<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999.
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-21421
UOL PUBLISHING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 54-1290319
(STATE OR OTHER JURISDICTION 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)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 703-893-7800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK, $0.01 PAR VALUE
(Class)
4,837,051
(Outstanding at August 11, 1999)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UOL PUBLISHING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
1998 1999 1998 1999
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues:
Instructor-led training revenues....... $ 1,428,723 $ 1,166,135 $ 3,102,540 $ 2,560,579
Online tuition revenues................ 258,177 967,491 530,382 1,848,739
Product sales revenues................. 877,005 311,510 1,827,211 711,145
Online development and other
revenues............................ 267,772 340,325 364,253 576,199
Other service revenues................. 594,960 68,600 1,160,611 150,316
Virtual campus software revenues....... 834 74,926 43,334 117,092
----------- ----------- ------------ -----------
Net revenues............................. 3,427,471 2,928,987 7,028,331 5,964,070
Costs and expenses:
Cost of revenues....................... 2,194,268 1,481,484 4,522,946 2,949,923
Sales and marketing.................... 1,636,766 1,153,927 3,267,324 2,196,440
Product development and operations..... 1,840,775 506,749 4,640,559 1,011,631
General and administrative............. 648,188 633,913 2,548,701 1,322,043
Depreciation and amortization.......... 744,852 768,385 1,549,073 1,538,816
Reorganization costs................... 928,870 -- 1,396,510 --
----------- ----------- ------------ -----------
Total costs and expenses................. 7,993,719 4,544,458 17,925,113 9,018,853
----------- ----------- ------------ -----------
Loss from operations..................... (4,566,248) (1,615,471) (10,896,782) (3,054,783)
Gain on the sale of subsidiary........... -- 1,446 -- 1,446
Interest expense......................... (165,018) (164,551) (294,870) (292,318)
----------- ----------- ------------ -----------
Net loss................................. $(4,731,266) $(1,778,576) $(11,191,652) $(3,345,655)
=========== =========== ============ ===========
Dividends to preferred stockholders...... -- (74,226) -- (147,637)
----------- ----------- ------------ -----------
Net loss attributable to common
stockholders........................... $(4,731,266) $(1,852,802) $(11,191,652) $(3,493,292)
=========== =========== ============ ===========
Net loss per share....................... $ (1.24) $ (0.40) $ (2.93) $ (0.79)
=========== =========== ============ ===========
Net loss per share -- assuming
dilution............................... $ (1.24) $ (0.40) $ (2.93) $ (0.79)
=========== =========== ============ ===========
</TABLE>
See accompanying notes.
1
<PAGE> 3
UOL PUBLISHING, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 336,194 $ 304,871
Accounts receivable, less allowance of approximately
$567,000 and $522,000 at December 31, 1998 and June 30,
1999, respectively..................................... 3,087,268 1,730,528
Loans receivable from related parties..................... 143,515 132,844
Loans receivable -- current............................... 232,375 1,075,177
Prepaid expenses and other current assets................. 172,926 788,825
------------ ------------
Total current assets........................................ 3,972,278 4,032,245
Property and equipment, net................................. 2,436,534 1,942,540
Capitalized software costs and courseware development costs,
net....................................................... 2,130,665 1,858,598
Acquired online publishing rights, net...................... 407,552 332,835
Loans receivable -- less current portion.................... 380,234 662,212
Other assets................................................ 194,644 185,731
Other intangible assets, net................................ 2,508,664 2,160,590
Goodwill, net............................................... 2,840,460 1,853,783
------------ ------------
Total assets...................................... $ 14,871,031 $ 13,028,534
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 4,617,418 $ 3,734,572
Notes payable -- current portion.......................... 3,075,139 600,665
Deferred revenues -- current portion...................... 911,072 1,069,630
------------ ------------
Total current liabilities......................... 8,603,629 5,404,867
Deferred revenues -- less current portion................. 109,834 8,835
Notes payable -- less current portion..................... 337,235 2,098,957
------------ ------------
Total liabilities................................. 9,050,698 7,512,659
------------ ------------
Stockholders' equity:
Series C convertible Preferred Stock, $0.01 par value per
share; aggregate liquidation preference of $7,912,509;
1,000,000 shares authorized; 626,293 and 623,339 shares
issued and outstanding at December 31, 1998 and June
30, 1999, respectively................................. 6,263 6,233
Series D convertible Preferred Stock, $0.01 par value per
share; aggregate liquidation preference of $8,931,656;
1,200,000 shares authorized; 1,082,625 shares issued
and outstanding at December 31, 1998 and June 30, 1999,
respectively........................................... 10,826 10,826
Common Stock, $0.01 par value per share; 36,000,000 shares
authorized; 3,990,046 and 4,799,310 shares issued and
outstanding at December 31, 1998 and June 30, 1999,
respectively........................................... 39,900 47,993
Additional paid-in capital................................ 53,460,264 56,641,036
Accumulated deficit....................................... (47,696,920) (51,190,213)
------------ ------------
Total stockholders' equity........................ 5,820,333 5,515,875
============ ============
Total liabilities and stockholders' equity........ $ 14,871,031 $ 13,028,534
============ ============
</TABLE>
See accompanying notes.
