<PAGE>
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
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Transition Period from to
Commission File No. 0-12993
---------------------------
TELS Corporation
(Exact name of Registrant as specified in its charter)
UTAH 87-0373840
---- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification
No.)
406 West South Jordan Parkway, Suite 250, South Jordan, Utah 84095
- ------------------------------------------------------------ -----------
(Address of principal executive offices) (Zip Code)
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 (ss.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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 31, 1997, was approximately $ 1,627,145.
The Registrant had issued and outstanding 3,891,820 shares of its common stock
on March 31, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Those sections of portions of the Registrant's 1997 Proxy Statement for its
Annual Meeting of Shareholders to be held on June 2, 1997, are incorporated by
reference into Part III hereof.
<PAGE>
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 CORPORATIONTM 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. The Company operated this P.C.
reseller division through January, 1996, at which time the Company made the
decision to discontinue all P.C. reseller operations (by closing all of the
Computer Express operations and selling the assets of Micro Station on March 31,
1996).
Hash Tech, Inc. ("HTI"), 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. HTI, 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 two different product and
service sectors: first, and the most typical products for the Company for the
last 15 years, the telecommunications products are used to provide management,
accounting, and billing information to various business, education, and
government entities, but primarily to the lodging industry; and second, 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-SURETM, which
provides answer detection and verification for phone calls. The
telecommunication division accounted for 35% of consolidated sales for 1996. The
manufacturing and assembly operation accounted for approximately 65% of
consolidated sales for 1996.
<PAGE>
Products and Services
- ---------------------
INN-FORM/XL(R), INN-FORM PLUS(R) . The INN-FORM/XL 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, a larger version of the INN-FORM/XL, includes many business features
similar to TEL-EXECUTIVE, below, and is ideal for larger hotels and motels with
gift shops, etc., or other business needs.
INN-FORM EXPRESSTM. This new product, released in 1996, is an expanded
version of INN-FORM/XL and the INN-FORM PLUS, with new capabilities for custom
needs of users.
TEL-SENSE(R) and TEL-SENSE/K(R). These products 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 is for smaller key telephone systems.
TEL-EXECUTIVE(R). This product, a "big brother" to TEL-SENSE, 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/PCSTM. 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.
WIN-SENSETM. This Windows(R)-based business call accounting PC software
system, released in 1996, has been designed to compete favorably with
competitive products in the telephone call accounting business applications
market. WIN-SENSE has graphical representations in full color, with intuitive
commands and processes.
INN-SURETM. 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 such calls actually are answered.
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 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 system increases revenues and reduces customer complaints, providing
excellent capabilities for any type of business.
INN-TELTM. This call accounting system is a PC software-only system
roughly similar to the INN-FORM/XL, adding telephone call accounting and billing
capabilities to standard PC's. The memory or call storage of an INN-TEL system
is dependent only on the size of the disk storage of the PC used, so the INN-TEL
can handle very large hotels for long periods of time.
INTERROTM. The INTERRO is a proprietary medical electronics product
that provides many capabilities similar to acupuncture, however, the INTERRO
procuct is implemented via non-invasive, unharmful electronic stimulation at
lower intensity than the stimulation from standard light bulbs. The INTERRO
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.
<PAGE>
ISO 9002 Quality Services. TELS, through its subsidiary HTI, provides
electronics production services for companies needing high quality turnkey or
consignment contract manufacturing. HTI 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. HTI had one customer which accounted for
approximately 17% its of consolidated net sales for 1996.
Management 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 volume telecommunications
dealers and these programs are expected to continue. Several activities, to
include special volume promotions, support and upgrade agreements, 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.
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 its telecommunications products
and/or enhancements will need to be further developed to meet the changes
expected in 1997, and beyond.
Research and Development
- ------------------------
The Company spent approximately $172,000, $481,000 and $328,000,
including certain capitalized expenses, on research and development activities
in the years ended December 31, 1996, 1995 and 1994, respectively. All research
and development expenses originated 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 1996.
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 begun competing with 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.
<PAGE>
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
modernize its operation, the Company spent considerable effort and resources in
obtaining and re-certifying its 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 HTI 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 are aggressively pursuing their
independent activities, while evolving technologies are creating many new
opportunities for cable T.V. and utilities companies in the telecommunications
marketplace. 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 will also 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 (i):
product quality, meaning features, technology, reliability, simplicity of use,
price, and size and (ii): 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 for
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 sacrificing
profit margin. Management believes that the wholesale prices of its
telecommunications products are competitive relative to their features, thereby
allowing 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, to be very easy to use,
and to sell at competitive prices. The small physical product size (smaller than
an average size telephone) provides a competitive advantage over the larger and
more bulky equipment marketed by many competitors.
<PAGE>
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
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 competitors 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, 1996, the Company had 85 full-time employees, with 8
in administration, 17 in its telecommunications sector business, 4 in research
and development and 56 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, sales delays, additional costs, or
contract cancellations if certain of its suppliers should fail to deliver
sufficient computer products. To date, management believes that TELS has not
been materially adversely affected by any failure of suppliers to deliver
systems or components on schedule.
Customer Service
- ----------------
The Company's telecommunications products are serviced by its dealers,
with assistance as required from TEL employees. It has been TELS' experience
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 hotel and other users of the public
switch network services to convert their telephone operations centers from a
service or a convenience to a potential profit center.
<PAGE>
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. HTI 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.
Item 3. Legal Proceedings
- -------------------------
On February 2, 1996, the former owners of Hash Tech (Plaintiffs) filed
a complaint in the Superior Court for the County of Santa Clara, California,
against the Company and several of its officers and directors in their
individual and representative capacities, and also against HTI, a wholly owned
subsidiary of the Company. The Plaintiffs have alleged causes of action for
recision of a certain "Asset Purchase Agreement" dated March 31, 1994, civil
conspiracy, fraud, violation of California securities laws, common law gender
discrimination, and intentional infliction of emotional distress. The Company
and its officers deny any wrongdoing in regard to the above allegations. On
April 15, 1996, the Company filed a complaint in the Third Judicial District
Court of Salt Lake City, Utah, against the Plaintiffs for breach of "non compete
agreements" and breach of a "Severance Agreement" between the Plaintiffs and the
Company and on February 24, 1997, the company filed a Motion for Summary
judgment in this matter, which is awaiting oral argument. In addition, the
Company has filed a complaint with the American Arbitration Association, which
is being held pending the outcome of certain legal hearings. On April 9, 1996,
the Superior Court of Santa Clara, California, heard and denied the Company's
motion to compel arbitration. In July, 1996, the Company filed an appeal to
reverse this decision with the Sixth Appellate District in the Court of Appeal
of the State of California. On February 18, 1997, this appeal was denied.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year 1996.
<PAGE>
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". The following table sets forth
the range of high and low sales prices per share of the Company's Common 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.
