SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
/x/ Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Fiscal Year Ended June 30, 1998
/ / Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Commission File Number 000-24197
DelSoft Consulting, Inc.
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(Name of Small Business Issuer in its Charter)
Georgia 75-2719614
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
106 Bombay Lane, Roswell, Georgia 30076
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (770) 518-4289
Securities registered pursuant to Section 12(g) of the Act: Common
Stock, no par value per share
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act during the
past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes / / No /x/
Check if disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-KSB or any amendment to this Form 10-KSB. /X/
State issuer's revenues for its most recent fiscal year. $11,020,278.
State the aggregate market value of the voting stock held by non-
affiliates computed by reference to the price at which the stock was
sold, or the average bid and asked prices of such stock as of a
specified date within the past 60 days: As of December 23, 1998 there
were 1,165,895 shares of Common Stock outstanding held by non-
affiliates of the issuer, with an aggregate value of $1,130,918
(based upon a value of $0.97 per share, the average bid and asked
price of the Common Stock on December 23, 1998)
At December 23, 1998, there were issued and outstanding
11,259,149 shares of Common Stock.
Transitional Small Business Disclosure Format (check one):
Yes / / No /x/
1
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DOCUMENTS INCORPORATED BY REFERENCE
None.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
CERTAIN FACTORS AFFECTING FORWARD LOOKING STATEMENTS
In addition to statements of historical fact, this Annual Report
on Form 10-KSB contains forward-looking statements. The presentation
of future aspects of the Company found in these statements is subject
to a number of risks and uncertainties that could cause actual results
to differ materially from those reflected in such statements. Some of
these risks might include, but are not limited to, those discussed in
the "Competition" section below. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. Without limiting
the generality of the foregoing, words such as "may", "will",
"expect", "believe", "anticipate", "intend", or "could" or the
negative variations thereof or comparable terminology are intended to
identify forward-looking statements. The Company undertakes no
obligation to publicly revise these forward-looking statements to
reflect events or circumstances that arise after the date hereof.
Readers should carefully review the factors described in other
documents the Company files from time to time with the Securities and
Exchange Commission, including the Quarterly Reports on Form 10-QSB to
be filed by the Company in 1998 and any Current Reports on Form 8-K
filed by the Company.
OVERVIEW
DelSoft Consulting, Inc. ("DelSoft" or the "Company") was founded
in July 1996 as a professional services staffing firm, and has, over
the past 27 months, developed its technological and managerial
infrastructure to offer its clients value added services, including
professional services staffing, solutions and services for the Year
2000 problem and application maintenance outsourcing (collectively
referred to as "solutions"). The Company markets solutions to both
existing and potential clients with the objective of becoming one of
such client's preferred providers of comprehensive information
technology ("IT") services and solutions. With the trend in the
commercial market moving toward fully integrated information systems
solutions, the Company offers its clients a broad range of business
and technical services as a service outsourcer and systems integrator
capable of providing complex tool solutions. This total solutions
approach includes proprietary software and tools, proven processes and
methodologies, tested project management practices and resources
management and procurement programs. The Company is headquartered in
the Metropolitan Atlanta area with satellite offices in Ottawa,
Canada, Indianapolis, Indiana and Detroit, Michigan. It also has
human resources officers stationed in Bangalore and Madras, India who
are actively recruiting IT professionals.
BACKGROUND
The Company was incorporated in Georgia on July 1, 1996. In its
first two years, the Company has applied a significant amount of its
funds and resources towards the creation of the kind of infrastructure
it believes will be needed to grow its business. This included the
hiring of personnel, development of new services, establishment of an
overseas recruitment division, and opening of satellite offices.
2<PAGE>
On December 12, 1996, DelSoft merged with Pyke Corp., a Delaware
corporation and publicly traded shell company ("Pyke") with the
Company as the surviving entity. Pyke's 418 shareholders received one
share of DelSoft Common Stock for every six shares of Pyke common
stock they held. The Company issued 1,713,316 shares in the merger,
or approximately 17% of DelSoft's outstanding Common Stock on a post-
merger, fully diluted basis. The primary purpose of the merger was to
increase the Company's shareholder base to help support an eventual
trading market in the stock to make the securities more attractive and
thereby facilitate the company's future efforts to raise equity
capital.
At the time of the merger, Pyke had a cash balance of $10,279 and
no other assets or liabilities. Pyke had no operations prior to the
effective date of the merger, and there was no market for the shares,
so the shares issued by the Company in the merger were valued at
Pyke's net asset value of $10,279.
SERVICES
DelSoft provides its clients with a one-stop shop for a broad
range of IT applications solutions and services. Historically, the
substantial majority of the Company's projects have been client-
managed. On client-managed projects, DelSoft provides professional
services as a member of the project team on a time-and-materials
basis. On DelSoft-managed projects, DelSoft takes complete
responsibility for project management and bills the client on either a
time-and materials or fixed-price basis. The Company is seeking to
shift a larger portion of its business to DelSoft-managed projects,
which generally carry higher profit margins.
The solutions and services offered by the Company include the
following:
(a) Professional Services Staffing: Providing highly-skilled
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software professionals to augment the internal information management
staffs of major corporations remains the Company's primary business.
The Company supplies clients' staffing needs from among its diverse
supply of software professionals. The Company is committed to
expanding its professional services staffing operations in conjunction
with its solutions business in both the mainframe and client/server
development environments.
(b) Services and Solutions for the Year 2000 Problem: The
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Company offers the NYE 2000(TM) proprietary software toolset. The NYE
2000 software tool may be used to analyze and convert Natural(TM)
source code to be Year 2000 compliant, and is expected to allow the
Company to perform Year 2000 projects more efficiently. The NYE 2000
software tool allows a user to choose between full field expansion,
windowing, or a combination of both. Customers may license the
toolset and use it in their environment, or the Company will provide
the toolset in conjunction with its delivery of proven methodologies,
experienced project management, and skilled resources with significant
Year 2000 project experience.
(c) Application Maintenance Outsourcing: Spurred by global
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competition and rapid technological change, large companies, in
particular, are downsizing and turning to outside service providers to
perform their IT functions. The reasons for such outsourcing range
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from cost reduction to capital asset improvement and from improved
technology introduction to better strategic focus. In response to
this trend, the Company, has at its disposal a complete staff that
includes experienced project managers, technicians and operators.
These professionals provide essential data functions including,
applications development, systems maintenance, data network
management, voice network administration and help desk operations.
SALES AND MARKETING
DelSoft sells its services to large organizations through a
direct sales force. The Company is also aggressively pursuing
preferred vendor arrangements with large organizations. As a
preferred vendor, the Company would be one of a limited number of
service providers to a particular client, thus enabling it to sell its
services more effectively. These contracts generally result in lower
margins due to negotiated discounts, but are expected to generate
higher and more steady revenues.
CLIENTS
The Company provides its services and solutions primarily to
Fortune 1,000 companies with significant IT budgets and recurring
staffing or software development needs. Substantially all of the
Company's clients are large companies, major systems integrators or
governmental agencies. The Company's strategy is to maximize its
client retention rate and secure follow-on engagements by providing
high quality services and client responsiveness.
Two-thirds of the Company's net revenues for fiscal year 1998
were derived from only two clients: USA Group and Ernst & Young LLP.
The Company's relationship with USA Group is long-standing. Although
the parties could terminate the arrangement at any time, the current
project has been renewed through September 1999. Significant effort
has already been invested in this project and the Company believes it
unlikely that its current project with USA Group would be abruptly
terminated. Although Ernst & Young is a major client, the nature of
the relationship is that the Company works with Ernst & Young on
projects for their clients.
Most of the Company's projects, including those with its two
major clients, are terminable by the client at any time without
penalty. The loss of any significant client and/or project could have
a material adverse effect on the Company's business, operating results
and financial condition.
COMPETITION
The IT services industry is highly competitive and is served by
numerous national, regional and local firms, all of which are either
existing or potential competitors of the Company. Currently, the
Company's primary competitors include participants from a variety of
market segments, including "Big Five" accounting firms, service
departments of computer hardware and software companies, general
management consulting firms, programming companies and temporary
staffing firms. Many of these competitors have substantially greater
financial, technical and marketing resources and greater name
recognition than the Company. In addition, the Company's clients may
elect to increase their internal IT resources to satisfy their
solutions needs. The Company believes that the principal competitive
factors in the IT services industry include the range of services
5<PAGE>
offered, technical expertise, responsiveness to client needs, speed in
delivering IT solutions, quality of service and perceived value. The
Company believes that the range of services and solutions that it
offers combined with its diverse pool of labor resources gives the
Company a competitive advantage in the IT marketplace.
INTELLECTUAL PROPERTY RIGHTS
The Company relies upon a combination of nondisclosure and other
contractual arrangements and trade secret, copyright and trademark
laws to protect its proprietary rights and the proprietary rights of
third parties from whom the Company licenses intellectual property.
The Company enters into confidentiality agreements with its
employees and limits distribution of proprietary information. There
can be no assurance that the steps taken by the Company in this regard
will be adequate to deter misappropriation of proprietary information
or that the Company will be able to detect unauthorized use and take
appropriate steps to enforce its intellectual property rights. The
intellectual property rights to the software developed by the Company
in connection with a client engagement is typically assigned to the
client.
Although the Company's intellectual property has never been the
subject of an infringement claim, there can be no assurance that third
parties will not assert infringement claims against the Company in the
future, that assertion of such claims will not result in litigation or
that the Company would prevail in such litigation or be able to obtain
a license for the use of any infringed intellectual property from a
third party on commercially reasonable terms. Furthermore,
litigation, regardless of its outcome, could result in substantial
costs to, and diversion of effort by, the Company. Any infringement
claim or litigation against the Company could, therefore, materially
and adversely affect the Company's business, operating results and
financial condition.
HUMAN RESOURCES
The Company's success depends in large part on its ability to
attract, develop, motivate and retain highly skilled IT professionals.
