U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT #1
TO
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, 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 X NO
The Issuer had outstanding 4,191,819 shares of common stock on August 1, 2000.
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TELS Corporation
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<CAPTION>
INDEX
PART I. FINANCIAL INFORMATION Page
<S> <C>
Consolidated Balance Sheets -- June 30, 2000 (Unaudited) and
December 31, 1999 3
Consolidated Statements of Operations -- Three and Six Months Ended
June 30, 2000 and 1999 (Unaudited) 4
Consolidated Statements of Cash Flows -- Six Months Ended
June 30, 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
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<CAPTION>
TELS Corporation
Consolidated Balance Sheets
June 30, December 31,
2000 1999
Assets (Unaudited) Audited
------------ -----------
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 7,656 $ 3,467
Trade accounts receivable, less allowance for
doubtful receivables of $ 31,600 and $ 33,485, respectively 341,278 371,714
Inventories, net 131,848 133,421
Prepaid expenses 73,105 80,985
------------ -----------
Total current assets 553,887 589,587
------------ -----------
Property, plant and equipment, net 413,436 442,398
Software development costs, net 108,199 74,775
Cash surrender value of life insurance 107,960 107,960
Other assets 8,519 8,519
------------ -----------
$ 1,192,001 $ 1,223,239
============ ===========
Liabilities and Stockholders' Deficit
Current Liabilities
Cash overdraft $ 46,274 $ 22,252
Trade accounts payable 461,771 280,278
Accrued expenses 157,994 300,498
Current portion of long-term debt 297,018 352,187
Deferred Income 147,945 145,736
Net liabilities of discontinued operations 369,884 353,985
------------ -----------
Total current liabilities 1,480,886 1,454,936
------------ -----------
Long-term debt, excluding current installments 387,455 399,810
------------ -----------
Total liabilities 1,868,341 1,854,746
------------ -----------
Stockholders' deficit
Common stock, $.02 par value. Authorized 50,000,000 shares;
issued and outstanding 4,191,819 and 3,891,819 shares
at June 30, 2000 and December 31, 1999, respectively 83,835 77,835
Additional paid-in capital 4,318,741 4,228,741
Unearned Compensation (156,000) -
Accumulated deficit (4,922,916) (4,938,083)
------------ -----------
Total stockholders' deficit (676,340) (631,507)
------------ -----------
$ 1,192,001 $ 1,223,239
============ ===========
See accompanying notes to consolidated financial statements.
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<CAPTION>
TELS Corporation
Consolidated Statements of Operations
(Unaudited)
Three months ended Six months ended
June 30, June 30,
---------------------- -----------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net sales $ 711,274 $ 830,096 $ 1,324,354 $ 1,595,924
Cost of goods sold 142,788 208,695 286,032 361,204
----------- ------------ ----------- -----------
Gross profit 568,486 621,401 1,038,322 1,234,720
Research and development expenses 1,880 35,382 26,162 65,381
Selling, general and administrative expenses 499,121 696,503 918,353 1,160,428
----------- ------------ ----------- -----------
Operating income (loss) 67,485 (110,484) 93,807 8,911
----------- ------------ ----------- -----------
Other income (expense):
Interest income - - - 3,376
Interest expense (43,906) (22,148) (65,975) (42,401)
Other income (expense) (158) 62,338 3,334 62,338
----------- ------------ ----------- -----------
Other income (expense), net (44,064) 40,190 (62,641) 23,313
----------- ------------ ----------- -----------
Income (loss) before income
tax benefit 23,421 (70,294) 31,166 32,224
Income tax (provision), benefit - 26,283 (100) 56,733
----------- ------------ ----------- -----------
Income (loss) from continuing operations 23,421 (44,011) 31,066 88,957
Income (loss) from discontinued operations,
net of income taxes (2,614) 152,857 (15,899) 122,979
----------- ------------ ----------- -----------
Net income $ 20,807 $ 108,846 $ 15,167 $ 211,936
=========== ============ =========== ===========
Basic and diluted net income $ .01 $ .03 $ .00 $ .05
=========== ============ =========== ===========
per common share
Weighted average shares - basic and diluted 4,158,852 3,891,819 4,025,335 3,891,819
----------- ------------ ----------- -----------
See accompanying notes to consolidated financial statements
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<CAPTION>
TELS Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
June 30,
------------------------
2000 1999
Cash flows from operating activities:
<S> <C> <C>
