U.S. 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 QUARTERLY PERIOD ENDED FEBRUARY 28, 2001
COMMISSION FILE NO. 1-13830
TELESOFT CORP.
(Name of Registrant as specified in its charter)
ARIZONA 86-0431009
(State of Incorporation) (IRS Employer Identification No.)
3443 NORTH CENTRAL AVENUE #1800
PHOENIX, ARIZONA 85012
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (602) 308-2100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
issuer was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No ( )
At April 12, 2001, the Registrant had outstanding 1,415,833 shares of common
stock, no par value.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Balance Sheets as of February 28, 2001 and November 30, 2000 . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the three month periods ended February 28, 2001 and February 29, 2000 4
Consolidated Statements of Cash Flows for the three month periods ended February 28, 2001 and February 29, 2000 5 - 6
Notes to the Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 - 8
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.. . . . . . . . . 9 - 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.. . . . . . . . . . . . . . . . . . . . . . 12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 3. DEFAULTS ON SENIOR SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28, 2001 November 30, 2000
(unaudited)
ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . $ 6,370 $ 41,434
Accounts receivable, net of allowance for uncollectibles of $532,211
and $423,437 at February 28, 2001 and November 30, 2000,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . 6,627,558 7,737,213
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165,017 208,325
Income taxes receivable. . . . . . . . . . . . . . . . . . . . . . . 236,781 349,364
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 223,500 188,400
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97,485 94,010
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 7,356,711 8,618,746
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . 1,290,113 1,407,118
Computer software costs, net . . . . . . . . . . . . . . . . . . . . 37,548 54,484
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177,532 141,709
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,861,904 $10,222,057
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Related party debt . . . . . . . . . . . . . . . . . . . . . . . . . $ 600,000 $ 1,375,000
Accounts payable and accrued liabilities . . . . . . . . . . . . . . 4,491,739 5,199,187
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . 361,912 203,900
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . 782,696 1,130,375
----------- -----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . 6,236,347 7,908,462
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,900 121,900
----------- -----------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 6,362,247 8,030,362
----------- -----------
Commitments
Stockholders' Equity:
Preferred Stock, no par value, 10,000,000 shares authorized; . . . . - -
none issued and outstanding
Common stock, no par value, 50,000,000 shares authorized;
1,684,934 issued and 1,415,833 and 1,376,828 outstanding,
respectively . . . . . . . . . . . . . . . . . . . . . . . . 956,731 665,125
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . 2,354,626 2,191,695
----------- -----------
3,311,357 2,856,820
Less: Treasury stock, 269,101 and 178,106 shares, at cost. . . . . (811,700) (665,125)
----------- -----------
Total stockholders' equity 2,499,657 2,191,695
----------- -----------
Total liabilities and stockholders' equity . . . . . . . . . . . . . $8,861,904 $10,222,057
=========== ===========
The Accompanying Notes are an Integral Part of
the Consolidated Financial Statements.
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended February 28, 2001 and February 29, 2000 (unaudited)
2001 2000
----------- -----------
Sales, net . . . . . . . . . . . . . . . . . . $6,119,019 $7,022,543
Cost of sales. . . . . . . . . . . . . . . . . 2,837,878 3,626,409
----------- -----------
Gross profit . . . . . . . . . . . . . . . . . 3,281,141 3,396,134
General and administrative expenses. . . . . . 2,733,682 3,172,828
----------- -----------
Operating income . . . . . . . . . . . . . . . 547,459 223,306
----------- -----------
Other income (expense):
Interest income. . . . . . . . . . . . . . . . 11,614 224,767
Interest expense . . . . . . . . . . . . . . . (18,025) -
Other (expense) income . . . . . . . . . . . . (1,042) 145,189
----------- -----------
(7,453) 369,956
----------- -----------
Income before provision for income taxes . . . 540,006 593,262
Provision for income taxes . . . . . . . . . . 230,500 215,600
----------- -----------
Net income . . . . . . . . . . . . . . . . . . 309,506 377,662
Other comprehensive (loss) income, net of tax
Reclass of holding gains realized during
period and included in income statement - (66,120)
----------- -----------
Comprehensive income . . . . . . . . . . . . . $ 309,506 $ 311,542
=========== ===========
Earnings per share
Basic. . . . . . . . . . . . . . . . . . . . . $ 0.23 $ 0.10
Diluted. . . . . . . . . . . . . . . . . . . . $ 0.23 $ 0.10
=========== ===========
Weighted average number of shares outstanding
Basic. . . . . . . . . . . . . . . . . . . . . 1,345,584 3,711,500
Diluted. . . . . . . . . . . . . . . . . . . . 1,349,307 3,829,204
=========== ===========
The Accompanying Notes are an Integral Part of
the Consolidated Financial Statements.
