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 August 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 August 31,
1996
Transitional Small Business Disclosure Format Yes ( ) No (X)
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 nine months ended August 31, 1995 and
1996
Revenues increased $1,739,000 or 13.9% for the nine months ended August
31, 1996 to $14,219,000 compared to $12,480,000 for the nine months
ended August 31, 1995. Such increase in revenues was due primarily to
Goodnet division revenues of $1,287,000 in conjunction with the
addition of Netzone and Internet Direct accounts (see "Acquisitions"
below). Such increase was also due to a $700,000 improvement in STS
Service Bureau revenues.
Total gross profit increased 5.3% for the nine months ended August 31,
1996 to 42.6%, or $6,057,000, compared to 46.1%, or $5,754,000.
The increase in gross profit was chiefly due to internet related revenues
and was offset by a two percent increase in STS Service Bureau cost of
sales. The Company expects the STS Service Bureau cost of sales to
remain at current levels.
General and Administrative Expenses increased to $5,481,000 for the
nine months ended August 31, 1996 compared to $4,192,000 for the nine
months ended August 31, 1995, an increase of 30.8%. As anticipated by
management, approximately 73% of this increase was due to the
acquisitions of the RATEX and Goodnet divisions in March, 1995,
and April 1996, respectively, as well as the addition of Netzone and
Internet Direct accounts. This increase is also due to an increase of
approximately 10% in general and administrative expenses in the
STS Service Bureau and Telemanagement divisions. The Company
expects general and administrative expenses to increase an additional
10% for the Telemanagement division in the fourth quarter due to the
release of TelMaster, a graphical user interface telemanagement
software package. Expenses of $591,000 incurred from development
of this product have been capitalized and will be depreciated over the
next five years.
Net income declined to $495,000, for the nine months ended August 31,
1996 compared to $998,000, for the nine months ended August 31, 1995.
This was primarily due to reduced system installations in the
Telemanagement division and the increase in cost of sales for the STS
Service Bureau division as well as higher general and administrative
expenses at the STS Service Bureau and the Telemanagement divisions.
This decline was partially mitigated by an increase in interest income.
Net Income per share decreased to $.13 for the nine months ended August
31, 1996 compared to $.37, for the same period in 1995, partially due
to the increase in the weighted average number of shares outstanding
from the company's initial public offering in June 1995.
Results of Operations for the three months ended August 31, 1995 and
1996
Revenues from net sales increased $504,000 or 18.9% for the three
months ended August 31, 1996 to $3,170,000 compared to $2,666,000 for
the three months ended August 31, 1995. The Goodnet division
contributed approximately $1,150,000 in revenues. However, this was
significantly mitigated by a decrease in system installations of
approximately $650,000 for the Telemanagement division. This decrease
was due to delays in the introduction of the TelMaster product, a
graphical user interface telemanagement software package presently
being tested at two customer locations. This product is scheduled for
full release in December 1996.
Total gross profit declined to $1,436,000 for the three months ended
August 31, 1996 compared to $1,663,000 for the three months ended
August 31, 1995. This was attributable to higher costs in the STS
Service Bureau division and reduced new system installations at the
Telemanagement division which yields higher gross profit margins. This
decline was significantly mitigated by the Goodnet division's gross
profit of $643,000.
General and Administrative Expenses increased to $2,344,000 for the
three months ended August 31, 1996 compared to $1,641,000 for the three
months ended August 31, 1995, an increase of 42.8%. Approximately 93%,
or $655,000 of this increase was attributable to the expansion of the
Goodnet division's operation through acquisitions and for the
deployment of the Asynchronous Transfer Mode network (ATM backbone).
The Company expects general and administrative expenses to increase in
the fourth quarter in conjunction with the release of the TelMaster
product and remain at fourth quarter levels in the future.
Interest income declined to $68,000 for the three months ended August
31, 1996 compared to $69,000 for the three months ended August 31,
1995. The Company's cash balance was reduced due to the acquisitions
of Netzone and Internet Direct's account base as well as equipment
investments at the Goodnet division. Interest income is expected to
decline as the proceeds from the initial public offering are utilized
for purposes of expansion.
