U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission File No. 0-12993
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TELS Corporation
(Name of small business issuer in its charter)
UTAH 87-0373840
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
705 East Main Street, American Fork, Utah 84003
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (801)756-9606
Securities registered under Section 12 (b) of the Act:
"None"
Securities registered under Section 12 (g) of the Act:
Common Stock, $.02 par value
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES X NO
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were $4,748,304.
The aggregate market value of the voting and non voting common equity held by
non-affiliates of the registrant as of March 31, 1999, was approximately
$428,100.
The issuer had issued and outstanding 3,891,819 shares of its Common Stock on
March 31, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Those sections of portions of the registrant's 1999 Proxy Statement for its
Annual Meeting of Shareholders to be held on June 7, 1999, are incorporated by
reference into Part III hereof.
<PAGE>
PART I
Item 1. Business
Introduction
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TELS Corporation, ("TELS"TM, "Company" or "Registrant"-OTC Bulletin
Board: "TELS") is a Utah Corporation, incorporated in February, 1981, with its
principal executive offices at 705 East Main Street, American Fork, Utah, 84003,
telephone number (801) 756-9606.
MICROMEGA CORPORATIONTM ("MICROMEGA") 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. TM, 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 operated 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 to Micro
Station Corporation on March 31, 1996).
Hash Tech, Inc. TM ("HTI"TM), 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.TM ("TEL"TM), 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
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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 18 years, 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, contract
manufacturing and assembly operations, provide comprehensive full service
turnkey or consignment contract manufacturing services. The Company's segment
information is provided in Note 14 of the financial statements.
<PAGE>
Products and Services
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The Company distributes its telecommunication products through dealers,
distributors, management companies and national account chains throughout the
United States.
INN-FORM/XL, INN-FORM PLUS . 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 and is ideal
for larger hotels and motels with gift shops, etc., or other business needs.
WIN-SENSETM. This Windows-based business call accounting PC software
system, introduced in 1997, has been designed to compete favorably with software
products in the telephone call accounting business applications market.
WIN-SENSE has graphical representations in full color, with intuitive commands
and processes.
The INN-FORM/XL and WIN-SENSETM products 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 54% of consolidated sales for 1998. The
manufacturing and assembly operation accounted for approximately 45% of
consolidated sales for 1998.
TEL-SENSE and TEL-SENSE/K. 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-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.
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.
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 12% of consolidated net sales for 1998.
<PAGE>
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 plans to continue its travel program, 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. The Company expects its telecommunications products
and/or enhancements will need to be further developed to meet the changes
expected in 1999 and beyond. The Company expects a continuing demand for its
products as these future changes occur.
Research and Development
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The Company spent approximately $160,000 and $184,000, including certain
capitalized expenses, on research and development activities in the years ended
December 31, 1998 and 1997, respectively. All research and development expenses
for the Company originated from MICROMEGA.
TELS formed and operates MICROMEGA 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 1998.
Competition
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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 and
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.
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
provide their own manufacturing capabilities internally within their own
<PAGE>
operations. There can be no assurance that the Company will be able to compete
successfully with these companies in the future. Since 1995, in an effort to
modernize its operation, the Company continues to spend considerable effort and
resources in maintaining 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 continue to enhance the Company's
ability to compete in a changing manufacturing environment.
Changing Marketplace
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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
wireless, cable 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 processes in order to meet the needs of
its customers in a rapidly changing technology and product-driven marketplace.
There can be no assurance that the Company's contract manufacturing operations
will be able to compete in its marketplace or to provide services which will
generate a profitable level of sales for the Company.
Competitive Strategy
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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 the end-user's price 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 products will not increase.
TELS' stand-alone 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
<PAGE>
(smaller than an average size telephone) provides a competitive advantage over
the larger and more bulky equipment marketed by many competitors.
Proprietary Rights
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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
microprocessor memories or is available on protected, but standard PC 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 its products and software it develops 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.
Manufacturing and Supply
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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
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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
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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
<PAGE>
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
manufacturers, 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.
Employees
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As of December 31, 1998, the Company had 60 full-time employees.
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 completed in 1988.
This facility houses the Company's telecommunication, administrative and
research and development offices. The Company leases a 15,000 square foot space
in a building located in Santa Clara, California which houses the HTI
manufacturing operation. Management believes that these facilities are adequate
for operations and production needs at current production levels.
Item 3. Legal Proceedings
Ameriquest Technologies, Inc. v. Microstation Corporation and Stephen M.
Nelson, (11th Judicial Circuit Court, Dade County, Florida, Case No. 97-11878
CA20, filed May 28, 1997). The Complaint alleges causes of action for breach of
contract, account stated, open account, and unjust enrichment/breach of implied
contract. Plaintiff alleges that Defendant Stephen M. Nelson, President and
Director of the Company, executed a personal guarantee guaranteeing to pay
Plaintiff for any indebtedness incurred by Defendant Micro Station Corporation
(purchaser of certain assets from D. J. GunTEL, Inc. dba Micro Station, a
wholly-owned subsidiary of the Company) in favor of Plaintiff and that Nelson
has breached the alleged personal guarantee in that he has failed and refused to
pay for the goods sold. Plaintiff also alleges that it agreed with Defendant
Micro Station Corporation to a resulting balance of $37,000 before instituting
this action and that Defendants have not made any payment toward the outstanding
amount due. Plaintiff requests compensatory damages, costs, expenses,
prejudgment interest, reasonable attorney's fees, and other appropriate relief
of an unspecified amount.
Defendant Nelson filed his Answer denying the allegations and responded to
Plaintiff's Motion for Summary Judgment and filed a Cross-Motion for Summary
Judgment. On August 25, 1998, the Court granted Plaintiff's Motion for Summary
Judgment and denied Nelson's Cross-Motion for Summary Judgment. On October 21,
1998, Nelson filed a Notice of Appeal, challenging the trial court's denial of
Nelson's Cross-Motion for Summary Judgment and the trial court's decision to
grant Plaintiff's Motion for Summary Judgment and deny Nelson's Cross-Motion for
Summary Judgment. The appellate case has been assigned to the Third District
Court of Appeals.
