UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1995 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) 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 (IRS Employer
jurisdiction of Identification No.)
incorporation or organization)
406 West South Jordan Parkway, Suite 250
South Jordan, Utah 84095
(Address of principal executive offices)
Registrant's telephone number,
including area code (801)571-1182
Securities registered pursuant to Section 12 (b) of the Act:
"None"
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.02 par value
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 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
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (229.405 of this
chapter) is not contained herein, and will not be contained to
the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant.
NON-AFFILIATED VOTING AGGREGATE
DATE SHARES OUTSTANDING MARKET VALUE
March 25, 1996 2,669,700 $ 3,550,701
Indicate the number of shares outstanding of each of the
registrant's classes of stock, as of the latest practicable
date.
Class Outstanding Shares at March 25, 1996 Common
Stock, $.02 3,891,319
par value
Documents Incorporated by Reference
"None"
PART I
Item 1. Business
Introduction
TELS Corporation, ("TELS", the "Company" or "Registrant"-
NASDAQ:"TELS") is a Utah Corporation, incorporated in February,
1981, with its principal executive offices at 406 West South
Jordan Parkway, Suite 250, South Jordan, Utah 84095, telephone
number (801) 571-1182.
MICROMEGA CORPORATION(TM)is a wholly-owned subsidiary of TELS
Corporation. MICROMEGA was formed in March, 1991, for the
purpose of providing research and development services for TELS
and other companies. MedTech, Inc., dba Interro, a wholly-owned
subsidiary of MICROMEGA, was formed in April, 1991, for the
purpose of providing further development of the Interro medical
electronics product.
D.J. GunTEL, Inc., was formed on May 21, 1993, as a wholly-
owned subsidiary of TELS for the purpose of operating the
personal computer ("P.C.") reseller division of the Company.
This subsidiary was established as a result of the acquisition
of the assets of Computer Express in 1993 and also the
acquisition of the assets of Micro Station in 1994. Computer
Express and Micro Station operate as dba's under D.J. GunTEL,
Inc. Computer Express sells and services computer and network
products as a value-added computer reseller in Dallas, Texas.
Micro Station is a computer systems integrator operating in San
Antonio, Texas. The Company operated this P.C. reseller
division through January 1995, at which time the Company made
the decision to discontinue all P.C. reseller operations (by
closing all of Computer Express operations and selling the
assets of Micro Station).
Hash Tech, Inc., a Utah corporation, was formed on March
31, 1994, as a wholly-owned subsidiary of TELS for the purpose
of operating the manufacturing and assembly division of TELS.
This subsidiary was formed as a result of the acquisition of the
assets of Hash Tech, a California corporation, on March 31,
1994, by TELS. Hash Tech, Inc., operates as a full service
turnkey or consignment contract manufacturer of: printed
circuit boards (through-hole and surface mount); cable, harness,
chassis wiring; and electro-mechanical assemblies.
TEL electronics, inc. ("TEL"), was formed on September 26,
1994, as a wholly owned subsidiary of TELS for the purpose of
operating the telecommunications business of TELS. TEL designs,
builds, sells and services microprocessor-based computer systems
for telecommunications applications in various industries,
particularly the lodging industry. TEL's diversified line of
telephone call management products are also used in business,
education and government applications, where they cost-
effectively bill and record telephone system usage. TEL also
supplies interactive voice response and processing systems and
telecommunications specialty products.
General
TELS products and services are divided into three different
product and service sectors: first, and the most typical
products for the Company for the last 15 years, the
telecommunications products- used to provide management,
accounting and billing information to various business,
education and government entities, but primarily to the lodging
industry; second, the personal computer and network products and
services - used to provide many different capabilities for
corporate, education, government and general customers; and
third, the manufacturing and assembly operation, which provides
comprehensive full service turnkey or consignment contract
manufacturing services. The Company's continuing segment
information is provided in Note 14 of the financial statements.
The INN-FORM/XL(R) product continues to account for a
majority of the Company's telecommunications sector sales,
followed by the INN-SURE(TM), which provides answer detection
and verification for phone calls. The telecommunication division
account for 41% of consolidated sales for 1995. The
manufacturing and assembly operation accounted for approximately
59% of consolidated sales for 1995.
Products and Services
INN-FORM/XL(R), INN-FORM PLUS(R) and TEL-SENSE(R) Products.
The INN-FORM/XL(R) provides immediate on-site billing data,
permitting hotel/motel guests to make direct-dialed long
distance calls and eliminating costly operator-assisted calls.
The INN-FORM PLUS(R), a larger version of the INN-FORM/XL(R),
includes many business features similar to TEL-EXECUTIVE(R)
below, and is ideal for larger hotels and motels with gift
shops, etc., or other business needs.
INN-FORM EXPRESS(TM). This new product, to be released in
early 1996, is an expanded version of INN-FORM/XL(R) and the
INN-FORM PLUS(R), with many new features and new capabilities
for custom needs of users.
TEL-SENSE(R) and TEL-SENSE/K(R) track business phone usage
and record time spent and charges for telephone calls. These
products operate automatically, reducing clerical errors and
accounting effort. TEL-SENSE/K(R) is for smaller key telephone
systems.
TEL-EXECUTIVE(R). This product, a "big brother" to TEL-
SENSE(R), is targeted for larger businesses with higher calling
traffic and/or more sophisticated data analysis needs. Product
advantages include small, in-box-storage of 60,000 or more
detailed call records; larger display for tutorial aids to
users; added reporting capabilities; soft function keys (usage
defined by the display); additional interface ports, including
one Centronics parallel port and three RS-232C serial ports; and
a full QWERTY keyboard for entering alphabetic and numeric data.
TEL-SENSE/PCS(R)TM. This product is targeted for and used
by personal computer ("PC") owners. Product advantages include
disk storage for millions of calls; interfaces for spreadsheet
and data base programs to customize reports/analyses; toll fraud
detection; cost control; and trunk planning.
WINSENSE(TM) This Windows(R)-based business call
accounting PC software system, to be released in early 1996, has
been designed to compete favorably with competitive products in
the telephone call accounting business applications market.
WINSENSE is currently an internal Company name and testing and
release activities, plus trademark activities, may indicate that
another name will be needed upon final release. WINSENSE has
graphical representations in full color, with intuitive commands
and processes.
TEL-SCAN(R) Scanner Products. These telephone usage data-
generating devices allow the INN-FORM/XL(R), INN-FORM/PLUS(R),
TEL-SENSE(R), TEL-SENSE/K(R), TEL-SENSE/PCS(R) and other call
accounting products to work with most telephone systems without
SMDR capability. Enhancements provide data on number of rings
before being answered. Management believes that TEL-SCAN(R)
products provide data and features not available with standard
telephone systems.
INN-SURE(TM). This product provides answer detection-
verification information. In many cases, telephone bills
generated by long-distance companies (and typically by most
companies, to include hotels and motels) have been computed
based upon an assumption as to whether a call was answered or
not - and not upon any exact method of knowing whether calls
really are answered or not. Thus, short answered calls go
incorrectly "un-billed" - a loss of revenue - while longer
unanswered calls are incorrectly billed, causing complaints from
customers. The INN-SURE(TM) provides "answer detection" and
"answer verification", solving these problems by accounting for
(and billing, in resale systems) all answered calls regardless
of duration and by ignoring unanswered calls. The INN-SURE(TM)
system increases revenues and reduces customer complaints,
providing excellent capabilities for any type of business.
INN-TEL(TM). This call accounting system is a PC software-
only system roughly similar to the INN-FORM/XL(R), adding
telephone call accounting and billing capabilities to standard
PC's. The memory or call storage of an INN-TEL(TM) system is
dependent only on the size of the disk storage of the PC used,
so the INN-TEL(TM) can handle very large hotels for long periods
of time.
