UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUERS Under Section 12(b) or (g) of the
Securities Exchange Act of 1934
EDUVERSE.COM
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(Name of Small Business Issuer in its charter)
Nevada 88-0277072
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1135 Terminal Way
Suite 209
Reno, Nevada 89502-2168
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (775) 332-3325
Securities to be registered under Section 12(b) of the Act:
None Not Applicable
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Title of each class to be so registered Name of each exchange on which
each class is to be registered
Securities to be registered under Section 12(g) of the Act:
Common Stock, $0.001 par value
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(Title of Class)
Not Applicable
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(Title of Class)
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TABLE OF CONTENTS
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Page
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NOTE REGARDING FORWARD LOOKING STATEMENTS.........................................................................2
ITEM 1 DESCRIPTION OF BUSINESS.............................................................................2
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............12
ITEM 3 DESCRIPTION OF PROPERTY............................................................................25
ITEM 4 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....................................25
ITEM 5 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.......................................26
ITEM 6 EXECUTIVE COMPENSATION.............................................................................28
ITEM 7 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................................................30
ITEM 8 DESCRIPTION OF SECURITIES..........................................................................30
PART II 32
ITEM 1 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS............................................................................................32
ITEM 2 LEGAL PROCEEDINGS..................................................................................32
ITEM 3 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS......................................................32
ITEM 4 RECENT SALES OF UNREGISTERED SECURITIES............................................................33
ITEM 5 INDEMNIFICATION OF DIRECTORS AND OFFICERS..........................................................35
PART III 59
ITEM 1 INDEX TO EXHIBITS..................................................................................59
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ITEM 1 DESCRIPTION OF BUSINESS
Note Regarding Forward Looking Statements
Except for statements of historical fact, certain information contained herein
constitutes "forward-looking statements," including without limitation
statements containing the words "believes," "anticipates," "intends," "expects"
and words of similar import, as well as all projections of future results. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results or achievements of the Company
to be materially different from any future results or achievements of the
Company expressed or implied by such forward-looking statements. Such factors
include, but are not limited to the following: the Company's limited operating
history, competition, management of growth and integration, risks of
technological change, the Company's dependence on key personnel, marketing
relationships and third-party suppliers, the Company's ability to protect its
intellectual property rights and the other risks and uncertainties described
under "Description of Business - Risk Factors" in this Form 10-SB. Certain of
the forward looking statements contained in this registration statement are
identified with cross references to this section and/or to specific risks
identified under "Description of Business - Risk Factors."
Overview
The Company develops and markets software programs under several product
names to assist non-English speaking students in learning spoken English. In
addition to traditional "boxed" software available in retail stores, the Company
has been delivering its software products via the Internet since the launch of
its Internet-enabled product line in December 1998.
The Company was incorporated in Nevada in 1991 under the name Ward's Futura
Automotive, Ltd. The Company subsequently changed its name to Perfect Future,
Ltd. and amended its articles of incorporation to authorize 5,000,000 shares of
preferred stock, $0.001 par value. On December 22, 1997, the Company effected a
2.5:1 split of its issued and outstanding common stock. On June 16, 1998 the
Company changed its name to EDUVERSE Accelerated Learning Systems, Inc. and on
May 19, 1999, the Company changed its name to eduverse.com. The Company did not
engage in any business operations from its inception until May 1998, when it
acquired ESL PRO Systems, Inc., a Nevada corporation ("ESL PRO") and M&M
Information and Marketing Services, Inc., a Nevada corporation ("M&M").
On May 28, 1998, the Company purchased all the issued and outstanding
capital stock of ESL PRO in exchange for 2,000,000 shares of the Company's
common stock. ESL PRO presently owns a software license for some of the
Company's current English teaching systems incorporated in the Company's ENGLISH
PRO Version 6.2 software. On May 29, 1998, the Company purchased all the issued
and outstanding capital stock of M&M in exchange for 7,000,000 shares of the
Company's common stock. M&M presently owns to rights to certain technology
designs and methods for designing and delivering advanced learning systems via
the Internet. As a result of these acquisitions, the former shareholders of ESL
and M&M, as a group, owned more than 50% of the issued and outstanding voting
shares of the Company. Consequently, this business combination has been
accounted for as a reverse acquisition whereby ESL and M&M are deemed to have
been combined, on a continuity of interests basis, since their inception on May
5, 1998 and to have acquired the Company. Accordingly, the financial statements
of the Company reflect the historical accounts of ESL and M&M since their
inception at their historic net book values, and the accounts of the Company,
comprising nominal net assets, at their estimated fair value at the time of the
transaction
On July 20, 1998, the Company formed EDUVERSE Accelerated Learning Systems
(Canada), Inc., a British Columbia, Canada corporation ("EDUVERSE Canada").
EDUVERSE Canada operates the Company's development and marketing operations.
The Company's common stock currently trades on the NASD
Over-The-Counter-Market Bulletin Board ("OTCBB") under the symbol "EDUV." The
Company's registered office is located at Suite 209, 1135 Terminal Way, Reno,
Nevada 89502-2168 and its phone number at that address is (775) 332-3325.
EDUVERSE Canada's principal executive offices are located at 2nd Floor, 1235
West Pender Street, Vancouver, British Columbia V6E 2V1 and its phone number at
that address is (604) 623-4864.
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Industry Background
The market for educational software is relatively small, but growing. It is
often described in two market segments: consumers and educational institutions.
The Company competes in both of these segments. The factors driving the growth
in the market include increasing penetration of personal computers in homes,
expanding distribution channels for educational software, growth in consumer and
educational publications featuring educational software and increased awareness
of the potential of multimedia as an effective educational tool.
The distribution channels for consumer educational software products have
expanded significantly in recent years. Traditionally these products were sold
through specialty software stores. Today, these products are increasingly sold
through these and other distribution channels, including the Internet, computer
superstores, consumer electronic stores, mass merchants, office supply, discount
warehouse stores and bookstores. While the number of distribution outlets has
increased, competition for retail shelf space and customer awareness has also
increased due to growth in the numbers of products and publishers competing for
that shelf space and awareness. The Company believes that, with proliferation of
software titles and the corresponding decrease in the availability of retail
shelf space, it becomes increasingly important to find alternative methods of
offering educational software products to the public such as via the Internet or
in educational settings.
The market for educational software in educational institutions is also
expanding and changing rapidly. School sales of educational software are being
driven by growth in penetration of computers into schools, upgrades of the
installed base to new multimedia computers, increases in the number of teachers
trained to incorporate technology-based products into their curriculum and
changes in governmental funding authorizations to encourage the use of
technology-based instructional materials. In addition, educational institutions
are increasingly requiring students to use particular software applications as
part of their coursework requirements. The Company believes that distributors
and vendors marketing to the educational software market in schools choose
products on the basis of their educational content and the reputation of the
publisher and its products among teachers and other educational professionals.
The educational software industry has been characterized over the last few
years by a high degree of consolidation, which favors companies with greater
resources than the Company. This consolidation has provided certain of the
Company's competitors with increased financial resources, marketing power and
distribution capabilities. Larger companies that offer a wide range of products
also may find it easier to gain access to shelf space than smaller companies,
such as the Company, and they are more able to proliferate product offerings,
including bundles and suites for a single low price. This strategy is used to
dominate shelf space and may tend to reduce shelf lives and prices for
individual products. Additional consolidation may tend to result in increased
price competition for educational software products. In addition, in some cases,
these competitors have invested heavily in marketing and delivering their
products over the Internet.
eduverse.com
The Company develops and markets software programs under several product
names to assist non-English speaking students in learning spoken English. In
addition to traditional "boxed" software available in retail stores, the Company
has been delivering its software products via the Internet since the launch of
its Internet-enabled product line in December 1998.
The Company's core software products feature phonetic-based English
language tutorial systems, which use multimedia presentations to help
non-English speaking students learn English language pronunciation. The Company
produces a shrink-wrapped version of its software called ENGLISH PRO, which is
sold in retail stores at a suggested retail price of $29.99, an Internet-enabled
version of its software called ENGLISH PRO Web Edition, which is available for
free from the Company's web portal at http://www.freeENGLISH.com, and a
network-enabled version of its software called ENGLISH PRO Network Edition,
which is designed to be installed on private computer networks. Revenues are
currently generated only from the sale of CD-ROM software packages. For the year
ended December 31, 1998, 36% of the Company's software sales were derived from
one customer. The Company anticipates generating revenues from its ENGLISH PRO
Web Edition and ENGLISH PRO Network Edition products by charging fees for
advertising that is placed within the ENGLISH PRO Web Edition and ENGLISH PRO
Network Edition software. To date, the Company has not generated any revenues
from the ENGLISH PRO Web
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Edition and ENGLISH PRO Network Edition products. All of the Company's products
operate only on Windows computers.
The Company distributes ENGLISH PRO in retail computer stores and
bookstores. The Company distributes ENGLISH PRO Web Edition through its
freeENGLISH.com Internet Web site and through Internet Service Providers
("ISPs") and Web portals. The Company plans to distribute its ENGLISH PRO
Network Edition through corporate intranets and computer networks operated by
educational institutions. Currently, the Company has an agreement with the
Ministry of University Affairs in Thailand to offer its software products to
university students in Thailand via the University Network in Thailand (UniNet),
a proprietary computer network operated by the Ministry. The Company estimates
that upon implementation of ENGLISH PRO Network Edition on the UniNet,
approximately one million students in Thailand will have access to the Company's
English language teaching software.
The Company intends to further promote the sale and use of its educational
software products by:
o continuing to distribute its software products through traditional
retail channels;
o making its educational software products available free to Internet
users; and
o entering into agreements with foreign educational institutions and
other operators of private computer environments to distribute its
products on their proprietary networks.
Distribution Through Traditional Retail Channels. The Company currently
distributes its shrink-wrapped CD-ROM product, ENGLISH PRO, through traditional
retail outlets, such as retail computer stores and bookstores, through the
efforts of its in-house sales and marketing department and traditional
distributors. The Company's ENGLISH PRO product line is marketed in the United
States and Canada on an non-exclusive basis by Tri Synergy, Inc. and is also
distributed in other countries by a number of non-exclusive distributors. The
Company currently distributes its CD-ROM version of ENGLISH PRO through 500
retail outlets in North America and anticipates that over 1,000 retail outlets
in North America will carry its products before the end of 1999.
Free Distribution over the Internet. Since December 1998, the Company has
distributed its Internet-enabled software ENGLISH PRO Web Edition free of charge
from its Web portal at http://www.freeENGLISH.com. The Company plans to generate
revenues on this product by charging fees for advertising that is placed within
the ENGLISH PRO Web Edition software. In order to drive traffic to its
freeENGLISH.com Internet Web site, the Company has established a freeENGLISH
affiliate program pursuant to which ISPs, Web portals and other online sites
have agreed to place a link to the Company's freeENGLISH.com Internet Web site
on their Web sites in exchange for receiving a portion of the advertising
revenues generated. Typically, an affiliate program participant is entitled to
receive 10% - 15% of all revenue generated in this manner. In addition, under
the program agreements, the affiliate program participants are entitled to share
revenues generated from the sale of goods and services to the affiliate program
participants' users by third-party Web sites with which the Company has signed
an affiliate program agreement.
As of August 24. 1999, the Company has affiliate program agreements with
eight ISPs and five Web portals:
Internet Service Providers / Location
-------------------------------------
Internet KCS -- Thailand
Freeinet -- United States
X-Steam -- United Kingdom
eHola -- Columbia, United States, Mexico, Argentina, Brazil, Chile,
Venezuela, Peru, Ecuador, Guatemala, El Salvador, Costa Rica
and Panama.
Xin Net Corp. -- China
MDI Corp. -- Canada, Hong Kong, China.
Infinet Group -- Canada
MIMOS BERHAD -- Malaysia
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Web Portals / Location
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African News Online -- United States
CompuCollege School of Business -- Canada
CIBT -- China
2dobiz.com -- Canada, China, United States, Hong Kong, Philippines,
Mexico, Japan, Switzerland.
Utusan Multimedia Sdn. Bhd. -- Malaysia
Where a freeENGLISH affiliate program participant targets a foreign market in
which the Company has not previously distributed its products, the Company
generally works with the affiliate program participant to translate the required
freeENGLISH.com Web pages and ENGLISH PRO Web Edition software program
information. Currently, the Company's freeENGLISH.com Web Site and software is
available in English, Chinese (simplified Chinese), Spanish and Portuguese. In
addition, to date, each of the ISPs with whom the Company has signed an
affiliate program agreement, has agreed to distribute ENGLISH PRO Web Edition on
any CD-ROM that it distributes to install the necessary software to browse the
Internet and connect to its services.
Foreign Educational Institutions and Private Online Networks. In addition
to retail software sales and distribution over the Internet, the Company plans
to provide its ENGLISH PRO Network Edition software to educational and other
institutions that operate private computer networks and collect advertising fees
for advertisements placed within the software. ENGLISH PRO Network Edition is a
multi-user version of ENGLISH PRO Web Edition. The Company's wholly-owned
subsidiary, EDUVERSE Canada, recently signed an agreement with the Ministry of
University Affairs in Thailand to provide ENGLISH PRO Network Edition to 24
Universities and 37 Information Technology campuses (a combined total of 70,000
workstations) on the University Network (UniNet) in Thailand. Under terms of the
agreement, the Company has agreed to provide installation, support and upgrades
necessary to provide ENGLISH PRO Network Edition to approximately one million
university students using the UniNet. Installation is comprised of the Company
placing approximately six ENGLISH PRO Network Edition servers (running Windows
NT, Microsoft SQL Server, Microsoft Internet Server and ENGLISH PRO Network
Edition server software) on the UniNet. These servers control the data flow
between the workstations and the Company's central server located in Canada. The
estimated cost for hardware, software and travel for installation of the
Company's servers on the UniNet is approximately $35,000. In addition, the
Company has agreed to provide support services comprised of a Web-based
installation and management system which controls the installation of ENGLISH
PRO Network Edition on the workstations and manages the connection to the
ENGLISH PRO Network Edition servers. The Company expects there will be no
significant additional costs incurred by the Company for providing this support
as the web-based installation and management system is a key component of the
ENGLISH PRO Network Edition software. Upgrades are provided immediately upon
their release by the Company, via the ENGLISH PRO Network Edition servers and
workstation software and the web-based installation and management system. Under
the terms of the agreement, the Ministry will receive a 15% commission on gross
revenues generated from advertising displayed on the Company's software that is
accessed through its private computer network. The Company is currently
installing the software and servers and expects to complete the installation of
ENGLISH PRO Network Edition on the UniNet network before November 30, 1999.
Additionally, EDUVERSE Canada has signed a Memorandum of Understanding to
jointly develop and deploy additional educational programs for the students of
Thailand.
The Company is currently meeting with other educational ministries in
Malaysia, Taiwan, and China and with private corporations in Asia which require
English language training. The Company's goal is to enter into similar
agreements with one of these ministries and with one or more private
corporations prior to December 31, 1999.
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Products
The Company's current product line consists of seven software titles:
o ENGLISH PRO Version 6.2 (single user)
o ENGLISH PRO Version 6.2 (multi-user)
o ENGLISH PRO Web Edition
o ENGLISH PRO Network Edition
o English as a Second/Foreign Language - Learn2.com, Inc.
o ENGLISH PRO Version 7.0 (single user) (under development)
o ENGLISH PRO Version 7.0 (multi-user) (under development)
ENGLISH PRO Version 6.2 (single user). ENGLISH PRO Version 6.2 (single
user) teaches English using phonics and uses an advanced instructional method
called Mental Mapping, a process which involves matching the sounds of the
English language to keys on an onscreen phonetic keyboard, thereby reinforcing
them in the student's mind. This version of ENGLISH PRO consists of over 2,000
commonly used words, a Picture Dictionary with over 1,700 definitions, an
animated pronunciation simulator, 260 lessons and 130 hours of private
instruction. The suggested retail price is $29.99.
ENGLISH PRO Version 6.2 (multi-user). This multi-user version of ENGLISH
PRO is designed for use in school, government and corporate computer
environments that operate a local area network (LAN). This multi-user product
has additional features required for academic, corporate and government use,
including the ability to reprint workbooks, a teacher's manual and course
curriculum outline. The multi-user product also comes with a student login and
monitoring system known as the Student Progress Monitor (SPM). Through the SPM
program, teachers and administrators can customize each student's course flow,
access individual achievement levels and monitor a student's progress through
the system. The suggested retail price of the multi-user version is $199 per
workstation.
ENGLISH PRO Web Edition. ENGLISH PRO Web Edition also teaches English using
phonics, however it incorporates proprietary onscreen phonetic keyboard, new
lesson content, dictionary definitions, studio recorded sounds, a visual
pronunciation assistant and contains embedded banner advertising, for which the
Company charges a fee to advertisers. ENGLISH PRO Web Edition uses the latest in
development technologies and teaching methodologies and was designed in
conjunction with Dr. E. Wyn Roberts, a professor of linguistics and a graduate
of Cambridge University, who is the head of the Company's Educational Advisory
Board. The product teaches English phonetically and in future releases is
anticipated to include whole language instruction, including conversational
English. ENGLISH PRO Web Edition is an Internet-enabled software program which
can be installed free from the Internet and which allows users to download
lesson materials from the Internet. In addition, ENGLISH PRO Web Edition
contains a feature called "Check for Updates," which reduces support problems
normally found in updating older versions of software by allowing users to
download program updates on demand.
ENGLISH PRO Network Edition. This multi-user version of ENGLISH PRO Web
Edition is designed for use in school, government and corporate computer
environments that operate local or wide area networks (LAN or WAN) and contains
embedded banner advertising, for which the Company charges a fee to advertisers.
This multi-user product has additional features required for multi-user login
from personal computer workstations on the network and includes special server
software that resides on the Company's computers placed on the LAN or WAN. It
takes advantage of emerging network technologies, allowing for a central
location containing all course curriculum and student records. Enhanced
reporting features for teachers, along with a course management system in
ENGLISH PRO Network Edition, allows flexibility in its implementation and
integration into existing curriculum. The Company is currently installing this
version of ENGLISH PRO within the Thailand Ministry of University Affairs'
private computer network.
