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 quarterly period ended February 28, 1997
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
April 14, 1997
Transitional Small Business Disclosure Format Yes ( ) No (X)
39271-1 1
<PAGE 2>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements
Page
The following financial statements required to be included
in Item 1 are listed below:
Consolidated Balance Sheets as of February 28, 1997 and
November 30, 1996 3
Consolidated Statements of Operations for the three month
periods ended February 28, 1997 and February 29, 1996 4
Consolidated Statements of Cash Flows for the three month
periods ended February 28, 1997 and February 29, 1996 5 -- 6
Notes to the Consolidated Financial Statements 7
<PAGE 3>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28, 1997 November 30, 1996
ASSETS
Cash and cash equivalents $ 13,051 $ 219,023
Investment Securities 703,332 703,332
Accounts receivable, net of
allowance for uncollectibles of
$775,675 at February 28, 1997
and $708,127 at November 30, 1996 4,486,567 5,678,469
Inventory 520,785 474,254
Deferred taxes 343,000 234,300
Income taxes receivable 170,131 147,242
Note receivable from related party 208,691 208,635
Other 429,693 194,834
-------------- -------------
Total Current Assets 6,875,250 7,860,089
Investment securities 3,000,000 2,800,000
Property and equipment, net 2,217,824 2,094,952
Computer software costs, net 569,545 605,912
Intangibles, net 1,075,531 1,136,898
Other 248,213 155,085
------------- -------------
Total Assets $ 13,986,363 $ 14,652,936
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued
liabilities $ 3,651,986 4,085,134
Deferred revenue 528,467 526,351
------------- ------------
Total Current Liabilites 4,180,453 4,611,485
Deferred taxes 123,200 153,500
------------- ------------
Total Liabilities 4,303,653 4,764,985
------------- ------------
Stockholders' Equity
Common Stock, 50,000,000 shares
of common stock, no par value,
authorized; 3,818,333 issued
and outstanding 7,343,859 7,343,859
Additional paid-in-capital 80,069 80,069
Retained earnings 2,258,782 2,464,023
------------ ------------
Total Stockholders' Equity 9,682,710 9,887,951
------------ ------------
Total Liabilities and Stockholders'
Equity $ 13,986,363 $ 14,652,936
============ ============
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
<PAGE 4>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMETNS OF OPERATIONS
(UNAUDITED)
Three months ended
February 28, 1997 February 29, 1996
Sales, net $ 5,938,475 $ 5,235,015
Cost of Sales 3,830,894 3,097,765
------------- -------------
2,107,581 2,137,250
General and Administrative
Expenses 2,497,615 1,459,033
------------- -------------
(390,034) 678,217
------------- -------------
Other Income (Expense):
Interest Income 60,809 103,801
Interest Expense (116) (330)
Other (Expense) Income (14,900) 250
------------- -------------
45,793 103,721
------------- -------------
(Loss) Income before Benefit
(Provision) for Income Taxes (344,241) 781,938
Benefit (Provision) for Income Taxes 139,000 (302,400)
------------- -------------
Net (Loss) Income $ (205,241) $ 479,538
============= =============
(Loss) Earnings per Share
primary (.05) .13
fully diluted $ (.05) .13
============== ============
Weighted Average Number of
Shares Outstanding
primary 3,848,160 3,795,972
fully diluted 3,884,896 3,795,972
============ ===========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
<PAGE 5>
TELESOFT CORP. AND SUBISIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended
February 28, 1997 February 29, 1996
Cash flows from operating activities:
Cash received from customers $ 7,005,869 $ 5,397,303
Cash paid to suppliers and employees (6,668,156) (5,616,183)
Interest paid (116) (330)
Interest received 10,053 103,801
Income taxes paid (22,889) (655,077)
------------ -------------
Net cash provided by (used in) operating
activities 324,761 (770,486)
------------ --------------
Cash flows from investing activities:
Purchase of property and equipment (333,839) (123,242)
Computer software costs - (93,837)
Disbursements for notes receivable from
related parties (23,379) -
Collection of notes receivable from related
parties 26,485 -
Purchase of Investments (200,000) -
------------ ------------
Net cash used in investing activities (530,733) (217,079)
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable - -
Payment of notes payable - (2,608)
------------ ------------
Net cash used in financing activities - (2,608)
------------ ------------
Net decrease in cash and cash equivalents (205,972) (990,173)
Cash and cash equivlents at beginning of period 219,023 7,791,915
------------ -----------
