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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, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-24197
DELSOFT CONSULTING, INC.
(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
(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. $5,667,990.
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 October 11, 2000 there were 7,684,516 shares of Common
Stock outstanding held by non- affiliates of the issuer, with an aggregate value
of $1,075,832.24 (based upon a value of $0.14 per share, the closing price of
the Common Stock on October 11, 2000).
At October 11, 2000, there were issued and outstanding 12,109,983 shares
of Common Stock.
Transitional Small Business Disclosure Format (check one): Yes / / No /x/
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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 2000 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 developed its
technological and managerial capabilities as well as its infrastructure to the
point that the Company is able to offer its clients value added services,
including professional services staffing and solutions 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.
We market our 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.
We continue to identify opportunities to become a client's preferred provider of
comprehensive information technology ("IT") services and solutions.
Our 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 portion of our projects have been
client-managed applications development and Year 2000 remediation related work
performed on a time-and-materials basis. Now that our Year 2000 solutions have
been fully implemented, our goal is to greatly increase the number of projects
we do that are based on Internet applications development and to execute them on
a fixed-price basis. The pricing, management, and execution of individual
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engagements are the responsibility of the consulting office that performs or
coordinates the services.
Our cost of revenues includes 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. Our most significant cost item is our personnel expense, which
consists primarily of the salaries and benefits of our billable personnel. The
number of IT professionals assigned to projects varies depending on the size and
duration of each engagement. In addition, project terminations and completion
and scheduling delays may result in short periods when personnel are not
assigned to active projects. We manage our 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,
we continue to process H1-B visas and to maintain a database of available
professionals to respond to increased demand for our services on both existing
projects and new engagements.
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 we offer include the following:
(a) INTERNET CENTRIC SERVICES AND SOLUTIONS: We provide
professional services to clients who are creating or weaving the Internet into
their existing businesses to achieve e-commerce capabilities. We expect a
significant portion of our future revenues to be derived from professional
services related to Internet consulting, including intranet, extranet, and
website 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 our business. We supply
clients' staffing needs from among our diverse supply of software professionals.
We are committed to expanding our professional services staffing operations in
conjunction with our solutions business. We expect that future revenues will be
dependent on the number and scope of client engagements. Currently, our IT
professionals have significant experience in mainframe, client/server, ERP, and
CRM applications development and systems integration.
We are headquartered in the metropolitan Atlanta area and have
satellite offices in Indianapolis, Indiana and Ann Arbor, Michigan.
Our Web site address is http://www.delsoft-consulting.com.
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SALES AND MARKETING
DelSoft sells its services to large organizations through a direct sales
force. The Company is also aggressively pursuing preferred vendor arrangements
with large organizations. As a preferred vendor, the Company would be one of a
limited number of service providers to a particular client, thus enabling it to
sell its services more effectively. These contracts generally result in lower
margins due to negotiated discounts, but are expected to generate higher and
more steady revenues.
CLIENTS
The Company provides its services and solutions primarily to Fortune
1,000 companies with significant IT budgets and recurring staffing or software
development needs. Substantially all of the Company's clients are large
companies, major systems integrators or governmental agencies. The Company's
strategy is to maximize its client retention rate and secure follow-on
engagements by providing high quality services and client responsiveness.
Two-thirds of the Company's net revenues for fiscal year 2000 were
derived from only three clients: USA Group, Ernst & Young LLP and DRT. 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 March 31, 2001. 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 three 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 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
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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 47 full-time employees, consisting of 34 technical
consultants, 5 employees in marketing and sales and 8 employees in
administration and support. DelSoft also has contracts with 8 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
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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
year 2000. The statutory limit will be reduced to 107,500 for fiscal year 2001.
The statutory limit will be 195,000 fiscal years 2001, 2002 and 2003. 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 $16,000 on obtaining visas for the fiscal
year ended June 30, 2000. Because some of its employees hold visas, the Company
is obligated to maintain certain public access files. The cost of that effort is
included in the amount disclosed above.
ITEM 2. DESCRIPTION OF PROPERTY.
DelSoft's principal office is located at 106 Bombay Lane, Roswell,
Georgia 30076. The office, which is approximately 2300 square feet, is leased
pursuant to a lease which expires in May 2001. 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 an office located
at 3500 De Paw Boulevard, Suite 2085, Indianapolis, Indiana. The office, which
is approximately 6028 square feet, is leased pursuant to a lease which expires
in November 2002. The office is adequate for its projected needs, and the
Company does not believe it will have difficulty obtaining additional space as
needed. The Company has an additional sales office, located at 6111 Jackson
Road, Suite 105, Ann Arbor, Michigan. The Michigan office is approximately 150
square feet and is leased pursuant to a lease which will expire on November 30,
2000. 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:
<TABLE>
<S> <C>
Roswell, Georgia $2,756
Indianapolis, Indiana $5,488
Ann Arbor, Michigan $ 300
</TABLE>
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The Company maintains a Commercial Business Package (Property) insurance
policy on all of its offices. The policy coverage total on contents is
approximately $830,000. The liability coverage is an aggregate amount of
$2,000,000 for all locations.