English as a Second/Foreign Language. This Internet-deliverable English
tutorial program was developed in partnership with Learn2.com, Inc. using
Learn2.com's proprietary development tools. The course is available through
Learn2.com's Learning University at www.learninguniversity.com and its
resellers. Students subscribe to the course online and pay for it with their
credit cards. The Company's English as a Second/Foreign Language program is sold
at www.learninguniversity.com based on 3 pricing levels: $19.95 per month of
use, $39.95 per six months of use and $59.95 per twelve months of use. Every
three months, the Company is entitled to receive 30% of the revenue
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generated from the sale of its program by the Learn2.coms and its resellers. To
date, the Company has not received any funds from Learn2.com and the Company
does not expect that significant revenues will be generated from this program.
ENGLISH PRO Version 7.0 (single user). This product is ENGLISH PRO Web
Edition without embedded advertising that can be used on a personal computer.
The Company expects that this product will be released on CD-ROM by November 1,
1999 and will have a retail price of $29.99.
ENGLISH PRO Version 7.0 (multi-user). This product is ENGLISH PRO Network
Edition without embedded advertising and is designed for use in environments
that operate on local or wide area networks. The Company expects that this
product will be released on CD-ROM by the second quarter of 2000.
Markets
The Company has identified 30 countries that it believes have the largest
market potential for its products. The major geographical regions these
countries fall in to are: Asia Pacific, Latin America, North America, Western
Europe and the Middle East. Within these geographic regions, the Company has
identified the following market segments for its English language tutorial
products.
Foreign Educational Institutions. The Company intends to offer its ENGLISH
PRO Network Edition software free to educational institutions that allow
advertisements to be displayed to their students. For educational institutions
that do not allow advertisements, the Company plans to make ENGLISH PRO Network
Edition available under the product name ENGLISH PRO Version 7.0 (multi-user)
during the second quarter of 2000. The Company currently has an affiliate
program agreement with the Ministry of University Affairs in Thailand to
distribute its English language teaching software on its private computer
network. The Company is presenting the opportunity to use ENGLISH PRO Network
Edition on school networks to ministries of education in Malaysia, Taiwan and
China. Sales agents acting on behalf of the Company are presenting this same
opportunity to ministries in Hong Kong, India, Pakistan, Sri Lanka, South Korea
and Colombia. At present, the Company does not have any advertising agreements
for its installation in Thailand.
Internet Service Providers and Web Portals. In each country where the
Company has active English education initiatives, it intends to pursue
agreements with ISPs and Web portals to be affiliate program participants. In
Thailand, for example, the Company has entered into a freeENGLISH affiliate
program agreement with one of that country's largest ISPs, Internet Knowledge
Service Center Co., Ltd. ("IKSC"), allowing IKSC to hyperlink from their Web
site at www.ksc.net.th to www.freeENGLISH.com and to provide ENGLISH PRO Web
Edition on CD-ROMs they provide to their subscribers. As of August 24, 1999, the
Company currently has affiliate program agreements with eight ISPs and five Web
portals and expects to sign additional affiliate program agreements before the
end of 1999.
Personal Computer Manufacturers. The Company intends to negotiate
agreements with personal computer manufacturers in Taiwan, Singapore and China
for the pre-installation of ENGLISH PRO Web Edition software on their computers.
The Company believes this presents a unique opportunity for personal computer
manufacturers in Asia to deliver a quality educational product which addresses a
significant need of a large portion of their customers. In exchange for the
Company's software, the Company would share with the PC computer manufacturer
revenue generated from advertising imbedded within the software. The Company
anticipates signing an agreement with one personal computer manufacturer before
the end of 1999. In an instance where the personal computer manufacturer does
not want to provide ENGLISH PRO Web Edition they have an opportunity to provide
ENGLISH PRO Version 7.0 (single user) and pay the Company a nominal per-copy fee
in the range of $0.25 to $1.00. To date, no such agreements have been entered
into by the Company.
Retail Marketplace. The Company has addressed the retail marketplace
through agreements with non-exclusive distributors in North America, Australia,
Hong Kong and Macao. At present the Company does not advertise its products in
any trade publications or journals. The Company intends to continue to deliver
the ENGLISH PRO CD-ROM versions through these channels. Additionally, in markets
where Internet access is cost-prohibitive or weak, the Company is seeking
exclusive and non-exclusive distributors for its products.
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Product Development
The Company develops all of its products and Internet Web sites internally.
The Company's development team includes software programmers, Web site
developers, English course material developers and graphic artists.
Currently the Company is developing additional features and course
materials for ENGLISH PRO Web Edition, including whole language instruction;
interactive lesson breaks that provide information about an advertiser's
products and services; interactive chat services via the Internet and via the
local or wide area network; message boards via the Internet and via the local or
wide area network; user-generated design of the user interface; and support for
additional advertising models. The course materials include lessons specific to
"going shopping," "going to a restaurant," "meeting a friend," "having a job
interview" and other practical situations. Also in development are tools
providing better controls for targeting advertisements and reporting statistical
data to advertisers.
The Company intends to deliver the first release of ENGLISH PRO Version 7.0
(single user) on CD-ROM as early as November 1, 1999. ENGLISH PRO Version 7.0
(single user) is the CD-ROM version of ENGLISH PRO Web Edition and contains all
the features of ENGLISH PRO Web Edition, except advertising.
Competition
The educational software industry has been characterized over the last few
years by a high degree of consolidation, which favors companies with greater
resources than the Company. This consolidation has provided certain of the
Company's competitors with increased financial resources, marketing power and
distribution capabilities. Larger companies that offer a wide range of products
also may find it easier to gain access to shelf space than smaller companies,
such as the Company, and they are more able to proliferate product offerings,
including bundles and suites for a single low price. This strategy is used to
dominate shelf space and may tend to reduce shelf lives and prices for
individual products. Additional consolidation may tend to result in increased
price competition for educational software products. In addition, in some cases,
these competitors have invested heavily in marketing and delivering their
products over the Internet.
The English language instructional software market in which the Company
operates is also very competitive. Many competitors have substantially greater,
financial, technical, marketing and distribution resources than the Company. The
Company primarily competes in three major product areas:
o educational retail software;
o academic courseware developed for the school, corporate and
government markets; and
o education courses developed for the Internet.
In all its markets, the Company competes against a large number of
companies of varying sizes and resources. In the educational retail software
market, the Company's primary competitors are The Learning Company and
Broderbund divisions of Mattel, Inc., The Walt Disney Co. and SofSource, Inc. In
the academic courseware market, the Company's primary competitors are Berlitz
International, Inc., DynEd International, Inc. and LinguaTech International. In
the Internet education market, the Company's primary competitors are Scholastic,
Inc., Simon & Schuster, a division of Viacom, Inc. and The Lightspan
Partnership, Inc. There is an increasing number of competitive products offered
by a growing number of companies. Increased competition in any product area may
result in a loss of retail shelf space, reduction in sales or additional price
competition, any of which could have a material adverse effect on the Company's
operating results. In addition, existing competitors may continue to broaden
their product lines and potential competitors, including large computer or
software manufacturers, entertainment companies and educational publishers, may
enter or increase their focus on the English language education market,
resulting in greater competition for the Company.
Other Web Sites and software applications sell advertising. The Company
faces competition from these Web Sites and software developers for advertising
contracts as well as from a variety of other traditional media sources, such as
television, radio and print media. The Company does not currently have
agreements with any advertisers to advertise in its Web Site or within its
software products. If the Company fails to attract a sufficient amount of
advertising for its products or Web Site or software products, its business
could be adversely affected.
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Sales and Marketing
General. The Company anticipates that preliminary marketing of the CD-ROM
version of ENGLISH PRO will consist of securing exclusive and non-exclusive
distributors on a country-by-country basis. The Company plans to try to identify
a number of exclusive Master Distributors globally who are capable of supporting
a complete distribution channel in several countries.
When it is deemed advantageous, the Company plans to enter into
co-development agreements with third parties. A co-development opportunity often
arises when a third party would like to design a custom version of the Company's
products for a particular market or market segment. The Company anticipates that
most of these arrangements would center on additional course curriculum in a
particular field, and that the Company and the co-developer would share in the
revenue generated by a co-development effort.
Internet Marketing. The Company participates in Web-based discussion groups
centered on education, computers in education, distance education and related
topics through which it attempts to encourage and influence the purchase of its
products. The Company also markets ENGLISH PRO Web Edition and
www.freeENGLISH.com through relationships with ISPs and Web portals. These
affiliate program participants provide the marketing awareness to their end
users, which then create traffic to the www.freeENGLISH.com Web site. To
generate new affiliate program participants, the Company identifies ISPs and Web
portals in regions of the world that are of interest to the Company or are
interested in developing education-oriented Web portals. The Company actively
solicits these prospective ISPs and Web portals through initial email campaigns
followed by telemarketing efforts to bring its products to the attention of
these prospective affiliate program participants. To date, the Company has not
advertised any of its products on the Internet, however, it may do so in the
future. The Company also intends to continue developing relationships with ISPs
and Web portals to promote ENGLISH PRO Web Edition and www.freeENGLISH.com on
their Web sites.
Direct Sales. The Company currently has 4 people in its sales and marketing
department, all of whom are salaried sales people. The Company's direct sales
activities include: weekly facsimile distributions to potential distributors
from purchased mailing lists, follow up phone calls, direct mail campaigns to
distributors and Fortune 1000 companies that require English language training
for their staff and contacts with embassies of targeted countries to generate
qualified leads of potential distributors interested in distributing the
Company's product line. The Company also attends industry trade shows where
there is a large concentration of companies interested in educational products
and uses print media in target countries to increase product awareness. The
Company anticipates that, in the near term, two additional sales and marketing
personnel will be hired to concentrate on Internet product awareness and sales
globally.
Customer and Technical Support
The Company provides a variety of customer and technical support services
to purchasers of its software products and users of its online applications. End
users are able to consult with support personnel regarding software use,
hardware problems and peripheral needs via telephone, facsimile and a variety of
voice mail and online service options. In addition, the Company provides its
educational institution clients access to trained educational professionals and
a variety of preview, sample and demonstration options. The Company's English
language instruction products are sold with a variety of lesson plans,
recordkeeping tools and other materials to support English language teachers.
Intellectual Property Rights
The Company's success is dependent on its ability to protect its
intellectual property rights. The Company relies principally on a combination of
patent, copyright and trade secret laws, non-disclosure agreements and other
contractual provisions to establish and maintain its proprietary rights. The
Company currently licenses the source code for its current CD-ROM version of
ENGLISH PRO Version 6.2 from Boswell International Technologies Inc. and Boswell
Industries Inc. The Company does not include any mechanisms to prevent or
inhibit unauthorized copying, but relies on "shrink wrap" licenses that restrict
copying and use of its software products. The Company is aware that significant
copying occurs within the software industry, and if a significant amount of
unauthorized copying of the Company's products were to occur, the Company's
business, financial condition and operating results could be adversely affected.
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As part of its confidentiality procedures, the Company generally enters
into nondisclosure and confidentiality agreements with each of its key
employees, consultants and business partners and limits access to and
distribution of its technology, documentation and other proprietary information.
In particular, the Company has entered into non-disclosure agreements with each
of its employees and business partners. The terms of the employee non-disclosure
agreements include provisions requiring assignment to the Company of employee
inventions. Despite the Company's efforts to protect its intellectual property
rights, unauthorized third parties, including competitors, may from time to time
copy or reverse engineer certain portions of the Company's technology and use
such information to create competitive products.
Policing the unauthorized use of the Company's software is difficult, and,
while the Company is unable to determine the extent to which piracy of the
Company's software exists, such piracy can be expected to be a persistent
problem. In addition, the laws of certain countries in which the Company's
software is or may be licensed do not protect its products and intellectual
property rights to the same extent as do the laws of the United States. As a
result, sales of products based on the Company's software in such countries may
increase the likelihood that the Company's software might be infringed upon by
unauthorized third parties.
It is possible that the scope, validity and/or enforceability of the
Company's intellectual property rights could be challenged by competitors or
other parties. The results of such challenges before administrative bodies or
courts depend on many factors which cannot be accurately assessed at this time.
Unfavorable decisions by such administrative bodies or courts could have a
negative impact on the Company's intellectual property rights. Any such
challenges, whether with or without merit, could be time consuming, result in
costly litigation and diversion of resources, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company or at all. In the event of a claim of infringement against the
Company and the Company's failure or inability to license the infringed or
similar software, the Company's business, operating results and financial
condition could be materially adversely affected.
The Company has not registered any patents or trademarks in the Canada, the
United States or elsewhere.
Government Regulation
The Company is not currently subject to direct federal, state or local
regulation in the United States other than regulations applicable to businesses
generally or directly applicable to electronic commerce. However, because the
Internet is becoming increasingly popular, it is possible that a number of laws
and regulations may be adopted in the United States with respect to the
Internet. These laws may cover issues such as user privacy, freedom of
expression, pricing, content and quality of products and services, taxation,
advertising, intellectual property rights and information security. Furthermore,
the growth of electronic commerce may prompt calls for more stringent consumer
protection laws. Several states have proposed legislation to limit the use of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has indicated that it
may propose legislation on this issue to Congress in the near future and has
initiated action against at least one online service regarding the manner in
which personal information was collected from users and provided to third
parties. The adoption of such consumer protection laws could create uncertainty
in Internet usage and reduce the demand for all products and services. The
Company does not provide customer information to third parties and, therefore,
does not anticipate any current or proposed legislation relating to online
privacy to directly affect its activities to a material extent.
The Company is not certain how its business may be affected by the
application of existing laws governing issues such as property ownership,
copyrights, encryption and other intellectual property issues, taxation, libel,
obscenity and export or import matters. The vast majority of those laws were
adopted prior to the advent of the Internet. As a result, they do not
contemplate or address the unique issues of the Internet and related
technologies. Changes in laws intended to address such issues could create
uncertainty in the Internet marketplace. That uncertainty could reduce demand
for the Company's products or services or increase the cost of doing business as
a result of litigation costs or increased service delivery costs.
In addition, because the Company's products and services are available over
the Internet in multiple states and foreign countries, other jurisdictions may
claim that the Company is required to qualify to do business and pay
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taxes in each state or foreign country. The Company is qualified to do business
only in Nevada. The Company's failure to qualify in other jurisdictions when it
is required to do so could subject it to penalties. It could also hamper the
Company's ability to enforce contracts in those jurisdictions. The application
of laws or regulations from jurisdictions whose laws do not currently apply to
the Company's business could have a material adverse affect on its business,
results of operations and financial condition.
The European Union has adopted a policy directive which went into effect in
1998. Under this directive, business entities domiciled in member states of the
EU are limited in the transactions they may do with business entities domiciled
outside the EU unless they are domiciled in a jurisdiction with privacy laws
comparable to the EU privacy directive. The United States presently does not
have laws which satisfy the EU. Discussions between representatives of the EU
and the United States are ongoing and may lead to certain safe harbor provisions
which, if adhered to, would allow business entities in the EU and the United
States to continue to do business without limitation. If these negotiations are
not successful and the EU begins enforcement of the privacy directive, there
could be an adverse impact on international Internet business. If the Company
does business directly in the EU in the future the Company will be required to
comply with the privacy directive of the EU.
Plan of Operation
During the next twelve months, the Company plans to release the following
new software products and upgrades to existing products:
ENGLISH PRO Version 7.0 (single user), the CD-ROM version of the Company's
English tutorial software, is planned for release in fourth quarter 1999,
replacing the Company's current CD-ROM product, ENGLISH PRO Version 6.2 (single
user). The Company anticipates that ENGLISH PRO Version 7.0 (single user) will
be delivered to the retail market in time for the Christmas 1999 season.
ENGLISH PRO Web Edition is a continuously updated software program. Updates
to the program are made available over the Company's freeENGLISH.com Internet
Web site each month with additional course materials being made available each
week. The Company plans to continue this upgrade schedule for the foreseeable
future.
ENGLISH PRO Network Edition is also a continuously update software program
and updates are made available to institutional clients. Course materials for
ENGLISH PRO Web Edition are compatible with ENGLISH PRO Network Edition and as
such are made available to ENGLISH PRO Network Edition users shortly after being
made available to ENGLISH PRO Web Edition users.
New features are added to the Company's freeENGLISH.com Internet Web side
on average every three months. Under this schedule, the Company expects to
deliver approximately 20 new games and quizzes on its freeENGLISH.com Internet
Web site through the end of second quarter 2000. Additional features which the
Company plans to add to the freeENGLISH.com Internet Web site, include chat
rooms, message boards and an education-focused Internet search engine.
www.freeENGLISH.com is currently available in English, Chinese (simplified
Chinese), Spanish and Portuguese. The Company plans to add Thai, Bhasa, Chinese
(traditional Chinese), Japanese, German, French and Italian prior to the end of
second quarter 2000.
The Company plans to focus its marketing efforts for ENGLISH PRO Web
Edition and ENGLISH PRO Network Edition on current initiatives in Thailand,
Malaysia, Columbia, Taiwan, and China. The marketing focus is likely to be split
between signing new ISPs, Web portals and educational institutions in new
markets and increasing advertising revenues in countries where ENGLISH PRO Web
Edition and/or ENGLISH PRO Network Edition currently have a presence. The
Company expects a large portion of its of advertising marketing efforts will be
directed at Thailand, where the Company is currently implementing ENGLISH PRO
Network Edition on the private computer network operated by the Ministry of
University Affairs in Thailand. The Company expects that it will begin
generating revenues from these efforts in fourth quarter 1999.
Research and development of ENGLISH PRO Web Edition, Network Edition,
Version 7.0 (single user) and Version 7.0 (multi-user) is expected to continue
through the end of 2000. The primary focus on development will be the addition
of: additional phonetic English language modules; whole language English
conversation practice modules; reading comprehension practice modules; grammar
practice modules; vocabulary building
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exercise modules; support for interactive tests and quizzes. Additionally new
advertising models are continuously being developed for the products along with
the necessary Web-based management tools to deliver, manage and support the
advertisings.
Currently, the Company's working capital needs are approximately US$90,000
per month. The Company does not expect to significantly raise these levels until
advertising revenues have been generated. The Company is currently seeking
financing for its operations and expects that it may need additional financing
in the future.
