<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
Quarterly Report Under section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Quarterly Period Ended December 31, 1999
Transition Report under Section 13 or 15(d) of
The Exchange Act For the Transition Period from
____________________________________to ___________________________________
Commission File Number 000-24197
DelSoft Consulting, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Georgia 58-2247152
- --------------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
106 Bombay Lane, Roswell, Georgia 30076
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Issuer's telephone number, including area code: (770) 518-4289
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act during the past 12 months
(or such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
At February 22, 2000, there were issued and outstanding 9,889,149 shares
of Common Stock.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
DELSOFT CONSULTING, INC.
CONDENSED BALANCE SHEETS
DECEMBER 31, 1999 AND JUNE 30, 1999
<TABLE>
<CAPTION>
December June
ASSETS 31, 1999 30, 1999
---------- ----------
(Unaudited) (See Note 1)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 49,682 $ 11,139
Accounts receivable, net of allowance for doubtful accounts
of $20,000 798,212 1,376,033
Prepaid and refundable income taxes 258,454 137,567
Other current assets 95,667 50,702
----------- -----------
Total current assets 1,202,015 1,575,441
Equipment and furnishings, net of accumulated depreciation
of $137,513 and $102,555 172,813 205,845
Intangible assets, net of accumulated amortization of $171,458
and $343,701 307,460 1,107,023
Noncurrent deferred tax assets, net 377,000 157,200
Other assets 14,215 119,021
----------- -----------
Totals $ 2,073,503 $ 3,164,530
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 315,604 $ 643,412
Current portion of long-term debt 40,462 38,536
Accounts payable 118,759 145,692
Accrued compensation and other liabilities 262,580 284,595
----------- -----------
Total current liabilities 737,405 1,112,235
Long-term debt, net of current portion 44,466 64,588
----------- -----------
Total liabilities 781,871 1,176,823
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value; 100,000,000 shares authorized;
9,889,149 shares issued and outstanding (restated) 1,902,832 2,775,652
Retained earnings (accumulated deficit) (547,598) 16,742
Unearned compensation (63,602) (804,687)
----------- -----------
Total stockholders' equity 1,291,632 1,987,707
----------- -----------
Totals $ 2,073,503 $ 3,164,530
=========== ===========
</TABLE>
See Notes to Condensed Financial Statements.
-1-
<PAGE>
DELSOFT CONSULTING, INC.
CONDENSED STATEMENTS OF OPERATIONS
SIX AND THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Six Months Three Months
Ended December 31, Ended December 31,
1999 1998 1999 1998
------------ -------------- -------------- ------------
<S> <C> <C> <C> <C>
Gross revenue $ 3,255,299 $ 4,423,766 $ 1,476,807 $ 2,078,559
Direct project costs 2,213,454 3,229,026 1,005,262 1,525,467
------------ ------------ ------------ ------------
Net revenues 1,041,845 1,194,740 471,545 553,092
------------ ------------ ------------ ------------
Other (income) expenses:
Selling, general and administrative
expenses 1,225,924 1,249,217 655,366 652,562
Interest expense 46,947 43,243 25,199 22,879
Reversal of amortization of unearned
compensation (133,751) (6,251)
Loss from discontinued Canadian
operations 130,558 50,712
Write-off of intangible assets 703,598 703,598
Costs of terminated acquisition 112,593 112,593
------------ ------------ ------------ -----------
Totals 1,955,311 1,423,018 1,490,505 726,153
------------ ------------ ------------ ------------
Loss before credit for income taxes (913,466) (228,278) (1,018960) (173,061)
Credit for income taxes (349,126) (79,800) (394,410) (65,600)
------------ ------------ ------------ ------------
Net loss $ (564,340) $ (148,478) $ (624,550) $ (107,461)
============ ============ ============ ============
Basic loss per share (restated) $ (.06) $ (.02) $ (.06) $ (.01)
============ ============ ============ ============
Basic weighted average common shares
outstanding (restated) 9,889,149 9,889,149 9,889,149 9,889,149
============ ============ ============ ============
</TABLE>
See Notes to Condensed Financial Statements.
