U.S. 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, 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
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 $29,377,592.
As of February 10, 2000, 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 $8,420,000.
-28-
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 and RATEX Bookstore Solution. The Company also
assists large organizations in analyzing, recovering, and optimizing their
telecommunications expenditures.
HISTORICAL HIGHLIGHTS
The Company was incorporated in Arizona in May 1982. From 1982 to 1986
the Company focused primarily on its Distribution Control System 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
GoodNet to Winstar Communications, Inc. ("Winstar"). 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 website is located at
www.telesoft.com.
RECENT DEVELOPMENTS
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. The tender offer price will be between $7.00 and $7.50 per
share in cash, which would result in the payment to tendering stockholders of
an up to a maximum of an aggregate of $17.25 million if all 2.3 million shares
are tendered. The offer will expire at 12 Midnight, New York City time, March
6, 2000, unless extended.
Joseph Zerbib Retires as President and Chief Executive Officer
Effective February 1, 2000, Joseph Zerbib retired his position as the
Company's president and chief executive officer. He will remain chairman of
the board. The board of directors has appointed Michael Zerbib as president
and chief executive officer of the Company.
In connection with his retirement, Joseph Zerbib has agreed to sell all of his
293,750 shares of the Company's common stock back to the Company at a price of
$7.25 per share. The Company will purchase the shares at the earlier of the
time the Company is deemed to have accepted for payment the shares of common
stock with the self-tender offer described above and March 31, 2000.
<PAGE>
PRODUCTS AND SERVICES
The Company's products and services are broken down as follows:
(1) STS Outsourcing Program
(2) Customized Billing Outsourcing Services
(3) System Sales and Maintenance
(a) TelMaster Telemanagement System ("TMS")
(b) RATEX Bookstore Solution
(c) Distribution Control System ("DCS")
(d) Software and Hardware Recurring Maintenance Revenue
(4) Telesoft Recovery Services ("TRC")
(5) Network 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 these services 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 and Smith
College.
Telesoft has also sold the system, software and services required to
administer the STS Program to approximately 75 additional 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, and Fairfield University. Once a sale is consummated, the
Company maintains and services the hardware and software under renewable
one-year maintenance contracts.
<PAGE>
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 Inter eXchange Carriers and
RBOCs. During 1999, the Company implemented a customized billing service
contract for approximately 25,000 Qwest Talk subscribers. Under the terms of
the contract, the Company handles billing and customer service and provides
marketing assistance for the Talk series of products. The Company also
provides customized billing services for Bell Atlantic Data Solutions.
During fiscal 1999, the Company has been developing a custom 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
client server technology, this product was released in the fourth quarter of
1996. During 1999, TelMaster implementations were initiated at American
General Life, Aramark Corporation, California State University - Sacramento,
Colgate Palmolive, GE Capital, 3M Corporation, and others.
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.
TelMasterWeb is a newly introduced Java based set of modules providing
secured intranet access to enterprise directory, charge back reports, and
real-time access to billing and call detail information.
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 70 universities in North America,
including Ohio State University and Stanford University. In 1999,
installations of RATEX systems were initiated at Auraria Book Center,
University of New Mexico, Ohio State University, Brigham Young University,
University College of the Fraser Valley, among others.
Distribution Control System. The Company has offered the DCS product
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 runs on the IBM RS6000 server family. DCSWEB is a newly introduced Java
based business to business software module. This fully integrated web
offering provides electronic catalog publishing with real time inventory
control and flexible pricing shopping-cart system.
TELESOFT RECOVERY SERVICES
During the second quarter of fiscal 1999, the Company hired two
executives to run the Company's Recovery Services division headquartered in
New Jersey. 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. Initial marketing efforts for this division
have focused on the East Coast.
NETWORK SERVICES
During 1999, the Company formed a Network Services division to sell
telecommunication services, including dial tone and data transport services,
via strategic agent relationships with Regional Bell Operating Companies.
This division was discontinued in August 1999 due to unsatisfactory
performance.
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. The STS product
also competes with calling cards, prepaid cards and cellular/wireless service.
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
MCI WorldCom Inc provides a significant portion of the Company's
long-distance telecommunications service. Although the Company is dependent
upon this supplier, management believes comparable suppliers are available.
During the fiscal years ended November 30, 1999 and 1998, the Company did
not have any customers that accounted for greater than 10% of its revenues.
SALES AND MARKETING
The Company's sales staff consists of 21 people who are responsible for
all of the Company's marketing and sales efforts. 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, 1999
and 1998 were $1,424,000 and $622,000, respectively. These costs have been
expensed during their respective fiscal years. Research and development costs
have a current annual run-rate of approximately $1,756,000.
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 that 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 February 10, 2000, the Company had 164 full-time employees, four of
which are in executive positions, 21 are engaged in sales and marketing, 23
are in software development and system management, 43 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 1998, 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 for 1998. The Company
vacated this space in January 1998 and signed a ten-year lease for
approximately 30,000 square feet of office space in Phoenix, Arizona. The
Company's obligation under the terms of this lease agreement was approximately
$392,000 and $346,000 for the fiscal years ended November 30, 1999 and 1998,
respectively.
The Company leases 2,200 square feet of office space in Fort Washington,
Pennsylvania, which houses its RATEX operations. This lease agreement expires
in May 2001. The Company's obligations under the terms of this lease were
approximately $47,000 and $43,000 for the fiscal years ended November 30, 1999
and 1998, respectively.
The Company leases approximately 2,100 square feet in Cranford, New
Jersey, which houses its Telesoft Recovery Services operation. This lease
agreement expires in July 2000. The Company's obligations under the terms of
this lease were approximately $15,000 for 1999. There were no obligations
under this lease agreement during 1998.
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 $37,000 and $33,300 for the fiscal years ended November 30,
1999 and 1998, 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, 1999 LOW HIGH
- ---------------------------- ------- --------
<S> <C> <C>
$ 4 7/8 $ 6
First Quarter
Second Quarter. . . . . . . 4 3/16 5
Third Quarter . . . . . . . 4 3/8 4
Fourth Quarter. . . . . . . 4 1/16 4 11/16
<CAPTION>
YEAR ENDED NOVEMBER 30, 1998 LOW HIGH
- ----------------------------- -------- ------
<S> <C> <C>
$2 21/32 $5 1/8
First Quarter
Second Quarter . . . . . . . 4 5
Third Quarter. . . . . . . . 3 3/8 6
Fourth Quarter . . . . . . . 3 9/16 5
</TABLE>
As of February 10, 2000, there were 604 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 2000.
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 including uncertainties regarding the effectiveness
of initiatives to introduce and implement the TelMaster product. 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; and the amount and rate of
growth in general and administrative expenses associated with building a
strengthened corporate infrastructure to support operations.