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 plaintiffs alleged 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 plaintiffs' business relationship with one of plaintiff's
clients by placing computer consultants with the plaintiff's clients. The
complaint sought compensatory and punitive damages and other relief. A
settlement in this case was agreed to by the parties and the suit was
subsequently dismissed.
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 2000.
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 October
11, 2000, approximately 12,109,983 shares of Common Stock were issued and
outstanding, and there were 439 holders of record for such shares.
<TABLE>
<CAPTION>
Price Range
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High Low
---- ---
<S> <C> <C>
YEAR ENDED JUNE 30, 2000
Fourth Quarter 1.0625 .5625
Third Quarter 2.40625 .28125
Second Quarter .65625 .125
First Quarter .6875 .25
</TABLE>
The high and low bid information above is as reported by the National
Quotation Bureau. The quotations reflect inter-dealer prices, without retail
markup, markdown or commission and may not represent actual transactions.
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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
In March and May of 2000, the Company sold a total of 920,834
shares of its common stock through private placements exempt from registration
under Regulation D of the Securities Act of 1933. The Company received aggregate
gross proceeds of approximately $500,000, of which $400,000 was attributable to
the sale of 666,667 shares of common stock at $.60 per share and approximately
$100,000 was attributable to the sale of 254,167 shares of common stock at
approximately $.39 per share. The Company incurred aggregate expenses of $31,000
in connection with the private placements.
In January and March of 2000, the Company received $224,000 upon
the exercise of 1,300,000 options and issuance of 1,300,000 shares of common
stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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 website 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
technology development, systems implementation, and systems integration. DelSoft
markets its services and solutions to senior executives where technology-enabled
change can have a significant impact on the client's competitive position,
product offerings, operations and cost structure. The Company's approach
consists of targeting a client's specific business functions enabling the
linkage of people, processes, and technologies in the new digital economy. While
onsite, 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 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.
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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.
RESULTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 2000 COMPARED TO THE YEAR
ENDED JUNE 30, 1999
REVENUES
The Company's revenues decreased approximately 29%, from $8,000,000 in
1999 to approximately $5,700,000 in 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 approximately $5,600,000 in 1999 to approximately $4,000,000 in 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 29%, from approximately $2,400,000 in 1999 to
approximately $1,700,000 in 2000. This decrease is primarily attributable to the
reduction in the number of IT professionals utilized by the Company (including
independent contractors).
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 4% from approximately $2,700,000 in 1999 to approximately
$2,755,000 in 2000. This increase, while partially offset by a decrease in
certain selling, general, and administrative expenses required to implement and
support the Company's Year 2000 sales and marketing
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strategies, was primarily attributable to substantial increases in the
infrastructure required to support the Company's e-commerce consulting and
project implementation services.
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 $186,211 (or $.02 per share)
in 1999 and $68,836 (or $.01 per share in 2000) has been included in other
expenses.
At various dates during 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 as unearned compensation, $133,751 had been amortized
and charged to selling, general and administrative expenses during the year
ended June 30, 1999. The Company's statements of operations for the year ended
June 30, 2000, includes a credit of $133,751 for the reversal of the accumulated
amortization of the unearned compensation related to those shares through June
30, 2000.
Other (income) expense also includes nonrecurring charges of
$703,598 and $112,593 in 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
respectively.
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, the Company 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 statements of operations for the year ended June
30, 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 statements of operations for the year
ended June 30, 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 year ended June 30, 2000 increased approximately 542%, from a net loss of
($360,000) in 1999 to a net loss of $(1,950,000) in 2000.
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 of 7%. 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, 2000, the Company had outstanding
borrowings under the aforementioned facility of approximately $606,000 and
working capital of approximately $231,000.
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During the year ended June 30, 2000, the Company received net proceeds of
$369,000 and $100,000 from the sale of 666,667 and 254,167 shares of common
stock, respectively. In addition, the Company received net proceeds of
$224,000 from the exercise of 1,300,000 stock options.
GOING CONCERN
These financial statements have been prepared on the basis of accounting
principles applicable to a "going concern" which assume that DelSoft will
continue in operation for at least one year and will be able to realize its
assets and discharge its liabilities in the normal course of operations.
