SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 1996 Commission File No. 1-13830
TELESOFT CORP.
(Exact name of Registrant as specified in its charter)
Arizona 86-0431009
(State of Incorporation) (IRS Employer Identification No.)
3216 North Third Street
Phoenix, Arizona 85012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 265-6311
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of each exchange on which registered
Common Stock, No Par Value Pacific Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act : None
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
Check if there is no disclosure of delinquent filings in this Form and no
disclosure will be contained in the definitive Proxy Statement incorporated by
reference in Part III of this Form 10-KSB. X
Issuer's revenues for its fiscal year: $23,313,280
As of March 5, 1997, the number of shares of Common Stock outstanding was
3,818,333 and the aggregate market value of the Common Stock (based on the
closing price on that date) held by non-affiliates of the Registrant was
approximately $ 8,830,000.
Documents Incorporated By Reference
Portions of the Registrant's definitive Proxy Statement for its forthcoming
Annual Meeting of Shareholders are incorporated herein by reference into Part
III of this Report.
Exhibit Index Page 15
PART I
ITEM 1. BUSINESS.
General. Telesoft Corp. ("Company" or "Telesoft") designs, distributes,
installs, maintains and manages telecommunications systems comprised of
integrated hardware and proprietary software for the automated provision of
long distance telephone billing and other telecommunications services to
higher education, Fortune 1000, governmental agencies, Regional Bell
Operating Companies ("RBOC's"), and long distance carriers. The Company
offers the following integrated hardware and proprietary software systems
and services: the Student Telephone Services ("STS") Program, SunDial Program,
STS Telemanagement System ("TMS"), Distribution Control System ("DCS") and
RATEX Bookstore Solution.
Through its GoodNet subsidiary acquired in April, 1996, Telesoft has
become a National Service Provider ("NSP") offering high capacity data
communication to the Internet for high-bandwidth users including Internet
Service Providers ("ISP's"), universities and colleges, large landlords,
RBOC's, Cable Television ("CATV") Operators and Value Added Resellers.
The Company's products and services are broken down into the following
product lines for financial reporting purposes:
(1) STS Outsourcing Program Revenue
(a) On-Site and Polling Programs
(b) SunDial Off-Campus Programs
(2) Customized Billing Outsourcing Services
(3) System Sales and Maintenance Revenue
(a) TMS and TelMaster
(b) RATEX
(c) DCS
(d) Software and Hardware Recurring Maintenance Revenue
(4) Internet Products and Services (GoodNet)
(a) Asynchronous Transfer Mode ("ATM") Backbone Revenue
(b) Dial-Up Subscriber Revenue
Products and Services
Student Telephone Services (STS) Outsourcing Program
STS Outsourcing Program. The Company provides an outsourcing program
to universities and colleges to establish long distance resale programs to
residence hall students, off-campus students, and administrative staff and
faculty. Through its Student Telephone Services outsourcing program
("STS Program"), the Company offers a complete billing solution including the
following services: (1) production and distribution of marketing literature
for the program; (2) on-site solicitation and registration of program
participants; (3) installation of hardware and billing software;
(4) collection, costing and processing of long-distance billing data;
(5) production and distribution of individual bills; (6) on-site or remote
customer service center; (7) management of accounts receivable and collections;
(8) clearing-house services for the various suppliers involved with the program;
and (9) financial reporting services to the university or college on the
performance of the program.
In August, 1994, the Company began to offer such service to off-campus
residents through its SunDial Program ("SunDial"). The SunDial system is an
integrated hardware and proprietary software system which extends the STS
Program services and advantages to off-campus students. The SunDial platform
allows STS subscribers to place long distance calls from off-campus housing
using a local number for long distance service from local area dwellings or
using "1-800" access dialing for long distance service anywhere in the United
States at competitive rates. The SunDial service offers students the ability
to continue to use the Program after graduation. The SunDial platform uses
Telesoft's proprietary software and Motorola hardware specially adapted for
this software application.
Telesoft markets these programs through alliances developed with RBOC's
and long distance carriers such as NYNEX, Bell Atlantic, MCI, and AT&T.
Telesoft administers and operates its STS Program on a turnkey basis at 58
university and college campuses of various sizes including the University of
Delaware, SUNY Buffalo, Smith College and Indiana University.
Telesoft has sold the system, software and services required to administer the
STS Program to approximately 50 campuses of various sizes nationwide
(see System Sales and Maintenance Revenue section below), including Yale
University, State University of New York at Oswego, Case Western Reserve
University, the University of Oklahoma, Auburn University, Fairfield
University and George Mason University. In the event of a sale, the Company
continues to maintain and service the hardware and software under renewable
one-year maintenance contracts.
Customized Billing Outsourcing Services
The Company has concentrated its marketing efforts on the provision of
customized billing outsourcing applications to Fortune 1000 companies and
governmental agencies in conjunction with large long distance carriers and
RBOC's. In 1996, the Company secured a customized billing contract for 160
agencies for the State of Massachusetts in conjunction with NYNEX. In the
first fiscal quarter of 1997, the Company signed a Memorandum of Understanding
with NYNEX to negotiate a billing and customer care outsourcing contract for a
new residential Centrex product to be offered to Multiple Dwelling Units (MDU's)
residents in New York City. This product is expected to include dial-tone,
long-distance, and eventually, Internet access, CATV services and various
other services. This product is expected to be released by NYNEX and NorTel
in the second calendar quarter of 1997.
System Sales and Maintenance Revenue
The Company offers the following integrated hardware and proprietary
software systems and services: the Telecommunications Management System,
TelMaster, the RATEX Bookstore Solution, and the Distribution Control System.
Telecommunications Management System and TelMaster. The
Telecommunications Management System ("TMS") is a proprietary text-based
software solution used by the higher education, Fortune 1000, health care and
governmental agency markets to manage telephony data for billing and ad-hoc
reporting purposes. This product is comprised of a series of software modules
and is typically sold in a package that includes hardware, software,
installation, training and on-going hardware and software maintenance.
TelMaster is Telesoft's third generation telemanagement system. Based on
graphical user interface technology, this product was released in the fourth
quarter of 1996 and was installed at SUNY Oswego and GE Medical.
In addition to its extensive higher education customer base, the Company
currently services customers such as Allied Signal Corp., St. Luke's Roosevelt
Hospital in New York, Maricopa County in Arizona, and Bolt, Beranek & Newman.
Telesoft also provides telecommunications data management services and software
for Bell of Pennsylvania and Pacific Bell Corp.
RATEX. In March 1995 the Company acquired the RATEX line of software
and related assets. RATEX is a software program designed for university
bookstores to track merchandise from the ordering cycle to the point of sale.
The RATEX product line includes software modules for merchandise and inventory
management, buyer information, financial and accounting, point of sale and
scanning for management acceptance of credit/debit cards, mail order and
general merchandise management applications. RATEX systems have been installed
in over 60 universities in North America, including the University of
California-Los Angeles book stores.
Distribution Control System. The Company has offered the Distribution
Control System ("DCS") since 1982. DCS is an automated control solution for
the wholesale distribution industry. The Company includes extensive on-site
training and maintenance services as part of its DCS package. The fully
integrated software package has a modular design including applications for
sales order processing, inventory control, accounts receivable and sales
analysis, and is typically installed on a Motorola Unix server.
STS and System Sales Competition
The telecommunications industry is highly competitive and subject to rapid
technological change. Failure to keep pace with the technological advances
could adversely affect the Company's competitive position and future prospects.
To maintain or improve its position the Company must continue to enhance its
current products and develop new products and services in a timely fashion.
In connection with its STS Program, the Company competes with LCI and
ACC Corp., both of which provide long distance telephone service on a resale
basis and offer long distance billing services to universities. The Company
also competes with MCI, Sprint, AT&T and other long distance providers which
market long distance services to the public and directly to college campuses.
In connection with its SunDial Program, the Company competes with MCI, Sprint,
AT&T and similar long distance providers.
In connection with its Telemanagement system division, the Company
competes with Telco Research and Comco, both of which provide telemanagement
systems and services to the university, health care, government and general
business markets.
In connection with its RATEX division, the Company competes with large
book wholesalers, such as Nebraska Book Company and Missouri Books Systems
which provide management systems to universities and college bookstores.
The Company believes that the factors for its success include quality,
technical capability, reliability, price and promptness of performance. While
the Company has competed successfully against the foregoing companies, most,
if not all, of the Company's existing and potential competitors have longer
operating histories and significantly greater financial, technical, sales,
marketing and human and other resources than the Company. Most, if not all,
of these organizations have greater name recognition and a larger installed
base than the Company. The Company's competitors could, in the future,
introduce products and services with more features and lower prices than the
Company's product and service offerings. These organizations could also fund
existing or new product and services with other product or services to compete
with the Company. While the Company has operated successfully against such
competition in the past, there can be no assurance that it will be able to do
so in the future.
GoodNet - Internet Products and Services
GoodNet -- Dedicated Access Business. GoodNet has leased lines and installed
switching and routing equipment to create a high-speed (45Mbps) national ATM
network connecting GoodNet customers in 21 metropolitan areas to the Internet.
GoodNet has established peering relationships with major providers at three
National Access Points ("NAP's"), and the Company is presently pursuing private
peering arrangements. "Peering" is the industry term for making the
interconnection between service providers. Most of the peering done among
providers takes place at the NAP's.
In the first six months of offering this product, which was launched in
August, 1996, the Company has signed long-term contracts for dedicated
Internet connectivity with 88 ISP customers, for a total of approximately
$191,000 in recurring monthly revenue. In addition, the Company has
approximately 100 smaller customers (ISP's and other commercial concerns with
frame relay connections) within Arizona, representing an additional $35,000
in recurring monthly revenue.
GoodNet is initially targeting the ISP market. The Company intends to expand
its marketing efforts to universities and colleges, using Telesoft's existing
STS telemanagement relationships and to develop strategic reseller relationships
with RBOC's, CATV operators and large landlords.
Within each focus market, GoodNet's sales force initially targets the largest
ISP's which typically are companies with several years of operating history and
an average of 5,000 dial-up subscribers. In most cases, GoodNet is a second
provider of bandwidth to the ISP. For reasons of reliability, performance,
and pricing, ISP's are inclined to purchase bandwidth from two or more sources.
The targeted ISP's are typically candidates for 5 to 10 Mb of transmission
capacity (priced at $5,000 - $10,000 per month) in the form of a partial T3
connection. Follow-up sales within the same market usually target newer ISP's
requiring 1.5Mb of transmission capacity (priced at $1,500 per month).
The basis of competition is reliability, performance, service and price. The
purchase decision is typically made by the customer with the support of the
in-house technical expert. ISP customers can determine where competitors
source their bandwidth and how their connections perform, making it very easy
to expose the reliability and level of congestion existing on an NSP's network.
GoodNet's ATM backbone is gaining acceptance in the marketplace largely because
its network has been reliable and quite fluid to date.
GoodNet -- New Initiatives in Dedicated Access Business. GoodNet is
exploring Internet connectivity using Asymmetrical Digital Subscriber Line
("ADSL") technology. Because GoodNet's network operations facility is located
in the central business corridor of Phoenix, Arizona, approximately 300 yards
from the closest RBOC Central Office, the Company has 2400 pairs of non-spliced
copper wire going directly from its facility to the US West Phoenix-North
Central Office. With the range of current ADSL technologies, GoodNet can
offer high speed connectivity to nearly 30 square miles of businesses around
its central office. This will allow GoodNet to drastically lower the cost
for high speed Internet connectivity as plain copper loops that can be used
for ADSL are priced at a fraction of non-ADSL local loop rates. GoodNet is
evaluating all available technologies to determine which best fits its short
and long term needs in this new connectivity paradigm.
GoodNet -- Dial-Up Business. Through a combination of internal growth and
acquisitions, the Company has built a base of 15,000 dial-up subscribers in
Arizona. GoodNet is the largest ISP in Arizona as measured by number of
subscribers. The Company offers unlimited Internet access for an average of
$18 per month. While a number of larger competitors have entered the Arizona
market, including AT&T, MCI and on-line service providers such as AOL, the
increased competition has served to raise awareness to the Internet. GoodNet
competes with both national and local ISP's on the basis of service, support
and cost. GoodNet's Dial-Up business has experienced service difficulties
resulting from network capacity constraints affecting the Company's local
vendor. GoodNet does not plan to expand dial-up offerings beyond the Arizona
market.
