DRAFT FOR DISCUSSION PURPOSES ONLY
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 August 31, 1998
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.)
3443 North Central Avenue, Suite 1800, Phoenix, Arizona 85012
--------------------------------------------------------------
(Address of principal executive offices)
(602) 308-2100
--------------
(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, 3,787,500 shares outstanding at September 29,
1998
Transitional Small Business Disclosure Format Yes ( ) No (X)
39271-1 1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Balance Sheets as of August 31, 1998 (unaudited) and November 30, 1997 . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the three and nine month periods ended August 31, 1998 and 1997 (unaudited) 4 - 5
Consolidated Statements of Cash Flows for the three and nine month periods ended August 31, 1998 and 1997 (unaudited) 6 - 7
Notes to the Consolidated Financial Statements (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 - 9
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 31, November 30,
1998 1997
(unaudited)
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . $1,018,664 $1,621,784
Investment securities . . . . . . . . . . . . . . . 3,500,000 2,200,000
Investment securities - WCII Stock. . . . . . . . . 13,373,913 -
Accounts receivable, net of allowance for . . . . . 3,330,982 6,544,453
uncollectibles of $485,359 and $640,982 at August
31, 1998 and November 30, 1997, respectively
Inventory . . . . . . . . . . . . . . . . . . . . . 594,623 401,508
Deferred taxes. . . . . . . . . . . . . . . . . . . - 1,097,900
Income taxes receivable . . . . . . . . . . . . . . 169,602 235,981
Other . . . . . . . . . . . . . . . . . . . . . . . 232,069 233,979
---------- ----------
Total Current Assets. . . . . . . . . . . . . . . . 22,219,853 12,335,605
Property and equipment, net . . . . . . . . . . . . 1,159,081 3,006,567
Computer software costs, net. . . . . . . . . . . . 341,302 460,442
Intangibles, net. . . . . . . . . . . . . . . . . . - 1,303,826
Note receivable . . . . . . . . . . . . . . . . . . 362,968 347,335
Other . . . . . . . . . . . . . . . . . . . . . . . 93,019 187,075
----------- -----------
Total Assets. . . . . . . . . . . . . . . . . . . . $24,176,223 $17,640,850
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable-current portion. . . . . . . . . . . . $ - $ 90,523
Income taxes payable. . . . . . . . . . . . . . . . 551,218 286,295
Deferred taxes. . . . . . . . . . . . . . . . . . . 3,432,400 -
Accounts payable and accrued liabilities. . . . . . 2,340,768 6,632,968
Deferred revenue. . . . . . . . . . . . . . . . . . 756,184 1,245,806
----------- -----------
Total Current Liabilities . . . . . . . . . . . . . 7,080,570 8,255,592
Note payable. . . . . . . . . . . . . . . . . . . . - 371,551
Deferred taxes. . . . . . . . . . . . . . . . . . . 114,600 107,200
----------- -----------
Total Liabilities . . . . . . . . . . . . . . . . . 7,195,170 8,734,343
----------- -----------
Commitments . . . . . . . . . . . . . . . . . . . . - -
Stockholders' Equity:
Common Stock, 50,000,000 shares of. . . . . . . . . 7,286,159 7,286,159
common stock, no par value,
authorized; 3,787,500 issued and
outstanding
Additional paid-in capital. . . . . . . . . . . . . 80,069 80,069
Unrealized loss on investment securities. . . . . . (528,310) -
Retained Earnings . . . . . . . . . . . . . . . . . 10,143,135 1,540,279
----------- -----------
Total Stockholders' Equity. . . . . . . . . . . . . 16,981,053 8,906,507
----------- -----------
Total Liabilities and Stockholders' Equity. . . . . $24,176,223 $17,640,850
============ ===========
The Accompanying Notes are an Integral
Part of the Consolidated Financial Statements
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended August 31 Nine Months Ended August 31
---------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ------------ ------------
Sales, net . . . . . . . . . . . . . . . . $3,505,137 $2,713,537 $17.630,623 $13,187,103
Cost of Sales. . . . . . . . . . . . . . . 1,696,325 1,406,623 10,616,634 7,859,489
----------- ---------- ------------ ------------
Gross Profit 1,808,812 1,306,914 7,013,989 5,327,614
General and. . . . . . . . . . . . . . . . 2,164,207 1,915,517 6,384,632 5,464,368
Administrative Expense
----------- --------- ------------ ------------
Operating (Loss) Income (355,395) (608,603) 629,357 (136,754)
----------- --------- ------------ ------------
Other Income (Expense):
Interest Income. . . . . . . . . . . . . . 62,504 29,901 180,528 137,757
Interest Expense . . . . . . . . . . . . . (377) - (678) (116)
