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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997.
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM ____________________
TO ____________________.
COMMISSION FILE NUMBER
0-21421
UOL PUBLISHING, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 54-1290319
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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8251 GREENSBORO DRIVE, SUITE 500, MCLEAN, VIRGINIA 22102
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (703) 893-7800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
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<S> <C>
COMMON STOCK, $0.01 PAR VALUE 3,774,648 SHARES
(Class) (Outstanding at November 14, 1997)
</TABLE>
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UOL PUBLISHING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
1996 1997 1996 1997
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Online revenues....................... $ 25,534 $1,650,487 $ 63,034 $ 3,179,580
Product sales revenues ............... -- 715,978 -- 1,540,141
Development revenues.................. 33,237 300,288 54,222 1,488,556
Licensing and support revenues........ 152,357 90,432 325,619 266,724
----------- ---------- ----------- -----------
Net revenues............................... 211,128 2,757,185 442,875 6,475,001
COSTS AND EXPENSES:
Cost of online revenues............... 6,792 230,641 17,525 418,064
Cost of product sales revenues........ -- 112,130 -- 203,023
Cost of development revenues.......... 9,096 24,164 9,674 114,798
Cost of licensing and support
revenues............................ 50,587 26,572 85,252 60,064
Sales and marketing................... 451,970 939,244 1,048,284 2,473,428
Product development................... 465,239 866,578 839,762 3,061,530
General and administrative............ 1,467,632 436,306 1,980,349 1,172,434
Depreciation and amortization......... 48,289 239,666 66,722 485,420
Acquired in-process research,
development and content............. -- -- -- 2,700,000
----------- ---------- ----------- -----------
Total costs and expenses................... 2,499,605 2,875,301 4,047,568 10,688,761
LOSS FROM OPERATIONS....................... (2,288,477) (118,116) (3,604,693) (4,213,760)
Other income (expense):
Other income.......................... -- -- 205,529 --
Interest income (expense)............. (16,153) 46,271 (49,541) 367,096
----------- ---------- ----------- -----------
NET LOSS................................... $(2,304,630) $ (71,845) $(3,448,705) $(3,846,664)
Accrued dividends to preferred
stockholders............................. (127,838) -- (241,915) --
----------- ---------- ----------- -----------
NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS............................. $(2,432,468) $ (71,845) $(3,690,620) $(3,846,664)
=========== ========== =========== ===========
Net loss per share to common
stockholders............................. $ (2.16) $ (0.02) $ (3.34) $ (1.21)
=========== ========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING........ 1,125,152 3,186,167 1,103,899 3,186,167
=========== ========== =========== ===========
</TABLE>
See accompanying notes.
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UOL PUBLISHING, INC.
CONSOLIDATED BALANCE SHEETS
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<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
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(UNAUDITED)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................... $ 15,474,030 $ 5,591,565
Accounts receivable, less allowance of $36,100 at December
31, 1996 and $250,000 at September 30, 1997............... 412,095 2,986,128
Loans receivable from related parties....................... 101,444 105,986
Prepaid expenses and other current assets................... 132,128 583,864
------------ -------------
Total current assets............................................. 16,119,697 9,267,543
Property and equipment, net...................................... 622,958 1,603,890
Capitalized software and courseware development costs, net....... -- 1,763,381
Acquired online publishing rights................................ -- 805,000
Other assets..................................................... 89,995 129,189
Goodwill and other intangible assets, net........................ 656,503 3,110,298
------------ -------------
Total assets..................................................... $ 17,489,153 $ 16,679,301
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued expenses....................... $ 1,259,166 $ 1,465,232
Notes payable -- current portion............................ -- 737,742
Accrued interest............................................ -- 46,196
Deferred revenues........................................... 28,000 426,623
Deferred income taxes....................................... -- 334,600
------------ -------------
Total current liabilities........................................ 1,287,166 3,010,393
Notes payable, less current portion.............................. -- 1,230,880
Stockholders' equity:
Common Stock, $0.01 par value per share; 36,000,000 shares
authorized; 3,186,167 shares issued and outstanding at
December 31, 1996 and September 30, 1997.................. 31,861 31,861
Additional paid-in capital.................................. 27,553,128 27,635,833
Accumulated deficit......................................... (11,383,002) (15,229,666)
------------ -------------
Total stockholders' equity....................................... 16,201,987 12,438,028
------------ -------------
Total liabilities and stockholders' equity....................... $ 17,489,153 $ 16,679,301
============ =============
</TABLE>
See accompanying notes.