INTERRO(TM). The INTERRO(TM) is a proprietary medical
electronics product that provides many capabilities similar to
acupuncture, but via non-invasive, unharmful electronic
stimulation at lower intensity than the stimulation from
standard light bulbs. The Interro(TM) product is currently
being sold only to international markets as a research tool.
United States sales were halted several years ago due to FDA
issues with alternative medicine procedures or devices.
JOBLINE(TM). The JOBLINE(TM) product was developed by
Micromega to assist in providing data about job openings in
Utah, and JOBLINE services are marketed under the name "Utah
Employment Hotline". The basic product is a multi-application
interactive voice system which can receive commands from any
tone phone and search data bases to provide responses over the
telephone.
ISO 9002 Quality Services. TELS, through its subsidiary
Hash Tech, provides electronics production services for
companies needing high quality turnkey or consignment contract
manufacturing. Hash Tech utilizes state-of-the-art equipment
and ISO 9002 certified quality control systems to provide
services to companies needing circuit board manufacturing, cable
assembly, chassis wiring and electro-mechanical assembly
services. When coupled with the research and development
capabilities of MICROMEGA, TELS provides a complete service
opportunity, from research and development to final assembly,
under the management of one company. Revenues from Hash Tech
accounted for 59% of total consolidated sales in 1995. Hash Tech
had one customer which accounted for approximately 17% of
consolidated net sales for 1995.
Research and Development
The Company spent approximately $481,000, $328,000 and
$310,000, including certain capitalized expenses, on research
and development activities in the years ended December 31, 1995,
1994 and 1993, respectively. All research and development
expenses originate from MICROMEGA.
TELS formed and operates MICROMEGA CORPORATION as a wholly-
owned subsidiary to create an environment where engineering
personnel are part of a larger entity and also to solicit
outside contracts with entities other than TELS. The Company
believes that this arrangement improves the efficiency and
quality in research and development. MICROMEGA carried out all
research and development for TEL in 1995.
Product and Marketing Strategies
The Company's product and marketing strategies were
refocused in early 1996, on marketing its core business products
through its existing dealer channels; and the Company has
withdrawn from its efforts to add a second P.C. distribution
channel, by the divestiture of its P.C. reseller division.
The Company has maintained and will seek to expand its
capabilities to sell various high-to-medium technology products
through its own network of telecommunications dealers. TELS has
an expanded and improved, state-of-the-art production capability
as the result of the Hash-Tech acquisition. Future products can
now be designed and built using the industry's latest methods
with a larger and more experienced production group.
TELS' overall product and marketing strategy includes the
following areas:
Research and Development - continuing work by MICROMEGA starts
the product cycles and provides TELS with critical technologies;
Market Research - internally generated work and various stages
of "testing" with TELS' dealers and customers provide feedback
and input, both for initial designs and for refinements and
enhancements;
Production and Service - TELS is highly motivated by quality
customer service and solid production. Hash Tech, Inc., is ISO
9002 certified, which has increased the capabilities of the
Company in many areas;
Marketing and Advertising - although TELS has done reasonably
well in this area by slow development and careful use of media
campaigns, the Company is seeking a professional partner in this
area to help in developing future marketing and advertising
strategies;
Sales and Distribution - New Business Development initiatives,
Inner Circle efforts and Inner Circle dealers, Regional Managers
and dealers across the country, all provide primary channels for
selling and supporting TELS products into the telecommunications
marketplace. TELS' computer resellers in Dallas and San Antonio,
which sought to provide channels to sell the company's standard
computer products into the computer marketplace in 1995, have
been discontinued and the Company does not anticipate further
utilization of this type of P.C. channel in the near future.
Additionally, TELS seeks an international partner to expand into
foreign markets. Hash Tech hired direct sales personnel to
increase it's sales efforts in 1995, and results have been
encouraging.
TEL, a wholly-owned subsidiary of TELS, continues to
provide telephone management and accounting products to improve
the use of standard telephone systems. The INN-FORM/XL(R) and
TEL-SENSE(R) products are very compact call accounting products,
and yet have capabilities of much larger, more expensive
systems. The TEL-SENSE/PCS(TM) product, when installed in a
customer's personal computer, provides more capabilities for
managing phone systems than the TEL-SENSE(R). The TEL-
SENSE/PCS(TM) provides TEL with the additional opportunity for
sales into the computer markets and the Company will continue to
define a campaign to sell telecommunications products into this
customer base. TEL-EXECUTIVE(R), "big brother" to the TEL-
SENSE(R), was introduced in 1989 and provides a full-featured
telephone management system for the larger businesses. INN-FORM
PLUS, released in 1990, provides both business and lodging
features for larger hotels. INN-SURE(TM), introduced early in
1993, and enhanced in subsequent years to improve compatibility
with various telephone systems and environments, is an excellent
product which is being marketed to the Company's hospitality and
other accounts. WINSENSE and INN-FORM EXPRESS(TM), to be
released in early 1996, provide new and expanded features to
business users and hospitality industry users.
Management yet believes that the future success of any of
its products will require closer relationships between TELS and
its major customers. TEL continues to provide additional
services and discounts to its several volume telecommunications
dealers and these programs are expected to continue. Several
activities, to include special volume promotions, new
advertising methods, etc., are now in place and should help TEL
to continue to improve relationships with major dealers, in
particular.
The Company continues with its travel program to improve
sales, attending various trade shows and visiting with major
dealers from time to time, as well. In addition, key management
personnel are involved in travel to coordinate the activities of
the various TELS companies.
Management believes computer technology will continue to
evolve and be a dominant element in the telecommunications
industry. TELS recognizes major telecommunications industry
changes ahead as a result of changes in the "NANP" (North
American Numbering Plan) and "NADP" (North American Dialing
Plan), which went into effect in 1995. These changes in the
numbering plan and method for making telephone calls in the
United States, created strong demand for the Company's
telecommunications products in the first half of 1995, as
customers upgraded older systems. The Company expects their
telecommunications products and/or enhancements will need to be
further developed to meet the changes expected in 1996, and
beyond.
Competition
The telecommunications and computer industries are highly
competitive. The Company competes with a number of
manufacturers and distributors of similar telecommunications
products, some of which have a longer operating history, greater
financial strength, manufacturing capabilities, and name
recognition in the marketplace. In addition, some large
telecommunications companies and other companies incorporate
call accounting, answer detection, voice processing and/or other
capabilities into their own products, which they sell directly
or indirectly into the same marketplace addressed by the
Company's products. There can be no assurance that the Company
will be able to compete successfully with these companies in the
future. Additionally, there are relatively few barriers to
entry into this marketplace. Because of the divestiture by AT&T
and the changing regulatory climate, AT&T and the regional BELL
operating companies ("RBOCs") have developed into competitors of
the Company and the Company's dealers and distributors. The
Company's ability to meet this competition will depend upon,
among other things, the Company's ability to: expand sales
capabilities; attract management as well as technical and
marketing personnel; develop enhancements to existing products;
develop and market new products; and obtain financing as needed.
The Company competes with many printed circuit board and
cable assembly operations, many who have a longer operating
history, greater financial strength and larger manufacturing
capabilities. In addition, many companies incorporate their own
manufacturing capabilities internally within their own
operations. There can be no assurance that the Company will be
able to compete successfully with these companies in the future.
However, in an effort to keep its operation up to date, the
Company spent considerable effort and resources in obtaining
and re-certifying it's ISO 9002 certification. The ISO 9002 is
a quality standard adopted by the international business
community to assure consistent quality manufacturing standards
throughout the world. Management believes that the ISO 9002
certification for Hash Tech should enhance the Company's ability
to compete in a changing manufacturing environment.
Changing Telecommunications Marketplace
As a result of governmental actions, AT&T has been divided
into a number of independent public companies, each with a
separate and distinct charter. Each of these independent
companies has a major impact on the telecommunications industry.
