Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal quarter ended January 31, 2005

Commission File Number 000-21535

Prosoft Learning Corporation

(Exact name of Registrant as specified in its charter)

410 N. 44^th Street, Suite 600

Phoenix, Arizona 85008

(Address of Principal Executive Offices)

Registrant’s telephone number, including area code: (602) 794-4199

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 whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

The number of shares of the registrants’ common stock, $.001 par value, outstanding as of March 14, 2005 was 4,614,660 shares.

Table of Contents

PROSOFT LEARNING CORPORATION

TABLE OF CONTENTS

Table of Contents

PART I

Item 1. Financial Statements

PROSOFT LEARNING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share data)

(Unaudited)

The accompanying notes are an integral part of these consolidated statements.

3

Table of Contents

PROSOFT LEARNING CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

The accompanying notes are an integral part of these consolidated statements.

4

Table of Contents

PROSOFT LEARNING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

The accompanying notes are an integral part of these consolidated statements.

5

Table of Contents

PROSOFT LEARNING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share data)

(unaudited)

1. General

These interim consolidated financial statements do not include certain footnotes and financial information normally presented annually under accounting principles generally accepted in the United States of America and, therefore, should be read in conjunction with the Consolidated Financial Statements and the Notes thereto contained in the Company’s 2004 Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC. The results of operations for the interim period ended January 31, 2005, are not necessarily indicative of results that can be expected for the fiscal year ending July 31, 2005. The interim consolidated financial statements are unaudited but contain all adjustments, consisting of normal recurring adjustments management considers necessary to present fairly its consolidated financial position, results of operations, and cash flows as of and for the interim periods. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

The report on the Company’s consolidated financial statements as of and for the year ended July 31, 2004, issued by the Company’s independent registered public accounting firm and dated September 24, 2004, contained a qualification regarding matters related to the substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements for the year ended July 31, 2004, the Company is party to certain note agreements that provide creditors with the ability to demand accelerated repayment of amounts owed to those creditors if the Company is unable to comply with the terms of those note agreements. Should the Company fail to comply with the terms of those agreements the creditors could demand accelerated repayment of the amounts owed. The Company’s ability to comply with the terms of the agreements is uncertain and raises substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Certain reclassifications have been made in the prior-period consolidated financial statements to conform with the current-period presentation. All share and per share data have been restated to reflected the one-for-six stock split as approved by the shareholders and the Board of Directors on January 7, 2005.

2. Comprehensive Income

The components of comprehensive income for the three and six months ended January 31, 2005 and 2004 are as follows:

3. Recent Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 151 (“FASB No. 151”), Inventory Costs, an amendment of APB No. 43, Chapter 4. The amendments made by FASB No. 151 are designed to improve financial reporting by requiring that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) be recognized as current-period charges and by requiring the allocation of fixed production overhead to inventory based on the normal capacity of production facilities. FASB No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 24, 2004. We are currently evaluating the impact that the adoption of FASB No. 151 may have on our financial position, results of operations and cash flows.

In December 2004, the FASB issued Statement No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29. FASB Statement No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005, with earlier application permitted. We are currently evaluating the impact that the adoption of FASB Statement No. 153 may have on our financial position, results of operations and cash flows.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123 (revised 2004), Share-Based Payment (“FASB No. 123R”), which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. FASB No. 123R supersedes Accounting Principal Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, FASB No. 123R requires that all share-based payments to employees, including grants of employee stock options, be recognized in the financial statements based on their fair values. Currently we account for these payments under the intrinsic value provisions of APB No. 25 with no expense recognition included on our consolidated income statements. We are required to adopt FASB No.

6

Table of Contents

123R effective August 1, 2005. FASB No. 123R offers several alternatives for implementation. We are currently evaluating the impact that the adoption of FASB No. 123R may have on our financial position, results of operations and cash flows. See Note 7 of the Notes to the Consolidated Financial Statements for the proforma impact of stock-based compensation on the three and six month periods ended January 31, 2005 and January 31, 2004, respectively.

4. Earnings (Loss) Per Share of Common Stock

Basic earnings (loss) per share, or basic EPS, of common stock was calculated by dividing net loss by the weighted-average number of common shares outstanding during the period. Since the Company recorded losses for the three-month periods and six month periods ended January 31, 2005 and 2004, the diluted EPS of common stock is the same as the basic EPS, as any potentially dilutive securities would be anti-dilutive.

