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 SEPTEMBER 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
December 11, 2000.
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TELS Corporation
<TABLE>
<CAPTION>
INDEX
PART I. FINANCIAL INFORMATION Page
<S> <C>
Consolidated Balance Sheets -- September 30, 2000 (Unaudited) and
December 31, 1999 3
Consolidated Statements of Operations -- Three and Nine Months Ended
September 30, 2000 and 1999 (Unaudited) 4
Consolidated Statements of Cash Flows -- Nine Months Ended
September 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
</TABLE>
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<CAPTION>
TELS Corporation
Consolidated Balance Sheets
Assets September 30, December 31,
2000 1999
(Unaudited) Audited
------------ -----------
<S> <C>
Current assets: <C>
Cash and cash equivalents $ 8,363 $ 3,467
Accounts receivable, net 356,258 371,714
Inventories, net 123,443 133,421
Prepaid expenses 31,313 80,985
----------------- -----------
Total current assets 519,377 589,587
Property and equipment, net 397,205 442,398
Software development costs, net 128,992 74,775
Cash surrender value of life insurance 107,960 107,960
Other assets 8,519 8,519
----------------- -----------
$ 1,162,053 $ 1,223,239
----------------- -----------
Liabilities and Stockholders' Deficit
------------------------------------------------------------------------------------------
Current liabilities:
Cash overdraft $ 71,742 $ 22,252
Accounts payable 243,955 280,278
Accrued expenses 266,171 300,498
Deferred income 131,697 145,736
Current portion of long-term debt 640,028 352,187
Net liabilities of discontinued operations - 353,985
----------------- -----------
Total current liabilities 1,353,593 1,454,936
Long-term debt 382,903 399,810
----------------- -----------
Total liabilities 1,736,496 1,854,746
Commitments and contingencies -
Stockholders' deficit:
Common stock, $.02 par value, authorized 50,000,000
shares; issued and outstanding 3,891,819 shares 83,835 77,835
Additional paid-in capital 4,318,741 4,228,741
Unearned Compensation (130,000) -
Accumulated deficit (4,847,019) (4,938,083)
----------------- -----------
Total stockholders' deficit (574,444) (631,507)
----------------- -----------
$ 1,162,053 $ 1,223,239
----------------- -----------
</TABLE>
See accompanying notes to financial statements
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TELS Corporation
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
-------------------- --------------------
<S> <C> <C> <C> <C>
Net sales 669,548 747,743 1,993,902 2,343,667
Cost of goods sold 142,433 163,588 428,465 524,792
----------- --------- --------- ---------
Gross profit 527,115 584,155 1,565,437 1,818,875
Operating expenses:
Research and development expenses 2,820 33,088 28,982 98,469
Selling, general and administrative expenses 433,225 545,191 1,351,578 1,705,619
----------- --------- --------- ---------
Operating income 91,070 5,876 184,877 14,787
----------- --------- --------- ---------
Other income (expense):
Interest income 1,366 5,728 1,366 9,104
Interest expense (47,627) (18,456) (113,602) (60,857)
Other income (expense) 15,620 (62,338) 18,954 -
----------- --------- --------- ---------
Other income (expense), net (30,641) (75,066) (93,282) (51,753)
----------- --------- --------- ---------
Income (loss) before benefit (provision)
for income taxes 60,429 (69,190) 91,595 (36,966)
Benefit (provision) for income taxes - (30,368) (100) 26,365
----------- --------- --------- ---------
Income (loss) from continuing operations 60,429 (99,558) 91,495 (10,601)
Discontinued operations:
Income (loss) from discontinued segment, net of income taxes (27,887) (111,642) (43,786) 11,337
Gain on disposal of discontinued operations 43,355 - 43,355 -
----------- --------- --------- ---------
Net income (loss) from discontinued operations 15,468 (111,642) (431) 11,337
----------- --------- --------- ---------
Net income (loss) 75,897 (211,200) 91,064 736
----------- --------- --------- ---------
Income (loss) per share - basic and diluted .02 (.05) .02 .00
----------- --------- --------- ---------
Weighted average shares - basic and diluted 4,191,819 3,891,819 4,081,235 3,891,819
----------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements
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<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
2000 1999
--------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income 91,064 736
Loss (income) from discontinued segment 431 (11,337)
Stock compensation 26,000 -
