days after the termination of this Agreement, UOL
shall return all such items as Autodesk may direct, at Autodesk's shipping
expense.
10.5 All UOL information, data, photographs, samples, literature, and
sales aids of any kind shall remain the property of UOL. Within thirty (30) days
after the termination of this Agreement, Autodesk shall return all such items as
UOL may direct, at UOL's shipping expense.
10.6 Survival of Terms. These terms and conditions of this Agreement
which by their nature should survive, shall survive and continue after any
termination of this Agreement.
10.7 Effect of Termination. Upon the termination of this Agreement for
any reason (at expiration of its term or pursuant to Sections 10.2 or 10.3), UOL
shall retain all right, title and interest in and to the Autodesk Virtual Campus
(which henceforth shall no longer be called the Autodesk Virtual Campus), with
all rights to exploit the virtual campus without renumeration or accountability
to Autodesk; the right and license granted to UOL in Section 2.1 for the use of
Autodesk's trademarks shall terminate and be of no further force or effect; UOL
shall immediately cease use of the Autodesk trademarks; and all royalties and
other payments from UOL to Autodesk shall immediately cease.
11. Publicity
All public announcements, press releases or other press contact made by
either party respecting the relationship established by this Agreement or
regarding the terms and conditions hereof shall be subject to the prior review
and approval of the other party, which approval shall not be unreasonably
withheld.
12. Limitation of Liability
THE PARTIES AGREE THAT IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE
OTHER PARTY, UNDER ANY THEORY OF LIABILITY, WHETHER IN AN ACTION BASED ON A
CONTRACT, TORT (INCLUDING NEGLIGENCE) OR ANY OTHER LEGAL THEORY, HOWEVER
ARISING, FOR ANY COSTS OF PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES OR FOR ANY
LOSS OF USE, INTERRUPTION OF BUSINESS, OR INDIRECT, SPECIAL, INCIDENTAL, OR
CONSEQUENTIAL DAMAGES OF ANY KIND, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF
THE POSSIBILITY OF SUCH DAMAGE.
13. Confidentiality
Both parties shall hold as confidential any information which the one
party obtains from the other party in the performance of this Agreement and
which is marked or noted as confidential. Neither party shall, without the prior
written consent of the other party, publish or disclose such information or
authorize anyone else to publish or disclose such information, unless and until
such information has ceased to be confidential. Notwithstanding anything to the
contrary set forth herein, the following information shall not be deemed
confidential under this Agreement:
(a) Information which is in the public domain,
(b) Information which is received by the non-disclosing party without
any breach of the non-disclosing party's obligations hereunder,
(c) Any information which is independently developed by the
non-disclosing party without reference to or without any use of the disclosing
party's confidential information, or
5
<PAGE>
(d) Any information which is required by law to be disclosed.
Notwithstanding the foregoing, UOL may disclose terms of this Agreement
to potential third-party investors solely in connection with efforts to obtain
funding for UOL, provided that such third parties have executed a nondisclosure
agreement which includes restrictions on the disclosure of confidential
information substantially similar to the restrictions set forth herein.
The parties hereto acknowledge and agree that UOL may contract with a
third party to provide some or all of the funding required by UOL to accomplish
the development and operation of the Autodesk Virtual Campus. Other provisions
in this Agreement to the contrary notwithstanding, Autodesk acknowledges and
agrees that such third party may engage in financing efforts for the Autodesk
Virtual Campus project as described in this Agreement, which efforts will
require the disclosure to potential investors of the substance of this
Agreement. UOL agrees that all such disclosures will be subject to the prior
review and approval of Autodesk as contemplated by Section 11 above, and
Autodesk agrees to review and comment on such submissions promptly.
14. Miscellaneous Provisions
(a) This Agreement is made under and shall be construed in accordance
with the laws of the State of California, without regard to the conflict of law
provisions thereof.
(b) In the event legal action is undertaken to enforce or interpret the
terms of this Agreement, the prevailing party in such action shall be entitled
to recover reasonable attorneys' fees and costs incurred in addition to any
other relief to which it may be entitled.
(c) UOL may not assign or transfer any of its rights or
responsibilities set forth herein without the express written consent of
Autodesk.
(d) The Exhibits attached hereto and referenced herein are hereby
incorporated herein as part of this Agreement by this reference.
(e) This document and any referenced documents represent the entire
agreement between the parties as to the matters set forth and integrates all
prior discussions or understandings between them. This Agreement may only be
modified or amended in writing by a document signed by an authorized
representative of both Autodesk and UOL.
(f) The failure of either party to insist, in any one or more
instances, upon the performance of any of the terms, covenants or conditions of
this Agreement or to exercise any right hereunder, shall not be construed as a
waiver of the future performance of any such term, covenant or condition or the
future exercise of such right.
(g) Independent Contractors. It is agreed that the relationship between
the parties is that of independent contractors, and nothing contained in this
Agreement shall be construed or implied to create the relationship of partners,
joint venturers, agent and principal, employer and employee, or any relationship
other than that of independent contractors. At no time shall either party make
any commitments or incur any charges or expenses for or in the name of the other
party.
6
<PAGE>
15. Notices
(a) All notices given in connection with this Agreement shall be in
writing. Notice may be given by mailing the same by United States mail,
certified or registered, return receipt requested, first class postage prepaid,
or by sending the same by Federal Express or equivalent courier service,
addressed as follows:
(i) If to Autodesk: Autodesk, Inc.
111 McInnis Parkway
San Rafael, CA 94903
Attention: Legal Department
(ii) If to UOL: University Online, Inc.
105 West Broad Street, Suite 301
Falls Church, Virginia 22046
Attention: John Birdsong, CFO
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
AUTODESK, INC. UNIVERSITY ONLINE, INC.
By: _________________________________ By: __________________________________
Print Name: _________________________ Print Name: __________________________
Title: _______________________________ Title: _______________________________
Date: ____________________________ Date: ______________________________
7
PROJECT FINANCING AND DEVELOPMENT AGREEMENT
This PROJECT FINANCING AND DEVELOPMENT AGREEMENT (the "Agreement"),
effective as of ___________ 1996 (the "Effective Date"), is made by and between
InternetU, Inc., a New Jersey corporation having its principal place of business
at 648 Winthorp Road, Teaneck, New Jersey 07866 ("InternetU"), and University
Online, Inc., a Delaware corporation having its principal place of business at
105 West Broad Street, Suite 301, Falls Church, Virginia 22046 ("UOL").
RECITALS
WHEREAS, UOL is in the business of developing, publishing, and
distributing multimedia educational software through local area networks and
wide area networks, such as the Internet and the World Wide Web;
WHEREAS, UOL has entered into an agreement with Autodesk, Inc.
("Autodesk") dated effective as of April 15, 1996 (the "Autodesk/UOL
Agreement"), pursuant to which Autodesk has licensed to UOL rights to use
certain Autodesk trademarks and UOL has undertaken to develop the Autodesk
Virtual Campus (as that term is defined below);
WHEREAS, the Autodesk/UOL Agreement acknowledges that UOL may contract
with a third party to provide some or all of the funding required by UOL to
accomplish the development, operation and marketing of the Autodesk Virtual
Campus;
WHEREAS, InternetU has been formed for the purpose of commercially
exploiting opportunities in connection with the Internet, including the Autodesk
Virtual Campus;
WHEREAS, InternetU and UOL desire to enter into a project financing
agreement related to the Autodesk Virtual Campus pursuant to which the specific
terms and conditions of such financing by InternetU may be set forth, including
the consideration to InternetU of such financing; and
WHEREAS, InternetU and UOL executed a letter agreement dated January
22, 1996 and now intend this agreement to replace and supersede that letter
agreement.
NOW, THEREFORE, the parties agree as follows:
1. DEFINITIONS
1.1 "Autodesk Virtual Campus" shall mean a campus-like graphical user
interface located on the Internet that a student or learning professional may
access to obtain information about Autodesk, Inc. products and other related
subject areas through the Internet as contemplated by the Autodesk/UOL
Agreement.
