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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, 1999
/ / 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 /X/ No / /
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. $8,023,832.
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 June 30, 1999 there were 3,914,145 shares of Common Stock
outstanding held by non- affiliates of the issuer, with an aggregate value of
$2,568,657.60 (based upon a value of $0.65625 per share, the average bid and
asked price of the Common Stock on June 30, 1999).
At June 30, 1999, there were issued and outstanding 11,159,149 shares of
Common Stock.
Transitional Small Business Disclosure Format (check one): Yes / / No /x/
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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 filed by the Company in 1999 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 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.
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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 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 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 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.
Three-quarters of the Company's net revenues for fiscal year 1999 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 2000. 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
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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 42 full-time employees, consisting of 34 technical
consultants, 2 employees in marketing and sales and 6 employees in
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administration and support. DelSoft also has contracts with 9 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.
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 115,000 new H1-B
visas that may be issued for the federal government fiscal years 1999 and 2000.
The statutory limit will be reduced to 107,500 for fiscal year 2001. The
statutory limit will be further reduced 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.
The Company spent approximately $42,000 on obtaining visas for the fiscal
year ended June 30, 1999 . 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.
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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.
In 1999, the Company had 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, were leased pursuant to leases which expired
in November 1999 and December 1998, respectively. In March, 1999, the Company
closed the Canadian sales office. The Michigan sales office is 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 $2,756
Carmel, Indiana $1,918
Ottawa, Canada $ 552*
Detroit, Michigan $ 300
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* Based on exchange rate on March 1, 1999. Actual rate is in Canadian dollars
at CAN$834.
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 did not maintain insurance on the
Ottawa and Detroit offices because the contents of these two offices was
negligible, and they were 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.
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 fiscal year 1999.
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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 June 30, 1999,
approximately 11,159,149 shares of Common Stock were issued and outstanding, and
there were 406 holders of record for such shares.
Price Range
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High Low
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YEAR ENDED JUNE 30, 1999
Fourth Quarter 1.03125 .50
Third Quarter 1.50 .8125
Second Quarter 2.1875 .65625
First Quarter 3.1875 1.875
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.
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.
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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.
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.
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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.
RESULTS OF OPERATIONS FOR THE YEAR COMPARED TO THE YEAR ENDED JUNE 30, 1998
REVENUES: The Company's revenues decreased approximately 27%, from
approximately $11,000,000 in 1998 to approximately $8,000,000 in 1999. This
decrease in revenues was primarily attributable to the Company's release of
numerous consultants that were not direct and/or end-user client placements in
its effort to redirect its focus to expanding its professional service staffing
operations through direct and/or end-user client placements as well as a decline
in Year 2000 placements.
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 decreased
approximately 31%, from approximately $8,100,000 in 1998 to approximately
$5,600,000 in 1999. This decrease is primarily attributable to the release of
numerous consultants that were not direct and/or end-user client placements in
its effort to redirect its focus to expanding its professional service staffing
operations through direct and/or end-user client placements as well as a decline
in Year 2000 placements.
NET REVENUE. Net revenue consists of revenues less direct project costs.
Net revenue decreased approximately 18%, from approximately $2,925,000 in 1998
to approximately $2,400,000 in 1999. This decrease is attributable primarily to
the release of numerous consultants and a decline in Year 2000 placements. The
decrease is partially offset by billing rates increasing at a slightly higher
level than professional salaries, and engagements with new clients being more
profitable than those with existing clients.
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 35%, from
approximately $2,000,000 in 1998 to approximately $2,700,000 in 1999. 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. In addition,
these costs for the year ending June 30, 1999 included non-cash charges for
amortization of intangible assets and unearned compensation of approximately
$290,000 and $133,000, respectively, as opposed to only approximately $54,000
for the amortization of intangible assets for the year ended June 30, 1998.
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NET INCOME (LOSS). The Company's net income for the year ended June 30,
1999, decreased approximately 220%, from approximately $300,000 in 1998 to a net
loss of approximately $(360,000) in 1999. The decrease in net income 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.
