FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter ended June 30, 2000
Commission File Number: 0-29183
EKNOWLEDGE GROUP, INC.
formerly known as Richmond Services, Inc.
Nevada 91-1982250
(Incorporation) (IRS Number)
1520 West Sixth Street, Suite 101, Corona, CA 92880
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (909) 372-2800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: 19,555,556
Yes[x] No[] (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.)
As of June 30, 2000, the number of shares outstanding of the Registrant's Common
Stock was 19,555,556.
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
eKnowledge Group, Inc., previously eTestPrep, Inc. (the Company), was
incorporated in the state of Nevada on June 1, 1999, for the purpose of
providing educational training courses over the Internet and through other media
sources. Effective April 17, 2000, Richmond Services, Inc. (Richmond), acquired
all of the issued and outstanding common stock of the Company. Currently the
Company has 50,000,000 common shares authorized, with 19,555,556 shares of
common stock issued and outstanding. There are currently approximately 450
shareholders in the Company. As a result of the transaction, the Company s
former shareholders obtained control of Richmond, a blank-check corporation with
no operations. For accounting purposes, this acquisition has been treated as a
re-capitalization of the Company. The accompanying financial statements have
been prepared in conformity with generally accepted accounting principles, which
contemplate continuation of the Company as a going concern. Attached hereto and
incorporated herein by this reference are the following financial statements:
Exhibit FINANCIAL STATEMENTS
00QF-2 Un-Audited Financial Statements for the three months and six months
ended June 30, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
(A) PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS. The following discussion
should be read in conjunction with our financial statements and the accompanying
notes that appear elsewhere in this report. The results for both the current
quarter and six months reflect the operations of eKnowledge Group. Because
eKnowledge Group began operations on June 1, 1999, results for the comparable
periods in 1999 include only one month. The following discussion contains
forward-looking statements that reflect our plans, estimates and beliefs. Our
actual results could differ materially from those discussed in the
forward-looking statements.
EKNOWLEDGE GROUP, INC. OVERVIEW
We provide online interactive video streamed learning programs in the
supplemental education market. Additionally, we provide corporate solutions
designed to address the strategic business objectives of our customers by
helping them to increase employee productivity, education access and decrease
the overwhelming cost of corporate training. We host and centrally manage all
software and content, significantly reducing our customers' learning
infrastructure costs and enabling us to rapidly update or customize our courses.
Our Web-based solutions deliver content on new initiatives, products or
processes to large, geographically dispersed groups who can access courses from
anywhere, at anytime through a standard Web browser. Our interactive video-based
design approach encourages active learning among the participants.
As of June 30, 2000, we had over 2000 customers. We also maintained online
courses in the standardized test preparation area and providing corporate online
delivery services in the technology, financial services, and telecommunications
industries. Clients in the corporate education arena include Citibank, eGoose
and Practicing Law Institute.
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(B) DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
NET SALES
Net product sales include the selling price of the HOME LSAT program offering
sold by the Company, net of returns, as well as outbound shipping and handling
charges.
For the quarter ended June 30, 2000, total revenues increased nearly from $0 to
$53,491 due to the start-up nature of the Company as of June 30, 1999. Further,
by virtue of the acquisition by Richmond Services and the contribution of cash
on April 17, 2000, the majority of operations have taken place since then. We
expect that revenues from product sales will continue to grow as we launch new
products and continue to increase our product offerings and services.
GROSS PROFIT
Gross profit is calculated as net sales less the cost of sales, which consists
of the cost of developing and producing the products sold to customers. Gross
profit exceeded net revenues due to the Company's focus on product development
for the quarter ending June 30, 2000. As a result of these product development
efforts, the Company's product offering will soon grow from one test review
course to five courses, as well as continue developing contracts for individual
companies.
MARKETING AND SALES
Marketing and sales expenses consist primarily of advertising, public relations
and promotional expenditures. Through the quarter ended June 30, 2000, the
Company had not spent significant amounts on marketing and sales. The Company
intends to increase these expenses as it continues its branding and marketing
campaigns, and as it increases is sales efforts. As a result, the Company
expects marketing and sales expenses to continue to increase significantly.
PRODUCT DEVELOPMENT
Product development expenses are reported as Cost of Sales and consist of
payroll and related expenses for developing new products, developing and
maintaining the Company's web sites and supporting technology.
GENERAL AND ADMINISTRATIVE
General and administrative ('G&A') expenses consist of payroll and related
expenses for executive, finance and administrative personnel, recruiting,
professional fees and other general corporate expenses. These expenses
increased dramatically in the quarter ended June 30, 2000 as the company began
building its management team and staffing its technical department. The Company
expects these costs to continue to increase, as additional resources will be
needed to support our new products and continue to offer new services.
STOCK-BASED COMPENSATION
Stock-based compensation is comprised of consideration offered to a number of
key employees as part of their employment agreements. This consideration must
be classified as compensation expense under generally accepted accounting
principles.
Approximately 1.4 million shares of restricted common stock were issued to
several key employees of the Company in May 2000. The compensation is being
amortized over the vesting period that ends on May 30, 2001
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LIQUIDITY AND CAPITAL RESOURCES
Since April 17, 2000, the Company has satisfied its cash requirements primarily
through private placements of equity securities (including the cash received at
the time of the acquisition by Richmond).
Net cash used in operating activities was approximately $305,000 for the six
months ended June 30, 2000. Net operating cash flows were primarily
attributable to quarterly net losses, increases in current assets, and prepaid
items such as rent due to the start-up nature of the Company.
Net cash provided by investing activities was $474,204, due primarily to the
cash infusion at the time of the merger with Richmond.
Net cash provided by financing activities of approximately $188,000 relates to
additional cash received for stock, also a result of the merger with Richmond.
The Company believes that the cash balance of $358,000 at June 30, 2000 is
currently sufficient to meet the Company's anticipated cash needs. We anticipate
that we will need to raise additional funds to meet our operating needs and the
company is in current discussions with potential investors. However, any
projections of future cash needs and cash flows are subject to substantial
uncertainty. If current cash that may be generated from operations are
insufficient to satisfy the Company's liquidity requirements, the Company may
seek to sell additional equity. Such a sale could result in additional dilution
to the Company's stockholders. In addition, the Company will, from time to
time, consider the acquisition of or investment in complementary businesses,
products, services and technologies, which might impact the Company's liquidity
requirements or cause the Company to issue additional equity. There can be no
assurance that financing will be available in amounts or on terms acceptable to
the Company, if at all.
INDUSTRY BACKGROUND
Today's businesses face rapidly changing environments characterized by
increasing competition, economic globalization and technological change. To
compete effectively, businesses must improve business processes, reduce
operating costs and provide an environment of continuing access to education and
training throughout the entire lifecycle of employment. The adoption of the
Internet as a business training and education platform has accelerated these
trends in nearly every industry. Driving knowledge to the extended enterprise
effectively reduces the time-to-market of new products and services, improves
the productivity of sales channels and reduces customer support costs, resulting
in increased operating efficiency and higher profitability.
In an attempt to address today's competitive business challenges, businesses are
investing increasing amounts on learning and skills development. In 1997, the
Department of Education estimated that in the United States alone businesses
spent nearly $55 billion annually on learning programs. We believe that their
investments in traditional educational programs have often yielded uncertain
results and in many cases have failed to address and satisfy strategic business
objectives. To date, investment in learning has consisted primarily of
in-person, instructor-led training programs. Traditional methodologies tend to
be inadequate because they are:
- Difficult to deploy across an organization and its extended enterprise. Many
businesses find it difficult to effectively deliver up-to-date content in a
timely and consistent manner to large, geographically-dispersed groups. The
traditional solution of scheduling corporate education programs at specific
times in single locations results in logistical challenges and opportunity costs
that often-lower participation rates and limit a company's ability to
disseminate knowledge to its extended enterprise.
- Difficult to customize and update. Instructor-led content is often prepared
in advance to provide for the production and distribution of printed or
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videotaped materials, which are then updated at fixed intervals and delivered
using an instructor-led, standardized curriculum of pre-scheduled meetings in
set physical locations. As a result, print-based content cannot be updated and
distributed to learners as rapidly as a Web-based content.
- Unable to track and monitor learning effectiveness. Tracking student
performance in traditional classroom programs typically requires additional
expenses for manual test administration, grading and recording. Many businesses
have chosen to avoid these costs by simply recording participant attendance. As
a result, they are unable to track and certify levels of competency directly
resulting from instruction and correlate learning investments with business
results.
- Costly and slow. Traditional learning initiatives require prolonged
absences of valuable employees due to travel to course locations and attendance
at scheduled course meetings, resulting in significant opportunity costs due to
lost work. In addition, course materials must be printed and delivered using
traditional means. As a result, businesses are unable to continuously educate
their extended enterprises on new products, strategies and processes in a timely
manner. With online courses, participants can learn at anytime from a computer,
without having to schedule classrooms or meetings, and without having to travel
to a classroom facility.
