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, 2000, or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM ----------- TO --------------
Commission File No. 0-12993
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TELS Corporation
(Name of small business issuer in its charter)
UTAH 87-0373840
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
705 East Main Street, American Fork, Utah 84003
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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 NO __X
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 $3,010,025.
The aggregate market value of the voting common equity held by non-affiliates of
the registrant as of March 31, 2000, was approximately $1,552,836.
The issuer had issued and outstanding 3,891,819 shares of its Common Stock on
March 31, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Those sections of portions of the registrant's 2000 Proxy Statement for its
Annual Meeting of Shareholders to be held on June 19, 2000, are incorporated by
reference into Part III hereof.
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PART I
Item 1. Business
Introduction
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TELS CorporationTM, ("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. The Company permanently closed down all MedTech
operations in 1999, consisting only of occasional service activities since no
Interro products have been sold for several years, and disposed of all related
inventory and equipment, all obsolete.
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). The Company permanently closed down all
D. J. GunTEL operations in 1999 since no operations had been carried out here
for several years.
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
contract 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. The Company operated this contract
manufacturing and assembly division until mid-November 1999, at which time the
Company made the decision to discontinue all contract manufacturing and assembly
operations (by permanently closing all HTI operations on November 19, 1999).
TEL electronics, inc.(R) ("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
- -------
TELS' telecommunications products are used to provide management,
accounting, and billing information to various business, education, and
government entities, but primarily to the lodging industry.
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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(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 and
is ideal for larger hotels and motels with gift or other shops, or other
business needs.
WIN-SENSETM. This Windows(R)-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(R), INN-FORM PLUS(R) 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.
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-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.
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 various business
activities of TELS.
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
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and/or enhancements will need to be further developed to meet the changes
expected in 2000 and beyond. The Company expects a continuing demand for its
products as these future changes occur.
Research and Development
- ------------------------
The Company spent $153,108 and $155,727, in addition to certain
capitalized expenses, on research and development activities in the years ended
December 31, 1999 and 1998, respectively. All research and development expenses
for the Company were for activities at or through 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 TELS in
1999.
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 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.
There can be no assurance that the Company will be able to compete
successfully with these companies or other telecommunications competitors in the
future.
Changing 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 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.
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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' products 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
(smaller than an average size telephone) provides a competitive advantage over
the larger and more bulky equipment marketed by many competitors.
Proprietary Rights
- ------------------
TELS does not currently hold, nor has it applied for, any patents.
Management does not believe that the Company's business is dependent upon the
acquisition of patents. TELS always seeks special copyright protection for its
names, software and developmental products. The Company designs its own printed
circuit boards and software for use in its telecommunications products. TELS'
proprietary telecommunications software is either imbedded in machine code in
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 the 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
- ------------------------
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
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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 and is
submitting all new products that the Company believes should be submitted 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: As of December 31, 1999, the Company had 28 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 formerly housed the
contract manufacturing and assembly operation, but which was subleased beginning
on November 19, 1999. Payments from the sublessor are equal to the amount of
payments by the Company and, per the sublease, are to be made directly to the
lessor. It is anticipated that the lessor and sublessor will rewrite the lease
and the Company will be removed from the process entirely in the near future.
Management believes that the American Fork facility is adequate for operations
and production needs at current and the near future anticipated production
levels.
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Item 3. Legal Proceedings
As a result of closing HTI and the contract manufacturing and assembly
division totally and ceasing all related operations, two claims have been
lodged. The California Department of Labor has sent documents to TELS covering
alleged vacation pay owed by HTI to a number of HTI's former employees, in total
alleged to be approximately $25,000. In addition, one HTI vendor has filed suit
against HTI in the Santa Clara District Court concerning approximately $50,000
allegedly owed and unpaid by HTI.
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 1999.
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7
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Listing
- --------------
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.
Price Range of Common Stock
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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.
<TABLE>
<CAPTION>
1999 High Low 1998 High Low
- ----- ----- --- ---- ---- ----
<S> <C> <C> <C> <C> <C>
First Quarter $ .14 $ .06 First Quarter $ .50 $ .34
Second Quarter .30 .08 Second Quarter .58 .41
Third Quarter .52 .18 Third Quarter .59 .25
Fourth Quarter .41 .11 Fourth Quarter .31 .06
</TABLE>
Approximate Number of Equity Security Holders:
- ----------------------------------------------
As of March 31, 2000, there were approximately 1,000 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
loan agreements, 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.
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.
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Results of Operations
- ----------------------
Overall sales continued to decrease in 1999 at HTI, the Company's
contract manufacturing and assembly division. The reduction in HTI sales had a
major impact on the profitability and cash flow of the Company. The Company
invested significant efforts and monies in the HTI business for over a year in
the belief that the business could be restored to its previous levels. During
this time, the HTI business was evaluated at every step along the way. Around
the middle of 1999, new information came to light that led the Company to
recognize that HTI was in a more serious situation than had been previously
understood, so the Company evaluated various alternatives to sell or close HTI.
