<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 29, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission file number: 0-25758
MULTI-MEDIA TUTORIAL SERVICES, INC.
------------------------------------
(Name of small business issuer specified in its charter)
Delaware 73-1293914
--------------------------------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
205 Kings Highway Brooklyn, New York 11223
------------------------------------------
(Address of principal executive offices, including zip code)
718-234-0404
------------
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.01 par value per share
Redeemable Warrants
-------------------
(Title of Class)
<PAGE>
Check whether the issuer: (i) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (ii) has been
subject to such filing requirements for the past 90 days. Yes X No
-- --
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ended February 28, 2000 were
$2,731,880.
The number of shares outstanding of the issuer's Common Stock as of June 23,
2000 was 10,918,676 shares. The aggregate market value of the Common Stock
(7,742,239 shares) held by non-affiliates, based on the approximate average of
the bid and asked prices ($0.11) of the Common Stock as of June 12, 2000 was
$851,646.
Transactional Small Business Disclosure Format (Check one): Yes No X
----- -----
This Annual Report on Form 10-KSB (the "Report") may be deemed to
contain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). Forward-looking statements in
this Report or hereafter included in other publicly available documents filed
with the Securities and Exchange Commission (the "Commission"), reports to the
Company's stockholders and other publicly available statements issued or
released by the Company involve known and unknown risks, uncertainties and other
factors which could cause the Company's actual results, performance (financial
or operating) or achievements to differ from the future results, performance
(financial or operating) or achievements expressed or implied by such
forward-looking statements. Such future results are based upon management's best
estimates based upon current conditions and the most recent results of
operations. These risks include, but are not limited to, the risks set forth
herein, each of which could adversely affect the Company's business and the
accuracy of the forward-looking statements contained herein.
2
<PAGE>
As of May 24, 1999, the Company effected a one-for-ten reverse stock
split of its issued and outstanding Common Stock, and increased the Company's
authorized Common Stock to 20,000,000 shares. Except as set forth herein, the
discussion set forth in this Annual Report on Form 10-KSB reflects the effect of
the one-for-ten reverse split.
PART I
ITEM 1. BUSINESS
GENERAL
The Company produces, acquires and telemarkets a variety of products to
educational institutions and consumers using direct marketing through
television, radio and print advertising. The Company's principal product to date
has been proprietary tutorial education programs on videotape for use by adults
and children in homes, workplaces, schools, libraries and other locales. This
principal product line, which is marketed under the brand Math Made Easy(TM),
consists of a series of over 100 videotapes and supplemental materials on
mathematics. The Math Made Easy(TM) line uses colorful computer graphics and
real life vignettes and is the most complete line of mathematics videotapes
available.
The Company offers customized telemarketing services to companies and
institutions who wish to outsource their telemarketing needs. These companies
and institutions can retain the Company on a project by project basis to take
advantage of the Company's telemarketing expertise and infrastructure instead of
having to develop or support telemarketing in their own operations. The fees for
these services are based on either a per minute charge or a combination of
hourly and commission rate. This portion of the business represented 60% of the
Company's revenues for the fiscal year ended February 29, 2000. See "Customized
Telemarketing Services."
Recently the Company has completed production of an on-line internet
and CD Rom version of one of its principal programs, the Basic Skills Math
Series, for grades 4-7.
The Company specializes in telemarketing generated by its own
television and radio advertisements, which it places on a "direct response"
basis at the lowest available rates. The Company uses different 800 numbers for
each channel on which it advertises, which permits the Company to track the
effectiveness of its advertising. Payment is made by credit card or direct debit
to a checking account. The product is then shipped by a fulfillment house to the
customer.
The Company's products are sold principally by an internal sales staff,
and have been purchased by over 250,000 customers over the last five years. The
Company's telemarketing staff is experienced in converting an individual who is
inquiring about an advertised product into a customer who will purchase the
product. This expertise, of converting a "call to inquire" into a sale, was
developed as a result of specialized training of telemarketers to sell the Math
Made Easy(TM) product line. See "Sales, Marketing and Distribution."
The Company's objective is to expand the scope of its telemarketing
business in a variety of ways. Subject to the availability of additional
financing, the Company intends to expand product offerings for sale to
individual consumers by developing, licensing or acquiring new complementary
educational products. In addition, subject to the availability of additional
financing, the Company anticipates expanding the marketing of its products
through such efforts as co-branding and joint-marketing.
In 1999, the Company determined to expand its business operations to
include an educational website on the internet and enter into the e-commerce
industry. The Company has entered into certain agreements and letters of intent
with respect to the commercialization of this new business segment, but has not
generated any revenues from this business to date. Further, the Company
anticipates that it will need financing of between $1,000,000 and $3,000,000 to
develop this business, and there can be no assurances that the Company will
receive such financing.
3
<PAGE>
In March, 2000, the Company launched its e-commerce website, known as
"1800USAMATH.COM" or "MATHMADEEASY.COM." This site offers the Company's tutorial
programs, known as MathMadeEasy(TM)" and "Reading MadeEasy(TM)."
The Company has recently concluded agreements with key internet
companies, such as Value Click and 24/7 Media Corp. to purchase advertising at
special negotiated rates. These rates are based either on impression or click
through volume. The Company has also begun to develop e-mail campaigns to
targeted customers. As it rolls out its advertising campaign, the Company will
test both price points and special offers to determine optimum major educational
advertising sites' cost effectiveness and profitability. The Company plans to
introduce Webified telemarketing, whereby visitors to the site will have the
option to be directly connected to the Company's call center and be advised as
to the appropriate program by its educational consultants.
The Company has formed a wholly-owned subsidiary, The Tutorial
Channel.com, to be an amalgamation of various on-line educational services,
which will use a subscription model to create revenues. The Tutorial Channel is
expected to offer on-line interactive programs that will provide an electronic
tutor at a substantial savings to the student as compared to traditional
tutoring. The Company may also offer supplemental "real person" on-line tutoring
to augment its electronic services. The Company expects to launch student and
parent chat rooms and make available counseling services for both parents and
students. The Company requires between $2,000,000 and $5,000,00 to fully develop
these plans. There can be no assurance that the Company will receive such
financing.
THE PRODUCTS
The Company's products consist of an extensive line of "Math Made
Easy(TM)" and "Reading Made Easy(TM)" videotapes and ancillary material for
direct sale to consumers via direct marketing through national and local TV and
radio advertising. See "Sales Marketing & Distribution"
CURRENT PRODUCTS
MATH MADE EASY(TM). The Company offers over 100 mathematics videotapes
in the Math Made Easy(TM) series. The series, which was developed and produced
by the Company, is geared to students ranging from pre-school to college and
adult education. Topics covered by the series include number concepts, basic
arithmetic, fractions, decimals, percents, word problems, fundamentals of
pre-algebra, algebra, logic, geometry, statistics and probability, pre-calculus
and calculus, trigonometry and advanced calculus. This product line is marketed
by the Company through television and radio advertising with specific "800MATH
telephone numbers directed to its telemarketing staff and is also sold directly
to schools. The average math consumer order consists of a set of five
educational videotapes at a price of $200. Sets of five video tapes are sold to
schools at a price of $250, and $9.95 per each additional workbook Reading Made
Easy(TM). The Company has also entered into non-exclusive agreements with
various companies to distribute tapes of reading and literacy educational
products as part of its Reading Made Easy(TM) series. The products include
reading readiness, letter identification, grammar, and reading comprehension
which cover topics from preschool through junior high school. The various titles
include videotapes, audiotapes and workbooks and flash cards. The Company
purchases these products at discounted rates from the respective manufacturers
or distributors and distributed through the Company's direct marketing
division.. The average reading consumer order consists of five videotapes at a
price of $159.
ON-LINE LEARNING. In June, 2000, the Company completed the first phase
of its transformation of its video product line to on-line learning. This
includes the production of basic skills covering fractions, decimals,
percentages and word problems. The new version consists of flash technology,
where animated characters replace the original screen teachers. The Company
plans to offer these programs for on-line learning.
PRODUCT DEVELOPMENT
The Company produces many of its own math videotape products and
supplemental workbooks by commissioning a curriculum from the Company's
educational coordinators. The Company employs Dr. Meryle Kohn, chairperson of
the mathematics and science departments at New York Institute of Technology, as
its curriculum coordinator and headwriter. The Company's educational writers are
independent contractors retained on a project-by-project basis. Total cost of a
videotape production is approximately $10,000 to $15,000.
4
<PAGE>
Many of the Company's videotapes include colorful computer graphics and
real life vignettes, certain of which are scripted by professional writers. The
curriculum writers seek to augment comprehension of the materials by numerous
examples, which are solved on a step by step basis. The curriculum invites
interaction by requesting the viewer to pause and to solve designated problems
before restarting the videotape to view the step by step solution.
The Company has plans to expand its on-line and CD Rom versions of the
"MathMadeEasy" programs featuring flash technology and interactive teaching, to
include its complete line. The Company will require additional funding of
$750,000 to complete this expansion and there can be no assurance that the
Company will receive such financing.
PRODUCT ACQUISITION
In addition to developing its own math product, the Company purchases
or licenses product from third parties, such as the Reading Made Easy(TM) line.
ANTICIPATED FUTURE PRODUCTS AND SERVICES
The launch of new product lines and customized telemarketing services
is subject to the availability of capital to be generated by additional funding.
The potential revenues, costs and margins that may be generated by the increased
product offerings and telemarketing services may cause different margins as
compared to the historical margins as a result of different pricing and costs of
the acquired product and services.
CUSTOMIZED TELEMARKETING SERVICES
The Company has also begun to expand its telemarketing services by
offering customized telemarketing services to companies and institutions who
wish to outsource their telemarketing needs. These companies and institutions
can retain the Company on a project by project basis to take advantage of the
Company's telemarketing expertise and infrastructure instead of having to
develop or support telemarketing in their own operations. For example, the
Company has been retained to handle telephone inquiries from potential customers
of Windmere Corp. who respond to the infomercial or 60 second advertisement for
Windmere's "Littermaid(TM)" product. The Company's telemarketing has ranged from
data base cleaning to sales and marketing and customer service. Among its
clients have been Fortune 500 companies and internet related and
telecommunications companies. The fees for these services are based on either a
per minute charge or a combination of hourly and commission rate. The Company's
telemarketing staff is trained and experienced in converting an individual who
is inquiring about an advertised product to a customer who will purchase the
product. This expertise, of converting a "call to inquire" into a sale, was
developed as a result of specialized training of telemarketers to sell the Math
Made Easy(TM) product.
THETUTORIALCHANNEL.COM
The Company has formed a wholly-owned subsidiary, The Tutorial
Channel.com, to be an amalgamation of various on-line educational services,
which will use a subscription model to create revenues. The Tutorial Channel is
expected to offer on-line interactive programs that will provide an electronic
tutor at a substantial savings to the student as compared to traditional
tutoring. The Company may also offer supplemental "real person" on-line tutoring
to augment its electronic services. The Company expects to launch student and
parent chat rooms and make available counseling services for both parents and
students. The Company requires between $2,000,000 and $5,000,00 to fully develop
these plans. There can be no assurance that the Company will receive such
financing.
5
<PAGE>
THE MARKET
GENERAL. Education is second only to health care in annual expenditures
in the U.S. representing almost ten percent of GNP, $400 to $600 billion. Fully
40 percent of students encounter some difficulty at various times mastering
mathematics and science. The loss of individualized instruction in many school
districts places an additional burden on the home, requiring supplemental
education products that are both informative and challenging.
The situation is against the backdrop of 50 to 75 million students in
our school system at any one time. There are currently 106,000 schools offering
education to students in grades K-12 in the U.S. representing a total of over 52
million children in the U.S. This population has access to the Internet with a
growth rate that has doubled every year since 1996 and is likely to continue
through 2001.
Much of the activity in the for-profit education industry lies in
post-secondary education and in niches around the margins of traditional
pre-collegiate education. Those niches include tutoring, test preparation,
college counseling, electronic learning and the education of at-risk children.
The e-commerce business of TheTutorialChannel.com lies at the
intersection of the consumer market for educational and developmental products
for children, and the increasing acceptance of Internet-based commerce.
Traditional retailers of educational products, including mass market retailers,
typically lack a focus on education, do not evaluate the products they offer and
may not understand the development needs of individual children.
In addition, these retailers often have a narrow product selection due
to physical space limitations, have high facilities and staffing costs, offer
limited service, and lack merchandising flexibility and shopping convenience.
Because of the limitations of the traditional retail distribution channel, the
Internet has emerged as an increasingly popular way to shop.
While educational software was one of the promising, and somewhat
disappointing technological trends of the 1980s, some analysts view various
forms of Internet-based learning as the next "big thing." Wall Street is
tracking companies which provide educational software and online courses over
the World Wide Web. From Wall Street's perspective, both K-12 and for-profit
post-secondary education are considered key sectors of future industry growth.
Education has boomed as a for-profit industry in the past few years for
the following reasons:
o The 1980's and much of this decade saw one report after
another decrying the condition of public education.
o Parents are more willing than ever to spend money to
supplement their children's schooling and give them a leg-up
in the college admissions process. That trend has particularly
benefited tutoring and test-prep companies.
o Strength of the economy has created new wealth that has
allowed entrepreneurs to turn their business ideas into
realities. Education businesses have raised some $6 billion in
private capital over the past decade.
Specialty educational and creative toy and game retailers that are
focused on education often lack the expertise or time to analyze a child's
specific needs. As a result, the traditional retail channel fails to satisfy
parents' needs for selection, convenience, personalized service , advice and
information.
EDUCATION AND THE INTERNET. As a result of a number of societal trends,
including constraints on school budgets and the increasing use of standardized
tests, many parents are taking a more active role in their children's education.
