U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2001
COMMISSION FILE NO. 1-13830
TELESOFT CORP.
(Name of Registrant 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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (602) 308-2100
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 issuer was required
to file such report), and (2) has been subject to such filing requirements for
the past 90 days.
Yes (X) No ( )
At June 8, 2001, the Registrant had outstanding 1,415,833 shares of common
stock, no par value.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Balance Sheets as of May 31, 2001 and November 30, 2000 3
Consolidated Statements of Operations and Consolidated Operations for the
three and six month periods ended May 31, 2001 and 2000 4
Consolidated Statements of Cash Flows for the six month periods ended May
31, 2001 and 2000 5 - 6
Notes to the Consolidated Financial Statements 7 - 8
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 9 - 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK. 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. 15
ITEM 3. DEFAULTS ON SENIOR SECURITIES. 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 15
ITEM 5. OTHER INFORMATION. 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 17
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
November 30,
May 31, 2001 2000
(unaudited)
ASSETS
Cash and cash equivalents $ 762,334 $ 41,434
Accounts receivable, net of allowance for uncollectibles of $602,809
and $423,437 at May 31, 2001 and November 30, 2000,
respectively 5,599,643 7,737,213
Inventory 142,599 208,325
Income taxes receivable 9,926 349,364
Deferred taxes 253,200 188,400
Other 103,585 94,010
------------- --------------
Total current assets 6,871,287 8,618,746
Property and equipment, net 1,196,491 1,407,118
Computer software costs, net 25,032 54,484
Other 123,067 141,709
------------- --------------
Total assets $ 8,215,877 $ 10,222,057
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Related party debt $ 300,000 $ 1,375,000
Accounts payable and accrued liabilities 4,111,907 5,199,187
Income taxes payable 364,760 203,900
Deferred revenue 608,990 1,130,375
------------- --------------
Total current liabilities 5,385,657 7,908,462
Deferred taxes 121,600 121,900
Other 29,507 -
------------- --------------
Total liabilities 5,536,764 8,030,362
-------------- --------------
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;
1,684,934 issued and 1,415,833 and 1,376,828 outstanding,
respectively 956,731 665,125
Retained earnings 2,534,082 2,191,695
-------------- --------------
3,490,813 2,856,820
Less: Treasury stock, 269,101 and 178,106 shares, at cost (811,700) (665,125)
-------------- --------------
Total stockholders' equity 2,679,113 2,191,695
-------------- --------------
Total liabilities and stockholders' equity $ 8,215,877 $ 10,222,057
============= ==============
The Accompanying Notes are an Integral Part of
The Consolidated Financial Statements. 3
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
For the three and six months ended May 31, 2001 and 2000 (unaudited)
Three Months Ended May 31, Six Months Ended May 31,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Sales, net $ 6,399,724 $ 6,484,553 $12,518,743 $13,507,096
Cost of sales 3,329,007 3,807,791 6,166,885 7,434,200
-------------------------- --------------------------
Gross profit 3,070,717 2,676,762 6,351,858 6,072,896
General and administrative expenses 2,760,760 3,098,914 5,494,442 6,271,742
-------------------------- --------------------------
Operating income (loss) 309,957 (422,152) 857,416 (198,846)
-------------------------- --------------------------
Other income (expense):
Interest income 9,997 106,424 21,611 331,191
Interest expense (10,725) (37,470) (28,750) (37,470)
Other income 2,227 233 1,185 145,422
-------------------------- --------------------------
1,499 69,187 (5,954) 439,143
-------------------------- --------------------------
Income (loss) before provision for income taxes 311,456 (352,965) 851,462 240,297
Provision for income taxes (132,000) 130,100 (362,500) (85,500)
-------------------------- --------------------------
Net income (loss) 179,456 (222,865) 488,962 154,797
Other comprehensive (loss) income, net of tax
Reclass of holding gains realized during
period and included in income statement - - - (66,120)
-------------------------- --------------------------