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended February 28, 2001 and February 29, 2000 (unaudited)
2001 2000
------------ ------------
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Cash received from customers. . . . . . . . . . . . . . $ 7,093,569 $ 9,180,539
Cash paid to suppliers and employees. . . . . . . . . . (6,225,625) (7,715,316)
Interest paid . . . . . . . . . . . . . . . . . . . . . (18,025) -
Interest received . . . . . . . . . . . . . . . . . . . 11,614 386,137
Income taxes paid . . . . . . . . . . . . . . . . . . . - (6,261)
Income taxes received . . . . . . . . . . . . . . . . . 8,995 -
------------ ------------
Net cash provided by operating activities 870,528 1,845,099
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment. . . . . . . . . . . (14,215) (231,444)
Cash received from sale of fixed assets . . . . . . . . 30,198 -
Disbursements for notes receivable from related parties - (450,000)
Collection of notes receivable from related parties . . - 150,000
Cash received from sale of investment securities. . . . - 13,846,439
Purchase of investment securities . . . . . . . . . . . - (1,500,000)
------------ ------------
Net cash provided by investing activities . . . . . . . 15,983 11,814,995
------------ ------------
Cash flows from financing activities:
Purchases of treasury stock . . . . . . . . . . . . . . (146,575) -
Proceeds from debt - related parties. . . . . . . . . . 300,000 -
Repayment of debt - related parties . . . . . . . . . . (1,075,000) -
------------ ------------
Net cash used in financing activities . . . . . . . . . (921,575) -
------------ ------------
Net (decrease) increase in cash and cash equivalents. . (35,064) 13,660,094
Cash and cash equivalents at beginning of period. . . . 41,434 2,157,701
------------ ------------
Cash and cash equivalents at end of period. . . . . . . $ 6,370 $15,817,795
============ ============
Supplemental disclosure of non-cash investing and financing activities:
During the three months ended February 28, 2001, the Company issued 130,000
shares of its common stock to Telesoft Recovery Corp. executives. This stock
issuance was made in connection with their employment agreements in lieu of
cash compensation in the amount of $145,031.
The Accompanying Notes are an Integral Part of
the Consolidated Financial Statements.
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the three months ended February 28, 2001 and February 29, 2000 (unaudited)
2001 2000
----------- ------------
Reconciliation of net income to net cash
provided by operating activities:
Net income . . . . . . . . . . . . . . . . $ 309,506 $ 377,662
----------- ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization. . . . . . . 116,916 166,886
Gain on sale of investment securities. . . - (145,189)
Loss on sale of fixed assets . . . . . . . 1,042 -
Stock compensation . . . . . . . . . . . . 145,031 -
Changes in assets and liabilities:
Accounts receivable, net . . . . . . . . . 1,109,655 2,164,080
Inventory. . . . . . . . . . . . . . . . . 43,308 46,590
Other current assets . . . . . . . . . . . (3,475) 112,613
Deferred taxes, net. . . . . . . . . . . . (31,100) (7,400)
Other assets . . . . . . . . . . . . . . . (35,823) 4,057
Accounts payable and accrued liabilities . (707,448) (1,153,388)
Deferred revenue . . . . . . . . . . . . . (347,679) 62,449
Income taxes payable . . . . . . . . . . . 158,012 -
Income taxes receivable. . . . . . . . . . 112,583 216,739
----------- ------------
561,022 1,467,437
----------- ------------
Net cash provided by operating activities. $ 870,528 $ 1,845,099
=========== ============
The Accompanying Notes are an Integral Part of
the Consolidated Financial Statements.
