SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1998
COMMISSION FILE NO. 1-13830
TELESOFT CORP.
(Name of Small Business Issuer 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)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (602) 308-2100
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
Title of Class Name of each exchange on which registered
---------------- -----------------------------------------------
COMMON STOCK, NO PAR VALUE PACIFIC STOCK EXCHANGE, INC.
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT : NONE
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 filer in response to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained, to
the best of the Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment of this Form 10-KSB X
---------
Issuer's revenues from continuing operations for its most recent fiscal year
were $28,250,373.
As of January 29, 1999, the number of shares of Common Stock outstanding was
3,711,500 and the aggregate market value of the Common Stock (based on the
closing price on that date) held by non-affiliates of the Issuer was
approximately $8,080,000.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Telesoft Corp. (the "Company" or "Telesoft") provides telecommunications
billing and customer care solutions to educational institutions, corporations
and government agencies. 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 ("DCS") 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 Telesoft Acquisition Corp II, d.b.a. GoodNet
("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
"Management's Discussion and Analysis of Financial Condition and results of
Operations - Discontinued Operations". The Company's 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
(2) Customized Billing Outsourcing Services
(3) System Sales and Maintenance
(a) Telecommunication's Management System ("TMS") and TelMaster
(b) RATEX Bookstore Solution
(c) Distribution Control System ("DCS")
(d) Software and Hardware Recurring Maintenance Revenue
Through GoodNet, its former 71% owned subsidiary 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, Regional Bell
Operating Companies ("RBOCs"), cable television operators and value added
resellers. In January 1998, the Company sold GoodNet to WinStar
Communications, Inc. ("WinStar")
<PAGE>
PRODUCTS AND SERVICES
STUDENT TELEPHONE SERVICES (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 which includes 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
Program is an integrated hardware and proprietary software system, which
extends the STS Program services and advantages to off-campus students. The
SunDial Program 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 toll-free access dialing for long distance service
anywhere in the United States at competitive rates. The SunDial Program also
enables STS subscribers to continue to use the Program after graduation. The
SunDial Program uses Telesoft's proprietary software and Motorola hardware
specially adapted for this software application.
Telesoft markets these programs through alliances developed with RBOCs
and interexchange carriers such as NYNEX, Bell Atlantic, MCI WorldCom and
AT&T.
Telesoft administers and operates its STS Program on a turnkey basis on
74 university and college campuses of various sizes including Rutgers College,
the University of Southern California, the University of Delaware, Smith
College and Indiana University.
Telesoft has sold the system, software and services required to
administer the STS Program to approximately 50 campuses of various sizes
nationwide, 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. Once a sale is
consummated, the Company maintains and services 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
RBOCs. In the first quarter of 1999, the Company secured a customized billing
service contract for approximately 30,000 Qwest Talk subscribers nationwide.
Under the terms of the contract, the Company will handle billing and customer
service and provide marketing assistance for their Talk series of products.
The Company also provides customized billing services for Blue Cross & Blue
Shield of Massachusetts and the Commonwealth of Massachusetts.
During fiscal 1998, the Company received authorization to proceed with
the implementation of a convergence billing, reporting and support system for
Pacific Bell and MCI customer care services for the State of California's
CALNET contract. This service contract is valued at approximately $7 million
over ten years.
SYSTEM SALES AND MAINTENANCE
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 universities, 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 1998,
TelMaster installations included Auburn University, Duquesne Light, Loma Linda
University, and Tulane University Medical Center. Select TelMaster
web-enabled modules were released in the fourth quarter of 1998 with
additional releases scheduled for the first and second quarters of 1999.
In addition to its extensive higher education customer base, the Company
currently services customers such as GTE Internetworking, Pennsylvania State
Geisinger Health Systems, Los Angeles County Public Works and St. Luke's
Roosevelt Hospital in New York. Telesoft also provides telecommunications
data management services and software for Bell of Pennsylvania and Pacific
Bell Corp.
RATEX Bookstore Solution. 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 Cornell University, Stanford University and the University of
Illinois-Chicago.
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, which includes applications
for sales order processing, inventory control, accounts receivable and sales
analysis. DCS is typically installed on a Motorola Unix server.
<PAGE>
COMPETITION
The telecommunications industry is highly competitive and subject to
rapid technological change. Failure to keep pace with 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 AT&T, which
provides long distance telephone service on a resale basis and offers long
distance billing services to universities. The Company also competes with MCI
WorldCom, Sprint and other long distance providers which market long distance
services to the public and directly to college campuses.
In connection with its telemanagement system division, the Company
competes with Telco Research Corporation, IntegraTRAK Inc., Stonehouse &
Company and ISI Infortext, all of which provide telemanagement 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 companies 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 companies also could fund existing or
new products and services with other products 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.
MAJOR CUSTOMERS AND SUPPLIERS
A significant portion of the Company's long-distance telecommunications
services are provided by MCI WorldCom Inc. Although the Company is dependent
upon this supplier, management believes comparable suppliers are available.
During the fiscal years ended November 30, 1998 and 1997, the Company did
not have any customers that accounted for greater than 10% of its revenues.
<PAGE>
SALES AND MARKETING
The Company's sales staff consists of fifteen 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 are compatible with or enhance existing programs.
Research and development costs for the fiscal years ended November 30, 1998
and 1997 were $622,000 and $414,000, respectively. These costs have been
expensed during their respective fiscal years. Research and development costs
have a current run-rate of approximately $850,000 and are expected to reach
$1 million for 1999.
REGULATION
The Company's business is subject to various federal and state
regulations. 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 Company's inability 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 regulatory compliance 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 90-day warranty 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 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 31, 1999, the Company had 122 full-time employees, four of
which are in executive positions, 15 are engaged in sales and marketing, 14
are in software development and system management, 37 are in customer service
and the balance are in various support positions. The Company's employees are
not covered by a collective bargaining agreement. The Company considers its
employee relations to be satisfactory.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY.
During fiscal 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 this
verbal month to month lease were approximately $55,800 and $84,000 for 1998
and 1997. The Company vacated this space in January 1998 and signed a
ten-year lease for approximately 15,000 square feet of office space in
Phoenix, Arizona. The Company's obligation under the terms of this lease
agreement was approximately $346,000 and $130,000 for the fiscal years ended
November 30, 1998 and 1997, respectively.
The Company leases 2,200 square feet in Fort Washington, Pennsylvania,
which houses its RATEX operations. This lease agreement expires in May 2001.
The Company's obligations under the terms of its Fort Washington office lease
were approximately $43,000 and $32,000 for 1998 and 1997, respectively.
The Company leases office space in Tempe, Arizona, which was used for
GoodNet headquarters prior to its acquisition by the Company in April 1996.
This lease agreement expires in March 2000. The Company is currently
subleasing this space under terms similar to the Company's obligation for this
lease, which was $33,300 and $7,500 for the fiscal years ended November 30,
1998 and 1997, respectively.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved as a party to any legal proceedings 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.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The following table sets forth, for the fiscal periods shown,
representative high and low bid prices of the Company's Common Stock as
reported by the Nasdaq SmallCap Market. The prices represent inter-dealer
quotations, which do not include retail mark-ups, mark-downs or commissions
and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30, 1998 LOW HIGH
- ---------------------------- -------- ------
<S> <C> <C>
First Quarter . . . . . . . $2 21/32 $5 1/8
Second Quarter. . . . . . . 4 5
Third Quarter . . . . . . . 3 3/8 6
Fourth Quarter. . . . . . . 3 9/16 5
<CAPTION>
YEAR ENDED NOVEMBER 30, 1997 LOW HIGH
- ----------------------------- ------ ------
<S> <C> <C>
First Quarter . . . . . . . $2 3/8 $ 6
Second Quarter . . . . . . . 3 6
Third Quarter. . . . . . . . 2 3/8 4 5/8
Fourth Quarter . . . . . . . 2 4 3/8
</TABLE>
As of January 19, 1999, there were 582 holders of record of the Common
Stock of the Company. 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 1999.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALY-SIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FORWARD LOOKING INFORMATION
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.
BACKGROUND
The Company began as a value-added reseller in the wholesale distribution
of accounting software (Distribution Control Systems) in 1982. During the
fiscal year ended November 30, 1998, the Company derived approximately 76% 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 university, Fortune 1000, governmental and wholesale
distribution markets.
