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 JUNE 30, 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 August 1, 1998.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION Page
Consolidated Balance Sheets -- June 30, 1998 (Unaudited) 3
and December 31, 1997
Consolidated Statements of Operations -- Six and Three Months 4
Ended June 30, 1998 (Unaudited) and 1997, respectively
Consolidated Statements of Cash Flows -- Six Months Ended 5
June 30, 1998 (Unaudited) and 1997, respectively
Notes to Consolidated Financial Statements (Unaudited) 6,7
Management's Discussion and Analysis of Financial 8,9
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
<PAGE>
<TABLE>
<CAPTION>
TELS Corporation
Consolidated Balance Sheets
June 30, December 31,
1998 1997
Assets (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents ........................................................... $ 67,927 $ 13,845
Cash investments .................................................................... 103,430 67,364
Trade accounts receivable, less allowance for
doubtful receivables of $111,279 and $119,381, respectively ..................... 703,089 719,260
Employee and other receivables ...................................................... 94,121 117,438
Inventories ......................................................................... 703,403 795,955
Prepaid expenses .................................................................... 193,754 171,168
Deferred income taxes ............................................................... 139,156 139,156
----------- -----------
Total current assets ....................................................... $ 2,004,880 $ 2,024,186
----------- -----------
Property, plant and equipment, net ........................................................... 719,789 758,149
Software development costs, net .............................................................. 217,157 189,216
Intangible assets, net ....................................................................... 79,994 119,017
Deferred income taxes ........................................................................ 768,980 701,730
Other assets ................................................................................. 203,116 167,938
----------- -----------
$ 3,993,916 $ 3,960,236
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities
Trade accounts payable .............................................................. $ 322,203 $ 294,644
Accrued expenses .................................................................... 128,950 149,530
Accrued vacation .................................................................... 91,899 94,562
Deferred income ..................................................................... 96,147 98,749
Current portion of long-term debt ................................................... 544,182 824,043
Deposits and advances ............................................................... 26,626 10,568
----------- -----------
Total current liabilities .................................................. 1,210,007 1,472,096
----------- -----------
Long-term debt, excluding current installments ............................................... 438,145 19,683
----------- -----------
Stockholders' equity
Common stock, $.02 par value. Authorized 10,000,000 shares;
issued and outstanding 3,891,819 ............................................... 77,835 77,835
Additional paid-in capital .......................................................... 4,226,532 4,226,532
Accumulated deficit ................................................................. (1,958,603) (1,825,735)
Deferred compensation ............................................................... -- (10,175)
----------- -----------
Total stockholders' equity ................................................. 2,345,764 2,468,457
----------- -----------
$ 3,993,916 $ 3,960,236
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<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 ..................................................... 678,223 736,541 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 5,083
----------- ----------- ----------- ----------
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 $ 87,114
========= =========
</TABLE>
See accompanying notes to financial statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Financial Statements
The financial statements for the six months ended June 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 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 six months ended
June 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
3,891,819 for the three and six months ended June 30, 1998, and 1997.
3. Inventories
Inventories at June 30, 1998 and December 31, 1997 consisted of the
following:
1998 1997
---- ----
Finished goods $ 70,100 $ 49,362
Work-in-process 83,912 143,679
Raw material and supplies 615,352 653,875
Reserve for obsolete inventory (65,961) (50,961)
--------- ---------
$ 703,403 $ 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 June 30, 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.
<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 second quarter of 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. 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. 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
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.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Article 5 Financial Data Schedule for the quarter ending
June 30, 1998.
(b) Reports on Form 8-K:
No reports on form 8-K were filed in the second 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: August 24, 1998 By: /s/ John L. Gunter
--------------- ------------------
John L. Gunter
Chairman and CEO
Dated: August 24, 1998 By: /s/ Stephen M. Nelson
--------------- ---------------------
Stephen M. Nelson
President and Treasurer
<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> APR-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1.000
<CASH> 171,354
<SECURITIES> 0
<RECEIVABLES> 797,210
<ALLOWANCES> 111,279
<INVENTORY> 703,403
<CURRENT-ASSETS> 2,004,880
<PP&E> 2,369,320
<DEPRECIATION> 1,649,531
<TOTAL-ASSETS> 3,993,916
<CURRENT-LIABILITIES> 1,210,007
<BONDS> 438,145
0
0
<COMMON> 77,835
<OTHER-SE> 2,267,929
<TOTAL-LIABILITY-AND-EQUITY> 3,993,916
<SALES> 1,313,640
<TOTAL-REVENUES> 1,313,640
<CGS> 678,223
<TOTAL-COSTS> 1,524,972
<OTHER-EXPENSES> 6,421
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,959
<INCOME-PRETAX> (217,153)
<INCOME-TAX> 67,250
<INCOME-CONTINUING> (150,503)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (150,503)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