Negotiations with a merger candidate that proposed an acceptable resolution of
the HTI situation entered final stages in the fall, but the candidate abandoned
the process in October 1999. It became obvious that HTI would cause a serious
loss for the Company for 1999. Investments into HTI ceased and top TELS
management made a number of personnel changes, terminating several senior
managers. Due to the worsening situation, it was not possible to finance the
continuing losses at HTI, provide sufficient investments to return HTI to
profitability and maintain TELS as a viable company. HTI was permanently closed
in late November 1999.
Consolidated net sales for continuing operations in 1999 increased 15%
to $3,010,025 from $2,604,203 in 1998. The increase in sales is due primarily to
increased sales activities in the business and lodging call accounting areas,
due to increased business construction in several parts of the country, and
major efforts to sign various support and upgrade agreements with customers. Due
to planned product enhancements and new products expected to be introduced
during 2000, the Company anticipates that sales to national accounts and
dealers, and sales of business call accounting systems, will increase in 2000.
Consolidated gross profit for continuing operations increased 14% or
$278,613 in 1999. The gross profit for continuing operations in 1999 represented
75% of sales. In 1998, gross profit of $1,991,632 represented 76% of sales. The
change in gross profit is due to changes in the sales mix from 1998 to 1999. In
2000, the Company anticipates that the gross profit percentage will be
consistent with 1999 results.
The consolidated research and development expense of $153,108 for 1999,
as compared to $155,727 for 1998, continues to consist mostly of personnel
expense for development and enhancement projects. The Company is continuing
efforts in research and development for enhanced and new products to be
introduced into its markets. As opportunities to improve existing products and
to introduce new products arise, the Company may need to increase research and
development activity in the near future.
Consolidated selling, general and administrative expenses increased 24%
to $2,416,398 for 1999 when compared to $1,943,475 for 1998. This increase in
1999 is attributable to non-recurring activities related to expenses relating to
HTI operations and closure, legal expenses and refinancing of the Company's line
of credit. In 1999 the Company incurred expenses relating to a major merger
process that was not successful and for legal fees involving litigation and the
closure of HTI. Management anticipates that it will need to make a concerted
effort to reduce expenses in 2000 in all 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 80%
in 1999 compared to 75% in 1998.
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For 1999, the Company reported a loss from continuing operations of
$(299,261) or $(.08) per share, compared to a loss from operations of $(107,570)
or $(.03) per share for 1998. The net loss for 1999 was $(1,118,385) or $(.28)
per share compared to the net loss of $(1,993,963) or $(.51) per share in 1998.
Continued losses, in general, are attributable to the decline in sales related
to contract manufacturing and assembly operations and the closure of HTI in
November 1999. Losses were also partly due to increases in administrative
expenses, primarily legal and acquisition expenses, surrounding the closure of
HTI and merger activities. The increased loss from operations in 1999, as
compared to 1998, is attributable to significant investments of time and money
made in 1998 and 1999 to assist the contract manufacturing and assembly
operation to return to profitability and to negotiate merger possibilities. The
reduction in net loss for 1999, as compared to 1998, is mostly attributable to
the Company's total discontinuance of such investments in early 1999 and an
emphasis on cost reductions. The Company has continued with its decision to keep
a valuation allowance at a level to fully offset its net deferred tax asset.
Liquidity and Capital Resources
- -------------------------------
In 1999, the Company negotiated a new line of credit. This $750,000
line consists of a line for the telecommunications division, which remains
active, and a line for the discontinued contract manufacturing and assembly
division, inactive since November 1999. The line is collateralized by
receivables, inventory, other assets, a second mortgage on the American Fork
property and a personal guarantee by an Officer.
As the HTI business diminished, losses mounted and the contract
manufacturing and assembly division was closed down, the Company sought to
restructure the HTI portion of its line into a one-year note with the secured
lender. As of April 10, 2000, the discontinued operations line was approximately
$120,000 and the telecommunications operations line was approximately $122,000,
although the telecommunications line varies with sales and collection
activities. During the last half of 1999, an Officer provided loans to the
Company totaling over $80,000 and two Officers added other loans totaling over
$70,000 during early 2000.
At December 31, 1999, the Company reported that current liabilities of
$1,492,246 exceeded current assets of $589,587 by $902,659.
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
- -------------------------------------------
As the result of planning and implementation activities carried out by
research and development personnel under severe conditions, the Company was able
to replace or upgrade most computers, networks and data bases prior to year-end
and essentially no "Y2K" problems were encountered with the Company's products,
commercial or internal systems.
Effects of Inflation
- --------------------
The Company's operations have not been significantly affected by
inflation during the periods covered in this report.