1996 High Low 1995 High Low
- ------------- ------- ------- ------------- ------- -------
First Quarter ........$ 1.32 $ .59 First Quarter $ 1.44 $ 1.06
Second Quarter ....... 1.28 .50 Second Quarter 1.63 1.10
Third Quarter ........ .97 .56 Third Quarter 1.69 1.13
Fourth Quarter ....... .69 .41 Fourth Quarter 1.11 .41
Approximate Number of Equity Security Holders:
- ----------------------------------------------
As of March 31, 1997, there were 1,065 shareholders of record of the
Companies Common Stock. Included in the number of shareholders of record are
shares held in "nominee" or "street" names. Because many of such shares are held
by brokers and other institutions on behalf of shareholders, the Company is
unable to estimate the total number of shareholders reported by these record
holders.
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 a
loan agreement dated April 5, 1996, the Company is required to obtain permission
from the lender for the payment of any cash dividends. The Company intends for
the foreseeable future to continue the policy of retaining its earnings to
finance the development and growth of its business.
<PAGE>
Item 6. Selected Financial Data
- -------------------------------
The following financial data for the years ended December 31, 1996 and
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, and 1992, have been
derived from the Company's financial statements audited by KPMG Peat Marwick
LLP, independent certified public accountants. The financial statements as of
December 31, 1996 and 1995 and for each year in the three year period ended
December 31, 1996, and the reports thereon are included under Item 8 below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
Selected Operating Data: 1996 1995 1994 1993 1992
- ---------------------------------------------------- -------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales ................................................ $ 6,728,816 $ 7,826,114 $ 6,275,779 $ 2,495,648 $ 2,775,404
Cost of sales ............................................ 3,842,466 3,870,004 2,300,232 715,046 743,503
----------- ----------- ----------- ----------- ----------
Gross profit ............................................. 2,886,350 3,956,110 3,975,547 1,780,602 2,031,901
----------- ----------- ----------- ----------- ----------
Income (loss) from continuing
operations before income taxes ...................... (378,074) (28,084) 614,857 (299,889) 70,974
Income tax (benefit) provision (1) ....................... (29,379) (17,563) (54,666) (7,017) (21,026)
----------- ----------- ----------- ----------- ----------
Income (loss) from continuing operations
before extraordinary item and
cumulative effect of change in
accounting principle ................................ (348,695) (10,521) 560,191 (306,906) 49,984
Loss from discontinued operations ........................ (78,486) (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
Cumulative effect at January 1, 1993, of .................
change in accounting for income taxes ............... -- -- -- 384,166 --
----------- ----------- ----------- ----------- ----------
=========== =========== =========== =========== ==========
Net income (loss) ........................................ ($ 427,181) ($ 530,478) $ 426,240 ($ 10,125) $ 70,974
=========== =========== =========== =========== ==========
=========== =========== =========== =========== ==========
Net income (loss) per common and common equivalent share:
From continuing operations ............................ $ (.09) $ (.01) $ .14 $ (.14) $ .03(1)
Discontinued operations ............................... (.02) (.13) (.03) (.04) --
Extraordinary item .................................... -- -- -- -- .01
Cumulative effect of accounting change ................ -- -- -- .18 --
=========== =========== =========== =========== ==========
$ (0.11) $ (0.14) $ 0 . 11 $ . - $ 0.04
=========== =========== =========== =========== ==========
</TABLE>
(1) Extraordinary item consists of the income tax benefit of $21,026 , from
operating tax loss carryforwards for the year ended December 31, 1992.
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
--------------------------------------------------------------
Selected Balance Sheet Data: 1996 1995 1994 1993 1992
- -------------------------------- ------------ ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total current assets ........... $2,053,004 $3,306,466 $2,902,347 $1,407,525 $ 948,496
Total current liabilities ...... $1,545,337 $2,209,966 $1,587,563 $ 788,892 $ 499,199
Working capital ................ $ 507,667 $1,096,500 $1,314,784 $ 618,633 $ 449,297
Total assets ................... $4,112,377 $5,259,168 $5,043,333 $3,082,256 $2,135,600
Long-term debt excluding current
installments ................... $ 235,739 $ 346,195 $ 463,712 $ 457,456 $ 218,125
Net Shareholders' equity ....... $2,331,301 $2,703,007 $2,992,058 $1,835,908 $1,418,278
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- -------------
The following Management Discussion and Analysis contains certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, including, among others: (i) results of
operations (including expected changes in the Company's gross profit margin and
general, administrative and selling expenses); (ii) the Company's business
strategy for increasing sales; (iii) the Company's strategy to increase its size
and customer base; (iv) the Company's ability to successfully increase its size
through acquisition/merger activity; and (v) the Company's ability to
distinguish itself from its current and future competitors.
These forward-looking statements are based largely on the Company's
current expectations and are subject to a number of risks and uncertainties.
Actual results could differ materially from these forward-looking statements.
Important factors to consider in evaluating such forward-looking statements
include (i) delays in the release of new products or new versions of existing
products; (ii) the shortage of reliable market data regarding the telephone call
management and contract manufacturing industries market; (iii) changes in
external competitive market factors or in the Company's internal budgeting
process which might impact trends in the Company's results of operations; (iv)
anticipated working capital or other cash requirements; (v) changes in the
Company's business strategy or an inability to execute its strategy due to
unanticipated changes in the market; and (vi) various competitive factors that
may prevent the Company from competing successfully in the marketplace. In light
of these risks and uncertainties, there can be no assurance that the events
contemplated by the forward-looking statements contained herein will in fact
occur.
Continuing Operations 1996
- --------------------------
Consolidated net sales for 1996 decreased 14% to $6,728,816, a decrease
of $1,097,298 when compared to consolidated net sales of $7,826,114 for 1995.
The decrease in sales is partially due to decreased sales activity in the
manufacturing division where sales decreased by $194,348. Throughout the first
half of 1997 the Company anticipates that sales levels in the manufacturing
sector will remain constant as a result of increased competition from smaller
competitors, lower demands from customers outsourcing their manufacturing
operations, and decreases in demand for computer and electronics related
products.
The decrease in sales in the manufacturing division was coupled with a
decrease in sales of the Company's call accounting products. In 1996, sales of
telecommunications products decreased 27% or $844,840 to $2,326,640 compared to
$3,171,480 for 1995. This decrease in sales in the telecommunications product
sector is attributable to a slowdown beginning in the third quarter of 1995.
This slow down is the result of a decrease in customer demand after they
purchased new systems or upgraded their older systems in order to meet the
requirements of 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 1997.
Consolidated gross profit decreased 27% in 1996, when compared to 1995.