The reconciliation of the amounts used to calculate the basic EPS and diluted EPS is as follows:

5. Goodwill and License Agreements

License agreements are those rights acquired from others through business combinations to produce and distribute courseware and other publications. License agreements are amortized on a straight-line basis over a period of seven years, subject to impairment based on the carrying value exceeding fair value. Goodwill is not amortized, but tested for impairment at least annually in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. The Company adopted SFAS No. 142 on August 1, 2002 and identified one reporting unit and discontinued goodwill amortization at that time.

Intangible assets consist of the following:

Amortization expense related to intangible assets totaled $64 and $128 during the three and six months ended January 31, 2005 and $64 and $127 during the three and six months ended January 31, 2004. The aggregate estimated amortization expense for intangible assets remaining as of January 31, 2005 is $101. License agreements will become fully amortized during the remainder of fiscal year 2005.

6. Valuation of Long-Lived Assets

The Company evaluates the carrying value of other long-lived assets whenever events or changes in circumstances indicate the carrying amount may not be fully recoverable. If the total expected future undiscounted cash flow is less than the carrying value of the assets, a loss is recognized based on the amount by which the carrying value exceeds the asset’s fair value.

7

Table of Contents

7. Stock-Based Compensation

The Company has adopted only the disclosure provisions of FASB No. 123 for employee stock options and continues to apply Accounting Principles Board, or APB, Opinion No. 25 for recording stock options issued to its employees and directors. Accordingly, no compensation expense was recognized in connection with the grant of options during the periods presented, as all options granted had an exercise price equal to the market value of the underlying stock on the date of grant. Pro forma information regarding net loss and net loss per share is required by FASB No. 123 as if the Company had accounted for its stock-based awards to employees under the fair value method. The fair value of the Company’s stock-based awards to employees was estimated using the Black-Scholes multiple option model.

The fair value of the Company’s stock-based awards to employees was estimated assuming no expected dividends and the following assumptions:

FASB Statement No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123, amends the disclosure requirement of FSAB Statement No 123. The following table illustrates the effect on net loss if the fair-value-based method had been applied to our stock-based employee compensation plans in each period.

8. Debt

On August 30, 2004, the Company issued $1.35 million of Secured 8% Convertible Notes due August 30, 2006, to institutional investors. The Notes are secured by all of the assets of the Company, subject to an intercreditor agreement with the Company’s existing secured creditor, and require interest payments semi-annually, in cash or, at the Company option, in shares of its Common Stock or in the form of additional one-year notes accruing interest at the rate of 10% per annum. The Notes are convertible into common stock of the Company at $1.68 per share. In connection with this financing, the Company also issued to the investors (i) warrants to purchase up to 200,893 shares of the Company’s Common Stock, exercisable at $2.28 per share and expiring in March 2010, and (ii) warrants to purchase up to 642,858 shares, exercisable at $2.10 per share and generally expiring in February 2006.

The intrinsic value of the beneficial conversion feature of the note was $0.79 million and the portion of the proceeds allocated to the warrants issued in connection with the debt totaled $0.56 million. Thus, $1.35 million was recognized as a reduction of the convertible debt and an addition to paid-in capital.

The Company engaged a registered broker-dealer to assist in the sale of the Notes and Warrants. The broker-dealer received a placement fee of $0.10 million and a warrant to purchase 60,268 shares at $2.28 per share. The issuance of the warrants to the broker-dealer was valued at $0.10 million.

8

Table of Contents

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this document. Results for interim periods are not necessarily indicative of results for the full year. Statements in this report that relate to future results and events are based on our current expectations. Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties, including those discussed under “Additional Factors That May Affect Results of Operations and Market Price of Stock” on Page 12.

Overview

Prosoft Learning is a leading provider of information and communications technology (“ICT”) curriculum and certifications which helps individuals develop, upgrade and validate critical ICT skills. We sell and license our content and certifications to academic institutions, commercial training centers, internal corporate training departments and individuals around the world.

Development of Business

Prosoft Learning 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. Fixed 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 content and educational services to the technology training industry and building its propriety certification programs. The demand for instruction services declined sharply from fiscal year 2000 to fiscal year 2002. At the end of fiscal year 2002, the Company reduced its full-time instructor base to zero and effectively exited the services business. The Company has refocused its business on offering job-role certifications and proprietary or content solutions to academic institutions and adult education providers.