1.2 "Content Provider" shall mean those individuals, institutions and
organizations that provide Products and Services or Courseware.
1.3 "Courseware" shall mean interactive courseware that runs on the
Student Management System.
* [ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SEC.
<PAGE>
1.4 "Net Revenue" shall mean revenues derived from (a) Courseware
delivered through the Autodesk Virtual Campus; (b) Products and Services that
are downloaded from the Autodesk Virtual Campus, or ordered and shipped to
customers through the Autodesk Virtual Campus, less costs paid by UOL to (i)
Content Providers, resellers, distributors, individuals and consultants offering
Products and Services (which costs shall not include UOL general administrative
costs), and (ii) credit card issuers for transaction processing fees and (c)
advertising, promotion, promotional links from the Autodesk Virtual Campus to
other Internet addresses, or other revenue-generating activities related to the
Autodesk Virtual Campus.
1.5 "Products or Services" shall mean all items offered on the
Autodesk Virtual Campus, except Courseware delivered through the Student
Management System of the Autodesk Virtual Campus, including but not limited to
books, CD ROMs and images.
1.6 "Student Management System" shall mean the system established to
track and record student enrollment, testing, grading, record keeping,
maintenance, and registration for the Autodesk Virtual Campus and to report
relevant information to students, faculty and Content Providers on the Autodesk
Virtual Campus.
2. DEVELOPMENT PROGRAM FINANCING
2.1 Funding Obligations. Subject to the terms of this Agreement,
InternetU hereby agrees to provide to UOL certain cash payments to be used by
UOL for the development, operation and marketing of the Autodesk Virtual Campus,
all as more specifically set forth in this Section 2.
2.2 Schedule of Payments. Subject to the fulfillment by UOL of the
milestones set forth below, as such may be amended from time to time by the
mutual agreement of the parties hereto, InternetU hereby agrees to make cash
payments to UOL in the following amounts on or before the dates and upon the
fulfillment by UOL of the milestone(s) here indicated:
2
<PAGE>
<TABLE>
<CAPTION>
Amount Payment Date Milestone
<S> <C> <C>
$ [ ] October 15, 1996 Final specification and white paper
for Virtual Campus delivered to
InternetU; procurement of dedicated
servers, software and
telecommunications equipment; 6-12
major partners signed up under Key
Partner Program
$ [ ] November 15, 1996 Beta merchandising system in place
$ [ ] January 31, 1997 Final development of fully
interactive online course delivery
product/tools; marketing of beta
tools to developers. First
interactive online courses
available; marketing campaign to
professional learners
$ [ ] May 31, 1997 Continued effectiveness of
Autodesk/UOL Agreement
$ [ ] September 30, 1997 Continued effectiveness of
---------- Autodesk/UOL Agreement
$1,550,000
</TABLE>
The parties acknowledge that the first three milestones set forth in this
Section 2.2 are based on the milestones to be achieved by UOL which are set
forth in the Autodesk/UOL Agreement, as such may be amended from time to time.
UOL represents that it has fully satisfied all requirements specified in the
October 15, 1996 milestone.
2.3 Effect of Missed Milestone. In the event UOL fails to meet the
milestone applicable to a particular payment as set forth above, and such
failure is not excused hereunder, InternetU may withhold the relevant payment
until such time as UOL fulfills the applicable milestone. InternetU may, at its
discretion, make any payment otherwise required under this Agreement
notwithstanding a missed milestone by UOL. For the purposes of this Agreement
(and particularly this Section 2.3), acceptance by Autodesk of a milestone shall
be deemed to be completion of such milestone for this Agreement and extension of
a milestone deadline by Autodesk under the Autodesk/UOL Agreement shall operate
to extend the milestone date under this Agreement and, accordingly, the
corresponding date for satisfaction of the payment obligation hereunder shall be
extended. In the event UOL fails to meet a milestone for purposes of the
Autodesk/UOL Agreement and Autodesk declines to extend the deadline, InternetU
may withhold the relevant payment; UOL shall have [
* [ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SEC.
3
<PAGE>
] days to meet the unfulfilled milestone or to negotiate a comparable new
project plan milestone with Autodesk; the use of such revised plan for the
InternetU funding obligation milestones shall be subject to the prior approval
of InternetU. If InternetU declines to approve such project plan, it shall be
released from further funding obligations under this Agreement upon its
termination of this Agreement pursuant to Section 10.5 below, subject to the
survival provisions of Section 10.6 below. In the event that during the [
] day cure period provided by this Section 2.3, UOL is able
to fulfill its comparable milestone under the Autodesk/UOL Agreement to the
satisfaction of Autodesk, InternetU agrees that UOL will be deemed to have met
the milestone hereunder, UOL shall be entitled to the full milestone payment and
InternetU shall have no termination rights under Section 10.5 with respect to
that milestone. In the event that UOL is unable to meet any of the first three
milestones within the [ ]-day cure period, then (i) the ownership interest of
UOL in the source code for the Autodesk Virtual Campus (as otherwise would apply
under Section 5.3) shall be reduced and (ii) the royalties to which UOL would
otherwise be entitled from the Autodesk Campus shall be reduced to UOL (and thus
paid to InternetU), each in accordance with the schedule set forth on SCHEDULE
2.3 attached hereto.
2.4 Effect of Missed or Partial Payment. In the event InternetU fails
to make any portion of a payment when such payment is due as set forth above,
then (i) the ownership interest of InternetU in the source code for the Autodesk
Virtual Campus (as otherwise would apply under Section 5.3) and (ii) the
royalties otherwise payable to InternetU as set forth in Section 5.1 below each
shall be reduced in accordance with the schedule set forth on SCHEDULE 2.4. Any
such reductions taken will correspond with the proportion of the payment amount
InternetU failed to make as it related to the aggregate payments then due. In
the event InternetU fails to make at least a partial payment of $200,000 in
respect of any three milestone payments as required by Section 2.2 above, UOL
may, in its discretion, invoke the termination provisions of Section 10.5 below.
The parties hereto expressly acknowledge and agree that there shall be no cure
period in respect of a missed payment, but InternetU shall have thirty (30) days
after making a timely payment of at least $200,000 within which to pay the
difference between the full milestone payment and such $200,000 (or such greater
amount as actually paid) before a reduction in ownership rights of the source
code and in the royalties otherwise payable to InternetU. If, in respect of any
milestone, InternetU offers to UOL $200,000 or more (but less than the amount
stipulated for that particular milestone), UOL may not refuse the payment. Any
consequential reduction in warrants granted to InternetU, reduction in revenue
stream or reduction in interest in the source code shall be based solely on the
amount not paid by InternetU on or before the last day of the 30-day grace
period. InternetU shall be entitled to the proportionate amount of warrants,
revenue stream and source code interest relevant to the partial payment made by
InternetU.
2.5 UOL's Use of Funding Supplied by InternetU. UOL shall utilize all
funds provided by InternetU under this Agreement for the sole purpose of paying
for the development, marketing and operational expenses incurred and to be
incurred by UOL under the Autodesk/UOL Agreement. These expenses shall include,
but are not limited to those associated with writing the source code, purchasing
hardware and marketing the Autodesk Virtual Campus. UOL expressly agrees that it
will not, without the prior written consent of InternetU, use any of the funds
provided hereunder by InternetU to reimburse Autodesk for expenses related to
Autodesk's obligations under the Autodesk/UOL Agreement. InternetU acknowledges
and agrees that it shall have no direct ownership interest in any of the
hardware or other assets relating to the Autodesk Virtual Campus, except as set
forth in Section 5 below.
* [ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SEC.
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2.6 Payment method. All payments required under this Section 2 shall
be made by wire transfer of immediately available funds to an account of UOL
pursuant to wire instructions delivered to InternetU by UOL at least three
business days in advance of a required payment. If such wire instructions are
not so given, InternetU may make that payment with a bank check mailed to the
offices of UOL.
