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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended: July 31, 1999
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
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ProsoftTraining.com
(Exact name of Registrant as specified in its charter)
NEVADA 87-0448639
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3001 Bee Caves Road, Suite 100, Austin, TX 78746
(Address of principal executive offices) (Zip Code)
(512) 328-6140
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.001 Per Share
(Title of class)
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 twelve (12) months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past ninety (90) days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's commmon stock held by non-
affiliates of the Registrant as of October 1, 1999, was $54,785,040 based on
the number of shares outstanding on such date and the last sale price for the
common stock on such date of $3.9375 per share as reported on the NASDAQ--
SmallCap market.
Part III is incorporated by reference from the Registrant's definitive proxy
statement for its 1999 Annual Meeting of Stockholders to be filed with the
Commission within 120 days of July 31, 1999.
The number of shares of Common Stock issued and outstanding as of October 1,
1999: 14,365,761.
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PROSOFTTRAINING.COM
INDEX TO ANNUAL REPORT ON FORM 10-K
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PART I
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Item 1. Business .....................................................
Overview...................................................... 1
Information Technology Education and Training Market.......... 1
The Prosoft Business Model.................................... 2
Courseware.................................................... 2
Services...................................................... 3
Certification................................................. 4
Customers..................................................... 6
Sales and Marketing........................................... 6
Competition................................................... 7
Seasonality................................................... 7
Risks as a Result of Year 2000................................ 7
Trademarks and Copyrights..................................... 8
Employees..................................................... 8
Regulations................................................... 8
Item 2. Properties.................................................... 8
Item 3. Legal Proceedings............................................. 8
Item 4. Submission of Matters to Vote of Security Holders............. 9
PART II
Market for Registrant's Common Equity and Related Stockholder
Item 5. Matters....................................................... 10
Item 6. Selected Financial Data....................................... 11
Management's Discussion & Analysis of Financial Condition &
Item 7. Results of Operations......................................... 11
Item 8. Financial Statements and Supplementary Data................... 17
Changes in and Disagreements with Accountants on Accounting &
Item 9. Financial Disclosure.......................................... 31
PART III
Item 10. Directors and Executive Officers of the Registrant............ 32
Item 11. Executive Compensation........................................ 32
Security Ownership of Certain Beneficial Owners and
Item 12. Management.................................................... 32
Item 13. Certain Relationships and Related Transactions................ 32
PART IV
Exhibits and Financial Statement Schedules and Reports on Form
Item 14. 8-K........................................................... 33
Signatures.............................................................. 34
Exhibit Index........................................................... 36
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ITEM 1. BUSINESS
This Annual Report on Form 10-K contains forward-looking statements, which
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that may cause such a difference include, but are not limited to;
those discussed throughout this document.
Organization History
Prosoft 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. Beginning in February 1995, the Company's business was operated as
a sole proprietorship (the "Proprietorship"). 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 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 and in December 1998
changed its name to ProsoftTraining.com.
Overview
Our mission at ProsoftTraining.com (the "Company" or "Prosoft" or "we" or
"our"), formerly Prosoft I-Net Solutions, Inc., is to lead the world in
Internet certification and education. We provide certification to individuals
seeking to validate their Internet skills to employers and clients. Our
education programs are sold to training companies, corporations and academic
institutions. We sell courseware, intellectual property licenses, instruction
services and related materials to allow individuals to complete training
towards certification or other Internet skills.
Prior to fiscal year 1999, the Company's main objective was to provide
Internet skills education directly to students. During fiscal year 1999 we
changed our name and business model from retail training to wholesale training
programs. Founded in 1996, we became publicly traded in December 1996 as a
result of a reverse merger into an already public shell company. In March
1997, November 1997 and November 1998 we raised additional capital through
private placements with institutional and individual investors.
At the end of fiscal year 1998, we concluded that we would not succeed with
a retail training business model. We decided to capitalize on our investment
in our intellectual property and excellent teaching staff by offering both to
the training industry. In the third quarter ended April 30, 1999, we recorded
a $3,723,148 restructuring charge associated with our decision to exit the
retail training business. We have now finished the transformation.
The Information Technology Education and Training Market
The rapidly growing role of information technology (IT) in business
organizations and the emergence of the Internet are creating significant and
increasing demand for information technology training. A 1999 Merrill Lynch
report estimates the current IT training market at $26 billion, growing at 10%
per year. This report estimates that the Corporate IT training market
represents $19 billion of the total and is growing at 12% annually.
International Data Corporation (IDC) projects the corporate training market
alone will grow to $28 billion by 2002.
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Corporations today devote nearly 50% of their capital spending to IT. This
requires a continuous investment in employee skills. The growing need for
technology training is driven by several developments including: (i) increased
use of computers in the workplace requiring employees to acquire and apply
information technology skills; (ii) rapid and complex technological changes in
operating systems, new software development, and technical training; (iii)
continuing emphasis by industry on productivity, increasing the number of
functions being automated throughout organizations; (iv) greater focus by
organizations on core competencies with a shifting emphasis to outsourcing of
non-core activities; (v) corporate downsizing requiring remaining personnel to
develop a greater variety of skills; and (vi) development of the Internet.
The demand for IT professionals is far outstripping the current supply. In a
recent survey conducted by the Information Technology Association of America:
. One of every ten IT positions, or approximately 350,000 jobs in the
United States, is unfilled today.
. Approximately 50% of IT company executives cited the lack of skilled
workers as the most significant barrier to growth during the next year.
. Approximately 70% of IT companies said that "few" or "some" applicants
for IT jobs have the skills the companies are seeking.
Instructor-led classroom training is the dominant delivery method for
technology training, with 78.4% of the information technology education market
according to the 1998 IDC report. IDC projects that instructor-led training
will continue to maintain a significant share of the market because trainees
value the personalized attention, interfacing and problem-solving with
classmates and instructors, and the insulation classroom training provides
from workplace interruptions. While IDC projects instructor-led training will
continue to be the leading delivery method in the market through 2001, the
role of technology-based training, consisting of computer-based training, Web-
based training and CD-ROM multimedia is gaining greater acceptance. IDC
estimates that technology-based training will have 54.9% of the information
technology education market by 2002 while instructor-led classroom training
will have a 42.4% share. IDC projects that revenues generated through
instructor-led training will still grow through 2000, but at that point will
start to decline.
The Internet, unlike every information technology implemented to date, is a
technology that has broad application beyond the Corporation. Internet skills
training will benefit K-12 and postsecondary students. It will also benefit
consumers. This increases the potential market for Prosoft Internet training
products dramatically. Globally, the market for education and training is two
trillion dollars. In the United States, the K-12 market is $360 billion, of
which $7 billion is spent on Teacher Training, Supplemental Instruction and
Textbooks. These are all areas where the Internet will have an impact. These
markets are growing between 5% and 10% annually. The postsecondary market is
$237 billion, of which $2.5 billion is spent on textbooks. The global
competition for students equipped for next millennium's knowledge economy will
drive K-12 and postsecondary schools to include Internet skills education in
their curriculum.
U.S. consumers are spending another $13 billion on education products and
services, of which $1.5 billion is spent on taking tests. Not only can
Internet skills training and certification benefit job candidates, but
individuals can start home businesses or create web sites for families,
churches and clubs with these skills.
THE PROSOFT BUSINESS MODEL
ProsoftTraining.com earns revenue in three primary ways:
. Courseware,
. Teaching services, and
. Certification.
Courseware
We have made significant investments in our intellectual property. We believe
our library of Internet skills courses is the largest of its kind in the
world. Courses are grouped in job-role certification tracks, which increase
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their value even further. Internet skills topics cover basic Internet,
Internetworking, web site design, Internet scripting, Internet application
development, Java, Internet server administration, Security and E-commerce. We
also have courses for Unix and Linux administration and CompTIA's Network +
certification. Our courses are vendor-neutral which is of critical importance
in the Internet where no one company dominates hardware or software. Our
courses train students in concepts and expose them to implementations from a
variety of software vendors. The courses also have exercises designed to be
completed by the student on a computer equipped with appropriate software and
a connection to the Internet. When taught in a classroom format, individual
courses have a suggested duration that ranges from one to five days. We have
been careful to build our courseware in a modular fashion so as to increase
our opportunities to license our courseware to other companies and to maximize
our chances to deploy our courseware in different learning formats and media.
The Company sells its courses in four primary ways.
1. As a Textbook. We print course textbooks ("Courseware") and ship them to
clients who provide them to students taking a class. Textbooks are
printed with a ProsoftTraining.com brand. Though the most popular titles
are available for sale to all clients, only companies that have signed
an agreement to be an authorized training center can purchase all
titles. Courseware pricing ranges from $20 to $50 per course day.
Printing costs usually do not exceed 25% of the selling price.
2. Through a Reproduction License. Under a reproduction license, a client
purchases the right to print a textbook using its own cover page and
introduction while leaving the rest of the content unchanged.
Reproduction licenses allow the Company to leverage other companies'
investments in printing facilities while retaining ownership in the
underlying content. Reproduction licenses are either purchased on a
royalty or lump sum basis depending on the client and the intended use.
Royalties rates range from 20% to 40% of the licensees' gross proceeds
from the sale of courses. Lump sum licenses generate from $40,000 to in
excess of $250,000.
3. Through an OEM License. Under an OEM license, Prosoft agrees to make
modifications to a course so that it conforms to standards and
appearance required by a third party. The third party then sells the
course under its own brand to a market contractually agreed between the
two companies. Prosoft retains ownership of the intellectual property
and collects a royalty per unit produced by the OEM.
4. As a Custom Developed Course(s). The Company leverages its Internet and
courseware development expertise by bidding on selected contracts for
courses required by third parties. For us to consider a project, it must
cover a subject where we have expertise, be a client with whom we have
an ongoing relationship or be for a project where we have the future
opportunity to rent instructors to teach the course. Projects are priced
according to time, materials and intellectual property re-used.
We have completed conversion of four of our entry-level courses to a
computer-based format delivered on CD-ROM. This format is known as computer-
based-training or "CBT." A student taking a course in this format will hear an
audio lesson accompanied by screen animations illustrating or demonstrating
the various topics and exercises. These courses will be offered to training
companies, corporations and individuals as an alternative to classroom
training. We are also in the process of converting these same courses for
delivery directly on the Internet. This is known as web-based training or
"WBT."
Introducing courses in alternate formats allows us to fulfill the increasing
requirement for "blended learning" solutions. A blended learning solution is
one where the same content is available in multiple formats. Students can then
choose the method that best fits their schedule and learning style. We believe
having the only Internet job-role certification in multiple delivery formats
is a distinct advantage in attracting channel partners and students.
