<PAGE>
$6,479,351 and $5,438,929, respectively, exceeded our current assets by
$6,218,101 and $5,127,710, respectively, and a majority of our accounts payable
at December 31, 2000, in the amount of $4,009,090, are beyond the normal payment
terms. The Company is in default on certain provisions of its loan and other
agreements. We are currently seeking additional financing to fund our
operations. See Note 13 to our financial statements for a discussion of our
efforts subsequent to December 31, 2000 to secure additional financing. We can
give no assurance that we will be able to secure new financing in an amount that
is required or on terms that are acceptable to us. Further, due to certain
non-compliance with financial reporting regulations, the American Stock Exchange
("AMEX") suspended trading of the Company's common stock in April 2001. This
suspension precludes the Company from seeking financing through the public
markets until such time as the AMEX lifts the suspension. These factors, among
others, raise substantial doubt about our ability to continue as a going
concern.
Our financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
we be unable to continue as a going concern. Our continuation as a going concern
is dependent upon our ability to obtain additional financing, generate
sufficient cash flow to meet our obligations on a timely basis, comply with the
terms of our financing agreements and to ultimately attain profitability.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2000 COMPARED TO UNAUDITED YEAR
ENDED DECEMBER 31, 1999 ("1999")
Net sales increased 5.3% to $1,725,019 in 2000 from $1,638,324 in 1999. The
increase can be attributed to new business associated with our acquisition of
the customer list from Copytron, Inc. ("Copytron") One customer, Barnes and
Noble College Bookstores, Inc. accounted for 29% and 66% of net sales for the
twelve months ended December 31, 2000 and 1999, respectively. No other single
customer represented 10% or more of sales during 2000 or 1999.
Cost of sales were $2,317,030, or 134.3% of net sales, in 2000 compared to
$2,152,409 or 131.4% of net sales, in 1999. The higher cost of sales in 2000 was
due to an increase in certain fixed production costs as the Company expands its
capacity in anticipation of increased sales levels.
Selling, marketing, and general and administrative expenses (excluding
stock-based compensation) increased 255% to $6,314,304 in 2000 from $1,779,075
in 1999 due primarily to higher compensation and related benefits and facility
costs associated with an increase in the number of employees we hired to: (a)
build market share in higher education; (b) research and identify new markets
for our products; (c) develop for launch our e-commerce portal to meet the
demand for customized learning materials; and (d) expand our digital library of
educational content. Legal and accounting expenses also increased due to the
costs normally associated with being a public company.
Stock-based compensation costs of $964,945 in 2000 represent the fair
market value of stock options and restricted stock awards granted to employees,
and stock warrants granted to financial advisors in connection with financial
advisory services. We recorded deferred compensation expense of $16,115 at
December 31, 2000 relating to the employee stock option grants, which will be
amortized and recognized as stock-based compensation as the options vest over
the next three years. In addition, certain employee stock options will be
accounted for as variable award options, and accordingly, changes to stock-based
compensation will be recorded in the future based upon the difference between
the grant price of the option and the fair value of the Company's common stock
at each reporting date. The fair value of the stock warrants granted to the
financial advisors was $402,143 in 2000. There were no stock-based compensation
costs in 1999.
Interest expense decreased to $157,580 in 2000 from $262,485 in 1999
primarily due to lower debt levels resulting from the conversion of $2,815,000
of related party debt in conjunction with the Merger and to the repayment of
approximately $1,070,000 of debt during the twelve months ended December 31,
2000.
Interest income was $30,297 in 2000 due to higher cash balances. There was
no interest income in 1999.
15
<PAGE>
Uncertainty exists regarding the future realization of our tax net
operating loss carryforwards. Accordingly we have fully reserved our deferred
tax assets.
The net loss increased to $7,998,543 in 2000 from $2,555,645 in 1999,
primarily due to higher selling, marketing, product development, general and
administrative expenses and stock-based compensation costs.
RESULTS OF OPERATIONS - FIVE MONTHS ENDED DECEMBER 31, 1999
Net sales for the five months ended December 31, 1999 were $1,024,866. This
five month period represents more than 70% of the annual sales for traditional
publishers. Sales to one customer, Barnes & Noble College Bookstores, Inc.,
accounted for approximately 70% of the net sales. No other single customer
represented 10% or more of net sales.
Cost of sales for the five months ended December 31, 1999 were $1,027,223,
or 100.2% of net sales, versus $1,578,308, or 118.8% of net sales, in fiscal
1999. The lower cost of sales in the five month period ended December 31, 1999,
on a percentage basis, is due to lower average copyright fees on the mix of
coursepacks sold, to lower overtime costs and to process improvements related to
production.