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and Amortization 62,365 169,758
Deferred Income Taxes - (37,000)
(Increase) Decrease in:
Accounts Receivable (28,970) (31,410)
Inventories 9,978 7,662
Prepaid Expenses 49,672 20,311
Other Assets - (23,823)
Increase (Decrease) in:
Accounts Payable (11,323) (76,461)
Accrued Expenses (94,327) (18,917)
Deferred Income (14,039) 18,352
------------ -----------
Net cash provided by continuing operations 90,851 17,871
Net cash provided by discontinued operations - 6,758
------------ -----------
Net cash provided by operating activities 90,851 24,629
------------ -----------
Cash flows from investing activities:
Proceeds from disposition of discontinued segment 10 -
Software development costs (58,918) (75,538)
Capital expenditures (12,471) (36,583)
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Net cash used in continuing operations (71,379) (112,121)
Net cash used in discontinued operations - (2,113)
------------ -----------
Net cash used in investing activities (71,379) (114,234)
5
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<PAGE>
Cash flows from financing activities:
Cash overdraft 49,490 46,867
Payments on long-term debt (212,423) (88,413)
Principle borrowings on long-term debt 148,357 94,196
------------ -----------
Net cash (used in) provided by continuing operations (14,576) 52,650
Net cash used in discontinued operations - (61,897)
------------ -----------
Net cash used in financing activities (14,576) (9,247)
------------ -----------
Net increase (decrease) in cash 4,896 (98,852)
Cash at beginning of period 3,467 63,326
------------ -----------
Cash at end of period 8,363 (35,526)
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</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
During the period ended September 30, 2000, the Company:
-issued a note payable totaling $25,000 for expenses due an officer
-increased its investment in HTI, prior to sale, in exchange for a note payable
of $310,000
-increased its investment in HTI, prior to sale, in exchange for a reduction of
receivables of $44,426
-accrued a bonus to an officer valued @ $156,000 consisting of 300,000 shares of
stock valued @ $96,000 with the remaining $60,000 to be paid in cash
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TELS Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Financial Statements
----------------------------
The financial statements for the three months ended September 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 ended September 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 4,191,819 and 3,891,819 for the three months
ended September 30, 2000 and 1999, respectively.
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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 nine months ended
september 30, 2000, compared to september 30, 1999
Consolidated net sales for continuing operations during the third
quarter of 2000 decreased $78,195, or 10%, to $669,548 when compared to $747,743
in net sales for the third quarter of 1999. The decrease in sales seems to be
mostly due to Company efforts to introduce new products and the long-range
coordination efforts dedicated to working with larger customers who postponed
purchases anticipating the Company's new customized software products. This
coordination process allowed the Company to renew and improve many of its key
relationships, however. Standard dealer sales activity continued and improved
slightly. Continuing internal efforts to improve operations also took some toll
on overall operations. No individual customer accounted for 10% or more of sales
in the third quarter of 2000. Consolidated net sales for continuing operations
for the first nine months of 2000 decreased $349,765, or 15%, to $1,993,902 when
compared to $2,343,667 in net sales for the first nine months of 1999.
Gross profit for continuing operations decreased to $527,115, a
decrease of $57,040, or almost 10%, when compared to gross profit for the third
quarter of 1999 of $584,155. The gross profit margin as a percentage of sales
remained at about 78% for the third quarter of 2000, the same as for the third
quarter of 1999. Gross profit for continuing operations decreased to $1,565,437,
a decrease of $253,438, or 14%, when compared to gross profit for the first nine
months of 1999 of $1,818,875. The gross profit margin as a percentage of sales
increased slightly to 79% for the first nine months of 2000, compared to 78% for
the first nine months of 1999. Gross margins for the near future are expected to
continue at close to current levels.
