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Registration No. 33-80973
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
POST-EFFECTIVE
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
TMCI ELECTRONICS, INC.
(Name of small business issuer in its charter)
<TABLE>
<CAPTION>
DELAWARE 3444 77-0413814
<S> <C> <C>
(State or other jurisdiction of (Primary standard industrial (IRS employer identification
incorporation or organization) classification code number) number)
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1875 DOBBIN DRIVE
SAN JOSE, CA 95133
408-272-5700
(Address and telephone number of principal executive offices)
1875 DOBBIN DRIVE
SAN JOSE, CA 95133
(Address of principal place of business or intended principal place of business)
ROLANDO LOERA
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
TMCI ELECTRONICS, INC.
1875 DOBBIN DRIVE
SAN JOSE, CA 95133
408-272-5700
(Name, address and telephone number of agent for service)
-----------------------
COPY TO:
FREDERICK W. LONDON, ESQ.
GOULD & WILKIE
ONE CHASE MANHATTAN PLAZA
NEW YORK, NY 10005-1401
(212) 344-5680
(212) 809-6890 FAX
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Approximate date of commencement of proposed sale to public:
As soon as practicable after the amendment to the
Registration Statement becomes effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
(facing page continues)
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-----------------------------
THE REGISTRANT HEREBY AMENDS THIS AMENDMENT TO THE REGISTRATION
STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE
DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY
STATES THAT THIS AMENDMENT TO THE REGISTRATION STATEMENT SHALL THEREAFTER
BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933
OR UNTIL THIS AMENDMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such state.
Subject to Completion, Dated March 21, 1997
PROSPECTUS
2,672,000 SHARES OF COMMON STOCK ($.001 PAR VALUE)
ISSUABLE UPON THE EXERCISE OF CLASS A WARRANTS
TMCI ELECTRONICS, INC.
TMCI Electronics, Inc. (the "Company"), a Delaware corporation, is
offering 2,672,000 shares of Common Stock, par value $.001 per share ("Common
Stock"), issuable upon the exercise of 2,672,000 outstanding Class A Warrants
("Warrants"). The Warrants became exercisable commencing on March 5, 1997.
Each Warrant entitles the holder to purchase one share of Common Stock at
$5.50 per share during the four year period commencing on March 5, 1997. The
Warrants are redeemable by the Company for $.01 per Warrant, at any time after
March 5, 1997, upon thirty (30) days' prior written notice, if the average
closing price or bid price of the Common Stock, as reported by the National
Association of Securities Dealers, Inc. Automatic Quotation System ("Nasdaq")
equals or exceeds $8.75 per share, for any twenty (20) consecutive trading
days within a period of thirty (30) consecutive trading days ending within
five (5) days prior to the date of the notice of redemption. Upon thirty (30)
days' written notice to all holders of the Warrants, the Company shall have
the right to reduce the exercise price and/or extend the term of the Warrants
in compliance with the requirements of Rule 13e-4 to the extent applicable.
See "Description of Securities."
The Warrants were initially sold in March 1996 in an underwritten
offering (the "March Offering") of units ("Units") consisting of one share of
Common Stock and one Warrant. The Common Stock and the Warrants were
detachable and traded separately upon issuance. The Common Stock and Class A
Warrants of the Company are listed on the Nasdaq SmallCap Market. On March 20,
1997, the closing bid price per share of the Common Stock as reported by the
Nasdaq SmallCap Market was $5.75.
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE
OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION OF THE BOOK VALUE OF
THE COMMON STOCK ISSUABLE UPON EXERCISE OF THE WARRANTS
AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN
AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT.
SEE "RISK FACTORS", WHICH BEGINS ON
PAGE 7, AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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PROCEEDS TO THE
PRICE TO PUBLIC WARRANT SOLICITATION FEE(1) COMPANY (2)
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Per Unit $5.50 $0.22 $5.28
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Total (3) $14,696,000 $587,840 $14,108,160
=============================================================================================================================
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NOTES
(1) Consists of a 4% Warrant solicitation fee which the Company has agreed to
pay to Biltmore Securities, Inc., the underwriter in the March Offering,
subject to certain conditions.
(2) Before deducting expenses of the offering payable by the Company,
estimated at $45,000.
(3) These proceeds will only be realized upon the exercise of all of the
Warrants. There can be no assurance that any of the Warrants will be
exercised.
The date of this Prospectus is March , 1997.
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NOTE ON FORWARD-LOOKING STATEMENTS
Certain information set forth in this Prospectus includes
"Forward-Looking Statements" within the meaning of the Private Securities
Reform Act of 1995 and is subject to certain risks and uncertainties,
including those identified under the caption "Risk Factors." Readers are
cautioned not to place undue reliance on these statements, which speak only as
of the date hereof. The Company undertakes no obligation to release publicly
any revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect unanticipated events or
developments.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). The reports and other information filed by the
Company can be inspected and copied without charge at the Commission, Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the following regional offices of the Commission: Seven World Trade Center,
13th Floor, New York, New York 10048, and Northwest Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material
can be obtained from the Public Reference Section of the Commission, Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Registration statements and other documents and reports that
are filed electronically through the Electronic Data Gathering, Analysis and
Retrieval System (including the Registration Statement) are publicly available
through the Commission's web site on the Internet (http://www.sec.gov).
This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits thereto. Statements contained in
this Prospectus as to the contents of any contract or other document referred
to are not necessarily complete, and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the
Registration Statement for a more complete description of the matter involved,
each such statement being qualified in its entirety by such reference. The
Company will provide without charge to each person who receives this
Prospectus, upon written or oral request of such person, a copy of any of the
information that is incorporated by reference herein (excluding exhibits to
the information that is incorporated by reference unless the exhibits are
themselves specifically incorporated by reference) by contacting the Company
at TMCI Electronics, Inc., 1875 Dobbin Drive, San Jose, CA 95133, telephone
(408) 272-5700, attention: Chief Financial Officer.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information, including information contained under the caption "Risk
Factors," and financial statements, including notes thereto, appearing
elsewhere in this Prospectus.
THE COMPANY
OVERVIEW
TMCI Electronics, Inc. (the "Company") was incorporated in the State of
Delaware on December 7, 1995 for the purpose of acquiring the businesses of
Touche Manufacturing, Inc. ("Touche") and Touche Electronics, Inc. ("TEI").
The principal executive offices of the Company, Touche and TEI are located in
San Jose, California. Touche and TEI were principally owned by Rolando Loera,
the President and Chief Executive Officer of the Company. The Company acquired
all of the issued and outstanding shares of common stock of Touche and TEI on
March 5, 1996 from Mr. Loera and all of the minority shareholders of Touche
and TEI pursuant to the terms of certain Stock Purchase Agreements dated
December 28, 1995 (the "Stock Purchase Agreements").
