<PAGE>
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 March 31, 1996 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.)
406 West South Jordan Parkway, Suite 250, South Jordan, Utah 84095
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (801) 571-1182
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 April 30, 1996 3,891,319
1
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TELS Corporation
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
<S> <C>
Consolidated Balance Sheets -- March 31, 1996, and December 31, 1995 3
Consolidated Statements of Operations -- Three Months Ended
March 31, 1996, and 1995, respectively 4
Consolidated Statements of Cash Flows -- Three Months Ended
March 31, 1996, and 1995, respectively 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7,8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
</TABLE>
2
<PAGE>
TELS Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
(Unaudited) Audited
----------- ------------
<S> <C> <C>
Assets
-------
Current Assets
Cash and cash equivalents $ 76,842 $ 28,075
Cash Investments 58,476 56,617
Trade Accounts receivable, less allowance for
doubtful receivable of $117,052 and
$105,788 respectively 1,165,607 1,044,128
Employee and other receivables 121,844 121,863
Inventories 1,010,764 1,100,044
Prepaid expenses 129,801 79,089
Deferred income taxes 144,798 118,900
Net assets - discontinued operations 407,686 757,750
---------- ----------
Total current assets 3,115,818 3,306,466
---------- ----------
Property, plant and equipment, net 1,088,462 1,087,778
Software development costs, net 133,110 140,080
Intangible assets, net 253,038 279,162
Deferred income taxes 322,471 314,850
Other assets 143,591 130,832
---------- ----------
$5,056,490 $5,259,168
========== ==========
Liabilities and Stockholders' Equity
--------------------------------------
Current Liabilities
Current portion of long-term debt 1,346,176 1,283,962
Trade accounts payable 325,639 313,002
Accrued expenses 198,838 382,016
Accrued vacation 114,518 115,404
Deposits and advances 88,570 115,582
---------- ----------
Total current liabilities 2,073,741 2,209,966
---------- ----------
Long-term debt, excluding current installments 332,242 346,195
Stockholders' equity
Common stock, $.02 par value. Authorized
10,000,000 shares; issued and outstanding
3,891,319 and 3,892,274 respectively 77,825 77,825
Additional paid-in capital 4,231,567 4,231,567
Accumulated deficit (1,562,885) (1,495,210)
Deferred Compensation (96,000) (111,175)
---------- ----------
Net stockholders' equity 2,650,507 2,703,007
---------- ----------
$5,056,490 $5,259,168
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 3
TELS Corporation
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------
1996 1995
------ ------
<S> <C> <C>
Net sales $ 1,839,006 $ 2,196,551
Cost of goods sold 1,157,863 949,408
------------ ------------
Gross profit 681,143 1,247,143
Research and development expenses 44,106 65,737
Selling, general and administrative expenses 726,166 910,378
------------ ------------
Operating income (loss) (89,129) 271,028
Other income (deductions):
Interest income 3,301 4,574
Interest expense (20,259) (18,844)
Other 6,438 4,411
------------ -------------
Net Other (10,520) (9,859)
------------ -------------
Income (loss) from continuing operations
before income tax benefit (provision) (99,649) 261,169
Income tax benefit, (provision) 31,974 (20,899)
------------ -------------
Net Income (loss) from continuing operations $ (67,675) $ 240,270
Loss from discontinued operations (net of tax
benefit, $13,149) - (22,872)
------------ -------------
Net income (loss) $ (67,675) $ 217,398
Net income (loss) per common and common
equivalent share:
From continuing operations $ (.02) $ .07
Discontinued operations .00 (.01)
----------- -------------
Net income (loss) $ (.02) $ .06
=========== =============
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
TELS Corporation
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------
Increase (Decrease) in Cash and Cash Equivalents 1996 1995
- ------------------------------------------------- ---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 67,675) $ 217,398
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation of plant and equipment 73,022 51,987
Amortization of other assets 21,594 18,969
Amortization of software development costs 22,644 54,821
Deferred income taxes (31,974) (9,250)
Deferred compensation 15,175
Changes in operating assets and liabilities:
Receivables (120,495) (13,111)
Inventories 89,280 (75,640)
Prepaid expenses (50,712) (28,817)
Other assets 13,365 (11,202)
Trade accounts payable and accrued expenses (171,427) 26,821
Deposits and advances (27,012) 3,872