The Company has adapted to fast-paced market changes by shifting its
resources from providing generic or general system hardware and software to
providing a full range of services in its specialty niches. The Company is
continuously developing new products and services to maintain and expand 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, LLP,
independent certified public accountants, for the years ended November 30,
1998 and 1997. 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 OPERATIONS DATA (1):. . 1998 1997
-------------------------- -------------
Net revenues. . . . . . . . . . . $ 28,250,373 22,593,450
Cost of sales . . . . . . . . . . (18,033,402) (14,330,388)
-------------------------- -------------
Gross profit. . . . . . . . . . . 10,216,971 8,263,062
Income from operations. . . . . . 1,544,157 561,191
Other income. . . . . . . . . . . 332,012 163,094
Income from continuing operations 1,089,578 402,985
Diluted Earnings per share- . . . $ . 28 $ . 11
continuing operations
Weighted average number of. . . . 3,888,033 3,830,698
shares outstanding-Diluted
<CAPTION>
Years Ended November 30,
<S> <C> <C>
1998 1997
----------- -----------
BALANCE SHEET DATA:
Cash and Investments . . . $17,677,008 $ 3,821,784
Working capital. . . . . . 16,970,488 4,080,013
Total assets . . . . . . . 27,620,329 17,640,850
Short-term debt. . . . . . - 90,523
Long-term debt . . . . . . - 371,551
Total stockholders' equity 18,395,164 8,906,507
<FN>
(1) Figures for 1998 and 1997 reflect results from continuing operations.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS BY PRODUCT LINE FOR THE FISCAL YEARS ENDED NOVEMBER 30, 1998 AND 1997
(in thousands except per share items)
Year Ended November 30, 1998 Year Ended November 30, 1997
-------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
System Custom System Custom
STS Sales Billing Total STS Sales Billing Total
Sales, Net. . . . . . . . . $21,461 $ 5,570 $ 1,219 $28,250 $17,430 $4,198 $ 965 $22,593
Cost of Sales . . . . . . . 16,504 1,529 - 18,033 13,288 1,042 - 14,330
-------- ------- -------- ------- ------- ------- -------- -------
Gross Profit. . . . . . . . 4,957 4,041 1,219 10,217 4,142 3,156 965 8,263
-------- ------- -------- ------- ------- ------- -------- -------
General and Administrative
Expenses:
General . . . . . . . . . . 3,366 3,455 696 7,517 3,387 3,177 210 6,774
Depreciation. . . . . . . . 190 109 - 299 125 202 - 327
Amortization. . . . . . . . - 2 - 2 - 8 - 8
Bad Debt. . . . . . . . . . 332 94 3 429 197 1 - 198
Corporate Allocations:
General . . . . . . . . . . 177 47 16 240 127 127 8 262
Depreciation. . . . . . . . 137 37 12 186 45 88 - 133
-------- ------- -------- ------- ------- ------- -------- -------
4,202 3,744 727 8,673 3,881 3,603 218 7,702
-------- ------- -------- ------- ------- ------- -------- -------
Operating Income (Loss) . . 755 297 492 1,544 261 (447) 747 561
Other Income. . . . . . . . 332 163
-------- -------
Pretax Income . . . . . . . 1,876 724
Income Tax Provision. . . . (786) (321)
-------- -------
Income from Continuing $ 1,090 $ 403
Operations ======== =======
Diluted Earnings per
Share-Continuing
Operations. . . . . . . . $ 0.28 $ 0.11
======== =======
</TABLE>
<PAGE>
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED NOVEMBER 30, 1998 AND 1997
The results of operations of the Company do not include the results of
operations of Telesoft Acquisition Corp II, d.b.a. GoodNet ("GoodNet"), its
former 71% owned subsidiary which was sold effective January 12, 1998 and
which is treated as a discontinued operation in the Company's financial
statements.
Revenues increased by 25% to $28,250,373 for the fiscal year ended
November 30, 1998, compared to $22,593,450 for the fiscal year ended November
30, 1997. 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 Program revenues were $21,461,885 for the fiscal year ended
November 30, 1998 compared to $17,430,383 for the fiscal year ended November
30, 1997, an increase of 23.1%. A substantial portion of this increase was due
to the implementation of service at Rutgers University and the conversion of
the University of Southern California from the Company's Customized Billing
Service to the STS Program during the fourth quarter of fiscal 1997. The
addition of these universities increased the Company's revenues by
approximately $1,555,000 and $916,000, respectively, during fiscal 1998. The
addition of eleven new universities during fiscal 1998 represented
approximately $2,410,000 in STS Program revenues. These increases were offset
by the termination of service at nine primarily smaller universities, which
contributed approximately $1,711,000 in revenues during fiscal 1997 and
$1,094,000 in revenues during fiscal 1998.
Revenues from System Sales and Maintenance were $5,569,733 for the fiscal
year ended November 30, 1998 compared to $4,197,480 for the fiscal year ended
November 30, 1997, an increase of 32.7%. This increase was mainly
attributable to increased sales from the Company's RATEX product, which had a
$1.3 million revenue increase from fiscal 1997 to 1998. For the fiscal years
ended November 30, 1998 and 1997, revenues from Customized Billing Outsourcing
Services were approximately $1,219,000 and $965,000, respectively. This
increase was due to the development of customized billing services for two
primary customers, offset by the conversion of the University of Southern
California to an STS Program customer.
Total gross profit increased by 23.6% to $10,216,971 for the fiscal year
ended November 30, 1998, compared to $8,263,062 for the fiscal year ended
November 30, 1997. Cost of goods sold was approximately 76.9% of STS revenues
for the fiscal year ended November 30, 1998, compared with 76.2% for the
fiscal year ended November 30, 1997. Cost of goods sold as a percentage of
system sale/maintenance revenues was approximately 27.5% for the fiscal year
ended November 30, 1998 compared with 24.8% for the fiscal year ended November
30, 1997. This increase was due to a higher percentage of system sales
revenues during fiscal 1998, which have a lower gross profit rate than
maintenance revenues.
General and administrative expenses increased by 12.6%, or $970,943, in
fiscal 1998 to $8,672,814 from $7,701,871 in fiscal 1997. Salaries and
recruitment expenses increased approximately $700,000 from fiscal 1997 to
fiscal 1998. This is a result of increased personnel hired for product
development and sales and marketing. Bad debt was approximately $227,000
higher in fiscal 1998 due to additional allowances for doubtful accounts taken
against revenues from terminated universities. Research and development costs
for the fiscal years ended November 30, 1998 and 1997 were $622,000 and
$414,000, respectively. These costs have been expensed during their
respective fiscal years. Research and development expenses are expected to
increase to approximately $1 million for 1999. Operating expenses as a
percentage of revenue decreased to 30.7% for the fiscal year ended November
30, 1998, compared to 34.1% for the fiscal year ended November 30, 1997.
<PAGE>
The provision for income taxes was $786,591 and $321,300 for the fiscal
years ended November 30, 1998 and 1997, respectively. This represents 42% and
44% of income before provision for income taxes for fiscal 1998 and 1997,
respectively. This percentage decrease is partially attributable to
increased interest from tax-free investments and increased state income taxes.
Income from continuing operations increased to $1,089,578 in fiscal 1998
from $402,985 in fiscal 1997. This is primarily attributable to approximately
$297,000 of operating income from the Company's System Sales division
resulting from increased System Sales revenue versus a $447,000 operating loss
in fiscal 1997.
DISCONTINUED OPERATIONS
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 (NASDAQ: WCII) 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 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. After commissions and related
legal expenses, the Company realized an approximate $13.2 million 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 accounts for its investment in WinStar as an available-for-sale
equity security, which accordingly is carried at market value. 400,000 of the
WinStar shares were sold in November, 1998 resulting in net proceeds, before
taxes, of approximately $11,970,000. As of November 30, 1998, pursuant to a
hedging strategy implemented by the Company during 1998, 31,448 of the
remaining 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. Subsequent to November 30, 1998, the Company sold 47,939
shares of WinStar stock for $1,733,382. This amount will be retained in
escrow through the end of 1999 pursuant to the terms of an escrow agreement
among the Company, GoodNet, the minority shareholders of GoodNet, and the
escrow agent.
As a result of the sale of GoodNet, the Company may be vacating a portion of
its office space in Phoenix, Arizona during the year ending November 30, 1999.
As a result, the Company will have to take steps to sublease the vacated space
or pay an early termination fee approximated at $300,000. This amount
has been included in accounts payable and accrued liabilities in the
accompanying financial statements.
<PAGE>
MATERIAL CHANGES IN FINANCIAL POSITION
Cash and cash equivalents increased to $7,740,219 at November 30, 1998
from $1,621,784 at November 30, 1997. During the fiscal year ended November
30, 1998, investment securities (excluding WinStar stock) increased by
$5,350,000. The Company's cash and investment holdings combined increased by
approximately $11,470,000. During fiscal 1998, net cash provided by operating
activities of continuing operations provided approximately $2,684,000, a 15.3%
increase from fiscal 1997. This increase was offset by an increase of
approximately $900,000 in income taxes paid for continuing operations in
fiscal 1998. The Company used approximately $600,000 in cash to purchase
property and equipment for its continuing operations. The Company received net
cash proceeds of approximately $1,406,000 from the sale of its discontinued
operations, an additional $11,970,000 upon the sale of 400,000 shares of
WinStar stock, and paid $3,866,100 in taxes related to these two transactions.
Accounts receivable increased to $7,435,184 as of November 30, 1998 from
$7,185,435 as of November 30, 1997 ($6,933,089 and $6,544,453, net of
allowance for uncollectibles as of November 30, 1998 and 1997, respectively).
Accounts receivable at November 30, 1997, excluding GoodNet related
receivables, was $5,877,021. This increase of approximately $1,558,000 was
primarily attributable to the increase in STS Program revenue. Accounts
receivable from students at STS Program universities that began service during
fiscal 1998 were approximately $1,154,000 as of November 30, 1998.
The Company's deferred tax asset decreased to $43,700 as of November 30,
1998 from $990,700 as of November 30, 1997. This decrease was primarily due
to the sale of GoodNet, but was offset by an approximate $457,000 deferred tax
asset attributable to an Internal Revenue Service ("IRS") examination, which
the Company underwent during fiscal 1997. The results of the IRS examination
have been recorded as a current liability in the accompanying financial
statements, but are currently being appealed. 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. The Company
believes that it is more likely than not that it will realize the net deferred
tax asset based upon the Company's future profitability. Accordingly, no
valuation allowance has been provided.
Property and equipment before accumulated depreciation decreased to
$2,679,829 as of November 30, 1998 from $5,151,229 as of November 30, 1997.
This decrease was primarily due to the sale of GoodNet, which had
approximately $2,916,000 in unamortized property and equipment as of November
30, 1997. The decrease from the sale of GoodNet was offset by an increase of
approximately $445,000 in property and equipment for continuing operations.
This was due to the purchase of approximately $70,000 in STS Program equipment
to support growth, the purchase of approximately $420,000 in furniture,
fixtures, and leasehold improvements as a result of the Company's relocation
of its office facilities, less approximately $120,000 in furniture and
fixtures sold and $30,000 in leasehold improvements from the old office
facilities that were retired.
Accounts payable and accrued liabilities ("payables") increased to
$8,208,584 as of November 30, 1998 from $6,632,968 as of November 30, 1997.
