U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 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 September 25, 2002, the Issuer had outstanding 1,282,883 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 August 31, 2002 (unaudited) and
November 30, 2001 3
Consolidated Statements of Operations and Consolidated Operations for the
three and nine month periods ended August 31, 2002 (unaudited) and 2001
(unaudited) 4
Consolidated Statements of Cash Flows for the nine month periods ended
August 31, 2002 (unaudited) and 2001 (unaudited) 5 - 6
Notes to the Consolidated Financial Statements 7
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL 8 - 13
CONDITION AND RESULTS OF OPERATIONS.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. 14
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. 14
ITEM 3. DEFAULTS ON SENIOR SECURITIES. 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 14
ITEM 5. OTHER INFORMATION. 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 15
TELESOFT CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
August 31, 2002 November 30, 2001
----------------- -------------------
(unaudited)
ASSETS
Cash and cash equivalents $ 1,794,773 $ 540,726
Restricted cash 19,390 19,390
Accounts receivable, net of allowance for uncollectibles of $686,509
and $385,272 at August 31, 2002 and November 30, 2001,
respectively 1,829,676 4,567,380
Inventory, net 84,576 83,542
Income taxes receivable 253,791 112,305
Deferred taxes 308,900 173,400
Other 82,577 101,589
----------------- -------------------
Total current assets 4,373,683 5,598,332
Property and equipment, net 787,417 1,032,860
Other 72,942 94,049
----------------- -------------------
Total assets $ 5,234,042 $ 6,725,241
================= ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 1,363,472 $ 2,696,839
Accrued compensation 512,702 307,291
Customer deposits 689,245 473,255
Income taxes payable 114,879 127,519
Deferred revenue 718,133 639,785
----------------- -------------------
Total current liabilities 3,398,431 4,244,689
Deferred taxes 81,000 116,400
----------------- -------------------
Total liabilities 3,479,431 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;
1,554,934 and 1,684,934 issued and 1,282,883 and 1,415,833
outstanding, respectively 830,631 956,731
Retained earnings 1,740,835 2,219,121
----------------- -------------------
2,571,466 3,175,852
Less: Treasury stock, 272,051 and 269,101 shares, at cost (816,855) (811,700)
----------------- -------------------
Total stockholders' equity 1,754,611 2,364,152
----------------- -------------------
Total liabilities and stockholders' equity $ 5,234,042 $ 6,725,241
================= ===================
The Accompanying Notes are a Part of
the Consolidated Financial Statements.
3
TELESOFT CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the three and nine months ended August 31, 2002 (unaudited) and 2001 (unaudited)
Three Months Ended August 31, Nine Months Ended August 31,
2002 2001(1) 2002 2001(1)
-------------- ------------------ ------------- ------------------
Sales, net $ 2,183,446 $ 2,867,114 $ 9,279,249 $ 15,385,857
Cost of sales 311,176 819,376 2,747,334 7,085,461
---------------------------------- ---------------------------------
Gross profit 1,872,270 2,047,738 6,531,915 8,300,396
General and administrative expenses 2,179,845 2,592,531 7,282,485 7,987,773
---------------------------------- ---------------------------------
Operating income (loss) (307,575) (544,793) (750,570) 312,623
---------------------------------- ---------------------------------
Other income (expense):
Interest income 5,769 10,885 17,193 32,496
Interest expense - (10,036) (1,457) (38,786)
Other income 3,112 50 3,348 1,235
---------------------------------- ---------------------------------
8,881 899 19,084 (5,055)
---------------------------------- ---------------------------------
Income (loss) before provision for income taxes (298,694) (543,894) (731,486) 307,568
Benefit (provision) for income taxes 101,140 229,500 253,200 (133,000)
---------------------------------- ---------------------------------
Net and comprehensive income (loss) $ (197,554) $ (314,394) $ (478,286) $ 174,568
================================== =================================
Earnings (loss) per share
Basic $ (0.14) $ (0.22) $ (0.34) $ 0.13
================================== =================================
Diluted $ (0.14) $ (0.22) $ (0.34) $ 0.12
================================== =================================
Weighted average number of shares outstanding
Basic 1,380,383 1,415,833 1,403,761 1,392,758
================================== =================================
Diluted 1,380,383 1,415,833 1,403,761 1,400,632
================================== =================================
(1) As restated for comparative purposes only.