AT&T and the RBOCs, freed from some previous governmental
regulation, are aggressively pursuing their independent
activities, while the evolving technologies are opening many new
opportunities for cable T.V. and utilities companies in the
telecommunications marketplace - thus, the entire
telecommunications industry is changing in complexity and scope.
As a result of changes in the telecommunications industry, there
can be no assurance that the Company's products will continue to
find a receptive marketplace. These changes have adversely
affected many dealers, distributors, and manufacturers in the
telecommunications industry. Since major competitive forces in
the telecommunications industry exist and since new technologies
may tend to favor larger and better-financed companies with
their often entrenched distribution networks, there can be no
assurance that a dealer and distributor network will continue to
exist in its previous form or, if such exists, that the network
will consist of enough dealers and distributors committed to
TELS' products sufficient to generate a profitable level of
sales for TELS.
The manufacturing and assembly marketplace is ever changing
to meet the demands of newer and more sophisticated products.
The Company will need to continue to purchase more sophisticated
equipment and also will need to continue its development of
quality manufacturing standards in order to meet the needs of
its customers in a rapidly changing technology and product-
driven marketplace.
Competitive Strategy
Management believes the Company's products compete on the
basis of quality: product quality, meaning features, technology,
reliability, simplicity of use, price, and size; and service
quality: meaning responsive customer support and company
personnel dedicated to profitably satisfying every customer.
From the outset, the Company's telecommunications products have
been designed to be marketed to the small and medium-sized
hotels, professional firms and general business establishments.
TELS' telecommunications products are based on state-of-the-art
technologies and designs, yet are relatively simple in function,
with the result that they may be priced lower than competitors'
equipment without a sacrifice of profit margin. Management
believes that the wholesale prices of its telecommunications
products are competitive relative to their features, thereby
allowing the prices to the end-user to be lower than or close to
that of its competitors. The Company has seen a general
reduction in the retail prices of certain of its competitors'
telecommunications products, and thus the Company cannot predict
at present whether it will continue to enjoy its current pricing
advantage. Moreover, there can be no assurance that the price
of the Company's telecommunications or computer products will
not increase.
TELS' telephone call accounting products are designed to
include advanced features, to occupy a minimum amount of space
either at the front desk or in office areas, to be very easy to
use, and to sell at competitive prices. The small physical
product size (smaller than a telephone) provides a competitive
advantage over the larger and more bulky equipment marketed by
many competitors.
Proprietary Rights
TELS does not currently hold, nor has it applied for, any
patents. Management does not believe that the Company's
business is dependent upon the acquisition of patents. TELS
always seeks special copyright protection for its names,
software and developmental products. The Company designs its
own printed circuit boards and software for use in its
telecommunications products. TELS' proprietary
telecommunications software is either imbedded in machine code
in microprocessors or is available on protected, but standard PC
floppy discs. Management believes that the circuit boards and
the software would be difficult and time-consuming to "reverse
engineer". The Company continues to take steps to protect its
trade names and trademarks and the products and software
developed through licensing, or other approaches designed to
contractually protect TELS' proprietary information. There can
be no assurance that others may not independently develop the
same or similar technology or obtain access to the Company's
proprietary technology. TELS has no proprietary rights to the
products previously marketed in its computer sector businesses.
Employees
As of December 31, 1995, the Company had 130 full-time
employees, with 10 in administration, 23 in its
telecommunications sector business, 15 in it's P.C. reseller
business, which was discontinued in January, 1996, 7 in research
and development and 75 in the manufacturing sector business.
Manufacturing and Supply
TELS' telecommunications products are assembled from
components manufactured by unaffiliated suppliers and designed
for modular assembly. This approach permits efficient use of
the Company's production staff in the assembly and testing of
these purchased items and the end products. The Company has
designed its own printed circuit boards for its
telecommunications business, which are manufactured to TELS'
specifications by subcontractors. Telecommunications products
are generally designed to permit multiple source procurement,
and it is TELS' policy to develop multiple sources of supply for
components it uses. There have been occasional shortages of the
electronic components included in TELS' telecommunications
products, and during such periods, suppliers have rationed the
available components among their customers. TELS may experience
manufacturing delays, additional costs, or contract
cancellations if certain of its suppliers should fail to deliver
sufficient components. TELS may experience sales delays,
additional costs, or contract cancellations if certain of its
suppliers should fail to deliver sufficient computer products.
To date, TELS has not been materially adversely affected by any
failure of suppliers to deliver systems on schedule.
Customer Service
The Company's telecommunications products are serviced by
its dealers, with assistance as required from TEL employees.
TELS' computer products were serviced by the Company's computer
businesses or by third-party service providers. Under the plan
for discontinued operations this service will be provided by
MICROMEGA and will be phased out as warranty issues expire. It
has been TELS' experience to date that its products have not
required a significant amount of customer service support
because of their design, simplicity and reliability.
Each of the Company's call accounting products now carries
a two year limited warranty covering the material and
workmanship of the entire system, including the material and
workmanship of the systems' printed circuit boards and
electronic components. Other Company telecommunications
products carry a one year warranty. Products purchased for
resale, such as printers, computers, etc., carry the original
manufacturer's warranty only.
Federal and State Regulations
The FCC has adopted regulations with respect to the
interconnection of communications equipment with telephone lines
and regulations with respect to radiation emanations of certain
equipment. TELS has complied with these regulations and
received all necessary FCC approvals for its telecommunications
products, or has submitted products for testing and
certification for compliance, and is submitting all new products
for such testing as they are completed. TELS anticipates that
the new products will be approved, but there can be no assurance
that such approvals will be obtained. Products purchased for
resale, such as printers, computers, etc., include original
manufacturer's certifications of compliance with FCC
regulations.
Rulings by the FCC adopted in 1976 and 1980 permit users of
the public switched network services, i.e., hotels, network
managers, equipment manufactures, and other potential resellers,
to earn revenues through resale on telephone calls. These
rulings have enabled every hotel and other user of the public
switch network services to convert their telephone operations
centers from a service or a convenience to a potential profit
center.
Item 2. Properties
The Company currently owns and occupies a facility with
approximately 15,000 square feet of space in American Fork,
Utah, which was purchased on August 15, 1984, and includes a
4,800 square foot addition plus renovation completed in 1988.
The Company leases 5,700 square feet of space for its
administrative and research and development offices in an office
building located in South Jordan, Utah. The Company's
subsidiaries Computer Express and Micro Station lease office
space in Dallas and San Antonio, Texas. Hash-Tech leases a
15,000 square foot space in a building located in Santa Clara,
California. Management believes that these facilities are
adequate for operations and production needs at current
production levels, but the decision to discontinue the P.C.
reseller division will require the Company to terminate or
sublease its leases in Dallas and San Antonio. Expanding sales
efforts on behalf of Hash Tech, Inc., will require the Company
to lease additional office space in the near future.
Item 3. Legal Proceedings
The Company is not a party to any legal proceedings the
outcome of which would have a materially adverse effect on the
Company.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
Price Range of Common Stock
The Company's Common Stock trades on The Nasdaq SmallCap
Market tier of The Nasdaq Stock Market under the symbol: "TELS".
Prices are quoted in the National Market System of the National
Association of Security Dealers Automated Quotation System
("NASDAQ"). The following table sets forth the range of sales
prices of the stock for the calendar quarters indicated, as
reported by NASDAQ. Quotations represent actual transactions in
NASDAQ's quotation system but do not include retail markup,
markdown, or commission.
1995 High Low 1994 High Low
First Quarter 1.44 $ 1.06 First Quarter $ 1.32 $ 1.21
Second Quarter 1.63 1.10 Second Quarter 1.39 1.28
Third Quarter 1.69 1.13 Third Quarter 1.44 1.33
Fourth Quarter 1.22 .41 Fourth Quarter 1.11 1.00
Approximate Number of Equity Security Holders:
Approximate Number of
Record Holders
Title of Class (At December 31, 1995)
Common Stock, $.02 Par Value 2,375
Included in the number of shareholders of record are shares
held in "nominee" or "street" names.
