DRAFT FOR DISCUSSION PURPOSES ONLY
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1999
COMMISSION FILE NO. 1-13830
TELESOFT CORP.
(Name of Small Business Issuer as specified in its charter)
ARIZONA 86-0431009
(State of Incorporation) (IRS Employer Identification No.)
3443 NORTH CENTRAL AVENUE #1800
PHOENIX, ARIZONA 85012
(Address of principal executive offices) (Zip Code)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (602) 308-2100
Indicate by check mark whether the issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the issuer was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
Common Stock, no par value, 3,711,500 shares outstanding at April 8, 1999
Transitional Small Business Disclosure Format Yes ( ) No (X)
39271-1 1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Balance Sheets as of February 28, 1999 and November 30, 1998. . . . . . . . . . . . . 3
Consolidated Statements of Operations for the three month periods ended February 28, 1999 and 1998 4
Consolidated Statements of Cash Flows for the three month periods ended February 28, 1999 and 1998 5 - 6
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 7
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
February 28, November 30,
1999 1998
(unaudited)
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $2,865,056 $7,740,219
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . 13,016,334 9,936,789
Accounts receivable, net of allowance for uncollectibles of $562,393. 6,349,029 6,933,089
and $502,095 at February 28, 1999 and November 30, 1998,
respectively
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 673,154 626,170
Deferred taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 779,900 170,800
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319,215 661,486
------------ ------------
Total Current Assets. . . . . . . . . . . . . . . . . . . . . . . . . 24,002,688 26,068,553
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . 1,118,166 1,146,766
Computer software costs, net. . . . . . . . . . . . . . . . . . . . . 278,629 314,962
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,526 90,048
------------ ------------
Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,488,009 $27,620,329
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . $ 551,114 $ 147,239
Accounts payable and accrued liabilities. . . . . . . . . . . . . . . 4,908,864 8,208,584
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . 736,131 742,242
------------ ------------
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . 6,196,109 9,098,065
Deferred taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 169,500 127,100
------------ ------------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 6,365,609 9,225,165
------------ ------------
Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
Stockholders Equity:
Preferred Stock, no par value, 10,000,000 shares authorized;. . . . . - -
none issued and outstanding
Common Stock, no par value, 50,000,000 shares authorized; . . . . . . 7,286,159 7,286,159
3,787,500 issued and 3,711,500 outstanding (1999)
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . 80,069 80,069
Unrealized gain on investment securities. . . . . . . . . . . . . . . - 84,566
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 12,123,236 11,127,129
Less Treasury Stock at cost, 76,000 shares (1999) and 39,000
shares (1998). . . . . . . . . . . . . . . . . . . . . . . . . . . (367,064) (182,759)
------------ ------------
Total Stockholders' Equity. . . . . . . . . . . . . . . . . . . . . . 19,122,400 18,395,164
------------ ------------
Total Liabilities and Stockholders' Equity. . . . . . . . . . . . . . $25,488,009 $27,620,329
============ ============
The accompanying Notes are an Integral Part of
the Consolidated Financial Statements
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FEBRUARY 28, 1999 AND 1998 (UNAUDITED)
1999 1998
----------- -----------
Sales, net . . . . . . . . . . . . . . . . . . . . . $7,802,597 $7,026,778
