DRAFT FOR DISCUSSION PURPOSES ONLY
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 31, 1999
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
Indicate by check mark whether the issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the issuer was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
Common Stock, no par value, 3,711,500 shares outstanding at July 1, 1999
Transitional Small Business Disclosure Format Yes ( ) No (X)
39271-1 1
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS.
<S> <C>
Consolidated Balance Sheets as of May 31, 1999 and November 30, 1998. . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the three and six month periods ended May 31, 1999 and 1998 4
Consolidated Statements of Cash Flows for the six month periods ended May 31, 1999 and 1998 . . . . . 5 - 6
Notes to the Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
</TABLE>
<TABLE>
<CAPTION>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
May 31, 1999 November 30, 1998
(unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $1,786,389 $7,740,219
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . 13,515,333 9,936,789
Accounts receivable, net of allowance for uncollectibles of $606,381. 5,520,619 6,933,089
and $502,095 at May 31, 1999 and November 30, 1998,
respectively
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 703,346 626,170
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . 458,015 -
Deferred taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 639,700 170,800
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349,535 661,486
----------- ------------
Total Current Assets. . . . . . . . . . . . . . . . . . . . . . . . . 22,972,937 26,068,553
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . 1,195,052 1,146,766
Computer software costs, net. . . . . . . . . . . . . . . . . . . . . 242,297 314,962
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,526 90,048
------------ ------------
Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,498,812 $27,620,329
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 147,239
Accounts payable and accrued liabilities. . . . . . . . . . . . . . . 4,307,462 8,208,584
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . 595,878 742,242
------------ ------------
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . 4,903,340 9,098,065
Deferred taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 193,300 127,100
------------ ------------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 5,096,640 9,225,165
------------ ------------
Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Stockholders Equity:
Preferred Stock, no par value, 10,000,000 shares authorized;. . . . . - -
none issued and outstanding
Common Stock, no par value, 50,000,000 shares authorized; . . . . . . 7,286,159 7,286,159
3,787,500 issued and 3,711,500 outstanding (1999)
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . 80,069 80,069
Unrealized gain on investment securities. . . . . . . . . . . . . . . - 84,566
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 12,403,008 11,127,129
Less Treasury Stock at cost, 76,000 shares (1999) and 39,000
shares (1998). . . . . . . . . . . . . . . . . . . . . . . . . . . (367,064) (182,759)
------------ ------------
Total Stockholders' Equity. . . . . . . . . . . . . . . . . . . . . . 19,402,172 18,395,164
------------ ------------
Total Liabilities and Stockholders' Equity. . . . . . . . . . . . . . $24,498,812 $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
Three Months Ended Six Months Ended
-------------------- ------------------
May 31, 1999 May 31, 1998 May 31, 1999 May 31, 1998
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Sales, net . . . . . . . . . . . . . . . . . . $ 7,224,389 $ 7,098,708 $ 15,026,986 $ 14,125,486
Cost of sales. . . . . . . . . . . . . . . . . 4,332,368 4,517,147 8,750,845 8,920,308
-------------- ------------- -------------- --------------
Gross profit . . . . . . . . . . . . . . . . . 2,892,021 2,581,561 6,276,141 5,205,178
General and administrative expenses. . . . . . 2,647,242 2,100,926 5,093,559 4,220,426
-------------- ------------- -------------- --------------
Operating income . . . . . . . . . . . . . . . 244,779 480,635 1,182,582 984,752
