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, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission File No. 0-12993
TELS Corporation
---------------
(Exact name of small business issuer as specified in its charter)
Utah 87-0373840
- ------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
705 East Main Street, American Fork, Utah 84003
- ----------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (801) 756-9606
-------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES NO X
The Issuer had outstanding 3,891,819 shares of common stock on May 1, 2000.
<PAGE>
TELS Corporation
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C>
Consolidated Balance Sheets -- March 31, 2000 (Unaudited) and
December 31, 1999 3
Consolidated Statements of Operations -- Three Months Ended
March 31, 2000 and 1999 (Unaudited) 4
Consolidated Statements of Cash Flows -- Three Months Ended
March 31, 2000 and 1999 (Unaudited) 5,6
Notes to Consolidated Financial Statements (Unaudited) 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8,9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
</TABLE>
<PAGE>
TELS Corporation
----------------
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
Assets (Unaudited) Audited
------ ----------- ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 1,570 $ 3,467
Trade accounts receivable, less allowance for
doubtful receivables of $ 30,727 and $ 33,485, respectively 271,598 371,714
Inventories, net 130,116 133,421
Prepaid expenses 97,482 80,985
Total current assets 500,766 589,587
------------- -----------
Property, plant and equipment, net 425,948 442,398
Software development costs, net 94,218 74,775
Cash surrender value of life insurance 112,960 107,960
Other assets 8,519 8,519
------------- -----------
$ 1,142,411 $ 1,223,239
============= ===========
Liabilities and Stockholders' Deficit
-------------------------------------
Current Liabilities
Cash overdraft $ 61,835 $ 22,252
Trade accounts payable 247,115 280,278
Accrued expenses 268,787 300,498
Current portion of long-term debt 302,549 352,187
Deferred Income 139,693 145,736
Net liabilities of discontinued operations 367,269 353,985
------------- -----------
Total current liabilities 1,387,248 1,454,936
------------- -----------
Long-term debt, excluding current installments 392,310 399,810
------------- -----------
Total liabilities 1,779,558 1,854,746
------------- -----------
Stockholders' deficit
Common stock, $.02 par value. Authorized 50,000,000 shares;
issued and outstanding 3,891,819 shares 77,835 77,835
Additional paid-in capital 4,228,741 4,228,741
Accumulated deficit (4,943,723) (4,938,083)
------------- -----------
Total stockholders' deficit (637,147) (631,507)
------------- -----------
$ 1,142,411 $ 1,223,239
============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
TELS Corporation
----------------
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
2000 1999
------------------
<S> <C> <C>
Net sales $ 613,080 $ 765,828
Cost of goods sold 143,244 152,509
----------- -----------
Gross profit 469,836 613,319
Research and development expenses 24,282 29,999
Selling, general and administrative expenses 419,233 463,925
----------- -----------
Operating income 26,321 119,395
----------- -----------
Other income (expenses):
Interest income - 3,376
Interest expense (22,069) (20,253)
Other income 3,492 -
----------- -----------
Other expense, net (18,577) (16,877)
----------- -----------
Income before income
tax (provision) benefit 7,744 102,518
Income tax (provision), benefit (100) 30,450
----------- -----------
Income from continuing operations 7,644 132,968
Loss from discontinued operations (13,284) (29,878)
----------- -----------
Net (loss) income $ (5,640) $ 103,090
=========== ===========
Basic and diluted net (loss) income per common share $ (.00) $ .03
=========== ===========
Weighted average shares - basic and diluted 3,891,819 3,891,819
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
TELS Corporation
----------------
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
2000 1999
------------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (5,640) $ 103,090
Loss (income) from discontinued operations 13,284 29,878
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and Amortization 16,531 47,038
(Increase) Decrease in:
Accounts Receivable 100,116 (92,763)
Employee Receivables - (5,846)
Inventories 3,305 (11,344)
Prepaid Expenses (16,497) (2,316)
Net Intangible Assets - 479
Other Assets - -
Increase (Decrease) in:
Accounts Payable (33,163) 106,102
Accrued Expenses (31,711) 8,312
Deferred Income (6,043) 2,619
Net cash provided by continuing operations 40,182 185,249
Net cash used in discontinued operations - (141,933)
Net cash provided by operating activities 40,182 43,316
----------- -----------
Cash flows from investing activities:
Software development costs (19,443) (32,615)
Increase in cash surrender value of life insurance (5,000) -
Capital expenditures (81) (5,483)
Net cash used in continuing operations (24,524) (38,098)
Net cash used in discontinued operations - (812)
Net cash used in investing activities (24,524) (38,910)
----------- -----------
Cash flows from financing activities:
Cash overdraft 39,583 -
Net payments under line of credit agreement - -
Payments on long-term debt (107,138) (79,480)
Principle borrowings on long-term debt 50,000 62,463
----------- -----------
Net cash used in continuing operations (17,555) (17,017)
Net cash used in discontinued operations - (5,166)
----------- -----------
Net cash used in financing activities (17,555) (22,183)
----------- -----------
</TABLE>
5
<PAGE>
TELS Corporation
----------------
Consolidated Statements of Cash Flows (continued)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Net decrease in cash (1,897) (17,777)
Cash at beginning of quarter 3,467 63,326
----------- -----------
Cash at end of quarter $ 1,570 $ 45,549
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest $ 22,068 $ 11,820
============ ===========
Income taxes $ 0 $ 0
=========== ===========
Supplemental disclosure of non-cash investing and financing activities:
During the quarter ended March 31, 2000, the Company issued a
note payable totaling $25,000 for expenses due to an officer.
