<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 ending April 30, 1998
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
------ ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3001 Bee Caves Road, Suite 220 Austin, Texas 78746
--------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (512) 328-6140
--------------
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 10, 1998, was 11,698,954 shares.
<PAGE>
Prosoft I-Net Solutions, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
(Unaudited)
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
April 30, July 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 6,382,854 $ 12,911,684
Tuition and accounts receivable, less
allowances of $113,813 2,234,489 1,646,765
Notes receivable from officers/shareholders 113,250 308,370
Prepaid expenses and other current assets 728,707 878,048
------------ ------------
Total current assets 9,459,300 15,744,867
------------ ------------
Property and equipment:
Computer equipment and software 5,796,871 5,489,035
Office equipment, furniture and fixtures 1,859,731 1,030,460
------------ ------------
7,656,602 6,519,495
Less accumulated depreciation 3,560,418 1,480,185
------------ ------------
4,096,184 5,039,310
------------ ------------
Goodwill, net 3,103,083 0
------------ ------------
Total assets $ 16,658,567 $ 20,784,177
============ ============
Liabilities and stockholders' equity
Current liabilities:
Note Payable $ 40,000 $ 0
Accounts payable 382,236 1,817,314
Accrued payroll and related expenses 176,492 924,781
Payable to underwriters 0 1,454,375
Deferred revenue 133,851 67,959
Current portion of capital lease obligations 1,631,331 1,960,221
------------ ------------
Total current liabilities 2,363,910 6,224,650
Obligations under capital leases, net of
current portion 472,653 1,519,965
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value:
Authorized - 50,000,000
Issued and outstanding - 11,666,954 and
10,119,651 shares, respectively 11,667 10,120
Additional capital 48,932,579 36,764,338
Note receivable from stockholder (9,500) (9,500)
Accumulated deficit (35,112,742) (23,725,396)
------------ ------------
Total stockholders' equity 13,822,004 13,039,562
------------ ------------
Total liabilities and stockholders' equity $ 16,658,567 $ 20,784,177
============ ============
</TABLE>
<PAGE>
Prosoft I-Net Solutions, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
-------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Training $ 2,080,211 $ 564,824 $ 4,807,001 $ 1,531,906
Courseware 846,250 - 1,023,171 -
----------- ----------- ------------ ------------
Total revenue 2,926,461 564,824 5,830,172 1,531,906
----------- ----------- ------------ ------------
Costs and expenses:
Cost of services 3,057,747 3,179,956 9,686,524 5,601,199
Sales and marketing 1,225,869 1,945,804 2,595,142 3,129,340
General and administrative 1,702,710 2,837,803 5,084,761 6,943,830
----------- ----------- ------------ ------------
Total costs and expenses 5,986,326 7,963,563 17,366,427 15,674,369
----------- ----------- ------------ ------------
Loss from operations (3,059,865) (7,398,739) (11,536,255) (14,142,463)
Interest income, net 60,121 32,777 148,909 83,071
----------- ----------- ------------ ------------
Loss before provision for income taxes (2,999,744) (7,365,962) (11,387,346) (14,059,392)
Provision for state franchise tax - - - 4,000
----------- ----------- ------------ ------------
Net loss $(2,999,744) $(7,365,962) $(11,387,346) $(14,063,392)
=========== =========== ============ ============
Loss per share - basic and diluted $ (0.26) $ (0.83) $ (1.05) $ (1.77)
=========== =========== ============ ============
Weighted average number of common
shares outstanding 11,370,845 8,914,893 10,796,972 7,933,313
=========== =========== ============ ============
</TABLE>
<PAGE>
Prosoft I-Net Solutions, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended April 30,
---------------------------
1998 1997
------------ -------------
<S> <C> <C>
Operating activities
Net loss $(11,387,346) $(14,063,392)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 2,080,233 812,616
Changes in operating assets and liabilities:
Tuition and accounts receivable (578,724) (78,038)
Prepaid expenses and other current assets 149,341 (681,763)
Accounts payable and payable to underwriters (1,434,878) 2,362,764
Accrued liabilities (748,289) 218,474
Deferred revenue (65,892) 190,959
------------ ------------
Net cash used in operating activities (11,985,555) (11,238,383)
------------ ------------
Investing activities:
