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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION 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)
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<S> <C>
DELAWARE 54-1290319
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8251 GREENSBORO DRIVE 22102
SUITE 500 (ZIP CODE)
MCLEAN, VIRGINIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 703-893-7800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK ($0.01 PAR VALUE PER SHARE)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant based upon the closing price of the Common Stock on March 24,
1999, on the NASDAQ National Market System was approximately $11,041,105 as of
such date. Shares of Common Stock held by each executive officer and director
and by each person who owns 10% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status may not be conclusive for other purposes.
As of March 24, 1999, the registrant had outstanding 4,276,668 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the 1999 Annual Meeting of
Stockholders are incorporated herein by reference into Part III.
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Statements in this Annual Report on Form 10-K that are not descriptions of
historical facts are forward-looking statements that are subject to risks and
uncertainties. Actual events or 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:
limited operating history in targeted markets and losses and negative operating
cash flows; future capital needs and uncertainty of additional funding;
difficulties in managing rapid growth; competition; developing market, rapid
technological changes and new products; dependence on online distribution;
substantial dependence on courseware and third party courseware providers;
substantial dependence on third party technology; and limited marketing
experience and substantial dependence on third party distribution. All
references to the "Company" herein shall mean UOL Publishing, Inc. and its
subsidiaries: Cognitive Training Associates, Inc., a Texas corporation ("CTA");
Cooper & Associates, Inc., an Illinois corporation, d/b/a Teletutor
("Teletutor"); HTR, Inc., a Delaware corporation ("HTR"); and UOL Leasing, Inc.,
a Delaware corporation.
PART I
ITEM 1. BUSINESS.
UOL Publishing, Inc. (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(TM), an online courseware delivery system and environment that
facilitates development, management and administration of training and education
over the Internet and intranets. Through its Teletutor and HTR 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
introduced its first World Wide Web (the "Web") demonstration course in November
1995, and its first revenue-generating Web-based course in Spring 1996. The
Company intends to leverage the courseware and the customer base of its
subsidiaries, as well as the courseware and customers provided by future
partnerships, to facilitate the development of its online training and education
business.
The corporate training marketplace is rapidly evolving to meet the
increasing demand for worker training and retraining in a cost-effective and
convenient manner. Online delivery technology significantly reduces training
costs, including those associated with students' time away from work, and
permits resources to be concentrated directly on the educational process. The
Company is initially targeting customers in the telecommunications, healthcare,
utilities, information technology and financial services industries, as well as
academic institutions, all of which the Company believes have relatively large
training and education budgets, significant training needs and receptiveness to
new technology. The Company's existing courseware library includes over 1,000
online courses, of which approximately 200 are available for general
distribution and consumer access. These courses are in what the Company believes
to be high-demand subject matter areas such as information technology,
telecommunications, compliance/OSHA, business, management, and finance. The
Company converts courseware that it believes are proven and popular in diverse
subject matter areas to the Company's interactive online format. Through
December 31, 1998, the Company had delivered over 110,000 course enrollments
through its corporate and academic partnerships.
The Company's objectives are to be the leading publisher of online
courseware for the corporate training and education market, and to make its
VCampus(TM) the global standard for online delivery of corporate training and
education courseware. See "-- Products and Services -- VCampus(TM)." The
Company's strategy to achieve these objectives includes publishing high-quality
courseware (including courseware certified by independent academic
institutions), expanding its customer base, especially those which benefit from
the Company's Web-based solution, upgrading its existing technologies to
maintain its position as a leader in technology-based corporate training, and
developing brand recognition for its products and services. Although the Company
continues to provide products and services through delivery methods other than
online delivery, in December 1998 the Company announced plans to divest its
non-online businesses in order to focus its efforts on its core online training
business. The Company believes this move is consistent with its strategy of
moving content and customers to an online training platform from the traditional
classroom and Computer
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Based Training ("CBT") sold through its non-online businesses. In furtherance of
this divestiture strategy, in September 1998 the Company sold Ivy Software, Inc.
("Ivy") while retaining the rights to sell and distribute the online versions of
the Ivy courseware. In December 1998, the Company sold HTR's consulting
division.
INDUSTRY BACKGROUND
Corporate training is a rapidly growing segment of the training and
education market, primarily as a result of the demand for increasing skills
required by employers. As the United States economy continues to shift from a
focus on industry to one focused on information and knowledge, employers seeking
to compete successfully in the marketplace find it necessary to invest more in
the training and education of their employees. According to a survey completed
in 1998 by Lakewood Research of Minneapolis, organizations in the United States
with more than 100 employees spent approximately $60.7 billion to provide some
type of formal training and education to approximately 54 million of their
employees.
Use of Technology in Training and Education
Historically, corporations, training organizations and academic
institutions have provided education through traditional classroom training.
Companies choosing to provide this type of training in-house must devote
managerial and financial resources towards training facilities, instructors,
materials and curriculum management. Companies often choose to use third parties
to provide training services to avoid some of the management and facility issues
but must pay tuition and materials fees. Both in-house and outsourced
traditional classroom approaches result in lost productivity and travel-related
costs while the employee attends and travels to and from the training. Distance
learning methods (satellite-based delivery, mail exchanges, voice mail, CD-ROMs,
diskettes) address space limitations by allowing students to take courses at
remote locations. Web-based delivery, due to its scalability, enables
corporations, training organizations and academic institutions to extend their
reach more cost-effectively than other distance learning methods. In addition,
Web-based delivery offers the ability to rapidly and cost-effectively update
course materials and can provide students a significant degree of time and place
independence.
With the advent of the Web, the Company has benefited from the way its
courseware can be managed, delivered and consumed. The use of such technologies
can lower publishing costs and could significantly increase demand. Online
technology makes it possible to combine the best elements of online connectivity
between students and teachers and the interactivity of a CD-ROM. The Company
believes that its online delivery of courseware combines convenience,
affordability, self-pacing, standardized curricula, individualized tailoring of
courses, immediate performance measurement and a high degree of student-teacher
interaction.
Online Technologies and The 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. Growth in the number of Internet users has been fueled by a number
of factors, including:
- the existing and increasing number of personal computers ("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.
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The Company believes that the emergence of online technologies, such as those
embodied in the Internet and the Web, are economical and effective methods for
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 working adults and other part-time
students.
The use of the Company's products and services will depend in large part
upon the development of an infrastructure for providing online access and
services. Because global commerce and online exchange of information on the
Internet and other similar open wide area networks are new and evolving, it is
difficult to predict with any assurance whether such networks will prove to be
viable commercial marketplaces. In particular, such networks are an unproven
medium for education. In the event such networks fail to become a viable
education medium, the Company may not be able to overcome the costs and
difficulties associated with adapting to alternative media, if and when they
become available. If such networks do not become viable commercial marketplaces
or do not develop as a viable medium for education, the Company would be
materially adversely affected. Additionally, such networks have experienced, and
are expected to continue to experience, significant growth in the number of
users and amount of traffic. The infrastructures of such networks may not be
able to support the demands placed on them by this continued growth. In
addition, such networks could lose their viability due to delays in the
development or adoption of new standards and protocols (for example, the
next-generation Internet Protocol) to handle increased levels of activity,
increased governmental regulation or other factors. The infrastructure or
complementary services necessary to make such networks viable commercial
marketplaces may not be developed. Even if developed, such networks may not
become viable commercial marketplaces for products and services such as those
offered by the Company.
COMPANY STRATEGY
The Company's objectives are to be the leading publisher of online
courseware for the corporate training and education market, and to make its
VCampus(TM) the global standard for online delivery of corporate training and
academic instruction. The Company's strategy to achieve these objectives
includes publishing high-quality courseware (including courseware certified by
independent academic institutions), expanding its customer base, particularly
those who benefit from the Company's Web-based solution, upgrading its existing
technologies to maintain its position as a leader in technology-based corporate
training and developing brand recognition for its products and services.
- Publish High Quality, High Demand Courseware. The Company intends to
continue to expand its courseware library primarily through relationships
with content providers. The Company seeks high quality courseware in
subject areas that the Company expects will be in high demand by
customers in the corporate training and education market including
business, management, finance, accounting, technology, and basic
technical and developmental skills. The Company intends to continue to
provide courseware certified by independent academic institutions. See
"-- Products and Services."
- Expand Customer Base. The Company intends to continue to develop
relationships with its existing and new business and academic institution
customers to increase the number of enrollments and accelerate awareness
and acceptance of its online content. The Company believes that
development of a VCampus(TM) for customers provides it with
cross-marketing opportunities. A VCampus(TM) can promote courses from,
and/or contain "hot links" to, other VCampuses(TM). See "-- Customers"
and "-- Sales and Marketing."
- Develop Proprietary Technology. The Company intends to maintain its
position as a leader in online courseware delivery technology by
continuing to develop and enhance the features and functionality of its
proprietary technology. See "-- Products and Services -- VCampus(TM)."
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- Develop Brand Recognition. The Company believes that establishing and
maintaining brand recognition is critical to its strategy of becoming the
leading publisher for online training and education. The Company plans to
achieve brand recognition through marketing efforts and the creation of a
standards-based user interface, incorporating audio, animation, graphics
and text as appropriate to create a stimulating learning experience. The
Company also intends to enter into arrangements with content providers to
adopt the Company's VCampus(TM) as their standard for online courseware
delivery. See "-- Products and Services -- VCampus(TM)."
ACQUISITIONS AND DIVESTITURES
Since 1994, the Company has completed five acquisitions -- HTR, Inc.,
Cooper & Associates, Inc., (d/b/a Teletutor), Ivy Software, Inc., Cognitive
Training Associates, Inc. and the CYBIS Division of Control Data Corporation.
These acquisitions provided the Company with customers and courseware content in
non-online format. The Company does not currently have an agreement, commitment
or understanding with any other potential acquisition candidates. The Company
has followed a strategy of moving content and customers to an online training
platform from the traditional classroom and computer based training. In December
1998, the Company announced plans to divest its non-online businesses in order
to focus its efforts on managing its core online customers and content. The
Company does not currently have an agreement, commitment or understanding with
any potential acquirors for the instructor-led training business, but has signed
a letter of intent to sell HTR's Knowledgeworks business (see below).
HTR, Inc. ("HTR") In October 1997, the Company acquired HTR, a corporation
primarily engaged in the business of providing traditional and on-site technical
training, publishing and consulting services for the information technology
("IT") industry. In December 1998, the Company sold the consulting division of
HTR for $750,000 in cash and notes receivable. During the first quarter of 1999,
the Company signed a letter of intent to sell the HTR Knowledgeworks legacy
business for $1,500,000. The Company expects this transaction to be completed
during the second quarter of 1999.
Cooper & Associates, Inc., d/b/a Teletutor ("Teletutor") In April 1997, the
Company acquired Teletutor, which develops, distributes and supports
computer-based training courses for the data and telecommunications industry.
This acquisition provided the Company with additional content that has been
converted into the Company's online format, as well as access to Teletutor's
existing customer base.
Ivy Software, Inc. ("Ivy") In March 1997, the Company acquired Ivy, which
develops and distributes business and accounting textbooks and software for the
academic education market. This acquisition provided the Company with additional
content as well as access to Ivy's existing customers in the academic
marketplace, ranging from community colleges to large universities. In September
1998 the Company sold Ivy back to its original owner. The Company retained the
right to distribute the online versions of Ivy Software.
Cognitive Training Associates, Inc. ("CTA") In August 1996, the Company
acquired CTA, which develops and distributes technology-based applications
online via distributed networks for educational institutions, corporations and
government agencies. CTA customers can access these applications from remote
locations using the Internet or their organization's intranets. This acquisition
provided the Company with an established customer base and additional content,
particularly in the electrical, medical and scientific equipment subject areas.
CYBIS. In 1994, the Company acquired the CYBIS division of Control Data,
together with a perpetual nonexclusive license for the CYBIS courseware, which
consisted primarily of courses in language arts, mathematics, social studies,
science, business and a variety of technical subjects. The Company's ability to
distribute a portion of the CYBIS courseware is limited by the terms of its
license. The Company is responsible for the CYBIS computer-based education and
training portion of certain CYBIS contracts to which Control Data is a party, as
well as support and other services under such contracts. The Company believes
that Web-based courseware developed from the CYBIS courseware, to the extent not
restricted by the terms of its license, may contribute to revenues in the
future.
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PRODUCTS AND SERVICES
The Company offers its online courseware primarily through its proprietary
virtual campus product, or VCampus(TM), an online courseware delivery system and
environment that facilitates development, management and administration of
training and education over the Internet and corporate intranets. Through its
HTR and Teletutor subsidiaries, the Company also offers courseware through more
traditional media, including on-site and classroom training, diskette, CD-ROM
and printed formats, although the Company plans to divest these non-online
businesses during 1999.
VCampus(TM)
The Company's VCampus(TM) is a centrally served delivery and tracking
system accessible by virtually any Internet-ready PC. Generally, students enroll
in the Company's courses online through a VCampus(TM), but have the option to
enroll in person, by telephone or through the mail. Enrolled students can then
access the courseware online, typically through a PC connected to the Internet
or a corporate intranet. Once a student has completed the course, he or she will
receive credit or certification, if appropriate. As of December 31, 1998, the
Company has over 50 VCampuses(TM) in operation with its corporate and academic
institution partners.
The VCampus(TM) environment is customizable and designed for ease of
administration and access to students, instructors and training administrators.
In addition, by using any combination of courses from the Company's courseware
library and the customer's own internal training libraries, customers can offer
a variety of distance learning options. The VCampus(TM) includes the following
components:
Registrar: In the "Registrar" function students can sign up for
courses and modify their student profile. Administrators can add new course
offerings, admit students, enroll students into course offerings, modify
the course offerings, search student records and administer much of the
VCampus(TM) functionality.
Classrooms: In the "Classrooms" function students can enter their
registered courses or check their grades for any course for which they are
registered. Administrators and instructors may also access courses and have
the capability to view student grades.
Faculty: Students can use the "Faculty" function to contact
VCampus(TM) instructors.
Information: Using the "Information" function administrators can post
news, announcements and answers to frequently asked questions to keep
students informed about their training options.
Commons: In the optional "Commons" function students can access games
and socialize with other students.
The VCampus(TM) supports a wide variety of tools and utilities supplied by
third parties, such as Netscape Navigator/Communicator, Microsoft Internet
Explorer, Macromedia Shockwave, Geo Emblaze, etc. In addition, the Company has
developed the following proprietary software tools that facilitate the
functionality of the VCampus(TM):
VCampus(TM) Courseware Delivery Engine. This product was designed and
built to serve as an integrated, Web-based courseware construction and
courseware delivery tool. First delivered in August 1997, the product is
currently at the release level 2.16 and has been used to build and deliver
the Company's courseware library of over 1,000 online courses as of
December 31, 1998. By incorporating features developed for the Company's
earlier version of the tool, the VCampus(TM) Courseware Delivery Engine
provides a simple, easy-to-use environment for instructors and students
that is capable of assessing, recommending, tracking and testing students
as they complete a course. The product also enables courseware developers
to easily construct, deliver and track a highly interactive and media-rich
online course.
For the instructor, the VCampus(TM) Courseware Delivery Engine
provides real-time editing of the course introduction, the syllabus, help
items and reference items. Students can visit the "Gradebook"
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functionality of the product to get a real-time view of how they are doing
in a course. The courseware developer has access to a complete suite of
Web-based tools necessary to construct and deliver a highly interactive,
online course. The "PointPage" functionality of the product provides a
choice of methods for displaying content. To make PointPage even more
powerful, the "Activity Studio" enables non-programmers to construct and
include into their PointPage, multimedia-rich (animation, sound and student
interactivity) activities by answering a few simple questions. Courseware
developers can also take advantage of the testing system, which includes
many advanced features such as question randomization and pooling.
Additionally, courseware developers can choose to link selected test
questions and PointPages to learning objectives, which allows a courseware
developer to group content and assess a student's progress based on
performance.
VCampus(TM) Curriculum/Group Manager. This product facilitates the
grouping of students with similar education needs and abilities to
appropriate groups of courses within a VCampus(TM). This can improve
overall system efficiency and facilitate interaction among students. The
result of this intersection of student groups and course groups is a
specific student "Training Plan". The Training Plan is designed to guide
students to courses that match the student's ability. Additionally, the
Training Plan can evaluate a student's performance in each course against
minimum standards established by the VCampus(TM) administrator for test
scores and attendance. The Curriculum/Group Manager was released during the
first quarter of 1998.
VCampus(TM) Batch/Mass Enrollment Tools. This series of tools
facilitates the enrollment of large groups into the VCampus(TM) and/or
courses without student involvement. Companies with a large population of
students can use this tool to import demographic data from legacy
enterprise resource planning or human resources systems, thus streamlining
the implementation process. This functionality was first made available in
July 1998 and was substantially enhanced in January 1999.
Existing Courseware Library
The Company's existing courseware library includes over 1,000 online
courses, of which approximately 200 are available for general distribution.
These courses are in what the Company believes to be high-demand subject matter
areas such as information technology, telecommunications, compliance/OSHA,
business, management and finance. Although the Company does not provide
accreditation or certification itself, a number of its current courses provide
either accreditation or certification through its content providers. The current
library was built from a combination of acquisitions, the Company's own
development efforts and relationships with leading content providers such as
NETg, Infosource, Vital Learning, Crisp Publications Inc. and American Media
Inc. Conversion of courseware into the Company's online format typically takes
approximately 45 days, although conversion time varies depending on any number
of factors, including the size and format of the original courseware content.
Traditional Delivery
The Company provides products and services through delivery methods other
than online delivery in order to expand its customer base and courseware library
for online delivery. For example, through its HTR and Teletutor subsidiaries,
the Company offers courseware through more traditional media, including on-site
and classroom training, as well as CD-ROM and printed formats. In December 1998,
the Company announced plans to divest its non-online businesses with the
exception of Teletutor in order to focus its efforts on managing its core online
customers and content.
HTR's strategy is to deliver a total solution for corporate IT training
through its suite of products and services, which includes traditional and
on-site training, and courseware. HTR seeks to provide a "Knowledge Transfer" to
its customers through flexible and customizable courseware titles for
client/server systems. IT training is delivered by instructors at HTR's five
offices located in the U.S., as well as at customer locations, and is provided
through both pre-scheduled, open enrollment classes and on-demand corporate
training sessions. HTR also provides customized training to meet a customer's
specific needs by tailoring existing titles for developing an entirely new
course. Furthermore, HTR converts certain content into other products
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(e.g., end-user books, videos, etc.) to extend its product line and to reach
additional market segments with minimum additional investment in content
development.
KnowledgeWorks(TM), a division of HTR, offers outsourcing services to
software vendors covering the entire process of design, development,
localization and global distribution of technical training materials.
KnowledgeWorks(TM) courseware is developed by a professional team of project
managers including: technical writers, editors, and instructional designers,
industry-recognized subject matter experts, and linguistic experts.
KnowledgeWorks(TM) seeks partnerships with an independent software vendor
("ISV"), such as those with existing partners Microsoft, Lotus and Corel to
rapidly penetrate the market and become recognized as the ISV's authorized
courseware. This courseware is then sold to the ISV for its internal use or as
part of its customer training program. During the first quarter of 1999, the
Company signed a letter of intent to sell the HTR Knowledgeworks legacy business
for $1,500,000. The Company expects this transaction to be completed during the
second quarter of 1999.
Teletutor's strategy is to focus its products and services primarily on the
data and telecommunications industry. Teletutor develops, distributes and
supports courseware, primarily in CBT formats, to the telecommunications
industry. As of December 31, 1998, the Company has converted 18 Teletutor
courses into its online format.
CUSTOMERS
The Company's primary target market is the corporate training and education
market. The Company focuses its sales and marketing efforts on Fortune 1,000
companies and is initially targeting customers in the telecommunications,
healthcare, utilities, IT and financial services industries, as well as academic
institutions, all of which the Company believes have relatively large training
and education budgets, significant training needs and receptiveness to new
technology. In 1998 no customer accounted for more than 10% of the Company's
revenues. The Company currently anticipates that future revenues may be derived
from sales to a limited number of customers. Accordingly, the cancellation or
deferral of a small number of contracts could have a material adverse effect on
the Company.
Business Customers
As of December 31, 1998, the Company had approximately 45 online corporate
business customers, including: All-Phase Electrical Supply Company; A.T.
Kearney, Inc; Baan Company; Bell South Telecommunications, Inc.; Cable and
Wireless, Inc.; Dearborn Financial Publishing, Inc.; Graybar Electric Co. Inc.;
Global One Communications, Inc.; Kelly Scientific Resources; Lucent
Technologies, Inc.; and SpectraComm, LLC. The Company plans to establish
relationships with additional business customers, in particular those that offer
access to large numbers of users (including the prospective customer's employees
or end-users), vendors and resellers, as well as significant amounts of
courseware content. The Company's business customers generally agree to market
and promote the Company's products and services, and to share with the Company
the net revenues generated from access and other fees charged to such customer's
end-users.
Academic Institution Customers
As of December 31, 1998, the Company had 11 online academic institution
customers, including: AIMS Community College; Clemson University; Duquesne
University; Eastern Michigan University; George Mason University; Northeastern
University; Park College; Regent University; Swindon College, England;
University of Texas System; and Wichita State University. The Company plans to
establish relationships with additional academic institution customers, in
particular those that have significant enrollments, offer broad curricula and
provide the Company with the opportunity to publish online courseware developed
by such institutions. The Company's agreements with these academic institutions
generally provide the Company with exclusive rights, or limit the institution's
right to develop and/or distribute the online courseware subject to the
agreements. The academic institutions market these courses in the same manner as
their existing, traditional course offerings, including through direct mail,
course catalogs, print advertising and through the Web.
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SALES AND MARKETING
The Company's primary marketing goals are to create a strong brand identity
as a leading training and educational courseware publisher for corporations and
academic institutions, and to establish its core technology, the VCampus(TM), as
the global standard for corporate training and education needs.
In addition to its direct sales efforts, the Company markets its products
and services through a variety of means, including the Web, public relations,
trade shows, direct mail, trade publications, customers, resellers and other
arrangements. The Company cross-markets through customers' VCampuses(TM) to
promote its products and services and to attract students. The Company believes
that forming strategic marketing alliances with partners who will sell, promote
and market the Company's products and services will be important for rapid
market penetration.
COMPETITION
The market for educational and training products and services is highly
competitive and the Company expects that competition will continue to intensify.
Although the Company believes that it was the first to offer Web-based,
interactive, on-demand courseware, there are no substantial barriers to entry in
the online education and training market. A number of companies, including
Microsoft Corporation, CBT Systems Ltd., Gartner Group, Inc., Oracle
Corporation, Centra Software, Inc. and Real Education, have recently entered
this market and the Company expects this trend to continue to accelerate. The
Company's competition also includes many institutions and businesses that
provide training or education that are 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 satellite communications, and audio and
video tapes. The Company also expects to encounter significant competition in
connection with its efforts to establish its VCampus(TM) as the standard
learning environment and format in the industry.
The Company believes that competition in the developing market for online
training and education will be based upon various factors, including: quality,
breadth and depth of courseware; marketing and third party relationships;
quality, flexibility and reliability of delivery system; and, to a lesser
degree, pricing. In addition, the Company believes that its products and tools
make the Company's courseware affordable, convenient, easy to use and
administer, and provide the Company with a competitive edge in attracting
additional customers. Most of the Company's competitors, as well as a number of
potential new competitors (including the Company's customers and partners), have
significantly greater financial, technical and marketing resources than the
Company. The Company will require financing to compete effectively in this
rapidly evolving market. In addition, any of these competitors may be able to
respond more quickly than the Company to new or emerging technologies, and to
devote greater resources to the development, promotion and sale of their
services. A number of the Company's current customers and partners have also
established relationships with certain of the Company's competitors, and future
customers and partners may establish similar relationships. In addition, the
Company's partners could use information obtained from the Company to gain an
additional competitive advantage over the Company. The Company's competitors may
develop products and services that are superior to those of the Company or that
achieve greater market acceptance than the Company's products and services.
Moreover, the Company may be unable to compete successfully against its current
or future competitors, and competition may have a material adverse effect on the
Company.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to or commerce
on online networks. Due to the increasing popularity and use of online networks,
it is possible that a number of laws and regulations may be adopted with respect
to online networks, covering issues such as user privacy, pricing, taxation
and/or the characteristics and quality of products and services. The adoption of
any such laws or regulations may decrease the growth of online networks, which
could in turn decrease the demand for the Company's products and increase the
Company's cost of doing business or otherwise have an adverse effect on the
Company. Moreover, the applicability to online networks
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<PAGE> 10
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 based on other legal theories. Such claims have been
brought against online services in the past. Although the Company carries
general liability insurance, the Company's insurance may not cover claims of
this type, or may not be adequate to cover all liability that may be imposed.
Any imposition of liability that is not covered by insurance or is in excess of
insurance coverage could have a material adverse effect on the Company.
TRADEMARKS AND PROPRIETARY RIGHTS
The Company regards its copyrights, trademarks, trade dress, trade secrets
and similar intellectual property as critical to its success, and the Company
relies upon federal statutory, as well as common law copyright and trademark
law, trade secret protection and confidentiality and/or license agreements with
its employees, customers, partners and others to protect its proprietary rights.
The Company owns registered trademarks in the United States for UOL, the UOL
logo, HTR, the HTR logo, Teletutor, The Chalkboard, Virtual Workforce,
Knowledgeworks, Experience and "What you think ... is our business."
Additionally, the Company has applied for registration in the United States for
certain of its other trademarks, including UOL Publishing, VCampus(TM),
VCampus(TM).com, Virtual Campus, Test Wizard, Web Course Builder, PointPage,
Courseware Construction Set, Course Architect, Registrar Architect, Test
Architect, Knowledge Workshop, Thought Leaders, and "Take It Online".
The Company has had certain trademark applications denied, and may have
more denied in the future. The Company will continue to evaluate the
registration of additional marks as appropriate. Despite the Company's efforts
to protect its proprietary rights, unauthorized parties may attempt to copy
aspects of the Company's products or services or to obtain and use information
that the Company regards as proprietary. In addition, the laws of some foreign
countries do not protect proprietary rights to as great an extent as do the laws
of the United States. Litigation may be necessary to protect the Company's
proprietary rights. Any such litigation may be time-consuming and costly (even
if successful), cause product release delays, require the Company to redesign
its products or services, or require the Company to enter into royalty or
licensing agreements, any of which could have a material adverse effect upon the
Company. Such royalty or licensing agreements, if required, may not be available
on terms acceptable to the Company or at all. The Company's means of protecting
its proprietary rights may prove inadequate and the Company's competitors may
independently develop similar technology or duplicate the Company's products or
services or design around intellectual property rights of the Company. In
addition, distributing the Company's products through online networks makes the
Company's software more susceptible than other software to unauthorized copying
and use. For example, online delivery of the Company's courseware makes it
difficult to ensure compliance by the Company with contractual restrictions, if
any, as to the parties who may access such courseware. The Company cannot
prevent users from downloading electronically certain of its courseware content,
which could adversely affect the Company's ability to collect payment from users
that obtain copies from the Company's existing or past customers. If, as a
result of changing legal interpretations of liability for unauthorized use of
the Company's software or otherwise, users were to become less sensitive to
avoiding copyright infringement, the Company would be materially adversely
affected.
EMPLOYEES
As of December 31, 1998, the Company had 127 employees, including 119
full-time employees and 8 part-time employees, consisting of 60 full-time
employees in general business operations, 33 full-time employees in sales and
marketing, 13 full-time and 8 part-time employees in product development, and 13
employees in general and administrative.
In 1998 the Company reduced its workforce significantly pursuant to a
management reorganization plan. The workforce reductions occurred primarily in
the product development and administrative areas. In
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<PAGE> 11
addition, the Company relocated certain sales and administrative staff to
smaller facilities, and moved the production of certain products to its Texas
and McLean facilities. The Company believes that its employee relations are
good.
The Company's performance is substantially dependent on the performance of
its executive officers and key employees. The loss of the services of any of its
executive officers or other key employees could have a material adverse effect
on the Company. The Company maintains key man life insurance in the amount of
$1,000,000 on Narasimhan P. Kannan, Chairman of the Board of Directors and Chief
Executive Officer, and has employment agreements with certain of its executive
officers. However, neither such insurance nor such agreements necessarily fully
compensate the Company for, or preclude the loss of the services of the relevant
personnel. The Company anticipates that future growth, if any, will require it
to identify, recruit, hire, compensate train and retain a substantial number of
new, technical, managerial, sales and marketing personnel. Competition for
qualified personnel is intense, and the Company may be unable to attract,
assimilate and retain such personnel. The loss of the services of key personnel,
or the inability to attract and retain additional qualified personnel, could
have a material adverse effect on the Company.
ITEM 2. PROPERTIES.
A current summary showing the operating properties of the Company, all of
which are leased, is shown below:
<TABLE>
<CAPTION>
LEASE
AREA EXPIRATION MONTHLY
LOCATION PRINCIPAL USE (SQUARE FEET) DATE RENT
-------- ------------- ------------- ---------- -------
<S> <C> <C> <C> <C>
McLean, VA................. Executive offices and 7,150 March 2000 $13,100
principal administration, 1,000 February 2000 1,792
technical marketing and
sales operations
Waxahachie, TX............. CTA offices 5,500 July 2001 2,500
Portsmouth, NH............. Former Teletutor office 6,000 July 2001 3,000
Rockville, MD.............. HTR executive offices 5,215 November 1999 10,000
Rockville, MD.............. HTR Branch office 6,222 January 2006 11,936
Atlanta, GA................ HTR Branch office 7,800 February 2001 16,056
Waltham, MA................ HTR Branch office 3,124 May 2003 5,467
Washington, DC............. HTR Branch office 2,253 July 2002 5,539
McLean, VA................. HTR Branch office 2,600 April 1999 4,681
</TABLE>
During the second half of 1998 and the first quarter of 1999, as a result
of reorganization plans, the Company closed one of its McLean executive office
facilities and moved primarily all of Teletutor's product fulfillment operations
to its remaining McLean office facility. Also, the Company closed its training
facilities in Los Angeles, CA and Baltimore, MD. As of December 31, 1998 the
Company has accrued an estimate of the costs it will incur to terminate its
remaining lease obligations.
The Company believes that its existing office space is sufficient to
accommodate its current needs and that suitable additional space will be
available on commercially reasonable terms to accommodate any expansion needs in
1999 should it become necessary.
ITEM 3. LEGAL PROCEEDINGS.
Although the Company is not currently involved in any material pending
legal proceedings, the Company could be subject to legal proceedings and claims
in the ordinary course of its business or otherwise, including claims relating
to license agreements, royalties or claims of alleged infringement of the
trademarks and other intellectual property rights of third parties by the
Company and its licensees.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1998.
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<PAGE> 12
EXECUTIVE OFFICERS
As of March 23, 1999, the executive officers of the Company were as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Narasimhan P. Kannan........ 50 Chairman of the Board of Directors and Chief Executive Officer
Michael W. Anderson......... 45 Chief Operating Officer
Farzin Arsanjani............ 35 Executive Vice President
Joanne O'Rourke Hindman..... 45 Vice President, Chief Financial Officer, Secretary and
Treasurer
Kamyar Kaviani.............. 37 Executive Vice President
</TABLE>
Narasimhan P. "Nat" Kannan has served as Chief Executive Officer and
Chairman of the Board of Directors of the Company since he founded the Company
in 1984. 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.
Michael W. Anderson was appointed the Company's Chief Operating Officer in
November 1998 after serving as the Company's Vice President of Technology and
Operations since March 1996. From 1994 to 1996, Mr. Anderson was a marketing
research consultant at O'Donnell & Associates, Inc. From 1990 to 1994 he served
as Vice President and Director of Marketing Operations at HarperCollins College
Publishers. From 1977 to 1990 he was employed by Scott, Foresman & Company, most
recently as Vice President of Marketing Operations. Mr. Anderson holds a B.A. in
English and Mathematics from the University of Texas.
Farzin Arsanjani joined the Company as an Executive Vice President upon the
Company's acquisition of HTR in October 1997. Prior to such acquisition, Mr.
Arsanjani co-founded HTR in 1987 and served as its Vice-Chairman and President
since that time. Mr. Arsanjani holds a B.S. in Electrical Engineering from the
University of Maryland.
Joanne O'Rourke Hindman joined the Company as Vice President, Chief
Financial Officer, Secretary and Treasurer in February 1998. From 1997 to
January 1998, Ms. Hindman served as Senior Vice President of Operations and
Financial Officer of iVillage, a Web-site publisher. From 1995 to 1997, she
served as the Senior Vice President of Finance and Treasurer of Tele-TV, a joint
venture formed by Bell Atlantic, NYNEX and Pacific Telesis. From 1983 to 1995,
she worked for the Washington Post Company, most recently from 1993 to 1995 as
General Manager of Newsweek Interactive while simultaneously serving as Vice
President of Finance for Newsweek Magazine, which position she held since 1989.
Prior to working for the Washington Post Company, she was an audit manager with
Price Waterhouse Coopers. Ms. Hindman holds a B.B.A. in Accounting from the
University of Massachusetts and is a Certified Public Accountant.
Kamyar Kaviani joined the Company as Executive Vice President upon the
Company's acquisition of HTR in October 1997. Prior to such acquisition, Mr.
