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, 1999
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 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 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 3,891,819 shares of common stock on
October 31, 1999.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION Page
Consolidated Balance Sheets -- September 30, 1999 (Unaudited)
and December 31, 1998 3
Consolidated Statements of Operations -- Three and Nine Months
Ended September 30, 1999 and 1998, respectively (Unaudited) 4
Consolidated Statements of Cash Flows -- Nine Months Ended
September 30, 1999 and 1998, respectively (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6,7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8,9,10
PART 11. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
<PAGE>
<TABLE>
<CAPTION>
TELS Corporation
----------------
Consolidated Balance Sheets
September 30, December 31,
1999 1998
Assets (Unaudited) Audited
------ ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents ............................................ $ (35,525) $ 63,326
Trade accounts receivable, less allowance for
doubtful receivables of $ 97,364 and $81,586, respectively ....... 658,172 608,802
Employee and other receivables ....................................... 71,248 65,514
Inventories .......................................................... 453,021 446,416
Prepaid expenses ..................................................... 137,249 161,942
Deferred income taxes ................................................ 37,000 -
------
Total current assets ................................................. $ 1,321,165 $ 1,346,000
----------- -----------
Property, plant and equipment, net ............................................ 522,604 627,085
Software development costs, net ............................................... 116,644 124,922
Intangible assets, net ........................................................ 12,723 40,974
Other assets .................................................................. 232,801 208,495
------- -------
$ 2,205,936 $ 2,347,476
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities
Trade accounts payable ............................................... $ 348,398 $ 420,270
Accrued expenses ..................................................... 87,431 180,308
Accrued vacation ..................................................... 102,086 131,887
Current portion of long-term debt .................................... 617,355 601,069
Deposits and advances ................................................ 205,792 144,273
------- -------
Total current liabilities ................................... 1,361,062 1,477,807
--------- ---------
Long-term debt, excluding current installments ................................ 359,467 385,000
------- -------
Stockholders' equity
Common stock, $.02 par value. Authorized 50,000,000 shares;
issued and outstanding 3,891,819 ................................ 77,835 77,835
Additional paid-in capital ........................................... 4,226,532 4,226,532
Accumulated deficit .................................................. (3,818,962) (3,819,698)
---------- ----------
Total stockholders' equity .................................. 485,406 484,669
------- -------
$ 2,205,936 $ 2,347,476
=========== ===========
</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,
1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C>
Net sales ....................................................... $ 1,100,787 $ 1,010,029 $ 3,503,341 $ 3,765,184
Cost of goods sold .............................................. 472,458 638,851 1,328,908 1,928,364
------- ------- --------- ---------
Gross profit ........................................... 628,329 371,178 2,174,433 1,836,820
Research and development expenses ............................... 33,088 43,535 98,469 118,274
Selling, general and administrative expenses .................... 751,758 639,957 2,040,506 2,190,995
------- ------- --------- ---------
Operating income (loss) ................................ (156,517) (312,314) 35,458 (472,449)
Other income (expenses):
Interest income ........................................ 21,703 1,100 27,417 11,644
Interest expense ....................................... (32,018) (41,706) (88,504) (94,239)
Other .................................................. (17,000) (12,887) -- 2,706
------- ------- -----
Net other expense ...................................... (27,315) (53,493) (61,087) (79,889)
------- ------- ------- -------
Income (loss) before income tax benefit (provision) .... (183,832) (365,807) (25,629) (552,338)
Income tax benefit, (provision) ................................. (27,368) 57,085 26,365 112,746
------- ------ ------ -------
Net income (loss) ...................................... $ (211,200) $ (308,722) $ 736 $ (439,592)
=========== =========== =========== ===========
Net income (loss) per basic and diluted common equivalent share $ (.05) $ (.08) $ .00 $ (.11)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