Comprehensive income (loss) $ 179,456 $ (222,865) $ 488,962 $ 88,677
========================== ==========================
Earnings (loss) per share
Basic $ 0.13 $ (0.11) $ 0.35 $ 0.05
Diluted $ 0.13 $ (0.11) $ 0.35 $ 0.05
Weighted average number of shares outstanding
Basic 1,415,833 2,030,721 1,381,095 2,866,518
Diluted 1,425,512 2,030,721 1,387,796 2,932,685
The Accompanying Notes are an Integral Part of
The Consolidated Financial Statements. 4
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended May 31, 2001 and 2000 (unaudited)
2001 2000
------------- -------------
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Cash received from customers $ 13,936,497 $ 16,328,075
Cash paid to suppliers and employees (12,070,055) (15,106,207)
Interest paid (28,750) (24,970)
Interest received 21,611 492,561
Income tax refund 216,391 592,496
Income taxes paid (143,693) (148,447)
------------- -------------
Net cash provided by operating activities 1,932,001 2,133,508
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (34,768) (424,188)
Disbursements for notes receivable from related
parties - (450,000)
Collection of notes receivable from related
parties - 500,000
Cash received from sale of fixed assets 45,242 -
Cash received from sale of investment securities - 13,846,439
Purchase of investment securities - (1,500,000)
------------- -------------
Net cash provided by investing activities 10,474 11,972,251
------------- -------------
Cash flows from financing activities:
Purchases of treasury stock (146,575) (275,295)
Proceeds from debt - related parties 300,000 1,500,000
Stock redemption (1,375,000) (17,384,768)
------------- -------------
Net cash used in financing activities (1,221,575) (16,160,063)
------------- -------------
Net increase (decrease) in cash and cash equivalents 720,900 (2,054,304)
Cash and cash equivalents at beginning of period 41,434 2,157,701
------------- -------------
Cash and cash equivalents at end of period $ 762,334 $ 103,397
============= =============
Supplemental disclosure of non-cash investing and financing activities:
During the six months ended May 31, 2001, the Company issued 130,000 shares of
its common stock to Telesoft Recovery Corp. executives. This stock issuance was
made in connection with their employment agreements in lieu of cash compensation
in the amount of $145,031.
The Accompanying Notes are an Integral Part of
the Consolidated Financial Statements. 5
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended May 31, 2001 and 2000 (unaudited)
2001 2000
------------ ------------
Reconciliation of net income to net cash
provided by operating activities:
Net income $ 488,962 $ 154,797
------------ ------------
Adjustments to reconcile net income to net
cash provided (used) by operating activities
from continuing operations:
Depreciation and amortization 231,832 334,231
Gain on sale of investment securities - (145,189)
Gain on sale of fixed assets (2,227) -
Interest expense included with note payable - 12,500
Stock compensation 145,031 -
Changes in assets and liabilities:
Accounts receivable, net 2,137,570 2,875,023
Inventory 65,726 (44,937)
Other current assets (9,575) 133,293
Deferred taxes, net (65,100) (39,700)
Other assets 18,642 19,247
Accounts payable and accrued liabilities (1,057,773) (1,820,596)
Deferred revenue (521,385) 85,590
Income taxes payable 160,860 149,840
Income taxes receivable 339,438 419,409
------------ ------------
1,443,039 1,978,711
------------ ------------
Net cash provided by operating activities $ 1,932,001 $ 2,133,508
============ ============
The Accompanying Notes are an Integral Part of
the Consolidated Financial Statements. 6
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the six month periods ended May 31, 2001 and 2000
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-Q.
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
consisting of recurring accruals considered necessary for a fair
presentation have been included. Operating results for the three and six
months ended May 31, 2001 are not necessarily indicative of the results
that may be expected for the year ending November 30, 2001. 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-K for the year ended November 30, 2000.
Principles of Consolidation
The consolidated financial statements include the accounts of Telesoft
Corp., together with its wholly owned subsidiaries, Telesoft Acquisition
Corp and Telesoft Recovery Corp.
