U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1997
SEC File No. 1-13830
TELESOFT CORP.
(Exact name of registrant as specified in its charter)
Arizona 86-
0431009
(State or other jurisdiction of (IRS
Employer
incorporation or organization)
Identification No.)
3216 North Third Street, Phoenix, Arizona 85012
(Address of principal executive offices)
(602) 265-6311
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to
such filing requirements for the past 90 days.
Yes (X) No ( )
Common Stock, without par value, 3,787,500 shares outstanding at July 14, 1997
Transitional Small Business Disclosure Format Yes ( ) No (X)
39271-1 1
<page 2>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Page
Consolidated Balance Sheets as of May 31, 1997 and
November 30, 1996 3
Consolidated Statements of Operations for the three
and six month periods ended May 31, 1997 and May 31, 1996 4
Consolidated Statements of Cash Flows for the six month periods
ended May 31, 1997 and May 31, 1996 5 -- 6
Notes to the Consolidated Financial Statements 7 -- 9
<PAGE 3>
<TABLE>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
May 31, 1997 November 30, 1996
(unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 193,424 $ 219,023
Investment securities 703,332 703,332
Accounts receivable, net of
allowance for uncollectibles
of $898,945 at May 31, 1997
and $708,127 at November 30,
1997 4,652,189 5,678,469
Inventory 524,172 474,254
Deferred taxes 613,400 234,300
Income taxes receivable 183,525 147,242
Note receivable from related party 153,814 208,635
Other 395,628 194,834
------------- ------------
Total Current Assets 7,419,484 7,860,089
Investment securities 1,500,000 2,800,000
Property and equipment, net 2,388,015 2,094,952
Computer software costs, net 533,177 605,912
Intangibles, net 1,498,140 1,136,898
Note receivable from related party 282,667 40,125
Other 161,374 114,960
------------- ------------
Total Assets $ 13,782,857 $ 14,652,936
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable-current portion $ 87,418 $ -
Accounts payable and accrued
liabilities 3,395,182 4,085,134
Deferred revenue 564,312 526,351
------------ -----------
Total Current Liabilities 4,046,912 4,611,485
Note payable 417,602 -
Deferred taxes 100,700 153,500
------------ -----------
Total Liabilities 4,565,214 4,764,985
------------ -----------
Stockholders' Equity:
Common stock, 50,000,000
shares authorized, no par value; 7,343,859 7,343,859
3,787,500 issued and outstanding
Additional paid-in capital 80,069 80,069
Retained earnings 1,793,715 2,464,023
------------ -----------
Total Stockholders' Equity 9,217,643 9,887,951
------------ -----------
Total Liabilities and
Stockholders' Equity $ 13,782,857 $ 14,652,936
============ ============
</TABLE>
The Accompanying Notes are an Intergral Part
of the Consolidated Financial Statements
<PAGE 4>
<TABLE>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
May 31, 1997 May 31,1996 May 31, 1997 May 31,1996
<S> <C> <C> <C> <C>
Sales, net $ 7,127,756 $ 5,814,238 $ 13,066,231 $ 11,049,253
Cost of sales 4,593,090 3,330,333 8,423,984 6,428,098
----------- ----------- ------------ ------------
2,534,666 2,483,905 4,642,247 4,621,155
----------- ----------- ------------ ------------
General and
administrative expenses 2,955,553 1,677,741 5,453,168 3,136,774
Settlement expense 384,138 - 384,138 -
----------- ----------- ------------ ------------
3,339,691 1,677,741 5,837,306 3,136,774
----------- ----------- ------------ ------------
(Loss) income from
operations (805,025) 806,164 (1,195,059) 1,484,381
----------- ---------- ------------ ------------
Other income (expense)
Interest income 47,047 73,790 107,856 177,591
Interest expense - (276) (116) (606)
Other 11 1,498 (14,889) 1,748
----------- ---------- ------------ ------------
47,058 75,012 92,851 178,733
----------- ---------- ------------ ------------
(Loss) income before
benefit (provision)
for income taxes (757,967) 881,176 (1,102,208) 1,663,114
Benefit (provision) for
income taxes 292,900 (378,800) 431,900 (681,200)
----------- ----------- ------------ -----------
Net (loss) income $ (465,067) $ 502,376 $ (670,308) $ 981,914
=========== =========== ============ ===========