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the three month periods ended February 28, 2001 and February 29, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for audited year-end financial
statements. In the opinion of management, all adjustments for normal
recurring accruals considered necessary for a fair presentation have been
included. Operating results for the three months ended February 28, 2001 are
not necessarily indicative of the results that may be expected for the year
ending November 30, 2001. The unaudited consolidated financial statements
should be read in conjunction with the consolidated financial statements and
footnotes thereto included in the Company's Form 10-K for the year ended
November 30, 2000.
Principles of Consolidation
The consolidated financial statements include the accounts of Telesoft Corp.,
together with its wholly owned subsidiaries Telesoft Acquisition Corp. and
Telesoft Recovery Corp.
All significant intercompany accounts and transactions have been eliminated.
2. INVESTMENT SECURITIES
Amdocs Ltd. ("DOX")
The Company accounted for its investment in DOX, which traded on the NYSE
under the symbol DOX, as an available-for-sale equity security, which
accordingly was carried at market value. During the three months ended
February 29, 2000, the Company sold all 7,434 DOX shares that it had held for
$296,439. These shares were previously held as 20,000 shares of International
Telecommunication Data Systems Inc. (ITDS).
3. STOCKHOLDERS' EQUITY
Self-Tender Offer
On February 3, 2000, the Company commenced an offer to repurchase up to 2.3
million shares of its common stock pursuant to a "Dutch auction" self-tender
offer. On March 24, 2000, the tender expired. Pursuant to the tender offer
the Company repurchased a total of 2.3 million shares of its common stock. The
purchase price for the shares of common stock was $7.25 per share and the
proration factor was 60.22 percent.
The Company redeemed 1,938,816 common shares for $14,056,416 and 351,352
common stock options for $1,112,674. Included in the common shares redeemed
were 1,031,663 shares of the Company's common stock redeemed from affiliates
of the Company for an aggregate of approximately $7,480,000.
Additionally, the Company repurchased all 293,750 shares of common stock owned
by Joseph Zerbib for $2,129,688. As of February 28, 2001, affiliates of the
Company owned 695,837 shares or 54.1% of the outstanding common stock of the
Company.
Expenses incurred related to the tender offer were $85,991.
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three month periods ended February 28, 2001 and February 29, 2000
3. STOCKHOLDERS' EQUITY (CONTINUED)
Treasury Stock
During the three months ended February 28, 2001, the Company repurchased
90,995 shares of its common stock for $146,575.
Common Stock
During the three months ended February 28, 2001, the Company issued 130,000
shares of its common stock to TRC executives. This stock issuance was made in
connection with their employment agreements in lieu of cash compensation in
the amount of $145,031. The Company has expensed the total amount of the stock
issuance.
Common Stock Options
In February 2000, the Company granted 27,200 options to employees at an
exercise price of $1.3125 per share, the fair market value of the underlying
shares at the date of grant.
4. RELATED PARTY DEBT
In April 2000, three of the Company's executive officers entered into an
agreement with the Company, pursuant to which each of them agreed to make
available to the Company up to $1,000,000 on the Company's request. In May
2000, each of their agreements was amended to increase the amount to
$1,350,000. Draw downs are payable on May 31, 2001 and have an annual
interest rate of 10%. Each loan is secured by the Company's assets. As of
February 28, 2001, the outstanding balance on the loans aggregated $600,000.