Non cash charges and working capital changes
of discontinued operations 350,064 42,437
----------- -----------
Net cash provided by operating activities 115,849 278,285
----------- -----------
Cash flows from investing activities:
Capital expenditures (73,705) (32,436)
Software development costs (15,674) (46,088)
Cash investments 1,859 (801)
Gain (loss) on disposal of equipment (13,235) 2,000
----------- -----------
Net cash (used in) investing activities (100,755) (77,325)
----------- -----------
Cash flows from financing activities:
Net borrowings (payments) under line of credit agreement 103,631 (36,185)
Financing activities of discontinued operations (28,541)
Principal payment on long-term debt (41,417) (74,181)
Proceeds from issuance of common stock 137,300
----------- -----------
Net cash provided by financing activities 33,673 26,934
----------- -----------
Net increase in cash and cash equivalents 48,767 227,894
Cash and cash equivalents at beginning of year 28,075 77,372
----------- -----------
Cash and cash equivalents at end of quarter $ 76,842 $ 305,266
=========== ===========
Supplemental Disclosures of cash flow information
Cash paid during the quarter for interest $ 20,259 $ 18,844
=========== ===========
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
TELS Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Financial Statements
----------------------------
The financial statements for the three months ended March 31, 1996
and 1995, 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
1996 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, 1995 and 1994 included in the
Company's 1995 Annual Report to the Securities and Exchange Commission
on Form 10-K.
The results for the three months ended March 31, 1996, are not
necessarily indicative of the results for the year ending December
31, 1996.
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. Stock options and stock warrants are
not included in the 1996 calculation because they are anti-dilutive.
The weighted average number of outstanding common and common
equivalent shares used in this computation were 3,891,319 and
3,971,351, respectively, for the three months ended March 31, 1996
and 1995.
3. Consolidated Financial Statements
---------------------------------
For the quarter ended March 31, 1996, all material intercompany
accounts and transactions have been eliminated in consolidation.
4. Impact of Recently Adopted Accounting Standards
-----------------------------------------------
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS
121 requires that long-lived assets and certain identifiable
intangible assets to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Accordingly,
the Company has reviewed its long-lived assets for the period ending
March 31, 1996, and has determined that the impact of SFAS 121 is not
material and that an adjustment is not required at this time.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation", and has elected to report the effects of SFAS 123 under
the disclosure method. SFAS 123 defines a fair value method of
accounting for employee stock options and requires pro forma net
income and earnings per share disclosure. The Company has applied
the "Black Scholes Option Pricing Model" to value all options issued
in 1995 and 1996, and determined that the applicable amounts do not
materially affect net income or earnings per share for the periods
ended March 31, 1996 and 1995.
6
<PAGE>
TELS Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continuing Operations 1996
- --------------------------
Consolidated net sales for the first quarter of 1996 decreased 16.3%
to $1,839,006 from $2,196,551 for 1995. The decrease is due to reduced
sales of telecommunication products by $712,261 or 60% compared to 1995 first
quarter sales levels. This decrease in sales is the result of an
extraordinary sales level in the first quarter of 1995, that was caused
by the changes in the North American Numbering Plan ("NANP") which became
effective in 1995. The decrease in sales of telecommunications products was
offset somewhat by increased sales in the manufacturing sector of $297,363 or
28% for the first quarter, due to increased economic activity and corporate
outsourcing mainly in the Silicon Valley area of California.
Gross profit decreased to $681,143, a reduction of $566,000 when
compared to gross profit for 1995 of $1,247,143. The gross profit margin as
a percentage of sales was 37% for 1996, compared to 57% for 1995. The
reduction in the gross profit margin as a percent of sales is due to the
decreased sales of telecommunications products which represented 54% of total
sales in 1995, compared to 25% of total sales in 1996.
