<PAGE>
As filed with the Securities and Exchange Commission on December 27, 1996
Registration No. 333-11247
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
POST EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
___________________
PROSOFT I-NET SOLUTIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
7100 KNOTT AVENUE
BUENA PARK, CALIFORNIA 90620
(714) 562-8282
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Executive Offices)
NEVADA 8243 87-0448639
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation Industrial Classification Identification No.)
or Organization) Code Number)
KEITH D. FREADHOFF
CHIEF EXECUTIVE OFFICER
PROSOFT I-NET SOLUTIONS, INC.
7100 KNOTT AVENUE
BUENA PARK, CALIFORNIA 90620
(714) 562-8282
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
____________________
COPY TO:
WILLIAM L. TWOMEY
HEWITT & MCGUIRE, LLP
19900 MACARTHUR BOULEVARD, SUITE 1050
IRVINE, CALIFORNIA 92612
____________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
____________________
If only the securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an Offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same Offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same Offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
<PAGE>
PROSPECTUS
- --------------------------------------------------------------------------------
PROSOFT I-NET SOLUTIONS, INC.
3,007,544 Shares of Common Stock
379,747 Shares of Common Stock Issuable Upon Exercise
of Common Stock Purchase Warrants
- --------------------------------------------------------------------------------
This Prospectus relates to 3,387,291 Shares of Common Stock (the "Shares")
of Prosoft I-Net Solutions, Inc. (the "Company"), including 3,007,544 currently
outstanding Shares and 379,747 Shares issuable upon exercise of currently
outstanding common stock purchase warrants (the "Warrants"). The Shares may be
offered and sold from time to time by and for the account of one or more of the
stockholders (the "Selling Stockholders") of the Company identified under the
caption "Selling Stockholders." The Company will receive no part of the
proceeds of such sales, with the exception of the exercise price of such
Warrants as may be exercised. The Company will bear all of the expenses
incurred in connection with the registration of the Shares. Holders of
2,660,291 of the Shares have agreed to limit the number of Shares they may sell
during any one-month period under the Prospectus, unless they obtain the written
consent of the Company.
The Shares offered by this Prospectus may be sold from time to time by the
Selling Stockholders. The distribution of the Shares offered hereby may be
effected in one or more transactions that may take place in the over-the-counter
market, including ordinary brokers' transactions, privately negotiated
transactions or through sales to one or more dealers for resale of such Shares
as principals, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices. Usual and
customary or specifically negotiated brokerage fees or commissions may be paid
by the Selling Stockholders.
The Selling Stockholders and intermediaries through whom such Shares are
sold may be deemed "underwriters" within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Shares offered, and
any profits realized or commission received may be deemed underwriting
compensation. The Company has agreed to indemnify the Selling Stockholders
against certain liabilities, including liabilities under the Securities Act.
The Company's Common Stock is currently traded on the NASDAQ SmallCap
Market under the symbol "POSO". On December 16, 1996, the closing bid price for
the Company's Common Stock was $18.00 per share. See "Price Range of Common
Stock and Dividend Policy."
____________________
THESE SHARES INVOLVE A HIGH DEGREE OF RISK AND SHOULD NOT BE PURCHASED
BY INVESTORS WHO CANNOT AFFORD TO LOSE THEIR ENTIRE INVESTMENT.
SEE "RISK FACTORS" COMMENCING ON PAGE 5 OF THIS PROSPECTUS.
____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
____________________
The Company intends to furnish its stockholders annual reports containing
audited consolidated financial statements with a report thereon by independent
accountants, and such other periodic reports as the Company may determine to be
appropriate or as required by law.
____________________
The date of this Prospectus is December 27, 1996.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus. Unless otherwise indicated,
references to "Company" or "Prosoft" are to the consolidated operations of
Prosoft I-Net Solutions, Inc. and its wholly-owned subsidiary, Pro-Soft
Development Corp. This Prospectus contains certain forward-looking statements
and intentions. The cautionary statements made in this Prospectus should be read
as being applicable to all related forward-looking statements wherever they
appear in this Prospectus. The Company's actual results could differ materially
from those discussed herein. Factors that could cause or contribute to such
differences include those discussed under "Risk Factors," as well as those
discussed elsewhere herein.
THE COMPANY
The Company is engaged in the business of training individuals in small,
medium and large organizations in Internet and Intranet technologies, with a
current emphasis on Netscape- and Microsoft-based Internet/Intranet products and
solutions. In addition, Prosoft is a certified Microsoft Authorized Technical
Education Center ("ATEC"), a certified Private Post Secondary Institution in the
State of California, and an approved recipient of Job Training Partnership Act
(the "JTPA") funding, the last of which enables the Company to recruit, train
and hire its own advanced technology instructor staff. Prosoft also develops
proprietary Internet/Intranet courseware and offers more than 45 customized, on-
line, hands-on and instructor-led Internet/Intranet-related courses for end-
users, system engineers and developers. While for the period from December 8,
1995 to October 31, 1996, approximately 81% of the Company's revenues were
generated from JTPA funded vocational training, the Company expects a
significant majority of its revenues in the future will come from the delivery
of commercial Internet/Intranet training to the employees of organizations
ranging from Fortune 1000 corporations to small entrepreneurial enterprises
throughout the United States.
The Company believes that the market for Internet and Intranet training is
substantial. The Internet is the world's largest network of computer networks,
and one which grows everyday. Companies are also beginning to develop private
internal networking systems called Intranets, which use the infrastructure,
standards and many of the technologies of the Internet and the World Wide Web,
but are cordoned off and protected from the public through software technologies
known as "fire walls." Companies are developing Intranets in order to improve
internal communications, facilitate employee training and motivation, and to
reduce the need for paper-based materials such as operational and procedural
manuals, internal phone books, requisition forms, and other items that must be
updated frequently. Intranets can integrate all of the computers within an
organization, including software and databases, into a unified system that
allows employees to quickly access and utilize information.
Prosoft's Internet/Intranet instruction is made available through Company
operated Internet/Intranet Training and Resource Centers ("Training Centers") as
well as through on-site tailored training for large organizations. Each Prosoft
student who takes an Internet or Intranet class is taught using a personal
computer that is connected to the Internet. As of December 1, 1996, the Company
had opened 16 Training Centers in the states of California, Florida, Maryland,
Massachusetts, Missouri, New Jersey, New York, North Carolina, Oklahoma,
Pennsylvania, South Carolina, Tennessee and Texas. The Company plans to have
between 40 and 50 centers opened across the country by July 1997 and its
strategy is to continue to expand the number of Training Centers across the
country, with the goal of creating a nationwide network of Training Centers that
will make Prosoft the primary choice for Fortune 1000 corporations and other
smaller firms that require unified, quality Internet and Intranet training. The
Company also expects to have opened approximately 30 on-site training facilities
by July 1997. Because Prosoft's typical customer is expected to be a medium or
large organization with offices in different geographic locations, the Company
believes that effective Internet and Intranet training must be available at many
locations throughout the country and must be consistently delivered so that all
members of the organization have a common understanding of the uses and
applicability of the technologies being taught. As such, Prosoft believes that
the development of a nationwide network of Prosoft Training Centers is essential
to the delivery of quality Internet/Intranet instruction.
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A typical Training Center ranges in size from 600 to 5,000 square feet and is
comprised of from one to four classrooms that can accommodate approximately 20
students per classroom. The Company has either leased commercial space for the
Training Centers or has entered into marketing affiliations with existing
computer training, consulting, distribution and reseller companies. Under such
marketing affiliations, the affiliate typically makes classroom space available
to Prosoft in exchange for a royalty payment based upon the training revenue
collected by Prosoft. Whether Prosoft leases commercial space or enters into a
marketing affiliation, the Company is responsible for building the
infrastructure of the Training Center to its specifications. The Company's
commercial Internet/Intranet training courses range in length from one to five
days at a cost of between $295 to $450 per day per student.
Prosoft has offered and will continue to offer a significant number of courses
relating to Microsoft products. In addition, the Company will continue to
attempt to develop strategic alliances with local training affiliates under its
Affiliate Program and with software manufacturers such as Innovus Corporation
and Street Technologies, Inc. Because of these strategic alliances and the
Company's broad categorical expertise in Internet and Intranet training ranging
from the most advanced system engineering to end-user training, Prosoft believes
that it is well-positioned to sell its training to small, medium and large
corporations and other organizations. As a result of the Company's approach to
Internet/Intranet training, which features highly trained instructors, course
materials designed by the Company's internal courseware department, live T-1
lines connected to the Internet, individual computers for each student and
rigorous pre- and post-testing of students, the Company believes it can offer
among the highest quality, consistent Internet curriculum in the industry. In
addition, because of the short curriculum development cycle that the Company
maintains, it can quickly create new course offerings to support new and
emerging technologies. Internet/Intranet software offerings and technology will
continue to evolve and training related to such software and technology will
need to keep pace. Technology trends indicate that end-user interfaces are and
will become more intuitive and user-friendly while system engineering and
solution development required to support these simple interfaces will become
increasingly complex. Because Prosoft addresses the full range of Internet and
Intranet technology training, the Company believes it is well positioned to
pursue and deliver on the expanding advanced Internet technology training
opportunities.
In June 1996, Prosoft created a division to develop and publish Internet,
Intranet and distant learning courseware and curriculum, which Prosoft uses in
its Internet/Intranet classes. The Company has several proprietary courseware
projects under development that support Microsoft, Netscape and Sun Microsystems
Internet/Intranet technologies.
The business of the Company was initially operated as a sole proprietorship
(the "Proprietorship") beginning in February 1995. In December 1995, Pro-Soft
Development Corp., a California corporation ("Old ProSoft") was incorporated and
acquired the business from the Proprietorship effective January 1, 1996. In
March 1996, the Company entered into a reorganization (the "Reorganization")
with Old ProSoft and the Old ProSoft shareholders, whereby (i) the Old ProSoft
shareholders received shares of Common Stock of the Company in exchange for
their shares of Old ProSoft, (ii) the Company changed its name to ProSoft
Development, Inc., and (iii) Old ProSoft became a wholly-owned subsidiary of the
Company. The Company changed its name to Prosoft I-Net Solutions, Inc. in
October 1996. The Company was incorporated in Nevada in March 1985 as Tel-Fed,
Inc. From its incorporation until the Reorganization, the Company had no
significant operations.
Under applicable accounting rules, for financial statement purposes, the
Reorganization is required to be accounted for as an acquisition of the Company
by Old ProSoft, with the additional shares held by the Company's prior
shareholders reflected as a recapitalization of Old ProSoft. As a result, the
consolidated financial statements included in this Prospectus for the Company
reflect, for the period prior to the Reorganization, the operations of Old
Prosoft. Financial statements of the Proprietorship are also included herein.
The Company's executive offices are located at 7100 Knott Avenue, Buena Park,
California 90620 and its telephone number is (714) 562-8282.
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The Offering
<TABLE>
<CAPTION>
<S> <C>
Common Stock Offered by the Selling Stockholders...... 3,387,291 shares(1)
Common Stock to be outstanding after this Offering.... 7,730,351 shares(1)(2)
Use of Proceeds....................................... Other than the exercise price of such of the
Warrants as may be exercised, none of the
proceeds from the sale of shares by the Selling
Stockholders will be received by the Company.
The gross proceeds to the Company in the event
that all of the Warrants are exercised would be
approximately $2,363,708. Any proceeds
received by the Company will be utilized for
working capital and general corporate purposes.
NASDAQ SmallCap Symbol................................ POSO
</TABLE>
____________________
(1) Includes 379,747 shares issuable upon exercise of the Warrants.
(2) Does not include 1,897,500 shares reserved for issuance upon the
exercise of outstanding stock options and warrants, other than the
Warrants.
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RISK FACTORS
INVESTMENT IN THE COMPANY INVOLVES A HIGH DEGREE OF RISK AND THE SECURITIES
OFFERED HEREBY SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD TO LOSE
THEIR ENTIRE INVESTMENT. IN ADDITION TO THE OTHER FACTORS SET FORTH IN THIS
PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CAREFULLY EVALUATE THE FOLLOWING RISK
FACTORS BEFORE MAKING AN INVESTMENT DECISION.
EXTREMELY LIMITED OPERATING HISTORY AND EXPECTATION OF CONTINUING SIGNIFICANT
LOSSES
The Company has an extremely limited operating history, which makes it
difficult to predict future operating results. Although the Company was formed
in 1985, from its incorporation until its acquisition of Old ProSoft in March
1996, it had no significant operations. The business of the Company was only
begun in February 1995 where it was run as the Proprietorship until its
acquisition by Old ProSoft in January 1996. The first Training Center was not
opened until late 1995 and the Company has only opened 16 Training Centers to
date. As a result, there is little financial information concerning the business
of the Company of the type commonly used by investors to evaluate a potential
investment. In addition, certain aspects of the Company's business are
relatively new and have not yet been fully tested in the marketplace. The
Company incurred a net loss of $3,074,123 from December 8, 1995 through July 31,
1996. For the quarter ended October 31, 1996, the Company incurred a net loss of
$3,015,665 and expects to continue to incur significant losses on a quarterly
basis in the foreseeable future. The Company has achieved only limited revenues
to date, with revenues of $77,477 for the period from February 1, 1995 to
December 31, 1995 and $1,421,453 for the period from December 8, 1995 to October
31, 1996. The Company's ability to generate significant revenues in the future
is subject to uncertainty, particularly with respect to the Internet/Intranet
training on which it intends to focus. There can be no assurances that the
Company will be able to address any of those challenges, that its activities
will be successful or that meaningful revenues or profits will result from these
activities.
FUTURE CAPITAL REQUIREMENTS AND UNCERTAINTY OF FUTURE FUNDING
The Company is dependent on outside financing to fund its growth. In order
to meet its goal of opening between 40 and 50 Training Centers by July 1997, the
Company will
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be required to obtain external funds. The actual amount of funds needed is
uncertain and will be dependent on several factors, including the availability
of cash from operations, the availability of equipment financing, and the rate
of growth. The Company currently estimates that the cost to open a Training
Center is approximately $100,000 per site and that it takes approximately six to
twelve weeks from the signing of a lease or addition of an affiliate to
complete. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Liquidity and Capital Resources." The Company is
planning on seeking additional equity capital either through additional private
placements of the Company's Common Stock or through a public offering of the
Company's Common Stock that is registered with the Securities and Exchange
Commission. If additional funds to fund growth are raised by selling equity
securities, further dilution to then existing stockholders may result. In
October 1996, the Company entered into an engagement letter with the investment
banking firm of Smith Barney Inc. pursuant to which Smith Barney will act as
exclusive placement agent in connection with a proposed private placement of
between $20 to $25 million of the Company's securities. However, the placement
by Smith Barney will be made only on a "best effort" basis. As a result, there
can be no assurance that the Smith Barney private placement will be successful,
that it or any other additional financing will be available, or that they will
be available on terms favorable to the Company. If adequate funds are not
available, the Company may be required to curtail its expansion plans. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS --Liquidity and Capital Resources." In the past, partially in order
to conserve cash, the Company has issued shares of Common Stock as compensation
for services rendered by outside consultants. A total of 445,000 shares have
been issued by the Company (primarily Old ProSoft) for services rendered. The
Company does not intend to issue shares of Common Stock in the future for
services. However, if it were to do so, further dilution to existing
stockholders would result.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
As a result of the Company's extremely limited operating history as well as
the very recent emergence of the market addressed by the Company, the Company
has neither internal nor industry-based historical financial data for any
significant period of time upon which to base planned operating revenues and
expenses. The Company has incurred significant net losses to date and expects
to continue to incur significant losses on a quarterly basis in the foreseeable
future. For the period from December 8, 1995 to July 31, 1996, the Company had a
net loss of $3,074,123 and negative cash flow from operations of $3,043,328. In
addition, the Company had a net loss of $3,015,665 and negative cash flow from
operations of $2,238,048 for the quarter ended October 31, 1996. The Company
expects to significantly increase its operating expenses to fund the planned
rapid expansion of its network of Training Centers. To the extent these
increased expenses precede or are not subsequently and timely followed by
increased revenues, the Company's business, results of operation and financial
condition will be materially adversely affected. The Company expects to be
subject to some seasonal fluctuations in its operating results, with revenues in
November and December expected to be lower because of decreased enrollment in
its classes due to holidays. However, the Company is unable to predict the
extent of such seasonal fluctuations with certainty due to its limited operating
history.
UNCERTAINTY OF RAPIDLY EVOLVING MARKET
While substantially all of the Company's limited revenues to date have been
generated from JTPA vocational training, the Company expects a significant
majority of its revenues in the future will come from the delivery of commercial
Internet/Intranet training to the employees of organizations ranging from
Fortune 1000 corporations to small entrepreneurial enterprises throughout the
United States. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Development of Business." The market for these
Internet/Intranet products and services has only recently begun to develop and
is rapidly evolving. The Company and its prospects must be considered in light
of the risks, costs and difficulties frequently encountered by companies in
their early stage of development, particularly companies in the new and rapidly
evolving Internet market. In order to be successful, the Company must, among
other things, continue to attract, retain and motivate qualified training
personnel, successfully implement its Internet/Intranet training programs, open
a substantial number of new Training Centers, respond to competitive
developments and successfully expand its internal infrastructure, particularly
sales, marketing and administrative personnel and its accounting system. See
"MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources." Moreover, due to the intense
competition in the emerging markets addressed by the Company, the Company must
seek to
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expand all aspects of its business rapidly, which increases the challenges
facing the Company, making it more difficult for the Company to recover from
business errors.
RISK OF INABILITY TO MANAGE RAPID GROWTH AND ATTRACT QUALIFIED PERSONNEL
The Company is currently experiencing a period of rapid growth that has
placed, and could continue to place, a significant strain on the Company's
financial, management and other resources. The Company's ability to manage its
growth effectively will require it to continue to improve its operational,
financial and management information systems, and to attract, train, motivate,
manage and retain key employees. In particular, the Company's planned expansion
from 16 Training Centers and 59 instructors to 40 to 50 centers by July 1997 and
up to an additional 200 instructors (depending on the number of classrooms per
Training Center), places significant pressure on the Company to attract, train
and retain qualified instructors for its Training Centers. The Company also
expects to have opened up to 30 on-site training facilities by July 1997, which
will place additional pressure on the Company to locate qualified instructors.
Historically, the Company has had a 10-1 student to instructor ratio but with
the shift from vocational to commercial business, the Company believes this
ratio should increase to approximately 12-1. In order to locate new instructors,
the Company is advertising in local and national markets via electronic services
(including its own Web site and other sites that offer job postings), newspapers
and trade publications. Additionally, the Company has engaged a recruiter who
specializes in technical recruiting. The Company has experienced very limited
turnover of its instructors, with only one instructor resigning and eight
instructors being released by the Company from its inception through December 1,
1996. The Company's performance is also dependent upon a number of other
factors, including its ability to identify qualified affiliates who will provide
space for its Training Centers and its ability to locate acceptable commercial
space to lease for its Training Centers. The Company's success is also dependent
upon its ability to obtain the necessary financing to fund its planned growth,
which will require external funds. See "Future Capital Requirements and
Uncertainty of Future Funding." There can be no assurance that management of the
Company will be able to effectively manage the expansion of the Company's
operations or achieve the rapid execution necessary to fully exploit any
potential market opportunity for the Company's products and services. If the
Company's management becomes unable to manage growth effectively, the Company's
business, operating results and financial condition could be materially
adversely affected.
NEED TO RESPOND TO RAPID TECHNOLOGICAL CHANGE
The market for the Company's products and services is characterized by
rapid technological change, changing customer needs, frequent new product
introductions and evolving industry standards. These market characteristics are
exacerbated by the emerging nature of the Internet market and the fact that many
companies are expected to introduce new Internet products and services in the
near future. The Company's future success will depend in significant part on
its ability to continually and on a timely basis introduce new products,
services and technologies and to continue to improve the Company's products and
services in response to both evolving demands of the marketplace and competitive
product offerings.
RELIANCE ON CURRENT MANAGEMENT
The Company is highly dependent upon the efforts of its officers who are
and will continue to be instrumental in the development of the Company's
business concept and the management of the Company's business. See
"MANAGEMENT." The loss of services of any one or more members of current
management could have a material adverse effect on the Company. The Company
currently does not have employment contracts with any of its employees,
including management.
DEPENDENCE ON STRATEGIC AFFILIATES
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The Company has focused and expects to continue to focus on the development
of strategic relationships with key strategic affiliates such as Microsoft,
Netscape and other Internet and Intranet software developers. The Company's
success will depend in part on the success of those strategic affiliates and the
Company's ability to establish successful strategic relationships with other
entities. Although the Company has entered into informal arrangements with
several key strategic affiliates, the Company has not entered into any long-term
agreements with any such affiliates and no assurances can be given that such
relationships will be maintained. See "BUSINESS -- Strategic Alliances."
HIGHLY COMPETITIVE MARKET
The higher education market is highly competitive. The Company is subject
to intense competition from a large number of public and private companies
providing training, many of which are older, larger and have greater financial
and personnel resources than the Company. In addition, the market for Internet
products and services has only recently begun to develop, is rapidly evolving
and is characterized by an increasing number of market entrants with competing
products and services. See "Need to Respond to Technological Change." There can
be no assurance that the Company will be able to compete successfully against
its current or future competitors or that competition will not have a material
adverse effect on the Company's business, operating results and financial
condition. See "BUSINESS -- Competition."
