<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ............... to ...............
Commission file number 0-22601
-------
TELESCIENCES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 51-0356153
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number.)
4000 Midlantic Drive
Mount Laurel, NJ 08054-5476
(Address of Principal Executive Offices) (Zip Code)
(856) 866-1000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 ___
---
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. 7,625,576 shares of Common
Stock, par value of $.01 per share, were outstanding as of August 12, 1999.
================================================================================
<PAGE>
Telesciences, Inc. And Subsidiaries
Index
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I - Financial Information:
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 1999 and September 30,
1998............................................................................... 3
Consolidated Statements of Operations - Three and Nine Months Ended
June 30, 1999 and 1998............................................................. 4
Consolidated Statements of Cash Flows - Nine Months Ended June 30, 1999
and 1998........................................................................... 5
Notes to Consolidated Financial Statements............................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................ 18
Part II - Other Information:
Item 1. Legal Proceedings..................................................................... 19
Item 2. Changes in Securities and Use of Proceeds............................................. 19
Item 3. Defaults Upon Senior Securities....................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders................................... 19
Item 5. Other Information..................................................................... 19
Item 6. Exhibits and Reports on Form 8-K...................................................... 19
(a) Exhibits
(b) Reports on Form 8-K
</TABLE>
2
<PAGE>
Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Telesciences, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION> June 30, September 30,
1999 1998
---------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 272 $ 1,093
Accounts receivable, net of allowance for doubtful accounts of $955 and $3,985.......... 5,428 11,325
Inventories............................................................................. 5,130 6,561
Deferred tax assets..................................................................... 436 436
Income tax receivable................................................................... -- 722
Restricted cash......................................................................... 548 --
Other................................................................................... 475 392
---------- ------------
Total current assets................................................................. 12,289 20,529
---------- ------------
PROPERTY AND EQUIPMENT
Computer hardware and software.......................................................... 4,536 4,354
Production and test equipment........................................................... 3,574 3,016
Furniture fixtures and leasehold improvements........................................... 1,642 1,636
---------- ------------
9,752 9,006
Less - Accumulated depreciation and amortization........................................ (5,935) (4,569)
---------- ------------
Net property and equipment........................................................... 3,817 4,437
DEFERRED TAX ASSETS....................................................................... 2,502 2,502
RESTRICTED CASH........................................................................... -- 548
OTHER ASSETS.............................................................................. 2,064 1,783
---------- ------------
$ 20,672 $ 29,799
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit.......................................................................... $ 426 $ 0
Current portion of long-term debt....................................................... 296 330
Obligations to Securicor and affiliates................................................. 73 64
Accounts payable........................................................................ 1,634 4,930
Accrued compensation and related benefits............................................... 1,093 1,085
Accrued agent commissions............................................................... 191 353
Other accrued expenses.................................................................. 1,364 1,885
Deferred revenues....................................................................... 2,918 1,602
---------- ------------
Total current liabilities............................................................ 7,995 10,249
---------- ------------
LONG-TERM LIABILITIES:
Deferred tax liabilities................................................................ 220 220
Long-term debt.......................................................................... 279 499
---------- ------------
Total long term liabilities.......................................................... 499 719
---------- ------------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, 5,000,000 shares authorized, no shares issued and
outstanding.......................................................................... -- --
Common stock, $0.01 par value, 25,000,000 shares authorized, 7,625,576 and 7,790,305 76 78
shares issued and outstanding...........................................................
Additional paid-in capital.............................................................. 36,548 37,156
Deferred compensation................................................................... (31) --
Accumulated deficit..................................................................... (24,408) (18,397)
Cumulative translation adjustment....................................................... (7) (6)
---------- ------------
Total stockholders' equity........................................................... 12,178 18,831
---------- ------------
$ 20,672 $ 29,799
========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
TELESCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended June 30, Ended June 30,
---------------------- ---------------------
1999 1998 1999 1998
---------------------- ---------------------
<S> <C> <C> <C> <C>
REVENUES:
Equipment................................................ $ 1,564 $ 7,349 $ 9,590 $ 16,131
Services................................................. 2,076 3,317 6,717 7,759
------- ------- ------- --------
Total revenues........................................ 3,640 10,666 16,307 23,890
------- ------- ------- --------
COST OF REVENUES:
Equipment................................................ 2,262 3,214 8,082 8,024
Services................................................. 905 2,904 3,110 6,424
------- ------- ------- --------
Total cost of revenues................................ 3,167 6,118 11,192 14,448
------- ------- ------- --------
Gross profit.......................................... 473 4,548 5,115 9,442
------- ------- ------- --------
OPERATING EXPENSES:
Research, development and engineering.................... 1,651 1,891 5,317 5,763
Selling, general and administrative...................... 2,058 6,339 5,833 13,273
Charge for purchased research and development............ -- 2,387 -- 2,387
------- ------- ------- --------
Total operating expenses.............................. 3,709 10,617 11,150 21,423
------- ------- ------- --------
Operating loss........................................ (3,236) (6,069) (6,035) (11,981)
INTEREST EXPENSE (INCOME), net............................. 9 (46) 13 (241)
OTHER INCOME (EXPENSE), net................................ 63 (9) 37 5
------- ------- ------- --------
Loss before income taxes................................. (3,182) (6,032) (6,011) (11,735)
INCOME TAX BENEFIT......................................... -- -- -- 1,939
------- ------- ------- --------
NET LOSS................................................... $(3,182) $(6,032) $(6,011) $ (9,796)
======= ======= ======= ========
BASIC AND DILUTED NET LOSS PER COMMON SHARE................ $ (0.41) $ (0.85) $ (0.78) $ (1.46)
======= ======= ======= ========
SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER
COMMON SHARE........................................... 7,686 7,133 7,748 6,689
======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
Telesciences, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For The Nine Months Ended
June 30,
-------------------------------------------
1999 1998
------------------ ------------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss........................................................................ $(6,011) $(9,796)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities -
Depreciation and amortization................................................ 1,569 1,398
Provision for doubtful accounts.............................................. -- 4,018
Charge for purchased research and development................................ -- 2,387
Common stock issued for services rendered.................................... 17 --
Decrease (increase) in -
Accounts receivable........................................................ 5,845 367
Inventories................................................................ 1,431 1,459
Other current assets....................................................... (83) (81)
Other assets............................................................... 78 (257)
Deferred taxes............................................................. -- 196
Income tax receivable...................................................... 722 (2,183)
Increase (decrease) in -
Accounts payable........................................................... (3,296) 675
Accrued compensation and related benefits.................................. 8 166
Accrued agent commissions.................................................. (162) (317)
Other accrued expenses..................................................... (521) 889
Deferred revenues.......................................................... 1,316 611
--------------- ---------------
Net cash provided by (used in) operating activities...................... 913 (468)
--------------- ---------------
INVESTING ACTIVITIES:
Purchase of property and equipment.............................................. (746) (1,767)
Cash paid for acquisition, net.................................................. -- (1,855)
Capitalized software development costs.......................................... (1,207) (112)
--------------- ---------------
Net cash used in investing activities.................................... (1,953) (3,734)
--------------- ---------------
FINANCING ACTIVITIES:
Proceeds from sale of common stock.............................................. 39 --
Net borrowings under line of credit............................................. 426 --
Payments on long-term debt...................................................... (254) (59)
Advances on obligations to Securicor and affiliates............................. 95 470
Repayment on obligations to Securicor and affiliates............................ (86) (629)
--------------- ---------------
Net cash provided by (used in) financing activities...................... 220 (218)
--------------- ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH......................................... (1) --
NET INCREASE DECREASE IN CASH AND CASH EQUIVALENTS.............................. (821) (4,420)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................................. 1,093 7,206
--------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................................ $ 272 $ 2,786
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
Telesciences, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
(Unaudited)
1. Background:
The Company
Telesciences, Inc. (the "Company"), a Delaware corporation, changed its
name from Axiom Inc. in March 1999. Through May 1997, the Company's business was
conducted through its wholly-owned subsidiary, Securicor Telesciences Inc.