Following the exchange of common stock of Touche and TEI contemplated by
the Stock Purchase Agreements, the Company's business became that of Touche
and TEI. The Company now derives its revenues from the operation of its wholly
owned subsidiaries, including Touche and TEI.
Touche and TEI provide custom manufacturing and value-added services,
respectively, to original equipment manufacturers ("OEMs"). Their customers
are concentrated into four (4) different segments of the Information
Technology Industry and include manufacturers of mini, mainframe, micro and
personal computers, telecommunications equipment, semiconductor manufacturing
test equipment and medical test equipment. Touche and TEI do not manufacture
or produce any products that are sold to customers from inventory; all of
their products are manufactured to customer specifications and all value-added
services are performed to the specifications of the customer.
The Company has recently acquired a wire cable and harness business and a
metal stamping manufacturing business. See "Pen Interconnect, Inc." and
"Enterprise Industries, Inc."
TOUCHE MANUFACTURING COMPANY, INC.
Touche manufactures custom designed fabricated metal cabinets or
enclosures for OEMs that produce computers, telecommunications equipment,
semiconductor manufacturing test equipment and medical test equipment. These
products are used by the OEMs to house various types of electronic components.
Touche is a full service manufacturing facility for such products. As such,
Touche's engineering and design personnel work closely with each customer to
design and build an initial prototype of the specified cabinet or enclosure.
Based upon the actual production of the prototype, its design and
specifications are reviewed and a cost effective manufacturing process is
developed. All of the various manufacturing processes, which include metal
shearing, punching, bending and welding, as well as machining, detailing, zinc
plating, painting and final assembly are provided in-house by Touche. All of
the raw materials used to manufacture these products are readily available
from numerous suppliers at competitive prices. By controlling the various
manufacturing processes in-house, Touche is able to provide its customers
custom manufactured metal cabinets or enclosures in a timely, efficient and
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cost-effective manner. The full service manufacturing capability enables
Touche to derive a competitive advantage over manufacturers that have to
sub-contract for one or more of the various manufacturing processes. All of
Touche's products are manufactured to specific customer requirements pursuant
to contracts or purchase orders with the respective customers. Approximately
75% of Touche's manufacturing is performed on a mass production basis for
metal cabinets or enclosures, while the remaining 25% is in developing
prototype products for future development by its customers.
TOUCHE ELECTRONICS, INC.
In late 1992, a number of Touche's customers expressed an interest in
identifying methods of reducing their own manufacturing costs. This desire led
the management of Touche to examine its existing manufacturing capabilities
and to consider other types of services that could be offered to its customers
in conjunction with its manufacturing of custom designed fabricated metal
cabinets or enclosures. Accordingly, in early 1993 TEI was formed as a sister
company to Touche. TEI provides value-added turnkey services to many of
Touche's OEM customers. Today, these services are primarily the installation
of cable and harness assemblies into the products manufactured by Touche and
also into enclosure products manufactured by other local enclosure
manufacturers that do not have the in-house capability to provide such
services. All of TEI's value-added turnkey services are provided pursuant to
contracts or purchase orders with its customers.
The custom manufacturing of fabricated metal cabinets or enclosures
combined with the capability to provide cable and harness assembly services
enables Touche and TEI to attract and retain customer business that they may
not have otherwise obtained, thereby enhancing their competitive position in
the marketplace.
CUSTOMER PRODUCT SERVICES
Touche and TEI work with their respective customers in designing and
engineering products and in helping to develop prototypes for such products
before production manufacturing. The following processes are involved in
providing these services: shearing, bending, sheet metal, welding, machining,
detailing, zinc plating, painting and assembly. These services are currently
provided to a wide range of computer manufacturing companies,
telecommunications equipment manufacturing companies, semiconductor test
equipment manufacturing companies and medical test equipment manufacturing
companies throughout the Silicon Valley area.
The businesses of Touche and TEI, in providing customers with custom
designed and manufactured products or services, relate to four major market
areas:
Computer Systems. Touche and TEI manufacturing and assembly
businesses provide a full complement of manufacturing capabilities for mini
and mainframe computers, microcomputers and personal computers. Even though
this segment of the information technology industry is being reshaped by
evolutionary changes in semiconductor design and memory capacity, the Company
intends to increase its marketing efforts in these areas. However, the
Company's principal focus will remain in commercial markets.
Telecommunications Equipment. The changes in the basic structure of
the telecommunications segment of the information technology industry are
reflected in the recently adopted legislation that allows for wireless
communications and cable operators to offer telephone service over coaxial
connections to
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the home. The information superhighway is expected to provide new avenues into
the home. The use of coaxial cable and fiber optics will give companies the
bandwidth necessary to deliver hundreds of channels of voice, data, and video
services. Based on the changing conditions within the industry,
telecommunications equipment is forecast to continue to grow at an above
average annual rate. Touche and TEI believe that, with their present and
future manufacturing and service capabilities, they are well positioned to
take on the competitive challenges of this growing industry. Penetration of
this market segment is considered a more long term goal for the Company.
Marketing activities in this segment are directly in line with the Company's
current development of manufacturing facilities for the production of specific
types of wire and cable that is used in the computer systems segment of the
information technology industry.
Test Equipment. Touche and TEI intend to market their product
manufacturing and service capabilities in test equipment market areas. The
Company's target customers are principally large and medium-sized corporations
that specialize in the design and development of scientific measurement and
production devices that may be used by major producers in the semiconductor
industry who design and manufacture wafers that produce computer chips and the
like. The Company will continue to explore and expand new opportunities with
its customer base and look to refine the diversification of its production
capabilities in designing and manufacturing products within this market
segment as well as others.
Medical Equipment. Touche and TEI intend to continue marketing their
manufacturing and cable harness assembly services, respectively, to existing
and prospective OEMs of medical equipment. The Company targets customers with
strong track records in the design, development and production of
sophisticated medical diagnostic and analysis equipment, such as MRI
equipment, which is used in hospital and medical clinics by medical doctors to
assist in their diagnoses of otherwise very serious and complicated patient
medical problems. The Company believes that this segment of the information
technology industry will grow, offering increased opportunities to companies
like Touche and TEI which are positioned to provide cost-effective
manufacturing services at competitive prices.
PEN INTERCONNECT INC.
On November 12, 1996, TEI acquired the net assets (accounts
receivable, inventory and capital equipment) of the San Jose-based wire cable
and harness manufacturing division of Pen Interconnect Inc. ("PII").
The division acquired is a wire cable harness manufacturer, producing
different types of cable and harnesses that are used by TEI and other
subcontractors in the production of original equipment products. TEI intends
to continue such business by operating it as a division.
The consideration paid for the acquisition consisted of (a) $2.0
million in cash; (b) two promissory notes in the principal amounts of $500,000
and $400,000, respectively; and (c) 134,172 shares of the Company's Common
Stock. The notes bear interest at the prime rate plus .5% and are payable over
periods of 48 and 24 months, respectively. TMCI may also be obligated to issue
up to an additional 13,417 shares of Common Stock in the event that certain
overdue accounts receivable are collected.