2
<PAGE> 4
UOL PUBLISHING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1998 1999
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(11,191,652) $(3,345,655)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 1,549,074 1,538,815
Net write-off of acquired online publishing rights........ 241,000 --
Net write-off of capitalized courseware development
costs.................................................. 502,669 --
Gain on sale of subsidiary................................ -- (1,446)
Stock option and stock warrant compensation............... -- 108,150
Increase (decrease) in allowance for doubtful accounts.... 1,039,991 (270,554)
Changes in operating assets and liabilities:
Decrease in accounts receivable........................ 47,250 1,132,290
(Increase) decrease in prepaid expenses and other
current assets....................................... 215,779 (340,899)
Decrease in other assets............................... 23,327 8,915
Increase (decrease) in accounts payable and accrued
expenses............................................. 360,442 (782,846)
Increase in deferred revenues.......................... 293,737 57,559
------------ -----------
Net cash used in operating activities....................... (6,918,383) (1,895,671)
INVESTING ACTIVITIES
Purchases of property and equipment......................... (601,767) (20,430)
Capitalized software and courseware development costs....... (525,002) (186,406)
Additions to intangible assets.............................. (355,810) --
Proceeds from loans from related parties.................... -- 10,671
Proceeds from loans receivable.............................. -- 72,508
Proceeds from sale of subsidiary............................ -- 75,000
Advances under loans receivable from related parties........ (30,988) (2,290)
------------ -----------
Net cash used in investing activities....................... (1,513,567) (50,947)
FINANCING ACTIVITIES
Proceeds from issuance of Common Stock...................... 75,922 2,415,547
Proceeds from Series C convertible Preferred Stock.......... 5,244,824 --
Proceeds from Series D convertible Preferred Stock.......... 2,895,561 --
Proceeds from notes payable................................. 1,594,902 2,300,000
Repayments of notes payable................................. (1,838,595) (2,800,252)
------------ -----------
Net cash provided by financing activities................... 7,972,614 1,915,295
------------ -----------
Net decrease in cash and cash equivalents................... (459,336) (31,323)
Cash and cash equivalents at the beginning of the period.... 2,705,490 336,194
------------ -----------
Cash and cash equivalents at the end of the period.......... $ 2,246,154 $ 304,871
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................... $ 188,165 $ 308,800
============ ===========
</TABLE>
See accompanying notes.
3
<PAGE> 5
UOL PUBLISHING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the interim periods are not necessarily indicative of the
results that may be expected for any future period, including the year ending
December 31, 1999. For further information, refer to the audited financial
statements and footnotes thereto included in the UOL Publishing, Inc. ("UOL" or
the "Company") Annual Report on Form 10-K for the year ended December 31, 1998.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Through December 31, 1998 the Company recognized online tuition fees from
academic institutions once the drop/add period had expired. Beginning January 1,
1999 the Company changed its revenue recognition policy for academic
institutions to recognize revenue ratably over the semester period the services
are delivered.
Reclassification
Certain 1998 amounts have been reclassified to conform to the 1999
presentation.
NOTE C -- EQUITY TRANSACTIONS
For the three months ended June 30, 1999, the Company raised approximately
$1,316,000 though a private placement of 448,287 shares of its common stock at
$2.94 per share.
The Company entered into a Private Equity Line of Credit Agreement (the
"Equity Line Agreement")with Hambrecht & Quist Guaranty Finance, LLC ("H&QGF")
effective May 4, 1999. Under the Equity Line Agreement, the Company has the
right, subject to certain conditions, to issue and sell to H&QGF, from time to
time, shares of its Series E Convertible Preferred Stock, for cash consideration
of up to an aggregate of $3.0 million, subject to availability.
