U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1997
SEC File No. 1-13830
TELESOFT CORP.
(Exact name of registrant as specified in its charter)
Arizona 86-0431009
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3216 North Third Street, Phoenix, Arizona 85012
(Address of principal executive offices)
(602) 265-6311
(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 report), and (2) has been subject to
such filing requirements for the past 90 days.
Yes (X) No ( )
Common Stock, without par value, 3,787,500 shares outstanding at
October 14, 1997
Transitional Small Business Disclosure Format Yes ( ) No (X)
39271-1 1
<PAGE 2>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<S> <C>
Page
Consolidated Balance Sheets as of August 31, 1997 and
November 30, 1996 3
Consolidated Statements of Operations for the three
and nine month periods ended August 31, 1997 and
August 31, 1996 4
Consolidated Statements of Cash Flows for the nine month
periods ended August 31, 1997 and August 31, 1996 5 -- 6
Notes to the Consolidated Financial Statements 7 -- 9
<PAGE 3>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
</TABLE>
<TABLE>
<S> <C> <C>
August 31, 1997 November 30, 1996
(unaudited)
ASSETS
Cash and cash equivalents $ 174,219 $ 219,023
Investment securities 1,436,899 703,332
Accounts receivable, net of allowance for
uncollectibles of $ 939,402 at
August 31, 1997 and $708,127 at
November 30, 1996 3,332,087 5,678,469
Inventory 592,169 474,254
Deferred taxes 1,015,200 234,300
Income taxes receivable 56,281 147,242
Note receivable from related party - 208,635
Other 521,100 194,834
--------------- -----------------
Total Current Assets 7,127,955 7,860,089
Investment securities 500,000 2,800,000
Property and equipment, net 2,744,863 2,094,952
Computer software costs, net 496,809 605,912
Intangibles, net 1,352,722 1,136,898
Note receivable from related party 286,266 40,125
Deferred taxes 84,300 -
Other 143,267 114,960
---------------- -----------------
Total Assets $ 12,736,182 $ 14,652,936
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable-current portion $ 88,957 $ -
Accounts payable and accrued liabilities 2,300,711 4,085,134
Income taxes payable 286,295 -
Deferred revenue 1,084,637 526,351
---------------- -----------------
Total Current Liabilities 3,760,600 4,611,485
Note payable 394,777 -
Deferred taxes - 153,500
---------------- -----------------
Total Liabilities 4,155,377 4,764,985
---------------- -----------------
Stockholders' Equity:
Common stock, 50,000,000 shares
authorized, no par value; 7,343,859 7,343,859
3,787,500 issued and outstanding
Additional paid-in capital 22,369 80,069
Retained earnings 1,214,577 2,464,023
----------------- ------------------
Total Stockholders' Equity 8,580,805 9,887,951
----------------- ------------------
Total Liabilities and Stockholders' Equity $ 12,736,182 $ 14,652,936
================= ==================
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
<PAGE 4>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
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Three Months Ended Nine Months Ended
August 31, 1997 August 31,1996 August 31, 1997 August 31,1996
Sales, net $ 4,182,831 $ 3,169,786 $ 17,249,062 $ 14,219,039
Cost of sales 2,018,604 1,733,969 10,442,588 8,162,067
------------------ -------------- ----------------- ----------------
2,164,227 1,435,817 6,806,474 6,056,972
------------------ -------------- ----------------- ----------------
General and administrative expenses 2,930,146 2,344,113 8,383,314 5,480,887
Settlement expense - - 384,138 -
------------------ -------------- ----------------- ----------------
2,930,146 2,244,113 8,767,452 5,480,887
------------------ -------------- ----------------- ----------------
(Loss) income from operations (765,919) (908,296) (1,960,978) 576,085
------------------ -------------- ----------------- ----------------
Other income (expense)
Interest income 28,910 67,683 136,766 245,274
Interest expense (7,723) (2,252) (7,839) (2,858)
Other 4,194 (8) (10,695) 1,740
------------------ -------------- ----------------- ----------------
25,381 65,423 118,232 244,156
------------------ -------------- ----------------- ----------------
(Loss) income before benefit (provision)
for income taxes (740,538) (842,873) (1,842,746) 820,241
Benefit (provision) for income taxes 161,400 355,600 593,300 (325,600)
------------------ -------------- ----------------- ----------------