3. INTERNETU FINANCING EFFORTS
3.1 Offers to Third Parties. UOL acknowledges that InternetU will
obtain some or all of the funding required by InternetU to make the payments to
UOL as set forth in this Agreement from third parties. InternetU agrees that it
will limit the persons from whom it will solicit funds for such purpose to
persons who are resellers of Autodesk products and services; provided, however,
that InternetU may make such solicitations to persons who qualify as "accredited
investors" (as that term is defined in Regulation D promulgated under the
Securities Act of 1933, as amended) and with whom principals or representatives
of InternetU have a prior relationship (or are affiliates of such persons), so
long as InternetU discloses the names and relationship of such persons to UOL
prior to any such solicitation and InternetU obtains from such persons written
representations with respect to the nature of the investment as more
particularly set forth in SCHEDULE 3.1 hereto.
3.2 Conduct of Financing Efforts. InternetU agrees that it will
conduct all of its financing efforts in compliance with all federal and
applicable state securities laws and that it will not hold itself out in any
way, directly or indirectly, as a broker, selling agent or finder for the sale
of UOL securities. InternetU agrees to provide to UOL in advance of their use,
copies of all soliciting material to be used by InternetU that includes
references to UOL, the Autodesk/UOL Agreement or this Agreement. UOL shall have
the right to approve all such materials prior to their use. InternetU
acknowledges and agrees that UOL must submit such materials to Autodesk for its
prior review and approval pursuant to the requirements of the Autodesk/UOL
Agreement and UOL agrees to use its best efforts to obtain such approvals.
3.3 Eligible Investors. To the extent the funding will be provided by
third party investors in InternetU, InternetU agrees that it will sell its
securities only to persons who are qualified "accredited investors" as that term
is defined in Regulation D promulgated by the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "1933 Act").
3.4 Benefits to Investors. UOL and InternetU agree to make available
to third party investors the following:
(a) Policy and Procedure Committee. The parties hereto
shall establish a Policy and Procedure Committee
which shall make recommendations as to desirable
policies and procedures for access to the Autodesk
Virtual Campus by vendors and resellers. The
Committee shall consist of six persons, three persons
appointed by UOL and three persons appointed by
InternetU, which persons may include investors.
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(b) Advertising on the Autodesk Virtual Campus. Each
investor shall be offered preferred advertising space
at a discount from advertising rates offered to
unrelated third parties, as follows: an investment of
$23,000 shall entitle the investor to a 25% discount
for one year; an investment of $46,000 shall entitle
the investor to a 50% discount for one year; an
investment of $69,000 shall entitle the investor to a
discount of 50% for the first year and 25% for the
next year; and an investment of $92,000 shall entitle
the investor to a 50% discount for two years. After
these periods, the investors will be given the right
to continue in the preferred advertising space at a
10% discount from the then full rate.
4. COMMON STOCK PURCHASE WARRANTS
4.1 Common Stock Purchase Warrants. UOL hereby agrees to issue to
InternetU warrants to purchase the Common Stock of UOL, par value $.01 per
share, pursuant to the following schedule:
Number of Shares Date of Issuance
---------------- -----------------------------
166,666 October 15, 1996
166,666 November 15, 1996
166,666 January 31, 1997
166,666 May 31, 1997
194,444 September 30, 1997
-------
861,108
4.2 Terms of Warrants. The exercise price for the Common Stock
underlying the warrants shall be $1.80 per share. Each warrant shall expire
three years after the Effective Date of this Agreement. Other terms and
conditions of the warrants issued pursuant to this Section 4 shall be
substantially as set forth in the form of Warrant set forth hereto as Exhibit A.
4.3 Effect of Missed or Partial Payment by InternetU. If a scheduled
payment by InternetU as required by Section 2.2 is not made when due, UOL shall
be under no obligation to issue the warrant of the corresponding date as set
forth above. If InternetU fails to make the full required payment as set forth
in Section 2.2, but makes a partial payment, UOL may, in its discretion, reduce
the number of shares subject to the corresponding warrant by the proportionate
amount of the deficient payment to the full amount of the payment due. A partial
payment of at least $200,000 by InternetU will not afford UOL with a right of
termination under Section 10.5.
4.4 Investor Representations. InternetU understands and acknowledges
that neither the warrants to be issued under this Agreement nor the shares of
Common Stock for which they may be exercised have been registered under the 1933
Act or the securities laws of any
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state in reliance on exemptions therefrom. InternetU agrees to make such
investor representations as may be reasonably required to facilitate reliance on
such exemptions from registration at the time the warrants are issued and at the
time the shares of Common Stock are issued pursuant to exercise of such warrants
unless such shares are subject to a then effective registration statement.
5. SHARING OF ROYALTIES AND OWNERSHIP OF CAMPUS
5.1 Royalties. Subject to the provisions of Section 2.4, InternetU
shall be entitled to [ ] percent ([ ]%) of the Net Revenues generated by
the license or sale of Courseware through the Autodesk Virtual Campus; [ ]
percent ([ ]%) of the Net Revenues from the sale of Products or Services on the
Autodesk Virtual Campus; and [ ] percent ([ ]%) of the Net Revenues from
fees derived from all other activities related to the Autodesk Virtual Campus.
In the event of the termination or expiration of the Autodesk/UOL Agreement and
any successor agreement such that Autodesk is no longer participating in the
Autodesk Virtual Campus, or in the event the revenues to be shared by Autodesk
from the Autodesk Virtual Campus are reduced, revenues that otherwise would have
been paid to Autodesk shall be allocated as follows: [ ]% of such funds shall
be expended for actual marketing efforts related specifically to promotion of
the Virtual Campus; [ ]% of such funds shall be retained by UOL; and of the
remaining [ ]% of the funds, UOL shall pay to InternetU that portion of the
[ ]% which is equivalent to the proportionate amount of the payments made by
InternetU pursuant to Section 2.1 above (i.e., if InternetU has made 100% of the
payments theretofore required by Section 2.1, it shall be entitled to 100% of
the [ ]%; if InternetU has made only 50% of the payments required by Section
2.1, it shall be entitled to only 50% of the [ ]% and the remaining 50% shall
be retained by UOL).
5.2 InternetU Marketing Contribution and UOL Ongoing Obligations.
InternetU agrees that at least [ ] percent ([ ]%) of the revenues to which it
is entitled under this Agreement will be used for marketing expenses
attributable to promoting the Autodesk Virtual Campus. InternetU and UOL
acknowledge that the actual allocation of InternetU's revenue towards marketing
may be greater than [ ] percent ([ ]%). UOL agrees that after the completion
of the development of the Autodesk Virtual Campus, UOL will use its best efforts
to maintain the existence of a Virtual Campus to serve the Autodesk market on
the Internet, capable of performing transactions and, for the term of the
Autodesk/UOL Agreement, UOL will fulfill its marketing obligations as required
by the Autodesk/UOL Agreement.
5.3 Source Code for Autodesk Virtual Campus. UOL and InternetU will
jointly own the source code for the Autodesk Virtual Campus; unless such
ownership interest has been reduced as the result of one or more missed
milestones by UOL or missed or partial milestone payments by InternetU,
InternetU shall own an equal share of such source code. The source code shall be
placed in escrow pursuant to the terms of an escrow agreement in substantially
the form attached hereto as Exhibit B. InternetU agrees to pay all expenses to
initiate such escrow and all expenses to maintain such escrow, provided that UOL
will reimburse InternetU for half the expenses up to a maximum cost to UOL of
$1,550 the first year and $1,050 each year thereafter. Neither party shall be
entitled to license, transfer, sell or otherwise encumber the ownership rights
to the source code, or enter into negotiations concerning same, without the
prior written consent of the other party. InternetU expressly acknowledges and
agrees that its interest in the Autodesk Virtual Campus source code is limited
to the exploitation of such
* [ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SEC.