-2-
<PAGE>
DELSOFT CONSULTING, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Retained
------------------------ Earnings Total
Number of (Accumulated Unearned Stockholders'
Shares Amount Deficit) Compensation Equity
------ ------ -------- ------------ ------
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1999 11,159,149 $2,775,652 $ 16,742 $(804,687) $1,987,707
Cancellation of shares held
by Founder (1,270,000)
----------- ------------- ------------ -------------- ----------
Balance, July 1, 1999, as adjusted 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 2,016 2,016
Effect of cancellation of stock options (937,500) 803,749 (133,751)
Net loss (564,340) (564,340)
----------- ------------- ------------ -------------- ----------
Balance, December 31, 1999 9,889,149 $1,902,832 $(547,598) $ (63,602) $1,291,632
========== ========== ========= ========== ==========
</TABLE>
See Notes to Condensed Financial Statements.
<PAGE>
DELSOFT CONSULTING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ --------
<S> <C> <C>
Operating activities:
Net loss $(564,340) $(148,478)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation of equipment and furnishings 34,958 32,700
Amortization of intangible assets 95,965 145,072
Amortization of unearned compensation 2,016 66,406
Reversal of amortization of unearned compensation (133,751)
Write-off of intangible assets 703,598
Write-off of costs of terminated acquisition 112,593
Deferred income taxes (219,800) (79,800)
Changes in operating assets and liabilities:
Accounts receivable 577,821 89,327
Prepaid and refundable income taxes (120,887) (129,720)
Other current assets (44,965) (24,854)
Other assets (7,787) (45,968)
Accounts payable (26,933) 32,604
Accrued compensation and other liabilities (22,015) (226,549)
Income taxes payable (180,346)
--------- ---------
Net cash provided by (used in) operating activities 386,473 (469,606)
--------- ---------
Investing activities - capital expenditures (1,926) (7,647)
--------- ---------
Financing activities:
Net proceeds from (repayments of) line of credit borrowings (327,808) 283,632
Repayments of long-term borrowings (18,196) (17,070)
--------- ---------
Net cash provided by (used in) financing activities (346,004) 266,562
--------- ---------
Net increase (decrease) in cash and cash equivalents 38,543 (210,691)
Cash and cash equivalents, beginning of period 11,139 313,451
--------- ---------
Cash and cash equivalents, end of period $ 49,682 $ 102,760
========= =========
Supplemental disclosure of cash flow data:
Interest paid $ 47,513 $ 40,201
========= =========
Income taxes paid $ 55,459 $ 310,066
========= =========
</TABLE>
See Notes to Condensed Financial Statements.
-4-
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Unaudited interim financial statements:
In the opinion of management, the accompanying unaudited condensed
financial statements reflect all adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial
position of Delsoft Consulting, Inc. (the "Company") as of December
31, 1999 and its results of operations for the six and three months
ended December 31, 1999 and 1998, changes in stockholders' equity for
the six months ended December 31, 1999 and cash flows for the six
months ended December 31, 1999 and 1998. Information included in the
condensed balance sheet as of June 30, 1999 has been derived from,
and certain terms used herein are defined in, the audited financial
statements of the Company as of June 30, 1999 and for the years ended
June 30, 1999 and 1998 (the "Audited Financial Statements") included
in the Company's Annual Report on Form 10-KSB for the year ended June
30, 1999 that was previously filed with the United States Securities
and Exchange Commission (the "SEC"). Pursuant to the rules and
regulations of the SEC, certain information and disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted from these financial statements unless significant changes
have taken place since the end of the most recent fiscal year.
Accordingly, these unaudited condensed financial statements should be
read in conjunction with the Audited Financial Statements and the
other information also included in the Form 10-KSB.
The results of the Company's operations for the six and three months
ended December 31, 1999 are not necessarily indicative of the results
of operations for the full year ending June 30, 2000.
Note 2 - Earnings (loss) per common share:
As further explained in Note 1 of the notes to the Audited Financial
Statements, the Company presents basic and, if appropriate, diluted
earnings (loss) per share in accordance with the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128"). Diluted per share amounts have not been
presented in the accompanying unaudited condensed statements of
operations because the Company had a net loss for the six and three
months ended December 31, 1999 and 1998 and, accordingly, the assumed
effects of the exercise of all of the Company's outstanding stock
options and warrants and the application of the treasury stock method
would have been anti-dilutive.
The number of shares outstanding and the weighted average number of
shares outstanding have been retroactively adjusted in the
accompanying condensed financial statements as if the cancellation of
1,270,000 shares issued to a founder of the Company had occurred on
the date of their original issuance instead of during the six months
ended December 31, 1999 (see Note 9).