In the third and fourth quarter of 1999, the Company significantly reduced the
costs associated with its Year 2000 services. These reductions, which exceed
$600,000 on an annualized basis, will be reflected in the selling, general, and
administrative expenses in the first quarter of 2000. The Company also took a
one-time charge of approximately $186,000 from the discontinuation of its
Canadian operations.
RECENT DEVELOPMENTS. Since its inception, the Company has developed a
reputation as a technology-staffing firm with expertise in mainframe
development, CASE tool usage, Year2000 services, and project management. Due to
a significant shift in the market, including the conclusion of Year2000 focused
remediation and testing and the move away from case tool and mainframe centric
development, the Company is redirecting its sales and marketing efforts to
internet-software development and e-commerce consulting (the "Internet
Division"). For that reason, in September 1999, the Company hired Brian Koch as
President. Mr. Koch has prior experience in establishing and growing a start-up
e-commerce consulting company and significant experience in the professional
services consulting industry.
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 1999, the Company did not
receive any net proceeds from sales of its 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 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 expired 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 June
30, 1999 and October 11, 1998, the Company had outstanding borrowings of
approximately $652,912 and $293,101, respectively.
The Company plans on seeking between $500,000 and $1,000,000 in equity
financing to fund a rapid expansion of its Internet Division. The Company
currently anticipates these funds together with existing sources of liquidity
and cash generated from operations are sufficient to satisfy its cash needs
through the next twelve months. 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.
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During the year ended June 30, 1998, the Company received proceeds of
$455,000 and $250,000 upon the issuance of 533,333 and 75,000 shares of common
stock respectively.
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.
We are also subject to external Year 2000-related failures or disruptions
that might generally affect industry and commerce, such as utility or
transportation company Year 2000 compliance failures and related service
interruptions. All of these factors could materially effect our business,
results of operations and financial condition.
We are in the process of developing a contingency plan to address
situations that may result if we are unable to achieve Year 2000 compliance. The
cost of developing and implementing such a plan, if necessary, is expected to be
completed by late Fall of 1999 and its cost is not expected to be material.
ITEM 7. FINANCIAL STATEMENTS.
The Financial Statements required by this item are attached hereto on pages
F1 - F18.
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 or 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. The report of J.H. Cohn
LLP on the Company's financial statements as of June 30, 1999, and for the year
ended June 30, 1999 and 1998, 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, there were no disagreements with J.H.
Cohn LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure with respect to the
Company's financial statements.
12
<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>
Business Experience During
Name (Age) Position(s) the Past Five Years
- ---------- ----------- -------------------------------------
<S> <C> <C>
Brian Koch (31) President and Director Mr. Koch has served as President
and as a Director since September 16,
1999. Prior to his employment with
DelSoft, Mr. Koch was employed by
Bostech Corporation, as Vice President
and Chief Operating Officer from
February 1999 through September 1999,
and by Ernst & Young LLP as a Senior
Manager from 1994 through February 1999.
Michael Osso (38) President and Director Mr. Osso served as President of Delsoft
from September 1997 through September
16, 1999, and as a Director from
November 1997 through September 16,
1999. 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 (35) Vice President Mr. Choksey has served as Vice President
of DelSoft since November 1996, and as a
Director since September 16, 1999. 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 (32) Chief Financial Mr. Rinde has served as Chief Financial
Officer, General Officer and General Counsel of DelSoft
Counsel, Secretary since January 1997, as its Secretary
Director 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.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Ben J. Giacchino (44) 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,
1999 and as of October 11, 1999, none of the executive officers, directors, and
beneficial owners of 10% or more of the Company's Common Stock were current with
these filing requirements.
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, 1999
with respect to the Company's Chief Executive Officer and all other executive
officers as of June 30, 1999 who earned more than $100,000 in salary and bonus
during such fiscal year (the "Named Executive Officers"):
14
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Compensation and
Annual Compensation Awards
- -----------------------------------------------------------------------------------------------------
Name and Principal Position Year Salary Bonus Options
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael Osso 1999 $197,745 $ 0 25,000
President
Adil Choksey 1999 $115,299 $84,750 --
Vice President
Jeffrey A. Rinde 1999 $167,139 $ 0 50,000
Chief Financial Officer
</TABLE>
The following table contains certain information concerning the options
granted to the Named Executive Officers during the fiscal year ended June 30,
1999.