GoodNet -- Background. GoodNet was formed in late 1994 and signed up its
first dial-up account in April 1995. In June and July, 1996, GoodNet acquired
the dial-up and dedicated customer bases of NetZone and Internet Direct (both
Arizona ISP's), respectively.
In December, 1995, the Company initiated the design and began to plan the
implementation of a network of high speed ATM backbone connections in order to
offer "wholesale" Internet connectivity to ISP's and commercial customers in
select US metropolitan markets. In April 1996, Telesoft acquired GoodNet.
With the financial and organizational backing of Telesoft, GoodNet launched its
ATM backbone in August, 1996 and became a National Service Provider ("NSP").
The GoodNet ATM backbone consists of 21 Points of Presence ("POP") accessing the
Internet through three of the largest Internet National Access Points ("NAP").
GoodNet was featured as one of 14 companies enjoying NSP status in
Boardwatch Magazine's Fall 1996 ISP Directory (December 1996). The NSP
designation signifies that GoodNet has secured peering arrangements with the
major NSP's (i.e., Sprint, MCI, BBN), enabling the seamless exchange of data
between GoodNet customers and the Internet community at large at both national
access and private peering points. Furthermore, the Company has secured peering
agreements with network providers in Europe, Japan, and Australia and plans to
initiate international dedicated access in 1997.
GoodNet currently employs 58 full time equivalent employees at its corporate
offices located at 3443 North Central Avenue in Phoenix, Arizona. The
functions are broken down as follows: Management - 5, Sales - 9,
Engineering/Programming - 8, Provisioning - 4 , Administrative - 4, and
Billing/Technical Support - 28.
Internet Market Overview. The number of Internet users is projected to reach
200 million people by 1999, according to industry research firm Netcraft. The
number of commercial Internet domains (i.e. "abccorp.com") has grown from
4,912 in August, 1994 to 171,738 in June, 1996. At the same time, the number
of local ISP's is growing rapidly. According to Boardwatch Magazine, an
industry publication, the number of ISP's doubled to over 4,000 between
February and December, 1996.
While the Internet is most commonly used to transmit e-mail, which requires a
relatively small amount of bandwidth, the Company believes that the future holds
increasingly more bandwidth-intensive applications for the Internet, including
voice, data and graphics. As a consequence, the Company expects size and speed
for connections to the Internet to grow significantly in the future.
The typical modem transmits data at 14.4 Kilobytes ("Kb") per second while
newer modems offering speeds of 33.6Kb to 56Kb per second have been introduced.
Industry experts believe that cable modems and a variety of digital telephony
standards, such as ISDN and ADSL, will increase the amount of traffic carried
over the Internet as the reliability and speed of access from the home is
improved through these new technologies.
Bandwidth is in high demand and will continue to be for the foreseeable
future. The typical act of viewing a Web page involves sending at least a
dozen packets of information over at least five separate networks:
1. From the operator's computer over a modem and phone line, to the ISP;
2. From the ISP to one of the national backbone providers;
3. From the backbone provider through one of the national peering locations
to another backbone provider;
4. From the second backbone provider to the Web site's ISP; and
5. From the Web site's ISP to the server itself.
The whole process must reverse itself when data is transmitted back to the
sender. A fault in any of these paths can lead to a slowdown. While the
nation's large network providers have redundant paths between their locations
around the nation, the links between a modem and the backbone typically are
not redundant, nor are the links between the backbones and many commercial
Web sites.
A growing number of businesses are connecting to the Internet with dedicated,
high bandwidth lines either to enable communications between parts of their
enterprise (Intranets) or to connect the company with customers, suppliers
and partners in the larger Internet community. Telesoft believes that ISP's
will continue to require high connections to the Internet while new market
players, such as the CATV companies, will also require dedicated access.
Competition. GoodNet competes with Sprint, MCI, MFS-UUNET and Digex.
Companies in this industry compete on the basis of quality, technical
capability, reliability, price and promptness of performance. Most, if not
all, of GoodNet's existing and potential competitors have longer operating
histories and significantly greater financial, technical, sales, marketing
and human and other resources than GoodNet. While GoodNet has operated
favorably against such competition in the past, there can be no assurance
that they will be able to do so in the future.
Historical Highlights
The Company was incorporated in Arizona in May 1982. From 1982 to
1986 the Company focused primarily on its DCS product line. In 1986 the Company
began to shift its focus to developing and marketing proprietary software and
integrated systems to serve the long distance telecommunications and data
management and call processing needs of the university and college market.
In April, 1996 the Company acquired GoodNet, an Arizona-based Internet service
provider. The Company's executive offices are located at 3216 North 3rd
Street, Phoenix, Arizona 85012, and its telephone number is (602) 265-6311.
Regulation
The Company's ability to pursue its business activities is affected or
regulated by various federal agencies and departments of state governments.
Commencement of new services frequently requires licenses from public utilities
commissions. There is no assurance that the Company or its customers, if
required, will be successful in their efforts to obtain necessary licenses or
regulatory approvals. The inability of the Company to secure any necessary
licenses or approvals could have a material adverse effect on its business.
In addition to specific regulations, the Company is subject to all federal,
state and local rules and regulations imposed upon businesses generally. The
cost of compliance with regulations is an additional cost of doing business
for the Company. The Company cannot predict the impact, if any, that future
regulation or regulatory changes may have on its business.
Warranties
The Company offers a warranty of 90 days on hardware and software and an
extended warranty program in connection with the Company's service and
maintenance programs. The Company has not had any material claims made under
its warranty program.
Patents, Trademarks, Licenses and Copyrights
The Company regards its software as proprietary and attempts to protect it
with copyrights, trademarks, trade secret laws and restrictions on disclosure,
copying and transferring title. The Company also attempts to preserve its
proprietary rights by contractual non-disclosure safeguards and restrictions
on transferability in its software license agreements. Additionally, the
Company does not provide the source codes for its products to its customers.
The Company's products are not patented and are not the subject of any current
patent application, nor is it anticipated that any of its products will be
patented. Existing copyright laws afford only limited practical protection
for its software. Accordingly, despite precautions taken by the Company, it
may be possible for unauthorized third parties to copy certain portions of the
Company's products and to obtain and use information that the Company regards
as proprietary.
Key officers and employees have assigned to the Company certain technical
and other information and patent rights, if any, acquired by them during their
employment by the Company and after termination of their employment with the
Company, if such information of rights arose out of information obtained by
them during their employment. They have also agreed not to use or disclose
any such information for a period of two years following termination of their
employment.
In spite of these precautions, it may be possible for competitors or users to
copy aspects of the Company's products or to obtain information which the
Company regards as trade secrets. The Company believes that due to the rapid
pace of innovation within its industry, factors such as technological and
creative skills of its personnel are more important to establishing and
maintaining a technology leadership position within the industry than are
the various legal protections of its technology. The Company believes that
its products and technology do not infringe on any proprietary rights of
others, although there can be no assurance that third parties will not assert
infringement claims in the future.
The Company has not obtained trademark or trade name registration on the
use of the names "Student Telephone Services," "STS Outsourcing Program,"
"SunDial Program," "University Internet Access Program" or "Sunbelt Business
Computers." The Company is in the process of investigating the feasibility, and
protection which might be afforded, by registration of these names, or certain
of them as trademarks or trade names on a national, regional or local basis.
Backlog
Backlog is not material to the Company's business since it ships and installs
its software and systems promptly upon receipt of customers' orders. While it
does tend to experience higher installation activity on university campuses
during the summer months, it has not historically had problems in installing
its products and performing its services in a timely fashion.
Employees
As of February 18, 1997, the Company had 170 full-time employees, of which
four were in executive positions, eight were engaged in sales and marketing,
seven were in software development and system management, 31 were in customer
service, 58 were in Internet related services, and the balance were in various
support positions. The Company's employees are not covered by a collective
bargaining agreement. The Company considers its employee relations to be
satisfactory.
ITEM 2. PROPERTIES.
The Company leases 13,500 square feet of office space in Phoenix, Arizona,
from Joseph W. Zerbib, an officer, director and principal shareholder of the
Company. The Company's obligations under the terms of its Phoenix office lease
were approximately $84,000 and $83,700 for 1995 and 1996, respectively, under
a verbal month-to-month lease. The Company believes that the foregoing lease
rate is no less favorable than it could obtain from an unaffiliated third
party for comparable space. RATEX leases 2,200 square feet in Fort Washington,
Pennsylvania. The Company's obligations under the terms of its Fort Washington
office lease were approximately $3,200 and $39,500 for 1995 and 1996,
respectively.
The Company also leases additional office space in Phoenix, Arizona for its
GoodNet operations. By January, 1998, the Company plans to relocate all
Phoenix, Arizona based operations to this office. The Company's obligation
under the terms of this lease agreement was approximately $40,000 for the
fiscal year ended November 30, 1996.
Finally, the Company leases office space in Tempe, Arizona, which was
used for GoodNet headquarters prior to the Company's acquisition of GoodNet,
LLC. The Company is currently subleasing this space under terms similar to the
Company's obligation for this lease, which was $ 7,456 for the fiscal year ended
November 30, 1996.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved as a party to any other legal proceeding other
than various claims and lawsuits arising in the normal course of its business,
none of which, in the opinion of the Company's management, are individually
or collectively material to the Company's business.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to security holders through the solicitation of
proxies or otherwise during the fourth quarter of the fiscal year covered by
the Form 10-KSB Report.
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The following table sets forth, for the fiscal periods shown, representative
high and low bid prices in dollars per share as reported by market makers in
the Company's Common Stock on the NASDAQ SmallCap Market since June 30, 1995,
the date on which the Company became publicly held.
Fiscal Year Ended November 30, 1996
Low High
First Quarter $ 4 5/8 $ 7 3/4
Second Quarter 4 5/8 7 5/8
Third Quarter 3 7/8 7 3/4
Fourth Quarter 2 1/2 4 1/8
Fiscal Year Ended November 30, 1995
Low High
First Quarter N/A N/A
Second Quarter N/A N/A
Third Quarter $ 7 1/4 $ 12 1/4
Fourth Quarter 6 1/4 10 1/2
The number of beneficial holders of the Common Stock of the Company as
of the close of business on February 11, 1997 was 572.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data are derived from the Financial
Statements of the Company which have been audited by Coopers & Lybrand, LLP,
independent accountants for the fiscal year ended November 30, 1996 and Semple
& Cooper, PLC, independent accountants, for the fiscal year ended November 30,
1995. Such selected financial data should be read in conjunction with the
Company's financial statements and related notes set forth in Item 8 herein.
Fiscal Years Ended November 30
1996 1995
Pro Forma Statement of Operation Data (1):
Net revenues $ 23,313,280 $19,576,905
Cost of sales 14,230,430 11,804,050
Gross profit 9,082,850 7,772,855
Income from operations 878,504 1,904,061
Other income (expense) 305,773 163,613
Net income 776,577 1,214,112
Income per share $.20 $.41
Weighted average number of
shares outstanding (2) 3,817,130 2,977,272
Fiscal Years Ended November 30
1996 1995
Statement of Operation Data:
Net revenues $ 23,313,280 $ 19,576,905
Cost of sales 14,230,430 11,804,050
Gross profit 9,082,850 7,772,855
Income from operations 878,504 1,792,061
Other income (expense) 305,773 163,613
Net income 776,577 1,145,792
Income per share $.20 $.38
Weighted average number of
shares outstanding (2) 3,817,130 2,977,270
Fiscal Years Ended November 30
1996 1995
Balance Sheet Data:
Cash & Investments $ 3,722,355 $ 7,791,915
Working capital 3,248,604 7,392,087
Total assets 14,652,936 14,366,810
Short-term debt - 10,742
Long-term debt - 6,840
Total stockholders' equity 9,887,951 9,013,674
(1) Pro forma figures for 1995 are unaudited and reflect the elimination of
executive officers' compensation in excess of the amounts due under
current employment agreements that came into effect when the Company
issued stock to the public in June of 1995.
(2) The weighted average shares outstanding represents the average number of
shares outstanding for such periods adjusted to reflect the 39.16667 for
one stock split effected on April 3, 1995.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Background
The Company began as a value added reseller in the wholesale distribution
of accounting software business (Distribution Control Systems) in 1982. During
the fiscal year ended November 30, 1996, the Company derived approximately
64% of its revenues from its STS Outsourcing Program. An additional 10% of the
Company's revenues were derived from GoodNet. The balance of revenues were
derived from hardware, software, maintenance and other services in the higher
education, Fortune 1000, governmental and wholesale distribution markets.