Selling, marketing and general and administrative expenses for the five
months ended December 31, 1999 were $932,540, or 91.0% of net sales, versus
$1,718,300 or 129.3% of net sales, in fiscal 1999. Actual costs increased (on an
annualized basis) due to an increase in personnel and to additional office space
and related costs. However, selling, marketing, general and administrative
expenses as a percentage of net sales were lower in the five months ended
December 31, 1999 as the costs were allocated over the peak revenue season.
Interest expense was $125,749, or 12.3% of net sales, down from $214,636 or
16.2% of net sales in fiscal 1999 due to the conversion of $500,000 in related
party debt to common stock on September 30, 1999.
RESULTS OF OPERATIONS - FISCAL YEARS ENDED JULY 31, 1999 AND 1998
Net sales increased 67.5% to $1,328,813 in 1999 from $793,178 in 1998 due
to greater penetration of the large corporate market and to the high retention
rate of existing customers. Sales to one customer, Barnes & Noble College
Bookstores, Inc., accounted for approximately 75% and 57% of the net sales in
1999 and 1998, respectively. No other single customer represented 10% or more of
net sales.
Cost of sales were $1,578,308, or 118.8% of net sales, in 1999 compared to
$856,559, or 108.0% of net sales in 1998. The higher cost of sales percentage in
1999 was primarily due to higher average copyright fees on the mix of
coursepacks sold and to significant overtime costs incurred to handle the
increase in sales volume.
Selling, marketing and general and administrative expenses were $1,718,300,
or 129.3% of net sales, in 1999 compared to $1,025,932, or 129.3% of net sales,
in 1998. The actual cost increase is due to an increase in personnel and
additional office space and related costs.
Interest expense increased to $214,636 in 1999 from $112,300 in 1998 due to
additional loans from related parties to fund our operating losses. Since
virtually all of the accrued interest expense due to related parties was
converted into common stock in conjunction with the Merger, most of the interest
expense incurred on these loans did not require an outlay of cash.
The net loss increased to $2,182,431 in 1999 from $1,201,613 in 1998
primarily due to the higher copyright fees and to additional overhead costs
incurred to accommodate the growth in sales.
16
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
To meet our financing needs, we have historically depended primarily upon
loans from our stockholders and directors and sales of our common stock. During
the year ended December 31, 2000, we also relied significantly on (1) the
issuance of common stock to finance the purchase of assets; (2) trade credit;
and (3) common stock awards to employees and non-employees as compensation for
their services. Other sources of financing have included bank debt.
As shown in our financial statements, we incurred net losses of $7,998,543,
$1,060,646 and $2,182,431 during the year ended December 31, 2000, the five
months ended December 31, 1999 and the year ended July 31, 1999, respectively
and our cash balance at December 31, 2000 was $4,611. Our current liabilities at
December 31, 2000 and December 31, 1999 of $6,479,351 and $5,438,929,
respectively, exceeded our current assets at those dates by $6,218,101 and
$5,127,710, respectively. Moreover, a majority of our accounts payable in the
amount of $4,009,090 at December 31, 2000 were beyond their normal payment
terms. The Company is in default on certain provisions of its loan and other
contractual agreements. Accordingly, we are currently seeking additional
financing to fund our operations.
Until new financing can be secured on a more permanent basis, we will
require interim financing. Verus Investments Holdings, Inc. ("Verus") provided
$2,639,261 in interim financing to fund the Company's working capital needs
during the year ended December 31, 2000. In connection with the Merger,
$1,500,000 of the loans provided in 2000 and $500,000 in Verus loans outstanding
at December 31, 1999 were converted into 1,333,333 shares of common stock. The
remaining due on demand unsecured advances of $939,261 and $200,000 outstanding
at December 31, 2000, carry interest at a rate of 8% and 10%, respectively, per
annum. The advances have been formalized with stated repayment terms which
provide for the advances to be repaid by December 31, 2001 and November 22,
2001, respectively. $200,000 of these loans are convertible at the option of the
holder, into shares of common stock on the earlier of (i) November 22, 2001 at a
conversion rate of $2.35 per share or (ii) at anytime at a conversion rate of
$2.94 per share when the average price of the Company's common stock, as defined
in the convertible agreement, exceeds $3.675. In addition, Verus was granted
warrants to purchase 50,000 shares of our common stock at an exercise price of
$2.94 per share.