(Loss) earnings per share
primary $ (.12) $ .13 $ (.17) $ .26
fully diluted $ (.12) $ .13 $ (.17) $ .26
Weighted average number
of shares outstanding
primary 3,854,249 3,824,193 3,848,508 3,808,688
fully diluted 3,854,249 3,875,441 3,848,508 3,854,306
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
<PAGE 5>
<TABLE>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six month periods ended May 31, 1997 and 1996 (unaudited)
<CAPTION>
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 13,973,949 $ 11,699,348
Cash paid to suppliers and employees (14,401,610) (11,833,900)
Interest paid (116) (606)
Interest received 61,461 150,023
Income taxes paid (36,283) (1,032,846)
-------------- ------------
Net cash used by operating activities (402,599) (1,017,981)
-------------- ------------
Cash flows from investing activities:
Purchase of property and equipment (746,447) (681,069)
Computer software costs - (184,459)
Disbursement for notes receivable
from related parties (345,577) -
Collection of notes receivable from
related parties 169,024 -
Payments for purchase of GoodNet, LLC,
net of cash acquired, and purchase
of customer base - (102,515)
Purchase of investment securities (200,000) -
Sale of investment securities 1,500,000 -
----------- -----------
Net cash provided (used) by investing
activities 377,000 (1,017,981)
------------ ------------
Cash flows from financing activities:
Payment of notes payable - (5,268)
----------- ------------
Net cash used by financing activities - (5,268)
----------- ------------
Net decrease in cash and cash equivalents (25,599) (1,991,292)
Cash and cash equivalents at beginning
of period 219,023 7,791,915
----------- -----------
Cash and cash equivalents at end of
period $ 193,424 $ 5,800,623
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
<PAGE 6>
<TABLE>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six month period ended May 31, 1997 and 1996 (unaudited)
<CAPTION>
1997 1996
<S> <C> <C>
Reconciliation of Net (Loss) Income to
Net Cashd Used By Operating Activities
Net (Loss) Income $ (670,308) $ 981,914
Adjustments to reconcile net (loss)
income to net cash used by operating
activities:
Depreciation and amortization 669,897 226,912
Interest income included with note
receivable from related party (11,168) -
Changes in Assets and Liabilities:
Accounts receivable 1,026,280 708,380
Inventory (49,918) (198,645)
Other current assets (200,794) (264,996)
Deferred taxes (431,900) 11,800
Other assets (46,414) (133,816)
Accounts payable and accrued
liabilities (689,952) (1,873,300)
Deferred revenue 37,961 (112,784)
Income taxes payable - (363,446)
Income taxes receivable (36,283) -
267,709 (1,017,981)
------------- ---------------
Net cash used by operating activities $ (402,599) $ (1,017,981)
============= ==============
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
During the six month period ended May 31, 1997, the Company financed a
convenant not to compete in the amount of $505,020.
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
<PAGE 7>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the three and six month periods ended May 31, 1997 and 1996 (unaudited)
1. Summary of Significant Accounting Policies:
Principles of Consolidation:
The consolidated financial statements include the accounts of Telesoft Corp.,
together with its wholly owned subsidiary, Telesoft Acquisition Corp and
a 75% owned subsidiary, Telesoft Acquisition Corp II (the Company). All
significant intercompany accounts and transactions have been eliminated.
Basis of Presentation:
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310
of Regulation SB. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
audited year-end financial statements. In the opinion of management, all
adjustments for normal recurring accruals considered necessary for a fair
presentation have been included. Operating results for the three and six
month periods ended May 31, 1997 are not necessarily indicative of the results
that may be expected for the year ending November 30, 1997. The unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in the
Company's Form 10KSB/A for the year ended November 30, 1996.
