DRAFT FOR DISCUSSION PURPOSES ONLY
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 February 28, 1998
SEC File No. 1-13830
TELESOFT CORP.
--------------
(Exact name of registrant as specified in its charter)
Arizona 86-0431009
------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3443 North Central Avenue, Suite 1800, Phoenix, Arizona 85012
--------------------------------------------------------------
(Address of principal executive offices)
(602) 308-2100
--------------
(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 April 13,
1998
Transitional Small Business Disclosure Format Yes ( ) No (X)
39271-1 1
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS.
<S> <C>
Consolidated Balance Sheets as of February 28, 1998 and November 30, 1997 . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the three months periods ended February 28, 1998 and 1997 4
Consolidated Statements of Cash Flows for the three month periods ended February 28, 1998 and 1997. 5 - 6
Notes to the Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . 7 -- 9
</TABLE>
<TABLE>
<CAPTION>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
February 28 November 30
1998 1997
(unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents. . . . . . . . . $ 717,146 $ 1,621,784
Investment securities. . . . . . . . . . . 4,700,000 2,200,000
Investment securities - WCII Stock . . . . 15,899,755 -
Accounts receivable, net of allowance for. 4,964,112 6,544,453
uncollectibles of $421,809 and
$640,982 at February 28, 1998 and
November 30, 1997, respectively
Inventory. . . . . . . . . . . . . . . . . 511,270 401,508
Deferred taxes . . . . . . . . . . . . . . - 1,097,900
Income taxes receivable. . . . . . . . . . 241,616 235,981
Other. . . . . . . . . . . . . . . . . . . 213,341 233,979
---------- ----------
Total Current Assets . . . . . . . . . . . 27,247,240 12,335,605
Property and equipment, net . . . . . . . 1,187,165 3,006,567
Computer software costs, net . . . . . . . 420,732 460,442
Intangibles, net . . . . . . . . . . . . . - 1,303,826
Note receivable. . . . . . . . . . . . . . 352,546 347,335
Other. . . . . . . . . . . . . . . . . . . 95,895 187,075
----------- -----------
Total Assets . . . . . . . . . . . . . . . $29,303,578 $17,640,850
=========== ===========
Liabilities and Stockholders' Equity
Note payable-current portion . . . . . . . $ - $ 90,523
Income taxes payable . . . . . . . . . . . 1,469,730 286,295
Deferred taxes . . . . . . . . . . . . . . 3,559,800
Accounts payable and accrued liabilities . 4,250,852 6,632,968
Deferred revenue . . . . . . . . . . . . . 552,401 1,245,806
----------- ---------
Total Current Liabilities. . . . . . . . . 9,832,783 8,255,592
- 371,551
Note payable
Deferred taxes . . . . . . . . . . . . . . 153,100 107,200
----------- ---------
Total Liabilities. . . . . . . . . . . . . 9,985,883 8,734,343
----------- ---------
Commitments. . . . . . . . . . . . . . . . -
Stockholders Equity:
Common Stock, 50,000,000 shares of . . . . 7,286,159 7,286,159
common stock, no par value
authorized; 3,787,500 issued and
outstanding
Additional paid-in capital . . . . . . . . 80,069 80,069
Unrealized gain on investment securities . 1,997,532 -
Retained Earnings. . . . . . . . . . . . . 9,953,935 1,540,279
---------- -----------
Total Stockholders' Equity . . . . . . . . 19,317,695 8,906,507
---------- -----------
Total Liabilities and Stockholders' Equity $29,303,578 $17,640,850
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of
the Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1997(UNAUDITED)
b 1998 1997
---- ----
<S> <C> <C>
Sales, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,026,778 $4,856,591
Cost of Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,403,161 3,062,140
---------- ----------
Gross Profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,623,617 1,794,451
General and Administrative Expense. . . . . . . . . . . . . . . . . . 2,119,500 1,698,135
---------- ----------
Operating Income 504,117 96,316
Other Income (Expense):
Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,566 60,809
Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . (678) (116)
Other income (expense). . . . . . . . . . . . . . . . . . . . . . . . 16,740 (145)
----------- -----------
78,628 60,548
----------- -----------
Income before Provision for Income Taxes and Discontinued Operations. 582,745 156,864
Provision for Income Taxes. . . . . . . . . . . . . . . . . . . . . . 263,050 71,000
----------- -----------
Income from Continuing Operations . . . . . . . . . . . . . . . . . . 319,695 85,864
Loss from Discontinued Operations, net of Income Taxes. . . . . . . . (68,428) (291,105)
Gain on Sale of Discontinued Operations, net of Income Taxes. . . . . 8,162,389 -
----------- ----------
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $8,413,656 $ (205,241)
=========== ==========
Earnings per share - continuing operations - basic & diluted $ .08 $ .02