Ameriquest has attempted to domesticate its judgment in Utah by filing an
action in Third District Court for Salt Lake County, purportedly for purposes of
pursuing Nelson's assets in Utah. Nelson has answered the Complaint. The Company
<PAGE>
has agreed to indemnify Nelson for any damage awards that become final and
nonappealable. In view of the uncertainties inherent in litigation, the Company
is unable to express any judgments as to the outcome of this matter.
Market Listing
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Effective September 30, 1998, pursuant to a hearing on July 23, 1998, by a
Nasdaq Listing Qualifications Panel, a decision was made to delist the Company's
securities from the Nasdaq Small Cap Market. The hearing by the Panel was held
at the Company's request to consider the issues pertaining to the Company's
common stock not being in compliance with the minimum bid price requirement of
$1.00. Subsequent to this decision by Nasdaq, the Company is currently listed on
the OTC Bulletin Board with the symbol "TELS". The OTC Bulletin Board is run by
the National Association of Securities Dealers ("NASD") and is maintained by
Nasdaq as an electronic trade-and-quote-reporting forum.
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 1998.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Price Range of Common Stock
Until September 30, 1998, the Company's common stock traded on the Nasdaq
SmallCap Market. Effective September 30, 1998, the Company's common stock
started trading on The NASD OTC Bulletin Board 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.
Quotations represent actual transactions in NASD and Nasdaq's quotation system
but do not include retail markup, markdown, or commission.
1998 High Low 1997 High Low
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First Quarter $ .50 $ .34 First Quarter $ .75 $ .50
Second Quarter .58 .41 Second Quarter .56 .25
Third Quarter .59 .25 Third Quarter .38 .22
Fourth Quarter .31 .06 Fourth Quarter .44 .25
Approximate Number of Equity Security Holders:
As of March 31, 1999, there were 1,031 shareholders of record of the
Company's 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 July 11, 1997, 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.
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<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto, all included elsewhere
herein.
Results of Operations
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Consolidated net sales for 1998 decreased 23% to $4,748,304, a decrease of
$1,446,756 when compared to consolidated net sales of $6,195,060 for 1997. The
decrease in sales is due primarily to a significant decrease of sales activity
in the contract manufacturing division where sales decreased by $1,351,581. In
1998 the Company had one major customer in the contract manufacturing segment
who reduced its orders with the Company by over 60%, or approximately $900,000,
compared to 1997. This reduction occurred in the last half of 1998. The Company
was materially dependent on its business with this customer and other customers
who were closely aligned with the computer chip industry. This reduction has had
a major impact on the revenues and profitability of the Company. Efforts are
being made to replace revenues attributable to this customer by developing new
customers. The Company expects it will take at least nine months to generate
sufficient replacement revenues.
In addition to the decrease in sales in the manufacturing division, sales
of the Company's call accounting products also decreased. In 1998, sales of
telecommunications products decreased 4% or $102,420 to $2,595,053 compared to
$2,697,473 for 1997. This decrease in sales in the telecommunications product
sector is attributable to decreased sales from the Company's dealer distribution
channel and national accounts, and was offset somewhat by increased sales of the
business call accounting products. Due to planned product enhancements, the
Company anticipates that sales to national accounts and dealers, and sales of
business call accounting systems, will increase in 1999 and account for the
majority of sales in the telecommunications division in 1999.
Consolidated gross profit decreased 30% or $999,102 in 1998, when compared
to 1997. The gross profit of $2,294,130 for 1998, represented 48% of sales. In
1997, gross profit of $3,293,232 represented 53% of sales. The decrease in gross
profit as a percentage of sales is due to the change in the sales mix from 1997
to 1998 and reductions in sales in the manufacturing business. In 1998, sales in
the telecommunications sector accounted for 55% of total sales, compared to 44%
of total sales for 1997. Because the telecommunication products have a higher
gross profit margin than products in the manufacturing sector, the Company
believes that its consolidated gross profit margin will normally be higher when
sales from the telecommunication products increase over those in the
manufacturing sector. However, due to the major decline in net sales in the
manufacturing sector, including the loss of higher margin customers, the gross
profit in the manufacturing sector also decreased by 77% or $985,317 causing the
overall consolidated gross margin to decrease. The gross profit for the
manufacturing sector of $302,497 for 1998, represented 14% of sales, whereas, in
1997, gross profit of $1,287,814 represented 37% of sales. In 1999, the Company
anticipates that the consolidated gross profit percentage will be consistent
with 1998 results.
Consolidated research and development expenditures consisted of several
components in 1998. The consolidated expense of $155,727 for 1998 consists of
$1,182 for current expenses and $154,545 for amortization of projects which were
capitalized in prior years. In addition to these costs currently being expensed,
the Company also spent $89,800 in 1998 and $115,705 in 1997, 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 increased 7% to
$3,164,502 for 1998, when compared to $2,970,693 for 1997. This increase in 1998
is attributable to non-recurring activities related to legal expenses and
investment banking services. In 1998 the Company expended funds to procure
funding for acquisitions and legal fees involving litigation. Management
anticipates that it will need to make a concerted effort to reduce expenses in
1999 in certain operations of the Company as it continues to focus its efforts
toward increased profitability. As a percentage of consolidated net sales,
selling, general and administrative expenses were 66% in 1998, compared to 48%
in 1997.
For 1998, the Company reported a net loss from operations of $(1,993,963)
or $(.51) per share, compared to a net income from operations of $96,659 for
1997, or $.02 per share. This significant decrease in earnings is primarily
attributable to the decline in sales related to contract manufacturing as well
as to increases in the administrative expenses, primarily legal and acquisition
expenses. Additionally, as of December 31, 1998, the Company decreased its net
deferred tax asset to zero by increasing the valuation allowance to fully offset
the net deferred tax asset of $840,886 in 1999. The deferred tax asset is
primarily the result of net operating loss carry forwards. The Company believes
that it is more likely than not that it will not be able to realize the benefit
of the net deferred tax asset.
