<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 June 30, 1998
Commission file number: 0-27862
REALITY INTERACTIVE, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1781991
------------------------------- ---------------------------------
State or other jurisdiction of I.R.S. Employer Identification No.
incorporation of organization
SUITE 115
6121 BAKER ROAD
MINNETONKA, MINNESOTA 55345 (612) 253-4700
------------------------------- ---------------------------------
Address of principal executive offices Registrant's telephone number
Check whether the registrant (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 registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. /X/ Yes / / No
At July 31, 1998, 4,677,407 shares of registrant's $.01 par value Common Stock
were outstanding.
Transitional Small Business Issuer Format / / Yes /X/ No
1
<PAGE>
FORM 10-QSB INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
<S> <C>
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 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . 10
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
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 limited growth of the market for multimedia
education and training products; lack of market acceptance of the Company's
products and services; 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; 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 June 30, 1998.
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REALITY INTERACTIVE, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . . .$ 794,692 $ 487,994
Short-term investments . . . . . . . . . . . . . 0 1,530,545
Accounts receivable. . . . . . . . . . . . . . . 250,951 410,916
Inventory. . . . . . . . . . . . . . . . . . . . 66,780 71,197
Prepaid expenses and other current assets. . . . 77,055 52,357
------------ ------------
Total current assets. . . . . . . . . . . . . 1,189,478 2,553,009
------------ ------------
Fixed assets, net. . . . . . . . . . . . . . . . . 93,941 121,971
Restricted cash. . . . . . . . . . . . . . . . . . 169,500 58,500
Other assets . . . . . . . . . . . . . . . . . . . 15,506 19,850
------------ ------------
Total assets. . . . . . . . . . . . . . . . .$ 1,468,425 $ 2,753,330
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . .$ 37,196 $ 36,117
Accrued liabilities. . . . . . . . . . . . . . . 43,171 130,213
Deferred revenue . . . . . . . . . . . . . . . . 29,643 181,906
Other current liabilities. . . . . . . . . . . . 10 1,694
------------ ------------
Total current liabilities . . . . . . . . . . 110,020 349,930
------------ ------------
Long-term liabilities. . . . . . . . . . . . . . . 0 0
------------ ------------
Total liabilities . . . . . . . . . . . . . . 110,020 349,930
------------ ------------
Stockholders' equity:
Common stock, $.01 par value, 25,000,000
shares authorized; 4,677,407 shares
outstanding at both dates . . . . . . . . . . 46,774 46,774
Additional paid-in capital . . . . . . . . . . . 15,386,692 15,386,692
Accumulated deficit. . . . . . . . . . . . . . . (14,075,061) (13,030,066)
------------ ------------
Total stockholders' equity. . . . . . . . . . 1,358,405 2,403,400
------------ ------------
Total liabilities and stockholders' equity. .$ 1,468,425 $ 2,753,330
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to the financial statements.