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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 affect the Company; (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 sales of telephone call accounting systems continue at
levels somewhat below 1999 in the first quarter of 2000 and management believes
that this trend will continue for the immediate future, with increased sales,
compared to 1999, expected in the summer and fall of 2000. The expense
reductions implemented in the telecommunications area in the latter part of 1999
and the first quarter of 2000, coupled with ongoing expense reductions and
expected increased sales of telephone call accounting products and the
diminishing affect of discontinued operations, should all add to improve the
Company's operating results in 2000.
The Company has incurred significant losses in the last two years,
creating a working capital deficit at December 31, 1999. The net loss for 1999
is attributable to the decline in revenues in the contract manufacturing and
assembly division, which was shut down completely on November 19, 1999.
Although the Company has discontinued its losing operations in the
contract manufacturing and assembly division and although the telecommunications
division has improved operations in early 2000 as compared to 1999, there is no
assurance that the cash flows or profits from the telecommunications division
will continue, or, if they do, that such will provide the basis for the Company
to sustain ongoing operations. There is also no assurance that pressures,
distractions and requirements that could affect the Company because of the now
defunct contract manufacturing and assembly division will not materially
adversely affect the Company.
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.
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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 who 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
- ----------------------------------------------
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective date of FASB
Statement No. 133. The Company believes that the adoption of SFAS 133 will not
have any material effect on the financial statements of the Company. In December
1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting
Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements, which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosure
related to revenue recognition policies. Though the Company is currently
evaluating the impact (if any) of SAB 101, the Company does not presently
believe it will have a material effect on the financial position or result of
operations of the Company.
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 Tanner + Company.
Report of PricewaterhouseCoopers, LLP.
Consolidated Balance Sheet as of December 31, 1999.
Consolidated Statements of Operations for the years ended
December 31, 1999 and 1998.
Consolidated Statements of Changes in Stockholders' Deficit
for the years ended December 31, 1999 and 1998.
Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998.
Consolidated Notes to Financial Statements for the years ended
December 31, 1999 and 1998.
Item 8. Disagreements on Accounting and Financial Disclosures. - None.
(THIS SPACE INTENTIONALLY LEFT BLANK)
12
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
TELS Corporation
We have audited the accompanying consolidated balance sheet of TELS Corporation
as of December 31, 1999, and the related consolidated statements of operations,
stockholders' deficit, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements 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 referred to above present
fairly, in all material respects, the financial position of TELS Corporation as
of December 31, 1999, and the results of their operations and their cash flows
for the year then ended in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2, the
Company has an accumulated deficit, a deficit in working capital and has
suffered significant losses. These issues raise 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 accompanying consolidated financial
statements do not include any adjustment that might result from the outcome of
this uncertainty.
TANNER + Co.
Salt Lake City, Utah
April 7, 2000
<PAGE>
Report of Independent Accountants
To the Shareholders and Board of Directors of
TELS Corporation and Subsidiaries:
In our opinion, the consolidated statements of operations, of changes in
stockholders' equity and cash flows for the year ended December 31, 1998 present
fairly, in all material respects, the results of operations and cash flows of
TELS Corporation and its subsidiaries (the "Company") for the year ended
December 31, 1998, in conformity with accounting principles generally accepted
in the United States. 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 audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of the Company for any period
subsequent to December 31, 1998.
The financial statements referred to above 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
PricewaterhouseCoopers LLP
Salt Lake City, Utah
April 14, 1999
<PAGE>
<TABLE>
<CAPTION>
TELS CORPORATION
Consolidated Balance Sheet
December 31, 1999
- ----------------------------------------------------------------------------------------------------------
Assets
------
<S> <C>
Current asset:
Cash and cash equivalents $ 3,467
Accounts receivable, net 371,714
Inventories, net 133,421
Prepaid expenses 80,985
------------------
Total current assets 589,587
Property and equipment, net 442,398
Software development costs, net 74,775
Cash surrender value of life insurance 107,960
Other assets 8,519
------------------
$ 1,223,239
------------------
- ----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Cash overdraft $ 22,252
Accounts payable 280,278
Accrued expenses 300,498
Current portion of long-term debt 352,187
Deferred income 145,736
Net liabilities of discontinued operations 353,985
------------------
Total current liabilities 1,454,936
Long-term debt 399,810
------------------
Total liabilities 1,854,746
------------------
Commitments and contingencies -
Stockholders' deficit:
Common stock, $.02 par value, authorized 50,000,000