<PAGE>
BACKGROUND
The Company began as a value-added reseller in the wholesale distribution
of accounting software (Distribution Control System) in 1982. During the
fiscal year ended November 30, 1999, the Company derived approximately 67% 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,
1999 and 1998. 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):. . 1999 1998
-------------------------- -------------
Net sales . . . . . . . . . . . . $ 29,377,592 $ 28,250,373
Cost of sales . . . . . . . . . . (16,780,838) (18,033,402)
-------------------------- -------------
Gross profit. . . . . . . . . . . 12,596,754 10,216,971
Income from operations. . . . . . 1,261,686 1,544,157
Other income. . . . . . . . . . . 567,157 332,012
Income from continuing operations 1,249,043 1,089,578
Diluted earnings per share- . . . $ . 33 $ . 28
Continuing operations
Weighted average number of. . . . 3,832,067 3,888,033
shares outstanding-diluted
<CAPTION>
Years Ended November 30,
<S> <C> <C>
1999 1998
----------- -----------
BALANCE SHEET DATA:
Cash and investments . . . $14,425,071 $17,677,008
Working capital. . . . . . 18,452,329 16,970,488
Total assets . . . . . . . 26,862,937 27,620,329
Short-term debt. . . . . . - -
Long-term debt . . . . . . - -
Total stockholders' equity 19,990,765 18,395,164
<FN>
(1) Figures for 1999 and 1998 reflect results from continuing operations.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS BY PRODUCT LINE FOR THE FISCAL YEARS ENDED NOVEMBER 30, 1999 AND 1998
(in thousands except per share items)
Year ended November 30, 1999 Year ended November 30, 1998
-------------------------------- --------------------------------
System Custom Network Recovery System Custom
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STS Sales Billing Services Services Total STS Sales Billing Total
------- ------- -------- ---------- ---------- ------- ------- ------ -------- -------
Sales, net. . . . . . $19,816 $ 7,857 $ 1,404 $ 165 $ 136 $29,378 $21,461 $5,570 $ 1,219 $28,250
Cost of sales . . . . 14,766 1,980 35 - - 16,781 16,504 1,529 - 18,033
------- ------- -------- ---------- ---------- ------- ------- ------ -------- -------
Gross profit. . . . . 5,050 5,877 1,369 165 136 12,597 4,957 4,041 1,219 10,217
------- ------- -------- ---------- ---------- ------- ------- ------ -------- -------
General &
administrative
expenses:
General . . . . . . . 3,563 4,901 1,046 285 453 10,248 3,366 3,455 696 7,517
Depreciation. . . . . 160 137 21 - - 318 190 109 - 299
Amortization. . . . . - - - - - - - 2 - 2
Bad debt. . . . . . . 215 7 53 - - 275 332 94 3 429
Corporate
allocations:
General . . . . . . . 195 52 17 1 1 266 177 47 16 240
Depreciation. . . . . 101 99 23 5 - 228 137 37 12 186
------- ------- -------- ---------- ---------- ------- ------- ------ -------- -------
4,234 5,196 1,160 291 454 11,335 4,202 3,744 727 8,673
------- ------- -------- ---------- ---------- ------- ------- ------ -------- -------
Operating income. . . 816 681 209 (126) (318) 1,262 755 297 492 1,544
(loss)
Other income. . . . . 567 332
------- -------
Pretax income . . . . 1,829 1,876
Income tax provision. 580 786
------- -------
Income from
continuing
operations. . . . . $ 1,249 $ 1,090
======= =======
Diluted earnings per
share-continuing
operations. . . . . $ 0.33 $ 0.28
======= =======
</TABLE>
<PAGE>
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED NOVEMBER 30, 1999 AND 1998
The results of operations of the Company do not include the results of
operations GoodNet, its former 71% owned subsidiary which was sold in January
1998 and which is treated as a discontinued operation in the Company's
financial statements.
Revenues increased by 4.0% to $29,377,592 for the fiscal year ended
November 30, 1999, compared to $28,250,373 for the fiscal year ended November
30, 1998. 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 Program revenues were $19,815,617 for the fiscal year ended
November 30, 1999 compared to $21,461,885 for the fiscal year ended November
30, 1998, a decrease of 7.7%. This decrease resulted from a 22% decline in
STS Program revenues in the fourth quarter of 1999 compared to the fourth
quarter 1998. This decrease was primarily due to market pressure on both the
retail and wholesale sides, including increased competition from calling card
and wireless services. The Company is adjusting to market pressures both on
the retail and wholesale sides and is attempting to rebuild subscriber counts
by lowering rates. We expect this trend to stabilize at an approximately 22%
decline in revenues.
Revenues from System Sales and Maintenance were $7,856,532 for the fiscal
year ended November 30, 1999 compared to $5,569,733 for the fiscal year ended
November 30, 1998, an increase of 41.1%. Revenues from the TelMaster and
RATEX products increased by 139% and 15% respectively, for the year ended
November 30, 1999, compared to the year ended November 30, 1998.
This reflects an increase in excess of 200% in both the TelMaster and Ratex
products from the fourth quarter 1998 to the fourth quarter 1999 and a 50%
increase in TelMaster revenues from the third quarter 1999 to the fourth
quarter 1999. Approximately $1,044,000, or 49%, of the fiscal year increase
in TelMaster revenues is related to 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. Revenue
from the DCS product declined by 13% during the year ended November 30, 1999.
This decrease was primarily due to a significant decline in demand for this
text-based product. We expect DCS revenue to continue to decline in the
future.
For the fiscal years ended November 30, 1999 and 1998, revenues from
Customized Billing Outsourcing Services were approximately $1,404,000 and
$1,219,000, respectively. Recovery Services, which began operations in March
1999, had revenues of approximately $135,000 during fiscal 1999. Network
Services, which began operations in December 1998 and ceased operations in
August 1999, had revenues of approximately $165,000 during fiscal 1999.
<TABLE>
<CAPTION>
Fiscal Year Ended November 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
REVENUE
Telemanagement. . $ 3,652,921 $ 1,526,959 $ 1,368,985 $ 1,630,932 $ 1,963,787
DCS . . . . . . . 1,393,617 1,606,088 1,684,631 1,892,470 1,943,454
RATEX . . . . . . 2,809,994 2,436,686 1,143,864 1,578,444 873,497
----------- ----------- ----------- ----------- -----------
System Sales 7,856,532 5,569,733 4,197,480 5,101,846 4,780,738
STS . . . . . . . 19,815,617 21,460,885 17,430,383 15,092,010 14,465,157
Custom Billing. . 1,404,230 1,219,755 965,587 549,137 331,010
Network Services. 165,435 - - - -
Recovery Services 135,778 - - - -
----------- ----------- ----------- ----------- -----------
$29,377,592 $28,250,373 $22,593,450 $20,742,993 $19,576,905
</TABLE>
Total gross profit increased by 23.3% to $12,596,754 for the fiscal year
ended November 30, 1999, compared to $10,216,971 for the fiscal year ended
November 30, 1998. Cost of goods sold was approximately 74.5% of STS revenues
for the fiscal year ended November 30, 1999, compared with 76.9% for the
fiscal year ended November 30, 1998. This decrease is primarily due to the
decreased cost of long distance services from the Company's suppliers. Cost
of goods sold as a percentage of system sales and maintenance revenues was
25.2% for the fiscal year ended November 30, 1999 compared with 27.5% for the
fiscal year ended November 30, 1998. This improvement was due to a higher
percentage of TelMaster sales during fiscal 1999, which have a higher gross
profit rate than the RATEX and DCS products.
General and administrative expenses increased by 30.7%, or $2,662,254, in
fiscal 1999 to $11,335,068 from $8,672,814 in fiscal 1998. This increase was
primarily due to an increase in human resources in the areas of TelMaster
research and development, implementation, sales, and support services, as well
as the addition of the Network Services and Recovery Services divisions.
Research and development costs incurred and expensed during the fiscal years
ended November 30, 1999 and 1998 were $1,424,000 and $622,000, respectively.