Loss per share - discontinued operations - basic & diluted . . . . . $ (.02) $ (.07)
Income per share - sale of discontinued operations
- -basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.16 $ -
- -diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.12 -
Net (Loss) earnings per share
- -basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.22 $ (.05)
- -diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.18 (.05)
Weighted average number of shares outstanding
- -basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,787,500 3,818,333
- -diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,859,321 3,848,160
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of
the Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1997 (UNAUDITED)
1998 1997
------------ ------------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Cash received from customers . . . . . . . . . . . . . . . . . . . . . . . . $ 7,390,169 $ 6,141,703
Cash paid to suppliers and employees . . . . . . . . . . . . . . . . . . . . (7,487,137) (5,525,954)
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (678) (116)
Interest received. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,708 10,053
Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29,950) (22,889)
------------ ------------
Net cash (used in) provided by operating activities of continuing operations (71,888) 602,797
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . . (389,677) (40,891)
Cash received from sale of equipment . . . . . . . . . . . . . . . . . . . . 11,490 -
Disbursements for notes receivable from related parties. . . . . . . . . . . - (23,379)
Collection of notes receivable from related parties. . . . . . . . . . . . . - 26,485
Purchase of investment securities. . . . . . . . . . . . . . . . . . . . . . (2,500,000) (200,000)
------------ ------------
Net cash used in investing activities of continuing operations . . . . . . . (2,878,187) (237,785)
------------ ------------
Net cash (used in) provided by continuing operations . . . . . . . . . . . . (2,950,075) 365,012
Cash provided by (used in) discontinued operations . . . . . . . . . . . . . 30,942 (570,984)
Net cash provided from sale of discontinued operations . . . . . . . . . . . 2,014,495 -
------------ ------------
Net decrease in cash and cash equivalents (904,638) (205,972)
Cash and cash equivalents at beginning of period 1,621,784 219,023
------------ ------------
Cash and cash equivalents at end of fiscal period. . . . . . . . . . . . . . $ 717,146 $ 13,051
============ ============
</TABLE>
The Accompanying Notes are an Integral Part of
the Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1997 (UNAUDITED)
1998 1997
---- ----
<S> <C> <C>
Reconciliation of Net Income (Loss) to
net Cash (Used In) Provided by
operating Activities from Continuing
operations:
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,413,656 $ (205,241)
------------ -----------
Adjustments to reconcile net income
(loss) to net cash (used in) provided by
operating activities from continuing
operations:
Loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . 68,428 291,105
Gain on sale of discontinued. . . . . . . . . . . . . . . . . . . . . . . . . . (8,162,389) -
operations
Income taxes payable and deferred . . . . . . . . . . . . . . . . . . . . . . . (5,235,800) -
taxes related to sale of discontinued
operations
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . 119,031 115,246
Gain on sale of fixed assets. . . . . . . . . . . . . . . . . . . . . . . . . . (10,277) -
Interest income included with note. . . . . . . . . . . . . . . . . . . . . . . (5,211) (3,162)
receivable from related party
Changes in Assets and Liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 544,808 1,388,980
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (154,674) (51,467)
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,586) (333,650)
Deferred taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,291,100 273,500
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (620) (1,328)
Accounts payable and accrued. . . . . . . . . . . . . . . . . . . . . . . . . . (1,000,290) (601,682)
liabilities
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (108,864) (44,115)
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,183,435 (163,476)
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,635) (61,913)
------------ -----------
(8,485,544) 808,038
------------ -----------
Net cash (used in) provided by operating activities from continuing operations. $ (71,888) $ 602,797
============ ===========
<FN>
Supplemental disclosure of non-cash investing and financing activities:
During the three month period ended February 28, 1998, the Company sold its 71% owned subsidiary, Telesoft
Acquisition Corp. II, in exchange for $3,500,000 cash and 479,387 shares of WinStar common stock valued at
$13,902,223 on the date of sale. Expenses paid and accrued relating to the sale were $1,485,505.