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source code in the market served by Autodesk. Notwithstanding any other
provisions of this Agreement, InternetU shall have no rights whatsoever to
exploitation of the generic platforms and related software created, acquired or
otherwise utilized by UOL in connection with the Autodesk Virtual Campus, it
being expressly understood and agreed that, as between UOL and InternetU, such
platforms and related software are the sole and exclusive property of UOL. UOL
expressly agrees that InternetU shall be under no obligation to pay to UOL any
additional royalties or fees in connection with the platforms and related
software which are the sole and exclusive property of UOL but which are included
in the Autodesk Virtual Campus so long as the use by InternetU is limited to the
Autodesk Virtual Campus. Notwithstanding any other provision of this Agreement,
UOL acknowledges that InternetU shall have the right to develop independently
other campuses, and engage in other activities, including without limitation
activities similar to those contemplated by this Agreement, with other parties,
so long as InternetU is not using UOL confidential or proprietary information or
technology.
6. PAYMENTS, BOOKS, AND RECORDS
6.1 Payment Method. Payments to InternetU of royalties under Section 5
above shall be made on a monthly basis in arrears.
6.2 Records; Inspection. UOL shall keep complete, true, and accurate
books of account and records for the purpose of determining the royalty amounts
payable under this Agreement. Such books and records shall be kept at UOL's
principal place of business. InternetU may inspect such books and records to
confirm the royalty payments paid and payable to InternetU under this Agreement.
Such inspections may be done by InternetU's independent certified public
accountant at InternetU's sole cost and expense no more than twice each calendar
year, at reasonable times as mutually agreed. The certified public accountant
will be obliged to execute a reasonable confidentiality agreement on terms
consistent with Article 8 hereof prior to commencing any such inspection. In the
event an inspection reveals a variation or error producing an increase exceeding
ten percent (10%) of the amount stated as having been due by UOL for any period
covered by the inspection, all costs relating to the inspection for such period
and any unpaid amounts that are discovered shall be paid by UOL. InternetU's
independent certified public accountant will report to InternetU as to whether
or not there has been an underpayment and, if so, the amount thereof. No
additional information discerned by the certified public accountant during the
course of their inspection may be disclosed to InternetU.
7. REPRESENTATIONS AND WARRANTIES
7.1 InternetU.
(a) Organization; Good Standing; Corporate Power. InternetU is
a corporation duly organized, validly existing and in good standing under the
laws of the State of New Jersey, has all requisite corporate power and authority
to own, lease and operate its properties and to carry on its business as now
being conducted, to execute and deliver this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated hereby.
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(b) Authority. The execution, delivery and performance of this
Agreement has been duly and validly authorized by all necessary corporate action
on the part of InternetU, and this Agreement will be, upon such execution and
delivery, duly executed and will constitute legal, valid and binding obligations
of InternetU, enforceable against InternetU in accordance with their respective
terms.
(c) No Conflicts. The execution, delivery and performance by
InternetU of this Agreement does not and will not violate, conflict with or
result in the breach of any agreement, instrument, judgment, judicial decree or
order, or any provision of federal or state law to which InternetU is a party or
by which InternetU or any of its assets are bound.
(d) No Consent. No consent or approval by, or any notification
of or filing with, any person (governmental or private) is required in
connection with the execution, delivery and performance by InternetU of this
Agreement.
(e) Absence of Litigation. There are no judicial,
administrative or other legal proceedings or governmental investigations pending
against InternetU or its principals with respect to the execution or performance
of InternetU's obligations under this Agreement or involving its business or
assets and, to the best of InternetU's knowledge, there are no such proceedings
or investigations threatened.
(f) Compliance with Laws. InternetU has complied in all
material respects with all laws (statutory or otherwise), rules, regulations,
ordinances, orders, writs, injunctions, judgments, decrees and awards of all
governmental and regulatory authorities (collectively the "Laws") relating to
the operation of its business and assets. InternetU has not received any
notification of any asserted present or past failure of InternetU so to comply
with any Law and no such violation of any Law exists.
7.2 UOL.
(a) Organization; Good Standing; Corporate Power. UOL is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, has all requisite corporate power and authority to
own, lease and operate its properties and to carry on its business as now being
conducted, to execute and deliver this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby. UOL represents
and warrants that it has provided to InternetU a true and complete copy of UOL's
certificate of incorporation and bylaws, each in effect on the date hereof.
(b) Authority. The execution, delivery and performance of this
Agreement, including the issuance of warrants as contemplated by Article 4, has
been duly and validly authorized by all necessary corporate action on the part
of UOL, and this Agreement will be, upon such execution and delivery, duly
executed and will constitute legal, valid and binding obligations of UOL,
enforceable against UOL in accordance with their respective terms.
(c) No Conflicts. The execution, delivery and performance by
UOL is this Agreement does not and will not violate, conflict with or result in
the breach of any agreement, instrument, judgment, judicial decree or order, or
any provision of federal or state law to which UOL is a party or by which UOL or
any of its assets are bound.
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(d) No Consent. No consent or approval by, or any notification
of or filing with, any person (governmental or private) is required in
connection with the execution, delivery and performance by UOL of this
Agreement.
(e) Intangible Assets. To the best of UOL's knowledge, UOL
owns or possesses adequate rights to develop, manufacture, license, provide and
market its products and services using all patents, patent applications,
trademarks, service marks, copyrights, trade secrets, confidential information,
processes and formulations used or proposed to be used in the conduct of its
business related to this Agreement (collectively the "Intangibles"); to the best
of UOL's knowledge, UOL has not infringed and is not infringing upon the rights
of others with respect to Intangibles; and UOL has not received any notice of
conflict with the asserted rights of others with respect to Intangibles which
could, singly or in the aggregate, materially adversely affect its business as
presently conducted or the prospects, financial condition or results of
operations of UOL, and UOL knows of no basis therefor; and to the best of UOL's
knowledge, no others have infringed upon the Intangibles of UOL.
(f) Absence of Litigation. There are no judicial,
administrative or other legal proceedings or governmental investigations pending
against UOL with respect to the right of UOL to enter into or perform its
obligations under this Agreement or involving its business or assets, and, to
the best of UOL's knowledge, there are no such proceedings or investigations
threatened.
(g) Compliance with Laws. UOL has complied in all material
respects with all laws (statutory or otherwise), rules, regulations, ordinances,
orders, writs, injunctions, judgments, decrees and awards of all governmental
and regulatory authorities (collectively the "Laws") relating to the operation
of its business and assets and the development, marketing and operation of the
Autodesk Virtual Campus. UOL has not received any notification of any asserted
present or past failure of UOL so to comply with any Law and no such violation
of any Law exists.
(h) Financial Statements. Attached hereto as Exhibit C are the
draft audited balance sheets of UOL as of December 31, 1995 and 1994, and the
accompanying draft Report of Independent Auditors, as well as the draft
quarterly financials for each of the first two quarters of fiscal 1996. Such
financial statements fairly present the financial condition of UOL at December
31, 1995 and 1994, respectively, and, in respect of the quarterly reports, at
March 31, 1996 and June 30, 1996, and were prepared in accordance with generally
accepted accounting principles.
(i) No Adverse Changes. Since December 31, 1995, there has not
been any material adverse change in the financial condition, assets,
liabilities, business or resulting operations of UOL.
(j) Taxes. UOL has filed all federal, state and local taxes
and other returns and reports which were required to be filed in respect of all
taxes, levies, license, registration and permit fees, charges or withholding of
any nature whatsoever, and has paid all applicable taxes, levies and assessments
which are due; and except for taxes which are not yet due and payable, there are
no taxes, levies or assessments which will be payable by UOL in respect of any
period prior to the date hereof; UOL is not in default in the payment of any
taxes due
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or payable or of any assessments received in respect thereof; and there are no
unpaid assessments or proposals for additional federal, state or local taxes for
which UOL does not have adequate reserves, nor does UOL know of any basis
therefor.
(k) Assets. The assets and properties of UOL include all
assets and properties which are or will be material to the conduct of UOL's
business as presently contemplated.