2. Stock Option Plans:
During the six month period ended May 31, 1997, the Company granted 20,000
options with an exercise price of $3.125 per share and 5,000 options with an
exercise price of $4.00 per share to Company employees.
3. Note Payable:
At May 31, 1997, note payable consists of:
Note payable to an individual in 60 monthly
installments of $10,000, less imputed interest at 7%
of $94,980, beginning June 15, 1997; in payment for
a covenant not to compete (See Note 5) $ 505,020
less: current portion (87,418)
---------
$ 417,602
=========
Future minimum principal payments due on the note payable are as follows:
Year Ending
May 31
1998 $ 87,418
1999 93,737
2000 100,514
2001 107,780
2002 115,571
-----------
Total $ 505,020
===========
<PAGE 8>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the three and six month periods ended May 31, 1997 and 1996 (unaudited)
3. Note Payable (continued):
The Company has available a $1,000,000 operating line of credit, expiring
April 15, 1998. Interest is payable monthly at the bank's prime rate, plus
one-half percent. The line of credit is collateralized by various corporate
assets and requires compliance with various loan covenants. As of May 31,
1997, there were no balances outstanding on this operating line of credit.
4. Note Receivable From Related Party
At May 31, 1997, the Company has an outstanding 6% note receivable from the
president of a subsidiary company in the amount of $282, including accrued
interest. The note, including accrued interest, is due in May 2002.
5. Agreements:
On March 12, 1997, the Company entered into an agreement, effective February
28, 1997, with the former owners of GoodNet, LLC (GoodNet) whereby the
Company agreed to the following:
1) The Company agreed to pay one of the former owners an additional
$393,638 in exchange for the return and relinquishment of all of that
owner's claims to the Company's common stock, issued or contingently
issuable in conjunction with the purchase of GoodNet's assets in 1996.
2) The former owner agreed to repay the Company $57,500.
3) The Company agreed to pay the former owner $10,000 per month,
commencing June 15, 1997, for a period of five years in exchange for
a convenant not to compete.
4) The Company agreed to pay $48,000 to other former owners of GoodNet in
exchange for the assignment of their interest in GoodNet.
The above transaction has resulted in a $384,138 settlement expense during the
three month period ended May 31, 1997. Additionally, the Company has included
in intangibles the cost of the convenant not to compete ($505,020) and a
corresponding note payable.
Effective May 31, 1997, the Company entered into an agreement with the
remaining former owner of GoodNet to exchange a 25% interest in Telesoft
Acquisition Corp II (fomerly a wholly owned subsidiary, dba GoodNet) for the
return of the Company's stock issued and rights to receive contingently
issuable stock in conjunction with the purchase of GoodNet in 1996. Under
terms of the agreement, the remaining former owner of GoodNet agreed to repay
the Company $57,500, plus accrued interest, which the former owner received
in conjunction with the purchase of GoodNet in 1996.
<PAGE 9>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the three and six month periods ended May 31, 1997 and 1996 (unaudited)
6. Commitments:
Telesoft Acquisition Corp. II dba GoodNet, a 75% owned subsidiary of the
Company, has entered into an operating lease agreement for broadband service
with a provider of its ATM services. Under the terms of the agreement, the
Company is required to maintain minimum service levels of approximately
$45,000 per month with the provider through March 2001. The Company currently
has approximately $140,000 in monthly charges from this provider during the
quarter ended May 31, 1997.
GoodNet has also entered into an operating lease agreement for broadband
service with another ATM provider. Under the terms of this agreement, the
Company is committed to pay $135,000 per month beginning November 1, 1998 and
$267,000 per month from May 1, 2000 through April 30, 2002.