Subsequent to the closing of the foregoing acquisition, a dispute has
arisen as to the value of the inventory included in the assets acquired. The
Company has initiated an arbitration proceeding in an effort to resolve this
dispute and is seeking a rescission of the transaction.
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ENTERPRISE INDUSTRIES, INC.
On January 24, 1997, the Company acquired all of the outstanding
shares of capital stock of Enterprise Industries, Inc. ("EII"), a North
Hollywood, California based metal stamping manufacturing business. The
purchase price consisted of $1,000,000 in cash and the issuance of 96,560
shares of the Company's Common Stock. EII will continue to operate under its
present name as a wholly-owned subsidiary of the Company. The President of
Enterprise Industries, Inc. has signed a five (5) year employment contract
with the company to manage that company's operations.
The principal executive offices of the Company are located at 1875
Dobbin Drive, San Jose, California 95133 and its telephone number is (408)
272-5700.
SEE "RISK FACTORS," "MANAGEMENT," "BUSINESS" AND "CERTAIN
TRANSACTIONS" FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED
IN EVALUATING THE COMPANY AND ITS BUSINESS.
THE OFFERING
Securities Offered(1)..................................2,672,000 shares
Shares of Common Stock Outstanding
Prior to Offering....................................3,596,332 shares
Shares of Common Stock Outstanding
After Offering(1).................................6,268,332 shares
Use of Net Proceeds................................See "Use of Proceeds"
Nasdaq SmallCap Market Symbols
Common Stock.....................................................TMEI
Class A Warrants................................................TMEIW
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(1) The Company is offering 2,672,000 shares of Common Stock issuable upon
exercise of the Series A Warrants. Each Class A Warrant entitles the
holder to purchase one share of Common Stock at $5.50 per share during
the four year period which commenced on March 5, 1997. The Class A
Warrants are redeemable upon certain conditions. Should the Class A
Warrants be exercised, of which there is no assurance, the Company will
receive the proceeds therefrom aggregating up to $14,108,160 net of the
warrant solicitation fee but before payment of the expenses of this
offering. See "Plan of Distribution" and "Description of Securities."
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<PAGE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK. ONLY THOSE PERSONS ABLE TO LOSE THEIR ENTIRE INVESTMENT SHOULD
PURCHASE THESE SECURITIES. PROSPECTIVE INVESTORS, PRIOR TO MAKING AN
INVESTMENT DECISION, SHOULD CAREFULLY READ THIS PROSPECTUS AND CONSIDER, ALONG
WITH OTHER MATTERS REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS:
FORWARD LOOKING STATEMENTS
When used in this Prospectus, the words "believes", "anticipates",
"expects" and similar expressions are intended to identify in certain
circumstances, forward-looking statements. Such statements are subject to a
number of risks and uncertainties that could cause actual results to differ
materially from those projected, including the risks described in the "Risk
Factors" section. Given these uncertainties, prospective investors are
cautioned not to place undue reliance on such statements. The Company also
undertakes no obligation to update these forward-looking statements.
NEW COMPANY WITH LIMITED OPERATING HISTORY
TMCI Electronics, Inc. (the "Company"), incorporated in the State of
Delaware on December 7, 1995, is a recently organized corporation that
acquired in March 1996 all of the issued and outstanding stock of Touche
Manufacturing Company, Inc. ("Touche") and Touche Electronics, Inc. ("TEI"),
San Jose, California, in an exchange of securities, whereby each corporation
became a wholly-owned subsidiary of the Company. The Company's only operations
prior to March 1996 consisted of entering into agreements to acquire Touche
and TEI and taking steps preparatory to the March Offering. The Company can
make no assurances that the combination of these companies will prove as
successful as the subsidiaries were independently.
NO ASSURANCE OF FUTURE PROFITABILITY OR PAYMENT OF DIVIDENDS
Although Touche and TEI had a combined rolling backlog at December
31, 1996 of approximately $10 million, no assurance can be given that the
future operations of the Company or its subsidiaries will be profitable.
Should the operations of the Company or its subsidiaries remain profitable, it
is likely that the Company or its subsidiaries would retain much or all of the
earnings in order to finance future growth and expansion. Therefore, the
Company does not presently intend to pay dividends.
DEPENDENCE UPON MAJOR CUSTOMERS
The largest customers of Touche and TEI are Lam Research Corporation,
Tandem Computers Incorporated and Hewlett-Packard Company. Sales to these
customers accounted for 28%, 24% and 13%, respectively, of the combined
revenues of Touche and TEI for the year ended December 31, 1996.
The contracts relating to these sales are terminable upon short
notice and none of these customers is obligated to continue to use Touche or
TEI product services at all or at existing prices. In addition, these
customers could demand price concessions from Touche and/or TEI which could
adversely affect profits and profit margins. The termination by these
customers of their relationship with Touche and/or
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TEI or a substantial decrease in prices paid by these customers would have a
material adverse effect upon the business, properties, financial condition,
results of operations and prospects of the Company.
The dependence on major customers subjects Touche and TEI to
significant financial risk in the operation of their business should a major
customer terminate, for any reason, its business relationship with Touche or
TEI. In such an event, the financial condition of the Company may be adversely
affected and the Company may be required to obtain additional financing, of
which there is no assurance.
The continuing ability of Touche and TEI to maintain these customer
relationships and to build new relationships is dependent, among other things,
upon their ability to maintain the high quality standards demanded by their
customers.
RISK OF INVENTORY OBSOLESCENCE
The products manufactured by the original equipment manufacturers
(OEMs) which are serviced by the Company are being upgraded and enhanced on a
continuous basis by these OEMs. As a result of this process, the inventory
maintained by the Company may become obsolescent. Such obsolescence may cause
the Company to have excess supplies of unusable inventory which could have a
material adverse effect on the Company.
DISPUTE RELATING TO PEN ACQUISITION
Subsequent to the closing of the Pen acquisition, a dispute has
arisen as to the value of the inventory included in the assets acquired. The
Company has initiated an arbitration proceeding in an effort to resolve this
dispute and is seeking a recission of the transaction.
IMMEDIATE AND SUBSTANTIAL DILUTION
An investor in this offering will experience immediate and
substantial dilution of $1.91 (34.73%) per share. Prior to the offering, the
Company had a net tangible book value of $8,448,470 or $2.51 per share,
derived from the Company's September 30, 1996 combined balance sheet and based
upon 3,365,600 shares being outstanding as of that date. After projecting the
effect of the possible sale of the shares offered hereby at an assumed
offering price of $5.50 per share and after deducting warrant solicitation
fees and estimated offering expenses, pro forma net tangible book value would
have been $22,511,630 or $3.59 per share. The result will be an immediate
increase in net tangible book value per share of $1.08 to existing
shareholders and an immediate dilution to new investors of $1.91 per share.
