U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2000
COMMISSION FILE NO. 1-13830
TELESOFT CORP.
(Name of Registrant as specified in its charter)
ARIZONA 86-0431009
(State of Incorporation) (IRS Employer Identification No.)
3443 NORTH CENTRAL AVENUE #1800
PHOENIX, ARIZONA 85012
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (602) 308-2100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
issuer was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No ( )
At September 29, 2000, the Registrant had outstanding 1,377,728 shares of
common stock, no par value.
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<S> <C>
Consolidated Balance Sheets as of August 31, 2000 and November 30, 1999 3
Consolidated Statements of Operations for the three and nine month periods ended August 31, 2000 and 1999 4 - 5
Consolidated Statements of Cash Flows for the nine month periods ended August 31, 2000 and 1999 . . . . . 6 - 7
Notes to the Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.. . . . . . 10 - 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.. . . . . . . . . . . . . . . . . . . 16
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . . . . . . . . . . . . . . . 17
ITEM 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
<TABLE>
<CAPTION>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
August 31, 2000 November 30, 1999
(unaudited)
ASSETS (Note 4)
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $140,759 $ 2,157,701
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 12,267,370
Accounts receivable, net of allowance for uncollectibles of $595,371. . . . . . . . . . 5,019,208 9,484,936
and $552,601 at August 31, 2000 and November 30, 1999,
respectively
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 430,123 366,794
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382,717 462,626
Deferred taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270,800 221,100
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201,225 301,774
----------- -----------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,444,832 25,262,301
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,418,613 1,320,246
Computer software costs, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,280 169,667
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,079 110,723
----------- -----------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,072,804 $26,862,937
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Related party debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,500,000 -
Accounts payable and accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . 2,413,929 5,880,975
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,089 -
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,115,188 928,997
----------- -----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,139,206 6,809,972
Deferred taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,600 62,200
----------- -----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,227,806 6,872,172
----------- -----------
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; . . . . . . . . . . . . . . . 663,539 6,919,095
1,554,934 and 3,787,500 issued and 1,377,728 and 3,711,500 outstanding, respectively
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 80,069
Accumulated other comprehensive income. . . . . . . . . . . . . . . . . . . . . . . . . - 66,120
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,844,998 12,925,481
----------- -----------
2,508,537 19,990,765
Less: Treasury stock, 177,206 shares, at cost. . . . . . . . . . . . . . . . . . . . . (663,539) -
----------- -----------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,844,998 19,990,765
----------- -----------
Total liabilities and stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . $8,072,804 $26,862,937
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended August 31, 2000 and 1999 (unaudited)
Three Months Ended Nine Months Ended
August 31, August 31,
2000 1999 2000 1999
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Sales, net. . . . . . . . . . . . . . . . . . . . $ 3,115,845 $3,965,810 $16,622,940 $18,992,796
Cost of sales . . . . . . . . . . . . . . . . . . 1,055,098 1,667,418 8,489,297 10,418,263
------------ ----------- ------------ ------------
Gross profit. . . . . . . . . . . . . . . . . . . 2,060,747 2,298,392 8,133,643 8,574,533
General and administrative expenses . . . . . . . 3,112,735 2,907,652 9,385,122 8,001,211
------------ ----------- ------------ ------------
Operating (loss) income . . . . . . . . . . . . . (1,051,988) (609,260) (1,251,479) 573,322
------------ ----------- ------------ ------------
Other income (expense):
Interest income . . . . . . . . . . . . . . . . . 7,329 130,089 338,520 448,303
Interest expense. . . . . . . . . . . . . . . . . (44,907) - (82,377) (255)
Other income. . . . . . . . . . . . . . . . . . . 168,810 (1,506) 314,232 (1,777)
------------ ----------- ------------ ------------
131,232 128,583 570,375 446,271
------------ ----------- ------------ ------------
(Loss) income from continuing operations. . . . . (920,756) (480,677) (681,104) 1,019,593
before provision for income taxes
Benefit (provision) for income taxes. . . . . . . 368,200 240,200 282,700 (351,700)
------------ ----------- ------------ ------------
(552,556) (240,477) (398,404) 667,893
(Loss) income from continuing operations
Gain on disposal of GoodNet subsidiary (net of
income taxes of $239,500 in 1999) . . . . . . - - - 367,509
------------ ----------- ------------ ------------
Net (loss) income . . . . . . . . . . . . . . . . (552,556) (240,477) (398,404) 1,035,402
Other comprehensive (loss) income, net of tax
Reclass of holding gains realized during