Cost of sales. . . . . . . . . . . . . . . . . . . . 4,418,477 4,403,161
----------- -----------
Gross profit . . . . . . . . . . . . . . . . . . . . 3,384,120 2,623,617
General and administrative expenses. . . . . . . . . 2,446,317 2,119,500
----------- -----------
Operating income . . . . . . . . . . . . . . . . . . 937,803 504,117
----------- -----------
Other income (expense):
Interest income. . . . . . . . . . . . . . . . . . . 161,702 62,566
Interest expense . . . . . . . . . . . . . . . . . . (214) (678)
Other income . . . . . . . . . . . . . . . . . . . . 107 16,740
----------- -----------
161,595 78,628
----------- -----------
Income from continuing operations before provision
for income taxes. . . . . . . . . . . . . . . . 1,099,398 582,745
Provision for income taxes . . . . . . . . . . . . . 470,800 263,050
----------- -----------
Income from continuing operations. . . . . . . . . . 628,598 319,695
Loss from discontinued operations, net of income
taxes. . . . . . . . . . . . . . . . . . . . . . - (68,428)
Gain on disposal of GoodNet subsidiary (net of
income taxes of $239,500 in 1999 and $5,648,300
in 1998) . . . . . . . . . . . . . . . . . . . . 367,509 8,162,389
----------- -----------
Net Income . . . . . . . . . . . . . . . . . . . . . $ 996,107 $8,413,656
=========== ===========
Basic earnings (loss) per share
Continuing operations. . . . . . . . . . . . . . . . $ 0.17 $ 0.08
Discontinued operations. . . . . . . . . . . . . . . - (0.02)
Sale of discontinued operations. . . . . . . . . . . 0.10 2.16
----------- -----------
Net income (loss). . . . . . . . . . . . . . . . . . $ 0.27 $ 2.22
=========== ===========
Diluted earnings (loss) per share
Continuing operations. . . . . . . . . . . . . . . . $ 0.16 $ 0.08
Discontinued operations. . . . . . . . . . . . . . . - (0.02)
Sale of discontinued operations. . . . . . . . . . . .10 2.12
----------- -----------
Net income (loss). . . . . . . . . . . . . . . . . . $ 0.26 $ 2.18
=========== ===========
Weighted average number of shares outstanding
- - basic. . . . . . . . . . . . . . . . . . . . . . . 3,720,022 3,787,500
- - diluted. . . . . . . . . . . . . . . . . . . . . . 3,867,837 3,859,321
=========== ===========
The Accompanying Notes are an Integral Part of
the Consolidated Financial Statements
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED FEBRUARY 28, 1999 AND 1998 (UNAUDITED)
1999 1998
------------ ------------
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Cash received from customers. . . . . . . . . . . . $ 8,324,505 $ 7,390,169
Cash paid to suppliers and employees. . . . . . . . (9,980,603) (7,487,137)
Interest paid . . . . . . . . . . . . . . . . . . . (214) (678)
Interest received . . . . . . . . . . . . . . . . . 83,261 55,708
Income taxes paid . . . . . . . . . . . . . . . . . (507,725) (29,950)
------------ ------------
Net cash used in operating activities of
continuing operations. . . . . . . . . . . . . . (2,080,776) (71,888)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment. . . . . . . . . (60,733) (389,677)
Cash received from sale of equipment. . . . . . . . - 11,490
Collection of notes receivable. . . . . . . . . . . 373,153 -
Cash received from sale of investment securities. . 3,409,232 -
Purchase of investment securities . . . . . . . . . (5,966,334) (2,500,000)
------------ ------------
Net cash used in investing activities of. . . . . . (2,244,682) (2,878,187)
continuing operations
------------ ------------
Cash flows from financing activities:
Purchases of treasury stock . . . . . . . . . . . . (184,305) -
------------ ------------
Net cash used in financing activities of. . . . . . (184,305) -
continuing operations
------------ ------------
Cash used in continuing operations. . . . . . . . . (4,509,763) (2,950,075)
Cash (used in) provided by discontinued operations, (365,400) 2,045,437
Including income taxes paid in the amount of
$365,400 for 1999
------------ ------------
Net decrease in cash and cash equivalents. . . . . (4,875,163) (904,638)