Sales and support related expenses increased $267,000 and $238,000,
respectively from fiscal 1998 to fiscal 1999. Increased effort in the
Customized Billing division, primarily as a result of the Qwest project, also
contributed approximately $130,000 in increased customer service related
expenses. Recovery Services and Network Services divisions had operating
expenses of approximately $454,000 and $291,000, respectively, during the
fiscal year ended November 30, 1999. General and administrative expenses as a
percentage of revenues increased to 38.6% for the fiscal 1999, compared to
30.7% for the fiscal 1998. The Company expects to continue to experience
increases in TelMaster research and development, sales and professional
service expenses as part of its effort to increase TelMaster product sales.
The provision for income taxes was $579,800 and $786,591 for the fiscal
years ended November 30, 1999 and 1998, respectively. This represents 32% and
42% of income before provision for income taxes for fiscal 1999 and 1998,
respectively. This percentage decrease is primarily attributable to increased
interest from tax-free investments.
Income from continuing operations increased to $1,249,043 in fiscal 1999
from $1,089,578 in fiscal 1998. This was attributable to an approximate
$384,000 and $61,000 increase in operating income from the System Sales and
STS product lines, offset by operating losses of approximately $126,000 and
$318,000 from the Network Services and Recovery Services divisions,
respectively. The increase was also attributable to an approximate $250,000
increase in interest income.
For the year ended November 30, 1999, gain on the sale of GoodNet
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. It also represents the reversal of accrued lease
termination fees in the amount of $300,000. The Company no longer believes
that it will need to terminate any portion of its lease, as it will be used
for future expansion of the Company.
<PAGE>
DISCONTINUED OPERATIONS
Effective January 12, 1998, the Company, together with the minority
shareholders of GoodNet, entered into an agreement with 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 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.
MATERIAL CHANGES IN FINANCIAL POSITION
Cash and cash equivalents decreased to $2,157,701 at November 30, 1999
from $7,740,219 at November 30, 1998. During the fiscal year ended November
30, 1999, investment securities increased by approximately $2,331,000. The
Company's cash and investment holdings combined decreased by approximately
$3,251,000. During fiscal 1999, net cash from operating activities of
continuing operations used $2,563,489, which includes net taxes paid of
approximately $818,000. The Company used approximately $580,000 in cash to
purchase property and equipment for its continuing operations. 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 $844,600 in taxes related to the sale of GoodNet, including
this sale of the Winstar stock.
Accounts receivable increased to $9,937,537 as of November 30, 1999 from
$7,435,184 as of November 30, 1998 ($9,484,936 and $6,933,089, net of
allowance for uncollectibles as of November 30, 1999 and 1998, respectively).
This approximate $2,500,000 increase is due to an approximate $1,000,000
increase in TelMaster revenues for the month of November 1999 versus November
1998 and an approximate $700,000 increase in RATEX revenues from the fourth
quarter 1998 to the fourth quarter 1999.
As of November 30, 1999, the Company had a net current and deferred tax
asset of $158,900 compared with a net deferred tax asset of $43,700 on
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. The Company believes that it is likely
to realize the net deferred tax asset subject to the Company's ability to
generate profits in the future. Accordingly, no valuation allowance has been
provided.
Accounts payable and accrued liabilities ("payables") decreased to
$5,880,975 as of November 30, 1999 from $8,208,584 as of November 30, 1998.
This is partially attributable to an approximate $1,800,000 decline in STS
Program cost of sales from the fourth quarter 1998 to the fourth quarter 1999.
Additionally, a $300,000 accrual for an early lease termination fee was
reversed during fiscal 1999. This has been included with the "Gain on
disposal of GoodNet subsidiary" in the accompanying financial statements.
LIQUIDITY AND CAPITAL RESOURCES
At November 30, 1999, the Company had cash of $2,157,701 and investment
securities of $12,267,370. 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.
On February 3, 2000, the Company commenced an offer to repurchase up to
2.3 million shares of its common stock pursuant to a modified "Dutch auction''
self-tender offer. The tender offer price will be between $7.00 and $7.50 per
share in cash, which would result in the payment to tendering stockholders of
up to a maximum of an aggregate of $17.25 million if all 2.3 million shares
are tendered. The offer will expire at 12:00 Midnight, New York City time, on
Monday, March 6, 2000, unless extended. As a result of this tender, the
Company has established a 12-month line of credit in order to satisfy the
terms of the tender offer. If the maximum number of shares are tendered, the
Company believes it will require initial financing of approximately
$3,000,000. While the Company believes that it will be able to extend or
replace the current line of credit, there can be no assurance that this will
happen. The Company believes that cash flows from its business will allow it
to service the interest payments the Company will incur on this facility.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board Issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133 requires companies to recognize all derivative contracts as either assets
or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss
recognition as the hedging derivative with the recognition of (i) the changes
in the fair value of the hedged asset or liability that are attributable to
the hedged risk or (ii) the earnings effect of the hedged forecasted
transaction. For a derivative not designated as a hedging instrument, the gain
or loss is recognized in income in the period of change. SFAS No. 133 is
effective for all fiscal years beginning after June 15, 2000. Historically,
the Company has not entered into derivative contracts either to hedge existing
risks or for speculative purposes. The Company has not yet evaluated the
financial statement impact of adopting this new standard.
<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 needed to accept four digit entries to distinguish 21st century dates.
As a result, computer systems and/or software used by many companies needed 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 conducted 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 has made all known
material changes to internal systems in order to be Year 2000 compliant. 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. Although the
Year 2000 is now underway, it is possible that Year 2000 issues could still
arise. 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. Although
there have been no material Year 2000 issues to date, there can be no
assurance there will be no 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.
There has been no disagreement on accounting and financial disclosure
with the Company's accountants within the two years prior to the date of the
most recent financial statements requiring disclosure under this item and any
accountants' reports on the financial statements of the Company for the past
two years has contained no adverse opinion and no disclaimer of opinion and
was not qualified as to uncertainty, audit scope or accounting principles.
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>
NAME AGE POSITION
- ------------------------- --- -----------------------------------------------------------------------------------
Michael F. Zerbib(1)(2).. 33 President, Chief Executive Officer, Chief Financial Officer, Treasurer and Director
Joseph W. Zerbib. . . . . 64 Chairman of the Board of Directors
Thierry E. Zerbib . . . . 38 Vice President-Technologies, Secretary and Director
Brian H. Loeb . . . . . . 38 Vice President-Marketing, Sales and Operations and
Director
Cecile Silverman(1)(2) .. 75 Director
Kalvan Swanky (2) . . . . 36 Director
</TABLE>
______________________________________
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
Michael F. Zerbib has been President and Chief Executive Officer of the
Company since February 2000 and 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.
Joseph W. Zerbib has been Chairman of the Board of Directors since 1982.
From 1982 to February 2000, he served as President and Chief Executive Officer
of the Company.
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.
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, 1999, the Board of Directors
held three meetings. All directors attended these meetings.
Audit Committee. The Board of Directors 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, 1999.
Compensation Committee. The Board of Directors 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, 1999.
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. In October 1996, 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 $3.00 per share through
October 2001. 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. None of the
options granted were pursuant to any stock option plan.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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, 1999.
<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, 1999, 1998, and 1997.