7. Accounting Pronouncement:
In February 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 128, Earnings Per Share (SFAS 128). SFAS 128
specifies the computation, presentation and disclosure requirements for
earnings per share and is effective for financial statements issued for
periods ending after December 15, 1997. Pursuant to the provisions of SFAS
128, the Company's net loss (income) per share would have been as follows:
<TABLE>
<CAPTION>
Three Month Six Month
Period Ended Period Ended
May 31, 1997 May 31, 1996 May 31, 1997 May 31, 1996
<S> <C> <C> <C> <C>
Basic (loss) earnings per share:
Net (Loss) income $ (465,067) $ 502,376 $ (670,308) $ 981,914
Weighted average number
of shares outstanding 3,818,333 3,797,889 3,818,333 3,787,500
(Loss) earnings per share $ (.12) $ .13 $ (.18) $ .26
Diluted (loss) earnings per share:
Net (loss) income $ (465,067) $ 502,376 $ (607,308) $ 981,914
Weighted average number
of shares outstanding 3,818,333 3,797,889 3,818,333 3,787,500
Net effect of dilutive 35,916 77,552 30,175 66,806
stock options based on
the treasury stock method
using the average market price
Common stock including
assumed conversions 3,854,249 3,875,441 3,848,508 3,854,306
(Loss) earnings per share $ (.12) $ .13 $ (.17) .26
<PAGE 10>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Results of Operations for the six months ended May 31, 1997 and 1996
Revenues increased by 18.3% to $13,066,231 for the six months ended May 31,
1997 compared to $11,049,253 for the six months ended May 31, 1996. The
Company's revenue is derived from four principal product lines and services:
STS Outsourcing Programs (STS), System Sales and Maintenance, Customized
Billing Outsourcing Services and GoodNet.
STS revenues were approximately $8,269,000 for the six months ended May 31,
1997 compared to $8,111,000 for the six months ended May 31, 1996. Revenues
from System Sales were $1,895,000 for the six months ended May 31, 1997
compared to $2,509,000 for the six months ended May 31, 1996, a decrease of
24.5%. This decrease was mainly attributable to delays in the release of
TelMaster, the "Client/Server" and "Graphical User Interface" environment
version of the Company's existing text-based telemanagement software modules.
See "Future Expectations" below. For both the six months ended May 31, 1997
and May 31, 1996, revenues from Customized Billing Outsourcing Services were
approximately $310,000. During the six months ended May 31, 1997, GoodNet
contributed revenues of $1,325,000 and $1,267,000 from its dial-up and
Asynchronous Transfer Mode Backbone (ATM) products, respectively. GoodNet,
acquired in April 1996, contributed revenues of approximately $123,000
during the six months ended May 31, 1996.
Total gross profit increased to $4,642,247 for the six months ended May 31,
1997 compared to $4,621,155 for the six months ended May 31, 1996. Cost of
goods sold was approximately 73% of STS Outsourcing Program revenues for the
six months May 31, 1997, comparable with the six months ended May 31, 1996.
Cost of goods sold as a percentage of System Sale revenues was approximately
21% for the six months ended May 31, 1997 and 20% for the six months ended
May 31, 1996. Cost of goods sold for GoodNet's dial-up business was
approximately 32% while ATM cost of goods exceeded ATM revenue by
approximately $285,000 as anticipated.
Operating expenses increased by 86%, or $2,700,532, for the six months ended
May 31, 1997 to $5,837,306 from $3,136,774 for the six months ended May 31,
1996. This was primarily due to the acquisition of the GoodNet division,
which contributed $1,904,00 in recurring operating expenses during the six
months ended May 31, 1997 compared to $155,000 during the six months ended
May 31, 1996. Current operating expenses include a charge of approximately
$385,000 in connection with an agreement with the former owners of GoodNet,
LLC. See Note 5 to the financial statements. There were increases in the
number of employees hired for sales and marketing, and customer support,
representing approximately $275,000 of the remaining increase. Additionally,
there was no capitalization of software development expenditures during the
six month period ended May 31, 1997. During the six month period ended May
31, 1996, approximately $185,000 was capitalized.
