-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CBVSCo2UYY00/Pc8Cc7pByJDy/h3Pd9ozs590/5zNNAdf6s4NPg9C0UU6ulu8yS6 k3QK3IumEhCr01MlM6ck+w== 0000912057-97-027416.txt : 19970814 0000912057-97-027416.hdr.sgml : 19970814 ACCESSION NUMBER: 0000912057-97-027416 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: REALITY INTERACTIVE INC CENTRAL INDEX KEY: 0001006655 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 411781991 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-27862 FILM NUMBER: 97657740 BUSINESS ADDRESS: STREET 1: 11200 WEST 78TH ST STREET 2: SUITE 300 CITY: EDEN PRAIRE STATE: MN ZIP: 55344 BUSINESS PHONE: 6129666777 MAIL ADDRESS: STREET 1: 11200 W 78TH ST STREET 2: SUITE 300 CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 10QSB 1 FORM 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 Commission file number: 0-27862 REALITY INTERACTIVE, INC. (Exact name of registrant as specified in its charter) MINNESOTA 41-1781991 ------------ -------------- State or other jurisdiction of I.R.S. Employer Identification No. incorporation of organization SUITE 400 7500 FLYING CLOUD DRIVE EDEN PRAIRIE, MINNESOTA 55344 (612) 996-6777 ------------------------------ --------------- Address of principal executive offices Registrant's telephone number Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. /X/ Yes / / No At July 31, 1997, 4,677,407 shares of registrant's $.01 par value Common Stock were outstanding. Transitional Small Business Issuer Format / / Yes /X/ No 1 FORM 10-QSB INDEX PART I - FINANCIAL INFORMATION Item 1. Financial Statements ............................................... 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ..................................... 7 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K ................................... 9 SIGNATURES ................................................................. 10 EXHIBIT INDEX .............................................................. 11 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Quarterly Report on Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties that may cause the Company's actual results to differ materially from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, the uncertainty in growth of a development stage company; limited growth of the market for multimedia education and training products; lack of market acceptance of the Company's products; inability of the Company to expand its marketing capability; inability of the Company to diversify its product offerings; failure of the Company to respond to evolving industry standards and technological changes; inability of the Company to meet its future additional capital requirements; inability of the Company to compete in the business education and training industry; loss of key management personnel; inability to retain subject matter experts; failure of the Company to secure adequate protection for the Company's intellectual property rights; and the Company's exposure to product liability claims. The forward-looking statements are qualified in their entirety by the cautions and risk factors set forth in Exhibit 99.1, under the caption "Cautionary Statement," to this Quarterly Report on Form 10-QSB for the quarter ended June 30, 1997. 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS REALITY INTERACTIVE, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEET June 30, December 31, 1997 1996 --------- ----------------- ASSETS (Unaudited) Current assets: Cash and cash equivalents....... $ 203,046 $ 508,728 Short-term investments.......... 2,864,196 4,744,712 Accounts receivable............. 150,017 97,396 Inventory....................... 169,515 134,853 Prepaid expenses and other current assets............... 62,330 62,835 ----------- ----------- Total current assets........ 3,449,104 5,548,524 ----------- ----------- Fixed assets, net................... 172,925 191,936 Restricted cash..................... 116,800 116,800 Other assets........................ 20,250 28,481 ----------- ----------- Total assets................ $3,759,079 $5,885,741 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................ $ 65,360 $ 116,388 Accrued liabilities............. 244,011 118,686 Other current liabilities....... 61,512 12,345 ----------- ----------- Total current liabilities... 370,883 247,419 Long-term liabilities............... 0 0 ----------- ----------- Total liabilities........... 370,883 247,419 ----------- ----------- Stockholders' equity: Common stock, $.01 par value, 25,000,000 shares authorized; 4,677,407 shares outstanding.............. 46,774 46,774 Additional paid-in capital...... 15,386,692 15,386,692 Accumulated deficit during the development stage........ (12,045,270) (9,795,144) ------------ ----------- Total stockholders' equity.. 3,388,196 5,638,322 ------------ ----------- Total liabilities and stockholders' equity..... $ 3,759,079 $ 5,885,741 ------------ ----------- ------------ ----------- See accompanying notes to the financial statements. 3 REALITY INTERACTIVE, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF OPERATIONS (UNAUDITED)