<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 . . 1999 $ 144,000 -0- -0- -0- -0- -0- -0-
President and Chief
Executive Officer
1998 $ 144,000 $ 150,000 -0- -0- -0- -0- -0-
1997 $ 144,000 -0- -0- -0- 26,000 -0- -0-
- -------------------- ---- ------------ --------- ------- ---------- ---------- ------- -------
Thierry E. Zerbib. . 1999 $ 154,000 -0- -0- -0- -0- -0- -0-
Vice President -
Technologies and
Secretary
1998 $ 144,000 $ 150,000 -0- -0- -0- -0- -0-
1997 $ 144,000 -0- -0- -0- 26,000 -0- -0-
- -------------------- ---- ------------ --------- ------- ---------- ---------- ------- -------
Michael F. Zerbib. . 1999 $ 144,000 -0- -0- -0- -0- -0- -0-
Chief Financial
Officer
and Treasurer
1998 $ 144,000 $ 150,000 -0- -0- -0- -0- -0-
1997 $ 104,000 -0- -0- -0- 26,000 -0- -0-
- -------------------- ---- ------------ --------- ------- ---------- ---------- ------- -------
Brian H. Loeb. . . . 1999 $ 144,000 -0- -0- -0- -0- -0- -0-
Vice President -
Marketing, Sales and
Operations
1998 $ 144,000 $ 150,000 -0- -0- -0- -0- -0-
1997 $ 144,000 -0- -0- -0- 26,000 -0- -0-
- -------------------- ---- ------------ --------- ------- ---------- ---------- ------- -------
<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>
The executive officers of the Company named above routinely receive other
benefits from the Company, the amounts of which are customary in the industry.
The Company has concluded, after reasonable inquiry, that the aggregate
amounts of such benefits during the years ended November 30, 1999 and 1998 did
not exceed the lesser of $50,000 or 10% of the compensation set forth above as
to any named individual.
<PAGE>
OPTION GRANTS IN FISCAL 1999
There were no options granted to the Company's executive officers during
fiscal 1999.
<TABLE>
<CAPTION>
OPTION EXERCISES IN FISCAL 1999
<S> <C> <C> <C> <C>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at FY-End at FY-end
Acquired Value Exercisable / Exercisable /
Name on Exercise Realized Unexercisable Unexercisable
- ---------------- ----------- -------- ---------------------- ----------------------
Joseph W. Zerbib -0- $0 73,500 / 19,500 $21,650 / $16,588
Thierry E. Zerbib -0- $0 69,750 / 18,250 $17,853 / $15,322
Michael F. Zerbib -0- $0 75,000 / 20,000 $23,169 / $17,094
Brian H. Loeb -0- $0 69,750 / 18,250 $17,853 / $15,322
</TABLE>
STOCK OPTION 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, 1999, 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, 1999, 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.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of February 10,
2000, 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, (iii) each executive officer whose compensation exceeded $100,000 in
the fiscal year ended November 30, 1999, 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>
Amount and Nature of Percent
<S> <C> <C>
Beneficial Ownership(2) of Class
----------------------- ---------
Name and Address of Beneficial Owner(1)
- ---------------------------------------
Thierry E. Zerbib . . . . . . . . . . . 647,250(3) 15.9%
Brian H. Loeb . . . . . . . . . . . . . 647,250(4) 15.9%
Michael F. Zerbib . . . . . . . . . . . 647,500(5) 15.9%
Joseph W. Zerbib. . . . . . . . . . . . 367,250(6) 9.0%
Nicholas Zerbib . . . . . . . . . . . . 293,750 7.2%
Cecile Silverman. . . . . . . . . . . . 3,000(7) *
Kalvan Swanky . . . . . . . . . . . . . 3,000(7) *
All executive officers and directors
as a group (six persons). . . . . . . 2,315,250(8) 56.73%
<FN>
______________________________
* 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 10, 2000 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 10,
2000, have been exercised.
(3) Includes 69,750 shares of Common Stock issuable upon exercise of
currently exercisable options. Does not include 18,250 shares of Common Stock
underlying options, 4,000 of which vest in April 2000, 7,750 of which vest in
October 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 69,750 shares of Common Stock issuable upon
exercise of currently exercisable options. Does not include 18,250 shares of
Common Stock underlying options, 4,000 of which vest in April 2000, 7,750 of
which vest in October 2000 and 6,500 of which vest in October 2001.
(5) Includes 75,000 shares of Common Stock issuable upon exercise of
currently exercisable options. Does not include 20,000 shares of Common Stock
underlying options, 4,000 of which vest in April 2000, 9,500 of which vest in
October 2000 and 6,500 of which vest in October 2001.
(6) Includes 73,500 shares of Common Stock issuable upon exercise of
currently exercisable options. Does not include 19,500 shares of Common Stock
underlying options, 4,000 of which vest in April 2000, 9,000 of which vest in
October 2000 and 6,500 of which vest in October 2001.
(7) Includes 3,000 shares of Common Stock issuable upon exercise of
currently exercisable options.
(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.
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED 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
continued to pay rent through July 1998.
In February 2000, in connection with the Company's self-tender offer and
Joseph Zerbib's retirement as the Company's President and Chief Executive
Officer, the Board of Directors approved to purchase all 293,750 shares of the
Company's Common Stock held by Joseph W. Zerbib at a price of $7.25 per share.
The Company will purchase these shares at the earlier of the time the Company
is deemed to have accepted for payment the shares of Common Stock in the
self-tender off and March 31, 2000.
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>
DESCRIPTION REFERENCE
--------------------------------------------------------------------------------- ----------
NO.
- -----
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 (3)
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 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, 1999.
<PAGE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-27
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: February 28, 2000 By /s/ Michael F. Zerbib
----------------------------------
Michael F. 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/ Michael F. Zerbib February 28, 2000
- -----------------------------
Michael F. Zerbib, President, Chief Executive Officer,
Chief Financial Officer, Treasurer and Director (and
principal accounting officer)
/s/ Joseph W. Zerbib February 28, 2000
- ----------------------------
Joseph W. Zerbib,
Chairman of the Board of Directors
/s/ Thierry E Zerbib February 28, 2000
- ----------------------------
Thierry E. Zerbib, Vice President - Technologies,
Secretary and Director
/s/ Brian H. Loeb February 28, 2000
- -------------------------
Brian H. Loeb, Vice President - Marketing,
Sales and Operations and Director
/s/ Cecile Silverman February 28, 2000
- ---------------------------
Cecile Silverman, Director
/s/ Kalvan Swanky February 28, 2000
- ------------------------
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 Sheets as of November 30, 1999 and 1998. . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the years ended November 30, 1999 and 1998. . . . . . . . . . . F-4 - F-5
Consolidated Statements of Changes in Stockholders' Equity for the years ended November 30, 1999 and 1998 F-6
Consolidated Statements of Cash Flows for the years ended November 30, 1999 and 1998. . . . . . . . . . . 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 sheets of Telesoft Corp.
and Subsidiaries as of November 30, 1999 and 1998 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation
of the financial statements. We believe that our 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, 1999 and 1998 and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ BDO Seidman, LLP
Los Angeles, California
January 14, 2000
<TABLE>
<CAPTION>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1999 AND 1998
1999 1998
---- ----
ASSETS
<S> <C> <C>
Cash and cash equivalents (Note 2). . . . . . . . . . . . . . . . . . . . . $ 2,157,701 $ 7,740,219
Investment securities (Notes 3 and 17). . . . . . . . . . . . . . . . . . . 12,267,370 9,936,789
Accounts receivable, net of allowance for uncollectibles of $452,601 and. .
