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 May 31, 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 July 1, 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 May 31, 1998 (unaudited) and November 30, 1997 3
Consolidated Statements of Operations for the three and six month periods ended May 31, 1998 and 1997 (unaudited) 4 - 5
Consolidated Statements of Cash Flows for the three and six month periods ended May 31, 1998 and 1997 (unaudited) 6 - 7
Notes to the Consolidated Financial Statements (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 - 9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
May 31, November 30,
1998 1997
(unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents. . . . . . . . . . . . $ 8,337 $ 1,621,784
Investment securities. . . . . . . . . . . . . . 5,500,000 2,200,000
Investment securities - WCII Stock . . . . . . . 15,696,913 -
Accounts receivable, net of allowance for. . . . 4,749,219 6,544,453
uncollectibles of $501,159 and $640,982 at May
31, 1998 and November 30, 1997, respectively
Inventory. . . . . . . . . . . . . . . . . . . . 920,466 401,508
Deferred taxes . . . . . . . . . . . . . . . . . - 1,097,900
Income taxes receivable. . . . . . . . . . . . . 169,602 235,981
Other. . . . . . . . . . . . . . . . . . . . . . 299,393 233,979
---------- ----------
Total Current Assets . . . . . . . . . . . . . . 27,343,930 12,335,605
Property and equipment, net . . . . . . . . . . 1,152,645 3,006,567
Computer software costs, net . . . . . . . . . . 381,012 460,442
Intangibles, net . . . . . . . . . . . . . . . . - 1,303,826
Note receivable. . . . . . . . . . . . . . . . . 357,757 347,335
Other. . . . . . . . . . . . . . . . . . . . . . 93,019 187,075
----------- -----------
Total Assets . . . . . . . . . . . . . . . . . . $29,328,363 $17,640,850
=========== ===========
LIABILITIES AND STOCKHOLDERS'EQUITY
Note payable-current portion . . . . . . . . . . $ - $ 90,523
Income taxes payable . . . . . . . . . . . . . . 1,108,719 286,295
Deferred taxes . . . . . . . . . . . . . . . . . 3,517,600 -
Accounts payable and accrued liabilities . . . . 4,596,837 6,632,968
Deferred revenue . . . . . . . . . . . . . . . . 566,864 1,245,806
----------- -----------
Total Current Liabilities. . . . . . . . . . . . 9,790,020 8,255,592
Note payable . . . . . . . . . . . . . . . . . . - 371,551
Deferred taxes . . . . . . . . . . . . . . . . . 107,400 107,200
----------- -----------
Total Liabilities. . . . . . . . . . . . . . . . 9,897,420 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 . . . . 1,794,690 -
Retained Earnings. . . . . . . . . . . . . . . . 10,270,025 1,540,279
---------- ---------
Total Stockholders' Equity . . . . . . . . . . . 19,430,943 8,906,507
----------- -----------
Total Liabilities and Stockholders' Equity . . . $29,328,363 $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
(UNAUDITED)
Three Months Ended Six Months Ended
------------------ ----------------
May 31, 1998 May 31, 1997 May 31, 1998 May 31, 1997
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Sales, net. . . . . . . . . $ 7,098,708 $ 5,616,975 $ 14,125,486 $ 10,473,566
Cost of Sales . . . . . . . 4,517,147 3,390,726 8,920,308 6,452,866
------------- ------------- ------------- ---------------
Gross Profit 2,581,561 2,226,249 5,205,178 4,020,700
General and . . . . . . . . 2,100,926 1,850,716 4,220,426 3,548,851
Administrative Expense
------------- ------------- ------------- ---------------
Operating Income 480,635 375,533 984,752 471,849
------------- ------------- ------------- ---------------
Other Income (Expense):
Interest Income . . . . . . 73,772 47,047 136,338 107,856
Interest Expense. . . . . . - - (678) (116)
Other income. . . . . . . . 18,833 11 35,573 (134)
(expense) ------------- ------------- ------------- ---------------
92,605 47,058 171,233 107,606
------------- ------------- ------------- ---------------
Income before Provision
for Income Taxes and
Discontinued Operations . 573,240 422,591 1,155,985 579,455
Provision for Income Taxes 257,150 189,800 520,200 260,800
------------- ------------- ------------- ---------------
Income from Continuing 316,090 232,791 635,785 318,655
Operations
Loss from Discontinued
Operations, net of