Dividends:
The Company has not paid dividends to date and intends to
retain its future earnings to finance the development and growth
of its business. Under Utah law the Company is restricted to
paying dividends if it is deemed that the payment of such
dividend would prove the Company insolvent or create an
impairment of the Company's assets. Under a loan agreement
dated April 5, 1995, the Company is required to obtain
permission from the lender for the payment of any cash
dividends.
Item 6. Selected Financial Data
The following financial data for the year ended December
31, 1995 have been derived from the Company's financial
statements audited by Coopers & Lybrand, L.L.P., independent
certified public accountants. The financial data for the years
ended December 31, 1994, 1993, 1992 and 1991, have been derived
from the Company's financial statements audited by KPMG Peat
Marwick,L.L.P. independent certified public accountants. The
financial statements as of December 31, 1995 and 1994 and for
each year in the three year period ended December 31, 1995, and
the reports thereon are included under Item 8 below.
YEAR ENDED DECEMBER 31,
Selected Operating Data:
1995 1994 1993 1992 1991
Net sales
$7,826,114 6,275,779 2,495,648 2,775,404 2,778,077
Cost of sales
3,870,004 2,300,232 715,046 743,503 690,048
Gross profit
3,956,110 3,975,547 1,780,602 2,031,901 2,088,029
Income (loss) from continuing operations before income taxes
(28,084) 614,857 (299,889) 70,974 102,743
Income tax (benefit) provision (1)
17,563 (54,666) (7,017) (21,026) (52,402)
Income (loss) from continuing operations
before extraordinary item and cumulative effect of change
in accounting principle
(10,521) 560,191 (306,906) 49,984 50,341
Loss from discontinued operations
(327,018) (133,951) (87,385) - -
Loss on disposal of discontinued operations
(192,939) - - - -
Extraordinary item - income tax benefit
from operating loss carryforward (1)
- - - 21,026 52,402
Cumulative effect at January 1, 1993, of
change in accounting for income taxes
- - 384,166 - -
Net income (loss)
$(530,478) 426,240 (10,125) 70,974 102,743
Net income (loss) per common and common equivalent share:
From continuing operations
$ (.01) .14 (.14) .03(1) .03(1)
Discontinued operations
(.13) (.03) (.04) - -
Extraordinary item
- - - .01 .03
Cumulative effect of accounting change
$ (.14) . 11 - .04 .06
(1) Extraordinary item consists of the income tax benefit of
$21,026 and $52,402, from operating tax loss carryforwards for
the years ended December 31, 1992 and 1991, respectively.
YEAR ENDING DECEMBER 31
Selected Balance Sheet Data:
1995 1994 1993 1992 1991
Total current assets
$3,306,466 $2,902,347 $1,407,525 $ 948,496 1,004,064
Total current liabilities
2,209,966 1,587,563 788,892 499,199 235,612
Working capital
1,096,500 1,314,784 618,633 449,297 768,452
Total assets
5,259,168 5,043,333 3,082,256 2,135,600 1,842,039
Long-term debt excluding current installments
346,195 463,712 457,456 218,125 259,125
Net Shareholders' equity
2,703,007 2,992,058 1,835,908 1,418,278 1,347,302
PART III
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Continuing Operations 1995
Consolidated net sales for 1995, increased 24% to
$7,826,114, an increase of $1,550,335 compared to consolidated
net sales of $6,275,779 for 1994. The increase in sales is due
to increased sales activity in the manufacturing division where
sales increased by $2,150,613. The Company anticipates that
sales in the manufacturing sector will remain strong throughout
the first half of 1996, as a result of corporations outsourcing
their manufacturing operations and increases in demand for
computer and electronics related products.
The increase in sales in the manufacturing division was
offset by a decrease in sales of the Company's call accounting
products. In 1995, sales of telecommunications products
decreased $680,666 to $3,171,480 compared to $3,852,145 for
1994. This decrease in sales in the telecommunications product
sector is attributable to a slowdown during the third and fourth
quarters of 1995, as a result of customer demand decreasing
after initially upgrading their systems for the NANP changes.
The Company anticipates some uncertainty in the
telecommunications industry for the foreseeable future as
companies continue to compete for market share and product
innovations. However, the Company believes that sales to its
existing core of dealers and national accounts will continue to
account for the majority of sales in the telecommunications
division in 1996.
Consolidated gross profit amounts did not change materially
in 1995, when compared to 1994. The gross profit of $3,956,110
for 1995, represented 51% of sales. In 1994, gross profit of
$3,975,547 represented 63% of sales. The decrease in gross
profit as a percent of sales is due to the change in the sales
mix from 1994 to 1995. In 1994, sales in the telecommunications
sector accounted for 61% of total sales, compared to 41% of
total sales for 1995. Because the telecommunication products
have a higher gross profit margin than products in the
manufacturing sector, the Company's consolidated gross profit
margin will be lower when sales from this sector increase and
become a more significant factor for overall operations. In
1996, the Company anticipates that the gross profit percentage
will be consistent with 1995, results.
Research and development expenditures for 1995 consisted of
current expense of $213,799 and amortized expenditures of
$148,899 for development projects which were capitalized in
prior years. In addition to these costs currently being
expensed, the Company also spent $118,321 in 1995, and $72,155
in 1994, which has been capitalized as software development
costs. The Company is continuing its efforts in research and
development on products which will primarily be introduced into
the telecommunications marketplace, as it looks for
opportunities to improve existing products and identify areas
for new products.
Consolidated selling, general and administrative expenses
increased to $3,666,076 for 1995, compared to $3,030,423 for
1994. This increase in 1995, is attributable to increases in the
manufacturing division, increased selling expenses in the
telecommunications division and costs associated with efforts to
expand corporate services and operations. As a percentage of
consolidated net sales, selling, general and administrative
expenses were 47% in 1995, compared to 48% in 1994.
For 1995, the Company reported a net loss from continuing
operations of $10,521 or $.01 per share, compared to net income
from continuing operations of $560,191 for 1994, or $.14 per
share. This decrease in earnings is a result of reduced sales
related to telecommunications products, where the gross profit
contribution is significantly higher than other sectors of the
Company and to costs associated with the write off of certain
assets previously capitalized. Management of the Company
expects that this trend will continue into the first quarter of
1996, due to some uncertainty in the telecommunications
industry. As of December 31, 1995, the Company has a net
deferred tax asset (net of valuation allowance of $128,850) of
$433,750 which is primarily the result of prior operating
losses. The Company believes that it is more likely than not
that through the generation of taxable income, it will be able
to realize the benefit of the net deferred tax asset in the
future.
Discontinued operations 1995
In January 1996 the Board of Directors approved a plan to
dispose of the Company's P.C. reseller business (See Note 15 of
the Financial Statements). Accordingly, the results of
operations of the P.C. reseller operations have been classified
as discontinued operations for all periods presented in the
consolidated statements of operations. The discontinued
operations had a net loss after tax of $327,018 in 1995,
compared to a net loss of $133,951 in 1994. The increase in the
loss is due to expenses associated with the Company's effort to
expand into twilight inventory event purchase activities in the
third and fourth quarter of 1995. The focus of this activity
was to bring buyers and sellers together by locating excess
inventory products and moving this inventory into channels
identified through innovative marketing programs. Although
sales in the P.C. reseller division increased to $3,245,979 in
1995, from $2,916,231 in 1994, the Company continued to incur
losses on this operation due to intense competition and
reductions in gross profit margins. The Company also recorded
a loss on disposal of this discontinued operation of $292,332
net of tax benefit, including a provision of $294,158 for losses
during the phase out period, in 1995.