In their efforts to help their children learn, improve their children's
standardized test scores and make learning fun, parents are increasingly
purchasing educational books, toys and games, and software.
6
<PAGE>
Parents are faced with the challenge of finding quality educational
products and selecting the right products for their children. With thousands of
educational products to choose from and few reliable sources of information,
finding the appropriate products for a specific child's needs and goals can be
overwhelming and confusing. Parents seek a resource for comprehensive and
trusted educational content and product information to help them make informed
purchase decisions. TheTutorialChannel's Online Education Directory will help
parents fulfill the need to locate the best solutions for their children.
The education market is considered to be a rapidly growing vertical
market on the web, and is forecast to offer an increasingly attractive and
expanding demographic for advertising and e-commerce. The traffic drive to the
Internet for research and education is steadily increasing, with Internet access
in fifty-one percent of the instructional rooms (classroom computer or other
labs, libraries, and media centers) in U.S. schools, according to a 1998 survey
released by the U.S. Department of Education. The percentage of students who
spend an average of three or more hours a week online has more than doubled,
rising from 5 percent in 1997 to 11 percent in 1998.
SUPPLEMENTAL EDUCATION AT HOME. The Company believes that parents are
increasingly concerned about the quality of their children's education and are
seeking to supplement the existing curricula. In particular, they are seeking to
use televisions and videotape players now found in most homes for educational
purposes. In addition, the Company believes that adults going back to school to
prepare for career moves or promotions are an ever growing potential market for
its educational videotapes. The Company has found that its primary customers are
parents with children in the educational system. The Company's efforts to date
have resulted in a database of more than 445,000 names, of which 260,000 ordered
product, and approximately 185,000 names of potential customers.
SCHOOLS. As part of the drive to improve education, the Company
believes that school districts may increasingly allocate available funds to the
acquisition of educational tools. The Company believes that the possible
expansion of this market and the increased availability of funds may present an
important opportunity for its products.
In the fiscal year ended February 28, 2000, consumer videotape sales
and school videotape sales constituted approximately 45%, and 15% of total
sales, respectively. For the fiscal year ended February 29, 1999, consumer
videotape sales and school videotape sales constituted approximately 90% and 10%
of total sales, respectively.
CUSTOMIZED TELEMARKETING SERVICES. In 1996, the WEFA Group conducted a
study for the Direct Marketing Association the total sales generated by
telephone marketing was estimated to be $244 billion. The Company believes that
many companies across the nation are interested in outsourcing their customer
service, sales staff and help desk hotlines. Outsourcing of these specialized
tasks to non-employees has become common in today's business world. The Company
has offered its telemarketing services to clients, for services including data
base cleaning to sales and marketing and customer services. In the fiscal year
ended February 28, 2000, customized telemarketing sales constituted
approximately 48% of total sales. For the fiscal year ended February 29, 1999,
customized telemarketing sales constituted approximately 25% of total sales.
SALES, MARKETING AND DISTRIBUTION
The Company markets its videotapes and related materials to consumers
primarily by inbound telemarketing efforts, which are supported by advertising
on radio and television on a national and regional level. Each commercial is
assigned a distinct 800 telephone number to call. The Company tests the
efficiency of each commercial on a daily and weekly basis by sourcing each
incoming call by the phone number that was dialed. The results of tracking
consumer response directly affect the placement of future advertising. The
Company's telemarketing staff, which responds to incoming calls, seeks to
convert into sales all leads, which are generated by the Company's advertising.
The telemarketer attempts to record all pertinent information regarding the
customer who responded to the advertisement, thereby adding the potential
customer to the Company's database even if they do not purchase at that time. If
the customer agrees to purchase the product, the telemarketer will record either
credit card or checking account information, which is then transferred to the
billing department which processes the payment and sends the information to the
fulfillment center for shipping. The Company has documented repeat sales for
additional items for existing customers. The Company believes that many repeat
sales may be a direct response to the commercial that the customer had initially
seen.
7
<PAGE>
In an effort to maximize efficient use of the telemarketers, the
Company has a predictive dialing system. This system eases the telemarketing
efforts by having the computer dial return calls to prospective customers for
the telemarketers. The Company believes this system facilitates the Company's
efforts to enter into the telemarketing servicing arena. In addition, it allows
the Company to contact prospective customers who have not yet purchased products
from its math and reading videotapes, as well as previous customers on a timely
basis, in a more efficient manner. The Company also utilizes the "predictive
dialing" system in its off-season to generate new contacts from its existing
customer base.
Credit cards are the preferred method of payment, both for the Company
and for its customers. These cards are either billed in full or in partial
monthly payments. The Company also offers consumers who do not wish to use their
credit card another means of payment; an automatic check debit, in which the
customer is shipped the merchandise after he offers the Company his bank name
and checking account number.
ADVERTISING
The Company purchases media time on a "direct response" basis. This
allows the Company to have the lowest cost per lead possible, as the direct
response rate is significantly lower than regular advertising rate. Although
this minimizes the advertising costs, reservations for advertising time at
direct response rates are subject to last minute cancellation by the radio and
television stations and are difficult to purchase efficiently. See "Risk
Factors."
The Company has recently concluded agreements with key internet
companies, such as Value Click and 24/7 Media Corp., to purchase advertising at
special negotiated rates. The Company has also begun to develop e-mail campaigns
to targeted customers. These rates are based either on impression or click
through volume. As it rolls out its advertising campaign, the Company will test
both price points and special offers to determine optimum major educational
advertising sites' cost effectiveness and profitability. The Company plans to
introduce Webified telemarketing, whereby visitors to the site will have the
option to be directly connected to the Company's call center and be advised as
to the appropriate program by its educational consultants.
CUSTOMIZED TELEMARKETING SERVICES
The Company solicits business for its customized telemarketing services
division by advertising in trade magazines as well as through its own internal
efforts. To date, the Company has entered into agreements with .LitterMaid, a
subsidiary of Windmere Corp. and Net2Phone, pursuant to which the Company
provides inbound and outbound telemarketing services. The Company offers its
clients the advantage of a highly trained sales force as well as the capability
to produce accurate telephone and sales reports. In addition, the Company can
offer its expertise in creating and placing advertisements, for which it
receives a commission on all media placed. The Company is actively seeking to
service additional accounts in this area. The Company's telemarketing services
have ranged from database cleaning to sales and marketing and customer service.
The Company's clients have included Fortune 500 companies, and internet related
and telecommunications companies.
TECHNOLOGY RESOURCES
The Company has created a customized network to augment the efficiency
of its telemarketing operations. This enables the Company to handle over 1,000
simultaneous inbound calls. The Company's PABX (Private Automatic Branch
Exchange telephone switch) uses an open ended ISDN (Integrated Services Digital
Network) architecture which allows the Company to link multiple systems together
in an automated fashion, thus gathering numerical data and other information
from every inbound toll-free call. All inbound and outbound calls are tracked
and tagged for later examination and database development. The Company utilizes
an SMDR (Station Message Detail Recorder) specialized call accounting and
tracking software package to record vital call statistics. The Company uses CTI
(Computer Telephony Integration) to combine voice and data and then delivers
this information into the Company's data management systems. These are then
integrated into centrally managed Local Area Networks (LANs) and Wide Area
Networks (WANs).
8
<PAGE>
The Company utilizes an ACD (Automatic Call Distributor) to help
identify each customer's call and automatically route those calls to specific
telemarketers. The Company's predicative dialer utilizes specific algorithms to
assist in analyzing each telemarketer's performance and the network's
efficiency. The predictive dialer's UNIX processor provides centralized list
management, data consolidation, reporting and interfaces with the LAN as well.
The Company's location is protected by a fire extinguishing system and
it's primary systems have an uninterruptable power supply. In addition, the
Company has a short-term battery back-up in the event of power outage, reduced
voltage or power surge. Furthermore, instantaneous rerouting of all call traffic
takes place in the event of telecommunication failure, natural disaster or other
emergencies, thus insuring calls are usually answered properly even under
duress.
PERSONNEL AND TRAINING
The Company believes that the quality of its employees is a key factor
in its effort to develop a profitable telemarketing business. The Company
tailors its recruiting and training techniques towards the industries and
products it services. All telemarketers receive a detailed review of each
product they will be selling. In addition, the Company trains its telemarketers
in the art of converting an inquiry into a sale. A telemarketer is in training
for approximately 5 days, prior to receiving customer calls on a full-time, solo
basis. Furthermore, the Company continually monitors telemarketers'
conversations to assure quality and customer satisfaction. Compensation is based
on a combination of salary and commission. See "Risk Factors."
RETURNS, GUARANTY AND WARRANTY POLICIES
The Company offers its customers a 90 day money back guarantee during
which period they may return the merchandise for an exchange or full credit. The
Company believes that a money back guaranty policy is essential to the success
of its telemarketing efforts. In addition, management of the Company has
implemented policies and procedures intended to minimize the number of returned
products. These policies and procedures include increasing the appeal of the
Company's products by designing more attractive packaging, and enclosing with
its shipments full color catalogues and parent guides. In addition, the customer
service department, which must be contacted before merchandise is returned, has
been trained to specifically reduce returns. See "Risk Factors."
COMPETITION
The Company's educational videotape offerings compete with a variety of
programs, including Hooked on Phonics, Reading Genius, Davidson, the Learning
Co., and MegaMath. In the school market, the Company competes with Video Aided
Instruction, Video Tutor and Educational Video Resources. In the internet
market, the Company's competition includes Kaplan and Sylvan. Almost all of
these competitors have greater financial resources, greater public and industry
recognition and broader marketing capabilities than the Company. The market is
characterized by numerous small companies, with whose products the Company may
be unfamiliar, and which may be competitive with the Company's products. The
Company's products also compete with other methods of education such as private
tutors and televised programs. The Company believes that its products are
competitive because it offers a more complete range of subjects, the products
are designed to be more engaging, and the Company has generally developed more
effective use of the telemarketing process.
The telemarketing industry is intensely competitive and the Company's
principal competition in its primary markets comes from large and small
telemarketing companies including Apac Teleservices, Inc., Sykes Enterprises,
Incorporated, ICT Group, Inc., Precision Response Corporation, Teletech
Teleservices, West Telemarketing, Iti Marketing Services, Inc., Matrixx
Marketing, Inc., West Teleservices Corporation and Dial America. Because of the
size of this market, the Company believes that no one entity dominates this
business. Nevertheless, the Company's competitors in this area have greater
financial resources, greater public and industry recognition, advanced
technological expertise and equipment and broader marketing capabilities than
the Company. In addition, most businesses that are significant consumers of
telemarketing services utilize more than one telemarketing firm at one time and
reallocate work among various firms from time to time. A significant amount of
such work is contracted on an individual project basis, thus increasing the
competition in the industry. Furthermore, the Company believes there is a trend
among businesses with telemarketing operations toward outsourcing the management
of those operations to others and this trend may attract new and substantially
larger competitors. The Company believes that it may be able to offer
competitive services based upon its expertise developed by marketing its own
products. For example, because the Company produces and places its own media it
is more experienced in linking the telemarketers' approaches to the clients'
specific advertising.
9
<PAGE>
SEASONALITY
The Company's educational telemarketing business is highly seasonal.
Demand for its products tends to peak during the first and fourth fiscal
quarters when school is in session. Demand is especially slow during the school
vacation periods. This seasonality greatly affects the Company's advertising
campaigns, which must be timed to coincide with the annual periods when demand
is traditionally high. The Company does not reserve advertising time in advance
and purchases air time at the lowest possible rates. Consequently, its
reservations are subject to last minute cancellation by the radio and television
stations. In addition, as a result of the Company's dependence on the
availability of media time, operating results can be negatively impacted by
difficulty in purchasing cost effective media time. Although the Company has
entered into certain ventures, which may reduce the impact of seasonality on the
Company's business, it will in all likelihood continue to experience a certain
amount of seasonality in its operations.
PROPRIETARY RIGHTS
The Company has received certificates of registration with the United
States Trademark Office for the following trademarks: MATH MADE EASY, PASSPORT
TO MATH SUCCESS, LEARNING TRENDS, AND REAL LIFE MATH. The Company has filed
applications with the United States Trademark Office for the registration of
READING MADE EASY.
EMPLOYEES
As of June 19, 2000, the Company had 57 employees, of whom 3 were
executive officers, 43 were engaged in sales, and 11 were in marketing, support
and administrative staff. The Company has made significant reductions in
personnel in order to reduce overhead expenses. The Company retains outside
consultants to augment its computer, telephone and telemarketing expertise. The
Company also relies on several outside consultants for expertise in hardware,
software and curriculum development. The Company believes that its relationship
with its employees is generally satisfactory.
RISK FACTORS
The Company's business involves a high degree of risk. Shareholders and
investors should carefully consider the following risk factors and the other
information included in this Report. Financial Condition of the Company; History
of Losses; Going Concern Qualification in Certified Public Accountant's Report;
Company Highly Leveraged.
HISTORY OF OPERATING LOSSES
The Company has experienced significant losses from operations since
inception. It experienced losses of $1,492,686 and $753,136 for the fiscal years
ended February 28, 2000 and 1999. As of February 28, 2000, the Company had a
working capital deficit of $4,273,430 and an accumulated deficit of $15,582,267.
The Company's working capital requirements have been met primarily from loans
and private sales of securities provided by management and other investors, but
there can be no assurance the Company will be able to obtain such funds in the
future. As of February 28, 2000, the Company had outstanding investor loans and
advances aggregating $2,325,900, of which a certain amount may be converted into
equity. $1,225,000 of this amount is currently due and payable, and there can be
no assurance the Company will be able to convert the debt to equity, or generate
the funds from operations or further financings to repay these obligations. The
Company is in default on one of its capitalized leases. Currently, the Company's
sales volume is not sufficient to repay this indebtedness. In addition, the
Company's operating expenses are anticipated to increase significantly in the
future if the Company is able to implement its expanded marketing strategy.