Liquidity and Capital Resources
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At December 31, 1998, the Company reported that current liabilities of
$1,477,807 exceeded current assets of $1,346,000 by $131,807. This is a decrease
in working capital of $683,897 when compared to working capital of $552,090 at
the end of 1997. This decrease in working capital is due to decreases in
accounts receivable of $162,382, and inventories of $349,539 and to increases in
accounts payable of $125,626 and increases in accrued expenses of $68,102. The
Company also used cash provided from long-term debt of $156,907, and redemption
of investments of $72,198, to purchase equipment of $63,214 and for capitalized
software development costs of $90,252.
The Company decreased its borrowing on a line of credit by $14,563 in 1998
and increased its long-term debt by $156,907 from $843,726 at the end of 1997.
In 1998 the Company made an adjustment to inventory of $210,000 to decrease its
inventory level to reflect the lower of cost or market of its remaining
inventory. The Company has violated certain requirements of its debt agreements
relating to maintaining minimum cash flow levels. The Company's lender has
declared the Company in default, but has granted a forbearance on the default
and has allowed the Company to remain in violation of the covenants. The lender
has put the Company on notice that its $750,000 line of credit will not be
renewed in July, 1999, when the current loan matures. If the Company is not able
to find replacement financing, the Company may not be able to repay the line of
credit. Recently the Company has not been able to make timely payments to its
trade creditors, predominantly in the contract manufacturing division. The
Company has past due payables in the amount of $148,000. Certain vendors have
suspended parts deliveries to the manufacturing division. Nevertheless, the
Company has been able to make its deliveries on time and no orders have been
canceled. The Company is currently seeking sources of working capital financing
sufficient to fund delinquent balances and meet ongoing trade obligations and to
find additional financing through investment equity or subordinated debt, which
will be needed to fund operations, future acquisitions and final development and
marketing of new products under consideration. If additional funding cannot be
obtained from these sources, the Company believes it can mortgage assets and/or
factor receivables to obtain funding necessary to pay its ordinary business
obligations.
<PAGE>
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.
Year 2000 (Y2K) Computer Systems Compliance
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Many older computer software programs refer to years in terms of their
final two digits only. Such programs may interpret the year 2000 to mean the
year 1900 instead. If not corrected, those programs could cause date-related
transaction failures. The Company is continuing its efforts to address this
concern. A project team is performing assessments of all internal computer
systems and developing and implementing plans to correct the problems. We expect
these projects to be successfully completed during the second and third quarters
of 1999. External and internal costs specifically associated with modifying
internal use software for Year 2000 compliance are expensed as incurred. To
date, we have spent approximately $25,000 on this project. Remaining costs to be
incurred in 1999 to fix Year 2000 problems are estimated at approximately
$40,000. We do not expect the costs relating to Year 2000 remediation to have a
material effect on our results of operations or financial condition. The Company
has evaluated its existing accounting software for compliance with the year 2000
and has determined that an upgrade to the existing accounting system will be
required. This upgrade has been purchased and will be installed in the second
quarter of 1999.
Our Proprietary Call Accounting Products (INN-FORMXL, INN-FORMPlus,
INN-FORM Express and TEL-SENSE) are Year 2000 compliant. The hardware,
operating system and software are all unconcerned with the year portion of the
date in that they do not store the year nor perform any computations based on
year. Our PC-based products (TEL-SENSE PCS, WIN-SENSE and INN-SURE) are also
Year 2000 complaint for the same reasons as given above: they do not base
computations on the year. However, the PC that they may be running on may or may
not be compliant. PCs are composed of various components (CPU, real time clock,
BIOS, etc.)some of which may use dates as part of their basic functioning and
may be vulnerable to the Y2K problem.
Year 2000 problems could affect research and development, production,
distribution, financial, administrative and communication operations. Systems
critical to our business which have been identified as non-Year 2000 compliant
are either being replaced or corrected through programming modifications. In
addition to our in-house efforts, we intend to continue asking vendors, major
customers, service suppliers, communications providers and banks whose systems
failures potentially could have a significant impact on our operations to verify
their Year 2000 readiness and test such systems where appropriate and possible.
As part of our contingency plan, we are developing plans for those areas
that are critical to TELS' business such as scheduling and/or purchase of
critical inventory parts, developing relationships with multiple vendor sources,
implementing additional backup procedures and printing and storing critical
documentation. Based on our current plans and efforts to date, we anticipate
that our contingency plan will be completed in the third quarter of 1999 and
that the Year 2000 problems will not have a material effect on our results of
operations or financial condition.
The above expectations are subject to uncertainties. For example, if we are
unsuccessful in identifying or fixing all Year 2000 problems in our critical
operations, or if we are affected by the inability of suppliers or major
customers to continue operations due to such a problem, our results of
operations or financial condition could be materially impacted.
<PAGE>
The total costs that we incur in connection with the Year 2000 problems
will be influenced by our ability to successfully identify Year 2000 systems'
flaws, the nature and amount of programming required to fix the affected
problems, the related labor and/or consulting costs for such remediation, and
the ability of third parties with whom we have business relationships to
successfully address their own Year 2000 concerns. These and other unforeseen
factors could have a material adverse effect on our results of operations or
financial condition.
Effects of Inflation
- --------------------
The Company's operations have not been significantly affected by inflation
during the periods covered in this report.
Outlook: Issues and Uncertainties
- ---------------------------------
The 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 which might impact trends in the Company's results of operations;
(iv) anticipated working capital or other cash requirements and inability to
obtain financing; (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.
The Company's net sales of telephone call accounting systems have improved
in the first quarter of 1999, increasing approximately 15% over the first
quarter of 1998, and management believes that this trend will continue for the
foreseeable future. The expense reductions implemented in the latter part of
1998 and the first quarter of 1999, particularly in the manufacturing division,
coupled with the increased sales in telephone call accounting, are expected to
improve the Company's operating results in the first and second quarters of
1999.