Pursuant to the Equity Line Agreement, the Company filed a Registration
Statement with the SEC on July 28,1999. Beginning on the date the Registration
Statement is declared effective, the Company may sell to H&QGF shares of its
Series E Convertible Preferred Stock at a price equal to 85% of the lower of (1)
the closing market price of the Company's common stock on the date of issuance
and (2) the average of the lowest intra-day prices of the Company's common stock
over the five-day period ending on the date of issuance. The Company may sell as
much as $500,000 in preferred stock at any time, subject to certain conditions,
with the total amount sold not to exceed $3.0 million; except that the number of
shares of preferred stock that can be sold to H&QGF is further limited by the
requirement that H&QGF hold no more than 9.9% of our outstanding stock at any
given time.
4
<PAGE> 6
UOL PUBLISHING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D -- NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net
loss per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
1998 1999 1998 1999
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Numerator:
Net loss....................... $(4,731,266) $(1,778,576) $(11,191,652) $(3,345,655)
Accrued dividends to preferred
stockholders................ -- (74,226) -- (147,637)
----------- ----------- ------------ -----------
Net loss available to common
stockholders................ $(4,731,266) $(1,852,802) $(11,191,652) $(3,493,292)
=========== =========== ============ ===========
Denominator:
Denominator for basic earnings
per share --
weighted-average shares..... 3,822,299 4,646,281 3,816,898 4,409,067
=========== =========== ============ ===========
Denominator for diluted
earnings per
share -- adjusted weighted-
average shares.............. 3,822,299 4,646,281 3,816,898 4,409,067
=========== =========== ============ ===========
Basic net loss per share......... $ (1.24) $ (0.40) $ (2.93) $ (0.79)
=========== =========== ============ ===========
Diluted net loss per share....... $ (1.24) $ (0.40) $ (2.93) $ (0.79)
=========== =========== ============ ===========
</TABLE>
5
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this Form 10-Q that are not descriptions of historical facts
are forward-looking statements that are subject to risks and uncertainties.
Actual results could differ materially from those currently anticipated due to a
number of factors, including those set forth herein and in the Company's other
SEC filings, and including, in particular, the availability of sufficient
capital to finance the Company's business plan on terms satisfactory to the
Company, risks relating to uncertainties relating to dependence on strategic
partners and third party relationships, management of rapid growth, dependence
on online distribution, the risks and the Company's payment obligations relating
to acquisitions, security risks, government regulations and competition.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30,
1998
Summary
For the three months ended June 30, 1999, the Company incurred a net loss
of $1,852,802 (or $0.40 per share after accrual of dividends for preferred
stockholders) as compared to a net loss of $4,731,266 (or $1.24 per share) for
the three months ended June 30, 1998. The improvement in second quarter 1999
results as compared to the three months ended June 30, 1998 was due primarily to
an increase in higher margin online tuition revenues as a percentage of total
revenues, and to cost controls implemented during the first quarter of 1998 as a
result of management reorganization plans, and certain non-recurring charges in
the same period.
Net Revenues
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30,
-------------------------------------------------
1998 1999
--------------------- ---------------------
<S> <C> <C> <C> <C>
Instructor-led training revenues............. $1,428,723 41.7% $1,166,135 39.9%
Online tuition revenues...................... 258,177 7.5 967,491 33.0
Product sales revenues....................... 877,005 25.6 311,510 10.6
Online development and other revenues........ 267,772 7.8 340,325 11.6
Other service revenues....................... 594,960 17.4 68,600 2.3
Virtual campus software revenues............. 834 0.0 74,926 2.6
---------- ----- ---------- -----
Total net revenues...................... $3,427,471 100.0% $2,928,987 100.0%
========== ===== ========== =====
</TABLE>
Instructor-led training revenues decreased 18.4% to $1,166,135 in the
second quarter of 1999, compared to $1,428,723 for the same period in 1998. The
decrease was due primarily to the closing of two instructor-led training
facilities at the end of the second quarter of 1998 as a result of management
reorganization plans.