Continuing Operations, 1994
Consolidated net sales for 1994 increased to $6,275,779, an
increase of $3,780,131 compared to consolidated net sales of
$2,495,648 for 1993. The increase in sales is primarily
attributable to the acquisition of the assets of Hash Tech,
Inc., in March of 1994. In addition to the increased revenue
from Hash Tech, the Company also experienced a significant
increase in the sales of its telecommunications products sold
through TEL, where sales increased to $3,852,145 in 1994, which
showed an increase of 55% compared to sales of $2,482,851 for
1993. A significant portion of the increase in
telecommunications products sales in 1994, was due to the
changes dictated by the NANP which became effective in 1995.
The majority of the Company's telecommunications customers
upgraded their telecommunications equipment in 1994, and this
fueled strong sales growth in this division. In addition, the
hospitality industry is experiencing a growth trend and this
added to increases in the sales of the Company's call accounting
products in 1994.
Consolidated gross profit of $3,975,547 increased
$2,194,945 in 1994, or 123% when compared to consolidated gross
profit for 1993, of $1,780,602. The increase was mainly due to
the increased sales of telecommunications products from TEL,
which recorded an increase in gross profit of $1,254,255 or 72%
over 1993, and also due to the acquisition of Hash Tech, Inc.,
which added $914,408 in gross profit for 1994. Consolidated
gross profit as a percentage of consolidated net sales decreased
to 63% for 1994, compared to 71% for 1993. The change in the
gross profit is a result of the sales mix where the Company
benefitted from a gross profit of 77% on telecommunications
products and 37% on manufacturing products.
Consolidated research and development expenditures
consisted of several components in 1994. The consolidated
expense of $255,804 for 1994, consists of $127,403 for current
expenses and $128,401 for amortization of projects which were
capitalized in prior years. In addition to the consolidated
research and development costs expensed in 1994, the Company
also capitalized $72,155 in 1994, and $85,116 in 1993, of
research and development expenditures.
Consolidated selling, general and administrative expenses
increased to $3,030,423 for 1994, compared to $1,818,139 for
1993. As a percentage of consolidated net sales, this expense
represented 48% of net sales in 1994, compared to 73% in 1993.
The increase in total expense was due primarily to the
acquisition of Hash Tech, Inc. which added $846,724 of expense
in 1994. The decrease as a percent of total sales in 1994, was
primarily due to increases in revenues in addition to
management's efforts to keep expenses in line with the growth of
the Company.
The Company recorded net income from continuing operations
of $560,191 or $.14 per share for 1994, compared to a net loss
from continuing operations of $306,906 or $.14 in 1993. This
increase in earnings reflected the profit margin contribution
from Hash Tech and the increased sales in telecommunications
products along with management's efforts to minimize expenses
while expanding the Company.
Discontinued Operations 1994
For the year ended December 31, 1994, the Company reported
a net loss of $133,951 or $.03 per share as compared to a net
loss of $87,385 or $.04 per share in 1993. The increased loss
is primarily due to lower profit margins as a result of
increased price competition in the P.C. reseller industry.
Sales from discontinued operations increased to $2,916,231 for
1994, compared to sales of discontinued operations in 1993 of
$1,770,861.
Liquidity and Capital Resources
1995
At December 31, 1995, the Company reported current assets
of $3,306,466 and current liabilities of $2,209,966, resulting
in working capital of $1,096,500. This is a decrease in working
capital of $218,284 when compared to working capital of
$1,314,784 at the end of 1994. This reduction in working
capital is due to the usage of cash in discontinued operations,
reductions in long-term debt, and purchases of property and
equipment. Accounts receivable decreased by $135,381, but this
decrease was partially offset by increases in inventory levels
of $288,979. To finance the uses of cash the Company increased
its borrowing on a line of credit by $518,244 to $1,080,989 in
1995, from $562,745 in 1994. The Company received $148,160 from
the exercise of common stock warrants and options. In 1995, the
Company was able to reduce its long term debt by $217,940 from
$463,712 at the end of 1994. The Company purchased property and
equipment of $264,846 in 1995, and incurred $118,321 in
capitalized software development costs. The purchase of
equipment in 1995, was for production machinery and office
furniture and computer equipment needed to keep the Company
competitive and efficient. In January, 1996, the Company made
a strategic decision to divest itself of its P.C. reseller
operations. In 1995, the Company suffered significant losses
from these discontinued operations which impacted the working
capital of Company. This impact has resulted in TELS being in
violation of certain debt covenants under the terms of its loan
agreements. Though the Company has obtained waivers of these
violations for the year ended December 31, 1995, the Company
will not pursue the appropriate waivers for expected violations
subsequent to December 31, 1995 from the lending institution
because the Company expects to refinance this line of credit by
entering into a new line of credit or renewing the existing line
with similar terms with the current lender. If the Company is
unable to obtain or renew a new line of credit with this lender
it will seek alternative sources of debt or equity to repay this
obligation. The Company believes that the plan of divestiture
will provide the impetus to move the Company back into an
improved operating position. As of April 3, 1996, the Company
had disposed of the bulk of the assets from the discontinued
operations without suffering losses greater than the estimated
liability at December 31, 1995. The Company expects the
divestiture to be materially completed by the end of the second
quarter of 1996. Once this plan is completed the Company
believes that continuing operations will provide positive cash
flows. The Company is continuing its efforts to find additional
financing through debt and/or investment equity which will be
needed to fund operations, future acquisitions and final
development and marketing of new products under consideration.
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.
1994
At December 31, 1994, the Company reported current assets
of $2,902,347 and current liabilities of $1,587,563, resulting
in working capital of $1,314,784. This is an increase in
working capital of $696,151 when compared to working capital of
$618,633 at the end of 1993. This increase is primarily due to
the Company receiving $550,000 from the proceeds of the exercise
of common stock warrants, and also to cash generated from
operations. The Company was able to reduce its line of credit
to $562,745 at the end of 1994, from $643,872 in 1993. The
Company renewed its line of credit with a commercial bank on
January 7, 1995. This line of credit is for a maximum of
$850,000 of which the Company had borrowed $562,745 as of
December 31, 1994. The cash generated from operations was used
to purchase the assets of Hash Tech, Inc., and Micro Station,
Inc., in 1994. Long term debt remained comparatively the same
in 1994, when compared to 1993, in spite of the fact that the
Company consummated the acquisitions of Hash Tech, Inc., and
Micro Station, Inc., which were purchased with cash and long
debt. Net property and equipment increased to $1,052,273 in
1994, an increase of $162.673 compared to property and equipment
in 1993 of $889,600. Accounts receivable, inventory and
accounts payable increased due to the acquisitions in 1994, and
also due to increased sales activity throughout the Company.
Effects of Inflation
The Company 's operations have not been significantly
affected by inflation during the periods covered in this report.
Impact of Recently Issued Accounting Standard
In March, 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". The Statement requires
that long-lived assets and certain identifiable intangible
assets to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
The Statement is effective for financial statements for fiscal
years beginning after December 15, 1995. The impact of the
Statement on the Company is not expected to be material.
In October, 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation". This Statement
defines a fair value method of accounting for an employee stock
option or similar equity instrument and encourages adoption of
that method. The Statement also requires that an employer's
financial statements include certain disclosures about stock-
based compensation arrangements regardless of the method used to
account for them. The Statement is effective for financial
statements for fiscal years that begin after December 15, 1995.
The Company has not determined how it will account for stock
options when the standard is adopted nor has it estimated what
impact such adoption will have on the Company's financial
statements.
Item 8. Financial Statements and Supplementary Data.
The following constitutes a list of Financial Statements
and related notes as required in Part II of this report.
Independent Auditors' Reports.
Consolidated Balance Sheets as of December 31, 1995 and 1994.
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993.
Consolidated Statements of Changes in Stockholder's Equity for
the years ended December 31, 1995, 1994 and 1993.
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993.
Consolidated Notes to Financial Statements for the years ended
December 31, 1995, 1994 and 1993.
Item 9. Disagreements on Accounting and Financial Disclosures.