The Accompanying Notes are a Part of
the Consolidated Financial Statements.
4
TELESOFT CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended August 31, 2002(unaudited) and 2001 (unaudited)
2002 2001
------------- -------------
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Cash received from customers $ 12,019,328 $ 18,008,101
Cash paid to suppliers and employees (10,664,534) (16,110,274)
Interest paid (1,457) (38,786)
Interest received 17,193 32,496
Income tax refund 36,246 220,043
Income taxes paid (108,072) (183,137)
------------- -------------
Net cash provided by operating activities 1,298,704 1,928,443
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (43,547) (49,684)
Cash received from sale of fixed assets 4,045 44,434
------------- -------------
Net cash used by investing activities (39,502) (5,250)
------------- -------------
Cash flows from financing activities:
Purchases of treasury stock (5,155) (146,575)
Proceeds from debt - related parties - 300,000
Repayment of debt - related parties - (1,375,000)
------------- -------------
Net cash used in financing activities (5,155) (1,221,575)
------------- -------------
Net increase in cash and cash equivalents 1,254,047 701,618
Cash and cash equivalents at beginning of period 540,726 41,434
------------- -------------
Cash and cash equivalents at end of period $ 1,794,773 $ 743,052
============= =============
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. During the nine months ended August
31, 2002, all 130,000 shares of the Company's common stock were returned and
retired. Deferred compensation in the amount of $126,100 has been recorded in
connection with this transaction, based upon the fair market value of the
Company's stock.
The Accompanying Notes are a Part of
the Consolidated Financial Statements.
5
TELESOFT CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine months ended August 31, 2002(unaudited) and 2001 (unaudited)
2002 2001
------------ ------------
Reconciliation of net income (loss) to net cash
provided by operating activities:
Net income (loss) $ (478,286) $ 174,568
------------ ------------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 288,262 345,982
Gain on sale of fixed assets (3,317) (1,235)
Stock compensation (126,100) 145,031
Changes in assets and liabilities:
Accounts receivable, net 2,737,704 3,395,475
Inventory (1,034) 81,345
Other current assets 19,012 (18,920)
Deferred taxes, net (170,900) (78,400)
Other assets 21,107 19,368
Accounts payable and accrued liabilities (1,333,367) (2,412,134)
Customer deposits 215,990 270,432
Accrued compensation 205,411 309,467
Deferred revenue 78,348 (550,842)
Income taxes payable (12,640) (44,867)
Income taxes receivable (141,486) 293,173
------------ ------------
1,776,990 1,753,875
------------ ------------
Net cash provided by operating activities $ 1,298,704 $ 1,928,443
============ ============
The Accompanying Notes are a Part of
the Consolidated Financial Statements.
6
TELESOFT CORP. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the nine month periods ended August 31, 2002 and 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America 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
accounting principles generally accepted in the United States of America
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, 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 subsidiary, Telesoft Recovery Corp.
All significant intercompany accounts and transactions have been
eliminated.
2. STOCKHOLDERS' EQUITY
Treasury Stock
During the nine months ended August 31, 2002 and 2001, the Company
repurchased 2,950 and 90,995 shares of its common stock for $5,155 and
$146,575, respectively.
Common Stock
During the nine months ended August 31, 2001, the Company issued an
aggregate of 130,000 shares of its common stock to two 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. During the quarter ended
August 31, 2002, their employment agreements were amended to require the
executives to return all 130,000 shares of the Company's common stock back
to the Company in consideration for cash compensation based upon a
percentage of TRC earnings. The common stock was valued at $126,100 upon
the return, based upon the fair market value of Company's stock on that
date. The stock was retired upon its return.
