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 AUGUST 31, 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 September 30, 1999
Transitional Small Business Disclosure Format Yes ( ) No (X)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Balance Sheets as of August 31, 1999 and November 30, 1998 . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the three and nine month periods ended August 31, 1999 and 1998 4
Consolidated Statements of Cash Flows for the nine month periods ended August 31, 1999 and 1998 . . . . . 5 - 6
Notes to the Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
August 31, 1999 November 30, 1998
(unaudited)
ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . $ 1,181,044 $ 7,740,219
Investment securities. . . . . . . . . . . . . . . . . . . . . . . . 12,207,500 9,936,789
Accounts receivable, net of allowance for uncollectibles of $631,862 5,453,633 6,933,089
and $502,095, respectively
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 892,617 626,170
Income taxes receivable. . . . . . . . . . . . . . . . . . . . . . . 782,237 -
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 644,600 170,800
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 377,826 661,486
----------------- -------------------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . 21,539,457 26,068,553
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . 1,220,736 1,146,766
Computer software costs, net . . . . . . . . . . . . . . . . . . . . 205,975 314,962
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,750 90,048
----------------- -------------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,048,918 $ 27,620,329
================= ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 147,239
Accounts payable and accrued liabilities . . . . . . . . . . . . . . 2,801,497 8,208,584
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . 834,276 742,242
----------------- -------------------
Total Current Liabilities. . . . . . . . . . . . . . . . . . . . . . 3,635,773 9,098,065
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 245,200 127,100
----------------- -------------------
Total Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 3,880,973 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
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . 80,069 80,069
Unrealized gain on investment securities . . . . . . . . . . . . . . 6,250 84,566
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . 12,162,531 11,127,129
Less Treasury Stock at cost, 76,000 and 39,000 shares,
Respectively . . . . . . . . . . . . . . . . . . . . . . . . . . (367,064) (182,759)
----------------- -------------------
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . 19,167,945 18,395,164
----------------- -------------------
Total Liabilities and Stockholders' Equity . . . . . . . . . . . . . $ 23,048,918 $ 27,620,329
================= ===================
The accompanying notes are an integral part
of the consolidated financial statements.
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
-------------------- -------------------
August 31, 1999 August 31, 1998 August 31, 1999 August 31, 1998
-------------------- ------------------- ----------------- -----------------
Sales, net . . . . . . . . . . . . . . . . . . $ 3,965,810 $ 3,505,137 $ 18,992,796 $ 17,630,623
Cost of sales. . . . . . . . . . . . . . . . . 1,667,418 1,696,325 10,418,263 10,616,634
-------------------- ------------------- ----------------- -----------------
Gross profit . . . . . . . . . . . . . . . . . 2,298,392 1,808,812 8,574,533 7,013,989
General and administrative expenses. . . . . . 2,907,652 2,164,207 8,001,211 6,384,632
-------------------- ------------------- ----------------- -----------------
Operating (loss) income. . . . . . . . . . . . (609,260) (355,395) 573,322 629,357
-------------------- ------------------- ----------------- -----------------
Other income (expense):
Interest income. . . . . . . . . . . . . . . . 130,089 62,504 448,303 180,528
Interest expense . . . . . . . . . . . . . . . - (377) (255) (678)
Other. . . . . . . . . . . . . . . . . . . . . (1,506) 5,878 (1,777) 59,388
-------------------- ------------------- ----------------- -----------------
128,583 68,005 446,271 239,238
-------------------- ------------------- ----------------- -----------------
(Loss) Income from continuing. . . . . . . . . (480,677) (287,390) 1,019,593 868,595
operations before benefit (provision)
for income taxes
Benefit (Provision) for income taxes . . . . . 240,200 160,500 (351,700) (359,700)
-------------------- ------------------- ----------------- -----------------
(Loss) Income from continuing. . . . . . . . . (240,477) (126,890) 667,893 508,895
operations
Loss from discontinued operations, . . . . . . - - - (68,428)
net of income taxes
Gain on disposal of GoodNet. . . . . . . . . . - - 367,509 8,162,389