</TABLE>
(THIS SPACE INTENTIONALLY LEFT BLANK)
See accompanying notes to consolidated financial statements
6
<PAGE>
TELS Corporation
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Financial Statements
----------------------------
The financial statements for the three months ended March 31, 2000 and
1999, 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, 1999 and 1998, included in the
Company's 1999 Annual Report to the Securities and Exchange Commission on
Form 10-KSB. The results for the three months ended March 31, 2000, are
not necessarily indicative of the results for the year ending December 31,
2000.
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 for 628,500 shares for 2000 are not included in the calculations,
since 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 on both March 31, 2000 and 1999.
3. Inventories
-----------
Inventories at March 31, 2000 and December 31, 1999 consisted of the
following:
2000 1999
--------- ----------
Finished goods $ 22,862 $ 27,756
Work-in-process 44,027 45,104
Raw material and supplies 83,008 74,341
Reserve for obsolete inventory (19,781) (13,780)
------------ ------------
$ 130,116 $ 133,421
============ ============
(THIS SPACE INTENTIONALLY LEFT BLANK)
7
<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
selling, general and administrative 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 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, 2000
compared to March 31, 1999
Consolidated net sales for continuing operations during the first
quarter of 2000 decreased $152,748, or 20%, to $613,080 when compared to
$765,828 in net sales for the first quarter of 1999. The decrease in sales is
mostly due to Company difficulties associated with the discontinuance of HTI,
its previous contract manufacturing and assembly division, as well as serious
weather problems in the east and west negatively affecting travel and lodging
revenues and thus lodging capital expenditures. No individual customer accounted
for 10% or more of sales in the first quarter of 2000.
Gross profit for continuing operations decreased to $469,836, a
decrease of $143,483, or 23%, when compared to gross profit for the first
quarter of 1999 of $613,319. The gross profit margin as a percentage of sales
decreased slightly to 77% for the first quarter of 2000, compared to 80% for the
first quarter of 1999. Gross margins for the near future are expected to
continue at close to current levels.
For the first quarter of 2000, total research and development costs
including amortization of previously capitalized research and development
expenses, were $24,282, compared to $29,999 for the same period in 1999.
Management of the Company believes that it will be necessary to increase its
level of research and development in 2000 to keep its current product lines up
to date and to take advantage of technology changes from which the Company
expects to benefit.
Selling, general and administrative ("SG&A") expenses for continuing
operations decreased $44,692, or 10%, to $419,233 for the first quarter of 2000,
when compared to $463,925 for the first quarter of 1999. As a percentage of net
sales, SG&A expenses were 68% for the first quarter of 2000, due to lower sales,
as compared to 61% for the first quarter of 1999.