period and included in income statement. . . . - - (66,120) (78,316)
------------ ----------- ------------ ------------
Comprehensive (loss) income . . . . . . . . . . . $ (552,556) $ (240,477) $ (464,524) $ 957,086
============ =========== ============ ============
The accompanying notes are an integral part of the
consolidated financial statements
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
</TABLE>
Three Months Ended Nine Months Ended
August 31, August 31,
<TABLE>
<CAPTION>
2000 1999 2000 1999
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Basic (loss) earnings per share
Continuing operations . . . . . $ (0.40) $ (0.06) $ (0.17) $ 0.18
Sale of discontinued operations - - - 0.10
----------- ----------- ----------- ----------
Net (loss) income . . . . . . . $ (0.40) $ (0.06) $ (0.17) $ 0.28
=========== =========== =========== ==========
Diluted earnings per share
Continuing operations . . . . . $ (0.40) $ (0.06) $ (0.17) $ 0.17
Sale of discontinued operations - - - 0.10
----------- ----------- ----------- ----------
Net (loss) income . . . . . . . $ (0.40) $ (0.06) $ (0.17) $ 0.27
=========== =========== =========== ==========
Weighted average number
of shares outstanding
- basic . . . . . . . . . . . . 1,377,728 3,711,500 2,371,002 3,714,299
- diluted . . . . . . . . . . . 1,377,728 3,711,500 2,371,002 3,838,909
=========== =========== =========== ==========
</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 nine months ended August 31, 2000 and 1999 (unaudited)
2000 1999
------------- -------------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Cash received from customers. . . . . . . . . . . . $ 21,295,595 $20,424,534
Cash paid to suppliers and employees. . . . . . . . (20,918,240) (23,585,704)
Interest paid . . . . . . . . . . . . . . . . . . . (82,377) (255)
Interest received . . . . . . . . . . . . . . . . . 499,890 395,576
Income tax refund . . . . . . . . . . . . . . . . . 598,707 -
Income taxes paid . . . . . . . . . . . . . . . . . (149,309) (1,271,276)
------------- -------------
Net cash provided (used) by operating
activities of continuing operations . . . . . . . 1,244,266 (4,037,125)
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment. . . . . . . . . (476,404) (364,834)
Disbursements for notes receivable from related
parties. . . . . . . . . . . . . . . . . . . . (450,000) -
Collection of notes receivable from related
parties. . . . . . . . . . . . . . . . . . . . 500,000 -
Collection of notes receivable. . . . . . . . . . . - 373,153
Cash received from sale of fixed assets . . . . . . - 1,054
Cash received from sale of investment securities. . 13,846,439 4,874,232
Purchase of investment securities . . . . . . . . . (1,500,000) (6,616,250)
------------- -------------
Net cash provided (used) by investing
activities of continuing operations. . . . . . . 11,920,035 (1,732,645)
------------- -------------
Cash flows from financing activities:
Purchases of treasury stock . . . . . . . . . . . . (296,475) (184,305)
Proceeds from debt - related parties. . . . . . . . 2,500,000 -
Stock redemption. . . . . . . . . . . . . . . . . . (17,384,768) -
------------- -------------
Net cash used in financing activities of
continuing operations. . . . . . . . . . . . . . (15,181,243) (184,305)
------------- -------------
Cash used by continuing operations. . . . . . . . . (2,016,942) (5,954,075)
Cash used by discontinued operations, including
income taxes paid in the amount of $605,100 for 1999 - (605,100)
------------- -------------
Net decrease in cash and cash equivalents (2,016,942) (6,559,175)
Cash and cash equivalents at beginning of period. . 2,157,701 7,740,219
------------- -------------
Cash and cash equivalents at end of period. . . . . $ 140,759 $ 1,181,044
============= =============
</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 nine months ended August 31, 2000 and 1999 (unaudited)
2000 1999
------------ ------------
<S> <C> <C>
Reconciliation of net (loss) income to net cash
provided (used) by operating activities from
continuing operations:
Net (loss) income . . . . . . . . . . . . . . . . $ (398,404) $ 1,035,402
------------ ------------
Adjustments to reconcile net (loss) income to net
cash provided (used) by operating activities
from continuing operations:
Gain on sale of discontinued operations . . . . . - (367,509)
Income taxes payable and deferred taxes
related to sale of discontinued operations . . - 365,600
Depreciation and amortization . . . . . . . . . . 464,424 396,914
Gain on sale of investment securities . . . . . . (145,189) -
Loss on sale of fixed assets. . . . . . . . . . . - 1,883
Interest income included with note receivable . . - (2,294)
Changes in assets and liabilities:
Accounts receivable, net. . . . . . . . . . . . . 4,465,728 1,479,456
Inventory . . . . . . . . . . . . . . . . . . . . (63,329) (266,447)
Other current assets. . . . . . . . . . . . . . . 50,549 (87,199)
Deferred taxes, net . . . . . . . . . . . . . . . (23,300) (355,700)
Other assets. . . . . . . . . . . . . . . . . . . (15,356) 7,298
Accounts payable and accrued liabilities. . . . . (3,467,046) (5,407,087)
Deferred revenue. . . . . . . . . . . . . . . . . 186,191 92,034
Income taxes payable. . . . . . . . . . . . . . . 110,089 (147,239)
Income taxes receivable . . . . . . . . . . . . . 79,909 (782,237)
------------ ------------
1,642,670 (5,072,527)
------------ ------------
Net cash provided (used) by operating activities. $ 1,244,266 $(4,037,125)
from continuing operations ============ ============
</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 nine month periods ended August 31, 2000 and 1999
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-Q.