The Company realized a $670,308 net loss for the six months ended May 31, 1997
compared to net income of $981,914 for the six months ended May 31, 1996. This
is primarily attributable to an approximate $1,667,000 operating loss realized
by GoodNet, including the $385,000 GoodNet settlement expense and an operating
loss of $259,000 caused by lower System Sales revenue.
<PAGE 11>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND OPERATIONS (CONTINUED)
</TABLE>
<TABLE>
Results of Operations by Product Line for the six months ended May 31, 1997
with comparative totals for the six months ended May 31, 1996
<CAPTION>
Total for the
System Sales/ Customized GoodNet GoodNet six months ended
STS Maintenance Billing Dial-Up ATM Total May 31, 1996
<S> <C> <C> <C> <C> <C> <C> <C>
Sales, Net $ 8,268,643 $ 1,894,856 $ 310,067 $ 1,325,599 $ 1,267,066 $ 13,066,231 $ 11,049,253
------------ -------------- ---------- ----------- ----------- ------------ ------------
Cost of Sales 6,047,113 405,753 - 282,669 1,397,472 8,133,007 6,400,548
Cost of Sales,
Depreciation - - - 136,263 154,714 290,977 27,550
------------ -------------- ----------- ---------- ----------- ------------ ------------
6,047,113 405,753 - 418,932 1,552,186 8,423,984 6,428,098
------------ -------------- ----------- ---------- ----------- ------------ ------------
Gross Profit 2,221,530 1,489,103 310,067 906,667 (285,120) 4,642,247 4,621,155
General & Administrative
Expenses:
General 1,445,245 1,535,482 92,999 473,463 1,099,062 4,646,251 2,745,872
Settlement - - - 384,138 - 384,138 -
Depreciation 62,530 117,558 - - 4,610 184,698 146,100
Amortization - 4,167 - 69,469 70,142 143,778 7,506
Bad Debt 121,128 114 - 80,000 50,000 251,242 60,033
Corporate
Allocations:
General 58,329 58,329 3,535 19,443 37,119 176,755 131,507
Depreciation 16,647 32,788 - - 1,009 50,444 45,756
--------- -------------- ---------- ----------- ----------- ------------- ------------
1,703,879 1,748,438 96,534 1,026,513 1,261,702 5,837,308 3,136,774
--------- -------------- ---------- ----------- ----------- ------------- ------------
(Loss) Income
from Operations 517,651 (259,335) 213,533 (119,846) (1,547,062) (1,195,059) 1,484,381
Other Income 92,851 178,733
------------- ------------
Pretax (Loss) Income (1,102,208) 1,663,114
Income Tax Benefit (Provision) 431,900 (681,200)
------------- ------------
Net (Loss) Income $ (670,308) $ 981,914
============== ===========
Primary (Loss) Earnings
per share $ (.17) $ .26
</TABLE>
Results of Operations for the three months ended May 31, 1997 and 1996
Revenues increased by 22.6% to $7,127,756 for the three months ended May 31,
1997 compared to $5,814,238 for the three months ended May 31, 1996. STS
Outsourcing Program revenues were approximately $4,201,000 for the three
months ended May 31, 1997 compared to $4,079,000 for the three months ended
May 31, 1996. Revenues from System Sales were $1,274,000 for the three
months ended May 31, 1997 compared to $1,449,000 for the three months ended
May 31, 1996, a decrease of 12%. Revenues from Customized Billing Outsourcing
Services were $142,000 for the three months ended May 31, 1997 compared with
$164,000 for the three months ended May 31, 1996. During the three months
ended May 31, 1997, GoodNet contributed revenues of $752,000 and $759,000
from its dial-up and ATM products, respectively. This represents a 39.6%
increase over the first quarter of 1997. During the three months ended May
31, 1996, GoodNet contributed revenues of approximately $123,000.
Total gross profit increased to $2,534,666 for the three months ended May 31,
1997 compared to $2,483,905 for the three months ended May 31, 1996. Cost of
goods sold was approximately 74% of STS Outsourcing Program revenues for the
three months May 31, 1997, compared with 73% for the three months ended May
31, 1996. Cost of goods sold as a percentage of System Sale revenues was
approximately 23% for the three months ended May 31, 1997 and May 31, 1996.
