Report of Independent Accountants
To the Shareholders and Board of Directors of
TELS Corporation and Subsidiaries:
We have audited the 1995 financial statements and the 1995
financial statement schedule of TELS Corporation and
Subsidiaries as listed in Item 14(a) of the Form 10-K. These
financial statements and financial statement schedule are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our
audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management,
as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of TELS Corporation and Subsidiaries as of
December 31, 1995, and the consolidated results of their
operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all
material respects, the information required to be included
therein.
COOPERS & LYBRAND L.L.P.
Salt Lake City, Utah
April 9, 1996<PAGE>
Independent Auditors' Report
To the Board of Directors and Shareholders
TELS Corporation:
We have audited the accompanying consolidated balance sheets
of TELS Corporation and subsidiaries as of December 31, 1994,
and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in
the two-year period ended December 31, 1994. In connection
with our audits of the consolidated financial statements, we
also have audited the financial statement schedule for
December 31, 1994 and 1993. These consolidated financial
statements and financial statement schedule are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our
audit.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management,
as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
financial position of TELS Corporation and subsidiaries as of
December 31, 1994, and the results of their operations and
their cash flows for each of the years in the two-year period
ended December 31, 1994, in conformity with generally accepted
accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set
forth therein.
KPMG Peat Marwick LLP
Salt Lake City, Utah
March 6, 1995<PAGE>
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
ASSETS 1995 1994
Current assets:
Cash and cash equivalents $28,075 $77,372
Investments 56,617 54,150
Trade accounts receivable, less
allowance for doubtful
accounts of $105,788 in 1995 and
$122,502 in 1994 1,044,128 1,154,676
Employee and other receivables 121,863 146,696
Inventories 1,100,044 811,065
Prepaid expenses 79,089 95,574
Deferred income taxes 118,900 96,300
Net assets - discontinued operations 757,750 466,514
Total current assets 3,306,466 2,902,347
Property and equipment, net 1,087,778 1,052,273
Software development costs, net 140,080 289,673
Intangible assets, net 279,162 346,744
Deferred income taxes 314,850 355,013
Other assets 130,832 97,283
$ 5,259,168 $ 5,043,333
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 313,002 $ 367,706
Accrued expenses 382,016 339,814
Accrued vacation 115,404 43,638
Current portion of long-term debt 1,283,962 777,615
Deposits and advances 115,582 58,790
Total current liabilities 2,209,966 1,587,563
Long-term debt, less current portion 346,195 463,712
Commitments and contingencies (Notes 7 and 13)
Stockholders' equity
Common stock, $.02 par value,
Authorized 10,000,000 shares;
issued and outstanding 3,892,274
shares in 1995 and 3,677,800 shares
in 1994 77,825 73,556
Additional paid-in capital 4,231,567 4,014,909
Accumulated deficit (1,495,210) (964,732)
Deferred compensation (111,175) (131,675)
Stockholders' equity 2,703,007 2,992,058
$ 5,259,168 $ 5,043,333
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
Net sales $7,826,114 $6,275,779 $2,495,648
Cost of goods sold 3,870,004 2,300,232 715,046
Gross profit 3,956,110 3,975,547 1,780,602
Research and development expenses 362,698 255,804 225,188
Selling, general and
administrative expenses 3,666,076 3,030,423 1,818,139
Operating income (loss) (72,664) 689,320 (262,725)
Other income (expense):
Interest income 6,876 24,919 13,320
Interest expense (36,193) (102,105) (51,810)
Other, net 73,897 2,723 1,326
44,580 (74,463) (37,164)
Income (loss) from continuing
operations before income tax
benefit (provision) (28,084) 614,857 (299,889)
Income tax benefit (provision) 17,563 (54,666) (7,017)
Income (loss) from continuing
operations (10,521) 560,191 (306,906)
Discontinued operations (Note 15):
Loss from discontinued operations
(less applicable income tax benefit
of $168,464, $69,051 and $45,017,
respectively) (327,018) (133,951) (87,385)
Loss on disposal of
discontinued operations including
provision of $294,158 for operating
losses during phase-out period
(less applicable income tax benefit
of $99,393 in 1995) (192,939) - -
Loss from discontinued operations (519,957) (133,951) (87,385)
Income (loss) before cumulative
effect of change in accounting
principle (530,478) 426,240 (394,291)
Cumulative effect at January 1,