Employees
As of June 30, 1999, the Company had 20 employees, including 11 in research
and development, four in marketing and sales and five in management, finance and
administration. The Company's success will depend in large part on its ability
to attract and retain skilled and experienced employees. None of the Company's
employees are covered by a collective bargaining agreement and the Company
believes that its relations with its employees is good. The Company does not
currently have any key man life insurance on any of its directors or executive
officers.
Risk Factors
The business of the Company involves a number of risks and uncertainties
that could cause actual results to differ materially from results projected in
any forward-looking statement in this report. These risks and uncertainties
include the risks set forth below. The Company's securities are speculative and
investment in the Company's securities involves a high degree of risk and the
possibility that the investor will suffer the loss of the entire amount
invested.
Limited Operating History; History of Losses; Increased Expenses
The Company was organized in 1991 and therefore has only a limited
operating history upon which an evaluation of its business and prospects can be
based. Prior to 1998, the Company had no operations or revenues. The Company
incurred a net loss of $322,021 in the six months ended June 30, 1999. The
Company has not had any significant revenue in recent years, it has never been
profitable and there can be no assurance that, in the future, the Company will
be profitable on a quarterly or annual basis. In addition, the Company plans to
increase its operating expenses to expand its sales and marketing operations,
fund greater levels of research and development, broaden its customer support
capabilities and increase its administration resources. In view of the rapidly
evolving nature of the Company's business and markets and limited operating
history, the Company believes that period-to-period comparisons of financial
results are not necessarily meaningful and should not be relied upon as an
indication of future performance.
Need for Additional Financing
Revenue from the Company's operations is not sufficient to finance the cost
of development and marketing of its software. Accordingly, the Company must
raise substantial additional funding. The Company expects to be able to meet its
financial obligations for approximately the next three months. There is no
assurance that, after such period, the Company will be able to secure financing
or that such financing will be obtained on terms favorable to the Company.
Failure to obtain adequate financing could result in significant delays in
development of new products and a substantial curtailment of operations. The
Company has accumulated losses of $738,737 since it began operations in May 1998
and will require additional working capital to complete its business development
activities and generate revenue adequate to cover operating and further
development expenses.
Unpredictability of Future Revenues; Potential Fluctuations in Quarterly Results
As a result of the Company's limited operating history and the emerging
nature of the market in which it competes, the Company is unable to forecast its
revenues accurately. The Company's current and future expense levels are based
largely on its investment plans and estimates of future revenue and are to a
large extent fixed. Sales and operating results generally depend on the volume
of, timing of and ability to fulfill orders received and advertising revenues
generated, which are difficult to forecast. The Company may be unable to adjust
spending in a timely manner to compensate for any unexpected revenue shortfall.
Accordingly, any significant shortfall in
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revenue in relation to the Company's planned expenditures would have an
immediate adverse affect on the Company's business, financial condition and
results of operations. Further, in response to changes in the competitive
environment, the Company may from time to time make certain pricing, service or
marketing decisions that could have a material adverse effect on the Company's
business, financial condition, operating results and cash flows.
Developing Market; Unproven Acceptance of the Internet as a Medium for Learning
and Education
The Company's long-term viability is substantially dependent upon the
widespread acceptance and use of the Internet as a medium of learning and
education. The use of the Internet as a means of facilitating educational
processes is in a recent stage of development, and there can be no assurance
that a sufficiently large number of customers will begin to use the Internet as
a medium of learning and education. Demand and market acceptance for recently
introduced educational programs over the Internet are subject to a high level of
uncertainty and there exists few proven electronic learning business models. The
Internet may not prove to be a viable medium of instruction because of
inadequate development of the necessary infrastructure, such as a reliable
network backbone, or delayed development of enabling technologies, such as
high-speed modems and high-speed communication lines. The Internet has
experienced, and is expected to continue to experience, significant growth in
the number of users and amount of traffic. There can be no assurance that the
Internet infrastructure will continue to be able to support the demands placed
on it by this continued growth. In addition, delays in the development or
adoption of new standards and protocols to handle increased levels of Internet
activity or increased governmental regulation could slow or stop the growth of
the Internet as a viable medium for learning and education. Moreover, critical
issues concerning the commercial use of the Internet (including security,
reliability, accessibility and quality of service) remain unresolved and may
adversely affect the growth of Internet use or the attractiveness of subscribing
to online educational content. Because the exchange of information on the
Internet is new and evolving, there can be no assurance that the Internet will
prove to be a viable medium of learning and education. The failure to resolve
critical issues concerning the educational use of the Internet, the failure of
the necessary infrastructure to develop in a timely manner, or the failure of
the Internet to continue to develop rapidly as a viable medium of learning and
education would have a material adverse effect on the Company's business,
financial condition, operating results and cash flows.
Unproven Acceptance of the Company's Products
The Company has only recently begun marketing and selling its ENGLISH PRO
software products. As a result, it does not know that its products can
successfully teach English to non-English speakers or that its products will
attain market acceptance among persons seeking to learn the English language.
The Company began offering its Internet-enabled version in December 1998 and has
not yet installed its ENGLISH PRO Network Edition software product on any
private computer networks. If the Company's products prove to be unsuccessful in
assisting non-English speakers in learning the English language, or if they fail
to attain market acceptance, it could materially adversely affect the Company's
financial condition, operating results and cash flows.
Dependence on Key Personnel
The Company's performance and future operating results are substantially
dependent on the continued service and performance of its senior management and
key technical and sales personnel. The Company intends to hire a significant
number of additional technical and sales personnel in the next year. Competition
for such personnel is intense, and there can be no assurance that the Company
can retain its key technical, sales and managerial employees or that it will be
able to attract or retain highly-qualified technical and managerial personnel in
the future. The loss of the services of any of the Company's senior management
or other key employees or the inability to attract and retain the necessary
technical, sales and managerial personnel could have a material adverse effect
upon the Company's business, financial condition, operating results and cash
flows. The Company does not currently maintain "key man" insurance for any
senior management or other key employees.
Mark Crimeni, EDUVERSE Canada's Executive Vice President, has recently been
the subject to a disciplinary action by the British Columbia Securities
Commission and a criminal charge relating to illegal possession and storage of a
firearm. The criminal charges have been dropped. To the extent Mr. Crimeni, or
any
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other executive officers of the Company become involved in regulatory or
criminal proceedings in the future, it could materially, adversely affect the
Company.
Liability for Information Displayed on the Company's Internet Web Sites
The Company may be subjected to claims for defamation, negligence,
copyright or trademark infringement and various other claims relating to the
nature and content of materials it publishes on its Internet Web sites. These
types of claims have been brought, sometimes successfully, against online
businesses in the past. The Company could also face claims based on the content
that is accessible from its Internet Web sites through links to other Web sites.
Dependence on Continued Growth in Use of the Internet
The success of the Company's business depends, in part, on continued growth
in the use of the Internet and would suffer if Internet usage does not continue
to grow. Internet usage may be inhibited for a number of reasons, such as:
o Inadequate network infrastructure;
o Security concerns;
o Inconsistent quality of service;
o Disruptions resulting from the inability of computer systems to
recognize the year 2000;
o Lack of available cost-effective, high-speed service;
o The adoption of new standards or protocols for the Internet; and
o Changes or increases in government regulation.
Online companies have experienced interruptions in their services as a
result of outages and other delays occurring due to problems with the Internet
network infrastructure, disruptions in Internet access provided by third-party
providers or failure of third party providers to handle higher volumes of user
traffic. If Internet usage grows, the Internet infrastructure or third-party
service providers may be unable to support the increased demands which may
result in a decline of performance, reliability or ability to access the
Internet. If outages or delays frequently occur in the future, Internet usage,
as well as usage of the Company's Internet Web sites, could grow more slowly or
decline.
Security and Privacy Issues
The Company could be subject to litigation and liability if third parties
were able to penetrate the Company's network security or otherwise
misappropriate its customers' personal or other information. The Company uses a
third-party system for processing online Internet orders for its products and as
such keeps no personal information on its customers. The only information
required by a user downloading ENGLISH PRO Web Edition from the freeENGLISH.com
Web site is their birthdate, gender, city, state and country, however visitors
may enter their name, company, mailing address, telephone, fax information
voluntarily. No credit card information is required to be entered into any of
its freeENGLISH.com systems. Liability for misuse of customer information could
include impersonation or other similar fraud claims. It could also include
claims for other misuses of personal information, such as for unauthorized
marketing purposes. In addition, the Federal Trade Commission and some states
have been investigating various Internet companies regarding their use of
personal information. The Company could incur additional expenses and be
required to change its current practices if new regulations regarding the use of
personal information are adopted or should government agencies choose to
investigate its privacy practices.
Furthermore, the Company's computer servers may be vulnerable to computer
viruses, physical or electronic break-ins and similar disruptions. The Company
may need to expend significant additional capital and other resources to protect
against a security breach or to alleviate problems caused by any breaches. There
can be no assurance that the Company can prevent or remedy all security
breaches. If any of these breaches occur, the Company could lose customers and
visitors to its Internet Web sites.
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Dependence on Certain Marketing and Licensing Relationships
The Company is dependent upon a number of marketing, and licensing
arrangements relating to the development and sale of its products. Of the
Company's current products, ENGLISH PRO Version 6.2 (single user) and ENGLISH
PRO Version 6.2 (multi-user) are based upon the technology licensed from
Boswell. Under the terms of the license, the Company must pay Boswell a 5%
royalty on gross revenues from the sale of all products that contain source code
from the licensed technology. The Company expects that the ENGLISH PRO Version
6.2 products will continue to have a market presence until the fourth quarter of
1999, at which time the newly-developed ENGLISH PRO Version 7.0 is anticipated
to become available in the retail market. In addition, the Company's software
products are currently the only English tutorial products available through Web
sites operated by Learn2.com, Inc. The agreement between the Company and
Learn2.com, Inc. is non-exclusive and the introduction of other English tutorial
software products by Learn2.com could reduce demand for the Company's products.
The Company has a number of agreements with ISPs and third party Web sites
pursuant to which such parties place links on their Web sites to the Company's
freeENGLISH.com Internet Web site in exchange for a portion of the revenues
generated from advertising in the Company's ENGLISH PRO Web Edition software. As
of August 24, 1999, the Company currently has affiliate program agreements with
eight ISPs and five third party Web portals. In addition, the Company has
recently completed an affiliate program agreement with the Ministry of
University Affairs in Thailand pursuant to which it is implementing its ENGLISH
PRO Network Edition on the private computer network operated by the Ministry.
The loss of one or more of these relationships could have a material adverse
effect on the Company's financial condition and results of operations.
Reliance on Other Third Parties
The Company's operations depend to a significant degree on a number of
other third parties, including telecommunication service providers. The Company
has no effective control over these third parties and no long-term contractual
relationships with any of them. From time to time, the Company could experience
temporary interruptions in its Internet Web sites connections and its
telecommunications access. Continuous or prolonged interruptions in the
Company's Internet Web sites' connections or in its telecommunications access
would have a material adverse effect on the Company's business, financial
condition and results of operations. The Company's agreements with its Internet
service providers place certain limits on the Company's ability to obtain
damages from the service providers for failure to maintain the Company's
connection to the Internet.
Competition
The English language instructional software market in which the Company
operates is very competitive. Many competitors have substantially greater,
financial, technical, marketing and distribution resources than the Company. The
Company primarily competes in three major product areas:
o educational retail software;
o academic courseware developed for the school, corporate and
government markets; and
o distance education courses developed for the Internet.
In the all its markets, the Company competes against a large number of
companies of varying sizes and resources. In the educational retail software
market, the Company's primary competitors are The Learning Company and
Broderbund, divisions of Mattel, Inc., The Walt Disney Co. and SofSource, Inc.
In the academic courseware market, the Company's primary competitors are Berlitz
International, Inc., DynEd International, Inc. and LinguaTech International. In
the distance education market, the Company's primary competitors are Scholastic,
Inc., Simon & Schuster, a division of Viacom, Inc. and The Lightspan
Partnership, Inc. There are an increasing number of competitive products offered
by a growing number of companies. Increased competition in any product area may
result in a loss of retail shelf space, reduction in sales or additional price
competition, any of which could have a material adverse effect on the Company's
operating results. In addition, existing competitors may continue to broaden
their product lines and potential competitors, including large computer or
software manufacturers, entertainment companies and educational publishers, may
enter or increase their focus on the English language education market,
resulting in greater competition for the Company.
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Most of the Company's current and potential competitors have substantially
longer operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than the Company.
In addition, competitors may be acquired by, receive investments from or enter
into other commercial relationships with larger, well-established and
well-financed companies as the use of the Internet and other online services
increases. Many of the Company's competitors may be able to respond more quickly
to changes in customer preferences, devote greater resources to marketing and
promotional campaigns, develop more advanced educational systems, adopt more
aggressive pricing or inventory availability policies and devote substantially
more resources to Internet site and systems development than the Company.
It is possible that new competitors or alliances among competitors may
emerge and rapidly acquire market share. Increased competition may result in
reduced operating margins, loss of market share and a diminished brand
franchise, any one of which could materially adversely affect the Company's
business, results of operations and financial condition. There can be no
assurance that the Company will be able to compete successfully against current
or future competitors or alliances of such competitors, or that competitive
pressures faced by the Company will not materially adversely affect its
business, financial condition, operating results and cash flows.
Need To Adapt To Business And Cultural Practices Of Other Countries
The Company plans to provide its English language educational programs in
many different countries throughout the world. There are enormous variations in
language, culture, religion, custom and business practices in the areas in which
the Company plans to do business. Even where people speak a common language
(such as Spanish), there are great variations from region to region and nation
to nation. To be successful, the Company will need to adapt its offerings and
method of operations to the locations in which it does business. Educational
methods and business practices that succeed in one nation or region may be
entirely inappropriate in others. To be successful, the Company must adapt its
educational offerings and business practices to each market it services, and its
ability to do so is uncertain.
Uncertainty Of Business Model
The Company expects to receive significant revenues from advertising on its
ENGLISH PRO Web Edition and ENGLISH PRO Network Edition products. The Company's
arrangements with the Ministry of Education of Thailand permit the Company to
sell banner advertisements to be included in material displayed to students
accessing the Company's software, and to share a portion of advertising revenue
with the Ministry. It is uncertain whether advertisers will find this an
attractive marketing medium or that the Company will be able to generate
significant advertising revenue in order to cover the cost of developing and
marketing its software.
Even if the Company is successful in its program with the Ministry of
Thailand, it is uncertain whether government agencies, universities and other
prospective business partners will find it appropriate to permit advertising to
be displayed to students or others who access course materials through networks
or facilities they operate or endorse.
Capacity Constraints; Reliance on Internally Developed Systems; System
Development Risks
The availability, reliability and satisfactory performance of the Company's
Internet Web sites, transaction processing systems and network infrastructure
are critical to the Company's reputation and its ability to attract and retain
online students and to provide adequate customer service. Because the Company
intends to place advertising within its Internet-enabled software, the Company
anticipates that a significant portion of its future revenues will depend on the
number of English language students who download its software from its
freeENGLISH.com Internet Web Site. Any network interruptions or system
shortcomings that result in the unavailability of the Company's Internet Web
sites would reduce the volume of software downloaded and the attractiveness of
the Company's product and service offerings. System delays or interruptions
could negatively impact a customer's experience and reduce the likelihood that
such customer would return to the Company's Internet Web sites in the future.
Substantial increases in the volume of traffic on the Company's Internet Web
sites or the number of downloads by prospective students through the Company's
Internet Web sites may require the Company to further expand and upgrade its
technology, transaction processing systems and network infrastructure and
increase costs. There can be no assurance that the Company will be able to
accurately project the rate or timing of increases, if any, in the use of its
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Internet Web sites, or that it will have the technical or financial resources to
expand and upgrade its systems and infrastructure to accommodate such increases
in a timely manner.
Risks of Potential Government Regulation and Other Legal Uncertainties Relating
to the Internet
The Company is not currently subject to direct federal, state or local
regulation in the United States other than regulations applicable to businesses
generally or directly applicable to electronic commerce. However, because the
Internet is becoming increasingly popular, it is possible that a number of laws
and regulations may be adopted in the United States with respect to the
Internet. These laws may cover issues such as user privacy, freedom of
expression, pricing, content and quality of products and services, taxation,
advertising, intellectual property rights and information security. Furthermore,
the growth of electronic commerce may prompt calls for more stringent consumer
protection laws. The adoption of such consumer protection laws could create
uncertainty in Internet usage and reduce the demand for all products and
services.
In addition, the Company is not certain how its business may be affected by
the application of existing laws governing issues such as property ownership,
copyrights, encryption and other intellectual property issues, taxation, libel,
obscenity and export or import matters. It is possible that future applications
of these laws to the Company's business could reduce demand for its products and
services or increase the cost of doing business as a result of litigation costs
or increased service delivery costs.
Because the Company's services are available over the Internet in multiple
states and foreign countries, other jurisdictions may claim that the Company is
required to qualify to do business and pay taxes in each state or foreign
country. The Company is qualified to do business only in Nevada. The Company's
failure to qualify in other jurisdictions when it is required to do so could
subject the Company to penalties and could restrict the Company's ability to
enforce contracts in those jurisdictions. The application of laws or regulations
from jurisdictions whose laws do not currently apply to the Company's business
may have a material adverse affect on its business, results of operations and
financial condition.
The European Union recently adopted a directive addressing data privacy
that may result in limits on the collection and use of consumer information. See
"Business -- Government Regulation."
Intellectual Property Rights
The Company's success is dependent on its ability to protect its
intellectual property rights. The Company relies principally on a combination of
patent, copyright and trade secret laws, non-disclosure agreements and other
contractual provisions to establish and maintain its proprietary rights. The
Company currently licenses the source code for its current retail CD-ROM version
of ENGLISH PRO Version 6.2 from Boswell International Technologies Inc. and
Boswell Industries Inc. The Company does not include any mechanisms to prevent
or inhibit unauthorized copying, but instead relies on "shrink wrap" licenses
that restrict copying and use of its software products. The Company is aware
that significant copying occurs within the software industry, and if a
significant amount of unauthorized copying of the Company's products were to
occur, the Company's business, financial condition and operating results could
be adversely affected.