</TABLE>
The Accompanying Notes are an Integral Part of
the Consolidated Financial Statements
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLLIDATED FINANCIAL STATEMENTS
For the three month periods ended February 28, 1998 and 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 months ended
February 28, 1998 are not necessarily indicative of the results that may be
expected for the year ending November 30, 1998. 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 for the year ended November 30, 1997.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Telesoft Corp.,
together with its wholly owned subsidiary, Telesoft Acquisition Corp. and its
former 71% owned subsidiary, Telesoft Acquisition Corp. II, d.b.a. GoodNet
("GoodNet").
The minority interest in the accompanying consolidated statement of operations
represents the minority shareholder's proportionate share of the net loss from
GoodNet during fiscal year 1997. As of November 30, 1997, there was no equity
attributable to the minority shareholders of GoodNet.
All significant inter-company accounts and transactions have been eliminated.
ACCOUNTING PRONOUNCEMENTS:
In February 1998, the Company adopted Financial Accounting Standards Board
Statement of Accounting Standards No. 128, Earnings Per Share (SFAS 128). As
------------------
a result, earnings (loss) per share for all prior periods have been restated.
2. SALE OF SUBSIDIARY
Effective January 12, 1998, the Company together with the minority
shareholders of GoodNet, entered into an agreement with WinStar
Communications, Inc. (WinStar) to sell the Company's Internet services
subsidiary for approximately $22.0 million, consisting of $3.5 million cash
and shares of common stock of WinStar (WCII: NASDAQ) having an aggregate
market value of approximately $18.5 million.
Under the terms of the agreement, the Company received approximately
$3,500,000 in cash plus 479,387 shares (based on the 20 day average price of
WinStar stock) of WinStar common stock, which had an aggregate fair market
value of approximately $13.9 million as of the close of business on January
12, 1998. After commissions and related expenses, the Company realized a
$13,810,689 pretax gain on the sale. Additionally, the Company received
$235,484 in cash to offset GoodNet's net cash disbursements from December 12,
1997 through the date of the sale.
As a result of the above transaction, the Company will be vacating a portion
of its office space in Phoenix, Arizona during the year ending November 30,
1998. As a result, the Company will have to take steps to sublease the
vacated space or pay an early termination fee approximated at $300,000.
3. INVESTMENT SECURITIES-WCII STOCK
The Company accounts for its investment in WinStar as an available-for-sale
equity security, which accordingly is carried at market value. Pursuant to a
hedging strategy implemented by the Company in January, 1998, 440,000 WinStar
shares are hedged, utilizing the purchase of puts and calls in combination to
minimize the downside risk of loss should the price of WinStar stock decline
while allowing for limited upside participation should the stock price rise.
The call option is secured by shares of WinStar stock held by the Company. As
of February 28, 1998, the WinStar stock had an aggregate fair market value of
$17,469,255, resulting in an unrealized gain of $1,997,532 (net of estimated
income taxes of $1,569,500 as result of sale).
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1997
The results of operations of the Company do not include the results of
operations of Telesoft Acquisition Corp. II, d.b.a. GoodNet ("GoodNet"), its
former 71% owned subsidiary which was sold effective January 12, 1998 and
which is treated as a discontinued operation in the Company's financial
statements.
Revenues increased by 44.7% to $7,026,778 for the three months ended
February 28, 1998 compared to $4,856,591 for the three months ended February
28, 1997. The Company's revenue is derived from three principal product lines
and services: STS Outsourcing Programs, System Sales and Maintenance, and
Customized Billing Outsourcing Services.