1993 of changein accounting for
income taxes - - 384,166
Net income (loss) $ (530,478) $ 426,240 $ (10,125)
Net income (loss) per common
and common equivalent share:
Income (loss) per share
from continuing operations $ (.01) $ .14 $ (.14)
Loss per share from
discontinued operations (.13) (.03) (.04)
Income (loss) before cumulative
effect of change in accounting
principle (.14) .11 (.18)
Cumulative effect of change in
accounting for income taxes - - .18
Net income (loss) $ (.14) $ .11 $ - <PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1995, 1994 and 1993
Additional Net
Common paid-in Accumulated Deferred Stockholders'
stock capital deficit compensation equity
Balances at
December 31, 1992 $34,266 $2,764,857 $(1,380,847) $ - $1,418,276
Net loss - - (10,125) - (10,125)
Grant of 513,000
shares for stock
bonuses 10,260 220,590 - (202,500) 28,350
Issuance of 30,000
shares for Computer
Express acquisition 600 31,350 - - 31,950
Issuance of 600,000
shares upon exercise
of warrants, net of
expenses 12,000 355,457 - - 367,457
Balances at
December 31, 1993 57,126 3,372,254 (1,390,972) (202,500) 1,835,908
Net income - - 426,240 - 426,240
Amortization of
deferred
compensation - - - 70,825 70,825
Issuance of 50,000
shares for Hash Tech
acquisition 1,000 106,500 - - 107,500
Issuance of 764,500
shares upon exercise
of warrants, net of
expenses 15,290 533,145 - - 548,435
Issuance of 7,000
shares upon
exercise of
options 140 3,010 - - 3,150
Balances at
December 31, 1994 73,556 014,909 (964,732) (131,675) 2,992,058
Net loss - - (530,478) - (530,478)
Amortization of
deferred
compensation - -- 40,500 40,500
Grant of 58,974
shares for stock
bonuses 1,159 71,608 - (20,000) 52,767
Issuance of
135,500 shares
upon exercise of
warrants, net of
expenses 2,710 132,790 - - 135,500
Issuance of
20,000 shares
upon exercise of
options 400 12,260 - - 12,660
Balances at
December 31, 1995 $ 77,825 $4,231,567 $(1,495,210) $ (111,175) $2,703,007
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
Cash flows from
operating activities:
Net income (loss) $(530,478) $ 426,240 $ (10,125)
Adjustments to reconcile
net income (loss)
to net cash provided
by (used in)
operating activities:
Depreciation and
amortization 544,307 384,906 225,317
Impairment of assets 172,253 - -
Deferred income taxes 17,563 (24,666) (426,647)
Stock bonuses and
amortization of
deferred compensation 93,267 70,825 28,350
Loss on disposal
of equipment (1,864) (1,885) -
Changes in operating
assets and liabilities:
Receivables 135,381 (306,948) 216,036
Inventories (288,979) (146,860) 119,215
Prepaid expenses,
deposits and advances 73,277 (38,985) 57
Trade accounts payable
and accrued expenses 59,264 170,380 (340,687)
Other assets and
liabilities (104,082) (19,512) 18,609
Noncash charges and
working capital changes
of discontinued
operations (204,447) (4,797) (144,053)
Net cash provided by
(used in) operating
activities (34,538) 508,698 (313,928)
Cash flows from
investing activities:
Net purchase of
investments (2,467) (2,046) 116,448
Capital expenditures (264,846) (152,488) (144,826)
Proceeds from disposal
of equipment 9,200 7,650 -
Software
development costs (118,321) (72,155) (85,116)
Net cash paid for
purchase of assets of
Computer Express - - (74,200)
Net cash paid for
purchase of assets
of Micro Station - (1,471) -
Net cash paid for
purchase of assets
of Hash Tech - (173,823) -
Net cash used in
investing activities (376,434) (394,333) (187,694)
Cash flows from
financing activities:
Net borrowings under
line of credit
agreement 518,244 (81,127) (29,125)
Proceeds from
long-term debt - - 674,799
Principal payments
on long-term debt (217,940) (608,133) (344,416)
Proceeds from issuance
of common stock 148,160 551,585 367,457
Financing activities
of discontinued
operations 4,050 - -
Net cash provided by
(used in) financing
activities 452,514 (137,675) 668,715
- Continued -<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS, Continued
for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
Net increase (decrease)
in cash and cash
equivalents $ 41,542 $ (23,310) $ 167,093
Cash and cash
equivalents at
beginning of year 172,399 195,709 28,616
Cash and cash
equivalents at
end of year
Continuing operations 28,075 77,372 151,039
Discontinued operations 185,866 95,027 44,670
Total cash and cash
equivalents at
end of year $ 213,941 $ 172,399 $ 195,709
Supplemental
disclosure of cash
flow information:
Cash paid during the
year for interest $ 114,434 $ 127,108 $ 72,826
Supplemental schedule
of noncash investing
and financing
activities:
Acquisition of
equipment for
capital lease
obligations $ 83,126 - -
Long-term debt
issued to acquire
equipment 5,400 - -
During 1994, the Company acquired Hash Tech, Inc. and Micro Station, Inc.