Services
We have a staff of instructors we rent to the training industry and
corporations to teach our courses. Currently two thirds of our revenue comes
from this business. As of October 1999, we had 28 instructors on
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staff in the United States and Ireland. Instructors usually specialize in two
or three of our course tracks. Instructors perform the following tasks: (i)
training of client instructors or "train the trainer," (ii) conducting classes
for clients, (iii) developing custom courseware, (iv) developing or improving
Prosoft courseware and (v) client consulting.
We charge $1,000 to $3,000 per day for our instructors. The rate depends on
the difficulty of the course, the location of the assignment and whether
travel is included in the rate. Annual instructor compensation ranges from
$30,000 to over $100,000. All instructors receive stock options after a
probationary period with the Company. Full utilization of an instructor occurs
when Prosoft can bill 65% to 70% of their available days in a month.
A pool of qualified instructors does not currently exist in the job market.
We hire people with education or technical backgrounds and prepare them to
teach our courses through a series of "Instructor Boot Camps." Our success in
growing services revenue and achieving our target for gross margin depends on
our ability to attract, develop and retain instructors.
We do not plan to service 100% of our teaching assignments with our own
instructors. We have created a pool of contractors qualified to teach Prosoft
courses. So as to ensure very high utilization of our own employees in the
face of seasonality or other market volatility, our goal is to use our
instructors for 75% of our teaching jobs and to use contractors for the rest.
We plan to hire instructors throughout fiscal year 2000 and grow the number
of instructors on staff to more than 50. Fortunately, instructors do not need
to relocate; instead they travel to their assignments. As a result of a
typically heavy travel schedule and the high demand from customers for our
instructors, turnover is expected to run 15%-20% per year. When our
instructors leave they very often go to work for one of our customers, which
tends to reinforce the use of Prosoft products.
Distance Learning. We have converted ten of our courses for delivery via our
ProFlexsm distance-learning program. ProFlexsm is a classroom caliber learning
experience without the classroom. Students participate in a series (five to
eight) of forty-five minute class sessions, complete interim homework
assignments and communicate with their instructor via e-mail. The Internet is
used for class presentations, gathering assignments, communicating with the
instructor and submitting questions during class sessions. Courses are priced
the same as classroom training sessions for the same topic. At present,
ProFlexsm does not generate a significant level of revenue for the Company,
but due to the great interest in distance learning, we do expect to see some
growth during the next fiscal year. We also plan to spend more money on
marketing and establishment of more reseller relationships to drive business
for this product.
Certification
One of the major trends in the IT industry is certification. Certification
training is growing at a rapid pace, with the number of exams growing at over
30% annually according to the Merrill Lynch report. The certification testing
market is already $900 million and is estimated to grow to over $2 billion by
2001.
IT certification provides individuals and employers with a standardized
measurement of one's understanding of a specific technical area. From an
employer's standpoint, certification provides a benchmark for quality,
allowing companies to quickly assess an employee's knowledge and ensure they
have the qualifications necessary to accomplish their jobs. This then
translates to increased productivity as well as reduced hiring and training
costs associated with turnover. According to IDC, more than 80% of IT managers
report that certified employees are more productive in all areas.
Large technology vendors such as Novell and Microsoft led the movement to
certify information technology professionals. Today hundreds of thousands of
technology professionals have earned certifications like MCP (Microsoft
Certified Professional), MCSE (Microsoft Certified System Engineer), MCSD
(Microsoft Certified System Developer), CNE (Certified Novell Engineer) and
CNA (Certified Novell Administrator). In recent years,
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new certifications have arisen that provide "vendor-independent" credentials.
The most successful of these entrants has been A+, which now boasts over
130,000 certificate holders in the United States. A+ certifies individuals as
competent to assemble and service PC hardware from various manufacturers.
The emergence of the Internet, where no hardware or software vendor
dominates the standards, created an opportunity to establish a vendor-neutral
certification for individuals desiring to provide Internet competency
credentials. In January 1998, we acquired Net Guru Technologies, Inc. and its
Certified Internet Webmaster (CIW) program.
Foundations
5-day track
CIW Exam #310
Site Application Server Internetworking E-Commerce
Designer Developer Administrator Professional Professional
5-day track 10-day track 5-day track 7-day track 5-day track
Exam 1DO-320 Exam 1DO-330 Exam 1DO-350 Exam 1DO-360 Exam 1DO-380
Enterprise Security
Developer Professional
10-day track 8-day track
Exam 1DO-340 Exam 1DO-370
Certified Internet Webmaster (CIW). The CIW program is built around the job
roles for Internet professionals critical to deploying today's e-Business
solutions. In the early days of the Internet, a single individual had
responsibility for web site development and administration. Because these
early web experts knew something about everything, they acquired the title
"webmaster." The Internet, its networks, servers and applications have now
grown so complex that no one person can easily provide expertise in all areas.
Instead, web teams and distinct Internet job roles have emerged. In the last
year, these job roles have been validated by the Association of Internet
Professionals, an industry group comprised of important players including
Novell, Microsoft and IBM.
The CIW program recognizes the movement to Internet job roles and provides
certifications in eight job areas. The CIW certifications are:
1. CIW Foundations (entry level skills)
2. CIW Site Designer (site design skills)
3. CIW Application Developer (interactive web site development)
4. CIW Enterprise Developer (web sites connected to database applications)
5. CIW Administrator (web server administration)
6. CIW Internetworking Professional (TCP/IP networking skills)
7. CIW Security Professional (server and network protection skills)
8. CIW e-Commerce Professional (e-Commerce transaction skills)
CIW Certification tests are administered through leading testing vendors
Sylvan Prometric and VUE. Sylvan has 5,200 testing affiliates worldwide and
VUE has over two thousand. These are the same testing services used by other
leading certification providers such as Microsoft and Novell.
Students prepare for certification tests on their own or by using one of the
CIW preparatory education programs offered by training companies worldwide.
Students pay between $100 and $150 to take a test. Many students do not pass
the test on the first try and must take the test a second time. Other students
earn multiple
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certifications. The Company earns between 40% and 50% from each test taken.
The actual margin depends on the country in which the test is taken and which
testing service is used.
Authorized Training Centers. A development that parallels the growth of
certification for Internet professionals is certification for training
centers. We have created an authorized training partner channel. Authorized
training centers agree to use only official courseware provided by Prosoft,
teach courses using only certified instructors and advertise courses using the
official trademark and logo. Training companies usually pay a fee to become an
authorized training partner. The fee is waived for academic institutions and
for others it ranges from $3,000 to $9,000.
The company currently has agreements in place that allow over 800 training
centers access to the CIW curriculum. In the United States, companies like
IBM, New Horizons, CompUSA, ExecuTrain, Catapult, Productivity Point
International (a subsidiary of Knowledge Universe), ARIS and Knowledge
Alliance offer training for CIW.
Though revenue from certification testing is a small percentage of total
revenue, the Company expects this source of revenue to grow as the majority of
the Company's authorized training partners have joined the program in the last
six months. Experience indicates it takes approximately six months for a
company to begin teaching courses after it becomes an authorized training
center. It then may take another several months before students begin to take
certification tests.
Customers
United States. In the United States, companies like IBM, New Horizons,
CompUSA, ExecuTrain, Productivity Point International (a subsidiary of
Knowledge Universe), ARIS and Knowledge Alliance offer training for CIW. The
Company also has relationships with web-based training companies DigitalThink
and Learn2.com, and education portal Hungry Minds.com. The Company also
conducts training at Mecklermedia's Internet World shows in the United States
and overseas. A recent development in the United States is the development of
a potentially lucrative academic client base, including universities, junior
and community colleges, and vocational-technical schools. Towards this end,
during 1999, the Company's CIW courses received accreditation from the
American Council on Education as part of their college credit recommendation
service.
Canada. In Canada, companies like CDI, PBSC and General Physics offer
training for CIW.
Europe. In Europe, companies like IBM, Semcon (Sweden), DiTEC (Germany),
TECHConnect (UK), BIC Systems (UK), Rumos (Portugal), Fringes (Spain),
Institute Eris (France), and Technology Training (Northern Ireland) offer our
programs.
Asia. We have sold courseware to training companies in India (5), Australia
(3), Singapore (Drake International and Net Assist Services), Hong Kong and
Korea (Samsung). The company is currently negotiating a relationship in Japan
with a government agency and two training companies.
Latin America. Though we do not sell courseware to any company in Latin
America right now, we expect our products to expand to this region through our
relationship with IBM, and through one of our OEM relationships.
Sales and Marketing
Because we share the burden of selling and marketing our courses with our
channel partners, we have a very efficient sales and marketing organization.
We have nine people directly involved in sales and marketing in the United
States and two people in Ireland. Sales and marketing personnel develop
relationships with channel partners and then help these customers sell our
courses to their clients.
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We also have a channel support and customer service organization in Austin,
Texas that has five people making sure customer orders are completed with a
high level of quality and customer assurance. This group assists the sales
organization by entering orders for courseware or teachers into our computer
system, contacting the customer to make sure arrangements are satisfactory and
following up with the customer after delivery. Since many customers need to
make last minute adjustments or forget to order courseware until a few days
before the class, we use our quick response as a competitive advantage. Most
customers are not price sensitive about courseware if it is delivered on time
and to the right place.
Competition
Each area of our business is highly competitive, and there are few economic
barriers to prevent entry in any of them. We not only face competition from
many other companies offering similar services and products, but we must also
compete with the internal training, marketing and publishing units of large
corporations. Many of our competitors have access to greater resources and
capital than is currently available to us. However, we believe that a company
cannot effectively compete with us at this time unless it is willing to invest
millions of dollars in courseware development and spend more than a year to
complete the task. The trade association CompTIA has announced its intention
to introduce a certification that will compete with our CIW Foundations
certification. This may negatively affect our certification revenue from this
test, but it may increase substantially the number of people who can pursue
upper level certifications. Also, CompTIA does not produce courseware and our
CIW Foundations courseware will prepare students for the CompTIA
certification, as well as our own test. Trade associations like Association of
Web Professionals, World Organization of Webmasters and Internet Webmasters
Association have either released or announced plans to offer Internet
certifications. So far none of these certifications appears to have much
industry support, but if they grow in importance, we would offer our partners
courses to prepare for them.
Two companies offer certification and courseware that competes with ours--
Novell and HyCurve. Most of our channel partners are already channel partners
of Novell. Since the Novell program has been available for over two years we
feel that the adoption of the CIW program by these partners means that they
prefer our program. HyCurve is a new company and its program is not widely
available. Still, both of these companies could represent a significant
competitive challenge to our courseware and certification and require the
company to spend more money on sales, marketing and course development to
successfully compete with them.
If our CIW credential does emerge as an industry standard, then it will be
harder for other companies to enter or succeed in this market. In addition,
there appears to be a high cost of switching from one curriculum to another
once an organization's sales and instructional staff have adopted a particular
program.