Excluding GoodNet related payables of approximately $1,382,000 payable at
November 30, 1997, payables at November 30, 1997 were approximately
$5,251,000, resulting in a $2,958,000 increase in payables for continuing
operations. STS Program payables relating to new universities were
approximately $1,770,000 at November 30, 1998, and there was an approximate
$720,000 increase in costs from continuing universities accrued as of November
30, 1998. Also included in the November 30, 1998 payables was $300,000 in
estimated lease termination expenses accrued upon the sale of GoodNet.
Deferred revenue decreased to $742,242 as of November 30, 1998 from
$1,245,806 as of November 30, 1997. This decrease was due to the sale of
GoodNet, which had approximately $585,000 in deferred revenue at November 30,
1997.
LIQUIDITY AND CAPITAL RESOURCES
At November 30, 1998, the Company had cash of $7,740,219 and investment
securities of $9,936,789. Included within investment securities are 79,387
shares of WinStar stock with a fair market value of $2,474,089. The Company
believes that present cash reserves available, along with anticipated cash
flows from its business, will be adequate to supply currently anticipated
operating requirements for the Company for the next 12 months. However, there
can be no assurance that the Company will not require additional funding
within this time frame. The Company may be required to raise additional funds
through public or private financing, strategic relationships, or other
arrangements. There can be no assurance that such additional funding, if
needed, will be available on terms attractive to the Company, or at all.
Furthermore, any additional equity financing may be dilutive to existing
stockholders.
FUTURE EXPECTATIONS
STS revenues are projected to increase by approximately 5% from fiscal
1998 levels during the fiscal year ending November 30, 1999. The Company
expects that this increase will be due to accounts added during the fourth
quarter of fiscal 1998. 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 had 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. The TelMaster system began full product
release in January 1998 and the Company expects to sell and install increasing
numbers of TelMaster systems in fiscal 1999. However, there can be no
assurance that this will happen.
It is anticipated that the cost of human resources for continuing
operations will increase by 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.
<PAGE>
ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130, Reporting
---------
Comprehensive Income, ("SFAS 130") issued by the Financial Accounting
-----------
Standards Board ("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 AICPA's 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.
Statement of Financial Accounting Standards No. 132, Employers'
----------
Disclosures About Pensions and Other Postretirement Benefits, ("SFAS 132")
-------------------------------------------------------
issued by the FASB is effective for financial statements with fiscal years
beginning after December 15, 1997. SFAS 132 revises employers' disclosures
about pension and other postretirement benefit plans. The Company does not
expect adoption of SFAS 132 to have a material effect, if any, on its
financial position or results of operations.
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
-------------------------
Instruments and Hedging Activities, ("SFAS 133") issued by the FASB is
- -------------------------------------
effective for financial statements with fiscal years ending June 15, 1999 and
- -------
later. SFAS 133 establishes accounting and reporting standards for derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. The Company does not expect adoption
of SFAS 133 to have a material effect, if any, on its financial position or
results of operations.
Statement of Financial Accounting Standards No. 134, Accounting for
---------------
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
--------------------------------------------------------------------
Held for Sale By A Mortgage Banking Enterprise, ("SFAS 134") issued by the
- --------------------------------------------------
FASB is effective for financial statements with fiscal years beginning after
- ---
December 15, 1998. SFAS 134 amends SFAS No. 65, Accounting for Certain
- - ----------------------
mortgage Banking Activities, which establishes accounting and reporting
- - -----------------------
standards for certain activities of mortgage banking enterprises and other
enterprises that conduct operations which are substantially similar to the
primary operations of a mortgage banking enterprise. The Company does not
expect adoption of SFAS 134 to have a material effect, if any, on its
financial position or results of operations.
<PAGE>
YEAR 2000 COMPUTER ISSUES
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st century
dates. As a result, in less than a year, computer systems and/or software used
by many companies may need to be upgraded to comply with such "Year 2000"
requirements. Significant uncertainty exists in the software industry
concerning the potential effects associated with such compliance. Although the
Company's internal systems as well as its software and applications are
designed to be Year 2000 compliant, there can be no assurance that such
systems and software contain all necessary date code changes.
The Company is conducting an assessment of its information technology ("IT")
systems and non-IT systems (such as building security, voice mail, telephone
and other systems containing embedded microprocessors) and is in the process
of determining the nature and extent of the work required, if any, to make any
material internal systems Year 2000 compliant. This assessment is expected to
be completed by the end of the second quarter of 1999. The Company's material
internal IT systems consist principally of human resources and sales force
automation application software created by third parties, plus internally
developed project accounting software applications. The Company also expects
that each of these third party applications will be upgraded, as well as
tested by the Company for Year 2000 compliance by the end of the second
quarter of 1999. The Company's internally developed applications are also
expected to be Year 2000 compliant by the end of the second quarter of 1999.
The Company's is conducting an assessment of its computer hardware platforms
and operating systems, principally servers and collection devises with
manufacturers and the Company expects to have completed testing by the end of
1999.
Based on currently available information, the Company believes the expense
associated with these efforts will be immaterial and has provided for the
enhancement of these systems in its operating and capital budgets for the
current fiscal year. However, if compliance efforts of which the Company is
not currently aware are required and are not completed on time, or if the cost
of any required updating, modification or replacement of the Company's IT
systems exceeds the Company's estimates, the Year 2000 issue could have a
material adverse effect on the Company.
In addition to the Company's internal systems, the Company relies on
third party relationships in the conduct of its business. For example, third
party vendors handle the payroll function for the Company, and the Company
also relies on the services of landlords of its facilities, telecommunication
companies, banks, utilities, and commercial airlines, among others. The
Company is currently obtaining assurances from its landlords and material
vendors and suppliers that there will be no interruption of service as a
result of the Year 2000 issue, and to the extent such assurances are not
given, the Company intends to devise contingency plans to ameliorate the
negative effects on the Company in the event the Year 2000 issue results in
the unavailability of services. There can be no assurance that any contingency
plans developed by the Company will prevent any such service interruption on
the part of one or more of the Company's third party vendors or suppliers from
having a material adverse effect on the Company. In addition, the failure on
the part of the accounting systems of the Company's clients due to the Year
2000 issue could result in a delay in the payment of invoices issued by the
Company for services and expenses. A failure of the accounting systems of a
significant number of the Company's clients would have a material adverse
effect on the Company. Although the Company's principal service offerings do
not include Year 2000 remediation services, former, present and future clients
could assert that certain services performed by the Company involved or are
related to the Year 2000 issue. The Company has recommended, implemented and
customized various third-party software packages for its clients, certain of
which may not be Year 2000 compliant. Because the Company has designed,
developed and implemented software and systems for a large number of clients
since 1982, there can be no way of assuring that all such software programs
and systems will be Year 2000 compliant. In particular, the Company's solution
delivery methodology, in many cases, empowers clients to maintain, alter and
upgrade systems after the completion of an engagement. Due to the potential
significance of the Year 2000 issue upon client operations, upon any failure
of critical client systems or processes that may be directly or indirectly
connected or related to systems or software analyzed, designed, developed, or
implemented by the Company, the Company may be subjected to claims regardless
of whether the failure is related to the services provided by the Company. If
asserted, the resolution of such claims (and the associated defense costs)
could have a material adverse effect on the Company.
SEASONALITY
The Company generally completes the sale of the majority of STS Program
system installations in the university market during the spring and early
summer months. The implementation and installation of these systems and
services typically occurs during the summer months. Revenues derived from STS
Programs 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 second and fourth quarters.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and schedules are included herewith commencing
on page F-1.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DIS-CLOSURE.
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 accounting firm. In February
1997, the Company selected Coopers & Lybrand, LLP as its new independent
accountants.
On October 16, 1997, Coopers & Lybrand, LLP informed the Company that
they resigned as the Company's independent certified public accountants.
Coopers & Lybrand, LLP'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, LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure through Coopers &
Lybrand, LLP'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 ended May 31, 1997.
During the quarter ended August 31, 1997, Coopers & Lybrand, LLP ("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 completed such an analysis, and therefore should consider a
write down of a portion of its intangible assets related to GoodNet. It was
the opinion of the Company's management, based upon its internal projections,
that the Company would be able to recover the goodwill associated with
GoodNet. Management believed that a majority of the goodwill associated with
GoodNet was derived from its dialup business, which was 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 was the opinion of the Company's management that the
Company would 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 at the direction of its Board
of Directors, selected BDO Seidman, LLP (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, the above
issues identified by the former accountant were not a concern as of November
30, 1997. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Discontinued Operations.")
The audit committee did not discuss the above issues with the former
accountant.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following sets forth certain information with respect to the
Company's directors and executive officers.
<TABLE>
<CAPTION>
<S> <C> <C>
AGE POSITION
--- ---------------------------------------------------
NAME
- -------------------------
Joseph W. Zerbib. . . . . 63 President, Chief Executive Officer and Director
Thierry E. Zerbib . . . . 37 Vice President-Technologies, Secretary and Director
Brian H. Loeb . . . . . . 37 Vice President-Marketing, Sales and Operations and
Director
Michael F. Zerbib(1)(2).. 32 Chief Financial Officer, Treasurer and Director
Cecile Silverman(1)(2) .. 74 Director
Kalvan Swanky (2) . . . . 35 Director
</TABLE>
______________________________________
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
Joseph W. Zerbib has been President, Chief Executive Officer and a
director of the Company since 1982.
Thierry E. Zerbib has been Vice President-Technologies, Secretary and a
director of the Company since 1982. He holds dual degrees in computer science
and math from Tel Aviv University, Israel.
Brian H. Loeb has been Vice President-Marketing, Sales and Operations
since 1982 and a director of the Company since 1992.
Michael F. Zerbib has been Chief Financial Officer, Treasurer and a
director of the Company since 1990. He holds a Bachelor of Science degree in
finance and a Master's 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 has been a director of the Company since June 1995. Ms.
Silverman is a certified public accountant and has been self employed since
1989. From 1975 to 1989, she was a partner at the firm of Schwartz, Cohen &
Co. 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 accounting.
