SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 1997
Commission File No. 1-13830
TELESOFT CORP.
(Exact name of Registrant as specified in its charter)
Arizona 86-0431009
(State of Incorporation) (IRS Employer Identification No.)
3443 North Central Avenue #1800
Phoenix, Arizona 85012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 308-2100
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of each exchange on which registered
Common Stock, No Par Value Pacific Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act : None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
Check if there is no disclosure of delinquent filings in this Form and no
disclosure will be contained in the definitive Proxy Statement incorporated by
reference in Part III of this Form 10-KSB. X
Issuer's revenues from continuing operations for its fiscal year: $22,593,450
As of February 19, 1998, the number of shares of Common Stock outstanding was
3,787,500 and the aggregate market value of the Common Stock (based on the
closing price on that date) held by non-affiliates of the Registrant was
approximately $6,440,000.
Documents Incorporated By Reference
Portions of the Registrant's definitive Proxy Statement for its forthcoming
Annual Meeting of Shareholders are incorporated herein by reference into Part
III of this Report.
Exhibit Index Page 30
PART I
ITEM 1. BUSINESS.
General
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.
Telesoft Corp. ("Company" or "Telesoft") designs, distributes, installs,
maintains and manages telecommunications systems comprised of integrated
hardware and proprietary software for the automated provision of billing and
other telecommunications services to higher education, Fortune 1000,
governmental agencies, Regional Bell Operating Companies ("RBOC's"), and long
distance interexchange carriers. The Company offers the following integrated
hardware and proprietary software systems and services: the STS Outsourcing
Program, Customized Billing Outsourcing Services, TelMaster Telemanagement
System, Distribution Control System and RATEX Bookstore Solution.
Historical Highlights
The Company was incorporated in Arizona in May 1982. From 1982 to 1986 the
Company focused primarily on its DCS product line. In 1986 the Company began
to shift its focus to developing and marketing proprietary software and
integrated systems to serve the long distance telecommunications and data
management and call processing needs of the university and college market.
In April 1996 the Company acquired GoodNet, an Arizona-based internet
service provider to deploy a nationwide ATM network to sell high-speed
connectivity to high-bandwidth users.
In January 1998, the Company sold its GoodNet subsidiary. (See Discontinued
Operations, below) Its executive offices are located at 3443 North Central
Avenue, Suite 1800, Phoenix, Arizona 85012, and its telephone number is (602)
308 2100.
The Company's products and services are broken down in the following product
lines for financial reporting purposes:
(1) STS Outsourcing Program Revenue,
(a) On-Site and Polling Programs,
(b) SunDial Off-Campus Program,
(2) Customized Billing Outsourcing Services.
(3) System Sale and Maintenance revenue
(a) TMS and TelMaster,
(b) RATEX,
(c) DCS,
(d) Software and Hardware Recurring Maintenance Revenue,
Through its former 71% owned subsidiary, Telesoft Acquisition Corp II, d.b.a.
GoodNet ("GoodNet") which was acquired in April 1996, Telesoft became a
National
Service Provider offering high capacity data communication to the Internet for
high-bandwidth users including Internet Service Providers, universities and
colleges, large landlords, RBOC's, Cable Television Operators and Value Added
Resellers. In January 1998, the Company sold GoodNet to Winstar
Communications
Incl. ("Winstar")
Products and Services
Student Telephone Services (STS) Outsourcing Program
STS Outsourcing Program. The Company provides an outsourcing program to
universities and colleges to establish long distance resale programs to
residence hall students, off-campus students, administrative staff and
faculty. Through its Student Telephone Services Outsourcing Program ("STS
Program"), the Company offers a complete billing solution including the
following services: (1) production and distribution of marketing literature
for the program, (2) on-site solicitation and registration of program
participants, (3) installation of hardware and billing software,
(4) collection, costing and processing of long-distance billing data,
(5) production and distribution of individual bills, (6) on-site or remote
customer service center, (7) management of accounts receivable
and collections, (8) clearing-house services for the various suppliers
involved with the program, and (9) financial reporting services to the
university or college on the performance of the program.
In August 1994, the Company began to offer such service to off-campus
residents through its SunDial Program ("SunDial Program"). The SunDial
system is an integrated hardware and proprietary software system, which
extends the STS Program services and advantages to off-campus students.
The SunDial platform allows STS subscribers to place long distance calls
from off-campus housing using a local number for long distance service
from local area dwellings or using "1-800" access dialing for long distance
service anywhere in the United States at competitive rates, and the
ability to continue to use the Program after graduating from the University.
The SunDial platform uses Telesoft's proprietary software and Motorola
hardware specially adapted for this software application.
Telesoft markets these programs through alliances developed with RBOC's and
interexchange carriers such as NYNEX, Bell Atlantic, MCI, and AT&T.
Telesoft administers and operates its STS Program on a turnkey basis on 73
university and college campuses of various sizes including Rutgers College,
the University of Southern California, the University of Delaware, SUNY
Buffalo, Smith College and Indiana University.
Telesoft has sold the system, software and services required to administer the
STS Program to approximately 44 campuses of various sizes nationwide (See
"System Sales and Maintenance Revenue"), including Yale University, State
University of New York at Oswego, Case Western Reserve University, the
University of Oklahoma, Auburn University, Fairfield University and George
Mason University. In the event of a sale, the Company continues to maintain
and service the hardware and software under renewable one-year
maintenance contracts.
Customized Billing Outsourcing Services.
The Company has concentrated its marketing efforts on the provision of
customized billing outsourcing applications to Fortune 1000 companies and
governmental agencies in conjunction with large interexchange carriers and
RBOC's. In 1996, the Company secured a customized billing contract for 140
agencies for the State of Massachusetts in conjunction with Bell Atlantic. In
the third fiscal quarter of 1997, the Company signed a contract with Bell
Atlantic to provide billing and customer care outsourcing services including a
new residential Centrex product ("Restrex") to be offered to Multiple Dwelling
Units (MDU's) dwellers in New York City. This product is expected to include
dial-tone, long-distance, internet access, and cable TV services. This
product is expected to be released by Bell Atlantic in the second calendar
quarter of 1998. The Company also provides customized billing services for
Blue Cross & 1999. Blue Shield of Massachusetts, and to the State of
West Virginia.
System Sales and Maintenance Revenue
The Company offers the following integrated hardware and proprietary software
systems and services: the Telecommunications Management System, TelMaster, the
RATEX Bookstore Solution, and the Distribution Control System.
Telecommunications Management System and TelMaster. The Telecommunications
Management System ("TMS") is a proprietary text-based software solution used
by the higher education, Fortune 1000, companies and the health care
and governmental agency markets to manage telephony data for billing and
ad-hoc reporting purposes. TMS is comprised of a series of software
modules and is typically sold in a package including hardware,
software, installation, training, and on-going hardware and software
maintenance.
TelMaster is Telesoft's third generation telemanagement system. Based on
graphical user interface technology, this product was released in the fourth
quarter of 1996 and was installed at SUNY Oswego and GE Medical. During 1997,
TelMaster was installed at the University of Oklahoma Health Sciences, Ohio
Northern University, Geneva College, Dana Corporation, Briggs Stratton
Corporation, and the State of South Dakota.
In addition to its extensive higher education customer base, the Company
currently services customers such as Allied Signal Corp., St. Luke's Roosevelt
Hospital in New York, Florida, Maricopa County in Arizona, and Bolt, Beranek &
Newman. Telesoft also provides telecommunications data management services
and software for Bell of Pennsylvania and Pacific Bell Corp.
RATEX. In March 1995 the Company acquired the RATEX line of software and
related assets. RATEX is a software program designed for University
bookstores to track merchandise through the ordering cycle to the point
of sale. The RATEX product line includes software modules for
merchandise and inventory management, buyer information, financial and
accounting, point of sale and scanning for management acceptance of
credit/debit cards, mail order and general merchandise management
application. RATEX systems have been installed in over 60
universities in North America, including the University of California-Los
Angeles bookstores.
Distribution Control System. The Company has offered the Distribution Control
System ("DCS") since 1982. DCS is an automated control solution for the
wholesale distribution industry. The Company includes extensive on-site
training and maintenance services as part of its DCS package. The fully
integrated software package has a modular design including applications for
sales order processing, inventory control, accounts receivable and sales
analysis, and is typically installed on a Motorola Unix server.
STS and System Sales Competition
The telecommunications industry is highly competitive and subject to rapid
technological change. Failure to keep pace with the technological advances
could adversely affect the Company's competitive position and future
prospects. In order to maintain or improve its position, the Company must
continue to enhance its current products and develop new products and services
in a timely fashion.
In connection with its STS Program, the Company competes with LCI and ACC
Corp., both of which provide long distance telephone service on a resale
basis and offer long distance billing services to universities. The
Company also competes with MCI, Sprint, AT&T and other long distance
providers which market long distance services to the public and
directly to college campuses. In connection with its SunDial Program,
the Company competes with MCI, Sprint, AT&T and similar long distance
providers.
In connection with its Telemanagment system division, the Company competes
with Telco Research and Comco, both of which provide telemanagment
systems and services to the university, health care, government and
general business markets.
In connection with its RATEX product line, the Company competes with large
book wholesalers, such as Nebraska Book Company and Missouri Books Systems,
which provide management systems to universities and college bookstores.
The Company believes that the factors for its success include quality,
technical capability, reliability, price and promptness of performance.
While the Company has competed successfully against the foregoing companies,
most, if not all, of the Company's existing and potential competitors
have longer operating histories and significantly greater financial,
technical, sales, marketing and human and other resources than the
Company. Most if not all, of these organizations have greater name
recognition and a larger installed base than the Company. The Company's
competitors could, in the future, introduce products and services with
more features and lower prices than the Company's product and service
offerings. These organizations could also fund existing or new product and
services with other product or services to compete with the Company. While
the Company has operated successfully against such competition in the past,
there can be no assurance that it will be able to do so in the
future.
Sales and Marketing
The Company's sales staff consists of ten people who are responsible for all
of the Company's marketing and sales efforts. The Company has agreements
with certain of its key sales personnel, which contain confidentiality
provisions, and prohibits such persons from competing with the Company
within certain territories during the term of their employment and for a period
of six months thereafter. Sales personnel are paid on both a salary and
commission basis. The Company's executive officers also devote a
substantial amount of their time to developing and maintaining personal
relationships with the Company's customers and with prospective new
customers.
Research and Development
The Company conducts an active and ongoing research and development program
that focuses on developing new and improved software products, and
particularly those that tie into or enhance existing programs. Research
and development costs for the fiscal years ended November 30, 1997 and 1996
were $414,000 and $266,000, respectively.
Regulation
The Company's ability to pursue its business activities is affected or
regulated by various federal agencies and departments of state
governments. Commencement of new services frequently requires licenses
from public utilities commissions. There is no assurance that the Company
or its customers, if required, will be successful in their efforts to
obtain necessary licenses or regulatory approvals. The inability of the
Company to secure any necessary licenses or approvals could have a material
adverse effect on its business. In addition to specific regulations, the
Company is subject to all federal, state and local rules and regulations
imposed upon businesses generally. The cost of compliance with
regulations is an additional cost of doing business for the Company. The
Company cannot predict the impact, if any, that future regulation or
regulatory changes may have on its business.
Warranties
The Company offers a warranty of 90 days on hardware and software and an
extended warranty program in connection with the Company's service and
maintenance programs. The Company has not had any material claims made under
its warranty program.
Patents, Trademarks, Licenses and Copyrights
The Company regards its software as proprietary and attempts to protect it
with copyrights, trademarks, and though the use of trade secret laws
and restrictions on disclosure, copying and transferring title. The Company
also attempts to preserve its proprietary rights by contractual
non-disclosure safeguards and restrictions on transferability in its
software license agreements. Additionally, the Company does not provide
the source codes for its products to its customers. The Company's
products are not patented and are not the subject of any current patent
application, nor is it anticipated that any of its products will be
patented. Existing copyright laws afford only limited practical
protection for its software. Accordingly, despite precautions taken
by the Company, it may be possible for unauthorized third parties to copy
certain portions of the Company's products and to obtain and use information
that the Company regards as proprietary.
Key officers and employees have assigned to the Company certain technical and
other information and patent rights, if any, acquired by them during their
employment by the Company and after termination of their employment with the
Company, if such information or rights arose out of information obtained by
them during their employment. They have also agreed not to use or disclose
any such information for a period of two years following termination
of their employment.
