<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 AND 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ending January 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
_______________
ProsoftTraining.com
(Exact Name of Registrant as Specified in its Charter)
NEVADA 87-0448639
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3001 Bee Caves Road, Suite 100 Austin, Texas 78746
(Address of Principal Executive Offices) (Zip Code)
(512) 328-6140
Registrant's Telephone Number, Including Area Code
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
The number of shares of the registrant's common stock, $.001 par value,
outstanding as of March 1, 1999, was 13,552,893 shares.
<PAGE>
ProsoftTraining.com and Subsidiaries
Consolidated Balance Sheets
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
January 31, 1999 July 31, 1998
---------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 2,286,596 $ 3,311,014
Accounts receivable, less allowances of $118,232 and $329,802,
respectively 1,582,808 2,224,638
Notes receivable............................................................ 184,250 422,750
Prepaid expenses and other current assets................................... 571,576 567,596
------------ ------------
Total current assets.......................................................... 4,625,230 6,525,998
------------ ------------
Property and equipment:
Computer equipment and software............................................. 6,396,703 5,744,480
Office equipment, furniture and fixtures.................................... 1,299,418 1,939,270
------------ ------------
7,696,121 7,683,750
Less accumulated depreciation............................................... 6,268,031 4,584,566
------------ ------------
1,428,090 3,099,184
Goodwill, net of accumulated amortization of $387,276 and $249,043,
respectively............................................................... 2,322,717 2,898,839
License agreements, net of accumulated amortization of $121,026............... 103,093 0
Other assets.................................................................. 1,675,684 0
------------ ------------
Total assets.................................................................. $ 10,154,814 $ 12,524,021
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................ 982,305 1,054,866
Accrued payroll and related expenses........................................ 401,388 648,802
Deferred revenue............................................................ 0 23,105
Bank Line of Credit......................................................... 0 0
Current portion of capital lease obligations................................ 1,157,827 1,465,159
------------ ------------
Total current liabilities..................................................... 2,541,520 3,191,932
Obligations under capital leases, net of current portion...................... 283,789 559,205
Convertible debentures........................................................ 2,086,000 0
------------ ------------
Total liabilities............................................................. 4,911,309 3,751,137
------------ ------------
Common stock subject to redemption............................................ 56,666 2,056,520
Stockholders' equity:
Common stock, $.001 par value:
Authorized - 50,000,000
Issued and outstanding 13,154,910 and 11,502,079 shares, respectively....... 13,155 11,502
Additional paid-in capital.................................................... 51,395,783 47,030,129
Accumulated deficit........................................................... (46,147,351) (40,250,519)
Less common stock in treasury, at cost; 11,912 Shares......................... 74,748 74,748
------------ ------------
Total stockholder's equity.................................................... 5,186,839 6,716,364
------------ ------------
Total liabilities and stockholders' equity.................................... $ 10,154,814 12,524,021
============ ============
</TABLE>
See Accompanying Notes
<PAGE>
ProsoftTraining.com and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended January 31, Six Months Ended January 31,
1999 1998 1999 1998
--------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Training $ 1,169,853 $ 1,525,062 $ 2,865,866 $ 2,726,790
Courseware 265,619 150,000 578,634 176,921
Certification 70,550 -- 70,550 --
----------- ----------- ----------- -----------
Total revenue 1,506,022 1,675,062 3,515,050 2,903,711
----------- ----------- ----------- -----------
Costs and expenses:
Costs of services 2,564,930 3,057,886 5,191,439 6,628,777
Sales and marketing 336,631 671,633 1,063,621 1,369,273
General and administrative 1,504,969 1,521,901 3,111,909 3,382,051
----------- ----------- ----------- -----------
Total costs and expenses 4,406,530 5,251,420 9,366,969 11,380,101
----------- ----------- ----------- -----------
Loss from operations (2,900,508) (3,576,358) (5,851,919) (8,476,390)
Interest income (expense), net (34,634) 47,088 (44,913) 88,788
----------- ----------- ----------- -----------
Net loss $(2,935,142) $(3,529,270) $(5,896,832) $(8,387,602)
----------- ----------- ----------- -----------
Net loss per share $ (0.23) $ (0.32) $ (0.48) $ (0.78)
----------- ----------- ----------- -----------
Weighted average number of common
shares outstanding 12,620,343 11,072,690 12,330,995 10,756,972
----------- ----------- ----------- -----------
</TABLE>
See Accompanying Notes
<PAGE>
ProsoftTraining.com and Subsidiaries
Consolidated Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended January 31,
----------------------------
1999 1998
------------- ------------
<S> <C> <C>
Operating activities
Net loss.............................................................................. ($5,896,832) ($8,387,602)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization ...................................................... 1,943,726 1,418,533
Changes in operating assets and liabilities:
Accounts receivable................................................................. 641,830 (223,776)
Prepaid expenses and other current assets........................................... (3,980) 258,551
Other assets (103,093) 0
Accounts payable ................................................................... (407,574) (2,919,184)
Accrued liabilities................................................................. (247,414) (448,546)
Deferred revenue.................................................................... (23,105) 98,190
------------ ------------
Net cash used in operating activities................................................. (4,096,442) (10,203,834)
Investing activities:
Acquisitions of businesses net of Cash.............................................. (30,000) (1,000,000)
Purchase of property and equipment.................................................. 0 (544,894)
Proceeds from sales of property & equipment......................................... 15,786
Notes receivable ................................................................... (61,500) 117,411
------------ ------------
Net cash used in investing activities................................................. (75,714) (1,427,483)
Financing activities:
Issuance of convertible debentures and warrants..................................... 3,060,000 0
Issuance of common stock............................................................ 675,963 9,928,934
Principal payments on debt and capital leases....................................... (588,225) (880,478)
------------ ------------
Net cash provided by financing activities............................................. 3,255,574 9,048,456
------------ ------------
Decrease in cash and cash equivalents................................................. (1,024,418) (2,582,861)
Cash and cash equivalents at the beginning of period.................................. 3,311,014 12,911,684
------------ ------------
Cash and cash equivalents at the end of period........................................ $ 2,286,596 $ 10,328,823
Supplementary disclosure of cash paid during the period for:
Interest.............................................................................. $ 100,210 $ 188,502
Income taxes.......................................................................... $ 0 $ 0
Supplementary disclosure on non-cash financing activities:
Equipment acquired under capital leases............................................. $ 0 $ 173,290
Common Stock used in acquisitions..................................................... $ 567,500 $ 1,699,998
</TABLE>
See Accompanying Notes
<PAGE>
ProsoftTraining.com and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The consolidated financial statements do not include footnotes and
certain financial information normally presented annually under generally
accepted accounting principles and, therefore, should be read in conjunction
with the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission. Accounting measurements at interim dates inherently involve
greater reliance on estimates than at year-end. The results of operations for
the three month and six month periods ended January 31,1999, are not necessarily
indicative of results that can be expected for the fiscal year ending July 31,
1999. The consolidated financial statements included herein are unaudited;
however, they contain all adjustments (consisting of normal recurring accruals)
which, in the opinion of the Company, are necessary to present fairly its
consolidated financial position, results of operations, and cash flows as of and
for the three month and six month periods ended January 31, 1999.
2. In January 1998, the Company purchased 100% of the outstanding common
stock of Net Guru Technologies, Inc. (Net Guru) in exchange for cash of
$1,000,000 and 152,809 shares of the Company's common stock valued at
$1,700,000. In March 1998, the Company purchased 100% of the outstanding common
stock of The Chapel Hill Group- Technology Consultants, Inc. in exchange for
68,728 shares of the Company's common stock, valued at $500,000. In November
1998, the Company purchased the remaining 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 acquisition the Company also received 49% of ICII. However, share
transference was subject to a shareholder agreement. With the purchase of 51% of
ICII the other 49% was also transferred to Prosoft. The operations of the
acquired companies have been reflected in the Company's financial statements
since the dates of the acquisitions. For the quarter and six months ended
January 31, 1999, the operations of the acquired companies were not significant.