Note 3 - Note payable to bank:
At December 31, 1999, the Company had borrowed $315,604 under the
revolving credit agreement that provides it with a $1,250,000 line of
credit (see Note 4 of the notes to the Audited Financial Statements).
Interest on outstanding borrowings is payable monthly at the higher of
1.5% above the prime rate or 7% (an effective rate of 10% at December
31, 1999).
-5-
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Long-term debt:
At December 31, 1999, long-term debt consisted of equipment loans
totaling $84,928 which are payable in monthly installments and bear
interest at rates ranging from 7.75% to 8.95%. The loans were secured
by equipment with a net book value that approximated the total
outstanding balance.
Principal payment requirements for long-term obligations in each of
the years subsequent to December 31, 1999 total $40,462 in 2000;
$24,605 in 2001; $18,617 in 2002; and $1,244 in 2003.
See Note 5 of the notes to the Audited Financial Statements for
additional information regarding long-term debt.
Note 5 - Credit for income taxes:
The net credit for income taxes for the six and three months ended
December 31, 1999 and 1998 consisted of the following provisions
(credits):
Six Months Three Months
Ended December 31, Ended December 31,
1999 1998 1999 1998
------------- ---------- ------------- --------
Federal:
Current $(142,000) $(147,900)$ (5,000)
Deferred (152,000) $(67,800) (176,000) (48,900)
--------- --------- --------- ---------
Totals (294,000) (67,800) (323,900) (53,900)
--------- --------- --------- ---------
State:
Current 3,874 2,490 (3,000)
Deferred (59,000) (12,000) (73,000) (8,700)
--------- --------- --------- ---------
Totals (55,126) (12,000) (70,510) (11,700)
--------- --------- --------- ---------
Totals $(349,126) $ (79,800) $(394,410) $(65,600)
========= ========= ========= =========
The net credit for income taxes for the six and three months ended
December 31, 1999 and 1998 differs from the amount computed using the
Federal statutory rate of 34% as a result of the following:
<TABLE>
<CAPTION>
Six Months Three Months
Ended December 31, Ended December 31,
1999 1998 1999 1998
----- ---- ---- ----
<S> <C> <C> <C> <C>
Expected credit at Federal statutory rate (34)% (34)% (34)% (34)%
Effect of:
State income taxes, net of Federal income
tax effect (4) (1) (5) (1)
Nondeductible expenses 3 1
Other (primarily surtax exemptions) (3) (4)
--- --- ---- ---
Effective tax rate (38)% (35)% (39)% (38)%
=== === ==== ===
</TABLE>
-6-
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 5 - Credit for income taxes (concluded):
As of December 31, 1999, deferred tax assets and liabilities were
attributable to temporary differences related to the following:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Net operating losses carryforwards $325,000
Amortization of intangible assets 44,500
Other 9,000
--------
Total 378,500
Deferred tax liabilities - depreciation (1,500)
--------
Net deferred tax assets $377,000
========
</TABLE>
The deferred tax assets listed above include the potential benefits of
$325,000 attributable to net operating loss carryforwards of
approximately $681,000 and $1,337,000 available as of December 31,
1999 to reduce the Company's future Federal and state taxable income,
respectively, which will expire at various dates through 2019.
Future realization of the net deferred tax assets of $377,000 as of
December 31, 1999 is dependent on the Company's ability to generate
sufficient taxable income prior to the expiration of the net operating
loss carryforwards or reversal of the other temporary differences from
which the net deferred tax assets arose. Management believes, but
cannot assure, that it is more likely than not that the Company will
realize its net deferred assets prior to their expiration in 2019
since the net operating loss carryforwards arose primarily from
nonrecurring losses (see Note 10 herein). However, such estimates are
subject to change and management cannot assure that the net deferred
tax assets will be realized.
Note 6 - Stock options:
Pursuant to the Company's Stock Option Plan (the "Plan"), incentive
and/or nonincentive stock options for the purchase of up to 2,000,000
shares of the Company's common stock may be granted by the Board of
Directors to key executives, other members of management, other
employees and directors of the Company, as further explained in Note
10 of the notes to the Audited Financial Statements.
The Board of Directors may also grant options for the purchase of
shares of common stock to the Company's directors, officers,
consultants and other advisors that are not covered under the Plan.
During the six months ended December 31, 1999, options were granted to
directors and officers for the purchase of 4,400,000 shares and to a
consultant for the purchase of 1,100,000 shares.