shares; issued and outstanding 3,891,819 shares 77,835
Additional paid-in capital 4,228,741
Accumulated deficit (4,938,083)
------------------
Total stockholders' deficit (631,507)
------------------
$ 1,223,239
------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TELS CORPORATION
Consolidated Statement of Operations
Years Ended December 31,
- -------------------------------------------------------------------------------------------------------------------
1999 1998
-----------------------------------
<S> <C> <C>
Net sales $ 3,010,025 $ 2,604,203
Cost of goods sold 739,780 612,571
-----------------------------------
Gross profit 2,270,245 1,991,632
Operating expenses:
Research and development expenses 153,108 155,727
Selling, general and administrative expenses 2,416,398 1,943,475
-----------------------------------
Loss from operations (299,261) (107,570)
-----------------------------------
Other income (expense):
Interest income - 4,838
Interest expense (80,211) (76,149)
Other, net (69,891) -
-----------------------------------
(150,102) (71,311)
-----------------------------------
Loss before benefit (provision) for income
taxes and discontinued operations (449,363) (178,881)
Benefit (provision) for income taxes - (843,286)
Loss from discontinued operations, net of income taxes (669,022) (971,796)
-----------------------------------
Net loss $ (1,118,385) $ (1,993,963)
-----------------------------------
Loss per share - basic and diluted $ (.29) $ (.51)
-----------------------------------
Weighted average shares - basic and diluted 3,891,819 3,891,819
-----------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TELS CORPORATION
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
Years Ended December 31, 1999 and 1998
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock Additional Stockholders'
--------------------- Paid-in Accumulated Deferred Equity
Shares Amount Capital Deficit Compensation (Deficit)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 3,891,819 $ 77,835 $ 4,226,532 $ (1,825,735) $ (10,175) $ 2,468,457
Amortization of deferred
compensation - - - - 10,175 10,175
Net loss - - - (1,993,963) - (1,993,963)
------------------------------------------------------------------------------------
Balance, December 31, 1998 3,891,819 77,835 4,226,532 (3,819,698) - 484,669
Grant of stock options - - 2,209 - - 2,209
Net loss - - - (1,118,385) - (1,118,385)
------------------------------------------------------------------------------------
Balance, December 31, 1999 3,891,819 $ 77,835 $ 4,228,741 $ (4,938,083) $ - $ (631,507)
------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TELS CORPORATION
Consolidated Statement of Cash Flows
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------
1999 1998
-----------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,118,385) $ (1,993,963)
Loss from discontinued operations 669,022 971,796
Adjustments to reconcile netloss to net cash
provided by (used in) operating activities:
Depreciation and amortization 234,343 260,603
Loss on disposal of assets 2,868 -
Deferred income taxes - 840,886
Stock bonuses and amortization of
deferred compensation - 10,175
Stock compensation 2,209 -
(Increase) decrease in:
Accounts receivable 124,243 42,227
Inventories 76,363 15,717
Prepaid expenses 71,165 (13,194)
Other assets 84,293 (31,641)
Increase (decrease) in:
Accounts payable 124,903 101,954
Accrued expenses 67,356 85,727
Deferred income 26,284 20,703
-----------------------------------
Net cash provided by continuing operations 364,664 310,990
Net cash used in discontinued operations (208,881) (317,751)
-----------------------------------
Net cash provided by (used in)
operating activities 155,783 (6,761)
-----------------------------------
Cash flows from investing activities:
Software development costs (102,911) (90,252)
Capital expenditures (25,905) (31,536)
Redemption of investments - 72,198
Purchases of investments - (4,834)
-----------------------------------
Net cash used in continuing operations (128,816) (54,424)
Net cash used in discontinued operations (812) (31,678)
-----------------------------------
Net cash used in
investing activities (129,628) (86,102)
-----------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TELS CORPORATION
Consolidated Statement of Cash Flows
Continued
- ----------------------------------------------------------------------------------------------------------
1999 1998
-----------------------------------
<S> <C> <C>
Cash flows from financing activities:
Cash overdraft 22,252 -
Net repayments under lin
of credit agreement (16,225) -
Payments on long-term debt (37,416) (189,894)
Principal borrowings on long-term debt 79,623 193,361
-----------------------------------
Net cash provided by continuing operations 48,234 3,467
Net cash (used in) provided by discontinued operations (134,248) 138,877
-----------------------------------
Net cash (used in) provided by
financing activities (86,014) 142,344
-----------------------------------
Net (decrease) increase in cash (59,859) 49,481
Cash at beginning of year 63,326 13,845
-----------------------------------
Cash at end of year $ 3,467 $ 63,326
-----------------------------------
Supplemental disclosure of cash flow information: 1999 1998
-----------------------------------
Cash paid during the year for:
Interest $ 117,836 $ 130,675
-------------------------------
Income taxes $ 4,800 $ 4,800
-----------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
TELS CORPORATION
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies
Organization
TELS Corporation and its wholly owned subsidiaries TEL Electronics, Inc., DJ
GunTEL, Inc., Hash Tech, Inc., Medtech, Inc., and MICROMEGA CORPORATION, (the
Company) designs, manufactures and sells telecommunications and call accounting
products to hotels, motels and small businesses throughout the United States.
During the year ended December 31, 1999, the Company discontinued the operations
of Hash Tech, Inc. (see Note 17). Discontinued operations consisted primarily of
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 the Company and
its wholly owned subsidiaries. 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 recorded at cost, less accumulated depreciation.