Results of Operations

Revenues

Total revenues were $1.76 million in the three months ended January 31, 2005, compared with $2.00 million in the three months ended January 31, 2004, a decrease of $0.24 million. Total revenues decreased to $3.61 million in the six months ended January 31, 2005 from $4.33 million in the six months ended January 31, 2004, a decrease of $0.72 million. The decline in total revenues was driven by continued weakness in corporate training budgets and reduced purchases of our courseware products and certifications by our learning center customers. In addition, academic customer purchases continue to be limited by budget constraints, though academic adoption for our programs continues to progress.

Costs of Revenues

Costs of revenues decreased $0.16 million, or 26 percent, compared with the year-ago quarter, and decreased $0.49 million, or 34 percent, compared with the year-ago six-month period. This decrease is related to the decrease in revenues and a reduction in costs of revenues related to a credit in the current quarter for over-billing by our major content supplier in prior periods. As a percentage of revenue, gross profit, defined as total revenues less costs of revenues, increased to 73 percent from 68 percent in the year-ago quarter and to 74 percent from 67 percent in the year-ago six-month period.

Content Development

Content development expenses increased $0.05 million, or 31 percent, compared with the year-ago quarter and increased $0.07 million, or 24 percent, compared with the year-ago six-month period. The increase in content development expenses was attributable to the development of new products including the introduction of a major revision to our CIW product line.

9

Table of Contents

Sales and Marketing

Sales and marketing expenses decreased $0.16 million, or 23 percent, compared with the year-ago quarter, and decreased $0.23 million, or 17 percent, compared with the year-ago six month period. The decrease was attributable to lower revenues and associated sales commissions and a decrease in the number of sales employees.

General and Administrative

General and administrative expenses were $0.76 million for the current quarter compared with $0.62 million for the year-ago quarter, an increase of $0.14 million, or 23 percent. General and administrative expenses increased $0.21 million, or 17 percent, for the six months ended January 31, 2005, compared with the year-ago six-month period. The increase was primarily attributable to non-recurring legal fees and professional services expenses related to the abandoned merger with Trinity Learning Corporation in July 2004, higher personnel costs and other professional services expenses.

Depreciation and Amortization

Depreciation and amortization expenses decreased 16 percent compared with the year-ago quarter and with the year-ago six-month period. The decrease is due primarily to the closing of the Santa Ana, California and Eden Prairie, Minnesota offices in the year-ago periods.

Gain on the Settlement of Liability

The gain on the settlement of liability for $0.10 million resulted from the settlement of a liability of $0.18 million for $0.08 million.

Interest Income and Interest Expense

Interest expense was $0.89 million for the three months ended January 31, 2005, compared with $0.07 for the three months ended January 31, 2004, an increase of $0.82 million. Interest expense increased $0.97 million during the six months ended January 31, 2005, compared with the year-ago six-month period. The increase is attributable to the issuance on August 30, 2004 of $1.35 million in Secured 8% Convertible Notes and the subsequent conversion of 54 percent of the debt into the Company’s common stock by the Investors. The conversion of the debt accelerated the amortization of deferred debt issuance expenses and debt discount in the three months ended January 31, 2005.

The components of interest expense are reflected in the following table (dollars are in thousands):

Liquidity and Capital Resources

The Company’s primary need for liquidity relates to funding its operations and financing its working capital needs. At January 31, 2005, the Company had $0.88 million of cash.

Net cash used in operating activities was $0.82 million in the six months ended January 31, 2005, compared with $0.36 million for the six months ended January 31, 2004, an increase of $0.46 million. Cash used in operating activities for the six months ended January 31, 2005 was the result of our net loss of $1.52 million, adjusted for non-cash items of $1.24 million and a $0.54 million increase in changes in operating assets and liabilities, which consisted primarily of an increase in our outstanding trade accounts receivable.

There was no cash used in investing activities for the six months ended January 31, 2005, compared with $0.02 million in the same year-ago period. Cash used in investing activities for the six months ended January 31, 2004 was related to the purchase of property and equipment.