Cash and cash equivalents at beginning of period . 7,740,219 1,621,784
------------ ------------
Cash and cash equivalents at end of fiscal period . $ 2,865,056 $ 717,146
============ ============
The Accompanying Notes are an Integral Part of
the Consolidated Financial Statements
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS ENDED FEBRUARY 28, 1999 AND 1998 (UNAUDITED)
1999 1998
---- ----
Reconciliation of Net Income to net Cash Used In
Operating Activities from Continuing Operations:
Net Income . . . . . . . . . . . . . . . . . . . . $ 996,107 $ 8,413,656
------------ ------------
Adjustments to reconcile net income to net
cash used in operating activities
from continuing operations:
Loss from discontinued operations. . . . . . . . . - 68,428
Gain on sale of discontinued operations. . . . . . (367,509) (8,162,389)
Income taxes payable and deferred taxes
related to sale of discontinued operations. . . 125,900 (5,235,800)
Depreciation and amortization. . . . . . . . . . . 125,666 119,031
Gain on sale of fixed assets . . . . . . . . . . . - (10,277)
Interest income included with note receivable. . . (2,294) (5,211)
Changes in Assets and Liabilities:
Accounts receivable, net . . . . . . . . . . . . . 584,060 544,808
Inventory. . . . . . . . . . . . . . . . . . . . . (46,984) (154,674)
Other current assets . . . . . . . . . . . . . . . (28,589) (8,586)
Deferred taxes, net. . . . . . . . . . . . . . . . (566,700) 4,291,100
Other assets . . . . . . . . . . . . . . . . . . . 1,522 (620)
Accounts payable and accrued liabilities . . . . . (3,299,719) (1,000,290)
Deferred revenue . . . . . . . . . . . . . . . . . (6,111) (108,864)
Income taxes payable . . . . . . . . . . . . . . . 403,875 1,183,435
Income taxes receivable. . . . . . . . . . . . . . - (5,635)
(3,076,883) (8,485,544)
------------ ------------
Net cash used in operating activities from . . . . $(2,080,776) $ (71,888)
============ ============
continuing operations
<FN>
Supplemental disclosure of non-cash investing and financing activities:
During the three month period ended February 28, 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 $2,094,205.
The Accompanying Notes are an Integral Part of
the Consolidated Financial Statements
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the three month periods ended February 28, 1999 and 1998
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, 1999 are not necessarily indicative of the results that may be
expected for the year ending November 30, 1999. The unaudited consolidated
financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in the Company's Form
10-KSB for the year ended November 30, 1998.
Principles of Consolidation
The consolidated financial statements include the accounts of Telesoft Corp.,
together with its wholly owned subsidiary, Telesoft Acquisition Corp. and its
former 71% owned subsidiary, Telesoft Acquisition Corp. II, d.b.a. GoodNet
("GoodNet").
All significant inter-company accounts and transactions have been eliminated.
2. DISCONTINUED OPERATIONS/SALE OF 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, GoodNet, for approximately $22.0 million, consisting of $3.5
million cash and shares of common stock of WinStar (NASDAQ: WCII) having an
aggregate market value of approximately $18.5 million.
Under the terms of the agreement, the Company received approximately
$3,500,000 cash plus 479,387 shares of WinStar restricted 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 legal
expenses, the Company realized an approximate $13.2 million pretax gain on the
sale in the first quarter of fiscal 1998. Additionally, the Company received
$235,000 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 may be vacating a portion of
its office space in Phoenix, Arizona during the year ending November 30, 1999.
As a result, the Company will have to take steps to sublease the vacated space
or pay an early termination fee approximated at $300,000. This amount has
been included in accounts payable and accrued liabilities in the accompanying
financial statements.