Kaviani co-founded HTR in 1987 and served as its Chairman and Chief Executive
Officer since that time. Mr. Kaviani holds a B.A. in Economics from the
University of Maryland.
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<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market Information
The Company's Common Stock has historically traded on the Nasdaq National
Market under the symbol "UOLP". In October 1998 the Company's Common Stock began
trading of the NASDAQ Small Capitalization Market under the same symbol. The
following sets forth the quarterly high and low bid prices during the two years
ended December 31, 1998 as reported by Nasdaq. These prices are based on
quotations between dealers, which do not reflect retail mark-up, markdowns or
commissions.
<TABLE>
<CAPTION>
HIGH LOW
1997 ------ ------
<S> <C> <C>
First Quarter............................................. $15.25 $12.00
Second Quarter............................................ $13.25 $10.00
Third Quarter............................................. $26.25 $12.13
Fourth Quarter............................................ $26.50 $12.50
1998
First Quarter............................................. $16.50 $ 7.75
Second Quarter............................................ $13.25 $ 3.88
Third Quarter............................................. $ 8.00 $ 4.00
Fourth Quarter............................................ $ 9.13 $ 1.94
</TABLE>
Since the Company's IPO in late 1996, the public market for the Company's
Common Stock has been characterized by low and/or erratic trading volume, often
resulting in price volatility. There can be no assurance that there will be an
active public market for the Company's Common Stock in the future. 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' earning 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. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."
(b) Holders
As of March 23, 1999, the number of record holders of the Company's Common
Stock was 144 and the Company believes that the number of beneficial owners was
approximately 1,350.
(c) Dividends
The Company has never paid a cash dividend on its Common Stock and
anticipates that for the foreseeable future any earnings will be retained for
use in its business and, accordingly, does not anticipate the payment of cash
dividends.
(d) Sales of Unregistered Securities
During the quarter ended December 31, 1998, the Company issued the
following unregistered securities, none of which involved the use of
underwriters or the payment of commissions:
In October 1998, the Company issued an aggregate of 9,191 shares of Common
Stock to two former HTR shareholders in exchange for cancellation of the
Company's indebtedness to such shareholders, at a conversion price of $3.75 per
share, the closing price of the Company's Common Stock on the date of issuance;
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<PAGE> 14
In December 1998, the Company issued an aggregate of 105,000 shares of
Common Stock at $5.875 per share, the closing price of the Company's Common
Stock on the date of issuance, to the three former stockholders of Teletutor and
their attorney, pursuant to a restructuring of the Company's indebtedness to
such shareholders. Pursuant to this restructuring, the Company also issued to
such persons three-year warrants to purchase an aggregate of 55,000 shares of
Common Stock with an exercise price of $6.00 per share;
In December 1998, the Company issued an aggregate of 28,902 shares of
Common Stock to the Company's Series D Preferred Stockholders in payment of
accrued dividends; and
In December 1998, the Company issued an aggregate of 1,480 shares of Common
Stock to one former security holder of HTR upon net exercise of a warrant with
an exercise price of $1.30 per share.
The sales of the above securities were deemed exempt from registration
under the Securities Act of 1933, as amended (the "Act") in reliance upon
Section 4(2) of 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 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. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes thereto
included elsewhere herein. The consolidated statement of operations data set
forth below with respect to the years ended December 31, 1996, 1997 and 1998 and
the consolidated balance sheet data as of December 31, 1997 and 1998 are derived
from, and should be read in conjunction with, the audited consolidated financial
statements of the Company included elsewhere in this Annual Report on Form 10-K.
The consolidated statement of operations data set forth below with respect to
the years ended December 31, 1994 and 1995 and the consolidated balance sheet
data as of December 31, 1994, 1995 and 1996 are derived from audited financial
statements not included in this Annual Report on Form 10-K.
14
<PAGE> 15
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1994 1995 1996 1997 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA) -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Online tuition revenues.............. $ 14 $ 56 $ 119 $ 1,662 $ 1,549
Virtual campus software revenues..... -- -- -- 2,718 112
Product sales revenues............... -- -- -- 2,330 3,348
Development revenues................. 82 76 399 1,631 926
Other service revenues............... 710 416 424 718 2,445
Instructor-led training revenues..... -- -- -- 1,086 6,303
------- ------- ------- -------- --------
Total net revenues........... 806 548 942 10,145 14,683
Cost of revenues..................... 146 94 195 2,391 10,073
Sales and marketing.................. 296 933 1,593 4,439 5,304
Product development.................. 206 576 1,482 4,465 5,782
General and administrative........... 890 927 2,477 2,388 3,783
Depreciation and amortization........ 298 309 144 931 2,463
Acquired in-process research,
development and content........... -- -- -- 11,100 --
Compensation expense in connection
with the acquisition of HTR,
Inc............................... -- -- -- 690 --
Reorganization and other
non-recurring charges............. -- -- -- 340 5,585
------- ------- ------- -------- --------
Loss from operations................... (1,030) (2,291) (4,949) (16,599) (18,307)
Loss on sale of subsidiaries........... -- -- -- -- (907)
Other income (expense)................. (6) 126 304 125 --
Interest income (expense).............. (260) (75) 4 329 (597)
------- ------- ------- -------- --------
Loss before extraordinary gain on debt
forgiveness.......................... (1,296) (2,240) (4,641) (16,145) (19,811)
Extraordinary gain on debt
forgiveness.......................... 609 -- -- -- --
------- ------- ------- -------- --------
Net loss............................... $ (687) $(2,240) $(4,641) $(16,145) $(19,811)
======= ======= ======= ======== ========
Accrued dividends to preferred
stockholders......................... -- (175) (331) -- (358)
Net loss available to common
stockholders......................... $ (687) $(2,415) $(4,972) $(16,145) $(20,169)
======= ======= ======= ======== ========
Net loss available to common
stockholders per share, basic and
diluted:(1)
Loss before extraordinary gain on
debt forgiveness.................. $ (3.11) $ (3.13) $ (4.98) $ (4.91) $ (5.27)
Extraordinary gain on debt
forgiveness....................... 1.46 -- -- -- --
------- ------- ------- -------- --------
Net loss per share................... $ (1.65) $ (3.13) $ (4.98) $ (4.91) $ (5.27)
Weighted average shares
outstanding(1)....................... 417 771 998 3,286 3,827
======= ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
BALANCE SHEET DATA: 1994 1995 1996 1997 1998
(IN THOUSANDS) -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Working capital (deficit)............. $(2,587) $(1,402) $ 14,833 $ (3,789) $ (4,631)
Total assets.......................... 879 613 17,489 26,465 14,871
Long-term debt........................ -- -- -- 1,531 337
Total liabilities..................... 3,158 1,887 1,287 13,054 9,051
Accumulated deficit................... (4,503) (6,742) (11,383) (27,528) (47,697)
Total stockholders' equity
(deficit)........................... (2,279) (1,274) 16,202 13,411 5,820
</TABLE>
- ---------------
(1) Computed on the basis described in Note 16 of Notes to UOL Consolidated
Financial Statements.
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<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
The following presentation of management's discussion and analysis of the
Company's consolidated financial condition and results of operation should be
read in conjunction with the Company's consolidated financial statements,
accompanying Notes thereto and other financial information appearing elsewhere
in this report.
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(TM), an online courseware
delivery system and environment that facilitates development, management and
administration of training and education over the Internet and intranets.
Through its HTR and Teletutor subsidiaries, the Company also offers courseware
through more traditional media, including on-site and classroom training,
diskette, CD-ROM and printed formats. In December 1998, the Company announced
plans to divest its non-online businesses with the exception of Teletutor in
order to focus its efforts on managing its core online customers and content.
The Company was formed in 1984 as IMSATT Corporation, a multimedia research
and development company. In 1991, the Company acquired from Control Data certain
rights to resell the CYBIS online courseware, which consisted primarily of
courses in language arts, mathematics, social studies, science, business and a
variety of technical subjects. In 1993, the Company modified its business focus
to capitalize on market opportunities for online education resulting from
technological advances relating to the Internet. Subsequently, the Company
raised additional financing and focused its development efforts on migrating its
technology to the Web in preparation for the launch of its first Web-based
course in November 1995. Under the current business model, UOL's revenues are
derived from five primary sources:
- online tuition revenues;
- product sales revenues;
- development revenues;
- other service revenues; and
- instructor-led training revenues.
Online tuition revenues are generated primarily from online tuition derived
from corporate and academic customers. Product sales revenues are derived from
the sale of computer-based training ("CBT") courses that are delivered through
traditional CBT format (e.g. CD-ROM). Development revenues consist primarily of
fees paid to the Company for developing and converting courseware. Other service
revenues consist primarily of monthly fees generated by the licensing and
maintenance of the CYBIS courseware under the Control Data subcontracts.
Instructor-led training revenues are generated from on-site and classroom
training fees. During 1998 the Company announced a new strategy to move away
from licensing the VCampus(TM) software towards the sales of online courseware
subscriptions. While prior to 1997 licensing and support revenues have
represented a substantial majority of the Company's revenues, the Company
believes that online revenues and product sales will become the primary sources
of its revenues in the future.
ACQUISITIONS AND DIVESTITURES
Since 1994, the Company has completed five acquisitions -- HTR Inc., Cooper
& Associates, Inc. (d/b/a Teletutor), Ivy Software, Inc., Cognitive Training
Associates, Inc. and the CYBIS Division of Control Data Corporation. Each of
these acquisitions was accounted for as a purchase, and accordingly, the
operating results of each acquired company are included in the Company's
financial statements from the effective date of each respective acquisition.
These acquisitions provided the Company with customers and courseware content in
non-online format. The Company does not currently have an agreement, commitment
or understanding with any other potential acquisition candidates. The Company
has followed a strategy of
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<PAGE> 17
moving content and customers to an online training platform from the traditional
classroom and CBT based training sold through its non-online business. In
December 1998, the Company announced plans to divest its non-online businesses
with the exception of Teletutor in order to focus its efforts on managing its
core online customers and content. The Company does not currently have an
agreement, commitment or understanding with any potential acquirors for the
instructor-led training business, but has signed a letter of intent to sell
HTR's Knowledgeworks business (see below).
In October 1997, the Company acquired HTR, Inc. ("HTR") a corporation
primarily engaged in the business of providing traditional and on-site technical
training, publishing and consulting services for the information technology
("IT") industry. The Company acquired HTR for common stock, warrants and options
totaling 620,000 shares, and the assumption of approximately $3,500,000 of debt
and cash and notes payable aggregating approximately $600,000. The executive
officers of HTR were to receive bonuses no later than December 31, 1998 in the
total amount of $690,000 granted in conjunction with the signing of three-year
employment agreements. As of June 29, 1998, the executive officers of HTR agreed
to convert approximately $420,000 of their sign-on bonuses and $320,000 of
acquisition-related indebtedness into 134,447 shares of UOL Series D convertible
Preferred Stock. In addition, UOL created a stock option pool of 180,000 shares
of Common Stock and an incentive bonus pool with a potential payout not to
exceed approximately $3,300,000 for three years, contingent upon the financial
performance of HTR. In December 1998, the Company sold HTR's consulting division
for $750,000 in cash and notes receivable. The note bears interest at 5% and is
payable in eight equal quarterly installments beginning March 31, 1999 through
December 31, 2000. As a result of the sale, the Company recorded a loss on the
sale of subsidiary of $525,472 (or $0.14 per share) for the year ended December
31, 1998. In December 1998, as a result of the Company's plans to divest the
remaining non-online businesses, the Company revalued the remaining assets of
HTR's non-online businesses. As a result, the Company wrote off $3,669,598 (or
$0.96 per share) of goodwill related to these businesses for the year ended
December 31, 1998. During the first quarter of 1999, the Company signed a letter
of intent to sell the HTR Knowledgeworks legacy business for $1,500,000. The
Company expects this transaction to be completed during the second quarter of
1999.
In April 1997, the Company acquired Cooper & Associates, Inc., d/b/a
Teletutor ("Teletutor") Teletutor, which develops, distributes and supports
computer-based training courses for the data and telecommunications industry.
This acquisition provided the Company with additional content that has been
converted into the Company's online format, as well as access to Teletutor's
existing customer base. The Company paid $3,000,000 in cash and $2,000,000 in
promissory notes to be paid ratably on the first, second and third anniversary
dates of the acquisition. In December 1997, the Company's management, in
accordance with its impairment policy for long-lived assets, determined that the
employee workforce asset had been impaired as of December 31, 1997 due to
planned workforce reductions, and as such, wrote off approximately $250,000 of
the carrying amount of the asset. During 1998, goodwill was reduced to zero and
the remaining intangible assets were reduced ratably by approximately $329,000
due to a purchase price adjustment related to the acquisition. During 1998, the
Company paid the first installment of $666,667 in cash on the note balance. In
December 1998, the Company and the former stockholders of Teletutor restructured
the terms of the note as follows: the Company issued 105,000 shares of Common
Stock and three-year warrants to purchase 55,000 shares of its Common Stock at
an exercise price of $6.00 per share; the Company executed a new non-interest
bearing promissory note for $826,666, payable in installments between March 15,
1999 and April 15, 2000. As a result, the Company recorded $145,208 as loss on
debt restructuring for the excess of the fair market value of the Common Stock,
warrants and new promissory note over the carrying amount of the original
promissory note. The loss in debt restructuring is included in reorganization
and non-recurring expenses in the 1998 statement of operations.
In March 1997, the Company acquired Ivy Software, Inc. ("Ivy") which
develops and distributes business and accounting textbook and software for the
academic education market. This acquisition provided the Company with additional
content as well as access to Ivy's existing customers in the academic
marketplace, ranging from community colleges to large universities. The Company
acquired Ivy in exchange for $314,000 in cash and potential future payments not
to exceed approximately $862,000. In September 1998 the Company sold Ivy back to
its original owner for $250,000 in cash and a note receivable for $196,000. The
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<PAGE> 18
note bears interest at 6% and is payable in quarterly installments through
September 2005. As a result of the sale, the Company recorded a loss on the sale
of subsidiary of $381,954, or $0.10 per share, during the third quarter of 1998.
The Company's obligation to make the remaining potential future payments of
approximately $300,000 related to the acquisition was terminated upon the sale.
The Company retains the right to distribute the online versions of Ivy Software.
In August 1996, the Company acquired Cognitive Training Associates, Inc.
("CTA") which develops and distributes technology-based applications online via
distributed networks for educational institutions, corporations and government
agencies. CTA customers can access these applications from remote locations
using the Internet or their organization's intranets. This acquisition provided
the Company with an established customer base and additional content,
particularly in the electrical, medical and scientific equipment subject areas.
The Company acquired CTA in exchange for 42,487 shares of the Company's Common
Stock.
In 1994, the Company acquired the CYBIS division of Control Data, together
with a perpetual nonexclusive license for the CYBIS courseware, which consisted
primarily of courses in language arts, mathematics, social studies, science,
business and a variety of technical subjects. The Company's ability to
distribute a portion of the CYBIS courseware is limited by the terms of its
license. The Company is responsible for the CYBIS computer-based education and
training portion of certain CYBIS contracts to which Control Data is a party, as
well as support and other services under such contracts. The Company believes
that Web-based courseware developed from the CYBIS courseware, to the extent not
restricted by the terms of its license, may contribute to revenues in the
future. The Company acquired CYBIS in exchange for $150,000 in cash and $544,000
in notes.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of total net revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Online tuition revenues................................ 12.6% 16.4% 10.6%
Virtual campus software revenues....................... -- 26.8 0.8
Product sales revenues................................. -- 22.9 22.8
Development and other revenues......................... 42.4 16.1 6.3
Instructor-led training revenues....................... -- 10.7 42.9
Other service revenues................................. 45.0 7.1 16.6
------ ------ ------
Total net revenues............................. 100.0 100.0 100.0
Costs and expenses:
Cost of revenues....................................... 20.7 23.6 68.6
Sales and marketing.................................... 169.0 43.7 36.1
Product development.................................... 157.3 44.0 39.4
General and administrative............................. 262.8 23.5 25.8
Depreciation and amortization.......................... 15.3 9.2 16.8
Reorganization and other non-recurring charges......... -- 119.6 38.0
------ ------ ------
Total costs and expenses....................... 625.1 263.6 224.7
------ ------ ------
Loss from operations..................................... (525.1) (163.6) (124.7)
Other income (expense):
Other income (expense)................................. 32.3 1.2 (6.2)
Interest income (expense).............................. 0.4 3.2 (4.1)
------ ------ ------
Net loss................................................. (492.4)% (159.2)% (135.0)%
====== ====== ======
</TABLE>
18
<PAGE> 19
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Summary
The Company incurred a net loss of $20,169,155 (or $5.27 per share) in 1998
as compared to a net loss of $16,144,763 (or $4.91 per share) in 1997. Excluding
certain non-recurring items in both years, the Company incurred a net loss of
$13,676,515 (or $3.57 per share) in 1998 as compared to a net loss of $4,014,419
(or $1.22 per share) in 1997. Non-recurring items for 1998 amounted to
$6,492,640 (or $1.70 per share) and included $1,770,408 of costs incurred
pursuant to a management reorganization plan, $3,669,598 goodwill impairment
related to the planned divestiture of certain non-online businesses, losses of
$907,426 related to the sale of Ivy and HTR's consulting division, and a loss on
debt restructuring of $145,208. Non-recurring items for 1997 totaled $12,130,344
(or $3.69 per share) and included acquired in-process research and development
costs of $2,700,000 and $8,400,000 related to the acquisition of Teletutor and
HTR, respectively, $690,000 of compensation expense related to the acquisition
of HTR and $340,344 pursuant to a management reorganization plan. Total revenues
in 1998 were $14,683,112 in 1998 as compared to $10,144,500 for 1997. The
increase in revenues was due primarily to the acquisitions of Ivy, Teletutor and
HTR and was partially offset by decreases in VCampus(TM) software revenues and
development and other revenue. Online tuition revenues decreased from $1,662,058
in 1997 to $1,548,950 in 1998 primarily due to the Company's change in method
for recognizing revenue for its VCampus(TM) software systems and prepaid online
tuition fees upon adoption of the AICPA Statement of Position 97-2, "Software
Revenue Recognition, ("SOP 97-2"). VCampus(TM) software revenues decreased from
$2,718,000 in 1997 to $112,253 primarily due to the Company's new marketing
strategy of moving away from licensing the VCampus(TM) software towards sales of
online courseware subscriptions. Development and other revenues decreased in
1998 as compared to 1997 primarily due to an agreement with one customer in 1997
that provided funding for the development of a custom VCampus(TM) in exchange
for a share of future net revenues derived from the operation of such campus and
warrants to purchase Common Stock of the Company. Excluding this one customer
from 1997, development and other revenues decreased slightly from 1997 to 1998.
Excluding the non-recurring items described above, total costs and expenses were
$27,404,598 in 1998 as compared to costs of $14,612,719 for 1997. The increase
was due primarily to the addition of Ivy, Teletutor and HTR costs and expenses
as well as increased operating costs related to the expansion of operations
prior to workforce reductions and the closing of certain office facilities
implemented during 1998 as a result of certain management reorganization plans.
Net Revenues
Total net revenues increased 45% from $10,144,500 in 1997 to $14,683,112 in
1998. Online tuition revenues decreased from $1,662,058 (16.4% of net revenues)
in 1997 to $1,548,950 (10.6% of net revenues) in 1998. While the Company
delivered approximately 95,000 courses online, a six-fold increase over 1997's
approximately 15,000, online tuition revenues decreased due to the Company's
adoption of SOP 97-2 as of January 1, 1998, which requires the Company to
recognize revenue ratably over the length of the service period. Virtual campus
software revenues decreased from $2,718,000 (26.8% of net revenues) for 1997 to
$112,253 (0.8% of net revenues) for 1998. The decrease is primarily due to the
Company's new marketing strategy of moving away from licensing the VCampus(TM)
software towards sales of online courseware subscriptions. Product sales
revenues increased in absolute terms from $2,330,029 (22.9% of net revenues) in
1997 to $3,347,777 (22.8% of net revenues) in 1998. The increase was due
primarily to the acquisition of the Ivy, Teletutor and HTR product lines.
Development and other revenues decreased from $1,631,233 (16.1% of net revenues)
in 1997 to $925,751 (6.3% of net revenues) in 1998 primarily due to an agreement
with one customer in 1997 that provided funding for the development of a custom
VCampus(TM) in exchange for a share of future net revenues derived from the
operation of such campus and warrants to purchase Common Stock of the Company.
Excluding this one customer from 1997, development and other revenues decreased
slightly from 1997 to 1998. Development revenues were primarily related to
courseware conversion between the Company and its customers in both years. Other
service revenues increased from $ 717,546 (7.1% of net revenues) in 1997 to
$2,444,719 (16.6% of net revenues) in 1998. The increase was due primarily to
the acquisition of HTR in October 1997. Instructor-led training revenues
increased from $1,085,634 (10.7% of net revenues) in 1997 to $6,303,662 (42.9%
of net revenues) in 1998. The increase was due primarily to the acquisition of
HTR in October 1997.
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<PAGE> 20
Cost of Revenues
Total cost of revenues increased from $2,390,711 (23.6% of net revenues) in
1997 to $10,072,558 (68.6% of net revenues) in 1998. Total cost of revenues
increased in absolute dollars due primarily to the acquisitions of Ivy,
Teletutor and HTR. As a percentage of net revenues, cost of revenues increased,
due primarily to the addition of instructor-led training revenues, which have
higher direct costs than the Company's other sources of revenues. The Company
believes that in the future, once the remaining non-online businesses are sold,
cost of revenues will decrease in absolute dollars, and will decrease as a
percentage of total net revenues.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased in absolute
terms from $4,438,717 (43.7% of net revenues) in 1997 to $5,304,394 (36.1% of
net revenues) in 1998. Sales and marketing expenses consist primarily of costs
related to personnel, sales commissions, travel, market research, advertising
and marketing materials. Sales and marketing expenses increased in absolute
dollars due primarily to the addition of Ivy, Teletutor and HTR, but decreased
as a percentage of revenues because of the greater increase in revenues. The
Company expects sales and marketing expense to increase substantially in the
future as the Company expands its sales and marketing efforts.
Product Development. Product development expenses increased in absolute
terms from $4,464,976 (44.0% of net revenues) in 1997 to $5,781,880 (39.4% of
net revenues) in 1998. Product development expenses consist primarily of certain
costs associated with the design, programming, testing, documenting and support
of the Company's new and existing courseware and software. Product development
expenses increased in absolute dollars due primarily to the acquisition of
Teletutor and HTR. In addition, the Company wrote-off approximately $694,000
related to certain content acquisition and development costs. As a percentage of
net revenues, product development expenses decreased in 1998 as compared to 1997
due primarily to increased revenues and workforce reductions implemented during
1998 as a result of management reorganization plans and because of 1997 efforts
to build the Company's courseware library.
General and Administrative. Excluding $1,300,000 of bad debt expense
recognized in the first quarter of 1998 for certain uncollectible accounts
receivable, general and administrative expenses increased from $2,387,172 (23.5%
of net revenues) in 1997 to $2,482,844 (17.0% of net revenues) in 1998. General
and administrative expenses consist primarily of personnel costs, facilities and
related costs, as well as legal, accounting and other costs. General and
administrative expenses increased in absolute dollars due primarily to the
acquisition of Ivy, Teletutor and HTR. As a percentage of revenues, general and
administrative costs decreased in 1998 as compared to 1997 due primarily to
increased revenues and workforce reductions during 1998 as a result of
management reorganization plans.
Depreciation and Amortization. Depreciation and amortization expense
increased from $931,143 (9.2% of net revenues) in 1997 to $2,462,922 (16.8% of
net revenues) in 1998. Depreciation expense increased due primarily to
additional purchases of computer equipment and other assets in 1997 to support
product development, technical operations and personnel needs as well as the
acquisitions of Ivy, Teletutor and HTR. Amortization expense increased due
primarily to the acquisitions of Ivy, Teletutor and HTR.
Reorganization Costs. During 1998, the Company implemented a plan to
reduce its workforce and close certain office facilities. The plan resulted in
(i) the termination of approximately 85 employees primarily from the product
development and administrative areas and (ii) the closure of the Company's
training facilities located in Los Angeles, and Baltimore, and an executive
office in McLean, Virginia. As a result, the Company recorded a restructuring
charge of approximately $1,770,000. The restructuring charge included
approximately $ 1,494,000 for employee severance and termination costs and
approximately $276,000 primarily for expenses related to facilities lease
cancellations and write down of assets no longer in use. During 1998, the
Company paid approximately $1,224,000 in costs under the restructuring accrual.
Included in accounts payable and accrued expenses at December 31, 1998 is
approximately $546,000 primarily representing future severance payments.
Interest and Other Income (Expense). Net interest income was $328,800 in
1997 and net interest expense was $597,139 in 1998. Interest income was derived
primarily from investing funds raised in the Company's private and public
securities offerings during 1996. Other income of $125,000 in 1997 was derived
20
<PAGE> 21
from the sale of an investment in a joint venture (an asset acquired in
connection with the acquisition of HTR).
Loss on Sale of Subsidiaries. During 1998 the Company announced plans to
divest its non-online businesses in order to focus its efforts on its core
online training business. The Company believes this move is consistent with its
strategy of moving content and customers to an online training platform from the
traditional classroom training sold through its non-online businesses. As such,
in September 1998, the Company sold Ivy back to its original owner. As a result
of this sale, the Company recorded a loss on the sale of subsidiary of $381,954
(or $0.10 per share) during the third quarter of 1998. In December 1998, the
Company sold HTR's consulting division. As a result of this sale, the Company
recorded a loss on the sale of subsidiary of $ 525,472 (or $0.14 per share) for
the year ended December 31, 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Revenues
Net revenues increased from $942,426 in 1996 to $10,144,500 in 1997,
primarily due to an increase in virtual campus licensing and tuition revenues
and revenues generated by the Company's 1997 acquisitions. Consolidated net
revenues for 1997 included $566,751 and $1,568,956 of product sales revenues
from Ivy and Teletutor, respectively. Consolidated revenues also included
$167,322 in product sales revenues, $1,085,634 in instructor-led training
revenues, and $367,548 in consulting revenues from HTR.
Cost of Revenues
Cost of revenues increased from $194,730, or 20.7% of total net revenues,
in 1996 to $2,390,711, or 23.6% of total net revenues, in 1997. The increase was
primarily due to the inclusion of the results of operations of CTA, Ivy,
Teletutor and HTR in the 1997 period, and certain royalties to content providers
incurred under contracts entered into during the last two quarters of 1997. Cost
of revenues primarily consisted of instructor fees, course packages and other
costs directly associated with training and consulting revenues, 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.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased from
$1,592,668 in 1996 to $4,438,717 in 1997 and decreased as a percentage of total
net revenues from 169.0% in 1996 to 43.7% in the comparable period in 1997.
Sales and marketing expenses consisted primarily of costs related to personnel,
sales commissions, travel, market research, advertising and marketing materials.
The increase in absolute dollars was primarily due to increased staffing and
marketing campaigns to secure contracts and strategic partnerships, and the
inclusion of the results of operations of Ivy, Teletutor, and HTR. Specifically,
during the latter part of 1996 and throughout 1997, the Company significantly
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 expenses increased from
$1,482,179 in 1996 to $4,464,976 in 1997. Product and development expenses
decreased as a percentage of total net revenues from 157.3% in 1996 to 44.0% in
1997. The increase in absolute dollars was primarily attributable to the overall
staffing and other cost increases aimed at maintaining and enhancing the
Company's courseware library and VCampus(TM) software. During 1996 and 1997 the
Company incurred significant expenses to convert traditional educational and
training content to online courseware. Contributing to the increase in product
development costs in 1997 was the inclusion of the results of the operations of
CTA and Teletutor. Product development costs for 1997 are net of $1,990,000 of
costs capitalized in accordance with the Company's software capitalization and
content development policy. No product development costs were capitalized during
1996.
General and Administrative. General and administrative expenses decreased
from $2,477,144 in 1996 to $2,387,172 in 1997 and decreased as a percentage of
total net revenues from 262.8% in 1996 to 23.5% in 1997. General and
administrative costs during 1996 included certain stock option compensation
expense of $1,022,052, which was the amount by which the fair market value of
the Common Stock exceeded the
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<PAGE> 22
exercise price of certain options as of the date the Board of Directors granted
such options or extended their exercise period. Also included in 1996 expenses
were certain one-time relocation, recruiting and acquisition costs. General and
administrative expenses generally consisted of personnel costs, facilities and
related costs, as well as legal, accounting and other costs. Excluding the 1996
compensation expense and one-time relocation, recruiting and acquisition costs,
general and administrative expenses increased in 1997 primarily due to increases
related to 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 expenses
increased from $144,284 in 1996 to $931,143 in 1997, and decreased as a
percentage of total net revenues from 15.3% in 1996 to 9.2% in 1997. In August
1996, the Company recorded goodwill and other intangibles in connection with its
acquisition of CTA in the amount of approximately $780,000, which amount is
being amortized over a three- to ten-year period. In 1997, the Company recorded
goodwill and other intangibles of approximately $12 million in connection with
its acquisitions of Ivy, Teletutor and HTR. These amounts are being amortized
over periods ranging from four to twelve years. The increase in depreciation is
attributable to additional purchases of computer equipment and other assets to
support its product development, technical operations and personnel needs.
Reorganization and Other Non-Recurring Charges. During 1997, the Company
incurred certain non-recurring charges totaling $12,130,344, primarily related
to in-process research, development and content expense in connection with the
Teletutor and HTR acquisitions. Also included in non-recurring charges are
accrued compensation expense related to the HTR acquisition and certain other
non-recurring costs.
Interest and Other Income (Expense). Interest income was $3,893 in 1996
and $328,800 in 1997. Interest income is derived primarily from investing funds
raised in the Company's private and public securities offerings during 1996.
Other income of $303,983 in 1996 was primarily due to the settlement of a note
payable to Control Data and certain trade obligations with a former vendor.
Other income of $125,000 in 1997 was derived from the sale of an investment in a
joint venture (an asset acquired in connection with the acquisition of HTR).
YEAR 2000
Computers, software and microprocessors that use only two digits to
identify a year in a date field may be unable to process accurately certain
date-based information at or after the year 2000. This is commonly referred to
as the "Year 2000" issue. The Company is addressing the issue in several ways.
First, the Company has established a team to monitor product compliance and
believes that all Company products are Year 2000 compliant. Secondly, the
Company is in the process of seeking Year 2000 compliance certification from its
major suppliers and vendors related to their products and internal business
applications. Finally, the Company has established a team to coordinate Year
2000 compliance related to internal systems.
Many of the Company's systems use vendor-provided software, and Year 2000
compliance is expected to be achieved through vendor specific upgrades. For
other internal systems, testing will be completed internally to ensure Year 2000
compliance. As of December 31, 1998, the Company has completed its assessments
of Year 2000 compliance with respect to all of its own products, 90% of its own
internal systems and approximately 75% of its vendor-provided systems and
applications. The Company anticipates all of its systems will have been
addressed and updated through vendor provided upgrades or through completion of
internal testing prior to April 30, 1999. The Company does not believe that the
cost of its Year 2000 compliance program will be material to its financial
condition or results of operations. The Company does not believe that the Year
2000 issue will materially adversely affect its business. However, the Company
continues to bear risk related to Year 2000 and could be materially adversely
affected if significant customers or suppliers fail to address the issue or if
vendor upgrades are not provided to the Company as required. The Company could
be forced to spend significant resources and funds to find alternative providers
of systems and applications used by the Company. The Company's contingency plan
for any vendor-provided product found to be non-Year 2000 compliant upon
completion of the Company's assessment is to insist upon vendor compliance
within a reasonable time in advance of Year 2000 and to pursue alternative
products with other Year 2000 compliant vendors.
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<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had $336,194 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. Cash utilized in operating activities was $9,500,483 for the
year ended December 31, 1998 and $5,775,809 for the year ended December 31,
1997. Use of cash was primarily attributable to the net loss recorded.
Cash utilized in investing activities was $1,398,793 for the year ended
December 31, 1998 as compared to $6,932,195 for the year ended December 31,
1997. The use of cash for investing activities during 1998 primarily represented
purchases of equipment and investments in software and courseware development.
The use of cash for investing activities during 1997 primarily represented
purchases of businesses, and to a lesser extent the purchase of equipment and
investments in software and courseware development.
Cash provided by financing activities was $8,529,979 for the year ended
December 31, 1998 as compared to $60,536 used by financing activities for the
year ended December 31, 1997. In March 1998, the Company raised approximately
$5,300,000 in its Series C private placement. In this transaction, the Company
issued 626,293 shares of its Series C Preferred Stock, which are convertible
into approximately 759,100 shares of Common Stock. In connection with this
transaction, the Company also issued five-year warrants to purchase 626,293
shares of Common Stock at an exercise price of $8.46 per share. The Series C
Preferred Stock has a liquidation preference of $12.69 per share upon sale or
liquidation of the Company. The Common Stock underlying both the Series C
Preferred Stock and the warrants has certain registration rights.
In June 1998, the Company raised approximately $5,200,000 through its
Series D private placement. In this transaction, the Company issued 1,082,625
shares of its Series D Preferred Stock, convertible to an equal number of common
shares. The holders of Series D Preferred Stock are entitled to receive a 5%
annual dividend compounded and paid semi-annually beginning December 31, 1998.