Seasonality
Our revenue and income can vary from quarter to quarter due to seasonal and
other factors. We experience greater revenue in the second half of our fiscal
year (February through July) than in the first half of our fiscal year (August
through January). In the European market August is usually a poor month
because many workers take their summer holiday at that time. In the United
States the period from Thanksgiving to New Year tends to be slow for the
training industry. Other seasonality is due to customers' seasonal spending
patterns and corporate training budgets.
Risks as a Result of Year 2000
A detailed discussion of the risks with our own computer systems is included
later in this document, but the year 2000 may also affect our operating
outlook as a result of how it affects the training industry. No one at this
time knows if the year 2000 will dramatically change the normal seasonality
associated with training at the end of this calendar year and the beginning of
next year. We are taking steps to keep our revenue from suffering at the end
of the year, but we can provide no assurance that our efforts will be
successful.
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Trademarks and Copyrights
Copyright laws protect most Prosoft courseware. We have also filed for
trademark and service mark registration for certain of our products, tag lines
and feature names. We will continue to seek copyright registration on certain
newly developed courseware products and on software products.
Employees
As of September 30, 1999, we employed a total of 85 associates in our United
States and European operations. Of these associates, 28 are instructors, 15
are in courseware development and 21 are in sales, marketing and customer
support. We also use the services of outside contract instructors to teach
some of our curriculum.
None of our associates is represented by a labor organization. We consider
our relations with our associates and outside contract instructors to be
satisfactory.
Regulations
All the jurisdictions in which we operate regulate and license certain kinds
of vocational, trade, technical or other post-secondary education. We believe
that employer-funded or reimbursed information technology training is exempt
from such requirements in most of the United States. To the extent that we
desire to participate in programs funded by government entities, we will apply
for licensing in the regulatory jurisdiction. If we were found to be in
violation of a state's licensing or other regulatory requirements, we could be
subject to civil or criminal sanctions, including monetary penalties.
We are also subject to federal, state and local regulations concerning the
environment, occupational safety and health. The Company has not experienced
significant difficulty in complying with such regulations and compliance has
not had a material impact on the Company's business or its financial results.
ITEM 2. PROPERTIES
As of September 30, 1999, the Company had entered into leases for commercial
space in the following locations:
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Square Monthly Rent
Location Footage Lease Expiration
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Santa Ana, CA.................................. 7,378 $ 9,248 July 2002
Jacksonville, FL............................... 6,191 $ 6,325 January 2000
Austin, TX..................................... 10,253 $15,348 July 2003
Dallas, TX..................................... 5,022 $ 8,082 January 2002
Oak Brook, IL.................................. 200 $ 1,730 November 1999
Vienna, VA..................................... 3,497 $ 5,732 November 2001
Chapel Hill, NC................................ 3,853 $ 5,934 April 2002
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ITEM 3. LEGAL PROCEEDINGS
The Company and certain of its present and former officers and/or directors
are defendants in three "class action" lawsuits. On April 20, 1998, an initial
class action complaint was filed against Prosoft in the case entitled
Robertson v. Prosoft I-Net Solutions, Inc., et al., Orange County (California)
Superior Court Case No. 793247. On April 24, 1998, a second class action
complaint containing essentially identical allegations was filed in the case
entitled Alvarado v. Prosoft I-Net Solutions, Inc., et al, Orange County
Superior Court Case No. 793468. Finally, a third class action complaint was
filed on June 5, 1998, in the case entitled Calhoun v. Prosoft I-Net
Solutions, Inc., et al, Orange County Superior Court Case No. 795190. The
three complaints purport to establish a class of shareholders who purchased
Prosoft stock between July 21, 1997 and April 13, 1998. By stipulation of
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the parties, Calhoun and Alvarado have been consolidated with Robertson, lead
counsel has been appointed, and plaintiffs have filed a consolidated amended
complaint. 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. On September 24, 1999 a Preliminary Settlement was
accepted by the Orange County Superior Court and a notice has been sent to
that effect to all shareholders in the claim. The Court has currently set a
final hearing on the settlement for November 16, 1999. The settlement would
have no future impact on the financial statements because the Company's
insurance carrier has agreed to pay for the cost of the settlement less a
deductible that the Company made a reserve for in fiscal 1998.
The Company is also engaged in litigation filed in Jackson County (Michigan)
Circuit Court on April 22, 1998. In the case Frank J. DiSanto v. Prosoft I-Net
Solutions, Inc., Jackson County Circuit Court Case No. 98-87738-CK,
plaintiff's complaint alleges misrepresentation in connection with a
confidential offering memorandum, pursuant to which plaintiff purchased
$600,000 worth of stock. Plaintiff is seeking rescission of the stock
purchase, interest, attorney fees and other unspecified damages. The Company
has filed an Answer and Affirmative Defenses denying liability. On February
11, 1999 the Company asked the court to dismiss the case. The Court gave the
defendant the opportunity to file an amended complaint which it did on March
17, 1999. The Company intends to file another motion to dismiss certain
aspects of the amended lawsuit in October 1999. The Company believes that it
has meritorious defenses to the plaintiffs' claims, and it intends to defend
itself vigorously in this lawsuit.
Parties related to Frank J. DiSanto filed an identical complaint to the
DiSanto amended complaint in Jackson County (Michigan) Circuit Court on March
11, 1999. In the case The Free Methodist Foundation, et al. v.
ProsoftTraining.com, Jackson County Circuit Court Case No. 99-92817 CK,
plaintiff's complaint alleges, among other things, violation of the "blue sky"
securities laws of the State of Michigan in connection with their purchase of
stock in a private placement in March 1997. The defendant is seeking
rescission of their stock purchase of approximately $2,700,000, interest,
attorney's fees and other unspecified damages. The lawsuit was removed to the
U.S. District Court for the Eastern District of Michigan as Case No. 99-CV-
60239-AA. The Company filed a motion to dismiss certain aspects of the amended
lawsuit on October 27, 1999. The Company believes that it has meritorious
defenses to the plaintiffs' claims, and it intends to defend itself vigorously
in this lawsuit.
The Company and certain of its former officers and predecessor entity(s),
among others, are defendants to a lawsuit currently pending before the
Superior Court for the State of California, County of Los Angeles as Case No.
BC194941 entitled Fred Kassner and Brent Jay v. Prosoft I-Net Solutions, Inc.,
et al. The Company believes the Lawsuit was originally filed July 27, 1998;
the First Amended Complaint in the Lawsuit was filed on September 30, 1998.
Plaintiffs allege in the First Amended Complaint, among other things, that the
Company participated in a conspiratorial scheme to breach fiduciary duties
owed by others to the plaintiffs, to engage in unfair competition and to
defraud the plaintiffs. The plaintiffs seek compensatory damages, disgorgement
of profits, punitive damages, and attorneys' fees, as well as other relief.
The court dismissed the First Amended Complaint whereupon a Second Amended
Complaint was filed on June 8, 1999. As before, the Second Amended Complaint
was, on September 8, 1999, dismissed in its entirety. On September 20, 1999,
plaintiffs filed a Third Amended Complaint. Another motion to dismiss
(demurrer) has been filed, which the Company expects will be granted. The
Company believes it has meritorious defenses to the plaintiffs' claims, and it
intends to defend itself vigorously in the Lawsuit.
Separately, the Company is also the defendant in several claims and lawsuits
arising out of the ordinary course of business, whose outcomes cannot be
determined yet. Management believes that any liability the Company may incur
as a result of these suits, will not materially affect the Company's financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock currently trades on the NASDAQ SmallCap Market,
under the trading symbol of "POSO." The following table sets forth for each
quarter during fiscal years 1999 and 1998 the high and low bid quotations for
the Common Stock as reported by NASDAQ.
<TABLE>
<CAPTION>
Quarter Low High
------- ------ ------
<S> <C> <C>
May 1, 1999 - July 31, 1999................................. $ 2.06 $ 3.88
February 1, 1999 - April 30, 1999........................... $ 2.25 $ 4.75
November 1, 1998 - January 31, 1999......................... $ 1.25 $ 5.00
August 1, 1998 - October 31, 1998........................... $ 1.00 $ 5.38
May 1, 1998 - July 31, 1998................................. $ 3.88 $ 8.00
February 1, 1998 - April 30, 1998........................... $ 3.50 $ 9.50
November 1, 1997 - January 31, 1998......................... $ 6.50 $14.75
August 1, 1997 - October 31, 1997........................... $10.00 $17.25
</TABLE>
On October 1, 1999, the Company had approximately 2,129 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>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Proprietorship
Company February 1,
Company Company Company December 6, 1995 (date of
Fiscal Year Fiscal Year Fiscal Year 1995 to inception) to
Ended Ended Ended July 31, December 31,
July 31, 1999 July 31, 1998 July 31, 1997 1996 1995
------------- ------------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Revenue................. $ 8,716,016 $ 8,836,685 $ 3,483,140 $ 907,772 $ 77,477
Cost of services........ 9,071,871 13,685,680 10,197,373 698,725 60,526
------------ ------------ ------------ ---------- ---------
Gross profit (loss)..... (355,855) (4,848,995) (6,714,233) 209,047 16,951
Operating expenses:
Sales and marketing..... 1,613,182 3,962,534 4,918,942 426,221 44,769
General and
administrative......... 5,509,102 7,959,767 9,219,521 2,788,988 556,382
Restructuring charge.... 3,723,148 -- -- --
------------ ------------ ------------ ---------- ---------
Loss from operations.... (11,201,287) (16,771,296) (20,852,696) (3,006,162) (584,200)
Interest income
(expense).............. (405,648) 246,173 201,423 (67,961) (20,126)
------------ ------------ ------------ ---------- ---------
Net loss................ $(11,606,935) $(16,525,123) $(20,651,273) (3,074,123) (604,326)
============ ============ ============ ========== =========
Basic loss per share.... $ (.90) $ (1.48) $ (2.48) $ (0.61) --
============ ============ ============ ========== =========
Shares used in computing
basic loss per share... 12,845,182 11,143,166 8,312,911 5,011,781 --
============ ============ ============ ========== =========
<CAPTION>
At
At July 31, At July 31, At July 31, At July 31, December 31,
1999 1998 1997 1996 1995
------------- ------------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Working capital
(deficiency)........... $ (632,973) $ 3,334,066 $ 9,529,717 $6,764,828 $(561,885)
Total assets............ 7,634,376 12,524,021 20,793,677 8,997,490 765,990
Short-term debt......... 918,680 1,465,159 1,960,221 437,532 308,671
Long-term debt.......... 2,840,058 559,205 1,519,965 7,694,729 (194,473)
Stockholders' equity.... 472,271 6,716,364 13,049,062
</TABLE>
- --------
(1) Certain reclassifications were made in 1996, 1997 and 1998 to conform with
the presentation in 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and the accompanying notes. It includes certain forward-
looking statements. Actual results could differ materially and numerous
factors may affect future results, liquidity and capital resources. These
factors include softness in the general economic environment, the Company's
limited operating history, uncertainty of a rapidly evolving market, future
capital requirements and uncertainty of future funding, the need to respond to
rapid technological change and a highly competitive market.
