U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2000
COMMISSION FILE NO. 1-13830
TELESOFT CORP.
(Name of Registrant as specified in its charter)
ARIZONA 86-0431009
(State of Incorporation) (IRS Employer Identification No.)
3443 NORTH CENTRAL AVENUE #1800
PHOENIX, ARIZONA 85012
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (602) 308-2100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
issuer was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No ( )
At July 10, 2000, the Registrant had outstanding 1,388,955 shares of common
stock, no par value.
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<S> <C>
Consolidated Balance Sheets as of May 31, 2000 and November 30, 1999. . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the three and six month periods ended May 31, 2000 and 1999 4 - 5
Consolidated Statements of Cash Flows for the six month periods ended May 31, 2000 and 1999 . . . . . 6 - 7
Notes to the Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.. . . . 10 - 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.. . . . . . . . . . . . . . . . . 16
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . . . . . . . . . . . . . 17
ITEM 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
<TABLE>
<CAPTION>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
May 31, 2000 November 30, 1999
(unaudited)
ASSETS (Note 4)
<S> <C> <C>
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . $ 103,397 $2,157,701
Investment securities. . . . . . . . . . . . . . . . . . . . . . . . - 12,267,370
Accounts receivable, net of allowance for uncollectibles of $595,371 6,609,913 9,484,936
and $452,601 at May 31, 2000 and November 30, 1999,
respectively
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 411,731 366,794
Income taxes receivable. . . . . . . . . . . . . . . . . . . . . . . 43,217 462,626
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 296,600 221,100
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,481 301,774
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 7,583,339 25,262,301
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . 1,477,398 1,320,246
Computer software costs, net . . . . . . . . . . . . . . . . . . . . 102,472 169,667
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,476 110,723
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,254,685 $26,862,937
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Related party debt . . . . . . . . . . . . . . . . . . . . . . . . . $1,512,500 -
Accounts payable and accrued liabilities . . . . . . . . . . . . . . 4,060,379 5,880,975
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . 149,840 -
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . 1,014,587 928,997
----------- -----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . 6,737,306 6,809,972
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,000 62,200
----------- -----------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 6,835,306 6,872,172
----------- -----------
Commitments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Stockholders' Equity:
Preferred stock, no par value, 10,000,000 shares authorized; . . . . - -
none issued and outstanding
Common stock, no par value, 50,000,000 shares authorized;. . . . . . 642,360 6,919,095
1,554,934 issued and 1,388,955 outstanding
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . - 80,069
Accumulated other comprehensive income . . . . . . . . . . . . . . . - 66,120
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . 2,419,379 12,925,481
----------- -----------
3,061,739 19,990,765
Less: Treasury stock, 165,979 shares, at cost . . . . . . . . . . . (642,360) -
----------- -----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . 2,419,379 19,990,765
----------- -----------
Total liabilities and stockholders' equity . . . . . . . . . . . . . $9,254,685 $26,862,937
=========== ===========
</TABLE>
The Accompanying Notes are an Integral
Part of the Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended May 31, 2000 and 1999 (unaudited)
Three Months Ended May 31, Six Months Ended May 31,
------------------------------ ----------------------------
2000 1999 2000 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Sales, net. . . . . . . . . . . . . . . . . . . . $6,484,553 $7,224,389 $13,507,096 $15,026,986
Cost of sales . . . . . . . . . . . . . . . . . . 3,807,791 4,332,368 7,434,200 8,750,845
----------- ----------- ------------ ------------
Gross profit. . . . . . . . . . . . . . . . . . . 2,676,762 2,892,021 6,072,896 6,276,141
General and administrative expenses . . . . . . . 3,098,914 2,647,242 6,271,742 5,093,559
----------- ----------- ------------ ------------
Operating (loss) income . . . . . . . . . . . . . (422,152) 244,779 (198,846) 1,182,582
----------- ----------- ------------ ------------
Other income (expense):
Interest income . . . . . . . . . . . . . . . . . 106,424 156,511 331,191 318,213
Interest expense. . . . . . . . . . . . . . . . . (37,470) (41) (37,470) (255)
Other income. . . . . . . . . . . . . . . . . . . 233 (377) 145,422 (270)
----------- ----------- ------------ ------------
69,187 156,093 439,143 317,688
----------- ----------- ------------ ------------
(Loss) income from continuing operations. . . . . (352,965) 400,872 240,297 1,500,270
before provision for income taxes
Provision for income taxes. . . . . . . . . . . . 130,100 (121,100) (85,500) (591,900)
----------- ----------- ------------ ------------
(Loss) income from continuing operations. . . . . (222,865) 279,772 154,797 908,370
Gain on disposal of GoodNet subsidiary (net of
income taxes of $239,500 in 1999) . . . . . . - - - 367,509
----------- ----------- ------------ ------------
Net (loss) income . . . . . . . . . . . . . . . . (222,865) 279,772 154,797 1,275,879
Other comprehensive (loss) income, net of tax
Reclass of holding gains realized during
period and included in income statement. . . . - - (66,120) (84,566)
----------- ----------- ------------ ------------
Comprehensive (loss) income . . . . . . . . . . . $ (222,865) $ 279,772 $ 88,677 $ 1,191,313
=========== =========== ============ ============
</TABLE>
The Accompanying Notes are an Integral