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 consisting of
recurring accruals considered necessary for a fair presentation have been
included. Operating results for the three and nine months ended August 31,
2000 are not necessarily indicative of the results that may be expected for
the year ending November 30, 2000. 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, 1999.
Principles of Consolidation
The consolidated financial statements include the accounts of Telesoft Corp.,
together with its wholly owned subsidiaries, Telesoft Acquisition Corp and
Telesoft Recovery Corp.
All significant intercompany accounts and transactions have been eliminated.
2. INVESTMENT SECURITIES
Municipal Bonds
The Company accounted for its investment in Municipal bonds as an
available-for-sale debt security, which accordingly was carried at market
value. During the six months ended August 31, 2000, the Company sold all
12,050,000 shares that it had held for $12,050,000.
Winstar Communications, Inc. ("Winstar")
The Company accounted for its investment in Winstar as an available-for-sale
equity security, which accordingly was carried at market value. During the
nine months ended August 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.
Amdocs Ltd. ("DOX")
The Company accounted for its investment in DOX, which traded on the NYSE
under the symbol DOX, as an available-for-sale equity security, which
accordingly was carried at market value. During the nine months ended August
31, 2000, the Company sold all 7,434 DOX shares that it had held for $296,439.
These shares were previously held as 20,000 shares of International
Telecommunication Data Systems Inc. (ITDS).
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine month periods ended August 31, 2000 and 1999
3. STOCKHOLDERS' EQUITY
Self-Tender Offer
On February 3, 2000, the Company commenced an offer to repurchase up to 2.3
million shares of its common stock pursuant to a "Dutch auction" self-tender
offer. On March 24, 2000, the tender offer expired. Pursuant to the tender
offer, the Company repurchased a total of 2.3 million shares of its common
stock. The purchase price for the shares of common stock was $7.25 per share
and the proration factor was 60.22 percent. The Company redeemed 1,938,816
common shares for $14,056,416 and 351,352 common stock options for
$1,112,674. Included in the common shares redeemed are 1,031,663 shares of
the Company's common stock redeemed from affiliates of the Company for an
aggregate of approximately $7,480,000.
Additionally, the Company repurchased all 293,750 shares of common stock owned
by Joseph Zerbib for $2,129,688. Subsequent to the completion of the tender
offer, affiliates of the Company owned 695,837 shares or 47% of the
outstanding common stock of the Company.
Expenses incurred related to the tender offer were $85,991.
Treasury Stock
On April 4, 2000, the Company announced that it authorized the repurchase of
up to 10% (146,913 shares) of its outstanding common stock on the open market
under prevailing market conditions as applicable under appropriate securities
laws. From the announcement date through August 31, 2000, the Company
repurchased 101,206 shares of its common stock in the open market for
$296,475.
4. RELATED PARTY DEBT:
On April 3, 2000, the Company entered into three $1,350,000 lines of credit
(total of $4,050,000), payable on demand, bearing a term of one year and an
annual interest rate of 10%, with three officers of the Company. Each line of
credit is secured by the assets of the Company. The interest rate on this
debt is at least as favorable as the Company could receive from third-party
lenders. The Company has obtained several proposals from third-party lenders
bearing effective rates in excess of 12%.