In response to these limitations, many businesses are seeking more effective
learning solutions. The Internet is transforming the corporate learning
marketplace by offering innovative ways to design and deliver knowledge.
According to International Data Corporation, the online corporate learning
market is projected to grow from $550 million in 1998 to more than $11.4 billion
in 2003. By leveraging the Internet, businesses can instantly and simultaneously
deploy content to a broad, global audience. This content can be easily and
continuously accessed, modified and refreshed and learning programs can be
enhanced as participants use e-mail and chat rooms to establish interactive
relationships with instructors and peers. Web-based technologies can also offer
real-time tracking of participant performance.
Internal training organizations and external corporate learning providers are
geared to instructor-led training and their set of skills is limited to
classroom scheduling and instruction. To compete effectively in the e-learning
market, these organizations would need to develop a broad range of competencies,
including technology development, content creation, Web-hosting and online
community management. Companies are seeking outsourced and integrated e-learning
solutions as a means of more effectively educating their extended enterprise.
THE EKNOWLEDGE GROUP SOLUTION
We provide interactive video streamed education programs and services that
address the supplemental and continuing education to both students and corporate
employees. Our online learning courses and services combine powerful Internet
delivery technologies, customized content, and interactive video streaming with
downloadable text. Because we host our online courses, they can be easily
deployed to thousands of participants. We have delivered high quality courses to
more than 2000 students and to companies in a number of industries, including
high technology, financial services, education and professional services. The
advantages of our solutions include:
INNOVATIVE DELIVERY MODEL. We deliver interactive video streamed solutions that
offer all of the benefits of live training while overcoming the shortcomings of
traditional learning methods. Our programs are Web-based and we host and
centrally manage all software and content from our servers. Central hosting and
delivery reduces our customers' expenses because they avoid the need to build
e-learning delivery systems and staff and manage large teams to design, develop
and produce e-learning content. In addition, our centrally hosted system enables
us to deploy e-learning solutions rapidly and broadly to course participants who
have an Internet connection and standard Web browser.
POWERFUL E-COMMERCE CAPABILITY. Our e-commerce tools enable our customers and
strategic resellers to develop revenue-generating businesses around our
e-learning solutions. We have entered into revenue sharing agreements with some
of these customers and resellers. To date, revenues generated from these
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arrangements have been insignificant, although we have revenue-sharing projects
underway. Using our Web-based tools, our customers can use this e-learning
portal to register and bill online the distributors, suppliers and customers in
their extended enterprise, providing course participants with a customer-branded
learning experience that is delivered and tracked from our centrally-hosted Web
servers.
HIGH-QUALITY CONTENT. We offer a full spectrum of courses in the test
preparation arena and are in development with programs supporting the curriculum
of grades 1 through grade 12 in the United States and additional learning titles
at the university and beyond market. Our staff of trained instructional
designers identify and contract with people in the industry who are regarded as
experts in their fields. We either pay royalties to these content sources or pay
them on a per hour basis. In some cases, custom course development content is
provided to us by our customers' employees that are most knowledgeable about
their specific product or application. Using a Web-based deployment system
allows us to continually update content, and avoids the need to ship or recall
physical materials such as books or CD-ROMs. This ability to rapidly deploy
courses from a central location allows our customers to better ensure that
course content remains aligned with business needs, and that courses do not
remain in use or circulation if they are outdated or factually incorrect.
WEB-BASED INSTRUCTIONAL DESIGN. Courses designed for our e-learning environment
leverage the unique communications and interactive capabilities of the Internet.
This Web-based approach results in an engaging and compelling student experience
resulting from increased interactivity through the use of Internet technologies
such as Java applets within the course material, discussion boards, online labs,
simulations, e-mail and chat rooms. These elements allow a student to learn
course material by actively participating in the learning experience. This level
of personalization represents an improvement over instructor-led curricula that
may not offer the equivalent, extended opportunity for interaction.
INTERACTIVE EDUCATION PROCESS. Our courses are interactive, self-paced and can
be accessed at any time. The learning experience benefits from quick responses
from consultants and direct interaction via e-mail and the Internet. The team of
content developers is available to consult and answer questions or issues by
phone and email. On average, participants receive responses to their submissions
within a few hours. Participants are required to complete exercises and can ask
questions or solicit feedback from the tutor.
ROBUST AND SCALABLE TECHNOLOGY FRAMEWORK. Participants have access to our
courses at anytime from anywhere using standard Web browser software. Our open,
standards-based solution allows participants to access courses online without
any proprietary plug-ins or other software. Our technology can easily expand to
support our customers as they deploy learning throughout their extended
enterprises.
ENTERPRISE TRACKING AND REPORTING TOOLS. We offer Web-based tools that are used
by our customers to track and monitor each participant's progress in order to
measure course completion and knowledge acquisition. Managers can assess the
performance of their employees and correlate this information with business
results to evaluate the effectiveness of any course.
STRATEGY
Our objective is to be the leading provider of e-learning solutions. Key
elements of our strategy include:
- Enhance our e-learning solutions. We intend to continually add
functionality and features to enhance our comprehensive e-learning solutions to
meet our customers' evolving needs. For example, we plan to integrate our
services more closely with the internal systems of our customers to facilitate
our customers' ability to correlate learning data, such as course completion
rates and student assessment scores, with organizational and performance
metrics. Examples of these performance metrics include sales per employee,
customer satisfaction and manager evaluations. We also plan to devote
significant resources to expanding the breadth of our course offerings and
improving the reporting and tracking features of our solutions.
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- Develop long-term strategic relationships with our customers. We
believe that e-learning solutions will become increasingly critical to
businesses' ability to compete successfully. As an existing provider of
e-learning solutions, we become a strategic resource for our customers. We plan
to extend our presence within our customers' enterprises by helping our
customers understand the value and applicability of our solutions to a broad
range of operational initiatives.
- Expand our course offerings. We intend to continually introduce new
courses and leverage our existing courses across multiple customers and
industries. In many instances, we will modify content developed for existing
customers in order to provide similar courses to customers in different
industries. This approach allows us to generate additional revenue opportunities
while leveraging previous course development efforts.
- Leverage development alliances and joint venture relationships. We
plan to grow both our direct and indirect sales channels to better service our
existing markets and penetrate new markets such as healthcare, life sciences,
consumer products, telecommunications and government.
- Expand our international presence. As the rate of Internet adoption
accelerates overseas, we believe that significant international market demand
will exist for e-learning solutions, especially in Europe and Asia. To that end,
we have begun delivering our e-learning solutions in strategically targeted
international locations, using courseware and tutor support in English, French,
German and Japanese. We plan to expand our reach into both Europe and Asia by
developing direct and indirect sales channels and curriculum support
capabilities in these regions.
CUSTOMERS
Our customers can use our e-learning solutions to compress the learning cycle,
increase knowledge throughout the extended enterprise, enhance brand equity and
customer service and reduce operational costs.
As of June 30, 2000, we have over 2000 registered users. The specific categories
for each type of customer are designated according to the desired outcomes of
the e-learning courses from which the majority of that customer's revenue is
received.
CONTENT AND COURSES
We currently offer our customers more than test preparation courses at the
university and graduate school level. Each course consists of 30 to 50 hours of
video instruction combined with student work, including lessons, quizzes,
interactive applets, simulations, and hands-on participant exercises. All of our
courses have been designed to take advantage of our e-learning environment and
leverage Internet technologies, such as video and audio streaming, e-mail and
discussion boards, in order to provide participants with an engaging learning
experience and extensive interaction with the content and technology. In
addition to pre-developed courses, we develop customized content for our
customers. These customized courses incorporate the significant domain knowledge
of our clients and can be rapidly redesigned for other customers in the same
industry. We typically retain all or some portion of the intellectual rights to
our content and can reuse it for other customers. In a few cases, however, we
have agreed not to sell that content to third parties.
PRODUCTS AND TECHNOLOGY
Our e-learning environment consists of technologies that we have designed and
created to function as an integrated solution. By employing standard Internet
technologies and a hosted content delivery model, we are able to provide our
customers with a high quality, efficient means to educate their extended
enterprise.
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CONTENT DELIVERY SYSTEM
We host the e-learning environments of our customers. By centralizing all
infrastructure and hosting requirements, our customers derive the following
significant benefits:
- Customers do not need to install or manage any software;
- Content can be updated and infrastructure technology can be improved
continuously without impacting our clients and at a minimal cost to us;
Customers avoid the need to make significant investments in technology
infrastructure such as servers, databases, technical staff or technical support;
and
- Participants can access course content at anytime, from anywhere,
through the use of a standard modem and browsers.
SYSTEM ARCHITECTURE
Our e-learning architecture is designed to scale rapidly to provide large
student populations with tutor-supported e-learning content. In addition, we
have developed our content delivery system using standard Internet technologies
such as Java and HTML, facilitating the delivery of our content to our
customers' Web browsers. We utilize a single code base to deliver content. As a
result, any improvement made in our software for one customer automatically
benefits all other customers.