Such dividends are payable, at the option of the Company, either in cash or in
Common Stock. The first of such dividends were paid in shares of Common Stock in
December 1998. In June 1998 and September 1998, 137,174 of Series D shares and
17,569 shares of UOL Common Stock were issued in connection with the conversion
of approximately $867,000 of indebtedness to certain former shareholders of HTR.
The non-cash portion of this transaction has been excluded from the consolidated
statements of cash flows.
During the year ended December 31, 1998, the Company borrowed an additional
$1,500,000 on its line of credit from its then existing bank lender, and
subsequently repaid approximately $5,000,000, satisfying all its obligations to
that lender.
In August 1998, the Company obtained a secured lending facility through a
new lending institution that provided up to $2,000,000 in a revolving line of
credit ("Line of Credit") and a $500,000 senior term loan ("Senior Term Loan").
Under the terms of the agreement, the Company may borrow the lesser of (i)
$2,000,000 or (ii) a percentage of its accounts receivable in accordance with an
agreed upon schedule. The Line of Credit bears interest at the bank prime rate
plus 2.00%, while the interest rate for the Senior Term Loan is at the bank
prime rate plus 2.50%. Borrowings under the Line of Credit originally matured on
February 15, 1999, while the Senior Term Loan was set to mature on July 15,
2001. As of December 31, 1998 the Company had borrowed $1,547,931 against the
Line of Credit and $500,000 under the Senior Term Loan. The proceeds were used
primarily to satisfy the Company's obligations to its prior lending institution.
In addition, in August 1998, the Company obtained a secured term loan for
$500,000 with another lending institution, that is subordinated to the two
facilities described above (the "Subordinated Term Loan"). Amounts borrowed
under this Subordinated Term Loan bear interest at 12% annually and were due on
February 15, 1999. In connection with these transactions, the Company issued
warrants for the purchase of an aggregate of 90,000 shares of Series D Preferred
Stock at an aggregate exercise price of $495,000.
As of December 31, 1998, the Company was in violation of certain covenants
related to these secured lending facilities. In February 1999, the Company
repaid the $500,000 Senior Term Loan to its primary lender in exchange for which
the maturity date of the Line of Credit was extended (effective March 22, 1999)
to April 15, 1999. In addition, the interest rate for the Line of Credit was
increased to the bank prime rate plus 3.00%. The Company is also negotiating to
extend the maturity date for the Subordinated Term Loan to
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<PAGE> 24
May 15, 1999. In exchange for these extensions, the Company will issue warrants
to its lenders for the purchase of up to 95,000 additional shares of Series D
Preferred and/or common stock at an aggregate price of up to $387,500.
The Company is currently negotiating for a $3,000,000 line of credit from a
new lender, which facility, if approved is expected to be in place in the second
quarter of 1999.
During the fourth quarter of 1998 the Company announced plans to divest its
non-online businesses ("the legacy businesses") and, as such, engaged the
services of Friedman, Billings, Ramsey & Co. to provide investment-banking
services related to the divestiture of the HTR instructor-led training business.
The Company expects to complete this divestiture sometime in the second quarter
of 1999. Also related to the planned divestitures of the legacy businesses,
during the first quarter of 1999, the Company signed a letter of intent to sell
the HTR Knowledgeworks legacy business for $1,500,000. The Company expects this
transaction to be completed during the second quarter of 1999.
In January 1999, the Company raised approximately $1,050,000 through a
private placement of 282,500 shares of its Common Stock at $4.00 per share. In
connection with this transaction, the Company also issued warrants, exercisable
over 3 years at $3.00 per share, for the purchase of 70,625 shares of Common
Stock.
The Company expects negative cash flow from operations to continue for at
least the next six months until the legacy businesses are sold and as the online
revenue stream matures. During 1998, the Company reduced its workforce by over
50% and closed four office facilities. This reorganization is expected to
provide annual savings of approximately $6,000,000. In addition, the Company has
implemented measures to curtail the rate of discretionary spending. The Company
recognizes that it will need to raise additional funding to meet its working
capital requirements and in addition to the steps taken during the first quarter
of 1999 as described above, is considering all of its alternatives, including
continuing its efforts to obtain financing through additional equity or debt
financing, which may not be available on favorable terms, or at all. If the
Company does not address its funding needs, it will be materially adversely
affected. The Company's future capital requirements will depend on many factors,
including, but not limited to, acceptance of and demand for its products and
services, the types of arrangements that the Company may enter into with
customers and resellers, and the extent to which the Company invests in new
technology and research and development projects.
As of December 31, 1998, the Company had net operating loss carryforwards
of approximately $30,661,000 for federal income tax purposes, which will expire
at various dates through 2018. The Company's ability to utilize all of its net
operating loss and credit carryforwards may be limited by changes in ownership.
RECENT PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AcSEC") issued AICPA Statement of
Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use ("SOP 98-1"). SOP 98-1 is effective for fiscal years
beginning after December 15, 1998. SOP 98-1 requires the capitalization of
certain costs incurred in connection with developing or obtaining software for
internal use. The adoption of SOP 98-1 is not expected to have a material impact
on the Company's financial statements.
In April 1998, AcSEC issued AICPA Statement of Position 98-5 Reporting on
the Costs of Start Up Activities ("SOP 98-5"). SOP 98-5 is effective for fiscal
years beginning after December 15, 1998, and requires certain start-up and
organizational costs to be expensed as incurred. The adoption of SOP 98-5 is not
expected to have a material impact on the Company's financial statements.
In December 1998, AcSEC issued AIPCA Statement of Position 98-9,
Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions ("SOP 98-9"). SOP 98-9 amends certain provisions of SOP 97-2 to
require revenue recognition using the "residual method" when there is
vendor-specific objective evidence ("VSOE") of the fair value of all undelivered
elements in a multiple-element arrangement, but VSOE does not exist for one or
more individual elements. These provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after March 15, 1999. SOP
98-9 also extends the deferral of the application of certain provisions of SOP
97-2 provided by SOP 98-4 through fiscal
24
<PAGE> 25
years beginning on or before March 15, 1999. The adoption of SOP 98-9 is not
expected to have a material impact on the Company's financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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PART III
Certain information required by Part III is omitted from this report
because the Registrant intends to file a definitive proxy statement for its 1999
Annual Meeting of Stockholders (the "Proxy Statement") within 120 days after the
end of its fiscal year pursuant to Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended, and the information included
therein is incorporated herein by reference to the extent provided below.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 of Form 10-K concerning the
Registrant's executive officers is set forth under the heading "Executive
Officers" located at the end of Part I of this Form 10-K.
The other information required by Item 10 of Form 10-K concerning the
Registrant's directors is incorporated by reference to the information under the
heading "Proposal No. 1 -- Election of Directors" and "Other
Information -- Section 16(a) Beneficial Ownership Reporting Compliance" in the
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 of Form 10-K is incorporated by
reference to the information under the heading "Proposal No. 1 -- Election of
Directors -- Information Concerning the Board of Directors and Its Committees",
"Other Information -- Compensation of Executive Officers", "-- Compensation of
Directors", "-- Report of the Compensation Committee on Executive Compensation",
"-- Compensation Committee Interlocks and Insider Participation" and
"-- Performance Graph" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 of Form 10-K is incorporated by
reference to the information under the heading "Other Information -- Principal
Stockholders" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 of Form 10-K is incorporated by
reference to the information under the heading "Other Information -- Certain
Transactions" in the Proxy Statement.
26
<PAGE> 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following Financial Statements, Financial Statement Schedules and
Exhibits are filed as part of this report:
(1) Financial Statements.
See Index to Consolidated Financial Statements on page F-1.
(2) Financial Statement Schedules.
The following financial statement schedule is filed with this
report:
Schedule I -- Valuation and Qualifying Account and Reserve
All other financial statement schedules for which provision is
made in Regulation S-X are omitted because they are not required
under the related instructions, are inapplicable, or the required
information is given in the financial statements, including the
notes thereto and, therefore, have been omitted.
(3) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
2.1(a) Agreement and Plan of Merger, dated July 31, 1996, relating
to the acquisition of Cognitive Training Associates, Inc.
2.2(b) Stock Purchase Agreement, dated March 1, 1997, with Ivy and
its Shareholders.
2.3(c) Stock Purchase Agreement, dated April 30, 1997, relating to
the acquisition of Teletutor.
2.4(d) Agreement and Plan of Merger, dated October 31, 1997,
relating to the acquisition of HTR.
2.5 Stock Purchase Agreement, effective September 30, 1998, by
and among UOL Publishing, Inc., Ivy Software, Inc. and
Robert N. Holt.
2.6 Asset Purchase Agreement, effective December 31, 1998, by
and among UOL Publishing, Inc., and A & T Systems, Inc.
relating to the sale of the HTR consulting division.
2.7 First amendment to the Teletutor Stock Purchase Agreement,
dated December 30, 1998, relating to the restructure of
acquisition debt.
3.1(a) Amended and Restated Certificate of Incorporation, as
currently in effect.
3.2(a) Amended and Restated Bylaws, as currently in effect.
4.1(a) Form of Common Stock certificate.
10.2(a) Warrant Agreement, dated as of March 22, 1995, with Spencer
Trask Securities Incorporated and Forms of Warrant
Certificates.
10.3(a) Form of Promissory Note.
10.6(a) Warrant, dated July 23, 1996, granted to Oppenheimer & Co.,
Inc.
10.7(a) Letter Agreement, dated as of September 12, 1996, with
Austin O. Furst and certain related entitles.
10.8(a) Amended and Restated Stock Option Plan.
10.9(a) 1996 Stock Plan, as amended.
10.10(a) Employment Agreement, dated July 1, 1996, with Narasimhan P.
Kannan.
10.11(a) Employment Agreement, dated July 1, 1996, with Carl N.
Tyson.
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.12(a) Employment Agreement, dated July 31, 1996, with Michael L.
Brown.
10.13(a) Employment Agreement, dated August 15, 1996, with Leonard P.
Kurtzman.
10.14(a)* Agreement, dated August 14, 1995, as amended, with
Educational Services Institute.
10.15(a) Form of Online Educational Services Distribution Agreement.
10.16(a) Form of University Master Agreement for Online Education
Services.
10.17(a) Form of Online Educational Services Agreement.
10.18(a) Form of Inner Circle Online Educational Services Development
and Distribution Agreement.
10.19(a)* Agreement, dated April 15, 1996, with Autodesk, Inc.
10.20(a)* Project Financing and Development Agreement with InternetU,
Inc., as amended.
10.21(a) Employment letter agreement, dated October 29, 1996, with W.
Braun Jones, Jr.
10.23(e) Employment Agreement, dated April 30, 1997, with James R.
Cooper.
10.24(e) Employment Agreement, dated January 1, 1997, with Michael W.
Anderson.
10.25(e) Employment Agreement, dated October 31, 1997, with Kamyar
Kaviani.
10.26(e) Employment Agreement, dated October 31, 1997, with Farzin
Arsanjani.
10.27(e) Employment Agreement, dated October 31, 1997, with Daniel J.
Callahan, IV.
10.28(e) Letter agreement, dated December 18, 1997, with Leonard P.
Kurtzman.
10.29(f) First Union loan amendment documents dated March 31, 1998.
10.30(f) Series C Preferred Stock and Warrant Purchase Agreement.
10.31(f) Registration Rights Agreement, dated March 31, 1998.
10.32(g) Series D Preferred Stock Purchase Agreement, dated June 29,
1998.
10.33(g) Amended and Restated Registration Rights Agreement, dated
June 29, 1998.
10.34(g) Certificate of Designations, Preferences and Rights of
Series D Convertible Preferred Stock dated June 26, 1998.
10.35(g) Certificate of Designations, Preferences and Rights of
Series C Convertible Preferred Stock dated June 25, 1998.
10.36(h) Loan and Security Agreement dated August 14, 1998 with
Imperial Bank.
10.37(h) Warrant to Purchase Stock dated August 14, 1998 issued to
Imperial Bank.
10.38(h) Loan Agreement dated August 14, 1998 with Sand Hill Capital,
LLC.
10.39(h) Warrant to Purchase Stock dated August 14, 1998 issued to
Sand Hill Capital, LLC.
10.40 Form of Subscription Agreement for the $1.05 million Spencer
Trask Financing.
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Confidential treatment requested.
(a) Incorporated by reference to the similarly numbered Exhibit to the
Registrant's Registration Statement on Form S-1 (File No. 333-12135).
28
<PAGE> 29
(b) Incorporated by reference to Exhibit No. 2.1 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996.
(c) Incorporated by reference to the similarly numbered Exhibit to the
Registrant's Current Report on Form 8-K dated May 14, 1997.
(d) Incorporated by reference to Exhibit No. 2.3 to the Registrant's Current
Report on Form 8-K dated November 17, 1997.
(e) Incorporated by reference to the similarly numbered Exhibit to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.
(f) Incorporated by reference to the identically numbered Exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998.
(g) Incorporated by reference to the identically numbered Exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998.
(h) Incorporated by reference to the identically numbered Exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998.
(b) The Registrant filed no reports on Form 8-K during the fourth quarter
of the fiscal year ended December 31, 1998.
29
<PAGE> 30
UOL PUBLISHING, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998.......................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1996, 1997 and 1998...... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 31
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
UOL Publishing, Inc.
We have audited the accompanying consolidated balance sheets of UOL
Publishing, Inc. as of December 31, 1997 and 1998 and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1998. 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 consolidated financial position of UOL Publishing,
Inc. at December 31, 1997 and 1998, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Vienna, Virginia
February 26, 1999, except for Note
10
as to which the date is March 22,
1999
F-2
<PAGE> 32
UOL PUBLISHING, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 2,705,490 $ 336,194
Accounts receivable, less allowance of $739,000 and
$567,000 at December 31, 1997 and 1998, respectively... 4,413,170 3,087,268
Loans receivable from related parties..................... 133,516 143,515
Loans receivable -- current............................... -- 232,375
Prepaid expenses and other current assets................. 481,516 172,926
------------ ------------
Total current assets........................................ 7,733,692 3,972,278
Property and equipment, net................................. 2,809,619 2,436,534
Capitalized software costs and courseware development costs,
net....................................................... 2,354,159 2,130,665
Acquired online publishing rights, net...................... 845,000 407,552
Loans receivable -- less current portion.................... -- 380,234
Other assets................................................ 358,208 194,644
Other intangible assets, net................................ 3,531,514 2,508,664
Goodwill, net............................................... 8,833,040 2,840,460
------------ ------------
Total assets...................................... $ 26,465,232 $ 14,871,031
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 6,398,488 $ 4,617,418
Notes payable -- current portion.......................... 4,551,950 3,075,139
Deferred revenues......................................... 572,390 911,072
------------ ------------
Total current liabilities......................... 11,522,828 8,603,629
Long-term liabilities:
Deferred revenues -- less current portion................. -- 109,834
Notes payable -- less current portion..................... 1,531,121 337,235
------------ ------------
Total liabilities................................. 13,053,949 9,050,698
------------ ------------
Stockholders' equity:
Series C convertible Preferred Stock, $0.01 par value per
share; aggregate liquidation preference of $7,947,658;
1,000,000 shares authorized; no shares issued and
outstanding at December 31, 1997; 626,293 shares issued
and outstanding at December 31, 1998................... -- 6,263
Series D convertible Preferred Stock, $0.01 par value per
share; aggregate liquidation preference of $8,931,656;
1,200,000 shares authorized; no shares issued and
outstanding at December 31, 1997; 1,082,625 shares
issued and outstanding at December 31, 1998............ -- 10,826
Common Stock, $0.01 par value per share; 36,000,000 shares
Authorized; 3,785,210 and 3,990,046 shares issued and
outstanding at December 31, 1997 and 1998,
respectively........................................... 37,852 39,900
Additional paid-in capital................................ 40,901,196 53,460,264
Accumulated deficit....................................... (27,527,765) (47,696,920)
------------ ------------
Total stockholders' equity........................ 13,411,283 5,820,333
============ ============
Total liabilities and stockholders' equity........ $ 26,465,232 $ 14,871,031
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 33
UOL PUBLISHING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Online tuition revenues......................... $ 118,685 $ 1,662,058 $ 1,548,950
Virtual campus software revenues................ -- 2,718,000 112,253
Product sales revenues.......................... -- 2,330,029 3,347,777
Development and other revenues.................. 399,497 1,631,233 925,751
Instructor-led training revenues................ -- 1,085,634 6,303,662
Other service revenues.......................... 424,244 717,546 2,444,719
----------- ------------ ------------
Net revenues...................................... 942,426 10,144,500 14,683,112
Costs and expenses:
Cost of revenues................................ 194,730 2,390,711 10,072,558
Sales and marketing............................. 1,592,668 4,438,717 5,304,394
Product development............................. 1,482,179 4,464,976 5,781,880
General and administrative...................... 2,477,144 2,387,172 3,782,844
Depreciation and amortization................... 144,284 931,143 2,462,922
Acquired in-process research, development and
content...................................... -- 11,100,000 --
Compensation expense in connection with the
acquisition of HTR, Inc...................... -- 690,000 --
Reorganization and other non-recurring
charges...................................... -- 340,344 5,585,214
----------- ------------ ------------
Total costs and expenses.......................... 5,891,005 26,743,063 32,989,812
----------- ------------ ------------
Loss from operations.............................. (4,948,579) (16,598,563) (18,306,700)
Other income (expense):
Loss on sale of subsidiaries.................... -- -- (907,426)
Other income (expense).......................... 303,983 125,000 --
Interest income (expense)....................... 3,893 328,800 (597,139)
----------- ------------ ------------
Net loss.......................................... $(4,640,703) $(16,144,763) $(19,811,265)
=========== ============ ============
Dividends to preferred stockholders............... (330,706) -- (357,890)
----------- ------------ ------------
Net loss attributable to common stockholders...... $(4,971,409) $(16,144,763) $(20,169,155)
=========== ============ ============
Net loss per share................................ $ (4.98) $ (4.91) $ (5.27)
=========== ============ ============
Net loss per share -- assuming dilution........... $ (4.98) $ (4.91) $ (5.27)
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 34
UOL PUBLISHING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A SERIES C SERIES D
CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------ ---------------- ------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- ------- ------- ------ --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995....... 381,335 $ 3,813 -- -- -- -- 783,246 $ 7,832
Issuance of Common Stock primarily
in connection with the CTA
acquisition..................... -- -- -- -- -- -- 47,584 476
Issuance of Series A convertible
Preferred Stock................. 21,625 217 -- -- -- -- -- --
Issuance of compensatory stock
options and warrants............ -- -- -- -- -- -- -- --
Transactions in connection with
Company's initial public
offering:
Issuance of Common Stock in
connection with initial public
offering...................... -- -- -- -- -- -- 1,430,000 14,300
Conversion of Series A
Convertible Preferred Stock... (402,960) (4,030) -- -- -- -- 402,960 4,030
Conversion of Series B
Redeemable convertible
Preferred Stock............... -- -- -- -- -- -- 383,786 3,837
Conversion of Preferred Stock
dividends payable to shares of
Common Stock.................. -- -- -- -- -- -- 55,623 556
Issuance of Common Stock in
connection with exercise of
warrants...................... -- -- -- -- -- -- 67,980 680
Conversion of debt to equity.... -- -- -- -- -- -- 14,988 150
Net loss.......................... -- -- -- -- -- -- -- --
-------- ------- ------- ------ --------- ------- --------- -------
Balance at December 31, 1996....... -- -- -- -- -- -- 3,186,167 31,861
Issuance of Common Stock in
connection with the HTR
acquisition..................... -- -- -- -- -- -- 585,940 5,860
Issuance of stock options and
warrants in connection with the
HTR acquisition................. -- -- -- -- -- -- -- --
Issuance of Common Stock in
connection with exercise of
options and exercise of
warrants........................ -- -- -- -- -- -- 13,103 131
Issuance of compensatory stock
options and warrants............ -- -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- -- --
-------- ------- ------- ------ --------- ------- --------- -------
Balance at December 31, 1997....... -- -- -- -- -- -- 3,785,210 37,852
Issuance of Series C convertible
Preferred Stock................. -- -- 626,293 $6,263 -- -- -- --
Issuance of Series D convertible
Preferred Stock................. -- -- -- -- 1,082,625 $10,826 -- --
Issuance of Common Stock primarily
in connection with conversion of
debt to equity.................. -- -- -- -- -- -- 138,039 1,380
Issuance of Common Stock for
payment of Series D convertible
Preferred Stock dividends....... -- -- -- -- -- -- 28,902 289
Issuance of Common Stock in
connection with exercise of
options and exercise of
warrants........................ -- -- -- -- -- -- 37,895 379
Compensatory stock options and
warrants........................ -- -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- -- --
Dividends on convertible Preferred
Stock........................... -- -- -- -- -- -- -- --
-------- ------- ------- ------ --------- ------- --------- -------
Balance at December 31, 1998....... -- $ -- 626,293 $6,263 1,082,625 $10,826 3,990,046 $39,900
======== ======= ======= ====== ========= ======= ========= =======
<CAPTION>
TOTAL
ADDITIONAL STOCKHOLDERS'
PAID-IN ACCUMULATED EQUITY
CAPITAL DEFICIT (DEFICIT)
----------- ------------ -------------
<S> <C> <C> <C>
Balance at December 31, 1995....... $ 5,456,325 $ (6,742,299) $ (1,274,329)
Issuance of Common Stock primarily
in connection with the CTA
acquisition..................... 741,524 -- 742,000
Issuance of Series A convertible
Preferred Stock................. 412,583 -- 412,800
Issuance of compensatory stock
options and warrants............ 1,046,232 -- 1,046,232
Transactions in connection with
Company's initial public
offering:
Issuance of Common Stock in
connection with initial public
offering...................... 15,822,328 -- 15,836,628
Conversion of Series A
Convertible Preferred Stock... -- -- --
Conversion of Series B
Redeemable convertible
Preferred Stock............... 3,338,834 -- 3,342,671
Conversion of Preferred Stock
dividends payable to shares of
Common Stock.................. (556) -- --
Issuance of Common Stock in
connection with exercise of
warrants...................... 599,312 -- 599,992
Conversion of debt to equity.... 136,546 -- 136,696
Net loss.......................... -- (4,640,703) (4,640,703)
----------- ------------ ------------
Balance at December 31, 1996....... 27,553,128 (11,383,002) 16,201,987
Issuance of Common Stock in
connection with the HTR
acquisition..................... 12,591,850 -- 12,597,710
Issuance of stock options and
warrants in connection with the
HTR acquisition................. 591,118 -- 591,118
Issuance of Common Stock in
connection with exercise of
options and exercise of
warrants........................ 15,250 -- 15,381
Issuance of compensatory stock
options and warrants............ 149,850 -- 149,850
Net loss.......................... -- (16,144,763) (16,144,763)
----------- ------------ ------------
Balance at December 31, 1997....... 40,901,196 (27,527,765) 13,411,283
Issuance of Series C convertible
Preferred Stock................. 5,445,553 -- 5,451,816
Issuance of Series D convertible
Preferred Stock................. 5,859,185 -- 5,870,011
Issuance of Common Stock primarily
in connection with conversion of
debt to equity.................. 806,166 -- 807,546
Issuance of Common Stock for
payment of Series D convertible
Preferred Stock dividends....... 150,585 -- 150,874
Issuance of Common Stock in
connection with exercise of
options and exercise of
warrants........................ 88,279 -- 88,658
Compensatory stock options and
warrants........................ 209,300 -- 209,300
Net loss.......................... -- (19,811,265) (19,811,265)
Dividends on convertible Preferred
Stock........................... -- (357,890) (357,890)
----------- ------------ ------------
Balance at December 31, 1998....... $53,460,264 $(47,696,920) $ 5,820,333
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 35
UOL PUBLISHING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(4,640,703) $(16,144,763) $(19,811,265)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 95,451 442,151 1,058,950
Amortization.............................................. 48,833 663,663 2,287,796
Loss on sale of subsidiaries.............................. -- -- 907,426
Loss (gain) on debt restructuring......................... (100,000) -- 145,208
Net write-off of acquired online publishing rights........ -- -- 266,000
Net write-off of capitalized software and courseware
development costs....................................... -- -- 428,284
Revenues in connection with non-monetary transactions..... -- (795,000) --
Acquired in-process research, development and content..... -- 11,100,000 --
Stock option and stock warrant compensation expense....... 1,046,232 149,850 --
Write-off of intangible assets............................ -- 237,344 3,669,598
Interest expense related to notes payable................. -- 66,130 --
Increase in allowance for doubtful accounts............... -- -- (162,693)
Changes in operating assets and liabilities:
Accounts receivable..................................... (216,020) (2,345,382) 1,425,813
Prepaid expenses and other current assets............... (124,089) (103,894) 307,112
Other assets............................................ -- (168,042) 49,814
Accounts payable and accrued expenses................... (139,087) 926,450 (596,041)
Deferred revenues....................................... (74,250) 195,684 523,516
----------- ------------ ------------
Net cash used in operating activities....................... (4,103,633) (5,775,809) (9,500,482)
INVESTING ACTIVITIES
Purchases of property and equipment......................... (463,773) (1,412,537) (700,383)
Acquired online publishing rights........................... -- (60,000) --
Capitalized courseware development costs.................... -- (1,990,494) (992,163)
Acquisitions of businesses, net of cash acquired............ -- (3,106,294) --
Additions to intangible assets.............................. -- (330,798) (355,809)
Proceeds from loans receivable from related parties......... 286,948 -- --
Advances under loans receivable from related parties........ (101,444) (32,072) (9,999)
Proceeds from sale of subsidiaries.......................... -- -- 337,500
Proceeds from loans receivable.............................. -- -- 325,000
Advances under loans receivable............................. -- -- (2,939)
----------- ------------ ------------
Net cash used in investing activities....................... (278,269) (6,932,195) (1,398,793)
FINANCING ACTIVITIES
Proceeds from issuance of Common Stock...................... 16,437,738 15,381 123,466
Proceeds from issuance of Series A convertible Preferred
Stock..................................................... 412,800 -- --
Proceeds from the issuance of Series B redeemable
convertible Preferred Stock............................... 3,042,671 -- --
Proceeds from the issuance of Series C convertible Preferred
Stock..................................................... -- -- 5,244,824
Proceeds from the issuance of Series D convertible Preferred
Stock..................................................... -- -- 5,115,545
Proceeds from loans payable to related parties.............. 430,000 -- --
Proceeds from notes payable................................. 300,000 3,700,000 4,047,931
Repayments of loans payable to related parties.............. (585,300) -- --
Repayments of notes payable................................. (286,155) (3,775,917) (6,001,787)
----------- ------------ ------------
Net cash provided by (used in) financing activities......... 19,751,754 (60,536) 8,529,979
Net increase (decrease) in cash and cash equivalents........ 15,369,852 (12,768,540) (2,369,296)
Cash and cash equivalents at the beginning of the year...... 104,178 15,474,030 2,705,490
----------- ------------ ------------
Cash and cash equivalents at the end of the year............ $15,474,030 $ 2,705,490 $ 336,194
=========== ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................... $ 200,197 $ 125,000 $ 377,516
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 36
UOL PUBLISHING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
UOL Publishing, Inc. (the "Company") was incorporated in Virginia in 1984
and reincorporated in Delaware in 1985. The Company is a publisher of high
quality, interactive and on-demand courseware for the corporate training and
education market. Through certain of its subsidiaries, the Company also offers
courseware through more traditional media, including on-site and classroom
training, and diskette, CD-ROM and printed formats.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents, which are stated at cost, consist of highly liquid
investments with original maturities of three months or less.
Capitalized Software Costs
During 1997 and 1998, the Company capitalized certain software development
costs. Capitalization of software costs began upon the establishment of
technological feasibility, which management deemed to have occurred upon the
completion of a working model of the Company's virtual campus product
("VCampus(TM)"). The establishment of technological feasibility and the ongoing
assessment of recoverability of capitalized software costs requires considerable
judgment by management with respect to certain external factors, including, but
not limited to, technological feasibility, anticipated future gross revenues,
estimated economic life and changes in software and hardware technology.
Amortization of such costs is based on the greater of (1) the ratio of current
gross revenues to the sum of current and anticipated gross revenues, or (2) the
straight-line method over the remaining economic life of the VCampus. During
1998, the Company changed its estimate of the economic life of the VCampus(TM)
from five years to three years. This change in estimate was not material to the
net loss or net loss per share recorded by the Company for 1998. As with
estimates of this nature, it is possible that estimates of future gross
revenues, the remaining economic life of the products or both may be revised
again as a result of future events. During 1998, the Company wrote off
approximately $280,000 of software development costs for courses within certain
industry segments that the Company does not anticipate pursuing in the
short-term. The write off has been included in product development costs in the
1998 statement of operations.
Capitalized Courseware Development Costs
During 1997, the Company capitalized certain courseware development costs.
Capitalization of courseware development costs began upon the establishment of
technological feasibility, which management deemed to have occurred upon the
completion of a working model of the relevant courseware. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized
F-7
<PAGE> 37
UOL PUBLISHING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
courseware development costs requires considerable judgment by management with
respect to certain external factors, including, but not limited to,
technological feasibility, anticipated future gross revenues, estimated economic
life and changes in software and hardware technology. Amortization of such costs
is based on the greater of (1) the ratio of current gross revenues to the sum of
current and anticipated gross revenues, or (2) the straight-line method over the
remaining economic life of the product, typically two to three years. It is
possible that those estimates of future gross revenues, the remaining economic
life of the products or both may be reduced as a result of future events. During
1998, the Company wrote off approximately $150,000 of courseware development
costs for courses within certain industry segments that the Company does not
anticipate pursuing in the short-term or courses that have not shown meaningful
activity. The write-off has been included in product development costs in the
1998 statement of operations.
Acquired Online Publishing Rights
During 1997, the Company acquired online publishing rights to certain
courseware. Generally, the Company's acquisition of online publishing rights has
occurred in connection with non-monetary exchanges; see Note 2, "Non-Monetary
Transactions". At the time of licensing to the Company, this courseware was
generally established in CD-ROM, diskette or printed formats. The Company
capitalized the costs associated with acquiring this content and amortizes them
based on the greater of (1) the ratio of current gross revenues to the sum of
current and anticipated gross revenues, or (2) the straight-line method over the
remaining economic life of the product, typically two to three years.
Amortization begins when the course becomes available for sale online. It is
possible that those estimates of future gross revenues, the remaining economic
life of the products or both may be reduced as a result of future events. During
1998, the Company wrote off approximately $270,000 of acquired online publishing
rights to courses belonging to certain industry segments that the Company does
not anticipate pursuing in the short-term. The write-off has been included in
product development costs in the 1998 statement of operations.
Goodwill and Other Intangible Assets
Goodwill and other intangibles represent the unamortized excess of the cost
of acquiring subsidiary companies over the fair values of such companies' net
tangible assets at the dates of acquisition. Goodwill related to the Company's
acquisitions as described in Notes 6 and 7 are being amortized on a
straight-line basis over periods ranging from ten to twelve years. Other
intangibles, including contracts, content, trademarks, workforce, customer base
and others, are being amortized on a straight-line basis over periods ranging
from three to twelve years.
Impairment of Long-Lived Assets
At each balance sheet date, management determines whether any property and
equipment or any other assets have been impaired based on the criteria
established in Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of. The Company made no adjustments to the carrying values of the
assets during the years ended December 31, 1996. During 1997, the Company wrote
off approximately $250,000 of the workforce asset, which resulted from the
Teletutor acquisition (see Note 6). During 1998, the Company wrote off
approximately $280,000 in capitalized software development costs, $150,0000 in
capitalized courseware development costs and approximately $270,000 in acquired
online publishing rights. Also, during 1998, the Company wrote off approximately
$3,670,000 of goodwill recorded in connection with the acquisition of HTR, Inc.
("HTR") as a result of its decision to dispose of HTR's non online businesses as
described in Note 7.
F-8
<PAGE> 38
UOL PUBLISHING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition
The Company derives its revenues from the following
sources -- instructor-led training revenues, product sales revenues, other
service revenues, online tuition revenues, virtual campus software revenues, and
development and other revenues.
Revenues for instructor-led training and other services are recognized as
the services are delivered.
The Company recognizes product sales revenues, online tuition revenues and
virtual campus software revenues in accordance with Statement of Position 97-2,
Software Revenue Recognition ("SOP 97-2"), as amended by Statement of Position
98-4, Deferral of the Effective Date of a Provision of SOP 97-2. The Company
recognizes revenues from product sales upon delivery of the product to the
customer, provided no significant obligations remain. The costs of remaining
Company obligations (which are insignificant) are accrued when the related
revenues are recognized. For online tuition fees, revenue is recognized at the
time the student has accessed the selected course and is contractually obligated
to pay for the course or the drop/add period (for academic partners) has
expired. For prepaid online tuition fees and VCampus(TM) software revenues, the
Company recognizes revenue ratably over the period during which customers are
entitled to use the courseware and the duration of the VCampus(TM) licenses,
respectively.
During 1996 and 1997, the Company recognized revenues from the sale of
prepaid online tuition fees and VCampus(TM) software systems at the time the
courses or systems were delivered to the customer or reseller, in accordance
with Statement of Position 91-1, Software Revenue Recognition.
Development and other revenues earned under courseware conversion contracts
are recognized using the percentage-of-completion method. For these contracts,
revenues are recognized based on the ratio that total costs incurred to date
bear to the total estimated costs of the contract. Provisions for losses on
contracts are made in the period in which they are determined.
