<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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
------------------------------ ------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
(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 / /
At November 13, 2000, there were issued and outstanding 20,650,616 shares
of Common Stock.
Transitional Small Business Disclosure Format (check one): Yes / / No /x/
<PAGE> 2
PART I
ITEM 1. FINANCIAL STATEMENTS
<PAGE> 3
DELSOFT CONSULTING, INC.
INDEX TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2000 AND JUNE 30, 2000 F-2
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 F-3
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 2000 F-4
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 F-5
NOTES TO CONDENSED FINANCIAL STATEMENTS F-6/12
</TABLE>
* * *
<PAGE> 4
DELSOFT CONSULTING, INC.
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2000 AND JUNE 30, 2000
<TABLE>
<CAPTION>
ASSETS September June
30, 2000 30, 2000
-------- --------
(Unaudited) (See Note 1)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 24,066 $ 46,252
Accounts receivable, net of allowance for doubtful accounts
of $20,000 1,125,713 862,302
Prepaid and refundable income taxes 170,034 197,034
Other current assets 124,760 131,258
----------- -----------
Total current assets 1,444,573 1,236,846
Equipment and furnishings, net of accumulated depreciation
of $102,641 and $131,671 128,308 179,250
Intangible assets, net of accumulated amortization of $241,747
and $218,318 237,171 260,600
Other assets 17,132 17,132
----------- -----------
Totals $ 1,827,184 $ 1,693,828
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 795,005 $ 606,272
Current portion of long-term debt 25,163 40,550
Accounts payable 258,944 156,498
Accrued compensation and other liabilities 233,854 202,483
----------- -----------
Total current liabilities 1,312,966 1,005,803
Long-term debt, net of current portion 47,337 83,047
----------- -----------
Total liabilities 1,360,303 1,088,850
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value; 100,000,000 shares authorized;
12,734,983 and 12,109,983 shares issued and outstanding 3,595,832 2,595,832
Accumulated deficit (2,200,051) (1,933,720)
Unearned compensation (53,900) (57,134)
Subscription receivable for 4,375,000 shares of common
stock (875,000)
----------- -----------
Total stockholders' equity 466,881 604,978
----------- -----------
Totals $ 1,827,184 $ 1,693,828
=========== ===========
</TABLE>
See Notes to Condensed Financial Statements.
F-2
<PAGE> 5
DELSOFT CONSULTING, INC.
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Gross revenue $ 1,393,640 $ 1,778,492
Direct project costs 984,039 1,208,192
------------ ------------
Net revenues 409,601 570,300
------------ ------------
Other (income) expenses:
Selling, general and administrative expenses 645,234 570,556
Interest expense 30,698 21,750
Reversal of amortization of unearned compensation (127,500)
------------ ------------
Totals 675,932 464,806
------------ ------------
Income (loss) before provision for income taxes (266,331) 105,494
Provision for income taxes 45,284
------------ ------------
Net income (loss) $ (266,331) $ 60,210
============ ============
Basic earnings (loss) per share $ (.02) $ .01
============ ============
Basic weighted average common shares outstanding
(1999 restated) 12,592,320 9,889,149
============ ============
</TABLE>
See Notes to Condensed Financial Statements.
F-3
<PAGE> 6
DELSOFT CONSULTING, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Accumu- Total
Common Stock lated Unearned Subscription Stockholders'
Shares Amount Deficit Compensation Receivable Equity
------ ------ ------- ------------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 2000 12,109,983 $2,595,832 $(1,933,720) $(57,134) $ 604,978
Amortization of unearned compensation 3,234 3,234
Subscription for purchase of
4,375,000 shares of common stock 875,000 $(875,000)
Proceeds from issuance of
common stock 625,000 125,000 125,000
Net loss (266,331) (266,331)
---------- ---------- ----------- -------- --------- ---------
Balance, September 30, 2000 12,734,983 $3,595,832 $(2,200,051) $(53,900) $(875,000) $ 466,881
========== ========== =========== ======== ========= =========
</TABLE>
See Notes to Condensed Financial Statements.