(l) Capitalization, etc. As of the date hereof, UOL's
authorized capitalization consists of (a) 36,000,000 shares of Common Stock, par
value $0.01 per share, of which 9,777,524 shares are issued and outstanding and
(b) 34,000,000 shares of Preferred Stock, par value $0.01 per share, of which
12,000,000 shares have been designated "Series A Preferred Stock" (and there are
now outstanding 4,742,406 of such Series A Preferred Stock), 6,000,000 shares
have been designated "Series B Preferred Stock" (and there are now none
outstanding) and 6,000,000 shares have been designated "Series B-1 Preferred
Stock" (and there are now outstanding 2,187,500 of such Series B-1 Preferred
Stock). The Common Stock issuable upon exercise of the Warrants to be acquired
pursuant to this agreement have been duly and validly reserved for issuance and,
upon issuance, will be duly and validly issued, fully paid and non-assessable
and will be free of restrictions on transfer, except pursuant to applicable
federal and state securities laws. All corporate action on the part of UOL and
stockholders thereof, if necessary, for the authorization, execution and
delivery of this agreement and the Warrants contemplated hereby, and the
authorization, issuance or reservation for issuance of such Warrants and the
Common Stock issuable upon exercise thereof has been taken. Except as set forth
on SCHEDULE 7.2 or as contemplated by the Warrants issuable hereunder, there are
no outstanding options, warrants, rights (including conversion or pre-emptive
rights) or agreements for the purchase or acquisition from UOL of any shares of
its capital stock or any rights which permit or allow a holder of securities of
UOL to cause UOL to file a registration statement or which permit or allow the
holder thereof to include securities of UOL in a registration statement filed by
UOL.
7.3 Disclaimer of Warranties. EXCEPT AS EXPRESSLY STATED HEREIN,
NEITHER PARTY HAS MADE ANY WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED BY
OPERATION OF LAW OR OTHERWISE, CONCERNING THE PRODUCT TO BE DEVELOPED BY UOL,
THE SCOPE OR DURATION OF ANY MARKETING EFFORTS THAT THE PARTIES MAY UNDERTAKE,
OR THE SUCCESS OF SUCH MARKETING EFFORT. NEITHER PARTY HAS RELIED ON ANY EXPRESS
OR IMPLIED REPRESENTATION OF THE OTHER PARTY, WRITTEN OR ORAL, AS AN INDUCEMENT
TO ENTERING INTO THIS AGREEMENT EXCEPT AS SPECIFICALLY SET FORTH IN THIS
AGREEMENT.
8. CONFIDENTIALITY
8.1 ______ Confidential Information. Except as expressly provided
herein, the parties agree that, for the term of this Agreement and for two (2)
years thereafter, the receiving party shall keep completely confidential and
shall not publish or otherwise disclose and shall not use for any purpose except
for the purposes contemplated by this Agreement, any information that is marked
or noted as confidential and furnished to it by the disclosing party hereto
pursuant to this Agreement, except that to the extent that it can be established
by the receiving party by
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competent proof that such confidential information (a) was already known to the
receiving party, other than under an obligation of confidentiality, at the time
of disclosure, as evidenced by its written records; (b) was generally available
to the public or otherwise part of the public domain at the time of its
disclosure to the receiving party; (c) became generally available to the public
or otherwise part of the public domain after its disclosure and other than
through any act or omission of the receiving party in breach of this Agreement;
(d) was independently developed by the receiving party as demonstrated by
documented evidence prepared contemporaneously with such independent
development; or (e) was subsequently lawfully disclosed to the receiving party
by a person other than a party hereto.
8.2 Permitted Use and Disclosures. Each party hereto may use or
disclose information disclosed to it by the other party to the extent such use
or disclosure is reasonably necessary in prosecuting or defending litigation,
complying with applicable governmental regulations or otherwise submitting
information to tax or other government authorities, or otherwise exercising its
rights hereunder; provided that if a party is required to make any such
disclosure of another party's confidential information, other than pursuant to a
confidentiality agreement, it will give reasonable advance notice to the latter
party of such disclosure and will use its best efforts to secure confidential
treatment of such information prior to its disclosure (whether through
protective orders or otherwise).
8.3 Public Disclosure. Except as otherwise required by law, neither
party shall issue a press release or make any other public oral or written
disclosure of the terms of this Agreement or the results of the development and
funding project contemplated hereby without prior approval of the other party,
it being expressly acknowledged that InternetU will be seeking UOL's prior
approval with respect to certain of such information in disclosure to be
provided to potential investors.
9. INDEMNIFICATION
9.1 Indemnification of InternetU. UOL shall indemnify, defend and hold
harmless InternetU and the directors, officers, employees, agents and counsel of
InternetU and the successors and assigns of any of the foregoing (the "InternetU
Indemnitees"), from and against any and all liabilities, damages, losses, costs
or expenses (including reasonable attorneys' and professional fees and expenses
and other expenses of litigation and arbitration) resulting from a claim, suit
or proceeding brought by a third party against an InternetU Indemnitee, arising
from or occurring (i) as a result of a breach of any of UOL's representations
and warranties as set forth herein, or (ii) as a result of a breach by UOL of
any of its obligations hereunder.
9.2 Indemnification of UOL. InternetU shall indemnify, defend and hold
harmless UOL and the directors, officers, employees, agents and counsel of UOL
and the successors and assigns of any of the foregoing (the "UOL Indemnitees"),
from and against any and all liabilities, damages, losses, costs or expenses
(including reasonable attorneys' and professional fees and expenses and other
expenses of litigation and arbitration) resulting from a claim, suit or
proceeding brought by a third party against a UOL Indemnitee, arising from or
occurring (i) as a result of a breach of any of InternetU's representations and
warranties of InternetU set forth herein, or (ii) as a result of a breach of any
of InternetU's obligations hereunder, or (iii) as a result of InternetU's
financing efforts contemplated by Section 3 above, provided, however, that
InternetU shall have no obligation to indemnify the UOL Indemnitees for claims
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based on information provided by UOL or Autodesk and included in information
provided by InternetU to potential investors.
9.3 Procedure. A party (the "Indemnitee") that intends to claim
indemnification under this Section 9 shall promptly notify the other party (the
"Indemnitor") in writing of any loss, claim, damage, liability, or action in
respect of which the Indemnitee or any of its directors, officers, employees, or
agents intend to claim such indemnification, and the Indemnitor shall have the
right to participate in, and, to the extent the Indemnitor so desires, to assume
the defense thereof. The indemnity agreement in this Section 9 shall not apply
to amounts paid in the settlement of any loss, claim, damage, liability or
action if such settlement is effected without the consent of the Indemnitor,
which consent shall not be withheld or delayed unreasonably. The failure to
deliver written notice to the Indemnitor within a reasonable time after the
commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such Indemnitor of any liability to the Indemnitee under
Section 9. At the Indemnitor's request, the Indemnitee under this Section 9, its
employees and agents, shall cooperate fully with the Indemnitor and its legal
representatives in the investigation of any action, claim, or liability covered
by this indemnification and provide full information with respect thereto.
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10. TERMINATION
10.1 Term. This Agreement shall commence as of the Effective Date and
shall continue until terminated pursuant to this Section 10.
10.2 Termination of Autodesk/UOL Agreement.
(a) Termination for Convenience. In the event of the
termination (or nonrenewal) of the Autodesk/UOL Agreement, either party may give
the other party written notice of its intention to terminate this Agreement for
any reason or no reason (hereafter referred to as a "Termination for
Convenience"), which termination shall take effect ten days after the date of
such written notice.
(b) Effect of Termination for Convenience. Upon a Termination
for Convenience, the non-terminating party shall have the right to exploit the
source code in respect of the Autodesk market without the further involvement of
the terminating party and revenues otherwise payable to the terminating party
from merchants offering Products and Services on the Autodesk Virtual Campus at
the time of the Termination for Convenience, shall be reduced by one-half.