The Company's human resources department is dedicated full-time to
recruiting IT professionals and managing its human resources. The
Company recruits in a number of countries and regions, including the
United States, India, Canada, South America, Central America, Mexico,
and the Philippines. The Company also advertises in various
newspapers. In addition, the Company's employees are a valuable
recruiting tool and are actively involved in referring new employees
and screening candidates for new positions. DelSoft uses a
standardized global selection process which includes interviews, tests
and reference checks.
The Company has a focused retention strategy that includes career
planning, training and benefits. The Company's comprehensive benefits
package includes Company-paid health insurance, a 401(k) plan, dental
insurance, and green card processing. The Company uses stock options
as part of its recruitment and retention strategy.
DelSoft employs 63 full-time employees, consisting of 43
technical consultants, 7 employees in marketing and sales and 7
6<PAGE>
employees in administration and support. DelSoft also has contracts
with 6 independent consultants. DelSoft's IT professionals typically
have Master's or Bachelor's degrees in Computer Science or another
technical discipline and two to ten years of IT experience. In
addition, the Company uses independent contractors to staff client
engagements.
On April 13, 1998, the Company acquired the client database of an
IT recruiting company based in Detroit, Michigan. The Company has
maintained an ongoing relationship with this IT recruiting company
since 1996, and it has assisted the Company in finding and placing IT
professionals in the past. Management believes that the newly
acquired client database will reduce the costs of hiring its IT
professionals.
GOVERNMENTAL REGULATION OF IMMIGRATION
The Company's solutions and services are not currently subject to
direct regulation by any government or law other than regulations
applicable to businesses generally.
Some of DelSoft's consultants are citizens of other countries,
most of whom are working in the United States under H1-B temporary
visas. The H1-B visa, which is issued subject to approval by the
Immigration and Naturalization Service, allows companies that can
prove that they need workers with certain skills Americans cannot
provide to hire foreign nationals for such jobs for up to six years.
Under current law, there is a statutory limit of 65,000 new H1-B visas
that may be issued in any government fiscal year. For the federal
fiscal year ending September 30, 1998, this limit was reached in May.
The statutory limit will be increased to 115,000 new H1-B visas for
fiscal year 1999 and 2000, and 107,500 for fiscal year 2001. The
statutory limit will return to 65,000 in fiscal year 2002, beginning
October 1, 2001. In years in which this limit is reached, the Company
may be unable to obtain enough H1-B visas to bring sufficient foreign
employees to the U.S. Moreover, the Company may have to replace
existing employees whose H1-B visas expire at the end of their six
year term with new employees, some of whom may also require visas. If
the Company were unable to obtain H1-B visas for its employees in
sufficient quantities or at a sufficient rate for a significant period
of time, the Company's business, operating results and financial
condition could be materially adversely affected.
Furthermore, Congress and administrative agencies with
jurisdiction over immigration matters have periodically expressed
concerns over the levels of legal and illegal immigration into the
U.S. These concerns have often resulted in proposed legislation,
rules and regulations aimed at reducing the number of employment-based
visas and permanent residency visas that may be issued. Any changes
in such laws making it more difficult to hire foreign nationals or
limiting the ability of the Company to retain foreign employees, could
require the Company to incur additional unexpected labor costs and
expenses or result in the Company having insufficient qualified
personnel to perform all of the engagements under which the Company is
obligated or that might otherwise be available to the Company. Any
such restrictions or limitations on the Company's hiring practices
could have a material adverse effect on the Company's business,
operating results and financial condition.
7<PAGE>
The Company spent approximately $113,072 on obtaining 47 visas
for the fiscal year ended June 30, 1998. Because some of its
employees hold visas, the Company is obligated to maintain certain
public access files. The cost of that effort is included in the
amount disclosed above.
ITEM 2. DESCRIPTION OF PROPERTY.
DelSoft's principal office is located at 106 Bombay Lane,
Roswell, Georgia 30076. The office, which is approximately 2300
square feet, is leased pursuant to a lease which expires in May 2000.
DelSoft's current location is adequate for its projected needs, and
the Company does not believe it will have difficulty obtaining
additional space as needed. DelSoft has a second office located at
1980 E. 116th Street, Suite 317, Carmel, Indiana. The office, which
is approximately 1,618 square feet, is leased pursuant to a lease
which expires in December 1999. The office is adequate for its
projected needs, and the Company does not believe it will have
difficulty obtaining additional space as needed. The Company has
recently opened two additional sales offices, located at 6111 Jackson
Road, Suite 105, Ann Arbor, Michigan, and 440 Laurier Avenue West,
Suite 200, Ottawa, Ontario, Canada K1R7X6, respectively. These sales
offices, which are each approximately 150 square feet, are leased
pursuant to leases which expire in November 1999 and December 1998,
respectively. Both of these sales offices are adequate for the
Company's projected needs, and the Company does not believe it will
have difficulty in obtaining additional space as needed.
The monthly rent on each of the offices is as follows:
Roswell, Georgia $2,650
Carmel, Indiana $1,867
Ottawa, Canada $ 552*
Detroit, Michigan $ 300
*Based on exchange rate on November 19, 1998. Actual rate is in
Canadian dollars at CAN$856.
The Company maintains a Commercial Business Package (Property)
insurance policy on the Roswell, Georgia and Carmel, Indiana offices.
The policy coverage total on contents is approximately $164,000. The
liability coverage is $2,000,000 on these two locations. The Company
does not maintain insurance on the Ottawa and Detroit offices because
the contents of these two offices is negligible, and they are not used
for meeting with customers.
ITEM 3. LEGAL PROCEEDINGS.
An action entitled HAS, INC. V. BRIDGTON, INC., ET. AL., Civil
Action No. IP98-0167 C was filed on February 6, 1998 in the United
States District Court for the Southern District of Indiana,
Indianapolis Division. The plaintiffs named the Company as a co-
defendant. The plaintiff alleges that the Company tortiously
interfered with the plaintiff's contracts with Bridgton, causing
Bridgton to breach such contracts, and that the Company tortiously
interfered with the plaintiff's business relationship with one of
plaintiff's clients by placing computer consultants with the
plaintiff's clients. The complaint seeks compensatory and punitive
damages and other relief. The Company believes such claim is baseless
and intends to defend itself vigorously.
8<PAGE>
The Company is, from time to time, a party to litigation arising
in the normal course of its business. Management believes that none
of these actions, individually or in the aggregate, will have a
material adverse effect on the financial position or results of
operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No meeting of shareholders was held during the fourth quarter of fiscal
year 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The Common Stock is traded in the over-the-counter market and
quoted under the symbol "DSFT." The following table sets forth, for
the periods indicated, the high and low bid information for the Common
Stock. As of December 23, 1998, approximately 11,259,149 shares of
Common Stock were issued and outstanding, and there were 398 holders
of record for such shares.
Price Range
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High Low
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YEAR ENDED JUNE 30, 1998
Fourth Quarter 2.33 1.27
Third Quarter 2.25 1.50
Second Quarter 10.375 6.25
First Quarter 10.875 5.34
The high and low bid information provided above are those
reported by the Nasdaq Stock Market OTC Bulletin Board. The
quotations reflect inter-dealer prices, without retail markup,
markdown or commission and may not represent actual transactions.
The Company has not declared or paid any cash dividends since its
organization. The credit facility with Emergent Financial Group
prohibits the Company from declaring or paying any cash or other
dividends or distributions on any of its corporate stock (other than
stock dividends) while there is an outstanding balance.
RECENT SALES OF UNREGISTERED SECURITIES
The Company issued 375,000 shares of Common Stock to NYE 2000
Systems, Inc. as part of the consideration for the NYE 2000 software
tool and related rights purchased by the Company pursuant to a certain
Purchase Agreement, dated May 15, 1998. There were no underwriters
involved in the sale, and no commissions were paid in connection with
the sale. The sale was exempt from registration under Section 4(2) of
the Securities Act. NYE 2000 Systems, Inc. was a sophisticated
investor and had available to it a copy of the Company's filed Form
10-SB.
9<PAGE>
On May 22, 1998, the Company sold 533,333 newly issued shares of
Common Stock to Merchant Services Group, Inc. for $500,000 ($0.938 per
share). There were no underwriters involved in the sale, and no
commissions were paid in connection with the sale, although the Company
did pay a finder's fee of $45,000 in connection with the sale. The sale
was exempt from registration under Rule 504 promulgated under the
Securities Act.
On April 13, 1998, the Company issued 162,500 shares of Common
Stock in a restricted stock agreement with Randy Hitchcock in
connection with a purchase of certain assets of his business, American
Computer Company. The Company also paid $90,000 and issued to him
options to purchase 87,500 shares of Common Stock as part of the
consideration in that transaction. In connection with this
transaction, Mr. Hitchcock was provided access to the Company's
financial statements and business plans. Through a prior business
relationship with the Company, he was familiar with the Company's
business and customers. The Company believes Mr. Hitchcock was
adequately sophisticated to make an investment in the Company under
the exemption from registration provided under Section 4(2) of the
Securities Act.
In March 1998, the Company issued options to purchase up to
100,000 shares of Common Stock to Barry Kaplan Associates in
consideration of consulting services performed for the Company. The
Company believes the principals of Barry Kaplan Associates were
sophisticated investors, and they were provided with financial
statements of the Company, business summaries of the Company and a
copy of the Company's Rule 15c2-11 Disclosure Statement. The Company
is claiming an exemption from registration of the issuance of the
options under Section 4(2) of the Securities Act.
On November 25, 1997, the Company issued 100,000 shares of Common
Stock to Millennium Holdings Group, Inc. as consideration for certain
consulting services provided under a Consulting Agreement dated
October 22, 1997. There were no underwriters involved in the sale,
and no commissions were paid in connection with the sale. The Company
believes Millennium Holdings Group, Inc. was a sophisticated investor,
and the Company provided this investor with information about the
Company to the extent requested by the investor and as the Company
deemed adequate for an exemption from registration under Section 4(2)
of the Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing
elsewhere in this report.