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 nine months ended August 31, 2001, interest expense in
connection with these notes was $36,169. 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 NINE MONTHS ENDED AUGUST 31, 2002 AND 2001
(IN THOUSANDS EXCEPT PER SHARE ITEMS)
Nine months ended August 31, 2002 Nine months ended August 31, 2001
------------------------------------------ ------------------------------------------
System System
Sales TRS STS CBS Total Sales TRS STS CBS Total
--------------------------------------------------------------------------------------
Sales, net $ 2,819 $2,378 $3,738 $ 344 $9,279 $ 4,607 $1,797 $8,249 $ 733 $15,386
Cost of sales 536 238 1,973 - 2,747 1,107 153 5,821 5 7,086
-------- ------- ------- ----- ------- -------- ------ ------- ----- --------
Gross profit 2,283 2,140 1,765 344 6,532 3,500 1,644 2,428 728 8,300
-------- ------- ------- ----- ------- -------- ------ ------- ----- --------
General & administrative
expenses:
General 3,195 1,699 1,365 212 6,471 3,564 1,148 2,098 364 7,174
Depreciation - 8 69 - 77 28 3 84 9 124
Bad debt - 22 270 - 292 1 1 221 - 223
Corporate allocations:
General 123 46 62 8 239 122 2 115 5 244
Depreciation 126 7 56 14 203 133 6 66 17 222
-------- ------- ------- ----- ------- -------- ------ ------- ----- --------
3,444 1,782 1,822 234 (750) 3,848 1,160 2,584 395 7,987
-------- ------- ------- ----- ------- -------- ------ ------- ----- --------
Operating income (loss) (1,161) 358 (57) 110 (750) (348) 484 (156) 333 313
------- ------- -----
Other income (expense) 19 (5)
------- --------
Pretax (loss) income (731) 308
Income tax provision 253 (133)
------- --------
Net (loss) income $ (478) $ 175
======= ========
Diluted (loss) earnings per share
$(0.34) $ 0.12
======= ========
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED AUGUST 31, 2002 AND 2001
Revenues decreased by $6,106,608, or 39.7%, to $9,279,249 for the nine
months ended August 31, 2002 compared to $15,385,857 for the nine months ended
August 31, 2001. The Company's revenues are 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). System Sales and Maintenance includes two principal products:
TelMaster and DCS.
Revenues from System Sales and Maintenance were $2,819,140 for the nine
months ended August 31, 2002 compared to $4,606,961 for the nine months ended
August 31, 2001, a 38.8% decrease. TelMaster sales and maintenance related
revenues decreased by $1,643,944, or 43.0%, to $2,180,025 for the nine months
ended August 31, 2002 compared to $3,823,969 for the nine months ended August
31, 2001. During the nine months ended August 31, 2001, TelMaster revenues
included $1,076,900 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. This contract was
terminated in April 2001. Also contributing to this drastic decrease in
revenues is a general freeze in corporate budgets. As of the date of this
quarterly report, we are seeing an improved sales pipeline, but closing sales
remains challenging. Management intends to make additional expense cuts should
sales fail to materialize in the foreseeable future.
8
The DCS product revenues were $639,115 for the nine months ended August 31,
2002 compared to $746,620 for the nine months ended August 31, 2001. The
Company expects declining revenues from this product. In December 2000, the
Company completed the sale of the RATEX division. RATEX revenues were $36,372
for the nine months ended August 31, 2001.
TRS revenues, which are generated through the Company's wholly-owned
subsidiary, Telesoft Recovery Corp., increased by $581,089, or 32.3%, to
$2,377,942 for the nine months ended August 31, 2002 from $1,796,853 for the
nine months ended August 31, 2001.
STS Program revenues decreased by $4,511,482, or 54.7%, to $3,737,955 for
the nine months ended August 31, 2002 compared to $8,249,437 for the nine months
ended August 31, 2001. This decrease was primarily due to market pressure from
competing long-distance communications products, including wireless services and
the Internet. The Company continues to reduce its selling, general and
administrative expenses to adjust to the decline 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.
CBS revenues were $344,212 for the nine months ended August 31, 2002
compared to $732,606 for the nine months ended August 31, 2001. This $388,394
decrease was due to the cancellation of two contracts, which contributed
combined revenues of $198,000 during the nine months ended August 31, 2001, and
an approximate $182,000 decrease in recurring revenues resulting from the
cancellation of the Company's CBS contract with Qwest Communications effective
July 31, 2002.
