U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2002
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 ( )
At April 5, 2002, the Issuer had outstanding 1,415,833 shares of common stock,
no par value.
Transitional Small Business Disclosure Format Yes ( ) No (X)
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS.
Consolidated Balance Sheets as of February 28, 2002 and
November 30, 2001 3
Consolidated Statements of Operations for the three month periods
ended February 28, 2002 and 2001 4
Consolidated Statements of Cash Flows for the three month
periods ended February 28, 2002 and 2001 5-6
Notes to the Consolidated Financial Statements 7
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. 8-10
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. 11
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. 11
ITEM 3. DEFAULTS ON SENIOR SECURITIES. 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS. 11
ITEM 5. OTHER INFORMATION. 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 12
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28, November 30,
2002 2001
(unaudited)
ASSETS
Cash and cash equivalents $ 673,410 $ 540,726
Restricted cash 19,390 19,390
Accounts receivable, net of allowance for uncollectibles of $578,792
and $385,272 at February 28, 2002 and November 30, 2001,
respectively 3,362,005 4,567,380
Inventory 90,011 83,542
Income taxes receivable 165,384 112,305
Deferred taxes 260,500 173,400
Other 76,942 101,589
------------------------------
Total current assets 4,647,642 5,598,332
Property and equipment, net 966,523 1,032,860
Other 84,888 94,049
------------------------------
Total assets $ 5,699,053 $ 6,725,241
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 1,679,467 $ 2,696,839
Accrued compensation 264,756 307,291
Customer deposits 591,700 473,255
Income taxes payable 105,295 127,519
Deferred revenue 693,369 639,785
------------------------------
Total current liabilities 3,334,587 4,244,689
Deferred taxes 112,900 116,400
------------------------------
Total liabilities 3,447,487 4,361,089
------------------------------
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 outstanding, respectively 956,731 956,731
Retained earnings 2,106,535 2,219,121
------------------------------
3,063,266 3,175,852
Less: Treasury stock, 269,101 shares, at cost (811,700) (811,700)
------------------------------
Total stockholders' equity 2,251,566 2,364,152
------------------------------
Total liabilities and stockholders' equity $ 5,699,053 $ 6,725,241
==============================
The accompanying Notes are an Integral Part of
The Consolidated Financial Statements.
3
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended February 28, 2002 and 2001 (unaudited)
2002 2001 (1)
----------- -----------
Sales, net $3,495,932 $6,119,019
Cost of sales 1,053,117 2,886,228
----------- -----------
Gross profit 2,442,815 3,232,791
General and administrative expenses 2,651,399 2,685,332
----------- -----------
Operating (loss) income (208,584) 547,459
----------- -----------
Other income (expense):
Interest income 5,513 11,614
Interest expense (1,225) (18,025)
Other expense - (1,042)
----------- -----------
4,288 (7,453)
----------- -----------
Income (loss) before provision for income taxes (204,296) 540,006
Benefit from (provision for) income taxes 91,710 (230,500)
----------- -----------
Net and comprehensive (loss) income $ (112,586) $ 309,506
=========== ===========
(Loss) earnings per share
Basic $ (0.08) $ 0.23
Diluted $ (0.08) $ 0.23
=========== ===========
Weighted average number of shares outstanding
Basic 1,415,833 1,345,584
Diluted 1,415,833 1,349,307
=========== ===========
(1) As restated for comparative purposes only.
The accompanying Notes are an Integral Part of
The Consolidated Financial Statements.
4
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended February 28, 2002 and 2001 (unaudited)
2002 2001
------------ ------------
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Cash received from customers $ 4,702,110 $ 7,093,569
Cash paid to suppliers and employees (4,471,946) (6,225,625)
Interest paid (1,225) (18,025)
Interest received 5,513 11,614
Income taxes paid (76,680) -
Income taxes received 2,487 8,995
------------ ------------
Net cash provided by operating activities 160,259 870,528
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (27,664) (14,215)
Cash received from sale of fixed assets 89 30,198
------------ ------------
Net cash (used) provided by investing activities (27,575) 15,983
------------ ------------
Cash flows from financing activities:
Purchases of treasury stock - (146,575)
Proceeds from debt - related parties - 300,000
Repayment of debt - related parties - (1,075,000)
------------ ------------
Net cash used in financing activities - (921,575)
------------ ------------
Net increase (decrease) in cash and cash equivalents 132,684 (35,064)
Cash and cash equivalents at beginning of period 540,726 41,434
------------ ------------
Cash and cash equivalents at end of period $ 673,410 $ 6,370
============ ============
Supplemental disclosure of non-cash investing and financing activities:
During the three months ended February 28, 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 three months ended February 28, 2002 and 2001 (unaudited)
2002 2001
------------ -----------
Reconciliation of net (loss) income to net cash
provided by operating activities:
Net (loss) income $ (112,586) $ 309,506
-------------------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 93,912 116,916
Loss on sale of fixed assets - 1,042
Stock compensation - 145,031
Changes in assets and liabilities:
Accounts receivable, net 1,205,375 1,109,655
Inventory (6,469) 43,308
Other current assets 24,647 (3,475)
Deferred taxes, net (90,600) (31,100)
Other assets 9,161 (35,823)
Accounts payable and accrued liabilities (1,017,372) (984,055)
Customer deposits 118,445 41,177
Accrued compensation (42,535) 235,430
Deferred revenue 53,584 (347,679)
Income taxes payable (22,224) 158,012
Income taxes receivable (53,079) 112,583
-------------------------
272,845 561,022
-------------------------
Net cash provided by operating activities $ 160,259 $ 870,528
=========================
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 three month periods ended February 28, 2002 and 2001
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 S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for audited year-end financial statements. In the opinion of
management, all adjustments for normal recurring accruals considered
necessary for a fair presentation have been included. Operating results for
the three months ended February 28, 2002 are not necessarily indicative of
the results that may be expected for the year ending November 30, 2002. 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, 2001.