Kalvan Swanky has been a director of the Company since June 1995. Since
1986, he has been employed by Storage Technology Corporation ("STC"), which
develops, manufactures and distributes computer memory devices. Mr. Swanky
has held a number of positions with STC, 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 E. Zerbib and Michael F. Zerbib.
BOARD MEETINGS, COMMITTEES AND COMPENSATION
During the fiscal year ended November 30, 1998, the Board of Directors
held four meetings. All directors attended these meetings.
Audit Committee. The Board of Directors currently maintains an Audit
Committee, which currently is composed of Cecile Silverman and Michael Zerbib.
The responsibilities of the Audit Committee include, in addition to such other
duties as the Board of Directors may specify, (i) receiving reports with
respect to loss contingencies, the public disclosure or financial statement
notation of which may be legally required, (ii) annually reviewing and
examining those matters that relate to a financial and performance audit of
the Company's stock option plans, (iii) recommending to the Board of Directors
the selection, retention and termination of the Company's independent
accountants, (iv) reviewing the professional services, proposed fees and
independence of such accountants, and (v) providing 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, 1998.
Compensation Committee. The Board of Directors currently maintains a
Compensation Committee, which currently is composed of Cecile Silverman,
Kalvan Swanky, and Michael Zerbib. The responsibilities of the Compensation
Committee include, in addition to such other duties as the Board of Directors
may specify, (i) reviewing and recommending to the Board of Directors the
salaries, compensation and benefits of the Company's executive officers and
key employees, (ii) reviewing any related party transactions on an ongoing
basis for potential conflicts of interest, and (iii) administering the
Company's stock plans. The Compensation Committee held two meetings during
the fiscal year ended November 30, 1998.
The members of the Board of Directors do not receive any cash
compensation for serving as directors. However, the Company may reimburse the
independent directors for their reasonable out-of-pocket expenses in
connection with their attendance at meetings. In April 1996, the Company
granted immediately exercisable options to purchase 1,000 shares of Common
Stock to each of Ms. Silverman and Mr. Swanky. The options are exercisable at
a price of $4.75 per share through April 2001 and were not granted pursuant to
any stock option plan. In October 1997, the Company granted each of Ms.
Silverman and Mr. Swanky immediately exercisable options to purchase 1,000
shares of Common Stock at a price of $2-15/16 per share through October 2002.
These options also were not granted pursuant to any stock option plan.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act, as amended, requires the Company's
officers, directors and persons who beneficially own more than ten percent of
the Company's Common Stock to file reports of ownership and changes in
ownership with the Commission. These reporting persons also are required to
furnish the Company with copies of all Section 16(a) forms they file. To the
Company's knowledge, based solely on its review of the copies of such forms
furnished to it and representations that no other reports were required, the
Company believes that all Section 16(a) reporting requirements were complied
with during the fiscal year ended November 30, 1998.
<PAGE>
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, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LONG TERM COMPENSATION (1)
----------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------- ------------------- ------------------
OTHER SECURITIES ALL
ANNUAL RESTRICTED UNDERLYING OTHER
NAME AND. . . . . . . . COMPEN STOCK OPTIONS/ LTIP COMPEN-
PRINCIPAL POSITION. . . YEAR SALARY(2) BONUS -SATION AWARDS SARS PAYOUTS SATION
- ----------------------- -------------------------- ------------ ----------- ------- ------- ------ ------- ------
Joseph W. Zerbib. . . . 1998 $ 144,000 $ 150,000 -0- -0- -0- -0- -0-
President and Chief 1997 $ 144,000 -0- -0- -0- 26,000 -0- -0-
Executive Officer . . . 1996 $ 108,000 -0- -0- -0- 26,000 -0- -0-
Thierry E. Zerbib . . . 1998 $ 144,000 $ 150,000 -0- -0- -0- -0- -0-
Vice President -. . . . 1997 $ 144,000 -0- -0- -0- 26,000 -0- -0-
Technologies and. . . . 1996 $ 126,000 -0- -0- -0- 21,000 -0- -0-
Secretary
- -----------------------
Michael F. Zerbib . . . 1998 $ 144,000 $ 150,000 -0- -0- -0- -0- -0-
Chief Financial Officer 1997 $ 104,000 -0- -0- -0- 26,000 -0- -0-
and Treasurer . . . . . 1996 $ 100,000 -0- -0- -0- 28,000 -0- -0-
Brian H. Loeb . . . . . 1998 $ 144,000 $ 150,000 -0- -0- -0- -0- -0-
Vice President -. . . . 1997 $ 144,000 -0- -0- -0- 26,000 -0- -0-
Marketing, Sales and. . 1996 $ 126,000 -0- -0- -0- 21,000 -0- -0-
Operations
- -----------------------
<FN>
(1) See "Security Ownership of Certain Beneficial Owners and Management" below for additional information on options
which were granted to these four officers.
</TABLE>
(2) The Company extended one-year employment agreements to Joseph W.
Zerbib, Thierry E. Zerbib, Brian H. Loeb and Michael F. Zerbib.
<PAGE>
OPTION GRANTS IN FISCAL 1998
There were no options granted to officers during fiscal 1998.
OPTION EXERCISES IN FISCAL 1998
There were no exercises of outstanding stock options by officers in
fiscal 1998.
STOCK OPTION AND RESTRICTED STOCK PLANS
1995 and 1996 Incentive Stock Option Plans. The Board of Directors
adopted the 1995 Incentive Stock Option Plan ("1995 ISO Plan") on February 1,
1995 and the 1996 Incentive Stock Option Plan ("1996 ISO Plan") and, together
with the 1995 ISO Plan, the ("Plans") on April 15, 1996. The Plans
subsequently were approved by the shareholders. The terms and conditions of
the Plans are substantively similar.
There are 264,000 shares authorized for grant under the 1995 ISO Plan.
As of November 30, 1997, options to purchase 264,000 shares of Common Stock
were outstanding under the 1995 ISO Plan, which includes options to purchase
(i) 164,000 shares currently held by executive officers at an exercise price
of $6.60 per share and (ii) 100,000 shares currently held by certain employees
of the Company at an exercise price of $6.00 per share. The exercise price of
the options granted to the executive officers exceeded the fair market value
of the Common Stock on the date of grant.
There are 260,000 shares authorized for grant under the 1996 ISO Plan.
As of November 30, 1997, options to purchase 237,400 shares of Common Stock
were outstanding under the 1996 ISO Plan, which includes options to purchase
(i) 96,000 shares currently held by executive officers at exercise prices
ranging from $3.30 to $5.23 per share and (ii) 141,400 shares currently held
by certain employees of the Company at exercise prices ranging from $3.00 to
$4.75 per share. The exercise price of the options granted to the executive
officers exceeded the fair market value of the Common Stock on the date of
grant.
Each of the Plans authorizes the Company to grant to key employees both
incentive options and non-qualified options. Incentive options are qualified
options under the Internal Revenue Code. 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. 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 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 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.
1997 Performance Equity Plan. ("1997 Plan") On October 2, 1997, the
Board of Directors adopted the 1997 Plan. On May 15, 1998, the Board of
Directors amended the 1997 Plan. The 1997 Plan was subsequently approved by
the shareholders. The Board of Directors has authorized 1,000,000 shares for
grant under the 1997 Plan. In October 1997, the Company granted options under
the 1997 Plan to purchase an aggregate of 233,500 shares of Common Stock,
129,500 shares of which were granted to certain employees of the Company at an
exercise price of $2.9375 per share and 104,000 shares of which were granted
to the Company's executive officers at an exercise price of $3.23 per share.
The exercise price of the options granted to the executive officers exceeded
the fair market value of the Common Stock on the date of grant. In February
1998, the Company granted 14,600 options to employees at an exercise price of
$4.25 per share, the fair market value of the underlying shares at the date of
grant.
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. The 1997 Restricted Stock
Plan has not yet been approved by the shareholders. No shares have been
granted under any of the Restricted Stock Plans. Accordingly, on May 15,
1998, in connection with the amendments to the 1997 Plan (which permits grants
of restricted stock awards), the Board of Directors determined that it was in
the best interests of the Company to terminate the 1995, 1996 and 1997
Restricted Stock Plans. Any restricted stock awards that the Company may wish
to make in the future may be made pursuant to the 1997 Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of February 17,
1999, with respect to (i) those persons or groups known to the Company to
beneficially own more than 5% of the Company's Common Stock, (ii) each
director and nominee, (iii) each executive officer whose compensation exceeded
$100,000 in the fiscal year ended November 30, 1998, and (iv) all directors
and executive officers as a group. The information is determined in
accordance with Rule 13d-3 promulgated under the Securities Exchange Act of
1934 ("Exchange Act") based upon information furnished by the persons listed
or contained in filings made by them with the Securities and Exchange
Commission ("Commission"). Except as indicated below, the shareholders listed
possess sole voting and investment power with respect to their shares.
<TABLE>
<CAPTION>
<S> <C> <C>
Amount and Nature of Percent
Name and Address of Beneficial Owner(1) Beneficial Ownership(2) of Class
- --------------------------------------- ----------------------- --------
Thierry E. Zerbib 639,500(3) 15.3%
Brian H. Loeb 639,500(4) 15.3%
Michael F. Zerbib 638,000(5) 15.3%
Joseph W. Zerbib 358,250(6) 8.6%
Nicholas Zerbib 293,750 7.0%
Cecile Silverman 2,000(7) *
Kalvan Swanky. 2,000(7) *
All executive officers and directors
as a group (six persons) 2,279,500(8) 54.5%
</TABLE>
______________________________
* Less than 1%.
(1) The address of each of the persons listed is c/o Telesoft Corp., 3443
North Central Avenue, Suite 1800, Phoenix, Arizona 85012.
(2) A person is deemed to be the beneficial owner of voting securities
that can be acquired by such person within 60 days from February 17, 1999 upon
the exercise of options, warrants or convertible securities. Each beneficial
owner's percentage ownership is determined by assuming that options, warrants
or convertible securities that are held by such person (but not those held by
any other person) and which are exercisable within 60 days of February 17,
1999, have been exercised.