-7-
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 6 - Stock options (continued):
The options for the 4,400,000 shares issued to the directors and
officers have exercise prices ranging from $.275 to $.4125 per share
(which represented 110% of the fair market value on the date of
grant) and will expire in September and November 2009. Options for
the purchase of 2,600,000 shares vested as of the respective dates of
issuance and options for the purchase of 600,000 shares will vest in
September 2000, 2001 and 2002, respectively. No compensation was
charged in connection with the issuance of the options to the
directors and officers.
The options for the 1,100,000 shares issued to the consultant have an
exercise price of $.16 per share (which was less than the fair market
value of $.21875 per share on the date of grant) and will expire in
December 2004. All of the options became vested as of the date of
issuance. The fair value of the options was estimated at $64,680 as
of the date of grant using the Black-Scholes option-pricing model
(see Note 10 of the notes to the Audited Financial Statements).
Accordingly, the Company charged $64,680 to unearned compensation and
common stock as of the date of grant. The unearned compensation is
being amortized over the effective period of the consulting agreement
of five years. A total of $1,078 was amortized during the six months
ended December 31, 1999, and the unamortized balance of the unearned
compensation of $63,602 has been shown separately as a reduction of
stockholders' equity in the accompanying condensed balance sheet as
of December 31, 1999.
The Company had also issued options that were not covered under the
Plan during 1998 for the purchase of 2,500,000 shares of common stock
to certain executive officers that were exercisable at $.50 per share
through February 2008. The options had a fair market value of $.875
per share on the date they were granted. Accordingly, the Company
charged $937,500 to unearned compensation and common stock on June 30,
1998 based on the number of shares that were subject to the options
and the excess of the fair market value over the exercise price for
each share. The unearned compensation was being amortized from July 1,
1998 on a straight-line basis over the remaining term of each option.
A total of $132,813 had been amortized and charged to selling, general
and administrative expenses during the year ended June 30, 1999
(including $66,406, or $.01 per share, during the six months ended
December 31, 1998). The unamortized balance of the unearned
compensation of $804,687 has been shown separately as a reduction of
stockholders' equity in the accompanying condensed balance sheet as of
June 30, 1999.
-8-
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 6 - Stock options (concluded):
At various dates during the six months ended December 31, 1999, the
options for the purchase of the 2,500,000 shares granted in 1998 were
canceled. A total of $938 of unearned compensation related to these
options had been amortized during the six months ended December 31,
1999. The cancellation of the options has been accounted for as a
change in accounting estimate and, accordingly, the Company wrote off
related balances of the unearned compensation as of the respective
dates of cancellation which totaled $803,749 and reduced common stock
by an equivalent amount during the six months ended December 31,
1999. In addition, the accompanying condensed statements of
operations include a credit of $133,751 (or $.01 per share) for the
six months ended December 31, 1999 and a credit of $6,251 (or less
than $.01 per share) for the three months ended December 31, 1999 for
the reversal of the accumulated amortization of the unearned
compensation related to those shares through the respective dates of
cancellation.
As of December 31, 1999, the Company had stock options that remained
outstanding for the purchase of 6,698,000 shares of common stock that
expire at various dates through November 2009 with exercise prices
ranging from $.16 to $2.50 per share, of which options to purchase
4,262,667 shares were exercisable.
A summary of the status of the Company's shares subject to options as
of December 31, 1999 and changes during the six months then ended is
presented below:
Weighted
Shares Average
or Exercise
Price Price
--------- ------------
Outstanding, at July 1, 1999 4,203,500 $1.08
Granted 5,500,000 .30
Canceled (3,005,500) .78
---------
Outstanding, at December 31, 1999 6,698,000 $ .58
=========== ============
Options exercisable, at December 31, 1999 4,262,667
===========
Weighted average fair value of options
granted during the six months
ended December 31, 1999 $.29
========
-9-
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Major customers and concentration of credit risk:
Aproximately 68% of the Company's net revenues were derived from two
customers during both the six and three months ended December 31, 1999
and approximately 77% and 71% of the Company's net revenues were
derived from these customers during the six and three months ended
December 31, 1998, respectively. These customers also accounted for
approximately 56% of the Company's accounts receivable balance at
December 31, 1999. The Company closely monitors the extension of
credit to its customers while maintaining appropriate allowances for
potential credit losses. Accordingly, management does not believe that
the Company was exposed to significant credit risk at December 31,
1999.