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. STOCKHOLDERS' EQUITY
Treasury Stock
During the three months ended February 28, 2001, the Company repurchased
90,995 shares of its common stock for $146,575.
Common Stock
During the three months ended February 28, 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.
3. RELATED PARTY DEBT
In April 2000, the Company entered into an agreement with three executive
officers, 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, their
agreements were 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 was secured by the Company's assets. Pursuant to a second amendment to
their agreements in April 2001, each of the officers agreed to extend
$350,000 of their loans until August 31, 2001. A third amendment to their
agreements in July 2001 extended their loans until November 30, 2001.
During the three months ended February 28, 2001, interest expense in
connection with these notes was $18,024. These loans were paid in full
prior to November 30, 2001.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS BY PRODUCT LINE FOR THE THREE MONTHS ENDED FEBRUARY 28, 2002 AND 2001
(in thousands except per share items)
Three months ended February 28, 2002 Three months ended February 28, 2001
------------------------------------ ------------------------------------
System System
Sales TRS STS CBS Total Sales TRS STS CBS Total
------- ---- ------ ---- ------- ------- ---- ------ ---- -------
Sales, net $1,035 $637 $1,697 $127 $3,496 $1,405 $569 $3,882 $263 $6,119
Cost of sales 205 64 784 - 1,053 367 48 2,469 2 2,886
------- ---- ------ ---- ------- ------- ---- ------ ---- -------
Gross profit 830 573 913 127 2,443 1,038 521 1,413 261 3,233
------- ---- ------ ---- ------- ------- ---- ------ ---- -------
General & administrative
expenses:
General 1,177 473 559 84 2,293 1,264 336 693 118 2,411
Depreciation - 2 23 - 25 12 1 28 3 44
Bad debt - 8 163 - 171 - - 77 - 77
Corporate allocations:
General 48 15 27 3 93 40 1 38 2 81
Depreciation 41 2 20 6 69 44 2 22 5 73
------- ---- ------ ---- ------- ------- ---- ------ ---- -------
1,266 500 792 93 2,651 1,360 340 858 128 2,686
------- ---- ------ ---- ------- ------- ---- ------ ---- -------
Operating (loss) income (436) 73 121 34 (208) (322) 181 555 133 547
Other (expense) income 4 (7)
------- -------
Pretax (loss) income (204) 540
Income tax provision 92 (230)
------- -------
Net (loss) income $ (112) $ 310
======= =======
Diluted (loss) earnings
per share $(0.08) $ 0.23
======= =======
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED FEBRUARY 28, 2002 AND 2001
Revenues decreased 42.9% to $3,495,932 for the three months ended February
28, 2002 compared to $6,119,019 for the three months ended February 28, 2001.
The Company's revenue is derived from four principal product lines and services:
System Sales and Maintenance, Telesoft Recovery Services (TRS), STS Outsourcing
Programs (STS) and Customized Billing Outsourcing Services (CBS).
Revenues from System Sales and Maintenance were $1,034,588 for the first
quarter of fiscal 2002 compared to $1,404,505 for the first quarter of fiscal
2001, a decrease of 26.3%. TelMaster sales and maintenance related revenues
decreased by $377,528, or 31.7%, to $813,772 for the first quarter of fiscal
2002, compared to $1,191,300 for the first quarter of fiscal 2001. The
decrease in TelMaster revenues from the first quarter of fiscal 2001 to the
first quarter of fiscal 2002 was related to a $478,913 decrease in revenues
related to the CALNET contract, which was terminated in April 2001.
8
The DCS product revenues increased 24.9%, or $43,983, to $220,816. The
Company expects flat to declining revenues from this product. In December 2000,
the Company completed the sale of the RATEX division. RATEX revenues were
$36,372 for the three months ended February 28, 2001.
Revenues from TRS, which are generated through the Company's wholly-owned
subsidiary, Telesoft Recovery Corp., increased 12.1%, or $68,744, to $637,446
for the three months ended February 28, 2002 from $568,702 for the three months
ended February 28, 2001.