During the nine months ended August 31, 2000, interest expense in connection
with these notes was $69,900. As of August 31, 2000, borrowings outstanding
on the line of were $2,500,000 and no interest was due on the notes.
<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 NINE MONTHS ENDED AUGUST 31, 2000 AND 1999
(in thousands except per share items)
Nine months ended August 31, 2000 Nine months ended August 31, 1999
-------------------------------------- --------------------------------------
System Custom Recovery System Custom Recovery Network
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STS Sales Billing Services Total STS Sales Billing Services Services Total
Sales, net . . . $10,518 $ 4,540 $ 730 $ 835 $16,623 $ 12,690 $ 5,063 $ 1,025 $ 50 $ 165 18,933
Cost of. . . . . 7,635 822 32 - 8,489 9,397 990 32 - - 10,419
sales -------- -------- --------- --------- -------- --------- -------- -------- ---------- --------- ------
Gross. . . . . . 2,883 3,718 698 835 8,134 3,293 4,073 993 50 165 8,574
profit -------- -------- --------- --------- -------- --------- -------- -------- ---------- --------- ------
General & administrative
expenses:
General. . . . . 2,711 4,551 591 727 8,580 2,632 3,252 846 256 283 7,269
Depreciation . . 127 97 14 1 239 116 99 16 - - 231
Bad debt . . . . 148 - - - 148 124 3 12 - - 139
Corporate
Allocations:
General. . . . . 107 62 19 4 192 143 38 13 1 1 196
Depreciation . . 101 100 25 - 226 75 71 15 - 5 166
-------- -------- --------- --------- -------- --------- -------- -------- ---------- --------- ------
3,194 4,810 649 732 9,385 3,090 3,463 902 257 289 8,001
-------- -------- --------- --------- -------- --------- -------- -------- ---------- --------- ------
Operating. . . . (311) (1,092) 49 103 (1,251) 203 610 91 (207) (124) 573
income (loss)
Other. . . . . . 570 446
income -------- -------
Pretax income. . . . . (681) 1,019
Income tax benefit (provision) 283 (352)
-------- -------
Income from continuing $ (398) $ (667)
operations ======== =======
Diluted earnings per share-
Continuing operations $ (0.17) $ 0.17
======== =======
</TABLE>
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED AUGUST 31, 2000 AND 1999
Revenues decreased by 12% to $16,622,940 for the nine months ended August
31, 2000 compared to $18,992,796 for the nine months ended August 31, 1999.
The Company's revenue is derived from four principal product lines and
services: STS Outsourcing Programs (STS), System Sales and Maintenance,
Customized Billing Outsourcing Services and Recovery Services. Network
Services, which began operations in December 1998, was discontinued in August
1999 due to unsatisfactory performance.
STS revenues were $10,517,725 for the nine months ended August 31, 2000
compared to $12,689,765 for the nine months ended August 31, 1999, a decrease
of 17.1%. This decrease was primarily due to market pressure from competing
means of communication including pre-paid cards, other calling cards, wireless
services and the Internet. During the course of last year, the Company
adjusted to these market pressures by lowering its retail rates and
renegotiating its wholesale rates with its suppliers. The majority of the
impact of these new rates will be felt during the course of our fourth fiscal
quarter (September-November), which represents the first three months of the
2000-2001 academic year. As of the date of this document, we are experiencing
a significant decline in revenue for the first several weeks of the Fall
semester compared to the same period last year. Historically, the calling
patterns during September through November are indicative of calling patterns
for the balance of the academic year. Based on this decline in revenue, we
have made some cost adjustments in a number of selling, general and
administrative expenses, including a reduction in staff to adjust to the
reduction in subscribers, traffic, and revenues.
Revenues from System Sales and Maintenance were $4,540,000 for the nine
months ended August 31, 2000 compared to $5,063,000 for the nine months ended
August 31, 1999, a decrease of 10%. TelMaster sales and maintenance related
revenues increased 20.4% to $2,775,000 for the nine months ended August 31,
2000 compared to $2,305,000 for the nine months ended August 31, 1999. This
$470,000 increase in TelMaster revenues was related to increased revenues from
the ongoing development of a custom convergence billing, reporting and support
system for Pacific Bell and MCI customer care services for the State of
California's CALNET contract. In the past, TelMaster system sales have been
Affected by longer than expected implementation periods. Our investment in
additional implementation, programming and software development personnel has
reduced our implementation cycles. We now have a solid foundation for
scaling the number of systems we are able to implement each year, while
simultaneously improving customer satisfaction.