Purchase of businesses (1,000,000)
Purchase of property and equipment (1,137,107) (1,282,612)
Notes receivable from officers/shareholders 195,120 (803,865)
------------ ------------
Net cash used in investing activities (1,941,987) (2,086,477)
------------ ------------
Financing activities:
Issuance of common stock 8,774,914 21,181,443
Principal payments on debt and capital leases (1,376,202) (519,340)
------------ ------------
Net cash provided by financing activities 7,398,712 20,662,103
============ ============
Decrease in cash and cash equivalents (6,528,830) 7,337,243
Cash and cash equivalents at the beginning of period 12,911,684 6,466,460
------------ ------------
Cash and cash equivalents at the end of period $ 6,382,854 $ 13,803,703
============ ============
Supplementary disclosure of cash paid during the
period for:
Interest $ 248,623 $ 81,346
============ ============
Income taxes $ - $ 4,000
============ ============
Supplementary disclosure on non-cash financing
activities:
Equipment acquired under capital leases $ 173,290 $ 1,502,351
============ ============
</TABLE>
<PAGE>
PROSOFT I-NET SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The condensed consolidated financial statements do not include footnotes and
certain financial information normally presented annually under generally
accepted accounting principles and, therefore, should be read in conjunction
with the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission. 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 periods ended April 30,1998 are
not necessarily indicative of results that can be expected for the fiscal year
ending July 31, 1998. The condensed consolidated financial statements included
herein are unaudited; however, they contain all adjustments (consisting of
normal recurring accruals) which, in the opinion of the Company, are necessary
to present fairly its consolidated financial position, results of operations,
and cash flows as of and for the three months and nine months periods ended
April 30,1998.
2. In January 1998 the Company purchased 100% of the outstanding common stock
of Net Guru Technologies, Inc. in exchange for $1,000,000 and 152,809 shares of
the Company's common stock. Subsequent operations of Net Guru Technologies,
Inc. have been consolidated with the Company's operations. Shares issued in
connection with this purchase have been valued at their fair value as of the
date the acquisition was consummated, $1,700,000. Goodwill arising from the
acquisition, $2,687,833, is being amortized over a twenty-year period that
commenced January 1, 1998.
In March 1998 the Company purchased 100% of the outstanding common stock of
The Chapel Hill Group-Technology Consultants, Inc. ("The Chapel Hill Group") in
exchange for 68,728 shares of the Company's common stock. Subsequent operations
of The Chapel Hill Group have been consolidated with the Company's operations.
Shares issued in connection with this purchase have been valued at their fair
value as of the date the acquisition was consummated, $500,000. Goodwill arising
from the acquisition, $459,996, is being amortized over a ten-year period
that commenced April 1, 1998.
3. In January 1998 and in October 1997 the Company sold then existing
courseware and authorization for the reproduction of such courseware to third
parties. The two agreements pursuant to which such sales were consummated allow
purchasers to reproduce and sell such courseware and provide exclusive rights to
sell courseware to customer groups specified therein. The January 1998
transaction provides exclusive rights to sell specified courseware to
educational institutions, and the October 1997 transaction provides exclusive
rights to sell specified courseware to governmental entities. The January 1998
transaction provides for minimum payments to the Company of $1.6 million over 24
months; and the October 1997 transaction provides for minimum payments to the
Company of $1.8 million over 12 months. In April 1998, the Company determined
that collectability of amounts due pursuant to these agreements was not
sufficiently predictable to allow for accrual accounting. Accordingly, amounts
previously accrued, approximately $1.6 million and $3.4 million for the three
month and six month periods ended January 31, 1998, respectively, have been
reversed and payments are recorded as revenue when received in cash. During the
three month period ending April 30, 1998, cash payments of $200,000 and $550,000
were received on the respective contracts and recognized as revenue.