("STI"). At that time, STI merged into the Company. As the merger of STI into
the Company represented a transaction between entities under common control, the
net assets of STI were transferred at net book value. Prior to May 1998, the
Company was a majority-owned subsidiary of Securicor Communications Limited
("SCL"), an entity organized under the laws of the United Kingdom and a wholly-
owned subsidiary of Securicor plc ("Securicor"), a company organized under the
laws of the United Kingdom. SCL currently owns approximately 45.6% of the
Company's outstanding Common Stock. Prior to the completion of the Company's
initial public offering, Securicor provided the financing requirements for the
Company through advances.
2. Summary Of Significant Accounting Policies:
Interim Financial Information and Summary Financial Information
The financial statements as of June 30, 1999 and for the three month and
nine month periods ended June 30, 1999 and 1998 are unaudited and, in the
opinion of management, include all adjustments (consisting only of normal
recurring adjustments) necessary for the fair presentation of results for these
interim periods. The results for the nine months ended June 30, 1999 are not
necessarily indicative of the results to be expected for the entire year. While
the Company believes that the disclosures presented are adequate to make the
information not misleading, these Consolidated Financial Statements should be
read in conjunction with the Consolidated Financial Statements and the notes
included in the Company's Form 10-K for the fiscal year ended September 30,
1998, as amended.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Restricted Cash
Restricted cash consists of funds to support a standby letter of credit
required under a contractual arrangement with one of the Company's customers.
Based upon the contractual agreement, this amount will be released on December
31, 1999. Accordingly, this restricted cash is reflected as a current asset as
of June 30, 1999.
Software Development Costs
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." Under
SFAS No. 86, costs incurred to create a computer software product are charged to
research and development expense as incurred until technological feasibility has
been established. The Company establishes technological feasibility upon
completion of a detailed program design. At that point, computer software costs
are capitalized until the product is available for general release to customers.
The establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized software development costs require considerable
judgment by management with respect to certain external factors, including, but
not limited to, anticipated future revenues, estimated economic life, and
changes in technology.
6
<PAGE>
Telesciences, Inc. and Subsidiaries
Notes To Consolidated Financial Statements (Continued)
(Unaudited)
Amortization will begin when the product is released. Capitalized software
development costs are amortized on a product-by-product basis using the
straight-line method over the estimated life of the product enhancement.
Capitalized software development costs consist primarily of salary,
consulting, and computer costs incurred to develop new products. During the nine
months ended June 30, 1999 and 1998, respectively, software development costs of
$1,207,000 and $112,000 were capitalized. Amortization has not yet begun.
Revenue Recognition
Revenues are generally recognized upon shipment of the equipment. In "bill
and hold" transactions, the Company recognizes revenues when the following
conditions are met: the equipment is complete, ready for shipment and segregated
from other inventory; the Company has no further significant performance
obligations in connection with the completion of the transaction; the commitment
and delivery schedule is fixed; the customer requested the transaction be
completed on this basis; and the risks of ownership have passed to the customer.
There were no outstanding accounts receivable balances relating to "bill and
hold" transactions at June 30, 1999 or September 30, 1998. Revenues from
installation and engineering activities are recognized as services are provided.
Depending on contract terms and conditions, software license fees are
recognized upon delivery of the product if no significant vendor obligations
remain and collection of the resulting receivable is deemed probable. The
Company had nominal stand-alone software license fee revenues for the nine
months ended June 30, 1999 and $1,184,000 stand-alone software license fee
revenues for the nine months ended June 30, 1998, and these amounts are included
in equipment revenues. If significant vendor obligations exist at delivery
and/or the product is subject to customer acceptance, revenue is deferred until
no significant obligations remain and/or acceptance has occurred. If the payment
of the license fee is coincident to services which are deemed to be essential to
the transaction, the license fee is deferred and recognized using contract
accounting over the period during which the services are performed. The
Company's software licensing agreements provide for a warranty/customer support
(typically 90 days). The portion of the license fee associated with the
warranty/ customer support is unbundled from the license fee and is recognized
ratably over the warranty period as services revenue.
The Company offers support agreements to its customers. Revenues from
customer support are recognized as services are provided. Services are generally
provided ratably over the term of the customer support agreement and are
included in services revenue in the accompanying statements of operations.
Net Loss Per Common Share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share," which superseded Accounting Principles Board Opinion
No. 15, "Earnings per Share." SFAS No. 128 requires dual presentation of basic
and diluted net loss per common share for complex capital structures on the face
of the statements of operations. According to SFAS No. 128, basic net loss per
common share, which replaced primary loss per share, is calculated by dividing
net loss available to common stockholders by the weighted average number of
shares of common stock outstanding for the period. Diluted net loss per common
share, which replaced fully diluted loss per common share, reflects the
potential dilution from the exercise or conversion of securities into shares of
common stock, such as stock options. The Company was required to and did adopt
SFAS No. 128 during the period ended December 31, 1997, as earlier application
was not permitted. As required by SFAS No. 128, all prior-period loss per common
share data have been restated to conform with the provisions of this statement.