A net loss of $487,000 was realized for the three months ended August
31, 1996 compared to a net income of $62,000 for the three months ended
August 31, 1995. This loss was chiefly due to higher costs at the STS
Service Bureau division and reduced new system installations for the
Telemanagement division. A Net loss per share of $.13 was realized for
the three months ended August 31, 1996 compared to a net income per
share of $.02 for the same period in 1995. Net income or loss per
share is based on the weighted average number of shares outstanding.
The weighted average number of shares outstanding increased to
3,860,020 as of August 31, 1996 from 3,318,750 on August 31, 1995 due
to 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 August 31, 1996, the Company had cash of $3,411,000. The Company
believes that the working capital and internally generated cash flow
from its operations will satisfy its anticipated capital needs.
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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; however, significant investments within
the Goodnet division discussed below under Acquisitions, combined with
reduced system installations at the Telemanagement division, causes
management to anticipate a break-even fourth 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 division's operating results over the next eighteen
months. 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 to provide 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.
To date, the Goodnet division has deployed seven points of presence
with four additional planned in the next thirty days.
Initially, The Company intends to concentrate its sales effort of high
speed dedicated lines to Internet service providers within these eleven
markets. No additional points of presence will be deployed until the
existing points reach a break-even level. The combined existing
customers and backlog consist of approximately $80,000 in monthly
recurring revenue with approximately $140,000 in related cost of sales.
The Company expects significant losses from its Goodnet subsidiary in
the first twelve to eighteen months of operations as it builds revenues
on its ATM backbone.
In June and July, 1996, the Company acquired equipment and dial-up
access and dedicated internet accounts from two local internet
providers, Netzone LLC and Internet Direct, Inc., respectively. The
company paid $425,000 and $440,000 in cash for Netzone LLC and Internet
Direct access customers, respectively. These acquisitions are
contributing approximately $160,000 in monthly revenue.
The combined dial-up customer base of approximately 15,500 has not been
growing due to problems arising from transitioning to the Company's new
location, difficult access due to the local line provider, and
difficulties associated with transitioning new subscribers onto an
integrated billing system. The Company anticipates that these problems
will be remedied in the fourth quarter.
Lease
Telesoft has entered into a 10-year lease for a total of approximately
32,000 square feet located in the basement, 17th, and 18th floors of
3443 North Central. In July 1996, all internet related operations were
moved into one half of the 17th floor consisting of approximately 7,000
square feet. The other Phoenix-based operations will be moved as the
new space becomes available during the course of the next eighteen
months.
TELESOFT CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
Year Ended Nine Months Ended
November 30, 1995 August 31, 1996
Current Assets:
Cash and cash equivalents $ 7,791,915 $ 3,411,235
Accounts receivable, net of allowance 4,358,779 2,921,086
for doubtful accounts
Inventory 450,571 720,311
Deferred tax asset 38,600 22,400
Income taxes receivable - 224,918
Other current assets 98,518 416,328
--------- ---------
Total Current Assets 12,738,383 7,716,278
Property and equipment, net 1,031,875 1,987,906
Unamortized computer software costs 433,687 641,575
Covenant not-to-compete, net 18,750 12,500
Goodwill, net - 1,156,123
Other assets 144,115 153,960
--------- ---------
Total Assets 14,366,810 11,668,342
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable - current portion 10,742 9,605
Accounts payable 3,851,130 1,457,949
Payroll and sales tax payable 373,330 82,918
Deferred revenue 448,151 511,855
Income taxes payable 617,343 -
Other accrued expenses 45,600 -
---------- ---------
Total Current Liabilities 5,346,296 2,062,327
---------- ---------
Long-Term Liabilities:
Notes payable - long term portion 6,840 -
---------- ---------
Commitments: - -
Stockholders Equity:
Common Stock 7,246,159 7,343,859
Additional paid in capital 79,969 79,969
Common Stock warrants - 100
Retained earnings 1,687,446 2,182,087
--------- ---------
Total Stockholders' Equity 9,013,674 9,606,015