UNCERTAIN AND CHANGING REGULATORY ENVIRONMENT FOR VOCATIONAL TRAINING
The Company's Training Centers are subject to extensive state and federal
regulations with respect to the Company's vocational training. See "BUSINESS --
Government Regulation." As a vocational, non-degree granting school, the
Company is governed by the State of California Council for Private Postsecondary
and Vocational Education (CPPVE). In addition to commercial business, the
Company also actively seeks vocational retraining funding as a vendor under the
JTPA. Because JTPA Regulations impose new regulatory requirements on the
Company annually and because the United States Department of Labor has not fully
developed administrative interpretations of the Regulations, there exists some
uncertainty concerning the application and interpretation of the new regulatory
requirements imposed by the Regulations. New or revised interpretations of such
regulatory requirements could have a material adverse effect on the Company's
vocational business. In addition, changes in or new interpretations of other
applicable laws, rules or regulations could have a material adverse effect on
the accreditation, authorization to operate in various states, permissible
activities and costs of doing business of the Company. Although the Company
expects its vocational JTPA funded business to represent a rapidly decreasing
portion of its revenues in the future, the failure to maintain or renew any
required regulatory approvals, accreditation or state authorizations by the
Company or certain of the Training Centers could have a material adverse effect
on the Company's vocational business.
CONCENTRATION OF BUSINESS
During the period December 8, 1995 to October 31, 1996, the Company derived
approximately 30%, 26% and 18%, respectively, of its total revenues from the
County of Los Angeles, the City of Los Angeles and South Bay (a Private Industry
Council), respectively. Each of these southern California governmental agencies
provided JTPA vocational training funds for students in the Company's Training
Centers. Although substantially all of the Company's limited revenues to date
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have been generated from JTPA vocational training, the Company expects a
significant majority of its revenues in the future will come from commercial
Internet/Intranet training of the employees of organizations ranging from
Fortune 1000 corporations to small entrepreneurial enterprises throughout the
United States, and the reliance on these three agencies will diminish. However,
until such time as the Company is not dependent on JTPA vocational training for
a significant portion of its revenues, the loss of, or significant adverse
change in, the relationship between the Company and any of these three agencies
would have a material adverse effect on the Company's business, operating
results and financial conditions. See "BUSINESS -- Government Regulation."
LIMITED MARKET FOR SECURITIES OF THE COMPANY; POSSIBLE VOLATILITY OF STOCK PRICE
There is a very limited trading market for the securities of the Company.
The Common Stock was approved for quotation on the NASDAQ SmallCap Market
effective December 6, 1996. Previously, trading, if any, in the Company's
securities was conducted in the over-the-counter market on the NASD OTC
Electronic Bulletin Board established for securities that do not meet NASDAQ
listing requirements. See "PRICE OF COMMON STOCK AND DIVIDEND POLICY." The
market price for the Common Stock of the Company may be highly volatile
depending on various factors, including the general economy, stock market
conditions, announcements by the Company or its competitors, the small trading
volume of the Common Stock, and other events or factors. See "Shares Eligible
for Future Sale."
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, none of the 7,350,604 outstanding shares of Common
Stock have been registered for sale under the Securities Act of 1933, as amended
(the "Securities Act"). As a result, none of these shares may be sold unless
registered under the Securities Act or sold pursuant to an applicable exemption
from registration such as Rule 144 of the Securities Act. Only 286,723 of such
shares are currently eligible for sale under Rule 144. See "DESCRIPTION OF
COMMON STOCK -- Shares Eligible for Future Sale." An aggregate of 3,387,291
shares are being registered for sale under this Registration Statement. Of the
shares being registered, 727,000 shares are not subject to any lock-up agreement
and are eligible for sale as of the date of this Prospectus, while the remaining
2,660,291 shares are held by stockholders who have agreed not to sell, under
this Prospectus, more than 1% of their respective Shares for each month that
elapses after November 27, 1996, unless the Company's written consent is
obtained. See "DESCRIPTION OF CAPITAL STOCK -- Shares Eligible for Future
Sale."
In addition, the Company intends to register up to 1,792,500 shares
issuable upon exercise of outstanding options to purchase Common Stock of the
Company held by employees and consultants of the Company. As of December 1,
1996, 1,355,104 of these options were exercisable.
The Company has had a very limited trading volume in its Common Stock to
date. Sales of substantial amounts of Common Stock of the Company under this
Registration Statement or otherwise could adversely affect the prevailing market
price of the Common Stock and could impair the
9
<PAGE>
Company's ability to raise capital at that time through the sale of its
securities. See "DESCRIPTION OF CAPITAL STOCK -- Shares Eligible for Future
Sale."
CONTROL BY PRINCIPAL STOCKHOLDERS
As of the date of this Prospectus, officers and directors of the Company
will beneficially own approximately 28.2% of Common Stock of the Company. As a
result, these stockholders may be able to effectively control most matters
requiring approval by the stockholders of the Company, including the election of
directors. See "PRINCIPAL AND SELLING STOCKHOLDERS."
NO DIVIDENDS
As of the date of this Prospectus, the Company has not paid any cash
dividends on its Common Stock and does not intend to declare any such dividends
in the foreseeable future. The Company's ability to pay dividends is subject to
limitations imposed by Nevada law and, as a quasi-California corporation, to the
more restrictive provisions of California law. Under Nevada law, dividends may
be paid to the extent that the corporation's assets exceed its liabilities and
it is able to pay its debts as they become due in the usual course of business.
California law generally prohibits a corporation from paying dividends unless
the retained earnings of the corporation immediately prior to the distribution
exceed the amount of the distribution. Alternatively, a corporation may pay
dividends if (i) the assets of the corporation exceed 1 1/4 times its
liabilities; and (ii) the current assets of the corporation equal or exceed its
current liabilities, but if the average pre-tax earnings of the corporation
before interest expense for the two years preceding the distribution was less
than the average interest expense of the corporation for those years, the
current assets of the corporation must exceed 1 1/4 times its current
liabilities. See "PRICE OF COMMON STOCK AND DIVIDEND POLICY" and "DESCRIPTION OF
CAPITAL STOCK."
EFFECT OF ANTI-TAKEOVER PROVISIONS
The Company is subject to the anti-takeover provisions of Sections 78.411
through 78.444 of the Nevada Revised Statutes, which restrict certain
"combinations" with "interested stockholders" unless certain conditions are met.
In addition, the Company's Bylaws provide that the Company's Board of Directors
will be divided into three classes of directors serving staggered three-year
terms and eliminate the right of stockholders to act by written consent without
a meeting, unless such written consent is unanimous. All of the foregoing could
have the effect of delaying or deterring unsolicited takeover attempts and could
adversely affect prevailing market prices for the Company's Common Stock. See
"DESCRIPTION OF CAPITAL STOCK -- Nevada Anti-Takeover Laws and Certain Charter
Provisions."
10
<PAGE>
USE OF PROCEEDS
Other than the exercise price of such of the Warrants as may be exercised,
the Company will not receive any proceeds from the sale of Shares by the Selling
Stockholders. Holders of the Warrants are not obligated to exercise their
Warrants, and there can be no assurance that such holders will choose to
exercise all or any of such Warrants. The gross proceeds to the Company in the
event that all of the Warrants are exercised would be approximately $2,363,708.
Any proceeds received by the Company will be utilized for working capital and
general corporate purposes.
PRICE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock currently trades on the NASDAQ SmallCap Market,
under the trading symbol of "POSO." Prior to December 6, 1996, the Company's
Common Stock traded on the National Association of Security Dealers Over-the-
Counter (OTC) Market Bulletin Board. The following table sets forth the high and
low bid quotation for the Common Stock as reported by various Bulletin Board
market makers. The quotations do not reflect adjustments for retail mark-ups,
mark-downs, or commissions and may not necessarily represent actual
transactions. There were no trades of the Company's Common Stock between August
1, 1994 and April 1, 1996, therefore the following table does not reflect the
bid price per share during the quarters ending prior to April 1, 1996.
<TABLE>
<CAPTION>
Quarter Low Bid High Bid
------- ------- --------
<S> <C> <C>
August 1, 1996 -- October 31, 1996 $18.00 $20.00
May 1, 1996 -- July 31, 1996 $15.00 $19.00
February 1, 1996 -- April 30, 1996 $ 6.00 $15.00
</TABLE>
On December 16, 1996, the closing bid price for the Common Stock was
$18.00.
On December 16, 1996, the Company had approximately 375 stockholders of
record.
To date, no dividends have been declared or paid on any capital stock of
the Company, and the Company does not anticipate paying any dividends in the
foreseeable future.
11
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at October
31, 1996.
<TABLE>
<CAPTION>
October 31, 1996
----------------
<S> <C>
Capital lease obligations, net of current portion............. $ 427,529
-----------
Stockholder's equity:
Common stock, $.001 par value; 50,000,000 shares authorized;
7,350,604 shares issued and outstanding(1)................. 7,351
Additional paid-in capital.................................. 11,013,623
Note receivable from stockholder............................ (9,500)
Accumulated deficit......................................... (6,089,788)
Total stockholder's equity.......................... 4,921,686
-----------
Total capitalization............................. $ 5,349,215
===========
</TABLE>
____________________
(1) Excludes: (i) an aggregate of 750,000 shares reserved for issuance under
the Company's 1996 Stock Option Plan, of which 750,000 shares were subject
to outstanding options as of October 31, 1996 at exercise prices ranging
from $3.50 to $20.00 per share, with a weighted average exercise price of
$6.75 per share; (ii) 1,042,500 shares subject to other outstanding options
as of October 31, 1996 at an exercise price of $1.00 per share; and (iii)
484,747 shares issuable upon exercise of warrants (including the Warrants)
at exercise prices ranging from $1.00 to $11.00, with a weighted average
exercise price of $5.95.
12
<PAGE>
SELECTED FINANCIAL DATA
The consolidated financial data as of July 31, 1996 and for the period
December 8, 1995 to July 31, 1996 has been derived from, and is qualified by
reference to, the consolidated financial statements of the Company included
elsewhere herein which have been audited by Ernst & Young, LLP, independent
auditors. The financial data of the Proprietorship as of December 31, 1995 and
for the period February 1, 1995 to December 31, 1995 has been derived from, and
is qualified by reference to, the financial statements of the Proprietorship
included elsewhere herein, which have been audited by Kelly & Company,
independent auditors. The financial data as of October 31, 1996 and for the
three-month periods ended October 31, 1995 and 1996 is derived from unaudited
financial statements included elsewhere in this Prospectus. The unaudited
financial data include, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the Company's and the Proprietorship's financial position at
those dates and results of operation for those periods. The results for the
three months ended October 31, 1996 are not necessarily indicative of the
results for any future period. The following data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of the Company and the
Proprietorship and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PROPRIETORSHIP COMPANY PROPRIETORSHIP COMPANY
----------------- ----------------- ----------------- ----------------
FEBRUARY 1, 1995 DECEMBER 8, THREE MONTHS THREE MONTHS
TO DECEMBER 31, 1995 TO JULY 31, ENDED ENDED
1995 1996 OCTOBER 31, 1995 OCTOBER 31, 1996
----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue............................................. $ 77,477 $ 907,772 $ 23,243 $ 513,681
Cost of services.................................... 60,526 698,725 17,277 1,054,019
--------- ----------- ---------- -----------
Gross profit........................................ 16,951 209,047 5,966 (540,338)
Operating expenses:
Sales and marketing............................... 44,769 426,221 23,331 440,373
General and administrative........................ 556,382 2,788,188 213,357 2,088,231
--------- ----------- ---------- -----------
Loss from operations................................ (584,200) (3,005,362) (230,722) (3,068,942)
Interest income (expense)........................... (20,126) (67,961) (804) 57,277
--------- ----------- ---------- -----------
Loss before provision for taxes..................... (604,326) (3,073,323) (231,526) (3,011,665)
Provision for state franchise tax................... -- 800 26 4,000
--------- ----------- ---------- -----------
Net loss............................................ $(604,326) $(3,074,123) $ (231,552) $(3,015,665)
========= =========== ========== ===========
Net loss per share.................................. $ (0.61) $ (0.41)
=========== ===========
Shares used in computing net loss per share......... 5,011,781 7,343,504
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
AT AT AT
DECEMBER 31, JULY 31, OCTOBER 31,
1995 1996 1996
--------------- ---------------- ------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficiency)........................ $(561,885) $6,764,828 $2,925,119
Total assets........................................ 765,990 8,997,490 7,021,649
Capital lease obligations, net of current portion... 308,671 437,532 427,529
Stockholders' equity (owner's deficit).............. (194,473) 7,694,729 4,921,686
</TABLE>
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto found elsewhere herein. In March 1996, the Company
and Old ProSoft completed a reorganization pursuant to an Agreement and Plan of
Reorganization whereby Old ProSoft became a wholly-owned subsidiary of the
Company. Although the Company survived as the parent of Old ProSoft, the
transaction was accounted for such that the financial statements for the Company
following the transaction are the financial statements of Old ProSoft, with the
additional shares held by the Company's prior shareholders reflected as a
recapitalization of Old ProSoft. The assets and operating results of the
Company separate from Old ProSoft are not material and separate financial
statements of the Company prior to the transaction are not presented herein.
The financial statements of the Proprietorship, which operated the business from
its inception in February 1995 until it was acquired by Old ProSoft January 1,
1996, are included herein.
DEVELOPMENT OF BUSINESS
Prosoft, and prior to that, the Proprietorship, have delivered training in
the vocational and advanced technical education business since February 1995.
Initially, a majority of time and resources were spent in the development of
government funded, JTPA vocational business and qualifying as a recipient of
JTPA funds. Resources were also spent training and developing the initial staff
of Microsoft Certified Engineers, Developers and Trainers and in securing and
maintaining its status as a Microsoft ATEC. Vocational training sales commenced
on a limited basis at the end of 1995.
For the period from December 8, 1995 to October 31, 1996, JTPA funded
vocational training accounted for approximately 81% of the Company's revenues,
while commercial training accounted for approximately 19% of the Company's
revenues. With the planned expansion of the Company's Training Centers over the
next year, the Company expects revenues from commercial training to account for
a significant majority of the Company's revenues.
Upon completion of a private placement of stock in February 1996, the
Company had the resources to expand its vocational training capacity in March
through May of 1996. As the Company began to graduate MCSEs, MCSDs and MCPs, it
was able to retain several of these graduates as instructors to accommodate the
expanding vocational business.
Concurrent with the expansion of the government-funded vocational
business, the Company embarked on a strategy to build a nationwide network of
Training Centers. The Company developed and opened its first two Training
Centers in late 1995 in Buena Park and Palmdale, California, and opened a third
Training Center in February 1996 in North Hollywood, California. As of December
1, 1996, the Company had opened 16 Training Centers located in 13 states and
was in the process of building out tenant improvements and hiring instructors
for 9 additional Training Centers in those states as well as in Georgia,
Virginia and Washington. In addition, the Company is in preliminary
negotiations for approximately 6 additional sites around the country. To
support this expansion strategy, the Company significantly increased its
accounting, operational, administrative, marketing, sales, courseware
development, instructor development, instructor, information systems and
technology staffing. Further expansion of the Company's infrastructure will be
necessary for the Company to meet its planned growth. See "Liquidity and Capital
Resources."
As a result of the start-up nature of the Company's business through
October 31, 1996 and the shift in focus from vocational to commercial training
which is currently in process, the Company does not believe that the results of
operations of the Company through October 31, 1996 are indicative of future
results.
14
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended October 31, 1996 Compared to Three Months Ended October 31,
1995
Revenues. Revenues increased to $513,681 for the quarter ended October 31,
1996 from $23,243 for the quarter ended October 31, 1995. Losses from
operations increased to $3,068,942 for the quarter ended October 31, 1996 from
$230,722 for the quarter ended October 31, 1995. The increase in revenues can
be attributed to the increase in the number of students taking classes from the
Company. This is a direct result of the expansion of the Company during 1996
from only one location a year earlier.
Cost of Services. The Company's cost of services includes the costs
associated with the course instructors, content developers, course materials and
equipment and classroom facilities. Cost of services for the quarter ended
October 31, 1996 increased to $1,054,019 from $17,277 for the quarter ended
October 31, 1995. This increase is primarily the result of an increased number
of course events, a larger course library, and the increase in the number of and
training of instructors and content developers in the quarter ended October
31,1996 compared to the corresponding quarter in the prior year.
Sales and Marketing. Sales and marketing expense consists of salaries,
commissions and travel-related costs of sales and marketing personnel, the costs
of designing, producing and distributing direct mail marketing and media
advertisements, and the costs of the information systems to support these
activities. Sales and marketing expense increased to $440,373 for the quarter
ended October 31, 1996 from $23,331 for the quarter ended October 31, 1995. The
increase in sales and marketing expense is due to an increase in marketing
intended to reach a broader range of potential customers, to expand the
Company's presence in certain U.S. cities and to communicate the availability of
new course titles.
General and Administrative. General and administrative expense increased
to $2,088,231 for the quarter ended October 31, 1996 from $213,357 for the
quarter ended October 31, 1995. This increase is primarily due to the continued
buildup of the administrative staffing needed to support the expansion in sites
and the growth in sales.
Interest income for the quarter ended October 31, 1996 is comprised of
interest earned from higher cash balances which had been generated by the
proceeds from a private placement completed in September 1996.
The Company expects to incur losses for at least the first nine months of
the fiscal year ending July 1997 pursuant to its current expansion plans.
RESULTS OF OPERATIONS
December 8, 1995 to July 31, 1995 Compared to February 1, 1995 to December 31,
1995
Revenues. Revenues for the period from December 8, 1995 to July 31, 1996
were $907,722, compared to $77,477 for the period from February 1, 1995 to
December 31, 1995. The increase was principally attributable to an increase in
the number of students enrolled in the Company's JTPA vocational training
programs. In January 1996, the number of students enrolled was 16 with monthly
training revenue of $34,000. By July 1996, student enrollment was up to 102
and monthly training revenue was $213,000. The Company projects limited revenue
growth from JTPA vocational training in the future. The Company projects
substantial revenue growth in the future based on the expansion in the number of
sites, and its ability to deliver training in Internet and Intranet
technologies, and the Microsoft Back Office family of products.
Cost of Services. Cost of services for the period ended July 31, 1996 was
$698,725, compared to $60,526 for the period ended December 31, 1995. For the
period ended July 31, 1996, cost of services primarily consisted of courseware
($244,000), instructor salaries ($177,000) and overhead salaries ($161,000).
These costs are generally variable with revenues. The increase was principally
attributable to an increase in the number of classes being conducted, and the
related increase in the number of students attending those classes. The gross
margin for the period ended July 31, 1996 was 23%, compared to a gross margin of
22% for the period ended December 31, 1995.
Sales and Marketing. Sales and marketing expenses for the period ended
July 31, 1996 were $426,221, compared to $44,769 for the period ended December
31, 1995. For the period ended July 31, 1996, sales and marketing expenses
primarily consisted of promotions ($200,000), advertising ($90,000) and travel
($75,000). The increase in sales and marketing expenses was based on the
following: (i) new positioning of the Company in the commercial market of
Internet and Intranet training, (ii) establishing a national presence and image,
(iii) opening of a national sales office in Jacksonville Florida, (iv) hiring
four regional sales managers, and (v) participating in the Microsoft World Wide
Live promotion. In the future, the Company anticipates that sales and marketing
expenses will vary according to revenue, but at a lower percentage of revenue
due to the start-up nature of expenditures during the period ended July 31,
1996.
General and Administrative. General and administrative expenses for the
period ended July 31, 1996 were $2,788,188 compared to $556,382 for the period
ended December 31, 1995. For the period ended July 31, 1996, general and
administrative expenses primarily consisted of payroll ($1,510,000),
depreciation ($257,000) and rent ($206,000). Other than $381,000 of
compensation related to stock issued to the founders, these costs are
substantially fixed costs. The increase in general and administrative expenses
related primarily to expenses incurred in hiring and staffing of additional
personnel to support the business expansion.
Interest Expense. Interest expense for the period ended July 31, 1996 was
$67,961, compared to $20,126 for the period ended December 31, 1995. For the
period ended July 31, 1996, interest expense consisted solely of interest paid
on capital equipment leases. The increase in interest expense is related to the
increase in the amount of equipment financed through capital leases.
Net Loss. Net loss increased for the period ended July 31, 1996 to
$3,074,123 compared to $604,326 for the period ended December 31, 1995. The
increase in net loss resulted from (i) increased staffing, (ii) the opening of
new Training Centers without a corresponding increase in revenues, (iii)
developing new courseware, and (iv) an increase in the Company's sales and
marketing efforts.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
From inception, the Company has financed its operations and met a portion
of its capital expenditure requirements primarily through net proceeds from
private sales of equity securities totaling approximately $10.8 million. Cash
and cash equivalents decreased from $6,466,460 at July 31, 1996 to $3,085,024 at
October 31, 1996. For the quarter ending October 31, 1996, operating activities
used cash of $2,238,048, primarily due to a net operating loss of $3,015,665.
During the quarter ended October 31, 1996, the Company invested $1,222,569
in equipment and leasehold improvements. The Company currently estimates that
the cost to open a Training Center is approximately $100,000 per site. The
Company anticipates purchases of equipment and furniture of approximately an
additional $5,000,000 as it expands the number of Training Centers during fiscal
1997. However, that amount may change depending on the speed and breadth of the
national expansion. It will also be dependent upon the Company securing credit
and raising equity capital. The Company anticipates that it will continue to be
able to purchase equipment and furniture through lease lines of credit.