Cash and cash equivalents at end of period $ 13,051 $ 6,801,742
============ ===========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
<PAGE 6>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
Three months Ended
February 28, 1997 February 29, 1996
Reconciliation of Net (Loss) Income to Net Cash
Provided by (Used In) Operating Activities
Net (Loss) Income $ (205,241) $ 479,538
------------- -----------
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 308,701 105,551
Interest income included with note receivable
from related party (3,162) -
Changes in Assets and Liabilities:
Accounts receivable 1,191,902 209,053
Inventory (46,531) (93,709)
Other current assets (234,859) (47,645)
Deferred taxes (139,000) 3,200
Other assets (93,128) (54,809)
Accounts payable and accrued liabilities (433,148) (977,734)
Deferred revenue 2,116 (38,054)
Income taxes payable - (355,877)
Income taxes receivable (22,889) -
---------- -----------
530,002 (1,250,024)
---------- -----------
Net cash provided by (used in) operating activities $ 324,761 $ (770,486)
========== ===========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
<PAGE 7>
TELESOFT CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
For the three months ended February 28, 1997 and February 29, 1996
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-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
months ended February 28, 1997 are not necessarily indicative of the results
that may be expected for the year ending November 30, 1997. 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/A for the year ended November 30, 1996.
2. Stock Option Plans:
During the three month period ended February 28, 1997, the Company granted
20,000 options with an exercise price of $3.125 per share and 5,000 options
with an exercise price of $4.00 per share to Company employees.
3. Subsequent Events:
On March 12, 1997, the Company entered into an agreement, effective
February 28, 1997, with the former owners of GoodNet, LLC ("GoodNet")
whereby the Company agreed to the following:
1) The Company agreed to pay one of the former owners an additional
$393,638 in exchange for the return and relinquishment of all of
that owner's claims to the Company's common stock, issued or
contingently issuable in conjunction with the purchase of GoodNet's
assets in 1996.
2) The former owner agreed to repay the Company $102,783.
3) The Company agreed to pay the former owner $10,000 per month,
commencing June 15, 1997, for a period of five years in exchange
for a covenant not to compete.
4) The Company agreed to pay $48,000 to other former owners of GoodNet
in exchange for the assignment of their interest in GoodNet.
The Company is currently in the process of finalizing an agreement with the
remaining former owner of GoodNet to exchange a 25% interest in Telesoft
Acquisition Corp II (a wholly owned subsidiary, dba GoodNet) for the return
of the Company's common stock issued and rights to receive contingently
issuable stock in conjunction with the purchase of GoodNet in 1996. The
remaining former owner of GoodNet will also agree to repay the Company $57,500,
plus accrued interest, which the former owner received in conjuction with
the purchase of GoodNet in 1996.
<PAGE 8>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Results of Operations for the three months ended February 28, 1997 and
February 29, 1996
Revenues increased by 13.4% to $5,938,475 for the three months ended
February 28, 1997 compared to $5,235,015 for the three months ended February
29, 1996. The Company's revenue is derived from four principal product lines
and services: STS Outsourcing Programs, System Sales and Maintenance,
Customized Billing Outsourcing Services and GoodNet.
STS Outsourcing Program revenues were approximately $4,068,000 for the three
months ended February 28, 1997 compared to $4,032,000 for the three months
ended February 29, 1996. Revenues from System Sales were $620,000 for the
three months ended February 28, 1997 compared to $993,000 for the three months
ended February 29, 1996, a decrease of 37.6%. Revenues from Customized
Billing Outsourcing Services were $168,000 for the three months ended
February 28, 1997 compared with $210,000 for the three months ended February
29, 1996. This decrease was mainly attributable to further delays in the
relesase of TelMaster, the "Client/Server" and "Graphical User Interface"
environment version of the Company's existing text-based telemanagement
software modules. See "Future Expectations" below. GoodNet, acquired in
April, 1996, contributed revenues of $574,000 and $508,000 from its dial-up
and Asynchronous Transfer Mode Backbone ("ATM") products, respectively.
