<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2000
Transition Report under Section 13 or 15(d) of
The Exchange Act For the Transition Period from
____________________________________to ___________________________________
Commission File Number
DelSoft Consulting, Inc.
(Exact Name of Small Business Issuer as Specified in its Charter)
Georgia 58-2247152
--------------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
106 Bombay Lane, Roswell, Georgia 30076
(Address of principal executive office) (Zip Code)
Issuer's telephone number, including area code: (770) 518-4289
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act during the past 12 months
(or such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
At May 11, 2000, there were issued and outstanding 11,855,816 shares of
Common Stock.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
DELSOFT CONSULTING, INC.
INDEX TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
CONDENSED BALANCE SHEETS
MARCH 31, 2000 AND JUNE 30, 1999 F-3
CONDENSED STATEMENTS OF OPERATIONS
NINE AND THREE MONTHS ENDED MARCH 31, 2000 AND 1999 F-4
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 2000 F-5
CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2000 AND 1999 F-6
NOTES TO CONDENSED FINANCIAL STATEMENTS F-7/14
* * *
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors and
Stockholders
Delsoft Consulting, Inc.
We have reviewed the accompanying condensed balance sheet of DELSOFT CONSULTING,
INC. as of March 31, 2000, and the related condensed statements of operations
for the nine and three months ended March 31, 2000, statements of stockholders'
equity and cash flows for the nine months ended March 31, 2000. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review of the condensed financial statements referred to above, we
are not aware of any material modifications that should be made to the
accompanying financial statements for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of the Company as of June 30, 1999, and the related
statements of operations, stockholders' equity and cash flows for the year then
ended which are not presented herein, and in our report dated July 23, 1999, we
expressed an unqualified opinion on those financial statements. In our opinion,
the information set forth in the accompanying balance sheet as of June 30, 1999
is fairly stated, in all material respects, in relation to the balance sheet
from which it has been derived.
The accompanying condensed statements of operations for the nine and three
months ended March 31, 1999 and cash flows for the nine months ended March 31,
1999 were not audited or reviewed by us and, accordingly, we do not express an
opinion or any other form of assurance on them.
J.H. Cohn LLP
Roseland, New Jersey
May 9, 2000
F-2
<PAGE>
DELSOFT CONSULTING, INC.
CONDENSED BALANCE SHEETS
MARCH 31, 2000 AND JUNE 30, 1999
<TABLE>
<CAPTION>
March June
ASSETS 31, 2000 30, 1999
------ -------- --------
(Unaudited) (See Note 1)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 150,046 $ 11,139
Accounts receivable, net of allowance for doubtful accounts
of $20,000 664,767 1,376,033
Prepaid and refundable income taxes 191,441 137,567
Other current assets 175,565 50,702
----------- -----------
Total current assets 1,181,819 1,575,441
Equipment and furnishings, net of accumulated depreciation
of $119,665 and $102,555 154,241 205,845
Intangible assets, net of accumulated amortization of $194,888
and $343,701 284,030 1,107,023
Noncurrent deferred tax assets, net 580,000 157,200
Other assets 18,409 119,021
----------- -----------
Totals $ 2,218,499 $ 3,164,530
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Note payable to bank $ 291,847 $ 643,412
Current portion of long-term debt 30,647 38,536
Accounts payable 113,207 145,692
Accrued compensation and other liabilities 118,523 284,595
----------- -----------
Total current liabilities 554,224 1,112,235
Long-term debt, net of current portion 72,028 64,588
----------- -----------
Total liabilities 626,252 1,176,823
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value; 100,000,000 shares authorized;
11,855,816 and 9,889,149 shares (1999 restated)
issued and outstanding 2,495,832 2,775,652
Retained earnings (accumulated deficit) (843,217) 16,742
Unearned compensation (60,368) (804,687)
----------- -----------
Total stockholders' equity 1,592,247 1,987,707
----------- -----------
Totals $ 2,218,499 $ 3,164,530
=========== ===========
</TABLE>
See Notes to Condensed Financial Statements.
F-3
<PAGE>
DELSOFT CONSULTING, INC.