Net income $ 15,167 $ 211,936
Loss (income) from discontinued operations 15,899 (122,979)
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and Amortization 43,312 105,723
Deferred Income Taxes - (56,950)
(Increase) Decrease in:
Accounts Receivable 30,436 (108,796)
Inventories 1,573 5,076
Prepaid Expenses 7,880 46,965
Other Assets - (10,734)
Increase (Decrease) in:
Accounts Payable 206,493 (38,145)
Accrued Expenses (202,504) (7,677)
Deferred Income 2,209 12,039
---------- -----------
Net cash provided by continuing operations 120,465 36,458
Net cash provided by discontinued operations - 162,140
---------- -----------
Net cash provided by operating activities 120,465 198,598
---------- -----------
Cash flows from investing activities:
Software development costs (35,304) (52,888)
Capital expenditures (12,470) (24,141)
---------- -----------
Net cash used in continuing operations (47,774) (77,029)
Net cash used in discontinued operations - (120,564)
---------- -----------
Net cash used in investing activities (47,774) (197,593)
---------- -----------
Cash flows from financing activities:
Cash overdraft 24,022 -
Payments on long-term debt (161,629) (16,091)
Principle borrowings on long-term debt 69,105 27,388
---------- -----------
Net cash used in continuing operations (68,502) 11,297
Net cash used in discontinued operations - (45,152)
---------- -----------
Net cash used in financing activities (68,502) (33,855)
---------- -----------
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(continued)
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<CAPTION>
TELS Corporation
Consolidated Statements of Cash Flows (continued)
(Unaudited)
<S> <C> <C>
Net increase (decrease) in cash 4,189 (32,850)
Cash at beginning of quarter 3,467 63,326
---------- ----------
Cash at end of quarter $ 7,656 $ 30,476
========== ===========
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Supplemental disclosure of non-cash investing and financing activities:
-----------------------------------------------------------------------
During the quarter ended June 30, 2000, the Company -
- Accrued a bonus to an officer valued at $156,000 consisting of 300,000 shares
of stock valued at $96,000 with the remaining $60,000 to be paid in cash
- Issued a note payable totaling $25,000 for expenses due an officer
(THIS SPACE INTENTIONALLY LEFT BLANK)
See accompanying notes to consolidated financial statements
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TELS Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Financial Statements
----------------------------
The financial statements for the three months ended June 30, 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 and six months ended June 30, 2000, are not
necessarily indicative of 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 reflect the potential dilution that could occur if options or
warrants to issue common stock were exercised into common stock. The
weighted average number of outstanding common and common equivalent shares
used in this computation was 4,158,852 and 3,891,819 for the three months
ended June 30, 2000 and 1999, respectively.
3. Inventories
-----------
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<CAPTION>
Inventories at June 30, 2000 and December 31, 1999 consisted of the following:
2000 1999
----------- -----------
<S> <C> <C>
Finished goods $ 33,125 $ 27,756
Work-in-process 63,885 45,104
Raw material and supplies 70,671 74,341
Reserve for obsolete inventory (35,833) (13,780)
----------- ----------
$ 131,848 $ 133,421
=========== ===========
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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 and six months ended June 30,
2000, compared to JUNE 30, 1999
Consolidated net sales for continuing operations during the second quarter
of 2000 decreased $118,822, or 14%, to $711,274 when compared to $830,096 in net
sales for the second quarter of 1999. The decrease in sales is mostly due to the
slowdown in capital purchases apparently due to weather - and thus travel -
changes and to lower guest revenues in the lodging industry. No individual
customer accounted for 10% or more of sales in the second quarter of 2000.
Consolidated net sales for continuing operations for the first half of 2000
decreased $271,570, or 17%, to $1,324,354 when compared to $1,595,924 in net
sales for the first half of 1999.
Gross profit for continuing operations decreased to $568,486, a decrease of
$52,915, or 9%, when compared to gross profit for the second quarter of 1999 of
$621,401. The gross profit margin as a percentage of sales increased to 80% for
the second quarter of 2000, compared to 75% for the second quarter of 1999.