Although the Company is seeking additional funds to allow it to repay its
current debt, expand its customized telemarketing operations and develop its
e-commerce business plan, there can be no assurance that the Company will not
continue to experience such losses or will ever generate revenues at levels
sufficient to support profitable operations. The Company has received a report
from its current and former independent public accountants, that includes an
explanatory paragraph describing the uncertainty as to the ability of the
Company's operations to continue as a going concern. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Consolidated Financial Statements."
10
<PAGE>
NEED FOR ADDITIONAL FINANCING
The Company has limited resources and has not been able to finance its
activities with the proceeds from operations and there can be no assurance it
will be able to do so in the future. The Company is seeking additional financing
in order to meet its debt repayment obligations and to maintain and potentially
expand its current operations. Even if the Company is able to obtain funding,
there can be no assurance that a sufficient level of sales will be attained to
fund such operations or that unbudgeted costs will not be incurred. Future
events, including the problems, delays expenses and difficulties frequently
encountered by similarly situated companies, as well as changes in economic,
regulatory or competitive conditions, may lead to cost increases that could make
the net proceeds of any new funding and cash flow from operations insufficient
to fund the Company's capital requirements. There can be no assurances that the
Company will be able to obtain such additional funding from management or other
investors on terms acceptable to the Company, if at all. Additional financings
may result in dilution for then current stockholders. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
FUTURE ISSUANCES OF STOCK; DILUTION TO CURRENT STOCKHOLDERS
The Company currently has outstanding options, warrants and other
rights to acquire an aggregate of approximately 4,948,860 shares of Common Stock
at exercise or conversion prices ranging from $0.0625 to $56.00 per share. The
Company currently has outstanding 10,918,676 shares of Common Stock and as of
June 12, 2000, the price of the Company's current stock as quoted on the NASD
Electronic Bulletin Board was approximately $0.11 per share. Any future
issuances may substantially dilute the holdings of the Company's current
stockholders. Furthermore, such issuances could result in a change of control of
the Company. See "Need for Additional Financing."
UNCERTAINTY OF MARKET ACCEPTANCE
Consumer acceptance of the Company's products is difficult to predict.
The success of the Company's marketing strategy is dependent on direct responses
to its advertising campaigns. The Company's marketing techniques are therefore
based on an "impulse buy" which is susceptible to any softening in the
consumer's overall confidence caused by economic turndowns, which affect the
consumer. Furthermore, the pool of potential customers for its products
advertised through media may be decreased as a result of market saturation. As a
consequence, there can be no assurance that the Company's present level of sales
will be sustainable in the future. See "Business--Sales, Marketing and
Distribution."
The Company plans to augment its radio and television advertisement
with internet advertisement. This will be accomplished with the main portals
such as Yahoo and Infoseek as well as banner advertisement on education and
family related sites. This strategy will require the availability of cost
effective advertising rates on the internet and sufficient funds to pay for such
advertising, and there can be no assurance that this will materialize. Failure
of the Company's products to achieve or sustain market acceptance would have a
material adverse effect on the Company's operating results and financial
condition.
The Company experiences a high level of returns, which generally range
from 20% to 25% for its various products. The Company believes that an important
reason for the high level of returns is that a substantial number of purchasers
return their tutorial videotapes after being unable to motivate their children
to view the tapes.
11
<PAGE>
SEASONALITY AND AVAILABILITY OF MEDIA TIME
The Company's math and reading videotape business is highly seasonal.
Demand for its products tends to peak during the first and fourth fiscal
quarters when school is in session. Demand is especially slow during the school
vacation periods. This seasonality greatly affects the Company's advertising
campaigns, which must be timed to coincide with the annual periods when demand
is traditionally high. In addition, the Company does not reserve advertising
time in advance in order to purchase air time at the lowest possible rates;
rather, it purchases direct response time, which is characterized as remnant
time and is difficult to purchase efficiently. In addition, its reservations are
subject to last minute cancellation by the radio and television stations. As a
result of the Company's dependence on the availability of media time, operating
results can be negatively impacted by difficulty in purchasing media time such
as occurs during elections and holidays. Any significant decrease in sales
during the season when business activity is high could have a material adverse
impact upon the Company's operations. Although the Company is trying to reduce
its dependence on curriculum based products, it will in all likelihood continue
to experience significant seasonality in sales of its educational products.
DISPUTE WITH ATT
The Company is currently in a dispute with ATT regarding the amount of
the outstanding charges for telephone services. ATT asserts that there is
approximately $260,000 currently due and payable, and the Company believes that
a lesser amount is due and payable of approximately $25,000. The Company's
defenses to ATT's claims include, but are not limited to, the Company's
assertion that ATT billed the Company for numbers belonging to other parties and
for special features and services, which the Company had requested to be
disconnected, and that ATT failed to make available to the Company discount
plans customarily available to users with comparable volume. The Company has
entered into discussions with ATT to resolve this dispute. However, there can be
no assurances as to the resolution of this dispute or whether ATT will not take
action to discontinue its services prior to the resolution of this dispute.
Although the Company believes that it can obtain an alternative provider for the
services currently provided by ATT, a change of service could result in a
temporary disruption in the Company's ability to service its telemarketing
accounts, which could have an adverse impact on the Company's financial
condition.
CUSTOMER SATISFACTION
The Company's revenues are mainly generated through telemarketing to
customers on a national basis. Although the Company attempts to satisfy
customers' needs, there may at times be dissatisfied customers. These customers
may contact local or national consumer advocate groups as well as television, or
radio station reporters to voice their dissatisfaction with the Company. This
negative publicity may have an adverse effect on future sales.
LIMITED PRODUCT LINE
In the fiscal year ended February 28, 2000, most of sales were from the
Math Made Easy(TM) product line. Although the Company is continually seeking to
introduce additional product lines there can be no assurance that these new
product lines will generate significant sales. In the event that the popularity
of the Math Made Easy(TM) product line decreases or faces increased competition,
the Company's sales would be adversely affected and if not replaced by
substantially increased sales from other products, the Company could be forced
to cease operations.
CREDIT CARD FRAUD
Credit card fraud perpetrated by disreputable telemarketing operations
have increased the reluctance of the consumers to make use of their credit cards
by telephone. This may adversely affect the Company's ability to secure credit
card orders
12
<PAGE>
TURNOVER RATE
Recruiting, training and retaining qualified telemarketers is essential
for the Company. There is a high turnover rate among telemarketers as a result
of the frustration of the telemarketing process, the high pressure atmosphere,
and the reliance on commissions as a major component of salaries. The training
of telemarketers is a lengthy process, which involves learning a complex product
line and special sales techniques. In addition, it is essential that the Company
utilize the optimal number of telemarkerters for its level of advertisements and
the number of clients it is servicing. Too many advertisements may overwhelm the
telemarketers while too few advertisements may lead to a drop in the
commissions, which will cause the telemarketers to leave the Company.
Furthermore, the ability of the Company to convert leads into sales is largely
dependent on the expertise of its telemarketers. There can be no assurance that
the Company will be able to continue to recruit and retain a qualified team of
telemarketers.
NEW PRODUCTS; TECHNOLOGICAL OBSOLESCENCE
The Company's prospects depend in significant part on its ability to
develop and/or license new products that achieve market acceptance. Most of the
new electronic tutorial products being introduced into the market are based on
computer technology, usually with interactive capabilities. There can be no
assurance that the Company's ability to market its educational products in
videotape, CD ROM or DVD versions will not be materially adversely affected by
the increase in the number and sophistication of computer based educational
products. Furthermore, there can be no assurance that the introduction of such
computer based technologies will not render obsolete the products currently
marketed by the Company. No assurance can be given that the Company can adapt to
such new media technologies. In addition, when the Company may license new
non-educational products there is no guarantee of market acceptance of these new
products. See "Business--Product Acquisition and Development."
COMPETITION
The Company's educational videotape offerings compete with a variety of
programs, including Hooked on Phonics, Reading Genius, Davidson and The Learning
Co. In the school market, the Company competes with Video Tutor, and Educational
Video Resources. Almost all of these competitors have greater financial
resources, greater public and industry recognition and broader marketing
capabilities than the Company. The market is characterized by numerous small
companies, with whose products the Company may be unfamiliar, and which may be
competitive with the Company's products. The Company's products also compete
with other methods of education such as private tutors and televised programs.
With respect to the Company's new marketing initiatives via its E-commerce
supersite, "MathMadeEasy.com," the Company recognizes that the internet
currently hosts many other educational and children related sites that include
competitive educational videos and software. An example of this is the
Smarterkids.com site, which carries a broad range of educational products.
Kaplan and Sylvan are others which carry competitive products and services.
The telemarketing industry is intensely competitive and the Company's
principal competition in its primary markets comes from large and small
telemarketing companies including Apac Teleservices, Inc., Sykes Enterprises,
Incorporated, ICT Group, Inc., Precision Response Corporation, Teletech
Teleservices, West Telemarketing, Iti Marketing Services, Inc., Matrixx
Marketing, Inc., West Teleservices Corporation and Dial America. Because of the
size of this market, the Company believes that no one entity dominates this
business. Nevertheless, the Company's competitors in this area have greater
financial resources, greater public and industry recognition, advanced
technological expertise and equipment and broader marketing capabilities than
the Company. In addition, most businesses that are significant consumers of
telemarketing services utilize more than one telemarketing firm at one time and
reallocate work among various firms from time to time. A significant amount of
such work is contracted on an individual project basis, thus increasing the
competition in the industry. Furthermore, the Company believes there is a trend
among businesses with telemarketing operations toward outsourcing the management
of those operations to others and this trend may attract new and substantially
larger competitors. Competition in both the education products and telemarketing
markets may result in loss of sales by the Company or a reduction of the prices
which the Company can charge for its products or services. See "Business
-Competition."
13
<PAGE>
DEPENDENCE ON MANAGEMENT
The Company's business is significantly dependent upon the personal
efforts and continued availability of Barry Reichman, its Chief Executive
Officer, and Hershel Waldner, its Chief Operating Officer. The loss or
unavailability to the Company of Messrs. Reichman and Waldner could have a
materially adverse effect upon the Company's business operations and prospects.
To the extent that the services of Messrs. Reichman and Waldner are unavailable
to the Company for any reason, the Company would be required to procure other
personnel to manage and operate the Company. There can be no assurance that the
Company would be able to locate or employ such personnel on acceptable terms, if
at all.
GOVERNMENT REGULATION
In response to the concerns of consumer advocacy groups and as a result
of the practices of a number of unscrupulous telemarketing companies, the
Federal Trade Commission and the Federal Communications Commission have
promulgated rules regulating the telemarketing industry. The Federal Telephone
Consumer Protection Act of 1991 (the "TCPA"), enforced by the Federal
Communications Commission, imposes restrictions on unsolicited telephone calls
to residential telephone subscribers. The rules applicable to the Company
include, among other things, an obligation to advise customers of their rights,
to initiate telephone solicitations to residential telephone customers before
8:00AM or after 9:00PM local time at the customer's location, obligation to ship
merchandise in a timely fashion and an obligation to notify a customer of delays
in shipments and to offer a refund in the event of a delay. In addition, many
states are enacting their own laws regulating the telemarketing industry which
are, to the extent applicable to the Company, similar to the Federal rules in
most respects. Furthermore, there exist both state and federal laws governing
false advertising and deceptive trade practices. Due to the subjective nature of
interpreting and enforcing such laws, there can be no assurance that the Company
will be in compliance with such laws at all times. Although such regulations are
expected to have a minimal impact on the Company's ability to operate its
business in its present form, the nature of which is considered inbound
telemarketing, such regulations generally tend to add significant recordkeeping
requirements and, consequently, expenses.
DELISTING FROM NASDAQ SMALL CAP MARKET; MAINTENANCE CRITERIA FOR NASDAQ
SECURITIES; PENNY STOCK RULES
On April 17, 1997, the National Association of Securities Dealers, Inc.
Automated Quotation System Stock Market ("NASDAQ") delisted the Company's Common
Stock and Warrants from trading on the NASDAQ Small-Cap Market because the
minimum bid price of the Company's Common Stock had been below the requirement
of $1.00 per share. In order to regain a listing for the Company's securities on
the NASDAQ Small-Cap Market, the Company's Common Stock must have a minimum bid
price of $4.00 per share and at least three market makers for the trading
securities.. In addition, the Company must either have $4,000,000 in net
tangible assets, a market capitalization of at least $50,000,000, or net income
of at least $750,000 in its most recently completed fiscal year or in two of the
three last completed fiscal years, and the Company must have at least 1,000,000
publicly traded shares not held by affiliates of the Company ("public float"),
with a market value of at least $5,000,000, and at least 300 stockholders of
record. There can be no assurances that the Company will be able to meet the
requirements for relisting on the NASDAQ Small Cap Market.
If the Company's securities are again listed on the NASDAQ Small-Cap
Market, in order to maintain such listing the Company must continue to be
registered under Section 12(g) of the Securities Exchange Act of 1934 (the
"Exchange Act") and have,. In addition, NASDAQ has proposed increasing the
requirements for maintaining a NASDAQ Small-Cap listing to require either: (1)
net tangible assets of at least $2,000,000, (2) a market capitalization of
$35,000,000 or (3) net income in at least two of the last three years of
$500,000, and at least 300 holders of record, a minimum bid price of $1.00 per
share, at least two market makers and a public float of at least 500,000 shares
with a market value of at least $1,000,000. There can be no assurance that the
Company would be able to meet the requirements for maintaining a listing on the
NASDAQ Small-Cap Market.
Failure to regain or to maintain NASDAQ Small-Cap Market listing will
probably depress the market value of the Common Stock and purchasers likely
would find it more difficult to dispose of, or to obtain accurate quotations as
to the market value of, the Common Stock.
