U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission File No. 0-12993
TELS Corporation
----------------
(Exact name of small business issuer 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)
Issuer's telephone number, including area code: (801) 756-9606
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 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 [ ]
The Registrant had issued and outstanding 3,891,774 shares of common stock on
October 31, 1997.
<PAGE>
TELS Corporation
INDEX
PART I. FINANCIAL INFORMATION Page
Consolidated Balance Sheets -- September 30, 1997 3
and December 31, 1996
Consolidated Statements of Operations -- Three and Nine Months 4
Ended September 30, 1997 and 1996, respectively
Consolidated Statements of Cash Flows -- Nine Months Ended 5
September 30, 1997 and 1996, 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 1. Legal Proceedings 9
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
<PAGE>
<TABLE>
<CAPTION>
TELS Corporation
Consolidated Balance Sheets
September 30, December 31,
1997 1996
Assets (Unaudited) Audited
------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents ............................................. $ 58,275 $ 31,980
Cash investments ...................................................... 66,159 62,399
Trade accounts receivable, less allowance for
doubtful receivables of $ 123,038 and $ 127,852 respectively ..... 897,212 736,771
Employee and other receivables ........................................ 112,117 117,692
Inventories ........................................................... 709,139 750,427
Prepaid expenses ...................................................... 112,724 158,367
Deferred income taxes ................................................. 225,248 195,368
----------- -----------
Total current assets ......................................... 2,180,874 2,053,004
----------- -----------
Property, plant and equipment, net .................................... 758,449 894,705
Software development costs, net ....................................... 178,540 146,142
Intangible assets, net ................................................ 140,124 199,144
Deferred income taxes ................................................. 631,826 657,709
Other assets .......................................................... 187,180 161,673
----------- -----------
$ 4,076,993 $ 4,112,377
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities
Current portion of long-term debt ..................................... 685,992 624,276
Trade accounts payable ................................................ 371,632 401,433
Accrued expenses ...................................................... 213,681 308,233
Accrued vacation ...................................................... 100,892 92,716
Deposits and advances ................................................. 116,546 118,679
----------- -----------
Total current liabilities .................................... 1,488,743 1,545,337
----------- -----------
Long-term debt, excluding current installments ................................. 197,335 235,739
----------- -----------
Stockholders' equity
Common stock, $.02 par value. Authorized 10,000,000 shares;
issued and outstanding 3,891,774 and 3,891,774 respectively....... 77,835 77,835
Additional paid-in capital ............................................ 4,226,532 4,226,532
Accumulated deficit ................................................... (1,893,152) (1,922,391)
Deferred compensation ................................................. (20,300) (50,675)
----------- -----------
Net stockholders' equity ..................................... 2,390,915 2,331,301
----------- -----------
$ 4,076,993 $ 4,112,377
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
TELS Corporation
Consolidated Statements of Operations
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Net sales ................................................ $ 1,719,386 $ 1,671,874 $ 4,716,789 $ 5,203,651
Cost of goods sold ....................................... 753,288 936,747 2,316,423 2,947,215
----------- ----------- ------------ -----------
Gross profit .................................... 966,098 735,127 2,400,366 2,256,436
Research and development expenses ........................ 29,780 14,458 100,224 81,810
Selling, general and administrative expenses ............. 776,010 678,845 2,198,893 2,225,124
----------- ----------- ----------- -----------
Operating income (loss) ......................... 160,308 41,824 101,249 (50,498)
Other income (expenses):
Interest income ................................. 6,428 1,564 11,148 7,414
Interest expense ................................ (37,603) (26,808) (87,088) (73,361)
Other ........................................... 949 26,372 7,049 31,455
----------- ----------- ----------- -----------
Net other ....................................... (30,226) 1,128 (68,891) (34,492)
----------- ----------- ----------- -----------
Income (loss) from operations before