Three months ended Six months ended June 30, June 30, --------------------------- --------------------------- 1997 1996 1997 1996 ------------ ------------ ------------- ------------ Revenues............................ $ 137,495 $ 125,298 $ 285,841 $ 248,107 Cost of revenues.................... 39,961 22,618 77,896 46,470 ----------- ------------ ------------ ------------ Gross profit........................ 97,534 102,680 207,945 201,637 ----------- ------------ ------------ ------------ Operating expenses: Sales and marketing.............. 299,275 713,868 705,238 1,146,189 Research and development......... 629,249 573,830 1,025,530 920,166 General and administrative....... 380,640 380,637 834,779 658,752 ----------- ------------ ------------- ------------ Total operating expenses 1,309,164 1,668,335 2,565,547 2,725,107 ----------- ------------ ------------- ------------ Operating loss....................... (1,211,630) (1,565,655) (2,357,602) (2,523,470) ----------- ------------ ------------- ------------ Other income (expense): Interest income (expense), net... 46,646 6,771 107,476 (165,586) Debt offering costs.............. 0 (38,745) 0 (113,486) ----------- ------------ ------------- ------------ Total other income (expense). 46,646 (31,974) 107,476 (279,072) ----------- ------------ ------------- ------------ Income before extraordinary loss. $(1,164,984) $(1,597,629) $(2,250,126) $(2,802,542) Extraordinary loss from early retirement of debt................ 0 (219,470) 0 (219,470) ----------- ------------ ------------- ------------ Net loss..................... $(1,164,984) $(1,817,099) $(2,250,126) $(3,022,012) ----------- ------------ ------------- ------------ ----------- ------------ ------------- ------------ Net loss per common and common equivalent share ................. $ (0.25) $ (0.44) $ (0.48) $ (1.05) ----------- ------------ ------------- ------------ ----------- ------------ ------------- ------------ Weighted average common and common equivalent shares.......... 4,677,407 4,137,438 4,677,407 2,883,636 ----------- ------------ ------------- ------------ ----------- ------------ ------------- ------------
See accompanying notes to the financial statements. 4 REALITY INTERACTIVE, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF CASH FLOWS (UNAUDITED)
Six months ended June 30, -------------------------------- 1997 1996 ------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss................................................................. $ (2,250,126) $ (3,022,012) Reconciliation of net loss to net cash used by operating activities: Depreciation and amortization........................................ 44,856 60,000 Noncash interest expense related to warrants......................... 0 193,979 Extraordinary loss related to early retirement of debt (interest expense related to warrants).................................... 0 142,021 Changes in assets and liabilities: Accounts receivable.................................................. (52,620) (118,512) Inventory............................................................ (26,431) (43,134) Prepaid expenses and other current assets............................ 505 (78,309) Accounts payable..................................................... (51,027) (1,238) Accrued liabilities.................................................. 125,325 10,491 Other current liabilities............................................ 49,167 12,695 ----------- ------------ Net cash used by operating activities............................ (2,160,351) (2,844,019) ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of fixed assets................................................ (25,846) (269,155) Purchases of short-term investments...................................... (119,485) (10,049,686) Sales of short-term investments.......................................... 2,000,000 2,000,000 ----------- ------------ Net cash used by investing activities............................ 1,854,669 (8,318,841) ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of capital lease obligation................................... 0 (10,080) Repayment of notes payable............................................... 0 (201,002) Proceeds from convertible notes payable.................................. 0 2,800,000 Repayment of convertible notes payable................................... 0 (2,774,997) Proceeds from sale leaseback of fixed assets............................. 0 266,157 Net proceeds from initial public offering................................ 0 11,549,607 Proceeds from exercise of stock options.................................. 0 990 ----------- ------------ Net cash provided by financing activities........................ 0 11,630,675 ----------- ------------ Net cash provided (used) during period....................................... (305,682) 467,815 CASH AND CASH EQUIVALENTS: Beginning of period...................................................... 508,728 118,916 ----------- ------------ End of period............................................................ $ 203,046 $ 586,731 ----------- ------------ ----------- ------------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest................................................... $ 0 $ 88,867 ----------- ------------ ----------- ------------ Warrants issued in connection with notes payable......................... $ 0 $ 336,000 ----------- ------------ ----------- ------------ Conversion of mandatorily redeemable convertible preferred stock to common stock...................................................... $ 0 $ 2,125,962 ----------- ------------ ----------- ------------ Conversion of bridge notes payable to common stock....................... $ 0 $ 25,003 ----------- ------------ ----------- ------------