-------------- ------------- -------------- --------------
Other income (expense):
Interest income. . . . . . . . . . . . . . . . 156,511 73,772 318,213 136,338
Interest expense . . . . . . . . . . . . . . . (41) - (255) (678)
Other income . . . . . . . . . . . . . . . . . (377) 18,833 (270) 35,573
-------------- ------------- -------------- --------------
156,093 92,605 317,688 171,233
-------------- ------------- -------------- --------------
Income from continuing operations. . . . . . . 400,872 573,240 1,500,270 1,155,985
Before provision for income taxes
Provision for income taxes . . . . . . . . . . 121,100 257,150 591,900 520,200
-------------- ------------- -------------- --------------
Income from continuing operations. . . . . . . 279,772 316,090 908,370 635,785
Loss from discontinued operations, . . . . . . - - - (68,428)
net of income taxes
Gain on disposal of GoodNet. . . . . . . . . . - - 367,509 8,162,389
Subsidiary (net of income taxes of
$239,500 in 1999 and $5,648,300
in 1998)
------------- ------------- -------------- --------------
Net Income . . . . . . . . . . . . . . . . . . $ 279,772 $ 316,090 $ 1,275,879 $ 8,729,746
============== ============= ============== ==============
Basic earnings (loss) per share
Continuing operations. . . . . . . . . . . . . $ 0.08 $ 0.08 $ 0.24 $ 0.17
Discontinued operations. . . . . . . . . . . . - - - (0.02)
Sale of discontinued operations. . . . . . . . - - 0.10 2.16
-------------- ------------- -------------- --------------
Net income (loss). . . . . . . . . . . . . . . $ 0.08 $ 0.08 $ 0.34 $ 2.31
============== ============= ============== ==============
Diluted earnings (loss) per share
Continuing operations. . . . . . . . . . . . . $ 0.07 $ 0.08 $ 0.24 $ 0.16
Discontinued operations. . . . . . . . . . . . - - - (0.02)
Sale of discontinued operations. . . . . . . . - - 0.10 2.11
-------------- ------------- -------------- --------------
Net income (loss). . . . . . . . . . . . . . . $ 0.07 $ 0.08 $ 0.34 $ 2.25
============== ============= ============== ==============
Weighted average number of shares outstanding
- - basic. . . . . . . . . . . . . . . . . . . . 3,711,500 3,787,500 3,715,715 3,787,500
- - diluted. . . . . . . . . . . . . . . . . . . 3,834,538 3,907,819 3,850,108 3,885,497
============== ============= ============== ==============
</TABLE>
The Accompanying Notes are an Integral Part of
the Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MAY 31, 1999 AND 1998 (UNAUDITED)
1999 1998
------------- -------------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Cash received from customers. . . . . . . . . . . . $ 16,171,651 $ 14,646,924
Cash paid to suppliers and employees. . . . . . . . (17,399,829) (13,991,386)
Interest paid . . . . . . . . . . . . . . . . . . . (255) (678)
Interest received . . . . . . . . . . . . . . . . . 216,067 64,164
Income taxes paid . . . . . . . . . . . . . . . . . (1,234,254) (663,997)
------------- -------------
Net cash (used in) provided by operating. . . . . . (2,246,620) 55,027
activities of continuing operations ------------- -------------
Cash flows from investing activities:
Purchase of property and equipment. . . . . . . . . (235,911) (440,723)
Cash received from sale of equipment. . . . . . . . 1,054 26,812
Collection of notes receivable. . . . . . . . . . . 373,153 -
Cash received from sale of investment securities. . 3,409,232 -
Purchase of investment securities . . . . . . . . . (6,465,333) (3,300,000)
------------- -------------
Net cash used in investing activities of. . . . . . (2,917,805) (3,713,911)
continuing operations ------------- -------------
Cash flows from financing activities:
Purchases of treasury stock . . . . . . . . . . . . (184,305) -
------------- -------------
Net cash used in financing activities of. . . . . . (184,305) -
continuing operations ------------- -------------
Cash used in continuing operations. . . . . . . . . (5,348,730) (3,658,884)
Cash (used in) provided by discontinued operations, (605,100) 2,045,437
Including income taxes paid in the amount of
$605,100 for 1999
------------- -------------
Net decrease in cash and cash equivalents . . . . . (5,953,830) (1,613,447)
Cash and cash equivalents at beginning of period. . 7,740,219 1,621,784
------------- -------------
