UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q SB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 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 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
Check whether the registrant (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
August 1, 1997.
<PAGE>
TELS Corporation
INDEX
PART I. FINANCIAL INFORMATION Page
Consolidated Balance Sheets -- June 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations -- Six and Three Months 4
Ended June 30, 1997 and 1996, respectively
Consolidated Statements of Cash Flows -- Six Months Ended 5
June 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 4. Submission of Matters to a Vote of Security Holders 9
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
<PAGE>
<TABLE>
<CAPTION>
TELS Corporation
Consolidated Balance Sheets
June 30, December 31,
1997 1996
Assets (Unaudited) Audited
------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents ............................................. $ 87,114 $ 31,980
Cash investments ...................................................... 63,614 62,399
Trade accounts receivable, less allowance for
doubtful receivables of $ 116,633 and $ 127,852 respectively ..... 764,203 736,771
Employee and other receivables ........................................ 110,499 117,692
Inventories ........................................................... 718,049 750,427
Prepaid expenses ...................................................... 143,082 158,367
Deferred income taxes ................................................. 195,368 195,368
----------- -----------
Total current assets ......................................... 2,081,929 2,053,004
----------- -----------
Property, plant and equipment, net .................................... 797,449 894,705
Software development costs, net ....................................... 171,891 146,142
Intangible assets, net ................................................ 159,330 199,144
Deferred income taxes ................................................. 696,108 657,709
Other assets .......................................................... 181,092 161,673
----------- -----------
$ 4,087,799 $ 4,112,377
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities
Current portion of long-term debt ..................................... 706,666 624,276
Trade accounts payable ................................................ 372,962 401,433
Accrued expenses ...................................................... 296,799 308,233
Accrued vacation ...................................................... 102,126 92,716
Deposits and advances ................................................. 109,822 118,679
----------- -----------
Total current liabilities .................................... 1,588,375 1,545,337
----------- -----------
Long-term debt, excluding current installments ................................. 210,200 235,739
----------- -----------
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 ................................................... (1,984,718) (1,922,391)
Deferred compensation ................................................. (30,425) (50,675)
----------- -----------
Net stockholders' equity ..................................... 2,289,224 2,331,301
----------- -----------
$ 4,087,799 $ 4,112,377
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
TELS Corporation
Consolidated Statements of Operations
(Unaudited)
Three months ended Six months ended
June 30 , June 30,
1997 1996 1997 1996
----- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales ................................................ $ 1,628,804 $ 1,692,771 $ 2,997,403 $ 3,531,777
Cost of goods sold ....................................... 826,594 852,605 1,563,135 2,010,468
----------- ----------- ----------- -----------
Gross Profit .................................... 802,210 840,166 1,434,268 1,521,309
Research and development expenses ........................ 44,040 23,246 70,444 67,352
Selling, general and administrative expenses ............. 717,164 820,112 1,422,883 1,546,278
----------- ----------- ----------- -----------
Operating income (loss) ......................... 41,006 (3,192) (59,059) (92,321)
Other income (expenses):
Interest income ................................. 3,564 2,549 4,720 5,850
Interest expense ................................ (21,982) (26,294) (49,484) (46,553)
Other ........................................... 2,617 (1,355) 6,097 5,083
Net Other ....................................... (15,801) (25,100) (38,667) (35,620)
----------- ----------- ---------- -----------
Income (loss) from operations before
income tax benefit (provision) .................. 25,205 (28,292) (97,726) (127,941)
Income tax benefit, (provision) .......................... (4,101) (6,922) 35,399 25,052
----------- ----------- --------- ------------
Net income (loss) ............................... $ 21,104 $ (35,214) $ (62,327) $ (102,889)
============ =========== ========= ============
Net income (loss) per common and common equivalent share.. $ .01 $ (.01) $ (.02) $ (.03)
============ =========== ========== ===========
</TABLE>
See accompanying notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
TELS Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
June 30,
1997 1996
----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................. $ (62,327) $(102,889)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation of plant and equipment ....................... 120,452 156,697
Amortization of other assets .............................. 39,812 81,510
Amortization of software development costs ................ 53,101 44,726
Deferred income taxes ..................................... (38,399) 50,974
Deferred compensation ..................................... 20,250 30,250
Changes in operating assets and liabilities:
Receivables .......................................... (20,239) 297,604
Inventories .......................................... 32,378 163,252
Prepaid expenses ..................................... 15,285 (45,650)
Other assets ......................................... (19,418) 31,379
Trade accounts payable and accrued expenses .......... (30,495) (201,236)
Deposits and advances ................................ (8,857) (94,400)
Non cash charges and working capital changes
of discontinued operations ......................... 420,599
--------- ---------
Net cash provided by operating activities ......... 101,543 832,816
--------- ---------
Cash flows from investing activities:
Capital expenditures .............................................. (23,196) (76,029)
Software development costs ........................................ (78,850) (27,606)
Cash investments .................................................. (1,215) 2,880
Net cash (used in) investing activities ............ (103,261) (130,235)
--------- ---------
Cash flows from financing activities:
Net (payments) borrowings under line of credit agreement .......... 116,416 (336,646)
Financing activities of discontinued operations ................... (159,738)
Principal payment on long-term debt ............................... (59,564) (134,772)
--------- ---------
Net cash (used in) provided by financing activities 56,852 (631,156)
--------- ---------
Net increase in cash and cash equivalents ............................... 55,134 71,425
Cash and cash equivalents at beginning of year .......................... 31,980 28,075
Cash and cash equivalents at end of quarter ............................. $ 87,114 $ 99,500
========= =========
</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 six months ended June 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 six months ended June 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 six months ended
June 30, 1997, and 3,892,274 for the three and six months ended June 30,
1996.
