UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q SB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO 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
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(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
The Registrant had issued and outstanding 3,891,774 shares of common stock on
May 1, 1997.
<PAGE>
TELS Corporation
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INDEX
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PART I. FINANCIAL INFORMATION Page
----
Consolidated Balance Sheets -- March 31, 1997, and December 31, 1996 3
Consolidated Statements of Operations -- Three Months Ended
March 31, 1997, and 1996, respectively 4
Consolidated Statements of Cash Flows -- Three Months Ended
March 31, 1997, and 1996, respectively 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7,8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
<PAGE>
<TABLE>
<CAPTION>
TELS Corporation
----------------
Consolidated Balance Sheets
March 31, December 31,
1997 1996
Assets (Unaudited) Audited
------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents ............................................. $ 29,790 $ 31,980
Cash Investments ...................................................... 62,829 62,399
Trade Accounts receivable, less allowance for
doubtful receivable of $ 113,860 and $ 127,852 respectively ....... 658,094 736,771
Employee and other receivables ........................................ 115,304 117,692
Inventories ........................................................... 734,440
750,427
Prepaid expenses ...................................................... 145,935 158,367
Deferred income taxes ................................................. 210,471 195,368
----------- -----------
Total current assets ......................................... 1,956,863 2,053,004
----------- -----------
Property, plant and equipment, net .................................... 848,367 894,705
Software development costs, net ....................................... 151,386 146,142
Intangible assets, net ................................................ 178,987 199,144
Deferred income taxes ................................................. 683,606 657,709
Other assets .......................................................... 165,985 161,673
----------- -----------
$ 3,985,194 $ 4,112,377
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities
Current portion of long-term debt ..................................... 747,413 624,276
Trade accounts payable ................................................ 274,167 401,433
Accrued expenses ...................................................... 281,105 308,233
Accrued vacation ...................................................... 100,997 92,716
Deposits and advances ................................................. 102,015 118,679
----------- -----------
Total current liabilities .................................... 1,505,697 1,545,337
----------- -----------
Long-term debt, excluding current installments ................................. 221,502 235,739
----------- -----------
Stockholders' equity
Common stock, $.02 par value. Authorized 10,000,000 shares;
issued and outstanding 3,891,774 and 3,891,274 respectively....... 77,835 77,835
Additional paid-in capital ............................................ 4,226,532 4,226,532
Accumulated deficit ................................................... (2,005,822) (1,922,391)
Deferred Compensation ................................................. (40,550) (50,675)
----------- -----------
Net stockholders' equity ..................................... 2,257,995 2,331,301
----------- -----------
$ 3,985,194 $ 4,112,377
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
TELS Corporation
----------------
Consolidated Statements of Operations
(Unaudited)
Three months ended
March 31 ,
1997 1996
----- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales .............................................. $ 1,368,599 $ 1,839,006
Cost of goods sold ..................................... 736,541 1,157,863
----------- -----------
Gross profit .................................. 632,058 681,143
Research and development expenses ...................... 26,404 44,106
Selling, general and administrative expenses ........... 705,719 726,166
----------- -----------
Operating income (loss) ....................... (100,065) (89,129)
Other income (expenses):
Interest income ............................... 1,156 3,301
Interest expense .............................. (27,502) (20,259)
Other ......................................... 3,480 6,438
----------- -----------
Net Other ..................................... (22,866) (10,520)
----------- -----------
Income (loss) from operations before
income tax benefit (provision) ................ (122,931) (99,649)
Income tax benefit, (provision) ........................ 39,500 31,974
----------- -----------
Net income (loss) ............................. $ (83,431) $ (67,675)
=========== ===========
Net income (loss) per common and common equivalent share $ (.02) $ (.02)
=========== ===========
</TABLE>
See accompanying notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
TELS Corporation
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Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31,
1997 1996
----- ----
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ......................................................... $ (83,431) $ (67,675)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation of plant and equipment ............................... 60,152 73,022
