Risk Factors
The Company's business involves a high degree of risk. Shareholders and investors, should consider carefully 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
The Company has experienced significant losses from operations since inception. It experienced losses of $1,697,000 and $1,659,000 for the fiscal years ended February 28, 1997, and February 29, 1996. As of February 28, 1997, the Company had working capital of only $1,303 and an accumulated deficit of $8.3 million. The Company's working capital requirements have been met primarily from loans and private sales of securities provided by management and other investors and with the net proceeds of the IPO but there can be no assurance the Company will be able to obtain such funds in the future. As of the date hereof, the Company has investor loans and advances aggregating $1.65 million, of which a certain amount may be converted into
equity, subject to ongoing negotiations. All of this amount is due over the next twelve months; 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. Currently, the Company's sales volume is not sufficient to repay this indebtedness or to absorb the fixed overhead arising from the
infrastructure necessary to support the telemarketing effort which causes current operating losses. 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, fund its operating losses, increase the number of products it offers and its advertising budget, and expand its customized telemarketing operations, 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 independent public accountants, Holtz Rubenstein & Co., LLP, 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."
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 12,300,000 shares of Common
Stock at exercise prices ranging from 75% of the current market price to $5.60
per share. The Company currently has outstanding 6,213,297 shares of Common
Stock and as of June 2, 1997 the price of the Company's current stock as quoted
on the Nasdaq Electronic Bulletin Board was $.125 per share. The Company is
planning to offer to exchange additional shares of Common Stock with certain of
these warrantholders in order to simplify its capital structure and to certain
lenders in order to reduce its liabilities. In addition, the Company is engaged
in negotiations to obtain additional funding in
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order to maintain the Company's operations and meet current debt repayment
commitments. At the present time, the Company's management believes that these
equity offerings will result in the issuance of shares of Common Stock in an
amount in excess of the Company's current outstanding Common Stock, and will
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."
Market acceptance of the Company's products is further dependent on the
existence and development of other means to market similar products, such as
interactive television, which enable the consumer to participate directly in
courses offered on television, and home shopping clubs, which enable the
consumer to directly order and pay for products shown on television. The Company
has currently no plans to employ interactive television as a strategy to sell
its products. 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.
High Level of Returned Merchandise; Accounts Receivable Collection & Adequacy of
Reserves
The Company experiences a high level of returns, which generally range
from 25% to 35% 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 or having illegally copied them. There are currently no
cost-effective ways to prevent the illegal copying of the Company's videotapes.
In addition, the Company does not currently have the funds to prosecute
infringers. There can be no assurance that the Company will be able to
successfully prosecute infringements even if the Company is adequately funded.
Further, the Company has sold to customers on credit terms. Although this
procedure has been suspended, there are substantial receivables outstanding as a
result of sales on credit terms and sales to customers whose checking accounts
were drawn upon but the drafts returned unfunded. The Company has implemented
certain procedures that have enhanced the collectibility of the outstanding
amounts. The Company believes it has established appropriate allowances for
anticipated returns and uncollectible receivables based upon historical
experiences and the increased control and procedures to limit and collect
receivables. Notwithstanding the above, there can be no assurance that actual
returns and uncollectible accounts receivable will not exceed the Company's
allowances. Any significant increase in returns or uncollected accounts
receivable beyond the established returns could have a material adverse effect
on the Company's results of operations and financial condition.
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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. For example, the Company incurred difficulty in
purchasing media time prior to and immediately following the November 1996
elections and thereby experienced lower results for the fiscal year ended
February 28, 1997. 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.
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, 1997, 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
System Breakdowns
During fiscal 1996, the Company has periodically experienced complete
or partial breakdowns of its incoming and outgoing call systems which have
lasted from several hours to
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several days. Such breakdowns were usually attributable to the Company's long
distance service provider or hardware. In addition, telephone companies are from
time to time unable to provide the Company with accurate computerized telephone
logs which advise the Company of the connection between an 800 number and a
particular television or radio station which has been keyed to such 800 number.
Such logs are essential in the Company's evaluation of the effectiveness of its
advertising campaigns. There can be no assurance that such breakdowns, which are
usually beyond the Company's control, will not occur in the future. Frequent or
prolonged system breakdowns would have a material adverse effect on the
Company's operating results and financial condition. Although, the Company has
implemented certain procedures that it believes will help to reduce this risk,
there can be no assurance the procedures are fail proof. The Company, to its
knowledge, did not incur any extended breakdowns during fiscal 1997.
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 videotape products 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 videotape 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."
Intellectual Property Rights
The Company realizes that a substantial number of its videotapes are
copied illegally. There are currently no cost-effective ways to prevent the
illegal copying of the Company's videotapes. In addition, the Company does not
currently have the funds to prosecute infringers. There can be no assurance that
the Company will be able to successfully prosecute infringements even if the
Company is adequately funded. The Company's videotapes do not contain a blocking
device to deter unauthorized copying, because newer technologies constantly
develop to override
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such devices and the cost to implement the locking devices would negatively
impact gross margins. There can be no assurance that future illegal copying of
the Company's products will not continue, worsen, exceed the Company's reserves
therefore or have a material adverse effect on operations.
Terms of Contracts and Licenses
Many of the Company's newer products are based on contracts and
licenses with third parties. In general, these contracts and licenses are for
relatively short terms or are terminable at will. There can be no assurance that
these contracts and licenses will be extended or renewed, in which case the
Company's results could be negatively affected..
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 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."
Dependence on Management
The Company's business is significantly dependent upon the personal
efforts and continued availability of Morris Berger, its Chief Executive
Officer. The loss or unavailability to the Company of Mr. Berger could have a
materially adverse effect upon the Company's business operations and prospects.
To the extent that the services of Mr. Berger are unavailable to the
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Company for any reason, the Company would be required to procure other personnel
to manage and operate the Company. The Company is the beneficiary of a $1
million, key man life insurance policy on Mr. Berger. 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. |