Revenues thereafter generated in respect of additional merchants offering
Products or Services on the Virtual Campus shall be the sole property of the
non-terminating party. The source code shall then be released to the
non-terminating party subject to the terms of the escrow agreement. The
terminating party in a Termination for Convenience agrees not to seek to
restrict the use of the source code on and after the effective date of the
Termination for Convenience.
10.3 Breach.
(a) Termination for Breach. Either party to this Agreement may
terminate this Agreement in the event the other party shall have materially
breached or defaulted in the performance of any of its material obligations
hereunder, and such default shall have continued for thirty (30) days after
written notice thereof was provided to the breaching party by the non-breaching
party. Any termination shall become effective at the end of such thirty (30)
days unless the breaching party (or any other party acting on its behalf), has
cured any such breach or default prior to the expiration of the thirty (30) day
period; provided, however, if either party receives notification from the other
of a material breach and the party alleged to be in breach notifies the other
that it disputes the asserted material breach, then the matter shall be
submitted to arbitration pursuant to Section 12.2 of this Agreement. In such
event, no termination shall become effective unless the arbitrators have
determined that a material breach occurred and the breaching party fails to cure
such breach within thirty (30) days as applicable after the conclusion of such
an arbitration proceeding. The parties hereto expressly acknowledge and agree
that this Section 10.3 shall not apply to Section 2.2; breach of Section 2.2 by
UOL shall be governed by Section 2.3 and breach of Section 2.2 by InternetU
shall be governed by Section 2.4 (see Section 10.5 below). The parties hereto
expressly agree that breach by either party of its obligations under Section 5.2
shall be deemed material and may give rise to termination by the non-breaching
party if not cured as herein provided.
(b) Effect of Termination for Breach. The parties expressly
agree that the provisions of Section 10.2(b) above ("Effect of Termination for
Convenience") shall apply
14
<PAGE>
in the event of a termination for breach pursuant to this Section 10.3 and the
non-breaching party shall have the rights of the non-terminating party as set
forth in Section 10.2(b).
10.4 Termination for Insolvency. If a voluntary or involuntary
proceeding by or against a party are instituted in bankruptcy under any
insolvency law, or a receiver or custodian is appointed for such party, or
proceedings are instituted by or against such party for corporate reorganization
or the dissolution of such party, which proceedings, if involuntary, shall not
have been dismissed within sixty (60) days after the date of filing, or if such
party makes an assignment for the benefit of creditors, or substantially all of
the assets of such party are seized or attached and not released within sixty
(60) days thereafter, the other party may immediately terminate this Agreement
effective upon notice of such termination.
10.5 Permissive Termination.
(a) In the event UOL fails to meet a milestone as set forth in
Section 2.3 and InternetU is entitled to terminate this Agreement as provided
therein, InternetU may terminate this Agreement upon the giving of written
notice thereof. The source code may then be released to InternetU subject to the
terms of the escrow agreement.
(b) In the event InternetU fails to make all or at least
$200,000 of any three required payments as set forth in Section 2.2, UOL may
terminate this Agreement as provided in Section 2.4. Such termination shall be
effective immediately upon the giving of written notice thereof and there shall
be no cure period. The source code will then be released to UOL subject to the
terms of the escrow agreement.
10.6 Other Effects of Termination.
(a) In the event of termination of this Agreement by the
mutual agreement of the parties, the parties will continue to jointly own the
source code (in such ownership amounts as provided in this Agreement) and may
pursue exploitation of such source code pursuant to such other agreements
between the parties as they may determine, consistent with the provisions of
Section 5. Only Sections 8, 9, 12.2 and 12.3 of this Agreement shall survive
such termination.
(b) In the event of termination of this Agreement pursuant to
Section 10.2 or Section 10.3 above, Sections 6, 8, 9, 12.2 and 12.3 of this
Agreement shall survive such termination.
(c) In the event of termination pursuant to Section 10.4, the
provisions of Sections 5.1 and 5.3 (as modified by Sections 2.3 and 2.4) and
Sections 6, 8, 9, 12.2 and 12.3 of this Agreement shall survive such termination
and the terminating party shall have the right, subject to applicable law, to
use the source code in a manner consistent with this Agreement and subject to
the Autodesk/UOL Agreement. If InternetU is the terminating party, the source
code may then be released from the escrow to InternetU, subject to the terms of
the escrow agreement.
(d) In the event of termination pursuant to Section 10.5, only
the provisions of Sections 5.1 and 5.3 (as modified by Sections 2.3 and 2.4) and
Sections 6, 8, 9, 12.2 and 12.3 of this Agreement shall survive.
15
<PAGE>
10.7 Accrued Obligations. Termination of this Agreement for any reason
shall not release any party hereto from any liability which, at the time of such
termination, has already accrued to the other party or which is attributable to
such termination, nor shall it preclude either party from pursuing all rights
and remedies it may have hereunder or at law or in equity with respect to any
breach of this Agreement.
10.8 Return of Confidential Information. Upon any termination of this
agreement, InternetU and UOL shall promptly return to the other party all
confidential information received from the other party (except one copy which
may be retained for archival purposes), and shall no longer be entitled to use
any such confidential information for any purpose.
10.9 "Release Conditions". Termination of this Agreement pursuant to
Section 10.2, Section 10.3, 10.4 or 10.5 shall give rise to the release from
escrow of the source code as provided in such Sections. Each such termination
shall be a "Release Condition" as contemplated under the escrow agreement.
11. UOL INITIAL PUBLIC OFFERING
11.1 Impact of UOL Initial Public Offering. In the event UOL files with
the Securities and Exchange Commission a Registration Statement for the initial
public offering of its Common Stock (an "IPO") in 1996, payments under Section 2
shall be accelerated pursuant to the following terms:
(a) Half of the remaining payments required under Section 2
shall be due and payable to UOL upon the consummation of the IPO; and
(b) The remaining half of the payment amounts will be due and
payable four months after the consummation of the IPO.
11.2 Acceleration of Warrant Issuances. If and when payments are
accelerated, the same acceleration shall apply to the issuance of the
corresponding warrants contemplated by Section 3.
12. MISCELLANEOUS
12.1 Governing Law. This Agreement and any dispute arising from the
performance or breach hereof shall be governed by and construed and enforced in
accordance with the laws of the state of Virginia, without reference to
conflicts of laws principles.
12.2 Arbitration. Any dispute under this Agreement which is not settled
by mutual consent shall be finally settled by binding arbitration, conducted in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association by three (3) arbitrators appointed in accordance with said rules.
The arbitration shall be held in the location most convenient to the parties and
the subject matter of the dispute. The costs of the arbitration, including
administrative and arbitrator's fees, and attorneys' and witness' fees shall be
borne by the losing party. The decision of the panel shall be rendered in
writing. A disputed
16
<PAGE>
performance or suspended performance pending the resolution of arbitration must
be completed within thirty (30) days following the final decision of the
arbitrators or within such other reasonable period as the arbitrators determine
in their written decision. Any arbitration subject to this Section shall be
completed within six (6) months from the filing of notice of a request for such
arbitration.
12.3 Financial Reports. UOL covenants and agrees that for as long as
InternetU holds securities of UOL, commencing on the date hereof:
(a) it shall furnish to InternetU as soon as practicable, and
in any event within 90 days after the end of each fiscal year of UOL, an annual
report of UOL, including an audited consolidated balance sheet as at the end of
such fiscal year and audited consolidated statements of income, stockholders'
equity and changes in financial position, together with notes thereto, for such
fiscal year, setting forth in comparative form corresponding figures for the
preceding fiscal year, all of which shall be correct and complete and shall
fairly present the financial position of UOL and any subsidiaries at the date
thereof and the results of their operations for the period then ended. The
financial statements shall be accompanied by a report thereon of nationally
recognized independent certified public accountants to the effect that such
financial statements have been prepared in accordance with generally accepted
accounting principles.