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UOL PUBLISHING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1996 1997
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OPERATING ACTIVITIES
Net loss........................................................... $(3,448,705) $(3,846,664)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................. 66,722 519,492
Acquired online publishing rights............................. -- (745,000)
Acquired in-process research, development and content......... -- 2,700,000
Stock option and stock warrant compensation .................. 1,022,052 73,350
Changes in operating assets and liabilities:
Accounts receivable...................................... 44,308 (2,198,461)
Prepaid expenses and other current assets................ (427,989) (418,398)
Other assets............................................. -- (17,125)
Accounts payable and accrued expenses.................... 636,281 (517,818)
Accrued interest......................................... 48,046 41,218
Deferred revenues........................................ (92,051) 398,623
----------- -----------
Net cash used in operating activities.............................. (2,151,336) (4,010,783)
INVESTING ACTIVITIES
Purchases of property and equipment................................ (215,462) (999,641)
Acquired online publishing rights.................................. -- (60,000)
Capitalized software and courseware development costs.............. -- (1,304,595)
Acquisitions of businesses, net of cash acquired .................. -- (3,214,435)
Additions to intangible assets..................................... -- (376,798)
Proceeds from loans receivable from related parties................ 44,966 --
Advances under loans receivable from related parties............... (9,083) --
----------- -----------
Net cash used in investing activities.............................. (179,579) (5,955,469)
FINANCING ACTIVITIES
Proceeds from issuance of Series A convertible Preferred Stock..... 412,800 --
Proceeds from issuance of Series B redeemable convertible Preferred
Stock............................................................ 3,042,671 --
Adjustment of expenses related to the initial public offering...... -- 9,355
Proceeds from loans payable to related parties..................... 430,000 --
Proceeds from notes payable........................................ 300,000 --
Proceeds from short-term debt...................................... 19,410 157,500
Repayments of notes payable and short-term borrowings.............. (65,821) (83,068)
----------- -----------
Net cash provided by financing activities.......................... 4,139,060 83,787
Net increase (decrease) in cash and cash equivalents............... 1,808,145 (9,882,465)
Cash and cash equivalents at the beginning of the period........... 104,178 15,474,030
----------- -----------
Cash and cash equivalents at the end of the period................. $ 1,912,323 $ 5,591,565
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid...................................................... $ 24,517 $ 13,940
=========== ===========
</TABLE>
See accompanying notes.
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UOL PUBLISHING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the interim periods are not necessarily indicative of the
results that may be expected for any future period, including the year ended
December 31, 1997. For further information, refer to the audited financial
statements and footnotes thereto included in the UOL Publishing, Inc. ("UOL" or
the "Company") Annual Report on Form 10-K for the year ended December 31, 1996.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany activity and
transactions are eliminated upon consolidation.
REVENUE RECOGNITION
The Company derives its revenues from four primary sources -- online
revenues, product sales revenues, development revenues and licensing and support
revenues.
The Company recognizes online revenues in accordance with Statement of
Position 91-1, "Software Revenue Recognition" ("SOP 91-1"). Online revenues are
generally derived from two sources, sales of the Company's Virtual Campus
("VCampus(TM)") and online tuition fees. The Company recognizes revenues from a
VCampus sale at the time a VCampus is delivered to the customer. The Company
also sells VCampuses in bulk to resellers. The Company recognizes revenues
pursuant to these arrangements when the VCampuses are delivered to the reseller,
so long as all payments due under the agreement are not contingent, and are to
be received within six months (or within twelve months if the Company receives
adequate collateral). For all VCampus sales, the fee is fixed at the time of
contract and there is no right of return. At that time, substantially all of the
Company's obligations with respect to the associated revenues have been
completed. The Company accrues the costs (which are insignificant) associated
with the continued support of the VCampus at the time the revenues are
recognized. If the costs of the continuing obligations of a VCampus sale are
deemed to be significant, the Company defers a portion of the revenues
associated with the contract. For online tuition fees, revenue is recognized at
the time the student has accessed the selected course and is contractually
obligated to pay for the course or the drop/add period (for academic partners)
has expired.
The Company recognizes revenue from product sales upon delivery of the
product to the customer, provided no significant Company obligations remain. The
Company ships business and accounting software to the academic market through
its subsidiary, Ivy Software, Inc. The Company distributes and supports
computer-based training courses for the data and telecommunications industry
through its subsidiary, Cooper and Associates, Inc. (d/b/a Teletutor). The
software fee is fixed at the time of sale and there is no right of return. The
costs of remaining Company obligations (which are insignificant) are accrued
when the related revenues are recognized.
Development revenues earned under courseware conversion contracts are
recognized using the percentage-of-completion method. For these contracts,
revenues are recognized based on the ratio that total costs incurred to date
bear to the total estimated costs of the contract. Provisions for losses on
contracts are made in the period in which they are determined.
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The Company recognizes licensing and support revenues as services are
performed pursuant to the Company's contracts. The Company typically receives
fixed monthly payments over the term of the contracts.
CAPITALIZED SOFTWARE COSTS
Through March 31, 1997, the Company expensed its software development costs
as incurred because realizability of capitalizing such costs had not been
established. During the second quarter of 1997, the Company began capitalizing
certain software development costs. Capitalization of software costs began upon
the establishment of technological feasibility, which management deemed to have
occurred upon the completion of a working model of the Company's VCampus
product. The establishment of technological feasibility and the ongoing
assessment of recoverability of capitalized software costs requires considerable
judgment by management with respect to certain external factors, including, but
not limited to, technological feasibility, anticipated future gross revenues,
estimated economic life and changes in software and hardware technology.
Amortization of such costs is based on the greater of (a) the ratio of current
gross revenues to the sum of current and anticipated gross revenues, or (b) the
straight-line method over the remaining economic life of the VCampus, typically
five years . It is possible that those estimates of future gross revenues, the
remaining economic life of the products or both may be reduced as a result of
future events.
