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 June 30, 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 July 31, 1996 3,899,819
<PAGE>
TELS Corporation
INDEX
PART I. FINANCIAL INFORMATION Page
Consolidated Balance Sheets -- June 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations -- Six and Three Months 4
Ended June 30, 1996 and 1995, respectively
Consolidated Statements of Cash Flows -- Six Months Ended 5
June 30, 1996 and 1995, respectively
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial 7,8
Condition and Results of Operations
PART 11. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
<PAGE>
TELS Corporation
Consolidated Balance Sheets
June 30, December 31,
1996 1995
Assets (Unaudited) Audited
-------- ------------ -------------
Current Assets
Cash and cash equivalents $ 99,500 $ 28,075
Cash investments 59,497 56,617
Trade accounts receivable, less allowance
for doubtful receivables of $100,894 and
$105,788 respectively 726,742 1,044,128
Employee and other receivables 141,645 121,863
Inventories 936,791 1,100,044
Prepaid expenses 124,739 79,089
Deferred income taxes 162,253 118,900
Net assets - discontinued operations 354,958 757,750
----------- -----------
Total current assets 2,606,125 3,306,466
----------- -----------
Property, plant and equipment, net 1,007,110 1,087,778
Software development costs, net 122,960 140,080
Intangible assets, net 238,040 279,162
Deferred income taxes 322,471 314,850
Other assets 140,575 130,832
------------ ------------
$ 4,437,281 $ 5,259,168
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities
Current portion of long-term debt 890,899 1,283,962
Trade accounts payable 217,234 313,002
Accrued expenses 274,353 382,016
Accrued vacation 117,599 115,404
Deposits and advances 21,182 115,582
------------ ------------
Total current liabilities 1,521,267 2,209,966
------------ ------------
Long-term debt, excluding current installments 267,840 346,195
------------ ------------
Stockholders' equity
Common stock, $.02 par value. Authorized
10,000,000 shares; issued and
outstanding 3,892,274 77,825 77,825
Additional paid-in capital 4,231,567 4,231,567
Accumulated deficit (1,580,293) (1,495,210)
Deferred compensation (80,925) (111,175)
------------ ------------
Net stockholders' equity 2,648,174 2,703,007
------------ ------------
$ 4,437,281 $ 5,259,168
============ ============
See accompanying notes to financial statements.
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TELS Corporation
Consolidated Statements of Operations
(Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
1996 1995 1996 1995
-------- ------- ------- ---------
Net sales $1,692,771 $2,031,177 $3,531,777 $4,227,728
Cost of goods sold 852,605 921,331 2,010,468 1,870,739
---------- ---------- ---------- ----------
Gross profit 840,166 1,109,846 1,521,309 2,356,989
Research and development expenses 23,246 75,946 67,352 141,683
Selling, general and administrative
expenses 820,112 855,585 1,546,278 1,765,964
---------- --------- --------- ---------
Operating income (loss) (3,192) 178,315 (92,321) 449,342
Other income (deductions):
Interest income 2,549 2,596 5,850 7,170
Interest expense (26,294) (22,305) (46,553) (41,149)
Other (1,355) 30,135 5,083 34,547
---------- --------- --------- --------
Net other (25,100) 10,426 (35,620) 568
---------- --------- --------- --------
Income (loss) from continuing
operations before income
tax benefit (provision) (28,292) 188,741 (127,941) 449,910
Income tax benefit, (provision) 10,885 (9,249) 42,859 (16,999)
---------- --------- --------- --------
Net income (loss) from continuing
operations (17,407) 179,492 (85,082) 432,911
Loss from discontinued operations
(net of tax benefit) (17,807) (34,855) (17,807) (70,876)
--------- --------- --------- -------
Net income (loss) $(35,214) $144,637 $(102,889) $362,035
========= ========== ========= ========
Net income (loss) per common and
common equivalent share:
From continuing operations $ (.00) $ .05 $ (.02) $ .11
Discontinued operations (.00) (.02) .00 (.02)
-------- --------- --------- --------
Net income (loss) per common and
common equivalent share $ (.01) $ .03 $ (.03) $ .09
======== ========= ========= ========
See accompanying notes to financial statements
<PAGE>
TELS Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
June 30,
Increase (Decrease) in Cash and Cash Equivalents 1996 1995
Cash flows from operating activities:
Net income (loss) $(102,889) $362,035
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation of plant and equipment 156,697 107,728
Amortization of other assets 81,510 11,490
Amortization of software development
costs 44,726 74,564
Deferred income taxes 50,974 17,000