In 1996, two customers individually represented 29% and 27% of net
revenues. In 1997 and 1998, no individual customer represented more than 10% of
net revenues.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation, ("SFAS No. 123"). SFAS No. 123
allows companies to account for stock-based compensation either under the new
provisions of SFAS No. 123 or under the provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, ("APB No. 25"),
but requires pro forma disclosures in the footnotes to the consolidated
financial statements as if the measurement provisions of SFAS No. 123 had been
adopted. The Company accounts for its stock-based compensation in accordance
with the intrinsic value method of APB No. 25. As such, the adoption of SFAS No.
123 did not impact the Company's consolidated financial condition or results of
operations.
Concentration of Credit Risk
The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. The Company maintains
reserves for credit losses, and such losses have been within management's
expectations. During 1998, the Company increased its allowance for doubtful
accounts to approximately $2,030,000 in order to reserve for certain receivables
for which collection had become doubtful. The Company subsequently wrote off
approximately $1,460,000 of the amount reserved. As such, the allowance for
doubtful accounts totaled approximately $570,000 as of December 31, 1998.
F-9
<PAGE> 39
UOL PUBLISHING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Non-Monetary Transactions
During 1997, the Company entered into several transactions with third
parties whereby the third party exchanged a non-monetary asset (such as the
online publishing rights with respect to certain courseware content) as payment
(or partial payment) for the purchase of a VCampus(TM) software product as well
as courseware development services.
Royalties
The Company has a royalty arrangement with an entity that has provided
product development funding, which royalties become due and payable by the
Company upon the completion and sale of these products.
Royalties are also due and payable by the Company upon the sale of certain
courses for which the Company has acquired the online publishing rights. In
addition, the Company may be obligated to pay certain royalties related to
courses which a VCampus(TM) customer may have converted to an online format and
elected to distribute to all the Company's VCampus(TM)customers. Royalties
accrue at a rate of 15% to 60% of the tuition fees related to certain courses.
Royalties are classified as a cost of revenues and amounted to
approximately $315,000 and $368,000 during the year ended December 31, 1997 and
1998, respectively, the only years in which royalty costs were incurred.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs
amounted to approximately $64,000, $149,000 and $153,000 for the years ended
December 31, 1996, 1997, and 1998 respectively.
Income Taxes
The Company provides for income taxes in accordance with the liability
method.
Net Loss Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share ("SFAS No. 128").
SFAS No. 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All net loss per
share amounts for all periods have been presented, and where appropriate,
restated to conform to the SFAS No. 128 requirements.
Comprehensive Income
Effective January 1, 1998, the company adopted SFAS No. 130, Reporting of
Comprehensive Income ("SFAS No. 130"). SFAS No. 130 establishes standards for
the display of comprehensive income and its components in a full set of
financial statements. Comprehensive income includes all changes in equity during
a period except those resulting from the issuance of shares or stock and
distributions to shareholders. There were no differences between net loss and
comprehensive loss.
Segment Information
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS No.
131"). SFAS No. 131 changes the way public companies report segment information
in annual financial reports to stockholders. It also establishes
F-10
<PAGE> 40
UOL PUBLISHING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
standards for related disclosures about products and services, geographic areas,
and major customers. Management believes the Company's operations compromise
only one segment and as such adoption of SFAS No. 131 has not impacted the
disclosures made in the Company's financial statements.
Supplemental Information of Non-Cash Investing and Financing Activities
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Fair value of assets acquired & acquired in-process research
& development............................................. $27,232,695
Less: Cash paid............................................. 3,393,390
Notes payable issued........................................ 2,308,590
Stock issued................................................ 13,184,870
-----------
Liabilities assumed......................................... $ 8,345,845
===========
</TABLE>
Recent Pronouncements
In March, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AcSEC") issued AICPA
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 is effective for
fiscal years beginning after December 15, 1998. SOP 98-1 requires the
capitalization of certain costs incurred in connection with developing or
obtaining software for internal use. The adoption of SOP 98-1 is not expected to
have a material impact on the Company's financial statements.
In April 1998, AcSEC issued AICPA Statement of Position 98-5, Reporting on
the Costs of Start Up Activities ("SOP 98-5"). SOP 98-5 is effective for fiscal
years beginning after December 15, 1998. SOP 98-5 requires certain start-up and
organizational costs to be expensed as incurred. The adoption of SOP 98-5 is not
expected to have a material impact on the Company's financial statements.
In December 1998, AcSEC issued AIPCA Statement of Position 98-9,
Modification of SOP 97-2, "Software Revenue Recognition" With Respect to Certain
Transactions ("SOP 98-9"). SOP 98-9 amends certain provisions of SOP 97-2 to
require revenue recognition using the "residual method" when there is
Vendor-Specific Objective Evidence ("VSOE") of the fair value of all undelivered
elements in a multiple-element arrangement, but VSOE does not exist for one or
more individual elements. These provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after March 15, 1999. SOP
98-9 also extends the deferral of the application of certain provisions of SOP
97-2 provided by SOP 98-9 through fiscal years beginning on or before March 15,
1999. The adoption of SOP 98-9 is not expected to have a material impact on the
Company's financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements, are stated at
cost. Depreciation is calculated using the straight-line method over an
estimated useful life of three to seven years. Leasehold improvements
F-11
<PAGE> 41
UOL PUBLISHING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
are amortized over the lesser of the related lease term or the useful life.
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Equipment............................................ $2,284,640 $2,634,111
Computer software.................................... 787,588 1,068,049
Leasehold improvements............................... 64,682 88,357
Furniture and fixtures............................... 388,932 396,708
---------- ----------
3,525,842 4,187,225
Less accumulated depreciation........................ (716,223) (1,750,691)
---------- ----------
Total................................................ $2,809,619 $2,436,534
========== ==========
</TABLE>
4. CAPITALIZED SOFTWARE AND COURSEWARE DEVELOPMENT COSTS
Capitalized software and courseware development costs consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Capitalized software costs........................... $1,617,584 $2,195,160
Capitalized courseware development costs............. 865,768 806,425
---------- ----------
2,483,352 3,001,585
Less accumulated amortization........................ (129,193) (870,920)
---------- ----------
Total................................................ $2,354,159 $2,130,665
========== ==========
</TABLE>
During 1998, the Company wrote off approximately $280,000 of software
development costs and $150,000 of courseware development costs (see Note 2).
5. ACQUIRED ONLINE PUBLISHING RIGHTS
Acquired online rights consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Acquired online publishing rights.................... $ 855,000 $ 505,000
Less accumulated amortization........................ (10,000) (97,448)
---------- ----------
Total................................................ $ 845,000 $ 407,552
========== ==========
</TABLE>
In 1997, the Company acquired approximately $795,000 of the acquired online
publishing rights through non-monetary transactions (See Note 2).
During 1998, the Company wrote off approximately $270,000 of acquired
online publishing rights (see Note 2).
F-12
<PAGE> 42
UOL PUBLISHING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets were comprised of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998
----------- ----------
<S> <C> <C>
Goodwill............................................ $ 9,057,863 $3,234,499
Contracts........................................... 200,000 200,000
Developed content................................... 1,529,574 1,369,836
Work force.......................................... 500,000 407,080
Trademarks and names................................ 1,056,875 969,444
Customer base....................................... 456,875 369,444
Other............................................... 100,000 100,000
----------- ----------
12,901,187 6,650,303
Less accumulated amortization....................... (536,633) (1,301,179)
----------- ----------
$12,364,554 $5,349,124
=========== ==========
</TABLE>
In December 1997, the Company's management, in accordance with its
impairment policy for long-lived assets, determined that the Teletutor employee
workforce asset had been impaired as of December 31, 1997 due to planned
workforce reductions, and as such, wrote off approximately $250,000 of the
carrying amount of the asset. This amount is included in reorganization and
non-recurring expenses in the 1997 statement of operations. In 1998, as a result
of the sale of Ivy Software, Inc. ("Ivy"), the Company wrote off approximately
$775,000 which was the remaining net unamortized goodwill balance that had
resulted from the acquisition of Ivy . In addition, during 1998, goodwill that
had resulted from the acquisition of Teletutor was reduced to zero and the
remaining intangible assets were reduced ratably by approximately $329,000 due
to purchase price adjustments. In December 1998, upon the sale of its consulting
line of business, the Company wrote off approximately $1,238,000 in goodwill and
workforce assets. In addition, in accordance with its impairment policy for
long-lived assets, the Company determined that goodwill that resulted from the
HTR acquisition which related to HTR's non-online businesses had been impaired
as of December 31, 1998. As a result, the Company wrote off approximately
$3,670,000 of goodwill (see Note 7).
7. ACQUISITIONS AND DISPOSITIONS
During the three years ended December 31, 1998, the Company made the
following acquisitions, all of which were accounted for using the purchase
method. Accordingly, the purchase price of each company acquired was allocated
first to the fair market value of the acquired tangible and identifiable
intangible assets.
Cognitive Training Associates, Inc.
On August 1, 1996, the Company acquired by merger substantially all of the
assets and liabilities (with the exception of the building, vehicle, certain
equipment, and certain notes payable) of Cognitive Training Associates, Inc., a
Texas corporation ("CTA"), for 42,487 shares of the Company's Common Stock. In
conjunction with the acquisition, the Company recorded goodwill in the amount of
$505,336, which was subsequently adjusted to $579,312 in 1997, and other
intangible assets in the amount of $200,000.
The Company also issued fully vested options to purchase 5,096 shares of
the Company's Common Stock, at an exercise price of $0.12 per share, to four
employees of CTA. Additionally, the Company granted an option to purchase 16,995
shares of the Company's Common Stock, at an exercise price of $21.18 per share,
to the former stockholder of CTA in conjunction with a two-year employment
agreement. In December 1996, management repriced the option to $12.75 per share.
Management believes that this new grant price approximated the fair market value
on the date of repricing. The option vested over a two-year
F-13
<PAGE> 43
UOL PUBLISHING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
period beginning in August 1996. Additionally, pursuant to the employment
agreement, the former stockholder of CTA was paid $150,000 by the Company upon
successful integration of CTA into the Company. The Company expensed this
$150,000 during 1996. The Company also agreed to lease the building owned by the
former stockholder of CTA for $5,000 per month or $60,000 annually (see Note
11).
Ivy Software, Inc.
In March 1997, the Company acquired Ivy Software, Inc. ("Ivy"), a Virginia
corporation that develops and distributes business and accounting software for
the academic education market, for $314,000 in cash and potential future
payments not to exceed approximately $862,000, which were based upon integration
of operations, conversion of software and operating results. In connection with
this transaction, the President and sole shareholder of Ivy entered into a
three-year consulting agreement with the Company. As a result of this
acquisition, the Company recorded goodwill in the amount of $300,000, which was
subsequently adjusted to $869,643 upon scheduled payments to the former
shareholder of Ivy. In September 1998, the Company sold Ivy for approximately
$250,000 in cash and $196,000 in a note receivable. The note bears interest at
6% and is payable in quarterly installments through September 2005. The Company
retained the rights to sell and distribute the online versions of Ivy software.
As a result of the sale, the Company wrote off the unamortized goodwill balance
and recorded a loss on the sale of subsidiary of $381,954. The Company's
potential future obligations of approximately $300,000 related to the
acquisition were terminated upon the sale. The operating results of Ivy are
included in the Company's financial statements from the effective date of the
acquisition through the effective date of the sale.
Cooper & Associates, Inc. (d/b/a. Teletutor)
In April 1997, the Company acquired Cooper & Associates, Inc., d/b/a
Teletutor ("Teletutor"), an Illinois corporation that develops, distributes and
supports computer-based training courses for the data and telecommunications
industry. The terms of the transaction included a $3,000,000 cash payment at
closing and a $2,000,000 non-interest bearing note to be paid ratably on the
first, second and third anniversary dates of the acquisition. The operating
results of Teletutor are included in the Company's financial statements since
the effective date of the acquisition. In conjunction with this acquisition, the
Company allocated the excess of the purchase price over the fair market value of
the acquired net assets as follows: (i) $829,575 to developed content, $273,858
to work force, $456,875 to trademarks and names, $456,875 to customer base and
contracts and $5,138 to goodwill and (ii) $2,700,000 to acquired in-process
research, development and content.
In December 1997, the Company's management, in accordance with its
impairment policy for long-lived assets, determined that the employee workforce
asset had been impaired as of December 31, 1997 due to planned workforce
reductions, and wrote off approximately $250,000 of the carrying amount of the
asset. This amount was included in reorganization and non-recurring expenses in
the statement of operations for the year ended December 31, 1997. In addition,
during 1998, goodwill was reduced to zero and the remaining intangible assets
were reduced ratably by approximately $329,000 due to purchase price
adjustments.
HTR, Inc.
In October 1997, the Company acquired HTR, Inc. ("HTR"), a Delaware
corporation primarily engaged in the business of providing technical training,
publishing and consulting services for the information technology industry. 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
paid the former HTR stockholders $600,000 in a combination of cash and
short-term notes and assumed approximately $3,500,000 of HTR debt. The executive
officers of HTR were to receive bonuses in the total amount of $690,000 granted
in conjunction with the signing of three-year employment agreements no later
than December 31, 1998. In addition, the Company created a stock option pool of
180,000 shares of Common Stock and an incentive bonus pool with a potential
payout not to exceed approximately $3,300,000 for three years, contingent upon
F-14
<PAGE> 44
UOL PUBLISHING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the financial performance of HTR. In conjunction with this acquisition, the
Company allocated the excess of the purchase price over the fair market value of
the acquired net assets as follows (i) $8,010,590 to goodwill, $700,000 to
developed content, $500,000 to workforce, $600,000 to trademarks and names, and
(ii) $8,400,000 to acquired in-process research, development and content. On
June 29, 1998, the executive officers of HTR agreed to convert approximately
$420,000 of their sign-on bonuses and $320,000 of acquisition related
indebtedness into 134,447 shares of the Company's Series D convertible Preferred
Stock (see Note 13).
In December 1998, the Company sold HTR's consulting business for $750,000
in cash and a note receivable. The note bears interest at 5% and is payable in
quarterly installments through December 2000. As a result of the sale, the
Company wrote off the intangible assets related to the consulting business and
recorded a loss on the sale of $525,472.
In December 1998, the Company announced its intention to dispose of HTR's
non-online businesses. In accordance with SFAS 121, the Company has reported
assets related to such businesses at the lower of carrying amount or fair value
less estimated selling costs. This resulted in a write off of approximately
$3,670,000 of goodwill related to the non-online businesses.
8. RESTRUCTURING OF OPERATIONS
During 1998, the Company implemented a plan to reduce workforce and close
certain office facilities. The plan resulted in (i) the termination of
approximately 85 employees primarily from the product development and
administrative areas and (ii) closure of the Company's training facilities
located in Los Angeles and Baltimore and an executive office in McLean,
Virginia. As a result, the Company recorded a restructuring charge of
approximately $1,770,000 in 1998 included in reorganization and other
non-recurring charges in the 1998 statement of operations. The restructuring
charge included approximately $ 1,494,000 for employee severance and termination
costs and approximately $276,000 primarily for expenses related to facilities
lease cancellations and write-down of assets no longer in use. During 1998, the
Company paid approximately $1,224,000 in costs under the restructuring accrual.
Included in accounts payable and accrued expenses at December 31, 1998 is
approximately $546,000 primarily representing future severance payments. The
Company expects these actions to be completed by the end of calendar year 1999.
9. LOANS PAYABLE TO (RECEIVABLE FROM) RELATED PARTIES
In March 1996, the Company issued a convertible promissory note for
$300,000 to an entity controlled by a stockholder. The note bore interest at
10.5% per annum. In connection with an agreement executed by the Company and the
stockholder in September 1996, the stockholder exercised warrants to purchase
67,980 shares of Common Stock, resulting in proceeds to the Company of
approximately $600,000 and the Company repaid the balance of the $300,000
convertible note payable plus accrued interest of $23,560 to the entity
controlled by the stockholder. Additionally, the Company issued to the
stockholder warrants to purchase 15,687 shares of Common Stock at an exercise
price equal to the initial public offering ("IPO") price of $13.00 per share.
In May 1996, the Company issued a convertible subordinated unsecured
promissory note for $130,000 to an officer of the Company. The note bore
interest at a rate of 10% per annum. In addition, the officer was issued
warrants to purchase 6,904 shares of the Company's Common Stock at an exercise
price of $18.83 per share. These warrants are exercisable for eight years. The
Company believes that any value associated with the warrants is immaterial. In
December 1996, the officer converted his outstanding note payable balance plus
accrued interest of $136,696 to 14,988 shares of Common Stock. In addition, the
number of shares of Common Stock underlying such officer's warrant, was
increased by 7,349 shares and the exercise price thereof reduced to $9.12 per
share, pursuant to certain anti-dilution rights previously granted. In 1998, the
number of
F-15
<PAGE> 45
UOL PUBLISHING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
shares underlying the warrant and the warrant exercise prices were further
adjusted to 15,771 shares and $8.24 per share, respectively, due to the
anti-dilution provisions pursuant to the agreement.
Loans receivable from the Company's officers and employees amounted to
$125,000 as of December 31, 1997 and 1998. The Company accrues interest on the
loans receivable at a rate of prime less 1%. Interest income related to loans
receivable amounted to $10,152, $8,516 and $10,000 during the years ended
December 31, 1996, 1997 and 1998, respectively.
10. NOTES PAYABLE
At December 31, 1995, the Company owed $293,366 in a non-interest bearing
note payable. The note was discounted at a rate of 12% per annum. As of December
31, 1995, accrued interest on note payable totaled $106,217. During 1996, the
Company repaid $299,583 as settlement of the note and accrued interest. The
remaining $100,000 was forgiven pursuant to a settlement agreement executed by
the Company and the issuer of the note. The Company included the gain of
$100,000 as other income in the statements of operations.
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 was convertible into shares of the
Company's Series B redeemable convertible Preferred Stock at a conversion rate
of $18.83 per share, subject to adjustments for certain events, such as the sale
of the Company's Common or Preferred Stock at a price less than the conversion
price. In July 1996, principal and accrued interest were converted into shares
of Series B redeemable convertible Preferred Stock (see Note 13).
In connection with the Teletutor acquisition (see Note 7), the Company
entered into a non-interest bearing promissory note with the stockholders of
Teletutor whereby the Company agreed to pay $2,000,000 due in three annual
installments of $666,667 beginning on May 1, 1998. The Company has used a 5.5%
discount rate in recording this note. During 1998, the Company paid $666,667 in
cash on the note balance. In December 1998, the Company and the former
stockholders of Teletutor restructured the terms of the note as follows: the
Company issued 105,000 shares of Common Stock and three-year warrants to
purchase 55,000 shares of its Common Stock at an exercise price of $6.00 per
share; and the Company executed a new non-interest bearing promissory note for
$826,666, payable in installments through April 2000. As a result, the Company
recorded $145,208 as loss on debt restructuring for the excess of the fair
market value of the Common Stock, warrants and new promissory note over the
carrying amount of the original promissory note. The loss on debt restructuring
is included in reorganization and non-recurring expenses in the 1998 statement
of operations.
In connection with the HTR acquisition, the Company assumed approximately
$3,633,000 of notes payable and accrued interest. In December 1997, the Company
repaid the principal and accrued interest on the notes payable. The Company also
issued notes payable to former stockholders of HTR totaling $509,968 and bearing
simple interest at an annual rate of 6%. The principal amounts of these notes
were due in two annual installments payable on October 31, 1998 and October 31,
1999. During 1998, the Company repaid approximately $100,000 and converted
approximately $352,000 into 9,191 and 58,194 of the Company's Common and Series
D convertible Preferred Stock, respectively (see Note 13).
In December 1997, the Company and its then existing bank lender entered
into a secured lending facility agreement, which provided for a line of credit
in the amount of $3,000,000 bearing interest at the LIBOR Market Index Rate plus
275 basis points. Interest was payable monthly with the principal originally due
on April 30, 1999. Also in December 1997, the Company and its bank entered into
a secured lending facility agreement which provided for a term loan in the
amount of $3,000,000 bearing interest at the LIBOR Market Index Rate plus 350
basis points. Interest was payable monthly with the principal originally due on
April 1, 1999. As of December 31, 1997, the Company was in violation with
certain of its covenants related to this line of credit facility and during
August 1998, the Company repaid approximately $5,000,000 under the line of
credit and term loan, satisfying all of its obligations to that lender.
F-16
<PAGE> 46
UOL PUBLISHING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In August 1998, the Company obtained a secured lending facility through a
new lending institution that provided up to $2,000,000 in a revolving line of
credit ("Line of Credit")and a $500,000 senior term loan ("Senior Term Loan").
Under the terms of the agreement, the Company may borrow the lesser of (i)
$2,000,000 or (ii) a percentage of its accounts receivable in accordance with an
agreed upon schedule. The Line of Credit bears interest at the bank prime rate
plus 2.00%, while the interest rate for the Senior Term Loan is at the bank
prime rate plus 2.50%. Borrowings under the Line of Credit originally matured on
February 15, 1999 while the Senior Term Loan was set to mature on July 15, 2001.
As of December 31, 1998 the Company had borrowed $1,547,931 against the Line of
Credit and $500,000 under the Senior Term Loan. The proceeds were used primarily
to satisfy the Company's obligations to its prior lending institution. In
addition, in August 1998, the Company obtained a secured term loan for $500,000
with another lending institution, that is subordinated to the $2,500,000
facility described above (the "Subordinated Term Loan"). Amounts borrowed under
this Subordinated Term Loan bear interest at 12% annually and were due on
February 15, 1999. In connection with these transactions, the Company issued
warrants for the purchase of an aggregate of 90,000 shares of Series D Preferred
Stock at an aggregate exercise price of $495,000.
As of December 31, 1998, the Company was in violation of certain covenants
related to these secured lending facilities. In February 1999, the Company
repaid the $500,000 Senior Term Loan to its primary lender in exchange for which
the maturity date of the Line of Credit was extended (effective March 22, 1999)
to April 15, 1999. In addition, the interest rate for the Line of Credit was
increased to the bank prime rate plus 3.00%. The Company is also negotiating to
extend the maturity date for the Subordinated Term Loan to May 15, 1999. In
exchange for these extensions, the Company will issue warrants to its lenders
for the purchase of up to 95,000 additional shares of Series D Preferred and/or
common stock at an aggregate price of up to $387,500.
Notes payable at December 31, 1998 consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Line of credit to a bank............................. $ 500,000 $1,547,931
Notes payable to banks............................... 3,000,000 985,000
Notes payable to former stockholders of Teletutor.... 1,864,752 769,346
Notes payable to former stockholders of HTR.......... 509,968 60,078
Other................................................ 208,351 50,019
---------- ----------
$6,083,071 $3,412,374
---------- ----------
Current portion of notes payable..................... $4,551,950 $3,075,139
---------- ----------
Notes payable, less current portion.................. $1,531,121 $ 337,235
========== ==========
</TABLE>
Annual maturities of notes payable at December 31, 1998 were as follows:
<TABLE>
<S> <C>
1999........................................................ $3,075,139
2000........................................................ 337,235
----------
$3,412,374
==========
</TABLE>
11. 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.
F-17
<PAGE> 47
UOL PUBLISHING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, which was included in other income in the 1996 statement
of operations.
Leases
The Company leases office space under non-cancelable operating lease
agreements with various renewal options. Future minimum lease payments may be
periodically adjusted based on changes in the lessors' operating charges.
Additionally, the Company leases various office equipment under non-cancelable
operating leases. Rent expense for the years ended December 31, 1996, 1997 and
1998 was $137,519, $437,756 and $1,022,693, respectively.
As of December 31, 1998, payments due under non-cancelable operating leases
were as follows:
<TABLE>
<S> <C>
1999........................................................ $1,008,680
2000........................................................ 781,555
2001........................................................ 522,201
2002........................................................ 375,256
2003........................................................ 185,809
----------
$2,873,501
==========
</TABLE>
Employment Agreements
During 1996 and 1997, the Company entered into employment agreements with
certain key executives under which the Company is required to pay the following
base salaries annually over the next three years:
<TABLE>
<S> <C>
1999........................................................ 710,000
2000........................................................ 263,333
--------
$973,333
========
</TABLE>
In addition, the Company is required to pay certain performance incentives
limited to 50% of such base salaries.
12. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Accounts payable and accrued expenses................ $5,435,498 $3,690,090
Accrued payroll and payroll taxes.................... 602,323 164,957
Accrued reorganization costs......................... -- 545,669
Accrued vacation..................................... 360,667 216,702
---------- ----------
$6,398,488 $4,617,418
========== ==========
</TABLE>
In 1996, the Company accrued interest on the accrued payroll in arrears to
the Chief Executive Officer and three other officers of the Company at a rate of
5% per annum. Interest expense related to the accrued
F-18
<PAGE> 48
UOL PUBLISHING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
payroll in arrears amounted to $36,182 during the year ended December 31, 1996.
Accrued payroll as of December 31, 1998 consists of earned but unpaid
commissions.
In 1998, the Company implemented a reorganization plan to reduce workforce
and close certain office facilities (see Note 8). Amounts accrued at December
31, 1998 primarily represent payments to be made under employee severance
agreements.
13. STOCKHOLDERS' EQUITY
Equity Transactions
During 1996, the Company issued 5,097 shares of Common Stock as payment for
certain accounts payable amounting to $42,000. The shares were issued at a price
per share of $8.83. The non-cash portion of this transaction has been excluded
from the statements of cash flows. In addition, the Company issued 42,487 shares
of Common Stock in connection with the purchase of CTA, which the Company valued
at the estimated fair market value of the Company's Common Stock on the
acquisition date (see Note 7).
During 1996, the Company issued an aggregate of 20,534 shares of Series A
convertible Preferred Stock for net proceeds of approximately $413,000 at a
price of $21.18 per share. Additionally, the Company issued 1,091 shares of
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.
On July 19, 1996, the Company issued 185,877 shares of Series B redeemable
convertible Preferred Stock for total proceeds of $3,500,000, including
conversion of a $300,000 convertible promissory note (see Note 10).
During 1996, the Board of Directors approved a 1-for-11.76812037 reverse
stock split of the Company's $0.01 par value Series A, Series B and Series B-1
Preferred Stock and Common Stock, which became effective on November 20, 1996.
All references in the accompanying financial statements to the number of shares
of Preferred Stock and Common Stock and per share amounts have been restated to
reflect the split.
On December 2, 1996, the Company sold 1,430,000 shares of Common Stock in
its IPO for net proceeds of approximately $15,800,000. Simultaneously with the
IPO, the Company converted all outstanding shares of Series B redeemable
convertible Preferred Stock into shares of Common Stock on a 1-for-2.06 basis.
The Company also declared accrued dividends in arrears of 4,852 shares of Series
B redeemable convertible Preferred Stock to holders of Series B redeemable
convertible Preferred Stock, which were then converted to Common Stock on a
1-for-2.06 basis. The Company also converted all outstanding shares of Series A
convertible Preferred Stock into shares of Common Stock on a one-for-one basis,
and the Company declared accrued dividends in arrears of 45,628 shares of Series
A convertible Preferred Stock to holders of Series A convertible Preferred
Stock, which were then converted to Common Stock on the same basis as the Series
A conversion. The conversion of Preferred Stock to Common Stock is a non-cash
transaction and accordingly, has been excluded from the statements of cash
flows. Also, one of the Company's stockholders exercised warrants to purchase
67,980 shares of Common Stock and the Company subsequently repaid the $300,000
convertible note payable balance with the proceeds therefrom. Also, an officer
of the Company converted his $130,000 note payable into 14,988 shares of Common
Stock.
On October 31, 1997, the Company issued 585,940 shares of Common Stock in
connection with the purchase of HTR (see Note 7). In addition, the Company
issued 34,020 of options and warrants in connection with the HTR acquisition,
which options and warrants were valued at fair value ($591,118) using the Black-
Scholes pricing model and were accounted for as purchase price.
In March 1998, the Company raised net proceeds of approximately $5,300,000
in a private placement of Series C Preferred Stock and warrants (the "Series C
Preferred Stock"). In this transaction, the Company issued approximately 626,300
shares of the Series C Preferred Stock, which are convertible into approximately
F-19
<PAGE> 49
UOL PUBLISHING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
759,100 shares of Common Stock. The Company also issued five-year warrants to
purchase approximately 626,300 shares of Common Stock at an exercise price of
$8.46 per share. The Series C Preferred Stock has a liquidation preference of
$12.69 per share upon sale or liquidation of the Company. The Common Stock
underlying both the Preferred Stock and the warrants has certain registration
rights. The Company has recorded a deemed dividend of approximately $207,000 due
to the Series C Preferred Stock being convertible to Common Stock at a discount
from fair value on the date of issuance.
In June 1998, the Company raised approximately $5,200,000 in net proceeds
through its private placement of Series D Preferred Stock (the "Series D
Preferred Stock"). In this transaction, the Company issued 1,082,625 shares of
the Series D Preferred Stock, which are convertible to an equal number of common
shares. The holders of Series D Preferred Stock are entitled to receive a 5%
annual dividend compounded and paid semi-annually beginning December 31, 1998.
Such dividends are payable, at the option of the Company, either in cash or in
Common Stock. The Series D Preferred Stock has a liquidation preference of $8.25
per share upon sale or liquidation of the Company. In June and September 1998,
respectively, 137,174 of Series D shares and 17,569 shares of the Company's
Common Stock were issued in connection with the conversion of approximately
$867,000 of indebtedness primarily to certain former shareholders of HTR. The
non-cash portion of this transaction has been excluded from the 1998
consolidated statement of cash flows.
In October 1998, the Company issued 9,191 shares of Common Stock at $3.75
per share, the closing price of the Company's Common Stock on the date of
issuance, to two former HTR shareholders in exchange for cancellation of the
Company's indebtedness to such shareholders.
In December 1998, the Company issued 6,279 shares at $7.06 per share though
an employee stock purchase program. For each share purchased, employees also
received a fully vested option to purchase one share of the Company's Common
Stock at an exercise price of $7.06, the closing price of the Common Stock at
the date of issuance.
In December 1998, the Company issued 105,000 shares at $5.875 per share,
the closing price of the Company's Common Stock on the date of issuance,
primarily to former Teletutor shareholders pursuant to a restructuring of the
Company's indebtedness to such shareholders. Pursuant to that restructuring, the
Company also issued three-year warrants to purchase 55,000 shares of its Common
Stock with an exercise price of $6.00 per share.
In December 1998, the Company also issued 28,902 shares of Common Stock to
its Series D Preferred Stockholders as payment for accrued dividends. The number
of shares to be issued as payment of the dividend was determined based on the
fair market value of the Company's Common Stock on the date of issuance.
Stock Option Plans
The Company adopted a stock option plan (the "Original Plan") which
permitted the Company to grant options to purchase up to 288,916 shares of
Common Stock to employees, board members and others who contribute materially to
the success of the Company. In November 1996, the Company's Board of Directors
decided not to grant any further options under the Original Plan.
During 1996, the Company's Board of Directors approved a new stock plan
(the "1996 Plan"), which reserved 135,960 shares of Common Stock for issuance,
pursuant to options or otherwise, to employees, directors and consultants. The
number of shares reserved was subsequently increased to 524,893 options. During
1997, the Company's Board of Directors approved an additional increase of
1,000,000 shares, which was approved by the stockholders at the annual
stockholder meeting in 1998. Stock options under the Original Plan and 1996 Plan
are generally granted at prices which the Company's Board of Directors believes
approximates the fair market value of its Common Stock at the date of grant.
Individual grants generally become exercisable ratably over a period of four to
five years from the date of grant. The contractual terms of the options range
from three to ten years from the date of grant.
F-20
<PAGE> 50
UOL PUBLISHING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1996, the Company's Board of Directors extended the exercise period
of 88,032 fully vested options to August 31, 1999. This extension of the
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. Additionally, the
Company recognized an expense of $144,270 during 1996 for options whose grant
price at the grant date was below fair market value. During 1997, the Company
granted certain options contingent on stockholder approval. Because these
options are considered variable, the Company measured the difference between the
grant price and fair market value of the Company's Common Stock at December 31,
1997 and accordingly recorded compensation expense of $75,000.
Common stock option activity was as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1996 1997 1998
------------------ -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the beginning of the
year............................. 100,438 $ 2.71 595,233 $10.23 1,236,481 $11.69
Granted.......................... 515,189 11.50 766,460 12.64 1,096,877 9.08
Exercised........................ -- -- (12,604) 1.29 (33,265) 3.25
Canceled or expired.............. (20,394) 5.30 (112,608) 11.61 (844,047) 12.61
------- ------ --------- ------ --------- ------
Outstanding at the end of the
year............................. 595,233 $10.23 1,236,481 11.69 1,456,046 10.62
======= ====== ========= ====== ========= ======
Options exercisable at year-end.... 185,408 $ 7.05 303,638 $ 8.76 364,824 $ 9.79
======= ====== ========= ====== ========= ======
</TABLE>
As of December 31, 1998, 218,833 shares were available for issuance under
the 1996 Plan.
