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, 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 October 30, 1996 3,899,819
1
<PAGE>
TELS Corporation
INDEX
PART I. FINANCIAL INFORMATION Page
Consolidated Balance Sheets -- September 30, 1996
and December 31, 1995 3
Consolidated Statements of Operations -- Three and
Nine Months Ended September 30, 1996 and 1995,
respectively 4
Consolidated Statements of Cash Flows -- Nine Months Ended
September 30, 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 11. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
2
<PAGE>
TELS Corporation
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
1996 1995
Assets (Unaudited) Audited
--------
------------- --------------
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 59,122 $ 28,075
Investments 60,330 56,617
Trade accounts receivable, less allowance for
doubtful receivables of $89,987 and $105,788 respectively 842,313 1,044,128
Employee and other receivables 138,891 121,863
Inventories 931,075 1,100,044
Prepaid expenses 182,076 79,089
Deferred income taxes 162,253 118,900
Net assets - discontinued operations 390,314 757,750
-------------- --------------
Total current assets 2,766,374 3,306,466
-------------- --------------
Property, plant and equipment, net 954,922 1,087,778
Software development costs, net 123,295 140,080
Intangible assets, net 220,013 279,162
Deferred income taxes 322,471 314,850
Other assets 144,239 130,832
-------------- --------------
$ 4,531,314 $ 5,259,168
Liabilities and Stockholders' Equity
Current Liabilities
Current portion of long-term debt 780,116 1,283,962
Trade accounts payable 421,953 313,002
Accrued expenses 186,555 382,016
Accrued vacation 73,444 115,404
Deposits and advances 138,322 115,582
-------------- --------------
Total current liabilities 1,600,390 2,209,966
-------------- --------------
Long-term debt, excluding current installments 237,973 346,195
-------------- --------------
Stockholders' equity
Common stock, $.02 par value. Authorized 10,000,000 shares;
issued and outstanding 3,899,819 and 3,892,274 77,945 77,825
Additional paid-in capital 4,234,147 4,231,567
Accumulated deficit (1,545,841) (1,495,210)
Deferred compensation (73,300) (111,175)
-------------- --------------
Net stockholders' equity 2,692,951 2,703,007
-------------- --------------
$ 4,531,314 $ 5,259,168
See accompanying notes to financial statements.
3
</TABLE>
<PAGE>
TELS Corporation
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------- -----------------------------
1996 1995 1996 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 1,671,874 $ 1,728,319 $ 5,203,651 $5,956,047
Cost of goods sold 936,747 946,751 2,947,215 2,817,490
-------------- -------------- -------------- --------------
Gross profit 735,127 781,568 2,256,436 3,138,557
Research and development expenses 14,458 28,257 81,810 169,938
Selling, general and administrative expenses 678,845 808,848 2,225,124 2,574,814
-------------- -------------- -------------- --------------
Operating income (loss) 41,824 (55,537) (50,498) 393,805
Other income (deductions):
Interest income 1,564 2,009 7,414 9,179
Interest expense (26,808) (11,963) (73,361) (53,112)
Other 26,372 (16,179) 31,455 18,368
-------------- -------------- -------------- --------------
Net other 1,128 (26,133) 34,492) (25,565)
-------------- -------------- -------------- --------------
Income (loss) from continuing operations before
income tax benefit (provision) 42,952 (81,670) (84,990) 368,240
Income tax benefit, (provision) (8,500) 23,250 34,359 (24,748)
-------------- -------------- -------------- --------------
Net income (loss) from continuing operations 34,452 (58,420) (50,631) 343,492
Loss from discontinued operations (net of tax benefit) (5,053) (58,863) (22,860) (98,740)
-------------- -------------- -------------- --------------
Net income (loss) $ 29,399 (117,283) (73,491) 244,752
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Net income (loss) per common and common equivalent share:
From continuing operations $ .01 $ (.01) $ (.01) $ .08
Discontinued operations (.00) (.01) (.01) (.02)
-------------- -------------- -------------- --------------
Net income (loss) per common and common equivalent share
$ .01 $ (.02) $ (.02) $ .06
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
See accompanying notes to financial statements
4
</TABLE>
<PAGE>
TELS Corporation
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 1996 1995
-------------------------------------------------------
-------------- --------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ (73,491) $ 244,752
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation of plant and equipment 218,796 220,390
Amortization of other assets 60,900 36,218
Amortization of software development costs 55,559 123,707
Deferred income taxes 36,520 17,000
Deferred compensation 37,875 26,373
Changes in operating assets and liabilities:
Receivables 184,787 162,438
Inventories 168,969 (83,986)
Prepaid expenses (102,987) 17,929
Other assets (15,157) (32,744)
Trade accounts payable and accrued expenses (128,470) 110,144
Deposits and advances 22,740 (1,360)
Non cash charges and working capital changes
of discontinued operations 367,436 (767,326)
-------------- --------------
Net cash provided by operating activities 833,477 73,535
-------------- --------------
Cash flows from investing activities:
Capital expenditures (56,460) (298,064)
Software development costs (38,774) (100,040)
Cash investments 3,713 2,467
Gain (loss) on disposal of equipment (29,480)
-------------- --------------
Net cash used in investing activities (121,001) (395,637)
-------------- --------------
Cash flows from financing activities:
Net (payments) borrowings under line of credit agreement (458,244) 146,594
Financing activities of discontinued operations (72,061) (43,766)
Principal payment on long-term debt (153,824) (71,665)
Proceeds from issuance of common stock 2,700 145,460
------------- --------------
Net cash (used in) provided by financing activities (681,429) 176,623
-------------- --------------
Net increase (decrease) in cash and cash equivalents 31,047 (145,479)
Cash and cash equivalents at beginning of year 28,075 172,399
-------------- --------------
Cash and cash equivalents at end of quarter $ 59,122 $ 26,920
============== ==============
Supplemental Disclosures of cash flow information
Cash paid year to date for interest $ 73,361 $ 70,725
============== ==============
</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 and six months ended September 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 nine months ended September 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 4,025,200 and 3,899,819 for the three and nine
months ended September 30, 1996, and 4,106,300 and 4,110,300 for the three
and nine months ended September 30, 1995.
