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As filed with the Securities and Exchange Commission on April 17, 1997
Registration No. 333-11247
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
POST-EFFECTIVE
AMENDMENT NO. 2
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)
2333 NORTH BROADWAY, SUITE 300
SANTA ANA, CALIFORNIA 92706
(714) 953-1200
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Executive Offices)
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<S> <C> <C>
NEVADA 8243 87-0448639
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
Incorporation or Organization) Classification Code Number)
</TABLE>
KEITH D. FREADHOFF
CHIEF EXECUTIVE OFFICER
PROSOFT I-NET SOLUTIONS, INC.
2333 NORTH BROADWAY, SUITE 300
SANTA ANA, CALIFORNIA 92706
(714) 953-1200
(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.
================================================================================
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PROSPECTUS
- ----------
- --------------------------------------------------------------------------------
PROSOFT I-NET SOLUTIONS, INC.
3,028,252 Shares of Common Stock
324,140 Shares of Common Stock Issuable Upon Exercise
of Common Stock Purchase Warrants
- --------------------------------------------------------------------------------
This Prospectus relates to 3,352,392 Shares of Common Stock (the "Shares") of
Prosoft I-Net Solutions, Inc. (the "Company"), including 3,028,252 currently
outstanding Shares and 324,140 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
2,636,292 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 April 10, 1997, the closing bid price for the
Company's Common Stock was $13.50 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 April __, 1997.
<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 53 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 January 31, 1997, approximately 70% 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 April 10, 1997, the Company
had opened 26 Training Centers in 17 states. 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
a 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 during the
fiscal year ending July 31, 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.
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
2
<PAGE>
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 2333 North Broadway, Suite 300,
Santa Ana, California 92706 and its telephone number is (714) 953-1200.
3
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THE OFFERING
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Common Stock Offered by the Selling Stockholders........ 3,352,392 shares(1)
Common Stock to be outstanding after this Offering...... 10,231,673 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 $2,284,271. Any proceeds
received by the Company will be utilized for
working capital and general corporate purposes.
NASDAQ SmallCap Symbol.................................. POSO
</TABLE>
____________________
(1) Includes 324,140 shares issuable upon exercise of the Warrants.
(2) Does not include 1,830,500 shares reserved for issuance upon the exercise
of outstanding stock options and warrants, other than the Warrants.
4
<PAGE>
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 26 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 six months ended January 31, 1997, the Company incurred a net
loss of $6,697,430 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 $1,874,854 for the period from December 8, 1995
to January 31, 1997. 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.
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 $6,697,430 and negative cash flow
from operations of $5,392,454 for the six months ended January 31, 1997. 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 a majority 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
5
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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'S 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 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 26 Training Centers and 103 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 limited turnover of its instructors, with only five
instructors resigning and eleven instructors being released by the Company from
its inception through March 31, 1997. 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.
Although the Company has recently raised approximately $27 million from private
placements of its stock, its future success will be dependent upon its ability
to generate revenues and profits and, if necessary, additional financing to fund
continued growth. 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.
FUTURE CAPITAL REQUIREMENTS AND UNCERTAINTY OF FUTURE FUNDING
Since inception, the Company has been dependent on outside financing to
fund its growth. The Company recently raised approximately $22 million from a
private placement of 2,081,758 shares of Common Stock. An additional $5 million
was raised in a sale to an institutional investor in April 1997 of 408,164
shares of common stock. The $5 million investment is in escrow and subject to
certain rights of rescission in favor of the investor if a registration
statement covering those shares is not declared effective by the Securities and
Exchange Commission by December 31, 1997. The Company anticipates that the
proceeds from these offerings will be sufficient to meet its needs for working
capital expenditures for at least the next 12 months, including the planned
expansion of Training Centers to between 40 and
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50 by July 1997. However, the Company's long-term capital requirements will be
dependent 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. 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.
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
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 Rapid 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."
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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 January 31, 1997, the Company derived
approximately 20%, 23% and 16%, 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 a majority 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 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 as 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
could 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
Future sales of Common Stock by existing stockholders pursuant to Rule 144
under the Securities Act, pursuant to this Registration Statement or otherwise
could have an adverse effect on the price of the Company's Common Stock. The
Company currently has outstanding 9,907,533 shares of Common Stock,
substantially all of which are "restricted securities" as defined in Rule 144
and which may not be sold without registration under the Securities Act unless
pursuant to an applicable exemption therefrom. Only 480,000 of such shares are
currently eligible for sale under Rule 144, but effective April 29, 1997,
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an aggregate of 4,362,126 shares will be eligible for sale under Rule 144,
subject to the satisfaction of certain conditions. See "DESCRIPTION OF COMMON
STOCK -- Shares Eligible for Future Sale."
The Company is registering the sale of up to 3,352,392 shares of Common
Stock under the Registration Statement of which this Prospectus is a part and
has agreed to register an additional 2,489,922 shares under registration
agreements with certain investors. See "DESCRIPTION OF CAPITAL STOCK --
Registration Rights." Of the shares covered by this Registration Statement,
2,636,392 shares are held by stockholders who have agreed not to sell, under
this Prospectus, more than 1% of their respective Shares held as of November 27,
1996 for each month that elapses after that date, unless the Company's written
consent is obtained, although 2,249,645 of those Shares will become eligible for
sale under Rule 144 on April 29, 1997. See "DESCRIPTION OF CAPITAL STOCK --
Shares Eligible for Future Sale." In addition, the Company has registered 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 April 10, 1997, 1,422,331 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 Rule
144, 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
"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 20.0% of Common Stock of the Company. As a
result, these stockholders may be able to significantly influence 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."
9
<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 $2,284,271.
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>
November 1, 1996 -- January 31, 1997 $16.38 $20.00
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 April 10, 1997, the closing bid price for the Common Stock was $13.50.
On April 10, 1997, the Company had approximately 346 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.
10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at January
31, 1997.
<TABLE>
<CAPTION>
January 31, 1997
------------------
<S> <C>
Capital lease obligations, net of current portion................. $ 462,261
-----------
Stockholder's equity:(1)
Common stock, $.001 par value; 50,000,000 shares authorized; 7,406
7,406,211 shares issued and outstanding(2).....................
Additional paid-in capital..................................... 11,093,005
Note receivable from stockholder............................... (9,500)
Accumulated deficit............................................ (9,771,551)
Total stockholder's equity................................. 1,391,360
-----------
Total capitalization..................................... $ 1,781,621
===========
</TABLE>
____________________
(1) Does not reflect the issuance of an additional 2,489,922 shares of Common
Stock after January 31, 1997 to investors for total gross proceeds of
$27,139,723. Of this amount, $5 million is subject to certain rights of
rescission in favor of an investor if a registration statement covering
that investor's 408,164 shares is not declared effective by December 31,
1997. See "DESCRIPTION OF CAPITAL STOCK - Registration Rights."
(2) Excludes: (i) an aggregate of 1,250,000 shares reserved for issuance under
the Company's Amended 1996 Stock Option Plan, of which 748,750 shares were
subject to outstanding options as of January 31, 1997 at exercise prices
ranging from $3.50 to $19.75 per share, with a weighted average exercise
price of $6.23 per share; (ii) 997,100 shares subject to other outstanding
options as of January 31, 1997 at an exercise price of $1.00 per share; and
(iii) 429,140 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 $6.62.
11
<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 January 31, 1997 and for the
six-month periods ended January 31, 1996 and 1997 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 six
months ended January 31, 1997 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
--------------- ------------
FEBRUARY 1, DECEMBER 8, SIX MONTHS SIX MONTHS
1995 TO 1995 TO ENDED ENDED
DECEMBER 31, JULY 31, JANUARY 31, JANUARY 31,
1995 1996 1996(1) 1997
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue....................................... $ 77,477 $ 907,772 $ 111,648 $ 967,082
Cost of services.............................. 60,526 698,725 87,748 2,421,243
--------- ----------- --------- -----------
Gross profit(loss)............................ 16,951 209,047 23,900 (1,454,161)
Operating expenses:
Sales and marketing......................... 44,769 426,221 37,794 1,183,536
General and administrative.................. 556,382 2,788,188 438,891 4,106,027
--------- ----------- --------- -----------
Loss from operations.......................... (584,200) (3,005,362) (452,785) (6,743,724)
Interest income (expense)..................... (20,126) (67,961) (20,907) 50,294
--------- ----------- --------- -----------
Loss before provision for taxes............... (604,326) (3,073,323) (473,692) (6,693,430)
Provision for state franchise tax............. -- 800 0 4,000
--------- ----------- --------- -----------
Net loss...................................... $(604,326) $(3,074,123) $(473,692) $(6,697,430)
========= =========== ========= ===========
Net loss per share............................ $(0.61) $(0.91)
=========== ===========
Shares used in computing net loss per share... 5,011,781 7,364,292
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
AT AT AT
DECEMBER 31, JULY 31, JANUARY 31,
1995 1996 1997
------------ ----------- -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficiency).................. $(561,885) $ 6,764,828 $ 71,240
Total assets.................................. 765,990 8,997,490 4,024,635
Capital lease obligations, net of current 308,671 437,532 462,261
portion......................................
Stockholders' equity (owner's deficit)........ (194,473) 7,694,729 1,319,360
</TABLE>
- ------------
(1) Represents operations of the Proprietorship from August 1, 1995 through
December 31, 1995 and of the Company from December 8, 1995 through January
31, 1996.
12
<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 January 31, 1997, JTPA funded
vocational training accounted for approximately 70% of the Company's revenues,
while commercial training accounted for approximately 30% 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 April 10, 1997,
the Company had opened 26 Training Centers located in 17 states and was in the
process of building out tenant improvements and hiring instructors for 2
additional Training Centers in those states. The Company is also 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.
As a result of the start-up nature of the Company's business through
January 31, 1997 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 January 31, 1997 are indicative of future
results.
13
<PAGE>
RESULTS OF OPERATIONS
Six Months Ended January 31, 1997 Compared to Six Months Ended January 31, 1996
Revenues. Revenue for the six-month period ended January 31, 1997, was
$967,082, compared with $111,648 for the six-month period ended January 31,
1996, an increase of $855,434. 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 from two locations on January
31, 1996 to 20 locations on January 31, 1997.
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 six-month period
ended January 31, 1997 were $2,421,243, compared with $87,748 for the six-month
period ended January 31, 1996, an increase of $2,333,495. 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 six months ended January 31, 1997 compared to the
corresponding period of 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 for the six-month period ended January
31, 1997 were $1,183,536, compared with $37,794 for the six-month period ended
January 31, 1996, an increase of $1,145,742. 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 for the
six-month period ended January 31, 1997 were $4,106,027, compared to $438,891
for the six-month period ended January 31, 1996, an increase of $3,667,136.
This increase is primarily due to the continued buildup of the administrative
staffing needed to support the expansion of sites and the growth in sales.
Interest. Interest income for the six months ended January 31, 1997 was
$50,294, compared to interest expense of $20,907 for the six-month period ended
January 31, 1996. Interest expense, which consists principally of interest paid
on capital leases, increased for the period ended January 31, 1997 due to an
increase in the amount of equipment financed through capital leases. However,
this increase was more than offset by interest earned from higher cash balances
generated by the proceeds from a private placement completed in September 1996.
Net Loss. Net loss for the six-month period ended January 31, 1997 was
$6,697,430, compared with $473,692 for the six-month period ended January 31,
1996, an increase of $6,223,738. 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.
December 8, 1995 to July 31, 1996 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 1995, 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
14
<PAGE>
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.
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. Cash and cash equivalents decreased from
$6,466,460 at July 31, 1996 to $196,970 at January 31, 1997. For the six
months ending January 31, 1997, operating activities used cash of $5,454,284,
primarily due to a net operating loss of $6,697,430. Since January 31, 1997,
the Company has raised approximately $27 million from the sale of equity
securities. Of this amount, $5 million is subject to certain rights of
rescission in favor of an investor if a registration statement covering such
shares is not declared effective by December 31, 1997.
During the six months ended January 31, 1997, the Company invested $714,670
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
15
<PAGE>
approximately an additional $4,000,000 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. 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 may need to add additional internal
infrastructure, which will also require additional capital expenditures. As
sales increase, additional personnel will continue to be needed not only for
training but also for affiliate support, administration and accounting. Besides
personnel, plans have been implemented to increase the capacity of many of the
Company's systems. The accounting system is being upgraded to handle the
anticipated growth in sales, and the Company is developing a sophisticated
customer reservation system and an enhanced web page for customers.
In October 1996, the Company entered into an agreement with the investment
banking firm of Smith Barney Inc. pursuant to which Smith Barney acted as
placement agent in connection with a private placement of the Company's
securities. From February through April 1997, the Company received gross
proceeds of approximately $22 million in this private placement through the sale
of 2,081,758 shares of common stock. Net proceeds from that offering, after
payment of commissions and finders fees, will be $20,811,332. The proceeds are
being used by the Company for working capital expenditures.
In April 1997, the Company sold 408,164 shares of its common stock to an
institutional investor for $5 million. This amount has been placed in escrow and
will be released to the Company upon effectiveness of a registration statement
covering the shares purchased. If a registration statement is not declared
effective by December 31, 1997, the investor will have certain rights of
rescission of its investment. The net proceeds from this offering are
$4,700,008.
In April 1997, the Company made a 30-day loan to one of its vendors, a
computer memory distributor, in the principal amount of $500,000. This loan
bears interest at a rate equal to 9.5% per annum, and is guaranteed by a
principal of the borrower who has secured the guaranty with a pledge of certain
of his shares in the borrower. This loan is due and payable on May 9, 1997.
The Company anticipates that its existing resources will be sufficient to
meet its working capital needs for at least the next 12 months, including the
planned expansion of Training Centers. 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.
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 53 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 70% of
the Company's revenues through January 31, 1997, 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 April 10, 1997, the Company had opened 26 Training Centers in
the states of California, Florida, Georgia, Indiana, Maryland, Massachusetts,
Missouri, New Jersey, New York, North Carolina, Oklahoma, Pennsylvania, South
Carolina, Tennessee, Texas, Virginia, and Washington. 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 during the fiscal year ending July 31, 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
17
<PAGE>
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 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
April 1, 1997, Prosoft had employed approximately 55 full-time MCPs. In
addition, as of April 1, 1997, the Company had approximately 23 additional
students under development to be MCPs.
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 addition, some students have been
recruited directly by employers on the Company's property. Through April 1,
1997, 129 people had graduated from the Company's Training Centers and the
Company had retained 47 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 increased to 55% in 1996 from just 11% in
1995, 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 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.
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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 April 10, 1997, the Company had opened 26 Training
Centers located in 17 states and had 2 additional Training Centers under
development in those 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 during the fiscal year ending July 31, 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. This processing speed has enabled the Company to
attract and process large pools of qualified displaced workers from which to
select its instructor trainees.
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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.
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
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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.
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. 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.
MARKETING
Prosoft will market Internet and Intranet training through its own internal
sales and marketing organization in conjunction with key strategic alliances.
As of April 1, 1997, the Company's sales and marketing organization consisted of
81 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 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 affiliate's sales staff, either acting alone or in concert with Prosoft's
sales force, sells the training course, the affiliate is entitled to purchase
the training course at 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.
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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 two national
inbound/outbound telemarketing organizations located in Jacksonville, Florida
and Salt Lake City, Utah. 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 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.
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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.
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.
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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 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 April 1, 1997, the Company has had a student job placement
rate of approximately 86%.
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.
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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.
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 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 January 31, 1997, three southern
California governmental agencies accounted for approximately 59% of the
Company's total revenues. Each of these agencies provided JTPA vocational
training funds for students in the Company's Training Centers. Although a
majority 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 April 1, 1997, Prosoft had 305 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.
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PROPERTIES
As of April 1, 1997, 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>
Santa Ana, CA* 22,813 $23,953 September 1999
Carson, CA* 6,893 $ 8,616 December 1999
North Hollywood, CA* 3,000 $ 3,000 April 1999
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
Jacksonville, FL* 6,191 $ 6,325 January 2000
Salt Lake City, UT 8,443 $ 9,322 March 2000
</TABLE>
* Open Training Center
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." Affiliate contracts can only be
terminated by the affiliate for cause. As of April 10, 1997, the Company
operated 18 Training Centers and was in the process of opening two additional
Training Centers under this type of arrangement in the following locations:
27
<PAGE>
<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%
Largo, FL 1,400 Florida Supplies and Solutions 5%
Menlo Park, CA 1,000 Reliant Integration Services 5%
San Diego, CA 700 Video Tex of America 5%
Springfield, IL 800 Computerland of Springfield 5%
San Jose, CA 1,200 Devries 5%
Indianapolis, IN 1,250 Computerland of Indianapolis 5%
In Process of Opening--
- ---------------------
San Diego, CA 700 Computerland of San Diego 5%
Boston, MA 750 Vanstar 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 40 President and Director
John J. Buckley 43 Chief Technology Officer
Eric W. Richardson 30 Chief Operating Officer and General
Counsel
James P. Stapleton 34 Chief Knowledge Officer
Brooks A. Corbin 36 Chief Financial Officer
</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, leaving total obligations owing
the Internal Revenue Service ("IRS") and California Franchise Tax Board ("CFTB")
of approximately $255,000 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.
29
<PAGE>
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 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.
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.
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 L. 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. Freadhoff 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.
31
<PAGE>
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.
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"). The following is a
brief summary of the material features of the 1996 Plan.
The 1996 Plan originally called for the granting of options to purchase up
to 750,000 shares of the Company's Common Stock. In April 1997, the Board of
Directors approved, subject to stockholder approval, an increase in the shares
eligible for issuance upon exercise of options granted under the Plan to
1,250,000 shares. 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 April 1, 1996,
approximately 205 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 April 10, 1997, there were options outstanding under the 1996
Plan to purchase 748,750 shares of Common Stock, with exercise prices ranging
from $3.50 to $19.75 per share and termination dates ranging from January 1997
to March 2001. 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 April 10, 1997, 976,750 of these options remained outstanding and
were fully exercisable at an exercise price of $1.00 per share. All of these
options expire on July 31, 1997.
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
33
<PAGE>
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.
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, a former director of the Company, 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 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.
34
<PAGE>
OTHER
During the period January 1, 1996 through April 10, 1997, the Company
loaned approximately $206,350 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 an aggregate of 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. 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 April 10, 1997, with respect to the Selling
Stockholders:
<TABLE>
<CAPTION>
Shares Shares Shares
Owned Covered Owned
Prior to By after the
Name of Selling Stockholder Offering Prospectus Offering(1)
--------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Alder, Susan 13,000(2) 13,000 0
Alhadeff, Victor D. 9,000 9,000 0
American Ports Consultants, Inc. 95,236(2) 95,236 0
Baker, Jason R. & Kelly JTWROS 333(2) 333 0
Bannister, Henry F. 3,500 3,500 0
Banyan Investment Co. 113,310(2) 113,310 0
Basson, David N. 2,858(2) 2,858 0
Beebe, R. Scott 50,000(2) 50,000 0
Bev Partners 21,000 21,000 0
Biggs, John W., D.C.,P.C. Pension Plan & Trust 5,000 5,000 0
Bodon, Michael G. 29,100(2) 29,100 0
Boyko, Jeffrey A., D.C., P.C. Pension Plan 3,000 3,000 0
Brades, Doreen 4,000(2) 4,000 0
Bradshaw, Brett 2,000(2) 2,000
Buma, Ryan L. 6,868(2) 6,868 0
Butler, Jeffrey D. 8,571(2) 8,571 0
Carter, Kathy 13,470(2) 13,470 0
Cecala, Enrico 50,000(2) 50,000 0
Chaffetz, Alex 13,072(2) 3,072 10,000
Chaffetz, Jason E. & Julie Marie, Trust 9,600(2) 9,600 0
Chaffetz, John 57,828(2) 57,828 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 19,200(2) 19,200 0
Cook, Steve 600(2) 600 0
Corbin, Brooks A. 109,333(2)(4) 9,333(5) 100,000
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
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Shares Shares Shares
Owned Covered Owned
Prior to By after the
Name of Selling Stockholder Offering Prospectus Offering(1)
--------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
D'Ambrosio, Christianne C. & Kara C. 2,000(2) 2,000 0
D'Ambrosio, Kara C. 30,000(2) 30,000 0
D'Ambrosio, Louis J. 117,600(2) 117,600 0
D'Ambrosio, Louis J. & Kara C. 1,000(2) 1,000 0
D'Ambrosio, Louis J. & Sue R. JTWROS 20,000(2) 20,000 0
Davies, Paul M. 4,500 4,500 0
Delaware Charter Guarantee & Trust, FBO
Burt Cohen IRA 12,000 12,000 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 14,200(2) 14,200 0
EGS Associates 42,000 42,000 0
Evans, Pat 1,000(2) 1,000 0
Ervin, Cohen & Jessup Profit Sharing Plan FBO
Gary Freedman 3,000 3,000 0
Fliege, James R. 48,500(2) 48,500 0
Forrester, Michael & Pamela 98,500(2) 98,500 0
Gaeta, Frank 1,000(2) 1,000 0
Gilbreth, Joseph Jr. & Jean 10,000 10,000 0
Gillen, Frank J. 20,640(2) 20,640 0
Gladstein, Gary S. 5,000 5,000 0
Gramm, Colton 2,500 2,500 0
Granville, Richard 1,000(2) 1,000 0
Gronning, Gene 2,000(2) 2,000 0
Grubbs, Joel 2,660(2) 2,660 0
Gunn, Bob 2,660(2) 2,660 0
Hall, L. Dee 500(2) 500 0
Harding, David 9,904(2)(6) 9,904(6) 0
Haussman Holdings N.V. 40,000 40,000 0
Heiserman & Hamer 921(2) 921 0
Herron, Christopher & Elizabeth 300(2) 300 0
Holt, Dave 1,000(2) 1,000 0
Honig, Roy & Valeta 500(2) 500 0
Hunsaker, Stephen 2,000(2) 2,000 0
IPESA NV 20,000(2) 20,000 0
Jackson, Valerie 4,000(2) 4,000 0
Jensen, W. Reed 10,000(2) 10,000 0
Johnston, Susan 2,860(2) 2,860 0
Jones, Milton C. 50,000(2) 50,000 0
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Shares Shares Shares
Owned Covered Owned
Prior to By after the
Name of Selling Stockholder Offering Prospectus Offering(1)
--------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Kaveggia, Laszlo P. 1,250 1,250 0
Ketcher, Fred 2,500 2,500 0
Keyway Investments 36,000 36,000 0
Khaled, Michael E. 339,000(2)(7) 129,000(7) 210,000(8)
Koch, Ronald R. Living Trust 4,000 4,000 0
Lothian, Mathew 40,000(2) 40,000 0
Lowe, Raymond E. IRA 49,000(2) 49,000 0
Lukoff, Jonathon 5,607(2) 5,607 0
Lyneis, Donald & Janet 200(2) 200 0
Malamut, Mark 1,333(2) 1,333 0
Manni, Arthur 25,000(2) 25,000 0
Marathan Investments, LTD 71,542(2)(9) 71,542(9) 0
McCulloch, Patricia 2,667(2) 2,667 0
Miller, Kim 1,000(2) 1,000 0
Minkoff, Donald E. 2,500 2,500 0
Mock, David 150,000(2)(10) 150,000(10) 0
Modiano, Mario 14,600(2) 14,600 0
Moon, Cynthia 500(2) 500 0
Mourlas, James 1,000(2) 1,000 0
Nievaard, Hans 1,000(2) 1,000 0
Nosseck, Noel 3,000 3,000 0
Olafson, Gregory 100,000(2)(11) 100,000(2)(11) 0
Olafson, Joan 1,330(2) 1,330 0
Patrou, John P. 5,000 5,000 0
Patterson, M. Lisa 500(2) 500 0
Peterson, Brian 1,000(2) 1,000 0
Peterson, Jeffrey 1,000(2) 1,000 0
Peterson, Nancy cust Jonathan Peterson 1,000(2) 1,000 0
Peterson, Mark 18,000(2) 18,000 0
Peterson, Robert 1,000(2) 1,000 0
Resource Services Ltd. Money Purchase Pension 4,576(2) 4,576 0
& Profit Sharing Trust
Richardson, Eric W. 140,666(2)(12) 10,666(13) 130,000(3)
Richardson, William E. 160,000(2)(14) 60,000(14) 100,000(17)
Pillsbury, Jill & Taylor 4,000(2) 4,000 0
Rizzotto, Ken & Jane 1,000(2) 1,000 0
Ronchetti, Jennifer Cook 300(2) 300 0
ROPAR, LLC 15,000 15,000 0
Rosenthal, Murray H. 19,046(2) 19,046 0
Ruenitz Associates 2,000 2,000 0
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Shares Shares Shares
Owned Covered Owned
Prior to By after the
Name of Selling Stockholder Offering Prospectus Offering(1)
--------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Schenker, Walter Milton 3,000 3,000 0
Schmidt Family Trust 5,000 5,000 0
Sheppard, Robert 68,200(2) 68,200 0
Siegel, Richard B. 50,000(2) 50,000 0
Simon, Joe P. & Sanders, Michaelette JTWROS 9,700(2) 9,700 0
Slawson, Steve 3,000 3,000 0
Slobe, Roger D. 7,850(2) 7,850 0
Smith, Randy 13,300(2) 13,300 0
Smith, George R. 1,000(2) 1,000 0
Spair, James J. & Shonna S. JTWROS 5,000(2) 5,000 0
Stallman, Andrew 60,000(2)(15) 60,000(15) 0
Steps, Inc. 50,000(2) 50,000 0
Stevens, Sandra 1,000(2) 1,000 0
Sullivan, Gregory A. 33,333(2) 33,333 0
SunAmerica Small Company Growth Fund 250,000 250,000 0
Terreau, William R. & Marilyn J. JTWROS 500(2) 500 0
Thomas, William E. 50,000(2) 50,000 0
Thomas, William E., Custodian for
Kelly O'Rourke 9,600(2) 9,600 0
Thorp, Terry L. & Pamela A. JTWROS 3,000(2) 3,000 0
Torp, Wade 1,000(2) 1,000 0
Travelers Indemnity Co. 110,000 110,000 0
Trimble, Kelly 119,200(2) 19,200 100,000(13)
Turnbow, Lynn 120,000(2) 120,000 0
Vanderhoff, Michael D. 279,990(2) 199,990 80,000(16)
Wasatch Textiles 9,700(2) 9,700 0
Weinstein, Ronald A. 9,000 9,000 0
Whisper Investment Company 20,000(2) 20,000 0
Whittier Equities Corp. 5,000 5,000 0
Wittwer, Chet A. 1,000(2) 1,000 0
Wood, Ann M. TOD to John C. Wood 5,000(2) 5,000 0
Wood, Mark 17,200(2) 17,200 0
Wood, Mark & Jerri 10,000(2) 10,000 0
Young, Kenneth M. 50,000(2) 50,000 0
Zane and Alice Feldman Trust 7,142(2) 7,142 0
--------- --------- -------
4,182,392 3,352,392 830,000
========= ========= =======
</TABLE>
39
<PAGE>
____________________
(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 held as of November 27,
1996 for each month that elapses after that date 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 100,000 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 2.1% 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 100,000 shares subject to a currently exercisable option and 2,666
shares subject to a currently exercisable warrant.
(13) Includes 2,666 shares subject to a currently exercisable warrant.
(14) Includes 25,000 shares subject to a currently exercisable warrant.
(15) Includes 60,000 shares subject to a currently exercisable warrant.
(16) Represents less than 1% of the Company's shares after this offering.
(17) Represents 1.0% of the Company's shares after this offering.
40
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's capital stock at April 10, 1997, 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
Owned Prior to Owned After
the Offering the Offering
Name of Individual ----------------------- Shares --------------------
or Identity of Group(1) Number Percent to be Sold Number Percent
----------------------- ------------ -------- ------------- --------- --------
<S> <C> <C> <C> <C> <C>
J.P. Morgan & Co., Incorporated (2) 1,013,244 10.2% -- 1,013,244 10.2%
Keith D. Freadhoff 715,000 7.2% -- 715,000 7.2%
Douglas Hartman 710,000 7.2% -- 710,000 7.2%
Donald L. Danks 706,500 7.1% -- 706,500 7.1%
All directors and executive
officers as a group (6 persons) 2,060,099(3) 20.0% 19,999(4) 2,040,100 19.8%
--------- ----- ------ --------- ----
</TABLE>
- ----------------
(1) The address of each of Messrs. Freadhoff, Danks and Hartman is c/o the
Company, 2333 North Broadway, Suite 300, Santa Ana, California 92706.
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) J.P. Morgan & Co. Incorporated is the ultimate parent of the trustee
of four record stockholders, none of which individually owns greater
than 5% of the Common Stock of the Company.
(3) Includes 400,999 shares issuable pursuant to options and warrants
exercisable within 60 days of the date of this Prospectus.
(4) Includes 4,999 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 9,907,533 shares of Common
Stock were issued and outstanding as of April 10, 1997.
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 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.
41
<PAGE>
The Transfer Agent for the Company's Common Stock is Interwest Transfer
Company, Inc.
SHARES ELIGIBLE FOR FUTURE SALE
On April 10, 1997, the Company had 9,907,533 shares of Common Stock
outstanding, assuming no exercise of the outstanding stock options or warrants,
which total 2,153,990 shares.
Substantially all of the outstanding shares of Common Stock are "restricted
securities" as defined in Rule 144 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. Only 480,000 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. Pursuant to amendments adopted by
the SEC, effective April 29, 1997, the two-year and three-year holding periods
under Rule 144 described above will be reduced to one year and two years,
respectively. As a result, on April 29, 1997, 4,362,126 of the Company's
currently outstanding shares will be eligible for sale under Rule 144.
An aggregate of 3,352,392 shares have been registered for sale by the
Selling Stockholders under this Prospectus. In connection with such
registration, holders of 2,636,392 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 held as
of November 27, 1996 for each month that elapses after that date, 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 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 has also registered 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 April 10, 1997, 1,422,981 of these
options were exercisable. In addition, the Company has agreed to register an
additional 2,489,922 shares under registration agreements with certain
investors. See "Registration Rights."
42
<PAGE>
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 Rule
144, 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.
REGISTRATION RIGHTS
In connection with a 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 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 are
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.
In connection with a private placement of 2,081,758 shares of Common Stock
in February through April 1997, the Company entered into a Registration Rights
Agreement with the purchasers of those shares. Under that Registration Rights
Agreement, the Company has agreed to file a registration statement covering
179,167 of those shares no later than June 11, 1997 and a registration statement
covering the remaining 1,902,591 of those shares no later than September 9,
1997. The Company has agreed to use its best efforts to cause those
registration statements to be declared effective and to keep them effective
until all such shares have been sold or until all of such shares could otherwise
be sold under Rule 144 under the Act. The Company has also granted the holders
of 1,013,244 of those shares certain piggyback registration rights during the
period from September 13, 1997 to March 13, 2000.