4. The Company anticipates that its existing resources will be sufficient to
meet its needs for working capital expenditures through at least fiscal 1998. In
November 1997 the Company received proceeds of approximately $8.4 million in a
private placement through the sale of 803,638 shares of common stock. The
Company's long-term capital requirements will depend on numerous factors,
including the profitability of Training Centers, the acquisition and/or
development of additional training tools, and the potential acquisition of
complementary businesses or product lines.
The Company has incurred losses aggregating approximately $35 million since
inception, primarily due to the start-up nature of its business. The Company
has used these funds to implement its strategy of becoming one of the leading
national training companies focused on the Internet/Intranet. This strategy
consists of opening additional state-of-the-art training centers across the
country, preparing and executing a national image defining marketing campaign in
numerous national publications, recruiting one of the nation's largest high-end
group of Internet/Intranet instructors strategically located across the nation,
recruiting top management and sales professionals, and developing one of the
largest libraries of Internet/Intranet courses available. Having substantially
completed these tasks, the Company is beginning to realize increasing revenue.
If revenue continues to grow as in fiscal 1998, the Company expects to reach
quarterly profitability in fiscal year 1999, based on existing resources.
However, no assurances can be given that the Company will be successful in
realizing these goals. If the Company is unable to increase revenue as
anticipated, management will implement a plan to substantially reduce the size
of the Company's operations. Such a reduction in operations may reduce the
Company's ability to meet expected market demand. The Company's ability to
continue as a going concern is dependent upon its ability to obtain necessary
financing, grow revenue, attain operational efficiencies and, ultimately,
sustain a profitable level of operations.
5. Net loss per share is based on the weighted average number of shares of
common stock outstanding during the period. Potentially dilutive securities
(stock options and warrants) were not considered because the effect of their
inclusion would have been anti-dilutive.
<PAGE>
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. In October 1997,
Prosoft was chosen by Netscape Communications Corp. ("Netscape") to be a
Netscape Education Partner ("NEP") for selected locations. The Company also
develops proprietary Internet/Intranet courseware and offers over 40 customized,
on-line, hands-on and instructor-led Internet/Intranet-related courses for end-
users, system engineers and developers.
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
- ---------------------
Three Months Ended April 30, 1998 Compared
To the Three Months Ended April 30, 1997
- ------------------------------------------
REVENUE.
Training revenue for the three months ended April 30, 1998 amounted to
$2,080,211, compared to $564,824 in the three months ended April 30, 1997, an
increase of $1,515,387. This increase reflects a higher level of enrollment in
the Company's class offerings (6,940 student days in the three months ended
April 30, 1998 compared to 2,387 student days in the three months ended April
30, 1997). The increase in student days reflects greater acceptance of the
Company's class offerings and more Training Centers being open in fiscal 1998
(30 Training Centers were open at April 30, 1998 compared to 26 Training Centers
at April 30, 1997). Average revenue per student fluctuates based on, among
other things, the Company's class offerings and participants' class selection.
Courseware sales increased to $846,250 in the three months ended April 30,
1998, compared to zero in the three months ended April 30, 1997. A majority of
this amount ($750,000) is related to existing contracts which authorize the
reproduction and resale of courseware to third parties, for which revenue is
recognized on a cash basis. During the three month period ending April 30, 1998,
cash payments of $200,000 and $550,000 were received on these existing contracts
and recognized as revenue. See Note 3.
<PAGE>
Courseware for specific subjects is offered for sale based on management's
evaluation of the maturity of such class offerings and their stage in the class
development life cycle. Courseware sales are consummated periodically based on
purchaser's evaluation of the economic opportunities offered by the Company.
COST OF SERVICES.
Cost of services is comprised of the following:
<TABLE>
<CAPTION>
Three Months Ended April 30,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Instruction $1,043,065 $ 983,247
Classroom costs 1,422,637 1,008,686
Courseware 339,543 191,097
Other 252,502 996,926
---------- ----------
Total $3,057,747 $3,179,956
========== ==========
</TABLE>
The Company's cost of services includes the costs associated with course
instructors, course materials, classroom equipment, and facilities. Most course
instructors are employees and their costs are fixed. For three to six month
periods, instructor costs vary based on the Company's expected demand for its
class offerings. Instructor travel varies with, among other things, the location
of class offerings and local instructor availability. The Company uses
instructors, dedicated content employees and contractors to develop course
content and materials. The cost of content development varies with the Company's
evaluation of the effectiveness of its existing class offerings and the
anticipated release of new software products. Most equipment and classroom
facility costs are incurred at the Company's own facilities, and are fixed for
prospective periods of six to twelve months.