OVERVIEW
DelSoft Consulting, Inc. is a professional services staffing firm
that was incorporated in Georgia on July 1, 1996. The Company offers
its clients value added services, including professional services
staffing, solutions and services for the Year 2000 problem, and
application maintenance outsourcing (collectively referred to as
"solutions"). DelSoft markets solutions to both existing and
potential clients with the objective of becoming one of such client's
preferred providers of comprehensive information technology ("IT")
services and solutions.
10<PAGE>
DelSoft's revenues are derived from fees paid by clients for
professional services. Historically, a substantial majority of the
Company's projects have been client-managed. On client-managed
projects, DelSoft provides professional services as a member of the
project team on a time-and-materials basis. The Company recognizes
revenues on such projects as the services are performed.
DelSoft's most significant cost item is its personnel expense,
which consists primarily of salaries and benefits for the Company's
billable personnel. The number of IT professionals assigned to
projects may vary depending on the size and duration of each
engagement. Moreover, project terminations and completion and
scheduling delays may result in short periods when personnel are not
assigned to active projects. DelSoft manages its personnel costs by
closely monitoring client needs and basing personnel increases on
specific project engagements. While the number of IT professionals
may be adjusted to reflect active projects, the Company continues to
process H1-B visas and maintain a database of available professionals
to respond to increased demand for the Company's services on both
existing projects and new engagements.
The Company provides its services and solutions primarily to
Fortune 1,000 companies with significant IT budgets and recurring
staffing or software development needs. Substantially all of the
Company's clients are large companies, major systems integrators or
governmental agencies.
During 1998, the Company redirected its focus to expanding its
professional services staffing operations through direct and/or end-
user client placements that generate higher revenues and higher gross
margins than subcontractor placements. As a result, DelSoft released
any consultants not meeting this general profile. In the first
quarter, this process continued. New placements during this period
will generate an average of approximately $220,000 in gross revenues
per placement (on an annualized basis) at an average gross margin of
approximately 44%. This compares to an average of approximately
$137,000 in gross revenues per placement (on an annualized basis) at
an average gross margin of approximately 37% during the three-month
period ending September 30, 1997.
RESULTS OF OPERATIONS FOR THE YEAR COMPARED TO THE YEAR ENDED JUNE 30,
1997
REVENUES: The Company's revenues increased approximately 80%,
from approximately $6.1 million in 1997 to approximately $11 million
in 1998. This growth in revenues was primarily attributable to
additional services provided to existing clients and engagements with
new clients. In addition, new placements in 1998 were at higher
billable rates as compared to the billable rates for the same period
last year.
DIRECT PROJECT COSTS. Direct project costs consist primarily of
salaries and employee benefits for billable IT professionals, as well
as the cost of the independent contractors used by the Company.
Direct project costs increased approximately 69%, from approximately
$4.8 million in 1997 to approximately $8.1 million in 1998. This
increase is primarily attributable to the Company's ability to attract
and retain its own qualified IT professionals while decreasing its
reliance on independent contractors. In addition, professional
salaries to attract and retain qualified IT professionals to staff
existing and additional projects are higher due to increased
competition in the marketplace.
11<PAGE>
NET REVENUE. Net revenue consists of revenues less direct
project costs. Net revenue increased approximately 123%, from
approximately $1.3 million in 1997 to approximately $2.9 million in
1998. This increase is attributable primarily to an increase in the
number of IT professionals utilized by the Company (including
independent contractors). In addition, billing rates increased at a
slightly higher level than professional salaries and engagements with
new clients were more profitable than those with existing clients.
The increase in net revenue was partially offset by higher personnel
expenses resulting from the hiring of additional professionals to
support the increase in client engagements.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses consist of costs associated with the Company's
sales and marketing efforts, executive management, finance and human
resource functions, facilities and telecommunications costs and other
general overhead expenses. Selling, general and administrative
expenses increased approximately 75%, from approximately $1.2 million
in 1997 to approximately $2.1 million in 1998. The increase in
selling, general, and administrative expenses is primarily
attributable to the Company's continued investment in infrastructure
and in the initiatives required to implement the Company's marketing
strategies. These costs include the development of additional
services offerings, the expansion of its recruiting capabilities, and
the opening of additional offices. Also, the Company has increased
professional and marketing expenses as a public company not previously
incurred as a private company.
NET INCOME (LOSS). The Company's net income for the year ended
June 30, 1998, increased approximately 305%, from approximately
$74,000 in 1997 to approximately $300,000 in 1998.
RECENT DEVELOPMENTS. During the first quarter of 1998, the
Company signed a letter of intent to acquire a computer-consulting
firm, providing a variety of computer programming services with an
emphasis on client-server ("Acquisition"). The target company, which
is headquartered in New York City, has approximately one hundred IT
professionals throughout the tri-state area and Europe. Management of
the target company estimates current revenues of approximately $9.6
million and current profits (prior to taxes, compensation and
distributions to shareholders and any resulting acquisition costs) of
approximately $1 million in 1998. The companies are in the process of
completing their respective due diligence. The terms of the
Acquisition, including the purchase price, have not been finalized.
The Acquisition will be paid for with a combination of cash and stock.
The target company has agreed to a payout over three years. In
addition, the purchase price is subject to reduction in the event the
revenues and/or profits of the target company decline.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its working capital
requirements through internally generated funds, the sale of shares of
its common stock, and proceeds from short-term bank borrowings.
During 1998, the Company received net proceeds of $705,000 from sales
of common stock.
The Company currently has a $1.25 million revolving credit
facility with Emergent Financial Group. The credit facility bears
interest at the higher of 1.5% over the prime rate or 7%. Borrowings
12<PAGE>
under the revolving credit facility are secured by substantially all
of the Company's assets. In addition, Jerry Rosemeyer, Benjamin
Giacchino, and Jeffrey A. Rinde each executed a limited personal
guaranty obligating each of them to pay the sum of $100,000 of the
Company's outstanding borrowings when due; provided, however, that if
an event of default and/or a default had not occurred as defined in
the Loan Documents dated February 18, 1997, between the Company and
Emergent Financial Group, the limited personal guaranty expire at the
end of six months from its execution. Accordingly, these guarantees
have expired. The facility contains certain restrictive covenants,
including, the maintenance of certain financial ratios and limitations
on payment of dividends and additional borrowings. As of September
30, 1998 and November 10, 1998, the Company had outstanding borrowings
of approximately $548,000 and $590,000, respectively.
Except for additional cash that may be required to close the
Acquisition, the Company currently anticipates existing sources of
liquidity and cash generated from operations are sufficient to satisfy
its cash needs through the next twelve months. To close the
Acquisition or in the future, the Company may seek to increase the
amount of its credit facilities, negotiate additional credit
facilities or issue corporate debt or equity securities. Any debt
incurred or issued by the Company may be secured or unsecured, fixed
or variable rate interest and may be subject to such terms as the
board of directors of the Company deem prudent. The Company expects
any proceeds from such additional credit or sales of securities to be
used primarily in the hiring of further IT professionals and/or the
acquisition of other consulting companies.
The Company does not believe that its business is subject to
seasonal trends.
The Company does not believe that inflation had a significant
impact on the Company's results of operations for the periods
presented. On an ongoing basis, the Company attempts to minimize any
effects of inflation on its operating results by controlling operating
costs, and, whenever possible, seeking to insure that billing rates
reflect increases in costs due to inflation.
YEAR 2000
The "Year 2000" issue concerns the potential exposures related to
the automated generation of business and financial misinformation
resulting from the use of computer programs which have been written
using two digits, rather than four, to define the applicable year of
business transactions. The Company has evaluated, and is continuing
to evaluate, the potential cost associated with becoming Year 2000
compliant. The Company believes that the principal staffing and
financial systems it intends on using as of January 1, 1999, which are
licensed from and maintained by third-party software development
companies, are Year 2000 compliant. Management does not anticipate
that the remaining costs associated with assuring that its internal
systems will be Year 2000 compliant will be material to its business,
operations or financial condition.
The Company intends on conducting a risk evaluation and
assessment study to determine the preparedness level of customers,
vendors, and other service providers for the Year 2000 and the subsequent
impact on the Company. The Company will take such actions as management
deems appropriate based on the results of the review. The Company expects
to incur only minimal internal staff costs and other miscellaneous
expenses related to the risk evaluation and assessment project.
13<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
The Financial Statements required by this item are attached
hereto on pages F1 - F20.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Effective as of December 31, 1997, the Company's board of
directors dismissed Allen P. Fields, CPA and appointed J.H. Cohn LLP
as the Company's independent public accountants. The report of Allen
P. Fields, CPA on the Company's financial statements as of June 30,
1997 did not contain an adverse opinion or disclaimer of opinion and
was not modified as to uncertainty, audit scope or accounting
principles. In connection with the audit for the period from July 31,
1996 (date of inception) to June 30, 1997 and through December 31,
1997, there were no disagreements with Allen P. Fields, CPA on any
matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure at the time of the change of
independent public accountants or with respect to the Company's
financial statements. Prior to retaining J.H. Cohn LLP, the Company
had not consulted J.H. Cohn LLP regarding the application of
accounting principles or the type of audit opinion that might be
rendered on the Company's financial statements.
14<PAGE>
PART III
ITEM 9. DIRECTORS, OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the directors and executive officers of the
Company:
<TABLE>
<CAPTION>
Name (Age) Position(s) Business Experience During the Past Five Years
---------- ----------- ----------------------------------------------
<S> <S> <C>
Michael Osso (37) President and Director Mr. Osso has served as President of
DelSoft since September 1997 and as a Director
since November 1997. Prior to his employment
with DelSoft, Mr. Osso was employed by Bridgton
Consulting, Inc. ("Bridgton"), an IT services
provider similar to the Company, as a
Consultant from November 1993 to August 1997,
by TTI Technologies, a computer consulting
company, as a Software Engineer from July 1993
to November 1993, and by Long Island Savings
Bank as a Systems Analyst from November 1988 to
June 1993.