The Company also agreed to file a registration statement by October 17,
1997 covering 408,164 shares sold to an institutional investor in April 1997 and
to use its best efforts to cause that registration statement to be declared
effective and to keep it effective until April 1999. If this registration
statement is not declared effective by December 31, 1997, the investor has the
right to rescind its investment. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and Capital
Resources." The Company has also granted this investor
43
<PAGE>
certain piggyback registration rights for so long as it owns greater than three
percent of the Company's outstanding shares.
No other stockholders 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 "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
44
<PAGE>
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, 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. 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
45
<PAGE>
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.
The Bylaws generally provide that the foregoing provisions of the Bylaws
may be amended or repealed by stockholders 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;
46
<PAGE>
(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 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 2,636,392 of the Shares have agreed to sell only certain
specified percentages of such Shares under 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.
47
<PAGE>
LEGAL MATTERS
The validity of the issuance of the Shares offered hereby have been passed
upon for the Company by Eric W. Richardson, Chief Operating Officer and General
Counsel to the Company. As of April 10, 1997, Mr. Richardson beneficially owned
140,666 shares of Common Stock of the Company.
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.
48
<PAGE>
PROSOFT I-NET SOLUTIONS, INC. AND PREDECESSOR
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<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 six months ended January 31, 1996 and 1997
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
--------- -----------
606,013 1,367,433
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>
PROSOFT I-NET
PREDECESSOR PRO-SOFT DEVELOPMENT CORP. SOLUTIONS, INC.
ENTITY COMMON STOCK COMMON STOCK
------------ -------------------------- -----------------------
OWNER'S
DEFICIT SHARE AMOUNT SHARES AMOUNT
------------- -------------------------- -----------------------
<S> <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 - -
Issuance of common stock for cash, note
and services - 3,576,250 3,576 - -
Conversion of accounts payable to common stock - 150,000 150 - -
Shares outstanding prior to reorganization - - - 480,060 480
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
Exercise of warrants - - - 960,632 961
Net loss - - - - -
--------------------------------------------------------------------
Balance at July 31, 1996 $ - - $ - 7,336,404 $ 7,336
=========== ========== ========= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL RECEIVABLE
PAID-IN FROM ACCUMULATED
CAPITAL STOCKHOLDER DEFICIT TOTAL
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Capital contributions to sole proprietorship $ - $ - $ - $ -
Net loss - - - -
---------------------------------------------------------------
Balance at December 31, 1995 - - - -
Contribution of net assets of Predecessor
to Pro-Soft Development Corp. in
exchange for common stock (195,473) - - (194,473)
Issuance of common stock for cash, note
and services 1,380,174 (9,500) - 1,374,250
Conversion of accounts payable to common stock 37,350 - - 37,500
Shares outstanding prior to reorganization (455) - - 25
Acquisition of Pro-Soft Development Corp.
by the Company - - - -
Issuance of common stock for cash, net of
issuance costs of $33 8,000 8,307,221 - - 8,308,390
Exercise of warrants 1,242,199 - - 1,243,160
Net loss - - (3,074,123) (3,074,123)
---------------------------------------------------------------
Balance at July 31, 1996 $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.
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.
F-8
<PAGE>
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 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.
F-9
<PAGE>
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.
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.
F-10
<PAGE>
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>
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.
F-11
<PAGE>
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>
<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. AND PREDECESSOR
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1996 1997
----------- -----------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,466,460 $ 196,970
Tuition receivable 766,405 1,029,938
Note receivable from officers/shareholders 85,600 411,993
Prepaid expenses and other current assets 311,592 675,353
----------- -----------
Total current assets 7,630,057 2,314,254
Property and equipment:
Leasehold improvements -- 299,907
Computer equipment and software 1,494,677 1,815,734
Office equipment, furniture and fixtures 118,211 118,211
----------- -----------
1,612,888 2,233,852
Less depreciation and amortization 617,177
-----------
1,367,433 1,616,675
Deposits on computer leases -- 93,706
----------- -----------
Total assets $ 8,997,490 $ 4,024,635
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 61,832 $ --
Accounts payable 363,414 1,530,100
Accrued payroll and related expenses 88,474 194,860
Deferred revenue -- 287,476
Current portion of capital lease obligations 351,509 230,578
----------- -----------
Total current liabilities 865,229 2,243,014
Obligations under capital leases, net of current portion 437,532 462,261
Stockholders' equity:
Common stock, $.001 par value:
Authorized shares - 50,000,000
Issued and outstanding shares at January 31, 1997 -
7,406,211; and at July 31, 1996 - 7,336,404 7,336 7,406
Additional paid-in capital 10,771,016 11,093,005
Note receivable from stockholder (9,500) (9,500)
Accumulated deficit (3,074,123) (9,771,551)
----------- -----------
Total liabilities and stockholders' equity 8,997,490 1,319,360
----------- -----------
Total stockholders' equity $ 7,694,729 $ 4,024,635
=========== ===========
</TABLE>
F-13
<PAGE>
PROSOFT I-NET SOLUTIONS, INC. AND PREDECESSOR
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JANUARY 31,
1996 1997
---------- ------------
<S> <C> <C>
Revenue.................................. $ 111,648 $ 967,082
Costs and expenses:
Cost of services........................ 87,748 2,421,243
Sales and marketing..................... 37,794 1,183,536
General and administrative.............. 438,891 4,106,027
--------- -----------
Total costs and expenses................. 564,433 7,710,806
--------- -----------
Loss from operations..................... (452,785) (6,743,724)
Interest income (expense)................ (20,907) 50,294
--------- -----------
Loss before provision for income taxes... (473,692) (6,693,430)
Provision for state franchise tax........ 0 4,000
--------- -----------
Net loss................................. $(473,692) $(6,697,430)
========= ===========
Net loss per share....................... N/A $(0.91)
========== ===========
Weighted average number of common N/A 7,364,292
shares outstanding...................... ========== ===========
</TABLE>
F-14
<PAGE>
PROSOFT I-NET SOLUTIONS, INC. AND PREDECESSOR
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR ENTITY COMPANY
-------------------- -----------
SIX MONTHS ENDED JANUARY 31,
1996 1997
-------------------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Loss $(473,692) $(6,697,430)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 55,667 371,722
Changes in operating assets and liabilities:
Tuition receivable (90,404) (263,533)
Prepaid expenses and other assets 9,800 (363,761)
Accounts payable 55,992 1,166,686
Accrued payroll and related expenses 13,600 106,386
Deferred revenue 38,744 287,476
--------- -----------
Net cash used in operating activities (390,293) (5,392,454)
--------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (112,887) (620,962)
Deposits on computer leases -- (93,706)
Notes receivable from officers/shareholders (16,450) (326,393)
--------- -----------
Net cash (used in) investing activities (129,337) (1,041,061)
--------- -----------
FINANCING ACTIVITIES:
Principal payments on debt and capital leases -- (158,034)
Proceeds from issuance of notes payable 53,790
Issuance of common stock 453,663 322,059
--------- -----------
Net cash provided by financing activities 507,453 164,025
--------- -----------
Decrease in cash and cash equivalents (12,177) (6,269,490)
Cash and cash equivalents at the beginning of period 1,231 6,466,460
--------- -----------
Cash and cash equivalents at the end of period $ (10,946) $ 196,970
========= ===========
SUPPLEMENTARY DISCLOSURE OF CASH PAID DURING THE
PERIOD FOR:
Interest $ 20,907 $ 30,384
========= ===========
Income taxes $ 0 $ 4,000
========= ===========
Acquisition of equipment under capital leases $ 592,652 $ 0
========= ===========
</TABLE>
F-15
<PAGE>
PROSOFT I-NET SOLUTIONS, INC. AND PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 six months ended January 31, 1997 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 January 31, 1997 and its consolidated results of
operations for the three and six months ended January 31, 1997, and its cash
flows for the six months ended January 31, 1997.
Net loss per share is based on the weighted average number of shares of common
stock outstanding.
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............................................ 18
Management.......................................... 31
Certain Transactions................................ 36
Selling Stockholders................................ 38
Principal Stockholders.............................. 42
Description of Capital Stock........................ 42
Plan of Distribution................................ 47
Legal Matters....................................... 48
Experts............................................. 48
Additional Information.............................. 48
Index to Consolidated Financial Statements.......... F-1
</TABLE>
Until May __, 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.
3,028,252 Shares of
Common Stock
324,140 Shares of
Common Stock
Issuable Upon Exercise of
Common Stock Purchase Warrants
____________________
PROSPECTUS
____________________
APRIL , 1997
================================================================================
<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>
<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 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.
II-1
<PAGE>
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 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.
II-2
<PAGE>
(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.
(i) During April 1996 through December 1996, the Company, pursuant to its 1996
Stock Option Plan, issued options to purchase 748,750 shares of Common Stock to
certain of its employees and consultants, with exercise prices ranging from
$3.50 to $19.75 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
II-3
<PAGE>
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.
(m) In February through April 1997, the Company issued and sold 2,081,758
shares of Common Stock to 16 investors for aggregate consideration of
$22,139,714 in a private offering. This offering was made on a private basis
only to persons who were "accredited investors" as defined in Securities Act
Rule 501(a). Total commissions of $112,500 will be paid in connection with
this offering. 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.
(n) In April 1997, the Company issued 408,164 shares of Common Stock to one
investor for aggregate consideration of $5,000,009 in a private offering. This
offering was made only to one "accredited investor" as defined in Securities Act
Rule 501(a). No commissions were paid in connection with this offering.
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 and/or Regulation D promulgated thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Index of Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibits
- ------- -----------------------------------------------------------------------
<S> <C>
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 I-Net Solutions, Inc. Amended 1996 Stock Option Plan
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibits
- ------- -----------------------------------------------------------------------
<S> <C>
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*
10.15 Office Building Lease dated as of December 16, 1996 between COSCAN
California Limited Partnership and the Company (incorporated by reference to
Exhibit 10 to the Company's Report on Form 10-Q for the quarter ended
January 31, 1997).
10.16 Form of Subscription Agreement, entered into in February through April 1997,
between the Company and various investors.
10.17 Registration Rights Agreement dated as of March 13, 1997 among the Company
and various investors.
10.18 Subscription Agreement between the Company and General Electric Pension
Trust dated April 4, 1997
10.19 Escrow Agreement among the Company, General Electric Pension Trust and
State Street Bank and Trust dated April 4, 1997
10.20 Secured Promissory Note dated April 9, 1997 in favor of the Company
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibits
- ------- -----------------------------------------------------------------------
<S> <C>
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 Exhibit 5)*
24 Power of Attorney*
27 Financial Data Schedule*
</TABLE>
- -------------------------
* 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.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Post-Effective Amendment No. 2 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Santa Ana, State of California on the 16th day of April, 1997.
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 Amendment 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 April 16, 1997
- ----------------------------- Chairman of the Board
Keith D. Freadhoff (Principal Executive Officer)
/s/ Donald L. Danks* President and Director April 16, 1997
- -----------------------------
Donald L. Danks
/s/ Brooks A. Corbin* Chief Financial Officer April 16, 1997
- ----------------------------- (Principal Financial and
Brooks A. Corbin Accounting Officer)
*By /s/ Eric W. Richardson April 16, 1997
- -----------------------------
Eric W. Richardson
Attorney-in-Fact
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibits
- ------- -----------------------------------------------------------------------
<S> <C>
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 I-Net Solutions, Inc. Amended 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*
10.15 Office Building Lease dated as of December 16, 1996 between COSCAN
California Limited Partnership and the Company (incorporated by reference to
Exhibit 10 to the Company's Report on Form 10-Q for the quarter ended
January 31, 1997).
10.16 Form of Subscription Agreement, entered into in February through April 1997,
between the Company and various investors.
10.17 Registration Rights Agreement dated as of March 13, 1997 among the Company
and various investors.
10.18 Subscription Agreement between the Company and General Electric Pension
Trust dated April 4, 1997
10.19 Escrow Agreement among the Company, General Electric Pension Trust and
State Street Bank and Trust dated April 4, 1997
10.20 Secured Promissory Note dated April 9, 1997 in favor of the Company
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibits
- ------- -----------------------------------------------------------------------
<S> <C>
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 Exhibit 5)*
24 Power of Attorney*
27 Financial Data Schedule*
</TABLE>
- -------------------------
* Previously filed.
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
PROSOFT I-NET SOLUTIONS, INC.
(April 8, 1997)
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - IDENTIFICATION.................................. 1
Section 1.1 NAME...................................... 1
Section 1.2 REGISTERED OFFICE AND RESIDENT AGENT...... 1
Section 1.3 OTHER OFFICES............................. 1
Section 1.4 SEAL...................................... 1
Section 1.5 FISCAL YEAR............................... 1
ARTICLE II - STOCK.......................................... 1
Section 2.1 CONSIDERATION FOR SHARES.................. 1
Section 2.2 PAYMENT FOR SHARES........................ 1
Section 2.3 CERTIFICATES REPRESENTING SHARES.......... 2
Section 2.4 TRANSFER OF SHARES........................ 2
Section 2.5 REGULATIONS............................... 2
ARTICLE III - STOCKHOLDERS.................................. 2
Section 3.1 PLACE OF STOCKHOLDERS' MEETINGS........... 2
Section 3.2 ANNUAL STOCKHOLDERS' MEETING.............. 2
Section 3.3 SPECIAL STOCKHOLDERS' MEETINGS............ 2
Section 3.4 BUSINESS AT STOCKHOLDERS' MEETINGS........ 3
Section 3.5 NOTICE OF STOCKHOLDERS' MEETINGS.......... 4
Section 3.6 STOCKHOLDER QUORUM........................ 4
Section 3.7 ADJOURNED STOCKHOLDERS' MEETINGS.......... 4
Section 3.8 ENTRY OF NOTICE........................... 4
Section 3.9 VOTING.................................... 4
Section 3.10 CONSENT OF ABSENTEES...................... 5
Section 3.11 STOCKHOLDER ACTION WITHOUT MEETING........ 5
Section 3.12 PROXIES................................... 5
Section 3.13 DEFINITION OF "STOCKHOLDER"............... 5
ARTICLE IV - BOARD OF DIRECTORS............................. 6
Section 4.1 NUMBER; TERM; ELECTION.................... 6
Section 4.2 NOMINATIONS............................... 7
Section 4.3 VACANCIES................................. 8
Section 4.4 ANNUAL MEETING............................ 8
Section 4.5 REGULAR MEETINGS.......................... 9
Section 4.6 OTHER MEETINGS............................ 9
Section 4.7 NOTICE OF ADJOURNED MEETINGS.............. 9
Section 4.8 ENTRY OF NOTICE........................... 9
Section 4.9 WAIVER OF NOTICE.......................... 9
Section 4.10 QUORUM.................................... 10
Section 4.11 PARTICIPATION IN MEETINGS BY TELEPHONE.... 10
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Section 4.12 ADJOURNMENT............................... 10
Section 4.13 ACTION WITHOUT MEETING.................... 10
Section 4.14 FEES AND COMPENSATION..................... 10
Section 4.15 LIMITATION OF LIABILITY................... 10
Section 4.16 INDEMNIFICATION; ADVANCEMENT OF EXPENSES.. 11
Section 4.17 INDEMNIFICATION OF EMPLOYEES AND AGENTS... 11
Section 4.18 INSURANCE................................. 11
Section 4.19 POWERS OF DIRECTORS....................... 12
Section 4.20 COMMITTEES................................ 12
ARTICLE V - OFFICERS........................................ 12
Section 5.1 OFFICERS.................................. 12
Section 5.2 ELECTION.................................. 12
Section 5.3 SUBORDINATE OFFICERS...................... 12
Section 5.4 REMOVAL AND RESIGNATION................... 12
Section 5.5 VACANCIES................................. 13
Section 5.6 CHAIRMAN OF THE BOARD OF DIRECTORS........ 13
Section 5.7 CHIEF EXECUTIVE OFFICER................... 13
Section 5.8 PRESIDENT................................. 13
Section 5.9 VICE PRESIDENTS........................... 13
Section 5.10 SECRETARY................................. 14
Section 5.11 ASSISTANT SECRETARIES..................... 14
Section 5.12 CHIEF FINANCIAL OFFICER................... 14
Section 5.13 TREASURER................................. 15
Section 5.14 ASSISTANT TREASURERS...................... 15
Section 5.15 CORPORATE BANK ACCOUNTS................... 15
Section 5.16 TRANSFERS OF AUTHORITY.................... 15
ARTICLE VI - MISCELLANEOUS.................................. 15
Section 6.1 RECORD DATE AND CLOSING STOCK BOOKS....... 15
Section 6.2 INSPECTION OF CORPORATE RECORDS........... 16
Section 6.3 CHECKS, DRAFTS, ETC....................... 16
Section 6.4 CONTRACTS, ETC., HOW EXECUTED............. 16
Section 6.5 LOST CERTIFICATES OF STOCK................ 16
Section 6.6 REPRESENTATION OF SHARES.................. 17
Section 6.7 INSPECTION OF BYLAWS...................... 17
ARTICLE VII - AMENDMENTS.................................... 17
Section 7.1 POWER OF STOCKHOLDERS..................... 17
Section 7.2 POWER OF DIRECTORS........................ 17
</TABLE>
ii
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
PROSOFT I-NET SOLUTIONS, INC.
ARTICLE I
IDENTIFICATION
Section 1.1 NAME. The name of the Corporation is Prosoft I-Net Solutions,
Inc.
Section 1.2 REGISTERED OFFICE AND RESIDENT AGENT. The address of its
registered office in Nevada is 3263 Howard Hughes Parkway, Suite 350, Las Vegas,
Nevada 89109.
Section 1.3 OTHER OFFICES. The principal executive office of the
Corporation shall be established by the Board of Directors and branch or
subordinate offices may be established by the Board of Directors.
Section 1.4 SEAL. The seal of the Corporation will be circular in form
and mounted upon a metal die, suitable for impressing the same upon paper. The
use of the seal is not necessary on any corporate document and its use or nonuse
shall not in any way affect the legality of the document.
Section 1.5 FISCAL YEAR. The fiscal year of the Corporation will be
determined by resolution of the Board of Directors.
ARTICLE II
STOCK
Section 2.1 CONSIDERATION FOR SHARES. The shares of stock may be issued
or such consideration, expressed in dollars, as shall be fixed from time to time
by the Board of Directors. Treasury shares may be disposed of by the
Corporation for such consideration expressed in dollars as may be fixed from
time to time by the Board of Directors.
Section 2.2 PAYMENT FOR SHARES. The consideration for the issuance of
shares may be paid, in whole or in part, in the form of any tangible or
intangible property or benefit to the Corporation, including, but not limited
to, cash, promissory notes, services performed, contracts for services to be
performed or other securities of the Corporation. When the Corporation receives
the consideration for which the Board of Directors authorized the issuance of
shares, the shares issued therefor are fully paid and non-assessable. The
judgment of the Board of Directors as to the adequacy of the consideration
received for shares shall be conclusive in the absence of actual fraud in the
transaction. The Corporation may place in escrow shares issued for a contract
for further services or benefits or a promissory note, or make any other
arrangement to restrict the transfer of the shares.
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Section 2.3 CERTIFICATES REPRESENTING SHARES. Each holder of stock is
entitled to a certificate in such form as may be required by applicable law
signed by the Chairman of the Board of Directors, Chief Executive Officer, or
President (or a vice president), and the Secretary (or an assistant secretary),
certifying the number of shares owned by the stockholder in the Corporation.
In case any officer or officers who shall have signed, or whose facsimile
signature or signatures shall have been used on, any certificate or certificates
shall cease to be an officer or officers of the Corporation, ether because of
death, resignation or otherwise, before the certificate or certificates shall
have been delivered by the Corporation, the certificate or certificates may
nevertheless be adopted by the Corporation and be issued and delivered as though
the person or persons who signed the certificate or certificates, or whose
facsimile signature or signatures shall have been used thereon, had not ceased
to be an officer or officers of the Corporation.
Section 2.4 TRANSFER OF SHARES. Transfers of shares shall be made only
upon the stock transfer books of the Corporation kept in an office of the
Corporation or by transfer agents designated to transfer shares of the stock of
the Corporation.
Section 2.5 REGULATIONS. The issue, transfer, conversion and registration
of stock shall be governed by such other regulations as the Board Directors may
establish.
ARTICLE III
STOCKHOLDERS
Section 3.1 PLACE OF STOCKHOLDERS' MEETINGS. Meetings of the Corporation
shall be held at the principal executive office of the Corporation, or at such
other place as may be designated by the Chairman of the Board of Directors, the
Chief Executive Officer or the Board of Directors.
Section 3.2 ANNUAL STOCKHOLDERS' MEETING. The annual meeting of the
stockholders shall be held on such date and at such time as the Board of
Directors shall fix for the purposes of electing directors and transacting such
other business as may properly be brought before the meeting.
Section 3.3 SPECIAL STOCKHOLDERS' MEETINGS. Subject to the Corporation's
Articles of Incorporation, special meetings of the stockholders may be called by
the Board of Directors, or by one or more stockholders holding not less than ten
percent (10%) of shares entitled to vote at the meeting and shall be held on
such date and at such time as shall be fixed by resolution. Upon request in
writing that a special meeting of stockholders be called for any proper purpose,
directed to the Chairman of the Board, President, Vice President or Secretary by
any person (other than the Board) entitled to call a special meeting of
stockholders, the officer shall cause notice to be given to each registered
stockholder entitled to vote that a
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meeting will be held at a time requested by the person or persons calling the
meeting, not less than thirty-five (35) days nor more than sixty (60) days after
receipt of the request.
Section 3.4 BUSINESS AT STOCKHOLDERS' MEETINGS. Except as otherwise
provided by law (including but not limited to Rule 14a-8 of the Securities
Exchange Act of 1934, as amended, or any successor provision thereto) or in
these Bylaws, the business which shall be conducted at any meeting of the
stockholders shall (a) have been specified in the written notice of the meeting
(or any supplement thereto) given by the Corporation, (b) be brought before the
meeting at the direction of the Board of Directors or the presiding officer of
the meeting, or (c) have been specified in a written notice given to the
Secretary of the Corporation by or on behalf of any stockholder who shall have
been a stockholder of record on the record date of such meeting and who shall
continue to be entitled to vote thereat and who is in continuing compliance with
the requirements of Rule 14a-8 (the "Stockholder's Notice"), in accordance with
all of the following requirements:
(1) Each Stockholder's Notice must be delivered to, or mailed and
received at, the principal executive offices of the Corporation:
(a) in the case of an annual meeting that is called for a date
that is within thirty (30) days before or after the anniversary date of the
immediately preceding annual meeting of stockholders, not less than one hundred
twenty (120) calendar days in advance of the anniversary date of the
Corporation's proxy statement for the previous year's annual stockholder's
meeting nor more than one hundred fifty (150) days prior to such anniversary
date; and
(b) in the case of an annual meeting that is called for a date
that is not within thirty (30) days before or after the anniversary date of the
immediately preceding annual meeting, not later than the close of business on
the tenth (10th) day following the day on which notice of the date of the
meeting was mailed or public disclosure of the date of the meeting was made,
whichever occurs first; and
(2) Each such Stockholder's Notice must set forth each of the
following:
(a) the name and address of the stockholder who intends to bring
the business before the meeting:
(b) the general nature of the business which he or she seeks to
bring before the meeting; and
(c) a representation that the stockholder is a holder of record
of shares of stock entitled to vote at such meeting and intends to appear in
person or by proxy at the meeting to bring the business specified in the notice
before the meeting.
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The presiding officer of the meeting may, in his or her sole discretion,
refuse to acknowledge any business proposed by a stockholder not made in
compliance with the foregoing procedure.
Section 3.5 NOTICE OF STOCKHOLDERS' MEETINGS. Written notice stating the
place, day and hour of a meeting of stockholders and the purpose for which the
meeting is called must be delivered not less than ten (10) days, nor more than
sixty (60) days before the date of the meeting, either personally, or by mail,
or by means of written communication, charges prepaid, signed by the President
(or any vice-president) or the Secretary (or any assistant secretary) to each
registered stockholder entitled to vote at the meeting. If mailed, the notice
shall be considered to be delivered when deposited in the United States mail
addressed to the stockholder at the stockholder's address as it appears on the
stock transfer books of the Corporation. It is not required that the notice be
published in any newspaper. Waiver by a stockholder in writing of notice of a
meeting is equivalent to giving notice. Attendance by a stockholder, without
objection to the notice, whether in person or by proxy, at a meeting is a waiver
of notice of the meeting.
Section 3.6 STOCKHOLDER QUORUM. A majority of the shares entitled to
vote, represented in person or by proxy, is a quorum at a meeting of
stockholders, unless or except to the extent that the presence of a larger
number may be required by law. Where separate vote by a class or classes is
required, a majority of the shares of such class or classes present in person or
represented by proxy shall constitute a quorum entitled to take action with
respect to that vote on that matter. The stockholders present at a duly
organized meeting may continue to do business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum.
Section 3.7 ADJOURNED STOCKHOLDERS' MEETINGS. Any meeting of
stockholders, whether annual or special, whether or not a quorum is present, may
be adjourned from time to time by the vote of a majority of the shares, the
holders of which are either present in person or represented by proxy, but in
the absence of a quorum no other business may be transacted at any meeting of
stockholders.
When any meeting of stockholders, whether annual or special, is adjourned
for thirty (30) days or more, notice of the adjourned meeting shall be given as
in the case of an original meeting. As to any adjournment of less than (30)
days, it shall not be necessary to give any notice of the time and place of the
adjourned meeting or of the business to be transacted, other than by
announcement at the meeting at which the adjournment is taken.
Section 3.8 ENTRY OF NOTICE. An entry in the minutes of any meeting of
stockholders, whether annual or special, to the effect that notice has been duly
given shall be conclusive and incontrovertible evidence that due notice of the
meeting was given to all stockholders as required by law and these bylaws.
Section 3.9 VOTING. Except as otherwise provided by law, only persons in
whose names shares entitled to vote stand on the stock registry of the
Corporation (a) on the day prior
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to any meeting of stockholders, or (b) if a record date for voting purposes is
fixed as provided in Article VI, Section 6.1, of these Bylaws, then on that
record date, shall be entitled to vote at the meeting. Voting shall be by
ballots, each of which shall state the stockholder's name or proxy voting and
such other information as may be required under the procedure established for
the meeting. The Corporation may, and to the extent required by law shall, in
advance of any meeting of stockholders, appoint one or more inspectors to act at
the meeting and make written report thereof. Each vote taken by ballot shall be
counted by an inspector or inspectors appointed by the chairman of the meeting.
Except as otherwise provided by law or by an express provision of the
Articles of Incorporation, or by an express provision of any Directors'
Resolution for a series of Preferred Stock, each full share is entitled to one
vote and, when a quorum is present at the commencement of any meeting of
stockholders, the vote of the holders of a majority of the shares entitled to
vote present, in person or by proxy, shall decide any question brought before
the meeting of stockholders. Fractional shares shall not be entitled to any
voting rights whatsoever.
Section 3.10 CONSENT OF ABSENTEES. The transactions of any meeting of
stockholders, whether annual or special, and however called and noticed, shall
be as valid as though had at a meeting duly held after regular call and notice
if a quorum be present either in person or by proxy and if, either before or
after the meeting, each of the stockholders entitled to vote, not present in
person or by proxy, signs a written waiver of notice, or a consent to the
holding of the meeting, or an approval of the minutes thereof, all such waivers,
consents or approvals shall be filed with the Secretary or be made a part of the
minutes of the meeting.
Section 3.11 STOCKHOLDER ACTION WITHOUT MEETING. Except for actions taken
by the unanimous written consent of the stockholders, all action taken by the
stockholders, including but not limited to the election and removal of
directors, voting on stockholder issues, consents, approvals and ratifications,
must be taken at a duly called, noticed and held meeting of the stockholders and
no such action may be taken without a meeting.
Section 3.12 PROXIES. Every person entitled to vote or execute consents
shall have the right to do so either in person or by an agent or agents
authorized by a written proxy executed by the person or by the person's duly
authorized agent and filed with the Secretary of the Corporation; provided, that
no proxy shall be valid after the expiration of six (6) months from the date of
its execution unless the person executing it specified therein the length of
time for which the proxy is to continue in force, which in no event all exceed
seven (7) years from the date of its execution.
Section 3.13 DEFINITION OF "STOCKHOLDER". As used in these Bylaws, the
term "stockholder," and any term of like import, shall include all persons
entitled to vote the shares held by a stockholder, unless the context in which
the term is used indicates that a different meaning is intended.
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ARTICLE IV
BOARD OF DIRECTORS
Section 4.1 NUMBER; TERM; ELECTION. The number of directors shall be
fixed from time to time exclusively by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of authorized directors
(whether or not there exists any vacancy in a previously authorized directorship
at the time any such resolution is presented to the Board of Directors for
adoption) but the number shall be not less than three (3) nor more than twenty-
five (25).
If a vacancy occurs on the Board of Directors, including a vacancy created
by an increase in the number of directors, the vacancy shall be filled by the
Board of Directors. All directors shall continue in office until the election
and qualification of their respective successors in office. No decrease in the
number of directors shall have the effect of shortening the term of any
incumbent director.
Effective at the first annual meeting of stockholders held after September
25, 1996 (the "Initial Meeting"), the Board of Directors shall be divided into
three classes: Class I, Class II and Class III. Such classes shall be as
nearly equal in number of directors as possible. Each director shall serve for
a term ending at the third annual stockholders meeting following the annual
meeting at which such director was elected; provided, however, that the
directors first elected to Class I shall serve for a term ending at the first
annual meeting held after the Initial Meeting, the directors first elected to
Class II shall serve for a term ending at the second annual meeting held after
the Initial Meeting, and the directors first elected to Class III shall serve
for a term ending at the third annual meeting held after the Initial Meeting.
At each annual election held after the Initial Meeting, the directors
chosen to succeed those whose terms then expire shall be identified as being of
the same class as the directors they succeed, unless, by reason of any
intervening changes in the authorized number of directors, the Board shall
designate one or more directorships whose term then expires as directorships of
another class in order more nearly to achieve equality in the number of
directors among the classes. When the Board of Directors fills a vacancy
resulting from the death, resignation or removal of a director, the director
chosen to fill that vacancy shall be of the same class as the director he or she
succeeds, unless, by reason of any previous changes in the authorized number of
directors, the Board shall designate the vacant directorship as a directorship
of another class in order more nearly to achieve equality in the number of
directors among the classes.
Notwithstanding the rule that the three classes shall be as nearly equal in
number of directors as possible, in the event of any change in the authorized
number of directors each director then continuing to serve as such will
nevertheless continue as a director of the class of which he or she is a member
until the expiration of his or her current term or earlier death, resignation or
removal. If any newly created directorship or vacancy on the Board, consistent
with the rule that the three classes shall be as nearly equal in number of
directors as possible, may be allocated to one or two or more classes, the Board
shall allocate it to that of the
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available classes whose term of office is due to expire at the earliest date
following such allocation.