STS revenues were $5,456,000 for the three months ended February 29,
1998 compared to $4,068,000 for the three months ended February 28, 1997, an
increase of 34.1%. A substantial portion of this increase is due to the
implementation of service at Rutgers University and the conversion of the
University of Southern California from the Company's Customized Billing
Service to the STS Program during the fourth quarter of fiscal 1997,
representing approximately $700,000 and $380,000 in revenue, respectively.
Revenues from System Sales and Maintenance were $1,328,000 for the three month
ended February 28, 1998 compared to $621,000 for the three months ended
February 28, 1997, an increase of 114%. For the three months ended February
28, 1998 and 1997, revenues from Customized Billing Outsourcing Services were
approximately $243,000 and $168,000, respectively. This increase is due to
the development of customized billing services for two primary customers,
resulting in increased revenues of approximately $150,000, offset by the
conversion of the University of Southern California to the STS Program, which
contributed approximately $74,000 to Customized Billing Service revenue in the
first quarter of 1997.
Total gross profit increased by 46.2% to $2,623,617 for the three months
ended February 28, 1998 compared to $1,794,451 for the three months ended
February 28, 1997. Cost of goods sold was approximately 74.5% of STS revenues
for the three months ended February 28, 1998, compared with 72.5% for the
three months ended February 28, 1997. This increase is primarily the result
of higher commissions to new universities participating in the STS Program.
Cost of goods sold as a percentage of System Sales and Maintenance revenues
was approximately 25% for the three months ended February 28, 1998 compared
with 18% for three months ended February 28, 1997. This increase is due to a
higher percentage of system sales revenues, which have a lower gross profit
margin than maintenance revenues, during the first quarter of 1998.
Overall operating expenses increased by 24.8%, or $421,365, for the three
months ended February 28, 1998 to $2,119,500 from $1,698,135 for the three
months ended February 28, 1997. Operating expenses as a percentage of revenue
decreased to 30% compared to 35% for the three months ended February 28, 1997.
The provision for income taxes was $263,050 and $71,000 for the three
months ended February 28, 1998 and 1997, respectively. This represents 45% of
income before provision for income taxes for each period.
Income from continuing operations increased to $319,695 for the first
quarter of fiscal 1998 from $85,864 in the first quarter of fiscal 1997. This
is primarily attributable to a decrease in operating losses from the Company's
System Sales division from approximately $300,000 in the first quarter of 1997
to approximately $40,000 in the first quarter of fiscal 1998.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS BY PRODUCT LINE FOR THE THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1997
For the three months ended February 28, 1998
--------------------------------------------
<S> <C> <C> <C> <C>
System Sales/ Customized
STS Maintenance Billing Total
-------------------------- --------------------
Sales, Net. . . . . . . . . . . . . . . . . . . $ 5,455,812 $ 1,328,464 $242,502 $7,026,778
Cost of Sales . . . . . . . . . . . . . . . . . 4,064,333 338,828 - 4,403,161
-------------------------- -------------------- -------- ----------
Gross Profit. . . . . . . . . . . . . . . . . . 1,391,479 989,636 242,502 2,623,617
-------------------------- -------------------- -------- ----------
General & Administrative Expenses:
General . . . . . . . . . . . . . . . . . . . . 789,649 975,772 103,770 1,869,191
Depreciation. . . . . . . . . . . . . . . . . . 47,367 26,110 - 73,477
Amortization. . . . . . . . . . . . . . . . . . - 2,084 - 2,084
Bad Debt. . . . . . . . . . . . . . . . . . . . 69,899 8,117 1,000 79,016
Corporate Allocations:. . . . . . . . . . . . . -
General . . . . . . . . . . . . . . . . . . . . 38,466 10,347 3,449 52,262
Depreciation. . . . . . . . . . . . . . . . . . 31,994 8,607 2,869 43,470
