<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission file number: 0-27862
REALITY INTERACTIVE, INC.
(Exact name of issuer as specified in its charter)
MINNESOTA 41-1781991
--------------------------------- ----------------------------------
State or other jurisdiction of I.R.S. Employer Identification No.
incorporation of organization
SUITE 400
7500 FLYING CLOUD DRIVE
EDEN PRAIRIE, MINNESOTA 55344 (612) 996-6777
-------------------------------------- ----------------------------------
Address of principal executive offices Issuer's telephone number
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. /X/ Yes / / No
At October 31, 1997, 4,677,407 shares of issuer's $.01 par value Common
Stock were outstanding.
Transitional Small Business Issuer Format / / Yes /X/ No
1
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FORM 10-QSB INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements................................................. 3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 7
PART II - OTHER INFORMATION
Item 2. Changes in Securities (Use of Proceeds from Public Offering) ........ 9
Item 6. Exhibits and Reports on Form 8-K.....................................10
SIGNATURES....................................................................11
EXHIBIT INDEX.................................................................12
SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-QSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve risks and uncertainties that may cause the
Company's actual results to differ materially from the results discussed in
the forward-looking statements. Factors that might cause such differences
include, but are not limited to, the uncertainty in growth of a development
stage company; limited growth of the market for multimedia education and
training products; lack of market acceptance of the Company's products;
inability of the Company to expand its marketing capability; inability of the
Company to diversify its product offerings; failure of the Company to respond
to evolving industry standards and technological changes; inability of the
Company to meet its future additional capital requirements; inability of the
Company to compete in the business education and training industry; loss of
key management personnel; inability to retain subject matter experts; failure
of the Company to secure adequate protection for the Company's intellectual
property rights; and the Company's exposure to product liability claims. The
forward-looking statements are qualified in their entirety by the cautions
and risk factors set forth in Exhibit 99.1, under the caption "Cautionary
Statement," to this Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1997.
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REALITY INTERACTIVE, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 348,927 $ 508,728
Short-term investments............................. 2,006,979 4,744,712
Accounts receivable................................ 614,307 97,396
Inventory.......................................... 162,727 134,853
Prepaid expenses and other current assets.......... 56,224 62,835
------------ ----------
Total current assets............................ 3,189,164 5,548,524
------------ ----------
Fixed assets, net................................... 151,514 191,936
Restricted cash..................................... 116,800 116,800
Other assets........................................ 20,250 28,481
------------ ----------
Total assets.................................... $ 3,477,728 $5,885,741
------------ ----------
------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................. $ 48,150 $ 116,388
Accrued liabilities................................ 275,194 118,686
Other current liabilities.......................... 168,120 12,345
------------ ----------
Total current liabilities....................... 491,464 247,419
Long-term liabilities................................ 0 0
------------ ----------
Total liabilities............................... 491,464 247,419
------------ ----------
Stockholders' equity:
Common stock, $.01 par value, 25,000,000 shares
authorized; 4,677,407 shares outstanding....... 46,774 46,774
Additional paid-in capital....................... 15,386,692 15,386,692
Accumulated deficit during the development stage. (12,447,202) (9,795,144)
------------ ----------
Total stockholders' equity..................... 2,986,264 5,638,322
------------ ----------
Total liabilities and stockholders' equity..... $ 3,477,728 $5,885,741
------------ ----------
------------ ----------
</TABLE>
See accompanying notes to the financial statements.