All significant intercompany accounts and transactions have been
eliminated.
2. INVESTMENT SECURITIES
Amdocs Ltd. ("DOX")
The Company accounted for its investment in DOX, which traded on the NYSE
under the symbol DOX, as an available-for-sale equity security, which
accordingly was carried at market value. During the six months ended May
31, 2000, the Company sold all 7,434 DOX shares that it had held for
$296,439. These shares were previously held as 20,000 shares of
International Telecommunication Data Systems Inc. (ITDS).
3. STOCKHOLDERS' EQUITY
Self-Tender Offer
On February 3, 2000, the Company commenced an offer to repurchase up to 2.3
million shares of its common stock pursuant to a "Dutch auction"
self-tender offer. On March 24, 2000, the tender expired. Pursuant to the
tender offer the Company repurchased a total of 2.3 million shares of its
common stock. The purchase price for the shares of common stock was $7.25
per share and the proration factor was 60.22 percent.
The Company redeemed 1,938,816 common shares for $14,056,416 and 351,352
common stock options for $1,112,674. Included in the common shares redeemed
were 1,031,663 shares of the Company's common stock redeemed from
affiliates of the Company for an aggregate of approximately $7,480,000.
Additionally, the Company repurchased all 293,750 shares of common stock
owned by Joseph Zerbib for $2,129,688. As of February 28, 2001, affiliates
of the Company owned 695,837 shares or 54.1% of the outstanding common
stock of the Company.
Expenses incurred related to the tender offer were $85,991.
7
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six month periods ended May 31, 2001 and 2000
3. STOCKHOLDERS' EQUITY (CONTINUED)
Treasury Stock
During the six months ended May 31, 2001, the Company repurchased 90,995
shares of its common stock for $146,575.
Common Stock
During the six months ended May 31, 2001, the Company issued 130,000 shares
of its common stock to TRC executives. This stock issuance was made in
connection with their employment agreements in lieu of cash compensation in
the amount of $145,031. The Company has expensed the total amount of the
stock issuance.
Common Stock Options
In February 2001, the Company granted 27,200 options to employees at an
exercise price of $1.3125 per share, the fair market value of the
underlying shares at the date of grant.
4. RELATED PARTY DEBT:
In April 2000, three of the Company's executive officers entered into an
agreement with the Company, pursuant to which each of them agreed to make
available to the Company up to $1,000,000 on the Company's request. In May
2000, each of their agreements was amended to increase the amount to
$1,350,000. Draw downs are payable on May 31, 2001 and have an annual
interest rate of 10%. Each loan is secured by the Company's assets. As of
February 28, 2001, the outstanding balance on the loans aggregated
$600,000. This financing was completed in order to satisfy the terms of the
Company's self-tender offer of its common stock completed in fiscal 2000.
Pursuant to a second amendment to their respective agreements in April
2001, each of the officers has agreed to extend $350,000 of their
respective loans until August 31, 2001.