Net (loss) income $ (579,138) $ (487,273) $ (1,249,446) $ 494,641
================== ============== ================= ================
(Loss) earnings per share
primary $ (.15) $ (.13) $ (.33) $ .13
fully diluted $ (.15) $ (.13) $ (.33) $ .13
================== ============== ================= ================
Weighted average number of
shares outstanding
primary 3,798,187 3,860,020 3,832,839 3,817,034
fully diluted 3,798,187 3,860,020 3,832,839 3,817,034
================= ============== ================= ================
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
<PAGE 5>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine month periods ended August 31, 1997 and 1996 (unaudited)
<TABLE>
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1997 1996
Cash flows from operating activities:
Cash received from customers $ 19,836,209 $ 15,606,593
Cash paid to suppliers and employees (20,083,950) (16,701,314)
Interest paid (7,839) (2,858)
Interest received 102,761 224,450
Income taxes paid (48,144) (1,151,661)
---------------- ----------------
Net cash used by operating activities (200,963) (2,024,790)
---------------- ----------------
Cash flows from investing activities:
Purchase of property and equipment (1,365,887) (1,183,926)
Computer software costs - (276,472)
Disbursement for notes receivable from
related parties (385,417) -
Collection of notes receivable from related
parties 362,316 -
Payments for purchase of GoodNet, LLC, net of
cash acquired, and purchase of customer base - (887,515)
Purchase of investment securities (4,568,567) -
Sale of investment securities 6,135,000 -
--------------- ----------------
Net cash provided (used) by investing activities 177,445 (2,347,913)
--------------- ----------------
Cash flows from financing activities
Proceeds from notes payable - 1,200,000
Payment of notes payable (21,286) (1,207,977)
-------------- ----------------
Net cash used by financing activities (21,286) (7,977)
-------------- ----------------
Net decrease in cash and cash equivalents (44,804) (4,380,680)
Cash and cash equivalents at beginning of period 219,023 7,791,915
-------------- ----------------
Cash and cash equivalents at end of period $ 174,219 $ 3,411,235
============== ================
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
<PAGE 6>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine month periods ended August 31, 1997 and 1996 (unaudited)
<TABLE>
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1997 1996
Reconciliation of Net (Loss) Income to Net Cash
Used By Operating Activities
Net (Loss) Income $ (1,249,446) $ 494,641
----------------- -----------------
Adjustments to reconcile net (loss) income to net
cash used by operating activities:
Depreciation and amortization 1,056,575 424,435
Interest income included with note receivable
from related party (14,405) -
Deferred taxes (1,018,700) 16,200
Changes in Assets and Liabilities:
Accounts receivable 2,346,382 1,519,026
Inventory (117,915) (269,740)
Other current assets (326,266) (341,741)
Other assets (28,307) (134,845)
Accounts payable and accrued liabilities (1,784,423) (2,928,350)
Deferred revenue 558,286 37,845
Income taxes payable 286,295 (617,343)
Income taxes receivable 90,961 (224,918)
---------------- -----------------
1,048,483 (2,519,431)
---------------- -----------------
Net cash used by operating activities $ (200,963) $ (2,024,790)
================ =================
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
During the nine month period ended August 31, 1997, the Company financed a
covenant not to compete in the amount of $505,020.
During the nine month period ended August 31, 1997, the Company reacquired
30,833 shares of its common stock valued at $57,700 as partial payment of
the sale of 25% of the outstanding shares of Telesoft Acquisition Corp II.
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
<PAGE 7>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the three and nine month periods ended August 31, 1997 and 1996 (unaudited)
1. Summary of Significant Accounting Policies:
Principles of Consolidation:
The consolidated financial statements include the accounts of Telesoft Corp.
(Telesoft), together with its wholly owned subsidiary, Telesoft Acquisition
Corp and a 75% owned subsidiary, Telesoft Acquisition Corp II (the Company).
All significant intercompany accounts and transactions have been eliminated.