3
<PAGE>
REALITY INTERACTIVE, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Product revenues . . . . . . . . . . . . . . . . .$ 87,215 $ 137,495 $ 218,910 $ 285,841
Service revenues . . . . . . . . . . . . . . . . . 114,696 0 227,340 0
------------- ------------- ------------ ------------
Total revenues. . . . . . . . . . . . . . . . 201,911 137,495 446,250 285,841
------------- ------------- ------------ ------------
Cost of product revenues . . . . . . . . . . . . . 25,625 39,961 57,363 77,896
Cost of service revenues . . . . . . . . . . . . . 91,542 0 184,143 0
------------- ------------- ------------ ------------
Total cost of revenues. . . . . . . . . . . . 117,167 39,961 241,506 77,896
------------- ------------- ------------ ------------
Gross profit . . . . . . . . . . . . . . . . . . . 84,744 97,534 204,744 207,945
------------- ------------- ------------ ------------
Operating expenses:
Sales and marketing. . . . . . . . . . . . . . . 168,061 299,275 323,312 705,238
Research and development . . . . . . . . . . . . 161,683 629,249 296,991 1,025,530
General and administrative . . . . . . . . . . . 336,239 380,640 668,655 834,779
------------- ------------- ------------ ------------
Total operating expenses. . . . . . . . . . . 665,983 1,309,164 1,288,958 2,565,547
------------- ------------- ------------ ------------
Operating loss.. . . . . . . . . . . . . . . . . . (581,239) (1,211,630) (1,084,214) (2,357,602)
------------- ------------- ------------ ------------
Interest income (expense), net . . . . . . . . . . 15,450 46,646 39,219 107,476
Net loss. . . . . . . . . . . . . . . . . . .$ (565,789) $ (1,164,984) $(1,044,995) $(2,250,126)
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
Basic and diluted loss per share . . . . . . . . .$ (0.12) $ (0.25) $ (0.22) $ (0.48)
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
Weighted average common shares outstanding . . . . 4,677,407 4,677,407 4,677,407 4,677,407
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
</TABLE>
See accompanying notes to the financial statements.
4
<PAGE>
REALITY INTERACTIVE, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . .$ (1,044,995) $ (2,250,126)
Reconciliation of net loss to net cash used by
operating activities:
Depreciation and amortization . . . . . . . . 33,117 44,856
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . 159,965 (52,620)
Inventory . . . . . . . . . . . . . . . . . . 4,417 (26,431)
Prepaid expenses and other assets.. . . . . . (20,354) 505
Accounts payable. . . . . . . . . . . . . . . 1,079 (51,027)
Accrued liabilities . . . . . . . . . . . . . (87,042) 125,325
Deferred revenue. . . . . . . . . . . . . . . (152,263) 0
Other current liabilities . . . . . . . . . . (1,684) 49,167
------------ ------------
Net cash used by operating activities . . (1,107,760) (2,160,351)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets . . . . . . . . . . . . (5,087) (25,846)
Purchases of short-term investments. . . . . . . (32,977) (119,485)
Sale of short-term investments . . . . . . . . . 1,563,522 2,000,000
Cash restricted for operating leases . . . . . . (111,000) 0
------------ ------------
Net cash used by investing activities . . 1,414,458 1,854,669
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES: 0 0
------------ ------------
Net cash provided (used) during period . . . . . . 306,698 (305,682)
CASH AND CASH EQUIVALENTS:
Beginning of period. . . . . . . . . . . . . . . 487,994 508,728
------------ ------------
End of period. . . . . . . . . . . . . . . . . .$ 794,692 $ 203,046
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to the financial statements.
5
<PAGE>
REALITY INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
NOTE 1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Reality Interactive, Inc. (the "Company") was incorporated on May 24, 1994
for the purpose of developing technology-based knowledge solutions for the
industrial marketplace. Since inception, the Company has developed several
off-the-shelf multimedia training products within the areas of international
quality and environmental management standards. To better align with the needs
of the marketplace, the Company recently began offering multimedia and web
development services to help customers improve business performance through
technology-assisted knowledge transfer. The Company consults with its customers
to identify initiatives and corporate best practices that are key to improving
productivity, quality, cost reduction and time to market. The Company then uses
its expertise with interactive technologies, such as the Web and multimedia, to
develop solutions that foster enterprise-wide learning and culture change.
Through the third quarter of 1997 the Company was in the development
stage. The Company has an accumulated deficit of $14,075,061. To become
profitable and to conserve capital, management's plans are to significantly
increase revenues in part through custom multimedia projects and to control
expenses. Future operating results will depend upon many factors, including
the rate at which industry adopts interactive multimedia and Web technology
for education, training and knowledge transfer, 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, including the 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 all
adjustments necessary for a fair presentation of the results of operations for
the interim periods presented. Operating results for the three and six months
ended June 30, 1998 are not necessarily indicative of the operating results to
be expected for the year ending December 31, 1998.