3. INVESTMENT SECURITIES-WINSTAR SHARES
The Company accounted for its investment in WinStar as an available-for-sale
equity security, which accordingly was carried at market value. During the
quarter ended February 28, 1999, the Company sold the last of its WinStar
shares, or 79,387 shares, resulting in net proceeds, before taxes of
$2,909,232.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS BY PRODUCT LINE FOR THE THREE MONTHS ENDED FEBRUARY 28, 1999 AND 1998
(in thousands except per share items)
Three months ended February 28, 1999 Three months ended February 28, 1998
----------------------------------------- -----------------------------------------
STS System Sales Custom Network Total STS System Custom Total
Billing Services Billing
Sales, Net. . . . . . . . $ 5,818 $ 1,264 $ 669 $ 51 $7,802 $5,456 $ 1,329 $ 242 $7,027
Cost of Sales . . . . . . 4,201 217 - - 4,418 4,064 339 - 4,403
--------- -------------- ------- --------- ------ ------ -------- ------- ------
Gross Profit. . . . . . . 1,617 1,047 669 51 3,384 1,392 990 242 2,624
--------- -------------- ------- --------- ------ ------ -------- ------- ------
General & Administrative
Expenses:
General . . . . . . . . . 866 990 278 70 2,204 790 976 104 1,870
Depreciation. . . . . . . 37 33 5 - 75 47 26 - 73
Amortization. . . . . . . - - - - - - 2 - 2
Bad Debt. . . . . . . . . 54 2 - - 56 70 8 1 79
Corporate Allocations:
General . . . . . . . . . 45 12 4 - 61 39 10 3 52
Depreciation. . . . . . . 22 22 5 1 50 32 9 3 44
--------- -------------- ------- --------- ------ ------ -------- ------- ------
1,024 1,059 292 71 2,446 978 1,031 111 2,120
--------- -------------- ------- --------- ------ ------ -------- ------- ------
Operating Income (Loss) . 593 (12) 377 (20) 938 414 (41) 131 504
Other Income. . . . . . . 161 79
------ ------
Pretax Income . . . . . . 1,099 583
Income Tax Provision. . . (471) (263)
------ ------
Income from Continuing Operations $ 628 $ 320
====== ======
Diluted Earnings per Share-Continuing
Operations. . . . . . . $0.16 $ 0.08
====== ======
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED FEBRUARY 28, 1999 AND 1998
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 11% to $7,802,597 for the three months ended
February 28, 1999 compared to $7,026,778 for the three months ended February
28, 1998. 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 Network Services.
STS revenues were $5,817,928 for the three months ended February 28,
1999 compared to $5,455,813 for the three months ended February 28, 1998, an
increase of 6.7%. Revenues from System Sales and Maintenance were $1,264,196
for the three month ended February 28, 1999 compared to $1,328,464 for the
three months ended February 28, 1998, a decrease of 4.8%. Revenue from the
TelMaster product increased 33.5%, while revenue from the RATEX and DCS
product decreased 33% and 12.7% respectively. The decrease from the RATEX
product is primarily due to unusually strong sales during the first quarter of
fiscal 1998. For the three months ended February 28, 1999 and 1998, revenues
from Customized Billing Services were approximately $669,000 and $242,000,
respectively. This 176% increase is due to the development of customized
billing services for three customers, resulting in increased revenues of
approximately $427,000. Network Services, which began operations in December
1998, had revenues of approximately $51,000 during the first quarter of fiscal
1999.
Total gross profit increased by 29% to $3,384,120 for the three months
ended February 28, 1999 compared to $2,623,617 for the three months ended
February 28, 1998. Cost of goods sold was approximately 72.2% of STS revenues
for the three months ended February 28, 1999, compared with 74.5% for the
three months ended February 28, 1998. This decrease is primarily due to the
decreased cost of long distance from the Company's suppliers. Cost of goods
sold as a percentage of System Sales and Maintenance revenues was
approximately 17% for the three months ended February 28, 1999 compared with
25% for three months ended February 28, 1998. This decrease is due to a
slightly lower percentage of system sales revenues, which have a lower gross
profit rate than maintenance revenues, as well as a higher percentage of
TelMaster sales, which have a higher gross profit margin than RATEX systems.
Overall operating expenses increased by 15.4%, or $326,817, for the three
months ended February 28, 1999 to $2,446,317 from $2,119,500 for the three
months ended February 28, 1998. This increase is primarily due to increased
costs of human resources. Network Services had operating expenses of
approximately $71,000 during the first quarter of fiscal 1999. Operating
expenses as a percentage of revenue increased slightly to 31% compared to 30%
for the three months ended February 28, 1998. Research and development costs
for the three months ended February 28, 1999 and 1998 were $234,000 and
$134,000, respectively.