Accordingly, a pro forma statement of operations, giving effect to the
acquisitions of the aforementioned companies as if they occurred on August 1,
1997, are not presented.
During the quarter ended January 31, 1999, the Company determined that
$1,005,122 of the purchase price of the Net Guru acquisition should have been
allocated to license agreements and other identifiable intangibles like service
marks, brands, and certification credentials at the date of acquisition. As a
result, a reclassification from goodwill to license agreements has been made.
3. In November of 1998, the Company entered into an Accounts Receivable
Line of Credit whereby up to 80% of the gross receivables can be advanced up to
$3,500,000. As of January 31, 1999, there have been no borrowings on this line.
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.
4. During the second quarter, the Company issued shares of common stock
in lieu of the waiver of certain put rights issued in conjunction with certain
acquisitions.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Management Discussion and Analysis of Financial Condition and Results
of Operations contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes", "anticipates", "plans", "expects" and similar expressions are
intended to identify forward-looking statements. In addition, forward looking
statements include, but are not limited to, statements regarding future
financing needs, changes in business strategy, future profitability, and factors
affecting liquidity. A number of important factors could cause the Company's
actual results to differ materially from those indicated by such forward-looking
statements. These forward-looking statements represent the Company's judgment as
of the date of the filing of this Form 10-Q. The Company disclaims any intent or
obligation to update theses forward-looking statements.
<PAGE>
OVERVIEW
ProsoftTraining.com ("Prosoft" or the "Company") is an Internet solutions
company committed to providing comprehensive Internet skills curriculum, vendor-
neutral Internet skills certification programs and instructors to deliver the
curriculum and certification. Prosoft offers more than 50 instructor led
Internet skill courses ranging from one-day end-user workshops to 10-day
certification programs. The Certified Internet Webmaster program offered by the
Company creates the professional skills required to develop and implement e-
business solutions for the Internet age. The certification testing program is
administered worldwide by testing leader Sylvan Prometric. The Company also
sells its courseware to Prosoft Certified Training Center (PCTC) resellers and
courseware licenses. The Company works closely with industry associations,
vendors and its partners to define the job roles and skills essential to deploy
e-business solutions which apply and use Internet technology in business
processes and functions.
Prosoft offers comprehensive training solutions. Company services include
certification in critical Internet skills, instructor-led training (ILT),
instructor-facilitated online learning using the Company's proprietary ProFlex
distance learning program, classroom texts, and e-courseware.
The Company's Certified Internet Webmaster (CIW) certification, currently
in its third generation, is offered globally in partnership with IBM,
ExecuTrain, CompUSA, Computer Prep, among others. The program is based on key
e-business job roles and the skills required to perform them. The CIW curriculum
and examinations develop and prove competency in those important job roles. It
is a standardized method of ensuring that individuals have demonstrated
technical competency in selected areas and is vendor-neutral in that it is not
content specific to any single vendor or any single product associated with any
vendor. CIW is endorsed by the Association of Internet Professionals and the
World Organization of Webmasters.
Historically, Internet instruction had been offered through Company-
operated training centers ("Training Centers"). As of January 31, 1999, the
Company no longer operated any training centers though it still operated 4
offices. This number is significantly reduced from the July 31, 1998, totals of
12 Company owned sites and 16 Training Centers under the old revenue sharing
affiliate agreements. The Company has altered its strategy and decided to exit
the retail training business and sell curriculum and service to the training
industry on a wholesale basis. Prosoft has increased its offerings through
wholesale relationships with other international, national, and regional
training companies. The companies add Prosoft Internet curriculum which provides
them a new or expanded product line to augment their other training product
lines. The Company also provides contract training services at a wholesale cost
of $1,450 to $2,600 per day. This strategy shift to eliminate Company run sites
and increase distribution through Prosoft Certified Training Centers (resellers)
will begin to impact the financial statements in fiscal third and fourth
quarters. The Company is now positioned as a wholesale training services
company, supplying training and curriculum in the Unites States and abroad. This
new wholesale plan leverages instructor resources and adds a product line in
courseware sales. This plan should also allow the Company to significantly
reduce its fixed site expenses as training occurs at resellers sites. The
transition began in the second quarter and should continue over the last two
quarters of fiscal 1999 as the number of sites are reduced, the sales force
transitioned, and sell-through occurs in the new reseller channels. Since
resellers have training schedules published six months in advance, there will be
a lag for the distribution of Prosoft's product from the time of agreement
signing. Distribution agreements entered into in the first and second fiscal
quarters with ExecuTrain, CompUSA, IBM, ComputerPrep, and various PCTCs should
provide a solid foundation to implement the Company's new strategy and remain a
leader in Internet/intranet skills development. However, there can be no
assurances that this strategy will be successful and that such sales will occur
and such margins realized.
RESULTS OF OPERATIONS
Three Months Ended January 31, 1999, Compared to the Three Months Ended
January 31, 1998
RECLASSIFICATIONS
Certain amounts for the three months ended January 31, 1998, and for the
six months ended January 31, 1998, have been reclassified to conform with the
1999 presentation.
<PAGE>
REVENUE
Training revenue for the three months ended January 31, 1999, was
$1,169,853, compared to $1,525,062 in the three months ended January 31, 1998, a
decrease of $355,209. This decrease reflects a change in the distribution
strategy of the company from a retail to a wholesale model and a greater
percentage of revenue derived from content in the current quarter as compared to
previous quarters.
Courseware sales increased to $265,619 in the three months ended January
31, 1999, compared to $150,000 in the three months ended January 31, 1998. This
increase is the result of the increasing customer base in connection with the
new PCTC and strategic partner relationships.
Certification revenue increased to $70,550 in the three months ended
January 31, 1999, compared to $0 in the three months ended January 31, 1998.
Certification revenue is derived from the new PCTC program and in the future
will include revenue derived from certification testing.
COST OF SERVICES
Cost of services is composed of the following:
<TABLE>
<CAPTION>
Three Months Ended January 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Instruction....................... $1,111,033 $1,615,184
Classroom costs................... 1,071,130 1,204,595
Courseware........................ 382,767 238,107
---------- ----------
Total........................... $2,564,930 $3,057,886
========== ==========
</TABLE>
The Company's cost of services includes the costs of instructors, course
materials, classroom equipment, and facilities. The majority of course
instructors are employees. Instructor travel varies with, among other things,
the location of class offerings and local instructor availability. The Company
uses instructors, dedicated content development employees, and contractors to
develop course content and materials. The cost of content development varies
with the Company's evaluation of the effectiveness of its existing class
offerings and the anticipated release of new software products. The cost of
courseware this quarter included additional expenses resulting from the
completion of the third generation of the courseware library.
The classroom costs consist of equipment related expenses of $826,260, and
facilities rent of $244,870 in the quarter ended January 31, 1999. Because the
Company reduced the number of classroom sites, we expect net facilities rent for
quarterly periods subsequent to January 31, 1999, to be approximately $120,000.
As discussed in previous filings and press releases, the Company has changed its
distribution strategy and no longer needs the original national training center
infrastructure. The Company is also in the process of reducing its equipment
costs as a result of the reduced number of locations. However, as of January 31,
1999, the Company cannot accurately estimate the going forward costs nor
charges, if any, that will be necessary to remove obligations for equipment
leases.