7
<PAGE>
Telesciences, Inc. and Subsidiaries
Notes To Consolidated Financial Statements (Continued)
(Unaudited)
The following is a reconciliation of the numerators and denominators of the
basic and diluted loss per common share computations:
<TABLE>
<CAPTION>
For The Three Months Ended June 30,
Loss Shares Per Share
1999 (Numerator) (Denominator) Amount
---------------------------------------------------- ------------ ------------- ----------
<S> <C> <C> <C>
Basic net loss per common share..................... $(3,182,000) 7,686,000 $ (0.41)
==========
Dilutive effect of stock options.................. -- --
------------ -------------
Diluted net loss per common share................... $(3,182,000) 7,686,000 $ (0.41)
============ ============= ==========
1998
----------------------------------------------------
Basic net loss per common share..................... $(6,032,000) 7,133,164 $ (0.85)
==========
Dilutive effect of stock options.................. -- --
----------- -------------
Diluted net loss per common share................... $(6,032,000) 7,133,164 $ (0.85)
=========== ============= ==========
</TABLE>
<TABLE>
<CAPTION>
For The Nine Months Ended June 30,
Loss Shares Per Share
1999 (Numerator) (Denominator) Amount
---------------------------------------------------- ------------ ------------- ---------
<S> <C> <C> <C>
Basic net loss per common share..................... $(6,011,000) 7,748,000 $ (0.78)
=========
Dilutive effect of stock options.................. -- --
------------ -------------
Diluted net loss per common share................... $(6,011,000) 7,748,000 $ (0.78)
============ ============= =========
1998
----------------------------------------------------
Basic net loss per common share..................... $(9,796,000) 6,688,988 $ (1.46)
=========
Dilutive effect of stock options.................. -- --
------------ -------------
Diluted net loss per common share................... $(9,796,000) 6,688,988 $ (1.46)
============ ============= =========
</TABLE>
Options to purchase 1,435,482 and 922,915 shares of common stock with a
weighted average exercise price of $2.71 and $4.20 per share were outstanding as
of June 30, 1999 and 1998, respectively, but were not included in the
computation of diluted net loss per common share. For the three and nine months
ended June 30, 1999 and 1998, the effects of the exercise or conversion of
securities into shares of common stock were anti-dilutive due to the Company's
losses. Accordingly, they were excluded from the calculation of diluted loss per
share.
Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements, SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be presented with the same prominence as is
given to other financial statements. The comprehensive losses for the nine
months ended June 30, 1999 and 1998 were $6,012,000 and $9,796,000,
respectively.
<TABLE>
<CAPTION>
Cumulative
Translation
Adjustments
-----------
<S> <C>
Beginning balance............................ (6,000)
Current period change........................ (1,000)
-----------
Ending Balance............................... $(7,000)
===========
</TABLE>
8
<PAGE>
Telesciences, Inc. and Subsidiaries
Notes To Consolidated Financial Statements (Continued)
(Unaudited)
Supplemental Disclosures of Cash Flow Information
For the nine months ended June 30, 1999 and 1998, the Company paid interest
of $73,000 and $18,000, respectively. For the nine months ended June 30, 1999
and 1998, income taxes paid by the Company were immaterial.
The Company entered into three capital lease obligations during the nine
months ended June 30, 1998 totaling $961,000. No capital leases were entered
into during the nine months ended June 30, 1999.
On May 15, 1998, pursuant to an Agreement of Merger and Plan of
Reorganization by and among the Company, AV Technology, Inc., a Delaware
corporation ("Technology") and a wholly-owned subsidiary of the Company,
Innovative Data Technology, a California corporation ("IDT"), and the
shareholders of IDT (the "Shareholders"), IDT was merged into Technology in
accordance with the relevant provisions of the California General Corporation
Law and the Delaware General Corporation Law (the "Merger"). In connection with
the Merger, the Company issued to the Shareholders, in exchange for their shares
of common stock of IDT which constituted in the aggregate all of the issued and
outstanding common stock of IDT, an aggregate of 1,290,000 shares of the Common
Stock. In November 1998, this number of shares was reduced by 15,056 to
1,274,944 based on certain post-closing adjustments. In March 1999, the number
of shares was further reduced by 187,500 to 1,087,444 based on certain sales
amount adjustments, and may be subject to further adjustment. In conjunction
with the reduction in shares, the Company reduced its intangibles related to the
Merger and recorded Treasury Stock in the amount of $644,000. The Treasury Stock
was retired in April 1999.
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with current
year presentation.
3. Accounts Receivable:
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
--------------- ---------------
<S> <C> <C>
Billed....................................... $6,091,000 $ 13,970,000
Unbilled..................................... 292,000 1,340,000
--------------- ---------------
6,383,000 15,310,000
Less - allowance for doubtful accounts....... (955,000) (3,985,000)
--------------- ---------------
$5,428,000 $ 11,325,000
=============== ===============
</TABLE>
4. INVENTORIES:
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
--------------- ---------------
<S> <C> <C>
Raw materials................................ $3,746,000 $ 4,323,000
Work-in-process.............................. 385,000 581,000
Finished goods............................... 999,000 1,657,000
--------------- ---------------
$5,130,000 $ 6,561,00
=============== ===============
</TABLE>
9
<PAGE>
Telesciences, Inc. and Subsidiaries
Notes To Consolidated Financial Statements (Continued)
(Unaudited)
5. LINE OF CREDIT:
On December 7, 1998, the Company entered into an agreement with Silicon
Valley Bank to establish a $5,000,000 line of credit (the "Line of Credit")
which the Company is using to meet its short-term borrowing requirements. The
amount available under the Line of Credit is based upon a percentage of eligible
accounts receivable, as defined. Interest is charged at Silicon Valley Bank's
prime rate plus 1%. Borrowings under the Line of Credit are secured by an
interest in substantially all of the Company's assets. Under the Line of
Credit, the Company is required to comply with specified financial and non-
financial covenants, as defined. On June 18, 1999 the Company and Silicon
Valley Bank amended the Line of Credit to allow the Company to borrow up to an
additional $3,000,000 (the "Overadvance"). The Overadvance is not based on
accounts receivables. In order to obtain the Overadvance, the Company's largest
stockholder has provided a $3,000,000 Letter of Credit as security. All
receivable collections are first applied against any outstanding balance under
the Line of Credit and the Overadvance. The highest principal balance
outstanding during the quarter ended June 30, 1999 was $1,132,000. Interest was
charged at a weighted average rate of 8.75% and interest expense was $15,000 for
the nine months ended June 30, 1999. The outstanding balance under the Line of
Credit at June 30, 1999 was $426,000.
