1
U.S. 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 MARCH 31, 1998
[ ] 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.)
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 Issuer had outstanding 3,891,819 shares of common stock on May 1, 1998.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION Page
Consolidated Balance Sheets -- March 31, 1998 (Unaudited) and
December 31, 1997 3
Consolidated Statements of Operations -- Three Months Ended
March 31, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows -- Three Months Ended
March 31, 1998 and 1997 (Unaudited) 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 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
March 31, December 31,
1998 1997
Assets (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents ....................................... $ 52,921 $ 13,845
Cash investments ................................................ 100,673 67,364
Trade accounts receivable, less allowance for
doubtful receivables of $ 105,041 and $ 119,381, respectively 691,193 719,260
Employee and other receivables .................................. 175,850 117,438
Inventories ..................................................... 824,220 795,955
Prepaid expenses ................................................ 199,553 171,168
Deferred income taxes ........................................... 149,245 139,156
---------- ----------
Total current assets ................................... 2,193,655 2,024,186
---------- ----------
Property, plant and equipment, net ....................................... 718,129 758,149
Software development costs, net .......................................... 177,622 189,216
Intangible assets, net ................................................... 99,506 119,017
Deferred income taxes .................................................... 681,552 701,730
Other assets ............................................................. 184,318 167,938
---------- ----------
$4,054,782 $3,960,236
========== ==========
Liabilities and Stockholders' Equity
Current Liabilities
Trade accounts payable .......................................... 398,716 294,644
Accrued expenses ................................................ 134,441 149,530
Accrued vacation ................................................ 114,797 94,562
Current portion of long-term debt ............................... 777,087 824,043
Deposits and advances ........................................... 116,516 109,317
---------- ----------
Total current liabilities .............................. 1,541,557 1,472,096
---------- ----------
Long-term debt, excluding current installments ........................... 15,040 19,683
---------- ----------
Stockholders' equity
Common stock, $.02 par value. Authorized 10,000,000 shares;
issued and outstanding 3,891,819 shares .................... 77,835 77,835
Additional paid-in capital ...................................... 4,226,532 4,226,532
Accumulated deficit ............................................. (1,806,132) (1,825,735)
Deferred compensation ........................................... (50) (10,175)
---------- ----------
Total stockholders' equity ............................. 2,498,185 2,468,457
---------- ----------
$4,054,782 $3,960,236
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Operations
(Unaudited)
Three months ended
March 31 ,
1998 1997
----- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales .................................................................. $ 1,441,515 $ 1,368,599
Cost of goods sold ......................................................... 611,290 736,541
----------- -----------
Gross profit ...................................................... 830,225 632,058
Research and development expenses .......................................... 37,995 26,404
Selling, general and administrative expenses ............................... 741,063 705,719
----------- -----------
Operating income (loss) ........................................... 51,167 (100,065)
Other income (expenses):
Interest income ................................................... 5,084 1,156
Interest expense .................................................. (27,574) (27,502)
Other ............................................................. 2,515 3,480
----------- -----------
Other expense, net ................................................ (19,975) (22,866)
----------- -----------
Income (loss) before income
tax (provision) benefit .......................................... 31,192 (122,931)
Income tax benefit, (provision) ............................................ (11,589) 39,500
----------- -----------
Net income (loss) ................................................. $ 19,603 $ (83,431)
=========== ===========
Basic and diluted net income (loss) per common and common equivalent share $ .01 $ (.02)
=========== ===========
</TABLE>
See accompanying notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31,
1998 1997
----- ----
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ......................................................... $ 19,603 $ (83,431)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation of plant and equipment ............................... 52,904 60,152
Amortization of other assets ...................................... 19,511 20,157
Amortization of software development costs ........................ 37,169 25,931
Deferred income taxes ............................................. 10,089 (41,000)
Deferred compensation ............................................. 10,125 10,125
Changes in operating assets and liabilities:
Receivables .................................................. (30,345) 81,065
Inventories .................................................. (28,265) 15,987
Prepaid expenses ............................................. (28,385) 12,432
Other assets ................................................. (16,380) (4,312)
Trade accounts payable and accrued expenses .................. 109,218 (146,113)
Deposits and advances ........................................ 7,199 (16,664)
--------- ---------
Net cash provided by (used in) operating activities........ 162,443 (65,671)
--------- ---------
Cash flows from investing activities:
Capital expenditures ...................................................... (12,884) (13,814)
Software development costs ................................................ (25,575) (31,175)
Cash investments .......................................................... (33,309) (430)
--------- ---------
Net cash used in investing activities ...................... (71,768) (45,419)
--------- ---------
Cash flows from financing activities:
Net borrowings (payments) under line of credit agreement .................. (36,078) 130,765
Principal payments on long-term debt ...................................... (15,521) (21,865)
--------- ---------
Net cash provided by (used in) financing activities......... (51,599) 108,900
--------- ---------
Net increase (decrease) in cash and cash equivalents ............................ 39,076 (2,190)
Cash and cash equivalents at beginning of quarter ............................... 13,845 31,980
Cash and cash equivalents at end of quarter ..................................... $ 52,921 $ 29,790
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the quarter for interest ................................. $ 27,574 $ 27,502
========= =========
</TABLE>
See accompanying notes to financial statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Financial Statements
The financial statements for the three months ended March 31, 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 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 three months ended
March 31, 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
3,891,819 for the three months ended March 31, 1998 and 1997.