Income Taxes . . . . . . - (697,858) (68,428) (988,963)
Gain on Sale of
Discontinued Operations,
net of Income Taxes - - 8,162,389 -
------------- -------------- ------------- ---------------
Net Income (Loss) $ 316,090 $ (465,067) $ 8,729,746 $ (670,308)
============= ============== ============= ===============
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
May 31, 1998 May 31, 1997 May 31, 1998 May 31, 1997
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Basic earnings (loss) per share
Continued operations . . . . . . . $ 0.08 $ 0.06 $ 0.17 $ 0.08
Discontinued operations. . . . . . - (0.18) (0.02) (0.26)
Sale of discontinued operations. . - - 2.16 -
------------- -------------- -------------- --------------
Net income (loss). . . . . . . . . $ 0.08 $ (0.12) $ 2.31 $ (0.18)
============= ============== ============== ==============
Diluted earnings (loss) per share
Continued operations . . . . . . . $ 0.08 $ 0.06 $ 0.16 $ 0.08
Discontinued operations. . . . . . - (0.18) (0.02) (0.26)
Sale of discontinued operations. . - - 2.11 -
------------- -------------- -------------- --------------
Net income (loss). . . . . . . . . $ 0.08 $ (0.12) $ 2.25 $ (0.18)
============= ============== ============== ==============
Weighted average number
of shares outstanding
- - basic. . . . . . . . . . . . . . 3,787,500 3,818,333 3,787,500 3,818,333
============= ============== ============== ==============
- -diluted . . . . . . . . . . . . . 3,907,819 3,854,249 3,885,497 3,848,508
============= ============== ============== ==============
</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 SIX MONTHS ENDED MAY 31, 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 . . . . . . . . . . . . $ 14,646,924 $ 11,512,732
Cash paid to suppliers and employees . . . . . . . . (13,991,386) (11,006,231)
Interest paid. . . . . . . . . . . . . . . . . . . . (678) (116)
Interest received. . . . . . . . . . . . . . . . . . 64,164 61,461
Income taxes paid. . . . . . . . . . . . . . . . . . (663,997) (36,283)
------------- -------------
Net cash provided by operating activities of
continuing operations . . . . . . . . . . . . . . 55,027 531,563
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment . . . . . . . . . (440,723) (136,197)
Cash received from sale of equipment . . . . . . . . 26,812 -
Disbursements for notes receivable from related. . . - (345,577)
Parties
Collection of notes receivable from related parties. - 169,024
Sale of investment securities. . . . . . . . . . . . - 1,500,000
Purchase of investment securities. . . . . . . . . . (3,300,000) (200,000)
------------- -------------
Net cash (used in) provided by investing
activities of continuing operations. . . . . . . . (3,713,911) 987,250
------------- -------------
Net cash (used in) provided by continuing operations (3,658,884) 1,518,813
Cash provided by (used in) discontinued operations . 30,942 (1,544,412)
Net cash provided from sale of discontinued
operations . . . . . . . . . . . . . . . . . . . . 2,014,495 -
------------- -------------
Net decrease in cash and cash equivalents (1,613,447) (25,599)
Cash and cash equivalents at beginning of period . . 1,621,784 219,023
------------- -------------
Cash and cash equivalents at end of period . . . . . $ 8,337 $ 193,424
============= =============
</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 SIX MONTHS ENDED MAY 31, 1998 AND 1997 (UNAUDITED)
1998 1997
---- ----
<S> <C> <C>
Reconciliation of Net Income (Loss) to net Cash
Provided by Operating Activities from
Continuing Operations:
Net Income (Loss). . . . . . . . . . . . . . . . . $ 8,729,746 $ (670,308)
------------ ------------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities from
continuing operations:
Loss from discontinued operations. . . . . . . . . 68,428 988,963
Gain on sale of discontinued operations. . . . . . (8,162,389) -
Income taxes payable and deferred taxes. . . . . . (5,235,800) -
related to sale of discontinued operations
Depreciation and amortization. . . . . . . . . . . 239,457 233,690
Gain on sale of fixed assets . . . . . . . . . . . (20,739) -
Interest income included with note receivable. . . (10,422) (11,168)
from related party
Changes in Assets and Liabilities:
Accounts receivable. . . . . . . . . . . . . . . . 759,701 1,227,945
Inventory. . . . . . . . . . . . . . . . . . . . . (563,870) (57,768)
Other current assets . . . . . . . . . . . . . . . (94,638) (295,203)
Deferred taxes . . . . . . . . . . . . . . . . . . 4,203,200 181,500
Other assets . . . . . . . . . . . . . . . . . . . 2,256 45,386
Accounts payable and accrued liabilities . . . . . (654,305) (1,087,088)
Deferred revenue . . . . . . . . . . . . . . . . . (94,401) (67,403)
Income taxes payable . . . . . . . . . . . . . . . 822,424 118,324
Income taxes receivable. . . . . . . . . . . . . . 66,379 (75,307)
------------ ------------
(8,674,719) 1,201,871
------------ ------------
Net cash provided by operating activities from $ 55,027 $ 531,563
continuing operations ============ ============
<FN>
Supplemental disclosure of non-cash investing and financing activities:
During the six month period ended May 31, 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.
During the six month period ended May 31, 1997, the Company's discontinued
operations financed a covenant not to compete in the amount of $505,020.
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED MAY 31, 1998 AND 1997 (UNAUDITED)
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 and six
month periods ended May 31, 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.
(the "Company"), 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.
Statement of Position 98-5, "Reporting of the Costs of Start-Up Activities."
(SOP 98-5) issued by the Accounting Standards Executive Committee is effective
for financial statements with fiscal years beginning after December 1, 1998.
SOP 98-5 requires that the costs of start-up activities should be expensed as
incurred. At the time of adopting this SOP, the initial application should be
reported as the cumulative effect of a change in accounting principles. The
Company does not believe that the adoption of the SOP will have a material
effect on its financial position, results of operations or cash flows.
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED MAY 31, 1998 AND 1997 (UNAUDITED)
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 May 31, 1998, the WinStar stock had an aggregate fair market value of
$17,107,013, resulting in an unrealized gain of $1,794,690 (net of estimated
income taxes of $1,410,100 as result of sale).
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MAY 31, 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 34.9% to $14,125,486 for the six months ended May
31, 1998 compared to $10,473,566 for the six months ended May 31, 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 $11,012,000 for the six months ended May 31, 1998
compared to $8,269,000 for the six months ended May 31, 1997, an increase of
33.2%. 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
$1,424,000 and $760,000 in revenue, respectively. Revenues from System Sales
and Maintenance were $2,651,000 for the six month ended May 31, 1998 compared
to $1,895,000 for the six months ended May 31, 1997, an increase of 39.9%. For
the six months ended May 31, 1998 and 1997, revenues from Customized Billing
Outsourcing Services were approximately $463,000 and $310,000, respectively.
This increase is due to the development of customized billing services for two
primary customers, resulting in increased revenues of approximately $300,000,
offset by the conversion of the University of Southern California to the STS
Program, which contributed approximately $126,000 to Customized Billing
Service revenue in the first half of 1997.
Total gross profit increased by 29.5% to $5,205,178 for the six months
ended May 31, 1998 compared to $4,020,700 for the six months ended May 31,
1997. Cost of goods sold was approximately 75.2% of STS revenues for the six
months ended May 31, 1998, compared with 73.1% for the six months ended May
31, 1997. This increase is primarily the result of higher commissions to
universities participating in the STS Program. Cost of goods sold as a
percentage of System Sales and Maintenance revenues was approximately 24% for
the six months ended May 31, 1998 compared with 21% for the six months ended
May 31, 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 half of 1998.