CONDENSED STATEMENTS OF OPERATIONS
NINE AND THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Three Months
Ended March 31, Ended March 31,
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Gross revenue $ 4,331,995 $6,075,930 $ 1,076,695 $1,779,043
Direct project costs 3,040,805 4,297,093 827,351 1,297,134
----------- ---------- ----------- ----------
Net revenues 1,291,190 1,778,837 249,344 481,909
----------- ---------- ----------- ----------
Other (income) expenses:
Selling, general and administrative
expenses 1,957,592 2,021,377 731,668 669,972
Interest expense 63,243 68,968 16,296 25,725
Reversal of amortization of unearned
compensation (133,751)
Loss from discontinued Canadian
operations 196,085 65,527
Write-off of intangible assets 703,598
Costs of terminated acquisition 112,593
----------- ---------- ----------- ----------
Totals 2,703,275 2,286,430 747,964 761,224
----------- ---------- ----------- ----------
Loss before credit for income taxes (1,412,085) (507,593) (498,620) (279,315)
Credit for income taxes (552,126) (190,800) (203,000) (111,000)
----------- ---------- ----------- ----------
Net loss $ (859,959) $ (316,793) $ (295,620) $ (168,315)
=========== ========== =========== ==========
Basic loss per share (1999 restated) $ (.08) $ (.03) $ (.03) $ (.02)
=========== ========== =========== ==========
Basic weighted average common shares
outstanding (1999 restated) 10,223,937 9,889,149 10,900,871 9,889,149
=========== ========== =========== ==========
</TABLE>
See Notes to Condensed Financial Statements.
F-4
<PAGE>
DELSOFT CONSULTING, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Retained
---------------------------- Earnings Total
Number of (Accumulated Unearned Stockholders'
Shares Amount Deficit) Compensation Equity
---------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1999 11,159,149 $2,775,652 $ 16,742 $ (804,687) $1,987,707
Cancellation of shares held by founder (1,270,000)
---------- ---------- --------- ---------- ----------
Balance, July 1, 1999, as restated 9,889,149 2,775,652 16,742 (804,687) 1,987,707
Issuance of compensatory stock options 64,680 (64,680)
Amortization of unearned compensation 5,250 5,250
Effect of cancellation of stock options (937,500) 803,749 (133,751)
Proceeds from issuance of common stock,
net of expenses of $31,000 666,667 369,000 369,000
Proceeds from exercise of stock options 1,300,000 224,000 224,000
Net loss (859,959) (859,959)
---------- ---------- --------- ---------- ----------
Balance, March 31, 2000 11,855,816 $2,495,832 $(843,217) $ (60,368) $1,592,247
========== ========== ========= ========== ==========
</TABLE>
See Notes to Condensed Financial Statements.
F-5
<PAGE>
DELSOFT CONSULTING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Operating activities:
Net loss $(859,959) $(316,793)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of equipment and furnishings 49,421 49,885
Amortization of intangible assets 119,395 217,609
Amortization of unearned compensation 5,250 99,609
Reversal of amortization of unearned compensation (133,751)
Noncash compensation 56,964
Write-off of intangible assets 703,598
Write-off of costs of terminated acquisition 112,593
Deferred income taxes (414,000) (106,800)
Changes in operating assets and liabilities:
Accounts receivable 711,266 248,050
Prepaid and refundable income taxes (53,874) (239,720)
Other current assets (133,663) (24,147)
Other assets (11,981) (101,328)
Accounts payable (32,485) 11,174
Accrued compensation and other liabilities (166,072) (133,409)
Income taxes payable (180,346)
---------- ----------
Net cash used in operating activities (47,298) (476,216)
---------- ----------
Investing activities - capital expenditures (2,908) (23,071)
---------- ----------
Financing activities:
Net proceeds from (repayments of) line of credit borrowings (351,565) 245,029
Repayments of long-term borrowings (52,322) (25,358)
Net proceeds from issuances of common stock 369,000
Proceeds from exercise of stock options 224,000
---------- ----------
Net cash provided by financing activities 189,113 219,671
---------- ----------
Net increase (decrease) in cash and cash equivalents 138,907 (279,616)
Cash and cash equivalents, beginning of period 11,139 313,451
---------- ----------
Cash and cash equivalents, end of period $ 150,046 $ 33,835
========== ==========
Supplemental disclosure of cash flow data:
Interest paid $ 68,597 $ 64,583
========== ==========
Income taxes paid (refunded) $ (4,554) $ 167,254
========== ==========
</TABLE>
Supplemental schedule of noncash investing and financing activities:
The Company purchased equipment at a cost of, and issued long-term
obligations in the principal amount of, $51,873 during the nine months
ended March 31, 2000 and $16,069 during the nine months ended March 31,
1999.
See Notes to Condensed Financial Statements.