STS revenues were $1,696,861 for the three months ended February 28, 2002
compared to $3,882,567 for the three months ended February 28, 2001, a 56.3%
decrease. This decrease was primarily due to market pressure from competing
long-distance communications products, including calling cards, wireless
services and the Internet. The Company continues to reduce its selling, general
and administrative expenses to adjust to the reduction in subscribers, traffic
and revenues. The Company expects STS Program revenues to continue to decrease
in the 2002-2003 academic year, based on decreases in long distance usage and
its customer base.
For the three months ended February 28, 2002 and 2001, revenues from
Customized Billing Services were $127,037 and $263,245, respectively. CBS
revenues were affected by a decline in new contract setup fees, which were
approximately $48,000 in the first quarter of fiscal 2001, as well as the
termination of contracts in place in the prior year.
Revenue for the three-month period ended
February 28, February 28, February 29, February 28, February 28,
------------- ------------- ------------- ------------- -------------
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- -------------
Telemanagement $ 813,772 $ 1,191,300 $ 1,108,955 $ 717,672 $ 444,788
DCS 220,816 176,833 372,156 338,942 388,228
RATEX - 36,372 337,109 331,582 495,448
-------------------------------------------------------------------------
System Sales 1,034,588 1,404,505 1,818,220 1,388,196 1,328,464
STS 1,696,861 3,882,567 4,791,533 5,817,928 5,455,812
Custom Billing 127,037 263,245 253,685 545,005 242,502
Network Services - - - 51,468 -
TRS 637,446 568,702 159,105 - -
-------------------------------------------------------------------------
$ 3,495,932 $ 6,119,019 $ 7,022,543 $ 7,802,597 $ 7,026,778
=========================================================================
Total gross profit decreased 24.4% to $2,442,815 for the three months ended
February 28, 2002 compared to $3,232,791 for the three months ended February 28,
2001. Cost of goods sold was approximately 46.2% of STS revenues for first
quarter of fiscal 2002, compared to 63.6% for the first quarter of fiscal 2001.
The increased emphasis on fixed fee structures resulted in a more moderate
decrease in gross profits of 35.4% compared to the 56.3% decrease in revenues
from this division. Cost of goods sold as a percentage of System Sales and
Maintenance revenues was approximately 19.8% for the three months ended February
28, 2002, compared to 26% for three months ended February 28, 2001. This
decrease was primarily due to a higher percentage of maintenance revenues, which
have a higher gross profit rate than system revenues.
General and administrative expenses decreased by 1.3%, or $33,933, in the
first quarter of fiscal 2002 to $2,651,399 from $2,685,332 in the first quarter
of fiscal 2001. While the Company has cut many costs, it did realize an
approximate $99,000 increase in bad debt expense as well as an increase in TRS
operating expenses. TRS had operating expenses of $501,000 and $339,000 during
the first quarter of fiscal 2002 and 2001, respectively. General and
administrative expenses as a percentage of gross profit were 108.5% and 83.1%
for the first quarter of fiscal 2002 and 2001, respectively. The Company
expects general and administrative expenses as a percentage of gross profit to
decrease over time as revenues for TelMaster systems increase.
9
There was a $91,710 benefit from income taxes for the first quarter of
fiscal 2002 compared to a $230,500 provision for income taxes for the first
quarter of fiscal 2001.
The first quarter of fiscal 2002 resulted in a net loss of $112,586
compared to net income of $309,506 in the first quarter of fiscal 2001.
MATERIAL CHANGES IN FINANCIAL POSITION
Accounts receivable decreased to $3,940,797 as of February 28, 2002 from
$4,952,652 as of November 30, 2001 ($3,362,005 and $4,567,380, net of allowance
for uncollectibles as of February 28, 2002 and November 30, 2001, respectively).
This decrease was primarily due to normal seasonal decline in STS revenues. STS
revenues were approximately $1,697,000 and $2,635,000 for the first quarter of
2002 and the fourth quarter of 2001, respectively.
Accounts payable and accrued liabilities decreased to $1,679,467 as of
February 28, 2002 from $2,696,839 as of November 30, 2001. This decrease was
attributable to the decline in STS revenues, offset by increasing gross profit
margins.
LIQUIDITY AND CAPITAL RESOURCES
At February 28, 2002, the Company had cash and cash equivalents of
$673,410. The Company believes that 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.
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.
10
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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to security holders through the solicitation of
proxies or otherwise during the first quarter of fiscal 2002.
ITEM 5. OTHER INFORMATION
Not applicable.
11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) NO. DESCRIPTION REFERENCE
--- ----------- ---------
11 Earnings per common and common equivalent shares filed herewith
(b) There were no reports on Form 8-K during the current quarter.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Issuer has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TELESOFT CORP.
BY: /s/ Michael F. Zerbib
------------------------------------
Michael F. Zerbib
Chief Financial Officer
DATED: April 5, 2002
12