<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.
--------------------------------------------------------------------
(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 May 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>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
DELSOFT CONSULTING, INC.
CONDENSED BALANCE SHEETS
MARCH 31, 1999 AND JUNE 30, 1998
<TABLE>
<CAPTION>
March 31, June 30,
ASSETS 1999 1998
------------- -------------
(Unaudited) (See Note 1)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 33,835 $ 313,451
Accounts receivable, net of allowance for doubtful accounts
of $10,000 935,344 1,183,394
Federal income tax prepayments and refunds receivable 239,720
Deferred tax assets 129,700 13,000
Other current assets 44,703 20,556
------------- -------------
Total current assets 1,383,302 1,530,401
Equipment and furnishings, net of accumulated depreciation
of $87,258 and $47,829 221,551 232,296
Intangible assets, net of accumulated amortization of $276,165
and $53,556 1,179,559 1,397,168
Other assets 121,930 20,602
------------- -------------
Totals $2,906,342 $3,180,467
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 245,029
Current portion of long-term debt 38,992 $ 38,134
Accounts payable 210,688 199,514
Accrued compensation and other liabilities 330,508 463,917
Income taxes payable 180,346
------------- -------------
Total current liabilities 825,217 881,911
Long-term debt, net of current portion 74,867 85,014
Deferred tax liabilities 10,700 800
------------- -------------
Total liabilities 910,784 967,725
------------- -------------
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 2,775,652
Retained earnings 57,797 374,590
Unearned compensation (837,891) (937,500)
------------- -------------
Total stockholders' equity 1,995,558 2,212,742
------------- -------------
Totals $2,906,342 $3,180,467
============= =============
</TABLE>
See Notes to Condensed Financial Statements.
-1-
<PAGE>
DELSOFT CONSULTING, INC.
CONDENSED STATEMENTS OF OPERATIONS
NINE AND THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Three Months
Ended March 31, Ended March 31,
--------------------------- ---------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Gross revenue $6,212,538 $8,202,842 $1,788,772 $3,052,262
Direct project costs 4,593,513 5,818,211 1,364,487 1,911,587
---------- ---------- ---------- ----------
Net revenues 1,619,025 2,384,631 424,285 1,140,675
---------- ---------- ---------- ----------
Expenses:
Selling, general and administrative
expenses 2,057,650 1,640,043 677,875 690,040
Interest expense 68,968 133,068 25,725 58,205
Write-off of capitalized software
development costs 135,963 135,963
---------- ---------- ---------- ----------
Totals 2,126,618 1,909,074 703,600 884,208
---------- ---------- ---------- ----------
Income (loss) before provision (credit)
for income taxes (507,593) 475,557 (279,315) 256,467
Provision (credit) for income taxes (190,800) 173,361 (111,000) 98,940
---------- ---------- ---------- ----------
Net income (loss) $ (316,793) $ 302,196 $ (168,315) $ 157,527
========== ========== ========== ==========
Basic earnings (loss) per share $(.03) $.03 $(.02) $.02
===== ==== ===== ====
Basic weighted average common shares
outstanding 11,159,149 10,135,214 11,159,149 10,088,316
========== ========== ========== ==========
</TABLE>
See Notes to Condensed Financial Statements.
-2-
<PAGE>
DELSOFT CONSULTING, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
------------------------- Total
Number of Retained Unearned Stockholders'
Shares Amount Earnings Compensation Equity
---------- ---------- -------- ------------ -------------
<S> <C> <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 99,609 99,609
Net loss (316,793) (316,793)
---------- ---------- --------- --------- ----------
Balance, March 31, 1999 11,159,149 $2,775,652 $ 57,797 $(837,891) $1,995,558
========== ========== ========= ========= ==========
</TABLE>
See Notes to Condensed Financial Statements.