Online tuition revenues increased 274.7% to $967,491 in the second quarter
of 1999, compared to $258,177 for the same period in 1998. For the three months
ended June 30, 1999, sales of online courses jumped 506.3% to approximately
97,000 courses delivered during the quarter, up from second quarter 1998
deliveries of approximately 16,000 online courses. The Company believes that
online tuition revenues will continue to increase in absolute dollars and as a
percentage of total revenue as the Company completes the previously-announced
divestitures of its non-online businesses, with the exception of Teletutor.
Product sales revenues decreased 64.5% to $311,510 in the second quarter of
1999, compared to $877,005 for the same period in 1998. The decrease was due to
the sale of Ivy at the end of the third quarter of 1998, and a decrease in
product sales to a major Knowledgeworks customer.
Development and other revenues increased 27.1% to $340,325 in the second
quarter of 1999, compared to $267,772 for the second quarter of 1998. The
increase was due primarily to an increase in courseware development orders from
existing customers.
6
<PAGE> 8
Other service revenues decreased 88.5% to $68,600 in the second quarter of
1999, compared to $594,960 for the same period in 1998. The decrease was due to
the sale of HTR's consulting business at the end of the fourth quarter of 1998.
Virtual campus software revenues were $74,926 in the second quarter of
1999, compared to $834 in the second quarter of 1998. The Company continues to
receive virtual campus licensing fees from existing customers who renew their
licenses.
The following table sets forth selected financial data:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30,
---------------------------------------------------
1998 1999
---------------------- ----------------------
<S> <C> <C> <C> <C>
Revenue................................... $ 3,427,471 100.0% $ 2,928,987 100.0%
Cost of revenues.......................... 2,194,268 64.0 1,481,484 50.6
Sales and marketing....................... 1,636,766 47.8 1,153,927 39.4
Product development....................... 1,840,775 53.7 506,749 17.3
General and administrative................ 648,188 18.9 633,913 21.6
Depreciation and amortization............. 744,852 21.7 768,385 26.2
Reorganization and other non-recurring
charges................................. 928,870 27.1 -- --
----------- ------ ----------- -----
Loss from operations.................... (4,566,248) (133.2) (1,615,471) (55.1)
Gain on sale of subsidiary.............. -- -- 1,446 0.0
Interest expense.......................... (165,018) (4.8) (164,551) (5.6)
----------- ------ ----------- -----
Net loss................................ (4,731,266) (138.0) (1,778,576) (60.7)
Accrued dividends to preferred
stockholders............................ -- -- (74,226) (2.6)
----------- ------ ----------- -----
Net loss to common stockholders......... $(4,731,266) (138.0)% $(1,852,802) (63.3)%
=========== ====== =========== =====
</TABLE>
Cost of Revenues
Cost of revenues decreased 32.5% to $1,481,484 in the second quarter of
1999 as compared to $2,194,268 for the second quarter of 1998. The decrease was
due primarily to the closing of two instructor-led training facilities at the
end of the second quarter of 1998, the sale of HTR's consulting business at the
end of the fourth quarter of 1998, and to a lesser extent, the sale of Ivy at
the end of the third quarter of 1998.
Operating Expenses
Sales and Marketing. Sales and marketing expenses decreased 29.5% to
$1,153,927 in the second quarter of 1999 as compared to $1,636,766 for the
second quarter in 1998. The decrease was due primarily to cost controls
initiated at the end of the first quarter of 1998 as a result of management
reorganization plans.
Product Development. Product development expenses decreased 72.5% to
$506,749 in the second quarter of 1999 as compared to $1,840,775 for the second
quarter of 1998. The decrease was due primarily to cost controls initiated at
the end of the first quarter of 1998 as a result of management reorganization
plans.
General and Administrative. General and administrative expenses decreased
2.2% to $633,913 in the second quarter of 1999 as compared to $648,188 for the
second quarter of 1998.
Depreciation and Amortization. Depreciation and amortization expense
increased 3.2% to $768,385 in the second quarter of 1999 as compared to $744,852
for the second quarter of 1998. The increase was due primarily to an increase in
amortization of capitalized product development costs offset by decreases due to
the sale of Ivy at the end of the third quarter of 1998, the sale of HTR's
consulting business at the end of the fourth quarter of 1998, and the write-down
of goodwill related to the non-online businesses at the end of the fourth
quarter of 1998 as a result of the Company's plan to divest these assets in
1999.