The provision for income taxes was $470,800 and $263,050 for the three
months ended February 28, 1999 and 1998, respectively. This represents 42.8%
and 45% of income before provision for income taxes for 1999 and 1998,
respectively. This percentage decrease is partially attributable to
increased interest from tax-free investments and increased state income taxes.
Income from continuing operations increased to $628,598 for the first
quarter of fiscal 1999 from $319,695 in the first quarter of fiscal 1998.
This is primarily attributable to increased revenues from Customized Billing
Services.
For the quarter ended February 28, 1999, gain on disposal of GoodNet
subsidiary represents additional gain realized as a result of the sale of
79,387 shares of WinStar common stock received in the sale of GoodNet to
WinStar. See "Investment Securities - WinStar Shares" in the notes to the
consolidated financial statements.
NETWORK SERVICES
During the first quarter of fiscal 1999, the Company formed a Network
Services division to initially provide telecommunication services to companies
in Arizona. The division provides dial tone and data transport services via
strategic agent relationships with Regional Bell Operating Companies
("RBOCs"). The division offers expertise in telecommunications network
services to the end user of the RBOCs and will provide consultation on new
product offerings, ways to enhance current services, and ongoing upgrades and
improvements. For the quarter ended February 28, 1999, the division
generated $51,000 in revenues and a loss of ($20,000). The division is
projected to have an annual run-rate of approximately $1,000,000 in revenues
at the end of fiscal 1999. However, there can be no assurance that revenues
will increase as expected.
RECOVERY SERVICES
During March and April 1999, the Company has been negotiating employee
agreements with two professionals who will head the Company's recovery
services. This division will assist large organizations in analyzing,
recovering, and optimizing their telecommunications expenditures. The
division will be lead by two senior executives with 27 years of combined
industry experience in two leading companies. This division will be
headquartered in New Jersey, where the Company is currently negotiating for
office space. Initially, the Company will concentrate its marketing efforts
to the East Coast, with eventual nationwide coverage. The division is
expected to generate a loss of approximately ($500,000) on revenues of
$200,000 in fiscal 1999.
DISCONTINUED OPERATIONS
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 (NASDAQ: WCII) having an aggregate
market value of approximately $18.5 million.
Under the terms of the agreement, the Company received approximately
$3,500,000 cash plus 479,387 shares of WinStar restricted 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 legal
expenses, the Company realized an approximate $13.2 million pretax gain on the
sale in the first quarter of fiscal 1998. Additionally, the Company received
$235,000 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 may be vacating a portion of
its office space in Phoenix, Arizona during the year ending November 30, 1999.
As a result, the Company will have to take steps to sublease the vacated space
or pay an early termination fee approximated at $300,000. This amount has
been included in accounts payable and accrued liabilities in the accompanying
financial statements.
MATERIAL CHANGES IN FINANCIAL POSITION
Cash and cash equivalents decreased to $2,865,056 at February 28, 1999
from $7,740,219 at November 30, 1998. During the three months ended February
28, 1999, investment securities increased $3,079,545. Combined, the Company's
cash and investment holdings decreased approximately $1,796,000. During the
first quarter of 1998, activities from continuing operations used
approximately $2,081,000. Additionally, the Company used approximately
$184,000 in cash to purchase treasury stock. The Company received $2,909,232
upon the sale of 79,387 shares of WinStar stock, and paid $500,900 in taxes
related the sale of GoodNet, including this sale of the WinStar stock.
Accounts receivable decreased to $6,911,422 from $7,435,184 as of
November 30, 1998 ($6,394,029 and $6,933,089, net of allowance for
uncollectibles as of February 28, 1999 and November 30, 1998 respectively).
This decrease is due to increased collections on accounts past due.
As of February 28, 1999, the Company had a net current and deferred tax
liability of $610,400 compared with a net deferred tax asset of $43,700 of
November 30, 1998. This is primarily a result of the sale of the remaining
WinStar shares, resulting in a shift to current tax liability from deferred
taxes previously accrued.