In addition, if the Company cannot obtain a NASDAQ Small-Cap Market
listing for its securities, and no other exclusion from the definition of a
"penny stock" under the Exchange Act is available, then the Company's stock will
continue to be subject to additional federal and state regulatory requirements.
Rule 15g-9 under the Exchange Act, among other things requires that
14
<PAGE>
broker/dealers satisfy sales practice requirements, including making
individualized written suitability determinations and receiving any purchaser's
written consent prior to any transaction. The Company's securities could also be
deemed penny stocks under the Securities Enforcement and Penny Stock Reform Act
of 1990, which requires additional disclosure in connection with trades in the
Company's securities, including the delivery of a disclosure schedule explaining
the nature and risks of the penny stock market. Such requirements can severely
limit the liquidity of the Company's securities and the ability of purchasers to
sell their securities in the secondary market.
LIMITED PUBLIC TRADING MARKET FOR THE COMPANY'S SECURITIES, VOLATILITY
There is only a limited public trading market for the Company's
securities and no assurances can be given that a liquid market will develop or,
if developed, that it will continue to be maintained. There can be no assurance
that a more active trading market will develop or, if developed, that it will be
maintained. In addition, there can be no assurance that the Company will obtain
relisting of its securities on NASDAQ. See "Maintenance Criteria for NASDAQ
Securities; Delisting from NASDAQ Small Cap Market; Penny Stock Rules."
LIMITATION OF USE OF NET OPERATING LOSS CARRYFORWARDS
As of February 29, 2000 and February 28, 1999, the Company had federal
net operating loss carryforwards of approximately $9,688,000 and $8,667,000,
respectively, portions of which expire yearly through 2014 (subject to certain
limitations). This balance gives effect to annual limitations on the utilization
of the loss carryforwards caused by "ownership changes" as defined in Section
382 of the Internal Revenue Code. If there is any additional ownership change,
there can be no assurance as to the specific amount of net operating loss
carryforwards available in any post-change year since the calculation is based
upon a fact-dependent formula. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
NO DIVIDENDS
The Company has never paid any dividends on its Common Stock. The
payment of future dividends will be dependent upon earnings, financial
requirements of the Company and other factors deemed relevant by the Company's
Board of Directors. For the foreseeable future it is anticipated that any
earnings which may be generated from operations of the Company will be used to
finance the growth of the Company and that cash dividends will not be paid to
holders of Common Stock.
ISSUANCE OF PREFERRED STOCK; POTENTIAL ANTI-TAKEOVER EFFECT
Certain provisions of Delaware law and the Company's certificate of
incorporation and by-laws could make more difficult a merger, tender offer or
proxy contest involving the Company, even if such events could be beneficial to
the interests of the stockholders. The Board of Directors has the authority to
issue up to 1,000,000 shares of Preferred Stock in one or more series and to fix
the number of shares constituting any such series, the voting powers,
designation, preferences and relative participation, optional or other special
rights and qualifications, limitations or restrictions thereof, including the
dividend rights and dividend rate, terms of redemption (including sinking fund
provisions), redemption price or prices, conversion rights and liquidation
preferences of the shares constituting any series, without any further vote or
action by the stockholders. The issuance of preferred stock by the Board of
Directors could adversely affect the rights of the holders of Common Stock. For
example, such issuance could result in a class of securities outstanding that
would have preferences with respect to voting rights and dividends and in
liquidation over the Common Stock, and could (upon conversion or otherwise)
enjoy all of the rights appurtenant to Common Stock. The authority possessed by
the Board of Directors to issue preferred stock could potentially be used to
discourage attempts by others to obtain control of the Company through a merger,
tender offer, proxy contest or otherwise by making such attempts more difficult
to achieve or more costly. Such provisions could limit the price that certain
investors might be willing to pay in the future for shares of the Company's
Common Stock or preferred stock.
15
<PAGE>
ITEM 2. PROPERTIES
The Company leases an approximately 4,700 square foot facility at 205
Kings Highway, Brooklyn, New York, which houses its telemarketing and other
staff. This lease, which currently calls for monthly rentals of $7,500, subject
to annual increases, is scheduled to expire in June, 2001, with an option to
extend through June, 2003. The Company also leases a 20,000 square foot
warehouse located at 201 Kings Highway in Brooklyn, New York, which calls for a
monthly rent of $1,300.
ITEM 3. LEGAL PROCEEDINGS
The Company has judgments entered against it by certain of its vendors
in the aggregate amount of approximately $70,000. The Company has reached
agreements or is in the course of negotiating agreements with these vendors to
make scheduled payments on these obligations. Further, certain creditors of the
Company have commenced various lawsuits asserting claims in the aggregate amount
of approximately $235,000. In addition, the Company has been sued by a vendor
for approximately $100,000, and the Company has asserted a counterclaim against
the vendor seeking damages in the sum of $500,000.
The Company is currently in a dispute with ATT regarding the amount of
the outstanding charges for telephone services. ATT asserts that there is
approximately $260,000 currently due and payable, and the Company believes that
a lesser amount is due and payable of approximately $25,000. The Company's
defenses to ATT's claims include, but are not limited to, the Company's
assertion that ATT billed the Company for numbers belonging to other parties and
for special features and services, which the Company had requested to be
disconnected, and that ATT failed to make available to the Company discount
plans customarily available to users with comparable volume. The Company has
entered into discussions with ATT to resolve this dispute. However, there can be
no assurances as to the resolution of this dispute or whether ATT will not take
action to discontinue its services prior to the resolution of this dispute.
Although the Company believes that it can obtain an alternative provider for the
services currently provided by ATT, a change of service could result in a
temporary disruption in the Company's ability to service its telemarketing
accounts, which could have an adverse impact on the Company's financial
condition.
There can be no assurances as to the outcome of any of the pending
litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 13, 1997, the company's stockholders approved resolutions to
adopt a one-for-ten reverse split and an increase in the authorized shares of
Common Stock to 20,000,000. The Company effected these resolutions on May 24,
1999.
PART II
ITEM 5. MARKET PRICE OF REGISTRANT'S COMMON EQUITY AND EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock and Warrants are listed for trading on the
NASD Electronic Bulletin Board under the symbols MMTS and MMTSW, respectively.
The following table sets forth the high and low sales price for the
Company's Common Stock in each quarter of the fiscal years ended February 28,
1999 and 2000, and the initial quarter of the fiscal year ending February 28,
2001, and further reflects the period preceding and following May 24, 1999, the
date on which the Company effected a one-for-ten reverse split of the issued and
outstanding Common Stock. These quotations have been reported by the National
Association of Securities Dealers, Inc. and represent quotations by dealers
without adjustments for retail mark-ups, mark-downs or commissions and may not
represent actual transactions.
16
<PAGE>
<TABLE>
COMMON STOCK
<CAPTION>
Bid Prices Asked Prices
---------- ------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
Year Ended February 28, 1999
1st Quarter 0.04 0.3125 0.05 0.05
2nd Quarter 0.0325 0.03125 0.05 0.045
3rd Quarter 0.0325 0.0325 0.045 0.04
4th Quarter 0.05 0.03 0.07 0.04
Year Ended February 29, 2000
March 1-May 24 0.11 0.05 0.15 0.06
May 25-May 28 0.60 0.60 0.96875 0.75
2nd Quarter 0.60 0.09375 0.75 0.125
3rd Quarter 0.46875 0.10 0.53125 0.12
4th Quarter 0.375 0.25 0.53125 0.3125
Year Ending February 28, 2001
1st Quarter 0.75 0.625 0.96875 0.9375
</TABLE>
The closing bid and asked sales prices of the Common Stock, as traded
in the over-the-counter market, on June 12, 2000, were approximately $0.105 and
$0.12, respectively. These prices are based upon quotations between dealers,
without adjustments for retail mark-ups, mark-downs or commissions, and
therefore may not represent actual transactions.
The Company has not paid a cash dividend on its Common Stock since its
inception and, by reason of its present financial status and its contemplated
financial requirements, does not anticipate paying and cash dividends in the
foreseeable future. It is anticipated that earnings, if any, which may be
generated from operations will be used to finance the operations of the Company.
SALES OF UNREGISTERED SECURITIES
As of May 24, 1999, the Company effected a reverse split of its issued
and outstanding Common Stock on a one-for-ten basis. Except as set forth below,
the following discussion gives effects to the reverse split.
In May and June 1997, the Company secured approximately $350,000 of
loans ("1997 Loans"), which were used for working capital and for debt
repayment. As of June 9, 2000, the noteholders had converted all of the loans
into 5,200,000 shares of Common Stock.
In 1996, the Company issued an aggregate amount of $1,000,000 principal
amount of promissory notes. $750,000 of principal of these loans
remain outstanding and are currently due and payable. With respect to the
assignment of $600,000 of these notes by the original noteholders to certain
other persons, the Company issued 546,672 shares of Common Stock during the
fiscal year ended February 29, 2000, and recognized interest charges of
$142,135, as of February 29, 2000.
The Company issued 230,769 shares of Common Stock to an employee in
cancellation of $30,000 of accrued and unpaid salary.
17
<PAGE>
In December, 1999, the Company entered into an agreement with Gaspra,
Inc., a software development company, to develop a website and to convert a
portion of the Company's "MathMadeEasy" video into on-line learning programs
utilizing flash technology. The Company agreed to pay $130,000 for these
services, and has issued 433,333 shares of Common Stock in satisfaction of
$65,000 of this obligation.
The Company has received advances aggregating $375,000, which bear
interest at the rate of 10% per year, and are currently due and payable.
In May, 1999, the Company issued 670,000 shares of Common Stock in
satisfaction of an obligation of $201,000 to its former counsel, Oscar Folger,
for services rendered.
In December, 1999, the Company issued 250,000 shares of Common Stock,
as a finance charge of $60,000 for a bridge financing.
From November, 1999, to May, 2000, the Company issued approximately
$713,000 of convertible, unsecured promissory notes. The notes bear interest at
the rate of 10% per annum, and are due 10-months following the date of issuance.
The notes are convertible into Common Stock at the lesser of: (i) $0.50 per
share, or (ii) 50% of the average of the closing bid price for the Common Stock
during the five (5) days immediately preceding conversion. However, the notes
may not be converted at a price of less than $0.10 per share. The notes may be
converted into a number of shares of common stock of the Company's subsidiary,
The Tutorial Channel.com, equal to 1% of the issued and outstanding shares of
common stock of such subsidiary for each $25,000 principal amount with respect
to $600,000 of certain of these notes (Class A Notes), and equal to 0.25% of the
issued and outstanding shares of common stock of such subsidiary for each
$25,000 principal amount with respect to $113,000 of certain of these notes
(Class B Notes). Each class of these notes is convertible on the earlier of (i)
the last business day preceding the filing of the first registration statement
for the common stock of such subsidiary, or (ii) December 1, 2000.
In March, 2000, the Company issued 150,000 shares of Common Stock to a
public relations consultant for $21,000 of services rendered. The Company
recognized a consulting expense of $10,500 during the fiscal year ended February
29, 2000.
In March, 2000, the Company issued 52,000 shares of Common Stock to
consultant for $13,000 of services rendered.
At February 29, 2000, the Company maintained advances of $83,224 from
Barry and Anne Reichman, who are directors and executive officers of the
Company. The advances are unsecured, bear interest at the rate of 10% per annum
and are payable on demand. In December, 1999, the Company issued 230,769 shares
of Common Stock to Anne Reichman in cancellation of $30,000 of these
obligations. In connection with the conversion, the Company recognized financing
charges of approximately $35,000.
In addition to the various issuances of securities referenced above in
this Report, the Company issued options to purchase 4,465,087 shares of Common
Stock at exercise prices ranging from $0.10 to $0.90 to various employees and
consultants of the Company during the fiscal year ended February 29, 2000.
These transactions were exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT, INCLUDING THE DISCLOSURES BELOW, CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES.
WHEN USED HEREIN, THE TERMS "ANTICIPATES," "EXPECTS," "ESTIMATES," "BELIEVES"
AND SIMILAR EXPRESSIONS, AS THEY RELATE TO THE COMPANY OR ITS MANAGEMENT, ARE
INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED
OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH MATERIAL DIFFERENCES INCLUDE THE FACTORS DISCLOSED IN THE
"RISK FACTORS" SECTION OF THIS ANNUAL REPORT ON FORM 10-KSB, WHICH READERS OF
THIS REPORT SHOULD CONSIDER CAREFULLY.
18
<PAGE>
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED FEBRUARY 28, 2000 AND
1999. Net sales for the fiscal year ended February 29, 2000 (the "2000 Period")
were $2,731,880 compared to $5,369,597 in the fiscal year ended February 28,
1999 (the "1999 Period").
Gross profit was $2,458,273 in the 2000 Period compared to $4,773,174
in the 1999. Net sales and related gross profit decreased due to a reduction in
advertising. This reduction was a result of an increase in advertising prices,
which caused the advertising to cease to be cost effective.
Selling and marketing expenses were $1,448,156 in the 2000 Period
compared to $2,379,814 for the 1999 Period. Selling and marketing expenses were
significantly reduced as the Company eliminated advertising, which had become
inefficient.
General and administrative expenses were $1,320,843 in the 2000 Period
compared to $2,746,455 in the 1999 Period. General and administrative expenses
were reduced in the fiscal year ended February 29, 2000, as the Company reduced
its overhead personnel by consolidating its operations under a leaner management
team.
Interest expense was $765,131 in the 2000 Period compared to $141,335
in the 1999 Period. $608,980 of the interest expense attributable to losses
reported during the fiscal year ended February 29, 2000 resulted from
non-recurring, non-cash interest charges related to securities issued by the
Company in connection with certain debt.