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, 1997.
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 quarter and six months ended June 30, 1998 and 1997.
RESULTS OF OPERATIONS
REVENUES. Revenues were $201,911 for the second quarter of 1998, a
47% increase from revenues of $137,495 for the first quarter of 1997. For
the six month period ended June 30, 1998, revenues were $446,250, a 56%
increase over revenues of $285,841 for the comparable period of 1997. The
revenue increase was due primarily to service revenues recognized on custom
development projects for Sundstrand Aerospace and General Motors Corporation.
Revenues derived from custom development services are recognized on the
percentage of completion method over the life of each project, which may
range from three to nine months. The Company's use of the percentage of
completion method of revenue recognition requires estimates of the degree of
project completion. To the extent these estimates prove to be inaccurate,
the revenues and gross profits, if any, reported during the periods where the
project is ongoing may not accurately reflect the final results of the
project. Provisions for any estimated losses on uncompleted contracts are
made in the period in which such losses are determinable. Revenue is
reported net of reimbursable expenses.
For the second quarter of 1998, revenues from Sundstrand Aerospace and
General Motors Corporation, along with product sales from Synergie Gmbh, the
Company's German distributor, accounted for 39%, 17% and 20% of total revenues
for the quarter. For the six months ended June 30, 1998, revenues from
Sundstrand Aerospace, General Motors Corporation and Synergie Gmbh accounted for
31%, 18% and 17% of total revenues.
COST OF REVENUES. Cost of revenues were $117,167 for the second quarter
of 1998, compared to $39,961 for the second quarter of 1997. For the six month
period ended June 30, 1998, cost of revenues were $241,506, compared to cost of
revenues of $77,896 for the same period of 1997. The increase in cost of
revenues was primarily due to the costs associated with the Sundstrand and
General Motors custom development projects, which were classified as cost of
service revenues when related project revenues were recognized. Project
development costs include all direct labor costs and other direct costs related
to service performance, such as contract labor, supplies and equipment costs.
Cost of product revenues includes the cost of media duplication, packaging
materials and royalties earned by business partners and subject matter experts.
Such costs are recognized upon the sale and shipment of the Company's products.
OPERATING EXPENSES. The Company's operating expenses for the second
quarter of 1998 were $665,983, a 49% decrease from operating expenses of
$1,309,164 in the second quarter of 1997. For the six month period ended June
30, 1998, operating expenses were $1,288,958, a 50% decrease over operating
expenses of $2,565,547 for the same period of 1997. This decrease in operating
expenses between 1998 and 1997 was due primarily to the following areas:
(a) SALES AND MARKETING. Sales and marketing expenses were $168,061 for
the second quarter of 1998 compared to $299,275 for the second quarter
of 1997, a 44% decrease. For the six-month period ended June 30,
1998, sales and marketing expenses were $323,312, a 54% decrease from
sales and marketing expenses of $705,238 for the same period of 1997.
This decrease between periods was due primarily to fewer direct sales
people, lower sales travel expenses and a decrease in the number of
marketing programs.
7
<PAGE>
The Company expects that sales and marketing expenses for the
remainder of 1998 will moderately decrease from second quarter 1998
levels.
(b) RESEARCH AND DEVELOPMENT. Research and development expenses were
$161,683 for the second quarter of 1998 compared to $629,249 for the
first quarter of 1997, a 74% decrease. For the six month period ended
June 30, 1998, research and development expenses were $296,991, a 71%
decrease from research and development expenses of $1,025,530 for the
same period of 1997. This decrease was primarily attributed to a
decrease in the number of development personnel, and a shift towards
providing custom development services, the costs of which get
classified as cost of revenues when project revenues are recognized.
The Company expects that research and development expenses will remain
consistent for the remainder of 1998.