The Company has adapted to fast-paced market changes by shifting its
resources from providing generic or general system hardware and software to
providing a full range of services in its specialty niches. The Company is
continuously developing new products and services to maintain and expand the
Company's market share.
During the fiscal year ended November 30, 1996, the Company expanded into
the Internet related services and products marketplace through the acquisition
of GoodNet, LLC. The subsequent acquisitions of equipment and customer base
from NetZone LLC and Internet Direct, Inc.'s access subscriber base further
enhanced the Company's presence into the Internet market.
Results of Operations for the Fiscal Years ended November 30, 1996 and 1995
Revenues increased by 19.1% to $23,313,280 for the fiscal year ended
November 30, 1996 compared to $19,576,905 for the fiscal year ended November
30, 1995. The Company's revenue is derived from four principal product lines
and services: STS Outsourcing Programs, Customized Billing Outsourcing
Services, System Sales and Maintenance, and GoodNet.
STS Outsourcing Program revenues were approximately $15,000,000 for
the fiscal year ended November 30, 1996 compared to $14,465,000 for the fiscal
year ended November 30, 1995, an increase of 3.7%. Revenues from
Customized Billing Outsourcing Services were $640,000 for the fiscal year ended
November 30, 1996 compared with $330,000 for the fiscal year ended November
30, 1995. Revenues from System Sales were $5,430,000 for the fiscal year ended
November 30, 1996 compared to $4,780,000 for the fiscal year ended November
30, 1995, an increase of 13.6%. This increase was mainly attributable to the
RATEX division acquired in March 1995, which contributed an approximately
$700,000 in additional revenue. GoodNet, the Internet related services division
contributed approximately $2,240,000 in revenue for the fiscal year ended
November 30, 1996.
Total gross profit increased by 16.9% to $9,082,850 for the fiscal year
ended November 30, 1996 compared to $7,772,855 for the fiscal year ended
November 30, 1995. Cost of goods sold was approximately 76% of STS
Outsourcing Program revenues for the fiscal year ended November 30, 1996. This
represents a three percent (3%) increase over the fiscal year ended
November 30, 1995. The Company anticipated this increase due to increasing
competition in the STS Outsourcing Program marketplace. Cost of goods sold
as a percentage of system sale revenues was approximately 30% for the fiscal
year ended November 30, 1996 compared to 24% for the fiscal year ended
November 30, 1995. Cost of goods sold for GoodNet's dial-up business was
approximately 30% while ATM cost of goods exceeded ATM revenue as anticipated.
Overall operating expenses increased by 37.2%, or $2,223,552, in fiscal
1996 to $8,204,346 from $5,980,794 in fiscal 1995. This was primarily due to
the acquisition of the GoodNet division (which contributed approximately
$1,500,000 in SG&A expenses) and an increase in the number of employees hired
for sales and marketing, and customer support, representing approximately
$600,000 of the remaining increase.
Net income decreased to $776,577 in fiscal 1996 from $1,145,792 in fiscal
1995 primarily due to a $400,000 operating loss realized by GoodNet.
The Company capitalized approximately $280,000 in development expenditures
during fiscal 1996 mainly for the enhancement of the existing text-based
telemanagement software modules to a "Client/Server" and "Graphical User
Interface" environment.
Contingencies
By letter dated November 7, 1996, prior owners of GoodNet, LLC notified the
Company that they intend to exercise their alleged right to repurchase all of
the assets which GoodNet, LLC, had sold to Telesoft Acquisition Corp. II in
April 1996 (Note 19). The Company disputes the rights of the prior owners to
repurchase the assets. The parties are currently negotiating a settlement of
this matter. A draft settlement agreement is now being circulated and
finalized, although any settlement will not be final until definitive documents
are executed by all parties. At the present time, it is not possible to
Future Expectations
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 form 10-KSB 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 of the 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 infrastructure to support operations.
Liquidity and Capital Resources
The Company obtained a line of credit of $1,000,000 during fiscal 1996.
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 November 30, 1996, the Company had cash of $219,023 and short
term investments of $3,503,332. The Company believes that present cash reserves
available under 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 for the Company.
Seasonality
The Company generally completes the sale of the majority of STS
Outsourcing Program 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 Outsourcing Programs begin in the
fall and weaken 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and schedules are included herewith commencing
on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
In January, 1997, the Registrant, acting at the direction of its Board of
Directors, informed Semple & Cooper, PLC, that it desired to obtain proposals
for its November 30, 1996 audit from a national CPA firm. In February, 1997,
the Registrant selected Coopers & Lybrand, LLP as its new independent
accountants.
There has been no disagreement on accounting and financial disclosure
with the Company's accountants within the two years prior to the date of the
most recent financial statements requiring disclosure under this item and any
accountants' reports on the financial statements of the Company for the past
two years has contained no adverse opinion and no disclaimer of opinion and
was not qualified as to uncertainty, audit scope or accounting principles.
PART III
As indicated in the following table, the information required to be presented
in Part III of this report is hereby incorporated by reference from the
Company's definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders to be prepared in accordance with Schedule 14A and filed with
the Securities and Exchange Commission within 120 days of the end of the
fiscal year covered by this report:
Material in Proxy Statement for 1997 Annual Meeting
which is incorporated herein by reference
Item No. and Item Caption Proxy
Statement Caption
10 Directors and Executive Officers "Directors and Executive
of the Registrant Officers"
11 Executive Compensation "Executive Compensation"
12 Security Ownership of Certain Beneficial "Security Ownership of Principal
Owners and Management Stockholders and Management"
13 Certain Relationships and Related "Certain Transactions"
Transactions
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The following financial statements of the Company and its subsidiaries are
included in Part II, Item 8 of this report:
Consolidated Balance Sheet as of November 30, 1996;
Consolidated Statements of Operations for the fiscal years ended November 30,
1996 and 1995;
Consolidated Statements of Changes in Stockholders' Equity for the fiscal
years ended November 30, 1996 and 1995;
Consolidated Statements of Cash Flows for the fiscal years ended
November 30, 1996 and 1995;
and Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
None.
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted,
or the required information is otherwise included in the consolidated financial
statements and the notes thereto.
(a)(3) Exhibits
The following Exhibits are filed herewith pursuant to Ruse 601 of Regulation
S-K and paragraph (c) of this item 14.
No. Description Reference
10 1996 Incentive Stock Option Plan *
10.1 1996 Restricted Stock Plan *
11 Earnings per common and common equivalent share *
23 Consent of Independent Certified Accountants *
99 Form 8-K filed February 7, 1997 *
99.1 Form 8-K/A filed February 27, 1997 *
* Filed herewith
(b) Current Reports on Form 8-K
The Company filed no reports on Form 8-K during the last quarter of the
fiscal year ended November 30, 1996.
<PAGE>
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.
Dated: March 4, 1997 By /S/ Joseph W. Zerbib
Joseph W. Zerbib,
President and Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature and Title Date
/s/ Joseph W. Zerbib March 4, 1997
Joseph W. Zerbib,
President, Principal Executive Officer and Director
/s/ Thierry E. Zerbib March 4, 1997
Thierry E. Zerbib, Vice President - Technologies,
Secretary and Director
/s/ Brian H. Loeb March 4, 1997
Brian H. Loeb, Vice President - Marketing,
Sales and Operations and Director
/s/ Michael F. Zerbib March 4, 1997
Michael F. Zerbib, Chief Financial Officer,
Treasurer and Director
/s/ Cecile Silverman March 4, 1997
Cecile Silverman, Director
/s/ Kalvan Swanky March 4, 1997
Kalvan Swanky, Director
<PAGE>
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Telesoft Corp. and Subsidiaries
We have audited the consolidated balance sheet of Telesoft Corp. and
Subsidiaries (the "Company") as of November 30, 1996, and the related
consolidated statements of operations, changed in stockholders' equity,
and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility
it to express an opinion on these financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of the Company as of November 30, 1996, and the consolidated results
of their operations and their cash flows for the year ended November
30, 1996, in conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Phoenix, Arizona
March 3, 1996
INDEPENDENT AUDITORS' REPORT
To The Stockholders and Board of Directors of
Telesoft Corp. and Subsidiary
We have audited the accompanying consolidated statements of operations,
changed in stockholders' equity, and cash flows for the year ended
November 30, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations,
changes in stockholder's equity, and cash flows of Telesoft Corp. and
subsidiary for the year ended November 30th, 1995, in conformity with
generally accepted accounting principles.
/s/ Semple & Cooper, P.L.C.
<TABLE>
<CAPTION>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
November 30, 1996
<S> <C>
ASSETS
Cash and cash equivalents $ 219,023
Investment securities 703,332
Accounts receivable, net of allowance for
uncollectibles of $708,127 5,678,469
Inventory 474,254
Deferred taxes 234,300
Income taxes receivable 147,242
Note receivable from related party 208,635
Other 194,834
----------------
Total Current Assets 7,860,089
----------------
Investment securities 2,800,000
Property and equipment, net 2,094,952
Computer software costs, net 605,912
Intangibles, net 1,136,898
Other 155,085
----------------
Total Assets $ 14,652,936
================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 4,085,134
Deferred revenue 526,351
----------------
Total Current Liabilities 4,611,485
Deferred taxes 153,500
----------------
Total Liabilities 4,764,985
----------------
Commitments and contingencies (Notes 15,16)
Stockholders Equity:
Common Stock, 50,000,000 shares of common
stock, no par value
authorized; 3,818,333 issued and outstanding 7,423,928
Retained earnings 2,464,023
---------------
Stockholders' Equity 9,887,951
---------------
Total Liabilities and Stockholders' Equity $ 14,652,936
===============
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements
</TABLE>
<PAGE>F-4
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended November 30, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
Sales, net $ 23,313,280 $ 19,340,905
Termination Fees - 236,000
----------------- --------------
23,313,280 19,576,905
Cost of Sales 14,230,430 11,804,050
------------------- --------------
9,082,850 7,772,855
General and Administrative
Expenses 8,204,346 5,980,794
------------------ -------------
878,504 1,792,061
------------------ ------------
Other Income (Expense):
Interest Income 308,297 183,023
Interest Expense (3,122) (19,410)
Other Income 598 -
------------------ --------------
305,773 163,613
------------------ --------------
Income before Provision
for Income Taxes 1,184,277 1,955,674
Provision for Income Taxes (407,700) (809,882)
------------------ ----------------
Net Income $ 776,577 $ 1,145,792
================= ================
Earnings per Share $ 0.20 $ 0.38
----------------- ----------------
Weighted Average Number of
Shares Outstanding 3,817,130 2,977,272
================= ================
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements
</TABLE>
<PAGE> F-5
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended November 30, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Common Stock
-------------------
Number of
Shares Retained
Outstanding Amount Earnings
Balance, November 30, 1994 (a) 2,350,000 $ 179,969 $ 541,654
Initial Public Offering:
June,1995, net of costs of
$ 1,478,841 1,437,500 7,146,159 -
Issuance of warrants - 100 -
Net income - - 1,145,792
---------- ---------- ------------
Balance, November 30, 1995 3,787,500 7,326,228 1,687,446
Restricted Stock Issued in
Connection with GoodNet LLC
Acquisition (Note 19) 30,833 97,700 -
Net income - - 776,577
------------ ----------- ------------
Balance November 30, 1996 3,818,333 $ 7,423,928 $ 2,464,023
========= =========== ==========
(a) The number of shares outstanding at November 30, 1994 has been restated
to reflect the 39.1667 for 1 stock split effective April 3, 1995.