for a net cash payment of $175,294. The fair value of assets acquired and
liabilities assumed in conjunction with these acquisitions were as follows:
Current assets $ 1,021,260
Long-term assets 610,943
Current liabilities (919,145)
Long-term liabilities (382,058)
Net purchase price 331,000
Purchase price paid
with note payable and
common stock (135,000)
Cash acquired in acquisition (20,706)
Net cash paid for acquisition $ 175,294
During 1993, the Company acquired Subert Electronic Service Corporation,
d.b.a. Computer Express, for a net cash payment of $74,200. The fair value
of assets acquired and liabilities assumed in conjunction with this
acquisition were as follows:
Current assets $ 381,800
Long-term assets 279,150
Current liabilities (354,000)
Long-term liabilities (100,000)
Net purchase price 206,950
Purchase price paid with
note payable and common stock (131,950)
Cash acquired in acquisition (800)
Net cash paid for acquisition $ 74,200
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Business Information
TELS Corporation and subsidiaries (the Company) designs, manufactures
and sells telecommunications/call accounting products to hotels, motels
and small businesses throughout the United States. They also provide
contract production and assembly services for computer and electronics
companies located mainly in California, and sell and service computer and
network products for businesses located mainly in Texas.
On January 31, 1996, the Company's Board of Directors approved a plan to
discontinue the Company's computer retail business which is located in Texas
(see Note 15, "Discontinued Operations"). The Company's management believes
that its remaining operations will generate sufficient positive cash flow in
1996 to service the Company's long-term debt and fund necessary capital
expenditures.
Principles of Consolidation
The consolidated financial statements include the accounts of TELS
Corporation and its 100% owned subsidiaries, DJ GunTEL (formed during 1993 as
a holding company for the Company's discontinued P.C. reseller subsidiaries,
Computer Express and Micro Station), Hash Tech, Medtech, Micromega, and Tel
Electronics. All significant intercompany balances and transactions have
been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
to the Company of three months or less to be cash equivalents.
Investments
Cash investments consist of certificates of deposit, stated at cost, which
approximates market value.
Inventories
Raw materials are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method. Work-in-process and finished goods are
stated at standard cost, which approximates accumulated manufacturing cost,
but not in excess of market.
1. Summary of Significant Accounting Policies, Continued:
Property and Equipment
Property and equipment are stated at cost. Equipment under capital leases is
stated at the lower of cost or the present value of minimum lease payments at
the inception of the lease.
Depreciation on property and equipment is calculated using the straight-line
method over the estimated useful lives of the assets. Equipment held under
capital leases is amortized using the straight-line method over the shorter
of the lease term or estimated useful life of the asset.
Software Development Costs
The Company capitalizes costs associated with development of software that
will be sold as part of its principal products. Amortization of these costs
is calculated using the straight-line method over periods ranging from 24 to
36 months or the ratio of current year gross revenue to total current and
anticipated gross revenues, whichever results in the greater annual
amortization.
The realizability of software development costs is evaluated periodically as
events or circumstances indicate a possible inability to recover the carrying
amount. Such evaluation is based on various analyses, including cash flow and
profitability projections.
Intangible Assets
The Company amortizes goodwill and other intangible assets related to
acquired businesses using the straight-line method over a period of 5 to 7
years. The realizability of intangible assets is evaluated periodically as
events or circumstances indicate a possible inability to recover the carrying
amount. Such evaluation is based on various analyses, including cash flow
and profitability projections.
Income Taxes
Effective January 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, (SFAS
No. 109) and has reported the cumulative effect of that change in the method
of accounting for income taxes in the 1993 consolidated statement of
operations. Deferred income taxes are provided for the differences between
the financial statement and tax bases of assets and liabilities using
applicable future tax rates.
Net Income (Loss) Per Share
Net income (loss) per common and common equivalent share is computed based on
the weighted average number of shares outstanding during the period. For
purposes of this computation, stock options and stock warrants are treated as
common stock equivalents at issuance. Stock options and stock warrants are
not included in the 1995 and 1993 calculations because they are
antidilutive. The weighted average number of outstanding common and common
equivalent shares used in this computation was 3,838,459, 3,949,748 and
2,168,585 for 1995, 1994, and 1993, respectively.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Concentrations of Credit Risk
Approximately 11% of the Company's trade accounts receivable are due from two
customers in the computer production and assembly industry located in
California. The Company does not anticipate the termination of these
relationships.
The majority of the Company's cash and cash equivalents are held by a single
financial institution in Salt Lake City, Utah which is also responsible for
the Company's line of credit.