During the six months ended May 31, 2001 and May 31, 2000, interest expense
in connection with these notes was $28,750 and $25,000, respectively. As of
May 31, 2001, borrowings outstanding on the line of credit were $300,000.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS BY PRODUCT LINE FOR THE SIX MONTHS ENDED MAY 31, 2001 AND 2000
(in thousands except per share items)
Six months ended May 31, 2001 Six months ended May 31, 2000
----------------------------------------------- ------------------------------------------------
System Custom Recovery System Custom Recovery
STS Sales Billing Services Total STS Sales Billing Services Total
-------------------------------------------------------------------------------------------------
Sales, net $7,702 $ 3,203 $ 447 $ 1,167 $12,519 $9,729 $ 2,862 $ 484 $ 432 $13,507
Cost of sales 5,337 828 2 - 6,167 6,939 485 10 - 7,434
------ -------- -------- --------- -------- ------ -------- -------- ---------- --------
Gross profit 2,365 2,375 445 1,167 6,352 2,790 2,377 474 432 6,073
------ -------- -------- --------- -------- ------ -------- -------- ---------- --------
General & administrative
expenses:
General 1,408 2,429 244 816 4,897 1,841 2,958 416 456 5,671
Depreciation 56 20 6 2 84 91 79 10 1 181
Bad debt 197 - - - 197 140 - - - 140
Corporate allocations:
General 79 84 3 2 168 70 41 12 3 126
Depreciation 45 88 11 4 148 69 68 16 - 153
------ -------- -------- --------- -------- ------ -------- -------- ---------- --------
1,785 2,621 264 824 5,494 2,211 3,146 454 460 6,271
------ -------- -------- --------- -------- ------ -------- -------- ---------- --------
(28)
Operating income (loss) 580 (246) 181 343 858 579 (769) 20 (198)
Other (expense) income (6) 439
-------- --------
Pretax income 852 241
Income tax provision (363) (86)
-------- --------
Net income $ 489 $ 155
======== ========
Diluted earnings per share $ 0.35 $ 0.05
======== ========
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MAY 31, 2001 AND 2000
Revenues decreased by 7.3% to $12,518,743 for the six months ended May 31,
2001 compared to $13,507,096 for the six months ended May 31, 2000. The
Company's revenue is derived from four principal product lines and services: STS
Outsourcing Programs (STS), System Sales and Maintenance, Customized Billing
Outsourcing Services and Recovery Services.
STS Program revenues were $7,702,411 for the six months ended May 31, 2001
compared to $9,728,487 for the six months ended May 31, 2000, a (20.8%)
decrease. This decrease was primarily due to market pressure from competing
long-distance communications products including pre-paid cards, other calling
cards, wireless services and the Internet. During fiscal 2000, the Company
adjusted to these market pressures by lowering its retail rates and
renegotiating its wholesale rates with its suppliers. The impact of these new
rates began during the fourth fiscal quarter (September-November), which
represents the first three months of the 2000-2001 academic year. Revenues for
the fourth quarter of fiscal 2000 were 23.2% lower than the fourth quarter of
fiscal 1999. Historically, the calling patterns during September through
November are indicative of calling patterns for the balance of the academic
year. Based on this decline in revenue, the Company has reduced selling, general
and administrative expenses, including a reduction in staff to adjust to the
reduction in subscribers, traffic, and revenues. We expect to have additional
pressure on revenue in the 2001-2002 academic year, based on decreased long
distance usage, and a decrease in customer base.
9
Revenues from System Sales and Maintenance were $3,202,147 for the six
months ended May 31, 2001 compared to $2,862,443 for the six months ended May
31, 2000, an increase of 11.9%. TelMaster sales and maintenance related
revenues increased by $1,050,761, or 62.8%, to $2,724,453 for the six months
ended May 31, 2001 compared to $1,673,692 for the six months ended May 31, 2000.
The increase in TelMaster revenues from the first half of fiscal 2000 to the
first half of fiscal 2001 included a $385,700 increase in revenues from the
development of a custom convergence billing, reporting and support system for
Pacific Bell and MCI customer care services for the State of California's CALNET
contract, which was subsequently terminated.
The DCS product revenues declined 27.8%, or $170,044, to $441,322, due to a
decrease in demand for its text-based software. The Company expects this trend
to continue. RATEX revenues declined 93.7%, or $541,013, to $36,372 for the six
months ended May 31, 2001 compared to $577,385 for the six months ended May 31,
2000. In December 2000, the Company completed the sale of the RATEX division.
For the six months ended May 31, 2001 and 2000, revenues from Customized
Billing Services were approximately $447,000 and $484,000, respectively.
Revenues from Recovery Services, which are generated through the Company's
wholly-owned subsidiary, Telesoft Recovery Corp., increased 170.3%, or $735,097,
to $1,166,838 for the six months ended May 31, 2001 from $431,741, for the six
months ended May 31, 2000.