Not applicable.
<PAGE>
PART III
Item 10. Directors and Executive Officer of the Registrant.
The directors and executive officers of the Company are as
follows:
Name Age Position with the Company Term
Expires
Dr. John L. Gunter 59 Chairman of the Board, 1996
President and
Chief Executive Officer
Willard H. Gardner 70 Director, Secretary 1997
Chairman Budget-Audit
Committee
David K. Doyle 66 Director, Chairman 1998
Executive Compensation
Committee
Dr. Ming T. Chen 59 Director 1996
Stephen M. Nelson 47 Director, Senior Executive 1997
Vice President
Chief Financial Officer,
and Treasurer
R. James Taylor 37 Vice President,
Chief Technical Officer,
General Manager Micromega
In 1995, the Company's Board of Directors held ten meetings
either in person or by telephone. A majority of directors were
in attendance at all of the meetings. The budget-audit
committee met three times during the year and the compensation
committee met one time. All outside directors are reimbursed
for expenses incurred in attending meetings plus board fees as
disclosed in Item 10 of Form 10-K.
The Company's Articles of Incorporation and By-Laws provide
for classification of the Board of Directors into three classes.
Directors are elected at the annual meeting of shareholders, at
which time respective classes are established. Subsequent terms
are for three years and/or until successors are elected and
qualified. Executive officers are elected by the Board of
Directors at its regularly scheduled meeting following the
annual meeting of shareholders, and serve until successors are
elected and qualified.
Dr. Gunter, TELS' founder, has been a Director and
President of the Company since its organization in February,
1981. He was elected Chairman of the Board on February 9, 1984.
From November, 1980, to February, 1981, he was involved in
activities leading to the organization of the Company. Dr.
Gunter received a B.S. in physics from Marshall University,
Huntington, West Virginia, and a doctorate in physics from
Brigham Young University, Provo, Utah. For five years after
completing his doctorate, Dr. Gunter was on the faculty of
Rochester Institute of Technology, Rochester, New York, first as
Associate Professor and Director of Computer Sciences, and later
as the Director of Computing Activities and the Director (Dean)
of the College of Computer and Information Sciences and
Technology, Dr. Gunter has been involved in design and/or
management of design activities in the computer field for over
thirty years, first as a high school and college student working
as a computer programmer for Union Carbide Corporation, then as
Factory Engineer, Project Design Engineer and Project Manager
from 1959 to 1965 for RCA, EDP Division and for North American
Aviation, Space and Information Systems Division. Dr. Gunter
also served as Senior Vice President for Information Systems
with Galbraith and Green, Inc., an insurance company during 1974
and 1975. He was a political appointee of Governor Calvin
Rampton for almost five years, serving as the Director of
Systems, Planning and Computing for the State of Utah from 1975
to 1979. He served as a private consultant and as General
Manager for Business Communications Systems, Inc. during 1980.
Mr. Gardner has been a Director of the Company since
September 5, 1984, and effective January 14, 1989, he took on
the additional responsibility of Corporate Secretary. From 1963
until 1990, he was employed by Brigham Young University in
various capacities including as the Executive Director of
Information Systems Services, and he was an Associate Professor
of Computer Science from 1980 to 1990. In September of 1990,
Mr. Gardner moved into semi-retirement and has since been
involved with several voluntary industry initiatives intended to
expand high-capacity data telecommunications, both nationally
and locally. Mr. Gardner served in the Utah State Legislature
from 1973 to 1985. He was a Founding Member of the Board of
Trustees of the Utah Technology Finance Corporation, served as
a member of the Board of State Lands and Forestry, and was a
Founding Member of the Board of Trustees of the Utah Information
Technology Association. Mr. Gardner received a B.S. in physics
from Utah State University and an M.S. in mathematics from
Brigham Young University. Mr. Gardner's technical
accomplishments include development of computer programs for
trajectory studies in connection with the ABLE project (first
moon shot) in 1958 and of display checkout routines for the
APOLLO project in 1962. He also managed the development of
payroll and accounting computer programs at BYU during the
decade of 1960.
Lieutenant General Doyle, U.S. Army Retired, was appointed
Director of the Company on July 21, 1988, and has served as a
director continuously since that time. General Doyle spent over
35 years in service before retiring on June 30, 1986. During
his last period of service, he reengineered the Army's
automation and communications services to create a world-wide
integrated information system. Concurrently, he served as the
Army's Chief Information Officer and organized a new corporate
staff to establish policy, plan, program and budget for the
Army's tactical command and control and information management
organizations. Since leaving the service, General Doyle co-
founded WELS Research Corporation, a weather information
company. He has served on an information system oversight
committee for the National Academy of Science, and has consulted
on a wide range of information issues for both commercial and
defense industries.
Dr. Ming-Tzong Chen was appointed a Director in December,
1995, to fill a vacancy on the Board of Directors. His term of
appointment expires on June 3, 1996. Dr. Chen received a
doctorate in physics from Brigham Young University, Provo, Utah.
Dr. Chen formed Pro Sports USA, Co. in 1992, to handle the
distribution of Fox Tennis products worldwide. During the last
three years, Pro Sports USA, Co. has produced a patented golf
club head design. Currently, Fox golf and tennis products are
distributed throughout the United States, as well as many
European and Asian countries. In 1990, Dr. Chen founded Chateau
Research, Inc., which designs and manufactures top quality loud
speaker systems. In 1978, Dr. Chen founded Chen's International
Corp. and Galaxy International Corp. ("Galaxy"), to handle real
estate investments, engage in international trade and explore
other business opportunities. In 1979, under the management of
Dr. Chen, Galaxy obtained a major contract with the Taiwan Power
Company, which resulted in Galaxy becoming the first firm to
export coal from the western U.S. to Taiwan. Galaxy has also
been involved in distribution and sales of Digital Equipment
Corporation (DEC) equipment and from 1980 to 1986, Galaxy was
one of the fastest growing DEC original equipment manufacturer's
in the United States.
Mr. Nelson was appointed as a Director in June, 1991, and
was elected to serve a three year term at the June, 1994, annual
meeting. He has been involved with the Company since 1982.
From 1982 through 1986, and from 1987 to 1989, he was an outside
consultant. From 1986 through 1987 he served as Chief Financial
Officer. In February, 1990, he was appointed Chief Financial
Officer, Treasurer and Vice President, Finance. In 1993 he was
appointed Senior Executive Vice President and in 1994 he became
a member of the Office of the President. He has been a major
force behind the Company's acquisition initiatives and has been
instrumental in automating the Company's financial systems. Mr.
Nelson is a Certified Public Accountant. He graduated from the
University of Utah in 1974 with a B.S. degree in accounting.
From 1974 through 1980 he worked in public accounting for Tanner
& Co. in Salt Lake City, Utah. From 1980 through 1982, Mr.
Nelson worked as the Vice President of Finance and Treasurer for
Gem Insurance Company in Salt Lake City, Utah. From 1982
through 1989 he was a partner and owner of Nelson and Holyoak,
a Certified Public Accountants firm. Mr. Nelson is a member of
the American Institute of Certified Public Accountants and the
Utah Association of Certified Public Accountants and is also a
member of the Institute of Management Accountants. From 1989
through 1990 he served as president of the Institute of
Management Accountants. He also served on the Board of
Directors of the American Fork Chamber of Commerce from January
1992 through 1994.
Mr. Taylor joined the Company as a software programmer on
January 13, 1986. In 1987, he was appointed manager of Research
and Development. In 1988, he assumed the additional
responsibilities of managing Production and Customer Service.