Several conditions and events cast doubt about the Company's ability to
continue as a "going concern." The Company has incurred net losses of
approximately $1.9 million for the year ended June 30, 2000, cash used in
operating activities totaled approximately $549,000 and requires additional
financing for its business operations. As of June 30, 2000, the Company had
approximately $644,000 of the credit facility available to it through Emergent
Financial Group.
The Company's ability to continue as a going concern will depend on
numerous factors including, but not limited to, adequate sources of capital, the
ability to develop profitable results of operations, continued progress in
increasing the Company's market share and cash flows sufficient to meet the
Company's short and long term liquidity needs. The Company is actively pursuing
alternative financing and has had discussions with various third parties,
although no firm commitments have been obtained. Management is also pursuing
acquisitions of other businesses with existing positive cash flows. In addition,
management is working on increasing sales, attaining reductions in the Company's
operating costs and achieving efficiencies in order to enhance the Company's
overall profitability.
These financial statements do not reflect adjustments that would be
necessary if the Company were unable to continue as a "going concern." While
management believes that the actions already taken or planned will mitigate the
adverse conditions and events which raise doubts about the "going concern"
assumption used in preparing these financial statements, there can be no
assurance that these actions will be successful.
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
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The statements contained in this 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 Exchange Act of 1934, as amended. These forward-looking statements
represent the Company's present expectations of 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 system to manage the Company's growth.
ITEM 7. FINANCIAL STATEMENTS.
The Financial Statements required by this item are attached hereto on
pages F1 - F20.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The report of J.H. Cohn LLP on the Company's financial statements as of
June 30, 2000, and for the year ended June 30, 2000 and 1999, did not contain an
adverse opinion or disclaimer of opinion and was not modified as to audit scope
or accounting principles. However, the report of J.H. Cohn LLP on the Company's
financial statements included an emphasis paragraph relating to the Company's
ability to continue as a going concern. 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.
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 (32) 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
</TABLE>
12
<PAGE> 13
<TABLE>
<S> <C> <C>
Operating Officer from February 1999
through September 1999, and by Ernst &
Young LLP as a Senior Manager from
1994 through February 1999.
Adil Choksey (36) 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 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.
Ben J. Giacchino (45) 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 with Greenway Capital Corp.,
a brokerage firm, as a stock broker
from August 1991 to December 1993. Mr.
Giacchino has more than15 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.
* Jeffrey A. Rinde resigned as Chief Financial Officer and a Director of DelSoft
in November 1999.
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,
2000 and as of October 11,
13
<PAGE> 14
2000, 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, 2000
with respect to the Company's Chief Executive Officer and all other executive
officers as of June 30, 2000 who earned more than $100,000 in salary and bonus
during such fiscal year (the "Named Executive Officers"):
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation and
Annual Compensation Awards
-----------------------------------------------------------------------------------------
Name and Principal Position Year Salary Bonus Options
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Brian Koch 2000 $146,000 $ 0 2,000,000
President
Adil Choksey 2000 $149,625 $ 0 2,400,000
Vice President
Ben J. Giacchino 2000 $149,625 $ 0
Director
</TABLE>
The following table contains certain information concerning the options
granted to the Named Executive Officers during the fiscal year ended June 30,
2000.
<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>
Brian Koch
President 2,000,000 .50% $.24 November 19, 2009
Adil Choksey
Vice President 2,400,000 .50% $.24 November 19, 2009
</TABLE>
14
<PAGE> 15
The following table sets forth certain information concerning the
exercise of stock options during the fiscal year ended June 30, 2000 by each
Named Executive Officer and the value at fiscal year end of unexercised options
held by the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
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>
Brian Koch
President 0 -- 1,900,000/1,800,000 $0/$0
Adil Choksey
Vice President 0 -- 2,300,000/0 $0/$0
</TABLE>
* Based on the closing sale price of Common Stock reported by the Nasdaq
Stock Market OTC Bulletin Board as of October 11, 2000, which was $0.14
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.
15
<PAGE> 16
In July 1996, the Company adopted the Executive Incentive Compensation
Plan (the "Incentive Plan") that was administered by the Company's Board of
Directors. Under the terms of the Incentive Plan, a participant earned incentive
compensation, which was payable in cash and/or common stock of the Company,
based on a formula that took into consideration the percentage increase in the
Company's billable hours, gross revenues and profitability over the
corresponding amounts in the preceding fiscal year. Incentive compensation was
limited to 80% of a participant's base salary for the year. The Incentive Plan
was rescinded on July 1, 1997, because the Board of Directors decided that the
plan placed an undue financial strain on the Company.
EMPLOYMENT AGREEMENTS
The Company 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 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.