Cost of goods sold for GoodNet's dial-up business was approximately 32.5%
while ATM cost of goods exceeded ATM revenue by approximately $200,000 as
anticipated.
<PAGE 12>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND OPERATIONS (CONTINUED)
Operating expenses increased by 99%, or $1,661,950 for the three months ended
May 31, 1997 to $3,339,691 from $1,677,741 for the three months ended May 31,
1996. This was primarily due to the acquisition of the GoodNet division, which
contributed $1,105,000 in recurring operating expenses during the three months
ended May 31, 1997 compared to $155,000 during the three months ended May 31,
1996. Current operating expenses include the settlement charge of
approximately $385,000. (See Note 5 to the financial statements).
Additionally, there was no capitalization of software development expenditures
during the three month period ended May 31, 1997. During the three month
period ended May 31, 1996, approximately $90,000 was capitalized.
The Company realized a $465,067 net loss for the three months ended May 31,
1997 compared to net income of $502,376 for the three months ended May 31,
1996. This is primarily attributable to an approximate $1,180,000 operating
loss realized by GoodNet, including the $385,000 settlement expense.
<TABLE>
Results of Operations by Product Line for the three months ended May 31, 1997
with comparative totals for the three months ended May 31, 1996
<CAPTION>
Total for the
System Sales/ Customized GoodNet GoodNet six months ended
STS Maintenance Billing Dial-Up ATM Total May 31,1996
<S> <C> <C> <C> <C> <C> <C> <C>
Sales, Net $ 4,200,662 $ 1,274,141 $ 142,173 $ 751,800 $ 758,980 $ 7,127,756 $ 5,814,238
------------ -------------- ---------- ----------- ----------- ------------ ------------
Cost of Sales 3,097,975 292,751 - 167,992 875,434 4,434,152 3,302,783
Cost of Sales,
Depreciation - - - 75,551 83,387 158,938 27,550
------------ -------------- ---------- ----------- ----------- ------------ ------------
3,097,975 292,751 - 243,543 958,821 4,523,090 3,330,333
------------ -------------- ---------- ----------- ----------- ------------ ------------
Gross Profit 1,102,687 981,390 142,173 508,257 (199,841) 2,534,666 2,483,905
------------ -------------- ---------- ----------- ----------- ------------ ------------
General & Administrative
Expenses:
General 725,049 824,054 44,334 263,427 640,861 2,497,725 1,517,615
Settlement - - - 384,138 - 384,138 -
Depreciation 31,330 50,055 - - 2,479 92,864 64,251
Amortization - 2,084 - 40,327 40,000 82,411 5,423
Bad Debt 61,520 114 - 80,000 - 141,634 13,018
Corporate
Allocations:
General 36,754 37,771 2,131 13,382 23,897 113,935 53,298
Depreciation 8,675 17,844 - - 465 26,984 24,136
------------ -------------- ---------- ----------- ----------- ------------ ------------
863,328 940,922 46,465 781,274 707,702 3,339,691 1,677,741
------------ -------------- ---------- ----------- ----------- ------------ ------------
(Loss) Income
from Operations 239,359 40,468 95,708 (273,017) (907,543) (805,025) 806,164
Other Income 47,058 75,012
------------ ------------
Pretax (Loss) Income (757,967) 881,176
Benefit (Provision) for Income taxes 292,900 (378,800)
------------ ------------
Net (Loss) Income $ (465,067) $ 502,376
============ ============
Primary (Loss) Earnings
per share $ (.12) $ .13
============ ============
Cash & Investment Securities per share $ .62 $ 1.52
============ ============
Book Value per share $ 2.41 $ 2.65
============ ============
</TABLE>
<PAGE 13>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND OPERATIONS (CONTINUED)
Future Expectations
STS revenues are expected to increase in the fourth quarter of 1997. As a
result of a stronger than expected backlog, the Company expects an increase
in gross revenue and gross profit in the fourth quarter of 1997 and continuing
into 1998.