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------------
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1998 LIFE PRICE 1998 PRICE
--------------- -------------- ----------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Less than $1.00...... 26,001 0.9 $ 0.86 26,001 $ 0.86
$1.01 - $3.00........ 29,090 5.5 1.81 29,090 1.81
$3.01 - $6.00........ 202,944 8.9 4.67 23,694 4.95
$6.01 - $9.00........ 398,363 7.6 7.56 122,999 8.60
$9.01 - $12.00....... 244,325 9.3 10.17 50,500 11.38
$12.01 - $15.00...... 376,198 8.8 13.07 81,740 12.99
$15.01 - $18.00...... 14,825 8.7 16.90 3,800 16.87
Greater than
$18.00............. 164,300 8.8 23.00 27,000 23.00
--------- --- ------ ------- ------
1,456,046 8.4 $10.62 364,824 $ 9.79
========= === ====== ======= ======
</TABLE>
F-21
<PAGE> 51
UOL PUBLISHING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Had compensation expense related to the stock option plans been determined
based on the fair value at the grant date for options granted during the years
ended December 31, 1996, 1997 and 1998 consistent with the provisions of SFAS
No. 123, the Company's net loss and net loss per share would have been as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Net loss -- pro-forma............... $(4,617,938) $(17,885,671) $(22,672,194)
----------- ------------ ------------
Net loss per share -- pro-forma..... $ (3.86) $ (5.44) $ ($5.92)
=========== ============ ============
</TABLE>
The effect of applying SFAS No. 123 on the years ended December 31, 1996,
1997, and 1998 pro forma net loss as stated above is not necessarily
representative of the effects on reported net loss for future years due to,
among other things, the vesting period of the stock options and the fair value
of additional stock options in future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing fair value model with the following
weighted-average assumptions used for grants in 1996: dividend yield of 0%;
expected volatility of 43%; risk-free interest rate of 6.125%; and expected life
of the option term of 3.5 years. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing fair value
model with the following weighted-average assumptions used for grants in 1997:
dividend yield of 0%; expected volatility of 69%; risk-free interest rate of
6.5%; and expected life of the option term of 7 years. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing fair value model with the following weighted average assumptions used
for grants in 1998: dividend yield of 0%; expected volatility of 100%; risk free
interest rate of 5.0%; and expected life of the option term of 7 years. The
weighted average fair value of the options granted in 1995 with a stock price
greater than the exercise price is $5.37. The weighted average fair values of
the options granted in 1996 with a stock price equal to the exercise price and
with a stock price greater than the exercise price are $4.65 and $12.42,
respectively. The weighted average fair values of the options granted in 1997
with a stock price equal to the exercise price, and with a stock price greater
than the exercise price, and with a stock price less than the exercise price are
$9.85, $10.81 and $11.57, respectively. The weighted average fair values of the
options granted in 1998 with a stock price equal to the exercise price, and with
a stock price greater than the exercise price, and with a stock price less than
the exercise price are $6.07, $7.98 and $6.27, respectively.
Warrants
The Company has also granted warrants to purchase Common Stock to various
investors, employees and outside vendors. Warrant activity was as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------- ---------
<S> <C> <C> <C>
Outstanding at the beginning of the year....... 500,484 476,367 535,368
Granted...................................... 43,863 60,199 862,294
Exercised.................................... (67,980) (1,198) (42,150)
Canceled or expired.......................... -- -- --
------- ------- ---------
Outstanding at the end of the year............. 476,367 535,368 1,355,512
======= ======= =========
</TABLE>
Exercise prices on the outstanding warrants range from $2.94 to $20.50 per
share.
Of the total warrants outstanding at December 31, 1998, warrants to
purchase 1,000,360 shares of Common Stock were issued in connection with equity
transactions and a research and development agreement and warrants to purchase
355,152 Common Stock were issued in connection with convertible related party
F-22
<PAGE> 52
UOL PUBLISHING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
debt and short-term debt. There are certain anti-dilution rights associated with
these warrants, which are effective upon the occurrence of certain events.
In connection with the Company's IPO, the exercise prices of warrants to
purchase 35,167 shares of Common Stock were reduced from $17.65 or $18.83 per
share to the IPO price, $13.00 per share, to satisfy certain anti-dilution
rights previously granted. The holders of these warrants have agreed to waive
further price-based anti-dilution rights, except with respect to issuances of
Common Stock below $8.83 per share. During 1998, the number of shares and
exercise prices of certain warrants were adjusted to satisfy certain anti-
dilution rights previously granted.
In connection with the Company's new borrowing arrangements (see Note 10),
the Company issued warrants for the purchase of an aggregate of 90,000 shares of
Series D Preferred Stock at an exercise price of $5.50 per share, the issuance
price of the Series D Preferred Stock.
Reserve for Issuance
As of December 31, 1998, the Company had reserved 3,030,391 shares of
Common Stock for issuance upon the exercise of outstanding options and warrants.
13. RESEARCH AND DEVELOPMENT AGREEMENT
On April 15, 1996, the Company entered into an agreement with Autodesk,
Inc. ("Autodesk") to develop and maintain a campus-like graphical user interface
located on the Internet. The Company will be entitled to certain revenues
generated by the project and will pay 20% in royalties to Autodesk for the use
of certain trademark rights. Additionally, the Company will pay royalties to the
authors of the projects. During September 1996 and as later amended, the Company
contracted with InternetU, Inc., ("InternetU"), a stockholder, to provide the
funding for the project. In exchange for $1,550,000, to be provided in
installments through September 30, 1997, corresponding to the achievement of
certain milestones, the Company agreed to grant InternetU Common Stock warrants
to purchase 73,172 shares of Common Stock at an exercise price of $13.00 per
share. In addition, InternetU will receive royalties on certain future revenues
generated by the project. The Company determined that the fair value of the
warrants was approximately $150,000 and will recognize this amount as research
and development expense in line with the payments it receives from InternetU.
This agreement is cancelable and should either party to the agreement fail to
perform no additional cash or warrants are required to be paid or issued, or
revenues shared. The Company recognized $250,000 as revenue during 1996 as the
related work to achieve the milestone was completed during 1996. Accordingly,
the Company recorded $24,180 as expense for the warrants to be issued to
InternetU. In 1997, the Company recognized an additional $560,000 of revenue
related to the work performed to achieve the milestones set as of March 31, 1997
and June 30, 1997. The Company recognized $54,350 as expense for the warrants
issued to InternetU pursuant to the terms of the agreement in 1997.
14. RETIREMENT PLANS
Teletutor had a 401(k) Retirement Savings Plan covering all employees who
met defined eligibility requirements. Employee contributions to Teletutor's plan
were made at predetermined rates elected by the employees. Additionally, the
employer had the option to match a portion of the employee contributions and
make a discretionary contribution to the plan. The Company did not make
discretionary contributions in 1997 or 1998. The Company did automatically vest
all employees separated from Teletutor in 1998 due to a partial plan termination
which was approved on November 30, 1998.
HTR, Inc. maintained a tax deferred savings and retirement plan to provide
retirement benefits for all eligible employees. HTR's 401(k) plan assets were
frozen in July 1998 and all participants were eligible to begin deferrals into
the UOL Publishing, Inc. 401(k) plan at that time. All assets were merged into
the UOL Publishing, Inc. 401(k) plan on December 31, 1998.
F-23
<PAGE> 53
UOL PUBLISHING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The UOL Publishing, Inc. 401(k) plan (adopted in 1997) allows employees to
elect an amount between 1% and 15% of their total compensation to contribute to
the plan. All full-time employees are eligible to make participation elections
in January and July of each year. There is a graduated vesting schedule for
employee contributions in which contributions fully vest over a period of four
years. The plan allows discretionary Company contributions. In 1997 and 1998,
there were no discretionary Company contributions made to the plan.
15. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes. Significant components of the Company's net deferred
tax assets were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
Net operating loss carryforwards................... $10,411,000 $12,266,000
Accrued payroll.................................... 358,000 131,000
Reserves........................................... -- 708,000
Other assets and liabilities, net.................. 28,000 199,000
----------- -----------
Total deferred tax assets.......................... 10,797,000 13,304,000
Valuation allowance................................ (10,797,000) (13,304,000)
----------- -----------
Net deferred tax assets............................ $ -- $ --
=========== ===========
</TABLE>
As of December 31, 1997 and 1998, the Company had net operating loss
carryforwards for federal income tax purposes of approximately $25,757,000 and
$30,661,000, respectively, which will expire at various dates through 2018. 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.
16. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net
loss per share:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Numerator:
Net loss.......................... $(4,640,703) $(16,144,763) $(19,811,265)
Accrued dividends to preferred
stockholders................... (330,706) -- (357,890)
----------- ------------ ------------
Net loss available to common
stockholders................... $(4,971,409) (16,144,763) (20,169,155)
=========== ============ ============
Denominator:
Denominator for basic earnings per
share -- weighted-average
shares......................... 997,958 3,286,281 3,827,216
=========== ============ ============
Denominator for diluted earnings
per share -- adjusted
weighted-average shares........ 997,958 3,286,281 3,827,216
=========== ============ ============
Basic net loss per share............ $ (4.98) $ (4.91) $ (5.27)
=========== ============ ============
Diluted net loss per share.......... $ (4.98) $ (4.91) $ (5.27)
=========== ============ ============
</TABLE>
F-24
<PAGE> 54
UOL PUBLISHING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The net loss per share amounts exclude the dilutive effect of stock
purchase warrants, options and convertible securities because the net losses
recorded by the Company for 1998, 1997 and 1996 make such common stock
equivalents anti-dilutive.
17. MANAGEMENT'S PLANS
During the fourth quarter of 1998 the Company announced plans to divest its
non-online businesses ("the legacy businesses") and, as such, engaged the
services of Friedman, Billings, Ramsey & Co. to provide investment-banking
services related to the divestiture of the HTR instructor-led training business.
The Company expects to complete this divestiture sometime in the second quarter
of 1999. Also related to the planned divestitures of the legacy businesses,
during the first quarter of 1999, the Company signed a letter of intent to sell
the HTR Knowledgeworks legacy business for $1,500,000. The Company expects this
transaction to be completed during the second quarter of 1999.
The Company is currently negotiating for a $3,000,000 line of credit from a
new lender, which facility if approved is expected to be in place in the second
quarter of 1999.
The Company expects negative cash flow from operations to continue for at
least the next six months until the legacy businesses are sold and as the online
revenue stream matures. During 1998, the Company reduced its workforce by over
50% and closed four office facilities. This reorganization is expected to
provide significant cost savings to the Company. In addition, the Company has
implemented measures to curtail the rate of discretionary spending. The Company
recognizes that it will need to raise additional funding to meet its working
capital requirements and in addition to the steps taken during the first quarter
of 1999 as described above, is considering all of its alternatives, including
continuing its efforts to obtain financing through additional equity or debt
financing, which may not be available on favorable terms, or at all.
18. SUBSEQUENT EVENTS
In February 1999, the Company completed a private placement of its Common
Stock. The Company issued 282,500 shares of Common Stock to certain accredited
investors at $4.00 per share, the closing price of the Common Stock on the date
of issuance, with net proceeds of approximately $1,050,000. The Company also
issued warrants to purchase 70,625 shares of its Common Stock at an exercise
price of $3.00 per share, the closing price of the Common Stock on the date of
issuance. The Company used the proceeds from this private placement for
retirement of bank debt and for working capital. The Common Stock issued and the
Common Stock underlying the warrants have certain registration rights.
In February 1999, the Company signed a letter of intent to sell the HTR
Knowledgeworks legacy business for $1,500,000. The Company expects this
transaction to be completed during the second quarter of 1999.
In February 1999, the Company repaid a $500,000 note to its primary bank
lender.
F-25
<PAGE> 55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UOL PUBLISHING, INC.
By: /s/ NARASIMHAN P. KANNAN
------------------------------------
Narasimhan P. Kannan
Chief Executive Officer
Date: March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ NARASIMHAN P. KANNAN Director and Chief Executive March 30, 1999
- --------------------------------------------------- Officer (Principal Executive
Narasimhan P. Kannan Officer)
/s/ JOANNE O. HINDMAN Chief Financial Officer March 30, 1999
- --------------------------------------------------- (Principal Financial and
Joanne O. Hindman Accounting Officer)
/s/ EDSON D. DECASTRO Director March 30, 1999
- ---------------------------------------------------
Edson D. DeCastro
/s/ BARRY K. FINGERHUT Director March 30, 1999
- ---------------------------------------------------
Barry K. Fingerhut
/s/ KAMYAR KAVIANI Director March 30, 1999
- ---------------------------------------------------
Kamyar Kaviani
/s/ WILLIAM E. KIMBERLY Director March 30, 1999
- ---------------------------------------------------
William E. Kimberly
/s/ JOHN D. SEARS Director March 30, 1999
- ---------------------------------------------------
John D. Sears
/s/ STEVEN M. H. WALLMAN Director March 30, 1999
- ---------------------------------------------------
Steven M. H. Wallman
</TABLE>
<PAGE> 56
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
UOL Publishing, Inc.
We have audited the consolidated balance sheets of UOL Publishing, Inc. as
of December 31, 1997 and 1998 and for each of the three years in the period
ended December 31, 1998 and have issued our report thereon dated February 26,
1999, except for Note 10, as to which the date is March 22, 1999. Our audits
also included the financial statement schedule listed in Item 14(d) of this Form
10-K. The schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Vienna, Virginia
February 26, 1999, except for Note 10,
as to which the date is March 22, 1999
<PAGE> 57
SCHEDULE I -- VALUATION AND QUALIFYING ACCOUNT AND RESERVE
(IN THOUSANDS)
UOL PUBLISHING, INC.
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING OF BALANCE AT
CLASSIFICATION PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
-------------- ------------ --------- ---------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1996..................... $ 20 $ 16 $ -- $ 36
Year ended December 31, 1997..................... 36 703* -- 739
Year ended December 31, 1998..................... 739 1,293 1,465 567
</TABLE>
- ---------------
* Includes additions of $253,500 from purchase price adjustments resulting from
the acquisitions of Ivy Software, Inc., Cooper & Associates, Inc. (d/b/a
Teletutor), and HTR, Inc.
<PAGE> 1
EXHIBIT 2.5
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made and entered into
effective as of September 30, 1998, by and among UOL PUBLISHING, INC., a
Delaware corporation ("UOL"), IVY SOFTWARE, INC., a Virginia corporation
("Ivy"), and ROBERT N. HOLT (the "Purchaser"). UOL and Ivy shall sometimes
collectively be referred to as the "Transferors" and individually as a
"Transferor".
WITNESSETH:
WHEREAS, Ivy has authorized capital stock of 100,000 shares of Ivy Common
Stock (as defined below), of which 51,000 shares are issued and outstanding;
WHEREAS, UOL currently owns all of the outstanding shares of Ivy Common
Stock (collectively the "Ivy Shares");
WHEREAS, such Ivy Shares had been owned by Purchaser prior to UOL's
acquisition of such shares pursuant to that certain Stock Purchase Agreement
made and entered into effective March 1, 1997, by and among UOL, Ivy and
Purchaser (the "Original Agreement");
WHEREAS, UOL now desires to sell back to Purchaser, and Purchaser desires
to repurchase from UOL, all right, title and interest in and to the Ivy Shares;
NOW, THEREFORE, in reliance upon the premises, representations, warranties
and covenants made herein and in consideration of the mutual agreements herein
contained, the parties hereto hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Definitions. For purposes of this Agreement, the following terms shall
have the meaning set forth below:
"Acquiror Indemnitee" and "Acquiror Indemnitees" shall have the respective
meanings set forth in Section 10.1.
"Acquiror Indemnitor" and "Acquiror Indemnitors" shall have the respective
meanings set forth in Section 10.1.
"Affiliate" means, with respect to any Person, any other Person directly or
indirectly Controlling, Controlled by, or under common Control with such other
Person.
"Affiliated Group" means any affiliated group within the meaning of Code
Section 1504.
"Balance Sheet" shall have the meaning set forth in subsection 4.5(a).
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms or could form the basis for any
specified consequence.
"CERCLA" shall have the meaning set forth in subsection 4.23(a).
"Closing" shall have the meaning set forth in Section 3.1.
"Closing Date" shall have the meaning set forth in Section 3.1.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" shall have the meaning set forth in Section 6.1.
<PAGE> 2
"Consulting Agreement" shall have the meaning set forth in Section 6.5.
"Controlled Group of Corporations" has the meaning set forth in Code
Section 1563.
"Control" (including, with correlative meanings, the terms "controlled by",
"controlling" and "under common control with"), as used with respect to any
Person, means the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of such Person, whether
through ownership of voting securities, by contract or otherwise.
"Employee Benefit Plan" means any: (i) nonqualified deferred compensation
or retirement plan or arrangement which is an Employee Pension Benefit Plan;
(ii) qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan; (iii) qualified defined benefit retirement plan
or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan); and (iv) Employee Welfare Benefit Plan or fringe benefit
plan or program.
"Employee Pension Benefit Plan" has the meaning set forth in ERISA Section
3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in ERISA Section
3(1).
"Encumbrances" means any and all restrictions on transfer, liens,
encumbrances, charges, pledges, security interests, taxes, options, warrants,
purchase rights, contracts, commitments, equities, claims and demands.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Fiduciary" has the meaning set forth in ERISA Section 3(21).
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"Intellectual Property" means: (i) all inventions (whether patentable or
unpatentable and whether or not reduced to practice and the record of conception
documentation relating thereto), all improvements thereto, and all patents,
patent applications, and patent disclosures, together with all reissuances,
divisions, continuations, renewals, continuations-in-part, revisions,
extensions, and reexaminations thereof; (ii) all trademarks, service marks,
certification marks, collective marks, trade dress, trade styles, logos, trade
names, company names, and corporate names, together with all translations,
adaptions, derivations, and combinations thereof and including all goodwill
associated therewith, and all applications, registrations, recordings and
renewals in connection therewith; (iii) all copyrightable works, all copyrights,
rights and interests in copyrights and all applications, registrations,
recordings and renewals in connection therewith; (iv) all mask works and all
applications, registrations, recordings and renewals in connection therewith;
(v) all trade secrets and confidential business information (including ideas,
research and development, know-how, formulas, compositions, manufacturing and
production processes and techniques, technical data, designs, drawings,
specifications, customer and supplier lists, pricing and cost information, and
business and marketing plans and proposals); (vi) all computer software
(including data and related documentation); (vii) all other proprietary rights;
(viii) all copies and tangible embodiments thereof (in whatever form or medium);
(ix) all income, royalties, damages or payments now and hereafter due and/or
payable under any of the foregoing with respect to any of the foregoing and the
right to sue for past, present or future infringements of any of the foregoing;
(x) all licenses with respect to any of the foregoing; and (xi) all rights
corresponding to any of the foregoing throughout the world.
"Ivy Common Stock" means the Common Stock, $1.00 par value per share, of
Ivy.
"Knowledge" means knowledge after reasonable investigation.
"Liability" means any liability (whether known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due), including
liability for Taxes.
"Litigation" shall have the meaning set forth in subsection 4.7(a).
"Multiemployer Plan" has the meaning set forth in ERISA Section 3(37).
2
<PAGE> 3
"New Contracts" shall have the meaning set forth in subsection 4.9(a).
"PBGC" means the Pension Benefit Guaranty Corporation.
"Person" means any individual, corporation, partnership, limited
partnership, limited liability company, trust, entity or unincorporated
organization or a government or any agency or political subdivision thereof.
"Prohibited Transaction" has the meaning set forth in ERISA Section 406 and
Code Section 4975.
"Proprietary Information" shall have the meaning set forth in subsection
4.15(g).
"RCRA" has the meaning set forth in subsection 4.23(a).
"Reportable Event" has the meaning set forth in ERISA Section 4043.
"Subsidiary" means any corporation with respect to which a specified Person
(or Subsidiary thereof) owns a majority of the common stock or has the power to
vote or direct the voting of sufficient securities to elect a majority of the
directors.
"Tax" or "Taxes" means any federal, state, local, foreign or other income,
gross receipts, profits, franchise, license, transfer, sales, use, payroll,
withholding, occupation, property (real or personal), excise and similar taxes,
fees, duties, assessments, withholdings or governmental charges of any nature
(including interest, penalties or additions to such taxes).
"Tax Returns" means all returns, reports, estimates, information returns
and statements of any nature with respect to Taxes.
"Transferor Indemnitee" and "Transferor Indemnitees" shall have the
respective meanings set forth in Section 10.2.
"Transferor Indemnitor" and "Transferor Indemnitors" shall have the
respective meanings set forth in Section 10.2.
ARTICLE 2
BASIC TRANSACTION
2.1 Agreement to Sell and Purchase Securities. For the consideration
hereinafter provided and subject to the terms and conditions of this Agreement,
at the Closing, UOL shall sell, assign, transfer, convey and deliver to
Purchaser, free and clear of all liens and encumbrances, and Purchaser shall
purchase and acquire from UOL, all of the Ivy Shares.
2.2 Consideration at Closing. At the Closing, subject to the terms and
conditions hereof and subject to adjustment as set forth in Section 2.4 hereof:
(a) UOL shall cause to be delivered to Purchaser certificates
representing the Ivy Shares, together with stock powers duly endorsed in
blank for the transfer of the Ivy Shares to Purchaser, and, if applicable,
with all necessary transfer taxes paid or other revenue stamps affixed
thereto;
(b) Purchaser shall deliver to UOL by check or wire transfer the sum
of $25,000.00; and
(c) Ivy shall execute the $420,919.97 promissory note in favor of UOL
attached hereto as Exhibit A.
ARTICLE 3
CLOSING
3.1 Closing. The closing of the transactions provided for herein (the
"Closing") shall be effective as of 2:00 p.m. on September 30, 1998 (the
"Closing Date"), at the offices of UOL Publishing, Inc., 8251 Greensboro Drive,
Suite 500, McLean, Virginia 22102.
3
<PAGE> 4
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF TRANSFERORS
Except as otherwise set forth in the Disclosure Schedule attached hereto as
Exhibit B, UOL and Ivy hereby jointly and severally represent and warrant to
Purchaser as follows:
4.1 Organization of Ivy; Authority. Ivy is a corporation duly organized,
validly existing and in good standing under the laws of the Commonwealth of
Virginia, with the full power and authority, corporate and otherwise, to enter
into this Agreement and to carry out and perform its obligations under the terms
of this Agreement. Ivy has the full and unrestricted power and authority,
corporate and otherwise, to own, operate and lease its assets and properties and
to carry on its business as currently conducted and in which it presently
proposes to engage. Ivy is not qualified to do business in any other
jurisdiction, and the nature of Ivy's business does not require it to be so
qualified. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by all requisite
corporate or other action on the part of UOL and Ivy. This Agreement has been
duly executed and delivered by UOL and Ivy and constitutes the valid, binding
and enforceable obligation of UOL and Ivy, enforceable in accordance with its
terms and conditions.
4.2 Ability to Carry Out the Agreement. Neither UOL nor Ivy is subject to
or bound by any provision of:
(i) any law, statute, rule, regulation, ordinance or judicial or
administrative decision;
(ii) any articles or certificate of incorporation or bylaws;
(iii) any mortgage, deed of trust, lease, note, stockholders'
agreement, bond, indenture, other instrument or agreement, license, permit,
trust, custodianship, or other restriction of any kind or character
whatsoever, at any time entered into by UOL, or entered into by Ivy since
March 1, 1997;
(iv) any judgment, order, writ, injunction or decree of any court,
governmental body, administrative agency or arbitrator, at any time entered
against UOL, or entered against Ivy since March 1, 1997;
that would prevent or be violated by, or would result in any penalty, forfeiture
or contract termination as a result of, or under which there would be a default
as a result of, nor is the consent of any Person under any contract or agreement
disclosed in Schedule 4.9(a) which has not been obtained required for, the
execution, delivery and performance by UOL and Ivy of this Agreement and the
transactions contemplated hereby.
4.3 Capitalization of Ivy; Ownership; Investment. (a) The authorized
capital stock of Ivy consists solely of 100,000 shares of Ivy Common Stock. No
shares of Ivy Common Stock, nor any other securities of Ivy, have been issued
since March 1, 1997. None of the directors and officers of Ivy has any Basis to
believe that there are shares of Ivy Common Stock or other securities of Ivy
issued and outstanding other than the Ivy Shares. The Ivy Shares are held of
record by UOL. Since March 1, 1997, Ivy has neither authorized nor issued any
options, warrants, purchase rights, subscription rights, conversion rights,
exchange rights, rights of first refusal, preemptive rights or other rights of
any kind to acquire, directly or indirectly, any shares of capital stock of Ivy
or securities convertible into or exchangeable for, or which otherwise confer on
the holder thereof any right to acquire, any shares of capital stock or
securities of Ivy, nor, since March 1, 1997, has Ivy committed itself to issue
any such capital stock option, warrant, right or security. Prior to the Closing,
any and all notes and debts of Ivy to UOL or its Affiliates, any advances made
by UOL to Ivy, any similar or related rights or interests owed to UOL, and any
and all interest or dividends payable with respect to any of the foregoing
shall, without any liability on the part of Ivy, be repaid or converted into
shares of Ivy Common Stock. Since March 1, 1997, Ivy has neither authorized nor
issued any stock appreciation, phantom stock, profit participation or other
similar rights with respect to Ivy. UOL is not party to any voting trust, proxy,
or other agreement, commitment, obligation, or understanding with respect to the
voting of the Ivy Shares.
(b) The Ivy Shares are owned of record and beneficially by UOL. UOL has
good, valid, and marketable title to the Ivy Shares, free and clear of any and
all Encumbrances, with full right and lawful authority to transfer, assign,
deliver, convert and exchange the Ivy Shares pursuant to this Agreement. UOL is
not party to
4
<PAGE> 5
any option, warrant, purchase right, or other contract or commitment that could
require UOL to sell, transfer, or otherwise dispose of any capital stock of Ivy
(other than pursuant to this Agreement).
4.4 Subsidiaries and Affiliates. Since March 1, 1997, Ivy has formed no
Subsidiaries and has not acquired control, directly or indirectly, or any direct
or indirect equity participation or any interest in any corporation,
partnership, trust, venture, business, enterprise, firm or other business
association.
4.5 Balance Sheet; Liabilities. (a) Attached hereto as Exhibit C is Ivy's
unaudited balance sheet as of September 30, 1998 (the "Balance Sheet"). The
Balance Sheet (including the notes thereto) is true, correct, and complete,
fairly presents the financial position of Ivy at the date thereof, and is
consistent with the books and records of Ivy (which books and records are
correct and complete).
(b) None of the directors and officers of Ivy has any Basis to believe that
there are Liabilities of Ivy (and there is no Basis for any present or future
action, suit, proceeding, hearing, investigation, charge, complaint, claims or
demand against Ivy since March 1, 1997, giving rise to any Liability), except
for those: (i) accrued or reflected on the face of the Balance Sheet; or (ii)
arising in the ordinary course of business (none of which results from, arises
out of, relates to, is in the nature of, or was caused by any breach of
contract, breach of warranty, tort infringement, or violation of law).
4.6 Title to Tangible Personal Properties; Absence of Liens. (a) Ivy has
good, valid and marketable title to, or valid and subsisting leasehold interests
in, all buildings, machinery, equipment and other tangible personal properties
and assets acquired since March 1, 1997 that are used in the business of Ivy,
located on its premises, or shown on the Balance Sheet, free and clear of any
and all Encumbrances, except for Encumbrances reflected on the Balance Sheet.
All such personal property is free from defects, has been maintained in
accordance with normal industry practice, is in good operating condition and
repair, ordinary wear and tear excepted, and is suitable for the purposes for
which it presently is used and presently is proposed to be used.
(b) None of the directors and officers of Ivy has any Basis to believe that
Ivy does not have good, valid and marketable title to, or valid and subsisting
leasehold interests in, all buildings, machinery, equipment and other tangible
personal properties and assets acquired prior to March 1, 1997 that are used in
the business of Ivy, located on its premises, or shown on the Balance Sheet,
free and clear of any and all Encumbrances, except for Encumbrances reflected on
the Balance Sheet. Since March 1, 1997, all such personal property has been
maintained in accordance with normal industry practice, is in good operating
condition and repair, ordinary wear and tear excepted, and is suitable for the
purposes for which it presently is used and presently is proposed to be used.
(c) The assets and properties of Ivy as reflected on the Balance Sheet
constitute all of the assets and properties necessary to conduct the business of
Ivy in the manner in which it has previously been conducted and as presently
proposed to be conducted.
4.7 Litigation. (a) There is no charge, complaint, action, suit,
arbitration, proceeding, hearing, or investigation (collectively, "Litigation")
pending or, to the best knowledge and belief of Ivy and UOL, threatened against
Ivy in, before, or by any court or arbitrator or governmental agency or
authority. None of the directors and officers of Ivy has any Basis to believe
that any Litigation may be brought or threatened against Ivy. Since March 1,
1997, Ivy has not become subject to any injunction, judgment, order, decree,
ruling, or charge that remains outstanding.
(b) Ivy has not breached, and is not in default of, any of the legal
obligations it has undertaken since March 1, 1997, with respect to any of its
licensors, licensees, collaborative and other partners, joint venturers,
brokers, distributors, business consultants, franchisees, franchisors,
representatives or other independent contractors since that date. None of the
directors and officers of Ivy has any Basis to believe that Ivy has breached, or
is in default of, any other of its legal obligations with respect to any of its
licensors, licensees, collaborative and other partners, joint venturers,
brokers, distributors, business consultants, franchisees, franchisors,
representatives or other independent contractors.
5
<PAGE> 6
4.8 Compliance with Law. Since March 1, 1997, UOL and Ivy have complied in
all material respects with all applicable statutes, laws, ordinances,
regulations, rules, orders, determinations, writs, injunctions, awards,
judgments, and decrees of every kind whatsoever of any and all governmental
authorities applicable to Ivy (including all agencies thereof) or to the assets,
properties and business of Ivy, and no suit, action, proceeding, hearing,
investigation, charge, complaint, claim, demand or notice has been filed,
commenced or threatened against Ivy alleging any failure to so comply. All
material governmental approvals, permits and licenses required by Ivy in
connection with the conduct of its business have been obtained, are in full
force and effect, and are being complied with in all respects. Since March 1,
1997, neither Ivy nor any of its employees, agents, distributors or
representatives has paid or received any bribe or other unlawful, questionable
or unusual payment of money or other thing of more than nominal value, granted
or accepted any extraordinary discount, or furnished or been given any other
unlawful or unusual inducement to or from any person, business association or
governmental entity in the United States or elsewhere in connection with or in
furtherance of the business of Ivy, and such business, since March 1, 1997, is
not in any manner dependent upon the making or receipt of such payment,
discounts or other inducements.
4.9 Contracts. (a) Section 4.9(a) of the Disclosure Schedule sets forth a
list of each written and oral contract or agreement to which Ivy has become a
party since March 1, 1997 (collectively, the "New Contracts"):
(i) which involves the lease of personal property from or to third
parties providing for lease payments in excess of $1,000 per annum;
(ii) under which it has created, incurred, assumed or guaranteed (or
may create, incur, assume or guarantee) indebtedness for borrowed money
(including capitalized lease obligations) involving more than $1,000;
(iii) which is in the nature of an employment, consulting or severance
agreement or collective bargaining agreement involving the payment of more
than $1,000 or not entered into in the ordinary course of business;
(iv) which is with any of UOL and its Affiliates (other than Ivy);
(v) which concerns confidentiality, nondisclosure or noncompetition;
(vi) which is a profit sharing, stock option, stock appreciation,
deferred compensation, severance or other plan or arrangement for the
benefit of its current or former directors, officers and employees;
(vii) which by its terms is not terminable without liability and
involves the payment or receipt of $1,000 or more;
(viii) which the consequences of a default or termination could have
an adverse effect on the business, assets, financial condition, operations,
results of operations, or future prospects of Ivy;
(ix) which is in the nature of a partnership, joint venture, or
collaborative arrangement or relationship;
(x) which involves the purchase or sale of raw materials, commodities,
supplies, products, or other personal property, or for the furnishing or
receipt of services, the performance of which shall extend over a period of
more than one year, result in financial loss to Ivy, or involves
consideration in excess of $1,000; or
(xi) which is outside of the ordinary course of business or contains
any provision requiring Ivy to indemnify any other party thereto.
(b) Ivy has delivered or made available to Purchaser a correct and complete
copy of each written New Contract, as amended to date, and a written summary
setting forth the terms and conditions of each oral New Contract. All of the New
Contracts are legal, valid, binding, enforceable in accordance with their
respective terms against Ivy and any other parties thereto, and are in full
force and effect on identical terms following the consummation of the
transactions contemplated in this Agreement. There is not under any New
Contract:
6
<PAGE> 7
(i) any existing default, breach or violation by Ivy or by any other party
thereto; (ii) an event which, after notice or lapse of time or both, would
constitute a default or breach by Ivy or by any other party, or permit
termination, modification, or acceleration, under the New Contract; or (iii) any
repudiation of any provision of any New Contract.
4.10 Brokers and Intermediaries. None of the Transferors has employed any
broker, finder, advisor, or intermediary in connection with the transactions
contemplated by this Agreement which would be entitled to a broker's, finder's,
or similar fee or commission in connection therewith or upon the consummation
thereof.
4.11 Tax Matters. Since March 1, 1997:
(a) Ivy has filed all Tax Returns that it has been required to file. All
such Tax Returns were correct and complete in all respects. All Taxes owed by
Ivy (whether or not shown on any Tax Return) have been paid. Ivy currently is
not the beneficiary of any extension of time within which to file any Tax
Return. No claim has ever been made by an authority in a jurisdiction where Ivy
does not file Tax Returns that it is or may be subject to taxation by that
jurisdiction. There are no Encumbrances on any of the assets of Ivy that arose
in connection with any failure (or alleged failure) to pay any Tax.