SALES AND MARKETING
Sales and marketing expenses are composed of:
<TABLE>
<CAPTION>
Three Months Ended January 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Advertising and trade shows........... $ 10,734 $ 83,516
Salaries and wages.................... 296,020 552,605
Travel and entertainment.............. 35,512
-------- --------
Total.............................. $336,631 $671,633
======== ========
</TABLE>
Sales and marketing expenses for the three months ended January 31, 1999,
amounted to $336,631, compared to $671,633 for the three months ended January
31, 1998, a decrease of $335,002. These expenses consist of salaries,
commissions and travel-related costs of sales and marketing personnel, the costs
of designing, producing and distributing direct mail marketing and media
advertisements, and the costs of the information systems to support these
activities. This decrease reflects the elimination of the Company's public class
schedule and direct mail and telemarketing staff associated with that
distribution method.
<PAGE>
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended January
31,1999, were $1,504,969, compared to $1,521,901 for the three months ended
January 31, 1998, a decrease of $16,932. This decrease reflects reduced numbers
of administrative employees. We expect this category to decrease slightly as the
impact of the new strategy results in lower administrative costs. Exclusive of
the G&A costs of ICII which was acquired on November 11, 1998, the G&A costs for
the quarter decreased by $121,824.
NET INTEREST INCOME (EXPENSE)
Net interest expense was $34,634 for the three months ended January 31,
1999, compared to net interest income of $47,088 for the three months ended
January 31, 1998, a decrease of $81,722. Interest expense, which consists
principally of interest paid on capital leases, is offset by interest earned on
cash balances. The increase in net interest expense was a result of smaller cash
balances and the addition of approximately $100,000 of interest expense per
quarter attributable to the convertible debenture issued in the second quarter.
Of this amount only half must be paid in cash.
Six Months Ended January 31, 1999, Compared to the Six Months Ended January
31, 1998
REVENUE
Training revenue for the six months ended January 31, 1999, was $2,865,866,
compared to $2,726,790 in the six months ended January 31, 1998, an increase of
$139,076. This increase reflects greater acceptance of the Company's class
offerings and increased distribution through strategic third party
relationships.
Courseware sales increased to $578,634 in the six months ended January 31,
1999, compared to $176,921 in the six months ended January 31, 1998. This
increase is the result of the increasing customer base in connection with the
new PCTC and strategic partner relationships.
Certification revenue increased to $70,550 in the six months ended January
31, 1999, compared to $0 in the six months ended January 31, 1998. Certification
revenue is derived from the new PCTC program and in the future will include
revenue derived from certification testing.
COST OF SERVICES
Cost of services is composed of the following:
<TABLE>
<CAPTION>
Six Months Ended January 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Instruction......................... $2,337,504 $3,680,395
Classroom costs..................... 2,089,536 2,596,659
Courseware.......................... 764,399 351,723
---------- ----------
Total............................. $5,191,439 $6,628,777
========== ==========
</TABLE>
The Company's cost of services includes the costs of instructors, course
materials, classroom equipment, and facilities. Most course instructors are
employees. Instructor travel varies with, among other things, the location of
class offerings and local instructor availability. The Company uses instructors,
dedicated content development employees and contractors to develop course
content and materials. The cost of content development varies with the Company's
evaluation of the effectiveness of its existing class offerings and the
anticipated release of new software products. The cost of courseware this
quarter included additional expenses resulting from the completion of the third
generation of the courseware library.
The classroom costs consist of equipment depreciation of $1,648,260, and
facilities rent of $441,276 in the six months ended January 31, 1999. Because
the Company reduced the number of classroom sites, we expect net facilities rent
for quarterly periods subsequent to January 31, 1999, to be approximately
$120,000. As discussed in previous
<PAGE>
filings and press releases, the Company has changed its distribution strategy
and no longer needs the original national training center infrastructure. The
Company is also in the process of reducing its equipment costs as a result of
the reduced number of locations. However, as of January 31, 1999, the Company
cannot accurately estimate the going forward costs nor charges, if any, that
will be necessary to remove obligations for equipment leases.
SALES AND MARKETING
Sales and marketing expenses are composed of:
<TABLE>
<CAPTION>
Six Months Ended January 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Advertising and trade shows........... $ 27,204 $ 100,396
Salaries and wages.................... 923,592 1,183,652
Travel and entertainment.............. 112,825 85,225
---------- ----------
Total............................... $1,063,621 $1,369,273
========== ==========
</TABLE>
Sales and marketing expenses for the six months ended January 31, 1999,
amounted to $1,063,621, compared to $1,369,273 for the six months ended January
31, 1998, a decrease of $305,652. These expenses consist of salaries,
commissions and travel-related costs of sales and marketing personnel, the costs
of designing, producing and distributing direct mail marketing and media
advertisements, and the costs of the information systems to support these
activities. This decrease reflects the elimination of the Company's public class
schedule and direct mail and telemarketing staff associated with that
distribution method.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the six months ended January
31,1999, were $3,111,909, compared to $3,382,051 for the six months ended
January 31, 1998, a decrease of $270,142. This decrease reflects reduced numbers
of administrative employees. Exclusive of the G&A costs of ICII which was
acquired on November 11th, 1998, the G&A costs for the quarter would have
decreased by $391,966.
NET INTEREST INCOME (EXPENSE)
Net interest expense was $44,913 for the six months ended January 31, 1999,
compared to net interest income of $88,788 for the six months ended January 31,
1998, a decrease of $133,701. Interest expense, which consists principally of
interest paid on capital leases, is offset by interest earned on cash balances.
The increase in net interest expense was a result of smaller cash balances and
the addition of approximately $100,000 of interest expense per quarter
attributable to the convertible debenture issued in the second quarter. Of this
amount only half must be paid in cash.
Liquidity And Capital Resources
From inception, the Company has financed its operations and met
substantially all of its capital expenditure requirements primarily through net
proceeds from private sales of securities. Cash and cash equivalents decreased
from $3,311,014 at July 31, 1998, to $2,286,596 at January 31, 1999. This
decrease was the result of net cash used by operations, primarily due to a net
loss of $5,896,832 for the period, which was partially offset by financing
activities which raised approximately $3,800,000.
The Company has incurred losses of approximately $46 million since
inception, primarily due to the startup nature of its business. However, due to
the recent sales reorganization and refocusing efforts, the Company is beginning
to realize increasing revenue and decreasing costs. This shift in the business
strategy should reduce fixed costs over comparable fiscal 1998 periods. If
revenues continue to grow as demonstrated in fiscal 1998 and cost savings are
realized from programs previously discussed as anticipated, the Company hopes to
reach profitability in the last half of fiscal 1999. In addition, in the second
quarter of fiscal 1999, the Company received proceeds of approximately $700,000
in a private placement of common stock to various accredited individual
investors, $3.2 million in a private placement of convertible debt to various
institutional investors, and secured a $3.5 million asset based credit line from
Silicon Valley Bank. The Company anticipates that its existing resources, along
with these
<PAGE>
financings, will be sufficient to meet its needs for working capital
expenditures through at least 1999. However, no assurances can be given that the
Company will be successful in realizing its goals. The Company's ability to
continue as a going concern depends upon its ability to obtain necessary
financing, grow revenue, attain operational efficiencies and, ultimately,
sustain a profitable level of operations.
In November 1998, the Company entered into a renewable one year line of
credit with Silicon Valley Bank for a maximum of $3,500,000. The collateral for
the line is the Company's accounts receivables of which the Company can draw
down up to 80% of the balance.
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 have completed our Year 2000 assessment and determined our financial
system needed to be updated at an expected cost of less than $3,000. We expect
the update to be 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 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 OR THE COMPANY
The discussions in this Form 10-Q 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. For purposes of this Form 10-Q, "we" and "our" refer to the Company.
EXPECTATION OF CONTINUING 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 quarterly profitability until the fiscal fourth
quarter at the earliest. We have incurred net losses of approximately $46
million from our inception in December 5, 1995, through January 31, 1999. For
the quarter ended January 31, 1999, we incurred a net loss of $2,935,142. Our
ability to
<PAGE>
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 $46 million.