Note 8 - Venture capital agreement:
As of December 31, 1999, the Group had not fulfilled its commitment to
provide the Company with $550,000 of equity financing pursuant to
their October 4, 1996 agreement (see Note 11 of the notes to the
Audited Financial Statements).
Note 9 - Employment agreements:
As explained in Note 12 of the notes to the Audited Financial
Statements, the Company had entered into employment agreements with
three of its key executives as of June 30, 1999. During the six months
ended December 31, 1999, two of those agreements were amended and one
was cancelled. In addition, the Company entered into an employment
agreement with another key executive. As a result, the Company was
obligated as of December 31, 1999 to make aggregate payments to the
three key executives under the remaining employment agreements of
approximately $215,000 during the remainder of the year ending June
30, 2000, $430,000 during each of the years ending June 30, 2001 and
2002 and $155,000 during the year ending June 30, 2003.
In connection with the employment agreement that was cancelled during
the six months ended December 31, 1999, the former executive officer,
who was also one of the founders of the Company, agreed to allow the
Company to cancel 1,270,000 shares of common stock that it had issued
to him in exchange for nominal consideration at the time the Company
was founded. The number of shares outstanding and the weighted average
number of shares outstanding have been retroactively adjusted in the
accompanying condensed financial statements as if the cancellation had
occurred on the date of their original issuance.
This retroactive change reduced the weighted average number of shares
outstanding for both the six and three months ended December 31, 1999
and 1998 from 11,159,149 shares to 9,889,149 shares, but it did not
affect the loss of $.06 per share and $.01 per share for the
respective periods. This retoractive change also reduced the weighted
average number of shares outstanding from 11,159,149 shares to
9,889,149 shares and increased the loss per share from $(.03) to
$(.04) for the year ended June 30, 1999 and reduced the weighted
average number of shares outstanding from 10,146,767 shares to
8,876,767 shares but did not affect the income per share of $.03 for
the year ended June 30, 1998.
Note 10- Nonrecurring losses:
As further explained in Note 7 of the notes to the Audited Financial
Statements, the Company ceased its operations in Canada during March
1999 and transferred all of the remaining Canadian assets to the
United States. The losses from the Canadian operations of $130,558 and
$50,712 (or $.01 per share) for the six and three months ended
December 31, 1998, respectively, have been included in the Company's
continuing operations in the accompanying unaudited condensed
statements of operations.
-10-
<PAGE>
DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 10- Nonrecurring losses (concluded):
As further explained in Note 3 of the notes to the Audited Financial
Statements, in May 1998, the Company acquired NYE 2000 Systems, Inc.
("NYE 2000"), which was the developer of a software product for the
conversion of other software into programs that are "Year 2000"
compliant. Management of the Company believed that the NYE 2000
software product would continue to have a substantial international
market after January 1, 2000, and it was focusing the Company's
marketing efforts for this product in Europe. The entire cost of
acquiring NYE 2000 of $1,450,724 had been allocated to intangible
assets and were being amortized over five years.
In September 1999, management decided to redirect the Company's sales
and marketing efforts primarily to internet software development and
e-commerce consulting and, in January 2000, it decided to abandon
substantially all of the Company's activities related to "Year 2000"
compliance, including the international marketing efforts for the NYE
2000 software product. As a result, the accompanying unaudited
condensed statements of operations for the six and three months ended
December 31, 1999 include a charge of $703,598 (or $.07 per share) for
the write-off of the unamortized portion of the intangible assets
arising from the acquisition of NYE 2000.
During December 1999, management decided to terminate the Company's
negotiations for the proposed acquisition of a computer consulting
company. As a result, the accompanying unaudited condensed statements
of operations for the six and three months ended December 31, 1999
include a charge for the write-off of $112,593 (or $.01 per share) for
the costs related to the terminated acquisition.
* * *
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the condensed
financial statements and notes thereto appearing elsewhere in this report.
OVERVIEW
DelSoft Consulting, Inc. ("DelSoft" or the "Company") is a rapidly
growing professional services firm that was incorporated in Georgia on July 1,
1996. The Company offers its clients value added services, including intranet,
extranet, and Web site solutions (which collectively commenced in the second
quarter of fiscal 2000), professional services staffing, strategy consulting,
and related services. DelSoft delivers internet solutions designed to improve
clients' business processes including, strategy consulting, analysis and design,
technology development, systems implementation, and systems integration. The
Company also provides consulting services in the areas of ERP/CRM application
development and integration, large scale application development, and Year 2000
solutions. The Company's solutions target a client's specific business functions
enabling the linkage of people, processes, and technologies in the new digital
economy.