Basis of Presentation:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Item 310 of Regulation SB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for audited year-end financial statements. In the opinion of
management, all adjustments for normal recurring accruals considered necessary
for a fair presentation have been included. Operating results for the three
and nine month periods ended August 31, 1997 are not necessarily indicative of
the results that may be expected for the year ending November 30, 1997. The
unaudited consolidated financial statements should be read in conjunction with
the consolidated financial statements and footnotes thereto included in the
Company's Form 10/KSB/A for the year ended November 30, 1996.
2. Stock Option Plans:
During the nine month period ended August 31, 1997, the Company granted
20,000 options with an exercise price of $3.125 per share and 5,000 options
with an exercise price of $4.00 per share to Company employees. The
exercise price approximates fair market value at the dates of issuance.
3. Note Payable:
At August 31, 1997, note payable consists of:
Note payable to an individual in 60 monthly
installments of $10,000, less imputed interest at 7%
of $94,980, beginning June 15, 1997; in payment for
a covenant not to compete (See Note 5) $ 483,734
less: current portion (88,957)
----------
$ 394,777
==========
Future minimum principal payments due on the note payable are as follows:
Year Ending
August 31
1998 $ 88,957
1999 95,387
2000 102,283
2001 109,677
2002 87,430
-----------
Total $ 483,734
===========
<PAGE 8>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the three and nine month periods ended August 31, 1997 and 1996 (unaudited)
3. Note Payable (continued):
The Company has available a $1,000,000 operating line of credit, expiring
April 15, 1998. Interest is payable monthly at the bank's prime rate, plus
one-half percent. The line of credit is collateralized by various corporate
assets and requires compliance with various loan covenants. As of August 31,
1997, there were no balances outstanding on this operating line of credit.
4. Note Receivable From Related Party
At August 31, 1997, Telesoft has an outstanding 6% unsecured note receivable
from the president of a subsidiary company in the amount of $286,266, including
accrued interest. The note, including accrued interest, is due in May 2002.
5. Agreements:
On March 12, 1997, the Company entered into an agreement, effective February
28, 1997, with the former owners of GoodNet, LLC ("GoodNet") whereby the
Company agreed to the following:
1) The Company agreed to pay one of the former owners an additional $393,638
in exchange for the return and relinquishment of all of that owner's
claims to the Company's common stock, issued or contingently issuable in
conjunction with the purchase of GoodNet's assets in 1996.
2) The former owner agreed to repay the Company $57,500.
3) The Company agreed to pay the former owner $10,000 per month, commencing
June 15, 1997, for a period of five years in exchange for a covenant not
to compete.
4) The Company agreed to pay $48,000 to other former owners of GoodNet in
exchange for the assignment of their interest in GoodNet.
The above transaction has resulted in a $384,138 settlement expense during
the three month period ended May 31, 1997. Additionally, the Company has
included in intangibles the cost of the covenant not to compete ($505,020)
and a corresponding note payable.
Effective May 31, 1997, the Company entered into an agreement with the
remaining former owner of GoodNet to exchange a 25% interest in Telesoft
Acquisition Corp II (formerly a wholly owned subsidiary, dba GoodNet) for
the return of the Company's stock issued and rights to receive contingently
issuable stock in conjunction with the purchase of GoodNet in 1996. Under
terms of the agreement, the remaining former owner of GoodNet agreed to
repay the Company $57,500, plus accrued interest, which the former owner
received in conjunction with the purchase of GoodNet in 1996.
<PAGE 9>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the three and nine month periods ended August 31, 1997 and 1996 (unaudited)
6. Commitments:
Telesoft Acquisition Corp. II dba GoodNet, a 75% owned subsidiary of the
Company, has entered into an operating lease agreement for broadband service
with a provider of its ATM services. Under the terms of the agreement, the
Company is required to maintain minimum service levels of approximately
$45,000 per month with the provider through March 2001. The Company currently
has approximately $150,000 in monthly charges from this provider during the
quarter ended August 31, 1997.
GoodNet has also entered into an operating lease agreement for broadband
service with another ATM provider. Under the terms of this agreement, the
Company is committed to pay $135,000 per month beginning November 1, 1998
and $267,000 per month from May 1, 2000 through April 30, 2002.
