<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 AND 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1997
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ________________ to _______________
Commission file number 000-21535
PROSOFT I-NET SOLUTIONS, INC.
--------------------
(Exact Name of Registrant as Specified in its Charter)
NEVADA 87-0448639
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2333 N. Broadway, Suite 300, Santa Ana, CA 92706
----------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (714) 953-1200
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares of the registrant's common stock, $.001 par value,
outstanding as of June 9, 1997, was 9,986,251 shares.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROSOFT I-NET SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
1997 1996
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(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $13,803,703 $ 6,466,460
Restricted cash (see Note 2) 4,700,008 -
Tuition receivable, net 844,443 766,405
Note receivable 500,000 -
Notes receivable from officers/shareholders 389,465 85,600
Prepaid expenses and other current assets 993,355 311,592
----------- ------------
Total current assets 21,230,974 7,630,057
Property and equipment:
Leasehold improvements 749,063 -
Computer equipment and software 3,446,150 1,494,677
Office equipment, furniture and fixtures 202,638 118,211
----------- ------------
4,397,851 1,612,888
Less depreciation and amortization 1,058,071 245,455
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3,339,780 1,367,433
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Total assets $24,570,754 $ 8,997,490
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ - $ 61,832
Accounts payable 2,726,178 363,414
Accrued payroll and related expenses 306,948 88,474
Deferred revenue 190,956 -
Current portion of capital leases obligations 1,387,406 351,509
----------- ------------
Total current liabilities 4,611,488 865,229
Obligations under capital leases, net of current
portion 446,478 437,532
Stockholders' equity:
Common stock, $.001 par value:
Authorized shares - 50,000,000
Issued and outstanding shares at
April 30, 1997 - 9,910,367
and at July 31, 1996 - 7,336,404 9,910 7,336
Additional paid-in capital 36,649,893 10,771,016
Note receivable from stockholder (9,500) (9,500)
Accumulated deficit (17,137,515) (3,074,123)
------------ ------------
Total stockholders' equity 19,512,788 7,694,729
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Total liabilities and stockholders' equity $ 24,570,754 $ 8,997,490
============ ============
</TABLE>
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Prosoft I-Net Solutions, Inc. and Predecessor Company
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended April 30, Nine Months Ended April 30,
1997 1996 1997 1996
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 564,824 $ 293,632 $ 1,531,906 $ 405,280
Costs and expenses:
Cost of services 3,179,956 366,287 5,601,199 454,035
Sales and marketing 1,945,804 76,187 3,129,340 113,981
General and administrative 2,837,803 524,124 6,943,830 963,015
----------- ------------ ------------ ------------
Total costs and expenses 7,963,563 966,598 15,674,369 1,531,031
----------- ------------ ------------ ------------
Loss from operations (7,398,739) (672,966) (14,142,463) (1,125,751)
Interest income (expense) 32,777 (305) 83,071 (21,212)
----------- ------------ ------------ ------------
Loss before provision for income taxes (7,365,962) (673,271) (14,059,392) (1,146,963)
Provision for state franchise tax - - 4,000 -
----------- ------------ ------------ ------------
Net loss $(7,365,962) $ (673,271) $(14,063,392) $ (1,146,963)
=========== ============ ============ ============
Net loss per share $ (0.83) $ N/A $ (1.77) $ N/A
=========== ============ ============ ============
Weighted average number of common
shares outstanding 8,914,893 N/A 7,933,313 N/A
=========== ============ ============ ============
</TABLE>
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PROSOFT I-NET SOLUTIONS, INC. AND PREDECESSOR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED APRIL 30,
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (14,063,392) $ (1,146,963)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 812,616 105,259
Changes in operating assets and liabilities:
Tuition receivable (78,038) (297,730)
Prepaid expenses and other assets (681,763) (114,265)
Accounts payable 2,362,764 178,951
Accrued payroll and related expenses 218,474 45,800
Deferred revenue 190,956 38,744
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Net cash used in operating activities (11,238,383) (1,190,204)
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INVESTING ACTIVITIES:
Purchases of property and equipment (1,282,612) (397,452)
Notes receivable (803,865) (57,650)
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Net cash used in investing activities (2,086,477) (455,102)
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FINANCING ACTIVITIES:
Principal payments on notes payable and capital leases (519,340) (81,661)
Proceeds from issuance of notes payable - 61,832
Issuance of common stock 21,181,443 2,897,887
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Net cash provided by financing activities 20,662,103 $ 2,878,058
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Increase in cash and cash equivalents 7,337,243 1,232,752
Cash and cash equivalents at the beginning of period 6,466,460 1,231
------------- ------------
Cash and cash equivalents at the end of the period $ 13,803,703 $ 1,233,983
============= ============
SUPPLEMENTARY DISCLOSURE OF CASH PAID DURING THE PERIOD FOR:
Interest $ 81,456 $ 21,212
============= ============
Income taxes $ 4,000 $ 0
============= ============
Acquisition of equipment under capital leases $ 1,502,351 $ 592,652
============= ============
</TABLE>
<PAGE>
PROSOFT I-NET SOLUTIONS, INC. AND PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Prosoft I-Net Solutions, Inc. (Prosoft or the Company) is a Nevada
corporation (previously named Tel-Fed, Inc. and ProSoft Development, Inc.).