<PAGE>
The Company's net sales decreased by over 23% from net sales in 1997.
Additionally, the Company has incurred a significant loss in the current year
creating negative cash flows from operating activities for 1998 and has a
working capital deficit at December 31, 1998. A significant portion of the loss
for 1998 is attributable to the decline in revenues in the contract
manufacturing division where the company was reliant on revenue from one
customer which reduced its orders with the Company by over 60% or approximately
$900,000. Additionally, the Company's line of credit which is due July, 1999,
contains cash flow covenants that, if not complied with, may result in the
acceleration of repayment. The Company has been notified that it is in violation
of its debt covenants and no waiver has been obtained. Replacement of this line
of credit by another financial institution cannot be assured. As of December 31,
1998, the Company's Certifying Accountants have stated that these factors raise
substantial doubt about the Company's ability to continue as a going concern.
Failure to accomplish management's plans in 1999 and to generate positive
operating cash flow could result in further erosion of the Company's financial
condition and failure to meet its financial obligations.
The Company's business and products may be significantly influenced by the
constantly changing body of regulatory laws and regulations, which require that
certain regulatory standards be met and impose liability for the failure to
comply with such standards. While the Company endeavors at each of its
facilities to assure compliance with regulatory laws and regulations, there can
be no assurance that the Company's operations or activities, or historical
operations by others at the Company's locations, will not result in civil or
criminal enforcement actions or private actions that could have a material
adverse effect on the Company.
The Company's future operating results depend in part upon its ability to
retain and attract qualified engineering, manufacturing, technical, sales, and
support personnel for its operations. Competition for such personnel is intense,
and there can be no assurance that the Company will be successful in attracting
or retaining such personnel. The failure to attract or retain such persons could
materially adversely affect the Company's business and results of operations.
The Company's success will depend in significant part upon the continued
contributions of its officers and key personnel, many of whom would be difficult
to replace. The loss of any key person could have a material adverse effect on
the business, financial condition, and results of operations of the Company.
Impact of Recently Issued Accounting Standards
- ----------------------------------------------
The Accounting Standards Executive Committee (AcSEC) issued Statement of
Position No. 98-1 (SOP 98-1), Accounting for the Cost of Computer Software
Development or Obtained for Internal Use. The SOP was issued to address
diversity in practice regarding whether and under what conditions the costs of
internal-use software should be capitalized. SOP 98-1 is effective for financial
statements for years beginning after December 15, 1998. The Company is currently
evaluating the impact SOP 98-1 will have on its financial statements, if any.
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.
<PAGE>
Item 7. Financial Statements and Supplementary Data.
The following constitutes a list of Financial Statements and related notes
as required in Part II of this report.
Report of Independent Accountants.
Consolidated Balance Sheet as of December 31, 1998.
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997.
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997.
Consolidated Notes to Financial Statements for the years ended
December 31, 1998 and 1997.
Item 8. Disagreements on Accounting and Financial Disclosures.
None.
(THIS SPACE INTENTIONALLY LEFT BLANK)
<PAGE>
Report of Independent Accountants
To the Shareholders and Board of Directors of TELS Corporation and Subsidiaries:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows present fairly, in all material respects, the financial position of TELS
Corporation and its subsidiaries (the "Company") at December 31, 1998, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company suffered a significant loss from operations in
1998, has an accumulated deficit and has a net working capital deficit that,
along with other factors, raises substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Salt Lake City, Utah
April 14, 1999
<PAGE>
<TABLE>
<CAPTION>
TELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1998
ASSETS 1998
------ ----
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents .................................. $ 63,326
Trade accounts receivable, less allowance for doubtful
accounts of $81,586 ..................................... 608,802
Employee and other receivables ............................. 65,514
Inventories, net ........................................... 446,416
Prepaid expenses ........................................... 161,942
-------
Total current assets .............................. 1,346,000
Property and equipment, net .................................... 627,085
Software development costs, net ................................ 124,922
Intangible assets, net ......................................... 40,974
Other assets ................................................... 208,495
-------
$ 2,347,476
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Trade accounts payable ..................................... $ 420,270
Accrued expenses ........................................... 180,308
Accrued vacation ........................................... 131,887
Current portion of long-term debt .......................... 601,069
Deposits and advances ...................................... 144,273
-------
Total current liabilities ......................... 1,477,807
---------
Long-term debt, less current portion ........................... 385,000
-------
Commitments and contingencies (Notes 7 and 13)
Stockholders' equity
Common stock, $.02 par value,
Authorized 50,000,000 shares; issued and
outstanding 3,891,819 shares ............................ 77,835
Additional paid-in capital ................................. 4,226,532
Accumulated deficit ........................................ (3,819,698)
----------
Stockholders' equity .............................. 484,669
-------
$ 2,347,476
===========
The accompanying notes are an integral part
of these consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1998 and 1997
1998 1997
---- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales ........................................ $ 4,748,304 $ 6,195,060
Cost of goods sold ............................... 2,454,174 2,901,828
--------- ---------
Gross profit ..................................... 2,294,130 3,293,232
Research and development expenses ................ 155,727 140,448
Selling, general and administrative expenses ..... 3,164,502 2,970,693
--------- ---------
Operating income (loss) ........................ (1,026,099) 182,091
---------- ---------
Other income (expense):
Interest income ................................ 4,838 17,934
Interest expense ............................... (124,616) (122,060)
Other, net ..................................... -- 50,895
--------- ---------
(119,778) (53,231)
--------- ---------
Income (loss) before income tax provision ........ (1,145,877) 128,860
Income tax provision ............................. (848,086) (32,204)
--------- ---------
Net income (loss) ............................ $(1,993,963) $ 96,656
=========== ===========
Net income (loss) per share:
Basic earnings (loss) per share (Note 12) ...... $ (.51) $ .02
=========== ===========
