<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/x/ Quarterly Report Under Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Quarterly Period Ended December 31, 1998
/ / Transition Report Under Section 13 or 15(d) of
The Exchange Act For the Transition Period from
___________________ to _________________
Commission File Number 000-24197
DelSoft Consulting, Inc.
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(Exact Name of Small Business Issuer as Specified in its Charter)
Georgia 58-2247152
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
106 Bombay Lane, Roswell, Georgia 30076
----------------------------------------------------
(Address of principal executive office) (Zip Code)
Issuer's telephone number, including area code: (770) 518-4289
Check whether the issuer (1) 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 /x/ No / /
At Febraury 15, 1999, there were issued and outstanding
11,259,149 shares of Common Stock.
Transitional Small Business Disclosure Format (check one): Yes / / No/x/
<PAGE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DELSOFT CONSULTING, INC.
CONDENSED BALANCE SHEET
DECEMBER 31, 1998
(Unaudited)
ASSETS
------
<S> <C>
Current assets:
Cash and cash equivalents $ 102,760
Accounts receivable, net of allowance for doubtful accounts of $10,000 1,094,067
Prepaid income taxes 129,720
Deferred tax assets 104,200
Other current assets 45,410
------------
Total current assets 1,476,157
Equipment and furnishings, net of accumulated depreciation of $70,073 223,312
Intangible assets, net of accumulated amortization of $198,628 1,252,096
Other assets 66,570
------------
Total $ 3,018,135
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Note payable to bank $ 283,632
Current portion of long-term debt 37,927
Accounts payable 232,118
Accrued compensation and other liabilities 237,368
-----------
Total current liabilities 791,045
Long-term debt, net of current portion 84,220
Deferred tax liabilities 12,200
-----------
Total liabilities 887,465
-----------
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 226,112
Unearned compensation (871,094)
-----------
Total stockholders' equity 2,130,670
-----------
Total $ 3,018,135
===========
See Notes to Condensed Financial Statements.
(/TABLE>
-1-
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<PAGE>
DELSOFT CONSULTING, INC.
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS
SIX AND THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(Unaudited)
Six Months Three Months
Ended December 31, Ended December 31,
--------------------------- ---------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Gross revenue $4,423,766 $5,150,580 $2,078,559 $2,832,023
Direct project costs 3,229,026 3,906,624 1,525,467 2,235,344
---------- ---------- ---------- ----------
Net revenues 1,194,740 1,243,956 553,092 596,679
---------- ---------- ---------- ----------
Expenses:
Selling, general and administrative
expenses 1,379,775 950,003 703,274 447,433
Interest expense 43,243 74,863 22,879 38,936
---------- ---------- ---------- ----------
Totals 1,423,018 1,024,866 726,153 486,369
---------- ---------- ---------- ----------
Income (loss) before provision (credit)
for income taxes (228,278) 219,090 (173,061) 110,310
Provision (credit) for income taxes (79,800) 74,421 (65,600) 36,489
---------- ---------- ---------- ----------
Net income (loss) $(148,478) $ 144,669 $(107,461) $ 73,821
========= ========== ========= ==========
Basic earnings (loss) per share $(.01) $.01 $(.01) $.01
===== ==== ===== ====
Basic weighted average common shares
outstanding 11,159,149 10,108,697 11,159,149 10,080,164
========== ========== ========= ==========
(/TABLE>
See Notes to Condensed Financial Statements.
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<PAGE>
<PAGE>
DELSOFT CONSULTING, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 1998
(Unaudited)
</TABLE>
<TABLE>
<CAPTION>
Common Stock
------------------------ Total
Number of Retained Unearned Stockholders'
Shares Amount Earnings Compensation Equity
----------- ---------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1998 11,159,149 $2,775,652 $374,590 $(937,500) $2,212,742
Amortization of unearned compensation 66,406 66,406
Net loss (148,478) (148,478)
---------- ---------- -------- --------- ----------
Balance, December 31, 1998 11,159,149 $2,775,652 $226,112 $(871,094) $2,130,670
========== ========== ======== ========= ==========
(/TABLE>
See Notes to Condensed Financial Statements.