(3) Includes 62,000 shares of Common Stock issuable upon exercise of
currently exercisable options. Does not include 26,000 shares of Common Stock
underlying options, 4,000 of which vest in April 2000, 7,750 of which vest in
each of October 1999 and 2000 and 6,500 of which vest in October 2001.
(4) Represents 577,500 shares of Common Stock which are owned jointly by
Mr. Loeb and his spouse and 62,000 shares of Common Stock issuable upon
exercise of currently exercisable options. Does not include 26,000 shares of
Common Stock underlying options, 4,000 of which vest in April 2000, 7,750 of
which vest in each of October 1999 and 2000 and 6,500 of which vest in October
2001.
(5) Includes 65,500 shares of Common Stock issuable upon exercise of
currently exercisable options. Does not include 29,500 shares of Common Stock
underlying options, 4,000 of which vest in April 2000, 9,500 of which vest in
each of October 1999 and 2000 and 6,500 of which vest in October 2001.
(6) Includes 64,500 shares of Common Stock issuable upon exercise of
currently exercisable options. Does not include 28,500 shares of Common Stock
underlying options, 4,000 of which vest in April 2000, 9,000 of which vest in
each of October 1999 and 2000 and 6,500 of which vest in October 2001.
(7) Includes 2,000 shares of Common Stock issuable upon exercise of
currently exercisable options. Does not include 1,000 shares of Common Stock
underlying options, 250 of which vest in each October 1999, April 2000,
October 2000 and 2001.
(8) Includes those shares of Common Stock deemed to be included in the
respective beneficial ownership of Messrs. Thierry E. Zerbib, Brian H. Loeb,
Michael F. Zerbib, Joseph W. Zerbib, Kalvan Swanky and Ms. Cecile Silverman as
described in notes 3, 4, 5, 6 and 7 above.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CERTAIN TRANSACTIONS
The Company leased 13,500 square feet of office space from Joseph W.
Zerbib, an officer, director and principal shareholder of the Company. The
Company leased this office in fiscal 1996 and 1997 on a month-to-month basis
for $6,978 per month. The Company vacated this space in January 1998, but
will continued to pay rent through July 1998.
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.
<PAGE>
ITEM 13. EXHIBIT LISTAND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
<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 (1)
Incorporated and CSI Acquisition Corp. dated March 13, 1995
10.4. Form of Employment Agreement between the Registrant and Joseph W. Zerbib (1)
10.5. Form of Employment Agreement between the Registrant and Thierry E. Zerbib (1)
10.6. Form of Employment Agreement between the Registrant and Brian H. Loeb (1)
10.7. Form of Employment Agreement between the Registrant and Michael F. Zerbib (1)
10.8. Contract between Registrant and the University of Delaware (1)
10.9. 1996 Incentive Stock Option Plan (2)
10.10 1996 Restricted Stock Plan (2)
10.11 1997 Performance Equity Plan (5)
16. . Letter on Change in Certifying Accountants (3)
16.1. Letter on Change in Certifying Accountants (4)
21. Subsidiaries of Registrant *
27. Financial Data Schedule *
<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
(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
(5) Filed with Definitive Proxy Statement dated June 16, 1998
</TABLE>
(b) Current Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the quarter ended
November 30, 1998.
<PAGE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-50
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TELESOFT CORP.
Dated: March 1, 1999 By /s/ Joseph W. Zerbib
Joseph W. Zerbib,
President and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signature and Title Date
- --------------------- ----
/s/ Joseph W. Zerbib March 1, 1999
Joseph W. Zerbib,
President, Chief Executive Officer and Director
/s/ Thierry E. Zerbib March 1, 1999
Thierry E. Zerbib, Vice President - Technologies,
Secretary and Director
/s/ Brian H. Loeb March 1, 1999
Brian H. Loeb, Vice President - Marketing,
Sales and Operations and Director
/s/ Michael F. Zerbib March 1, 1999
Michael F. Zerbib, Chief Financial Officer
Treasurer and Director (and principal accounting officer)
/s/ Cecile Silverman March 1, 1999
Cecile Silverman, Director
/s/ Kalvan Swanky March 1, 1999
Kalvan Swanky, Director
TELESOFT CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
INDEX TO THE FINANCIAL STATEMENTS
PAGE
<S> <C>
Report of Independent Certified Public Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheet as of November 30, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the years ended November 30, 1998 and 1997 F-4 - F-5
Consolidated Statements of Changes in Stockholders' Equity for the years ended November 30, 1998 and 1997 F-6
Consolidated Statements of Cash Flows for the years ended November 30, 1998 and 1997 F-7 - F-8
Notes to the Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9 - F-26
</TABLE>
<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, 1998 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended November 30, 1998 and 1997. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation
of the financial statements. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Telesoft
Corp. and Subsidiaries at November 30, 1998 and the results of their
operations and their cash flows for the years ended November 30, 1998 and
1997, in conformity with generally accepted accounting principles.
/s/ BDO Seidman LLP
Los Angeles, California
February 5, 1999
<TABLE>
<CAPTION>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
NOVEMBER 30, 1998
1998
----
ASSETS
<S> <C>
Cash and cash equivalents (Note 2). . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,740,219
Investment securities (Notes 3 and 18) . . . . . . . . . . . . . . . . . . . . . . . . . 9,936,789
Accounts receivable, net of allowance for uncollectibles of $502,095 (Notes 2 and 4) 6,933,089
Inventory (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 626,170
Deferred taxes (Note 9). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,800
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 661,486
------------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,068,553
Property and equipment, net (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . 1,146,766
Computer software costs, net (Note 7). . . . . . . . . . . . . . . . . . . . . . . . . . 314,962
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,048
------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,620,329
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 147,239
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . 8,208,584
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 742,242
------------
Total Current Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,098,065
Deferred taxes (Note 9). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127,100
------------
Total Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,225,165
------------
Commitments and contingencies (Notes 11 and 14)
Minority Interest (Note 17). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
Stockholders Equity: (Note 12)
Preferred Stock, no par value, 10,000,000 shares authorized; none. . . . . . . . . . . . -
issued and outstanding
Common Stock, no par value, 50,000,000 shares authorized;
3,787,500 issued and 3,748,500 outstanding . . . . . . . . . . . . . . . . . . . . . 7,103,400
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,069
Unrealized gain on investment securities (Note 3). . . . . . . . . . . . . . . . . . . . 84,566
Retained Earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,127,129
------------
Total Stockholders Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,395,164
------------
Total Liabilities and Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . $27,620,329
============
</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, 1998 AND 1997
<S> <C> <C>
1998 1997
------------ ------------
Sales, net. . . . . . . . . . . . . . . . . . . . . . . $28,250,373 $22,593,450
Cost of sales . . . . . . . . . . . . . . . . . . . . . 18,033,402 14,330,388
----------- -----------
Gross profit. . . . . . . . . . . . . . . . . . . . . . 10,216,971 8,263,062
General and administrative expenses . . . . . . . . . . 8,672,814 7,701,871
----------- -----------
Operating income. . . . . . . . . . . . . . . . . . . . 1,544,157 561,191
----------- -----------
Other income (expense):
Interest income . . . . . . . . . . . . . . . . . . . . 292,295 177,780
Interest expense. . . . . . . . . . . . . . . . . . . . (1,277) -
Other income (expense). . . . . . . . . . . . . . . . . 40,994 (14,686)
----------- -----------
332,012 163,094
------------ ------------
Income from continuing operations before provision. . . 1,876,169 724,285
for income taxes
Provision for income taxes (Note 9) . . . . . . . . . . (786,591) (321,300)
----------- ------------
Income from continuing operations . . . . . . . . . . . 1,089,578 402,985
Discontinued operations (Note 18):
Loss from operations of GoodNet subsidiary (net of. (68,428) (1,326,729)
income tax of $2,173 in 1998 and income tax
benefit of $973,800 and minority interest of
$186,350 for 1997)
Gain on disposal of GoodNet subsidiary (net of. . . 8,565,700 -
income taxes of $4,611,099)
------------ ------------
Net Income (Loss) . . . . . . . . . . . . . . . . . . . $ 9,586,850 $ (923,744)
============ ============
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Basic earnings (loss) per share
Continuing operations. . . . . . . $ 0.29 $ 0.11
Discontinued operations. . . . . . (0.02) (0.35)
Sale of discontinued operations. . 2.26 -
----------- -----------
Net income (loss). . . . . . . . . $ 2.53 $ (0.24)
=========== ===========
Diluted earnings (loss) per share
Continuing operations. . . . . . . $ 0.28 $ 0.11
Discontinued operations. . . . . . (0.02) (0.35)
Sale of discontinued operations. . 2.20 -
----------- -----------
Net income (loss). . . . . . . . . $ 2.46 $ (0.24)
=========== ===========
Weighted average number
of shares outstanding
- - basic. . . . . . . . . . . . . . 3,784,793 3,802,874
- - diluted. . . . . . . . . . . . . 3,888,033 3,830,698
=========== ===========
<PAGE>
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 1998 AND 1997
Common Stock
--------------
<S> <C> <C> <C> <C> <C> <C>
Unrealized
Number of Additional Gain on
Shares Paid-In Investment Retained Total Stockholders'
Outstanding Amount Capital Securities Earnings Equity
-------------- ------------ ----------- ----------- ---------------- -------------------
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
Treasury Stock acquired (Note 12) . . (39,000) (182,759) - - - (182,759)
Unrealized gain on investment . . . .