As part of its confidentiality procedures, the Company generally enters
into nondisclosure and confidentiality agreements with each of its key
employees, consultants and business partners and limits access to and
distribution of its technology, documentation and other proprietary information.
In particular, the Company has entered into non-disclosure agreements with each
of its employees and business partners. The terms of the employee non-disclosure
agreements include provisions requiring assignment to the Company of employee
inventions. Despite the Company's efforts to protect its intellectual property
rights, unauthorized third parties, including competitors, may from time to time
copy or reverse engineer certain portions of the Company's technology and use
such information to create competitive products.
Policing the unauthorized use of the Company's software is difficult, and,
while the Company is unable to determine the extent to which piracy of the
Company's software exists, such piracy can be expected to be a persistent
problem. In addition, the laws of certain countries in which the Company's
software is or may be licensed do not protect its products and intellectual
property rights to the same extent as do the laws of the United
-17-
<PAGE>
States. As a result, sales of products based on the Company's software in such
countries may increase the likelihood that the Company's software might be
infringed upon by unauthorized third parties.
It is possible that the scope, validity and/or enforceability of the
Company's intellectual property rights could be challenged by competitors or
other parties. The results of such challenges before administrative bodies or
courts depend on many factors which cannot be accurately assessed at this time.
Unfavorable decisions by such administrative bodies or courts could have a
negative impact on the Company's intellectual property rights. Any such
challenges, whether with or without merit, could be time consuming, result in
costly litigation and diversion of resources, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company or at all. In the event of a claim of infringement against the
Company and the Company's failure or inability to license the infringed or
similar software, the Company's business, operating results and financial
condition could be materially adversely affected.
Uncertainties Relating to the Year 2000
Because many computer applications have been written using two digits
rather than four to define the applicable year, some date sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
year 2000 problem could result in systems failures or miscalculations causing
disruptions of operations, including disruptions of the Company's Internet Web
site. The Company has obtained confirmation from all of its third-party vendors
that they have resolved their year 2000 issues and has completed its year 2000
compliance testing program. The systems and services provided by these vendors
may fail to be year 2000 compliant despite their representations to the
contrary. Failure of these systems or services to be year 2000 compliant could
result in a systemic failure beyond the Company's control and prevent the
Company from delivering its products to its customers, prevent users from
accessing the Company's Internet Web site and decrease the use of the Internet
generally. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Compliance."
-18-
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. the Company's actual results could differ materially
from those discussed in these forward-looking statements as a result of various
factors, including those set forth in "risk factors" and elsewhere in this
registration statement. The following discussion should be read in conjunction
with the financial statements and notes thereto included elsewhere in this
registration statement. See "Forward-looking Statements" and "Business-Risk
Factors."
Overview
The Company develops and markets software programs under several product
names to assist non-English speaking students in learning spoken English. In
addition to traditional "boxed" software available in retail stores, the Company
has been delivering its software products via the Internet and private computer
networks since December 1998. The Company began operations on May 5, 1998.
On May 28, 1998 and May 29, 1998, the Company acquired all of the issued
and outstanding share capital of ESL PRO Systems Inc. ("ESL") and M&M
Information and Marketing Services, Inc. ("M&M"), respectively, which were both
Nevada corporations incorporated on May 5, 1998 and under common control. As a
result of these acquisitions, the former shareholders of ESL and M&M, as a
group, owned more than 50% of the issued and outstanding voting shares of the
Company. Consequently, this business combination has been accounted for as a
reverse acquisition whereby ESL and M&M are deemed to have been combined, on a
continuity of interests basis, since their inception on May 5, 1998 and to have
acquired the Company. Accordingly, the financial statements of the Company
reflect the historical accounts of ESL and M&M since their inception at their
historic net book values, and the accounts of the Company, comprising nominal
net assets, at their estimated fair value at the time of the transaction.
The reverse acquisition transaction resulted in the acquisition by the
Company of 2,000,000 shares of ESL common stock and 7,000,000 shares of M&M
common stock in exchange for the issuance of 9,000,000 shares of the Company's
common stock.
On June 20, 1998, the Company formed EDUVERSE Accelerated Learning Systems
(Canada) Inc. ("EDUVERSE Canada"). EDUVERSE Canada operates the Company's
development and marketing operations.
The Company licensed the core software application contained in ENGLISH PRO
Version 6.2 in May 1998 and began shipping ENGLISH PRO Version 6.2 to computer
retailers and bookstores in Canada in December 1998. In first quarter 1999 the
Company began offering its products in the United States. In order to direct
more of its internal resources to establishing awareness of its Internet-enabled
products, in March 1999, the Company appointed Tri Synergy, Inc. ("Tri Synergy")
as a non-exclusive North American retail marketer of its CD-ROM based products.
As of August 1999, ENGLISH PRO Version 6.2 is sold in over 500 retail outlets in
North America.
The Company began development of its Internet-enabled software product in
August 1998 and released the first version of ENGLISH PRO Web Edition on its
freeENGLISH.com Internet Web site in December 1998. Since that time, the Company
has upgraded the program and added additional course materials. The first
version of ENGLISH PRO Network Edition is currently being installed in Thailand
on the Ministry of University Affairs University Network, a private computer
network operated by the Ministry. ENGLISH PRO Web Edition and ENGLISH PRO
Network Edition are delivered free to consumers over the Internet, private
computer networks and local and wide area networks.
The Company derives revenues from the sale of CD-ROM products in the retail
marketplace and plans to derive its revenues from the sale of advertisements
embedded in the ENGLISH PRO Web Edition and ENGLISH PRO Network Edition software
and on its freeENGLISH.com Internet Web site. Revenues are recognized on its
CD-ROM products upon shipping to its retailers or distributors. Typically, the
Company enters into reseller and distribution arrangements with retailers and
distributors for the sale of its CD-ROM products. Resellers are normally offered
a 40% discount off of the manufacturer's suggested list price, which for ENGLISH
PRO Version 6.2 is $29.99. Distributors are normally offered an additional
discount up to 30%.
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<PAGE>
To date, the Company has not derived any revenues from the sales of
advertising embedded in its Internet- and network-enabled software. However, in
order to increase the number of users of its ENGLISH PRO Web Edition software
and its ENGLISH PRO Network Edition software, the Company has entered into
affiliate program agreements with ISPs, Web portals, private corporations and
governmental and educational institutions, pursuant to which the Company has
agreed to share gross revenues derived from advertising and from the sale of
products and services on a third party's Web site that result from traffic
directed from an affiliate program participant's Web site. The agreements
typically require the Company to share 15% of any gross revenues generated;
however, this percentage may be higher depending upon the nature of the
contributions by the third party. The Company has recently entered into an
agreement with the Ministry of University Affairs in Thailand to install its
ENGLISH PRO Network Edition software on a private computer network operated by
the Ministry. The Company estimates that upon implementation, approximately one
million students in Thailand will have access to the Company's English language
teaching software. The Company expects to begin generating advertising revenues
from this contract in the fourth quarter of 1999.
The Company has incurred losses since inception, and at June 30, 1999, had
an accumulated deficit of $738,737. The Company has recently increased its sales
and marketing and general and administrative expenses as it has focused the
entire efforts of its direct sales force to signing agreements with ISPs, Web
portals and foreign governmental and educational institutions. The Company has
also increased research and development expenses as its has focused almost
entirely on continued development of the ENGLISH PRO Web Edition and ENGLISH PRO
Network Edition software and its freeENGLISH.com Internet Web site. The Company
plans to continue increasing operating expenses to expand its sales operations,
fund greater levels of research and development for its Internet-based product
lines, improve its operational and financial systems and expand its
international operations. As a result, the Company is likely to continue to
incur losses, and if the Company's revenues do not continue to grow
significantly, the Company may not ever be profitable.
Results of Operations
The following table presents the Company's audited results of operations
for the nine-month period ended December 31, 1998 and unaudited results of
operations for the six-month period ended June 30, 1999. The unaudited
statements include data that has been derived from unaudited consolidated
financial statements that have been prepared on the same basis as the annual
audited consolidated financial statements and, in the opinion of the Company's
management, include all normal recurring adjustments necessary for the fair
presentation of such information. This data should be read in conjunction with
the Company's consolidated financial statements included in this registration
statement.
-20-
<PAGE>
<TABLE>
Six-Month Nine-Month
Period Ended Period Ended
Jun-30 Dec-31
1999 1998
-------- --------
Revenues:
<S> <C> <C>
Software.............................................................. $ 95,497 $ 14,824
Distribution Royalties................................................ 40,644
Other................................................................. 96,945
-------- --------
Total Revenues.................................................... 233,086 14,824
-------- --------
Cost of Revenues:
Total Cost of Revenues............................................ (35,923) (6,873)
-------- --------
Gross Profit............................................................... 197,163 7,951
-------- --------
Expenses:
Amortization of License............................................... 31,900 52,000
Depreciation.......................................................... 7,336 4,205
General and Administrative............................................ 216,185 207,644
Marketing............................................................. 127,797 57,485
Research and Development.............................................. 135,966 103,333
-------- --------
Total Expenses.................................................... 519,184 424,667
-------- --------
Net Loss................................................................... (322,021) (416,716)
Deficit Beginning of Period................................................ (416,716) 0
Deficit End of Period...................................................... (738,737) (416,716)
</TABLE>
Six-Month Period Ended June 30, 1999
Revenues. The Company derives its revenues from retail sales of its
software products, royalties received from distributors of its software products
and consulting fees from services performed by senior management of the Company.
Royalties are fees paid by third parties to obtain the exclusive right to sell
the Company's software products in a country or region for a fixed period of
time. Other revenue items include non-software related income, such as
consulting fees and bank interest. These consulting fees are determined on a
project-by-project basis taking into account the value of its input in the
project and the amount of hours required to complete the project. For the year
ended December 31, 1998, 36% of the Company's software sales were derived from
one customer. Revenues for the six-month period ended June 30, 1999 were
$233,086 compared with $14,824 for the nine-month period ended December 31,
1998. This increase is primarily due to the introduction of the Company's
ENGLISH PRO Version 6.2 product into the retail marketplace in Canada and the
United States in December 1998 and March 1999, respectively, and also due to
increased consulting fees paid to the Company's executive officers. The Company
anticipates that retail sales of its software products will continue during the
remainder of 1999 as a result of the planned introduction of ENGLISH PRO Version
7.0 (single user) in the fourth quarter of 1999. In addition, it is anticipated
that additional revenues from the sale of advertising embedded in the Company's
Internet-enabled software product will be generated beginning the fourth quarter
of 1999.
Cost of Revenues. Cost of revenues consists of expenses associated with the
physical production of the "boxed" software packages that are sold in the retail
market and the deployment of the Company's Internet Web sites, including
Internet connection charges. During the six-month period ended June 30, 1999,
cost of goods sold increased to $35,923 from $6,873 during the nine-month period
ended December 31, 1998. This increase is primarily due to increased costs
associated with the increase in the sales of software packages.
Amortization and Depreciation. Amortization and depreciation expenses
consist of depreciation on leased and owned computer equipment, software, office
equipment and furniture and amortization of a license fee for the use of
software. Capital assets such as computer equipment and furniture and office
equipment are depreciated on a straight-line basis over their estimated useful
lives, computer equipment over three years and furniture and office equipment
over five years. The license fee for use of software is amortized on a
strait-line basis over the three-year
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<PAGE>
minimum term of the license agreement with Boswell. The Company incurred
depreciation expenses of 7,336 during the six-month period ended June 30, 1999
and amortization expenses of $31,900 for the same period.
General and Administration Expenses. General and administrative expenses
primarily consist of management, financial and administrative personnel expenses
and related costs and professional service fees. General and administrative
expenses were $216,185 for the six-month period ended June 30, 1999, which
represents an increase of 4.1% over the 1998 fiscal year. This increase is due
primarily to an increase in expenses related to auditing the Company's financial
statements for the fiscal period ended December 31, 1998. The Company
anticipates that general and administrative expenses will increase in the third
quarter of 1999 as a result of increased legal fees relating to the registration
of its common stock under the United States Securities Exchange Act of 1934 and
compliance with related reporting requirements.
Marketing Expenses. Marketing expenses consist primarily of marketing and
promotional costs relating to the development of the Company's brands as well as
personnel, travel and other costs. Marketing expenses were $127,797 for the
six-month period ended June 30, 1999 which were 122% higher than those incurred
during the 1998 fiscal year. This increase was primarily attributable to
increased travel expenses incurred to promote the Company's Internet-enabled
software products. The Company anticipates marketing expenses will increase over
the next 12 months as a result of its current initiatives in Thailand and
throughout Asia and Latin America, which will require extensive travel for the
its marketing staff.
Research and Development Expenses. Research and development expenses
primarily include personnel costs relating to developing the Company's software
and maintaining and enhancing the features, content and functionality of the
Company's Internet Web site and related systems. Research and development
expenses were $135,966 for the six-month period ended June 30, 1999 which
represents an increase of 31.6% over the 1998 fiscal year. This increase was
primarily due to increased staffing in the research and development team. The
Company anticipates that its research and development staff will continue to
grow through the end of 1999 and into 2000 as the Company focuses on improving
and expanding the features and availability of its Internet-and network-enabled
software products.
Income Taxes. No provision for federal income taxes has been recorded for
the six-month period ended June 30, 1999 or the nine-month period ended December
31, 1998 as a result of losses. As of December 31,1998, the Company had
approximately $416,716 of federal net operating loss carryforwards available to
offset future taxable income; these carryforwards expire in various years
beginning in 2018, if not previously utilized.
Nine-Month Period Ended December 31, 1998
Revenues. Revenues were $14,824 for the nine-month period ended December
31, 1998. This amount primarily consists of retail sales of the Company's
ENGLISH PRO Version 6.2 CD-ROM software product which was introduced in Canada
in December 1998.
Cost of Revenues. Cost of revenues was $6,873 for the nine-month period
ended December 31, 1998 and primarily reflects costs associated with production
of the initial production of the Company's ENGLISH PRO Version 6.2 CD-ROM
software product.
Amortization and Depreciation. Depreciation expenses for the nine-month
period ended December 31, 1998 were $4,205 and amortization expenses were
$52,000 for the same period. Amortization expenses consist primarily of
amortization of a license fee for the use of software.
General and Administration Expenses. General and administrative expenses
were $207,644 for the nine-month period December 31, 1998, which consisted
primarily of management, financial and administrative personnel expenses and
related costs and professional service fees.
Marketing Expenses. Marketing expenses were $57,485 for the nine-month
period ended December 31, 1998 during which period the Company began preliminary
sales and marketing efforts related to the CD-ROM version of its software.
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<PAGE>
Research and Development Expenses. Research and development expenses were
$103,333 for the nine-month period ended December 31, 1998 during which period
the Company began assembling a research and development team necessary to
further the development of the Company's software products and Internet Web
sites.
Liquidity and Capital Resources
Since inception, the Company has financed operations and met its capital
expenditure requirements primarily through private sales of equity securities,
which have resulted in net proceeds of $985,731 through June 30, 1999. At June
30, 1999, the Company had $331,733 in cash and cash equivalents and $321,178 in
working capital.
The Company has not yet generated positive cash from operating activities.
Cash used in operating activities was $241,396 and $373,693 for the nine-month
period ended December 31, 1998 and the six-month period ended June 30, 1999,
respectively. The Company does not expect to generate positive cash from
operations for the year ending December 31, 1999.
To date, the Company's investing activities have consisted of capital
expenditures totaling $20,298 and $26,294 for the nine-month period ended
December 31, 1998 and the six-month period ended June 30, 1999, respectively.
The capital expenditures related primarily to the acquisition of computer
software and equipment as well as furniture and fixtures used to support its
growing employee base.
Net cash provided by financing activities was $297,778 and $697,662 for the
nine-month period ended December 31, 1998 and the six month period ended June
30, 1999, respectively. Net cash provided by financing activities resulted
primarily from issuance of capital stock, which was partially offset by
principal payments on capital leases and notes payable.
The Company does not foresee an immediate increase in operating expenses
until such time as revenues commence from the sale of advertisements in Thailand
and/or the Company is successful in raising equity or debt financing sufficient
enough to meet its current working capital requirements and support an increase
in operating expenses. The Company expects that revenues from advertising sales
will occur in the fourth quarter of 1999 and therefore projects increases in
development and marketing will coincide with these revenues.
The Company believes that available cash and cash equivalents combined with
anticipated operating revenues will be adequate to fund the Company's operations
over the next three months. Thereafter, the Company expects it will need to
raise additional capital to meet its long-term operating requirements. The
Company may encounter business initiatives that require significant cash
commitments or unanticipated problems or expenses that could result in a
requirement for additional cash before that time. If the Company raises
additional funds through the issuance of equity or convertible debt securities,
the percentage ownership of its shareholders would be reduced, and such
securities might have rights, preferences or privileges senior to its common
stock. Additional financing may not be available upon acceptable terms, or at
all. If adequate funds are not available or are not available on acceptable
terms, the Company's ability to fund its expansion, take advantage of business
opportunities, develop or enhance its products or otherwise respond to
competitive pressures would be significantly limited, and it may significantly
restrict the Company's operations.
Foreign Currency Translation and Hedging
The Company is exposed to foreign currency fluctuations through its
operations in Canada. Substantially all of its revenues to date and
corresponding receivables have been in United States dollars. However, all
research and development expenses, customer support costs and administrative
expenses are in Canadian dollars.
The Company recorded a foreign exchange gain (loss) of $1,673 and ($2,026)
for the nine-months ended December 31, 1998, the six-months ended June 30, 1999,
respectively. As the foreign exchange gains (losses) were not significant, the
Company does not, at this time, engage in forward exchange contracts for the
purpose of hedging against fluctuations in the exchange rate between United
States and Canadian dollars.
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<PAGE>
During the fourth quarter 1999 and the first two quarters of 2000, the
Company intends to engage in activities in foreign countries, namely Thailand,
Malaysia, Columbia, Taiwan and China. These activities will likely result in
development expenses related to the installation, support and maintenance of
ENGLISH PRO Network Edition on educational networks and sales and marketing
expenses related to generating advertising revenues in these regions. The
Company has no immediate plans for hedging against fluctuations in these
currencies.