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements
</TABLE>
<PAGE> F-6
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended November 30, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
Cash flows from operating activities:
Cash received from customers $ 21,553,215 $ 18,463,067
Cash paid to suppliers and employees (21,856,978) (17,710,823)
Interest paid (3,121) (19,410)
Interest received 270,241 183,023
Income taxes paid (1,214,485) (279,629)
------------- --------------
Net cash (used in) provided by operating activities $ (1,251,128) $ 636,228
-------------- --------------
Cash flows from investing activities:
Purchase of property and equipment (1,442,198) (706,268)
Computer software costs (276,472) (449,202)
Disbursements for notes receivable from related parties (393,053) (220,000)
Collection of notes receivable from related parties 191,548 220,000
Payments for covenant not-to-compete - (25,000)
Payments for Purchase of GoodNet, LLC, net of cash
acquired, and purchase of customer base (887,515) -
Purchase of Investments (3,503,332) -
------------- --------------
Net cash used in investing activities $ (6,311,022) $ (1,180,470)
-------------- --------------
Cash flows from financing activities:
Proceeds from notes payable 1,200,000 -
Payment of notes payable (1,210,742) (312,001)
Payments for deferred offering costs - (424,348)
Proceeds from issuance of stock - 7,621,350
-------------- ----------------
Net cash (used in) provided by financing activities (10,742) 6,885,001
------------- ----------------
Net (decrease) increase in cash and cash equivalents (7,572,892) 6,340,759
Cash and cash equivalents at beginning of fiscal year 7,791,915 1,451,156
-------------- ----------------
Cash and cash equivalents at end of fiscal year $ 219,023 $ 7,791,915
============== ================
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements
</TABLE>
<PAGE> F-7
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
for the years ended November 30, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
Reconciliation of Net Income to Net Cash
(Used In) Provided By Operating Activities
Net Income $ 776,577 $ 1,145,792
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 643,049 347,204
Changes in Assets and Liabilities:
Accounts receivable (1,238,357) (876,320)
Inventory (23,683) (37,891)
Other current assets (127,377) (72,850)
Deferred taxes (42,200) 6,800
Other assets (135,970) (113,813)
Accounts payable and accured liabilities (390,923) (398,466)
Deferred revenue 52,341 112,319
Income taxes payable (617,343) 523,453
Income taxes receivable (147,242) -
------------ --------
(2,027,705) (509,564)
------------ ---------
Net cash (used in) provided by operating
activities $ (1,251,128) $ 636,228
============ ===========
Supplemental disclosure of investing and financing activities:
During the year ended November 30, 1996, the company issued 30,833 shares of restricted common
stock valued at $97,700 as partial payment for the acquisition of the net assets of GoodNet, LLC.
During the year ended November 30, 1995, the company transferred property and equipment in the
amount of $153,743 to inventory.
During the year ended November 30, 1995, the company issued common stock for proceeds of
$7,621,350, which was net of commissions and other offering costs of $1,003,750.
The Accompanying Notes are an Integral Part of the Consolidated Financial Statements
</TABLE>
<PAGE>F-8
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Nature of Corporation: Telesoft Corp. (the "Company" or "Telesoft"), an
Arizona corporation, was incorporated on May 5, 1982. The Company provides
four principal product lines and services: long distance, telecommunications
division, dba Student Telephone Services (STS); Customized Billing Outsourcing
Services; computer software and hardware sales, dba Sunbelt Business Computers
(SBC) or RATEX; and Internet related services (GoodNet). The long distance and
telecommunications division is primarily involved in the design, distribution,
installation, and maintenance of computer hardware and software.
The Company originally operated as B.P. & J. Investors, Ltd., dba Sunbelt
Business Computers. Effective April 12, 1995, the Company changed its name
to Telesoft Corp.
Acquisitions:
During the fiscal year ended November 30, 1996, the Company incorporated a
wholly-owned subsidiary, Telesoft Acquisition Corp II. Telesoft Acquisition
Corp II. is a corporation whose primary business activity is to acquire other
businesses. Subsequent to the incorporation of Telesoft Acquisition Corp II.,
it acquired the net assets of GoodNet LLC. (See "Acquisitions", note 19)
During the fiscal year ended November 30, 1996, the Company also acquired the
equipment and customer bases of NetZone LLC and Internet Direct, Inc.
(See "Acquisitions", note 19)
Principles of Consolidation
The consolidated financial statements include the accounts of Telesoft Corp.,
together with its wholly-owned subsidiaries, Telesoft Acquisition Corp and
Telesoft Acquisition Corp II. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to makes estimates and assumptions
that effect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statement and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash and cash equivalents for the
purposes of reporting cash flows.
Investments
The Company has classified its entire investment portfolio as
available-for-sale in accordance with the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
Available-for-sale securities are stated at fair value with unrealized gains
and losses included in shareholders' equity. The amortized cost of debt
securities is adjusted for amortization of premiums and accretion of discounts
to maturity. Such amortization is included in interest income. Realized gains
and losses are included in other income (expense). The cost of securities sold
is based on the specific identification method.
<PAGE> F-9
1. Summary of Significant Accounting Policies: (Continued)
Inventory
Inventory is stated at the lower of cost, first-in, first-out (FIFO) method,
or market. Inventory quantities are reviewed periodically for obsolescence.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided for on
the straight-line method over the estimated useful lives of the assets. The
average lives range from three to seven years. The gain or loss on disposal
of assets is reflected in earnings, and the cost and related accumulated
depreciation are removed from the accounts. Maintenance and repairs that
neither materially add to the value of the property nor appreciably prolong
its life are charged to expense as incurred. Betterments or renewals are
capitalized when incurre. Depreciation expense was $471,263 and $265,988
for the fiscal years ended November 30, 1996 and 1995, respectively.
Computer Software Costs
The Company capitalizes software development costs in accordance with
Financial Accounting Standards Board Statement No. 86. Software development
costs not qualifying for capitalization are expensed as research and
development costs. Capitalized costs are amortized on a product-by-product
basis using the greater of the straight-line method over the product's
remaining estimated economic life or the ratio of the current year's gross
revenues to the total of a product's current year and anticipated revenues.
The Company evaluates the estimated net realizable value of each software
product at each balance sheet date and records writedowns for any products
for which net book value is in excess of net realizable value.
Intangibles
Amortization of intangibles is on a straight-line basis as follows:
Covenant Not-to-Compete 3 years
Goodwill 5 years
Customer Base 5 years
The Company assesses the recoverability of goodwill at each balance sheet
date by determining whether amortization of the assets over their original
estimated useful life can be recovered through estimated future undiscounted
operating income, excluding amortization.
Deferred Revenue
Deferred revenue represents deferred income from maintenance contracts. The
income is recognized ratably over the applicable lives of the respective
contracts.
<PAGE> F-10
1. Summary of Significant Accounting Policies: (Continued)
Income Taxes
The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred
income taxes are recognized for the tax consequences of "temporary differences"
by applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities.
Revenue Recognition
The Company recognizes revenues as follows: Systems sales and software
revenue is recognized when the equipment and software has been delivered and
installed; Revenues from collection of long-distance charges is recognized
as the charges are incurred. The Company accrues revenues from customers
based upon actual usage as reported on billings received from long-distance
carriers and estimates of the amount of unbilled revenues based upon the
number of days in the billing cycle and past usage by customers; GoodNet
charges a fixed flat rate for Internet access. Revenues are recognized in the
month the service is provided to users. Fees collected in advance of usage
are deferred.
Stock Compensation
In October 1995, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 123, Accounting for Stock-Based Compensation
("SFAS No. 123"), which will be effective for the year ended November 30, 1997.
The Company anticipates adopting the disclosure-only provisions of SFAS No. 123.
Earnings Per Share
Earnings per share are based upon the weighted average number of shares of
common stock outstanding during the fiscal year. The effect of stock options
(Note 12) as common stock equivalents is less than 3% dilutive and therefore
is not included in the computation.
2. Concentration of Credit Risk:
The Company maintains cash balances at various financial institutions.
Deposits not in excess of $100,000, on deposit at each institution, are
insured by the Federal Deposit Insurance Corporation. At November 30, 1996,
the Company had uninsured cash and cash equivalent bank balances of
approximately $603,000.
Suppliers
The Company is provided a significant portion of its long-distance
telecommunications services by one telecommunications company. For the
fiscal years ended November 30, 1996 and 1995, fees paid to this company
totaled approximately $3,270,000 and $5,850,000. As of November 30, 1996,
the outstanding amount due to the service provider was approximately $665,000.
Customers
For the fiscal years ended November 30, 1996 and 1995, the Company had one
customer representing nine and ten percent of total revenues, respectively.
As of November 30, 1996, the account receivable outstanding from this
customer was $321,895.
3. Investment Securities:
The amortized cost and fair value (based on quoted market prices) of debt
securities at November 30, 1996 are shown below. Expected maturities will
differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Securities Available-for-Sale
Amortized Fair
Cost Value
Debt securities, maturity less than one year $ 703,332 $ 703,332
Debt securities, maturity greater than 10 years 2,800,000 2,800,000
----------- ----------
Total securities available-for-sale $ 3,503,332 $ 3,503,332
=========== ===========
4. Accounts Receivable:
At November 30, 1996, accounts receivable include billed and unbilled amounts
as follows:
Billed $ 4,889,250
Unbilled 1,497,346
-----------
6,386,596
Less: allowance for uncollectibles (708,127)
-----------
$ 5,678,469
============
Unbilled accounts receivable represent amounts earned but not billed for
long-distance telephone services.
5. Inventory:
At November 30, 1996, inventory consists of:
Parts and equipment $ 128,149
Finished products 346,105
---------
$ 474,254
=========
6. Property and Equipment:
At November 30, 1996, property and equipment consists of:
Equipment $ 2,565,915
Vehicles 40,284
Furniture and fixtures 195,944
Leasehold improvements 39,764
Property leased to others 507,464
-----------
3,349,371
Less: accumulated
depreciation and amortization (1,254,419)
------------
$ 2,094,952
============
7. Computer Software Cost:
At November 30, 1996, computer software costs capitalized are:
Computer software $ 1,115,385
Accumulated amortization (509,473)
-------------
$ 605,912
=============
Amortization expense relating to computer software cost during the
years ended November 30, 1996 and 1995 was $104,247 and $74,966, respectively.
8. Intangibles:
At November 30, 1996, intangibles consist of:
Covenant Not-to-Compete $ 25,000
Goodwill 785,000
Customer Base 400,687
-------------
1,210,687
Less: accumulated amortization (73,789)
-------------
$ 1,136,898
=============
Amortization expense relating to intangibles during the years ended
November 30, 1996 and 1995 was $67,539 and $6,250, respectively.
9. Line of Credit:
The Company has available a $1,000,000 operating line of credit, expiring
April 15, 1997. 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
November 30, 1996, there were no balances outstanding on this operating line
of credit.
10. Income Taxes:
The components of the provision for income taxes for the years ended
November 30, 1996 and 1995 consist of:
1996 1995
Current $ 449,900 $ 803,082
Deferred (42,200) 6,800
----------- ---------
Provision for income taxes $ 407,700 $ 809,882
=========== ==========
The Company's tax expense differs from the expense calculated using the
statutory federal income tax rate for the following reasons:
1996 1995
Federal income tax expense at statutory rate $ 400,000 $ 675,000
Tax exempt interest income (40,000) -
State taxes, net of federal benefit 47,700 134,882
---------- ---------
Provision for income taxes $ 407,700 $ 809,882
========== =========
The income tax effect of temporary differences between financial and tax
reporting gives raise to the deferred income tax assets and liabilities as
follows:
Current asset:
Allowance for uncollectibles $ 234,300
Non-Current Liability:
Accumulated depreciation (166,100)
Accumulated amortization 12,600
------------
Net deferred tax asset $ 80,800
============
The Company believes that it is more likely than not that they will realize
the net deferred tax asset based upon the Company's expected future
profitability. Accordingly, no valuation allowance has been provided.
11. Stockholders' Equity:
Stock Split
Effective April 3, 1995, the stockholders of the Company approved a split
of the existing 60,000 shares of outstanding common stock on a 39.1667 for 1
basis, or 2,350,000 shares outstanding after the split. All share amounts
have been restated to reflect the stock split.
Serial Preferred Stock
The Company is authorized to issue 10,000,000 shares of serial preferred
stock, no par value. As of November 30, 1996, there were no shares issued
or outstanding.
Common Stock Warrants
During the year ended November 30, 1995, the Company issued 125,000 common
stock warrants to the Underwriters of the Company's initial public offering
in exchange for $100. The warrants are exercisable at $7.20 per warrant for
a period of four years beginning July 1, 1996. As of November 30, 1996,
125,000 common stock warrants were outstanding.
Dividend Policy
The Company has no limitations or restrictions for declaring dividends.
As of November 30, 1996, no dividends have been declared.