<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 25,000 4.5% $2.00 September 1, 2007
Jeffrey A. Rinde
Chief Financial Officer 50,000 9.1% $2.00 January 31, 2009
</TABLE>
The following table sets forth certain information concerning the exercise
of stock options during the fiscal year ended June 30, 1999 by each Named
Executive Officer and the value at fiscal year end of unexercised options held
by the Named Executive Officers.
15
<PAGE>
<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>
Michael Osso
President 0 -- 2,425,000/100,000 $375,000/$ 0
Jeffrey A. Rinde
Chief Financial Officer 0 -- 250,000/100,000 $ 15,625/$ 0
</TABLE>
- -------------------
* Based on the closing sale price of Common Stock reported by the Nasdaq
Stock Market OTC Bulletin Board as of June 30, 1999, which was $0.65625 per
share, less exercise price payable by optionees.
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.
16
<PAGE>
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.
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.
17
<PAGE>
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.
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 11,159,149 shares were issued and outstanding on June 30, 1999. As of June
30, 1999, there were 406 shareholders of record.
The following table sets forth certain information regarding the beneficial
ownership of the shares of Common Stock as of June 30, 1999, 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 Percent of
Beneficially Shares
Beneficial Owner* Owned Outstanding**
- --------------------------------------------------------------------------------
<S> <C> <C>
Ben J. Giacchino 2,706,767(1) 24.09%
Jerry Rosemeyer 2,708,650(1) 24.11%
Jeffrey A. Rinde 2,352,837(2) 20.53%
Michael Osso 2,425,000(3) 17.85%
Adil Choksey 0 --
All Directors and Executive
Officers as a Group (5 persons) 10,193,254 71.92%
- --------------------
* 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.
(1) Includes 75,000 shares subject to stock options which are currently
exercisable.
(2) Includes 300,000 shares subject to stock options which are currently
exercisable.
(3) Consists of 2,425,000 shares subject to stock options which are currently
exercisable.
</TABLE>
18
<PAGE>
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.
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.
During fiscal year 1999, the Company and Bridgton had no material
transactions.
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
- ----------- -----------
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)
19
<PAGE>
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)
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.
20
<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/ Brian Koch
--------------
President
Date: October 11, 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/ Brian Koch President and Director Date: October 11, 1999
- -------------------- (principal executive
Brian Koch officer)
/s/ Jeffrey A. Rinde Chief Financial Officer, Date: October 11, 1999
- -------------------- General Counsel, Secretary
Jeffrey A. Rinde and Director (principal
financial and
accounting officer)
/s/ Ben J. Giacchino Director Date: October 11, 1999
- --------------------
Ben J. Giacchino
<PAGE>
DELSOFT CONSULTING, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
BALANCE SHEET
JUNE 30, 1999 F-3
STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999 AND 1998 F-4
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999 AND 1998 F-5
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999 AND 1998 F-6
NOTES TO FINANCIAL STATEMENTS F-7/18
* * *
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, 1999, and the related statements of operations, stockholders' equity
and cash flows for the years ended June 30, 1999 and 1998. 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 audits.
We conducted our audits 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 audits provide 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, 1999, and its results of operations and cash flows for the years ended
June 30, 1999 and 1998, in conformity with generally accepted accounting
principles.
J.H. COHN LLP
Roseland, New Jersey
July 23, 1999
F-2
<PAGE>
DELSOFT CONSULTING, INC.