Year 2000 Compliance
The Year 2000 ("Y2K") issue is the result of certain computer hardware,
operating system software and software application programs having been
developed using two digits rather than four to define a year. For example the
clock circuit in certain hardware may be incapable of holding a date beyond the
year 1999; some operating systems may recognize a date using "00" as the year
1900 rather than 2000 and certain applications may have limited date processing
capabilities. These problems could result in the failure of major systems or
miscalculations, which could have a material impact on companies through
business interruption or shutdown, financial loss, damage to reputation, and
legal liability to third parties.
Within the past twelve months, the Company has been assessing its exposure
to risks relating to the Y2K issue. These analysis and remediation issues are
addressed in a four-phase plan of action.
Phase I - Inventory and Risk Assessment. This Phase requires an inventory
and assessment of the business and information systems used by the Company,
including desktop hardware and software, network hardware and software, and
telephone systems. The Company uses Intel-based PC desktop products. In
connection with a review of this hardware the Company has determined that all
systems are Year 2000 compliant and contain four digit date codes. In addition
the Company uses "off the shelf" software for desktop applications. In
connection with a review of this software the Company has replaced its
accounting software. The Company's existing products are all Year 2000 compliant
and contain four digit date codes. As a result, the Company believes it has
completed this Phase. The Company's Internet Web sites are Y2K compliant. The
Company relies on Windows NT server software, Microsoft Internet Server software
and Microsoft SQL Server software, all of which, the Company has been informed,
are Y2K compliant. The Company does not have any contingency plans should the
Microsoft software not work on January 1, 2000.
Phase II - Remediation Cost Estimation. This Phase involves the analysis of
each Y2K compliance issue, determination of how such risks will be remediated
and the cost of such remediation. As indicated, the Company does not anticipate
needing to replace any additional hardware. It has upgraded some desktop
software with readily available prepackaged programs. Because of the Company's
limited operating history, it has not incurred significant time or expense in
connection with transferring data to any upgraded desktop software. The Company
believes it has completed this Phase.
Phase III - Remediation. This Phase includes the replacement or correction
of any necessary business or information systems. This Phase is complete for
both the information technology systems and the non-information technology
business systems.
Phase IV - Remediation Testing. This Phase includes the future date testing
of all remediation efforts made in Phase III to confirm that the changes made
bring the affected systems into compliance, no new problems have arisen as a
result of the remediation, and that all new systems which replaced non-compliant
systems are Y2K compliant regardless of whether vendors represent that such
systems are Y2K complaint. The Company believes it has completed this Phase and
is therefore Y2K compliant.
Third Party Relationships. Even if the internal systems of the Company are
not materially affected by the Year 2000 problem, the Company's business,
financial condition and results of operations could be materially adversely
affected by disruption in the operation of enterprises with which the Company
interacts. The Company currently relies or plans to rely on third party
companies in connection with the manufacture and distribution of its products.
The Company plans to rely on Pac Services Inc. ("PAC") for the assembly and
distribution of the Company's packaged CD-ROM software products. PAC has
reported that it has developed a comprehensive plan to achieve Year 2000
compliance of its sensitive systems by the fall of 1999. However, PAC cannot
guarantee its Year 2000 compliance or that of its suppliers. While another
company could be retained to assemble and distribute the Company's packaged
CD-ROM software products, any interruption in PAC's assembly or distribution of
the
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<PAGE>
Company's packaged CD-ROM software products could have a significant adverse
effect on the Company's business. The Company's servers in Thailand are Y2K
compliant, and the Company has been informed by the Ministry of University
Affairs that the Ministry is currently completing its Y2K readiness programs. If
the Ministry's UniNet network does not operate on January 1, 2000, the Company
will be unable to provide service on the UniNet until such time as the
Ministry's network is functional, which could have a material adverse effect on
the Company business and financial results.
Based on current information, the Company believes the Y2K issue will not
have a material adverse effect on the Company, its consolidated financial
position, results of operations or cash flows. However, there can be no
assurance that the Company's Y2K remediation efforts, or those of third parties
will be properly and timely completed, and the failure to do so could have a
material adverse effect on the Company, its business, results of operation, and
its financial condition. In particular, the Company has not yet completed its
assessment of the Y2K readiness of its significant third-party service
providers. Completion of this assessment may result in the identification of
additional issues, which could have a material adverse effect on the Company's
results of operations. In addition, important factors that could cause results
to differ materially include, but are not limited to, the ability of the Company
to successfully identify systems which have a Y2K issue, the nature and amount
of remediation effort required to fix the affected system, and the costs and
availability of labor and resources to successfully address the Y2K issues.
The worst-case scenario pertaining to the Y2K issue would be an overall
failure of the Internet, electronic and telecommunications infrastructure. In
addition, the systems and services provided by the Company's third-party vendors
may fail to be Y2K compliant despite their representations to the contrary. The
failure by these entities or systems to be Y2K compliant could result in a
systemic failure beyond the Company's control, which could also prevent users
from accessing the Company's freeENGLISH.com Internet Web site, which would have
a material adverse effect on the Company's business, results of operations and
financial condition.
The Company is continuing to formulate its Y2K contingency plans. The
Company views its dependence on critical suppliers and the Internet as its
primary exposure to potential Y2K concerns. The Company will continue to
evaluate potential alternatives to reduce its dependence on those suppliers, and
secure alternate supplies in the event that any supplier experiences significant
business interruption as a result of Y2K or other concerns. Development of the
Y2K contingency plans is expected to be substantially complete by the end of
September 1999.
ITEM 3 DESCRIPTION OF PROPERTY
EDUVERSE Accelerated Learning Systems (Canada) Inc., a wholly-owned
subsidiary of the Company, currently leases approximately 5,000 square feet of
office space on a month-to-month basis in Vancouver, British Columbia, Canada.
The monthly rent is approximately US$1,070. The Company's www.eduverse.com Web
site is located on a server operated by Interland, a web-hosting service
provider in the United States. The Company's www.freeENGLISH.com Web site is
located on a Company-owned and operated server housed at SMARTT.COM, a Canadian
server farm. The Company's servers operating the Ministry of University Affairs
ENGLISH PRO Network Edition software are currently located on servers owned and
operated by the Company and located in the offices of the Ministry of University
Affairs in Bangkok, Thailand.
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<PAGE>
ITEM 4 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the number of
shares of Common Stock owned beneficially as of June 30, 1999 by: (i) each
person known to the Company to own more than five percent (5%) of any class of
the Company's voting securities; (ii) each director of the Company; and (iii)
all directors and officers as a group. Unless otherwise indicated, the
shareholders listed possess sole voting and investment power with respect to the
shares shown.
<TABLE>
Amount and Nature of Percent of
Title of Class Name and Address (7) of a Beneficial Owner Beneficial Owner Class(1)
- -------------- ------------------------------------------ -------------------- --------
<S> <C> <C> <C>
Common Stock Mark E. Bruk (2) 3,861,100 30.1%
Common Stock Marc Crimeni (3) 3,686,100 28.8%
Common Stock Robert Harris (4) 28,500 *
Common Stock Peter O'Donnell (5) 19,500 *
Common Stock All directors and officers of the Company as 3,909,100 30.4%
a group (3 persons) (6)
</TABLE>
* Represents less than 1% of the outstanding shares of common stock.
(1) Based on an aggregate 12,753,434 shares outstanding as of August 25, 1999
(2) Includes options to purchase 90,000 shares exercisable within 60 days of
August 25, 1999.
(3) Includes options to purchase 30,000 shares exercisable within 60 days of
August 25, 1999.
(4) Includes options to purchase 13,500 shares exercisable within 60 days of
August 25, 1999.
(5) Includes options to purchase 4,500 shares exercisable within 60 days of
August 25, 1999.
(6) Includes options to purchase 108,000 shares exercisable within 60 days of
August 25, 1999.
(7) Unless otherwise noted, the address of each beneficial owner is 2nd Floor,
1235 West Pender Street, Vancouver, British Columbia V6E 2V1.
ITEM 5 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Executive Officers and Directors
The following table sets forth certain information concerning the certain
executive officers and directors of the Company and its subsidiaries as of
August 31, 1999.
Position with the Company or
Name Age Subsidiary
---- --- ----------------------------
Mark E. Bruk 40 President, Chief Executive Officer,
Treasurer and Chairman of the Board
and Director
Robert Harris 50 Manager of Creative Research,
EDUVERSE Accelerated Learning Systems
(Canada) Inc., Secretary and Director
Marc Crimeni 40 Executive Vice President, EDUVERSE
Accelerated Learning Systems (Canada)
Inc.
Jeffrey Mah 38 Chief Technology Officer, EDUVERSE
Accelerated Learning Systems (Canada)
Inc.
Lorne Reicher 42 Vice President, Operations, EDUVERSE
Accelerated Learning Systems (Canada)
Inc.
Peter O'Donnell 48 Director
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<PAGE>
Mark E. Bruk has served as the Company's President, Treasurer, CEO and
Chairman since May 28, 1998. He is also President, Treasurer, CEO and Chairman
of the Company's wholly-owned subsidiary EDUVERSE Accelerated Learning Systems
(Canada), Inc.; President, Secretary, Treasurer and sole Director of the
Company's wholly owned subsidiary ESL PRO Systems, Inc.; and President,
Secretary, Treasurer and sole Director of the Company's wholly owned subsidiary
M&M Information & Marketing Services, Inc. From July 1996 to August 1997, Mr.
Bruk served as Vice President of Applications and then Vice President of
Research & Development for InMedia Presentations, Inc., a multimedia and
software company ("InMedia"). From August 1995 to May 1996, Mr. Bruk served as
the Product Manager for Boswell International Technologies Ltd., a software
development company, where he supervised the redesign, development and
production of the Boswell ESL system which the Company has subsequently
licensed. From October 1994 to July 1995, Mr. Bruk founded and served as the
President of News4U, a information service for delivering news via alpha-numeric
and numeric pagers. From October 1993 to October 1994, Mr. Bruk served as
President of CanFuture Development Inc., a custom software development company.
Robert Harris has served as the Manager of Creative Research of the
Company's wholly owned subsidiary EDUVERSE Accelerated Learning Systems (Canada)
Inc. and as Secretary and Director of the Company since June 3, 1998. From 1996
to 1998, Mr. Harris served as executive assistant to the Investment Director of
a private investment corporation based in Vancouver and Riyadh, Saudi Arabia and
as the assistant to the President for Wayburn Resources Inc., a mineral
exploration company. From November 1990 to November 1995, Mr. Harris served as a
compliance officer and a director for SZL Sportsight Inc., a sports
entertainment technology company.
Marc Crimeni has served as the Executive Vice President of the Company's
wholly owned subsidiary EDUVERSE Accelerated Learning Systems (Canada), Inc.
since August 1, 1998. From November 1996 to July 1997, Mr. Crimeni served as
Vice President of Sales and Marketing at InMedia. From February 1994 to November
1996, he served as the International Sales Manager for Inetco Systems Inc., a
software company. From June 1992 to July 1993, Mr. Crimeni served as
International Sales Manager for Prologic Computer Corporation, a software
development company. On September 3, 1998, the British Columbia Securities
Commission fined Mr. Crimeni Cdn$10,000 for failing to disclose a pending
criminal proceeding involving the improper storage of a firearm in a regulatory
filing. As a result of this action, Mr. Crimeni agreed to resign any position he
held as a director or officer of a reporting issuer in British Columbia, to not
serve as a director or officer of any reporting issuer in British Columbia and
to not engage in any investor relations activities until December 4, 1999. Mr.
Crimeni also agreed to complete an educational program relating to securities
prior to resuming any position as a director or executive officer of a British
Columbia reporting issuer.
Jeffrey Mah has served as the Chief Technology Officer of the Company's
wholly-owned subsidiary EDUVERSE Accelerated Learning Systems (Canada), Inc.,
since August 1, 1998. From January 1998 to May 1998, Mr. Mah founded and was
President of e-werks Software, Inc., an educational software development firm.
From March 1997 to January 1998, he served as Senior Java Programer at InMedia.
From May 1996 to November 1996, Mr. Mah was a member of the Scientific and
Engineering Staff at MacDonald Dettwiler and Associates, an information
technology company. From May 1994 to May 1996, Mr. Mah founded and was President
of Stormchaser Productions, an information technology strategy and systems
development and integration company. Mr. Mah is also serving as an Instructor at
the British Columbia Institute of Technology, offering courses in object
oriented application design in Java and structured programming. He received his
Bachelor of Science Degree in Computer Science from the University of British
Columbia in 1985.
Lorne Reicher has served as the Vice President of Operations of the
Company's wholly owned subsidiary EDUVERSE Accelerated Learning Systems
(Canada), Inc., since January 1, 1999. From June 1991 to January 1998, Mr.
Reicher was the Director of Franchising, Western Region for Hartco Enterprises
Inc., a franchisor of systems integrators, computer resellers and computer
retailers. From June 1985 to Jun 1991, Mr. Reicher founded and was a partner and
General Manager of the Penny Group, a independent computer reseller association.
Peter O'Donnell has served as a Director of the Company since May 28, 1998.
Mr. O'Donnell is currently serving as the Vice-President, Marketing, of Intracom
Corporation, an Internet medical imaging company and as the Chief Operating
Officer of Personal Internet Assistants, Inc., an Internet research service.
From 1997 to 1998, Mr. O'Donnell served as the Chief Executive Officer of Soqual
Creative Marketing Services, a marketing company, and as the Executive
Vice-President, Marketing, of The Black Vodka Company. From 1994 to 1997,
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<PAGE>
Mr. O'Donnell served as the Executive Vice-President of Sales and Marketing for
OneVoice Corp., a multi-lingual Web content and translation/localization
service. Mr. O'Donnell currently serves on the Board of Advisors for VidBot.com,
a streaming video Internet directory company. He received his Bachelor's Degree
in Journalism in 1972 from the University of Florida.
Board of Directors
Each member of the Board of Directors is elected annually and holds office
until the next annual meeting of shareholders or until his successor has been
elected or appointed, unless his office is earlier vacated in accordance with
the Bylaws of the Company. Officers serve at the discretion of the Board and are
appointed annually. The Board currently has no committees.
None of the Company's directors or executive officers are parties to any
arrangement or understanding with any other person pursuant to which said
individual was elected as a director or officer of the Company. No director or
executive officer of the Company has any family relationship with any other
officer or director of the Company.
ITEM 6 EXECUTIVE COMPENSATION
Compensation of Executive Officers
The following table sets forth compensation information for the Company's
Chief Executive Officer during the fiscal year ended December 31, 1998:
<TABLE>
Summary Compensation Table
--------------------------
Compensation
Other Annual
Name and Salary Bonus Compensation
Principal Position Fiscal Year ($) ($) ($)
------------------ ----------- ----- ------ --------------
<S> <C> <C> <C> <C>
Mark E. Bruk 1998 60,000 -- --
President, CEO and Chairman
</TABLE>
Option/SAR Grants in Last Fiscal Year
The following table shows information regarding grants of stock options to
the Company's Chief Executive Officer during the year ended December 31, 1998.
<TABLE>
Individual Grants
-----------------------------------------------------------------------
Percent of
Number of Total Options
Shares Granted to
Underlying Employees in Exercise
Options Fiscal Price Expiration
Name Granted(#)(3) Year(%)(2) ($/Share)(1) Date
- --------------------------- ------------- -------------- ------------ -----------
<S> <C> <C> <C> <C>
Mark E. Bruk 300,000 23.7% $0.75 6/3/02
</TABLE>
- ----------------------------
(1) The exercise price per share of each option is equal to the fair market
value per share plus a premium of 10% of the fair market value per share of
the underlying common stock on the date of grant.
(2) Options to purchase 1,262,500 shares of common stock were granted by the
Company to its employees, consultants and directors.
(3) The options vest 2% per month for a period of 50 months from June 3, 1998.
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<PAGE>
Employment Agreements
Effective May 3, 1999, Marc Crimeni, Robert Harris, Jeffrey Mah and Lorne
Reicher have entered into employment agreements with EDUVERSE Accelerated
Learning Systems (Canada) Inc., the Company's wholly-owned subsidiary, providing
for annual salaries of Cdn$90,000, Cdn$36,000, Cdn$108,000 and Cdn$60,000,
respectively. The employment agreements may be terminated by the Company with 14
days written notice and by the employees with 30 days written notice. Each of
the above named employees have entered into confidentiality and non-competition
agreements with the Company.
Stock Option and Purchase Plans
1998 Stock Option Plan. The Board of Directors and shareholders of the
Company adopted the 1998 Stock Option Plan (the "1998 Plan") on June 3, 1998 and
amended it on May 30, 1999 and again on June 30, 1999. The 1998 Plan will
terminate on the earlier of June 3, 2008 or such other date as the Board of
Directors or committee thereof may determine. The 1998 Plan is administered by
the Board of Directors or by a committee thereof (the "Plan Administrator") and
provides that options may be granted to employees and officers of the Company or
any of its subsidiaries and to directors of the Company who are employees of the
Company or any of its subsidiaries, based on the eligibility criteria set out in
the 1998 Plan.
The 1998 Plan authorizes the grant of "incentive stock options" as defined
in Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"),
and "non-qualified" stock options. The options issued under the Stock Option
Plan are exercisable at a price fixed by the Plan Administrator, in its sole
discretion, subject to specific requirements relating to incentive stock options
under the Code. Non-qualified and incentive stock options generally expire ten
years from the grant date, except non-qualified and incentive stock options
which are granted to a person owning more than 10% of the combined voting power
of all classes of stock of the Company or any parent or subsidiary of the
Company expire after five years from the grant date.
The maximum number of the shares reserved for issuance under the 1998 Plan,
including options currently outstanding, is 2,500,000 shares. As of August 25,
1999, a total of 1,477,500 options are issued and unexercised.
1998 Director's Stock Option Plan. The Board of Directors and stockholders
of the Company adopted the 1998 Director's Stock Option Plan (the "1998
Directors Plan") on June 3, 1998. The 1998 Directors Plan will terminate on the
earlier of June 30, 2008 or such other date as the Board of Directors or
committee thereof may determine. The 1998 Directors Plan is administered by the
Board of Directors or by a committee thereof (the "Plan Administrator") and
provides that options may be granted to Directors of the Company who are not
employees of the Company.