In spite of these precautions, it may be possible for competitors or users to
copy aspects of the Company's products or to obtain information which the
Company regards as trade secrets. However, the Company believes that due to
the rapid pace of innovation within its industry, factors such as
technological and creative skills of its personnel are more important
to establishing and maintaining a technology leadership position within the
industry than are the various legal protections of its technology. The
Company believes that its products and technology do not infringe on any
proprietary rights of others, although there can be no assurance that
third parties will not assert infringement claims in the future.
The Company has not obtained trademark or trade name registration on the use
of the names "Student Telephone Services," "STS Service Bureau,"
"SunDial Program," "RATEX", "DCS" or "Sunbelt Business Computers." The
Company is in the process of investigating the feasibility, and protection,
which might be afforded, by registration of these names, or certain of
them as trademarks or trade names on a national, regional or local basis.
Backlog
Backlog is not material to the Company's business since it ships and installs
its software and systems promptly upon receipt of customers' orders. While
the
Company does tend to experience higher installation activity on university
campuses during the summer months, it has not historically had problems
installing its products and performing its services in a timely fashion.
Employees
As of January 15, 1998, the Company had 105 full-time employees, of which four
were in executive positions, ten were engaged in sales and marketing, eight
were in software development and system management, 13 were in customer service
and the balance are in various support positions. This represents a
decrease during the past year due to the sale of GoodNet. The Company's
employees are not covered by a collective bargaining agreement. The
Company considers its employee relations to be satisfactory.
ITEM 2. PROPERTIES.
During fiscal 1996 and 1997, the Company leased 13,500 square feet of office
space in Phoenix, Arizona, from Joseph W. Zerbib, an officer, director and
principal shareholder of the Company. The Company's obligations under the
terms of its Phoenix office lease were approximately $84,000 and for both
1997 and 1996, under a verbal month-to-month lease. The Company vacated this
space in January 1998 and will be obligated for a minimum of 90 days.
The Company also leases office space in Phoenix, Arizona for its STS and,
previously, its GoodNet operations. In January 1998, the Company relocated
all of its Phoenix, Arizona based operations to this office. The
Company's obligation under the terms of this lease agreement was approximately
$130,000 and $40,000 for the fiscal years ended November 30, 1997 and
1996, respectively.
RATEX leases 2,200 square feet in Fort Washington, Pennsylvania. The
Company's obligations under the terms of its Fort Washington office
lease were approximately $32,000 and $39,000 for 1997 and 1996,
respectively.
Finally, the Company leases office space in Tempe, Arizona, which was used for
GoodNet headquarters prior to its acquisition by the Company. The Company is
currently subleasing this space under terms similar to the Company's
obligation for this lease, which was $7,456 for the fiscal year ended
November 30, 1997.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved as a party to any other legal proceeding other
than various claims and lawsuits arising in the normal course of its business,
none of which, in the opinion of the Company's management, are individually
or collectively material to the Company's business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to security holders through the solicitation of
proxies or otherwise during the fourth quarter of the fiscal year covered by
this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The following table sets forth, for the fiscal periods shown, representative
high and low bid prices in dollars per share as reported by market makers in
the Company's Common Stock on the NASDAQ SmallCap.
<TABLE>
<CAPTION>
Year Ended November 30, 1997
Low High
<S>
<C> <C>
First Quarter $2 3/8 $6 1/2
Second Quarter 3 6 1/2
Third Quarter 2 3/8 4 5/8
Fourth Quarter 2 3/4 4 3/8
<CAPTION>
Year Ended November 30, 1996
Low High
<S>
<C> <C>
First Quarter $4 5/8 $7 3/4
Second Quarter 4 5/8 7 5/8
Third Quarter 3 7/8 7 3/4
Fourth Quarter 2 1/2 4 1/8
</TABLE>
The number of beneficial holders of the Common Stock of the Company as of the
close of business on February 18, 1998 was 419. Although the Company has no
limitations or restrictions on declaring dividends the Company has not
declared or paid dividends on its Common Stock and does not expect to
declare or pay dividends in fiscal 1998.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Background
The Company began as a value-added reseller in the wholesale distribution of
accounting software business (Distribution Control Systems) in 1982. During the
fiscal year ended November 30, 1997, the Company derived approximately 77% of
its revenues from continuing operations from its STS Outsourcing Program. The
balance of revenues were derived from hardware, software, maintenance and
other services in the higher education, Fortune 1000, governmental and
wholesale distribution markets.
The Company has adapted to the fast-paced market changes by shifting its
resources from providing generic or general system hardware and software to
providing a full range of services in its specialty niches. The Company is
continuously developing new products and services to maintain and expand its
market share.
SELECTED FINANCIAL DATA.
The following selected financial data are derived from the Financial
Statements of the Company which have been audited by BDO Seidman, L.L.P.,
independent certified public accountants, for the year ended November 30, 1997
and Coopers & Lybrand, L.L.P. independent certified public accountants, for
the fiscal year ended November 30, 1996. Such selected financial data
should be read in conjunction with the Company's financial statements and
related notes set forth in Item 7 herein.
<TABLE>
<CAPTION>
Years Ended November 30
<S>
<C> <C>
Statement of Operation Data (1):
1997 1996
Net revenues $22,593,450 20,742,993
Cost of sales (14,330,388) (12,821,582)
Gross profit 8,263,062 7,921,411
Income from operations 561,191 1,297,762
Other income (expense) 163,094 305,773
Income from continuing operations 402,985 989,335
Earnings per share- continuing
operations $. 11 $0.26
Weighted average number of
shares outstanding 3,802,874 3,817,130
<CAPTION>
Years Ended November 30
<S>
<C> <C>
Balance Sheet Data: 1997 1996
Cash & Investments $3,821,784 $3,722,355
Working capital 4,080,013 3,248,604
Total assets 17,640,850 14,652,936
Short-term debt 90,523 6,840
Long-term debt 371,551 -
Total stockholders' equity 8,906,507 9,887,951
<FN>
(1) Figures for 1996 and 1997 are unaudited and reflect results from
continuing operations.
</TABLE>
<TABLE>
<CAPTION>
Results of Operations by Product Line for the fiscal year ended November 30,
1997 with comparative totals for the year ended November 30, 1996
<S>
<C> <C> <C> <C> <C>
For the year ended November 30, 1997 Total for
the year ended
System Sales/ Customized November 30, 1996
STS Maintenance Billing Total
Sales, Net $17,430,383 $4,197,480 $965,587 $22,593,450 $20,742,993
Cost of Sales 13,288,224 1,042,164 - 14,330,388 12,821,582
------------ ----------- --------- ------------ ------------
Gross Profit 4,142,159 3,155,316 965,587 8,263,062 7,921,411
------------ ----------- --------- ------------ ------------
General &
Administrative
Expenses:
General 3,386,395 3,177,039 210,532 6,773,966 5,732,588
Depreciation 125,470 201,682 - 327,152 312,641
Amortization - 8,333 - 8,333 8,333
Bad Debt 197,327 655 - 197,982 264,056
Corporate
Allocations:
General 127,155 127,155 7,706 260,015 212,824
Depreciation 44,591 87,831 - 134,423 93,207
------------ ----------- --------- ------------ ------------
3,880,938 3,602,695 218,238 7,701,871 6,623,649
------------ ----------- --------- ------------ ------------
Operating
Income (Loss) 261,221 (447,379) 747,349 561,191 1,297,762
Other Income 163,094 305,773
------------ ------------
Pretax Income 724,285 1,603,535
Income Tax Provision 321,300 614,200
------------ ------------
Income from Continuing Operations $402,985 $989,335
Primary Earnings per Share-Continuing Operations $0.11 $0.26
</TABLE>
Results of Operations for the Years ended November 30, 1997 and 1996
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 8.9% to $22,593,450 for the fiscal year ended November
30, 1997 compared to $20,742,993 for the fiscal year ended November 30, 1996.
The Company's revenue is derived from three principal product lines and
services: STS Outsourcing Programs (STS), System Sales and Maintenance, and
Customized Billing Outsourcing Services.
STS revenues were $17,430,000 for the fiscal year ended November 30, 1997
compared to $15,000,000 for the fiscal year ended November 30, 1996, an
increase of 16.2%. A substantial portion of this increase occurred the
fourth quarter of fiscal 1997 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,
representing approximately $1,000,000 and $625,000 in revenue, respectively.
Revenues from System Sales and Maintenance were $4,198,000 for the fiscal
year ended November 30, 1997 compared to $5,102,000 for the fiscal year ended
November 30, 1996, a decrease of 17.7%. This decrease was mainly attributable
to delays in the release of TelMaster, the "Client/Server" and "Graphical
User Interface" environment version of the Company's existing text-based
telemanagement software modules. See "Future Expectations" below. For the
fiscal year ended November 30, 1997 and 1996, revenues from Customized
Billing Outsourcing Services were approximately $965,000 and $640,000.
This increase is due to the development of customized billing services for
one primary customer. The Company received a non-recurring fee of
approximately $320,000 from this customer during the third quarter of
fiscal 1997.
Total gross profit increased by 4.3% to $8,263,062 for the fiscal year ended
November 30, 1997 compared to $7,921,411 for the fiscal year ended November 30,
1996. Cost of goods sold was approximately 76% of STS revenues for the fiscal
year ended November 30, 1997, comparable with the fiscal year ended November
30, 1996. Cost of goods sold as a percentage of system sale/maintenance
revenues was approximately 25% for the fiscal year ended November 30, 1997
compared with 30% for the fiscal year ended November 30, 1996. This
decrease is due to a higher percentage of maintenance revenues, which have
a higher gross profit rate than system sales revenues, during fiscal
1997.
General and administrative expenses increased by 16.3%, or $1,078,222 in
fiscal 1997 to $7,701,871 from $6,623,649 in fiscal 1996. Approximately
$105,000 of this increase was attributable to the write down of equipment
in inventory that was going to be used for the SunDial program. Because
the usage levels of this program did not meet expectations in the
smaller-campus environment, the effort to market the SunDial program has been
significantly decreased and the Company has been unsuccessful at reselling
the SunDial related equipment to date. Salaries increased approximately
$600,000 from fiscal 1996 to fiscal 1997. This is a result of increased
personnel hired for product development, sales and marketing and customer
support. There was no capitalization of software development expenditures
during the fiscal year ended November 30, 1997. During the fiscal year
ended Novemer 30, 1996, approximately $276,000 was capitalized.
Research and development costs for the fiscal years ended November 30, 1997
and 1996 were $414,000 and $266,000, respectively.
The provision for income taxes was $321,300 and $614,200 for the fiscal years
ended November 30, 1997 and 1996, respectively. This represents a 44% and 38%
of income before provision for income taxes for the fiscal 1997 and 1996,
respectively. This increase is partially attributable to decreased interest
from tax free investments and increased state income taxes.
Income from continuing operations decreased to $402,985 in fiscal 1997 from
$989,335 in fiscal 1996. This is primarily attributable to an operating loss
from the Company's System Sales division of approximately $450,000 resulting
from decreased System Sales revenue.
Discontinued Operations: Telesoft Acquisition Corp II, d.b.a. GoodNet
("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 cash plus 479,387 shares (based on the 20 day average price of
WinStar stock) of WinStar restricted common stock, which had an aggregate
fair market value of approximately $13.9 million as of the close of business
on January 12, 1998 which includes a tentative gain of approximately $1,760,000
from the date of close of the transaction. The shares are restricted for a
period of one year and include piggy-back registration rights should the
company complete an additional registration. After commissions and related
legal expenses, the Company will realize an approximate $10,000,000 pretax
gain on the sale in the first quarter of fiscal 1998. Additionally, the
Company received $235,000 in cash to offset GoodNet's net cash disbursements
from December 12, 1997 through the date of the sale.
The Company will account 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, 400,000 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.
Material Changes in Financial Position
Cash and cash equivalents increased to $1,621,784 at November 30, 1997 from
$219,023 at November 30, 1996. During the fiscal year ended November 30, 1997,
investments decreased $1,303,332. Combined, the Company's cash and investment
holdings were relatively unchanged from the prior year. During fiscal 1997,
activities from continuing operations provided approximately $2,330,000.
These cash flows supported the Company's discontinued operations, which used
approximately $1,826,000 net in cash during fiscal year 1997. Additionally, the
company used approximately $385,000 in cash to purchase property and equipment
for its continuing operations.
Accounts receivable increased to $7,185,435 as of November 30, 1997 from
$6,386,596 as of November 30, 1996 ($6,544,453 and $5,678,469, net of
allowance for uncollectibles as of November 30, 1997 and 1996
respectively). This increase is primarily due to the growth of GoodNet's
ATM product line during the fiscal year. Accounts Receivable from
GoodNet related products increased approximately $365,000 during fiscal 1997.
