1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q SB/A
AMENDMENT TO REPORT
Filed pursuant to Section 12, 13, or 15(d) of the
Securities Exchange Act of 1934
TELS Corporation
(Exact name of registrant as specified in its charter)
Commission File No. 0-12993
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its report dated June 30, 1998, on
Form 10-Q SB as set forth in the pages attached hereto:
PART I, Consolidated Statements of Operations, Cost of Goods Sold,
Three Months Ended June 30, 1997
PART I, Consolidated Statements of Operations, Other Income, Other, Six
Months Ended June 30, 1997
PART I, Consolidated Statements of Operations, Income Tax Benefit,
(Provision), Three Months Ended June 30, 1998, and Six Months
Ended June 30, 1998
PART I, Consolidated Statements of Cash Flows, Trade Accounts Payable
and Accrued Expenses, Six Months Ended June 30, 1998
PART I, Management's Discussion and Analysis of Financial Condition and
Results of Operations, Consolidated Net Loss
PART I, Management's Discussion and Analysis of Financial Condition and
Results of Operations, Liquidity and Capital Resources
PART II, Item 1, Legal Proceedings
PART II, Item 4, Submission of Matters to a Vote of Security Holders
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
TELS Corporation
----------------
(Registrant)
Dated: September 18, 1998 By: /s/ John L. Gunter
- -------------------------- ------------------------------
John L. Gunter
Chairman and CEO
Dated: September 18, 1998 By: /s/ Stephen M. Nelson
- -------------------------- ------------------------------
Stephen M. Nelson
President and Treasurer
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION Page
Consolidated Balance Sheets -- June 30, 1998 (Unaudited)
and December 31, 1997 3
Consolidated Statements of Operations -- Six and Three Months
Ended June 30, 1998 (Unaudited) and 1997, respectively 4
Consolidated Statements of Cash Flows -- Six Months Ended
June 30, 1998 (Unaudited) and 1997, respectively 5
Notes to Consolidated Financial Statements (Unaudited) 6,7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8,9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Operations
(Unaudited)
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales .......................................... $ 1,313,640 $ 1,628,804 $ 2,755,155 $ 2,997,403
Cost of goods sold ................................. 678,223 826,594 1,289,513 1,563,135
----------- ----------- ----------- -----------
Gross profit .............................. 635,417 802,210 1,465,642 1,434,268
Research and development expenses .................. 36,774 44,040 74,739 70,444
Selling, general and administrative expenses ....... 809,975 717,164 1,551,038 1,422,883
----------- ----------- ----------- -----------
Operating income (loss) ................... (211,332) 41,006 (160,135) (59,059)
Other income (expenses):
Interest income ........................... 5,460 3,564 10,544 4,720
Interest expense .......................... (24,959) (21,982) (52,533) (49,484)
Other ..................................... 13,078 2,617 15,593 6,097
----------- ----------- ----------- -----------
Other expense, net ........................ (6,421) (15,801) (26,396) (38,667)
----------- ----------- ----------- -----------
Income (loss) before income
tax (provision) benefit .................. (217,753) 25,205 (186,531) (97,726)
Income tax benefit, (provision) .................... 67,250 (4,101) 55,661 35,399
----------- ----------- ----------- -----------
Net income (loss) ......................... $ (150,503) $ 21,104 $ (130,870) $ (62,327)
=========== =========== =========== ===========
Basic and diluted net income (loss)per common and
common equivalent share $ (.04) $ .01 $ (.03) $ (.02)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
June 30,
1998 1997
---- ----
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................................................... $(130,870) $ (62,327)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation of plant and equipment .......................................... 87,137 120,452
Amortization of other assets ................................................. 50,132 39,812
Amortization of software development costs ................................... 73,700 53,101
Deferred income taxes ........................................................ (69,248) (38,399)
Deferred compensation ........................................................ 10,175 20,250
Changes in operating assets and liabilities:
Receivables ............................................................. 39,488 (20,239)
Inventories ............................................................. 92,552 32,378
Prepaid expenses ........................................................ (22,586) 15,285
Other assets ............................................................ (35,178) (19,418)
Trade accounts payable and accrued expenses ............................. (1,714) (30,495)
Deposits and advances ................................................... 16,058 (8,857)
--------- ---------
Net cash provided by (used in) operating activities .................. 113,074 101,543
--------- ---------
Cash flows from investing activities:
Capital expenditures ................................................................. (48,777) (23,196)
Software development costs and other ................................................. (112,750) (78,850)
Cash investments ..................................................................... (36,066) (1,215)
--------- ---------
Net cash used in investing activities ................................. (197,593) (103,261)
--------- ---------
Cash flows from financing activities:
Net borrowings (payments) under line of credit agreement ............................. (86,027) 116,416
Principal borrowings (payments) on long-term debt .................................... 224,628 (59,564)
--------- ---------
Net cash provided by (used in) financing activities ................... 138,601 56,852
--------- ---------
Net increase (decrease) in cash and cash equivalents ....................................... 54,082 55,134
Cash and cash equivalents at beginning of year ............................................. 13,845 31,980
Cash and cash equivalents at end of quarter ................................................ $ 67,927 $ 7,114
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
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, 1998 compared to June
30, 1997
Consolidated net sales for the six months ended June 30, 1998, decreased
$242,248, or 8%, to $2,755,155, when compared to $2,997,403 of net sales for the
six months ended June 30, 1997. The decrease is due primarily to economic
factors affecting the electronics industry where sales in the contract
manufacturing division decreased to $1,489,476, or 15%, for the period ended
June 30, 1998, compared to $1,756,916 for the period ended June 30, 1997. Sales
of telephone call accounting products remained nearly the same at $1,261,204 for
the period ended June 30, 1998, compared to $1,268,296 for the period ended June
30, 1997.