TELS Corporation
----------------
The Company reported income from continuing operations of $7,644 for
the first quarter of 2000, compared to $132,968 for the same period in 1999. The
Company reported a net loss for the first quarter of 2000 of $(5,640), or $(.00)
per share, compared to the first quarter net income of $103,090, or $.03 per
share, for the same period in 1999. Management of the Company believes that the
income from operations represents a major turnaround from the latter part of
1999 and that more consistent profitability could be reached later in 2000. As
the effects of efforts to reduce expenses are realized, as the Company focuses
8
<PAGE>
on its core business and is able to increase sales from its telecommunication
products, and as remaining issues are resolved with discontinued operations,
results should continue to improve. However, 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 generate a profitable level of sales.
Liquidity and Capital Resources
- -------------------------------
As of March 31, 2000, the Company reported current assets of $500,766
and current liabilities of $1,387,248, resulting in a net working capital
deficit of $(886,482). During the first quarter of 2000, the Company's
continuing operations generated $40,182 in cash from operating activities, used
$(24,524) in its investing activities and used $(17,555) in its financing
activities.
At December 31, 1999, the Company was in violation of certain
requirements of its line of credit financing agreement relating to minimum cash
flow levels and issues surrounding the closure of HTI. The Company is in the
process of restructuring its line of credit with its current lender and believes
that it is or soon will be in compliance with new covenants to be in place as of
May 25, 2000. The Company has resumed timely payments to many of its trade
creditors, and this situation is improving monthly. As of May 22, 2000, the
Company has been able to make its deliveries on time and no orders have been
canceled.
Outlook: Issues and Uncertainties
- ---------------------------------
The Company's sales of telephone call accounting systems in the first
four months of 2000 have been below the 1999 level, due primarily to issues
relating to the discontinuance and closure of the HTI contract manufacturing and
assembly division in late 1999 and weather factors reducing the lodging
industry's ability to make capital expenditures. Despite these issues,
operations have been improving since early 2000. With the expense reductions
implemented in the latter part of 1999 and continuing into the first quarter of
2000, the Company expects operations to continue to improve in the second
quarter of 2000 and beyond. At December 31, 1999, the Company's Certifying
Accountants stated that, due to uncertainties surrounding the losses in 1999,
there was substantial doubt about the Company's ability to continue as a going
concern. Management intends to continue its efforts to address these issues in
2000. Failure to accomplish management's plans in 2000, and to continue to
generate increasing positive operating cash flow could result in further erosion
of the Company's financial condition and failure to meet its financial
obligations.
Year 2000 (Y2K) Computer Systems Compliance
- -------------------------------------------
As the result of planning and implementation activities carried out by
research and development personnel under severe conditions, the Company was able
to replace or upgrade most computers, networks and data bases prior to year-end
and essentially no "Y2K" problems were encountered with the Company's products,
commercial or internal systems.
9
<PAGE>
TELS Corporation
----------------
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibit 27 - Article 5 Financial Data Schedule for the quarter
ending March 31, 2000.
(b) Reports on Form 8-K:
No reports on form 8-K were filed in the first quarter of 2000.
(THIS SPACE INTENTIONALLY LEFT BLANK)
10
<PAGE>
<PAGE>
TELS Corporation
----------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 22, 2000 By: /s/ John L. Gunter
- --------------------------------------------------------------------------------
John L. Gunter
Chairman and CEO
Dated: May 22, 2000 By: /s/ P. Diane Gunter
- --------------------------------------------------------------------------------
P. Diane Gunter
Secretary, Treasurer
Dated: May 22, 2000 By: /s/ Lawrence A. Palmer
- --------------------------------------------------------------------------------
Lawrence A. Palmer
Controller
11
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
TELS CORPORATION MARCH 31, 2000 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,570
<SECURITIES> 0
<RECEIVABLES> 302,325
<ALLOWANCES> 30,727
<INVENTORY> 130,116
<CURRENT-ASSETS> 500,766
<PP&E> 1,971,933
<DEPRECIATION> 1,545,985
<TOTAL-ASSETS> 1,142,411
<CURRENT-LIABILITIES> 1,387,248
<BONDS> 392,310
0
0
<COMMON> 77,835
<OTHER-SE> (714,982)
<TOTAL-LIABILITY-AND-EQUITY> 1,142,411
<SALES> 613,080
<TOTAL-REVENUES> 616,572
<CGS> 143,244
<TOTAL-COSTS> 586,759
<OTHER-EXPENSES> 18,577
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,069
<INCOME-PRETAX> 7,744
<INCOME-TAX> (100)
<INCOME-CONTINUING> 7,644
<DISCONTINUED> (13,284)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,640)
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