Section 4.2 NOMINATIONS. Only persons who are nominated in accordance
with the following procedures shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors at the annual
meeting, by or at the direction of the Board of Directors, may be made by any
Nominating Committee or person appointed by the Board of Directors; nominations
may also be made by any stockholder of the Corporation entitled to vote for the
election of directors at the meeting who complies with the notice procedures set
forth in this Section 4. Such nomination, other than those made by or at the
direction of the Board of Directors, shall be made pursuant to timely notice in
writing to the Secretary of the Corporation. To be timely, a stockholder's
nominating notice shall be delivered to or mailed and received at the principal
executive office of the Corporation addressed to the attention of the Secretary
of the Corporation not less than thirty-five (35) days prior to the meeting or
the date the stockholders are first solicited for their consents as the case may
be; provided, however, that, in the case of an annual meeting and in the event
that less than fifty (50) days' notice or prior public disclosure of the date of
the meeting is given or made to stockholders, notice by the stockholder to be
timely must be so received no later than the earlier of (a) the close of
business on the tenth (10th) day following the day on which such notice of the
date of the meeting was mailed or such public disclosure was made, whichever
first occurs, or (b) two (2) days prior to the date of the meeting.
Such stockholder's nominating notice to the Secretary shall set forth
(1) as to each person whom the stockholder proposes to nominate for
election or reelection as a director, each of the following:
(a) the name, age, business address and residence address of the
person;
(b) the principal occupation or employment of the person;
(c) the class and number of shares of stock which are
beneficially owned by the person;
(d) a statement as to the person's citizenship; and
(e) any other information relating to the person that is required
to be disclosed in solicitations for proxies for election of directors pursuant
to Section 14 of the Securities Exchange Action of 1934, as amended, and the
rules and regulations promulgated thereunder; and
(2) as to the stockholder giving the notice, each of the following:
(a) the name and record address of the stockholder giving the
notice;
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(b) the name and record address of the stockholder; and
(c) the class, series and number of shares of stock which are
beneficially owned by the stockholder.
The Corporation may require any proposed nominee to furnish such other
information as may reasonably be required by the Corporation to determine the
eligibility of such proposed nominee to serve as a director of the Corporation.
No person shall be eligible for election as a director of the Corporation unless
nominated in accordance with the procedures set forth herein.
In connection with any annual meeting, the Chairman of the Board of
Directors or the Chief Executive Officer or such officer presiding at the
meeting shall, if the facts warrant, determine and declare to the meeting that a
nomination was not made in accordance with the foregoing procedure and that the
defective nomination shall be disregarded.
Section 4.3 VACANCIES. Any vacancy occurring in the Board of Directors
may be filled by the affirmative vote of a majority of the remaining directors
though less than a quorum of the Board of Directors was present, or a sole
remaining director. A director elected to fill a vacancy shall be elected for
the unexpired term of the director's predecessor in office.
A vacancy or vacancies in the Board of Directors shall be deemed to exist
in case of the death, resignation or removal of any director, or if the
authorized number of directors be increased, or if the stockholders fail at any
annual or special meeting of stockholders at which any director or directors are
elected to elect the full authorized number of directors to be voted for at that
meeting, or if a vacancy is declared by the Board of Directors for any reason
permitted by law.
The stockholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the Board of Directors. If the Board of
Directors accepts the resignation of a director tendered to take effect at a
future time, the Board of Directors shall have power to elect a successor to
take office when the resignation is to become effective.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of the director's term office.
Section 4.4 ANNUAL MEETING. Immediately after the annual meeting of the
stockholders, at the same place as the meeting of the stockholders or such other
place as may be provided in a notice thereof, the Board of Directors shall meet
each year for the purpose of organization, election of officers, and
consideration of any other business that may properly be brought before the
meeting. No notice of any kind to either old or new members of the Board of
Directors for this annual meeting shall be necessary unless the meeting is to be
held at a place other than the place of the meeting of the stockholders, in
which case notice of the place of the meeting shall be given as provided in
Section 4.6.
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Section 4.5 REGULAR MEETINGS. Regular meetings of the Board of Directors
shall be held at the times and places within or without the State Nevada as may
be designated from time to time by resolution of the Board Directors or by
written consent of all members of the Board of Directors. No notice of any kind
to members of the Board of Directors for these regular meetings shall be
necessary unless the meeting is to be held at a place other than the principal
executive office of the Corporation, in which case notice of the place of the
meeting shall be given as provided in Section 4.6.
Section 4.6 OTHER MEETINGS. Other meetings of the Board of Directors for
any purpose or purposes may be held at any time upon call by the Chairman the
Board of Directors, Chief Executive Officer, President or, if any of the above
listed officers is absent or unable or refuses to act, by any vice president or
by any two (2) directors. The other meetings may be held at any place within or
without the State of Nevada as may be designated from time to time by resolution
of the Board of Directors or by written consent of all directors.
Written notice of the time and place of other meetings shall be delivered
personally to each director or sent to each director by mail or other form of
written communication, charges prepaid, addressed to the director at the
director's address as it is shown upon the records of the Corporation or, if it
is not so shown on the Corporation's records or is not readily ascertainable, at
the place in which the meetings of the directors are regularly held. In case
the notice is mailed or telegraphed, it shall be deposited in the United States
mail or delivered to the telegraph company in the place in which the principal
executive office of the Corporation is located at least three (3) days prior to
the time of the holding of the meeting. In case the notice is delivered
personally, it shall be so delivered at least three (3) days prior to the time
of the holding of the meeting. The mailing, telegraphing or delivery as above
provided shall constitute due, legal and personal notice to the director.
Section 4.7 NOTICE OF ADJOURNED MEETINGS. Notice of the time and place of
holding an adjourned meeting need not be given to absent directors if the time
and place be fixed at the meeting adjourned.
Section 4.8 ENTRY OF NOTICE. An entry in the minutes of any special
meeting of the Board of Directors to the effect that notice has been duly given
shall be conclusive and incontrovertible evidence that due notice of the special
meeting was given to all directors as required by law and by these Bylaws.
Section 4.9 WAIVER OF NOTICE. The transactions of any meeting of the
Board of Directors, however called and noticed or wherever held, shall be as
valid as though had at a meeting duly held after regular call and notice, if a
quorum be present, and if, either before or after the meeting, each of the
directors not present signs a written waiver of notice or a consent to the
holding of the meeting or an approval of the minutes thereof. All such waivers,
consents or approvals shall be filed with the corporate records or be a part of
the minutes of the meeting.
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Section 4.10 QUORUM. A majority of the authorized number of directors,
or, in the event that a flexible number of directors is authorized by the
Articles of Incorporation or these Bylaws, a majority of the exact authorized
number of directors, shall be necessary to constitute a quorum for the
transaction of business, except to adjourn as hereinafter provided. Every act
or decision done or made by a majority of the directors present at a meeting
duly held at which a quorum is present shall be regarded as the act of the Board
of Directors unless a greater number be required by the Articles of
Incorporation, these Bylaws or applicable law.
Section 4.11 PARTICIPATION IN MEETINGS BY TELEPHONE. Members of the Board
of Directors, or of any committee thereof, may participate in any meeting of the
Board of Directors or committee by means of telephone conference or similar
communications by which all persons participating in the meeting can hear each
other and such participation shall constitute presence in person at such
meeting.
Section 4.12 ADJOURNMENT. A quorum of the directors may adjourn any
directors' meeting to meet again at a stated day and hour; provided, however,
that in the absence of a quorum, a majority of the directors present at any
directors' meeting either regular or special, may adjourn from time to time
until the time fixed for the next regular meeting of the Board of Directors.
Section 4.13 ACTION WITHOUT MEETING. Any action required or permitted to
be taken by the Board of Directors under the Articles of Incorporation, these
Bylaws, or under applicable law, may be taken without a meeting if all members
of the Board of Directors shall individually or collectively consent, in
writing, before or after the action, to the action. Any action by written
consent shall have the same force and effect as a unanimous vote of all
directors. All written consents must be filed with the Secretary.
Section 4.14 FEES AND COMPENSATION. By resolution of the Board of
Directors, a fixed fee, with or without expenses of attendance, may be allowed
to any director for the director's services and any director may participate in
a stock option plan. Nothing herein contained shall be construed to preclude
any director from serving the Corporation in any other capacity as an officer,
agent, employee or otherwise, and receiving compensation therefor.
Section 4.15 LIMITATION OF LIABILITY. No officer or director of the
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as an officer or director;
provided, however, that this Section 4.15 shall not eliminate or limit the
liability of an officer or director to the extent provided by applicable law
for: (a) acts or omissions that involve intentional misconduct, fraud, or a
knowing violation of law; or (b) authorizing the unlawful payment of any
dividend or other distribution in violation of Section 78.300 of the Nevada
Revised Statutes. The limitation of liability provided herein shall continue
after an officer or director has ceased to occupy such position as to acts or
omissions occurring during such officer's or director's term or terms of office,
and no amendment or repeal of this Section 4.15 shall apply to or have any
effect on the liability or alleged liability of any officer or director of the
Corporation for or with respect to any acts or omissions of such officer or
director occurring prior to such amendment or repeal.
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Section 4.16 INDEMNIFICATION; ADVANCEMENT OF EXPENSES. The Corporation
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending, or completed action, suit, or proceeding,
whether civil, criminal, administrative, or investigative, including an action
by or in the right of the Corporation, by reason of the fact that he or she is
or was a director or officer of the Corporation, or is or was serving at the
request of the Corporation as a director or officer of another corporation,
partnership, joint venture, trust, or other enterprise, against expenses
(including attorneys' fees), judgments, fines, and amounts paid in settlement
actually and reasonably incurred by him or her in connection with such action,
suit, or proceeding if he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
Corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful.
The Corporation shall pay the expenses incurred by an officer or director
in defending any civil, criminal, administrative, or investigative action, suit
or proceeding in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such officer or
director to repay such amount if it should by ultimately determined that he/she
is not entitled to be indemnified by the Corporation authorized by Nevada law.
The indemnification and advancement of expenses provided by or granted
pursuant to this Article IV shall not be deemed exclusive of any other rights to
which those seeking indemnification may be entitled under any law, bylaw,
agreement, vote of stockholders, or disinterested directors or otherwise, both
as to action in his or her official capacity and as to action in another
capacity while holding such office.
Any amendment to or repeal of any of the provisions in this Section 4.16
shall not adversely affect any right or protection of an officer or director of
the Corporation for or with respect to any act or omission of such officer or
director occurring prior to such amendment or repeal.
Section 4.17 INDEMNIFICATION OF EMPLOYEES AND AGENTS. The Corporation
may, to the extent authorized from time to time by the Board of Directors, grant
rights to indemnification and to the advancement of expenses to any employee or
agent of the Corporation to the fullest extent permitted by law.
Section 4.18 INSURANCE. The Corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee, or agent of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise against any liability
asserted against him or her and incurred by him or her in any such capacity or
arising out of his or her status as such, whether or not the Corporation would
have the power to indemnify him or her against such liability under the
provisions of this Article IV.
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Section 4.19 POWERS OF DIRECTORS. The Board of Directors may, except as
otherwise provided or required by law, exercise all such powers and do all such
acts and things as may be exercised or done by the Corporation.
Section 4.20 COMMITTEES. The Board of Directors, by resolution passed by
a majority of the whole Board, may from time to time designate committees of the
Board of Directors, including, without limitation, Executive, Nominating, Audit
and Compensation Committees with such lawfully delegable powers and duties as
the Board of Directors may confer, to serve at the pleasure of the Board of
Directors and shall, for those committees and any other provided herein, elect
one or more directors to serve on such committees. Except as otherwise provided
in these Bylaws or by resolution of the Board of Directors, each committee may
fix its own rules of procedure and shall hold its meetings as provided by such
rules.
ARTICLE V
OFFICERS
Section 5.1 OFFICERS. The officers of the Corporation shall be a Chairman
of the Board of Directors, Chief Executive Officer, President, Chief Financial
Officer, Treasurer and Secretary. The Corporation may also have, at the
discretion of the Board of Directors, one or more executive vice presidents or
vice presidents, one or more assistant treasurers, one or more assistant
secretaries, and such other officers as may be designated from time to time by
the Board of Directors. Any number of offices may be held by the same person.
Officers, other than the Chairman of the Board of Directors, need not be
directors.
Section 5.2 ELECTION. The officers of the Corporation, except those
officers as may be appointed in accordance with the provisions of Section 5.3 or
Section 5.5 of this Article V, shall be elected annually by the Board of
Directors, and each shall hold office until the officer shall resign or shall be
removed as set forth in Section 5.4 or otherwise be disqualified to serve, or
the officer's successor shall be elected and qualified; provided that officers
may be elected at any time by the Board of Directors, or, as permitted by
Section 5.3 of this Article V, appointed by the Chairman of the Board of
Directors or the Chief Executive Officer, for the purpose of initially filling
an office or filling a newly created or vacant office.
Section 5.3 SUBORDINATE OFFICERS. The Board of Directors may appoint, and
may empower the Chairman of the Board of Directors or Chief Executive Officer to
appoint, such other officers as the business of the Corporation may require,
each of whom shall hold office for the term, have the authority and perform the
duties as are provided in these Bylaws or as the Board of Directors may from
time to time determine.
Section 5.4 REMOVAL AND RESIGNATION. Any officer may, subject to any
contractual arrangements between the officer and the Corporation, be removed,
either with or without cause, by a majority vote of the outstanding stock or a
majority of the Directors in office at the time, at any regular or special
meeting of the stockholders or the Board of Directors, or, unless otherwise
specified by the Board of Directors, by the Chairman of the Board Directors
12
<PAGE>
or any other officer upon whom a general or special power of removal may be
conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
Secretary and, in the case of the Secretary, to the President. Any resignation
shall take effect at the earlier of fourteen (14) days after receipt of the
notice or upon acceptance thereof by the Board of Directors.
Section 5.5 VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in these Bylaws for regular appointments to that office.
Section 5.6 CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board
of Directors, if there be such officer, shall, if present, preside at all
meetings of the Board of Directors and exercise and perform such other powers
and duties as may be from time to time assigned to him or her by the Board of
Directors or prescribed by these Bylaws. If there is not a Chief Executive
Officer, the Chairman of the Board of Directors shall, in addition, be the Chief
Executive Officer of the Corporation and shall have the powers duties prescribed
in Section 5.7 of Article V of these Bylaws.
Section 5.7 CHIEF EXECUTIVE OFFICER. Subject to the control of the Board
of Directors and the Chairman of the Board of Directors, the Chief Executive
Officer shall have the general supervision, direction and control of the
business and officers of the Corporation. In the absence of the Chairman of the
Board of Directors, or if there be none, the Chief Executive Officer shall
preside at all meetings of the Board of Directors and the stockholders. Except
as expressly stated otherwise in these Bylaws, the Chief Executive Officer shall
be ex officio a member of all standing committees of the Board of Directors,
including the Executive Committee, if any. The Chief Executive Officer shall
have all the powers and shall perform all of the duties which are ordinarily
inherent in the office of Chief Executive Officer of a corporation, and he or
she shall have such further powers and shall perform such further duties as may
as prescribed for him or her by the Board Directors.
Section 5.8 PRESIDENT. In the absence or disability of the Chief
Executive Officer, or if there be none, the President shall perform all of the
duties of the Chief Executive Officer, and when so acting shall have all the
powers of and be subject to all of the restrictions upon the Chief Executive
Officer. The President shall have such other duties as from time to time may be
prescribed for him or her by the Board of Directors.
Section 5.9 VICE PRESIDENTS. In the absence or disability of the
President, the vice presidents in order of their rank as fixed by the Board of
Directors, or if not ranked, the vice president designated by the Board of
Directors, the President or the officer, if any, senior to the President, shall
perform all the duties of the President, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the President. The vice
presidents shall have such other powers and perform such other duties as may be
prescribed for them
13
<PAGE>
respectively by the Board of Directors, the President, the officer, if any,
senior to the President or these Bylaws.
Section 5.10 SECRETARY. The Secretary shall keep or cause to be kept, at
the registered office, the principal executive office or such other place as the
Board of Directors may order, a book of minutes of all meetings of directors and
stockholders, with the time and place of holding, whether regular or special,
and, if special, how authorized, the notice thereof given, the names of those
present at directors' meetings, the number of shares present or represented at
meetings of the stockholders, and the proceedings thereof. The Secretary shall
be responsible for authenticating records of the Corporation.
The Secretary shall keep or cause to be kept, in any form permitted by law,
at the registered office, the principal executive office or at the office of the
Corporation's transfer agent, a stock register, or a duplicate stock register,
revised at least annually, showing the names of the stockholders and their
residence addresses and the number and classes of shares held by each
stockholder. If the share register or a duplicate share register is located at
a place other than the registered office of the Corporation, the Secretary shall
file a certificate with the resident agent located at the registered office
setting out the name of the custodian of the stock ledger or a duplicate stock
ledger, and the present and complete post office address, including street and
number, if any, where such stock ledger or duplicate stock ledger is kept.
The Secretary shall give, or cause to be given, notice of all the meetings
of the stockholders and of the Board of Directors and written consents in lieu
thereof required by these Bylaws or by law to be given, and shall keep the seal
of the Corporation in safe custody, and shall have such other powers and perform
such other duties as may be prescribed by the Board Directors, the Chairman of
the Board of Directors, the Chief Executive Officer, the President or these
Bylaws.
After fixing a record date for a meeting, the Secretary shall prepare an
alphabetical list of the names of all stockholders who are entitled to notice of
a stockholders meeting, which is arranged by voting group and class, and shows
the address and number of shares held by each stockholder. The list must be
available for inspection by any stockholder, for any purpose germane to the
meeting, beginning ten (10) business days before the meeting and continue to be
available throughout the meeting at the place indicated in the meeting notice in
the city where the meeting will be held.
Section 5.11 ASSISTANT SECRETARIES. It shall be the duty of the assistant
secretaries to assist the Secretary in the performance of his or her duties and
generally to perform such other duties as may be delegated to them by the Board
of Directors, the Secretary or these Bylaws.
Section 5.12 CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall
keep and maintain, or cause to be kept and maintained, adequate and correct
books and records of account of the Corporation. He or she shall receive and
deposit all moneys and other valuables belonging to the Corporation in the name
and to the credit of the Corporation and shall disburse
14
<PAGE>
the same only in such manner as the Board of Directors or the appropriate
officer of the Corporation may from time to time determine, shall render to the
Board of Directors, the Chairman of the Board of Directors, and the Chief
Executive Officer whenever any of them may request it, an account of all his or
her transactions as Chief Financial Officer and of the financial condition of
the Corporation, and shall perform such further duties as the Board of Directors
or the Chairman of the Board of Directors may require.
Section 5.13 TREASURER. The Treasurer shall assist the Chief Financial
Officer in the performance of his or her duties and generally such other duties
as may be delegated to him or her by the Board of Directors, the Chief Financial
Officer or these Bylaws.
Section 5.14 ASSISTANT TREASURERS. It shall be the duty of the assistant
treasurers to assist the Treasurer in the performance of his or her duties and
generally to perform such other duties as may be delegated to them by the Board
of Directors, the Chief Financial Officer, the Treasurer or these Bylaws.
Section 5.15 CORPORATE BANK ACCOUNTS. Bank accounts in the name of the
Corporation may be opened without the approval of the Board of Directors if
opened with the consent of both the Chief Executive Officer and the Chief
Financial Officer. The Chief Financial Officer shall inform the Board of
Directors of any bank account opened by the Chief Executive Officer and Chief
Financial Officer pursuant to the authority granted in this section at the next
meeting of the Board of Directors.
Section 5.16 TRANSFERS OF AUTHORITY. In case of the absence of any
officer of the Corporation, or for any reason that the Board of Directors may
consider sufficient, the Board of Directors may transfer the powers or duties of
that officer to any other officer or to any director or employee of the
Corporation, provided a majority of the Board of Directors concurs.
ARTICLE VI
MISCELLANEOUS
Section 6.1 RECORD DATE AND CLOSING STOCK BOOKS. The Board of Directors
may fix a time in the future, as a record date for the determination of the
stockholders entitled to notice of and to vote at any meeting of stockholders,
or entitled to receive any dividend or distribution, or any allotment of rights,
or to exercise rights in respect to any change, conversion or exchange of
shares. The record date so fixed shall not be more an sixty (60) days prior to
the date of the meeting or event for the purposes of which it is fixed. When a
record date is so fixed, only stockholders of record on that date shall be
entitled to notice of and to be at the meeting, or to receive the dividend,
distribution or allotment of rights, or to exercise the rights, as the case may
be, notwithstanding any transfer of any shares on the books of the Corporation
after the record date. The Board of Directors may close the books of the
Corporation against transfers of shares during the whole or any part of the
sixty (60) day period.
15
<PAGE>
Section 6.2 INSPECTION OF CORPORATE RECORDS. The share register or
duplicate share register, the books of account, and minutes of proceedings of
the stockholders and directors shall be open to inspection upon the written
demand of any stockholder or holder of a voting trust certificate, at any
reasonable time, and for a purpose reasonably related to his interest as a
stockholder or as the holder of a voting trust certificate. Such inspection may
be made in person or by an agent or attorney, and shall include the right to
make extracts. Demand of inspection shall be made in writing upon the
President, Secretary, Assistant Secretary or General Manager of the Corporation.
Every director shall have the absolute right at any reasonable time to
inspect and copy all books, records and documents of every kind and to inspect
the physical properties of the Corporation. Such inspection by a director may
be made in person or by agent or attorney and the right of inspection includes
the right to copy and make extracts.
Section 6.3 CHECKS, DRAFTS, ETC. All checks, drafts, bonds, bills of
change, or other orders for payment of money, notes, or other evidences of
indebtedness issued in the name of or payable to the Corporation shall be signed
or endorsed by such person or persons and in such manner as, from time to time,
shall be determined by resolution of the Board of Directors.
Section 6.4 CONTRACTS, ETC., HOW EXECUTED. The Board of Directors, except
as in these Bylaws otherwise provided, may authorize any officer or officers,
agent or agents, to enter into any contract or execute any instrument or
document in the name of and on behalf of the Corporation, and the authority may
be general or confined to specific instances. Unless otherwise specifically
determined by the Board of Directors or otherwise required by law, formal
contacts, promissory notes and other evidences of indebtedness, deeds of trust,
mortgages and corporate instruments or documents requiring the corporate seal,
and certificates for shares of stock owned by the Corporation shall be executed,
signed or endorsed by the Chairman of the art of Directors, Chief Executive
Officer or the President (or any vice president) and by the Secretary (or any
assistant secretary) or the Treasurer or any assistant treasurer). The Board of
Directors may, however, authorize any one (1) of these officers to sign any of
such instruments, for and on behalf of the Corporation, without necessity of
countersignature; may designate officers or employees of the Corporation, other
than those named above, who may, in the name of the Corporation, sign such
instruments; and may authorize the use of facsimile signatures for any of such
persons. No officer, agent or employee shall have any power or authority to
bind the Corporation by any contract or engagement or to pledge its credit to
render it liable for any purpose or to any amount except as specifically
authorized in these Bylaws or the Board of Directors in accordance with these
Bylaws.
Section 6.5 LOST CERTIFICATES OF STOCK. The Board of Directors may direct
a new certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
destroyed, or stolen, upon the making of an affidavit of that act by the person
claiming the certificate of stock to be lost or destroyed. When authorizing the
issue of a new certificate or certificates, the Board of Directors may, in its
discretion, and as a condition precedent to the issuance thereof, require the
owner of the lost or destroyed certificate or certificates, or the stockholder's
legal representative, to advertise the
16
<PAGE>
same in any manner as it shall require or give the Corporation a bond in any sum
as it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost or
destroyed, or both.
Section 6.6 REPRESENTATION OF SHARES. The Chairman of the Board of
Directors, Chief Executive Officer, the President (or any vice president) and
the Secretary (or any assistant secretary) of this Corporation are each
authorized to vote, represent and exercise on behalf of this Corporation all
rights incident to any and all shares of any other Corporation or Corporations
standing in the name of this Corporation. The authority herein granted to these
officers to vote or represent on behalf of this Corporation any and all shares
held by this Corporation in any other Corporation or Corporations may be
exercised either by these officers in person or by any persons authorized so to
do by proxy or power of attorney duly executed by these officers.
Section 6.7 INSPECTION OF BYLAWS. The Corporation shall keep in its
registered office for the transaction of business the original or a copy of the
Bylaws as amended or otherwise altered to date, certified by the Secretary,
which shall be open to inspection by the stockholders at all reasonable times
during office hours.
ARTICLE VII
AMENDMENTS
Section 7.1 POWER OF STOCKHOLDERS. New Bylaws may be adopted or these
Bylaws may be amended or repealed by the vote of stockholders entitled to
exercise a majority of the voting power of the Corporation, unless a greater
number is required by law, by the Articles of Incorporation or by these Bylaws.
Section 7.2 POWER OF DIRECTORS. Subject to the right of stockholders as
provided in Section 7.1 of this Article VII to adopt, amend or repeal Bylaws,
Bylaws may be adopted, amended, or repealed by the Board of Directors.
17
<PAGE>
EXHIBIT 10.2
PROSOFT I-NET SOLUTIONS, INC.
(a Nevada corporation)
AMENDED
1996 STOCK OPTION PLAN
NONSTATUTORY STOCK OPTION AGREEMENT
INCENTIVE STOCK OPTION AGREEMENT
NOTICE OF EXERCISE OF NONSTATUTORY STOCK OPTION
NOTICE OF EXERCISE OF INCENTIVE STOCK OPTION
(Amended April 8, 1997)
<PAGE>
PROSOFT I-NET SOLUTIONS, INC.
AMENDED
1996 STOCK OPTION PLAN
1. Purpose. The purposes of this Plan are to attract and retain the best
-------
available personnel for positions of substantial responsibility, to provide
additional incentive to the Employees, Directors and Consultants of the Company
and to promote the success of the Company's business.
Options granted hereunder may be either Incentive Stock Options or
Nonstatutory Stock Options, at the discretion of the Board and as reflected in
the terms of the written option agreement.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Board" shall mean the Board of Directors of the Company.
-----
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Committee" shall mean the Committee appointed by the Board of
---------
Directors in accordance with paragraph (b) of Section 3 of the Plan, if one is
appointed.
(d) "Common Stock" shall mean the Common Stock of the Company.
------------
(e) "Company" shall mean Prosoft I-Net Solutions, Inc., a Nevada
-------
corporation.
(f) "Consultant" shall mean any person who is engaged by the Company
----------
or any Parent or Subsidiary to render consulting services and is compensated for
such consulting services, including compensation through Options granted under
this Plan; provided that the term Consultant shall not include Directors who are
not compensated for their services or are paid only a director's fee by the
Company.
(g) "Continuous Status as an Employee, Director or Consultant" shall
--------------------------------------------------------
mean the absence of any interruption or termination of service as an Employee,
Director or Consultant (as the case may be). Continuous Status as an Employee,
Director or Consultant shall not be considered interrupted in the case of sick
leave, military leave, or any other leave of absence approved by the Board;
provided that such leave is for a period of not more than 90 days or
reemployment upon the expiration of such leave is guaranteed by contract or
statute.
(h) "Director" shall mean a member of the Board.
--------
<PAGE>
(i) "Disability" shall mean a total and permanent disability as that
----------
term is defined in Section 22(e)(3) of the Code.
(j) "Disinterested Person" shall have the meaning set forth in Rule
--------------------
16b-3 and shall mean a Director who has not, during the one-year period prior to
the date he or she is appointed to the Committee or during the period he or she
is on the Committee, received an option grant or stock issuance under this Plan
or any other stock plan of the Company or any Parent or Subsidiary of the
Company, other than as permitted by Rule 16b-3; provided, however, if Rule 16b-3
is amended after the effective date of this Plan, "Disinterested Person" shall
have the meaning set forth in such amended Rule 16b-3.
(k) "Employee" shall mean any person, including officers and
--------
directors, employed by the Company or any Parent or Subsidiary of the Company.
The payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
(l) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" shall mean: (i) if Shares are exchange-traded
-----------------
or traded on the NASDAQ National Market System ("NMS"), the closing sale or last
sale price per share of the Shares; (ii) if Shares are regularly traded in any
over-the-counter market other than NMS, the average of the bid and asked prices
per share of the Shares; and (iii) if Shares are not traded as described in (i)
and (ii) of this Section 2(m), the per share fair market value of the Shares as
determined in good faith by the Board on such basis as the Board in its sole
discretion shall choose including the price most recently obtained in arms-
length transactions involving the sales of Common Stock to unrelated third
parties and whether or not any material changes in the Company's business have
occurred since such sale which would impact the fair market value of the Common
Stock. Fair Market Value as of a given date with respect to subparagraphs (i),
(ii) and (iii) shall be determined as of the close of business on the day prior
to the date of determination, or if no trading in the Shares takes place on such
date, on the next preceding trading day on which there has been such trading.
(n) "Incentive Stock Option" shall mean an Option intended to qualify
----------------------
as an incentive stock option within the meaning of Section 422(b) of the Code.
(o) "Nonstatutory Stock Option" shall mean an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(p) "Option" shall mean a stock option granted pursuant to the Plan.
------
(q) "Optionee" shall mean an Employee, Director or Consultant who
--------
receives an Option.
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<PAGE>
(r) "Option Termination Date" shall mean the date of expiration of the
-----------------------
term of such Option as set forth in the written option agreement.
(s) "Parent" shall mean a "parent corporation", whether now or
------
hereafter existing, as defined in Section 424(e) of the Code.
(t) "Plan" shall mean this Prosoft I-Net Solutions, Inc. Amended 1996
----
Stock Option Plan.
(u) "Restricted Shareholder" shall mean an Optionee who, at the time
----------------------
the Option is granted, owns stock representing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or any
Parent or Subsidiary of the Company.
(v) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities
----------
and Exchange Commission under the Exchange Act, as such rule may be amended from
time to time.
(w) "Share" shall mean a share of the Common Stock, as adjusted in
-----
accordance with Section 10 of the Plan.
(x) "Subsidiary" shall mean a "subsidiary corporation", whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
(y) "Terminating Transaction" shall mean any of the following events:
-----------------------
(a) the dissolution or liquidation of the Company; (b) a reorganization, merger
or consolidation of the Company with one or more other corporations (except with
respect to a transaction, the purpose of which is to change the domicile or name
of the Company), as a result of which the Company goes out of existence or
becomes a subsidiary of another corporation (which shall be deemed to have
occurred if another corporation shall own, directly or indirectly, fifty percent
(50%) or more of the aggregate voting power of all outstanding equity securities
of the Company); or (c) a sale of all or substantially all of the Company's
assets.