DelSoft markets its services and solutions to senior executives in
organizations of both existing and potential clients where technology-enabled
change (primarily Internet centric) can have a significant competitive impact.
DelSoft continues to identify opportunities to become a client's preferred
provider of comprehensive information technology ("IT") services and solutions.
DelSoft's revenues primarily consist of fees from consulting services
engagements, including both time-and-materials and fixed-price engagements.
Revenues from time-and-materials engagements are recognized as services are
provided. Billable rates vary by the service provided and the geographical
region. Historically, a substantial majority of the Company's projects have been
client-managed applications development and Year 2000 remediation related work
performed on a time-and-materials basis. DelSoft intends to increase the
percentage of its projects that are based on internet applications development
on a fixed-price engagement. The pricing, management, and execution of
individual engagements are the responsibility of the consulting office that
performs or coordinates the services.
Cost of revenues include direct costs, such as personnel salaries and
benefits and the cost of any third-party hardware or software included in an
Internet solution, and overhead expenses directly related to the engagement.
DelSoft's most significant cost item is its personnel expense, which consists
primarily of salaries and benefits for the Company's billable personnel. The
number of IT professionals assigned to projects may vary depending on the size
and duration of each engagement. Moreover, projects terminations and completion
and scheduling delays may result in short periods when personnel are not
assigned to active projects. DelSoft manages its personnel costs by closely
monitoring client needs and basing personnel increases on specific project
engagements. While the number of IT professionals may be adjusted to reflect
active projects, the Company continues to process H1-B visas and/or maintains a
database of available professionals to respond to increased demand for the
Company's services on both existing projects and new engagements.
The Company provides its services and solutions primarily to Fortune
1000 companies with significant IT budgets and recurring staffing or software
development needs. Substantially all of the Company's clients are large
companies, major systems integrators or governmental agencies.
The key solutions offered by the Company include the following:
(a) INTERNET CENTRIC SERVICES AND SOLUTIONS: Providing professional
services to clients who are creating or weaving the internet with their existing
businesses to achieve e-Business capabilities. The Company
<PAGE>
expects a significant portion of its future revenues to be derived from
professional services related to internet consulting, including intranet,
extranet, and Web site solutions.
(b) PROFESSIONAL SERVICES STAFFING: Providing highly-skilled software
professionals to augment the internal information management staffs of major
corporations currently represents the majority of the Company's business. The
Company supplies clients' staffing needs from among its diverse supply of
software professionals. The Company is committed to expanding its professional
services staffing operations in conjunction with its solutions business. DelSoft
expects that future revenues will be dependent on the number and scope of client
engagements. Currently, the Company's IT professionals have significant
experience in mainframe, client/server, ERP, and CRM applications development
and systems integration.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO
THE THREE MONTHS ENDED DECEMBER 31, 1998
REVENUES:
The Company's revenues decreased approximately 29%, from approximately $2.1
million for the second quarter of 1999 to approximately $1.5 million for the
second quarter of 2000. This decrease in revenues was primarily attributable to
a reduction in the total number of IT professionals on existing client projects,
due to the winding down of the number of Year 2000 engagements.
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 33%, from
approximately $1.5 million for the second quarter of 1999 to approximately $1.0
million for the second quarter of 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 15%, from approximately $550,000 for the three-month
period ended December 31, 1998 to approximately $470,000 for the three-month
period ended December 31, 1999. 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 remained
approximately unchanged, from approximately $650,000 in the second quarter of
1999 to approximately $650,000 in the second quarter of 2000. Decreases in
certain selling, general, and administrative expenses which were primarily
attributable to the reduction in the infrastructure and initiatives previously
required to implement and support the Company's Year 2000 sales and marketing
strategies were substantially offset by increases in the infrastructure required
to support the Company's e-commerce consulting services.
<PAGE>
OTHER (INCOME) EXPENSES.
The Company ceased its operations in Canada during March 1999 and transferred
all of the remaining Canadian assets to the United States. The nonrecurring loss
from the Canadian operations of $50,712 ($.01 per share) for the three months
ended December 31, 1998 has been included in other expenses.
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. The results
of operations for the three months ended December 31, 1999 include a
nonrecurring charge of $703,598 (or $.07 per share) for the write-off of the
unamortized portion of the intangible assets arising from the acquisition of NYE
2000.