See "Dilution."
LITIGATION INVOLVING MARKET MAKER
Although Biltmore Securities, Inc. ("Biltmore") is not the sole
market maker in the Company's securities, from time to time it may be the
dominant market maker in such securities. Biltmore is involved in litigation
which may adversely affect its abilities to make a market in the Company's
securities.
The Company has been advised by Biltmore that on or about May 22,
1995, Biltmore and Elliot Loewenstern and Richard Bronson, principals of
Biltmore, and the Commission agreed to an offer of settlement (the "Offer of
Settlement") in connection with a complaint filed by the Commission in the
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United States District Court for the Southern District of Florida alleging
violations of the federal securities laws, Section 17(a) of the Securities Act
of 1933, Section 10(b) and 15(c) of the Securities Exchange Act of 1934, and
Rules 10b-5, 10b-6 and 15c1-2 promulgated thereunder. The complaint also
alleged that in connection with the sale of securities in three (3) IPOs in
1992 and 1993, Biltmore engaged in fraudulent sales practices. The proposed
Offer of Settlement was consented to by Biltmore and Messrs. Loewenstern and
Bronson without admitting or denying the allegations of the complaint. The
Offer of Settlement was approved by Judge Gonzales on June 6, 1995. Pursuant
to the final judgment (the "Final Judgment"), Biltmore:
o was required to disgorge $1,000,000 to the Commission, which amount
was paid in four (4) equal installments on or before June 22, 1995;
o agreed to the appointment of an independent consultant
("Consultant").
Such Consultant was obligated, on or about November 1, 1996 (or at such later
date as may be extended by the Consultant without court approval):
o to review Biltmore's policies, practices and procedures in six (6)
areas relating to compliance and sales practices;
o to formulate policies, practices and procedures for Biltmore that
the Consultant deems necessary with respect to Biltmore's compliance
and sales practices;
o to prepare a report devoted to and which details the aforementioned
policies, practices and procedures (the "Report");
o to deliver the Report to the President of Biltmore and to the staff
of the Southeast Regional office of the Commission;
o to prepare, if necessary, a supervisory procedures and compliance
manual for Biltmore, or to amend Biltmore's existing manual; and
o to formulate policies, practices and procedures designed to provide
mandatory on-going training to all existing and newly hired
employees of Biltmore. The Final Judgment further provides that,
within thirty (30) days of Biltmore's receipt of the Report, unless
such time is extended, Biltmore shall adopt, implement and maintain
any and all policies, practices and procedures set forth in the
Report.
On or about December 19, 1996, the Consultant completed the Report which
was thereafter delivered to Biltmore. The Report addresses the areas relating
to compliance and sales practices referred to above. Biltmore is reviewing the
Report and undertaking steps to implement the recommendations and procedures
in the Report, in accordance with the provisions of the Final Judgment.
The Final Judgment also provides that an independent auditor
("Auditor") shall conduct four (4) special reviews of Biltmore's policies,
practices and procedures, the first such review to take place six (6) months
after the Report has been delivered to Biltmore and thereafter at six-month
intervals. The Auditor is also authorized to conduct a review, on a random
basis and without notice to Biltmore, to
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certify that any persons associated with Biltmore who have been suspended or
barred by any Commission order are complying with the terms of such orders.
On July 10, 1995, the action as against Messrs. Loewenstern and
Bronson was dismissed with prejudice. Mr. Bronson has agreed to a suspension
from associating in any supervisory capacity with any broker, dealer,
municipal securities dealer, investment advisor or investment company for a
period of twelve (12) months, dating from the beginning of such suspension.
Mr. Loewenstern has agreed to a suspension from associating in any supervisory
capacity with any broker, dealer, municipal securities dealer, investment
advisor or investment company for a period of twelve (12) months commencing
upon the expiration of Mr. Bronson's suspension.
In the event that the requirements of the foregoing judgment
adversely affect Biltmore's ability to act as a market maker for the Company's
stock, and additional brokers do not make a market in the Company's
securities, the market for and liquidity of the Company's securities may be
adversely affected. In the event that other broker dealers fail to make a
market in the Company's securities, the possibility exists that the market for
and the liquidity of the Company's securities may be adversely affected to
such an extent that public security holders may not have anyone to purchase
their securities when offered for sale at any price. In such event, the market
for, liquidity and prices of the Company's securities may not exist. FOR
ADDITIONAL INFORMATION REGARDING BILTMORE, INVESTORS MAY CALL THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. AT (800) 289-9999.
Recent State Action Involving Biltmore -- Possible Loss of Liquidity
The State of Indiana has commenced an action seeking, among other
things, to revoke Biltmore's license to do business in such state. The hearing
in this matter was scheduled for October 7, 1996 and has been adjourned
pending settlement discussions. Such proceeding, if ultimately successful, may
adversely affect the market for and liquidity of the Company's securities if
additional broker-dealers do not make a market in the Company's securities.
Moreover, should Indiana investors purchase any of the securities sold in this
Offering from Biltmore prior to the possible revocation of Biltmore's license
in Indiana, such investors will not be able to resell such securities in such
state through Biltmore but will be required to retain a new broker-dealer firm
for such purpose. The Company cannot ensure that other broker-dealers will
make a market in the Company's securities. In the event that other
broker-dealers fail to make a market in the Company's securities, the
possibility exists that the market for and the liquidity of the Company's
securities may be adversely affected to an extent that public security holders
may not have anyone to purchase their securities when offered for sale at any
price. In such event, the market for, liquidity and prices of the Company's
securities may not exist. The Company does not intend to seek qualification
for the sale of the Securities in the State of Indiana. It should be noted
that although Biltmore may not be the sole market maker in the Company's
securities, it will most likely be the dominant market maker in the Company's
securities.
POSSIBLE NEED FOR ADDITIONAL FINANCING
The Company intends to fund its operations and other capital needs
for the next twelve (12) months substantially from operations, but there can
be no assurance that such funds will be sufficient for these purposes. The
Company may require substantial amounts for its future expansion, operating
costs and working capital. There can be no assurance that such financing will
be available, or that it will be available on acceptable terms. See "Use of
Proceeds."
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<PAGE>
DEPENDENCE ON MANAGEMENT
The Company's business is principally dependent on certain key
management personnel for the operation of its business. In particular, Rolando
Loera has played the primary role in the promotion, development and management
of the Company. If the employment by the Company of Mr. Loera terminates, or
he is unable to perform his duties, the Company may be adversely affected. The
Company has obtained key-man life insurance on Mr. Loera in the amount of $1
million. The Company will be the owner and beneficiary of the insurance
policy. See "Use of Proceeds," "Business" and "Management."
SUBSTANTIAL COMPETITION
The Company encounters substantial competition from domestic
businesses. Nearly all of such entities have substantially greater financial
resources, technical expertise and managerial capabilities than the Company
and, consequently, the Company may be at a substantial competitive
disadvantage in the conduct of its business. See "Business."