12. Stock Plans:
Effective February 1, 1995, the Board of Directors adopted two stock plans,
the 1995 Incentive Stock Option Plan (ISOP) and the 1995 Restricted Stock
Plan. Under the 1995 Plans, a total of 264,000 shares are reserved for
issuance at the discretion of the compensation committee. Effective
April 15, 1996, the Board of Directors adopted two additional stock plans,
the 1996 ISOP and the 1996 Restricted Stock Plan. These Plans were approved
by the shareholders on August 7, 1996. Under the 1996 Plans, a total of
260,000 shares are reserved for issuance at the discretion of the compensation
committee.
The Company's stock plans, approved by the shareholders, provide for grants
of nonqualified or incentive stock options and restricted stock awards. All
plans are administered by the Company and the Compensation Committee of the
Board of Directors ("Committee") comprised of outside directors. Incentive
stock options may be granted under the 1995 and 1996 ISOP for terms of up to
ten years at an exercise price at least equal to 100% of the fair market value
of the common stock as of the date of grant, and 85% of the fair market value
in the case of nonstatutory options, except that incentive options granted to
any person who owns stock possessing more than 10% of the combined voting
power of all classes of the Company's stock or of any parent or subsidiary
corporations, must have an exercise price at least equal to 110% of the fair
market value of the Company's common stock on the date of grant. Options
granted become exercisable in installments of 25% per year commencing one
year from the date of grant or over a vesting period determined by the
Committee. During the year ended November 30, 1996 and November 30, 1995,
112,000 and 164,000 common stock options, respectively, were issued to persons
owning greater than 10% of the Company's currently outstanding common stock.
12. Stock Plans: (Continued)
Restricted stock awards issued under the restricted stock plans provide that
shares awarded may not be sold or otherwise transferred until restrictions
as established by the Committee have lapsed. Upon termination of employment,
death, retirement or permanent disability, the restrictions imposed shall
lapse, with the consent of the Board . There were no shares of restricted
stock issued under the 1995 or 1996 Restricted Stock Plans at November 30,
1996.
The following table summarizes stock option activity:
Stock Price
1995 ISOP Options Per Share
Outstanding at November 30, 1994 - $ -
Granted 264,000 6-7
Expired or canceled -
--------
Outstanding at November 30, 1995 264,000 6-7
Granted
Expired or canceled (500) 6
-------- --------
Outstanding at November 30, 1996 263,500 $ 6-7
======== ========
Stock Price
1996 ISOP Options Per Share
Outstanding at November 30, 1995 - $ -
Granted 246,000 3-5
Expired or canceled (2,600) 5
-------- ---------
Outstanding at November 30, 1996 243,400 3-5
======== =========
Exercisable at:
November 30, 1995 - $ -
November 30, 1996 263,500 6-7
Available for grant at: (a)
November 30, 1995 -
November 30, 1996 17,000
(a) Available for grant includes shares which may be granted as either stock
options or restricted stock, as determined by the Committee.
Other Options
During the fiscal year ended November 30, 1996, the Company issued 20,000
options with an exercise price of $5.625 to the Company's public relations
firm. Additionally, the Company issued 2,000 options with an exercise price
of $4.75 and 2,000 options with exercise price of $3.00 per share to the
Company's outside directors in connection with board meetings.
13. Related Party Transactions:
Lease Commitment
The Company leases its office facilities under a month-to-month operating
lease agreement from the President. Rent expense was $83,737 and $84,390,
respectively, for the fiscal years ended November 30, 1996 and 1995.
In addition, the Company pays all utilities, insurance and property taxes.
Note receivable
During the fiscal year ended November 30, 1996, the Company issued a line of
credit to a related party in the amount of $225,000. The line of credit earns
interest at the rate of 6% per annum and is due in full on November 30, 1997.
At November 30, 1996, the balance outstanding balance was $208,635, including
accrued interest.
14. Employee Benefit Plans:
The Company maintains a 401(k) profit sharing plan covering substantially all
full-time employees. Under the terms of the plan, the employees may elect to
contribute a portion of their salary to the plan. The Company has agreed to
make matching contributions equal to fifty percent of the first $500 in
deferred compensation plus twenty-five percent of deferrals in excess of
$1,000. In addition, the Company may make discretionary contributions to the
plan. For the fiscal years ended November 30, 1996 and 1995, contributions
were $22,904 and $32,767, respectively.
15. Contingencies:
During the fiscal year ended November 30, 1995, the Company was involved in
litigation with its primary provider of long-distance services, alleging a
breach of duty by the Company. A settlement agreement was reached wherein
the Company paid the long-distance carrier all fees owed to the carrier and
received its fee for early termination of services in the approximate amount
of $236,000.
By letter dated November 7, 1996, prior owners of GoodNet, LLC notified the
Company that they intend to exercise their alleged right to repurchase all of
the assets which GoodNet, LLC, had sold to Telesoft Acquisition Corp. II in
April 1996 (Note 19). The Company disputes the rights of the prior owners to
repurchase the assets. The parties are currently negotiating a settlement of
this matter. A draft settlement agreement is now being circulated and
finalized, although any settlement will not be final until definitive documents
are executed by all parties. At the present time, it is not possible to
evaluate the likelihood of an unfavorable outcome or the amount or a range
of potential loss, if any, which may be experienced by the Company if this
matter is not resolved.
16. Commitments:
The Company is obligated under long-term operating leases for office
facilities through the year 2006.
As of November 30, 1996, future minimum lease payments due under the
non-cancelable operating lease agreements are as follows:
Fiscal Year Ending
November 30,
1997 $ 177,384
1998 379,879
1999 413,342
2000 420,422
Thereafter 3,478,467
------------
Total $ 4,869,494
=============
Rent expense under all operating leases, including related party lease,
amounted to approximately $199,500 and $132,000 for the years ended
November 30, 1996 and 1995, respectively.
17. Operating Leases:
The Company is the lessor of equipment under operating lease agreements
expiring through June 2000. The equipment had an original cost basis of
$507,464. Accumulated depreciation was $312,283 as of November 30, 1996.
During the fiscal years ended November 30, 1996 and 1995, the Company
received $ 181,628 and $ 162,759, respectively under this agreement.
The Company is also the sublessor of office space (Note 16) mentioned above
in Tempe, Arizona. The lease agreement expires in March 2000. During the
fiscal year ended November 30, 1996, the Company received $7,456 under this
agreement.
As of November 30, 1996, a schedule of future minimum rentals to be received
under non-cancelable lease agreements was as follows:
Fiscal Year Ending Amount
November 30,
1997 $ 180,848
1998 75,800
1999 76,720
2000 57,400
-----------
Total future minimum rentals $ 390,768
============
18. Research and Development:
Research and development costs for the fiscal years ended November 30, 1996
and 1995 were $266,000 and $131,000, respectively.
19. Acquisitions:
GoodNet
During the fiscal year ended November 30, 1996, the Company acquired
proprietary software and other net assets relating to GoodNet LLC in exchange
for $115,000 cash, 30,833 restricted shares of the Company's common stock
valued at $97,700 and additional costs associated with the purchase. The
Company may also issue up to an additional 300,000 restricted shares of the
Company's common stock based upon the weighted average net income of the
Internet related services division for the four, six month periods commencing
March 1, 1996 through February 28, 1998 reaching $1,013,820. If the
Company sells substantially all of its assets to a third party on or prior
to February 28, 1998, the Company will issue all 300,000 shares to seller as
if all tests had been met. GoodNet provides Internet-related services,
including high speed dedicated lines, telephone dial-up access, as well as
design implementation and hosting for home pages on the World Wide Web.
The acquisition was accounted for as a purchase. Accordingly, the purchase
price was allocated to the assets and liabilities as follows:
April 30,
1996
Cash $ 21,485
Receivables 82,033
Property, plant and equipment 92,141
Goodwill 400,687
Current liabilities (69,452)
Notes payable (263,705)
Deferred revenues (25,859)
--------------
$ 237,330
==============
Other
The Company also acquired equipment and dial-up access and dedicated
Internet accounts from two local Internet providers, NetZone LLC and
Internet Direct, Inc. in exchange for $425,000 and $440,000 cash,
respectively. Of these amounts, $785,000 was allocated to customer base and
$80,000 to equipment.
<PAGE>
19. Acquisitions: (Continued)
Consolidated operating results include the operations of GoodNet, LLC
subsequent to the acquisition date. Unaudited pro-forma operating results
for the years ended November 30, 1996 and 1995, assuming the acquisition had
occurred at the beginning of each year are as follows:
1996 1995
(Unaudited)
Revenues $ 23,725,893 $ 19,830,418
Income before taxes 1,007,765 1,750,445
Net income 661,065 1,025,745
Earnings per common share $ 0.17 $ 0.34
(a) The unaudited pro-forma operating results for 1996 and 1995 have been
adjusted to reflect the amortization of goodwill in connection with the
purchase of GoodNet, LLC for the period from December 1, 1995 through the
date of acquisition, April 30, 1996.
The unaudited pro-forma operating results are presented for informational
purposes only. Accordingly, they are not necessarily indicative of the
operating results that would have occurred had the acquisition of GoodNet,
LLC been consummated as of December 1, 1994, nor are they necessarily
indicative of future operating results.
TELESOFT CORP.
1996 INCENTIVE STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this 1996 Incentive
Stock Option Plan are to provide additional incentive to Employees of the
Company to achieve financial results aimed at increasing stockholder value
and to attract and retain the best available personnel for positions of
responsibility within the Company through the grant of options to purchase
shares of the Company's Common Stock.
Options granted hereunder may be either Incentive Stock or
Non-Statutory Stock Options, at the discretion of the Board. The type of
options granted shall be reflected in the terms of written Stock Option
agreements.
2. Definitions. As used herein, the following definitions shall
apply:
(a) "Board" shall mean the Board of Directors of the
Company or, when appropriate, the Committee administering the
Plan, if one has been appointed.
(b) "Code" shall mean the Internal Revenue Code of
1986, as amended, and the rules and regulations promulgated
thereunder.
(c) "Common Stock" shall mean the common stock of
the Company described in the Company's Articles of Incorporation, as
amended.
(d) "Company" shall mean TELESOFT CORP., an
Arizona corporation, and shall include any parent or subsidiary
corporation of the Company as defined in Sections 425(e) and (f),
respectively, of the Code.
(e) "Committee" shall mean the Committee appointed by
the Board in accordance with paragraph (a) of Section 4 of the Plan,
if one is appointed.
(f) "Employee" shall mean any person, including
salaried officers and directors, employed by the Company. The
payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
(g) "Exchange Act" shall mean the Securities Exchange
Act of 1934, as amended.
(h) "Fair Market Value" shall mean, with respect to the
date a given Option is granted or exercised, the value of the Common
Stock determined by the Board in such manner as it may deem
equitable for Plan purposes but, in the case of an Incentive Stock
Option, no less than is required by applicable laws or regulations;
provided, however, that where there is a public market for the
Common Stock, the Fair Market Value per Share shall be the mean of
the bid and asked prices of the Common Stock on the date of grant, as
reported in the Wall Street Journal, or, if not so reported, as
otherwise reported in the National Association of Securities Dealers
Automated Quotation System ("Nasdaq") or, in the event the Common
Stock is listed on the New York Stock Exchange, the American Stock
Exchange, the Nasdaq National Market or the Nasdaq SmallCap
Market, the Fair Market Value per Share shall be the closing price on
the relevant Nasdaq market or exchange on the date of grant of the
Option, as reported in the Wall Street Journal.
(i) "Incentive Stock Option" shall mean an Option which
is intended to qualify as an incentive stock option within the meaning
of Section 422 of the Code.
(j) "Option" shall mean a stock option granted under the
Plan.
(k) "Optioned Stock" shall mean the Common Stock
subject to an Option.
(l) "Optionee" shall mean an Employee of the Company
who has been granted one or more Options.
(m) "Nonstatutory Stock Option" shall mean an Option
which is not an Incentive Stock Option.
(n) "Parent" shall mean a "parent corporation," whether
now or hereafter existing, as defined in Section 425(e) of the Code.
(o) "Plan" shall mean this 1996 Incentive Stock Option
Plan.
(p) "Share" shall mean a share of the Common Stock, as
adjusted in accordance with Section 11 of the Plan.
(q) "Stock Option Agreement" shall mean the written
agreement between the Company and the Optionee relating to the
grant of an Option.
(r) "Subsidiary" shall mean a "subsidiary corporation,"
whether now or hereafter existing, as defined in Section 425(f) of the
Code.
(s) "Tax Date" shall mean the date an Optionee is
required to pay the Company an amount with respect to tax
withholding obligations in connection with the exercise of an option.