COURSEWARE DEVELOPMENT COSTS
Through March 31, 1997, the Company expensed its courseware development
costs as incurred because realizability of capitalizing such costs had not been
established. During the second quarter of 1997, the Company began capitalizing
certain courseware development costs. Capitalization of courseware development
costs began upon the establishment of technological feasibility, which
management deemed to have occurred upon the completion of a working model of the
relevant courseware. The establishment of technological feasibility and the
ongoing assessment of recoverability of capitalized courseware development costs
requires considerable judgment by management with respect to certain external
factors, including, but not limited to, technological feasibility, anticipated
future gross revenues, estimated economic life and changes in software and
hardware technology. Amortization of such costs is based on the greater of (a)
the ratio of current gross revenues to the sum of current and anticipated gross
revenues, or (b) the straight-line method over the remaining economic life of
the product, typically two to four years . It is possible that those estimates
of future gross revenues, the remaining economic life of the products or both
may be reduced as a result of future events.
ACQUIRED ONLINE PUBLISHING RIGHTS
During 1997, the Company has acquired rights to publish certain courseware
in an online format. In most cases, this courseware, at the time of licensing to
the Company, was in a non-online format, i.e. CD-ROM, diskette, or printed
formats. The Company capitalizes the costs to acquire this content. The Company
amortizes acquired online publishing rights based on the greater of (a) the
ratio of current gross revenues to the sum of current and anticipated gross
revenues, or (b) the straight-line method over the remaining economic life of
the product, typically two to four years. Amortization begins when the online
course becomes available for sale.
IMPAIRMENT OF LONG-LIVED ASSETS
At each balance sheet date, management determines whether any property and
equipment or any other assets have been impaired based on the criteria
established in SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed of." The Company made no adjustments to the
carrying values of the assets during the years ended December 31, 1995 or 1996
or during the period ended September 30, 1997.
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NON-MONETARY TRANSACTIONS
During 1997, the Company entered into several transactions with customers
in which the customer exchanged a non-monetary asset (the online license rights
to certain courseware content) as payment (or partial payment) for the purchase
of a VCampus. The Company recognized revenues from the sale of the VCampus based
on the current sales price for the VCampus. Management determined that, in the
majority of these transactions, the value of the content rights acquired in
these transactions were equal to or greater than the sales price of the VCampus,
based on several factors, including; the historical revenues that the content
generated in non-online formats, the alternative cash payment for such rights as
indicated in the contract, projected online revenues from the content; and cash
purchase prices of other similar courseware content. If the Company determines
that the fair value of the acquired rights is less than the selling price of the
VCampus, then the Company requires the customer to pay the difference.
CONCENTRATION OF CREDIT RISK
The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. The Company maintains
reserves for credit losses, and through September 30, 1997 such losses have been
within management's expectations.
COSTS OF REVENUES
Costs of online revenues include software development costs involved in
configuring the VCampus model to specific parameters requested by the customer.
Additionally, costs related to the amortization of capitalized software and
courseware development costs are included as a direct cost of online revenues.
Costs of online revenues also include royalties to content providers, the
salaries of the employees who maintain the Company's Web servers and other costs
associated with maintaining the servers -- electricity, air conditioning,
maintenance, etc.
Costs of product sales revenue consist of the production and shipping costs
to create and distribute the diskettes and other education material (manuals,
etc.).
Costs of development revenues include the salary and other related
personnel costs for the employees who develop online courses that are
proprietary in nature to a specific customer.
Costs of licensing and support revenues consist of the personnel costs
associated with the maintenance of the monthly license fee support.
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.
Additionally, royalties will become due and payable by the Company upon the sale
of those courses in which the Company acquired the online content rights.
Royalties due could be as great as 50% of the tuition related to that course. No
significant royalty obligations have been incurred to date.
NOTE C -- ACQUISITIONS
COGNITIVE TRAINING ASSOCIATES, INC.
In August 1996, the Company acquired by merger substantially all of the
assets and liabilities (with the exception of a building, vehicle, certain
equipment, and certain notes payable) of Cognitive Training Associates, Inc., a
Texas corporation ("CTA"), for 42,487 shares of the Company's Common Stock. In
conjunction with the acquisition, the Company has recorded goodwill in the
amount of $579,312 and other intangible assets (contracts and underlying
courseware) in the amount of $200,000. This transaction was accounted for as a
purchase, and accordingly the operating results of CTA are included in the
Company's financial statements since the date of acquisition.
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IVY SOFTWARE, INC.
In March 1997, the Company acquired Ivy Software, Inc. ("Ivy"), a Virginia
corporation that develops and distributes business and accounting software for
the academic education market, for $314,000 in cash and potential future
payments not to exceed approximately $862,000, which are based upon integration
of operations, conversion of software and operating results. In connection with
this transaction, the President and sole shareholder of Ivy entered into a
three-year consulting agreement with the Company. This transaction was accounted
for as a purchase, and accordingly the operating results of Ivy are included in
the Company's financial statements since the date of the acquisition.
COOPER & ASSOCIATES, INC. (d.b.a. TELETUTOR)
In April 1997, the Company acquired Cooper & Associates, Inc., d.b.a.