The gross profit of $2,886,350 for 1996, represented 43% of sales. In 1995,
gross profit of $3,956,110 represented 51% of sales. The decrease in gross
profit as a percentage of sales is due to the change in the sales mix from 1995
to 1996. In 1995, sales in the telecommunications sector accounted for 41% of
total sales, compared to 35% of total sales for 1996. 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 the manufacturing sector increase and become a more
significant factor for overall operations. In 1997, the Company anticipates that
the gross profit percentage will be consistent with 1996 results.
Research and development expenditures for 1996 consisted of current
expense of $31,937 and amortized expenditures of $66,969 for development
projects which were capitalized in prior years. In addition to these costs
currently being expensed, the Company also spent $73,031 in 1996, and $118,321
in 1995, which have 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,
the Company may need to increase research and development activity in the near
future.
<PAGE>
Consolidated selling, general and administrative expenses decreased 16%
to $3,097,796 for 1996, when compared to $3,666,076 for 1995. This decrease in
1996 is attributable to management's efforts to control costs and reduce
expenses to meet lower sales levels in 1996. Management anticipates that it will
continue to reduce expenses in 1997 in certain operations of the Company as it
continues to focus its efforts toward profitability. As a percentage of
consolidated net sales, selling, general and administrative expenses were 46% in
1996, when compared to 47% in 1995.
For 1996, the Company reported a net loss from continuing operations of
$348,695 or $.09 per share, compared to a net loss from continuing operations of
$10,521 for 1995, or $.01 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.
Management of the Company expects that this trend will continue into the first
quarter of 1997, due to some uncertainty in the telecommunications industry. As
of December 31, 1996, the Company has a net deferred tax asset (net of valuation
allowance of $128,850) of $853,077 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 1996
- ----------------------------
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 $78,486 in 1996, (in addition to the operating loss from
disposal of discontinued operations during the phase-out period) compared to a
net loss of $327,018 in 1995. In 1996, the Company finalized all discontinued
operations and believes that the losses from discontinued operations have
ceased.
Continuing Operations, 1995
- ---------------------------
Consolidated net sales for 1995 increased 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 was primarily attributable to the acquisition of the assets of
Hash Tech, Inc., in March of 1994, and a 37% sales growth in this division in
1995. The increased revenue from HTI was offset by a reduction in sales of
telecommunications products, where sales decreased $680,665 or 18% when compared
to sales for 1994. Many of the Company's telecommunications customers upgraded
their telecommunications equipment in 1994, and early 1995, and this fueled
strong sales growth in this division during that period of time.
Consolidated gross profit amounts did not change materially from 1994
to 1995. 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 change in the
gross profit is a result of the sales mix where the Company benefited from a
gross profit of 74% on telecommunications products and 33% on manufacturing
products in 1995.
Consolidated research and development expenditures consisted of several
components in 1995. The consolidated expense of $362,698 for 1995, consists of
$213,799 for current expenses and $148,899 for amortization of projects which
were capitalized in prior years. In addition to the consolidated research and
development costs expensed in 1995, the Company also capitalized $118,321 in
1995, and $72,155 in 1994, of research and development expenditures.
Consolidated selling, general and administrative expenses increased to
$3,666,076 for 1995, compared to $3,030,423 for 1994. As a percentage of
consolidated net sales, this expense represented 47% of net sales in 1995,
compared to 48% in 1994. The increase in total expense was due primarily to the
acquisition of Hash Tech, Inc. which added $999,742 in 1995, and $846,724 in
1994.
The Company recorded a net loss from continuing operations of $10,521
or $.01 per share for 1995, compared to net income from continuing operations of
$560,191 or $.14 per share in 1994. This decrease in earnings is a reflection of
decreases in sales in the telecommunications division in the last half of 1995.
Discontinued Operations 1995
- ----------------------------
For the year ended December 31, 1995, the Company reported a net loss
of $327,018 compared to a net loss of $133,951 in 1994. The increased loss is
primarily due to expanded P.C. reseller activities in the third and fourth
quarter of 1995.
<PAGE>
Liquidity and Capital Resources
- -------------------------------
1996
- ----
At December 31, 1996, the Company reported current assets of $2,053,004
and current liabilities of $1,545,337, resulting in working capital of $507,667.
This is a decrease in working capital of $588,833 when compared to working
capital of $1,096,500 at the end of 1995. This reduction in working capital is
due to the use of cash in discontinued operations, reductions in long-term debt,
and purchases of property and equipment. Accounts receivable decreased by
$307,357 and inventories decreased by $349,617 as a result of lower sales levels
in 1996.
The Company reduced its borrowing on a line of credit by $624,057 in
1996, as a result of lower sales activity when compared to 1995. In 1996 the
Company reduced its long term debt by $110,456 from $346,195 at the end of 1995.
In January, 1996, the Company made a strategic decision to divest itself of its
P.C. reseller operations. In 1996 and 1995, the Company suffered significant
losses from these discontinued operations which impacted the working capital of
the 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, 1996, the
Company will not pursue the appropriate waivers for expected violations
subsequent to December 31, 1996, from the lending institution because the
Company has been notified that this line of credit will not be renewed in May,
1997. The Company expects to refinance this line of credit by entering into a
new line of credit with similar terms with a different lender. If the Company is
unable to obtain a new line of credit with another lender, it would not be able
to continue to operate at its current level. The Company has entered into
negotiations with lending institutions to replace this line of credit and is
considering various alternatives, including the refinancing of real property to
raise additional funds. The Company is continuing its efforts to find additional
financing through investment equity which may be needed to fund operations,
future acquisitions and final development and marketing of new products under
consideration. The Company is evaluating its existing system for compliance with
the year 2000 and has not determined the modifications, if any, that will be
required. 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.
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 use 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 $110,456 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.
Effects of Inflation
- --------------------
The Company 's operations have not been significantly affected by
inflation during the periods covered in this report.
<PAGE>
Impact of Recently Issued Accounting Standards
- ----------------------------------------------
In February, 1997, the Financial Accounting Standards Board issued
Statement on Financial Accounting Standards No. 128, Earnings Per Share. This
statement establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly-held common stock or potential
common stock. This statement simplifies the standards for computing EPS and
makes them comparable to international EPS standards. This statement is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. The company is currently evaluating the impact of the
recently issued statement and will adopt the requirements for the year ending
December 31, 1997.
The Company has reviewed all other recently issued, but not yet
adopted, accounting standards in order to determine their effects, if any, on
the results of operations or financial position of the Company. Based on that
review, the Company believes that none of these pronouncements will have a
significant effect on current or future earnings or operations.
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.
Reports of Independent Accountants.
Consolidated Balance Sheets as of December 31, 1996 and 1995.
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994.
Consolidated Statements of Changes in Stockholder's Equity for
the years ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994.
Consolidated Notes to Financial Statements for the years ended
December 31, 1996, 1995 and 1994.
Item 9. Disagreements on Accounting and Financial Disclosures.
- --------------------------------------------------------------
Not applicable.