RECENT AND POSSIBLE FUTURE ACQUISITIONS
The Company has recently acquired a wire cable and harness
manufacturing business and a metal stamping business. No assurances can be
made that either combination will be successful. In addition, a dispute has
arisen with respect to the valuation of certain assets acquired in the wire
cable and harness manufacturing business acquisition and no assurance can be
given as to the outcome of such dispute. In the event that any of the Warrants
are exercised, the Company may use the bulk of any such proceeds in its
acquisition activities. No assurances can be made that such funds will enable
the Company to expand its base or realize profitable consolidated operations.
In addition, the Company's shareholders may not have the opportunity to review
the financial statements of any of the companies that may be acquired or have
the opportunity to vote on any proposed acquisitions. Should such funds not be
utilized in its acquisitions activities, the Company intends to utilize any
proceeds for working capital purposes.
See "Use of Proceeds" and "Business."
BROAD DISCRETION IN APPLICATION OF PROCEEDS
The management of the Company has broad discretion to adjust the
application and allocation of the net proceeds of this offering in order to
address changed circumstances and opportunities. As a result of the foregoing,
the success of the Company will be substantially dependent upon the discretion
and judgment of the management of the Company with respect to the application
and allocation of the net proceeds hereof. Pending use of such proceeds, any
proceeds of this offering will be invested by the Company in temporary,
short-term interest-bearing obligations. See "Use of Proceeds," "Business" and
"Management."
VOTING CONTROL; POTENTIAL ANTI-TAKEOVER EFFECT
Assuming none of the Warrants are exercised, the officers, directors
and principal stockholders of the Company beneficially own approximately
26.59% of the Company's Common Stock. Accordingly, such persons may, with the
votes of the holders of an additional 23.41% of the Company's Common Stock, be
able to approve major corporate transactions including amending the
Certificate of Incorporation of the Company or the sale of substantially all
of the Company's assets, and may be able to elect all of
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<PAGE>
the directors of the Company and to control the Company's affairs. This voting
control may have the effect of delaying or preventing a change in control of
the Company and may adversely affect the rights of the holders of the shares
of Common Stock of the Company. In addition, the Company is subject to a State
of Delaware statute regulating business combinations which may also hinder of
delay a change of control.
SUBSTANTIAL REGULATION
Substantial environmental laws have been enacted in the United States
and California in response to public concern over environmental deterioration.
These laws and the implementing regulations affect nearly every activity of
the Company. The principal federal legislation which has the most significant
effect on the Company's business includes the following: The Comprehensive
Environmental Response, Compensation and Liability Act; The Resource
Conservation and Recovery Act; The Clean Air Act; The Safe Drinking Water Act;
The Emergency Planning and Community Right-to-Know Act; The Clean Water Act
and The Toxic Substance Control Act. Failure by the Company to comply with
applicable federal and state environmental regulations could result in the
Company incurring substantial fines and penalties and/or having restraining
orders issued against it. See "Business - Regulation."
LIMITATION ON DIRECTOR LIABILITY
As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation limits the liability of directors to the Company
or its stockholders for monetary damages for breach of a director's fiduciary
duty, except for liability in four specific instances. These are for (i) any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional
misconduct or knowing violation of law, (iii) unlawful payments of dividends
or unlawful stock purchases or redemptions as provided in Section 174 of the
Delaware General Corporation Law, or (iv) any transaction from which the
director derived an improper personal benefit. As a result of the Company's
charter provision and Delaware law, stockholders may have more limited rights
to recover against directors for breach of fiduciary duty than as existing
prior to the enactment of the laws. See "Management - Limitation on Liability
of Directors."
REQUIREMENTS OF CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION IN
CONNECTION WITH THE EXERCISE OF THE WARRANTS WHICH MAY NOT BE EXERCISABLE AND
MAY THEREFORE BE VALUELESS
The Company will be able to issue shares of its Common Stock upon the
exercise of the Warrants and the Unit Purchase Option only if (i) there is a
current prospectus relating to the securities offered hereby under an
effective registration statement filed with the Securities and Exchange
Commission, and (ii) such Common Stock is then qualified for sale or exempt
therefrom under applicable state securities laws of the jurisdictions in which
the various holders of Warrants reside. There can be no assurance, however,
that the Company will be successful in maintaining a current registration
statement. After a registration statement or post-effective amendment thereto
becomes effective, it may require updating by the filing of one or more
post-effective amendments. A post-effective amendment is required (i) anytime
after nine (9) months subsequent to the effective date of the registration
statement or most recent post-effective amendment thereto when any information
contained in the prospectus is over sixteen (16) months old; (ii) when facts
or events have occurred which represent a fundamental change in the
information contained in the registration statement; or (iii) when any
material change occurs in the information relating to the plan or distribution
of the securities registered by such registration statement. The Company
intends to qualify the sale of the Common Stock in a limited number of states,
although certain
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<PAGE>
exemptions under certain state securities ("Blue Sky") laws may permit the
Warrants to be transferred to purchasers in states other than those in which
the Warrants were initially qualified. The Company will be prevented, however,
from issuing Common Stock upon exercise of the Warrants in those states where
exemptions are unavailable and the Company has failed to qualify the Common
Stock issuable upon exercise of the Warrants. The Company may decide not to
seek, or may not be able to obtain qualification of the issuance of such
Common Stock in all of the states in which the ultimate purchasers of the
Warrants reside. In such a case, the Warrants of those purchasers will expire
and have no value if such warrants cannot be exercised or sold. Accordingly,
the market for the Warrants may be limited because of the Company's obligation
to fulfill both of the foregoing requirements. See "Description of
Securities."
ADDITIONAL AUTHORIZED SHARES AVAILABLE FOR ISSUANCE MAY ADVERSELY AFFECT THE
MARKET
The Company is authorized to issue 25,000,000 shares of its Common
Stock, $.001 par value per share. If all of the Warrants are exercised, there
will be a total of 6,268,332 shares of Common stock issued and outstanding.
However, this number does not include the exercise of the Unit Purchase Option
granted to the underwriter in the Company's initial public offering which
represents the right to acquire 128,000 Units at $8.25 per Unit. After
reserving a total of 128,000 shares of Common Stock for issuance upon the
exercise of the foregoing Unit Purchase Option, and 128,000 shares of Common
Stock for issuance upon exercise of the Warrants included in said Unit
Purchase Option and 100,000 shares for issuance upon the exercise of other
options, the Company will have 18,375,668 shares of authorized but unissued
capital stock available for issuance without further shareholder approval. As
a result, any issuance of additional shares of common stock may cause current
shareholders of the Company to suffer significant dilution which may adversely
affect the market. See "Dilution" and "Description of Securities."