Cash and cash equivalents at end of fiscal period $ 1,786,389 $ 8,337
============= =============
</TABLE>
The Accompanying Notes are an Integral Part of
the Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED MAY 31, 1999 AND 1998 (UNAUDITED)
1999 1998
---- ----
<S> <C> <C>
Reconciliation of Net Income to Net Cash (Used
In) Provided By Operating Activities from
Continuing Operations:
Net Income. . . . . . . . . . . . . . . . . . . . . . $ 1,275,879 $ 8,729,746
------------ ------------
Adjustments to reconcile net income to net cash
used in operating activities from continuing
operations:
Loss from discontinued operations . . . . . . . . . . - 68,428
Gain on sale of discontinued operations . . . . . . . (367,509) (8,162,389)
Income taxes payable and deferred taxes . . . . . . . 365,600 (5,235,800)
related to sale of discontinued operations
Depreciation and amortization . . . . . . . . . . . . 258,859 239,457
Loss (gain) on sale of fixed assets . . . . . . . . . 377 (20,739)
Interest income included with note receivable . . . . (2,294) (10,422)
Changes in Assets and Liabilities:
Accounts receivable, net. . . . . . . . . . . . . . . 1,412,470 759,701
Inventory . . . . . . . . . . . . . . . . . . . . . . (77,176) (563,870)
Other current assets. . . . . . . . . . . . . . . . . (58,908) (94,638)
Deferred taxes, net . . . . . . . . . . . . . . . . . (402,700) 4,203,200
Other assets. . . . . . . . . . . . . . . . . . . . . 1,522 2,256
Accounts payable and accrued liabilities. . . . . . . (3,901,122) (654,305)
Deferred revenue. . . . . . . . . . . . . . . . . . . (146,364) (94,401)
Income taxes payable. . . . . . . . . . . . . . . . . (147,239) 822,424
Income taxes receivable . . . . . . . . . . . . . . . (458,015) 66,379
------------ ------------
(3,522,499) (8,674,719)
------------ ------------
Net cash used in operating activities from $(2,246,620) $ 55,027
continuing operations ============ ============
<FN>
Supplemental disclosure of non-cash investing and financing activities:
During the six month period ended May 31, 1998, the Company sold its 71% owned
subsidiary, Telesoft Acquisition Corp. II, in exchange for $3,500,000 cash and
479,387 shares of WinStar common stock valued at $13,902,223 on the date of sale.
Expenses paid and accrued relating to the sale were $2,094,205.
</TABLE>
The Accompanying Notes are an Integral Part of
the Consolidated Financial Statements.
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the six month periods ended May 31, 1999 and 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Item 310 of Regulation SB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for audited year-end financial statements. In the opinion of management, all
adjustments for normal recurring accruals considered necessary for a fair
presentation have been included. Operating results for the six months ended
May 31, 1999 are not necessarily indicative of the results that may be
expected for the year ending November 30, 1999. The unaudited consolidated
financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in the Company's Form
10-KSB for the year ended November 30, 1998.
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").
All significant inter-company accounts and transactions have been eliminated.
2. 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, GoodNet, 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.
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.
3. INVESTMENT SECURITIES-WINSTAR SHARES
The Company accounted for its investment in WinStar as an available-for-sale
equity security, which accordingly was carried at market value. During the
six months ended May 31, 1999, the Company sold the last of its WinStar
shares, or 79,387 shares, resulting in net proceeds before taxes of
$2,909,232.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS BY PRODUCT LINE FOR THE SIX MONTH PERIODS ENDED MAY 31, 1999 AND 1998
(in thousands except per share items)
Six months ended May 31, 1999 Six months ended May 31, 1998
---------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STS System Custom Network Recovery Total STS System Custom Total
Sales Billing Services Services Sales Billing
Sales, Net. . . . . . $ 11,391 $ 2,550 $ 956 $ 130 $ - $15,027 $11,011 $ 2,652 $ 462 $14,125