TELS Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
-------------
1999 1998
---- ----
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................. $ 736 $(439,592)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation of plant and equipment ....................... 143,187 139,630
Amortization of other assets .............................. 24,385 58,788
Amortization of software development costs ................ 83,806 114,288
Deferred income taxes ..................................... (37,000) (130,235)
Deferred compensation ..................................... -- 10,175
Changes in operating assets and liabilities:
Receivables .......................................... (55,104) 57,089
Inventories .......................................... (6,605) 290,266
Prepaid expenses ..................................... 24,693 15,498
Other assets ......................................... (20,439) (39,766)
Trade accounts payable and accrued expenses .......... (194,549) 130,097
Deposits and advances ................................ 61,519 32,465
------ ------
Net cash provided by operating activities ............ 24,629 238,703
------ -------
Cash flows from investing activities:
Capital expenditures .............................................. (38,706) (61,744)
Software development costs ........................................ (75,528) (126,080)
Cash investments .................................................. -- 20,668
------
Net cash used in investing activities .............. (114,234) (167,668)
-------- --------
Cash flows from financing activities:
Net (payments) borrowings under line of credit agreement .......... 4,224 (157,758)
Proceeds from long-term debt ...................................... -- 429,577
Principal payment on long-term debt ............................... (13,471) (302,184)
------- --------
Net cash (used in) provided by financing activities (9,247) (30,365)
------ -------
Net increase in cash and cash equivalents ............................... (98,852) 40,670
Cash and cash equivalents at beginning of year .......................... 63,326 13,845
------ ------
Cash and cash equivalents at end of quarter ............................. $ (35,525) $ 54,515
========= =========
</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,
1999 and 1998 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 1999 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, 1998 and 1997
included in the Company's 1998 Annual Report to the Securities and Exchange
Commission on Form 10-KSB. The results for the nine months ended September 30,
1999 are not necessarily indicative of the results for the year ending December
31, 1999.
2. 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 1999 or 1998 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 six and nine months ended September
30, 1999 and 1998.
3. Inventories
Inventories at September 30, 1999 and December 31, 1998 consisted of the
following:
1999 1998
---- ----
Finished goods $ 25,351 $ 64,962
Work-in-process 135,953 69,045
Raw Materials and supplies 597,458 573,369
Reserve for obsolete inventory (305,741) (260,960)
-------- --------
$ 453,021 $ 446,416
========== ==========
-Continued-
<PAGE>
TELS Corporation
----------------
4. Activity of Business Segments
In 1998 the Company adopted Statement of Financial Accounting Standards No.
131, Disclosures About Segments of an Enterprise and Related Information, (SFAS
No. 131), which governs disclosures relating to a business enterprises'
operating statements. The accounting policies of the Company's segments are the
same as those described in the "Summary of Significant Accounting Policies." The
Company's reportable segments are strategic business units that offer different
products and services. They are managed separately because each business
requires different technology and marketing strategies. Substantially all of the
Company's continuing operations are in telecommunications and contract
manufacturing and assembly. Total revenue by industry segment includes both
sales to unaffiliated customers, as reported in the Company's consolidated
statements of operations, and intersegment sales, which are accounted for based
on the estimated fair market value of the products. Intersegment sales are not
material.
Operating income (loss) is total revenue less operating expenses. In
computing operating income (loss), the effects of general corporate expenses,
interest expense and income taxes are not included.
Identifiable assets by segment are those that are used in the Company's
operations in each business segment. One customer in the contract manufacturing
and assembly segment, accounted for approximately 7% of the Company's sales in
the six months ending June 30, 1999. The same customer accounted for 19% of the
sales for the same period of 1998. Identifiable assets are principally accounts
receivable, inventory, property and equipment, capitalized software development
costs and other assets.