WARRANTS SUBJECT TO REDEMPTION
The Warrants became exercisable commencing March 5, 1997. Each Class
A Warrant entitles the holder to purchase one share of Common Stock at $5.50
per share during the four year period commencing March 5, 1997. The Class A
Warrants are redeemable by the Company for $.01 per Warrant, at any time after
March 5, 1997, upon thirty (30) days' prior notice, if the average closing
price or bid price of the Common Stock, as reported by the Nasdaq equals or
exceeds $8.75 per share, for any twenty (20) consecutive trading days within a
period of thirty (30) consecutive trading days ending within five (5) days
prior to the date of the notice of redemption. Upon thirty (30) days' written
notice to all holders of the Class A Warrants, the Company shall have the
right to reduce the exercise price and/or extend the term of the Class A
Warrants in compliance with the requirements of Rule 13e-4 to the extent
applicable. See "Description of Securities."
MARKET MAKER'S INFLUENCE ON THE MARKET MAY HAVE ADVERSE CONSEQUENCES
Although it has no legal obligation to do so, Biltmore from time to
time in the future may make a market in and otherwise effect transactions in
the Company's securities. To the extent Biltmore acts as market maker in the
securities, it may be a dominating influence in that market. The price and
liquidity of such securities may be affected by the degree, if any, of
Biltmore's participation in the market, inasmuch as a significant amount of
such securities may be sold to customers of Biltmore. Such customers
subsequently may engage in transactions for the sale or purchase of such
securities through or with Biltmore. Such market making activities, if
commenced, may be discontinued at any time or from
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<PAGE>
time to time by Biltmore without obligation or prior notice. If a dominating
influence at such time, Biltmore's discontinuance may adversely affect the
price and liquidity of the securities.
Further, unless granted an exemption by the Securities and Exchange
Commission to its Rule 10b-6, Biltmore may be prohibited from engaging in any
market making activities with regard to the Company's securities for the
period from two or nine business days prior to any solicitation of the
exercise of Warrants until the later of the termination of such solicitation
activity or the termination, by waiver or otherwise, of any right that
Biltmore may have to receive a fee for the exercise of Warrants following the
solicitation. As a result, Biltmore may be unable to continue to provide a
market for the Company's securities under certain periods while the Warrants
are exercisable which may adversely affect the price and liquidity of the
securities.
EXERCISE OF WARRANTS MAY HAVE DILUTIVE EFFECT ON MARKET
The Class A Warrants to be issued in connection with this offering
will provide, during their term, an opportunity for the holder to profit from
a rise in the market price, of which there is no assurance, with resulting
dilution in the ownership interest in the Company held by the then present
shareholders. Holders of the Warrants most likely would exercise the Warrants
and purchase the underlying Common Stock at a time when the Company may be
able to obtain capital by a new offering of securities on terms more favorable
than those provided by such Warrants, in which event the terms on which the
Company may be able to obtain additional capital would be affected adversely.
"PENNY STOCK" REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY OF
SECURITIES
The Securities and Exchange Commission ("Commission") has adopted
regulations which generally define "penny stock" to be any equity security
that has a market price (as defined) less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to certain exceptions. The
Company's securities are currently exempt from the definition of "penny stock"
based upon their being listed on the Nasdaq SmallCap Market. If the Company's
securities are removed from listing on Nasdaq at any time they may become
subject to rules that impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally, those person with assets in
excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together
with their spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of such
securities and have received the purchaser's written consent to the
transaction prior to the purchase. Additionally, for any transaction involving
a penny stock, unless exempt, the rules require the delivery, prior to the
transaction, of a risk disclosure document mandated by the Commission relating
to the penny stock market. The broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Finally,
monthly statements must be sent disclosing recent price information for the
penny stock held in the account and information on the limited market in penny
stocks. Consequently, the "penny stock" rules may restrict the ability of
broker-dealers to sell the Company's securities and may affect the ability of
purchasers in this offering to sell the Company's securities in the secondary
market.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET
Certain of the Company's currently outstanding shares of common stock
are "restricted securities" and, in the future, may be sold upon compliance
with Rule 144, adopted under the Securities Act of 1933, as amended. Rule 144
provides, in essence, that a person holding "restricted securities" for a
period of one year may sell only an amount every three months equal to the
greater of (a) one percent of the Company's issued and outstanding shares, or
(b) the average weekly volume of sales during the four calendar weeks
preceding the sale. The amount of "restricted securities" which a person who
is not an affiliate of the Company may sell is not so limited, since
non-affiliates may sell without volume limitation their shares held for two
years if there is adequate current public information available concerning the
Company. Assuming that there is no exercise of any issued and outstanding
Warrants, the Company will have 3,596,332 shares of its Common Stock issued
and outstanding, of which 1,224,332 shares are "restricted securities" and
2,372,000 are publicly traded shares. Therefore, during each three month
period, beginning June 4, 1996, a holder of restricted securities who has held
them for at least the one year period may sell under Rule 144 a number of
shares up to 12,243 shares. Nonaffiliated persons who hold for the two-year
period described above may sell unlimited shares once their holding period is
met. Notwithstanding the above, the current officers, directors and principal
stockholders have agreed, except as noted below, not to sell, transfer, assign
or issue any securities of the Company for a period of twenty-four (24) months
ending March 5, 1998, without the consent of Biltmore. These restrictions have
been released by Biltmore with respect to a portion of such securities. The
Company has also agreed not to issue any additional securities other than as
contemplated by this Prospectus for a period of twenty-four (24) months
without the consent of Biltmore.
Prospective investors should be aware that the possibility of sales
may, in the future, have a depressive effect on the price of the Company's
Common Stock in any market which may develop and, therefore, the ability of
any investor to market his shares may be dependent directly upon the number of
shares that are offered and sold. Affiliates of the Company may sell their
shares during a favorable movement in the market price of the Company's Common
Stock which may have a depressive effect on its price per share. See
"Description of Securities."
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<PAGE>
USE OF PROCEEDS
There can be no assurance that any of the Warrants will be exercised.
In the event holders of Warrants elect to exercise the Warrants, Management
anticipates that the proceeds from such exercise would be contributed to
working capital of the Company. Nonetheless, the Company may at the time of
exercise allocate a portion of the proceeds to any other corporate purposes.
Accordingly, investors who exercise their Warrants will entrust their funds to
management, whose specific intentions regarding the use of such funds are not
presently and specifically known.