Overall operating expenses increased by 18.9%, or $671,575, for the six
months ended May 31, 1998 to $4,220,426 from $3,548,851 for the six months
ended May 31, 1997. Operating expenses as a percentage of revenue decreased
to 30% compared to 34% for the six months ended May 31, 1997.
The provision for income taxes was $520,200 and $260,800 for the six
months ended May 31, 1998 and 1997, respectively. This represents 45% of
income before provision for income taxes for each period.
Income from continuing operations increased to $635,785 for the first six
months of fiscal 1998 from $318,655 in the comparable period of fiscal 1997.
This is attributable to increased gross profit and increased controls of
operating expenses during the first half of fiscal 1998 compared to the same
period in fiscal 1997.
<PAGE>
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS BY PRODUCT LINE FOR THE SIX MONTHS ENDED MAY 31, 1998
AND 1997
For the six months ended May 31, 1998
-------------------------------------
<S> <C> <C> <C> <C>
System Sales/ Customized
STS Maintenance Billing Total
-------------- ------------ -------- -----------
Sales, Net $ 11,011,644 $ 2,651,247 $462,595 $14,125,486
Cost of Sales . . . . . . 8,283,677 636,631 - 8,920,308
-------------- ------------ -------- -----------
Gross Profit. . . . . . . 2,727,967 2,014,616 462,595 5,205,178
-------------- ------------ -------- -----------
General & Administrative
Expenses:
General . . . . . . . . . 1,630,282 1,762,861 303,205 3,696,348
Depreciation. . . . . . . 95,283 54,440 - 149,723
Amortization. . . . . . . - 2,084 - 2,084
Bad Debt. . . . . . . . . 149,579 8,117 1,000 158,696
Corporate Allocations:. . -
General . . . . . . . . . 92,681 24,933 8,311 125,925
Depreciation. . . . . . . 64,510 17,355 5,785 87,650
-------------- ------------ -------- -----------
2,032,335 1,869,790 318,301 4,220,426
-------------- ------------ -------- -----------
Operating Income 695,632 144,826 144,294 984,752
Other Income. . . . . . . 171,233
-----------
Pretax Income . . . . . . 1,155,985
Income Tax Provision. . . 520,200
-----------
Income from Continuing
Operations $ 635,785
===========
Basic Earnings per Share- $ 0.17
Continuing Operations ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the six months ended May 31, 1997
-------------------------------------
<S> <C> <C> <C> <C>
System Sales/ Customized
STS Maintenance Billing Total
-------------- ------------- -------- -----------
Sales, Net. . . . . . . . . . . . . $ 8,268,643 $ 1,894,856 $310,067 $10,473,566
Cost of Sales . . . . . . . . . . . 6,047,113 405,753 - 6,452,866
-------------- ------------- -------- -----------
Gross Profit. . . . . . . . . . . . 2,221,530 1,489,103 310,067 4,020,700
-------------- ------------- -------- -----------
General & Administrative Expenses:
General . . . . . . . . . . . . . . 1,445,245 1,535,482 92,999 3,073,726
Depreciation. . . . . . . . . . . . 62,530 117,558 - 180,088
Amortization. . . . . . . . . . . . - 4,167 - 4,167
Bad Debt. . . . . . . . . . . . . . 121,128 114 - 121,242
Corporate Allocations:
General . . . . . . . . . . . . . . 58,329 58,329 3,535 120,193
Depreciation. . . . . . . . . . . . 16,647 32,788 - 49,435
-------------- ------------- -------- -----------
1,703,879 1,748,438 96,534 3,548,851
-------------- ------------- -------- -----------
Operating Income (Loss) . . . . . . 517,651 (259,335) 213,533 471,849
Other Income. . . . . . . . . . . . 107,606
-----------
Pretax Income . . . . . . . . . . . 579,455
Income Tax Provision . . . . . . . 260,800
-----------
Income from Continuing . . . . . . $ 318,655
Operations ===========
Basic Earnings per Share-
Continuing Operations . . . . . . $ 0.08
===========
</TABLE>
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MAY 31, 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 26% to $7,098,708 for the three months ended May
31, 1998 compared to $5,616,975 for the three months ended May 31, 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 $5,556,000 for the three months ended May 31, 1998
compared to $4,201,000 for the three months ended May 31, 1997, an increase of
32.3%. Again, 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 $724,000 and $380,000 in revenue, respectively.