3. Administration.
--------------
(a) The Plan shall be administered by the Board, which shall have sole
authority in its absolute discretion, subject to the terms of Section 3(b)
herein, (i) to determine which Employees, Directors and Consultants shall
receive Options, (ii) subject to the express provisions of the Plan, to
determine the time when Options shall be granted, the number of Shares subject
to the Options, the exercise prices, and the terms and conditions of Options
other than those terms and conditions fixed under the Plan, and (iii) to
interpret the provisions of the Plan and any Option granted under the Plan. The
Board shall adopt by resolution such rules and regulations as may be required to
carry out the purposes of the Plan and shall have authority to do everything
necessary or appropriate to administer the Plan. All decisions, determinations
and interpretations of the Board shall be final and binding on all Optionees.
3
<PAGE>
(b) The Board may delegate administration of the Plan to a Committee
of no less than two Directors, each of which shall be Disinterested Persons
unless the Board expressly declares that it does not require the Plan to comply
with the requirements of Rule 16b-3. The Board may from time to time remove
members from, or add members to, the Committee, and vacancies on the Committee
shall be filled by the Board. Furthermore, the Board at any time by resolution
may abolish the Committee and revest in the Board the administration of the
Plan. (For purposes of this Plan document, the term "Board" shall mean the
Committee to the extent that the Board's powers have been delegated to the
Committee.)
4. Eligibility.
-----------
(a) Incentive Stock Options may be granted only to Employees who
render services which contribute to the Company. Nonstatutory Stock Options may
be granted only to Employees, Directors or Consultants who render services which
contribute to the Company.
(b) The Plan shall not confer upon any Optionee any right to continue
as an Employee, Director or Consultant of the Company, nor shall it interfere in
any way with an Optionee's right or the Company's right to terminate Optionee's
employment or relationship as a Director or Consultant at any time, with or
without cause.
(c) The determination as to whether an Employee, Director or
Consultant is eligible to receive Options hereunder shall be made by the Board
in its sole discretion, and the decision of the Board shall be binding and
final.
5. Number of Shares. The maximum aggregate number of Shares which may be
----------------
optioned and sold under this Plan is 1,250,000 Shares of authorized but unissued
Common Stock of the Company. No Employee, Director or Consultant shall receive
Options for more than 250,000 shares over any one-year period. In the event
that Options granted under the Plan shall terminate or expire without being
exercised, in whole or in part, the Shares subject to such unexercised Options
may again be optioned and sold under this Plan.
6. Term of the Plan. The Plan shall be effective as of March 26, 1996,
----------------
and shall continue in effect until March 25, 2006, unless terminated earlier.
7. Exercise Price and Consideration.
--------------------------------
(a) The per Share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Board in
its sole discretion, but shall be subject to the following:
(i) for an Option granted to a Restricted Shareholder, the per
Share exercise price shall be no less than 110% of the Fair Market Value
per Share on the date of grant;
4
<PAGE>
(ii) for a Nonstatutory Stock Option granted to any Employee,
Director or Consultant (other than a Restricted Shareholder), the per Share
exercise price shall be no less than 85% of the Fair Market Value per Share
on the date of grant; and
(iii) for an Incentive Stock Option granted to any Employee
(other than a Restricted Shareholder), the per Share exercise price shall
be no less than 100% of the Fair Market Value per Share on the date of
grant.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option shall consist of full payment in cash or cash equivalents
or, with the consent of the Board, one of the alternative forms specified below:
(i) full payment in shares of Common Stock (duly endorsed for
transfer to the Company) held by the Optionee for the requisite period
necessary to avoid a charge to the Company's earnings for financial
reporting purposes and valued at Fair Market Value on the date of delivery;
or
(ii) full payment through a combination of cash or cash
equivalents and shares of Common Stock (duly endorsed for transfer to the
Company) held by the Optionee for the requisite period necessary to avoid a
charge to the Company's earnings for financial reporting purposes and
valued at Fair Market Value on the date of delivery; or
(iii) full payment effected through a broker-dealer sale and
remittance procedure pursuant to which the Optionee (A) shall provide
irrevocable written instructions to a designated brokerage firm to effect
the immediate sale of the purchased shares and remit to the Company, out of
the sale proceeds available on the settlement date, sufficient funds to
cover the aggregate option price payable for the purchased Shares plus all
applicable Federal and State income and employment taxes required to be
withheld by the Company by reason of such purchase and (B) shall provide
written directives to the Company to deliver the certificates for the
purchased Shares directly to such brokerage firm in order to complete the
sale transaction; or
(iv) any other legal consideration that may be acceptable to the
Board.
8. Exercise of Options.
-------------------
(a) Vesting of Options. Any Option granted hereunder shall be
------------------
exercisable at such times and under such conditions as determined by the Board,
including performance criteria with respect to the Company and/or the Optionee,
and as shall be permissible under the terms of the Plan, except that any Option
granted hereunder to an employee who is not an officer or director shall be
exercisable at a rate of at least 20% per year over five (5) years from the date
of grant.
5
<PAGE>
(b) Procedure for Exercise. An Option may be exercised at any time as
----------------------
to all or any portions of the Shares as to which it is then exercisable, except
that an Option may not be exercised for a fraction of a Share and shall be
subject to any provision in the written option agreement governing the minimum
number of Shares as to which the Option may be exercised. An Option shall be
deemed to be exercised when written notice of such exercise has been given to
the Company in accordance with the terms of the Option by the person entitled to
exercise the Option and full payment for the Shares with respect to which the
Option is exercised has been received by the Company. Full payment may, as
authorized by the Board, consist of any consideration and method of payment
allowable under Section 7(b) of the Plan.
(c) Termination of Options. All installments of an Option shall
----------------------
expire and terminate on such date(s) as the Board shall determine, but in no
event later than ten (10) years from the date such Option was granted (except
that an Incentive Stock Option granted to a Restricted Shareholder shall by its
terms not be exercisable after the expiration of five (5) years from the date
such Option was granted).
(d) Death or Termination of Service of Optionee. The following
-------------------------------------------
provisions shall govern the exercise period applicable to any Options held by an
Optionee at the time of his or her death or termination of service with the
Company or any Parent or Subsidiary of the Company:
(i) Termination of Continuous Status as an Employee, Director or
------------------------------------------------------------
Consultant. In the event of termination of an Optionee's Continuous Status
----------
as an Employee, Director or Consultant (as the case may be) for any reason
other than Optionee's death or Disability, such Optionee may only exercise
the Option within three (3) months (or such shorter period as specified in
the written option agreement, but in no event less than thirty (30) days)
after the date of such termination.
(ii) Disability of Optionee. In the event of termination of an
----------------------
Optionee's Continuous Status as an Employee, Director or Consultant as a
result of the Optionee's Disability, the Optionee may only exercise the
Option within twelve (12) months (or such shorter period as is specified in
the written option agreement, but in no event less than six (6) months)
from the date of such termination.
(iii) Death of Optionee. In the event of termination of an
-----------------
Optionee's Continuous Status as an Employee, Director or Consultant as a
result of the Optionee's death, the Option may only be exercised any time
within twelve (12) months (or such shorter period as is specified in the
written option agreement, but in no event less than six (6) months)
following the date of death by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance.
(iv) Limitations. Each Option shall, during the limited exercise
-----------
period under this Section 8(d), be exercisable only as to the Shares for
which the Option is exercisable on the date of the Optionee's death or
termination of service with the Company. Under no circumstances shall any
Option become exercisable under this
6
<PAGE>
Section 8(d) after the Option Termination Date. Upon the earlier of the
expiration of such limited exercise period or the Option Termination Date,
the Option shall terminate and cease to be exercisable.
(v) Immediate Termination. Should (A) the Optionee's Continuous
---------------------
Status as an Employee, Director or Consultant be terminated for misconduct
(including any act of dishonesty, willful misconduct, fraud or
embezzlement) or (B) the Optionee make any unauthorized use or disclosure
of confidential information or trade secrets of the Company or any Parent
or Subsidiary, then in any such event all outstanding Options granted to
the Optionee under this Plan shall terminate immediately and cease to be
exercisable.
(e) Extensions. Notwithstanding the provisions covering the
----------
exercisability of Options following death or termination of service, as
described in Section 8(d), the Board may, in its sole discretion, with the
consent of the Optionee or the Optionee's estate (in the case of the death of
Optionee), extend the period of time during which the Option shall remain
exercisable, provided that in no event shall such extension go beyond the Option
Termination Date. In the case of Incentive Stock Options, extensions under this
Section 8(e) may result in loss of the favorable treatment accorded to incentive
stock options under the Code.
9. Restrictions on Grants of Options and Issuance of Shares.
--------------------------------------------------------
(a) Regulatory Approvals. No Shares shall be issued or delivered upon
--------------------
exercise of an Option unless and until there shall have been compliance with all
applicable requirements of the Securities Act of 1933, as amended, (the "1933
Act"), and any other requirement of law or of any regulatory body having
jurisdiction over such issuance and delivery. The inability of the Company to
obtain any required permits, authorizations or approvals necessary for the
lawful issuance and sale of any Shares hereunder on terms deemed reasonable by
the Board shall relieve the Company, the Board, and any Committee of any
liability in respect of the non-issuance or sale of such Shares as to which such
requisite permits, authorizations, or approvals shall not have been obtained.
(b) Representations and Warranties. As a condition to the granting or
------------------------------
exercise of any Option, the Board may require the person receiving or exercising
such Option to make any representation and/or warranty to the Company as may be
required (or deemed appropriate by the Board, in its discretion) under any
applicable law or regulation, including but not limited to a representation that
the Option and/or Shares are being acquired only for investment and without any
present intention to sell or distribute such Option and/or Shares, if such a
representation is required under the 1933 Act or any other applicable law, rule,
or regulation.
(c) Shareholder Approval. The exercise of Options under the Plan also
--------------------
is conditioned on approval of the Plan, or any amendment thereto increasing the
authorized number of Shares issuable thereunder, by the Company's Shareholders
within twelve (12) months of adoption of the Plan or Amendment by the Board, and
no Option shall be exercisable hereunder unless and until the Plan or Amendment
has been so approved.
7
<PAGE>
10. Option Adjustments.
------------------
(a) Change in Capitalization. If the outstanding shares of Common
------------------------
Stock of the Company are increased, decreased, changed into or exchanged for a
different number or kind of shares of the Company through reorganization,
recapitalization, reclassification, stock dividend, stock split or reverse stock
split, upon authorization by the Board an appropriate and proportionate
adjustment shall be made in the number or kind of shares, and the per-share
option price thereof, which may be issued in the aggregate and to any individual
Optionees under the Plan upon exercise of Options granted under the Plan;
provided, however, that no such adjustment need be made if, upon the advice of
counsel, the Board determines that such adjustment may result in the receipt of
federal taxable income to holders of Options granted under the Plan or the
holders of Common Stock or other classes of the Company's securities.
(b) Corporate Reorganizations. Upon the occurrence of a Terminating
-------------------------
Transaction, as of the effective date of such Terminating Transaction, the Plan
and any then outstanding Options (whether or not vested) shall terminate unless
(i) provision is made in writing in connection with such transaction for the
continuance of the Plan and for the assumption of such Options, or for the
substitution for such Options of new options covering the securities of a
successor corporation or an affiliate thereof, with appropriate adjustments as
to the number and kind of securities and exercise prices, in which event the
Plan and such outstanding Options shall continue or be replaced, as the case may
be, in the manner and under the terms so provided; or (ii) the Board otherwise
shall provide in writing for such adjustments as it deems appropriate in the
terms and conditions of the then-outstanding Options (whether or not vested),
including without limitation providing for the cancellation of Options and their
automatic conversion into the right to receive the securities or other
properties which a holder of the Shares underlying such Options would have been
entitled to receive upon such Terminating Transaction had such Shares been
issued and outstanding (net of the appropriate option exercise prices). If,
pursuant to the foregoing provisions of this paragraph (b), the Plan and the
Options shall terminate by reason of the occurrence of a Terminating Transaction
without provision for any of the action(s) described in clause (i) or (ii)
hereof, then any Optionee holding outstanding Options shall have the right, at
such time immediately prior to the consummation of the Terminating Transaction
as the Board shall designate, to exercise his or her Options to the full extent
not theretofore exercised, including any portion which has not yet become
exercisable.
11. Option Agreement. The terms and conditions of Options granted under
----------------
the Plan shall be evidenced by a written option agreement executed by the
Company and the person to whom the Option is granted. Each option agreement
shall incorporate the Plan by reference and shall include such provisions as are
determined to be necessary or appropriate by the Board.
12. Limitations on Incentive Stock Options. In the event that the
--------------------------------------
aggregate Fair Market Value of Shares (determined as of the date of grant of the
Option covering such Shares) with respect to which Incentive Stock Options are
exercisable for the first time by an Employee during any calendar year under
this Plan and any other plan of the Company exceeds $100,000, Options with
respect to and to the extent of such excess shall be treated as Nonstatutory
Stock
8
<PAGE>
Options. This Section 12 shall be applied by taking Options which are intended
to be Incentive Stock Options into account in the order in which they were
granted.
13. Amendment or Termination of the Plans.
-------------------------------------
(a) Board Authority. The Board may amend, suspend, alter, or
---------------
terminate the Plan at any time. To the extent necessary or desirable to comply
with Rule 16b-3 of the Exchange Act, the Code or any other applicable law or
regulation, the Company may obtain shareholder approval of any amendment to the
Plan only in such a manner and to such a degree as required under applicable
law.
(b) Limitation on Board Authority. Furthermore, the Plan may not,
-----------------------------
without the approval of the shareholders, be amended in any manner that would
cause Incentive Stock Options issued hereunder to fail to qualify as Incentive
Stock Options as defined in Section 422(b) of the Code. Notwithstanding the
foregoing, no amendment, suspension or termination of the Plan shall adversely
affect Options granted on or prior to the date thereof, as evidenced by the
execution of an option agreement by both the Company and the Optionee, without
the consent of such Optionee.
(c) Contingent Grants Based on Amendments. Options may be granted in
-------------------------------------
reliance on and consistent with any amendment adopted by the Board and which is
necessary to enable such Options to be granted under the Plan, even though such
amendment requires future shareholder approval; provided, however, that any such
contingent Option by its terms may not be exercised prior to shareholder
approval of such amendment, and provided further, that in the event shareholder
approval is not obtained within twelve (12) months of the date of grant of such
contingent Option, then such contingent Option shall be deemed cancelled and no
longer outstanding.
14. Options Not Transferable. Options granted under this Plan may not be
------------------------
sold, pledged, hypothecated, assigned, encumbered, gifted or otherwise
transferred or alienated in any manner, either voluntarily or involuntarily by
operation of law, other than by will or the laws of descent or distribution, and
may be exercised during the lifetime of an Optionee only by such Optionee.
15. No Rights in Shares Before Issuance and Delivery. Neither the
------------------------------------------------
Optionee, his or her estate nor his or her transferees by will or the laws of
descent and distribution shall be, or have any rights or privileges of, a
shareholder of the Company with respect to any Shares issuable upon exercise of
the Option unless and until certificates representing such Shares shall have
been issued and delivered notwithstanding exercise of the Option. No adjustment
will be made for a dividend or other rights where the record date is prior to
the date such stock certificates are issued, except as provided in Section 10.
16. Taxes. The Board shall make such provisions and take such steps as it
-----
deems necessary or appropriate for the withholding of any federal, state, local
and other tax required by law to be withheld with respect to the grant or
exercise of an Option under the Plan,
9
<PAGE>
including, without limitation, the deduction of the amount of any such
withholding tax from any compensation or other amounts payable to an Optionee by
the Company, or requiring an Optionee (or the Optionee's beneficiary or legal
representative) as a condition of granting or exercising an Option to pay to the
Company any amount required to be withheld, or to execute such other documents
as the Board deems necessary or desirable in connection with the satisfaction of
any applicable withholding obligation. In the discretion of the Board, upon
exercise of a Nonstatutory Stock Option, the Optionee may request the Company to
withhold from the Shares to be issued upon such exercise that number of Shares
(based on the Fair Market Value of the Shares as of the day notice of exercise
is received by the Company) that would satisfy any tax withholding requirement.
17. Legends on Options and Stock Certificates. Each option agreement and
-----------------------------------------
each certificate representing Shares acquired upon exercise of an Option shall
be endorsed with all legends, if any, required by applicable federal and state
securities laws to be placed on the option agreement and/or the certificate.
The determination of which legends, if any, shall be placed upon option
agreements and/or the certificates representing Shares shall be made by the
Board in its sole discretion and such decision shall be final and binding.
18. Availability of Plan and Financial Statements. A copy of this Plan
---------------------------------------------
shall be delivered to the Secretary of the Company and shall be shown by the
Secretary to any eligible person making reasonable inquiry concerning the Plan.
The Company shall also provide Optionees with financial statements of the
Company at least annually.
19. Applicable Law. This Plan shall be governed by and construed in
--------------
accordance with the laws of the State of California.
10
<PAGE>
NONSTATUTORY STOCK OPTION AGREEMENT
On this ___ day of __________, ____, ("Grant Date"), PROSOFT I-NET
SOLUTIONS, INC., a Nevada corporation (the "Company"), hereby grants to
____________________ (the "Optionee") an Option to purchase a total of
__________ shares of Common Stock (the "Shares"), on the terms and conditions
set forth below, and in all respects subject to the terms, definitions and
provisions of the Prosoft I-Net Solutions, Inc. Amended 1996 Stock Option Plan
(the "Plan") adopted by the Company, which is incorporated herein by reference.
Unless otherwise defined in this Option, the terms defined in the Plan shall
have the same defined meanings in this Option. In the event of any conflict
between the provisions of this Option and those of the Plan, the Plan shall
control.
1. NATURE OF THE OPTION. This Option is intended to qualify as a
--------------------
Nonstatutory Stock Option.
2. EXERCISE PRICE. The exercise price is $____ for each share of Common
--------------
Stock.
3. VESTING AND EXERCISE OF OPTION. This Option shall be exercisable
------------------------------
during its term in accordance with the provisions of Section 8 of the Plan as
follows:
(a) VESTING. Subject to the limitations contained in this Option and
-------
the Plan, this Option shall become exercisable in installments as follows:
Number of Shares Date of Earliest Exercise
(Installment) (Vesting)
------------- ---------
The installments provided for in this Section 3(a) are cumulative. Each such
installment which becomes exercisable pursuant to this Section shall remain
exercisable until expiration or earlier termination of this Option.
(b) METHOD OF EXERCISE. This Option shall be exercisable by written
------------------
notice (in a form designated by the Company) which shall state the election to
exercise the Option, the number of Shares in respect of which the Option is
being exercised, and such other representations and warranties of Optionee as
may be required by the Company pursuant to Section 9(b) of the Plan. Such
written notice shall be signed by Optionee and shall be delivered in person or
by certified mail to the President, Secretary or Chief Financial Officer of the
Company. The written notice shall be accompanied by payment of the exercise
price.
<PAGE>
No Shares will be issued pursuant to the exercise of an Option unless
such issuance and such exercise shall comply with all relevant provisions of
law. Assuming such compliance, for income tax purposes the Shares shall be
considered transferred to the Optionee on the date on which the Option is
exercised with respect to such Shares.
(c) MINIMUM EXERCISE. The minimum number of Shares with respect to
----------------
which this Option may be exercised at any one time is One Hundred (100) Shares,
and this Option shall be exercised for whole Shares only.
(d) CONDITIONAL GRANT. This Option may not be exercised unless and
-----------------
until both (i) stockholder approval of the amendment of the Plan increasing the
authorized number of Shares issuable thereunder to 1,250,000 is obtained prior
to April 8, 1998 and (ii) the Company receives from the California Department of
Corporations a permit qualifying the grant of this Option and the sale of the
underlying Shares.
4. CERTAIN REPRESENTATIONS AND WARRANTIES; RESTRICTIONS ON TRANSFER.
----------------------------------------------------------------
(a) By receipt of this Option, by its execution and by its exercise in
whole or in part, Optionee represents to the Company the following:
(i) Optionee has read and understands the terms and provisions
of the Plan, and hereby accepts this Option subject to all the terms and
provisions of the Plan;
(ii) Optionee shall accept as binding and final all decisions or
interpretations of the Board or of the Committee upon any questions arising
under the Plan;
(iii) Optionee understands that this Option and any Shares
purchased upon its exercise are securities, the issuance of which requires
compliance with federal and state securities laws;
(iv) Optionee is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the
Company to reach an informed and knowledgeable decision to acquire the
securities. Optionee is acquiring these securities for investment for
Optionee's own account only and not with a view to, or for sale in
connection with, any "distribution" thereof within the meaning of the
Securities Act of 1933, as amended (the "Securities Act");
(v) Optionee acknowledges and understands that the securities
constitute "restricted securities" under the Securities Act and must be
held indefinitely unless they are subsequently registered under the
Securities Act or an exemption from such registration is available.
Optionee further acknowledges and understands that the Company is under no
obligation to register the securities. Optionee understands that the
certificate evidencing the securities will be imprinted with a legend which
prohibits the
2
<PAGE>
transfer of the securities unless they are registered or such registration
is not required in the opinion of counsel satisfactory to the Company, and
any other legend required under applicable state securities laws.
(b) Optionee agrees that, if required by the Company in connection
with the Company's initial underwritten public offering of the Company's
securities, Optionee (i) will not sell, make short sale of, loan, grant any
options for the purchase of, or otherwise dispose of any Shares acquired upon
exercise of this Option (other than those shares included in the registration)
without the prior written consent of the Company or the underwriters managing
such initial underwritten public offering of the Company's securities for one
hundred eighty (180) days from the effective date of such registration, and (ii)
will execute any agreement reflecting (i) above as may be requested by the
underwriters at the time of the public offering.
5. METHOD OF PAYMENT.
-----------------
(a) The consideration to be paid for the Shares to be issued upon
exercise of the Option shall consist of full payment in cash or cash equivalents
or, with the consent of the Board or the Committee, one of the alternative forms
specified below:
(i) full payment in shares of Common Stock (duly endorsed for
transfer to the Company) held by the Optionee for the requisite period
necessary to avoid a charge to the Company's earnings for financial
reporting purposes and valued at Fair Market Value on the date of delivery;
or
(ii) full payment through a combination of cash or cash
equivalents and shares of Common Stock (duly endorsed for transfer to the
Company) held by the Optionee for the requisite period necessary to avoid a
charge to the Company's earnings for financial reporting purposes and
valued at Fair Market Value on the date of delivery; or
(iii) full payment effected through a broker-dealer sale and
remittance procedure pursuant to which the Optionee (A) shall provide
irrevocable written instructions to a designated brokerage firm to effect
the immediate sale of the purchased shares and remit to the Company, out of
the sale proceeds available on the settlement date, sufficient funds to
cover the aggregate option price payable for the purchased Shares plus all
applicable Federal and State income and employment taxes required to be
withheld by the Company by reason of such purchase and (B) shall provide
written directives to the Company to deliver the certificates for the
purchased Shares directly to such brokerage firm in order to complete the
sale transaction; or
(iv) any other legal consideration that may be acceptable to the
Board or the Committee.
3
<PAGE>
6. RESTRICTIONS ON EXERCISE. This Option may not be exercised if the
------------------------
issuance of such Shares upon such exercise or the method of payment of
consideration for such Shares would constitute a violation of any applicable
federal or state securities or other law or regulation. As a condition to the
exercise of this Option, the Company may require Optionee to make any
representation and warranty to the Company as may be required by any applicable
law or regulation.
7. TERMINATION OF STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT. In the
------------------------------------------------------------
event of termination of Optionee's Continuous Status as an Employee, Director or
Consultant, Optionee may, but only within three (3) months after the date of
such termination (but in no event later than the date of expiration of the term
of this Option as set forth in Section 11 below), exercise this Option to the
extent that Optionee was entitled to exercise it at the date of such
termination. To the extent that Optionee was not entitled to exercise this
Option at the date of such termination, or if Optionee does not exercise this
Option within the time specified herein, this Option shall terminate.
8. DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section 7
----------------------
above, in the event of termination of Optionee's Continuous Status as an
Employee, Director or Consultant as a result of Optionee's permanent and total
disability (as defined in Section 22(e)(3) of the Code), Optionee may, but only
within twelve (12) months from the date of termination of employment or
relationship as director or consultant (but in no event later than the date of
expiration of the term of this Option as set forth in Section 11 below),
exercise this Option to the extent Optionee was entitled to exercise it at the
date of such termination. To the extent that Optionee was not entitled to
exercise this Option at the date of termination, or if Optionee does not
exercise such Option (which Optionee was entitled to exercise) within the time
specified herein, this Option shall terminate.
9. DEATH OF OPTIONEE. In the event of the death of Optionee during the
-----------------
term of this Option while an Employee, Director or Consultant of the Company and
having been in Continuous Status as an Employee, Director or Consultant since
the date of grant of this Option, this Option may be exercised, at any time
within twelve (12) months following the date of death (but in no event later
than the date of expiration of the term of this Option as set forth in Section
11 below), by Optionee's estate or by a person who acquired the right to
exercise this Option by bequest or inheritance, but only to the extent Optionee
was entitled to exercise this Option on the date of death.
10. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of Optionee.
11. TERM OF OPTION. In no event may this Option be exercised after
--------------
__________, 200_ (which date shall be no more than five (5) years from the date
this Option was granted).
4
<PAGE>
12. NO EMPLOYMENT RIGHTS. Optionee acknowledges and agrees that the
--------------------
vesting of Shares pursuant to Section 3 hereof is earned only through Optionee's
Continuous Status as an Employee, Director or Consultant (not through the act of
being hired or engaged, being granted this Option or acquiring Shares
hereunder). Optionee further acknowledges and agrees that this Option, the
Company's Plan which is incorporated herein by reference, the transactions
contemplated hereunder and the vesting schedule set forth herein do not
constitute an express or implied promise of continued engagement as an Employee,
Director or Consultant for the vesting period, for any period, or at all, and
shall not interfere with Optionee's right or the Company's right to terminate
Optionee's employment, directorship or consulting relationship at any time, with
or without cause.
13. WITHHOLDING OF TAXES. Optionee authorizes the Company to withhold, in
--------------------
accordance with any applicable law, from any compensation payable to him any
taxes required to be withheld by federal, state, or foreign law as a result of
the grant of the Option or the issuance of stock pursuant to the exercise of the
Option.
14. NOTICES. Any notice to be given to the Company shall be addressed to
-------
the Company in care of its Secretary at its principal office, and any notice to
be given to Optionee shall be addressed to Optionee at the address given below
or at such other address as the Optionee may hereafter designate in writing to
the Company. Any such notice shall be deemed duly given upon personal delivery
or three business days after deposit in the United States mail, registered or
certified, postage prepaid.
15. GOVERNING LAW. This Option shall be governed by and construed in
-------------
accordance with the internal laws of the State of California.
PROSOFT I-NET SOLUTIONS, INC.
By:
-------------------------------
Title:
----------------------------
----------------------------------
, Optionee
--------------
Address:
--------------------------
----------------------------------
5
<PAGE>
INCENTIVE STOCK OPTION AGREEMENT
On this ___ day of __________, ____, ("Grant Date"), PROSOFT I-NET
SOLUTIONS, INC., a Nevada corporation (the "Company"), hereby grants to
____________________ (the "Optionee") an Option to purchase a total of
__________ shares of Common Stock (the "Shares"), on the terms and conditions
set forth below, and in all respects subject to the terms, definitions and
provisions of the Prosoft I-Net Solutions, Inc. Amended 1996 Stock Option Plan
(the "Plan") adopted by the Company, which is incorporated herein by reference.
Unless otherwise defined in this Option, the terms defined in the Plan shall
have the same defined meanings in this Option. In the event of any conflict
between the provisions of this Option and those of the Plan, the Plan shall
control.
1. NATURE OF THE OPTION. This Option is intended to qualify as an
--------------------
Incentive Stock Option.
2. EXERCISE PRICE. The exercise price is $___ for each share of Common
--------------
Stock, which price is not less than the fair market value per share of Common
Stock on the date of grant, as determined by the Board or the Committee.
3. VESTING AND EXERCISE OF OPTION. This Option shall be exercisable
------------------------------
during its term in accordance with the provisions of Section 8 of the Plan as
follows:
(a) VESTING. Subject to the limitations contained in this Option and
-------
the Plan, this Option shall become exercisable in installments as follows:
Number of Shares Date of Earliest Exercise
(Installment) (Vesting)
------------- ---------
The installments provided for in this Section 3(a) are cumulative. Each such
installment which becomes exercisable pursuant to this Section shall remain
exercisable until expiration or earlier termination of this Option.
(b) METHOD OF EXERCISE. This Option shall be exercisable by written
------------------
notice (in a form designated by the Company) which shall state the election to
exercise the Option, the number of Shares in respect of which the Option is
being exercised, and such other representations and warranties of Optionee as
may be required by the Company pursuant to Section 9(b) of the Plan. Such
written notice shall be signed by Optionee and shall be delivered in person or
by certified mail to the President, Secretary or Chief Financial Officer of the
Company. The written notice shall be accompanied by payment of the exercise
price.
<PAGE>
No Shares will be issued pursuant to the exercise of an Option unless
such issuance and such exercise shall comply with all relevant provisions of
law. Assuming such compliance, for income tax purposes the Shares shall be
considered transferred to the Optionee on the date on which the Option is
exercised with respect to such Shares.
(c) MINIMUM EXERCISE. The minimum number of Shares with respect to
----------------
which this Option may be exercised at any one time is One Hundred (100) Shares,
and this Option shall be exercised for whole Shares only.
(d) CONDITIONAL GRANT. This Option may not be exercised unless and
-----------------
until both (i) stockholder approval of the amendment of the Plan increasing the
authorized number of Shares issuable thereunder to 1,250,000 is obtained prior
to April 8, 1998 and (ii) the Company receives from the California Department of
Corporations a permit qualifying the grant of this Option and the sale of the
underlying Shares.
4. CERTAIN REPRESENTATIONS AND WARRANTIES; RESTRICTIONS ON TRANSFER.
----------------------------------------------------------------
(a) By receipt of this Option, by its execution and by its exercise in
whole or in part, Optionee represents to the Company the following:
(i) Optionee has read and understands the terms and provisions
of the Plan, and hereby accepts this Option subject to all the terms and
provisions of the Plan;
(ii) Optionee shall accept as binding and final all decisions or
interpretations of the Board or of the Committee upon any questions arising
under the Plan;
(iii) Optionee understands that this Option and any Shares
purchased upon its exercise are securities, the issuance of which requires
compliance with federal and state securities laws;
(iv) Optionee is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the
Company to reach an informed and knowledgeable decision to acquire the
securities. Optionee is acquiring these securities for investment for
Optionee's own account only and not with a view to, or for sale in
connection with, any "distribution" thereof within the meaning of the
Securities Act of 1933, as amended (the "Securities Act");
(v) Optionee acknowledges and understands that the securities
constitute "restricted securities" under the Securities Act and must be
held indefinitely unless they are subsequently registered under the
Securities Act or an exemption from such registration is available.