Development of Business
ProsoftTraining.com, formerly Prosoft I-Net Solutions, Inc., was founded in
1995 as a proprietorship that delivered training in vocational and advanced
technical subjects. After completing a private placement of stock in March
1997, the Company embarked on a strategy to build a nationwide network of
training centers to teach technical skills for the emerging Internet market.
Overhead costs associated with the "bricks and mortar" network significantly
outpaced revenues. In fiscal year 1999, the Company closed the training center
network and focused exclusively on selling its educational programs and
instructional services to the technology training industry.
11
<PAGE>
Results of Operations
Comparison of Fiscal Years Ended July 31, 1999 and July 31, 1998
Revenues
Revenues for the year ended July 31, 1999 were $8,716,016, compared with
$8,836,685 for the year ended July 31, 1998, a decrease of $120,669. This
decrease reflects a change in the distribution strategy of the Company from
retail to a wholesale model. Revenues in fiscal year 1999 came from instructor
rental, courseware licensing, textbook sales, Prosoft Certified Training
Center (PCTC) fees and certification testing. In fiscal 1998, revenues came
from student fees, and courseware licensing.
Cost of Services
Cost of services for the year ended July 31, 1999 were $9,071,871, compared
with $13,685,680 for the year ended July 31, 1998, a decrease of $4,613,809 or
34%. The reduction in costs was primarily related to a decrease of
instructors, classroom equipment and training facilities cost. Training
facilities went from 31 at July 31, 1998 to zero at July 31, 1999 and
instructor headcount decreased by 15 during that period.
Sales and Marketing
Sales and marketing expenses for the year ended July 31, 1999 were
$1,613,182, compared with $3,962,534 for the year ended July 31, 1998, a
decrease of $2,349,352 or 59%. The decrease reflects the elimination of the
Company's public class schedule and direct mail and sales staff associated
with that distribution method.
General and Administrative
General and administrative expenses for the year ended July 31, 1999 were
$5,509,102, compared with $7,959,767 for the year ended July 31, 1998, a
decrease of $2,450,665 or 31%. The decrease is primarily due to savings from
headcount reductions and cost control initiatives.
Restructuring Charge
A restructuring charge of $3,723,148 was recorded in the year ended July 31,
1999. The restructuring consisted of the following: employee termination and
severance costs, $284,600; fixed asset write-downs, $1,104,452; and leased
facilities, equipment and other termination costs, $2,334,096. Of the total
$3,723,148 restructuring charge, $2,493,123 was settled in the fiscal year and
$1,230,025 remains in accrued restructuring costs. The unsettled amounts may
change when final payments are made. The Company anticipates that the
remaining restructuring actions will be completed by the end of fiscal 2000.
Net Interest Income (Expense)
Net interest expense for the year ended July 31, 1999 was $405,648, compared
to net interest income of $246,173 for the year ended July 31, 1998, a
decrease of $651,821. Interest expense, which consists principally of interest
on the convertible debentures, is offset by interest earned on cash balances.
The increase in net interest expense was a result of smaller cash balances and
the convertible debenture issued in the second quarter of fiscal year 1999.
Only half of the convertible debenture interest must be paid in cash.
Net Loss
Net loss for the year ended July 31, 1999, was $11,606,935, compared to
$16,525,123 for the year ended July 31, 1998, a decrease of $4,918,188 or 30%.
The decrease in the net loss was primarily due to our change in distribution
strategy from retail to a wholesale model, reduction in employee headcount and
cost control initiatives.
12
<PAGE>
Comparison of Fiscal Years Ended July 31, 1998 and July 31, 1997
Revenues
Revenues for the year ended July 31, 1998, were $8,836,685, compared with
$3,483,140 for the year ended July 31, 1997. The increase in revenues reflects
a higher level of enrollment in the Company's class offerings and increased
sales of courseware through license agreements.
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 year ended July 31, 1998, was
$13,685,680, compared with $10,197,373 for the year ended July 31, 1997. The
increase is primarily due to fiscal year 1998 being the Company's first full
year of operation as a national training company. Fiscal year 1998 had an
increased number of course events, and a larger course library.
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 expenses for the year ended July 31, 1998, were $3,962,534, compared
with $4,918,942 for the year ended July 31, 1997. The decrease in sales and
marketing expenses is the result of a focused marketing and sales effort that
yielded reduced expenditures for advertising and travel which more than offset
increases in sales commissions. Marketing expenses did increase in the last
two quarters of the fiscal year as a direct result of the Company's attempt to
sell more seats in its training centers. This program has been abandoned for
fiscal year 1999.
General and Administrative
General and administrative expenses for the year ended July 31, 1998, were
$7,959,767, compared to $9,219,521 for the year ended July 31, 1997. General
and administrative expenses decreased as a result of a reduction in the number
of employees, a reduction in the use of outside services, and lower
recruitment and relocation expenses.
Interest
Net interest income for the year ended July 31, 1998, was $246,173, compared
to $201,423 for the year ended July 31, 1997. Interest expense, which consists
principally of interest paid on capital leases, increased for the year ended
July 31, 1998, due to an increase in the amount of equipment financed under
capital leases. However, this increase was more than offset by interest earned
from higher cash balances generated by the proceeds from private placement
offerings completed in 1997.
Net Loss
Net loss for the year ended July 31, 1998, was $16,525,123, compared to
$20,651,273 for the year ended July 31, 1997. The decrease in the net loss was
the result of increased revenues through a larger number of students and
classes taking place throughout the year, the sale of licenses for courseware
developed by the Company, and a reduction in both sales and marketing and
general and administrative expenses.
Liquidity and Capital Resources
Since inception, we have financed our operations and capital expenditures
primarily through private placement of common stock, the sale of convertible
debentures and, to a lesser extent, from revenues generated from operations.
At July 31, 1999, we had $1.2 million in cash and cash equivalents.
13
<PAGE>
Net cash used in operating activities decreased $9,809,831 or 62% from
$15,883,008 for the fiscal year ended July 31, 1998 to $6,073,177 for the
fiscal year ended July 31, 1999. The decrease in net cash used in operating
activities can be attributed to the decrease in net loss.
Net cash used in investing activities decreased $1,736,183 or 98% from
$1,766,410 for the fiscal year ended July 31, 1998 to $30,227 for the fiscal
year ended July 31, 1999. The decrease in net cash used in investing
activities resulted primarily from collection of amounts due from officers,
insignificant purchases of property and equipment and a reduction in business
acquisitions.
Net cash provided by financing activities decreased $4,113,165 or 51% from
$8,048,748 for the fiscal year ended July 31, 1998 to $3,935,583 for the
fiscal year ended July 31, 1999. The decrease in net cash provided by
financing activities resulted primarily from fewer sales of the Company's
common stock, offset by the proceeds from the sale of approximately $3 million
of convertible debentures.
In November of 1998, the Company entered into an Accounts Receivable Line of
Credit agreement with the Silicon Valley Bank, whereby up to 80% of the
accounts receivable can be advanced up to $3,500,000. As of July 31, 1999,
there have been no borrowings on this line of credit. In November 1998, the
Company issued approximately $700,000 in common stock and $3,200,000 in the
form of 13% convertible promissory notes with detachable warrants. The
convertible debt has a five year maturity with interest payable quarterly.
We currently expect that cash on hand and funds from operations, together
with our line of credit with the Silicon Valley Bank for a maximum of
$3,500,000, will be sufficient to cover our reasonably foreseeable working
capital, capital expenditure and debt service requirements for the next 12
months. We cannot be certain that assumed levels of revenues and expenses will
prove to be accurate. We may seek additional funding through public or private
financing or other arrangements prior to such time. If funding is insufficient
at any time in the future, we may be unable to develop or enhance our products
or services, take advantage of business opportunities or respond to
competitive pressures, any of which could have a negative impact on our
business, operating results and financial condition.
Year 2000 Issue Risks
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. We rely on our systems,
applications and devices, including financial systems, registration systems,
embedded computer chips, networks and telecommunications equipment.
We completed our Year 2000 assessment and determined our financial system
needed to be updated at an expected cost of less than $3,000. This update was
completed in fiscal 1999. We have received assurances from our other software
vendors that their systems are Year 2000 compliant. In addition, we have
conducted an inventory, review and assessment of our personal computers,
networks and servers and desktop software applications to determine whether
they support Year 2000 date codes and we believe that all are Year 2000
compliant. In the event of an unexpected failure in one of our systems, our
employees would be able to continue operations on a manual basis until such
systems have been restored to full operating capacity. We estimate that the
total cost of our Year 2000 compliance will not be significant.
We have contacted our key vendors and service suppliers to determine the
extent to which we are vulnerable to their failure to address the Year 2000
problem. We have received verbal assurances from these key suppliers that
their systems are Year 2000 compliant. Although we do not believe our
operations will be significantly disrupted even if third parties with whom we
have relationships are not Year 2000 compliant, we cannot guarantee that any
Year 2000 compliance problems of our suppliers will not negatively affect our
financial performance. If our key suppliers are unable to provide us
sufficient quantities of materials or goods as a result of their failure to be
Year 2000 compliant, we believe that we can obtain adequate supplies of
materials and
14
<PAGE>
goods at comparable prices from other sources. Because uncertainty exists
concerning the potential costs and effects associated with any Year 2000
compliance, we intend to continue to make efforts to ensure that third parties
with whom we have relationships are Year 2000 compliant.
The Year 2000 problem could also have an effect on our customers. If
customers delay or forego purchasing our products based upon Year 2000 related
issues, it could affect our operating results. Based upon our evaluation of
our current information, we do not believe such an occurrence is likely.
However, we cannot control the Year 2000 readiness of third parties and such a
risk is possible.
Additional Factors That May Affect Results of Operations
The discussions in this Form 10-K concerning future financing needs, changes
in business strategy, future profitability, and factors affecting liquidity
contain forward-looking statements. Although management believes that these
statements are reasonable in view of the facts available to it, no assurance
can be given that all of these statements will prove to be accurate. Numerous
factors could have a material effect upon whether these projections could be
realized or whether these trends will continue. Among these factors are those
set forth in the following section, as well as those discussed elsewhere
herein.