FULL INTEGRATION WITH CORPORATE INFRASTRUCTURES
Our e-learning solutions can be fully integrated with our customers' corporate
information technology systems, including their Web sites and intranets. As a
result, course participants do not necessarily realize that they are accessing
content hosted from our servers. Our integration layer provides adapters for
training management systems. We design our course content to be compatible with
our customer's security concerns and bandwidth limitations. As a result, it is
highly unusual for participants at our corporate clients to be unable to access
our courses.
SCALABLE ARCHITECTURE
Our system has been designed to scale rapidly and to consistently deliver
content to large numbers of participants. We use extensive load testing to
measure our system capacity and identify potential bottlenecks. Constant
improvements to our system architecture continue to increase system capacity
well beyond the current demands.
HIGH-AVAILABILITY SYSTEMS
Our systems have been designed to maximize availability, with redundancy in the
areas in which we believe failures are most likely to occur. We have also
implemented redundant network connections to the Internet, a load-balanced
redundant web server and a highly redundant storage array to safeguard our
information. We are vulnerable to certain types of failures, including
catastrophic failure of our hosting site due to natural disasters or other
events and simultaneous failure of our primary and redundant systems.
SALES AND MARKETING
We sell our e-learning solutions primarily through our own direct sales
organization. Our direct sales organization focuses on developing long-term
relationships with major corporate customers while our e-commerce Web site sells
directly to consumers and individual buyers.
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COMPETITION
The e-learning market is evolving quickly and is subject to rapid technological
change, shifts in customer demands and evolving learning methodologies. To
succeed, we must continue to expand our course offerings, upgrade our technology
and distinguish our solution. As competition continues to intensify, we expect
the e-learning market to undergo significant price competition. We expect to
face increasing price pressures from competitors as our potential customers
demand more value for their education budgets.
The e-learning market is highly fragmented with no single competitor accounting
for a dominant market share, and competition is intense. In addition to
competing with other suppliers of technology-based learning solutions, we also
compete with third-party suppliers of instructor-led education and learning and
internal education departments.
Our competitors vary in size and in the scope and breadth of the courses and
services they offer. Several of our competitors have longer operating histories
and significantly greater financial, technical and marketing resources. In
addition, larger companies may enter the e-learning market through the
acquisition of our competitors. We anticipate that the lack of significant entry
barriers to the e-learning market will allow other competitors to enter the
market, increasing competition.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Our success depends, in part, on our ability to protect our proprietary rights
and technology. We rely on a combination of copyrights, trademarks, service
marks, trade secret laws, a pending patent and third-party nondisclosure
agreements to protect our proprietary rights. We have registered the trademark
eKnowledge Group and we own the domain name eknowledgegroup.com as well as many
other domain names currently used in our operations. It is possible, however,
that third parties could acquire trademarks or domain names that are
substantially similar or conceptually similar to our trademarks or domain names.
This could decrease the value of our trademarks or domain names and could hurt
our business. The regulation of domain names in the United States and in foreign
countries is subject to change. The relationship between regulations governing
domain names and laws protecting trademarks and similar proprietary rights is
unclear.
We obtain the content for many of our courses from our customers and often also
receive the right to resell this content to other customers. It is possible that
the use of this content may subject us to the intellectual property claims of
third parties. Although we generally seek indemnification from our customers
extensive damage claims or claims for injunctive relief. In addition, our
customers may assert that some of the courses we develop for our general catalog
or under contract with other customers may improperly use their proprietary
content. Our involvement in any litigation to resolve intellectual property
ownership matters would require us to incur substantial costs and divert
management's attention and resources. In addition, we cannot predict the effect
of a failure to prevail in any litigation of this kind.
EMPLOYEES
As of June 30, 2000, we employed 34 persons. Of these employees, there were 8 in
course development, 4 in sales and marketing, 16 in Web delivery and customer
support and 6 in general and administration.
Our success will depend in large part upon our ability to attract and retain
employees. We face competition in this regard from other companies, but we
believe that we maintain good relations with our employees. None of our
employees are members of organized labor groups.
RISK FACTORS
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You should consider the risks described below before making an investment
decision. We believe that the risks and uncertainties described below are the
principal material risks facing our company as of the date of this 10QSB. In the
future, we may become subject to additional risks that are not currently known
to us. Our business, financial condition or results of operations could be
materially adversely affected by any of the following risks. The trading price
of our common stock could decline due to any of the following risks.
WE COMMENCED OPERATIONS IN JUNE 1999 AND OUR LIMITED OPERATING HISTORY AND THE
NEW AND EMERGING E-LEARNING MARKET MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS
AND FUTURE PROSPECTS.
We commenced operations in June 1999 and have yet to begin to generate
significant revenues. We are still in the early stages of our development,
which, when combined with the new and emerging market for Web-based delivery of
learning programs, or e-learning market, make it difficult to evaluate our
business or our prospects. Because of our limited operating history, we have a
limited and unproven ability to predict the trends that may emerge in the
e-learning market and affect our business. The uncertainty of our future
performance, in general, and the uncertainty regarding the acceptance of
e-learning, in particular, increases the risk that we will be unable to build a
sustainable business and that our stockholder value will decline.
WE HAVE A HISTORY OF LOSSES OUR ACCUMULATED DEFICIT IS $328,988 AT JUNE 30,
2000, WE EXPECT FUTURE LOSSES AND WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.
We have experienced losses in each quarter since our inception and expect that
our losses will increase in each quarter at least through the end of fiscal
2001. Our accumulated deficit as of June 30, 2000, was $328,988. We expect to
continue to incur increasing quarterly losses as we expand our operations and
fund our growth. We plan to increase our operating expenses to market, sell and
support our e-learning solutions, build infrastructure and hire additional
staff. We also plan to invest heavily to develop and acquire new course
offerings with new areas of expertise, which will increase operating expenses in
absolute dollars. We currently expect our total costs and expenses to be at
least $12.0 million in fiscal 2001. As a result, we will need to significantly
increase our quarterly revenues to achieve profitability. If we do not generate
sufficient revenues or become profitable within a time frame expected by public
market analysts or investors, the market price of our common stock will likely
decline. Even if we do achieve profitability, we may not be able to sustain or
increase profitability on a quarterly or annual basis in the future.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS, WHICH COULD
ADVERSELY AFFECT OUR STOCK PRICE.
Our revenue and operating results are volatile and difficult to predict and may
be susceptible to declines in future periods. Our quarterly results of
operations may fluctuate significantly in the future due to shortfalls in
revenues or orders. We therefore believe that quarter-to-quarter comparisons of
our operating results may not be a good indication of our future performance. In
the event of a revenue or order shortfall or unanticipated expenses in some
future quarter or quarters, our operating results may be below the expectations
of public market analysts or investors. In such an event, the price of our
common stock may decline significantly.
Due to the factors discussed in this risk factors section and elsewhere in this
prospectus and because we are engaged in a relatively new and emerging business,
revenue and operating results for the foreseeable future are difficult to
forecast. Our current and future expense estimates are largely fixed and based,
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to a significant degree, on our estimates of future revenue. We will likely be
unable to, or may elect not to, reduce spending quickly enough to offset any
unexpected revenue shortfall. Therefore, any significant shortfall in revenue in
relation to our expectations would cause our quarterly results for a particular
period to decline.
OUR RECOGNITION OF REVENUE IS DEPENDENT UPON THE ACHIEVEMENT OF VARIOUS
MILESTONES, AND OUR INABILITY TO RECOGNIZE REVENUE IN ACCORDANCE WITH OUR
EXPECTATIONS WILL HARM OUR OPERATING RESULTS.
In accordance with our revenue recognition policy, our ability to record
revenues depends upon several factors. These factors include acceptance by our
customers of new courses and the pace of participant registrations in courses
once they are completed and made available on our Web site. All of our customer
contracts provide that at least a portion of our revenues depend on either
course completion or participant registration, or both.
Many of our courses are custom-tailored to the specifications of our customers.
As such, course revenues are dependent upon customers providing us with the
subject matter expertise to be incorporated into the course as well as our
completion of production and customer sign-off. Accordingly, if customers do not
provide us with the specific subject matter content in a timely manner, our
ability to recognize revenues will be harmed, which would harm our operating
results. In addition, if participant registration, which requires the
participants to come to our Web site to sign up for the course, does not proceed
as expected, our ability to recognize revenues will be delayed, which will also
harm our operating results. Participant registration depends in large part on
the promotional activities of our customers. If customers fail to take necessary
measures to require employee enrollment in courses or if they fail to promote
the course effectively to persons outside their organization, our ability to
recognize revenues, and therefore our operating results, could be harmed.
OUR FUTURE GROWTH DEPENDS ON SUCCESSFUL HIRING AND RETENTION, INCLUDING HIRING
AND RETENTION OF THIRD-PARTY TUTORS, AND WE MAY BE UNABLE TO HIRE AND RETAIN THE
SKILLED PERSONNEL WE NEED TO SUCCEED.