During December 1999, management decided to terminate the Company's negotiations
for the proposed acquisition of a computer consulting company. As a result,
other expenses for the three months ended December 31, 1999 include a
nonrecurring 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 for the three months ended
December 31, 1999, increased approximately 483%, from a net loss of
approximately ($107,000) for the three-month period ending December 31, 1998 to
a net loss of approximately ($624,000) for the comparable three-month period.
OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THE SIX MONTHS
ENDED DECEMBER 31, 1998 REVENUES:
The Company's revenues decreased approximately 26%, from approximately $4.4
million for the six months ended December 31, 1998 to approximately $3.25
million for the six months ended December 31, 1999. This decrease in revenues
was primarily attributable to a reduction in the total number of IT
professionals on existing client projects, due to the winding down of the number
of Year 2000 engagements.
DIRECT PROJECT COSTS.
Direct project costs consist primarily of salaries and employee benefits for
billable IT professionals, as well as the cost of the independent contractors
used by the Company.
Direct project costs decreased approximately 31%, from approximately $3.2
million for the first six months of fiscal year 1999 to approximately $2.2
million for the first six months of fiscal year 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 17%, from approximately $1,200,000 for the six month
period ended December 31, 1998 to approximately $1,000,000 for the six month
period ended December 31, 1999. 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.
<PAGE>
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 remained
approximately unchanged, from approximately $1,250,000 for the first six months
of 1999 and approximately $1,226,000 for the first six months of 2000. Decreases
in certain selling, general, and administrative expenses which were primarily
attributable to the reduction in the infrastructure and initiatives previously
required to implement and support the Company's Year 2000 sales and marketing
strategies were substantially offset by increases in the infrastructure required
to support the Company's e-commerce consulting services.
OTHER (INCOME) EXPENSES.
During the six months ended December 31, 1999, options to purchase 2,500,000
shares of common stock granted to certain executive officers during the year
ended June 30, 1998 were canceled. The Company had charged $937,500 to unearned
compensation and common stock upon the issuance of these options. Of the
$937,500 initially charged to unearned compensation, $133,751 had been amortized
and charged to selling, general and administrative expenses during the six
months ended December 31, 1999 and during the year ended June 30, 1999,
including $938 and $66,406 during the six months ended December 31, 1999 and
1998, respectively. The Company's condensed statement of operations for the six
months ended December 31, 1999, includes a credit of $133,751 for the reversal
of the accumulated amortization of the unearned compensation related to those
shares through December 31, 1999.
Other (income) expense also includes nonrecurring charges of $130,558 for
the six months ended December 31, 1998 related to the Company's discontinued
Canadian operations and $703,598 and $112,593 for the six months ended December
31, 1999 related to the write-off of the intangible assets arising from the
acquisition of NYE 2000 and the termination further described above.
In September 1999, management decided to redirect the Company's sales and
marketing efforts primarily to Internet software development and e-commerce
consulting and, in January 2000, it decided to abandon substantially all of the
Company's activities related to "Year 2000" compliance, including the
international marketing efforts for the NYE 2000 software product. As a result,
the accompanying unaudited condensed statement of operations for the six months
ended December 31, 1999 includes a charge of $703,598 (or $.07 per share) for
the write-off of the unamortized portion of the intangible assets arising from
the acquisition of NYE 2000. In addition, during December 1999, management
decided to terminate the Company's negotiations for the proposed acquisition of
a computer consulting company. As a result, the accompanying unaudited condensed
statement of operations for the six months ended December 31, 1999 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 for the six months ended
December 31, 1999, increased approximately 273%, from a net loss of
approximately ($150,000) for the six month period ending December 31, 1998 to a
net loss of approximately ($560,000) for the comparable three-month period.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its working capital requirements
through internally generated funds, the sale of shares of its common stock, and
proceeds from short-term bank borrowings. The Company currently has a $1.25
million revolving credit facility with Emergent Financial Group. The credit
facility bears interest at the higher of 1.5% over the prime rate or 7%.
Borrowings under the revolving credit facility are secured by substantially all
of the Company's assets. In addition, Jerry Rosemeyer, Benjamin Giacchino, and
Jeffrey A. Rinde each executed a limited personal guaranty obligating each of
them to pay the sum of $100,000 of the Company's outstanding borrowings when
due; provided, however, that if an event of default and/or a default had not
occurred as defined in the Loan Documents dated February 18, 1997, between the
Company and Emergent Financial Group, the limited personal guaranty expire at
the end of six months from its execution. Accordingly, these guarantees have
expired. The facility contains certain restrictive covenants, including, the
maintenance of certain financial ratios and limitations on payment of dividends
and additional borrowings. As of December 31, 1999, the Company had outstanding
borrowings of approximately $315,000 and working capital of approximately
$465,000.