The gross profit increased to $1,465,643, or 2%, when compared to gross
profit for six months ended June 30, 1997, of $1,434,268. The gross profit
margin as a percentage of sales increased to 53% for the six months ended June
30, 1998, compared to 48% for the same period of 1997. The margin increased from
48% in 1997 to 53% for the six months ended June 30, 1998, primarily as a result
of the sales mix. The telecommunication sector sales represented 46% of total
sales in 1998, compared to 42% of total sales in 1997.
For the six months ended June 30, 1998, total research and development
costs including amortization of previously capitalized research and development
expenses were $74,739 compared to $70,044 for the same period in 1997.
Management of the Company believes that it will be necessary to increase its
level of research and development in 1998 to keep its current product lines up
to date and to take advantage of technology changes which the Company expects to
develop.
Selling, general and administrative ("SG&A") expenses increased $128,155,
or 9%, for the six months ended June 30, 1998, when compared to the same period
of 1997. As a percentage of net sales, SG&A expenses were 56% for 1998, compared
to 47% for the same period of 1997. SG&A expenses increased due to legal
expenses of defending the Company against the Neuenswander lawsuit; costs
associated with acquisition and related financing activities; financing and
NASDAQ listing issues.
<PAGE>
The Company reported a consolidated net loss for the six months ended June
30, 1998, of $130,870, or $.03 per share. This loss is due to decreased sales in
the contract manufacturing division and increased legal and administrative
expenses. The telecommunications and contract manufacturing industries are
experiencing drastic changes which could limit the Company's ability to meet
sales projections in these industries and there can be no assurance that the
Company will be able to continue to generate a profitable level of sales.
Liquidity and Capital Resources
As of June 30, 1998, the Company reported current assets of $2,004,880 and
current liabilities of $1,210,007, resulting in net working capital of $794,873.
This is an increase of $242,783 when compared to net working capital of $552,090
at December 31, 1997. The Company's operating activities provided $113,074 of
cash during the first six months of 1998, compared to $101,543 of cash provided
in operating activities during the first six months of 1997. Cash provided by
operating activities was used to purchase equipment of $48,777, for capitalized
software development costs of $112,750, and to increase cash investments of
$36,066. In 1998, the Company paid down its line of credit by $136,764. The
Company's working capital has been severely impacted by reductions in sales from
its major customers in the contract manufacturing division, when sales decreased
by 18% for the second quarter of 1998 when compared to 1997. Local and foreign
economic factors affecting the electronics industry are expected to continue to
negatively impact operations of the Company in the third and fourth quarters of
1998. The Company refinanced its existing mortgage secured by its land and
building in American Fork, Utah, on May 5, 1998, providing $224,628 in working
capital. The new loan is dated May 5, 1998, which matures on May 5, 2003 and is
payable in monthly installments of $4,667 with interest of 9.875% per annum. On
May 14, 1998, the Company signed a financing term sheet with Provident Capital.
This financing was to provide working capital and funding for the acquisition of
K.S. Telecom. The Company has subsequently ended discussions with Provident
Capital, and is continuing its efforts to find additional financing through
investment equity which may be needed to fund 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.
(THIS SPACE INTENTIONALLY LEFT BLANK)
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See items previously reported on Form 10-Q SB for the quarterly period
ended March 31, 1998.
Diane Neuenswander and Harold Neuenswander vs. TEL electronics, inc., Hash
Tech Inc., R. James Taylor, John L. Gunter, and Stephen M. Nelson, et.al.
(Superior court of the State of California, County of Santa Clara, Case No.
CV755710, filed February 5, 1996). In July, 1998, the Company reached a final
settlement agreement pertaining to this lawsuit. Under the terms of the
agreement both parties agreed to release all past, current and future claims
against each other.
NASDAQ Market Listing
NASDAQ, on August 22, 1997, with SEC approvals, announced new listing
requirements for maintaining NASDAQ Small Cap stock listings. To maintain a
NASDAQ Small Cap listing of a company's stock, effective February 23, 1998, 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 million,
or Market Capitalization of $35 million, or Net Income in the latest fiscal year
of $500,000; have 500,000 shares of stock in the Public Float; have a market
value of $1 million for the Public Float shares; have a minimum Bid Price of
$1.00; have two Market Makers; have 300 shareholders; and comply with Corporate
Governance requirements. The Company complies with all new NASDAQ requirements
except the minimum Bid Price of Company Stock. On March 2, 1998, the Company was
notified by NASDAQ that it was not in compliance with the minimum Bid Price
requirement. The Company may regain compliance if its securities trade at or
above the minimum requirement for at least ten consecutive trade days. Effective
July 23, 1998, the Company began the review process and is currently being
evaluated by NASDAQ concerning its listing status. The Company cannot provide
any assurance that it will meet the bid price. 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 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders was held on June 22, 1998, at which time
David K. Doyle and Ming-Tzong Chen were re-elected to serve as directors. Mr.
Doyle and Mr. Chen will serve three-year terms expiring in 2001. Affirmative
votes cast for Mr. Doyle were 2,920,602, with 66,621 votes withheld or
abstained, and zero votes against. The affirmative votes represented 98% of the
total shares voted. Affirmative votes cast for Mr. Chen were 2,891,202, with
96,021 votes withheld or abstained, and zero votes against. The affirmative
votes represented 97% of the total shares voted.
(THIS SPACE INTENTIONALLY LEFT BLANK)
<PAGE>
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: September 18, 1998 By: /s/ John L. Gunter
------------------ ------------------
John L. Gunter
Chairman and CEO
Dated: September 18, 1998 By: /s/ Stephen M. Nelson
------------------ ---------------------
Stephen M. Nelson
President and Treasurer