-3-<PAGE>
<PAGE>
DELSOFT CONSULTING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(Unaudited)
</TABLE>
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Operating activities:
Net income (loss) $(148,478) $ 144,669
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation of equipment and furnishings 32,700 22,989
Amortization of intangible assets 145,072
Amortization of unearned compensation 66,406
Deferred income taxes (79,800) (3,078)
Changes in operating assets and liabilities:
Accounts receivable 89,327 (653,528)
Prepaid income taxes (129,720)
Other current assets (24,854) (40,711)
Other assets (45,968) 208
Accounts payable 32,604 (163,411)
Accrued compensation and other liabilities (226,549) 99
Income taxes payable (180,346) 5,249
--------- ---------
Net cash used in operating activities (469,606) (687,514)
--------- ---------
Investing activities - capital expenditures (7,647) (21,851)
--------- ---------
Financing activities:
Net proceeds from line of credit borrowings 283,632 306,240
Repayments of long-term borrowings (17,070) (37,942)
Proceeds from issuances of common stock 250,000
--------- ---------
Net cash provided by financing activities 266,562 518,298
--------- ---------
Net decrease in cash and cash equivalents (210,691) (191,067)
Cash and cash equivalents, beginning of period 313,451 197,514
--------- ---------
Cash and cash equivalents, end of period $ 102,760 $ 6,447
========= =========
Supplemental disclosure of cash flow data:
Interest paid $ 40,201 $ 68,757
========= =========
Income taxes paid $ 310,066 $ 72,300
========= =========
(/TABLE>
Supplemental schedule of noncash investing and financing activities:
During the six months ended December 31, 1998 and 1997, the
Company purchased equipment at a cost of, and issued long-term
obligations in the principal amount of, $16,069 and $98,045,
respectively.
See Notes to Condensed Financial Statements.
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DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Unaudited interim financial statements:
In the opinion of management, the accompanying unaudited
condensed financial statements reflect all adjustments,
consisting of normal recurring accruals, necessary to present
fairly the financial position of Delsoft Consulting, Inc.
(the "Company") as of December 31, 1998 and its results of
operations for the six and three months ended December 31,
1998 and 1997, changes in stockholders' equity for the six
months ended December 31, 1998 and cash flows for the six
months ended December 31, 1998 and 1997. Certain terms used
herein are defined in the audited financial statements of the
Company as of June 30, 1998 and for the years ended June 30,
1998 and 1997 (the "Audited Financial Statements") included
in the Company's Annual Report on Form 10-KSB for the year
ended June 30, 1998 that was previously filed with the United
States Securities and Exchange Commission. Accordingly, these
unaudited condensed financial statements should be read in
conjunction with the Audited Financial Statements and the
other information also included in the Form 10-KSB.
The results of the Company's operations for the six and three
months ended December 31, 1998 are not necessarily indicative
of the results of operations for the full year ending June
30, 1999.
Note 2 - Earnings (loss) per common share:
As further explained in Note 1 to the Audited Financial
Statements, the Company presents basic and, if appropriate,
diluted earnings (loss) per share in accordance with the
provisions of Statement of Financial Accounting Standards No.
128, EARNINGS PER SHARE ("SFAS 128"). Diluted per share
amounts have not been presented in the accompanying unaudited
condensed statements of operations because: (i) the Company
had a net loss for the six and three months ended December
31, 1998 and, accordingly, the assumed effects of the
exercise of all of the Company's outstanding stock options
and warrants and the application of the treasury stock method
would have been anti-dilutive; and (ii) the assumed effects
of the exercise of all of the Company's outstanding stock
options and warrants and the application of the treasury
stock method for the six and three months ended December 31,
1997 would have had an insignificant effect on the weighted
average number of common shares outstanding and no effect on
earnings per share.