3. Consolidated Financial Statements
For the periods ended September 30, 1996, and 1995, all material
intercompany accounts and transactions have been eliminated in
consolidation. Inventories of continuing operations at September 30, 1996
and December 31, 1995 consisted of the following:
1996 1995
Finished goods $ 40,363 $ 129,355
Work-in-process 255,244 283,937
Raw Materials and supplies 698,900 746,684
Reserve for obsolete inventory (63,432) (59,932)
$ 931,075 $ 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 September 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 September 30, 1996 and 1995.
6
<PAGE>
TELS Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following Management Discussion and Analysis contains certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, including, among others (i)results of operations
(including expected changes in the Company's gross profit margin and general,
administrative and selling expenses); (ii) the Company's business strategy for
increasing sales; (iii) the Company's strategy to increase its size and customer
base; and (iv) the Company's ability to distinguish itself from its current and
competitors.
These forward-looking statements are based largely on the Company's
current expectations and are subject to a number of risks and uncertainties.
Actual results could differ materially from these forward-looking statements.
Important factors to consider in evaluating such forward-looking statements
include (i) delays in the release of new products or new versions of existing
products; (ii) the shortage of reliable market data regarding the telephone call
management and contract manufacturing industries market; (iii) changes in
external competitive market factors or in the Company's internal budgeting
process which might impact trends in the Company's results of operations; (iv)
anticipated working capital or other cash requirements; (v) changes in the
Company's business strategy or an inability to execute its strategy due to
unanticipated changes in the market: and (vi) various competitive factors that
may prevent the Company from competing successfully in the marketplace. In light
of these risks and uncertainties, there can be no assurance that the events
contemplated by the forward-looking statements contained herein will in fact
occur.
Continuing Operations
Consolidated net sales for the nine months ended September 30, 1996,
decreased by 12.6% to $5,203,651 when compared to $5,956,047 of net sales for
the nine months of 1995. Consolidated net sales of $1,671,874 decreased by 3.2%
when compared to the third quarter of 1995 sales of $1,728,319. The decrease in
sales is due to a 33.2% decline in shipments of the Company's telecommunication
products for the first nine months of 1996, when compared to the same period of
1995 sales levels. For the third quarter of 1996, telecommunication produc
sales were at the same level as the third quarter of 1995. The Company believes
that the 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 3.5%
increase in sales by the Company's contract manufacturing sector.
Gross profit for the third quarter of 1996, decreased to $735,127, a
reduction of $46,441 when compared to gross profit for the second quarter of
1995 of $781,568. The gross profit margin as a percentage of sales was 43.9% for
the third quarter of 1996 compared to 45.2% 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 37% of total
sales in 1996, compared to 35% of total sales in 1995. For the nine months
ending September 30, 1996, the gross profit margin was 43.4% compared to 52.7%
in 1995. As this sales mix continues for the remainder of 1996, the company
expects the gross profit margin to remain at approximately 45% for the fourth
quarter of 1996.
Research and development expenditures for the third quarter and nine
months of 1996, were $14,458 and $81,810 respectively, compared to $28,257 and
$169,938 for the same periods in 1995. The total research and development
expense for the nine months ending September 30, 1996 consisted of $26,251
in current expense and $55,559 of amortization expense for previously
capitalized software development costs. For the third quarter of 1996, the
Company continued to develop the INN-FORMR Express and the WIN-SENSETM,
telephone call accounting products. These products are scheduled for release in
the fourth quarter of 1996. 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 in the fourth quarter of 1996,
and the first half of 1997, to take advantage of technology changes which have
and are expected to develop.