Expectation of Continued Losses
We have a limited operating history, particularly with the new distribution
strategy, which makes it difficult to predict our future operating results. In
addition, we do not expect profitability until sometime during fiscal 2000. We
have incurred net losses of approximately $52 million from our inception in
December 5, 1995, through July 31, 1999. For the fiscal year ended July 31,
1999, we incurred a net loss of $11,606,935, which included a restructuring
charge of $3,723,148. Our ability to generate significant revenues in the
future is subject to uncertainty. In order to achieve profitability, we must
increase our revenues. We cannot assure you that we will be able to increase
revenues or achieve profitability.
Uncertainty of Future Capital Requirements
Since our inception, we have been dependent on outside financing to fund our
operations and growth. We have raised approximately $47 million from private
placements since our inception and incurred losses of approximately $52
million. We began experiencing revenue growth in the last two quarters of the
fiscal year ended July 31, 1999 as a result of the implementation of the new
business strategy. This shift in our business strategy has resulted in a
reduction in overhead expenses and, if revenues continue to grow as
demonstrated in the third and fourth quarters of fiscal 1999, we hope to reach
profitability in fiscal 2000. We currently expect that cash on hand and funds
from operations, together with our line of credit with the Silicon Valley Bank
for a maximum of $3.5 million, will be sufficient to cover our minimum
foreseeable working capital, capital expenditure and debt service requirements
for the next 12 months. However, if we do not achieve profitability and
generate positive cash flow as anticipated, our ability to continue as a going
concern will be jeopardized unless additional outside financing can be
obtained.
Uncertainty of Future Funding
If we do not achieve profitability and generate positive cash flow as
anticipated, we may need additional outside financing. Even if we do achieve
profitability and positive cash flow, we may need outside financing to fund
further growth of our business. We do not know at this time when we may need
additional funds, and we cannot be certain that if we do need additional funds
in the future we will be able to obtain them on terms satisfactory to us, if
at all. If we are unable to raise additional funds when necessary, we may have
to reduce planned capital expenditures, scale back our operations or growth,
or enter into financing arrangements on terms which we would not otherwise
accept.
Intense Competition in Training Market
We face substantial competition in the training market. Competition in the
Internet/intranet training market is intense, rapidly changing and affected by
the rapidly evolving nature of the Internet/intranet industry. A
15
<PAGE>
number of other companies offer products and services similar to ours, and
additional new competitors may emerge in the near future. Many of our existing
competitors have substantially greater capital resources, technical expertise,
marketing experience, research and development status, established customers
and facilities than we do. As a result, there is a risk that we will not be
able to successfully compete with existing and future competitors which would
adversely affect our financial performance.
Need to Respond to Rapid Technological Changes
In our industry, technology advances rapidly and industry standards change
frequently. To remain competitive and achieve profitability, we must
continually enhance our existing products and services and promptly introduce
new products, services, and technologies to meet the changing demands of our
customers. Our failure to respond to technological changes quickly will
adversely affect our financial performance.
Effect of Market Overhang on Stock Price
Future sales of our Common Stock could depress the market price of our
Common Stock. In addition, the perception that such sales will occur could
also adversely affect the price. As long as certain registration statements
which have been filed with the SEC remain effective, the selling stockholders
under those registration statements may sell approximately 8,000,000 shares
(or approximately 47% of the shares of Common Stock currently outstanding on a
fully-diluted basis). These shares were privately issued and are otherwise
subject to restrictions on resale under securities laws. Any such sales, or
even the market perception that such sales could be made, may depress the
price of the Common Stock. The majority of the shares registered are already
saleable under rule 144.
Volatility of Stock Price
Our Common Stock has experienced substantial price volatility and such
volatility may continue to occur in the future. Additionally, the stock market
from time to time experiences significant price and volume fluctuations that
are unrelated to the operating performance of particular companies. These
broad market fluctuations may also adversely affect the market price of our
Common Stock. In addition to such broad market fluctuations, factors such as
the following may have a significant effect on the market price of our Common
Stock:
. fluctuations in our operating results
. the perception by others of our ability to obtain any necessary new
financing
. limited trading market for our Common Stock
. announcements of new ventures or products and services by us or our
competitors
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rates
The Company's credit arrangements bear interest at fixed rates and do not
expose it to fluctuations in interest rates. Based upon the interest rates and
borrowings at July 31, 1999, a 10% increase in interest rates would not
materially affect the Company's financial position, results of operations or
cash flows.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PROSOFTTRAINING.COM AND PREDECESSOR
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<S> <C>
Reports of Independent Auditors
Grant Thornton LLP....................................................... 18
Ernst & Young LLP........................................................ 19
Financial Statements of ProsoftTraining.com
Consolidated Balance Sheets at July 31, 1999 and 1998.................... 20
Consolidated Statements of Operations for the years ended July 31, 1999,
1998 and 1997........................................................... 21
Consolidated Statement of Stockholders' Equity for the years ended July
31, 1999, 1998 and 1997................................................. 22
Consolidated Statements of Cash Flows for the years ended July 31, 1999,
1998 and 1997........................................................... 23
Notes to Consolidated Financial Statements............................... 24
Schedule
Schedule II--Valuation and Qualifying Accounts........................... 35
</TABLE>
17
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
ProsoftTraining.com.
We have audited the accompanying consolidated balance sheets of
ProsoftTraining.com (formerly Prosoft I-Net Solutions, Inc.) and subsidiaries
as of July 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years then ended.
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 audits.
We conducted our audits 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 audits provide 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
ProsoftTraining.com. as of July 31, 1999 and 1998 and the consolidated results
of its operations and its consolidated cash flows for the years then ended, in
conformity with generally accepted accounting principles.
We have also audited Schedule II for the years ended July 31, 1999 and 1998.
In our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
/s/ Grant Thornton LLP
Dallas, Texas
September 22, 1999
18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Prosoft Training.com
We have audited the consolidated balance sheet of ProsoftTraining.com
(formerly known as Prosoft I-Net Solutions, Inc.) as of July 31, 1997 (not
presented separately herein), and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year ended July 31,
1997. 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
ProsoftTraining.com (formerly known as Prosoft I-Net Solutions, Inc.) at
July 31, 1997, and the consolidated results of its operations and its cash
flows for the year ended July 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Orange County, California
October 24, 1997
19
<PAGE>
PROSOFTTRAINING.COM AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 1,152,715 $ 3,311,014
Acounts receivable, less allowances of $199,362 and
$329,802 at July 31, 1999 and 1998, respectively.. 1,993,827 2,224,638
Notes receivable from officers/stockholders........ 29,900 422,750
Prepaid expenses and other current assets.......... 319,943 567,596
------------ ------------
Total current assets........................... 3,496,385 6,525,998
Property and equipment, net........................ 334,001 3,099,184
Goodwill, net of accumulated amortization of
$548,638 and $165,283 at July 31, 1999 and 1998,
respectively...................................... 2,176,453 1,977,477
License agreements, net of accumulated amortization
of $283,891 and $83,760 at July 31, 1999 and 1998,
respectively...................................... 1,512,819 921,362
Other assets....................................... 114,718 --
------------ ------------
Total assets................................... $ 7,634,376 $ 12,524,021
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 1,415,331 $ 1,054,866
Accrued payroll and related expenses............... 565,322 648,802
Deferred revenue................................... -- 23,105
Current portion of capital lease obligations....... 918,680 1,465,159
Accrued restructure costs.......................... 1,230,025 --
------------ ------------
Total current liabilities...................... 4,129,358 3,191,932
Obligations under capital leases, net of current
portion........................................... 847,978 559,205
Convertible debentures............................. 1,992,080 --
Other.............................................. 136,040
------------ ------------
Total liabilities.............................. 7,105,456 3,751,137
------------ ------------
Commitments and contingencies...................... -- --
Common stock subject to redemption................. 56,649 2,056,520
Stockholders' equity:
Common shares, par value $.001 per share:
Authorized shares: 50,000,000; Outstanding:
14,297,133 and 11,502,079 shares, respectively.... 14,297 11,502
Additional paid-in capital......................... 52,380,454 47,030,129
Accumulated deficit................................ (51,857,454) (40,250,519)
Accumulated other comprehensive income............. 9,722 --
Less common stock in treasury, at cost: 11,912
shares............................................ (74,748) (74,748)
------------ ------------
Total stockholders' equity..................... 472,271 6,716,364
------------ ------------
Total liabilities and stockholders' equity..... $ 7,634,376 $ 12,524,021
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE>
PROSOFTTRAINING.COM AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Years Ended July 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues............................ $ 8,716,016 $ 8,836,685 $ 3,483,140
Costs and expenses:
Cost of services.................. 9,071,871 13,685,680 10,197,373
Sales and marketing............... 1,613,182 3,962,534 4,918,942
General and administrative........ 5,509,102 7,959,767 9,219,521
Restructuring charge.............. 3,723,148 -- --
------------ ------------ ------------
Total costs and expenses........ 19,917,303 25,607,981 24,335,836
------------ ------------ ------------
Loss from operations................ (11,201,287) (16,771,296) (20,852,696)
Interest income..................... 77,985 246,173 201,423
Interest expense.................... (483,633) -- --
------------ ------------ ------------
Net loss............................ $(11,606,935) $(16,525,123) $(20,651,273)
============ ============ ============
Basic and diluted net loss per
share.............................. $ (0.90) $ (1.48) $ (2.48)
============ ============ ============
Weighted average shares
outstanding........................ 12,845,182 11,143,166 8,312,911
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE>
PROSOFTTRAINING.COM AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Treasury Stock Other
------------------- Paid-In ----------------- Accumulated Comprehensive
Shares Amount Capital Shares Amount Deficit Income Total
---------- ------- ----------- ------- -------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at August 1,
1996................... 7,336,404 $ 7,336 $10,771,016 -- $ -- $(3,074,123) $ -- $ 7,704,229
Issuance of common stock
for cash, net of
issuance costs of
$1,628,375............. 2,502,922 2,503 25,669,052 -- -- -- -- 25,671,555
Exercise of warrants.... 111,807 112 140,325 -- -- -- -- 140,437
Exercise of stock
options................ 168,518 169 183,945 -- -- -- -- 184,114
Net loss................ -- -- -- -- -- (20,651,273) -- (20,651,273)
---------- ------- ----------- ------- -------- ------------ ------ ------------
Balances at July 31,
1997................... 10,119,651 10,120 36,764,338 -- -- (23,725,396) -- 13,049,062
Issuance of common stock
for cash............... 803,638 804 8,437,395 -- -- -- -- 8,438,199
Issuance of common stock
for services........... 12,750 13 77,148 -- -- -- -- 77,161
Acquisition of
businesses............. 221,537 222 2,199,778 -- -- -- -- 2,200,000
Less redemption price of
stock issued........... (221,537) (222) (2,131,046) -- -- -- -- (2,131,268)
Purchase of common stock
subject to redemption.. 11,912 12 74,736 (11,912) (74,748) -- -- --
Exercise of stock
options................ 472,463 472 921,443 -- -- -- -- 921,915
Exercise of warrants.... 81,665 81 686,337 -- -- -- -- 686,418
Net loss................ -- -- -- -- -- (16,525,123) -- (16,525,123)
---------- ------- ----------- ------- -------- ------------ ------ ------------
Balances at July 31,
1998................... 11,502,079 11,502 47,030,129 (11,912) (74,748) (40,250,519) -- 6,716,364
-- -- -- -- -- -- -- --
Issuance of stock
warrants............... -- -- 1,124,000 -- -- -- -- 1,124,000
Common stock issued for
debenture interest..... 38,113 38 134,458 -- -- -- -- 134,496
Conversion of debentures
and warrants to stock.. 491,250 492 538,084 -- -- -- -- 538,576
Issuance of common stock
for cash, net of
issuance costs of
$113,439............... 678,000 678 563,882 -- -- -- -- 564,560
Acquisition of
business............... 311,000 311 567,189 -- -- -- -- 567,500
Issuance of common stock
for services 20,000 20 19,980 20,000
Issuance of common stock
in satisfaction of put
provisions............. 771,631 771 1,969,100 -- -- -- -- 1,969,871
Exercise of stock
options, warrants and
other transactions .... 485,060 485 433,632 -- -- -- -- 434,117
Comprehensive income:
Foreign currency
translation
adjustment............ -- -- -- -- -- -- 9,722 9,722
Net loss............... -- -- -- -- -- (11,606,935) -- (11,606,935)
Total comprehensive
loss................... -- -- -- -- -- -- -- (11,597,213)
---------- ------- ----------- ------- -------- ------------ ------ ------------
Balances at July 31,
1999................... 14,297,133 $14,297 $52,380,454 (11,912) $(74,748) $(51,857,454) $9,722 $ 472,271
========== ======= =========== ======= ======== ============ ====== ============
</TABLE>
The accompanying notes are an integral part of this statement.