Professional Development Institute, the predecessor entity, (a sole
proprietorship formed on February 1, 1995), acquired and developed training
curricula and commenced a marketing program for a private vocational training
institution. Its first students were enrolled in September 1995. On December 8,
1995, Pro-Soft Development Corp. was formed as a California corporation, and
effective January 1, 1996, the assets and liabilities of the Professional
Development Institute, (Predecessor) were contributed to Pro-Soft Development
Corp. in exchange for 1,000,000 shares of common stock.
In March 1996, Pro-Soft Development Corp. entered into an Agreement and Plan of
Reorganization whereby Pro-Soft Development Corp.'s shareholders received one
share of common stock of the Company in exchange for each of the 4,726,250
outstanding shares and Pro-Soft Development Corp. became a wholly owned
subsidiary of the Company. For accounting purposes, Pro-Soft Development Corp.
was deemed to be the acquiring corporation and, therefore, the transaction has
been 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 for all periods prior to March 31, 1996.
The condensed consolidated financial statements do not include footnotes and
certain financial information normally presented annually under generally
accepted accounting principles and, therefore, should be read in conjunction
with the Company's July 31, 1996 year-end financials found in the Company's
Registration Statement on Form S-1 (File No. 333-11247). Accounting measurements
at interim dates inherently involve greater reliance on estimates than at year-
end. The results of operations for the three months and nine months ended April
30, 1997 are not necessarily indicative of results that can be expected for the
full year.
The Condensed Consolidated Statements of Operations and the Condensed
Consolidated Statements of Cash Flows include the accounts of the Predecessor
organization (Professional Development Institute) for periods presented prior to
its acquisition by the Company (January 1, 1996).
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 April 30, 1997 and its consolidated results of operations
for the three months and the nine months ended April 30, 1997, and its cash
flows for the nine months ended April 30, 1997.
2. In April 1997, the Company sold 408,164 shares of its common stock to an
institutional investor for $5,000,000. The net proceeds from this offering have
been placed in escrow and will be released to the Company when a registration
statement covering such shares is declared to be effective. If a registration
statement is not declared effective by December 31, 1997, the investor will have
certain rights of recission.
3. Notes receivable from officers/shareholders bear interest generally at
10%, are repayable upon demand and are secured by the Company's common stock and
options to purchase the Company's common stock owned by such
officers/shareholders.
4. Tuition revenue is recognized ratably as earned over the term of the course.
Amounts charged customers are deferred until earned.
<PAGE>
5. Net loss per share is based on the weighted average number of shares of
common stock outstanding during the period. Common stock equivalents (stock
options and warrants) were not considered because the effect of their inclusion
would have been anti-dilutive.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This report on Form 10-Q contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes", "anticipates", "plans", "expects" and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause the Company's actual results to
differ materially from those indicated by such forward-looking statements.