3
<PAGE>
REALITY INTERACTIVE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ ------------------------
1997 1996 1997 1996
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues................................................ $530,468 $ 93,677 $ 816,309 $ 341,784
Cost of revenues........................................ 95,022 18,768 172,918 65,238
--------- --------- --------- ----------
Gross profit............................................ 435,446 74,909 643,391 276,546
--------- --------- --------- ---------
Operating expenses:
Sales and marketing................................... 216,129 712,912 921,367 1,859,101
Research and development.............................. 225,988 678,085 1,251,518 1,598,251
General and administrative............................ 434,630 428,357 1,269,409 1,087,109
--------- --------- --------- ---------
Total operating expenses.......................... 876,747 1,819,354 3,442,294 4,544,461
--------- --------- --------- ---------
Operating loss.......................................... (441,301) (1,744,445) (2,798,903) (4,267,915)
--------- --------- --------- ---------
Other income (expense):
Interest income (expense), net........................ 39,369 104,551 146,845 (61,035)
Debt offering costs................................... 0 0 0 (113,486)
--------- --------- --------- ----------
Total other income (expense)...................... 39,369 104,551 146,845 (174,521)
--------- --------- --------- -----------
Income before extraordinary loss...................... $(401,932) $(1,639,894) $(2,652,058) $(4,442,436)
Extraordinary loss from early retirement of debt........ 0 0 0 (219,470)
--------- ----------- --------- -----------
Net loss.......................................... $(401,932) $(1,639,894) $(2,652,058) $(4,661,906)
--------- ----------- --------- -----------
--------- ----------- --------- -----------
Net loss per common and common equivalent share......... $ (0.09) $ (0.35) $ (0.57) $ (1.34)
--------- ----------- --------- -----------
--------- ----------- --------- -----------
Weighted average common and common equivalent
shares.................................................. 4,677,407 4,677,407 4,677,407 3,488,130
--------- ----------- --------- -----------
--------- ----------- --------- -----------
</TABLE>
See accompanying notes to the financial statements.
4
<PAGE>
REALITY INTERACTIVE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------
1997 1996
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $ (2,652,058) $(4,661,906)
Reconciliation of net loss to net cash used by
operating activities:
Depreciation and amortization........... 65,791 90,000
Noncash interest expense related to warrants.... 0 193,979
Extraordinary loss related to early
retirement of debt (interest expense related
to warrants) ................................. 0 142,021
Changes in assets and liabilities:
Accounts receivable............................. (516,911) (89,880)
Inventory....................................... (27,873) (60,871)
Prepaid expenses and other assets............... 14,842 (82,389)
Accounts payable................................ (68,239) (52,577)
Accrued liabilities............................. 156,508 (18,697)
Other current liabilities....................... 155,775 11,059
------------ ---------
Net cash used by operating activities....... (2,872,165) (4,529,261)
------------ ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets........................... (25,369) (279,266)
Purchases of short-term investments................. (157,267) (10,164,404)
Sales of short-term investments..................... 2,895,000 3,500,000
------------ -----------
Net cash used by investing activities....... 2,712,364 (6,943,670)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease obligation.............. 0 (15,471)
Repayment of notes payable.......................... 0 (201,002)
Proceeds from convertible notes payable............. 0 2,800,000
Repayment of convertible notes payable.............. 0 (2,774,997)
Proceeds from sale leaseback of fixed assets........ 0 266,157
Net proceeds from initial public offering........... 0 11,549,607
Proceeds from exercise of stock options............. 0 990
------------ -----------
Net cash provided by financing activities... 0 11,625,284
------------ -----------
Net cash provided (used) during period.................. (159,801) 152,353
CASH AND CASH EQUIVALENTS:
Beginning of period................................. 508,728 118,916
------------ -----------
End of period....................................... $ 348,927 $ 271,269
------------ -----------
------------ -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest.............................. $ 0 $ 88,867
------------ -----------
------------ -----------
Warrants issued in connection with notes payable.... $ 0 $ 336,000
------------ -----------
------------ -----------
Conversion of mandatorily redeemable convertible
preferred stock to common stock................... $ 0 $2,125,962
------------ -----------
------------ -----------
Conversion of bridge notes payable to common stock.. $ 0 $ 25,003
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to the financial statements.
5
<PAGE>
REALITY INTERACTIVE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
The Company was formed in May 1994 to design, develop and market
interactive multimedia knowledge solutions to the industrial marketplace.