Subsidiary (net of income taxes of
$239,500 in 1999 and $5,648,300
in 1998)
-------------------- ------------------- ----------------- -----------------
Net (loss) income. . . . . . . . . . . . . . . $ (240,477) $ (126,890) $ 1,035,402 $ 8,602,856
==================== =================== ================= =================
Basic earnings (loss) per share:
Continuing operations. . . . . . . . . . . . . $ (0.06) $ (0.03) $ 0.18 $ 0.13
Discontinued operations. . . . . . . . . . . . - - - (0.02)
Sale of discontinued operations. . . . . . . . - - 0.10 2.16
-------------------- ------------------- ----------------- -----------------
Net income (loss). . . . . . . . . . . . . . . $ (0.06) $ (0.03) $ 0.28 $ 2.27
==================== =================== ================= =================
Diluted earnings (loss) per share:
Continuing operations. . . . . . . . . . . . . $ (0.06) $ (0.03) $ 0.17 $ 0.13
Discontinued operations. . . . . . . . . . . . - - - (0.02)
Sale of discontinued operations. . . . . . . . - - 0.10 2.10
-------------------- ------------------- ----------------- -----------------
Net income (loss). . . . . . . . . . . . . . . $ (0.06) $ (0.03) $ 0.27 $ 2.21
==================== =================== ================= =================
Weighted average number of shares outstanding
- - basic. . . . . . . . . . . . . . . . . . . . 3,711,500 3,787,500 3,714,299 3,787,500
- - diluted. . . . . . . . . . . . . . . . . . . 3,711,500 3,787,500 3,838,909 3,891,966
==================== =================== ================= =================
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, 1999 AND 1998 (UNAUDITED)
1999 1998
------------- -------------
(Decrease) increase in cash and cash equivalents:
Cash flows from operating activities:
Cash received from customers. . . . . . . . . . . . $ 20,424,534 $ 19,768,868
Cash paid to suppliers and employees. . . . . . . . (23,585,704) (19,641,688)
Interest paid . . . . . . . . . . . . . . . . . . . (255) (678)
Interest received . . . . . . . . . . . . . . . . . 395,576 174,213
Income taxes paid . . . . . . . . . . . . . . . . . (1,271,276) (528,998)
------------- -------------
Net cash used in by operating activities of . . . . (4,037,125) (228,283)
Continuing operations
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment. . . . . . . . . (364,834) (537,086)
Cash received from sale of equipment. . . . . . . . 1,054 26,812
Collection of notes receivable. . . . . . . . . . . 373,153 -
Cash received from sale of investment securities. . 4,874,232 2,000,000
Purchase of investment securities . . . . . . . . . (6,616,250) (3,300,000)
------------- -------------
Net cash used in investing activities of. . . . . . (1,732,645) (1,810,274)
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. . . . . . . . . (5,954,075) (2,038,557)
Cash (used in) provided by discontinued operations, (605,100) 1,435,437
Including income taxes paid in the amount of
$605,100 for 1999 and $610,000 for 1998
------------- -------------
Net decrease in cash and cash equivalents . . . . . (6,559,175) (603,120)
Cash and cash equivalents at beginning of period. . 7,740,219 1,621,784
------------- -------------
Cash and cash equivalents at end of fiscal period . $ 1,181,044 $ 1,018,664
============= =============
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, 1999 AND 1998 (UNAUDITED)
1999 1998
------------ ------------
Reconciliation of net income to net cash used
in operating activities from continuing
operations:
Net Income. . . . . . . . . . . . . . . . . . . . . . $ 1,035,402 $ 8,602,856
------------ ------------
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 . . . . . . . 365,600 (4,625,800)
Related to sale of discontinued operations
Depreciation and amortization . . . . . . . . . . . . 396,914 369,094
Loss (gain) on sale of fixed assets . . . . . . . . . 1,883 (20,739)
Interest income included with note receivable . . . . (2,294) (15,633)
Changes in Assets and Liabilities:
Accounts receivable, net. . . . . . . . . . . . . . . 1,479,456 2,177,938
Inventory . . . . . . . . . . . . . . . . . . . . . . (266,447) (238,027)
Other current assets. . . . . . . . . . . . . . . . . (87,199) (27,314)
Deferred taxes, net . . . . . . . . . . . . . . . . . (355,700) 4,125,200
Other assets. . . . . . . . . . . . . . . . . . . . . 7,298 2,256
Accounts payable and accrued liabilities. . . . . . . (5,407,087) (2,910,374)
Deferred revenue. . . . . . . . . . . . . . . . . . . 92,034 94,919
Income taxes payable. . . . . . . . . . . . . . . . . (147,239) 264,923
Income taxes receivable . . . . . . . . . . . . . . . (782,237) 66,379
------------ ------------
(5,072,527) (8,831,139)
------------ ------------
Net cash used in operating activities from. . . . . . $(4,037,125) $ (228,283)
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.