(b) it shall furnish to InternetU as soon as practicable and
in any event within 45 days after the end of each fiscal quarter, the quarterly
report of UOL and any subsidiaries, consisting of an unaudited consolidated
balance sheet as at the end of such fiscal quarter and unaudited consolidated
statements of income, stockholders' equity and changes in financial position,
together with notes thereto, for such fiscal quarter and for the fiscal year to
date, setting forth in each case in comparative form the corresponding figures
for the preceding year. All such reports shall be certified to by the chief
financial officer of UOL to be correct and complete, to fairly present the
financial condition of UOL and any subsidiaries as of the date thereof and the
results of their operations for the period then ended and to have been prepared
in accordance with generally accepted accounting principles consistently
applied, except for normal year-end adjustments.
12.4 Waiver. Neither party may waive or release any of its rights or
interests in this Agreement except in writing. The failure of either party to
assert a right hereunder or to insist upon compliance with any term or condition
of this Agreement shall not constitute a waiver of the right or excuse a similar
subsequent failure to perform any such term or condition.
12.5 Assignment. The rights, obligations, and options granted pursuant
to this Agreement shall not be assignable by either party to any third party
without prior written consent of the non-assigning party; provided, however,
that either party may assign its rights and delegate its duties hereunder to its
successor in interest by way of a reincorporation pursuant to the laws of the
state of its reincorporation. In addition, InternetU shall be permitted to make
distributions in kind of UOL securities to the stockholders of InternetU pro
rata in accordance with their ownership interests therein, provided that all
transfer restrictions applicable to InternetU shall apply to the transferees of
such securities.
12.6 Independent Contractors. The relationship of the parties hereto is
that of independent contractors. The parties are not deemed to be agents,
partners, or joint venturers
17
<PAGE>
of the others for any purpose as a result of this Agreement or the transactions
contemplated thereby.
12.7 Notices. All notices, requests and other communications hereunder
shall be in writing and shall be personally delivered or sent by telecopy or
other electronic facsimile transmission or by registered or certified mail,
return receipt requested, postage prepaid, in each case to the respective
address specified below, or such other address as may be specified in writing to
the other parties hereto:
InternetU: InternetU, Inc.
648 Winthorp Road
Teaneck, New Jersey 07866
UOL: University Online, Inc.
105 West Broad Street, Suite 301
Falls Church, Virginia 22046
12.8 Severability. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall otherwise continue in full force and
effect without said provision.
12.9 Force Majeure. Non-performance of any party shall be excused to
the extent that performance is rendered impossible by strike, fire, earthquake,
flood, governmental acts or orders or restrictions, failure of suppliers, or any
other reason where failure to perform is beyond the reasonable control and not
caused by the negligence, intentional conduct or misconduct of the
non-performing party.
12.10 Complete Agreement. This Agreement, together with all Exhibits
hereto, constitutes the entire agreement, both written and oral, between the
parties with respect to the subject matter hereof, and that all prior agreements
respecting the subject matter hereof, either written or oral, expressed or
implied, are merged and canceled, and are null and void and of no effect. No
amendment or changes hereof or addition hereto shall be effective or binding on
either of the parties hereto unless reduced to writing and executed by the
respective duly authorized representatives of InternetU and UOL.
12.11 Headings. The captions to the Sections and paragraphs hereof are
not a part of this Agreement, but are included merely for convenience of
reference only and shall not affect its meaning or interpretation.
12.12 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original and both together shall be
deemed to be one and the same agreements.
IN WITNESS WHEREOF each of the parties hereto has caused this Agreement
to be duly executed by their authorized representatives and delivered in
duplicate as of the date first written above.
InternetU, Inc. University Online, Inc.
18
<PAGE>
By: ______________________________ By: __________________________________
Name: ____________________________ Name: ________________________________
Title: ___________________________ Title: _______________________________
19
<PAGE>
This is to confirm our mutual understanding that, as a result of the filing of
the registration statement by UOL with the SEC, the schedule of payments under
Section 2.2 of the Project Financing and Development Agreement with InternetU is
modified in accordance with Section 11.1 of the Agreement (the "Agreement").
Accordingly, assuming that UOL meets all the milestones and other conditions
under the Agreement such that the total payments which may be made under the
Agreement are $1,550,000, and assuming that the IPO is consummated prior to the
third milestone date, then, subject to the terms set forth below, the total
amount which may be paid by InternetU as of the consummation of the IPO
(including any payments made prior thereto in accordance with the Agreement)
shall be $775,000, with the balance due four months following the IPO closing.
The foregoing shall not affect the other terms of the Agreement, including the
obligations of UOL to satisfy its milestones. In event UOL fails to satisfy any
of the milestones required to be satisfied by it prior to the consummation of
the IPO, the amount which may be paid by InternetU upon such consummation of the
IPO will be appropriately reduced to reflect the missed milestone. At such time
as the milestone is satisfied, in accordance with the Agreement, the related
payment terms of the Agreement will apply. In addition, UOL must satisfy any
milestones remaining prior to the date on which the final payment after the IPO
shall be due. The final payment shall not be due until all of the milestones
have been completed. If UOL has not satisfied any of its milestones scheduled
for completion subsequent to the consummation of the IPO, the four month period
shall be extended for the same amount of time that the successful completion of
the milestone is delayed.
In addition, nothing set forth herein shall affect the rights of InternetU under
the Agreement, including its right to approve milestone changes and its ability
to make a partial payment of $200,000 in connection with any specific funding
obligation. UOL must accept such payment and grant InternetU the relevant
warrants and other proportionate rights to the revenue stream and source code.
The ability of InternetU to make a partial payment shall apply to all required
payments including those due in connection with the IPO.
<PAGE>
Except as set forth above, there are no other changes or modifications to the
Agreement.
If the foregoing is in accordance with your understanding, kindly so indicate by
signing the acknowledgment below and returning a copy.
Sincerely,
/s/ Leon Siegel
Leon Siegel
Acknowledged & Agreed
UOL Publishing, Inc.
By:
------------------------------------
Name:
------------------------------------
Title:
------------------------------------
Date:
------------------------------------
<PAGE>
648 Winthrop Road Tel: (201) 240-5181
Teaneck, NJ 07666 Fax: (201) 836-4257
INTERNETU, INC.
October 29, 1996
Nat Kannan
UOL Publishing, Inc.
105 West Broad Street
Falls Church, VA 22046
Dear Nat:
At this time we would like to take the opportunity to confirm our discussion
regarding the extension of the certain payments due under the Project Financing
Agreement, as amended. As discussed, any payments otherwise due prior to
December 15, 1996, shall not be due, (subject to the terms of the Project
Financing Agreement, as amended) until December 15, 1996 and shall be deemed
timely made if made on such date. Accordingly, if the UOL IPO becomes effective
prior to December 15, 1996, the amount to be paid by InternetU to UOL shall be
$775,000 subject to completion by UOL of the milestones and other terms as
stated in the Project Financing Agreement, as amended. If the UOL IPO is not
effective by December 15, 1996 the amount due shall be $600,000 subject to
completion by UOL of the milestones and other terms as stated in the Project
Financing Agreement, as amended.
In either case, a partial payment of at least $200,000 by InternetU on December
15, 1996 will not afford UOL with a right of termination under section 10.5 of
the Project Financing Agreement, as amended. All provisions of the Project
Financing Agreement, as amended, shall apply to the December 15, 1996 payment as
if it were one milestone payment.
InternetU, Inc.
/s/ Leon Siegel
----------------------
Leon Siegel, Treasurer
ACKNOWLEDGED AND AGREED
UOL Publishing, Inc.
- ------------------------
(Name)
By: Leonard P. Kurtzman
-------------------
Title: CFO
------------------
October 29, 1996
Mr. W. Braun Jones, Jr.
511 South Fairfax Street
Alexandria, VA 22071
Dear Braun:
This letter is to confirm your continuing relationship with UOL Publishing, Inc.