Our future growth depends on successful hiring and retention, and we may be
unable to hire and retain the skilled personnel we need to succeed. The growth
of our business and revenues will depend in large part upon our ability to
attract and retain sufficient numbers of highly skilled employees, particularly
course content developers, Web designers and technical and sales personnel.
Qualified personnel are in great demand throughout education and
Internet-related industries and we require personnel with both educational
course design experience as well as experience in Web design. The number of
potential candidates with experience in both these areas is limited. The demand
for qualified personnel is particularly acute in the Greater Los Angeles Area
market in which we compete for a majority of these personnel due to the large
number of Internet companies and the low unemployment rate in the region.
OUR BUSINESS WILL SUFFER IF E-LEARNING IS NOT WIDELY ACCEPTED.
The market for e-learning solutions is new and rapidly evolving. We expect that
we will engage in intensive marketing and sales efforts to educate prospective
customers about the benefits of our e-learning solutions. There are a number of
factors that could impact the acceptance of our e-learning solutions, which are
new and largely untested compared to more established educational methods,
including:
- Companies that have historically relied on, or invested in,
traditional educational methods may be reluctant or slow to adopt Web-based
e-learning solutions;
11
<PAGE>
- Many of our potential customers have allocated only a limited portion
of their education budgets to e-learning; and
- End users may not use online learning solutions effectively. If the
market for e-learning fails to develop or develops more slowly than we expect,
we will not achieve our growth and revenue targets and the value of our common
stock will likely decline.
THE VARIABILITY AND LENGTH OF OUR SALES CYCLE FOR OUR E-LEARNING SOLUTIONS MAY
MAKE OUR OPERATING RESULTS UNPREDICTABLE AND VOLATILE.
The period between our initial contact with a potential customer and the first
purchase of our solution by that customer typically ranges from three to nine
months, and in some cases has extended for close to two years. Because we rely
on large sales for a substantial portion of our revenues, these long sales
cycles can have a particularly significant effect on our financial performance
in any quarter. Factors that may contribute to the variability and length of our
sales cycle include:
- The time required to educate potential customers about the benefits of
our e-learning solutions;
- The time it takes our potential customers to assess the value of
online solutions compared to more traditional educational solutions;
- The time it takes our potential customers to evaluate competitive
online solutions;
- Our potential customers' internal budget and approval processes; and
- The extended periods most large corporations require to make
purchasing decisions.
As a result of our lengthy sales cycle, we have only a limited ability to
forecast the timing and size of specific sales. This, in turn, makes it more
difficult to predict quarterly financial performance.
THE E-LEARNING MARKET IS HIGHLY COMPETITIVE AND WE MAY NOT HAVE ADEQUATE
RESOURCES TO COMPETE EFFECTIVELY, ACQUIRE AND RETAIN CUSTOMERS AND ATTAIN FUTURE
GROWTH.
The e-learning market is evolving quickly and is subject to rapid technological
change, shifts in customer demands and evolving learning methodologies. The
recent shift in customer demand from CD-ROM delivered training to the use of the
Internet for providing interactive courses is one example of a technological
change that has affected the e-learning market. Future evolutions may include
such technology innovations as increased bandwidth connections to the home, the
adoption of a standard for receiving voice or video transmissions over the
Internet, and development of new online learning methodologies that achieve
better knowledge results for adult learners. Our failure to adapt to changes in
our industry could cause us to lose existing customers or fail to gain new
customers. Although the e-learning market is highly fragmented with no single
competitor accounting for a dominant market share, competition is intense. We
compete primarily with:
- Third-party suppliers of instructor-led education and learning;
- Internal education departments; and
- Other suppliers of technology-based learning solutions.
Due to the high market fragmentation, we do not often compete head-to-head with
any particular company. On occasion, our customers may evaluate our end-to-end
solution by comparison with point solutions offered by other e-learning
companies. These companies may include click2learn.com, Inc., NETg (a unit of
12
<PAGE>
Harcourt), SmartForce Corporation and SmartPlanet (a division of Ziff-Davis,
Inc.).
We may not provide solutions that compare favorably with traditional or new
instructor-led techniques or other technology-based learning methodologies. Our
competitors vary in size and in the scope and breadth of the courses and
services they offer. Several of our competitors have longer operating histories
and significantly greater financial, technical and marketing resources. In
addition, larger companies may enter the e-learning market through the
acquisition of our competitors. We anticipate that the lack of significant entry
barriers to the e-learning market will allow other competitors to enter the
market, increasing competition.
To succeed, we must continue to expand our course offerings, upgrade our
technology and distinguish our solution. We may not be able to do so
successfully. Any failure by us to anticipate or respond adequately to changes
in technology and customer preferences, or any significant delays in course
development or implementation, could impact our ability to capture market
share. As competition continues to intensify, we expect the e-learning
market to undergo significant price competition. We also expect to face
increasing price pressures from customers, as they demand more value for
their learning related expenditures. Increased competition or our inability to
compete successfully against current and future competitors could result in
reduced operating margins, as well as loss of market share and reduction in
brand recognition.
WE MUST DELIVER COURSES THAT MEET THE NEEDS OF OUR CUSTOMERS OR OUR BUSINESS
WILL NOT SUFFER.
To be competitive, we must develop and introduce on a timely basis new course
offerings, which meet the needs of companies seeking to use our e-learning
solutions. Furthermore, the quality of our learning solutions depends in large
part on our ability to frequently update our courses and develop new content as
the underlying subject matter changes. We create courses both by using subject
matter expertise provided by our customers, which we then incorporate into an
educational course format, and through material obtained from third-party
content developers. The quality of our courses depends on our receiving content
and cooperation from the following sources:
Customers, who provide us with specific subject matter expertise for
incorporation into many of our courses; and
Third-party content developers, who provide us with much of the
content for our catalog courses.
If we do not receive materials from the above sources in a timely manner, we may
not be able to develop or deliver specialized courses for our customers in the
time frame they are expecting. Even if we do receive necessary materials from
third parties, if our employees and consultants, upon whom we rely for
instructional and Web design expertise, fail to complete their work in a timely
manner, we will be unable to meet customer expectations. In the past, we have
experienced delays in obtaining access to our customers' expertise. Any
prolonged delays, even when caused by our customers, can damage our reputation
and lead to a failure to satisfy a customer's demands.
OUR PLANS TO EXPAND THE SCOPE OF OUR COURSES TO FIELDS OTHER THAN TEST
PREPARATION MAY DEPEND ON OUR ABILITY TO ATTRACT EXPERTS OR SPECIALISTS, AND IF
WE ARE UNABLE TO ATTRACT THE NECESSARY EXPERTISE, WE WILL NOT BE ABLE TO ENTER
NEW FIELDS.
Our strategy involves broadening the fields presently covered by our courses. In
particular, to date we have been primarily focused on courses in the test
preparation area, and we are currently planning to develop and introduce new
course offerings in corporate and professional training and other fields. These
13
<PAGE>
new course offerings may encompass areas in which we have little or no
experience or expertise. Therefore, our ability to expand our courses into these
areas may require us to locate and evaluate third-party experts or specialists
who would develop or assist us in developing the course content. If we are
unable to locate and evaluate these experts, we may fail to develop the courses
our customers demand or be unable to pursue new market opportunities. Any
failure of ours to expand our course offerings to new fields could constrain our
revenue growth and harm our future prospects.
TO REMAIN COMPETITIVE, WE MUST KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES IN OUR
INDUSTRY.
The e-learning market is characterized by rapidly changing technologies,
frequent new service introductions, short development cycles and evolving
standards. We must adapt to rapidly changing technologies by maintaining and
improving the performance features and reliability of our courses. We may
experience technical difficulties that could delay or prevent the successful
development, introduction or marketing of new courses and related services. For
instance, adding capabilities to deliver video over the Internet to our courses
may be desired by some customers and may nevertheless pose a serious technical
challenge and could have a negative impact on our ability to develop and deliver
courses on a profitable basis. In addition, any new enhancements to our courses
must meet the requirements of our current and prospective customers and
participants. We could incur substantial costs to modify our services or
infrastructure to adapt to rapid technological change.
WE ARE GROWING RAPIDLY AND IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, WE MAY
NOT BE ABLE TO TAKE ADVANTAGE OF MARKET OPPORTUNITIES, WHICH WOULD SEVERELY
IMPACT OUR ABILITY TO COMPETE.
Our recent rapid growth has placed, and future anticipated growth is likely to
continue to place, a considerable strain on our managerial resources. We plan
to continue to expand our sales and marketing, administration, content and
technology development and tutoring organizations. In order to manage this
growth effectively, we will need to improve our financial and managerial
controls, our reporting systems and procedures. In addition, we will need to
expand, train and manage our work force, which we anticipate will expand
significantly. If we fail to manage our growth effectively, we will not be able
to capitalize on attractive business opportunities and may fail to adequately
support our existing customer base.