$502,095, respectively (Notes 2 and 4) . . . . . . . . . . . . . . . . . 9,484,936 6,933,089
Inventory (Note 5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 366,794 626,170
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . 462,626 -
Deferred taxes (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . 221,100 170,800
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301,774 661,486
----------- -----------
Total Current Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,262,301 26,068,553
Property and equipment, net (Note 6). . . . . . . . . . . . . . . . . . . . 1,320,246 1,146,766
Computer software costs, net (Note 7) . . . . . . . . . . . . . . . . . . . 169,667 314,962
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,723 90,048
----------- -----------
Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26,862,937 $27,620,329
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 147,239
Accounts payable and accrued liabilities (Note 2) . . . . . . . . . . . . . 5,880,975 8,208,584
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 928,997 742,242
----------- -----------
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 6,809,972 9,098,065
Deferred taxes (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . 62,200 127,100
----------- -----------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,872,172 9,225,165
----------- -----------
Commitments and contingencies (Notes 11, 13 and 14)
Stockholders' Equity: (Notes 10 and 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 3,711,500 and 3,748,500 outstanding, respectively. 6,919,095 7,103,400
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . 80,069 80,069
Accumulated other comprehensive income (Note 3) . . . . . . . . . . . . . . 66,120 84,566
Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,925,481 11,127,129
----------- -----------
Total Stockholders' Equity. . . . . . . . . . . . . . . . . . . . . . . . . 19,990,765 18,395,164
----------- -----------
Total Liabilities and Stockholders' . . . . . . . . . . . . . . . . . $26,862,937 $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, 1999 AND 1998
<S> <C> <C>
1999 1998
------------ ------------
Sales, net. . . . . . . . . . . . . . . . . . . . . . . $29,377,592 $28,250,373
Cost of sales (Note 2). . . . . . . . . . . . . . . . . 16,780,838 18,033,402
------------ ------------
Gross profit. . . . . . . . . . . . . . . . . . . . . . 12,596,754 10,216,971
General and administrative expenses (Note 16) . . . . . 11,335,068 8,672,814
------------ ------------
Operating income. . . . . . . . . . . . . . . . . . . . 1,261,686 1,544,157
------------ ------------
Other income (expense):
Interest income . . . . . . . . . . . . . . . . . . . . 564,804 292,295
Interest expense. . . . . . . . . . . . . . . . . . . . (270) (1,277)
Other income (expense). . . . . . . . . . . . . . . . . 2,623 40,994
------------ ------------
567,157 332,012
------------ ------------
Income from continuing operations before provision. . . 1,828,843 1,876,169
for income taxes
Provision for income taxes (Note 9) . . . . . . . . . . (579,800) (786,591)
------------ ------------
Income from continuing operations . . . . . . . . . . . 1,249,043 1,089,578
Discontinued operations (Note 17):
Loss from operations of GoodNet subsidiary (net of. - (68,428)
income tax of $2,173 in 1998)
Gain on disposal of GoodNet subsidiary (net of
income taxes of $357,700 in 1999 and
$4,611,099 in 1998). . . . . . . . . . . . . . 549,309 8,565,700
------------ ------------
Net income. . . . . . . . . . . . . . . . . . . . . . . 1,798,352 9,586,850
Other comprehensive (loss) income, net of tax
Unrealized holding (losses) gains arising during . .
period . . . . . . . . . . . . . . . . . . . . . . (18,446) 84,566
------------ ------------
Comprehensive income. . . . . . . . . . . . . . . . . . $ 1,779,906 $ 9,671,416
============ ============
</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, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------- -----------
<S> <C> <C>
Basic earnings (loss) per share
Continuing operations . . . . . . $ 0.33 $ 0.29
Discontinued operations . . . . . - (0.02)
Sale of discontinued operations . 0.15 2.26
---------- -----------
Net income. . . . . . . . . . . . $ 0.48 $ 2.53
========== ===========
Diluted earnings (loss) per share
Continuing operations . . . . . . $ 0.33 $ 0.28
Discontinued operations . . . . . - (0.02)
Sale of discontinued operations . 0.14 2.20
---------- -----------
Net income. . . . . . . . . . . . $ 0.47 $ 2.46
========== ===========
Weighted average number
of shares outstanding
- - basic . . . . . . . . . . . . . 3,713,601 3,784,793
- - diluted . . . . . . . . . . . . 3,832,067 3,888,033
========== ===========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 1999 AND 1998
Common Stock
--------------
<S> <C> <C> <C> <C> <C> <C>
Accumulated
Number of Additional Other
Shares Paid-In Comprehensive Retained Total Stockholders'
Outstanding Amount Capital Income Earnings Equity
-------------- ------------ -------------- ------------ --------------- -------------------
Balance, November 30, 1997. . . . 3,787,500 $ 7,286,159 $ 80,069 $ - $ 1,540,279 $ 8,906,507
Treasury Stock acquired (Note 10) (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
Treasury Stock acquired (Note 10) (37,000) (184,305) - - - (184,305)
Change in unrealized gain on
Investment securities . . . . - - - (18,446) - (18,446)
Net income. . . . . . . . . . . . - - - - 1,798,352 1,798,352
-------------- ------------ -------------- ------------ --------------- -------------------
Balance, November 30, 1999. . . . 3,711,500 $ 6,919,095 $ 80,069 $ 66,120 $ 12,925,481 $ 19,990,765
============== ============ ============== ============ =============== ===================
</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, 1999 AND 1998
<S> <C> <C>
1999 1998
------------- -------------
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Cash received from customers . . . . . . . . . . . . . $ 26,737,413 $ 26,498,226
Cash paid to suppliers and employees . . . . . . . . . (28,989,264) (23,120,762)
Interest paid. . . . . . . . . . . . . . . . . . . . . (270) (1,277)
Interest received. . . . . . . . . . . . . . . . . . . 506,597 208,311
Income taxes paid. . . . . . . . . . . . . . . . . . . (817,965) (900,165)
------------- -------------
Net cash (used) provided by operating activities
of continuing operations. . . . . . . . . . . . . (2,563,489) 2,684,333
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment . . . . . . . . . . (578,912) (617,037)
Cash received from sale of equipment . . . . . . . . . 7,653 27,951
Disbursements for notes receivable from related
Parties . . . . . . . . . . . . . . . . . . . . . . (50,000) (2,000)
Collection of notes receivable . . . . . . . . . . . . 373,153 -
Purchase of investment securities. . . . . . . . . . . (6,616,250) (7,350,000)
Sale of investment securities. . . . . . . . . . . . . 4,874,232 13,971,131
------------ -------------
Net cash (used) provided by investing activities
of continuing operations. . . . . . . . . . . . . (1,990,124) 6,030,045
------------- -------------
Cash flows from financing activities:
Purchases of treasury stock. . . . . . . . . . . . . . (184,305) (182,759)
------------- -------------
Net cash used in financing activities of
continuing operations . . . . . . . . . . . . . . (184,305) (182,759)
------------- -------------
Cash (used) provided by continuing operations. . . . . (4,737,918) 8,531,619
Cash used in discontinued operations, including income
taxes paid in the amount of $844,600 in 1999 and
$3,866,100 in 1998. . . . . . . . . . . . . . . . . (844,600) (2,413,184)
------------- -------------
Net (decrease) increase in cash and cash equivalents . (5,582,518) 6,118,435
Cash and cash equivalents at beginning of fiscal year. 7,740,219 1,621,784
------------- -------------
Cash and cash equivalents at end of fiscal year. . . . $ 2,157,701 $ 7,740,219
============= =============
</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, 1999 AND 1998
1999 1998
------------ ------------
<S> <C> <C>
Reconciliation of Net Income to Net Cash
(Used) Provided by Operating Activities
from Continuing Operations:
Net Income . . . . . . . . . . . . . . . . . . . . $ 1,798,352 $ 9,586,850
------------ ------------
Adjustments to reconcile net income (loss) to net
cash (used) provided by operating activities
from continuing operations:
Loss from discontinued operations. . . . . . . . . - 68,428
Gain on sale of discontinued operations. . . . . . (549,309) (8,565,700)
Income taxes payable and deferred taxes
related to sale of discontinued operations. . . 486,900 (744,999)
Depreciation and amortization. . . . . . . . . . . 545,590 486,481
Gain on sale of fixed assets . . . . . . . . . . . (2,516) (20,659)
Interest income included with note receivable. . . (2,294) (21,525)
Changes in Assets and Liabilities:
Accounts receivable. . . . . . . . . . . . . . . . (2,551,847) (1,424,169)
Inventory. . . . . . . . . . . . . . . . . . . . . 259,376 (269,574)
Other current assets . . . . . . . . . . . . . . . 38,853 (85,871)
Deferred taxes . . . . . . . . . . . . . . . . . . (115,200) 534,500
Other assets . . . . . . . . . . . . . . . . . . . (20,675) 5,227
Accounts payable and accrued liabilities . . . . . (2,027,609) 2,957,442
Deferred revenue . . . . . . . . . . . . . . . . . 186,755 80,977
Income taxes payable . . . . . . . . . . . . . . . (147,239) (139,056)
Income taxes receivable. . . . . . . . . . . . . . (462,626) 235,981
------------ ------------
(4,361,841) (6,902,517)
------------ ------------
Net cash (used) provided by operating activities . $(2,563,489) $ 2,684,333
from 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 in 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
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 subsidiaries, Telesoft Acquisition Corp and
Telesoft Recovery Corp., and its former 71% owned subsidiary, Telesoft
Acquisition Corp II, d.b.a. GoodNet ("GoodNet"). (See Note 17)
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, accounts payable and
accrued liabilities 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, 1999.
