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 AUGUST 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 October 5, 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 August 31, 2001 and November 30, 2000 3
Consolidated Statements of Operations and Consolidated Operations for the
three and nine month periods ended August 31, 2001 and 2000 4
Consolidated Statements of Cash Flows for the nine month periods ended
August 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,
August 31, 2001 2000
(unaudited)
ASSETS
Cash and cash equivalents $ 743,052 $ 41,434
Accounts receivable, net of allowance for uncollectibles of $597,114
and $423,437 at August 31, 2001 and November 30, 2000,
respectively 4,341,738 7,737,213
Inventory 126,980 208,325
Income taxes receivable 56,191 349,364
Deferred taxes 268,700 188,400
Other 112,930 94,010
-------------- ------------
Total current assets 5,649,591 8,618,746
Property and equipment, net 1,109,589 1,407,118
Computer software costs, net 12,516 54,484
Other 122,341 141,709
-------------- ------------
Total assets $ 6,894,037 $10,222,057
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Related party debt $ 300,000 $ 1,375,000
Accounts payable and accrued liabilities 3,366,952 5,199,187
Income taxes payable 159,033 203,900
Deferred revenue 579,533 1,130,375
-------------- ------------
Total current liabilities 4,405,518 7,908,462
Deferred taxes 123,800 121,900
-------------- ------------
Total liabilities 4,529,318 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 2,219,688 2,191,695
-------------- ------------
3,176,419 2,856,820
Less: Treasury stock, 269,101 and 178,106 shares, at cost (811,700) (665,125)
-------------- ------------
Total stockholders' equity 2,364,719 2,191,695
-------------- ------------
Total liabilities and stockholders' equity $ 6,894,037 $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 nine months ended August 31, 2001 and 2000 (unaudited)
Three Months Nine Months
Ended August 31, Ended August 31,
2001 2000 2001 2000
----------- ------------ ------------ ------------
Sales, net $2,867,114 $ 3,115,845 $15,385,857 $16,622,940
Cost of sales 765,826 1,055,098 6,932,711 8,489,297
----------- ------------ ------------ ------------
Gross profit 2,101,288 2,060,747 8,453,146 8,133,643
General and administrative expenses 2,646,081 3,112,735 8,140,523 9,385,122
----------- ------------ ------------ ------------
Operating income (loss) (544,793) (1,051,988) 312,623 (1,251,479)
----------- ------------ ------------ ------------
Other income (expense):
Interest income 10,885 7,329 32,496 338,520
Interest expense (10,036) (44,907) (38,786) (82,377)
Other income 50 168,810 1,235 314,232
----------- ------------ ------------ ------------
899 131,232 (5,055) 570,375
----------- ------------ ------------
Income (loss) before provision for income taxes (543,894) (920,756) 307,568 (681,104)
Benefit (provision) for income taxes 229,500 368,200 (133,000) 282,700
----------- ------------ ------------ ------------
Net income (loss) (314,394) (552,556) 174,568 (398,404)
Other comprehensive (loss) income, net of tax
Reclass of holding gains realized during
period and included in income statement - - - (66,120)
----------- ------------ ------------ ------------
Comprehensive income (loss) $ (314,394) $ (552,556) $ 174,568 $ (464,524)
=========== ============ ============ ============
Earnings (loss) per share
Basic $ (0.22) $ (0.40) $ 0.13 $ (0.17)
Diluted $ (0.22) $ (0.40) $ 0.12 $ (0.17)
Weighted average number of shares outstanding
Basic 1,415,833 1,377,728 1,392,758 2,371,002
Diluted 1,415,833 1,377,728 1,400,632 2,371,002
The Accompanying Notes are an Integral Part of
the Consolidated Financial Statements. 4
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended August 31, 2001 and 2000 (unaudited)
2001 2000
------------- -------------
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Cash received from customers $ 18,008,101 $ 21,295,595
Cash paid to suppliers and employees (16,110,274) (20,918,240)
Interest paid (38,786) (82,377)
Interest received 32,496 499,890
Income tax refund 220,043 598,707
Income taxes paid (183,137) (149,309)
------------- -------------
Net cash provided by operating activities 1,928,443 1,244,266
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (49,684) (476,404)
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 44,434 -
Cash received from sale of investment securities - 13,846,439
Purchase of investment securities - (1,500,000)
------------- -------------
Net cash provided by investing activities (5,250) 11,920,035
------------- -------------
Cash flows from financing activities:
Purchases of treasury stock (146,575) (296,475)
Proceeds from debt - related parties 300,000 2,500,000
Repayment of debt - related parties (1,375,000) -
Stock redemption - (17,384,768)
------------- -------------
Net cash used in financing activities (1,221,575) (15,181,243)
------------- -------------