3. Common Stock Subject to the Plan. Subject to the
provisions of Section 11 of the Plan, the maximum aggregate number of
shares which may be optioned and sold under the Plan is Two Hundred Sixty
Thousand (260,000) Shares of Common Stock. The Shares may be
authorized, but unissued, or previously issued Shares acquired by the
Company and held in treasury.
If an Option should expire or become unexercisable for any
reason without having been exercised in full, the unpurchased Shares covered
by such Option shall, unless the Plan shall have been terminated, be available
for future grants of Options.
4. Administration of the Plan.
(a) Procedure.
(i) The Plan shall be administered by the Board
in accordance with Rule 16b-3 under the Exchange Act
("Rule 16b-3"); provided, however, that the Board may
appoint a Committee to administer the Plan at any time or
from time to time, and, provided further, that if the Board is
not "disinterested" within the meaning of Rule 16b-3, the Plan
shall be administered by a Committee in accordance with
Rule 16b-3.
(ii) Once appointed, the Committee shall
continue to serve until otherwise directed by the Board. From
time to time the Board may increase the size of the Committee
and appoint additional members thereof, remove members
(with or without cause), appoint new members in substitution
therefor, and fill vacancies however caused: provided,
however, that at no time may any person serve on the
Committee if that person's membership would cause the
Committee not to satisfy the "disinterested administration"
requirements of Rule 16b-3.
(b) Powers of the Board. Subject to the provisions of
the Plan, the Board shall have the authority, in its discretion: (i) to
grant Incentive Stock Options and Nonstatutory Stock Options; (ii) to
determine, upon review of relevant information and in accordance
with Section 2 of the Plan, the Fair Market Value of the Common
Stock; (iii) to determine the exercise price per Share of Options to be
granted, which exercise price shall be determined in accordance with
Section 8(a) of the Plan; (iv) to determine the Employees to whom,
and the time or times at which, Options shall be granted and the
number of Shares to be represented by each Option; (v) to interpret
the Plan; (vi) to prescribe, amend and rescind rules and regulations
relating to the Plan; (vii) to determine the terms and provisions of
each Option granted (which need not be identical) and, with the
consent of the Optionee thereof, modify or amend each Option; (viii)
to accelerate or defer (with the consent of the Optionee) the exercise
date of any Option; (ix) to authorize any person to execute on behalf
of the Company any instrument required to effectuate the grant of an
Option previously granted by the Board; (x) to accept or reject the
election made by an Optionee pursuant to Section 17 of the Plan; and
(xi) to make all other determinations deemed necessary or advisable
for the administration of the Plan.
(c) Effect of Board's Decision. All decisions,
determinations and interpretations of the Board shall be final and
binding on all Optionees and any other holders of any Options granted
under the Plan.
5. Eligibility.
(a) Consistent with the Plan's purposes, Options may be
granted only to Employees of the Company as determined by the
Board. An Employee who has been granted an Option may, if he is
otherwise eligible, be granted an additional Option or Options.
Incentive Stock Options may be granted only to those Employees who
meet the requirements applicable under Section 422 of the Code.
(b) All Options granted to Employees of the Company
under the Plan will be subject to forfeiture until such time as the
Optionee has been continuously employed by the Company for one
year after the date of the grant of the Options, and may not be
exercised prior to such time. At such time as the Optionee has been
continuously employed by the Company for one year, the foregoing
restriction shall lapse and the Optionee may exercise the Options at
any time otherwise consistent with the Plan.
(c) With respect to Incentive Stock Options, the
aggregate Fair Market Value (determined at the time the Incentive
Stock Option is granted) of the Common Stock with respect to which
Incentive Stock Options are exercisable for the first time by the
employee during any calendar year (under all employee benefit plans
of the Company) shall not exceed One Hundred Thousand Dollars
($100,000).
6. Stockholder Approval and Effective Dates. The Plan
became effective upon approval by the Board. The grant of any options under
the Plan is effective only upon approval of the Plan by the Shareholders. No
Option may be granted under the Plan after April 14, 2006; provided, however
that the Plan and all outstanding Options shall remain in effect until such
Options have expired or until such Options are canceled.
7. Term of Option. Unless otherwise provided in the Stock
Option Agreement, the term of each Option shall be ten (10) years from the
date of grant thereof. In no case shall the term of any Option exceed ten (10)
years from the date of grant thereof. Notwithstanding the above, in the case
of an Incentive Stock Option granted to an Employee who, at the time the
Incentive Stock Option is granted, owns ten percent (10%) or more of the
Common Stock as such amount is calculated under Section 422(b)(6) of the
Code ("Ten Percent Stockholder"), the term of the Incentive Stock Option
shall be five (5) years from the date of grant thereof or such shorter time as
may be provided in the Stock Option Agreement.
8. Exercise Price and Payment.
(a) Exercise Price. The per Share exercise price for the
Shares to be issued pursuant to exercise of an Option shall be
determined by the Board, but in the case of an Incentive Stock Option
shall be no less than one hundred percent (100%) of the Fair Market
Value per share on the date of grant, and in the case of a Nonstatutory
Stock Option shall be no less than eighty-five percent (85%) of the
Fair Market Value per share on the date of grant. Notwithstanding
the foregoing, in the case of an Incentive Stock Option granted to an
Employee who, at the time of the grant of such Incentive Stock
Option, is a Ten Percent Stockholder, the per Share exercise price
shall be no less than one hundred ten percent (110%) of the Fair
Market Value per Share on the date of grant.
(b) Payment. The price of an exercised Option and the
Employee's portion of any taxes attributable to the delivery of
Common Stock under the Plan, or portion thereof, shall be paid:
(i) In United States dollars in cash or by check,
bank draft or money order payable to the order of the
Company; or
(ii) At the discretion of the Board, through the
delivery of shares of Common Stock with an aggregate Fair
Market Value equal to the option price and withholding taxes,
if any; or
(iii) At the election of the Optionee pursuant to
Section 17 and with the consent of the Board pursuant to
Section 4(b)(x), by the Company's retention of such number
of shares of Common Stock subject to the exercised Option
which have an aggregate Fair Market Value on the exercise
date equal to the Employee's portion of the Company's
aggregate federal, state, local and foreign tax withholding and
FICA and FUTA obligations with respect to income
generated by the exercise of the Option by Optionee;
(iv) By a combination of (i), (ii) and (iii) above;
or
(v) In the manner provided in subsection (c)
below.
The Board shall determine acceptable methods for
tendering Common Stock as payment upon exercise of an Option and
may impose such limitations and prohibitions on the use of Common
Stock to exercise an Option as it deems appropriate.
(c) Financial Assistance to Optionees. The Board may
assist Optionees in paying the exercise price of Options granted under
this Plan in the following manner:
(i) The extension of a loan to the Optionee by
the Company; or
(ii) Payment by the Optionee of the exercise
price in installments; or
(iii) A guaranty by the Company of a loan
obtained by the Optionee from a third party.
The terms of any loans, installment payments or
guarantees, including the interest rate and terms of repayment, and
collateral requirements, if any, shall be determined by the Board, in its
sole discretion. Subject to applicable margin requirements, any loans,
installment payments or guarantees authorized by the Board pursuant
to the Plan may be granted without security, but the maximum credit
available shall not exceed the exercise price for the Shares for which
the Option is to be exercised, plus any federal and state income tax
liability incurred in connection with the exercise of the Option.
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder.
Any Option granted hereunder shall be exercisable at such times and
under such conditions as determined by the Board, including
performance criteria with respect to the Company and/or the
Optionee, and as shall be permissible under the terms of the Plan.
Unless otherwise determined by the Board at the time of grant, an
Option may be exercised in whole or in part. An Option may not be
exercised for a fraction of a Share.
An Option shall be deemed to be exercised when
written notice of such exercise has been given to the Company in
accordance with the terms of the Option by the person entitled to
exercise the Option and full payment for the Shares with respect to
which the Option is exercised has been received by the Company.
Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(b) of
the Plan. Until the issuance (as evidenced by the appropriate entry on
the books of the Company or of a duly authorized transfer agent of
the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a stockholder shall
exist with respect to the Optioned Stock, notwithstanding the exercise
of the Option. No adjustment will be made for a dividend or other
right for which the record date is prior to the date the stock certificate
is issued, except as provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a
decrease in the number of Shares which thereafter may be available,
both for purposes of the Plan and for sale under the Option, by the
number of Shares for which the Option is exercised.
(b) Termination of Status as an Employee. If an
Employee's employment by the Company is terminated for cause, then
any Option held by the Employee shall be immediately canceled upon
termination of employment and the Employee shall have no further
rights with respect to such Option. Unless otherwise provided in the
Stock Option Agreement (which may reduce but not increase the time
period described below), if an Employee's employment by the
Company is terminated for reasons other than cause, and does not
occur due to death or disability, then the Employee may, with the
consent of the Board, but only within ten (10) days after the date he
ceases to be an Employee of the Company, exercise his Option to the
extent that he was entitled to exercise it at the date of such
termination. To the extent that he was not entitled to exercise the
Option at the date of such termination, or if he does not exercise such
Option (which he was entitled to exercise) within the time specified
herein, the Option shall terminate.
(c) Disability. Unless otherwise provided in the Stock
Option Agreement (which may reduce but not increase the time period
described below), notwithstanding the provisions of Section 9(b)
above, in the event an Employee is unable to continue his employment
with the Company as a result of his permanent and total disability (as
defined in Section 22(e)(3) of the Code), he may, but only within
twelve (12) months from the date of termination, exercise his Option
to the extent he was entitled to exercise it at the date of such
termination. To the extent that he was not entitled to exercise the
Option at the date of termination, or if he does not exercise such
Option (which he was entitled to exercise) within the time specified
herein, the Option shall terminate.
(d) Death. Unless otherwise provided in the Stock
Option Agreement (which may reduce but not increase the time period
described below), if an Employee dies during the term of the Option
and is at the time of his death an Employee of the Company who shall
have been in continuous status as an Employee since the date of grant
of the Option, the Option may be exercised at any time within twelve
(12) months following the date of death (or such other period of time
as is determined by the Board) by the Employee's estate or by a
person who acquired the right to exercise the Option by bequest or
inheritance, but only to the extent that an Employee was entitled to
exercise the Option on the date of death. To the extent the Employee
was not entitled to exercise the Option on the date of death, or if the
Employee's estate, or person who acquired the right to exercise the
Option by bequest or inheritance, does not exercise such Option
(which he was entitled to exercise) within the time specified herein,
the Option shall terminate.
10. Non-Transferability of Options. An Option may not be
sold, pledged, assigned, hypothecated, transferred or disposed of in any
manner other than by will or by the laws of descent or distribution, or
pursuant to a "qualified domestic relations order" under the Code and ERISA,
and may be exercised, during the lifetime of the Optionee, only by the
Optionee.
11. Adjustments Upon Changes in Capitalization or Merger.
Subject to any required action by the stockholders of the Company, the
number of shares of Common Stock covered by each outstanding Option, and
the number of shares of Common Stock which have been authorized for
issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of an
Option, as well as the price per share of Common Stock covered by each such
outstanding Option, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a
stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in
the number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made
by the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of
stock of any class, shall affect and no adjustment by reason thereof, shall
be made with respect to the number or price of shares of Common Stock subject
to an Option.
In the event of the proposed dissolution or liquidation of the
Company, the Option will terminate immediately prior to the consummation of
such proposed action, unless otherwise provided by the Board. The Board
may, in the exercise of its sole discretion in such instances, declare that any
Option shall terminate as of a date fixed by the Board and give each Optionee
the right to exercise his Option as to all or any part of the Optioned Stock,
including Shares as to which the Option would not otherwise be exercisable.
In the event of a proposed sale of all or substantially all of the assets of
the Company, or the merger of the Company with or into another corporation, the
Option shall be assumed or an equivalent option shall be substituted by such
successor corporation or a parent or subsidiary of such successor corporation,
unless the Board determines, in the exercise of its sole discretion and in
lieu of such assumption or substitution, that the Optionee shall have the
right to exercise the option as to all of the Optioned Stock, including
Shares as to which the Option would not otherwise be exercisable. If the
Board makes an Option fully exercisable in lieu of assumption or substitution
in the event of a merger of sale of assets, the Board shall notify the
Optionee that the Option shall be fully exercisable for a period of sixty (60)
days from the date of such notice (but not later than the expiration of the term
of the Option under the Option Agreement), and the Option will terminate upon
the expiration of such period.