Adil Choksey (34) Vice President Mr. Choksey has served as Vice President
of DelSoft since November 1996. Prior to his
employment with DelSoft, Mr. Choksey was
employed by Bridgton as Vice President of Sales
from November 1995 to October 9 1996, by
Beechwood Computing Limited, a software
consulting firm, as Vice President of Sales
from July 1994 to October 1995, and by Pertech
Computers Ltd., a hardware/software sales
company, as a Regional Sales Manager from July
1990 to June 1994.
Jeffrey A. Rinde (31) Chief Financial Officer, General Mr. Rinde has served as Chief Financial
Counsel, Secretary, and Director Officer and General Counsel of DelSoft since
January 1997, as its Secretary since July 1997
and as a Director since November 1997. He has
also been a member of Briskin & Rinde, L.C., a
general civil litigation firm with an emphasis
on commercial transactions and litigation,
since May 1995. Prior to his membership in
Briskin & Rinde, L.C., Mr. Rinde was employed
by Chapman & Fennell, a general practice law
firm, from April 1993 to November 1994. During
the period from November 1994 through May 1995,
Mr. Rinde relocated from New York to Georgia
and obtained a license to practice law in the
State of Georgia. From May 1992 to April 1993,
Mr. Rinde was General Counsel for Willow
Peripherals, a computer company.
15
<PAGE>
Ben J. Giacchino (43) Director Mr. Giacchino has served as a Director of
DelSoft since July 1996. He also served as
Chief Operating Officer and Secretary of the
Company from July 1996 to July 1997. Prior to
his employment with DelSoft, Mr. Giacchino was
employed with Bridgton as Vice President from
January 1994 to July 1996 and as a Director
since January 1994, and with Greenway Capital
Corp., a stock brokerage firm, as a stock
broker from August 1991 to December 1993. Mr.
Giacchino has 15 years experience as a manager
at various levels in the investment banking and
brokerage industry.
</TABLE>
Directors serve from the time they are elected or appointed until the
next annual meeting of shareholders or until their successors are
elected.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16(a) of the Securities Exchange Act of 1934,
each executive officer, director and beneficial owner of 10% or more
of the Company's Common Stock is required to file certain forms with
the Securities and Exchange Commission. A report of beneficial
ownership of the Company's Common Stock on Form 3 is due at the time
such person becomes subject to the reporting requirement and a report
on Form 4 or 5 must be filed to reflect changes in beneficial
ownership occurring thereafter. During the fiscal year ended June 30,
1998, Section 16 reporting was not applicable to any executive
officer, director or beneficial owner.
ITEM 10. EXECUTIVE COMPENSATION.
Management Compensation
The following table sets forth certain information regarding the
annual compensation for services to the Company for the fiscal year
ended June 30, 1998 with respect to the Company's Chief Executive
Officer and all other executive officers as of June 30, 1998 who
earned more than $100,000 in salary and bonus during such fiscal year
(the "Named Executive Officers"):
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term
Compensation and
Awards
--------------------------------------- ----------------
Name and Principal Position Year Salary Bonus Options
- ------------------------------------------------------------------------ ----------------
<S> <C> <C> <C> <C>
Jerry Rosemeyer 1998<F1> $ 26,666 $ 0 --
President and Chief
Executive Officer
Michael Osso 1998<F2> $147,796 $ 0 2,525,000
President
Adil Choksey 1998 $110,002 $ 5,000 --
Vice President
Jeffrey A. Rinde 1998 $142,723 $0 100,000
Chief Financial Officer
16<PAGE>
<FN>
<F1> Mr. Rosemeyer served in these positions in fiscal year 1998 only
through August 31, 1997.
<F2> Mr. Osso became president of the Company September 1, 1997.
</FN>
</TABLE>
The following table contains certain information concerning the
options granted to the Named Executive Officers during the fiscal year
ended June 30, 1998.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
Number of Percent of
Securities Total Options
Underlying Granted to
Options Granted Employees in Exercise or
Name Fiscal Year Base Price Expiration Date
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael Osso
President 125,000 3.5% $2.00 September 1, 2007
2,400,000 67.4% $0.50 January 31, 2008
Jeffrey A. Rinde
Chief Financial Officer 100,000 2.8% $0.50 January 31, 2008
</TABLE>
The following table sets forth certain information concerning the
exercise of stock options during the fiscal year ended June 30, 1998
by each Named Executive Officer and the value at fiscal year end of
unexercised options held by the Named Executive Officers.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Number of
Securities
Underlying Value of Unexercised
Shares Unexercised In-The-Money Options
Acquired Options at FY-End at FY-End
on Exercisable / Exercisable /
Name Exercise Value Realized Unexercisable Unexercisable*
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jerry Rosemeyer
Chief Executive Officer 0 -- 50,000/75,000 $12,500/$18,750
Michael Osso
President 0 -- 2,400,000/125,000 $4,200,000/$31,250
Jeffrey A. Rinde
Chief Financial Officer 0 -- 200,000/150,000 $200,000/$37,500
* Based on the closing sale price of Common Stock reported by the
Nasdaq Stock Market OTC Bulletin Board as of June 30, 1998, which
was $2.25 per share, less exercise price payable by optionees.
</TABLE>
17<PAGE>
STOCK OPTION AND INCENTIVE PLANS
In December 1997, the Company adopted the DelSoft Consulting,
Inc. Stock Option Plan (the "Stock Option Plan") to provide key
employees, officers and directors an opportunity to own Common Stock
of the Company and to provide incentives for such persons to promote
the financial success of the Company. Pursuant to the Stock Option
Plan, the Board of Directors of the Company is authorized to grant to
its key executives, other members of management and directors
incentive and/or nonincentive stock options for the purchase of up to
2,000,000 shares of the Company's common stock. Under the Stock
Option Plan, the exercise price of all options must be at least 100%
of the fair market value of the common stock on the date of grant (the
exercise price of an incentive stock option for an optionee that holds
more than ten percent of the combined voting power of all classes of
stock of the Company must be at least 110% of the fair market value on
the date of grant). The maximum term of an option may not exceed ten
years.
In July 1996, the Company adopted the Executive Incentive
Compensation Plan (the "Incentive Plan") that was administered by the
Company's Board of Directors. Under the terms of the Incentive Plan,
a participant earned incentive compensation, which was payable in cash
and/or common stock of the Company, based on a formula that took into
consideration the percentage increase in the Company's billable hours,
gross revenues and profitability over the corresponding amounts in the
preceding fiscal year. Incentive compensation was limited to 80% of a
participant's base salary for the year. The Incentive Plan was
rescinded on July 1, 1997, because the Board of Directors decided that
the plan placed an undue financial strain on the Company.
EMPLOYMENT AGREEMENTS
The Company has entered into an Employment Agreement with Mr.
Osso, dated August 5, 1997, pursuant to which Mr. Osso agreed to serve
as President of the Company for a term of four years commencing on
September 1, 1997, and for additional one year terms unless the
Company elects not to extend the term. In consideration for his
services as President, Mr. Osso will receive on an annual basis, (i) a
base salary of not less than $130,000, subject to an annual increase
of 5%, (ii) options to purchase 25,000 shares of the Company's Common
Stock at a price equal to the fair market value of the Common Stock on
the date such options are granted, and (iii) a bonus for any month in
which the Company bills 15,000 hours or more. The Employment
Agreement contains covenants against competition, solicitation and a
confidentiality agreement. On April 1, 1998, Mr. Osso's base salary
was increased to $200,000.
The Company has entered into an Employment Agreement with Mr.
Choksey, dated July 1, 1996, pursuant to which Mr. Choksey agreed to
serve as Vice President of Sales of the Company for a term of five
years commencing on July 1, 1996, and for additional one year terms
unless the Company elects not to extend the term. In consideration
for his services as Vice President, Mr. Choksey will receive, (i) a
base salary of not less than $95,000 per year ($65,000 for 1996),
subject to an annual increase of 5%, and (ii) a bonus for any month in
which the Company bills 15,000 hours or more. The Employment
Agreement contains covenants against competition and solicitation and
a confidentiality agreement.
18<PAGE>
The Company has entered into an Employment Agreement with Mr.
Rinde, dated July 1, 1996, pursuant to which Mr. Rinde agreed to serve
as General Counsel and Chief Financial Officer of the Company for a
term of five years commencing on January 1, 1997, and for additional
one year terms unless the Company elects not to so extend the term.
In consideration for his services as General Counsel and Chief
Financial Officer, Mr. Rinde will receive on an annual basis, (i) a
base salary of $111,500, subject to an annual increase of 5%, (ii)
options to purchase 50,000 shares of the Company's Common Stock at a
price equal to the fair market value of the Common Stock on the date
of exercise, and (iii) a bonus for any month in which the Company
bills 15,000 hours or more. The Employment Agreement contains
covenants against competition and solicitation and a confidentiality
agreement. On November 1, 1998, Mr. Rinde's base salary was increased
to $181,000.
The Company has entered into a Consulting Agreement with Mr.
Rosemeyer, dated September 1, 1997. Under the agreement, the Company
has agreed to pay Mr. Rosemeyer (i) $288,000 over a period of 24
months in consecutive equal monthly installments of $12,000, (ii) any
amount due and owing as of June 30, 1997 pursuant to the Company's
Executive Incentive Compensation Program, and (iii) a commission in
the amount equal to 10% of the gross sales price for any sale of the
Company's hyperdate methodology made by Mr. Rosemeyer on behalf of the
Company. The Company also agreed to grant to Mr. Rosemeyer, on an
annual basis for a period of four years, an option to purchase 25,000
shares of Common Stock in accordance with the Company's Stock Option
Plan. In consideration for the payments and options, Mr. Rosemeyer
agreed to provide up to 10 hours of services per week during the term
of the Agreement. The Consulting Agreement contains covenants against
competition and solicitation and a confidentiality agreement. Mr.
Rosemeyer was employed by Bridgton, which engages in a business
similar to the Company's, at the time the Consulting Agreement was
entered into. The Company has consented to, and has waived its rights
under the covenant against competition with respect to such
employment.