Financial information by segments is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales:
Telecommunications .................... $ 2,367,113 $ 2,396,585
Contract manufacturing and assembly ... 1,136,228 1,368,599
Corporate and other ................... -- --
$ 3,503,341 $ 3,765,184
=========== ===========
Operating income (loss):
Telecommunications .................... $ 274,569 $ 134,781
Contract manufacturing and assembly.... (149,530) (240,651)
Corporate and other ................... (89,581) (366,579)
------- --------
$ 35,458 $ (472,449)
=========== ===========
Identifiable assets:
Telecommunications .................... $ 833,819 $ 992,351
Contract manufacturing and assembly ... 543,808 730,398
Corporate and other ................... 828,309 624,727
------- -------
$ 2,205,936 $ 2,347,476
=========== ===========
Depreciation and amortization expense:
Telecommunications .................... $ 89,667 $ 133,923
Contract manufacturing and assembly ... 85,007 129,626
Corporate and other ................... 76,704 49,157
------ ------
$ 251,378 $ 312,706
=========== ===========
Interest expense:
Telecommunications .................... $ 30,718 $ 40,728
Contract manufacturing and assembly ... 27,645 24,736
Corporate and other ................... 30,141 28,775
------ ------
$ 88,504 $ 94,239
=========== ===========
</TABLE>
<PAGE>
TELS CORPORATION
----------------
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, 1999
COMPARED TO SEPTEMBER 30, 1998
Consolidated 1999 third quarter net sales of $1,100,787 increased by 9%
when compared to the third quarter of 1998 sales of $1,010,029. Consolidated net
sales for the nine months ended September 30, 1999, decreased by 7% to
$3,503,341 when compared to $3,765,184 of net sales for the same nine month
period of 1998. The decrease in sales is due primarily to economic factors
affecting the electronics manufacturing industry causing a sales decrease at HTI
of 17% for the first nine months of 1999, when compared with the same period of
1998. Sales in the telephone call accounting division decreased by 1% for the
nine months ending September 30, 1999, when compared to the same period in 1998.
Gross profit for the third quarter of 1999 increased to $628,329, an
increase of $257,151 when compared to gross profit for the third quarter of 1998
of $371,178. The gross profit margin as a percentage of sales was 57% for the
third quarter of 1999, compared to 37% for the third quarter of 1998. The gross
profit margin for the nine months ending September 30, 1999, increased to 62%
when compared to 49% for the nine months ending September 30, 1998.
Total research and development expenses including amortization of
previously capitalized development costs for the third quarter and nine months
ending September 30, 1999 were $33,088 and $98,469 respectively, compared to
$43,535 and $118,385 for the same periods in 1998. 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 1999 and 2000 to
take advantage of technology changes in the industry.
<PAGE>
Selling, general and administrative expenses for the nine months ended
September 30, 1999 decreased by $150,489 to $2,040,506 when compared to
$2,190,995 for the same period in 1998. For the third quarter of 1999, selling,
general and administrative expenses were $751,758, an increase of $111,801, or
17%, when compared to $639,957 for the third quarter of 1998. As a percentage of
net sales, selling, general and administrative expenses were 68% for the third
quarter of 1999, and 63% for the third quarter of 1998. Management's efforts to
reduce costs were offset somewhat by expenses related to litigation, funding,
and acquisition costs. Management of the Company is continuing its efforts to
reduce administrative expenses until such time that increased sales revenues
warrant expansion and/or growth.
The Company reported a consolidated net loss for the third quarter of 1999
of $(211,200) or $(.05) per share compared to a consolidated net loss of
$(308,722) or $(.08) per share in 1998. For the nine months ending September 30,
1999, the Company reported a net income of $736 or ($.00) per share compared to
a net loss of $(439,592) or $(.11) per share for the same period of 1998. Losses
continue to be attributed to the significantly lower sales levels in the
electronics contract manufacturing division.
Liquidity and Capital Resources
As of September 30, 1999, the Company reported current assets of
$1,321,165, and current liabilities of $1,361,063, resulting in net working
capital of $(39,898). This is a decrease of $482,762 when compared to net
working capital of $442,864 at September 30, 1998. The Company's operating
activities provided $24,634 of cash during the first nine months of 1999,
compared to $238,703 of cash provided in operating activities during the first
nine months of 1998. Cash provided by operating activities was used to purchase
equipment of $38,705 and capitalized software development costs of $75,529. In
1999, the Company increased its line of credit by $4,220. 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 17%
for the nine months of 1999 when compared to 1998. The Company replaced its line
of credit with a different lender in September of 1999.