Accounts payable and accrued liabilities decreased to $4,908,865 from
$8,208,584 as of November 30, 1998. As of February 28, 1998, there was
approximately $4,250,852 in accounts payable and accrued liabilities. This
approximate $658,000 increase is attributable to the growth in STS revenue.
STS cost of sales increased to approximately $4,201,000 during the first
quarter of fiscal 1999 from approximately $4,064,000 during the first quarter
of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
At February 28, 1999, the Company had cash of $2,865,056 and investment
securities of $13,016,334. 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 may be required to raise additional funds through public or private
financing, strategic relationships, or other arrangements. There can be no
assurance that such additional funding, if needed, will be available on terms
attractive to the Company, or at all. Furthermore, any additional equity
financing may be dilutive to existing stockholders.
FUTURE EXPECTATIONS
STS revenues are projected to increase by approximately 5% from fiscal
1998 levels during the fiscal year ending November 30, 1999. The Company
expects that this increase will be due to accounts added during the fourth
quarter of fiscal 1998. However, there can be no assurance that revenues will
increase as expected.
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.
The Company had 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. The TelMaster system began full product
release in January 1998 and the Company expects to sell and install increasing
numbers of TelMaster systems in fiscal 1999. However, there can be no
assurance that this will happen.
It is anticipated that the cost of human resources for continuing
operations will increase by 15%-25% as the Company increases its employee base
to expand launch the Network Services and Recovery divisions, and expands its
products, services and market penetration. This increase will ensure adequate
research and development, and 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.
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
consistently 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) There were no reports on Form 8-K during the current quarter.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Issuer has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TELESOFT CORP.
BY /s/ Michael F. Zerbib
------------------------------------------
Michael F. Zerbib
Chief Financial Officer
DATED: April 13, 1999
The following table reconciles the numerators and denominators of the basic and diluted earnings (loss) per share:
THREE MONTHS ENDED
FEBRUARY 28,
--------------------
1999 1998
-------- ---------
BASIC EARNINGS (LOSS) PER COMMON SHARE:
- ---------------------------------------------
NUMERATOR
Income from continuing operations 628,598 319,695
Loss from operations of GoodNet subsidiary - (68,428)
Gain on disposal of GoodNet 367,509 8,162,389
--------- ----------
Net earnings available to common shareholders 996,107 8,413,656
========= ==========
DENOMINATOR
Weighted average number of shares outstanding 3,720,022 3,787,500
========= ==========
PER SHARE AMOUNTS
Income from continuing operations . . . . . . .17 .08
Loss from operations of GoodNet subsidiary. . - (.02)
Gain on disposal of GoodNet . . . . . . . . . .10 2.16
--------- ----------
Net earnings available to common shareholders .27 2.22
========= ==========
DILUTED EARNINGS (LOSS) PER SHARE
- -----------------------------------
NUMERATOR
Income from continuing operations. . . . . . . 628,598 319,695
Loss from operations of GoodNet subsidiary . . - (68,428)
Gain on disposal of GoodNet. . . . . . . . . . 367,509 8,162,389
--------- ----------
Net earnings available to common shareholders. 996,107 8,413,656
========= ==========
DENOMINATOR
Weighted average number of shares outstanding 3,720,022 3,787,500
Effect of dilutive securities
Options and warrants. . . . . . . . . . . . . 482,100 345,400
Stock acquired with proceeds. . . . . . . . . (334,285) (273,579)
--------- ----------
Weighted average common shares and assumed
conversions outstanding . . . . . . . . . . 3,867,837 3,859,321
========== ==========
PER SHARE AMOUNTS
Income from continuing operations . . . . . . .16 .08
Loss from operations of GoodNet subsidiary. . - (.02)
Gain on disposal of GoodNet . . . . . . . . . .10 2.12
--------- ----------
Net earnings available to common shareholders. .26 2.18
========== ==========