On March 31, 2000, the Company received $317,951 in advances from a
stockholder. During the twelve months ended December 31, 2000, the Company
repaid $456,710 in principal and accrued interest on loans from stockholders,
including the $317,951 received on March 31, 2000, using a portion of the
proceeds from the sale of the common stock in conjunction with the Merger.
During the year ended December 31, 2000, the cost of our property and
equipment increased by $3,518,818, primarily due to the purchase of a new
management information system. The total $3,518,818 of property and equipment
purchases was financed as follows: $833,686 through debt (primarily capital
leases), $1,862,318 through accounts payable and the balance of $822,814 in
cash. We are not currently planning to make any significant capital outlays in
2001.
On August 2, 2000, we entered into an Asset Purchase Agreement (the
"Agreement") with Copytron, an unrelated entity, to purchase a customer list for
a maximum aggregate purchase price of up to $1,300,000. The terms of the
agreement required aggregate cash payments of $300,000, $100,000 at closing and
$200,000 payable in three installments with the last $100,000 due on October 9,
2000, and the $1.0 million balance of the purchase price to be paid through the
issuance of three tranches of our common stock. We paid the $100,000 at closing
and one additional $100,000 installment during 2000. However, given our
financial position, we only paid $50,000 as of December 31, 2000 against the
last installment and the balance of $50,000 owing on the last installment
remains unpaid as of the date of this report. Accordingly, we are in default
under the terms of this promissory note. On August 2, 2000, we issued 238,298
shares of common stock with an aggregate value of $700,000 as payment of the
first tranche under the Agreement. On the one year anniversary of the Agreement,
and in the event that the fair value of the Company's common stock is less than
the fair market value, as defined in the Agreement, the Company is obligated to
pay, either in cash or in common stock at the discretion of the Company, an
amount, which when combined
17
<PAGE>
with the value of the original issuance of the Company common stock has an
aggregate value of $700,000. The Company intends to satisfy this requirement by
issuing additional shares of common stock. As calculated using the April 23,
2001 fair market value of the Company's common stock, the Company would be
obligated to issue an additional 720,000 shares. In addition, we will issue
additional shares of common stock on August 2, 2001 and 2002, if annual sales
from customers previously served by Copytron exceed $700,000, with each issuance
having a then current fair market value of up to $150,000.
In conjunction with the Merger on March 31, 2000, we (a) refinanced
$2,815,000 of our stockholder and director loans plus $401,171 in related
accrued interest by the issuance of 2,135,301 shares of Series A Preferred
Stock; (b) purchased new technology and a related patent application with the
issuance of 1,379,310 shares of common stock; and (c) sold 4,666,667 shares of
common stock, including warrants to purchase an additional 833,333 shares of our
common stock for an aggregate purchase price of $7 million, including conversion
of the notes payable, advances and accrued interest owed to Verus International
Group, Ltd. At the time of the Merger, we realized net cash proceeds of $5
million on the sale.
Since November 1, 2000, all senior officers have deferred their salaries in
anticipation of the Company securing additional financing. The financing has not
been secured and accordingly, the officers' salaries have been accrued as a
liability in the Company's financial statements as of December 31, 2000, in the
amount of $168,462. The liability as of May 6, 2001, is $535,961. The officers
will be paid for current salaries beginning May 7, 2001, and accordingly, no
further liability is expected to be accrued.
On January 5, 2001, the Company borrowed $55,000 from two of its officers.
These promissory notes are unsecured, bear interest at 5% per annum, and are due
February 5, 2001. As of June 28, 2001 $46,000 has been repaid.
On January 10, 2001, the Company refinanced $455,627 of accounts payable
due to Xerox under the services agreement described in Note 8 to the
consolidated financial statements with a promissory note. The note is payable in
monthly installments of $41,339, including interest at a rate of 16% per annum,
beginning on February 15, 2001. The final payment will be due on January 10,
2002, unless the Company defaults under the terms of the note, in which case,
the promissory note becomes fully due and payable. The Company has not made the
required payments under the promissory note in 2001 and, accordingly, the
Company is in default under the terms of the note.
On January 19, 2001, the Company borrowed $40,000 from two additional
officers. These promissory notes are unsecured, are due February 19, 2001, and
are payable with interest at a rate of 5% per annum.
On February 8, 2001, the Company sold 40,000 shares of its common stock to
an accredited investor for $20,000. The issuance was made pursuant to Section
4(2) of the Securities Act.
On February 13, 2001, the Company borrowed $100,000 from a stockholder and
officer of the Company due and payable on June 30, 2001 with interest at 8% per
annum. This borrowing is unsecured.