F-6
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Unaudited interim financial statements:
In the opinion of management, the accompanying unaudited
condensed financial statements reflect all adjustments,
consisting of normal recurring accruals, necessary to present
fairly the financial position of Delsoft Consulting, Inc. (the
"Company") as of March 31, 2000 and its results of operations
for the nine and three months ended March 31, 2000 and 1999,
changes in stockholders' equity for the nine months ended March
31, 2000 and cash flows for the nine months ended March 31, 2000
and 1999. Information included in the condensed balance sheet as
of June 30, 1999 has been derived from, and certain terms used
herein are defined in, the audited financial statements of the
Company as of June 30, 1999 and for the years ended June 30,
1999 and 1998 (the "Audited Financial Statements") included in
the Company's Annual Report on Form 10-KSB for the year ended
June 30, 1999 that was previously filed with the United States
Securities and Exchange Commission (the "SEC"). Pursuant to the
rules and regulations of the SEC, certain information and
disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have
been condensed or omitted from these financial statements unless
significant changes have taken place since the end of the most
recent fiscal year. Accordingly, these unaudited condensed
financial statements should be read in conjunction with the
Audited Financial Statements and the other information also
included in the Form 10-KSB.
The results of the Company's operations for the nine and three
months ended March 31, 2000 are not necessarily indicative of
the results of operations for the full year ending June 30,
2000.
Note 2 - Earnings (loss) per common share:
As further explained in Note 1 of the notes to the Audited
Financial Statements, the Company presents basic and, if
appropriate, diluted earnings (loss) per share in accordance
with the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). Diluted
per share amounts have not been presented in the accompanying
unaudited condensed statements of operations because the Company
had a net loss for the nine and three months ended March 31,
2000 and 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.
The number of shares outstanding and the weighted average number
of shares outstanding have been retroactively adjusted in the
accompanying condensed financial statements as if the
cancellation of 1,270,000 shares issued to a founder of the
Company had occurred on the date of their original issuance
instead of on November 16, 1999 (see Note 9 herein).
F-7
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 3 - Note payable to bank:
At March 31, 2000, the Company had borrowed $291,847 under the
revolving credit agreement that provides it with a $1,250,000
line of credit (see Note 4 of the notes to the Audited Financial
Statements). Interest on outstanding borrowings is payable
monthly at the higher of 1.5% above the prime rate (an effective
rate of 10.5% at March 31, 2000) or 7%.
Note 4 - Long-term debt:
At March 31, 2000, long-term debt consisted of equipment loans
totaling $102,676 which are payable in monthly installments and
bear interest at rates ranging from 7.75% to 13.75%. The loans
were secured by equipment with a net book value that approximated
the total outstanding balance.
Principal payment requirements for long-term obligations in each
of the years subsequent to March 31, 2000 total $30,647 in 2001;
$34,065 in 2002; $32,835 in 2003; and $5,128 in 2004.
See Note 5 of the notes to the Audited Financial Statements for
additional information regarding long-term debt.
Note 5 - Credit for income taxes:
The net credit for income taxes for the nine and three months
ended March 31, 2000 and 1999 consisted of the following
provisions (credits):
<TABLE>
<CAPTION>
Nine Months Three Months
Ended March 31, Ended March 31,
------------------------- -------------------------
2000 1999 2000 1999
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Federal:
Current $(142,000) $ (84,000) $ (84,000)
Deferred (320,000) (79,900) $(168,000) (12,100)
---------- ----------- --------- -----------
Totals (462,000) (163,900) (168,000) (96,100)
---------- ----------- --------- -----------
State:
Current 3,874
Deferred (94,000) (26,900) (35,000) (14,900)
---------- ----------- --------- -----------
Totals (90,126) (26,900) (35,000) (14,900)
---------- ----------- --------- -----------
Totals $(552,126) $(190,800) $(203,000) $ (111,000)
========== =========== ========= ===========
</TABLE>
F-8
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 5 - Credit for income taxes (concluded):
The net credit for income taxes for the nine and three months
ended March 31, 2000 and 1999 differs from the amount computed
using the Federal statutory rate of 34% as a result of the
following:
<TABLE>
<CAPTION>
Nine Months Three Months
Ended Ended
March 31, March 31,
---------------- ---------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Tax at Federal statutory rate (34)% (34)% (34)% (34)%
State income taxes, net of Federal income
tax effect (4) (4) (5) (4)
Effect of nondeductible expenses 2 1
Other items, primarily surtax exemptions (1) (2) (2) (3)
---- ---- ---- ----
Effective tax rate (39)% (38)% (41)% (40)%
==== ==== ==== ====
<CAPTION>
As of March 31, 2000, deferred tax assets and liabilities were
attributable to temporary differences related to the following:
<S> <C>
Deferred tax assets:
Net operating losses carryforwards $521,000
Amortization of intangible assets 50,500
Other 9,900
--------
Total 581,400
Deferred tax liabilities - depreciation (1,400)
--------
Net deferred tax assets $580,000
========
</TABLE>
The deferred tax assets listed above include the potential
benefits of $521,000 attributable to net operating loss
carryforwards of approximately $1,158,000 and $1,814,000
available as of March 31, 2000 to reduce the Company's future
Federal and state taxable income, respectively, which will expire
at various dates through 2019.