Optionee further acknowledges and understands that the Company is under no
obligation to register the securities. Optionee understands that the
certificate evidencing the securities will be imprinted with a legend which
prohibits the transfer of the securities unless they are registered or such
registration is not required in
2
<PAGE>
the opinion of counsel satisfactory to the Company, and any other legend
required under applicable state securities laws; and
(vi) Optionee understands that the existence of the Plan and the
execution of this Option are not sufficient by themselves to cause any
exercise of any Incentive Stock Options granted under the Plan and this
Option to qualify for favorable tax treatment through the application of
Section 422(a) of the Code; and that Optionee must, in order to so qualify,
individually meet by Optionee's own action all applicable requirements of
Section 422, including, without limitation, the requirement that no
disposition of Shares may be made by Optionee within two (2) years from the
date of the granting of the Option nor within one (1) year after the
transfer of such Shares to Optionee.
(b) Optionee agrees that, if required by the Company in connection
with the Company's initial underwritten public offering of the Company's
securities, Optionee (i) will not sell, make short sale of, loan, grant any
options for the purchase of, or otherwise dispose of any Shares acquired upon
exercise of this Option (other than those shares included in the registration)
without the prior written consent of the Company or the underwriters managing
such initial underwritten public offering of the Company's securities for one
hundred eighty (180) days from the effective date of such registration, and (ii)
will execute any agreement reflecting (i) above as may be requested by the
underwriters at the time of the public offering.
5. METHOD OF PAYMENT.
-----------------
(a) The consideration to be paid for the Shares to be issued upon
exercise of the Option shall consist of full payment in cash or cash equivalents
or, with the consent of the Board or the Committee, one of the alternative forms
specified below:
(i) full payment in shares of Common Stock (duly endorsed for
transfer to the Company) held by the Optionee for the requisite period
necessary to avoid a charge to the Company's earnings for financial
reporting purposes and valued at Fair Market Value on the date of delivery;
or
(ii) full payment through a combination of cash or cash
equivalents and shares of Common Stock (duly endorsed for transfer to the
Company) held by the Optionee for the requisite period necessary to avoid a
charge to the Company's earnings for financial reporting purposes and
valued at Fair Market Value on the date of delivery; or
(iii) full payment effected through a broker-dealer sale and
remittance procedure pursuant to which the Optionee (A) shall provide
irrevocable written instructions to a designated brokerage firm to effect
the immediate sale of the purchased shares and remit to the Company, out of
the sale proceeds available on the settlement date, sufficient funds to
cover the aggregate option price payable for the purchased Shares plus all
applicable Federal and State income and employment taxes required to be
3
<PAGE>
withheld by the Company by reason of such purchase and (B) shall provide
written directives to the Company to deliver the certificates for the
purchased Shares directly to such brokerage firm in order to complete the
sale transaction; or
(iv) any other legal consideration that may be acceptable to the
Board or the Committee.
6. RESTRICTIONS ON EXERCISE. This Option may not be exercised if the
------------------------
issuance of such Shares upon such exercise or the method of payment of
consideration for such Shares would constitute a violation of any applicable
federal or state securities or other law or regulation. As a condition to the
exercise of this Option, the Company may require Optionee to make any
representation and warranty to the Company as may be required by any applicable
law or regulation.
7. TERMINATION OF STATUS AS AN EMPLOYEE. In the event of termination of
------------------------------------
Optionee's Continuous Status as an Employee, Optionee may, but only within three
(3) months after the date of such termination (but in no event later than the
date of expiration of the term of this Option as set forth in Section 11 below),
exercise this Option to the extent that Optionee was entitled to exercise it at
the date of such termination. To the extent that Optionee was not entitled to
exercise this Option at the date of such termination, or if Optionee does not
exercise this Option within the time specified herein, this Option shall
terminate.
8. DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section 7
----------------------
above, in the event of termination of Optionee's Continuous Status as an
Employee, as a result of Optionee's permanent and total disability (as defined
in Section 22(e)(3) of the Code), Optionee may, but only within twelve (12)
months from the date of termination of employment (but in no event later than
the date of expiration of the term of this Option as set forth in Section 11
below), exercise this Option to the extent Optionee was entitled to exercise it
at the date of such termination. To the extent that Optionee was not entitled
to exercise this Option at the date of termination, or if Optionee does not
exercise such Option (which Optionee was entitled to exercise) within the time
specified herein, this Option shall terminate.
9. DEATH OF OPTIONEE. In the event of the death of Optionee during the
-----------------
term of this Option while an Employee of the Company and having been in
Continuous Status as an Employee since the date of grant of this Option, this
Option may be exercised, at any time within twelve (12) months following the
date of death (but in no event later than the date of expiration of the term of
this Option as set forth in Section 11 below), by Optionee's estate or by a
person who acquired the right to exercise this Option by bequest or inheritance,
but only to the extent Optionee was entitled to exercise this Option on the date
of death.
10. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of Optionee.
4
<PAGE>
11. TERM OF OPTION. In no event may this Option be exercised after
--------------
_______, ____ (which date shall be no more than five (5) years from the date
this Option was granted).
12. NO EMPLOYMENT RIGHTS. Optionee acknowledges and agrees that the
--------------------
vesting of Shares pursuant to Section 3 hereof is earned only by continuing
service as an employee at the will of the Company (not through the act of being
hired, being granted this Option or acquiring Shares hereunder). Optionee
further acknowledges and agrees that this Option, the Company's Plan which is
incorporated herein by reference, the transactions contemplated hereunder and
the vesting schedule set forth herein do not constitute an express or implied
promise of continued engagement as an employee for the vesting period, for any
period, or at all, and shall not interfere with Optionee's right or the
Company's right to terminate Optionee's employment relationship at any time,
with or without cause.
13. WITHHOLDING OF TAXES. Optionee authorizes the Company to withhold, in
--------------------
accordance with any applicable law, from any compensation payable to him any
taxes required to be withheld by federal, state, or foreign law as a result of
the grant of the Option or the issuance of stock pursuant to the exercise of the
Option.
14. NOTICES. Any notice to be given to the Company shall be addressed to
-------
the Company in care of its Secretary at its principal office, and any notice to
be given to Optionee shall be addressed to Optionee at the address given below
or at such other address as the Optionee may hereafter designate in writing to
the Company. Any such notice shall be deemed duly given upon personal delivery
or three business days after deposit in the United States mail, registered or
certified, postage prepaid.
15. GOVERNING LAW. This Option shall be governed by and construed in
-------------
accordance with the internal laws of the State of California.
PROSOFT I-NET SOLUTIONS, INC.
By:
-----------------------------
Title:
--------------------------
--------------------------------
, Optionee
--------------
Address:
------------------------
--------------------------------
5
<PAGE>
EXHIBIT 10.16
SUBSCRIPTION AGREEMENT
----------------------
COMMON STOCK
Prosoft I-Net Solutions, Inc.
2333 North Broadway
Suite 300
Santa Ana, CA 92706
The undersigned hereby subscribes to become a shareholder in Prosoft
I-Net Solutions, Inc., a Nevada corporation (the "Company"), and to purchase the
number of shares of Common Stock of the Company (the "Shares") indicated below
in accordance with the terms and conditions of the Confidential Offering
Memorandum dated January 1997 including the Exhibits attached thereto (the
"Memorandum"), which relates to the offering of up to $25 million of the Shares
of the Company (the "Offering").
The undersigned acknowledges that any questions regarding this
document or the subscription should be directed to: J.P. Morgan Investment
Management Inc., 522 Fifth Avenue, New York, New York 10036, attn: Kurt J.
Wolfgruber (telephone: 212-837-2121).
1. Subscription. Subject to the terms and conditions hereof, (i) the
------------
undersigned hereby irrevocably agrees to purchase the Shares set forth on the
signature page hereof at the purchase price of $10.50 per Share and to tender
the cash purchase price set forth on the signature page hereof by means of a
check (cashiers, certified or personal), money order or wire transfer payable to
Prosoft I-Net Solutions, Inc. upon acceptance of the undersigned's subscription
by the Company in accordance with the provisions hereof and (ii) the Company
hereby agrees, upon such acceptance, to sell the Shares to the undersigned in
accordance with the provisions hereof.
2. Representations and Warranties. The undersigned represents and
------------------------------
warrants to the Company as of the date hereof as follows:
(a) The undersigned has received and read and understands the
Memorandum and each of the Exhibits to the Memorandum which contain important
information relating to the Company and the Offering and has relied solely on
those documents; the undersigned has not relied on any oral representations or
oral information furnished to the undersigned in connection with the purchase of
the Shares.
(b) The undersigned has had the opportunity to seek from the Company
or its representatives, and has received from such parties, all information
deemed necessary by the undersigned to evaluate the merits and risks of the
Offering. The undersigned has had the opportunity to verify the accuracy of the
information contained in the Memorandum and to seek investment, tax or legal
counsel prior to investing in the Company.
<PAGE>
(c) The undersigned understands that, except as provided in Section 5
below, the Shares will not be registered for sale under the Securities Act of
1933, as amended (the "1933 Act") or registered or qualified under any state
securities laws in reliance upon exemptions from such registration and
qualification, and that such exemptions depend in large part on the
undersigned's representations and warranties herein.
(d) The undersigned, if a corporation, partnership, trust or other
entity, is authorized and duly empowered to purchase and hold the Shares, has
its principal place of business at the address set forth on the signature page
and has not been formed for the specific purpose of acquiring the Shares.
(e) The Shares are being purchased for the account specified on the
signature page hereof, for investment and not with a view to resale or
distribution to any person, corporation or other entity. The undersigned also
understands that there will not be any public market for the sale of such
Shares.
(f) The undersigned has such knowledge and experience in financial and
business matters that will enable the undersigned to utilize the information
made available to it in connection with this Offering to evaluate the merits and
risks of the Offering.
(g) The undersigned is able to bear the economic risks related to a
purchase of Shares (i.e., the undersigned is able to afford a complete loss of
the Shares the undersigned is subscribing to purchase). The undersigned has
made other investments of a similar nature and, by reason of the undersigned's
business and financial experience, has acquired the capacity to protect its own
interests in investments of this nature. The undersigned has carefully reviewed
the Memorandum, and has made its own examination of the investment, as well as
the accounting and tax aspects of this transaction, and will depend on the
advice of its own counsel and accountants.
(h) The undersigned recognizes that the Shares involve a high degree
of risk, including those special risks referred to or set forth under the
caption "Risk Factors" in the Memorandum.
(i) The undersigned is both (A) an "accredited investor" within the
meaning of Rule 501 of Regulation D as promulgated under the 1933 Act, and (B) a
"qualified institutional buyer" within the meaning of Rule 144A promulgated
under the 1933 Act.
(j) All information which the undersigned has provided to the Company,
including, but not limited to, the undersigned's financial position and
knowledge of financial and business matters, is true, correct and complete as of
the date of execution of this Subscription Agreement. The undersigned
understands that the Company will rely to a material degree upon the
representations contained herein.
2
<PAGE>
(k) The undersigned is aware that no federal or state agency has made
any finding or determination as to the fairness of investment in, nor any
recommendation or endorsement of, the Shares.
(l) The undersigned understands that the Shares are subject to
restrictions on transferability and resale and may not be transferred or resold
except as permitted under the 1933 Act and applicable state securities laws,
pursuant to either a registration or an exemption therefrom.
(m) The undersigned further represents and warrants to the Company
that, with respect to each source of funds to be used by it to purchase Shares
hereunder (each being referred to as the "Source"), at least one of the
following statements is and shall be accurate as of the date hereof:
(i) the Source is not the assets of any "plan" (as such term is
defined in Section 4975(e)(1) of the Internal Revenue Code of 1986, as amended
(the "Code")) subject to Section 4975 of the Code, or any "employee benefit
plan" (as such term is defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) subject to Section 406 of ERISA
(each such plan and employee benefit plan, being referred to as a "Benefit
Plan") or otherwise out of "plan assets" within the meaning of United States
Department of Labor regulation Section 2510.3-101, 29 CFR (S) 2510.3-101;
(ii) the Source is the assets of a "governmental plan" (as such
term is defined in Section 3(32) of ERISA);
(iii) the undersigned is an insurance company and the Source is
the assets of its general asset account and the conditions set forth in Sections
I(a) and IV of Prohibited Transaction Class Exemption ("PTCE") 95-60 have been
satisfied with respect to the undersigned's purchase of the Shares;
(iv) the undersigned is an insurance company and the Source is the
assets of an insurance company pooled separate account within the meaning of
PTCE 90-1 issued by the United States Department of Labor and either (x) no
Benefit Plan has assets in such separate account which exceed or are expected to
exceed 10% of the total assets of such separate account as of the date hereof
(for purposes of this clause (iv), all Benefit Plans maintained by the same
employer or employee organization are deemed to be a single plan), or (y) the
undersigned has disclosed to the Company in writing prior to the date hereof the
identity of each Benefit Plan whose assets in such separate account exceed or
are expected to exceed 10% of the total assets of such separate account as of
the date hereof;
(v) the undersigned is a bank and the Source is assets of a
collective investment fund as defined in Section IV(e) of PTCE 91-38 and either
(x) no Benefit Plan has assets in such collective investment fund which exceed
or are expected to exceed 10%
3
<PAGE>
of the total assets of such collective investment fund as of the date hereof
(for purposes of this clause (v), all Benefit Plans maintained by the same
employer or employee organization are deemed to be a single plan), or (y) the
undersigned has disclosed to the Company in writing prior to the date hereof the
identity of each Benefit Plan whose assets in such collective investment fund
exceed or are expected to exceed 10% of the total assets of such collective
investment fund as of the date hereof;
(vi) the Source is assets of an "investment fund" managed by a
"qualified professional asset manager" or "QPAM" (as such terms are defined in
Part V of PTCE 84-14), and the conditions set forth in Sections I(c), (d), (e)
and (g) of PTCE 84-14 have been satisfied, and the identity of such QPAM and the
names of all Benefit Plans whose assets are included in such investment fund
(other than, in the case of a collective investment fund described in the clause
(v) above, any Benefit Plan the identity of which is not required to be
disclosed to the Company pursuant to clause (v) above) have been identified in
writing to the Company prior to the date hereof pursuant to this clause (vi); or
(vii) the Source is assets of a Benefit Plan or a separate
account comprised of Benefit Plans, which Benefit Plans have been identified
in writing to the Company prior to the date hereof pursuant to this
clause (vii).
3. Indemnification.
---------------
(a) The undersigned hereby indemnifies the Company, its affiliates and
its agents and holds them harmless from and against any and all loss, damage,
liability or expense, including costs and reasonable attorney's fees, incurred
by the Company (or its affiliates or agents) by reason of or in connection with
any misrepresentation made by the undersigned, any breach of any of the
undersigned's warranties, or failure of the undersigned to fulfill any covenants
or agreements under this Subscription Agreement; provided, however, that,
notwithstanding anything to the contrary herein, in no event shall the
undersigned be liable hereunder to the Company, its affiliates and its agents or
any other party for special, incidental, consequential or punitive damages,
including without limitation loss of profits sustained or claimed. This
Subscription Agreement and the representations and warranties contained herein
shall survive the undersigned's purchase of the Shares.
(b) The Company hereby indemnifies the undersigned, its affiliates,
directors, officers, agents and employees and holds them harmless from and
against any and all loss, damage, liability or expense, including costs and
reasonable attorneys' fees, incurred by the undersigned (or its affiliates,
directors, officers, agents and employees) by reason of or in connection with
any misrepresentation made by the Company, any breach of any of the Company's
warranties, or failure of the Company to fulfill any covenants or agreements
under this Subscription Agreement. This Subscription Agreement and the
representations and warranties contained herein shall survive the Company's
issuance of the Shares.
4
<PAGE>
4. Acceptance or Rejection of Subscription. The parties hereto agree
---------------------------------------
that:
(a) the Company reserves the right to reject the undersigned's
subscription, in whole or in part, at the sole discretion of the Company for any
reason;
(b) the undersigned's subscription will be accepted or rejected within
15 days from receipt and will be effective only upon acceptance by the Company;
and
(c) upon acceptance of the undersigned's subscription by the Company,
(i) the undersigned's subscription will be irrevocable, (ii) the obligations of
the undersigned and the Company hereunder to purchase and sell the Shares,
respectively, will become effective immediately thereafter and (iii) the Company
will deliver the Shares to the undersigned against payment therefor within 15
days from the Company's receipt of this Subscription Agreement.
5. Registration Rights. The Company hereby grants to the undersigned
-------------------
the registration rights provided in the Registration Rights Agreement attached
hereto as Exhibit 1.
6. Antidilution Protection.
-----------------------
(a) If at any time after the final closing of the Offering and prior
to the earlier of: (i) the occurrence of a firmly underwritten public offering
of the Company's Common Stock pursuant to an effective registration statement
filed by the Company with the Securities and Exchange Commission with gross
proceeds of at least $25 million; or (ii) such time as all of the Shares held by
the undersigned may immediately be sold under Rule 144 during any 90-day period,
the Company sells or issues shares of capital stock or options, rights or
warrants entitling the holders thereof to subscribe for or purchase shares of
capital stock in a Financing (as defined below) at a purchase price less than
$10.50 per share (as adjusted to reflect any increase or decrease or change into
or exchange for a different number or kind of shares or other securities of the
Company by reason of any recapitalization, reclassification, stock split-up,
combination of shares, exchange of shares, stock dividend or other distribution
payable in capital stock, or other increase or decrease in such shares effected
without receipt of consideration by the Company), the undersigned will receive
additional shares of Common Stock under this Subscription Agreement so that the
total number of Shares received by the undersigned under this Subscription
Agreement (after taking into account that additional issuance) equals the total
purchase price paid by the undersigned divided by the Adjusted Price (as defined
----------
below).
(b) For purposes of this Section, the following definitions shall
apply:
(1) "Adjusted Price" shall mean (i) with respect to the issuance
of equity securities, the price per share determined by multiplying the Existing
Price by a fraction, the numerator of which shall be the number of shares of
Common Stock outstanding immediately prior to such Financing plus the number of
shares of Common Stock which the aggregate consideration received by the Company
in such Financing would have purchased at
5
<PAGE>
the Existing Price, and the denominator of which shall be the number of shares
of Common Stock outstanding immediately prior to such Financing plus the number
of shares actually issued in such Financing and (ii) with respect to the
issuance of options, rights or warrants entitling the holders thereof to
subscribe for or purchase shares of equity securities, the price per share
determined by multiplying the Existing Price by a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such Financing plus the number of shares of Common Stock which the
aggregate consideration received by the Company in such Financing (including
both the issue price of the options, rights or warrants and the exercise price
thereof) would have purchased at the Existing Price, and the denominator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such Financing plus the number of shares such holders of options,
rights and warrants would own if they exercised the options, rights or warrants
received by them in the Financing. For the purposes of the foregoing
calculation, the number of shares of Common Stock outstanding immediately prior
to such Financing shall be calculated on a fully diluted basis, as if all
outstanding warrants or options to purchase Common Stock had been fully
exercised immediately prior to such Financing as of such date, but shall not
include shares of Common Stock held in the treasury of the Company.
(2) "Existing Price" shall initially mean the purchase price per
share paid by the undersigned (as adjusted to reflect any increase or decrease
or change into or exchange for a different number or kind of shares or other
securities of the Company by reason of any recapitalization, reclassification,
stock split-up, combination of shares, exchange of shares, stock dividend or
other distribution payable in capital stock, or other increase or decrease in
such shares effected without receipt of consideration by the Company), and after
any adjustments pursuant to this Section, shall mean the then current Adjusted
Price.
(3) "Financing" shall mean any issuances of equity securities or
options, rights or warrants entitling the holders thereof to subscribe for or
purchase equity securities by the Company for cash or any other form of
consideration, but shall not include (i) the issuance of shares or options to
employees, directors or consultants of the Company to the extent that all such
issuances pursuant to this subclause (i) do not result in the issuance to
employees, directors or consultants of the Company, at a price per share less
than $10.50 (as adjusted to reflect any increase or decrease or change into or
exchange for a different number or kind of shares or other securities of the
Company by reason of any recapitalization, reclassification, stock split-up,
combination of shares, exchange of shares, stock dividend or other distribution
payable in capital stock, or other increase or decrease in such shares effected
without receipt of consideration by the Company), of a number of shares (and/or
options, rights or warrants to buy a number of shares) in excess of 10% of the
outstanding shares of Common Stock in the aggregate immediately after the
consummation of the Offering, or (ii) the issuance of shares upon exercise of
outstanding warrants or options described in the Memorandum.
7. Representations, Warranties and Covenants of the Company. By
--------------------------------------------------------
accepting this subscription, the Company hereby represents and warrants to, and
covenants with, the
6
<PAGE>
undersigned as follows:
(a) Organization. The Company is duly organized, validly existing and
------------
in good standing under the laws of the State of Nevada. The Company has full
power and authority to own, lease and operate its properties and to conduct its
business as currently conducted and is registered or qualified to do business
and is in good standing in each jurisdiction in which it owns or leases property
or transacts business and where the failure to be so qualified would have a
material adverse effect upon the business, financial condition, prospects,
properties or operations of the Company. The Company is not currently qualified
to do business in various states where it does conduct business but is in the
process of so qualifying in those states.
(b) Due Authorization. The Company has all requisite power and
-----------------
authority to execute, deliver and perform its obligations under this
Subscription Agreement, and this Subscription Agreement has been duly authorized
and validly executed and delivered by the Company and constitutes a valid and
binding agreement of the Company enforceable against the Company in accordance
with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally and except as enforceability may be subject to
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
(c) Non-Contravention. The execution and delivery of this
-----------------
Subscription Agreement, the issuance and sale of the Shares to be sold by the
Company hereunder, and the consummation of the transactions contemplated hereby
will not conflict with or constitute a violation of, or default (with the
passage of time or otherwise) under, any material agreement or instrument to
which the Company is a party or by which it is bound or the Articles of
Incorporation (the "Charter") or the Bylaws of the Company nor result in the
creation or imposition of any lien, encumbrance, claim, security interest or
restriction whatsoever upon any of the material properties or assets of the
Company or an acceleration of indebtedness pursuant to any obligation, agreement
or condition contained in any material bond, debenture, note or any other
evidence of indebtedness or any material indenture, mortgage, deed of trust or
any other agreement or instrument to which the Company is a party or by which
the Company is bound or to which any of the property or assets of the Company is
subject, nor conflict with, or result in a violation of, any law, administrative
regulation, ordinance or order of any court or governmental agency, arbitration
panel or authority applicable to the Company. No consent, approval,
authorization or other order of, or registration, qualification or filing with,
any regulatory body, administrative agency, or other governmental body in the
United States is required for the valid issuance and sale of the Shares to be
sold pursuant to this Agreement (other than such as have been made or obtained).
(d) Capitalization. The authorized and outstanding capital stock of
--------------
the Company and rights to acquire capital stock of the Company are as set forth
in the Memorandum. Except as set forth in the Memorandum, there are no
outstanding shares of, or
7
<PAGE>
rights to acquire shares of, capital stock of the Company. The Shares have been
duly authorized, and when issued and paid for in accordance with the terms of
this Agreement, will be validly issued, fully paid and nonassessable.
(e) Legal Proceedings. There is no legal or governmental proceeding
-----------------
pending or, to the knowledge of the Company, threatened or contemplated to which
the Company is or may be a party or of which the business or property of the
Company is or may be subject that, if adversely determined, would have a
material adverse effect upon the business, financial condition, prospects,
properties or operations of the Company.
(f) No Violations. The Company is not in violation of its Charter or
-------------
Bylaws, in violation of any law, administrative regulation, ordinance or order
of any court or governmental agency, arbitration panel or authority (including
without limitation any law, regulation or order relating to ERISA) applicable to
the Company, which violation, individually or in the aggregate, would have a
material adverse effect on the business or financial condition of the Company,
or in default in any material respect in the performance of any obligation,
agreement or condition contained in any bond, debenture, note or any other
evidence of indebtedness in any indenture, mortgage, deed of trust or any other
agreement or instrument to which the Company is a party or by which the Company
is bound or by which the properties of the Company are bound or affected, and
there exists no condition which, with the passage of time or the giving of
notice or both, would constitute a material default under any such document or
instrument or result in the imposition of any material penalty or the
acceleration of any indebtedness.
(g) Government Permits, Etc. Except as set forth in Section 7(a), the
------------------------
Company has all necessary franchises, licenses, certificates and other
authorizations from any foreign, federal, state or local government or
governmental agency, department, or body that are currently necessary for the
operation of the business of the Company as currently conducted, the absence of
which would have a material effect on the business or operations of the Company.
(h) Financial Statements. The financial statements of the Company and
---------------------
the related notes contained in the Memorandum present fairly the financial
position of the Company as of the dates indicated therein and its results of
operations for the period therein specified, were prepared in accordance with
generally accepted accounting principles and are true, correct and complete in
all respects.
(i) No Material Adverse Change. Since the date of the Memorandum, the
--------------------------
Company has not incurred any material liabilities or obligations, direct or
contingent, other than in the ordinary course of business, and there has not
been any material adverse change in its business, financial condition,
prospects, properties or results of operations.
(j) Memorandum. The Memorandum does not contain any untrue statement
----------
of a material fact nor does it omit to state a material fact necessary to make
the
8
<PAGE>
statements made therein not misleading. With respect to projections delivered
in connection with the Memorandum, the Company represents only that such
projections were prepared in good faith and that the Company reasonably believed
there is a reasonable basis for such projections.
(k) Offers of Shares. Neither the Company nor anyone acting on its
----------------
behalf has offered the Shares or any similar securities to, or solicited any
offer to purchase the same from, or otherwise approached or negotiated in
respect thereof with, any person, or has taken any other action, which in all
cases mentioned above would require the registration of the Shares under Section
5 of the 1933 Act or under the registration and qualification provisions of any
securities or "blue sky" law of any applicable jurisdiction.
(l) Contingent Liabilities. The Company does not have any contingent
----------------------
liabilities that would be material to the Company that are not provided for or
disclosed in the financial statements that are included as exhibits to the
Memorandum.
(m) Transaction with Affiliates. All of the Company's transactions
---------------------------
and relationships with affiliates are on fair and reasonable terms comparable to
those that would be obtained in an arm's-length transaction between unrelated
third parties.
(n) Fees and Commissions. Except for a fee payable to Smith Barney
--------------------
Inc. as placement agent in connection with the issuance and sale of the Shares,
no broker's or finder's fee or commission will be payable by the Company with
respect to the issuance and sale of the Shares or the transactions contemplated
hereby, and the Company shall hold the undersigned harmless from any claim,
demand or liability for any such broker's or finder's fees or commission alleged
to have been incurred in connection herewith.
(o) Investment Company Act. The Company is not and, after giving
----------------------
effect to the offering and sale of the Shares and the application of the
proceeds thereof, will not be an "investment company" as such term is defined in
the Investment Company Act of 1940, as amended (the "Investment Company Act").
The Company is not directly or indirectly controlled by or acting on behalf of
any person which is an "investment company" as such term is defined in the
Investment Company Act.
(p) ERISA. (i) Assuming the accuracy of the representation set forth
-----
in Section 2(m), the execution and delivery of the Subscription Agreement and
the issue and purchase of the Shares hereunder will not, as of the date hereof,
involve any transaction that is prohibited under Section 406(a)(1) of ERISA or
which is a "prohibited transaction" as defined in Section 4975(c)(1) of the
Code, in either case for which a statutory or administrative exemption is not
available.
(i) The Company does not maintain, contribute to or have any
liability with respect to any Plan or Multiemployer Plan.
9
<PAGE>
(ii) The Company has no ERISA Affiliates.
(iii) The Company is not a party to any collective bargaining
agreement.
For purposes of this Section, the following terms shall be defined as stated
below:
"ERISA Affiliate" means each trade or business (whether or not
incorporated) which, together with the Company, is treated as a single employer
under Title IV of ERISA or Section 414 of the Code.
"Multiemployer Plan" means a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA to which the Company, any of its subsidiaries or any
ERISA Affiliate is then making or accruing an obligation to make contributions
or has within any of the preceding five plan years made or accrued an obligation
to make contributions, including for these purposes any person which ceased to
be an ERISA Affiliate during such five-year period.
"Plan" means an employee benefit plan, other than a Multiemployer
Plan, which is subject to Title IV of ERISA or subject to the minimum funding
standards under Section 412 of the Code or Section 302 of ERISA, and either (i)
is maintained for employees of the Company, any of its subsidiaries or any ERISA
Affiliate or in which any such employees participate or to which contributions
are made by the Company, any of its subsidiaries or any ERISA Affiliate, or (ii)
has at any time within the preceding five years been maintained for employees of
the Company, any of its subsidiaries or any ERISA Affiliate or any person which
was at such time an ERISA Affiliate or in which any such employees participated
at such time, or (iii) with respect to which the Company, any of its
subsidiaries or any ERISA Affiliate could be subjected to any liability under
Title IV of ERISA (including without limitation Section 4069 of ERISA) in the
event that such plan has been or were to be terminated.
8. Acceptance. Execution and delivery of this Subscription Agreement
----------
shall constitute an irrevocable offer to purchase the Shares indicated, which
offer may be accepted or rejected by the Company in its sole discretion for any
cause or for no cause. Acceptance of this offer by the Company shall be
indicated by the execution hereof by an officer of the Company and delivery of
the Shares to the undersigned against payment therefor within 15 days from the
Company's receipt of this Subscription Agreement.
9. Binding Agreement. The parties hereto agree that, upon acceptance
-----------------
hereof by the Company, they may not cancel, terminate or revoke this
Subscription Agreement or any agreement made by them hereunder, and that, upon
acceptance hereof by the Company, this Subscription Agreement shall be binding
upon the successors and assigns of the parties hereto.
10. Incorporation by Reference. The statement of the number of
--------------------------
Shares subscribed and related information set forth on the signature page are
incorporated as integral
10
<PAGE>
terms of this Subscription Agreement.
11. Other Agreements. The Company hereby represents and warrants
----------------
that it has not entered into or agreed to any agreement with any other purchaser
of stock in the Offering that confers rights or benefits more favorable than the
rights and benefits conferred upon the undersigned hereunder. The Company shall
not enter into any agreement with any other purchaser of stock in the Offering
that shall confer rights or benefits more favorable than the rights and benefits
conferred upon the undersigned, unless, in each case, the undersigned has been
notified in writing and been provided with a copy of such proposed agreement at
least 15 days prior to the effective date of such agreement and has been given
the opportunity to receive the rights and benefits in such agreement as of the
date of such agreement.
IN WITNESS WHEREOF, the undersigned has executed this Subscription
Agreement on the date set forth on the signature page.
The undersigned desires to take title in the Shares as follows (check
one):
(a) Trust (Trustee(s) must sign on Page 6);
-----
(b) Partnership (general partner(s) must sign on Page 7);
-----
(c) Corporation (authorized officer must sign on Page 8).