securities . . . . . . . . . . . - - - 84,566 - 84,566
Net income. . . . . . . . . . . . . . - - - - 9,586,850 9,586,850
-------------- ------------ ----------- ----------- --------------- -----------
Balance, November 30, 1998. . . . . . 3,748,500 $ 7,103,400 $ 80,069 84,566 $ 11,127,129 $18,395,164
============== ============ =========== =========== =============== ===========
</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, 1998 AND 1997
<S> <C> <C>
1998 1997
------------- -------------
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Cash received from customers . . . . . . . . . . . . . . . . . . . $ 26,498,226 $ 22,232,221
Cash paid to suppliers and employees . . . . . . . . . . . . . . . (23,120,762) (19,990,408)
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . (1,277) -
Interest received. . . . . . . . . . . . . . . . . . . . . . . . . 208,311 146,234
Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . . . (900,165) (59,844)
------------- -------------
Net cash provided by operating activities of continuing operations 2,684,333 2,328,203
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment . . . . . . . . . . . . . . . . (617,037) (384,642)
Cash received from sale of equipment . . . . . . . . . . . . . . . 27,951 3,290
Disbursements for notes receivable from related parties. . . . . . (2,000) (502,275)
Collection of notes receivable from related parties. . . . . . . . - 480,674
Purchase of investment securities. . . . . . . . . . . . . . . . . (7,350,000) (4,831,668)
Sale of investment securities. . . . . . . . . . . . . . . . . . . 13,971,131 6,135,000
------------- ------------
Net cash provided by investing activities of continuing operations 6,030,045 900,379
------------- ------------
Cash flows from financing activities:
Purchases of treasury stock. . . . . . . . . . . . . . . . . . . . (182,759) -
------------- ------------
Net cash used in financing activities of continuing operations . . (182,759) -
------------- ------------
Cash provided by continuing operations . . . . . . . . . . . . . . 8,531,619 3,228,582
Cash used in discontinued operations, including income . . . . . . (2,413,184) (1,825,821)
taxes paid in the amount of $3,866,100
------------- ------------
Net increase in cash and cash equivalents 6,118,435 1,402,761
Cash and cash equivalents at beginning of fiscal year. . . . . . . 1,621,784 219,023
------------- ------------
Cash and cash equivalents at end of fiscal year. . . . . . . . . . $ 7,740,219 $ 1,621,784
============= ============
</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, 1998 AND 1997
1998 1997
------------ -----------
<S> <C> <C>
Reconciliation of Net (Loss) Income to Net Cash
Provided by Operating Activities from
Continuing Operations:
Net Income (Loss) . . . . . . . . . . . . . . . . . $ 9,586,850 $ (923,744)
------------ -----------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities from
continuing operations:
Loss from discontinued operations . . . . . . . . . 68,428 1,326,729
Gain on sale of discontinued operations . . . . . . (8,565,700) -
Income taxes payable and deferred taxes
related to sale of discontinued operations . . . (744,999) -
Depreciation and amortization . . . . . . . . . . . 486,481 469,908
(Gain) Loss on sale of fixed assets . . . . . . . . (20,659) 21,082
Interest income included with note receivable . . . (21,525) (19,474)
Changes in Assets and Liabilities:
Accounts receivable . . . . . . . . . . . . . . . . (1,424,169) (401,893)
Inventory . . . . . . . . . . . . . . . . . . . . . (269,574) 42,932
Other current assets. . . . . . . . . . . . . . . . (85,871) (115,479)
Deferred taxes. . . . . . . . . . . . . . . . . . . 534,500 (497,400)
Other assets. . . . . . . . . . . . . . . . . . . . 5,227 19,685
Accounts payable and accrued liabilities. . . . . . 2,957,442 1,409,751
Deferred revenue. . . . . . . . . . . . . . . . . . 80,977 237,250
Income taxes payable. . . . . . . . . . . . . . . . (139,056) 611,614
Income taxes receivable . . . . . . . . . . . . . . 235,981 147,242
------------ -----------
(6,902,517) 3,251,947
------------ -----------
Net cash provided by operating activities from. . . $ 2,684,333 $2,328,203
continuing operations ============ ===========
<FN>
Supplemental disclosure of investing and financing activities:
- --------------------------------------------------------------------
During the year ended November 30, 1998, the Company sold its 71% owned
subsidiary, Telesoft Acquisition Corp. II, for $3,500,000 cash and 479,387
shares of WinStar common stock valued at $13,902,223 on the date of sale.
Expenses paid and accrued relating to the sale were $2,094,205.
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% represented
partial payment of the sale of 24% of the outstanding shares of Telesoft
Acquisition Corp. II. The remaining 50% represented 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
</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 and 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). 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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Telesoft Corp.,
together with its wholly owned subsidiary, Telesoft Acquisition Corp and its
former 71% owned subsidiary, Telesoft Acquisition Corp II, d.b.a. GoodNet
("GoodNet"). (See Note 18)
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has cash and cash equivalents, receivables, and accounts payable
for which the carrying value approximates the fair value due to the short-term
nature of these instruments.
LONG-LIVED ASSETS
Statement of Financial Accounting Standards No.121, Accounting for the
--------------------
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of"
-----------------------------------------------------------------------
("SFAS 121") issued by the Financial Accounting Standards Board ("FASB") is
effective for financial statements for fiscal years beginning after December
15, 1995. The standard establishes guidelines regarding when impairment
losses on long-lived assets, which include plant and equipment, and certain
identifiable intangible assets, should be recognized and how impairment losses
should be measured. The Company adopted SFAS 121 during the year ended
November 30, 1997. The Company does not believe any assets are impaired as of
November 30, 1998.
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.
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
DEFERRED REVENUE
Deferred revenue represents deferred income from maintenance contracts. The
income is recognized ratably over the applicable lives of the respective
contracts.
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 97-2; 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.
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
Basic earnings per share of common stock were computed by dividing net
earnings by the weighted average number of common shares.
Diluted earnings per share are computed based on the weighted average
number of shares of common stock and dilutive securities outstanding during
the period. Dilutive securities are options that are freely exercisable into
common stock at less than market exercise prices. Dilutive securities are not
included in the weighted average number of shares when inclusion would
increase the earnings per share or decrease the loss per share.
During the year ended November 30, 1998, the Company adopted Financial
Accounting Standards Board Statement of Accounting Standards No. 128 ("SFAS
128"). As a result, earnings (loss) per share for all prior periods have been
restated. The restatement did not impact previously reported amounts.
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
ACCOUNTING PRONOUNCEMENTS:
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 AICPA's 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.
Statement of Financial Accounting Standards No. 132, Employers' Disclosures
----------------------
About Pensions and Other Postretirement Benefits, ("SFAS 132") issued by the
------------------------------------------------
FASB is effective for financial statements with fiscal years beginning after
December 15, 1997. SFAS 132 revises employers' disclosures about pension and
other postretirement benefit plans. The Company does not expect adoption of
SFAS 132 to have a material effect, if any, on its financial position or
results of operations.
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
-------------------------
Insturments and Hedging Activities, ("SFAS 133") issued by the FASB is
- -------------------------------------
effective for financial statements with fiscal years ending June 15, 1999 and
- -------
later. SFAS 133 establishes accounting and reporting standards for derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. The Company does not expect adoption
of SFAS 133 to have a material effect, if any, on its financial position or
results of operations.
Statement of Financial Accounting Standards No. 134, Accounting for
---------------
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
--------------------------------------------------------------------
Held for Sale By A Mortgage Banking Enterprise, ("SFAS 134") issued by the
- --------------------------------------------------
FASB is effective for financial statements with fiscal years beginning after
- ---
December 15, 1998. SFAS 134 amends SFAS No. 65, Accounting for Certain
- - ----------------------
mortgage Banking Activities, which establishes accounting and reporting
- - -----------------------
standards for certain activities of mortgage banking enterprises and other
enterprises that conduct operations which are substantially similar to the
primary operations of a mortgage banking enterprise. The Company does not
expect adoption of SFAS 134 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, 1998, the Company
had uninsured cash and cash equivalent bank balances of approximately
$781,000.
SUPPLIERS
The Company is provided a significant portion of its long-distance
telecommunications services by one telecommunications company. Although the
Company is dependent upon this supplier, management believes comparable
suppliers are available. For the fiscal years ended November 30, 1998 and
1997, fees paid to this company totaled approximately $2,640,000 and
$2,555,000, respectively. As of November 30, 1998, the outstanding amount due
to the service provider was approximately $1,293,000.
CUSTOMERS
During the years ended November 30, 1998 and 1997, the Company did not
have any customers that accounted for greater than 10% of its revenues.
3. INVESTMENT SECURITIES:
The amortized cost or carrying amount and fair value (based on quoted
market prices) of securities available for sale at November 30, 1998 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>
Carrying Cost/
Amortized Cost Fair Value
------------------------------ -----------
Short term investments, equity. . . . . . . $ 2,386,789 $ 2,386,789
Municipal Bonds, maturing from 2025 to 2033 7,550,000 7,550,000
------------------------------ -----------
Investment Securities $ 9,936,789 $ 9,936,789
</TABLE>
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
At November 30, 1998, accounts receivable include billed and unbilled amounts,
as follows:
<S> <C>
Billed. . . . . . . . . . . . . . $5,208,678
Unbilled. . . . . . . . . . . . . 2,226,506
----------
7,435,184
Less: allowance for uncollectibles (502,095)
----------
$6,933,089
==========
</TABLE>
Unbilled accounts receivable represent amounts earned but not billed for long
distance telephone service and internet dialup service.