IF WE DO NOT DEVELOP OUR INDIRECT SALES CHANNELS, WE WILL BE LESS LIKELY TO
INCREASE OUR REVENUES.
If we do not develop our indirect sales channels, we will be less likely to
increase our revenues. To date, more than 90% of our sales have been made
through direct sales efforts. We believe that we will need to diversify our
sales efforts if we are to be successful. If we do not develop indirect sales
channels, we may miss sales opportunities that might be available through these
other channels. For example, domestic and international resellers may be able to
reach new customers more quickly or more effectively than our direct sales
force. We are currently investing in personnel and marketing activities to
develop indirect sales channels including instructor-led training companies that
are seeking to provide an e-learning product offering, e-commerce Web sites that
sell Web-based learning, and other market participants such as software
producers and systems integrators who provide learning as an additional service
to their clients. Although we are currently investing to develop these indirect
sales channels, we may not succeed in establishing a channel that can
effectively market our e-learning solutions on a profitable basis. In addition,
our direct sales force may compete with these resellers, and we may not be able
to manage conflicts across our direct and indirect sales channels. Our focus on
increasing sales through our indirect channel may divert management resources
and attention from direct sales. Conflicts across sales channels could cause us
to encounter pricing pressures and lose revenue opportunities, which could harm
our business and cause our operating results to decline.
14
<PAGE>
IN ORDER TO ADDRESS THE EXPECTED GROWTH IN OUR BUSINESS WE MUST CONTINUE TO
IMPROVE THE CAPACITY OF OUR COMPUTER NETWORK; ANY FAILURE OF OUR NETWORK WOULD
DIRECTLY IMPACT OUR ABILITY TO DELIVER COURSES AND WOULD LIKELY LEAD TO
SIGNIFICANT LOSSES AND CUSTOMER DISSATISFACTION.
In order to address the expected growth in our business we must continue to
improve the capacity of our computer network. The continuing and uninterrupted
performance of our internal computer network and Internet course servers is
critical to our success. Any system failure that causes interruptions or delays
in our ability to make our courses accessible to customers could reduce customer
satisfaction and, if sustained or repeated, could reduce the attractiveness of
our courses and services and result in significant revenue losses. We are
particularly vulnerable to network failures during periods of rapid growth when
our roster of courses and participants can outpace our network capacity. The
continued viability of our business requires us to support multiple participants
concurrently and deliver fast response times with minimal network delays. We are
continuing to add system capacity, but we may not be able to adequately address
network capacity, especially during periods of rapid growth. Any failure to meet
these capacity requirements could lead to additional expenditures, lost business
opportunities and damage to our reputation and competitive position.
ANY FAILURE OF, OR CAPACITY CONSTRAINTS IN, THE SYSTEMS OF THIRD PARTIES ON
WHICH WE RELY COULD ADVERSELY AFFECT OUR BUSINESS.
Our communications hardware and some of our other computer hardware operations
are located at the facilities of Oasis, Inc. in Los Angeles, California.
Unexpected events such as natural disasters, power losses and vandalism could
damage our systems. Telecommunications failures, computer viruses, electronic
break-ins, earthquakes, fires, floods, other natural disasters or other similar
disruptive problems could adversely affect the operation of our systems. Despite
precautions we have taken, unanticipated problems affecting our systems in the
future could cause interruptions or delays in the delivery of our courses. The
failure of our telecommunications provider or Oasis, which together provide us
with our Internet connection, to provide sufficient and timely data
communications capacity and network infrastructure could cause service
interruptions or slower response times, and reduce customer demand for our
courses and services. Our insurance policies may not adequately compensate us
for any losses that may occur due to any damages or interruptions in our
systems. Accordingly, we could be required to make capital expenditures in the
event of damage. We do not currently have fully redundant systems or a formal
disaster recovery plan.
Our Web site must accommodate a high volume of traffic and deliver courses and
other information in a timely manner. Our Web site has experienced in the past,
and may experience in the future, slow response times for a variety of reasons.
We periodically experience unscheduled system downtime, which results in our Web
site being inaccessible to participants. If we experience extended downtime in
the future, customers and our course participants could lose confidence in our
services.
WE CURRENTLY INTEND TO EXPAND INTERNATIONALLY AND, AS A RESULT, WE COULD BECOME
SUBJECT TO NEW RISKS.
Our strategy includes international expansion of our business. To date, however,
we have not received revenues from customers outside of the United States. Our
current plans include possible expansion into the Germany and Switzerland during
fiscal 2000. In Germany and Switzerland, we could be affected by political and
monetary changes, including European unification and introduction of the Euro.
This international expansion will require significant management attention and
financial resources and could harm our financial performance by increasing our
15
<PAGE>
costs. We have limited experience in marketing, selling and distributing courses
internationally. We currently have one employees located outside of the United
States. We could become subject to additional risks as we expand
internationally, including:
- Difficulties in staffing and managing international operations;
- Our inability to develop content localized for international
jurisdictions;
Protectionist laws and business practices that favor local
competition;
- Multiple, conflicting and changing governmental laws and regulations;
- Slower adoption of e-learning solutions;
- Different learning styles;
- Longer sales and payment cycles;
- Greater difficulties in collecting accounts receivable;
- Fluctuations in currency exchange rates;
- Political and economic instability;
- Potentially adverse tax consequences;
- Little or no protection of our intellectual property rights in some
foreign countries, particularly less developed countries; and
Increases in tariffs, duties, price controls or other restrictions on
foreign currencies or trade barriers imposed by foreign countries.
If we encounter these factors in connection with our planned expansions in the
Germany and Switzerland, our revenues could fall below expectations, which would
harm our business and operating results. In this event, our stock price could
decline.
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS AND
OUR INTERNET DOMAIN NAME COULD LEAD TO UNAUTHORIZED USE OF OUR COURSES OR
RESTRICT OUR ABILITY TO MARKET OUR COURSES.
Our success depends, in part, on our ability to protect our proprietary rights
and technology. We rely on a combination of patents, copyrights, trademarks,
service marks, trade secret laws and employee and third-party nondisclosure
agreements to protect our proprietary rights. Despite our efforts to protect
these rights, unauthorized parties may attempt to duplicate or copy our courses
or our delivery technology or obtain and use information that we regard as
proprietary. In addition, the laws of many countries do not protect our
proprietary rights to as great an extent as do the laws of the United States. As
a consequence, effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which our courses and
services are made available.
We own the domain name eknowledgegroup.com. It is possible, however, that third
parties could acquire trademarks or domain names that are substantially similar
or conceptually similar to our trademarks or domain names. This could decrease
the value of our trademarks or domain names and could hurt our business. The
regulation of domain names in the United States and in foreign countries is
subject to change. The relationship between regulations governing domain names
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<PAGE>
and laws protecting trademarks and similar proprietary rights is unclear. As a
result, we may not acquire or maintain exclusive rights to our domain names in
the United States or in other countries in which we conduct business.
We may from time to time encounter disputes over rights and obligations
concerning intellectual property. We obtain the content for many of our courses
from our customers and it is possible that the use of this content may subject
us to the intellectual property claims of third parties. Although we generally
seek indemnification from our customers to protect us from these types of
claims, we may not be fully protected from extensive damage claims or claims for
injunctive relief. In addition, our customers may assert that some of the
courses we develop for our general catalog or under contract with other
customers may improperly use their proprietary content. Our involvement in any
litigation to resolve intellectual property ownership matters would require us
to incur substantial costs and divert management's attention and resources. In
addition, we cannot predict the effect of a failure to prevail in any litigation
of this kind.
PROVISIONS OF OUR CHARTER DOCUMENTS AND NEVADA LAW MAY HAVE ANTI-TAKEOVER
EFFECTS THAT COULD PREVENT A CHANGE IN OUR CONTROL, EVEN IF THIS WOULD BE
BENEFICIAL TO STOCKHOLDERS.
Provisions of our amended and restated certificate of incorporation, bylaws and
Nevada law could make it more difficult for a third party to acquire us, even if
doing so would be beneficial to our stockholders. These provisions include:
- A classified board of directors, in which our board is divided into
three classes with three-year terms with only one class elected at each annual
meeting of stockholders, which means that a holder of a majority of our common
stock will need two annual meetings of stockholders to gain control of the
board;
- A provision which prohibits our stockholders from acting by written
consent without a meeting;
- A provision which permits only the board of directors, the president
or the chairman to call special meetings of stockholders; and
- A provision that requires advance notice of items of business to be
brought before stockholders meetings. In addition, amending any of the above
provisions will require the vote of the holders of 66 2/3% of our outstanding
common stock.
DIRECTORS, EXECUTIVE OFFICERS AND THEIR AFFILIATED ENTITIES HOLD A SUBSTANTIAL
AMOUNT OF OUR STOCK AND ARE ABLE TO CONTROL MATTERS REQUIRING STOCKHOLDER
APPROVAL.