Depreciation and amortization on capital leases and property and equipment are
determined using the straight-line method over the estimated useful lives of the
assets or terms of the lease. Expenditures for maintenance and repairs are
expensed when incurred and betterments are capitalized. Gains and losses on sale
of property and equipment are reflected in the statement of operations.
- --------------------------------------------------------------------------------
<PAGE>
TELS CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization and 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.
Revenue Recognition
Revenues were 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 using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Earnings (Loss) Per Common Share
The computation of basic earnings (loss) per common share is based on the
weighted average number of shares outstanding during each year.
- --------------------------------------------------------------------------------
<PAGE>
TELS CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies Continued
Earnings (Loss) Per Common Share - Continued
The computation of diluted earnings per common share is based on the weighted
average number of shares outstanding during the year, plus the common stock
equivalents that would arise from the exercise of stock options and warrants
outstanding, using the treasury stock method and the average market price per
share during the year. Options to purchase 628,500 and 597,250 shares of common
stock at prices ranging from $.14 to $1.59 per share were outstanding at
December 31, 1999 and 1998 respectively, but were not included in the diluted
earnings (loss) per share calculation because the effect would have been
antidilutive.
Concentration of Credit Risk and Significant Customer
Financial instruments which potentially subject the Company to concentration of
credit risk consist primarily of trade receivables. In the normal course of
business, the Company provides credit terms to its customers. Accordingly, the
Company performs ongoing credit evaluations of its customers and maintains
allowances for possible losses which, when realized, have been within the range
of management's expectations.
The Company's customer base consists primarily of the hotel and leisure
industry. Although the Company is directly affected by the well- being of this
industry, management does not believe significant credit risk exists at December
31, 1999.
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Major customers are those customers that account for 10% or more of total
revenue. There were no customers in this category during 1999. In 1998, the
Company had sales to a major customer which represented 12% of total sales.
- --------------------------------------------------------------------------------
<PAGE>
TELS CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies Continued
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimate 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.
Reclassifications
Certain amounts in the 1998 consolidated financial statements have been
reclassified to conform with the current year presentation.
2. Going Concern
At December 31, 1999, the Company has a working capital deficiency, a
stockholders' deficit and has suffered significant losses during the years ended
December 31, 1999 and 1998. These conditions raise substantial doubt about the
ability of the Company to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
The Company's plan with respect to 2000 is to restructure debt, reduce operating
expenses and increase sales in the telephone call accounting division. Failure
to accomplish management's plan in 2000 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.
3. Detail of Certain Balance Sheet Accounts
Additional information regarding accounts receivable, inventories, and accrued
expenses is presented below:
Accounts Receivable
- --------------------
Trade accounts receivable $ 405,199
Less allowance for doubtful accounts (33,485)
-----------------
$ 371,714
-----------------
- --------------------------------------------------------------------------------
<PAGE>
TELS CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
3. Detail of Certain Balance Sheet Accounts Continued
Inventories
- -----------
Finished goods $ 27,756
Work-in-process 45,104
Raw materials 74,341
Reserve for obsolete inventory (13,780)
-----------------
$ 133,421
-----------------
Accrued Expenses
- ----------------
Deposits $ 99,858
Accrued vacation 83,464
Payroll, payroll taxes and benefits 53,169
Other 64,007
----------------
$ 300,498
----------------
4. Property and Equipment
Property and equipment consists of the following:
Land $ 35,380
Building and improvements 488,037
Furniture and equipment 1,436,316
----------------
1,959,733
Less accumulated depreciation and amortization (1,517,335)
----------------
$ 442,398
----------------
Depreciation expense totaled $157,022 and $194,278 for the years ended December
31, 1999 and 1998, respectively.
5. Software Development Costs
Capitalized software development costs consists of the following:
Software development costs $ 277,481
Less accumulated amortization (202,706)
-----------------
$ 74,775
-----------------
- --------------------------------------------------------------------------------
<PAGE>
TELS CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
5. Software Development Costs Continued
Amortization expense related to capitalized software development costs totaled
$153,058 and $154,545 for the years ended December 31, 1999 and 1998,
respectively.
6. Long-Term Debt
Long-term debt consists of the following:
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; secured by real property and
guaranteed by an officer. $ 415,921
Revolving line-of-credit payable to a
financing institution, including interest
at the institution's prime rate plus 2.75%
(11.25% at December 31, 1999), due
September 10, 2000, secured by all Company
assets and guaranteed by an officer. A
maximum of $750,000 was available under the
line of credit at December 31, 1999 less the
amount owing related to discontinued operations
(see note 17). The Company was not in compliance
with certain requirements related to this line
of credit at December 31, 1999. 251,453
Notes payable to an officer, including interest at
12%, due on demand, secured by real property. 79,623
Contract payable under legal settlement due in
quarterly installments of $5,000, final payment
due March, 2000. 5,000
-----------------
Total long-term debt 751,997
Less current portion (352,187)
-----------------
$ 399,810
-----------------
- --------------------------------------------------------------------------------
<PAGE>
TELS CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
6. Long-Term Debt Continued
Future maturities of long-term debt are as follows:
Years Ending December 31: Amount
-----------------
2000 $ 352,187
2001 17,755
2002 19,612
2003 362,443
-----------------
$ 751,997
-----------------
7. Leases
The Company leases office space and equipment under noncancelable operating
lease agreements. Rent expense was $123,364 and $144,107 for the years ended
December 31, 1999 and 1998, respectively.