BALANCE SHEET
JUNE 30, 1999
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Current assets:
Cash and cash equivalents $ 11,139
Accounts receivable, net of allowance for doubtful accounts of $20,000 1,376,033
Prepaid and refundable income taxes 137,567
Other current assets 50,702
-----------
Total current assets 1,575,441
Equipment and furnishings, net of accumulated depreciation of $102,555 205,845
Intangible assets, net of accumulated amortization of $343,701 1,107,023
Noncurrent deferred tax assets, net 157,200
Other assets 119,021
-----------
Total $ 3,164,530
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Note payable to bank $ 643,412
Current portion of long-term debt 38,536
Accounts payable 145,692
Accrued compensation and other liabilities 284,595
-----------
Total current liabilities 1,112,235
Long-term debt, net of current portion 64,588
-----------
Total liabilities 1,176,823
-----------
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 16,742
Unearned compensation (804,687)
-----------
Total stockholders' equity 1,987,707
-----------
Total $ 3,164,530
===========
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
DELSOFT CONSULTING, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Gross revenues $ 8,023,832 $11,020,278
Direct project costs 5,617,879 8,094,640
----------- -----------
Net revenues 2,405,953 2,925,638
----------- -----------
Expenses:
Selling, general and administrative expenses 2,692,326 2,007,705
Interest expense 98,244 137,147
Write-off of capitalized software development costs 135,963
Loss from discontinued Canadian operations 186,211 66,736
----------- -----------
Totals 2,976,781 2,347,551
----------- -----------
Income (loss) before income taxes (570,828) 578,087
Provision (credit) for income taxes (212,980) 277,979
----------- -----------
Net income (loss) $ (357,848) $ 300,108
=========== ===========
Basic earnings (loss) per share $(.03) $.03
===== ====
Basic weighted average common shares outstanding 11,159,149 10,146,767
=========== ===========
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
DELSOFT CONSULTING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
Common Stock
---------------------- Stock Total
Number of Subscription Retained Unearned Stockholders'
Shares Amount Receivable Earnings Compensation Equity
------ ------ ---------- -------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1998 10,013,316 $ 260,777 $(250,000) $ 74,482 $ 85,259
Issuance of shares upon receipt of pro-
ceeds from subscriptions receivable 75,000 250,000 250,000
Issuance of compensatory stock options 937,500 $(937,500)
Proceeds from sales 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
Amortization of unearned compensation 132,813 132,813
Net loss (357,848) (357,848)
----------- ---------- ----------- --------- --------- ----------
Balance, June 30, 1999 11,159,149 $2,775,652 $ -- $ 16,742 $(804,687) $1,987,707
=========== ========== =========== ========= ========= ==========
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
DELSOFT CONSULTING, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Operating activities:
Net income (loss) $(357,848) $ 300,108
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation of equipment and furnishings 67,367 42,417
Amortization of intangible assets 290,145 53,556
Amortization of unearned compensation 132,813
Provision for bad debts 10,000 6,750
(Gain) loss on sale of equipment (756) 14,429
Write-off of capitalized software development costs 135,963
Deferred income taxes (153,800) (61,700)
Changes in operating assets and liabilities:
Accounts receivable (202,639) (324,370)
Prepaid and refundable income taxes (137,567)
Other current assets (21,346) 8,812
Other assets (98,419) (5,281)
Accounts payable (53,822) (185,472)
Accrued compensation and other liabilities (179,322) 178,761
Income taxes payable (180,346) 168,646
--------- ---------
Net cash provided by (used in) operating activities (885,540) 332,619
--------- ---------
Investing activities:
Capital expenditures (25,939) (63,966)
Proceeds from sale of equipment 1,848 29,837
Purchases of intangible assets (328,349)
--------- ---------
Net cash used in investing activities (24,091) (362,478)
--------- ---------
Financing activities:
Net proceeds from (repayments of) line of credit borrowings 643,412 (489,316)
Repayments of long-term borrowings (36,093) (69,888)
Net proceeds from issuances of common stock 705,000
--------- ---------
Net cash provided by financing activities 607,319 145,796
--------- ---------
Net increase (decrease) in cash and cash equivalents (302,312) 115,937
Cash and cash equivalents, beginning of year 313,451 197,514
--------- ---------
Cash and cash equivalents, end of year $ 11,139 $ 313,451
========= =========
Supplemental disclosure of cash flow data:
Interest paid $ 92,678 $ 133,771
========= =========
Income taxes paid $ 162,031 $ 171,033
========= =========
</TABLE>
See Notes to Financial Statements.