Reorganization Costs. Reorganization costs of $928,870 incurred during the
three months ended June 30, 1998 primarily relate to the Company's workforce
reduction plan, closing of certain office and
7
<PAGE> 9
training facilities, and elimination and/or re-definition of certain positions
within UOL and HTR to reduce costs and improve functionality.
Gain on Sale of Subsidiary. The Company recognized a gain of $1,446 on the
sale of its Knowledgeworks line of business in the second quarter of 1999.
Interest Expense. Interest expense remained relatively unchanged in the
second quarter of 1999 as compared to the second quarter of 1998. Interest
expense was primarily incurred in connection with the Company's borrowings on
its line of credit facility and term loan. See "Liquidity and Capital
Resources".
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Summary
For the six months ended June 30, 1999, the Company incurred a net loss of
$3,493,292 (or $0.79 per share after accrual of dividends for preferred
stockholders) as compared to a net loss of $11,191,652 (or $2.93 per share) for
the six months ended June 30, 1998. The improvement in results for the six
months ended June 30, 1999 as compared to results for the six months ended June
30, 1998 was due primarily to an increase in higher margin online tuition
revenues as a percentage of total revenues, and to cost controls implemented
during the first six months of 1998 as a result of management reorganization
plans, and certain non-recurring charges in the same period.
Net Revenues
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
-------------------------------------------------
1998 1999
--------------------- ---------------------
<S> <C> <C> <C> <C>
Instructor-led training revenues............. $3,102,540 44.2% $2,560,579 42.9%
Online tuition revenues...................... 530,382 7.5 1,848,739 31.0
Product sales revenues....................... 1,827,211 26.0 711,145 11.9
Online development and other revenues........ 364,253 5.2 576,199 9.7
Other service revenues....................... 1,160,611 16.5 150,316 2.5
Virtual campus software revenues............. 43,334 0.6 117,092 2.0
---------- ----- ---------- -----
Total net revenues...................... $7,028,331 100.0% $5,964,070 100.0%
========== ===== ========== =====
</TABLE>
Instructor-led training revenues decreased 17.5% to $2,560,579 for the six
months ended June 30, 1999, compared to $3,102,540 for the same period in 1998.
The decrease was due primarily to the closing of two instructor-led training
facilities at the end of the second quarter of 1998 as a result of management
reorganization plans.
Online tuition revenues increased 248.6% to $1,848,739 for the six months
ended June 30, 1999, compared to $530,382 for the same period in 1998. Sales of
online courses jumped 361.1% to approximately 160,000 courses delivered for the
six months ended June 30, 1999, as compared to course deliveries of
approximately 34,700 during the six months ended June 30, 1998.
Product sales revenues decreased 61.1% to $711,145 for the six months ended
June 30, 1999, compared to $1,827,211 for the same period in 1998. The decrease
was due to the sale of Ivy at the end of the third quarter of 1998, a decrease
in Teletutor product sales due to the downsizing its operations at the end of
the first quarter of 1998, and a decrease in product sales to a major
Knowledgeworks customer.
Development and other revenues increased 58.2% to $576,199 for the six
months ended June 30, 1999, compared to $364,253 for the same period in 1998.
The increase was due primarily to an increase in courseware development orders
from existing customers.
Other service revenues decreased 87.0% to $150,316 for the six months ended
June 30, 1999, compared to $1,160,611 for the same period in 1998. The decrease
was due to the sale of HTR's consulting business at the end of the fourth
quarter of 1998.
8
<PAGE> 10
Virtual campus software revenues increased 170.2% to $117,092 for the six
months ended June 30, 1999, compared to $43,334 for the same period in 1998. The
Company continues to receive virtual campus licensing fees from existing
customers who renew their licenses.