3. Consolidated Financial Statements
For the periods ended June 30, 1997, and 1996, all material intercompany
accounts and transactions have been eliminated in consolidation.
Inventories at June 30, 1997 and December 31, 1996 consisted of the
following:
1997 1996
-------- --------
Finished goods $ 48,502 $ 52,795
Work-in-process 145,310 235,483
Raw Materials and supplies 646,101 584,013
Reserve for obsolete inventory (121,864) (121,864)
-------- --------
$ 718,049 $ 750,427
4. 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 SIX MONTHS ENDED JUNE 30, 1997
COMPARED TO JUNE 30, 1996
Consolidated net sales for the six months ended June 30, 1997,
decreased by 15% to $2,997,403 when compared to $3,531,777 of net sales for the
six months of 1996. Consolidated net sales of $1,628,804 decreased by 4% when
compared to the second quarter of 1996 sales of $1,692,771. The decrease in
sales is due primarily to a decline in revenue from the manufacturing division
where sales decreased 27% for the first half 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 15% for the six months ending June 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, increased sales
from the Company's dealer distribution channel, and through national accounts.
Gross profit for the second quarter of 1997, decreased to $802,210, a
reduction of $37,956 when compared to gross profit for the second quarter of
1996 of $840,166. The gross profit margin as a percentage of sales was 49% for
the second quarter of 1997, compared to 50% for the second quarter of 1996. The
gross profit margin for the first half of 1997 improved to 48% when compared to
43% for the first half of 1996. This change is due to increased sales levels of
telephone call accounting products and reductions in manufacturing costs at HTI.
For the first half of 1997, the Company's sales of telephone call accounting
products increased from 31% 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.
Total research and development expenses including amortization of
previously capitalized development costs for the second quarter and six months
of 1997 were $44,040 and $70,444 respectively, compared to $23,246 and $67,352
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 are expected to develop.
<PAGE>
TELS Corporation
Selling, general and administrative expenses were $717,164 for the
second quarter of 1997, compared to $820,112 for the second quarter of 1996.
This decrease of $102,948, or 13%, in 1997, is mainly due to continuing expense
reductions implemented by management of the Company. As a percentage of net
sales, administrative expenses were 44% for the second quarter of 1997, and 48%
for the second quarter of 1996. For the six months ending June 30, 1997,
selling, general and administrative expenses were $1,422,883 compared to
$1,546,278 for 1996. The reductions in administrative expenses in the six months
ending June 30, 1997, were offset somewhat by increased selling expenses
incurred to introduce the WIN-SENSETM and INN-FORMR Express telephone call
accounting products begun 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
second quarter of 1997 of $21,104. This is a significant improvement when
compared to the second quarter net loss of $35,214 for 1996. For the six months
ending June 30, 1997, the Company incurred a net loss of $62,327 compared to a
net loss of $102,889 for the same period of 1996. This favorable change in net
loss can be attributed to the increased sales levels of telecommunications
products and lower manufacturing and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company reported current assets of $2,081,929,
and current liabilities of $1,588,375, resulting in net working capital of
$493,554. This is a decrease of $14,113 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 $23,196, for capitalized
software development costs of $78,850, and to reduce accounts payable of
$30,495. The Company increased its borrowing under its line of credit by
$116,416, and reduced long term debt by $59,564. The Company was able to replace
its line of credit facility by entering into a new inventory and accounts
receivable financing agreement with a new lender on July 1, 1997. The agreement
is for twenty four months, with interest at prime plus 3%. 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
See items previously reported on Form 10-QSB for the quarterly period
ended March 31, 1997.
Item 4. Submission of Matters to a vote of Security Holders.
The annual meeting of shareholders was held on June 2, 1997 at which
time Willard H. Gardner, Stephen M. Nelson and Ming-Tzong Chen were
re-elected to serve as directors. Mr. Gardner and Mr. Nelson will
serve three year terms expiring in 2000, Mr. Chen will serve a one
year term expiring in 1998. Affirmative votes cast for Mr. Gardner
were 3,152,948, with 179,620 votes withheld or abstained, and 0 votes
against. The affirmative votes represented 95% of the total shares
voted. Affirmative votes cast for Mr. Nelson were 3,157,848, with
174,720 votes withheld or abstained, and 0 votes against. The
affirmative votes represented 95% of the total shares voted.
Affirmative votes cast for Mr. Chen were 3,148,348, with 184,220 votes
withheld or abstained, and 0 votes against. The affirmative votes
represented 94% of the total shares voted.
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, 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: August 14, 1997 By: /s/ Stephen M. Nelson
---------------------------
Stephen M. Nelson, President
Dated: August 14, 1997 By: /s/ Melody Rasmussen
---------------------------
Melody Rasmussen, Controller
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1997
<CASH> 150,728
<SECURITIES> 0
<RECEIVABLES> 880,836
<ALLOWANCES> 116,633
<INVENTORY> 718,049
<CURRENT-ASSETS> 2,081,929
<PP&E> 2,288,938
<DEPRECIATION> 1,491,489
<TOTAL-ASSETS> 4,087,799
<CURRENT-LIABILITIES> 1,588,375
<BONDS> 210,200
0
0
<COMMON> 77,835
<OTHER-SE> 2,211,389
<TOTAL-LIABILITY-AND-EQUITY> 4,087,799
<SALES> 1,628,804
<TOTAL-REVENUES> 1,628,804
<CGS> 826,594
<TOTAL-COSTS> 1,587,798
<OTHER-EXPENSES> (15,801)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,937
<INCOME-PRETAX> 25,205
<INCOME-TAX> (4,101)
<INCOME-CONTINUING> 21,104
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,104
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
