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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 AND 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ________________ to _______________
Commission file number 000-21535
PROSOFT I-NET SOLUTIONS, INC.
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(Exact Name of Registrant as Specified in its Charter)
NEVADA 87-0448639
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7100 KNOTT AVENUE, BUENA PARK, CA 90620
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (714) 562-8282
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ___ No X
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The number of shares of common stock, $.001 par value, outstanding as of
December 27, 1996, is 7,350,604 shares.
1
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROSOFT I-NET SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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<CAPTION>
OCTOBER 31 JULY 31
1996 1996
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<S> <C> <C>
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 3,085,024 $ 6,466,460
Tuition receivable 991,465 766,405
Note receivable from officers/shareholders 223,263 85,600
Prepaid expenses and other current assets 297,801 311,592
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Total current assets 4,597,553 7,630,057
Property and equipment:
Leasehold improvements 78,033 -
Computer equipment and software 1,639,213 1,159,391
Office equipment, furniture and fixtures 118,211 453,497
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1,835,457 1,612,888
Less depreciation and amortization 411,361 245,455
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1,424,096 1,367,433
Deposits on computer leases 1,000,000 -
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Total assets $ 7,021,649 $ 8,997,490
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ - $ 61,832
Accounts payable 822,436 363,414
Accrued payroll and related expenses 264,414 88,474
Deferred revenue 249,850 -
Current portion of capital leases obligations 335,734 351,509
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Total current liabilities 1,672,434 865,229
Obligations under capital leases, net of current portion 427,529 437,532
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 7,351 7,336
Additional paid-in capital 11,013,623 10,771,016
Note receivable from stockholder (9,500) (9,500)
Accumulated deficit (6,089,788) (3,074,123)
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Total stockholders' equity 4,921,686 7,694,729
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Total liablilities and stockholders' equity $ 7,021,649 $ 8,997,490
============== ==============
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PROSOFT I-NET SOLUTIONS, INC. AND PREDECESSOR
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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<CAPTION>
COMPANY PREDECESSOR ENTITY
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THREE MONTHS ENDED OCTOBER 31,
1996 1995
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<S> <C> <C>
Revenue $ 513,681 $ 23,243
Costs and expenses:
Cost of services 1,054,019 17,277
Sales and marketing 440,373 23,331
General and administrative 2,088,231 213,357
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Total costs and expenses 3,582,623 253,965
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Loss from operations (3,068,942) (230,722)
Interest income (expense) 57,277 (804)
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Loss before provision for income taxes (3,011,665) (231,526)
Provision for state franchise tax 4,000 26
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Net loss $ (3,015,665) $ (231,552)
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Net loss per share $ (0.41) $ N/A
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Weighted average number of common shares
outstanding 7,343,504 N/A
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PROSOFT I-NET SOLUTIONS, INC. AND PREDECESSOR
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
Company Predecessor Entity
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Three Months Ended October 31,
1996 1995
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<S> <C> <C>
Operating activities:
Net loss $ (3,015,665) $ (231,552)
Adjustments to reconcile net loss to cash provided by
(used in) operating activities:
Depreciation and amortization 165,906 14,634
Changes in operating assets and liabilities:
Tuition receivable (225,060) (64,202)
Prepaid expenses and other assets 13,791 70,534
Notes payable (61,832) -
Accounts payable 459,022 45,809
Accrued payroll and related expenses 175,940 185,834
Deferred revenue 249,850 38,744
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Net cash provided by (used in) operating activities (2,238,048) 59,801
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Investing activities:
Purchases of property and equipment (222,569) (118,108)
Deposits on computer leases (1,000,000) -
Notes receivable from officers/shareholders (137,663) -
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Net cash (used in) investing activities (1,360,232) (118,108)
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Financing activities:
Capital contribution to sole proprietorship - 57,076
Principal payments on debt and capital leases (25,778) -
Issuance of common stock 242,622 -
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Net cash provided by financing activities 216,844 57,076
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Decrease in cash and cash equivalents (3,381,436) (1,231)
Cash and cash equivalents at the beginning of period 6,466,460 1,231
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Cash and cash equivalents at the end of period $ 3,085,024 $ -
================== ==================
Supplementary disclosure of cash paid during the period for:
Interest $ 25,770 $ 804
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Incomce taxes $ 4,000 $ 26
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PROSOFT I-NET SOLUTIONS, INC. AND PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Prosoft I-Net Solution, Inc. (Prosoft or the Company) is a Nevada
corporation (previously named Tel-Fed, Inc. and ProSoft Development, Inc.).