Revenues from System Sales and Maintenance were $1,323,000 for the three month
ended May 31, 1998 compared to $1,274,000 for the three months ended May 31,
1997, an increase of 4%. For the three months ended May 31, 1998 and 1997,
revenues from Customized Billing Outsourcing Services were approximately
$220,000 and $142,000, 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 $52,000 to Customized Billing Service revenue in the second
quarter of 1997.
Total gross profit increased by 16% to $2,581,561 for the three months
ended May 31, 1998 compared to $2,226,249 for the three months ended May 31,
1997. Cost of goods sold was approximately 75.9% of STS revenues for the
three months ended May 31, 1998, compared with 73.8% for the three months
ended May 31, 1997. This increase is primarily the result of higher
commissions to universities participating in the STS Program. Cost of goods
sold as a percentage of System Sales and Maintenance revenues was
approximately 23% for the three months ended May 31, 1998 and 1997.
Overall operating expenses increased by 13.5%, or $250,210, for the three
months ended May 31, 1998 to $2,100,926 from $1,850,716 for the three months
ended May 31, 1997. Operating expenses as a percentage of revenue decreased
to 30% compared to 33% for the three months ended May 31, 1997.
The provision for income taxes was $257,150 and $189,800 for the three
months ended May 31, 1998 and 1997, respectively. This represents 45% of
income before provision for income taxes for each period.
Income from continuing operations increased to $316,090 for the second
quarter of fiscal 1998 from $232,791 in the second quarter of fiscal 1997.
This is primarily attributable to increased controls of operating expenses and
an increase in operating income from the Company's System Sales division to
$186,000 in the second quarter of fiscal 1998 from approximately $40,000 in
the second quarter of 1997.
<PAGE>
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS BY PRODUCT LINE FOR THE THREE MONTHS ENDED MAY 31, 1998 AND 1997
For the three months ended May 31, 1998
---------------------------------------
<S> <C> <C> <C> <C>
System Sales/ Customized
STS Maintenance Billing Total
-------------- ------------ -------- ----------
Sales, Net . . . . . . . . . . . . $ 5,555,832 $ 1,322,783 $220,093 $7,098,708
Cost of Sales. . . . . . . . . . . 4,219,344 297,803 - 4,517,147
-------------- ------------ -------- ----------
Gross Profit . . . . . . . . . . . 1,336,488 1,024,980 220,093 2,581,561
-------------- ------------ -------- ----------
General & Administrative Expenses:
General. . . . . . . . . . . . . . 840,633 787,089 199,435 1,827,157
Depreciation . . . . . . . . . . . 47,916 28,330 - 76,246
Amortization . . . . . . . . . . . - - - -
Bad Debt . . . . . . . . . . . . . 79,680 - - 79,680
Corporate Allocations: . . . . . . -
General. . . . . . . . . . . . . . 54,215 14,586 4,862 73,663
Depreciation . . . . . . . . . . . 32,516 8,748 2,916 44,180
-------------- ------------ -------- ----------
1,054,960 838,753 207,213 2,100,926
-------------- ------------ -------- ----------
Operating Income . . . . . . . . . 281,528 186,227 12,880 480,635
Other Income . . . . . . . . . . . 92,605
----------
Pretax Income. . . . . . . . . . . 573,240
Income Tax Provision . . . . . . . 257,150
----------
Income from Continuing Operations $ 316,090
==========
Basic Earnings per Share-. . . . . $ 0.08
Continuing Operations ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the three months ended May 31, 1997
---------------------------------------
<S> <C> <C> <C> <C>
System Sales/ Customized
STS Maintenance Billing Total
-------------- ------------ -------- ----------
Sales, Net . . . . . . . . . . . . $ 4,200,661 $ 1,274,141 $142,173 $5,616,975