Cost of services for the three-month period ended April 30, 1998 was
$3,057,747 compared with $3,179,956 for the three-month period ended April 30,
1997, a decrease of $122,209.
SALES AND MARKETING.
Sales and marketing expenses are comprised of the following:
<TABLE>
<CAPTION>
Three Months Ended April 30,
---------------------------
1998 1997
---------- ----------
<S> <C> <C>
Advertising and trade shows $ 389,496 $ 516,611
Salaries and wages 543,910 941,769
Travel and entertainment 69,416 141,071
Other 223,047 346,353
---------- ----------
Total $1,225,869 $1,945,804
========== ==========
</TABLE>
Sales and marketing expenses for the three months ended April 30, 1998
amounted to $1,225,869, compared to $1,945,804 for the three months ended April
30, 1997, a decrease of $719,935. These expenses consist 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 objectives are established by the
Company's management based on their evaluation of market potential, the expected
effectiveness of alternative marketing and sales strategies, and anticipated
cost-benefit relationships. Should anticipated cost-benefit relationships not
be achieved, the Company's management reevaluates programs and resets cost
objectives. The decrease in sales and marketing expense for the three months
ended April 30, 1998, compared to the three months ended April 30, 1997, is due
to reduced emphasis on advertising and was partially offset by increased
emphasis on direct contact with customers, strategic partners, and affiliates.
<PAGE>
GENERAL AND ADMINISTRATIVE.
General and administrative expenses for the three months ended April 30, 1998
amounted to $1,702,710, compared to $2,837,803 for the three months ended April
30, 1997, a decrease of $1,135,093. This decrease reflects reduced numbers of
employees involved in administrative functions and the timing of certain
administrative expenses.
INTEREST INCOME, NET.
Net interest income amounted to $60,121 for the three months ended April 30,
1998, compared to net interest income of $32,777 for the three months ended
April 30, 1997, an increase of $27,344. Interest expense, which consists
principally of interest paid on capital leases, was offset by interest earned on
higher cash balances generated by the proceeds of private placements.
Nine Months Ended April 30, 1998 Compared
To the Nine Months Ended April 30, 1997.
- -----------------------------------------
REVENUE.
Training revenue for the nine months ended April 30, 1998 amounted to
$4,807,001, compared to $1,531,906 in the nine months ended April 30, 1997, an
increase of $3,275,095. This increase reflects a higher level of enrollment in
the Company's class offerings (15,573 student days in the nine months ended
April 30, 1998 compared to 4,902 student days in the nine months ended April 30,
1997). The increase in student days reflects greater acceptance of the
Company's class offerings and more Training Centers being open in fiscal 1998
(30 Training Centers were open at April 30, 1998 compared to 26 Training Centers
at April 30, 1997). Average revenue per student fluctuates based on, among
other things, the Company's class offerings and participants' class selection.
Courseware sales amounted to $1,023,171 in the nine months ended April 30,
1998, compared to zero in the nine months ended April 30, 1997. In January 1998
and in October 1997 the Company sold then existing courseware and authorization
for the reproduction of such courseware to third parties. The agreements
pursuant to which such sales were consummated allow purchasers to reproduce and
resell to specified groups/customers. The January 1998 transaction allows sales
to educational institutions and the October 1997 transaction covers sales to
governmental entities. The January 1998 transaction provides for minimum
payments to the Company over 24 months of $1.6 million, 1998, and the October
1997 transaction provides for minimum payments to the Company over 12 months of
$1.8 million. Payments are recorded as revenues when received. See Note 3.