12. Time of Granting Options. The date of grant of an Option
shall, for all purposes, be the date on which the Board makes the
determination granting such Option. Notice of the determination shall be
given to each Employee to whom an Option is so granted within a reasonable
time after the date of such grant.
13. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may
amend or terminate the Plan from time to time in such respects as the
Board may deem advisable; provided, however, that the following
revisions or amendments shall require approval of the Stockholders of
the Company, to the extent required by law, rule or regulation:
(i) Any material increase in the number of
Shares subject to the Plan, other than in connection with an
adjustment under Section 11 of the Plan;
(ii) Any material change in the designation of the
Employees eligible to be granted Options; or
(iii) Any material increase in the benefits
accruing to participants under the Plan.
(b) Effect of Amendment or Termination. Any such
amendment or termination of the Plan shall not affect Options already
granted and such Options shall remain in full force and effect as if
this Plan had not been amended or terminated, unless mutually agreed
otherwise between the Optionee and the Board, which agreement must
be in writing and signed by the Optionee and the Company.
14. Conditions Upon Issuance of Shares. Shares shall not be
issued pursuant to the exercise of an Option unless the exercise of such Option
and the issuance and delivery of such Shares pursuant thereto shall comply
with all relevant provisions of law, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon
which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company
may require the person exercising such Option to represent and warrant at the
time of any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such Shares
if, in the opinion of counsel for the company, such a representation is
required by any of the aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the
Company's counsel to be necessary to the lawful issuance and sale of any
Shares hereunder, shall relieve the Company of any liability in respect of the
failure to issue or sell such Shares as to which such requisite authority shall
not have been obtained.
In the case of an Incentive Stock Option, any Optionee who
disposes of Shares of Common Stock acquired upon the exercise of an Option
by sale or exchange (a) either within two (2) years after the date of the grant
of the Option under which the Common Stock was acquired or (b) within one
(1) year after the acquisition of such Shares of Common Stock shall notify the
Company of such disposition and of the amount realized upon such
disposition.
15. Reservation of Shares. The Company will at all times
reserve and keep available such number of Shares as shall be sufficient to
satisfy the requirements of the Plan.
16. Option Agreement. Options shall be evidenced by Stock
Option Agreements in such form as the Board shall approve.
17. Withholding Taxes. Subject to Section 4(b)(x) of the Plan
and prior to the Tax Date, the Optionee may make an irrevocable election to
have the Company withhold from those Shares that would otherwise be
received upon the exercise of any Option, a number of Shares having a Fair
Market Value equal to the minimum amount necessary to satisfy the
Company's federal, state, local and foreign tax withholding obligations and
FICA and FUTA obligations with respect to the exercise of such Option by
the Optionee.
An Optionee who is also an officer of the Company must
make the above described election:
(a) at least six months after the date of grant of the
Option (except in the event of death or disability); and
(b) either:
(i) six months prior to the Tax Date, or
(ii) prior to the Tax Date and during the period
beginning on the third business day following the date the
Company releases its quarterly or annual statement of sales
and earnings and ending on the twelfth business day following
such date.
18. Miscellaneous Provisions.
(a) Plan Expense. Any expense of administering this
Plan shall be borne by the Company.
(b) Use of Exercise Proceeds. The payment received
from Optionees from the exercise of Options shall be used for the
general corporate purposes of the Company.
(c) Construction of Plan. The place of administration of
the Plan shall be in the State of Arizona, and the validity,
construction, interpretation, administration and effect of the Plan and
of its rules and regulations, and rights relating to the Plan, shall be
determined in accordance with the laws of the State of Arizona
without regard to conflict of law principles and, where applicable, in
accordance with the Code.
(d) Taxes. The Company shall be entitled if necessary or
desirable to pay or withhold the amount of any tax attributable to the
delivery of Common Stock under the Plan from other amounts
payable to the Employee after giving the person entitled to receive
such Common Stock notice as far in advance as practical, and the
Company may defer making delivery of such Common Stock if any
such tax may be pending unless and until indemnified to its
satisfaction.
(e) Indemnification. In addition to such other rights of
indemnification as they may have as members of the Board, the
members of the Board shall be indemnified by the Company against
all costs and expenses reasonably incurred by them in connection with
any action, suit or proceeding to which they or any of them may be
party by reason of any action taken or failure to act under or in
connection with the Plan or any Option, and against all amounts paid
by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Company) or paid by
them in satisfaction of a judgment in any such action, suit or
proceeding, except a judgment based upon a finding of bad faith;
provided that upon the institution of any such action, suit or
proceeding a Board member shall, in writing, give the Company
notice thereof and an opportunity, at its own expense, to handle and
defend the same before such Board member undertakes to handle and
defend it on her or his own behalf.
(f) Gender. For purposes of this Plan, words used in the
masculine gender shall include the feminine and neuter, and the
singular shall include the plural and vice versa, as appropriate.
(g) No Employment Agreement. The Plan shall not
confer upon any Optionee any right with respect to continuation of
employment with the Company, nor shall it interfere in any way with
his right or the Company's right to terminate his employment at any
time.
-4-
Exhibit B
TELESOFT CORP.
1996 RESTRICTED STOCK PLAN
1. Purposes of the Plan. The purposes of this 1996 Restricted
Stock Plan are to provide additional incentive to employees and others who
provide services to the Company to achieve financial results aimed at
increasing stockholder value and to attract and retain the best available
personnel for positions of responsibility within the Company through the grant
of restricted shares of the Company's Common Stock.
2. Definitions. As used herein, the following definitions shall
apply:
(a) "Award" shall mean a grant of one or more shares of
Restricted Stock.
(b) "Board" shall mean the Board of Directors of the
Company or, when appropriate, the Committee administering the
Plan, if one has been appointed.
(c) "Code" shall mean the Internal Revenue Code of
1986, as amended, and the rules and regulations promulgated
thereunder.
(d) "Common Stock" shall mean the common stock of
the Company described in the Company's Articles of Incorporation, as
amended.
(e) "Company" shall mean TELESOFT CORP., an
Arizona corporation, and shall include any parent or subsidiary
corporation of the Company as defined in Sections 425(e) and (f),
respectively, of the Code.
(f) "Committee" shall mean the Committee appointed by
the Board in accordance with paragraph (a) of Section 4 of the Plan,
if one is appointed.
(g) "Employee" shall mean any person, including
salaried officers and directors, employed by the Company.
(h) "Exchange Act" shall mean the Securities Exchange
Act of 1934, as amended.
(i) "Fair Market Value" shall mean, with respect to the
date a given Award is granted, the value of the Common Stock
determined by the Board in such manner as it may deem equitable for
Plan purposes; provided, however, that where there is a public market
for the Common Stock, the Fair Market Value per Share shall be the
mean of the bid and asked prices of the Common Stock on the date of
grant, as reported in the Wall Street Journal, or, if not so reported, as
otherwise reported in the National Association of Securities Dealers
Automated Quotation System ("Nasdaq"), or, in the event the
Common Stock is listed on the New York Stock Exchange, the
American Stock Exchange, the Nasdaq National Market or the
Nasdaq SmallCap Market, the Fair Market Value per Share shall be
the closing price on the relevant Nasdaq market or exchange on the
date of grant of the Award, as reported in the Wall Street Journal.
(j) "Grantee" shall mean an employee or other
individual who provides services to the Company who has been
granted one or more shares of Restricted Stock.
(k) "Parent" shall mean a "parent corporation," whether
now or hereafter existing, as defined in Section 425(e) of the Code.
(l) "Plan" shall mean this 1996 Restricted Stock Plan.
(m) "Restricted Stock" shall mean Common Stock, issued
and outstanding, restricted as to transfer and subject to a substantial
risk of forfeiture.
(n) Share" shall mean a share of the Common Stock, as
adjusted in accordance with Section 8 of the Plan.
(o) "Stock Purchase Agreement" shall mean the written
agreement between the Company and the Grantee relating to the grant
of an Award.
(p) "Subsidiary" shall mean a "subsidiary corporation,"
whether now or hereafter existing, as defined in Section 425(f) of the
Code.
(q) "Tax Date" shall mean the date a Grantee is required
to pay the Company an amount with respect to tax withholding
obligations in connection with an Award.
3. Common Stock Subject to the Plan. Subject to the
provisions of Section 8 of the Plan, the maximum aggregate number of shares
of Common Stock which may be granted under the Plan may be determined by
the Board of Directors, for issuance as part of the total Shares reserved under
the 1996 Incentive Stock Option Plan. The Shares may be authorized, but
unissued, or previously issued Shares acquired by the Company and held in
treasury. If Restricted Stock is forfeited, the forfeited Shares shall,
unless the Plan shall have been terminated, be available for future grants
under the Plan.
4. Administration of the Plan.
(a) Procedure.
(i) The Plan shall be administered by the Board
in accordance with Rule 16b-3 under the Exchange Act
("Rule 16b-3"); provided, however, that the Board may
appoint a Committee to administer the Plan at any time or
from time to time, and, provided further, that if the Board is
not "disinterested" within the meaning of Rule 16b-3, the Plan
shall be administered by a Committee in accordance with
Rule 16b-3.
(ii) Once appointed, the Committee shall
continue to serve until otherwise directed by the Board. From
time to time the Board may increase the size of the Committee
and appoint additional members thereof, remove members
(with or without cause), appoint new members in substitution
therefor, and fill vacancies however caused: provided,
however, that at no time may any person serve on the
Committee if that person's membership would cause the
Committee not to satisfy the "disinterested administration"
requirements of Rule 16b-3.
(b) Powers of the Board. Subject to the provisions of
the Plan, the Board shall have the authority, in its discretion: (i) to
grant Restricted Stock; (ii) to determine, upon review of relevant
information and in accordance with Section 2 of the Plan, the Fair
Market Value of the Common Stock; (iii) to determine the Employees
and other individuals who provide services to the Company to whom,
and the time or times at which, Restricted Stock shall be granted and
the number of Shares to be represented by each Award; (iv) to
interpret the Plan; (v) to prescribe, amend and rescind rules and
regulations relating to the Plan; (vi) to determine the terms and
provisions of each Award granted (which need not be identical) and,
with the consent of the Grantee thereof, modify or amend each Award;
(vii) to accelerate or defer (with the consent of the Grantee) the date of
any Award; (viii) to authorize any person to execute on behalf of the
Company any instrument required to effectuate the grant of an Award
previously granted by the Board; (ix) to accept or reject the election
made by a Grantee pursuant to Section 14 of the Plan; and (x) to
make all other determinations deemed necessary or advisable for the
administration of the Plan.
(c) Effect of Board's Decision. All decisions,
determinations and interpretations of the Board shall be final and
binding on all Grantees and any other holders of any Restricted Stock
granted under the Plan.
5. Eligibility. Consistent with the Plan's purposes, Restricted
Stock may be granted only to Employees and other individuals who provide
services to the Company as determined by the Board. An Employee or other
individual who provides services to the Company who has been granted
Restricted Stock may, if he is otherwise eligible, be granted additional
Restricted Stock.
6. Stockholder Approval and Effective Dates. The Plan
became effective upon approval by the Board. No Award may be granted
under the Plan after April 14, 2006. The grant of any Restricted Stock under
the Plan is effective only upon approval of the Plan by the Shareholders.
7. Restricted Stock.
(a) Awards. The Committee may award Restricted
Stock to any Employee or other individual who provides services to
the Company. Each certificate for Restricted Stock shall be registered
in the name of the Grantee and deposited by him, together with a stock
power endorsed in blank, with the Company. Restricted Stock shall
be awarded by a signed written agreement containing such terms and
conditions as the Board may determine. At the time of an award there
shall be established a restriction period of such length as shall be
determined by the Board. Shares of Restricted Stock shall not be
sold, assigned, transferred, pledged or otherwise encumbered, except
as hereinafter provided, during the restriction period. Except for such
restrictions on transfer, the Grantee as owner of such shares of
Restricted Stock shall have all the rights of a holder of Common
Stock. At the expiration of the restriction period, the Company shall
redeliver to the Grantee (or his legal representative or designated
beneficiary) the Restricted Stock deposited pursuant to this paragraph
7.
(b) Termination. If a Grantee ceases to be an Employee
or to provide services to the Company with the consent of the Board,
or upon his death, retirement or total and permanent disability, the
restriction imposed under paragraph 7(a) shall lapse with respect to
such number of shares of Restricted Stock theretofore awarded to him
as shall be determined by the Board.