(b) Ivy has withheld and paid all Taxes required to have been withheld and
paid in connection with amounts paid or owing to any employee, consultant,
independent contractor, creditor, stockholder, or other third Person.
(c) No Transferor or director or officer (or employee responsible for Tax
matters) of Ivy expects any authority to assess any additional Taxes for any
period for which Tax Returns have been filed. There is no dispute or claim
concerning any Tax Liability of Ivy either: (i) claimed or raised by any
authority in writing; or (ii) as to which any of the Transferors or the
directors and officers (and employees responsible for Tax matters) of Ivy has
Knowledge based upon personal contact with any agent of such authority. No
federal, state, local, and foreign income Tax Returns filed with respect to Ivy
for the tax year ended December 31, 1997 are currently the subject of any audit.
The Transferors have delivered or made available to Purchaser correct and
complete copies of all federal, state and local income Tax Returns, examination
reports, and statements of deficiencies assessed against or agreed to by Ivy for
the tax year ended December 31, 1997.
(d) Ivy has not waived any statute of limitations in respect of Taxes or
agreed to any extension of time with respect to a Tax assessment or deficiency.
(e) Ivy has not filed a consent under Code Section 341(f) concerning
collapsible corporations. Ivy has not made any payments, is not obligated to
make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that shall not be
deductible under Code Section 280G. Ivy has not been a United States real
property holding corporation within the meaning of Code Section 897(c)(2) during
the applicable period specified in Code Section 897(c)(1)(A)(ii). Ivy has
disclosed on its Federal income Tax Returns all positions taken therein that
could give rise to a substantial understatement of federal income Tax within the
meaning of Code Section 6662. Ivy is not a party to any Tax allocation or
sharing agreement. Ivy is not a member of an Affiliated Group filing a
consolidated Federal income Tax Return and has no Liability for the Taxes of any
Person (other than Ivy) under Treas. Reg. sec. 1.1502-6 (or any similar
provision of state, local or foreign law), as a transferee or successor, by
contract, or otherwise.
(f) The unpaid Taxes of Ivy: (i) did not, as of the Most Recent Fiscal
Month End exceed the reserve for Tax Liability (rather than any reserve for
deferred Taxes established to reflect timing differences between book and Tax
income) set forth on the face of the Balance Sheet (rather than in any notes
thereto); and (ii) do not exceed that reserve as adjusted for the passage of
time through the Closing Date in accordance with the past custom and practice of
Ivy in filing its Tax Returns.
(g) As of the Closing, Ivy shall not have outstanding any warrants,
options, convertible securities, or any other type of right pursuant to which
any Person could acquire stock in Ivy that, if exercised or converted, would
affect Purchaser's acquisition or retention of control of Ivy as defined in Code
Section 368(c)(1).
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(h) Ivy operates at least one significant historic business line or owns at
least a significant portion of its historic business assets, in each case within
the meaning of Treas. Reg. sec.1.368-1(d).
4.12 Employee Benefits. Section 4.12 of the Disclosure Schedule lists each
Employee Benefit Plan that Ivy maintains or to which Ivy contributes. Each such
Employee Benefit Plan (and each related trust, insurance contract, or fund)
complies in form and in operation in all respects with the applicable
requirements of ERISA, the Code, and other applicable laws. Since March 1, 1997:
(a) All required reports and descriptions (including Form 5500 Annual
Reports, Summary Annual Reports, PBGC-1's, and Summary Plan Descriptions) have
been filed or distributed appropriately with respect to each such Employee
Benefit Plan. The requirements of Part 6 of Subtitle B of Title I of ERISA and
of Code Section 4980B have been met with respect to each such Employee Benefit
Plan which is an Employee Welfare Benefit Plan.
(b) All contributions (including all employer contributions and employee
salary reduction contributions) which are due have been paid to each such
Employee Benefit Plan which is an Employee Pension Benefit Plan, and all
contributions for any period ending on or before the Closing Date which are not
yet due have been paid to each such Employee Pension Benefit Plan or accrued in
accordance with the past custom and practice of Ivy. All premiums or other
payments for all periods ending on or before the Closing Date have been paid
with respect to each such Employee Benefit Plan which is an Employee Welfare
Benefit Plan.
(c) None of the directors and officers of Ivy has any Basis to believe that
each such Employee Benefit Plan which is an Employee Pension Benefit Plan meets
the requirements of a "qualified plan" under Code Section 401(a) and has not
received, within the last two years, a favorable determination letter from the
Internal Revenue Service.
(e) The market value of assets under each such Employee Benefit Plan which
is an Employee Pension Benefit Plan (other than any Multiemployer Plan) equals
or exceeds the present value of all vested and nonvested Liabilities thereunder
determined in accordance with PBGC methods, factors, and assumptions applicable
to an Employee Pension Benefit Plan terminating on the date for determination.
(f) The Transferors have delivered or made available to Purchaser correct
and complete copies of the plan documents and summary plan descriptions, the
most recent determination letter received from the Internal Revenue Service, the
most recent Form 5500 Annual Report, and all related trust agreements, insurance
contracts, and other funding agreements which implement each such Employee
Benefit Plan.
(g) With respect to each Employee Benefit Plan that Ivy and the Controlled
Group of Corporations which includes Ivy maintains or has maintained within the
last five years, or has contributed, or been required to contribute within the
last five years:
(i) No such Employee Benefit Plan which is in Employee Pension Benefit
Plan (other than any Multiemployer Plan) has been completely or partially
terminated or been the subject of a Reportable Event as to which notices
would be required to be filed with the PBGC. No proceeding by the PBGC to
terminate any such Employee Pension Benefit Plan (other than any
Multiemployer Plan) has been instituted or threatened.
(ii) There have been no Prohibited Transactions with respect to any
such Employee Benefit Plan. No Fiduciary has any Liability for breach of
fiduciary duty or any other failure to act or comply in connection with the
administration or investment of the assets of any such Employee Benefit
Plan. No action, suit, proceeding, hearing, or investigation with respect
to the administration or the investment of the assets of any such Employee
Benefit Plan (other than routine claims for benefits) is pending or
threatened. None of Purchaser and the directors and officers (and employees
with responsibility for employee benefits matters) of Ivy has any Knowledge
of any Basis for any such action, suit, proceeding, hearing, or
investigation.
(iii) Ivy has not incurred, and none of Purchaser and the directors
and officers (and employees with responsibility for employee benefits
matters) of Ivy has any reason to expect that Ivy shall incur, any
Liability to the PBGC (other than PBGC premium payments) or otherwise under
Title IV of ERISA
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(including any withdrawal Liability) or under the Code with respect to any
such Employee Benefit Plan which is an Employee Pension Benefit Plan.
(h) None of Ivy and the other members of the Controlled Group of
Corporations that includes Ivy contributes to, has contributed to, or has been
required to contribute to any Multiemployer Plan or has any Liability (including
withdrawal Liability) under any Multiemployer Plan.
(i) Ivy does not maintain or contribute and has not maintained or
contributed, and has not been required to contribute to any Employee Welfare
Benefit Plan providing medical, health, or life insurance or other welfare-type
benefits for current or future retired or terminated employees, their spouses,
or their dependents (other than in accordance with Code Sec. 4980B).
4.13 Articles of Incorporation and Bylaws. Ivy has delivered or made
available to Purchaser complete and correct copies of the Articles of
Incorporation and Bylaws of Ivy, as currently in effect. Since March 1, 1997,
the Transferors have not defaulted under or violated any provision of the
Articles of Incorporation or Bylaws of Ivy.
4.14 Insurance. Section 4.14 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including policies
providing property, casualty, liability, and workers' compensation coverage and
bond and surety arrangements) to which Ivy has been a party, a named insured, or
otherwise the beneficiary of coverage since March 1, 1997:
(i) the name, address, and telephone number of the agent;
(ii) the name of the insurer, the name of the policyholder, and the
name of each covered insured;
(iii) the policy number and the period of coverage;
(iv) the scope (including an indication of whether the coverage was on
a claims made, occurrence, or other basis) and amount (including a
description of how deductibles and ceilings are calculated and operate) of
coverage;
(v) a description of any retroactive premium adjustments or other
loss-sharing arrangements; and
(vi) any self-insurance arrangements affecting Ivy.
With respect to each such insurance policy: (i) the policy is legal, valid,
binding, enforceable, and in full force and effect; (ii) the policy shall
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
by this Agreement; (iii) Ivy is not nor is any other party to the policy in
breach or default (including with respect to the payment of premiums or the
giving of notices), and no event has occurred which, with notice or the lapse of
time, would constitute such a breach or default, or permit termination,
modification, or acceleration, under the policy; and (iv) no party to the policy
has repudiated any provision thereof. Ivy has been covered since March 1, 1997,
by insurance in scope and amount customary and reasonable for the businesses in
which it has engaged during the aforementioned period.
4.15 Intellectual Property. (a) Ivy hereby represents and warrants that it
owns or has the legal right to use pursuant to license, sublicense, agreement,
or permission all Intellectual Property reasonably necessary for the operation
of the businesses of Ivy as presently conducted and as presently proposed to be
conducted (except that Ivy so represents and warrants only with respect to
Intellectual Property that Ivy has acquired since March 1, 1997, and with
respect to Intellectual Property acquired before that date, Ivy only represents
and warrants that none of its directors and officers has any Basis to believe
that Ivy does not own or have the legal right to use such Intellectual
Property). Each item of Intellectual Property owned or used by Ivy immediately
prior to the Closing hereunder shall be owned or used by Ivy on identical terms
and conditions subsequent to the Closing, subject to the provisions of any
license agreement as to the term thereof. Since March 1, 1997, Ivy has taken
reasonable actions to maintain and protect each item of Intellectual Property
that it owns or uses.
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(b) Since March 1, 1997, Ivy has not interfered with, infringed upon,
misappropriated, or otherwise come into conflict with, any Intellectual Property
rights of third Persons, and none of the Transferors and the directors and
officers of Ivy has ever received any charge, complaint, claim, demand, or
notice alleging any such interference, infringement, misappropriation, or
violation (including any claim that Ivy must license or refrain from using any
Intellectual Property rights of any third party), except where such action would
not have a material adverse effect upon Ivy. To the Knowledge of any of the
Transferors and the directors and officers of Ivy, no third Person has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of Ivy since March 1, 1997.
(c) Since March 1, 1997, Ivy has not utilized any inventions of any of its
employees (or people it currently intends to hire, if any) made prior to their
employment by Ivy. To its Knowledge, Ivy believes that all of the Intellectual
Property owned by it was conceived of during the corporate existence of Ivy and
was created by its employees within the scope of their employment with Ivy.
Section 4.15(c) of the Disclosure Schedule identifies each new trade name or
unregistered trademark used by Ivy in connection with its business since March
1, 1997, and each new patent or registration which has been issued to Ivy with
respect to any of its Intellectual Property since March 1, 1997, identifies each
pending patent application or application for registration which Ivy has made
since March 1, 1997, with respect to any of its Intellectual Property,
identifies any of its Intellectual Property since March 1, 1997, which is either
a trade secret or claimed as proprietary and not subject to a patent or pending
patent application, and identifies each license, agreement, or other permission
which Ivy has granted since March 1, 1997, to any third Person with respect to
any of its Intellectual Property (together with any exceptions). Ivy has
delivered to Purchaser correct and complete copies of all such registrations,
applications, licenses, agreements, and permissions (as amended to date) since
March 1, 1997, and has made available to Purchaser correct and complete copies
of all other written documentation evidencing ownership and prosecution (if
applicable) of each such item. With respect to each such item of Intellectual
Property:
(i) Ivy possesses all right, title, and interest in and to the item,
free and clear of any Encumbrance, license, or other restriction;
(ii) the item is not subject to any outstanding injunction, judgment,
order, decree, ruling, or charge;
(iii) no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, or demand is pending or is threatened which challenges
the legality, validity, enforceability, use, or ownership of the item; and
(iv) Ivy has never agreed in writing, or to its Knowledge verbally, to
indemnify any Person for or against any interference, infringement,
misappropriation, or other conflict with respect to the item, except as set
forth in the standard agreements with Ivy customers.
(d) Section 4.15(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third Person owns and that Ivy uses pursuant to
any license, sublicense, agreement, or permission entered into or materially
amended since March 1, 1997. Ivy has delivered to Purchaser correct and complete
copies of all such licenses, sublicenses, agreements, and permissions (as
amended to date). With respect to each such item of Intellectual Property:
(i) the license, sublicense, agreement, or permission covering the
item is legal, valid, binding, enforceable, and in full force and effect;
(ii) the license, sublicense, agreement, or permission shall continue
to be legal, valid, binding, enforceable, and in full force and effect on
identical terms following the Closing, subject to the provisions of any
license agreements as to the term thereof;
(iii) to the Transferors' Knowledge, no party to the license,
sublicense, agreement, or permission is in breach or default, and no event
has occurred which with notice or lapse of time would constitute a breach
or default or permit termination, modification, or acceleration thereunder;
(iv) no party to the license, sublicense, agreement, or permission has
repudiated any provision thereof;
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(v) with respect to each sublicense, the representations and
warranties set forth in clauses (i) through (iv) immediately above are true
and correct with respect to the underlying license;
(vi) the underlying item of Intellectual Property is not subject to
any outstanding injunction, judgment, order, decree, ruling, or charge;
(vii) no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, or demand is pending or is threatened which challenges
the legality, validity, or enforceability of the underlying item of
Intellectual Property; and
(viii) Ivy has not granted any sublicense or similar right with
respect to the license, sublicense, agreement, or permission which violates
any term or condition thereof.
(e) Ivy's ownership and/or right to the use of its Intellectual Property
acquired after March 1, 1997, shall not interfere with, infringe upon,
misappropriate, or otherwise come into conflict with, any Intellectual Property
rights of third Persons as a result of the continued operation of its business
as presently conducted and as presently proposed to be conducted.
(f) None of the Transferors and the directors and officers (and employees
with responsibility for Intellectual Property matters) of Ivy has or had any
Knowledge of any new products, inventions, procedures, or methods of
manufacturing or processing that any competitors or other third Persons have
developed since March 1, 1997, which reasonably could be expected to supersede
or make obsolete any product or process of Ivy.
(g) Since March 1, 1997, none of the Transferors and the directors and
officers (and employees with responsibility for Intellectual Property matters)
of Ivy has done anything to compromise the secrecy, confidentiality or value of
any of its trade secrets, know-how, inventions, prototypes, designs, processes
or technical data (collectively "Proprietary Information") required to conduct
its business as now conducted and as proposed to be conducted. Since March 1,
1997, Ivy has taken reasonable security measures to protect the secrecy,
confidentiality, and value of its Proprietary Information important to the
conduct of its business, including requiring each employee and consultant to
acknowledge a requirement to safeguard proprietary or sensitive information of
Ivy in accordance with the employee handbook of Ivy.
(h) None of the Transferors and the directors and officers (or employees
with responsibility for Intellectual Property matters) of Ivy has any Knowledge
that any of Ivy's employees, officers, or consultants is in violation of his or
her obligations of confidentiality.
4.16 Bank Accounts. Section 4.16 of the Disclosure Schedule sets forth a
true and complete list of all bank accounts of Ivy and all authorized
signatories to each such account.
4.17 Directors, Officers and Employees. Ivy has heretofore delivered or
made available to Purchaser a correct and complete listing as of the date hereof
of all of the directors, officers and employees of Ivy, showing their names,
positions, and current wage or salary and bonuses.
4.18 Labor Relations; Employees. (a) Since March 1, 1997, Ivy has entered
no collective bargaining agreements with any of its employees; there has been no
labor union organizing activity pending or threatened with respect to Ivy; and
Ivy has not experienced any strikes, grievances, claims of unfair labor
practices, or other collective bargaining disputes. Since March 1, 1997, Ivy has
not committed any unfair labor practices. To the Knowledge of the Transferors,
no executive, key employee or group of employees has any plans to terminate
employment with Ivy. Copies of all personnel brochures or handbooks delivered to
employees or in effect since March 1, 1997, have been delivered or made
available to Purchaser.
(b) Since March 1, 1997, there has been no claim nor any Basis or grounds
for any claim by any Person or party (including, but not limited to,
governmental agencies of any kind) against Ivy arising out of any federal,
state, county, local or foreign statute, ordinance or regulation relating to
discrimination against employees or any other employee practices, including
without limitation retirement or labor relations, or occupational, safety and/or
health standards, sexual harassment or intentional infliction of emotional
distress.
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4.19 Transactions with Related Parties. Since March 1, 1997, none of UOL
or any present or former officer, director or shareholder of UOL, and no
Affiliate of UOL or of such officer, director or shareholder: (a) has been
involved in any business (excluding relationships and payments arising from the
employment or retention by Ivy of any such persons in the ordinary course of
business) arrangement or relationship with Ivy, including, without limitation,
any contract, agreement, or other arrangement providing for the employment of,
furnishing of services, by, rental of real or personal property from or
otherwise requiring payment to any such officer, director, shareholder or
Affiliate; or (b) owns any asset, tangible or intangible, which is used in the
business of Ivy.
4.20 Copies of Documents. True, correct, and complete copies of all
documents listed in the Disclosure Schedule have been heretofore delivered or
made available to Purchaser and identified in writing as constituting such
delivery.
4.21 Real Property. (a) Ivy owns no real estate.
(b) Section 4.21(b) of the Disclosure Schedule lists and describes briefly
all real property leased or subleased to or by Ivy since March 1, 1997. UOL has
delivered or made available to Purchaser correct and complete copies of such
leases and subleases, as amended to date. With respect to each such lease and
sublease:
(i) the lease or sublease is legal, valid, binding, enforceable, and
in full force and effect;
(ii) the lease or sublease shall continue to be legal, valid, binding,
enforceable, and in full force and effect on identical terms following the
consummation of the transactions contemplated hereby;
(iii) no party to the lease or sublease is in breach or default, and
no event has occurred which, with notice or lapse of time, would constitute
a breach or default or permit termination, modification, or acceleration
thereunder;
(iv) no party to the lease or sublease has repudiated any provision
thereof;
(v) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or sublease;
(vi) with respect to each sublease, the representations and warranties
set forth in clauses (i) through (v) above are true and correct with
respect to the underlying lease;
(vii) Ivy has not assigned, transferred, conveyed, mortgaged, deeded
in trust, or encumbered any interest in the leasehold or subleasehold;
(viii) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits)
required in connection with the operation thereof and have been operated
and maintained in accordance with applicable laws, rules, and regulations;
(ix) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said
facilities; and
(x) the owner of the facility leased or subleased has good and
marketable title to the parcel of real property, free and clear of any
Encumbrance, easement, covenant, or other restriction, except for
installments of special easements not yet delinquent and recorded
easements, covenants, and other restrictions which do not impair the
current use, occupancy, or value, or the marketability of title, of the
property subject thereto.
4.22 Books and Records. The stock records of Ivy since March 1, 1997, are
in all respects complete and accurate, and the minute books of Ivy since March
1, 1997, accurately reflect the actions taken at shareholder and director
meetings or by unanimous written consent since that date and are in all respects
correct, complete, and accurate.
4.23 Environmental Matters. (a) Ivy has complied, since March 1, 1997, and
is in compliance with all local, state, and federal statutes, ordinances, and
regulations dealing with the protection of the environment or
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public health and safety, including, but not limited to, the Comprehensive
Environmental Response, Compensation, and Liability Act (codified as amended, 42
U.S.C. sections 9601 et seq.) ("CERCLA") and the Resource Conservation and
Recovery Act (codified as amended, 42 U.S.C. sections 6901 et seq.) ("RCRA").
(b) Since March 1, 1997, Ivy has obtained all required local, state and
federal permits, licenses, certificates and approvals relating to: (i) air
emissions; (ii) discharges to surface water or groundwater; (iii) noise
emissions, (iv) solid or liquid waste disposal; (v) the use, generation,
storage, transportation or disposal of toxic or hazardous substances or wastes
(intended hereby and hereafter to include any and all such materials listed in
any local, state or federal statute, ordinance, or regulation); (vi) the use,
storage, transportation or disposal of petroleum or petroleum products; or (vii)
other environmental, health and safety matters.
(c) Since March 1, 1997, Ivy has not caused, suffered, permitted or
sustained any emission, spill, release or discharge of any toxic or hazardous
substances or wastes, or any petroleum products, into or upon: (i) the air; (ii)
soils or any improvements located thereon, whether on Ivy' property or
elsewhere; (iii) surface water or groundwater; or (iv) a sewer, septic system or
waste treatment, storage or disposal system except in accordance with applicable
law or a valid government permit, license, certificate or approval.
(d) Since March 1, 1997, none of the Transferors or the officers and
directors (including employees responsible for environmental matters) of Ivy has
received written or oral notice of any actual or potential claims, orders,
directives, citations, or causes of action based on actual or alleged violations
of any local, state, or federal statutes, ordinances, or regulations dealing
with the protection of the environment or public health and safety, including,
but not limited to, CERCLA or RCRA, or oral or written notice of any actual or
potential common law claims or causes of action based upon Ivy' actual or
alleged involvement with or use of any substance regulated by local, state, or
federal statutes, ordinances, or regulations dealing with the protection of the
environment or public health and safety.
(e) Since March 1, 1997, none of the Transferors or the officers and
directors (including employees responsible for environmental matters) of Ivy has
received oral or written notice of any actual or potential claims, orders,
directives, citations or causes of action under any local, state, or federal
statutes, ordinances, or regulations dealing with the protection of the
environment or public health and safety, including, but not limited to, CERCLA
and RCRA, based upon or arising out of its actual or alleged disposal of
hazardous wastes or substances, whether on or off real property being operated
by Ivy.
(f) None of the Transferors and the officers and directors (including
employees responsible for environmental matters) of Ivy has any Knowledge of any
condition on any of the real property owned by Ivy which may give rise to any
claim, order, directive, citation, or cause of action based on any local, state,
or federal statute, ordinance, or regulation dealing with protection of the
environment or public health and safety, including, but not limited to, CERCLA
or RCRA.
4.24 Guaranties. Ivy is not a guarantor or otherwise liable for any
Liability or obligation of any Person other than itself (including indebtedness
of any other Person) accrued since March 1, 1997.
4.25 Government Consents. No consent, approval or authorization of or
designation, declaration or filing with any state, federal, or foreign
governmental authority on the part of UOL or Ivy because of any special
characteristic of UOL or Ivy is required in connection with the valid execution
and delivery of this Agreement and the consummation by UOL or Ivy of the
transactions contemplated hereby.
4.26 Manufacturing Rights. Since March 1, 1997, Ivy has not granted rights
to manufacture or sell its products, processes, Intellectual Property or
technology to any other Person.
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ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to UOL that:
5.1 Authority. This Agreement has been duly executed and delivered by
Purchaser and constitutes the valid, binding and enforceable obligation of
Purchaser, subject to applicable bankruptcy, reorganization, insolvency,
moratorium and other laws affecting creditors' rights generally from time to
time in effect and to general equitable principles.
5.2 Ability to Carry Out the Agreement. Purchaser is not subject to or
bound by any provision of:
(i) any law, statute, rule, regulation, ordinance or judicial or
administrative decision;
(ii) any articles or certificate of incorporation or by-laws;
(iii) any mortgage, deed of trust, lease, note, stockholders'
agreement, bond, indenture, other instrument or agreement, license, permit,
trust, custodianship, other restriction, of any kind or character
whatsoever; or
(iv) any judgment, order, writ, injunction or decree of any court,
governmental body, administrative agency or arbitrator;
that would prevent or be violated by or would result in any penalty, forfeiture
or contract termination as a result of, or under which there would be a default
as a result of, nor is the consent of any Person under any material agreement
which has not been obtained required for, the execution, delivery and
performance by Purchaser of this Agreement and the transactions contemplated
hereby, other than violations, penalties, forfeitures, contract terminations,
defaults or failure to obtain consents which, singly or in the aggregate, shall
not have a material adverse effect on the enforceability or validity of this
Agreement or the ability of Purchaser to perform its obligations hereunder.
5.3 Brokers and Intermediaries. Purchaser has not employed any broker,
finder, advisor, or intermediary in connection with the transactions
contemplated by this Agreement which would be entitled to a broker's, finder's,
or similar fee or commission in connection therewith or upon the consummation
thereof.
5.4 Solvency of Ivy. Purchaser represents and warrants that Ivy is not
insolvent under any definition, and that the consummation of the transactions
contemplated hereby do not and will not render Ivy insolvent under any
definition.
ARTICLE 6
CERTAIN COVENANTS AND AGREEMENTS
6.1 Confidentiality. Each party to this Agreement agrees and covenants to
the other that all information concerning the business and offices of the other
parties to the Agreement that is not generally available to the public
("Confidential Information") and obtained from such other party shall be deemed
confidential and shall not be disclosed to, or utilized by, any Person for any
reason or purpose whatsoever, except in connection with this Agreement, to the
parties and their representatives involved in this transaction, or as may by
required by law or stock exchange or market regulation. Notwithstanding any
provision herein to the contrary, any party failing to comply in a full and
timely fashion with Section 6.4 shall indemnify the other for all losses,
damages, claims or expenses of any nature whatsoever, including reasonable
attorneys' fees, incurred by the other party and related to the unauthorized
disclosure or use of Confidential Information.
6.2 Books and Records. Purchaser shall retain all books, records and other
documents pertaining to the business of Ivy in existence on the Closing Date for
a period of at least three years from the Closing Date and to make the same
reasonably available after the Closing Date for such three year period for
inspection and copying by UOL at UOL's expense during normal business hours,
upon reasonable request and upon reasonable notice.
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6.3 Best Efforts. Without limiting the specific obligations of any party
hereto under any agreement or covenant hereunder, each of the parties hereto
shall use its respective best efforts to take all action and do such acts and
things necessary in order to consummate and make effective the transactions
contemplated by this Agreement (including satisfaction, but not waiver, of the
conditions to Closing set forth in Articles 7 and 8 below).
6.4 Cooperation in Litigation. Each party hereto shall fully cooperate
with the other in the defense or prosecution of any litigation or proceeding
already instituted or which may be instituted hereafter against or by such party
relating to or arising out of the conduct of the business of Ivy prior to or
after the Closing Date (other than litigation arising out of the transactions
contemplated by this Agreement). The party requesting such cooperation shall pay
the out-of-pocket expenses (including legal fees and disbursements) of the party
providing such cooperation and of its officers, directors, employees and agents
reasonably incurred in connection with providing such cooperation, but shall not
be responsible to reimburse the party providing such cooperation for such
party's time spent in such cooperation or the salaries or costs of fringe
benefits or similar expenses paid by the party providing such cooperation to its
officers, directors, employees and agents while assisting in the defense or
prosecution of any such litigation or proceeding.
6.5 Other Agreements. Each party to this Agreement hereby agrees and
covenants to the other that consummation of the transactions contemplated hereby
(a) shall terminate any and all obligations of the parties under the Original
Agreement, including but not limited to any obligation of UOL or Ivy to pay to
Purchaser any consideration; and (b) shall terminate the Consulting Agreement
dated March 1, 1997, between UOL and Purchaser (the "Consulting Agreement"),
other than the $35,000.00 payment currently due to Purchaser from UOL under the
Consulting Agreement, including but not limited to the consideration set forth
in Sections 1.3 and 1.4 of the Consulting Agreement, as well as Exhibit A
thereto. As and when his duties as owner, sole officer, and sole director of Ivy
may permit, Robert N. Holt agrees to provide consulting services upon request by
UOL at his current consulting rate of $2,500.00 per day (subject to reasonable
increases as may occur from time to time) from the date of this Agreement until
December 31, 2005, such services to specifically include advice concerning the
updating of Ivy products utilized by UOL and market guidance with respect to
such products.
ARTICLE 7
CONDITIONS PRECEDENT OF TRANSFERORS
The obligation of the Transferors to consummate the transactions to be
performed by them in connection with the Closing is subject to the satisfaction,
or written waiver by the Transferors, of each of the following conditions prior
to or at the Closing:
7.1 No Injunction. No injunction, restraining order or decree of any
nature of any court or governmental or regulatory authority shall exist against
Purchaser, the Transferors or any of their respective Affiliates, or any of the
principals, officers or directors of any of them, that restrains, prevents or
materially adversely changes the transactions contemplated hereby.
7.2 No Violation. The consummation of the transactions contemplated
hereunder shall not be in violation of any material applicable law, statute,
rule or regulation for which a waiver has not been obtained and where such
violation would make illegal or otherwise prevent the consummation of the
transactions contemplated hereby.
7.3 Consents. All material consents, approvals and authorizations of
governmental and regulatory authorities, and all material filings with and
notifications of governmental authorities and regulatory agencies or other
entities which regulate the business of Ivy or UOL, necessary on the part of Ivy
or UOL, or their respective Affiliates, to the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby, shall
have been obtained or effected (and all applicable waiting periods, if any,
including any extensions thereof, under any applicable law, statute, regulation
or rule, including but not limited to the HSR Act, if applicable, shall have
expired or terminated, as applicable). UOL shall have
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<PAGE> 16
received the written consents or approvals of any and all third Persons required
under the terms of the Contracts to the consummation of the transactions
contemplated hereunder.
7.4 No Proceedings. No claim, suit, action or other proceeding shall be
pending or threatened in writing before or by any court, governmental agency or
other entity against any of the parties to this Agreement with respect to the
transactions contemplated by this Agreement or which materially adversely affect
the assets, property, operations, results of operations, financial condition, or
prospects of Purchaser.
7.5 License Agreement. Ivy and UOL shall have entered into the license
agreement in form and substance as set forth in Exhibit D and the same shall be
in full force and effect.
7.6 Miscellaneous Closing Deliveries. The Transferors shall have received
such evidence as they may reasonably request in order to establish: (a) the
power and authority of Purchaser to consummate the transactions contemplated by
this Agreement; and (b) compliance with the conditions of Closing set forth
herein.
ARTICLE 8
CONDITIONS PRECEDENT OF THE PURCHASER
The obligation of Purchaser to consummate the transactions to be performed
by them in connection with the Closing is subject to the satisfaction, or
written waiver by Purchaser, of each of the following conditions prior to or at
the Closing:
8.1 No Injunction. No injunction, restraining order or decree of any
nature of any court or governmental or regulatory authority shall exist against
Purchaser, the Transferors or any of their respective Affiliates, or any of the
principals, officers or directors of any of them, that restrains, prevents or
materially adversely changes the transactions contemplated hereby.
8.2 No Violation. The consummation of the transactions contemplated
hereunder shall not be in violation of any material applicable law, statute,
rule or regulation for which a waiver has not been obtained.
8.3 Consents. All material consents, approvals and authorizations of
governmental and regulatory authorities, and all material filings with and
notifications of governmental authorities and regulatory agencies or other
entities which regulate the business of Ivy or UOL, necessary on the part of Ivy
or UOL, or their respective Affiliates, to the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby, shall
have been obtained or effected (and all applicable waiting periods, if any,
including any extensions thereof, under any applicable law, statute, regulation
or rule, including but not limited to the HSR Act, if applicable, shall have
expired or terminated, as applicable). UOL shall have received the written
consents or approvals of any and all third Persons required under the terms of
the Contracts to the consummation of the transactions contemplated hereunder.
8.4 Resignations. Purchaser shall have received resignations, effective as
of the Closing, of each officer and director of Ivy other than those whom
Purchaser shall have specified in writing prior to the Closing.
8.5 No Proceedings. No claim, suit, action or other proceeding shall be
pending or threatened in writing before or by any court, governmental agency or
other entity against any of the parties to this Agreement with respect to the
transactions contemplated by this Agreement or which materially adversely affect
the assets, property, operations, results of operations, financial condition, or
prospects of Ivy.
8.6 License Agreement. Ivy and UOL shall have entered into the license
agreement in form and substance as set forth in Exhibit D and the same shall be
in full force and effect.
8.7 Miscellaneous Closing Deliveries. Purchaser shall have received such
evidence as Purchaser may reasonably request in order to establish: (a) the
power and authority of the Transferors to consummate the transactions
contemplated by this Agreement; and (b) compliance with the conditions of
Closing set forth herein.
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ARTICLE 9
SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
9.1 Survival of Representations and Warranties. All of the representations
and warranties of the parties hereto contained in the Agreement shall survive
the Closing (even if the damaged party knew or had reason to know of any
misrepresentation or breach of warranty at the time of Closing) and continue in
full force and effect for a period of two years. Any claims with respect to the
foregoing sentence under Sections 10.1 and 10.2 below must be asserted in
writing with reasonable particularity by the party making such claim within two
years of the Closing, and the obligations of the indemnifying party under
Section 10.1 and 10.2 below with respect to such claims shall continue until
such claims have been resolved.
9.2 Survival of Covenants and Agreements. The respective covenants and
agreements of the parties contained in this Agreement shall survive the Closing
without limitation as to time. Any claims as to a breach of a covenant or
agreement under Sections 10.1 and 10.2 below must be asserted in writing with
reasonable particularity by the party making such claims.