The increase is also attributable to the increase in STS revenue.
Accounts receivable from students at Rutgers University and the University
of Southern California, both new STS schools during fiscal 1997, was
approximately $790,000 as of November 30, 1997.
The Company's deferred tax asset increased to a net deferred tax asset of
$990,700 as of November 30, 1997 from a net deferred tax asset of $80,800 as of
November 30, 1996. $405,800 of this increase is due to expenses from the
Company's discontinued operations that will be included as a part of the basis
in its subsidiary, GoodNet, for income tax purposes. An additional $482,200 of
this increase is due to an Internal Revenue Service ("IRS") examination, which
the Company underwent during the current year. The results of the IRS
examination has been recorded as a current liability in the accompanying
financial statements, but is currently in appeals. Virtually all of the
pending issues are due to timing differences that the Company will be able to
utilize in future years should the appeal be unfavorable to the Company.
Approximately an additional $40,000 of this increase is due to net operating
losses that the Company should be able carryforward for state income tax
purposes. The Company believes that is more likely than not that it will
realize the net deferred tax asset based upon the Company's future
profitability and on its impending gain on the sale of GoodNet.
Accordingly, no valuation allowance has been provided.
Property and equipment before accumulated depreciation increased to $5,151,229
as of November 30, 1997 from $3,349,371 as of November 30, 1996. This
increase is primarily due to approximately $1,640,000 invested in
GoodNet related assets, including expansion of GoodNet's ATM Backbone.
Accounts payable and accrued liabilities increased to $6,632,968 as of
November 30, 1997 from $4,085,134 as of November 30, 1996. This increase
is due to three primary factors: growth of GoodNet's ATM Backbone, increased
STS revenue, and generous payment terms from a supplier of GoodNet ATM
equipment. Cost of sales, excluding depreciation, as a result of expansion
of GoodNet's ATM backbone increased from approximately $85,000 per month in
the last quarter of fiscal 1996 to approximately $350,000 per month
during the last quarter of fiscal 1997. STS cost of sales increased from
approximately $4,590,000 during the fourth quarter of fiscal 1996 to
approximately $6,240,000 during the fourth quarter of fiscal 1997. As of
November 30, 1997, there is approximately $375,000 in payables relating to
ATM equipment. The supplier of this equipment has given the Company extended
payment terms. This liability was assumed by WinStar upon the sale of
GoodNet in January 1998.
Deferred revenue increased to $1,245,806 from $526,351 as of November 30,
1997. This increase is primarily due to the growth of the ATM product
line.
Future Expectations
STS revenues are projected to increase to approximately 10%-15% 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 has experienced delays in the release and installation of certain
modules of TelMaster, the "Client/Server" and "Graphical User Interface"
environment version of the Company's existing text based telemanagement
software modules. Certain modules of this product were released in the third
quarter of 1996, and installations have been completed in the second and
third quarters of 1997. Based on the full product release in January 1998,
the Company expects to sell and install a significantly higher number of
TelMaster systems in fiscal 1998, however, there can be no assurance
that this will happen.
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.
Accounting Pronouncements:
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 periods ending after December 15, 1997.
Pursuant to the provisions of SFAS 128, the Company's basic net (loss) income
per share would have been ($.24) and $.20 and its diluted (loss) earnings per
share would have been ($.22) and $.20 for the fiscal years ended November
30, 1997 and 1996, respectively.
Statement of Financial Accounting Standards No. 129, Disclosure of Information
about Capital Structure, ("SFAS. 129") issued by the FASB is effective for
financial statements ending after December 15, 1997. The new standard
reinstates various securities disclosure requirements previously in effect
under Accounting Principles Board Opinion No. 15, which has been superseded
by SFAS NO. 129. The Company does not expect adoption of SFAS. 129 to have a
material effect, if any, on its financial position or results of
operations.
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income, ("SFAS. 130") issued by the FASB is effective for financial statements
with fiscal years beginning after December 15, 1997. Earlier application is
permitted. SFAS. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The Company does not expect adoption of SFAS. 130 to
have a material effect, if any, on its financial position or results of
operations.
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information, ("SFAS. 131") issued by
the FASB is effective for financial statements with fiscal years beginning
after December 15, 1997. Earlier application is permitted. SFAS. 131
requires that public companies report certain information about
operating segments, products, services and geographical areas in which
they operate and their major customers. The Company does not expect
adoption of SFAS. 131 to have a material effect,if any, on its financial
position or results of operations.
Statement of Position 97-2 Software Revenue Recognition, (SOP 97-2) issued by
the accounting standards executive committee, is effective for fiscal years
beginning after December 15, 1997. Earlier application is permitted. SOP 97-2
provides guidance on when revenue should be recognized and in what amounts for
licensing, selling, leasing, or other wise marketing computer software. The
Company does not expect adoption of SOP 97-2 to have a material effect, if
any, on its financial position or results of operations.
Year 2000 Computer Issues
All of the Company's accounting software, including software available for
sale, utilizes a four-digit year field. Therefore, the Company does not
anticipate any material impact from year 2000 issues.
Liquidity and Capital Resources
From inception through the present, the Company has funded its operations
primarily through internally generated cash flow.
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 Service Bureau installations for the following
fall season.
At November 30, 1997, the Company had cash of $1,621,784 and investment
securities of $2,200,000. In January 1998, the Company received approximately
$3,500,000 cash and 479,387 shares of WinStar restricted common stock from the
sale of GoodNet valued at $18.5 million. The Company believes that present
cash reserves available, the cash received from the sale of GoodNet, the
existing line of credit, 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 Service Bureau
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 Service Bureaus begin in the fall and weaken during winter holiday
and the summer months when students are on vacation. As a result, the
Company's revenues have consistently been highest during the fourth and
second quarters.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and schedules are included herewith commencing on
page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
In January, 1997, the Company, acting at the direction of its Board of
Directors, informed Semple & Cooper, PLC, that it desired to obtain proposals
for its November 30, 1996 audit from a National CPA firm. In February 1997, the
Company selected Coopers & Lybrand, LLP as its new independent accountants.
On October 16, 1997, Coopers & Lybrand, L.L.P informed the Company that they
resigned as the Company's independent certified public accountants.
Coopers & Lybrand, L.L.P.'s reports on the Company's financial statements for
the year ended November 30, 1996, did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope, or principles. There were no disagreements with Coopers &
Lybrand, L.L.P. on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure through
Coopers & Lybrand, L.L.P.'s issuance of their report in connection with
their audit of the Company's financial statements for the year ended
November 30, 1996 and through the interim period ending May 31, 1997.
During the quarter ended August 31, 1997, Coopers & Lybrand, L.L.P. (former
accountant) brought the following issues to the attention of the Company's
management:
Goodwill GoodNet: the former accountant informed the Company that in order to
evaluate the recoverability of goodwill associated with GoodNet, the Company
would need to prepare a detailed forecast of GoodNet's projected income and
cash flows. Based on the results of this forecast the Company must
evaluate whether the asset is expected to be recovered through GoodNet's
earnings based on guidance of SFAS 121 "Impairment of Long Lived Assets".
If the projected earnings are not sufficient to recover the goodwill, the
Company is required to consider whether the asset is impaired as defined by
SFAS 121. If the Company determines that the asset is impaired, it is
required to reduce the goodwill to its net realizable value. The former
accountant did not believe that the Company has completed such an analysis,
and therefore should consider a write down of a portion of its intangible
assets related to GoodNet. It is the opinion of the Company's management,
based upon its internal projections, that the Company will be able to
recover the goodwill associated with GoodNet. Management believes that a
majority of the goodwill associated with GoodNet was derived from its dialup
business, which is a profitable line of business.
Deferred Tax Asset: The former accountant informed the Company that deferred
tax assets must be evaluated for recoverability in accordance with the
provisions of SFAS 109 "Accounting for Income Taxes". In the opinion
of the former accountant, the Company has sold 25% of the its interest
in GoodNet, and therefore the Company is unable, from the date of sale, to
include GoodNet in the consolidated tax return of the Company. The former
accountant believes that since GoodNet has no proven prior taxable
income and that there is no assurance of sufficient amount of future income,
a $653,000 deferred tax asset relating to GoodNet should be reserved for
at the end of the quarter ended August 31, 1997. It is the opinion of the
Company's management that the Company will utilize the deferred tax asset
either through future earnings or by securing additional interest in GoodNet
in order to include them in the consolidated tax return of the Company.
On December 15, 1997, the Company, acting on the direction of its Board of
Directors, selected BDO Seidman, L.L.P.(BDO), as its new independent certified
public accountants. Management did not consult with BDO regarding the above
issues prior to engaging them as the new accountants. Management did give the
former accountant authorization to discuss the above issues with BDO.
Due to the subsequent sale of GoodNet at a substantial profit (See
"Discontinued Operations"), the above issues identified by the former
accountant were not a concern as of November 30, 1997.
The audit committee did not discuss the above issues with the former
accountant.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECIION 16(A) OF THE EXCHANGE ACT
The following sets forth certain information with respect to directors and
executive officers of the Company with the year in which each director's term
expires in parentheses.
<TABLE>
<CAPTION>
<S>
<C> <C>
Name Age Position With Company and Tenure
Joseph W. Zerbib 62 President, Principal Executive Officer and
Director since 1982. (1998)
Thierry E. Zerbib 36 Vice President - Technologies, Secretary and
Director since 1982. (1998)
Brian H. Loeb 36 Vice President - Marketing, Sales and Operations
and Director since 1992. (1998)
Michael F. Zerbib 31 Chief Financial Officer, Treasurer and Director
since 1990. (1998)
Cecile Silverman 73 Director since 1995. (1998)
Kalvan Swanky 34 Director since 1995. (1998)
</TABLE>
Directors hold office until the next annual meeting of shareholders and until
their successors are elected and qualified or until their prior resignation.
The terms of the executive officers are continuous, subject to the authority
of the Company's Board of Directors.
Joseph W. Zerbib was born in Algeria and has lived in the Middle East, Europe
and the United States. From 1982 to the present, Mr. Zerbib has been the
President of the Company. He concentrates on strategic planning and
financial, accounting and human resources management. From 1975 to 1982
Mr. Zerbib managed a large supermarket chain in Israel. From 1960 to 1975
Mr. Zerbib owned and managed a full service drug store and blood analysis
laboratory in Paris, France.
Thierry E. Zerbib has been with the Company since 1982. His responsibilities
include day-to-day supervision of software/hardware customer service, system
configuration, system implementation, research and development, and quality
control. He holds dual degrees in computer science and math from the
University
of Tel Aviv, Israel.
Brian H. Loeb has been with the Company since 1982. His responsibilities
include day to day supervision of sales, marketing, customer service, and
service bureau implementation.
Michael F. Zerbib has been with the Company since 1990 with main emphasis on
service bureau sales and financial reporting. He holds a Bachelor of Science
degree in finance and a Master degree in taxation and financial accounting
from Arizona State University. Mr. Zerbib also holds a certification from
the Arizona State Board of Accountancy.
Cecile Silverman is a certified public accountant employed by the firm of
Schwartz, Cohen & Co. She was a partner/shareholder of such firm from 1975 to
1989 and is now self-employed. Ms. Silverman specializes in tax planning for
corporations and individuals, as well as representing clients before various
governmental agencies. She graduated from Syracuse University with a degree
in public accounting.
Kalvan Swanky has been employed for the past twelve years by Storage
Technology Corporation, which develops, manufacturers and distributes
computer memory devices. Mr. Swanky has held a number of positions with
Storage Technology, most recently as Direct Sales Manager for Arizona and
Nevada. He received a Bachelor of Science degree from the University
of Colorado.
Joseph W. Zerbib is the father of Thierry E. Zerbib and Michael F. Zerbib and
the father-in-law of Brian H. Loeb. Accordingly, Thierry E. Zerbib and
Michael F. Zerbib are brothers and Brian H. Loeb is the brother-in-law of
Thierry and Michael Zerbib.
Business of the Board of Directors
During the fiscal year ended November 30, 1997, the Company's board of
directors
held 4 meetings. All directors attended these meetings.
Compensation and Audit Committees
The Board of Directors appointed Cecile Silverman and Kalvan Swanky to the
Compensation and Audit Committees of the Board of Directors in June 1995 and
they continue to serve in such capacity. Such persons are not officers or
employees of the Company and thus are Independent Directors. Such individuals
will not have any contractual or other relationships with the Company during
the present fiscal year, except as directors.
