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, 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 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, 1999.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION Page
Consolidated Balance Sheets -- June 30, 1999 (Unaudited)
and December 31, 1998 3
Consolidated Statements of Operations -- Six and Three Months
Ended June 30, 1999 and 1998, respectively (Unaudited) 4
Consolidated Statements of Cash Flows -- Six Months Ended
June 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 II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
<PAGE>
<TABLE>
<CAPTION>
TELS Corporation
----------------
Consolidated Balance Sheets
June 30, December 31,
1999 1998
Assets (Unaudited) Audited
------ ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents ............................................... $ 29,471 $ 63,326
Trade accounts receivable, less allowance for
doubtful receivables of $ 91,293 and $111,279, respectively ......... 788,345 608,802
Employee and other receivables .......................................... 88,807 65,514
Inventories ............................................................. 565,242 446,416
Prepaid expenses ........................................................ 110,100 161,942
Deferred income taxes ................................................... 56,950 -
------
Total current assets .................................................... $ 1,638,915 $ 1,346,000
----------- -----------
Property, plant and equipment, net ............................................... 556,581 627,085
Software development costs, net .................................................. 129,378 124,922
Intangible assets, net ........................................................... 2,309
40,974
Other assets ..................................................................... 219,776 208,495
------- -------
$ 2,546,959 $ 2,347,476
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities
Trade accounts payable .................................................. $ 411,324 $ 420,270
Accrued expenses ........................................................ 179,937 180,308
Accrued vacation ........................................................ 124,129 131,887
Current portion of long-term debt ....................................... 564,867 601,069
Deposits and advances ................................................... 195,545 144,273
------- -------
Total current liabilities ...................................... 1,475,802 1,477,807
--------- ---------
Long-term debt, excluding current installments ................................... 374,550 385,000
------- -------
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 ..................................................... (3,607,760) (3,819,698)
---------- ----------
Total stockholders' equity ..................................... 696,607 484,669
------- -------
$ 2,546,959 $ 2,347,476
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
TELS Corporation
Consolidated Statements of Operations
(Unaudited)
Three months ended Six months ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales .................................. $ 1,276,952 $ 1,313,640 $ 2,402,554 $ 2,755,155
Cost of goods sold ......................... 471,422 678,223 856,450 1,289,513
Gross profit ...................... 805,530 635,417 1,546,104 1,465,642
Research and development expenses .......... 35,382 36,774 65,381 74,739
Selling, general and administrative expenses 675,890 809,975 1,288,748 1,551,038
Operating income (loss) ........... 94,258 (211,332) 191,975 (160,135)
Other income (expenses):
Interest income ................... 2,338 5,460 5,714 10,544
Interest expense .................. (29,533) (24,959) (56,486) (52,533)
Other ............................. 17,000 13,078 17,000 15,593
Other expense, net ................ (10,195) (6,421) (33,772) (26,396)
Income (loss) before income
tax (benefit) provision .......... 84,063 (217,753) 158,203 (186,531)
Income tax (benefit), provision ............ (24,783) (67,250) (53,733) (55,661)
Net income (loss) ................. $ 108,846 $ (150,503) $ 211,936 $ (130,870)
Basic and diluted net income (loss)
per common and common equivalent share ..... $ .03 $ (.04) $ .05 $ (.03)
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
TELS Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
June 30,
--------
1999 1998
---- ----
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................ $ 211,936 $(130,870)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation of plant and equipment ...................... 95,458 87,137
Amortization of other assets ............................. 38,186 50,132
Amortization of software development costs ............... 48,421 73,700
Deferred income taxes .................................... (56,950) (69,248)
Deferred compensation .................................................. -- 10,175
Changes in operating assets and liabilities:
Receivables ......................................... (202,837) 39,488
Inventories ......................................... (118,826) 92,552
Prepaid expenses .................................... 51,842 (22,586)
Other assets ........................................ (10,802) (35,178)
Trade accounts payable and accrued expenses ......... (17,073) 1,714
Deposits and advances ............................... 51,272 16,058
------ ------
Net cash provided by operating activities ........ 90,627 113,074
------ -------
Cash flows from investing activities:
Capital expenditures ............................................. (24,953) (48,777)
Software development costs and other ............................. (52,879) (112,750)
Cash investments ................................................. -- (36,066)
-------
Net cash used in investing activities ............. (77,832) (197,593)
------- --------
Cash flows from financing activities:
Net borrowings (payments) under line of credit agreement ......... (21,200) (86,027)
Principal borrowings (payments) on long-term debt ................ (25,450) 224,628
------- -------
Net cash provided by (used in) financing activities (46,650) 138,601
------- -------
Net increase (decrease) in cash and cash equivalents ................... (33,855) 54,082
Cash and cash equivalents at beginning of year ......................... 63,326 13,845
------ ------
Cash and cash equivalents at end of quarter ............................ $ 29,471 $ 67,927
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
TELS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Financial Statements
The financial statements for the six months ended June 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 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 six months ended
June 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 three and six months ended June 30,
1999 and 1998.