Revenue for the six-month period ended May 31,
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
Telemanagement $ 2,724,453 $ 1,673,692 $ 1,311,235 $ 854,140 $ 705,326
DCS 441,322 611,366 661,226 906,641 828,920
RATEX 36,372 577,385 725,775 890,466 360,610
---------------------------------------------------------------
System Sales 3,202,147 2,862,443 2,698,236 2,651,247 1,894,856
STS 7,702,411 9,728,487 11,390,479 11,011,644 8,268,643
Customized Billing Services 447,347 484,425 808,474 462,595 310,067
Network Services - - 129,556 - -
Recovery Services 1,166,838 431,741 241 - -
---------------------------------------------------------------
$12,518,743 $13,507,096 $15,026,986 $14,125,486 $10,473,566
===============================================================
10
Total gross profit increased 4.6% or $278,962, to $6,351,858 for the six
months ended May 31, 2001 compared to $6,072,896 for the six months ended May
31, 2000. Cost of goods sold was approximately 69.3% of STS revenues for the
six months ended May 31, 2001, compared with 71.3% for the six months ended May
31, 2000. This decrease was primarily due to more favorable billing fee
structures with the Company's university customers. The emphasis on more fixed
fee structures positively contributed to the more moderate decrease in gross
profits of 15.2% compared to the 21% decrease in revenues from this division.
Cost of goods sold as a percentage of System Sales and Maintenance revenues were
approximately 26% and 17% for the six months ended May 31, 2001 and 2000,
respectively. This increase was due to a higher proportion of professional
services-related revenue.
General and administrative expenses decreased by 12.4%, or $777,300, for
the six months ended May 31, 2001 to $5,494,442 from $6,271,742 for the six
months ended May 31, 2000. This decrease was primarily due to a human resources
cost-cutting effort implemented by the Company during the last two fiscal
quarters of 2000 and the first fiscal quarter of 2001. Also contributing to the
decrease was the decrease in human resource costs resulting from the sale of the
RATEX division. The gain on the sale of RATEX was largely offset by a charge
taken for the issuance of common stock to the TRC executives in lieu of cash
compensation under their employment agreements. RATEX related expenses for the
first half of fiscal 2001 and 2000 were approximately $50,000 and $534,000,
respectively. Recovery Services had operating expenses of $824,000 and $460,000
during the first half of fiscal 2001 and 2000, respectively. General and
administrative expenses as a percentage of gross profit were 86.5% and 103.3%
for the first half of fiscal 2001 and 2000, respectively. The Company expects
general and administrative expenses as a percentage of gross profit to decrease
over time as revenues for TelMaster systems and Recovery services increase.
Other income and expense decreased to an expense of $5,954 for the first
half of fiscal 2001 from income of $439,143 in the first half of fiscal 2000.
This decrease was attributable to an approximate $310,000 decrease in pre-tax
interest income in the first half of fiscal 2001 and a $145,189 pretax gain on
the sale of investment securities in the first half of fiscal 2000. Interest
expense for the six months ended May 31, 2001 and 2000 was $28,750 and $37,470,
respectively.
The provision for income taxes was $362,500 and $85,500 for the six months
ended May 31, 2001 and 2000, respectively. This represents 42.6% and 35.6% of
income before provision for income taxes for 2001 and 2000, respectively. This
percentage increase was partially attributable to decreased interest from
tax-free investments as well as a lower percentage of tax-free interest included
in pretax income.
Net income increased to $488,962 for the first half of fiscal 2001 from
$154,797 in the first half of fiscal 2000. This increase was attributable to an
approximate $523,000 decrease in operating loss from the System Sales division,
reflecting the impact of cost cutting measures, and improved results from the
Recovery Services division, which had operating income of approximately $343,000
for the first half of fiscal 2001 compared to an approximate $28,000 operating
loss in the first half of fiscal 2000. These increases were offset by an
approximate $309,000 decrease in pre-tax interest income in the first half of
fiscal 2001 and a $145,189 pretax gain on the sale of investment securities in
the first half of fiscal 2000.
