1
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, 1998
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 Securities 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, 1998.
<PAGE>
TELS Corporation
----------------
INDEX
-----
PART I. FINANCIAL INFORMATION Page
Consolidated Balance Sheets -- September 30, 1998 3
and December 31, 1997
Consolidated Statements of Operations -- Three and Nine Months 4
Ended September 30, 1998 and 1997, respectively
Consolidated Statements of Cash Flows -- Nine Months Ended 5
September 30, 1998 and 1997, respectively
Notes to Consolidated Financial Statements 6,7
Management's Discussion and Analysis of Financial 8,9,10
Condition and Results of Operations
PART 11. OTHER INFORMATION
Item 1. Market Listing 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
<PAGE>
<TABLE>
<CAPTION>
TELS Corporation
----------------
Consolidated Balance Sheets
September 30, December 31,
1998 1997
Assets (Unaudited) Audited
------ ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents ..................................... $ 54,515 $ 13,845
Cash investments .............................................. 46,696 67,364
Trade accounts receivable, less allowance for
doubtful receivables of $108,809 and $119,381 respectively 725,346 719,260
Employee and other receivables ................................ 54,263 117,438
Inventories ................................................... 505,689 795,955
Prepaid expenses .............................................. 155,670 171,168
Deferred income taxes ......................................... 139,156 139,156
------- -------
Total current assets ................................. 1,681,335 2,024,186
--------- ---------
Property, plant and equipment, net ..................................... 680,263 758,149
Software development costs, net......................................... 201,264 189,216
Intangible assets, net ................................................. 60,485 119,017
Deferred income taxes .................................................. 831,965 701,730
Other assets ........................................................... 207,704 167,938
------- -------
$ 3,663,016 $ 3,960,236
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities
Current portion of long-term debt ............................. 427,856 824,043
Trade accounts payable ........................................ 426,724 294,644
Accrued expenses .............................................. 172,291 149,530
Accrued vacation .............................................. 69,818 94,562
Deferred Income ............................................... 113,149 98,749
Deposits and advances ......................................... 28,633 10,568
------ ------
Total current liabilities ............................ 1,238,471 1,472,096
--------- ---------
Long-term debt, excluding current installments ......................... 385,505 19,683
------- ------
Stockholders' equity
Common stock, $.02 par value. Authorized 50,000,000 shares;
issued and outstanding 3,891,774 ........................ 77,835 77,835
Additional paid-in capital .................................... 4,226,532 4,226,532
Accumulated deficit ........................................... (2,265,327) (1,825,735)
Deferred compensation ......................................... (10,175)
-------
Net stockholders' equity ............................. 2,039,040 2,468,457
--------- ---------
$ 3,663,016 $ 3,960,236
=========== ===========
</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,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales ....................................................... $ 1,010,029 $ 1,719,386 $ 3,765,184 $ 4,716,789
Cost of goods sold .............................................. 638,851 753,288 1,928,364 2,316,423
------- ------- --------- ---------
Gross profit ........................................... 371,178 966,098 1,836,820 2,400,366
Research and development expenses ............................... 43,535 29,780 118,274 100,224
Selling, general and administrative expenses .................... 639,957 776,010 2,190,995 2,198,893
------- ------- --------- ---------
Operating income (loss) ................................ (312,314) 160,308 (472,449) 101,249
Other income (expenses):
Interest income ........................................ 1,100 6,428 11,644 11,148
Interest expense ....................................... (41,706) (37,603) (94,239) (87,088)
Other .................................................. (12,887) 949 2,706 7,047
------- --- ----- -----
Net other expense ...................................... (53,493) (30,226) (79,889) (68,893)
------- ------- ------- -------
Income (loss) before income tax benefit (provision) .... (365,807) 130,082 (552,338) 32,356
Income tax benefit, (provision) ................................. 57,085 (38,518) 112,746 (3,119)
------ ------- ------- ------
Net income (loss) ...................................... $ (308,722) $ 91,564 $ (439,592) $ 29,237
========== =========== =========== ===========
Net income (loss) per basic and diluted common equivalent share $ (.08) $ .02 $ (.11) $ .01
========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
TELS Corporation
----------------
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
-------------
1998 1997
---- ----
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................. $(439,592) $ 29,237
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation of plant and equipment ....................... 139,630 180,752
Amortization of other assets .............................. 58,788 59,020
Amortization of software development costs ................ 114,288 81,127
Deferred income taxes ..................................... (130,235) (3,999)