Deferred compensation 30,250 16,250
Changes in operating assets and
liabilities:
Receivables 297,604 167,905
Inventories 163,252 (53,423)
Prepaid expenses (45,650) 12,662
Other assets 31,379
Trade accounts payable and
accrued expenses (201,236) 32,232
Deposits and advances (94,400) 26,340
Non cash charges and working
capital changes of discontinued
operations 420,599 179,072
--------- --------
Net cash provided by operating
activities 832,816 953,855
---------- --------
Cash flows from investing activities:
Capital expenditures (76,029) (121,460)
Software development costs (27,606) (81,990)
Cash investments 2,880 1,773
Gain (loss) on disposal of equipment (29,480)
---------- ----------
Net cash used in investing activities (130,235) (201,677)
---------- ----------
Cash flows from financing activities:
Net (payments) under line of credit
agreement (336,646) (551,223)
Financing activities of discontinued
operations (159,738) (134,669)
Principal payment on long-term debt (134,772) (94,304)
Proceeds from issuance of common stock 145,500
--------- ----------
Net cash used in financing activities (631,156) (634,696)
--------- ----------
Net increase in cash and cash equivalents 71,425 117,482
Cash and cash equivalents at beginning of year 28,075 77,372
--------- ----------
Cash and cash equivalents at end of quarter $ 99,500 $ 194,854
============= =============
Supplemental Disclosures of cash flow information
Cash paid year to date for interest $ 46,553 $ 41,149
============= =============
See accompanying notes to financial statements
<PAGE>
TELS Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Financial Statements
The financial statements for the three and six months ended June 30, 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 six months ended June 30, 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 3,892,274 for the three and six months ended June 30, 1996,
and 4,090,460 and 4,031,055 for the three and six months ended June 30,
1995.
3. Consolidated Financial Statements
For the periods ended June 30, 1996, and 1995, all material intercompany
accounts and transactions have been eliminated in consolidation. Inventories
of continuing operations at June 30, 1996 and December 31, 1995 consisted of
the following:
1996 1995
----- ------
Finished goods $ 57,701 $ 129,355
Work-in-process 252,943 283,937
Raw Materials and supplies 693,579 746,684
Reserve for obsolete inventory (67,432) (59,932)
--------- ---------
$936,791 $1,100,044
--------- ----------
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 June 30, 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 June 30, 1996 and
1995.
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TELS Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for the historical information contained herein, this report on form
10-Q contains forward-looking statements that involve risks and uncertainties.
The Company's actual results could differ materially. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed as factors that may affect future results of operations, as well as
those discussed elsewhere in the Company's SEC reports (including without
limitation, its report on form 10-K for the fiscal year ended December 31, 1995.
Continuing Operations 1996
Consolidated net sales for the six months ended June 30, 1996, decreased by
16.5% to $3,531,777 when compared to $4,227,728 of net sales for the six months
of 1995. Consolidated net sales of $1,692,771 decreased by 16.6% when compared
to the second quarter of 1995, sales of $2,031,177. The decrease in sales is due
to a 60% decline in shipments of the Company's telecommunication products when
compared to 1995 second quarter sales levels. This decrease in sales is the
result of an extraordinary sales level in the first and second quarters of 1995,
that was caused by the changes created by the North American Numbering Plan
("NANP") which became effective in 1995. The decrease in sales of
telecommunications products was offset somewhat by a 7% increase in sales by the
Company's manufacturing sector.
Gross profit for the second quarter of 1996, decreased to $840,166, a reduction
of $269,680 when compared to gross profit for the second quarter of 1995 of
$1,109,846. The gross profit margin as a percentage of sales was 49.6% for the
second quarter of 1996, compared to 54.6% for the second quarter of 1995. The
reduction in the gross profit margin as a percent of sales is due to the
decreased sales of telecommunications products which represented 46.5% of total
sales in 1995, compared to 31% of total sales in 1996. For the six months ending
June 30, 1996, the gross profit margin was 43.1% compared to 55.8% in 1995.