In September of 1989, he was appointed Vice President of
Operations, and in 1991 he was appointed General Manager of
MICROMEGA Corporation. In 1994, he was appointed Vice President
of TELS Corporation and became a member of the Office of the
President. He has also been a major force behind the Company's
acquisition initiatives and has been instrumental in automating
the Company's production systems. In addition, he was appointed
Chief Technology Officer for the Corporation. Mr. Taylor has
been instrumental in the planning and development of several of
the Company's new products. Additionally, Mr. Taylor has
designed and implemented several of the automated processes for
the Company and its subsidiaries. Mr. Taylor graduated from the
University of Utah in 1985 with a B.S. degree in Physiological
Psychology and was president of Psi Chi, a national honor
society. He was the founder and general manager of a printing
company from 1974 to 1976. He was also the co-founder and
general manager of a computer consulting company from 1980 to
1982. From 1982 to 1985 he was the manager of Kay-Bee Toys, in
Salt Lake City, Utah. From 1985 to 1986 he was the manager of
Follett's College Stores, in Salt Lake City, Utah.
Item 11. Executive Compensation
The following table sets forth the aggregate cash
compensation paid by the Company for services rendered during
the last three years to the Company's Chief Executive Officer
and to each of the Company's other executive officers whose
annual salary and bonus exceeded $100,000:
Annual Compensation Long Term Compensation
Securities
Name and Year Other Annual Restricted Underlying
Principal ended Salary Bonus Compensation Stock Awards Option/SARs
Position 12/31 ($) ($) ($) ($) (#)
John L. Gunter 1995 150,330 4,165 16,756 0 0
President/CEO 1994 140,297 6,500 16,756 0 0
1993 103,158 24,092 (1) 112,500 100,000
Stephen M. Nelson 1995 115,385 0 (1) 0 0
Chief Financial 1994 113,558 2,500 (1) 0 0
Officer 1993 74,521 7,000 (1) 90,000 77,500
(1) Amounts are less than $50,000 or ten percent (10%) of compensation.
The following table provides information with respect to stock options
granted during the Company's last fiscal year to the persons named in
the Summary Compensation Table above:
% of Total
Options
Number of Securities Granted to Exercise or
Underlying Options Employees in Base Price Expiration
Name Granted Fiscal Year ($/sh) Date
John L. Gunter None N/A N/A N/A
Stephen M. Nelson None N/A N/A N/A
Aggregated Option/SAR Exercises in Year Ended December 31, 1995, and
Option/SAR Values at December 31, 1995.
The following table features information concerning the exercise of
options and/or SARs during the last fiscal year by persons named in the
Summary Compensation Table, the number of unexercised options and/or SARs
held by such persons at the end of the last fiscal year and the value of
such unexercised options and/or SARs as of such date.
Number of Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs
12/31/95 (#) 12/31/95 ($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized($) Unexercisable Unexercisable
John L. Gunter None N/A 100,000 $ 82,800
Stephen M. Nelson None N/A 82,500 $ 68,310
Employment Contracts, Termination of Employment and Change of Control
Arrangements:
In March, 1994, the Board of Directors authorized a form of employment
contract for Dr. John L. Gunter, President and CEO, and Mr. Stephen M. Nelson,
Executive Vice President and CFO, allowing for annual compensation of
$150,000 and $115,000, respectively. The contract is for a term of
three years beginning on March 1, 1994, automatically renewable on
December of each year, unless notice is properly given by the Company or
the executive. The contract allows for a severance agreement which
provides that: (a) if termination occurs for reasons other than
death, disability, or cause, the executive shall receive his
annualized base salary and other benefits, throughout the remaining
term of the agreement, and (b) if termination occurs by the Company or
the executive, due to a change in control, the executive will be
entitled to receive an amount equal to two hundred fifty percent
of the amount includable in the gross income of the executive
during the preceding one-year period ending on the executive's
termination date.
Compensation of Directors
Effective March 1, 1994, non-employee directors receive a
monthly retainer fee of $800, and $1,400 for each meeting attended
in person. Non-employee directors do not receive fees for telephone
meetings. In addition each non-employee Director is entitled to receive
common stock options pursuant to the annual automatic, non-discretionary
grant mechanism under the "TELS Corporation 1994 outside Directors Stock
Option Plan" approved by the shareholders in June, 1994. On April 1, 1995,
each outside director received 15,000 options under the, non-discretionary
grant provision of the plan based upon 1994 year-end results.
Compliance With Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than
ten percent of the Company's Common Stock, to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. Except
as disclosed below, to the Company's knowledge, based solely on information
furnished to the Company and written representations that no other reports
were required, during the last fiscal year all applicable Section 16(a)
filing requirements were met. Mr. Gardner and Mr. Doyle were delinquent in
filing Form 4 regarding the receipt of certain restricted common stock options
for 1995.
Executive Stock Bonus Plan
In January, 1984, the Company's Board of Directors adopted the 1984
Executive Stock Bonus Plan (the "Stock Bonus Plan"). The Stock Bonus Plan
provides for the Board of Directors or a committee thereof to grant shares
of the Company's Common Stock, or the right to receive such shares, to
officers and other members of the executive or general management of the
Company, excluding such individuals who hold 10% or more of the Company's
Common Stock. Shares or rights to shares will be granted without other
payment therefore, as additional compensation for services rendered to the
Company. The Board of Directors, or a duly appointed committee thereof,
has the power to determine the persons to whom bonus awards will be made,
the number of shares or rights to be granted, and the terms and conditions
under which such grants will be made, including issuance in installments,
forfeiture provisions or other restrictions. The Company has reserved
537,500 of the authorized but unissued shares of the Company's Common
Stock for grant under the Stock Bonus Plan. The total shares issued and
outstanding under this plan are 497,625 at December 31, 1995. No shares were
issued under this plan in 1995.
TELS Corporation Stock Option and Incentive Plan for Officers and Key
Employees of the Company and Its Subsidiaries
This Plan, approved by shareholders on June 7, 1993, replaced the
1984 Incentive Stock Option and the 1984 Non-Qualified stock Option Plans
which expired. This newer plan permits the granting of incentive stock
options, non-qualified stock options, stock appreciation rights, stock
performance shares, dividend equivalents and restricted stock. The
Board of Directors believes that the Plan will assist TELS in recruiting
and retaining outstanding individuals as officers and members of management
by enabling such persons to participate in the long-term growth of TELS
and by providing additional incentive to increase their efforts in promoting
the financial success of the Company and its subsidiaries. On June 6, 1994,
the shareholders voted to increase the number of shares reserved under
this plan to a maximum of 2,000,000 shares of stock that may be made
subject to awards, as defined. In 1995, the Company granted 120,000
options and 10,974 shares under this plan and recorded compensation
expense of $12,767.
TELS Corporation Board of Directors Stock Bonus and Option Plan
On June 6, 1994, the shareholders of the Company approved the
Outside Directors Plan. This Directors Plan provides for the grant of
nonstatutory stock options to non-employee Directors of the Company
("Outside Directors") pursuant to an automatic, non-discretionary
grant mechanism. The primary purposes of the Director Plan are to
enhance the Company's ability to attract and retain the services of
experienced and knowledgeable individuals to serve on the Board of
Directors of the Company (the "Board"), to encourage ownership in the
Company by the Directors of the Company, and to provide the Company's
Directors with reward opportunities based upon the success of the Company.
The shareholders have approved 500,000 shares to be reserved for this plan.
In April 1995, each outside director received 15,000 options under the
automatic, non-discretionary grant provision of the plan.
Employees' Profit Sharing Plan
The Company adopted an employees' 401-K profit sharing plan, effective
January 1, 1988, covering substantially all employees who have attained age
21 with service in excess of six months. The plan provides for Company
contributions at the discretion of the Board of Directors. Company
contributions begin partial vesting after the first full year in which eligible
employees complete 501 hours of service, with full vesting occurring after
seven years. During the year ended December 31, 1995, the Company
contributed $15,000 to the plan.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding beneficial
ownership of the Company's Common Stock at March 25, 1996, of (i) each
beneficial owner of five percent or more of the Company's Common Stock,
(ii) each of its Company's directors, and (iii) all directors and
officers of the Company as a group.
