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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)
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)
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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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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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:
LEASE
AREA EXPIRATION MONTHLY
LOCATION PRINCIPAL USE (SQUARE FEET) DATE RENT
-------- ------------- ------------- ---------- -------
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
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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EXECUTIVE OFFICERS
As of March 23, 1999, the executive officers of the Company were as
follows:
NAME AGE POSITION
---- --- --------
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
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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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.
HIGH LOW
1997 ------ ------
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
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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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.
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YEAR ENDED DECEMBER 31,
--------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1994 1995 1996 1997 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA) -------- -------- -------- -------- --------
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
======= ======= ======= ======== ========
DECEMBER 31,
--------------------------------------------------------
BALANCE SHEET DATA: 1994 1995 1996 1997 1998
(IN THOUSANDS) -------- -------- -------- -------- --------
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
- ---------------
(1) Computed on the basis described in Note 16 of Notes to UOL Consolidated
Financial Statements.
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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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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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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:
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
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)%
====== ====== ======
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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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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
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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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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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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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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
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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.
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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.
EXHIBIT NO. DESCRIPTION
----------- -----------
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.
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EXHIBIT NO. DESCRIPTION
----------- -----------
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.
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* 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).
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(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) Incorpora