Total gross profit decreased to $2,107,581 for the three months ended
February 28, 1997 compared to $2,137,250 for the three months ended February
29, 1996. Cost of goods sold was approximately 72.5% of STS Outsourcing
Program revenues for the three months February 28, 1997, comparable with
the three months ended February 29, 1996. Cost of goods sold as a percentage
of System Sale revenues was approximately 18.2% for the three months ended
February 28, 1997 and February 29, 1996. Cost of goods sold for GoodNet's
dial-up business was approximately 30.5% while ATM cost of goods exceeded
ATM revenue by approximately $86,000 as anticipated.
Operating expenses increased by 71.2%, or $1,038,582, for the three months
ended February 28, 1997 to $2,497,615 from $1,459,033 for the three months
ended February 29, 1996. This was primarily due to the acquisition of the
GoodNet division which contributed approximately $835,000 in SG&A expenses
and an increase in the number of employees hired for sales and marketing,
and customer support, representing approximately $130,000 of the remaining
increase. Additionally, there was no capitalization of development
expenditures during the three month period ended February 28, 1997. During
the three month period ended February 29, 1996, approximately $94,000 was
capitalized.
The Company realized a $205,241 loss for the three months ended February 28,
1997 compared to a net income of $479,538 in for the three months ended
February 29, 1996 primarily due to a $ 290,000 operating loss realized by
GoodNet.
Results of Operations by Product Line for the quarter ended February 28, 1997
System Sales/ Customized GoodNet GoodNet Total
STS Maintenance Billing Dial-Up ATM
Sales, Net $ 4,067,982 $ 620,715 $ 167,894 $ 573,798 $ 508,086 $ 5,938,475
Cost of Sales 2,949,138 113,002 - 114,185 522,530 3,698,855
Cost of Sales, Depreciation - - - 60,712 71,327 132,039
------------ -------------- ---------- ---------- ----------- ------------
2,949,138 113,002 - 174,897 593,857 3,830,894
------------ -------------- ---------- ---------- ----------- ------------
Gross Profit 1,118,844 507,713 167,894 398,901 (85,771) 2,107,581
------------ -------------- ---------- ---------- ----------- ------------
General & Administrative
Expenses:
General 720,005 712,417 48,664 210,037 458,201 2,149,324
Depreciation 31,201 58,503 - - 2,131 91,835
Amortization - 2,083 - 29,142 30,142 61,367
Bad Debt 59,608 - - - 50,000 109,608
Corporate Allocations:
General 20,777 20,558 1,404 6,061 13,222 62,022
Depreciation 7,971 14,944 - - 544 23,459
---------- -------------- ---------- ---------- ----------- ------------
839,562 808,505 50,068 295,240 540,240 2,497,615
---------- ------------- ---------- ---------- ----------- ------------
Income(Loss) from Operations 279,282 (300,792) 117,826 103,661 (590,011) (390,034)
Interest 45,793
------------
Pretax Income (Loss) (344,241)
Provision for Income taxes 139,000
------------
Net Income (Loss) $ (205,241)
=============
Primary Earnings
per share $ (.05)
Cash & Investment Securities per share $ .97
Book Value per share $ 2.52
Future Expectations
STS Outsourcing Program revenues are expected to be flat with 1996 results
until the fourth quarter of 1997. As a result of a stronger than expected
backlog for Summer, 1997 installations, the Company expects an increase in
gross revenue and gross profit in the fourth quarter of 1997 and all of 1998.
The Company expects revenues from Customized Billing Services to increase
starting in the third quarter of 1997 and thereafter based on existing
proposals outstanding; however, it is not possible to ascertain the amount of
such increase until actual contracts are in place.