F-6
<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. Management considers all of the services
provided by the Company to be within the same business
segment.
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 $20,000 as of June 30, 1999.
Equipment and furnishings:
Equipment and furnishings are stated at cost, net of
accumulated depreciation. Depreciation is providing using
the straight-line method over the estimated useful lives of
the assets.
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. Thereafter,
capitalized software development costs and costs of
purchased software are reported at the lower of unamortized
cost or estimated net realizable value. Due to the inherent
technological changes in the software development industry,
estimated net realizable values or economic lives may
decline and, accordingly, the amortization period may have
to be accelerated.
F-7
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business and summary of accounting policies (continued):
Software development costs (concluded):
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 1999 and
1998.
Advertising:
The Company expenses the cost of advertising and promotions
as incurred. Advertising costs charged to operations were
not material during 1999 and 1998.
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.
Earnings (loss) per share:
The Company has presented "basic" earnings (loss) per share
in the accompanying statements of operations 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 (loss) per share is calculated by dividing
net income (loss) 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-8
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business and summary of accounting policies (continued):
Earnings per share (concluded):
Diluted per share amounts have not been presented in the
accompanying statements of operations because: (i) the
Company had a net loss in 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 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.
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 temporary
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.
Recent accounting pronouncements:
The Financial Accounting Standards Board and the Accounting
Standards Executive Committee of the American Institute of
Certified Public Accountants had issued certain accounting
pronouncements as of June 30, 1999 that will become
effective in subsequent periods; however, management of the
Company does not believe that any of those pronouncements
would have significantly affected the Company's financial
accounting measurements or disclosures had they been in
effect during the years ended June 30, 1999 and 1998.
F-9
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business and summary of accounting policies (concluded):
Reclassifications:
Certain accounts in the 1998 financial statements have been
reclassified to conform to the 1999 presentations.
Note 2 - Equipment and furnishings:
Equipment and furnishings consisted of the following as of June
30, 1999:
Range of
Estimated
Useful
Lives Amount
---------- ---------
Equipment 3-7 years $ 94,444
Furnishings 7 years 26,523
Automobiles 5 years 187,433
--------
308,400
Less accumulated depreciation 102,555
--------
Total $205,845
========
Depreciation of equipment and furnishings amounted to $67,367
and $42,417 in 1999 and 1998, respectively.
During 1999 and 1998, the Company purchased equipment at a cost
of, and issued long-term obligations in the principal amount of,
$16,069 and $158,352, respectively. These noncash transactions
are not reflected in the accompanying statements of cash flows.
Note 3 - Acquisitions of businesses:
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, a fair value
method allowable under the provisions of SFAS 123. The seller
also entered into an employment agreement with the Company (see
Note 12). The sole proprietorship did not have any sales or
significant expenses prior to, or any significant tangible
assets as of, the date of acquisition.
F-10
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
Note 3 - Acquisitions of businesses (concluded):
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 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. 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
operations from the respective dates of acquisition. The total
initial costs of the acquisitions are summarized below:
<TABLE>
<CAPTION>
<S> <C>
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
==========
</TABLE>
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 respective dates
of acquisition based on an estimated useful life of five years.
Amortization of intangible assets amounted to $290,145 and
$53,556 in 1999 and 1998, respectively. 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, 1997 has not been
presented because such information would not differ materially
from the information in the accompanying 1998 historical
statement of operations.
F-11
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
Note 4 - Note payable to bank:
At June 30, 1999, the Company had borrowings of $643,412
outstanding under a revolving credit agreement with Emergent
Asset Based Lending, L.L.C. that allows maximum borrowings of
$1,250,000 through February 18, 2000. Borrowings bear interest,
which is payable monthly, at the higher of 2% above the prime
rate or 7%, and are secured by substantially all of the
Company's assets.
Note 5 - Long-term debt:
As of June 30, 1999, long-term debt consisted of equipment loans
totaling $103,124 which are payable in monthly installments
through February 2003 with 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
year subsequent to June 30, 1999 total $38,536 in 2000; $35,435
in 2001; $18,958 in 2002 and $10,195 in 2003.