Note 3 - Note payable to bank:
At December 31, 1998, the Company had borrowed $283,632 under
the revolving credit agreement that provides it with a
$1,250,000 line of credit (see Note 4 of the notes to the
Audited Financial Statements). Interest on outstanding
borrowings is payable monthly at the higher of 1.5% above the
prime rate or 7% (an effective rate of 9.25% at December 31,
1998).
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<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Long-term debt:
At December 31, 1998, long-term debt consisted of equipment
loans totaling $122,147 which are payable in monthly
installments and bear interest at rates ranging from 7.75% 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 years subsequent to December 31, 1998 total
$37,927 in 1999; $40,197 in 2000; $24,320 in 2001; $18,458 in
2002; and $1,245 in 2003.
See Note 5 of the notes to the Audited Financial Statements
for additional information regarding long-term debt.
Note 5 - Related party transactions:
During the six months ended December 31, 1998, there were no
transactions between the Company and Bridgton (see Note 6 of
the notes to the Audited Financial Statements). During the
six and three months ended December 31, 1997, the Company
billed Bridgton approximately $139,000 and $48,000,
respectively, for the services of its programmers and
engineers and realized a gross profit of approximately
$25,000 and $9,000, respectively, on such billings, and
Bridgton billed the Company approximately $309,000 and
$85,000, respectively, for the services of its programmers
and engineers and, based on information provided by the
management of Bridgton, realized a gross profit of
approximately $62,000 and $8,000, respectively. Bridgton also
billed the Company approximately $50,000 during the six and
three months ended December 31, 1997 to obtain reimbursement
for the overhead expenses it incurred on behalf of the
Company.
Note 6 - Provision (credit) for income taxes:
The provision (credit) for income taxes for the six and three
months ended December 31, 1998 and 1997 consisted of the
following:
</TABLE>
<TABLE>
<CAPTION>
Six Months Three Months
Ended December 31, Ended December 31,
----------------------- --------------------------
1998 1997 1998 1997
-------- ------- --------- -------
<S> <C> <C> <C> <C>
Federal:
Current provision (credit) $61,887 $ (5,000) $31,675
Deferred credit $(67,800) (3,078) (48,900) (3,111)
-------- ------- --------- -------
Totals (67,800) 58,809 (53,900) 28,564
-------- ------- --------- -------
State:
Current provision (credit) 15,612 (3,000) 7,925
Deferred credit (12,000) (8,700)
-------- ------- --------- -------
Totals (12,000) 15,612 (11,700) 7,925
-------- ------- --------- -------
Totals $(79,800) $74,421 $(65,600) $36,489
======== ======= ======== =======
(/TABLE>
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DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 6 - Provision (credit) for income taxes (concluded):
The provision (credit) for income taxes for the six and three
months ended December 31, 1998 and 1997 differs from the amount
computed using the Federal statutory rate of 34% as a result of
the following:
</TABLE>
<TABLE>
<CAPTION>
Six Months Three Months
Ended Ended
December 31, December 31,
---------------- ---------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Tax at Federal statutory rate (34)% 34% (34)% 34%
State income taxes, net of Federal income
tax effect (1) 5 (1) 2
Effect of nondeductible expenses 3 1
Other items, primarily surtax exemptions (3) (5) (4) (3)
--- --- --- ---
Effective tax rate (35)% 34% (38)% 33%
==== === === ===
(/TABLE>
At December 31, 1998, deferred tax assets and liabilities
were attributable to the following:
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Unearned compensation $ 26,600
Amortization of intangible assets 53,400
Other 24,200
--------
Total 104,200
Deferred tax liabilities - depreciation (12,200)
--------
Net deferred tax assets $ 92,000
========
(/TABLE>
Note 7 - Stock option plan:
Subject to ratification by the Company's stockholders, the
Company may grant incentive and/or nonincentive stock options
for the purchase of up to 2,000,000 shares of the Company's
common stock to key executives, other members of management,
other employees and directors of the Company under the
Company's Stock Option Plan (the "Plan"), as further
explained in Note 9 of the Notes to the Audited Financial
Statements.