--------- ---------
Total Liabilities and Stockholders' Equity 14,366,810 11,668,342
======= ========
TELESOFT CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Previous Ended Nine Months Previous Ended
Aug. 31, 1995 Aug. 31, 1996 Aug. 31, 1995 Aug. 31, 1996
Revenues
Net sales 2,665,939 3,169,786 12,243,711 14,219,039
Termination Fees - - 236,000 -
---------- ---------- ---------- ----------
Net Revenues 2,665,939 3,169,786 12,479,711 14,219,039
Cost of Sales 1,003,065 1,733,969 6,726,034 8,162,067
---------- ---------- ---------- ----------
Gross Profit 1,662,874 1,435,817 5,753,677 6,056,972
General and Administrative
Expenses 1,641,104 2,344,113 4,191,683 5,480,887
---------- --------- --------- ---------
Income (Loss) from
Operations 21,770 (908,296) 1,561,994 576,085
--------- --------- --------- ---------
Other Income (Expense):
Interest Income 69,068 67,683 86,725 245,274
Interest Expense (5,744) (2,252) (18,885) (2,858)
Other Income (Expense) - (8) - 1,740
--------- --------- --------- --------
63,324 65,423 67,840 244,156
--------- --------- --------- --------
Income (Loss) before Provision
for Income Taxes 85,094 (842,873) 1,629,834 820,241
--------- --------- --------- -------
Provision for Income Tax
(Expense) Benefit:
- current (50,132) 360,000 (680,713) (309,400)
- deferred 26,900 (4,400) 48,400 (16,200)
-------- -------- --------- ----------
(23,232) 355,600 (632,313) (325,600)
-------- -------- ---------- ----------
Net Income (Loss) 61,862 (487,273) 997,521 494,641
======== ======== ======== =========
Earnings (Loss) per Share
-primary $ 0.02 $ (.13) $ 0.37 $ 0.13
-fully diluted $ 0.02 $ (.13) $ 0.37 $ 0.13
Weighted Average Number of
Shares Outstanding
-primary 3,318,750 3,860,020 2,674,091 3,817,034
-fully diluted 3,409,020 3,860,020 2,704,290 3,817,034
TELESOFT CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
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) 494,641
--------- ----------- ---------- ----- ----------
Balance August 31, 1996 3,818,333 $ 7,343,859 $ 79,969 $100 $ 2,182,087
(unaudited)
TELESOFT CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Month Periods Ended
Aug. 31, 1995 Aug. 31, 1996
Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Cash received from customers $13,415,782 $ 15,606,593
Cash paid to suppliers and employees 14,102,644) (16,701,314)
Interest paid (18,885) (2,858)
Interest received 86,725 224,450
Income taxes paid (238,422) (1,151,661)
----------- ------------
Net cash used by operating activities $ (857,444) $ (2,024,790)
---------- -----------
Cash flows from investing activities:
Purchase of property and equipment (689,449) (1,183,926)
Computer software costs (358,406) (276,472)
Disbursements for notes receivable from
related parties (220,000) -
Collection of notes receivable from
related parties 220,000 -
Payments for covenant not-to-compete (25,000) -
Payments for Purchase of Goodnet, LLC - (115,000)
Net Cash Received with Purchase of Goodnet, - 12,485
Purchase of Customer Lists - (785,000)
-------- --------
Net cash used by investing activities $(1,072,855) $(2,347,913)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable - 1,200,000
Payment of notes payable (308,607) (1,207,977)
Payments for deferred offering costs (411,724) -
Proceeds from issuance of stock 7,621,350 -
---------- -----------
Net cash provided (used) by financing activities 6,901,019 (7,977)
---------- ---------
Net increase (decrease) in cash and cash
equivalents 4,970,720 (4,380,680)
Cash and cash equivalents at beginning of period 1,451,156 7,791,915
---------- ----------
Cash and cash equivalents at end of period $ 6,421,876 $ 3,411,235
TELESOFT CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
Nine Month Periods Ended
Aug. 31, 1995 Aug. 31, 1996
Reconciliation of Net Income to Net Cash
Used by Operating Activities
Net Income $ 997,521 $ 494,641
------------ -------------
Adjustments to reconcile net income to net
cash used by operating activities:
Depreciation and amortization 239,530 424,435
Changes in Assets and Liabilities:
Accounts receivable 936,071 1,519,026
Inventory (116,258) (269,740)
Other current assets (68,892) (341,741)
Deferred tax assets (48,400) 16,200
Other assets 11,146 (134,845)
Accounts payable (2,810,559) (2,531,886)
Payroll and sales tax (655,262) (293,831)
Deferred revenue 215,368 37,845
Income taxes payable 442,291 (617,343)
Income taxes receivable - (224,918)
Other accrued expenses - (102,633)
---------- ----------
(1,854,965) (2,519,431)
---------- ----------
Net cash used by operating
activities $ (857,444) $ (2,024,790)
=========== ===========
Supplemental disclosure of investing and financing activities:
During the nine month period ended August 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.