This financing was completed in order to satisfy the terms of the Company's
self-tender offer of its common stock completed in fiscal 2000. Pursuant to a
second amendment to their respective agreements in April 2001, each of the
officers has agreed to extend $350,000 of their respective loans until August
31, 2001.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS BY PRODUCT LINE FOR THE THREE MONTHS ENDED FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
(in thousands except per share items)
Three months ended February 28, 2001 Three months ended February 29, 2000
----------------------------------------- -----------------------------------------
System Custom Recovery System Custom Recovery
STS Sales Billing Services Total STS Sales Billing Services Total
Sales, net. . . . . . . . . $ 3,882 $ 1,405 $ 263 $ 569 $ 6,119 $ 4,792 $1,818 $ 253 $ 159 $7,022
Cost of sales . . . . . . . 2,469 367 2 - 2,838 3,287 333 6 - 3,626
-------- -------- --------- --------- ------- --------- ------- -------- ---------- ------
Gross profit. . . . . . . . 1,413 1,038 261 569 3,281 1,505 1,485 247 159 3,396
-------- -------- --------- --------- ------- --------- ------- -------- ---------- ------
General & administrative
expenses:
General . . . . . . . . . . 693 1,264 118 384 2,459 950 1,472 224 233 2,879
Depreciation. . . . . . . . 28 12 3 1 44 47 39 5 - 91
Bad debt. . . . . . . . . . 77 - - - 77 69 9 - - 78
Corporate allocations:
General . . . . . . . . . . 38 40 2 1 81 32 19 6 1 58
Depreciation. . . . . . . . 22 44 5 2 73 31 29 6 - 66
-------- -------- --------- --------- ------- --------- ------- -------- ---------- ------
858 1,360 128 388 2,734 1,129 1,568 241 234 3,172
-------- -------- --------- --------- ------- --------- ------- -------- ---------- ------
Operating income (loss) . . 555 (322) 133 181 547 376 (83) 6 (75) 224
Other (expense) income. . . (7) 370
------- ------
Pretax income . . . . . . . 540 594
Income tax provision. . . . (230) (216)
------- ------
Net income. . . . . . . . . $ 310 $ 378
======= ======
Diluted earnings per share. $ 0.23 $ 0.10
======= ======
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED FEBRUARY 28, 2001 AND
FEBRUARY 29, 2000
Revenues decreased 12.9% to $6,119,019 for the three months ended
February 28, 2001 compared to $7,022,543 for the three months ended February
29, 2000. The Company's revenue is derived from four principal product lines
and services: STS Outsourcing Programs (STS), System Sales and Maintenance,
Customized Billing Outsourcing Services (CBS) and Recovery Services.
STS Program revenues were $3,882,567 for the three months ended February
28, 2001 compared to $4,791,533 for the three months ended February 29, 2000,
a 19.0% decrease. This decrease was primarily due to market pressure from
competing long-distance communications products including pre-paid cards,
other calling cards, wireless services and the Internet. During fiscal 2000,
the Company adjusted to these market pressures by lowering its retail rates
and renegotiating its wholesale rates with its suppliers. The impact of these
new rates began during the fourth fiscal quarter (September-November), which
represents the first three months of the 2000-2001 academic year. Revenues for
the fourth quarter of fiscal 2000 were 23.2% lower than the fourth quarter of
fiscal 1999. Historically, the calling patterns during September through
November are indicative of calling patterns for the balance of the academic
year. Based on this decline in revenue, the Company has reduced selling,
general and administrative expenses, including a reduction in staff to adjust
to the reduction in subscribers, traffic, and revenues.
Revenues from System Sales and Maintenance were $1,404,505 for the three
months ended February 28, 2001 compared to $1,818,220 for the three months
ended February 29, 2000, a decrease of 22.8%. TelMaster sales and maintenance
related revenues increased by $82,345, or 7.4%, to $1,191,300 for the three
months ended February 28, 2001 compared to $1,108,955 for the year ended
November 30, 1999. The increase in TelMaster revenues from the first quarter
of fiscal 2000 to the first quarter of fiscal 2001 was related to a $152,000
increase in revenues from the ongoing development of a custom convergence
billing, reporting and support system for Pacific Bell and MCI customer care
services for the State of California's CALNET contract, and offset by a
$108,000 decrease in other TelMaster system sales.