Teletutor ("Teletutor"), an Illinois corporation that develops, distributes and
supports computer-based training courses for the data and telecommunications
industry. The terms of the transaction included a $3.0 million cash payment at
closing and $2.0 million to be paid in cash ratably ($666,667) on the first,
second and third anniversary dates of the acquisition. All of the executive
officers of Teletutor have entered into employment contracts with UOL. This
transaction was accounted for as a purchase, and accordingly the operating
results of Teletutor are included in the Company's financial statements since
the date of the acquisition. In conjunction with this acquisition, the Company
allocated the excess of the purchase price over the fair market value of the
acquired net assets as follows (i) $2,017,182 to identifiable intangible assets,
and (ii) $2,700,000 to acquired in-process research, development and content.
HTR, INC.
In October 1997, the Company acquired HTR, Inc. ("HTR"), a company with
locations throughout the United States that is primarily engaged in the business
of providing technical training, publishing and consulting services for the
information technology industry. UOL acquired HTR for Common Stock, warrants and
options totaling 620,000 shares in exchange for all of the outstanding equity
securities of HTR. In addition, UOL will pay the former HTR stockholders
$600,000 in a combination of cash and short-term notes and assume approximately
$3,500,000 of HTR debt, including approximately $3,000,000 payable to Sirrom
Capital Corporation ("Sirrom"). The executive officers of HTR will receive
bonuses granted in conjunction with the signing of three-year employment
agreements. In addition, UOL will create a stock option pool of 180,000 shares
of Common Stock and an incentive bonus pool with a potential payout of up to
approximately $3,300,000 for three years, contingent upon the financial
performance of HTR. This transaction was accounted for as a purchase, and
accordingly the operating results of HTR will be included in the Company's
financial statements as of the effective date of the acquisition.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this Form 10-Q that are not descriptions of historical facts
are forward-looking statements that are subject to risks and uncertainties.
Actual results could differ materially from those currently anticipated due to a
number of factors, including those set forth herein and in the Company's other
SEC filings, and including, in particular, risks relating to uncertainties
relating to dependence on strategic partners and third party relationships,
management of rapid growth, dependence on online distribution, the risks and the
Company's payment obligations relating to acquisitions, the availability of
sufficient capital to finance the Company's business plan on terms satisfactory
to the Company, security risks, government regulations, regulatory filings and
competition.
OVERVIEW
The Company believes that it is a leading publisher of high quality
interactive and on-demand courseware for the corporate training and education
market. The Company offers its online courseware primarily through its
proprietary virtual campus product, or VCampus. The VCampus facilitates
development, management and administration of training and education over the
Internet and intranets. Through its HTR, Teletutor and
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Ivy subsidiaries, the Company also offers courseware through more traditional
media, including on-site and classroom training, and diskette, CD-ROM and
printed formats. The Company was formed in 1984 as IMSATT Corporation, a
multimedia research and development company. In 1991, the Company acquired from
Control Data certain rights to resell the CYBIS online courseware, which
consisted primarily of courses in language arts, mathematics, social studies,
science, business and a variety of technical subjects. In 1993, the Company
modified its business focus to capitalize on market opportunities for online
education resulting from technological advances relating to the Internet.
Subsequently, the Company raised additional financing and focused its
development efforts on migrating its technology to the World Wide Web ("Web") in
preparation for the launch of its first Web-based 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 businesses and academic institutions and to
develop and market its online products and services. Prior to the fourth quarter
of 1996, the Company generated a substantial majority of its revenues from the
licensing and maintenance of CYBIS courseware under the Control Data
subcontracts. However, the Company believes that online revenues and product
sales will be the primary sources of its revenues in the future.
RESULTS OF OPERATIONS
(i) THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
Net Revenues
Net revenues increased from $211,128 for the three months ended September
30, 1996 to $2,757,185 for the three months ended September 30, 1997. Online
revenues increased to $1,650,487 (60 % of net revenues) for the three months
ended September 30, 1997 from to $25,534 (12% of net revenues) for the three
months ended September 30, 1996. Online revenues are generated primarily from
the sale of online licenses to the Company's VCampus product and online tuition
derived from corporate and academic partners. In 1997, the Company began to
market its on-line learning environment, the VCampus. Sales of VCampuses during
1997 were the primary reason for the increase in online revenues. During the
third quarter, the Company recorded approximately $240,000 of revenue in
connection with the sale of VCampuses to one of its business partners, HTR, Inc.
("HTR"). The Company announced that it acquired HTR in a transaction accounted
for as a purchase, on October 31, 1997 (see "Liquidity and Capital Resources").
The receivable associated with the HTR transaction during the third quarter of
1997 will be adjusted as part of the Company's purchase accounting entry in the
fourth quarter. In the third quarter of 1997, the Company entered into a
reseller agreement with a European business partner to distribute the Company's
VCampuses in Europe. The terms of the transaction included the purchase of ten
VCampuses for $500,000. The reseller is obligated to pay the Company in
quarterly installments during the next twelve months. The contract also contains
a provision whereby if the reseller does not meet its financial obligations
under the contract, the Company is entitled to the print and online rights to
the majority of the content owned by the reseller.
Included in the Company's third quarter online revenues are approximately
$465,000 of revenues associated with sales of VCampuses involving non-monetary
transactions (see Note B).