Cost of Sales. . . . . . . . . . . 3,097,975 292,751 - 3,390,726
-------------- ------------ -------- ----------
Gross Profit . . . . . . . . . . . 1,102,686 981,390 142,173 2,226,249
-------------- ------------ -------- ----------
General & Administrative Expenses:
General. . . . . . . . . . . . . . 725,240 823,065 44,335 1,592,640
Depreciation . . . . . . . . . . . 31,329 59,055 - 90,384
Amortization . . . . . . . . . . . - 2,084 - 2,084
Bad Debt . . . . . . . . . . . . . 61,520 114 - 61,634
Corporate Allocations:
General. . . . . . . . . . . . . . 37,552 37,771 2,131 77,454
Depreciation . . . . . . . . . . . 8,676 17,844 - 26,520
-------------- ------------ -------- ----------
864,317 939,933 46,466 1,850,716
-------------- ------------ -------- ----------
Operating Income 238,369 41,457 95,707 375,533
Other Income 47,058
----------
Pretax Income 422,591
Income Tax Provision 189,800
----------
Income from Continuing Operations $ 232,791
==========
Basic Earnings per Share-. . . . . $ 0.06
Continuing Operations ==========
</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 $8,337 at May 31, 1998 from
$1,621,784 at November 30, 1997. During the six months ended May 31, 1998,
investment securities (excluding WCII Stock) increased $3,300,000. Combined,
the Company's cash and investment holdings increased approximately $1,687,000.
During the first half of 1998, activities from continuing operations provided
approximately $55,000. This is down from net cash provided from continuing
operations of approximately $563,000 during the first half of fiscal 1997.
However, this decrease is due to the payment of approximately $664,000 in
income taxes during the first half of 1998. Additionally, the Company used
approximately $440,000 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 $5,250,378 from $7,185,435 as of
November 30, 1997 ($4,749,219 and $6,544,453, net of allowance for
uncollectibles as of May 31, 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 May 31, 1997 was approximately
$4,428,000. The $822,000 increase in receivables reflects the Company's
current growth.
Inventory increased from $401,508 as of November 30, 1997 to $920,466 as
of May 31, 1998. This increase is primarily due to the build up of inventory
levels to support installations for the Ratex product line scheduled in the
third quarter of fiscal 1998.
As of May 31, 1998, the Company had a net current and deferred tax
liability of $4,564,117 compared with a net current and deferred tax asset of
$940,386 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
$2,504,864 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 $270,000 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 $360,000 in
furniture, fixtures, and leasehold improvements as a result of the Company's
relocation of its office facilities, less approximately $120,000 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 $4,596,837 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 May 31, 1997, there was
approximately $2,754,000 in accounts payable and accrued liabilities resulting
from continuing operations. This approximate $1,842,000 increase is primarily
attributable to the growth in STS revenue. STS cost of sales increased from
approximately $6,047,000 during the first half of fiscal 1997 to approximately
$8,284,000 during the first half of fiscal 1998.
Deferred revenue decreased to $566,864 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 a moderate increase in the third
quarter of fiscal 1998. STS revenues are also expected to increase for the
fourth fiscal quarter of 1998, as new universities are implemented for the
program during the course of the summer 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 and 1999; however, there can be no assurance
that increased sales will materialize.