Net increase (decrease) in cash and cash equivalents 701,618 (2,016,942)
Cash and cash equivalents at beginning of period 41,434 2,157,701
------------- -------------
Cash and cash equivalents at end of period $ 743,052 $ 140,759
============= =============
Supplemental disclosure of non-cash investing and financing activities:
During the nine months ended August 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 nine months ended August 31, 2001 and 2000 (unaudited)
2001 2000
------------ ------------
Reconciliation of net income to net cash
provided by operating activities:
Net income $ 174,568 $ (398,404)
------------ ------------
Adjustments to reconcile net income to net
cash provided (used) by operating activities
from continuing operations:
Depreciation and amortization 345,982 464,424
Gain on sale of investment securities - (145,189)
Gain on sale of fixed assets (1,235) -
Stock compensation 145,031 -
Changes in assets and liabilities:
Accounts receivable, net 3,395,475 4,465,728
Inventory 81,345 (63,329)
Other current assets (18,920) 50,549
Deferred taxes, net (78,400) (23,300)
Other assets 19,368 (15,356)
Accounts payable and accrued liabilities (1,832,235) (3,467,046)
Deferred revenue (550,842) 186,191
Income taxes payable (44,867) 110,089
Income taxes receivable 293,173 79,909
------------ ------------
1,753,875 1,642,670
------------ ------------
Net cash provided by operating activities $ 1,928,443 $ 1,244,266
============= ============
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 nine month periods ended August 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 nine
months ended August 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 nine months ended
August 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 August 31, 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 nine month periods ended August 31, 2001 and 2000
3. STOCKHOLDERS' EQUITY (CONTINUED)
Treasury Stock
During the nine months ended August 31, 2001, the Company repurchased
90,995 shares of its common stock for $146,575.
Common Stock
During the nine months ended August 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 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 agreed to extend $350,000 of their respective loans until
August 31, 2001. Pursuant to a third amendment to their respective
agreements in July 2001, each of the officers has agreed to extend their
respective loans until November 30, 2001.
During the nine months ended August 31, 2001 and 2000, interest expense in
connection with these notes was $36,169 and $69,900, respectively. As of
August 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 NINE MONTHS ENDED AUGUST 31, 2001 AND 2000
(in thousands except per share items)
Nine months ended August 31, 2001 Nine months ended August 31, 2000
-------------------------------------- --------------------------------------
System Custom Recovery System Custom Recovery
STS Sales Billing Services Total STS Sales Billing Services Total
------- -------- -------- ---------- -------- -------- -------- --------- --------- --------
Sales, net $8,249 $ 4,607 $ 733 $ 1,797 $15,386 $10,518 $ 4,540 $ 730 $ 835 $16,623
Cost of sales 5,821 1,107 5 - 6,933 7,635 822 32 - 8,489
------- -------- -------- ---------- -------- -------- -------- --------- --------- --------
Gross profit 2,428 3,500 728 1,797 8,453 2,883 3,718 698 835 8,134
------- -------- -------- ---------- -------- -------- -------- --------- --------- --------
General & administrative
expenses:
General 2,098 3,564 364 1,301 7,327 2,711 4,551 591 727 8,580
Depreciation 84 28 9 3 124 127 97 14 1 239
Bad debt 221 1 - 1 223 148 - - - 148
Corporate allocations:
General 115 122 5 2 244 107 62 19 4 192
Depreciation 66 133 17 6 222 101 100 25 - 226
------- -------- -------- ---------- -------- -------- -------- --------- --------- --------
2,584 3,848 395 1,313 8,140 3,194 4,810 649 732 9,385
------- -------- -------- ---------- -------- -------- -------- --------- --------- --------
Operating income (loss) (156) (348) 333 484 313 (311) (1,092) 49 103 (1,251)
Other (expense) income (5) 570
-------- --------
Pretax income (loss) 308 (681)
Income tax (provision)
benefit (133) 283
-------- --------
Net income (loss) $ 175 $ (398)
======== ========
Diluted earnings (loss)
per share $ 0.12 $ (0.17)
======== ========
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED AUGUST 31, 2001 AND 2000
Revenues decreased by 7.4% to $15,385,857 for the nine months ended August
31, 2001 compared to $16,622,940 for the nine months ended August 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 $8,249,437 for the nine months ended August 31,
2001 compared to $10,517,725 for the nine months ended August 31, 2000, a 21.6%
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, 2000), 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
9
pressure on revenue in the 2001-2002 academic year, based on decreased long
distance usage, and a decrease in customer base.