<PAGE>
Report of Independent Accountants
To the Shareholders and Board of Directors of TELS Corporation and Subsidiaries:
We have audited the 1996 and 1995 consolidated financial statements and the 1996
and 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, 1996 and 1995, and the consolidated results
of their operations and their cash flows for the years 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 10, 1997
<PAGE>
Independent Auditors Report
---------------------------
To the Shareholders and Board of Directors of TELS Corporation and Subsidiaries:
We have audited the accompanying consolidated statements of operation,
stockholder's equity and cash flows of TELS Corporation and Subsidiaries for the
year ended December 31, 1994. In connection with our audit of the consolidated
financial statements, we also audited the financial statement schedule for the
year ended December 31, 1994. 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 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 consolidated financial statements of TELS Corporation and
subsidiaries referred to above present fairly, in all material respects, the
results of their operations and their cash flows for the year 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 financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
KPMG Peat Marwick L.L.P.
Salt Lake City, Utah
March 6, 1995
<PAGE>
<TABLE>
<CAPTION>
TELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
ASSETS 1996 1995
------ ---- ----
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents ............................. $ 31,980 $ 28,075
Investments ........................................... 62,399 56,617
Trade accounts receivable, less allowance for doubtful
accounts of $127,852 in 1996 and $105,788 in 1995 .. 736,771 1,044,128
Employee and other receivables ........................ 117,692 121,863
Inventories, net ...................................... 750,427 1,100,044
Prepaid expenses ...................................... 158,367 79,089
Deferred income taxes ................................. 195,368 118,900
Net assets - discontinued operations .................. -- 757,750
------------ ------------
Total current assets ......................... 2,053,004 3,306,466
Property and equipment, net ............................... 894,705 1,087,778
Software development costs, net ........................... 146,142 140,080
Intangible assets, net .................................... 199,144 279,162
Deferred income taxes ..................................... 657,709 314,850
Other assets .............................................. 161,673 130,832
------------ ------------
$ 4,112,377 $ 5,259,168
- ----------------------------------------------------------- ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Trade accounts payable ................................ $ 401,433 $ 313,002
Accrued expenses ...................................... 308,233 382,016
Accrued vacation ...................................... 92,716 115,404
Current portion of long-term debt ..................... 624,276 1,283,962
Deposits and advances ................................. 118,679 115,582
------------ ------------
Total current liabilities .................... 1,545,337 2,209,966
------------ ------------
Long-term debt, less current portion ...................... 235,739 346,195
------------ ------------
Commitments and contingencies (Notes 7 and 13)
Stockholders' equity
Common stock, $.02 par value,
Authorized 10,000,000 shares; issued and
outstanding 3,891,774 shares in 1996
and 3,892,274 shares in 1995 ....................... 77,835 77,825
Additional paid-in capital ............................ 4,226,532 4,231,567
Accumulated deficit ................................... (1,922,391) (1,495,210)
Deferred compensation ................................. (50,675) (111,175)
------------ ------------
Stockholders' equity ......................... 2,331,301 2,703,007
------------ ------------
$ 4,112,377 $ 5,259,168
- ----------------------------------------------------------- ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales ............................................... $ 6,728,816 $ 7,826,114 $ 6,275,779
Cost of goods sold ...................................... 3,842,466 3,870,004 2,300,232
----------- ----------- -----------
Gross profit ............................................ 2,886,350 3,956,110 3,975,547
Research and development expenses ....................... 98,906 362,698 255,804
Selling, general and administrative expenses ............ 3,097,796 3,666,076 3,030,423
----------- ----------- -----------
Operating income (loss) ............................... (310,352) (72,664) 689,320
Other income (expense):
Interest income ....................................... 10,765 6,876 24,919
Interest expense ...................................... (104,297) (36,193) (102,105)
Other, net ............................................ 25,810 73,897 2,723
----------- ----------- -----------
(67,722) 44,580 (74,463)
----------- ----------- -----------
Income (loss) from continuing operations before
income tax benefit (provision) ........................ (378,074) (28,084) 614,857
Income tax benefit (provision) .......................... 29,379 17,563 (54,666)
----------- ----------- -----------
Income (loss) from continuing operations ................ (348,695) (10,521) 560,191
Discontinued operations (Note 15):
Loss from discontinued operations (less applicable
income tax benefit of $44,148, $168,464 and
$69,051 respectively) ............................... (78,486) (327,018) (133,951)
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 ....................... (78,486) (519,957) (133,951)
----------- ----------- -----------
Net income (loss) ................................... $ (427,181) $ (530,478) $ 426,240
=========== =========== ===========
Net income (loss) per common and common equivalent share:
Income (loss) per share from continuing operations .... $ (.09) $ (.01) $ .14
Loss per share from discontinued operations ........... (.02) (.13) (.03)
----------- ----------- -----------
Net income (loss) ..................................... $ (.11) $ (.14) $ .11
=========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY for the years ended December 31, 1996,
1995 and 1994
Additional Net
Common paid-in accumulated Deferred Stockholders'
stock capital deficit compensation equity
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
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 4,014,909 (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
----------- ----------- ----------- ----------- -----------
Net loss .............................. -- -- (427,181) -- (427,181)
Amortization of deferred
compensation ........................ -- -- -- 60,500 60,500
Grant of 2,500 shares for stock bonuses 50 2,225 -- -- 2,275
Issuance of 6,000 shares upon
exercise of options ................ 120 2,580 -- -- 2,700
Cancellation of 8,000 shares ......... (160) (9,840) -- -- (10,000)
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1996 ......... $ 77,835 $ 4,226,532 $(1,922,391) $ (50,675) $ 2,331,301
=========== =========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS for
the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................... $(427,181) $(530,478) $ 426,240
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization .............................. 392,012 544,307 384,906
Impairment of assets ....................................... -- 172,253 --
Deferred income taxes ...................................... 35,479 17,563 (24,666)
Stock bonuses and amortization of deferred compensation .... 62,775 93,267 70,825
Cancellation of stock ...................................... (10,000) -- --
Loss on disposal of equipment .............................. (4,328) (1,864) (1,885)
Changes in operating assets and liabilities:
Receivables .............................................. 313,044 135,381 (306,948)
Inventories .............................................. 349,617 (288,979) (146,860)
Prepaid expenses, deposits and advances .................. (76,181) 73,277 (38,985)
Trade accounts payable and accrued expenses .............. (11,906) 59,264 170,380
Other assets and liabilities ............................. (29,312) (104,082) (19,512)
Noncash charges and working capital changes
of discontinued operations ............................... 329,177 (204,447) (4,797)
--------- --------- ---------
Net cash provided by (used in) operating activities 923,196 (34,538) 508,698
--------- --------- ---------
Cash flows from investing activities:
Net purchase of investments ..................................... (5,782) (2,467) (2,046)
Capital expenditures ............................................ (74,936) (264,846) (152,488)
Proceeds from disposal of equipment ............................. 1,900 9,200 7,650
Software development costs ...................................... (73,031) (118,321) (72,155)
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 ............. (151,849) (376,434) (394,333)
--------- --------- ---------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit agreement ...... (624,057) 518,244 (81,127)
Principal payments on long-term debt ............................ (146,085) (217,940) (608,133)
Proceeds from issuance of common stock .......................... 2,700 148,160 551,585
Financing activities of discontinued operations ................. -- 4,050 --
--------- --------- ---------
Net cash provided by (used in) financing activities (767,442) 452,514 (137,675)
--------- --------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS, Continued
for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents ...... $ 3,905 $ 41,542 $ (23,310)
Cash and cash equivalents at beginning of year ............ 28,075 172,399 195,709
------ ------- -------
Total cash and cash equivalents at end of year ......... $ 31,980 $ 213,941 $ 172,399
========= ========= =========
Cash and cash equivalents at end of year
Continuing operations .................................. 31,980 28,075 77,372
Discontinued operations ................................ -- 185,866 95,027
------- ------- ------
31,980 213,941 172,399
Supplemental disclosure of cash flow information:
Cash paid during the year for interest ................. $ 128,408 $ 114,434 $ 127,108
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 --
</TABLE>
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:
<TABLE>
<CAPTION>
1994
----
<S> <C> <C> <C> <C> <C> <C>
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
===========
</TABLE>
<PAGE>
TELS CORPORATION AND SUBSIDIARIES
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.