Our directors, executive officers and their affiliated entities own
approximately 77.5% of our outstanding capital stock. As a result, these
stockholders, acting together, are able to control all matters requiring
approval by the stockholders, including the election of all directors and
approval of significant corporate transactions.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
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ITEM 2. CHANGE IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On April 17, 2000, our shareholders approved a Plan of Reorganization by
which we acquired 100% of eKnowledge Group, Inc. (a private Nevada state
corporation engaged in providing supplemental, distance learning over the
internet), as a wholly-owned subsidiary, for the issuance of 15,155,556 new
investment shares of common stock; and we changed our corporate name to
eKnowledge Group, Inc.
The terms and conditions of the acquisition are that Richmond Services,
Inc. issued 15,155,556 shares (post reverse split) of the common stock of the
Company. These shares are not registered under the Securities Act of 1933, and
may not be resold unless the shares are registered under the Act or an exemption
from such registration is available. They are Restricted Securities subject to
the holding periods of Rule 144. These shares were issued to the shareholders of
eKnowledge Group, Inc. As a part of the proposed reorganization and acquisition,
the representatives of eKnowledge Group, Inc. with our cooperation will attempt
to consummate a private placement offering on behalf of the to-be-reorganized
Company, of up to 500,000 new investment shares of our common stock on a
post-reverse stock split basis, by which approximately $500,000 in funding will
be obtained.
Also elected were five Directors to serve until the next meeting of
shareholders: Gary S. Saunders, Scott Hildebrandt, Chris DeSantis, Mark S.
Zouvas and Wayne Saunders as Directors of the Company. The business experience
and biographies of all the proposed Directors are as follows:
GARY S. SAUNDERS is the President and Chief Executive Officer of
eKnowledge. Prior to starting eKnowledge, Mr. Saunders was the President of
Longacre/White Patent Education ( LWPE ), a company that offers Patent Bar
Review courses. He is widely credited with taking LWPE to the number one market
share position in less than a year in the face of stiff competition, a mature
market, and a company undergoing a name change. Mr. Saunders has produced an
Online Bar Exam Review Program for Practicing Law Institute, the Nation s
leading Continuing Legal Education provider. Mr. Saunders was also the Director
of Operations for the Western United States for West Publishing s West Bar
Review, Vice President of Bar Review Operations for American Professional
Testing Services, Inc., the parent company of Barpassers bar review, and on the
management team that oversaw the Sum & Substance product line, a line of
supplemental study aids for law students. Prior to APTS, Mr. Saunders was the
Director of GRE/GMAT/LSAT/MCAT Operations for the Western United States for
Bar/bri s Professional Testing Centers, then a market leader in the field. A
leading expert in both test preparation and sales and marketing to the student
market, Mr. Saunders has participated in the start up of two other companies. He
is a member of the State Bar of California, a graduate of Brigham Young
University and University of San Diego School of Law, and is one of the
principal lecturers in eKnowledge s initial Home LSAT program as well as the
eTestprep.com SAT program.
SCOTT HILDEBRANDT is the author and a principal lecturer in the Home LSAT
program and a coauthor and lecturer in the eTestprep SAT program. Mr.
Hildebrandt is the Senior Vice President of Academics for eKnowledge as well as
a partner in the Silicon Valley law firm of Hildebrandt and Welker. Mr.
Hildebrandt formerly created the curriculum for a San Francisco test preparation
company, Columbia Review Course. When he taught for Bar/bri s Professional
18
<PAGE>
Testing Centers he was the Western United States top rated lecturer. Mr.
Hildebrandt is also the author of a line of study aids for law students. Mr.
Hildebrandt is a member of the State Bar of California, a graduate of Brigham
Young University and its J. Reuben Clark Law School.
CHRIS DESANTIS is currently the Director of the Online Bar Review Program
at Practicing Law Institute. PLI, a non-profit organization founded in 1933, is
the nation s premier provider of continuing legal education programs. Prior to
PLI Mr. DeSantis was with The Washington Post s Kaplan Division working in both
the Test Preparation and Online Law School areas. As Director of Kaplan CPA
Review, Mr. DeSantis introduced the concept of Online Test Preparation for those
taking the CPA examination. He was on the management team that designed and
implemented the first Online Law School, Concord. Prior to Kaplan, Mr. DeSantis
was a Director for West Bar Review. A graduate of Swarthmore College and
California Western University School of Law, Mr. DeSantis is licensed to
practice law in California, New Jersey, New York, and Pennsylvania.
MARK ZOUVAS was previously our Sole Officer & Director. He was elected
August 12, 1999 and is nominated for re-election. Mr. Zouvas is 37 years old. He
was appointed to the Board of Directors of the Company on October 5, 1999. He
serves as the Company s Chief Financial Officer, a position he has held since
September, 1997. From September 1993 to September, 1997, Mr. Zouvas worked for
Vantage Capital Management Company in Chicago, Illinois. Mr. Zouvas has a BA
from the University of California at Berkeley (Accounting and Real Estate). As a
staff auditor with Price Waterhouse, he performed services for clients in the
banking and real estate industries. Mr. Zouvas has been involved in several
venture capital transactions over the past five years. He is a Licensed Real
Estate Broker and an Accountant in California. Mr. Zouvas is currently a
principal in Delphi Consulting Group that specializes in taking companies public
through reverse-merger acquisitions. Mr. Zouvas is also the Chief Financial
Officer of Power Exploration, Inc., a publicly traded oil exploration firm
located in Fort Worth, Texas.
WAYNE SAUNDERS began his career in Consumer and Commercial Finance, rising
to the level of President of Universal Finance. From Finance Saunders went to
Manufacturing in the Plumbing and Air Conditioning Industries leading Wright
Manufacturing to the market share leader position. Saunders has successfully
started many businesses including, Life Insurance, Manufacturing, Equipment
Rental, Commodities Investment, Oil Development, and Real Estate Development
companies. Saunders is credited with starting TuneMatic, the quick auto tune up
with a 6 month or 6,000 mile guarantee that he originated and sold to Andy
Granatelli. Tune-up Masters continues to lead the tune up industry. Saunders is
a graduate of St. Mary s with a BA in Business Administration.
ITEM 5. OTHER INFORMATION
(A) SECURITY OWNERSHIP OF MANAGEMENT AND 5% OWNERS.
TABLE A
OFFICERS AND DIRECTORS AND OWNERS OF 5% OR MORE
<TABLE>
<CAPTION>
<S> <C> <C>
Share %
------------------------------------------------------------
Name and Address of Beneficial Owner . Ownership
Gary S. Saunders. . . . . . . . . . . . 12,107,696 61.91
527 Redwing Circle
Corona CA 92882
------------------------------------------------------------
Scott Hildebrandt . . . . . . . . . . . 1,000,000 5.11
1520 West Sixth Street, Suite 101
Corona, CA 92880
------------------------------------------------------------
19
<PAGE>
------------------------------------------------------------
Chris DeSantis. . . . . . . . . . . . . 200,000 1.02
1520 West Sixth Street, Suite 101
Corona, CA 92880
------------------------------------------------------------
Mark S. Zouvas. . . . . . . . . . . . . 0 0.00
1520 West Sixth Street, Suite 101
Corona, CA 92880
------------------------------------------------------------
Wayne Saunders. . . . . . . . . . . . . 50,000 0.26
1520 West Sixth Street, Suite 101
Corona, CA 92880
------------------------------------------------------------
All Officers and Directors as a Group . 13,357,696 68.31
------------------------------------------------------------
Total Shares Issued and Outstanding (1) 19,555,556 100.00
------------------------------------------------------------
</TABLE>
(1) This is the total issued and outstanding. It is not the total of the
previous columns. Ownership of shares may be attributed to more than one person.
The total of the items shown therefore may be more or less than this total of
all shares issued and outstanding.
(B) NEW AUDITOR. We have engaged a new Independent Auditor, prospectively,
to review and comment on its next Annual Report, and to assist management in
preparing other current reports. There has been no dispute of any kind or sort
with any auditor on any subject. The new and prospective Auditing firm is
Merdiner, Fruchter, Rosen & Corso, 888 7th Avenue, New York, NY 10106,
212-757-8400. The decision to change accountants was recommended or approved by
our new Board of Directors, following the change of control of this Reporting
Corporation. The former accountant, Todd Chisholm, and Crouch, Bierwolf &
Chisholm, neither resigned or declined to stand for election. The former
accountant's report on the financial statements for either of the past two years
contained no adverse opinion or disclaimer of opinion, nor was modified as to
uncertainty, audit scope or accounting principles. During the two most recent
fiscal years and later interim period through the termination of the
client-auditor relationship, there were no disagreements of the type described
under Item 304(a)(1)(iv)(A) of Regulation S-B.
ITEM 6. REPORTS ON FORM 8-K
A Form 8-K was filed on April 17, 2000 to report the shareholder action
reported in Item 4 above.