See accompanying notes to the financial statements. 5 REALITY INTERACTIVE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997 (UNAUDITED) NOTE 1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization and Business The Company was formed in May 1994 to design, develop and market interactive multimedia knowledge solutions to the industrial marketplace. The Company's business strategy is to identify industry standards and practices that affect business productivity and profitability, where the adoption of such standards and practices require enterprise-wide education and training. To address this education and training need, the Company creates products that incorporate digital multimedia elements, such as animation, video, graphics, audio and text, into a rich, interactive learning environment. Each of the Company's products contain productivity tools, such as word processors, budget forms and custom tailored project plans, to allow the user to organize, analyze and produce documents using company-specific information. The Company believes the interactivity of its products allows the user to control the learning environment, including the pace, sequence and level of instruction, as well as improve memory retention, compress learning time and reduce costs compared to traditional learning methods. The Company considers itself to be a development stage company as its sales and marketing efforts have not yet generated predictable or significant revenues. The Company has a deficit accumulated during the development stage of $12,045,270. To become profitable and to conserve capital, the Company must significantly increase revenues and manage expenses. Future operating results will depend upon many factors, including the rate at which industry adopts interactive multimedia technology for education and training, the level of product and price competition, the Company's success in maturing its direct and indirect sales channels and the ability of the company to manage its expenses in relation to sales. Basis of Presentation The accompanying unaudited financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information. The preparation of financial statements in accordance with generally accepted accounting principles require management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities as well as disclosure of contingent assets and liabilities at the date of the accompanying interim financial statements, and the reported amounts of revenue and expenses during the reporting period. In the opinion of management, the interim financial statements include adjustments necessary for a fair presentation of the results of operations for the interim periods presented. Operating results for the three and six months ended June 30, 1997 are not necessarily indicative of the operating results to be expected for the year ending December 31, 1997. Certain information and footnote disclosures normally included in financial statements in accordance with generally accepted accounting principles have been omitted. The statements should be read in conjunction with the Company's Annual Report on Form 10-KSB for the year ended December 31, 1996. 6 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following presentation of management's discussion and analysis of the Company's financial condition and results of operation should be read in conjunction with the Company's financial statements and notes contained herein for the quarters ended June 30, 1997 and 1996. RESULTS OF OPERATIONS REVENUES. Revenues were $137,495 for the second quarter of 1997, a 9.7% increase from revenues of $125,298 for the second quarter of 1996. For the six month period ended June 30, 1997, revenues were $285,841, a 15.2% increase over revenues of $248,107 for the comparable period of 1996. The revenue increase was due primarily to sales of the Company's QS-9000 COMPLIANCE SERIES and ISO 14000 EMS CONFORMANCE SERIES, which were released in the third quarter of 1996 and the first quarter of 1997, respectively. Sales of the Company's first product, the ISO 9000 REGISTRATION SERIES, decreased 61% between the second quarter of 1997 and 1996, and decreased 53% for the six months ended June 30, 1997, compared to the same period of 1996. This decrease in sales for the ISO 9000 REGISTRATION SERIES from 1996 to 1997 is attributed to an unanticipated slowdown in the number of companies electing to adopt the ISO 9000 quality management standard. COST OF REVENUES. Cost of revenues were $39,961 for the second quarter of 1997, compared to $22,618 for the second quarter of 1996. For the six month period ended June 30, 1997, cost of revenues were $77,896, compared to cost of revenues of $46,470 for the same period of 1996. The increase in cost of revenues was primarily due to royalties paid on an increasing level of sales, as well as a minimum quarterly royalty paid to a marketing partner, which the Company began paying in the third quarter of 1996. Cost of revenues also includes the cost of media duplication and packaging materials. OPERATING EXPENSES. The Company's operating expenses for the second quarter of 1997 were $1,309,164, a 21.5% decrease from operating expenses of $1,668,335 for the second quarter of 1996. For the six month period ended June 30, 1997, operating expenses were $2,565,547, a 5.9% decrease over operating expenses of $2,725,107 for the same period of 1996. This change in operating expenses between 1997 and 1996 was due primarily to the following changes: (a) SALES AND MARKETING. Sales and marketing expenses were $299,275 for the second quarter of 1997, a 58.1% decrease from sales and marketing expenses of $713,868 for the second quarter of 1996. For the six month period ended June 30, 1997, sales and marketing expenses were $705,238, a 38.5% decrease from sales and marketing expenses of $1,146,189 for the same period of 1996. This decrease between periods was due primarily to fewer direct sales people, lower sales travel expenses and a decrease in the number of product marketing