Future minimum rental payments required under operating leases that have initial
or remaining noncancelable lease terms in excess of one year as of December 31,
1999 are as follows:
Years Ending December 31: Amount
------------------------- -----------------
2000 $ 229,467
2001 233,526
2002 234,305
2003 150,912
-----------------
Total minimum lease payments $ 848,210
-----------------
- --------------------------------------------------------------------------------
<PAGE>
TELS CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Leases Continued
The Company subleases office space under a noncancelable sublease. Future
minimum lease payments to be received are as follows:
Years Ending December 31: Amount
- ------------------------- ------
2000 $ 199,290
2001 214,963
2002 226,368
2003 150,912
---------------
$ 791,533
---------------
8. Income Taxes
The income tax benefit (provision) differs from the amount computed at federal
statutory rates as follows:
Years Ended
December 31,
----------------------------------
1999 1998
----------------------------------
Income tax benefit (provision) at
statutory rate $ 148,000 $ 61,000
State income tax 22,000 9,000
Other (71,000) 333,634
Change in valuation allowance (99,000) (1,246,920)
----------------------------------
$ - $ (843,286)
----------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TELS CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
8. Income Taxes Continued
Deferred tax assets (liabilities) are comprised of the following:
Accounts receivable $ 25,000
Inventory 186,000
Property and equipment (160,000)
Accrued liabilities 37,000
Deferred revenue 50,000
General business tax credits 92,000
NOL carryforwards 1,225,000
-----------------
1,455,000
Valuation allowance (1,455,000)
-----------------
$ -
-----------------
As of December 31, 1999, the Company has net operating loss carry forwards (NOL)
and general business tax credit carry forwards (GB) for federal income tax
purposes which expire as follows:
Expiration Date NOL GB
- ---------------------------------------------------------------------------
2000 $ - $ 6,000
2001 380,000 6,000
2002 - 14,000
2003 - 24,000
2004 - 20,000
2005 60,000 -
2006 - 11,000
2007 6,000 11,000
2008 648,000 -
2010 151,000 -
2011 638,000 -
2018 840,000 -
2019 927,000 -
---------------------------------------
$ 3,650,000 $ 92,000
---------------------------------------
A valuation allowance has been established that offsets the net deferred tax
asset due to the uncertainty of realization caused by the Company's recurring
losses, working capital deficiency and accumulated deficit.
- --------------------------------------------------------------------------------
<PAGE>
TELS CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Capital Stock
The Company has established a series of preferred stock with a total of
10,000,000 authorized shares and a par value of $1.00, and one series of common
stock with a par value of $.02 and a total of 50,000,000 authorized shares.
10. Stock Option Plans
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.
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.
- --------------------------------------------------------------------------------
<PAGE>
TELS CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
10. Stock Option Plans Continued
Information regarding the Option Plans is as follows:
Number of Option Price
Options Per Share
---------------------------------
Outstanding at January 1, 1998 748,875 $ .45 - 1.59
Granted - -
Exercised - -
Expired (151,625) $ .45 - 1.59
---------------------------------
Outstanding at December 31, 1998 597,250 $ .45 - 1.59
Granted 50,000 .14
Exercised - -
Expired (18,750) .45
---------------------------------
Outstanding at December 31, 1999 628,500 $ .14 - 1.59
---------------------------------
Options exercisable and available for future grant are as follows:
December 31,
1999 1998
---------------------------------
Options exercisable 613,496 547,247
Options available for grant 2,542,651 2,573,901
- --------------------------------------------------------------------------------
<PAGE>
TELS CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
11. Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Statement for
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. Accordingly, no compensation cost has been recognized in the
financial statements. Had compensation cost for the Company's stock option plans
been determined based on the fair value at the grant date for awards in 1999 and
1998, consistent with SFAS No. 123, the Company's net earnings per share would
have been reduced to the pro forma amounts indicated below:
Years Ended
December 31,
---------------------------------
1999 1998
---------------------------------
Net loss - as reported $ (1,118,385) $ (1,993,963)
Net loss - pro forma $ (1,121,640) $ (1,993,963)
Loss per share - as reported $ (.29) $ (.51)
Loss per share - pro forma $ (.29) $ (.51)
---------------------------------
The fair value of each option grant is estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions:
Years Ended
December 31,
---------------------------------
1999 1998
---------------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 114% 92%
Risk-free interest rate 5% 5%
Expected life of options 10 years 10 years
---------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TELS CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
11. Stock-Based Compensation Continued
The following table summarizes information about stock options outstanding at
December 31, 1999:
Number Weighted Weighted Number Weighted
Range of Outstanding at Average Average Exercisable at Average
Exercise December 31, Remaining Exercise December 31, Exercise
Prices 1999 Contractual Life Price 1999 Price
- -------------------------------------------------------------------------------
$0.14 50,000 9.10 years $ 0.14 50,000 $ 0.14
$0.45 to $0.60 378,500 4.74 years $ 0.48 363,496 $ 0.47
$0.86 to $1.11 40,000 6.11 years $ 0.93 40,000 $ 0.93
$1.21 to $1.59 160,000 4.90 years $ 1.45 160,000 $ 1.45
--------- -------
628,500 $ 0.73 613,496 $ 0.73
--------- -------
Stock options in the table above include 50,000 options that were issued to
outside directors; $2,209 of compensation expense was recognized on the issuance
of these options. In April, 1993, stock bonus awards were made to officers
totaling 450,000 shares that vested over a five-year period commencing in 1993.