-7-
<PAGE>
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Stock option plan (continued):
As of June 30, 1998, the Company had options outstanding for
the purchase of a total of 3,652,750 shares of common stock
at exercise prices ranging from $.50 to $2.25 per share,
including options not subject to the Plan for the purchase of
2,500,000 shares of common stock exercisable at $.50 per
share granted to two executive officers during the year ended
June 30, 1998. During the six months ended December 31, 1998,
the Company granted options subject to the Plan to purchase a
total of 550,750 shares of common stock at an exercise price
of $2.00 per share and no options were exercised or canceled.
Accordingly, as of December 31, 1998, the Company had options
outstanding for the purchase of a total of 4,203,500 shares
of common stock at exercise prices ranging from $.50 to $2.25
per share, of which options to purchase a total of 3,002,500
shares were exercisable.
The Company has elected to continue to use the provisions of
APB 25 in accounting for its stock options. Since the exercise
price of the options not subject to the Plan for
the purchase of 2,500,000 shares of common stock granted to
the two executive officers during 1998 was less than the fair
market value at the date of grant, the Company recorded
deferred compensation of $937,500 in 1998, of which $66,406
and $33,203 was amortized during the six and three months
ended December 31, 1998, respectively (there was no charge
for amortization during the six and three months ended
December 31, 1997). The Company has not recognized any earned
or unearned compensation cost in connection with the issuance
of any other options or warrants since the exercise price of
all of those options approximated the fair market value at
the date of grant. Pro forma net loss and loss per share
amounts assuming compensation cost for all of the other stock
options granted by the Company been determined based on the
fair value of the options at the grant date under the
provisions of SFAS 123 and the comparative historical amounts
reported in the accompanying unaudited condensed statements
of operations for the six and three months ended December 31,
1998 are set forth below (pro forma net income and income per
share amounts for the six and three months ended December 31,
1997 are not presented because they would not differ
materially from the historical amounts for the corresponding
periods):
</TABLE>
<TABLE>
<CAPTION>
Six Months Three Months
Ended Ended
December December
31, 1998 31, 1998
----------- ----------
<S> <C> <C>
Net loss - as reported $(148,478) $(107,461)
Net loss - pro forma (265,542) (166,004)
Basic weighted average common shares
outstanding - as reported 11,159,149 11,159,149
Basic weighted average common shares
outstanding - pro forma 12,875,308 12,875,308
Basic loss per share - as reported $(.01) $(.01)
Basic loss per share - pro forma $(.02) $(.01)
(/TABLE>
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<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Stock option plan (concluded):
The fair value of each option granted was estimated on the
date of grant using the Black-Scholes option-pricing model
with the following weighted average assump-tions: risk-free
interest rate of 6.3%; expected option lives of ten years;
expected volatility of 16.0%; and expected dividends of 0%.
Note 8 - Major customers and concentration of credit risk:
Approximately 77% and 71% of the Company's net revenues were
derived from two customers during the six and three months
ended December 31, 1998, respectively, and approximately 66%
of the Company's net revenues were derived from these
customers during both the six and three months ended December
31, 1997.
These customers also accounted for approximately 55% of the
Company's accounts receivable balance at December 31, 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 December 31, 1998.
Note 9 - Venture capital agreement:
As of December 31, 1998, the Group had not fulfilled its
commitment to provide the Company with $550,000 of equity
financing pursuant to their October 4, 1996 agreement (see
Note 11 of the notes to the Audited Financial Statements).
-9-<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the
condensed 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 application maintenance outsourcing, and
the Year 2000 problem (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.
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/or maintains 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.
The solutions offered by the Company include the following:
(a) PROFESSIONAL SERVICES STAFFING: Providing highly-skilled
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 the mainframe and client/server
development environments and enterprise resource planning software
market.
(b) SERVICES AND SOLUTIONS FOR THE YEAR 2000 PROBLEM: The
Company offers NYE2000(TM), a proprietary software toolset, which
facilitates the analysis and conversion of NATURAL(TM) source code to
make it Year 2000 compliant. NYE2000(TM) 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 DelSoft will provide
-10-<PAGE>
the toolset in conjunction with proven methodologies, experienced project
management, and skilled resources with significant Year 2000 project
experience.