programs. The Company expects that sales and marketing expenses for the remainder of 1997 will remain consistent with second quarter 1997 levels. (b) RESEARCH AND DEVELOPMENT. Research and development expenses were $629,249 for the second quarter of 1997, a 9.7% increase from research and development expenses of $573,830 for the second quarter of 1996. For the six month period ended June 30, 1997, research and development expenses were $1,025,530, an 11.5% increase from research and development expenses of $920,166 for the same period of 1996. This increase was primarily attributed to the following items: Completion of the ISO 14000 EMS CONFORMANCE SERIES project in February 1997, which resulted in a higher level of activity at project end than at the beginning of the project in early 1996; development of Web-enabled versions of the Company's ISO 9000 and ISO 14000 CD-ROM products; and, expenditures associated with a translation of the Company's QS-9000 CD-ROM product into the German language, which is expected to be ready for sale during the third quarter of 1997. 7 The Company expects that research and development expenses for the remainder of 1997 will decrease compared to prior periods as the Company's focus shifts away from the development of off-the-shelf multimedia products. During the remainder of 1997, the Company's business strategy will focus on developing customer relationships that allow the Company to provide custom multimedia development services, resulting in customer- specific CD-ROM or Web-enabled training solutions. The Company expects that such development services will enable the Company to conserve capital, and will also better position the Company to become a more complete source for multimedia content development. Although this business model has proven itself in a number of multimedia development companies, there can be no assurance that the Company will be successful in developing this multimedia services model. (c) GENERAL AND ADMINISTRATIVE. General and administrative expenses were $380,640 for the second quarter of 1997, compared to general and administrative expenses of $380,637 for the second quarter of 1996. For the six month period ended June 30, 1997, general and administrative expenses were $834,779, a 26.7% increase from general and administrative expenses of $658,752 for the same period of 1996. This increase was due primarily to increased travel, office rent, depreciation expense, operating leases and professional fees attributed to being a public company. The Company does not anticipate any significant changes in general and administrative expenditure levels for the remainder of 1997. OTHER INCOME (EXPENSE). The Company's net other income was $46,646 for the second quarter of 1997, compared to net other expense of $31,974 for the second quarter of 1996. For the six month period ended June 30, 1997, net other income was $107,476, compared to net other expense of $279,072 for the same period of 1996. For 1997, net other income consists entirely of interest earned on short-term investments. For 1996, net other expense primarily consists of expenses associated with the Company's January 1996 bridge note financing, including interest expense and amortization of offering costs, as well as interest earned from the investment of proceeds from its bridge note financing. NET LOSS. Net loss was $1,164,984 for the second quarter of 1997, compared to a net loss of $1,817,099 for the second quarter of 1996 after deducting $219,470 in extraordinary losses from an early retirement of debt. For the six month period ended June 30, 1997, net loss was $2,250,126, compared to a net loss of $3,022,012 for the same period of 1996 after deducting the extraordinary loss from an early retirement of debt. The Company expects to continue to incur losses for the foreseeable future as it develops the market for its off-the-shelf products and custom multimedia development services. LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and short-term investments were $3,067,242 as of June 30, 1997, compared to $5,253,440 as of December 31, 1996. This decrease in cash, cash equivalents and short-term investments was due primarily to the net loss from operations for the six months ended June 30, 1997. Although the Company anticipates that it will experience operating losses and negative cash flow from operations at least through 1997, the Company has developed plans to decrease its expenditures as a measure to conserve capital. Based on these expenditure plans and the revenue the Company expects to generate through December 31, 1997, the Company believes that its current cash balances will be sufficient to meet its working capital and capital expenditure requirements at least through June of 1998. Thereafter, the Company may need to raise additional funds to finance its operations. In addition, to the extent the Company's revenues do not meet management's expectations, or the Company's growth exceeds management's expectations, the Company may require additional financing prior to June of 1998. In such event, there can be no assurance that debt or equity financing would be available to the Company on favorable terms or at all. 8 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS EXHIBIT NO. DESCRIPTION 27.1 Financial Data Schedules 99.1 Cautionary Statement (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the quarter ended June 30, 1997 9 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REALITY INTERACTIVE, INC. Dated: August 13, 1997 By /s/ Paul J. Wendorff ---------------------- Paul J. Wendorff Its Chief Executive Officer Dated: August 13, 1997 By /s/ Wesley W. Winnekins ----------------------- Wesley W. Winnekins Its Chief Financial Officer 10 EXHIBIT INDEX Exhibit No. Description Page No. --------- ------------- -------- 27.1 Financial Data Schedules................ 99.1 Cautionary Statement.................... 12 11 EX-27 2 EXHIBIT 27 (FDS)