Future realization of the net deferred tax assets of $580,000 as
of March 31, 2000 is dependent on the Company's ability to
generate sufficient taxable income prior to the expiration of the
net operating loss carryforwards or reversal of the other
temporary differences from which the net deferred tax assets
arose. Management believes, but cannot assure, that it is more
likely than not that the Company will realize its net deferred
assets prior to their expiration in 2019 since the net operating
loss carryforwards arose primarily from nonrecurring losses (see
Note 10 herein). However, such estimates are subject to change
and management cannot assure that the net deferred tax assets
will be realized.
F-9
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 6 - Stock options:
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, as further explained in Note 10 of the notes to the
Audited Financial Statements.
The Board of Directors may also grant options for the purchase
of shares of common stock to the Company's directors, officers,
consultants and other advisors that are not covered under the
Plan. During the nine months ended March 31, 2000, options were
granted to directors and officers for the purchase of 4,400,000
shares and to a consultant for the purchase of 1,100,000 shares.
The options for the 4,400,000 shares issued to the directors and
officers have an exercise price of $.24 per share (which
represented the fair market value on the date of grant) and will
expire in September and November 2009. Options for the purchase
of 2,600,000 shares vested as of the date of issuance and
options for the purchase of 600,000 shares will vest in
September 2000, 2001 and 2002, respectively. No compensation was
charged in connection with the issuance of the options to the
directors and officers. During the three months ended March 31,
2000, the Company received $48,000 upon the exercise of options
issued to directors and officers for the purchase of 200,000
shares.
The options for the 1,100,000 shares issued to the consultant
have an exercise price of $.16 per share (which was less than
the fair market value of $.21875 per share on the date of grant)
and were initially scheduled to expire in December 2004. All of
the options became vested as of the date of issuance. The fair
value of the options was estimated at $64,680 as of the date of
grant using the Black-Scholes option-pricing model (see Note 10
of the notes to the Audited Financial Statements). Accordingly,
the Company charged $64,680 to unearned compensation and common
stock as of the date of grant. The unearned compensation is
being amortized over the effective period of the options. A
total of $4,312 was amortized during the nine months ended March
31, 2000, and the unamortized balance of the unearned
compensation of $60,368 has been shown separately as a reduction
of stockholders' equity in the accompanying condensed balance
sheet as of March 31, 2000. During the three months ended March
31, 2000, the Company received $176,000 upon the exercise of
options issued to the consultant for the purchase of 1,100,000
shares.
F-10
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 6 - Stock options (continued):
The Company had also issued options that were not covered under
the Plan during 1998 for the purchase of 2,500,000 shares of
common stock to certain executive officers that were 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 common stock on June 30, 1998 based on the
number of shares that were subject to the options and the excess
of the fair market value over the exercise price for each share.
The unearned compensation was being amortized from July 1, 1998
on a straight-line basis over the remaining term of each option.
A total of $132,813 had been amortized and charged to selling,
general and administrative expenses during the year ended June
30, 1999 (including $99,609, or $.01 per share, during the nine
months ended March 31, 1999). The unamortized balance of the
unearned compensation of $804,687 has been shown separately as a
reduction of stockholders' equity in the accompanying condensed
balance sheet as of June 30, 1999.
At various dates during the nine months ended March 31, 2000, the
options for the purchase of the 2,500,000 shares granted in 1998
were canceled. A total of $938 of unearned compensation related
to these options had been amortized during the nine months ended
March 31, 2000. The cancellation of the options has been
accounted for as a change in accounting estimate and,
accordingly, the Company wrote off related balances of the
unearned compensation as of the respective dates of cancellation
which totaled $803,749 and reduced common stock by an equivalent
amount during the nine months ended March 31, 2000. In addition,
the accompanying condensed statements of operations include a
credit of $133,751 (or $.01 per share) for the nine months ended
March 31, 2000 and a credit of $6,251 (or less than $.01 per
share) for the nine months ended March 31, 2000 for the reversal
of the accumulated amortization of the unearned compensation
related to those shares through the respective dates of
cancellation.