The following table sets forth selected financial data:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------------------------
1998 1999
----------------------- ----------------------
<S> <C> <C> <C> <C>
Revenue.................................. $ 7,028,331 100.0% $ 5,964,070 100.0%
Cost of revenues......................... 4,522,946 64.4 2,949,923 49.5
Sales and marketing...................... 3,267,324 46.5 2,196,440 36.8
Product development...................... 4,640,559 66.0 1,011,631 17.0
General and administrative............... 2,548,701 36.3 1,322,043 22.0
Depreciation and amortization............ 1,549,073 22.0 1,538,816 25.8
Reorganization and other non-recurring
charges................................ 1,396,510 19.9 -- --
------------ ------ ----------- -----
Loss from operations................... (10,896,782) (155.0) (3,054,783) (51.2)
Gain on sale of subsidiary............. -- -- 1,446 0.0
Interest expense......................... (294,870) (4.2) (292,318) (4.9)
------------ ------ ----------- -----
Net loss............................... (11,191,652) (159.2) (3,345,655) (56.1)
Accrued dividends to preferred
stockholders........................... -- -- (147,637) (2.5)
------------ ------ ----------- -----
Net loss to common stockholders........ $(11,191,652) (159.2)% $(3,493,292) (58.6)%
============ ====== =========== =====
</TABLE>
Cost of Revenues
Cost of revenues decreased 34.8% to $2,949,923 for the six months ended
June 30, 1999 as compared to $4,522,946 for the same period in 1998. The
decrease was due primarily to the closing of two instructor-led training
facilities at the end of the second quarter of 1998, the sale of HTR's
consulting business at the end of the fourth quarter of 1998, and to a lesser
extent, the sale of Ivy at the end of the third quarter of 1998.
Operating Expenses
Sales and Marketing. Sales and marketing expenses decreased 32.8% to
$2,196,440 for the six months ended June 30, 1999 as compared to $3,267,324 for
the same period in 1998. The decrease was due primarily to cost controls
initiated at the end of the first quarter of 1998 as a result of management
reorganization plans.
Product Development. Product development expenses decreased 78.2% to
$1,011,631 for the six months ended June 30, 1999 compared to $4,640,559 for the
same period in 1998. The decrease was due primarily to cost controls initiated
at the end of the first quarter of 1998 as a result of management reorganization
plans, and the write-off during the first quarter of 1998 of approximately
$750,000 related to previously capitalized content acquisition and development
costs.
General and Administrative. General and administrative expenses decreased
48.1% to $1,322,043 for the six months ended June 30, 1999 as compared to
$2,548,701 for the same period in 1998. The decrease was due primarily to
approximately $1,075,000 of bad debt expense in the first quarter of 1998, and
to a lesser extent, cost controls initiated at the end of the first quarter of
1998 as a result of management reorganization plans.
Depreciation and Amortization. Depreciation and amortization expense
remained relatively unchanged for the six months ended June 30, 1999 as compared
to the same period in 1998.
Reorganization Costs. Reorganization costs of $1,396,510 incurred during
the six months ended June 30, 1998, primarily relate to the Company's workforce
reduction plan, closing of certain office and training facilities, and
elimination and/or re-definition of certain positions within UOL and HTR to
reduce costs and improve functionality.
9
<PAGE> 11
Gain on Sale of Subsidiary. The Company recognized a gain of $1,446 on the
sale of its Knowledgeworks line of business in the second quarter of 1999.
Interest Expense. Interest expense remained relatively unchanged for the
six months ended June 30, 1999 as compared to the same period in 1998. Interest
expense was primarily incurred in connection with the Company's borrowings on
its line of credit facility and term loan. See "Liquidity and Capital
Resources".
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 June 30, 1999, the Company has completed its assessments of
Year 2000 compliance with respect to all of its own products and internal
systems and 95% 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 the
end of the third quarter of 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.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had $304,871 in cash and cash equivalents.
Cash utilized in operating activities was $1,895,671 for the six months ended
June 30, 1999, all of which was funded by two private placements of common stock
totaling approximately $2,366,000. Net cash used in operating activities for the
same period in 1998 was $6,918,383. The improvement primarily reflects cost
controls initiated at the end of the first quarter of 1998 as a result of
management reorganization plans.
Net cash utilized in investing activities was $50,947 for the six months
ended June 30, 1999 and $1,513,567 for the six months ended June 30, 1998. The
use of cash for investing activities was primarily attributable to purchases of
equipment, software development costs that were capitalized, and in 1998,
approximately $356,000 paid to the former shareholder of Ivy pursuant to the
acquisition agreement relating to the Company's acquisition of IVY.
Net cash provided by financing activities was $1,915,295 for the six months
ended June 30, 1999 and $7,972,614 for the six months ended June 30, 1998.
During the six months ended June 30, 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. During the same period, the Company also raised
approximately $1,316,000 though a private placement of 448,297 shares of its
common stock at $2.94 per share. For the six months ended June 30, 1998 the
Company raised $5,300,000 through a private placement of 626,300 shares of its
Series C convertible Preferred Stock, raised approximately $5,200,000 in a
10
<PAGE> 12
private placement of 1,082,625 of its Series D convertible Preferred Stock, and
borrowed on its then existing line of credit facility.