Amortization of other assets ...................................... 20,157 21,594
Amortization of software development costs ........................ 25,931 22,644
Deferred income taxes ............................................. (41,000) (31,974)
Deferred compensation ........................................................... 10,125 15,175
Changes in operating assets and liabilities:
Receivables .................................................. 81,065 (120,495)
Inventories .................................................. 15,987 89,280
Prepaid expenses ............................................. 12,432 (50,712)
Other assets ................................................. (4,312) 13,365
Trade accounts payable and accrued expenses .................. (146,113) (171,427)
Deposits and advances ........................................ (16,664) (27,012)
Non cash charges and working capital changes
of discontinued operations ................................. 350,064
------- -------
Net cash (used in) provided by operating activities (65,671) 115,849
------- -------
Cash flows from investing activities:
Capital expenditures ...................................................... (13,814) (73,705)
Software development costs ................................................ (31,175) (15,674)
Cash investments .......................................................... (430) 1,859
Gain (loss) on disposal of equipment ...................................... (13,235)
--------- ---------
Net cash (used in) investing activities .................... (45,419) (100,755)
--------- ---------
Cash flows from financing activities:
Net borrowings (payments) under line of credit agreement .................. 130,765 103,631
Financing activities of discontinued operations ........................... (28,541)
Principal payment on long-term debt ....................................... (21,865) (41,417)
--------- -------
Net cash provided by financing activities .................. 108,900 33,673
--------- ---------
Net (decrease) increase in cash and cash equivalents ............................ (2,190) 48,767
Cash and cash equivalents at beginning of year .................................. 31,980 28,075
Cash and cash equivalents at end of quarter ..................................... $ 29,790 $ 76,842
========= =========
Supplemental disclosures of cash flow information
Cash paid during the quarter for interest ................................. $ 27,502 $ 20,259
========= =========
</TABLE>
See accompanying notes to financial statements
<PAGE>
TELS Corporation
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Financial Statements
The financial statements for the three months ended March 31, 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, 1995 and 1994 included in the Company's 1996 Annual
Report to the Securities and Exchange Commission on Form 10-K.The results
for the three months ended March 31, 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 and 3,891,274, respectively, for
the three months ended March 31, 1997 and 1996.
3. Consolidated Financial Statements
For the quarter ended March 31, 1997, all material intercompany accounts
and transactions have been eliminated in consolidation.
Inventories at March 31, 1997 and December 31, 1996 consisted of the
following:
1997 1996
---- ----
Finished goods $ 75,992 $ 52,795
Work-in-process 195,851 235,483
Raw material and supplies 584,461 584,013
Reserve for obsolete inventory (121,864) (121,864)
-------- --------
$734,440 $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
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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 three months ended March 31, 1997 compared to
March 31, 1996
Consolidated net sales for the first quarter of 1997 decreased 26% to
$1,368,599 when compared to $1,839,006 of net sales for the first quarter 1996.
The decrease is primarily due to reduced sales in the contract manufacturing
sector of $495,341 or 37% for the first quarter of 1997, due to lower overall
industry sales, increased product competition, and timely product delivery
problems. The decrease in contract manufacturing sales was offset somewhat by
increased sales of $58,288 or 12% in the telecommunication products for the
first quarter of 1997. This increase was mostly due to sales from new products,
INN-FORM EXPRESS and WIN-SENSE.
Gross profit decreased to $632,058, a reduction of $49,085 when
compared to gross profit for the first quarter of 1996 of $681,143. The gross
profit margin as a percentage of sales increased to 46.2% for the first quarter
of 1997, compared to 37% for the first quarter of 1996. The increase in the
gross profit margin as a percent of sales is due primarily to the lower sales
levels and higher margins in the contract manufacturing sector which represented
62% of total sales in 1997, compared to 73% of total sales in 1996. The contract
manufacturing sector's gross profit margin increased from 22% in 1996 to 29% for
the first quarter of 1997.
For the first quarter of 1997, total research and development costs
including amortization of previously capitalized development expenses, were
$57,579 compared to $66,750 for the same period in 1996. Management of the
Company believes that it will be necessary to increase its level of research and
development in 1997 to keep its current product line up to date and to take
advantage of technology changes which the Company expects to develop.