As of March 31, 2000, the Company had stock options that remained
outstanding for the purchase of 5,398,000 shares of common stock
that expire at various dates through November 2009 with exercise
prices ranging from $.24 to $2.50 per share, of which options to
purchase 2,962,667 shares were exercisable.
F-11
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 6 - Stock options (concluded):
A summary of the status of the Company's shares subject to
options as of March 31, 2000 and changes during the nine months
then ended is presented below:
<TABLE>
<CAPTION>
Weighted
Shares Average
or Exercise
Price Price
---------- --------
<S> <C> <C>
Outstanding, at July 1, 1999 4,203,500 $1.08
Granted 5,500,000 .30
Canceled (3,005,500) .78
Exercised (1,300,000) .24
----------
Outstanding, at March 31, 2000 5,398,000 $ .60
========== ======
Options exercisable, at March 31, 2000 2,962,667
Weighted average fair value of options
granted during the nine months
ended March 31, 2000 $.22
====
</TABLE>
Note 7 - Major customers and concentration of credit risk:
Approximately 53% and 62% of the Company's net revenues were
derived from two customers during the nine and three months ended
March 31, 2000, respectively, and approximately 76% and 75% of
the Company's net revenues were derived from these customers
during the nine and three months ended March 31, 1999,
respectively. These customers also accounted for approximately
46% of the Company's accounts receivable balance at March 31,
2000. The Company closely monitors the extension of credit to its
customers while maintaining appropriate allowances for potential
credit losses. Accordingly, management does not believe that the
Company was exposed to significant credit risk at March 31, 2000.
Note 8 - Venture capital agreement:
As of March 31, 2000, the Group had not fulfilled its commitment
to provide the Company with $550,000 of equity financing pursuant
to their October 4, 1996 agreement (see Note 12 of the notes to
the Audited Financial Statements).
F-12
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 9 - Employment agreements:
As explained in Note 12 of the notes to the Audited Financial
Statements, the Company had entered into employment agreements
with three of its key executives as of June 30, 1999. During the
nine months ended March 31, 2000, two of those agreements were
amended and one was cancelled. In addition, the Company entered
into an employment agreement with another key executive. As a
result, the Company was obligated as of March 31, 2000 to make
aggregate payments to the three key executives under the
remaining employment agreements of approximately $107,500 during
the remainder of the year ending June 30, 2000, $430,000 during
each of the years ending June 30, 2001 and 2002 and $47,500
during the year ending June 30, 2003.
In connection with the employment agreement that was effectively
cancelled on November 16, 1999, the former executive officer, who
was also one of the founders of the Company, agreed to allow the
Company to cancel 1,270,000 shares of common stock that it had
issued to him in exchange for nominal consideration at the time
the Company was founded. The number of shares outstanding and the
weighted average number of shares outstanding have been
retroactively adjusted in the accompanying condensed financial
statements as if the cancellation had occurred on the date of
their original issuance. The retroactive change reduced the
weighted average number of shares outstanding for the nine months
ended March 31, 2000 from 11,493,937 shares to 10,223,937 shares,
for the three months ended March 31, 2000 from 12,170,871 shares
to 10,900,871 shares and for both the nine and three months ended
March 31, 1999 from 11,159,149 shares to 9,889,149 shares. It
increased the loss per share from ($.07) to ($.08) for the nine
months ended March 31, 2000 and from ($.02) to ($.03) for
both the nine months ended March 31, 1999 and the three months
ended March 31, 2000; it did not affect the loss of ($.02) per
share for the three months ended March 31, 1999. The retroactive
change also reduced the weighted average number of shares
outstanding from 11,159,149 shares to 9,889,149 shares and
increased the loss per share from $(.03) to $(.04) for the year
ended June 30, 1999 and reduced the weighted average number of
shares outstanding from 10,146,767 shares to 8,876,767 shares but
did not affect the income per share of $.03 for the year ended
June 30, 1998.
Note 10- Nonrecurring losses:
As further explained in Note 7 of the notes to the Audited
Financial Statements, the Company ceased its operations in Canada
during March 1999 and transferred all of the remaining Canadian
assets to the United States. The losses from the Canadian
operations of $196,085 (or $.02 per share) and $65,527 (or $.01
per share) for the nine and three months ended March 31, 2000,
respectively, have been included in the Company's continuing
operations in the accompanying unaudited condensed statements of
operations.