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").
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of TELS
Corporation and its 100% owned subsidiaries, DJ GunTEL, 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.
<PAGE>
TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, 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 certain 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 24 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
------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes,
(SFAS No. 109). 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 1996 and 1995
calculations because they are antidilutive. The weighted average
number of outstanding common and common equivalent shares used in this
computation was 3,888,564, 3,838,459, and 3,949,748 for 1996, 1995,
and 1994, respectively.
<PAGE>
TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. Summary of Significant Accounting Policies, Continued:
- -- ------------------------------------------------------
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 and disclosure of contingent 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 16% of the Company's trade accounts receivable are due
from two customers in the computer production and assembly industry.
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, 1996 and 1995
consisted of the following:
1996 1995
---- ----
Finished goods ............... $ 52,795 $ 129,355
Work-in-process .............. 235,483 283,937
Raw materials and supplies ... 584,013 746,684
Reserve for obsolete inventory (121,864) (59,932)
----------- -----------
$ 750,427 $ 1,100,044
=========== ===========
Inventories of discontinued operations consisted of finished goods
totaling $0 and $297,837, which is net of a reserve for obsolete
inventory of $0 and $55,000, at December 31, 1996 and 1995,
respectively.
3. Property and Equipment:
- -- -----------------------
Property and equipment of continuing operations at December 31, 1996
and 1995 consisted of the following:
1996 1995
---- ----
Land $ 35,380 $ 35,380
Building and improvements 477,855 475,975
Furniture and equipment 1,556,672 1,474,207
Equipment under capital lease 195,835 195,202
------------ ------------
2,265,742 2,180,764
Less accumulated depreciation and
amortization (1,371,037) (1,092,986)
---------- ----------
$ 894,705 $ 1,087,778
============ ==========
During the year ended December 31, 1995, the Company wrote-off
equipment with a net book value of $53,253.
<PAGE>
3. Property and Equipment, Continued:
- -- ----------------------------------
Property and equipment of discontinued operations at December 31, 1996
and 1995 consisted of the following:
1996 1995
---- ----
Buildings and improvements .................... $ -- $ 5,040
Furniture and equipment ....................... -- 63,710
------ ------
-- 68,750
Less accumulated depreciation and amortization -- (55,605)
------ ------
$ -- $ 13,145
======== ========
4. Software Development Costs:
- -- ---------------------------
Capitalized software development costs at December 31, 1996 and 1995
consisted of the following:
1996 1995
---- ----
Software development costs .. $ 402,835 $ 424,544
Less accumulated amortization (256,693) (284,464)
--------- ---------
$ 146,142 $ 140,080
========= =========
Amortization expense, totaled $66,969, $148,899 and $127,403 for the
years ended December 31, 1996, 1995 and 1994, respectively.
5. Intangible Assets:
- -- ------------------
Intangible assets of continuing operations at December 31, 1996 and
1995 consisted of the following:
1996 1995
---- ----
Non-compete agreements ...... $ 308,000 $ 308,000
Goodwill .................... 56,041 56,041
Organizational costs ........ 41,398 41,398
Other ....................... 12,511 9,715
Less accumulated amortization (218,806) (135,992)
--------- ---------
$ 199,144 $ 279,162
========= =========
Intangible assets of discontinued operations at December 31, 1996 and
1995 consisted of the following:
1996 1995
---- ----
Non-compete agreements ...... $ -- $ 34,167
Goodwill .................... -- 8,053
Organizational costs ........ -- 226
Customer list ............... -- 18,100
Trademarks .................. -- 6,786
Less accumulated amortization -- (66,332)
--------
$ -- $ 1,000
======== ========
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, 1996
and 1995, the carrying value of which approximates fair value,
consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C> <C> <C> <C>
Revolving line of credit payable to a bank, bearing interest at the
bank's index rate plus 2.0% (10.25% at December 31, 1996), interest due
monthly, principal due May 1997, collateralized by trade accounts
receivable and inventories. $ 456,932 $ 1,080,989
Mortgage note payable to a bank in monthly installments of $3,063,
including interest at the bank's index rate plus 1.5% (9.75% at
December 31, 1996), final payment of $184,898 due May 1998; collater-
alized by real property. 229,688 269,500
Note payable under non compete agreement, payable in quarterly
principal installments of $4,833, plus accrued
interest at 7%, remaining principal paid July 1996. - 19,333
Note payable under non compete agreement, payable in quarterly
principal installments of $8,333, plus accrued
interest at 7%, remaining principal paid July 1996. - 33,333
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 paid April 1996; collateralized by
equipment. - 7,500
Installment note payable to a corporation in monthly installments of
$335 through January 1999, plus accrued
interest at 7.9%, collateralized by an automobile. 7,355 10,655
Note payable under non compete agreement, payable in quarterly
principal installments of $1,000, through April 1997. Payments
suspended by Company until resolution of contract
terms. 7,000 7,000
</TABLE>
<PAGE>
6. Long-term Debt, Continued:
- -- --------------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C> <C> <C> <C>
Note payable under non compete 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. Payments
suspended by
Company until resolution of contract terms. $ 75,000 $ 75,000
Capital leases for equipment (Note 7) 84,040 126,847
---------- ------------
Total long-term debt 860,015 1,630,157
Less current portion (624,276) (1,283,962)
-------- ----------
Long-term debt, less current portion $ 235,739 $ 346,195
========= ============
</TABLE>
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, 1996 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, 1997. 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.