The RATEX and DCS product revenues declined 49.4% or $848,000 and 14% or
$146,000, respectively for the nine months ended August 31, 1999 compared to
the nine months ended August 31, 2000. The decline in revenues in these
segments was the result of a decrease in demand for these text-based software
products.
For the nine months ended August 31, 2000 and 1999, revenues from
Customized Billing Services were approximately $730,000 and $1,025,000,
respectively, a decrease of $295,000 or 29%. Approximately $257,000, of this
decline was due to the loss of the MDU contract with Bell Atlantic in March
1999 and the loss of the Blue Cross Blue Shield contract in July 1999. The
Customized Billing Services division is currently generating approximately
$850,000 in annual revenues.
Recovery Services, which began operations in March 1999, had revenues of
approximately $835,000 during the first three quarters of fiscal 2000 compared
with $50,000 in revenues for the same period in 1999. Network Services, which
was discontinued in August 1999, had begun operations in December 1998 and had
revenues of approximately $165,000 during the first three quarters of fiscal
1999.
<TABLE>
<CAPTION>
Revenue for the nine-month periods ended August 31,
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Telemanagement. . . . . . . $ 2,775,230 $ 2,157,208 $ 1,057,028 $ 984,898 $ 1,251,877
DCS . . . . . . . . . . . . 894,828 1,040,532 1,223,142 1,392,374 1,339,670
RATEX . . . . . . . . . . . 869,562 1,717,340 2,101,899 826,413 974,094
----------- ----------- ----------- ----------- -----------
System Sales. . . . . . 4,539,620 4,915,080 4,382,069 3,203,685 3,565,641
STS . . . . . . . . . . . . 10,517,725 12,689,765 12,252,518 9,229,288 9,025,335
Customized Billing Services 730,564 1,172,502 996,036 754,130 340,846
Network Services. . . . . . - 165,435 - - -
Recovery Services . . . . . 835,031 50,014 - - -
----------- ----------- ----------- ----------- -----------
$16,622,940 $18,992,796 $17,630,623 $13,187,103 $12,931,822
</TABLE>
<PAGE>
Total gross profit decreased 5.1% or $440,890 to $8,133,643 for the nine
months ended August 31, 2000 compared to $8,574,533 for the nine months ended
August 31, 1999. Cost of goods sold was approximately 72.6% of STS revenues
for the nine months ended August 31, 2000, compared with 74.1% for the nine
months ended August 31, 1999. Cost of goods sold as a percentage of System
Sales and Maintenance revenues were approximately 18% and 20% for both the
nine months ended August 31, 2000 and 1999, respectively.
Overall operating expenses increased by 17.3%, or $1,383,911, for the
nine months ended August 31, 2000 to $9,385,122 from $8,001,211 for the nine
months ended August 31, 1999. Human resource expenses in the areas of
TelMaster research and development, implementation, sales, and support
services, increased by $1,136,000 to $2,412,000. The Recovery Services
division had operating expenses of approximately $732,000 during the first
nine months of fiscal 2000 compared to $257,000 in the first nine months of
fiscal 1999. Network Services, which was discontinued in August 1999,
contributed approximately $289,000 to operating expenses in the nine months
ended August 31, 1999. General and administrative expenses as a percentage of
revenues increased to 56.5% for the first nine months of fiscal 2000, compared
to 42.1% for the first nine months of fiscal 1999. We expect general and
administrative expenses as a percentage of revenues to decrease over time, as
revenues for TelMaster systems increase.
Other income increased to $314,231 for the first nine months of fiscal
2000 from a ($1,777) expense in the first nine months of fiscal 1999. This
increase is attributable to the sale of 7,434 shares of Amdocs Ltd. ("DOX")
common for $296,439, through which the Company realized a $145,189 gain on the
sale. Additionally, the Company realized a $168,782 return of premium on a
key-person insurance policy.
The provision for income taxes was a $282,700 benefit for the nine months
ended August 31, 2000 compared with a $351,700 expense for the nine months
ended August 31, 1999. This represents 41.5% and 34.5% of income before
provision for income taxes for 2000 and 1999, respectively. This percentage
increase was partially attributable to a lower percentage of tax-free interest
included in pretax income.
