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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, 2000
[_]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 Identification No.)
incorporation or organization)
3001 Bee Caves Road, Suite 300, 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)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 September 29, 2000, was $296,181,647 based
on the number of shares outstanding on such date and the last sale price for
the common stock on such date of $14.25 per share as reported on the NASDAQ--
National Market System.
Part III is incorporated by reference from the Registrant's definitive
proxy statement for its 2000 Annual Meeting of Stockholders to be filed with
the Commission within 120 days of July 31, 2000.
The number of shares of Common Stock issued and outstanding as of September
29, 2000: 22,706,187.
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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...................................................... 1
Overview...................................................... 1
The Prosoft Solution.......................................... 2
The Prosoft Strategy.......................................... 3
ComputerPREP Acquisition...................................... 4
Customers..................................................... 5
Products...................................................... 5
Sources of Revenue............................................ 6
Sales, Marketing and Customer Support......................... 7
Competition................................................... 7
Seasonality................................................... 8
Trademarks and Copyrights..................................... 8
Employees..................................................... 8
Regulations................................................... 8
Item 2. Properties.................................................... 8
Item 3. Legal Proceedings............................................. 9
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....................................... 10
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.......................................... 30
PART III
Item 10. Directors and Executive Officers of the Registrant............ 31
Item 11. Executive Compensation........................................ 31
Security Ownership of Certain Beneficial Owners and
Item 12. Management.................................................... 31
Item 13. Certain Relationships and Related Transactions................ 31
PART IV
Exhibits and Financial Statement Schedules and Reports on Form
Item 14. 8-K........................................................... 32
Signatures.................................................... 33
Exhibit Index................................................. 35
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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
ProsoftTraining.com 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
ProsoftTraining.com (the "Company" or "Prosoft" or "we" or "our") is a
leading provider of information technology (IT) skills content, training and
certification. We sell and license our courseware, instruction services and
Internet skills certification, Certified Internet Webmaster (CIW), to training
companies, internal corporate training departments and academic institutions
around the world. Our products allow individuals to develop, upgrade and
certify their IT skills.
Our courses, the majority of which are vendor-neutral, primarily support
job-role certifications for the Internet, Java, Linux, e-commerce, technical
support, and convergence technology. We believe vendor-neutrality is important
as the IT environment, as a result of the Internet and other open technologies,
is now composed of multiple hardware and software platforms with which IT
professionals must be familiar in order to do their jobs.
In order to provide our customers with a single source for high-quality IT
courseware, we also provide courses that support certifications for Microsoft,
Cisco, and Oracle. Our ability to deliver and continuously update courseware of
the highest quality over a variety of media has allowed us to establish
distribution relationships with both traditional classroom training providers
and emerging e-learning organizations. Training providers such as IBM, New
Horizons, Productivity Point International, ExecuTrain, CompUSA, SmartForce,
NETg and DigitalThink distribute courses using our content. We have
relationships with training organizations that represent more than 1,700
learning centers in 48 countries.
We believe that our CIW certification is accepted worldwide as a standard
for vendor-neutral Internet certification. CIW certification is endorsed by
several independent Internet professional trade organizations, including the
International Webmasters Association and the Association of Internet
Professionals. CIW certification validates an individual's Internet skills
competency in one of three master job roles: Designer, Administrator, and
Enterprise Developer. During fiscal 2000, we licensed our courseware or
provided services leading to CIW certification to IBM, Hewlett-Packard, Intel,
SmartForce, Arthur Andersen and Compuware, among others.
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Prior to fiscal year 1999, the Company's main objective was to provide
Internet skills education directly to students through our own learning
centers. During fiscal year 1999, we changed our business model from retail
training to providing programs and courseware to the training and education
industry.
In July 2000, we acquired ComputerPREP, Inc. from Drake Personnel (New
Zealand) Limited, a wholly owned subsidiary of Drake International.
ComputerPREP is a leading developer and marketer of technology training
courseware. ComputerPREP markets more than 300 courseware titles, including
courses covering A+ certification, Microsoft applications and operating
systems, Cisco products, Linux operating systems, Oracle, and CIW
certification. ComputerPREP has a small content development staff, but the
majority of ComputerPREP's revenue is derived from the sale of courseware,
which it licenses from third-party content providers and markets under the
ComputerPREP brand name.
The Prosoft Solution
We believe our strengths uniquely position us to play a key enabling role in
fulfilling the worldwide need for trained IT personnel. We are also well
positioned to provide key content to the rapidly emerging e-learning industry.
Our education solutions offer the following advantages:
High-Quality, Extensive, Proprietary Internet Courseware Library. We believe
that our library of Internet skills courses is the largest in the world. The
majority of our Internet courses are organized into job-role certification
tracks and are vendor-neutral. Before the acquisition of ComputerPREP, our
course content consisted of approximately 56 courses, comprising more than 860
hours of Internet-related material, which we packaged into more than 450 unique
titles.
Vendor-Neutral Courseware. We believe vendor-neutrality is important,
because the IT environment, as a result of the Internet and other open
technologies, is now comprised of multiple hardware and software platforms with
which IT professionals must be familiar in order to do their jobs. Therefore,
the majority of our course content incorporates both core IT skills as well as
specific training related to multiple hardware and software platforms and
products.
Industry Recognized Certification. We believe that our CIW certification is
accepted worldwide as a standard for vendor-neutral Internet certification.
With acceptance from many leading training and e-learning companies and the
endorsements of the International Webmasters Association and the Association of
Internet Professionals, CIW has emerged as an important way for existing and
aspiring Internet professionals to demonstrate their competency to employers.
Our CIW courses are also accredited by the American Council on Education as
part of its college credit recommendation service. During fiscal 2000, we
licensed our courseware or provided services leading to CIW certification to
IBM, Hewlett-Packard, Intel, SmartForce, Arthur Andersen, and Compuware, among
others.
Distribution Partners with Significant Presence. Training providers such as
IBM, New Horizons, Productivity Point International, ExecuTrain, CompUSA,
SmartForce, NETg, Click2Learn and DigitalThink distribute courses using our
content. We have relationships with training organizations representing more
than 1,700 learning centers in 48 countries. Because many of our customers are
still in the early stages of implementing the CIW program, we believe that we
can significantly increase penetration through increased sales and marketing
efforts. Previous successful certifications have taken three to four years to
reach full penetration of this channel.
Multiple Content Delivery Formats. Our content is available in multiple
delivery formats and we believe that this feature provides a distinct advantage
in attracting and maintaining customers. Our courseware is available through
traditional classroom settings offered by our CIW Authorized Training Providers
(CIW ATP) as well as through customized courseware, CD-ROM, Web-based training
and distance learning. Our ability to develop, maintain and deliver courseware
efficiently over a variety of media allows us to establish effective
distribution relationships with a variety of e-learning organizations,
including SmartForce, Click2Learn and NETg.
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The Prosoft Strategy
Our objective is to be the leading provider of vendor-neutral IT skills
training, content and certification in the world. Key elements of our strategy
are to:
Provide Superior Content. We intend to continually update our courses,
introduce new courses and leverage our courses across multiple customers and
industries. We continually monitor developments and changes in the IT industry
in general, as well as the specific needs of our customers. We update our
courses three times each year to reflect evolving technologies. We have added
courses for Linux certification and for CompTIA's Network+ and i-Net+
certifications in response to customer demand for these products. In many
instances, we will modify content developed for existing customers to provide
similar courses to customers in different industries. This approach allows us
to generate additional revenue opportunities while leveraging previous course
development efforts.
Establish CIW Certification as the Industry Standard. We intend to establish
CIW as the industry-leading certification program for Internet professionals,
through our strategic alliances and marketing efforts. CIW has the endorsement
of the Association of Internet Professionals and the International Webmasters
Association. By maintaining these endorsements and seeking the endorsement of
leading hardware, software and e-business service providers, we believe that we
can enhance customer awareness and confidence in our certification and training
solutions.
We believe better consumer recognition will result in broader acceptance of
our certification standard and training solutions. In September 2000, we
announced the issuance of the 10,000th CIW certificate, a milestone reached by
only a small number of IT certification programs. We continue to pursue an
aggressive brand development strategy for our CIW certification standard
through targeted advertising, promotion and press campaigns. We believe the
further development of our brand will give us a competitive advantage in the
Internet certification and training market.
Leverage the Sales Forces of our Training Providers. To participate in the
CIW program, training providers become CIW Authorized Training Providers by
agreeing to use official CIW courseware and CIW Certified instructors. We
intend to leverage our CIW ATP channel by providing training and tools to sell
more of our products and services. The majority of our CIW ATPs have joined the
program only in the last year and we believe there is substantial opportunity
to leverage our partners' efforts devoted to selling CIW. Experience indicates
it takes approximately six months for an CIW ATP to begin teaching courses
after it enters the program.
Target New Markets by Adding New Distribution Channels. We intend to target
new markets in which we believe we can offer customized solutions addressing
significant needs for IT skills training and certification. For example,
universities, junior and community colleges, and vocational/technical schools
in the United States have recently purchased our course materials. We believe
these institutions represent a potentially lucrative addition to our customer
base.