The Company's business strategy is to identify industry standards and
practices that affect business productivity and profitability, where the
adoption of such standards and practices require enterprise-wide education
and training. To address this education and training need, the Company
creates products that incorporate digital multimedia elements, such as
animation, video, graphics, audio and text, into a rich, interactive learning
environment. Each of the Company's products contain productivity tools, such
as word processors, budget forms and custom tailored project plans, to allow
the user to organize, analyze and produce documents using company-specific
information. The Company believes the interactivity of its products allows
the user to control the learning environment, including the pace, sequence
and level of instruction, as well as improve memory retention, compress
learning time and reduce costs compared to traditional learning methods.
The Company considers itself to be a development stage company as its
sales and marketing efforts have not yet generated predictable or significant
revenues. The Company has a deficit accumulated during the development stage
of $12,447,202. To become profitable and to conserve capital, the Company
must significantly increase revenues and manage expenses. Future operating
results will depend upon many factors, including the rate at which industry
adopts interactive multimedia technology for education and training, the
level of product and price competition, the Company's success in maturing its
direct and indirect sales channels and the ability of the company to manage
its expenses in relation to sales.
Basis of Presentation
The accompanying unaudited financial statements of the Company have been
prepared in accordance with generally accepted accounting principles for
interim financial information. The preparation of financial statements in
accordance with generally accepted accounting principles require management
to make estimates and assumptions. Such estimates and assumptions affect the
reported amounts of assets and liabilities as well as disclosure of
contingent assets and liabilities at the date of the accompanying interim
financial statements, and the reported amounts of revenue and expenses during
the reporting period. In the opinion of management, the interim financial
statements include adjustments necessary for a fair presentation of the
results of operations for the interim periods presented. Operating results
for the three and nine months ended September 30, 1997 are not necessarily
indicative of the operating results to be expected for the year ending
December 31, 1997.
Certain information and footnote disclosures normally included in
financial statements in accordance with generally accepted accounting
principles have been omitted. The statements should be read in conjunction
with the Company's Annual Report on Form 10-KSB for the year ended December
31, 1996.
6
<PAGE>
ITEM 2 - 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 financial condition and results of operation should be read in
conjunction with the Company's financial statements and notes contained
herein for the quarters ended September 30, 1997 and 1996.
RESULTS OF OPERATIONS
REVENUES. Revenues were $530,468 for the third quarter of 1997, an
increase of 466% from revenues of $93,677 for the third quarter of 1996. For
the nine month period ended September 30, 1997, revenues were $816,309, an
increase of 139% from revenues of $341,784 for the comparable period of 1996.
The revenue increase during the third quarter of 1997 is primarily
attributable to a sale of the Company's QS-9000 COMPLIANCE SERIES and ISO
9000 REGISTRATION SERIES to General Motors Corporation and the UAW-GM Center
for Human Resources. This sale resulted in revenue of $387,618, or
approximately 73% of total revenue for the quarter. The Company anticipates
that sales to these parties will continue to be a material source of its
revenue for at least the next quarter, but is uncertain if future revenues
from these parties will be comparable to those realized in the third quarter.
COST OF REVENUES. Cost of revenues were $95,022 for the third quarter of
1997, compared to $18,768 for the third quarter of 1996. For the nine month
period ended September 30, 1997, cost of revenues were $172,918, compared to
cost of revenues of $65,238 for the same period of 1996. The increase in
cost of revenues is primarily attributable to royalties paid on an increasing
level of sales. These royalties represent a contractual obligation for the
Company to its marketing partners and subject matter experts. Cost of
revenues also includes the cost of media duplication and packaging materials.
OPERATING EXPENSES. The Company's operating expenses for the third
quarter of 1997 were $876,747, a 51.8% decrease from operating expenses of
$1,819,354 for the third quarter of 1996. For the nine month period ended
September 30, 1997, operating expenses were $3,442,294, a 24.3% decrease over
operating expenses of $4,544,461 for the same period of 1996. This change
in operating expenses between 1997 and 1996 was due primarily to a cash
conservation program the Company initiated during the early part of 1997 and
is specifically explained by the following changes:
(a) SALES AND MARKETING. Sales and marketing expenses were $216,129 for the
third quarter of 1997, a 69.7% decrease from sales and marketing
expenses of $712,912 for the third quarter of 1996. For the nine month
period ended September 30, 1997, sales and marketing expenses were
$921,367, a 50.4% decrease from sales and marketing expenses of
$1,859,101 for the same period of 1996. This decrease between periods
was due primarily to substantially fewer direct sales people, lower
sales travel expenses and a decrease in the number of product marketing
initiatives. The Company expects that sales and marketing expenses for
the remainder of 1997 will remain consistent with third quarter 1997
levels.