22
<PAGE>
PROSOFTTRAINING.COM AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended July 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Operating Activities:
Net loss............................ $(11,606,935) $(16,525,123) $(20,651,273)
Adjustments to reconcile net loss to
cash used in Operating activities:
Depreciation and amortization..... 2,435,131 3,353,424 1,235,129
Operating expenses paid in common
stock............................ 20,000 77,161 --
Restructuring charge--non cash.... 1,456,465 -- --
Disposition of property and
equipment........................ 48,805 -- --
Accretion of debt discount........ 144,906 -- --
Debenture interest paid in common
stock............................ 134,496 -- --
Changes in operating assets and
liabilities:
Accounts receivables............ 230,811 (499,741) (880,360)
Prepaid expenses and other
current assets................. (65,331) 312,275 (566,456)
Accounts payable ............... 360,465 (2,258,493) 2,908,275
Accrued liabilities............. (438,910) (297,657) 836,307
Accrued restructure costs....... 1,230,025 -- --
Deferred revenue................ (23,105) (44,854) 67,959
------------ ------------ ------------
Net cash used in operating
activities................... (6,073,177) (15,883,008) (17,050,419)
Investing Activities:
Acquisitions, net of cash acquired.. (330,000) (997,231) --
Purchases of property and
equipment.......................... (26,477) (664,299) (1,214,914)
Decrease (increase) in notes
receivable from
officers/stockholders.............. 326,250 (104,880) (222,770)
------------ ------------ ------------
Net cash used in investing
activities................... (30,227) (1,766,410) (1,437,684)
Financing Activities:
Issuance of common stock............ 1,268,427 10,046,533 25,996,106
Other............................... 136,040 -- --
Purchase of treasury stock.......... -- (74,748) --
Principal payments on debt and
capital leases..................... (528,884) (1,923,037) (1,062,779)
Proceeds from convertible
debentures......................... 3,060,000 -- --
------------ ------------ ------------
Net cash provided by financing
activities................... 3,935,583 8,048,748 24,933,327
Effects of exchange rates on cash... 9,522 -- --
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents................... (2,158,299) (9,600,670) 6,445,224
Cash and cash equivalents at
beginning of year.................. 3,311,014 12,911,684 6,466,460
Cash and cash equivalents at end of
year............................... $ 1,152,715 $ 3,311,014 $ 12,911,684
============ ============ ============
Supplementary disclosure of cash
paid during the year for:
Interest.......................... $ 243,836 $ 340,166 $ 171,349
============ ============ ============
Income taxes...................... $ -- $ -- $ 4,000
============ ============ ============
Supplementary disclosure of non-cash
financing activities:
Equipment acquired under capital
leases............................. $ -- $ 417,215 $ 3,691,693
============ ============ ============
Acquisition of businesses
Assets acquired................... $ 1,403,709 $ 3,293,749 $ --
Liabilities assumed............... (506,209) (96,518) --
Common stock issued............... (567,500) (2,200,000) --
------------ ------------ ------------
Net cash paid for
acquisitions................. $ 330,000 $ 997,231 $ --
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE>
PROSOFTTRAINING.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Business
ProsoftTraining.com is an Internet skills solutions company providing
comprehensive Internet skills curriculum, vendor-neutral Internet skills
certification programs and instructors to deliver the curriculum and
certification to customers in the United States and Europe. The Certified
Internet Webmaster (CIW) program creates the professional skills required to
develop and implement e-business solutions for the Internet age.
Instructor-led Internet skill courses range from one-day end-user workshops
to ten-day certification programs. Courseware is sold to Prosoft Certified
Training Center (PCTC), resellers and courseware licensees.
Consolidation
The financial statements include the accounts of the Company and its wholly-
owned subsidiaries. Intercompany transactions and balances are eliminated in
consolidation.
Currency Translation
Assets and liabilities of the Company's Irish subsidiary are translated into
United States dollars at the exchange rate in effect at the close of the
period. Income statement amounts are translated at the average exchange rate
during the period. The Company presents translation adjustments as a component
of accumulated other comprehensive income within stockholders' equity.
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 Credit Risk
Financial instruments that subject the Company to credit risk consist
primarily of accounts receivable. Credit risk with respect to accounts
receivable is generally not concentrated due to the number of customers
comprising the Company's customer base and their geographic dispersion. The
Company performs ongoing credit evaluations of its customers and maintains an
allowance for potential credit losses.
Advertising Costs
The Company expenses the costs of advertising as incurred. Advertising
expenses were $90,713, $926,791, and $805,301 in fiscal 1999, 1998 and 1997,
respectively.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the asset, generally two to seven years. Leasehold improvements are
amortized over the shorter of the life of the lease or the improvement.
Goodwil and License Agreements
Goodwill and license agreements are the excess of the purchase price over
the fair value of net assets acquired in business combinations accounted for
as purchases. Goodwill and license agreements are amortized on a straight-line
basis over a period of seven years.
Accounting for Impairment of Long-lived Assets
The Company evaluates long-lived and intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amounts
may not be recoverable. Impairment is recognized when the undiscounted cash
flows estimated to be generated by those assets are less than the carrying
amounts of such assets.
24
<PAGE>
PROSOFTTRAINING.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue and Cost Recognition
The Company recognizes courseware and training revenues when the courseware
is shipped and accepted by customers and when training is provided. Cost of
developing courses is expensed as incurred.
Stock-based Compensation
The Company accounts for stock-based compensation to employees using the
intrinsic value method. Under this method, compensation cost for stock-based
compensation to employees is the excess, if any, of the quoted market price of
the stock at the grant date or other measurement date over the amount an
employee must pay to acquire the stock.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenues and expenses during the period reported. Actual
results could differ from those estimates.
Loss Per Share
The Company uses the weighted-average number of common shares outstanding
during each period to compute basic loss per common share. Diluted loss per
share is computed using the weighted-average number of common shares and
dilutive potential common shares outstanding. In fiscal years 1997, 1998 and
1999 all potential common shares were anti-dilutive.
Reclassifications
Certain reclassifications were made to the prior years' consolidated
financial statements to conform to the current year presentation.
Recent Accounting Pronouncements
Effective August 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income", which addresses the manner in which certain adjustments to
stockholders' equity are displayed in the financial statements. The adoption
of this statement did not impact the Company's consolidated financial
position, results of operations or cash flows.
2. Restructuring Charge
In the third quarter of fiscal 1999, the Company recorded a $3,723,148
charge for restructuring associated with the Company's decision to exit the
retail training business. The restructuring charge and the amount settled are
summarized as follows:
<TABLE>
<CAPTION>
Accrued at
July 31,
Charge Settled 1999
---------- ----------- ----------
<S> <C> <C> <C>
Severance and other related employee
costs.................................. $ 284,600 $ (233,781) $ 50,819
Fixed asset write downs................. 1,104,452 (1,104,452) --
Leased facilities, equipment and other
termination costs...................... 2,334,096 (1,154,890) 1,179,206
---------- ----------- ----------
$3,723,148 $(2,493,123) $1,230,025
========== =========== ==========
</TABLE>
25
<PAGE>
PROSOFTTRAINING.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company anticipates that all liabilities will be settled by the end of
fiscal 2000.
3. Acquisitions
In November 1998, the Company purchased 51% of the outstanding common stock
of International Certification Internet Institute (ICII) in exchange for
300,000 shares of the Company's common stock valued at $547,500. As part of
the January 1998 Net Guru Technologies, Inc. (Net Guru) acquisition, the
company also received 49% of ICII. However, ownership transfer was subject to
a shareholder agreement. With the purchase of the 51% of ICII, the other 49%
was also transferred to the Company. As a result of the acquisition of ICII,
which was accounted for as a purchase, the Company recorded goodwill and
license agreements of $582,332 and $791,588, respectively.
In March 1998, the Company purchased all 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. Shares issued in
connection with this purchase have been valued at $500,000. As a result of the
acquisition of The Chapel Hill Group, which was accounted for as a purchase,
goodwill of $459,996 was recorded by the Company.
In January 1998, the Company purchased all of the outstanding common stock
of Net Guru in exchange for $1,000,000 and 152,809 shares of the Company's
common stock. Shares issued in connection with this purchase have been valued
at $1,700,000. As a result of the acquisition of Net Guru, which was accounted
for as a purchase, the Company recorded goodwill and license agreements of
$1,673,764 and $1,005,122, respectively.
The operations of the acquired companies have been reflected in the
Company's financial statements since the date of acquisitions. On a pro forma
basis, the impact of the acquisitions on the Company's consolidated net loss
and net loss per share for the years ended July 31, 1999 and 1998 was not
material.
4. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
July 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Computer equipment and software....................... $ 748,089 $5,744,480
Office equipment, furniture and fixtures.............. 510,651 1,939,270
---------- ----------
1,258,740 7,683,750
Less accumulated depreciation......................... 924,739 4,584,566
---------- ----------
Property and equipment, net........................... $ 334,001 $3,099,184
========== ==========
</TABLE>
5. Debt
In November 1998, the Company issued $3,200,000 of 13% convertible
debentures. The debentures mature in November 2003 and are convertible into
the Company's common stock at $1.60 per share.
In connection with the issuance of the aforementioned debentures, the
Company issued detachable stock warrants. The value assigned to the warrants
of $1,124,000, has been reflected as debt discount and is being accreted over
the term of the debentures using the interest method.
26
<PAGE>
PROSOFTTRAINING.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In November 1998, the Company obtained a $3.5 million credit facility with a
bank, expiring November 1999 and bearing interest at 18% per annum. Available
borrowings are based on a formula of eligible accounts receivable. At July 31,
1999, there were no amounts outstanding under this credit facility.
6. Stock Options, Warrants and Put Rights on Common Stock
Stock options
The Company's 1996 Stock Option Plans provide for the granting of options to
purchase shares of the Company's common stock to employees, officers,
consultants and directors. The plans include nonstatutory options and
incentive stock options. The plans authorized the issuance of an aggregate of
3,542,500 shares of common stock. At July 31, 1999, 1,190,669 options were
available for grant under the plans. Options generally vest over three to four
years and expire no later than ten years after the date of grant.
Stock option transactions are as follows:
<TABLE>
<CAPTION>
Shares Price
--------- -----------
<S> <C> <C>
Outstanding at August 1, 1996........................ 1,693,750 $1.00-20.00
Granted............................................ 752,500 $6.75-18.00
Exercised.......................................... (168,518) $1.00- 5.00
Cancelled.......................................... (116,913) $1.00-18.00
---------
</TABLE>
<TABLE>
<CAPTION>
Weighted Average
Exercise Price
----------------
<S> <C> <C>
Outstanding at July 31, 1997.................... 2,160,819 $5.04
Granted....................................... 871,802 $6.81
Exercised..................................... (472,463) $1.95
Cancelled..................................... (441,538) $7.76
----------
Outstanding at July 31, 1998.................... 2,118,620 $4.99
Granted....................................... 2,466,923 $1.53
Exercised..................................... (254,241) $1.11
Cancelled..................................... (1,979,471) $5.15
---------- -----
Outstanding at July 31, 1999.................... 2,351,831 $1.96
========== =====
Exercisable at July 31, 1997.................... 1,487,286 $3.52
========== =====
Exercisable at July 31, 1998.................... 1,165,699 $4.41
========== =====
Exercisable at July 31, 1999.................... 1,500,294 $2.19
========== =====
</TABLE>
The following table summarizes information concerning options outstanding
and exercisable as of July 31, 1999:
<TABLE>
<CAPTION>
Options
Options outstanding exercisable
------------------------------ ------------------
Weighted
Weighted average Weighted
average remaining average
exercise contractual exercise
Range of exercise prices Number price life Number price
------------------------ --------- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
$1.00-$ 3.50............. 1,987,927 $1.32 2.68 1,136,390 $1.14
$5.00-$ 7.12............. 326,814 5.00 2.85 326,814 5.00
$9.50-$11.00............. 37,090 9.77 1.41 37,090 9.77
--------- ----- --------- -----
2,351,831 $1.96 1,500,294 $2.19
========= ===== ========= =====
</TABLE>
27
<PAGE>
PROSOFTTRAINING.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro forma information regarding net loss and net loss per share is required
by SFAS 123 for awards granted after January 31, 1995 as if the Company had
accounted for its stock-based awards to employees under the fair value method
of SFAS 123. The fair value of the Company's stock-based awards to employees
was estimated using the Black-Scholes multiple option pricing model. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, the Black-Scholes model requires the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock-based awards to employees have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock based awards
to employees.
The fair value of the Company's stock-based awards to employees was
estimated assuming no expected dividends and the following assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Weighted average expected life (years)........................... 3.00 3.00 1.00
Expected stock price volatility.................................. 0.60 0.70 0.75
Risk-free interest rate (percent)................................ 5.50 5.50 4.85
</TABLE>
For purpose of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information for the years ended July 31, 1999, 1998 and
1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net loss--actual..................... $(11,606,935) $(16,525,123) $(20,651,273)
Net loss--pro forma.................. $(13,411,641) $(18,284,022) $(22,453,127)
Net loss per share--actual........... $ (.90) $ (1.48) $ (2.48)
Net loss per share--pro forma........ $ (1.04) $ (1.64) $ (2.70)
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to
December 8, 1995, its pro forma effect will not be fully reflected until
fiscal 2000. The weighted average fair value of options granted during the
years ended July 31, 1999, 1998 and 1997 was $1.88, $3.77 and $3.89,
respectively.
Warrants
During fiscal 1997, warrants for 111,807 shares of common stock were
exercised at prices ranging from $1.00 to $5.00, and warrants for 2,476 shares
expired. During fiscal 1998, warrants for 81,664 were exercised at prices
ranging from $5.75 to $11.00. During fiscal 1999, the Company issued warrants
to purchase 1,617,500 shares of common stock to purchasers of its convertible
debentures at $1.10 per share. Warrants for 337,500 shares of common stock
were exercised at prices ranging from $1.00 to $1.10 and warrants for 4,999
shares expired. At July 31, 1999, warrants for 1,525,000 shares of common
stock, exercisable at $1.10 to $11 per share and expiring through 2008,
remained outstanding.
Put Rights on Common Stock
In connection with the fiscal 1998 acquisitions, the Company guaranteed the
value of the common stock issued in the acquisitions by granting put rights
covering 68,728 and 152,809 shares at $6.275 and $11.125 per share,
respectively. The Company is obligated through these put rights to repurchase
the shares for cash. As a result, the redemption amount has been reclassified
from permanent equity to temporary equity under the caption, "common stock
subject to redemption". During fiscal 1998, 11,912 shares have been
repurchased under these
28
<PAGE>
PROSOFTTRAINING.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
rights. During fiscal 1999, the Company issued 567,098 shares of common stock
in settlement of put rights covering 56,816 and 147,717 shares at $6.275 and
$11.125 per share, respectively. At July 31, 1999, put rights covering 5,092
shares at $11.125 per share remain outstanding.
7. Commitments
The Company leases certain facilities as well as computers and production
equipment under noncancellable lease agreements. The Company's future minimum
lease payments at July 31, 1999 under such agreements are as follows:
<TABLE>
<CAPTION>
Operating
Capital leases leases
-------------- ----------
<S> <C> <C>
2000............................................. $1,041,659 $ 681,911
2001............................................. 692,191 614,966
2002............................................. 109,585 438,217
2003............................................. 58,411 213,934
2004............................................. 58,411 27,665
2005............................................. 58,411 20,749
---------- ----------
2,018,668 $1,997,442
---------- ----------
Less amounts representing interest............... (252,010)
----------
Present value of minimum lease payments.......... 1,766,658
Less current portion............................. (918,680)
----------
Obligations under capital leases, net of current
portion......................................... $ 847,978
==========
</TABLE>
Assets held under capital leases are included in property and equipment and
had a total cost of $350,872, $5,351,689 and $4,934,474, respectively, and a
net book value of $571, $1,850,761 and $3,804,667, at July 31, 1999, 1998 and
1997, respectively.
Rent expense for the periods ended July 31, 1999, 1998, and 1997 totaled
$811,664, $1,269,779, and $930,675 respectively.
8. Contingencies
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. The three complaints purport to establish a class of
shareholders who purchased the Company's stock between July 21, 1997 and April
13, 1998. No class has been certified at this time. The complaints seek
compensatory damages, attorneys' fees, and injunctive relief, as well as other
relief. In September 1999, the court accepted a preliminary settlement and the
settlement amount is within the Company's insurance limits. A final settlement
hearing has been set for November 16, 1999.
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 outcome 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, cash flows or financial
condition.
29
<PAGE>
PROSOFTTRAINING.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Income Taxes
No federal or state income tax benefit was recognized 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 basis of assets and liabilities and their basis
for financial reporting purposes. Temporary differences which give rise to
deferred tax assets are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net operating loss carryforwards............... $ 18,601,000 $ 14,434,000
Accrued expenses............................... 579,000 113,000
Allowance for returns and for doubtful
accounts...................................... 85,000 189,000
Other.......................................... (29,000) (1,000)
------------ ------------
Total deferred tax assets.................... 19,236,000 14,735,000
Valuation allowance............................ (19,236,000) (14,735,000)
------------ ------------
Net deferred tax assets........................ $ -- $ --
============ ============
</TABLE>
Due to the uncertainties surrounding the timing of realizing the benefits of
its favorable tax attributes in future tax returns, the Company has placed a
valuation allowance against its otherwise recognizable deferred tax assets.
The valuation allowance increased by approximately $4,501,000 during the year
ended July 31, 1999 and by approximately $5,725,000 during the period ended
July 31, 1998. The increase in the valuation allowance is primarily due to the
increase in the net operating loss carryforwards.
At July 31, 1999, the Company has net operating loss carryforwards available
to offset future federal and state taxable income of approximately $49,018,000
and $21,900,000, respectively. Such carryforwards expire principally in 2011
to 2019 and 2001 to 2004, respectively. Because of the equity transactions
completed by the Company in 1996, utilization of certain net operating loss
carryforwards for federal income tax reporting purposes created prior to those
transactions will be subject to annual limitations under the change in
ownership provisions of the Tax Reform Act of 1986.
10. Liquidity
Management expects that cash on hand and funds from operations, together
with the credit facility with a Bank for maximum borrowings of $3,500,000,
will be sufficient to cover the Company's reasonably foreseeable working
capital needs, capital expenditures and debt service requirements for the next
12 months. There are no assurances that assumed levels of revenues and
expenses will prove to be accurate. If necessary, the Company may seek
additional funding through public or private financing or other arrangements
prior to such time. However, if the Company does not achieve profitability and
generate positive cash flow as anticipated, its ability to continue as a going
concern will be jeopardized unless additional outside financing can be
obtained.
30
<PAGE>
PROSOFTTRAINING.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As previously reported on a Form 8-K filed by the Company on April 13, 1998,
the Company's former auditors resigned. The Company has engaged the firm of
Grant Thornton as its principal accountant to audit its financial statements
for the fiscal years ended July 31, 1998 and July 31, 1999. Prior to the
engagement of Grant Thornton, neither the Company nor anyone acting on its
behalf consulted Grant Thornton regarding either: (i) the application of
accounting principles to a specified transaction, either completed or
proposed; or the type of audit opinion that might be rendered on the Company's
financial statements, and either a written report was provided to the Company
or oral advice was provided that Grant Thornton concluded was an important
factor considered by the Company in reaching a decision as to the accounting,
auditing or financial reporting issue; or (ii) any matter that was either the
subject of a disagreement (as defined in paragraph 304(a)(1)(iv) of Regulation
S-K of the Securities Act of 1933) or a reportable event, as described in
paragraph 304(a)(1)(v) of Regulation S-K.