Research and development expenditures for the second quarter and six months
of 1996, were $23,246 and $67,352 respectively, compared to $75,946 and $141,683
for the same periods in 1995. The total research and development expense for the
six months ending June 30, 1996 was made up of $22,629 in current expense and
$44,723 amortization expense for previously capitalized software development
costs. For the second quarter of 1996, $1,167 represented current expense, and
$22,079 represented amortization of previously capitalized software development
costs. The Company is continuing its research and development efforts on
products which bring together technological advances in the telecommunications
industry and 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 $820,112 for the second
quarter of 1996, compared to $855,585 for the second quarter of 1995. This
decrease of $35,473 or 4% 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 half of 1996. As a percentage of net sales, administrative expenses
were 48.4% for the second quarter of 1996, and 42.1% for the second quarter of
1995. For the six months ending June 30, 1996, selling, general and
administrative expenses were $1,546,278 compared to $1,765,964 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 second quarter of 1996 of $17,407. This is a significant decrease when
compared to the second quarter net income of $179,492 for 1995. For the six
months ending June 30, 1996, the Company incurred a net loss of $85,082 compared
to net income of $432,911 for same period of 1995. This unfavorable decrease in
net income can be attributed to the decreased sales levels of telecommunications
products and higher than expected production costs experienced in the
manufacturing segment.
Discontinued 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. In the second quarter of 1996, the
Company incurred additional expenses from discontinuance of $17,807. Management
of the Company believes that any future expenses from discontinued operations
will not be material.
<PAGE>
Continuing Operations 1995
Consolidated net sales for the second quarter of 1995 of $2,031,177 showed
an increase of $191,669 or 10% when compared with net sales of $1,839,508 for
the second quarter of 1994. For the six months ending June 30, 1995 net sales
increased to $4,227,728 from $2,614,633 for the first half of 1994. The increase
in net sales was principally due to the increases in sales of call accounting
products which 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 benefitted
from sales of $1,045,217 generated by Hash Tech, the manufacturing sector of the
Company, which was acquired in March of 1994.
Gross profit increased to $1,109,846 or 54.6% of sales in the second quarter
of 1995, from $1,049,726, or 57% of sales for the second quarter in 1994. The
decrease as a percentage of sales for the second 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, resulted in the consolidated gross profit
margin slipping to 54.6% in 1995.
The Company spent $75,946 or 3.7% of sales revenues on research and
development during the second quarter of 1995, compared to $37,089 or 2% of
sales revenues for the second quarter of 1994. Selling, general and
administrative expenses of $855,585 for 1995, showed an increase of $27,120 when
compared to 1994, expense of $828,465. Consolidated net income from continuing
operations for the second quarter of 1995 was $179,492 or $.05 per share
compared to net income of $101,963 or $.04 per share, from continuing operations
for the second quarter of 1994.
Discontinued Operations 1995
In the second quarter of 1995, the Company had net sales of $301,090 from
discontinued operations, compared to $792,635 in net sales for the second
quarter of 1994. Discontinued operations reported a net loss of $34,855, net of
a tax benefit of $13,149, for the first quarter of 1995, compared to a net loss
of $56,535 for the second quarter of 1994.
Liquidity and Capital Resources
As of June 30, 1996, the Company reported current assets of $2,606,125, and
current liabilities of $1,521,267, resulting in net working capital of
$1,084,858. This is a decrease of $11,642 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 $402,792 was used to
purchase equipment of $76,029 and for capitalized software development costs of
$27,606. The Company reduced its line of credit by $336,646, and reduced long
term debt by $134,772. The Company discontinued the P.C. reseller operations in
Texas and has substantially completed this divestiture as of June 30, 1996. The
Company renewed its financing line with a commercial bank on July 1, 1996, for
twelve months, with interest at prime 2%. Management of the Company believes
that the current working capital level will meet it's cash requirements for the
foreseeable future, but anticipates that additional financing through debt
and/or equity will be needed to fund material sales growth, future acquisitions
and final development and marketing of new products under development and
consideration.
The Company derives the majority of its sales from two distinct industries. The
Company develops, produces, sales and services products used in telephone call
management. The Company also derives significant sales from a contract
manufacturing and cable/wire harness service facility. The Company expects that
sales in the telecommunications sector will increase by approximately 10% over
1995 levels for the third and fourth quarter of 1996, due to economic growth in
the industry, technological changes and product enhancements being introduced.