As its expansion continues, the Company's internal infrastructure will need
to be further expanded, which will also require additional capital. As sales
increase, additional personnel will be needed not only for training but also
for affiliate support, administration and accounting. Besides personnel, there
are plans to increase the capacity of many of the Company's systems. The
accounting system is expected to be upgraded to handle the anticipated growth in
sales, and the Company plans to develop a sophisticated reservation system and
an enhanced web page for customers.
The Company currently anticipates that its current working capital,
together with the net proceeds of warrants to be exercised before January 31,
1997, will be sufficient to meet its anticipated needs for working capital
expenditures, assuming no further expansion. However, in order to meet its goal
of having between 40 and 50 Training Centers opened by July, 1997, and to fund
the related growth in its internal infrastructure, the Company will be required
to obtain additional external funds. In October 1996, the Company entered into
an agreement with the investment banking firm of Smith Barney Inc. pursuant to
which Smith Barney will act as exclusive placement agent in connection with a
proposed private placement of between $20 and $25 million of the Company's
securities. It is expected that this private placement will be sold through
Smith Barney to only institutional investors. The Company will pay Smith Barney
a placement fee equal to 6% of the gross proceeds of the private placement. It
is currently contemplated that this offering will be concluded in January 1997.
Given that the Company believes the prospects for raising additional external
funds are good, it will continue its expansion and growth as currently planned.
However, there can be no assurance that the Smith Barney private placement will
be successful, or that any other additional financing will be available on terms
favorable to the Company, or at all. If adequate funds are not available or are
not available on acceptable terms, it would limit the Company's ability to fund
expansion beyond January 31, 1997. Such limitation would have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company's long-term capital requirements will depend on numerous
factors, including the rate at which new Training Centers are opened, the
profitability of existing Training Centers and the acquisition and/or
development of additional training tools. Until such time as the expansion of
the Company's Training Centers and the addition of new training tools can be
financed from existing Training Centers, the Company will need to seek
additional external funds.
The above discussion concerning future financing needs, business expansion
and factors affecting liquidity are forward-looking statements. Although
management believes that these statements are reasonable in view of the facts
available to it, there can be no assurance that all of these statements will
prove to be accurate. There are numerous factors which could have a material
impact upon whether these projections could be realized or whether these trends
will continue. Among these factors are those set forth in "RISK FACTORS," as
well as those discussed elsewhere herein.
16
<PAGE>
BUSINESS
OVERVIEW
Prosoft I-Net Solutions, Inc. ("Prosoft" or the "Company") is incorporated
under the laws of the State of Nevada. From its incorporation in May 1985 until
March 1996, the Company had no significant operations. The business of the
Company was initially operated as a sole proprietorship (the "Proprietorship")
beginning in February 1995. In December 1995, Pro-Soft Development Corp., a
California corporation ("Old ProSoft"), was incorporated and acquired the
business from the Proprietorship effective January 1, 1996. In March 1996, the
Company entered into an Agreement and Plan of Reorganization (the
"Reorganization Agreement") with Old ProSoft and the Old ProSoft shareholders.
Under the terms of the Reorganization Agreement, Old ProSoft shareholders
received one share of Common Stock of the Company in exchange for each of their
shares of Old ProSoft, and Old ProSoft became a wholly-owned subsidiary of the
Company (the "Reorganization"). As part of the Reorganization, all of the
executive officers and directors of the Company resigned and the executive
officers and directors of Old ProSoft became the executive officers and
directors of the Company and the Company changed its name from Tel-Fed, Inc. to
ProSoft Development, Inc. The Company changed its name to Prosoft I-Net
Solutions, Inc. in October 1996.
Prosoft is engaged in the business of training individuals in small,
medium and large organizations in Internet and Intranet technologies, with a
current emphasis on Netscape- and Microsoft-based Internet/Intranet products and
solutions. Prosoft is a certified Microsoft Authorized Technical Education
Center ("ATEC"), which is a certification from Microsoft Corporation
("Microsoft") allowing the Company to teach courses using certified Microsoft
courseware. In order to become a Microsoft ATEC, the Company first had to be
designated by Microsoft as a Microsoft Solution Provider (which was received
after the Company demonstrated to Microsoft that it trains others to use
Microsoft products), then had to submit an ATEC application and comprehensive
business plan to Microsoft for approval, which approval was received in November
1995. The Company is also a certified Private Post Secondary Institution in the
State of California, and an approved recipient of Job Training Partnership Act
(the "JTPA") funding, the last of which enables the Company to recruit, train
and hire its own advanced technology instructor staff. Prosoft also develops
proprietary Internet/Intranet courseware and offers more than 45 customized, on-
line, hands-on and instructor-led Internet/Intranet-related courses for end-
users, system engineers and developers.
While JTPA funded vocational training accounted for approximately 81% of
the Company's revenues through October 31, 1996, with the planned expansion of
the Company's Internet/Intranet Training Resource Centers ("Training Centers")
over the next year, the Company expects revenues from commercial training to
account for a significant majority of the Company's revenues.
Internet/Intranet instruction is made available through Company-operated
Training Centers offering commercial Internet/Intranet training to the employees
of organizations ranging from Fortune 1000 corporations to small entrepreneurial
enterprises throughout the United States. The Company also offers tailored
training on-site at the customer's facility, usually for larger organizations
with a significant number of trainees. On-site training facilities are set up by
the customer, at its expense, in substantially the same configuration as a
Training Center classroom. Each Prosoft student who takes an Internet or
Intranet class is taught using a personal computer that is connected to the
Internet. As of December 1, 1996, the Company had opened 16 Training Centers in
the states of California, Florida, Maryland, Massachusetts, Missouri, New
Jersey, New York, North Carolina, Oklahoma, Pennsylvania, South Carolina,
Tennessee and Texas. The Company plans to have between 40 and 50 Training
Centers opened across the country by July 1997. In addition, the Company expects
to have opened approximately 30 on-site training facilities by July 1997.
A typical Training Center ranges in size from 600 to 5,000 square feet and
is comprised of from one to four classrooms that can accommodate approximately
20 students per classroom. The Company has either leased commercial space for
the Training Centers or has entered into marketing affiliations with existing
computer training, consulting, distribution and reseller companies. Under such
marketing affiliations, the affiliate typically makes classroom space available
to Prosoft in exchange for a royalty payment based upon the training revenue
collected by Prosoft. Whether Prosoft leases commercial space or enters into a
marketing affiliation, the Company is responsible for building the
17
<PAGE>
infrastructure of the Training Center to its specifications. The Training
Centers are connected directly to the Internet by means of a high speed T-1 line
(provided by UUNET, a leader in high speed Internet/Intranet access) that
guarantees a connection of 1.544 MBps and insures that the students' computers
have the high speed bandwidth required to complete the complex, hands-on
exercises efficiently, especially those exercises that are focused on the
graphics-intensive World Wide Web. The Company's commercial Internet/Intranet
training courses range in length from one to five days at a cost of between $295
to $450 per day per student.
A common barrier to entry in the advanced technical education business is
developing and maintaining a staff of qualified, motivated instructors. In
addition to hiring experienced commercial instructors, Prosoft has developed a
strategy to internally develop such a staff in numbers large enough to support a
national network of Internet/Intranet training centers. Prosoft is an authorized
recipient of JTPA funding and uses these funds to recruit displaced defense,
airline and aerospace workers, provide them with instruction in advanced
Microsoft and Internet/Intranet technologies, and then hire them as Microsoft
Certified Professionals, Internet/Intranet Training Professionals or both. The
JTPA-funded programs pay Prosoft approximately $10,000 for each displaced worker
that receives advanced Microsoft technology training, which vocational training
runs eight hours a day, five days a week and spans six to nine months. The
Company has been successful at attracting and retraining displaced employees to
become Microsoft Certified and qualified to teach the Company's
Internet/Intranet curriculum. Each of the Company's vocational students
graduates as a Microsoft Certified System Engineer, a Microsoft Certified
Solution Developer, a Microsoft Certified Trainer (all three of these
certifications fall under a designation known as a Microsoft Certified
Professional or "MCP") or an Internet/Intranet Professional ("IIP"). As of
December 1, 1996, Prosoft had employed approximately 37 full-time MCPs. In
addition, as of December 1, 1996, the Company had approximately 98 additional
students under development to be MCPs and an additional 6 students under
development to be IIPs.
Once a student completes vocational training, he or she is either placed
into the job market through Prosoft's placement efforts or, if the student meets
Prosoft's training standards, is retained by the Company and hired to teach in
one of the Company's Training Centers. In adddition, some students have been
recruited directly by employers on the Company's property. The Company is
currently considering the creation of a formal placement office but has not made
a final decision on this matter. Through December 1, 1996, 68 people had
graduated from the Company's Training Centers and the Company had retained 10
graduates as instructors. In addition, although the Company has not done so to
date, it expects to develop a growing pool of MCP and IIP employees who can be
leased out at daily rates to corporations that are engaged in commercial
computer training but cannot satisfy their internal demand for MCPs or IIPs to
provide such training.
In June 1996, Prosoft created a division to develop and publish Internet,
Intranet and distant learning courseware and curriculum, which Prosoft uses in
its Internet/Intranet classes. The Company has several proprietary courseware
projects under development that support Microsoft, Netscape Communications Corp.
("Netscape") and Sun Microsystems Internet/Intranet technologies.
MARKET BACKGROUND
Internet and Intranet information technology is transforming the way
people live and work. Companies are migrating to Internet and Intranet
technologies in order to improve customer service, seek productivity gains,
access voluminous databases around the world, and attain or maintain a
competitive profile. International Data Corp. and Forrester Research, Inc.
estimate that the number of Internet users doubles every nine months and that
there will be more than 200 million users by the year 2000. Forrester estimates
that less than 10% of the population is currently connected to the Internet,
with no estimate of how many of those connected actually know how to access the
full potential of the medium.
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Companies are also beginning to develop private internal networking
systems called Intranets, which use the infrastructure, standards and many of
the technologies of the Internet and the World Wide Web, but are cordoned off
and protected from the public through software programs known as "fire walls."
Companies are developing Intranets in order to improve internal communications,
facilitate employee training and motivation, and to reduce the need for paper-
based materials such as operational and procedural manuals, internal phone
books, requisition forms, and other items that must be updated frequently.
Intranets can integrate all of the computers within an organization, including
software and databases, into a unified system that allows employees to quickly
access and utilize information. The percentage of large and midsize companies
employing some sort of Intranet system has increased to 55% from just 11% a year
ago, according to Business Research Group of Newton, Massachusetts. Zona
Research in Redwood City, California estimates that Intranet software sales will
grow at four times the rate of Internet server software sales.
The Company believes that the market for Internet and Intranet training is
substantial. The Internet is the world's largest network of computer networks,
and one which grows everyday. Originally conceived and implemented by the U.S.
Department of Defense and later taken over by the National Science Foundation,
the Internet was developed for scientists and those in academia. It was not
developed nor intended for the average American or as a corporate information
tool, and as a result, it is neither intuitive nor user friendly. In the eyes
of many executives in corporate America, understanding how to efficiently move
through this "maze" and identify and manage its power is critical if the
Internet is to achieve its full promise as a productivity tool and not become
merely a distraction in the workplace.
PROSOFT'S MARKET POSITIONING
Prosoft has and will continue to develop courseware, provide training and
deliver technical support relating to the Internet and Intranets as a
competitive business tool.
Because the Company's Internet/Intranet training relates primarily to the
software products developed by the major Internet software companies, Microsoft
and Netscape, the business strategies of these companies are highly relevant to
Prosoft. Microsoft and Netscape have given away "browser" software (software
that provides a user-friendly interface to the Internet) while selling the more
expensive "server" software. In addition, Microsoft is bundling both browser and
server software (Internet Information Server) with its Window NT operating
system. Dozens of major computer companies plan to ship their machines with this
software. Windows NT has become a leading network operating system for the kind
of small-scale servers used on local area networks and now those machines are
positioned to become Intranet servers. Microsoft's Internet Information Server
includes security features and has the ability to connect to corporate data
bases.
Based on Microsoft's aggressive strategy and historical dominance of the
software market, Prosoft's management believes that Microsoft is well-positioned
to be a dominant entity in the Internet/Intranet technology market and has
strategically embraced Microsoft's vision and approach. Currently, most
training courses offered by Prosoft revolve around Microsoft's Internet/Intranet
tools and platforms, ranging from advanced courses for system engineers and
solution developers to courses for end-users and self-paced, self-help
instruction. A central part of the Company's strategy will be to proactively
assist Microsoft in building marketshare for Microsoft's Internet/Intranet
products and
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technologies by providing a nationwide network of Training Centers that offer
courses in all of the major Microsoft Internet and Intranet technologies.
Notwithstanding the number of Prosoft courses that relate to Microsoft
products, the Company realizes that not every corporation and end-user will
ultimately embrace Microsoft's technologies, and that other Internet companies,
such as Netscape, will continue to maintain a large presence in this arena.
Accordingly, the Company intends to expand its training curriculum to include
Internet and Intranet tools and products offered by companies other than
Microsoft, including those offered by Netscape and Sun MicroSystems.
THE PROSOFT STRATEGY
Prosoft believes that it should have an advantage over the majority of
other computer and advanced technology training companies by virtue of its
growing national presence and its specific emphasis and expertise in
Internet/Intranet technologies. While other training institutions may offer a
limited number of Internet/Intranet courses, this type of training is Prosoft's
primary area of emphasis. As a result, the Company believes that it has
developed a broad range of experience with respect to classroom infrastructure,
curriculum, courseware and instructor development, mastery of subject matter,
breadth and depth of course offerings, and the ability to quickly develop and
offer new Internet/Intranet technology training as market demands shift.
The Company's strategy is to continue to expand the number of Training
Centers across the country, with the goal of creating a nationwide network of
Training Centers that will make Prosoft a primary choice for Fortune 1000
corporations and other smaller firms that require unified, quality Internet and
Intranet training. As of December 1, 1996, the Company had opened 16 Training
Centers located in 13 states and had 9 additional Training Centers under
development in those and 3 additional states. The Company plans to have between
40 and 50 centers opened across the country by July 1997. Prosoft believes that
the development of a nationwide network of Prosoft Training Centers is essential
to the delivery of quality Internet/Intranet instruction. By the very nature of
Internet/Intranet technology, the delivery of uniform, consistent training is
mandatory in order for companies with multiple geographic locations to
efficiently learn and use the technology. In addition, Prosoft believes that
because the Internet/Intranet demands that an entire organization be properly
trained in order for the technology to be effective, training should be
delivered locally, but with identical curriculum and content in every region of
the country. Internet/Intranet training is not effective if varying curriculum
is dispensed to one office or group of employees at a time. All members of an
organization must simultaneously learn the proper skills necessary to realize
the full capabilities of the Internet/Intranet.
In addition to its strategy of expanding the number of Training Centers
across the country, the Company believes there is excellent potential for future
growth in on-site training. The Company expects to have opened approximately 30
on-site locations by July 1997. The Company anticipates its on-site customers
will be larger organizations with a significant number of trainees, including
both corporate and government entities. As the trend of outsourcing Internet/
Intranet technology training continues, the Company believes that the largest
and fastest growing customer base within this market are those larger
organizations that require sophisticated technology training.
STRATEGIC ALLIANCES
Prosoft will continue to attempt to develop strategic relationships with
Private Industry Councils (PICs), which are provided technical assistance by the
Department of Labor (the "DOL"), Microsoft, Microsoft-based Internet and
Intranet software developers, computer distributors (otherwise known as value-
added-resellers or "VARs"), telecommunications companies, local training
affiliates under the Affiliate Program (described below) and future Internet
technology developers to attract and deliver training opportunities.
Prosoft will continue to work with the DOL through "subrecipients"
(administrators of JTPA funds on the local level) to access JTPA retraining
funds as a steady source of revenue and to develop its advanced technology
instructors. With respect to the Company's hiring programs, Prosoft is able to
administer its own intake and eligibility criteria under authority granted by
the City of Los Angeles. This is significant because Prosoft can execute its
own intake and eligibility of displaced workers living in the City of Los
Angeles to determine if they qualify for a JTPA grant. In addition, the Company
can complete the intake and eligibility process significantly quicker than the
normal government processing.
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This processing speed has enabled the Company to attract and process large pools
of qualified displaced workers from which to select its instructor trainees.
In June 1996, Microsoft chose Prosoft to be the exclusive training company
featured in a worldwide presentation of two Microsoft Internet programs: (a)
Microsoft Explorer Version 3.0, the updated version of Microsoft's popular
Internet browser software, and (b) Microsoft Front Page, a new Microsoft web
page authoring tool that applies the user-friendly and intuitive point and click
technology to HTML, or hypertext markup language, the language currently used to
build and develop Internet/Intranet web pages (put another way, Front Page is to
HTML as Windows is to DOS). In connection with the presentation, known as World
Wide Live, Microsoft created a direct link from its web page to Prosoft's web
page, which contains training schedules of the various Prosoft curricular
offerings, including training relating to the Microsoft technologies featured at
World Wide Live. It is estimated that approximately 20,000 people viewed
the World Wide Live program at various satellite down-link theaters across the
U.S. and Canada. The Company has developed and maintains proprietary ownership
of its Front Page curriculum.
In June 1996, the Company also entered into an agreement with Innovus
Corporation, a developer and marketer of interactive multimedia software, to
become Innovus's exclusive national training resource for its multimedia
products, subject to Innovus' rights to provide training for certain major
customers, distributors which require specialized training, and VARs in cities
where the Company has no Training Centers. Innovus Multimedia is designed to
allow business managers and their employees, even those with only modest
business skills, to quickly build a wide range of employee management, training
and customer support applications. The product, developed on Microsoft
platforms and designed to take advantage of advanced features of Windows 95 and
Windows NT, requires from two to five days of training. Prosoft will train and
certify its instructors to deliver this training and will provide a national
training support system for Innovus. Prosoft plans to incorporate Innovus
Multimedia presentations into all of its Internet/Intranet classes and will work
with Innovus to develop pre- and post-class student performance assessment tools
using the Innovus products. The Company will continue to carefully select a
number of software developers whose products support the Internet/Intranet and
Microsoft tools and platforms, and develop similar training relationships. This
agreement has a one-year term and is automatically extended for additional one
year terms unless either party gives at least 120 days prior notice of its
intent not to extend.
The Company's success will depend in large part on the success of its
strategic affiliates and the Company's ability to establish successful strategic
relationships with other entities.
COURSEWARE, COMPUTER BASED TRAINING AND DISTANCE LEARNING
The Company intends to continue to develop cutting edge courseware for all
new Microsoft and Netscape Internet/Intranet product releases as well as other
popular and emerging Internet/Intranet technology courses.
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Once Prosoft has designed the books and materials that will constitute the
courseware for a given class, it is able to internally produce such courseware
on a sophisticated copying and binding machine located in its Buena Park,
California facility. Prosoft courseware is published, packaged and shipped from
Buena Park either to a Prosoft Training Center or another training company or
organization.
Prosoft is also building the staff and technological resources necessary
to offer what the Company calls "Learning on Demand" (LOD) or distance learning.
The Company is developing proprietary Internet/Intranet technologies that will
allow individuals to access training on an any number of products, tools or
applications, in real time and on demand. To reach this goal, the Company is
developing strategic alliances and plans to invest in the infrastructure and
development of LOD technologies. For example, the Company has licensed from
Street Technologies, Inc. ("Street") the "streaming" technologies and products
developed by Street which will permit the Company to format its
Internet/Intranet course offerings into an integrated computer-based training
presentation that combines audio, video, graphical and other multi-media
elements. The license agreement with Street has no stated term, but can be
terminated by Street in the event that Prosoft fails to perform its obligations
under the agreement or becomes insolvent or subject to bankruptcy proceedings.
The license agreement requires Prosoft to make specified payments to Street at
such times as Prosoft uses the streaming technologies. Prosoft has also entered
into preliminary negotiations with a company that has developed its own
proprietary LOD technologies for the development by Prosoft of several
Internet/Intranet course titles for use by that company in connection with its
LOD technologies.
The Company believes that such LOD technologies could become an important
source of revenues in the future, and plans to commit funding and employee time
to develop such technologies, although the timing and amounts of such
commitments remain uncertain at this time. Any funding for the development of
LOD technologies and the strategic affiliations related thereto, however, would
have to be raised through additional equity financings, and the ability of the
Company to successfully complete such financings is uncertain. See "RISK
FACTORS--Future Capital Requirements and Uncertainty of Future Funding."
Learning on Demand or distance learning over the Internet has the
potential to lower training costs, increase accuracy, and facilitate
communications among employees and their managers. By making LOD content
available on the Internet, companies can distribute curriculum around the world
and update materials every hour if they desire. Prosoft is addressing various
security, billing and other issues that must be resolved before LOD can become
commonplace on the Internet, but with the proliferation of Intranet systems
within large organizations, there is a large and immediate opportunity for the
Company to sell and/or license its LOD content.
MARKETING
Prosoft will market Internet and Intranet training through its own
internal sales and marketing organization in conjunction with key strategic
alliances. As of December 1, 1996, the Company's sales and marketing
organization consisted of 32 employees. Prosoft is currently creating and
producing marketing material designed to help position ProSoft as the premier
Internet/Intranet training and resource company.
As part of Prosoft's overall strategy to offer a significant number of
courses relating to Microsoft products, whenever the Company opens a Training
Center in a new market, its first priority will be to offer introductory
Internet and Intranet training to all Microsoft Solution Providers and Microsoft
sales and marketing employees in the area. This plan is designed to help
Microsoft employees better understand Microsoft products as well as gain an
appreciation for the training support that Prosoft will provide to Microsoft
clients. The intent is to develop goodwill with Microsoft and ultimately to
increase the frequency of Microsoft recommendations and sales of Prosoft
Internet training.