10

Table of Contents

Cash provided by (used in) financing activities was $1.15 million and $(0.03) million in the six months ended January 31, 2005 and 2004, respectively. The change in cash provided by financing activities was due to the issuance on August 30, 2004 of $1.35 million of Secured 8% Convertible Notes, due August 30, 2006, to institutional investors. We received net proceeds of $1.15 million. The Notes are secured by all of the assets of the Company, subject to an intercreditor agreement with the Company’s existing secured creditor, and require interest payments semi-annually on February 28 and August 30, in cash or, at the Company option, in shares of its Common Stock or in the form of additional one-year notes accruing interest at the rate of 10% per annum. The Notes are convertible into common stock of the Company at $1.68 per share. In connection with this financing, the Company also issued to the investors (i) warrants to purchase up to 200,893 shares of the Company’s Common Stock, exercisable at $2.28 per share and expiring in March 2010, and (ii) warrants to purchase up to 642,858 shares, exercisable at $2.10 per share and generally expiring in February 2006. The portion of the proceeds allocated to the warrants issued in connection with the debt totaled $0.56 million and the intrinsic value of the beneficial conversion feature of the notes was $0.79 million. Thus, $1.35 million was recognized as a reduction of the convertible debt and an addition to paid-in capital.

The following summarizes our contractual cash obligations as of January 31, 2005(in millions):

The long-term debt identified as due in year 2007 in the preceding table represents principal and accrued interest to date on the Subordinated Secured Convertible Note of $3.42 million and principal remaining on the Secured 8% Convertible Notes of $0.63 million. In the three months ended January 31, 2005, investors converted $0.73 million of the Secured 8% Convertible Notes into the Company’s common stock. Given the potentially significant cash requirements to meet this debt repayment schedule during the first fiscal quarter of our fiscal year 2007, the Company will need to seek additional capital to refinance these note issues in fiscal 2007 if they have not been converted into common stock prior to that time.

A term of the Subordinated Secured Convertible Note and the Secured 8% Convertible Notes requires that the Company maintain the listing and trading of its common stock on either the Nasdaq National Market or the Nasdaq SmallCap Market. If the Company is unable to maintain its listing on Nasdaq for any reason, the Company will be in default on the listing requirement covenant in the note agreements. Such a default provides the holders of the notes with the ability to require immediate repayment of the principal and interest then owed under the notes.

We believe, based on current activity and expectations, including maintaining our listing on Nasdaq, that cash on hand will be sufficient to meet our cash requirements for at least the next twelve months. If future financing is required, we will seek to arrange a financing to meet our requirements with the timing, amount and form of issue depending on the prevailing market and general economic conditions.

Critical Accounting Policies

Our critical accounting policies are as follows:

Revenue recognition

The Company derives revenue from two primary sources: content and certification.

Content revenue includes fees received from the sale of course materials such as books, CD-ROM’s, Web-based course books, assessment products and content licenses. We recognize content revenue from the sale of course books and other products when they are shipped. Content 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 most cases no such commitment exists, and revenue is recognized when content is shipped.

Certification revenue includes fees paid by certification candidates to take our certification tests and annual fees received from our education partners, including CIW ATP’s. We recognize certification revenue when certification tests are administered, and partner fees over the period during which we have a commitment for continuing involvement or obligation to provide services to the partner.

11

Table of Contents

Valuation of intangible and long-lived assets

We assess the impairment of identifiable intangibles, long-lived assets and related goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important which could trigger an impairment review include the following:

When it is determined that the carrying value of intangibles and long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, the measurement of any impairment is determined and the carrying value is reduced as appropriate. Goodwill is tested for impairment at least annually in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets.

Additional Factors That May Affect Results of Operations and Market Price of Stock

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that involve a number of risks and uncertainties. Without limiting the foregoing, the words “believes”, “anticipates”, “plans”, “expects” and similar expressions are intended to identify forward-looking statements. In addition, forward-looking statements include, but are not limited to, statements regarding future financing needs, changes in business strategy, competitive advantage, market growth, future profitability, and factors affecting liquidity. Although we believe that these statements are reasonable in view of the facts available to us, 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 in this Form 10-Q and those discussed in our Annual Report on Form 10-K for the year ended July 31, 2004 on file with the SEC and subsequent reports on Forms 10-Q and 8-K. We undertake no obligation to update this forward-looking information.

We have limited cash resources and may need to raise additional funds.

We are operating with limited cash resources. Based on our current activity and expectations, including maintaining our listing on Nasdaq, we believe we have sufficient cash resources for at least the next twelve months of operations. However, a moderate change to our revenue-generating capability or expense structure could result in increased operating losses. Increased operating losses would erode our liquidity by further reducing cash resources and could result in the need to raise additional funds.

In the first quarter of fiscal year 2007 both the Subordinated Secured Convertible Note and the Secured 8% Convertible Notes will mature and all outstanding principal and capitalized interest thereupon will become due and payable. Although these securities are convertible into common stock by their holders prior to their maturity dates, the Company may need to seek capital to refinance these debt instruments.