Net loss was $1,492,686 in the 2000 Period compared to $753,136 in the
1999 Period. Loss from operations was $727,555 in the 2000 Period compared to
$611,801 in the 1999 Period. The non-recurring, non-cash interest charges
constituted $608,980 of the losses in the 2000 Period. Loss from operations
before depreciation and amortization was $471,378 and $359,095 for the fiscal
years ended February 29, 2000 and February 28, 1999, respectively.
During the first half of fiscal year ended February 29, 2000, the
Company was still actively purchasing significant quantities of advertising time
on national radio. Due to the influx of dot com advertisers, the inventory
available was limited to unfavorable air times and rates for such advertising
increased. This resulted in a deterioration in the advertising performance.
Beginning in the second half of fiscal year ended February 29, 2000,
management reduced the Company's dependency on such advertising and restricted
its purchasing to those areas of advertising, which were still available on
favorable terms. The Company also took steps to diversify its revenue base,
which included a greater share of revenue from teleservicing.
Consequently, the Company was able to improve its financial performance
in the second half of the fiscal year ended February 29, 2000.
Management also took steps to transition its educational sales from
off-line advertising to an internet model. The Company developed a fully
functioning e-commerce site and has developed an advertising strategy designed
to procure leads from other educational and family related sites at a lower cost
per lead than what the Company had been paying for off-line leads. Additionally,
the Company is developing its product line for on-line learning, which it
intends to provide on a subscription basis.
LIQUIDITY AND CAPITAL RESOURCES. The Company's cash and restricted cash
decreased to $50,000 at February 29, 2000 from $80,000 at February 28, 1999. The
Company did not have any cash, other than restricted cash, at February 28, 2000.
Net cash used in operations in the 2000 Period was $499,665 compared to
$108,352 in the 1999 Period.
Net cash used in investing activities in the 2000 Period was $46,462
compared to $25,857 in the 1999 Period.
19
<PAGE>
Net cash provided from financing activities in the 2000 Period was
$617,712, compared to net cash used in financing activities of $30,069 in the
1999 Period.
As of May 24, 1999, the Company effected a reverse split of its issued
and outstanding Common Stock on a one-for-ten basis.
In April 1996, the Company received gross proceeds of $500,000 from the
issuance of convertible notes. The notes bear interest at 10% per annum and an
accelerated rate of 17% per annum beginning April 17, 1997. The noteholders have
the right to convert the principal and accrued interest into common shares of
the Company at a price of (i) $1.2656 per share or (ii) 75% of the closing bid
for the five trading days immediately preceding the conversion. In the event of
default, as defined, the Company will not have the right to compel conversion.
The Company placed 909,090 shares of common stock into escrow for the benefit of
the noteholders. During the nine months ended November 30, 1996, $250,000 was
converted into 34,190 shares and $250,000 of principal remain outstanding and
are currently due and payable. As a result of the conversion, 45,455 shares
remained in escrow.
The Company arranged a six month short term loan that yielded the
Company in the months of September 1996 and October 1996 approximately
$1,000,000 which was used to retire existing debt and fund working capital.
$750,000 of principal of these loans remain outstanding and are currently due
and payable. With respect to the assignment of $600,000 of these notes by the
original noteholders to certain other persons, the Company issued 546,672 shares
of Common Stock during the fiscal year ended February 29, 2000, and recognized
interest charges of $142,135, as of February 29, 2000.
In May and June 1997, the Company secured approximately $350,000 of
loans ("1997 Loans"), which were used for working capital and for debt
repayment. As of June 9, 2000, the noteholders had converted all of the loans
into 5,200,000 shares of Common Stock.
The Company has received advances aggregating $375,000, which bear
interest at the rate of 10% per year, and are currently due and payable.
At February 29, 2000, the Company maintained advances of $83,224 from
Barry and Anne Reichman, who are directors and executive officers of the
Company. In December, 1999, the Company issued 230,769 shares of Common Stock to
Anne Reichman (on a post-split basis) in cancellation of $30,000 of these
obligations.
In December, 1999 the Company entered into an agreement with Gaspra,
Inc., a software development company, to develop a website and to convert a
portion of its educational video product into on-line learning courses utilizing
flash technology. The Company agreed to pay $130,000 for these services and has
issued 433,333 shares of Common Stock in satisfaction of $65,000 of this
obligation. The Company has agreed to issue an additional 433,333 shares in
satisfaction of the $65,000 balance, once the Company has determined that the
project has been completed to its satisfaction.
In May, 1999, the Company issued 670,000 shares of Common Stock in
satisfaction of an obligation of $201,000 to its former counsel, Oscar Folger,
for services rendered.
In December, 1999, the Company issued 250,000 shares of Common Stock,
as a finance charge of $60,000 for a bridge financing.
From November, 1999, to May, 2000, the Company issued approximately
$713,000 of convertible, unsecured promissory notes. The notes bear interest at
the rate of 10% PER ANNUM, and are due 10-months following the date of issuance.
The notes are convertible into Common Stock at the lesser of: (i) $0.50 per
share, or (ii) 50% of the average of the closing bid price for the Common Stock
during the five (5) days immediately preceding conversion. However, the notes
may not be converted at a price of less than $0.10 per share. The notes may be
converted into a number of shares of common stock of the Company's subsidiary,
The Tutorial Channel.com, equal to 1% of the issued and outstanding shares of
common stock of such subsidiary for each $25,000 principal amount with respect
to $600,000 of certain of these notes (Series A Notes), and equal to 0.25% of
the issued and outstanding shares of common stock of such subsidiary for each
$25,000 principal amount with respect to $113,000 of certain of these notes
(Series B Notes). Each class of these notes is convertible on the earlier of (i)
the last business day preceding the filing of the first registration statement
for the common stock of such subsidiary, or (ii) December 1, 2000.
20
<PAGE>
From November, 1999 to February, 2000, the Company issued $100,000 of
unsecured, demand promissory notes, bearing interest at the rate of 10% PER
ANNUM.
As of February 2, 2000, the Company converted an account payable of
$135,500 due to its former accountants, Holtz Rubenstein & Co., LLP, into a
one-year Series B Note, in the principal amount of $135,500, bearing interest at
the rate of 10% PER ANNUM.
In March, 2000, the Company issued 150,000 shares of Common Stock for
public relations consultant for $21,000 for services rendered. The Company
recognized a consulting expense of $10,500 during the fiscal year ended February
29, 2000.
In March, 2000, the Company issued 52,000 shares of Common Stock to
consultant for $13,000 of services rendered.
The Company has judgments entered against it by certain of its vendors
in the aggregate amount of approximately $70,000. The Company has reached
agreements or is in the course of negotiating agreements with these vendors to
make scheduled payments on these obligations. Further, certain creditors of the
Company have commenced various lawsuits asserting claims in the aggregate amount
of approximately $235,000. In addition, the Company has been sued by a vendor
for approximately $100,000, and the Company has asserted a counterclaim against
the vendor seeking damages in the sum of $500,000. The Company also has reached
agreements with certain of its vendors relating to obligations in the aggregate
amount of approximately $800,000. Of these settled amounts, approximately
$765,000 is payable over a period of two (2) years, and the other $35,000 is
payable over a period between 6 to 18 months.
The Company continues to meet its working capital requirements through
debt and equity funding from outside sources and internally generated funds. In
addition, the Company may have increased capital requirements as it seeks to
expand its product lines and customized telemarketing services. In order to meet
its current and future cash requirements, the Company is in discussions to
negotiate additional debt and equity financing. There can be no assurance that
any financing will be successful nor that the Company will be able to fund
internally its working capital requirements or meet its debt repayment
obligations. In the event that the Company is unable to secure additional
financing, it may be obligated to significantly reduce its operations and seek
to sell assets, which would have a material adverse affect on the Company's
prospects and financial results.
The Company has received a report from its independent public
accountants, that includes an explanatory paragraph describing the uncertainty
as to the ability of the Company's operations to continue as a going concern.
The Company's operations have not been materially affected by the
impact of inflation.
YEAR 2000
The Company has updated its computer systems to address issues related
to year 2000 compliance. Financial and operational systems were developed to
address systems modification requirements to become year 2000 compliant. The
financial impact of making the required systems changes was not material to the
Company's consolidated financial position, liquidity and results of operations.
In the first week of January, 2000, the Company experienced a year 2000 problem
relating to the operations of its voice mail system. The problem has been
resolved with minimal expense, and the problem did not have a material adverse
effect on the operations of the Company during the weeklong period and the
Company does not anticipate that there will be a material adverse effect on the
Company relating to the matter for the foreseeable future.
21
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included herein commencing on page F-1
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
a. On December 14, 1999, the Company terminated its relationship with
Holtz Rubenstein & Co., LLP ("Holtz Rubenstein"), as principal independent
accountants for the Company.
In connection with the audits for the two (2) most recent fiscal years
ended February 28, 1999 and 1998 and the subsequent interim periods through
December 14 1999, there were no disagreements between Holtz Rubenstein and the
Company, on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which disagreements, if
not resolved to the satisfaction of Holtz Rubenstein would have caused Holtz
Rubenstein to make reference in connection with its report for the related
periods with respect to the subject matter of the disagreement.
Except for a qualification with respect to the ability of the Company
to continue as a going concern stated in the opinion of Holtz Rubenstein, dated
as of April 25, 1997, the audit reports of Holtz Rubenstein on the consolidated
financial statements of the Company, as of and for the fiscal years ended
February 28, 1997 and 1996, did not contain any adverse opinion, or disclaimer
of opinion, nor were they qualified or modified as to uncertainty, audit scope,
or accounting principles.
b. As of November 14, 1999, the Company engaged Singer Lewak Greenbaum
& Goldstein ("SLGG"), as the Company's principal independent accountants. Prior
to engaging SLGG, neither the Company nor someone on its behalf consulted SLGG
regarding either: (i) the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Company's financial statements, or (ii) any matter that
was either the subject of a disagreement or a reportable event.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Officers and Directors
The officers and directors of the Company, as of June 23, 2000, are as
follows:
NAME AGE POSITION
---- --- --------
Barry Reichman 49 Chief Executive Officer,
Chief Financial Officer and Director
Anne Reichman 46 Secretary and Director
Irving Bader 60 Director
Hershel Waldner 49 Chief Operating Officer
HERSHEL WALDNER was appointed as Chief Operating Officer in January,
2000. Mr. Waldner's duties include spearheading the Company's restructured
internet based business operations and developing the Company's teleservicing
operations. From 1980 until January, 2000, he served as management consultant
and contract negotiator for a large New York corporation known as Systems
Services of America, Inc.. Mr. Waldner holds an MBA from the New York Institute
of Technology and licenses in Nursing Home Administration from both the New York
and New Jersey Department of Health.
22
<PAGE>
BARRY REICHMAN has been Chief Executive Officer and a Director of the
Company since August 1994, and Chief Financial Officer since September, 1999.
>From 1985 until 1994, he was Secretary and a Director of VTS. Mr. Reichman
holds a B.A. in Economics from Yeshiva University and an M.B.A. from Baruch
College. He is the husband of Anne Reichman, a Director of the Company.
ANNE REICHMAN has been a Director of the Company since October 1994.
Ms. Reichman was elected Secretary of the Company in March 1995. From 1985 until
1994 she developed and oversaw the computer and order fulfillment system for VTS
and supervised internal accounting. Ms. Reichman was also an assistant producer
in a number of VTS mathematics videotape productions and authored several math
workbooks. Ms. Reichman holds a B.A. in Mathematics from Yeshiva University. Ms.
Reichman is the wife of Barry Reichman, President and a Director of the Company.
IRVING BADER was elected a Director of the Company in March 1995. Mr.
Bader has been Director of Adaptive Physical Education with the New York City
Board of Education since 1973. He has also been an Adjunct Professor of Physical
Education at Brooklyn College since 1980. In addition, he has been the area
coordinator of the New York Special Olympics since 1985. Mr. Bader holds a B.A.
in English from Yeshiva College and M.S.E. from Yeshiva Graduate School of
Education.
AUDIT COMMITTEE
The Board has designated an Audit Committee consisting of Messrs.
Bader. There were no meetings held for this committee during the most recent
fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation
paid by the Company for services to the Company during the two (2) fiscal years
ended February 28, 2000, to the Company's Chief Executive Officer and other
officers of the Company who received annual compensation in excess of $100,000.
23
<PAGE>
SUMMARY COMPENSATION TABLE
SUMMARY COMPENSATION TABLE. The following table sets forth certain
information concerning compensation of certain of the Company's executive
officers (the "Named Executives"), including the Company's Chief Executive
Officer and all executive officers whose total annual salary and bonus exceeded
$100,000, for the years ended February 29, 2000 and February 28, 1999:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
Awards Payouts
---------------------------------------------------------------------------------------------------------------------
Restricted Securities
Name and Other annual Stock Underlying LTIP All other
Principal Compensation Awards (s Options/ SARs Payouts Compensation
Position Year Salary Bonus ($) ($) (#) ($) ($)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Barry 2000 $100,000 -0- -0- -0- 1,000,000 - -
Reichman(1)
1999 $100,000 -0- -0- -0- 104,967 - -
Morris 1999 $76,000 -0- $3,850 -0- 134,986 - -
Berger(2)
</TABLE>
------------------------
(1) Mr. Reichman has served as Chief Executive Officer since July 31, 1999.
(2) Mr. Berger served as Chief Executive Officer during the fiscal year
ended February 28, 1999 until July 31, 1999. His salary and
compensation for a car allowance reflect compensation generated from
March 1, 1999 until July 31, 1999.