Deferred compensation expense of $10,175 was recognized in 1998 with respect to
this grant.
The weighted average fair value of options issued during 1999 was $.04.
12. Related Party Transactions
At December 31, 1999, there are notes payable due to an officer of the Company
totaling $79,623. The notes bear interest at 12%, are secured by real property
and are due on demand.
Included in employee and other receivables at December 31, 1998, is a $39,302
uncollateralized note receivable due from an officer of the Company. The note
bears interest at eight percent and is due on demand.
Selling, general and administrative expenses include payments totaling $2,126
and $12,756 in 1999 and 1998, respectively, to an officer of the Company for the
Company's use of vehicles and property owned by the officer.
- --------------------------------------------------------------------------------
<PAGE>
TELS CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
13. Employees' Profit Sharing Plan
The Company has an employee 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, 1999 and 1998, totaled $-0- and $20,000, respectively.
14. Commitments and Contingencies
Employment Agreement
The Company has entered into an employment agreement with a certain
officer/shareholder that expires December 31, 2002. The agreement is
automatically extended each December for one additional year, unless either
party gives written notice 6 months in advance of the renewal date. The
agreement provides the officer with an annual base salary, business expense
reimbursement, certain employee benefits or equivalent compensation, vacation
and paid holidays, office space and eligibility for: 1) bonuses; 2) other
benefit programs which may be offered by the Company to its employees; 3) a lump
sum termination payment ranging from 50% to 250% of the officer/shareholder's
gross income for the year preceding termination. In the event the
officer/shareholder is terminated for other than cause, the officer/shareholder
will be entitled to receive all or part of the items noted above; including a
bonus, if paid in the year preceding termination, for the remaining term of the
agreement as if employment had not terminated. The agreement must be assigned to
acquiring or successor entities and termination of the officer/shareholder must
be approved by a majority of the directors of the Company.
Litigation
The Company may become or is subject to investigations, claims or lawsuits
ensuing out of the conduct of its business, including those related to
environmental safety and health, product liability, commercial transactions,
etc. The Company is currently aware of certain items involving litigation or
potential litigation with former employees of the discontinued operation and a
vendor, but does not believe such claims could have a material adverse affect on
its financial position. No amounts have been accrued in the accompanying
consolidated financial statements related to litigation.
- --------------------------------------------------------------------------------
<PAGE>
TELS CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
15. Fair Value of Financial Instruments
The Company's financial instruments consist of cash, receivables, payables, and
notes payable. The carrying amount of cash, receivables, and payables
approximates fair value because of the short-term nature of these items. The
carrying amount of notes payable approximates fair value as the individual
borrowings bear interest at market interest rates.
16. Recent Accounting Pronouncements
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective date of FASB
Statement No. 133." SFAS 133 establishes accounting and reporting standards for
derivative instruments and requires recognition of all derivatives as assets or
liabilities in the statement of financial position and measurement of those
instruments at fair value. SFAS 133 is now effective for fiscal years beginning
after June 15, 2000. The Company believes that the adoption of SFAS 133 will not
have any material effect on the financial statements of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosure related to revenue recognition policies. Though the
Company is currently evaluating the impact (if any) of SAB 101, the Company does
not presently believe it will have a material effect on the financial position
as result of operations of the Company.
- --------------------------------------------------------------------------------
<PAGE>
TELS CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
17. Discontinued Operations
During the year ended December 31, 1999, in an effort to increase cash flow and
reduce expenses, the Company discontinued the Hash Tech, Inc. segment of its
operations, which provided contract manufacturing and assembly services to the
Company.