The accompanying notes are an integral part
of the consolidated financial statements.
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the nine month periods ended August 31, 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 nine months ended
August 31, 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.
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine month periods ended August 31, 1999 and 1998
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
nine months ended August 31, 1999, the Company sold the last of its WinStar
shares, or 79,387 shares, resulting in net proceeds before taxes of
$2,909,232.
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS INC. SHARES (ITDS)
The Company accounts for its investment in ITDS, which trades on NASDAQ under
the symbol ITDS, as an available-for-sale equity security, which accordingly
is carried at market value. During the nine months ended August 31, 1999, the
Company purchased 20,000 ITDS shares for $151,250. As of August 31, 1999 the
shares were valued at $157,500.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS BY PRODUCT LINE FOR THE NINE MONTH PERIODS ENDED AUGUST 31, 1999 AND 1998
(in thousands except per share items)
Nine months ended August 31, 1999 Nine months ended August 31, 1998
-------------------------------------- --------------------------------------
System Custom Network Recovery System Custom
STS Sales Billing Services Services Total STS Sales Billing Total
Sales, Net. . . . . . $12,690 $ 4,915 $ 1,173 $ 165 $ 50 $18,993 $12,253 $4,382 $ 996 $17,631
Cost of Sales . . . . 9,397 990 31 - - 10,418 9,355 1,261 1 10,617
-------- ------- -------- ---------- ---------- ------- -------- ------ -------- -------
Gross Profit. . . . . 3,293 3,925 1,142 165 50 8,575 2,898 3,121 995 7,014
-------- ------- -------- ---------- ---------- ------- -------- ------ -------- -------
General &
Administrative
Expenses:
General . . . . . . . 2,632 3,252 845 283 256 7,268 2,561 2,602 498 5,661
Depreciation. . . . . 116 99 16 - - 231 152 82 - 234
Amortization. . . . . - - - - - - - 2 - 2
Bad Debt. . . . . . . 124 3 13 - - 140 163 9 1 173
Corporate
Allocations:
General . . . . . . . 143 38 13 1 1 196 134 36 12 182
Depreciation. . . . . 75 71 15 5 - 166 98 26 9 133
-------- ------- -------- ---------- ---------- ------- -------- ------ -------- -------
3,090 3,463 902 289 257 8,001 3,108 2,757 520 6,385
-------- ------- -------- ---------- ---------- ------- -------- ------ -------- -------
Operating Income. . . 203 462 240 (124) (207) 574 (210) 364 475 629
(Loss)
Other Income. . . . . 446 239
------- -------
Pretax Income . . . . 1,020 868
Income Tax. . . . . .