Revenues from System Sales and Maintenance were $ 4,606,961 for the nine
months ended August 31, 2001 compared to $4,540,000 for the nine months ended
August 31, 2000. TelMaster sales and maintenance related revenues increased by
$1,048,739, or 37.8%, to $3,823,969 for the nine months ended August 31, 2001
compared to $2,775,230 for the nine months ended August 31, 2000.
The DCS product revenues declined 16.6%, or $148,208, to $746,620, due to a
decrease in demand for its text-based software. The Company expects this trend
to continue. RATEX revenues declined 95.8%, or $833,190, to $36,372 for the nine
months ended August 31, 2001 compared to $869,562 for the nine months ended
August 31, 2000. In December 2000, the Company completed the sale of the RATEX
division.
For the nine months ended August 31, 2001 and 2000, revenues from
Customized Billing Services were approximately $733,000 and $730,000,
respectively.
Revenues from Recovery Services, which are generated through the Company's
wholly-owned subsidiary, Telesoft Recovery Corp., increased 115.2%, or $961,822,
to $1,796,853 for the nine months ended August 31, 2001 from $835,031 for the
nine months ended August 31, 2000.
Revenue for the nine-month period ended August 31,
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
Telemanagement $ 3,823,969 $ 2,775,230 $ 2,157,208 $ 1,057,028 $ 984,898
DCS 746,620 894,828 1,040,532 1,223,142 1,392,374
RATEX 36,372 869,562 1,717,340 2,101,899 826,413
----------- ----------- ----------- ----------- -----------
System Sales 4,606,961 4,539,620 4,915,080 4,382,069 3,203,685
STS 8,249,437 10,517,725 12,689,765 12,252,518 9,229,288
Customized Billing Services 732,606 730,564 1,172,502 996,036 754,130
Network Services - - 165,435 - -
Recovery Services 1,796,853 835,031 50,014 - -
----------- ----------- ----------- ----------- -----------
$15,385,857 $16,622,940 $18,992,796 $17,630,623 $13,187,103
=========== =========== =========== =========== ===========
10
Total gross profit increased 3.9% or $319,502, to $8,453,146 for the nine
months ended August 31, 2001 compared to $8,133,643 for the nine months ended
August 31, 2000. Cost of goods sold was approximately 70.6% of STS revenues for
the nine months ended August 31, 2001, compared with 72.6% for the nine months
ended August 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 15.8% compared to the 21.6% decrease in revenues from this
division. Cost of goods sold as a percentage of System Sales and Maintenance
revenues were approximately 24% and 18% for the nine months ended August 31,
2001 and 2000, respectively. This increase was due to a higher proportion of
professional services-related revenue.
General and administrative expenses decreased by 13.3%, or $1,244,599, for
the nine months ended August 31, 2001 to $8,140,523 from $9,385,122 for the nine
months ended August 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 three-quarters of fiscal 2001 and 2000 were approximately $50,000 and
$765,000, respectively. Recovery Services had operating expenses of $1,313,000
and $732,000 during the first three-quarters of fiscal 2001 and 2000,
respectively. General and administrative expenses as a percentage of gross
profit were 96.3% and 115.4% for the first three-quarters 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 $5,005 for the first
three-quarters of fiscal 2001 from income of $570,375 in the first
three-quarters of fiscal 2000. This decrease was attributable to an approximate
$306,000 decrease in pre-tax interest income in the first three-quarters of
fiscal 2001 and a $145,189 pretax gain on the sale of investment securities in
the first three-quarters of fiscal 2000. Interest expense for the nine months
ended August 31, 2001 and 2000 was $38,786 and $82,378, respectively.