Part of the Consolidated Financial Statements
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
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<CAPTION>
Three Months Ended May 31, Six Months Ended May 31,
------------------------------ ----------------------------
2000 1999 2000 1999
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic (loss) earnings per share
Continuing operations . . . . . $ (0.11) $ 0.08 $ 0.05 $ 0.24
Sale of discontinued operations - - - 0.10
----------- ---------- ---------- ----------
Net (loss) income . . . . . . . $ (0.11) $ 0.08 $ 0.05 $ 0.34
=========== ========== ========== ==========
Diluted earnings per share
Continuing operations . . . . . $ (0.11) $ 0.07 $ 0.05 $ 0.24
Sale of discontinued operations - - - 0.10
----------- ---------- ---------- ----------
Net (loss) income . . . . . . . $ (0.11) $ 0.07 $ 0.05 $ 0.34
=========== ========== ========== ==========
Weighted average number
of shares outstanding
- basic . . . . . . . . . . . . 2,030,721 3,711,500 2,866,518 3,715,715
- diluted . . . . . . . . . . . 2,030,721 3,834,538 2,932,685 3,850,108
=========== ========== ========== ==========
</TABLE>
The Accompanying Notes are an Integral
Part of the Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended May 31, 2000 and 1999 (unaudited)
2000 1999
------------- -------------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Cash received from customers. . . . . . . . . . . . $ 16,328,075 $ 16,171,651
Cash paid to suppliers and employees. . . . . . . . (15,106,207) (17,399,829)
Interest paid . . . . . . . . . . . . . . . . . . . (24,970) (255)
Interest received . . . . . . . . . . . . . . . . . 492,561 216,067
Income tax refund . . . . . . . . . . . . . . . . . 592,496 -
Income taxes paid . . . . . . . . . . . . . . . . . (148,447) (1,234,254)
------------- -------------
Net cash provided (used) by operating
activities of continuing operations . . . . . . . 2,133,508 (2,246,620)
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment. . . . . . . . . (424,188) (235,911)
Disbursements for notes receivable from related
parties. . . . . . . . . . . . . . . . . . . . (450,000) -
Collection of notes receivable from related
parties. . . . . . . . . . . . . . . . . . . . 500,000 -
Collection of notes receivable. . . . . . . . . . . - 373,153
Cash received from sale of fixed assets . . . . . . - 1,054
Cash received from sale of investment securities. . 13,846,439 3,409,232
Purchase of investment securities . . . . . . . . . (1,500,000) (6,465,333)
------------- -------------
Net cash provided (used) by investing
activities of continuing operations. . . . . . . 11,972,251 (2,917,805)
------------- -------------
Cash flows from financing activities:
Purchases of treasury stock . . . . . . . . . . . . (275,295) (184,305)
Proceeds from debt - related parties. . . . . . . . 1,500,000 -
Stock redemption. . . . . . . . . . . . . . . . . . (17,384,768) -
------------- -------------
Net cash used in financing activities of
continuing operations. . . . . . . . . . . . . . (16,160,063) (184,305)
------------- -------------
Cash used by continuing operations. . . . . . . . . (2,054,304) (5,348,730)
Cash used by discontinued operations, including
income taxes paid in the amount of $605,100 for 1999 - (605,100)
------------- -------------
Net decrease in cash and cash equivalents . . . . . (2,054,304) (5,953,830)
Cash and cash equivalents at beginning of period. . 2,157,701 7,740,219
------------- ------------
Cash and cash equivalents at end of period. . . . . $ 103,397 $ 1,786,389
============= ============
</TABLE>
The Accompanying Notes are an Integral
Part of the Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended May 31, 2000 and 1999 (unaudited)
2000 1999
------------ ------------
<S> <C> <C>
Reconciliation of net income to net cash
provided (used) by operating activities from
continuing operations:
Net income . . . . . . . . . . . . . . . . . . . $ 154,797 $ 1,275,879
------------ ------------
Adjustments to reconcile net income to net
cash provided (used) by operating activities
from continuing operations:
Gain on sale of discontinued operations. . . . . - (367,509)
Income taxes payable and deferred taxes
related to sale of discontinued operations. . - 365,600
Depreciation and amortization. . . . . . . . . . 334,231 258,859
Gain on sale of investment securities. . . . . . (145,189) -
Gain on sale of fixed assets . . . . . . . . . . - 377
Interest expense included with note payable. . . 12,500 -
Interest income included with note receivable. . - (2,294)
Changes in assets and liabilities:
Accounts receivable, net . . . . . . . . . . . . 2,875,023 1,412,470
Inventory. . . . . . . . . . . . . . . . . . . . (44,937) (77,176)
Other current assets . . . . . . . . . . . . . . 133,293 (58,908)
Deferred taxes, net. . . . . . . . . . . . . . . (39,700) (402,700)
Other assets . . . . . . . . . . . . . . . . . . 19,247 1,522
Accounts payable and accrued liabilities . . . . (1,820,596) (3,901,122)
Deferred revenue . . . . . . . . . . . . . . . . 85,590 (146,364)
Income taxes payable . . . . . . . . . . . . . . 149,840 (147,239)
Income taxes receivable. . . . . . . . . . . . . 419,409 (458,015)
------------ ------------
1,978,711 (3,522,499)
------------ ------------
Net cash provided (used) by operating activities $ 2,133,508 $(2,246,620)
from continuing operations ============ ============
</TABLE>
The Accompanying Notes are an Integral
Part of the Consolidated Financial Statements
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the six month periods ended May 31, 2000 and 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for audited year-end financial
statements. In the opinion of management, all adjustments consisting of
recurring accruals considered necessary for a fair presentation have been
included. Operating results for the three and six months ended May 31, 2000
are not necessarily indicative of the results that may be expected for the
year ending November 30, 2000. The unaudited consolidated financial
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto included in the Company's Form 10-KSB for the
year ended November 30, 1999.