31
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be included in the Company's Proxy
Statement with respect to its 1999 Annual Meeting of Stockholders to be filed
with the Commission within 120 days of July 31, 1999 and is incorporated herein
by this reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be included in the Company's Proxy
Statement with respect to its 1999 Annual Meeting of Stockholders to be filed
with the Commission within 120 days of July 31, 1999 and is incorporated herein
by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be included in the Company's Proxy
Statement with respect to its 1999 Annual Meeting of Stockholders to be filed
with the Commission within 120 days of July 31, 1999 and is incorporated herein
by this reference
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be included in the Company's Proxy
Statement with respect to its 1999 Annual Meeting of Stockholders to be filed
with the Commission within 120 days of July 31, 1999 and is incorporated herein
by this reference.
32
<PAGE>
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
a. The following documents are filed as part of this report.
1. Consolidated Financial Statements
See "Index to Consolidated Financial Statements"--Item 8.
2. Exhibits
See "Exhibit Index."
b. Reports on Form 8-K. No reports on Form 8-K were filed during the last
quarter of the fiscal year ended July 31, 1999.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Prosofttraining.com
/s/ William J. Weronick
By: _________________________________
William J. Weronick
Vice President Finance
Dated: October 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Jerrell M. Baird Chief Executive Officer October 26, 1999
______________________________________ and Chairman of the Board
Jerrell M. Baird (Principal Executive
Officer)
/s/ Uday O. Pabrai Vice Chairman and Director October 26, 1999
______________________________________
Uday O. Pabrai
/s/ William J. Weronick Vice President Finance October 26, 1999
______________________________________ (Principal Financial and
William J. Weronick Accounting Officer)
/s/ Andrew Stallman Director October 26, 1999
______________________________________
Andrew Stallman
/s/ Jeffrey G. Korn Director October 26, 1999
______________________________________
Jeffrey G. Korn
/s/ Rich Groeneweg Director October 26, 1999
______________________________________
Rich Groeneweg
/s/ J. William Fuller Director October 26, 1999
______________________________________
J. William Fuller
/s/ Charles McCusker Director October 26, 1999
______________________________________
Charles McCusker
</TABLE>
34
<PAGE>
PROSOFTTRAINING.COM AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Deductions Balance at
beginning costs and write-offs, end of
of year expenses net of recoveries year
---------- ---------- ----------------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts
Year ended July 31,
1999.................... $329,802 $197,052 $(327,492) $199,362
Year ended July 31,
1998.................... $131,182 $707,815 $(509,195) $329,802
Year ended July 31,
1997.................... -- $150,000 $ (18,818) $131,182
Allowance for returns
Year ended July 31,
1999.................... -- -- -- --
Year ended July 31,
1998.................... $375,000 $ 36,792 $(411,792) --
Year ended July 31,
1997.................... -- $375,000 -- $375,000
</TABLE>
35
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibits
------- -----------------------
<C> <S>
2 Agreement and Plan of Reorganization dated March 26, 1996 between the
Company, Pro-Soft Development Corp. and the shareholders of Pro-Soft
Development Corp. Filed as Exhibit 2 to the Company's Registration
Statement on Form S-1 (No. 333-11247) ("Registration Statement No.
333-11247") and incorporated herein by reference.
3.1 Restated Articles of Incorporation of the Company, as amended. Filed
as Exhibit 3.1 to Registration Statement No. 333-35249 and
incorporated herein by reference.
3.2 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 Pro-Soft Development Corp. 1996 Stock Option Plan. Filed as Exhibit
10.1 to Registration Statement No. 333-11247 and incorporated herein
by reference.
10.2 ProSoft I-Net Solutions, Inc. Amended 1996 Stock Option Plan. Filed as
Exhibit 10.2 to Registration Statement No. 333-35249 and incorporated
herein by reference.
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. Filed as Exhibit 10.3 to Registration Statement No.
333-11247 and incorporated herein by reference.
10.4 Form of Registration and Lock-Up Agreement dated September , 1996
between the Company and certain of the Selling Stockholders. Filed as
Exhibit 10.5 to Registration Statement No. 333-11247 and incorporated
herein by reference.
10.5 Form of Indemnification Agreement between the Company and its
Directors and Officers. Filed as Exhibit 10.13 to Registration
Statement No. 333-11247 and incorporated herein by reference.
10.6 Office Building Lease dated as of December 16, 1996 between COSCAN
California Limited Partnership and the Company. Filed as Exhibit 10 to
the Company's Report on Form 10-Q for the quarter ended January 31,
1997 and incorporated herein by reference.
10.7 Form of Subscription Agreement, entered into in 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.
10.8 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.
10.9 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.
10.10 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.
10.11 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.
10.12 Form of Subscription Agreement, entered into in November 1997 between
the Company and various investors. Filed as Exhibit 10.21 to the
Company's Registration Statement on Form S-3 (No. 333-35249)
and incorporated herein by reference.
10.13 Registration Rights Agreement dated as of November 12, 1997 among the
Company and various investors. Filed as Exhibit 10.22 to the Company's
Registration Statement on Form S-3 (No. 333-35249)
and incorporated herein by reference.
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibits
------- -----------------------
<C> <S>
10.14 Stock Purchase Agreement dated as of January 1, 1998 by and between
Prosoft I-Net Solutions, Inc. and Uday O. Pabrai with respect to all
outstanding capital stock of Net Guru Technologies, Inc. Filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K dated January
1, 1998 and incorporated herein by reference.
10.15 Employment Agreement dated January 1, 1998 between Prosoft I-Net
Solutions, Inc. and Uday O. Pabrai. Filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K dated January 1, 1998 and
incorporated herein by reference.
10.16 Promissory Note dated June 18, 1998, made by Uday Pabrai in favor of
the Company. Filed as Exhibit 10.16 to the Company's Annual Report on
Form 10-K for the year ending July 31, 1998 ("1998 Form 10-K") and
incorporated herein by reference.
10.17 Consulting Agreement dated April 30, 1998, between Investment
Transaction, LLC, and the Company. Filed as Exhibit 10.17 to the
Company's 1998 Form 10-K and incorporated herein by reference.
10.18 Form of Stock Purchase Agreement dated as of November 18, 1998 by and
among the Company and various investors. Filed as Exhibit 10.18 to
Registration Statement No. 333-35249 and incorporated herein by
reference.
10.19 Note and Warrant Purchase Agreement dated as of December 2, 1998 by
and among the Company and various investors. Filed as Exhibit 10.19 to
Registration Statement No. 333-35249 and incorporated herein by
reference.
10.20 Registration Rights Agreement dated as of December 2, 1998 among the
Company and various investors. Filed as Exhibit 10.20 to Registration
Statement No. 333-35249 and incorporated herein by reference.
10.21 Accounts Receivable Purchase Agreement dated as of November 6, 1998 by
and between the Company and Silicon Valley Financial Services (a
division of Silicon Valley Bank). Filed as exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
January 31, 1999 and incorporated herein by reference.
10.22 Consultant Agreement dated July 1, 1999 by and between the Company and
Investment Transaction, LLC. Filed as exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended April 30,
1999 and incorporated herein by reference.
10.23 Employment Agreement dated January 1, 1999 between Prosoft I-Net
Solutions, Inc. and David I. Perl. Filed as exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
April 30, 1999 and incorporated herein by reference.
10.24 Employment Agreement dated January 1, 1999 between Prosoft I-Net
Solutions, Inc. and Uday O. Pabrai. Filed as exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
April 30, 1999 and incorporated herein by reference.
10.25 Employment Agreement dated January 1, 1999 between Prosoft I-Net
Solutions, Inc. and Jerrell M. Baird. Filed as exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
April 30, 1999 and incorporated herein by reference.
21 Subsidiaries of the Company.
23.1 Consent of Grant Thornton LLP.
23.2 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
</TABLE>
37
<PAGE>
EXHIBIT NO. 21
Subsidiaries
<TABLE>
<CAPTION>
State of
Name Incorporation
---- --------------
<S> <C>
Pro-Soft Development Corp. California
The Chapel Hill Group - Technology Consultants, Inc. North Carolina
Net Guru Technologies, Inc. Illinois
International Certification Internet Institute Ireland
</TABLE>
<PAGE>
EXHIBIT NO. 23.1
Consent of Independent Certified Public Accountants
We have issued our report dated September 22, 1999, accompanying the
consolidated financial statements and schedule included in the Annual Report
of ProsoftTraining.com on Form 10-K for the year ended July 31, 1999. We
hereby consent to the incorporation by reference of said report in the
Registration Statements of ProsoftTraining.com on Form S-3 (File
No. 333-35249) and on Form S-8 (File No. 333-19477).
/s/ Grant Thornton LLP
Dallas, Texas
October 27, 1999
<PAGE>
EXHIBIT 23.2
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-19477) pertaining to the 1996 Stock Option Plan of
ProsoftTraining.com (formerly known as Prosoft I-Net Solutions, Inc.) of our
report dated October 24, 1997, included in the annual report (Form 10-K) for
the year ended July 31, 1999, with respect to the consolidated balance sheet
of ProsoftTraining.com as of July 31, 1997 (not presented separately therein),
and the related consolidated statements of operations, stockholders' equity,
and cash flows for the year ended July 31, 1997.
/s/ Ernst & Young LLP
Orange County, California
October 27, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 1,152,715
<SECURITIES> 0
<RECEIVABLES> 2,193,189
<ALLOWANCES> 199,362
<INVENTORY> 0
<CURRENT-ASSETS> 3,496,385
<PP&E> 1,258,740
<DEPRECIATION> 924,739
<TOTAL-ASSETS> 7,634,376
<CURRENT-LIABILITIES> 4,129,358
<BONDS> 984,018
0
0
<COMMON> 14,297
<OTHER-SE> 457,974
<TOTAL-LIABILITY-AND-EQUITY> 7,634,376
<SALES> 8,716,016
<TOTAL-REVENUES> 8,716,016
<CGS> 9,071,871
<TOTAL-COSTS> 19,720,251
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 197,052
<INTEREST-EXPENSE> 483,633
<INCOME-PRETAX> (11,606,935)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,606,935)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,606,935)
<EPS-BASIC> (0.90)
<EPS-DILUTED> (0.90)
</TABLE>