Diluted earnings (loss) per share (Note 12) .... $ (.51) $ .02
=========== ===========
Basic and diluted weighted average number
of shares outstanding .......................... 3,891,819 3,891,819
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
TELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1998 and 1997
Additional
Common paid-in Accumulated Deferred Stockholders'
stock capital deficit compensation equity
----- ------- ------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 77,835 $ 4,226,532 $(1,922,391) $ (50,675) $ 2,331,301
Net income ................. -- 96,656 -- 96,656
Amortization of deferred
compensation ............. -- -- -- 40,500 40,500
------ --------- --------- ------ ------
Balance at December 31, 1997 77,835 4,226,532 (1,825,735) (10,175) 2,468,457
Net loss ................... -- -- (1,993,963) -- (1,993,963)
Amortization of deferred
compensation ............. -- -- -- 10,175 10,175
------ --------- --------- ------ ------
Balance at December 31, 1998 $ 77,835 $ 4,226,532 $(3,819,698) $ -- $ 484,669
======== =========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
TELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the years ended December 31, 1998 and 1997
1998 1997
---- ----
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,993,963) $ 96,656
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization .............................. 426,866 396,311
Deferred income taxes ...................................... 840,886 12,191
Stock bonuses and amortization of deferred compensation .... 10,175 40,500
Changes in operating assets and liabilities:
Receivables .............................................. 162,383 17,766
Inventories .............................................. 349,539 (45,528)
Prepaid expenses ......................................... 44,181 (22,164)
Trade accounts payable and accrued expenses .............. 193,728 (263,647)
Other assets and liabilities ............................. (40,556) (6,264)
------- ------
Net cash provided by (used in) operating activities .... (6,761) 225,821
------ -------
Cash flows from investing activities:
Redemption of investments ....................................... 72,198 --
Purchases of investments ........................................ (4,834) (4,965)
Capital expenditures ............................................ (63,214) (70,028)
Proceeds from disposal of equipment ............................. -- 7,000
Software development costs ...................................... (90,252) (159,675)
------- --------
Net cash used in investing activities (86,102) (227,668)
------- --------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit agreement ...... (14,563) 65,679
Payments on long-term debt ...................................... (276,821) (81,967)
Principal borrowings on long-term debt .......................... 433,728 --
------- -------
Net cash provided by (used in) financing activities .... 142,344 (16,288)
------- -------
</TABLE>
- Continued -
The accompanying notes are an integral part
of these consolidated financial statements
<PAGE>
TELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS, Continued
for the years ended December 31, 1998 and 1997
1998 1997
---- ----
Net increase (decrease) in cash and cash equivalents $ 49,481 $ (18,135)
Cash and cash equivalents at beginning of year ..... 13,845 31,980
Cash and cash equivalents at end of year ........... $ 63,326 $ 13,845
Supplemental disclosure of cash flow information:
Cash paid during the year for interest .......... $ 130,675 $ 122,060
Cash paid during the year for income taxes ...... $ 4,800 $ 4,000
The accompanying notes are an integral part
of these consolidated financial statements
<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.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of TELS
Corporation and its 100% owned subsidiaries, TEL electronics, inc., DJ
GunTEL, Inc., Hash Tech, Inc., Medtech, Inc., and MICROMEGA CORPORATION.
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.
Inventories
-----------
Raw materials are stated at the lower of cost or market. Cost is determined
using the average cost method, which approximates the first-in, first-out
method. Work-in-process and finished goods are stated at the accumulated
manufacturing cost, but not in excess of market.
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 ranging
from fifteen to forty years for building and improvements and five to ten
years for furniture and equipment. 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.
Continued
<PAGE>
TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. Summary of Significant Accounting Policies, Continued:
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.
Revenue Recognition
-------------------
Revenues are derived primarily from sales of telephone call accounting
products and custom assembly services of electro-mechanical, cable and
printed circuit boards. Revenues are recorded at the time of shipment of
products or performance of services. Revenues from service contracts are
recognized in earnings over the terms of the contract.
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
---------------------------
Basic net income (loss) per share is computed by dividing the net income
(loss) by the weighted average number of common shares outstanding. Diluted
net income (loss) per share is computed by dividing the net income (loss)
by the sum of the weighted average number of common shares and the effect
of dilutive unexercised stock options. Options to purchase 746,250 and
748,875 shares of common stock at prices ranging from $0.45 to $1.59 per
share were outstanding at December 31, 1998 and 1997 respectively, but were
not included in the computation of diluted earnings per share because the
effect would have been antidilutive.
Continued
<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.
New Accounting Pronouncements
-----------------------------
The Accounting Standards Executive Committee (AcSEC) issued Statement of
Position No. 98-1 (SOP 98-1), Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use. The SOP was issued to address
diversity in practice regarding whether and under what conditions the costs
of internal-use software should be capitalized. SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. The
Company has not determined the effect which SOP 98-1 will have on its
consolidated financial position or results of operations.
2. Basis of Presentation:
The Company's 1998 net sales decreased by over 23% from net sales for 1997.
Additionally, the Company has incurred a significant loss in the current
year creating negative cash flows from operating activities for 1998 and
has a working capital deficit at December 31, 1998. A significant portion
of the loss for 1998 is attributable to the decline in revenues in the
contract manufacturing division where the company was reliant on revenue
from one customer which reduced its orders with the Company by over 60% or
approximately $900,000. The loss was further increased as a result of the
Company decreasing its net deferred tax asset to zero by increasing the
valuation allowance to fully offset the Company's net deferred tax asset.
The Company believes that it is more likely than not that it will not be
able to realize the benefit of the net deferred tax asset.
Additionally, the Company's line of credit which is due in July, 1999,
contains cash flow covenants that, if not complied with, may result in the
acceleration of repayment. The Company has been notified that it is in
violation of its debt covenants and no waiver has been obtained.
Replacement of this line of credit by another financial institution cannot
be assured. As of December 31, 1998, these factors raise substantial doubt
about the Company's ability to continue as a going concern.