The Company reduced its expenses in research and development due to
lower telecommunications products sales. For the first quarter of 1996,
total research and development expenditures were $44,106. Of this amount,
$21,462 represented current expense, $22,644 represented amortization of
previously capitalized software development costs. Management of the Company
believes that it will be necessary to increase its level of research and
development later in 1996 to take advantage of technology changes which are
expected to develop.
Selling, general and administrative expenses were $726,166 for the
first quarter of 1996, compared to $910,378 for the first quarter of 1995.
This decrease of $184,212 or 20% in 1996 is mainly due to the expense
reductions implemented by management of the Company as a result of lower
sales activity in the first quarter of 1996. As a percentage of net sales,
administrative expenses were 39.5% for 1996, and 41.4% for 1995. Management
believes that it may be necessary to continue to reduce administrative
expenses until such time that sales activities warrant any expansion and/or
growth.
The Company reported a consolidated net loss from continuing operations
for the first quarter of 1996 of $99,649 or $.02 per share. This is a
significant decrease when compared to the first quarter net income of
$240,370 or $.06 per share for 1995. This unfavorable decrease in net
income can be attributed to the decreased sales levels of telecommunications
products and the discontinued operations.
Discontinuted Operations 1996
The Company discontinued its P.C. reseller businesses located in Texas
during the first quarter of 1996. Accordingly, the Company recorded an
estimated liability of $292,000 at December 31, 1995, to account for the
estimated losses which were to occur on discontinuance. As of March 31,
1996, the Company had used approximately $250,000 of this estimated loss on
discontinuance, and expects that any future losses will be absorbed by the
remaining estimate established in December, 1995.
Continuing Operations 1995
Consolidated net sales for the first quarter of 1995 of $2,196,551
showed an increase of $1,431,354 when compared with net sales of $765,197
for the first quarter of 1994. The increase in net sales was principally
due to increases in sales of call accounting products of 39%. The increases
in sales of call accounting products was mainly precipitated by the upgrading
and replacement of many systems in preparation for the changes in the North
American Dialing Patterns which took effect in 1995. In the first quarter
of 1995, the Company also benefitted from sales generated by Hash Tech, the
manufacturing sector of the Company, of $1,045,217.
Gross profit increased to $1,247,143 or 57% of sales in the first
quarter of 1995, from $578,981, or 76% of sales for the first quarter in
1994. The decrease as a percentage of sales for the first quarter of 1995,
was due to the sales mix. The additional sales of Hash Tech in 1995, where
the gross profit margin was 34.6% of sales, combined with the gross profit
margin of 75% on the Company's telecommunications products, caused the
consolidated gross profit margin to change in 1995.
7
<PAGE>
TELS Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company continued its research and development efforts on products
which bring together technological advances in the telecommunications and
the computer industries. The Company spent $65,737 or 3% of sales revenues
on research and development during the first quarter of 1995, compared to
$69,897 or 9% of sales revenues for the first quarter of 1994.
Selling, general and administrative expenses of $910,378 for 1995,
showed an increase of $494,382 when compared to 1994, expense of $415,996.
Consolidated net income from continuing operations for the first quarter of
1995 was $240,370 or $.07 per share compared to net income of $96,109 or
$.04 per share, from continuing operations for the first quarter of 1994.
Discontinued Operations 1995
- ----------------------------
In the first quarter of 1995, the Company had net sales of $784,704
for discontinued operations, compared to $667,694 in net sales for the first
quarter of 1994. Discontinued operations reported a net loss of $22,872, net
of a tax benefit of $13,149, for the first quarter of 1995, compared to a net
loss of $44,592.
Liquidity and Capital Resources
- -------------------------------
As of March 31, 1996, the Company reported current assets of
$3,115,818, and current liabilities of $2,073,741, resulting in net working
capital of $1,042,077. This is a decrease of $54,423 when compared to net
working capital of $1,096,500 at December 31, 1995. Working capital
contributed by the disposition of assets from discontinued operations
of $350,064 was used to purchase equipment of $73,705 and for capitalized
software development costs of $15,674. The Company utilized its line of
credit which increased by $103,631. These borrowings were used to fund
working capital needs and to reduce long term debt by $41,417. The Company
discontinued the P.C. reseller operations in Texas and has substantially
completed this divestiture as of March 31, 1996. The Company expects to be
fully divested of these operations by the end of the second quarter of 1996.