-3-
<PAGE>
DELSOFT CONSULTING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Operating activities:
Net income (loss) $(316,793) $ 302,196
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation of equipment and furnishings 49,885 37,357
Amortization of intangible assets 217,609
Amortization of unearned compensation 99,609
Write-off of capitalized software development costs 135,963
Deferred income taxes (106,800) (59,584)
Changes in operating assets and liabilities:
Accounts receivable 248,050 (635,126)
Federal income tax prepayments and refunds receivable (239,720)
Other current assets (24,147) (35,215)
Other assets (101,328) (1,337)
Accounts payable 11,174 (136,428)
Accrued compensation and other liabilities (133,409) 58,606
Income taxes payable (180,346) 97,223
--------- ---------
Net cash used in operating activities (476,216) (236,345)
--------- ---------
Investing activities - capital expenditures (23,071) (36,962)
--------- ---------
Financing activities:
Net proceeds from (repayments of) line of credit borrowings 245,029 (93,028)
Repayments of long-term borrowings (25,358) (46,248)
Proceeds from issuances of common stock 250,000
--------- ---------
Net cash provided by financing activities 219,671 110,724
--------- ---------
Net decrease in cash and cash equivalents (279,616) (162,583)
Cash and cash equivalents, beginning of period 313,451 197,514
--------- ---------
Cash and cash equivalents, end of period $ 33,835 $ 34,931
========= =========
Supplemental disclosure of cash flow data:
Interest paid $ 64,583 $ 128,564
========= =========
Income taxes paid $ 167,254 $ 135,772
========= =========
</TABLE>
Supplemental schedule of noncash investing and financing activities:
The Company purchased equipment at a cost of, and issued long-term
obligations in the principal amount of, $16,069 during the nine months ended
March 31, 1999 and $133,217 during the nine months ended March 31, 1998.
See Notes to Condensed Financial Statements.
-4-
<PAGE>
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 March 31, 1999 and its results of operations
for the nine and three months ended March 31, 1999 and 1998,
changes in stockholders' equity for the nine months ended March
31, 1999 and cash flows for the nine months ended March 31, 1999
and 1998. Information included in the condensed balance sheet as
of June 30, 1998 has been derived from, and 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 (the "SEC"). Pursuant to
rules and regulations of the SEC, certain information and
disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have
been condensed or omitted from these financial statements unless
significant changes have taken place since the end of the most
recent fiscal year. 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 nine and three
months ended March 31, 1999 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 nine and three months ended March 31, 1999 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 nine and
three months ended March 31, 1998 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 March 31, 1999, the Company had borrowed $245,029 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 March 31, 1999).
-5-
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Long-term debt:
At March 31, 1999, long-term debt consisted of equipment loans
totaling $113,859 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 March 31, 1999 total $38,992 in 2000;
$38,059 in 2001; $21,733 in 2002; and $15,075 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 nine months ended March 31, 1999, there were no
transactions between the Company and Bridgton (see Note 6 of the
notes to the Audited Financial Statements). During the nine and
three months ended March 31, 1998, the Company billed Bridgton
approximately $211,000 and $72,000, respectively, for the
services of its programmers and engineers and realized a gross
profit of approximately $38,000 and $13,000, respectively, on
such billings, and Bridgton billed the Company approximately
$322,000 and $13,000, 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 $75,000 and $13,000, respectively. Bridgton also
billed the Company approximately $50,000 during the nine and
three months ended March 31, 1998 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 nine and three
months ended March 31,1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
Nine Months Three Months
Ended March 31, Ended March 31,
------------------------- -------------------------
1999 1998 1999 1998
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Federal:
Current provision $ (84,000) $192,604 $ (84,000) $130,717
Deferred credit (79,900) (59,584) (12,100) (56,506)
--------- -------- --------- --------
Totals (163,900) 133,020 (96,100) 74,211
--------- -------- --------- --------
State:
Current provision 40,341 24,729
Deferred credit (26,900) (14,900)
--------- -------- --------- --------
Totals (26,900) 40,341 (14,900) 24,729
--------- -------- --------- --------
Totals $(190,800) $173,361 $(111,000) $ 98,940
========= ======== ========= ========
</TABLE>
-6-
<PAGE>
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 nine and three
months ended March 31, 1999 and 1998 differs from the amount
computed using the Federal statutory rate of 34% as a result of
the following:
<TABLE>
<CAPTION>
Nine Months Three Months
Ended March 31, Ended March 31,
------------------------- -------------------------
1999 1998 1999 1998
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Tax at Federal statutory rate (34)% 34% (34)% 34%
State income taxes, net of Federal income
tax effect (4) 6 (4) 6
Effect of nondeductible expenses 2 1
Other items, primarily surtax exemptions (2) (4) (3) (2)
---- --- ---- ---
Effective tax rate (38)% 36% (40)% 38%
=== == === ==
</TABLE>
At March 31, 1999, deferred tax assets and liabilities were attributable to
the following:
Deferred tax assets:
Unearned compensation $ 39,900
Amortization of intangible assets 72,300
Other 17,500
--------
Total 129,700
Deferred tax liabilities - depreciation (10,700)
--------
Net deferred tax assets $119,000
========
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>
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 nine months ended March 31, 1999, 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
March 31, 1999, 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 $99,609 and $33,203 was amortized
during the nine and three months ended March 31, 1999,
respectively (there was no charge for amortization during the
nine and three months ended March 31, 1998). 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 nine and three months ended
March 31, 1999 are set forth below (pro forma net income and
income per share amounts for the nine and three months ended
March 31, 1998 are not presented because they would not differ
materially from the historical amounts for the corresponding
periods):
Nine Months Three Months
Ended Ended
March March
31, 1999 31, 1999
----------- ------------
Net loss - as reported $(316,793) $(168,315)
Net loss - pro forma (492,389) (226,858)
Basic weighted average common shares
outstanding - as reported 11,159,149 11,159,149
Basic weighted average common shares
outstanding - pro forma 12,569,738 12,569,738
Basic loss per share - as reported $(.03) $(.02)
Basic loss per share - pro forma $(.04) $(.02)
-8-
<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 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 8 - Major customers and concentration of credit risk:
Approximately 76% and 75% of the Company's net revenues were
derived from two customers during the nine and three months
ended March 31, 1999, respectively, and approximately 65% of the
Company's net revenues were derived from these customers during
both the nine and three months ended March 31, 1998.