EXHIBITS
Exhibit FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
00QF-2 Un-Audited Financial Statements for the three months and six months
ended June 30, 2000
--------------------------------------------------------------------------------
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-Q Report for the Quarter ended June 30, 2000, has been signed below by
the following person on behalf of the Registrant and in the capacity and on the
date indicated.
Dated: August 14, 2000
EKNOWLEDGE GROUP, INC.
formerly known as Richmond Services, Inc.
by
/s/Gary S. Saunders /s/Scott Hildebrandt /s/Chris DeSantis
Gary S. Saunders Scott Hildebrandt Chris DeSantis
/s/Mark S Souvas /s/Waybe Saunders
Mark S. Zouvas Wayne Saunders
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<PAGE>
--------------------------------------------------------------------------------
EXHIBIT 00QF-2
UN-AUDITED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
22
<PAGE>
EKNOWLEDGE GROUP, INC.
Balance Sheet
For the fiscal year ended December 31, 1999
And for the periods ended June 30, 1999 and 2000
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(unaudited) (unaudited) (audited)
June 30, 2000 June 30, 1999 Dec. 31, 1999
-----------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents 358,036 3,571 36
Accounts Receivable 30,084 0 0
Inventory 10,708 6,765 14,221
Prepaid Expenses 18,191 0 0
TOTAL CURRENT ASSETS 417,019 10,336 14,257
-------------- -------------- --------------
PROPERTY AND EQUIPMENT
Furniture and Equipment 27,853 2,057 2,057
Less: Accumulated Depreciation (1,907) (59) (411)
PROPERTY AND EQUIPMENT, NET 25,947 1,998 1,646
-------------- -------------- --------------
OTHER ASSETS
Deposits - Rent 10,606 0 0
Intangible Assets, net 15,146 15,146 15,988
TOTAL OTHER ASSETS 25,752 15,146 15,988
-------------- -------------- --------------
TOTAL ASSETS 468,717 27,480 31,891
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts Payable 3,611 0 12,022
Deposits Payable 1,000 2,400 2,400
Income Tax Payable 0 800 800
TOTAL CURRENT LIABILITIES 4,611 3,200 15,222
-------------- -------------- --------------
LONG-TERM LIABILITIES
Note Payable 7,500 0 9,500
TOTAL LONG-TERM LIABILITIES 7,500 0 9,500
-------------- -------------- --------------
TOTAL LIABILITIES 12,111 3,200 24,722
-------------- -------------- --------------
STOCKHOLDER'S EQUITY
Common Stock 19,556 25,000 25,000
Additional Paid-in Capital 1,409,996 1,618 1,618
Unearned Compensation (643,958) (2,338) 0
Accumulated Deficit (328,988) 0 (19,449)
TOTAL STOCKHOLDER'S EQUITY 456,606 24,280 7,169
-------------- -------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY 468,717 27,480 31,891
</TABLE>
23
<PAGE>
EKNOWLEDGE GROUP, INC.
Statement of Operations
For the fiscal year ended December 31, 1999
And for the periods ended June 30, 1999 and 2000
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(unaudited) (unaudited)
Six Months Ended Quarter Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
---------------
REVENUES
Sales $38,142 $0 $32,202 $ 0
Sales Returns and Allowances (1,773) 0 (1,773) 0
Other Income 19,293 0 19,293 0
Interest Income 3,769 0 3,769 0
Total Revenues 59,431 0 53,491 0
------------------ --------------- --------------- ---------------
COST OF SALES 76,294 0 76,294 0
GROSS PROFIT (16,863) 0 (22,803) 0
------------------ --------------- --------------- ---------------
GENERAL AND ADMINISTRATIVE EXPENSES
Wages Expense 201,321 1,026 174,611 1,026
Rent 9,358 0 7,058 0
Small Equipment 8,541 0 8,541 0
Legal and Professional Expense 4,300 0 4,300 0
Travel and Entertainment Expense 33,107 0 23,107 0
Investor Relations 12,503 0 7,003 0
Shipping Expense 2,916 0 2,794 0
Printing Expense 6,180 0 5,855 0
Advertising Expense 1,596 0 1,596 0
Depreciation & Amortization 2,338 59 2,161 59
Other Expense 10,516 453 8,016 453
TOTAL GENERAL AND ADMINISTRATIVE 355,711 1,538 245,042 1,538
------------------ --------------- --------------- ------------
Net Operating Income before taxes (309,539) (1,538) (267,845) (1,538)
------------------ --------------- --------------- ------------
Provisions for Income taxes 0 0 0 0
Net Income (Loss) $(309,539) $(1,538) $(267,845) $(1,538)
------------------ --------------- --------------- ------------
Weighted Average Common Shares 19,555,556 1,000,000 19,555,556 1,000,000
Loss Per Share $(0.0158) $(0.0015) $(0.0137) $(0.0015)
</TABLE>
24
<PAGE>
EKNOWLEDGE GROUP, INC.
Statement of Cash Flows
For the periods ended June 30, 1999 and 2000
<TABLE>
<CAPTION>
<S> <C> <C>
(unaudited) (unaudited)
June 30, 2000 June 30, 1999
----------------------------------------------------------------------------
CASH FLOWS FROM OPERATION ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . $ (309,539) $ (1,538)
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and Amortization. . . . . . . 2,338 59
Stock Compensation . . . . . . . . . . . . 58,542 0
Consulting Paid in Stock . . . . . . . . . 10,000 0
Accounts Receivable. . . . . . . . . . . . (30,084) 0
Inventory. . . . . . . . . . . . . . . . . 3,513 0
Prepaid Expenses . . . . . . . . . . . . . (18,191) 0
Deposits - Rent. . . . . . . . . . . . . . (10,606) 0
Accounts Payable . . . . . . . . . . . . . (8,411) 0
Deposits Payable . . . . . . . . . . . . . (1,400) 0
Income Tax Payable . . . . . . . . . . . . (800) 0
Total Adjustments. . . . . . . . . . . . . 4,901 59
--------------- ---------------
NET CASH USED IN OPERATIONS. . . . . . . . (304,638) (1,479)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Furniture and Equipment. . . . . . . . . . (25,796) 0
Cash acquired through acquisition. . . . . 500,000 0
NET CASH PROVIDED BY INVESTING . . . . . . 474,204 0
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Notes Payable. . . . . . . . . . . . . . . (2,000) 0
Additional Paid-in Capital . . . . . . . . 190,434 0
NET CASH PROVIDED BY FINANCING ACTIVITIES. 188,434 0
----------------------------------------------------------------------------
NET INCREASE IN CASH . . . . . . . . . . . 358,000 (1,479)
----------------------------------------------------------------------------
CASH BALANCE AT BEGINNING OF PERIOD. . . . 36 3,571
============================================================================
CASH BALANCE AT END OF PERIOD. . . . . . . $ 358,036 $ 2,092
</TABLE>
25
<PAGE>
EKNOWLEDGE GROUP, INC.
Statement of Stockholder's Equity
For the Period from Inception (June 1, 1999) to June 30, 2000
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN UNEARNED ACCUMULATED
DESCRIPTION SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
------------------------------------------------------------------------------------------------------------------------
BALANCE, 6/1/99 (INCEPTION) 0 $0 $0 $0 $0
Issuance of common stock, 6/1/99 1,000,000 1,000 25,618 0 0
Net (loss) at 12/31/99 0 0 0 0 (19,449)
Stock Split, 3/31/00 14,155,556 14,156 (14,156) 0 0
Acquisition of public shell corporation, 4/17/00 4,400,000 4,400 495,600 0 0
Shares transferred by shareholder for services 0 0 190,434 0 0
Shares transferred by shareholder for compensation 0 0 702,500 (643,958) 0
Shares transferred by shareholder for consulting 0 0 10,000 0 0
Net (loss) for period ended 6/30/00 0 0 0 0 (309,539)
----------------------------------------------------------------------------------------------------------------------
BALANCE, 6/30/00 1,000,000 $19,556 $1,409,996 $(643,958) $(328,988)
26
<PAGE>
EKNOWLEDGE GROUP, INC.
Statement of Stockholder's Equity
For the Period from Inception (June 1, 1999) to June 30, 2000
(continued)
<S> <C>
TOTAL STOCKHOLDERS'
DESCRIPTION EQUITY
-------------------------------------------------------------
BALANCE, 6/1/99 (INCEPTION) $0
Issuance of common stock, 6/1/99 26,618
Net (loss) at 12/31/99 (19,449)
Stock Split, 3/31/00 0
Acquisition of public shell corporation, 4/17/00 500,000
Shares transferred by shareholder for services 190,434
Shares transferred by shareholder for compensation 58,542
Shares transferred by shareholder for consulting 10,000
Net (loss) for period ended 6/30/00 (309,539)
BALANCE, 6/30/00 $456,606
</TABLE>
27
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
UNAUDITED FINANCIAL INFORMATION. In the opinion of the Company, the accompanying
unaudited consolidated financial statements contain all adjustments (consisting
of only normal recurring adjustments) necessary to present fairly its financial
position as of June 30, 2000 and the results of its operations and cash flows
for the six months ended June 30, 2000. These statements are condensed and
therefore do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. The
results of operations for the six months ended June 30, 2000 are not necessarily
indicative of the results to be expected for the full year.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid investments
purchased with original maturities of three months or less to be cash
equivalents.