(c) GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$336,239 for the second quarter of 1998 compared to $380,640 for the
second quarter of 1997, a 12% decrease. For the six month period
ended June 30, 1998, general and administrative expenses were
$668,655, a 20% decrease from general and administrative expenses of
$834,779 for the same period of 1997. This decrease was due primarily
to a decrease in headcount and lower expenses for executive travel,
equipment leases and administrative operating costs due to an overall
drop in Company personnel. The Company expects that its general and
administrative expenses will remain consistent for the remainder of
1998.
OTHER INCOME (EXPENSE). The Company's net other income was $15,450 for the
second quarter of 1998, compared to net other income of $46,646 for the second
quarter of 1997. For the six month period ended June 30, 1998, net other income
was $39,219, compared to net other income of $107,476 for the same period of
1997. Net other income consists entirely of interest earned on short-term
investments. The decrease between periods is attributed to a decrease in
short-term investments.
NET LOSS. Net loss was $565,789 for the second quarter of 1998, compared to
a net loss of $1,164,984 for the second quarter of 1997. For the six-month
period ended June 30, 1998, net loss was $1,044,995, compared to a net loss of
$2,250,126 for the same period of 1997. The Company expects to continue to
experience losses for the foreseeable future in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments were
$794,692 as of June 30, 1998, compared to $2,018,539 as of December 31, 1997.
This decrease in cash, cash equivalents and short-term investments was due
primarily to the net loss from operations for the six-months ended June 30,
1998.
As of June 30, 1998, the Company had outstanding letters of credit from a
bank totaling $169,500. The letters of credit secure an operating lease of
office furniture and an office lease for its business premises. The Company is
required to maintain at the bank a cash amount equal to the letters of credit
until such letters of credit expire. A letter of credit in the amount of
$58,500 is scheduled to expire in November 1998, with the remaining letter of
credit in the amount of $111,000 scheduled to expire in July 1999.
The Company anticipates that it will continue to experience operating
losses and negative cash flow from operations for the foreseeable future in
1998. 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 December 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
8
<PAGE>
management's expectations, or the Company's growth exceeds management's
expectations, the Company may require additional financing prior to December
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.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Some computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. All of the software produced by the
Company has been analyzed and the Company is not aware of any potential for date
recognition problems in its products. The Company also uses off-the-shelf
software ("Administrative Software") produced by third parties for use in
administrative functions such as word processing, billing and record keeping.
The vendors of the Company's Administrative Software products have indicated
that such products are Year 2000 compliant. In the event that any of these
programs are susceptible to date recognition problems, this could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process critical business
transactions. In the event that the Company experiences Year 2000 problems, the
Company believes the cost to remedy such problems will be immaterial.
RECENT DEVELOPMENTS
On May 27, 1998, the Company's securities (Common Stock, Units and
Warrants) were delisted from The Nasdaq Stock Market-SM-. The delisting was the
result of noncompliance with the new minimum bid price requirement, pursuant to
NASD Marketplace Rule 4310(c)(04), which became effective February 23, 1998.
Trading in the Company's securities now occurs on the Over The Counter
Bulletin Board and will be subject to certain "Penny Stock Rules." Under
Exchange Act Rule 15g-9, broker-dealers must take certain steps prior to selling
a "penny stock," including: (i) obtaining financial and investment information
from the investor; (ii) a written suitability questionnaire and purchase
agreement signed by the investor; (iii) providing the investor a written
identification of the shares being offered and in what quantity; and (iv)
deliver to the investor a written statement setting forth the basis on which the
broker-dealer approved the investor's account for the transaction. If the Penny
Stock Rules are not followed by a broker-dealer, the investor has no obligation
to purchase the shares. Accordingly, delisting from The Nasdaq Stock Market-SM-
and the application of the foregoing Penny Stock Rules may make it more
difficult for broker-dealers to sell the Company's securities. In addition,
purchasers of the Company's securities may have difficulty in selling such
securities in the future in secondary trading markets and the price of such
securities may be reduced.