2.Inventories:
Inventories of continuing operations at December 31, 1995 and 1994 consisted
of the following:
1995 1994
Finished goods $ 129,355 $ 74,552
Work-in-process 283,937 281,616
Raw materials and supplies 746,684 507,829
Reserve for obsolete inventory (59,932) (52,932)
$ 1,100,044 $ 811,065
Inventories of discontinued operations consisted of finished goods totaling
$297,837 and $192,752, which is net of a reserve for obsolete inventory of
$55,000 and $10,500, at December 31, 1995 and 1994, respectively.
3. Property and Equipment:
Property and equipment of continuing operations at December 31, 1995 and 1994
consisted of the following:
1995 1994
Land $ 35,380 $ 35,380
Building and improvements 475,975442,359
Furniture and equipment 1,474,207 1,363,640
Equipment under capital lease 195,202 90,312
2,180,764 1,931,691
Less accumulated
depreciation and amortization (1,092,986) (879,418)
$ 1,087,778 $ 1,052,273
During the year ended December 31, 1995, the Company wrote-off equipment with
a net book value of $53,253.
Property and equipment of discontinued operations at December 31, 1995 and
1994 consisted of the following:
1995 1994
Buildings and improvements $ 5,040$ 5,040
Furniture and equipment 63,710 40,922
68,750 45,962
Less accumulated depreciation
and amortization (55,605) (28,273)
$ 13,145 $ 17,689
4. Software Development Costs:
Capitalized software development costs at December 31, 1995 and 1994
consisted of the following:
1995 1994
Software development costs $ 424,544 $ 547,447
Less accumulated amortization (284,464) (257,774)
$ 140,080 $ 289,673
Amortization expense, which totalled $148,899, $127,403 and $63,136 for the
years ended December 31, 1995, 1994 and 1993, respectively, is included in
selling, general and administrative expenses in the Consolidated Statement of
Operations.
In accordance with its policy of evaluating impairment, the Company wrote-off
software development costs with a net book value of $119,000 during the year
ended December 31, 1995.
5. Intangible Assets:
Intangible assets of continuing operations at December 31, 1995 and 1994
consisted of the following:
1995 1994
Non-compete agreements $ 308,000 $ 299,000
Goodwill 56,041 56,041
Organizational costs 41,398 41,398
Other 9,715 4,955
Less accumulated amortization (135,992) (54,650)
$ 279,162 $ 346,744
Intangible assets of discontinued operations at December 31, 1995 and 1994
consisted of the following:
1995 1994
Non-compete agreements $ 34,167 $112,000
Goodwill 8,053 30,900
Organizational costs 226 1,000
Customer list 18,100 53,000
Trademarks 6,786 30,000
Less accumulated amortization (66,332) (64,748)
$ 1,000 $ 162,152
In accordance with its policy of evaluating impairment, the Company wrote-off
$107,256 of intangible assets related to discontinued operations during the
year ended December 31, 1995.<PAGE>
6. Long-term Debt:
Long-term debt related to continuing operations at December 31, 1995 and
1994, the carrying value of which approximates fair value, consisted of the
following:
1995 1994
Revolving line of credit payable to a bank,
bearing interest at the bank's index rate
plus 1.0% (9.5% at December 31, 1995),
interest due monthly, principal due June 1996,
collateralized by trade accounts receivable
and inventories. $ 1,080,989 $ -
Revolving line of credit payable to a bank, bearing
interest at the bank's index rate plus 2.5% (11%
at December 31, 1994), interest due monthly,
paid in full June 1995, collateralized by trade
accounts receivable, inventories and a personal
guarantee by the Company's president.- 556,569
Revolving line of credit payable to a commercial
financial institution, bearing interest at prime
plus 3.0% (11.5% at December 31, 1994), paid
in full January 1995. Collateralized by trade
accounts receivable and inventories. - 6,176
Mortgage note payable to a bank in monthly install-
ments of $3,063, including interest at the bank's
index rate plus 1.5% (10% at December 31, 1995),
final payment of $184,898 due May 1998;
collateralized by real property. 269,500 306,250
Note payable under noncompete agreement,
payable in quarterly principal installments
of $4,833, plus accrued interest at 7%,
remaining principal due July 1996. 19,333 29,000
Note payable under noncompete agreement,
payable in quarterly principal installments
of $8,333, plus accrued interest at 7%,
remaining principal due July 1996. 33,333 50,000
<PAGE>