5 3-MOS DEC-31-1997 JUN-30-1997 203,046 2,864,196 150,017 0 169,515 3,449,104 447,527 274,602 3,759,079 370,883 0 0 0 46,774 3,341,422 3,759,079 137,495 184,141 39,961 39,961 1,309,164 0 0 (1,164,984) 0 (1,164,984) 0 0 0 (1,164,984) (.25) 0
EX-99.1 3 EXHIBIT 99-1 EXHIBIT 99.1 CAUTIONARY STATEMENT Reality Interactive, Inc. (the "Company"), or persons acting on behalf of the Company, or outside reviewers retained by the Company making statements on behalf of the Company, or underwriters, from time to time make, in writing or orally, "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in conjunction with an identified forward-looking statement, this Cautionary Statement is for the purpose of qualifying for the "safe harbor" provisions of such sections and is intended to be a readily available written document that contains factors which could cause results to differ materially from such forward-looking statements. These factors are in addition to any other cautionary statements, written or oral, which may be made or referred to in connection with any such forward-looking statement. The following matters, among others, may have a material adverse effect on the business, financial condition, liquidity, results of operations or prospects, financial or otherwise, of the Company. Reference to this Cautionary Statement in the context of a forward-looking statement or statements shall be deemed to be a statement that any or more of the following factors may cause actual results to differ materially from those in such forward-looking statement or statements: DEVELOPMENT STAGE COMPANY. The Company was incorporated in May 1994. The Company has only a limited history of operations, and its sales and marketing efforts have not yet generated predictable or significant revenues. The Company's prospects for success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with the formation and development of a new business in an emerging industry. In addition, due to the uncertainty in growth of a development stage company and the rate of change in the industry perceived by the Company, the Company is uncertain of the time frame or amount of funding required to accomplish its business objectives. DEVELOPING MARKET; MARKET ACCEPTANCE. The market for educating and training businesses has historically been served by consultants, instructor-led training and training publications such as books, manuals and tapes. Currently, there is little use of interactive multimedia education and training products by businesses, and many of the Company's potential customers do not own or have access to multimedia compatible equipment. The Company's future success will depend upon, among other factors, the extent to which companies acquire multimedia equipment compatible with the Company's products, the adoption and use of interactive multimedia education and training programs and the Company's ability to develop its custom multimedia service business. In addition, the Company's success will depend in part on its ability to market and sell multiple copies of its products to large corporate customers. In the event that adoption and use of multimedia equipment compatible with the Company's products do not become widespread, the number of potential customers of the Company will be limited. There can be no assurance that the Company's products, the prices the Company charges for its products or its custom multimedia services will be acceptable to the market, or that the Company will be able to sell multiple copies of its existing products to large corporate customers. LIMITED MARKETING CAPABILITY. The Company currently has a small sales and marketing staff and limited number of strategic alliances relating to distribution of its products. There can be no assurance that the Company will be able to build a suitable sales force or enter into satisfactory marketing alliances with third parties, or that its sales and marketing efforts will be successful. DEPENDENCE ON DIVERSIFICATION OF PRODUCT OFFERINGS. The Company currently has a limited number of product offerings, and purchasers of the Company's products are not required to purchase additional products. Accordingly, the Company's products represent non-recurring revenue sources, and the success of the Company is dependent, in part, on its ability to develop sustained demand for its current products and to 12 develop and sell additional products. There can be no assurance that the Company will be successful in developing and maintaining such demand or in developing and selling additional products. DEPENDENCE ON EVOLVING INDUSTRY STANDARDS. The Company's initial product offerings prepare businesses for adherence to worldwide management standards. The failure of the Company to enhance its products in a timely manner to changes in the standards, the lack of public acceptance of such standards or the delay in introduction of or enhancement to such standards would materially adversely affect the Company's operations. TECHNOLOGICAL CHANGE. The industry in which the Company competes is characterized by rapid technological change. The introduction of products embodying new technology can render existing products and product formats obsolete and unmarketable. The Company's success will depend on its ability to anticipate changes in technology and to develop and introduce new