3. Inventories
Inventories at March 31, 1998 and December 31, 1997 consisted of the
following:
1998 1997
---- ----
Finished goods $ 55,669 $ 49,362
Work-in-process 163,923 143,679
Raw material and supplies 655,589 653,875
Reserve for obsolete inventory (50,961) (50,961)
------- -------
$824,220 $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
as other financial statements. SFAS 130 is effective for financial statements
issued for periods beginning after December 15, 1997. The application of SFAS
130 for the interim period ended March 31, 1998 resulted in no additional
comprehensive income to report. The adoption of this new standard is not
expected to have a material impact on the Company.
<PAGE>
4. Impact of Recently Issued Accounting Standards, cont.
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 Company is currently
evaluating the impact SOP 98-1 will have on its financial statements, if any.
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 Company is currently evaluating the impact SOP 97-2 will
have on its financial statements, if any.
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.
5. Contingencies
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 the Complaint, the Plaintiffs have alleged
causes of action for the following: (1) rescission, (2) civil conspiracy, (3)
fraud, (4) violation of California securities laws, (5) intentional interference
with economic advantage, (6) common law gender discrimination, and (7)
intentional infliction of emotional distress. The essence of each of Plaintiffs'
claims is that the Company induced Plaintiffs to sell their interest in a
business referred to as "HTI" by allegedly making false statements relating to
employment security, stock options, and bonuses. Plaintiffs claim that they have
not received the employment security, stock options, and bonuses because their
employment has been terminated.
Plaintiffs seek general damages, special damages and punitive damages
in an unspecified amount. In addition, Plaintiffs seek entry of an order
rescinding the Asset Purchase Agreement entered into between TEL electronics,
inc. and Hash Tech, Inc. on March 16, 1994 and the Employment Agreements entered
into by Hash Tech, Inc. and the Neuenswanders on March 31, 1994. Plaintiffs also
seek recovery of their attorney's fees and costs.
The Company denies the allegations of the Complaint and intends to
vigorously defend the matter. On October 7, 1997, the Company filed a
cross-complaint in the Superior Court for the County of Santa Clara, against the
Plaintiffs for breach of non-compete agreements, breach of severance agreements,
and intentional and negligent misrepresentations. In the cross-complaint, the
Company requests compensatory and punitive damages and other appropriate relief
of an unspecified amount. On December 10, 1997, the Plaintiffs filed their
answer to the cross-complaint denying generally and specifically each and every
allegation in the cross-complaint and asserted various affirmation defenses. The
parties mediation to resolve this matter was unsuccessful.
In view of the uncertainties inherent in litigation, the Company is
unable to express any judgments as to the outcome of this matter.
<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 months ended March 31, 1998 compared to
March 31, 1997
Consolidated net sales for the first quarter of 1998 increased $72,916,
or 5%, to $1,441,515 when compared to $1,368,599 of net sales for the first
quarter 1997. The increase is due primarily to increased sales of $75,927, or
14%, in the Company's call accounting products for the first quarter of 1998.
This increase was mostly due to sales from the new product WIN-SENSETM,
increased sales from the Company's dealer distribution channel, and increased
sales through national accounts. The increase in telecommunication sales was
offset somewhat by reduced net sales in the contract manufacturing sector of
$25,450 or 3% for the first quarter of 1998, due to lower overall industry sales
and increased product competition.
Gross profit increased to $830,225, an increase of $198,167, or 31%,
when compared to gross profit for the first quarter of 1997 of $632,058. The
gross profit margin as a percentage of sales increased to 58% for the first
quarter of 1998, compared to 46% for the first quarter of 1997. The increase in
the gross profit margin as a percent of sales is due primarily to the increase
in the contract manufacturing sector's gross profit margin. The margin increased
from 29% in 1997 to 42% for the first quarter of 1998 primarily as a result of
more accuracy in the bidding and quoting of new jobs. The higher sales levels in
the telecommunication sector, which represented 43% of total sales in 1998
compared to 39% of total sales in 1997, also contributed to the increased gross
profit margin due to a higher contribution margin from telecommunication
products over that of contract manufacturing products.
For the first quarter of 1998, total research and development costs
including amortization of previously capitalized research and development
expenses, were $37,995 compared to $39,254 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 to
$741,063, or 5%, for the first quarter of 1998, when compared to $705,719 for
the first quarter of 1997. As a percentage of net sales, SG&A expenses were 51%
for the first quarter of 1998, compared to 52% for the first quarter of 1997.