The Company expects revenues from Customized Billing Services to increase
starting in the third quarter of 1997 and thereafter based on existing
proposals outstanding; however, it is not possible to ascertain the amount of
such increase until actual contracts are in place.
The Company has experienced delays in the release and installation of certain
modules of TelMaster the "Client/Server" and "Graphical User Interface"
environment version of the Company's existing text-based telemanagement
software modules. Certain modules of this product were released in the third
quarter of 1996, and installations have been completed in the second quarter
of 1997. Other modules are scheduled for release in the third and fourth
quarters of 1997. Due to persisting delays, the Company does not expect
significant increases in system sales from the TelMaster product until the
third quarter of 1998.
GoodNet is comprised of two product lines: High Speed ATM Backbone
Connectivity (ATM) and Dial-Up Services in Arizona. The ATM product line,
which provides high-speed connectivity to the Internet, is expected to
continue to grow both in geographical scope and revenue generated. Currently,
the ATM backbone consists of 24 national points of presence, which allow the
Company to provide high-speed connectivity to businesses in those regions.
Because of the nature of the ATM backbone deployment, cost of goods sold is
currently exceeding gross revenue. The Company expects to realize a gross
profit in the fourth quarter of 1997 and an operational break even in the
third quarter of 1998.
GoodNet experienced a significant decrease in its dial-up customer base due to
lingering connection problems with the Company's local line provider. The
Company's subscriber base has further eroded to approximately 12,750 customers
from 13,500. It is anticipated that this number will stabilize and that growth
will resume during the fourth quarter of 1997. The Company is evaluating
alternative local line providers to replace the current one.
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.
Due to the anticipated GoodNet losses, the seasonality of STS, as well as
delays in the release of the TelMaster product, the Company expects a loss in
the third quarter of 1997.
This report contains forward-looking statements within the meaning of
section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Such statements involve certain risks and uncertainties
that could cause actual results to differ materially from those in the
forward-looking statements including uncertainties regarding the effectiveness
of initiatives to expand GoodNet's ATM backbone, reduce the high turnover
rate of GoodNet's dial-up subscribers, and introduce and implement 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.
<PAGE 14>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND OPERATIONS (CONTINUED)
Liquidity and Capital Resources
The Company has available a line of credit of $1,000,000. The credit line has
been used for seasonal fluctuations in cash flow. The credit line is typically
used during the summer months due to the high demand for cash from new system
and STS Outsourcing Program installations for the following fall season.
At May 31, 1997, the Company had cash of $193,424 and investment securities of
$2,203,332. Net cash and investment securities used during the six month
period ended May 31, 1997 was approximately $1,325,000. The Company believes
that present cash reserves available, the existing line of credit, along with
anticipated cash flows from its operations will be adequate to supply currently
anticipated operating requirements for the next twelve (12) months. However,
there can be no assurance that the Company will not require additional
financing within this time frame. The Company may be required to raise
additional funds through public or private financing, strategic relationships
or other arrangements. There can be no assurance that such additional funding,
if needed, will be available on terms attractive to the Company, or at all.
Furthermore, any additional equity financing may be dilutive to stockholders.
Seasonality
The Company generally completes the sale of the majority of STS and STS
Program system installations in the higher education industry during the
spring and early summer months. The implementation and installation of these
systems and services occurs during the summer months. Revenues derived from
STS begin in the fall and decline during the Christmas holiday and the summer
months when university students are on vacation. As a result, the Company's
revenues have consistently been highest during the second and fourth quarters.
<PAGE 15>
PART II
OTHER INFORMATION
Response to Items 1-5 are omitted since these items are not applicable to this
report.
Item 6. Exhibits and Reports on Form 8-K
(a) No. Description Reference
11 (Loss) Earnings per common and common equivalent shares *
-----------------------------
* filed herewith
(b) No reports on Form 8-K have been filed during the quarter ended May 31,
1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TELESOFT CORP.