DILUTION
As of September 30, 1996, the Company had a net tangible book value
of $8,448,470, or $2.51 per share (based on the Company having 3,365,600
shares outstanding as of that date), derived from the Company's balance sheet
as of that date. Net tangible book value per share means the tangible assets
of the Company, less all liabilities, divided by the number of shares of
Common Stock outstanding. After giving effect to the exercise of the Warrants
at a price of $5.50 per share, after deducting warrant solicitation fees and
estimated offering expenses, pro forma net tangible book value would have been
$22,511,630, or $3.59 per share. The result will be an immediate increase in
net tangible book value per share of $1.08 to existing shareholders and an
immediate dilution to new investors of $1.91 per share. "Dilution" is
determined by subtracting net tangible book value per share after the offering
from the offering price to investors. The following table illustrates this
dilution:
Exercise price of the Warrants $5.50
Net tangible book value per share,
before the offering $2.51
Increase per share attributable to
the sale by the Company of the
shares offered hereby $1.08
Pro forma net tangible book value per
share, after the offering $3.59
Dilution per share to new investors $1.91
The above table assumes exercise of all of the Warrants.
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<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is traded on the NASDAQ SmallCap Market
under the symbol "TMEI."
The following table sets forth the reported high and low bid
quotations of the Common Stock for the periods indicated. Such quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission
and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Common Stock
--------------------------
High Low
---- ---
<S> <C> <C>
1996:
First Quarter $ 8.375 $ 6.50
Second Quarter $ 9.50 $ 8.375
Third Quarter $ 9.50 $ 6.50
Fourth Quarter $ 7.00 $ 4.75
1997:
First Quarter $ 6.75 $ 6.375
(through March 20, 1997)
</TABLE>
On March 20, 1997, the closing bid price for the Company's Common
Stock as reported on the NASDAQ SmallCap Market system was $5.75. On that date
there were approximately 30 holders of record of Common Stock (including
entities which hold stock in street name on behalf of other beneficial
owners).
The Company has not paid any cash dividends on its Common Stock to
date. The Company anticipates that for the foreseeable future it will follow a
policy of retaining earnings, if any, in order to finance the expansion and
development of its business. Payment of dividends is within the discretion of
the Company's Board of Directors and will depend upon the earnings, capital
requirements and operating and financial condition of the Company, among other
factors.
Other than the foregoing, the Company does not anticipate the
declaration or payment of any dividends in the foreseeable future. There can
be no assurance that cash dividends of any kind will ever be paid.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
On March 5, 1996, the Company acquired Touche and TEI pursuant to
certain Stock Purchase Agreements executed on December 28, 1995. Prior to that
time, the Company's operations consisted of forming the Company, preparing for
the acquisition of Touche and TEI, as well as preparing for the initial public
offering of its securities discussed below.
In the first quarter ended March 31, 1996, the Company made a limited
investment to start two new divisions at TEI: the Wire and Cable Manufacturing
division and the Clean Room Assembly division. These divisions will produce
basic cable products and will provide clean-room assembly capabilities for
specialized products for their customers, respectively. The Company's strategy
has been to expand its core and value added business by increasing its product
offerings to satisfy its customers' needs and their growing demand for more
outsourcing of contract manufacturing services. In November 1996, TEI acquired
the wire cable and harness manufacturing division of Pen Interconnect, Inc. In
January 1997, the Company acquired Enterprise Industries, Inc. a metal
stamping business. See "Business."
RESULTS OF OPERATIONS-FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED
WITH 1995
The results of operations utilizes the combined results from Touche
and TEI prior to their acquisition by the Company, eliminating intercompany
transactions as represented by the financial statements. The table and the
discussion below should be read in conjunction with the financial statements
and the notes thereto, that appear elsewhere in this report.
<TABLE>
<CAPTION>
Combined Statements of Income
Nine Months Ended
September 30,
-----------------------------------------
1996 1995
---- ----
<S> <C> <C>
Sales(1) $20,496,567 $20,543,000
Cost of goods sold(1) 13,497,840 14,418,419
Gross Profit 6,998,727 6,124,581
Operating expenses 5,800,330 4,546,855
Income before tax provision 1,198,397 1,577,726
Other income (expense) (231,636) 23,308
Interest expense (246,655) (447,328)
Provision for tax (254,736) (394,677)
Net income 465,370 759,029
</TABLE>
(footnotes on next page)
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- -------------------
(1) Net of intercompany sales and cost of goods sold as follows:
September 30, 1996..................................$3,257,678
September 30, 1995..................................$3,456,519
NET SALES
Net sales decreased by approximately $46,400 to $20,496,567 from
$20,543,000 for the nine month period ended September 30, 1996 as compared to
the nine month period ended September 30, 1995. The slight decline in sales
was due primarily to a number of order cancellations and the rescheduling of
customer orders. In the third quarter ended September 30, 1996, the Company's
sales forecast was adjusted downward to reflect the impact of the general
slowdown in the industry, changing local market conditions, and the resulting
decline in sales and operations. In response to the decline in value-added
business, the Company has accelerated its sales and marketing to capture more
of the core business from new potential customers.
GROSS PROFIT
Gross profit increased approximately $874,100 or 14% to $6,998,727
from $6,124,581 for the nine month period ended September 30, 1996 as compared
to the nine month period ended September 30, 1995. As a percentage of sales,
gross profit increased approximately 4% to 34% from 30% for the nine month
period ended September 30, 1996 as compared to the nine month period ended
September 30, 1995. Operating efficiencies continue playing a key part in the
maintenance of higher gross profit margins in the business.
OPERATING EXPENSES
Operating expenses increased approximately $1,253,500 or 22% to
$5,800,330 from $4,546,855 for the nine month period ended September 30, 1996
as compared to the nine month period ended September 30, 1995. As a percentage
of sales, the Company's operating expenses increased 6% to 28% from 22% for
the nine month period ended September 30, 1996 as compared to the nine month
period ended September 30, 1995. The increase in operating expenses was
primarily due to an investment in infrastructure to support planned growth,
including two new operating divisions. This investment included additional
personnel, building rental costs, repairs, professional fees, promotions of
certain engineers to management positions and other items. The Company
continues to respond quickly to the changing market conditions by lowering its
operating costs through reduced labor force and other actions to levels that
are more in line with its revised sales and growth plans for the remainder of
the calendar year ending December 1996.
INTEREST EXPENSE
Interest expense for the nine month period ended September 30, 1996
was approximately $246,600, representing a decrease of approximately $200,700
or 45% from the nine month period ended September 30, 1995. Interest expense
decreased during the nine month period ended September 30, 1996 due to a
substantial reduction in outstanding long term debt, capital lease
obligations, and bank borrowings as compared to the nine month period ended
September 30, 1995.
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<PAGE>
NET INCOME
Net income decreased approximately $293,700 or 39% to $465,370 from
$759,029 for the nine month period ended September 30, 1996 as compared to the
nine month period ended September 30, 1995. The decline in net income was due
primarily to: (1) a one-time financing charge of approximately $462,100 on
certain bridge loans that were made by the Company in the fourth quarter of
1995 to help fund its initial public offering, and (2) increased operating
expenses incurred to fund two new divisions which did not generate income in
the nine month period, partially offset by a reduction in interest expense, a
gain of approximately $139,000 on the sale of capital equipment, and a $63,000
increase in interest and other income.