The Company believes that continuing operations will provide positive cash
flows. The Company is continuing its efforts to renew its financing line
with a commercial bank and also to find additional financing through debt
and/or equity which will be needed to fund operations, future acquisitions
and final development and marketing of new products under development and
consideration. The telecommunications industry is continuing to change at a
drastic pace which could limit the Company's ability to meet sales
projections. In the fourth quarter of 1995 and the first quarter of 1996,
the Company incurred significant losses from operations which have had an
impact on working capital. The Company continues to be in violation of
certain debt covenants under the terms of its loan agreements. Though
the Company has obtained waivers of these violations as of December 31, 1995,
the Company will not seek further waivers of these violations or expected
violations in the near term because the Company expects to refinance this
line of credit by entering into a new line of credit or renewing the
existing line with similar terms with the current lender. If the Company
is unable to obtain or renew a new line of credit with the current lending
institution, it will seek alternative sources of debt and/or equity to repay
this obligation. There can be no assurance that the Company will be able
to arrange for new debt or equity financing on terms that will be acceptable
to the Company.
(THIS SPACE INTENTIONALLY LEFT BLANK)
8
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TELS Corporation
PART II. OTHER INFORMATION
(Item 6. Exhibits and Reports on Form 8-K.)
(a) Exhibit 27 - Article 5 Financial Data Schedule for the
quarter ending March 31, 1996.
(b). Reports on Form 8-K:
None
(THIS SPACE INTENTIONALLY LEFT BLANK)
9
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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
Dated: May 13, 1996 By: /s/ John L. Gunter
- -------------------- --------------------
John L. Gunter
President and CEO
Dated: May 13, 1996 By: /s/ Stephen M. Nelson
- -------------------- -----------------------
Stephen M. Nelson
Executive Vice President
and Chief Financial Officer
10
<PAGE>
May 13, 1996
National Association of Securities Dealers, Inc.
Attn: NASDAQ OPERATIONS
1735 K Street - N.W.
Washington, D.C. 20006
RE: TELS Corporation
FILE NO. 0-12993
To Whom It May Concern:
On behalf of TELS Corporation, a Utah corporation ("Company"), please find
enclosed herewith for filing, one (1) complete copy of the Company's
Form 10-Q, which has been manually signed. Also included are two (2) copies
of Form 10-Q excluding exhibits.
Kindly acknowledge receipt and filing of the enclosed Form 10-Q by signing
and returning to the undersigned the enclosed copy of this letter. A
stamped, self-addressed envelope has been enclosed for your convenience.
Respectfully,
Stephen M. Nelson
Executive Vice President and
Chief Financial Officer
SMN:sm
I hereby acknowledge receipt of the above 10-Q.
Signature Date
11
<PAGE>
/TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE COMPANY AS FILED IN ITS 10-K (ITEM 7) FOR THE
YEAR ENDED DECEMBER 31, 1995 AND ITS 10-Q (ITEM 1) FOR THE QUARTER ENDED
MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<CASH> 135318
<SECURITIES> 0
<RECEIVABLES> 1282659
<ALLOWANCES> 117052
<INVENTORY> 1010764
<CURRENT-ASSETS> 3115818
<PP&E> 2254469
<DEPRECIATION> 1166007
<TOTAL-ASSETS> 5056490
<CURRENT-LIABILITIES> 2073741
<BONDS> 332242
0
0
<COMMON> 77825
<OTHER-SE> 2572682
<TOTAL-LIABILITY-AND-EQUITY> 5056490
<SALES> 1839006
<TOTAL-REVENUES> 1839006
<CGS> 1157863
<TOTAL-COSTS> 1928135
<OTHER-EXPENSES> 10520
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20259
<INCOME-PRETAX> (99649)
<INCOME-TAX> 31974
<INCOME-CONTINUING> (67675)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (67675)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