Audit Committee. The functions of the Audit Committee are to receive reports
with respect to loss contingencies, the public disclosure or financial
statement notation of which may be legally required; annually review and
examine those matters that relate to a financial and performance audit of
the Company's employee plans; recommend to the Company's board of directors
the selection, retention and termination of the Company's independent
accountants; review the professional services, proposed fees and independence
of such accountants; and provide for the periodic review and examination of
management performance in selected aspects of corporate responsibility.
The Audit Committee held one meeting during the fiscal year ended November
30, 1997. See "Compensation Committee Interlocks and Insider Participation"
in the following section.
Compensation Committee. The functions of the Compensation Committee are to
review annually the performance of the chairman and president and of the other
principal officers whose compensation is subject to the review and
recommendation by the Committee to the Company's board of directors.
Additionally, the Compensation Committee is to review compensation of outside
directors for service on the Company's board of directors and for service on
committees of the Company's board of directors, and to review the level and
extent of applicable benefits provided by the Company with respect to
automobiles, travel, insurance, health and medical coverage, stock options and
other stock plans and benefits. The Compensation Committee had two meetings
during the fiscal year ended November 30, 1997. See "Compensation Committee
Interlocks and Insider Participation" in the following section.
The Compensation Committee has adopted a policy that the Company should be
competitive in total compensation and include as a part of total compensation
opportunities for equity ownership and utilize incentives that offer
competitive compensation.
Compensation Committee Interlocks and Insider Participation
Cecile Silverman and Kalvan Swanky serve as members of the Compensation
Committee. They were appointed in June 1995 and continue to serve in such
capacity. These persons are non-employee directors for purposes of
administering the 1995, 1996 and 1997 Incentive Stock Option Plan under SEC
Rule 16(b)(3).
Director Compensation
Directors receive no compensation for their services as members of the Board of
Directors. However, the Company may reimburse the independent directors for
their reasonable out-of-pocket expenses in connection with their attendance at
meetings. Also, in 1996 and 1997 the Company issued 1,000 stock options each
per year to Ms. Silverman and Mr. Swanky. See Item 12, "Security Ownership of
Certain Beneficial Owners and Management."
ITEM 10. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth the total compensation received by the chief
executive officer and each additional executive officer whose compensation
exceeded $100,000, paid to the named individuals and group for services
rendered in all capacities to the Company and its subsidiaries for the
fiscal years ended November 30, 1997, 1996,and 1995.
<TABLE>
<CAPTION>
<S>
<C> <C> <C> <C> <C> <C> <C> <C>
Long Term Compensation (1)
Annual Compensation Awards Payouts
Other -------------- ALL
Annual Restricted Other
Name and Compen- Stock Options LTIP Compen-
Principal Year Salary(2) Bonus sation Awards SARs Payouts sation
Joseph W. Zerbib
President 1997 $144,000 -0- -0- -0- 26,000 -0- -0-
1996 $108,000 -0- -0- -0- 26,000 -0- -0-
1995 $120,000 -0- -0- -0- 41,000 -0- -0-
Thierry E. Zerbib
Vice President -
Technologies
and Secretary 1997 $144,000 -0- -0- -0- 26,000 -0- -0-
1996 $126,000 -0- -0- -0- 21,000 -0- -0-
1995 $120,000 -0- -0- -0- 41,000 -0- -0-
Michael F. Zerbib
Chief Financial
Officer and
Treasurer 1997 $104,000 -0- -0- -0- 26,000 -0- -0-
1996 $100,000 -0- -0- -0- 28,000 -0- -0-
1995 $120,000 -0- -0- -0- 41,000 -0- -0-
Brian H. Loeb
Vice President -
Marketing, Sales
and Operation 1997 $144,000 -0- -0- -0- 26,000 -0- -0-
1996 $126,000 -0- -0- -0- 21,000 -0- -0-
1995 $120,000 -0- -0- -0- 41,000 -0- -0-
<FN>
(1) See "Stock Option Grants in 1997 Fiscal Year and Stock Options and
Restricted Stock Plans" below for additional information on options which were
granted to these four officers.
</TABLE>
(2) The Company extended one-year employment agreements with annualized
salaries of $144,000 to Joseph W. Zerbib, Thierry E. Zerbib, Brian H. Loeb and
Michael F. Zerbib.
Option Grants in 1997 Fiscal Year
The following executive officers were granted stock options by the Company in
fiscal 1996 in recognition of their past contributions to the Company. In
each case, the option price was in excess of the fair market value of the
Common Stock on the date of grant.
<TABLE>
<CAPTION>
<S>
<C> <C> <C> <C>
Percentage of
Name No. of Total Options
Shares Underlying Granted Exercise Expiration
Options Granted to Employees in Price Date (2)
Fiscal Year
Joseph W. Zerbib 26,000 11.13 $3.23 10/23/02
Thierry E. Zerbib 26,000 11.13 $3.23 10/23/02
Brian H. Loeb 26,000 11.13 $3.23 10/23/02
Michael F. Zerbib 26,000 11.13 $3.23 10/23/02
<FN>
(1) Options become exercisable one fourth on October 23, 1998, one fourth on
October 22, 1999, one fourth on October 22, 2000 and one fourth on October 22,
2001.
</TABLE>
Option Exercises in 1997 Fiscal Year
There were no exercises of outstanding stock options in fiscal 1997.
Stock Option and Restricted Stock Plans
1995, 1996 and 1997 Incentive Stock Option Plans. The Board of Directors
adopted the 1995 Incentive Stock Option Plan ("1995 ISO Plan") on February 1,
1995, the 1996 Incentive Stock Option Plan ("1996 ISO Plan") on April 15,
1996, and the 1997 Incentive Stock Option Plan ("1997 ISO Plan") on April 10,
1997. (The 1995 ISO Plan, 1996 ISO Plan, and 1997 ISO Plan are collectively
referred to as the "Plans"). The terms and conditions of the 1995 ISO Plan,
the 1996 ISO Plan, and the 1997 ISO Plan are substantively similar, therefore
the following description is valid for both Plans.
There are 264,000 shares under the 1995 ISO Plan, and 260,000 shares for both
the 1996 ISO Plan and 1997 ISO Plan, reserved for issuance subject to options
granted under the Plans, for a total of 784,000 shares. Each of the Plans
authorizes the Company to grant to key employees of the Company (i) incentive
stock options to purchase shares of Common Stock and (ii) non-qualified stock
options to purchase shares of Common Stock.
The objectives of the Plans are to provide incentives to key employees to
achieve financial results aimed at increasing stockholder value and attracting
talented individuals to the Company. The Compensation Committee, which is
comprised of non-employee Directors, has the discretion to make awards of
stock options. Although the Plans do not specify what portion of the shares
may be awarded in the form of incentive stock options or non-statutory
options, at the time of adoption it was anticipated that a substantially
greater number of incentive stock options would be awarded under the Plans.
The incentive stock options are qualified stock options under the Internal
Revenue Code. Further, the Plans are stock option plans meeting the
requirements of Rule 16b-3 promulgated under the Exchange Act. Persons
eligible to participate in the Plans will be those employees of the
Company whose performance, in the judgment of the Compensation Committee,
can have significant effect on the success of the Company.
The Plans are administered by the Compensation Committee, which has the
authority to interpret their provisions, to establish and amend rules for
their administration, to determine the types and amounts of awards to
be made pursuant to the Plans, subject to the Plans' limitations, and
to approve recommendations made by management of the Company as to
who should receive awards.
Incentive stock options may be granted under the Plans for terms of up to ten
years and at an exercise price at least equal to 100% of the fair market value
of the Common Stock as of the date of grant, and 85% of the fair market value
in the case of non-statutory options, except that incentive options granted
to any person who owns stock possessing more than 10% of the combined voting
power of all classes of the Company's stock or of any parent or subsidiary
corporation must have an exercise price at least equal to 110% of the fair
market value of the Company's Common Stock on the date of grant. The
aggregate fair market value, determined as of the time an incentive stock
option is granted, of the Common Stock with respect to which incentive stock
options are exercisable by an employee for the first time during any
calendar year shall not exceed $100,000.
There is no aggregate dollar limitation on the amount of non-statutory stock
options which may be exercisable for the first time by an employee during any
calendar year. Payment of the exercise price is to be in cash, although the
Compensation Committee may, in its discretion, allow payment in the form of
shares of the Company's Common Stock under certain circumstances. Any option
granted under the Plans will expire at the time fixed by the Committee, which
will not be more than ten years after the date it is granted. Any employee
receiving a grant must remain continuously employed by the Company for a
period of twelve months after the date of the grant, as a condition to the
exercise of the option. The Compensation Committee may also specify when
all or part of an option becomes exercisable, but in the absence of such
specification, the option will ordinarily be exercisable in whole or part
at any time during its term. In addition, optionees who are directors or
executive officers of the Company may not exercise any portion of an option
within six months of the date of grant. Subject to the foregoing, the
Compensation Committee may accelerate the exercisability of any option
in its discretion.
Options granted under the Plans are not assignable. Options may be exercised
only while the optionee is employed by the Company or within twelve months
after termination by reason of death, within twelve months after the
date of disability, or within ten days after termination for any other
reason.
The Company may assist optionees in paying the exercise price of options
granted under the Plans by either the extension of a loan by the Company
for payment by the optionee of the exercise price in installments, or a
guarantee by the Company of a loan obtained by the optionee from a third
party. The terms of any loan, installment payments or guarantees,
including the interest rate and terms of repayment and collateral requirements,
if any, shall be determined by the Board of Directors in its sole
discretion.
The Company issued options under the 1995 ISO Plan to purchase 100,000 shares
of Common Stock to certain key employees and options to purchase 164,000
shares to its four executive officers, Joseph W. Zerbib, Thierry E. Zerbib,
Michael F. Zerbib and Brian H. Loeb in June 1995. Such options are
exercisable commencing September 28, 1995 through September 27, 2000.
The exercise price of the options granted to key employees is $6.00 per
share. The exercise price of the options granted to the executive officers
is $6.60 per share. See "Principal Shareholders" and "Certain Relationships
and Related Transactions."
The Company issued options under the 1996 ISO Plan to purchase 141,400 shares
of Common Stock to certain key employees and options to purchase 96,000 shares
of Common Stock to its four executive officers, Joseph W. Zerbib, Thierry
E. Zerbib, Michael F. Zerbib and Brian H. Loeb in two grants, one in April
1996 and one in October 1996. The options granted in April 1996 are
exercisable one fourth on April 14, 1997, one fourth on April 14, 1998,
one fourth on April 14, 1999, and one fourth on April 14, 2000. The
options granted on October 22, 1996 are exercisable one fourth on
October 22, 1997, one fourth on October 22, 1998, one fourth on October
22, 1999 and one fourth on October 22, 2000.
The Company issued options under the 1997 ISO Plan to purchase 129,500 shares
of Common Stock to certain key employees and options to purchase 104,000
shares of Common Stock to its four executive officers, Joseph W. Zerbib,
Thierry E. Zerbib, Michael F. Zerbib and Brian H. Loeb in October 1997.
The options granted on October 23, 1997 are exercisable one fourth on
October 23, 1998, one fourth on October 23, 1999, one fourth on October 23,
2000 and one fourth on October 23, 2001.
1995, 1996, and 1997 Restricted Stock Plan. The Board of Directors adopted the
1995 Restricted Stock Plan on February 1, 1995, the 1996 Restricted Stock Plan
on April 15, 1996 and the 1997 Restricted Stock Plan on April 10, 1997. The
1995 Restricted Stock Plan was approved by the stockholders at a Special
Meeting of Stockholders, which was held on February 1, 1995. The 1996
Restricted Stock Plan was approved by the stockholders at the 1996 Annual
Meeting held on August 7, 1996. Under both Restricted Stock Plans, shares
of Common Stock of the Company are reserved, in such amounts as determined by
the Board of Directors, for issuance as part of the total shares reserved
under the Plan described above. The Restricted Stock Plans authorize the
grant of shares of Common Stock to key employees, consultants, researchers,
and to members of the Advisory Board. The Restricted Stock Plans are
administered by the Board of Directors or a committee of the Board,
which determines the persons to whom shares of Common Stock will be
granted and the terms of such share grants.
