ESPN How-to Sports The Company entered into an exclusive agreement with West One Video to distribute a specific line of ESPN sports videos. These videos are aimed both at the adult and child level, teaching the consumer to perfect his or her skills at various sports. The Company offers 29 videotapes produced by ESPN. Professional athletes or coaches teach the fundamentals of their respective sport. There are 29 tapes covering 17 sports ranging from baseball to
volleyball.
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.
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.
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.
The Company intends to emphasize acquisition of product instead of internal
development because of the lower cost and the greater variety of available
product, as discussed below.
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
3
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. In addition, the Company anticipates that the initial costs, including
production of commercials or infomercials, initial media buys and training of
the telemarketers will be between $50,000 and $250,000 per product or service.
The Company has entered into a licensing agreement with Cambridge
Educational to direct market a series of 19 videotapes on parenting advice. The
topics assist parents on real life experiences from pre-natal care through
adolescence. This series of videotapes will be marketed under the name
"Parenting Made Easy" through direct telephone contacts and a television
advertisement which is expected to be produced in Winter 1997.
The Company has signed an agreement with Dream Analysis Group, Inc. to
exclusively market a dream analysis product similar to the "Psychic Hotline"
concept. According to an article in Jordan Whitney Inc. Direct Response
Television Monitoring Report of April 1997, the psychic industry is estimated to
be a $300 million industry. This new service may be popular because it is
available to people in the privacy of their own home and is perceived as
substituting for the expensive services of personal psychiatrists,
psychoanalysts and therapists. The agreement calls for the Company to create an
advertisement and to purchase media to attract callers to a 900 telephone number
which will generate revenue for the Company on a per minute basis. The call will
be answered by the Company telemarketers who will be trained in dream analysis
and will discuss the caller's dream. The Company will have access to Dr. Pepsi
Togar, a psychotherapist and author specializing in dreams and dream analysis
who has been featured on such television shows as The Today Show, Maury Povich
and on numerous radio talk shows. The Company will charge the caller's telephone
bill and collect that amount from the long distance carrier. Dream Analysis
Group, Inc. will promote the campaign through various bookings of Dr. Togar as
well as general public relations. The agreement calls for the Company to pay a
royalty based on net cash receipts.
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
4
develop or support telemarketing in their own operations. For example, the
Company has been retained to handle telephone inquiries from potential students
interested in attending St. Johns University as well as 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 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.
The Market
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 395,000 names, of which 225,000 ordered
product, and approximately 170,000 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, 1997, consumer videotape sales
and school videotape sales constituted approximately 95%, and 5% of total sales,
respectively. For the fiscal year ended February 29, 1996, consumer videotape
sales and school videotape sales constituted approximately 80% and 20% of total
sales, respectively.
Customized Telemarketing Services In a recent study conducted by the
WEFA Group for the Direct Marketing Association the total sales generated by
telephone marketing in 1996 was estimated to be $244 billion. The Company
believes that many companies across the nation are interested in out-sourcing
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 believes that it can successfully enter this market based on its
experience of telemarketing its Math Made Easy(TM) and Reading Made Easy(TM)
videotapes. To date, the Company has signed two agreements to act as an
outsource of telemarketing for third parties.
The Company has entered into agreements with other business entities to
provide marketing and distribution services. The Company expects that these
agreements may ease the seasonality of the Company's educational products,
although there can be no assurance of this in the foreseeable future. "See
Management Discussion and Analysis" and "Risk Factors."
5
Sales, Marketing and Distribution
Direct Marketing
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.
In an effort to maximize efficient use of the telemarketers,
the Company has installed a new 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 will
facilitate 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 Management
Discussion and Analysis" and "Risk Factors."
In January 1997 the Company completed the development of a 30 minute,
Math Made Easy(TM) infomercial starring Charles Shaughnessy of CBS's hit show
"The Nanny." The infomercial aired in a test mode in February and March 1997,
with varying results depending on the locations and stations that were tested.