Cost of Sales . . . . 8,280 466 5 - - 8,751 8,283 637 - 8,920
--------- -------------- --------- --------- ---------- ------- ------- ------- ------- -------
Gross Profit. . . . . 3,111 2,084 951 130 - 6,276 2,728 2,015 462 5,205
--------- -------------- --------- --------- ---------- ------- ------- ------- ------- -------
General &
Administrative
Expenses:
General . . . . . . . 1,713 2,042 529 194 101 4,579 1,630 1,763 303 3,696
Depreciation. . . . . 75 66 10 - - 151 95 55 - 150
Amortization. . . . . - - - - - - - 2 - 2
Bad Debt. . . . . . . 116 3 3 - - 122 149 8 1 158
Corporate
Allocations:
General . . . . . . . 98 26 8 1 1 134 93 25 8 126
Depreciation. . . . . 48 46 11 3 - 108 65 17 6 88
--------- -------------- --------- --------- ---------- ------- ------- ------- ------- -------
2,050 2,183 561 198 102 5,094 2,032 1,870 318 4,220
--------- -------------- --------- --------- ---------- ------- ------- ------- ------- -------
Operating Income. . . 1,061 (99) 390 (68) (102) 1,182 696 145 144 985
(Loss)
Other Income. . . . . 318 171
------- -------
Pretax Income . . . . 1,500 1,156
Income Tax Provision. (592) (520)
------- --------
Income from Continuing Operations $ 908 $ 636
======= ========
Diluted Earnings per
Share-Continuing
Operations. . . . . $ 0.24 $ 0.16
======= ========
</TABLE>
<PAGE>
RESULTS OF OPERATIONS FOR THE SIX MONTH PERIODS ENDED MAY 31, 1999 AND 1998
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 6.4% to $15,026,986 for the six months ended May
31, 1999 compared to $14,125,486 for the six months ended May 31, 1998. The
Company's revenue is derived from four principal product lines and services:
STS Outsourcing Programs, System Sales and Maintenance, Customized Billing
Outsourcing Services and Network Services.
STS revenues were $11,390,479 for the six months ended May 31, 1999
compared to $11,011,644 for the six months ended May 31, 1998, an increase of
3.4%. Revenues from System Sales and Maintenance were $2,550,236 for the six
months ended May 31, 1999 compared to $2,651,247 for the six months ended May
31, 1998, a decrease of 3.8%. Revenue from the TelMaster product increased
36%, while revenue from the RATEX and DCS products decreased 18.5% and 27.1%
respectively. The decrease from the RATEX product is primarily due to
unusually strong sales during the first half of fiscal 1998. The decrease in
DCS revenue is primarily due to a significant decrease in demand for this
text-based product. We expect DCS revenue to continue to decline. For the
six months ended May 31, 1999 and 1998, revenues from Customized Billing
Services were approximately $956,000 and $462,000, respectively. The 107%
increase in revenues is attributable to the development of customized billing
services for Qwest Communications and Blue Cross Blue Shield of Massachusetts,
and is offset by the loss of the MDU contract with Bell Atlantic in March
1999. Network Services, which began operations in December 1998, had revenues
of approximately $130,000 during the first half of fiscal 1999. Recovery
Services, which began operations in March 1999, did not have significant
revenues during the first half of fiscal 1999.
<TABLE>
<CAPTION>
Six Months Ended May 31,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
REVENUE
DCS . . . . . . . $ 661,226 $ 906,641 $ 828,920 $ 926,889 $ 874,452
RATEX . . . . . . 725,775 890,466 360,610 592,349 244,003
Telemangement . . 1,163,235 854,140 705,326 988,578 776,140
----------- ----------- ----------- ----------- ----------
System Sales 2,550,236 2,651,247 1,894,856 2,507,816 1,894,595
STS . . . . . . . 11,390,479 11,011,644 8,268,643 8,110,752 7,780,196
Custom Billing. . 956,474 462,595 310,067 307,315 121,973
Network Services. 129,556 - - - -
Recovery Services 241 - - - -
----------- ----------- ----------- ----------- ----------
$15,026,986 $14,125,486 $10,473,566 $10,925,883 $9,796,764
=========== =========== =========== =========== ==========
</TABLE>
Total gross profit increased 20.6% to $6,276,141 for the six months ended
May 31, 1999 compared to $5,205,178 for the six months ended May 31, 1998.
Cost of goods sold was approximately 72.7% of STS revenues for the six months
ended May 31, 1999, compared with 75.2% for the six months ended May 31, 1998.