There was a loss from continuing operations of $398,404 for the first
nine months of fiscal 2000 compared with net income from continuing operations
of $667,893 in the first nine months of fiscal 1999. This was attributable to
a decrease of $514,000 in operating income from the STS product line, an
operating loss of approximately $1,092,000 versus a $610,000 profit from the
system sales division. These decreases were offset by an operating income of
$103,000 versus a $207,000 loss in the prior year from the Recovery Services
division, a $314,000 increase in other income and the discontinuation of the
Network Services division, which had a $124,000 operating loss for the first
nine months of fiscal 1999. Additionally, interest income expense increased
$82,000, while interest income decreased $109,800 as a result of decreased
cash and investments due to the Company's tender of its common stock completed
in March 2000. These operating result changes were also offset by a $634,000
decrease in income taxes.
For the nine months ended August 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 note 2 in the notes to the fiscal year ended November 30, 1999
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS BY PRODUCT LINE FOR THE THREE MONTHS ENDED AUGUST 31, 2000 AND 1999
(in thousands except per share items)
Three months ended August 31, 2000 Three months ended August 31, 1999
--------------------------------------- ---------------------------------------
System Custom Recovery System Custom Recovery Network
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STS Sales Billing Services Total STS Sales Billing Services Services Total
Sales, net . . . $ 789 $ 1,678 $ 246 $ 403 $ 3,116 $ 1,299 $ 2,365 $ 217 $ 50 $ 35 $3,966
Cost of sales. . 696 337 22 - 1,055 1,117 524 27 - - 1,668
-------- -------- ---------- ---------- -------- --------- -------- -------- --------- -------- -----
Gross profit . . 93 1,341 224 403 2,061 182 1,841 190 50 35 2,298
-------- -------- ---------- ---------- -------- --------- -------- -------- --------- -------- -----
General & administrative
expenses:
General. . . . . 870 1,593 175 271 2,909 919 1,210 317 155 89 2,690
Depreciation . . 36 18 4 - 58 41 33 6 - - 80
Bad debt . . . . 8 - - - 8 8 - 9 - - 17
Corporate allocations:
General. . . . . 37 21 7 1 66 45 12 4 - - 61
Depreciation . . 32 32 9 - 73 27 25 5 - 2 59
-------- -------- ---------- ---------- -------- --------- -------- -------- --------- -------- -----
983 1,664 195 272 3,114 1,040 1,280 341 155 91 2,907
-------- -------- ---------- ---------- -------- --------- -------- -------- --------- -------- -----
Operating. . . .
income (loss) (890) (323) 29 131 (1,053) (858) 561 (151) (105) (56) (609)
Other income . . 131 128
-------- ------
Pretax (loss) income (922) (481)
Income tax benefit 369 240
-------- ------
(Loss) income
from continuing . ($553) $(241)
operations ======== ======
Diluted (loss)
earnings per share-
continuing operations ($0.40) $(0.06)
======== ======
</TABLE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED AUGUST 31, 2000 AND 1999
Revenues decreased by 21% to $3,115,844 for the three months ended August
31, 2000 compared to $3,965,810 for the three months ended August 31, 1999.
The Company's revenue is derived from four principal product lines and
services: STS Outsourcing Programs (STS), System Sales and Maintenance,
Customized Billing Outsourcing Services and Recovery Services. Network
Services, which began operations in December 1998, was discontinued in August
1999 due to unsatisfactory performance.
STS revenues were $789,238 for the three months ended August 31, 2000
compared to $1,299,286 for the three months ended August 31, 1999, a decrease
of 39.3%. This decrease was primarily due to market pressure from competing
means of communication including pre-paid cards, other calling cards, wireless
services and the Internet. Please see corresponding paragraph under Results
of Operations fo rthe nine months ended August 31, 2000 and 1999.
Revenues from System Sales and Maintenance were $1,677,177 for the three
months ended August 31, 2000 compared to $2,364,844 for the three months ended
August 31, 1999, a decrease of 29%. TelMaster sales and maintenance related
revenues increased 10.8% to $1,101,538 for the three months ended August 31,
2000 compared to $993,973 for the three months ended August 31, 1999. This
increase was a result of a $248,000 increase in TelMaster revenues related the
State of California's CALNET contract, offset by just slightly lower systems
revenues.
The RATEX and DCS product revenues declined 70.5% or $699,400 and 25.3%
or $95,800, respectively. The decline in revenues in these segments was the
result of a decrease in demand for these text-based software products, as well
as a very strong third quarter for RATEX in fiscal 1999.
For the three months ended August 31, 2000 and 1999, revenues from
Customized Billing Services were approximately $246,000 and $217,000,
respectively.