11
RESULTS OF OPERATIONS BY PRODUCT LINE FOR THE THREE MONTHS ENDED MAY 31, 2001
AND 2000 (in thousands except per share items)
Three months ended May 31, 2001 Three months ended May 31, 2000
--------------------------------------------- -----------------------------------------------
System Custom Recovery System Custom Recovery
STS Sales Billing Services Total STS Sales Billing Services Total
----------------------------------------------------------------------------------------------
Sales, net $3,820 $ 1,798 $ 184 $ 598 $6,400 $4,937 $ 1,044 $ 231 $ 273 $6,485
Cost of sales 2,868 461 - - 3,329 3,652 152 4 - 3,808
------ ------- -------- --------- ------- ------ -------- -------- ---------- -------
Gross profit 952 1,337 184 598 3,071 1,285 892 227 273 2,677
------ ------- -------- --------- ------- ------ -------- -------- ---------- -------
General &
administrative
expenses:
General 715 1,165 126 432 2,438 891 1,486 192 223 2,792
Depreciation 28 8 3 1 40 44 31 5 1 81
Bad debt 120 - - - 120 71 - - - 71
Corporate allocations:
General 41 44 1 1 87 38 22 6 2 68
Depreciation 23 44 6 2 75 38 39 10 - 87
------ ------- -------- --------- ------- ------ -------- -------- ---------- -------
927 1,261 136 436 2,760 1,082 1,578 213 226 3,099
------ ------- -------- --------- ------- ------ -------- -------- ---------- -------
Operating income (loss) 25 76 48 162 311 203 (686) 14 47 (422)
Other income 1 69
------- -------
Pretax income (loss) 312 (353)
Income tax provision (133) 130
------- -------
Net income (loss) $ 179 ($223)
======= =======
Diluted earnings (loss)
per share $ 0.13 ($0.11)
======= =======
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MAY 31, 2001 AND 2000
Revenues decreased by 1.3% to $6,399,724 for the three months ended May 31,
2001 compared to $6,484,553 for the three months ended May 31, 2000. The
Company's revenue is derived from four principal product lines and services: STS
Outsourcing Programs (STS), System Sales and Maintenance, Customized Billing
Outsourcing Services and Recovery Services.
STS Program revenues were $3,819,844 for the three months ended May 31,
2001 compared to $4,936,954 for the three months ended May 31, 2000, a 22.6%
decrease.
Revenues from System Sales and Maintenance were $1,797,642 for the three
months ended May 31, 2001 compared to $1,044,223 for the three months ended May
31, 2000, an increase of 72.2%. TelMaster sales and maintenance related revenues
increased by $968,416, or 171.5%, to $1,533,153 for the three months ended May
31, 2001 compared to $564,737 for the three months ended May 31, 2000. The
increase in TelMaster revenues from the second quarter of fiscal 2000 to the
second quarter of fiscal 2001 included a $233,400 increase in revenues from the
development of a custom convergence billing, reporting and support system for
Pacific Bell and MCI customer care services for the State of California's CALNET
contract, which was subsequently terminated.
The DCS product revenues increased 10.6%, or $25,279, to $264,489. For the
three months ended May 31, 2000, RATEX revenues were $240,276. In December
2000, the Company completed the sale of the RATEX division.
12
For the three months ended May 31, 2001 and 2000, revenues from Customized
Billing Services were approximately $184,000 and $230,000, respectively.
Revenues from Recovery Services, which are generated through the Company's
wholly-owned subsidiary, Telesoft Recovery Corp., increased 119.4%, or $325,500,
to $598,136 for the three months ended May 31, 2001 from $272,636 for the three
months ended May 31, 2000.