-------------------------- -------------------- -------- ----------
977,375 1,031,037 111,088 2,119,500
-------------------------- -------------------- -------- ----------
Operating Income (Loss) . . . . . . . . . . . . 414,104 (41,401) 131,414 504,117
Other Income. . . . . . . . . . . . . . . . . . 78,628
----------
Pretax Income . . . . . . . . . . . . . . . . . 582,745
Income Tax Provision 263,050
----------
Income from Continuing Operations $ 319,695
==========
Basic Earnings per Share-Continuing Operations $ 0.08
==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the three months ended February 28, 1997
--------------------------------------------
<S> <C> <C> <C> <C>
System Sales/ Customized
STS Maintenance Billing Total
-------------------------- --------------------
Sales, Net. . . . . . . . . . . . . . . . . . . $ 4,067,982 $ 620,715 $167,894 $4,856,591
Cost of Sales . . . . . . . . . . . . . . . . . 2,949,138 113,002 - 3,062,140
-------------------------- -------------------- -------- ----------
Gross Profit. . . . . . . . . . . . . . . . . . 1,118,844 507,713 167,894 1,794,451
-------------------------- -------------------- -------- ----------
General & Administrative Expenses:
General . . . . . . . . . . . . . . . . . . . . 720,005 712,417 48,664 1,481,086
Depreciation. . . . . . . . . . . . . . . . . . 31,201 58,503 - 89,704
Amortization. . . . . . . . . . . . . . . . . . - 2,083 - 2,083
Bad Debt. . . . . . . . . . . . . . . . . . . . 59,608 - - 59,608
Corporate Allocations:. . . . . . . . . . . . . -
General . . . . . . . . . . . . . . . . . . . . 20,777 20,558 1,404 42,739
Depreciation. . . . . . . . . . . . . . . . . . 7,971 14,944 - 22,915
-------------------------- -------------------- -------- ----------
839,562 808,505 50,068 1,698,135
-------------------------- -------------------- -------- ----------
Operating Income (Loss) . . . . . . . . . . . . 279,282 (300,792) 117,826 96,316
Other Income. . . . . . . . . . . . . . . . . . 60,548
----------
Pretax Income . . . . . . . . . . . . . . . . . 156,864
Income Tax Provision . . . . . . . . . . . . . (71,000)
----------
Income from Continuing Operations $ 85,864
==========
Basic Earnings per Share-Continuing Operations $ 0.02
==========
</TABLE>
DISCONTINUED OPERATIONS: TELESOFT ACQUISITION CORP. II, D.B.A. GOODNET
Effective January 12, 1998, the Company together with the minority
shareholders of GoodNet, entered into an agreement with WinStar
Communications, Inc. ("WinStar") to sell the Company's Internet services
subsidiary for approximately $22.0 million, consisting of $3.5 million cash
and shares of common stock of WinStar (WCII: NASDAQ) having an aggregate
market value of approximately $18.5 million.
Under the terms of the agreement, the Company received approximately
$3,500,000 in cash plus 479,387 shares (based on the 20 day average price of
WinStar stock) of WinStar common stock, which had an aggregate fair market
value of approximately $13.9 million as of the close of business on January
12, 1998. After commissions and related expenses, the Company realized a
$13,810,689 pretax gain ($8,162,389 after taxes) on the sale. Additionally,
the Company received $235,484 in cash to offset GoodNet's net cash
disbursements from November 12, 1997 through the date of the sale.
<PAGE>
MATERIAL CHANGES IN FINANCIAL POSITION
Cash and cash equivalents decreased to $717,146 at February 28, 1998 from
$1,621,784 at November 30, 1997. During the three months ended February 28,
1998, investment securities (excluding WCII Stock) increased $2,500,000.
Combined, the Company's cash and investment holdings increased approximately
$1,595,000. During the first quarter of 1998, activities from continuing
operations used approximately $72,000. Additionally, the company used
approximately $390,000 in cash to purchase property and equipment for its
continuing operations. The Company received net cash proceeds of
approximately $2,014,000 from the sale of discontinued operations.
Accounts receivable decreased to $5,385,921 from $7,185,435 as of
November 30, 1997 ($4,964,112 and $6,544,453, net of allowance for
uncollectibles as of February 28, 1998 and November 30, 1997 respectively).