Prosoft, as an integral part of its strategy to have between 40 and 50
Training Centers opened by July 1997, has established what is called the
Affiliate Training Program (the "Affiliate Program"). Under the terms of the
Affiliate Program, an existing computer training, consulting, distribution
and/or reseller company, such as a ComputerLand franchisee, will provide the
physical space within its premises for the completion and operation of one or
more Prosoft training rooms in a particular market. In
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exchange for this rent-free classroom space, the affiliate is entitled to 5%,
except for three initial affiliates who receive 3% and one who receives 0%, of
all revenue generated from the Internet and Intranet training that occurs at
that location. In addition, if the affiliates sales staff, either acting alone
or in concert with Prosoft's sales force, sells the training course, the
affiliate is entitled to a wholesale price. In the past, the price at which an
affiliate could purchase a training course ranged from 4% to 25% (and in one
instance 40%) less than the Company's retail list price depending, among other
things, on the affiliate's level of participation in the sales effort. Beginning
in August 1996, all new affiliates purchase training courses at a wholesale
price which is 20% less than the Company's retail list price if they participate
in the sales effort, regardless of the level of their participation. The Company
previously issued options to acquire a total of 60,000 shares of its Common
Stock, at exercise prices ranging from $5.00 to $19.75 per share, to four of the
initial participants in the Affiliate Program, but has since discontinued this
practice. By forming various affiliations in this fashion, the Company has
dramatically reduced its fixed operating expense by replacing fixed rent or
lease payments with a small variable expense tied to sales revenue. In addition,
the Affiliate Program permits the Company to take advantage of the affiliate's
local sales force in each market, which understands and has personal
relationships with the local customer base.
In addition to the local affiliate's marketing and sales efforts,
Prosoft plans to enter each market with a uniform advertising campaign that
employs direct mail, newspaper and radio advertising, followed up by aggressive
telemarketing efforts, to support Prosoft's sale of training for each of the
Training Centers. The Company has also established a national inbound/outbound
telemarketing organization located in Jacksonville, Florida. The Company's
telemarketing sales group will market the Company's Internet and Intranet
training to computer resellers and end-users.
Prosoft has also entered into preliminary discussions with various
software training and consulting companies to permit such companies to sell
Prosoft training seats in their regularly published catalogues and marketing
materials. As part of this program, these companies, including end-user
application training firms, software companies and VARs, may publish Prosoft
training schedules in their course catalogs and other marketing materials and
will be paid a percentage of the training revenue generated by such means. In
this way, potential competitors that offer a wide range of unrelated training
courses can add Internet offerings to their catalog without having to develop
the curriculum or instructors, install T-1 lines, or compete with Prosoft.
MARKET POTENTIAL
Because Prosoft has offered and will continue to offer a significant
number of courses relating to Microsoft products, and because the Company has
broad categorical expertise in Internet and Intranet training ranging from the
most advanced system engineering to end-user training, Prosoft believes that it
is well-positioned to sell its training to small, medium and large
organizations. As a result of the Company's approach to Internet/Intranet
training, which features highly-trained instructors, course materials designed
by the Company's internal courseware department, live T-1 lines connected to the
Internet, individual computers for each student, and numerous pre- and
post- testing of students, the Company believes it can offer among the highest
quality, consistent Internet curriculum in the industry. In addition, because
of the short curriculum development cycle that the Company maintains, it can
quickly create new course offerings to support new and emerging technologies.
Internet/Intranet software offerings and technology will continue to evolve and
training related to such software and technology will need to keep pace.
Technology trends indicate that end-user interfaces are and will become more
intuitive and user-friendly while system engineering and solution development
required to support these simple interfaces will become increasingly complex.
Because Prosoft addresses a broad range of Internet and Intranet technology
training, the Company believes it is well positioned to pursue and deliver on
the expanding advanced Internet technology training opportunities.
As corporations move to develop and expand internal Intranet systems,
Prosoft believes it will be positioned to deliver a wide range of Intranet
training classes, ranging from Internet Information Servers to Web Page
development and maintenance, as well as a host of other courses necessary for an
organization to maximize the utility of Intranet systems. Prosoft believes that
company-developed
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Intranets will become indispensable tools in the workplace and
intends to position itself to take advantage of this growing market.
COMPETITION
At the present time, the Company has been unable to identify any other
Internet/Intranet-specific training company that offers the breadth and depth of
Internet and Intranet courses that Prosoft offers, or that teaches such courses
in Training Centers located across the country as the Company intends to do.
However, as the Internet and company-developed Intranets continue to grow in
popularity and become mandatory productivity tools in the workplace, Prosoft's
management believes that several existing training companies will increase their
focus on Internet/Intranet training. In addition, other large computer software
and reseller companies with even greater financial resources than the training
companies may enter the market and begin providing Internet training.
Although studies by the American Society for Training and Development and
the International Technology Training Association consistently demonstrate that
hands-on, instructor led training is the most effective manner in which to learn
and master technology-oriented subject matter, most Internet users in the U.S.
have not had access to this type of training. Most Internet instruction is
delivered seminar-style in hotel auditoriums or similar venues using passive
training techniques such as slides, multimedia presentations or perhaps an
overhead of an instructor's computer in action. There are several regionally-
based Internet training companies, but only a few that have direct, high speed
access to the Internet. Gestalt Systems, Inc., a Washington, DC-based training
Company, offers such training. CompUSA, a national computer retail chain, has
opened computer training centers in several of its stores, offering a wide array
of training across many different platforms ranging from advanced technical
education to end-user applications training. CompUSA, however, offers a limited
schedule of hands-on, on-line, end-user Internet instruction.
Prosoft's management believes that it will have a competitive advantage
over most existing training organizations because of the Company's developed
curriculum, training focus, ability to offer high speed, on-line training and
ability to quickly develop quality courseware to support the rapidly evolving
Internet products and technologies. In addition, the Company believes that its
planned national presence will give it an advantage over its competitors having
a limited geographical presence. In order for existing training companies to
develop the level of expertise and consistency offered by Prosoft, the Company
believes they would have to narrow their focus, eliminate many of their current
course offerings, retrain and/or develop their staffs, and dramatically expand
their training locations.
Prosoft believes that by virtue of its careful positioning, convenience of
training, and commitment to an Internet/Intranet-specific strategy, its courses
and services will have a strong appeal to the corporate market, which is looking
to expand its understanding and use of Internet and Intranet technologies.
Prosoft also believes that it can preempt many potential competitors by teaming
up with training affiliates across the nation under the Affiliate Program and
expanding quickly to become the largest and most visible provider of
Internet/Intranet training. In addition, Prosoft has developed strategies and
programs that will allow other training companies in any Prosoft market to re-
sell Prosoft training seats as if they were their own.
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SEASONALITY
The Company's revenues and income are expected to vary significantly from
quarter to quarter due to seasonal and other factors. The Company expects
greater revenue in the second half of its fiscal year (February through July)
than in the first half of its fiscal year (August through January). This
seasonality is due in part to seasonal spending patterns of the Company's
customers, and in part to quarterly anticipated differences in the frequency and
size of the Company's marketing campaigns, as well as weather, holiday and
vacation patterns.
PROPRIETARY RIGHTS
Most of Prosoft's Internet courseware is protected by copyright laws. The
Company has also filed for trademark registration for certain of its products,
tags lines and feature names. The Company will continue to seek copyright
registration on certain newly developed courseware products and on operating
software products that relate to the delivery of Internet and Intranet training.
GOVERNMENT REGULATION
The Company's Training Centers are subject to extensive state and federal
regulations with respect to the Company's vocational training. As a vocational,
non-degree granting school, the Company is governed by the State of California
Council for Private Postsecondary and Vocational Education ("CPPVE"). In
addition to commercial business, the Company also actively seeks vocational
retraining funding as a vendor under the JTPA.
Federal job re-training programs under the JTPA pay Prosoft, on average, a
grant of approximately $10,000 for each qualifying student for 22 to 37 weeks of
intensive advanced Microsoft-based Internet technology training. If a student
leaves a JTPA program before the completion of the course, Prosoft is paid a pro
rata portion of the grant. The Company has been successful at attracting and
re-training displaced defense and aerospace workers to become Microsoft
Certified Professionals. As discussed above, those MCPs who Prosoft deems
qualified are then offered positions as instructors to deliver Internet and
Intranet training in Prosoft Training Centers.
Prosoft actively seeks vocational retraining funding as a vendor under the
JTPA, which was signed into law in 1982 with the stated purpose to "establish
programs to prepare youth and unskilled adults for entry into the labor force
and to afford job training to those economically disadvantaged individuals and
others facing serious barriers to employment who are in special need of such
training to obtain productive employment." Prosoft participates primarily in
JTPA Title III programs, which provide for operation of state and local programs
of employment and training assistance for dislocated workers. Vocational schools
are traditionally providers of Title III training. Title III requires that the
entity delivering JTPA-funded training be a certified school operating within
the regulations set forth by the state department of education. The CPPVE is
the governing council for Vocational and non-degree granting schools.
JTPA awards are made directly from the DOL to the individual states, which
are the direct recipients of the funds. Each state then allocates funding to a
local grantee, known as a Service Delivery Area ("SDA"). The Governor of each
state designates SDAs pursuant to JTPA regulations (an SDA is also referred to
as a subrecipient). Funds may also be allocated to a subrecipient that,
depending on local
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circumstances, may be a Private Industry Council, local elected official or
administrative entity. Subrecipients then identify eligible participants for
retraining and refer them to vendors for the necessary training and contracted
services.
California has 52 subrecipients. Each subrecipient allocates training
through service providers or vendors. A school becomes qualified to be a vendor
through a proposal process. Each subrecipient has its individual set of vendor
qualifications as allowed under the JTPA. Each subrecipient may allocate funding
to a vendor only through a direct contract allowing for individual referral
voucher training. The JTPA requires that all commercial for-profit schools offer
"commercially available off-the-shelf" training programs and packages. In order
to be a "commercially available off-the-shelf" training program, such course
must be sold to the general public in the course of normal business operations
at prices set forth in established catalogs or at market prices. In addition,
qualifying schools must not derive more than 90% of their annual net revenues
from students who participate in JTPA programs. A further criteria for funding
eligibility is a student job placement rate of 75%. From inception through
December 1, 1996, the Company has had a student job placement rate of
approximately 84%.
Because the JTPA imposes new regulations annually and because the DOL has
not fully developed administrative interpretations of such new regulations,
there exists some uncertainty concerning the application of the evolving rules.
New or revised interpretations of such requirements could have a material
adverse effect on the Company. In addition, changes in and new interpretations
of the applicable laws, rules or regulations could have a material adverse
effect on Prosoft's accreditation, authorization to operate, permissible
activities and cost of doing business in various states. The failure to maintain
or renew any required approval, accreditation or state authorization by Prosoft
could have a material adverse effect on the Company.
In addition, each subrecipient of JTPA funds may limit the amount of Title
III funds that are allocated per eligible student for retraining purposes. The
cost of retraining is dependent upon the type of retraining desired and
currently ranges from $6,000 to $12,000 per student. The limits are determined
by either the size of the grant received, the needs of the student and/or the
funding policy of the subrecipient's policy board.
The violation by the Company of regulatory standards governing JTPA
programs could be the basis for a proceeding by the subrecipient to suspend or
terminate the Company's participation in these Title III programs. Although
there is no such proceedings pending, and the Company has no reason to believe
such a proceeding is contemplated, if such a proceeding were initiated against
the Company, and resulted in a substantial curtailment of the Company's
participation in JTPA programs, the Company would be adversely effected. In
addition, if the CPPVE were to determine that the Company misappropriated JTPA
funds or failed to deliver the training as contracted, the Company could be
required to repay such funds as outlined in each contract executed with each
subrecipient.
CPPVE regulations contain specific requirements governing the
establishment of new main campuses, branch campuses and classroom locations at
which students qualifying for JTPA funds receive instruction. The Company
intends to continue to seek CPPVE approvals for certain of its new locations if
and when it determines that such locations warrant JTPA type training. To date,
the Company has not sought CPPVE approval for its new locations.
Should the CPPVE change its regulation with respect to this approval process, or
delay approvals of new locations beyond the current approval time rate, the
Company's vocational business may be adversely affected. In addition, the United
States Department of Education directs the CPPVE to assess the administrative
capability of each school participating in federal retraining programs. A
finding by the CPPVE that a school has failed to satisfy administrative
capability criteria may result in a suspension or revocation of that school's
ability to operate.
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CPPVE regulations also contain specific requirements governing curriculum
and course content for JTPA funded programs. While Prosoft has obtained all
approvals for the courses of instruction that are currently offered as well as
the projected 1996 and 1997 course offerings, in the event that any Prosoft site
is determined by the CPPVE to have offered a course of instruction without
having obtained the proper approvals, Prosoft can be placed on probation by the
CPPVE for a specific period of time not to exceed two years, and can be ordered
to post a bond and to refrain from entering into any new agreements for any
course of instruction. In such a case, the CPPVE may order the Company to
reimburse all reasonable costs and expenses on behalf of the affected student.
During the period December 8, 1995 to October 31, 1996, three southern
California governmental agencies accounted for approximately 74% of the
Company's total revenues. Each of these agencies provided JTPA vocational
training funds for students in the Company's Training Centers. Although
substantially all of the Company's revenues to date have been generated from
JTPA vocational training and these three agencies, the Company expects a
significant majority of its revenues in the future will come from
Internet/Intranet training, and its dependence on these agencies and its
exposure to state and federal regulations discussed above will diminish.
EMPLOYEES
As of December 1, 1996, Prosoft had 164 full-time employees and plans to
hire additional support, executive, and instructor staff as new Training Centers
open across the country. The current employees have considerable experience in
all areas of vocational and commercial advanced technology school management,
education and training.
PROPERTIES
The Company's headquarters are located at 7100 Knott Avenue, Buena Park,
California, a 22,700 square foot facility on which the Company pays rent on a
month-to-month basis. Prosoft and its Buena Park landlord have agreed that this
lease will terminate on February 28, 1997. The Company has entered into a letter
of intent for a new 17,000 square foot headquarters facility located in Santa
Ana, California. The new facility will be leased for a period of 30 months,
beginning March 1, 1997, with monthly lease payments of approximately $18,000.
As of December 1, 1996, the Company had entered into leases for commercial space
in the following locations:
<TABLE>
<CAPTION>
LOCATION SQUARE FOOTAGE MONTHLY LEASE RENT EXPIRATION
<S> <C> <C> <C>
Buena Park, CA* 22,700 $25,000 Month-to-month
Carson, CA 6,893 $ 8,616 December 1999
North Hollywood, CA* 3,000 $ 3,000 April 1999
Palmdale, CA 5,000 $ 3,100 Month-to-month
Atlanta, GA** 3,127 $ 3,648 December 2001
New York, NY* 5,558 $ 7,410 August 1999
Dallas, TX* 2,000 $ 1,500 Month-to-month
Vienna, VA** 3,497 $ 5,732 November 2001
Bellevue, WA** 3,550 $ 5,547 November 2001
</TABLE>
- -------------------
*Open Training Center
** In Process of Opening
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In addition, Prosoft has entered into the Affiliate Program with several
independent training, consulting, distribution and/or reseller companies under
which the affiliates provide space to ProSoft for its Training Centers. See
"Marketing." Prosoft's use of such affiliates' space is not subject to a lease
or sublease arrangement, but rather is set forth in an agreement under which
Prosoft is given use of such affiliates' facilities at certain times for the
providing of Internet/Intranet training in exchange for the payment of
commissions or royalties to such affiliates. The lease or rental agreements
reside with the affiliate and Prosoft has no fixed obligation or liability for
this rent. Prosoft is obligated to pay such affiliates a royalty of up to 5%
that is directly tied to the training revenues generated at such affiliates'
sites. In addition, the Company is responsible for all necessary tenant
improvements relating to the Training Centers made at the affiliates' locations,
which can range anywhere from $5,000 to $50,000 per site, and in the event that
any such affiliation is terminated prior to the expiration of the contract,
Prosoft would have to write off the remaining value of those improvements,
subject to certain reimbursement obligations on the part of some affiliates. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS --Liquidity and Capital Resources." These affiliate contracts can
only be terminated by the affiliate for cause or if certain attendance
thresholds are not met during the first 90 days. All future affiliate contracts
will only permit an affiliate to terminate the contract for cause. As of
December 1, 1996, the Company operated twelve Training Centers and was in the
process of opening six additional Training Centers under this type of
arrangement in the following locations:
<TABLE>
<CAPTION>
LOCATION SQUARE FEET AFFILIATE ROYALTY
<S> <C> <C> <C>
Opened -
South Plainfield, NJ 1,600 Polmar Inc 3%
Brentwood, TN 1,520 National Technology Group 5%
Jacksonville, FL 1,400 Florida Supplies and Solutions 5%
Springfield, PA 760 Valens Information Systems 3%
Marlborough, MA 750 Merisel, Inc. 0%
Owings Mills, MD 750 Valens Information Systems 3%
Durham, NC 720 National Technology Group 3%
Greenville, SC 720 Computerland of Greenville, SC 3%
Greensboro, NC 700 National Technology Group 3%
St. Louis, MO 660 G.A. Sullivan 5%
Charlotte, NC 650 National Technology Group 3%
Tulsa, OK 609 Computer Resources of Tulsa 5%
In Process of Opening -
Largo, FL 1,400 Florida Supplies and Solutions 5%
Austin, TX 1,400 Database Consultants, Inc. 5%
Houston, TX 1,400 Database Consultants, Inc. 5%
Menlo Park, CA 1,000 Relient Integration Services 5%
San Diego, CA 700 Video Tex of America 5%
San Diego, CA 700 Computerland of San Diego 5%
</TABLE>
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
28
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------ --- -----------------------------------------
<S> <C> <C>
Keith D. Freadhoff 37 Chairman of the Board and Chief Executive
Officer
Donald Danks 39 President and Director
John J. Buckley 43 Chief Technology Officer
Eric W. Richardson 30 Chief Operating Officer and General Counsel
James P. Stapleton 33 Chief Knowledge Officer
Brooks A. Corbin 36 Chief Financial Officer
William E. Richardson 49 Director
</TABLE>
KEITH D. FREADHOFF. Mr. Freadhoff has served as Director, Chairman of the
Board and Chief Executive Officer of the Company since the Reorganization and
prior to that served in the same capacities with Old ProSoft from its inception.
From February 1995 to December 1995, Mr. Freadhoff operated the business of the
Company while it was owned by the Proprietorship. From 1994 through 1995, Mr.
Freadhoff served as Executive Director for the Career Planning Center, a
community based non-profit organization. From 1993 through 1994, Mr. Freadhoff
served as President of The Focus Institute, a company specializing in computer
based, classroom training. Mr. Freadhoff headed a new government training
program division for Frojen Advertising Company between 1991 and 1993. Mr.
Freadhoff began his training background by forming Oasis Corporate Education and
Training in 1987. Oasis was a customized training company that developed
courseware for manufacturing, financial, service and public organizations. Mr.
Freadhoff completed graduate level coursework in the University of Southern
California School of Business Management and graduated from the University of
Nebraska in 1982.
In November 1991, Oasis filed for bankruptcy protection and Mr. Freadhoff
filed for personal bankruptcy. As a result of these bankruptcies, Mr. Freadhoff
was unable to pay state and federal taxes due for the years 1992 through 1994
totaling approximately $55,000 and was also personally liable for unpaid state
and federal payroll taxes for Oasis during the same time period totaling
approximately $225,000. Mr. Freadhoff's personal tax returns and Oasis's
payroll tax filings were all made on a timely basis, but without payment due to
financial difficulties arising out of the Oasis bankruptcy. In 1995 and 1996,
Mr. Freadhoff made payments on these taxes, reducing the total obligations owing
the Internal Revenue Service ("IRS") and California Franchise Tax Board ("CFTB")
to approximately $167,000 inclusive of penalties and interest. The IRS and CFTB
have filed tax liens against Mr. Freadhoff for these unpaid taxes. Mr.
Freadhoff intends to pay down these delinquent taxes over the next six to twelve
months.
DONALD DANKS. Mr. Danks has served as Director and President of the
Company since the Reorganization and prior to that served in the same capacities
with Old ProSoft from its inception. From 1991 through 1995, Mr. Danks was
President and Chief Executive Officer of Advantage Life Products, Inc.
("Advantage"), a publicly traded consumer products company. From 1989 to 1991,
Mr. Danks was the Chief Operating Officer for Advantage. Mr. Danks has
extensive experience in strategic planning, capital formation and the
development and implementation of national marketing strategies. Mr. Danks
graduated from the University of California, Los Angeles, in 1979.
JOHN J. BUCKLEY. Mr. Buckley has served as the Chief Technology Officer
of the Company since the Reorganization and prior to that served in the same
capacities with Old ProSoft which he joined in February 1996. Mr. Buckley was
Vice President of Business Development for Gestalt Systems, Inc., an Internet
training company, from July 1993 through January 1996. From May 1992 through
June 1993, Mr. Buckley was an Information Technology Consultant to corporations
in the Washington, D.C. metropolitan area, where he specialized in the design
and implementation of Novell LANs. From October 1987 through April 1992, Mr.
Buckley served as President of Communication Services International, a company
specializing in LAN consulting and implementation services for corporations
29
<PAGE>
in the Mid-Atlantic U.S. Mr. Buckley graduated from the University of Maryland
at College Park with a BA in Political Science in 1974, and earned an MBA in
1976 from the same institution.