Selling, general and administrative expenses were $678,845 for the third
quarter of 1996, compared to $808,848 for the third quarter of 1995. This
decrease of $130,003 or 16% 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 nine months of 1996, and efforts aimed at improving operating
efficiencies. As a percentage of net sales, administrative expenses were 40.6%
for the third quarter of 1996, and 46.8% for the third quarter of 1995. For the
nine months ending September 30, 1996, selling, general and administrative
expenses were $2,225,124 compared to $2,574,814 for 1995. Management believes
that it may be necessary to continue to reduce administrative expenses in the
near term until such time that sales activities warrant any expansion and/or
growth.
7
<PAGE>
TELS Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The Company reported consolidated net income from continuing operations
for the third quarter of 1996 of $34,452. This is a significant improvement when
compared to the third quarter net loss from continuing operations of $58,420 for
1995. The third quarter net income is an improvement in earnings over the first
half of 1996, and is attributable to lower administrative expenses and to the
Company's continuing focus on core strengths and technologies. For the nine
months ending September 30, 1996, the Company incurred a net loss from
continuing operations of $50,631 compared to net income from continuing
operations of $343,492 for same period of 1995.
Discontinued Operations
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. For the nine months
ending September 30, 1996, the Company incurred additional expenses from
discontinuance of $22,860.
Liquidity and Capital Resources
As of September 30, 1996, the Company reported current assets of
$2,766,374, and current liabilities o f $1,600,390, resulting in net working
capital of $1,165,984. This is an increase of $69,484 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 $367,436 was used
to purchase equipment of $56,460 and for capitalized software development costs
of $38,774. The Company also used these funds and funds generated by operations
to reduce its line of credit by $458,244, and reduce its long term debt by
$153,824. Cash provided from operations of $833,477 was primarily attributable
to reductions in accounts receivable of $184,787, and inventories of $168,969.
The Company discontinued the P.C. reseller operations in Texas and has
substantially completed this divestiture as of September 30, 1996. 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, sells 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 somewhat over 1995 levels
for the fourth quarter of 1996, due to economic growth in the industry,
technological changes and product enhancements being introduced. 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.
8
<PAGE>
TELS Corporation
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On February 2, 1996, Harold and Diane Neuenswander("Neuenswanders")
filed a complaint in the Superior Court for the County of Santa Clara,
California, against the Company and several of its officers and
directors in their individual and representative capacities, and also
against Hash Tech a wholly owned subsidiary of the Company. The
Neuenswanders have alleged causes of action for recision of a certain
"Asset Purchase Agreement" dated March 31, 1996, civil conspiracy,
fraud, violation of California securities laws, intentional
interference with economic advantage, common law gender discrimination
against Diane Neuenswander, intentional infliction of emotional
distress, and breach of fiduciary duty. The Company and its officers
deny any wrongdoing in regards to the above allegations and believe
that the resolution of any disputes between the Company and the
Neuenswanders should be settled through arbitration in Salt Lake City,
Utah, as stipulated in both the Asset Purchase Agreement, and the
"Employment Agreements" entered into in March, 1994. On April 15,
1996, the Company filed a complaint in the Third Judicial District
Court of Salt Lake City, Utah, against the Neuenswanders claiming
breach of certain "Non-Compete Agreements" between the Company and the
Neuenswanders and breach of a "Severance Agreement" between Harold
Neuenswander and the Company. In addition, the Company has filed a
complaint with the American Arbitration Association, which is being
held pending the outcome of certain legal hearings. On April 9, 1996,
the Superior Court of Santa Clara, California, heard and denied the
Company's motion to compel arbitration. In July, 1996, the Company
filed an appeal to reverse this decision with the Sixth Appellate
District in the Court of Appeal of the State of California.
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
September 30, 1996.
9
<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: October 30, 1996 By: /s/ Stephen M. Nelson
----------------------------
Stephen M. Nelson, President
Dated: October 30, 1996 By: /s/ Deborah Walford
----------------------------
Deborah Walford, Controller
10
<PAGE>
November 1, 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 September 30, 1996, being filed with
the Securities and Exchange Commission.
Sincerely,
Stephen M. Nelson
President
Enclosures
SMN/mr
<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 SEPTEMBER
30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENT
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 119,452
<SECURITIES> 0
<RECEIVABLES> 932,300
<ALLOWANCES> 89,987
<INVENTORY> 931,075
<CURRENT-ASSETS> 2,766,374
<PP&E> 2,266,704
<DEPRECIATION> 1,311,782
<TOTAL-ASSETS> 4,531,314
<CURRENT-LIABILITIES> 1,600,390
<BONDS> 237,973
0
0
<COMMON> 77,945
<OTHER-SE> 2,615,006
<TOTAL-LIABILITY-AND-EQUITY> 4,531,314
<SALES> 5,203,651
<TOTAL-REVENUES> 5,203,651
<CGS> 2,947,215
<TOTAL-COSTS> 5,254,149
<OTHER-EXPENSES> 34,492
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73,361
<INCOME-PRETAX> (84,990)
<INCOME-TAX> 34,359
<INCOME-CONTINUING> (50,631)
<DISCONTINUED> (22,860)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (73,461)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