Principles of Consolidation
The consolidated financial statements include the accounts of Telesoft Corp.,
together with its wholly owned subsidiaries, Telesoft Acquisition Corp and
Telesoft Recovery Corp.
All significant intercompany accounts and transactions have been eliminated.
2. INVESTMENT SECURITIES
Municipal Bonds
The Company accounted for its investment in Municipal bonds as an
available-for-sale debt security, which accordingly was carried at market
value. During the six months ended May 31, 2000, the Company sold all
12,050,000 shares that it had held for $12,050,000.
Winstar Communications, Inc. ("Winstar")
The Company accounted for its investment in Winstar as an available-for-sale
equity security, which accordingly was carried at market value. During the
six months ended May 31, 1999, the Company sold the last of its Winstar
shares, or 79,387 shares, resulting in net proceeds before taxes of
$2,909,232.
Amdocs Ltd. ("DOX")
The Company accounted for its investment in DOX, which traded on the NYSE
under the symbol DOX, as an available-for-sale equity security, which
accordingly was carried at market value. During the six months ended May 31,
2000, the Company sold all 7,434 DOX shares that it had held for $296,439.
These shares were previously held as 20,000 shares of International
Telecommunication Data Systems Inc. (ITDS).
<PAGE>
TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six month periods ended May 31, 2000 and 1999
3. STOCKHOLDERS' EQUITY
Self-Tender Offer
On February 3, 2000, the Company commenced an offer to repurchase up to 2.3
million shares of its common stock pursuant to a "Dutch auction" self-tender
offer. On March 24, 2000, the tender offer expired. Pursuant to the tender
offer, the Company repurchased a total of 2.3 million shares of its common
stock. The purchase price for the shares of common stock was $7.25 per share
and the proration factor was 60.22 percent. The Company redeemed 1,938,816
common shares for $14,056,416 and 351,352 common stock options for
$1,112,674. Included in the common shares redeemed are 1,031,663 shares of
the Company's common stock redeemed from affiliates of the Company for an
aggregate of approximately $7,480,000.
Additionally, the Company repurchased all 293,750 shares of common stock owned
by Joseph Zerbib for $2,129,688. Subsequent to the completion of the tender
offer, affiliates of the Company owned 695,837 shares or 47% of the
outstanding common stock of the Company.
Expenses incurred related to the tender offer were $85,991.
Treasury Stock
On April 4, 2000, the Company announced that it authorized the repurchase of
up to 10% (146,913 shares) of its outstanding common stock on the open market
under prevailing market conditions as applicable under appropriate securities
laws. From the announcement date through May 31, 2000, the Company
repurchased 89,979 shares of its common stock in the open market for $275,296.
4. RELATED PARTY DEBT:
On April 3, 2000, the Company entered into three $1,350,000 lines of credit
(total of $4,050,000), payable on demand, bearing a term of one year and an
annual interest rate of 10%, with three officers of the Company. Each line of
credit is secured by the assets of the Company. The interest rate on this
debt is at least as favorable as the Company could receive from third-party
lenders. The Company has obtained several proposals from third-party lenders
bearing effective rates in excess of 12%.