The aggregate principal maturities of long-term debt excluding capital
leases, for the years following December 31, 1996 are as follows:
Year ending December 31:
1997 $579,253
1998 40,533
1999 156,189
Long-term debt relating to discontinued operations at December 31, 1996
and 1995 consisted of the following:
1996 1995
---- ----
Note payable to a corporation, payable in monthly
installments of $450 through September 1996. $ - $ 4 ,050
======== =======
<PAGE>
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, 1996 and 1995, the gross amount of machinery, equipment
and related accumulated amortization recorded under capital leases were
as follows:
1996 1995
---- ----
Equipment under capital lease $ 195,202 $195,202
Less accumulated amortization (116,828) (76,767)
-------- --------
$ 78,374 $118,435
========== =======
The Company leases office space and equipment under noncancelable
operating lease agreements. Rent expense charged to continuing
operations was $181,397, $189,967, and $102,462 for the years ended
December 31, 1996, 1995, and 1994, 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, 1996 are:
Capital Operating
leases lease
Year ending December 31: --------- ---------
1997 $ 56,024 $ 243,953
1998 23,452 219,467
1999 18,662 195,567
2000 2,711 69,106
--------- ---------
Total minimum lease payments 100,849 $ 728,093
--------- =========
Less amount representing interest
(at rates ranging from 5.5% to (16,809)
---------
Present value of net minimum
capital lease payments 84,040
Less current installments of
obligations under capital leases (45,022)
Obligations under capital leases,
excluding current installments $ 39,018
=========
Rental expense charged to discontinued operations was $0, $53,564 and
$38,944 for the years ended December 31, 1996, 1995 and 1994,
respectively.
<PAGE>
8. Income Taxes:
- -- -------------
Income tax benefit (expense) attributable to income from continuing
operations consists of:
1996 1995 1994
---- ---- ----
Current:
Federal .. $ -- $ -- $(10,000)
State .... (6,100) -- (20,000)
-------- -------- --------
-- -- (30,000)
-------- -------- --------
Deferred:
Federal .. 32,879 10,832 (19,733)
State .... 2,600 6,731 (4,933)
-------- -------- --------
35,479 17,563 (24,666)
-------- -------- --------
Total $ 29,379 $ 17,563 $(54,666)
======== ======== ========
The income tax benefit (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:
1996 1995 1994
--------- --------- ---------
Computed expected tax benefit (expense) .. $ 128,545 $ 9,549 $(209,051)
Increase (decrease) in income
taxes resulting from:
Change in valuation allowance .......... -- 35,963 193,554
Graduated rate effect .................. -- -- 1,900
Effect of tax credits .................. -- (4,039) (4,760)
Officers' life insurance ............... (1,646) (1,945) (1,945)
State income taxes,
net of federal income tax benefit ...... (24,197) (3,253) (7,340)
Prior year taxes ....................... (53,944) -- --
Other, net ............................. (19,379) (18,712) (27,024)
--------- --------- ---------
Total income tax expense $ 29,379 $ 17,563 $ (54,666)
<PAGE>
8. Income Taxes, Continued:
- -- ------------------------
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1996 and 1995, are presented
below:
Continuing operations
---------------------
1996 1995
---- ----
Deferred tax assets:
Deferred revenue ................ $ 40,400 $ --
Accounts receivable ............. 65,200 40,300
Inventories ..................... 45,500 34,700
Accrued liabilities ............. 42,200 43,900
Intangible assets ............... 47,200 27,100
General business tax credits .... 124,000 124,500
AMT tax credit .................. 4,000 4,000
Jobs credit ..................... 4,400 4,400
Net operating loss carry forwards 702,527 338,000
----------- -----------
Deferred tax assets ........... 1,075,427 616,900
Less valuation allowance ...... (128,850) (128,850)
----------- -----------
Total deferred tax assets ..... 946,577 488,050
Deferred tax liability:
Property and equipment .......... (93,500) (54,300)
----------- -----------
Net deferred tax asset ............. $ 853,077 $ 433,750
=========== ===========
Discontinued operations
-----------------------
1996 1995
---- ----
Deferred tax assets:
Accounts receivable ................... $ -- $ 9,400
Inventories ........................... -- 8,200
Accrued liabilities ................... -- 10,300
Intangible assets ..................... -- 6,400
Accrued loss on discontinued operations -- 119,070
Net operating loss carry forward ...... -- 168,464
--------- --------
Total deferred tax assets ........... -- 321,834
Deferred tax liability:
Property and equipment ................ -- (12,700)
--------- ---------
Net deferred tax asset ................... $ -- $ 309,134
======= =========
<PAGE>
8. Income Taxes, Continued:
- -- ------------------------
The net deferred tax asset as of December 31, 1996 and 1995 is
reflected in the consolidated balance sheet as follows:
Continuing operations
---------------------
1996 1995
--------- ---------
Current deferred tax asset ......... $ 195,368 $ 118,900
Long-term deferred tax asset ....... 751,209 369,150
Long-term deferred tax liability ... (93,500) (54,300)
--------- ---------
$ 853,077 $ 433,750
========= =========
Discontinued operations
-----------------------
1996 1995
--------- ---------
Current deferred tax asset ..... $ -- $ 315,434
Long-term deferred tax liability -- (6,300)
--------- ---------
$ -- $ 309,134
========= =========
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.
<PAGE>
8. Income Taxes, Continued:
As of December 31, 1996, the Company has net operating loss carry
forwards, investment tax credit carry forwards and research and
experimentation credit carry forwards for federal income tax purposes
which expire as follows:
Research and
Net Investment experimentation
Expiration operating loss tax credit credit
date carry forwards carry forwards carry forwards
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 - -
2011 387,000 - -
------- ------- -------
$1,876,600 $12,500 $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, non employees, 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.
<PAGE>
9. Capital Stock, Continued:
- -- -------------------------
Stock Option and Bonus Plans, Continued
---------------------------------------
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, non employee 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.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for options granted under either plan and for other option
agreements. Consistent with FASB Statement 123, the Company calculated
the options fair value based on the grant dates and determined that
FASB Statement 123 would not result in a significant difference from
reported net income and earnings per share.