6. Long-term Debt, Continued:
1995 1994
Installment note payable to a bank in 36
monthly principal payments of $2,500,
plus accrued interest at a variable rate
(10% at December 31, 1995), final payment
due April 1996; collateralized by equipment. $ 7,500 $ 37,500
Installment note payable to a corporation
in monthly installments of $335 through
January 1999, plus accrued interest at 7.9%,
collateralized by an automobile. 10,655 13,705
Note payable under noncompete agreement,
payable in quarterly principal installments
of $1,000, through April 1997. 7,000 9,000
Note payable under noncompete agreement
payable in (a) monthly installments of
$2,000, final payment due March 1995
and (b) quarterly installments of $15,000,
final payment due July 1997. 75,000 156,000
Capital leases for equipment (Note 7) 126,847 77,127
Total long-term debt 1,630,157 1,241,327
Less current portion (1,283,962) (777,615)
Long-term debt, less current portion $ 346,195 $ 463,712
The Company's revolving line of credit contains various covenants and
restrictions that specify the Company maintain specified ratios or minimum
financial amounts with regard to current ratio, tangible net worth, and
earnings. As of December 31, 1995 the Company was in compliance with all
debt covenants or had obtained the appropriate waivers from the lending
institution. The Company does not expect to be in compliance with these
covenants as of March 31, 1996. The Company will not pursue the appropriate
waivers for expected covenant 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 a new line of credit with this lender, it will seek alternative
sources of debt or equity to repay this obligation.<PAGE>
6. Long-term Debt,
Continued:
The aggregate principal maturities of long-term debt excluding capital
leases, for the years following December 31, 1995 are as follows:
Year ending December 31:
1996 $1,241,156
1997 58,321
1998 203,833
Long-term debt relating to discontinued operations at December 31, 1995 and
1994 consisted of the following:
1995 1994
Note payable to a corporation,
payable in monthly installments
of $450 through September 1996. $4,050 $ -
7. Leases:
Continuing Operations
The Company is obligated under capital leases for machinery and equipment
that expire between August 1997 and December 1999. At December 31, 1995 and
1994, the gross amount of machinery, equipment and related accumulated
amortization recorded under capital leases were as follows:
1995 1994
Equipment under capital lease$195,202 $ 90,312
Less accumulated amortization (76,767) (9,031)
$118,435 $ 81,281
The Company leases office space and equipment under noncancelable operating
lease agreements. Rent expense charged to continuing operations was
$189,967, $102,462, and $44,211 for the years ended December 31, 1995, 1994,
and 1993, respectively. Future minimum rental payments required under
capital leases and operating leases that have initial or remaining
noncancelable lease terms in excess of one year as of December 31, 1995 are:
7. Leases, Continued:
Capital Operating
leases lease
Year ending December 31:
1996 $ 61,576 $ 198,642
1997 56,024199,697
1998 23,452180,341
1999 18,662 160,072
2000 2,711 45,610
Total minimum lease payments 162,425 $ 784,362
Less amount representing interest
(at rates ranging from 5.5% to 20%) (35,578)
Present value of net minimum
capital lease payments 126,847
Less current installments of
obligations under capital leases (42,806)
Obligations under capital leases,
excluding current installments $ 84,041
Discontinued Operations
The Company's discontinued subsidiaries have noncancellable operating leases,
primarily for equipment, that are in effect through 1996. At December 31,
1995, minimum rental payments due under noncancellable operating leases are
$7,500.
Rental expense charged to discontinued operations was $53,564, $38,944 and
$14,224 for the years ended December 31, 1995, 1994 and 1993, respectively.
8. Income Taxes:
Income tax benefit (expense) attributable to income from continuing
operations consists of:
1995 1994 1993
Current:
Federal $ - $ (10,000) $ -
State - (20,000) -
- (30,000) -
Deferred:
Federal 10,832 (19,733) (6,117)
State 6,731 (4,933) (900)
17,563 (24,666) (7,017)
Total $ 17,563 $ (54,666) $ (7,017)
The income tax expense attributable to income from continuing operations
differs from the expected tax benefit (expense) computed by applying the U.S.