The Company entered into an Employment Agreement with Mr. Koch, dated
September 19, 1999, pursuant to which Mr. Koch agreed to serve as President of
the Company for a term of three years, and for additional one year terms unless
the Company elects not to extend the term. In consideration for his services as
President, Mr. Koch will receive (i) a base salary of not less than $146,000 per
year, subject to an annual increase of 5%, and (ii) an option to purchase two
million (2,000,000) shares of the Company's Common Stock. The Employment
Agreement contains covenants against competition and solicitation and a
confidentiality 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 12,109,983 shares were issued and outstanding on October 11, 2000. As of
October 11, 2000 there were 439 shareholders of record.
16
<PAGE> 17
The following table sets forth certain information regarding the
beneficial ownership of the shares of Common Stock as of October 11, 2000, 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>
JERRY ROSEMEYER 2,538,700 (1) 20.96%
BRIAN KOCH 0 --
ADIL CHOKSEY 0 --
BEN J. GIACCHINO 2,086,767 (2) 17.23%
ALL DIRECTORS AND EXECUTIVE
OFFICERS AS A GROUP (3 PERSONS) 2,086,767 17.23%
</TABLE>
--------------------
* 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 100,000 shares subject to stock options which are currently
exercisable.
(2) Includes 100,000 shares subject to stock options which are currently
exercisable.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
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.
EXHIBITS INCORPORATED BY REFERENCE TO FORM 10-5B, AS AMENDED
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
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)
</TABLE>
17
<PAGE> 18
<TABLE>
<S> <C>
10.3 Loan and Security Agreement, dated February 18, 1997, by and
between the Company and Emergent Financial Corp. (Exhibit
10.3 to Form 10-SB)
10.4 Employment Agreement, dated August 5, 1997, by and between
the Company and Michael Osso (Exhibit 10.4 to Form 10-SB)
10.5 Employment Agreement, dated July 1, 1996, by and between the
Company and Adil Choksey (Exhibit 10.5 to Form 10-SB)
10.6 Employment Agreement, dated July 1, 1996, by and between the
Company and Jeffrey A. Rinde (Exhibit 10.6 to Form 10-SB)
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)
</TABLE>
Exhibits Incorporated by Reference to Form S-8
10.11 Employment Agreement, dated September 19, 1999, by and between the
Company and Brian Koch (Exhibit 10.11 to Form S-8).
Exhibits Filed Herewith
27 Financial Data Schedule
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.
18
<PAGE> 19
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: 10/13/00
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.
<TABLE>
<CAPTION>
Signature Position Date
--------- -------- ----
<S> <C> <C>
/s/ Brian Koch President Acting Chief Financial 10/13/00
-------------------- Officer and Director
Brian Koch (principal executive officer)
/s/ Ben J. Giacchino Director Date
-------------------- ----
10/13/00
Ben J. Giacchino
-----------------------
</TABLE>
<PAGE> 20
DELSOFT CONSULTING, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
BALANCE SHEET
JUNE 30, 2000 F-3
STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2000 AND 1999 F-4
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2000 AND 1999 F-5
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000 AND 1999 F-6
NOTES TO FINANCIAL STATEMENTS F-7/20
</TABLE>
* * *
F-1
<PAGE> 21
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, 2000, and the related statements of operations, stockholders' equity
and cash flows for the years ended June 30, 2000 and 1999. 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, 2000, and its results of operations and cash flows for the years ended
June 30, 2000 and 1999, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As further discussed in Note 1 to the
financial statements, the Company's operations have generated recurring losses
and it had an accumulated deficit as of June 30, 2000. Such matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 3. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
J.H. COHN LLP
Roseland, New Jersey
July 28, 2000
F-2
<PAGE> 22
DELSOFT CONSULTING, INC.