3. Inventories
Inventories at June 30, 1999, and December 31, 1998, consisted of the
following:
1999 1998
---- ----
Finished goods $ 67,241 $ 64,962
Work-in-process 143,553 69,045
Raw material and supplies 565,409 573,369
Reserve for obsolete inventory (210,961) (260,960)
-------- --------
$ 565,242 $ 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 .................... $ 1,622,805 $ 1,265,679
Contract manufacturing and assembly ... 779,749 1,489,476
Corporate and other ................... -- --
$ 2,402,554 $ 2,755,155
=========== ===========
Operating income (loss):
Telecommunications .................... $ 243,152 $ 22,285
Contract manufacturing and assembly (76,005) (133,845)
Corporate and other ................... 24,828 (48,575)
------ ------
$ 191,975 $ (160,135)
=========== ===========
Identifiable assets:
Telecommunications .................... $ 844,446 $ 962,574
Contract manufacturing and assembly ... 736,452 902,995
Corporate and other ................... 966,061 2,128,347
------- ---------
$ 2,546,959 $ 3,993,916
=========== ===========
Depreciation and amortization expense:
Telecommunications .................... $ 58,333 $ 90,352
Contract manufacturing and assembly ... 74,040 87,453
Corporate and other ................... 49,692 33,164
------ ------
$ 182,065 $ 210,969
=========== ===========
Interest expense:
Telecommunications .................... $ 23,079 $ 13,988
Contract manufacturing and assembly ... 14,086 24,160
Corporate and other ................... 19,321 14,385
------ ------
$ 56,486 $ 52,533
=========== ===========
</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.
The Company's sales of telephone call accounting systems have continued to
improve in the second quarter of 1999, increasing approximately 34% over the
second quarter of 1998, and management believes that this trend will continue
for the foreseeable future. Efforts to improve sales coupled with expense
reductions in the manufacturing division are expected to help improve the
Company's operating results throughout 1999.
Results of operations for the six months ended June 30, 1999, compared to
June 30, 1998
Consolidated net sales for the six months ended June 30, 1999, decreased
$352,601, or 13%, to $2,402,554, when compared to $2,755,155 of net sales for
the six months ended June 30, 1998. A significant portion of this decrease is
attributable to the decline in revenues in the contract manufacturing division
where the Company was reliant on revenue from one customer which substantially
reduced its orders with the Company. Sales in the manufacturing division
decreased 48% to $779,749 for the six months ended June 30, 1999, compared to
$1,489,476 for the period June 30, 1998. The decrease in contract manufacturing
sales was mostly offset by increased sales of telephone call accounting products
where sales increased by $357,126 or 28% to $1,622,805 for the period ended June
30, 1999, compared to $1,265,679 for the period ended June 30, 1998.
The gross profit increased 5% to $1,546,104, when compared to gross profit
for the six months ended June 30, 1998, of $1,465,642. The gross profit margin
as a percentage of sales increased to 64% for the six months ended June 30,
1999, compared to 53% for the same period of 1998. The margin increased
primarily as a result of the sales mix. The telecommunication sector sales
represented 71% of total sales in 1999, compared to 46% of total sales in 1998.
The telecommunication product sales traditionally have a higher margin than the
manufacturing sales.
For the six months ended June 30, 1999, total research and development
costs including amortization of previously capitalized research and development
expenses were $101,300 compared to $186,450 for the same period in 1998.
Management of the Company believes that it will be necessary to increase its
level of research and development in 1999 to keep its current product lines up
to date and to take advantage of technology changes which the Company expects to
develop.