federal corporate income tax rate of 34 percent to earnings (loss) before
income taxes as follows:
1995 1994 1993
Computed expected tax benefit
(expense) $ 9,549 $(209,051) $ 101,962
Increase (decrease) in
income taxes resulting from:
Change in valuation allowance 35,963 193,554 (152,474)
Graduated rate effect - 1,900 -
Effect of tax credits (4,039) (4,760) -
Officers' life insurance (1,945) (1,945) -
State income taxes, net of
federal income tax benefit (3,253) (7,340) 13,807
Other, net (18,712) (27,024) 29,688
Total income tax expense $ 17,563 $ (54,666) $ (7,017)
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1995 and 1994, are presented below:
Continuing operations
1995 1994
Deferred tax assets:
Deferred revenue $ - $ 10,800
Accounts receivable 40,300 41,000
Inventories 34,700 19,800
Accrued liabilities 43,900 24,700
Intangible assets 27,100 41,300
General business tax credits 124,500 138,500
AMT tax credit 4,000 -
Jobs credit 4,400 -
Net operating loss
carryforwards 338,000 311,000
Deferred tax assets 616,900 587,100
Less valuation allowance (128,850) (92,887)
Total deferred tax assets 488,050 494,213
Deferred tax liability:
Property and equipment (54,300) (42,900)
Net deferred tax asset $ 433,750 $ 451,313
Discontinued operations
1995 1994
Deferred tax assets:
Accounts receivable $ 9,400 $ 7,800
Inventories 8,200 3,800
Accrued liabilities 10,300 4,700
Intangible assets 6,400 7,900
Accrued loss on
discontinued operations 119,070 -
Net operating loss
carryforward 168,464 -
Total deferred tax assets 321,834 24,200
Deferred tax liability:
Property and equipment (12,700) (8,200)
Net deferred tax asset $ 309,134 $ 16,000
The net deferred tax asset as of December 31, 1995 and 1994 is reflected in
the consolidated balance sheet as follows:
Continuing operations
1995 1994
Current deferred tax asset $ 118,900 $ 96,300
Long-term deferred tax asset 314,850 355,013
$ 33,750 $ 451,313
Discontinued operations
1995 1994
Current deferred tax asset $315,434 $ 16,300
Long-term deferred tax liability (6,300) (300)
$309,134 $ 16,000
Based on the level of current taxable income and projections for future
taxable income over the periods in which the deferred tax assets are expected
to be realized, management believes that it is more likely than not that the
Company will realize the benefit of the deferred tax assets in the future,
net of the existing valuation allowance.
As of December 31, 1995, the Company has net operating loss carryforwards,
investment tax credit carryforwards and research and experimentation credit
carryforwards for federal income tax purposes which expire as follows:
Research and
Net Investment experimentation
Expiration operating loss tax credit credit
date carryforwards carryforwards carryforwards
1996 $ - $ 500 $ -
1997 - 3,000 16,000
1998 - 1,500 13,000
1999 - 1,800 1,000
2000 - 6,200 -
2001 486,000 - 6,000
2002 - - 14,500
2003 - - 21,500
2004 - - 19,000
2005 62,000 - -
2006 - - 10,000
2007 6,000 - 10,500
2008 391,500 - -
2009 3,500 - -
2010 540,600 - -
$1,489,600 $13,000 $111,500
9. Capital Stock:
Stock Option and Bonus Plans
On June 7, 1993, the Board of Directors approved the 1993 TELS Corporation
Stock Option and Incentive Plan (the 1993 Plan) which replaced the Company's
1984 Stock Option and Bonus Plan (the 1984 Plan). The Company had reserved
1,237,500 shares of its common stock for issuance under the 1984 Plan, of
which 247,750 remained available for grant. The Company will not make any
further grants under the 1984 Plan. Under the 1993 Plan, as amended on June
6, 1994, the maximum number of shares issuable to employees, nonemployees,
and consultants totals 2,000,000 shares. The exercise price of options
granted is not less than the fair market value on the date of grant as
determined by the Compensation Committee (Committee) appointed by the Board
of Directors. The options become exercisable over a three-year period, in
equal annual increments beginning one year after the date of grant, and
expire ten years after the date of grant.
On June 6, 1994, the Board of Directors also approved the TELS Corporation
1994 Outside Directors Stock Option Plan (the Director Plan) for which
500,000 shares of the Company's common stock have been reserved. Under the
Director Plan, nonemployee directors may be granted stock options pursuant to
an automatic and nondiscretionary grant mechanism. Options granted under
this plan fully vest upon the six month anniversary of receipt and may be
exercised at any time during the period beginning six months after the date
of grant, and ending ten years after the date of grant. The exercise price
of the options granted is the fair market value on the date of grant.
A summary of activity related to stock options is indicated in the following
table:
1995 1994
Number Number
ofExercise of Exercise
shares price shares price
Options outstanding
at beginning of
period 897,500 $ .45-1.72 616,000 $.45
Options granted 241,000 1.19-1.39 404,000 .69-1.72
Options exercised (20,000) .45-1.06 (7,000) .45
Options canceled (243,000) .45-1.72 (115,500) .45
Options outstanding
at end of year 875,500 $ .45-1.59 897,500 $.45-1.72
At December 31, 1995, 1,298,151 shares of the Company's common stock are
authorized for issuance under the stock option and bonus plans, and options
to acquire 517,268 shares are exercisable.
In May 1995, the Company granted stock bonuses aggregating 48,000 common
shares to three outside directors of the Company. Shares granted to one of
the directors were fully vested on the date of the grant. Shares granted to
the other two directors vested equally over two years, beginning on the date
of the grant. Compensation expense of $40,000 was recognized in 1995 with
respect to this grant, and additional compensation of $20,000 was deferred
until 1996. Also, in August of 1995 the Company granted stock bonuses
aggregating 10,974 common shares to key officers and managers of the Company
for which compensation expense of $12,767 was recorded in the Consolidated
Statement of Operations.