<PAGE>
The Company reported consolidated net income for the first quarter of
1998 of $19,603, or $.01 per share. This is a marked improvement when compared
to the first quarter net loss of ($83,431), or ($.02) per share for the same
period in 1997. Management of the Company believes that profitability will
continue to improve in the second quarter of 1998 as it continues its focus on
reducing expenses, increasing sales from telecommunication products, and
improving gross profit margins. 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 continue to generate a profitable level of sales.
Liquidity and Capital Resources
As of March 31, 1998, the Company reported current assets of $2,193,655
and current liabilities of $1,541,557, resulting in net working capital of
$652,098. This is an increase of $100,008 when compared to net working capital
of $552,090 at December 31, 1997. The Company's operating activities provided
$162,443 of cash during the first three months of 1998, compared to $65,671 of
cash used in operating activities during the first three months of 1997. Cash
provided by operating activities was used to purchase equipment of $12,884, for
capitalized software development costs of $25,575, and to increase cash
investments of $33,309. In 1998, the Company paid down its line of credit by
$36,078 and reduced long term debt by $15,521. The Company has entered into
negotiations with lending institutions to replace its existing mortgage which is
due May 5, 1998, and is in the final stages of loan closing. The Company 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
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 the Complaint, the Plaintiffs have alleged
causes of action for the following: (1) rescission, (2) civil conspiracy, (3)
fraud, (4) violation of California securities laws, (5) intentional interference
with economic advantage, (6) common law gender discrimination, and (7)
intentional infliction of emotional distress. The essence of each of Plaintiffs'
claims is that the Company induced Plaintiffs to sell their interest in a
business referred to as "HTI" by allegedly making false statements relating to
employment security, stock options, and bonuses. Plaintiffs claim that they have
not received the employment security, stock options, and bonuses because their
employment has been terminated.
Plaintiffs seek general damages, special damages and punitive damages
in an unspecified amount. In addition, Plaintiffs seek entry of an order
rescinding the Asset Purchase Agreement entered into between TEL electronics,
inc. and Hash Tech, Inc. on March 16, 1994 and the Employment Agreements entered
into by Hash Tech, Inc. and the Neuenswanders on March 31, 1994. Plaintiffs also
seek recovery of their attorney's fees and costs.
The Company denies the allegations of the Complaint and intends to
vigorously defend the matter. On October 7, 1997, the Company filed a
cross-complaint in the Superior Court for the County of Santa Clara, against the
Plaintiffs for breach of non-compete agreements, breach of severance agreements,
and intentional and negligent misrepresentations. In the cross-complaint, the
Company requests compensatory and punitive damages and other appropriate relief
of an unspecified amount. On December 10, 1997, the Plaintiffs filed their
answer to the cross-complaint denying generally and specifically each and every
allegation in the cross-complaint and asserted various affirmation defenses. The
parties mediation to resolve this matter was unsuccessful.
In view of the uncertainties inherent in litigation, the Company is
unable to express any judgments as to the outcome of this matter.
NASDAQ Market Listing
NASDAQ, on August 22nd, 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 23rd, 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 2 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. As a result, the Company was provided 90 calendar days, which
expires May 28, 1998, to regain compliance with this standard. The Company may
regain compliance if its securities trade at or above the minimum requirement
for at least 10 consecutive trade days. If the securities do not regain
compliance within 90 days, NASDAQ will issue a delisting letter which will
identify the review procedures available to the Company. The Company may request
a review at that time, which will generally stay delisting. 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.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Article 5 Financial Data Schedule for the quarter
ending March 31, 1998.
(b) Reports on Form 8-K:
No reports on form 8-K were filed in the first quarter of
1998.
(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: May 1, 1998 By: /s/ Stephen M. Nelson
----------- ---------------------
Stephen M. Nelson
President and Treasurer
Dated: May 1, 1998 By: /s/ Melody Rasmussen
----------- --------------------
Melody Rasmussen
Controller
and Chief Financial Officer
<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> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 153,594
<SECURITIES> 0
<RECEIVABLES> 867,043
<ALLOWANCES> 105,041
<INVENTORY> 824,220
<CURRENT-ASSETS> 2,193,655
<PP&E> 2,341,654
<DEPRECIATION> 1,623,526
<TOTAL-ASSETS> 4,054,782
<CURRENT-LIABILITIES> 1,541,557
<BONDS> 305,594
0
0
<COMMON> 77,835
<OTHER-SE> 2,420,350
<TOTAL-LIABILITY-AND-EQUITY> 4,054,782
<SALES> 1,441,515
<TOTAL-REVENUES> 1,441,515
<CGS> 611,290
<TOTAL-COSTS> 1,390,348
<OTHER-EXPENSES> 19,975
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,574
<INCOME-PRETAX> 31,192
<INCOME-TAX> (11,589)
<INCOME-CONTINUING> 19,603
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,603
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