Provision . . . . . (352) (359)
------- -------
Income from Continuing $ 668 $ 509
Operations ======== =======
Diluted Earnings per
Share-Continuing
Operations. . . . . $ 0.17 $ 0.13
======== =======
RESULTS OF OPERATIONS FOR THE NINE MONTH PERIODS ENDED AUGUST 31, 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 7.7% to $18,992,796 for the nine months ended
August 31, 1999 compared to $17,630,623 for the nine months ended August 31,
1998. The Company's revenue is derived from five principal product lines and
services: STS Outsourcing Programs, System Sales and Maintenance, Customized
Billing Outsourcing Services and Recovery Services. Network Services, which
began operations in December 1998, was discontinued in August 1999 due to
unsatisfactory performance.
STS revenues were $12,689,765 for the nine months ended August 31, 1999
compared to $12,252,518 for the nine months ended August 31, 1998, an increase
of 3.6%. Revenues from System Sales and Maintenance were $4,915,080 for the
nine months ended August 31, 1999 compared to $4,382,069 for the nine months
ended August 31, 1998, a increase of 12.2%. Revenue from the TelMaster
product increased 104%, while revenue from the RATEX and DCS products
decreased 18.3% and 14.9% respectively. The decrease from the RATEX product
is primarily due to unusually strong sales during the first nine months of
fiscal 1998. The decrease in DCS revenue is primarily due to a significant
decrease in demand for this text-based product. We expect DCS revenue to
continue to decline. For the nine months ended August 31, 1999 and 1998,
revenues from Customized Billing Services were approximately $1,173,000 and
$996,000, respectively. The 17.7% increase in revenues is attributable to the
development of customized billing services for Qwest Communications and is
offset by the loss of the MDU contract with Bell Atlantic in March 1999.
Network Services, which began operations in December 1998, had revenues of
approximately $165,000 during the nine months ended August 31, 1999. Recovery
Services, which began operations in March 1999, had revenues of approximately
$50,000 during the first nine months of fiscal 1999.
Nine Months Ended August 31,
REVENUE 1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
DCS . . . . . . . $ 1,040,532 $ 1,223,142 $ 1,392,374 $ 1,339,670 $ 1,600,517
RATEX . . . . . . 1,717,340 2,101,899 826,413 974,094 586,528
Telemanagement. . 2,157,208 1,057,028 984,898 1,251,877 1,613,914
----------- ----------- ----------- ----------- -----------
System Sales 4,915,080 4,382,069 3,203,685 3,565,641 3,800,959
STS . . . . . . . 12,689,765 12,252,518 9,229,288 9,025,335 8,320,779
Custom Billing. . 1,172,502 996,036 754,130 340,846 121,973
Network Services. 165,435 - - - -
Recovery Services 50,014 - - - -
----------- ----------- ----------- ----------- -----------
$18,992,796 $17,630,623 $13,187,103 $12,931,822 $12,243,711
Total gross profit increased 22.2% to $8,574,533 for the nine months
ended August 31, 1999 compared to $7,013,989 for the nine months ended August
31, 1998. Cost of goods sold was approximately 74.0% of STS revenues for the
nine months ended August 31, 1999, compared with 76.4% for the nine months
ended August 31, 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 20.1%
for the nine months ended August 31, 1999 compared with 28.8% for nine months
ended August 31, 1998. This decrease is due to a higher mix of software
development revenues, which have a higher gross profit margin than hardware
system revenues, as well as a higher percentage of TelMaster sales, which have
a higher gross profit margin than RATEX systems.
Overall operating expenses increased 25.3%, or $1,616,579, for the nine
months ended August 31, 1999 to $8,001,211 from $6,384,632 for the nine months
ended August 31, 1998. This increase is primarily due to an increase in human
resources in the areas of TelMaster research and development, sales, and
support services, as well as the addition of the Network Services and Recovery
Services divisions. Research and development costs incurred and expensed
during the nine months ended August 31, 1999 and 1998 were $970,000 and
$431,000, respectively, while sales and support related expenses increased
$163,000 and $110,000, respectively. Increased effort in the Customized
Billing division, primarily as a result of the Qwest project, also contributed
approximately $97,000 in increased customer service related expenses. Network
Services and Recovery Services divisions had combined operating expenses of
approximately $546,000 during the nine months ended August 31, 1999.