The Company has entered into a Consulting Agreement with Mr.
Giacchino, dated June 18, 1997. Under the agreement, the Company
agreed to pay Mr. Giacchino (i) $80,000 in 16 equal installments in
accordance with the Company's normal payroll practices and (ii) any
commissions and amounts payable pursuant to the Company Executive
Incentive Compensation Program due and owing as of June 1997. The
Company also agreed to grant to Mr. Giacchino, on an annual basis for
a period of four years, an option to purchase 25,000 shares of Common
Stock in accordance with the Company's Stock Option Plan. In
consideration for the payments and options, Mr. Giacchino agreed to
provide up to 10 hours of services per week during the term of the
Agreement. The Consulting Agreement contains covenants against
competition and solicitation, and a confidentiality agreement. Mr.
Giacchino was employed by Bridgton, which engaged in a business
similar to the Company's, at the time the Consulting Agreement was
entered into. The Company has consented to, and has waived its rights
under the covenant against competition with respect to such
employment. On October 1, 1997, Mr. Giacchino rejoined the Company as
a full-time employee, and he no longer receives payments under the
consulting agreement.
19
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The Company is authorized to issue 100,000,000 shares of Common
Stock, of which 11,259,149 shares were issued and outstanding on
December 23, 1998. As of December 23, 1998, there were 398
shareholders of record.
The following table sets forth certain information regarding the
beneficial ownership of the shares of Common Stock as of December 23,
1998, by (i) each person who is known by the Company to be the
beneficial owner of more than five percent (5%) of the issued and
outstanding shares of Common Stock, (ii) each of the Company's
directors and executive officers and (iii) all directors and executive
officers as a group:
<TABLE>
<CAPTION>
Shares Beneficially Percent of Shares
Beneficial Owner* Owned Outstanding**
- --------------------------------------------------------------------------------------
<S> <C> <C>
Ben J. Giacchino 2,681,767<F1> 23.71%
Jerry Rosemeyer 2,683,650<F1> 23.73%
Jeffrey A. Rinde 2,302,837<F2> 20.10%
Michael Osso 2,425,000<F3> 15.05%
Adil Choksey 0 --
All Directors and Executive Officers
as a Group (5 persons) 10,093,254 72.18%
____________________
* Unless otherwise indicated, the beneficial owner's address is the
same as the Company's principal office.
** Percentages calculated on the basis of the amount of outstanding
shares plus, for each person, any shares that person has the
right to acquire within 60 days pursuant to options or other
rights.
<FN>
<F1> Includes 50,000 shares subject to stock options which are
currently exercisable.
<F2> Includes 200,000 shares subject to stock options which are
currently exercisable.
<F3> Consists of 2,425,000 shares subject to stock options which are
currently exercisable.
</FN>
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Jerry Rosemeyer and Ben Giacchino, who together own approximately
48% of the issued and outstanding Common Stock, are officers,
directors and controlling shareholders of Bridgton. Bridgton ceased
further business operations in February 1998. While it was in
business, Bridgton and the Company occupied the same office
facilities, and Bridgton was in the same business as the Company and
dealt with many of the same customers and vendors. Michael Osso and
Adil Choksey were also previously employed by Bridgton.
20<PAGE>
During fiscal year 1998 , the Company billed Bridgton a total
of $211,000 for the services of its programmers and engineers and
realized a gross profit of approximately $38,000; and Bridgton billed
the Company approximately $322,000 for the services of its programmers
and engineers and, based on information provided by the management of
Bridgton, realized a gross profit of approximately $75,000. Bridgton
also billed the Company approximately $50,000 for reimbursement of
overhead expenses during fiscal year 1998.
ITEM 13. EXHIBITS, LIST, AND REPORTS ON FORM 8-K.
a) Exhibits. The exhibits filed as part of this Annual report on
--------
Form 10-KSB are as listed below. All exhibits are incorporated by
reference to the indicated exhibit to the Company's registration of
its Common Stock on Form 10-SB, as amended.
Exhibit No. Description
----------- -----------
[C] [S]
2 Agreement and Plan of Merger, dated November 13,
1996, by and between the Company and Pike Corp.
(Exhibit 2 to Form 10-SB)
3.1 Articles of Incorporation (Exhibit 3.1 to Form
10-SB)
3.2 Bylaws (Exhibit 3.2 to Form 10-SB)
4 Form of Common Stock Certificate of Company
(Exhibit 4 to Form 10-SB)
10.1 Lease Agreement, dated December 20, 1996, by and
between the Company and VPB Realty (Exhibit
10.1 to Form 10-SB)
10.2 Subcontractor Agreement, dated July 1, 1996, by
and between the Company and Bridgton, Inc.
(Exhibit 10.2 to Form 10-SB)
10.3 Loan and Security Agreement, dated February 18,
1997, by and between the Company and Emergent
Financial Corp. (Exhibit 10.3 to Form 10-SB)
10.4 Employment Agreement, dated August 5, 1997, by
and between the Company and Michael Osso
(Exhibit 10.4 to Form 10-SB)
10.5 Employment Agreement, dated July 1, 1996, by and
between the Company and Adil Choksey (Exhibit
10.5 to Form 10-SB)
10.6 Employment Agreement, dated July 1, 1996, by and
between the Company and Jeffrey A. Rinde
(Exhibit 10.6 to Form 10-SB)
21
<PAGE>
10.7 Consulting Agreement, dated September 1, 1997,
by and between the Company and Jerry Rosemeyer
(Exhibit 10.7 to Form 10-SB)
10.8 Consulting Agreement, dated June 18, 1997, by
and between the Company and Benjamin J.
Giacchino (Exhibit 10.8 to Form 10-SB)
10.9 Delsoft Consulting, Inc. Stock Option Plan
(Exhibit 10.9 to Form 10-SB)
10.10 Consulting Agreement, dated October 22, 1997, by
and between the Company and Millennium Holdings
Group, Inc. (Exhibit 10.10 to Form 10-SB)
10.11 Amendments to Loan and Security Agreement, dated
April 22, 1997, July 8, 1997 and August 29,
1997, by and between the Company and Emergent
Financial Corp. (Exhibit 10.11 to Form 10-SB)
10.12 Guaranty of Validity, executed by Messrs. Ben J.
Giacchino, Jerry Rosemeyer and Jeffrey A. Rinde
in favor of Emergent Financial Corporation on
February 18, 1997 (Exhibit 10.12 to Form 10-
SB)
10.13 Guaranty, executed by Messrs. Ben J. Giacchino,
Jerry Rosemeyer and Jeffrey A. Rinde in favor
of Emergent Financial Corporation on February
18, 1997 (Exhibit 10.13 to Form 10-SB)
16.1 Letter from Allen P. Fields, dated November 21,
1998, on change in certifying accountant
(Exhibit 16.1 to Form 10-SB)
b) Reports on Form 8-K. No reports on Form 8-K were filed during
the last quarter of the period covered by this report.
22
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Company duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DELSOFT CONSULTING, INC.
By: /s/ Michael Osso
Michael Osso
President
Date: January 15, 1999
In accordance with the Exchange Act, this Report has been signed
below by the following persons on behalf of the Company in the
capacities set forth and on the dates indicated.
Signature Position Date
/s/ Michael Osso President and Director Date: January 15, 1999
Michael Osso (principal executive officer)
/s/ Jeffrey A. Rinde Chief Financial Officer, General Date: January 15, 1999
Jeffrey A. Rinde Counsel, Secretary and Director
(principal financial and
accounting officer)
/s/ Ben J. Giacchino Director Date: January 15, 1999
Ben J. Giacchino
<PAGE>
DELSOFT CONSULTING, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS F-2/3
BALANCE SHEET
JUNE 30, 1998 F-4
STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1998 AND 1997 F-5
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998 AND 1997 F-6
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998 AND 1997 F-7
NOTES TO FINANCIAL STATEMENTS F-8/21
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors and Stockholders
Delsoft Consulting, Inc.
We have audited the accompanying balance sheet of Delsoft Consulting,
Inc. as of June 30, 1998, and the related statements of income,
stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Delsoft
Consulting, Inc. as of June 30, 1998, and its results of operations
and cash flows for the year then ended, in conformity with generally
accepted accounting principles.
J. H. COHN LLP
Roseland, New Jersey
August 5, 1998
F-2
<PAGE>
REPORT OF CERTIFIED PUBLIC ACCOUNTANT
To the Board of Directors and Stockholders
Delsoft Consulting, Inc.
I have audited the accompanying statements of income, stockholders' equity
and cash flows of Delsoft Consulting, Inc. for the year ended June 30, 1997.
These financial statements are the resonsibility of the Company's management.
My responsibility is to express an opinion on these financial statements based
on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards required that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principes used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. I believe that my audit provides a reasonable basis
for my opinion.
In my opinion, the financial statements referred to above presently fairly,
in all material respects, the results of operations and cash flows of Delsoft
Consulting, Inc. for the year ended June 30, 1997, in conformity with
generally accepted accounting principles.
Allen Field, CPA
Atlanta, Georgia
September 19, 1997
F-3
<PAGE>
<TABLE>
<CAPTION>
DELSOFT CONSULTING, INC.
Balance Sheet
June 30, 1998
ASSETS
------
<S> <C>
Current assets:
Cash and cash equivalents $ 313,451
Accounts receivable, net of allowance for doubtful accounts of $10,000 1,183,394
Deferred tax assets 13,000
Other current assets 20,556
-----------
Total current assets 1,530,401
Equipment and furnishings, net of accumulated depreciation of $47,829 232,296
Intangible assets, net of accumulated amortization of $53,556 1,397,168
Other assets 20,602
-----------
Total $ 3,180,467
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 38,134
Accounts payable 199,514
Accrued compensation and other liabilities 463,917
Income taxes payable 180,346
-----------
Total current liabilities 881,911
Long-term debt, net of current portion 85,014
Deferred tax liabilities 800
-----------
Total liabilities 967,725
-----------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value; 100,000,000 shares authorized;
11,159,149 shares issued and outstanding 2,775,652
Retained earnings 374,590
Unearned compensation (937,500)
-----------
Total stockholders' equity 2,212,742
-----------
Total $ 3,180,467
===========
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
DELSOFT CONSULTING, INC.