Selling, general and administrative expenses decreased to $705,719, or
3%, for the first quarter of 1997, when compared to $726,166 for the first
quarter of 1996. The decrease in administrative expense was offset by selling
expense associated with the WIN-SENSETM product introduction. As a percentage of
net sales, administrative expenses were 52% for the first quarter of 1997,
compared to 40% for the first quarter of 1996. Management intends to continue to
reduce administrative expenses until such time that sales activities warrant any
expansion and/or growth.
<PAGE>
TELS Corporation
----------------
The Company reported a consolidated net loss from continuing operations
for the first quarter of 1997 of $83,431, or $.02 per share. This is a slight
decrease when compared to the first quarter net loss of $67,675, or $.02 per
share for the same period in 1996. Management of the Company believes that
profitability will improve in the second quarter as a result of reductions in
expenses, increased sales from telecommunication products, and improved gross
profit margins.
Liquidity and Capital Resources
As of March 31, 1997, the Company reported current assets of $1,956,853
and current liabilities of $1,505,697, resulting in net working capital of
$451,166. This is a decrease of $56,501 when compared to net working capital of
$507,667 at December 31, 1996. Working capital provided by financing activities
was used to purchase equipment of $13,814, for capitalized software development
costs of $31,175, and to reduce accounts payable of $146,113. The Company
utilized its line of credit which increased by $130,765. These borrowings were
used to fund working capital needs and to reduce long term debt by $21,865. The
Company is in violation of certain debt covenants under the terms of its loan
agreements. Though the Company has obtained waivers of these violations, the
Company will not pursue the appropriate waivers for expected violations
subsequent to March 31, 1997, from the lending institution because the Company
has been notified that this line of credit will not be renewed in May, 1997. The
Company expects to refinance this line of credit by entering into a new line of
credit with similar terms with a different lender. If the Company is unable to
obtain a new line of credit with another lender, it would not be able to
continue to operate at its current level. The Company has entered into
negotiations with lending institutions to replace this line of credit and is
considering various alternatives, including the refinancing of real property to
raise additional funds. The Company is continuing its efforts to find additional
financing through investment equity which may be needed to fund operations,
future acquisitions and final development and marketing of new products under
consideration. The Company is evaluating its existing system for compliance with
the year 2000 and has not determined the modifications, if any, that will be
required. The telecommunications industry is experiencing drastic changes which
could limit the Company's ability to meet sales projections in this industry and
there can be no assurance that the Company will be able to generate a profitable
level of sales.
(THIS SPACE INTENTIONALLY LEFT BLANK)
<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
April 15, 1996, the Company filed a complaint in the Third Judicial District
Court of Salt Lake City, Utah, against the Plaintiffs for breach of "non compete
agreements" and breach of a "Severance Agreement" between the Plaintiffs and the
Company and on February 24, 1997, the company filed a Motion for Summary
judgment in this matter, which is awaiting oral argument. 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. On February 18, 1997, this appeal was denied.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Article 5 Financial Data Schedule for the quarter
ending March 31, 1997.
(b). Reports on Form 8-K:
No reports on form 8-K were filed in the first quarter of 1997.
(THIS SPACE INTENTIONALLY LEFT BLANK)
<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: May 15, 1997 By: /s/ Stephen M. Nelson
- -------------------- --------------------------
Stephen M. Nelson
President and Treasurer
Dated: May 15, 1997 By: /s/ Melody Rasmussen
- --------------------- ---------------------------
Melody Rasmussen
Controller
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 92619
<SECURITIES> 0
<RECEIVABLES> 771954
<ALLOWANCES> 43860
<INVENTORY> 734440
<CURRENT-ASSETS> 1956863
<PP&E> 2279556
<DEPRECIATION> 1431189
<TOTAL-ASSETS> 3985194
<CURRENT-LIABILITIES> 1505697
<BONDS> 221502
0
0
<COMMON> 77835
<OTHER-SE> 2180160
<TOTAL-LIABILITY-AND-EQUITY> 3985194
<SALES> 1368599
<TOTAL-REVENUES> 1368599
<CGS> 736541
<TOTAL-COSTS> 1468664
<OTHER-EXPENSES> 22866
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27502
<INCOME-PRETAX> (122931)
<INCOME-TAX> 39500
<INCOME-CONTINUING> (83431)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (83431)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