During the six months ended May 31, 2000, interest expense in connection with
these notes was $25,000. As of May 31, 2000, borrowings outstanding on the
line of credit and accrued interest payable were $1,500,000 and $12,500,
respectively.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS BY PRODUCT LINE FOR THE SIX MONTHS ENDED MAY 31, 2000 AND 1999
(in thousands except per share items)
Six months ended May 31, 2000 Six months ended May 31, 1999
------------------------------------------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
System Custom Recovery System Custom Recovery Network
STS Sales Billing Services Total STS Sales Billing Services Services Total
Sales, net. . . $ 9,729 $ 2,862 $ 484 $ 432 $13,507 $ 11,391 $ 2,698 $ 808 $ - $ 130 15,027
Cost of sales . 6,939 485 10 - 7,434 8,280 466 5 - - 8,751
-------- -------- --------- ---------- -------- --------- -------- -------- ---------- --------- -----
Gross profit. . 2,790 2,377 474 432 6,073 3,111 2,232 803 - 130 6,276
-------- -------- --------- ---------- -------- --------- -------- -------- ---------- --------- -----
General & Administrative
Expenses:
General . . . . 1,841 2,958 416 456 5,671 1,713 2,042 529 101 194 4,579
Depreciation. . 91 79 10 1 181 75 66 10 - - 151
Bad debt. . . . 140 - - - 140 116 3 3 - - 122
Corporate
allocations:
General . . . . 70 41 12 3 126 98 26 8 1 1 134
Depreciation. . 69 68 16 - 153 48 46 11 - 3 108
-------- -------- --------- ---------- -------- --------- -------- -------- ---------- --------- -----
2,211 3,146 454 460 6,271 2,050 2,183 561 102 198 5,094
-------- -------- --------- ---------- -------- --------- -------- -------- ---------- --------- -----
Operating income 579 (769) 20 (28) (198) 1,061 49 242 (102) (68) 1,182
(loss)
-
Other income. . 439 318
-------- -----
Pretax income . 241 1,500
Income tax. . . (86) (592)
provision -------- -------
Income from continuing
operations . . $ 155 $ 908
======== =======
Diluted earnings per
share -continuing
operations . $ 0.05 $ 0.24
======== =======
</TABLE>
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MAY 31, 2000 AND 1999
Revenues decreased by 10% to $13,507,096 for the six months ended May 31,
2000 compared to $15,026,986 for the six months ended May 31, 1999. The
Company's revenue is derived from four principal product lines and services:
STS Outsourcing Programs (STS), System Sales and Maintenance, Customized
Billing Outsourcing Services and Recovery Services. Network Services, which
began operations in December 1998, was discontinued in August 1999 due to
unsatisfactory performance.
STS revenues were $9,728,487 for the six months ended May 31, 2000
compared to $11,390,479 for the six months ended May 31, 1999, a decrease of
14.6%. This decrease was primarily due to market pressure from competing
long-distance calling products including pre-paid cards, other calling cards,
wireless services and the Internet. The Company is adjusting to these market
pressures by lowering its retail rates and renegotiating its wholesale rates
with its suppliers. The majority of the impact of these new rates will be
felt during the course of our fourth fiscal quarter (September-November),
which represents the first three months of the 2000-2001 academic year.
Historically, the calling patterns during these months are indicative of
calling patterns for the balance of the academic year. Additionally, we plan
to test the roll-out of additional services such as debit cards and wireless
products during this Fall.
Revenues from System Sales and Maintenance were $2,862,443 for the six
months ended May 31, 2000 compared to $2,698,236 for the six months ended May
31, 1999, an increase of 6%. TelMaster sales and maintenance related revenues
increased 27.6% to $1,673,692 for the six months ended May 31, 2000 compared
to $1,311,235 for the six months ended May 31, 1999. This $362,000 increase
in TelMaster revenues was largely related to increased revenues from
the ongoing development of a custom convergence billing, reporting and
support system for Pacific Bell and MCI customer care services for the
State of California's CALNET contract. TelMaster system sales have been
affected by longer than expected implementation periods. We expect
that our investment in additional implementation, programming and software
development personnel will reduce our implementation cycles, which will
increase the number of systems we are able to implement each year, while
simultaneously improving customer satisfaction. The RATEX and DCS product
revenues declined 20.4% or $148,000 and 7.5% or $50,000, respectively. The
decline in revenues in these segments was the result of a decrease in
demand for these text-based software products.
For the six months ended May 31, 2000 and 1999, revenues from Customized
Billing Services were approximately $484,000 and $808,000, respectively.
Approximately $230,000, of this decline was due to the loss of the MDU
contract with Bell Atlantic in March 1999 and the loss of the Blue Cross Blue
Shield contract in July 1999. Approximately $376,000 of the decline was due
to set up fees generated in the first half of fiscal 1999, which decline was
offset by approximately $336,000 in recurring revenues from those projects.
The Customized Billing Services division is currently generating
approximately $960,000.
Recovery Services, which began operations in March 1999, had revenues of
approximately $432,000 during the first half of fiscal 2000, a 219% increase
over the second half of fiscal 1999. Network Services, which was discontinued
in August 1999, had begun operations in December 1998 and had revenues of
approximately $130,000 during the first half of fiscal 1999.