Courseware for specific subjects is offered for sale based on management's
evaluation of the maturity of such class offerings and their stage in the class
development life cycle. Courseware sales are consummated periodically based on
purchaser's evaluation of the economic opportunities offered by the Company.
COST OF SERVICES.
Cost of services is comprised of the following:
<TABLE>
<CAPTION>
Nine Months Ended April 30,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Instruction $2,993,127 $1,782,490
Classroom costs 4,019,296 1,828,776
Courseware 691,266 360,097
Other 1,982,835 1,629,836
---------- ----------
Total $9,686,524 $5,601,199
========== ==========
</TABLE>
The Company's cost of services includes the costs associated with course
instructors, content developers, course materials and equipment and classroom
facilities. Most course instructors are employees and their costs are fixed in
the short run. For three to six month periods, instructor costs vary based on
the Company's expected demand for its class offerings. Instructor travel varies
with, among other things, the location of class offerings and local instructor
availability. The Company uses employees and contractors to develop course
content and materials. The cost of content development varies with the Company's
evaluation of the effectiveness of its existing class offerings and the
anticipated release of new software products. Most equipment and classroom
facility costs are incurred at the Company's own facilities, and are fixed for
prospective periods of six to twelve months.
<PAGE>
Cost of services for the nine-month period ended April 30, 1998 was
$9,686,524, compared with $5,601,199 for the nine-month period ended April 30,
1997, an increase of $4,085,325. This increase is primarily the result of an
increased number of course events, a larger course library, and an increase in
the number and training of instructors and content developers.
SALES AND MARKETING.
Sales and marketing expenses are comprised of the following:
<TABLE>
<CAPTION>
Nine Months Ended April 30,
--------------------------
1998 1997
----------- ----------
<S> <C> <C>
Advertising and trade shows $ 489,892 $ 842,027
Salaries and wages 1,437,057 1,512,867
Travel and entertainment 154,641 229,052
Other 513,552 545,394
---------- ----------
Total $2,595,142 $3,129,340
========== ==========
</TABLE>
Sales and marketing expenses for the nine months ended April 30, 1998 amounted
to $2,595,142, compared to $3,129,340 for the nine months ended April 30, 1997,
a decrease of $534,198. These expenses consist 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 objectives are established by the Company's management based
on their evaluation of market potential, the expected effectiveness of
alternative marketing and sales strategies, and anticipated cost-benefit
relationships. Should anticipated cost-benefit relationships not be achieved,
the Company's management reevaluates programs and resets cost objectives.
The decrease in sales and marketing expense for the nine months ended April
30, 1998, compared to the nine months ended April 30, 1997, is due to a focused
marketing and sales effort. During the most recent nine month period the
Company has placed significantly more emphasis on direct contact with customers,
strategic partners, and affiliates and less emphasis on advertising.
GENERAL AND ADMINISTRATIVE.
General and administrative expenses for the nine months ended April 30, 1998
amounted to $5,084,761, compared to $6,943,830 for the nine months ended April
30, 1997, a decrease of $1,859,069. This decrease reflects reduced numbers of
employees involved in administrative functions and the timing of certain
administrative expenses.
INTEREST INCOME, NET.
Net interest income amounted to $148,909 for the nine months ended April 30,
1998, compared to $83,071 for the nine months ended April 30, 1997, an increase
of $65,838. Interest expense, which consists principally of interest paid on
capital leases, was offset by interest earned on higher cash balances generated
by the proceeds of private placements.
Liquidity And Capital Resources
- -------------------------------
From inception, the Company has financed its operations and met substantially
all of its capital expenditure requirements primarily through net proceeds from
private sales of equity securities. Cash and cash equivalents decreased from
$12,911,684 at July 31, 1997 to $6,382,854 at April 30, 1998. Such decrease was
the result of net cash used by operations, $11,985,555, and was partially offset
by proceeds from private placements of common stock of approximately $8.4
million.
<PAGE>
For the nine months ending April 30, 1998, operating activities required cash
of $11,985,555, primarily due to a net loss of $11,387,346. The use of cash to
liquidate accounts payable and payable to underwriters of $1,435,078 was offset
by depreciation and amortization accruals.