The DCS product revenues declined 52.5%, or $195,323, to $176,833 due to
a decrease in demand for its text-based software. The Company expects this
trend to continue. RATEX revenues declined 89.2%, or $300,737, to $36,372 for
the three months ended February 28, 2001 compared to the three months ended
February 29, 2000. In December 2000, the Company completed the sale of the
RATEX division.
For the three months ended February 28, 2001 and February 29, 2000,
revenues from Customized Billing Services were $263,245 and $253,685,
respectively. While CBS revenues were relatively consistent, recurring
revenues from CBS projects declined approximately $39,000, which was offset by
setup fees of approximately $48,000 for new contracts.
Revenues from Recovery Services, which are generated through the
Company's wholly-owned subsidiary, Telesoft Recovery Corp., increased 257.4%,
or $409,597, to $568,702 for the three months ended February 28, 2001 from
$159,105 for the three months ended February 29, 2000.
Revenue for the three month period ended
February 28, 2001 February 29, 2000 February 28, 1999 February 28, 1998 February 28, 1997
------------------ ------------------ ------------------ ------------------ ------------------
Telemanagement. . $ 1,191,300 $ 1,108,955 $ 717,672 $ 444,788 $ 212,236
DCS . . . . . . . 176,833 372,156 338,942 388,228 250,264
RATEX . . . . . . 36,372 337,109 331,582 495,448 158,215
------------------ ------------------ ------------------ ------------------ ------------------
System Sales 1,404,505 1,818,220 1,388,196 1,328,464 620,715
STS . . . . . . . 3,882,567 4,791,533 5,817,928 5,455,812 4,067,982
Custom Billing. . 263,245 253,685 545,005 242,502 167,894
Network Services. - - 51,468 - -
Recovery Services 568,702 159,105 - - -
------------------ ------------------ ------------------ ------------------ ------------------
$ 6,119,019 $ 7,022,543 $ 7,802,597 $ 7,026,778 $ 4,856,591
================== ================== ================== ================== ==================
Total gross profit decreased 3.4% to $3,281,141 for the three months
ended February 28, 2001 compared to $3,396,134 for the three months ended
February 29, 2000. Cost of goods sold was approximately 63.6% of STS revenues
for the three months ended February 28, 2001, compared to 68.6% for the three
months ended February 29, 2000. This decrease was primarily due to more
favorable billing fee structures with the Company's university customers. The
emphasis on more fixed fee structures positively contributed to the more
moderate decrease in gross profits of 6% compared to the 19% decrease in
revenues from this division. Cost of goods sold as a percentage of System
Sales and Maintenance revenues was approximately 26% for the three months
ended February 28, 2001, compared to 18% for three months ended February 29,
2000. This increase was due to a higher percentage of labor-driven revenues
which have a higher cost of goods sold than materials-based revenues.
General and administrative expenses decreased by 13.9%, or $439,146, in
the first quarter of fiscal 2001 to $2,733,682 from $3,172,828 in the first
quarter of fiscal 2000. This decrease was primarily due to a decrease in
human resources borne from a cost cutting effort implemented by the Company
during the last two fiscal quarters of 2000 and the first fiscal quarter of
2001. Also contributing to the decrease was the decrease in human resource
costs resulting from the sale of the RATEX division. The gain on the sale of
RATEX was largely offset by a charge taken for the issuance of common stock to
the TRC executives in lieu of cash compensation under their employment
agreements. RATEX related expenses for the first quarter of fiscal 2001 and
2000 were $49,819 and $277,456, respectively. Recovery Services had operating
expenses of $388,000 and $234,000 during the first quarter of fiscal 2001 and
2000, respectively. General and administrative expenses as a percentage of
gross profit were 83.3% and 93.4% for the first quarter of fiscal 2001 and
2000, respectively. The Company expects general and administrative expenses
as a percentage of gross profit to decrease over time as revenues for
TelMaster systems increase.