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 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 found in
the Company's Form S-1 (File No. 333-11247) dated November 27, 1996.
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This report on Form 10-Q contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes", "anticipates", "plans", "expects" and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause the Company's actual results to
differ materially from those indicated by such forward-looking statements.
OVERVIEW
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Prosoft I-Net Solutions, Inc. (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, the Company 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. The Company 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 August 1, 1996 through October 31, 1996,
approximately 66% 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.
FLUCTUATIONS IN QUARTERLY RESULTS
- ---------------------------------
The Company's operating results may fluctuate based on various factors,
including the frequency of course events, the frequency and size of, and
response to, the Company's marketing campaigns, the timing of the introduction
of new course titles, customer-site course events, affiliate-site course events,
Company site course events, competitive forces within the current and
anticipated future markets served by the Company, the spending patterns of its
customers, inclement weather and general economic conditions. Fluctuations in
quarter-to-quarter results may also occur depending on differences in the timing
of, and the time period between, the Company's expenditures on the development
and marketing of its courses and the receipt of revenues.
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.
RESULTS OF OPERATIONS
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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
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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.
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
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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 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.
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PART II - OTHER INFORMATION
Item 4: SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
An Annual Meeting of the Stockholders of the Company was held on Friday
October 18, 1996, at 10:00 a.m., California time to:
1. Consider a proposal to amend the Company's Articles of
Incorporation to change the Company's name to "Prosoft I-Net
Solutions, Inc." The proposal was approved by the holders of
Common Stock with 4,344,447 affirmative votes and no negative
votes with respect to this proposal. The holders of 3,006,157
shares did not vote with respect to this proposal.
2. Consider a proposal to amend and restate the Company's Bylaws to,
among other things, provide that the Bylaws may only be amended
by the Board of Directors or, if approved by a majority of the
voting power of the Company, by the stockholders. The proposal
was approved by the holders of Common Stock with 4,344,447
affirmative votes and no negative votes cast with respect to this
proposal. The holders of 3,006,157 shares did not vote with
respect to this proposal.
3. Elect a Board of Directors. William E. Richardson, Donald L.
Danks and Keith D. Freadhoff were each elected to serve on the
Company's Board of Directors for an additional one-year, two-year
and three-year term, respectively, and until their respective
successors are elected and qualified. There were 4,319,447
affirmative votes and no negative votes with respect to the
election of each of the directors. The holders of 3,031,157
shares did not vote with respect to the election of directors.
No other matters were voted on at the Annual Meeting.
Pursuant to an Action by Written Consent of the Stockholders of the
Company, effective September 9, 1996, stockholders amended and restated the
Company's Articles of Incorporation to, among other things, provide for
mandatory indemnification by the Company of its directors and officers and to
eliminate the personal liability of directors and officers for breach of
fiduciary duty, and approved the Company's 1996 Stock Option Plan. This Action
was approved by the holders of 3,721,506 shares of Common Stock. The holders of
2,836,462 shares did not execute the Action by Written Consent.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROSOFT I-NET SOLUTIONS, INC.
Dated: December 27, 1996 By:/s/ Brooks A. Corbin
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Brooks A. Corbin
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
<TABLE> <S> <C>
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> OCT-31-1996
<CASH> 3,085,024
<SECURITIES> 0
<RECEIVABLES> 1,214,526
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,597,553
<PP&E> 1,835,457
<DEPRECIATION> 411,361
<TOTAL-ASSETS> 7,021,649
<CURRENT-LIABILITIES> 1,672,434
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,021,649
<SALES> 0
<TOTAL-REVENUES> 513,681
<CGS> 1,054,019
<TOTAL-COSTS> 3,582,623
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (57,277)
<INCOME-PRETAX> (3,011,655)
<INCOME-TAX> 4,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,015,665
<EPS-PRIMARY> (.41)
<EPS-DILUTED> 0
</TABLE>