Recovery Services, which began operations in March 1999, had revenues of
approximately $403,000 during the third quarter of fiscal 2000, a 710%
increase over the third quarter of fiscal 1999 and a 48% increase over the
second quarter of fiscal 2000. Network Services, which began operations in
December 1998 and ceased operations in August 1999, had revenues of
approximately $35,000 during the third quarter of fiscal 1999.
<TABLE>
<CAPTION>
Revenue for the three-month period ended August 31,
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Telemanagement. . . . . . . $1,101,538 $ 993,973 $ 202,888 $ 279,572 $ 263,296
DCS . . . . . . . . . . . . 283,462 379,306 316,500 563,454 412,782
RATEX . . . . . . . . . . . 292,177 991,565 1,211,434 465,803 381,745
---------- ---------- ---------- ---------- ----------
System Sales . . . . . 1,677,177 2,364,844 1,730,822 1,308,829 1,057,823
STS . . . . . . . . . . . . 789,238 1,299,286 1,240,874 960,645 914,584
Customized Billing Services 246,139 216,028 533,441 444,063 33,531
Network Services. . . . . . - 35,879 - - -
Recovery Services . . . . . 403,290 49,773 - - -
---------- ---------- ---------- ---------- ----------
$3,115,844 $3,965,810 $3,505,137 $2,713,537 $2,005,938
</TABLE>
Total gross profit decreased 10.3% or $237,644 to $2,060,748 for the
three months ended August 31, 2000 compared to $2,298,392 for the three months
ended August 31, 1999. Cost of goods sold was approximately 88% of STS
revenues for the three months ended August 31, 2000, compared with 86% for the
three months ended August 31, 1999. Cost of goods sold as a percentage of
System Sales and Maintenance revenues were approximately 20% and 22% for the
three months ended August 31, 2000 and 1999, respectively. This decrease was
due to a higher percentage of maintenance revenues, which has a higher profit
margin.
<PAGE>
Overall operating expenses increased by 7.1%, or $205,083, for the three
months ended August 31, 2000 to $3,112,735 from $2,907,652, for the three
months ended August 31, 1999. This increase was primarily due to an increase
in human resources in the areas of TelMaster research and development,
implementation, sales, and support services, which increased by $413,000 to
$906,000. The Recovery Services division had operating expenses of
approximately $273,000 during the third quarter of fiscal 2000 compared to
$155,000 in the third quarter of fiscal 1999. Network Services, which was
discontinued in August 1999, contributed approximately $91,000 to operating
expenses in the three months ended August 31, 1999. We expect general and
administrative expenses as a percentage of revenues to decrease over time, as
revenues for TelMaster systems increase. Additionally, we expect STS
operating expenses to decline based on lower revenue volumes in this division.
The provision for income taxes was a benefit of $368,200 and $240,200 for
the three months ended August 31, 2000 and 1999, respectively.
For the third quarter of fiscal 2000, the Company realized a ($552,557)
loss from continuing operations compared to a ($240,477) loss from continuing
operations in the third quarter of fiscal 1999. This decline was primarily
due to a ($323,000) operating loss from the system sales division the in the
third quarter of fiscal 2000 compared to a $561,000 operating income from this
division in the third quarter of fiscal 1999. This increase was primarily due
to increased investments in TelMaster division personnel. The Recovery
Services division realized its second profitable quarter, providing an
operating income of $131,000, compared to a loss of $105,000 during the third
quarter of fiscal 1999.
MATERIAL CHANGES IN FINANCIAL POSITION
Cash and cash equivalents decreased to $140,759 at August 31, 2000 from
$2,157,701 at November 30, 1999. During the nine months ended August 31,
2000, investment securities decreased by $12,267,370. This decrease is
primarily a result of the Company's "dutch auction" tender offer of its common
stock, which used approximately $17,385,000 of the Company's cash. This use
of cash was offset by $2,500,000 in cash advances from the Company's lines of
credit with certain officers of the Company. During the first three quarters
of 2000, activities from continuing operations provided approximately
$1,244,000, compared to the use of approximately $4,037,000 in the first three
quarters of 1999. Additionally, the Company purchased computer equipment,
furniture and fixtures for approximately $476,000.
Accounts receivable decreased to $5,614,579 from $9,937,537 as of
November 30, 1999 ($5,019,208 and $9,484,936, net of allowance for
uncollectibles as of August 31, 2000 and November 30, 1999, respectively).