F-4
<PAGE> 7
DELSOFT CONSULTING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Operating activities:
Net income (loss) $(266,331) $ 60,210
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation of equipment and furnishings 16,175 17,417
Amortization of intangible assets 23,429 72,536
Amortization of unearned compensation 3,234 938
Reversal of amortization of unearned compensation (127,500)
Gain on sale of equipment (9,442)
Deferred income taxes 38,000
Changes in operating assets and liabilities:
Accounts receivable (263,411) 485,148
Prepaid and refundable income taxes 27,000 52,457
Other current assets 6,498 (15,340)
Accounts payable 102,446 (12,195)
Accrued compensation and other liabilities 31,371 11,762
Income taxes payable 17,900
--------- ---------
Net cash provided by (used in) operating activities (329,031) 601,333
--------- ---------
Investing activities:
Capital expenditures (17,791)
Proceeds from sale of equipment 62,000
---------
Net cash provided by investing activities 44,209
---------
Financing activities:
Net proceeds from (repayments of) line of credit borrowings 188,733 (547,811)
Repayments of long-term borrowings (51,097) (8,346)
Net proceeds from issuances of common stock 125,000
--------- ---------
Net cash provided by (used in) financing activities 262,636 (556,157)
--------- ---------
Net increase (decrease) in cash and cash equivalents (22,186) 45,176
Cash and cash equivalents, beginning of period 46,252 11,139
--------- ---------
Cash and cash equivalents, end of period $ 24,066 $ 56,315
========= =========
Supplemental disclosure of cash flow data:
Interest paid $ 26,858 $ 25,353
========= =========
Income taxes paid (refunded) $ (15,000) $ (51,812)
========= =========
</TABLE>
See Notes to Condensed Financial Statements.
F-5
<PAGE> 8
DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of presentation:
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 September 30, 2000, its results of operations
and cash flows for the three months ended September 30, 2000 and
1999 and its changes in stockholders' equity for the three months
ended September 30, 2000. Information included in the condensed
balance sheet as of June 30, 2000 has been derived from, and
certain terms used herein are defined in, the audited financial
statements of the Company as of June 30, 2000 and for the years
ended June 30, 2000 and 1999 (the "Audited Financial Statements")
included in the Company's Annual Report on Form 10-KSB for the
year ended June 30, 2000 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 three months
ended September 30, 2000 are not necessarily indicative of the
results of operations for the full year ending June 30, 2001.
The accompanying unaudited condensed financial statements have
been prepared assuming that the Company will continue as a going
concern. However, as shown in those financial statements, the
Company incurred a net loss of approximately $266,000 and a cash
flow deficiency from operating activities of approximately
$329,000 in the three months ended September 30, 2000. As further
explained in Note 1 of the notes to the Audited Financial
Statements, the Company also incurred substantial net losses and
cash flow deficiencies from operating activities in the years
ended June 30, 2000 and 1999. Management believes that the
Company will continue to incur net losses through at least
September 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 and generate cash flows from its operating
activities on a recurring basis. These matters raise substantial
doubt about the Company's ability to continue as a going concern.
F-6
<PAGE> 9
DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of presentation (concluded):
Management believes that the Company will be able to obtain a
portion of the financing it needs to continue to operate through
the collection of receivables of $875,000 arising from sales of
shares of common stock through private placements in July 2000
that are due no later than July 21, 2000 (see Note 7 herein).
Management also believes that the Company's ability to achieve
profitability depends primarily upon its ability to reduce
selling, general and administrative expenses as a percentage of
revenues and obtain additional short-term contracts or
subcontracts by expanding its customer base and the range of the
services it offers. Management plans to expand the Company's
customer base and the range of the services it offers and obtain
the additional debt or equity financing it needs primarily
through a merger with another company or an agreement with a
strategic partner that has similar operations and additional
financial resources. However, management cannot assure that the
Company will be able to collect all of the receivables or
consummate such a merger or agreement on acceptable terms. If the
Company is not able to obtain adequate financing, the Company may
have to curtail or terminate some or all of its operations.
The accompanying unaudited condensed 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.
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 (i) the Company had a net loss
for the three months ended September 30, 2000 and, accordingly,
the assumed effects of the exercise of all of the Company's
outstanding stock options and warrants and the application of the
treasury stock method would have been anti-dilutive; and (ii) the
assumed effects of the exercise of all of the Company's
outstanding stock options and warrants and the application of the
treasury stock method for the three months ended September 30,
1999 would have had an insignificant effect on the weighted
average number of common shares outstanding and no effect on
earnings per share.
The number of shares outstanding and the weighted average number
of shares outstanding have been retroactively adjusted in the
accompanying condensed financial statements as if the
cancellation of 1,270,000 shares issued to a founder of the
Company had occurred on the date of their original issuance
instead of on November 16, 1999 (see Note 9 herein).
F-7
<PAGE> 10
DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 3 - Note payable to bank:
At September 30, 2000, the Company had borrowed $795,005 under
the revolving credit agreement that provides it with a $1,250,000
line of credit (see Note 3 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 11% at September 30, 2000).