<PAGE>
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. The Company is continuing its efforts to address this
concern. A project team has performed assessments of all internal computer
systems and is developing and implementing plans to correct the problems. The
Company expects these projects to be successfully completed during the fourth
quarter of 1999. External and internal costs specifically associated with
modifying internal use software for Y2K compliance are expensed as incurred. To
date, the Company has spent approximately $35,000 on this project. Remaining
costs to be incurred in 1999 to fix Y2K problems are estimated at approximately
$50,000. The Company does not expect the costs relating to Y2K remediation to
have a material effect on results of operations or financial condition. The
Company evaluated its existing accounting software for compliance with Y2K and
determined that an upgrade to the existing accounting system was required. This
upgrade has been purchased and has been installed.
TELS Corporation's Proprietary Call Accounting Products (INN-FORM XL,
INN-FORM Plus, INN-FORM Express and TEL-SENSE) are Y2K 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. The Company's PC-based products (TEL-SENSE PCS, WIN-SENSE and INN-SURE)
are also Y2K 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.), some of which may use dates as part of their basic functioning and
may be vulnerable to the Y2K problem.
Y2K problems could affect research and development, production,
distribution, financial, administrative and communication operations. Systems
critical to TELS Corporation's business which have been identified as non-Y2K
compliant are either being replaced or corrected through programming
modifications. In addition to in-house efforts, the Company intends to continue
asking vendors, major customers, service suppliers, communications providers and
banks, whose systems failures potentially could have a significant impact on
operations, to verify their Y2K readiness and test such systems where
appropriate and possible.
As part of TELS Corporation's contingency plan, the Company is developing
plans for those areas that are critical to TELS' business such as scheduling
and/or purchase of critical inventory parts, developing relationships with
multiple vendor sources, implementing additional backup procedures and printing
and storing critical documentation. Based on current plans and efforts to date,
TELS Corporation anticipates that Y2K issues will not have a material effect on
TELS Corporation's results of operations or financial condition.
The above expectations are subject to uncertainties. For example, if the
Company is affected by the inability of suppliers or major customers to continue
operations due to Y2K issues, the results of operations or financial condition
could be materially impacted. The Company recognizes that there is some
probability of a slow down in sales around the end of 1999 and the beginning of
2000 as more conservative customers postpone purchases until Y2K matters have
become more definite.
The total costs that TELS Corporation will incur in connection with the
Year 2000 problems will be influenced by the Company's 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, the effects of any sales slow down related to Y2K, and the ability
of third parties with whom TELS Corporation has business relationships to
successfully address their own Year 2000 concerns. These and other unforeseen
factors could have a material adverse effect on TELS Corporation's results of
operations or financial condition.
(THIS SPACE INTENTIONALLY LEFT BLANK)
<PAGE>
TELS CORPORATION
----------------
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a). Exhibit 27 - Article 5 Financial Data Schedule for the quarter ending
September 30, 1999.
(b). Reports on Form 8-K:
No reports on Form 8-K were filed for the third quarter of 1999.
<PAGE>
TELS CORPORATION
----------------
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELS Corporation
Dated: November 12, 1999 By: /s/ John L. Gunter
----------------- ------------------
John L. Gunter
Chairman and CEO
Dated: November 12, 1999 By: /s/ Ronald A. Haller
----------------- --------------------
Ronald A. Haller
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-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1.000
<CASH> (35,525)
<SECURITIES> 0
<RECEIVABLES> 755,536
<ALLOWANCES> 97,364
<INVENTORY> 453,021
<CURRENT-ASSETS> 1,321,165
<PP&E> 2,422,413
<DEPRECIATION> 1,899,809
<TOTAL-ASSETS> 2,205,936
<CURRENT-LIABILITIES> 1,361,062
<BONDS> 359,467
0
0
<COMMON> 77,835
<OTHER-SE> 407,570
<TOTAL-LIABILITY-AND-EQUITY> 2,205,936
<SALES> 3,503,341
<TOTAL-REVENUES> 3,503,341
<CGS> 1,328,908
<TOTAL-COSTS> 3,467,883
<OTHER-EXPENSES> (61,087)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 88,504
<INCOME-PRETAX> (25,629)
<INCOME-TAX> (26,365)
<INCOME-CONTINUING> 736
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 736
<EPS-BASIC> .00
<EPS-DILUTED> .00
</TABLE>