These customers also accounted for approximately 55% of the
Company's accounts receivable balance at March 31, 1999. 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 March 31,
1999.
Note 9 - Venture capital agreement:
As of March 31, 1999, 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.
<PAGE>
(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 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 more 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. As a result, in the
short-term the Company's gross revenues decreased; however, the Company expects
through new placements to generate net revenue commencing in the first quarter
of the 2000 fiscal year comparable with net revenue earned prior to the
Company's change in focus.
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. The target
company had 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 July 1, 1999.
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999
COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
REVENUES. The Company's revenue decreased to approximately $1.8 million for the
third quarter of 1999 from approximately $3.0 for the third 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 $1.4 million for the third
quarter of 1999 from approximately $1.9 million for the third 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.
NET REVENUE. Net revenue consists of revenues less direct project costs. Net
revenue decreased from approximately $1,140,000 during the three-month period
ended March 31, 1998, to approximately $424,000 during the three-month period
ended March 31, 1999. This decrease in net revenue is primarily attributable to
a decrease in the total number of consultants as a result of the Company's
change in focus.
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 decreased slightly to approximately $678,000 in the
third quarter of 1999 from approximately $690,000 in the third quarter of 1998.
NET INCOME (LOSS). The Company's net income for the three months ended March 31,
1998, of approximately $157,000 decreased by approximately $325,000 to a net
loss of approximately $168,000 for the comparable period in 1999. The primary
reason for this decrease isthe Company's change in focus and the costs of
developing additional service offerings, the expansion of recruiting
capabilities, non-recurring charges associated with the Acquisition, and the
continuing efforts associated with marketing and selling the Company's
proprietary Year 2000 software toolset, NYE2000(TM).
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1999
COMPARED TO NINE MONTHS ENDED MARCH 31, 1998
REVENUES. The Company's revenue decreased to approximately $6.2 million for the
first nine months of 1999 from approximately $8.2 for the comparable nine month
period in 1998. 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.
<PAGE>
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 for the first nine months of 1999 decreased to
approximately $4.5 million from approximately $5.8 million for the comparable
nine month period ending March 31, 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.
NET REVENUE. Net revenue consists of revenues less direct project costs. Net
revenue decreased to approximately $1.6 million for the nine month period ending
March 31, 1999 from approximately $2.4 million for the comparable nine month
period ending March 31, 1998. The decrease in net revenues is primarily
attributable to a decrease in the total number of consultants as a result of the
Company's change in focus.
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 $2.0
million for the nine months ended March 31, 1999, from approximately $1.6
million for the comparable period ending March 31, 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.
NET INCOME (LOSS). The Company's net income for the nine months ended March 31,
1998, of approximately $302,000 decreased to a net loss of approximately
$317,000 for the comparable period in 1999. The primary reason for this decrease
is attributable to 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.
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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 additional
borrowings. As of March 31, 1999, and April 30, 1999, the Company had
outstanding borrowings under this credit facility of approximately $245,029 and
$460,756, 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 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 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 intends on completing this study during the fourth 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.
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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) No exhibits are filed as of part of this report.
(b) No Reports on Form 8-K were filed during this period
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: May 15, 1999
---------------------------------------------
Michael Osso
President
/s/ Jeffrey A. Rinde Date: May 15, 1999
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Jeffrey A. Rinde
Chief Financial Officer, General Counsel,
and Secretary (principal financial and
accounting officer)