It is anticipated that the cost of human resources will grow 10%-15% as
the Company increases its employee base to expand its research and
development, products, services and market penetration. This increase will
ensure adequate 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 May 31, 1998, the Company had cash of $8,337, other investments of
$5,500,000, and 479,387 restricted shares of WinStar stock (WCII: NASDAQ),
with a fair market value of $15,696,913 (net of estimated taxes of $1,410,100
on the unrealized gain). 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
traditionally 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: July 3, 1998
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11; Earnings (Loss) per share
Earnings (Loss) per share is calculated as follows:
Three Months Ended Six Months Ended
------------------ ----------------
May 31, 1998 May 31, 1997 May 31, 1998 May 31, 1997
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Income from continuing operations . . $ 316,090 $ 232,791 $ 635,785 $ 318,655
Loss from discontinued operations . . - $ (697,858) $ (68,428) $ (988,963)
Gain on sale of discontinued. . . . . - - $ 8,162,389 -
Operations
------------- -------------- -------------- --------------
Net Income (Loss) . . . . . . . . . . $ 316,090 $ (465,067) $ 8,729,746 $ (670,308)
============= ============== ============== ==============
BASIC EARNINGS (LOSS) PER SHARE:
- -------------------------------------
Weighted average number of. . . . . . 3,787,500 3,818,333 3,787,500 3,818,333
shares outstanding ============= ============= ==============
Continued operations. . . . . . . . . $ 0.08 $ 0.06 $ 0.17 $ 0.08
Discontinued operations . . . . . . . - (0.18) (0.02) (0.26)
Sale of discontinued operations . . . - - 2.16 -
------------- -------------- -------------- --------------
Net income (loss) . . . . . . . . . . $ 0.08 $ (0.12) $ 2.31 $ (0.18)
============= ============== ============== ==============
DILUTED EARNINGS (LOSS) PER SHARE
- -------------------------------------
Weighted average number of. . . . . . 3,787,500 3,818,333 3,787,500 3,818,333
shares outstanding
Net effect of dilutive stock options. 120,319 35,916 97,997 30,175
based on the treasury stock
method using the average
market price
------------- ------------- --------------- -------------
Common Stock including assumed. . . . 3,907,819 3,854,249 3,885,497 3,848,508
Conversions ============= ============= =============== =============
Continued operations. . . . . . . . . $ 0.08 $ 0.06 $ 0.16 $ 0.08
Discontinued operations . . . . . . . - (0.18) (0.02) (0.26)
Sale of discontinued operations . . . - - 2.11 -
------------- -------------- -------------- --------------
Net income (loss) . . . . . . . . . . $ 0.08 $ (0.12) $ 2.25 $ (0.18)
============= ============== ============== ==============
</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-30-1998 NOV-30-1997 NOV-30-1998 NOV-30-1997
<PERIOD-END> MAY-31-1998 MAY-31-1997 MAY-31-1998 MAY-31-1997
<CASH> 8,337 193,424 8,337 193,424
<SECURITIES> 5,500,000 2,203,332 5,500,000 2,203,332
<RECEIVABLES> 5,250,378 5,551,134 5,250,378 5,551,134
<ALLOWANCES> (501,159) (898,945) (501,159) (898,945)
<INVENTORY> 920,466 524,172 920,466 524,172
<CURRENT-ASSETS> 27,343,930 7,419,484 27,343,930 7,419,484
<PP&E> 2,504,864 4,051,265 2,504,864 4,051,265
<DEPRECIATION> (1,352,219) (1,663,250) (1,352,219) (1,663,250)
<TOTAL-ASSETS> 29,328,363 13,782,857 29,328,363 13,782,857
<CURRENT-LIABILITIES> 9,790,020 4,046,912 9,790,020 4,046,912
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 7,366,228 7,423,928 7,366,228 7,423,928
<OTHER-SE> 12,064,715 1,793,715 12,064,715 1,793,715
<TOTAL-LIABILITY-AND-EQUITY> 29,328,363 13,782,857 29,328,363 13,782,857
<SALES> 7,098,708 5,616,975 14,125,486 10,473,566
<TOTAL-REVENUES> 7,098,708 5,616,975 14,125,486 10,473,566
<CGS> 4,517,147 3,390,726 8,920,308 6,452,866
<TOTAL-COSTS> 6,618,073 5,241,442 13,140,734 10,001,717
<OTHER-EXPENSES> (18,833) (11) (35,573) 134
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 0 678 116
<INCOME-PRETAX> 573,240 422,591 1,155,985 579,455
<INCOME-TAX> 257,150 189,800 520,200 260,800
<INCOME-CONTINUING> 316,090 232,791 635,785 318,655
<DISCONTINUED> 0 (697,858) (68,428) (988,963)
<EXTRAORDINARY> 0 0 8,162,389 0
<CHANGES> 0 0 0 0
<NET-INCOME> 316,090 (465,067) 8,729,746 (670,308)
<EPS-PRIMARY> 0.08 (0.12) 2.31 (0.18)
<EPS-DILUTED> 0.08 (0.12) 2.25 (0.18)
</TABLE>