BALANCE SHEET
JUNE 30, 2000
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Current assets:
Cash and cash equivalents $ 46,252
Accounts receivable, net of allowance for doubtful accounts of $20,000 862,302
Prepaid and refundable income taxes 197,034
Other current assets 131,258
-----------
Total current assets 1,236,846
Equipment and furnishings, net of accumulated depreciation of $131,671 179,250
Intangible assets, net of accumulated amortization of $218,318 260,600
Other assets 17,132
-----------
Total $ 1,693,828
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Note payable to bank $ 606,272
Current portion of long-term debt 40,550
Accounts payable 156,498
Accrued compensation and other liabilities 202,483
-----------
Total current liabilities 1,005,803
Long-term debt, net of current portion 83,047
-----------
Total liabilities 1,088,850
-----------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value; 100,000,000 shares authorized;
12,109,983 shares issued and outstanding 2,595,832
Accumulated deficit (1,933,720)
Unearned compensation (57,134)
-----------
Total stockholders' equity 604,978
-----------
Total $ 1,693,828
===========
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE> 23
DELSOFT CONSULTING, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Gross revenues $ 5,667,990 $ 8,023,832
Direct project costs 3,992,806 5,617,879
------------ ------------
Net revenues 1,675,184 2,405,953
------------ ------------
Other (income) expenses:
Selling, general and administrative expenses 2,755,446 2,692,326
Interest expense 85,901 98,244
Reversal of amortization of unearned compensation (133,751)
Loss from discontinued Canadian operations 68,836 186,211
Write-off of intangible assets 703,598
Write-off of costs of terminated acquisition 112,593
------------ ------------
Totals 3,592,623 2,976,781
------------ ------------
Loss before income taxes (1,917,439) (570,828)
Provision (credit) for income taxes 33,023 (212,980)
------------ ------------
Net loss $ (1,950,462) $ (357,848)
============ ============
Basic net loss per share (1999 restated) $ (.18) $ (.04)
============ ============
Basic weighted average common shares
outstanding (1999 restated) 10,658,350 9,889,149
============ ============
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE> 24
DELSOFT CONSULTING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2000 AND 1999
<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, 1998 11,159,149 $ 2,775,652 $ 374,590 $ (937,500) $ 2,212,742
Cancellation of shares held by founder (1,270,000)
----------- ----------- ----------- ----------- -----------
Balance, July 1, 1998, as restated 9,899,149 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 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 8,484 8,484
Effect of cancellation of stock options (937,500) 803,749 (133,751)
Proceeds from issuance of common stock,
net of expenses of $31,000 920,834 469,000 469,000
Proceeds from exercise of stock options 1,300,000 224,000 224,000
Net loss (1,950,462) (1,950,462)
----------- ----------- ----------- ----------- -----------
Balance, June 30, 2000 12,109,983 $ 2,595,832 $(1,933,720) $ (57,134) $ 604,978
=========== =========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE> 25
DELSOFT CONSULTING, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Operating activities:
Net loss $(1,950,462) $ (357,848)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation of equipment and furnishings 66,263 67,367
Amortization of intangible assets 142,825 290,145
Amortization of unearned compensation 8,484 132,813
Reversal of amortization of unearned compensation (133,751)
Provision for bad debts 10,000
Gain on sale of equipment (756)
Noncash compensation 52,127
Write-off of intangible assets 703,598
Write-off of costs of terminated acquisition 112,593
Deferred income taxes 157,200 (153,800)
Changes in operating assets and liabilities:
Accounts receivable 513,731 (202,639)
Prepaid and refundable income taxes (59,467) (137,567)
Other current assets (80,556) (21,346)
Other assets (10,704) (98,419)
Accounts payable 10,806 (53,822)
Accrued compensation and other liabilities (82,112) (179,322)
Income taxes payable (180,346)
----------- -----------
Net cash used in operating activities (549,425) (885,540)
----------- -----------
Investing activities:
Capital expenditures (9,601) (25,939)
Proceeds from sale of equipment 1,848
----------- -----------
Net cash used in investing activities (9,601) (24,091)
----------- -----------
Financing activities:
Net proceeds from (repayments of) line of credit borrowings (37,140) 643,412
Repayments of long-term borrowings (61,721) (36,093)
Net proceeds from issuances of common stock 469,000
Proceeds from exercise of stock options 224,000
----------- -----------
Net cash provided by financing activities 594,139 607,319
----------- -----------
Net increase (decrease) in cash and cash equivalents 35,113 (302,312)
Cash and cash equivalents, beginning of year 11,139 313,451
----------- -----------
Cash and cash equivalents, end of year $ 46,252 $ 11,139
=========== ===========
Supplemental disclosure of cash flow data:
Interest paid $ 87,714 $ 92,678
=========== ===========
Income taxes paid $ 18,882 $ 162,031
=========== ===========
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE> 26
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.
Basis of presentation:
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern.
However, as shown in the accompanying financial statements,
the Company incurred net losses of approximately $1,950,000
and $358,000 and its operating activities used cash of
approximately $549,000 and $886,000 in 2000 and 1999,
respectively. Management believes that the Company will
continue to incur net losses through at least June 30, 2001
and that, although a substantial portion of the Company's
historical net losses have been attributable to noncash
operating expenses, it will need additional equity or debt
financing to be able to sustain its operations until it can
achieve profitability. These matters raise substantial
doubt about the Company's ability to continue as a going
concern.