<TABLE>
<CAPTION>
At November 30, 1998, accounts receivable by product line is as follows:
STS Custom Billing System Sales/ Maintenance Total
------------- ---------------- --------------------------- -----------
<S> <C> <C> <C> <C>
Outsourcing
-------------
Billed . . $ 3,031,956 $ 672,945 $ 1,503,777 $5,208,678
Unbilled . 2,392,996 (163,800) (2,690) 2,226,506
Allowance. (410,791) (2,300) (89,004) (502,095)
------------- ---------------- --------------------------- -----------
Total, Net $ 5,014,161 $ 506,845 $ 1,412,083 $6,933,089
============= ================ =========================== ===========
</TABLE>
5. INVENTORY:
<TABLE>
<CAPTION>
At November 30, 1998, inventory consists of:
<S> <C>
Parts and equipment. . . . . . . . . . . . . $308,820
Finished products. . . . . . . . . . . . . 317,350
--------
$626,170
========
</TABLE>
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
At November 30, 1998, property and equipment consists of:
<S> <C>
$ 1,687,161
Equipment
Vehicles. . . . . . . . . . . . . . . . . . . . . . . . . 28,458
Furniture and fixtures. . . . . . . . . . . . . . . . . . 401,219
Leasehold improvements. . . . . . . . . . . . . . . . . . 55,527
Property leased to others . . . . . . . . . . . . . . . . 507,464
------------
2,679,829
Accumulated depreciation and amortization . . . . . . . . (1,533,063)
-----------
$ 1,146,766
============
</TABLE>
Depreciation expense from continuing operations was $338,917 and $316,105
for the fiscal years ended November 30, 1998 and 1997, respectively.
Depreciation expense, included with the net loss from discontinued operations
was $113,846 and $668,279 for the fiscal years ended November 30, 1998 and
1997, respectively.
7. COMPUTER SOFTWARE COSTS:
<TABLE>
<CAPTION>
At November 30, 1998, computer software costs capitalized are:
<S> <C>
Computer software. . . . . . . . . . . . . . . . . . . . . . . $ 987,885
Accumulated amortization . . . . . . . . . . . . . . . . . . . (672,923)
---------
$ 314,962
=========
</TABLE>
Amortization expense from continuing operations related to computer
software cost during the years ended November 30, 1998 and 1997 was $145,480
and $145,470, respectively. There was no amortization expense attributable to
discontinued operations for the years ended November 30, 1998 and 1997.
8. INTANGIBLES:
<TABLE>
<CAPTION>
At November 30, 1998, intangibles consist of:
<S> <C>
Covenant Not-to-Compete-SBC . . . . . . . . . $ 25,000
Accumulated amortization. . . . . . . . . . . (25,000)
---------
$ -
=========
</TABLE>
Amortization expense for continuing operations was $2,084 and $8,333
during the years ended November 30, 1998 and 1997, respectively. Amortization
expense from discontinued operations was $35,294 and $300,909 during the years
ended November 30, 1998 and 1997, respectively.
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES:
<TABLE>
<CAPTION>
The components of the provision for income taxes for the years ended November
30, 1998 and 1997 consist of:
<S> <C> <C>
1998 1997
-------- ----------
Current. . . . . . . . . . $738,991 $ 818,700
Deferred . . . . . . . . . 47,600 (497,400)
-------- ----------
Provision for income taxes $786,591 $ 321,300
======== ==========
<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>
1998 1997
--------- ---------
Current . . . . . . . . . . . . . . $637,891 $246,300
Tax exempt interest income. . . . . (55,000) (25,000)
Non deductible portion of
meals and entertainment. . . . 9,600 15,000
State taxes, net of federal benefit 194,100 85,000
--------- ---------
Provision for income taxes. . . . . $786,591 $321,300
========= =========
<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 . . . . . . . . . . . $ 225,900
Deferred revenue . . . . . . . . . . . . . . . . . 247,200
Timing differences from pending IRS audit. . . . . 184,600
Gain on sale of subsidiary - sale of WinStar stock (486,900)
----------
170,800
----------
Non-current liability
Deferred revenue . . . . . . . . . . . . . . . . . 25,200
Accumulated depreciation . . . . . . . . . . . . . (160,800)
Accumulated amortization . . . . . . . . . . . . . 8,500
----------
(127,100)
----------
Net deferred tax asset . . . . . . . . . . . . . . $ 43,700
==========
</TABLE>
The Company believes that it is more likely than not that they will realize
the net deferred tax asset based upon the Company's expected future
profitability. Accordingly, no further valuation allowance has been provided.
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. 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, 1998, 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, 1998, 125,000
common stock warrants were outstanding.
DIVIDEND POLICY
The Company has no limitations or restrictions for declaring dividends. As of
November 30, 1998, no dividends have been declared.
TREASURY STOCK
The Board of Directors has authorized the repurchase of up to 10% of the
Company's outstanding stock. During the year ended November 30, 1998, the
Company repurchased 39,000 shares of its common stock on the open market for
$182,759.
11. STOCK PLANS:
INCENTIVE STOCK OPTION PLANS
Effective February 1, 1995, the Board of Directors adopted the 1995 Incentive
Stock Option Plan (ISOP). Under the 1995 ISOP, 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 an additional stock
plan, the 1996 ISOP. This plan was approved by the shareholders on August 7,
1996. Under the 1996 Plan, a total of 260,000 shares are reserved for
issuance at the discretion of the compensation committee.
On October 2, 1997, the Board of Directors adopted the 1997 Performance Equity
Plan ("1997 Plan"). On May 15, 1998, the Board of Directors amended the 1997
Plan. The 1997 Plan was subsequently approved by the shareholders. The Board
of Directors has authorized 1,000,000 shares for grant under the 1997 Plan.
In October 1997, the Company granted options under the 1997 Plan to purchase
an aggregate of 233,500 shares of Common Stock, 129,500 shares of which were
granted to certain employees of the Company at an exercise price of $2.9375
per share and 104,000 shares of which were granted to the Company's executive
officers at an exercise price of $3.23 per share. The exercise price of the
options granted to the executive officers exceeded the fair market value of
the Common Stock on the date of grant. In February 1998, the Company granted
14,600 options to employees at an exercise price of $4.25 per share.
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK PLANS: (CONTINUED)
1995, 1996, AND 1997 RESTRICTED STOCK PLANS.
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. The 1997
Restricted Stock Plan has not yet been approved by the shareholders. No
shares have been granted under any of the Restricted Stock Plans.
Accordingly, on May 15, 1998, in connection with the amendments to the 1997
Plan (which permits grants of restricted stock awards), the Board of Directors
determined that it was in the best interests of the Company to terminate the
1995, 1996 and 1997 Restricted Stock Plans. Any restricted stock awards that
the Company may wish to make in the future may be made pursuant to the 1997
Plan.
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.
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK PLANS: (CONTINUED)
<TABLE>
<CAPTION>
The following table summarizes stock option activity:
<S> <C> <C>
Number of Shares Weighted Average Exercise Price
----------------- --------------------------------
Outstanding at December 1, 1996 . . . . . . . . . . . 506,900 $ 6.37
Granted . . . . . . . . . . . . . . . . . . . . . . . 258,500 3.09
Exercised . . . . . . . . . . . . . . . . . . . . . . -
Forfeited . . . . . . . . . . . . . . . . . . . . . . (15,600) 4.88
-----------------
Outstanding at November 30, 1997. . . . . . . . . . . 749,800 4.62
Granted . . . . . . . . . . . . . . . . . . . . . . . 14,600 4.25
Exercised . . . . . . . . . . . . . . . . . . . . . . -
Forfeited . . . . . . . . . . . . . . . . . . . . . . (37,600) 4.55
-----------------
Outstanding at November 30, 1998. . . . . . . . . . . 726,800 4.61
=================
Options exercisable at 11/30/97 . . . . . . . . . . . 326,350 5.97
Options exercisable at 11/30/98 . . . . . . . . . . . 417,650 5.38
</TABLE>
Available for grant at: (a)
November 30, 1997 64,400
November 30, 1998 772,700
(a) Available for grant includes shares that may be granted as either
stock options or restricted stock, as determined by the Committee.
<TABLE>
<CAPTION>
Following is a summary of the status of options outstanding at November 30, 1998:
Outstanding Options Exercisable Options
------------------- -------------------
<S> <C> <C> <C> <C> <C>
Weighted Weighted Weighted
average average Average
Exercise price. remaining exercise exercise
range Number contractual life price Number price
-------------- --------------- ---------------- ------------- ------- ---------
6.00-$6.60 . . 245,500 7 years $ 6.40 245,500 $ 6.40
3.00-$5.88 . . 221,700 8 years 4.33 113,450 4.37
2.94-$3.23 . . 221,800 9 years 3.08 55,450 3.08
3.13 . . . . . 20,000 9 years 3.13 2,000 4.04
4.00 . . . . . 5,000 9 years 4.00 1,250 4.00
4.25 . . . . . 12,800 10 years 4.25 - -
- --------------- ---------------- -------------- ------------- ------- ---------
2.94 - $6.60 . 726,800 8 years $ 4.61 417,650 $ 5.38
=============== ================ ============== ============= ======= =========
</TABLE>
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK PLANS: (CONTINUED)
OTHER OPTIONS
During the fiscal year ended November 30, 1997, the Company issued 20,000
options with an exercise price of $3.125 and 2,000 options with an exercise
price of $4.25 to the Company's outside directors in connection with board
meetings.
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, 1998 and 1997.
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 income (loss) and diluted earnings (loss) per
share for the fiscal years ended November 30, 1998 and 1997 would have been
reduced (increased) to the pro-forma amounts presented below:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---------- ------------
Net income (loss) as reported . . . . . $9,586,850 $ (923,744)
Pro-forma . . . . . . . . . . . . . . . 9,572,002 $(1,230,244)
Net income (loss) per share as reported $ 2.46 $ (.24)
Pro-forma . . . . . . . . . . . . . . . $ 2.46 $ (.32)
</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 1998 and 1997; expected life of options of
1-3 years, expected volatility of 37% in 1998 and 244% in 1997, risk-free
interest rates of 8%, and a 0% dividend yield. The weighted average fair
value at date of grant for options granted during 1998 approximated $1.16 and
options granted in 1997 approximated $2.41.
12. RELATED PARTY TRANSACTIONS:
LEASE COMMITMENT
The Company leased its office facilities under a month-to-month operating
lease agreement from the President of the Company. Rent paid was $55,824 and
$83,737 for each of the fiscal years ended November 30, 1998 and 1997. In
addition, the Company paid all utilities, insurance and property taxes.
During January 1998 the Company vacated this space, however, based upon the
agreement with the President, the Company paid rent through July 1998.