(c) APPLICATION MAINTENANCE OUTSOURCING: Spurred by global
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
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.
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
most consultants not meeting this general profile with minimal cost to the
Company. In the first six months of fiscal 1999, this process was completed.
During this period, new direct and/or end user placements (or preferred
vendor placements) generated an average of approximately $197,000 in gross
annual revenues per placement at an average gross margin of approximately
40%. This compares to an average of approximately $79,000 in gross annual
revenues per subcontractor placement (not including preferred vendor
placements) at an average gross margin of approximately 28% (after deducting
placement costs) during the same six-month period.
During the first quarter, the Company signed a letter of intent to acquire a
computer-consulting firm, that provides a variety of computer programming
services with an emphasis on the client-server market ("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 revenues of approximately $9.6 million and
profits (prior to taxes, compensation and distributions to shareholders) of
approximately $1 million in 1998. The companies completed their respective
due diligence during the second quarter and are currently negotiating the
final contract terms. The Acquisition will be paid for with a combination
of cash and stock over a three year period. The Company expects to close
this transaction on or about April 1, 1999.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1997
REVENUES. The Company's revenue decreased to approximately
$2.1 million for the second quarter of 1999 from $2.8 for the second quarter
of 1998. This decrease in revenues is a result of the Company redirecting
its focus by expanding its professional services staffing operations
through direct and/or end-user client placements that generate higher gross
margins than subcontractor placements.
DIRECT PROJECT COSTS. Direct project costs consist primarily of salaries and
employee benefits for billable IT professionals and the associated travel and
relocation costs of these professionals, as well as the cost of the independent
contractors used by the Company.
Direct project costs decreased to approximately $1.5 million
for the second quarter of 1999 from $2.2 million for the second
quarter of 1998. The decrease in direct project costs is primarily
attributable to a decrease in the total number of consultants as a
result of the Company's change in focus.
-11-<PAGE>
NET REVENUE. Net revenue consists of revenues less direct project costs. Net
revenue decreased slightly from approximately $600,000 or 21% of Gross Revenue
during the three-month period ended December 31, 1997, to approximately
$550,000 or 26% of Gross Revenue during the three-month period ended
December 31, 1998. This slight decrease, in spite of a more
substantial decrease in the total number of consultants, is primarily
attributable to billing rates increasing at higher levels than
professional salaries and engagements with new clients being more
profitable than those with existing clients.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. 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, including amortizing certain acquisition costs. Selling,
general and administrative expenses increased to approximately
$700,000 in the second quarter of 1999 from approximately $450,000 in
the second quarter of 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 service offerings, the expansion of its
recruiting capabilities, and non-recurring charges associated with the
Acquisition. The most significant of these costs consisted of the
sales and marketing efforts associated with the Company's proprietary
Year 2000 software toolset, NYE2000. In addition, the Company
recognized charges relating to the amortization of intangible assets
and unearned compensation of approximately $53,000 and $27,000,
respectively during the three months ended December 31, 1998, with no
corresponding charges in the comparable prior period.
NET INCOME (LOSS). The Company's net income for the three months
ended December 31, 1997, of approximately $74,000 decreased by
approximately $181,000 to a net loss of approximately $107,000 for the
comparable period in 1998. The primary reason for this decrease
is attributable to the non-cash charges of $53,000 and $27,000,
respectively, relating to amortization of the intangibles and unearned
compensation, plus the costs of developing additional service
offerings, the expansion of recruiting capabilities, non-recurring
charges associated with the Acquisition, and the efforts associated
with marketing and selling the Company's proprietary Year 2000
software toolset, NYE2000(TM).
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
COMPARED TO SIX MONTHS ENDED DECEMBER 31, 1997
REVENUES. The Company's revenue decreased to approximately
$4.4 million for the six months ended December 31, 1998, from approximately
$5.1 for the six months ended December 31, 1997. This decrease in revenues
is a result of the Company redirecting its focus to expanding its professional
services staffing operations through direct and/or end-user client
placements that generate higher gross margins than subcontractor
placements.