The provision for income taxes was $230,500 and $215,600 for the three
months ended February 28, 2001 and February 29, 2000, respectively. This
represents 42.7% and 36.3% of income before provision for income taxes for
2001 and 2000, respectively. This percentage increase was partially
attributable to decreased interest from tax-free investments as well as a
lower percentage of tax-free interest included in pretax income.
Net income decreased to $309,506 for the first quarter of fiscal 2001
from $377,662 in the first quarter of fiscal 2000. This decrease was
attributable to an approximate $213,000 decrease in pre-tax interest income in
the first quarter of fiscal 2001 and a $145,189 pretax gain on the sale of
investment securities in the first quarter of fiscal 2000. These decreases
were offset by an approximate $179,000 increase in operating income from the
STS product lines, reflecting the impact of cost cutting measures, and
improved results from the Recovery Services division, which had operating
income of approximately $181,000 for the first quarter of fiscal 2001 compared
to an approximate $75,000 operating loss in the first quarter of fiscal 2000.
MATERIAL CHANGES IN FINANCIAL POSITION
Accounts receivable decreased to $7,159,769 as of February 28, 2001 from
$8,160,650 as of November 30, 2000 ($6,627,558 and $7,737,213, net of
allowance for uncollectibles as of February 28, 2001 and November 30, 2000,
respectively). This decrease was primarily due to normal seasonal decline in
STS revenues. STS revenues were approximately $3,882,000 and $5,473,000 for
the first quarter of 2001 and the fourth quarter of 2000, respectively. This
29% decline was a slight improvement over the 32% decline from the fourth
quarter of 1999 to the first quarter of fiscal 2000.
Accounts payable and accrued liabilities decreased to $4,491,739 as of
February 28, 2001 from $5,199,187 as of November 30, 2000. As of February 29,
2000, there was approximately $4,727,587 in accounts payable and accrued
liabilities. This slight decrease was attributable to the decline in STS
revenues, offset by increasing gross profit margins.
LIQUIDITY AND CAPITAL RESOURCES
At February 28, 2001, the Company had cash and cash equivalents of
$6,370. In April 2000, three of the Company's executive officers entered into
an agreement with the Company, pursuant to which each of them agreed to make
available to the Company up to $1,000,000 at the Company's request. In May
2000, each of their agreements was amended to increase the amount to
$1,350,000. Draw downs are payable on May 31, 2001 and have an annual
interest rate of 10%. As of February 28, 2001, the outstanding balance on the
loans aggregated $600,000. Pursuant to a second amendment to their
respective agreements in April 2001, each of the officers has agreed to extend
$350,000 of their respective loans until August 31, 2001. The Company
believes that cash flows from its business will allow it to service the
interest payments the Company will incur on these loans. However, there can
be no assurance that the Company will not require additional funding within
this time frame. The Company may be required to raise additional funds
through public or private financing, strategic relationships, or other
arrangements. There can be no assurance that such additional funding, if
needed, will be available on terms attractive to the Company, or at all.
Furthermore, any additional equity financing may be dilutive to existing
stockholders.