ARTICLE 10
INDEMNIFICATION
10.1 Indemnification of Purchaser. UOL (the "Acquiror Indemnitor") agrees
to defend, indemnify and hold harmless Purchaser and its successors and assigns
(each individually an "Acquiror Indemnitee", and collectively the "Acquiror
Indemnitees") from, against, and in respect of the following:
(a) any and all losses, damages, deficiencies or liabilities caused by,
resulting or arising from, or otherwise relating to: (i) any breach of the
representations and warranties of the Transferors contained in this Agreement;
(ii) any failure by any of the Transferors to perform or otherwise fulfill or
comply with any undertaking or other agreement or obligation hereunder to be
performed, fulfilled or otherwise complied with by UOL after the Closing
(including but not limited to the undertakings, agreements and obligations to be
performed by UOL pursuant to Section 6.4); (iii) any unknown or undisclosed
Liabilities of Ivy arising out of or related to the conduct or operation of
Ivy's business prior to the Closing (other than Liabilities incurred in the
ordinary course of business subsequent to the execution of this Agreement); and
(iv) except as disclosed in Schedule 4.11, any and all legal, investment
banking, accounting, auditing, and other professional fees and expenses of Ivy
related to this Agreement and the transactions contemplated hereby; and
(b) any and all actions, suits, proceedings, claims, liabilities, demands,
assessments, judgments, interest, penalties, costs and expenses, including
reasonable attorneys' fees (whether or not incurred by the Acquiror Indemnitees
or in connection with investigating, defending, settling or prosecuting any
action, suit, proceeding or claim against the Acquiror Indemnitor hereunder),
incident to any of the items referred to herein or such indemnification;
provided, however, that if any action, suit, proceeding, claim, liability,
demand or assessment shall be asserted against any Acquiror Indemnitee in
respect of which such Acquiror Indemnitee proposes to demand indemnification,
such Acquiror Indemnitee shall notify UOL thereof within a reasonable period of
time after assertion thereof, and such notice shall include copies of all suit,
service and claim documents, all other relevant documents in the possession of
the Acquiror Indemnitee, and an explanation of the Acquiror Indemnitee's
contentions and defenses with as much specificity and particularity as the
circumstances permit, provided that the failure of the Acquiror Indemnitee to
give such notice shall not relieve UOL of its obligations under this Section
10.1, if the Acquiror Indemnitee shall have demonstrated that: (i) it acted in
good faith and without unreasonable delay; and (ii) UOL shall not have been
prejudiced thereby. Subject to rights of or duties to any insurer or other third
Person having liability therefor, UOL shall have (subject to the prior written
consent of Acquiror Indemnitee, which consent shall not be unreasonably
withheld) the right within 10 days after receipt of such notice to assume the
control of the defense, compromise or settlement of any such action, suit,
proceeding, claim, liability, demand, or assessment, including, at its own
expense, employment of counsel; provided further, however, that if UOL shall
have exercised his right to assume such
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<PAGE> 18
control, the Acquiror Indemnitee: (x) may, in its sole discretion and expense,
employ counsel to represent it (in addition to counsel employed by UOL) in any
such matter, and in such event counsel selected by UOL shall be required to
cooperate with such counsel of the Acquiror Indemnitee in such defense,
compromise or settlement for the purpose of informing and sharing information
with such Acquiror Indemnitee; and (y) shall, at its own expense, make available
to UOL those employees of the Acquiror Indemnitees whose assistance, testimony
or presence is reasonably deemed by UOL necessary or beneficial to assist UOL in
evaluating and in defending any such action, suit, proceeding, claim, liability,
demand or assessment; provided further, however, that any such access shall be
conducted in such a manner as not to interfere unreasonably with the operations
of the businesses of the Acquiror Indemnitees.
Notwithstanding any other provisions of this Agreement to the contrary, UOL
shall have no liability under this Article 10 unless the aggregate amount of the
damages and losses to the Acquiror Indemnitees from all claims finally
determined and arising under the provisions of this Agreement exceed $10,000.00,
and in such event UOL shall be required to pay only the amount by which the
aggregate amount of such claims exceeds such amount. In calculating amounts
payable pursuant to this Article 10, UOL shall receive credit for (i) any
reduction of actual tax liabilities of any Acquiror Indemnitee arising from
facts giving rise to a claim of indemnification, and (ii) any insurance proceeds
received with respect to any damages or losses that are the subject of a claim
for indemnification hereunder.
10.2 Indemnification of UOL. Purchaser and Ivy (each individually a
"Transferor Indemnitor", and collectively the "Transferor Indemnitors") agree to
defend, indemnify and hold harmless UOL and its successors and assigns (each
individually a "Transferor Indemnitee", and collectively the "Transferor
Indemnitees") from, against and in respect of:
(a) any and all losses, damages, deficiencies or liabilities caused by,
resulting or arising from or otherwise relating to: (i) any breach of the
representations and warranties of Purchaser contained in this Agreement; and
(ii) any failure by Purchaser to perform or otherwise fulfill or comply with any
undertaking or other agreement or obligation hereunder to be performed,
fulfilled or otherwise complied with by Purchaser and Ivy after the Closing
(including, but not limited to, the undertaking, agreements and obligations to
be performed pursuant to Section 6.4 hereof); and
(b) any and all actions, suits, proceedings, claims, liabilities, demands,
assessments, judgments, interest, penalties, costs and expenses, including
reasonable attorneys' fees (whether or not incurred by the Transferor
Indemnitees in connection with investigating, defending, settling or prosecuting
any action, suit, proceeding or claim against any of the Transferor Indemnitors
hereunder), incident to any of the items referred to herein or such
indemnification;
provided, however, that if any action, suit, proceeding, claim, liability,
demand or assessment shall be asserted against any Transferor Indemnitee in
respect of which such Transferor Indemnitee proposes to demand indemnification,
such Transferor Indemnitee shall notify Purchaser thereof within a reasonable
period of time after assertion thereof, and such notice shall include copies of
all suit, service and claim documents, all other relevant documents in the
possession of the Transferor Indemnitees and an explanation of the Transferor
Indemnitees' contentions and defenses with as much specificity and particularity
as the circumstances permit, provided that the failure of the Transferor
Indemnitee to give such notice shall not relieve Purchaser of its obligations
under this Section 10.2 if the Transferor Indemnitee shall have demonstrated
that: (i) it acted in good faith and without unreasonable delay; and (ii)
Purchaser shall not have been prejudiced thereby. Subject to rights of or duties
to any insurer or other third Person having liability therefor, Purchaser shall
have (subject to the prior written consent of Transferor Indemnitee, which
consent shall not be unreasonably withheld) the right within 10 days after
receipt of such notice to assume the control of the defense, compromise or
settlement of any such action, suit, proceeding, claim, liability, demand, or
assessment, including, at its own expense, employment of counsel; provided
further, however, that if Purchaser shall have exercised its right to assume
such control, the Transferor Indemnitees: (x) may, in their sole discretion and
expense, employ one counsel to represent them (in addition to counsel employed
by Purchaser) in any such matter, and in such event counsel selected by
Purchaser shall be required to cooperate with such counsel of the Transferor
Indemnitees in such defense, compromise or settlement for the purpose of
informing and sharing information
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with such Transferor Indemnitees; and (y) shall, at its own expense, make
available to Transferor Indemnitees those employees of Purchaser or any
Affiliate of Purchaser whose assistance, testimony or presence is reasonably
deemed by the Transferor Indemnitees necessary or beneficial to assist the
Transferor Indemnitees in evaluating and in defending any such action, suit,
proceedings, claim, liability, demand or assessment; provided further, however,
that any such access shall be conducted in such a manner as not to interfere
unreasonably with the operations of the business of Purchaser or any of its
Affiliates.
Notwithstanding any other provisions of this Agreement to the contrary,
Transferor Indemnitors shall have no liability under this Article 10 unless the
aggregate amount of the damages and losses to the Transferor Indemnitees from
all claims finally determined and arising under the provisions of this Agreement
exceed $10,000.00, and in such event Transferor Indemnitors shall be required to
pay only the amount by which the aggregate amount of such claims exceeds such
amount. In calculating amounts payable pursuant to this Article 10, Transferor
Indemnitors shall receive credit for (i) any reduction of actual tax liabilities
of any Transferor Indemnitee arising from facts giving rise to a claim of
indemnification, and (ii) any insurance proceeds received with respect to any
damages or losses that are the subject of a claim for indemnification hereunder.
10.3 Remedies. The indemnification provisions of this Article 10 are in
addition to, and not in lieu or in derogation of, any other rights or remedies
any party may have in equity for a breach of representations, warranty or
covenant. Each of the parties acknowledges and agrees that the other parties
hereto would be damaged irreparably in the event any of the provisions of this
Agreement are not performed in accordance with their specific terms or otherwise
are breached. Accordingly, each of the parties hereto agrees the other parties
hereto shall be entitled to an injunction or injunctions to prevent breaches of
the provisions of this Agreement and to enforce specifically this Agreement and
the terms and provisions hereof in any competent court having jurisdiction over
the parties (subject to the provisions of Section 11.11 below), in addition to
any other remedy to which they may be entitled in equity.
10.4 Survival. Except as otherwise expressly set forth herein, this
Article 10 shall survive termination of this Agreement without limitation.
ARTICLE 11
MISCELLANEOUS
11.1 Further Assurances. From time to time at or after the Closing, each
of the parties agrees to take, or cause to be taken, such further actions, to
execute, deliver and file, or cause to be executed, delivered and filed, such
further documents and instruments, and to obtain consents, as may be necessary
or reasonably requested in order to fully effectuate the purposes, terms and
conditions of this Agreement.
11.2 Expenses. Each of Purchaser and UOL shall bear its respective legal,
investment banking, accounting, audit, and other costs and expenses associated
with this Agreement and the consummation of the transactions contemplated
hereby.
11.3 Applicable Law. Except as otherwise expressly provided herein, this
Agreement shall be governed by, and construed in accordance with, the law of the
Commonwealth of Virginia without reference to any choice or conflict of law
principle, provision or rule, including all matters of construction, validity
and performance.
11.4 Notices. All notices, requests, permissions, waivers, and other
communications hereunder shall be in writing and shall be deemed to have been
duly given (i) upon personal delivery or receipt of a telecopy transmission,
(ii) two days after being sent by registered or certified United States mail,
return receipt
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requested, or (iii) one day after being transmitted by a nationally recognized
overnight courier service, properly addressed and postage prepaid to the
intended recipient as follows:
If to Purchaser or Ivy to:
Ivy Software, Inc.
P.O. Box 5124
Charlottesville, Virginia 22905
Telephone No.: (804) 293-7105
Telecopy No.: (804) 293-9356
with a copy to:
Lindsay R. Barnes, Esq.
McCallum & Kudravetz, P.C.
250 High Street East
Charlottesville, Virginia 22902
Telephone No.: (804) 293-8191
Telecopy No.: (804) 296-9641
If to UOL, to:
UOL Publishing, Inc.
8251 Greensboro Drive, Suite 500
McLean, Virginia 22102
Telephone No.: (703) 893-7800
Telecopy No.: (703) 893-1905
Attention: Chief Executive Officer
Chief Financial Officer
with a copy to:
Wyrick Robbins Yates & Ponton LLP
4101 Lake Boone Trail, Suite 300
Raleigh, North Carolina 27607
Telephone No.: (919) 781-4000
Telecopy No.: (919) 781-4865
Attention: Donald R. Reynolds, Esq.
11.5 Entire Agreement. This Agreement (including the Exhibits and
Schedules attached hereto and the documents referred to herein, all of which are
a part hereof) constitutes the entire agreement and understanding of the parties
hereto with respect to the subject matter contained herein, supersedes and
cancels all prior agreements, negotiations, correspondence, undertakings and
communications of the parties, oral or written, respecting such subject matter.
There are no restrictions, promises, representations, warranties, agreements or
undertakings of any party hereto with respect to the transactions under this
Agreement other than those set forth herein or made hereunder.
11.6 Amendments. This Agreement may be amended only by a written
instrument executed by the parties or their respective successors or assigns.
11.7 Headings; References. The article, section and paragraph headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. All references
herein to "Articles", "Sections", "Exhibits" or "Schedules" shall be deemed to
be references to Articles or Sections hereof or Exhibits or Schedules hereto
unless otherwise indicated.
11.8 Counterparts. This Agreement may be executed in one or more
counterparts and each counterpart shall be deemed to be an original.
11.9 Parties in Interest; Assignment. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors. Nothing in this Agreement, express or implied, is intended
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to confer upon any Person not a party to this Agreement any rights or remedies
under or by reason of this Agreement. No party to this Agreement may assign or
delegate all or any portion of its rights, obligations or liabilities under this
Agreement without the prior written consent of the other parties to this
Agreement.
11.10 Severability; Enforcement. The invalidity of any portion hereof
shall not affect the validity, force or effect of the remaining portions hereof.
If it is ever held that any restriction hereunder is too broad to permit
enforcement of such restriction to its fullest extent, each party agrees that a
court of competent jurisdiction may enforce such restriction to the maximum
extent permitted by law, and each party hereby consents and agrees that such
scope may be judicially modified accordingly in any proceeding brought to
enforce such restriction.
11.11 JURISDICTION. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND
UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE COURTS OF THE
COMMONWEALTH OF VIRGINIA AND TO VENUE IN VIRGINIA AS THE SAME SHALL BE
DETERMINED.
11.12 Waiver. Any of the conditions to Closing set forth in this Agreement
may be waived at any time prior to or at the Closing hereunder by the party
entitled to the benefit thereof. The failure of any party hereto to enforce at
any time any of the provisions of this Agreement shall in no way be construed to
be a waiver of any such provision, nor in any way to affect the validity of this
Agreement or any part hereof or the right of such party thereafter to enforce
each and every such provision. No waiver of any breach of or non-compliance with
this Agreement shall be held to be a waiver of any other or subsequent breach or
non-compliance.
11.13 Incorporation of Exhibits and Schedules. All of the Exhibits and
Schedules identified in this Agreement are incorporated by reference into this
Agreement and made a part hereof.
11.14 Construction. The parties hereto have participated jointly in the
negotiation and drafting of this Agreement. In the event of any ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if grafted jointly by the parties hereto and no presumption or burden of
proof shall arise favoring or disfavoring any party hereto by virtue of the
authorship of any of the provisions of this Agreement.
[The next page is the signature page.]
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IN WITNESS WHEREOF, the parties hereto have duly executed this Stock
Purchase Agreement effective as of the date first above written.
UOL:
UOL PUBLISHING, INC.
By: /s/ NARASIMHAN P. KANNAN
--------------------------
Title: CEO
IVY SOFTWARE, INC.
By: /s/ ROBERT N. HOLT
--------------------------
Title: President
PURCHASER:
/s/ ROBERT N. HOLT
-----------------------------
Robert N. Holt
22
<PAGE> 1
EXHIBIT 2.6
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "Agreement"), is dated as of the 31st
day of December 1998, by and between HTR, Inc. a Delaware corporation
("Seller"), and A & T Systems, Inc., a Maryland corporation ("Buyer").
WITNESSETH:
WHEREAS, Seller desires to sell certain intangible assets used in Seller's
business providing consulting services and support for networks (the "Business")
for cash and a promissory note and, Buyer desires to purchase such assets for
cash and a promissory note.
NOW, THEREFORE, for and in consideration of the premises, the mutual
covenants and agreements set forth below, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
ARTICLE 1.
TRANSFER OF ASSETS AND PURCHASE PRICE
1.1 Assets. Subject to the terms and conditions of this Agreement and in
consideration of the obligations of Buyer herein, Seller agrees to sell, convey,
transfer and deliver to Buyer at the Closing (as defined in Section 2), free and
clear of any claims, liens or encumbrances, all right, title and interest of
Seller in and to certain intangible assets of Seller relating solely to the
Business as described on Schedule 1.1 (collectively, the "Assets"). The Assets
transferred shall be limited to those described on Schedule 1.1.
1.2 Consideration. In consideration of the sale and transfer of the
Assets, Buyer will:
(a) Pay Seller Three Hundred Fifty Thousand Dollars ($350,000.00) at
Closing by wire transfer to Seller's account; provided, however, Buyer hereby
assumes all liability and responsibility for HTR's obligation to HTR employees
for a staying bonus in the amount of Thirty Seven Thousand Five Hundred Dollars
($37,500.00) based upon the sale of the Business. As a result of such
assumption, Buyer shall be entitled to a credit in the amount of Thirty Seven
Thousand Five Hundred Dollars ($37,500.00) in reduction of the cash due at
Closing. Buyer shall indemnify and hold Seller harmless from such obligation
relating to the referenced $37,500 staying bonus commitment made by Seller.
Seller's account information for purposes of the wire transfer is as follows:
<TABLE>
<S> <C>
Account Number: UOL Publishing, Inc.
Bank Name: First Union National Bank of Virginia
ABA #: 0541400549
Account #: 2050000112713
</TABLE>
(b) Pay Seller Four Hundred Thousand Dollars ($400,000.00) pursuant to a 5%
promissory note in the form of Exhibit A attached hereto and made a part hereof
(the "Note"); Buyer shall be entitled to a credit against the first installment
of the Note for the actual amount of accrued but unused vacation carried over by
employees of Seller hired by Buyer and any other mutually agreed upon amounts
otherwise due to Seller employees which are paid by the Buyer. Seller shall
calculate such amount on or about January 15, 1999 and confirm to Buyer the
amount of the deduction Buyer shall be entitled to take from the first
installment of the Note.
(c) Assume, perform and discharge after the Closing Date, Seller's
obligations pursuant to the Contracts included in the Assets, other than the
obligations of the Seller arising under the Contracts prior to the Closing Date.
<PAGE> 2
1.3 Security. The amounts due under the Note including principal,
interest, penalties and expenses if any and all renewals, modifications and
extensions thereof (collectively, the "Obligations"), are and shall continue to
be secured as follows: Buyer hereby grants, assigns and pledges to Seller a
purchase money security interest in all Assets, together with proceeds thereof
(the "Collateral"). Buyer has all necessary right, power and authority to grant
to Seller a valid and enforceable purchase money security interest in the
Collateral. Without the prior written consent of Seller, and except as otherwise
provided for herein, which consent shall not unreasonably be withheld, Buyer
will not, and will not permit any subsidiary to, create or incur, or suffer to
be incurred or to exist, any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (collectively, "Liens") on the Collateral. Buyer will
not sell, exchange, lease, negotiate, pledge, assign or otherwise dispose of the
Collateral outside of the ordinary course of business. In the event that Buyer
fails to meet a payment on the Note, Seller shall have all the rights and
remedies of a secured party under the Uniform Commercial Code and shall be
entitled to immediately exercise all remedies possessed by Seller hereunder. The
security interest granted by Buyer to Seller shall be subordinate to any
security interest granted by Buyer to a commercial or institutional lender in
connection with loans made by any such lender to Buyer. Upon the request of
Buyer, Seller shall take such action as may be required to confirm its
subordinate position, including the filing of releases, amended financing
statements or any other documents reasonably required in connection with any
such commercial subordination.
1.4 Further Cooperation. From time to time after the Closing Date, without
further consideration, the parties will execute and deliver such other
instruments of conveyance and transfer and take such other action as the other
reasonably may request to give effect to Sections 1.3 and 1.4. Each of the
parties will furnish the other with such information and documents in its
possession or under its control or which it can execute or cause to be executed
as will enable the other to prosecute any and all pending claims, applications
and the like hereunder.
1.5 Allocation of Consideration. The parties will allocate 100% of the
consideration paid pursuant to Section 1.2 to goodwill of the Business.
ARTICLE 2.
CLOSING
The transfer of Assets and payment of the Purchase Price referred to in
Article 1 hereof (the "Closing") will take place at 10:00 a.m. at the offices of
Seller in McLean, Virginia on December 31, 1998 or at such other time and date
as Seller and Buyer may in writing designate or such exchange actually occurs
(the "Closing Date").
ARTICLE 3.
SELLER'S REPRESENTATIONS AND WARRANTIES
Seller represents and warrants to Buyer that the statements contained in
this Article 3 are correct as of the date of this Agreement and will be correct
as of the Closing Date as though made on the Closing Date, except as otherwise
set forth in the Schedule of Exceptions delivered herewith attached hereto.
3.1 Existence and Qualification. Seller is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware, and has full power and authority, corporate and otherwise, to carry
on the Business as presently conducted. Seller is duly qualified, where such
qualification is necessary, to conduct the Business as presently conducted by
Seller as a foreign corporation.
3.2 Authority. Seller has all requisite corporate power and authority to
enter into this Agreement and to perform its obligations hereunder. The
execution, delivery and performance of this Agreement by Seller have been duly
and validly authorized by all necessary corporate action. This Agreement
constitutes the valid and binding obligation of Seller enforceable against
Seller in accordance with its terms except as the enforcement thereof may be
affected by bankruptcy or other laws affecting the rights of creditors
generally.
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<PAGE> 3
3.3 Government Authorization. No consent, waiver, approval, order or
authorization of, or registration, declaration, or filing with, any court,
administrative agency, or commission or other governmental authority or
instrumentality is required to be made or obtained by Seller in connection with
the execution and delivery of this Agreement by Seller or the consummation by
Seller of the transactions contemplated hereby (except for any consents required
for the assignment of any Contract as that term is herein defined).
3.4 No Conflicts. Neither the execution, delivery and performance of this
Agreement, nor the consummation of the transactions provided for herein, will
conflict with or result in a breach of the charter or bylaws of Seller or any of
the terms, conditions or provisions of any agreement or instrument to which
Seller is a party or by which Seller is bound (except for any consents required
for the assignment of any Contract as that term is herein defined) or will
result in a violation of any applicable law, ordinance, regulation, permit,
authorization or decree or order of any court or other governmental agency
applicable to Seller, or create or impose any lien, charge or encumbrance on any
of the Assets.
3.5 Litigation. Seller is not engaged in and, to Seller's knowledge, is
not threatened with any litigation or other proceeding which may give rise to
any claim against, or dispute involving, any of the Assets or the Business.
3.6 Title to Assets. Seller has, or as of the Closing will have, good and
indefeasible title to all of the Assets free and clear of all liens, mortgages,
pledges, security interests, conditional sales agreements, charges,
encumbrances, and other adverse claims or interest of any kind, except for liens
for taxes not yet due and payable, and other liens arising by operations of law,
which liens do not in any case materially and adversely affect Seller's title to
the Assets, Seller's use of the Assets or the value of such Assets. Seller is
not party to any contract, agreement or commitment for the sale or disposition
of any of the Assets other than in the ordinary course of business.
3.7 Contracts. Schedule 1.1 lists all customer service accounts by
customer name and account number, and all other supply contracts, maintenance
contracts, consulting agreements and any other service contracts or other
agreements for the purchase or sale of goods or services relating to the
Business, ("Contracts"), that are to be assumed by Buyer hereunder. Seller is
not in default in any material respect under any Contract. To the best of
Seller's knowledge, no other party to any Contract is in default which would, in
the aggregate, have a material adverse effect on the Business. All of the
Contracts are assignable by Seller to Buyer.
3.8 Laws and Regulations. Seller is not in material violation of, or
default under, any law, regulation, or any order of any court or federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality having jurisdiction over Seller in connection with operation of
the Business; and there is no judgment, writ, decree, injunction, rule, or order
of any court, governmental entity or arbitrator outstanding against Seller or
the Assets, or that would prevent, enjoin, materially alter or materially delay
any of the transactions contemplated by this Agreement.
3.9 Taxes. All tax returns, statements, reports and forms (including
estimated tax returns and reports and information returns and reports) required
to be filed with any taxing authority with respect to any taxable period ending
on or before the Closing Date, by or on behalf of Seller, have been or will be
filed when due (including any extensions of such due date), and all amounts
shown due thereon, or finally determined to be due, for any taxable period
ending on or before the Closing Date have been accrued or paid or will be paid
on or before such date.
3.10 No Other Representations. Except as expressly set forth herein,
Seller expressly makes no representations or warranties as to the condition of
the Assets, their merchantability or their fitness for any particular purpose.
The sale of the Assets to Buyer is an "AS IS, WHERE IS" sale.
3
<PAGE> 4
ARTICLE 4.
BUYER'S REPRESENTATIONS AND WARRANTIES
Buyer represents and warrants to Seller as follows:
4.1 Existence and Qualification. Buyer is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Maryland
with all requisite power and authority, corporate and otherwise, to carry on its
business as presently conducted and the Business upon consummation of the
transactions contemplated by this Agreement, and as of the date of Closing, it
will be duly qualified as a foreign corporation, where such qualification is
necessary, to carry on the Business.
4.2 Authority. Buyer has all requisite corporate power and authority to
enter into this Agreement and to perform its obligations hereunder. The
execution, delivery and performance of this Agreement have been duly and validly
authorized by all necessary corporate and other action on the part of Buyer.
This Agreement constitutes a valid and binding obligation of Buyer enforceable
against Buyer in accordance with its terms except as the enforcement thereof may
be affected by bankruptcy or other laws affecting the rights of creditors
generally.
4.3 No Conflicts. Neither the execution, delivery and performance of this
Agreement, nor the consummation of the transactions provided for herein, will
conflict with or result in a breach of the charter or bylaws of Buyer or any of
the terms, conditions or provisions of any agreement or instrument to which
Buyer is a party or by which it is bound.
4.4 Solvency. Buyer is solvent (as defined in Section 101(31) of the
United States Bankruptcy Code), and is able to pay debts as they mature; Buyer
is engaged in business with reasonable capital.
ARTICLE 5.
COVENANTS OF BUYER AND SELLER
5.1 Affirmative Covenants of Buyer. Until the satisfaction in full of the
Obligations, Buyer shall:
(a) Preserve and maintain its separate corporate existence and all material
rights, franchises, licenses and privileges necessary to the conduct of its
business; and qualify and remain qualified as a foreign corporation and
authorized to do business in each jurisdiction in which the character of its
properties or the nature of its business requires such qualification or
authorization, except in each case to the extent that the failure to be or
remain so qualified could not reasonably be expected to have a material adverse
effect on the ability of Buyer to satisfy its obligations under the Note.
(b) Protect and preserve all properties necessary and material to its
business.
(c) Maintain insurance with responsible insurance companies against such
risks and in such amounts as are customarily maintained by similar businesses or
as may be required by any law or contractual obligation of Buyer.
(d) Pay or perform all taxes, assessments and other governmental charges
that may be levied or assessed upon it or any of its property (including,
without limitation, withholding, social security, payroll and similar employment
related taxes on the dates such taxes are due); provided, that Buyer or such
subsidiary may contest such taxes, assessments and other governmental charges in
good faith so long as adequate reserves are maintained with respect thereto in
accordance with GAAP.
(e) Maintain a system of accounting, and keep such books, records and
accounts (which shall be true and complete in all material respects) as may be
required or as may be necessary to permit the preparation of financial
statements in accordance with GAAP consistently applied and in compliance with
the regulations of any governmental authority having jurisdiction over it or any
of its properties.
4
<PAGE> 5
(f) Observe and remain in material compliance with all laws and contractual
obligations and maintain full force and effect all approvals of governmental
authorities, in each case applicable or necessary to the conduct of its business
except where the failure to do so would not result in a material adverse effect
on it.
(g) At any time during which a default exists under the Note, permit
representatives of Seller, from time to time, as often as may be reasonably
requested, but only during normal business hours and upon reasonable prior
notice, to visit and inspect its properties; inspect, audit and make extracts
from its financial books, records and files, including, but not limited to,
management letters prepared by independent accountants; and discuss with its
principal officers and its independent accountants, its business, assets,
liabilities, financial conditions, results of operations and business prospects.
5.2 Negative Covenants of Buyer. Until the satisfaction in full of the
Obligations, Buyer shall not enter into any contractual obligations which would
restrict or encumber the exercise by Seller of any material right or privilege
under this Agreement or the Note except as otherwise provided herein.
5.3 Negative Covenant of Seller. Seller will not directly or indirectly
for a period of two years from the Closing Date solicit the customers which have
previously entered into Contracts with Seller for the purpose of providing
consulting services and support for networks nor will Seller solicit the
employment of former employees of Seller.
ARTICLE 6.
INDEMNIFICATION
6.1 Indemnity by Seller. Seller will jointly and severally indemnify,
defend and hold harmless Buyer, its successors and assigns and their respective
officers, directors, employees, stockholders and agents (collectively, the
"Buyer Indemnified Persons") against all material claims, losses, liabilities,
damages, deficiencies, costs and expenses, including without limitation,
reasonable attorneys', accountants' and expert witness' fees, costs and expenses
of investigation, and the costs and expenses of enforcing this indemnification
(hereinafter individually a "Loss" and collectively "Losses") incurred by any
such Buyer Indemnified Person arising out of or related to any material
misrepresentation or breach of warranty by Seller, or nonfulfillment of any
agreement or covenant to be performed by Seller under this Agreement or in any
writing delivered pursuant to the provisions of this Agreement or out of or
relating to the obligations of Seller, under the Contracts or otherwise as
agreed to by Seller under this Agreement, arising prior to the Closing Date.
The obligations of indemnity of Seller under this Section 8.1 will not
exceed the amount of the Purchase Price, excluding interest thereon, actually
received by Seller.
6.2 Indemnity by Buyer. Buyer covenants and agrees that it will indemnify
and hold harmless Seller, its successors and assigns and their respective
officers, directors, employees, stockholders and agents (collectively the
"Seller Indemnified Persons"), after the Closing, against any and all Losses
arising out of or related to any material misrepresentation, breach of warranty,
or nonfulfillment of any agreement or covenant to be performed by Buyer under
this Agreement or in any writing delivered pursuant to the provisions of this
Agreement and out of or relating to the obligations and Contracts assumed
hereunder.
6.3 Notice of Indemnity Claim. A party seeking indemnity hereunder
("Indemnified Party") will notify the other party ("Indemnifying Party") of the
Loss in question within a reasonable time after the Indemnified Party becomes
aware of the existence of such Indemnity Event, but in no event more than 60
days; provided, that the failure so to timely notify will relieve the
Indemnifying Party from the obligation to indemnify against the liability
respecting such Indemnity Event only to the extent the Indemnifying Party
establishes by competent evidence that it is prejudiced thereby. In any case, if
any such action will be brought, and the Indemnified Party will notify the
Indemnifying Party of the commencement thereof, such Indemnified Party will be
entitled to participate in the defense thereof at his own expense; provided,
however, that the Indemnifying Party will have sole discretion to determine
whether to contest, compromise, enter pleas, or settle any action brought
against the Indemnified Party.
5
<PAGE> 6
ARTICLE 7.
ADDITIONAL AGREEMENTS
7.1 Nondisclosure of Confidential Information. Seller will not disclose
the customer names, addresses and/or any other confidential information relating
to the Business to any person, firm, corporation, association or other entity
for any purpose or reason whatsoever for five years after the Closing Date,
except to authorized representatives of Buyer; provided, however, that Seller
may disclose the information in response to any legally enforceable summons or
subpoena or in order to comply with any order, law, ruling or regulation
applicable to Seller. If Seller becomes legally compelled to disclose such
confidential information, Seller will provide Buyer with prompt notice of such
requirement so that Buyer may seek a protective order or other appropriate
remedy.
7.2 Fees and Expenses. Whether or not the transactions herein contemplated
are consummated, (i) Seller will pay the fees, expenses and disbursements of
Seller and its agents, representatives, accountants and counsel incurred in
connection with the subject matter of this Agreement and any amendments hereto,
and (ii) Buyer will pay the fees, expenses and disbursements of Buyer and
Stockholders and their agents, representatives, accountants and counsel incurred
in connection with the subject matter of this Agreement and any amendments
hereto.
7.3 Transition. Seller will assist Buyer in the orderly transition of
Seller's customers and the Business to Buyer for a period of 30 days following
the Closing Date (the "Transition Period"). Seller will cooperate with Buyer and
its representatives and counsel in the preparation of any documents or other
material which may be required by any governmental agency in connection with
approvals for consummation of the transactions contemplated by this Agreement.
7.4 Press Releases. Neither party will disclose to any third party or
issue any press release or otherwise publicize the terms of the Agreement
without the consent or approval of the other party; however, each party may make
such public disclosure that it believes in good faith to be required by any law.
7.5 Customer Letters. Immediately after the Closing, Buyer and Seller will
jointly prepare a letter to be sent by Buyer, at Buyer's expense, informing the
customers whose contracts have been sold and transferred pursuant to this
Agreement, of such sale under this Agreement.
7.6 Sales, Transfer and Documentary Taxes, etc. Buyer will pay all
federal, state and local sales, documentary and other transfer taxes, if any,
due as a result of the purchase, sale or transfer of the Assets in accordance
herewith whether imposed by law on Seller or Buyer, and Buyer will indemnify,
reimburse and hold harmless Seller in respect of the liability for payment of or
failure to pay any such taxes or the filing of or failure to file any reports
required in connection therewith.
7.7 General Responsibilities. Seller shall be responsible for all trade
payables related to the Contracts including those related to the Business for
periods prior to Closing. Seller shall be entitled to all accounts receivable
for all work or work in progress performed prior to closing and the parties
shall cooperate to report to each other relating to any such payments or
obligations. Following the Closing Date, Buyer shall forward to Seller any
payments received by Buyer that Seller is entitled to pursuant to the terms of
this Agreement (including in respect of accounts receivable existing as of the
Closing) and Seller shall forward to Buyer any payments received by Seller that
Buyer is entitled to pursuant to the terms of this Agreement, in each case
within one week of receipt of any such payment by Buyer or Seller, as the case
may be. Buyer shall promptly deliver to Seller any mail or other communications
received by Buyer relating to assets not sold to Buyer and to retained
liabilities and Seller shall promptly deliver to Buyer any mail or other
communications received by Seller relating to the Assets or the assumed
liabilities.
