U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended May 31, 1996 SEC File No. 1-13830
TELESOFT CORP.
(Exact name of registrant as specified in its charter)
Arizona 86-0431009
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3216 North Third Street, Phoenix, Arizona 85012
(Address of principal executive offices)
(602) 265-6311
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
Common Stock, without par value, 3,818,333 shares outstanding at
May 31, 1996
Transitional Small Business Disclosure Format Yes ( ) No (X)
39271-1 1
PART I - FINANCIAL INFORMATION
Item 1.FINANCIAL STATEMENTS
The financial statements are included herewith commencing
on page F-1
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS
Results of Operations for the six months ended May 31,
1995 and 1996
Revenues increased 12.6% for the six months ended May 31,
1996 to $11,049,253 compared to $9,813,772 for the six
months ended May 31, 1995. Such increase in revenues was
due to improvement in STS Service Bureau revenues and
Billing Service revenue. The increase was mitigated by
the recognition of a fee of $236,000 in the six months
ended May 31, 1995 in connection with the termination of
the University of Florida contract.
Total gross profit increased 13% for the six months ended
May 31, 1996 to 41.8%, or $4,621,155, compared to 41.7%,
or $4,090,803, including the $236,000 termination fee for
the six months ended May 31, 1995. The gross profit
margin adjusted to exclude the termination fee, would have
been 40.2%. The increase in gross profit margin was
chiefly due to the higher ratio in Billing Service revenue
which has a higher profit margin than other divisions of
the company.
General and Administrative Expenses increased to
$3,136,774 for the six months ended May 31, 1996 compared
to $2,550,579 for the six months ended May 31, 1995, an
increase of 23.0%. This increase is primarily due to the
increase in administrative expenses due to to the
acquisitions of the RATEX and Goodnet divisions in March,
1995, and April 1996, respectively.
Net income increased 4.7% to $981,914, or $.26 per share,
for the six months ended May 31, 1996 compared to
$935,659, or $.40 per share, for the six months ended May
31, 1995. The increase was primarily due to the increase
in interest income and was mitigated by a loss of
approximately $40,000 realized by the Goodnet division.
Results of Operations for the three months ended May 31,
1995 and 1996
Revenues from net sales increased 17.7% for the three
months ended May 31, 1996 to $5,814,238 compared to
$4,939,257 for the three months ended May 31, 1995. Such
increase in revenues was primarily attributable to
increased revenue from billing services, an increase in
DCS system sales and an improvement in STS Service Bureau
revenue.
Total gross profit increased 12.8% for the three months
ended May 31, 1996 to 42.7%, or $2,483,905, compared to
43.0%, or $2,122,257 the three months ended May 31, 1995.
The slight percentage decline in gross profit margin was
attributable to increased costs in the STS Service Bureau
division. The company expects gross profit margins to
remain at this lower level.
General and Administrative Expenses increased to
$1,677,741 for the three months ended May 31, 1996
compared to $1,346,042 for the three months ended May 31,
1995, an increase of 24.6%. Approximately 40% of this
increase was attributable to the acquisition of the
Goodnet division in late April, 1996. The Company expects
general and administrative expenses to remain steady for
the balance of fiscal 1996.
Interest income increased to $73,790 for the three months
May 31, 1996 compared to $7,939 for the three months ended
May 31, 1995. This increase is due to the temporary
investment of proceeds from the initial public offering in
June, 1995. Interest income is expected to decline once
these proceeds from the initial public offering have been
utilized for expansion.
Net income increased 8.2% to $502,376 for the three months
ended May 31, 1996 compared to $464,279 for the three
months ended May 31, 1995. This increase was chiefly due
to the increase in interest income and was mitigated by a
loss of approximately $40,000 from the Goodnet division.
Historically seasonality effects in the third quarter
combined with the losses anticipated from the Goodnet
division discussed below under Acquisitions causes
management to anticipate a loss for the third quarter of
this fiscal year. Net income per share declined to $.13
for the three months ended May 31, 1996 compared to $.20
for the same period in 1995 due to the increase in the
weighted average number of shares outstanding because of
the Company's initial public offering in June 1995. The
Company expects that its earnings per share for the fiscal
year will continue to be affected by the additional shares
issued as a result of the initial public offering in June,
1995.
Liquidity and Capital Resources
As of May 31, 1996, the Company had cash of $5,800,623.
The Company believes that the working capital and
internally generated cash flow from its operations will
satisfy its anticipated growth for 12 to 24 months.
Seasonality
Revenues derived from STS Service Bureaus are strongest in
the Fall and weaken or cease in the Summer. As a result,
the Company's revenue and net income have consistently
been strongest in the fourth quarter and lowest in the
third quarter.
Acquisitions
In late April 1996, Telesoft acquired the net assets of
privately held Goodnet LLC in exchange for $115,000 and
30,833 restricted shares of common stock valued at
$97,700. Additional shares may be issued based upon the
Goodnet divisions operating results over the next two
years. Goodnet develops, markets and installs Internet
related services, including dedicated high speed lines and
telephone dial-up access to the Internet.