Management also believes that the Company's success and
profitability will depend significantly on its ability to
(i) expand its customer base and the number of IT
professionals it can place at these customers, therefore
increasing its revenue; (ii) expand the range and
profitability of the IT related services it offers; (iii)
reduce its selling, general and administrative expenses;
(iv) obtain alternative financing whether debt or equity;
and/or (v) identify and pursue an acquisition candidate
with existing positive cash flow or a strategic partner in
order to expand its revenue base. However, if the Company
is not able to achieve enough of the above, in order to
become profitable, its operations may have to be curtailed
during the year and, eventually, it may not be able to
continue to operate.
The accompanying financial statements do not include any
adjustments related to the recoverability and
classifications of assets or the amounts and classification
of liabilities that might be necessary should the Company
be unable to continue its operations as a going concern.
F-7
<PAGE> 27
DELSOFT CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business and summary of accounting policies (continued):
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, 2000.
Equipment and furnishings:
Equipment and furnishings are stated at cost, net of
accumulated depreciation. Depreciation is provided 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-8
<PAGE> 28
DELSOFT CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business and summary of accounting policies (continued):
Software development costs (concluded):
During 2000 and 1999, charges to research and development
expenses for software development costs incurred prior to
the establishment of technological feasibility were not
material, and no software development costs were
capitalized.
Advertising:
The Company expenses the cost of advertising and promotions
as incurred. Advertising costs charged to operations were
not material during 2000 and 1999.
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.
Impairment of long-lived assets:
The Company has adopted the provisions of Statement of
Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" ("SFAS 121"). Under SFAS 121, impairment
losses on long-lived assets, such as equipment and
furnishings and intangible assets, are recognized when
events or changes in circumstances indicate that the
undiscounted cash flows estimated to be generated by such
assets are less than their carrying value and, accordingly,
all or a portion of such carrying value may not be
recoverable. Impairment losses are then measured by
comparing the fair value of assets to their carrying
amounts.
Earnings (loss) per common share:
The Company presents "basic" earnings (loss) per common
share and, if applicable, "diluted" earnings per common
share pursuant to the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS
128") and certain other financial accounting
pronouncements. Basic earnings (loss) per common share is
calculated by dividing net income or loss by the weighted
average number of common shares outstanding during the
period. The calculation of diluted earnings per common
share is similar to that of basic earnings per common
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.
Since the Company had losses in 2000 and 1999, the assumed
effects of the exercise of stock options and warrants and
the application of the treasury stock method were
anti-dilutive and, accordingly, diluted per share amounts
have not been presented in the accompanying statements of
operations.
F-9
<PAGE> 29
DELSOFT CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business and summary of accounting policies (concluded):
Earnings (loss) per common share (concluded):
The number of shares outstanding and the weighted average
number of shares outstanding have been retroactively
adjusted in the accompanying 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 10).
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 to 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, 2000 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, 2000 and 1999 or
that will have a significant affect at the time they become
effective.
F-10
<PAGE> 30
DELSOFT CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
Note 2 - Equipment and furnishings:
Equipment and furnishings consisted of the following as of June
30, 2000:
<TABLE>
<CAPTION>
Range of
Estimated
Useful
Lives Amount
----------- --------
<S> <C> <C>
Equipment 3-7 years $149,302
Furnishings 7 years 63,462
Automobiles 5 years 98,157
--------
310,921
Less accumulated depreciation 131,671
--------
Total $179,250
========
</TABLE>
Depreciation of equipment and furnishings amounted to $66,263 and
$67,367 in 2000 and 1999, respectively.
During 2000 and 1999, the Company purchased equipment at a cost
of, and issued long-term obligations in the principal amount of,
$82,194 and $16,069, respectively. These noncash transactions are
not reflected in the accompanying statements of cash flows.
Note 3 - Note payable to bank:
At June 30, 2000, the Company had borrowings of $606,272
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, 2001. Borrowings bear interest, which is
payable monthly, at the higher of 1.5% above the prime rate or 7%,
and are secured by substantially all of the Company's assets.
Note 4 - Long-term debt:
As of June 30, 2000, long-term debt consisted of equipment loans
totaling $123,597 which are payable in monthly installments
through June 2003 with interest at rates ranging from 7.75% to
12.83%; 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, 2000 total $40,550 in 2001; $46,354 in
2002 and $36,693 in 2003.
F-11
<PAGE> 31
DELSOFT CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
Note 5 - Nonrecurring losses:
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:
<TABLE>
<CAPTION>
2000 1999
-------- ---------
<S> <C> <C>
Gross revenues $ - $145,000
Loss before income taxes (69,000) (186,000)
Net loss (69,000) (123,000)
Basic loss per share (.01) (.01)
</TABLE>
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 2000 statement
of operations includes a charge for the write-off of $112,593 (or
$.01 per share) for the costs related to the terminated
acquisition.
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 was 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 2000 statement of operations 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.