The Company currently anticipates existing sources of liquidity and cash
generated from operations are sufficient to satisfy its cash needs through the
next twelve months. In the future, the Company may seek to increase the amount
of its credit facilities, negotiate additional credit facilities or issue
corporate debt or equity securities. Any debt incurred or issued by the Company
may be secured or unsecured, fixed or variable rate interest and may be subject
to such terms as the board of directors of the Company deem prudent. The Company
expects any proceeds from such additional credit or sales of securities to be
used primarily in the hiring of further IT professionals and/or the acquisition
of other consulting companies.
<PAGE>
The Company does not believe that its business is subject to seasonal
trends.
The Company does not believe that inflation had a significant impact on
the Company's results of operations for the periods presented. On an ongoing
basis, the Company attempts to minimize any effects of inflation on its
operating results by controlling operating costs, and, whenever possible,
seeking to insure that billing rates reflect increases in costs due to
inflation.
YEAR 2000
The "Year 2000" issue concerns the potential exposures related to the automated
generation of business and financial misinformation resulting from the use of
computer programs which have been written using two digits, rather than four, to
define the applicable year of business transactions. The Company has evaluated,
and is continuing to evaluate, the potential cost associated with becoming Year
2000 compliant. The Company believes that the principal staffing and financial
systems it is using, which are licensed from and maintained by third-party
software development companies, are Year 2000 compliant. In addition, the
Company has requested assurances from major third party vendors and licensors
regarding the year 2000 readiness of their material hardware, software and
services. To date, such third parties have informed us that their products used
are compliant. Based on our assessment, we have determined that a contingency
plan in the event that we are unable to achieve Year 2000 compliance is
unnecessary. Management does not believe that the Year 2000 issue will have a
material adverse impact on the Company's financial condition or results of
operation. In addition, as of the date of this filing, the Company has not
encountered any year 2000 issues either externally or internally.
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in the section captioned Management's Discussion and
Analysis of Financial Condition and Results of Operations which are not
historical are "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements represent the
Company's present expectations or beliefs concerning future events. The Company
cautions that such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, the
uncertainty as to the Company's future profitability; the uncertainty as to the
demand for information technology services and solutions; industry trends toward
outsourcing information technology services; increasing competition in the
information technology services market; the ability to hire, train and retain
sufficient qualified personnel; the ability to obtain financing on acceptable
terms to finance the Company's growth strategy; and the ability to develop and
implement operational and financial systems to manage the Company's growth.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
DELSOFT CONSULTING, INC.
By: /s/ Brian Koch
---------------------
Brian Koch
President
Date: February 22, 2000
In accordance with the Exchange Act, this Report has been signed below by the
following persons on behalf of the Company in the capacities set forth and on
the dates indicated.
Signature Position Date
By: /s/ Brian Koch President and Director Date: February 21, 2000
--------------------- (Principal Executive Officer)
Brian Koch
By: /s/ Brian Koch Acting Chief Date: February 21, 2000
--------------------- Financial Officer
Brian Koch
By: /s/ Ben J. Giacchino Director Date: February 21, 2000
---------------------
Ben J. Giacchino
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 49,682
<SECURITIES> 0
<RECEIVABLES> 818,212
<ALLOWANCES> 20,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,202,015
<PP&E> 310,326
<DEPRECIATION> 137,513
<TOTAL-ASSETS> 2,703,503
<CURRENT-LIABILITIES> 737,405
<BONDS> 0
0
0
<COMMON> 1,902,832
<OTHER-SE> (611,200)
<TOTAL-LIABILITY-AND-EQUITY> 2,703,503
<SALES> 3,255,299
<TOTAL-REVENUES> 3,255,299
<CGS> 2,213,454
<TOTAL-COSTS> 2,213,454
<OTHER-EXPENSES> 1,908,364
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,947
<INCOME-PRETAX> (913,466)
<INCOME-TAX> (349,126)
<INCOME-CONTINUING> (564,340)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (564,340)
<EPS-BASIC> (.06)
<EPS-DILUTED> (.06)
</TABLE>