Under the 1998 Directors Plan, options may be exercised at a price not less
than the fair market value of the Company's common stock on the date of grant,
which is deemed to be the closing price of the Company's shares on NASD
Over-The-Counter Bulletin Board Market on the date of grant. Options are granted
under the 1998 Directors Plan to eligible Directors in accordance with the
following formula:
1. Upon initial election or appointment to the Board of Directors each
director is entitled to receive an option to purchase up to 25,000
share of the Company's common stock.
2. Upon re-election to the Board of Directors each director is entitled
to receive and option to purchase up to 8,000 shares of the Company's
common stock.
In the event a Director serves only a partial term before re-election, the
number of options to purchase shares granted upon their re-election is prorated
to reflect the amount of time served as a Director. Options typically vest 2%
each month and expire 10 years from the date of grant.
At December 31, 1998 and June 30, 1999, the granting of 25,000 options at
an exercise price of $0.68 per share had been authorized by the Board of
Directors; however, no option agreements had been executed during 1998 or during
the six months ended June 30, 1999.
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<PAGE>
The maximum number of shares reserved for issuance under the 1998 Directors
Plan, including options currently outstanding, is 150,000 shares. As of August
25, 1999, a total of 25,000 options are issued and outstanding.
1998 Employee Stock Purchase Plan. The Company has established a share
compensation arrangement for its employees known as the 1998 Employee Stock
Purchase Plan (the "1998 Purchase Plan"). The 1998 Purchase Plan became
effective as of June 3, 1998 and will terminate on the earlier of June 3, 2008,
the date on which all authorized shares under the 1998 Purchase Plan are
distributed or on a date determined by the Board of Directors. The 1998 Purchase
Plan is administered by the Board of Directors or committee thereof (the "Plan
Administrator"). Under the terms of the 1998 Purchase Plan, the aggregate number
of shares that may be issued pursuant to the plan is 500,000.
The 1998 Purchase Plan provides that each full-time employee (subject to
certain limited exceptions) of the Company may purchase shares of the Company's
common stock by payroll deduction up to an amount equal to the lesser of (1) the
maximum number of shares set by the Plan Administrator, or (2) 200% of the
number of shares determined by dividing the dollar amount in such employee's
payroll deduction account by 85% of the closing bid price on the NASD OTC
Bulletin Board on the day previous to the purchase. The number of shares which
an employee may purchase during any given offering period is determined by
dividing the amount accumulated in such employee's payroll deduction account
during the offering period by the lower of (1) eighty-five percent of the fair
market value of a share of the Company's common stock on the first day of the
offering period, or (2) eighty-five percent of the fair market value of the
Company's common stock on the purchase date. At August 25, 1999, no employees
had yet been offered participation in the 1998 Purchase Plan.
Compensation of Directors
During the most recently completed financial year ended December 31, 1998,
there was no compensation paid by the Company to the directors for their
services as directors except as otherwise disclosed herein. There are no
standard arrangements for any such compensation to be paid other than
reimbursement for expenses incurred in connection with their services as
directors, although the Company from time to time may grant options to acquire
Common Shares for directors. As at the date hereof the Company has no
outstanding options to Directors that have been granted for their services as
such.
ITEM 7 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as otherwise disclosed herein, no director, senior officer,
principal shareholder, or any associate or affiliate thereof, had any material
interest, direct or indirect, in any transaction since the beginning of the last
financial year of the Company that has materially affected the Company, or any
proposed transaction that would materially affect the Company, except for an
interest arising from the ownership of shares of the Company where the member
will receive no extra or special benefit or advantage not shared on a pro rata
basis by all holders of shares in the capital of the Company.
In May 1998, pursuant to an exchange offer, the Company acquired 100% of
the outstanding Common Stock of ESL PRO Systems, Inc. and M&M Information &
Marketing Services, Inc., corporations controlled by Mark E. Bruk, the Company's
Chief Executive Officer, Treasurer and Chairman, and Marc Crimeni, Executive
Vice President of the Company's wholly owned subsidiary EDUVERSE Accelerated
Learning Systems (Canada) Inc. In connection with the acquisitions, the Company
issued to the stockholders of ESL and M&M an aggregate of 9,000,000 shares of
common stock. Mr. Bruk and Mr. Crimeni received 3,746,100 and 3,686,100 shares
of the Company, respectively.
During 1998 and 1999, Mr. Bruk loaned an aggregate of $63,685 to the
Company, of which amount $45,000 represented deferred consulting fees payable to
Mr. Bruk. The loan was interest free and contained no repayment terms. As of
July 31, 1999, all amounts outstanding under the loan have been prepaid.
In May 1999, the Company entered into employment agreements with Marc
Crimeni, Robert Harris, Jeffrey Mah and Lorne Reicher. See "Executive
Compensation -- Employment Agreements."
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<PAGE>
ITEM 8 DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue 50,000,000 shares of Common Stock,
$0.001 par value, of which 12,751,089 were outstanding at June 30, 1999. Holders
of Common Stock are entitled to dividends, pro rata, when, as and if declared by
the Board of Directors out of funds available therefor. Holders of Common Stock
are entitled to cast one vote for each share held at all stockholder meetings
for all purposes, including the election of directors. The holders of more than
50% of the Common Stock issued and outstanding and entitled to vote, present in
person or by proxy, constitute a quorum at all meetings of stockholders. The
vote of the holders of a majority of Common Stock present at such a meeting will
decide any question brought before such meeting, except for certain actions such
as amendments to the Company's Articles of Incorporation, mergers or
dissolutions which require the vote of the holders of a majority of the
outstanding Common Stock. Upon liquidation or dissolution, the holder of each
outstanding share of Common Stock will be entitled to share equally in the
assets of the Company legally available for distribution to such stockholder
after payment of all liabilities. Holders of Common Stock are not granted any
preemptive, subscription, redemption rights or registration rights. All
outstanding shares of Common Stock are fully paid and nonassessable.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of Preferred Stock,
$0.001 par value, of which no shares are currently outstanding. Holders of
Preferred Stock are not entitled to any voting rights. The Company does not
currently have any plans or arrangements to issue any Preferred Stock.
Anti-Takeover Provisions
Provisions of applicable Nevada law may affect potential changes in
control. The cumulative effect of these provisions may be to make it more
difficult to acquire and exercise control and to make changes in management.
Nevada law prohibits combinations between Nevada corporations and
interested stockholders for a period of three years after the interested
stockholder's date of acquiring shares unless the combination or the purchase of
the shares by the interested stockholder is approved by the board of directors.
Applicable Nevada law also prohibits business combinations between Nevada
corporations and interested stockholders following the expiration of three years
after the interested stockholder's date of acquiring shares unless the
combination meets the requirements specified in Section 78.439 for director and
stockholder approvals or Sections 78.441 to 78.444 inclusive with respect to the
consideration to be received in the combination by all stockholders other than
the interested stockholder. Applicable Nevada law defines "interested
stockholders" to include persons who, alone or together with affiliates,
beneficially own at least 10% of the outstanding stock of the corporation. A
Nevada corporation may opt out of the application of these provisions, but the
Company has not opted out.
Applicable Nevada law also denies voting rights to a stockholder who
acquires a controlling interest in a Nevada corporation, unless the voting
rights are approved by a majority of the voting powers of the corporations. A
Nevada corporation may opt out of the application of these provisions, but the
Company has not opted out.
Nevada law does not require a stockholder vote of the surviving corporation
of the merger if:
o the merger does not amend the existing articles of incorporation;
o each outstanding share of the surviving corporation before the merger
is unchanged; and
o the number of shares to be issued by the surviving corporation in the
merger does not exceed 20% of the shares outstanding immediately prior
to such issuance.
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<PAGE>
The effect of these provisions may be to make more difficult the
accomplishment of a merger or other takeover or change in control. To the extent
that these provisions have this effect, removal of the Company's incumbent Board
of Directors and management may be rendered more difficult. Further, these
provisions may make it more difficult for stockholders to participate in a
tender or exchange offer for common stock and in so doing may diminish the
market value of the common stock.
Transfer Agent and Registrar
The registrar and transfer agent of the Company is Holladay Stock Transfer,
Inc., 2939 North 67th Place, Scottsdale, Arizona, US 85251
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<PAGE>
PART II
ITEM 1 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock has traded on the NASD Over-The-Counter Market
Bulletin Board ("OTCBB") since July 6, 1998 under the symbol "EDUV." The
following is a summary of trading, on a calendar quarter basis, in the shares on
the OTCBB during 1998 and 1999:
<TABLE>
1998 High Low Volume
---- ---- --- ------
<S> <C> <C> <C>
Third Quarter $1.80 $1.60 171,500
Fourth Quarter $1.70 $0.50 1,221,800
1999
----
First Quarter $1.60 $0.62 6,419,700
Second Quarter $2.00 $0.68 4,068,600
Third Quarter (through $1.43 $.90 632,900
July 31, 1999)
</TABLE>
The price for the Company's Shares on the OTCBB on July 31, 1999, was $1.18
(High) and $1.00 (Low), and the close price was $1.06.
Other than described above, the Company's shares are not and have not been
listed or quoted on any other exchange or quotation system.
As of June 30, 1999, the Company had approximately 800 shareholders of
record (including nominees and brokers holding street accounts) of shares the
Company's Common Stock.
The Company has never paid dividends on its Common Stock. The Company
currently intends to retain earnings for use in its business and does not
anticipate paying any dividends in the foreseeable future. As of August 31, 1999
there are outstanding options to purchase 1,477,500 shares of common stock.
ITEM 2 LEGAL PROCEEDINGS
The Company is not a party to, and none of the Company's property is
subject to, any material pending or threatened legal proceeding.
ITEM 3 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
On May 28, 1998, upon recommendation by its Board of Directors, the Company
dismissed the accounting firm Barry L. Friedman, P.C., of 1582 Tulita Drive, Las
Vegas, Nevada, US 89123, as the auditors for the Company. On March 22, 1999, the
Company retained Ernst & Young LLP, of 700 West Georgia Street, Vancouver,
British Columbia, Canada V7Y1C7, as auditors for the Company.
In connection with the audits of the most recent fiscal years and any
interim period preceding dismissal, no disagreements exist with any former
accountant on any matter of accounting principles or procedure, which
disagreements if not resolved to the satisfaction of the former accountant would
have caused him to make reference in connection with his report to the subject
matter of the disagreement(s).
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<PAGE>
The principal accountant's report on the financial statements for any of
the past two years contained no adverse opinion or a disclaimer of opinion nor
was qualified as to uncertainty, audit scope or accounting principles.
ITEM 4 RECENT SALES OF UNREGISTERED SECURITIES
On May 28, 1999, the Company issued 2,000,000 shares of common stock in
connection with the acquisition of ESL Pro Systems, Inc. ("ESL") at a deemed
price of $0.001 per share for an aggregate purchase price of $2,000.00. The
shares were issued to the stockholders of ESL: Mark Bruk, Marc Crimeni, Boswell
International Technologies Ltd., Maggie Dodd, Al Hasley, Peter Apostoli, Wyn
Roberts and Colin Laine. The shares were issued to holders outside the United
States pursuant to an exemption from registration provided by Section 4(2) under
the Securities Act of 1933, as amended (the "Securities Act").
On May 28, 1999, the Company issued 7,000,000 shares of common stock in
connection with the acquisition of M&M Information & Marketing Service, Inc.
("M&M") at a deemed price of $0.001 per share for an aggregate purchase price of
$7,000.00. The shares were issued to the stockholders of M&M: Mark Bruk, Lil
Crimeni, John and Helen Bruk, Ian Bruk, Bruce Bruk, Steven and Karen Bruk, Emily
Bruk, Adele Paulsen, Nick Sereda, Ron Crimeni, Darrel Crimeni, Adrian Crimeni,
Zena Weston, Iris Hickey, Jeffrey Mah, Jeff Giddens, Jeff Day, Lorne Johnson,
Bonnie Mah, David and Florence Mazzucco, Marlene Derrah, Martin Mazzucco,
Deborah Joel, Marshall Farris, Christopher Brough, Dickson Wong, Carlos Ceberio,
Juraj Krajci, Robert Harris, Peter O'Donnell and Ron Balshine. The shares were
issued to holders outside the United States pursuant to an exemption from
registration provided by Section 4(2) under the Securities Act and an exclusion
from registration provided by Regulation S under the Securities Act.
On May 27, 1998, the Company issued and additional 2,250,000 shares of
common stock at a deemed price of $0.001 per share in connection with the
acquisition of ESL and M&M to the former stockholders of ESL and M&M. The shares
were issued pursuant to an exemption from registration provided by Section 4(2)
under the Securities Act and an exclusion from registration provided by
Regulation S under the Securities Act.
In June 1998, the Company issued 136,500 shares of common stock to Tantum
Ltd. at prices per share ranging from $0.675 to $0.80 for an aggregate purchase
price of $99,950. The shares were issued to a holder outside the United States
pursuant to an exclusion from registration under Regulation S under the
Securities Act.
On July 27, 1998, the Company issued 2,630 shares of common stock to Ryan
and Erin Sawatzky at a price of per share of $1.25 for an aggregate purchase
price of $3,288. The shares were issued to a holder outside the United States
pursuant to an exclusion from registration under Regulation S under the
Securities Act.
On August 28, 1998, the Company issued 66,666 shares of common stock to
Tantum Ltd. at a price of per share of $0.75 for an aggregate purchase price of
$50,000. The shares were issued to a holder outside the United States pursuant
to an exclusion from registration under Regulation S under the Securities Act.
From October to November, 1998, the Company issued convertible notes in the
aggregate amount of $30,000 to Mark Bruk, Marshall Farris and Zina Weston. The
notes beared interest at 25% for the first 90 days and 10% thereafter. At the
option of the holder(s) the loan was convertible into common shares of the
Company at a conversion rate of (i) $0.60 per share for the accrued interest
protion only or (ii) $0.50 per share for the principal and accured interest. On
March 15,1999 49,999 shares of commons stock at $0.60 per share were issued to
Mark Bruk (25,000), Marshall Farris (16,666) and Zina Weston (8,333) in payment
of outstanding interest on these notes. The Notes were issued pursuant to an
exclusion from registration under Regulation S under the Securities Act. As of
August 27, 1999, the outstanding principal amount of the notes has been paid in
full.
On December 14, 1998, the Company issued 25,000 shares of common stock to
Lorne Reicher in exchange for cancellation of $8,750 in debt owed by the
Company. The deemed price of per share was $2.86. The shares were issued to a
holder outside the United States pursuant to an exclusion from registration
under Regulation S under the Securities Act.
In December 1998, the Company issued 123,880 shares of common stock to
Tantum Ltd. at prices per share ranging from $0.35 to $0.57 for an aggregate
purchase price of $54,936.60. The shares were issued to a holder outside the
United States pursuant to an exclusion from registration under Regulation S
under the Securities Act.
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<PAGE>
On December 29, 1998 and December 30, 1998, the Company issued an aggregate
of 93,500 shares of common stock to Jonathan Davies, Vaughn Barbon and Maggie
Dodd in exchange for cancellation of an aggregate of $62,900 in debt owed by the
Company. The deemed price per share of $0.672. The shares were issued to a
holder outside the United States pursuant to an exclusion from registration
under Regulation S under the Securities Act.
On January 12, 1999, the Company issued 35,211 shares of common stock to
Tantum Ltd. at a price per share of $0.71 for an aggregate purchase price of
$24,999.81. The shares were issued to a holder outside the United States
pursuant to an exclusion from registration under Regulation S under the
Securities Act.
On January 29, 1999, the Company issued 30,768 shares of common stock to
Tantum Ltd. and Bingo, Inc. at a price per share of $0.65 for an aggregate
purchase price of $19,999.20. The shares were issued to holders outside the
United States pursuant to an exclusion from registration under Regulation S
under the Securities Act.
On January 29, 1999, the Company issued 6,541 shares of common stock to
Marshall Farris at a price per share of $0.733 for an aggregate purchase price
of $4,794.55. The shares were issued to a holder outside the United States
pursuant to an exclusion from registration under Regulation S under the
Securities Act.
In February 1999 and March 1999, the Company issued an aggregate of 119,038
shares of common stock to Tantum Ltd. at prices per share ranging from $0.59 to
$1.00 for an aggregate purchase price of $85,998.98. The shares were issued to a
holder outside the United States pursuant to an exclusion from registration
under Regulation S under the Securities Act.
In March 1999, the Company issued an aggregate 700,000 shares of common
stock to Bona Vista West Ltd. at prices per share ranging from $0.83 to $1.00
for an aggregate purchase price of $575,000. The shares were issued pursuant to
an exemption from registration provided by Rule 504 under the Securities Act.
On March 15, 1999, the Company issued an aggregate of 49,999 shares of
common stock to Mark Bruk, Marshall Farris and Zina Weston at a price per share
of $0.60 for an aggregate purchase price of $29,999.40. The shares were issued
to a holder outside the United States pursuant to an exclusion from registration
under Regulation S under the Securities Act.
On March 31, 1999, the Company issued 5,294 shares of common stock to
Vaughn Barbon at a price per share of $0.567 for an aggregate purchase price of
$3,000.00. The shares were issued to a holder outside the United States pursuant
to an exclusion from registration under Regulation S under the Securities Act.
On March 31, 1999, the Company issued 3,393 shares of common stock to
Marshall Farris at a price per share of $0.507 for an aggregate purchase price
of $1,719.48. The shares were issued to a holder outside the United States
pursuant to an exclusion from registration under Regulation S under the
Securities Act.
On May 21, 1999, the Company issued 102,669 shares of common stock to
Re/Max Realty Investments Ltd. at a price per share of $$0.487 for an aggregate
purchase price of $49,999.80. The shares were issued to a holder outside the
United States pursuant to an exclusion from registration under Regulation S
under the Securities Act.
On July 19, 1999, the Company issued 2,345 shares of common stock to Vaughn
Barbon at a price per share of $0.853 for an aggregate purchase price of $2,700.
The shares were issued to a holder outside the United States pursuant to an
exclusion from registration under Regulation S under the Securities Act.
From July 1998 to June, 1999, the Company issued non-interest bearing notes
with no specific terms of repayment in the aggregate amount of $95,000. The
notes were issued pursuant to an exclusion from registration under Regulation S
under the Securities Act. As of August 27, 1999, the outstanding principal
amount of the notes has been paid in full.