F-13
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 10- Nonrecurring losses (concluded):
As further explained in Note 3 of the notes to the Audited
Financial Statements, in May 1998, the Company acquired NYE 2000
Systems, Inc. ("NYE 2000"), which was the developer of a software
product for the conversion of other software into programs that
are "Year 2000" compliant. Management of the Company believed
that the NYE 2000 software product would continue to have a
substantial international market after January 1, 2000, and it
was focusing the Company's marketing efforts for this product in
Europe. The entire cost of acquiring NYE 2000 of $1,450,724 had
been allocated to intangible assets and were being amortized over
five years.
In September 1999, management decided to redirect the Company's
sales and marketing efforts primarily to internet software
development and e-commerce consulting and, in January 2000, it
decided to abandon substantially all of the Company's activities
related to "Year 2000" compliance, including the international
marketing efforts for the NYE 2000 software product. As a result,
the accompanying unaudited condensed statements of operations for
the nine and three months ended March 31, 2000 include a charge
of $703,598 (or $.07 per share) for the write-off of the
unamortized portion of the intangible assets arising from the
acquisition of NYE 2000.
During December 1999, management decided to terminate the
Company's negotiations for the proposed acquisition of a computer
consulting company. As a result, the accompanying unaudited
condensed statements of operations for the nine months ended
March 31, 2000 include a charge for the write-off of $112,593 (or
$.01 per share) for the costs related to the terminated
acquisition.
* * *
F-14
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the condensed
financial statements and notes thereto appearing elsewhere in this report.
OVERVIEW
DelSoft Consulting, Inc. ("DelSoft" or the "Company") is a rapidly
growing professional services firm that was incorporated in Georgia on July 1,
1996. The Company offers its clients value added services, including intranet,
extranet, and Web site solutions (which collectively commenced in the second
quarter of fiscal 2000), professional services staffing, strategy consulting,
and related services. DelSoft delivers internet solutions designed to improve
clients' business processes including, strategy consulting, analysis and design,
technology development, systems implementation, and systems integration. The
Company also provides consulting services in the areas of ERP/CRM application
development and integration, and large scale application development. The
Company's solutions target a client's specific business functions enabling the
linkage of people, processes, and technologies in the new digital economy.
DelSoft markets its services and solutions to senior executives in
organizations of both existing and potential clients where technology-enabled
change (primarily Internet centric) can have a significant competitive impact.
DelSoft continues to identify opportunities to become a client's preferred
provider of comprehensive information technology ("IT") services and solutions.
DelSoft's revenues primarily consist of fees from consulting services
engagements, including both time-and-materials and fixed-price engagements.
Revenues from time-and-materials engagements are recognized as services are
provided. Billable rates vary by the service provided and the geographical
region. Historically, a substantial majority of the Company's projects have been
client-managed applications development and Year 2000 remediation related work
performed on a time-and-materials basis. DelSoft intends to increase the
percentage of its projects that are based on internet applications development
on a fixed-price engagement. The pricing, management, and execution of
individual engagements are the responsibility of the consulting office that
performs or coordinates the services.
Cost of revenues include direct costs, such as personnel salaries and
benefits and the cost of any third-party hardware or software included in an
Internet solution, and overhead expenses directly related to the engagement.
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, projects terminations and completion
and scheduling delays may result in short periods when personnel are not
assigned to active projects. DelSoft manages its personnel costs by closely
monitoring client needs and basing personnel increases on specific project
engagements. While the number of IT professionals may be adjusted to reflect
active projects, the Company continues to process H1-B visas and/or maintains a
database of available professionals to respond to increased demand for the
Company's services on both existing projects and new engagements.
The Company provides its services and solutions primarily to Fortune
1000 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.
<PAGE>
The key solutions offered by the Company include the following:
(a) INTERNET CENTRIC SERVICES AND SOLUTIONS: Providing professional
services to clients who are creating or weaving the internet with their existing
businesses to achieve e-Business capabilities. The Company expects a significant
portion of its future revenues to be derived from professional services related
to internet consulting, including intranet, extranet, and Web site solutions.
(b) PROFESSIONAL SERVICES STAFFING: Providing highly-skilled software
professionals to augment the internal information management staffs of major
corporations currently represents the majority of the Company's 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. DelSoft
expects that future revenues will be dependent on the number and scope of client
engagements. Currently, the Company's IT professionals have significant
experience in mainframe, client/server, ERP, and CRM applications development
and systems integration.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000
COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1999
REVENUES:
The Company's revenues decreased approximately 39%, from $1,779,043 for the
three months ended March 31, 1999 to $1,076,695 for the three months ended March
31, 2000. This decrease in revenues was primarily attributable to a reduction in
the total number of IT professionals on existing client projects, as the Company
transitioned from Year 2000 engagements to e-commerce consulting services.