Revenue for the three-month period ended May 31,
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Telemanagement $1,533,153 $ 564,737 $ 593,563 $ 409,352 $ 493,090
DCS 264,489 239,210 322,284 518,413 578,656
RATEX - 240,276 394,193 395,018 202,395
----------------------------------------------------------
System Sales 1,797,642 1,044,223 1,310,040 1,322,783 1,274,141
STS 3,819,844 4,936,954 5,572,551 5,555,832 4,200,661
Customized Billing Services 184,102 230,740 263,469 220,093 142,173
Network Services - - 78,088 - -
Recovery Services 598,136 272,636 241 - -
----------------------------------------------------------
$6,399,724 $6,484,553 $7,224,389 $7,098,708 $5,616,975
==========================================================
Total gross profit increased 14.7%, or $393,955, to $3,070,717 for the
three months ended May 31, 2001 compared to $2,676,762 for the three months
ended May 31, 2000. Cost of goods sold was approximately 75% of STS revenues
for the three months ended May 31, 2001, compared with 74% for the three months
ended May 31, 2000. Cost of goods sold as a percentage of System Sales and
Maintenance revenues were approximately 26% and 14% for the three months ended
May 31, 2001 and 2000, respectively. This increase was due to a higher
proportion of professional services-related revenue.
General and administrative expenses decreased by 10.9%, or $338,154, for
the three months ended May 31, 2001 to $2,760,760 from $3,098,914, for the three
months ended May 31, 2000. This decrease was primarily due to a human resources
cost cutting effort implemented by the Company during the last two fiscal
quarters of 2000 and the first fiscal quarter of 2001. Also contributing to the
decrease was the decrease in human resource costs resulting from the sale of the
RATEX division. RATEX related expenses for the second quarter of fiscal 2000
were $256,000. Recovery Services had operating expenses of $436,000 and
$226,000 during the second quarter of fiscal 2001 and 2000, respectively.
General and administrative expenses as a percentage of gross profit were 89.9%
and 115.8% for the second quarter of fiscal 2001 and 2000, respectively. The
Company expects general and administrative expenses as a percentage of gross
profit to decrease over time as revenues for TelMaster systems and Recovery
services increase.
Other income decreased to $1,499 for the second quarter of fiscal 2001 from
$69,187 in the second quarter of fiscal 2000. This decrease was attributable to
an approximate $96,000 decrease in pre-tax interest income in the second quarter
of fiscal 2001. Interest expense for the three months ended May 31, 2001 and
2000 was $10,725 and $37,470, respectively.
The provision for income taxes was an expense of $132,000 and benefit of
$130,100 for the three months ended May 31, 2001 and 2000, respectively. This
represents 42.4% and 36.9% of income before provision for income taxes for 2001
and 2000, respectively.
For the second quarter of fiscal 2001, the Company realized net income of
$179,456 compared to a $222,865 net loss in the second quarter of fiscal 2000.
13
MATERIAL CHANGES IN FINANCIAL POSITION
Accounts receivable decreased to $6,202,452 as of May 31, 2001 from
$8,160,650 as of November 30, 2000 ($5,599,643 and $7,737,213, net of allowance
for uncollectibles as of May 31, 2001 and November 30, 2000, respectively).
This decrease was primarily due to normal seasonal decline in STS revenues. STS
revenues were approximately $3,820,000 and $5,473,000 for the second quarter of
2001 and the fourth quarter of 2000, respectively.
Accounts payable and accrued liabilities decreased to $4,111,907 as of May
31, 2001 from $5,199,187 as of November 30, 2000. As of May 31, 2000, there was
$4,060,379 in accounts payable and accrued liabilities. This slight decrease
from May 31, 2001 to May 31, 2000 was attributable to the decline in STS
revenues, offset by increasing gross profit margins.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 2001, the Company had cash and cash equivalents of $762,334. In
April 2000, three of the Company's executive officers entered into an agreement
with the Company, pursuant to which each of them agreed to make available to the
Company up to $1,000,000 at the Company's request. In May 2000, each of their
agreements was amended to increase the amount to $1,350,000. Draw downs were
payable on May 31, 2001 and had an annual interest rate of 10%. Pursuant to a
second amendment to their respective agreements in April 2001, each of the
officers has agreed to extend $350,000 of their respective loans until August
31, 2001. As of May 31, 2001, the outstanding balance on the loans aggregated
$300,000. The Company believes that cash flows from its business will allow it
to service the interest payments the Company will incur on these loans.