BY /s/Michael F. Zerbib
Michael F. Zerbib
Chief Financial Officer
DATED: July 14, 1997
<PAGE 16>
<TABLE>
Exhibit 11; (Loss) Earnings per common and common equivalent shares
(Loss) Earnings per common and common equivalent share is calculated as
follows:
<CAPTION>
Three Months Ended Six Months Ended
May 31 May 31 May 31 May 31
1997 1996 1997 1996
<S> <C> <C> <C> <C>
(Loss) Earnings per common and
common equivalent shares:
Net (loss) income $ (465,067) $ 502,376 $ (670,308) $ 981,914
========== ========= ========== =========
Weighted average number of
shares outstanding 3,818,333 3,797,889 3,818,333 3,787,500
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 35,916 17,711 30,175 21,188
--------- --------- --------- ---------
Weighted average number of
shares and equivalent shares 3,854,249 3,815,600 3,848,508 3,808,688
========= ========= ========= =========
(Loss) Earnings per common
and common equivalent shares $ (.12) $ .13 $ (.17) $ .26
========= ========= ========= =========
(Loss) Earnings per common share,
assuming full dilution:
Net (loss) income $ (465,067) $ 502,376 $ (670,308) $ 981,914
========== ========= ========== =========
Weighted average number of
shares outstanding 3,818,333 3,797,889 3,818,333 3,787,500
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 35,916 77,552 30,175 66,806
--------- --------- --------- ---------
Common stock and common stock
equivalents 3,854,249 3,875,441 3,848,508 3,854,306
========= ========= ========= =========
(Loss) Earnings per common
and common equivalent share $ (.12) $ .13 $ (.17) $ .26
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 6-MOS 6-MOS
<FISCAL-YEAR-END> NOV-30-1997 NOV-30-1996 NOV-30-1997 NOV-30-1996
<PERIOD-END> MAY-31-1997 MAY-31-1996 MAY-31-1997 MAY-31-1996
<CASH> 193,424 5,800,623 193,424 5,800,623
<SECURITIES> 2,203,332 0 2,203,332 0
<RECEIVABLES> 5,551,134 4,040,693 5,551,134 4,040,693
<ALLOWANCES> (898,945) (308,961) (898,945) (308,961)
<INVENTORY> 524,172 649,216 524,172 649,216
<CURRENT-ASSETS> 7,419,484 10,547,954 7,419,484 10,547,954
<PP&E> 4,051,265 2,607,599 4,051,265 2,607,599
<DEPRECIATION> (1,663,250) (979,192) (1,663,250) (979,192)
<TOTAL-ASSETS> 13,782,857 13,316,642 13,782,857 13,316,642
<CURRENT-LIABILITIES> 4,046,912 5,346,296 4,046,912 3,222,211
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 7,343,859 7,343,859 7,343,859 7,343,859
<OTHER-SE> 1,873,784 2,749,429 1,873,784 2,749,429
<TOTAL-LIABILITY-AND-EQUITY> 13,782,857 13,316,642 13,782,857 13,316,642
<SALES> 7,127,756 5,814,238 13,066,231 11,049,253
<TOTAL-REVENUES> 7,127,756 5,814,238 13,066,231 11,049,253
<CGS> 4,593,090 3,330,333 8,423,984 6,428,098
<TOTAL-COSTS> 7,932,781 5,008,074 14,261,290 9,564,872
<OTHER-EXPENSES> 0 0 (14,889) 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 276 116 606
<INCOME-PRETAX> (757,967) 881,176 (1,102,208) 1,663,114
<INCOME-TAX> 292,900 (378,800) 431,900 (681,200)
<INCOME-CONTINUING> (465,067) 502,376 (670,308) 981,914
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (465,067) 502,376 (670,308) 981,914
<EPS-PRIMARY> (.12) .13 (.17) .26
<EPS-DILUTED> (.12) .13 (.17) .26
</TABLE>