This decrease is primarily due to the decreased cost of long distance from the
Company's suppliers. Cost of goods sold as a percentage of System Sales and
Maintenance revenues was approximately 18% for the six months ended May 31,
1999 compared with 24% for six months ended May 31, 1998. This decrease is
due to a slightly lower percentage of system sales revenues, which have a
lower gross profit margin than maintenance revenues, as well as a higher
percentage of TelMaster sales, which have a higher gross profit margin than
RATEX systems.
Overall operating expenses increased 20.6%, or $873,133, for the six
months ended May 31, 1999 to $5,093,559 from $5,205,178 for the six months
ended May 31, 1998. This increase is primarily due to the addition of the
Network Services and Recovery Services divisions, which had combined operating
expenses of approximately $300,000 during the first half of fiscal 1999. The
increase is also due to higher human resource costs, including a $208,000
increase in sales personnel related expenses. Operating expenses as a
percentage of revenue increased slightly to 33.8% compared to 29.8% for the
six months ended May 31, 1998. Research and development costs expensed and
incurred during the six months ended May 31, 1999 and 1998 were $506,000 and
$250,000, respectively.
The provision for income taxes was $591,900 and $520,200 for the six
months ended May 31, 1999 and 1998, respectively. This represents 39.5% and
45% of income before provision for income taxes for 1999 and 1998,
respectively. This percentage decrease is primarily attributable to higher
income from tax-free investments.
Net income from continuing operations increased to $908,370 for the first
half of fiscal 1999 from $635,785 in the first half of fiscal 1998.
For the six months ended May 31, 1999, gain on disposal of GoodNet
subsidiary represents additional gain realized as a result of the sale of
79,387 shares of WinStar common stock received in the sale of GoodNet to
WinStar. See "Investment Securities - WinStar Shares" in the notes to the
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS BY PRODUCT LINE FOR THE THREE MONTH PERIODS ENDED MAY 31, 1999 AND 1998
(in thousands except per share items)
Three months ended May 31, 1999 Three months ended May 31, 1998
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
System Custom Network Recovery System Custom
STS Sales Billing Services Services Total STS Sales Billing Total
-------- -------- -------- ---------- ---------- ------- ------ ------ -------- ------
Sales, Net. . . . . . $ 5,573 $ 1,286 $ 287 $ 79 $ - $ 7,225 $5,555 $1,323 $ 220 $7,098
Cost of Sales . . . . 4,079 249 5 - - 4,333 4,219 298 - 4,517
-------- -------- -------- ---------- ---------- ------- ------ ------ -------- ------
Gross Profit. . . . . 1,494 1,037 282 79 - 2,892 1,336 1,025 220 2,581
-------- -------- -------- ---------- ---------- ------- ------ ------ -------- ------
General &
Administrative
Expenses:
General . . . . . . . 847 1,052 251 124 101 2,375 840 787 199 1,826
Depreciation. . . . . 38 33 5 - - 76 48 29 - 77
Bad Debt. . . . . . . 62 1 3 - - 66 79 - - 79
Corporate
Allocations:
General . . . . . . . 53 14 4 1 1 73 54 15 5 74
Depreciation. . . . . 26 24 6 2 - 58 33 8 3 44
-------- -------- -------- ---------- ---------- ------- ------ ------ -------- ------
1,026 1,124 269 127 102 2,648 1,054 839 207 2,100
-------- -------- -------- ---------- ---------- ------- ------ ------ -------- ------
Operating Income. . . 468 (87) 13 (48) (102) 244 282 186 13 481
(Loss)
Other Income. . . . . 157 92
-------- ------
Pretax Income . . . . 401 573
Income Tax Provision (121) (257)
-------- -------
Income from Continuing
Operations $ 280 $ 316
======== =======
Diluted Earnings per
Share-Continuing
Operations. . . . . $ 0.07 $ 0.08
</TABLE>
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED MAY 31, 1999 AND 1998
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 1.8% to $7,224,389 for the three months ended May
31, 1999 compared to $7,098,708 for the three months ended May 31, 1998. The
Company's revenue is derived from four principal product lines and services:
STS Outsourcing Programs, System Sales and Maintenance, Customized Billing
Outsourcing Services and Network Services.