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.
SEASONALITY
The Company generally completes the sale of the majority of STS Program
system installations in the university market during the spring and early summer
months. The implementation and installation of these systems and services
typically occurs during the summer months. Revenues derived from STS Programs
begin in the fall and weaken during winter holiday and the summer months when
students are on vacation. As a result, the Company's revenues have consistently
been highest during the second and fourth quarters.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
At November 30, 2000 and May 31, 2001, the Company had no derivative
Financial instruments, other financial instruments, or long-term debt
obligations.
14
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved as a party to any legal proceedings other than
various claims and lawsuits arising in the normal course of its business, none
of which, in the opinion of the Company's management, are individually or
collectively material to the Company's business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the six months ended May 31, 2001, the Company made the following sales of
unregistered securities:
==================================================================================================
CONSIDERATION RECEIVED IF OPTION,
AND DESCRIPTION OF WARRANT OR
UNDERWRITING OR OTHER EXEMPTION CONVERTIBLE
DISCOUNTS TO MARKET FROM SECURITY, TERMS
DATE OF NUMBER PRICE AFFORDED TO REGISTRATION OF EXERCISE OR
SALE TITLE OF SECURITY SOLD PURCHASERS CLAIMED CONVERSION
======= =================== ======= ========================= ============= =================
2/13/01 Options to purchase 27,200 Options granted - no 4(2) Exercisable for
shares of common consideration received by five years from
stock Company until exercise date of grant at
an exercise price
of $1.3125 per
share
- ------- ------------------- ------- ------------------------- ------------- -----------------
2/13/01 Common Stock 130,000 Issued to TRC executives 4(2) N/A
in connection with their
employment agreements
- ------- ------------------- ------- ------------------------- ------------- -----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 18, 2001, the Company held its annual meeting of shareholders, at
which the Company's shareholders considered the election of directors.
Shareholders voted to elect Joseph W. Zerbib, Michael F. Zerbib, Thierry E.
Zerbib, Brian H. Loeb, Cecile Silverman, Kalvan Swanky and Todd Belfer to serve
as directors for the ensuing year and until their successors are elected and
qualified. 771,892 shares were voted and 1,057 shares were withheld for each
director.
15
ITEM 5. OTHER INFORMATION
In April 2000, three of the Company's executive officers entered into an
agreement with the Company, pursuant to which each of them agreed to make
available to the Company up to $1,000,000 on the Company's request. In May
2000, each of their agreements was amended to increase the amount to $1,350,000.
Draw downs were payable on May 31, 2001 and had an annual interest rate of 10%.
Each loan is secured by the Company's assets. This financing was completed in
order to satisfy the terms of the Company's self-tender offer of its common
stock completed in fiscal 2000. Pursuant to a second amendment to their
respective agreements in April 2001, each of the officers has agreed to extend
$350,000 of their respective loans until August 31, 2001. As of May 31, 2001,
the outstanding balance on the loans aggregated $300,000.
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) NO. DESCRIPTION REFERENCE
--- ----------- ---------
10.12 Form of Promissory Note between the Company and (1)
each of Michael Zerbib, Thierry Zerbib and Brian
Loeb, dated April 3, 2000
10.13 Form of Amendment to the Promissory Note dated (1)
April 3, 2000 between the Company and each of
Michael Zerbib, Thierry Zerbib and Brian Loeb,
dated May 24, 2000
10.14 Form of Second Amendment to the Promissory Note (1)
dated April 3, 2000, as amended on May 24, 2000,
between the Company and each Michael Zerbib,
Thierry Zerbib and Brian Loeb, dated April 9, 2001
11 Earnings per common and common equivalent shares Filed
herewith
(1) Filed with Form 10-Q for the quarter ended February 28, 2001
(b) There were no reports on Form 8-K filed during the quarter
ended May 31, 2001.
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: June 8, 2001
17