F-12
<PAGE> 32
DELSOFT CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
Note 6 - Income taxes:
The net provision (credit) for income taxes in 2000 and 1999
consisted of the following provisions (credits):
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Federal:
Current $(136,893) $ (71,146)
Deferred 124,000 (113,700)
--------- ---------
Totals (12,893) (184,846)
--------- ---------
State:
Current 3,916 11,966
Deferred 42,000 (40,100)
--------- ---------
Totals 45,916 (28,134)
--------- ---------
Totals $ 33,023 $(212,980)
========= =========
</TABLE>
The provision for income taxes in 2000 and the credit for income
taxes in 1999 differ from the credits computed using the Federal
statutory rate of 34% and the Company's loss before Federal income
tax as a result of the following:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Expected credit at Federal statutory rate (34)% (34)%
Effect of:
State income taxes, net of Federal income tax effect 1 (3)
Nondeductible expenses 1 2
Increase in valuation allowance for net deferred
tax assets 34
Other (primarily surtax exemptions) (2)
--- ---
Effective tax rate 2% (37)%
=== ===
</TABLE>
As of June 30, 2000, the Company had no deferred tax liabilities
and deferred tax assets and a valuation allowance that were
attributable to temporary differences related to the following:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating losses carryforwards (A) $ 710,000
Amortization of intangible assets 66,400
Depreciation 3,600
---------
Total 780,000
Valuation allowance (A) (780,000)
---------
Net deferred tax assets (A) $ -
=========
</TABLE>
F-13
<PAGE> 33
DELSOFT CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
Note 6 - Income taxes (concluded):
(A) As of June 30, 2000, the Company had net operating loss
carryforwards of approximately $1,627,000 and $2,237,000
available to reduce the Company's future Federal and state
taxable income, respectively, which will expire at various
dates through 2020. Due to the uncertainties related to, among
other things, the extent and timing of its future taxable
income, the Company offset the potential benefits from the net
operating loss carryforwards and the other deferred tax assets
by the equivalent valuation allowance of $780,000 as of June
30, 2000. The Company had no net operating loss carryforwards
and no valuation allowance as of June 30, 1999.
Note 7 - 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
2000 and 1999.
Note 8 - 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.
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.
F-14
<PAGE> 34
DELSOFT CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
Note 8 - Stock option plan (continued):
During 2000, options not covered under the Plan were granted for
the purchase of 5,500,000 shares, of which options for the
purchase of 4,400,000 shares were granted to directors and
officers and options for the purchase of 1,100,000 shares were
granted to a consultant. The options granted to the directors and
officers have an exercise price of $.24 per share and will expire
in September and November 2009. Options for the purchase of
3,200,000 shares vested during 2000 and options for the purchase
of 600,000 shares will vest in September 2001 and 2002,
respectively. Since the exercise price was equivalent to the fair
market value of the common stock on the date of grant, no
compensation was charged in connection with the issuance of the
options to the directors and officers. The options granted to the
consultant had an exercise price of $.16 per share and were
initially scheduled to expire in December 2004. All of the options
became vested as of the date of issuance. Since the fair market
value of the common stock of $.21875 per share on the date of
grant exceeded the exercise price, the Company charged the fair
value of the options of $64,680 to unearned compensation and
common stock as of the date of grant. A total of $7,546 was
amortized during 2000, and the unamortized balance of the unearned
compensation of $57,134 has been shown separately as a reduction
of stockholders' equity in the accompanying balance sheet as of
June 30, 2000. The fair value of the options was estimated using
the Black-Scholes option-pricing model based on assumptions
described below. During 2000, the Company received $48,000 upon
the exercise of options issued to directors and officers for the
purchase of 200,000 shares and $176,000 upon the exercise of all
of the options issued to the consultant for the purchase of
1,100,000 shares.
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 initially
exercisable at $.50 per share through February 2008. The common
stock had a fair market value of $.875 per share on the date the
options 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 granted to
the employees 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 1999 and $804,687 remained unamortized as of June
30, 1999.
F-15
<PAGE> 35
DELSOFT CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
Note 8 - Stock option plan (continued):
At various dates during 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 2000. The cancellation of the options has been accounted
for as a change in accounting estimate and, accordingly, the
Company wrote off the 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 2000. In addition, the accompanying 2000 statement of
operations includes a credit of $133,751 (or $.01 per share) for
the reversal of the accumulated amortization of the unearned
compensation related to those shares through the respective dates
of cancellation.