The Company's plans with respect to 1999 are to increase revenues in the
contract manufacturing division with a more diverse customer base, reduce
operating expenses, refinance its line of credit and increase sales in the
telephone call accounting division. Failure to accomplish management's
plans in 1999 and to generate positive operating cash flow could result in
further erosion of the Company's financial condition and failure to meet
its financial obligations.
Continued
<PAGE>
TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Inventories:
Inventories at December 31, 1998 consisted of the following:
Finished goods $ 64,962
Work-in-process 69,045
Raw materials and supplies 573,369
Reserve for obsolete inventory (260,960)
--------
$ 446,416
--------
4. Property and Equipment:
Property and equipment at December 31, 1998 consisted of the following:
Land $ 35,380
Building and improvements 478,885
Furniture and equipment 1,780,316
Equipment under capital lease 89,126
-----------
2,383,707
Less accumulated depreciation and
amortization (1,756,622)
-----------
$ 627,085
-----------
Depreciation expense totaled $194,278 and $199,584 for the years ended
December 31, 1998 and 1997, respectively.
5. Software Development Costs:
Capitalized software development costs at December 31, 1998 consisted of
the following:
Software development costs $ 382,856
Less accumulated amortization (257,934)
-----------
$ 124,922
-----------
Amortization expense totaled $154,545 and $116,601 for the years ended
December 31, 1998 and 1997, respectively.
6. Intangible Assets:
Intangible assets at December 31, 1998 consisted of the following:
Non-compete agreements $ 299,000
Goodwill 56,041
Organizational costs 41,398
Other 11,511
Less accumulated amortization (366,976)
-----------
$ 40,974
-----------
Amortization expense totaled $78,043 and $80,126 for the years ended
December 31, 1998 and 1997 respectively.
Continued
<PAGE>
TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. Long-term Debt:
Long-term debt at December 31, 1998, the carrying value of which
approximates fair value, consisted of the following:
Revolving line of credit payable to a financial institution,
bearing interest at the institution's index rate plus 3.0%
(11.5% at December 31, 1998), interest due monthly, principal
due July, 1999, collateralized by trade accounts receivable
and inventories. The unused line of credit at December 31,
1998 was $241,952. $ 508,048
Mortgage note payable to a bank in monthly installments
of $4,667, including interest at 9.875%,
final payment of $357,343 due May, 2003; collateralized
by real property. 426,337
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
Contract payable under legal settlement payable in
quarterly installments of $5,000, final payment due
March, 2000. 25,000
Capital leases for equipment (Note 8) 19,684
-----------
Total long-term debt 986,069
Less current portion (601,069)
-----------
Long-term debt, less current portion $ 385,000
-----------
The Company's revolving line of credit, which matures in July, 1999,
contains various covenants and restrictions that specify the Company
maintain certain reporting requirements and minimum financial amounts with
regard to cash flow. The Company has been notified that it is not in
compliance with these covenants. As the Company is unable to obtain a new
line of credit with this lender, it intends to seek alternative sources of
debt or equity to repay this obligation.
Continued
<PAGE>
TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Leases:
The Company is obligated under capital leases for machinery and equipment
that expire between April 1999 and February 2000. At December 31, 1998, the
gross amount of machinery, equipment and related accumulated amortization
recorded under capital leases were as follows:
Equipment under capital lease $ 89,126
Less accumulated amortization (62,956)
----------
$ 26,170
----------
The Company leases office space and equipment under noncancelable operating
lease agreements. Rent expense was $144,107 and $92,308 for the years
ended December 31, 1998 and 1997, 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 31,1998 are as follows:
Capital Operating
leases leases
------ ------
Year ending December 31:
1999 $ 18,662 $ 83,409
2000 2,711 11,153
2001 - 5,184
---- --------- ---------
Total minimum lease payments 21,373 $ 99,746
==========
Less amount representing interest
(at rates ranging from 5.5% to 20%) (1,689)
---------
Present value of net minimum
capital lease payments 19,684
Less current installments of
obligations under capital leases (17,017)
---------
Obligations under capital leases,
excluding current installments $ 2,667
==========
Continued
<PAGE>
TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Income Taxes:
Income tax benefit (expense) for the years ended December 31, 1998 and 1997
consists of:
1998 1997
---- ----
Current:
Federal $ - $ -
State (7,200) (20,013)
------ -------
(7,200) (20,013)
------ -------
Deferred:
Federal (878,052) (7,945)
State 37,166 (4,246)
------ ------
(840,886) (12,191)
-------- -------
Total $(848,086) $ (32,204)
--------- ---------
The income tax benefit (expense) for the years ended December 31, 1998 and
1997 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:
1998 1997
---- ----
Computed expected tax benefit (expense) $ 389,598 $ (43,812)
Increase(decrease)in income taxes
resulting from:
Change in valuation allowance (1,246,920) 19,500
Effect of expiring tax credits (14,758) (18,994)
Officers' life insurance - (645)
State income taxes, net of
federal income tax benefit 29,966 1,054
Meals and entertainment (5,848) -
Other, net (124) 10,693
---------- ----------
Total income tax benefit (expense) $ (848,086) $ (32,204)
---------- ----------
Continued
<PAGE>
TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Income Taxes, Continued:
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1998, are presented below:
Deferred tax assets:
Accounts receivable $ 30,431
Inventories 97,338
Accrued liabilities 75,311
Deferred revenue 44,557
Intangible assets 81,377
General business tax credits 94,658
AMT tax credit 4,039
Net operating loss carry forwards 1,015,477
---------
Deferred tax assets 1,443,188
Less valuation allowance (1,356,320)
----------
Total deferred tax assets 86,868
Deferred tax liability:
Property and equipment (86,868)
----------
Net deferred tax asset $ -
===========
Based on the recent history of net operating losses, management believes
that it is more likely than not that the Company will not realize the
benefit of the deferred tax assets. Consequently, the Company has
established a valuation allowance for the current and deferred tax asset,
net of any deferred tax liability at December 31, 1998.