Product sales revenues were $715,978 (26 % of net revenues) for the three
months ended September 30, 1997. Product sales revenues have historically been
derived from the sale of computer based training ("CBT") courses that are
delivered through traditional CBT format (e.g. CD-ROM). Product sales revenues
are generated by sales of the courseware acquired from both Ivy Software and
Teletutor (see Note C). Since both of these acquisitions occurred during 1997,
and were accounted for using purchase accounting, the Company had no product
sale revenues in 1996. Because of these acquisitions, and the recent acquisition
of HTR (which also derives revenues from product sales), the Company expects
product sales revenues to increase in the near-term.
Development revenues were $300,288 (11% of net revenues) for the three
months ended September 30, 1997 compared to $33,237 (16% of net revenues) for
the prior year's quarter. Development revenues are derived from courseware
conversion contracts between the Company and its customers.
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Licensing and support revenues were $90,432 (3% of net revenues) for the
three months ended September 30, 1997 compared to $152,357 (72% of net revenues)
for the same quarter in 1996. Licensing and support revenues consist primarily
of revenue derived from the Company's Control Data subcontracts. This source of
revenue is expected to decline on a year-to-year basis due to budgetary
constraints of government agencies and the continued migration of Control Data
customers away from mainframe applications.
Cost of Revenues
Total cost of revenues increased from $66,475 for the three months ended
September 30, 1996 to $393,507 for the three months ended September 30, 1997.
The increase in absolute dollars was primarily due to the inclusion of the
results of operations of CTA, Ivy and Teletutor in the 1997 period, and certain
third party royalties payable under contracts entered into during the third
quarter of 1997. Cost of revenues primarily consists of certain personnel costs
directly related to certain CTA development contracts and mainframe-based
courseware support, third party royalties, and amortization of capitalized
software and courseware development costs, as well as communication and
personnel costs related to online revenues. The Company believes that in the
future, total cost of revenues will increase in absolute dollars and as a
percentage of revenues due to the third party royalties payable to content
providers with respect to online tuition fees, which are expected to increase in
the aggregate in the future.
Operating Expenses
Sales and Marketing. Sales and marketing expense increased from $451,970
for the three months ended September 30, 1996 to $939,244 for the three months
ended September 30, 1997. Sales and marketing expense consisted primarily of
costs related to personnel, sales commissions, travel, market research,
advertising and marketing materials. The increase was primarily due to increased
staffing and marketing campaigns, and the inclusion of the results of operations
of CTA, Ivy and Teletutor. Specifically, during the latter part of 1996 and
throughout 1997, 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 continues to
expand its sales and marketing efforts.
Product Development. Product development expense increased from $465,239
for the three months ended September 30, 1996 to $866,578 for the three months
ended September 30, 1997. Product development expense consisted primarily of
certain costs associated with the design, programming, testing, documenting and
support of the Company's new and existing courseware and software. The increase
was primarily attributable to the overall staffing and other cost increases
aimed at maintaining and enhancing the Company's courseware library and VCampus
software. The Company is incurring significant expenses to convert traditional
educational and training content to online courseware. Contributing to the
increase in product development costs in the third quarter of 1997 was the
inclusion of the results of CTA and Teletutor. Product development costs for the
third quarter of 1997 are net of $866,208 of costs capitalized in accordance
with the Company's policy. No product development costs were capitalized during
the third quarter of 1996. The Company expects that product development expense
will substantially increase in the future as the Company continues to expand its
courseware library.
General and Administrative. General and administrative expense decreased
from $1,467,632 for the three months ended September 30, 1996 to $436,306 for
the three months ended September 30, 1997. General and administrative costs
during the third quarter of 1996 included stock compensation expense of
$1,022,052, which was the amount by which the fair market value of the Common
Stock exceeded the exercise price of certain options as of the date the
Company's Board of Directors granted such options or extended their exercise
period, and certain one-time relocation, recruiting and acquisition (related to
CTA) costs. General and administrative expense consisted primarily of personnel
costs, facilities and related costs, as well as legal, accounting and other
costs. General and administrative expense (excluding the 1996 compensation
expense and one-time relocation, recruiting and acquisition costs) increased
primarily due to increases in all of the above costs to support the Company's
growth and additional operations due to acquisitions, and generally to cover
increased expenses associated with operating as a public company.
10
<PAGE> 11
Depreciation and Amortization. Depreciation and amortization expense
increased from $48,289 for the three months ended September 30, 1996 to $239,666
for the three months ended September 30, 1997. In August 1996, the Company
recorded goodwill and other intangibles in connection with its acquisition of
CTA. in the amount of approximately $705,000, adjusted to $779,312 in the second
quarter of 1997. The Company is amortizing such goodwill and other intangibles
over 10 and three years, respectively. In March 1997, the Company recorded
approximately $300,000, subsequently adjusted to $500,000, in goodwill in
connection with the acquisition of Ivy. The Company is amortizing such goodwill
over 10 years. In April 1997, the Company recorded approximately $2,017,000 in
intangible assets in connection with the acquisition of Teletutor. The Company
is amortizing such intangibles over periods of between five and ten years. The
increase in depreciation and amortization is also attributable to increased
depreciation expense of computer equipment and other assets purchased by the
Company to support its product development, technical operations and personnel
needs. Amortization expense is expected to increase commencing in the fourth
quarter of 1997 due to the significant intangible assets acquired in the HTR
acquisition.