7. Accounting Pronouncement:
In February 1997, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 128, Earnings Per Share (SFAS 128). SFAS 128
specifies the computation, presentation and disclosure requirements for
earnings per share and is effective for financial statements issued for
periods ending after December 15, 1997. Pursuant to the provisions of SFAS
128, the Company's net (loss) income per share would have been as follows:
<TABLE>
<S> <C> <C> <C> <C>
Three Month Nine Month
Period Ended Period Ended
August 31, August 31,
1997 1996 1997 1996
Basic (loss) earnings per share:
Net (Loss) income $ (579,138) $ (487,273) $ (1,249,446) $ 494,641
Weighted average number
of shares outstanding 3,787,500 3,818,333 3,807,980 3,801,291
(Loss) earnings per share $ (.15) $ (.13) $ (.33) $ .13
Diluted (loss) earnings per share:
Net (loss) income $ (579,138) $ (487,273) $ (1,249,446) $ 494,641
Weighted average number
of shares outstanding 3,787,500 3,818,333 3,807,980 3,801,291
Net effect of dilutive stock
options based on the treasury
stock method using the average
market price 10,687 41,687 24,859 15,743
Common stock including assumed
conversions 3,798,187 3,860,020 3,832,839 3,817,034
(Loss) earnings per share $ (.15) $ (.13) $ (.33) $ .13
</TABLE>
<PAGE 10>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations for the nine months ended August 31, 1997 and 1996
Revenues increased by 21.3% to $17,249,062 for the nine months ended August
31, 1997 compared to $14,219,039 for the nine months ended August 31, 1996.
The Company's revenue is derived from four principal product lines and
services: STS Outsourcing Programs (STS), System Sales and Maintenance,
Customized Billing Outsourcing Services and GoodNet.
STS revenues were approximately $9,229,000 for the nine months ended August
31, 1997 compared to $9,025,000 for the nine months ended August 31, 1996.
Revenues from System Sales were $3,204,000 for the nine months ended August
31, 1997 compared to $3,431,000 for the nine months ended August 31, 1996,
a decrease of 6.6%. This decrease was mainly attributable to delays in the
release of TelMaster, the "Client/Server" and "Graphical User Interface"
environment version of the Company's existing text-based telemanagement
software modules. See "Future Expectations" below. For the nine months ended
August 31, 1997 and 1996, revenues from Customized Billing Outsourcing Services
were approximately $754,000 and $476,000, respectively. During the nine months
ended August 31, 1997, GoodNet contributed revenues of $1,991,000 and
$2,071,000 from its dial-up and Asynchronous Transfer Mode Backbone ("ATM")
products, respectively. GoodNet, acquired in April 1996, contribued revenues
of approximately $1,287,000 during the nine months ended August 31, 1996.
Total gross profit increased to $6,806,474 for the nine months ended August
31, 1997 compared to $6,056,972 for the nine months ended August 31, 1996.
Cost of goods sold was approximately 76% of STS Outsourcing Program revenues
for the nine months August 31, 1997, comparable with the nine months ended
August 31, 1996. Cost of goods sold as a percentage of System Sale revenues
was approximately 25% for the nine months ended August 31, 1997 and 21% for
the nine months ended August 31, 1996. Cost of goods sold for GoodNet's
dial-up business was approximately 5.3% while ATM cost of goods exceeded ATM
revenue by approximately $407,000 as anticipated. This low cost of sales for
the GoodNet dial-up business is due to a one time service credit of
approximately $550,000 from GoodNet's primary local line provider.
Operating expenses increased by 60%, or $3,286,565, for the nine months
ended August 31, 1997 to $8,767,452 from $5,480,887 for the nine months ended
August 31, 1996. This was primarily due to the acquisition of the GoodNet
subsidiary, which contributed $2,919,000 in recurring operating expenses
during the nine months ended August 31, 1997 compared to $790,000 during the
nine months ended August 31, 1996. Current operating expenses include a
charge of approximately $385,000 in connection with an agreement with the
former owners of GoodNet, LLC. See Note 5 to the financial statements. There
were also increases in the number of employees hired for sales and marketing,
and customer support, accounting for approximately $400,000 of the remaining
increase. There was no capitalization of software development expenditures
during the nine month period ended August 31, 1997. During the nine month
period ended August 31, 1996, approximately $276,000 was capitalized.