There are several factors that may affect future results of operations. The
Company believes that in the future its results of operations could be affected
by various factors such as delays in further development and sales of the
Company's new products and major new versions of existing products for the
telecommunications industry; market acceptance of new products, upgrade and
service agreements; telecommunications industry transitions; competitive pricing
in the contract manufacturing business; and adverse changes in general economic
conditions in the United States. In addition, the Company has grown and expects
to grow through acquisition activity and the ability of the Company to continue
to integrate the operations of acquisitions into existing structures could have
a material effect on the results of operations.
<PAGE>
TELS Corporation
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a vote of Security Holders.
The annual meeting of shareholders was held on June 3, 1996, at which time
John L. Gunter was re-elected to serve as a director. Mr. Gunter will serve
for a three year term expiring in 1999. Affirmative votes cast for Mr.
Gunter were 3,170,290, with 93,097 votes withheld or abstained, and 4,000
votes against. The affirmative votes represented 97% of the total shares
voted. All other directors of the Company are serving their elected term of
office.
Item 6. Exhibits and Reports on Form 8-K.
(b). Reports on Form 8-K:
No reports on Form 8-K were filed for the quarter ending
June 30, 1996.
<PAGE>
TELS Corporation
Signatures
Pursuant ot 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: August 14, 1996 By: /s/ Stephen M. Nelson
Stephen M. Nelson, President
Dated: August 14, 1996 By: /s/ Deborah Walford
Deborah Walford, Controller
<PAGE>
TELS CORPORATION
Exhibit 27
Article 5 Financial Data Schedule For Second Quarter 10-Q
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 JUNE 30,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT
10-Q
Item Number Item Description Amount
5-02(1) cash and cash items $158,997
5-02(2) marketable securities $0
5-02(3)(a)(1) notes and accounts receivable-trade $827,636
5-02(4) allowances for doubtful accounts $100,894
5-02(6) inventory $936,791
5-02(9) total current assets $2,606,125
5-02(13) property, plant and equipment $2,256,792
5-02(14) accumulated depreciation $1,249,682
5-02(18) total assets $4,437,281
5-02(21) total current liabilities $1,521,267
5-02(22) bonds, mortgages and similar debt $267,840
5-02(28) preferred stock-mandatory redemption $0
5-02(29) preferred stock-no mandatory redemption $0
5-02(30) common stock $77,825
5-02(31) other stockholders' equity $2,570,349
5-02(32) total liabilities and stockholders' equity $4,437,281
5-03(b)1(a) net sales of tangible products $3,531,777
5-03(b)1 total revenues $3,531,777
5-03(b)2(a) cost of tangible goods sold $2,010,468
5-03(b)2 total costs and expenses applicable to
sales and revenues $3,624,098
5-03(b)3 other cost and expenses $35,620
5-03(b)5 provision for doubtful accounts and notes $0
5-03(b)8 interest and amortization of debt discount
and expense $46,553
5-03(b)(10) income before taxes and other items ($127,941)
5-03(b)(11) income tax (expense) benefit $42,859
5-03(b)(14) income/loss continuing operations ($85,082)
5-03(b)(15) discontinued operations ($17,807)
5-03(b)(17) extraordinary items $0
5-03(b)(18) cumulative effect-changes in accounting principles $0
5-03(b)(19) net income or loss ($102,889)
5-03(b)(20) earnings per share-primary ($0.03)
5-03(b)(20) earnings per share-fully diluted ($0.03)
<PAGE>
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: August 14, 1996 By: /s/ Stephen M. Nelson
Stephen M. Nelson, President
Dated: August 14, 1996 By: /s/ Deborah Walford
Deborah Walford, Controller
<PAGE>
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: August 14, 1996 By:
Stephen M. Nelson
President
Dated: August 14, 1995 By:
Deborah Walford
Controller
<PAGE>
August 15, 1996
National Association of Securities Dealers, Inc.
Attn: NASDAQ Operations
1735 K Street NW
Washington, D. C. 20006
Gentlemen:
On behalf of TELS Corporation and in accordance with Section B.3.C of Part II of
Schedule D of the NASD By-laws, enclosed are three copies, one manually signed,
of the Company's 10-Q for the quarter ended June 30, 1995, being filed with the
Securities and Exchange Commission.
Sincerely,
Stephen M. Nelson
Executive Vice President and
Chief Financial Officer
Enclosures
SMN/mr