6. COMMITMENTS AND CONTINGENCIES:
The Company is obligated to make certain payments to certain key Company
employees if such employees are terminated. In addition, certain key employees
have performance incentives in the form of cash and equity (in Securicor or an
affiliate) related compensation. The Company does not expect to make these
payments other than in the normal course of business.
The Company is party to various claims arising in the ordinary course of
business. Although the ultimate outcome of these matters is presently not
determinable, management believes that the resolution of these matters will not
have a material adverse effect on the Company's financial position or results of
operations.
In August 1997, Acxiom Corporation ("Acxiom") filed suit against the
Company in the United States District Court for the District of Delaware
alleging trademark infringement and dilution under the Lanham Act, as well as
related state law causes of action. On November 16, 1998, the District Court
rendered its decision that Acxiom was entitled to an order enjoining the Company
from making further use of the Axiom name and related injunctive relief. The
court also concluded that Acxiom was not entitled to any money damages. The
Company and Acxiom agreed that neither would appeal the Court's decision, and
the Company agreed to reimburse Acxiom for ancillary costs in the amount of
$50,000.
Pursuant to the court order, on March 30, 1999, the Company amended its
Amended and Restated Certificate of Incorporation to change the name of the
Company from Axiom Inc. to Telesciences, Inc. In connection with the name
change, the Company's symbol on the Nasdaq National Market was changed to TLSI,
effective March 31, 1999.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company's principal products are billing data collection, transaction
data management, revenue assurance, fraud management systems and traffic
management systems. The Company also provides professional engineering services
for telecommunications service providers.
The Company's billing data collection and transaction data management
systems collect and normalize data from telecommunications switches that connect
users of telecommunications networks. They provide data to applications
including billing, customer care, marketing, fraud management, data warehousing
and network management applications. The Company's systems interface with all
major switch types.
The revenue assurance and fraud management systems help ensure carriers'
ability to bill accurately and completely for the services they render and guard
against fraudulent use of their networks. The need for such systems is
increasing as a result of the complexity in the marketplace introduced by the
growing number of telecommunications carriers and their interconnections. The
Company provides revenue assurance capabilities through its Sterling Fraud
Management System and in Specialized Processing Modules ("SPMs") running on the
Sterling Billing Mediation System.
The Company's traffic management systems capture information on trunk
usage. This information is transmitted to the customer's network planners who
use the information to optimize network performance. This capability helps
carriers avoid problems of too many available trunks, resulting in increased
costs, and too few available trunks, resulting in disconnected calls, poor
service and lost revenue.
The Company provides professional engineering services to integrate the
Company's product lines into customer networks and applications.
A significant portion of the Company's revenues has been, and is expected
to continue to be, derived from substantial orders placed by large
organizations, and in particular three Regional Bell Operating Companies
("RBOCs"). Aggregate revenues from US West, Inc., Southwestern Bell Telephone
Company and Ameritech Corporation accounted for 42.8% and 61.4% of the Company's
total revenues for the nine months ended June 30, 1999 and 1998, respectively.
Domestic revenues are typically generated under cancelable general purchase
agreements which provide for the continuing supply of products and services over
future years. Pricing is based upon the volume of products ordered.
Internationally, the Company typically enters into long-term contracts for the
delivery of turnkey systems which include products and services. All sales
arrangements with international customers are denominated in U.S. dollars.
Sales of Greendown Software Limited, which was acquired by the Company in
February 1998 and which subsequently changed its name to Telesciences, Europe
Ltd. ("Telesciences, Europe"), are denominated in pounds Sterling. These sales
have been insignificant to date. The Company's revenues are difficult to
forecast because the purchase of its systems generally involves a significant
commitment of capital and management time, which often results in lengthy sales
cycles.
Quarterly revenues are subject to substantial fluctuations due primarily to
the Company's concentration of customers and the timing of orders received. The
timing of orders is, in part, dependent on the timing of the Company's
customers' annual budget process. Prior to the Company's fiscal year ended
September 30, 1998 ("fiscal 1998'), the Company's first and second fiscal
quarters generated a lower level of revenues compared to the Company's third and
fourth fiscal quarters by which time the Company's customers typically approve
their budgets. However, more recently, the Company has experienced fluctuations
in quarterly revenues due to lower sales volumes from its larger customers due
in large part to lower capital spending on new billing mediation systems by such
customers as a result of these customers' internal Y2K preparations.
Historically, product and service backlog has been a relatively small amount and
the majority is fulfilled within three months. Because of its close links to,
and ongoing
11
<PAGE>
communications with, its customers, the Company generally is able to plan for
product demand and, when the order is received, ship its products within a
relatively short time period thereafter.
Cost of revenues includes the direct cost of hardware and software modules,
other manufacturing costs related to the assembly and testing of products,
customer service costs, agent commissions where applicable, and other variable
costs such as freight, scrap and installation materials. The Company has a
relatively high fixed cost base which is included in cost of revenues. As a
result, any significant decline in revenues would likely have a significant
adverse effect on margins.
Research, development and engineering expenses consist of payroll and
related expenses and other costs associated with the design and development of
the Company's products. The majority of these costs are charged to expense as
incurred. During fiscal 1998, the Company embarked upon a rearchitecture of its
core systems, principally for the Sterling Host Collector. This work is
expected to enable the Company to further enhance its product offerings to its
existing customer base, as well as new and multi-service providers, which will
include companies using new technology such as Asynchronous Transfer Mode and
Internet Protocol. The new technology is expected to use object oriented design
tools and the latest proven software tools and methods. Due to the nature of
this rearchitecture project, the Company is capitalizing the costs of the
project. For the nine months ended June 30, 1999 and 1998, the total amount
capitalized was $1,207,000 and $112,000, respectively. These software
development costs are accounted for under SFAS No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed." In fourth
quarter of the fiscal year ending September 30, 1999 ("fiscal 99"), the Company
expects to capitalize nominal amounts of costs under SFAS No. 86 associated with
this project.