ERIC W. RICHARDSON. Mr. Richardson has served as General Counsel of the
Company since June 1996 and became Chief Operating Officer in December 1996.
From September 1994 through June 1996, Mr. Richardson was an attorney at
Shearman & Sterling, where he specialized in the practice of real estate,
banking and corporate law. From February 1994 through August 1994, he was Vice
President of the Focus Institute. Prior to that, he was an attorney at Milbank,
Tweed, Hadley & McCloy from October 1991 through February 1994. Mr. Richardson
received his J.D. degree in 1991 from the University of Michigan and graduated
from the University of Southern California with a B.A. degree in Political
Science in 1988. Eric W. Richardson is not related to William E. Richardson, a
Director of the Company.
JAMES P. STAPLETON. Mr. Stapleton became Chief Knowledge Officer of the
Company in December 1996 and served as the Chief Operating Officer of the
Company from May 1996 until December 1996. Prior thereto, Mr. Stapleton served
as the Chief Financial Officer since he joined the Company in March 1996. Mr.
Stapleton was the Chief Financial Officer of BioTek Solutions, Inc., a life-
sciences company, from December 1995 through February 1996. Prior to that, Mr.
Stapleton was employed in a variety of positions for Advantage Life Products,
Inc. From 1992 though 1995, Mr. Stapleton was Executive Vice President and Chief
Financial Officer of Advantage. From March 1991 through May of 1992 Mr.
Stapleton was Vice President of Sales - Western U.S., and from May 1987 through
March of 1991, Mr. Stapleton was Vice President: Finance and Operations of
Advantage. Mr. Stapleton graduated from the University of California at Irvine
with an MBA in 1995, and from the University of Washington with a BA in
Economics in 1985.
BROOKS A. CORBIN. Mr. Corbin has served as Chief Financial Officer since
he joined the Company in May 1996. From 1995 through 1996, Mr. Corbin was Chief
Financial Officer for Hastl Acquisitions, Inc., an import-export company. In
February 1996, Hastl filed for Chapter 11 bankruptcy protection. Prior to 1995,
Mr. Corbin worked for six years as a business consultant to start-up and
troubled companies. He started his career with Price Waterhouse in 1982. Mr.
Corbin graduated from Stanford University with BAs in Economics and
International Relations in 1982, and from the University of California, Los
Angeles with an MBA in Finance and Real Estate in 1987. Mr. Corbin is a member
of the AICPA.
WILLIAM E. RICHARDSON. Mr. Richardson has served as a member of the Board
of Directors of the Company since the Reorganization and prior to that served as
a member of the Board of Directors of Old ProSoft beginning in February 1996.
Mr. Richardson co-founded Performance Consulting International ("PCI"), a
management consulting and training firm, in 1995 where he has served as
Principal Director. Prior to founding PCI, Mr. Richardson served as CEO for
Bird Products Corporation from 1993 to 1995 and CITATION Computer Systems from
1984 to 1989. In addition, Mr. Richardson has served over sixteen years in
executive management capacities with Diasonics, ADAC Laboratories and the
SmithKline Corporation. Mr. Richardson holds undergraduate degrees in Chemistry
and Mathematics from the University of Nebraska and an EMBA from Columbia
University. He currently is a member of the Executive Advisory Council,
Graduate School of Management and the Advisory Board for Entrepreneurial
Management at the University of California. William E. Richardson is not
related to Eric W. Richardson, the Company's Chief Operating Officer and General
Counsel.
30
<PAGE>
SUMMARY COMPENSATION TABLE
The following sets forth certain summary compensation information
concerning the named executive officers of the Company. No other executive
officer of the Company received more than $100,000 in compensation during the
period December 8, 1995 to July 31, 1996.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------
NAME AND PERIOD ENDING OTHER ANNUAL
PRINCIPAL POSITION JULY 31, 1996 SALARY COMPENSATION
------------------ ------------- ------------------- ------------
<S> <C> <C> <C>
Keith D. Freadhoff(1) 1996 $35,000 $190,500(2)
Chairman of the Board and Chief Executive Officer
Donald Danks(1) 1996 $35,000 $190,500(2)
President
</TABLE>
- ----------------
(1) Mr. Freadhoff became Chief Executive Officer and Mr. Danks President of the
Company in March 1996 upon completion of the Reorganization. The amounts
disclosed include compensation received as executive officers of Old
ProSoft prior to the Reorganization, as well as compensation received as
executive officers of the Company. Neither Mr. Freadhoff nor Mr. Danks has
been granted any stock options by the Company.
(2) Upon the formation of Old ProSoft, Mr. Feadhoff and Mr. Danks each received
1,000,000 shares of Old ProSoft Common Stock in exchange for $9,500. For
financial statement purposes, these shares were valued at $.20 per share
and the receipt thereof was treated as compensation of $190,500 to each of
Mr. Freadhoff and Mr. Danks.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company presently does not have a compensation committee or other
committee of the Board of Directors performing similar functions. Messrs.
Freadhoff and Danks are each officers of the Company and, as members of the
Board of Directors, participated in deliberations of the Board concerning
executive officer compensation.
COMPENSATION OF BOARD OF DIRECTORS
Directors of the Company do not receive compensation for serving on the
Board of Directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company believes that certain provisions of its Restated Articles of
Incorporation ("Articles") and Bylaws will be useful to attract and retain
qualified persons as directors and officers. The Company's Articles limit the
liability of directors to the fullest extent permitted by Nevada law. This is
intended to allow the Company's directors the benefit of Nevada Corporation Law
which provides that directors of Nevada corporations may be relieved of monetary
liabilities for breach of their fiduciary duties as directors, except under
certain circumstances, including (i) acts or omissions which involve intentional
misconduct, fraud or a knowing violation of law, or (ii) the payment of unlawful
distributions. The Company's Bylaws generally require the Company to indemnify,
as well as to advance expenses, to its directors and its officers to the fullest
extent permitted by Nevada law upon receipt of an undertaking by or on behalf of
such director or officer to repay such amount if it should be ultimately
determined that they are not entitled to indemnification by the Company. The
Company has also entered into indemnification agreements with its directors and
officers which similarly provide for the indemnification and advancement of
expenses by the Company.
The Company has obtained officer and director liability insurance with
respect to liabilities arising out of certain matters, including matters arising
under the Securities Act.
31
<PAGE>
There is no pending litigation or proceeding involving a director, officer,
associate or other agent of the Company as to which indemnification is being
sought, nor is the Company aware of any threatened litigation that may result in
claims for indemnification by any director, officer, associate or other agent.
EMPLOYMENT AGREEMENTS
The Company has not entered into any employment agreements with its
executive officers.
STOCK OPTION PLAN
In 1996, the Board of Directors and stockholders of the Company approved
the adoption of a 1996 Stock Option Plan (the "1996 Plan"), for which 750,000
shares of Common Stock are reserved for issuance on exercise of options. The
following is a brief summary of the material features of the 1996 Plan.
The 1996 Plan calls for the granting of options to purchase up to 750,000
shares of the Company's Common Stock. No employee, director or consultant may
be granted options to acquire more than 250,000 shares during any one-year
period under the 1996 Plan. Shares covered by options which terminate without
exercise are available for issuance upon the grant of additional options. The
number and kind of shares subject to the 1996 Plan and any outstanding options
under the 1996 Plan will be appropriately adjusted in the event of a stock
split, stock dividend, reorganization or other specified changes in the
capitalization of the Company. The 1996 Plan allows for the grant of either
incentive stock options or nonstatutory stock options.
The 1996 Plan is administered by the Company's Board of Directors, which
has the sole authority to determine which eligible persons shall receive options
and the terms and provisions of the options. The Board also has the full power
and authority to interpret the provisions of the 1996 Plan and any option
granted under the 1996 Plan. The Board may delegate administration of the 1996
Plan to a committee of not less than two members of the Board.
Employees, directors and consultants of the Company and any subsidiary of
the Company are eligible to receive options under the 1996 Plan, with only
employees eligible to receive incentive stock options. At December 1, 1996,
approximately 94 persons were eligible to participate in the 1996 Plan. The
Board has the discretion to set the exercise price for options granted under the
1996 Plan, provided that the exercise price per share for each incentive stock
option cannot be less than the fair market value on the date of grant and the
exercise price per share for each nonstatutory stock option cannot be less than
85% of the fair market value on the date of grant; provided, further, that the
exercise price per share for each option granted to a person owning greater than
10% of the total combined voting power of all classes of stock of the Company (a
"Restricted Stockholder") cannot be less than 110% of the fair market value on
the date of grant. The Board also has broad discretion as to the other terms
and conditions upon which options granted shall be exercisable, but under no
circumstances will an option have a term exceeding ten years from the date of
grant, nor may an option granted to an employee who is not an officer or
director be exercisable at a rate of less than 20% per year.
32
<PAGE>
The purchase price for shares issued under the 1996 Plan shall be paid by
cash or such other means deemed acceptable by the Board, including the payment
of all or part of the exercise price with shares previously acquired by the
optionee. The Company may also facilitate the cashless exercise of options
through customary brokerage arrangements.
Each option will expire on the date established by the Board for that
option, except that no option may be exercised later than ten years after the
date of grant and no incentive stock option granted to a Restricted Stockholder
may be exercised later than five years after the date of grant. Options
generally terminate upon the termination of the optionee's employment, except
that the Board may provide in the option agreement that the vested portion of
the option at the time of termination may be exercisable for up to three months
after termination for any reason other than death or disability, and for up to
one year after termination in the event of death or disability. The Board also
has the authority to extend the post-termination exercise period, although not
beyond the original option expiration date, and to accelerate unvested portions
of an option upon the termination of employment. Options are not transferable
by the optionee other than by will or the laws of descent and distribution.
The 1996 Plan provides that in the case of certain reorganizations, mergers
or consolidations of the Company with one or more corporations, or the sale of
substantially all of the Company's assets, all outstanding options, including
unvested installments, shall be accelerated and be exercisable in full beginning
immediately prior to the consummation of the transaction unless such options are
assumed in some manner as part of the transaction or new options or securities
are substituted for them.
The 1996 Plan provides that the Board may at any time amend or terminate
the 1996 Plan, although no amendment or termination may adversely affect any
previously granted option without the consent of the holder of the option.
Unless sooner terminated by the Board, the 1996 Plan will terminate in March
2006.
As of December 1, 1996, there were options outstanding under the 1996 Plan
to purchase 750,000 shares of Common Stock, with exercise prices ranging from
$3.50 to $20.00 per share and termination dates ranging from January 1997 to
December 1999. The options under the 1996 Plan vest over varying lengths of time
pursuant to various option agreements that the Company has entered into with the
grantees of such options.
OTHER STOCK OPTIONS
As a result of the Reorganization, nonstatutory stock options to purchase
1,042,500 shares of common stock of Old ProSoft were converted into options to
purchase 1,042,500 shares of the Company's Common Stock on substantially the
same terms and conditions as options granted under the 1996 Plan. As of July
31, 1996, all 1,042,500 options remained outstanding at an exercise price of
$1.00 per share and expire on July 31, 1997. All of such options became fully
exercisable on August 1, 1996.
33
<PAGE>
CERTAIN TRANSACTIONS
REORGANIZATION
From its incorporation in May 1985 until March 1996, the Company had no
significant operations. In March 1996, the Company entered into the
Reorganization Agreement with Old ProSoft and the Old ProSoft shareholders.
Under the term of the Reorganization Agreement, the Old ProSoft shareholders
received one share of Common Stock of the Company in exchange for each of their
shares of Old ProSoft, and Old ProSoft became a wholly-owned subsidiary of the
Company. An aggregate of 4,726,250 shares were issued to the Old ProSoft
shareholders in the Reorganization and the Old ProSoft shareholders ended up
owning approximately 90% of the Company immediately after the Reorganization.
All outstanding options and warrants to purchase shares of common stock of Old
ProSoft became options or warrants to purchase the same number of shares of
Common Stock of the Company, and on the same terms, in the Reorganization. As
part of the Reorganization, all of the executive officers and directors of the
Company resigned and the executive officers and directors of Old ProSoft became
the executive officers and directors of the Company and the Company changed its
name from Tel-Fed, Inc. to ProSoft Development, Inc.
STOCK ISSUANCES BY OLD PROSOFT
Old ProSoft was incorporated in December 1995. Donald L. Danks, a director
and President of the Company, Keith D. Freadhoff, Chairman of the Board and
Chief Executive Officer of the Company, and Douglas Hartman, a former director
of the Company, each received 1,000,000 shares of Common Stock of Old ProSoft in
exchange for $9,500 in the case of Mr. Danks, a demand promissory note for
$9,500 in the case of Mr. Freadhoff, and the contribution of all of the assets
and liabilities of the Proprietorship in the case of Mr. Hartman. For financial
statement purposes, the shares of Old Prosoft were valued at $.20 per share and
the receipt thereof was treated as compensation of $190,500 to each of Mr.
Freadhoff and Mr. Danks.
William E. Richardson, a director of the Company, purchased 100,000 shares
of Old ProSoft Common Stock for $25,000 in January 1996.
From January to March 1996, Old ProSoft conducted a private offering of its
common stock and warrants to purchase common stock. Pursuant to that offering,
a total of 931,250 shares of common stock were sold for total cash consideration
of $927,500. Warrants to purchase an aggregate of 945,000 shares of common
stock at $1.00 per share were issued to investors in that private placement. Mr.
William Richardson purchased 25,000 shares and received a warrant to purchase
25,000 shares in that offering for $25,000. Although the warrants issued in that
offering were called for redemption in May 1996, the Company has agreed to
extend Mr. William Richardson's warrants until 1999.
All outstanding Old ProSoft shares were exchanged for newly-issued shares
of Company Common Stock in the Reorganization. In addition, all outstanding Old
ProSoft options and warrants became options or warrants to purchase Company
Common Stock in the Reorganization.
POST-REORGANIZATION PRIVATE PLACEMENT
During April and May of 1996, the Company conducted a private offering of
its Common Stock and warrants to purchase Common Stock. Pursuant to that
offering, a total of 430,462 shares of Common Stock were sold for total cash
consideration of $1,506,639 and warrants to purchase
34
<PAGE>
143,473 shares of Common Stock at $5.00 per share were also issued to the
investors. Mr. William Richardson purchased 10,000 shares and a warrant to
purchase an additional 3,333 shares in that offering for an aggregate of
$35,000. Mr. Eric Richardson, the Company's Chief Operating Officer and General
Counsel, purchased 8,000 shares and a warrant to purchase an additional 2,666
shares in that offering for an aggregate of $28,000. Brooks Corbin, the
Company's Chief Financial Officer, purchased 7,000 shares and a warrant to
purchase an additional 2,333 shares for an aggregate of $24,500.
The Company and Messrs. Freadhoff, Danks and Hartman agreed to use
their best efforts to cause and maintain the election to the Board of Directors
of the Company of a representative mutually agreed upon by the Company and a
majority in interest of the shares issued in that private placement. This
obligation terminated upon execution of a registration agreement entered into in
connection with the Registration Statement of which this Prospectus is a part.
OTHER
During the period January 1, 1996 through December 16, 1996, the Company
loaned approximately $142,000 to Mr. Freadhoff at an interest rate of 10% per
annum. Principal and interest on this loan is due and payable on demand.
The Company has agreed to include in the Registration Statement of which
this Prospectus is a part, 60,000, 10,666 and 9,333 shares of Common Stock,
including 25,000, 2,666 and 2,333 shares of Common Stock issuable upon exercise
of warrants, owned by Mr. William Richardson, Mr. Eric Richardson and Mr. Brooks
Corbin, respectively. The Company has entered into a registration agreement with
these three individuals and certain other Selling Stockholders in connection
with such registration of their shares. See "DESCRIPTION OF CAPITAL STOCK --
Shares Eligible For Future Sale".
All transactions between the Company and its officers, directors and
principal stockholders have been on terms no less favorable to the Company than
could have been obtained from unaffiliated third parties.
35
<PAGE>
SELLING STOCKHOLDERS
All of the Shares offered by this Prospectus are being offered by the
Selling Stockholders for their own respective accounts. The following table
sets forth certain information as of December 1, 1996, with respect to the
Selling Stockholders:
<TABLE>
<CAPTION>
Shares Shares
Owned Shares Owned
Prior to Covered by after the
Name of Selling Stockholder Offering Prospectus Offering(1)
- ------------------------------ ------------- -------------- --------------
<S> <C> <C> <C>
Alhadeff, Victor D. 9,000 9,000 0
American Ports Consultants, Inc. 95,236(2) 95,236 0
Bannister, Henry F. 3,500 3,500 0
Banyan Investment Co. 200,000(2) 200,000 0
Basson, David N. 2,858(2) 2,858 0
Beaudry, Fores J. 2,500 2,500 0
Beebe, R. Scott 50,000(2) 50,000 0
Bev Partners L.P. 21,000 21,000 0
Biggs, John W., D.C., P.C.
Pension Plan & Trust 5,000 5,000 0
Bodon, Michael G. 30,000(2) 30,000 0
Boyko, Jeffrey A., D.C., P.C.
Pension Plan 3,000 3,000 0
Buma, Ryan L. 7,150(2) 7,150 0
Butler, Jeffrey D. 8,571(2) 8,571 0
Cecala, Enrico 50,000(2) 50,000 0
Chaffetz, Alex 13,200(2) 3,200 10,000
Chaffetz, John 70,000(2) 70,000 0
Chudnovsky, Vadim 1,250 1,250 0
Clark Fork Medical Associates,
P.C. 401(k) Profit Sharing Plan 2,000 2,000 0
Clem, Brent 50,000(2) 50,000 0
Cochran, Kirby D. 150,000(2) 50,000 100,000(3)
Conners Family Trust 20,000(2) 20,000 0
Corbin, Brooks A. 84,333(2)(4) 9,333(5) 75,000
Cord Capital LLC 6,000 6,000 0
Cox, Craig & Susan 5,000 5,000 0
Cranshire Capital L.P. 5,000 5,000 0
Crilly, Patrick J. 7,143(2) 7,143 0
Cudd & Co. 30,000 30,000 0
Cunningham, Joe N. 5,733(2) 5,733 0
D'Ambrosio, Christianne C. & Kara C. 2,000(2) 2,000 0
D'Ambrosio, Louis J. 180,000(2) 180,000 0
D'Ambrosio, Louis J. & Kara C. 1,000(2) 1,000 0
Davies, Paul M. 4,500 4,500 0
Delaware Charter
Guarantee & Trust, FBO Burt Cohen IRA 12,000 12,000 0
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Shares Shares
Owned Shares Owned
Prior to Covered by after the
Name of Selling Stockholder Offering Prospectus Offering(1)
- -------------------------------- -------- ---------- -----------
<S> <C> <C> <C>
Di Meo, Rino 1,500 1,500 0
DRC Corporation Pension Plan 27,999(2) 27,999 0
Dukakis, John & Lisa 3,811(2) 3,811 0
Eagle Growth Limited Partnership 50,000 50,000 0
Eggleston, Thomas & Mary 14,400(2) 14,400 0
EGS Associates 42,000 42,000 0
Ervin, Cohen & Jessup Profit
Sharing Plan FBO Gary Freedman 3,000 3,000 0
Fliege, James R. 50,000(2) 50,000 0
Forrester, Michael & Pamela 100,000(2) 100,000 0
Gaeta, Frank 1,000 1,000 0
Gilbreth, Joseph Jr. & Jean 10,000 10,000 0
Gillen, Frank J. 12,000(2) 12,000 0
Gladstein, Gary S. 5,000 5,000 0
Gramm, Colton 2,500 2,500 0
Granville, Richard 1,000(2) 1,000 0
Harding, David 9,904(2)(6) 9,904(6) 0
Haussman Holdings N.V. 40,000 40,000 0
Heiserman & Hamer 921 921 0
IPESA NV 20,000(2) 20,000 0
Johnson Advisory Group, Inc. 2,500 2,500 0
Jones, Milton C. 50,000(2) 50,000 0
Kaveggia, Laszlo P. 1,250 1,250 0
Ketcher, Fred 2,500 2,500 0
Keyway Investments Limited 36,000 36,000 0
Khaled, Michael E. 341,200(2)(7) 131,200(7) 210,000(8)
Koch, Ronald R. Living Trust 4,000 4,000 0
Lish, Gordon E. & Bernice B. 2,500 2,500 0
Lothian, Mathew 40,000(2) 40,000 0
Lowe, Raymond E. IRA 50,000(2) 50,000 0
Malamut, Mark 1,333(2) 1,333 0
Manni, Arthur 25,000(2) 25,000 0
Marathon Investments, LTD 74,522(2)(9) 74,522(9) 0
McCulloch, Patricia 2,667(2) 2,667 0
Minkoff, Donald & Erma 2,500 2,500 0
Mock, David 150,000(2)(10) 150,000(10) 0
Modiano, Mario 15,000(2) 15,000 0
Mourlas, James & Katherine 1,000(2) 1,000 0
Nosseck, Noel 3,000 3,000 0
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Shares Shares
Owned Shares Owned
Prior to Covered by after the
Name of Selling Stockholder Offering Prospectus Offering(1)
- ------------------------------ ------------- -------------- --------------
<S> <C> <C> <C>
Olafson, Gregory 122,583(2)(11) 122,583(11) 0
Patrou, John P. 5,000 5,000 0
Peterson, Mark 30,000(2) 30,000 0
Resource Services Ltd. Money
Purchase Pension & Profit
Sharing Trust 10,607(2)(12) 10,607(12) 0
Richardson, Eric W. 110,666(2)(13) 10,666(14) 100,000(3)
Richardson, William E. 160,000(2)(15) 60,000(15) 100,000(3)
Rizzotto, Ken & Jane 1,000(2) 1,000 0
ROPAR, LLC 15,000 15,000 0
Rosenthal, Murray H. 19,046(2) 19,046 0
Ruenitz Associates 2,000 2,000 0
Schenker, Walter Milton 3,000 3,000 0
Schmidt Family Trust 5,000 5,000 0
Sheppard, Robert 71,000(2) 71,000 0
Siegel, Richard B. 50,000(2) 50,000 0
Slawson, Steve 3,000 3,000 0
Slobe, Roger D. 8,000(2) 8,000 0
Stallman, Andrew 60,000(2)(16) 60,000(16) 0
Steps, Inc. 50,000(2) 50,000 0
Sullivan, Gregory A. 33,333(2) 33,333 0
SunAmerica Small Company
Growth Fund 250,000 250,000 0
Thomas, Luebs & Mort Profit
Sharing Plan FBO, William
Thomas 50,000(2) 50,000 0
Thomas, Homer & Mary 2,000 2,000 0
Thomas, William E.