CONCENTRATION OF CREDIT RISK. The Company places its cash in what is believes to
be credit-worthy financial institutions. However, cash balances may exceed FDIC
insured levels at various times during the year.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying value of cash and cash
equivalents, accounts receivable, accounts payable, and notes payable
approximates fair value due to the relatively short maturity of these
instruments.
INVENTORY. Inventory at June 30, 2000, consists of brochures, posters, banners,
t-shirts, handouts, audiotapes, and other related materials that are provided to
customers who purchase the products. Inventory is valued at the lower of cost
or market. Cost is determined using first-in-first-out (FIFO) method.
INTANGIBLE ASSETS. The Company s intangible assets include all intellectual
property including course names, mailing lists, contacts and licenses for Home
Education, Home LSAT, the World Wide Web address of Home-LSAT.com, eCorpEd.com,
eAfterSchool.com, eTestPrep.com, eLifeEd.com, eClassicNotes.com,
eCollegeNotes.com. A license from the Law School Admissions Council, Inc. has
been obtained for the use of prior testing questions. Management estimates the
useful life of these assets to be approximately 10 years. Amortization expense
for the period ended June 30, 2000, was $842.
MANAGEMENT ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE AND EXPENSE RECOGNITION. Revenues are recognized from the sale of course
publications as products are shipped. Other revenues are recognized as earned.
Cost of sales includes the cost of production and development of related course
materials. Such costs include professional consultation, printing, copying, and
related promotional materials and costs.
PROPERTY AND EQUIPMENT. Property and equipment are recorded at cost.
Depreciation and amortization expense for the year is calculated by the
straight-line method over their estimated useful lives.
ADVERTISING. The Company expenses advertising costs as they are incurred.
Advertising expenses for the six months ending June 30, 2000, were $1,596.
LONG-LIVED ASSETS. Long-lived assets and certain identifiable intangibles to be
held and used are reviewed for impairment whenever events or changes in
28
<PAGE>
circumstances indicate that the related carrying amount may not be recoverable.
When required, impairment losses on assets to be held and used are recognized
based on the fair value of the assets and long-lived assets to be disposed of
are reported at the lower of carrying amount or fair value less cost to sell.
COMPREHENSIVE INCOME. SFAS No. 130, Reporting Comprehensive Income establishes
standards for the reporting and display of comprehensive income and its
components in the financial statements. As of June 30, 2000 and 1999, the
Company has no items that represent comprehensive income and, therefore, has not
included a schedule of comprehensive income in the accompanying consolidated
financial statements.
INCOME TAXES. Income taxes are provided for based on the liability method of
accounting pursuant to SFAS No. 109, Accounting for Income Taxes . Deferred
income taxes, if any, are recorded to reflect the tax consequences on future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end.
EARNINGS PER SHARE. The Company calculates earnings per share in accordance with
SFAS No. 128, Earnings Per Share , which requires presentation of basic
earnings per share ( BEPS ) and diluted earnings per share ( DEPS ). The
computation of BEPS is computed by dividing income available to common
stockholders by the weighted average number of outstanding during the period.
DEPS gives effect to all dilutive potential common shares during the period.
The computation of DEPS does not assume conversion, exercise or contingent
exercise of securities that would have an antidilutive effect on earnings. As
of June 30, 2000, the Company has no securities that would affect loss per share
if they were to be dilutive.
CORPORATE REORGANIZATION AND MERGER. On April 17, 2000 Richmond, a public shell,
-----------------------------------
and the Company executed an Acquisition Agreement (the Agreement ) that
provided that Richmond would acquire all of the issued and outstanding common
stock of the Company. In connection with the transaction, the shareholders of
the Company received 15,155,556 shares of Richmond common stock for its
15,155,556 shares, which represents 100% of the Company. As a result of this
transaction the former shareholders of the Company acquired or exercised control
over a majority of the shares of Richmond. Accordingly, the transaction has
been treated for accounting purposes as a recapitalization of the Company and,
therefore, these financial statements represent a continuation of the accounting
acquirer, the Company, not Richmond, the legal acquirer. In accounting for this
transaction:
i) The Company is deemed to be the purchaser and surviving company for
accounting purposes. Accordingly, its net assets are included in the balance
sheet at their historical book values.
ii) Control of the net assets and business of Richmond was acquired
effective April 17, 2000 (the Effective Date ). This transaction has been
accounted for as a purchase of the assets and liabilities of Richmond by the
Company. At the effective date Richmond had some liabilities in the form of
accounts payable. These were paid prior to the effective date under the terms
of the transaction agreement.
iii) The consolidated statements of operations and cash flows include the
Company s results of operations and cash flows from June 1, 1999 (date of
inception) and Richmond s results of operations from the Effective Date.
CONVERTIBLE PROMISSORY NOTES. The Company entered into a convertible promissory
note agreement with an individual for $20,000 for consulting services. The note
bears interest at 5 percent per annum. Principle and any accrued interest shall
be due and payable upon the closing of a subsequent equity financing undertaken
for the purpose of raising proceeds, or October 12, 2001, if no subsequent
29
<PAGE>
financing takes place. The provisions for conversion are available upon the
closing of a subsequent financing prior to October 12, 2001, and provide that
the holder may choose to have the balance due of this note plus all accrued and
unpaid interest thereon automatically converted into shares of the Company s
stock at a price of $1.50 per share. As of December 31, 1999, the Company had
incurred expenses on the contract in the amount of $10,000 and paid $500.
During the six months ending June 30, 2000, the Company paid $2,000 towards the
note. Additionally, during the same period, the Company incurred expenses for
the contract balance of $10,000. On March 31, 2000, the holder of the note
accepted 6,667 shares of common stock as payment of the additional $10,000.
These shares were transferred by the majority shareholder of the Company.
INCOME TAXES. The provision for income taxes for the six months ended June 30,
-------------
2000, consist of the following:
Current
Federal $ 0
State 800
---------
Total Current 800
=========
Deferred Income Taxes 91,952
Valuation Allowance (91,952)
----------
Total Deferred 0
--------
Provision for Income Taxes $ 800
==========
The income tax provision differs from the expense that would result from
applying federal statutory rates to income before taxes due to the valuation
allowance described below. Provision for deferred income taxes of $91,952 have
been made for temporary differences existing in recognition of a net operating
loss being carried forward for tax and financial statement purposes. The Company
has established a valuation allowance for the deferred tax asset related to the
net operating loss carryforward of $91,952 due to the start-up nature of the
Company. The Company has total net loss carry-forwards of approximately $270,447
through the six months ending June 30, 2000. The net operating losses expire as
follows:
Amount Expiration Year
------ ----------------
$250,998 2020
19,449 2019
----------
Total $270,447
========
SHAREHOLDER EQUITY. On April 17, 2000 Richmond issued 15,155,556 shares of stock
for all the stock - 15,155,556 shares - of the Company. Before the transaction,
there were 4,400,000 shares of Richmond outstanding. After the transaction the
ownership of Richmond is as follows:
Shares Percent
------- -------
Original shareholders 4,400,000 22.5
(including public owners)
Former owners of the Company 15,155,556 77.5
---------- ----
Total 19,555,556 100
========== ====
Because the former owners of the Company end up with control of Richmond, the
transaction would normally be considered a purchase by the Company. However,
30
<PAGE>
since Richmond is not a business, the transaction is not a business combination.
Instead, the transaction is accounted for as a recapitalization of the Company
and the issuance of stock by the Company (represented by the outstanding shares
of Richmond) for the assets and liabilities of Richmond. The value of the net
assets of Richmond is the same as their historical book value. As part of this
recapitalization, Richmond shareholders agreed to pay all liabilities existing
prior to the date of the transaction. Richmond s liabilities prior to the
transaction were immaterial.
For the recapitalization, the Company s equity accounts are restated to reflect
the 4,400,000 shares of the Original shareholders of Richmond and the 15,155,556
shares issued based on the ratio of the exchange of 15,155,556 Richmond shares
for 15,155,556 of the Company shares. Currently, the Company is authorized to
issue up to 50,000,000 shares of Common Stock with a par value of $.001 per
share.
STOCK COMPENSATION. As part of their employment agreements, several employees
-------------------
were offered stock certificates of common stock as part of their compensation.
--
The stock certificates were transferred by the Company s sole shareholder at
that time. These stock offerings are deemed a benefit to the corporation and as
such, compensation is recognized based on the value of the stock. The stock
vests over the course of twelve months. As a result, approximately $703,000 was
reported as an increase to Additional Paid in Capital and approximately $644,000
was reported as a charge to Unearned Compensation. The resulting effect was a
net compensation expense of approximately $58,500, reported during the quarter
ending June 30, 2000.
31
<PAGE>