(b) RESEARCH AND DEVELOPMENT. Research and development expenses were
$225,988 for the third quarter of 1997, a 66.7% decrease from research
and development expenses of $678,085 for the third quarter of 1996. For
the nine month period ended September 30, 1997, research and development
expenses were $1,251,518, a 21.7% decrease from research and development
expenses of $1,598,251 for the same period of 1996. This decrease is
primarily attributable to a shift in the Company's strategy of
developing off-the-shelf CD-ROM multimedia products, which require
significant upfront expenditures to develop, to the development of
customer-specific products. Development costs associated with
customer-specific products require significantly less upfront expenditures
by the Company, and are generally reimbursed by the customer on a
percentage of completion basis.
For the remainder of 1997, the Company expects that research and
development expenses may experience an increase over current levels as a
result of customer-specific projects the Company began early in the
7
<PAGE>
fourth quarter of 1997. The Company expects that development expenses
to be incurred on these projects during the fourth quarter of 1997 will be
offset against earned revenue. These customer-specific projects are
consistent with the Company's previously stated strategy of developing
customer relationships that result in the delivery of custom
multimedia development services. The Company expects that such
development services will enable the Company to generate a new revenue
source while the market for off-the-shelf, multimedia training products
matures. The Company believes this strategy will conserve capital, and
at the same time, better position the Company to become a more complete
source for multimedia content development. Although this business model
has proven itself in a number of multimedia development companies, there
can be no assurance that the Company will be successful in developing
this multimedia services model.
(c) GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$434,630 for the third quarter of 1997, a 1.5% increase over general and
administrative expenses of $428,357 for the third quarter of 1996. For
the nine month period ended September 30, 1997, general and
administrative expenses were $1,269,409, a 16.8% increase from general
and administrative expenses of $1,087,109 for the same period of 1996.
This increase was due primarily to increased travel, office rent,
operating leases and professional fees attributed to being a public
company. The Company does not anticipate any significant changes in
general and administrative expenditure levels for the remainder of 1997.
OTHER INCOME (EXPENSE). The Company's net other income was $39,369 for
the third quarter of 1997, compared to net other income of $104,551 for the
third quarter of 1996. For the nine month period ended September 30, 1997,
net other income was $146,845, compared to net other expense of $174,521 for
the same period of 1996. For the nine month period ended September 30, 1997,
net other income consisted entirely of interest earned on short-term
investments. For the nine month period ended September 30, 1996, net other
expense primarily consisted of expenses associated with the Company's January
1996 bridge note financing, including interest expense and amortization of
offering costs, as well as interest earned from the investment of proceeds
from its bridge note financing and initial public offering.
NET LOSS. Net loss was $401,932 for the third quarter of 1997, compared to
a net loss of $1,639,894 for the third quarter of 1996. For the nine month
period ended September 30, 1997, net loss was $2,652,058, compared to a net loss
of $4,661,906 for the same period of 1996 after deducting $219,470 in
extraordinary losses from an early retirement of debt. The Company expects to
continue to incur losses for the foreseeable future as it develops the market
for its off-the-shelf products and custom multimedia development services.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments were
$2,355,906 as of September 30, 1997, compared to $5,253,440 as of December
31, 1996. This decrease in cash, cash equivalents and short-term investments
was due primarily to the net loss from operations for the nine months ended
September 30, 1997.