Statements Of Income
Years Ended June 30, 1998 and 1997
1998 1997
------------- ------------
<S> <C> <C>
Gross revenues $ 11,020,278 $ 6,124,133
Direct project costs 8,094,640 4,784,351
------------- ------------
Net revenues 2,925,638 1,339,782
------------- ------------
Expenses:
Selling, general and administrative expenses 2,074,441 1,188,416
Interest expense 137,147 15,684
Write-off of capitalized software development costs 135,963
------------- ------------
Totals 2,347,551 1,204,100
------------- ------------
Income before income taxes 578,087 135,682
Provision for income taxes 277,979 61,200
------------- ------------
Net income $ 300,108 $ 74,482
============= ============
Basic earnings per share $.03 $.01
==== ====
Basic weighted average common shares outstanding 10,146,767 10,013,316
========== ==========
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
DELSOFT CONSULTING, INC.
Statements of Stockholders' Equity
Years Ended June 30, 1998 and 1997
Common Stock
-------------------------
Stock Total
Number of Subscription Retained Unearned Stockholders'
Shares Amount Receivable Earnings Compensation Equity
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Initial issuance of 8,300,000 $ 498 $ 498
shares
Issuance of shares in
connection with
acquisition 1,713,316 10,279 10,279
Subscription for
purchase of 75,000
shares 250,000 $ (250,000)
Net income $ 74,482 74,482
---------- ---------- ---------- -------- ----------- -----------
Balance, June 30, 1997 10,013,316 260,777 (250,000) 74,482 85,259
Issuance of shares upon
receipt of proceeds
from subscriptions
receivable 75,000 250,000 250,000
Issuance of compensatory
stock options 937,500 $(937,500)
Proceeds from sale of
shares, net of
expenses of $45,000 533,333 455,000 455,000
Issuance of shares in
connection with
acquisitions 537,500 1,122,375 1,122,375
Net income 300,108 300,108
---------- ---------- ---------- ------- --------- -----------
Balance, June 30, 1998 11,159,149 $2,775,652 $ - $374,590 $(937,500) $ 2,212,742
========== ========== ========== ======== ========= ===========
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
DELSOFT CONSULTING, INC.
Statements of Cash Flows
Years Ended June 30, 1998 and 1997
1998 1997
------------ ----------
<S> <C> <C>
Operating activities:
Net income $ 300,108 $ 74,482
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation of equipment and furnishings 42,417 9,967
Amortization of intangible assets 53,556
Provision for bad debts 6,750 3,750
Loss on sale of equipment 14,429
Write-off of capitalized software costs 135,963
Deferred income taxes (61,700) 49,500
Changes in operating assets and liabilities:
Accounts receivable (324,370) (869,524)
Other current assets 8,812 (29,368)
Other assets (5,281) (15,321)
Accounts payable (185,472) 384,986
Accrued compensation and other liabilities 178,761 285,156
Income taxes payable 168,646 11,700
------------ ----------
Net cash provided by (used in) operating activities 332,619 (94,672)
------------ ----------
Investing activities:
Net cash received as a result of acquisition 10,279
Capital expenditures (63,966) (85,393)
Proceeds from sale of equipment 29,837
Capitalized software development costs (135,963)
Purchases of intangible assets (328,349)
------------ ----------
Net cash used in investing activities (362,478) (211,077)
------------ ----------
Financing activities:
Net proceeds from (repayments of) line of credit borrowings (489,316) 489,316
Proceeds from long-term borrowings 15,000
Repayments of long-term borrowings (69,888) (1,551)
Net proceeds from issuances of common stock 705,000 498
------------ ----------
Net cash provided by financing activities 145,796 503,263
------------ ----------
Net increase in cash and cash equivalents 115,937 197,514
Cash and cash equivalents, beginning of period 197,514 -
------------ ----------
Cash and cash equivalents, end of period $ 313,451 $ 197,514
============ ==========
Supplemental disclosure of cash flow data:
Interest paid $ 133,771 $ 14,934
============ ==========
Income taxes paid $ 171,033
===========
</TABLE>
F-7
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business and summary of accounting policies:
Business:
Delsoft Consulting, Inc. (the "Company") provides
customized software solutions, system integration and
development services to large commercial enterprises
throughout the United States primarily under short-term
contracts or subcontracts. The Company, which was
incorporated on July 1, 1996, uses June 30 as its fiscal
year end; accordingly, the period from its inception on
July 1, 1996 to June 30, 1997 was its initial fiscal year.
Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires
management to make estimates and assumptions that affect
certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Revenue recognition:
Revenues are generally recognized as services are
provided.
Cash equivalents:
Cash equivalents include all highly liquid investments
with a maturity of three months or less when acquired.
Allowance for doubtful accounts:
The Company establishes an allowance for uncollectible
trade accounts receivable based on historical collection
experience and management's evaluation of collectibility
of outstanding accounts receivable. The allowance for
doubtful accounts was $10,000 as of June 30, 1998.
Equipment and furnishings:
Equipment and furnishings are stated at cost, net of
accumulated depreciation. Provision is made for
depreciation of equipment and furnishings under the
straight-line method by annual charges to operations over
their estimated useful lives.
Software development costs:
Pursuant to Statement of Financial Accounting Standards
No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO
BE SOLD, LEASED OR OTHERWISE MARKETED, the Company is
required to charge the costs of creating a computer
software product to research and development expense as
incurred until the technological feasibility of the
product has been established; thereafter, all related
software development and production costs are required to
be capitalized.
Commencing upon the initial release of a product,
capitalized software development costs and any costs of
related purchased software are generally required to be
amortized over the estimated economic life of the product
based on current and estimated future revenues.
F-8
<PAGE>
Thereafter, capitalized software development costs and
the inherent technological changes in the software
costs of purchased software are reported at the lower of
unamortized cost or estimated net realizable value. Due to
development industry, estimated net realizable values or
economic lives may decline and, accordingly, the
amortization period may have to be accelerated.
During fiscal 1997, the Company was required to capitalize
$135,963 of software development costs related to a
software product that it evaluated as technologically
feasible. However, as of June 30, 1998, the Company had
not been able to market the product and management
estimated that as of that date the product did not have
any net realizable value; accordingly, the related
capitalized software development costs of $135,963 were
written off in 1998.
Charges to research and development expenses for software
development costs incurred prior to the establishment of
technological feasibility were not material in 1998 and
1997.
Advertising:
The Company expenses the cost of advertising and
promotions as incurred. Advertising costs charged to
operations were not material during 1998 and fiscal 1997.
Intangible assets:
Intangible assets are comprised of costs in excess of net
assets of acquired businesses that are being amortized on
a straight-line basis over estimated useful lives of five
years. The Company periodically evaluates the
recoverability of its intangible assets and measures the
amount of impairment, if any, by assessing, among other
things, the market and economic conditions related to, and
the current and estimated future levels of income and cash
flows to be generated by, the acquired businesses.
Stock split:
All references to numbers of shares and per share amounts
in these notes and the accompanying financial statements
have been retroactively restated for a 9-for-1 stock split
effected in the form of a dividend by the Company in
November 1996.
Earnings per share:
The Company has presented "basic" earnings per share in
the accompanying statements of income in accordance with
the provisions of Statement of Financial Accounting
Standards No. 128, EARNINGS PER SHARE ("SFAS 128"). SFAS
128 also requires the presentation of "diluted" earnings
per share if the amount differs from basic earnings per
share. Basic earnings per share is calculated by dividing
net income by the weighted average number of common shares
outstanding during each period. The calculation of diluted
earnings per share is similar to that of basic earnings
per share, except that the denominator is increased to
include the number of additional common shares that would
have been outstanding if all potentially dilutive common
shares, such as those issuable upon the exercise of stock
options and warrants, were issued during the period.
F-9<PAGE>
The weighted average number of common shares outstanding
used in computing basic earnings per share was 10,146,767
and 10,013,316 in 1998 and 1997, respectively, which
includes the 1,713,316 shares issued in connection with
the acquisition of Pyke Corp. ("Pyke") in November 1996
(see Note 3) as if they had been outstanding from July 1,
1996.
For the purpose of computing diluted earnings per share,
the assumed exercise of all of the Company's outstanding
stock options and warrants and the application of the
treasury stock method in 1998 would result in an increase
in the weighted average number of common shares
outstanding to 11,954,917; however, diluted earnings per
share would be $.03, which is the same as basic earnings
per share. The assumed exercise of all of the Company's
outstanding stock options and warrants and the application
of the treasury stock method in 1997 would have had an
insignificant effect on the weighted average number of
common shares outstanding and no effect on earnings per
share. Accordingly, diluted earnings per share amounts
have not been presented in the accompanying statements of
income.
Stock options:
In accordance with the provisions of Accounting Principles
Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES ("APB 25"), the Company will recognize
compensation costs as a result of the issuance of stock
options based on the excess, if any, of the fair value of
the underlying stock at the date of grant or award (or at
an appropriate subsequent measurement date) over the
amount the employee must pay to acquire the stock.
Therefore, the Company will not be required to recognize
compensation expense as a result of any grants of stock
options at an exercise price that is equivalent to or
greater than fair value. The Company will also make pro
forma disclosures, as required by Statement of Financial
Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("SFAS 123"), of net income or loss as if a
fair value based method of accounting for stock options
had been applied instead if such amounts differ materially
from the historical amounts.
Income taxes:
The Company accounts for income taxes pursuant to the
asset and liability method which requires deferred income
tax assets and liabilities be computed annually for
differences between the financial statement and tax bases
of assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws
and rates applicable to the periods in which the
differences are expected to affect taxable income.
Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be
realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during
the period in deferred tax assets and liabilities.