No shares have been granted under the Restricted Stock Plans. However, the
Company anticipates that shares will be granted under the Restricted Stock
Plans by the Compensation Committee from time to time in the future depending
upon the performance of the Company and availability of unreserved shares
under the 1995 and 1996 ISO Plans and Restricted Stock Plans.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information, as of February 18, 1998, with
respect to the number of shares of Common Stock of the Company beneficially
owned by individual directors, by all directors and officers of the Company as
a group, and by persons known by the Company to own more than 5% of the
Company's Common Stock. The Company has no other class of stock
outstanding.
<TABLE>
<CAPTION>
<S>
<C> <C>
Name of Beneficial Owner and Address Number of Percent of
Shares (1)(2) Common Stock
Owned (1)(3)
Thierry E. Zerbib
3216 North Third Street
Phoenix, Arizona 85012 665,500 17.6
Brian H. Loeb and
Irene Loeb
3216 North Third Street
Phoenix, Arizona 85012 665,500 17.6
Michael F. Zerbib
3216 North Third Street
Phoenix, Arizona 85012 667,500 17.6
Joseph W. Zerbib
3216 North Third Street
Phoenix, Arizona 85012 386,750 10.2
Nicolas Zerbib
3216 North Third Street
Phoenix, Arizona 85012 293,750 7.8
Cecile Silverman
3216 North Third Street
Phoenix, Arizona 85012 3,000 *
Kalvan Swanky
4725 North 33rd Street
Phoenix, Arizona 85018 3,000 *
All directors and
officers as a group 2,685,000 70.9
<FN>
* Less than 1%.
(1) Includes 41,000 shares of Common Stock which are issuable upon
exercise of stock options the Company granted to each of the following:
Joseph W. Zerbib, Thierry E. Zerbib, Michael F. Zerbib and Brian H. Loeb.
Such options were exercisable commencing September 28, 1995 through
September 27, 2000 to purchase shares of Common Stock at a price of $6.60
per share. See "Option Grants in 1996 Fiscal Year" and "Stock Option
and Restricted Stock Plans."
(2) Includes 1,000 shares of Common Stock which are issuable upon exercise
of stock options which the Company granted each to Cecile Silverman and
Kalvan Swanky in April 1996. The options are exercisable at a price of
$4.75 per share through April 15, 2001 and were not issued pursuant to any
stock option plan of the Company.
(3) Includes 41,000 shares of Common Stock which are issuable to each of
Joseph W. Zerbib, Michael F. Zerbib, Thierry E. Zerbib and Brian H. Loeb upon
exercise of stock options exercisable commencing September 28, 1995 through
September 27, 2000 to purchase shares of Common Stock at a price of $6.60 per
share and 16,000 shares of Common Stock which are issuable to each of the
aforementioned individuals upon exercise of stock options which become
exercisable one fourth on April 14, 1997, one fourth on April 14, 1998, one
fourth on April 14, 1999, and one fourth on April 14, 2000 and expire on
August 6, 2001 for a price of $5.23 per share. Includes 10,000 shares of
Common Stock issuable to Joseph W. Zerbib, 5,000 shares of Common Stock
issuable to each of Thierry E. Zerbib and Brian H. Loeb, and 12,000
shares of Common Stock issuable to Michael F. Zerbib upon exercise of stock
options which become exercisable one fourth on October 22, 1997, one fourth
on October 22, 1998, one fourth on October 22, 1999, and one fourth on October
22, 2000 and expire on October 22, 2001 at a purchase price of $3.30 per share.
Includes 26,000 shares of Common Stock issuable to each of Joseph W. Zerbib,
Michael F. Zerbib, Thierry E. Zerbib and Brian H. Loeb upon exercise of
stock options which become exercisable one fourth on October 23, 1998,
one fourth on October 23, 1999, one fourth on October 23, 2000 and one
fourth on October 23, 2001 and expire on October 23, 2002 at a purchase
price of $3.23 per share.
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Certain Transactions
The Company leases 13,500 square feet of office space from Joseph W. Zerbib, an
officer, director and principal shareholder of the Company. The Company's
obligations under the terms of the lease agreement were approximately $84,336
for fiscal 1995. The Company leased this office in fiscal 1996 and 1997 on a
month-to-month basis at a rate of $6,978 per month. The Company vacated this
space in January 1998, however is obligated to pay rent for a minimum 90 days
subsequent to that time.
The Board of Directors has adopted a policy that provides that all
transactions between the Company and its executive officers, directors,
employees and affiliates are subject to the approval of a majority
of disinterested directors of the Board of Directors and will be on terms
that are no less favorable to the Company than those that could be
negotiated with unaffiliated parties.
The Company has entered into one-year employment agreements with Joseph W.
Zerbib, Thierry E. Zerbib, Michael F. Zerbib and Brian H. Loeb in their
respective capacities. See note 2 to "Summary Compensation Table."
The Company issued options to purchase a total of 164,000 shares of Common
Stock to Joseph W. Zerbib, Thierry E. Zerbib, Michael F. Zerbib and Brian H.
Loeb in fiscal 1995 under the 1995 Incentive Stock Option Plan. Such
options were divided equally among the four individuals. In April 1996
the Company also granted options under the 1996 Incentive Stock Option Plan
to purchase 64,000 shares of Common Stock to the same four individuals in
equal proportions, such grants became effective upon approval of the Plan
by the shareholders at the 1996 Annual Meeting of Shareholders on August
7, 1996. These options are exercisable at a price of $5.23 per share for a
term of five years after their effective date. Also, in April 1996 the
Company granted options to Cecile Silverman and Kalvan Swanky exercisable
to purchase 1,000 shares of Common Stock at a price of $4.75 per share
through April 15, 2001. In October 1996 the Company granted options to
purchase Common Stock under the 1996 Incentive Stock Option Plan to purchase
10,000 shares in the case of Joseph W. Zerbib, 5,000 shares each to
Thierry E. Zerbib and Brian H. Loeb and 12,000 shares to Michael
F. Zerbib. In October 1997, the Company granted options to purchase Common
Stock under the 1997 Incentive Stock Option plan to purchase 26,000 shares to
each of Joseph W. Zerbib, Michael F. Zerbib, Thierry E. Zerbib and Brian H.
Loeb upon exercise of stock options which become exercisable one fourth on
October 23, 1998, one fourth on October 23, 1999, one fourth on October 23,
2000 and one fourth on October 23, 2001 and expire on October 23, 2002 at a
purchase price of $3.23 per share. See "Option Grants in 1997 Fiscal Year,"
"Stock Option and Restricted Stock Plans," and "Item 12. Security
Ownership of Certain Beneficial Owners and Management."
Policy Regarding Transactions
Management believes that all of its existing transactions with affiliates are on
terms no less favorable than could have been obtained from unaffiliated
parties.
The Board of Directors has adopted a policy that all future material
transactions and loans between the Company and its executive officers,
directors, employees and affiliates will be subject to the approval of the
majority of independent and disinterested directors and that such transactions
and loans, and any forgiveness of loans, will be on terms that are no less
favorable to the Company than those that are generally available from
unaffiliated third parties.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The following financial statements of the Company and its subsidiaries are
included in Part II, Item 7 of this report:
Consolidated Balance Sheets as of November 30, 1997;
Consolidated Statements of Operations for the fiscal years ended November
30, 1997 and 1996;
Consolidated Statements of Changes in Stockholders' Equity for the fiscal
years ended November 30, 1997 and 1996;
Consolidated Statements of Cash Flows for the fiscal years ended November
30, 1997 and 1996; and
Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
None.
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the
related instructions or are inapplicable, and therefore have been omitted, or
the required information is otherwise included in the consolidated financial
statements and the notes thereto.
(a)(3) Exhibits
<TABLE>
<CAPTION>
The following Exhibits are filed herewith pursuant to Rule 601 of Regulation S-K
and paragraph (c) of this Item 14.
<S>
<C> <C>
No. Description Reference
3.1 Amended and Restated Articles of Incorporation
of Registrant dated April 13, 1995 (1)
4.1 Form of Common Stock Certificate (1)
10.1 1995 Incentive Stock Option Plan (1)
10.2 1995 Restricted Stock Plan (1)
10.3 Asset Purchase Agreement between Telesoft Acquisition
Corp., Uniquest Incorporated and CSI Acquisition Corp.
dated March 13, 1995 (1)
10.4 Form of Employment Agreement between the Registrant
and Joseph W. Zerbib effective as of the date of the
Prospectus hereunder (1)
10.5 Form of Employment Agreement between the Registrant
and Thierry E. Zerbib effective as of the date of the
Prospectus hereunder (1)
10.6 Form of Employment Agreement between the Registrant
and Brian H. Loeb effective as of the date of the
Prospectus hereunder (1)
10.7 Form of Employment Agreement between the Registrant
and Michael F. Zerbib effective as of the date of the
Prospectus hereunder (1)
10.9 Contract between Registrant and the University of Delaware (1)
10.10 1996 Incentive Stock Option Plan (2)
10.11 1996 Restricted Stock Plan (2)
11 Statement Re: Computation of per Share Earnings *
16 Letter on Change in Certifying Accountants (3)
16.1 Letter on Change in Certifying Accountants (4)
21 Subsidiaries of Registrant *
<FN>
______________________________
* Filed herewith
(1) Filed with Registration Statement No. 33-91234-LA, dated June 30, 1995.
(2) Filed with Form 10-KSB/A for the fiscal year ended November 30, 1996, dated
March 7, 1997
(3) Filed with Current Report on Form 8-K/A, dated February 27, 1997
(4) Filed with Current Report on Form 8-K dated October 23, 1997
</TABLE>
(b) Current Reports on Form 8-K
During the last quarter of the fiscal year ended November 30, 1996, the
Company
issued an 8-K regarding the change in accountants. See "Item 9. Changes and
Disagreements with Accountants on Accounting and Financial Disclosure".
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TELESOFT CORP.
Dated: February 27, 1998 By
/s/ Joseph W. Zerbib
Joseph W. Zerbib,
President and Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature and Title Date
/s/ Joseph W. Zerbib February 27, 1998
Joseph W. Zerbib,
President, Principal Executive Officer and Director
/s/ Thierry E. Zerbib February 27, 1998
Thierry E. Zerbib, Vice President - Technologies,
Secretary and Director
/s/ Brian H. Loeb February 27, 1998
Brian H. Loeb, Vice President - Marketing,
Sales and Operations and Director
/s/ Michael F. Zerbib February 27, 1998
Michael F. Zerbib, Chief Financial Officer
Treasurer and Director
/s/ Cecile Silverman February 27, 1998
Cecile Silverman, Director
/s/ Kalvan Swanky February 27, 1998
Kalvan Swanky, Director
Telesoft Corp. and Subsidiaries
Form 10-KSB
Item 7, Item 14 (a)(1) and (2)
Index to the Financial Statements
The following financial statements required to be included
in Item 7 are listed below: Page
Reports of Independent Certified Public Accountants F-2 - F-3
Consolidated Balance Sheet as of November 30, 1997 F-4
Consolidated Statements of Operations for the years ended
November 30, 1997 and 1996 F-5
Consolidated Statements of Changes in Stockholders' Equity
for the years ended November 30, 1997 and 1996 F-6
Consolidated Statements of Cash Flows for the years ended
November 30, 1997 and 1996 F-7 - F-8
Notes to the Consolidated Financial Statements F-9 - F-26
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Telesoft Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Telesoft
Corp. and Subsidiaries as of November 30, 1997 and the related
consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Telesoft Corp. and their subsidiaries at November 30, 1997 and the
results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles.
/s/BDO SEIDMAN, LLP
Los Angeles, California
January 23, 1998
<PAGE>
Report of Independent Accountants
To the Board of Directors
Telesoft Corp. and Subsidiaries
We have audited the consolidated statements of operations,
changes in stockholders' equity, and cash flows of Telesoft
Corp. and Subsidiaries (the "Company") for the year ended
November 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
the significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
results of operations and cash flows of the Company for
the year ended November 30, 1996, in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand, L.L.P.
Phoenix, Arizona
March 3, 1997, except as to the information presented
in Note 21, for which the date is February 20, 1998.