We began realizing increasing revenues in late fiscal 1998 due to our sales
reorganization and refocusing efforts. This shift in our business strategy
should result in a reduction in overhead expenses and, if revenues continue to
grow as demonstrated in fiscal 1998, we hope to reach profitability in the
second half of fiscal 1999. We believe that our existing resources will be
sufficient to meet our needs for working capital expenditures through at least
fiscal 1999. 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 that 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 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 effect 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 up to 8,348,532 shares (or approximately
47.8% of the shares of Common Stock currently outstanding). 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 these
shares being registered were 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
<PAGE>
unrelated to the operating performance of particular companies. These broad
market fluctuations may also adversely effect 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
PART II - OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
a) Exhibits
10.1 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.
10.2 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.
10.3 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.
10.4 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).
21 Subsidiaries of the Company.
Financial Data Schedule.
b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended January 31,
1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ProsoftTraining.com
Dated: March 11, 1999
/s/ JERRELL M. BAIRD
----------------------
Jerrell M. Baird
Chief Executive Officer
and Chairman of the Board
(Duly Authorized Officer)
Dated: March 11, 1999
/s/ KIMBERLY V. JOHNSTON
--------------------------
Kimberly V. Johnston
Chief Financial Officer
(Principal Financial Officer)
<PAGE>
Silicon Valley Financial Services
A Division of Silicon Valley Bank
3003 Tasman Drive
Santa Clara, CA 95054
(408) 654-1000 - Fax (408) 980-6410
ACCOUNTS RECEIVABLE PURCHASE AGREEMENT
This Accounts Receivable Purchase Agreement (the "Agreement") is made on
this Sixth day of November 1998, by and between Silicon Valley Financial
Services (a division of Silicon Valley Bank) ("Buyer") having a place of
business at the address specified above and Prosoft I-Net Solutions, Inc., a
Nevada corporation, ("Seller") having its principal place of business and chief
executive office at
Street Address: 3001 Bee Caves Road, Suite 100
City: Austin
County: Travis
State: Texas
Zip code: 78746
Phone: 515/328-6140
1. Definitions. When used herein, the following terms shall have the
following meanings.
1.1. "Account Balance" shall mean, on any given day, the gross amount of
all Purchased Receivables unpaid on that day.
1.2. "Account Debtor" shall have the meaning set forth in the California
Uniform Commercial Code and shall include any person liable on any Purchased
Receivable, including without limitation, any guarantor of the Purchased
Receivable and any issuer of a letter of credit or banker's acceptance.
1.3. "Adjustments" shall mean all discounts, allowances, returns,
disputes, counterclaims, offsets, defenses, rights of recoupment, rights of
return, warranty claims, or short payments, asserted by or on behalf of any
Account Debtor with respect to any Purchased Receivable.
1.4. "Administrative Fee" shall have the meaning as set forth in Section
3.3 hereof.
1.5. "Advance" shall have the meaning set forth in Section 2.2 hereof.
1.6. "Collateral" shall have the meaning set forth in Section 8 hereof.
1.7. "Collections" shall mean all good funds received by Buyer from or on
behalf of an Account Debtor with respect to Purchased Receivables.
1.8 "Compliance Certificate" shall mean a certificate, in a form provided
by Buyer to Seller, which contains the certification of the chief financial
officer of Seller that, among other things, the representations and warranties
set forth in this Agreement are true and correct as of the date such certificate
is delivered.
1.9. "Event of Default" shall have the meaning set forth in Section 9
hereof.
1.10. "Finance Charges" shall have the meaning set forth in Section 3.2
hereof.
1.11. "Invoice Transmittal" shall mean a writing signed by an authorized
representative of Seller which accurately identifies the receivables which
Buyer, at its election, may purchase, and includes for each such receivable the
correct amount owed by the Account Debtor, the name and address of the Account
Debtor, the invoice number, the invoice date and the account code.
1.12. "Obligations" shall mean all advances, financial accommodations,
liabilities, obligations, covenants and duties owing, arising, due or payable by
Seller to Buyer of any kind or nature, present or future, arising under or in
connection with this Agreement or under any other document, instrument or
agreement, whether or not evidenced by any note, guarantee or other instrument,
whether arising on account or by overdraft, whether direct or indirect
(including those acquired by assignment) absolute or contingent, primary or
secondary, due or to become due, now owing or hereafter arising, and however
acquired; including, without limitation, all Advances, Finance Charges,
Administrative Fees, interest, Repurchase Amounts, fees, expenses, professional
fees and attorneys' fees and any other sums chargeable to Seller hereunder or
otherwise.
1.13. "Purchased Receivables" shall mean all those accounts, receivables,
chattel paper, instruments, contract rights, documents, general intangibles,
letters of credit, drafts, bankers acceptances, and rights to payment, and all
proceeds thereof (all of the foregoing being referred to as "receivables"),
arising out of the invoices and other agreements identified on or delivered with
any Invoice Transmittal delivered by Seller to Buyer which Buyer elects to
purchase and for which Buyer makes an Advance.
1.14. "Refund" shall have the meaning set forth in Section 3.5 hereof.
1.15. "Reserve" shall have the meaning set forth in Section 2.4 hereof.
1.16. "Repurchase Amount" shall have the meaning set forth in Section 4.2
hereof.
1.17. "Reconciliation Date" shall mean the last calendar day of each
Reconciliation Period.
1.18. "Reconciliation Period" shall mean each calendar month of every year.
2. Purchase and Sale of Receivables.
<PAGE>
2.1. Offer to Sell Receivables. During the term hereof, and provided that
there does not then exist any Event of Default or any event that with notice,
lapse of time or otherwise would constitute an Event of Default, Seller may
request that Buyer purchase receivables and Buyer may, in its sole discretion,
elect to purchase receivables. Seller shall deliver to Buyer an Invoice
Transmittal with respect to any receivable for which a request for purchase is
made. An authorized representative of Seller shall sign each Invoice Transmittal
delivered to Buyer. Buyer shall be entitled to rely on all the information
provided by Seller to Buyer on or with the Invoice Transmittal and to rely on
the signature on any Invoice Transmittal as an authorized signature of Seller.
2.2. Acceptance of Receivables. Buyer shall have no obligation to
purchase any receivable listed on an Invoice Transmittal. Buyer may exercise its
sole discretion in approving the credit of each Account Debtor before buying any
receivable. Upon acceptance by Buyer of all or any of the receivables described
on any Invoice Transmittal, Buyer shall pay to Seller 80 (%) percent of the face
------
amount of each receivable Buyer desires to purchase. Such payment shall be the
"Advance" with respect to such receivable. Buyer may, from time to time, in its
sole discretion, change the percentage of the Advance. Upon Buyer's acceptance
of the receivable and payment to Seller of the Advance, the receivable shall
become a "Purchased Receivable." It shall be a condition to each Advance that
(i) all of the representations and warranties set forth in Section 6 of this
Agreement be true and correct on and as of the date of the related Invoice
Transmittal and on and as of the date of such Advance as though made at and as
of each such date, and (ii) no Event of Default or any event or condition that
with notice, lapse of time or otherwise would constitute an Event of Default
shall have occurred and be continuing, or would result from such Advance.
Notwithstanding the foregoing, in no event shall the aggregate amount of all
Purchased Receivables outstanding at any time exceed Three Million Five Hundred
Thousand and No/100***** Dollars ($3,500,000.00).
2.3. Effectiveness of Sale to Buyer. Effective upon Buyer's payment of an
Advance, and for and in consideration therefor and in consideration of the
covenants of this Agreement, Seller hereby absolutely sells, transfers and
assigns to Buyer, all of Seller's right, title and interest in and to each
Purchased Receivable and all monies due or which may become due on or with
respect to such Purchased Receivable. Buyer shall be the absolute owner of each
Purchased Receivable. Buyer shall have, with respect to any goods related to the
Purchased Receivable, all the rights and remedies of an unpaid seller under the
California Uniform Commercial Code and other applicable law, including the
rights of replevin, claim and delivery, reclamation and stoppage in transit.