9
<PAGE>
PART II - OTHER INFORMATION
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 June 30,
1998
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: August 7, 1998 By /s/ Paul J. Wendorff
-------------------------------
Paul J. Wendorff
Its Chief Executive Officer
Dated: August 7, 1998 By /s/ Wesley W. Winnekins
-------------------------------
Wesley W. Winnekins
Its Chief Financial Officer
11
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Page No.
------- ---------------------------------------- --------
<S> <C> <C>
27.1 Financial Data Schedules . . . . . . . .
99.1 Cautionary Statement . . . . . . . . . . 13
</TABLE>
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 794,692
<SECURITIES> 0
<RECEIVABLES> 253,648
<ALLOWANCES> 2,697
<INVENTORY> 66,780
<CURRENT-ASSETS> 1,189,478
<PP&E> 453,112
<DEPRECIATION> 359,171
<TOTAL-ASSETS> 1,468,425
<CURRENT-LIABILITIES> 110,020
<BONDS> 0
0
0
<COMMON> 46,774
<OTHER-SE> 1,311,631
<TOTAL-LIABILITY-AND-EQUITY> 1,468,425
<SALES> 201,911
<TOTAL-REVENUES> 217,361
<CGS> 117,167
<TOTAL-COSTS> 117,167
<OTHER-EXPENSES> 665,983
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (565,789)
<INCOME-TAX> 0
<INCOME-CONTINUING> (565,789)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (565,789)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</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:
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 multimedia and web-based education and training products
and services by businesses, and many of the Company's potential customers do not
own or have access to the necessary equipment. The Company's future success
will depend upon, among other factors, the extent to which companies acquire
equipment compatible with the Company's products and services, and adopt and use
multimedia and web-based education and training programs. In addition, the
Company's success will depend in part on its ability to market and sell multiple
copies of its products, as well as sell its custom development services, to
large corporate customers. In the event that adoption and use of equipment
compatible with the Company's products and services 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 development services will be acceptable to the market or that
the Company will be able to sell multiple copies of its 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 maintain 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 develop and sell customized or tailored versions
of its products. There can be no assurance that the Company will be successful
in developing and maintaining such demand or in developing and selling
customized or tailored versions of its products.
DEPENDENCE ON EVOLVING INDUSTRY STANDARDS. The Company's off-the-shelf
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 or the lack of public acceptance of such
standards could materially adversely affect the Company's operations.
13
<PAGE>
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 debt
and equity financings, or through collaborative arrangements. There can be no
assurance that additional financing would be available 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 market for resources that prepare companies for
compliance to international management standards, such as ISO 9000, QS-9000 and
ISO 14000, is highly fragmented. No single company has a dominant market share,
and the Company generally competes with a variety of competitors, depending on
factors such as the size of the customer, specific business requirements,
geographic location and the level of investment anticipated by the customer.
The international standards market has traditionally been served by
consultants, instructor-led training and companies that market books, manuals,
tapes and similar technology solutions. Companies providing consulting
services, who may also provide training services, on ISO 9000, QS-9000 and ISO
14000, such as Andersen Consulting, Ernst & Young and Grant Thornton, enjoy a
high level of customer loyalty with respect to the implementation of
enterprise-wide business practices. Companies providing technology solutions
similar to the Company's product offerings include Powerway, Inc. and
SystemCorp. The Company can offer no assurance that it will be ultimately
successful in competing with such companies.
With respect to custom multimedia development services, the technology
training industry is highly competitive, and the Company expects the intensity
of competition to increase. The Company competes with numerous privately-held
companies that provide custom multimedia development services, many of which
have stronger client relationships, a better established market presence and a
greater capacity to provide custom development services than the Company. The
Company can offer no assurance that it will be ultimately successful in
competing with such companies.
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 and services. 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
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retain the qualified personnel needed for its business. The Company has no
written employment or noncompetition agreements with any of its management or
other personnel.
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 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 and web-based 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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