Additionally, during the nine-months ended August 31, 2000, the Company realized
a $168,782 return of premium on a key-person insurance policy.
The provision for income taxes was $133,000 and a $282,700 benefit for the
nine months ended August 31, 2001 and 2000, respectively. This represents 43.2%
and 41.5% 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 $174,568 for the first three-quarters of fiscal
2001 from a loss of $398,404 in the first three-quarters of fiscal 2000. This
increase was attributable to an approximate $744,000 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 $484,000 for the first three-quarters of fiscal 2001
compared to approximately $103,000 in the first three-quarters of fiscal 2000.
These increases were offset by an approximate $575,000 decrease in other income
from the first three-quarters of fiscal 2000 to the first three-quarters of
fiscal 2001.
11
RESULTS OF OPERATIONS BY PRODUCT LINE FOR THE THREE MONTHS ENDED AUGUST 31, 2001 AND 2000
(in thousands except per share items)
Three months ended August 31, 2001 Three months ended August 31, 2000
--------------------------------------- ---------------------------------------
System Custom Recovery System Custom Recovery
STS Sales Billing Services Total STS Sales Billing Services Total
------ -------- -------- ---------- ------- ------ -------- -------- ---------- --------
Sales, net $ 547 $ 1,404 $ 286 $ 630 $2,867 $ 789 $ 1,678 $ 246 $ 403 $ 3,116
Cost of sales 484 279 3 - 766 696 337 22 - 1,055
------ -------- -------- ---------- ------- ------ -------- -------- ---------- --------
Gross profit 63 1,125 283 630 2,101 93 1,341 224 403 2,061
------ -------- -------- ---------- ------- ------ -------- -------- ---------- --------
General &
administrative
expenses:
General 690 1,135 120 485 2,430 870 1,593 175 271 2,909
Depreciation 28 8 3 1 40 36 18 4 - 58
Bad debt 24 1 - 1 26 8 - - - 8
Corporate allocations:
General 36 38 2 - 76 37 21 7 1 66
Depreciation 21 45 6 2 74 32 32 9 - 73
------ -------- -------- ---------- ------- ------ -------- -------- ---------- --------
799 1,227 131 489 2,646 983 1,664 195 272 3,114
------ -------- -------- ---------- ------- ------ -------- -------- ---------- --------
Operating income (loss) (736) (102) 152 141 (545) (890) (323) 29 131 (1,053)
Other income 1 131
------- --------
Pretax loss (544) (922)
Income tax provision 230 369
------- --------
Net loss ($314) ($553)
======= ========
Diluted earnings (loss)
per share ($0.22) ($0.40)
======= ========
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED AUGUST 31, 2001 AND 2000
Revenues decreased by 8% to $2,867,114 for the three months ended August
31, 2001 compared to $3,115,844 for the three months ended August 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 decreased 30.7% to $547,026 for the three months ended
August 31, 2001 compared to $789,238 for the three months ended August 31, 2000.
We expect this trend to continue throughout the balance of the 2001-2002
academic year.
Revenues from System Sales and Maintenance were $1,404,814 for the three
months ended August 31, 2001 compared to $1,677,177 for the three months ended
August 31, 2000, a decrease of 16.2%. Revenues from TelMaster sales and
maintenance were flat at $1,099,516 for the three months ended August 31, 2001
compared to $1,101,538 for the three months ended August 31, 2000. The change
in TelMaster revenue mix from the third quarter of fiscal 2000 to the third
quarter of fiscal 2001 included a $368,632 decrease 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 terminated during the second quarter of 2001.
12
The DCS product revenues increased 7.7%, or $21,836, to $305,298. For the
three months ended August 31, 2000, RATEX revenues were $292,177. In December
2000, the Company completed the sale of the RATEX division.
For the three months ended August 31, 2001 and 2000, revenues from
Customized Billing Services were approximately $285,000 and $246,000,
respectively.