In April 1993, the Company granted stock bonuses aggregating 63,000 common
shares to certain directors and employees of the Company for which
compensation in the amount of $28,350 was recorded in the Consolidated
Statement of Operations. Grants were also made to officers totaling 450,000
shares that vest over a five-year period commencing in 1994. Compensation
expense of $40,500 and $70,825 was recognized in 1995 and 1994, respectively,
with respect to this grant. The remaining expense will be recognized over
the vesting period.
10. Related Party Transactions:
Included in employee and other receivables at December 31, 1995 and 1994, is
a $39,302 uncollateralized note receivable due from the President of the
Company. The note bears interest at eight percent and is due on demand.
Included in employee and other receivables at December 31, 1995 and 1994, are
expense advances to the President of the Company of $32,229 and $37,321,
respectively, and expense advances to the Senior Executive Vice President of
$23,219 and $25,424, respectively. These expense advances bear no interest
and are due on demand.
Also included in employee and other receivables are two notes due from TEL
Leasing, a related party in which TELS Corporation's Senior Executive Vice
President serves as general partner. The combined outstanding balance of
these notes at December 31, 1995 and 1994 was $15,103 and $26,014,
respectively. These notes bear interest at nine percent and are due in 1996.
Included in selling general and administrative expense are payments totaling
$12,756 in 1995 and $18,806 in 1994 to the President of the Company for the
Company's use of vehicles and property owned by the President.
11. Employees' Profit Sharing Plan:
The Company has an employees' profit sharing plan 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 vesting after the first full year in
which eligible employees complete 501 hours of service, with full vesting
occurring after seven years. Contributions to the plan during the year ended
December 31, 1995, 1994 and 1993 totaled $15,000, $21,000 and $10,000,
respectively.
12. Acquisitions:
On May 20, 1993, the Company acquired the assets and assumed the liabilities
of Subert Electronic Service Corporation, d.b.a. Computer Express (Computer
Express). Computer Express is based in Dallas, Texas and is a value-added
reseller of computer equipment, personal computer networks, and related
services. The Company paid $75,000 in cash and issued a promissory note of
$100,000 for the acquired net assets. In addition, the Company issued
Computer Express 30,000 shares of restricted common stock and 20,000 common
stock options valued at $31,950. The acquisition was accounted for by the
purchase method of accounting and, accordingly, the results of operations of
Computer Express have been included in the Company's consolidated financial
statements from the date of acquisition (see Note 15).
On March 1, 1994, the Company acquired the assets and assumed the liabilities
of Micro Station, Inc. (Micro Station). Micro Station is a computer systems
integrator located in San Antonio, Texas. The Company issued Micro Station
80,000 options to purchase shares of the Company's restricted common stock at
the fair market value of shares on the date of grant, and a $27,500
promissory note payable as settlement of the purchase price. In addition,
the Company entered into a $12,000 noncompete agreement with the former
President of Micro Station to be paid in quarterly payments of $1,000
beginning June 30, 1994. The acquisition was accounted for by the purchase
method of accounting and, accordingly, the results of operations of Micro
Station have been included in the Company's consolidated financial statements
from the date of acquisition (see Note 15).
On April 1, 1994, the Company acquired the assets and assumed the liabilities
of Hash Tech, Inc. (Hash Tech). Hash Tech is based in Santa Clara,
California and offers full service turnkey or consignment contract
manufacturing of printed circuit boards. The Company paid $196,000 in cash
and issued 50,000 shares of the Company's restricted common stock for the net
assets of Hash Tech. In addition, the Company entered into a $299,000
noncompete agreement with Hash Tech's former owners to be paid as follows:
an initial payment of $95,000, twelve monthly payments of $2,000 beginning
April 1, 1994, and twelve quarterly payments of $15,000 beginning July 1,
1994. The acquisition was accounted for by the purchase method of accounting
and, accordingly, the results of operations of Hash Tech have been included
in the Company's consolidated financial statements from the date of
acquisition.
13. Contingencies:
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, liquidity or results of operations.
14. Segment Information:
Substantially all of the Company's continuing operations are in
telecommunications and contract computer production and assembly. Total
revenue by industry includes both sales to unaffiliated customers, as
reported in the Company's consolidated statement of operations, and
intersegment sales, which are accounted for based on the estimated fair
market value of the products. Intersegment sales are not material.
Operating income (loss) is total revenue less operating expenses. In
computing operating income (loss), the effects of general corporate expenses,
interest expense and income taxes are not included.
Identifiable assets by industry are those assets that are used in the
Company's operations in each business segment. One customer, in the contract
computer production and assembly industry, accounted for approximately 17% of
the Company's sales in 1995. No single customer accounted for more than 10%
of sales in 1994 or 1993. Corporate assets are principally fixed assets,
capitalized software development costs, deferred tax assets and other assets.