6
<PAGE> 7
ARTICLE 8.
GENERAL
8.1 Survival of Representations and Warranties. The representations and
warranties of the parties contained in this Agreement or other attachments
hereto delivered pursuant to the provisions of this Agreement will survive the
consummation of the transactions contemplated hereby and any examination on
behalf of the parties in accordance with the terms of this Agreement and shall
continue in full force and effect thereafter for a period of one year following
the Closing Date.
8.2 Assignment. This Agreement may not be assigned (including by operation
of law) without the prior written consent of the other parties, which consent
will not be unreasonably withheld; provided, however, any party may assign its
rights, but may not delegate its duties or obligations hereunder, to its
affiliates or a purchaser by merger or otherwise of all of substantially all of
its business.
8.3 Arbitration. Any controversy or claim arising out of or related to
this Agreement, or any transactions contemplated herein, that cannot be amicably
resolved, including, without limitation, whether such controversy or claim is
subject to arbitration, will be resolved by binding arbitration held in McLean,
Virginia, in accordance with the commercial arbitration rules of the American
Arbitration Association, subject to this Section. Arbitration proceedings will
be conducted by a panel of three persons selected as follows. The party
initiating arbitration will select one arbitrator listed and qualified with the
American Arbitration Association ("Qualified Arbitrator") and the other party
will select a second Qualified Arbitrator, both within 10 days of any written
notice to arbitrate. The two arbitrators will select a third Qualified
Arbitrator within 20 days of the appointment of the first two arbitrators. No
arbitrator will have or previously have had any significant relationship with
any of the parties. The decision of any two of the arbitrators on any submitted
matter will be final and nonappealable. Notwithstanding the foregoing, if the
controversy or claim in question is not resolved by the arbitrators as provided
herein within 150 days after selection of the first arbitrator, either party may
pursue any remedy with respect hereto provided by law.
8.4 Notices. Any notice or communication required or permitted hereunder
will be sufficiently given if sent by first class mail, postage prepaid:
(a) If to Seller, addressed to:
UOL Publishing, Inc.
8251 Greensboro Drive, Suite 500
McLean, Virginia 22101
With a copy to its counsel, addressed to:
Wyrick Robbins Yates & Ponton LLP
4101 Lake Boone Trail, Suite 300
Raleigh, North Carolina 27607
Attention: Larry E. Robbins, Esq.
(b) If to Buyer, addressed to:
A & T Systems, Inc.
12520 Prosperity Drive, Suite 300
Silver Spring, MD 20904
Attention: Asaok Thareja
With a copy to its counsel, addressed to:
Joseph, Greenwald & Laake, P.A.
6404 Ivy Lane, Suite 400
Greenbelt, MD 20770
Attention: Jay D. Miller, Esq.
7
<PAGE> 8
8.5 Applicable Law. This Agreement will be construed in accordance with
the laws of the Commonwealth of Virginia, regardless of conflict of law
principles.
8.6 Headings. The section and article headings in this Agreement are for
convenience only and will not be considered a part hereof or affect the
construction or interpretation of any provisions of this Agreement.
8.7 Third Party Consents. To the extent that the rights of Seller under
any Contract or Asset to be assigned to Buyer hereunder may not be assigned
without the consent of another person which has not been obtained, this
Agreement will not constitute an agreement to assign the same if an attempted
assignment would constitute a breach thereof or be unlawful, and Seller will use
its reasonable efforts to obtain any such required consent(s) as promptly as
possible. If any such consent is not obtained or if any attempted assignment
would be ineffective or would impair Buyer's rights under the Asset in question
so that Buyer would not in effect acquire the benefit of all such rights,
Seller, to the maximum extent permitted by law and the Asset, will act after the
Closing as Buyer's agent in order to obtain for it the benefits thereunder and
will cooperate, to the maximum extent permitted by law and the Asset, with Buyer
in any other reasonable arrangement satisfactory to all parties designed to
provide such benefits to Buyer, and Buyer will be responsible for the reasonable
costs and expenses of obtaining such benefits.
8.8 No Benefit to Others. The representations, warranties, covenants and
agreements contained in this Agreement are for the sole benefit of the parties
hereto and, in the case of Article 8 hereof, the Indemnified Buyer Parties and
the Indemnified Seller Parties, and their successors and assigns, and they will
not be construed as conferring any rights on any other persons.
8.9 Entire Agreement. This Agreement (including the exhibits and schedules
hereto) and the documents delivered pursuant hereto constitute the entire
agreement and understanding among Seller and Buyer and supersede any prior
agreement and understanding relating to the subject matter of this Agreement.
This Agreement may be modified or amended only by a written instrument executed
by Seller and Buyer acting through their duly elected officers.
8.10 Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which will be deemed an original and all of which
together will constitute but one and the same instrument.
8.11 Severability. The provisions of this Agreement are severable, so that
the invalidity or unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of any other term or provision of this
Agreement, which shall remain in full force and effect.
8.12 Specific Performance. In addition to any and all other remedies that
may be available at law in the event of any breach of this Agreement, Seller
shall be entitled to specific performance of the agreements and obligations of
Buyer hereunder and to such other injunctive or other equitable relief as may be
granted by a court of competent jurisdiction.
[THE NEXT PAGE IS THE SIGNATURE PAGE.]
8
<PAGE> 9
IN WITNESS WHEREOF, the parties have executed this Asset Purchase Agreement
as of the day and year first above written.
<TABLE>
<S> <C>
SELLER:
HTR, INC.
ATTEST:
By: By: /s/ NARASIMHAN P. KANNAN
------------------------------------ -----------------------------------------
Name: Name:
---------------------------------- ---------------------------------------
Title: Title: President
--------------------------------- --------------------------------------
BUYER:
A & T SYSTEMS, INC.
ATTEST:
By: By: /s/ ASHOK THAREJA
------------------------------------ -----------------------------------------
Name: Name:
---------------------------------- ---------------------------------------
Title: Title: President and Chief Executive Officer
--------------------------------- --------------------------------------
</TABLE>
9
<PAGE> 1
EXHIBIT 2.7
FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT
This FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT ("Amendment") is made
and entered into and effective for all purposes as of this 30th day of December,
1998 by and among UOL PUBLISHING, INC., a Delaware corporation (hereinafter
referred to as "Purchaser"), and JAMES R. COOPER, TERRY K. HAMBEL and THOMAS
JOHNSON, each a New Hampshire resident (collectively hereinafter referred to as
"Company Shareholders" or as the "Transferors").
R E C I T A L S:
Purchaser, the Transferors and Cooper & Associates, Inc., an Illinois
corporation (the "Company") entered into that certain Stock Purchase Agreement
dated as of April 30, 1997 (the "Original Agreement") pursuant to which
Purchaser acquired from the Transferors all of the capital stock of the Company.
Pursuant to the Original Agreement, Purchaser was to pay to the
Transferors the aggregate sum of $5,000,000 in consideration of the transfer of
the Company's stock. At the closing of the transfer of the Company's stock,
Purchaser delivered to the Transferors the sum of $3,000,000; in May of 1998
Purchaser delivered to the Transferors the sum of $666,667. According to the
provisions of Section 2.3(a)(ii) and 2.3(a)(iii), Purchaser is required to
deliver to the Transferors the sum of $666,667 on April 30, 1999 (the "1999
Installment") and the sum of $666,666 on April 30, 2000 (the "2000
Installment").
Purchaser has informed the Transferors that the financial condition of
Purchaser would be greatly enhanced if the Transferors were to allow Purchaser
to restructure its obligations to the Transferors, including the obligations to
make the 1999 Installment and the 2000 Installment. The parties desire to revise
the Original Agreement, and particularly, the provisions of Section 2.3(a)(ii)
and 2.3(a)(iii) in order to accommodate the financial condition of Purchaser.
A G R E E M E N T S:
As such, the parties hereby agree as follows:
1. Amendment to Section 2.3(a)(ii) of the Original Agreement. The text in
Section 2.3(a)(ii) is hereby deleted in its entirety and replaced with the
following text:
(ii) $166,666 on or before April 15, 1999; and
2. Amendment to Section 2.3(a)(iii) of the Original Agreement. The text
in Section 2.3(a)(iii) is hereby deleted in its entirety and replaced with the
following text:
(iii) $660,000 in installments of $30,000 on or before the fifteenth day
of each calendar month commencing March 15, 1999 and continuing to and including
March 15, 2000 with a final installment of $270,000 on or before April 15, 2000.
3. Amendment to Section 2.3(a) Generally. Section 2.3(a) of the Original
Agreement is hereby amended by adding the following text at the end of the
existing text in Section 2.3(a):
In addition, on or before January 15, 1999, Purchaser will issue to
Company Shareholders (according to their proportional ownership of the Company
immediately prior to the Closing) One Hundred Thousand (100,000) shares of
Purchaser's common stock trading under the symbol "UOLP" AND Fifty Thousand
(50,000) warrants to purchase Purchaser's shares at Six Dollars ($6.00) within
three (3) years from the date of issuance. Purchaser further covenants and
agrees that on or before January 15,
<PAGE> 2
1999, Purchaser will issue to Steven L. Kroll (social security number:
###-##-####, home address: 923 W. Fullerton Avenue, Chicago, Illinois 60614)
Five Thousand (5,000) shares of Purchaser's common stock trading under the
symbol "UOLP" AND Five Thousand (5,000) warrants to purchase Purchaser's shares
at Six Dollars ($6.00) within three (3) years from the date of issuance.
Purchaser further covenants and agrees that Purchaser will file for registration
with the U.S. Securities and Exchange Commission all of the shares of
Purchaser's common stock and warrants to purchase common stock described in this
Section 2.3(a) within fifteen (15) days of the completion of Purchaser's
independent auditors of their 1998 audit of Purchaser and in no event later than
April 15, 1999, so that all of such shares and warrants shall be registered as
of the date upon which the registration statement is declared effective;
provided, however, that the Company may terminate such registration statement at
any time that the Company has executed an engagement letter with an underwriter
for a secondary offering of the Company's capital stock. At such time, the
Company will request that the Purchaser's common stock and warrants be
registered in such secondary offering subject to approval of the Company's
underwriter. The registration statement shall terminate no later than December
31, 1999.
4. Purchaser's Compliance with this Amendment. In the event that
Purchaser fails to comply with the provisions of Section 2.3(a) of the Original
Agreement, as amended by paragraph 3 of this Amendment, Transferors shall have
the right to accelerate the payment of all amounts under this Amendment.
5. Effectiveness of this Amendment. This Amendment is intended by the
parties to be an amendment to the Original Agreement in accordance with the
provisions of Section 11.6 of the Original Agreement and amends only those
sections of the Original Agreement described in this Amendment. All other
provisions of the Original Agreement shall remain in full force and effect
including, without limitation, the proviso at the end of Section 2.3(a), all of
Section 2.3(b) and all of Section 2.3(c), which are intended to provide
Transferors with remedies against Purchaser in the event that Purchaser fails to
meet all of its obligations as set forth in Section 2.3(a) as amended by this
Amendment.
6. Reaffirmation of Obligations. Purchaser hereby reaffirms all of its
obligations to Transferors described in the Original Agreement as amended by
this Amendment and hereby acknowledges that it has no existing rights of setoff
or other defenses to its obligations to Transferors.
7. Special Representations of Purchaser. Purchaser hereby represents and
warrants to Transferors all of the following in order to induce Transferors to
enter into this Amendment and as a condition precedent the effectiveness of this
Amendment:
(a) that Purchaser has obtained all necessary corporate and board
approval to enter into and perform the provisions of this Amendment;
(b) that the officer of Purchaser executing this Amendment has legal
authority and/or has been directed by the board of directors of Purchaser to
execute this Amendment in the name of and on behalf of Purchaser;
(c) that the issuance and registration of Purchaser's shares of common
stock and warrants to purchase common stock as described in the text amendment
of paragraph 3 above shall require no additional approvals of any person or
governmental entity (except for the SEC); and
(d) that the shares of Purchaser's stock described in the text amendment
of paragraph 3 above will, after issuance and completion of registration, all be
legally and properly registered, fully-paid, nonassessable and validly-issued.
8. Notice. The parties hereby agree that any notice required by the
Original Agreement to be delivered to Transferors shall be delivered by
overnight courier to Steven L. Kroll, attorney for Transferors at the following
address:
<PAGE> 3
c/o Wolin & Rosen, Attorneys
Two N. LaSalle Street, Suite 1776
Chicago, Illinois 60602
Ph: 312-726-1298
9. Counterparts. This Amendment may be executed in one or more
counterparts and each counterpart shall be deemed effective against the person
or party who executed such counterpart.
The parties hereto have executed this First Amendment to Stock Purchase
Agreement or caused this First Amendment to Stock Purchase Agreement to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
UOL PUBLISHING, INC.
By /s/ NARASIMHAN P. KANNAN
---------------------------
Its President
TRANSFERORS:
/s/ JAMES R. COOPER
- -------------------
JAMES R. COOPER
/s/ TERRY K. HAMBEL
- -------------------
TERRY K. HAMBEL
/s/ THOMAS JOHNSON
- ------------------
THOMAS JOHNSON
<PAGE> 1
EXHIBIT 10.40
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR BY THE SECURITIES REGULATORY
AUTHORITY OF ANY OTHER JURISDICTION, NOR HAS ANY COMMISSION OR AUTHORITY PASSED
UPON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION CONTRARY TO THE
FOREGOING IS UNLAWFUL. THE SHARES MAY NOT BE TRANSFERRED OR RESOLD IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS
OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
SUBSCRIPTION AGREEMENT
COMMON STOCK
UOL PUBLISHING, INC.
1. Subscription. The undersigned (hereinafter referred to as
"Subscriber") hereby subscribes for and agrees to purchase the number of shares
of Common Stock of UOL Publishing, Inc. (the "Company"), par value $0.01 per
share, set forth on the signature page hereto (the "Shares") in consideration
for payment by the Subscriber of $4.00 per Share pursuant to this Subscription
Agreement (the "Agreement"). The Subscriber herewith tenders the entire amount
of such purchase price by check or wire transfer payable to the order of Spencer
Trask Securities Incorporated, the Company's escrow agent (the "Escrow Agent").
The Subscriber acknowledges that at the time of issuance the Common Stock
will not be registered under the Securities Act of 1933, as amended (the "Act"),
in reliance upon an exemption from registration contained in the Act, and that
the Company's reliance upon such exemption is based, at least partially, on the
Subscriber's representations and warranties contained in this Subscription
Agreement.
2. Acceptance or Rejection of Subscription. Subscriber acknowledges and
agrees that this subscription shall not be effective until accepted in writing
by the Company, and that the Company reserves the right to reject this
subscription in whole or in part. The Company is raising capital through the
sale of a minimum of 150,000 and a maximum of 300,000 Shares. Subscriptions may
be rejected if this minimum subscription is not achieved, for insufficient
documentation or for such other reason as the Company may determine, in its sole
discretion, to be in the best interests of the Company. The Company, in its sole
discretion, reserves the right to close this offering at any time after 150,000
Shares are sold and may limit the number of Shares sold in excess of 150,000. In
the event Subscriber's subscription is accepted by the Company, Subscriber's
Shares shall be issued as of the date specified by the Company at the time of
acceptance.
3. Escrow Arrangements. All payments received from subscribers in this
offering will be deposited by the Escrow Agent in a non-interest bearing account
in the Company's name, specifically segregated for deposit of the subscription
payments, to be held in the account until the Company receives subscription
payments for at least 150,000 Shares. If the minimum investment requirement is
not satisfied prior to , 1999 (the "Termination Date"), then the funds
in the escrow account will be returned to Subscribers without interest. All
subscription payments received by the Escrow Agent after the minimum investment
requirement has been satisfied will be promptly forwarded to the Company.
4. Registration Rights. The Company agrees to prepare and file a
registration statement with the SEC on any available form of registration
statement for the public sale of the Shares and use reasonable efforts to cause
such registration statement to become effective within 120 days from the closing
of the last subscription accepted under this offering; provided, however, if the
Company shall furnish to the holders of Shares a certificate signed by the
Chairman or President of the Company stating that in the good faith judgment of
the Board of Directors of the Company, it would be seriously detrimental to the
Company for a registration
<PAGE> 2
statement to be filed or effective, then the Company's obligation shall be
deferred for a reasonable period, which shall in no event exceed 180 days from
the date such notice is delivered.
The Company will keep effective and maintain any registration for such
period (not exceeding 120 days) as may be reasonably necessary for Subscribers
to effect a public sale or disposition of the Shares. If the registration is to
be effected in connection with an underwritten offering, all holders of Shares
shall enter into an underwriting agreement with the managing or lead underwriter
in the form customarily used by such underwriter with such changes thereto as
the parties thereto shall agree. If any holder of Shares disapproves of the
terms of any such underwriting, it may elect to withdraw therefrom by written
notice to the Company and the managing or lead underwriter. Any Shares so
withdrawn from such underwriting shall be withdrawn from such registration. The
Company shall be required to prepare and file no more than one registration
statement in connection with this obligation. The Company may include in such
registration securities for offering by the Company and any other holder of
securities, it being understood, however, that the Company's and such other
holder's right of inclusion in such registration shall be subordinate to the
rights of the holders of the Shares under this Agreement. All Subscribers agree
provide necessary information and to cooperate fully with the Company and its
legal counsel in such registration. The Company may exclude from such
registration any Subscribers failing to so cooperate.
During the effective period of any registration statement covering the
Shares, the holders of the Shares will not effect sales thereof after receipt of
telegraphic or written notice from the Company to suspend sales to permit the
Company to correct or update a registration statement or prospectus until the
holders receive written notice from the Company that the registration statement
or prospectus has been corrected or updated.
At the end of the effective period of any registration statement covering
the Shares, the holders of the Shares shall discontinue sales of shares pursuant
to such registration statement upon receipt of notice from the Company of its
intention to remove from registration the Shares covered by such registration
statement which remain unsold, and the holders shall notify the Company of the
number of shares registered which remain unsold immediately upon receipt of such
notice from the Company.
5. Subscriber's Representations and Warranties. Subscriber represents,
warrants, acknowledges and agrees to the following.
a. Subscriber is a resident of the state indicated on the signature
page hereof, is legally competent to execute this Agreement, and:
(i) if Subscriber is an individual, has his or her principal
residence in such state; or
(ii) if Subscriber is a corporation, partnership, trust or other
form of business organization, has its principal office in such state;
and
(iii) if Subscriber is a corporation, partnership, trust or other
form of business organization, Subscriber has not been organized for the
specific purpose of acquiring the Shares.
b. This Agreement is and shall be irrevocable, except that the
Subscriber shall have no obligations hereunder in the event that the
subscription is not accepted by the Company in whole or in part.
c. The Subscriber has read this Agreement carefully and, to the
extent believed necessary, has discussed the representations, warranties
and agreements and the applicable limitations upon the Subscriber's resale
of the Common Stock with counsel.
d. The Subscriber represents that, if an individual, the Subscriber
is at least 21 years of age.
e. The Subscriber understands that no federal or state agency has
made any finding or determination regarding the fairness of this offering,
or any recommendation or endorsement of this offering.
f. The Subscriber is an "accredited investor" as defined in Rule 501
of Regulation D promulgated under the Act.
Entities that are accredited investors under Rule 501 include,
among others, certain banks, savings and loan associations,
registered securities broker-dealers, insurance companies,
2
<PAGE> 3
registered investment companies and trusts. Individuals that are
accredited investors under Rule 501 include, among others, any
natural person whose individual net worth, or joint net worth
with that person's spouse, exceeds $1 million; or who had income
in excess of $200,000 in each of the two most recent years or
joint income with that person's spouse in excess of $300,000 in
each of those years and who has a reasonable expectation of
reaching the same income level in the current year.
g. The Subscriber has received from the Company or others and has
read copies of the Company's filings with the U.S. Securities and Exchange
Commission (the "SEC"), and has had an adequate opportunity to ask
questions of and receive answers from the Company regarding these documents
(the "SEC Filings").
h. The Subscriber represents that the Subscriber, if an individual,
has adequate means of providing for his/her current needs and personal and
family contingencies and has no need for liquidity in his/her investment in
this offering.
i. The Subscriber is financially able to bear the economic risk of
this investment, including the ability to afford holding the Common Stock
for an indefinite period, or to afford a complete loss of its investment.
The Subscriber's total investment in the Company will not exceed ten
percent (10%) of net worth as determined exclusive of principal residence,
mortgage thereon, home furnishings and automobiles.
j. The Subscriber is purchasing the Common Stock for the Subscriber's
own account, with the intention of holding the Common Stock for investment
purposes and not for the purpose of reselling or otherwise participating,
directly or indirectly, in a distribution of the Common Stock, and shall
not make any sale, transfer or other disposition of any portion of the
Common Stock purchased hereby without registration under the Act and any
applicable securities act of any state or unless an exemption from
registration is available under such acts.
k. The Subscriber's overall commitment to investments that are not
readily marketable is not disproportionate to the Subscriber's net worth,
and the Subscriber's investment in the Common Stock will not cause such
overall commitment to become excessive.
l. The Subscriber understands that an investment in the Common Stock
is a highly illiquid investment, and that, the Subscriber will have to bear
the economic risk of the investment indefinitely (or at least until such
shares may become registered as provided under this Agreement) because the
Common Stock has not been registered under the Act and is being issued
pursuant to a private placement exemption under Regulation D, on the
grounds that no public offering is involved. Therefore, the Common Stock
cannot be offered, sold, transferred, pledged or hypothecated to any
person, unless either it is subsequently registered under the Act and
applicable state securities laws or an exemption from registration is
available and the Subscriber obtains a favorable opinion of the Company's
counsel to that effect.
m. Absent or prior to registration of the Shares by the Company
pursuant to Section 4 hereof, the Subscriber understands that the
provisions of Rule 144 promulgated under the Act are not available for at
least one (1) year, to permit resale of the Common Stock, and there can be
no assurance that the conditions necessary to permit routine sales of the
Common Stock under Rule 144 will ever be satisfied, and, if Rule 144 should
become available, routine sales made in reliance on its provisions could be
made only in limited amounts and in accordance with the terms and
conditions of the Rule. The Subscriber further understands that in
connection with sales for which Rule 144 is not available, compliance with
some other registration exemption will be required, which may not be
available.
n. The Subscriber understands that the Company is under a reasonable
efforts obligation to the Subscriber to register the Common Stock for
public sale under the Act within and that such obligation is subject to
certain limitations as provided in Section 4 hereof.
3
<PAGE> 4
o. The Subscriber understands and agrees that stop transfer
instructions will be given to the Company's transfer agent or the officer
in charge of its stock records and noted on the appropriate records of the
Company to the effect that the Common Stock may not be transferred out of
the Subscriber's name unless either the Shares become registered under the
Act or it is established to the satisfaction of counsel for the Company
that an exemption from the registration provisions of the Act and
applicable state securities laws is available therefore. The Subscriber
further agrees that there will be placed on the certificates for the Common
Stock, or any substitutions therefore, a legend stating in substance as
follows, that the Subscriber understands and agrees that the Company may
refuse to permit the transfer of the stock out of its name and that the
stock must be held indefinitely in the absence of compliance with the terms
of such legend.
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
STATE SECURITIES ACT AND MAY NOT BE SOLD, TRANSFERRED OR PLEDGED
IN THE ABSENCE OF SUCH REGISTRATION UNLESS THE CORPORATION
RECEIVES AN OPINION OF COUNSEL (WHICH MAY BE COUNSEL FOR THE
CORPORATION) REASONABLY SATISFACTORY TO IT THAT SUCH TRANSFER
MAY BE MADE IN COMPLIANCE WITH APPLICABLE FEDERAL AND STATE
SECURITIES LAWS AND REGULATIONS.
p. The Subscriber has been given the opportunity to review the
Company's SEC Filings, and to ask questions of, and receive answers from,
Company representatives concerning the Company and the terms and conditions
of the offering and to obtain such other information as the Subscriber
desires in order to evaluate an investment in the Common Stock.
q. The Subscriber agrees to indemnify the Company, its directors,
officers and employees, and to hold them harmless from and against any and
all liability, damages, costs or expenses, including reasonable attorney
fees, on account of or arising out of (i) any inaccuracy in the
Subscriber's representations and warranties hereinabove set forth; (ii) the
disposition of any of the Common Stock which it will receive, contrary to
its foregoing representations and warranties; and (iii) any action, suit or
proceeding based upon either the claim that its representations or
warranties were inaccurate or misleading or otherwise cause for obtaining
damages or redress from the Company, its directors, officers or employees,
or the disposition of any portion of the Common Stock.
r. The Subscriber understands that the Shares are being sold by the
Company through Spencer Trask Securities as the Company's placement agent
for the offering and that the Company has agreed to pay Spencer Trask
Securities a customary placement fee of 7.0% of the gross offering proceeds
for its services.
6. Company Representations and Warranties. The Company represents,
warrants acknowledges and agrees to the following.
a. Organization and Standing. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Delaware, and has all requisite corporate power and authority to
own and operate its properties and assets and to carry on its business as
now conducted and as currently proposed to be conducted. The Company is
duly qualified and authorized to do business, and is in good standing as a
foreign corporation, in Virginia and in each other jurisdiction where the
nature of its activities and of its properties (both owned and leased)
makes such qualification necessary, except where a failure to do so would
not have a material adverse effect on the Company.
b. Capitalization. The authorized capital of the Company,
immediately prior to the Closing, will consist of: 1,200,000 shares of
Series D Convertible Preferred Stock, $0.01 par value per share, 1,082,625
of which are issued and outstanding; 1,000,000 shares of Series C
Convertible Preferred Stock, $0.01 par value per share, 626,293 shares of
which are issued and outstanding; 7,800,000 shares of undesignated
Preferred Stock, $0.01 par value per share; and 36,000,000 shares of Common
Stock, $0.01 par value per share, 3,990,046 of which were issued and
outstanding as of December 31, 1998.
4
<PAGE> 5
All of the outstanding shares of Common Stock and Preferred Stock that
have been duly authorized and validly issued, are fully paid and
nonassessable and were issued in compliance with all applicable federal and
state securities laws. The Company has duly and validly reserved the Shares
for issuance as contemplated hereby and sufficient shares of Common Stock
for issuance upon exercise of warrants issued to certain parties and
options granted to officers, directors, employees and consultants of the
Company under the Company's stock option plan. Except as disclosed in the
SEC Filings, there are no outstanding rights of first refusal, preemptive
rights or other rights, options, warrants, conversion rights or other
agreements, either directly or indirectly, for the purchase or acquisition
from the Company of any shares of its capital stock.
c. Authorization. All corporate action on the part of the Company
and its directors and stockholders necessary for the authorization,
execution and delivery of this Agreement, the performance of all the
Company's obligations hereunder and thereunder, and the authorization,
issuance, sale and delivery of the Shares has been taken. This Agreement,
when executed and delivered by the Company and the respective other parties
thereto, shall constitute a valid and legally binding obligation of the
Company enforceable in accordance with its terms, subject to laws of
general application relating to bankruptcy, insolvency and the relief of
debtors, rules and laws governing specific performance, injunctive relief
and other equitable remedies.
d. Validity of the Shares. The Shares, when issued pursuant to the
terms of this Agreement, will be validly issued, and fully paid and
nonassessable and will be free of any liens or encumbrances; provided,
however, that the Shares will be subject to restrictions on transfer under
state and/or federal securities laws as set forth herein.
e. Compliance with Other Instruments. The Company is not in
violation of any provisions of its Certificate of Incorporation or its
Bylaws as amended, or of any provisions of any material agreement or any
judgment, decree or order by which it is bound or any statute, rule or
regulation applicable to the Company. Subject to the compliance with such
filings as may be required to be made with the SEC, the National
Association of Securities Dealers, Inc. (the "NASD") and certain state
securities commissions, the execution, delivery and performance of this
agreement and the issuance and sale of the Shares pursuant hereto, will not
result in any such violation or be in conflict with or constitute a default
under any such provisions or result in the creation of any mortgage,
pledge, lien, encumbrance or charge upon any of the properties or assets of
the Company.
f. Governmental Consents. All consents, approvals, orders or
authorization of, or registrations, qualifications, designations,
declarations or filings with, any federal or state governmental authority
on the part of the Company required in connection with the valid execution
and delivery of this agreement, the offer, sale or issuance of the Shares,
or the consummation of any other transaction contemplated hereby, have been
obtained, except for the registration of the Shares as provided in Section
4 hereof and the notices required to be filed with the SEC, the NASD and
certain state securities commissions thereafter, which notices will be
filed on a timely basis.
g. Accuracy of Reports. The SEC Filings required to be filed by the
Company within the year prior to the date of this Agreement under the
Securities Exchange Act of 1934 have been duly filed, were in substantial
compliance with the requirements of their respective forms, were complete
and correct in all material respects as of the dates at which the
information was furnished, and contained (as of such dates) no untrue
statement of a material fact or omitted to state a material fact necessary
in order to make the statements made therein, in light of the circumstances
under which they were made, not misleading.
h. Disclosure. No representation or warranty of the Company
contained in this Agreement contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make the
statements contained herein or therein, in light of the circumstances under
which they were made, not misleading.
5
<PAGE> 6
7. Revocation. Subscriber acknowledges and agrees that Subscriber shall
not and cannot cancel, terminate or revoke this Agreement or any agreement of
Subscriber made hereunder, except as otherwise provided by applicable state law,
and that (if Subscriber is an individual) this Agreement shall survive the
death, disability, or incompetence of Subscriber.
8. Assignment. This Agreement is not transferable or assignable by the
Subscriber.
9. Expenses. The Company and each of the Purchasers shall bear his, her
or its own expenses with respect to this Agreement and the transactions
contemplated hereby.
10. Correct Information. All information which the Subscriber has provided
concerning the Subscriber, his, her or its financial position and the
Subscriber's knowledge of financial and business matters is correct and complete
as of the date hereof, and if there should be any material change in such
information prior to the Company's acceptance of the subscription, the
Subscriber will immediately provide the Company with such information.
11. Miscellaneous. This Agreement shall be construed in accordance with
and governed by the laws of the State of Delaware. This Agreement constitutes
the entire agreement among the parties hereto with respect to the subject matter
hereof and may be amended only by a writing executed by all parties.
6
<PAGE> 7
SUBSCRIPTION AGREEMENT SIGNATURE PAGE
IN WITNESS WHEREOF, the Subscriber has executed this Subscription Agreement
on this ___ day of ________ 1999.
____________ = Shares of Common Stock
____________ = total payment by Subscriber
- ------------------------------------------------------
Signature of Subscriber
- ------------------------------------------------------
Printed or typed name of Subscriber (in exactly the form
in which securities are to be registered)
- ------------------------------------------------------
Printed or Typed Name and Title of person signing
(if Subscriber is not an individual)
Escrow Agent:
Spencer Trask Securities Incorporated
By:
---------------------------------------------------
Title:
------------------------------------------------
- ------------------------------------------------------
Address
- ------------------------------------------------------
Social Security Number(s) (if an individual)
FOR COMPANY USE ONLY:
ACCEPTED THIS ___ DAY OF ________ 1999, ON BEHALF OF UOL PUBLISHING, INC.,
FOR ______ SHARES OF COMMON STOCK.
BY:
-------------------------------------------
NAME:
-----------------------------------------
TITLE:
----------------------------------------
7
<PAGE> 1
EXHIBIT 21.1
<TABLE>
<CAPTION>
LIST OF SUBSIDIARIES
Name of Subsidiary Jurisdiction of Incorporation
- -------------------- -----------------------------
<S> <C>
Cognitive Training Associates, Inc. Texas
Cooper & Associates, Inc. Illinois
HTR, Inc. Delaware
UOL Leasing, Inc. Delaware
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-42803) pertaining to the Amended and Restated Stock Option
Plan and the 1996 Stock Option Plan of UOL Publishing, Inc. of our report dated
February 26, 1999, except for Note 10, as to which the date is March 22, 1999,
with respect to the consolidated financial statments and schedule of UOL
Publishing, Inc. included in the Annual Report on Form 10-K for the year ended
December 31, 1998.
/s/ ERNST & YOUNG LLP
Vienna, Virginia
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 336,194
<SECURITIES> 0
<RECEIVABLES> 3,654,408
<ALLOWANCES> 567,140
<INVENTORY> 0
<CURRENT-ASSETS> 3,972,278
<PP&E> 4,187,225
<DEPRECIATION> 1,750,691
<TOTAL-ASSETS> 14,871,031
<CURRENT-LIABILITIES> 8,603,629
<BONDS> 0
0
17,089
<COMMON> 39,900
<OTHER-SE> 5,763,344
<TOTAL-LIABILITY-AND-EQUITY> 14,871,031
<SALES> 14,683,112
<TOTAL-REVENUES> 14,683,112
<CGS> 10,072,558
<TOTAL-COSTS> 22,917,254
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 597,139
<INCOME-PRETAX> (19,811,265)
<INCOME-TAX> 0
<INCOME-CONTINUING> (19,811,265)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,811,265)
<EPS-PRIMARY> (5.27)
<EPS-DILUTED> (5.27)
</TABLE>