2.4. Establishment of a Reserve. Upon the purchase by Buyer of each
Purchased Receivable, Buyer shall establish a reserve. The reserve shall be the
amount by which the face amount of the Purchased Receivable exceeds the Advance
on that Purchased Receivable (the "Reserve"); provided, the Reserve with respect
to all Purchased Receivables outstanding at any one time shall be an amount not
less than 20 (%) percent of the Account Balance at that time and may be set at a
------
higher percentage at Buyer's sole discretion. The reserve shall be a book
balance maintained on the records of Buyer and shall not be a segregated fund.
3. Collections, Charges and Remittances.
3.1. Collections. Upon receipt by Buyer of Collections, Buyer shall
promptly credit such Collections to Seller's Account Balance on a daily basis;
provided, that if Seller is in default under this Agreement, Buyer shall apply
all Collections to Seller's Obligations hereunder in such order and manner as
Buyer may determine. If an item of collection is not honored or Buyer does not
receive good funds for any reason, the amount shall be included in the Account
Balance as if the Collections had not been received and Finance Charges under
Section 3.2 shall accrue thereon.
3.2. Finance Charges. On each Reconciliation Date Seller shall pay to
Buyer a finance charge in an amount equal to 1.00 (%) percent per month of the
--------
average daily Account Balance outstanding during the applicable Reconciliation
Period, (the "Finance Charges"). If Buyer sustains a loss which is greater than
or equal to ($4,100,000.00) for the 5 months ending December 31, 1998 then
effective February 1, 1999, Seller shall pay an amount equal to 1.25 (%) per
--------
percent per month of the average daily Account Balance outstanding during the
applicable Reconciliation Period. If the Buyer sustains a loss which is greater
than or equal to ($4,300,000.00) for the 5 months ending December 31, 1998 then
effective February 1, 1999, Seller shall pay an amount equal to 1.50 (%) percent
--------
per month of the average daily Account Balance outstanding during the applicable
Reconciliation Period. Buyer shall deduct the accrued Finance Charges from the
Reserve as set forth in Section 3.5 below.
3.3. Administrative Fee. On each Reconciliation Date Seller shall pay to
Buyer an Administrative Fee equal to .25 (%) percent of the face amount of each
-------
Purchased Receivable first purchased during that Reconciliation Period, (the
Administrative Fee"). If Buyer sustains a loss which is greater than or equal to
($4,100,000.00) for the 5 months ending December 31, 1998 then effective
February 1, 1999, Seller shall pay an Administrative Fee equal to .50 (%)
-------
percent of the face amount of each Purchased Receivable first purchased during
that Reconciliation Period. If the Buyer sustains a loss which is greater than
or equal to ($4,300,000.00) for the 5 months ending December 31, 1998 then
effective February 1, 1999, Seller shall pay an Administrative Fee equal to
.75 (%) percent of the face amount of each Purchased Receivable first purchased
- -------
during that Reconciliation Period. Buyer shall deduct the Administrative Fee
from the Reserve as set forth in Section 3.5 below.
<PAGE>
3.4. Accounting. Buyer shall prepare and send to Seller after the close
of business for each Reconciliation Period, an accounting of the transactions
for that Reconciliation Period, including the amount of all Purchased
Receivables, all Collections, Adjustments, Finance Charges, and the
Administrative Fee. The accounting shall be deemed correct and conclusive unless
Seller makes written objection to Buyer within thirty (30) days after the Buyer
mails the accounting to Seller.
3.5. Refund to Seller. Provided that there does not then exist an Event
of Default or any event or condition that with notice, lapse of time or
otherwise would constitute an Event of Default, Buyer shall refund to Seller by
check after the Reconciliation Date, the amount, if any, which Buyer owes to
Seller at the end of the Reconciliation Period according to the accounting
prepared by Buyer for that Reconciliation Period (the "Refund"). The Refund
shall be an amount equal to:
(A) (1) The Reserve as of the beginning of that Reconciliation Period,
plus
(2) the Reserve created for each Purchased Receivable purchased during
that Reconciliation Period, minus
(B) The total for that Reconciliation Period of:
(1) the Administrative Fee;
(2) Finance Charges;
(3) Adjustments;
(4) Repurchase Amounts, to the extent Buyer has agreed to accept
payment thereof by deduction from the Refund;
(5) the Reserve for the Account Balance as of the first day of the
following Reconciliation Period in the minimum percentage set
forth in Section 2.4 hereof; and
(6) all amounts due, including professional fees and expenses, as set
forth in Section 12 for which oral or written demand has been made by Buyer to
Seller during that Reconciliation Period to the extent Buyer has agreed to
accept payment thereof by deduction from the Refund.
In the event the formula set forth in this Section 3.5 results in an amount due
to Buyer from Seller, Seller shall make such payment in the same manner as set
forth in Section 4.3 hereof for repurchases. If the formula set forth in this
Section 3.5 results in an amount due to Seller from Buyer, Buyer shall make such
payment by check, subject to Buyer's rights under Section 4.3 and Buyer's rights
of offset and recoupment.
4. Recourse and Repurchase Obligations.
4.1. Recourse. Buyer's acquisition of Purchased Receivables from Seller
shall be with full recourse against Seller. In the event the Obligations exceed
the amount of Purchased Receivables and Collateral, Seller shall be liable for
any deficiency.
4.2. Seller's Agreement to Repurchase. If Buyers demands, Seller will
repurchase any Purchased Receivable from Buyer for the full face amount or any
unpaid portion. Buyer may require Seller to repurchase a Purchased Receivable
if:
(A) which remains unpaid ninety (90) calendar days after the invoice date;
or
(B) which is owed by any Account Debtor who has filed, or has had filed
against it, any bankruptcy case, assignment for the benefit of creditors,
receivership, or insolvency proceeding or who has become insolvent (as
defined in the United States Bankruptcy Code) or who is generally not
paying its debts as such debts become due; or
(C) with respect to which there has been any breach of warranty or
representation set forth in Section 6 hereof or any breach of any covenant
contained in this Agreement; or
(D) with respect to which the Account Debtor asserts any discount,
allowance, return, dispute, counterclaim, offset, defense, right of
recoupment, right of return, warranty claim, or short payment;
together with all reasonable attorneys' and professional fees and expenses and
all court costs incurred by Buyer in collecting such Purchased Receivable and/or
enforcing its rights under, or collecting amounts owed by Seller in connection
with, this Agreement (collectively, the "Repurchase Amount").
4.3. Seller's Payment of the Repurchase Amount or Other Amounts Due Buyer.
When any Repurchase Amount or other amount owing to Buyer becomes due, Buyer
shall inform Seller of the manner of payment which may be any one or more of the
following in Buyer's sole discretion: (a) in cash immediately upon demand
therefor; (b) by delivery of substitute invoices and an Invoice Transmittal
acceptable to Buyer which shall thereupon become Purchased Receivables; (c) by
adjustment to the Reserve pursuant to Section 3.5 hereof; (d) by deduction from
or offset against the Refund that would otherwise be due and payable to Seller;
(e) by deduction from or offset against the amount that otherwise would be
forwarded to Seller in respect of any further Advances that may be made by
Buyer; or (f) by any combination of the foregoing as Buyer may from time to time
choose.