This decrease is primarily due to the sale of GoodNet, which had approximately
$1,308,000 (before allowance for uncollectibles), in accounts receivable at
November 30, 1997. Accounts receivable, before allowance for uncollectibles
and excluding GoodNet related receivables, at February 28, 1997 was
approximately $4,143,000. The $1,240,000 increase in receivables, reflects
the Company's current growth.
As of February 28, 1998, the Company had a net current and deferred tax
liability of $4,941,014 compared with a net current and deferred tax asset of
$1,047,586 of November 30, 1997. This is primarily a result of the sale of
GoodNet, which resulted in an estimated current tax liability of $1,053,000 in
connection with cash received from the sale and a current deferred tax
liability of approximately $4,182,800 in connection with the common stock of
WinStar received in connection with the sale. These amounts are net of a
carry forward of approximately $412,500 in tax benefit from fiscal 1997.
Property and equipment before accumulated depreciation decreased to
$2,531,299 from $5,151,229 as of November 30, 1997. This decrease is
primarily due the sale of GoodNet, which had approximately $2,916,000 in
unamortized property and equipment as of November 30, 1997. This results in
an increase of approximately $300,000 in property and equipment for continuing
operations. This is due to the purchase of approximately $45,000 in STS
equipment to support growth, the purchase of approximately $325,000 in
furniture, fixtures, and leasehold improvements as a result of the Company's
relocation of its office facilities, less approximately $60,000 in furniture
and fixtures sold and $30,000 in leasehold improvements from the old office
facilities that were retired.
Accounts payable and accrued liabilities decreased to $4,250,852 from
$6,632,968 as of November 30, 1997. This decrease is primarily attributable
to the sale of GoodNet, which had $1,382,000 in accounts payable and accrued
liabilities as of November 30, 1997. As of February 28, 1997, there were
approximately $3,239,000 in accounts payable and accrued liabilities resulting
from continuing operations. This approximate $1,012,000 increase is primarily
attributable to the growth in STS revenue. STS cost of sales increased from
approximately $2,949,000 during the first quarter of fiscal 1997 to
approximately $4,064,000 during the first quarter of fiscal 1998.
Deferred revenue decreased to $552,401 from $1,245,806 as of November 30,
1997. This decrease is again due to the sale of GoodNet, which had
approximately $585,000 in deferred revenue at November 30, 1997.
<PAGE>
FUTURE EXPECTATIONS
STS revenues are expected to continue to show an increase moderately
from fiscal 1997 levels during the fiscal year ended 1998. This increase is
due to large accounts added during the fourth quarter of fiscal 1997; however,
there can be no assurance that revenues will increase as expected.
The Company expects revenues from Customized Billing Services to increase
based upon existing proposals outstanding; however, it is not possible to
ascertain the amount of such increase until actual contracts are in place.
The Company previously experienced delays in the release and installation
of certain modules of TelMaster, the "Client/Server" and "Graphical User
Interface" environment version of the Company's existing text based
telemanagement software modules. Certain modules of this product were
released in the third quarter of 1996, and installations have been completed
in the second and third quarters of 1997. Based on the full product release
in January 1998, the Company expects to sell and install a higher number of
TelMaster systems in fiscal 1998; however, there can be no assurance that
increased sales will materialize.
It is anticipated that the cost of human resources will grow 5%-10% as
the company increases its employee base to expand its products, services and
market penetration. This increase will ensure adequate research and
development, and sales and support for anticipated short and long-term growth.
This report contains forward-looking statements within the meaning of
section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Such statements involve certain risks and uncertainties
that could cause actual results to differ materially from those in the
forward-looking statements. 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
At February 28, 1998, the Company had cash of $717,146, 479,387
restricted shares of WinStar stock (WCII: NASDAQ), with a fair market value of
$15,899,755 (net of estimated taxes of $1,569,500 on the unrealized gain), and
other investments of $4,700,000. The Company believes that present cash
reserves available along with anticipated cash flows from its business,
will be adequate to supply currently anticipated operating requirements for
the Company for the next 12 months. However, there can be no assurance that
the Company will not require additional funding 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 existing stockholders.