Revenue for the nine-month period ended August 31,
2002 2001 2000 1999 1998
---------- ----------- ----------- ----------- -----------
TelMaster $2,180,025 $ 3,823,969 $ 2,775,230 $ 2,157,208 $ 1,057,028
DCS 639,115 746,620 894,828 1,040,532 1,223,142
RATEX - 36,372 869,562 1,717,340 2,101,899
--------------------------------------------------------------
System Sales 2,819,140 4,606,961 4,539,620 4,915,080 4,382,069
TRS 2,377,942 1,796,853 835,031 50,014 -
STS 3,737,955 8,249,437 10,517,725 12,689,765 12,252,518
CBS 344,212 732,606 730,564 1,172,502 996,036
Network Services - - - 165,435 -
--------------------------------------------------------------
$9,279,249 $15,385,857 $16,622,940 $18,992,796 $17,630,623
==============================================================
Total gross profit decreased by $1,768,481, or 21.3%, to $6,531,915 for the
nine months ended August 31, 2002 compared to $8,300,396 for the nine months
ended August 31, 2001. Cost of goods sold was approximately 52.8% of STS
revenues for the nine months ended August 31, 2002, compared to 70.6% for the
nine months ended August 31, 2001. The increased emphasis on fixed fee
structures resulted in a more moderate 27.3% decrease in gross profits compared
to the 54.7% decrease in revenues from this division. Cost of goods sold as a
percentage of System Sales and Maintenance revenues were approximately 19% and
24% for the nine months ended August 31, 2002 and 2001, respectively. This
decrease was due to a lower proportion of professional services-related revenue.
General and administrative expenses decreased by $705,288, or 8.8%, to
$7,282,485 for the nine months ended August 31, 2002 from $7,987,773 for the
nine months ended August 31, 2001. While the Company has cut many costs, it did
realize an approximate $70,000 increase in bad debt expense as well as an
increase in TRS operating expenses. TRS had operating expenses of $1,782,000
for the nine months ended August 31, 2002 compared to $1,160,000 for the nine
months ended August 31, 2001. General and administrative expenses as a
percentage of gross profit were 111.5% and 96.2% for the nine months ended
August 31, 2002 and 2001, respectively.
9
There was a $253,200 benefit from income taxes for the nine months ended
August 31, 2002 compared to a $133,000 provision for income taxes for the nine
months ended August 31, 2001.
The first three quarters of fiscal 2002 resulted in a net loss of $478,286
compared to net income of $174,568 in the first three quarters of fiscal 2001.
RESULTS OF OPERATIONS BY PRODUCT LINE FOR THE THREE MONTHS ENDED AUGUST 31, 2002 AND 2001
(in thousands except per share items)
Three months ended August 31, 2002 Three months ended August 31, 2001
---------------------------------- ----------------------------------
System System
Sales TRS STS CBS Total Sales TRS STS CBS Total
----------------------------------------------------------------------------------
Sales, net $ 876 $926 $ 286 $ 95 $2,183 $ 1,404 $630 $ 547 $ 286 $2,867
Cost of sales 156 93 62 - 311 279 53 484 3 819
-------- ---- ------ ------- ------- -------- ---- ------ ------- -------
Gross profit 720 833 224 95 1,872 1,125 577 63 283 2,048
-------- ---- ------ ------- ------- -------- ---- ------ ------- -------
General &
administrative
expenses:
General 951 638 371 56 2,016 1,135 432 690 120 2,377
Depreciation - 3 23 - 26 8 1 28 3 40
Bad debt - 1 7 - 8 1 1 24 - 26
Corporate allocations:
General 33 15 13 1 62 38 - 36 2 76
Depreciation 46 2 16 3 67 45 2 21 6 74
-------- ---- ------ ------- ------- -------- ---- ------ ------- -------
1,030 659 430 60 2,179 1,227 436 799 131 2,593
-------- ---- ------ ------- ------- -------- ---- ------ ------- -------
Operating (loss) income (310) 174 (206) 35 (307) (102) 141 (736) 152 (545)
Other income 9 1
------- -------
Pretax (loss) income (298) (544)
Income tax provision 101 230
------- -------
Net (loss) income $ (197) ($314)
======= =======
Diluted earnings (loss) per share
$(0.14) $(0.22)
======= =======
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED AUGUST 31, 2002 AND 2001
Revenues decreased by $683,668, or 23.8%, to $2,183,446 for the three
months ended August 31, 2002 compared to $2,867,114 for the three months ended
August 31, 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). System Sales and Maintenance includes two principal products:
TelMaster and DCS.