DIRECT PROJECT COSTS. Direct project costs consist primarily of
salaries and employee benefits for billable IT professionals and
the associated travel and relocation costs of these professionals, as
well as the cost of the independent contractors used by the Company.
-12-<PAGE>
Direct project costs for the first six months of fiscal year 1999
decreased to approximately $3.2 million from $3.9 million for the
comparable six month period ended December 31, 1997. The decrease in
direct project costs is primarily attributable to a decrease in the total
number of consultants as a result of the Company's change in focus.
NET REVENUE. Net revenue consists of revenues less direct
project costs. Net revenue was approximately $1.2 million for both the
six month periods ended December 31, 1997, and 1998. This result, in
spite of a decrease in the total number of consultants and Gross
Revenue, is primarily attributable to the Company's billing rates
increasing at higher levels than professional salaries and engagements
with new clients being more profitable than those with existing
clients.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. 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 to approximately $1.4 million for the six months
ended December 31, 1998, from approximately $950,000 for the
comparable period ended December 31, 1997. In addition, the Company
recognized charges relating to the amortization of intangible assets
and unearned compensation of approximately $126,000 and $60,000,
respectively during the six months ended December 31, 1998, with no
corresponding charges in the comparable prior six month period. 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 service
offerings, the expansion of its recruiting capabilities, and
non-recurring charges associated with the Acquisition. The most
significant of these costs consisted of the sales and marketing
efforts associated with the Company's proprietary Year 2000 software
toolset, NYE2000.
NET INCOME (LOSS). The Company's net income for the six months ended
December 31, 1997, of approximately $145,000 decreased to a net loss of
approximately $148,000 for the comparable period in 1998. The primary
reason for this decrease is attributable to the non-cash charges of
$126,000 and $60,000, respectively, relating to amortization of the
intangibles and unearned compensation, plus the costs of developing
additional service offerings, the expansion of recruiting capabilities,
non-recurring charges associated with the Acquisition, and the efforts
associated with marketing and selling the Company's proprietary Year
2000 software toolset, NYE2000(TM).
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.
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 under the
revolving credit facility are secured by substantially all of the
Company's assets. In addition, certain of the Company's directors
have executed a limited personal guaranty. The facility contains
certain restrictive covenants, including, the maintenance of certain
financial ratios and limitations on payment of dividends and
-13-<PAGE>
additional borrowings. As of December 31, 1998, and January 31, 1999,
the Company had outstanding borrowings under this credit facility of
approximately $284,000 and $456,309, 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 will be 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 system it is using as of January 1, 1999, which
is licensed from and maintained by third-party software development
companies, is 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 is in the process of 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 intends on completing
this study during the third quarter of 1999. 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. The Company is in the process of developing a
contingency plan should such a need arise.
-14-<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in the section captioned Management's
Discussion and Analysis of Financial Condition and Results of
Operations which are not historical are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements represent the Company's
present expectations or beliefs concerning future events. The Company
cautions that such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company to be
materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements.
Such factors include, among other things, the uncertainty as to the
Company's future profitability; the uncertainty as to the demand for
information technology services and solutions; industry trends towards
outsourcing information technology services; increasing competition in
the information technology services market; the ability to hire, train
and retain sufficient qualified personnel; the ability to obtain
financing on acceptable terms to finance the Company's growth
strategy; and the ability to develop and implement operational and
financial systems to manage the Company's growth.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule.
(b) No Reports on Form 8-K were filed during this period
-15-<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
Company caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DELSOFT CONSULTING, INC.
By: /s/ Michael Osso Date: February 15, 1999
Michael Osso
President
/s/ Jeffrey A. Rinde Date: February 15, 1999
Jeffrey A. Rinde
Chief Financial Officer, General Counsel,
and Secretary (principal financial and
accounting officer)
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