TELESOFT CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIODS ENDED AUGUST 31, 1995 AND AUGUST 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 nine month periods ended
August 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 nine month period ended August 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.
The Board of Directors adopted the 1996 Incentive Stock Option Plan and
the 1996 Restricted Stock Option Plan. Under the Plans, a total of
260,000 shares are reserved for issuance at the discretion of the
Compensation Committee of the Board of Directors.
1996 Incentive Stock Option Plan:
The 1996 Incentive Stock Option Plan authorized the Company to grant to
key employees of the Company (i) incentive stock options to purchase
shares of common stock and (ii) non-qualified stock options to purchase
shares of common stock.
Incentive stock options may be granted under the Plan for terms of up
to ten years and at an exercise price of at least equal to 100% of the
fair market value of the common stock as of the date of grant, and 85%
of the fair market value in the case of nonstatutory options, except
that incentive options granted to any person who owns stock possessing
more than 10% of the combined voting power of all classes of the
Company's stock or of any parent or subsidiary corporation that must
have an exercise priced at least equal to 110% of the fair market value
of the Company's common stock on the date of grant.
The Company granted 176,400 options under the Plan effective August 7,
1996. Of the 176,400 options granted, 20,000 shares were issued to the
company's public relations firm with an exercise price of $5.625 per
share. The remaining 156,400 shares were issued to key employees with
an exercise price of $4.75 per share. The exercise price of all the
options is equal to the fair market value of the Company's common stock
on the date of grant.
1996 Restricted Stock Plan:
The 1996 Restricted Stock Plan authorizes the grant of shares of common
stock to key employees, consultants, researchers and to ,members of the
Advisory Board. The 1996 Restricted Stock Plan is administered by the
Board of Directors or a committee of the Board, which determines the
persons to whom shares of Common Stock will be granted and the terms of
such share grants. No options have been granted under this plan to
date.
3. Acquisition:
During the nine month period ended August 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. The
company also acquired equipment and dial-up access and dedicated
internet accounts from two local internet providers, Netzone, LLC and
Internet Direct, Inc.
4. Notes Payable:
The Company has available a $1,000,000 operating line of credit,
expiring April 15, 1997. Interest is payable monthly at the bank's
prime rate plus one-half percent (.5%). The line of credit is secured
by various corporate assets and requires compliance with various loan
covenants. As of August 31, 1996, there were no outstanding balances
on this operating line of credit.
5. Commitments:
During the period ended August 31, 1996, the company entered into a ten
year operating lease agreement for office space in Phoenix, Arizona.
The lease requires the company to make monthly payments of
approximately $30,000 upon commencement of the lease. The commencement
date of the lease is currently undetermined, but is to be no later than
January, 1998. The company currently occupies a portion of this office
space and is making monthly payments of approximately $11,000.
F-7
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: October 7, 1996