Other income . . . . . . . . . . . . . . . 5,878 2,618 59,388 2,484
(expense) ----------- --------- ------------ ------------
68,005 32,519 239,238 140,125
(Loss) Income before Provision for Income
Taxes and Discontinued
Operations . . . . . . . . . . . . . . (287,390) (576,084) 868,595 3,371
Provision for Income
Taxes. . . . . . . . . . . . . . . . . . 160,500 259,500 (359,700) (1,300)
----------- --------- ------------ ------------
(Loss) Income from
Continuing Operations . . . . . . . . . (126,890) (316,584) 508,895 2,071
Loss from Discontinued . . . . . . . . . . - (262,554) (68,428) (1,251,517)
Operations, net of
Income Taxes
Gain on Sale of. . . . . . . . . . . . . . - - 8,162,389 -
Discontinued Operations,
net of Income Taxes
----------- ---------- ------------ ------------
Net (Loss) Income. . . . . . . . . . . . . $ (126,890) $ (579,138) $ 8,602,856 $(1,249,446)
=========== =========== ============ ============
The Accompanying Notes are an Integral
Part of the Consolidated Financial Statements
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
Three Months Ended August 31 Nine Months Ended August 31
---------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Basic (loss) earnings per share
Continued operations. . . . . . . $ (0.03) $ (0.08) $ 0.13 $ -
Discontinued operations . . . . . - (0.07) (0.02) (0.33)
Sale of discontinued operations . - - 2.16 -
----------- ----------- ----------- -----------
Net (loss) income . . . . . . . . $ (0.03) $ (0.15) $ 2.27 $ (0.33)
=========== =========== =========== ===========
Diluted (loss) earnings per share
Continued operations. . . . . . . $ (0.03) $ (0.08) $ 0.13 $ -
Discontinued operations . . . . . - (0.07) (0.02) (0.33)
Sale of discontinued operations . - - 2.10 -
----------- ----------- ----------- -----------
Net (loss) income . . . . . . . . $ (0.03) $ (0.15) $ 2.21 $ (0.33)
=========== =========== =========== ===========
Weighted average number
of shares outstanding
- - basic . . . . . . . . . . . . . 3,787,500 3,787,500 3,787,500 3,807,960
- - diluted . . . . . . . . . . . . 3,787,500 3,787,500 3,891,966 3,807,960
=========== =========== =========== ===========
The Accompanying Notes are an Integral
Part of the Consolidated Financial Statements
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED AUGUST 31, 1998 AND 1997 (UNAUDITED)
1998 1997
------------- -------------
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Cash received from customers . . . . . . . . . . . . $ 19,768,868 $ 15,773,765
Cash paid to suppliers and employees . . . . . . . . (19,641,688) (15,577,770)
Interest paid. . . . . . . . . . . . . . . . . . . . (678) (116)
Interest received. . . . . . . . . . . . . . . . . . 174,213 102,761
Income taxes paid. . . . . . . . . . . . . . . . . . (528,998) (48,144)
------------- -------------
Net cash (used by) provided by operating . . . . . . (228,283) 250,496
Activities of continuing operations ------------- -------------
Cash flows from investing activities:
Purchase of property and equipment . . . . . . . . . (537,086) (194,862)
Cash received from sale of equipment . . . . . . . . 26,812 -
Disbursements for notes receivable from related. . . - (385,417)
Parties
Collection of notes receivable from related parties. - 362,316
Sale of investment securities. . . . . . . . . . . . 2,000,000 6,135,000
Purchase of investment securities. . . . . . . . . . (3,300,000) (4,568,567)
------------- -------------
Net cash (used in) provided by investing . . . . . . (1,810,274) 1,348,470
activities of continuing operations ------------- -------------
Net cash (used in) provided by continuing operations (2,038,557) 1,598,966
Cash provided by (used in) discontinued operations . 30,942 (1,643,770)
Net cash provided from sale of discontinued
operations, net of estimated income taxes paid in
the amount of $610,000 . . . . . . . . . . . . . . 1,404,495 -
------------- -------------
Net decrease in cash and cash equivalents (603,120) (44,804)
Cash and cash equivalents at beginning of period 1,621,784 219,023
------------- -------------
Cash and cash equivalents at beginning of period $ 1,018,664 $ 174,219
============= =============
The Accompanying Notes are an Integral
Part of the Consolidated Financial Statements
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE NINE MONTHS ENDED AUGUST 31, 1998 AND 1997 (UNAUDITED)
1998 1997
---- ----
Reconciliation of Net Income (Loss) to net Cash
(Used in) Provided by Operating Activities from
Continuing Operations:
Net Income (Loss) . . . . . . . . . . . . . . . . . $ 8,602,856 $(1,249,446)
------------ ------------
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities
from continuing operations:
Loss from discontinued operations . . . . . . . . . 68,428 1,251,517
Gain on sale of discontinued operations . . . . . . (8,162,389) -
Income taxes payable and deferred taxes . . . . . . (4,625,800) -
Related to sale of discontinued operations
Depreciation and amortization . . . . . . . . . . . 369,094 346,636
Gain on sale of fixed assets. . . . . . . . . . . . (20,739) -
Interest income included with note receivable . . . (15,633) (14,405)
Changes in Assets and Liabilities:
Accounts receivable . . . . . . . . . . . . . . . . 2,177,938 2,493,996
Inventory . . . . . . . . . . . . . . . . . . . . . (238,027) (126,787)
Other current assets. . . . . . . . . . . . . . . . (27,314) (231,824)
Deferred taxes. . . . . . . . . . . . . . . . . . . 4,125,200 69,749
Other assets. . . . . . . . . . . . . . . . . . . . 2,256 (430,555)
Accounts payable and accrued liabilities. . . . . . (2,910,374) (2,468,113)
Deferred revenue. . . . . . . . . . . . . . . . . . 94,919 226,017
Income taxes payable. . . . . . . . . . . . . . . . 264,923 331,774
Income taxes receivable . . . . . . . . . . . . . . 66,379 51,937
------------ ------------
(8,831,139) 1,499,942
------------ ------------
Net cash (used in) provided by operating $ (228,283) $ 250,496
activities from continuing operations ============ ============
<FN>
Supplemental disclosure of non-cash investing and financing activities:
During the nine month period ended August 31, 1998, the Company sold its 71%
owned subsidiary, Telesoft Acquisition Corp. II, in exchange for $3,500,000
cash and 479,387 shares of WinStar common stock valued at $13,902,223 on the
date of sale. Expenses paid and accrued relating to the sale were $1,485,505.
During the nine month period ended August 31, 1997, the Company's discontinued
operations financed a covenant not to compete in the amount of $505,020.
During the year ended November 30, 1997, the Company reacquired 30,833 shares
of its common stock valued at $57,700. Of this amount, 50% was as partial
payment of the sale of 24% of the outstanding shares of Telesoft Acquisition
Corp. II. The remaining 50% were a reduction in goodwill.
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 AND NINE MONTH PERIODS ENDED AUGUST 31, 1998 AND 1997
(UNAUDITED)
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 and nine
month periods ended August 31, 1998 are not necessarily indicative of the
results that may be expected for the year ending November 30, 1998. 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, 1997.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Telesoft Corp.
(the "Company"), together with its wholly owned subsidiary, Telesoft
Acquisition Corp. and its former 71% owned subsidiary, Telesoft Acquisition
Corp. II, d.b.a. GoodNet ("GoodNet").
The minority interest in the accompanying consolidated statement of operations
represents the minority shareholder's proportionate share of the net loss from
GoodNet during fiscal year 1997. As of November 30, 1997, there was no equity
attributable to the minority shareholders of GoodNet.
All significant inter-company accounts and transactions have been eliminated.
ACCOUNTING PRONOUNCEMENTS
In February 1998, the Company adopted Financial Accounting Standards Board
Statement of Accounting Standards No. 128, Earnings Per Share (SFAS 128). As
------------------
a result, earnings (loss) per share for all prior periods have been restated.
Diluted per share amounts are not presented when resulting in a loss per
share, as they are anti-dilutive.
Statement of Position 98-5, "Reporting of the Costs of Start-Up Activities."
(SOP 98-5) issued by the Accounting Standards Executive Committee is effective
for financial statements with fiscal years beginning after December 1, 1998.
SOP 98-5 requires that the costs of start-up activities should be expensed as
incurred. At the time of adopting this SOP, the initial application should be
reported as the cumulative effect of a change in accounting principles. The
Company does not believe that the adoption of the SOP will have a material
effect on its financial position, results of operations or cash flows.
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED AUGUST 31, 1998 AND 1997
(UNAUDITED)
2. SALE OF SUBSIDIARY
Effective January 12, 1998, the Company together with the minority
shareholders of GoodNet, entered into an agreement with WinStar
Communications, Inc. (WinStar) to sell the Company's Internet services
subsidiary for approximately $22.0 million, consisting of $3.5 million cash
and shares of common stock of WinStar (WCII: NASDAQ) having an aggregate
market value of approximately $18.5 million.