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. Leasehold improvements are
recorded at cost and amortized over the shorter of the lives of the leases or
estimated useful lives.
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>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 AICPA Statement of Position 97-2 "Software
Revenue Recognition" ("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.
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board Issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
requires companies to recognize all derivative contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge,
the objective of which is to match the timing of gain or loss recognition as
the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged
risk or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS No. 133 is effective for
all fiscal years beginning after June 15, 2000. Historically, the Company has
not entered into derivative contracts either to hedge existing risks or for
speculative purposes. The Company has not yet evaluated the financial
statement impact of adopting this new standard.
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, 1999, the Company
had uninsured cash and cash equivalent bank balances of approximately
$2,203,000.
SUPPLIERS
One telecommunications company provides the Company with a significant
portion of its long distance telecommunications services. Although the
Company is dependent upon this supplier, management believes comparable
suppliers are available. For the fiscal years ended November 30, 1999 and
1998, fees paid to this company totaled approximately $2,323,000 and
$2,640,000, respectively. As of November 30, 1999, the outstanding amount due
to the service provider was approximately $583,000.
CUSTOMERS
During the years ended November 30, 1999 and 1998, the Company did not
have any customers that accounted for greater than 10% of its revenues.
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT SECURITIES:
The following is a summary of investment securities as of November 30,
1999 and 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cost Gross Estimated
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
<CAPTION>
<S> <C> <C> <C>
Cost Gross Estimated
unrealized gains Fair Value
November 30, 1998
- --------------------------------
Available-for-sale securities:
U.S. Corporate Equity Securities $2,302,223 $ 84,566 $ 2,386,789
Municipal bonds. . . . . . . . . 7,550,000 -0- 7,550,000
----------------- ---------------- ----------
$9,852,223 $ 84,566 $ 9,936,789
</TABLE>
The amortized cost or carrying amount and fair value (based on quoted market
prices) of securities available for sale at November 30, 1999 are shown below.
Expected maturities will differ from contractual maturities because issuers of
the securities may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Securities Available-for-Sale
------------------------------
<S> <C> <C>
Amortized cost Fair Value
------------------------------ -----------
Due after twenty-five years through thirty years 6,500,000 6,500,000
Due after thirty years through thirty-five years 5,550,000 5,550,000
------------------------------ -----------
$ 12,050,000 $12,050,000
</TABLE>
<TABLE>
<CAPTION>
Investment income fro the years ended November 30, 1999 and 1998:
1999 1998
<S> <C> <C>
Interest income. . . . . . . . . . . . . . . . . $ 564,804 $292,295
Gross realized gains, included with continuing . 107 92
operations
Gross realized gains, included with discontinued 607,009 371,130
operations ---------- --------
$1,171,920 $663,517
========== ========
</TABLE>
4. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
At November 30, 1999, accounts receivable include billed and unbilled amounts,
as follows:
<S> <C>
Billed. . . . . . . . . . . . . . $8,275,609
Unbilled. . . . . . . . . . . . . 1,661,928
-----------
9,937,537
Less: allowance for uncollectibles (452,601)
-----------
$9,484,936
===========
</TABLE>
Unbilled accounts receivable represent amounts earned but not billed for long
distance telephone service.
<TABLE>
<CAPTION>
At November 30, 1999, accounts receivable by product line is as follows:
<S> <C> <C> <C> <C> <C> <C>
STS Custom System Sales/ Recovery Network Total
Outsourcing Billing Maintenance Services Services
------------- --------- --------------- --------- --------- -----------
Billed . . $ 3,472,295 $366,156 $ 4,380,521 $ 28,629 $ 28,008 $8,275,609
Unbilled . 1,630,428 31,500 -0- -0- -0- 1,661,928
Allowance. (336,691) (54,800) (61,110) -0- -0- (452,601)
------------- --------- --------------- --------- --------- -----------
Total, Net $ 4,766,032 $342,856 $ 4,319,411 $ 28,629 $ 28,008 $9,484,936
============= ========= =============== ========= ========= ===========
</TABLE>
At November 30, 1998, accounts receivable by product line is as follows:
STS Custom System Sales/ Total
Outsourcing Billing Maintenance
----------- ----------- ------------ ------------
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
=========== =========== ============ ============
5. INVENTORY:
<TABLE>
<CAPTION>
At November 30, 1999, inventory consists of:
<S> <C>
Parts and equipment. . . . . . . . . . . . . $183,918
Finished products. . . . . . . . . . . . . 182,876
--------
$366,794
========
</TABLE>
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
At November 30, 1999, property and equipment consists of:
<S> <C>
Equipment . . . . . . . . . . . . . . . . . . . . . . . . $ 2,229,851
Vehicles. . . . . . . . . . . . . . . . . . . . . . . . . 28,458
Furniture and fixtures. . . . . . . . . . . . . . . . . . 402,638
Leasehold improvements. . . . . . . . . . . . . . . . . . 71,513
Property leased to others . . . . . . . . . . . . . . . . 351,518
------------
3,083,978
Accumulated depreciation and amortization . . . . . . . . (1,763,732)
------------
$ 1,320,246
============
</TABLE>
Depreciation and amortization expense from continuing operations was
$400,295 and $338,917 for the fiscal years ended November 30, 1999 and 1998,
respectively. Depreciation expense, included with the net loss from
discontinued operations was $113,846 for the fiscal year ended November 30,
1998.