Operating expenses as a percentage of revenue increased to 42.1% compared to
36.2% for the nine months ended August 31, 1998. We expect to continue to see
increases in TelMaster research and development, sales and professional
services expenses as part of our effort to increase TelMaster product sales.
The provision for income taxes was $351,700 and $359,700 for the nine
months ended August 31, 1999 and 1998, respectively. This represents 34.5%
and 41.4% of income before provision for income taxes for 1999 and 1998,
respectively. This percentage decrease is primarily attributable to higher
income from tax-free investments.
Net income from continuing operations increased to $667,893 for the nine
months ended August 31, 1999 from $508,895 for the nine months ended August
31, 1998.
For the nine months ended August 31, 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.
RESULTS OF OPERATIONS BY PRODUCT LINE FOR THE THREE MONTH PERIODS ENDED AUGUST 31, 1999 AND 1998
(in thousands except per share items)
Three months ended August 31, 1999 Three months ended August 31, 1998
--------------------------------------- ---------------------------------------
System Custom Network Recovery System Custom
STS Sales Billing Services Services Total STS Sales Billing Total
-------- -------- --------- ---------- ---------- -------- ------- ------ -------- -------
Sales, Net. . . . . . $ 1,299 $ 2,365 $ 217 $ 35 $ 50 $ 3,966 $1,242 $1,730 $ 534 $3,506
Cost of Sales . . . . 1,117 524 26 - - 1,667 1,072 624 1 1,697
-------- -------- --------- ---------- ---------- -------- ------- ------ -------- -------
Gross Profit. . . . . 182 1,841 191 35 50 2,299 170 1,106 533 1,809
-------- -------- --------- ---------- ---------- -------- ------- ------ -------- -------
General &
Administrative
Expenses:
General . . . . . . . 919 1,210 316 89 155 2,689 931 839 195 1,965
Depreciation. . . . . 41 33 6 - - 80 57 27 - 84
Bad Debt. . . . . . . 8 - 10 - - 18 14 1 - 15
Corporate
Allocations:
General . . . . . . . 45 12 5 - - 62 41 11 4 56
Depreciation. . . . . 27 25 4 2 - 58 33 9 3 45
-------- -------- --------- ---------- ---------- -------- ------- ------ -------- -------
1,040 1,280 341 91 155 2,907 1,076 887 202 2,165
-------- -------- --------- ---------- ---------- -------- ------- ------ -------- -------
Operating Income. . . (858) 561 (150) (56) (105) (608) (906) 219 331 (356)
(Loss)
Other Income. . . . . 128 68
-------- -------
Pretax Income . . . . (480) (288)
Income Tax Provision. 240 161
-------- -------
Loss from
Continuing
Operations. . . . . $ (240) $ (127)
======== =======
Loss per
Share-Continuing
Operations. . . . . $ (0.06) $ (0.03)
======== ========
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED AUGUST 31, 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 13.1% to $3,965,810 for the three months ended
August 31, 1999 compared to $3,505,137 for the three months ended August 31,
1998. The Company's revenue is derived from five principal product lines and
services: STS Outsourcing Programs, System Sales and Maintenance, Customized
Billing Outsourcing Services and Recovery Services. Network Services, which
began operations in December 1998, was discontinued in August 1999 due to poor
performance.
STS revenues were $1,299,286 for the three months ended August 31, 1999
compared to $1,240,874 for the three months ended August 31, 1998, an increase
of 4.7%. Revenues from System Sales and Maintenance were $2,364,844 for the
three month ended August 31, 1999 compared to $1,730,822 for the three months
ended August 31, 1998, an increase of 36.6%. Revenue from the TelMaster
product increased 389.9%. This increase is partially attributable to the
State of California CALNET contract with Pacific Bell and MCI WorldCom. For
the three months ended August 31, 1999 and 1998, revenues from Customized
Billing Services were approximately $216,000 and $533,000, respectively. This
decrease is due to the loss of the MDU contract with Bell Atlantic in March
1999, as well as approximately $115,000 in start up revenues billed in the
third quarter of 1998. Network Services and Recovery Services, which began
operations in December 1998 and March 1999 respectively, had revenues of
approximately $36,000 and $50,000, respectively, during the third quarter of
fiscal 1999.