income tax benefit (provision) ......... 130,082 42,952 32,356 (84,990)
Income tax benefit, (provision) .......................... (38,518) (13,553) (3,119) 11,499
----------- ----------- ----------- -----------
Net income (loss) ............................... $ 91,564 $ 29,399 $ 29,239 $ (73,491)
=========== ========== =========== ===========
Net income (loss) per common and common equivalent share.. $ .02 $ .01 $ .01 $ (.02)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
TELS Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
1997 1996
--------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................. $ 29,239 $ (73,491)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation of plant and equipment ....................... 180,752 218,796
Amortization of other assets .............................. 59,020 60,900
Amortization of software development costs ................ 81,127 55,559
Deferred income taxes ..................................... (3,997) 36,520
Deferred compensation ..................................... 30,375 37,875
Changes in operating assets and liabilities:
Receivables .......................................... (154,866) 184,787
Inventories .......................................... 41,288 168,969
Prepaid expenses ..................................... 45,643 (102,987)
Other assets ......................................... (25,507) (15,157)
Trade accounts payable and accrued expenses .......... (116,177) (128,470)
Deposits and advances ................................ (2,133) 22,740
Non cash charges and working capital changes
of discontinued operations ......................... 367,436
--------- ---------
Net cash provided by operating activities ......... 164,764 833,477
--------- ---------
Cash flows from investing activities:
Capital expenditures .............................................. (44,496) (56,460)
Software development costs ........................................ (113,525) (38,774)
Cash investments .................................................. (3,760) 3,713
Loss on disposal of equipment ..................................... (29,480)
--------- ---------
Net cash used in investing activities .............. (161,781) (121,001)
--------- ---------
Cash flows from financing activities:
Net (payments) borrowings under line of credit agreement .......... 100,739 (458,244)
Financing activities of discontinued operations ................... (72,061)
Principal payment on long-term debt ............................... (77,427) (153,824)
Proceeds from issuance of common stock ............................ 2,700
--------- ---------
Net cash (used in) provided by financing activities 23,312 (681,429)
--------- ---------
Net increase in cash and cash equivalents ............................... 26,295 31,047
Cash and cash equivalents at beginning of year .......................... 31,980 28,075
Cash and cash equivalents at end of quarter ............................. $ 58,275 $ 59,122
========= =========
</TABLE>
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 nine months ended September 30,
1997 and 1996, 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 1997
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, 1996 and 1995 included in the Company's 1996
Annual Report to the Securities and Exchange Commission on Form 10-K.
The results for the nine months ended September 30, 1997, are not
necessarily indicative of the results for the year ending December 31,
1997.
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 1997 or 1996 calculations because they are anti-dilutive. The
weighted average number of outstanding common and common equivalent shares
used in this computation were 3,891,774 for the three and nine months
ended September 30, 1997, and 4,025,200 and 3,899,819 for the three and
nine months ended September 30, 1996.
3. Consolidated Financial Statements
For the periods ended September 30, 1997, and 1996, all material
intercompany accounts and transactions have been eliminated in
consolidation.
4. Inventories
Inventories at September 30, 1997 and December 31, 1996 consisted of the
following:
1997 1996
--------- ---------
Finished goods $ 46,928 $ 52,795
Work-in-process 142,435 235,483
Raw Materials and supplies 623,925 584,013
Reserve for obsolete inventory (104,149) (121,864)
--------- ---------
$ 709,139 $ 750,427
========== =========
5. Impact of Recently Adopted Accounting Standards
In March, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share. This
statement establishes standards for computing and presenting earnings per
share ("EPS") and applies to entities with publicly-held common stock or
potential common stock. This statement simplifies the standards for
computing EPS and makes them comparable to international EPS standards.
This statement is effective for financial statements for both interim and
annual periods ending after December 15, 1997. The company is currently
evaluating the impact of the recently issued statement and will adopt the
requirements for the year ending December 31, 1997.