Under the terms of the agreement, the Company received approximately
$3,500,000 in cash plus 479,387 shares (based on the 20 day average price of
WinStar stock) of WinStar common stock, which had an aggregate fair market
value of approximately $13.9 million as of the close of business on January
12, 1998. After commissions and related expenses, the Company realized a
$13,810,689 pretax gain on the sale. Additionally, the Company received
$235,484 in cash to offset GoodNet's net cash disbursements from December 12,
1997 through the date of the sale.
As a result of the above transaction, the Company will be vacating a portion
of its office space in Phoenix, Arizona during the year ending November 30,
1998. As a result, the Company will have to take steps to sublease the
vacated space or pay an early termination fee estimated at $300,000. This
amount has been included in accounts payable and accrued liabilities in the
accompanying financial statements.
3. INVESTMENT SECURITIES-WCII STOCK
The Company accounts for its investment in WinStar as an available-for-sale
equity security, which accordingly is carried at market value. Pursuant to a
hedging strategy implemented by the Company in January, 1998, 440,000 WinStar
shares are hedged, utilizing the purchase of puts and the sale of calls in
combination to minimize the downside risk of loss should the price of WinStar
stock decline while allowing for limited upside participation should the stock
price rise. The call option is secured by shares of WinStar stock held by the
Company. As of August 31, 1998, the WinStar stock had an aggregate fair
market value of $12,958,813, resulting in an unrealized loss of $ 528,310 (net
of estimated income tax benefit of $415,100 as result of sale).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED AUGUST 31, 1998 AND 1997
The results of operations of the Company do not include the results of
operations of Telesoft Acquisition Corp. II, d.b.a. GoodNet ("GoodNet"), its
former 71% owned subsidiary which was sold effective January 12, 1998 and
which is treated as a discontinued operation in the Company's financial
statements.
Revenues increased by 33.6% to $17,630,623 for the nine months ended
August 31, 1998 compared to $13,187,103 for the nine months ended August 31,
1997. The Company's revenue is derived from three principal product lines and
services: STS Outsourcing Programs, System Sales and Maintenance, and
Customized Billing Outsourcing Services.
STS revenues were $12,253,000 for the nine months ended August 31, 1998
compared to $9,229,000 for the nine months ended August 31, 1997, an increase
of 32.8 %. A substantial portion of this increase is due to the implementation
of service at Rutgers University and the conversion of the University of
Southern California from the Company's Customized Billing Service to the STS
Program during the fourth quarter of fiscal 1997, representing approximately
$1,523,000 and $907,000 in revenue, respectively. Revenues from System Sales
and Maintenance were $4,382,000 for the nine month ended August 31, 1998
compared to $3,204,000 for the nine months ended August 31, 1997, an increase
of 36.8%. For the nine months ended August 31, 1998 and 1997, revenues from
Customized Billing Outsourcing Services were approximately $996,000 and
$754,000, respectively. This increase is due to the development of customized
billing services for two primary customers, resulting in increased revenues of
approximately $595,000, offset by the conversion of the University of Southern
California to the STS Program, which contributed approximately $134,000 to
Customized Billing Service revenue in the nine months ended August 31, 1997.
Additionally, during the nine months ended August 31, 1997, non-recurring
revenue fore the initial development of the Company's product for NYNEX in the
amount of $342,000 was realized.
Total gross profit increased by 31.7% to $7,013,989 for the nine months
ended August 31, 1998 compared to $5,327,614 for the nine months ended August
31, 1997. Cost of goods sold was approximately 76% of STS revenues for each
of the nine months ended August 31, 1998 and August 31, 1997. Cost of goods
sold as a percentage of System Sales and Maintenance revenues was
approximately 29% for the nine months ended August 31, 1998 compared with 25%
for the nine months ended August 31, 1997. This increase is due to a higher
percentage of system sales revenues, which have a lower gross profit margin
than maintenance revenues, during the nine months ended August 31, 1998.
Operating expenses increased by 16.8%, or $920,264, for the nine months
ended August 31, 1998 to $6,384,632 from $5,464,368 for the nine months ended
August 31, 1997. Operating expenses as a percentage of revenue decreased to
36% compared to 41% for the nine months ended August 31, 1997.
The provision for income taxes was $359,700 and $1,300 for the nine
months ended August 31, 1998 and 1997, respectively. This represents 41.4%
and 38.6% of income before provision for income taxes for each period.
Income from continuing operations increased to $508,895 for the first
nine months of fiscal 1998 from $2,071 in the comparable period of fiscal
1997. This is attributable to increased gross profit and increased controls
of operating expenses during the first nine months of fiscal 1998 compared to
the same period in fiscal 1997.