13. 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, 1998 and 1997, contributions
were $37,085 and $43,367, respectively.
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS:
OFFICE LEASE COMMITMENTS
The Company is obligated under long-term operating leases for office
facilities through the year 2006.
As of November 30, 1998, future minimum lease payments due under the
non-cancelable operating lease agreements are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
NOVEMBER 30, AMOUNT
-------------------
<S> <C>
1999 . . . . $ 453,382
2000 . . . . 461,606
2001 . . . . 457,909
2002 . . . . 463,409
2003 . . . . 477,709
Thereafter 2,100,339
-------------------
Total. . . $ 4,414,354
===================
</TABLE>
Rent expense under all operating leases, including the related party lease,
amounted to approximately $274,900 and $304,000 for the years ended November
30, 1998 and 1997, respectively.
15. 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 $449,410 as of November 30, 1998.
During the fiscal years ended November 30, 1998 and 1997, the Company received
rental income of $90,787 and $180,848, respectively under these agreements.
The Company is also the sublessor of office space in Tempe, Arizona. The
lease agreement expires in March 2000. During the fiscal year ended November
30, 1998, the Company received $33,288 under this agreement.
As of November 30, 1998, 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
------------
1999 . . . . . . . . . . . . . 76,720
2000 . . . . . . . . . . . . . 57,400
-------------
Total future minimum rentals $ 134,120
=============
</TABLE>
16. RESEARCH AND DEVELOPMENT:
Research and development costs included in general and administrative expenses
for the fiscal years ended November 30, 1998 and 1997 were $622,000 and
$414,000, respectively. These costs have been expensed during their respective
fiscal years.
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. AGREEMENTS:
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. These items were
sold, along with the other net assets of GoodNet in January 1998.
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.
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. DISCONTINUED OPERATIONS/SALE OF 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 (NASDAQ: WCII) 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 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. After commissions and related legal
expenses, the Company realized an approximate $13.2 million 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 accounts for its investment in WinStar as an available-for-sale
equity security, which accordingly is carried at market value. 400,000 of the
WinStar shares were sold in November, 1998 resulting in net proceeds, before
taxes, of $11,971,131. As of November 30, 1998, pursuant to a hedging
strategy implemented by the Company during 1998, 31,488 of the remaining
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. Subsequent to November 30, 1998, the Company sold 47,939 shares for
$1,733,382.
As a result of the above transaction, the Company may be vacating a portion of
its office space in Phoenix, Arizona during the year ending November 30, 1999.
As a result, the Company will have to take steps to sublease the vacated space
or pay an early termination fee approximated at $300,000. This amount
has been included in accounts payable and accrued liabilities in the
accompanying financial statements.
The results of operations of GoodNet have been shown as discontinued
operations in the accompanying financial statements.
19. SUBSEQUENT EVENTS
TREASURY STOCK
Subsequent to November 30, 1998, the Company purchased an additional 37,000
shares of the Company's common stock for $184,305.
<TABLE>
<CAPTION>
20. EARNINGS (LOSS) PER SHARE:
The following table reconciles the numerators and denominators of the basic
and diluted earnings (loss) per share:
YEAR ENDED NOVEMBER 30,
-----------------------
1998 1997
<S> <C> <C>
<CAPTION>
BASIC EARNINGS (LOSS) PER COMMON SHARE:
- ----------------------------------------------------
NUMERATOR
Income from continuing operations 1,089,578 402,985
Loss from operations of GoodNet subsidiary (68,428) (1,326,729)
Gain on disposal of GoodNet 8,565,700 -
---------- -----------
Net earnings (loss) available to common shareholders 9,586,850 (923,744)
========== ===========
DENOMINATOR
<S> <C> <C>
Weighted average number of shares outstanding . . . . . . . 3,784,793 3,802,874
PER SHARE AMOUNTS
Income from continuing operations . . . . . . . . . . . . . .29 .11
Loss from operations of GoodNet subsidiary. . . . . . . . . (.02) (.35)
Gain on disposal of GoodNet . . . . . . . . . . . . . . . . 2.26 -
---------- -----------
Net earnings (loss) available to common shareholders . . . . . 2.53 (.24)
========== ===========
<CAPTION>
<S> <C> <C>
DILUTED EARNINGS (LOSS) PER SHARE
- ------------------------------------------------------------------
NUMERATOR
Income from continuing operations. . . . . . . . . . . . . . . . . 1,089,578 402,985
Loss from operations of GoodNet subsidiary . . . . . . . . . . . . (68,428) (1,326,729)
Gain on disposal of GoodNet. . . . . . . . . . . . . . . . . . . . 8,565,700 -
---------- -----------
Net earnings (loss) available to common shareholders . . . . . . . 9,586,850 (923,744)
========== ===========
DENOMINATOR
Weighted average number of shares outstanding. . . . . . . . . . . 3,784,793 3,802,874
Effect of dilutive securities. . . . . . . . . . . . . . . . . . . 342,500 109,900
Options and warrants
Stock acquired with proceeds . . . . . . . . . . . . . . . . . . . (239,260) (84,863)
---------- -----------
Weighted average common shares and assumed conversions outstanding 3,888,033 3,827,911
========== ===========
PER SHARE AMOUNTS
Income from continuing operations. . . . . . . . . . . . . . . . . .28 .11
Loss from operations of GoodNet subsidiary . . . . . . . . . . . . (.02) (.35)
Gain on disposal of GoodNet. . . . . . . . . . . . . . . . . . . . 2.20 -
---------- -----------
Net earnings (loss) available to common shareholders . . . . . . . 2.46 (.24)
========== ===========
</TABLE>
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. EARNINGS (LOSS) PER SHARE: (CONTINUED)
At November 30, 1998, warrants and options to acquire 510,300 shares of common
stock, at various prices per share, were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares.
At November 30, 1997, warrants and options to acquire 532,400 shares of common
stock, at various prices per share, were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares.
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. SEGMENT INFORMATION
The Company's products and services are broken down in the following product
lines for financial reporting purposes:
(1) STS Outsourcing Program
(2) Customized Billing Outsourcing Services
(3) System Sales and Maintenance
(a) Telecommunication's Management System ("TMS") and TelMaster
(b) RATEX Bookstore Solution
(c) Distribution Control System ("DCS")
(d) Software and Hardware Recurring Maintenance Revenue
Following is selected segment information.
<TABLE>
<CAPTION>
Year Ended November 30, 1998 Year Ended November 30, 1997
---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
System Custom System Custom
STS Sales Billing Total STS Sales Billing Total
Sales, Net. . . . . . . . . $21,461 $ 5,570 $ 1,219 $28,250 $17,430 $4,198 $ 965 $22,593
Cost of Sales . . . . . . . 16,504 1,529 - 18,033 13,288 1,042 - 14,330
-------- ------- -------- ------- ------- ------- -------- -------
Gross Profit. . . . . . . . 4,957 4,041 1,219 10,217 4,142 3,156 965 8,263
-------- ------- -------- ------- ------- ------- -------- -------
General and Administrative
Expenses:
General . . . . . . . . . . 3,366 3,455 696 7,517 3,387 3,177 210 6,774
Depreciation. . . . . . . . 190 109 - 299 125 202 - 327
Amortization. . . . . . . . - 2 - 2 - 8 - 8
Bad Debt. . . . . . . . . . 332 94 3 429 197 1 - 198
Corporate Allocations:
General . . . . . . . . . . 177 47 16 240 127 127 8 262
Depreciation. . . . . . . . 137 37 12 186 45 88 - 133
-------- ------- -------- ------- ------- ------- -------- -------
4,202 3,744 727 8,673 3,881 3,603 218 7,702
-------- ------- -------- ------- ------- ------- -------- -------
Operating Income (Loss) . . 755 297 492 1,544 261 (447) 747 561
Other Income. . . . . . . . 332 163
-------- -------
Pretax Income . . . . . . . 1,876 724
Income Tax Provision. . . . (786) (321)
-------- --------
Income from Continuing. . . $ 1,090 $ 403
Operations ======== ========
Diluted Earnings per
Share-Continuing
Operations. . . . . . . . $ 0.28 $ 0.11
======== ========
</TABLE>
<PAGE>
Exhibit 21: Subsidiaries of Registrant
1. Telesoft Acquisition Corp.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> NOV-30-1998 NOV-30-1997
<PERIOD-END> NOV-30-1998 NOV-30-1997
<CASH> 7,740,219 1,621,784
<SECURITIES> 9,936,789 2,200,000
<RECEIVABLES> 7,435,184 7,185,435
<ALLOWANCES> (502,095) (640,982)
<INVENTORY> 626,170 401,508
<CURRENT-ASSETS> 26,068,553 12,335,605
<PP&E> 2,679,829 5,151,229
<DEPRECIATION> (1,533,063) (2,144,662)
<TOTAL-ASSETS> 27,620,329 17,640,850
<CURRENT-LIABILITIES> 9,098,065 8,255,592
<BONDS> 0 0
0 0
0 0
<COMMON> 7,103,400 7,286,159
<OTHER-SE> 11,291,764 1,062,348
<TOTAL-LIABILITY-AND-EQUITY> 27,620,329 17,640,850
<SALES> 28,250,373 22,593,450
<TOTAL-REVENUES> 28,250,373 22,593,450
<CGS> 18,033,402 14,330,388
<TOTAL-COSTS> 26,706,216 22,032,259
<OTHER-EXPENSES> (40,994) 14,686
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,277 0
<INCOME-PRETAX> 1,876,169 724,285
<INCOME-TAX> 786,591 321,300
<INCOME-CONTINUING> 1,089,578 402,985
<DISCONTINUED> (68,428) (1,326,729)
<EXTRAORDINARY> 8,565,700 0
<CHANGES> 0 0
<NET-INCOME> 9,586,850 (923,744)
<EPS-PRIMARY> 2.53 (.24)
<EPS-DILUTED> 2.46 (.24)
</TABLE>