F-10
<PAGE>
The Financial Accounting Standards Board (the "FASB") has
issued Statement of Financial Accounting Standards No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION ("SFAS 131"), which could require the
Company to make additional disclosures in its financial
statements no later than for the year ending June 30,
1999. SFAS 131 requires disclosures for each segment of a
business and the determination of segments based on its
internal management structure. Management is in the
process of evaluating whether SFAS 131 will require the
Company to make any additional disclosures.
The Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants
("ACSEC") has issued Statement of Position No. 98-1,
ACCOUNTING FOR THE COST OF COMPUTER SOFTWARE DEVELOPED OR
OBTAINED FOR INTERNAL USE ("SOP 98-1"), which could
require the Company to revise certain accounting
measurements and make additional disclosures in its
financial statements no later than for the year ending
June 30, 1999. SOP 98-1 defines internal use software and
modifies previous standards related to the capitalization,
amortization and write-off of costs related to the
development of such software. Management believes that the
Company's measurements and disclosures already
substantially comply with those required by SOP 98-1.
The FASB and ACSEC had issued certain other pronouncements
as of June 30, 1998 that will become effective in
subsequent periods; however, management does not believe
that any of those pronouncements will effect any financial
accounting measurements or disclosures the Company will be
required to make.
Note 2 - Equipment and furnishings:
Equipment and furnishings consisted of the following as of
June 30, 1998:
<TABLE>
<CAPTION>
Range of
Estimated
Useful
Lives Amount
--------- ---------
<S> <C> <C>
Equipment 3-7 years $ 73,597
Furnishings 7 years 26,523
Automobiles 5 years 180,005
---------
280,125
Less accumulated depreciation 47,829
---------
Total $ 232,296
=========
</TABLE>
Depreciation of equipment and furnishings amounted to $42,417
and $9,967 in 1998 and 1997, respectively.
During 1998 and 1997, the Company purchased equipment at a
cost of, and issued long-term obligations in the principal
amount of, $158,352 and $21,235, respectively. These noncash
transactions are not reflected in the accompanying statements
of cash flows.
F-11<PAGE>
Note 3 - Acquisitions of businesses:
Merger with Pyke in 1997:
On November 13, 1996, the Company entered into an
Agreement and Plan of Merger (the "Merger Agreement") with
Pyke. Under the Merger Agreement, the Company issued
1,713,316 shares of its common stock to the stockholders
of Pyke to acquire all of the shares of Pyke's common
stock then outstanding and Pyke was merged with the
Company (the "Merger"). At the time of the Merger, Pyke
was a publicly-traded shell corporation with no previous
operations of a commercial nature. Pyke had a cash balance
of $10,279 and no other assets or liabilities.
The acquisition was accounted for as a purchase that was
effective as of November 13, 1996. Since Pyke did not have
any operations prior to the date of the Merger and there
was no market for the shares of common stock that were
exchanged, the shares issued by the Company were valued at
Pyke's net asset value of $10,279 as of the date of the
Merger. Information as to the unaudited pro forma results
of operations of the Company and Pyke assuming the Merger
had been consummated on July 1, 1996 has not been
presented because such information would not differ
materially from the information in the accompanying 1998
and 1997 historical statements of income of the Company.
Acquisitions in 1998:
On April 13, 1998, the Company acquired a recruiting
business for technology consultants, including a database
containing certain proprietary information regarding the
names and "skillsets" of certain information technology
consultants, from its sole proprietor. The consideration
paid by the Company for this acquisition consisted of a
cash payment of $90,000; the issuance of 162,500 shares of
common stock valued by the Company at $314,844, or $1.9375
per share (the closing market price for the shares on
April 13, 1998); and options for the purchase of 87,500
shares at $1.25 per share, which were valued at $57,531
based on the Black-Scholes option-pricing model allowable
under the provisions of SFAS 123. The seller also entered
into an employment agreement with the Company (see Note
11). The sole proprietorship did not have any sales or
significant expenses prior to, or any significant tangible
assets as of, the date of acquisition.
On May 15, 1998, the Company acquired NYE 2000 Systems,
Inc. ("NYE 2000"), a Canadian development stage company
that had developed a technologically feasible software
product that will convert other software into programs
that are "Year 2000" compliant. The consideration
initially paid by the Company for this acquisition
consisted of a cash payment of $210,000 and the issuance
of 375,000 shares of common stock valued by the Company at
$750,000, or $2.00 per share (the closing market price for
the shares on May 15, 1998). The Company is also
contingently obligated to make additional cash payments to
F-12
<PAGE>
the sellers based on future sales, as defined, during any
period in which the Company is the licensor or user of the
software conversion product. The sellers also entered into
employment agreements with the Company (see Note 11). NYE
2000 did not have any sales or significant expenses prior
to, or any significant tangible assets as of, the date of
acquisition.
The acquisitions were accounted for as purchases and,
accordingly, the results of operations of each of the
acquired businesses have been included in the accompanying
statements of income from the respective dates of
acquisition. The total initial costs of the acquisitions
are summarized below:
Cash payments to sellers $ 300,000
Payments for acquisition costs 28,349
-----------
Total cash payments 328,349
Fair value of 537,500 shares and
options for the purchase of 87,500
shares of common stock issued to
sellers 1,122,375
-----------
Total costs of acquisitions $ 1,450,724
===========
Since the acquired companies did not have any significant
tangible assets as of the respective dates of acquisition,
the initial costs of the acquisitions represented costs in
excess of net assets acquired, which were allocated to
intangible assets and, accordingly, are being amortized
from the date of acquisition based on an estimated useful
life of five years. Amortization of intangible assets
amounted to $53,556 in 1998. Any additional contingent
consideration paid by the Company in connection with the
acquisition of NYE 2000 will be allocated to intangible
assets and amortized over the remaining useful life of the
asset.
The issuances of common stock and options for the purchase
of common stock valued at $1,122,375 as part of the
consideration paid for the acquired businesses were
noncash transactions that are not reflected in the
accompanying 1998 statement of cash flows.
Information as to the unaudited pro forma results of
operations of the Company and the acquired businesses
assuming their acquisitions had been consummated on July
1, 1996 has not been presented because such information
would not differ materially from the information in the
accompanying 1998 and 1997 historical statements of
income.
F-13
<PAGE>
Note 4 - Note payable to bank:
At June 30, 1998, the Company had an unused line of credit
under a revolving credit agreement with Emergent Financial
Corp. that allowed maximum borrowings of $1,250,000. Any
outstanding borrowings will bear interest, which will be
payable monthly, at the higher of 1.5% above the prime rate
or 7%, and will be secured by substantially all of the
Company's assets.
The revolving credit agreement contains certain restrictive
covenants which, among other things, require the maintenance
of certain financial ratios and limit payments of cash
dividends and capital expenditures. The lender has agreed to
waive certain of these covenants until July 1, 1999.
Note 5 - Long-term debt:
As of June 30, 1998, long-term debt totaled $123,148 and
consisted of equipment loans payable in monthly installments
through February 2003 with interest at rates ranging from
8.15% to 8.95%; the loans were secured by equipment with a
net book value that approximated the total outstanding
balance.
Principal payment requirements for long-term obligations in
each of the five years subsequent to June 30, 1998 total
$38,134 in 1999; $42,341 in 2000; $29,379 in 2001; $7,861 in
2002 and $5,433 in 2003.
Management of the Company believes that the equipment loans
had carrying values that approximated their fair values as of
June 30, 1998 because the interest rates and other relevant
terms of such financial instruments were the equivalent of
those that the Company could have obtained for new loans as
of that date.
Note 6 - Related party transactions:
Certain stockholders, who owned more than 50% of the
Company's common stock during 1998 and 1997 were also
directors and former officers of the Company. These
stockholders also owned a controlling interest in, and were
officers and directors of, Bridgton Consulting, Inc.
("Bridgton"), which had conducted business activities that
were similar to those of the Company prior to ceasing
operations in February 1998. Bridgton and the Company had
occupied the same office facilities.
The Company billed Bridgton approximately $211,000 and
$349,000 for the services of its programmers and engineers
and realized a gross profit of approximately $38,000 and
$63,000 on such billings during 1998 and 1997, respectively.
Bridgton billed the Company approximately $322,000 and
$406,000 for the services of its programmers and engineers
and, based on information provided by the management of
Bridgton, realized a gross profit of approximately $75,000
and $97,000 during 1998 and 1997, respectively. Bridgton also
billed the Company approximately $50,000 and $81,000 during
1998 and 1997, respectively, to obtain reimbursement for the
overhead expenses it incurred on behalf of the Company.
F-14
<PAGE>
During 1998, the Company paid a stockholder, who is also one
of its directors, a fee of $45,000 for assistance in raising
$500,000 through a private placement of common stock.
Note 7 - Provision for income taxes:
The provision for income taxes in 1998 and 1997 consisted of
the following:
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Federal:
Current provision $200,278 $ 8,300
Deferred provision (credit) (52,400) 42,000
-------- -------
Totals 147,878 50,300
-------- -------
State:
Current provision 139,401 3,400
Deferred provision (credit) (9,300) 7,500
-------- -------
Totals 130,101 10,900
-------- -------
Totals $277,979 $61,200
======== =======
</TABLE>
The provision for income taxes in 1998 and 1997 differs from
the amount computed using the Federal statutory rate of 34% as
a result of the following:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Tax at Federal statutory rate 34% 34%
State income taxes, net of Federal income tax effect 15 2
Effect of nondeductible expenses 6 11
Other (primarily surtax exemptions) (7) (2)
--- ---
Effective tax rate 48% 45%
=== ===
</TABLE>
At June 30, 1998, deferred tax assets and liabilities were
attributable to the following:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Provision for doubtful accounts $ 10,000
Accrued state taxes 3,000
---------
Total 13,000
---------
Deferred tax liabilities:
Depreciation expense (15,000)
Amortization expense 14,200
---------
Total (800)
---------
Net deferred tax assets $ 12,200
=========
</TABLE>
F-15<PAGE>
Note 8 - Retirement plan:
The Company sponsors a "401(k)" plan whereby eligible
employees may defer a portion of their salary for Federal
income tax purposes and accumulate retirement benefits. The
Company may make additional contributions to the plan,
subject to certain limitations, for the benefit of its
employees on a discretionary basis. The Company did not make
any contributions to the plan in 1998 and 1997.