Given our relatively small size and historical operating results, our access to capital is limited. Should we need to raise additional funds, it cannot be certain that we will be able to obtain them on terms satisfactory to us. If we could not raise additional funds on terms satisfactory to us, we would be forced to raise funds on terms that we would not otherwise accept, seek funds through other means such as a sale of some or all of our assets or operations, or otherwise significantly alter our operating plan, any of which could have a material adverse effect on our business, financial condition, and results of operations.

If our common stock is delisted from the Nasdaq Stock Market, payment of our secured debt could be accelerated.

A term of the Secured Convertible Note and the Secured 8% Convertible Notes requires that the Company maintain the listing and trading of its common stock on the Nasdaq SmallCap Market. If we do not maintain the $1.00 minimum bid price requirement or any other continued listing requirement under Nasdaq rules, and if Nasdaq delists our common stock, we will be in default on the listing requirement covenant in the note agreements. Such a default provides the holders of the notes with the ability to require immediate repayment of the principal and interest then owed under the notes. If the Company’s stock is delisted, and if as a result of that delisting the lenders should choose to accelerate the repayment of their notes, the Company may be unable to repay the principal and interest owed and would be forced to seek alternative financing at that time.

We have incurred significant losses to date and may continue to incur losses in the future.

We have incurred losses of approximately $102 million from our inception in 1995 through January 31, 2005. Our ability to generate revenue growth in the future is subject to uncertainty. There can be no assurance that we will be able to increase revenues, manage expenses or maintain profitability. Should revenue decrease in the future, we may not be able to stem losses thereafter through expense reductions, given the magnitude of the reductions already implemented.

12

Table of Contents

Our industry is intensely competitive and we may lose market share to companies developing similar services and products and to larger competitors with greater resources.

We face substantial competition in the education and training market. Competition in the ICT training market is intense and is affected by the rapidly evolving nature of the information technology 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 do we. 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.

In our industry, technology advances rapidly and industry standards change frequently. To remain competitive and improve profitability, we must continually enhance our existing products and promptly introduce new products, services, and technologies to meet the changing demands of our customers. Our failure to respond to technological changes quickly would adversely affect our financial performance.

Demand for our products is susceptible to adverse economic conditions and educational funding constraints.

Our business and financial performance is influenced by adverse financial conditions affecting our target customers and by general weakness in the economy. In the short run, many corporations may not view ICT skills training as critical to the success of their businesses. When these companies experience poor operating results, whether as a result of adverse economic conditions, competitive issues or other factors, they may decrease or delay spending on training and education. In addition, most of our academic customers are reliant on the availability of funding to pursue their existing educational programs and new initiatives. If educational funding is limited, whether as a result of overall economic conditions, budgetary constraints, the political environment or other factors, these institutions may delay or forego spending for our content and certification products.

Shares that may be sold could result in a market overhang that depresses our stock price.

The potential for 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 that have been filed with the SEC remain effective, the selling stockholders under those registration statements may sell approximately 3.3 million shares, or approximately 46% of the shares of common stock outstanding (assuming the issuance of all shares covered by those registration statements). These shares were privately issued and many shares 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.

Our common stock may experience extreme price and volume fluctuations.

Our common stock has experienced substantial price and volume volatility, which may continue 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, but not limited to, the following may have a significant effect on the market price of our common stock:

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk relating to our operations results primarily from changes in foreign currency exchange rates. A portion of our cash flow is expected to be received in non-U.S. currencies. In addition, a portion of our assets is held in foreign subsidiaries. Accordingly, we are exposed to foreign currency fluctuations against the U.S. dollar. Such exposure is not significant relative to our overall operations and we believe that the risk associated with our exposure will not have a material adverse impact on our consolidated results of operations.

13

Table of Contents

Item 4. Controls and Procedures

Based on evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) our Chief (principal) Executive Officer and Vice President Finance (principal financial officer) have concluded that such controls and procedures were effective as of the period covered by this report. In connection with such evaluation, no changes in our internal control over financial reporting was identified that occurred during the period covered by this report and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 4. Submission of Matters to Vote of Security Holders

The Company’s Annual Meeting of Stockholders was held on January 7, 2005. At the Annual Meeting, the following director was elected to serve as Class II director for a three-year term and until their respective successors are elected and qualified.

In addition, the stockholders approved the following proposals:

Item 6. Exhibits

14

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

15