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<PAGE>
Since May 1998, the Company has issued an aggregate of 1,477,500 options to
purchase its common stock, with exercise prices ranging from $0.68 to $5.50 per
share, to employees, directors, advisors and service providers under its 1998
Stock Option Plan and its 1998 Directors Stock Option Plan. Of these options,
none have been cancelled without being exercised, options for no shares have
been exercised and all options remain outstanding. The issuance of these options
and the underlying shares were exempt from registration under Rule 701 under the
Securities Act.
ITEM 5 INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Nevada General Corporation Law (the "Nevada Act") authorizes Nevada
corporations to indemnify any person who was or is a party to any proceeding
(other than an action by, or in the right of, the corporation), by reason of the
fact that he or she is or was a director, officer, employee, or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation or other entity,
against liability incurred in connection with such proceeding, including any
appeal thereof, if he or she acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. In the case of an
action by or on behalf of a corporation, indemnification may not be made if the
person seeking indemnification is adjudged liable, unless the court in which
such action was brought determines such person is fairly and reasonably entitled
to indemnification. The indemnification provisions of the Nevada Act require
indemnification if a director or officer has been successful on the merits or
otherwise in defense of any action, suit, or proceeding to which he or she was a
party by reason of the fact that he or she is or was a director or officer of
the corporation. The indemnification authorized under Nevada law is not
exclusive and is in addition to any other rights granted to officers and
directors under the Articles of Incorporation or Bylaws of a corporation or any
agreement between officers and directors and a corporation. A corporation may
purchase and maintain insurance or furnish similar protection on behalf of any
officer or director against any liability asserted against the officer or
director and incurred by the officer or director in such capacity, or arising
out of the status, as an officer or director, whether or not the corporation
would have the power to indemnify him or her against such liability under the
Nevada Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, or persons controlling the Company
pursuant to the foregoing provisions, the Registrant has been informed that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
-36-
<PAGE>
PART F/S
The report and financial statements of the Company for the year ended
December 31, 1998 reported on by Ernst & Young, LLP, and the unaudited financial
statements for the period ended June 30, 1999 are attached hereto. The financial
statements were prepared in accordance with generally accepted accounting
principles in United States and are presented in United States dollars.
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
EDUVERSE.COM
(formerly Perfect Future, Ltd.)
December 31, 1998
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Directors of
Eduverse.Com
We have audited the accompanying consolidated balance sheet of Eduverse.Com as
of December 31, 1998, and the related consolidated statement of operations and
deficit, stockholders' equity and cash flows for the period from the date of
incorporation on May 5, 1998 to December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Eduverse.Com as of
December 31, 1998 and the results of its operations and its cash flows for the
period from the date of incorporation on May 5, 1998 to December 31, 1998, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Vancouver, Canada,
May 25, 1999. Chartered Accountants
<PAGE>
Eduverse.Com
(formerly Perfect Future, Ltd.)
CONSOLIDATED BALANCE SHEET
(Expressed in U.S. dollars)
December 31, 1998
$
- --------------------------------------------------------------------------------
ASSETS
Current
Cash 37,757
Accounts receivable, less allowance of $nil [note 3] 18,477
Finished goods inventory 44,421
Prepaid expenses 5,651
- --------------------------------------------------------------------------------
Total current assets 106,306
Capital assets, net [note 4] 31,774
Deferred charge, net of accumulated amortization of
$52,000 [note 5] 159,800
- --------------------------------------------------------------------------------
297,880
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Accounts payable [notes 6 and 11] 102,778
Capital lease obligations 7,041
Loans payable [note 8] 78,685
Current portion of royalty payable [note 5] 29,400
Unearned revenue 20,138
- --------------------------------------------------------------------------------
Total current liabilities 238,042
Royalty payable [note 5] 130,400
- --------------------------------------------------------------------------------
368,442
- --------------------------------------------------------------------------------
Commitment [note 5]
Stockholders' equity
Share capital [note 9]
Common stock - $0.001 par value
50,000,000 authorized, 11,607,046 issued and outstanding 11,607
Preferred stock - $0.001 par value
5,000,000 authorized, nil issued and outstanding -
Shares to be issued [note 11] 46,747
Additional paid in capital 286,127
Cumulative translation adjustment 1,673
Deficit (416,716)
- --------------------------------------------------------------------------------
Total stockholders' equity (70,562)
- --------------------------------------------------------------------------------
297,880
- --------------------------------------------------------------------------------
See accompanying notes
On behalf of the Board:
Director Director
<PAGE>
Eduverse.Com
(formerly Perfect Future, Ltd.)
CONSOLIDATED STATEMENT OF OPERATIONS
AND DEFICIT
(Expressed in U.S. dollars)
For the Period From Date of
Incorporation on May 5, 1998
to December 31, 1998
$
- --------------------------------------------------------------------------------
REVENUE [note 3]
Software sales 14,824
- --------------------------------------------------------------------------------
Cost of goods sold (6,873)
- --------------------------------------------------------------------------------
7,951
- --------------------------------------------------------------------------------
EXPENSES
Amortization of deferred charge 52,000
Depreciation 4,205
General and administration [note 7] 207,644
Marketing 57,485
Research and development 103,333
- --------------------------------------------------------------------------------
424,667
- --------------------------------------------------------------------------------
Net loss (416,716)
Deficit, beginning of period --
- --------------------------------------------------------------------------------
Deficit, end of period (416,716)
- --------------------------------------------------------------------------------
Comprehensive loss
Net loss (416,716)
Foreign currency translation 1,673
- --------------------------------------------------------------------------------
Comprehensive loss 415,043
- --------------------------------------------------------------------------------
Basic and fully diluted loss per share [note 9] (0.04)
- --------------------------------------------------------------------------------
Weighted average number of shares 9,512,400
- --------------------------------------------------------------------------------
See accompanying notes
<PAGE>
Eduverse.Com
(formerly Perfect Future, Ltd.)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
For the period from date of incorporation on May 5, 1998 to December 31, 1998 (Expressed in U.S. dollars)
Common stock Cumulative
Number Shares to Additional translation Accumulated
of shares Amount be issued paid in capital adjustment deficit Total
# $ $ $ $ $ $
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Shares issued upon incorporation 9,000,000 9,000 -- 10,560 -- -- 19,560
Additional shares issued as a result
of the reverse acquisition [note 9] 2,250,000 2,250 -- (2,249) -- -- 1
Issuance of common stock 357,046 357 -- 229,816 -- -- 230,173
Common stock to be issued [note 11] 90,171 -- 46,747 -- -- -- 46,747
Stock based compensation -- -- -- 48,000 -- -- 48,000
Loss for year -- -- -- -- -- (416,716) (416,716)
Cumulative translation adjustment -- -- -- -- 1,673 -- 1,673
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 11,697,217 11,607 46,747 286,127 1,673 (416,716) (70,562)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Eduverse.Com
(formerly Perfect Future, Ltd.)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Expressed in U.S. dollars)
Nine Month Period Ended
December 31, 1998
$
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss (416,716)
Adjustment to reconcile net loss to net cash used in
operating activities:
Common shares issued for services rendered 16,748
Amortization of deferred charge 52,000
Depreciation 4,205
Stock based compensation 48,000
Changes in non-cash working capital items:
Accounts receivable (18,477)
Finished goods inventory (44,421)
Prepaid expenses (5,651)
Accounts payable 102,778
Unearned revenue 20,138
- --------------------------------------------------------------------------------
Net cash used in operating activities (241,396)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in loans payable 78,685
Payments under capital lease obligations (8,640)
Issuance of common stock 197,733
Cash received on common stock to be issued 30,000
- --------------------------------------------------------------------------------
Net cash provided by financing activities 297,778
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of capital assets (20,298)
- --------------------------------------------------------------------------------
Net cash used in investing activities (20,298)
- --------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash 1,673
Net increase in cash 37,757
Cash, beginning of period --
- --------------------------------------------------------------------------------
Cash, end of period 37,757
- --------------------------------------------------------------------------------
See accompanying notes
<PAGE>
1. NATURE OF BUSINESS AND REVERSE ACQUISITION
Eduverse.Com. (the "Company") was incorporated on October 22, 1991, under the
laws of the State of Nevada, as Ward's Futura Automotive, Ltd. The Company's
name was subsequently changed to Perfect Future, Ltd. On June 11, 1998 its name
was changed to Eduverse Accelerated Learning Systems, Inc. and on May 19, 1999
to Eduverse.Com.
Pursuant to a series of transactions on May 28, 1998 and May 29, 1998, the
Company acquired all of the issued and outstanding share capital of ESL Pro
Systems Inc. ("ESL") and M&M Information and Marketing Services Inc. ("M&M"),
both Nevada companies incorporated on May 5, 1998 and under common control. As a
result of these acquisitions, the previous shareholders of ESL and M&M, as a
group, owned more than 50% of the issued and outstanding voting shares of the
Company. Consequently, this business combination has been accounted for as a
reverse acquisition whereby ESL and M&M are deemed to have been combined, on a
continuity of interests basis (book value), since their inception on May 5, 1998
and to have acquired the Company. Accordingly, these consolidated financial
statements reflect the accounts of ESL & M&M since their inception at their
historic net book values, and the accounts of the Company, comprising nominal
net assets, at their estimated fair value at the time of the transaction.
The reverse acquisition transaction resulted in the acquisition of 2,000,000
common shares of ESL and 7,000,000 common shares of M&M for the issuance of
9,000,000 of the Company's common shares. The fair value of the net assets of
the Company deemed acquired as a result of the reverse acquisition were ascribed
a nominal value.
The Company is a technology-based company focused on developing and marketing
interactive multimedia educational software products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries: Eduverse Accelerated Learning Systems (Canada)
Inc. (British Columbia, Canada), incorporated July 9, 1998, ESL Pro Systems Inc.
(Nevada) and M&M Information and Marketing Services Inc. (Nevada). All
significant intercompany accounts and transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
Finished goods inventory
Finished goods inventory is valued at the lower of weighted average cost and net
realizable value.
Capital assets
Capital assets are recorded at cost and are being depreciated on a straight-line
basis over their estimated useful lives as follows:
Computer equipment 3 years
Furniture and office equipment 5 years
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
Leases
Leases which transfer substantially all the benefits and risks of ownership of
the leased property are accounted for as capital leases whereby the property is
recorded as an asset and the obligation incurred is recorded as a liability.
Under this method of accounting for leases, the asset is depreciated over its
estimated useful life and the obligation, including interest thereon, is
amortized over the life of the lease.
Financial instruments
The fair values of the financial instruments consisting of cash, accounts
receivable, accounts payable, capital lease obligations, loans and royalties
payable, approximates their carrying values in the financial statements unless
otherwise indicated.
Advertising costs
Advertising costs are expensed as incurred.
Deferred charge
The deferred charge represents a license fee for the use of software and is
being amortized on a straight-line basis over the three year minimum term of the
license agreement.
Income taxes
The Company uses the liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on the
difference between financial statement and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that are expected to be in
effect when the differences are expected to reverse. Deferred tax assets are
reduced by a valuation allowance in respect of amounts considered by management
to be less likely than not of realization in future periods.
Research and development
Research and development costs are expensed in the period incurred.
Stock-based compensation
The Company accounts for stock-based compensation based on the provision of
Accounting Principles Board Opinion No. 25 whereby the intrinsic value of
options granted is recorded at the measurement date. The Company has elected to
only disclose the effects of the fair value method of accounting for stock
options prescribed by Statement of Financial Accounting Standards ("SFAS") No.
123.
Computation of loss per share
Basic loss per share is computed by dividing the loss attributable to common
stockholders by the weighted average number of common shares outstanding for
that period. Diluted loss per share is computed giving effect to all dilutive
potential common shares that were outstanding during the period. As at December
31, 1998, the diluted loss per share is equivalent to the basic loss per share
since the Company is in a loss position.
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
Foreign currency translation
The functional currency of the Company is the Canadian dollar, while the
reporting currency is the U.S. dollar. Under this method assets and liabilities,
expressed in foreign currencies, are translated at the rate of exchange
prevailing at the balance sheet date. Revenue and expense accounts are
translated at the average exchange rate for the year.
Gains and losses arising on foreign currency translation are recorded in
stockholders' equity as an adjustment to the cumulative translation account.
Revenue recognition and unearned revenue
Revenue from the sale of software products is recognized at the time products
are shipped to customers.
Recent pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). SFAS 133 will be effective for the Company's December
31, 2001 year end. The Company has not determined the impact, if any, of these
pronouncements on its consolidated financial statements.
3. MAJOR CUSTOMERS
For the year ended December 31, 1998, the majority of software sales were
derived from one customer representing 36% of software sales. As at December 31,
1998 the aggregate accounts receivable balance relating to this customer was
$5,715.
4. CAPITAL ASSETS
<TABLE>
Accumulated Net book
Cost depreciation value
$ $ $
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Computer equipment 28,230 3,430 24,800
Furniture and office equipment 7,749 775 6,974
- --------------------------------------------------------------------------------------------------
35,979 4,205 31,774
- --------------------------------------------------------------------------------------------------
</TABLE>
Computer equipment under capital leases have a cost of $15,681 and related
accumulated depreciation of $2,348.
5. DEFERRED CHARGE
On May 7, 1998, the Company, entered into a license agreement with Boswell
International Technologies Ltd. to acquire certain rights to developed software.
Pursuant to the license agreement, the Company is required to make certain
minimum annual royalty payments and may be required to pay additional amounts
based on sales levels for a minimum period of 3 years. Accordingly, the Company
has recorded a liability and deferred charge equal to the minimum royalty
payable of $211,800 (Cdn $325,000).
<PAGE>
5. DEFERRED CHARGE (cont'd.)
The minimum amounts repayable over the next three years are as follows:
$
----------------------------------------------------------------------------
1999 29,400
2000 81,500
2001 48,900
----------------------------------------------------------------------------
159,800
----------------------------------------------------------------------------
During the year, the Company issued 80,000 common shares to settle $52,000 of
royalties due.
6. ACCOUNTS PAYABLE
1998
$
- ----------------------------------------------------------------------------
Trade accounts 83,055
Employee compensation 19,723
- ----------------------------------------------------------------------------
102,778
- ----------------------------------------------------------------------------
7. RELATED PARTY TRANSACTIONS
General and administration expenses includes consulting fees of $57,467 paid to
officers of the Company during the period.
8. LOANS PAYABLE
1998
$
- ------------------------------------------------------------------------------
Stockholder Loan 48,685
Inventory Loan 15,000
Third Party Loan 15,000
- ------------------------------------------------------------------------------
78,685
- ------------------------------------------------------------------------------
The Stockholder Loan, due to a stockholder who is also an officer of the
Company, and the Third Party Loan are non-interest bearing and have no specific
terms of repayment.
The Inventory Loan bears interest at 25% for the first 90 days and 10%
thereafter. At the option of the holder the loan may be converted into common
shares of the Company at a conversion rate of (i) $0.60 per share for the
accrued interest portion only or (ii) $0.50 per share for the principal and
accrued interest.
<PAGE>
9. SHARE CAPITAL
[a] Authorized
The authorized capital of the Company consists of 50,000,000 common shares with
$0.001 par value and 5,000,000 preferred shares with $0.001 par value.
[b] Issued and outstanding
<TABLE>
Number
of Shares Amount
# $
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Shares of ESL and M&M issued on incorporation May 5, 1998
(2,000,000 and 7,000,000 respectively) 9,000,000 9,000
Additional shares issued as a result of the reverse 2,250,000 2,250
acquisition
Shares issued for cash pursuant to subscription agreements 277,046 277
Shares issued for settlement of royalty
payable [note 5] 80,000 80
- --------------------------------------------------------------------------------------------------
Balance, December 31, 1998 11,607,046 11,607
- --------------------------------------------------------------------------------------------------
</TABLE>
During the period, the Company issued 277,046 common shares pursuant to
subscription agreements at prices ranging from $0.35 to $1.25 per share for cash
of $178,173.
During the period, the Company issued common shares for consideration greater
than the par value of $0.001 per share. The excess of the consideration received
over the par value of the shares issued in the amount of $229,816 has been
allocated to additional paid in capital.
[c] Stock options
During the period ended December 31, 1998, the stockholders approved the
creation of an employee stock option plan (the "1998 Stock Option Plan") and a
director stock option plan (the "1998 Directors' Stock Option Plan") pursuant to
which the Company has reserved 1,500,000 and 150,000 common shares,
respectively, for issuance.
Stock option transactions for the respective periods and the number of stock
options outstanding are summarized below:
Number of
Optioned
Common Price
Shares Range
# $
---------------------------------------------------------------- --------------
Options granted 1,262,500 $0.68 - 0.75
Options cancelled and expired -- --
---------------------------------------------------------------- --------------
Balance, December 31, 1998 1,262,500 $0.68 - 0.75
---------------------------------------------------------------- --------------
The outstanding options at December 31, 1998 of 1,262,500 expire after 50 months
from the date the option is granted, at various dates beginning August 3, 2002
and ending February 21, 2003.
During the period ended December 31, 1998 the Company repriced 400,000 and
362,500 stock options with exercise prices of $1.50 and $1.65 respectively, to
$0.68 and $0.75 respectively.
Options granted vest in equal amounts at 2% per month. At December 31, 1998,
84,250 options were exercisable.
[d] The exercise price of certain stock options granted to employees and a
consultant in the year were less than the market price of the underlying
stock on the date of grant. Compensation expense of $48,000 related to the
options has been reflected in 1998. Had compensation expense been
determined based on the fair value at the
<PAGE>
9. SHARE CAPITAL (cont'd.)
grant dates for those options issued to employees and the consultant,
consistent with the method described in SFAS No. 123, the Company's loss
and loss per common share would have been increased to the pro forma
amounts indicated below:
1998
$
---------------------------------------------------------------------------
Loss As reported (416,716)
Pro forma (457,716)
Basic and diluted loss per common share As reported (0.04)
Pro forma (0.05)
---------------------------------------------------------------------------
The fair value of each option granted in 1998 was estimated at the date of
grant using a Black-Scholes pricing model with the following weighted
average assumptions: risk free interest rates of 5%; dividend yields of 0%;
volatility factors of the expected market price of the Company's common
stock of 1.1 and a weighted average expected life of the option of 3.7
years. The weighted-average fair value of options granted during the year
was $0.81.