In January 1998, the Company purchased 100% of the outstanding common stock of
Net Guru Technologies, Inc. in exchange for $1,000,000 and 152,809 shares of the
Company's common stock. Subsequent operations of Net Guru Technologies, Inc.,
which have not been significant to the Company's consolidated operations, have
been combined with the Company's operations. Shares issued in connection with
this purchase have been valued at their fair value as of the date the
acquisition was consummated, $1,700,000. Goodwill arising from the acquisition,
$2,687,833, is being amortized over a twenty-year period that commenced January
1, 1998.
In March 1998, the Company purchased 100% of the outstanding common stock of
The Chapel Hill Group in exchange for 68,728 shares of the company's common
stock. Subsequent operations of The Chapel Hill Group, which have not been
significant to the Company's consolidated operations, have been combined with
the Company's operations. Shares issued in connection with this purchase have
been valued at their fair value as of the date the acquisition was consummated,
$500,000. Goodwill arising from the acquisition, $459,996, is being amortized
over a ten-year period that commenced April 1, 1998.
During the nine months ended April 30, 1998, the Company invested $1,137,107
in equipment and leasehold improvements. This amount could vary going forward
based upon the rate of growth in expansion and the Company's continued
expenditures on system implementation. 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.
From February through April 1997, the Company received gross proceeds of
approximately $22 million in a private placement through the sale of 2,081,758
shares of common stock. Net proceeds from this offering were $20,811,332. In
April 1997, the Company sold 408,164 shares of its common stock to an
institutional investor for $5 million. The net proceeds from this offering were
$4,700,008. In November 1997 the Company received proceeds of approximately $8.4
million in a private placement through the sale of 803,638 shares of common
stock. No commissions or finders' fees were paid for this offering.
The Company anticipates that its existing resources will be sufficient to meet
its needs for working capital expenditures through at least fiscal 1998. The
Company's long-term capital requirements will depend on numerous factors,
including the profitability of Training Centers, the acquisition and/or
development of additional training tools and the potential acquisition of
complementary businesses or product lines.
The Company has incurred losses aggregating approximately $35 million since
inception, primarily due to the start-up nature of its business. The Company has
used these funds to implement its strategy of becoming one of the leading
national training companies focused on the Internet/Intranet. This strategy
consists of opening additional state-of-the-art training centers across the
country, preparing and executing a national image defining marketing campaign in
numerous national publications, recruiting one of the nation's largest high-end
group of Internet/Intranet instructors strategically located across the nation,
recruiting top management and sales professionals, and developing one of the
largest libraries of Internet/Intranet courses available. Having substantially
completed these tasks, the Company is beginning to realize increasing revenue.
If revenue continues to grow, the Company expects to reach quarterly
profitability in fiscal year 1999, based on existing resources. However, no
assurances can be given that the Company will be successful in realizing these
goals. If the Company is unable to increase revenue as anticipated, management
will implement a plan to substantially reduce the size of the Company's
operations. Such a reduction in operations may reduce the Company's ability to
meet expected market demand. The Company's ability to continue as a going
concern is dependent upon its ability to obtain necessary financing, grow
revenue, attain operational efficiencies and, ultimately, sustain a profitable
level of operations.
<PAGE>
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 that could have a material impact upon
whether these projections could be realized or whether these trends will
continue.
Additional Factors That May Affect Results of Operations
Extremely Limited Operating History and Expectation of Continuing Significant
Losses
The Company has a very 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 a proprietorship until its acquisition by Old ProSoft
in January 1996. The first Training Center was not opened until late 1995. As a
result, there is limited 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 twelve months ended July 31, 1997, the Company incurred a net loss
of $20,651,273 and expects to continue to incur losses on a quarterly basis
through at least early fiscal 1999. 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 focuses. 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 projected earnings will result
from these activities.
Uncertainty of Rapidly Evolving Market
The market for 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 new Training Centers as the market demands, respond to
competitive developments and successfully develop its internal infrastructure,
particularly sales, marketing and administrative personnel and its accounting
system. Moreover, due to the intense competition in the emerging markets
addressed by the Company, the Company must seek to grow its business rapidly,
which increases the challenges facing the Company, making it more difficult for
the Company to recover from business errors.