<PAGE>
Selling, general and administrative ("SG&A") expenses decreased $262,290
or 17%, for the six months ended June 30, 1999, when compared to the same period
of 1998. As a percentage of net sales, SG&A expenses were 54% for 1999, compared
to 56% for the same period of 1998.
The Company reported consolidated net income of $108,846 or $.03 per share
for the second quarter and $211,936 or $.05 per share for the six months ended
June 30, 1999, compared to a net loss of $150,503 or $.04 per share and $130,870
or $.03 per share for the same period of 1998. This improvement is due to
increased sales in its core business of telephone call accounting, where the
gross profit margin is higher than in the contract manufacturing division.
Management continues to reduce operating expenses to be in line with revenues
and expects earnings to remain positive throughout 1999.
Liquidity and Capital Resources
As of June 30, 1999, the Company reported current assets of $1,638,915 and
current liabilities of $1,475,802, resulting in net working capital of $163,113.
This is a significant increase of $294,920 when compared to a net working
capital deficit of $131,807 at December 31, 1998. The Company's operating
activities provided $90,627 of cash during the first six months of 1999,
compared to $113,074 of cash provided during the first six months of 1998. Cash
provided by operating activities was used to purchase equipment of $24,953, and
capitalized software development costs of $52,879. In 1999, the Company paid
down its line of credit by $21,201 and long-term debt by $25,450. The first six
months has shown marked improvement in cash flows due to increased sales of call
accounting products. However, the Company's working capital has been severely
impacted by reductions in sales from its major customers in the contract
manufacturing division. The Company's line of credit matured on July 12, 1999,
and has been renewed until September 11, 1999. If the Company is unable to find
replacement financing, there is no assurance that the Company may be able to
repay the line of credit. The Company continues to be delinquent in payments to
its trade creditors, particularly in the contract manufacturing division where
certain vendors have placed the Company on COD basis. This could affect the
Company's ability to meet its customers needs on future orders. The Company is
continuing its efforts to find additional financing through bank financing and
investment equity which may be needed to fund future acquisitions and final
development and marketing of new products under consideration.
<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 expect these projects to be successfully completed during the third and
fourth quarters 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 has evaluated its existing accounting software for
compliance with Y2K and has determined that an upgrade to the existing
accounting system will be required. This upgrade has been purchased and has been
installed.
TELS Corporation's Proprietary Call Accounting Products (INN-FORMXL,
INN-FORMPlus, INN-FORMExpress 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-SENSEPCS, 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 contingency plans will be completed in the
third quarter of 1999 and that any 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 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, 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.
<PAGE>
TELS Corporation
----------------
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders was held on June 7, 1999, at which time
Dr. John L. Gunter was re-elected to serve as a director. Dr. Gunter will serve
a three-year term expiring in 2002. Affirmative votes cast for Dr. Gunter were
2,968,620, with 113,091 votes withheld or abstained, and zero votes against.
(THIS SPACE INTENTIONALLY LEFT BLANK)
<PAGE>
TELS Corporation
----------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Article 5 Financial Data Schedule for the quarter ending
June 30, 1999.
(b) Reports on Form 8-K:
No reports on form 8-K were filed in the second quarter of 1999.
(THIS SPACE INTENTIONALLY LEFT BLANK)
<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: August 23, 1999 By: /s/ John L. Gunter
--------------- ------------------
John L. Gunter
Chairman and CEO
Dated: August 23, 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> APR-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 29,471
<SECURITIES> 0
<RECEIVABLES> 879,639
<ALLOWANCES> 91,293
<INVENTORY> 565,242
<CURRENT-ASSETS> 1,638,915
<PP&E> 2,408,661
<DEPRECIATION> 1,852,080
<TOTAL-ASSETS> 2,546,959
<CURRENT-LIABILITIES> 1,475,802
<BONDS> 452,571
0
0
<COMMON> 77,835
<OTHER-SE> 696,607
<TOTAL-LIABILITY-AND-EQUITY> 2,546,959
<SALES> 2,402,554
<TOTAL-REVENUES> 2,402,554
<CGS> 856,450
<TOTAL-COSTS> 2,210,579
<OTHER-EXPENSES> 17,000
<LOSS-PROVISION> 12,690
<INTEREST-EXPENSE> 56,486
<INCOME-PRETAX> 158,203
<INCOME-TAX> 53,733
<INCOME-CONTINUING> 211,936
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 211,936
<EPS-BASIC> .05
<EPS-DILUTED> .05
</TABLE>