OVERVIEW
- --------
Prosoft I-Net Solutions, Inc. (the "Company"), is engaged in the business of
training individuals in small, medium and large organizations in Internet and
Intranet technologies, with a current emphasis on Netscape- and Microsoft-based
Internet/Intranet products and solutions. In addition, the Company is a
certified Microsoft Authorized Technical Education Center ("ATEC"), a certified
Private Post Secondary Institution in the State of California, and an approved
recipient of Job Training Partnership Act (the "JTPA") funding, the last of
which enables the Company to recruit, train and hire its own advanced technology
instructor staff. The Company also develops proprietary Internet/Intranet
courseware and offers 35 customized, on-line, hands-on and instructor- led
Internet/Intranet-related courses for end-users, system engineers and
developers. For the nine-month period ended April 30, 1997, approximately 33% of
the Company's revenues were generated from JTPA funded vocational training. The
Company expects that an ever greater portion of its future revenues will come
from the delivery of commercial Internet/Intranet training to the employees of
organizations ranging from Fortune 1000 corporations to small entrepreneurial
enterprises throughout the United States.
FLUCTUATIONS IN QUARTERLY RESULTS
- ---------------------------------
The Company's operating results may fluctuate based on various factors,
including the frequency of course events, the frequency and size of, and
response to, the Company's marketing campaigns, the timing of the introduction
of new course titles, customer-site course events, affiliate-site course events,
Company site course events, competitive forces within the current and future
markets served by the Company, the spending patterns of its customers, inclement
weather and general economic conditions. Fluctuations in quarter-to-quarter
results may also occur depending on differences in the timing of, and the time
period between, the Company's expenditures on the development and marketing of
its courses and the receipt of revenues.
The Company's revenues and income are expected to vary significantly from
quarter to quarter due to seasonal and other factors. The Company expects
greater revenue in the second half of its fiscal year (February through July)
than in the first half of its fiscal year (August through January). This
seasonality is due in part to seasonal spending patterns of the Company's
customers, and in part to quarterly anticipated differences in the frequency and
size of the Company's marketing campaigns, as well as weather, holiday and
vacation patterns.
RESULTS OF OPERATIONS
- ---------------------
Revenues. Revenue for the three and nine-month periods ended April 30, 1997,
were $564,824 and $1,531,906 respectively, compared with $293,632 and $405,280
for the three and nine-month periods
<PAGE>
ended April 30, 1996, an increase of $271,192 and $1,126,626 for the respective
periods. The increase in revenues is attributable 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 April 30, 1996 to 26 locations on
April 30, 1997.
Cost of Services. The Company's cost of services includes the costs
associated with course instructors, content developers, course materials and
equipment and classroom facilities. Cost of services for the three and nine-
month periods ended April 30, 1997 were $3,179,956 and $5,601,199, respectively,
compared with $366,287 and $454,035 for the three and nine-month periods ended
April 30, 1996, an increase of $2,813,669 and $5,174,764 for the respective
periods. This increase is primarily the result of an increased number of course
events, a larger course library, and an increase in the number of and training
of instructors and content developers in the three and nine-months periods ended
April 30, 1997 compared to the corresponding periods 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 three and nine-month periods
ended April 30, 1997 were $1,945,804 and $3,129,340, respectively, compared with
$76,187 and $113,981 for the three and nine-month periods ended April 30, 1996,
an increase of $1,869,617 and $3,015,359 for the respective periods. 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 expenses for the three
and nine-month periods ended April 30, 1997 were $2,837,803 and $6,943,830,
respectively, compared to $524,124 and $963,015 for the three and nine-month
periods ended April 30, 1996, an increase of $2,313,679 and $5,980,815 for the
respective periods. 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. Net interest income for the three and nine-month periods ended
April 30, 1997 was $32,777 and $83,071, respectively, compared to net interest
expense of $305 and $21,212 for the three and nine-month periods ended April 30,
1996, an increase of $33,082 and $104,283 for the respective periods.
Interest expense, which consists principally of interest paid on capital leases,
increased for the three and nine-month periods ended April 30, 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 private placements completed in late 1996 and
early 1997.