Selling, general and administrative expenses consist of costs to support
the Company's sales, marketing and administrative functions. Included within
these costs are payroll and related expenses, supplies, travel, outside
services, as well as the cost of the Company's participation in trade shows,
industry conferences and related travel and promotional costs.
Certain prior year amounts have been reclassified to conform with current
year presentation.
Disclosure Concerning Forward-Looking Statements
From time to time, the Company may publish statements that are not
historical facts but are forward-looking statements relating to such matters as
anticipated financial performance, business prospects, technological
developments, new products, research and development activities and similar
matters. Such statements are generally identified by the use of forward-looking
words and phrases such as "intended," "expects," "anticipates," and "is (or are)
expected (or anticipated)." The Private Litigation Reform Act of 1995 provides
a safe harbor for forward-looking statements. In order to comply with the terms
of the safe harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's forward-
looking statements. The risks and uncertainties that may affect the operations,
performance, development and results of the Company's business include, but are
not limited to the following important factors:
(i) reliance on a limited number of significant customers and dependence
on Sterling Series products;
(ii) difficulty in predicting quarterly revenues because of long sales
cycles and customer budgetary constraints;
(iii) competition in the market for billing data collection, transaction
data management, revenue assurance, fraud products and traffic
management systems;
(iv) rapid and unexpected changes in the telecommunications markets and
technologies;
12
<PAGE>
(v) the success of the Company's sales and marketing strategies;
(vi) the ability of the Company to manage its growth;
(vii) the ability of the Company to obtain financing for operations and
growth;
(viii) the ability of the Company to motivate, and retain the services of,
its key management and technical personnel and continue to hire
additional qualified personnel to meet the Company's evolving
staffing needs; and
(ix) risks related to sales to international customers, including, but
not limited to, currency fluctuations, instability in financial
markets and unanticipated shifts in economic policies of foreign
governments, particularly as it relates to Asia.
Results Of Operations
Quarter Ended June 30, 1999 Compared To Quarter Ended June 30, 1998
Revenues
Revenues decreased 65.9% to $3.6 million for the quarter ended June 30,
1999 from $10.7 million for the quarter ended June 30, 1998. The decrease was
primarily due to a change in mix in sales by customer type from the prior year.
RBOC sales, which were relatively high in 1998 due to sales of the data server
product, were lower at $1.8 million for the quarter ended June 30, 1999 compared
with $6.7 million for the same period in the previous year. Equipment revenues
were $1.6 million in 1999, for the quarter ended June 30 1999, a decrease of
78.7% from $7.3 million for the quarter ended June 30, 1998. The Company has
experienced lower sales volumes from its larger customers due in large part to
lower capital spending on new billing mediation systems by such customers as a
result of these customers' internal Y2K preparations. Services revenues
decreased 37.4% to $2.1 million for the quarter ended June 30, 1999 from $3.3
million for the quarter ended June 30, 1998. Services revenues were higher for
the quarter ended June 30, 1998 due to a large engineering services project in
the prior year for one of the RBOCs.
Gross Profit
Gross profit decreased to $473,000 for the quarter ended June 30, 1999 from
$4.5 million for the quarter ended June 30, 1998. This decrease was primarily
caused by a lack of demand for the Company's billing mediation systems by its
larger customers. Gross profit related to equipment revenues decreased to
$(698,000) for the quarter ended June 30, 1999 from $4.1 million for the quarter
ended June 30, 1998. The Company has a relatively high fixed cost base which is
included in cost of revenues. As a result, fluctuations in revenues have a
significant effect on margins. Gross profit from services revenues increased to
$1.2 million for the quarter ended June 30, 1999 from $413,000 for the quarter
ended June 30, 1998. This increase resulted mainly from the fact that a large
engineering services project with low margins was completed for one of the RBOCs
during the quarter ended June 30, 1998.
Research, Development and Engineering
Research, development and engineering expenses were $1.7 million and $1.9
million for the quarters ended June 30, 1999 and 1998, respectively. As a
percentage of revenues, research, development and engineering expenses increased
during the quarter ended June 30, 1999 to 45.4% from 17.7% for the quarter ended
June 30, 1998. Software development costs of $327,000 and $112,000 were
capitalized during the quarters ended June 30, 1999 and 1998, respectively, and,
therefore, were not charged to research, development and engineering expense.
Selling, General and Administrative
13
<PAGE>
Selling, general and administrative expenses were $2.1 million for the
quarter ended June 30, 1999, a decrease of 67.5% compared to $6.3 million for
the same period in 1998. As a percentage of revenues, selling, general and
administrative expenses decreased during the quarter ended June 30, 1999 to
56.5% from 59.4% for the quarter ended June 30, 1998. During the quarter ended
June 30, 1998, there was an increase to the allowance for doubtful accounts of
approximately $3.2 million as a result of the uncertainty in the Company's Asian
markets and legal cost of $330,000 related to the Acxiom lawsuit. No such costs
were incurred in the quarter ended June 30, 1999. The balance of the decrease
is due from the Company's program, instituted in July 1998, to reduce expenses
through a reduction in its work force, as well as other cost cutting measures.
Interest Expense and Income
Net interest expense was $9,000 for the quarter ended June 30, 1999. Net
interest income was $46,000 for the quarter ended June 30, 1998. In the quarter
ended June 30, 1998, the Company had substantially more cash available for
short-term investing as compared to the quarter ended June 30, 1999. In
addition, the Company did not have a Line of Credit available and associated
interest expense during the quarter ended June 30, 1998.
Income Taxes
Due to continued losses throughout fiscal 1998 and the first nine months of
fiscal 1999, the Company did not record an income tax benefit during the quarter
ended June 30, 1999. However, as of June 30, 1999, the Company had recorded net
deferred tax assets of $2.7 million. Based on an assessment of the Company's
taxable earnings history and expected future taxable income, management has
determined that it is more likely than not that the net deferred tax assets will
be realized in future periods. The Company may be required to provide an
additional valuation allowance for these assets in the future if it does not
generate sufficient taxable income as planned. Additionally, market conditions
and other variables not known or anticipated at this time could negatively
impact the ultimate realization of these assets. No provision was recorded for
the quarters ended June 30, 1999 and 1998, due to the Company's net loss.