Revenues from Recovery Services, which are generated through the Company's
wholly-owned subsidiary, Telesoft Recovery Corp., increased 56.2%, or $226,725,
to $630,015 for the three months ended August 31, 2001 from $403,290 for the
three months ended August 31, 2000.
Revenue for the three-month period ended August 31,
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Telemanagement $1,099,516 $1,101,538 $ 993,973 $ 202,888 $ 279,572
DCS 305,298 283,462 379,306 316,500 563,454
RATEX - 292,177 991,565 1,211,434 465,803
---------- ---------- ---------- ---------- ----------
System Sales 1,404,814 1,677,177 2,364,844 1,730,822 1,308,829
STS 547,026 789,238 1,299,286 1,240,874 960,645
Customized Billing Services 285,259 246,139 216,028 533,441 444,063
Network Services - - 35,879 - -
Recovery Services 630,015 403,290 49,773 - -
---------- ---------- ---------- ---------- ----------
$2,867,114 $3,115,844 $3,965,810 $3,505,137 $2,713,537
========== ========== ========== ========== ==========
Total gross profit increased 2%, or $40,540, to $2,101,288 for the three
months ended August 31, 2001 compared to $2,060,748 for the three months ended
August 31, 2000. Cost of goods sold was approximately 88% of STS revenues for
both the three months ended August 31, 2001 and the three months ended August
31, 2000. Cost of goods sold as a percentage of System Sales and Maintenance
revenues were approximately 19.8% and 20% for the three months ended August 31,
2001 and 2000, respectively.
General and administrative expenses decreased by 15%, or $466,654, for the
three months ended August 31, 2001 to $2,646,081 from $3,112,735, for the three
months ended August 31, 2000. This decrease was primarily due to a human
resources cost cutting effort implemented 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 third quarter of fiscal 2000 were
$232,000. Recovery Services had operating expenses of $489,000 and $272,000
during the third quarter of fiscal 2001 and 2000, respectively. General and
administrative expenses as a percentage of gross profit were 125.9% and 151.1%
for the third 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 $899 for the third quarter of fiscal 2001 from
$131,230 in the third quarter of fiscal 2000. Interest expense for the three
months ended August 31, 2001 and 2000 was $10,036 and $44,908, respectively.
Additionally, during the three-months ended August 31, 2000, the Company
realized a $168,782 return of premium on a key-person insurance policy.
The provision for income taxes was a benefit of $229,500 and $368,200 for
the three months ended August 31, 2001 and 2000, respectively. This represents
42% and 40% of income before provision for income taxes for 2001 and 2000,
respectively.
For the third quarter of fiscal 2001, the Company realized a $314,394 net
loss compared to a $552,557 net loss in the third quarter of fiscal 2000.
13
MATERIAL CHANGES IN FINANCIAL POSITION
Accounts receivable decreased to $4,938,852 as of August 31, 2001 from
$8,160,650 as of November 30, 2000 ($4,341,738 and $7,737,213, net of allowance
for uncollectibles as of August 31, 2001 and November 30, 2000, respectively).
This decrease was primarily due to normal seasonal decline in STS revenues. STS
revenues were approximately $547,000 and $5,473,000 for the third quarter of
2001 and the fourth quarter of 2000, respectively.
Accounts payable and accrued liabilities decreased to $3,366,952 as of
August 31, 2001 from $5,199,187 as of November 30, 2000. As of August 31, 2000,
there was $2,413,929 in accounts payable and accrued liabilities. This increase
from August 31, 2001 to August 31, 2000 was partially attributable to an
increase in customer deposits on TelMaster system sales.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 2001, the Company had cash and cash equivalents of $ 743,052.
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. Pursuant to a third amendment to their respective
agreements in July 2001, each of the officers has agreed to extend their
respective loans until November 30, 2001. As of August 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 August 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 nine months ended August 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. Pursuant to a third amendment to their respective
agreements in July 2001, each of the officers has agreed to extend their
respective loans until November 30, 2001. As of August 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
10.15 Form of Third Amendment to the Promissory Note Filed herewith
dated April 3, 2000, as amended on May 24, 2000 and
April 9, 2001, between the Company and each
Michael Zerbib, Thierry Zerbib and Brian Loeb, dated
July 23, 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 August 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: October 5, 2001
17