Expand our International Presence. As the rate of Internet adoption
accelerates outside of the United States, we believe that significant
international market demand exists for our Internet skills training and
certification, especially in Europe and Asia. To that end, we have begun
delivering solutions in strategically targeted international locations, using
courseware and instructor support in English. We plan to expand our reach into
both Europe and Asia by developing direct and indirect sales channels and
curriculum support capabilities in these regions, translating and localizing
our CIW certification exams and our courseware into other languages and by
pursuing strategic acquisitions of companies with international capabilities or
content.
Pursue Strategic Acquisitions. We have pursued and completed strategic
acquisitions to facilitate the growth of our business, such as our acquisitions
of ComputerPREP, Internet Certification Institute International, The Chapel
Hill Group--Technology Consultants, Inc., and Net Guru Technologies. We intend
to continue to pursue strategic acquisitions, both in the United States and
internationally, that provide access to
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complementary products and services, including companies with vendor-neutral
content expertise and companies that can expand domestic or international
distribution channels for our Internet skills training, content and
certification.
ComputerPREP Acquisition
The acquisition of ComputerPREP in July 2000, provided us with a number of
benefits that strengthened and complemented our strategy. Key strategic
benefits from the acquisition include:
Expansion of Sales Force. We needed to expand our sales force to continue
the growth of our business at a rapid pace. ComputerPREP had a sales force of
35 people which included 25 field sales representatives who called directly on
customers and 10 call center salespeople who managed both incoming and outgoing
call activity. Our sales force was composed of 13 people. ComputerPREP's sales
force was experienced in selling technology training courseware and was already
familiar with the CIW curriculum as it had been selling CIW courseware under
license from us since December 1998. Integration of the two sales forces allows
us to achieve the sales force expansion we required in a much shorter time
frame than we had previously anticipated.
Complementary Content. ComputerPREP offered courseware that complemented
Prosoft's existing suite of products and services. Of particular strategic
interest to us was ComputerPREP's courseware covering A+ certification training
and Linux training, both of which fit well with our strategic focus on vendor-
neutral technology training. A+ is a certification related to proficiency in
computer hardware and operating systems. As of March 2000, there were over
180,000 A+ certified technicians worldwide. We had identified both A+ and Linux
as attractive areas for future content development and over the last year had
begun developing Linux content and incorporating it into our CIW courseware.
Although ComputerPREP's A+ and Linux courseware are based on content which is
licensed from a third-party content provider, the courses are marketed under
the ComputerPREP brand name. Other complementary content includes
ComputerPREP's Microsoft Windows and Office applications training courseware,
most of which is based on proprietary content that is owned by ComputerPREP.
Sales and Marketing Infrastructure and Processes. The acquisition of
ComputerPREP enhanced the development of our sales and marketing efforts beyond
the previously discussed significant expansion of our sales force. ComputerPREP
had developed an impressive sales and marketing infrastructure which we will
leverage for our future growth. ComputerPREP had invested in advanced sales
force automation tools and had developed an infrastructure and processes that
provided a more effective means for managing and executing the sales process,
from the identification of potential customers to the gathering, storing and
analyzing of customer information to the filling and tracking of customer
orders and providing customer support. ComputerPREP also had a sophisticated
call center that served both a customer support function and a sales call
center function. William ("Lanny") Tucker, our Senior Vice President, Sales,
joined Prosoft in January 2000 from ComputerPREP, where he had been a Senior
Vice President since 1996 and where he was instrumental in building its sales
and marketing infrastructure. Mr. Tucker's familiarity with ComputerPREP helped
to facilitate the integration of our companies.
Expansion of Customer Base and Distribution Channels. ComputerPREP had an
existing and well-established customer base in three distribution channels: (i)
the learning center market; (ii) the educational institution market; and (iii)
the corporate training market. Our sales efforts historically have been focused
primarily on the learning center market, although we recently began to expand
the distribution of our products into the educational marketplace. ComputerPREP
had more than 5,000 active customers and a database of more than 10,000 past
customers. The integration of ComputerPREP's customer base will provide the
opportunity for cross-selling of additional content and services and the
opportunity to further position CIW certification as the industry-leading
certification program for Internet professionals.
Incremental Revenue Opportunities. We believe there is opportunity to
generate incremental revenues over and above ComputerPREP's existing revenues
and projected growth on a stand-alone basis. First, there is an opportunity to
enhance revenue by refocusing the sales team. We reduced the number of
courseware titles
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(ComputerPREP had previously offered more than 1,000 SKUs), established
incentives for the sales force to sell the more profitable titles and aligned
the sales force along vertical distribution channels (i.e., learning center,
educational institutions and corporate training markets). ComputerPREP's sales
force had been distracted from courseware sales by an effort to promote
ComputerPREP's distance learning technology platform, which business was
discontinued upon completion of the acquisition. Second, there is significant
opportunity for cross-selling of content and services to current ComputerPREP
and Prosoft customers (e.g., selling CIW courseware to a customer who is
currently purchasing A+ or vice versa). Finally, there is an opportunity for
revenue enhancement through incremental sales to ComputerPREP's previous
parent, Drake International.
Relationship with Drake International. Drake International ("Drake") is a
privately owned holding company which owns multiple businesses, primarily
focused on providing human resources services. Drake has an estimated 95,000
employees worldwide, and has a tremendous need for employee training and
assessment in the area of technology. As a result of the acquisition, Drake,
through one of its subsidiaries, owns a significant number of shares of our
common stock and warrants to purchase additional shares of our common stock.
Drake can earn additional incentive warrants based on incremental sales to
Drake subsidiaries. Drake is committed to employee training and certification
and has a successful history in the industry. Drake previously founded Drake
Prometric, a company that administers certification exams, which was sold to
Sylvan Learning Systems and became Sylvan Prometric, and was subsequently sold
to Thomson Corporation and is now known as Prometric.
Customers
We target learning centers, e-learning companies, internal corporate
training departments and academic institutions both domestically and
internationally. Our primary source of revenue is fees received from learning
centers who offer our training and certification programs throughout the world.
Historically, a significant percentage of our revenue has been derived from
IBM-affiliated entities. In fiscal 2000, IBM affiliates represented 22.9% of
our revenue. No other customer or group accounted for more than 10% of our
revenue in fiscal 2000. We expect that revenue from corporations such as IBM
will decrease as a percentage of our revenue as we increase sales through our
CIW ATPs and customers acquired through the ComputerPREP acquisition.
Products
We market and develop IT skills training and Internet certification
programs, which consist of courseware and tests, and we train instructors to
teach the CIW program. We make our programs available in a variety of ways:
. We partner with training providers that offer our programs to their
customers at their learning centers. These learning centers use our
instructors or their own instructors who have been trained to teach our
programs. For our CIW offerings, learning centers typically pay an annual
fee to be a CIW ATP. Learning centers may also purchase course materials
and instruction services.
. We sell our courseware to corporations that conduct internal training
programs. These corporations either use our instructors or their own
employees who have been trained to teach our programs. These corporations
pay us to use our instructors or to train their employees as instructors,
and purchase courseware from us for their employees in conjunction with
internal training.
. We license the content of our courseware to corporations and academic
institutions that distribute our courseware under either a reproduction
license or an OEM license. These corporations and academic institutions
pay us license fees for the use of our courseware content.
. We partner with e-learning providers that offer our programs over the
Internet to their customers. In a typical relationship we receive a
royalty on sales of the e-learning provided. Royalties range from 5% to
50% depending on the amount of investment made by the e-learning company
and on which entity
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actually sells the end product. In most cases we will negotiate for the
right to resell the e-learning product that results from our content
through the CIW ATP channel.
. We provide a Web-based synchronous e-learning product, CIW2Go, to our CIW
ATPs. We currently offer CIW Foundations, CIW Site Designer, CIW e-
Commerce Designer and Master CIW Designer via CIW2Go. Students are
enrolled by our CIW ATPs. Using our CIW Master Designer course as an
example, the students attend 32 synchronous class sessions each lasting
45 minutes via the Internet and conference call. Between sessions the
students complete homework assignments, participate in "class chats" and
receive mentoring from the instructor. List price for the online course
is $3,825. CIW2Go is sold exclusively by the CIW ATP channel and has been
gaining in popularity as a high-quality alternative to classroom
training.
Service Products. We have a pool of instructors, consisting of employees and
third-party contractors, that we provide to the training industry and to
corporations to teach our courses and conduct consulting. During fiscal 2000,
53% of our revenue was derived from these services. As of September 30, 2000,
we had 45 instructors on staff in the United States and Ireland; we also had
additional instructors available on a contract basis. Instructors usually
specialize in two or three of our CIW certification tracks.
Courseware Products. We believe that our general library of IT skills
courses, and specifically our proprietary library of Internet skills courses,
is one of the largest in the world. Our courses are organized into job-role
certification tracks and are vendor-neutral. As of September 2000, our course
content consists of 866 unique titles. Our courses are grouped in job-role
certification tracks.