[e] Stock purchase plan
During the period ended December 31, 1998, the stockholders approved the
creation of an employee stock purchase plan pursuant to which the Company has
reserved 500,000 common shares for issuance. The Plan allows participating
employees, as defined in the Plan, to purchase common shares of the Company
through payroll deductions up to a maximum as determined by a formula described
in the Plan. At December 31, 1998, no common shares have been purchased pursuant
to the Plan.
10. INCOME TAXES
At December 31, 1998, the Company has a net operating loss for United States
income tax purposes of approximately $100,000 which will expire in 2018 if not
utilized.
In addition, the Company has non-capital losses for Canadian income tax purposes
of approximately $210,000 which will expire in 2005.
Deferred income taxes reflect the net effects of temporary differences between
the carrying value of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The Company has recognized a
valuation allowance of $153,000 equal to the deferred tax assets due to the
uncertainty of realizing the benefits of the assets.
11. SUBSEQUENT EVENTS
The following events have occurred subsequent to December 31, 1998:
[a] The Company issued 52,630 common shares for which proceeds of $30,000 were
received prior to December 31, 1998, and 37,541 for services rendered prior
to December 31, 1998 at a deemed value of $16,748. The $16,748 was recorded
as an expense at December 31, 1998.
[b] Pursuant to subscription agreements, the Company issued 987,686 common
shares for gross proceeds of $756,000.
[c] The Company issued 66,186 common shares for services rendered at a deemed
value of $39,195. Of this amount, $4,875 was for services rendered prior to
December 31, 1998 and is included in accounts payable.
[d] The Company granted 215,000 stock options at various exercise prices
ranging from $1.06 to $5.50. These options expire up to July 9, 2003.
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
eduverse.com
June 30, 1999
(unaudited)
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
The following historical financial data provided as of and for the six months
ended June 30, 1999 have been derived from the Company's unaudited internal
consolidated interim financial statements and have been prepared in accordance
with United States generally accepted accounting principles. In the opinion of
the Company's management, contained within the financial statements are all
adjustments, which are necessary for a fair representation of the information
pertaining to the Company's financial position as of June 30, 1999.
<PAGE>
eduverse.com
(formerly Perfect Future Ltd.)
<TABLE>
CONSOLIDATED BALANCE SHEET
As at June 30, 1999 (unaudited) (Expressed in U.S. dollars)
30-Jun
1999
$
(unaudited)
- -----------------------------------------------------------------------------------------
<S> <C>
ASSETS
Current
Cash 331,733
Accounts receivable, less allowance of $nil 120,702
Finished goods inventory 15,464
- -----------------------------------------------------------------------------------------
Total currents assets 467,899
Capital assets, net [note 3] 50,732
Deferred charge, net of accumulated amortization of
$83,900 127,900
- -----------------------------------------------------------------------------------------
646,531
- -----------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Accounts payable and accrued liabilites 57,331
Loans payable [note 5] 27,390
Current portion of royalty payable [note 6] 62,000
- -----------------------------------------------------------------------------------------
Total current liabilities 146,721
Royalty payable [note 6] 97,800
- -----------------------------------------------------------------------------------------
244,521
- -----------------------------------------------------------------------------------------
Commitment [note 6]
Stockholders' equity
Share capital [note 7]
Common Stock - $0.001 par value
50,000,000 authorized, 12,751,089 issued and outstanding 12,751
Preferred stock - $0.001 par value
5,000,000 authorized, nil issued and outstanding 0
Additional paid in capital 1,130,022
Cumulative translation adjustment (2,026)
Deficit (738,737)
- -----------------------------------------------------------------------------------------
Total stockholders' equity 402,010
- -----------------------------------------------------------------------------------------
646,531
- -----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
eduverse.com
(formerly Perfect Future Ltd.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
(Expressed in U.S. dollars)
5-May-98
Six Months (date of
Ended incorporation) to
30-Jun 31-Dec
1999 1998
$ $
(unaudited) (audited)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE
Software Sales [note 4] 95,497 14,824
Distribution royalties 40,644 0
Other Income [note 4] 96,945 0
- -----------------------------------------------------------------------------------------------------
233,086 14,824
Cost of goods sold (35,923) 6,873
- -----------------------------------------------------------------------------------------------------
197,163 7,951
- -----------------------------------------------------------------------------------------------------
EXPENSES
Amortization of deferred charge 31,900 52,000
Depreciation 7,336 4,205
General and administration 216,185 207,644
Marketing 127,797 57,485
Research and development 135,966 103,333
- -----------------------------------------------------------------------------------------------------
519,184 424,667
- -----------------------------------------------------------------------------------------------------
Loss for the period (322,021) (416,716)
Deficit beginning of period (416,716) 0
- -----------------------------------------------------------------------------------------------------
Deficit end of period (738,737) (416,716)
- -----------------------------------------------------------------------------------------------------
Comprehensive loss
Net loss (738,737) (416,716)
Foreign currency translation (3,699) 1,673
- -----------------------------------------------------------------------------------------------------
Comprehensive loss (740,436) (415,043)
- -----------------------------------------------------------------------------------------------------
Basic and fully diluted loss per share (0.06) (0.04)
- -----------------------------------------------------------------------------------------------------
Weighted average number of shares 12,333,400 9,512,400
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
eduverse.com
(formerly Perfect Future Ltd.)
CONSOLIDATED STATEMENT OF CASH FLOW
<TABLE>
(Expressed in U.S. dollars)
5-May-98
Six months (date of
Ended Incorporation) to
30-Jun Dec. 31
1999 1998
$ $
(unaudited) (audited)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Loss for the period (322,021) (416,716)
Adjustment to reconcile net loss to net cash used in
operating activities:
Common shares issued for services rendered 42,294 16,748
Amortization of deferred charge 31,900 52,000
Depreciation 7,336 4,205
Stock based compensation 0 48,000
Changes in non-cash working capital items:
Accounts receivable (102,225) (18,477)
Finished goods inventory 28,957 (44,421)
Prepaid expenses 5,651 (5,651)
Accounts payable (45,447) 102,778
Unearned revenue (20,138) 20,138
- -------------------------------------------------------------------------------------------------
Net cash used in operating activities (374,053) (241,396)
- -------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Advances (repayments) of loans (51,295) 78,685
Payments under capital lease obligations (7,041) (8,640)
Issuance of common stock 755,998 197,733
Cash received on common stock to be issued 0 30,000
- -------------------------------------------------------------------------------------------------
Net cash provided by financing activities 697,662 297,778
- -------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of capital assets (26,294) (20,298)
- -------------------------------------------------------------------------------------------------
Net cash used in investing activities (26,294) (20,298)
- -------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash (3,699) 1,673
Net increase in cash 293,976 37,757
Cash, beginning of year 37,757 0
- -------------------------------------------------------------------------------------------------
Cash, end of the period 331,733 37,757
- -------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
1. BASIS OF PRESENTATION
The Company's consolidated financial statements for the period ended June
30, 1999 have been prepared on a going concern basis which contemplates the
realization of assets and the settlement of liabilities and commitments in
the normal course of business for the foreseeable future. The Company
incurred a loss of $322,021 and cash outflows from operations of $342,713
for the period ended June 30, 1999 and has incurred significant operating
losses and cash outflows from operations in the period ended December 31,
1998. The ability of the Company to continue as a going concern is
dependent upon achieving profitable operations and upon obtaining
additional financing. The outcome of these matters cannot be predicted at
this time. No assurances can be given that the Company will be successful
in raising sufficient additional capital. Further, there can be no
assurance, assuming the Company successfully raises additional funds, that
the Company will achieve positive cash flow. If the Company is unable to
obtain adequate additional financing, management will be required to
sharply curtail the Company's operating expenses. These financial
statements do not include any adjustments to the specific amounts and
classifications of assets and liabilities, which might be necessary should
the Company be unable to continue business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries: Eduverse Accelerated Learning Systems
(Canada) Inc. (British Columbia, Canada), ESL Pro Systems Inc. (Nevada) and
M&M Information and Marketing Services Inc. (Nevada). All significant
intercompany accounts and transactions have been eliminated.
Revenue recognition
Revenue from the sale of software products is recognized at the time
products are shipped to customers. Distribution royalty revenue is
recognized when the terms of the distribution agreement have been met.
Consulting revenue is recognized at the time the consulting services have
been rendered.
<PAGE>
3. CAPITAL ASSETS
<TABLE>
Accumulated Net book
Cost depreciation value
$ $ $
-----------------------------------------------------------------------------------------
June 30, 1998
<S> <C> <C> <C>
Computer equipment 49,304 9,723 39,581
Furniture and office equipment 12,969 1,818 11,151
-----------------------------------------------------------------------------------------
62,273 11,541 50,732
-----------------------------------------------------------------------------------------
</TABLE>
4. MAJOR CUSTOMERS
For the six-month period ended June 30, 1999, major customers represented
the following percentage of software sales and other income.
(a) One customer represented 52% of software sales.
(b) One customer represented 95% of other income.
5. LOANS PAYABLE
1998
$
- --------------------------------------------------------------------------------
Stockholder Loan 15,000
Third Party Loan 12,390
- --------------------------------------------------------------------------------
27,390
- --------------------------------------------------------------------------------
These loans were non-interest bearing and have no specific terms of repayment.
These loans were repaid by August 20, 1999.
6. DEFERRED CHARGE
On May 7, 1998, the Company, entered into a license agreement with Boswell
International Technologies Ltd. to acquire certain rights to developed
software. Pursuant to the license agreement, the Company is required to
make certain minimum annual royalty payments and may be required to pay
additional amounts based on sales levels for a minimum period of 3 years.
Accordingly, the Company has recorded a liability and deferred charge equal
to the minimum royalty payable of $211,800 (Cdn $325,000).
<PAGE>
The minimum amounts repayable over the next three years to June 30 are as
follows:
$
- --------------------------------------------------------------------------------
2000 62,000
2001 97,800
- --------------------------------------------------------------------------------
159,800
- --------------------------------------------------------------------------------
7. SHARE CAPITAL
(a) Authorized
The authorized capital of the Company consists of 50,000,000 common shares
with $0.001 par value, and 5,000,000 preferred shares with a par value of
$0.001.
(b) Issued and outstanding
Number
of Shares Amount
Common Shares # $
- --------------------------------------------------------------------------------
Balance, December 31, 1998 11,607,046 11,607
Issued for cash pursuant to subscription
agreements 1,071,316 1,071
Issued for services rendered 72,727 73
- --------------------------------------------------------------------------------
Balance, June 30, 1999 12,751,089 12,751
- --------------------------------------------------------------------------------
During the period, the Company issued 1,071,316 common shares pursuant to
subscription agreements at prices ranging from $0.48 to $1.00 per share for
cash of $755,998.
The Company also issued 72,727 common shares for services rendered at a
deemed value of $42,294. These shares were issued at prices between $0.50
to $0.73 per share.
(c) Stock Options
The Board of Directors and shareholders amended the Stock Option Plan on
May 30, 1999 and again on June 30, 1999. The maximum number of shares
reserved for issuance pursuant to the Stock Option Plan has increased from
1,500,000 common shares to 2,500,000 common shares. As of June 30, 1999 a
total of 1,477,500 options are issued and unexercised.
<PAGE>
Stock option transactions for the period ended June 30, 1999 and the number
of stock options outstanding are summarized below:
<TABLE>
Number of
Optioned
Common Price
Shares Range
# $
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Options granted as of December 31, 1998 1,262,500 $0.68 - $0.75
Options granted between January 1, 1999 -June 30, 1999 215,000 $1.00 - $5.50
- -----------------------------------------------------------------------------------------------------
Balance, June 30, 1999 1,477,500 $0.68 - $5.50
- -----------------------------------------------------------------------------------------------------
</TABLE>
The outstanding options expire at various dates beginning August 3, 2002
and ending May 12, 2003.
<PAGE>
PART III
ITEM 1 INDEX TO EXHIBITS
(a) Financial Statements
The following financial statements and related schedules are included in
this Item:
Auditors' Report;
Balance Sheets as at December 31, 1998 and June 30, 1999;
Combined Statements of Operation and Deficit for the nine-month period
ended December 31, 1998, and six months ended June 30, 1999; and
Notes to Financial Statements.
(b) Exhibits
Exhibit
Number Description
------ -----------
*2.1 Articles of Incorporation of the Registrant, as amended
*2.2 Bylaws of the Registrant
*3.1 Form of Common Stock share certificate
*6.1 1998 Stock Option Plan, as amended
*6.2 1998 Directors Stock Option Plan, as amended
*6.3 1998 Employee Stock Purchase Plan
*6.4 Form of Stock Option Agreement (1998 Stock Option Plan)
*6.5 Form of Stock Option Agreement (1998 Director's Stock Option
Plan)
*6.6 Form of Subscription Agreement (1998 Employee Stock Purchase
Plan)
*6.7 Form of Affiliate Program Agreement
*6.8 Form of Confidentiality and Non-Competition Agreement
*6.9 freeENGLISH Non-Exclusive Linking Agreement dated May 20,
1999 between the Registrant and the Ministry of University
Affairs (Thailand)
*6.10 Memorandum of Understanding between EDUVERSE Accelerated
Learning Systems (Canada), Inc. and the Ministry of
University Affairs (Thailand)
*6.11 Manufacturer's Representation Agreement dated March 1, 1999
between the Registrant and Tri Synergy, Inc.
*6.12 Software License Agreement dated May 7, 1998 by and among
the Registrant, Boswell International Technologies Ltd. And
Boswell Industries Inc.
<PAGE>
Exhibit
Number Description
------ -----------
*6.13 Employment Agreement effective May 3, 1999 between EDUVERSE
Accelerated Learning Systems (Canada ) Inc. and Marc Crimeni
*6.14 Employment Agreement effective May 3, 1999 between EDUVERSE
Accelerated Learning Systems (Canada) Inc. and Robert Harris
*6.15 Employment Agreement effective May 3, 1999 between EDUVERSE
Accelerated Learning Systems (Canada) Inc. and Jeffery Mah
*6.16 Employment Agreement effective May 3, 1999 between EDUVERSE
Accelerated Learning Systems (Canada) Inc. and Lorne Reicher
*8.1 Stock Exchange Agreement and Plan of Reorganization dated
May 28, 1998 between the Registrant and ESL Pro Systems Inc.
*8.2 Stock Exchange Agreement and Plan of Reorganization dated
May 29, 1998 between the Registrant and Marketing Services
Inc.
*27.1 Financial Data Schedule
- ---------------------------
* Previously filed
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Company has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
EDUVERSE.COM
Date: September 29, 1999 By /s/ Mark Bruk
-----------------------------------
Mark Bruk
President, Chief Executive Officer
<PAGE>
Exhibit Sequentially Number
Number Description Page
------ ----------- -------------------
*2.1 Articles of Incorporation of the
Registrant, as amended
*2.2 Bylaws of the Registrant
*3.1 Form of Common Stock share
certificate
*6.1 1998 Stock Option Plan, as amended
*6.2 1998 Directors Stock Option Plan,
as amended
*6.3 1998 Employee Stock Purchase Plan
*6.4 Form of Stock Option Agreement
(1998 Stock Option Plan)
*6.5 Form of Stock Option Agreement
(1998 Director's Stock Option Plan)
*6.6 Form of Subscription Agreement
(1998 Employee Stock Purchase Plan)
*6.7 Form of Affiliate Program Agreement
*6.8 Form of Confidentiality and
Non-Competition Agreement
*6.9 freeENGLISH Non-Exclusive Linking
Agreement dated May 20, 1999 between
the Registrant and the Ministry of
University Affairs (Thailand)
*6.10 Memorandum of Understanding between
EDUVERSE Accelerated Learning Systems
(Canada), Inc. and the Ministry of
University Affairs (Thailand)
*6.11 Software License Agreement dated
May 7, 1998 by and among the Registrant,
Boswell International Technologies Ltd.
and Boswell Industries Inc.
*6.12 Employment Agreement effective
May 3, 1999 between EDUVERSE Accelerated
Learning Systems (Canada ) Inc. and
Marc Crimeni
*6.13 Employment Agreement effective
May 3, 1999 between EDUVERSE Accelerated
Learning Systems (Canada) Inc. and
Robert Harris
*6.14 Employment Agreement effective
May 3, 1999 between EDUVERSE Accelerated
Learning Systems (Canada) Inc. and
Jeffery Mah
<PAGE>
Exhibit Sequentially Number
Number Description Page
------ ----------- -------------------
*6.15 Employment Agreement effective
May 3, 1999 between EDUVERSE Accelerated
Learning Systems (Canada) Inc. and
Lorne Reicher
*8.1 Stock Exchange Agreement and Plan of
Reorganization dated May 28, 1998 between
the Registrant and ESL Pro Systems Inc.
*8.2 Stock Exchange Agreement and Plan of
Reorganization dated May 29, 1998 between
the Registrant and Marketing Services Inc.
*27.1 Financial Data Schedule
- ---------------------------
* Previously filed
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-mos 6-mos
<FISCAL-YEAR-END> Dec-31-1998 Jun-30-1999
<PERIOD-END> Dec-31-1998 Dec-31-1998
<CASH> 37,757 331,733
<SECURITIES> 0 0
<RECEIVABLES> 18,477 120,702
<ALLOWANCES> 0 0
<INVENTORY> 44,421 15,464
<CURRENT-ASSETS> 106,306 467,899
<PP&E> 5,651 0
<DEPRECIATION> 4,205 7,336
<TOTAL-ASSETS> 297,880 646,531
<CURRENT-LIABILITIES> 368,442 146,721
<BONDS> 0 0
0 0
0 0
<COMMON> 11,607 12,751
<OTHER-SE> (82,169) 389,259
<TOTAL-LIABILITY-AND-EQUITY> 297,880 646,531
<SALES> 14,824 95,497
<TOTAL-REVENUES> 14,824 233,686
<CGS> 6,873 35,923
<TOTAL-COSTS> 424,667 519,184
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (415,043) (322,021)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (415,043) (322,021)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (415,043) (322,021)
<EPS-BASIC> (0.04) (0.06)
<EPS-DILUTED> (0.04) (0.06)
</TABLE>