4.4. Seller's Agreement to Repurchase All Purchased Receivables. Upon and
after the occurrence of an Event of Default, Seller shall, upon Buyer's demand
(or, in the case of an Event of Default under Section 9(B), immediately without
notice or demand from Buyer) repurchase all the Purchased Receivables then
outstanding , or such portion thereof as Buyer may demand. Such demand may, at
Buyer's option, include and Seller shall pay to Buyer immediately upon demand,
cash in an amount equal to the Advance with respect to each Purchased Receivable
then outstanding together with all accrued Finance Charges, Adjustments,
Administrative Fees, attorney's and professional fees, court costs and expenses
as provided for herein, and any other Obligations. Upon receipt of payment in
full of the Obligations, Buyer shall immediately instruct
<PAGE>
Account Debtors to pay Seller directly, and return to Seller any Refund due to
Seller. For the purpose of calculating any Refund due under this Section only,
the Reconciliation Date shall be deemed to be the date Buyer receives payment in
good funds of all the Obligations as provided in this Section 4.4.
5. Power of Attorney. Seller does hereby irrevocably appoint Buyer and its
successors and assigns as Seller's true and lawful attorney in fact, and hereby
authorizes Buyer, regardless of whether there has been an Event of Default, (a)
to sell, assign, transfer, pledge, compromise, or discharge the whole or any
part of the Purchased Receivables; (b) to demand, collect, receive, sue, and
give releases to any Account Debtor for the monies due or which may become due
upon or with respect to the Purchased Receivables and to compromise, prosecute,
or defend any action, claim, case or proceeding relating to the Purchased
Receivables, including the filing of a claim or the voting of such claims in any
bankruptcy case, all in Buyer's name or Seller's name, as Buyer may choose; (c)
to prepare, file and sign Seller's name on any notice, claim, assignment,
demand, draft, or notice of or satisfaction of lien or mechanics' lien or
similar document with respect to Purchased Receivables; (d) to notify all
Account Debtors with respect to the Purchased Receivables to pay Buyer directly;
(e) to receive, open, and dispose of all mail addressed to Seller for the
purpose of collecting the Purchased Receivables; (f) to endorse Seller's name
on any checks or other forms of payment on the Purchased Receivables; (g) to
execute on behalf of Seller any and all instruments, documents, financing
statements and the like to perfect Buyer's interests in the Purchased
Receivables and Collateral; and (h) to do all acts and things necessary or
expedient, in furtherance of any such purposes. If Buyer receives a check or
item which is payment for both a Purchased Receivable and another receivable,
the funds shall first be applied to the Purchased Receivable and, so long as
there does not exist an Event of Default or an event that with notice, lapse of
time or otherwise would constitute an Event of Default, the excess shall be
remitted to Seller. Upon the occurrence and continuation of an Event of
Default, all of the power of attorney rights granted by Seller to Buyer
hereunder shall be applicable with respect to all Purchased Receivables and all
Collateral.
6. Representations, Warranties and Covenants.
6.1. Receivables' Warranties, Representations and Covenants. To induce
Buyer to buy receivables and to render its services to Seller, and with full
knowledge that the truth and accuracy of the following are being relied upon by
the Buyer in determining whether to accept receivables as Purchased Receivables,
Seller represents, warrants, covenants and agrees, with respect to each Invoice
Transmittal delivered to Buyer and each receivable described therein, that:
(A) Seller is the absolute owner of each receivable set forth in the
Invoice Transmittal and has full legal right to sell, transfer and
assign such receivables;
(B) The correct amount of each receivable is as set forth in the
Invoice Transmittal and is not in dispute;
(C) The payment of each receivable is not contingent upon the
fulfillment of any obligation or contract, past or future and any and
all obligations required of the seller have been fulfilled as of the
date of the Invoice Transmittal;
(D) Each receivable set forth on the Invoice Transmittal is based on
an actual sale and delivery of goods and/or services actually
rendered, is presently due and owing to Seller, is not past due or in
default, has not been previously sold, assigned, transferred, or
pledged, and is free of any and all liens, security interests and
encumbrances other than liens, security interests or encumbrances in
favor of Buyer or any other division or affiliate of Silicon Valley
Bank;
(E) There are no defenses, offsets, or counterclaims against any of
the receivables, and no agreement has been made under which the
Account Debtor may claim any deduction or discount, except as
otherwise stated in the Invoice Transmittal;
(F) Each Purchased Receivable shall be the property of the Buyer and
shall be collected by Buyer, but if for any reason it should be paid
to Seller, Seller shall promptly notify Buyer of such payment, shall
hold any checks, drafts, or monies so received in trust for the
benefit of Buyer, and shall promptly transfer and deliver the same to
the Buyer;
(G) Buyer shall have the right of endorsement, and also the right to
require endorsement by Seller, on all payments received in connection
with each Purchased Receivable and any proceeds of Collateral;
(H) Seller, and to Seller's best knowledge, each Account Debtor set
forth in the Invoice Transmittal, are and shall remain solvent as that
term is defined in the United States Bankruptcy Code and the
California Uniform Commercial Code, and no such Account Debtor has
filed or had filed against it a voluntary or involuntary petition for
relief under the United States Bankruptcy Code.
(I) Each Account Debtor named on the Invoice Transmittal will not
object to the payment for, or the quality or the quantity of the
subject matter of, the receivable and is liable for the amount set
forth on the Invoice Transmittal;
(J) Each Account Debtor shall promptly be notified, after acceptance
by Buyer, that the Purchased Receivable has been transferred to and is
payable to Buyer, and Seller shall not take or permit any action to
countermand such notification; and
(K) All receivables forwarded to and accepted by Buyer after the date
hereof, and thereby becoming Purchased Receivables, shall comply with
each and every one of the foregoing representations, warranties,
covenants and agreements referred to above in this Section 6.1.
6.2. Additional Warranties, Representations and Covenants. In addition to
the foregoing warranties, representations and covenants, to induce Buyer to buy
receivables and to render its services to Seller, Seller hereby represents,
warrants, covenants and agrees that:
(A) Seller will not assign, transfer, sell, or grant , or permit any
lien or security interest in any Purchased Receivables or Collateral
to or in favor of any other party, without Buyer's prior written
consent;
<PAGE>
(B) The Seller's name, form of organization, chief executive office,
and the place where the records concerning all Purchased Receivables
and Collateral are kept is set forth at the beginning of this
Agreement, Collateral is located only at the location set forth in the
beginning of this Agreement, or, if located, at any additional
location, as set forth on a schedule attached to this Agreement, and
Seller will give Buyer at least thirty (30) days prior written notice
if such name, organization, chief executive office or other locations
of Collateral or records concerning Purchased Receivables or
Collateral is changed or added and shall execute any documents
necessary to perfect Buyer's interest in the Purchased Receivables and
the Collateral;
(C) Seller shall (i) pay all of its normal gross payroll for
employees, and all federal and state taxes, as and when due, including
without limitation all payroll and withholding taxes and state sales
taxes; (ii) deliver at any time and from time to time at Buyer's
request, evidence satisfactory to Buyer that such amounts have been
paid to the proper taxing authorities; and (iii) if requested by
Buyer, pay its payroll and related taxes through a bank or an
independent payroll service acceptable to Buyer.
(D) Seller has not, as of the time Seller delivers to Buyer an Invoice
Transmittal, or as of the time Seller accepts any Advance from Buyer,
filed a voluntary petition for relief under the United States
Bankruptcy Code or had filed against it an involuntary petition for
relief;
(E) If Seller owns, holds or has any interest in, any copyrights
(whether registered, or unregistered), patents or trademarks, and
licenses of any of the foregoing, such interest has been disclosed to
Buyer and is specifically listed and identified on a schedule to this
Agreement, and Seller shall immediately notify Buyer if Seller
hereafter obtains any interest in any additional copyrights, patents,
trademarks or licenses that are significant in value or are material
to the conduct of its business;
(F) Seller shall provide Buyer with a Compliance Certificate (i) on a
quarterly basis to be received by Buyer no later than the fifth
calendar day following each calendar quarter, and; (ii) on a more
frequent or other basis if and as requested by Buyer;
(G) Seller shall provide Buyer with financial statements on a monthly
basis to be received no later than the thirtieth business day
following month end; and
(H) Seller shall provide Buyer with a deferred revenue report upon
SVFS request.