Note 4 - Long-term debt:
At September 30, 2000, long-term debt consisted of equipment
loans totaling $72,500 which are payable in monthly installments
and bear 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
of the years subsequent to September 30, 2000 total $25,164 in
2001; $28,185 in 2002; and $19,151 in 2003.
See Note 4 of the notes to the Audited Financial Statements for
additional information regarding long-term debt.
Note 5 - Income taxes:
The provision for income taxes for the three months ended
September 30, 1999 consisted of the following:
<TABLE>
<S> <C>
Federal:
Current $ 5,900
Deferred 24,000
-------
Total 29,900
-------
State:
Current 1,384
Deferred 14,000
-------
Total 15,384
-------
Total $45,284
=======
</TABLE>
F-8
<PAGE> 11
DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 5 - Income taxes (concluded):
The following table reconciles the expected statutory provision
(credit) for Federal income tax to the effective tax rate for the
three months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Expected provision (credit) at Federal statutory rate (34)% 34%
Effects of:
State income taxes, net of Federal income tax effect 10
Nondeductible expenses 1 1
Increase in valuation allowance for net deferred
tax assets of $120,000 33
Other (primarily surtax exemptions) (2)
--- ---
Effective tax rate -- % 43%
=== ===
</TABLE>
As of September 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 loss carryforwards(A) $ 826,000
Amortization of intangible assets 70,000
Depreciation 4,000
---------
Total 900,000
Valuation allowance(A) (900,000)
---------
Net deferred tax assets(A) $ --
=========
</TABLE>
(A) As of September 30, 2000, the Company had net operating loss
carryforwards of approximately $1,900,000 and $2,500,000
available to reduce the Company's future Federal and state
taxable income, respectively, which will expire at various
dates through 2021. 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 its net operating loss carryforwards and other deferred
tax assets by an equivalent valuation allowance of $900,000
as of September 30, 2000. The Company also offset the
potential benefits from its net operating loss carryforwards
and other deferred tax assets by an equivalent valuation
allowance of $780,000 as of June 30, 2000. The Company did
not record a valuation allowance as of either September 30,
1999 or June 30, 1999. Primarily as a result of the $120,000
increase in the valuation allowance during the period from
July 1, 2000 to September 30, 2000, no credit for income
taxes is included in the accompanying unaudited condensed
statement of operations for the three months ended September
30, 2000.
F-9
<PAGE> 12
DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 6 - Stock options:
As further explained in Note 10 of the notes to the Audited
Financial Statements, 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 pursuant to the Company's Stock Option
Plan (the "Plan"). 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.
No stock options were granted, canceled or exercised during the
three months ended September 30, 1999. As of September 30, 2000,
the Company had stock options that remained outstanding for the
purchase of 5,398,000 shares of common stock that expire at
various dates through November 2009 with exercise prices ranging
from $.24 to $2.50 per share, of which options to purchase
4,098,000 shares were exercisable.
During the three months ended September 30, 1999, options to
purchase 2,400,000 shares granted in 1998 were canceled. The
Company had charged $900,000 to unearned compensation and
additional paid-in capital upon the issuance of these options.
The cancellation of the options was accounted for as a change in
accounting estimate and, accordingly, the Company wrote-off the
related balance of unearned compensation as of the date of
cancellation which totaled $772,500 and reduced common stock by
an equivalent amount during the three months ended September 30,
1999. In addition, the accompanying condensed statement of
operations for the three months ended September 30, 1999 includes
a credit of $127,500 (or $.01 per share) for the reversal of the
accumulated amortization of the unearned compensation related to
those shares through the date of cancellation.
Note 7 - Equity financing agreement:
In July 2000, the Company entered into agreements to sell a total
of 5,000,000 shares of common stock for total consideration of
$1,000,000 or $.20 per share through private placements intended
to be exempt from registration under the Securities Act of 1933.
As of September 30, 2000, it had received aggregate gross
proceeds of $125,000 and had issued 625,000 shares. The balance
receivable of $875,000 attributable to the sale of the remaining
4,375,000 shares must be paid no later than July 21, 2001. The
balance has been included in common stock and offset by a
subscription receivable in the same amount in the accompanying
unaudited condensed balance sheet as of September 30, 2000.
F-10
<PAGE> 13
DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 8 - Major customers and concentration of credit risk:
Approximately 53% and 68% of the Company's net revenues were
derived from four and two customers, respectively, during the
three months ended September 30, 2000 and 1999, respectively.