The Company has experienced further delays in the release and installation
of certain modules of TelMaster the "Client/Server" and "Graphical User
Interface" environment version of the Company's existing text-based
telemanagement software modules. Certain modules of this product were
released in the third quarter of 1996, and installations are scheduled to be
completed in the second quarter of 1997. Other modules are scheduled for
release in the third and fourth quarter of 1997. Increases in sales from the
TelMaster product had been projected from 1997 forward. Due to persisting
delays, the Company does not expect significant increases in system sales
from the TelMaster product until the third quarter of 1998.
GoodNet is comprised of two product lines: High Speed ATM Backbone
Connectivity ("ATM") and Dial-Up services in Arizona. The ATM product line,
which provides high-speed connectivity to the Internet is expected to continue
to grow both in geographical scope and from a revenue stand-point. The
current ATM backbone consists of 24 national points of presence, where the
Company can provide high-speed connectivity. The current monthly recurring
revenue is approximately $225,000, and is expected to grow at a rate of
$30,000 per month. Because of the nature of the ATM backbone deployment,
cost of goods sold is currently exceeding gross revenue. The Company
expects to realize a gross profit in the third quarter of 1997 and an
operational break even in the second quarter of 1998.
GoodNet experienced a significant decrease in its dial-up customer base due
to lingering connection problems caused by our local line supplier. In the
month of December, 1996, the Company provided a one month credit ($17.95) to
approximately 8,500 of its customers due to poor access to the Central Phoenix
modem pool. The Company's subscriber base has further eroded to approximately
13,500 customers from 15,000. It is anticipated that this number will further
decrease during the second quarter of 1997. The combined GoodNet product
lines are expected to break even in the first quarter of 1998 and to become
increasingly profitable thereafter.
It is anticipated that the cost of human resources will grow significantly as
the Company increases its employee base to expand its products, services, and
market penetration with a significant emphasis on the marketing of high-speed
dedicated access lines to the Internet. This increase will ensure adequate
research and development, and sales and support for anticipated short and
long-term growth.
Due to the reinvestment of profits from other product lines of the Company
into GoodNet, and due to significant delays in the release of the TelMaster
product, the Company expects a break-even in the second quarter and a loss in
the third quarter of 1997.
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. Such statements involve certain risks and uncertainties that
could cause actual results to differ materially from those in the
forward-looking statements including uncertainties regarding the effectiveness
of initiatives to expand GoodNet's ATM backbone, reduce the high turnover rate
of GoodNet's dial-up subscribers, and introduce and implent of the TelMaster
product. Certain factors which may cause such a difference include, but are
not limited to, the following: the impact of increased competition from
competitors with significant financial resources and market share; unforseen
difficulties in integrating acquired businesses; and the amount and rate of
growth in general and administrative expenses associated with building a
strengthened corporate infrastructure to support operations.
Liquidity and Capital Resources
The Company has available a line of credit of $1,000,000. The credit line
has been used for seasonal fluctuations in cash flow. The credit line is
typically used during the summer months due to the high demand for cash from
new system and STS Outsourcing Program installations for the following fall
season.
At February 28, 1997, the Company had cash of $13,051 and investments securities
of $3,703,332. The Company believes that present cash reserves available
under the existing line of credit, along with anticipated cash flows from its
operations will be adequate to supply currently anticipated operating
requirements for the next twelve (12) months.
Seasonality
The Company generally completes the sale of the majority of STS Outsourcing
Program and STS Program system installations in the higher education industry
during the spring and early summer months. The implementation and installation
of these systems and services occurs during the summer months. Revenues
derived from STS Outsourcing Programs begin in the fall and decline during
the Christmas holiday and the summer months when university students are on
vacation. As a result, the Company's revenues have consistently been highest
in the second and fourth quarters.
PART II
OTHER INFORMATION
Response to Items 1-5 are omitted since these items are not applicable to
this report.
Item 6. Exhibits and Reports on Form 8-K
(a) No. Description Reference
11 (Loss) Earnings per common and common equivalent shares *
16 Letter on Change in Certifying Accountants (1)
-----------------------------
* filed herewith
(1) filed with Form 10KSB/A, dated March 7, 1997
(b) Form 8-K dated February 18,1997
Form 8-K/A dated February 27, 1997
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: April 15, 1997