Nine Months Ended June 30, 1999 Compared To Nine Months Ended June 30, 1998
Revenues
Revenues decreased 31.7% to $16.3 million for the nine months ended June
30, 1999 from $23.9 million for the nine months ended June 30, 1998. The
decrease was primarily due to a change in mix in sales by customer type from the
prior year. RBOC sales decreased from $15.7 million to $7.1 million. In 1998,
significant sales of the data server product to the RBOCs and project
engineering services to US West accounted for much of the total and these were
not at the same level in 1999. However, sales to CLECs increased from $1.3
million for the nine months ended June 30, 1998 to $2.2 million for the nine
months ended June 30, 1999, and international sales increased from $4.7 million
to $5.4 million. Equipment revenues were $9.6 million for the nine months ended
June 30 1999, a decrease of 40.5% from the $16.1 million of equipment revenues
for the nine months ended June 30, 1998. The Company has experienced lower sales
volumes from its larger customers due in large part to lower capital spending on
new billing mediation systems by such customers as a result of these customers'
internal Y2K preparations. Services revenues decreased 13.4% to $6.7 million for
the nine months ended June 30, 1999 from $7.8 million for the nine months ended
June 30, 1998. Services revenues were higher for the nine months ended June 30,
1998 due to a large engineering services project in the prior year for one of
the RBOCs.
Gross Profit
Gross profit decreased to $5.1 million for the nine months ended June 30,
1999 from $9.4 million for the nine months ended June 30, 1998. This decrease
was primarily caused by a lack of demand for the Company's billing mediation
systems by its largest customers. Gross profit related to equipment revenues
decreased to $1.5 million for the nine months ended June 30, 1999 from $8.1
million for the nine months
14
<PAGE>
ended June 30, 1998. The Company has a relatively high fixed cost base which is
included in cost of revenues. As a result, fluctuations in revenues have a
significant effect on margins. Gross profit from services revenues increased to
$3.6 million for the nine months ended June 30, 1999 from $1.3 million for the
nine months ended June 30, 1998. This increase was due mainly to profits derived
from significant installation services provided to one of the RBOCs.
Research, Development and Engineering
Research, development and engineering expenses were $5.3 million and $5.8
million for the nine months ended June 30, 1999 and 1998, respectively. As a
percentage of revenues, research, development and engineering expenses increased
during the nine months ended June 30, 1999 to 32.6% from 24.1% for the nine
months ended June 30, 1998. Software development costs of $1,207,000 and
$112,000 were capitalized during the nine months ended June 30, 1999 and 1998,
respectively, and therefore, were not charged to research, development and
engineering expense. In 1999, engineering related to the new products acquired
as part of the Company's acquisitions in 1998 were included, whereas these costs
did not occur in the same period in 1998.
Selling, General and Administrative
Selling, general and administrative expenses were $5.8 million for the nine
months ended June 30, 1999, a decrease of 56.1% compared to $13.3 million for
the same period in 1998. As a percentage of revenues, selling, general and
administrative expenses decreased during the nine months ended June 30, 1999 to
35.8% from 55.6% for the nine months ended June 30, 1998. This decrease
resulted in part from the Company's program, instituted in July 1998, to reduce
expenses through a reduction in its work force, as well as other cost-cutting
measures. Additionally, during the nine months ended June 30, 1998, there was
an increase to the allowance for bad debts of approximately $3.9 million as a
result of the uncertainty in the Company's Asian markets and legal costs of
$600,000 related to the Acxiom lawsuit. No such costs were incurred during the
nine months ended June 30, 1999.
Interest Expense and Income
Net interest expense was $13,000 for the nine months ended June 30, 1999.
Net interest income was $241,000 for the nine months ended June 30, 1998. For
the nine months ended June 30, 1998, the Company had substantially more cash
available for short term investing as compared to the nine months ended June 30,
1999. In addition, during the nine months ended June 30, 1999, the Company
utilized the available Line of Credit to meet cash requirements.
Income Taxes
Due to continued losses throughout fiscal 1998 and the first nine months of
fiscal 1999, the Company did not record an income tax benefit during the nine
months ended June 30, 1999. However, as of June 30, 1999, the Company recorded
net deferred tax assets of $2,718,000. Based on an assessment of the Company's
taxable earnings history and expected future taxable income, management has
determined that it is more likely than not that the net deferred tax assets will
be realized in future periods. The Company may be required to provide an
additional valuation allowance for these assets in the future if it does not
generate sufficient taxable income as planned. Additionally, market conditions
and other variables not known or anticipated at this time could negatively
impact the ultimate realization of these assets.
The Company's effective tax rate was 16.5% for the nine months ended June
30, 1998. An income tax benefit of $1.9 million was recorded during the nine
months ended June 30, 1998.
15
<PAGE>
Backlog
The Company's backlog (firm purchase orders for products and services that
have not yet been recognized as revenue) was approximately $7.4 million and $7.6
million at June 30, 1999 and September 30, 1998, respectively. The Company
normally has a relatively small amount of product and service backlog because
ongoing informal communication with its major customers generally enables the
Company to anticipate orders and ship products within a relatively short time
after the customer's order is received. The Company expects to be able to
fulfill substantially all backlog existing at June 30, 1999 prior to the end of
fiscal 1999.
Liquidity and Capital Resources
The Company completed the initial public offering of its Common Stock (the
"Offering") in July 1997. Prior to the Offering, the Company had financed its
operations primarily with cash generated from operations and borrowings from
Securicor. In July 1997, the Company received net proceeds from the Offering of
approximately $32.4 million (after deducting underwriters' discounts and
commissions and other offering expenses). In August 1997, the Company repaid
$22.9 million in Company borrowings from Securicor. As of June 30, 1999, the
Company had $272,000 of cash and cash equivalents, $5.4 million in net trade
accounts receivable and $4.3 million of working capital.
Net cash provided by (used in) operating activities was $913,000 and
$(468,000) for the nine months ended June 30, 1999 and 1998, respectively. For
the nine months ended June 30, 1999, the major contributors to the net cash
provided by operating activities were a decrease in accounts receivable of $5.8
million, amortization and depreciation of $1.6 million, a decrease in
inventories of $1.4 million, a decrease to income tax receivable of $722,000 and
an increase in deferred revenues of $1.3 million, partially offset by a net loss
of $6.0 million, a decrease in accounts payable of $3.3 million and a decrease
in other accrued expenses of $521,000. For the nine months ended June 30, 1998,
the major contributors to the net cash used in operating activities were the net
loss of $9.8 million and the increase in income tax receivable of $2.2 million
partially offset by amortization and depreciation of $1.4 million, provision for
doubtful accounts of $4.0 million, charge for purchased research and development
relating to the IDT Merger of $2.4 million and the decrease in inventories of
$1.5 million, an increase in deferred revenues of $611,000, an increase in
accounts payables of $675,000 and an increase in other accrued expenses of
$889,000.