Note 9 - Stock option plan:
On July 1, 1996, the Board of Directors approved the
Company's Stock Option Plan (the "Plan") whereby, subject to
ratification of the Plan by the Company's stockholders,
incentive and/or nonincentive stock options for the purchase
of up to 2,000,000 shares of the Company's common stock may
be granted to key executives, other members of management,
other employees and directors of the Company. Under the Plan,
the exercise price of all options must be at least 100% of
the fair market value of the common stock on the date of
grant (the exercise price of an incentive stock option for an
optionee that holds more than ten percent of the combined
voting power of all classes of stock of the Company must be
at least 110% of the fair market value on the date of grant).
The maximum term of an option may not exceed ten years. The
actual term of each option and the manner of exercise are
determined by the Board of Directors.
In addition to issuing options pursuant to the Plan, the
Company issued options during 1998 for the purchase of
2,500,000 shares of common stock to certain executive
officers that are exercisable at $.50 per share through
February 2008. The options had a fair market value of $.875
per share on the date they were granted. Accordingly, the
Company charged $937,500 to deferred compensation and
additional paid-in capital in 1998 based on the number of
shares that are subject to the options and the excess of the
fair market value over the exercise price for each share (the
balance of the unamortized deferred compensation is shown
separately as a reduction of stockholders' equity in the
accompanying balance sheet as of June 30, 1998). The deferred
compensation will be amortized on a straight-line basis over
the remainder of the term of each option.
F-16
<PAGE>
A summary of the status of the Company's options as of June
30, 1998 and 1997 and changes during the years then ended is
presented below:
<TABLE>
<CAPTION>
1998 1997
----------------------- --------------------------
Weighted Weighted
Shares Average Shares Average
or Exercise or Exercise
Price Price Price Price
--------- --------- ------- ---------
<S> <C> <C> <C> <C>
Outstanding, at beginning of
year 651,250 $2.00 651,250 $2.00
Granted 3,087,500 .75
Canceled (86,000) 2.00 _________
--------- ----- ---------
Outstanding, at end of year 3,652,750 $ .95 651,250 $2.00
========= ===== ======= =====
Options exercisable, at
end of year 3,002,500 -
========= ======
Weighted average fair value
of options granted during
the year $.66 $.97
==== ====
</TABLE>
The following table summarizes information about fixed stock
options outstanding at June 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- -------------------------------------
Weighted
Average
Years of Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- --------- ----------- ---------
<C> <S> <C> <C> <C> <C>
$ .50 2,500,000 9.60 $ .50 2,500,000 $ .50
$1.25 87,500 9.79 1.25 1.25
$1.75 225,000 9.75 1.75 225,000 1.75
$2.00 50,000 9.00 2.00 50,000 2.00
$2.00 125,000 9.17 2.00 2.00
$2.00 565,250 8.67 2.00 127,500 2.00
$2.25 100,000 9.67 2.25 100,000 2.25
--------- ---------
$.50-$2.25 3,652,750 9.45 $ .95 3,002,500 $ .74
========== ========= ==== ====== ========= ======
</TABLE>
F-17<PAGE>
Since the Company has elected to continue to use the
provisions of APB 25 in accounting for its stock options and
the exercise price of all of the options granted approximated
the fair market value at the date of grant other than the
2,500,000 options granted to the two executive officers in
1998 as described above, no earned or unearned compensation
cost was recognized in the accompanying financial statements
for stock options granted in 1998 and 1997. Had compensation
cost for all of the other stock options granted in 1998 and
1997 been determined based on the fair value of the options
at the grant date under the provisions of SFAS 123, the
Company's net income and earnings per share would have been
reduced from the amounts reported in the accompanying
statements of income as shown below:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Net income - as reported $ 300,108 $ 74,482
Net income - pro forma 122,700 44,452
Basic weighted average common shares
outstanding - as reported 10,146,767 10,013,316
Basic weighted average common shares
outstanding - pro forma 11,946,913 10,223,316
Basic earnings per share - as reported $.03 $.01
Basic earnings per share - pro forma $.01 $ -
</TABLE>
The fair value of each option granted in 1998 and 1997 was
estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average
assumptions: risk-free interest rate of 6.3%; expected option
lives of ten years; expected volatility of 16.0%; and
expected dividends of 0%.
Note 10- Stock purchase warrants:
On January 7, 1997, the Company issued two warrants to
purchase an aggregate of 15,000 shares of common stock at
$1.00 per share to a lender as part of the consideration for
a loan made to the Company. The warrants became exercisable
on the date they were issued and will expire on December 31,
1999. The estimated fair market value of the warrants on the
date of issuance was not material.
Note 11- Commitments and contingencies:
Consulting agreements:
The Company has entered into a consulting agreement with
one of its former officers (who was also a member of its
Board of Directors) which obligates the Company to make
aggregate payments of $144,000 in 1999 and $24,000 in
2000.
Employment agreements:
The Company has entered into employment agreements with
three of its key executives which obligate the Company to
make aggregate payments of approximately $337,000 in 1999,
2000 and 2001; and $77,000 in 2002.
F-18
<PAGE>
During 1998, the Company entered into employment
agreements with four employees in connection with its
acquisitions (see Note 3) which obligate the Company to
make aggregate payments of approximately $540,000 in 1999,
plus bonuses based on certain types and levels of sales.
Executive incentive compensation plan:
On July 1, 1996, the Company adopted, and on July 1, 1997,
the Company terminated, an executive incentive
compensation plan (the "Incentive Plan") that was
administered by the Company's Board of Directors. Under
the terms of the Incentive Plan, a participant was going
to earn incentive compensation, which would have been paid
in cash and/or common stock of the Company, based on,
among other things, the percentage increases in the
Company's billable hours, gross revenues and profitability
over the corresponding amounts applicable to the preceding
fiscal year. Since fiscal 1997 was the base year and the
Incentive Plan was terminated as of the beginning of
fiscal 1998 by a resolution made by the Board of Directors
dated April 24, 1998, no amounts have been or will be
charged to compensation based on the terms of the
Incentive Plan.
Leases:
During the period from July 1, 1996 through December 20,
1996, the Company leased its office space for $1,000 per
month from certain stockholders. During December 1996, the
Company entered into agreements with an unrelated lessor
whereby it temporarily leased office space on a month-to-
month basis from
December 21, 1996 through April 30, 1997 and moved into
new office facilities on May 1, 1997 under a noncancelable
operating lease which expires on April 30, 2000. The
Company has a one-year renewal option. Minimum annual
rental commitments under the noncancelable lease for
periods after June 30, 1998 aggregate $59,322 which is
payable as follows: $31,762 in 1999 and $27,560 in 2000.
The lease also requires the Company to pay all operating
expenses. Rent expense charged to operations under all of
the leases aggregated $38,230 and $16,035 in 1998 and
1997, respectively.
Venture capital agreement:
On October 4, 1996, a venture capital group (the "Group")
agreed to: assist the Company in finding and acquiring a
publicly-traded shell company; assist the Company in
obtaining the approvals necessary for the quotation and
trading of the Company's common stock on the NASDAQ
Bulletin Board; and, upon the completion of the
acquisition and the commencement of quotation and trading
of the Company's common stock, contribute $550,000 to the
Company's capital or obtain equity financing totaling at
least $550,000 for the Company. In exchange, the Company
agreed to pay the Group $50,000 once the equity financing
and the other services had been provided.
As of June 30, 1997, the Group had assisted the Company in
consummating the acquisition of Pyke, which had been a
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publicly traded shell company, and obtaining the necessary
approvals for the quotation and trading of the Company's
common stock on the NASDAQ Bulletin Board. The members of
the Group had been stockholders of Pyke, and they or their
nominees had received a total of 1,356,664 shares of the
Company's common stock as a result of the Merger with
Pyke. However, as of June 30, 1998, the Group had not
fulfilled its commitment to provide the Company with
$550,000 of equity financing. Management of the Company
cannot provide any assurance that the Group will be able
to fulfill its commitment, and it is considering what
legal or equitable actions to take against the members of
the Group.
Concentrations of credit risk:
Financial instruments that potentially subject the Company
to concentrations of credit risk consist principally of
cash and trade accounts receivable. The Company maintains
its cash balances with high quality financial
institutions. At times, such balances may exceed Federally
insured limits.
Approximately 67% and 68% of the Company's net revenues
were derived from two customers during 1998 and 1997,
respectively, who also accounted for approximately 60% of
its accounts receivable balance at June 30, 1998. The
Company closely monitors the extension of credit to its
customers while maintaining appropriate allowances for
potential credit losses. Accordingly, management does not
believe that the Company was exposed to significant credit
risk at June 30, 1998.
Cancellation of shares:
During 1998, the Company issued 100,000 shares of
restricted common stock with a fair value of $405,000 to
consultants who agreed to provide the Company with certain
advertising and promotional services over a twelve month
period commencing in April 1998. Initially, the Company
recorded the value of the shares issued as a deferred
charge that it intended to write-off over the expected
service period. However, in the opinion of the management
of the Company, the consultants failed to provide the
agreed upon services. Accordingly, the Company considers
the agreement to have been effectively terminated, and it
reversed the deferred charge and reduced the number of
shares outstanding. The Company will seek the actual
cancellation of the shares.
Litigation:
The Company is a party to a number of lawsuits and claims
arising out of the conduct of its business. While the
ultimate outcome of these proceedings cannot be predicted
with certainty, management believes the overall effect of
these lawsuits will not be material to the Company's
financial statements.
Note 12- Change in number of authorized shares:
During 1998, the Board of Directors and stockholders approved
an increase from 20,000,000 to 100,000,000 in the number of
shares of common stock authorized for issuance by the
Company.
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