-----
The exact spelling of name under which title to the Shares shall be
taken is (please print):
----------------------------------------------
The exact location (including account number and receiving
person, if applicable)
for delivery of common stock:
-----------------------------
-----------------------------
-----------------------------
-----------------------------
11
<PAGE>
SUBSCRIPTION AGREEMENT
SIGNATURE PAGE
FOR TRUST INVESTORS
-------------------
Total Shares subscribed: # $
--------- ---------
- --------------------------------------
Name of Trust (Please print or type)
- --------------------------------------
Name of Trustee (Please print or type)
- --------------------------------------
Date Trust was formed
By:
-----------------------------------
Trustee's Signature
Taxpayer Identification Number:
-----------------------
Trustee's Address
------------------------------------
Attention:
-------------------
Executed at , , this day of , 1997.
-------- -------------- --- -----
SUBSCRIPTION ACCEPTED:
PROSOFT I-NET SOLUTIONS, INC.,
a Nevada corporation
By:
-------------------------------------
Printed Name
and Title:
--------------------------
12
<PAGE>
SUBSCRIPTION AGREEMENT
SIGNATURE PAGE
FOR PARTNERSHIP INVESTORS
-------------------------
Total Units subscribed: # $
------------ ---------
- ---------------------------------------------------
Name of Partnership (Please print or type)
- ---------------------------------------------------
Name of General Partner (Please print or type)
By:
-------------------------------------------------
Signature of a General Partner
- ----------------------------------------------------
Name of General Partner (Please type or print)
By:
-------------------------------------------------
Signature of Additional General Partner
(if required by partnership agreement)
Taxpayer Identification Number:
---------------------------
---------------------------
---------------------------
---------------------------
Partnership's Address
------------------------------------
------------------------------------
------------------------------------
Mailing Address (if different)
----------------------------
----------------------------
----------------------------
Attention:
-----------------------
Executed at , , this day of , 1997.
-------- --------------- ----- -----
SUBSCRIPTION ACCEPTED:
PROSOFT I-NET SOLUTIONS, INC.,
a Nevada corporation
By:
-----------------------------------------
Printed Name
and Title:
-----------------------------
13
<PAGE>
SUBSCRIPTION AGREEMENT
SIGNATURE PAGE
FOR CORPORATE INVESTORS
-----------------------
Total Units subscribed: # $
------------- ------------
- --------------------------------------------------------
Name of Corporation (Please print or type)
- --------------------------------------------------------
Name and Title of Authorized Agent (Please print or type)
By:
--------------------------------------
Signature of Authorized Agent
Title:
-----------------------------------
Taxpayer Identification Number:
---------------------------
Corporation's Address
-------------------------------------
-------------------------------------
-------------------------------------
Mailing Address (if different)
----------------------------
----------------------------
----------------------------
Attention:
-----------------------
Executed at , , this day of , 1997.
--------- --------------- --- -----
SUBSCRIPTION ACCEPTED:
PROSOFT I-NET SOLUTIONS, INC.,
a Nevada corporation
By:
-------------------------------------
Printed Name
and Title:
-------------------------
14
<PAGE>
EXHIBIT 10.17
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT is made as of March 13, 1997, by
and among Prosoft I-Net Solutions, Inc., a Nevada corporation (the "Company"),
-------
and the Persons set forth on Schedule I attached hereto (the "Investors").
----------
The Investors intend to purchase shares of the Company's Common Stock
pursuant to separate subscription agreements between the Company and each of the
Investors. The execution and delivery of this Agreement is a condition to the
Investors' purchase of the Common Stock. Capitalized terms used herein shall
have the meanings set forth in Section 9 below.
NOW, THEREFORE, the parties hereto, in consideration of the foregoing,
the mutual covenants and agreements hereinafter set forth, and other good and
valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, agree as follows:
1. REGISTRATION STATEMENTS.
(a) Shelf Registration. (i) (A) The Company shall, on or before the
------------------
Tier 1 Registration Date, prepare and file with the Commission under the
Securities Act a Registration Statement with respect to the Tier 1 Registrable
Securities, and shall use its best efforts to cause such Registration Statement
to be declared effective at the earliest practicable date. The Company shall,
subject to Sections 1(a)(v) and (vi), ensure the availability of a Prospectus
meeting the requirements of Section 10(a) of the Securities Act and shall take
any and all other actions necessary in order to ensure the ability of the
holders of the Tier 1 Registrable Securities to effect a resale of their Tier 1
Registrable Securities, for such period as the Company is obligated to maintain
the effectiveness of a Registration Statement pursuant to Section 1(a)(ii).
(B) The Company shall, on or before the Tier 2 Registration
Date, prepare and file with the Commission under the Securities Act a
Registration Statement with respect to the Tier 2 Registrable Securities, and
shall use its best efforts to cause such Registration Statement to be declared
effective at the earliest practicable date. The Company shall, subject to
Sections 1(a)(v) and (vi), ensure the availability of a Prospectus meeting the
requirements of Section 10(a) of the Securities Act and shall take any and all
other actions necessary in order to ensure the ability of the holders of the
Tier 2 Registrable Securities to effect a resale of their Tier 2 Registrable
Securities, for such period as the Company is obligated to maintain the
effectiveness of a Registration Statement pursuant to Section 1(a)(ii).
(ii) The Company shall use its best efforts to cause any such
Registration Statement described in Section 1(a)(i)(A) or 1(a)(i)(B) to remain
effective (or, if required by applicable law, to cause another Registration
Statement with respect to the Registrable Securities to become and remain
effective) until the earlier to occur of: (i) such time as all the Registrable
Securities have been sold by the Investors and (ii) such time as all the
Registrable Securities held by the Investors could be sold under Rule 144 of the
Securities Act during any
<PAGE>
90-day period.
(iii) Each holder of Registrable Securities agrees by acquisition of
such Registrable Securities to give at least five Business Days' prior notice to
the Company of any intended distribution of Registrable Securities under any
Registration Statement described in Section 1(a)(i), which notice shall specify
the date on which such holder intends to begin such distribution.
(iv) As soon as possible after the date notice is provided pursuant
to Section 1(a)(iii), and in any event within five Business Days of such date,
the Company shall, subject to Sections 1(a)(v) and 1(a)(vi): (A) file such
amendments to the Registration Statement and the Prospectus, file such documents
as may be required to be incorporated by reference in any of such documents, and
take all other actions as may be necessary to ensure to the holders of
Registrable Securities the ability to effect the public resale of their
Registrable Securities for a period of at least 90 days following the date set
forth in such notice (including without limitation taking any actions necessary
to ensure the availability of a Prospectus meeting the requirements of Section
10(a) of the Securities Act), (B) provide each holder of Registrable Securities
copies of any documents prepared pursuant to Section 1(a)(iv)(A), and (C) inform
each holder of Registrable Securities that the Company has complied with the
obligations in Seciton 1(a)(iv)(A) and that such holder may sell such holder's
Registrable Securities.
(v) The Company may suspend the effectiveness of any Registration
Statement filed pursuant to this Section 1(a) if, in its reasonable judgment,
(A) maintaining the effectiveness of such Registration Statement at such time
would adversely affect a proposed financing, reorganization or recapitalization,
or pending negotiations relating to a merger, consolidation, acquisition or
similar transaction, or otherwise adversely affect the Company; or (B) financial
statements meeting the requirements of Regulation S-X are not available at such
time because of any such pending proposal or negotiations; provided, however,
-------- -------
that the right of the Company pursuant to this subsection (v) to suspend the
effectiveness of the Registration Statement shall not extend for more than 90
days; and provided, further, that the Company shall give to each holder of
-------- -------
Registrable Securities prior written notice of such suspension.
(vi) No holder of Registrable Securities shall distribute its
Registrable Securities in an Underwritten Offering pursuant to a Registration
Statement filed pursuant to this Section 1(a) unless the holders of Registrable
Securities then constituting greater than 40% of the Registrable Securities have
given notice to the Company of their request for an Underwritten Offering. If a
request for an Underwritten Offering is made pursuant to this Section 1(a) by
less than all of the holders of Registrable Securities, the Company shall
promptly give notice of such request to all other holders of Registrable
Securities; and each of such holders shall have the right, by giving written
notice to the Company promptly (and in any event within 10 days after such
notice is given by the Company), to join in such request
2
<PAGE>
and to have included in the Underwritten Offering such number of Registrable
Securities as such holder shall specify in such notice.
(b) Incidental Registration. (i) In addition to and independent of the
-----------------------
rights afforded by Section 1(a), prior to filing with the Commission any
Registration Statement (on Form S-1 or Form S-3 or any general form for the
registration of securities now or hereafter adopted comparable to either of such
Forms as now in effect (other than a Registration Statement on Form S-4 or Form
S-8 or any successor form to such Forms)), during the period from and including
September 13, 1997 to but excluding March 13, 2000, with respect to any
underwritten public offering of the Company's equity securities or any
securities convertible into or exchangeable or exercisable for such equity
securities, the Company shall notify each Significant Investor Group of such
proposed filing and the price at which the shares are expected to be offered
pursuant thereto. Any such Significant Investor Group wishing to have any of
its members' Registrable Securities included in such Registration Statement
shall promptly (and in any event within 30 days after such notice is given by
the Company) give written notice to the Company requesting registration of such
members' Registrable Securities, specifying the member(s) whose Registrable
Securities are requested to be registered, specifying the number of Registrable
Securities requested to be registered by each such member and describing the
proposed method of disposition thereof, and specifying the number of Registrable
Securities which each such member of such Significant Investor Group wishes to
dispose of pursuant to such Underwritten Offering; provided, that no Significant
--------
Investor Group shall be permitted to register more than one-third of the
Registrable Securities held by the members of such Significant Investor Group.
(ii) At any time prior to the time that a Registration Statement as
to which notice has been given by the Company pursuant to this Section 1(b) has
been filed by the Company or, if filed, has been declared effective, the Company
may determine not to file, or may withdraw, such Registration Statement, in
either of which events the Company shall have no obligation pursuant to this
Section 1(b) to register any Registrable Securities in connection with such
proposed Registration Statement.
(c) Underwritten Offerings. In connection with any Underwritten Offering
----------------------
as to which notice is given by the Company pursuant to Section 1(b) or if the
proposed method of disposition of Registrable Securities selected by the holders
of Registrable Securities under Section 1(a) is to be an Underwritten Offering:
(i) the Company shall request the underwriter(s) participating in
such offering to purchase and sell all Registrable Securities the disposition of
which pursuant to such Underwritten Offering shall have been requested by the
holders thereof in notices given pursuant to Section 1(a) or 1(b);
(ii) each holder of Registrable Securities giving a notice pursuant
to Section
3
<PAGE>
1(a) or 1(b) agrees, by the giving of such notice, that if the underwriter(s)
desire(s) to purchase any of the requested Registrable Securities by such holder
to be purchased, such holder shall sell such Registrable Securities to such
underwriter(s) pursuant to an underwriting agreement to be entered into by and
among the Company, the underwriter(s), such holder and any other holders of
securities of the Company participating in such Underwritten Offering, unless,
upon written notice to the Company and the managing underwriter given at least
five days prior to the date that the Registration Statement with respect to such
offering is proposed to become effective, such holder withdraws its Registrable
Securities from such Underwritten Offering; provided, however, that if the
-------- -------
Registration Statement is amended in any way, including without limitation
amendments to the pricing information therein, or requires recirculation for any
reason, which such amendment or recirculation results in a later proposed
effective date of the Registration Statement, then such holder of Registrable
Securities shall be permitted to withdraw its Registrable Securities from such
Underwritten Offering upon written notice to the Company and the managing
underwriter given at least five days prior to such later proposed effective
date.
(iii) if the underwriter(s) elect(s) to purchase less than all
securities (including Registrable Securities) which it is requested to purchase
in connection with such offering, the Company shall use its best efforts to
cause purchases, if any, by such underwriter(s), (A) if such Underwritten
Offering is the result of a request for registration pursuant to Section 1(a),
first, of securities to be offered for the account of Persons other than the
Company requested by each such holder pursuant to Section 1(a) to be included in
the Underwritten Offering, to be made pro rata according to the number of
Registrable Securities requested by each such holder to be included in the
Underwritten Offering, and, second, of securities to be offered for the account
of the Company and (B) if such Underwritten Offering is the result of a
registration contemplated under Section 1(b), first, of securities to be offered
for the account of the Company, and, second, of securities to be offered for the
account of Persons other than the Company, to be made pro rata according to the
number of securities requested by each such holder to be included in the
Underwritten Offering;
(iv) if pursuant to Section 1(c)(iii), any of the Registrable
Securities requested by holders of Registrable Securities to be disposed of
pursuant to any Underwritten Offering shall not have been purchased by the
underwriter(s) thereunder, then such holders of Registrable Securities shall
have the right to distribute their remaining Registrable Securities in a
subsequent Underwritten Offering conducted in accordance with the provisions
hereof.
4
<PAGE>
(d) Restrictions on Sale of Securities by Holder. Each holder of
--------------------------------------------
Registrable Securities agrees, upon the written request of the Company or the
underwriter(s) in connection with the first Underwritten Offering, not to sell,
sell short, grant an option to buy, or otherwise dispose of shares of the
Company's Common Stock for a period of 120 days after the closing date of such
Underwritten Offering, to the extent timely so requested in writing by the
Company or such underwriter(s); provided, however, that nothing in this Section
-------- -------
1(d) shall be construed as to limit in any way the incidental registration
rights of any Significant Investor Group as described in Section 1(b).
The foregoing provision shall not apply to any holder of Registrable
Securities if such holder is prevented by applicable statute, regulation or
preexisting fiduciary duty from entering into any such agreement.
(e) Restrictions on Sale of Securities by the Company. The Company agrees
-------------------------------------------------
not to effect any public or private offer, sale or distribution of its equity
securities or any security convertible into or exchangeable or exercisable for
such equity security, including a sale pursuant to Regulation D under the
Securities Act, during the 10-day period prior to, and during the 90-day period
(or such longer period, not exceeding 180 days, as is required by the
underwriter(s)) beginning on, the closing date of each Underwritten Offering
permitted pursuant to Section 7 or for such period as may be reasonably required
by the underwriter(s) in such Underwritten Offering, to the extent timely and
reasonably so requested in writing by the underwriter(s) (except as part of such
registration, if permitted, or pursuant to registrations on Form S-4 or Form S-8
or any successor form to such Forms or pursuant to an issuance of Common Stock
of the Company where such Common Stock is exempted from the Securities Act
pursuant to Section 3(a)(10) thereof); provided, however, that a private offer,
-------- -------
sale or distribution of such securities shall be permitted with the consent of
the holders of a majority of the Registrable Securities owned by the Investors
to be disposed of in such Underwritten Offering, which consent shall not be
unreasonably withheld. Without limitation, the withholding of such consent by
the holders of Registrable Securities shall be deemed to be reasonable if (A)
such holders determine in good faith that the private offer, sale or
distribution of such securities proposed to be made by the Company would have a
material adverse effect on such Underwritten Offering and (B) such withholding
would not have a Material Adverse Effect.
(f) Amendments. Upon the occurrence of any event that would cause any
----------
Registration Statement (i) to contain a material misstatement or omission or
(ii) not to be effective and usable for resale of Registrable Securities during
the period that such Registration Statement is required to be effective and
usable, the Company shall promptly file an amendment to the Registration
Statement, in the case of clause (i), correcting any such misstatement or
omission, and in the case of either clause (i) or (ii), using its best efforts
to cause such amendment to be declared effective and such Registration Statement
to become usable as soon as practicable thereafter.
5
<PAGE>
2. REGISTRATION PROCEDURES.
In connection with any Registration Statement and subject to the provisions
of Section 1 the Company shall use its best efforts to effect such registration
to permit the sale of the Registrable Securities being sold in accordance with
the intended method or methods of distribution thereof, and pursuant thereto the
Company shall as expeditiously as possible:
(a) prepare and file with the Commission a Registration Statement relating
to the registration on any appropriate form under the Securities Act, which form
shall be available for the sale of the Registrable Securities being sold in
accordance with the intended method or methods of distribution thereof and shall
include all financial statements required by the Commission to be filed
therewith (including, if required by the Securities Act or any regulation
thereunder, financial statements of any Subsidiary of the Company which shall
have guaranteed any indebtedness of the Company), cooperate and assist in any
filings required to be made with the NASD and use its best efforts to cause such
Registration Statement to become effective and approved by such governmental
agencies or authorities as may be necessary to enable the selling holders to
consummate the disposition of such Registrable Securities; provided, that before
--------
filing a Registration Statement or any Prospectus, or any amendments or
supplements thereto, the Company shall (i) furnish to the holders of the
Registrable Securities and the underwriter(s), if any, copies of all such
documents proposed to be filed, which documents shall be subject to the review
of such holders and (ii) make the Company's representative available for
discussion of such documents; and provided, further, the Company shall not file
-------- -------
any Registration Statement or amendment thereto or any Prospectus or any
supplement thereto to which either the holders of a majority of Registrable
Securities owned by the Investors and covered by such Registration Statement or
the underwriter(s), if any, shall reasonably object within 10 Business Days
after the receipt thereof. For purposes of the preceding proviso, an objection
made by a holder of the Registrable Securities or an underwriter, if any, shall
be deemed to be reasonable if, including without limitation, the Registration
Statement, amendment, Prospectus or supplement, as applicable, as filed or
proposed to be filed, contains a material misstatement or omission;
(b) prepare and file with the Commission such amendments and post-
effective amendments to the Registration Statement as may be necessary to keep
the Registration Statement effective for the applicable period set forth in
Section 1; in the case of any Registration Statement filed pursuant to Rule 415
under the Securities Act, cause the Prospectus to be supplemented by any
required Prospectus supplement, and as so supplemented to be filed pursuant to
Rule 424 under the Securities Act, and to comply fully with the applicable
provisions of Rules 424 and 430A under the Securities Act in a timely manner,
and to comply with the provisions of the Securities Act with respect to the
disposition of all securities covered by such Registration Statement during the
applicable period in accordance with the intended method or methods of
distribution by the sellers thereof set forth in such Registration Statement or
supplement to the Prospectus;
6
<PAGE>
(c) if requested by the holders of a majority of the Registrable
Securities owned by Investors and being sold in an Underwritten Offering or the
underwriter(s) thereof, promptly incorporate in a Prospectus, Prospectus
supplement or post-effective amendment such information as such underwriter(s)
and the holders of a majority of the Registrable Securities being sold agree
should be included therein relating to the plan of distribution of the
Registrable Securities, including, without limitation, information with respect
to the number of Registrable Securities being sold to such underwriter(s), the
purchase price being paid therefor and with respect to any other terms of the
offering of the Registrable Securities to be sold in such offering; and make any
required filings of such Prospectus, Prospectus supplement or post-effective
amendment as soon as practicable after the Company is notified of the matters to
be incorporated in such Prospectus, Prospectus supplement or post-effective
amendment;
(d) advise the underwriter(s), if any, and holders of the Registrable
Securities promptly and, if requested by such Persons, confirm such advice in
writing:
(i) when the Prospectus or any Prospectus supplement or post-
effective amendment has been filed, and, with respect to the Registration
Statement or any post-effective amendment thereto, when the same has become
effective;
(ii) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information relating thereto;
(iii) if at any time the representations and warranties of the
Company contemplated by clause (l)(i) below cease to be true and correct;
(iv) of the existence of any fact and the happening of any event
that makes any statement of a material fact made in the Registration Statement,
the Prospectus, any amendment or supplement thereto, or any document
incorporated by reference therein untrue, or that requires the making of any
additions to or changes in the Registration Statement or the Prospectus in order
to make the statements therein not misleading; and
(v) of the issuance by the Commission of any stop order or other
order suspending the effectiveness of the Registration Statement, or any order
issued by any state securities commission or other regulatory authority
suspending the qualification or exemption from qualification of such Registrable
Securities under state securities or "blue sky" laws. If at any time the
Company shall receive any such stop order suspending the effectiveness of the
Registration Statement, or any such order from a state securities commission or
other regulatory authority, the Company shall use its best efforts to obtain the
withdrawal or lifting of such order at the earliest possible time.
7
<PAGE>
(e) furnish to each holder of the Registrable Securities and each of the
underwriter(s), if any, without charge, at least one complete conformed copy of
the Registration Statement, as first filed with the Commission, and of each
amendment thereto, including all documents incorporated by reference therein and
all exhibits (including exhibits incorporated therein by reference);
(f) deliver to each holder of the Registrable Securities and each of the
underwriter(s), if any, without charge, as many copies of the Prospectus
(including each preliminary prospectus) and any amendment or supplement thereto
as such Persons may reasonably request; the Company consents to the use of the
Prospectus and any amendment or supplement thereto by each of the holders of the
Registrable Securities and each of the underwriter(s), if any, in connection
with the offering and the sale of the Registrable Securities covered by the
Prospectus or any amendment or supplement thereto;
(g) prior to any public offering of Registrable Securities, cooperate with
the holders of the Registrable Securities, the underwriter(s), if any, and their
respective counsel in connection with the registration and qualification of the
Registrable Securities under the securities or "blue sky" laws of such
jurisdictions as the holders of the Registrable Securities or underwriter(s) may
reasonably request and do any and all other acts or things necessary or
advisable to enable the disposition in such jurisdictions of the Registrable
Securities covered by the Registration Statement;
(h) cooperate with the holders of the Registrable Securities and the
underwriter(s), if any, to facilitate the timely preparation and delivery of
certificates representing Registrable Securities being sold without bearing any
restrictive legends; and enable such Registrable Securities to be in such
denominations and registered in such names as such holders or the
underwriter(s), if any, may request at least two Business Days prior to any sale
of Registrable Securities made by such underwriter(s);
(i) use its best efforts to cause the Registrable Securities covered by
the Registration Statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the seller or
sellers thereof or the underwriter(s), if any, to consummate the disposition of
such Registrable Securities;
(j) if any fact or event contemplated by clause (d)(iv) above shall exist
or have occurred, prepare a supplement or post-effective amendment to the
Registration Statement or related Prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchasers of Registrable Securities, the Prospectus will not
contain any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein not misleading;
(k) provide a transfer agent and registrar (if the Company does not
already have
8
<PAGE>
such an agent) and CUSIP number for all Registrable Securities not later than
the effective date of the Registration Statement;
(l) enter into such agreements (including an underwriting agreement) and
take all such other actions in connection therewith as may be reasonably
required in order to expedite or facilitate the disposition of the Registrable
Securities pursuant to the Registration Statement, and in connection with any
such underwriting agreement entered into by the Company:
(i) make such representations and warranties to the holders of the
Registrable Securities and the underwriter(s), in form, substance and scope as
are customarily made by issuers to underwriters in primary underwritten
offerings;
(ii) obtain opinions of counsel to the Company and updates thereof
(which counsel and opinions (in form, scope and substance) shall be reasonably
satisfactory to the underwriter(s) and the holders of the Registrable Securities
being sold), addressed to the underwriter(s) covering the matters customarily
covered in opinions requested in underwritten offerings and such other matters
as may reasonably be requested by such holders and underwriters; and use its
best efforts to have such opinions addressed to each such selling holder;
(iii) obtain "cold comfort" letters and updates thereof from the
Company's independent certified public accountants, addressed to the
underwriters, such letters to be in customary form and covering matters of the
type customarily covered in "cold comfort" letters to underwriters in connection
with primary underwritten offerings; and use its best efforts to have such
letters and updates addressed to each selling holder of Registrable Securities;
(iv) set forth in full or incorporate by reference in the
underwriting agreement the indemnification provisions and procedures of Section
4 with respect to all parties to be indemnified pursuant to said Section; and
(v) deliver such documents and certificates as may be reasonably
requested by the holders of the Registrable Securities being sold or the
underwriter(s) of such Underwritten Offering to evidence compliance with
subclause (i) above and with any customary conditions contained in the
underwriting agreement or other agreement entered into by the Company pursuant
to this clause (l).
The above shall be done at each closing under such underwriting or
similar agreement, as and to the extent required thereunder;
(m) make available for inspection by a representative of the holders of
the
9
<PAGE>
Registrable Securities, any underwriter participating in any disposition
pursuant to the Registration Statement, and any attorney, accountant or other
professional retained by such holders or any of the underwriters, all financial
and other records, pertinent corporate documents and properties of the Company,
and cause the Company's officers, directors and employees to supply all
information reasonably requested by any such holder, underwriter, attorney,
accountant or other professional in connection with such Registration Statement
subsequent to the filing thereof and prior to its effectiveness, except that the
aforementioned advisors may be required to sign a reasonably acceptable
confidentiality agreement;
(n) otherwise use its best efforts to comply with all applicable rules and
regulations of the Commission, and make generally available to the holders of
the Registrable Securities, as soon as practicable, a consolidated earnings
statement (which need not be audited) for the 12-month period (A) commencing at
the end of any fiscal quarter in which Registrable Securities are sold to
underwriters in a firm or best efforts Underwritten Offering or (B) if not sold
to underwriters in such an offering, beginning with the first month of the
Company's first fiscal quarter commencing after the effective date of the
Registration Statement;
(o) use its best efforts to cause all Registrable Securities to be listed
on each securities exchange, if any, on which equity securities issued by the
Company are then listed; and
(p) use its best efforts to take all other steps necessary to effect the
registration of the Registrable Securities contemplated hereby.
Each holder of the Registrable Securities as to which any Registration
Statement is being effected agrees to furnish promptly to the Company all
information reasonably known to such holder to be necessary to make the
information previously furnished to the Company by such holder not materially
misleading.
Each holder of the Registrable Securities agrees by acquisition of such
Registrable Securities that, upon receipt of any notice from the Company of the
existence of any fact of the kind described in Section 2(d)(iv), or notice of a
stop order or suspension described in Section 2(d)(v), such holder shall
forthwith discontinue disposition of Registrable Securities and cease to use the
Prospectus in use under such Registration Statement. The Company shall, as
promptly as practicable, provide each holder with copies of the supplemented or
amended Prospectus contemplated by Section 2(j), or advise the holders in
writing that the use of the Prospectus may be resumed, and provide each holder
with copies of any additional or supplemental filings which are incorporated by
reference in the Prospectus. If so directed by the Company, each such holder
shall deliver to the Company (at the Company's expense) all copies, other than
permanent file copies then in such holder's possession, of the Prospectus
covering such Registrable Securities current at the time of receipt of such
notice.
10
<PAGE>
3. REGISTRATION EXPENSES.
(a) All expenses incident to the Company's performance of or compliance
with this Agreement shall be borne by the Company, regardless of whether a
Registration Statement becomes effective, including without limitation:
(i) all registration and filing fees and expenses (including
filings made with the NASD);
(ii) fees and expenses of compliance with federal securities and
state "blue sky" or securities laws;
(iii) expenses of printing (including printing certificates for the
Registrable Securities and Prospectuses), messenger and delivery services and
telephone;
(iv) in connection with any Underwritten Offering, fees and
disbursements of counsel for the Company and one counsel for the holders of the
Registrable Securities (subject to the provisions of Section 3(b));
(v) all application and filing fees in connection with listing the
Registrable Securities on a national securities exchange or automated quotation
system pursuant to the requirements hereof;
(vi) all fees and disbursements of independent certified public
accountants of the Company (including the expenses of any special audit and
"cold comfort" letters required by or incident to such performance);
(vii) any reasonable out-of-pocket expenses of the holders of the
Registrable Securities (or the agents who manage their accounts); and
(viii) such other reasonable and customary expenses as may be, at
such time (A) associated with underwritten offerings and (B) customarily borne
by the issuer.
The Company shall, in any event, bear its internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit, rating
agency fees and the fees and expenses of any Person, including special experts,
retained by the Company.
(b) In connection with any Underwritten Offering, the Company shall
reimburse the holders of the Registrable Securities for the reasonable fees and
disbursements of not more than one counsel chosen by the holders of a majority
of the Registrable Securities covered by such Registration Statement.
Notwithstanding the provisions of this Section 3, each holder
11
<PAGE>
shall pay registration expenses if and to the extent required by applicable law.
4. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each holder of the
Registrable Securities and each Person, if any, who controls such holder within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act from and against any and all losses, claims, damages, liabilities and
expenses (including, without limiting the foregoing but subject to Section 4(c),
the reasonable legal and other expenses incurred in connection with any action,
suit or proceeding or any claim asserted) arising out of or based upon any
untrue statement or alleged untrue statement of a material fact contained in any
Registration Statement or the Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) or any
preliminary prospectus, or arising out of or based upon any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except insofar as such losses,
claims, damages, liabilities or expenses are caused directly by an untrue
statement or omission contained in information relating to such holder,
furnished in writing to the Company by or on behalf of such holder expressly for
use therein. In connection with any Underwritten Offering permitted by Section
7, the Company shall also indemnify underwriters, if any, selling brokers,
dealer managers and similar securities industry professionals participating in
the distribution, their officers and directors and each Person who controls such
Persons (within the meaning of the Securities Act and the Exchange Act) to the
same extent as provided above with respect to the indemnification of the
holders, if requested in connection with any Registration Statement.
(b) As a condition to the inclusion of its Registrable Securities in any
Registration Statement pursuant to this Agreement, each holder thereof shall
furnish to the Company in writing, promptly after receipt of a request therefor,
such information as the Company may reasonably request for use in connection
with any Registration Statement, Prospectus or preliminary prospectus (including
such completed and executed questionnaires as the Company may reasonably
request) and agrees to indemnify and hold harmless, severally and not jointly,
the Company and its directors, its officers who sign such Registration
Statement, and any Person controlling the Company within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act to the same extent as
the indemnity from the Company to each holder and Persons controlling such
holder, but only with reference to information relating specifically to such
holder furnished in writing by or on behalf of such holder expressly for use in
such Registration Statement or the Prospectus or any preliminary prospectus
included therein, and of which none of the Company, its directors, officers or
Affiliates has any actual or constructive knowledge independent of such holder;
provided, however, that such holder of Registrable Securities shall not be
- -------- -------
liable in any such case to the extent that the holder has furnished in writing
to the Company prior to the filing of any such
12
<PAGE>
Registration Statement, Prospectus or preliminary prospectus information
expressly for use in such Registration Statement, Prospectus or preliminary
prospectus which corrected or made not misleading information previously
furnished to the Company, and the Company failed to include such information
therein. In case any action shall be brought against the Company, any of its
directors, any such officer, or any such controlling Person based on the
Registration Statement, the Prospectus or any preliminary prospectus and in
respect of which indemnity may be sought against one or more of the holders,
such holders shall have the rights and duties given to the Company by Section
4(c) (except that if the Company as provided in Section 4(c) shall have assumed
the defense thereof such holders shall not be required to do so, but may employ
separate counsel therein and participate in the defense thereof but the fees and
expenses of such counsel shall be at such holder's expense) and the Company and
its directors, any such officers, and any such controlling Person shall have the
rights and duties given to the holders by Section 4(c). In no event shall the
liability of any selling holder hereunder be greater than the net proceeds
(i.e., proceeds net of underwriting discounts, fees, commissions and any other
expenses payable by such selling holder) received by such holder upon the sale
of the Registrable Securities giving rise to such indemnification obligation.