STS revenues were $5,572,551 for the three months ended May 31, 1999
compared to $5,555,832 for the three months ended May 31, 1998, an increase of
0.3%. Revenues from System Sales and Maintenance were $1,286,040 for the
three month ended May 31, 1999 compared to $1,322,783 for the three months
ended May 31, 1998, a decrease of 2.8%. Revenue from the TelMaster product
increased 39.1%, while revenue from the DCS product decreased 37.8%. This is
primarily due to a significant decrease in demand for this text-based product.
We expect DCS revenue to continue to decline. For the three months ended May
31, 1999 and 1998, revenues from Customized Billing Services were
approximately $287,000 and $220,000, respectively. This 31% increase is due
to the development of customized billing services for Qwest Communications and
Blue Cross Blue Shield of Massachusetts, and is offset by the loss of the MDU
contract with Bell Atlantic in March 1999. Network Services, which began
operations in December 1998, had revenues of approximately $78,000 during the
second quarter of fiscal 1999.
<TABLE>
<CAPTION>
Three Months Ended May 31,
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
REVENUE
DCS . . . . . . . $ 322,284 $ 518,413 $ 578,656 548,803 312,804
RATEX . . . . . . 394,193 395,018 202,395 298,288 213,320
Telemangement . . 569,563 409,352 493,090 600,826 522,343
---------- ---------- ---------- ---------- ----------
System Sales. . . 1,286,040 1,322,783 1,274,141 1,447,917 1,048,467
STS . . . . . . . 5,572,551 5,555,832 4,200,661 4,079,057 3,815,949
Custom Billing. . 287,469 220,093 142,173 163,894 57,882
Network Services. 78,088 - - - -
Recovery Services 241 - - - -
---------- ---------- ---------- ---------- ----------
$7,224,389 $7,098,708 $5,616,975 $5,690,868 $4,922,298
</TABLE>
Total gross profit increased by 12% to $2,892,021 for the three months
ended May 31, 1999 compared to $2,581,561 for the three months ended May 31,
1998. Cost of goods sold was approximately 73.2% of STS revenues for the
three months ended May 31, 1999, compared with 75.9% for the three months
ended May 31, 1998. This decrease is primarily due to the decreased cost of
long distance from the Company's suppliers. Cost of goods sold as a
percentage of System Sales and Maintenance revenues was approximately 19.3%
for the three months ended May 31, 1999 compared with 22.5% for three months
ended May 31, 1998.
Overall operating expenses increased by 26%, or $546,317, for the three
months ended May 31, 1999 to $2,647,242 from $2,100,925 for the three months
ended May 31, 1998. This increase is primarily due to the addition of the
Network Services and Recovery Services divisions, which had combined operating
expenses of approximately $229,000 during the second quarter of fiscal 1999.
The increase is also due to higher human resource costs, including a $54,000
increase in sales personnel related expenses. Operating expenses as a
percentage of revenue increased to 37% from 30% for the three months ended May
31, 1998. Research and development costs for the three months ended May 31,
1999 and 1998 were $272,000 and $116,000, respectively.
The provision for income taxes was $121,100 and $257,150 for the three
months ended May 31, 1999 and 1998, respectively. This represents 30% and 45%
of income before provision for income taxes for 1999 and 1998, respectively.
This percentage decrease is primarily attributable to an increased percentage
of interest from tax-free investments included in income from continuing
operations.
Income from continuing operations decreased to $279,772 for the second
quarter of fiscal 1999 from $316,090 in the second quarter of fiscal 1998.
This is primarily attributable to the increase in operating expenses from the
launch of Network Services, Recovery Services, and the increase in personnel
related expenses in sales and research & development.
NETWORK SERVICES
During the first half of fiscal 1999, the Company formed a Network
Services division to initially sell telecommunication services to companies in
Arizona. The division sells dial tone and data transport services via
strategic agent relationships with Regional Bell Operating Companies
("RBOCs"). The division offers expertise in telecommunications network
services to the end user of the RBOCs and will provide consultation on new
product offerings, ways to enhance current services, and ongoing upgrades and
improvements. For the six months ended May 31, 1999, the division generated
$130,000 in revenues and a loss of ($68,000).