For the third quarter of 2000, total research and development costs,
including amortization of previously capitalized research and development
expenses, were $2,820, compared to $33,088 for the same period in 1999, as all
personnel continued to be focused on operational changes and new management
information, finance and accounting systems. For the first nine months of 2000,
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total research and development costs, including amortization of previously
capitalized research and development expenses, were $28,982, compared to $98,469
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 increase its level of research and development in 2001 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 $111,966, or 21%, to $433,225 for the third quarter of
2000, when compared to $545,191 for the same period in 1999, as management acted
to bring expenses in line with revenues. As a percentage of net sales, SG&A
expenses were down to 65% for the third quarter of 2000, due to lower sales and
reduced expenses, as compared to 73% for the same period in 1999. Selling,
general and administrative expenses for continuing operations decreased
$354,041, or almost 21%, to $1,351,578 for the first nine months of 2000, when
compared to $1,705,619 for the same period in 1999. As a percentage of net
sales, SG&A expenses were 68% for the first nine months of 2000, as compared to
73% for the same period in 1999.
The Company reported net income for the third quarter of 2000 of
$75,897, or $.02 per share, compared to a net loss of $(211,200), or $.(05) per
share, for the same period in 1999. The Company reported net income for the
first nine months of 2000 of $91,064, or $.02 per share, compared to essentially
a breakeven net income of $736 for the same period in 1999. At this lower level
of sales, operational numbers generally represent an overall improvement over
the previous quarter and much improvement when compared with the last two years.
Management of the Company believes that the Company continues a major
turnaround from the past several years and especially the major downturn in the
latter part of 1999. Management recognizes that increasing sales and making
operational improvements continue to take longer and be more difficult than
planned, but believes that these results reflect the first fruits of its
decisive actions. Management also 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, while the lodging industry is also undergoing a number of
changes, 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 September 30, 2000, the Company reported current assets of
$519,377 and current liabilities of $1,353,593, resulting in a net working
capital deficit of $(834,216), down from the working capital deficit of
$(926,999) at the end of the second quarter of 2000. During the first nine
months of 2000, the Company's continuing operations generated $90,851 in cash
from operating activities, used $(71,379) in its investing activities and used
$(14,576) in its financing activities.
On September 7, 2000, the Company sold all of the stock of HTI to InvEx
Corp., a corporation controlled by an officer. As a part of this sale, InvEx
loaned HTI the money to pay off the secured note under the HTI line of credit
financing agreement and removed the net HTI liabilities and obligations from the
Company. As of December 11, 2000, the Company believes it is in compliance with
the new covenants currently in place with its secured lender. As of December 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, but also to the many distracting internal activities
required to reorganize and return the Company to its previous efficiencies and
processes. Operations continue to improve slowly, as third quarter and the first
nine months' numbers reflect. 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 nine months of 2000 are
encouraging, that situation remains. Management continues to improve operations
and expects to see marked improvements in the next year. The Company's ability
9
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to make timely filings to the SEC has been negatively impacted by the many
internal improvement challenges. Management believes that the few recent filing
delays were a part of its operational improvement challenges and that future
filings beginning in 2001 will once again be timely, as past filings were for so
many years before. The Board of Directors previously directed management to take
actions to consider merger opportunities with a larger company or a private
company seeking a merger with a public company, and steps have been taken in
this area. The Board of Directors believes that a merger could provide
shareholders with a vigorous and promising investment opportunity - and is
looking for and at reasonable opportunities. Failure to accomplish management's
plans in 2000 and 2001 could result in further erosion of the Company's
financial condition and in failure to meet its financial obligations.
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibit 27 - Article 5 Financial Data Schedule for the quarter ending
September 30, 2000.
(b) Reports on Form 8-K:
No reports on form 8-K were filed in the third quarter of 2000.
(THIS SPACE INTENTIONALLY LEFT BLANK)
10
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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