(c) In case any action or proceeding (including any governmental or
regulatory investigation or proceeding) shall be brought against any current or
former holder of the Registrable Securities or any Person controlling such
holder, with respect to which indemnity may be sought against the Company
pursuant to Section 4(a), such holder or such Person controlling such holder
shall promptly notify the Company in writing and the Company shall assume the
defense thereof, including the employment of counsel reasonably satisfactory to
such holder and payment of all fees and expenses relating thereto. Such holder
and such Persons controlling such holder shall have the right to employ separate
counsel in any such action or proceeding and participate in the defense thereof,
but the fees and expenses of such counsel shall be at such holder's expense
unless (i) the employment of such counsel has been specifically authorized in
writing by the Company, which authorization shall not be unreasonably withheld,
(ii) the Company has not assumed the defense and employed counsel reasonably
satisfactory to such holder within 15 days after notice of any such action or
proceeding, or (iii) the named parties to any such action or proceeding
(including any impleaded parties) include both such holder or any Person
controlling such holder and the Company and such holder or any Person
controlling such holder shall have been advised by such counsel that there may
be one or more legal defenses available to such holder or Person controlling
such holder that are different from or additional to those available to the
Company and, in the reasonable opinion of such counsel, could not be asserted by
the Company's counsel without creating a conflict of interest (in which case the
Company shall not have the right to assume the defense of such action or
proceeding on behalf of such holder or controlling Person, it being understood,
however, that the Company shall not, in connection with any one such action or
separate but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys (in
addition to all
13
<PAGE>
local counsel which is necessary, in the good faith opinion of both counsel for
the indemnifying party and counsel for the indemnified party in order to
adequately represent the indemnified parties) for all such holders and
controlling Persons, which firm shall be designated in writing by the holders of
a majority of the Registrable Securities currently or formerly held by such
holders and that all such fees and expenses shall be reimbursed as they are
incurred upon written request and presentation of invoices). The Company shall
not be liable for any settlement of any such action effected without the written
consent of the Company (which consent shall not be unreasonably withheld), but
if settled with the written consent of the Company or if there is a final
judgment for the plaintiff, the Company agrees to indemnify and hold harmless
such holder and all Persons controlling such holder from and against any loss or
liability by reason of such settlement or judgment. The Company shall not,
without the prior written consent of the holder, effect any settlement of any
pending or threatened proceeding in respect of which any holder or any Person
controlling such holder is a party and indemnity has been sought hereunder by
such holder or any Person controlling such holder unless such settlement
includes an unconditional release of such holder or such controlling Person from
all liability on claims that are the subject matter of such proceeding.
(d) If the indemnification provided for in this Section 4 is unavailable
to an indemnified party under paragraphs (a), (b) or (c) hereof in respect of
any losses, claims, damages, liabilities or expenses referred to therein, then
each indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and expenses (i) in such proportion
as is appropriate to reflect the relative benefits received by the Company on
the one hand and the holders of the Registrable Securities on the other hand
from the original sale by the Company of the Registrable Securities, or (ii) if
the allocation provided by clause (i) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company on
the one hand and such holders on the other hand in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative fault of the Company on the one hand and such holders on the other
hand shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission to state a
material fact relates to information supplied by the Company on the one hand or
by such holders on the other hand and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities or expenses shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim.
(e) The Company and the holders of the Registrable Securities agree that
it would not be just and equitable if contribution pursuant to this Section 4
were determined by a pro
14
<PAGE>
rata allocation or by any other method of allocation that does not take account
of the equitable considerations referred to in subsection (d) above. The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages, liabilities and expenses referred to in subsection (d) above shall be
deemed to include, subject to the limitations set forth above, any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating any claim or defending any such action, suit or proceeding.
Notwithstanding any other provision of this Agreement, no holder of the
Registrable Securities shall be required to contribute an amount greater than
the net proceeds received by such holder with respect to the sale of Registrable
Securities giving rise to any indemnification or contribution obligation under
this Section 4. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
5. RULE 144A. The Company hereby agrees with each holder of the
Registrable Securities for so long as any of the Registrable Securities remain
outstanding and during any period in which the Company is not subject to Section
13 or 15(d) of the Exchange Act, to make available to any beneficial owner of
Registrable Securities in connection with any sale thereof and any prospective
purchaser of such Registrable Securities from such beneficial owner, the
information required by Rule 144A(d)(4) under the Securities Act.
6. RULE 144. The Company agrees with each holder of Registrable
Securities to:
(a) comply with the requirements of Rule 144(c) under the Securities Act
with respect to current public information about the Company;
(b) use its best efforts to file with the Commission in a timely manner
all reports and other documents required of the Company under the Securities Act
and the Exchange Act (at any time it is subject to such reporting requirements);
and
(c) furnish to any holder of Registrable Securities upon request (i) a
written statement by the Company as to its compliance with the requirements of
said Rule 144(c) and the reporting requirements of the Securities Act and the
Exchange Act (at any time it is subject to such reporting requirements), (ii) a
copy of the most recent annual or quarterly report of the Company, and (iii)
such other reports and documents of the Company as such holder may reasonably
request to avail itself of any similar rule or regulation of the Commission
allowing it to sell any such securities without registration.
7. PARTICIPATION IN UNDERWRITTEN OFFERINGS. No holder of the Registrable
Securities may participate in any Underwritten Offering hereunder unless such
holder (a) agrees to sell such holder's Registrable Securities on the basis
provided in any underwriting arrangements approved by the Persons entitled
hereunder to approve such arrangements and
15
<PAGE>
(b) completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents reasonably required under the terms
of such underwriting arrangements; provided, that no holder of Registrable
--------
Securities included in any Underwritten Offering shall be required to make any
representations or warranties to the Company or the underwriter(s) other than
representations and warranties regarding such holder and such holder's intended
method of distribution.
8. SELECTION OF UNDERWRITERS. In any Underwritten Offering of
Registrable Securities requested pursuant to Section 1(a), the investment
banker(s) and manager(s) that will administer the offering shall be selected by
the holders of a majority of the Registrable Securities with respect to which
the request for an Underwritten Offering was made under Section 1(a); provided,
--------
that, in either case, such investment banker(s) and manager(s) must be
reasonably acceptable to the Company; and provided, further, that non-acceptance
-------- -------
by the Company shall be deemed reasonable if, inter alia, (a) such investment
banker(s) and manager(s) are not of national stature and the Company's non-
acceptance is on the basis that such investment banker(s) and manager(s) are not
of national stature or (b) on or prior to October 31, 1997, such non-acceptance
is on the basis that the Company has an agreement with Smith Barney & Co., Inc.
giving to Smith Barney & Co., Inc. the right to administer any Underwritten
Offering; and provided, further, that non-acceptance by the Company shall not be
-------- -------
deemed reasonable if, inter alia, such non-acceptance is on the basis that the
Company has entered into any agreement or contract (which agreement or contract
the Company entered into without the consent of the holders of a majority of the
Registrable Securities included in such offering) giving to specific investment
banker(s) and/or manager(s) the right to administer an Underwritten Offering.
9. INTERPRETATION OF AGREEMENT; DEFINITIONS.
(a) Definitions. Unless the context otherwise requires, the terms
-----------
hereinafter set forth when used herein shall have the following meanings and the
following definitions shall be equally applicable to both the singular and
plural forms of any of the terms herein defined.
"AFFILIATE" means, as to any Person, a Person which directly or indirectly
through one or more intermediaries controls, or is controlled by, or is under
common control with, the first Person. The term "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
stock, through an investment advisory or other fiduciary arrangement, by
contract or otherwise.
"AGREEMENT" means this Registration Rights Agreement and all Schedules
hereto.
"BUSINESS DAY" means any day other than a Saturday, Sunday or other day on
which banks in New York are required by law to close or are customarily closed.
16
<PAGE>
"COMMISSION" means the Securities and Exchange Commission as from time to
time constituted, created under the Exchange Act, or, if at any time after the
execution of this instrument such Commission is not existing and performing the
duties now assigned to it under the Exchange Act, then the Person performing
such duties at such time.
"COMMON STOCK" means any stock of any class of the Company which has no
preference in respect of dividends or of amounts payable in the event of any
voluntary or involuntary liquidation, dissolution or winding-up of the Company
and which is not subject to redemption by the Company.
"COMPANY" has the meaning assigned in the first paragraph of this
Agreement.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"INVESTORS" means, collectively, the Persons listed on Schedule I, and any
----------
successors or permitted assignees of any of their rights hereunder that hold
Registrable Securities.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on the business,
assets, operations, prospects, liabilities or condition (financial or otherwise)
of the Company and its Subsidiaries, taken as a whole.
"NASD" means National Association of Securities Dealers, Inc.
"OFFERING" means the offering of up to $25,000,000 of shares of Common
Stock pursuant to the Confidential Offering Memorandum dated January 1997.
"PERSON" means an individual, partnership, corporation, trust or
unincorporated organization, and a government or agency or political subdivision
thereof.
"PROSPECTUS" means the prospectus included in a Registration Statement, as
amended or supplemented by any prospectus supplement and by all other amendments
thereto, including post-effective amendments, and all material incorporated by
reference into such Prospectus.
"REGISTRABLE SECURITIES" means all shares of Common Stock purchased in the
Offering held at the relevant time by an Investor. As to any particular
securities, such securities will cease to be Registrable Securities when (i)
they have been transferred in a public offering registered under the Securities
Act, (ii) they have been transferred in a sale made through a broker, dealer or
market-maker pursuant to Rule 144 under the Securities Act or (iii) the holder
thereof is able to sell all of such securities under Rule 144 under the
Securities Act during any 90-day period.
17
<PAGE>
"REGISTRATION STATEMENT" means any registration statement of the Company
relating to the registration for resale of Registrable Securities, including any
registration statement filed pursuant to the provisions of this Agreement,
including the Prospectus included therein, all amendments and supplements
thereto (including post-effective amendments) and all exhibits and material
incorporated by reference therein.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SIDE ARRANGEMENT" has the meaning assigned in Section 10(c).
"SIGNIFICANT INVESTOR GROUP" means any group of Investors that are
Affiliates and that collectively purchased more than 500,000 shares of Common
Stock in the Offering.
"TIER 1 REGISTRABLE SECURITIES" means Registrable Securities purchased by
Investors at a price equal to $12.00 per share.
"TIER 2 REGISTRABLE SECURITIES" means Registrable Securities purchased by
Investors at a price equal to $10.50 per share.
"TIER 1 REGISTRATION DATE" means the date 90 days after the date hereof.
"TIER 2 REGISTRATION DATE" means the date 180 days after the date hereof.
"UNDERWRITTEN OFFERING" means a registration in which securities of the
Company are sold to an underwriter for reoffering to the public.
(b) Accounting Principles. Where the character or amount of any asset or
---------------------
liability or item of income or expense is required to be determined or any
consolidation or other accounting computation is required to be made for the
purposes of this Agreement, the same shall be done in accordance with the
generally accepted accounting principles in effect from time to time, to the
extent applicable, except where such principles are inconsistent with the
express requirements of this Agreement including without limitation the
definitions set out in Section 9.
(c) Directly or Indirectly. Where any provision in this Agreement refers
----------------------
to action to be taken by any Person, or which such Person is prohibited from
taking, such provision shall be applicable whether the action in question is
taken directly or indirectly by such Person.
10. MISCELLANEOUS.
(a) Remedies. Each holder of the Registrable Securities, in addition to
--------
being
18
<PAGE>
entitled to exercise all rights provided herein, and granted by law, including
recovery of damages, shall be entitled to specific performance of its rights
under this Agreement. The Company agrees that monetary damages would not be
adequate compensation for any loss incurred by reason of a breach by it of the
provisions of this Agreement and hereby agrees to waive the defense in any
action for specific performance that a remedy at law would be adequate.
(b) No Inconsistent Agreements. The Company shall not, on or after the
--------------------------
date of this Agreement, enter into any agreement with respect to its securities
that is inconsistent with the rights granted to such holders of the Registrable
Securities in this Agreement or otherwise conflicts with the provisions hereof.
The rights granted to the holders hereunder do not in any way conflict with and
are not inconsistent with the rights granted to the holders of the Company's
securities under any other agreements.
(c) Comparable Agreements. The Company hereby represents and warrants
---------------------
that it has not entered into or agreed to any side letter or similar arrangement
or other agreement with any other holder or prospective holder of any securities
of the Company providing for registration rights with respect to the securities
of the Company that confers rights or benefits more favorable than the rights
and benefits conferred upon the holders of the Registrable Securities hereunder
(such a letter, arrangement or agreement, whether or not it confers such more
favorable rights or benefits, a "Side Arrangement"). The Company shall not
enter into any Side Arrangement with any holder or prospective holder of any
securities of the Company that shall confer rights or benefits more favorable
than the rights and benefits conferred upon the holders of the Registrable
Securities hereunder, unless, in each case, each of the holders of the
Registrable Securities have been notified in writing and been provided with a
copy of such a proposed Side Arrangement at least 20 Business Days prior to the
effective date of such Side Arrangement and have been given the opportunity to
receive the rights and benefits in such Side Arrangement as of the date of such
Side Arrangement.
(d) Amendments and Waivers. The provisions of this Agreement, including
----------------------
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given without the written consent of the Company and each of the Investors.
(e) Notices. All notices, demands and other communications provided for
-------
or permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, telex, telecopier, or any courier guaranteeing overnight
delivery. Such notices, demands and other communications will be sent to any
Investor at the address indicated on Schedule I, to any other holder of
----------
Registrable Securities at such holder's address of record appearing on the
Company's books and to the Company at the address indicated below:
Prosoft I-Net Solutions, Inc.
19
<PAGE>
2333 North Broadway
Suite 300
Santa Ana, CA 92706
Attention: General Counsel
Telecopier: (714) 953-1200
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party. All
such notices, demands and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; upon receipt, if
mailed postage prepaid; when answered back, if telexed; when receipt is
acknowledged, if telecopied; or at the time delivered, if delivered by an air
courier guaranteeing overnight delivery.
(f) Successors and Assigns. This Agreement shall inure to the benefit of
----------------------
and be binding upon the successors and permitted assigns of the Investors,
including without limitation and without the need for an express assignment,
Affiliates of the Investors; provided, however, that this Agreement shall not
-------- -------
inure to the benefit of or be binding upon transferees of the Investors that are
not Affiliates of the Investors and do not hold at least 25,000 shares of Common
Stock. In addition, whether or not any express assignment has been made, the
provisions of this Agreement which are for the benefit of the Investors are also
for the benefit of, and enforceable by, any subsequent holder of Registrable
Securities that is either an Affiliate of an Investor or a holder of at least
25,000 shares of Common Stock.
(g) Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) Governing Law. THE CORPORATE LAW OF THE STATE OF NEVADA SHALL GOVERN
-------------
ALL ISSUES AND QUESTIONS CONCERNING THE RELATIVE RIGHTS AND OBLIGATIONS OF THE
COMPANY AND ITS STOCKHOLDERS. ALL OTHER ISSUES AND QUESTIONS CONCERNING THE
CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT AND THE
EXHIBITS AND SCHEDULES HERETO SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS
OF LAW PRINCIPLES THEREOF, EXCEPT SECTION 5-1401 OF THE NEW YORK GENERAL
OBLIGATIONS LAW.
(i) Severability. Should any part of this Agreement for any reason be
------------
declared
20
<PAGE>
invalid, such decision shall not affect the validity of any remaining portion,
which remaining portion shall remain in force and effect as if this Agreement
had been executed with the invalid portion thereof eliminated and it is hereby
declared the intention of the parties hereto that they would have executed the
remaining portion of this Agreement without including therein any such part,
parts, or portion which may, for any reason, be hereafter declared invalid.
(j) Submission to Jurisdiction. THE COMPANY HEREBY CONSENTS TO THE
--------------------------
JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF NEW
YORK, STATE OF NEW YORK, WITH RESPECT TO ALL ACTIONS OR PROCEEDINGS RELATING TO
THIS AGREEMENT, AND THE COMPANY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED ON
IMPROPER VENUE OR FORUM NON CONVENIENS TO THE CONDUCT OF ANY PROCEEDING IN ANY
--------------------
SUCH COURT AND WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT, AND
CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY MAIL OR MESSENGER DIRECTED
TO IT AT THE ADDRESS OF THE COMPANY SET FORTH IN SECTION 10(E) ABOVE, AND THAT
SERVICE SO MADE, SHALL BE DEEMED TO BE COMPLETED UPON THE EARLIER OF ACTUAL
RECEIPT AND FIVE BUSINESS DAYS AFTER THE SAME SHALL HAVE BEEN POSTED TO THE
COMPANY'S ADDRESS, AS THE CASE MAY BE, IN ACCORDANCE HEREWITH. THE COMPANY
AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE
CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT
(IF SUCH A PROCEDURE IS AVAILABLE UNDER APPLICABLE LAW) OR IN ANY OTHER MANNER
PROVIDED BY LAW. NOTHING CONTAINED IN THIS SECTION SHALL AFFECT THE RIGHT OF
ANY INVESTOR TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO
BRING ANY ACTION OR PROCEEDING IN THE COURTS OF ANY JURISDICTION AGAINST THE
COMPANY OR TO ENFORCE A JUDGMENT OBTAINED IN THE COURTS OF ANY OTHER
JURISDICTION.
(k) Captions. The descriptive headings of the various Sections or parts
--------
of this Agreement are for convenience only and shall not affect the meaning or
construction of any of the provisions hereof.
(l) Waiver of Jury Trial. EACH OF THE COMPANY AND THE INVESTORS WAIVES
--------------------
ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND
ANY RIGHTS UNDER THIS AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR
AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION
HEREWITH OR ARISING FROM ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS
AGREEMENT, AND AGREES THAT ANY SUCH
21
<PAGE>
ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
(m) Effectiveness of Agreement. This Agreement shall become effective
--------------------------
upon execution by the Company and delivery hereof by the Company to at least one
Investor and the execution by such Investor and delivery hereof by such Investor
to the Company, notwithstanding the fact that any other potential Investors
listed in Schedule I have not so executed and delivered this Agreement.
----------
(n) Final Agreement. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL
---------------
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
22
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement, or caused this Agreement to be duly executed on its behalf, as of the
date first written above.
PROSOFT I-NET SOLUTIONS, INC.
By: _____________________________
Name:
Title:
[Signatures of Investors are contained in Schedule I.]
----------
<PAGE>
EXHIBIT 10.18
SUBSCRIPTION AGREEMENT
----------------------
PROSOFT I-NET SOLUTIONS, INC.
-----------------------------
Prosoft I-Net Solutions, Inc.
2333 North Broadway, Suite 300
Santa Ana, California 92706
Gentlemen:
The undersigned subscriber (the "Subscriber") understands that Prosoft
I-Net Solutions, Inc., a Nevada corporation (the "Corporation"), has made
available for purchase on a limited and private basis shares of Common Stock of
the Corporation (the "Shares") at a purchase price of $12.25 per Share.
1. Subscription. The Subscriber hereby subscribes for and agrees to
------------
purchase the number of Shares indicated at the aggregate purchase price
indicated on the signature page hereof. The Subscriber understands that this
Subscription Agreement (the "Subscription Agreement") and the funds delivered
hereunder will be returned promptly to the Subscriber and that all of the
Subscriber's obligations under the Subscription Agreement will terminate if the
Corporation does not accept the Subscription Agreement.
2. Closing. The Closing of the purchase of the Shares will be held
-------
at the offices of the General Electric Pension Trust on the 4th day of April,
1997 or on such earlier date as shall be designated by the Corporation on not
less than 72 hours prior notice or at such other place and time as shall be
agreed to by the Corporation and the Subscriber (the "Closing Date"). At the
Closing, the Subscriber will make payment of the purchase price for the Shares
by depositing the same in escrow with State Street Bank and Trust Company (the
"Escrow Agent") pursuant to an Escrow Agreement (the "Escrow Agreement") in the
form annexed hereto as Exhibit A. At the Closing, the Corporation will issue to
the Subscriber and deliver to the Escrow Agent a stock certificate representing
such number of fully-paid, validly issued and non-assessable shares of the
Common Stock of the Corporation as subscribed for hereby by the Subscriber.
3. Securities Act Registration.
---------------------------
3.1. The Corporation shall use its best efforts to register for
resale under the Securities Act of 1933, as amended (the "Securities Act"), at
the Corporation's expense, all of the Shares for which the Subscriber has
subscribed hereunder (the "Registrable Shares") and in that connection shall
file a Registration Statement on Form S-1
<PAGE>
with respect to the Registrable Shares (the "Resale Registration Statement")
with the Securities and Exchange Commission ("SEC") within one hundred ninety-
five (195) days from the date hereof. Notice of effectiveness of the Resale
Registration Statement shall be furnished promptly to the Subscriber. The
Corporation shall maintain the effectiveness of the Resale Registration
Statement and from time to time will amend or supplement such registration
statement and the prospectus contained therein as and to the extent necessary to
comply with the Securities Act. The effectiveness of the Resale Registration
Statement shall be maintained with respect to Registrable Shares until the later
to occur of the second anniversary of the Closing Date or such date as the
Registrable Shares may be sold pursuant to Rule 144(k) under the Securities Act
or otherwise without registration. The Corporation may, however, require the
Subscriber to suspend sales of the Registrable Shares pursuant to the Resale
Registration Statement for a reasonable period not to exceed 30 days if the
Corporation determines in good faith that such sales might (1) interfere with or
affect the negotiation or completion of any transaction at the time the right to
suspend sales is exercised or (2) involve initial or continuing disclosure
obligations that might not be in the best interests of the Corporation or for
which required information is not reasonably available. The Resale Registration
Statement and any registration statement filed pursuant to Section 3.2 below is
sometimes also referred to as a "Registration Statement."
3.2. So long as the Registrable Shares shall exceed three
percent (3%) of the number of issued and outstanding shares of Common Stock of
the Corporation, if the Corporation shall determine to register any of its
securities for its own account or the account of a security holder or holders
("Other Holders") in respect of a registered public offering involving an
underwriting, the Corporation will promptly give the Subscriber written notice
thereof and use its best efforts to include in such registration and
underwriting all of the Registrable Shares specified in a written request made
by the Subscriber within 20 days after the written notice from the Corporation
to the Subscriber. Such written request may specify all or part of the
Subscriber's Registrable Shares.
(a) The Subscriber shall, together with the Corporation and the
Other Holders enter into an underwriting agreement in customary form with the
representative of the underwriter or underwriters selected by the Corporation.
(b) If the representative of the underwriters advises the
Corporation in writing that marketing factors require a limitation on the number
of shares to be underwritten, the representative may exclude all Registrable
Shares from, or limit the number of Registrable Shares to be
2
<PAGE>
included in, the registration and underwriting. The Corporation shall so advise
all holders of securities requesting registration and the number of shares of
securities that are entitled to be included in the registration and underwriting
shall be allocated first to the Corporation for securities being sold for its
own account and thereafter as set forth in Subsection (c) below.
(c) In any circumstances in which all of the Registrable Shares
and shares of Other Holders requested to be included in a registration cannot be
so included for the reason set forth in Subsection (b) above, the number of
Registrable Shares and shares of Other Holders that may be so included shall be
allocated among the Subscriber and Other Holders requesting inclusion of
securities pro rata on the basis of the number of Registrable Shares and the
number of shares of Other Holders requested to be included by the Subscriber and
the Other Holders, respectively.
3.3. In the event that the Corporation registers under the
Securities Act any of the Registrable Shares held by the Subscriber, the
Corporation shall indemnify and hold harmless the Subscriber and each
underwriter of such shares (including any broker or dealer through whom such of
the shares may be sold) and each person, if any, who controls the Subscriber or
any such underwriter within the meaning of Section 15 of the Securities Act or
Section 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") from and against any and all losses, claims, damages, expenses or
liabilities, joint or several, to which they or any of them become subject under
the Securities Act or the Exchange Act or otherwise, and, except as hereinafter
provided, shall reimburse the Subscriber and each of the underwriters and each
such controlling person, if any, for any legal or other expenses reasonably
incurred by them or any of them in connection with investigating or defending
any actions whether or not resulting in any liability, insofar as such losses,
claims, damages, expenses, liabilities or actions arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement, or in the prospectus (or the registration statement
or prospectus as from time to time amended or supplemented by the Corporation)
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary in order to
make the statements therein not misleading, unless such untrue statement or
omission was made in such Registration Statement or prospectus in reliance upon
and in conformity with information furnished in writing to the Corporation in
connection therewith by the Subscriber (insofar as indemnification of the
Subscriber is concerned) or any underwriter (insofar as indemnification of any
such underwriter is concerned) relating thereto expressly for use
3
<PAGE>
therein. Promptly after receipt by the Subscriber or any underwriter or any
person controlling any of them of notice of the commencement of any action in
respect of which indemnity may be sought against the Corporation, the Subscriber
or such underwriter or any person controlling any of them, as the case may be,
shall notify the Corporation in writing of the commencement thereof, and,
subject to the provisions hereinafter stated, the Corporation shall assume the
defense of such action (including the employment of counsel, who shall be
counsel satisfactory to the Subscriber or such underwriter or controlling
person, as the case may be, and the payment of expenses) insofar as such action
shall relate to any alleged liability in respect of which indemnity may be
sought against the Corporation. The Subscriber or any underwriter or any such
controlling person shall have the right to employ separate counsel in any such
action and to participate in the defense thereof but the fees and expenses of
such counsel shall not be at the expense of the Corporation unless: (i) the
employment of such counsel has been specifically authorized by the Corporation,
(ii) the Corporation has failed to assume the defense and employ counsel or
(iii) the named parties to any such action, suit or proceeding (including any
impleaded parties) include both the person or persons seeking indemnification
(the "indemnified person") and the Corporation and such indemnified person shall
have been advised by its counsel that representation of the indemnified person
and the Corporation by the same counsel would be inappropriate under applicable
standards of professional conduct (whether or not such representation by the
same counsel has been proposed) due to actual or potential differing interests
between them (in which case the Corporation shall not have the right to assume
the defense of such action, suit or proceeding on behalf of such indemnified
person). The Corporation shall not be liable to indemnify any person for any
settlement by such person of any such action effected without the Corporation's
consent.
3.4. The Subscriber shall severally, and not jointly, indemnify
the Corporation, its officers and directors and each person, if any, who
controls the Corporation within the meaning of Section 15 of the Securities Act
or Section 20(a) of the Exchange Act, against all losses, claims, damages,
expenses or liabilities or actions to which they or any of them become subject
under the Securities Act or the Exchange Act or otherwise, and shall reimburse
the Corporation, its officers and directors and each such controlling person, if
any, for any legal or other expenses reasonably incurred by them or any of them
in connection with investigating or defending any actions whether or not
resulting in any liability, insofar as such losses, claims, damages, expenses,
liabilities or actions arise out of or are based upon any information relating
to the Subscriber furnished by or on behalf of the Subscriber in writing
specifically for inclusion in such Registration Statement.
4
<PAGE>
Notwithstanding the foregoing, the liability of the Subscriber for
indemnification under this Section 3.4 shall not exceed the proceeds (net of
underwriting discounts or commissions) received by the Subscriber upon the sale
of the Registrable Shares.
3.5. Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification under Sections 3.3 and
3.4 shall be paid by the indemnifying party to the indemnified party as such
losses, claims, damages, liabilities or expenses are incurred.
4. Rescission. In the event the Resale Registration Statement is
----------
not declared effective by the SEC on or prior to December 31, 1997 (the
"Effective Date"), the Subscriber may thereafter rescind this transaction at any
time prior to the effectiveness of the Resale Registration Statement by (i)
written notice to the Corporation and (ii) written notice to the Escrow Agent
certifying that the Resale Registration Statement referred to in this
Subscription Agreement did not become effective on or before the Effective Date
and has not yet become effective and that the Subscriber has given written
notice of the rescission of the transaction referred to in the Subscription
Agreement and directing the Escrow Agent to pay to the Subscriber the amount
deposited in escrow pursuant to Paragraph 2 above.
5. Information About the Corporation. The Subscriber acknowledges
---------------------------------
that it has been provided with a copy of the Corporation's Quarterly Reports on
Form 10-Q for the fiscal quarters ended October 31, 1996 and January 31, 1997,
the Registration Statement filed with the SEC on Form S-1 (Reg. No. 333-11247),
as amended to date (the "Current Registration Statement"), the prospectus dated
January 10, 1997 filed with the SEC pursuant to Rule 424(b) under the Securities
Act, and such other financial and other information about the Corporation as has
been requested by the Subscriber (collectively, the "Disclosure Materials").
6. Representations and Warranties of the Corporation. The
-------------------------------------------------
Corporation represents and warrants to the Subscriber as follows:
(a) The Registrable Shares have been duly authorized and, when
issued and delivered to the Subscriber against payment therefore in accordance
with the terms hereof, will be validly issued, fully paid and nonassessable.
(b) The Corporation is a corporation duly organized and validly
existing in good standing under the laws of the State of Nevada with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as currently conducted and as described in the
5
<PAGE>
Current Registration Statement and, except as set forth in the next sentence, is
duly registered and qualified to conduct its business and is in good standing in
each jurisdiction or place where the nature of its properties or the conduct of
its business requires such registration or qualification, except where the
failure so to register or qualify does not have a material adverse effect on the
condition (financial or other), business, prospects, properties, net worth or
results of operations of the Corporation. The Corporation is qualified to do
business as a foreign corporation in the state of California and has filed
applications for qualification to do business in the following states: Arizona,
Delaware, District of Columbia, Florida, Georgia, Illinois, Louisiana, Maryland,
Massachusetts, Michigan, Minnesota, Missouri, New Jersey, New York, North
Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Texas, Virginia and
Washington.
(c) Neither the issuance and sale of the Registrable Shares, the
execution, delivery or performance of this Subscription Agreement by the
Corporation, nor the consummation by the Corporation of the transactions
contemplated hereby (A) requires any consent, approval, authorization or other
order of or registration or filing with, any court, regulatory body,
administrative agency or other governmental body, agency or official or
conflicts or will conflict with or constitutes or will constitute a breach of,
or a default under, the certificate or articles of incorporation or by-laws, or
other organizational documents, of the Corporation or any of its subsidiaries or
(B) conflicts or will conflict with or constitutes or will constitute a material
breach of, or default under, any material agreement, indenture, lease or other
instrument to which the Corporation or any of its subsidiaries is a party or by
which any of them or any of their respective properties may be bound, or
violates or will violate any statute, law, regulation or filing or judgment,
injunction, order or decree applicable to the Corporation or any of its
subsidiaries or any of their respective properties, or will result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Corporation or any of its subsidiaries pursuant to the terms of
any agreement or instrument to which any of them is a party or by which any of
them may be bound or to which any of the property or assets of any of them is
subject.