RECOVERY SERVICES
During the second quarter of fiscal 1999, the Company hired two
executives to run the Company's Recovery Services division. These individuals
have 27 years of combined industry experience in two leading companies. The
Recovery Services division assists large organizations in analyzing,
recovering, and optimizing their telecommunications expenditures. This
division is headquartered in New Jersey. Initially, the Company will focus
its marketing efforts on the East Coast. The division is expected to generate
a loss of approximately ($500,000) in fiscal 1999.
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 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.
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.
<PAGE>
MATERIAL CHANGES IN FINANCIAL POSITION
Cash and cash equivalents decreased to $1,786,389 at May 31, 1999 from
$7,740,219 at November 30, 1998. During the six months ended May 31, 1999,
investment securities increased $3,578,544. Combined, the Company's cash and
investment holdings decreased approximately $2,375,000. During the first half
of 1999, activities from continuing operations used approximately $2,247,000,
which includes $1,234,000 in taxes. Additionally, the Company used
approximately $184,000 in cash to purchase treasury stock. The Company
received $2,909,232 upon the sale of 79,387 shares of WinStar stock and paid
$605,100 in taxes related to the sale of GoodNet, including this sale of the
WinStar stock.
Accounts receivable decreased to $6,127,000 from $7,435,184 as of
November 30, 1998 ($5,520,619 and $6,933,089, net of allowance for
uncollectibles as of May 31, 1999 and November 30, 1998 respectively). This
decrease is due to increased collections on accounts past due.
As of May 31, 1999, the Company had a net current and deferred tax asset
of $904,400 compared with a net deferred tax asset of $43,700 of November 30,
1998. This is due to the payment of taxes related to the WinStar stock sale
and the sale of GoodNet, as well as an increase in estimated tax payments for
the current fiscal year.
Accounts payable and accrued liabilities decreased to $4,307,462 from
$8,208,584 as of November 30, 1998. As of May 31, 1998, there was
approximately $4,596,837 in accounts payable and accrued liabilities.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 1999, the Company had cash of $1,786,389 and investment
securities of $13,515,333. 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.
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.
SEASONALITY
The Company generally completes the sale of the majority of STS
Outsourcing Program and STS Program system installations in the higher
education industry during the spring and early summer months. The
implementation and installation of these systems and services occurs during
the summer months. Revenues derived from STS Outsourcing Programs are highest
in the fall and spring, and lowest during the winter holiday and the summer
months when university students are on vacation. As a result, the Company's
revenues have consistently been highest during the fourth quarter, and lowest
during the third quarter.
PART II
OTHER INFORMATION
-----------------
Response to Items 1-5 are omitted since these items are not applicable to this
report.
Item 6. Exhibits and Reports on Form 8-K
(a) NO. DESCRIPTION REFERENCE
--- ----------- ---------
11 Earnings per common and common equivalent shares filed herewith
(b) There were no reports on Form 8-K during the current quarter.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Issuer has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TELESOFT CORP.
BY /s/ Michael F. Zerbib
-------------------------------------------------
Michael F. Zerbib
Chief Financial Officer
DATED: July 1, 1999
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11; Earnings (Loss) per share
The following table reconciles the numerators and denominators of the basic
and diluted earnings (loss) per share:
THREE MONTHS ENDED MAY 31 SIX MONTHS ENDED MAY 31
<S> <C> <C> <C>
<CAPTION>
1999 1998 1999 1998
BASIC EARNINGS (LOSS) PER COMMON SHARE:
- ------------------------------------------
NUMERATOR
Income from continuing operations 279,772 316,090 908,370 635,785
Loss from operations of GoodNet Subsidiary - - - (68,428)
Gain on disposal of GoodNet - - 367,509 8,162,389
--------- --------- --------- ----------
Net earnings available to common 279,772 316,090 1,275,879 8,729,746
Shareholders ========= ========= ========= ==========
DENOMINATOR
<S> <C> <C> <C> <C>
Weighted average number of shares 3,711,500 3,787,500 3,715,715 3,787,500
Outstanding ========= ========= ========= ==========
PER SHARE AMOUNTS
Income from continuing operations. . . . . .08 .08 .24 .17
Loss from operations of GoodNet. . . . . . - - - (.02)
Subsidiary
Gain on disposal of GoodNet. . . . . . . . - - .10 2.16
--------- --------- --------- ----------
Net earnings available to common . . . . . .08 .08 .34 2.31
Shareholders ========= ========= ========= ==========
<CAPTION>
<S> <C> <C> <C> <C>
DILUTED EARNINGS (LOSS) PER SHARE
- ----------------------------------
NUMERATOR
Income from continuing operations . 279,772 316,090 908,370 635,785
Loss from operations of GoodNet. . - - - (68,428)
subsidiary
Gain on disposal of GoodNet. . . . - - 367,509 8,162,389
--------- --------- ---------- ----------
Net earnings available to common . 279,772 316,090 1,275,879 8,729,746
shareholders ========= ========= ========== ==========
DENOMINATOR
Weighted average number of shares. 3,711,500 3,787,500 3,715,715 3,787,500
outstanding
Effect of dilutive securities. . .