8. Adjustments Upon Changes in Capitalization or Merger.
Subject to any required action by the stockholders of the Company, the
number of shares of Common Stock which have been authorized for issuance
under the Plan but as to which no Award has yet been granted or which have
been returned to the Plan upon cancellation, shall be proportionately adjusted
for any increase or decrease in the number of issued shares of Common Stock
resulting from a stock split, reverse stock split, stock dividend, combination
or reclassification of the Common Stock, or any other increase or decrease in
the number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of
stock of any class, shall affect and no adjustment by reason thereof, shall
be made with respect to the number or price of shares of Common Stock subject
to the Plan.
9. Time of Granting Restricted Stock. The date of grant of
Restricted Stock shall, for all purposes, be the date on which the Board makes
the determination granting such Restricted Stock. Notice of the determination
shall be given to each Employee or other individual who provides services to
the Company to whom an Award is so granted within a reasonable time after
the date of such grant.
10. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may
amend or terminate the Plan from time to time in such respects as the
Board may deem advisable; provided, however, that the following
revisions or amendments shall require approval of the shareholders of
the Company, to the extent required by law, rule or regulation:
(i) Any material increase in the number of
Shares subject to the Plan, other than in connection with an
adjustment under Section 8 of the Plan;
(ii) Any material change in the designation of the
Employees or other individuals who provide services to the
Company eligible to be granted Restricted Stock; or
(iii) Any material increase in the benefits
accruing to participants under the Plan.
(b) Effect of Amendment or Termination. Any such
amendment or termination of the Plan shall not affect Restricted Stock
already granted and such Restricted Stock shall remain in full force
and effect as if this Plan had not been amended or terminated, unless
mutually agreed otherwise between the Grantee and the Board, which
agreement must be in writing and signed by the Grantee and the
Company.
11. Conditions Upon Issuance of Shares. Shares shall not be
issued pursuant to this Plan unless the issuance and delivery of such Shares
pursuant thereto shall comply with all relevant provisions of law, including,
without limitation, the Securities Act of 1933, as amended, the Exchange Act,
the rules and regulations promulgated thereunder, and the requirements of any
stock exchange upon which the Shares may then be listed, and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the grant of Restricted Stock the Company
may require the Grantee to represent and warrant at the time of any such grant
that the Shares are being acquired only for investment and without any present
intention to sell or distribute such Shares if, in the opinion of counsel for
the Company, such a representation is required by any of the aforementioned
relevant provisions of law.
Inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the
Company's counsel to be necessary to the lawful issuance and sale of any
Shares hereunder, shall relieve the Company of any liability in respect of the
failure to issue or sell such Shares as to which such requisite authority shall
not have been obtained.
12. Reservation of Shares. The Company will at all times
reserve and keep available such number of Shares as shall be sufficient to
satisfy the requirements of the Plan.
13. Purchase Agreement. Awards of Restricted Stock shall be
evidenced by Stock Purchase Agreements in such form as the Board shall
approve.
14. Withholding Taxes. Subject to Section 4(b)(ix) of the Plan
and prior to the Tax Date, the Grantee may make an irrevocable election to
have the Company withhold from those Shares that would otherwise be
received upon the grant, a number of Shares having a Fair Market Value equal
to the minimum amount necessary to satisfy the Employee's portion of the
Company's federal, state, local and foreign tax withholding obligations and
FICA and FUTA obligations with respect to the grant of Restricted Stock to
the Grantee.
A Grantee who is also an officer of the Company must make
the above described election:
(a) at least six months after the date of grant of the
Restricted Stock (except in the event of death or disability); and
(b) either:
(i) six months prior to the Tax Date, or
(ii) prior to the Tax Date and during the period
beginning on the third business day following the date the
Company releases its quarterly or annual statement of sales
and earnings and ending on the twelfth business day following
such date.
15. Miscellaneous Provisions.
(a) Plan Expense. Any expense of administering this
Plan shall be borne by the Company.
(b) Construction of Plan. The place of administration of
the Plan shall be in the State of Arizona, and the validity,
construction, interpretation, administration and effect of the Plan and
of its rules and regulations, and rights relating to the Plan, shall be
determined in accordance with the laws of the State of Arizona
without regard to conflict of law principles and, where applicable, in
accordance with the Code.
(c) Taxes. The Company shall be entitled if necessary or
desirable to pay or withhold the amount of any tax attributable to the
delivery of Common Stock under the Plan from other amounts
payable to the Grantee after giving the person entitled to receive such
Common Stock notice as far in advance as practical, and the
Company may defer making delivery of such Common Stock if any
such tax may be pending unless and until indemnified to its
satisfaction.
(d) Indemnification. In addition to such other rights of
indemnification as they may have as members of the Board, the
members of the Board shall be indemnified by the Company against
all costs and expenses reasonably incurred by them in connection with
any action, suit or proceeding to which they or any of them may be
party by reason of any action taken or failure to act under or in
connection with the Plan or any Restricted Stock, and against all
amounts paid by them in settlement thereof (provided such settlement
is approved by independent legal counsel selected by the Company) or
paid by them in satisfaction of a judgment in any such action, suit or
proceeding, except a judgment based upon a finding of bad faith;
provided that upon the institution of any such action, suit or
proceeding a Board member shall, in writing, give the Company
notice thereof and an opportunity, at its own expense, to handle and
defend the same before such Board member undertakes to handle and
defend it on her or his own behalf.
(e) Gender. For purposes of this Plan, words used in the
masculine gender shall include the feminine and neuter, and the
singular shall include the plural and vice versa, as appropriate.
(f) No Employment Agreement. The Plan shall not
confer upon any Grantee any right with respect to continuation of
employment with the Company, nor shall it interfere in any way with
his right or the Company's right to terminate his employment at any
time.
-8-
Exhibit 11; Earnings per common and common equivalent shares
Earnings per common and common equivalent share is calculated as follows:
November 30
1996 1995
Earnings per common and common equivalent shares:
Net income $ 776,577 $ 1,145,792
Weighted average number of shares outstanding 3,805,528 2,952,568
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 11,602 24,704
Weighted average number of shares and equivalent
shares 3,817,130 2,977,272
Earnings per common and common equivalent shares $ . 20 $ . 38
Earnings per common share, assuming full dilution:
Net income $ 776,577 $ 1,145,792
Weighted average number of shares outstanding 3,805,528 2,952,568
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 11,602 24,704
Common stock and common stock equivalents 3,817,130 2,977,272
Earnings per common and common equivalent share $ . 20 $ . 38
Exhibit 23; Consent of Independent Certified Accountants
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the inclusion
of our report dated January 29, 1996 on the consolidated financial statements
of Telesoft Corp. and Subsidiaries for the year ended November 30, 1995, in
the Company's Form 10-KSB for the year ended November 30, 1996.
/S/ Semple & Cooper, PLC
Phoenix, Arizona
February 27, 1997
Exhibit 10.2; Form 8-K filed February 7, 1997
Form 8-K
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Pursuant to Section 13 OR 15(d) of the Securities
Exchange Act of 1934
TELESOFT CORP.
(Exact name of small business issuer as specified in its charter)
Arizona 86-0431009
(State or other jurisdiction of (I.R.S. Employer
Identification No.)
incorporation or organization)
3216 North Third Street, Phoenix, Arizona 85012
(Address of principal executive offices)
(602) 265-6311
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since
last report)
Item 4. Changes in Registrant's Certifying
Accountants
.
In January, 1997, the Registrant, acting on the direction of its
Board of Directors, informed Semple & Cooper, P.L.C., that it
desired to obtain proposals for its November 30, 1996 audit from
a national CPA firm.
Semple & Cooper, P.L.C.'s reports on the Registrant's financial
statements for the years ended November 20, 1994 and 1995,
did not contain an adverse opinion or a disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope, or
principles. There were no disagreements with Semple & Cooper,
P.L.C. on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure
through Semple & Cooper, P.L.C.'s issuance of their report in
connection with their audit of the Registrant's financial statements
for the year ended November 30, 1995.
On February 3, 1997, the Registrant selected Coopers &
Lybrand, L.L.P. as its new independent accountants.
Item 7. Exhibits
16 Letter from Semple & Cooper regarding change in
certifying independent accountants
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 bye the undersigned hereunto duly
authorized.
Telesoft Corp.
/S/ Thierry E. Zerbib
Date: February 7, 1997 Thierry E. Zerbib
Vice President/Secretary
Exhibit 16
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen:
Effective this date, Semple & Cooper, P.L.C. is resigning as the auditor of
record of Telesoft Corp. and Subsidiary.
Sincerely,
/s/ Semple & Cooper, P.L.C.
Semple & Cooper, P.L.C.
February 3, 1997
cc: Office of the Chief Accountant
SECPS Letter File
Securities and Exchange Commission
Mail Stop 9-5
450 Fifth Street, N.W.
Washington, D.C. 20549
Exhibit 10.3; Form 8-K/A filed February 27, 1997
Form 8-K/A
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Pursuant to Section 13 OR 15(d) of the Securities
Exchange Act of 1934
TELESOFT CORP.
(Exact name of small business issuer as specified in its charter)
Arizona 86-0431009
(State or other jurisdiction of (I.R.S. Employer
Identification No.)
incorporation or organization)
3216 North Third Street, Phoenix, Arizona 85012
(Address of principal executive offices)
(602) 265-6311
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since
last report)
Item 4. Changes in Registrant's Certifying
Accountants
.
In January, 1997, the Registrant, acting on the direction of its
Board of Directors, informed Semple & Cooper, P.L.C., that it
desired to obtain proposals for its November 30, 1996 audit from
a national CPA firm.
Semple & Cooper, P.L.C.'s reports on the Registrant's financial
statements for the years ended November 30, 1994 and 1995,
did not contain an adverse opinion or a disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope, or
principles. There were no disagreements with Semple & Cooper,
P.L.C. on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure
through Semple & Cooper, P.L.C.'s issuance of their report in
connection with their audit of the Registrant's financial statements
for the year ended November 30, 1995 and through the interim
period ending January, 1997 when the registrant notified Semple
& Cooper, P.L.C of its decision to seek a new independent
accountant.
On February 3, 1997, the Registrant selected Coopers &
Lybrand, L.L.P. as its new independent accountants.
Item 7. Exhibits
16 Letter from Semple & Cooper regarding change in
certifying independent accountants
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 hereunto duly authorized.
Telesoft Corp.
/s/ Thierry E. Zerbib
Date: February 27, 1997 Thierry E. Zerbib
Vice President/Secretary
Exhibit 16
February 27, 1997
Securities and Exchange Commission
Mail Stop 9-5
Washington, D.C. 20549
Dear Sirs/Madam:
We have read and concur with Item 4 of Form 8-K/A of Telesoft Corp. (the
"Registrant") as filed with the Securities and Exchange Commission on
February 27, 1997.
Sincerely,
/s/ Semple & Cooper, P.L.C.
Semple & Cooper, P.L.C.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> NOV-30-1995 NOV-30-1996
<PERIOD-END> NOV-30-1995 NOV-30-1996
<CASH> 7,791,915 219,023
<SECURITIES> 0 3,503,332
<RECEIVABLES> 4,515,579 6,386,596
<ALLOWANCES> (156,800) (708,127)
<INVENTORY> 450,571 474,254
<CURRENT-ASSETS> 12,738,383 7,860,089
<PP&E> 1,835,320 3,349,371
<DEPRECIATION> (803,445) (1,254,419)
<TOTAL-ASSETS> 14,366,810 14,652,936
<CURRENT-LIABILITIES> 5,346,296 4,611,485
<BONDS> 0 0
0 0
0 0
<COMMON> 7,326,228 7,423,928
<OTHER-SE> 1,687,446 2,464,023
<TOTAL-LIABILITY-AND-EQUITY> 14,366,810 14,652,936
<SALES> 19,340,905 23,313,280
<TOTAL-REVENUES> 19,576,905 23,313,280
<CGS> 11,804,050 14,230,430
<TOTAL-COSTS> 17,784,844 22,434,776
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 19,410 3,122
<INCOME-PRETAX> 1,955,674 1,184,277
<INCOME-TAX> 809,882 407,700
<INCOME-CONTINUING> 1,145,792 776,577
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,145,792 776,577
<EPS-PRIMARY> .38 .20
<EPS-DILUTED> .38 .20
</TABLE>