Net liabilities and condensed discontinued operations are as follows:
Assets:
Receivables, net $ 47,393
Inventory, net 27,143
Property and equipment, net 37,310
-----------------
$ 111,846
-----------------
Liabilities:
Notes payable $ (125,807)
Accounts payable (293,176)
Accrued expenses (46,848)
-----------------
$ (465,831)
-----------------
Net liabilities of discontinued operations $ (353,985)
-----------------
Years Ended December 31,
----------------------------------
1999 1998
----------------------------------
Revenue $ 1,186,113 $ 2,144,101
Costs and expenses 1,849,135 3,111,097
----------------------------------
Net loss before income taxes (663,022) (966,996)
Income taxes (6,000) (4,800)
----------------------------------
Net loss $ (669,022) $ (971,796)
----------------------------------
- --------------------------------------------------------------------------------
<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 2000 Proxy Statement
to be delivered to shareholders in connection with the Annual Meeting of
Shareholders to be held on June 19, 2000.
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 2000 Proxy Statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders to be held on
June 19, 2000.
Item 10. Executive Compensation
Information regarding this item is incorporated by reference from
"Executive Compensation" in the 2000 Proxy Statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders to be held on
June 19, 2000.
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 2000
Proxy Statement to be delivered to shareholders in connection with the Annual
Meeting of Shareholders to be held on June 19, 2000.
Item 12. Certain Relationships and Related Transactions
Information regarding this item is incorporated by reference from
"Certain Transactions" in the 2000 Proxy Statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders to be held on
June 19, 2000.
(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 Tanner + Company.
Report of PricewaterhouseCoopers, LLP.
Consolidated Balance Sheet as of December 31, 1999.
Consolidated Statements of Operations for the years ended
December 31, 1999 and 1998.
Consolidated Statement of Changes in Stockholders' Deficit for the years
ended December 31, 1999 and 1998.
Consolidated Statements of Cash Flows for the years ended December 31,
1999 and 1998.
Consolidated Notes to Financial Statements for the years ended December
31, 1999 and 1998.
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,
continued
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.
10.13 Severance Agreement between the Company and Stephen M. Nelson dated
July 1, 1999, filed herein as exhibit to the Company's 1999, form 10-K.
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.
<PAGE>
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K,
continued
21. Wholly-owned Subsidiaries of TELS Corporation:
TEL electronics, inc. D. J. GunTEL, Inc.
MICROMEGA CORPORATION HTI (or Hash Tech, Inc.)
MedTech, Inc.
23.1 Consent of Certifying Accountant filed as Exhibit 23.1 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.
23.2 Consent of Certifying Accountant filed as Exhibit 23.2 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.
23.3 Consent of Certifying Accountant filed as Exhibit 23.3 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, 1999,
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.
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)
May 12, 2000 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.
<TABLE>
<S> <C> <C>
/s/ John L. Gunter Chairman of the Board of Directors, President May 12, 2000
- ------------------ and CEO (Principal Executive Officer)
John L. Gunter
/s/ Diane Gunter
- ------------------ Director, Secretary, Treasurer May 12, 2000
P. Diane Gunter
/s/ Lawrence A. Palmer
- ------------------ Controller (Principal Accounting Officer) May 12, 2000
Lawrence A. Palmer
</TABLE>
TELS CORPORATION
----------------
Exhibit 21
Wholly-Owned Subsidiaries
<TABLE>
<CAPTION>
Name State of Incorporation Business Name
- ---- ---------------------- -------------
<S> <C> <C>
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
HTI (or Hash Tech, Inc.) Utah HTI,Inc.
</TABLE>
(THIS SPACE INTENTIONALLY LEFT BLANK)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-17149, 333-17163 and 333-17169) of TELS
Corporation of our report dated April 7, 2000 relating to the financial
statements, which appears in this Form 10-K.
TANNER + Co.
TANNER + Co.
Salt Lake City, Utah
May 8, 2000
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-17149, 333-17163 and 333-17169) of TELS
Corporation of our report dated April 14, 1999 relating to the financial
statements, which appears in this Form 10-K. We also consent to the reference to
us under the heading "Experts" in such Registration Statements.
PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Salt Lake City, Utah
May 8, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,467
<SECURITIES> 0
<RECEIVABLES> 405,199
<ALLOWANCES> 33,485
<INVENTORY> 133,421
<CURRENT-ASSETS> 589,587
<PP&E> 1,959,733
<DEPRECIATION> 1,517,335
<TOTAL-ASSETS> 1,223,239
<CURRENT-LIABILITIES> 1,454,936
<BONDS> 399,810
0
0
<COMMON> 77,835
<OTHER-SE> (709,342)
<TOTAL-LIABILITY-AND-EQUITY> 1,223,239
<SALES> 3,010,025
<TOTAL-REVENUES> 3,010,025
<CGS> 739,780
<TOTAL-COSTS> 3,309,286
<OTHER-EXPENSES> 69,891
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80,211
<INCOME-PRETAX> (449,363)
<INCOME-TAX> 0
<INCOME-CONTINUING> (449,363)
<DISCONTINUED> (669,022)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,118,385)
<EPS-BASIC> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