Custodian for Kelly O'Rourke 9,600(2) 9,600 0
Travelers Indemnity Co. 110,000 110,000 0
Trimble, Kelly 120,000(2) 20,000 100,000(13)
Turnbow, Lynn 120,000(2) 120,000 0
Vanderhoff, Michael D. 280,000(2)(17) 200,000(17) 80,000(18)
Weinstein, Ronald A. 9,000 9,000 0
Whittier Equities Corp. 5,000 5,000 0
Wood, Mark 33,333(2) 33,333 0
Wood, Mark & Jerri 20,000(2) 20,000 0
Young, Kenneth M. 50,000(2) 50,000 0
Zane & Alice Feldman Trust 7,142(2) 7,142 0
--------- --------- -------
4,137,291 3,387,291 750,000
========= ========= =======
</TABLE>
- ----------------
(1) Assumes that each Selling Stockholder sells all of the Shares to which this
Prospectus relates.
(2) These Selling Stockholders have agreed generally not to sell, under this
Prospectus, more than 1% of their respective Shares for each month that
38
<PAGE>
elapses after November 27, 1996 unless the consent of the Company is
obtained. See "DESCRIPTION OF CAPITAL STOCK -- Shares Eligible for Future
Sale."
(3) Represents 1.3% of the Company's shares after this offering.
(4) Includes 75,000 shares subject to a currently exercisable option and 2,333
shares subject to a currently exercisable warrant.
(5) Includes 2,333 shares subject to a currently exercisable warrant.
(6) Includes 2,476 shares subject to a currently exercisable warrant.
(7) Includes 25,000 shares subject to a currently exercisable warrant.
(8) Represents 2.8% of the Company's shares after this offering.
(9) Includes 31,665 shares subject to a currently exercisable warrant.
(10) Includes 120,000 shares subject to a currently exercisable warrant.
(11) Includes 55,000 shares subject to a currently exercisable warrant.
(12) Includes 5,607 shares subject to a currently exercisable warrant.
(13) Includes 100,000 shares subject to a currently exercisable option and 2,666
shares subject to a currently exercisable warrant.
(14) Includes 2,666 shares subject to a currently exercisable warrant.
(15) Includes 25,000 shares subject to a currently exercisable warrant.
(16) Includes 60,000 shares subject to a currently exercisable warrant.
(17) Includes 50,000 shares subject to a currently exercisable warrant.
(18) Represents 1.1% of the Company's shares after this offering.
39
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's capital stock at December 1, 1996, and as
adjusted to reflect the sale by the Company of the Shares offered hereby, (i) by
each person who is known by the Company to be the beneficial owner of more than
5% of the Common Stock of the Company, (ii) by each of the Company's directors,
and (iii) by all directors and executive officers as a group. Except as
otherwise noted, each named beneficial owner has sole voting and investment
power with respect to the shares owned.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Name of Individual Owned Prior to Shares Owned After
or Identity of Group(1) the Offering to be Sold the Offering
- ----------------------------------- ----------------------- ------------- --------------------
Number Percent Number Percent
------------ -------- --------- --------
<S> <C> <C> <C> <C> <C>
Keith D. Freadhoff 725,000 9.9% -- 725,000 9.4%
Douglas Hartman 720,000 9.8% -- 720,000 9.3%
Donald L. Danks 716,500 9.7% -- 716,500 9.3%
William E. Richardson 160,000(2) 2.2% 60,000(2) 100,000 1.3%
All directors and executive 2,188,099(3) 28.2% 79,999(4) 2,108,100 26.0%
officers as a group (7 persons)
</TABLE>
_______________________
(1) The address of each of Messrs. Freadhoff, Danks, Hartman and
Richardson is c/o the Company, 7100 Knott Avenue, Buena Park,
California 90620. Unless otherwise noted, the Company believes that
all persons named in the table have sole voting and investment power
with respect to all shares of stock beneficially owned by them.
(2) Includes 25,000 shares issuable pursuant to warrants exercisable
within 60 days of the date of this Prospectus.
(3) Includes 404,999 shares issuable pursuant to options and warrants
exercisable within 60 days of the date of this Prospectus.
(4) Includes 29,999 shares issuable pursuant to warrants exercisable
within 60 days of the date of this Prospectus.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, $0.001 par value per share, of which 7,350,604 shares of Common
Stock were issued and outstanding as of December 1, 1996.
The holders of outstanding shares of Common Stock are entitled to share
ratably in dividends declared out of assets legally available therefor at such
time and in such amounts as the Board of Directors may from time to time
lawfully determine. Each holder of Common Stock is entitled to one vote for
each share held. Cumulative voting in elections of directors and all other
matters brought before stockholders meetings, whether they be annual or special,
is not provided for under the Company's Articles or Bylaws. However, under
certain circumstances, cumulative voting rights in the election of the Company's
directors may exist under California law. See "DESCRIPTION OF CAPITAL STOCK -
Application of California GCL". The Common Stock is not entitled to conversion
or preemptive rights and is not subject to redemption
40
<PAGE>
or assessment. Upon liquidation, dissolution or winding up of the Company, any
assets legally available for distribution to stockholders as such are to be
distributed ratably among the holders of the Common Stock at that time
outstanding. The Common Stock presently outstanding is, and the Common Stock
issued in this offering will be, fully paid and nonassessable.
The Transfer Agent for the Company's Common Stock is Interwest Transfer
Company, Inc.
SHARES ELIGIBLE FOR FUTURE SALE
On December 1, 1996, the Company had 7,350,604 shares of Common Stock
outstanding, assuming no exercise of the outstanding stock options or warrants,
which total 2,277,247 shares.
None of the outstanding shares of Common Stock have been registered for
sale under the Securities Act of 1933, as amended (the "Securities Act"). These
shares may not be sold unless registered under the Securities Act or sold
pursuant to an applicable exemption from registration such as Rule 144 of the
Securities Act. Only 286,723 of such shares are currently eligible for sale
under Rule 144. In general, under Rule 144, as currently in effect, subject to
the satisfaction of certain other conditions, a person, including an affiliate
of the Company (or persons whose shares are aggregated), who has owned
restricted shares of Common Stock beneficially for at least two years is
entitled to sell, within any three-month period, a number of shares that do not
exceed the greater of 1% of the total number of outstanding shares of the same
class or, if the Common Stock is quoted on NASDAQ, the average weekly trading
volume during the four calendar weeks preceding the sale. Any person who has
not been an affiliate of the Company for at least the three months immediately
preceding the sale, and who has beneficially owned shares of Common Stock for at
least three years, is entitled to sell such shares under Rule 144 without regard
to any of the limitations described above.
An aggregate of 3,387,291 shares are being registered for sale by the
Selling Stockholders under this Registration Statement. In connection with such
registration, holders of 2,660,291 of these shares have entered into an
agreement with the Company relating to the sale of shares under this Prospectus
(the "Registration Agreement"). Under the Registration Agreement, the Company
has agreed to include those shares in this Prospectus and the stockholders have
agreed not to sell under this Prospectus more than 1% of their Shares for each
month that elapses after November 27, 1996, without the written consent of the
Company.
To the extent the Company allows shares in excess of this amount to be sold
it has agreed to do so only on a pro rata basis among all stockholders who are
parties to the Registration Agreement, except the Company may, in its
discretion, allow Selling Stockholders to sell amounts less than 1,000 shares
without regard to the percentage of that stockholder's shares. Such
stockholders have also agreed that, in the event of any future underwritten
public offering of
41
<PAGE>
the Company's securities they will not sell their shares for a period of 180
days after the closing of such offering without the written consent of the
managing underwriter.
The Company also intends to register up to 1,792,500 shares issuable upon
exercise of outstanding options to purchase Common Stock of the Company held by
employees and consultants of the Company. As of December 1, 1996, 1,355,104 of
these options were exercisable.
The Company has had a very limited trading volume in its Common Stock to
date. Sales of substantial amounts of Common Stock of the Company under this
Registration Statement or otherwise could adversely affect the prevailing market
price of the Common Stock and could impair the Company's ability to raise
capital at that time through the sale of its securities. See "Shares Eligible
for Future Sale."
REGISTRATION RIGHTS
In connection with the recent private placement of 727,000 shares of its
Common Stock, the Company agreed to prepare, file and use its best efforts to
have declared effective a registration statement covering the shares with the
Securities and Exchange Commission. The Company has agreed to file this
registration statement no later than August 31, 1996 and to keep it effective
until November 27, 1998 or until all of such shares could otherwise be sold
under Rule 144 under the Securities Act. This Registration Statement is intended
to satisfy the obligation to the purchasers in that private placement.
Under the Registration Agreement, the Company has agreed to register
2,660,291 shares of Common Stock held by certain investors in the Company. See
"Shares Eligible for Future Sale."
Investors in an earlier private placement by the Company received certain
piggyback registration rights with respect to a portion of the shares issuable
to them upon exercise of the warrants received in that offering. Generally,
those shareholders and others receiving warrants related to that offering shall
be entitled to include up to 50% of their warrant shares in any registration
statement filed by the Company after the closing of the Company's initial public
offering, subject to possible cutbacks by the underwriters, if any, in the
offering covered by that registration statement. A total of 116,579 shares of
Common Stock are issuable or have been issued upon exercise of warrants relating
to that private placement. Under the Registration Agreement, the Company has
agreed to include all of those warrant shares in this Prospectus, as well as all
430,462 shares issued in that private placement.
Another shareholder of the Company has certain piggyback registration
rights with respect to 120,000 shares of Common Stock issuable upon exercise of
a warrant held by him. All of those shares are included in this Prospectus.
No other shareholders of the Company have registration rights with respect
to the Common Stock which they own or have the right to acquire.
NEVADA ANTI-TAKEOVER LAWS AND CERTAIN CHARTER PROVISIONS
Nevada's "Combination with Interested Stockholders Statute," Nevada Revised
Statutes 78.411-78.444, which applies to Nevada corporations having at least 200
stockholders, prohibits an
42
<PAGE>
"interested stockholder" from entering into a "combination" with the
corporation, unless certain conditions are met. A "combination" includes (a) any
merger with an "interested stockholder," or any other corporation which is or
after the merger would be, an affiliate or associate of the interested
stockholder, (b) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of assets, in one transaction or a series of transactions, to an
"interested stockholder," having (i) an aggregate market value equal to 5% or
more of the aggregate market value of the corporation's assets, (ii) an
aggregate market value equal to 5% or more of the aggregate market value of all
outstanding shares of the corporation, or (iii) representing 10% or more of the
earning power or net income of the corporation, (c) any issuance or transfer of
shares of the corporation or its subsidiaries, to the "interested stockholder,"
having an aggregate market value equal to 5% or more of the aggregate market
value of all the outstanding shares of the corporation, (d) the adoption of any
plan or proposal for the liquidation or dissolution of the corporation proposed
by the "interested stockholder," (e) certain transactions which would have the
effect of increasing the proportionate share of outstanding shares of the
corporation owned by the "interested stockholder," or (f) the receipt of
benefits, except proportionately as a stockholder, of any loans, advances or
other financial benefits by an "interested stockholder." An "interested
stockholder" is a person who (i) directly or indirectly owns 10% or more of the
voting power of the outstanding voting shares of the corporation or (ii) an
affiliate or associate of the corporation which at any time within three years
before the date in question was the beneficial owner, directly or indirectly, of
10% or more of the voting power of the then outstanding shares of the
corporation.
A corporation to which the statute applies may not engage in a
"combination" within three years after the interested stockholder acquired its
shares, unless the combination or the interested stockholder's acquisition of
shares was approved by the board of directors before the interested stockholder
acquired the shares. If this approval was not obtained, then after the three-
year period expires, the combination may be consummated if all the requirements
in the Articles of Incorporation are met and either (a)(i) the board of
directors of the corporation approves, prior to such person becoming an
"interested stockholder," the combination or the purchase of shares by the
"interested stockholder" or (ii) the combination is approved by the affirmative
vote of holders of a majority of voting power not beneficially owned by the
"interested stockholder" at a meeting called no earlier than three years after
the date the "interested stockholder" became such or (b) the aggregate amount of
cash and the market value of consideration other than cash to be received by
holders of common shares and holders of any other class or series of shares
meets the minimum requirements set forth in Sections 78.411 through 78.443,
inclusive, and prior to the consummation of the combination, except in limited
circumstances, the "interested stockholder" will not have become the beneficial
owner of additional voting shares of the corporation.
Nevada's "Control Share Acquisition Statute," Nevada Revised Statute
(S)78.378-78.379, prohibits an acquiror, under certain circumstances, from
voting shares of a target corporation's stock after crossing certain threshold
ownership percentages, unless the acquiror obtains the approval of the target
corporation's stockholders. The Control Share Acquisition Statute only applies
to Nevada corporations with at least 200 stockholders, including at least 100
record stockholders who are Nevada residents, and which do business directly or
indirectly in Nevada. While the Company does not currently exceed these
thresholds, it may well do so in the near future. In addition, although the
Company does not presently "do business" in Nevada within the meaning of the
Control Share Acquisition Statute, it plans to open offices there shortly.
Therefore, it is likely that the Control Share Acquisition Statute will apply to
the Company. The statute specifies three thresholds: at least one-fifth but
less than one-third, at least one-third but less than a majority, and a majority
or more,
43
<PAGE>
of all the outstanding voting power. Once an acquiror crosses one of the above
thresholds, shares which it acquired in the transaction taking it over the
threshold or within ninety days become "Control Shares" which are deprived of
the right to vote until a majority of the disinterested stockholders restore
that right. A special stockholders' meeting may be called at the request of the
acquiror to consider the voting rights of the acquiror's shares no more than 50
days (unless the acquiror agrees to a later date) after the delivery by the
acquiror to the corporation of an information statement which sets forth the
range of voting power that the acquiror has acquired or proposes to acquire and
certain other information concerning the acquiror and the proposed control share
acquisition. If no such request for a stockholders' meeting is made,
consideration of the voting rights of the acquiror's shares must be taken at the
next special or annual stockholders' meeting. If the stockholders fail to
restore voting rights to the acquiror or if the acquiror fails to timely deliver
an information statement to the corporation, then the corporation may, if so
provided in its articles of incorporation or bylaws, call certain of the
acquiror's shares for redemption. The Company's Restated Articles of
Incorporation and Bylaws do not currently permit it to call an acquiror's shares
for redemption under these circumstances. The Control Share Acquisition Statute
also provides that the stockholders who do not vote in favor of restoring voting
rights to the Control Shares may demand payment for the "fair value" of their
shares (which is generally equal to the highest price paid in the transaction
subjecting the stockholder to the statute).
Certain provisions of the Company's Bylaws which are summarized below may
affect potential changes in control of the Company. The Board of Directors
believes that these provisions are in the best interests of stockholders because
they will encourage a potential acquiror to negotiate with the Board of
Directors, which will be able to consider the interests of all stockholders in a
change in control situation. However, the cumulative effect of these terms may
be to make it more difficult to acquire and exercise control of the Company and
to make changes in management more difficult.
The Bylaws provide that each director will serve for a three-year term and
that approximately one-third of the directors are to be elected annually. The
Company may have three to twenty-five directors as determined from time to time
by the Board, which currently consists of three members. Between stockholder
meetings, the Board may appoint new directors to fill vacancies or newly created
directorships. A director may be removed from office by the affirmative vote of
66-2/3% of the combined voting power of the then outstanding shares of stock
entitled to vote generally in the election of directors.
The Bylaws further provide that stockholder action must be taken at a
meeting of stockholders and may not be effected by a consent in writing, unless
such consent is unanimous. Special meetings of stockholders may be called only
by a majority of the Board of Directors. If a stockholder wishes to propose an
agenda item for consideration, they must give a brief description of each item
and written notice to the Company (i) in the case of an annual meeting called
for a date within 30 days of the anniversary date of the immediately preceding
annual meeting, not less than 120 days in advance of the anniversary date of the
proxy statement for the previous year's annual meeting nor more than 150 days
prior to such date and (ii) in the case of an annual meeting called for a date
that is not within 30 days of the anniversary date of the immediately preceding
annual meeting, not later than 10 days following the day on which notice of the
date of the meeting is mailed or public disclosure of the date of the meeting is
made, whichever occurs first.
44
<PAGE>
The Bylaws generally provide that the foregoing provisions of the Bylaws
may be amended or repealed only with the affirmative vote of at least a majority
of the outstanding shares. This provision exceeds the usual majority of a
quorum vote requirement of Nevada law and is intended to prevent the holders of
less than 50% of the voting power from circumventing the foregoing terms by
amending the Bylaws.
The effect of such provisions of the Company's Bylaws may be to make more
difficult the accomplishment of a merger or other takeover or change in control
of the Company. To the extent that these provisions have this effect, removal of
the Company's incumbent Board of Directors and management may be rendered more
difficult. Furthermore, these provisions may make it more difficult for
stockholders to participate in a tender or exchange offer for Common Stock and
in so doing may diminish the market value of the Common Stock. The Company is
not aware of any proposed takeover attempt or any proposed attempt to acquire a
large block of Common Stock.
The provisions described above may have the effect of delaying or deterring
a change in the control or management of the Company.
APPLICATION OF CALIFORNIA GCL
Although incorporated in Nevada, the Company is headquartered in the State
of California. Section 2115 of the California GCL ("Section 2115") provides
that certain provisions of the California GCL shall be applicable to a
corporation organized under the laws of another state to the exclusion of the
law of the state in which it is incorporated, if the corporation meets certain
tests regarding the business done in California and the number of its California
stockholders.
An entity such as the Company can be subject to Section 2115 if the average
of the property factor, payroll factor and sales factor deemed to be in
California during its latest full income year is more than 50 percent and more
than one-half of its outstanding voting securities are held of record by persons
having addresses in California. Section 2115 does not apply to corporations
with outstanding securities listed on the New York or American Stock Exchange,
or with outstanding securities designated as qualified for trading as a national
market security on NASDAQ, if such corporation has at least 800 beneficial
holders of its equity securities. Since the average of the property factor,
payroll factor and sales factor of the Company deemed to be in California during
the Company's latest fiscal year was almost 100% and over 60% of the Company's
outstanding voting securities are held of record by persons having addresses in
California, and as the Company does not currently qualify as a national market
security on NASDAQ, it is subject to Section 2115.
During the period that the Company is subject to Section 2115, the
provisions of the California GCL regarding the following matters are made
applicable to the exclusion of the law of the State of Nevada: (i) general
provisions and definitions; (ii) annual election of directors; (iii) removal of
directors without cause; (iv) removal of directors by court proceedings; (v)
filling of director vacancies where less than a majority in office were elected
by the stockholders; (vi) directors' standard of care; (vii) liability of
directors for unlawful distributions; (viii) indemnification of directors,
officers and others; (ix) limitations on corporate distributions of cash or
property; (x) liability of a stockholder who receives an unlawful distribution;
(xi) requirements for annual stockholders meetings; (xii) stockholders' right to
cumulate votes at any election of directors; (xiii) supermajority vote
requirements; (xiv) limitations on sales of assets; (xv) limitations on mergers;
(xvi) reorganizations; (xvii) dissenters' rights in connection with
45
<PAGE>
reorganizations; (xviii) required records and papers; (xix) actions by the
California Attorney General; and (xx) rights of inspection.
PLAN OF DISTRIBUTION
The sale of the Shares by the Selling Stockholders may be effected from
time to time in transactions (which may include block transactions by or for the
account of the Selling Stockholders) in the over-the-counter market or in
negotiated transactions, a combination of such methods of sale or otherwise.
Sales may be made at fixed prices which may be changed, at market prices
prevailing at the time of sale or at negotiated prices.
Selling Stockholders may effect such transactions by selling their Shares
directly to purchasers, through broker-dealers acting as agents for the Selling
Stockholders or to broker-dealers who may purchase Shares as principals and
thereafter sell the Shares from time to time in the over-the-counter market, in
negotiated transactions or otherwise. Such broker-dealers, if any, may receive
compensation in the form of discounts, concessions or commissions from the
Selling Stockholders or the purchasers for whom such broker-dealers may act as
agents or to whom they may sell as principals or otherwise (which compensation
as to a particular broker-dealer may exceed customary commissions).