RESULTS OF OPERATIONS BY PRODUCT LINE FOR THE NINE MONTHS ENDED AUGUST 31, 1998
AND 1997
For the nine months ended August 31, 1998
-----------------------------------------
System Sales/ Customized
STS Maintenance Billing Total
--------------- ------------ -------- -----------
Sales, Net. . . . . . . . $ 12,252,518 $ 4,382,069 $996,036 $17,630,623
Cost of Sales . . . . . . 9,354,830 1,260,822 982 10,616,634
--------------- ------------ -------- -----------
Gross Profit. . . . . . . 2,897,688 3,121,247 995,054 7,013,989
--------------- ------------ -------- -----------
General & Administrative
Expenses:
General . . . . . . . . . 2,560,499 2,602,470 497,626 5,660,595
Depreciation. . . . . . . 151,860 81,760 - 233,620
Amortization. . . . . . . - 2,084 - 2,084
Bad Debt. . . . . . . . . 163,644 8,617 1,000 173,261
Corporate Allocations:. . -
General . . . . . . . . . 133,718 35,973 11,991 181,682
Depreciation. . . . . . . 98,174 26,412 8,804 133,390
--------------- ------------ -------- -----------
3,107,895 2,757,316 519,421 6,384,632
--------------- ------------ -------- -----------
Operating (Loss) Income (210,207) 363,931 475,633 629,357
Other Income. . . . . . . 239,238
-----------
Pretax Income . . . . . . 868,595
Income Tax Provision. . . 359,700
------------
Income from Continuing. . $ 508,895
Operations ===========
Basic Earnings per Share- $ 0.13
Continuing Operations ===========
For the nine months ended August 31, 1997
-----------------------------------------
System Sales/ Customized
STS Maintenance Billing Total
--------------- ------------- -------- -----------
Sales, Net . . . . . . . . . . . . $ 9,229,288 $ 3,203,685 $754,130 $13,187,103
Cost of Sales. . . . . . . . . . . 7,045,233 814,256 - 7,859,489
--------------- ------------- -------- -----------
Gross Profit . . . . . . . . . . . 2,184,055 2,389,429 754,130 5,327,614
--------------- ------------- -------- -----------
General & Administrative Expenses:
General. . . . . . . . . . . . . . 2,289,464 2,362,301 156,319 4,808,084
Depreciation . . . . . . . . . . . 94,838 167,140 - 261,978
Amortization . . . . . . . . . . . - 6,250 - 6,250
Bad Debt . . . . . . . . . . . . . 136,171 655 - 136,826
Corporate Allocations:
General. . . . . . . . . . . . . . 83,868 83,871 5,083 172,822
Depreciation . . . . . . . . . . . 26,402 52,006 - 78,408
--------------- ------------- -------- -----------
2,630,743 2,672,223 161,402 5,464,368
--------------- ------------- -------- -----------
Operating (Loss) Income. . . . . . (446,688) (282,794) 592,728 (136,754)
Other Income . . . . . . . . . . . 140,125
-----------
Pretax Income. . . . . . . . . . . 3,371
Income Tax Provision 1,300
-----------
Income from Continuing $ 2,071
Operations ===========
Basic Earnings per Share- $ -
Continuing Operations ============
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED AUGUST 31, 1998 AND 1997
The results of operations of the Company do not include the results of
operations of Telesoft Acquisition Corp. II, d.b.a. GoodNet ("GoodNet"), its
former 71% owned subsidiary which was sold effective January 12, 1998 and
which is treated as a discontinued operation in the Company's financial
statements.
Revenues increased by 29% to $3,505,137 for the three months ended August
31, 1998 compared to $2,713,537 for the three months ended August 31, 1997.
STS revenues were $1,241,000 for the three months ended August 31, 1998
compared to $961,000 for the three months ended August 31, 1997, an increase
of 29%. A substantial portion of this increase is due to the implementation of
service at Rutgers University and the conversion of the University of Southern
California from the Company's Customized Billing Service to the STS Program
during the fourth quarter of fiscal 1997, representing approximately $99,000
and $147,000 in revenue, respectively. Revenues from System Sales and
Maintenance were $1,731,000 for the three month ended August 31, 1998 compared
to $1,309,000 for the three months ended August 31, 1997, an increase of 32%.
For the three months ended August 31, 1998 and 1997, revenues from Customized
Billing Outsourcing Services were approximately $533,000 and $444,000,
respectively. This increase is due to the development of customized billing
services for one primary customer, resulting in increased revenues of
approximately $132,000.
