SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1995
File No. 0-12993
TELS Corporation
(Exact name of registrant as specified in its charter)
Utah 87-0373840
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
705 East Main Street, American Fork, Utah 84003
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (801) 756-9606
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 registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Shares of common stock outstanding on October 31, 1995 3,892,420
TELS Corporation
INDEX
PART I. FINANCIAL INFORMATIONPage
Consolidated Balance Sheets -- September 30, 1995 and December 31,
1994 3
Consolidated Statements of Operations -- Nine and Three Months 4
Ended September 30, 1995 and 1994, respectively
Consolidated Statements of Cash Flows -- Nine Months Ended 5,6
September 30, 1995 and 1994, respectively
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8,9
PART II. OTHER INFORMATION
Item 6. Filing on Form 8-K 10
SIGNATURES 11
EXHIBIT 27 ARTICLE 5 FINANCIAL DATA SCHEDULE 12
TELS Corporation
Consolidated Balance Sheets
September 30, December 31,
1995 1994
Assets (Unaudited) (Audited)
Current Assets
Cash and cash equivalents $ 26,920 $ 172,399
Cash Investments 56,617 54,150
Trade accounts receivable, less allowance
for doubtful receivables of $117,512 and
$132,348 respectively
1,387,494 1,407,190
Employee and other receivables163,950 170,065
Inventories
Finished goods 432,300 277,804
Work in progress 223,833 281,616
Raw materials and supplies 639,113 444,397
Total inventories 1,295,246 1,003,817
Prepaid expenses 78,086 100,563
Deferred income taxes 120,500 112,600
Total current assets 3,128,813 3,020,784
Property, plant and equipment, at cost 2,275,717 1,977,653
Less accumulated depreciation 1,099,808 907,691
Net property, plant and equipment 1,175,909 1,069,962
Software Development Costs 647,487 547,447
Less accumulated amortization 381,481 257,774
Net software development costs 266,005 289,673
Other assets 583,183 614,094
Deferred income taxes 329,813 354,713
$ 5,483,723 $ 5,349,226
Liabilities and Stockholders' Equity
Current Liabilities
Note payable to bank 709,339 562,745
Current installments of long-term debt 179,609 214,870
Trade accounts payable 300,818 624,292
Accrued expenses 333,300 412,507
Deposits and advances 60,090 79,042
Deferred revenue 108,382 ---
Total current liabilities 1,691,538 1,893,456
Long-term debt, excluding current installments 383,542 463,712
Stockholders' equity
Common stock, $.02 par value.
Authorized 50,000,000 shares; issued
3,827,300 and 3,677,800 respectively 76,546 73,556
Additional paid-in capital 4,157,379 4,014,909
Accumulated deficit (719,980) (964,732)
Deferred compensation (105,302) (131,675)
Net stockholders' equity 3,408,643 2,992,058
$ 5,483,723 $ 5,349,226
See accompanying notes to financial statements.
TELS Corporation
Consolidated Statements of Operations
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
1995 1994 1995 1994
Net sales $2,415,302 $2,400,079 $7,728,824 $6,429,446
Cost of goods sold 1,469,325 1,234,284 4,307,755 3,454,495
Gross profit 945,977 1,165,795 3,421,069 2,974,951
Research and development expenses 28,257 31,480 169,940 112,314
Selling, general and
administrative expenses 1,033,356 982,045 2,966,785 2,515,920
Operating income (loss) (115,636) 152,270 284,344 346,717
Other expense - net of other income: 6,603 31,156 14,342 63,275
Income (loss) before taxes (109,033) 132,920 270,002 283,442
Income tax (expense), benefit (8,250) 15,152 (25,250) 46,385
Net income (loss) $ (117,283) $148,072 $ 244,752 $ 329,827
Net income loss per common
and common equivalent share $ (.02) $ .04 $ .06 $ .10
See accompanying notes to financial statements
TELS Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
Increase (Decrease) in Cash and Cash Equivalents 1995 1994
Cash flows from operating activities:
Net income $ 244,752 $329,827
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of software development costs 123,707 (52,185)
Depreciation of plant and equipment 192,117 166,488
Amortization of other assets 95,503 25,000
Provision for doubtful accounts (14,836) 7,954
Deferred income taxes 17,000 -
Changes in operating assets and liabilities:
Receivables 40,647 (136,526)
Inventories (291,429) 74,283
Prepaid expenses 22,477 (62,032)
Other assets (43,152) (36,943)