<TABLE>
<CAPTION>
Revenue for the six-month period ended May 31,
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Telemanagement. . . . . . . $ 1,673,692 $ 1,311,235 $ 854,140 $ 705,326 $ 988,578
DCS . . . . . . . . . . . . 611,366 661,226 906,641 828,920 926,889
RATEX . . . . . . . . . . . 577,385 725,775 890,466 360,610 592,349
----------- ----------- ----------- ----------- -----------
System Sales. . . . . . 2,862,443 2,698,236 2,651,247 1,894,856 2,507,816
STS . . . . . . . . . . . . 9,728,487 11,390,479 11,011,644 8,268,643 8,110,752
Customized Billing Services 484,425 808,474 462,595 310,067 307,315
Network Services. . . . . . - 129,556 - - -
Recovery Services . . . . . 431,741 241 - - -
----------- ----------- ----------- ----------- -----------
$13,507,096 $15,026,986 $14,125,486 $10,473,566 $10,925,883
=========== =========== =========== =========== ===========
</TABLE>
<PAGE>
Total gross profit decreased 3.2% or $203,245 to $6,072,896 for the six
months ended May 31, 2000 compared to $6,276,141 for the six months ended May
31, 1999. Cost of goods sold was approximately 71.3% of STS revenues for the
six months ended May 31, 2000, compared with 72.7% for the six months ended
May 31, 1999. Cost of goods sold as a percentage of System Sales and
Maintenance revenues were approximately 17% for both the six months ended May
31, 2000 and 1999.
Overall operating expenses increased by 23.1%, or $1,178,183, for the six
months ended May 31, 2000 to $6,271,742 from $5,093,559 for the six months
ended May 31, 1999. Of this increase, approximately $1,050,000 was from TMS
related expenses. Human resource expenses in the areas of TelMaster research
and development, implementation, sales, and support services, increased by
$680,000 to $1,255,000. The Recovery Services division had operating expenses
of approximately $460,000 during the first half of fiscal 2000 compared to
$102,000 in the first half of fiscal 1999. Network Services, which was
discontinued in August 1999, contributed approximately $198,000 to operating
expenses in the six months ended May 31, 1999. General and administrative
expenses as a percentage of revenues increased to 46.4% for the first half of
fiscal 2000, compared to 33.9% for the first half of fiscal 1999. We expect
general and administrative expenses as a percentage of revenues to decrease
over time, as revenues for TelMaster systems increase.
Other income increased to $145,422 for the first half of fiscal 2000 from
a $270 expense in the first half of fiscal 1999. This increase is
attributable to the sale of 7,434 shares of Amdocs Ltd. ("DOX") common for
$296,439. The Company realized a $145,189 gain on the sale.
The provision for income taxes was $85,500 and $591,900 for the six
months ended May 31, 2000 and 1999, respectively. This represents 35.6% and
39.5% of income before provision for income taxes for 2000 and 1999,
respectively. This percentage decrease was partially attributable to a
higher percentage of tax-free interest included in pretax income, as well as
being in lower income tax brackets for income tax calculation purposes.
Income from continuing operations decreased to $154,797 for the first
half of fiscal 2000 from $908,370 in the first half of fiscal 1999. This was
attributable to a decrease of $482,000 in operating income from the STS
product line, an operating loss of approximately $769,000 versus a $49,000
profit from the system sales division, and an operating loss of $28,000 from
the Recovery Services division. These decreases were offset by a $145,000
pretax gain on the sale of investment securities and the discontinuation of
the Network Services division, which had a $68,000 operating loss for the
first six months of fiscal 1999. Additionally, interest income increased
approximately $13,000 while interest expense increased $37,000 as a result of
decreased cash and investments due to the Company's tender of its common stock
completed in March 2000. These operating result changes were also offset by a
$506,000 decrease in income taxes.
For the six months ended May 31, 1999, gain on disposal of GoodNet
subsidiary represents additional gain realized as a result of the sale of
79,387 shares of Winstar common stock received in the sale of GoodNet to
Winstar. See note 2 in the notes to the consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS BY PRODUCT LINE FOR THE THREE MONTHS ENDED MAY 31, 2000 AND 1999
(in thousands except per share items)
Three months ended May 31, 2000 Three months ended May 31, 1999
------------------------------------------------- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
System Custom Recovery System Custom Recovery Network
STS Sales Billing Services Total STS Sales Billing Services Services Total
Sales, net. . . $ 4,937 $ 1,044 $ 231 $ 273 $ 6,485 $ 5,573 $ 1,310 $ 263 - $ 78 $7,224
Cost of . . . . 3,652 152 4 - 3,808 4,079 248 5 - - 4,332
-------- -------- ---------- ---------- -------- ---------- -------- -------- --------- -------- -----
Sales
Gross profit. . 1,285 892 227 273 2,677 1,494 1,062 258 - 78 2,892
-------- -------- ---------- ---------- -------- ---------- -------- -------- --------- -------- -----
General & Administrative
expenses:
General . . . . 891 1,486 192 223 2,792 847 1,052 250 101 124 2,374
Depreciation. . 44 31 5 1 81 38 33 5 - - 76
Bad debt. . . . 71 - - - 71 62 1 3 - - 66
Corporate
allocations:
General . . . . 38 22 6 2 68 53 14 5 1 1 74
Depreciation. . 38 39 10 - 87 26 24 5 - 2 57
-------- -------- ---------- ---------- -------- ---------- -------- -------- --------- -------- -----
1,082 1,578 213 226 3,099 1,026 1,124 268 102 127 2,647
-------- -------- ---------- ---------- -------- ---------- -------- -------- --------- -------- -----
Operating income 203 (686) 14 47 (422) (10) 468 (62) (102) (49) 245
(loss)
Other income. . 69 156
-------- -----
Pretax (loss) . (353) 401
income
130 (121)
-------- ------
Income tax
provision
(Loss) income from ($223) $ 280
continuing operations ======== ======
Diluted (loss) earnings
per share - continuting ($0.11) $0.07
operations ======== =====
</TABLE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MAY 31, 2000 AND 1999
Revenues decreased by 10% to $6,484,553 for the three months ended May
31, 2000 compared to $7,224,389 for the three months ended May 31, 1999. The
Company's revenue is derived from four principal product lines and services:
STS Outsourcing Programs (STS), System Sales and Maintenance, Customized
Billing Outsourcing Services and Recovery Services. Network Services, which
began operations in December 1998, was discontinued in August 1999 due to
unsatisfactory performance.