7. COMPUTER SOFTWARE COSTS:
<TABLE>
<CAPTION>
At November 30, 1999, computer software costs capitalized are:
<S> <C>
Computer software. . . . . . . . . . . . . . . . . . . . . . . $ 987,885
Accumulated amortization . . . . . . . . . . . . . . . . . . . (818,218)
----------
$ 169,667
==========
</TABLE>
Amortization expense from continuing operations related to computer
software cost during the years ended November 30, 1999 and 1998 was $145,295
and $145,480, respectively. There was no amortization expense attributable to
discontinued operations for the years ended November 30, 1999 and 1998.
8. INTANGIBLES:
<TABLE>
<CAPTION>
At November 30, 1999, intangibles consist of:
<S> <C>
Covenant Not-to-Compete-RATEX . . . . . . . . $ 25,000
Accumulated amortization. . . . . . . . . . . (25,000)
---------
$ -
=========
</TABLE>
Amortization expense for continuing operations was $2,084 during the
years ended November 30, 1998. Amortization expense from discontinued
operations was $35,294 during the year ended November 30, 1998.
<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, 1999 and 1998 consist
of:
1999 1998
-------- -----------
<S> <C> <C>
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $764,718 $5,347,917
Deferred. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172,782 47,600
-------- -----------
Provision for income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . $937,500 $5,395,517
======== ===========
Provision for income taxes attributable to continuing operations. . . . . . . . . $579,800 $ 786,591
Income tax benefit attributable to loss from operations of GoodNet subsidiary . . - (2,173)
Provision for income taxes attributable to Gain on disposal of GoodNet subsidiary 357,700 4,611,099
-------- -----------
Provision for income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . $937,500 $5,395,517
======== ===========
<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>
1999 1998
---------- ---------
Expected. . . . . . . . . . . . . . $ 621,800 $637,891
Tax exempt interest income. . . . . (148,400) (55,000)
Non deductible portion of
meals and entertainment. . . . 10,200 9,600
State taxes, net of federal benefit 96,200 194,100
---------- ---------
Provision for income taxes
attributable to continuing
operations . . . . . . . . . . . $ 579,800 $786,591
========== =========
</TABLE>
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES: (CONTINUED)
<TABLE>
<CAPTION>
The income tax effect of temporary differences between financial and tax
reporting gives rise to the deferred income tax assets and liabilities as
follows:
<S> <C> <C>
1999 1998
---------- ----------
Current asset
Allowance for uncollectibles . . . . . . . . . . . $ 153,900 $ 225,900
Deferred revenue . . . . . . . . . . . . . . . . . 19,000 247,200
Inventory allowance. . . . . . . . . . . . . . . . 23,000 -
Timing differences from IRS audit. . . . . . . . . 25,200 184,600
Gain on sale of subsidiary - sale of Winstar Stock - (486,900)
---------- ----------
221,100 170,800
---------- ----------
Non-current liability
Deferred revenue . . . . . . . . . . . . . . . . . - 25,200
Accumulated depreciation . . . . . . . . . . . . . (68,000) (160,800)
Accumulated amortization . . . . . . . . . . . . . 5,800 8,500
---------- ----------
(62,200) (127,100)
---------- ----------
Net deferred tax asset . . . . . . . . . . . . . . $ 158,900 $ 43,700
========== ==========
</TABLE>
The Company believes that it is likely to realize the net deferred tax asset
subject to the Company's ability to generate profits in the future.
Accordingly, no 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, 1999, 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, 1999, 125,000
common stock warrants were outstanding.
DIVIDEND POLICY
The Company has no limitations or restrictions for declaring dividends. As of
November 30, 1999, 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 years ended November 30, 1999 and
1998, the Company repurchased 37,000 and 39,000 shares of its common stock on
the open market for $184,305 and $182,759, respectively.
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. In
December 1998, the Company granted 25,000 options to employees at an exercise
price of $4.875 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. No shares
were granted under any of the Restricted Stock Plans. 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.
<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 Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding at December 1, 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
Granted . . . . . . . . . . . . . . . . . . . 25,000 4.875
Exercised . . . . . . . . . . . . . . . . . . - -
Forfeited . . . . . . . . . . . . . . . . . . (2,900) 3.04
--------- ----------------
Outstanding at November 30, 1999 748,900 4.62
========= ================
Options exercisable at November 30, 1999. . . 573,875 4.96
</TABLE>
Available for grant at: (a)
November 30, 1998 772,700
November 30, 1999 775,100
(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, 1999:
Outstanding Options Exercisable Options
------------------- -------------------
<S> <C> <C> <C> <C> <C>
Weighted Weighted
average Weighted Average
Exercise price remaining average Exercise
Range Number contractual life exercise price Number price
- --------------- --------------- ---------------- -------------- ------- ----------
6.00-$6.60 . . 245,400 6 years $ 6.40 245,400 $ 6.40
3.00-$5.88 . . 221,700 7 years 4.33 167,575 4.35
2.94-$3.23 . . 221,800 8 years 3.08 110,900 3.10
3.13 . . . . . 20,000 8 years 3.13 20,000 3.13
4.00 . . . . . 5,000 8 years 4.00 2,500 4.00
4.25 . . . . . 10,000 9 years 4.25 2,500 4.25
4.88 . . . . . 25,000 10 years 4.88 25,000 4.88
2.94 - $6.60 . 748,900 7 years $ 4.62 573,875 $ 4.96
=============== =============== ================ ============== ======= =========
</TABLE>
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK PLANS: (CONTINUED)
OTHER OPTIONS
No other options were granted during the years ended November 30, 1999 and
1998.
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, 1999 and 1998.
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 and diluted earnings per share for the
fiscal years ended November 30, 1999 and 1998 would have been reduced to the
pro-forma amounts presented below:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---------- ----------
Net income as reported . . . . . $1,798,353 $9,586,850
Pro-forma. . . . . . . . . . . . $1,636,018 $9,572,002
Net income per share as reported $ 0.47 $ 2.46
Pro-forma. . . . . . . . . . . . $ 0.43 $ 2.46
</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 1999 and 1998; expected life of options of
one to three years, expected volatility of 24% in 1999 and 37% in 1998,
risk-free interest rates of 8%, and a 0% dividend yield. The weighted average
fair value at date of grant for options granted during 1999 approximated $1.03
and options granted in 1998 approximated $1.16.
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 for
the fiscal year ended November 30, 1998. 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.
LINE OF CREDIT
At November 30, 1999, the Company has an outstanding a 7%, $500,000 line of
credit from an officer. The line of credit is secured by 572,500 shares of
the Company's common stock held by the officer. The line of credit, including
accrued interest, is due in June 2000. As of November 30, 1999, the
outstanding balance on the line of credit was $50,000.
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, 1999 and 1998, contributions
were $46,878 and $37,085, 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, 1999, 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> <C>
2000 $ 490,978
2001 457,909
2002 463,409
2003 477,709
2004 490,909
Thereafter 1,609,429
----------
Total $3,990,343
=================== ==========
</TABLE>
Rent expense under all operating leases, including the related party lease
amounted to approximately $335,000 and $304,000 for the years ended November
30, 1999 and 1998, 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
$351,518. Accumulated depreciation was $330,131 as of November 30, 1999.
During the fiscal years ended November 30, 1999 and 1998, the Company received
rental income of $47,587 and $90,787, 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, 1999 and 1998, the Company received $37,065 and $33,288, respectively
under this agreement.
As of November 30, 1999, 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> <C>
NOVEMBER 30, AMOUNT
------------------- ---------
2000 $ 57,400
---------
Total future minimum rentals $ 57,400
=========
</TABLE>
16. RESEARCH AND DEVELOPMENT:
Research and development costs included in general and administrative expenses
for the fiscal years ended November 30, 1999 and 1998 were $1,424,000 and
$622,000, respectively. These costs have been expensed during their
respective fiscal years.