Certification Products. In January 1998, we acquired Net Guru Technologies,
Inc. and its Certified Internet Webmaster program (CIW). The CIW program is
built around critical Internet job functions. In the early days of the
Internet, a single individual usually had responsibility for Web site
development and administration. Because these early Web experts knew something
about most aspects of the Internet, they acquired the title "Webmaster." The
Internet and its networks, servers and applications have now grown so complex
that no one person can easily provide expertise in all areas. Instead, distinct
Internet job roles have emerged. In the last year, some of these job roles have
been designated by the Association of Internet Professionals Certification
Accreditation Council, an industry group composed of industry leaders,
including Novell, Microsoft and IBM.
Our CIW certification tests cover Internet job roles and are administered
through leading testing services Prometric and Virtual University Enterprises
(VUE). Prometric has 5,200 testing affiliates worldwide and VUE has more than
2,000. These are the same testing services used by other leading certification
providers such as Microsoft, Cisco and Novell.
A development that parallels the growth of certification for Internet
professionals is the authorization of learning centers and e-learning companies
as providers of a particular curriculum. We have created a network of
companies, each with a number of authorized learning centers, known as CIW
Authorized Training Providers, or CIW ATPs. CIW ATPs agree to use only official
courseware provided by us, teach courses using only CIW certified instructors
and advertise courses using our official CIW trademark and logo. CIW ATPs
typically pay an initial fee of $3,000 to $6,000 to become a CIW ATP, and pay
an annual renewal fee of $3,000. These fees are sometimes waived for academic
institutions.
Sources of Revenue
We derive our revenue primarily from three sources: services, courseware and
certification.
Services Revenue. Services revenue includes fees received for training the
instructors of our learning center providers and of companies that plan to
conduct our courses internally. It also includes fees received for providing
instructors to our CIW ATPs or other companies to teach our courseware.
Finally, services revenue includes fees received for e-business consulting
services in which we assist our clients in implementing
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e-business solutions. Instructors are charged on a per day basis and consulting
is charged on a time and materials basis. We recognize services revenue when
instruction or consulting services are provided.
Courseware Revenue. Courseware revenue includes fees received from the sale
of course books and licensing of our training materials. We recognize
courseware revenue from the sale of course books when shipped. We also
recognize courseware revenue from courseware licenses, either reproduction
licenses or Original Equipment Manufacturer (OEM) licenses. Under a
reproduction license, a customer purchases the right to print a textbook using
that customer's own cover page and introduction, while our content remains
unchanged. Under an OEM license, we agree to make modifications to a course so
that it conforms to standards and appearances required by a third party, who
then sells the course under its own brand. Courseware licenses are either
purchased on a fee-per-use basis or for a one-time fee. Revenue is recognized
over the period in which we have a commitment for continuing involvement or
obligation to provide services to the customer. In some cases, no such
commitment exists, and revenue is recognized when courseware is shipped.
Certification Revenue. Certification revenue includes fees received from the
administration of our certification tests and annual fees received from CIW
ATPs. We recognize certification revenue when certification tests are
administered, and from CIW ATPs over the period during which we have a
commitment for continuing involvement or obligation to provide services to the
CIW ATP.
Sales, Marketing and Customer Support
We sell and market our courses to students mainly through a channel of
learning centers and academic institutions. As of September 30, 2000, we had 67
people directly involved in sales, marketing and customer support in the United
States and Ireland. Our customer courseware fulfillment organization in
Phoenix, Arizona reviews courseware orders for accuracy. Our service
fulfillment organization in Austin, Texas performs a similar function for
service orders. This service and support group assists the sales organization
by entering orders for courseware or instructors into our computer system, then
contacting the customer to make sure arrangements are satisfactory and to
obtain feedback from the customer after delivery of the courseware. Because
many customers need to make last-minute adjustments or wait to order courseware
until a few days before a class starts, our quick response is a competitive
advantage.
Competition
Each area of our business is highly competitive, and there currently are
only minor economic barriers to prevent entry into any of them. We not only
face competition from many other companies offering training and certification
services and products, but we also compete with the internal training,
marketing and publishing units of large corporations. Some of our competitors
have access to greater resources and capital than is currently available to us.
The trade association CompTIA has introduced i-Net+ certification, which
competes with our CIW Associate certification. This competing certification may
adversely affect our certification revenue. Individuals who have i-Net+
certification may receive the CIW Associate certification by providing contact
information and proof of i-Net+ certification. We believe this arrangement will
encourage those individuals to take further CIW courses and earn CIW
Professional and Master certifications, which could mitigate the possible
adverse effect of this competing certification. We also supply i-Net+
courseware to our customers because CompTIA does not offer courseware for its
certification. Trade associations such as Association of Web Professionals and
World Organization of Webmasters also have either released or announced plans
to offer Internet certifications. Two companies, Novell and iGeneration,
currently offer certification and courseware that compete with ours. Many
members of our channel already belong to the Novell education channel. Both of
these companies, if successful, could represent a significant competitive
challenge to our courseware and certification and require us to spend more
money than planned on sales, marketing and course development to successfully
compete with them. With the acquisition of ComputerPREP, we now also compete in
general IT skills courseware with Element K, Thomson Learning and Pearson LLC,
each of which has one or more subsidiaries that sells courseware.
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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's tends to be slow for the training
industry. Other seasonality is due to customers' spending patterns and
corporate training budgets.
Trademarks and Copyrights
Copyright laws protect most of our 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 newly
developed courseware products and on software products.
Employees
As of September 30, 2000, we employed a total of 190 associates in the
United States and in Europe, 75 of whom joined the Company as a result of the
ComputerPREP acquisition in July 2000. Of these associates, 45 are instructors,
24 are in courseware development and 67 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 want
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 standards. We have not experienced significant
difficulty in complying with such regulations and compliance has not had a
material impact on our business or our financial results.
ITEM 2. PROPERTIES
As of September 30, 2000, the Company had entered into leases for commercial
space in the following locations:
<TABLE>
<CAPTION>
Square Monthly Rent
Location Footage Cost Expiration
---------- ------- ------- -------------
<S> <C> <C> <C>
Santa Ana, CA..................................... 7,640 $10,021 July 2002
Phoenix, AZ....................................... 22,285 $32,707 April 2001
Austin, TX........................................ 18,280 $34,473 December 2006
Vienna, VA........................................ 3,497 $ 5,943 November 2001
Chapel Hill, NC................................... 3,853 $ 6,142 April 2002
Limerick, Ireland................................. 4,200 $ 3,850 April 2005
</TABLE>
The Austin, Texas location is our headquarters which provides a location for
executive offices, administrative, marketing, and instructor services. There
are two classrooms in Austin. The Phoenix, Arizona location serves sales,
courseware publishing, and customer service purposes. The facility in Santa
Ana, California serves our courseware development activities. The Vienna,
Virginia location is currently being
8
<PAGE>
subleased to a third party for purposes unrelated to our business. The Chapel
Hill, North Carolina location provides for courseware development and
consulting purposes. There are two classrooms in Chapel Hill. The Limerick
facility serves sales and customer service purposes. There is one classroom in
Limerick.
ITEM 3. LEGAL PROCEEDINGS
On April 22, 1998, we were sued by Frank J. DiSanto in state court in
Jackson County, Michigan. Mr. DiSanto's original complaint alleged
misrepresentation in connection with a confidential offering memorandum,
pursuant to which Mr. DiSanto purchased $600,000 of our common stock. Mr.
DiSanto sought rescission of the stock purchase, interest, attorneys' fees and
other unspecified damages. We filed an answer and affirmative defenses denying
liability. The plaintiff has had the opportunity to amend the complaint four
times. The court has struck all claims for damages except the claim that
Prosoft failed to use its best efforts under the terms of a registration rights
agreement to which plaintiff was a party. The case went to court ordered non-
binding mediation. The mediation panel ruled that the plaintiff had no basis
for damages, and recommended that the plaintiff be ordered to pay costs to
Prosoft in the amount of $20,000. The plaintiff rejected the mediation panel
ruling. Subsequent to mediation, the court denied a summary judgment motion
filed by Prosoft. Prosoft has filed a motion for reconsideration. If the motion
is again denied, a trial is scheduled for April 2001.
The Free Methodist Foundation and other parties related to Mr. DiSanto filed
an identical complaint to Mr. DiSanto's amended complaint on March 11, 1999 in
state court in Jackson County, Michigan. The lawsuit was removed to the U.S.
District Court for the Eastern District of Michigan. In September 2000, the
federal court found that there was no basis for the plaintiffs to seek damages,
and entered summary judgment in favor of Prosoft for all claims. The plaintiffs
filed a motion for reconsideration which was rejected by the court in October
2000.
From time to time, we may also be involved in litigation relating to claims
arising out of our operations in the normal course of business. As of the date
of this report, we are not a party to any other material legal proceedings.