7. Adjustments. In the event of a breach of any of the representations,
warranties, or covenants set forth in Section 6.1, or in the event any
Adjustment or dispute is asserted by any Account Debtor, Seller shall promptly
advise Buyer and shall, subject to the Buyer's approval, resolve such disputes
and advise Buyer of any adjustments. Unless the disputed Purchased Receivable
is repurchased by Seller and the full Repurchase Amount is paid, Buyer shall
remain the absolute owner of any Purchased Receivable which is subject to
Adjustment or repurchase under Section 4.2 hereof, and any rejected, returned,
or recovered personal property, with the right to take possession thereof at any
time. If such possession is not taken by Buyer, Seller is to resell it for
Buyer's account at Seller's expense with the proceeds made payable to Buyer.
While Seller retains possession of said returned goods, Seller shall segregate
said goods and mark them "property of Silicon Valley Financial Services."
8. Security Interest. To secure the prompt payment and performance to Buyer
of all of the Obligations, Seller hereby grants to Buyer a continuing lien upon
and security interest in all of Seller's now existing or hereafter arising
rights and interest in the following , whether now owned or existing or
hereafter created, acquired, or arising, and wherever located (collectively, the
"Collateral"):
(A) All accounts, receivables, contract rights, chattel paper,
instruments, documents, investment property, letters of credit,
bankers acceptances, drafts, checks, cash, securities, and general
intangibles (including, without limitation, all claims, causes of
action, deposit accounts, guaranties, rights in and claims under
insurance policies (including rights to premium refunds), rights to
tax refunds, copyrights, patents, trademarks, rights in and under
license agreements, and all other intellectual property);
(B) All inventory, including Seller's rights to any returned or
rejected goods, with respect to which Buyer shall have all the rights
of any unpaid seller, including the rights of replevin, claim and
delivery, reclamation, and stoppage in transit ;
(C) All monies, refunds and other amounts due Seller, including,
without limitation, amounts due Seller under this Agreement (including
Seller's right of offset and recoupment);
(D) All equipment, machinery, furniture, furnishings, fixtures, tools,
supplies and motor vehicles;
(E) All farm products, crops, timber, minerals and the like (including
oil and gas);
(F) All accessions to substitutions for, and replacements of, all of
the foregoing;
(G) All books and records pertaining to all of the foregoing; and
(H) All proceeds of the foregoing, whether due to voluntary or
involuntary disposition, including insurance proceeds.
Seller is not authorized to sell, assign, transfer or otherwise convey
any Collateral without Buyer's prior written consent, except for the sale of
finished inventory in the Seller's usual course of business. Seller agrees to
sign UCC financing statements, in a form acceptable to Buyer, and any other
instruments and documents requested by Buyer to evidence , perfect, or protect
the interests of Buyer in the Collateral. Seller agrees to deliver to Buyer
the originals of all instruments, chattel paper and documents evidencing or
related to Purchased Receivables and Collateral.
9. Default. The occurrence of any one or more of the following shall
constitute an Event of Default hereunder.
(A) Seller fails to pay any amount owed to Buyer as and when due;
<PAGE>
(B) There shall be commenced by or against Seller any voluntary or
involuntary case under the United States Bankruptcy Code, or any assignment
for the benefit of creditors, or appointment of a receiver or custodian for
any of its assets;
(C) Seller shall become insolvent in that its debts are greater than the
fair value of its assets, or Seller is generally not paying its debts as
they become due or is left with unreasonably small capital;
(D) Any involuntary lien, garnishment, attachment or the like is issued
against or attaches to the Purchased Receivables or any Collateral;
(E) Seller shall breach any covenant, agreement, warranty, or
representation set forth herein, and the same is not cured to Buyer's
satisfaction within ten (10) days after Buyer has given Seller oral or
written notice thereof; provided, that if such breach is incapable of being
cured it shall constitute an immediate default hereunder;
(F) Seller is not in compliance with, or otherwise is in default under, any
term of any document, instrument or agreement evidencing a debt, obligation
or liability of any kind or character of Seller, now or hereafter existing,
in favor of Buyer or any division or affiliate of Silicon Valley Bank,
regardless of whether such debt, obligation or liability is direct or
indirect, primary or secondary, joint, several or joint and several, or
fixed or contingent, together with any and all renewals and extensions of
such debts, obligations and liabilities, or any part thereof;
(G) An event of default shall occur under any guaranty executed by any
guarantor of the Obligations of Seller to Buyer under this Agreement, or any
material provision of any such guaranty shall for any reason cease to be
valid or enforceable or any such guaranty shall be repudiated or terminated,
including by operation of law;
(H) A default or event of default shall occur under any agreement between
Seller and any creditor of Seller that has entered into a subordination
agreement with Buyer; or
(I) Any creditor that has entered into a subordination agreement with Buyer
shall breach any of the terms of or not comply with such subordination
agreement.
10. Remedies Upon Default. Upon the occurrence of an Event of Default, (1)
without implying any obligation to buy receivables, Buyer may cease buying
receivables or extending any financial accommodations to Seller; (2) all or a
portion of the Obligations shall be, at the option of and upon demand by Buyer,
or with respect to an Event of Default described in Section 9(B), automatically
and without notice or demand, due and payable in full; and (3) Buyer shall have
and may exercise all the rights and remedies under this Agreement and under
applicable law, including the rights and remedies of a secured party under the
California Uniform Commercial Code, all the power of attorney rights described
in Section 5 with respect to all Collateral, and the right to collect, dispose
of, sell, lease, use, and realize upon all Purchased Receivables and all
Collateral in any commercial reasonable manner. Seller and Buyer agree that any
notice of sale required to be given to Seller shall be deemed to be reasonable
if given five (5) days prior to the date on or after which the sale may be held.
In the event that the Obligations are accelerated hereunder, Seller shall
repurchase all of the Purchased Receivables as set forth in Section 4.4.
11. Accrual of Interest. If any amount owed by Seller hereunder is not paid
when due, including, without limitation, amounts due under Section 3.5,
Repurchase Amounts, amounts due under Section 12, and any other Obligations,
such amounts shall bear interest at a per annum rate equal to the per annum rate
of the Finance Charges until the earlier of (i) payment in good funds or (ii)
entry of a final judgment thereof, at which time the principal amount of any
money judgment remaining unsatisfied shall accrue interest at the highest rate
allowed by applicable law.
12. FEES, COSTS AND EXPENSES; INDEMNIFICATION. THE SELLER WILL PAY TO BUYER
IMMEDIATELY ON DEMAND ALL FEES, COSTS AND EXPENSES (INCLUDING FEES OF ATTORNEYS
AND PROFESSIONALS AND THEIR COSTS AND EXPENSES ) THAT BUYER INCURS OR MAY IMPOSE
IN CONNECTION WITH ANY OF THE FOLLOWING: (a) PREPARING, NEGOTIATING ,
ADMINISTERING, AND ENFORCING THIS AGREEMENT OR ANY OTHER AGREEMENT EXECUTED IN
CONNECTION WITH THIS AGREEMENT, INCLUDING ANY AMENDMENTS, WAIVERS OR CONSENTS,
(b) ANY LITIGATION OR DISPUTE (WHETHER INSTITUTED BY BUYER, SELLER OR ANY OTHER
PERSON) ABOUT THE PURCHASED RECEIVABLES, THE COLLATERAL, THIS AGREEMENT OR ANY
OTHER AGREEMENT EXECUTED IN CONNECTION WITH THIS AGREEMENT, (c) ENFORCING ANY
RIGHTS AGAINST SELLER OR ANY GUARANTOR, OR ANY ACCOUNT DEBTOR, (d) PROTECTING OR
ENFORCING ITS INTEREST IN THE PURCHASED RECEIVABLES OR THE COLLATERAL, (e)
COLLECTING THE PURCHASED RECEIVABLES AND THE OBLIGATIONS, AND (f) THE
REPRESENTATION OF BUYER IN CONNECTION WITH ANY BANKRUPTCY CASE OR INSOLVENCY
PROCEEDING INVOLVING SELLER, ANY PURCHASED RECEIVABLE, THE COLLATERAL, ANY
ACCOUNT DEBTOR, OR ANY GUARANTOR. SELLER SHALL INDEMNIFY AND HOLD BUYER HARMLESS
FROM AND AGAINST ANY AND ALL CLAIMS, ACTIONS, DAMAGES, COSTS, EXPENSES, AND
LIABILITIES OF ANY NATURE WHATSOEVER ARISING IN CONNECTION WITH ANY OF THE
FOREGOING.