The Company realized a $1,249,446 net loss for the nine months ended
August 31, 1997 compared to net income of $494,641 for the nine months ended
August 31, 1996. This is primarily attributable to approximately $1,824,000
in operating losses realized by GoodNet and an operating loss of $280,000
caused by lower System Sales revenue.
<PAGE 11>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
OPERATIONS (CONTINUED)
Results of Operations by Product Line for the nine months ended August 31,
1997 with comparative totals for the nine months ended August 31, 1996
<TABLE>
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Total for the
System Sales/ Customized GoodNet GoodNet nine months ended
STS Maintenance Billing Dial-Up ATM Total August 31, 1996
Sales, Net $ 9,229,288 $ 3,203,685 $ 754,130 $ 1,990,806 $ 2,071,153 $ 17,249,062 $ 14,219,039
----------- ----------- --------- ----------- ----------- ------------- -------------
Cost of Sales 7,045,233 814,256 - (106,542) 2,213,463 9,966,410 8,070,744
Cost of Sales, Depreciation - - - 211,100 265,078 476,178 91,323
----------- ----------- --------- ----------- ----------- ------------- -------------
7,045,233 814,256 - 104,558 2,478,541 10,442,588 8,162,067
----------- ----------- --------- ----------- ----------- ------------- -------------
Gross Profit 2,184,055 2,389,429 754,130 1,886,248 (407,388) 6,806,474 6,056,972
----------- ---------- --------- ----------- ----------- ------------- -------------
General & Administrative
Expenses:
General 2,289,464 2,362,301 156,319 742,020 1,691,836 7,241,940 4,808,781
Settlement - - - 384,138 - 384,138 -
Depreciation 94,838 167,140 - - 6,915 268,893 226,598
Amortization - 6,250 - 112,554 112,692 231,496 35,814
Bad Debt 136,171 655 - 90,000 80,000 306,826 133,212
Corporate Allocations:
General 83,868 83,871 5,083 27,957 53,372 254,151 205,782
Depreciation 26,402 52,006 - - 1,600 80,008 70,700
----------- ---------- -------- ----------- ----------- ------------- ----------
2,630,743 2,672,223 161,402 1,356,669 1,946,415 8,767,452 5,480,887
----------- ---------- --------- ----------- ----------- ------------- ----------
(Loss) Income from
Operations (446,688) (282,794) 592,728 529,579 (2,353,803) (1,960,978) 576,085
Other Income 118,232 244,156
------------- ----------
Pretax (Loss) Income (1,842,746) 820,241
Income Tax Benefit (Provision) 593,300 (325,600)
------------- ----------
Net (Loss) Income $ (1,249,446) $ 494,641
============= ==========
Primary (Loss) Earnings
per share $ (.33) $ .13
Cash & Investment Securities per share $ .55 $ .89
Book Value per share $ 2.24 $ 2.52
============= ==========
</TABLE>
Results of Operations for the three months ended August 31, 1997 and 1996
Revenues increased by 32.0% to $4,182,831 for the three months ended August
31, 1997 compared to $3,169,786 for the three months ended August 31, 1996.
STS Outsourcing Program revenues were approximately $961,000 for the three
months ended August 31, 1997 compared to $915,000 for the three months ended
August 31, 1996. Revenues from System Sales were $1,309,000 for the three
months ended August 31, 1997 compared to $1,040,000 for the three months
ended August 31, 1996, an increase of 25.9%. Revenues from Customized Billing
Outsourcing Services were $444,000 for the three months ended August 31, 1997
compared with $51,000 for the three months ended August 31, 1996. This
increase is due to the development of customized billing services for one
primary customer. During the three months ended August 31, 1997, GoodNet
contributed revenues of $665,000 and $804,000 from its dial-up and ATM
products, respectively. GoodNet dial-up revenue is consistent with the average
quarterly revenue for the first two quarters of 1997. ATM revenue increased
approximately 5.6% from the three months ended May 31, 1997 through the
three months ended August 31, 1997. During the three months ended August 31,
1996, GoodNet contributed revenues of approximately $336,000.
<PAGE 12>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND OPERATIONS (CONTINUED)
Total gross profit increased to $2,164,227 for the three months ended August
31, 1997 compared to $1,435,817 for the three months ended August 31, 1996.