Note 6 - Related party transactions:
During 1999, there were no material related party transactions.
Certain stockholders, who owned more than 50% of the Company's
common stock during 1998 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 for the
services of its programmers and engineers and realized a gross
profit of approximately $38,000 on such billings during 1998.
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 during 1998. Bridgton also
billed the Company approximately $50,000 during 1998 to obtain
reimbursement for the overhead expenses it incurred on behalf of
the Company.
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.
F-12
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
Note 7 - Discontinued Canadian operations:
During February 1999, management decided to focus the Company's
international marketing efforts for the NYE 2000 software
product in Europe. As a result, the Company ceased its
operations in Canada during March 1999 and transferred all of
the remaining Canadian assets to the United States. Information
with respect to the results of the Canadian operations (which
are included in the Company's continuing operations in the
accompanying statements of operations) follows:
1999 1998
---- ----
Gross revenues $145,000 $ -
Loss before income taxes (186,000) (67,000)
Net loss (123,000) (44,000)
Basic loss per share (.01) -
Note 8 - Income taxes:
The net provision (credit) for income taxes in 1999 and 1998
consisted of the following provisions (credits):
1999 1998
---- ----
Federal:
Current $ (71,146) $200,278
Deferred (113,700) (52,400)
--------- --------
Totals (184,846) 147,878
--------- --------
State:
Current 11,966 139,401
Deferred (40,100) (9,300)
--------- --------
Totals (28,134) 130,101
--------- --------
Totals $(212,980) $277,979
========= ========
The provision for income taxes in 1999 and the credit for income
taxes in 1998 differ from the amounts computed using the Federal
statutory rate of 34% as a result of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Expected provision (credit) at Federal statutory rate (34)% 34%
Effect of:
State income taxes, net of Federal income tax effect (3) 15
Nondeductible expenses 2 6
Other (primarily surtax exemptions) (2) (7)
---- ---
Effective tax rate (37)% 48%
=== ==
</TABLE>
F-13
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
Note 8 - Income taxes (concluded):
At June 30, 1999, net noncurrent deferred tax assets were
attributable to the following:
Deferred tax assets:
Unearned compensation $ 53,100
Amortization of intangible assets 93,600
Other 20,000
--------
Total 166,700
Deferred tax liabilities - depreciation (9,500)
--------
Net noncurrent deferred tax assets $157,200
========
Note 9 - 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
1999 and 1998.
Note 10- Stock option plan:
Pursuant to the Company's Stock Option Plan (the "Plan"),
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 by the Board of Directors 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 unearned
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 unearned compensation is shown
separately as a reduction of stockholders' equity in the
accompanying balance sheet as of June 30, 1999). The unearned
compensation is being amortized on a straight-line basis over
the term of each option.
F-14
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
Note 10- Stock option plan (continued):
A summary of the status of the Company's options as of June 30,
1999 and 1998 and changes during the years then ended is
presented below:
<TABLE>
<CAPTION>
1999 1998
--------------------- -------------------
Weighted Weighted
Shares Average Shares Average
or Exercise or Exercise
Price Price Price Price
----- ----- ----- -----
<S> <C> <C> <C> <C>
Outstanding, at beginning of
year 3,652,750 $ .95 651,250 $2.00
Granted 550,750 2.00 3,087,500 .75
Canceled (86,000) 2.00
--------- ---------
Outstanding, at end of year 4,203,500 $1.08 3,652,750 $ .95
========= ===== ========= ======
Options exercisable, at
end of year 3,261,167 3,002,500
========= =========
Weighted average fair value
of options granted during
the year $2.00 $.66
===== ====
</TABLE>
The following table summarizes information about fixed stock
options outstanding at June 30, 1999:
<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
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$ .50 2,500,000 8.60 $ .50 2,500,000 $ .50
1.25 87,500 8.79 1.25 29,167 1.25
1.75 225,000 8.75 1.75 225,000 1.75
2.00 565,250 7.67 2.00 246,250 2.00
2.00 50,000 8.00 2.00 50,000 2.00
2.00 125,000 8.17 2.00 25,000 2.00
2.00 550,750 9.17 2.00 85,750 2.00
2.25 100,000 8.67 2.25 100,000 2.25
---------- ----------