Three Months Ended August 31,
REVENUE 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
DCS . . . . . . . $ 379,306 $ 316,500 $ 563,454 412,782 726,065
RATEX . . . . . . 991,565 1,211,434 465,803 381,745 342,525
Telemangement . . 993,973 202,888 279,572 263,296 837,775
---------- ---------- ---------- ---------- ----------
System Sales. . . 2,364,844 1,730,822 1,308,829 1,057,823 1,906,365
STS . . . . . . . 1,299,286 1,240,874 960,645 914,584 759,574
Custom Billing. . 216,028 533,441 444,063 33,531 -
Network Services. 35,879 - - - -
Recovery Services 49,773 - - - -
---------- ---------- ---------- ---------- ----------
$3,965,810 $3,505,137 $2,713,537 $2,005,938 $2,665,939
Total gross profit increased by 27.1% to $2,298,392 for the three months
ended August 31, 1999 compared to $1,808,811 for the three months ended August
31, 1998. Cost of goods sold was approximately 86% of STS revenues for the
three months ended August 31, 1999 and 1998. Cost of goods sold as a
percentage of System Sales and Maintenance revenues was approximately 22.2%
for the three months ended May 31, 1999 compared with 36.1% for three months
ended May 31, 1998.
Overall operating expenses increased by 34.4%, or $743,445, for the three
months ended August 31, 1999 to $2,907,652 from $2,164,207 for the three
months ended August 31, 1998. This increase is primarily due to an increase
in human resources in the areas of TelMaster research and development, sales,
and support services, as well as the addition of the Network Services and
Recovery Services divisions. Research and development costs for the three
months ended August 31, 1999 and 1998 were $464,000 and $181,000,
respectively. Network Services and Recovery Services had combined operating
expenses of approximately $210,000 during the third quarter of fiscal 1999. We
expect to continue to see increases in TelMaster research and development,
sales and support services expenses as part of our continued effort to grow
TelMaster product sales. Operating expenses as a percentage of revenue
increased to 73% from 62% for the three months ended August 31, 1998.
The income tax benefit was $240,200 and $160,500 for the three months
ended August 31, 1999 and 1998, respectively. This represents 50% and 55% of
income before provision for income taxes for 1999 and 1998, respectively.
Loss from continuing operations increased to $240,477 for the third
quarter of fiscal 1999 from $126,890 in the third quarter of fiscal 1998.
This is primarily attributable to the increase in operating expenses from the
launch of Network Services, Recovery Services, and the increase in personnel
related expenses in sales, and research and development.
NETWORK SERVICES
During the first nine months of fiscal 1999, the Company formed a Network
Services division to initially sell telecommunication services to companies in
Arizona. The division sold dial tone and data transport services via
strategic agent relationships with Regional Bell Operating Companies
("RBOCs"). For the nine months ended August 31, 1999, the division generated
$165,000 in revenues and a loss of ($124,000). Network Services, which began
operations in December 1998, was discontinued in August 1999 due to
unsatisfactory performance.
RECOVERY SERVICES
During the second quarter of fiscal 1999, the Company hired two
executives to run the Company's Recovery Services division. These individuals
have 27 years of combined industry experience in two leading companies. The
Recovery Services division assists large organizations in analyzing,
recovering, and optimizing their telecommunications expenditures. This
division is headquartered in New Jersey. Initially, the Company will focus
its marketing efforts on the East Coast. The division is expected to generate
a loss of approximately ($500,000) 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 $1,181,044 at August 31, 1999 from
$7,740,219 at November 30, 1998. During the nine months ended August 31,
1999, investment securities increased $2,270,711. Combined, the Company's
cash and investment holdings decreased approximately $4,288,000. During the
first nine months of 1999, activities from continuing operations used
approximately $4,037,000, which includes $1,271,000 in taxes. 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 $605,100 in taxes related to the sale of GoodNet, including
this sale of the WinStar stock.