Financial information by segments is as follows:
1995 1994
Net sales:
Telecommunications $ 3,171,480 $3,852,145
Computer production
and assembly 4,588,313 2,437,700
Corporate and other 66,321 (14,066)
$ 7,826,114 $ 6,275,779
Operating income (loss):
Telecommunications $ 900,112 $ 1,162,598
Computer production and assembly 570,086 67,685
Corporate and other (1,542,862) (540,963)
$ (72,664) $ 689,320
1995 1994
Identifiable assets:
Telecommunications $ 829,906 $1,469,158
Computer production and assembly 1,429,594 1,283,604
Corporate and other 2,241,918 1,824,057
$ 4,501,418 $ 4,576,819
Depreciation and
amortization expense:
Telecommunications $ 287,574 $ 241,341
Computer production and assembly 139,822 93,963
Corporate and other 116,911 49,602
$ 544,307 $ 384,906
Capital expenditures:
Telecommunications $ 21,447 $ 118,147
Computer production and assembly 141,852 3,724
Corporate and other 101,547 30,617
$ 264,846 $ 152,488
No segment information for 1993 is presented because the Company only
operated in the telecommunications industry prior to the acquisition of Hash
Tech on April 1, 1994.
15. Discontinued Operations:
The Company's product and marketing strategies were refocused in January
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.
Accordingly, subsequent to December 31, 1995 the Company formalized a plan to
discontinue the operations of Computer Express and Micro Station. On April
3, 1996, the Company entered into an agreement to sell the net assets of
Micro Station to a former employee for a $60,792 note (the Note). The Note
is collateralized by a security agreement covering non-real property and
bears interest at 12%. One-third of the purchase price is due and payable 30
days from the contract date, one-third is due and payable 60 days from the
contract date and the remaining amount due and payable 80 days from the
contract date.
During the first quarter of 1996, substantially all assets of Computer
Express were liquidated for cash proceeds of approximately $682,000.
Substantially all remaining liabilities were paid from such proceeds.
The results for the P.C. reseller subsidiaries have been classified as
discontinued operations for all periods presented in the Consolidated
Statements of Operations. The assets and liabilities of the discontinued
operations have been classified in the Consolidated Balance Sheets as "Net
assets - discontinued operations". Discontinued operations have also been
segregated for all periods presented in the Consolidated Statements of Cash
Flows.
Net assets of the Company's discontinued operations (excluding intercompany
balances which have been eliminated against the equity of the discontinued
operations) are as follows:
As ofAs of
December 31, December 31,
1995 1994
Assets:
Current assets:
Cash and cash equivalents $ 185,866 $ 95,027
Accounts receivable 247,973 252,514
Employee and other receivables 26,974 23,369
Inventories 297,837 192,752
Deferred income taxes 315,434 16,300
Prepaid expenses 168,121 4,989
Total current assets 1,242,205 584,951
Net property, plant and equipment 13,145 17,689
Other noncurrent assets 9,741 170,067
Total assets $ 1,265,091 $ 772,707
As of As of
December 31, December 31,
1995 1994
Liabilities:
Current liabilities:
Accounts payable $ (92,070) $(256,586)
Accrued expenses (96,955) (21,851)
Accrued vacation (11,201) (7,204)
Deposits and advances (4,433) (20,252)
Accrued loss on disposal (292,332) -
Current portion of long-term debt (4,050) -
Total current liabilities (501,041) (305,893)
Deferred income taxes (6,300) (300)
Total liabilities (507,341) (306,193)
Net assets - discontinued operations $ 757,750 $ 466,514
Revenues of the discontinued operations were $3,312,300, $2,916,231 and
$1,770,861 for the years ended December 31, 1995, 1994 and 1993,
respectively.
TELS CORPORATION, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(of Continuing Operations)
Years ended December 31, 1995, 1994 and 1993
Other
Additions
Additions reserves Deductions
Balance, charged to from doubtful Balance,
Allowance for beginning costs and acquired accounts end of
doubtful receivables of year expenses companies written off year
Years ended December 31:
1995 $ 122,502 $13,331 $ - $30,045 $105,788
1994 $ 59,930 $65,242 $19,032 $21,702 $122,502
1993 $ 49,352 $10,578 $- $- $59,930
Warranty reserve
Years ended December 31:
1995 $10,000 $ 7,976 $ - $- $17,976
1994 $16,752 $ - $- $6,752 $10,000
1993 $10,000 $6,752 $ - $- $16,752
Inventory reserve
Years ended December 31:
1995 $52,932 $7,000 $- $ - $59,932
1994 $6,500 $46,432 $- $ - $52,932
1993 $6,500 $- $- $- $ 6,500