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 36%, from
$1,297,134 for the three months ended March 31, 1999 to $827,351 for the three
months ended March 31, 2000. This decrease is primarily attributable to a
reduction in the total number of IT professionals on existing client projects
and is in line with the reduction of net revenue.
NET REVENUE.
Net revenue consists of revenues less direct project costs. Net revenue
decreased approximately 48%, from $481,909 for the three months ended March 31,
1999 to approximately $249,344 for the three month period ended March 31, 2000.
This decrease is primarily attributable to the reduction in the number of IT
professionals utilized by the Company (including independent contractors) and a
decrease in the overall margins on e-commerce engagements as compared to Year
2000 engagements.
SELLING, GENERAL AND ADMINISTRATIVE.
Selling, general and administrative expenses consist of costs associated with
the Company's sales and marketing efforts, executive management, finance and
human resource functions, facilities and telecommunications costs and other
general overhead expenses. Selling, general and administrative expenses
increased 9% from $669,972 for the three months ended March 31, 1999 to $731,668
for the three months ended March 31, 2000. This increase, while partially offset
by decreases in certain selling, general, and administrative expenses required
to implement and support the Company's Year 2000 sales and marketing strategies,
was primarily attributable to substantial increases in the infrastructure
required to support the Company's e-commerce consulting and project
implementation services.
<PAGE>
OTHER (INCOME) EXPENSES.
The Company ceased its operations in Canada during March 1999 and transferred
all of the remaining Canadian assets to the United States. The nonrecurring loss
from the Canadian operations of $65,527 (or $.01 per share) for the three months
ended March 31, 1999 has been included in other expenses.
NET INCOME (LOSS).
As a result of the above, the Company's net loss after taxes for the three
months ended March 31, 2000, increased approximately 76%, from a net loss of
($168,315) for the three months ended March 31, 1999 to a net loss of ($295,620)
for the comparable three-month period.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 2000
COMPARED TO THE NINE MONTHS ENDED MARCH 31, 1999
REVENUES:
The Company's revenues decreased approximately 29%, from $6,075,930 for the nine
months ended March 31, 1999 to $4,331,995 for the nine months ended March 31,
2000. This decrease in revenues was primarily attributable to a reduction in the
total number of IT professionals on existing client projects, as the Company
transitioned from Year 2000 engagements to e-commerce consulting services.
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 29%, from $4,297,093 for the nine
months ended March 31, 1999 to $3,040,805 for the nine months ended March 31,
2000. This decrease is primarily attributable to a reduction in the total number
of IT professionals on existing client projects and is in line with the
reduction of net revenue.
NET REVENUE
Net revenue consists of revenues less direct project costs. Net revenue
decreased approximately 27%, from $1,778,837 for the nine months ended March 31,
1999 to $1,291,190 for the nine months ended March 31, 2000. This decrease is
primarily attributable to the reduction in the number of IT professionals
utilized by the Company (including independent contractors) and a decrease in
the overall margins on e-commerce engagements as compared to Year 2000
engagements.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses consist of costs associated with
the Company's sales and marketing efforts, executive management, finance and
human resource functions, facilities and telecommunications costs and other
general overhead expenses. Selling, general and administrative expenses
decreased 3% from $2,021,377 for the nine months ended March 31, 1999 to
$1,957,592 for the nine months ended March 31, 2000. This decrease, while
partially offset by increases in the infrastructure required to support the
Company's e-commerce consulting and project implementation services and was
primarily attributable to decreases in certain selling, general, and
administrative expenses required to implement and support the Company's Year
2000 sales and marketing strategies.
<PAGE>
OTHER (INCOME) EXPENSES
The Company ceased its operations in Canada during March 1999 and transferred
all of the remaining Canadian assets to the United States. The nonrecurring loss
from the Canadian operations of $196,085 (or $.02 per share) for the nine months
ended March 31, 1999 has been included in other expenses.
At various dates during the nine months ended March 31, 2000, options to
purchase 2,500,000 shares of common stock granted to certain executive officers
during the year ended June 30, 1998 were canceled. The Company had charged
$937,500 to unearned compensation and common stock upon the issuance of these
options. Of the $937,500 initially charged to unearned compensation, $133,751
had been amortized and charged to selling, general and administrative expenses
during the year ended June 30, 1999, including $938 during the nine months ended
March 31, 2000. The Company's condensed statement of operations for the nine
months ended March 31, 2000, includes a credit of $133,751 for the reversal of
the accumulated amortization of the unearned compensation related to those
shares through March 31, 2000.