STS revenues were $4,936,954 for the three months ended May 31, 2000
compared to $5,572,551 for the three months ended May 31, 1999, a decrease of
11.4%. This decrease was primarily due to market pressure from competing
long-distance calling products including pre-paid cards, other calling cards,
wireless services and the Internet. The Company is adjusting to these market
pressures by lowering its retail rates and renegotiating its wholesale rates
with its suppliers.
Revenues from System Sales and Maintenance were $1,044,223 for the three
months ended May 31, 2000 compared to $1,310,040 for the three months ended
May 31, 1999, a decrease of 20%. TelMaster sales and maintenance related
revenues decreased 4.9% to $564,737 for the three months ended May 31, 2000
compared to $593,563 for the three months ended May 31, 1999. This decrease
was a result of a $141,000 increase in TelMaster revenues related the State of
California's CALNET contract, offset by lower systems revenues resulting
from longer than expected implementation periods. We expect that our
continued investment in additional implementation and software development
personnel will reduce our implementation cycles, which will increase the
number of systems we are able to implement each year, while simultaneously
improving customer satisfaction. The RATEX and DCS product revenues declined
39% or $154,000 and 25.8% or $83,000, respectively. The decline in revenues
in these segments was the result of a decrease in demand for these text-based
software products.
For the three months ended May 31, 2000 and 1999, revenues from
Customized Billing Services were approximately $230,000 and $263,000,
respectively. Approximately $70,000 of this decline was due to the loss of
the MDU contract with Bell Atlantic in March 1999 and the loss of the Blue
Cross Blue Shield contract in July 1999. Approximately $100,000 of the decline
was due to set up fees generated in the second quarter of fiscal 1999, which
decline was offset by approximately $150,000 in recurring revenues from those
projects.
Recovery Services, which began operations in March 1999, had revenues of
approximately $273,000 during the second quarter of fiscal 2000, a 71%
increase over the first quarter of fiscal 2000. Network Services, which began
operations in December 1998 and ceased operations in August 1999, had revenues
of approximately $78,000 during the second quarter of fiscal 1999.
<TABLE>
<CAPTION>
Revenue for the three-month period ended May 31,
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Telemanagement. . . . . . . $ 564,737 $ 593,563 $ 409,352 $ 493,090 $ 600,826
DCS . . . . . . . . . . . . 239,210 322,284 518,413 578,656 548,803
RATEX . . . . . . . . . . . 240,276 394,193 395,018 202,395 298,288
---------- ---------- ---------- ---------- ----------
System Sales . . . . . 1,044,223 1,310,040 1,322,783 1,274,141 1,447,917
STS . . . . . . . . . . . . 4,936,954 5,572,551 5,555,832 4,200,661 4,079,057
Customized Billing Services 230,740 263,469 220,093 142,173 163,894
Network Services. . . . . . - 78,088 - - -
Recovery Services . . . . . 272,636 241 - - -
---------- ---------- ---------- ---------- ----------
$6,484,553 $7,224,389 $7,098,708 $5,616,975 $5,690,868
</TABLE>
Total gross profit decreased 7.4% or $215,259 to $2,676,762 for the three
months ended May 31, 2000 compared to $2,892,021 for the three months ended
May 31, 1999. Cost of goods sold was approximately 74% of STS revenues for
the three months ended May 31, 2000, compared with 73% for the three months
ended May 31, 1999. Cost of goods sold as a percentage of System Sales and
Maintenance revenues were approximately 14% and 19% for the three months ended
May 31, 2000 and 1999, respectively. This decrease was due to a higher
percentage of maintenance revenues, which has a higher profit margin.