The Company has reviewed all other recently issued, but not yet adopted,
accounting standards in order to determine their effects, if any, on the
results of operations or financial position of the Company. Based on that
review, the Company believes that none of these pronouncements will have a
significant effect on current or future earnings or operations.
<PAGE>
TELS Corporation
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; (iv) the Company's ability to successfully increase its size
through acquisition/merger activity; and (v) the Company's ability to
distinguish itself from its current and future 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.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
COMPARED TO SEPTEMBER 30, 1996
Consolidated 1997 third quarter net sales of $1,719,386 increased by 3%
when compared to the third quarter of 1996 sales of $1,671,874. Consolidated net
sales for the nine months ended September 30, 1997, decreased by 9% to
$4,716,789 when compared to $5,203,651 of net sales for the same nine month
period of 1996. The decrease in sales is due primarily to a decline in net sales
from the manufacturing division, HTI, where sales decreased 22% for the first
nine months of 1997, when compared with the same period of 1996. This decrease
in sales in the manufacturing division was offset somewhat by an increase in
sales in the telephone call accounting division where sales increased by 14% for
the nine months ending September 30, 1997, when compared to the same period in
1996. This increase in telephone call accounting sales is due to new products
released in early 1997, to increased sales from the Company's dealer
distribution channel, and to increased sales through national accounts.
Gross profit for the third quarter of 1997, increased to $966,098, an
increase of $230,971 when compared to gross profit for the third quarter of 1996
of $735,127. The gross profit margin as a percentage of sales was 56% for the
third quarter of 1997, compared to 44% for the third quarter of 1996. The gross
profit margin for the nine months ending September 30, 1997 improved to 51% when
compared to 43% for the nine months ending September 30, 1996. This change is
due to increased sales levels of telephone call accounting products and
reductions in manufacturing costs in the contract manufacturing business. For
the nine months ended September 30, 1997, the Company's sales of telephone call
accounting products increased from 33% of total sales in 1996, to 42% of total
sales in 1997. The telephone call accounting products have traditionally had a
higher gross profit margin than products and service sales in the manufacturing
sector.
<PAGE>
TELS Corporation
Total research and development expenses including amortization of
previously capitalized development costs for the third quarter and nine months
ending September 30, 1997 were $29,780 and $100,224 respectively, compared to
$14,458 and $81,810 for the same periods in 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 1997 to take
advantage of technology changes which the Company hopes to develop.
Selling, general and administrative expenses for the nine months ended
September 30, 1997 decreased by $26,231 to $2,198,893 when compared to
$2,225,124 for the same period in 1996. For the third quarter of 1997, selling,
general and administrative expenses were $776,010, an increase of $97,165, or
14%, when compared to $678,845 for the third quarter of 1996. As a percentage of
net sales, selling, general and administrative expenses were 45% for the third
quarter of 1997, and 41% for the third quarter of 1996. This increase in
selling, general and administrative expenses is mainly due to additional selling
expenses incurred to introduce the WIN-SENSETM and INN-FORMR Express telephone
call accounting products which began in late 1996 and continuing into 1997.
Management of the Company is continuing its efforts to reduce administrative
expenses until such time that increased sales revenues warrant any expansion
and/or growth.
The Company reported consolidated net income from operations for the
third quarter of 1997 of $91,564 or $.02 per share. This is an increase of 311%
when compared to the third quarter net income of $29,399 for 1996. For the nine
months ending September 30, 1997, the Company reported net income of $29,237
compared to a net loss of $73,491 for the same period of 1996. This favorable
change in net income can be attributed to the increased sales levels of
telecommunications products and lower manufacturing expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company reported current assets of
$2,180,874, and current liabilities of $1,488,743, resulting in net working
capital of $692,131. This is an increase of $151,924 when compared to net
working capital of $507,667 at December 31, 1996. Working capital provided by
operating and financing activities was used to purchase equipment of $44,496,
for capitalized software development costs of $113,525, and to reduce accounts
payable and accrued expenses of $116,177. The Company increased its borrowing
under its line of credit by $100,739, and reduced long term debt by $77,427.