Trade accounts payable and accrued expenses (402,681) (31,098)
Deposits and advances (18,952) 2,126
Deferred revenue 108,382 -
Net cash provided by operating activities 73,535 478,798
Cash flows from investing activities:
Capital expenditures (298,064) (21,150)
Software development expenses (100,040) (36,221)
Cash investments 2,467 272
Acquisitions - Net - (231,545)
Net cash (used in) investing activities (395,637) (392,516)
Cash flows from financing activities:
Net borrowings (payments) under line
of credit agreement 146,594 (113,258)
Principal payments on long-term debt (115,431) (177,087)
Proceeds from issuance of common stock 145,460 452,150
Net cash provided by financing activities 176,623 26,708
Net increase (decrease) in cash and cash equivalents (145,479) 248,087
Cash and cash equivalents at beginning of year 172,399 58,586
Cash and cash equivalents at end of quarter $ 26,920 $ 306,673
See accompanying notes to financial statements
TELS Corporation
Consolidated Statements of Cash Flows (continued)
(Unaudited)
Nine Months ended
September 30,
1995 1994
Supplemental Disclosures of cash flow information
Cash paid during the period for interest $ 70,725 $ 84,465
Supplemental Schedule of Noncash Investing
and Financing Activities:
The Company purchased all of the assets of
Hash-Tech, Inc. and Micro Station in 1994
Fair Value of Assets Acquired $ 1,498,198
Cash paid for the purchase of assets (231,545)
Stock issued for the purchase of assets (103,500)
Liabilities payable $ 1,163,153
See accompanying notes to financial statements<PAGE>
TELS Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Financial Statements
The financial statements for the nine months ended September 30, 1995 and
1994, are unaudited. However, the Company, in its opinion, has made all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the financial position and the results of operations for the periods
presented. The financial statements for 1995 are subject to adjustment at the
end of the year when they will be audited by independent accountants. The
financial statements and notes thereto should be read in conjunction with the
financial statements and notes for the years ended December 31, 1994 and 1993,
included in the Company's 1994 Annual Report to the Securities and Exchange
Commission on Form 10-K.
The results for the nine months ended September 30, 1995, are not
necessarily indicative of the results for the year ending
December 31, 1995.
2. Earnings Per Share
Earnings per common and common equivalent share is computed based on the
weighted average number of shares outstanding. For purposes of this
computation, stock options and warrants are treated as common stock equivalents
at issuance. The weighted average number of outstanding common and common
equivalent shares used in this computation were 4,106,300 and 4,110,300,
respectively, for the three and nine months ended September 30, 1995, and
3,454,225 and 3,440,093, respectively, for the three and nine months ended
September 30, 1994.
3. Principles of Financial Consolidation Statements
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.
TELS Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the nine months ending September 30, 1995, consolidated net sales increased
by 20% to $7,728,824 when compared to $6,429,446 of net sales for 1994.
Consolidated net sales for the third quarter of 1995, of $2,415,302 increased
by 1% over sales of $2,400,079 for the third quarter of 1994. The increase in
sales for the nine months ending September 30, 1995, is primarily attributable
to an increase in sales of $1,676,858 at Hash Tech which was acquired in April
1994. For the quarter ending September 30, 1995, sales decreased by 27.4% in
telecommunications call accounting products, but this decrease was offset by
increased sales of 38.7% in the manufacturing division, leaving the quarterly
sales with an increase of 1%. For the nine months of 1995, sales in the p.c.
reseller division were down 16% when compared to sales for the nine months
ending September 30, 1994. For the quarter ending September 30, 1995, sales in
the p.c. reseller division were down 5.5% over 1994. The decrease in sales in
this division is due to changes in the management and the strategic direction as
the company moves toward improving revenues and profit margins in this
division.