<PAGE>
Overall operating expenses increased by 17.1%, or $451,672, for the three
months ended May 31, 2000 to $3,098,914 from $2,647,242, for the three months
ended May 31, 1999. This increase was primarily due to an increase in human
resources in the areas of TelMaster research and development, implementation,
sales, and support services, which increased by $295,000 to $600,000. Sales
and support related expenses increased by approximately $48,000 and $124,000,
respectively from the second quarter of fiscal 1999 to the second quarter of
fiscal 2000. The Recovery Services division had operating expenses of
approximately $226,000 during the second quarter of fiscal 2000 compared to
$102,000 in the second quarter of fiscal 1999. Network Services, which was
discontinued in August 1999, contributed approximately $127,000 to operating
expenses in the three months ended May 31, 1999. General and administrative
expenses as a percentage of revenues increased to 47.8% for the second quarter
of fiscal 2000, compared to 36.6% for the second quarter of fiscal 1999. We
expect general and administrative expenses as a percentage of revenues to
decrease over time, as revenues for TelMaster systems increase.
The provision for income taxes was a benefit of $130,100 and an expense
of $121,100 for the three months ended May 31, 2000 and 1999, respectively.
This represents 36.9% and 30.2% of income before provision for income taxes
for 2000 and 1999, respectively.
For the second quarter of fiscal 2000, the Company realized a $222,865
loss from continuing operations compared to $279,772 of income from continuing
operations in the second quarter of fiscal 1999. This decline was primarily
due to a $686,000 operating loss from the system sales division the in the
second quarter of fiscal 2000 compared to a $62,000 loss from this division in
the second quarter of fiscal 1999. This increase in operating loss for the
system sales division was due to lower revenues. The Recovery Services
division realized its first profitable quarter, providing an operating income
of $47,000, compared to a loss of $102,000 during the second quarter of fiscal
1999.
MATERIAL CHANGES IN FINANCIAL POSITION
Cash and cash equivalents decreased to $103,397 at May 31, 2000 from
$2,157,701 at November 30, 1999. During the three months ended May 31, 2000,`
investment securities decreased by $12,267,370. This decrease is primarily a
result of the Company's "dutch auction" tender offer of its common stock,
which used approximately $17,385,000 of the Company's cash. This use of cash
was offset by $1,500,000 in cash advances from the Company's lines of credit
with certain officers of the Company. During the first half of 2000,
activities from continuing operations provided approximately $2,133,000,
compared to the use of approximately $2,247,000 in the first half of 1999.
Additionally, the Company purchased computer equipment, furniture and fixtures
for approximately $424,000.
Accounts receivable decreased to $7,205,284 from $9,937,537 as of
November 30, 1999 ($6,609,913 and $9,484,936, net of allowance for
uncollectibles as of May 31, 2000 and November 30, 1999, respectively). This
decrease was primarily due to an approximate $2,189,000 decline in STS
revenues. STS revenues were approximately $4,937,000 and $7,126,000 for the
second quarter of 2000 and the fourth quarter of 1999, respectively.
Accounts payable and accrued liabilities decreased to $4,060,379 as of
May 31, 2000 from $5,880,975 as of November 30, 1999. As of May 31, 1999,
there was approximately $4,307,462 in accounts payable and accrued
liabilities. This slight decrease is attributable to the decline in STS
revenue.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 2000, the Company had cash and cash equivalents of $103,397.
On March 24, 2000, the Company completed a self-tender offer by repurchasing
2.3 million shares of its common stock pursuant to a modified "dutch auction"
tender offer. The tender offer, which carried an offer price of $7.25 per
share, combined with the repurchase of all 293,750 shares of common stock
owned by Joseph Zerbib, resulted in the payment of approximately $17,300,000
to tendering option and stockholders. As a result of this tender, the Company
has established a 12-month line of credit with three officers of the Company
in order to satisfy the terms of the tender offer. While the Company believes
that it will be able to maintain, extend or replace the current line of
credit, there can be no assurance that this will happen. The Company believes
that the current line along with cash flows from its business will allow it to
service the cash needs of the business including interest payments the Company
will incur on this facility. However, there can be no assurance that the
Company will not require additional funding within this time frame. The
Company may be required to raise additional funds through public or private
financing, strategic relationships, or other arrangements. There can be no
assurance that such additional funding, if needed, will be available on terms
attractive to the Company, or at all. Furthermore, any additional equity
financing may be dilutive to existing stockholders.
SEASONALITY
The Company generally completes the sale of the majority of STS Program
system installations in the university market during the spring and early
summer months. The implementation and installation of these systems and
services typically occurs during the summer months. Revenues derived from STS
Programs begin in the fall and weaken during winter holiday and the summer
months when students are on vacation. As a result, the Company's revenues
have consistently been highest during the second and fourth quarters.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
<TABLE>
<CAPTION>
The following is a summary of investment securities as of November 30, 1999:
<S> <C> <C> <C>
Gross Estimated
Cost unrealized Fair Value
gains
November 30, 1999
--------------------------------
Available-for-sale securities:
U.S. Corporate Equity Securities $ 151,250 $ 66,120 $ 217,370
Municipal bonds. . . . . . . . . 12,050,000 -0- 12,050,000
----------------- ----------- -----------
$ 12,201,250 $ 66,120 $12,267,370
</TABLE>
At May 31, 2000, the Company had no investment securities.