Revenues from System Sales and Maintenance were $876,496 for the three
months ended August 31, 2002 compared to $1,404,814 for the three months ended
August 31, 2001, a 37.6% decrease. TelMaster sales and maintenance related
revenues decreased by $419,003, or 38.1%, to $680,513 for the three months ended
August 31, 2002 compared to $1,099,516 for the three months ended August 31,
2001. This decrease is related to a significant reduction in information
technology spending by corporations and government entities based on the current
status of the economy. DCS product revenues decreased by $109,315, or 35.8%, to
$195,983 for the three months ended August 31, 2002 compared to $305,298 for the
three months ended August 31, 2001. This decrease was due to decreased demand
for this text-based software. The DCS segment is expected to continue to
decrease over time.
10
TRS revenues, which are generated through the Company's wholly-owned
subsidiary, Telesoft Recovery Corp., increased by $295,640, or 46.9%, to
$925,655 for the three months ended August 31, 2002 from $630,015 for the three
months ended August 31, 2001.
STS Program revenues decreased by $261,456, or 47.8%, to $285,570 for the
three months ended August 31, 2002 compared to $547,026 for the three months
ended August 31, 2001. 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.
CBS revenues were $95,725 for the three months ended August 31, 2002
compared to $285,259 for the three months ended August 31, 2001. This
approximate $189,000 decrease was due to the cancellation of two contracts,
which contributed combined revenues of $48,000 during the third quarter of 2001
and an approximate $140,000 decrease in recurring revenues resulting from the
cancellation of the Company's CBS contract with Qwest Communications effective
July 31, 2002.
Revenue for the three-month period ended August 31,
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
TelMaster $ 680,513 $1,099,516 $1,101,538 $ 993,973 $ 202,888
DCS 195,983 305,298 283,462 379,306 316,500
RATEX - - 292,177 991,565 1,211,434
----------------------------------------------------------
System Sales 876,496 1,404,814 1,677,177 2,364,844 1,730,822
TRS 925,655 630,015 403,290 49,773 -
STS 285,570 547,026 789,238 1,299,286 1,240,874
CBS 95,725 285,259 246,139 216,028 533,441
Network Services - - - 35,879 -
----------------------------------------------------------
$2,183,446 $2,867,114 $3,115,844 $3,965,810 $3,505,137
==========================================================
Total gross profit decreased by $175,468, or 8.6%, to $1,872,270 for the
three months ended August 31, 2002 compared to $2,047,738 for the three months
ended August 31, 2001. Cost of goods sold as a percentage of System Sales and
Maintenance revenues were approximately 17.8% and 19.8% for the three months
ended August 31, 2002 and 2001, respectively. This decrease was due to a lower
proportion of professional services-related revenue.
STS cost of goods sold was approximately 22% of STS revenues for the third
quarter of 2002, compared with 88% for the third quarter of 2001. The
significant decrease was due to $100,000 in additional revenues recognized in
the quarter, and a $50,000 decrease in accrued expenses at the end of the
quarter. It has been the Company's had practice to accrue a revenue contingency
related to billing issues each quarter. During the current quarter, an STS
customer agreed to reimburse the Company for a portion of this contingency, or
approximately $100,000. As a result, the Company has reversed $100,000 of the
revenue contingency related to this issue. This has increased gross profit by
$100,000. At the end of each reporting period, the Company estimates and accrues
for the amount due to long distance carriers and the commissions due to STS
customers. These estimates are based on the information available at the time
of reporting, as actual amounts are not known until a few months after financial
11
reporting. Due to a significant decrease in the number of customers, the
Company has reduced the accruals by $50,000 during the current quarter. This has
decreased cost of goods sold by $50,000 and increased gross profit by $50,000.