A summary of the status of the Company's options as of June 30,
2000 and 1999 and changes during the years then ended is presented
below:
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------------------------
Weighted Weighted
Shares Average Shares Average
or Exercise or Exercise
Price Price Price Price
----------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding, at beginning of
year 4,203,500 $1.08 3,652,750 $ .95
Granted 5,500,000 .22 550,750 2.00
Canceled (3,005,500) (.78)
Exercised (1,300,000) (.17)
---------- ---------
Outstanding, at end of year 5,398,000 $ .60 4,203,500 $1.08
========= ===== ========= =====
Options exercisable, at
end of year 3,201,084 3,261,167
========= =========
Weighted average fair value
of options granted during
the year $ .22 $2.00
===== =====
</TABLE>
F-16
<PAGE> 36
DELSOFT CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
Note 8 - Stock option plan (continued):
The following table summarizes information about fixed stock
options outstanding at June 30, 2000:
<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>
$.24 4,200,000 9.25 $.24 2,400,000 $.24
.50 100,000 7.60 .50 100,000 .50
1.25 87,500 7.79 1.25 58,334 1.25
2.00 910,500 6.95 2.00 542,750 2.00
2.25 100,000 7.67 2.25 100,000 2.25
--------- ---------
$.24-$2.25 5,398,000 8.82 $.60 3,201,084 $.24
========== ========= ==== ==== ========= ====
</TABLE>
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>
2000 1999
------------ ------------
<S> <C> <C>
Net loss - as reported $(1,950,462) $(357,848)
Net loss - pro forma (2,134,100) (625,536)
Basic weighted average common shares
outstanding - as reported 10,658,350 9,889,149
Basic loss per share - as reported $(.18) $(.04)
Basic loss per share - pro forma (.20) (.06)
</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 2000 and 1999:
<TABLE>
<S> <C>
Expected volatility 17%
Risk-free interest rate 4.7%
Expected years of option life 10
Expected dividends 0%
</TABLE>
F-17
<PAGE> 37
DELSOFT CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
Note 9 - Stock purchase warrants:
During 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 expired unexercised on December 31, 1999.
Note 10- Commitments and contingencies:
Employment agreements:
As of June 30, 2000, the Company had entered into
employment agreements with three of its key executives and
was obligated to make aggregate payments to them of
approximately $430,000 during both 2001 and 2002 and
$47,500 during 2003.
In connection with an employment agreement with another key
executive that was effectively cancelled on November 16,
1999, the former executive officer, who was also one of the
founders of the Company, agreed to allow the Company to
cancel 1,270,000 shares of common stock that it had issued
to him in exchange for nominal consideration at the time
the Company was founded. The number of shares outstanding
and the weighted average number of shares outstanding have
been retroactively adjusted in the accompanying financial
statements as if the cancellation had occurred on the date
of their original issuance. The retroactive change reduced
the weighted average number of shares outstanding from
11,928,350 shares to 10,658,350 shares for 2000 and from
11,159,149 shares to 9,889,149 shares for 1999. The
retroactive change also increased the net loss per share
from ($.16) to ($.18) for 2000 and from ($.03) to ($.04)
for 1999.
Leases:
The Company leases its office facilities under
noncancelable operating leases which expire on November 30,
2002. The leases also require the Company to pay all
operating expenses. Rent expense charged to operations
aggregated $90,759 and $62,300 in 2000 and 1999,
respectively. The Company's minimum rental commitments for
the period from July 1, 2000 through November 30, 2002 are
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.
F-18
<PAGE> 38
DELSOFT CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
Note 10- Commitments and contingencies (concluded):
Venture capital agreement (concluded)
As of June 30, 1997, the Group had assisted the Company in
consummating the acquisition of a publicly traded shell
company (the "Shell") 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 the Shell, 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 the Shell.
However, as of June 30, 2000, 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 in bank deposit accounts, the balances of which,
at times, may exceed Federal insurance limits. Exposure to
credit risk is reduced by placing such deposits with major
financial institutions and monitoring their credit ratings.
Approximately 73% and 76% of the Company's net revenues
were derived from four and two customers during 2000 and
1999, respectively, who also accounted for approximately
51% and 65% of its accounts receivable balance at June 30,
2000 and 1999, respectively. 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, 2000.
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.
F-19
<PAGE> 39
DELSOFT CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
Note 11- Private sale of shares of common stock:
In March and May 2000, the Company sold a total of 920,834 shares
of common stock through private placements intended to be exempt
from registration under the Securities Act of 1933 and received
aggregate gross proceeds of approximately $500,000, of which
$400,000 was attributable to the sale of 666,667 shares of common
stock at $.60 per share and approximately $100,000 was
attributable to the sale of 254,167 shares of common stock at
approximately $.39 per share. The Company incurred aggregate
expenses of $31,000 in connection with the private placements.
Note 12- Fair value of financial instruments:
The Company's material financial instruments at June 30, 2000 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-20