<PAGE>
<TABLE>
<CAPTION>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
November 30, 1997
ASSETS
<S>
<C>
Cash and cash equivalents (Notes 2 and 4) $1,621,784
Investment securities (Notes 3 and 4) 2,200,000
Accounts receivable, net of allowance for
uncollectibles of $640,982 (Notes 2 and 5) 6,544,453
Inventory (Note 6) 401,508
Deferred taxes (Note 11) 1,097,900
Income taxes receivable 235,981
Other 233,979
------------
Total Current Assets 12,335,605
Property and equipment, net (Note 7) 3,006,567
Computer software costs, net (Note 8) 460,442
Intangibles, net (Note 9) 1,303,826
Note receivable from related party (Note14) 347,335
Other 187,075
------------
Total Assets $17,640,850
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable-current portion (Note 10) $90,523
Income taxes payable 286,295
Accounts payable and accrued liabilities 6,632,968
Deferred revenue 1,245,806
------------
Total Current Liabilities 8,255,592
Note payable (Note 10) 371,551
Deferred taxes (Note 11) 107,200
------------
Total Liabilities 8,734,343
------------
Commitments and contingencies (Notes 13,14,16, and 22) -
Minority Interest (Notes 1 and 19) -
Stockholders Equity:
Common Stock, 50,000,000 shares of common stock, no par
value, authorized; 3,787,500 issued and outstanding 7,286,159
Additional paid-in capital 80,069
Retained Earnings 1,540,279
------------
Total Stockholders' Equity 8,906,507
------------
Total Liabilities and Stockholders' Equity $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 years ended November 30, 1997 and 1996
<S>
<C> <C>
1997 1996
Sales, net $22,593,450 $20,742,993
Cost of Sales 14,330,388 12,821,582
-------------- ---------------
Gross Profit 8,263,062 7,921,411
General and Administrative Expense 7,701,871 6,623,649
-------------- ---------------
Operating Income 561,191 1,297,762
-------------- ---------------
Other Income (Expense):
Interest Income 177,780 308,297
Interest Expense - (3,122)
Other (expense) income (14,686) 598
-------------- ---------------
163,094 305,773
-------------- ---------------
Income before Provision for Income Taxes
and Discontinued Operations 724,285 1,603,535
-------------- ---------------
Provision for Income Taxes (Note 11) (321,300) (614,200)
-------------- ---------------
Income from Continuing Operations 402,985 989,335
Loss from Discontinued Operations, net
Of Benefit for Income Taxes of $973,800
and $206,500 in 1997 and 1996, respectively
and Minority Interest of $186,350 for
1997. (Note 20) (1,326,729) (212,758)
-------------- ---------------
Net (Loss) Income $(923,744) $776,577
============== ===============
Earnings per share - continuing operations
primary and fully diluted $.11 $.26
============== ===============
Loss per share - discontinued operations $(.35) $(.06)
============== ===============
Net (Loss) earnings per share $(.24) $.20
============== ===============
Weighted average number of shares
outstanding-primary and fully diluted 3,802,874 3,817,130
============== ===============
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended November 30, 1997 and 1996
Common Stock
<S>
<C> <C> <C> <C> <C>
Number of Additional Total
Shares Paid-In Retained Stockholders'
Outstanding Amount Capital Earnings Equity
Balance, November 30, 1995 3,787,500 $7,246,159 $80,069 $1,687,446 $9,013,674
Restricted Stock Issued
in Connection with
GoodNet, LLC Acquisition
(Note 19) 30,833 97,700 - - 97,700
Net income - - - 776,577 776,577
--------- ----------- -------- ----------- --------
Balance, November 30, 1996 3,818,333 7,343,859 80,069 2,464,023 9,887,951
Restricted stock reacquired
and retired in connection
with sale of a minority
interest in Telesoft
Acquisition Corp II
(Note 19) (30,833) (57,700) - - (57,700)
Net loss - - - (923,744) (923,744)
--------- ----------- -------- ----------- --------
Balance, November 30, 1997 3,787,500 $7,286,159 $80,069 $1,540,279 $8,906,507
========= =========== ======== =========== =========
</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 years ended November 30, 1997 and 1996
<S>
<C> <C>
1997 1996
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Cash received from customers $22,232,221 $19,731,286
Cash paid to suppliers and employees (19,990,408) 19,146,399)
Interest paid - (3,121)
Interest received 146,234 270,241
Income taxes paid (59,844) (1,214,485)
-------------- ------------
Net cash provided by (used in) operating
activities of continuing operations 2,328,203 (362,478)
-------------- ------------
Cash flows from investing activities:
Purchase of property and equipment (384,642) (239,758)
Cash received from sale of equipment 3,290 -
Computer software costs - (276,472)
Disbursements for notes receivable from
related parties (502,275) (393,053)
Collection of notes receivable from
related parties 480,674 191,548
Purchase of investment securities (4,831,668) (3,503,332)
Sale of investment securities 6,135,000 -
-------------- ------------
Net cash provided by (used in) investing
activities of continuing operations 900,379 (4,221,067)
-------------- ------------
Cash flows from financing activities:
Proceeds from notes payable - 1,200,000
Payment of notes payable - (1,210,742)
-------------- ------------
Net cash used in financing activities
of continuing operations - (10,742)
-------------- ------------
Cash used in discontinued operations (1,825,821) (2,978,605)
-------------- ------------
Net increase (decrease) in cash and
cash equivalents 1,402,761 (7,572,892)
Cash and cash equivalents at
beginning of fiscal year 219,023 7,791,915
-------------- ------------
Cash and cash equivalents at
end of fiscal year $1,621,784 $219,023
============== ============
</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 years ended November 30, 1997 and 1996
1997 1996
<S>
<C> <C>
Reconciliation of Net (Loss) Income to Net
Cash Provided by (Used In) Operating
Activities from Continuing Operations:
Net (Loss) Income $(923,744) $776,577
-------------- -----------
Adjustments to reconcile net (loss) income
to net cash provided by (used in) operating
activities from continuing operations:
Loss from discontinued operations 1,326,729 212,758
Depreciation and amortization 469,908 414,180
Loss on sale of fixed assets 21,082 -
Interest income included with note receivable
from related party (19,474) -
Changes in Assets and Liabilities:
Accounts receivable (401,893) (748,248)
Inventory 42,932 51,043
Other current assets (115,479) 2,112
Deferred taxes (497,400) 164,300
Other assets 19,685 (10,970)
Accounts payable and accrued liabilities 1,409,751 (537,845)
Deferred revenue 237,250 78,200
Income taxes payable 611,614 (617,343)
Income taxes receivable 147,242 (147,242)
-------------- -----------
3,251,947 (1,139,055)
-------------- -----------
Net cash provided by (used in) operating
activities from continuing operations $2,328,203 $(362,478)
============== ===========
<FN>
Supplemental disclosure of investing and financing activities:
During the year ended November 30, 1996, the Company issued 30,833 shares of
restricted common stock valued at $97,700 as partial payment for the
acquisition
of the net assets of GoodNet, LLC.
During the year ended November 30, 1996, the Company financed a covenant not
to compete in the amount of $505,020.
During the year ended November 30, 1997, the Company reacquired 30,833 shares
of its common stock valued at $57,700. Of this amount, 50% was as
partial payment of the sale of 24% of the outstanding shares of Telesoft
Acquisition Corp. II. The remaining 50% was a reduction in goodwill.
During the year ended November 30, 1997, Telesoft Acquisition Corp II
(GoodNet) issued 576 shares of common stock, representing a 4% minority
interest in GoodNet, valued at $100,000 to key employees in exchange
for services.
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
<PAGE>
Telesoft Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
1. Summary of Significant Accounting Policies:
Telesoft Corp. (the "Company" or "Telesoft"), an Arizona corporation, was
incorporated on May 4, 1982. The Company provides three principal continuing
product lines and services: long distance, telecommunications division, d.b.a.
Student Telephone Services (STS); Customized Billing Outsourcing Services; and
computer software and hardware sales, d.b.a. Sunbelt Business Computers (SBC)
or RATEX. The long distance and telecommunications division is
primarily involved in long distance and telecommunication services to
higher education institutions. The software and hardware division is
primarily involved in the design, distribution, installation, and maintenance
of computer hardware and software systems.
The Company originally operated as B.P. & J Investors, Ltd., d.b.a. Sunbelt
Business Computers. Effective April 12, 1995, the Company changed its name to
Telesoft Corp.
Acquisitions
During the fiscal year ended November 30, 1996, the Company incorporated a
wholly owned subsidiary, Telesoft Acquisition Corp II. Telesoft Acquisition
Corp II is a corporation whose primary business activity is to acquire other
businesses. Subsequent to the incorporation of Telesoft Acquisition Corp II,
it acquired the net assets of GoodNet LLC. (See "Acquisitions", Note 19)
During the fiscal year ended November 30, 1996, the Company also acquired the
equipment and customer bases of NetZone LLC and Internet Direct, Inc. (See
"Acquisitions", Note 19)
Principles of Consolidation
The consolidated financial statements include the accounts of Telesoft Corp.,
together with its wholly owned subsidiary, Telesoft Acquisition Corp and 71%
owned subsidiary, Telesoft Acquisition Corp II, d.b.a. GoodNet ("GoodNet").
(See Note 20)
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 intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash and cash equivalents for the
purposes of reporting cash flows.
<PAGE>
Telesoft Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies: (Continued)
Investments
The Company has classified its entire investment portfolio as
available-for-sale
in accordance with the provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Available-for-sale securities are
stated at fair value with unrealized gains and losses included in
shareholders' equity. The amortized cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity.
Such amortization is included in interest income. Realized gains and losses
are included in other income (expense). The cost of securities sold is based
on the specific identification method.
Inventory
Inventory is stated at the lower of cost,first-in, first-out (FIFO) method, or
market. Inventory quantities are reviewed periodically for obsolescence.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided for on
the straight-line method over the estimated useful lives of the assets. The
average lives range from three to seven years. The gain or loss on disposal of
assets is reflected in earnings, and the cost and related accumulated
depreciation are removed from the accounts. Maintenance and repairs that
neither materially add to the value of the property nor appreciably prolong
its life are charged to expense as incurred. Betterments or renewals
are capitalized when incurred.
Computer Software Costs
The Company capitalizes software development costs in accordance with
Financial Accounting Standards Board Statement No. 86 ("FASB 86"). FASB
86 requires software development costs to be capitalized when technological
feasibility is reached and discontinued when the product is ready for
sale. Software development costs not qualifying for capitalization are
expensed as research and development costs. Capitalized costs are
amortized on product-by-product basis using the greater of the straight
line method over the product's remaining estimated economic life or the ratio
of the current year's gross revenues to the total of a product's current
year and anticipated revenues. The Company evaluates the estimated net
realizable value of each software product at each balance sheet date and
records write-downs for any products for which net book value is in excess
of net realizable value.
Intangibles
<TABLE>
<CAPTION>
Amortization of intangibles is on a straight-line basis as follows:
<S>
<C>
Covenant Not-to Compete 3 - 5 years
Goodwill 5 years
Customer Base 5 years
</TABLE>
The Company assesses the recoverability of goodwill at each balance sheet date
by determining whether amortization of the assets over their original
estimated useful life could be recovered through estimated future
undiscounted cash flows.
Deferred Revenue
Deferred revenue represents deferred income from maintenance contracts and
internet service. The income is recognized ratably over the applicable lives
of the respective contracts.
<PAGE>
Telesoft Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies: (Continued)
Income Taxes
The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109,"Accounting for Income Taxes." Under SFAS No. 109, deferred income
taxes are recognized for the tax consequences of "temporary differences" by
applying enacted statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities.
Revenue Recognition
The Company recognizes revenues as follows: System sales and software revenues
are recognized when the equipment and software have been delivered and
installed in accordance with SOP 91-1; Revenues from collection of long-
distance charges are recognized as the charges are incurred. The Company
accrues revenues from customers based upon actual usage as reported on billings
received from long-distance carriers and estimates of the amount of unbilled
revenues based upon the number of days in the billing cycle and past usage
by customers; GoodNet charges a fixed flat rate for Internet access, with
the exception of certain "burst" billings, where the customer is billed
for incremental ATM usage. Revenues are recognized in the month the service
is provided to users. Fees collected in advance of usage are deferred.
Stock Compensation
In October 1995, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 123, Accounting for Stock-Based Compensation ("SFAS
No. 123"), which became effective during the year ended November 30, 1997.
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Warranties
The Company offers a warranty of 90 days on hardware and software and an
extended warranty program in connection with the Company's service and
maintenance programs. The Company has not had any material claims made under
its warranty program to date.
Earnings (Loss) per Share
Earnings (Loss) per share is based upon the weighted average number of shares
of common stock outstanding during the fiscal year. Fully diluted
earnings (loss) per share from discontinued operations are not presented,
as they are anti-dilutive.
<PAGE>
Telesoft Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies: (Continued)
Accounting Pronouncements:
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 periods ending after December 15,
1997. Pursuant to the provisions of SFAS 128, the Company's basic net
(loss) income per share would have been ($.24) and $.20 and its diluted
(loss) earnings per share would have been ($.22) and $.20 for the fiscal
years ended November 30, 1997 and 1996, respectively.