Holders of 2,660,291 of the Shares have agreed to sell only certain
specified percentages of such Shares for a period of 450 days after the date of
this Prospectus. See "DESCRIPTION OF CAPITAL STOCK -- Shares Eligible for
Future Sale."
The Selling Stockholders and broker-dealers, if any, acting in connection
with such sales may be deemed to be "underwriters" within the meaning of Section
2(11) of the Securities Act and any commission received by them and any profit
on the resale of the securities by them might be deemed to be underwriting
discounts and commissions under the Securities Act. The Company has agreed to
indemnify the Selling Stockholders against certain liabilities, including
liabilities under the Securities Act.
From time to time this Prospectus will be supplemented and amended as
required by the Securities Act. During any time when a supplement or amendment
is so required, the Selling Stockholders are to cease sales until the Prospectus
has been supplemented or amended. Pursuant to the registration rights granted
to certain of the Selling Stockholders, the Company has agreed to update and
maintain the effectiveness of this Prospectus until November 1998. Certain of
the Selling Stockholders also may be entitled to sell their Shares without the
use of this Prospectus, provided that they comply with the requirements of Rule
144 promulgated under the Securities Act.
The Company has agreed to pay the fees and expenses incurred by it in
connection with the preparation and filing of the Registration Statement of
which this Prospectus is a part.
LEGAL MATTERS
The validity of the issuance of the Shares offered hereby will be passed
upon for the Company by Eric W. Richardson, Chief Operating Officer and General
Counsel to the Company. As of December 1, 1996, Mr. Richardson beneficially
owned 110,666 shares of Common Stock of the Company.
46
<PAGE>
EXPERTS
The consolidated financial statements of Prosoft I-Net Solutions, Inc. at
July 31, 1996 and for the period from December 8, 1995 (date of incorporation)
to July 31, 1996, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young, LLP, independent auditors, as set forth in their
report thereon, appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of Professional Development Institute as of
December 31, 1995, and for the period from February 1, 1995 (date of inception)
to December 31, 1995, appearing in this Prospectus and Registration Statement
have been audited by Kelly & Company, independent auditors,
as set forth in their report thereon, appearing elsewhere herein, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., a Registration Statement under the Securities
Act with respect to the Shares. This Prospectus omits certain information
contained in said Registration Statement as permitted by the rules and
regulations of the Commission. For further information with respect to the
Company and the Common Stock, reference is made to such Registration Statement,
including the exhibits thereto. Statements contained herein concerning the
contents of any contract or any other document are not necessarily complete, and
in each instance, reference is made to such contract or other document filed
with the Commission as an exhibit to the Registration Statement, or otherwise,
each such statement being qualified in all respects by such reference. The
Registration Statement, including exhibits and schedules thereto, may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, at the Chicago Regional Office, Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and at the New York
Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such materials can be obtained from the Public Reference Section of
the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission also maintains a Web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants, such as the Company, that file electronically with the
Commission.
47
<PAGE>
PROSOFT I-NET SOLUTIONS, INC. AND PREDECESSOR
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Reports of Independent Auditors
Ernst & Young LLP................................................. F-2
Kelly & Company................................................... F-3
Financial Statements of Prosoft I-Net Solutions, Inc. and Predecessor
at December 31, 1995 and July 31, 1996 and for the periods then ended
Consolidated Balance Sheets....................................... F-4
Consolidated Statements of Operations............................. F-5
Consolidated Statements of Stockholders' Equity................... F-6
Consolidated Statements of Cash Flows............................. F-7
Notes to Consolidated Financial Statements........................ F-8
Condensed Financial Statements of Prosoft I-Net Solutions, Inc. and
Predecessor at October 31, 1996 and for the three months ended
October 31, 1995 and 1996
Condensed Consolidated Balance Sheets............................. F-13
Condensed Consolidated Statements of Operations................... F-14
Condensed Consolidated Statements of Cash Flows................... F-15
Notes to Condensed Consolidated Financial Statements.............. F-16
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Prosoft I-Net Solutions, Inc.
We have audited the accompanying consolidated balance sheet of Prosoft I-Net
Solutions, Inc. (formerly known as ProSoft Development, Inc.) as of July 31,
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the period December 8, 1995 (date of incorporation) to
July 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Prosoft
I-Net Solutions, Inc. at July 31, 1996, and the consolidated results of its
operations and its cash flows for the period from December 8, 1995 (date of
incorporation) to July 31, 1996, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Orange County, California
August 28, 1996
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Owner
Professional Development Institute (a Sole Proprietorship)
We have audited the accompanying balance sheet of Professional Development
Institute (a Sole Proprietorship) as of December 31, 1995, and the related
statements of operations, Owner's deficit and cash flows for the period February
1, 1995 (date of inception) to December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Professional
Development Institute (a Sole Proprietorship) as of December 31, 1995, and the
results of its operations and its cash flows for the period February 1, 1995
(date of inception) to December 31, 1995, in conformity with generally accepted
accounting principles.
KELLY & COMPANY
Newport Beach, California
March 8, 1996
F-3
<PAGE>
PROSOFT I-NET SOLUTIONS, INC. AND PREDECESSOR
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PREDECESSOR
ENTITY COMPANY
----------------- -------------
DECEMBER 31, 1995 JULY 31, 1996
----------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 420 $ 6,466,460
Tuition receivable 89,487 766,405
Notes receivable from officers/shareholders - 85,600
Prepaid expenses and other current assets - 311,592
--------- -----------
Total current assets 89,907 7,630,057
Property and equipment:
Computer equipment and software 300,520 1,159,391
Office equipment, furniture and fixtures 335,354 453,497
--------- -----------
635,874 1,612,888
Less accumulated depreciation 29,861 245,455
--------- -----------
Other assets 70,070 -
--------- -----------
Total assets $ 765,990 $ 8,997,490
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ - $ 61,832
Accounts payable 293,305 363,414
Accrued payroll and related expenses - 88,474
Deferred revenue 38,744 -
Other accrued liabilities 16,811 -
Current portion of capital lease obligations 302,932 351,509
--------- -----------
Total current liabilities 651,792 865,229
Obligations under capital leases, net of current portion 308,671 437,532
Commitments and contingencies
Stockholders' equity (owner's deficit):
Common stock, $.001 par value:
Authorized shares - 50,000,000
Issued and outstanding shares - 7,336,404 7,336
Additional paid-in capital - 10,771,016
Note receivable from stockholder - (9,500)
Accumulated deficit - (3,074,123)
Owner's deficit (194,473) -
--------- -----------
Total stockholders' equity (owner's deficit) (194,473) 7,694,729
--------- -----------
Total liabilities and shareholders' equity (owner's deficit) $ 765,990 $ 8,997,490
========= ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
PROSOFT I-NET SOLUTIONS, INC. AND PREDECESSOR
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR ENTITY COMPANY
---------------------- --------------------
PERIOD FROM
PERIOD FROM DECEMBER 8, 1995
FEBRUARY 1, 1995 (DATE OF
(DATE OF INCEPTION) TO INCORPORATION) TO
DECEMBER 31, 1995 JULY 31, 1996
---------------------- ---------------------
<S> <C> <C>
Revenue $ 77,477 $ 907,772
Costs and expenses:
Cost of services 60,526 698,725
Sales and marketing 44,769 426,221
General and administrative 556,382 2,788,188
--------- -----------
Total costs and expenses 661,677 3,913,134
--------- -----------
Loss from operations (584,200) (3,005,362)
Interest expense 20,126 67,961
--------- -----------
Loss before provision for income taxes (604,326) (3,073,323)
Provision for state franchise tax - 800
--------- -----------
Net loss $(604,326) $(3,074,123)
========= ===========
Net loss per share $(.61)
===========
Shares used in computing net loss per share 5,011,781
===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
PROSOFT I-NET SOLUTIONS, INC. AND PREDECESSOR
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PRO-SOFT PROSOFT
PREDECESSOR DEVELOPMENT CORP. I-NET SOLUTIONS, INC.
ENTITY COMMON STOCK COMMON STOCK NOTE
----------- -------------------- -------------------- ADDITIONAL RECEIVABLE
OWNER'S PAID-IN FROM ACCUMULATED
DEFICIT SHARE AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDER DEFICIT TOTAL
----------- -------------------- -------------------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital contributions
to sole proprietorship $ 409,853 -- $ -- -- $ -- $ -- $ -- $ -- $ --
Net loss (604,326) -- -- -- -- -- -- -- --
----------------------------------------------------------------------------------------------------------
Balance at December 31,
1995 (194,473) -- -- -- -- -- -- -- --
Contribution of net
assets of Predecessor
to Pro-Soft Development
Corp. in exchange for
common stock 194,473 1,000,000 1,000 -- -- (195,473) -- -- (194,473)
Issuance of common
stock for cash, note
and services -- 3,576,250 3,576 -- -- 1,380,174 (9,500) -- 1,374,250
Conversion of accounts
payable to common stock -- 150,000 150 -- -- 37,350 -- -- 37,500
Shares outstanding prior
to reorganization -- -- -- 480,060 480 (455) -- -- 25
Acquisition of Pro-Soft
Development Corp. by the
Company -- (4,726,250) (4,726) 4,726,250 4,726 -- -- -- --
Issuance of common stock
for cash, net of issuance
costs of $338,000 -- -- -- 1,169,462 1,169 8,307,221 -- -- 8,308,390
Exercise of warrants -- -- -- 960,632 961 1,242,199 -- -- 1,243,160
Net loss -- -- -- -- -- -- -- (3,074,123) (3,074,123)
-----------------------------------------------------------------------------------------------------------
Balance at July 31,
1996 $ -- -- $ -- 7,336,404 $7,336 $10,771,016 $(9,500) $(3,074,123) $ 7,694,729
===========================================================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
PROSOFT I-NET SOLUTIONS, INC. AND PREDECESSOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR ENTITY COMPANY
---------------------- -----------------------
PERIOD FROM PERIOD FROM
FEBRUARY 1, 1995 DECEMBER 8, 1995
(DATE OF INCEPTION) TO (DATE OF INCORPORATION)
DECEMBER 31, 1995 TO JULY 31, 1996
---------------------- -----------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(604,326) $(3,074,123)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 40,441 257,454
Compensation and operating expenses paid in common stock - 397,250
Change in operating assets and liabilities:
Tuition receivable (89,487) (766,405)
Prepaid expenses and other assets (28,200) (311,592)
Accounts payable 293,305 363,414
Accrued liabilities 16,811 88,474
Deferred revenue 38,744 -
Other - 2,200
--------- ------------
Net cash used in operating activities (332,712) (3,043,328)
INVESTING ACTIVITIES
Acquisition of Predecessor, net of cash acquired - (194,893)
Acquisition of Tel-Fed, Inc., net of cash acquired - (560)
Purchases of property and equipment - (570,838)
Purchases of licenses (52,450) -
Notes receivable from officers/shareholders - (85,600)
--------- -----------
Net cash used in investing activities (52,450) (851,891)
FINANCING ACTIVITIES
Capital contributions 409,853 -
Issuance of common stock - 10,528,575
Payments on capital lease obligations (24,271) (228,728)
Proceeds from notes payable - 61,832
--------- -----------
Net cash provided by financing activities 385,582 10,361,679
--------- -----------
Increase in cash and cash equivalents 420 6,466,460
Cash and cash equivalents at beginning of period - -
--------- -----------
Cash and cash equivalents at end of period $ 420 $ 6,466,460
--------- -----------
SUPPLEMENTARY DISCLOSURE OF CASH PAID DURING THE
PERIOD FOR:
Interest $ 3,315 $ 84,772
========= ===========
Income taxes $ - $ -
========= ===========
SUPPLEMENTARY DISCLOSURE OF NONCASH FINANCING
ACTIVITIES:
Accounts payable converted to common stock $ - $ 37,500
========= ===========
Equipment acquired under capital leases $ 635,874 $ 393,460
========= ===========
</TABLE>
See accompanying notes.
F-7
<PAGE>
PROSOFT I-NET SOLUTIONS, INC. AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
COMPANY BACKGROUND
Prosoft I-Net Solutions, Inc. (Prosoft or the Company) is a Nevada
corporation (previously named Tel-Fed, Inc. and ProSoft Development, Inc.) that
is engaged in the business of training individuals in small, medium and large
organizations in Internet and Intranet technologies, with a current emphasis on
Microsoft and Internet/Intranet products and solutions.
Professional Development Institute, the predecessor entity, (a sole
proprietorship formed on February 1, 1995), acquired and developed training
curricula and commenced a marketing program for a private vocational training
institution. Its first students were enrolled in September 1995. On December
8, 1995, Pro-Soft Development Corp. was formed as a California corporation, and
effective January 1, 1996, the assets and liabilities of the Professional
Development Institute, (Predecessor) were contributed to Pro-Soft Development
Corp. in exchange for 1,000,000 shares of common stock.
In March 1996, Pro-Soft Development Corp. entered into an Agreement and
Plan of Reorganization whereby Pro-Soft Development Corp.'s shareholders
received one share of common stock of the Company in exchange for each of the
4,726,250 outstanding shares and Pro-Soft Development Corp. became a wholly
owned subsidiary of the Company. For accounting purposes, Pro-Soft Development
Corp. is deemed to be the acquiring corporation and, therefore, the transaction
is being accounted for as a reverse acquisition of the Company by Pro-Soft
Development Corp. Prior to March 31, 1996, the Company did not have operations
and at March 31, 1996, only immaterial liabilities existed. Accordingly, the
financial statements present the historical financial position and results of
operations of Pro-Soft Development Corp. and its predecessor entity,
Professional Development Institute.
The Company has incurred losses of $3,074,123 from inception, primarily due
to the start-up nature of its business. The ability of the Company to establish
itself as a successful operating entity on an ongoing basis is dependent upon
future events, including further marketing of its services and achieving
profitable operations.
BASIS OF CONSOLIDATION
The financial statements include the accounts of the Company and its wholly
owned subsidiary. All significant intercompany transactions and balances have
been eliminated in consolidation.
F-8
<PAGE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
CONCENTRATION OF BUSINESS AND CREDIT RISK
Financial instruments which potentially subject the Company to a
concentration of credit risk consist primarily of trade receivables. In the
normal course of business, the Company provides credit terms to its customers
and collateral is generally not required. The Company has not experienced any
credit losses during its existence, and does not consider its exposure to such
losses to be significant at July 31, 1996. As of July 31, 1996, three customers
accounted for 90% of total accounts receivable.
Revenues from three southern California governmental agencies aggregated
34%, 27% and 21% of revenues, respectively, in 1996 and revenues from two
southern California governmental agencies in 1995 aggregated 57% and 39% of
revenues, respectively.
ADVERTISING COSTS
The Company expenses the costs of advertising as incurred. Advertising
expenses aggregated $90,000 in 1996 and were not significant in 1995.
TAXES BASED ON INCOME
Deferred taxes are provided for items recognized in different periods for
financial and tax reporting purposes in accordance with Financial Accounting
Standards Board Statement No. 109, Accounting for Income Taxes.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding during the period presented.
LONG-LIVED ASSETS
In 1996, the Company adopted SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, which requires
impairment losses to be recorded on long-lived assets used in operations or are
expected to be disposed of, when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets
F-9
<PAGE>
are less than the carrying value of the assets. There were no impairment losses
recorded in fiscal 1996 as the result of adopting SFAS No. 121.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are computed on a straight-line basis over the lesser of the estimated useful
lives of the related assets or the lease term. The estimated useful lives range
from two to seven years.
STOCK OPTION PLANS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123). As permitted by SFAS 123, the Company intends to
continue to account for employee stock options under previous accounting
standards, and will make pro forma disclosures required by SFAS 123 in fiscal
1997.
RECOGNITION OF REVENUE AND COSTS
Tuition revenue is recognized ratably as earned over the term of the
course. Vocational training courses generally range from 20 to 37 weeks while
Internet training courses range from one to five days. Costs of providing
services to students are charged to expense as incurred.
TUITION RECEIVABLE
At various times, the Company will have unbilled receivables for tuition
earned prior to, or in excess of, billings under the terms of various contracts
with paying agencies. Tuition receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JULY 31, 1996
----------------- -------------
<S> <C> <C>
Billed tuition $58,725 $542,054
Unbilled tuition 30,762 224,351
------- --------
$89,487 $766,405
======= ========
</TABLE>
2. STOCKHOLDERS' EQUITY
FORMATION OF PRO-SOFT DEVELOPMENT CORP.
Upon the formation of Pro-Soft Development Corp. two of the founders
acquired an aggregate of 2,000,000 shares of common stock in exchange for
$19,000. For financial statement purposes, these shares were valued at $.20 per
share and compensation expense of $381,000 was recorded to reflect the
difference between the amount paid and the deemed fair market value of the
shares issued.
1996 STOCK OPTION PLAN
The ProSoft Development, Inc. 1996 Stock Option Plan (the Plan) provides
for the granting of options to purchase shares of the Company's common stock, to
employees, officers, consultants, and directors. The Plan includes nonstatutory
options (NSOs) and incentive stock options (ISOs). Options expire no later than
ten years after the date of grant.
F-10
<PAGE>
The plan allows for the issuance of up to 750,000 shares of common stock.
At July 31, 1996, options to purchase 697,500 shares of common stock at exercise
prices ranging from $3.50 to $20 per share were outstanding. At July 31, 1996,
none of the options issued under the Plan were exercisable.
As a result of the reorganization, nonstatutory stock options to purchase
1,042,500 shares of common stock of Pro-Soft Development Corp. were converted
into options to purchase 1,042,500 shares of the Company's common stock at an
exercise price of $1.00 per share, which become exercisable August 1, 1996.
During 1996, the Company issued warrants to purchase 1,496,461 shares of
common stock to purchasers of its common stock and other parties at prices
ranging from $1.00 to $11.00 per share. During 1996, warrants for 960,632
shares of common stock were exercised at prices ranging from $1.00 to $5.00, and
warrants for 49,882 were redeemed for a nominal amount. At July 31, 1996,
warrants for 485,947 shares of common stock exercisable at $1 to $11 per share
and expiring through 1999 remained outstanding.
COMMON STOCK RESERVED
At July 31, 1996, a total of 2,195,947 shares of the Company's common stock
were reserved for future exercise of stock options and warrants.
3. LEASES AND OTHER COMMITMENTS
The Company leases certain facilities as well computers and production
equipment under noncancelable, lease agreements. The Company's future minimum
lease payments under such agreements are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ---------
<S> <C> <C>
1997 $ 447,425 $ 98,182
1998 235,665 78,792
1999 99,505 59,094
2000 99,505 -
2001 94,065 -
Thereafter 31,600 -
---------- ---------
1,007,765 $ 236,068
=========
Less amounts representing interest 218,724
----------
Present value of minimum lease payments 789,041
Less current portion 351,509
----------
Obligations under capital lease, net of
current portion $ 437,532
==========
</TABLE>
F-11
<PAGE>
Assets held under capital leases are included in property and equipment and
at December 31, 1995 and July 31, 1996 had a total value of $635,874 and
$1,242,781, respectively, and a net book value of $606,013 and $1,043,822,
respectively.
Rent expense for the periods ended December 31, 1995 and July 31, 1996
totaled $20,516 and $166,763, respectively.
4. INCOME TAXES
The Predecessor's financial statements include no provision for income
taxes because, as a proprietorship, the results of operations were reported on
the individual income tax return of the owner.
There was no significant provision for federal or state income taxes for
any period as the Company has incurred operating losses and there can be no
assurance that the Company will realize the benefit of the resulting net
operating loss carryforwards.
Deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their bases for
financial reporting purposes. Temporary differences which give rise to deferred
tax assets are as follows:
<TABLE>
<CAPTION>
<S> <C>
Net operating loss carryforwards $ 960,000
Valuation allowance (960,000)
---------
Net deferred tax assets $ -
=========
</TABLE>
At July 31, 1996, the Company has net operating loss carryforwards
available to offset future federal and state taxable income of approximately
$2,600,000 and $1,300,000, respectively, that expire in 2011 and 2001,
respectively. Because of the equity transactions completed by the Company in
1996, utilization of net operating loss carryforwards for federal income tax
reporting purposes will be subject to annual limitations under the change in
ownership provisions of the Tax Reform Act of 1986.
5. NOTES PAYABLE
At July 31, 1996, notes payable consisted of a $61,832 demand note payable
to a shareholder bearing interest at 8%.
6. RELATED PARTY TRANSACTIONS
During 1996, the Company made short-term loans and advances to certain
officers and shareholders generally bearing interest at 10%.