Net cash used in investing activities relating to purchases of property and
equipment was $746,000 and $1.8 million for the nine months ended June 30, 1999
and 1998, respectively. In addition, the Company capitalized $1.2 million and
$112,000 of software development costs during the nine months ended June 30,
1999 and 1998, respectively. During the nine months ended June 30, 1998, the
Company acquired IDT for a net cash outlay (net of cash acquired) of $1,764,000
and Telesciences, Europe for a net cash outlay of $91,000.
Net cash provided by financing activities of $220,000 resulted primarily
from borrowings on the line of credit and offset by payments of long-term dept.
Net cash used in financing activities was $218,000 for the nine months ended
June 30, 1998.
On December 7, 1998, the Company entered into an agreement with Silicon
Valley Bank to establish the Line of Credit, which the Company is using to meet
its short-term borrowing requirements. The amount available under the Line of
Credit is based upon a percentage of eligible accounts receivable, as defined.
Interest is charged at Silicon Valley Bank's prime rate plus 1%. Borrowings
under the Line of Credit are secured by an interest in substantially all of the
Company's assets. Under the Line of Credit, the Company is required to comply
with specified financial and non-financial covenants, as defined. On June 18,
1999 the Company and Silicon Valley Bank amended the Line of Credit to allow the
Company to borrow up to the $3,000,000 Overadvance. The Overadvance is not
based on accounts receivables. In order to obtain the Overadvance, the
Company's largest stockholder has provided a $3,000,000 Letter of Credit as
security. All receivable collections are first applied against any outstanding
balance under the Line of Credit. The highest principal balance outstanding
during the nine months ended June 30, 1999 was
16
<PAGE>
$1.3 million. Interest was charged at a weighted average rate of 8.75% and
interest expense was $15,000. $426,000 remained outstanding under the Line of
Credit at June 30, 1999.
The Company believes that its existing cash balances, cash generated from
operations and borrowings under the Line of Credit will be sufficient to meet
the Company's cash requirements into its fiscal year ending September 30, 2000.
However, depending upon profitability, its rate of growth and the timing of its
collections and other operating factors, the Company may require additional
equity or debt financing to meet its working capital requirements or capital
expenditure needs. There can be no assurance that additional financing, if
needed, will be available when required or, if available, will be on terms
satisfactory to the Company.
The Company has retained an investment-banking firm to advise it with
respect to possible strategic transactions, which may involve a business
combination or strategic investment. There is no assurance that the Company
will be able to complete a strategic transaction.
Year 2000 Readiness Disclosure
Background
In the past, many computer software programs were written using two digits
rather than four to define the applicable year. As a result, date-sensitive
computer software may recognize a date using "00" as the year 1900 rather than
the year 2000. This is generally referred to as the Year 2000 issue. If this
situation occurs, the potential exists for computer system failures or
miscalculations by computer programs, which could disrupt operations.
Approach
The Company has established a group to coordinate the Company's response to
the Year 2000 issue, both as to its internal systems and as to its products.
This group includes the Company's Vice President - Operations Support, Director
of Quality, Director of Product Line Management, Manager of Engineering
Operations, Purchasing Manager and Manager of Information Technology, as well as
support staff. The Company has implemented a Year 2000 compliance program
consisting of the following: (i) compiling a list of internal information
technology ("IT") and non-IT systems, as well as Company products, that may
require adaptation, remediation or replacement with respect to the Year 2000
issue; (ii) identifying and prioritizing critical systems and products from the
list compiled in part (i) and making inquiries of third parties with whom the
Company does significant business (i.e., vendors and service providers) as to
the state of their Year 2000 readiness; (iii) analyzing critical systems and
products to determine which systems or products are not Year 2000 compliant and
evaluating the costs of adapting, repairing or replacing those systems; and (iv)
adapting, repairing or replacing noncompliant systems or products and testing of
the adapted, repaired or replaced systems.
Status
The Company believes that all of its internal systems are currently Year
2000 compliant in all material respects. It is anticipated that additional
minor Year 2000 problems will be identified and continuing efforts will be
required to validate the internal systems for Year 2000 compliance.
The Company believes that its internal telephone system is Year 2000
compliant. The Company expects to complete Year 2000 compliance testing on the
telephone system by September 1999. The Company does not expect that there will
be a material cost to the Company in the event that software must be upgraded.
The Company believes that the products which will be supported beyond the
year 2000 are currently Year 2000 compliant. It continues to test all such
products on an ongoing basis. Certain products
17
<PAGE>
sold by the Company in the past that have been discontinued are not Year 2000
compliant. Most customers of these products have been notified of such
noncompliance. The Company does not intend to repair or replace such products.
The Company does not expect any of such customers to assert that the Company has
an obligation to repair or replace such products, but there can be no assurance
that such an assertion will not be made.
The total cost to the Company of making its systems Year 2000 compliant is
currently estimated to be less than $500,000, of which the Company has already
incurred approximately $318,000. The cost for replacement of the equipment and
software will be capitalized and depreciated over their respective expected
useful lives. Any assets that will be replaced are fully depreciated at this
time. Furthermore, all costs related to software modification, as well as all
costs associated with the Company's administration of its Year 2000 project, are
being expensed as incurred and are likewise included in the cost estimate above.
Risks Associated with the Year 2000 Problem
The Company utilizes computer systems in many aspects of its business. As
noted, the Company's critical systems are Year 2000 compliant in all material
respects. It is anticipated that additional minor Year 2000 problems will be
identified and continuing efforts will be required to validate its computer
systems for Year 2000 compliance.
The Company is also exposed to the risk that one or more of its vendors or
service providers could experience Year 2000 problems that impact the ability of
such vendor or service provider to provide goods and services. Though this is
not considered as significant a risk with respect to the suppliers of goods, due
to the availability of alternative suppliers, the disruption of certain
services, such as utilities, could, depending upon the nature and extent of the
disruption, have a material adverse impact on the Company's operations. The
Company is in the process of contacting all vendors and suppliers with whom the
Company has a material relationship to determine whether they will be
sufficiently Year 2000 compliant so as not to cause any material adverse effect
on the Company. To date, the Company is not aware of any vendor or service
provider Year 2000 issue that management believes would have a material adverse
impact on the Company's operations. However, the Company has no means of
guaranteeing that its vendors or service providers will be Year 2000 ready. The
inability of vendors or service providers to complete their Year 2000 resolution
process in a timely fashion could have a material adverse impact on the Company.