Interest and Other Income (Expense). Interest expense for the three months
ended September 30, 1996 was $16,153, while interest income for the three months
ended September 30, 1997 was $46,271. Interest income is derived primarily from
investing funds raised in the Company's private and public securities offerings
during 1996, and has decreased from Quarter 1 and Quarter 2 of 1997 due to the
negative cash flow of the Company, and the use of cash for acquisitions and
capital expenditures.
(ii) NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
Net Revenues
Net revenues increased from $442,875 for the nine months ended September
30, 1996 to $6,475,001 for the nine months ended September 30, 1997. Online
revenues increased to $3,179,580 (49 % of net revenues) for the nine months
ended September 30, 1997 from $63,034 (14% of net revenues) for the nine months
ended September 30, 1996. Online revenues are generated primarily from the sale
of online licenses to the Company's VCampus product offerings and online tuition
derived from academic and corporate partners. In 1997, the Company began to
market its on-line learning environment, the VCampus. Sales of VCampuses during
the first nine months of 1997 were the primary reason for the increase in online
revenues. Included in the Company's online revenues for the nine months ended
September 1997 are approximately $745,000 of revenues associated with the sales
of VCampuses involving non-monetary transactions (see Note B).
Product sales revenues were $1,540,141 (24% of net revenues) for the nine
months ended September 30, 1997. Product sales revenues are derived from the
sales of computer based training ("CBT") courses that are delivered through
traditional CBT format (e.g. CD-ROM). Product sales revenues have historically
been generated by sales of the courseware acquired from both Ivy Software and
Teletutor (see Note C).
Development revenues were $1,488,556 (23% of net revenues) for the nine
months ended September 30, 1997 compared to $54,222 (12% of net revenues) for
the prior year period. Development and other revenues in 1997 included $560,000
recorded pursuant to a development funding agreement with InternetU entered into
in September 1996, as amended. Under this agreement, InternetU provides the
Company funding for the development of the Company's Autodesk VCampus in
exchange for a share of the net revenues derived from the operation of such
campus, and warrants to purchase Common Stock of the Company. As of September
30, 1997, Internet U owns 12,416 shares of common stock of the Company, and has
warrants to purchase 38,239 shares of common stock. Development revenues for the
nine months ended September 30, 1997 also include payments from certain of the
Company's partners for the Company's development of online courses.
Licensing and support revenues were $266,724 (4% of net revenues) for the
nine months ended September 30, 1997 compared to $325,619 (74% of net revenues)
for the same period in 1996. Licensing and support revenues consist primarily of
revenue derived from the Company's Control Data subcontracts. This source of
revenue is expected to decline on a year-to-year basis due to budgetary
constraints of government agencies and the continued migration of Control Data
customers away from mainframe applications.
11
<PAGE> 12
Cost of Revenues
Total cost of revenues increased from $112,451 for the nine months ended
September 30, 1996 to $795,949 for the nine months ended September 30, 1997. The
increase in absolute dollars was primarily due to the inclusion of the results
of operations of CTA, Ivy, and Teletutor in the 1997 period, and certain third
party royalties payable on contracts entered into in 1997.
Operating Expenses
Sales and Marketing. Sales and marketing expense increased from $1,048,284
for the nine months ended September 30, 1996 to $2,473,428 for the nine months
ended September 30, 1997. The increase was primarily due to increased staffing
and marketing campaigns, and the inclusion of the results of operations of CTA,
Ivy and Teletutor. Specifically, during the latter part of 1996 and throughout
1997, the Company expanded its sales and marketing organization in order to
build an infrastructure to support the anticipated revenue opportunities for
online courseware.
Product Development. Product development expense increased from $839,762
for the nine months ended September 30, 1996 to $3,061,530 for the nine months
ended September 30, 1997. The increase was primarily attributable to the overall
staffing and other cost increases aimed at maintaining and enhancing the
Company's courseware library and VCampus software. The Company is incurring
significant expenses to convert traditional educational and training content to
courseware that can be delivered online over the Web. Contributing to the
increase in product development costs in 1997 was the inclusion of the results
of CTA and Teletutor. Product development costs for the nine months ended
September 30, 1997 are net of $1,304,594 of costs capitalized in accordance with
the Company's policy. No product development costs were capitalized during the
nine months ended September 30, 1996.
General and Administrative. General and administrative expense decreased
from $1,980,349 for the nine months ended September 30, 1996 to $1,172,434 for
the nine months ended September 30, 1997. General and administrative costs in
1996 included compensation expense of $1,022,052, the amount by which the fair
market value of the Common Stock exceeded the exercise price of certain options
as of the date the Company's board of directors granted such options or extended
their exercise period. General and administrative expense consisted primarily of
personnel costs, facilities and related costs, as well as legal, accounting and
other costs. General and administrative expense (excluding the 1996 compensation
expense) increased primarily due to increases in all of the above costs to
support the Company's growth and additional operations due to acquisitions, and
generally to cover increased expenses associated with operating as a public
company.
Depreciation and Amortization. Depreciation and amortization expense
increased from $66,722 for the nine months ended September 30, 1996 to $485,420
for the nine months ended September 30, 1997. The increase in depreciation and
amortization is attributable to increased amortization associated with the CTA,
Ivy and Teletutor acquisitions, and to increased depreciation expense of
computer equipment and other assets purchased by the Company to support its
product development, technical operations and personnel needs.