Total gross profit increased by 38% to $1,808,812 for the three months
ended August 31, 1998 compared to $1,306,914 for the three months ended August
31, 1997. Cost of goods sold was approximately 86% of STS revenues for the
three months ended August 31, 1998. Cost of goods sold as a percentage of
System Sales and Maintenance revenues was approximately 36% and 31% for the
three months ended August 31, 1998 and 1997, respectively. This increase is
due to a higher mix of system sales versus maintenance revenues than in the
prior year.
Operating expenses increased by 13%, or $248,690, for the three months
ended August 31, 1998 to $2,164,207 from $1,915,517 for the three months ended
August 31, 1997. Operating expenses as a percentage of revenue decreased to
61.7% compared to 70.6% for the three months ended August 31, 1997.
The income tax benefit was $160,500 and $259,500 for the three months
ended August 31, 1998 and 1997, respectively. This represents 55%and 45% of
income before provision for income taxes for each period. This increase is
due to a higher percentage of non-taxable interest earned during the current
quarter.
Loss from continuing operations decreased to $126,890 for the third
quarter of fiscal 1998 from $316,584 in the second quarter of fiscal 1997.
This is primarily attributable to increased controls of operating expenses and
an improved gross profit from the Company's System Sales division to
$1,106,000 in the third quarter of fiscal 1998 from approximately $900,000 in
the third quarter of 1997.
RESULTS OF OPERATIONS BY PRODUCT LINE FOR THE THREE MONTHS ENDED AUGUST 31, 1998 AND
1997
For the three months ended August 31, 1998
------------------------------------------
System Sales/ Customized
STS Maintenance Billing Total
--------------- ------------ -------- -----------
Sales, Net . . . . . . . . . . . . $ 1,240,874 $ 1,730,822 $533,441 $3,505,137
Cost of Sales. . . . . . . . . . . 1,071,152 624,191 982 1,696,325
--------------- ------------ -------- -----------
Gross Profit . . . . . . . . . . . 169,722 1,106,631 532,459 1,808,812
--------------- ------------ -------- -----------
General & Administrative Expenses:
General. . . . . . . . . . . . . . 930,218 839,609 194,421 1,964,248
Depreciation . . . . . . . . . . . 56,577 27,320 - 83,897
Amortization . . . . . . . . . . . - - - -
Bad Debt . . . . . . . . . . . . . 14,065 500 - 14,565
Corporate Allocations: . . . . . . -
General. . . . . . . . . . . . . . 41,037 11,040 3,680 55,757
Depreciation . . . . . . . . . . . 33,664 9,057 3,019 45,740
--------------- ------------ -------- -----------
1,075,561 887,526 201,120 2,164,207
--------------- ------------ -------- -----------
Operating (Loss) Income. . . . . . (905,839) 219,105 331,339 (355,395)
Other Income . . . . . . . . . . . 68,005
----------
Pretax Loss. . . . . . . . . . . . (287,390)
Income Tax Provision . . . . . . . 160,500
-----------
Loss from Continuing Operations. . $ (126,890)
===========
Basic Loss per Share-. . . . . . . $ (0.03)
Continuing Operations ===========
For the three months ended August 31, 1997
------------------------------------------
System Sales/ Customized
STS Maintenance Billing Total
--------------- ------------- -------- -----------
Sales, Net . . . . . . . . . . . . $ 960,645 $ 1,308,829 $444,063 $2,713,537
Cost of Sales. . . . . . . . . . . 998,120 408,503 - 1,406,623
--------------- ------------- -------- -----------
Gross (Loss) Profit. . . . . . . . (37,475) 900,326 444,063 1,306,914
--------------- ------------- -------- -----------
General & Administrative Expenses:
General. . . . . . . . . . . . . . 844,219 826,819 63,320 1,734,358
Depreciation . . . . . . . . . . . 32,308 49,582 - 81,890
Amortization . . . . . . . . . . . - 2,083 - 2,083
Bad Debt . . . . . . . . . . . . . 15,043 541 - 15,584
Corporate Allocations:
General. . . . . . . . . . . . . . 25,539 25,542 1,548 52,629
Depreciation . . . . . . . . . . . 9,755 19,218 - 28,973
--------------- ------------- -------- -----------
926,864 923,785 64,868 1,915,517
--------------- ------------- -------- -----------
Operating (Loss) Income (964,339) (23,459) 379,195 (608,603)
Other Income . . . . . . . . . . . 32,519
-----------
Pretax Loss. . . . . . . . . . . . (576,084)
Income Tax Provision . . . . . . . 259,500
-----------
Loss from Continuing Operations. . $ (316,584)
===========
Basic Loss per Share-. . . . . . . $ (0.08)
Continuing Operations ===========
DISCONTINUED OPERATIONS: TELESOFT ACQUISITION CORP. II, D.B.A. GOODNET
Effective January 12, 1998, the Company together with the minority
shareholders of GoodNet, entered into an agreement with WinStar
Communications, Inc. ("WinStar") to sell the Company's Internet services
subsidiary for approximately $22.0 million, consisting of $3.5 million cash
and shares of common stock of WinStar (WCII: NASDAQ) having an aggregate
market value of approximately $18.5 million.