In connection with the acquisition of Goodnet, the Company
intends to provide approximately two to three million
dollars in capital to the Goodnet subsidiary for the
deployment of a fully meshed Asynchronous Transfer Mode
network (ATM backbone), and the addition of sales,
marketing and technical staff. The Company funded the
Goodnet subsidiary with part of the proceeds of its 1995
initial public offering. The Company has entered into
agreements with LDDS Worldcom and Cisco Systems for the
leasing of high speed lines and the purchase of routing
equipment.
The Company intends to concentrate its sales effort of
high speed dedicated lines to Internet service providers,
universities, value added resellers and commercial
customers. The Company expects significant losses from
its Goodnet subsidiary in the first twelve to eighteen
months of operations as it builds the Goodnet business.
Subsequent to May 31, 1996, the company acquired equipment
and dial-up access and dedicated internet accounts from
two local internet providers, Netzone LLC and Internet
Direct, Inc. The acquisitions are anticipated to
contribute approximately $105,000 in monthly revenue.
TELESOFT CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
Year Ended (Unaudited)
November 30, 1995 Six Months Ended
May 31, 1996
Current Assets:
Cash and cash equivalents $7,791,915 $5,800,623
Accounts receivable, net of allowance 4,358,779 3,731,732
for doubtful accounts
Inventory 450,571 649,216
Deferred tax asset 38,600 26,800
Other current assets 98,518 339,583
---------------- ---------------
Total Current Assets 12,738,383 10,547,954
Property and equipment, net 1,031,875 1,628,407
Unamortized Computer software costs 433,687 575,419
Covenant not-to-compete, net 18,750 14,583
Goodwill, net - 397,348
Other assets 144,115 152,931
----------- --------------
Total Assets $14,366,810 $13,316,642
=========== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable - current portion $ 10,742 $ 11,171
Accounts payable 3,851,130 2,303,113
Payroll and sales tax payable 373,330 270,619
Deferred revenue 448,151 361,226
Income taxes payable 617,343 253,897
Other accrued expenses 45,600 22,185
-------------- ------------
Total Current Liabilities 5,346,296 3,222,211
-------------- ------------
Long-Term Liabilities:
Notes payable - long term portion 6,840 1,143
--------------- ------------
Commitments:
Stockholders Equity:
Common stock 7,246,159 7,343,859
Additional paid in capital 79,969 79,969
Common Stock warrants 100 100
Retained earnings 1,687,446 2,669,360
------------ ---------------
Total Stockholders' Equity 9,013,674 10,093,288
--------------- ----------------
Total Liabilities and Stockholders'Equity $14,366,810 $13,316,642
=============== ================
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-1
TELESOFT CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Previous Ended Six Months Previous Ended
May 31, 1995 May 31, 1996 May 31, 1995 May 31, 1996
Revenues
Net sales $4,939,257 $5,814,238 $9,577,772 $11,049,253
Termination fees - - 236,000 -
---------- -------------- ---------- ------------
Net Revenues 4,939,257 5,814,238 9,813,772 11,049,253
Cost of Sales 2,817,000 3,330,333 5,722,969 6,428,098
----------- -------------- ------------ -----------
Gross Profit 2,122,257 2,483,905 4,090,803 4,621,155
General and Administrative
Expenses 1,346,042 1,677,741 2,550,579 3,136,774
----------- -------------- ------------ ------------
Income from Operations 776,215 806,164 1,540,224 1,484,381
----------- -------------- ------------ ------------
Other Income (Expense):
Interest Income 7,939 73,790 17,657 177,591
Interest Expense (5,115) (276) (13,141) (606)
Other Income - 1,498 - 1,748
------------ -------------- ------------- ----------
2,824 75,012 4,516 178,733
------------ -------------- ------------- ----------
Income before Provision
for Income Taxes 779,039 881,176 1,544,740 1,663,114
------------ -------------- ------------- ----------
Provision for Income Tax
(Expense) Benefit:
- - current (325,960) (370,200) (630,581) (669,400)
- - deferred 11,200 (8,600) 21,500 (11,800)
----------- -------------- ------------ -----------
(314,760) (378,800) (609,081) (681,200)
----------- -------------- ------------ -----------
Net Income $ 464,279 $ 502,376 $ 935,659 $ 981,914
=========== ============== ============ ===========
Earnings per Share
-Primary $ .20 $ .13 $ .40 $ .26
-Fully Diluted $ .20 $ .13 $ .40 $ .26
Weighted Average Number
of Shares Outstanding
-Primary 2,350,000 3,824,193 2,350,000 3,808,688
-Fully Diluted 2,350,000 3,875,441 2,350,000 3,854,306
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-2
TELESOFT CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock
-------------------------------------
Number of Additional Common
Shares Paid in Stock Retained
Outstanding Amount Capital Warrants Earnings
Balance, November 30, 1995 3,787,500 $7,246,159 $ 79,969 $ 100 $ 1,687,446
Restricted Stock Issued in
Connection with Goodnet LLC
Acquisition 30,833 97,700 - - -
Net Income (unaudited) - - - - $ 981,914
------------- ----------- ---------- ---------- --------------
Balance May 31, 1996
(unaudited) 3,818,333 $7,343,859 $ 79,969 $ 100 $ 2,669,360
============= =========== =========== ========== ==============
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-3