Acquired In-Process Research, Development and Content. During the second
quarter of 1997, the Company recorded a nonrecurring, non-cash $2,700,000
expense which was deemed to be the fair market value of acquired in process
research, development and content expense, in connection with the acquisition of
Teletutor.
Interest and Other Income (Expense). Interest expense for the nine months
ended September 30, 1996 was $49,541, while interest income for the nine months
ended September 30, 1997 was $367,096. Interest income is derived primarily from
investing funds raised in the Company's private and public securities offerings
during 1996. Other income of $205,529 for the nine months ended September 30,
1996 consists of a $119,276 settlement with a former vendor and $86,253 of
income recognized in connection with the release from a contract under which the
Company had received development funding.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had $5,591,565 in cash and cash
equivalents. Since its inception, the Company has financed its operating cash
flow needs primarily through offerings of equity securities and, to a lesser
extent, borrowings, primarily from stockholders. Cash utilized in operating
activities was $4,010,783 for the nine months ended September 30, 1997 and
$2,151,336 for the nine months ended September 30, 1996. Use of cash was
primarily attributable to the net loss recorded during the nine months ended
September 30, 1997, two advance payments of $300,000 each in March and May 1997
to a joint marketing partner for development of online courseware, acquisition
of online publishing rights and an increase in the level of accounts receivable
at September 30, 1997 due to increased revenues. The Company normally requires
its customers to pay for its products or services within 30 to 60 days of
delivery. On occasion, the Company will offer its customers extended payment
terms over a period not to exceed one year. The Company's accounts receivable
balance related to transactions entered into with HTR during the third quarter
of 1997 will be eliminated from the Company's balance sheet as part of the
acquisition.
The use of cash for investing activities was primarily attributable to cash
payments of $3,300,000 in March and April 1997 in connection with the
acquisitions of Teletutor and Ivy, purchases of equipment, software and
courseware development costs that were capitalized, and $60,000 for the
acquisition of online publishing rights for certain content the Company plans to
market. Cash utilized in investing activities was $5,955,469 for the nine months
ended September 30, 1997 and $179,579 for the nine months ended September 30,
1996. Cash provided by financing activities was $83,787 in the 1997 period and
$4,139,060 in the 1996 period.
The Company expects negative cash flow from operations to continue for at
least the next six to nine months, as it continues product development and
expansion of its sales and marketing and administrative capabilities. The
Company believes that existing cash balances and cash generated from anticipated
revenues, together with existing sources of liquidity, will satisfy its
anticipated working capital and capital equipment requirements for at least one
year, although without additional financing (which may not be available on
favorable terms or at all) the Company will not be able to expand as rapidly as
it would like to. Depending on its rate of growth, cash flow and profitability,
if any, the Company may require additional equity or debt financings to meet its
working capital requirements or capital expenditure needs in the future or to
fund and provide capital for its acquisitions. The Company's future capital
requirements will depend on many factors, including, but not limited to,
acceptance of and demand for its products and services, the types of
arrangements that the Company may enter into with customers and resellers, and
the extent to which the Company invests in new technology and research and
development projects, and uses cash for additional acquisitions.
The Company and its bank lender have entered into a secured lending
arrangement, which expires in November 1999, in the aggregate principal amount
of $100,000. 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. As of September 30, 1997, the Company had no borrowings
against this arrangement.
During 1996, Teletutor entered into a secured lending arrangement, which
expires in May 1998, with its bank in the aggregate principal amount of
$150,000. Amounts borrowed under this arrangement bear interest at the bank's
prime rate plus 2% and are collateralized by all business assets of Teletutor.
This line-of-credit facility requires monthly interest payments. As of September
30, 1997, the balance outstanding under this line-of-credit was $150,000.
In October 1997, the Company acquired HTR, a company with locations
throughout the United States that is primarily engaged in the business of
providing technical training, publishing and consulting services for the
information technology industry. UOL acquired HTR for Common Stock, warrants and
options totaling 620,000 shares in exchange for all of the outstanding equity
securities of HTR. In addition, UOL will pay the former HTR stockholders
$600,000 in a combination of cash and short-term notes and assume approximately
$3,500,000 of HTR debt, including approximately $3,000,000 payable to Sirrom.
The executive officers of HTR will receive bonuses granted in conjunction with
the signing of three-year employment agreements. In addition, UOL will create a
stock option pool of 180,000 shares of Common Stock and an incentive bonus pool
13
<PAGE> 14
with a potential payout of up to approximately $3,300,000 over three years,
contingent upon the financial performance of HTR. This transaction was accounted
for as a purchase, and accordingly the operating results of HTR will be included
in the Company's financial statements as of the effective date of the
acquisition.
In September 1996, HTR entered into a financing arrangement with Commerce
Funding Corporation ("CFC"), pursuant to which HTR sells all of its accounts
receivable to CFC. In exchange for each account, CFC advances 50% of the value
of the account to HTR with simple interest of 20% charged on the advanced
amount. CFC holds back the remaining 50% of each account until the obligor on
the account pays the amount. The Company is currently evaluating alternative
receivables financing arrangements to replace the existing CFC arrangement.