Cost of goods sold was approximately 4% above STS Outsourcing Program revenues
for the three months ended August 31, 1997, compared with 6% above revenue for
the three months ended August 31, 1996. Cost of goods sold as a percentage of
System Sale revenues was approximately 31% and 23% for the three months ended
August 31, 1997 and 1996, respectively. This increase is due to a higher mix
of system sales versus maintenance revenues than in the prior year. System
sales have a lower gross profit margin than maintenance revenues. GoodNet's
dial-up business had a negative cost of sales for the three months ended
August 31, 1997 due to a one time service credit of approximately $550,000
from GoodNet's local line provider. ATM cost of goods exceeded ATM revenue by
approximately $122,000 as anticipated. This represents an improvement over
the prior quarter during which, cost of goods exceeded ATM revenue by
approximately $200,000.
Operating expenses increased by 25%, or $586,033 for the three months ended
August 31, 1997 to $2,930,146 from $2,344,113 for the three months ended
August 31, 1996. This was primarily due to the acquisition of the GoodNet
subsidiary, which contributed $1,104,000 in recurring operating expenses
during the three months ended August 31, 1997 compared to $650,000 during
the three months ended August 31, 1996. There was no capitalization of
software development expenditures during the three month period ended August
31, 1997. During the three month period ended August 31, 1996, approximately
$90,000 was capitalized.
The Company realized a $579,138 net loss for the three months ended August
31, 1997 compared to a $487,273 net loss for the three months ended August
31, 1996.
Material Changes in Financial Position
Accounts receivable decreased to $4,271,489 as of August 31, 1997 from
$6,386,596 as of November 30, 1996 ($3,332,087 and $5,678,469, net of
allowance for uncollectibles as of August 31, 1997 and November 30, 1996
respectively). This decrease is due to the seasonality of the Company's STS
revenue. (See "Seasonality" below) Accounts receivable as of August 31, 1996,
was $3,396,681 ($2,921,086 net of allowance for uncollectibles). The increase
from August 31, 1996 to August 31, 1997 is primarily attributable to GoodNet
ATM sales which began during the fourth quarter of 1996.
Property and equipment before accumulated depreciation increased to
$4,662,174 from $3,349,371 as of November 30, 1996. This increase is
primarily due to approximately $1,234,000 invested in the expansion of
GoodNet's ATM Backbone.
Cash and investment securities decreased $1,611,237 to $2,111,118 at
August 31, 1997 from $3,722,355 at November 30, 1996. This is primarily due
to the investment of approximately $1,366,000 in property and equipment.
Additionally, approximately $200,000 was used for operating activities during
the nine months ended August 31, 1997. Excluding taxes, this represents a
$700,000 improvement over the nine months ended August 31, 1996.
Accounts payable and accrued liabilities decreased to $2,300,711 as of
August 31, 1997 from $4,085,134 as of November 30, 1996. This decrease is
due to the seasonality of the Company's STS revenues which result in lower
cost of sales during the third quarter. (See "Seasonality" below) Accounts
payable and accrued liabilities as of August 31, 1996 was $1,457,949. This
increase from August 31, 1996 to August 31, 1997 is primarily attributable
to GoodNet's ATM division, which began during the fourth quarter of 1996.
<PAGE 13>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND OPERATIONS (CONTINUED)
Future Expectations
STS revenues are expected to increase in the fourth quarter of 1997. As a
result of a stronger than expected backlog, the Company expects an increase
in gross revenue and gross profit in the fourth quarter of 1997 and continuing
into 1998.
The Company expects revenues from Customized Billing Services to decrease in
the fourth quarter of 1997, but remain above second quarter 1997 levels and
then increase thereafter based on existing proposals outstanding; however,
it is not possible to ascertain the amount of such increase until actual
contracts are in place.
The Company has experienced delays in the release and installation of
certain modules of TelMaster the "Client/Server" and "Graphical User
Interface" environment version of the Company's existing text-based
telemanagement software modules. Certain modules of this product were
released in the third quarter of 1996, and installations have been completed
in the second and third quarters of 1997. Other modules are scheduled for
release in the fourth quarter of 1997 and the first and second quarters of
1998. Due to persisting delays, the Company does not expect significant
increases in system sales from the TelMaster product until the third quarter
of 1998.