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 National Market,
under the trading symbol of "POSO". Before August 14, 2000, the Company's
common stock traded on the NASDAQ SmallCap Market. The following table sets
forth for each quarter during fiscal years 2000 and 1999 the high and low bid
quotations for the Common Stock as reported by NASDAQ.
<TABLE>
<CAPTION>
Quarter Low High
------------------ ------ ------
<S> <C> <C>
May 1, 2000--July 31, 2000....................................... $10.19 $25.00
February 1, 2000--April 30, 2000................................. $ 8.88 $29.88
November 1, 1999--January 31, 2000............................... $ 2.81 $12.94
August 1, 1999--October 31, 1999................................. $ 2.13 $ 4.38
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
</TABLE>
On October 6, 2000, the Company had approximately 4,000 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.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with the consolidated financial statements and the notes thereto and other
information contained elsewhere in this report.
<TABLE>
<CAPTION>
Proprietorship
February 1, 1995
Year Ended July 31, December 6, (date of inception)
---------------------------------------------------- 1995 to to December 31,
2000 1999 1998 1997 July 31, 1996 1995
----------- ------------ ------------ ------------ ------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenue................. $19,571,807 $ 8,716,016 $ 8,836,685 $ 3,483,140 $ 907,772 $ 77,477
Income (loss) from
operations............. 1,427,317 (11,201,287) (16,771,296) (20,852,696) (3,006,162) (584, 200)
Net income (loss)....... 1,630,824 (11,606,935) (16,525,123) (20,651,273) (3,074,123) (604,326)
Net income (loss) per
share:
Basic................. .09 (.90) (1.48) (2.48) (.61) --
Diluted............... .08 (.90) (1.48) (2.48) (.61) --
<CAPTION>
As of July 31,
-------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Total assets............ $58,518,947 $ 7,634,376 $ 12,524,021 $ 20,793,677 $ 9,006,990
Short-term debt......... 85,211 918,680 1,465,159 1,960,221 351,509
Long-term debt.......... 246,128 2,840,058 559,205 1,519,965 437,532
Stockholders' equity.... 50,372,029 472,271 6,716,364 13,049,062 7,704,229
</TABLE>
10
<PAGE>
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
learning 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 learning center
network and focused exclusively on selling its educational programs and
instructional services to the technology training industry.
Results of Operations
Comparison of Fiscal Years Ended July 31, 2000 and July 31, 1999
Revenues
Services revenue for the year ended July 31, 2000 was $10.4 million,
compared to $6.7 million for the year ended July 31, 1999, an increase of $3.7
million or 56%. Services revenue for fiscal 2000 consisted primarily of fees
from providing instructors to teach at customer sites.
Courseware revenue increased to $6.6 million for the year ended July 31,
2000, compared to $1.6 million for the year ended July 31, 1999, an increase of
$5.0 million or 322%. This increase is the result of an increasing customer
base in connection with the CIW ATP program and strategic partner distribution
relationships.
Certification revenue increased to $2.5 million for the year ended July 31,
2000, compared to $471,473 for the year ended July 31, 1999, an increase of
$2.0 million or 438%. We began offering the certification testing during the
second quarter of fiscal 1999.
Cost of Revenues
Cost of revenues for the year ended July 31, 2000, were $9.9 million,
compared to $8.1 million for the year ended July 31, 1999, an increase of $1.8
million or 22%. Costs of services, courseware and certification decreased
significantly as a percent of total revenues in fiscal 2000, to 51%, from 93%
in fiscal 1999.
Gross margin (gross margin is calculated by subtracting cost of revenues
from total revenues) for the year ended July 31, 2000 was $9.7 million,
compared to $601,277 for the year ended July 31, 1999, an increase of $9.1
million. The increase in gross margin for the year ended July 31, 2000 was
primarily due to higher revenues and the absence of classroom equipment and
facilities costs, a result of the new business strategy adopted in March 1999.
Content Development
Content development expenses in fiscal 2000 increased $241,348, or 25%, to
$1.2 million from $1.0 million in fiscal 1999, but improved significantly as a
percentage of courseware revenue, 18% for fiscal 2000 compared to 61% for
fiscal 1999.
11
<PAGE>
Sales and Marketing
Sales and marketing expenses in fiscal 2000 increased $668,816, or 41%, to
$2.3 million, from $1.6 million in fiscal 1999, and represented 12% of total
revenues in fiscal 2000, compared to 19% in the prior fiscal year. The increase
was primarily related to increased payroll costs as the Company paid additional
commissions on increased revenues.
General and Administrative
General and administrative expenses increased $1.1 million, or 35%, to $4.2
million, from $3.1 million in fiscal 1999, but decreased as a percentage of
revenues to 21% from 35%. The increase in fiscal 2000 is primarily due to
expenses associated with increased head count and related expenses associated
with the expansion of the Company.
Depreciation and Amortization
Depreciation and amortization expenses for the year ended July 31, 2000,
were $1.0 million, compared to $2.4 million for the year ended July 31, 1999, a
decrease of $1.4 million, or 60%. This decrease is primarily due to the absence
of expenses associated with classroom equipment when the Company decided to
exit the retail training business.
Restructuring Charge (Credit)
In fiscal 1999, the Company recorded a $3.7 million charge for restructure
and unusual items associated with the Company's decision to exit the retail
training business. The restructuring charge included $2.3 million for leased
facilities, equipment and other termination costs. During fiscal 2000, the
Company negotiated lease termination agreements for several of those leases,
resulting in a restructuring credit of $366,000. As of July 31, 2000, $132,882,
or 4%, of the $3.7 million restructuring charge remains unpaid.
Interest
Net interest expense decreased $184,155 or 45%, to $221,493, from $405,648
in fiscal 1999. Interest expense consists principally of interest on
convertible debentures and is offset by interest earned on cash balances. The
decrease in net interest expense was a result of the conversion of all
unconverted debentures in the second quarter of fiscal 2000 and higher cash
balances in the last two quarters of fiscal 2000.
Deferred Income Tax Benefit
Income tax benefit for the fiscal year ended July 31, 2000 was $425,000,
compared to $0 for fiscal 1999. During fiscal 2000, the deferred tax asset
valuation allowance decreased by $425,000, primarily the result of the
Company's analysis of realizing some portion of the future tax benefit of tax
loss carryforwards and additional temporary differences. Although the
realization is not assured, management believes it is more likely than not that
a net deferred tax asset of $425,000 will be realized.
Net Income
Net income for the fiscal year ended July 31, 2000 was $1.6 million, or $.09
per share, $.08 per share diluted, compared to a net loss of $11.6 million, or
$.90 per share in fiscal 1999.
Comparison of Fiscal Years Ended July 31, 1999 and July 31, 1998
Revenues
Revenues for the year ended July 31, 1999 were $8.7 million, compared with
$8.8 million for the year ended July 31, 1998, a decrease of $120,669. This
decrease reflected a change in the Company's distribution
12
<PAGE>
strategy from a retail to a wholesale model. Revenues in fiscal year 1999 came
from instructor services, courseware licensing, course book sales, CIW ATP fees
and certification testing. In fiscal 1998, revenues came from student fees, and
courseware licensing.
Cost of Revenues
Cost of revenues for the year ended July 31, 1999 were $8.1 million,
compared with $12.7 million for the year ended July 31, 1998, a decrease of
$4.6 million, or 36%. The reduction in costs was primarily related to a
decrease in 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.
Content Development
Content development expenses in fiscal year 1999 were $957,132, compared
with $946,068 for the year ended July 31, 1998, an increase of $11,064, or 1%,
and remained stable as a percentage of courseware revenue.
Sales and Marketing
Sales and marketing expenses for the year ended July 31, 1999 were $1.6
million, compared with $4.0 million for the year ended July 31, 1998, a
decrease of $2.4 million 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
$5.5 million, compared with $8.0 million for the year ended July 31, 1998, a
decrease of $2.5 million, or 31%. The decrease is primarily due to savings from
headcount reductions and cost-control initiatives.
Depreciation and Amortization
Depreciation and amortization expenses for the year ended July 31, 1999 were
$2.4 million, compared to $3.4 million for the year ended July 31, 1998, a
decrease of $1.0 million, or 27%. This decrease is primarily due to the fixed
asset write-downs of $1.1 million included in the restructuring charge recorded
in the third quarter of fiscal 1999.
Restructuring Charge
A restructuring charge of $3.7 million 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, $1.1 million; and
leased facilities, equipment and other termination costs, $2.3 million. Of the
total $3.7 million restructuring charge, $2.5 million was settled in the fiscal
year and $1.2 million remained in accrued restructuring costs.
Interest
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 consisted principally of interest on the
convertible debentures, was 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 was required to be paid in cash.
13
<PAGE>
Net Loss
Net loss for the year ended July 31, 1999, was $11.6 million, compared to
$16.5 million for the year ended July 31, 1998, a decrease of $4.9 million, 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.
Liquidity and Capital Resources
Since inception, we have financed our operations and capital expenditure
requirements primarily through private placements of common stock, the sale of
convertible debentures and, to a lesser extent, from cash generated from
operations.