The effect of non-compliance by vendors or service providers is not determinable
at this time.
Widespread disruptions in the national or international economy, including
disruptions affecting the financial markets, resulting from Year 2000 issues or
in certain industries, such as disruptions affecting the financial industry and
commercial or investment banks, could also have a material adverse impact on the
Company. The likelihood and effect of such disruptions is not determinable at
this time.
Inflation
To date, inflation has not had a material impact on the Company's financial
condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company does not have any
derivative financial instruments in its portfolio. The Company places its
investments in instruments that meet high credit quality standards. The Company
is adverse to principal loss and ensures the safety and preservation of its
invested funds by limiting default risk, market risk and reinvestment risk. As
of June 30, 1999, the Company's investments
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<PAGE>
consisted of a money market account and an overnight repurchase agreement. The
Company does not expect any material loss with respect to its investment
portfolio.
Foreign Currency Risk
The Company does not use foreign currency forward exchange contracts or
purchased currency options to hedge local currency cash flows or for trading
purposes. All sales arrangements with international customers are denominated
in U.S. dollars. Sales of Telesciences, Europe are denominated in pounds
Sterling. These sales have been insignificant to date.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amendment to Loan and Security Agreement by and between the
Company and Silicon Valley Bank, dated June 18, 1999.
27 Financial Data Schedule (EDGAR only)
(b) Reports on Form 8-K
Current Report on Form 8-K, filed on April 8, 1999, covering Item 5.
19
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Telesciences, Inc.
Dated: August 12, 1999 By: /s/ Andrew P. Maunder
-----------------------------------
Andrew P. Maunder
President and Chief Executive Officer
(Principal Executive Officer)
Dated: August 12, 1999 By: /s/ Frances Penfold
-----------------------------------
Vice President, Finance
(Principal Financial and Accounting
Officer)
20
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----------------------------------------------------------------------
Silicon Valley Bank
Amendment to Loan Documents
Borrower: Telesciences Inc. (formerly Axiom Inc.)
Date: June 18, 1999
THIS AMENDMENT TO LOAN DOCUMENTS is entered into between SILICON VALLEY
BANK ("Silicon") and the borrower named above ("BOrrower").
The Parties agree to amend the Loan and Security Agreement between them,
dated December 7, 1998 (as previously amended, if at all, the "Loan Agreement"),
as follows, effective as of the date hereof. (Capitalized terms used but not
defined in this Amendment, shall have the meanings set forth in the Loan
Agreement.)
1. Overadvance. Borrower has requested that Silicon make Loans in an
amount which will cause the aggregate outstanding Loans to exceed the
limitations set forth in the Loan Agreement by up to $3,000,000 (the
"Overadvance").
Silicon agrees to make the Overadvance to Borrower, and, on consideration
thereof, Borrower agrees: (i) to secure the Overadvance by providing Silicon
with a letter of credit in the amount of the Overadvance , issued by a bank
acceptable to Silicon, and containing terms and conditions acceptable to
Silicon; (ii) to repay the Overadvance in full or on before the date which is
thirty days from the Maturity Date; and (iii) not to permit the Overadvance to
exceed $3,000,000 at any time outstanding.
Borrower understands that, by making the Overadvance, Silicon is not
waiving any Event of Default which may result from any overadvance which may
occur in the future, or any other Event of Default.
2. Amendment of Financial Covenant. Section 5 of the Schedule is hereby
amended to read as follows:
"5. Financial
Covenants
(Section 5.1): Borrower shall comply with the following covenant.
Compliance shall be determined as of the end of each
quarter.
Minimum Tangible
Net Worth: Borrower shall maintain a Tangible Net Worth of not
less than $8,200,000, plus 75% of the sum of (i) the
Borrower's net income earned subsequent to the date of
the Loan Agreement, plus (ii) the proceeds of any
issuance(s) of equity or subordinated debt by the
Borrower subsequent to the date of the Loan Agreement.
-1-
<PAGE>
Silicon Valley Bank Amendment to Loan Documents
----------------------------------------------------------------------
Definitions. For purposes of the foregoing financial covenant,
the following terms shall have the following
meanings:
"Tangible Net Worth" shall mean the excess of
total assets over total liabilities, determined in
accordance with generally accepted accounting
principles, with the following adjustments:
(A) there shall be excluded from assets: (i)
notes, accounts receivable and other
obligations owing to the Borrower from its
officers or other Affiliates, and (ii) all
assets which would be classified as
intangible assets, under generally accepted
accounting principles, including without
limitation goodwill, licenses, parents,
trademarks, trade names, copyrights,
capitalized software and organizational
costs, licenses and franchises
(B) there shall be excluded from liabilities:
all indebtedness which is subordinated to the
Obligations under a subordination agreement
in form specified by Silicon or by language
in the instrument evidencing the indebtedness
which is acceptable to Silicon in its
discretion.
"Assets" and "liabilities" shall have the meanings
ascribed thereto by generally accepted accounting
principles."
3. Representations True. Borrower represents and warrants to Silicon that
all representations and warranties set forth in the Loan Agreement, as amended
hereby, are true and correct.
4. General Provisions. This Amendment, the Loan Agreement, any prior
written amendments to the Loan Agreement signed by Silicon and Borrower, and the
other written documents and agreements between Silicon and Borrower set forth in
full all of the representations and agreements of the parties with respect to
the subject matter hereof and supersede all prior discussions, representations,
agreements and understandings between the parties with respect to the subject
hereof. Except as herein expressly amended, all of the terms and provisions of
the Loan Agreement, and all other documents and agreements between Silicon and
Borrower shall continue in full force and effect and the same are hereby
ratified and confirmed.
Borrower: Silicon:
TELESCIENCES, INC. SILICON VALLEY BANK
By /s/ Andrew P. Maunder By /s/ Peter Bendoris
-------------------------------- ---------------------------------
President or Vice President Title /s/ Assistant Vice President
------------------------------
By /s/ Frances Penfold
--------------------------------
Secretary or Ass't Secretary
-2-
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