Options and warrants . . . . . . . 433,100 345,400 418,100 345,400
Stock acquired with proceeds . . . (310,062) (225,081) (283,707) (247,403)
--------- --------- --------- ----------
Weighted average common shares and 3,834,538 3,907,819 3,850,108 3,885,497
assumed conversions outstanding ========= ========= ========== ==========
PER SHARE AMOUNTS
Income from continuing operations. .07 .08 .24 .16
Loss from operations of GoodNet. . - - - (.02)
Subsidiary
Gain on disposal of GoodNet. . . . - - .10 2.11
--------- --------- ---------- ----------
Net earnings available to common . .07 .08 .34 2.25
shareholders ========= ========= ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 6-MOS 6-MOS
<FISCAL-YEAR-END> NOV-30-1999 NOV-30-1998 NOV-30-1999 NOV-30-1998
<PERIOD-END> MAY-31-1999 MAY-31-1998 MAY-31-1999 MAY-31-1998
<CASH> 1,786,389 8,337 1,786,389 8,337
<SECURITIES> 13,515,333 21,196,913 13,515,333 21,196,913
<RECEIVABLES> 6,127,000 5,250,378 6,127,000 5,250,378
<ALLOWANCES> (606,381) (501,159) (606,381) (501,159)
<INVENTORY> 703,346 920,466 703,346 920,466
<CURRENT-ASSETS> 22,972,937 27,343,930 22,972,937 27,343,930
<PP&E> 2,754,025 2,504,864 2,754,025 2,504,864
<DEPRECIATION> (1,558,973) (1,352,219) (1,195,052) (1,352,219)
<TOTAL-ASSETS> 24,498,812 29,328,363 24,498,812 29,328,363
<CURRENT-LIABILITIES> 4,903,340 9,790,020 4,903,340 9,790,020
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 7,366,228 7,366,228 7,366,228 7,366,228
<OTHER-SE> 12,035,944 12,064,715 12,035,944 12,064,715
<TOTAL-LIABILITY-AND-EQUITY> 24,498,812 29,328,363 24,498,812 29,328,363
<SALES> 7,224,389 7,098,708 15,026,986 14,125,486
<TOTAL-REVENUES> 7,224,389 7,098,708 15,026,986 14,125,486
<CGS> 4,332,368 4,517,147 8,750,845 8,920,308
<TOTAL-COSTS> 6,979,610 6,618,073 13,844,404 13,140,734
<OTHER-EXPENSES> 377 (18,833) 270 (35,573)
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 41 0 255 678
<INCOME-PRETAX> 400,872 573,240 1,500,270 1,155,985
<INCOME-TAX> 121,100 257,150 591,900 520,200
<INCOME-CONTINUING> 279,772 316,090 908,370 635,785
<DISCONTINUED> 0 0 0 (68,428)
<EXTRAORDINARY> 0 0 367,509 8,162,389
<CHANGES> 0 0 0 0
<NET-INCOME> 279,772 316,090 1,275,879 8,729,746
<EPS-BASIC> .08 .08 .34 2.31
<EPS-DILUTED> .07 .08 .34 2.25
</TABLE>