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. 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 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 results of operations of GoodNet have been shown as discontinued
operations in the accompanying financial statements.
<TABLE>
<CAPTION>
The following table reconciles the numerators and denominators of the basic and diluted earnings per share:
YEAR ENDED NOVEMBER 30,
-----------------------
<S> <C> <C>
1999 1998
------------ ----------
BASIC EARNINGS PER COMMON SHARE:
- ----------------------------------------------
NUMERATOR
Income from continuing operations. . . . . . . . . . $1,249,043 $1,089,578
Loss from operations of GoodNet subsidiary - (68,428)
Gain on disposal of GoodNet. . . . . . . . . . . . . 549,309 8,565,700
------------ ----------
Net earnings available to common shareholders. . . . $1,798,352 $9,586,850
============ ==========
DENOMINATOR
<S> <C> <C>
Weighted average number of shares outstanding 3,713,601 3,784,793
PER SHARE AMOUNTS
Income from continuing operations. . . . . . . . . . $ .33 $ .29
Loss from operations of GoodNet subsidiary . . . . . - (.02)
Gain on disposal of GoodNet. . . . . . . . . . . . . .15 2.26
----------- ----------
Net earnings (loss) available to common shareholders $ .48 $ 2.53
========== ==========
<CAPTION>
<S> <C> <C>
1999 1998
------------ ----------
DILUTED EARNINGS PER COMMON SHARE:
- ----------------------------------------------
NUMERATOR
Income from continuing operations. . . . . . . . . . $1,249,043 $1,089,578
Loss from operations of GoodNet subsidiary - (68,428)
Gain on disposal of GoodNet. . . . . . . . . . . . . 549,309 8,565,700
------------ ----------
Net earnings available to common shareholders. . . . $1,798,352 $9,586,850
============ ==========
DENOMINATOR
Weighted average number of shares outstanding. . . . . 3,713,601 3,784,793
Effect of dilutive securities: . . . . . . . . . . . . 339,700 342,500
Options and warrants
Stock acquired with proceeds . . . . . . . . . . . . . (221,234) (239,260)
------------ ----------
Weighted average common shares and assumed conversions
outstanding . . . . . . . . . . . . . . . . . . . 3,832,067 3,888,033
============ ==========
PER SHARE AMOUNTS
Income from continuing operations. . . . . . . . . . . $ .33 $ .28
Loss from operations of GoodNet subsidiary . . . . . . - (.02)
Gain on disposal of GoodNet. . . . . . . . . . . . . . .14 2.20
------------ ----------
Net earnings (loss) available to common shareholders . $ .47 $ 2.46
============ ==========
</TABLE>
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. EARNINGS PER SHARE: (CONTINUED)
At November 30, 1999, warrants and options to acquire 535,200 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, 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.
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. SEGMENT INFORMATION
The Company's products and services are broken down as follows:
1) STS Outsourcing Program
(2) Customized Billing Outsourcing Services
(3) System Sales and Maintenance
(a) TelMaster and Telecommunications Management System ("TMS")
(b) RATEX Bookstore Solution
(c) Distribution Control System ("DCS")
(d) Software and Hardware Recurring Maintenance Revenue
(4) Telesoft Recovery Services ("TRC")
(5) Network Services
<TABLE>
<CAPTION>
Following is selected segment information. (in thousands except per share
items)
Year ended November 30, 1999 Year ended November 30, 1998
-------------------------------- --------------------------------
System Custom Network Recovery System Custom
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STS Sales Billing Services Services Total STS Sales Billing Total
------- ------- -------- ---------- ---------- ------- ------- ------ -------- -------
Sales, net. . . . . . $19,816 $ 7,857 $ 1,404 $ 165 $ 136 $29,378 $21,461 $5,570 $ 1,219 $28,250
Cost of sales . . . . 14,766 1,980 35 - - 16,781 16,504 1,529 - 18,033
------- ------- -------- ---------- ---------- ------- ------- ------ -------- -------
Gross profit. . . . . 5,050 5,877 1,369 165 136 12,597 4,957 4,041 1,219 10,217
------- ------- -------- ---------- ---------- ------- ------- ------ -------- -------
General &
administrative
expenses:
General . . . . . . . 3,563 4,901 1,046 285 453 10,248 3,366 3,455 696 7,517
Depreciation. . . . . 160 137 21 - - 318 190 109 - 299
Amortization. . . . . - - - - - - - 2 - 2
Bad debt. . . . . . . 215 7 53 - - 275 332 94 3 429
Corporate
allocations:
General . . . . . . . 195 52 17 1 1 266 177 47 16 240
Depreciation. . . . . 101 99 23 5 - 228 137 37 12 186
------- ------- -------- ---------- ---------- ------- ------- ------ -------- -------
4,234 5,196 1,160 291 454 11,335 4,202 3,744 727 8,673
------- ------- -------- ---------- ---------- ------- ------- ------ -------- -------
Operating income. . . 816 681 209 (126) (318) 1,262 755 297 492 1,544
(loss)
Other income. . . . . 567 332
------- -------
Pretax income . . . . 1,829 1,876
Income tax provision. 580 786
------- -------
Income from
continuing
operations. . . . . $ 1,249 $ 1,090
======= =======
Diluted earnings per
share-continuing
operations. . . . . $ 0.33 $ 0.28
======= =======
</TABLE>
<PAGE>
Exhibit 21: Subsidiaries of Registrant
<TABLE>
<CAPTION>
Date of Incorporation State of Incorporation
- -------------------------- ----------------------
<S> <C> <C>
Name of Subsidiary
- --------------------------
Telesoft Acquisition Corp. March 24, 1992 Arizona
Telesoft Recovery Corp.. . April 13, 1999 Arizona
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> NOV-30-1999 NOV-30-1998
<PERIOD-END> NOV-30-1999 NOV-30-1998
<CASH> 2,157,701 7,740,219
<SECURITIES> 12,267,370 9,936,789
<RECEIVABLES> 9,937,537 7,435,184
<ALLOWANCES> (452,601) (502,095)
<INVENTORY> 366,794 626,170
<CURRENT-ASSETS> 25,262,301 26,068,553
<PP&E> 3,083,978 2,679,829
<DEPRECIATION> (1,763,732) (1,533,063)
<TOTAL-ASSETS> 26,862,937 27,620,329
<CURRENT-LIABILITIES> 6,872,172 9,098,065
<BONDS> 0 0
0 0
0 0
<COMMON> 6,919,095 7,103,400
<OTHER-SE> 13,071,670 11,291,764
<TOTAL-LIABILITY-AND-EQUITY> 26,862,937 27,620,329
<SALES> 29,377,592 28,250,373
<TOTAL-REVENUES> 29,377,592 28,250,373
<CGS> 16,780,838 18,033,402
<TOTAL-COSTS> 28,115,906 26,706,216
<OTHER-EXPENSES> (2,623) (40,994)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 270 1,277
<INCOME-PRETAX> 1,828,843 1,876,169
<INCOME-TAX> 579,800 786,591
<INCOME-CONTINUING> 1,249,043 1,089,578
<DISCONTINUED> 0 (68,428)
<EXTRAORDINARY> 549,309 8,565,700
<CHANGES> 0 0
<NET-INCOME> 1,798,352 9,586,850
<EPS-BASIC> 0.48 2.53
<EPS-DILUTED> 0.47 2.46
</TABLE>