Management of the Company anticipates that additional financing through debt
and/or equity will be needed to fund sales growth, operations, future
acquisitions, and final development and marketing of new products under
consideration.
<PAGE>
TELS Corporation
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On February 2, 1996, the former owners of Hash Tech (Plaintiffs) 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 HTI, a wholly owned subsidiary of the Company. The Plaintiffs
have alleged causes of action for recision of a certain "Asset Purchase
Agreement" dated March 31, 1994, civil conspiracy, fraud, violation of
California securities laws, common law gender discrimination, and
intentional infliction of emotional distress. The Company and its
officers deny any wrongdoing in regard to the above allegations. On
October 7, 1997, the Company filed a cross-complaint in the Superior
Court for the County of Santa Clara, California against the Plaintiffs
for breach of "non compete agreements," breach of a "Severance
Agreement," and intentional or negligent misrepresentation.
On October 14, 1997, the Third Judicial District Court of Salt Lake
City, Utah, granted a stay in the proceedings.
See items previously reported on Form 10-QSB for the quarterly period
ended March 31, 1997 and June 30, 1997.
NASDAQ Market Listing
---------------------
On August 25, 1997 NASDAQ implemented new requirements for maintaining
NASDAQ stock listings. To maintain a NASDAQ listing of a company's
stock, effective 6 months from August 25, 1997, a company must at a
minimum: be registered under Section 12(g) of the Securities and
Exchange Act of 1934 or equivalent; have net tangible assets of
$2,000,000; have 500,00 shares of stock in the Public Float; have a
market value of $1,000,000 for the Public Float Shares; have two Market
Makers; have a Bid Price of $1.00; and have a minimum of 300
shareholders. The Company complies with all new NASDAQ requirements
except the minimum Bid Price of Company Stock. The Company cannot
provide any assurance that it will meet the bid price by this deadline.
If the Company ceases to be listed on the Nasdaq Small-Cap Market, it
may continue to be listed on the OTC-Bulletin Board.
Item 6. Exhibits and Reports on Form 8-K.
(a). Exhibits:
Exhibit 27, Financial Data Schedule
(b). Reports on Form 8-K:
No reports on Form 8-K were filed for the quarter ending
September 30, 1997.
<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: November 11, 1997 By: /s/ Stephen M. Nelson
- ------------------------- ---------------------------
Stephen M. Nelson, President
Dated: November 11, 1997 By: /s/ Melody Rasmussen
- ------------------------- ---------------------------
Melody Rasmussen, Controller
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000756767
<NAME> TELS Corporation
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jul-01-1997
<PERIOD-END> Sep-30-1997
<EXCHANGE-RATE> 1
<CASH> $124,434
<SECURITIES> $0
<RECEIVABLES> $1,020,250
<ALLOWANCES> $123,038
<INVENTORY> $709,139
<CURRENT-ASSETS> $2,180,874
<PP&E> $2,310,238
<DEPRECIATION> $1,551,789
<TOTAL-ASSETS> $4,076,993
<CURRENT-LIABILITIES> $1,488,743
<BONDS> $197,335
$0
$0
<COMMON> $77,835
<OTHER-SE> $2,468,750
<TOTAL-LIABILITY-AND-EQUITY> $4,076,993
<SALES> $1,719,386
<TOTAL-REVENUES> $1,719,386
<CGS> $753,288
<TOTAL-COSTS> $1,559,078
<OTHER-EXPENSES> ($30,226)
<LOSS-PROVISION> $0
<INTEREST-EXPENSE> $87,088
<INCOME-PRETAX> $130,082
<INCOME-TAX> ($38,518)
<INCOME-CONTINUING> $91,564
<DISCONTINUED> $0
<EXTRAORDINARY> $0
<CHANGES> $0
<NET-INCOME> $91,564
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