TELESOFT CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(unaudited)
Six Month Periods Ended
May 31, 1995 May 31, 1996
Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Cash received from customers $10,696,933 $11,699,348
Cash paid to suppliers and employees (10,483,091) (11,833,900)
Interest paid (13,141) (606)
Interest received 17,657 150,023
Income taxes paid (66,334) (1,032,846)
---------------- -------------
Net cash provided (used) by operating activities 152,024 (1,017,981)
---------------- --------------
Cash flows from investing activities:
Purchase of property and equipment (105,848) (681,069)
Computer software costs (240,882) (184,459)
Payments for covenant not-to-complete (25,000) -
Payments for Purchase of Goodnet, LLC - (115,000)
Cash Received with Purchase of Goodnet, LLC - 12,485
---------------- --------------
Net cash used by investing activities (371,730) (968,043)
---------------- --------------
Cash flows from financing activities:
Payment of notes payable (52,856) (5,268)
Payments for deferred offering costs (350,114) -
---------------- --------------
Net cash used by financing activities (402,970) (5,268)
---------------- --------------
Net decrease in cash and cash equivalents (622,676) (1,991,292)
Cash and cash equivalents at beginning of period 1,451,156 7,791,915
---------------- ---------------
Cash and cash equivalents at end of period $828,480 $5,800,623
================ ============
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-4
TELESOFT CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
Six Month Periods Ended
May 31, 1995 May 31, 1996
Reconciliation of Net Income to Net Cash
Provided (Used) by Operating Activities
Net Income $ 935,659 $ 981,914
---------------- -------------
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 125,478 226,912
Changes in Assets and Liabilities:
Accounts receivable 883,161 708,380
Inventory (326,155) (198,645)
Other current assets 19,978 (264,996)
Deferred tax asset (21,500) 11,800
Other assets (19,091) (133,816)
Accounts payable (1,554,566) (1,686,722)
Payroll and sales tax (493,056) (106,130)
Deferred revenue 37,869 (112,784)
Income taxes payable 564,247 (363,446)
Other accrued expenses - (80,448)
-------------- --------------
(783,635) (1,999,895)
------------- --------------
Net cash provided (used) by operating
activites $ 152,024 $ (1,017,981)
============= =============
Supplemental disclosure of investing and financing activities:
During the six month period ended May 31, 1996, the company issued 30,833 shares
of restricted common stock valued at $97,700 as partial payment for the acquisition
of the net assets of Goodnet, LLC.
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-5
TELESOFT CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIOD ENDED MAY 31, 1995 MAY 31, 1996
(UNAUDITED)
1. 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-QSB and
Item 310 of Regulation SB. 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 and six month periods
ended May 31, 1996 are not necessarily indicative of the
results that may be expected for the year ending November
30, 1996. The unaudited consolidated financial statements
should be read in conjunction with the consolidated
financial statements and footnotes thereto included in the
Company's Form 10KSB for the year ended November 30, 1995.
Net Income Per Common and Common Equivalent Share:
The computation of net income per common and common
equivalent share was computed using the treasury stock
method by dividing net income by the weighted average
number of shares of common and common stock equivalents
outstanding during the year. Common Stock equivalents
included the number of shares issuable on exercise of
outstanding options and warrants less the number of shares
that could have been purchased with the proceeds from the
exercise of the options and warrants based on the exercise
price. Fully diluted earnings per share have been
computed based on the assumption that all of the
outstanding options and warrants were exercised.
2. Stock Option Plans:
During the six month period ended May 31, 1996, the
Company granted 10,700 options to purchase the Company's
common stock @ $5.875 per share, the fair market value of
the stock on the date of grant. The options were
exerciseable at issuance.
3. Acquisition:
During the six month period ended May 31, 1996, the
company acquired proprietary software and other net assets
relating to Goodnet LLC which provides internet-related
services, including high speed dedicated lines, telephone
dial-up access, as well as design implementation and
hosting for home pages on the World Wide Web.
4. Subsequent Events:
Subsequent to May 31, 1996, the company acquired equipment
and dial-up access and dedicated internet accounts from
two local internet providers, Netzone, LLC and Internet
Direct, Inc.
F-6
PART II
OTHER INFORMATION
Response to Items 1-2 are omitted since these items are
inapplicable to this report.
Item 3.Exhibits and Reports on Form 8-K
(a) No Exhibits required to be filed.
(b) The Company did not file any reports on Form 8-K
during the quarter.
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.
TELESOFT CORP.
BY \s\Michael F. Zerbib
---------------------------------
Michael F. Zerbib
Chief Financial Officer
DATED: July 12, 1996