Statement of Financial Accounting Standards No. 129, Disclosure of Information
about Capital Structure, ("SFAS. 129") issued by the FASB is effective for
financial statements ending after December 15, 1997. The new standard
reinstates various securities disclosure requirements previously in effect
under Accounting Principles Board Opinion No. 15, which has been superseded
by SFAS NO. 129. The Company does not expect adoption of SFAS. 129 to have
a material effect, if any, on its financial position or results of
operations.
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income, ("SFAS. 130") issued by the FASB is effective for financial statements
with fiscal years beginning after December 15, 1997. Earlier application is
permitted. SFAS. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The Company does not expect adoption of SFAS. 130 to
have a material effect, if any, on its financial position or results of
operations.
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments
of an Enterprise and Related Information, ("SFAS. 131") issued by the FASB is
effective for financial statements with fiscal years beginning after December
15, 1997. Earlier application is permitted. SFAS. 131 requires that public
companies report certain information about operating segments, products,
services and geographical areas in which they operate and their major
customers. The Company does not expect adoption of SFAS. 131 to have a
material effect, if any, on its financial position or results of
operations.
Statement of Position 97-2 Software Revenue Recognition, (SOP 97-2) issued by
the accounting standards executive committee, is effective for fiscal years
beginning after December 15, 1997. Earlier application is permitted. SOP
97-2 provides guidance on when revenue should be recognized and in what amounts
for licensing, selling, leasing, or other wise marketing computer software.
The Company does not expect adoption of SOP 97-2 to have a material effect,
if any, on its financial position or results of operations.
<PAGE>
Telesoft Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Concentration of Credit Risk:
The Company maintains cash balances at various financial institutions. The
Federal Deposit Insurance Corporation insures deposits not in excess of
$100,000, on deposit at each institution. At November 30, 1997, the Company
had
uninsured cash and cash equivalent bank balances of approximately $1,190,000.
Suppliers
The Company is provided a significant portion of its long-distance
telecommunications services by one telecommunications company. Although the
Company is dependant upon this supplier, management believes comparable
suppliers are available. For the fiscal years ended November 30, 1997 and
1996, fees paid to this company totaled approximately $2,555,000 and
$3,270,000, respectively. As of November 30, 1997, the outstanding
amount due to the service provider was approximately $780,000.
Customers
For the fiscal year ended November 30, 1996, the Company had one customer
representing ten percent of total revenues. During the year ending November 30,
1997, the Company did not have any customers which accounted for greater than
10% of its revenues.
3. Investment Securities:
The amortized cost and fair value (based on quoted market prices) of debt
securities at November 30, 1997 are shown below. Expected maturities will
differ from contractual maturities because issues may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Securities Available-for-Sale
<S>
<C> <C>
Amortized Cost Fair Value
Mutual Funds $2,200,000 $2,200,000
</TABLE>
4. Fair Value of Financial Instruments:
Estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
November 30, 1997
<S>
<C> <C>
Carrying Amount Fair Value
Cash and short-term investments $3,821,784 $3,821,784
Long-term debt 462,074 427,030
</TABLE>
The carrying amount approximates fair value of cash and short-term
instruments. The future fair value of long-term debt is based on the
current rates which the Company could borrow funds with similar remaining
maturities. The fair market value of the note receivable from related
party cannot be determined due to its related party nature.
<PAGE>
Telesoft Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
5. Accounts Receivable:
<TABLE>
<CAPTION>
At November 30, 1997, accounts receivable include billed and unbilled amounts,
as follows:
<S>
<C>
Billed $5,216,341
Unbilled 1,969,094
------------
7,185,435
Less: allowance for uncollectibles (640,982)
------------
$6,544,453
============
</TABLE>
Unbilled accounts receivable represent amounts earned but not billed for long
distance telephone service and internet dialup service.
6. Inventory:
<TABLE>
<CAPTION>
At November 30, 1997, inventory consists of:
<S>
<C>
Parts and equipment $204,342
Finished products 197,166
------------
$401,508
============
</TABLE>
7. Property and Equipment:
<TABLE>
<CAPTION>
At November 30, 1997, property and equipment consists of:
<S>
<C>
Equipment $4,321,408
Vehicles 44,550
Furniture and fixtures 230,380
Leasehold improvements 47,427
Property Leased to Others 507,464
------------
5,151,229
Less: accumulated depreciation and amortization (2,144,662)
------------
$3,006,567
============
</TABLE>
Depreciation expense from continuing operations was $316,105 and $301,600
for the fiscal years ended November 30, 1997 and 1996, respectively.
Depreciation expense, included with the net loss from discontinued operations
was $668,279 and $169,663 for the fiscal years ended November 30, 1996 and
1996,
respectively.
<PAGE>
Telesoft Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
8. Computer Software Costs:
<TABLE>
<CAPTION>
At November 30, 1997, computer software costs capitalized are:
<S>
<C>
Computer software $987,885
Accumulated amortization (527,443)
------------
$460,442
============
</TABLE>
Amortization expense from continuing operations related to computer
software cost during the years ended November 30, 1997 and 1996 was $145,470
and $104,247, respectively. There was no amortization expense attributable
to discontinued operations for the years ended November 30, 1997 and
1996.
9. Intangibles:
<TABLE>
<CAPTION>
At November 30, 1997, intangibles consist of:
<S>
<C>
Covenant Not-to-Compete-SBC $25,000
Covenant Not-to Compete-GoodNet 505,020
Goodwill-GoodNet 371,837
Customer Base-GoodNet 785,000
-----------
1,686,857
Accumulated amortization (383,031)
-----------
$1,303,826
===========
</TABLE>
Amortization expense for continuing operations was $8,333 during the years
ended November 30, 1997 and 1996. Amortization expense from discontinued
operations was $300,909 and $59,206 during the years ended November 30,
1997 and 1996, respectively.
<PAGE>
Telesoft Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
10. Note Payable:
<TABLE>
<CAPTION>
At November 30, 1997, note payable consists of:
<S>
<C>
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 19) $462,074
Less: current portion (90,523)
----------
$371,551
==========
</TABLE>
<TABLE>
<CAPTION>
Future minimum principal payments due on the note payable are as follows:
Fiscal Year Ending
November 30
<S>
<C> <C>
1998 $90,523
1999 97,066
2000 104,083
2001 111,608
2002 58,794
----------
Total $462,074
==========
</TABLE>
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-percent.
The line of credit is collateralized by various corporate assets and
requires compliance with various loan covenants. As of November 30, 1997,
there were no balances outstanding on this operating line of credit.
<PAGE>
Telesoft Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
11. Income Taxes:
<TABLE>
<CAPTION>
The components of the provision for income taxes for the years ended November
30, 1997 and 1996 consist of:
<S>
<C> <C>
1997 1996
Current $818,700 $449,900
Deferred (497,400) 164,300
--------------- ---------------
Provision for income taxes $321,300 $614,200
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
The Company's tax expense differs from the expense calculated using the
statutory federal income tax rate for the following reasons:
<S>
<C> <C>
1997 1996
Current $246,300 $545,500
Tax exempt interest income (25,000) (53,500)
Non deductible portion of
meals and entertainment 15,000 11,400
State taxes, net of federal
benefit 85,000 110,800
--------------- ---------------
Provision for income taxes $321,300 $614,200
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
The income tax effect of temporary differences between financial and tax
reporting gives rise to the deferred income tax assets and liabilities as
follows:
<S>
<C>
Current asset
Allowance for uncollectibles $165,600
Expense included as basis in subsidiary 405,800
Deferred revenue 297,600
Timing differences from pending IRS audit 184,600
State net operating loss carryforward 44,300
-----------
1,097,900
-----------
Non-Current Liability
Accumulated depreciation (115,400)
Accumulated amortization 8,200
-----------
(107,200)
-----------
Net deferred tax asset $990,700
===========
</TABLE>
The Company believes that is more likely than not that they will realize the
net deferred tax asset based upon the company's expected future profitability
and on its impending gain on the sale of GoodNet (See Note 21).
Accordingly, no further valuation allowance has been provided.
<PAGE>
Telesoft Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
12. Stockholders' Equity:
Serial Preferred Stock
The Company is authorized to issue 10,000,000 shares of serial preferred
stock, no par value. As of November 30, 1997, there were no shares
issued or outstanding.
Common Stock Warrants
During the year ended November 30, 1995, the Company issued 125,000 common
stock warrants to the Underwriters of the Company's initial public
offering in exchange for $100. The warrants are exercisable at $7.20 per
warrant for a period of four years beginning July 1, 1996. As of November 30,
1997, 125,000 common stock warrants were outstanding.
Dividend Policy
The Company has no limitations or restrictions for declaring dividends. As of
November 30, 1997, no dividends have been declared.
13. Stock Plans:
Effective February 1, 1995, the Board of Directors adopted two stock plans,
the 1995 Incentive Stock Option Plan (ISOP) and the 1995 Restricted Stock
Plan. Under the 1995 Plans, a total of 264,000 shares are reserved for
issuance at the discretion of the compensation committee. Effective April 15,
1996, the Board of Directors adopted two additional stock plans, the 1996
ISOP and the 1996 Restricted Stock Plan. These Plans were approved by
the shareholders on August 7, 1996. Under the 1996 Plans, a total of
260,000 shares are reserved for issuance at the discretion of the
compensation committee. Effective March 7, 1997, the Board of Directors
adopted two additional plans, the 1997 ISOP and the 1997 Restricted Stock
Plan. Under the 1997 Plans, a total of 260,000 share are reserved for
issuance at the discretion of the compensation committee.
The Company's stock plans, approved by the shareholders, provide for grants of
nonqualified or incentive stock options and restricted stock awards. All
plans are administered by the Company and the Compensation Committee of the
Board of Directors ("Committee") comprised of outside directors.
Incentive stock options may be granted under the 1995, 1996, and 1997
ISOP for terms of up to ten years at an exercise price at least equal to
100% of the fair market value of the common stock as of the date of grant,
and 85% of the fair market value in the case of nonstatutory options,
except that incentive options granted to any person who owns stock possessing
more than 10% of the combined voting power of all classes of the Company's
stock or of any parent or subsidiary corporations,
must have an exercise price at least equal to 110% of the fair market value of
the Company's common stock on the date of grant. Options granted become
exercisable in installments of 25% per year commencing one year from the date
of grant or over a vesting period determined by the Committee. During the
year ended November 30, 1997 and 1996, 104,000 and 96,000 common stock
options, respectively, were issued to persons owning greater than 10% of the
Company's currently outstanding common stock.
Restricted stock awards issued under the restricted stock plans provide that
shares awarded may not be sold or otherwise transferred until restrictions as
established by the Committee have lapsed. Upon termination of employment,
death retirement or permanent disability, the restrictions imposed shall
lapse with the consent of the Board. There were no shares of restricted
stock issued under the 1995, 1996, or 1997 Restricted Stock Plans at
November 30, 1997.
<PAGE>
Telesoft Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
13. Stock Plans: (Continued)
<TABLE>
<CAPTION>
The following table summarizes stock option activity:
<S>
<C> <C>
Number of Weighted Average
Shares Exercise Price
Outstanding at November 30, 1995 264,000 $6.37
Granted 246,000 4.36
Exercised -
Forfeited (3,100) 6.00
--------
Outstanding at November 30, 1996 506,900 5.41
Granted 258,500 3.09
Exercised -
Forfeited (15,600) 4.88
--------
Outstanding at November 30, 1997 749,800 4.62
========
Options exercisable at 11/30/96 263,500 6.37
Options exercisable at 11/30/97 326,350 5.97
</TABLE>
Available for grant at: (a)
November 30, 1996 17,100
November 30, 1997 64,400
(a) Available for grant includes shares that may be granted as either stock
(b) options or restricted stock, as determined by the Committee.
<TABLE>
<CAPTION>
Following is a summary of the status of options outstanding at November 30,
1997:
Outstanding Options Exercisable Options
------------------- -------------------
<S>
<C> <C> <C> <C> <C>
Weighted
Exercise average Weighted Weighted
Price remaining average average
Range Number contractual life exercise price Number exercise price
----- ------ ---------------- -------------- ------ --------------
6.00-$6.60 259,500 8 years $6.38 259,500 $6.38
3.00-$5.88 231,800 9 years 4.34 61,850 4.43
2.94-$3.23 233,500 10 years 3.07 - -
3.13 20,000 10 years 3.13 - -
4.00 5,000 10 years 4.00 5,000 4.00
- ----------- ------- -------- ----- -------- -----
2.94-$6.60 749,800 9 years 4.62 326,350 5.97
=========== ======= ======== ===== ======== -----
</TABLE>
<PAGE>
Telesoft Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
13. Stock Plans: (Continued)
Other Options
During the fiscal year ended November 30, 1996, the Company issued 20,000
options with an exercise price of $5.625 to the Company's public relations
firm. Additionally, the Company issued 2,000 options with an exercise price
of $4.75 and 2,000 options with an exercise price of $3.00 to the
Company's outside directors in connection with board meetings.