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 24, 2000, the Company held its annual meeting of shareholders,
at which the Company's shareholders considered the election of directors.
Shareholders voted to elect Joseph W. Zerbib, Michael F. Zerbib, Thierry E.
Zerbib, Brian H. Loeb, Cecile Silverman and Kalvan Swanky to serve as
directors for the ensuing year and until their successors are elected and
qualified. 2,324,200 shares were voted and 0 shares were withheld for each
director.
ITEM 5. OTHER INFORMATION
RELATED PARTY DEBT
On April 3, 2000, the Company entered into three $1,350,000 lines of
credit (total of $4,050,000), payable on demand, bearing a term of one year
and an annual interest rate of 10%, with three officers of the Company. Each
line of credit is secured by the assets of the Company. The interest rate on
this debt is at least as favorable as the Company could receive from
third-party lenders. The Company has obtained several proposals from
third-party lenders, bearing effective rates in excess of 12%. This financing
was completed in order to satisfy the terms of the tender offer along with
anticipated working capital needs. See "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources".
SELF-TENDER OFFER
On February 3, 2000, the Company commenced an offer to repurchase up to
2.3 million shares of its common stock pursuant to a "Dutch auction"
self-tender offer. On March 24, 2000, the tender offer expired. Pursuant to
the tender offer, the Company repurchased a total of 2.3 million shares of its
common stock. The purchase price for the shares of common stock was $7.25 per
share and the proration factor was 60.22 percent. The Company redeemed
1,938,816 common shares for $14,056,416 and 351,352 common stock options for
$1,112,674. Included in the common shares redeemed are 1,031,663 shares of the
Company's common stock redeemed from affiliates of the Company for an
aggregate of approximately $7,480,000.
Additionally, the Company repurchased all 293,750 shares of common stock
owned by Joseph Zerbib for $2,129,688. Subsequent to the completion of the
tender offer, affiliates of the Company owned 695,837 shares or 47% of the
outstanding common stock of the Company.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) NO. DESCRIPTION REFERENCE
--- ----------- ---------
11 Earnings per common and common equivalent shares filed herewith
27 Financial Data Schedule filed herewith
(b) There were no reports on Form 8-K filed during the quarter ended
May 31, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Issuer has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TELESOFT CORP.
BY: /s/ Michael F. Zerbib
----------------------------------------------------------
Michael F. Zerbib
Chief Financial Officer
DATED: July 14, 2000
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11: Earnings per share
The following table reconciles the numerators and denominators of the basic
and diluted earnings per share:
Three months ended Six months ended
May 31, May 31,
<S> <C> <C> <C>
2000 1999 2000 1999
---- ---- ---- ----
<CAPTION>
BASIC EARNINGS (LOSS) PER COMMON SHARE:
----------------------------------------
NUMERATOR
(Loss) income from continuing operations (222,865) 279,772 154,797 908,370
Gain on disposal of goodNet - - - 367,509
---------- --------- --------- -------------
Net earnings available to
common shareholders (222,865) 279,772 154,797 1,275,879
========== ========= ========= =========
DENOMINATOR
<S> <C> <C> <C> <C>
Weighted average number of
shares outstanding. . . . . . . . . . 2,030,721 3,711,500 2,866,518 3,715,715
PER SHARE AMOUNTS
Income from continuing operations. . . . (.11) .08 .05 .24
Gain on disposal of GoodNet. . . . . . . - - - .10
---------- --------- --------- ---------
Net earnings available to common . . . . (.11) .08 .05 .34
Shareholders ========== ========= ========= =========
<CAPTION>
.
<S> <C> <C> <C> <C>
DILUTED EARNINGS PER SHARE
--------------------------
NUMERATOR
(Loss) income . (222,865) 279,772 154,797 908,370
from continuing
operations
Gain on disposal - - - 367,509
of GoodNet --------- --------- -------- ---------
Net earnings available to
common shareholders (222,865) 279,772 154,797 1,275,879
========= ========= ======== =========
DENOMINATOR
Weighted average number of
shares outstanding . . 2,030,721 3,711,500 2,866,518 3,715,715
Effect of dilutive securities:
Options and warrants - 433,100 254,356 418,100
Stock acquired with
proceeds . . . . . - (310,062) (188,189) (283,707)
--------- --------- -------- -----------
Weighted average common shares
and assumed conversions
outstanding. . . . . . 2,030,721 3,834,538 2,932,685 3,850,108
========== ========== ======== ===========
PER SHARE AMOUNTS
Income from continuing
operations . . . (.11) .07 .05 .24
Gain on . . . . . - - - .10
disposal of GoodNet
--------- --------- -------- -----------
Net earnings available to
common shareholder. . . (.11) .07 .05 .34
========== ========== ======== ===========
</TABLE>