and enhanced products in a timely manner in response to technological changes, or if products or product enhancements by the Company do not achieve market acceptance, the Company's business would be materially adversely affected. FUTURE ADDITIONAL CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE AVAILABLE. If the Company is unable to generate substantial revenues from its operations or if the Company's expenses exceed expectations, the Company will likely require additional funds to meet its capital requirements. The Company does not currently have available bank financing. The Company may be required to raise additional funds through public or private financings, including equity or debt financings, or through collaborative arrangements. There can be no assurance that additional financing would be available to the Company on favorable terms, or at all. If funding is not available when needed or on acceptable terms, the Company may be forced to curtail its operations significantly or cease operations and abandon its business entirely. COMPETITION. The business education and training industry, as well as the custom multimedia services industry, is highly competitive. A large number of companies are currently developing interactive, multimedia-based training, educational and instructional aids. Competitors also include national, regional and local accounting firms engaged in industrial consulting and instructor-led training and companies which market training tools such as books, videos and audio tapes. Some of the Company's existing competitors, as well as a number of potential competitors, have larger technical staffs, more established marketing and sales organizations, and greater financial resources than the Company. There can be no assurance the Company will be able to compete successfully with such companies, or at all. FLUCTUATIONS IN OPERATING RESULTS. The Company's future operating results may vary substantially from quarter to quarter. At its current stage of operations, the Company's quarterly revenues and results of operations may be materially affected by the timing of the development and market acceptance of the Company's products. Generally, operating expenses will be higher during periods in which product development costs are incurred and marketing efforts are commenced. Due to these and other factors, including the general economy, stock market conditions and announcements by the Company or its competitors, the market price of the securities offered hereby may be highly volatile. DEPENDENCE ON KEY PERSONNEL; LACK OF EMPLOYMENT AND NONCOMPETITION AGREEMENTS. The success of the Company is dependent in large part upon the ability of the Company to attract and retain key management and operating personnel. Qualified individuals are in high demand and are often subject to competing offers. There can be no assurance that the Company will be able to attract and retain the qualified personnel needed for its business. The Company has no employment or noncompetition agreements with any of its management or other personnel. DEPENDENCE ON ABILITY TO RETAIN SUBJECT MATTER EXPERTS. The Company's product development strategy, including off-the-shelf and custom multimedia products, may require the Company to retain third-party subject matter experts to perform research and development functions by providing accurate and informative content for the Company's products. There can be no assurance that the Company will be able to continue to 13 attract and retain qualified subject matter experts required to develop new products, enhance existing products and satisfy customer contractual requirements. The inability of the Company to attract and retain such experts could have a material adverse effect on the Company and its prospects. INTELLECTUAL PROPERTY. The Company regards its multimedia products as proprietary and relies primarily on a combination of statutory and common law copyright, trademark and trade secret laws, customer licensing agreements, employee and third-party nondisclosure agreements and other methods to protect its proprietary rights. Despite these precautions, it may be possible for a third party to copy or otherwise obtain or use the Company's products or technology without authorization, or to develop similar products or technology independently. If unauthorized use or copying of the Company's products were to occur to any substantial degree, the Company's business and results of operations could be materially adversely affected. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop similar products. The Company believes that developers of multimedia products may increasingly be subject to such claims as the number of products and competitors in the industry grows and the functionality of such products in the industry overlaps. Any such claim, with or without merit, could result in costly litigation and could have a material adverse effect on the Company. LACK OF PRODUCT LIABILITY INSURANCE. The Company may face a risk of exposure to product liability claims in the event that use of its products is alleged to have resulted in damage to its customers. The Company does not currently carry product liability insurance. There can be no assurance that such insurance will be available on commercially reasonable terms, or at all, or that such insurance, even if obtained, would adequately cover any product liability claim. A product liability or other claim with respect to uninsured liabilities or in excess of insured liabilities could have a material adverse effect on the business and prospects of the Company. 14 -----END PRIVACY-ENHANCED MESSAGE-----