(d) The execution and delivery of, and the performance by the
Corporation of its obligations under, this Subscription Agreement have been duly
and validly authorized by the Corporation, and this Subscription Agreement has
been duly executed and delivered by the Corporation and constitutes the valid
and legally binding agreement of the Corporation, enforceable against the
Corporation in accordance with its terms.
6
<PAGE>
(e) The Corporation has filed in a timely manner each document
or report required to be filed by it pursuant to the Exchange Act and the rules
and regulations thereunder; each such document or report at the time it was
filed conformed to the requirements of the Exchange Act and the rules and
regulations thereunder; and none of such documents or reports contained an
untrue statement of any material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading.
(f) The Current Registration Statement in the form in which it
became effective, and also in such form as it existed or exists when any post-
effective amendment thereto became or shall become effective, and the related
prospectus and any supplement or amendment thereto as filed with the SEC
pursuant to Rule 424(b) under the Securities Act, complied or will comply in all
material respects with the provisions of the Securities Act and did not or will
not at any such times contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading. No other document provided by the
Corporation to the Subscriber as part of the Disclosure Materials contains an
untrue statement of a material fact or omits to state a material fact required
to be stated therein or necessary to make the statements therein not misleading.
(g) There has not been any material adverse change in the
Corporation's condition (financial or other), business, prospects, properties,
net worth or results of operations as described in the Current Registration
Statement, except as disclosed in the Corporation's Quarterly Report on Form 10-
Q for the period ended January 31, 1997.
7. Representations and Warranties of the Subscriber. The Subscriber
------------------------------------------------
hereby represents and warrants to the Corporation as follows:
(a) The Subscriber is aware that no federal or state agency has
passed upon the Shares or made any finding or determination concerning the
fairness of this investment.
(b) The Subscriber has had an opportunity to ask questions of
and receive answers from representatives of the Corporation, concerning the
terms and conditions of this investment.
(c) The Shares for which the Subscriber hereby subscribes will
be acquired for the Subscriber's own account, for investment only and not with a
view toward resale or distribution in a manner which would require registration
under the Securities Act.
7
<PAGE>
(d) The Subscriber is authorized and otherwise duly qualified to
purchase and hold the subscribed for Shares. Such entity has not been formed
for the specific purpose of acquiring the Shares subscribed for hereunder.
(e) The Subscriber is an "Accredited Investor" as that term is
defined in Rule 501 under the Securities Act. The particular category or
categories within which the Subscriber falls is set forth in Paragraph 10 below.
The Subscriber is also a "qualified institutional buyer" within the meaning of
Rule 144A promulgated under the Securities Act.
8. Limitation on Transfer of Shares. The Subscriber acknowledges
--------------------------------
that, until the Resale Registration Statement is declared effective by the SEC,
there are substantial restrictions on the transferability of the Registrable
Shares as required pursuant to federal and state securities laws. In connection
with, and prior to, the public offering of the Registrable Shares pursuant to
the Resale Registration Statement, the Corporation shall use its reasonable best
efforts to register or qualify, and cooperate with the Subscriber and its
counsel in connection with the registration or qualification of, such
Registrable Shares for offer and sale under the state securities or "blue sky"
laws of such states of the United States as the Subscriber shall reasonably
request in writing, and do any and all other acts and things which may be
reasonably necessary or advisable to enable the offer and sale in such
jurisdictions of the Registrable Shares; provided, however, that the Corporation
-------- -------
shall not be required to (i) qualify generally to do business in any
jurisdiction where it is not then so qualified or (ii) take any action which
would subject it to general service of process or to taxation in any
jurisdiction where it is not then so subject.
9. Conditions of Subscriber's Obligations. The several obligations
--------------------------------------
of the Subscriber under this Agreement to purchase Shares are subject to receipt
by the Subscriber of a certificate dated the Closing Date and signed by an
executive officer of the Corporation stating that all of the representations and
warranties of the Corporation contained in this Subscription Agreement are true
and correct in all material respects on and as of the Closing Date. In the
event that the Closing Date is the same as the date hereof, the requirement of
such a separate certificate signed by an executive officer of the Corporation
shall not be applicable.
10. "Accredited Investor" Status. In accordance with Paragraph 7(e)
----------------------------
of this Subscription Agreement, the Subscriber has placed an (X) in each of the
applicable spaces provided below:
8
<PAGE>
___(i) A bank as defined in Section 3(a)(2) of the Securities Act
of 1933 or a savings and loan association or other
institution as defined in Section 3(a)(5)(A) of the
Securities Act of 1933, whether acting in its individual or
fiduciary capacity.
___(ii) A broker or dealer registered pursuant to Section 15 of the
Securities Exchange Act of 1934.
___(iii) An insurance company as defined in Section 2(13) of the
Securities Act of 1933.
___(iv) An investment company registered under the Investment
Company Act of 1940 or a business development company as
defined in Section 2(a)(48) of the Investment Company Act of
1940.
___(v) A Small Business Investment Company licensed by the U.S.
Small Business Administration under Section 301(c) or (d) of
the Small Business Investment Act of 1958.
x (vi) An employee benefit plan within the meaning of Title I of
--- the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), if (a) the investment decision is made by
a plan fiduciary, as defined in Section 3(21) of ERISA,
which is either a bank, savings and loan association,
insurance company, or registered investment adviser, or (b)
the employee benefit plan has total assets in excess of
$5,000,000 or (c) if self-directed plan, the investment
decisions are made solely be persons that are Accredited
Investors.
___(vii) A private business development company as defined in
Section 202(a) (22) of the Investment Advisers Act of 1940.
___(viii) An organization described in Section 501(c)(3) of the
Internal Revenue Code of 1986, as amended, a corporation,
Massachusetts or similar business trust, or partnership, not
formed for the
9
<PAGE>
specific purpose of acquiring the securities offered, with
total assets in excess of $5,000,000.
___(ix) A natural person whose individual net worth, or joint net
worth with that person's spouse, at the time of this
purchase exceeds $1,000,000.
___(x) A natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint
income with that person's spouse in excess of $300,000 in
each of those years and has a reasonable expectation of
reaching the same income level in the current year.
___(xi) A trust, with total assets in excess of $5,000,000, not
formed for the specific purpose of acquiring the securities
offered, whose purchase is directed by a sophisticated
person as described in Regulation (S)230.506(b)(2)(ii)
promulgated under the Securities Act of 1933.
___(xii) An entity in which all of the equity owners are Accredited
Investors.
11. Miscellaneous
-------------
11.1. Grammatical References. All pronouns and any variations
----------------------
thereof used herein shall be deemed to refer to the masculine, feminine, neuter,
singular or plural as the identity of the antecedent may require.
11.2. Notices. Notices required or permitted to be given
-------
hereunder shall be in writing and shall be deemed to be sufficiently given when
personally delivered or upon receipt when sent by facsimile or registered mail,
return receipt requested, addressed to the other party at the address of such
party set forth below, or to such other address furnished by notice given in
accordance with this paragraph:
If to the Corporation:
Prosoft I-Net Solutions, Inc.
2333 North Broadway, Suite 300
Santa Ana, California 92706
Attention: General Counsel
10
<PAGE>
If to the Subscriber:
Trustees of General Electric Pension Trust
3003 Summer Street
Stamford, Connecticut 06904
Attention: Michael M. Pastore
11.3. No Waiver. Failure of the Corporation or the Subscriber
---------
to exercise any right or remedy under this Subscription Agreement or any other
agreement between the Corporation and the Subscriber, or otherwise, or delay by
the Corporation or the Purchaser in exercising same, will not operate as a
waiver thereof. No waiver by the Corporation or the Subscriber will be
effective unless and until it is in writing and signed by the Corporation or the
Subscriber.
11.4. Governing Law. This Subscription Agreement shall be
-------------
enforced, governed and construed in all respects in accordance with the laws of
the State of New York without giving effect to its conflicts of law rules or
principles.
11.5. Complete Agreement. This Subscription Agreement and the
------------------
documents referred to herein shall constitute the entire agreement among the
parties hereto with respect to the subject matter hereof and shall supersede all
prior understandings or agreements with respect to such subject matter. This
Subscription Agreement may be amended only by the written consent of both the
Corporation and the Subscriber.
11.6. Severability. If a court of competent jurisdiction
------------
determines that any provision of this Subscription Agreement is invalid,
unenforceable or illegal for any reason, such determination shall not affect or
impair the validity, legality and enforceability of the other provisions of this
Subscription Agreement, which shall remain in full force and effect in the same
manner and to the same extent as if the invalid, unenforceable or illegal
provision had not been contained in this Subscription Agreement. In the event
that any provision of this Subscription Agreement is invalid or unenforceable
under any applicable statute or rule of law, then such provision shall be deemed
inoperative to the extent that it may conflict therewith and shall be deemed
modified to conform with such statute or rule of law. Any provision hereof
which may prove invalid or unenforceable under any law shall not affect the
validity or enforceability of any other provision hereof.
11.7. Execution in Counterparts. This Subscription Agreement
-------------------------
may be executed in counterparts, each
11
<PAGE>
of which shall be deemed an original, but all of which together shall constitute
the same Subscription Agreement.
11.8. Titles and Subtitles. The titles and subtitles used in
--------------------
this Subscription Agreement are used for convenience only and are not to be
considered in construing or interpreting this Subscription Agreement.
11.9. Rights and Remedies Cumulative. The rights and remedies
------------------------------
provided in this Subscription Agreement shall be cumulative and not exclusive of
any other rights or remedies provided by law or otherwise.
12
<PAGE>
IN WITNESS WHEREOF, the undersigned Subscriber has executed this
Subscription Agreement for the following number of Shares:
<TABLE>
<S> <C>
Number of Shares subscribed for: 408,164
Total purchase price: $5,000,009.00
</TABLE>
Subscriber: TRUSTEES OF GENERAL ELECTRIC PENSION TRUST
------------------------------------------
By:______________________________________________
Name:
Title:
14-6015763
- -------------------------------------------------
(Tax Identification Number)
Date: April 4, 1997
Mailing address of Subscriber
(please print):
3003 Summer Street
- -------------------------------------------------
(Street)
Stamford, Connecticut 06904
- -------------------------------------------------
(City) (State) (Zip Code)
(203) 326-2312
- -------------------------------------------------
(Telephone Number)
Accepted:
PROSOFT I-NET SOLUTIONS, INC.
By:______________________________________________
Name:
Title:
13
<PAGE>
EXHIBIT 10.19
ESCROW AGREEMENT
----------------
AGREEMENT dated this 4th day of April, 1997, by and among Prosoft I-
Net Solutions, Inc., a Nevada corporation ("Prosoft"), the Trustees of General
Electric Pension Trust ("Subscriber") and State Street Bank and Trust Company, a
Massachusetts corporation (the "Escrow Agent").
W I T N E S S T H:
-----------------
WHEREAS, Prosoft and Subscriber are parties to a Subscription
Agreement dated April 4, 1997 (the "Subscription Agreement") which provides for
the escrow of $5,000,009.00 with the Escrow Agent (such amount and interest
thereon being sometimes referred to as the "Escrowed Assets") and the deposit of
408,164 shares of common stock of Prosoft (the "Shares"); and
WHEREAS, Prosoft and the Subscriber are desirous of entering into this
Agreement and the Escrow Agent is willing to act as escrow agent on the terms
and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
contained and subject to the conditions hereinafter set forth, the parties
hereto agree as follows:
1. Concurrently with the execution hereof, the Subscriber is paying
the sum of $5,000,009.00 referred to above to, and Prosoft is depositing the
Shares with, the Escrow Agent, which shall hold the same, and any interest
<PAGE>
earned on the Escrowed Assets, in escrow on the terms and conditions hereinafter
set forth.
2. The Escrow Agent shall make payment of the Escrowed Assets to the
Subscriber as follows: If the Escrow Agent shall have received a written notice
from the Subscriber to the Escrow Agent given after December 31, 1997, which
notice shall (i) certify that the Registration Statement referred to in the
Subscription Agreement did not become effective on or before December 31, 1997
and has not, as of the date of the Subscriber's notice, become effective and
that the Subscriber has given written notice to Prosoft of the rescission of the
transaction referred to in the Subscription Agreement and (ii) direct the Escrow
Agent to pay the Escrowed Assets to the Subscriber, the Escrow Agent shall
transmit a copy of such notice to Prosoft. The Escrow Agent shall act in
accordance with such notice from the Subscriber to the Escrow Agent unless
within ten days from transmittal by the Escrow Agent to Prosoft of the copy of
such notice, Prosoft shall notify the Escrow Agent not to comply with the
payment instruction contained in such notice from the Subscriber to the Escrow
Agent. Simultaneously with any payment of Escrowed Assets to the Subscriber
pursuant hereto, the Escrow Agent shall deliver the Shares to Prosoft.
3. The Escrow Agent shall make payment of the Escrowed Assets to
Prosoft as follows: If the Escrow Agent shall have received a written notice
from Prosoft which
2
<PAGE>
notice shall certify that the Registration Statement referred to in the
Subscription Agreement has become effective and shall direct the Escrow Agent to
pay the Escrowed Assets to Prosoft, the Escrow Agent shall transmit a copy of
such notice to the Subscriber. The Escrow Agent shall act in accordance with
such notice from Prosoft to the Escrow Agent unless within ten days from
transmittal by the Escrow Agent to the Subscriber of the copy of such notice the
Subscriber shall notify the Escrow Agent not to comply with the payment
instruction contained in such notice from Prosoft to the Escrow Agent.
Simultaneously with any payment of the Escrowed Assets to Prosoft pursuant
hereto, the Escrow Agent shall deliver the Shares to the Subscriber.
4. After Prosoft shall have notified the Escrow Agent not to comply
with the Subscriber's payment instruction (as referred to in Paragraph 2 above)
and after the Subscriber shall have notified the Escrow Agent not to comply with
Prosoft's payment instruction (as referred to in Paragraph 3 above), the Escrow
Agent shall act with respect to the Escrowed Assets and the Shares solely in
accordance with any of the following: (a) a new Instruction signed jointly by
Prosoft and the Subscriber; (b) a certified copy of an arbitrator's award issued
under the rules of the American Arbitration Association as to which the Escrow
Agent shall have received an opinion of counsel, which may include the Escrow
Agent and which is addressed and delivered also to each of Prosoft and the
Subscriber,
3
<PAGE>
satisfactory to the Escrow Agent in its sole and absolute discretion, that such
award is final beyond appeal or (c) a certified copy of a judgment of a court of
competent jurisdiction as to which the Escrow Agent shall have received an
opinion of counsel, which may include the Escrow Agent and which is addressed
and delivered also to Prosoft and the Subscriber, satisfactory to the Escrow
Agent in its sole and absolute discretion, that such judgment is final beyond
appeal. Anything in the foregoing to the contrary notwithstanding, at the sole
discretion of the Escrow Agent, the Escrow Agent may at any time deposit the
Escrowed Assets and the Shares with a court selected by the Escrow Agent and in
such event all liability and responsibility of the Escrow Agent as to acts or
omissions subsequent to such deposit shall terminate upon such deposit having
been made.
5. Upon any distribution of the Escrowed Assets to the Subscriber
pursuant to paragraph 2 above, or to Prosoft pursuant to paragraph 3 above, the
Escrow Agent shall deliver the Shares to Prosoft, in the case of a delivery of
the Escrowed Assets pursuant to paragraph 2 above, or to the Subscriber, in the
case of a delivery of the Escrowed Assets pursuant to paragraph 3 above. In no
event shall the Escrow Agent deliver the Escrowed Assets without
contemporaneously delivering the Shares to the party not receiving the Escrowed
Assets.
6. The Escrow Agent shall deliver the Escrowed Assets and the Shares
in accordance with any instruction or
4
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instructions which shall be signed jointly by both Prosoft and the Subscriber.
7. Prosoft shall be liable for any and all fees and expenses of the
Escrow Agent incurred in connection with this Agreement, including counsel fees,
if any, payable in connection with the delivery of the Escrowed Assets and the
Shares hereunder. Prosoft shall pay any such amounts due to the Escrow Agent
promptly upon demand therefor.
8. Prosoft and the Subscriber acknowledge and agree that the Escrow
Agent may consult counsel satisfactory to it, including house counsel, and the
opinion of such counsel shall be full and complete authorization and protection
in respect of any action taken, suffered or omitted by it hereunder in good
faith and in accordance with the opinion of such counsel.
9. Neither the Escrow Agent nor any of its directors, officers or
employees shall be liable to anyone for any action taken or omitted to be taken
by it or any of its directors, officers or employees hereunder except in the
case of gross negligence or willful misconduct. Prosoft and Subscriber, jointly
and severally, agree to indemnify the Escrow Agent and to hold it harmless
without limitation from and against any loss, liability or expense of any nature
incurred by the Escrow Agent arising out of or in connection with this Agreement
or with the administration of its duties hereunder, including but not limited to
legal fees and other costs and expenses of defending or preparing to defend
5
<PAGE>
itself against any claim of liability in the premises, unless such loss,
liability or expense shall be caused by the Escrow Agent's willful misconduct or
gross negligence. In no event shall the Escrow Agent be liable for indirect,
punitive, special or consequential damages. The provisions of this paragraph 9
shall survive termination of this Agreement.
10. The Escrow Agent shall not be bound in any way by any agreement
or contract (other than this Agreement) between Prosoft and the Subscriber,
whether or not it has knowledge thereof, and the Escrow Agent's only duties and
responsibilities shall be to hold the Escrowed Assets and the Shares as escrow
agent and to dispose of said assets and shares in accordance with the terms of
this Agreement. The Escrow Agent may act upon any instruments or other writings
believed by the Escrow Agent in good faith to be genuine and to be signed or
presented by the proper persons and the Escrow Agent shall not be liable in
connection with the performance of its duties under this Agreement except for
its own willful malfeasance or bad faith.
11. The Escrow Agent may at any time resign as Escrow Agent hereunder
by giving thirty (30) days' prior written notice of resignation to Prosoft and
the Subscriber. Prior to the effective date of the resignation as specified in
such notice, the Subscriber will issue to the Escrow Agent a written instruction
authorizing redelivery of the Escrowed Assets and the Shares to a bank or trust
company
6
<PAGE>
that it selects, subject to the reasonable consent of Prosoft. Such bank or
trust company shall have a principal office in New York, New York and shall have
capital, surplus and undivided profits in excess of $50,000,000. If, however,
the Subscriber shall fail to name such a successor escrow agent within twenty
(20) days after the notice of resignation from the Escrow Agent, Prosoft shall
be entitled to name such successor escrow agent. If no successor escrow agent
is named by the Subscriber or Prosoft, the Escrow Agent may apply to a court of
competent jurisdiction for appointment of a successor escrow agent.
12. Neither Prosoft nor the Subscriber nor the Escrow Agent shall be
responsible for delays or failures in performance resulting from acts beyond its
control. Such acts shall include but not be limited to acts of God, strikes,
lockouts, riots, acts of war, epidemics, governmental regulations superimposed
after the fact, fire, communication line failures, computer viruses, power
failures, earthquakes or other disasters.
13. Any notice, report, demand or instruction required or permitted
by the provisions of this Agreement shall be deemed to have been sufficiently
transmitted, delivered, given or served for all purposes if delivered by hand or
if sent by prepaid registered mail or certified mail, or by responsible
overnight delivery service or telecopy to the parties at their addresses set
forth below,
7
<PAGE>
or at such other address as a party may hereinafter give by written notice as
herein provided:
If to Prosoft:
Prosoft I-Net Solutions, Inc.
2333 North Broadway, Suite 300
Santa Ana, California 92706
Attention: General Counsel
If to the Subscriber:
Trustees of General Electric Pension Trust
3003 Summer Street
Stamford, Connecticut 06904
Attention: Michael M. Pastore
If to the Escrow Agent:
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02210
Attention: Michael P. Cloherty
Master Trust Services
The date of delivery or transmittal shall be the date of delivery, if
by hand or telecopy, or if mailed shall be deemed to be the date of mailing, or
if sent by overnight delivery service shall be deemed to be the next business
day except that no notice, report, demand or Instruction shall be deemed to have
been delivered or transmitted to the
8
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Escrow Agent until actual receipt thereof by the Escrow Agent.
14. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York and shall be binding upon and shall inure
to the benefit of the parties hereto and their respective heirs, successors and
assigns. This Agreement may not be changed or amended in any manner whatsoever
except in writing signed by each of the parties hereto.
9
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be made and executed the day and year first above written.
PROSOFT I-NET SOLUTIONS, INC.
By:__________________________
Name:
Title:
TRUSTEES OF GENERAL ELECTRIC
PENSION TRUST
By:__________________________
Name:
Title:
STATE STREET BANK AND TRUST COMPANY
as Escrow Agent
By:__________________________
Name:
Title:
10
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Exhibit 10.20
SECURED PROMISSORY NOTE
$500,000.00 April 9, 1997
1. Principal.
---------
For value received, ADMOR MEMORY CORP. ("Maker"), promises to pay to
the order of PROSOFT I-NET SOLUTIONS, INC., a Nevada corporation ("Holder"), at
its offices at 2333 North Broadway, Suite 300, Santa Ana, California 92707, or
at such other place as Holder may from time to time designate in writing, the
principal sum of Five Hundred Thousand and No One Hundredths Dollars
($500,000.00), together with accrued interest from the date of disbursement
hereunder on the unpaid principal at the rate set forth in Paragraph 4. As used
-----------
herein, the term "Holder" shall mean Holder and any subsequent holder of this
Secured Promissory Note (this "Note"), whichever is applicable from time to
time.
2. Maturity Date.
-------------
The unpaid principal balance hereof, together with all unpaid interest
accrued thereon, shall be due and payable on May 9, 1997 (the "Maturity Date").
3. Prepayment.
----------
This Note may be prepaid in full or in part, at any time without
penalty, upon not less than one business days' prior written notice to Holder.
Maker shall have no right to reborrow any such prepaid amounts.
4. Interest.
--------
All interest on the outstanding principal balance hereof shall be due
and payable on the Maturity Date. The outstanding principal balance hereof
shall bear interest at a rate of 9.5% per annum. All payments of principal of
and interest on the Note shall be made without deduction of any present and
future taxes, levies, imposts, deductions, charges or withholdings, which
amounts shall be paid by Maker. Maker will pay the amounts necessary such that
the gross amount of principal and interest received by Holder is not less than
that required by this Note. All stamp and documentary taxes shall be paid by
Maker. If, notwithstanding the foregoing, Holder pays such taxes, Maker will
reimburse Holder for the amount paid. Maker will furnish Holder official tax
receipts or other evidence of payment of all taxes. Throughout the term of this
Note, interest shall be calculated on a 360-day year, but shall be computed for
the actual number of days in the period for which interest is charged.
5. Manner of Payment.
-----------------
Principal and interest are payable in lawful money of the United
States of America. All payments of principal and interest on the Note shall be
made to Holder in immediately available funds not later than 11:30 a.m. Los
Angeles time on the dates such
<PAGE>
payments are to be made. Any payment received after 11:30 a.m. shall be deemed
received by Holder on the next business day.
6. Applications of Payments.
------------------------
Payments received by Holder pursuant to the terms hereof shall be
applied first, to the payment of all interest accrued to the date of such
payment; and second, to the payment of principal. Notwithstanding anything to
the contrary contained herein, after the occurrence and during the continuation
of an Event of Default (as hereinafter defined), all amounts received by Holder
from any party shall be applied in such order as Holder, in its sole discretion,
may elect.
7. Security.
--------
This Note is secured by a Guarantee and Pledge Agreement of even date
herewith, executed by Michael Rapp, in his individual capacity, as obligor, in
favor of Holder (the "Guarantee").
8. Events of Default.
-----------------
The occurrence of any of the following shall be deemed to be an event
of default ("Event of Default") hereunder:
(a) Holder shall have notified Maker in writing of a default in
the payment of principal or interest when due pursuant to the terms hereof; or
(b) the occurrence of an Event of Default under the Guarantee or
under any other deed of trust, security agreement, lease assignment, guaranty or
other agreement (including any amendment, modification or extension thereof) now
or hereafter securing this Note.
9. Remedies; Post-Default Rate; Late Charge.
----------------------------------------
Upon the occurrence of an Event of Default and without demand or
notice, Holder shall have the option to declare the entire balance of principal
together with all accrued interest thereon immediately due and payable and to
exercise all rights and remedies available to it under the Guarantee or
applicable law. Notwithstanding any provision of this Note or the Guarantee to
the contrary, any principal, accrued interest, and other amounts payable under
this Note or the Guarantee which remain unpaid after the Maturity Date or any
acceleration of this Note, shall bear interest at a rate per annum equal to
14.5% (the "Post-Default Rate"). If any payment under this Note (whether of
principal or interest or both and including the payment due on the Maturity Date
or upon any acceleration of this Note) is not paid within ten (10) days after
the date on which the payment is due, Maker shall pay to Holder, in addition to
the delinquent payment and without any requirement of notice or demand by
Holder, a late payment charge equal to five percent (5%) of such delinquent
amount. MAKER EXPRESSLY
2
<PAGE>
ACKNOWLEDGES AND AGREES THAT THE FOREGOING ACCRUAL OF INTEREST AT THE POST-
DEFAULT RATE AND LATE PAYMENT CHARGE PROVISION IS REASONABLE UNDER THE
CIRCUMSTANCES EXISTING ON THE DATE OF THIS NOTE, THAT IT WOULD BE EXTREMELY
DIFFICULT AND IMPRACTICAL TO FIX HOLDER'S ACTUAL DAMAGES ARISING OUT OF (i) ANY
FAILURE TO PAY SUCH OUTSTANDING INDEBTEDNESS OF THIS NOTE UPON THE MATURITY DATE
OR UPON ANY ACCELERATION OF THIS NOTE AND (ii) ANY LATE PAYMENT AND THAT
INTEREST ACCRUED AT THE POST-DEFAULT RATE AND THE FOREGOING LATE PAYMENT CHARGE
SHALL BE PRESUMED TO BE THE ACTUAL AMOUNT OF SUCH DAMAGES INCURRED BY HOLDER.
The application of this default rate or late charge shall not be interpreted or
deemed to limit any of Holder's remedies hereunder or thereunder. No delay or
omission on the part of Holder thereof in exercising any right under this Note
or the Guarantee shall operate as a waiver of such right.
10. WAIVER.
------
MAKER HEREBY WAIVES DILIGENCE, PRESENTMENT, PROTEST AND DEMAND, NOTICE
OF PROTEST, DISHONOR AND NONPAYMENT OF THIS NOTE AND EXPRESSLY AGREES THAT,
WITHOUT IN ANY WAY AFFECTING THE LIABILITY OF MAKER HEREUNDER, HOLDER MAY EXTEND
ANY MATURITY DATE OR THE TIME FOR PAYMENT OF ANY INSTALLMENT DUE HEREUNDER AND
RELEASE ANY SECURITY NOW OR HEREAFTER SECURING THIS NOTE. MAKER FURTHER WAIVES,
TO THE FULL EXTENT PERMITTED BY LAW, THE RIGHT TO PLEAD ANY AND ALL STATUTES OF
LIMITATIONS AS A DEFENSE TO ANY DEMAND ON THIS NOTE, OR ON ANY DEED OF TRUST,
SECURITY AGREEMENT, LEASE ASSIGNMENT, GUARANTY OR OTHER AGREEMENT NOW OR
HEREAFTER SECURING THIS NOTE. MAKER ALSO EXPRESSLY AND UNCONDITIONALLY WAIVES,
IN CONNECTION WITH ANY SUIT, ACTION OR PROCEEDING BROUGHT BY HOLDER ON THIS
NOTE, ANY AND EVERY RIGHT IT MAY HAVE TO (I) INJUNCTIVE RELIEF, (II) A TRIAL BY
JURY, (III) INTERPOSE ANY COUNTERCLAIM THEREIN AND (IV) HAVE THE SAME
CONSOLIDATED WITH ANY OTHER OR SEPARATE SUIT, ACTION OR PROCEEDING. NOTHING
HEREIN CONTAINED SHALL PREVENT OR PROHIBIT MAKER FROM INSTITUTING OR MAINTAINING
A SEPARATE ACTION AGAINST HOLDER WITH RESPECT TO ANY ASSERTED CLAIM.
11. Attorneys' Fees.
---------------
If this Note is not paid when due or if any Event of Default occurs,
Maker promises to pay all costs of enforcement and collection, including but not
limited to, Holder's reasonable attorneys' fees, whether or not any action or
proceeding is brought to enforce the provisions hereof. Upon demand by Holder,
Maker shall also pay the reasonable fees and expenses of Holder's counsel
incurred in connection with the preparation of this Note and the Guarantee.
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<PAGE>
12. Severability.
------------
Every provision of this Note is intended to be severable. In the
event any term or provision hereof is declared by a court of competent
jurisdiction, to be illegal or invalid for any reason whatsoever, such
illegality or invalidity shall not affect the balance of the terms and
provisions hereof, which terms and provisions shall remain binding and
enforceable.
13. Interest Rate Limitation.
------------------------
It is the intent of Maker and Holder in the execution of this Note and
all other instruments securing this Note that the loan evidenced hereby comply
with the usury laws of the State of California. Holder and Maker stipulate and
agree that none of the terms and provisions contained herein shall ever be
construed to create a contract for use, forbearance or detention of money
requiring payment of interest at a rate in excess of the maximum interest rate
permitted to be charged by the laws of the State of California. In such event,
if any Holder of this Note shall collect monies which are deemed to constitute
interest which would otherwise increase the effective interest rate on this Note
to a rate in excess of the maximum rate permitted to be charged by the laws of
the State of California, all such sums deemed to constitute interest in excess
of such maximum rate shall, at the option of Holder, be credited to the payment
of the sums due hereunder or returned to Maker.
14. Number and Gender.
-----------------
In this Note the singular shall include the plural and the masculine
shall include the feminine and neuter gender, and vice versa, if the context so
requires.
15. Headings.
--------
Headings at the beginning of each numbered Paragraph of this Note are
intended solely for convenience and are not to be deemed or construed to be a
part of this Note.
16. Choice of Law.
-------------
This Note shall be governed by and construed in accordance with the
laws of the State of California.
17. Admor Products.
--------------
As additional consideration for Holder's advancing sums to Maker under
this Note, Maker shall sell Maker's memory products to Holder at Maker's cost as
reasonably requested by Holder during the time that any principal or interest
remains outstanding under this Note.
4
<PAGE>
IN WITNESS WHEREOF, Maker has executed this Secured promissory Note as
of the date first above written.
ADMOR MEMORY CORP.
By: /s/ Michael Rapp
------------------------------------------
Michael Rapp
Chief Executive Officer
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<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. 2 to the Registration Statement (Form S-1) and
related Prospectus of Prosoft I-Net Solutions, Inc. for the registration of
3,352,392 shares of its common stock.
ERNST & YOUNG LLP
Orange County, California
April 16, 1997
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement relating to 3,352,392
shares of common stock of Prosoft I-Net Solutions, Inc. on Post-Effective
Amendment No. 2 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
April 16, 1997