Subject to the availability of funds, some revisions will
6
be made and the testing phase will continue. One major advantage of the
infomercial format is that television advertising time can be purchased and
guaranteed more easily in advance. Thus, the infomercial may reduce the risks
inherent in direct response advertising, particularly the uncertainty of
securing 60 and 30 second spots at the minimum rates. To the extent that the
Company increases the use of infomercials, its production and advertising budget
will increase and its operating margins may be materially affected. However, the
greater availability of infomercial media time may compensate for the increased
costs by permitting more frequent and timely advertising than is usually
available for short form commercials.
The Company has recently signed an agreement with Universal Spanish
Communications, Inc. ("Unispan") a direct marketing company, whereby Unispan
will market the Math Made Easy(TM) series on Spanish language television.
Unispan is a large direct response advertiser on Spanish language television.
The commercials will air in Spanish in order to attract the parent who may not
speak English. This campaign began in Spring 1997. As of the date hereof, the
results have been limited and further testing is to be performed.
Other Marketing Methods
The Company also markets its videotapes using methods other than
telemarketing. In August 1994, the Company entered into a marketing arrangement
with a company which distributes to Publishers Clearing House. In addition, the
Company markets videotape products by direct mail campaigns to schools culled
from commercially available mailing lists, and by inclusion in trade and private
catalogs which are distributed to schools by mail or by independent
representatives of the publisher. Catalog publishers typically purchase products
from the Company at a substantial discount from the Company's retail price.
The Company's efforts in this regard focus on inclusion in an increasing number
of catalogs.
The Company has signed an agreement with Shopworks Inc., to consult and
assist in the creation of "retail kiosks" to be placed in shopping malls across
the country. These kiosks will be marketed under the Learning Made Easy(TM)
tradename and will consist of all of the educational products distributed by the
Company. The Company believes that this may offer the customer a one stop shop
for educational needs. The Company anticipates that the kiosks may reduce the
dependence on telemarketing. In addition, by renting kiosks the burden of long
term leases is obviated as the kiosks are traditionally rented on a month to
month basis. Subject to obtaining financing, the Company is anticipating
beginning this campaign for the school season of 1997-1998.
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 St. John's
University and LitterMaid, a subsidiary of Windmere Corp., 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.
7
The Company has recently signed an agreement with Ace Marketing, Inc.
to service all inbound telemarketing needs for St. Johns University of New York
generated from print, radio and television commercials. The main task of the
telemarketers will be to complete a survey of all callers applying to
undergraduate and graduate schools affiliated with St. Johns University. In
addition, the Company will be receiving mail application requests for St. Johns
University and performing data entry. The Company is charging Ace Marketing on a
per minute or per name basis. St Johns advertises on a year round basis.
In the agreement with LitterMaid, the Company agrees to handle inbound
telemarketing calls generated from Littermaid's 60 second national advertising
campaign to sell its $199.99, self-cleaning electronic kitty litter product. The
Company will also receive overflow calls from LitterMaid's infomercial campaign.
In addition, the Company will be contacting prospective customers who have
responded to the advertisements and have received literature The agreement calls
for the Company to be paid on either a per call charge or on a commission basis.
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). By using Interactive Voice Response Units (IVRUs) technology,
the Company is able to automate the response to inbound calls. IVRU technology
also enables the Company to provide to telemarketing customers advanced
detailed reports and data management upon request. The Company's modular open
system architecture allows ongoing modifications and updates, thus increasing
efficiency without downtime due to system shutdown for such updating. The
Company's use of (OCDD/RT) On-Line Call Detail Real-Time reporting software,
provides the Company with detailed incoming call information. This assists the
call center managers by enabling them to efficiently schedule proper staffing
levels and accommodate fluctuations in call volumes. OCDD/RT also helps analyze
in real-time the efficiency and reliability of the call connections to the
Company's internal system, and helps the Company predict call volume using
historical models.
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.
8
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 7 - 21 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."
Competition
The Company's educational videotape offerings compete with a variety of
programs, including Hooked on Phonics, Reading Genius, Davidson, Megasystems,
the Video Professor and MegaMath. In the school market, the Company competes
with Video Aided Instruction, 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. 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
9
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 t |