Deferred compensation ..................................... 10,175 30,375
Changes in operating assets and liabilities:
Receivables .......................................... 57,089 (154,866)
Inventories .......................................... 290,266 41,288
Prepaid expenses ..................................... 15,498 45,643
Other assets ......................................... (39,766) (25,503)
Trade accounts payable and accrued expenses .......... 130,097 (116,177)
Deposits and advances ................................ 32,465 (2,133)
------- -------
Net cash provided by operating activities ............ 238,703 164,764
------- -------
Cash flows from investing activities:
Capital expenditures .............................................. (61,744) (44,496)
Software development costs ........................................ (126,336) (113,525)
Cash investments .................................................. 20,668 (3,760)
------- -------
Net cash used in investing activities .............. (167,668) (161,781)
======== ========
Cash flows from financing activities:
Net (payments) borrowings under line of credit agreement .......... (157,758) 100,739
Proceeds from long-term debt ...................................... 429,577
Principal payment on long-term debt ............................... (302,184) (77,427)
------- ------
Net cash (used in) provided by financing activities (30,365) 23,312
------- ------
Net increase in cash and cash equivalents ............................... 40,670 26,295
Cash and cash equivalents at beginning of year .......................... 13,845 31,980
------ ------
Cash and cash equivalents at end of quarter ............................. $ 54,515 $ 58,275
========= =========
</TABLE>
See accompanying notes to financial statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Financial Statements
The financial statements for the three and nine months ended September 30,
1998 and 1997 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, results of operations and cash flows for the
periods presented. The financial statements for 1998 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, 1997 and 1996
included in the Company's 1997 Annual Report to the Securities and Exchange
Commission on Form 10-KSB. The results for the nine months ended September 30,
1998 are not necessarily indicative of the results for the year ending December
31, 1998.
2. Earnings Per Share
In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128 Earnings Per Share ("SFAS 128"), which superseded
APB Opinion No. 15. Earnings per share for all periods presented has been
restated to reflect the adoption of SFAS 128. SFAS 128 requires companies to
present basic earnings per share, and if applicable, diluted earnings per share,
instead of primary and fully diluted earnings per share. Basic earnings per
share excludes dilution and is computed by dividing net earnings available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution that
could occur if options or warrants to issue common stock were exercised into
common stock. Stock options and warrants are not included in the 1998 or 1997
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, 1998 and 1997.
3. Inventories
Inventories at September 30, 1998 and December 31, 1997 consisted of the
following:
1998 1997
---- ----
Finished goods $ 61,640 $ 49,362
Work-in-process 89,356 143,679
Raw Materials and supplies 515,654 653,875
Reserve for obsolete inventory (160,961) (50,961)
-------- -------
$ 505,689 $ 795,955
========== ==========
4. Impact of Recently Issued Accounting Standards
In 1997, the Financial Accounting Standard Board ("FASB") issued Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive
Income, which prescribes standards for reporting comprehensive income and its
components. Comprehensive income consists of net income or loss for the current
period and other comprehensive income (income, expenses, gains and losses that
currently bypass the income statement and are reported directly in a separate
component of equity). SFAS 130 requires that components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
<PAGE>
4. Impact of Recently Issued Accounting Standards, cont.
as other financial statements. SFAS 130 is effective for financial statements
issued for periods beginning after December 15, 1997. The application of SFAS
130 resulted in no additional comprehensive income to report in 1998 or 1997.
Also in June, 1997, the FASB issued Statement No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), which requires
publicly-held companies to report financial and descriptive information about
its operating segments in financial statements issued to shareholders for
interim and annual periods. The statement also requires additional disclosures
with respect to products and services, geographical area of operations, and
major customers. SFAS 131 is effective for financial statements issued for
periods beginning after December 15, 1997, and for interim periods beginning in
the second year of application, which require restatement of earlier periods
presented. The Company is reviewing the effects of the disclosure requirements
of this new standard.
In addition, the Accounting Standards Executive Committee (AcSEC) issued
Statement of Position No. 98-1 (SOP 98-1), Accounting for the Cost of Computer
Software Development or Obtained for Internal Use. The SOP was issued to address
diversity in practice regarding whether and under what conditions the costs of
internal-use software should be capitalized. SOP 98-1 is effective for financial
statements for years beginning after December 15, 1998. The adoption of this new
standard is not expected to have a material impact on the Company.