We had net cash from operating activities of $454,039 in fiscal year 2000,
while we had used net cash in operating activities of $6.1 million in fiscal
1999. Our cash and cash equivalents increased by $11.9 million, to $13.0
million at July 31, 2000, from $1.1 at July 31, 1999. The increase in net cash
from operating activities for fiscal 2000 was primarily due to income from
operations.
Net cash used by investing activities was $15.6 million for fiscal 2000,
including the purchase of ComputerPREP. Investing activities for fiscal 2000
also included purchases of property and equipment totaling $608,095.
Net cash provided to us by all financing activities was $27 million. We
funded the acquisition of ComputerPREP through a combination of cash and the
sale of our common stock. During fiscal 2000, we sold 3.3 million shares of our
common stock in a private placement and issued 2.1 million shares of our common
stock upon the exercise of stock options and warrants for a total of $28.3
million. We repaid debt of $1.4 million in fiscal 2000, consisting principally
of capital lease obligations.
In November 1998, we entered into an Accounts Receivable Line of Credit
agreement with a bank whereby up to 80% of the accounts receivable can be
advanced, up to $3.5 million. We have not borrowed under this line of credit.
Management believes that, with respect to its current operations, cash on
hand and funds from operation, together with our credit facility, will be
sufficient to cover reasonably foreseeable working capital and capital
expenditure requirements. Acquisition transactions, if any, are expected to be
financed through a combination of cash on hand and from operations, and the
possible issuance from time to time of long-term debt or other securities.
Depending upon conditions in the capital markets and other factors, we will
from time to time consider the issuance of debt or other securities, or other
possible capital markets transactions, the proceeds of which could be used for
other corporate purposes.
Year 2000 Issue Risks
Before January 1, 2000, there was a great deal of concern regarding the
ability of computers to adequately distinguish pre-2000 from post-2000 dates
due to the two-digit date fields used by many systems. Most indications to
date, however, are that computer systems are functioning normally and the
compliance and remediation work accomplished leading up to 2000 was effective
to prevent any problems. We have not experienced any Year 2000 (Y2K) problems.
Computer experts have warned, however, that there may still be residual
consequences of the change in dates. Any of these residual difficulties could
affect our financial position or results of operations through decreases in
sales of our products or services, increases in costs due to allocation of
resources to address Y2K problems, or litigation costs relating to losses
suffered by our customers due to Y2K problems. As of July 31, 2000, costs
incurred by us in connection with Y2K compliance were immaterial.
14
<PAGE>
Additional Factors That May Affect Future Results of Operations and Market
Price of Stock
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.
Possibility 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. We
have incurred net losses of approximately $50 million from our inception on
December 5, 1995, through July 31, 2000. For the year ended July 31, 2000, we
reported net income of $1,630,000. Our ability to continue to generate revenue
growth in the future is subject to uncertainty. In order to maintain
profitability, we must continue to increase our revenues. We cannot assure you
that we will be able to continue 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 $82 million from private
placements and incurred losses of approximately $50 million since our inception
through July 31, 2000. We experienced revenue growth in the last fiscal year as
a result of the implementation of the new business strategy. This shift in our
business strategy has provided increased revenues and if we continue to invest
in our products and brands at current levels and revenues continue to grow as
in the last fiscal year, we expect to maintain profitability for the next
fiscal year. We currently expect that cash on hand and funds from operations
will be sufficient to meet our minimum foreseeable working capital, capital
expenditure and capital lease requirements for the next 12 months. However, if
we do not maintain 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 maintain profitability and generate positive cash flow as
anticipated, we may need additional outside financing. Even if we do maintain
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 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 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
15
<PAGE>
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 7,557,833 shares (or
approximately 32% 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, which 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
None
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PROSOFTTRAINING.COM AND PREDECESSOR
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants......................... 18
Financial Statements of ProsoftTraining.com
Consolidated Balance Sheets at July 31, 2000 and 1999.................... 19
Consolidated Statements of Operations for the years ended July 31, 2000,
1999 and 1998........................................................... 20
Consolidated Statement of Stockholders' Equity for the years ended July
31, 2000, 1999 and 1998................................................. 21
Consolidated Statements of Cash Flows for the years ended July 31, 2000,
1999 and 1998........................................................... 22
Notes to Consolidated Financial Statements............................... 23
Schedule
Schedule II--Valuation and Qualifying Accounts........................... 34
</TABLE>
17
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
ProsoftTraining.com.
We have audited the accompanying consolidated balance sheet of
ProsoftTraining.com (formerly Prosoft I-Net Solutions, Inc.) and subsidiaries
as of July 31, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended July 31, 2000. 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 auditing standards generally
accepted in the United States of America. 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. at July 31, 2000 and 1999 and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended July 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
We have also audited Schedule II of ProsoftTraining.com for each of the
three years in the period ended July 31, 2000. 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 15, 2000
18
<PAGE>
PROSOFTTRAINING.COM AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31,
--------------------------
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents........................ $ 13,043,625 $ 1,152,715
Accounts receivable, less allowances of $251,287
and $199,362 at July 31, 2000 and 1999,
respectively.................................... 4,893,508 1,993,827
Notes receivable from officers/stockholders...... -- 29,900
Deferred income taxes............................ 425,000 --
Prepaid expenses and other current assets........ 195,580 319,943
------------ ------------
Total current assets........................... 18,557,713 3,496,385
Property and equipment, net...................... 1,068,276 334,001
Goodwill, net of accumulated amortization of
$1,088,280 and $548,638 at July 31, 2000 and
1999, respectively.............................. 37,636,812 2,176,453
License agreements, net of accumulated
amortization of $540,564 and $283,891 at July
31, 2000 and 1999, respectively................. 1,256,146 1,512,819
Other assets..................................... -- 114,718
------------ ------------
Total assets................................... $ 58,518,947 $ 7,634,376
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................. $ 5,147,397 $ 1,415,331
Accrued expenses................................. 2,187,701 565,322
Current portion of capital lease obligations..... 85,211 918,680
Accrued restructure costs........................ 132,882 1,230,025
------------ ------------
Total current liabilities...................... 7,553,191 4,129,358
Obligations under capital leases, net of current
portion......................................... 246,128 847,978
Convertible debentures........................... -- 1,992,080
Other............................................ 290,950 136,040
------------ ------------
Total liabilities.............................. 8,090,269 7,105,456
------------ ------------
Commitments and contingencies.................... -- --
Common stock subject to redemption............... 56,649 56,649
Stockholders' equity:
Common shares, par value $.001 per share:
Authorized shares: 50,000,000; outstanding:
22,645,462 and 14,297,133 shares, respectively.. 22,645 14,297
Additional paid-in capital....................... 100,561,949 52,380,454
Accumulated deficit.............................. (50,226,630) (51,857,454)
Accumulated other comprehensive income........... 88,813 9,722
Less common stock in treasury, at cost: 11,912
shares.......................................... (74,748) (74,748)
------------ ------------
Total stockholders' equity..................... 50,372,029 472,271
------------ ------------
Total liabilities and stockholders' equity..... $ 58,518,947 $ 7,634,376
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE>
PROSOFTTRAINING.COM AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Years Ended July 31,
---------------------------------------
2000 1999 1998
----------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Services............................ $10,425,731 $ 6,679,703 $ 6,936,864
Courseware.......................... 6,608,429 1,564,840 1,899,821
Certification....................... 2,537,647 471,473 --
----------- ------------ ------------
Total revenues.................... 19,571,807 8,716,016 8,836,685
----------- ------------ ------------
Costs and expenses:
Cost of revenues.................... 9,890,664 8,114,739 12,739,612
Content development................. 1,198,480 957,132 946,068
Sales and marketing................. 2,281,998 1,613,182 3,962,534
General and administrative.......... 4,158,149 3,073,971 4,606,343
Depreciation and amortization....... 981,199 2,435,131 3,353,424
Restructuring charge (credit)....... (366,000) 3,723,148 --
----------- ------------ ------------
Total costs and expenses.......... 18,144,490 19,917,303 25,607,981
----------- ------------ ------------
Income (loss) from operations......... 1,427,317 (11,201,287) (16,771,296)
Interest income....................... 199,877 77,985 520,993
Interest expense...................... (421,370) (483,633) (274,820)
----------- ------------ ------------
Income (loss) before income taxes..... 1,205,824 $(11,606,935) $(16,525,123)
Deferred income tax benefit........... 425,000 -- --
----------- ------------ ------------
Net income (loss)..................... $ 1,630,824 $(11,606,935) $(16,525,123)
=========== ============ ============
Net income (loss) per share:
Basic............................... $ 0.09 $ (0.90) $ (1.48)