Continued
<PAGE>
<TABLE>
<CAPTION>
TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Income Taxes, Continued:
As of December 31, 1998, the Company has net operating loss carry forwards
and general business tax credit carry forwards for federal income tax
purposes which expire as follows:
<S> <C> <C> <C> <C> <C> <C>
Net General
Expiration operating loss business credit
date carry forwards carry forwards
1999 $ - $ 2,800
2000 - 6,200
2001 380,900 6,000
2002 - 14,500
2003 - 23,700
2004 - 19,700
2005 60,100 -
2006 - 11,300
2007 5,800 10,700
2008 648,400 -
2009 - -
2010 151,000 -
2011 638,000 -
2012 - -
2013 - -
2014 - -
2015 - -
2016 - -
2017 - -
2018 840,400 -
---- ---------- ----------
$ 2,724,600 $ 94,900
=========== ===========
</TABLE>
10. 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 464,000 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.
Continued
<PAGE>
TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. 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 have the following impact on reported net income (loss)
and earnings (loss) per share:
1998 1997
----------------------- -------------------------
Loss per Earnings per
share basic share basic
Net loss and diluted Net income and diluted
-------- ----------- ---------- -----------
As Reported $(1,993,963) $(.51) $ 96,656 $ 0.02
Pro Forma $(1,993,963) $(.51) $ 95,964 $ 0.02
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions: an expected life of 10 years, expected volatility of 92%, no
dividend yield and a risk free rate of 5%.
A summary of activity related to stock options is indicated in the
following table:
1998 1997
----------------- -----------------
Weighted Weighted
Number average Number average
of exercise of exercise
shares price shares price
------ ----- ------ -----
Outstanding at beginning of year 748,875 $0.87 746,250 $0.95
Granted - - 79,000 0.59
Exercised - - - -
Forfeited 151,625 1.47 76,375 0.59
Outstanding at end of year 597,250 0.77 748,875 0.87
Options exercisable at year end 547,247 0.77 585,510 0.90
Continued
<PAGE>
<TABLE>
<CAPTION>
TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Number Weighted Weighted Number Weighted
Range of outstanding at average average exercisable at average
exercise December 31, remaining exercise December 31, exercise
prices 1998 contractual life price 1998 price
------------- ------------ ---------------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
$0.45 to $0.66 397,250 4.79 years $0.48 358,913 $0.45
$0.86 to $1.11 40,000 7.16 years $0.93 28,334 $0.94
$1.21 to $1.59 160,000 5.94 years $1.45 160,000 $1.45
------- -------
597,250 $0.77 547,247 $0.77
======= =======
</TABLE>
At December 31, 1998, 2,573,901 shares of the Company's common stock are
authorized for issuance under the stock option and bonus plans.
In April, 1993, stock bonus awards were made to officers totaling 450,000
shares that vested over a five-year period commencing in 1993. Compensation
expense of $40,500 was recognized in 1997 with respect to this grant. The
remaining deferred compensation expense of $10, 175 was recognized in 1998.
11. Related Party Transactions:
Included in employee and other receivables at December 31, 1998, 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 selling, general and administrative expense are payments
totaling $12,756 in 1998 to the CEO of the Company for the Company's use of
vehicles and property owned by the CEO.
12. Employees' Profit Sharing Plan:
The Company has an employees' 401(k) 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 years ended December 31, 1998 and 1997, totaled $20,000 and $0
respectively.
Continued
<PAGE>
TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. Contingencies:
The Company is involved in litigation and disputes arising in the normal
course of business. After evaluation of matters known to be outstanding,
management is of the opinion that adequate liabilities have been recorded,
and that the ultimate disposition of these matters will not have a material
adverse affect on the Company's financial position or results of
operations.
14. Activity of Business Segments:
In 1998 the Company adopted Statement of Financial Accounting Standards No.
131, Disclosures About Segments of an Enterprise and Related Information,
(SFAS No. 131), which governs disclosures relating to a business
enterprises' operating statements. The accounting policies of the segments
are the same as those described in the "Summary of Significant Accounting
Policies." The Company's reportable segments are strategic business units
that offer different products and services. They are managed separately
because each business requires different technology and marketing
strategies. Substantially all of the Company's continuing operations are in
telecommunications and contract manufacturing and assembly. Total revenue
by industry segment 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 manufacturing and assembly industry, accounted for approximately
12% of the Company's sales in 1998. The same customer accounted for 26% of
the sales in 1997. Identifiable assets are principally property and
equipment, capitalized software development costs and other assets.
<PAGE>
TELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. Segment Information:
Financial information by segments is as follows:
1998 1997
---- ----
Net sales:
Telecommunications $ 2,595,053 $ 2,697,473
Contract manufacturing and assembly 2,144,101 3,495,682
Corporate and other 9,150 1,905
----------- -----------
$ 4,748,304 $ 6,195,060
----------- -----------
Operating income (loss):
Telecommunications $ 150,105 $ 138,562
Contract manufacturing and assembly (918,530) 73,822
Corporate and other (257,674) (80,293)
----------- -----------
$(1,026,099) $ 182,091
----------- -----------
Identifiable assets:
Telecommunications $ 953,942 $ 949,315
Contract manufacturing and assembly 603,498 1,219,669
Corporate and other 790,036 1,791,252
----------- -----------
$ 2,347,476 $ 3,960,236
----------- -----------
Depreciation and amortization expense:
Telecommunications $ 195,018 $ 189,795
Contract manufacturing and assembly 166,743 153,020
Corporate and other 65,105 53,496
----------- -----------
$ 426,866 $ 396,311
----------- -----------
Capital expenditures:
Telecommunications $ 4,109 $ 17,814
Contract manufacturing and assembly 31,677 39,913
Corporate and other 27,428 12,301
----------- -----------
$ 63,214 $ 70,028
----------- -----------
Interest expense:
Telecommunications $ 34,221 $ 35,892
Contract manufacturing and assembly 45,778 62,323
Corporate and other 44,617 23,845
----------- -----------
$ 124,616 $ 122,060
----------- -----------
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters, and Control Persons;
Compliance With Section 16(a) of the Exchange Act
Information regarding directors and officers of the Company is incorporated
by reference from "Information Relating to Directors, Nominees, Executive
Officers, Promoters, and Control Persons" in the 1999 Proxy Statement to be
delivered to shareholders in connection with the Annual Meeting of Shareholders
to be held on June 7, 1999.