Accounts receivable decreased to $6,085,495 from $7,435,184 as of
November 30, 1998 ($5,453,633 and $6,933,089, net of allowance for
uncollectibles as of August 31, 1999 and November 30, 1998 respectively).
This decrease is due to increased collections on accounts past due.
As of August 31, 1999, the Company had a net current and deferred tax
asset of $1,181,637 compared with a net deferred tax asset of $43,700 of
November 30, 1998. This is due to the payment of taxes related to the WinStar
stock sale and the sale of GoodNet, as well as an increase in estimated tax
payments for the current fiscal year.
Accounts payable and accrued liabilities decreased to $2,801,497 from
$8,208,584 as of November 30, 1998. As of August 31, 1998, there was
approximately $2,341,000 in accounts payable and accrued liabilities.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 1999, the Company had cash of $1,181,044 and investment
securities of $12,207,500. 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.
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 are highest
in the fall and spring, and lowest 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 fourth quarter, and lowest
during the third 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: October 15, 1999
Exhibit 11; Earnings (Loss) per share
The following table reconciles the numerators and denominators of the basic
and diluted earnings (loss) per share:
THREE MONTHS ENDED AUGUST 31 NINE MONTHS ENDED AUGUST 31
1999 1998 1999 1998
---- ---- ---- ----
BASIC EARNINGS (LOSS) PER COMMON SHARE:
- ------------------------------------------
NUMERATOR
Income (loss) from continuing operations (240,477) (126,890) 667,893 508,895
Loss from operations of GoodNet Subsidiary - - - (68,428)
Gain on disposal of GoodNet - - 367,509 8,162,389
--------- --------- --------- ---------
Net earnings available to common (240,477) (126,890) 1,035,402 8,602,856
Shareholders ========= ========= ========= =========
DENOMINATOR
Weighted average number of shares 3,711,500 3,787,500 3,714,299 3,787,500
Outstanding ========= ========= ========= =========
PER SHARE AMOUNTS
Income (loss) from continuing operations . (.06) (.03) .18 .13
Loss from operations of GoodNet Subsidiary - - - (.02)
Gain on disposal of GoodNet. . . . . . . . - - .10 2.16
--------- --------- --------- ---------
Net earnings available to common . . . . . (.06) (.03) .28 2.27
Shareholders ========= ========= ========= =========
DILUTED EARNINGS (LOSS) PER SHARE
- -------------------------------------------
NUMERATOR
Income (loss) from continuing operations. . (240,477) (126,890) 667,893 508,895
Loss from operations of GoodNet Subsidiary. - - - (68,428)
Gain on disposal of GoodNet . . . . . . . . - - 367,509 8,162,389
--------- --------- --------- ---------
Net earnings available to common. . . . . . (240,477) (126,890) 1,035,402 8,602,856
Shareholders ========= ========= ========= =========
DENOMINATOR
Weighted average number of shares . . . . . 3,711,500 3,787,500 3,714,299 3,787,500
Outstanding
Effect of dilutive securities . . . . . . . - -
Options and warrants (*). . . . . . . . . . - - 418,100 345,400
Stock acquired with proceeds (*). . . . . . - - (293,490) (240,934)
--------- --------- --------- ---------
Weighted average common shares and. . . . . 3,711,500 3,787,500 3,838,909 3,891,966
assumed conversions outstanding ========= ========= ========= =========
PER SHARE AMOUNTS
Income (loss) from continuing operations. . (.06) (.03) .17 .13
Loss from operations of GoodNet Subsidiary. - - - (.02)
Gain on disposal of GoodNet . . . . . . . . - - .10 2.10
--------- --------- --------- ---------
Net earnings available to common. . . . . . (.06) (.03) .27 2.21
Shareholders ========= ========= ========= =========