Under the terms of the agreement, the Company received approximately
$3,500,000 in cash plus 479,387 shares (based on the 20 day average price of
WinStar stock) of WinStar common stock, which had an aggregate fair market
value of approximately $13.9 million as of the close of business on January
12, 1998. After commissions and related expenses, the Company realized a
$13,810,689 pretax gain ($8,162,389 after taxes) on the sale. Additionally,
the Company received $235,484 in cash to offset GoodNet's net cash
disbursements from November 12, 1997 through the date of the sale.
MATERIAL CHANGES IN FINANCIAL POSITION
Cash and cash equivalents decreased to $1,018,664 at August 31, 1998 from
$1,621,784 at November 30, 1997. During the nine months ended August 31,
1998, investment securities (excluding WCII Stock) increased $1,300,000.
Combined, the Company's cash and investment holdings increased approximately
$697,000. During the nine months ended August 31, 1998, activities from
continuing operations used approximately $228,000. This is down from net cash
provided from continuing operations of approximately $250,000 during the nine
months ended August 31, 1997. However, this decrease is due to the payment of
approximately $530,000 in income taxes during the current period.
Additionally, the Company used approximately $540,000 in cash to purchase
property and equipment for its continuing operations. The Company received
net cash proceeds of approximately $2,014,000 from the sale of discontinued
operations. Of this amount, $610,000 has been used for estimated income taxes
related to the sale.
Accounts receivable decreased to $3,816,341 from $7,185,435 as of
November 30, 1997 ($3,330,982 and $6,544,453, net of allowance for
uncollectibles as of August 31, 1998 and November 30, 1997 respectively).
This decrease is primarily due to seasonal fluctuation of the STS Outsourcing
and the sale of GoodNet, which had approximately $1,308,000 (before allowance
for uncollectibles), in accounts receivable at November 30, 1997. Accounts
receivable, before allowance for uncollectibles and excluding GoodNet related
receivables, at August 31, 1997 was approximately $3,112,000. The $704,000
increase in receivables reflects the Company's current growth.
As of August 31, 1998, the Company had a net current and deferred tax
liability of $3,928,616 compared with a net current and deferred tax asset of
$940,386 of November 30, 1997. This is primarily a result of the sale of
GoodNet, which resulted in an estimated current tax liability of $1,053,000
(of which, $610,000 has been paid to date) in connection with cash received
from the sale and a current deferred tax liability of approximately $4,182,800
in connection with the common stock of WinStar received in connection with the
sale. These amounts are net of a carry forward of approximately $412,500 in
tax benefit from fiscal 1997.
Property and equipment before accumulated depreciation decreased to
$2,601,227 from $5,151,229 as of November 30, 1997. This decrease is
primarily due the sale of GoodNet, which had approximately $2,916,000 in
unamortized property and equipment as of November 30, 1997. This results in
an increase of approximately $367,000 in property and equipment for continuing
operations. This is due to the purchase of approximately $70,000 in STS
equipment to support growth, the purchase of approximately $368,000 in
furniture, fixtures, and leasehold improvements as a result of the Company's
relocation of its office facilities, less approximately $120,000 in furniture
and fixtures sold and $30,000 in leasehold improvements from the old office
facilities that were retired.
Accounts payable and accrued liabilities decreased to $2,340,768 from
$6,632,968 as of November 30, 1997. This decrease is primarily attributable
to seasonal fluctuation of STS Outsourcing and the sale of GoodNet, which had
$1,382,000 in accounts payable and accrued liabilities as of November 30,
1997. It is also attributable to the accrual of an estimated $300,000 early
termination fee the Company may have to pay should it be unable to sublease
the office space that may be vacated as a result of the GoodNet sale. (See
Note 2 to the financial statements). As of August 31, 1997, there was
approximately $1,373,000 in accounts payable and accrued liabilities resulting
from continuing operations. This approximate $968,000 increase is in part
attributable to the growth in STS revenue. STS cost of sales increased from
approximately $998,000 during the third quarter of fiscal 1997 to
approximately $1,071,000 during the third quarter of fiscal 1998.