A summary of activity related to stock options is indicated in the
following table:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Weighted Weighted Weighted
Number average Number average Number average
of exercise of exercise of exercise
shares price shares price shares price
---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 875,000 $ 0.95 897,500 $ 0.93 616,000 $ 0.47
Granted ............................... 65,000 0.78 241,000 1.37 404,000 1.48
Exercised ............................. 6,000 0.45 20,000 0.63 7,000 0.45
Forfeited ............................. 188,250 1.23 243,000 0.82 115,500 0.45
Outstanding at end of year ............ 746,250 0.87 875,500 0.95 897,500 0.93
Options exercisable at year end 536,518 517,268 505,432
</TABLE>
<TABLE>
<CAPTION>
Number Weighted Weighted Number Weighted
Range of outstanding at average average exercisable at average
exercise December 31, remaining exercise December 31, exercise
prices 1996 contractual life price 1996 price
---------------- ---------------- ----------------- ------------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
$.45 to $.66 421,250 6.22 years $0.46 314,850 $0.45
$.86 to $1.11 45,000 9.19 years $0.92 1,668 $1.11
$1.21 to $1.59 280,000 7.84 years $1.48 220,000 $1.54
---------------- ------------- ---------------- ------------
746,250 $0.87 536,518 $0.90
</TABLE>
At December 31, 1996, 1,298,151 shares of the Company's common stock
are authorized for issuance under the stock option and bonus plans.
<PAGE>
9. Capital Stock, Continued:
- -- -------------------------
Stock Option and Bonus Plans, Continued
---------------------------------------
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
$20,000 was recognized in 1996 with respect to this grant. During 1996,
one of the directors returned the 8,000 shares he received. The Company
canceled those shares. 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, stock bonus awards were made to officers totaling
450,000 shares that vest over a five-year period commencing in 1993.
Compensation expense of $40,500, $40,500 and $40,500 was recognized in
1996, 1995 and 1994, respectively, with respect to this grant. The
remaining deferred compensation expense will be recognized over the
vesting period.
10. Related Party Transactions:
- --- ---------------------------
Included in employee and other receivables at December 31, 1996 and
1995, is a $39,302 uncollateralized note receivable due from the CEO of
the Company. The note bears interest at eight percent and is due on
demand.
Included in employee and other receivables at December 31, 1996 and
1995, are expense advances to the CEO of the Company of $34,097 and
$32,229 respectively. These expense advances bear no interest and are
due on demand.
Included in selling general and administrative expense are payments
totaling $12,756 in 1996 and $12,756 in 1995 to the CEO of the Company
for the Company's use of vehicles and property owned by the CEO.
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, 1996, 1995
and 1994 totaled $15,000, $15,000 and $21,000, respectively.
<PAGE>
12. Acquisitions:
- --- -------------
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 non
compete 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 March 31, 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 non compete 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:
- --- --------------
On February 2, 1996, the former owners of Hash Tech (Plaintiffs)filed a
complaint in the Superior Court for the County of Santa Clara, California,
against the Company and several of its officers and directors in their
individual and representative capacities, and also against HTI, a wholly owned
subsidiary of the Company. The Plaintiffs have alleged causes of action for
recision of a certain "Asset Purchase Agreement" dated March 31, 1994, civil
conspiracy, fraud, violation of California securities laws, common law gender
discrimination, and intentional infliction of emotional distress. The Company
and its officers deny any wrongdoing in regard to the above allegations. On
April 15, 1996, the Company filed a complaint in the Third Judicial District
Court of Salt Lake City, Utah, against the Plaintiffs for breach of "non compete
agreements" and breach of a "Severance Agreement" between the Plaintiffs and the
Company and on February 24, 1997, the company filed a Motion for Summary
judgment in this matter, which is awaiting oral argument. In addition, the
Company has filed a complaint with the American Arbitration Association, which
is being held pending the outcome of certain legal hearings. On April 9, 1996,
the Superior Court of Santa Clara, California, heard and denied the Company's
motion to compel arbitration. In July, 1996, the Company filed an appeal to
reverse this decision with the Sixth Appellate District in the Court of Appeal
of the State of California. On February 18, 1997, this appeal was denied.
<PAGE>
13. Contingencies, Continued:
- --- -------------------------
In addition to the aforementioned legal matter, 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 all
legal 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 1996. The same customer
accounted for 17% of the sales in 1995. No single customer accounted
for more than 10% of sales in 1994. Corporate assets are principally
fixed assets, capitalized software development costs, deferred tax
assets and other assets.
<PAGE>
14. Segment Information, Continued:
- --- -------------------------------
Financial information by segments is as follows:
1996 1995
---- ----
Net sales:
Telecommunications $ 2,326,640 $ 3,171,480
Computer production and assembly 4,393,965 4,588,313
Corporate and other 8,211 66,321
------------- ------------
$ 6,728,816 $ 7,826,114
========== ==========
Operating income (loss):
Telecommunications $ 786,517 $ 900,112
Computer production and assembly 123,910 570,086
Corporate and other (1,220,779) (1,542,862)
---------- -----------
$ (310,352) $ (72,664)
=========== ============
Identifiable assets:
Telecommunications $ 574,079 $ 829,906
Computer production and assembly 1,039,365 1,429,594
Corporate and other 2,498,933 2,241,918
---------- ----------
$ 4,112,377 $ 4,501,418
========== ==========
Depreciation and amortization expense:
Telecommunications $ 186,344 $ 287,574
Computer production and assembly 147,531 139,822
Corporate and other 58,137 116,911
------------ -----------
$ 392,012 $ 544,307
=========== ===========
Capital expenditures:
Telecommunications $ 16,307 $ 21,447
Computer production and assembly 24,401 141,852
Corporate and other 33,688 101,547
------------ -----------
$ 74,396 $ 264,846
============ ============
<PAGE>
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 was due and
payable 30 days from the contract date, one-third was due and payable
60 days from the contract date and the remaining amount was due and
payable 80 days from the contract date. As of December 31, 1996, the
receivable had been either collected or fully reserved.
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 of As of
December 31, 1996 December 31, 1995
---------------------- ----------------------
Assets:
Current assets:
Cash and cash equivalents..... $ -- $ 185,866
Accounts receivable .......... -- 247,973
Employee and other receivables -- 26,974
Inventories .................. -- 297,837
Deferred income taxes ........ -- 315,434
Prepaid expenses ............. -- 168,121
----------- -----------
Total current assets ...... -- 1,242,205
Net property, plant and equipment -- 13,145
Other noncurrent assets .......... -- 9,741
----------- -----------
Total assets .............. $ -- $1,265,091
============ =========
Current liabilities:
Accounts payable ................. $ -- $ (92,070)
Accrued expenses ................. -- (96,955)
Accrued vacation ................. -- (11,201)
Deposits and advances ............ -- (4,433)
Accrued loss on disposal ......... -- (292,332)
Current portion of long-term debt -- (4,050)
---------
Total current liabilities ..... -- (501,041)
Deferred income taxes ..... -- (6,300)
---------
Total liabilities .... -- (507,341)
------------- ---------
Net assets - discontinued operations $ -- $ 757,750
============= =========
Revenues of the discontinued operations were $0, $3,312,300 and
$2,916,231 for the years ended December 31, 1996, 1995 and 1994,
respectively.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
- ------------------------------------------------------------
Information regarding directors and officers of the Company is
incorporated by reference from "Information Relating to Directors, Nominees, and
Executive Officers" in the 1997 Proxy Statement to be delivered to shareholders
in connection with the Annual Meeting of Shareholders to be held on June 2,
1997.