On March 15, 2001, the Company offered to issue 500,000 shares of its
common stock to Dutchess Advisors, Ltd. ("Dutchess") as consideration for their
advisory services in connection with the Company's current efforts to secure
additional financing through a private placement. The shares would be issued
pursuant to Regulation D under the Securities Act, as amended. Of the total
shares that could be issued, 100,000 shares contain piggyback registration
rights. At the date of this report the Company has rescinded the offer and no
shares have been offered to Dutchess. An additional finder's fee may be paid in
cash to Dutchess upon completion of a private placement transaction.
The Company is factoring the majority of its accounts receivable. Net
advances from the factor approximate $375,000 through June 28, 2001. Fees for
these services are expected to average 6% of amounts factored.
On March 22, 2001, the Company entered into an equity line of credit with a
private investor. Under the terms of this agreement, upon the effective
registration of the Company's common stock, the investor will purchase up to an
aggregate of $10 million of such common stock over the course of 36 months from
the date of the agreement at a purchase price per share equal to 91% of the
market price as defined therein. The amount of shares to be put to the investor
by the Company is subject to certain average daily trading volumes for the
Company's common stock in the U.S. financial markets. In connection with
18
<PAGE>
this agreement, we will be issuing 250,000 shares of common stock for no
consideration to an affiliate of the investor. The Company will record $212,500
in stock-based compensation in the quarter ended March 31, 2001 related to this
agreement.
Our cash balance at June 28, 2001 is not sufficient to fund the Company's
operations. As described above, we are currently seeking additional sources of
equity or debt financing to fund our operations. Between December 31, 2000 and
the date of this report, Verus loaned the Company $1,000,000.
Although we have been successful in raising financing in the past, there
can be no assurance that any additional financing will be available to us on
commercially reasonable terms, or at all. Furthermore, we can provide no
assurance that our stockholders will continue to provide additional financing on
either an interim or permanent basis. Any inability to obtain the necessary
additional financing will have a material adverse effect on us, requiring us to
significantly curtail or possibly cease our operations. In addition, any
additional equity financing may involve substantial dilution to the interests of
our then existing stockholders.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. We adopted SFAS No. 133 effective January
1, 2001 which did not have an impact on our financial position or our results of
operations.
In December 1999, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition. We adopted SAB
No. 101 in the fourth quarter of 2000, as required. The adoption of SAB No. 101
did not have an effect on the Company's financial position or its results of
operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
Any investment in shares of our common stock involves a high degree of
risk. You should carefully consider the following information about these risks,
together with the other information contained herein, before you decide to buy
our common stock. If any of the following risks occur, our business could be
materially harmed. In these circumstances, the market price of our common stock
could decline, and you may lose all or part of the money you paid to buy our
common stock.
STOCK TRADING HALT
On April 23, 2001, the American Stock Exchange halted trading of the
Company's common stock due to the Company's failure to file its Form 10-KSB for
the year ended December 31, 2000. With the filing of the Form 10-QSB for the
period ending March 31, 2001, the Company expects that AMEX will allow the
Company to resume trading. However, there can be no assurance that AMEX will
allow the Company to resume trading once this report on Form 10-KSB and the
10-QSB for the period ended March 31, 2001 has been filed. Moreover, although
the Company will attempt to do so, there can be no assurance that the Company
will be able to maintain its listing on the American Stock Exchange in the
future.
If the Company loses its listing on the AMEX, the common stock may
thereafter be included for trading on the Over The Counter Bulletin Board
("OTCBB"). For the common stock to be traded on the OTCBB, a market maker must
make certain filings with the National Quotation Bureau. There can be no
assurance that any such filings will be made, or that if made, the common stock
will be accepted for
19
<PAGE>
inclusion in the OTCBB. Even if included, a trading market may not develop or be
sustained, and investors may not be able to liquidate their investment.
WE HAVE NOT BEEN PROFITABLE, HAVE GENERATED NEGATIVE OPERATING CASH FLOWS AND WE
EXPECT OUR LOSSES AND NEGATIVE CASH FLOWS TO CONTINUE.