Management recognizes the need to raise additional funds in order to retire
existing debt and to fund anticipated ongoing operating losses, which management
expects to continue at least until the Company divests its remaining non-online
legacy businesses. The Company has also taken the following actions to provide
future funding for operations:
- The Company raised $2.5 million in June 1999 through the issuance of 9%
Secured Subordinated Convertible Debentures due December 15, 2000,
substantially all of the proceeds from which were used to retire all of
the Company's existing bank debt.
- The Company is in the process of negotiating a $1.0 million line of
credit facility with a new lender.
- The Company has retained investment-banking services to assist in the
divestiture of the HTR instructor-led training business, and expects to
complete this transaction during the fourth quarter of 1999.
- The Company has retained advisory services to identify a strategic
partner to provide both global marketing leverage and additional capital.
On July 28, 1999, the Company filed a registration statement with the
Securities Exchange Commission for the resale of 5,494,466 shares of its common
stock held by Company stockholders or issuable upon conversion of debt or
preferred stock. Shares to be registered include up to 1,800,000 shares that may
be offered and sold, from time to time, by H&Q, who will originally receive
these shares by converting shares of preferred stock that the Company may issue
and sell to them in the aggregate of up to $3.0 million under its private equity
line of credit agreement with H&Q.
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.
11
<PAGE> 13
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(a) No modifications.
(b) No limitations or qualifications.
(c) From April 1, 1999 to June 30, 1999, the Company has issued the
following unregistered securities:
1. 448,297 shares of Common Stock to accredited investors.
2. $2.5 million in principal amount of 9% Secured Subordinated
Convertible Debentures due December 15, 2000 to two accredited investors.
These debentures are convertible into the Company's Common Stock.
3. 22,819 shares of Common Stock were issued as a dividend to the
Company's Series D Preferred Stockholders.
4. 13,752 shares of Common Stock were issued to certain accredited
holders of the Company's Common Stock pursuant to the terms of their
subscription agreements.
5. 3,580 shares of Common Stock were issued to a Series C Preferred
Stockholder pursuant to his conversion of 2,954 shares of Series C
Preferred Stock on a 1 to 1.21 ratio.
6. Warrants to purchase: (a) 457,200 shares of Common Stock; (b) 5,000
shares of Series D Preferred Stock; and (c) 100,000 shares of Series E
Preferred Stock to certain accredited investors.
The sales of the above securities were deemed to be exempt from
registration under the Act in reliance upon section 4(2) of the Securities Act
of 1933, as amended (the "Act"), or Regulation D promulgated thereunder as
transactions by an issuer not involving a public offering. Recipients of the
securities in each such transaction represented their intentions to acquire such
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the
instruments issued in such transactions. All recipients had adequate access to
information about the Company.
ITEM 6. EXHIBITS
(a) Exhibits
27.1 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only and not filed.
(b) No current reports on Form 8-K were filed during the quarter ended June
30, 1999.
12
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by each of the
undersigned thereunto duly authorized.
UOL PUBLISHING, INC.
By: /s/ NARASIMHAN P. KANNAN
------------------------------------
Narasimhan P. Kannan
Chief Executive Officer
By: /s/ MICHAEL A. SCHWIEN
------------------------------------
Michael A. Schwien
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Date: August 13, 1999
13
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<S> <C>
27.1 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information
only and not filed.
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 304,871
<SECURITIES> 0
<RECEIVABLES> 2,252,118
<ALLOWANCES> 521,591
<INVENTORY> 0
<CURRENT-ASSETS> 4,032,245
<PP&E> 4,207,655
<DEPRECIATION> 2,265,115
<TOTAL-ASSETS> 13,028,534
<CURRENT-LIABILITIES> 5,404,867
<BONDS> 0
0
17,059
<COMMON> 47,993
<OTHER-SE> 5,450,823
<TOTAL-LIABILITY-AND-EQUITY> 13,028,534
<SALES> 5,964,070
<TOTAL-REVENUES> 5,964,070
<CGS> 2,949,923
<TOTAL-COSTS> 2,949,923
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 292,318
<INCOME-PRETAX> (3,345,655)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,345,655)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,345,655)
<EPS-BASIC> (0.79)
<EPS-DILUTED> (0.79)
</TABLE>