Information required by item 405 of Regulation S-K is incorporated by
reference from "Compliance with section 16(a) of the Securities Exchange Act of
1934" in the 1997 Proxy Statement to be delivered to shareholders in connection
with the Annual Meeting of Shareholders to be held on June 2, 1997.
Item 11. Executive Compensation
- -------------------------------
Information regarding this item is incorporated by reference from
"Executive Compensation" in the 1997 Proxy Statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders to be held on
June 2, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
Information regarding this item is incorporated by reference from
"Security Ownership of Certain Beneficial Owners and Management" in the 1997
Proxy Statement to be delivered to shareholders in connection with the Annual
Meeting of Shareholders to be held on June 2, 1997.
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
Information regarding this item is incorporated by reference from
"Certain Transactions" in the 1997 Proxy Statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders to be held on
June 2, 1997.
<PAGE>
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.
--------------------------------------------------------------------
Reports of Independent Accountants.
Consolidated Balance Sheets as of December 31, 1996 and 1995.
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994.
Consolidated Statements of Changes in Stockholders'Equity for the years
ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994.
Consolidated Notes to Financial Statements for the years ended
December 31, 1996, 1995 and 1994.
2. Financial Statements Schedules - Included in Part IV of this report:
-----------------------------------------------------------------------
Schedule II - 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.
-------------------------------------------------
No reports on Form 8-K were filed in the 4th quarter of 1996.
<PAGE>
<TABLE>
<CAPTION>
TELS CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(of Continuing Operations)
Years ended December 31, 1996, 1995 and 1994
Other
additions
Additions reserves Deductions -
Balance, charged to from doubtful Balance,
beginning costs and acquired accounts end of
Allowance for doubtful receivables of year expenses companies written off year
- ------------------------------------------- ------------- -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Years ended December 31:
1996 $105,788 $ 10,196 $ - $35,130 $ 80,854
------------- -------------- ------------ -------------- ------------
1995 $122,502 $ 13,331 $ - $30,045 $105,788
------------- -------------- ------------ -------------- ------------
1994 $ 59,930 $ 65,242 $19,032 $21,702 $122,502
------------- -------------- ------------ -------------- ------------
</TABLE>
<TABLE>
<CAPTION>
Other
additions
Additions reserves Deductions -
Balance, charged to from warranty Balance,
beginning costs and acquired repair end of
Warranty reserve of year expenses companies written off year
- ------------------------------------- -------------- ------------ -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Years ended December 31:
1996 $17,976 $ 2,400 $ - $ - $20,376
------------- -------------- ------------ -------------- -------------
1995 $10,000 $ 7,976 $ - $ - $17,976
------------- -------------- ------------ -------------- -------------
1994 $16,752 $ - $ - $ 6,752 $10,000
------------- -------------- ------------ -------------- -------------
</TABLE>
<TABLE>
<CAPTION>
Other
additions
Additions reserves
Balance, charged to from Deductions - Balance,
beginning costs and acquired inventory end of
Inventory reserve of year expenses companies written off year
- ------------------------------------------- ------------- -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Years ended December 31:
1996 $ 59,932 $61,932 $ - $ - $121,864
------------- -------------- ------------ -------------- ------------
1995 $ 52,932 $ 7,000 $ - $ - $ 59,932
------------- -------------- ------------ -------------- ------------
1994 $ 6,500 $46,432 $ - $ - $ 52,932
------------- -------------- ------------ -------------- ------------
</TABLE>
<PAGE>
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 14, 1997 By: /s/John L. Gunter
- ------------------ ------------------------------
Date John L. Gunter, CEO
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 14, 1997
- ----------------- Directors, and CEO
John L. Gunter (Principal Executive Officer)
/s/Willard H. Gardner Director and Secretary April 14, 1997
- ---------------------
Willard H. Gardner
/s/Stephen M. Nelson Director, President and April 14, 1997
- -------------------- Treasurer
Stephen M. Nelson
/s/Deborah Walford Controller April 14, 1997
- ------------------
Deborah Walford
<PAGE>
(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.
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, filed on 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.
23.1 Consent of Certifying Accountants filed as Exhibit 23 in connection to
the Company's Registration Statements on Form S-8, SEC File No.'s
333-17149, 333-17163, and 333-17169, effective December 2, 1996 and
incorporated herein by 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, 1996,
Form 10-K
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the incorporation by reference in the registration statement of
Tels Corporation on Form S-8, (File No. 333-17149, 333-17163, 333-17169) of our
report dated April 10, 1997, on our audit of the financial statements and
financial statement schedule of TELS Corporation as of December 31, 1996 and
1995, and for each of the two years in the period ended December 31, 1996, which
report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Salt Lake City, Utah
April 14, 1997
ACCOUNTANTS' CONSENT
--------------------
We consent to the incorporation by reference in the registration statement of
Tels Corporation on Form S-8 of the TEL electronics, Inc. 1994 Outside Directors
Plan, the 1993 TEL electronics, Inc. Stock Option and Incentive Plan, the 1984
Incentive Option Plan for Key Employees, the 1984 Non-Qualified Stock Option
Plan, and the 1984 Executive Stock Bonus Plan of our report dated March 6, 1995,
related to the consolidated statements of operation, stockholders' equity, and
cash flows of TELS Corporation and subsidiaries for the year ended December 31,
1994, and related schedule, which report appears in the December 31, 1996 annual
report on Form 10-K of TELS Corporation.
KPMG Peat Marwick L.L.P.
Salt Lake City, Utah
April 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> Article 5 Financial Data Schedule for 1996 10-K
</LEGEND>
<CIK> 0000756767
<NAME> TELS Corporation
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 31,980
<SECURITIES> 62,399
<RECEIVABLES> 982,315
<ALLOWANCES> 127,852
<INVENTORY> 750,427
<CURRENT-ASSETS> 2,053,004
<PP&E> 2,265,742
<DEPRECIATION> 1,371,037
<TOTAL-ASSETS> 4,112,377
<CURRENT-LIABILITIES> 1,545,337
<BONDS> 235,739
0
0
<COMMON> 77,835
<OTHER-SE> 2,253,466
<TOTAL-LIABILITY-AND-EQUITY> 4,112,377
<SALES> 6,728,816
<TOTAL-REVENUES> 6,728,816
<CGS> 3,842,466
<TOTAL-COSTS> 7,039,168
<OTHER-EXPENSES> 36,574
<LOSS-PROVISION> 10,196
<INTEREST-EXPENSE> 122,698
<INCOME-PRETAX> (378,074)
<INCOME-TAX> (29,379)
<INCOME-CONTINUING> (348,695)
<DISCONTINUED> (78,486)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (427,181)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>