This decrease was primarily due to seasonal fluctuations in the STS division.
Accounts receivable was approximately $6,085,000 as of August 31, 1999. The
decrease is also due to an increased collection effort in all areas of the
Company.
Accounts payable and accrued liabilities decreased to $2,413,929 as of
August 31, 2000 from $5,880,975, as of November 30, 1999. As of August 31,
1999, there was approximately $2,801,000 in accounts payable and accrued
liabilities. This slight decrease is attributable to the decline in STS
revenue.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 2000, the Company had cash and cash equivalents of
$140,759. On March 24, 2000, the Company completed a self-tender offer by
repurchasing 2.3 million shares of its common stock pursuant to a modified
"dutch auction" tender offer. The tender offer, which carried an offer price
of $7.25 per share, combined with the repurchase of all 293,750 shares of
common stock owned by Joseph Zerbib, resulted in the payment of approximately
$17,300,000 to tendering option and stockholders. As a result of this tender,
the Company has established a 12-month line of credit with three officers of
the Company in order to satisfy the terms of the tender offer. While the
Company believes that it will be able to maintain, extend or replace the
current line of credit, there can be no assurance that this will happen. The
Company believes that the current line along with cash flows from its business
will allow it to service the cash needs of the business including interest
payments the Company will incur on this facility. However, there can be no
assurance that the Company will not require additional funding within this
time frame. The Company may be required to raise additional funds through
public or private financing, strategic relationships, or other arrangements.
There can be no assurance that such additional funding, if needed, will be
available on terms attractive to the Company, or at all. Furthermore, any
additional equity financing may be dilutive to existing stockholders.
SEASONALITY
The Company generally completes the sale of the majority of STS 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
<TABLE>
<CAPTION>
Cost Gross Estimated
<S> <C> <C> <C>
unrealized gains Fair Value
November 30, 1999
--------------------------------
Available-for-sale securities:
U.S. Corporate Equity Securities $ 151,250 $ 66,120 $ 217,370
Municipal bonds. . . . . . . . . 12,050,000 -0- 12,050,000
----------- ----------- -----------
$ 12,201,250 $ 66,120 $12,267,370
</TABLE>
The following is a summary of investment securities as of November 30, 1999:
At August 31, 2000, the Company had no investment securities.
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 24, 2000, the Company held its annual meeting of shareholders,
at which the Company's shareholders considered the election of directors.
Shareholders voted to elect Joseph W. Zerbib, Michael F. Zerbib, Thierry E.
Zerbib, Brian H. Loeb, Cecile Silverman and Kalvan Swanky to serve as
directors for the ensuing year and until their successors are elected and
qualified. 2,324,200 shares were voted and 0 shares were withheld for each
director.
ITEM 5. OTHER INFORMATION
RELATED PARTY DEBT
On April 3, 2000, the Company entered into three $1,350,000 lines of
credit (total of $4,050,000), payable demand, bearing a term of one year
and an annual interest rate of 10%, with three officers of the Company. The
assets of the Company secure each line of credit. The interest rate on this
debt is at least as favorable as the Company could receive from third-party
lenders. The Company has obtained several proposals from third-party lenders,
bearing effective rates in excess of 12%. This financing was completed in
order to satisfy the terms of the tender offer along with anticipated working
capital needs. See "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources".
SELF-TENDER OFFER
On February 3, 2000, the Company commenced an offer to repurchase up to
2.3 million shares of its common stock pursuant to a "Dutch auction"
self-tender offer. On March 24, 2000, the tender offer expired. Pursuant to
the tender offer, the Company repurchased a total of 2.3 million shares of its
common stock. The purchase price for the shares of common stock was $7.25 per
share and the proration factor was 60.22 percent. The Company redeemed
1,938,816 common shares for $14,056,416 and 351,352 common stock options for
$1,112,674. Included in the common shares redeemed are 1,031,663 shares of the
Company's common stock redeemed from affiliates of the Company for an
aggregate of approximately $7,480,000.
Additionally, the Company repurchased all 293,750 shares of common stock
owned by Joseph Zerbib for $2,129,688. Subsequent to the completion of the
tender offer, affiliates of the Company owned 695,837 shares or 47% of the
outstanding common stock of the Company.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) NO. DESCRIPTION REFERENCE
--- ----------- ---------
27 Financial Data Schedule filed herewith
(b) There were no reports on Form 8-K filed during the quarter ended
August 31, 2000.
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: October 13, 2000