Deferred revenue decreased to $756,184 from $1,245,806 as of November 30,
1997. This decrease is due to the sale of GoodNet, which had approximately
$585,000 in deferred revenue at November 30, 1997.
FUTURE EXPECTATIONS
STS revenues are expected to increase for the fourth fiscal quarter of
1998 and through 1999. To date, eleven new universities have been implemented
for the program and will begin service during the fourth quarter of 1998.
The Company expects revenues from Customized Billing Services to increase
based upon existing proposals outstanding. However, it is not possible to
ascertain the amount of such increase until actual contracts are in place and
there can be no assurance that increased sales will materialize. During the
quarter ended August 31, 1998, Telesoft received authorization to implement a
convergence billing, reporting and support system as a subcontractor for
Pacific Bell and MCI customer care services for the State of California's new
CALNET contract. Under the subcontract, Telesoft will support MCI and Pacific
Bell in providing the same consolidated billing services to local government
and public universities. This services contract is valued at approximately $7
million over ten years.
The Company previously experienced 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 have been completed
in the second and third quarters of 1997. Based on the full product release
in January 1998, the Company expects to sell and install a higher number of
TelMaster systems in fiscal 1998 and 1999; however, there can be no assurance
that increased sales will materialize.
It is anticipated that the cost of human resources will grow 15%-20% as
the Company increases its employee base to expand its sales, research and
development, implementation and support staff. This increase will ensure
adequate sales and support for anticipated short and long-term growth.
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. 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; unforeseen 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
At August 31, 1998, the Company had cash of $1,018,664, other investments
of $3,500,000, and 479,387 restricted shares of WinStar stock (WCII: NASDAQ),
with a fair market value of $12,958,813 (net of an estimated income tax
benefit of $415,100 on the unrealized loss). The Company believes that
present cash reserves available, along with anticipated cash flows from its
business, will be adequate to supply currently anticipated operating
requirements for the Company for the next 12 months. However, there can be no
assurance that the Company will not require additional funding within this
time frame. The Company could 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 could be dilutive to existing stockholders.
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 weaken during the winter holiday and the summer months when
university students are on vacation. As a result, the Company's revenues have
traditionally been highest during the second and fourth quarter.
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 Earnings per common and common equivalent shares filed herewith
(b) Form 8-K dated January 27, 1998
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: September 29, 1998
Exhibit 11; Earnings (Loss) per share
Earnings (Loss) per share is calculated as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
August 31, 1998 August 31, 1997 August 31, 1998 August 31, 1997
----------------- ----------------- ----------------- -----------------
(Loss) Income from continuing . . . . $ (126,890) $ (316,584) $ 508,895 $ 2,071
operations
Loss from discontinued operations . . - $ (262,554) $ (68,428) $ (1,251,517)
Gain on sale of discontinued. . . . . - - $ 8,162,389 -
Operations ----------------- ----------------- ---------------- -----------------
Net (Loss) Income . . . . . . . . . . $ (126,890) $ (579,138) $ 8,602,856 $ (1,249,446
================= ================= ================= =================
BASIC (LOSS) EARNINGS PER SHARE:
- -------------------------------------
Weighted average number of. . . . . . 3,787,500 3,787,500 3,787,500 3,807,960
Shares outstanding ================= ================= ================ =================
Continued operations. . . . . . . . . $ (0.03) $ (0.08) $ 0.13 $ -
Discontinued operations . . . . . . . - (0.07) (0.02) (0.33)
Sale of discontinued operations . . . - - 2.16 -
----------------- ----------------- ----------------
Net income (loss) . . . . . . . . . . $ (0.03) $ (0.15) $ 2.27 $ (0.33)
================= ================= ================ =================
DILUTED EARNINGS (LOSS) PER SHARE
- -------------------------------------
Weighted average number of. . . . . . 3,787,500 3,787,500 3,787,500 3,807,960
Shares outstanding
Net effect of dilutive stock options. - - 104,466 -
Based on the treasury stock
method using the average
market price (1)
Common Stock including assumed. . . . 3,787,500 3,787,500 3,891,966 3,807,960
Conversions ================= ================= ================= =================
Continued operations. . . . . . . . . $ (0.03) $ (0.08) $ 0.13 $ -
Discontinued operations . . . . . . . - (0.07) (0.02) (0.33)
Sale of discontinued operations . . . - - 2.10 -
----------------- ----------------- ----------------- -----------------
Net income (loss) . . . . . . . . . . $ (0.03) $ (0.15) $ 2.21 $ (0.33)
================= ================= ================= =================
<FN>
(1) - not presented where effect would be anti-dilutive