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 winter 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 quarter.
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 Earnings per common and common equivalent shares filed herewith
(b) Form 8-K dated January 27, 1998
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: April 13, 1998
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11; Earnings (Loss) per share
Earnings (Loss) per share is calculated as follows:
THREE MONTHS ENDED FEBRUARY28,
--------------------------------
<S> <C> <C>
1998 1997
------------- ----------
Income from continuing operations . . . . . . . . . $ 319,695 $ 85,864
Loss from discontinued operations . . . . . . . . . $ (68,428) $(291,105)
Gain on sale of discontinued operations . . . . . . $ 8,162,389 -
Net (Loss) Income . . . . . . . . . . . . . . . . . $ 8,413,656 $(205,241)
<CAPTION>
BASIC EARNINGS (LOSS) PER SHARE:
- ----------------------------------------------------
<S> <C> <C>
Weighted average number of shares outstanding 3,787,500 3,818,333
Earnings per share - continuing operations . . . . . $ .08 $ .02
Loss per share - discontinued operations . . . . . . $ (.02) $ (.07)
Earnings per share - sale of discontinued operations $ 2.16 -
Earnings (Loss) per share. . . . . . . . . . . . . . $ 2.22 $ (.05)
<CAPTION>
<S> <C> <C>
DILUTED EARNINGS (LOSS) PER SHARE:
- ----------------------------------------------------
Weighted average number of shares outstanding. . . . 3,787,500 3,818,333
Net effect of dilutive stock options based on the
treasury stock method using the average market price 71,821 29,827
Common Stock including assumed conversions . . . . . 3,859,321 3,848,160
Earnings per share - continuing operations . . . . . $ .08 $ .02
Loss per share - discontinued operations . . . . . . $ (.02) $ (.07)
Earnings per share - sale of discontinued operations $ 2.12 -
(Loss) Earnings per share. . . . . . . . . . . . . . $ 2.18 $ (.05)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS YEAR
<FISCAL-YEAR-END> NOV-30-1998 NOV-30-1997 NOV-30-1997
<PERIOD-END> FEB-28-1998 FEB-28-1997 NOV-30-1997
<CASH> 717,146 13,051 1,621,784
<SECURITIES> 20,599,755 3,703,332 2,200,000
<RECEIVABLES> 5,385,921 5,262,242 7,185,435
<ALLOWANCES> (421,809) (775,675) (640,982)
<INVENTORY> 511,270 520,785 401,508
<CURRENT-ASSETS> 27,247,240 6,875,250 12,335,605
<PP&E> 2,531,299 3,667,923 5,151,229
<DEPRECIATION> (1,344,134) (1,450,099) (2,144,662)
<TOTAL-ASSETS> 29,303,578 13,986,363 17,640,850
<CURRENT-LIABILITIES> 9,832,783 4,180,453 8,255,592
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 7,366,228 7,423,928 7,366,228
<OTHER-SE> 11,951,467 2,258,782 1,540,279
<TOTAL-LIABILITY-AND-EQUITY> 29,303,578 13,986,363 17,640,850
<SALES> 7,026,778 4,856,591 22,593,450
<TOTAL-REVENUES> 7,026,778 4,856,591 22,593,450
<CGS> 4,403,161 3,062,140 14,330,388
<TOTAL-COSTS> 6,522,661 4,760,275 22,032,259
<OTHER-EXPENSES> (16,740) 145 14,686
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 678 116 0
<INCOME-PRETAX> 582,745 156,864 724,385
<INCOME-TAX> 263,050 71,000 321,300
<INCOME-CONTINUING> 319,695 85,864 402,985
<DISCONTINUED> (68,428) (291,105) (1,326,729)
<EXTRAORDINARY> 8,162,389 0 0
<CHANGES> 0 0 0
<NET-INCOME> 8,413,656 (205,241) (923,744)
<EPS-PRIMARY> 2.22<F1> (.05) (.24)
<EPS-DILUTED> 2.18 (.05) (.24)
<FN>
<F1>BASIC EARNINGS PER SHARE
</FN>
</TABLE>