Shares of Common Percent of
Stock Beneficially Total Voting
Name and Address of Owned Shares
Beneficial Owner
Dr. John L. Gunter (1) 631,115 16%
406 W. South Jordan Parkway, #250
South Jordan, Utah 84095
P. Diane Gunter (1) 196,600 5%
705 East Main Street
American Fork, Utah 84003
Willard H. Gardner 155,250 4%
1495 Oak Lane
Provo, Utah 84057
David D. Doyle 139,050 4%
8809 Bell Mountain Drive
Austin, Texas 78730
Stephen M. Nelson 289,500 8%
406 W. South Jordan Parkway, #250
South Jordan, Utah 84095
Dr. Ming T. Chen 0 0%
406 W. South Jordan Parkway, #250
South Jordan, Utah 84095
All Directors and Officers
as a Group (6 persons) 1,421,389 36%
(1) Dr. and Mrs. Gunter may be deemed to have control of the Company
by virtue of their combined ownership of 21% of the Company's
outstanding voting shares.
Item 13. Certain Relationships and Related Transactions
At December 31, 1995, Dr. Gunter is indebted to the Company
in the amount of $39,302 plus accrued interest, evidenced by a
promissory note dated March 25, 1986, and bearing interest at nine
percent (9%), and an employee receivable of $37,321 for expenses.
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K.
(a) The following constitutes a list of Financial Statements, Financial
Statement Schedules, and Exhibits required to be included in this report:
1. Financial Statements - Included in Part II, Item 8 of this report.
Independent Auditors' Reports.
Consolidated Balance Sheets as of December 31, 1995 and 1994.
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993.
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1995,1994 and 1993.
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993.
Consolidated Notes to Financial Statements for the years ended
December 31, 1995, 1994 and 1993.
2. Financial Statements Schedules - Included in Part IV of this report:
Schedule III - Valuation and Qualifying Accounts.
Schedules other than those listed above are omitted because of the
absence of conditions under which they are required or because the required
information is presented in the Financial Statements or Notes thereto.
3. Exhibits - Included in Part IV of this report.
(b) The Company filed a Form 8-K on November 3, 1995, reporting a change
in the Company's Certifying Accountant. The Form 8-K did not include any
financial statements.
<PAGE>
AUDIT
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
(Registrant)
Date April 12, 1996 By:
John L. Gunter, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
John L. Gunter Chairman of the Board of April 12, 1996
Directors CEO and President
(Principal Executive Officer)
Willard H. Gardner Director and Secretary April 12, 1996
Stephen M. Nelson Director, Senior April 12, 1996
Executive Vice President
Treasurer, (Principal
Financial and Accounting Officer)
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
(Registrant)
April 12, 1996 By:/s/John L. Gunter
Date John L. Gunter, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/John L. Gunter Chairman of the Board of April 12, 1996
Directors, CEO and President
John L. Gunter (Principal Executive Officer)
/s/Willard H. Gardner Director and Secretary April 12, 1996
Willard H. Gardner
/s/Stephen M. Nelson Director, Senior April 12, 1996
Executive Vice President
Stephen M. Nelson Treasurer, (Principal
Financial and Accounting Officer)
(C) Exhibits
3.1 Articles of Incorporation, as amended, filed as Exhibit 3.1
to the Company's Registration Statement on Form S-18, SEC File No. 2-93915-D,
and incorporated herein by this reference.
3.2 By-laws, as amended, filed as Exhibit 3.2 to the Company's Registration
Statement on form S-18, SEC File No. 2-93915-D, and incorporated herein
by this reference.
3.3 Certificate of Amendment of TEL electronics, inc. dated July 28, 1987,
changing the corporation name from Tel Electronics Inc., to
TEL electronics, inc., filed as exhibit 10.11 to the Company's Form 10-K
for the year ended December 31, 1988, and incorporated herein by this
reference.
3.4 Articles of Amendment to the Articles of Incorporation of
TEL electronics, inc., dated May 25, 1989, adding Article XIII -
Director Liability, filed as exhibit 3.4 to the Company's Form 10-K
for the year ended December 31, 1989, and incorporated herein by this
reference.
3.5 Certificate of Amendment of TEL electronics, inc., dated July 10, 1990,
changing the par value of common stock to $.02 and the authorized shares to
10,000,000, filed with the Company's form 10-K, and incorporated herein by
this reference.
3.6 Certificate of Amendment of TELS Corporation, dated August 24, 1994,
changing the name of the Company from TEL electronics, inc., to TELS
Corporation, and increasing the number of authorized common stock to
50,000,000 shares, and authorizing the number of preferred shares of stock to
10,000,000 shares, filed as exhibit 3.6 to the Company's Form 10-K for the
year ended December 31, 1994, and incorporated herein by this reference.
10.1 1984 Executive Stock bonus Plan, filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-18, SEC File No. 2-93915-D, and incorporated
herein by this reference.
10.2 1984 Incentive Stock Option Plan, filed as Exhibit 10.2 to the Company's
Registration Statement on Form S-18, SEC File No. 2-93915-D, and incorporated
herein by this reference.
10.3 Form of 1984 Incentive Stock Option Agreement filed as Exhibit 10.3
to the Company's Registration Statement on Form S-18, SEC File No. 2-93915-D,
and incorporated herein by this reference.
10.4 1984 Non-Qualified Stock Option Plan filed as Exhibit 10.4 to the
Company's Registration Statement on Form S-18, SEC File No. 2-93915-D, and
incorporated herein by this reference.
10.5 Form of 1984 Non-Qualified Stock Option Agreement filed as Exhibit 10.5
to the Company's Registration Statement on Form S-18, SEC File No. 2-93915-D,
and incorporated herein by this reference.
10.6 Form of Warrant issued to The Stuart-James Co., incorporated on
June 28, 1985, filed as Exhibit 4.2 to the Company's Registration Statement
on Form S-18, SEC File No. 2-93915-D, and incorporated herein by this
reference.
10.7 Warrant Agreement (including the form of warrant) between the
Company and Rooney Pace dated April 4, 1984, filed as Exhibit 10.10 to the
Company's Registration Statement on Form S-18, SEC file No. 2-93915-D, and
incorporated herein by this reference.
10.8 Employment Agreement between the Company and Dr. John L. Gunter dated
April 1, 1988, filed as Exhibit to the Company's form 10-K, and incorporated
herein by this reference.
10.9 Warrant Agreement (including the Form of Warrant) issued to Redwood
Micro Cap Fund, inc. dated November 10, 1993, filed as exhibit to the
Company's Registration on Form S-3, Sec File No. 2-93915-D and incorporated
herein by this reference.
10.10 Employment Agreement between the Company and Dr. John L. Gunter dated
March 1, 1994, filed as exhibit to the Company's 1994, form 10-K, and
incorporated herein by this reference.
10.11 Employment Agreement between the Company and Stephen M. Nelson
dated March 1, 1994, filed as exhibit to the Company's 1994, form 10-K, and
incorporated herein by reference.
10.12 Employment Agreement between the Company and Harold Neuenswander
dated March 31, 1994, filed as exhibit to the Company's 1994, form 10-K, and
incorporated herein by reference.
16.1 Letter on changes in Certifying Accountant filed as Exhibit 16 to the
Company's form 8-K, filedon May 4, 1995, and incorporated herein by this
reference.
16.2 Letter on changes in Certifying Accountant filed as Exhibit 16 to the
Company's form 8-K, filed on November 3, 1995, and incorporated herein by this
reference.
22.1 Wholly owned Subsidiaries of TELS Corporation:
TEL electronics, inc.
MICROMEGA CORPORATION
MedTech, Inc.
D.J. GunTEL, Inc.
Hash Tech, Inc.
27.1 Article 5 Financial Data Schedule for year ended December 31, 1995,
Form 10-K
<PAGE>
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