24
<PAGE>
OPTIONS/SAR GRANTS TABLE DURING LAST FISCAL YEAR. The following table
sets forth certain information concerning grants of stock options to certain of
the Named Executives, for the fiscal year ended February 29, 2000:
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rate of
Stock Price Appreciation
Individuals Grants For Option Term (1)
---------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
Number of % of
Securities Total
Underlying Options/
Options/ SARs Exercise
SARs Granted to Or Base
Granted Employees Price Expiration
Name (#) In Fiscal Year ($/Share) (1) Date (1) 5% ($) 10%($)
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Barry Reichman 1,000,000 40% 0.13 9/01/09 83,000 194,000
</TABLE>
--------------------
(1) This chart assumes a market price of $0.1375 for the Common Stock,
the average of the bid and asked prices for the Company's Common Stock in the
over-the-counter market, as of June 9, 2000, as the assumed market price for the
Common Stock with respect to determining the "potential realizable value" of the
shares of Common Stock underlying the options described in the chart, as reduced
by any lesser exercise price for such options. Each of the options reflected in
the chart was granted at exercise prices, which the Company believes to have
been determined based on the fair market value of the Common Stock as of the
date of grant. Further, the chart assumes the annual compounding of such assumed
market price over the relevant periods, without giving effect to commissions or
other costs or expenses relating to potential sales of such securities. The
Company's Common Stock has a very limited trading history. These values are not
intended to forecast the possible future appreciation, if any, price or value of
the Common Stock. See "Item 5-Market Price of Common Equity and Related
Stockholder Matters" and "Executive Compensation-Stock Option Plan."
25
<PAGE>
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Barry Reichman,
Anne Reichman and Harold Reichman pursuant to which they are paid annual base
salaries of $100,000, $50,000 and $75,000, respectively. In addition, Anne
Reichman and Harold Reichman were granted options to purchase up to 500,000 and
200,000 shares of Common Stock, respectively, at an exercise price equal to 50%
of the market price of the Common Stock during the year ended February 29, 2000.
The options vest in 20% increments, on each January 5 of the term of the
agreements, commencing January 5, 2000. The agreements terminate on December 31,
2004.
STOCK OPTION PLAN
The Company's 1995 Stock Option Plan (the "Stock Option Plan") provides
for the granting of options to purchase not more than an aggregate of 350,000
shares of Common Stock, subject to adjustment under certain circumstances. Such
options may be Incentive Stock Options ("ISO") within the meaning of the
Internal Revenue Code of 1986, as amended, or Non-Qualified Options ("NQO"). The
Stock Option Plan expires on March 31, 2004. The Company has granted 279,953
options under the Stock Option Plan.
The Stock Option Plan is administered by the Board of Directors or by a
stock option committee (the "Committee") which may be appointed by the Board of
Directors. To date the Board has not appointed a Committee. The Committee has
full power and authority to interpret the provisions, and supervise the
administration, of the Stock Option Plan. The Committee determines, subject to
the provisions of the Stock Option Plan, to whom options are granted, the number
of shares of Common Stock subject to each option, whether an option shall be an
ISO or a NQO and the period during which each option may be exercised. In
addition, the Committee determines the exercise price of each option, subject to
the limitations provided in the Stock Option Plan, including that (i) for a NQO
the exercise price per share may not be less than 85% of the fair market value
per share of Common Stock on the date of grant and (ii) for an ISO the exercise
price per share may not be less than the fair market value per share of Common
Stock on the date of grant (110% of such fair market value if the grantee owns
stock possessing more than 10% of the combined voting power of all classes of
the Company's stock). In determining persons to whom options will be granted and
the number of shares of Common Stock to be covered by each option, the Committee
considers various factors including each eligible person's position and
responsibilities, service and accomplishments, anticipated length of future
service and other relevant factors. Options may be granted under the Stock
Option Plan to all officers, directors and employees of the Company and, in
addition, NQO may be granted to other parties who perform services for the
Company. No options may be granted under the Stock Option Plan, after March 31,
2004. The Stock Option Plan may be amended from time to time by the Board of
Directors of the Company. The Board of Directors may not, however, without
stockholder approval, amend the Stock Option Plan to increase the number of
shares of Common Stock which may be issued under the Stock Option Plan (except
upon changes in capitalization as specified in the Stock Option Plan), decrease
the minimum exercise price provided in the plan or change the class of persons
eligible to participate in the plan.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on review of the copies of such forms furnished to the
Company, or written representations that no Forms 5 were required, the Company
believes that during the fiscal year ended February 29, 2000, no reports
required under Section 16 (a) of the Exchange Act were made by any of the
Company's executive officers, directors or 10% beneficial owners, if any, and
that all such reports remain delinquent. The Company intends determine which
reports, if any, are required to be filed by such persons, and to be in
compliance with the filing requirements of Section 16(a).
26
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 23, 2000, as adjusted for
the one-for-ten reverse split, information regarding the beneficial ownership of
the Common Stock based upon the most recent information available to the Company
for (i) each person known by the Company to own beneficially more than five
percent of the Common Stock, (ii) each of the Company's directors and (iii) all
officers and directors of the Company as a group. Unless otherwise indicated,
each stockholder's address is c/o the Company, 205 Kings Highway, Brooklyn, New
York, 11223.
<TABLE>
<CAPTION>
Name and Address
of Beneficial Owner Number of Shares Percent of Total #
------------------- ---------------- ------------------
<S> <C> <C>
Barry Reichman (1) 1,980,736 15.63
Anne Reichman (1) 1,980,736 15.63
Irving Bader (2) 25,000 *
Custer Company, Inc. (3) 1,685,556 15.44
Steel Partners II LP (4) 848,011 7.77
Jacob Wizman (5) 2,729,556 21.34
Rita Folger (6) 704,521 6.45
Generation Capital Associates (7) 1,405,556 11.79
Paul and Elizabeth Guez (8) 2,500,000 18.63
Richard Chase (9) 625,000 5.72
All officers and directors as a group 2,005,736 15.80
(4 persons)(10)
</TABLE>
-----------------------
(FOOTNOTES ON FOLLOWING PAGE)
27
<PAGE>
(FOOTNOTES FROM PRIOR PAGE)
# Pursuant to the rules of the Commission, shares of Common Stock which
an individual or group has a right to acquire within 60 days pursuant
to the exercise of options or warrants are deemed to be outstanding for
the purpose of computing the percentage ownership of such individual or
group, but are not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person shown in the
table.
* Less than 1%.
(1) Mr. and Mrs. Reichman are husband and wife, and are officers and
directors of the Company. Includes options to purchase up to 1,224,967
shares granted to Mr. Reichman, options to purchase up to 525,000
shares granted to Mrs. Reichman, and 230,769 shares owned by Mrs.
Reichman.
(2) Mr. Bader is a director of the Company. Includes options to purchase up
to 25,000 shares.
(3) The address for Custer Company, Inc. is 10911 Petal Street, Dallas
Texas 75238.
(4) The address for Steel Partners II LP is 150 East 52nd Street, 21st
Floor, New York, New York 10022. Per a Schedule 13D, dated June 9,
2000, filed with respect to Steel Partners II LP, Warren Lichtenstein
is also a beneficial owner of the securities owned by Steel Partners II
LP.
(5) The address for Mr. Wizman is 211 South Beverly Drive, Suite 108,
Beverly Hills, California 90210. Includes promissory notes convertible
into up to 1,875,000 shares of Common Stock.
(6) The address for Ms. Folger is 521 Fifth Avenue, New York, New York
10175.
(7) The address for Generation Capital Associates is 1085 Riverside Trace,
Atlanta, Georgia 30328. Includes promissory notes convertible into up
1,000,000 shares of Common Stock.
(8) The address for Mr. and Mrs. Guez is 6205 Busch Drive, Malibu,
California 90265. Includes promissory notes convertible into up to
2,500,000 shares of Common Stock.
(9) The address for Mr. Chase is c/o Chase Investments, Inc., 6218 Ramires
Mesa Drive, Malibu, California 90265.
(10) See Footnotes 1 and 2 above.
28
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At February 29, 2000, the Company maintained advances of $83,224 from
Barry and Anne Reichman, who are directors and executive officers of the
Company. The advances are unsecured, bear interest at the rate of 10% per annum
and are payable on demand. In December, 1999, the Company issued 230,769 shares
of Common Stock to Anne Reichman in cancellation of $30,000 of these
obligations. In connection with the conversion, the Company recognized financing
charges of approximately $35,000.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements and Schedules.
The financial statements are listed in the Index to Financial
Statements on page F-1 and are filed as part of this annual
report.
2. Exhibits.
The Index to Exhibits set forth below indicates the exhibits
which are being filed herewith and the exhibits which are
incorporated herein by reference.
EXHIBITS
3.1 Certificate of Incorporation, as amended (1)
3.2 By-Laws (1)
4.1 Form of Warrant Agreement entered into between Registrant and
American Stock Transfer & Trust Company (1)
4.2 Specimens of Registrant's Stock, Redeemable Warrant and Unit
Certificate (1)
10.1 Form of 1995 Stock Option Plan (1)
10.2 Employment Agreement between Registrant and Barry Reichman
16.1 Letter re change in certifying accountant (2)
27.1 Financial Data Schedule
--------------------------------------------------------------------------------
(1) Incorporated by reference from the Company's Registration Statement on
Form SB-2 (No. 33-88494) effective April 13, 2995.
(2) Incorporated by reference from the Company's Annual Report on Form
10-KSB for the fiscal year ended February 28, 1999.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
MULTI MEDIA TUTORIAL SERVICES, INC.
Dated: June 30, 2000 By: /S/ Barry Reichman
-------------------------------------------
Barry Reichman, Chief Executive Officer,
Chief Financial Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below as of June 30, 2000 by the following persons
on behalf of Registrant and in the capacities indicated.
/S/ Barry Reichman
------------------------------------------
Barry Reichman, Chief Executive Officer
Chief Financial Officer and Director
/S/ Anne Reichman
------------------------------------------
Anne Reichman, Director
30
<PAGE>
MULTI-MEDIA TUTORIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
<PAGE>
MULTI-MEDIA TUTORIAL SERVICES, INC.
AND SUBSIDIARY
CONTENTS
FEBRUARY 29, 2000
--------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheet F-2 - F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Deficit F-5
Consolidated Statements of Cash Flows F-6 - F-8
Notes to Consolidated Financial Statements F-9 - F-22
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholder
Multi-Media Tutorial Services, Inc. and subsidiary
We have audited the accompanying consolidated balance sheet of Multi-Media
Tutorial Services, Inc. and subsidiary as of February 29, 2000, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
each of the two years in the period ended February 29, 2000. 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 audits.