The AcSEC also issued Statement of Position No. 97-2 (SOP 97-2), Software
Revenue Recognition. The SOP was issued to provide guidance on applying
generally accepted accounting principles in recognizing revenue on software
transactions. SOP 97-2 is generally effective for fiscal years beginning after
December 15, 1997. The adoption of this new standard is not expected to have a
material impact on the Company.
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.
(THIS SPACE INTENTIONALLY LEFT BLANK)
<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 THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED TO SEPTEMBER 30, 1997
Consolidated 1998 third quarter net sales of $1,010,029 decreased by 41%
when compared to the third quarter of 1997 sales of $1,719,386. Consolidated net
sales for the nine months ended September 30, 1998, decreased by 20% to
$3,765,184 when compared to $4,716,789 of net sales for the same nine month
period of 1997. The decrease in sales is due primarily to economic factors
affecting the electronics manufacturing industry causing a sales decrease at HTI
of 33% for the first nine months of 1998, when compared with the same period of
1997. Sales in the telephone call accounting division decreased by 9% for the
nine months ending September 30, 1998, when compared to the same period in 1997.
Management of the company expects an improvement in sales in the manufacturing
division for the fourth quarter of 1998 over the third quarter of 1998 and the
industry appears to be rebounding with projections for 9% growth in 1999.
Gross profit for the third quarter of 1998, decreased to $371,178, a
decrease of $594,920 when compared to gross profit for the third quarter of 1997
of $966,098. The gross profit margin as a percentage of sales was 36% for the
third quarter of 1998, compared to 56% for the third quarter of 1997. The gross
profit margin for the nine months ending September 30, 1998 decreased to 49%
when compared to 51% for the nine months ending September 30, 1997. This change
is due to significantly lower sales levels in the contract manufacturing
business and adjustments to allow for excess inventory levels.
Total research and development expenses including amortization of
previously capitalized development costs for the third quarter and nine months
ending September 30, 1998 were $43,535 and $118,274 respectively, compared to
$29,780 and $100,224 for the same periods in 1997. 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 1998 and 1999 to
take advantage of technology changes in the industry.
<PAGE>
Results of Operations, cont.
Selling, general and administrative expenses for the nine months ended
September 30, 1998 decreased by $27,898 to $2,170,995 when compared to
$2,198,893 for the same period in 1997. For the third quarter of 1998, selling,
general and administrative expenses were $639,957, a decrease of $136,053, or
18%, when compared to $776,010 for the third quarter of 1997. As a percentage of
net sales, selling, general and administrative expenses were 63% for the third
quarter of 1998, and 45% for the third quarter of 1997. Management's efforts to
reduce costs were offset somewhat by expenses related to litigation, Nasdaq
hearings and related funding acquisition costs. Due to the significant decrease
in revenues, 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 a consolidated net loss for the third quarter of 1998
of $(308,722) or $(.08) per share. For the nine months ending September 30,
1998, the Company reported a net loss of $(439,592) or ($.11) per share compared
to net income of $29,237 or $.01 per share for the same period of 1997. This
unfavorable change in net income can be attributed to the significantly lower
sales levels in the electronics contract manufacturing division.
Liquidity and Capital Resources
As of September 30, 1998, the Company reported current assets of
$1,681,335, and current liabilities of $1,238,471, resulting in net working
capital of $442,864. This is a decrease of $109,226 when compared to net working
capital of $552,090 at December 31, 1997. The Company's operating activities
provided $238,703 of cash during the first nine months of 1998, compared to
$164,764 of cash provided in operating activities during the first nine months
of 1997. Cash provided by operating activities was used to purchase equipment of
$61,744 and capitalized software development costs of $126,336. In 1998, the
Company paid down its line of credit by $157,758. The Company's working capital
has been severely impacted by reductions in sales from its major customers in
the contract manufacturing division, where sales decreased by 33% for the nine
months 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 fourth quarter of 1998. The Company has
obtained waivers of certain debt covenants under the terms of its line of credit
financing. However, the Company has been notified the line of credit will need
to be replaced by a different lender. Any failure to obtain new funding could
have a material adverse effect on the Company's business. 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.
Year 2000 (Y2K) Computer Systems Compliance
Many older computer software programs refer to years in terms of their
final two digits only. Such programs may interpret the year 2000 to mean the
year 1900 instead. If not corrected, those programs could cause date-related
transaction failures.
We are continuing our efforts to address this concern and the company is
performing assessments of all internal computer systems and developing and
implementing plans to correct the problems. We expect these projects to be
successfully completed during 1999.