Other (income) expense also includes nonrecurring charges of $703,598 and
$112,593 for the nine months ended March 31, 2000 related to the write-off of
the intangible assets arising from the acquisition of NYE 2000 and the costs
related to the termination of the proposed acquisition of a computer consulting
company.
In September 1999, management decided to redirect the Company's sales and
marketing efforts primarily to Internet software development and e-commerce
consulting and, in January 2000, it decided to abandon substantially all of the
Company's activities related to "Year 2000" compliance, including the
international marketing efforts for the NYE 2000 software product. As a result,
the accompanying unaudited condensed statement of operations for the nine months
ended March 31, 2000 includes a charge of $703,598 (or $.07 per share) for the
write-off of the unamortized portion of the intangible assets arising from the
acquisition of NYE 2000. In addition, during December 1999, management decided
to terminate the Company's negotiations for the proposed acquisition of a
computer consulting company. As a result, the accompanying unaudited condensed
statement of operations for the nine months ended March 31, 2000 includes a
charge for the write-off of $112,593 (or $.01 per share) for the costs related
to the terminated acquisition.
NET INCOME (LOSS)
As a result of the above, the Company's net loss after taxes for the nine months
ended March 31, 2000, increased approximately 171%, from a net loss of
($316,793) for the nine months ended March 31, 1999 to a net loss of ($859,959)
for the comparable nine month period.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its working capital requirements
through internally generated funds, the sale of shares of its common stock, and
proceeds from short-term bank borrowings. The Company currently has a $1.25
million revolving credit facility with Emergent Financial Group. The credit
facility bears interest at the higher of 1.5% over the prime rate or 7%.
Borrowings under the revolving credit facility are secured by substantially all
of the Company's assets. In addition, Jerry Rosemeyer, Benjamin Giacchino, and
Jeffrey A. Rinde each executed a limited personal guaranty obligating each of
them to pay the sum of $100,000 of the Company's outstanding borrowings when
due; provided, however, that if an event of default and/or a default had not
occurred as defined in the Loan Documents dated February 18, 1997, between the
Company and Emergent Financial Group, the limited personal guaranty expire at
the end of six months from its execution. Accordingly, these guarantees have
expired. The facility contains certain restrictive covenants, including, the
maintenance of certain financial ratios and limitations on payment of dividends
and additional borrowings. As of March 31, 2000, the
<PAGE>
Company had outstanding borrowings under the aforementioned facility of
approximately $292,000 and working capital of approximately $628,000.
In addition, during the nine months ended March 31, 2000, the Company
received net proceeds from the issuance of Common Stock and the exercise of
stock options of $369,000 and $224,000, respectively.
The Company currently anticipates existing sources of liquidity and cash
generated from operations are sufficient to satisfy its cash needs through the
next twelve months. 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 additional IT professionals and/or the
acquisition of other consulting companies.
The Company does not believe that its business is subject to seasonal
trends.
The Company does not believe that inflation had a significant impact on
the Company's results of operations for the periods presented. On an ongoing
basis, the Company attempts to minimize any effects of inflation on its
operating results by controlling operating costs, and, whenever possible,
seeking to insure that billing rates reflect increases in costs due to
inflation.
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in the section captioned Management's Discussion and
Analysis of Financial Condition and Results of Operations which are not
historical are "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements represent the
Company's present expectations or beliefs concerning future events. The Company
cautions that such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, the
uncertainty as to the Company's future profitability; the uncertainty as to the
demand for information technology services and solutions; industry trends toward
outsourcing information technology services; increasing competition in the
information technology services market; the ability to hire, train and retain
sufficient qualified personnel; the ability to obtain financing on acceptable
terms to finance the Company's growth strategy; and the ability to develop and
implement operational and financial systems to manage the Company's growth.
<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
Brian Koch
President
Date: May 15, 2000
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
By: /s/Brian Koch President and Director Date: May 15, 2000
--------------------- (Principal Executive Officer)
Brian Koch
By: /s/ Brian Koch Acting Chief Date: May 15, 2000
--------------------- Financial Officer
Brian Koch
By: /s/ Ben J. Giacchino Director Date: May 15, 2000
Ben J. Giacchino
By:/s/Adil Choksey Secretary Date: May 15, 2000
Adil Choksey
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