GoodNet is comprised of two product lines: High Speed ATM Backbone
Connectivity ("ATM") and Dial-Up Services in Arizona. The ATM product line,
which provides high-speed connectivity to the Internet, is expected to
continue to grow both in geographical scope and revenue generated. Currently,
the ATM backbone consists of 29 national points of presence, which allow the
Company to provide high-speed connectivity to businesses in those regions.
Because of the nature of the ATM backbone deployment, cost of goods sold is
currently exceeding gross revenue. The Company expects to realize a gross
profit in the fourth quarter of 1997 and an operational break even in 1998.
GoodNet experienced a significant decrease in its dial-up customer base due
to lingering connection problems with the Company's local line provider. The
Company's subscriber base has further eroded to approximately 12,000 customers
from 12,750. It is anticipated that this number will stabilize and that
growth will resume during the fourth quarter of 1997. The Company has
installed 240 new digital lines that are being tested for reliability and
scalability. The Company plans to migrate its dial-up customer base to these
new lines over a period of six to twelve months.
It is anticipated that the cost of human resources will grow significantly
as the Company increases its employee base to expand its products, services,
and market penetration with a significant emphasis on the marketing of
high-speed dedicated access lines to the Internet. This increase will ensure
adequate research and development, and sales and support for anticipated short
and long-term growth.
This report contains forward-looking statements within the meaning of
section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Such statements involve certain risks and uncertainties
that could cause actual results to differ materially from those in the forward-
looking statements including uncertainties regarding the effectiveness of
initiatives to expand GoodNet's ATM backbone, reduce the high turnover rate
of GoodNet's dial-up subscribers, and introduce and implement TelMaster
product. Certain factors which may cause such a difference include, but are
not limited to, the following: the impact of increased competition from
competitors with significant financial resources and market share; unforeseen
difficulties in integrating acquired businesses; and the amount and rate of
growth in general and administrative expenses associated with building a
strengthened corporate infrastucture to support operations.
<PAGE 14>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
OPERATIONS (CONTINUED)
Liquidity and Capital Resources
The Company has available a line of credit of $1,000,000. The credit line
has been used for seasonal fluctuations in cash flow. The credit line is
typically used during the summer months due to the high demand for cash
from new system and STS Outsourcing Program installations for the following
fall season.
At August 31, 1997, the Company had cash of $179,219 and investment
securities of $1,936,899. Net cash and investment securities used during the
nine month period ended August 31, 1997 was approximately $1,600,000. The
Company believes that present cash reserves available, the existing line of
credit, along with anticipated cash flows from its operations will be
adequate to supply currently anticipated operating requirements for the next
twelve (12) months. However, there can be no assurance that the Company will
not require additional financing within this time frame. The Company may be
required to raise additional funds through public or private financing,
strategic relationships or other arrangements. There can be no assurance
that such additional funding, if needed, will be available on terms attractive
to the Company, or at all. Furthermore, any additional equity financing may
be dilutive to the existing shareholders.
Seasonality
The Company generally completes the sale of the majority of STS and STS
Program system installations in the higher education industry during the
spring and early summer months. The implementation and installation of these
systems and services occurs during the summer months. Revenues derived from
STS begin in the fall and decline during the Christmas holiday and the summer
months when university students are on vacation. As a result, the Company's
revenues have consistently been highest during the second and fourth quarters.
<PAGE 15>
PART II
OTHER INFORMATION
Response to Items 1-5 are omitted since these items are not applicable to
this report.
Item 6. Exhibits and Reports on Form 8-K
(a) No. Description Reference
11 (Loss) Earnings per common and common equivalent shares *
-----------------------------
* filed herewith
(b) No reports on Form 8-K have been filed during the quarter ended
August 31, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
TELESOFT CORP.