General and administrative expenses decreased by $412,686, or 15.9%, to
$2,179,845 for the quarter ended August 31, 2002 from $2,592,531 for the quarter
ended August 31, 2001. While the Company has cut costs, it did realize an
increase in TRS operating expenses. TRS had operating expenses of approximately
$659,000 during the third quarter of fiscal 2002 compared to $436,000 during the
third quarter of fiscal 2001. General and administrative expenses as a
percentage of gross profit were 116.4% and 126.6% for the third quarter of
fiscal 2002 and 2001, respectively.
There was a $101,140 benefit from income taxes for the third quarter of
fiscal 2002 compared to a $229,500 benefit from income taxes for the third
quarter of fiscal 2001.
The third quarter of fiscal 2002 resulted in a net loss of $197,554
compared to a net loss of $314,394 in the third quarter of fiscal 2001.
MATERIAL CHANGES IN FINANCIAL POSITION
Accounts receivable decreased to $2,516,184 as of August 31, 2002 from
$4,952,652 as of November 30, 2001 ($1,829,676 and $4,567,380, net of allowance
for uncollectibles as of August 31, 2002 and November 30, 2001, respectively).
This decrease was primarily due to normal seasonal decline in STS revenues as
well as the significant contraction of the STS business and collection of
TelMaster receivables as systems become fully implemented. STS revenues were
approximately $286,000 and $2,635,000 for the third quarter of 2002 and the
fourth quarter of 2001, respectively.
Accounts payable and accrued liabilities decreased to $1,363,472 as of
August 31, 2002 from $2,696,839 as of November 30, 2001. This decrease was
attributable to the decline in STS cost of sales.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 2002, the Company had cash and cash equivalents of
$1,794,773. 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.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Based on the evaluation conducted by Michael F. Zerbib, the Company's
President, CEO, Treasurer and CFO, as of a date within 90 days of the filing
date of this quarterly report ("Evaluation Date"), of the effectiveness of the
Company's disclosure controls and procedures, Mr. Zerbib concluded that, as of
the Evaluation Date, (i) there were no significant deficiencies or material
weaknesses in the Company's disclosure controls and procedures, (ii) there were
no significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the Evaluation Date and
(iii) no corrective actions were required to be taken.
12
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 third quarter of fiscal 2002.
ITEM 5. OTHER INFORMATION
On July 17, 2002, the Nasdaq Stock Market advised the Company that the
Company's common stock had not maintained a minimum market value of publicly
held shares of $1,000,000 for 30 consecutive business days and the common stock
was subject to delisting from the Nasdaq SmallCap Market if the minimum market
value of publicly held shares did not reach $1,000,000 for ten consecutive
business days by October 15, 2002.
In February 2001, the Company issued an aggregate of 130,000 shares of its
common stock to two 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. In
August 2002, their employment agreements were amended to require the executives
to return all 130,000 shares of the Company's common stock back to the Company
in consideration for cash compensation based upon a percentage of TRC earnings.
Deferred compensation in the amount of $126,100, and a corresponding decrease in
capital stock was recorded in connection with the return and retirement of the
Company's stock.
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 filed during the quarter ended
August 31, 2002.
13
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
President, Chief Executive Officer,
Chief Financial Officer, Treasurer
and Director
(and principal accounting officer)
DATED: September 30, 2002
14
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Telesoft Corp. (the "Company") on
Form 10-QSB for the period ended August 31, 2002 as filed with the Securities
and Exchange Commission (the "Report"), each of the undersigned, in the
capacities and on the dates indicated below, hereby certifies pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
1. the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operation of the
Company.
Date: September 30, 2002 /s/ Michael F. Zerbib
---------------------------------
Michael F. Zerbib
President, CEO, Treasurer and CFO
(principal executive officer and
principal financial officer)
15
CERTIFICATION
I, Michael F. Zerbib, President, CEO, Treasurer and CFO of Telesoft Corp.,
certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Telesoft Corp.;
2. based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to me by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days of the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on my
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the registrant's
auditors and to the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this quarterly report whether there were significant
changes in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of my most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: September 30, 2002 /s/ Michael F. Zerbib
---------------------------------
Michael F. Zerbib
President, CEO, Treasurer and CFO
(principal executive officer and
principal financial officer)
16