=========== ============ ============
Diluted............................. $ 0.08 $ (0.90) $ (1.48)
=========== ============ ============
Weighted average shares outstanding:
Basic............................... 17,296,560 12,845,182 11,143,166
=========== ============ ============
Diluted............................. 20,455,015 12,845,182 11,143,166
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE>
PROSOFTTRAINING.COM AND SUBSIDIARIES
CONSOLIDATED STATEMENTS 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,
1997................... 10,119,651 $10,120 $ 36,764,338 -- $ -- $(23,725,396) -- $13,049,062
Net loss................ -- -- -- -- -- (16,525,123) -- (16,525,123)
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, warrants and
other transactions..... 554,128 553 1,607,780 -- -- -- -- 1,608,333
---------- ------- ------------ ------ -------- ------------ ------- -----------
Balances at July 31,
1998................... 11,502,079 11,502 47,030,129 11,912 (74,748) (40,250,519) -- 6,716,364
Net loss................ -- -- -- -- -- (11,606,935) -- (11,606,935)
Foreign currency
translation
adjustment............. -- -- -- -- -- -- 9,722 9,722
-----------
Total comprehensive
loss................... -- -- -- -- -- -- -- (11,597,213)
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
---------- ------- ------------ ------ -------- ------------ ------- -----------
Balances at July 31,
1999................... 14,297,133 14,297 52,380,454 11,912 (74,748) (51,857,454) 9,722 472,271
Net income.............. -- -- -- -- -- 1,630,824 -- 1,630,824
Foreign currency
translation
adjustment............. -- -- -- -- -- -- 79,091 79,091
-----------
Total comprehensive
income................. -- -- -- -- -- -- -- 1,709,915
Common stock issued for
debenture interest..... 18,937 19 82,255 -- -- -- -- 82,274
Conversion of debentures
and warrants to stock.. 1,787,500 1,788 1,988,081 -- -- -- -- 1,989,869
Issuance of common stock
for cash, net of
issuance costs of
$1,247,720............. 3,278,032 3,278 24,756,902 -- -- -- -- 24,760,180
Acquisition of
business............... 1,142,422 1,142 17,835,240 -- -- -- -- 17,836,382
Exercise of stock
options, warrants and
other transactions..... 2,121,438 2,121 3,519,017 -- -- -- -- 3,521,138
---------- ------- ------------ ------ -------- ------------ ------- -----------
Balances at July 31,
2000................... 22,645,462 $22,645 $100,561,949 11,912 $(74,748) $(50,226,630) $88,813 $50,372,029
========== ======= ============ ====== ======== ============ ======= ===========
</TABLE>
The accompanying notes are an integral part of these statements
21
<PAGE>
PROSOFTTRAINING.COM AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended July 31,
---------------------------------------
2000 1999 1998
----------- ------------ ------------
<S> <C> <C> <C>
Operating Activities:
Net income (loss).................... $ 1,630,824 $(11,606,935) $(16,525,123)
Adjustments to reconcile net income
(loss) to cash used in operating
activities:
Depreciation and amortization....... 981,199 2,435,131 3,353,424
Operating expenses paid in common
stock.............................. -- 20,000 77,161
Restructuring....................... (366,000) 1,456,465 --
Disposition of property and
equipment.......................... -- 48,805 --
Accretion of debt discount.......... 99,270 144,906 --
Debenture interest paid in common
stock.............................. 82,474 134,496 --
Deferred income taxes............... (425,000) -- --
Changes in operating assets and
liabilities:
Accounts receivable................ (1,320,710) 230,811 (499,741)
Prepaid expenses and other current
assets............................ 206,608 (65,331) 312,275
Accounts payable................... (377,478) 360,465 (2,258,493)
Accrued expenses................... 545,280 (438,910) (297,657)
Accrued restructure costs.......... (602,428) 1,230,025 --
Deferred revenue................... -- (23,105) (44,854)
----------- ------------ ------------
Net cash provided by (used in)
operating activities............. 454,039 (6,073,177) (15,883,008)
Investing Activities:
Acquisitions, net of cash acquired... (14,961,054) (330,000) (997,231)
Purchases of property and equipment.. (608,095) (26,477) (664,299)
Decrease(increase) in notes
receivable from
officers/stockholders............... 13,100 326,250 (104,880)
----------- ------------ ------------
Net cash used in investing
activities....................... (15,556,049) (30,227) (1,766,410)
Financing Activities:
Issuance of common stock............. 28,281,318 1,268,427 10,046,533
Purchase of treasury stock........... -- -- (74,748)
Principal payments on debt and
capital leases...................... (1,433,568) (528,884) (1,923,037)
Proceeds from convertible
debentures.......................... -- 3,060,000 --
Other................................ 190,774 136,040 --
----------- ------------ ------------
Net cash provided by financing
activities....................... 27,038,524 3,935,583 8,048,748
Effects of exchange rates on cash..... (45,604) 9,522 --
----------- ------------ ------------
Net increase (decrease) in cash and
cash equivalents..................... 11,890,910 (2,158,299) (9,600,670)
Cash and cash equivalents at beginning
of year.............................. 1,152,715 3,311,014 12,911,684
----------- ------------ ------------
Cash and cash equivalents at end of
year................................. $13,043,625 $ 1,152,715 $ 3,311,014
=========== ============ ============
Supplementary disclosure of cash paid
during the year for:
Interest............................ $ 209,296 $ 243,836 $ 340,166
=========== ============ ============
Income taxes........................ $ -- $ -- $ --
=========== ============ ============
Supplementary disclosure of non-cash
financing activities:
Equipment acquired under capital
leases.............................. $ -- $ -- $ 417,215
=========== ============ ============
Acquisition of businesses:
Assets acquired..................... $35,616,078 $ 1,403,709 $ 3,293,749
Liabilities assumed................. (5,375,130) (506,209) (96,518)
Common stock issued................. (15,279,894) (567,500) (2,200,000)
----------- ------------ ------------
Net cash paid for acquisitions....... $14,961,054 $ 330,000 $ 997,231
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE>
PROSOFTTRAINING.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Business
ProsoftTraining.com is a provider of information technology (IT) skills
content, training and certification. We sell and license our courseware,
instruction services and Internet skills certification, Certified Internet
Webmaster, or CIW, to training companies, internal corporate training
departments and academic institutions around the world. Our products allow
individuals to develop, upgrade and certify their IT skills.
Consolidation
The financial statements include the accounts of the Company and its wholly
owned subsidiaries ComputerPREP and Internet Certification Institute
International Limited. Intercompany transactions and balances are eliminated in
consolidation.
Currency Translation
Assets and liabilities of foreign functional currency financial statements
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 rates during the period. The Company accumulates translation
adjustments as a separate component of 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 $103,752, $90,713, and $926,791 in fiscal 2000, 1999 and 1998,
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 assets, generally two to seven years. Leasehold improvements are
amortized over the shorter of the life of the lease or the improvement.
Goodwill and License Agreements
Goodwill is the excess of the purchase price over the fair value of tangible
net assets acquired in business combinations accounted for as purchases.
License agreements are those rights acquired from others through
23
<PAGE>
PROSOFTTRAINING.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
business combinations to produce and distribute courseware and other
publications. Goodwill and license agreements are amortized on a straight-line
basis over a period of seven to twenty years, subject to impairment based on
the carrying value exceeding fair value.
Valuation of Long-Lived Assets
The Company periodically evaluates the carrying value of long-lived assets,
including goodwill, whenever events or changes in circumstances indicate the
carrying amount may not be fully recoverable. If the total of the expected
future undiscounted cash flows is less than the carrying amount of the asset, a
loss is recognized based on the amount by which the carrying value exceeds the
asset's fair market value.
Revenue and Cost Recognition
The Company derives revenue from three primary sources, services, courseware
and certification. Services revenue includes training and consulting services
and is recognized when the services are provided. Courseware revenue is derived
from the sale of books or licensing of our training materials for reproduction
or repurposing, or under OEM arrangements. Courseware revenue is recognized
when the products are shipped. Certification revenue includes testing fees from
administration of our certification tests and annual fees received from CIW
Authorized Training Providers (CIW ATP). Testing fees are recognized when the
tests are administered and CIW ATP fees are recognized over the period of our
obligation for continuing involvement with the CIW ATP.
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 over the amount an employee must pay to acquire the
stock.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
Income (Loss) Per Share
The Company uses the weighted-average number of common shares outstanding
during each period to compute basic income (loss) per common share. Diluted
income (loss) per share is computed using the weighted-average number of common
shares outstanding plus the number of additional common shares that would have
been outstanding if dilutive potential common shares had been issued. In fiscal
years 1999 and 1998 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.
24
<PAGE>
PROSOFTTRAINING.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 related activity are
summarized as follows:
<TABLE>
<CAPTION>
Severance and Property and
Other Related Equipment Leased Facilities
Employee Costs Write-downs and Other Costs Total
-------------- ------------ ----------------- ------------
<S> <C> <C> <C> <C>
Restructure charge...... $ 284,600 $ 1,104,452 $ 2,334,096 $ 3,723,148
Settlements............. (233,781) (1,104,452) (1,154,890) (2,493,123)
---------- ------------ ------------ ------------
Balance at July 31,
1999................... 50,819 -- 1,179,206 1,230,025
Settlements............. (50,819) -- (680,324) (731,143)
Restructure
adjustments............ -- -- (366,000) (366,000)
---------- ------------ ------------ ------------
Balance at July 31,
2000................... $ -- $ -- $ 132,882 $ 132,882
========== ============ ============ ============
</TABLE>
3. Acquisitions
In January 1998, the Company purchased all of the outstanding common stock
of Net Guru Technologies, Inc. (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, the fair value as of the date the
acquisition. 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.