HTR entered a secured loan agreement with Sirrom in October 1996, as
amended in October 1997. The principal amount of the loan is $3,000,000, bearing
interest at 10% per annum. Monthly payments of interest only are required until
October 1998, at which time the entire outstanding principal balance, plus
accrued interest and a 3.5% per annum interest fee is due and payable. In
connection with the loan, HTR also granted Sirrom a warrant which was exercised
in connection with the HTR Acquisition for an aggregate of approximately 32,700
shares of UOL Common Stock.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share, which is required to be adopted in the December 31,
1997 financial statements. At that time, the Company will be required to change
the method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of SFAS 128 on
the calculation of primary and fully diluted earnings per share for the interim
periods presented herein, is not expected to be material.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Comprehensive Income, which is required to be adopted in the year ending
December 31, 1998. SFAS 130 requires that an enterprise (a) classify items of
other comprehensive income by their nature in the financial statements and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the Statement of
Stockholders Equity. The Company will be required to restate earlier periods for
comparative purposes.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which is
required to be adopted in the year ending December 31, 1998. SFAS 131 requires
changes in the way public companies report segment information in annual
financial statements and also requires those companies to report selected
segment information in interim financial reports to stockholders. SFAS 131
superedes FAS 14, Financial Reporting for Segments of a Business Enterprise. The
disclosure for segment information on the financial statements is not expected
to be material.
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(a) No modifications.
(b) No limitations or qualifications.
(c) From June 30, 1997 to September 30, 1997, the Company has issued the
following unregistered securities:
1. Options to purchase an aggregate of 122,000 shares of Common Stock
to employees of the Company.
The sales of the above securities were deemed to be exempt from
registration under the Act in reliance upon section 4(2) of the Securities Act
of 1933, as amended (the "Act"), or Regulation D promulgated thereunder as
transactions by an issuer not involving a public offering. Recipients of the
securities in each such transaction represented their intentions to acquire such
securities for investment only and not with a view to or
14
<PAGE> 15
for sale in connection with any distribution thereof and appropriate legends
were affixed to the instruments issued in such transactions. All recipients had
adequate access to information about the Company.
ITEM 6. EXHIBITS
(a) Exhibits
11.1 Statement Re: Computation of Per Share Loss
27.1 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only and not
filed.
(b) Reports on Form 8-K
On July 14, 1997, the Company filed an amendment to its May 14, 1997
Current Report of Form 8-K. The amendment included the financial information
required by Item 7 of Form 8-K with respect to the acquisition of Teletutor.
15
<PAGE> 16
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY EACH OF THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
UOL PUBLISHING, INC.
By: /s/ NARASIMHAN P. KANNAN
------------------------------------
NARASIMHAN P. KANNAN
CHIEF EXECUTIVE OFFICER
By: /s/ LEONARD P. KURTZMAN
------------------------------------
LEONARD P. KURTZMAN
VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
Date: November 14, 1997
16
<PAGE> 1
EXHIBIT 11.1
UOL PUBLISHING, INC.
STATEMENT RE: COMPUTATION OF PER SHARE LOSS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss per share:
Weighted average shares of Common Stock
outstanding............................. 817,291 3,186,167 796,038 3,186,167
Shares of Series A and Series B Preferred
Stock and Preferred Stock Dividends
issued during the 12-month period prior
to the initial filing of the S-1 (using
the treasury stock method).............. 187,787 -- 187,787 --
Shares of Common Stock issued during the
12-month period prior to the initial
filing of the S-1 (using the treasury
stock method)........................... 2,098 -- 2,098 --
Common equivalent shares from options,
warrants and convertible debt issued
during the 12-month period prior to the
initial filing of the S-1 (using the
treasury stock method).................. 117,976 -- 117,976 --
----------- ----------- ----------- -----------
Total................................ 1,125,152 3,186,167 1,103,899 3,186,167
----------- ----------- ----------- -----------
Net loss.................................. $(2,304,630) $ (71,845) $(3,448,705) $(3,846,664)
Accrued dividends to preferred
stockholders............................ (127,838) -- (241,915) --
----------- ----------- ----------- -----------
Net loss available to common
stockholders............................ $(2,432,468) $ (71,845) $(3,690,620) $(3,846,664)
Net loss per share to common
stockholders............................ $ (2.16) $ (.02) $ (3.34) $ (1.21)
=========== =========== =========== ===========
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,591,565
<SECURITIES> 0
<RECEIVABLES> 3,236,128
<ALLOWANCES> 250,000
<INVENTORY> 0
<CURRENT-ASSETS> 9,267,543
<PP&E> 2,229,606
<DEPRECIATION> 625,716
<TOTAL-ASSETS> 16,679,301
<CURRENT-LIABILITIES> 3,010,393
<BONDS> 0
0
0
<COMMON> 31,861
<OTHER-SE> 12,406,167
<TOTAL-LIABILITY-AND-EQUITY> 16,679,301
<SALES> 6,475,001
<TOTAL-REVENUES> 6,475,001
<CGS> 795,949
<TOTAL-COSTS> 795,949
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,846,664)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,846,664)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,846,664)
<EPS-PRIMARY> (1.21)
<EPS-DILUTED> (1.21)
</TABLE>