13. Severability, Waiver, and Choice of Law. In the event that any provision of
this Agreement is deemed invalid by reason of law, this Agreement will be
construed as not containing such provision and the remainder of the Agreement
shall remain in full force and effect. Buyer retains all of its rights, even if
it makes an Advance after a default. If Buyer waives a default, it may enforce a
later default. Any consent or waiver under, or amendment of, this Agreement must
be in writing. Nothing contained herein, or any action taken or not taken by
Buyer at any time, shall be construed at any time to be indicative of any
obligation or willingness on the part of Buyer to amend this Agreement or to
grant to Seller any waivers or consents. This Agreement has been transmitted by
Seller to Buyer at Buyer's office in the State of California and has been
executed and accepted by Buyer in the State of California.
<PAGE>
THIS AGREEMENT IS GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH THE
INTERNAL LAWS OF THE STATE OF CALIFORNIA.
Notwithstanding the choice of law Buyer and Seller agree that if this agreement
is ever deemed to be subject to Texas law, the transaction governed by this
Agreement is an "account purchase transaction" as defined in Article 5069-1.14
of Vernon's Annotated Texas Statutes and the discount provided in Section 2.2
and all fees and charges under the terms of this Agreement are not and shall not
be deemed to be compensation contracted for , charged or received by Buyer for
the use, forbearance or detention of money.
14. Account Collection Services. Certain Account Debtors may require or
prefer that all of Seller's receivables be paid to the same address and/or
party, or Seller and Buyer may agree that all receivables with respect to
certain Account Debtors be paid to one party. In such event Buyer and Seller
may agree that Buyer shall collect all receivables whether owned by Seller or
Buyer and (provided that there does not then exist an Event of Default or event
that with notice, lapse or time or otherwise would constitute an Event of
Default, and subject to Buyer's rights in the Collateral) Buyer agrees to remit
to Seller the amount of the receivables collections it receives with respect to
receivables other than Purchased Receivables. It is understood and agreed by
Seller that this Section does not impose any affirmative duty on Buyer to do any
act other than to turn over such amounts. All such receivables and collections
are Collateral and in the event of Seller's default hereunder, Buyer shall have
no duty to remit collections of Collateral and may apply such collections to the
obligations hereunder and Buyer shall have the rights of a secured party under
the California Uniform Commercial Code.
15. Notices. All notices shall be given to Buyer and Seller at the addresses
or faxes set forth on the first page of this Agreement and shall be deemed to
have been delivered and received: (a) if mailed, three (3) calendar days after
deposited in the United States mail, first class, postage pre-paid, (b) one (1)
calendar day after deposit with an overnight mail or messenger service; or (c)
on the same date of confirmed transmission if sent by hand delivery, telecopy,
telefax or telex.
16. ARBITRATION. AT THE REQUEST AT ANY TIME OF EITHER PARTY, ANY CONTROVERSIES
CONCERNING THIS AGREEMENT WILL BE SETTLED BY ARBITRATION IN ACCORDANCE WITH THE
UNITED STATES ARBITRATION ACT, AND UNDER THE COMMERCIAL ARBITRATION RULES AND
ADMINISTRATION OF THE AMERICAN ARBITRATION ASSOCIATION. THE UNITED STATES
ARBITRATION ACT WILL SUPPLEMENT CALIFORNIA LAW, AS APPROPRIATE, EVEN THOUGH THIS
AGREEMENT PROVIDES THAT IT IS OTHERWISE GOVERNED BY CALIFORNIA LAW.
17. Term and Termination. The term of this Agreement shall be for one (1) year
from the date hereof, and from year to year thereafter unless terminated in
writing by Buyer or Seller. Seller and Buyer shall each have the right to
terminate this Agreement at any time. Notwithstanding the foregoing, any
termination of this Agreement shall not affect Buyer's security interest in the
Collateral and Buyer's ownership of the Purchased Receivables, and this
Agreement shall continue to be effective, and Buyer's rights and remedies
hereunder shall survive such termination, until all transactions entered into
and Obligations incurred hereunder or in connection herewith have been completed
and satisfied in full.
18. Titles and Section Headings. The titles and section headings used herein
are for convenience only and shall not be used in interpreting this Agreement.
<PAGE>
19. Other Agreements. The terms and provisions of this Agreement shall not
adversely affect the rights of Buyer or any other division or affiliate of
Silicon Valley Bank under any other document, instrument or agreement. The
terms of such other documents, instruments and agreements shall remain in full
force and effect notwithstanding the execution of this Agreement. In the event
of a conflict between any provision of this Agreement and any provision of any
other document, instrument or agreement between Seller on the one hand, and
Buyer or any other division or affiliate of Silicon Valley Bank on the other
hand, Buyer shall determine in its sole discretion which provision shall apply.
Seller acknowledges specifically that any security agreements, liens and/or
security interests currently securing payment of any obligations of Seller owing
to Buyer or any other division or affiliate of Silicon Valley Bank also secure
Seller's obligations under this Agreement, and are valid and subsisting and are
not adversely affected by execution of this Agreement. Seller further
acknowledges that (a) any collateral under other outstanding security
agreements or other documents between Seller and Buyer or any other division or
affiliate of Silicon Valley Bank secures the obligations of Seller under this
Agreement and (b) a default by Seller under this Agreement constitutes a
default under other outstanding agreements between Seller and Buyer or any other
division or affiliate of Silicon Valley Bank.
IN WITNESS WHEREOF, Seller and Buyer have executed this Agreement on the day
and year above written.
SELLER: Prosoft I-Net Solutions, Inc.
By
---------------------------------------
Title
-----------------------------------
BUYER: SILICON VALLEY FINANCIAL SERVICES
A division of Silicon Valley Bank
By
----------------------------------------
Title
-------------------------------------
<PAGE>
Exhibit No. 21
Subsidiaries
------------
State or Other Jurisdiction
Name of Incorporation
---- ---------------------------
Pro-Soft Development Corp. California
The Chapel Hill Group - Technology Consultants, North Carolina
Inc.
Net Guru Technologies, Inc. Illinois
Internet Certification Institute Ireland
International Limited
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JAN-31-1998
<CASH> 2,286,596
<SECURITIES> 0
<RECEIVABLES> 1,701,040
<ALLOWANCES> 118,232
<INVENTORY> 0
<CURRENT-ASSETS> 4,625,230
<PP&E> 7,696,121
<DEPRECIATION> 6,268,031
<TOTAL-ASSETS> 10,154,814
<CURRENT-LIABILITIES> 2,490,525
<BONDS> 0
0
0
<COMMON> 13,155
<OTHER-SE> 5,299,427
<TOTAL-LIABILITY-AND-EQUITY> 10,154,814
<SALES> 1,506,022
<TOTAL-REVENUES> 1,506,022
<CGS> 0
<TOTAL-COSTS> 2,564,930
<OTHER-EXPENSES> 1,841,600
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,634
<INCOME-PRETAX> (2,935,142)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,935,142)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,935,142)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
</TABLE>