In March 1998, the Company purchased all of the outstanding common stock of
The Chapel Hill Group-Technology Consultants, Inc. (Chapel Hill) 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, the fair value as of the date
the acquisition. As a result of the acquisition of Chapel Hill, which was
accounted for as a purchase, goodwill of $459,996 was recorded by the Company.
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, the fair value
as of the date the acquisition. As part of the January 1998 Net Guru
Technologies, Inc. (Net Guru) acquisition, the company also received 49% of
ICII. However, share 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 July 2000, the Company purchased all of the outstanding common stock of
ComputerPREP, Inc. (ComputerPREP), a wholly owned subsidiary of Drake Personnel
(New Zealand) Limited (Drake) in exchange for $15,000,000 in cash, 1,142,422
shares of the Company's common stock and warrants to purchase 600,000 shares of
common stock. Shares and warrants issued in connection with this purchase have
been valued at $17,800,000. As a result of the acquisition of ComputerPREP,
which was accounted for as a purchase, goodwill of $36,000,000 was recorded by
the Company.
Pro forma operating results giving effect to the Net Guru, Chapel Hill and
ICII acquisitions as though they occurred at the beginning of the fiscal year
1999 are not presented because they are not materially different
25
<PAGE>
PROSOFTTRAINING.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
than the Company's actual results. The following unaudited pro forma
information presents summary consolidated results of operations of the Company
and ComputerPREP as if this acquisition had occurred at the beginning of each
period presented. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of what would have occurred
had the acquisition been made as of these dates or of results which may occur
in the future.
<TABLE>
<CAPTION>
Year Ended July 31,
-------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues......................................... $ 31,579,121 $ 22,552,249
============ ============
Net income (loss)................................ $ 4,203,411 $ (9,823,385)
============ ============
Income (loss) per share:
Basic.......................................... $ .21 $ (.64)
============ ============
Diluted........................................ $ .18 $ (.64)
============ ============
4. Property and Equipment
Property and equipment consist of the following:
<CAPTION>
As of July 31,
-------------------------
2000 1999
------------ ------------
<S> <C> <C>
Computer equipment and software.................. $ 1,486,426 $ 748,089
Office equipment, furniture and fixtures......... 785,840 510,651
------------ ------------
2,272,266 1,258,740
Less accumulated depreciation.................... 1,203,990 924,739
------------ ------------
Property and equipment, net...................... $ 1,068,276 $ 334,001
============ ============
</TABLE>
5. Debt
In November 1998, the Company issued $3,200,000 of 13% convertible
debentures. The debentures were to mature in November 2003 and were convertible
into the Company's common stock at $1.60 per share. In connection with the
issuance of these debentures, the Company issued detachable stock warrants. The
value assigned to the warrants of $1,124,000, was reflected as debt discount
and was accreted over the term of the debentures using the interest method.
During the second quarter of fiscal 2000, the Company exercised its right to
force conversion of all unconverted debentures of $2,490,000 into the Company's
common stock. The debentures were converted into 1,556,250 shares of common
stock. As a result of this conversion, the convertible debenture principal and
related debt discount have been reclassified to stockholders' equity.
In November 1998, the Company obtained a $3.5 million credit facility with a
bank bearing interest at a current rate of 12% per annum. Available borrowings
are based on a formula of eligible accounts receivable. The term of the credit
facility is for one year, and from year to year thereafter, unless terminated
by the Company or the bank. Since its inception, there have been no amounts
outstanding under this credit facility.
26
<PAGE>
PROSOFTTRAINING.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Stock Options, Warrants and Put Rights on Common Stock
Stock options
The Company's stock option plans provide for the granting of options to
purchase shares of the Company's common stock to employees, officers, directors
and consultants. The plans include nonstatutory options and incentive stock
options. Options generally vest over three to four years and expire no earlier
than five years and no later than ten years after the date of grant. The plans
authorized the issuance of an aggregate of 4,292,500 shares of common stock. As
of July 31, 2000, 453,841 options were available for grant under the plans.
Stock option transactions are as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares 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
Granted............................................... 1,017,601 7.91
Exercised............................................. (931,683) 2.29
Cancelled............................................. (250,395) 4.27
---------- -----
Outstanding at July 31, 2000............................ 2,187,354 $4.32
========== =====
Exercisable at July 31, 1998............................ 1,165,699 $4.41
========== =====
Exercisable at July 31, 1999............................ 1,500,294 $2.19
========== =====
Exercisable at July 31, 2000............................ 1,232,248 $2.20
========== =====
</TABLE>
The following table summarizes information concerning options outstanding
and exercisable as of July 31, 2000:
<TABLE>
<CAPTION>
Options
Options outstanding exercisable
----------------------------------- ------------------
Weighted Weighted
average Weighted average average
exercise remaining exercise
Range of exercise prices Number price contractual life Number price
------------------------ --------- -------- ---------------- --------- --------
<S> <C> <C> <C> <C> <C>
$1.00--$4.00............ 1,440,979 $ 1.59 2.6 1,053,348 $ 1.45
$5.00--$9.50............ 322,000 7.71 3.1 168,900 6.58
$10.00--$15.37.......... 424,375 11.03 4.7 10,000 11.00
--------- ------ --------- ------
2,187,354 $ 4.32 1,232,248 $ 2.20
========= ====== ========= ======
</TABLE>
The Company has adopted only the disclosure provisions of Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation," for employee stock options and continues to apply Accounting
Board Opinion No. 25, "Accounting for Stock Issued to Employees," for recording
stock options granted. Pro forma information regarding net loss and net loss
per share is required by SFAS 123 as if the Company had accounted for its
stock-based awards to employees under the fair value method. The fair
27
<PAGE>
PROSOFTTRAINING.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Weighted average expected life (years)........................ 3.00 3.00 3.00
Expected stock price volatility............................... 1.00 0.60 0.70
Risk-free interest rate (percent)............................. 6.7 5.50 5.50
</TABLE>
For purpose of pro forma disclosures, the excess of the estimated fair value
of the options over the quoted market price of the Company's stock is amortized
to expense over the options' vesting period. The Company's pro forma
information for the years ended July 31 is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---------- ------------ ------------
<S> <C> <C> <C>
Net income (loss)--actual.......... $1,630,824 $(11,606,935) $(16,525,123)
Net loss--pro forma................ $ (704,900) $(13,411,641) $(18,284,022)
Net income (loss) per share--
actual............................ $ .09 $ (.90) $ (1.48)
Net loss per share--pro forma...... $ (.03) $ (1.04) $ (1.64)
</TABLE>
SFAS 123 is applicable only to options granted subsequent to December 8,
1995. Accordingly, 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, 2000, 1999 and 1998 was $6.93, $1.88 and $3.77,
respectively.
Warrants
During fiscal 1998, warrants for 81,664 shares of common stock 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. During fiscal 2000, the Company
issued warrants to purchase 1,374,035 shares of common stock exercisable at
$.01 to $16.50 per share. Warrants for 1,188,209 shares of common stock were
exercised at prices ranging from $1.10 to $3.38. As of July 31, 2000, warrants
for 1,710,826 shares of common stock, exercisable at $.01 to $16.50 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 were repurchased
under these rights. During fiscal 1999, the Company issued 567,098 shares of
common stock in settlement of put
28
<PAGE>
PROSOFTTRAINING.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
rights covering 56,816 and 147,717 shares at $6.275 and $11.125 per share,
respectively. As of July 31, 2000 and 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, production and
other office equipment under noncancellable lease agreements. The Company's
future minimum lease payments at July 31, 2000 under such agreements are as
follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
-------- ----------
<S> <C> <C>
2001.................................................. $121,989 $1,130,180
2002.................................................. 109,424 706,378
2003.................................................. 58,411 489,634
2004.................................................. 58,411 487,541
2005.................................................. 58,411 469,509
2006.................................................. 9,758 172,365
-------- ----------
Future Minimum Lease Payments......................... 416,404 $3,455,607
==========
Less amounts representing interest.................... (85,065)
--------
Present value of minimum lease payments............... 331,339
Less current portion.................................. (85,211)
--------
Obligations under capital leases, net of current
portion.............................................. $246,128
========
</TABLE>
Assets held under capital leases are included in property and equipment and
had a total cost of $350,872 at July 31, 2000 and 1999. These assets were fully
depreciated at July 31, 2000 and had a net book value of $571 at July 31, 1999.
Rent expense for the periods ended July 31, 2000, 1999, and 1998 totaled
$297,647, $792,881, and $1,269,779 respectively.