The Company anticipates that it will continue to experience operating
losses and negative cash flow from operations at least through 1997. The
Company believes that its current cash balance, along with expected revenues
over the foreseeable future, will be sufficient to meet its working capital
and capital expenditure requirements at least through June of 1998.
Thereafter, the Company may need to raise additional funds to finance its
operations. In addition, to the extent the Company's revenues do not meet
management's expectations, or the Company's growth exceeds management's
expectations, the Company may require additional financing prior to June of
1998. In such event, there can be no assurance that debt or equity financing
would be available to the Company on favorable terms or at all.
8
<PAGE>
PART II - OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES (USE OF PROCEEDS FROM PUBLIC OFFERING)
The Company's initial Registration Statement on Form SB-2, file no.
333-01508C, was declared effective by the Securities and Exchange Commission
on April 10, 1996. The offering of the Company's Units (each consisting of
one share of Common Stock and one Redeemable Common Stock Purchase Warrant)
covered by such Registration Statement commenced on April 10, 1996. R.J.
Steichen & Company acted as the managing underwriter (the "Representative")
for the offering. A total of 2,530,000 Units were registered. The aggregate
offering price of the registered Units was $14,547,500. A total of 2,300,000
Units were sold, for an aggregate offering price of $13,225,000.
The offering has not yet terminated. The Company is maintaining the
effectiveness of the Registration Statement in order to allow the holders of
such Redeemable Common Stock Purchase Warrants to receive registered shares
of Common Stock upon the exercise of such warrants.
The amount of expenses incurred for the Company's account in connection
with the issuance and distribution of the securities registered are as
follows:
Underwriting discounts and commissions: $1,058,000
Finder's fees: 0
Expenses paid to or for underwriters: 330,625
Other expenses: 275,000
----------
Total expenses $1,663,625
All such expenses were paid directly or indirectly to others.
The net offering proceeds to the Company after deducting expenses were
$11,561,375.
The amount of net offering proceeds to the Company used for the
following purposes is as follows:
Construction of plant, building and facilities: $0
Purchase and installation of machinery and equipment: $80,049
Purchase of real estate: $0
Acquisition of other businesses: $0
Repayment of indebtedness: $2,861,281
Working capital: $2,451,167
Temporary investments:
(Interest Bearing Money Market Accounts) $0
Other purposes:
(Sales and Marketing) $3,022,963
(Research and Development) $3,145,915
All such payments were made directly or indirectly to others.
The use of proceeds contained herein does not represent a material
change in the use of proceeds described in the prospectus.
9
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION
27.1 Financial Data Schedules
99.1 Cautionary Statement
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 1997
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
REALITY INTERACTIVE, INC.
Dated: November 14, 1997 By /s/ Paul J. Wendorff
------------------------------
Paul J. Wendorff
Its Chief Executive Officer
Dated: November 14, 1997 By /s/ Wesley W. Winnekins
------------------------------
Wesley W. Winnekins
Its Chief Financial Officer
11
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EXHIBIT INDEX
Exhibit
No. Description Page No.
- ------- -------------------------------------------------------- --------
27.1 Financial Data Schedules................................
99.1 Cautionary Statement.................................... 13
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 348,927
<SECURITIES> 2,006,979
<RECEIVABLES> 614,307
<ALLOWANCES> 0
<INVENTORY> 162,727
<CURRENT-ASSETS> 3,189,164
<PP&E> 447,050
<DEPRECIATION> 295,536
<TOTAL-ASSETS> 3,477,728
<CURRENT-LIABILITIES> 491,464
<BONDS> 0
0
0
<COMMON> 46,774
<OTHER-SE> 2,939,490
<TOTAL-LIABILITY-AND-EQUITY> 3,477,728
<SALES> 530,468
<TOTAL-REVENUES> 569,837
<CGS> 95,022
<TOTAL-COSTS> 95,022
<OTHER-EXPENSES> 876,747
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (401,932)
<INCOME-TAX> 0
<INCOME-CONTINUING> (401,932)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (401,932)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> 0
</TABLE>
<PAGE>
EXHIBIT 99.1
CAUTIONARY STATEMENT
Reality Interactive, Inc. (the "Company"), or persons acting on behalf
of the Company, or outside reviewers retained by the Company making
statements on behalf of the Company, or underwriters, from time to time make,
in writing or orally, "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. When used in conjunction with
an identified forward-looking statement, this Cautionary Statement is for the
purpose of qualifying for the "safe harbor" provisions of such sections and
is intended to be a readily available written document that contains factors
which could cause results to differ materially from such forward-looking
statements. These factors are in addition to any other cautionary
statements, written or oral, which may be made or referred to in connection
with any such forward-looking statement.