The consolidated gross profit increased by $446,118 or 15% for the nine months
ended September 30, 1995, when compared to gross profit of $2,974,951 for the
same period of 1994. As a percentage of sales, gross profit decreased to 44%
for the nine months ended September 30, 1995, versus 46% for the same period of
1994. The gross profit margin as a percentage of sales for the three months
ended September 30, 1995, was at 39%, which reflects a 10% decrease in the gross
profit when compared to the three month period ended September 30, 1994. The
change in gross profit percentage for the third quarter and the nine months
ending September 30, 1995, is due primarily to the sales mix. The additional
sales from the manufacturing division which had a margin of 36% combined with
the slower sales of telecommunication call accounting products, where the
gross margin slipped to 73% from 78% for the year earlier, caused the overall
gross profit percentage to decline.
Selling, general and administrative expenses increased to $1,033,356 for the
third quarter of 1995, up slightly over the expense of $982,045 for the three
months ended
September 30, 1994. For the nine months ended September 30, 1995, selling,
general
and administrative expenses increased to $2,966,785, an increase of $446,118
over
the same period in 1994, where expense was $2,515,920. The increases in
expenses
for the nine months of 1995, over the nine months of 1994, are due to nine
months of
expenses for 1995, compared to only six months of expenses for 1994, due to the
acquisition of Hash Tech in April 1994.
Research and development expenses for the current quarter decreased slightly to
$28,257, from $31,480 for the three months ended September 30, 1994. For the
nine
months ended September 30, 1995, research and development expenses increased
$57,626 to $169,940 from $112,314 for the nine months ended September 30, 1994.
The Company capitalized software development costs of $100,040 for the nine
months
ended September 30, 1995, compared to $36,221 for the nine months ending
September 30, 1994, as required by Statement of Financial Accounting Standards
No.
86. The Company also amortized $123,707 of previously capitalized software
development costs for the first nine months of 1995. The majority of the
research and
development expense was directed towards bringing the Company's
telecommunication
products into compliance with the North American Numbering Plan(NANP) for 1995.
The Company projects that it will continue to allocate the same level of
resources for
the development of products to keep pace with technological changes and
competitive
trends in the telecommunications and computer industries.
The Company recorded net income of $244,752 or $.06 per share for the nine
months
ended September 30, 1995, compared to net income of $329,827 or $.10 per share
for the same period of 1994. For the quarter ended September 30, 1995, the
Company
reported a net loss of $117,283 or $.02 per share compared to net income of
$148,072
or $.04 per share for the third quarter of 1994. The decrease in net income
for the third
quarter of 1995 is primarily due to a decline in sales of telecommunications
call
accounting products. Management of the Company anticipates that sales in the
manufacturing division will continue to be strong for the fourth quarter of
1995, and
that sales of telecommunications call accounting products will remain
relatively flat for
the quarter.
TELS Corporation
Management's discussion and analysis (continued)
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1995, the Company had $3,128,813 in current assets and
$1,691,538 in current liabilities, resulting in net working capital of
$1,437,275,
compared to working capital at December 31, 1994, of $1,127,328. The
increase in
working capital of $309,947 is due to net income from operations; the
exercise of
common stock warrants and options in the amount of $145,460 and increases in
sales
of $1,299,379. The cash generated from operations and from the exercise of
common
stock warrants and options was used to purchase property and equipment of
$298,064,and for software development of $100,040. The Company also used cash
to reduce
long term debt by $115,431. Inventories increased by $291,429 to accommodate
increased sales activities. The Company increased its use of the bank line of
credit by
$146,594 and also reduced accounts payable by $402,681.
As of September 30, 1995, the Company had borrowed $709,339 against its line of
credit compared to borrowings of $562,745 at December 31, 1994. Management of
the Company believes that the current working capital level will meet it's cash
requirements for the foreseeable future. However, the Company may require
additional
financing for expansion, product development and other potential growth
opportunities
under consideration. The Company also intends to purchase additional equipment
to
enhance its production and administrative capabilities as needed.
<PAGE>
TELS Corporation
PART II. OTHER INFORMATION
(Item 6. Exhibits and Reports on Form 8-K.)
(b). Reports on Form 8-K:
On November 3, 1995, the Company filed a Form 8-K reporting a change
in certifying accountants.
TELS Corporation
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned
thereunto duly authorized.
TELS Corporation
By: /s/ Willard H. Gardner
Willard H. Gardner
Secretary
By: /s/ Stephen M. Nelson
Stephen M. Nelson
Vice President and
Chief Financial Officer
Dated: November 14, 1994
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