We have never been profitable. We base current and future expense levels on
our operating plans and our estimates of future revenues. If our revenues do not
materialize or grow at a slower rate than we anticipate, or if our spending
levels exceed our expectations or cannot be adjusted to reflect slower revenue
growth, we may not achieve profitability or positive cash flows. As shown in our
financial statements, we incurred losses of $7,998,543, $1,060,646 and
$2,182,431 for the year ended December 31, 2000, the five months ended December
31, 1999 and the year ended July 31, 1999, respectively. At December 31, 2000,
we had an accumulated deficit of $13,677,257 and our current liabilities of
$6,562,755 exceeded our current assets by $6,301,505. Moreover, a majority of
our accounts payable in the amount of $4,009,090 at December 31, 2000 were
beyond the normal payment terms. We expect to continue to lose money and
generate negative cash flows from operations in the foreseeable future because
we anticipate incurring significant expenses in connection with building our
brand, improving our services and increasing our product offerings. We may find
it necessary to accelerate expenditures relating to our marketing and sales
efforts or to further develop our Web site and information technology. If we
accelerate these expenditures and our revenues do not increase proportionately,
our rate of losses and negative operating cash flows will increase.
WE RELY ON ONE CUSTOMER FOR MOST OF OUR REVENUE.
We depend on Barnes & Noble College Bookstores, Inc. for a significant
portion of our revenues. Sales to this customer represented 29%, 70% and 75% of
net sales for the year ended December 31, 2000, the five months ended December
31, 1999 and the year ended July 31, 1999, respectively. The decrease in sales
to Barnes & Noble College Bookstores, Inc. during the year ended December 31,
2000 relative to the Company's total sales is primarily the result of increased
Company sales to other parties and sales to former Copytron customers, net of a
decrease in sales to this customer. There can be no assurance that the customer
will continue to purchase goods from us at prior levels, if at all. The loss of
this customer would have a material adverse effect on our company.
OUR BUSINESS AND REVENUE MODEL IS UNPROVEN.
Our ability to generate significant revenues and profits from the sale of
custom textbooks and course packs and other products and services we may offer
in the future is uncertain. To be successful, we must attract and retain a
significant number of customers to our Web site at a reasonable cost. Any
significant shortfall in the expected number of purchases occurring through our
Web site will negatively affect our financial results by increasing or
prolonging operating losses and negative operating cash flows. Conversion of
customers from traditional shopping methods to electronic shopping may not occur
as rapidly as we expect, if at all. Therefore, we may not achieve the customer
traffic we believe is necessary to become successful. Specific factors which
could prevent widespread customer acceptance of our business and our ability to
increase revenues include:
o Lack of consumer awareness of our online presence;
o Pricing that does not meet consumer expectations;
20
<PAGE>
o Consumer concerns about the security of online transactions;
o Shipping charges, which do not apply to shopping at traditional retail
stores and are not always charged by some of our online competitors;
o Delivery time associated with online orders, as compared to the
immediate receipt of products at traditional retail stores;
o Product damage from shipping or shipments of the wrong products, which
may result in a failure to establish trust in purchasing our products
online;
o Delays in responses to consumer inquiries or in deliveries to
consumers; and
o Difficulty in returning or exchanging orders.
YOU SHOULD NOT RELY ON OUR QUARTERLY OPERATING RESULTS AS AN INDICATION OF OUR
FUTURE RESULTS BECAUSE THEY ARE SUBJECT TO SIGNIFICANT SEASONAL FLUCTUATIONS.
Our quarterly operating results may fluctuate significantly in the future
due to a variety of factors that could affect our revenues or our expenses in
any particular quarter. Sales in the textbook industry traditionally are
significantly higher in the first and third calendar quarters of each year
compared with the second and fourth calendar quarters. A part of our strategy is
to offer additional products and services through our Web site. We cannot be
sure that we will be able to generate significant sales of any product other
than new textbooks or generate revenues from additional services or that such
sales or revenues will not occur with textbook sales or in their own seasonal
pattern and, as a result, we may continue to experience such fluctuations in
operating results. Fluctuations in our quarterly operating results could cause
our stock price to decline. You should not rely on sequential quarter-to-quarter
comparisons of our results of operations as an indication of future performance.
Factors that may affect our quarterly results include:
o Seasonal trends in the textbook industry;
o Our ability to manage or influence inventory and fulfillment
operations;
o The level of merchandise returns we experience;
o Our ability to attract new customers, retain existing customers and
maintain customer satisfaction;
o Introduction of new products and services or enhancements, or a change
in pricing policies, by us or our competitors, or a change in pricing
policy by our sole fulfillment source;
o Changes in the amount and timing of expenditures related to marketing,
information technology and other operating expenses to support future
growth;
o Technical difficulties or system downtime affecting the Internet
generally or the operation of our Web site specifically;
o Increasing consumer acceptance and use of the Internet and other
online services for the purchase of consumer products;
o Potential acquisitions or strategic alliances either by us or our
competitors; and
o General economic conditions and economic conditions specific to the
Internet, online commerce and the book industry.
21 |