These customers also accounted for approximately 43% and 64% of
the Company's accounts receivable balance at September 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 September 30, 2000.
Note 9 - Employment agreements:
As of September 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 $322,500 during
the remainder of 2001, $430,000 during 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 unaudited condensed financial statements as if the
cancellation had occurred on the date of their original issuance.
The retroactive change reduced the weighted average number of
shares outstanding from 11,159,149 shares to 9,889,149 shares but
did not affect net income per share for the three months ended
September 30, 1999.
Note 10- Venture capital agreement:
As of September 30, 2000, the Group had not fulfilled its
commitment to provide the Company with $550,000 of equity
financing pursuant to their October 4, 1996 agreement (see Note
10 of the notes to the Audited Financial Statements).
F-11
<PAGE> 14
DELSOFT CONSULTING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 11- 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.
* * *
F-12
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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
out sourcer 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. Although we shall continue to execute
client-based projects, 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
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.
13
<PAGE> 16
SERVICES
DelSoft provides its clients with a one-stop shop for a broad range of IT
applications solutions and services. Historically, a substantial majority of the
Company's projects have been client-managed. On client-managed projects, DelSoft
provides professional services as a member of the project team on a
time-and-materials basis. 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 integrating 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.
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.
14
<PAGE> 17
Two-thirds of the Company's net revenues during its most recent fiscal
year 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.
Most of the Company's projects, including those with its 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 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
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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 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
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<PAGE> 19
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 during its last
fiscal year. 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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 1999
REVENUES
The Company's revenues decreased approximately 22%, from $1.8 million for
the first quarter of 2000 to approximately $1.4 million for the first quarter of
2001. 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
17%, from approximately $1.2 million for the first quarter of 2000 to
approximately $1.0 for the first quarter of 2001. 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 28%, from approximately $570,000 for the three-month
period ended September 30,1999 to approximately $410,000 for the three-month
period ended September 30, 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 EXPENSE
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 13% from approximately $570,000 for the first quarter in 2000 to
approximately $645,000 in the first quarter of 2001. This increase in selling,
general, and administrative expenses was
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primarily attributable to substantial increases in the infrastructure required
to support the Company's e-commerce consulting and project implementation
services.
OTHER (INCOME) EXPENSES
During the three months ended September 30, 2000, options to purchase
2,400,000 share of common stock to the Company's former President were canceled.
The Company had charged $900,000 to unearned compensation and common stock upon
the issuance of these options. Of the $900,000 initially charged to unearned
compensation, $127,500 had been amortized and charged to selling, general and
administrative expenses during the year ended June 30, 1999. The Company's
condensed statement of operations for the three months ended September 30, 1999,
includes a credit of $127,500 for the reversal of the accumulated amortization
of the unearned compensation related to those shares through June 30, 1999.
NET INCOME (LOSS)
As a result of the above, the Company's net loss after taxes for the three
months ending September 30, 2000, increased approximately 543%, from a net
income of $60,000 for the three-month period ending September 30, 1999 to a net
loss of $(266,000) 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%. The
facility contains certain restrictive covenants, including, the maintenance of
certain financial ratios and limitations on payment of dividends and additional
borrowings. As of September 30, 2000, the Company had outstanding borrowings
under the aforementioned facility of approximately $795,000 and working capital
of approximately $132,000.
During the three months ended September 30, 2000, the Company received
$125,000 for the issuance of 625,000 shares of common stock. In addition, the
Company has a $875,000 subscription receivable for an additional 4,375,000
shares of common stock.
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 $266,000 for the three months ended September 30, 2000. Cash used
in operating activities totaled approximately $329,000 and the Company requires
additional financing for its business operations. As of September 30, 2000, the
Company had approximately $455,000 of the credit facility available to it
through Emergent Financial Group.
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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.
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
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 systems to manage the Company's growth.
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ITEM 6. 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-SB, 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)
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,
</TABLE>
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<TABLE>
<S> <C>
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
<TABLE>
<S> <C>
10.11 Employment Agreement, dated September 19, 1999, by and between
the Company and Brian Koch (Exhibit 10.11 to Form S-8).
</TABLE>
Exhibits Filed Herewith
<TABLE>
<S> <C>
27 Financial Data Schedule
</TABLE>
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.
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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: 11/14/00
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 11/14/00
Officer and Director
Brian Koch (principal executive officer)
/s/ Ben J. Giacchino Director Date
-------------------- -------------------------------- --------------
Ben J. Giacchino 11/14/00
</TABLE>