Gross profit for continuing operations decreased to $1,038,322, a decrease of
$196,398, or 16%, when compared to gross profit for the second quarter of 1999
of $1,234,720. The gross profit margin as a percentage of sales increased
slightly to 78% for the first half of 2000, compared to 77% for the first half
of 1999. Gross margins for the near future are expected to continue at close to
current levels.
For the second quarter of 2000, total research and development costs,
including amortization of previously capitalized research and development
expenses, were $1,880, compared to $35,382 for the same period in 1999, as all
personnel were focused on operational changes and new management information,
finance and accounting systems. For the first half of 2000, total research and
development costs, including amortization of previously capitalized research and
development expenses, were $26,162, compared to $65,381 for the same period in
1999. Management of the Company believes that, if the Company continues in its
current and future operations as in the past, it will be necessary to
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TELS Corporation
----------------
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 $197,382, or 28%, to $499,121 for the second quarter of
2000, when compared to $696,503 for the same period in 1999. As a percentage of
net sales, SG&A expenses were 70% for the second quarter of 2000, due to lower
sales, as compared to 84% for the same period in 1999. Selling, general and
administrative expenses for continuing operations decreased $242,075, or 21%, to
$918,353 for the first half of 2000, when compared to $1,160,428 for the same
period in 1999. As a percentage of net sales, SG&A expenses were 69% for the
first half of 2000, as compared to 73% for the same period in 1999.
The Company reported net income for the second quarter of 2000 of
$20,807, or $.01 per share, compared to net income of $108,846, or $.03 per
share, for the same period in 1999. The Company reported net income for the
first half of 2000 of $15,167, or $.00 per share, compared to net income of
$211,936, or $.05 per share, for the same period in 1999. Management of the
Company believes that the Company has orchestrated a major turnaround from the
downturn in the latter part of 1999. Management recognizes that increasing sales
and making operational improvements are taking longer and are more difficult
than expected, but believes that 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 continue to generate a
profitable level of sales.
Liquidity and Capital Resources
-------------------------------
As of June 30, 2000, the Company reported current assets of $553,887 and
current liabilities of $1,480,886, resulting in a net working capital deficit of
$(926,999), slightly worse than the working capital deficit of $(886,482) at
the end of the first quarter of 2000. During the second quarter of 2000, the
Company's continuing operations generated $120,465 in cash from operating
activities, used $(47,774) in its investing activities and used $(68,502) 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 restructured its line of
credit with its current lender and believes it is in compliance with new
covenants in place as of August 11, 2000. The Company has resumed timely
payments to many of its trade creditors, and this situation is improving
monthly. As of August 11, 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 2000 have been
below the 1999 level, due primarily to a slowdown in the lodging industry's
capital expenditures. Operations continue to improve, but reduced revenues,
coupled with the working capital deficit, have seriously slowed improvements. 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. While operating results
for the first half of 2000 have been encouraging, they have not been of the
magnitude to change that situation. Management has been working apace to improve
operations, under serious constraints, and also has considered merger
opportunities with several companies that have approached TELS. At this
juncture, the Board of Directors has directed management to take all actions
necessary to make the Company an attractive merger candidate for a private
company seeking a merger with a public company. These actions may include
selling all current operations and liabilities, thus seeking to prepare the
Company as an attractive public shell. The Board of Directors believes that the
Company would be a more attractive merger candidate if it did not have its
current level of liabilities. The Board of Directors also believes
9
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TELS Corporation
----------------
that a merger with a private company could provide shareholders with a more
vigorous and promising investment opportunity, as the Company's current
operations are not at a level that will permit the Company to recover from its
past difficulties in the short term. The Board of Directors believes that it
must consider all reasonable alternatives to increase shareholder value. Failure
to accomplish management's plans in 2000 could result in further erosion of the
Company's financial condition and in 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.
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibit 27 - Article 5 Financial Data Schedule for the quarter ending
June 30, 2000.
(b) Reports on Form 8-K:
No reports on form 8-K were filed in the second quarter of 2000.
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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: December 11, 2000 By: /s/ John L. Gunter
-----------------------
John L. Gunter
Chairman, CEO and
Principal Financial Officer
11