The following matters, among others, may have a material adverse effect
on the business, financial condition, liquidity, results of operations or
prospects, financial or otherwise, of the Company. Reference to this
Cautionary Statement in the context of a forward-looking statement or
statements shall be deemed to be a statement that any or more of the
following factors may cause actual results to differ materially from those in
such forward-looking statement or statements:
DEVELOPMENT STAGE COMPANY. The Company was incorporated in May 1994.
The Company has only a limited history of operations, and its sales and
marketing efforts have not yet generated predictable or significant revenues.
The Company's prospects for success must be considered in light of the
problems, expenses, difficulties, complications and delays frequently
encountered in connection with the formation and development of a new
business in an emerging industry. In addition, due to the uncertainty in
growth of a development stage company and the rate of change in the industry
perceived by the Company, the Company is uncertain of the time frame or
amount of funding required to accomplish its business objectives.
DEVELOPING MARKET; MARKET ACCEPTANCE. The market for educating and
training businesses has historically been served by consultants,
instructor-led training and training publications such as books, manuals and
tapes. Currently, there is little use of interactive multimedia education
and training products by businesses, and many of the Company's potential
customers do not own or have access to multimedia compatible equipment. The
Company's future success will depend upon, among other factors, the extent to
which companies acquire multimedia equipment compatible with the Company's
products, the adoption and use of interactive multimedia education and
training programs and the Company's ability to develop its custom multimedia
service business. In addition, the Company's success will depend in part on
its ability to market and sell multiple copies of its products to large
corporate customers. In the event that adoption and use of multimedia
equipment compatible with the Company's products do not become widespread,
the number of potential customers of the Company will be limited. There can
be no assurance that the Company's products, the prices the Company charges
for its products or its custom multimedia services will be acceptable to the
market, or that the Company will be able to sell multiple copies of its
existing products to large corporate customers.
LIMITED MARKETING CAPABILITY. The Company currently has a small sales
and marketing staff and limited number of strategic alliances relating to
distribution of its products. There can be no assurance that the Company
will be able to build a suitable sales force or enter into satisfactory
marketing alliances with third parties, or that its sales and marketing
efforts will be successful.
DEPENDENCE ON DIVERSIFICATION OF PRODUCT OFFERINGS. The Company
currently has a limited number of product offerings, and purchasers of the
Company's products are not required to purchase additional products.
Accordingly, the Company's products represent non-recurring revenue sources,
and the success of the Company is dependent, in part, on its ability to
develop sustained demand for its current products and to
13
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develop and sell additional products. There can be no assurance that the
Company will be successful in developing and maintaining such demand or in
developing and selling additional products.
DEPENDENCE ON EVOLVING INDUSTRY STANDARDS. The Company's initial
product offerings prepare businesses for adherence to worldwide management
standards. The failure of the Company to enhance its products in a timely
manner to changes in the standards, the lack of public acceptance of such
standards or the delay in introduction of or enhancement to such standards
would materially adversely affect the Company's operations.
TECHNOLOGICAL CHANGE. The industry in which the Company competes is
characterized by rapid technological change. The introduction of products
embodying new technology can render existing products and product formats
obsolete and unmarketable. The Company's success will depend on its ability
to anticipate changes in technology and to develop and introduce new and
enhanced products in a timely manner in response to technological changes, or
if products or product enhancements by the Company do not achieve market
acceptance, the Company's business would be materially adversely affected.