SEASONALITY
The Company generally completes the sale of the majority of STS Program
system installations in the university market during the spring and early
summer months. The implementation and installation of these systems and
services typically occurs during the summer months. Revenues derived from STS
Programs begin in the fall and weaken during winter holiday and the summer
months when students are on vacation. As a result, the Company's revenues
have consistently been highest during the second and fourth quarters.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
At November 30, 2000 and February 28, 2001, the Company had no derivative
financial instruments, other financial instruments, or long-term debt
obligations.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved as a party to any legal proceedings other
than various claims and lawsuits arising in the normal course of its business,
none of which, in the opinion of the Company's management, are individually or
collectively material to the Company's business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended February 28, 2001, the Company made the
following sales of unregistered securities:
Consideration Received If Option,
and Description of Warrant or
Underwriting or Other Exemption Convertible
Discount to Market From Security, Terms
Date of Number Price Afforded to Registration of Exercise or
Sale Title of Security Sold Purchasers Claimed Conversion
- ------- ------------------- ------- -------------------------- ------------ --------------------
2/13/01 Options to purchase 27,200 Options granted - no 4(2) Exercisable for
shares of common consideration received by five years from
stock Company until exercise date of grant at
an exercise price
of $1.3125 per
share
- ------- ------------------- ------- -------------------------- ------------ --------------------
2/13/01 Common Stock 130,000 Issued to TRC executives 4(2) N/A
in connection with their
employment agreements
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to security holders through the solicitation of
proxies or otherwise during the first quarter of fiscal 2001.
ITEM 5. OTHER INFORMATION
In April 2000, three of the Company's executive officers entered into an
agreement with the Company, pursuant to which each of them agreed to make
available to the Company up to $1,000,000 on the Company's request. In May
2000, each of their agreements was amended to increase the amount to
$1,350,000. Draw downs are payable on May 31, 2001 and have an annual
interest rate of 10%. Each loan is secured by the Company's assets. As of
February 28, 2001, the outstanding balance on the loans aggregated $600,000.
This financing was completed in order to satisfy the terms of the Company's
self-tender offer of its common stock completed in fiscal 2000. Pursuant to a
second amendment to their respective agreements in April 2001, each of the
officers has agreed to extend $350,000 of their respective loans until August
31, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) NO. DESCRIPTION REFERENCE
--- ----------- ---------
10.12 Form of Promissory Note between the Company and
each of Michael Zerbib, Thierry Zerbib and Brian
Loeb, dated April 3, 2000 Filed herewith
10.13 Form of Amendment to the Promissory Note dated
April 3, 2000 between the Company and each of
Michael Zerbib, Thierry Zerbib and Brian Loeb,
dated May 24, 2000 Filed herewith
10.14 Form of Second Amendment to the Promissory Note
dated April 3, 2000, as amended on May 24, 2000,
between the Company and each Michael Zerbib,
Thierry Zerbib and Brian Loeb, dated April 9, 2001 Filed herewith
11 Earnings per common and common equivalent shares Filed herewith
(b) On February 26, 2001, the Company filed a Current Report on Form 8-K,
dated February 14, 2001, to report a change in the Company's independent
accountants.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Issuer has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TELESOFT CORP.
BY: /s/ Michael F. Zerbib
------------------------------------
Michael F. Zerbib
Chief Financial Officer
DATED: April 12, 2001
The following table reconciles the numerators and denominators of the basic and diluted earnings per share:
THREE MONTHS ENDED
FEBRUARY 28, FEBRUARY 29,
2001 2000
--------- ---------
BASIC EARNINGS PER COMMON SHARE:
- ---------------------------------------------
NUMERATOR
Net earnings available to common shareholders 309,506 377,662
========= =========
DENOMINATOR
Weighted average number of shares outstanding 1,345,584 3,711,500
========= =========
PER SHARE AMOUNTS
Net earnings available to common shareholders 0.23 0.10
========= =========
DILUTED EARNINGS PER SHARE
- ---------------------------------------------
NUMERATOR
Net earnings available to common shareholders 309,506 377,662
========= =========
DENOMINATOR
Weighted average number of shares outstanding 1,345,584 3,711,500
Effect of dilutive securities:. . . . . . . .
Options and warrants. . . . . . . . . . . . . 27,200 418,100
Stock acquired with proceeds. . . . . . . . . (23,477) (300,396)
--------- ---------
Weighted average common shares and assumed. . 1,349,307 3,829,204
conversions outstanding
========= =========
PER SHARE AMOUNTS
Net earnings available to common shareholders 0.23 0.10
========= =========