8. Earnings per Share
The following represents a reconciliation of weighted-average common shares
outstanding for purposes of calculating basic and diluted net income (loss) per
share:
<TABLE>
<CAPTION>
Year ended July 31,
--------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Average common shares
outstanding.............. 17,296,560 12,845,182 11,143,166
Assumed conversions:
Stock options........... 1,731,361 -- --
Warrants................ 1,427,094 -- --
---------- ---------- ----------
Diluted average common
shares outstanding....... 20,455,015 12,845,182 11,143,166
========== ========== ==========
</TABLE>
In fiscal years 1999 and 1998, all potential common shares were anti-
dilutive.
9. Contingencies
The Company is 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 financial position, results of operations or cash flows.
29
<PAGE>
PROSOFTTRAINING.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Income Taxes
A reconciliation of income tax (benefit) expense using the statutory federal
income tax rate of 34% is as follows:
<TABLE>
<CAPTION>
Year ended July 31,
------------------------------------
2000 1999 1998
---------- ----------- -----------
<S> <C> <C> <C>
Income tax at statutory rate......... $ 409,980 $(3,946,358) $(5,618,542)
Amortization of non-deductible
goodwill............................ 270,747 200,230 59,758
State income taxes, net of federal
benefit............................. 72,349 (696,416) (991,507)
Tax benefit related to exercise of
employee stock options.............. (3,621,108) -- --
Other................................ (152,968) (58,458) 825,291
Increase in valuation allowance...... 2,596,000 4,501,000 5,725,000
---------- ----------- -----------
Deferred income tax benefit.......... $ (425,000) $ -- $ --
========== =========== ===========
</TABLE>
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>
2000 1999
------------ ------------
<S> <C> <C>
Net operating loss carryforwards............... $ 21,712,000 $ 18,601,000
Accrued expenses............................... 157,000 579,000
Allowance for returns and for doubtful
accounts...................................... 105,000 85,000
Property and equipment......................... 329,000 --
Other.......................................... (46,000) (29,000)
------------ ------------
Total deferred tax assets.................... 22,257,000 19,236,000
Valuation allowance............................ (21,832,000) (19,236,000)
------------ ------------
Net deferred tax assets........................ $ 425,000 $ --
============ ============
</TABLE>
As a result of the significant net losses incurred in fiscal 1999 and 1998,
the Company recorded a valuation allowance to fully reserve its deferred tax
asset. However, as a result of the restructuring of its operations and the
positive operating results for fiscal 2000, management believes it is more
likely than not that the results of future operations will generate sufficient
income to realize the deferred tax asset as reduced by the valuation allowance.
At July 31, 2000, the Company has net operating loss carryforwards available
to offset future federal and state taxable income of approximately $57,100,000
and $28,500,000, respectively. Such carryforwards expire principally in 2011 to
2020 and 2001 to 2005, respectively. Federal and state net operating loss
carryforwards of approximately $9,800,000 and $4,900,000 were generated from
the exercise of employee stock options and any decrease in the valuation
reserve related to these carryforwards will be reflected in the financial
statements as a credit to additional paid-in capital. 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
30
<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 2000 Annual Meeting of Stockholders to be
filed with the Commission within 120 days of July 31, 2000 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 2000 Annual Meeting of Stockholders to be
filed with the Commission within 120 days of July 31, 2000 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 2000 Annual Meeting of Stockholders to be
filed with the Commission within 120 days of July 31, 2000 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 2000 Annual Meeting of Stockholders to be
filed with the Commission within 120 days of July 31, 2000 and is incorporated
herein by this reference.
31
<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.
The Company filed a report on Form 8-K, dated June 27, 2000, with the
Securities and Exchange Commission reporting the acquisition of
ComputerPREP, Inc. and the completion of a private placement of Common
Stock. Financial statements of ComputerPREP, Inc. and pro forma
combined financial information of the Company and ComputerPREP, Inc.
were included with that filing.
32
<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/ Robert G. Gwin
By: _________________________________
Robert G. Gwin
Chief Financial Officer
/s/ William J. Weronick
By: _________________________________
William J. Weronick
Vice President, Finance
Dated: October 25, 2000
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 25, 2000
______________________________________ and Chairman of the Board
Jerrell M. Baird (Principal Executive
Officer)
/s/ Robert G. Gwin Chief Financial Officer October 25, 2000
______________________________________ (Principal Financial
Robert G. Gwin Officer)
/s/ William J. Weronick Vice President, Finance October 25, 2000
______________________________________ (Principal Accounting
William J. Weronick Officer)
/s/ J.R. Holland, Jr. Director October 25, 2000
______________________________________
J.R. Holland, Jr.
/s/ Edward Walsh Director October 25, 2000
______________________________________
Edward Walsh
/s/ Jeffrey G. Korn Director October 25, 2000
______________________________________
Jeffrey G. Korn
/s/ Rich Groeneweg Director October 25, 2000
______________________________________
Rich Groeneweg
/s/ J. William Fuller Director October 25, 2000
______________________________________
J. William Fuller
/s/ Charles McCusker Director October 25, 2000
______________________________________
Charles McCusker
</TABLE>
33
<PAGE>
PROSOFTTRAINING.COM AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Deductions
Balance write-
at Charged to Acquired through offs,
beginning costs and Business net of Balance at
of year expenses Combination (1) recoveries end of year
--------- ---------- ---------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year ended July 31,
2000................. $ 199,362 $ 93,240 $ 65,143 $ (106,458) $ 251,287
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
Allowance for returns:
Year ended July 31,
2000................. $ -- $ -- $ -- $ -- $ --
Year ended July 31,
1999................. $ -- $ -- $ -- $ -- $ --
Year ended July 31,
1998................. $ 375,000 $ 36,792 $ -- $ (411,792) $ --
</TABLE>
--------
(1) Acquired through the acquisition of ComputerPREP in July 2000.
34
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibits
----------- -----------------------
<S> <C>
2 Agreement and Plan of Reorganization dated March 26, 1996 between the Company,
Pro-Soft Development Corp. and the shareholders of Pro-Soft Development Corp.
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 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.
10.4 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.
10.5 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.
10.6 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.
10.7 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.
10.8 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.
10.9 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 333-35249 and incorporated herein by reference.
10.10 Registration Rights Agreement dated as of December 2, 1998 among the Company
and various investers. Filed as Exhibit 10.20 to Registration Statement No.
333-35249 and incorporated herein by reference.
10.11 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.
10.12 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.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.13 Employment Agreement dated January 1, 1999 between the Company 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.
10.14 Employment Agreement dated February 1, 2000 between the Company and David I.
Perl. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended April 30, 2000 and incorporated herein by reference.
10.15 Employment Agreement dated February 1, 2000 between the Company and Jerrell M.
Baird. Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended April 30, 2000 and incorporated herein by reference.
10.16 Securities Purchase Agreement dated as of November 22, 1999 among the Company
and Hunt Capital Growth Fund, II L.P. Filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1999
and incorporated herein by reference.
10.17 Registration Rights Agreement dated as of November 22, 1999 among the Company
and Hunt Capital Growth Fund, II L.P. Filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1999
and incorporated herein by reference.
10.18 Warrant Agreement dated as of November 22, 1999 among the Company and Hunt
Capital Growth Fund, II L.P. Filed as Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended October 31, 1999 and
incorporated herein by reference.
10.19 Stock Purchase Agreement dated as of June 27, 2000 by and among the Company,
Drake Personnel (New Zealand) Limited and ComputerPREP, Inc. Filed as Exhibit
2.1 to the Company's Current Report on Form 8-K dated June 27, 2000 and
incorporated herein by reference.
10.20 Registration Rights Agreement dated as of June 27, 2000 by and among the
Company and Drake Personnel (New Zealand) Limited. Filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K dated June 27, 2000 and incorporated
herein by reference.
10.21 Common Stock Purchase Warrant dated June 27, 2000 to purchase 300,000 shares
issued to Drake Personnel (New Zealand) Limited. Filed as Exhibit 10.2 to the
Company's Current Report on Form 8-K dated June 27, 2000 and incorporated
herein by reference.
10.22 Common Stock Purchase Warrant dated June 27, 2000 to purchase 300,000 shares
issued to Drake Personnel (New Zealand) Limited. Filed as Exhibit 10.3 to the
Company's Current Report on Form 8-K dated June 27, 2000 and incorporated
herein by reference.
10.23 Securities Purchase Agreement dated June 27, 2000 by and among the Company and
various investors. Filed as Exhibit 10.4 to the Company's Current Report on
Form 8-K dated June 27, 2000 and incorporated herein by reference.
10.24 Registration Rights Agreement dated June 27, 2000 by and among the Company and
various investors. Filed as Exhibit 10.5 to the Company's Current Report on
Form 8-K dated June 27, 2000 and incorporated herein by reference.
10.25 Employment Agreement dated July 17, 2000 between the Company and Robert S.
Gwin.
21 Subsidiaries of the Company
23.1 Consent of Grant Thornton LLP
27 Financial Data Schedule.
</TABLE>
36