$.50-$2.25 4,203,500 8.54 $ .95 3,261,167 $ .83
========== ========= ==== ====== ========= ======
</TABLE>
F-15
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
Note 10- Stock option plan (concluded):
Since the Company has elected to continue to use the provisions
of APB 25 in accounting for stock options, no earned or unearned
compensation cost was recognized in the accompanying financial
statements for stock options granted to employees at exercise
prices that were equal to or greater than the fair market value
of the Company's common stock on the date of grant. The pro
forma amounts computed as if the Company had elected to
recognize compensation cost for all stock options granted to
employees based on the fair value of the options at the date of
grant as prescribed by SFAS 123 and the related historical
amounts reported in the accompanying statements of operations
are set forth below:
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
<S> <C> <C>
Net income (loss) - as reported $ (357,848) $ 300,108
Net income (loss) - pro forma (625,536) 122,700
Basic weighted average common shares
outstanding - as reported 11,159,149 10,146,767
Basic earnings (loss) per share - as reported $(.03) $.03
Basic earnings (loss) per share - pro forma (.06) $.01
</TABLE>
The fair value of each option granted was estimated as of the
date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions used for 1999 and
1998:
1999 1998
---- ----
Expected volatility 17% 16%
Risk-free interest rate 4.7% 6.3%
Expected years of option life 10 10
Expected dividends 0% 0%
Note 11- 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 12- Commitments and contingencies:
Employment agreement:
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 2000
and 2001 and $77,000 in 2002.
F-16
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
Note 12- Commitments and contingencies (continued):
Leases:
The Company leases its office facilities under a
noncancelable operating lease which expires on April 30,
2000. The Company has a one-year renewal option. The lease
also requires the Company to pay all operating expenses.
Rent expense charged to operations aggregated $62,300 and
$38,230 in 1999 and 1998, respectively. The Company's
minimum rental commitment for the period from July 1, 1999
through April 30, 2000 was not material.
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
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, 1999, 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 major financial institutions that have
high credit ratings. At times, such balances may exceed
Federally insured limits.
Approximately 76% and 67% of the Company's net revenues were
derived from two customers during 1999 and 1998,
respectively, who also accounted for approximately 65% of
its accounts receivable balance at June 30, 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 June 30, 1999.
F-17
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
Note 12- Commitments and contingencies (concluded):
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 has reversed the
deferred charge and reduced the number of shares outstanding
for financial statement reporting purposes. 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 13- Fair value of financial instruments:
The Company's material financial instruments at June 30, 1999
for which disclosure of estimated fair value is required by
certain accounting standards consisted of cash and cash
equivalents, accounts receivable, accounts payable, notes
payable and long-term debt. In the opinion of management, (i)
cash and cash equivalents, accounts receivable and accounts
payable were carried at values that approximated their fair
values because of their liquidity and/or their short-term
maturities and (ii) notes payable and long-term debt were
carried at values that approximated their fair values because
they had interest rates equivalent to those currently prevailing
for financial instruments with similar characteristics.
* * *
F-18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 11,139
<SECURITIES> 0
<RECEIVABLES> 1,396,033
<ALLOWANCES> 20,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,575,441
<PP&E> 308,400
<DEPRECIATION> 102,555
<TOTAL-ASSETS> 3,164,530
<CURRENT-LIABILITIES> 1,112,235
<BONDS> 64,588
0
0
<COMMON> 2,775,652
<OTHER-SE> (787,945)
<TOTAL-LIABILITY-AND-EQUITY> 1,987,707
<SALES> 8,023,832
<TOTAL-REVENUES> 8,023,832
<CGS> 5,617,879
<TOTAL-COSTS> 5,617,879
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<INCOME-PRETAX> (570,828)
<INCOME-TAX> (212,980)
<INCOME-CONTINUING> (357,848)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (357,848)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.03)
</TABLE>