During the fiscal year ended November 30, 1997, the Company issued 20,000
options with an exercise price of $3.125 and 5,000 options with an exercise
price of $4.00 to company employees.
Stock Based Compensation
All stock options issued to employees have an exercise price not less than the
fair market value of the Company's common stock on the date of grant. In
accordance with accounting for such options utilizing the intrinsic value
method, there is no related compensation expense recorded in the Company's
financial statements for the fiscal years ended November 30, 1997 and 1996.
Had compensation cost for stock-based compensation been determined based on
the fair value of the options at the grant dates consistent with the method
of SFAS 123, the Company's net (loss) income and (loss) earnings per share
for the fiscal years ended November 30, 1997 and 1996 would have been
(increased) reduced to the proforma amounts presented below:
<TABLE>
<CAPTION>
<S>
<C> <C>
1997 1996
Net (loss) income as reported $(923,744) $776,577
Proforma (1,230,244) 466,577
Net (loss) income per share as reported $(.24) $.20
Proforma $(.32) $.12
</TABLE>
The fair value of the option grants is estimated as of the date of grant
utilizing the Black-Scholes option-pricing model with the following weighted
average assumptions for grants in 1997 and 1996; expected life of options of
1-3 years, expected volatility of 244% in 1997 and 88% in 1996, risk-free
interest rates of 8%, and a 0% dividend yield. The weighted average fair
value at date of grant for options granted during 1997 approximated
$2.41 and options granted in 1996 approximated $2.13, $1.87, and $1.18.
<PAGE>
Telesoft Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
14. Related Party Transactions:
Lease Commitment
The Company leases its office facilities under a month-to-month operating
lease agreement from the President of the Company. Rent expense was
$83,737 for each of the fiscal years ended November 30, 1997 and 1996.
In addition, the Company pays all utilities, insurance and property taxes.
During January 1998 the Company vacated this space, however, the Company has
agreed to a minimum of an additional 90 days of rent.
Notes receivable
At November 30, 1997, Telesoft has an outstanding 6% unsecured note receivable
from the president of GoodNet in the amount of $347,335, including accrued
interest. The note, including accrued interest, was scheduled to be due in
May 2002. Subsequent to November 30, 1997, the Company received a
pledge agreement against common stock in WinStar Communications, Inc.
(WCII: NASDAQ) ("WinStar") received by the president of GoodNet in
conjunction with the sale of GoodNet to WinStar. The pledged WinStar
common stock is valued at approximately $1,000,000. Additionally, the
due date of the note has been rescheduled for January 1999.
During the fiscal year ended November 30, 1996, the Company issued a line of
credit to a related party in the amount of $225,000. The line of credit
earned interest at the rate of 6% per annum and was paid in full during
the year ended November 30, 1997.
15. Employee Benefit Plans:
The Company maintains a 401 (k) profit sharing plan covering substantially all
full-time employees. Under the terms of the plan, the employees may elect to
contribute a portion of their salary to the plan. The Company has agreed to
make matching contributions equal to fifty percent of the first $500 in
deferred compensation plus twenty-five percent of deferrals in excess of
$1,000. In addition, the Company may make discretionary contributions to
the plan. For the fiscal years ended November 30, 1997 and 1996,
contributions were $43,367 and $22,904, respectively.
<PAGE>
Telesoft Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
16. Commitments:
Office Lease Commitments
The Company is obligated under long-term operating leases for office
facilities through the year 2006. (See "Subsequent Events", Note 21
below)
As of November 30, 1997, future minimum lease payments due under the non-
cancelable operating lease agreements are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending
November 30,
<S>
<C>
1998 $379,879
1999 413,342
2000 420,422
2001 437,009
2002 463,409
Thereafter 2,578,049
-----------
Total $4,692,110
===========
</TABLE>
Rent expense under all operating leases, including the related party lease,
amounted to approximately $304,000 and $199,500 for the years ended November
30, 1997 and 1996, respectively.
Other Commitments
GoodNet, a 71% 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. GoodNet currently has approximately $170,000 in monthly recurring
charges from this provider during the quarter ended November 30, 1997. The
Company will not longer be obligated for this commitment upon the sale of
GoodNet. See Note 21 below.
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 31, 2002. The Company
will not longer be obligated for this commitment upon the sale of GoodNet.
See Note 21 below.
<PAGE>
Telesoft Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
17. Operating Leases:
The Company is the lessor of equipment under operating lease agreements
expiring through June 2000. The equipment had an original cost basis of
$507,464. Accumulated depreciation was $412,743 as of November 30, 1997.
During the fiscal years ended November 30, 1997 and 1996, the Company
received rental income of $180,848 and $181,628, respectively under
this agreement. GoodNet is also the subleasor of office space (Note 15)
mentioned above in Tempe, Arizona. The lease agreement expires in March 2000.
During the fiscal year ended November 30, 1997, the Company received
$30,123 under this agreement.
As of November 30, 1997, a schedule of future minimum rentals to be received
under the non-cancelable lease agreements was as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending
<S>
<C>
November 30, Amount
1998 $75,800
1999 76,720
2000 57,400
--------
Total future minimum rentals $209,920
=========
</TABLE>
18. Research and Development:
Research and development costs for the fiscal years ended November 30, 1997
and 1996 were $414,000 and $266,000, respectively.
<PAGE>
Telesoft Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
19. Acquisitions and Agreements:
GoodNet
During the fiscal year ended November 30, 1996, the Company acquired
proprietary software and other net assets relating to GoodNet, LLC in
exchange for $115,000 cash, 30,833 restricted shares of the Company's common
stock valued at $97,700 and $24,630 in additional costs associated with
the purchase. Additional consideration was to be given under certain
conditions. However, this additional consideration was subsequently modified
(See "Agreements related to GoodNet" below).
The acquisition was accounted for as a purchase. As such, the operations of
GoodNet were included in the consolidated statement of operations from the
date of acquisition. Accordingly, the purchase price was allocated to the
assets and liabilities as follows:
<TABLE>
<CAPTION>
April 30,
1996
<S>
<C>
Cash $21,485
Receivables 82,033
Property, plant and equipment 92,141
Goodwill 400,687
Current liabilities (69,452)
Notes payable (263,705)
Deferred revenues (25,859)
-----------
$237,330
===========
</TABLE>
Agreements related to GoodNet
On March 12, 1997, the Company entered into an agreement effective February 28,
1997, with the former owners of GoodNet, LLC whereby the Company agreed to the
following:
- 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 fiscal 1996.
- The former owner agreed to repay the Company $57,500.
- The Company agreed to pay the former owner $10,000 per month commencing
June 15, 1997, for a period of five years in exchange for a covenant
not-to-compete.
- 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 for the
fiscal year ended November 30, 1997. This amount is included in the loss from
discontinued operations in the Consolidated Statements of Operations.
Additionally, the Company has included in intangibles the cost of the covenant
not-to-compete ($505,020) and a corresponding note payable.
<PAGE>
Telesoft Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
19. Acquisitions and Agreements: (Continued)
Agreements related to GoodNet (Continued)
Effective May 31, 1997, the Company entered into an agreement with the
remaining former owner of GoodNet, LLC to exchange a 24% interest in GoodNet
for the return of the Company's stock issued and rights to receive
contingently issuable stock in conjunction with the purchase of GoodNet, LLC
in fiscal 1996. Under terms of the agreement, the remaining former owner
of GoodNet, LLC agreed to repay the Company $57,500 plus accrued interest,
which the former owner received in conjunction with the purchase of
GoodNet, LLC in fiscal 1996. This transaction resulted in a $86,350
increase in minority interest during fiscal 1997 comprising of $28,850,
50% of the value of the return of the 30,833 shares issued in conjunction
with the original acquisition of GoodNet LLC, and the $57,500 cash to be
repaid by this former owner.
Other acquisitions
The Company also acquired equipment and dial-up access and dedicated Internet
accounts from two local Internet providers, NetZone LLC and Internet Direct,
Inc. in exchange for $425,000 and $440,000 cash, respectively. Of these
amounts, $785,000 was allocated to customer base and $80,000 to equipment. No
proforma information has been presented due to the insignificance of these
acquisitions.
20. Discontinued Operations:
Subsequent to November 30, 1997, the Company together with the minority
shareholders of GoodNet, sold the Company's Internet services subsidiary. (See
Note 21) As a result of this transaction, the results of operations of
GoodNet have been shown as discontinued operations in the accompanying
financial statements.
As of November 30, 1997, the net current assets of GoodNet, included in the
accompanying balance sheets were $1,109,669, net long term assets were
$3,494,701, net current liabilities were $2,086,927, and net long term
liabilities were $371,551.
<PAGE>
Telesoft Corp. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
21. Subsequent Events:
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, which includes a tentative gain of approximately $1,760,000
from the date of close of the transaction. After commissions and related
legal expenses, the Company will realize an approximate $10,000,000
pretax gain on the sale. Additionally, the Company received $235,000 in
cash to offset GoodNet's net cash disbursements from December 12, 1997
through the date of the sale.
The Company will account 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, 400,000 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 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 $250,000.
<TABLE>
<CAPTION>
Exhibit 11; Loss (Earnings) per common and common equivalent shares
(Loss) Earnings per common and common equivalent share is calculated as
follows:
Year Ended November 30,
<S>
<C> <C>
1997 1996
Income from continuing operations $402,985 $989,335
Loss from discontinued operations $(1,326,729) $(212,758)
Net (Loss) Income $(923,744) $776,577
<CAPTION>
Earnings per common and common equivalent shares:
<S>
<C> <C>
Weighted average number of shares outstanding 3,802,874 3,805,528
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 27,824 11,602
Weighed average number of shares and
equivalent shares 3,830,698 3,817,130
Earnings per share - continuing operations $.11 $.26
Loss per share - discontinued operations $(.35) $(.06)
(Loss) Earnings per share $(.24) $.20
<CAPTION>
<S>
<C> <C>
Earnings per share, assuming full dilution:
Weighted average number of shares outstanding 3,802,874 3,805,528
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 27,824 11,602
Common Stock including assumed conversions 3,830,698 3,817,130
Earnings per share - continuing operations $.11 $.26
Loss per share - discontinued operations $(.33) $(.06)
(Loss) Earnings per share $(.22) $.20
</TABLE>
<PAGE>
Exhibit 21: Subsidiaries of Registrant
1. Telesoft Acquisition Corp.
2. Telesoft Acquisition Corp. II
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> NOV-30-1997 NOV-30-1996
<PERIOD-END> NOV-30-1997 NOV-30-1996
<CASH> 1,621,784 219,023
<SECURITIES> 2,200,000 3,503,332
<RECEIVABLES> 7,185,435 6,386,596
<ALLOWANCES> (640,982) (708,127)
<INVENTORY> 401,508 474,254
<CURRENT-ASSETS> 12,335,605 7,860,089
<PP&E> 5,151,229 3,349,371
<DEPRECIATION> (2,144,662) (1,254,419)
<TOTAL-ASSETS> 17,640,850 14,652,936
<CURRENT-LIABILITIES> 8,255,592 4,611,485
<BONDS> 0 0
0 0
0 0
<COMMON> 7,366,228 7,423,928
<OTHER-SE> 1,540,279 2,464,023
<TOTAL-LIABILITY-AND-EQUITY> 17,640,850 14,652,936
<SALES> 22,593,450 20,742,993
<TOTAL-REVENUES> 22,593,450 20,742,993
<CGS> 14,330,388 12,821,582
<TOTAL-COSTS> 22,032,259 19,445,231
<OTHER-EXPENSES> (163,094) (308,895)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 3122
<INCOME-PRETAX> 724,285 1,603,535
<INCOME-TAX> (321,300) (614,200)
<INCOME-CONTINUING> 402,985 989,335
<DISCONTINUED> (1,326,729) (212,785)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (923,744) 776,577
<EPS-PRIMARY> (.24) .20
<EPS-DILUTED> (.24) .20
</TABLE>