We conducted our audits in accordance with 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Multi-Media
Tutorial Services, Inc. and subsidiary as of February 29, 2000, and the
consolidated results of their operations and their consolidated cash flows for
each of the two years in the period ended February 29, 2000 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company incurred a net loss of $1,492,686, it had an
accumulated deficit of $15,582,267, and it had negative cash flows from
operations of $499,665 during the year ended February 29, 2000. In addition, the
Company is currently in default on its capitalized leases. These factors, among
others, as discussed in Note 2 to the financial statements, raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
May 20, 2000
F-1
<PAGE>
MULTI-MEDIA TUTORIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
FEBRUARY 29, 2000
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Accounts receivable $ 44,605
Inventories 88,102
Prepaid income taxes 3,453
Prepaid expenses 120,601
-------------
Total current assets 256,761
FURNITURE AND EQUIPMENT, net 214,184
INTANGIBLE ASSETS, net 162,349
RESTRICTED CASH 50,000
OTHER ASSETS 21,681
-------------
TOTAL ASSETS $ 704,975
=============
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
MULTI-MEDIA TUTORIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
FEBRUARY 29, 2000
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Book overdraft $ 46,692
Short-term notes payable 1,580,176
Convertible promissory notes 662,500
Capital lease obligations 114,391
Due to related party 83,224
Accounts payable 1,282,047
Accrued payroll and other expenses 298,000
Accrued interest 463,161
-------------
Total current liabilities 4,530,191
LONG-TERM TRADE PAYABLE 366,980
-------------
Total liabilities 4,897,171
-------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred stock, Series A, $0.01 par value
1,000,000 shares authorized
no shares issued and outstanding -
Preferred stock, Series B, $0.01 par value
50 shares authorized
no shares issued and outstanding -
Common stock, $0.01 par value
20,000,000 shares authorized
8,683,343 shares issued and outstanding 86,835
Common stock committed, $0.01 par value
560,333 shares 88,500
Additional paid-in capital 11,214,736
Accumulated deficit (15,582,267)
-------------
Total stockholders' deficit (4,192,196)
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 704,975
=============
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
MULTI-MEDIA TUTORIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED FEBRUARY,
--------------------------------------------------------------------------------
2000 1999
------------- -------------
NET SALES $ 2,731,880 $ 5,369,597
COST OF SALES 273,607 596,423
------------- -------------
GROSS PROFIT 2,458,273 4,773,174
------------- -------------
OPERATING EXPENSES
Selling and marketing 1,448,156 2,379,814
General and administrative 1,320,843 2,746,455
Depreciation and amortization 256,177 252,706
Stock-based compensation 160,652 6,000
------------- -------------
Total operating expenses 3,185,828 5,384,975
------------- -------------
LOSS FROM OPERATIONS (727,555) (611,801)
------------- -------------
OTHER EXPENSE
Non-cash interest charges (608,980) -
Interest expense (156,151) (141,335)
------------- -------------
Total other expense (765,131) (141,335)
------------- -------------
NET LOSS $ (1,492,686) $ (753,136)
============= =============
BASIC LOSS PER SHARE $ (0.30) $ (0.27)
============= =============
DILUTED LOSS PER SHARE $ (0.30) $ (0.27)
============= =============
WEIGHTED-AVERAGE SHARES OUTSTANDING 5,042,019 2,743,646
============= =============
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
MULTI-MEDIA TUTORIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED FEBRUARY,
----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Common Stock Common Additional
------------------------ Stock Paid-In Accumulated
Shares Amount Committed Capital Deficit Total
----------- ----------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 28, 1998 2,743,646 $ 27,437 $ - $10,106,002 $(13,336,445) $(3,203,006)
STOCK OPTIONS ISSUED FOR SERVICES 6,000 6,000
NET LOSS (753,136) (753,136)
----------- ----------- ----------- ------------ ------------- ------------
BALANCE, FEBRUARY 28, 1999 2,743,646 27,437 - 10,112,002 (14,089,581) (3,950,142)
ISSUANCE OF COMMON STOCK FOR
Conversion of accounts payable 670,000 6,700 194,300 201,000
Conversion of notes payable 4,011,487 40,115 209,885 250,000
Conversion of stockholder advances 230,769 2,308 27,692 30,000
Services 230,769 2,308 27,692 30,000
Extension of notes payable 250,000 2,500 57,500 60,000
Interest charges on extension of debt 546,672 5,467 136,668 142,135
COMMON STOCK COMMITTED FOR SERVICES 88,500 88,500
INTEREST CHARGES ON BELOW-MARKET CONVERSION
OF STOCKHOLDER ADVANCES 34,846 34,846
CONVERSION FEATURE ON CONVERTIBLE DEBT 291,647 291,647
STOCK OPTIONS ISSUED FOR SERVICES 42,152 42,152
OPTIONS ISSUED FOR EXTENSION OF BRIDGE NOTES 80,352 80,352
NET LOSS
(1,492,686) (1,492,686)
----------- ----------- ----------- ------------ ------------- ------------
BALANCE, FEBRUARY 29, 2000 8,683,343 $ 86,835 $ 88,500 $11,214,736 $(15,582,267) $(4,192,196)
=========== =========== =========== ============ ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
MULTI-MEDIA TUTORIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY,
-------------------------------------------------------------------------------------------------------------
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,492,686) $ (753,136)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 256,177 252,706
Interest relating to beneficial conversion of stockholder
advances 34,846 -
Interest charges on bridge notes 142,135 -
Below-market conversion feature of convertible debt 291,647 -
Common stock issued for services 30,000 -
Common stock committed for consulting services 88,500 -
Stock options issued for services 42,152 6,000
Stock issued on conversion of bridge notes 60,000 -
Stock options issued for extension on debt 80,352 -
(Increase) decrease in
Restricted cash 30,000 10,000
Accounts receivable 172,978 65,597
Inventories - 21,097
Prepaid income taxes (1,104) (300)
Prepaid expenses (85,923) 31,976
Other assets 3,541 (2,500)
Increase (decrease) in
Due to related party 67,074 62,150
Accounts payable (295,041) 77,799
Accrued payroll and other expenses 10,106 (31,741)
Accrued interest 143,581 140,000
Deferred revenue (78,000) 12,000
------------- -------------
Net cash used in operating activities (499,665) (108,352)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment (45,462) (20,857)
Increase in intangibles (1,000) (5,000)
------------- -------------
Net cash used in investing activities (46,462) (25,857)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of capital lease obligations (14,464) (55,069)
Proceeds from issuance of notes payable 917,150 25,000
Repayment of notes payable (284,974) -
------------- -------------
Net cash provided by (used in) financing activities 617,712 (30,069)
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
<TABLE>
MULTI-MEDIA TUTORIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY,
-------------------------------------------------------------------------------------------------------------
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
Net increase (decrease) in cash and cash equivalents $ 71,585 $ (164,278)
CASH AND CASH EQUIVALENTS (BOOK OVERDRAFT), BEGINNING OF
YEAR (118,277) 46,001
------------- -------------
BOOK OVERDRAFT, END OF YEAR $ (46,692) $ (118,277)
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
INTEREST PAID $ 12,553 $ 1,334
============= =============
INCOME TAXES PAID $ 4,661 $ 1,060
============= =============
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended February 29, 2000, the Company converted $201,000 of
accounts payable into 670,000 shares of common stock.
During the year ended February 29, 2000, the Company converted $250,000 of notes
payable into 4,011,487 shares of common stock.
During the year ended February 29, 2000, the Company issued 250,000 shares of
common stock as consideration for the extension of notes payable. Related to the
issuance, the Company recognized financing charges of $60,000.
During the year ended February 29, 2000, the Company issued 546,672 shares of
common stock as consideration for the extension of debt. Related to the
issuance, the Company recognized interest charges of $142,135.
During the year ended February 29, 2000, the Company converted $30,000 of
stockholder advances into 230,769 shares of common stock.
During the year ended February 29, 2000, the Company issued 230,769 shares of
common stock as consideration for consulting services valued at $30,000.
During the year ended February 29, 2000, the Company committed to issue 75,000
shares of common stock for $10,500 of consulting services rendered during the
year.
During the year ended February 29, 2000, the Company converted $135,500 of
accounts payable into a promissory note and $366,980 into a long-term trade
payable.
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
MULTI-MEDIA TUTORIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY,
--------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES (CONTINUED)
During the year ended February 29, 2000, the Company committed to issue 433,333
shares of common stock for $65,000 of consulting services.
During the year ended February 29, 2000, the Company committed to issue 52,000
shares of common stock for $13,000 of consulting services rendered during the
year.
During the year ended February 28, 1999, the Company issued options to purchase
stock for consulting services valued at $6,000.
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
MULTI-MEDIA TUTORIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
--------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF BUSINESS
Multi-Media Tutorial Services, Inc., a Delaware corporation, is engaged
in the production and sales of educational videocassettes through its
wholly-owned subsidiary, Video Tutorial Services, Inc. (collectively,
the "Company"). The Company also provides telemarketing and webified
telemarketing to third party customers through its Multi-Media
Telemarketing Services division. During the year ended February 29,
2000, the Company also began to sell its educational products and
services on the Internet on the Company's website,
TheTutorialChannel.Com. Operations related to the website were not
material at February 29, 2000.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles, which
contemplate continuation of the Company as a going concern. The Company
incurred net losses of $1,492,686 and $753,136 during the years ended
February 29, 2000 and February 28, 1999, respectively. In addition, the
Company had an accumulated deficit of $15,582,267 and a working capital
deficit of $4,273,430 as of February 29, 2000. Further, the Company is
currently in default on its capitalized leases. Management recognizes
that the Company must generate additional resources and the eventual
achievement of sustained profitable operations. Management's plans
include obtaining additional capital through debt/equity financing and
the extension of existing debt. Management is also addressing improved
collection of customer accounts and the implementation of additional
products. The consolidated financial statements do not include any
adjustments that might be necessary if the Company is unable to
continue as a going concern.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of
Multi-Media Tutorial Services, Inc. and its wholly-owned subsidiary,
Video Tutorial Services, Inc. All significant intercompany transactions
and balances have been eliminated in consolidation.
Estimates
---------
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-9
<PAGE>
MULTI-MEDIA TUTORIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and Cash Equivalents
-------------------------
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with original maturity of three
months or less to be cash equivalents.
Advertising
-----------
The Company uses direct-response media advertising, consisting
primarily of television and radio commercials. The Company expenses
advertising costs as incurred. Advertising expense was $431,924 and
$1,832,536 during the years ended February 29, 2000 and February 28,
1999, respectively.
Inventories
-----------
The cost of inventories is determined by the first-in, first-out method
and is stated at the lower of cost or market. Inventories are composed
primarily of videocassettes and textbooks. Inventory carrying values
are composed entirely of product costs.
Furniture and Equipment
-----------------------
Furniture and equipment are recorded at cost. Depreciation and
amortization are provided using the straight-line and accelerated
methods over estimated useful lives as follows:
Furniture and fixtures 5 to 7 years
Office equipment 5 to 7 years
Computer equipment and software 3 to 5 years
Leasehold Improvements 1 to 4 years
Maintenance and minor replacements are charged to expense as incurred.
Leasehold improvements are amortized over the lease period or the
useful life of the asset, whichever is shorter.
Master Production Costs
-----------------------
Costs incurred in producing a master video program are capitalized and
expensed over the estimated life of the program, which is seven years.
Patents and Copyrights
----------------------
Patents and copyrights, stated at cost less accumulated amortization,
are amortized using the straight-line method over their estimated
useful lives of three years.
F-10
<PAGE>
MULTI-MEDIA TUTORIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
-------------------
Sales revenue is recognized when products are shipped to customers. The
Company provides a reserve for anticipated returns for customers based
upon historical return levels.
Stock Split
-----------
On May 24, 1999, the Company effected a one-for-10 reverse stock split
of its common stock. All share and per share data have been
retroactively restated to reflect this stock split.
Impairment of Long-Lived Assets
-------------------------------
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of the
assets to future net cash flows expected to be generated by the assets.
If the assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
exceeds the fair value of the assets. To date, no impairment has
occurred.
Income Taxes
------------
The Company utilizes Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes," which requires the
recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income
taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized.
Fair Value of Financial Instruments
-----------------------------------
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the
Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable, and accrued payroll and other
expenses, the carrying amounts approximate fair value due to their
short maturities. The amount shown for short-term notes payable also
approximates fair value because the current interest rates offered to
the Company for debt of similar maturities are substantially the same.
F-11
<PAGE>
MULTI-MEDIA TUTORIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentrations of Credit Risk
-----------------------------
The financial instrument which potentially subjects the Company to
concentrations of credit risk is cash. The Company places its cash with
high quality financial institutions, and at times it may exceed the
Federal Deposit Insurance Corporation $100,000 insurance limit. As of
February 29, 2000, there were no uninsured portions.
Net Loss per Share
------------------
The Company utilizes SFAS No. 128, "Earnings per Share." Basic loss per
share is computed by dividing loss available to common stockholders by
the weighted-average number of common shares outstanding. Diluted loss
per share is computed similar to basic loss per share except that the
denominator is increased to include the number of additional common
shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were dilutive. For
the years ended February 29, 2000 and February 28, 1999, the Company
incurred net losses; therefore, basic and diluted loss per share are
the same.
Comprehensive Income
--------------------
The Company utilizes SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting comprehensive income
and its components in a financial statement. Comprehensive income as
defined includes all changes in equity (net assets) during a period
from non-owner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include
foreign currency translation adjustments and unrealized gains and
losses on available-for-sale securities. Comprehensive income is not
presented in the Company's financials statements since the Company did
not have any of the items of comprehensive income in any period
presented.
Reclassifications
-----------------
Certain reclassifications have been made to the 1999 financial
statements to conform with the 2000 presentation.
F-12
<PAGE>
MULTI-MEDIA TUTORIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
--------------------------------------------------------------------------------
NOTE 3 - FURNITURE AND EQUIPMENT
Furniture and equipment at February 29, 2000 consisted of the
following:
Furniture and fixtures $ 55,565
Office equipment 19,338
Computer equipment and software 832,024
Leasehold improvements 113,960
-------------
1,020,887
Less accumulated depreciation and amortization 806,703
-------------
TOTAL $ 214,184
=============
Depreciation and amortization expense was $166,120 and $176,004 for the
years ended February 29, 2000 and February 28, 1999, respectively.
NOTE 4 - INTANGIBLE ASSETS
Intangible assets at February 29, 2000 consisted of the following:
Master video production costs $ 1,110,225
Patents and copyrights 22,088
-------------
1,132,313
Less accumulated amortization 969,964
-------------
TOTAL $ 162,349
=============
NOTE 5 - SHORT-TERM NOTES PAYABLE
At February 29, 2000, the Company maintained short-term, unsecured
promissory notes in the amount of $750,000. The notes bear interest at
8% per annum and were issued during September and October 1996 with a
six-month original maturity. The maturity dates were subsequently
extended and are currently due and payable. Related to the extension of
the due dates on these notes, the Company issued 546,672 shares of
common stock to the debt holders and recognized interest charges of
$142,135 during the year ended February 29, 2000.
F-13
<PAGE>
MULTI-MEDIA TUTORIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
--------------------------------------------------------------------------------
NOTE 5 - SHORT-TERM NOTES PAYABLE (CONTINUED)
At February 29, 2000, the Company maintained short-term,
non-interest-bearing, unsecured promissory notes in the amount of
$219,676 which are payable on demand.
The Company raised $375,000 through short-term, unsecured bridge
financing. The notes bear interest at 10% per annum, have a six-month
original maturity date, and are currently due and payable.
During the year ended February 29, 2000, the Company raised $100,000
through the issuance of short-term notes. The notes bear interest at
10% per annum and are payable on demand. These notes were outstanding
as of February 29, 2000.
During the year ended February 29, 2000, the Company converted $135,500
of accounts payable into a short-term promissory note. The note bears
interest at 10% per annum and has a 12-month original maturity date.
NOTE 6 - CONVERTIBLE PROMISSORY NOTES
At February 29, 2000, the Company maintained short-term, convertible
promissory notes in the amount of $250,000. The notes bear interest at
10% per annum and an accelerated interest rate of 17% per annum
beginning April 17, 1997, expired on December 31, 1997, and are
convertible into common stock at a price of (i) $1.2656 per share or
(ii) 75% of the closing bid for the five trading days prior to the
conversion. Related to this debt, the Company maintains 45,455 shares
of its common stock in escrow.
During the year ended February 29, 2000, the Company raised $312,500
through the placement of short-term, unsecured, convertible promissory
notes. The notes bear interest at 10% per annum, have 10-month original
maturity dates, and were outstanding at February 29, 2000. The notes
are convertible into common stock at a price of (i) $0.50 or (ii) 50%
of the average of the closing bid price for the five days immediately
preceding the conversion. The notes cannot be converted at a price less
than $0.10 per share. The shares are convertible at a par value of
$0.01 of the Company's stock or at a par value of $0.001 of the common
stock of TheTutorialChannel.Com. Related to the issuance, the Company
recognized the below-market conversion feature by recording non-cash
interest expense of $291,647.