F-12
<PAGE>
PROSOFT I-NET SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCED SHEETS
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
1996 1996
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,466,460 $ 3,085,024
Tuition receivable 766,405 991,465
Note receivable from officers/shareholders 85,600 223,263
Prepaid expenses and other current assets 311,592 297,801
----------- -----------
Total current assets 7,630,057 4,597,553
Property and equipment:
Leasehold improvements - 78,033
Computer equipment and software 1,159,391 1,639,213
Office equipment, furniture and fixtures 453,497 118,211
----------- -----------
1,612,888 1,835,457
Less depreciation and amortization 245,455 411,361
----------- -----------
1,367,433 1,424,096
Deposits on computer leases - 1,000,000
----------- -----------
Total assets $ 8,997,490 $ 7,021,649
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 61,832 $ -
Accounts payable 363,414 822,436
Accrued payroll and related expenses 88,474 264,414
Deferred revenue - 249,850
Current portion of capital leases obligations 351,509 335,734
----------- -----------
Total current liabilities 865,229 1,672,434
Obligations under capital leases, net of current portion 437,532 427,529
Stockholders' equity:
Common stock, $.001 par value:
Authorized shares - 50,000,000
Issued and outstanding shares at
October 31, 1996 - 7,350,664; and at
July 31, 1996 - 7,336,404 7,336 7,351
Additional paid-in capital 10,771,016 11,013,623
Note receivable from stockholder (9,500) (9,500)
Accumulated deficit (3,074,123) (6,089,788)
----------- -----------
Total stockholders' equity 7,694,729 4,921,686
----------- -----------
Total liabilities and stockholders' equity $ 8,997,490 $ 7,021,649
=========== ===========
</TABLE>
F-13
<PAGE>
PROSOFT I-NET SOLUTIONS, INC. AND PREDECESSOR
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR ENTITY COMPANY
------------------ -----------
THREE MONTHS ENDED OCTOBER 31,
1995 1996
------------------ -----------
<S> <C> <C>
Revenue $ 23,243 $ 513,681
Costs and expenses:
Cost of services 17,277 1,054,019
Sales and marketing 23,331 440,373
General and administrative 213,357 2,088,231
--------- -----------
Total costs and expenses 253,965 3,582,623
--------- -----------
Loss from operations (230,722) (3,068,942)
Interest income (expense) (804) 57,277
--------- -----------
Loss before provision for income taxes (231,526) (3,011,665)
Provision for state franchise tax 26 4,000
--------- -----------
Net loss $(231,552) $(3,015,665)
========= ===========
Net loss per share $ (0.41)
===========
Weighted average number of common shares outstanding 7,343,504
===========
</TABLE>
F-14
<PAGE>
PROSOFT I-NET SOLUTIONS, INC. AND PREDECESSOR
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR ENTITY COMPANY
------------------ -----------
THREE MONTHS ENDED OCTOBER 31,
1995 1996
------------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (231,552) $(3,015,665)
Adjustments to reconcile net loss to cash provided
by (used in) operating activities:
Depreciation and amortization 14,634 165,906
Changes in operating assets and liabilities:
Tuition receivable (64,202) (225,060)
Prepaid expenses and other assets 70,534 13,791
Notes payable - (61,832)
Accounts payable 45,809 459,022
Accrued payroll and related expenses 185,834 175,940
Deferred revenue 38,744 249,850
---------- -----------
Net cash provided by (used in) operating activities 59,801 (2,238,048)
---------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (118,108) (222,569)
Deposits on computer leases - (1,000,000)
Notes receivable from officers/shareholders - (137,663)
---------- -----------
Net cash (used in) investing activities (118,108) (1,360,232)
---------- -----------
FINANCING ACTIVITIES:
Capital contribution to sole proprietorship 57,076 -
Principal payments on debt and capital leases - (25,778)
Issuance of common stock - 242,622
---------- -----------
Net cash provided by financing activities 57,076 216,844
---------- -----------
Decrease in cash and cash equivalents (1,231) (3,381,436)
Cash and cash equivalents at the beginning of period 1,231 6,466,460
---------- -----------
Cash and cash equivalents at the end of period $ - $ 3,085,024
========== ===========
SUPPLEMENTARY DISCLOSURE OF CASH PAID DURING
THE PERIOD FOR:
Interest $ 804 $ 25,770
========== ===========
Income taxes $ 26 $ 4,000
========== ===========
</TABLE>
F-15
<PAGE>
PROSOFT I-NET SOLUTIONS, INC. AND PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The condensed consolidated financial statements do not include footnotes and
certain financial information normally presented annually under generally
accepted accounting principles and, therefore, should be read in conjunction
with the Company's July 31, 1996 year end financials. Accounting
measurements at interim dates inherently involve greater reliance on
estimates than at year-end. The results of operations for the three months
ended October 31, 1996 are not necessarily indicative of results that can be
expected for the full year.
The condensed consolidated financial statements included herein are
unaudited; however, they contain all adjustments (consisting of normal
accruals) which, in the opinion of the Company, are necessary to present
fairly its consolidated financial position at October 31, 1996 and its
consolidated results of operations and cash flows for the three months ended
October 31, 1996.
2. Earnings per share is based on the weighted average number of shares of
common stock and the dilutive effects of common stock equivalents (stock
options and warrants), determined using the treasury stock method.
F-16
<PAGE>
===============================================================================
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given or
made, such information and representations must not be relied upon as having
been authorized by the Company. This Prospectus does not constitute an offer to
sell or a solicitation of any offer to buy the shares of Preferred Stock by
anyone in any jurisdiction in which such offer or solicitation is not
authorized, or in which the person making such offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make such offer
or solicitation. Neither the delivery of this prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that
information contained herein is correct as of any time subsequent to the date
hereof.
_____________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................... 2
Risk Factors................................. 5
Use of Proceeds.............................. 11
Price of Common Stock and Dividend Policy.... 11
Capitalization............................... 12
Selected Financial Data...................... 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.............................. 14
Business..................................... 17
Management................................... 29
Certain Transactions......................... 34
Selling Stockholders......................... 36
Principal Stockholders....................... 40
Description of Capital Stock................. 40
Plan of Distribution......................... 46
Legal Matters................................ 46
Experts...................................... 47
Additional Information....................... 47
Index to Consolidated Financial Statements... F-1
</TABLE>
Until January 21, 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligation of dealers to deliver
a Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
===============================================================================
===============================================================================
PROSOFT I-NET SOLUTIONS, INC.
3,007,544 Shares of
Common Stock
379,747 Shares of
Common Stock
Issuable Upon Exercise of
Common Stock Purchase Warrants
____________________
PROSPECTUS
____________________
December 27, 1996
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered. All of the amounts
shown are estimates, except the Securities and Exchange Commission registration
and NASDAQ filing fees.
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission registration fee... $ 22,193
NASDAQ listing fee.................................... $ 10,000
Accounting fees and expenses.......................... $ 50,000
Printing and engraving expenses....................... $ 7,500
Transfer agent and registrar (fees and expenses)...... $ 1,250
Blue sky fees and expenses (including counsel fees)... $ 5,000
Other legal fees and legal expenses................... $ 75,000
Miscellaneous expenses................................ $ 4,057
--------
Total............................................ $175,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Nevada Private Corporation Law ("NPCL") provides that a corporation may
indemnify any person who was or is a party or is threatened to be made a party,
by reason of the fact that such person was an officer or director of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, to (x) any action or suit by or in the right
of the corporation against expenses, including amounts paid in settlement and
attorneys' fees, actually and reasonably incurred, in connection with the
defense or settlement believed to be in, or not opposed to, the best interests
of the corporation, except that indemnification may not be made for any claim,
issue or matter as to which such a person has been adjudged by a court of
competent jurisdiction to be liable to the corporation or for amounts paid in
settlement to the corporation and (y) any other action or suit or proceeding
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement, actually and reasonably incurred, if he or she acted in good
faith and in a manner which he or she reasonably believed to be in, or not
opposed to, reasonable cause to believe his or her conduct was unlawful. To the
extent that a director, officer, employee or agent has been "successful on the
merits or otherwise" the corporation must indemnify such person. The articles
of incorporation or bylaws may provide that the expenses of officers and
directors incurred in defending
II-1
<PAGE>
any such action must be paid as incurred and in advance of the final disposition
of such action. The NPCL also permits the corporation to purchase and maintain
insurance on behalf of the corporation's directors and officers against any
liability arising out of their status as such, whether or not the corporation
would have the power to indemnify him against such liability. These provisions
may be sufficiently broad to indemnify such persons for liabilities arising
under the Securities Act.
The Company's Restated Articles of Incorporation provide that the Company
shall indemnify any director or officer of the Company in connection with
certain actions, suits or proceedings, against expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement actually and reasonably
incurred. The Company is also required to pay any expenses incurred by a
director or officer in defending the Company or its stockholders for damages for
breach of fiduciary duty as a director or officer, provided that such a
provision must not eliminate or limit the liability of a director or officer
for: (a) acts or omissions which involve intentional misconduct, fraud or a
knowing violation of law; or (b) the payment of illegal distributions. The
Company's Restated Articles of Incorporation include a provision eliminating the
personal liability of directors for breach of fiduciary duty except that such
provision will not eliminate or limit any liability which may not be so
eliminated or limited under applicable law.
The Company's Bylaws generally require the Company to indemnify, as well as
to advance expenses, to its directors and its officers to the fullest extent
permitted by Nevada Law upon receipt of an undertaking by or on behalf of such
director or officer to repay such amount if it should be ultimately determined
that they are not entitled to indemnification by the Company. The Company has
also entered into indemnification agreements with its directors and officers
which similarly provide for the indemnification and advancement of expenses by
the Company.
The Company maintains liability insurance for its directors and officers
covering, subject to certain exceptions, any actual or alleged negligent act,
error, omission, misstatement, misleading statement, neglect or breach of duty
by such directors or officers, individually or collectively, in the discharge of
their duties in their capacity as directors or officers of the Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following securities of the Company have been sold by the Company
during the past three years without registration under the Securities Act of
1933, as amended (the "Act").
(a) In February 1995, the Company issued 100,000 shares for $1,500 in cash
to Kelly Trimble. No commissions were paid in connection with this issuance. The
Company believes the foregoing sale was exempt from the registration
requirements of the Act in reliance on the exemption contained in Section 4(2)
of the Act.
(b) In March 1996, the Company entered into the Reorganization Agreement
with Old ProSoft and the Old ProSoft stockholders. Under the terms of the
Reorganization Agreement, Old ProSoft stockholders received one share of Common
Stock of the Company in exchange for each of their shares of Old ProSoft, and
Old ProSoft became a wholly-owned subsidiary of the Company. An aggregate of
4,726,250 shares were issued to the 76 Old ProSoft stockholders in the
Reorganization and the Old ProSoft stockholders ended up owning approximately
90% of the Company immediately
II-2
<PAGE>
after the Reorganization. No commissions were paid in connection with such
issuance. The Company believes that the issuance of Common Stock to the Old
ProSoft stockholders was exempt from the registration requirements of the Act in
reliance on the exemption contained in Section 4(2) of the Act.
(c) In March 1996, the Company issued 25,000 shares to Kelly Trimble in
consideration for consulting services rendered in connection with the
Reorganization and valued at $25,000. The Company believes the foregoing
issuance was exempt from the registration requirements of the Act in reliance on
the exemption contained in Section 4(2) of the Act.
(d) In April and May of 1996, the Company issued and sold 430,462 shares of
Common Stock at $3.50 per share and warrants to purchase 143,473 shares of
Common Stock at $5.00 per share to 30 investors in a private offering (the
"$3.50 Private Placement"). This offering was made on a private basis only to
persons who were "accredited investors" as defined in Securities Act Rule
501(a). No commissions were paid in connection with the $3.50 Private
Placement. The Company believes the foregoing sales were exempt from the
registration requirement of the Act in reliance on the exemption contained in
Section 4(2) of the Act and/or Regulation D promulgated thereunder.
(e) In connection with the $3.50 Private Placement, in April 1996 the
Company issued warrants to purchase an aggregate of 22,988 shares to Barry
Nussbaum and Bram Nager as payment of finders' fees. These warrants were at an
exercise price of $5.25 per share. The Company believes that the foregoing
issuances were exempt from the registration requirement of the Act in reliance
on the exemption contained in Section 4(2) of the Act.
(f) In June and July of 1996, an aggregate of 840,000 shares were issued to
27 stockholders of the Company upon exercise of warrants at $1.00 per share to
purchase Common Stock by those stockholders. The warrants were originally
acquired by the stockholders in a private placement by Old ProSoft and became
warrants to purchase Common Stock of the Company as part of the Reorganization.
Each of the individuals exercising warrants was an accredited investor. The
Company believes the foregoing sales were exempt from the registration
requirements of the Act in reliance on the exemption contained in Section 4(2)
of the Act.
(g) In June 1996, 50,000 shares of Common Stock were issued to a
stockholder of the Company upon exercise of a warrant at $1.00 per share which
was originally received by the stockholder in consideration for services
performed for Old ProSoft. The warrant became a warrant to purchase Common Stock
of the Company as part of the Reorganization. The Company believes the foregoing
issuance was exempt from the registration requirements of the Act in reliance on
the exemption contained in Section 4(2) of the Act.
(h) In June through August 1996, the Company issued an aggregate of 71,832
shares to 17 stockholders of the Company upon exercise of warrants at $5.00 per
share acquired in the $3.50 Private Placement. Each of the individuals
exercising warrants was an accredited investor. The Company believes the
foregoing sales were exempt from the registration requirements of the Act in
reliance on the exemption contained in Section 4(2) of the Act.
II-3
<PAGE>
(i) During April 1996 through November 1996, the Company, pursuant to its
1996 Stock Option Plan, issued options to purchase 750,000 shares of Common
Stock to certain of its employees and consultants, with exercise prices ranging
from $3.50 to $20.00 per share. None of these options has been exercised. The
Company believes the foregoing issuances were exempt from the registration
requirements of the Act in reliance on the exemption contained in Section 4(2)
of the Act and by virtue of Rule 701 promulgated under the Act.
(j) In July through August 1996, the Company issued and sold 727,000 shares
of Common Stock at $10.00 per share to 42 investors in a private offering (the
"$10.00 Private Placement"). This offering was made on a private basis only to
persons who were "accredited investors" as defined in Securities Act Rule
501(a). No commissions were paid in connection with the $10.00 Private
Placement. The Company believes the foregoing sales were exempt from the
registration requirement of the Act in reliance on the exemption contained in
Section 4(2) of the Act and/or Regulation D promulgated thereunder.
(k) In August 1996, the Company issued an option to purchase 50,000 shares
at $10.00 per share to J.R. Boothe & Associates, a consultant to the Company,
for financial public relations work. The Company believes that the foregoing
issuance was exempt from the registration requirement of the Act in reliance on
the exemption contained in Section 4(2) of the Act.
(l) In August 1996, the Company issued warrants to purchase an aggregate of
120,000 and 60,000 shares at $11.00 per share to David Mock and Andy Stallman,
respectively. These warrants were issued as consideration for ongoing
consultant services by these two individuals. The Company believes that the
foregoing issuance was exempt from the registration requirement of the Act in
reliance on the exemption contained in Section 4(2) of the Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Index of Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibits
- ------- -------------------------------------------------------------------
<C> <S>
2 Agreement and Plan of Reorganization, dated March 26, 1996, between
the Company, Pro-Soft Development Corp. and the shareholders of Pro-
Soft Development Corp.**
3.1 Restated Articles of Incorporation of the Company, as amended**
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibits
- ------- -----------------------------------------------------------------
<C> <S>
3.2 Amended and Restated Bylaws of the Company**
4 Specimen Stock Certificate**
5 Opinion of Eric W. Richardson**
10.1 Pro-Soft Development Corp. 1996 Stock Option Plan**
10.2 ProSoft Development, Inc. 1996 Stock Option Plan**
10.3 Stock and Warrant Purchase Agreement, dated April 15, 1996, by
and among the Company, Donald L. Danks, Keith D. Freadhoff,
Douglas Hartman and various investors**
10.4 Form of Subscription Agreement, entered into in July and August
1996, between the Company and various investors**
10.5 Form of Registration and Lock-Up Agreement, dated September __,
1996, between the Company and certain of the Selling Stockholders**
10.6 Microsoft/Internet Contract Teaching Agreement dated as of April
29, 1996 by and between the Company and Merisel, Inc.**
10.7 Strategic Relationship Agreement dated as of June 25, 1996
between the Company and Innovus Corporation**
10.8 Lease dated September 29, 1995 between Douglas E. Hartman dba
Professional Development Institute and Steven R. Layton, as
Receiver**
10.9 Xerox Order Agreement dated September 26, 1995 between Professional
Development Institute and Xerox Corporation**
10.10 Term Lease Master Agreement dated as of April 19, 1996 between
Pro-Soft Development Corp. and IBM Credit Corporation**
10.11 Lease Agreement dated as of June 21, 1996 between Pro-Soft
Development Corp. and Sanwa Leasing Corporation**
10.12 Promissory Notes dated July 3, 1996 and July 31, 1996 made by
Keith Freadhoff in favor of the Company**
10.13 Form of Indemnification Agreement between the Company and its
Directors and Officers**
10.14 Licensing Agreement dated August 6, 1996 between Street
Technologies, Inc. and the Company**
11 Computation of Net Loss Per Share**
21 Subsidiaries of the Company**
23.1 Consent of Ernst & Young, LLP
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibits
- ------- -----------------------------------------------------------------
<C> <S>
23.2 Consent of Kelly & Co.
23.3 Consent of Eric W. Richardson (included in the opinion filed
as 5)**
24 Power of Attorney**
27 Financial Data Schedule**
- -------------------------
</TABLE>
* To be filed by amendment.
** Previously filed.
II-6
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually, or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement;
notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
Offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) (230.424(b) of this
Chapter) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate
Offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the Offering of such securities at that time
shall be deemed to be the initial bona fide Offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the Offering.
Insofar as indemnification for liabilities arising from the Securities Act
of 1933 (the "Act") may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Post-Effective Amendment No. 1 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Buena Park, State of California on the 27th day of December, 1996.
PROSOFT I-NET SOLUTIONS, INC.
By: /s/ Keith D. Freadhoff
----------------------
Keith D. Freadhoff,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to Registration Statement has been signed below
by the following persons on behalf of the Company in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- ----------------------------- ---------------------------- -----------------
<S> <C> <C>
/s/ Keith D. Freadhoff* Chief Executive Officer and December 27, 1996
- ----------------------------- Chairman of the Board
Keith D. Freadhoff (Principal Executive Officer)
/s/ Donald L. Danks* President and Director December 27, 1996
- -----------------------------
Donald L. Danks
/s/ Brooks A. Corbin* Chief Financial Officer December 27, 1996
- ----------------------------- (Principal Financial and
Brooks A. Corbin Accounting Officer)
/s/ William E. Richardson* Director December 27, 1996
- -----------------------------
William E. Richardson
*By /s/ Eric W. Richardson December 27, 1996
- -----------------------------
Eric W. Richardson
Attorney-in-Fact
</TABLE>
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<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibits
- ------- -------------------------------------------------------------------
<C> <S>
2 Agreement and Plan of Reorganization, dated March 26,1996, between
the Company, Pro-Soft Development Corp. and the shareholders of Pro-
Soft Development Corp.**
3.1 Restated Articles of Incorporation of the Company, as amended**
3.2 Amended and Restated Bylaws of the Company**
4 Specimen Stock Certificate**
5 Opinion of Eric W. Richardson**
10.1 Pro-Soft Development Corp. 1996 Stock Option Plan**
10.2 ProSoft Development, Inc. 1996 Stock Option Plan**
10.3 Stock and Warrant Purchase Agreement, dated April 15, 1996, by
and among the Company, Donald L. Danks, Keith D. Freadhoff,
Douglas Hartman and various investors**
10.4 Form of Subscription Agreement, entered into in July and August
1996, between the Company and various investors**
10.5 Form of Registration and Lock-Up Agreement, dated September __,
1996, between the Company and certain of the Selling Stockholders**
10.6 Microsoft/Internet Contract Teaching Agreement dated as of April
29, 1996 by and between the Company and Merisel, Inc.**
10.7 Strategic Relationship Agreement dated as of June 25, 1996
between the Company and Innovus Corporation**
10.8 Lease dated September 29, 1995 between Douglas E. Hartman dba
Professional Development Institute and Steven R. Layton, as
Receiver**
10.9 Xerox Order Agreement dated September 26, 1995 between Professional
Development Institute and Xerox Corporation**
10.10 Term Lease Master Agreement dated as of April 19, 1996 between
Pro-Soft Development Corp. and IBM Credit Corporation**
10.11 Lease Agreement dated as of June 21, 1996 between Pro-Soft
Development Corp. and Sanwa Leasing Corporation**
10.12 Promissory Notes dated July 3, 1996 and July 31, 1996 made by
Keith Freadhoff in favor of the Company**
10.13 Form of Indemnification Agreement between the Company and its
Directors and Officers**
10.14 Licensing Agreement dated August 6, 1996 between Street
Technologies, Inc. and the Company**
11 Computation of Net Loss Per Share**
21 Subsidiaries of the Company**
23.1 Consent of Ernst & Young, LLP
23.2 Consent of Kelly & Co.
23.3 Consent of Eric W. Richardson (included in the opinion filed
as 5)**
24 Power of Attorney**
27 Financial Data Schedule**
</TABLE>
- -------------------------
* To be filed by amendment.
** Previously filed.
<PAGE>
EXHIBIT 11
COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
Period from
December 8, 1995
to
July 31, 1996
----------------
<S> <C>
PRIMARY
Net loss $(3,074,123)
===========
Weighted average common shares outstanding 5,011,781
===========
Net loss per share $ (0.61)
===========
FULLY DILUTED
Net loss $(3,074,123)
===========
Weighted average common shares outstanding 5,011,781
===========
Net loss per share $ (0.61)
===========
</TABLE>
<PAGE>
EXHIBIT 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the captions "Selected Financial
Data" and "Experts" and to the use of our report dated August 28, 1996, in
Post-Effective Amendment No. 1 to the Registration Statement (Form S-1) and
related Prospectus of Prosoft I-Net Solutions, Inc. for the registration of
3,387,291 shares of its common stock.
ERNST & YOUNG LLP
Orange County, California
December 27, 1996
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement relating to 3,387,291
shares of common stock of Prosoft I-Net Solutions, Inc. on Post-Effective
Amendment No. 1 to Form S-1 of our report dated March 8, 1996, appearing in the
Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
KELLY & COMPANY
Newport Beach, California
December 27, 1996