Information required by item 401 and 405 of Regulation S-B is incorporated
by reference from "Compliance with section 16(a) of the Securities Exchange Act
of 1934" in the 1999 Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders to be held on June 7, 1999.
Item 10. Executive Compensation
Information regarding this item is incorporated by reference from
"Executive Compensation" in the 1999 Proxy Statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders to be held on
June 7, 1999.
Item 11. 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 1999 Proxy
Statement to be delivered to shareholders in connection with the Annual Meeting
of Shareholders to be held on June 7, 1999.
Item 12. Certain Relationships and Related Transactions
Information regarding this item is incorporated by reference from "Certain
Transactions" in the 1999 Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders to be held on June 7, 1999.
(THIS SPACE INTENTIONALLY LEFT BLANK)
<PAGE>
PART IV
Item 13. Exhibits, Financial Statement 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,
Report on Audit of Financial Statements.
Report of Independent Accountants.
Consolidated Balance Sheet as of December 31, 1998.
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997.
Consolidated Statement of Changes in Stockholders' Equity
for the years ended December 31, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997.
Consolidated Notes to Financial Statements for the years ended
December 31, 1998 and 1997.
2. Financial Statement Schedules - None
Schedules 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 - Exhibit number and description
3.1 Articles of Incorporation, as amended, filed as Exhibit 3.1 to the
Company's Registration Statement on Form S-18, SEC File No. 2-93915-D, and
incorporated herein by this reference.
3.2 By-laws, as amended, filed as Exhibit 3.2 to the Company's Registration
Statement on form S-18, SEC File No. 2-93915-D, and incorporated herein by
this reference.
3.3 Certificate of Amendment of TEL electronics, inc. dated July 28, 1987,
changing the corporation name from Tel Electronics Inc., to TEL
electronics, inc., filed as exhibit 10.11 to the Company's Form 10-K for
the year ended December 31, 1988, and incorporated herein by this
reference.
3.4 Articles of Amendment to the Articles of Incorporation of TEL
electronics, inc., dated May 25, 1989, adding Article XIII - Director
Liability, filed as exhibit 3.4 to the Company's Form 10-K for the year
ended December 31, 1989, and incorporated herein by this reference.
3.5 Certificate of Amendment of TEL electronics, inc., dated July 10, 1990,
changing the par value of common stock to $.02 and the authorized shares to
10,000,000, filed with the Company's form 10-K, and incorporated herein by
this reference.
3.6 Certificate of Amendment of TELS Corporation, dated August 24, 1994,
changing the name of the Company from TEL electronics, inc., to TELS
Corporation, and increasing the number of authorized common stock to
50,000,000 shares, and authorizing the number of preferred shares of stock
to 10,000,000 shares, filed as exhibit 3.6 to the Company's Form 10-K for
the year ended December 31, 1994, and incorporated herein by this
reference.
<PAGE>
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K, cont.
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.
<PAGE>
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K, cont.
16.2 Letter on changes in Certifying Accountant filed as Exhibit 16 to the
Company's form 8-K, filed on November 3, 1995, and incorporated herein by
this reference.
22.1 Wholly owned Subsidiaries of TELS Corporation:
TEL electronics, inc.
MICROMEGA CORPORATION
MedTech, Inc.
D. J. GunTEL, Inc.
Hash Tech, Inc.
23.1 Consent of Certifying Accountant 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.
27.1 Article 5 Financial Data Schedule for year ended December 31, 1998,
Form 10-KSB.
(b) Reports on Form 8-K: No Current Reports on Form 8-K were filed during
the last quarter of the period covered by this report.
(c) Financial Statement Schedules: See (a) 2 above.
(THIS SPACE INTENTIONALLY LEFT BLANK)
<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, 1999 By: /s/John L. Gunter
- -------------- -----------------
Date John L. Gunter, CEO
In accordance with the Exchange Act, 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, 1999
- ----------------- Directors, and CEO --------------
John L. Gunter (Principal Executive Officer)
/s/Stephen M. Nelson Director, President, Treasurer April 14, 1999
- -------------------- and Acting Secretary --------------
Stephen M. Nelson
/s/Ronald A. Haller Controller April 14, 1999
- ------------------- (Principal Accounting Officer) --------------
Ronald A. Haller
/s/David K. Doyle Director April 14, 1999
- ----------------- --------------
David K. Doyle
/s/Ming-Tzong Chen Director April 14, 1999
- ------------------ --------------
Ming-Tzong Chen
<PAGE>
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 14, 1999, on our audit of the financial statements of
TELS Corporation as of December 31, 1998 and for each of the two years in the
period ended December 31, 1998, which report is included in this Annual Report
on Form 10-K.
PricewaterhouseCoopers LLP
Salt Lake City, Utah
April 14, 1999
<PAGE>
TELS CORPORATION
Exhibit 21
Wholly Owned Subsidiaries
Name State of Incorporation Business Name
TEL electronics, inc. Utah TEL electronics, inc.
MICROMEGA CORPORATION Utah MICROMEGA
MedTech, Inc. Utah MedTech, Inc.
D.J.GunTEL, Inc. Utah Micro Station or
Computer Express
Hash Tech, Inc. Utah HTI
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000756767
<NAME> Tels Corporation
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 63326
<SECURITIES> 0
<RECEIVABLES> 690388
<ALLOWANCES> 81586
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<CURRENT-ASSETS> 1346000
<PP&E> 2383707
<DEPRECIATION> 1756622
<TOTAL-ASSETS> 2347476
<CURRENT-LIABILITIES> 1477807
<BONDS> 385000
0
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<COMMON> 77835
<OTHER-SE> 406834
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<CGS> 2454174
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