("UOL" or the "Company") after the conclusion of the Company's proposed initial
public offering ("IPO"). The terms I have stipulated here, I believe, are as we
discussed. Please let me know if I have altered anything in the codification.
Also, this agreement is effective only if the IPO is successfully concluded.
You will continue as an integral part of the management team, reporting to me.
Your title will be Senior Advisor. Your annual salary will be $100,000 ("Base
Salary"). You will receive options for 100,000 shares (pre IPO split) of the
Company's Common Stock after the IPO, vesting ratably over a three year period
with the first one third vesting on the IPO effective date. The price will be at
the IPO closing price.
Additionally, you will be eligible for cash bonuses (the "Bonuses") on strategic
partnerships that (i) are approved by Nat Kannan and myself (or our successors
in office as approved by the Board) and (ii) you close for UOL after
consummation of the IPO (the "Partnerships"). For each of the Partnerships, you
will receive a Bonus of $10,000. Also, you will be paid a Bonus of 1.5 percent
of all net revenues generated by the Partnership for UOL for a period of
thirty-six (36) months after the Partnership begins generating such revenue,
with this portion of the Bonuses payable annually. Additionally, you will be
paid a Bonus of 0.75 per cent of all net revenues generated by Partnerships in
1997, such Bonus to be paid on January 1, 1998 or as soon thereafter as such
Bonus (if any) can be calculated by the Company. You will receive a payment of
$100,000 as a nonrefundable advance against the Bonuses on January 2, 1997. In
the event that your employment by UOL is terminated (otherwise then for cause),
all Bonuses will cease being paid after two years from the date of termination,
but in no event later than the Bonuses would otherwise be paid. The Company
requires that you sign a non-compete agreement covering a period up until two
years after termination, which will be signed no later than January 15, 1997.
You will receive $100,000 upon signing the non-compete agreement.
You will continue to be on the Company's insurance plan with the present
contribution terms. You will be able to take vacation and sick time on an as
needed basis with a maximum of ten and five days per year respectively.
Upon termination of this agreement, or upon request of the Company at any time,
you will be required to deliver to the company all materials including, but not
limited to, customer lists, documents, reports, equipment, software, discs,
illustrations, and manuals relating to company information, it being agreed to
be and remain being the sole property of the Company. Upon termination by the
Company of your employment for reasons other than cause, you will be entitled to
severance pay equal to six months' Base Salary. This agreement is subject to
approval of the Board of Directors of UOL Publishing and you serve at the
pleasure of the Board.
Please indicate your acceptance of this offer by signing below and returning one
copy of this letter at your earliest convenience. In the meantime, we are
looking forward to working with you toward a mutually rewarding future.
Sincerely, Accepted:
---------------------
/s/ Carl N. Tyson
- -------------------------
Carl N. Tyson, President Date:
------------------------
EXHIBIT 11.1
UOL PUBLISHING, INC.
STATEMENT RE: COMPUTATION OF PER SHARE LOSS
<TABLE>
<CAPTION>
Year ended December 31, Nine months ended September 30,
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net loss per share:
Weighted average shares of common stock
outstanding......................................... 384,370 420,142 776,881 772,781 801,933
Shares of Series A and Series B Preferred Stock and
Preferred Stock Dividends issued during the twelve
months period prior to the initial filing of the
S-1 (using the treasury stock method)............... 207,599 207,599 207,599 207,599 207,599
Shares of Common Stock issued during the twelve
month period prior to the initial filing of the S-1
(using the treasury stock method)................... 3,469 3,469 3,469 3,469 3,469
Common equivalent shares from options, warrants
and convertible debt issued during the twelve
month period prior to the initial filing of the S-1
(using the treasury stock method)................... 131,693 131,693 131,693 131,693 131,693
Total............................................... 727,131 762,903 1,119,642 1,115,542 1,144,694
Net loss ........................................... $(413,503) $(687,258) $(2,239,641) $(1,329,533) $(3,448,075)
Accrued dividends to preferred stockholders ........ -- -- (174,830) (115,595) (241,958)
Net loss attributable to common stockholders ...... $(413,503) $(687,258) $(2,414,471) $(1,445,128) $(3,690,663)
Net loss per share.................................. $ (0.57) $ (0.90) $ (2.16) $ (1.30) $ (3.22)
Pro forma net loss per share:
Weighted average shares of common stock
outstanding:........................................ -- -- 776,881 -- 801,933
Shares of Series A and Series B Preferred Stock and
Preferred Stock Dividends issued during the twelve
month period prior the the initial filing of the
S-1 (using the treasury stock method)............... -- -- 207,599 -- 207,599
Shares of Common Stock issued during the twelve
month period prior to the initial filing of the S-1
(using the treasury stock method)................... -- -- 3,469 -- 3,469
Common equivalent shares from options, warrants and
convertible debt issued during the twelve month period
prior to the initial filing of the S-1
(using the treasury stock method)................... -- -- 131,693 -- 131,693
Common equivalent shares from preferred stock
converted upon completion of offering............... -- -- 286,536 -- 505,206
Total............................................... -- -- 1,406,178 -- 1,649,900
Net loss............................................ -- -- $(2,239,641) -- $(3,448,705)
Accrued dividends to preferred stockholders ........ -- -- (174,830) -- (241,958)
Net loss attributable to common stockholders ....... -- -- $(2,414,471) -- $(3,690,663)
Net loss per share.................................. -- -- $ (1.72) -- $ (2.24)
</TABLE>
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.
1 on Form S-1 No.333-12135) and related Prospectus of UOL Publishing, Inc. for
the registration of 1,334,000 shares of its common stock.
Vienna, Virginia /s/ Ernst & Young LLP
October 29, 1996
<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 September , 1996),
in the Registration Statement (Amendment No. 1 on Form S-1 No. 333-12135) and
related Prospectus of UOL Publishing, Inc. for the registration of 1,334,000
shares of its common stock.
Vienna, Virginia
September , 1996
Ernst & Young LLP
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the completion of
the restatement of the capital amounts for the reverse stock split as described
in Note 14 to the financial statements.
Vienna, Virginia
October 29, 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 report of Cognitive Training Associates, Inc. dated July 17, 1996
(except Note 9, as to which the date is August 1, 1996), in the UOL Publishing,
Inc. Registration Statement (Amendment No. 1 on Form S-1 No. 333-12135) and
related Prospectus of UOL Publishing, Inc. (formerly University Online, Inc.)
for the registration of 1,334,000 shares of its common stock.
Vienna, Virginia
September , 1996
Ernst & Young LLP
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the completion of
the restatement of the capital amounts in Note 9 for the reverse stock split as
described in Note 14 to UOL Publishing, Inc.'s financial statements.
Vienna, Virginia
October 29, 1996
/s/ Ernst & Young LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995 AND JUNE 30, 1996 AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
IS REFERENCED TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 SEP-30-1996
<EXCHANGE-RATE> 1 1
<CASH> 104,178 1,912,323
<SECURITIES> 0 0
<RECEIVABLES> 374,262 448,963
<ALLOWANCES> 19,950 45,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 484,540 2,807,250
<PP&E> 197,093 615,209
<DEPRECIATION> 68,960 216,319
<TOTAL-ASSETS> 612,673 3,944,937
<CURRENT-LIABILITIES> 1,887,002 3,144,603
<BONDS> 0 0
0 0
3,842 4,059
<COMMON> 7,890 8,370
<OTHER-SE> (1,286,061) (2,558,611)
<TOTAL-LIABILITY-AND-EQUITY> 612,673 3,944,937
<SALES> 547,679 442,875
<TOTAL-REVENUES> 547,679 442,875
<CGS> 93,630 112,451
<TOTAL-COSTS> 93,630 112,451
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (75,570) (49,541)
<INCOME-PRETAX> (2,239,641) (3,448,705)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,239,641) (3,448,705)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,239,641) (3,448,705)
<EPS-PRIMARY> (2.16) (3.22)
<EPS-DILUTED> 0 0
</TABLE>