F-14
<PAGE>
MULTI-MEDIA TUTORIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
--------------------------------------------------------------------------------
NOTE 6 - CONVERTIBLE PROMISSORY NOTES (CONTINUED)
During the year ended February 28, 1998, the Company raised $350,000
through the placement of short-term, unsecured promissory notes. The
notes bear interest at 10% per annum and have six-month original
maturity dates. The notes are convertible into common stock upon
default at $0.625 per share. During the year ended February 29, 2000,
the Company converted $250,000 of these notes into 4,011,487 shares of
common stock. The maturity dates for the remaining notes of $100,000
were extended for an additional six months and were converted into
1,600,000 shares of common stock subsequent to February 29, 2000.
In accordance with generally accepted accounting principles, the
Company accounts for the beneficial conversion feature of convertible
debt securities based on the difference between the conversion price
and the fair value of the common stock into which the security is
convertible, multiplied by the number of shares into which the security
is convertible. The amount attributable to the beneficial conversion
feature is recognized as additional interest expense over the most
beneficial conversion period.
NOTE 7 - LONG-TERM TRADE PAYABLE
During the year ended February 29, 2000, the Company reached an
agreement with a vendor to extend a short-term trade obligation in the
amount of $366,980 to January 2002. The obligation bears interest at
8%.
NOTE 8 - RELATED PARTY TRANSACTIONS
At February 29, 2000, the Company maintained advances from the
directors and executive officers of the Company in the amount of
$113,224. The advances are unsecured, non-interest-bearing, and are
payable on demand. In December 1999, the Company issued 230,769 shares
of common stock for the cancellation of $30,000 of these obligations.
Related to the conversion, the Company recognized interest charges of
approximately $34,846.
At February 29, 2000, the Company issued 230,769 shares of common stock
as consideration for consulting services rendered by a relative of a
director of the Company. The services were valued at $30,000.
In December 1999, the Company entered into two employment agreements
with a director of the Company and one with a relative of a director of
the Company, which provide for aggregate salaries of $37,500 for the
year ended February 29, 2000 and $225,000 for the years ending February
2001 through 2005.
F-15
<PAGE>
MULTI-MEDIA TUTORIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
--------------------------------------------------------------------------------
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Leases
------
The Company has entered into an operating lease for facilities and
equipment. The Company also leases certain office and computer
equipment under non-cancelable, capital lease arrangements. Future
minimum payments under operating and capital leases with initial or
remaining terms of one year or more at February 29, 2000 were as
follows:
Year Ending Operating Capital
February Leases Leases
----------- ----------- -----------
2001 $ 96,000 $ 140,924
2002 94,000 -
2003 99,000 -
2004 32,000 -
----------- -----------
$ 321,000 140,924
===========
Less amount representing interest 26,533
and fees -----------
TOTAL $ 114,391
===========
Assets capitalized under capital lease agreements at February 29, 2000
were valued at $274,770.
The Company was in default on its capital lease agreements at February
29, 2000 and as such, has classified the entire amount representing
principal as a current liability.
Rent expense was $151,372 and $133,683 for the years ended February 29,
2000 and February 28, 1999, respectively.
Software Development Agreement
------------------------------
In December 1999, the Company entered into a consulting agreement with
a software consulting firm. The agreement was valued at $130,000 and
called for an initial fee of $65,000 with $65,000 due upon completion.
Pursuant to the agreement, the Company will pay the fees with the
issuance of common stock. The Company has committed 433,333 shares of
common stock and recorded a prepaid expense of $65,000. Related to this
agreement, the Company has agreed to pay a finder's fee of 52,000
shares of common stock to a consultant and has recorded a $7,800
prepaid expense to be charged to operations upon completion of the
project.
F-16
<PAGE>
MULTI-MEDIA TUTORIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
--------------------------------------------------------------------------------
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Litigation
----------
The Company is involved in a breach of contract claim pertaining to a
service agreement. The outcome cannot be determined at February 29,
2000, and the potential loss is estimated at $260,000.
The Company is also involved in various other legal proceedings and
claims which arise in the ordinary course of its business. Management
does not believe that the outcome of these matters will have a material
adverse effect on the Company's consolidated position or results of
operations.
NOTE 10 - INCOME TAXES
Significant components of the Company's deferred tax assets and
liabilities for income taxes consisted of the following:
Deferred tax assets
Operating losses $ 3,875,423
Valuation allowance 3,875,423
-------------
NET DEFERRED TAX ASSET $ -
=============
Deferred tax assets consisted of net operating loss carryforwards. The
federal operating loss carryforwards at February 29, 2000 were
approximately $9,688,000.
NOTE 11 - STOCKHOLDERS' DEFICIT
Stock Purchase Warrants
-----------------------
On July 8, 1997, the Company negotiated a warrant re-capitalization
agreement, whereby certain warrant holders agreed to exchange their
warrants for shares of the Company's common stock. Pursuant to this
agreement, holders of warrants to purchase 330,000 shares at the lesser
of $10 per share or 75% of the market price of the underlying stock
exchanged their warrants for 0.75 shares per warrant for a total of
247,500 shares of common stock. In addition, holders of 58,520 warrants
exercisable at $1.50 per share were exchanged at a rate of $0.50 per
share for a total of 29,260 shares of common stock. Related to the
warrant re-capitalization, the Company charged $170,000 to operations
for exchange rates beneficial to the warrant holders.
F-17
<PAGE>
MULTI-MEDIA TUTORIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
--------------------------------------------------------------------------------
NOTE 11 - STOCKHOLDERS' DEFICIT (CONTINUED)
Stock Purchase Warrants (Continued)
-----------------------
Stock purchase warrants outstanding at February 29, 2000 consisted of
the following:
Exercise Price Outstanding Exercisable
---------------- ------------- -------------
$ 10.00 - 15.00 45,750 45,750
$ 15.00 242,462 242,462
$ 56.00 390,625 390,625
------------- -------------
TOTAL 678,837 678,837
============= =============
Common Stock
------------
During the year ended February 29, 2000, the Company converted certain
vendor obligations valued at $201,000 into 670,000 shares of common
stock at $0.30 per share, which approximated the value of the services
rendered.
In December 1999, the Company issued 250,000 shares of common stock as
consideration for extending outstanding bridge financing issued at par
value of $2,500. Related to the issuance, the Company recognized the
fair market value of the stock by recording interest expense of
$60,000.
During the year ended February 29, 2000, the Company committed to issue
75,000 shares of common stock in relation to $10,500 of consulting
services rendered during the year.
During the year ended February 28, 1999, the Company committed to issue
52,000 shares of common stock for $13,000 of consulting services
rendered during the year.
Stock Option Plan
-----------------
The Company adopted a stock option plan (the "Plan") for 350,000 shares
of the Company's common stock. The Plan is administered by the Board of
Directors or by a Stock Option Committee to be appointed by the Board
of Directors. The Stock Option Committee determines, subject to the
provisions of the Plan, to whom options are granted, the number of
shares of common stock subject to each option, whether an option shall
be an incentive stock option (an "ISO") or a non-qualified option (a
"NQO"), and the period during which each option may be exercised.
F-18
<PAGE>
MULTI-MEDIA TUTORIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
--------------------------------------------------------------------------------
NOTE 11 - STOCKHOLDERS' DEFICIT (CONTINUED)
Stock Option Plan (Continued)
-----------------
In addition, the Stock Option Committee determines the exercise price
of each option, subject to the limitations provided in the Stock Option
Plan, including that (i) for a NQO, the exercise price per share may
not be less than 85% of the fair market value per share of common stock
on the date of grant and (ii) for an ISO, the exercise price per share
may not be less than the fair market value per share of common stock on
the date of grant (11% of such fair market value if the grantee owns
stock possessing more than 10% of the combined voting power of all
classes of the Company's stock).
In determining persons to whom options will be granted and the number
of shares of common stock to be covered by each option, the Stock
Option Committee considers various factors, including each eligible
person's position and responsibilities, service, and accomplishments,
present and future value to the Company, anticipated length of future
service, and other relevant factors. Options may be granted under the
Plan to all officers, directors, and employees of the Company. No
options may be granted under the Plan after March 31, 2004. To date,
the Board of Directors has not appointed a Stock Option Committee.
The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." It applies Accounting
Principles Bulletin ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for its
plans and does not recognize compensation expense for its stock-based
compensation plans other than for restricted stock and options/warrants
issued to outside third parties. If the Company had elected to
recognize compensation expense based upon the fair value at the grant
date for awards under its plan consistent with the methodology
prescribed by SFAS No. 123, the Company's net loss and loss per share
would be increased to the pro forma amounts indicated below for the
years ended February 29, 2000 and February 28, 1999:
2000 1999
------------- -------------
Net loss
As reported $ (1,492,686) $ (753,136)
Pro forma $ (1,720,685) $ (814,075)
Basic and diluted loss per common share
As reported $ (0.30) $ (0.27)
Pro forma $ (0.34) $ (0.30)
F-19
<PAGE>
MULTI-MEDIA TUTORIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
--------------------------------------------------------------------------------
NOTE 11 - STOCKHOLDERS' DEFICIT (CONTINUED)
Stock Option Plan (Continued)
-----------------
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense
related to grants made before 1995. The fair value of these options was
estimated at the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions for the years
ended February 29, 2000 and February 28, 1999: dividend yields of 0%
and 0%, respectively; expected volatility of 100% and 100%,
respectively; risk-free interest rates of 6% and 5.3%, respectively;
values of $0.14 and $0.23, respectively; and expected lives of five and
five years, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The following summarizes the stock option transactions:
<TABLE>
<CAPTION>
Outside Option Plan
---------------------------
Weighted- Weighted-
Average Average
Stock Options Exercise Stock Options Exercise
Outstanding Price Outstanding Price
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, February 28,
1998 15,000 $ 1.00 - $ -
Granted 264,953 $ 0.32 - $ -
------------- -------------
Balance, February 28,
1999 279,953 $ 0.82 - $ -
Granted - $ - 2,500,000 $ 0.18
------------- -------------
BALANCE, FEBRUARY 29,
2000 279,953 $ 0.82 2,500,000 $ 0.18
============= =============
EXERCISABLE, FEBRUARY
29, 2000 279,953 $ 0.82 1,294,000 $ 0.28
============= =============
</TABLE>
The weighted-average remaining contractual life of the options
outstanding is 9.49 years at February 29, 2000.
F-20
<PAGE>
MULTI-MEDIA TUTORIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
--------------------------------------------------------------------------------
NOTE 11 - STOCKHOLDERS' DEFICIT (CONTINUED)
Stock Option Plan (Continued)
-----------------
During the year ended February 29, 2000, the Company issued 2,500,000
stock options to employees outside of the Company's stock option plan
when the exercise price was less than the fair value of the Company's
common stock at the date of grant.
Other Options
-------------
During the year ended February 28, 1999, the Company issued 568,820
stock options to various vendors for consulting services rendered
valued at $6,000 for an exercise price of $0.32, which has been
recorded as a consulting expense. As of February 29, 2000, all options
were exercisable and outstanding.
During the year ended February 28, 2000, the Company issued 1,197,916
options to an executive officer and non-employees as interest expense
for extending debt in default. The options were valued at the current
market value of options with a 25% discount and with exercise prices
ranging from $0.10 to $0.90. The Company recognized $80,352 of interest
expense related to these options. As of February 29, 2000, 683,075 of
these options were exercisable and outstanding.
In addition, the Company issued 517,171 options to an outside sales
consultant valued at $20,687 with exercise prices ranging from $0.15 to
$0.83, which has been recorded as a sales expense. As of February 29,
2000, these options were exercisable and outstanding.
Further, the Company issued 250,000 options to a consultant valued at
$19,800 with an exercise price of $0.10, which has been recorded as a
consulting expense. As of February 29, 2000, 82,500 of these options
were exercisable and outstanding.
NOTE 12 - MAJOR SUPPLIERS
The Company purchases its products primarily from one video
manufacturer. During the years ended February 29, 2000 and February 28,
1999, total product purchases from this supplier amounted to 12% and
44%, respectively.
The Company also purchases its products primarily from one video
duplication manufacturer. During the year ended February 29, 2000,
total product purchases from this supplier amounted to 27%.
F-21
<PAGE>
MULTI-MEDIA TUTORIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
--------------------------------------------------------------------------------
NOTE 13 - FOURTH QUARTER ADJUSTMENT
An adjustment to additional paid-in capital amounting to $468,628 was
made to record interest charges on convertible debt securities,
representing a beneficial conversion feature. The debt was issued and
converted primarily during the fourth quarter.
NOTE 14 - SUBSEQUENT EVENTS
In March 2000, the Company issued 150,000 shares of common stock for
public relations services provided during the period from January 17,
2000 through April 17, 2000 in the amount of $21,000. Related to the
issuance, the Company recognized consulting expense of $10,500 during
the year ended February 29, 2000.
In March 2000, the Company issued 52,000 shares of common stock for
consulting services of $13,000 that were provided during the year ended
February 29, 2000.
In April 2000, the Company converted $100,000 of short-term, 10%,
unsecured promissory notes into 1,600,000 shares of its common stock.
Subsequent to February 29, 2000, the Company issued $400,690 of
short-term, unsecured convertible promissory notes. The notes bear
interest at 10% per annum and are convertible into common stock at a
price of (i) $0.50 or (ii) 50% of the average of the closing bid price
for the five days immediately preceding the conversion. The notes
cannot be converted at a price less than $0.10 per share. The shares
are convertible at a par value of $0.01 of the Company's stock or at a
par value of $0.001 of the common stock of TheTutorialChannel.Com.
F-22