Net Loss. Net loss for the three and nine-month periods ended April 30, 1997
was $7,365,962 and $14,063,392, respectively, compared to $673,271 and
$1,146,963 for the three and nine-month periods ended April 30, 1996, an
increase of $6,692,691 and $12,916,429 for the respective periods. 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 increased from $6,466,460
at July 31, 1996 to $13,803,703 at April 30, 1997. For the nine months ending
April 30, 1997, operating activities used cash of $11,238,383, primarily due to
a net operating loss of $14,063,392.
<PAGE>
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, was $20,811,332. The proceeds
from that offering are being used by the Company for working capital
expenditures.
During the nine months ended April 30, 1997, the Company invested $1,282,612
in equipment and leasehold improvements. The Company currently estimates that
the cost to open a Training Center is approximately $100,000. The Company
anticipates purchases of equipment and furniture of approximately an additional
$3,000,000 as it expands the number of Training Centers through fiscal 1998.
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 a portion of this equipment and furniture through lease lines of
credit.
As its expansion continues, the Company may need to add 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 management information systems 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 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 recission of its investment. The net proceeds from this offering were
$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 bore
interest at a rate equal to 9.5% per annum, and was guaranteed by a principal of
the borrower who had secured the guaranty with a pledge of certain of his shares
in the borrower. The loan and accrued interest were repaid to the Company on
May 9, 1997.
The Company anticipates that its existing resources 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. 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 need, 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.
PART II - OTHER INFORMATION
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
3). Amended and Restated Bylaws of the Company. Filed as
exhibit 3.2 to Registration Statement No. 333-11247 and
incorporated herein by reference.
10.1). Prosoft I-Net Solutions, Inc. Amended 1996 Stock Option
Plan. Filed as Exhibit 10.2 to Registration Statement No.
333-11247 and incorporated herein by reference.
10.2). Form of Subscription Agreement, entered into February
through April 1997 between the company and various
investors. Filed as exhibit 10.16 to Registration
Statement No. 333-11247 and incorporated herein by
reference.
10.3). Registration Rights Agreement dated as of March 13, 1997
among the Company and various investors. Filed as exhibit
10.17 to Registration Statement No. 333-11247 and
incorporated herein by reference.
10.4). Subscription Agreement between the company and general
Electric Pension trust dated April 4, 1997. Filed as
Exhibit 10.18 to Registration Statement No. 333-11247
and incorporated herein by reference.
10.5). Escrow Agreement among the Company, General Electric
Pension trust and State Street Bank and trust dated April
4, 1997. Filed as Exhibit 10.19 to Registration Statement
No. 333-11247 and incorporated herein by reference.
10.6). Secured Promissory Note dated April 9, 1997 in favor of
the Company. Filed as exhibit 10.20 to Registration
Statement No. 333-11247 and incorporated herein by
reference.
10.7). AT&T Professional Consultant Agreement dated
March 28, 1997 by and between the Company
and AT&T Corp. Filed as Exhibit 10.7 to Registration
Statement No. 333-11247 and incorporated herein by
reference.
27). Financial Data Schedule
<PAGE>
b). Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
April 30, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROSOFT I-NET SOLUTIONS, INC.
Dated: June 11, 1997
/s/ BROOKS A. CORBIN
--------------------------------
Brooks A. Corbin
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> APR-30-1997
<CASH> 13,803,703
<SECURITIES> 0
<RECEIVABLES> 844,443
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 21,230,974
<PP&E> 4,397,851
<DEPRECIATION> (1,058,071)
<TOTAL-ASSETS> 24,570,754
<CURRENT-LIABILITIES> 4,611,488
<BONDS> 0
0
0
<COMMON> 9,910
<OTHER-SE> 19,502,878
<TOTAL-LIABILITY-AND-EQUITY> 24,570,754
<SALES> 564,824
<TOTAL-REVENUES> 564,824
<CGS> 0
<TOTAL-COSTS> 3,179,956
<OTHER-EXPENSES> 4,783,507
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (32,777)
<INCOME-PRETAX> (7,365,962)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,365,962)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,365,962)
<EPS-PRIMARY> (0.83)
<EPS-DILUTED> (0.83)
</TABLE>