BY
Michael F. Zerbib
Chief Financial Officer
DATED: October 15, 1997
<PAGE 16>
Exhibit 11; (Loss) Earnings per common and common equivalent shares
(Loss) Earnings per common and common equivalent share is calculated as
follows:
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
August 31, August 31,
1997 1996 1997 1996
(Loss) Earnings per common and common
equivalent shares:
Net (loss) income $ (579,138) $ (487,273) $ (1,249,446) $ 494,641
=================== ============= ================= ==============
Weighted average number of
shares outstanding 3,787,500 3,818,333 3,807,980 3,801,291
Net effect of dilutive common
stock options and common
stock warrants based on the
treasury stock method using
the period average market price
of the Company's common stock 10,687 41,687 24,859 15,743
------------------- -------------- ----------------- --------------
Weighted average number of
shares and equivalent shares 3,798,187 3,860,020 3,832,839 3,817,034
=================== ============== ================= ==============
(Loss) Earnings per common
and common equivalent shares $ (.15) $ (.13) $ (.33) $ .13
=================== ============== ================= ==============
(Loss) Earnings per common share,
assuming full dilution:
Net (loss) income $ (579,138) $ (487,273) $ (1,249,446) $ 491,641
================== ============== ================= ==============
Weighted average number of
shares outstanding 3,787,500 3,818,333 3,807,980 3,801,291
Net effect of dilutive stock options
based on the treasury stock method
using the end of period market price
of common, if higher than average 10,687 41,687 24,859 15,743
------------------ -------------- ----------------- --------------
Common stock and common stock
equivalents 3,798,187 3,860,020 3,832,839 3,817,034
================== ============== ================= ==============
(Loss) Earnings per common
and common equivalent share $ (.15) $ (.13) $ (.33) $ .13
================= ============== ================= ==============
</TABLE>
[ARTICLE] 5
<TABLE>
<S> <C> <C> <C> <C>
[PERIOD-TYPE] 3-MOS 3-MOS 9-MOS 9-MOS
[FISCAL-YEAR-END] NOV-30-1997 NOV-30-1996 NOV-30-1997 NOV-30-1996
[PERIOD-END] AUG-31-1997 AUG-31-1996 AUG-31-1997 AUG-31-1996
[CASH] 174,219 3,411,235 174,219 3,411,235
[SECURITIES] 1,936,899 0 1,936,899 0
[RECEIVABLES] 4,271,489 3,396,681 4,271,489 3,396,681
[ALLOWANCES] (939,402) (475,595) (939,402) (475,595)
[INVENTORY] 592,169 720,311 592,169 720,311
[CURRENT-ASSETS] 7,127,955 7,716,278 7,127,955 7,716,238
[PP&E] 4,662,174 3,107,135 4,662,174 3,107,135
[DEPRECIATION] (1,917,311) (1,119,229) (1,917,311) (1,119,229)
[TOTAL-ASSETS] 12,736,182 11,668,342 12,736,182 11,668,342
[CURRENT-LIABILITIES] 3,760,600 2,062,327 3,760,600 2,062,327
[BONDS] 0 0 0 0
[PREFERRED-MANDATORY] 0 0 0 0
[PREFERRED] 0 0 0 0
[COMMON] 7,343,859 7,343,859 7,343,859 7,343,859
[OTHER-SE] 1,236,946 2,262,156 1,236,946 2,262,156
[TOTAL-LIABILITY-AND-EQUITY] 12,736,182 11,668,342 12,736,182 11,668,342
[SALES] 4,182,831 3,169,786 17,249,062 14,219,039
<REVENUES> 4,182,831 3,169,786 17,249,062 14,219,039
[CGS] 2,018,604 1,733,969 10,442,588 8,162,067
[TOTAL-COSTS] 4,948,750 3,978,082 19,210,040 13,642,954
[OTHER-EXPENSES] 0 (8) (10,695) 0
[LOSS-PROVISION] 0 0 0 0
[INTEREST-EXPENSE] (7,723) (2,252) (7,839) (2,858)
[INCOME-PRETAX] (740,538) (842,873) (1,842,746) 820,241
[INCOME-TAX] 161,400 355,600 593,300 (325,600)
[INCOME-CONTINUING] (579,138) (487,273) (1,249,446) 494,641
[DISCONTINUED] 0 0 0 0
[EXTRAORDINARY] 0 0 0 0
[CHANGES] 0 0 0 0
[NET-INCOME] (579,138) (487,273) (1,249,446) 494,641
[EPS-PRIMARY] (.15) (.13) (.33) .13
[EPS-DILUTED] (.15) (.13) (.33) .13
</TABLE>