Our Proprietary Call Accounting Products (INN-FORM XL, INN-FORM Plus,
INN-FORM Express and TEL-SENSE) are Year 2000 compliant. The hardware,
operating system and software are all unconcerned with the year portion of the
date in that they do not store the year nor perform any computations based on
year. Our PC based products (TEL-SENSE PCS, WIN-SENSE and INN-SURE) are also
Year 2000 compliant for the same reasons as given above: they do not base
computations on the year. However, the PC that they may be running on may or may
not be compliant. PCs are composed of various components (CPU, real time clock,
BIOS, etc.) that often use dates as part of their basic functioning and may be
vulnerable to the Y2K problem.
<PAGE>
Year 2000 problems could affect research and development, production,
distribution, financial, administrative and communication operations. Systems
critical to our business which have been identified as non-Year 2000 compliant
are either being replaced or corrected through programming modifications. In
addition to our in-house efforts, we intend to continue asking vendors, major
customers, service suppliers, communications providers and banks whose systems
failures potentially could have a significant impact on our operations to verify
their Year 2000 readiness and test such systems where appropriate and possible.
As part of our contingency plan, we are developing plans for those areas
that are critical to TELS' business. Based on our current plans and efforts to
date, we do not anticipate that Year 2000 problems will have a material effect
on our results of operations or financial condition and internal costs
specifically associated with modifying internal use software for Year 2000
compliance are expensed as incurred. To date, we have spent $15,000 on this
project. Costs to be incurred in the remainder of 1998 and 1999 to fix Year 2000
problems are estimated at approximately $40,000. We do not expect the costs
relating to Year 2000 remediation to have a material effect on our results of
operations or financial condition.
The above expectations are subject to uncertainties. For example, if we are
unsuccessful in identifying or fixing all Year 2000 problems in our critical
operations, or if we are affected by the inability of suppliers or major
customers to continue operations due to such a problem, our results of
operations or financial condition could be materially impacted.
The total costs that we incur in connection with the Year 2000 problems
will be influenced by our ability to successfully identify Year 2000 systems'
flaws, the nature and amount of programming required to fix the affected
problems, the related labor and/or consulting costs for such remediation, and
the ability of third parties with whom we have business relationships to
successfully address their own Year 2000 concerns. These and other unforeseen
factors could have a material adverse effect on our results of operations or
financial condition.
(THIS SPACE INTENTIONALLY LEFT BLANK)
<PAGE>
PART II. OTHER INFORMATION
Item 1. Market Listing
Effective September 30, 1998, pursuant to a hearing on July 23, 1998 by a
Nasdaq Listing Qualifications Panel, a decision was made to delist the Company's
securities from the Nasdaq Small Cap Market. The hearing by the Panel was held
at the Company's request to consider the issues pertaining to the Company's
common stock not being in compliance with the minimum bid price requirement of
$1.00. Subsequent to this decision by Nasdaq, the Company is currently listed on
the OTC Bulletin Board with the symbol "TELS". The OTC Bulletin Board is run by
the National Association of Securities Dealers ("NASD") and is maintained by
Nasdaq as an electronic trade-and-quote-reporting forum.
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, 1998
<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: November 20, 1998 By: /s/ John L. Gunter
----------------- ------------------
John L. Gunter
Chairman and CEO
Dated: November 20, 1998 By: /s/ Stephen M. Nelson
----------------- ---------------------
Stephen M. Nelson
President and Treasurer
Dated: November 20, 1998 By: /s/ Richard Lamoreaux
----------------- ---------------------
Richard Lamoreaux
Controller
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000756767
<NAME> TELS Corporation
<MULTIPLIER> 1
<CURRENCY> U.S. Currency
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1.000
<CASH> 101,211
<SECURITIES> 0
<RECEIVABLES> 834,155
<ALLOWANCES> 108,279
<INVENTORY> 505,689
<CURRENT-ASSETS> 1,681,335
<PP&E> 2,383,818
<DEPRECIATION> 1,703,555
<TOTAL-ASSETS> 3,663,016
<CURRENT-LIABILITIES> 1,238,471
<BONDS> 385,505
0
0
<COMMON> 77,835
<OTHER-SE> 1,961,205
<TOTAL-LIABILITY-AND-EQUITY> 3,663,016
<SALES> 3,765,184
<TOTAL-REVENUES> 3,765,184
<CGS> 1,928,364
<TOTAL-COSTS> 4,217,633
<OTHER-EXPENSES> (79,889)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 94,239
<INCOME-PRETAX> (552,338)
<INCOME-TAX> (112,746)
<INCOME-CONTINUING> (439,592)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (439,592)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