Future Capital Requirements and Uncertainty of Future Funding
Since inception, the Company has been dependent on outside financing to fund
its growth. The Company has raised approximately $43 million from the private
placement of Common Stock since inception. The Company anticipates that the
proceeds from these offerings and cash flows from operations will be sufficient
to meet its needs for working capital expenditures through at least fiscal 1998.
However, the Company's long-term capital requirements will be dependent on
numerous factors, including the profitability of Training Centers, the
acquisition and/or development of additional training tools, and the potential
acquisition of complementary businesses or product lines.
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.
Highly Competitive Market
The technology training 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. 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.
<PAGE>
Impact of Year 2000
Many existing computer systems and applications, and other control devices,
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. As a result, such systems and
applications could fail or create erroneous results unless corrected so that
they can process data related to the year 2000. The Company relies on its
systems, applications and devices in operating and monitoring all major aspects
of its business, including financial systems (such as general ledger, accounts
receivable, accounts payable and payroll), student and customer services,
embedded computer chips, networks and telecommunications equipment and end
products. The Company also relies, directly and indirectly, on external systems
of business enterprises such as customers, suppliers, creditors, financial
organizations, and of governmental entities for accurate exchange of data. The
Company's current estimate is that the costs associated with the year 2000 issue
will not have a material adverse effect on the results of operations or
financial position of the Company. However, despite the Company's efforts to
address the year 2000 impact on its internal systems, the Company may not have
fully identified such impact or whether it can resolve it without disruption of
its business and without incurring significant expense. In addition, even if the
internal systems of the Company are not materially affected by the year 2000
issue, the Company could be affected through disruption in the operations of the
enterprises with which the Company interacts.
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
The Company and certain of its present and former officers and/or directors
are defendants in three "class action" lawsuits which allege, among other
things, that the defendants made false and/or misleading public statements
regarding the Company and its financial condition in violation of various state
securities laws. Alvarado vs. Prosoft I-Net Solutions, Inc., et al., was filed
on or about April 24, 1998 in the Orange County Superior Court, Case No. 793468;
Robertson vs. Prosoft I-Net Solutions, Inc., et al., was filed in the same Court
on or about April 20, 1998 and Calhoun vs. Prosoft I-Net Solutions, Inc., et
al., was filed in same Court on or about June 5, 1998. The three complaints
purport to establish a class of shareholders who purchased Prosoft stock between
July 21, 1997 and April 13, 1998. No class has been certified at this time.
The complaints allege, among other things, that the defendants made false and/or
misleading public statements regarding the Company and its financial condition
in violation of various state securities laws. The complaints seek compensatory
damages, attorneys' fees, and injunctive relief, as well as other relief. The
Company believes that is has meritorious defenses to the plaintiffs' claims, and
it intends to vigorously defend itself against the actions.
The Company is also engaged in the defense of certain claims and lawsuits
arising out of the ordinary course and conduct of its business, the outcomes of
which are not determinable at this time. In the opinion of Management, any
liability that might be incurred by the Company upon the resolution of these
claims and lawsuits will not, in the aggregate, have a material adverse effect
on the Company's consolidated results of operations and financial condition.
Item 6: Exhibits And Reports On Form 8-K
a) Exhibits
27 Financial Data Schedule
b) Reports on Form 8-K
A Current Report on Form 8-K, dated April 6, 1998, was filed
with the Securities and Exchange Commission (the "Commission")
reporting the resignation of the Company's independent auditors and
a restatement of its first and second quarter results for fiscal
1998 as a result of a change in revenue recognition practice.
<PAGE>
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 15, 1998
/s/ JERRELL M. BAIRD
-------------------------------------
Jerrell M. Baird
Chief Executive Officer
and Chairman of the Board
(Duly Authorized Officer)
Dated: June 15, 1998
/s/ BROOKS A. CORBIN
-------------------------------------
Brooks A. Corbin
Chief Financial Officer
(Principal Financial Officer)
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