FUTURE ADDITIONAL CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL
BE AVAILABLE. If the Company is unable to generate substantial revenues from
its operations or if the Company's expenses exceed expectations, the Company
will likely require additional funds to meet its capital requirements. The
Company does not currently have available bank financing. The Company may be
required to raise additional funds through public or private financings,
including equity or debt financings, or through collaborative arrangements.
There can be no assurance that additional financing would be available to the
Company on favorable terms, or at all. If funding is not available when
needed or on acceptable terms, the Company may be forced to curtail its
operations significantly or cease operations and abandon its business
entirely.
COMPETITION. The business education and training industry, as well as
the custom multimedia services industry, is highly competitive. A large
number of companies are currently developing interactive, multimedia-based
training, educational and instructional aids. Competitors also include
national, regional and local accounting firms engaged in industrial
consulting and instructor-led training and companies which market training
tools such as books, videos and audio tapes. Some of the Company's existing
competitors, as well as a number of potential competitors, have larger
technical staffs, more established marketing and sales organizations, and
greater financial resources than the Company. There can be no assurance the
Company will be able to compete successfully with such companies, or at all.
FLUCTUATIONS IN OPERATING RESULTS. The Company's future operating
results may vary substantially from quarter to quarter. At its current stage
of operations, the Company's quarterly revenues and results of operations may
be materially affected by the timing of the development and market acceptance
of the Company's products. Generally, operating expenses will be higher
during periods in which product development costs are incurred and marketing
efforts are commenced. Due to these and other factors, including the general
economy, stock market conditions and announcements by the Company or its
competitors, the market price of the securities offered hereby may be highly
volatile.
DEPENDENCE ON KEY PERSONNEL; LACK OF EMPLOYMENT AND NONCOMPETITION
AGREEMENTS. The success of the Company is dependent in large part upon the
ability of the Company to attract and retain key management and operating
personnel. Qualified individuals are in high demand and are often subject to
competing offers. There can be no assurance that the Company will be able to
attract and retain the qualified personnel needed for its business. The
Company has no employment or noncompetition agreements with any of its
management or other personnel.
DEPENDENCE ON ABILITY TO RETAIN SUBJECT MATTER EXPERTS. The Company's
product development strategy, including off-the-shelf and custom multimedia
products, may require the Company to retain third-party subject matter
experts to perform research and development functions by providing accurate
and informative
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content for the Company's products. There can be no assurance that the
Company will be able to continue to attract and retain qualified subject
matter experts required to develop new products, enhance existing products
and satisfy customer contractual requirements. The inability of the Company
to attract and retain such experts could have a material adverse effect on
the Company and its prospects.
INTELLECTUAL PROPERTY. The Company regards its multimedia products as
proprietary and relies primarily on a combination of statutory and common law
copyright, trademark and trade secret laws, customer licensing agreements,
employee and third-party nondisclosure agreements and other methods to
protect its proprietary rights. Despite these precautions, it may be
possible for a third party to copy or otherwise obtain or use the Company's
products or technology without authorization, or to develop similar products
or technology independently. If unauthorized use or copying of the Company's
products were to occur to any substantial degree, the Company's business and
results of operations could be materially adversely affected. There can be
no assurance that the Company's means of protecting its proprietary rights
will be adequate or that the Company's competitors will not independently
develop similar products.
The Company believes that developers of multimedia products may
increasingly be subject to such claims as the number of products and
competitors in the industry grows and the functionality of such products in
the industry overlaps. Any such claim, with or without merit, could result
in costly litigation and could have a material adverse effect on the Company.
LACK OF PRODUCT LIABILITY INSURANCE. The Company may face a risk of
exposure to product liability claims in the event that use of its products is
alleged to have resulted in damage to its customers. The Company does not
currently carry product liability insurance. There can be no assurance that
such insurance will be available on commercially reasonable terms, or at all,
or that such insurance, even if obtained, would adequately cover any product
liability claim. A product liability or other claim with respect to
uninsured liabilities or in excess of insured liabilities could have a
material adverse effect on the business and prospects of the Company.
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