RESULTS OF OPERATIONS-FOR THE YEAR ENDED DECEMBER 31, 1995 COMPARED WITH 1994
The Results of Operations discussion utilizes the combined results
from the operating subsidiaries (Touche and TEI) prior to their acquisition by
the Company eliminating intercompany transactions as represented by the
financial statements.
TOUCHE MANUFACTURING COMPANY, INC. AND TOUCHE ELECTRONICS, INC.
The following table sets forth the combined statements of operations
of Touche and TEI for the periods indicated:
Combined Statements of Operations
Years Ended December 31,
1995 1994
-----------------------------------------
Sales (1) $28,089,919 $20,869,434
Cost of goods sold (1) 19,991,649 14,950,750
---------- ----------
Gross Profit 8,107,270 5,918,684
Operating expenses 6,384,946 4,938,454
---------- ---------
Income from Operations 1,722,324 980,230
---------- ----------
Other Income 40,394 109,865
Interest Income 39,002 35,002
Interest expense (615,881) (602,733)
Non Cash Finance Charge (287,878) -0-
Gain on Sale of Equipment 109,655 835
---------- ---------
Total Other Expense (714,708) 457,011)
----------- ----------
Income before provision for
income taxes 1,007,616 523,219
Pro forma provision for income taxes 509,100 209,288
---------- ----------
$ 498,516 $ 313,931
============ ============
- -------------
(1) Net of intercompany sales and cost of goods sold as follows:
December 31, 1995 $4,649,012
December 31, 1994 $1,951,788
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<PAGE>
Revenue increased by $7,228,985 to $28,098,919 from $20,869,934 or
approximately 35% for the fiscal year ended December 31, 1995, as compared
with the fiscal year ended December 31, 1994. This increase reflects the
continuing change in the operating philosophy of the OEMs serviced by Touche
and TEI. Such OEMs continue to focus their resources on the design-engineering
and marketing aspects of their businesses, directing more of the manufacturing
activities to specialized full service contract manufacturers like Touche and
TEI. This trend has resulted in an increase in the number and dollar amount of
contracts started in 1995 as compared to 1994. The Company also believes that
the increase in the number of contracts started in 1995 is a result of the
strength of the economy, the growth of the information technology industry in
the areas of both voice and data, and the diversification of manufacturing
processes offered by its subsidiaries. There can be no assurance that the
economy will continue to be strong or that OEMs will continue to increase
their outsourcing of manufacturing activities to specialized firms such as the
Company.
The growth in the information technology industry has placed greater
demand on the products produced by the customers of Touche and TEI. In turn,
such growth has placed greater demand on the enclosure manufacturing, value
added assembly, and cable and harness installation services provided by the
Company. Furthermore, the diversification of manufacturing processes, through
the vertical integration into these value-added assembly and cable and harness
installation elements of the business, has provided the Company with growth
opportunities which were not previously available.
Inasmuch as the Company's three largest customers accounted for
approximately 70% of revenues for the fiscal year ended December 31, 1995,
with the largest accounting for 33% of such revenues, the disruption or loss
of any one of these three customers could have a material adverse impact on
the total revenues of the Company. The expansion of services offered by the
Company, however, in the view of management will contribute to the expansion
of the Company's customer base and toward the strengthening of the on-going
relationship with the Company's major customers.
Gross profit increased by $2,188,586 or approximately 37% to
$8,107,270 from $5,918,684 for the fiscal year ended December 31, 1995, as
compared with the fiscal year ended December 31, 1994. In addition, gross
profit as a percentage of revenue has increased from approximately 28% in
fiscal 1994 period to approximately 29% in fiscal 1995. The increase in gross
profit is due primarily to decreases in labor and subcontracting costs and the
significant increases in Touche and TEI's contract revenue, which was more
than sufficient to offset an approximate 56% increase in the cost of materials
and supplies during the period. The Company's gross profit margins may be
materially impacted by the diversity of its operations which are constantly
improved in order to meet the growing demands of the competitive market
bidding processes with its customers. For instance, the Company's expansion
into the manufacture of wire cable and harness assemblies is expected to
improve the profitability of TEI by virtue of its ability to produce wire
cable and harness assemblies at a cost below the cost of purchase from another
manufacturer. The Company's expansion into clean room assembly and metal
stamping are each expected to improve profits incrementally. The Company's
gross profit margins also may be materially impacted by the pricing of product
services which is directly affected by increases in direct labor and material
costs.
As a contract manufacturer, the Company's production capabilities are
limited to providing services for products that are designed and marketed by
OEMs, with the type and quantity of such product services being driven by the
greater need for such products by the business community and personal
end-user. The Company's competitive environment is very sensitive to diversity
of its services
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and operations which tend to drive prices down because of higher levels of
customer concentration, thus, making it less competitive and more of a captive
customer.
Operating expenses increased $1,446,492 or approximately 29% to
$6,384,946 from $4,938,454 in 1995 as compared to 1994. This increase was
primarily due to the increase in the number of contracts in 1995 as compared
to 1994.
Net income after taxes increased by $184,585 or approximately 59% to
$498,516 from $313,931 in 1995 as compared to 1994. This increase was
primarily due to increased contract revenue.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a long-term revolving line of credit with
Manufacturers Bank ("Mfrs."), which expires May 1, 1997, and bears interest at
Mfrs.' base rate plus 3/4%. This facility permits the Company to borrow up to
$4,000,000 based on a stipulated percentage of contractually defined eligible
trade accounts receivable. The Company had no outstanding borrowings under the
line of credit as of September 30, 1996. In addition, the Company and Mfrs.
have agreed to a term facility of up to $2,000,000 available for equipment
purchase, which will bear interest at Mfrs.' base rate plus 1 1/4%. There was
approximately $1,790,100 outstanding under this borrowing facility as of
September 30, 1996.
On March 11, 1996, the Company closed an Initial Public Offering of
its securities resulting in net proceeds of approximately $5.8 million. The
Company used the proceeds of the offering to repay certain bridge notes and
other debt and applied the remaining proceeds to working capital.
The Company's working capital increased by approximately $5,325,000
from $1,120,000 to $6,445,018 during the nine month period ended September 30,
1996. This increase resulted primarily from an increase in cash of
approximately $1,445,600 from the Initial Public Offering net proceeds, an
increase in inventory of approximately $1,912,300, a decrease in accounts
payable of approximately $904,000, and a decrease in the line of credit
drawdown of approximately $1,644,600.
The Company required cash to fund operating activities of
approximately ($375,500) in the nine month period ended September 30, 1996 as
compared to generating cash from operating activities of approximately
$1,239,500 in the nine month period ended September 30, 1995. Additional cash
was required to pay for inventory buildup, a reduction in accounts payable,
tax payments and an increase in prepaid expenses. Cash in the amount of
approximately $1,821,100 was provided by net investing and financing
activities, which included sale and purchase of equipment, debt reduction, and
the initial public offering in the nine month periods ended September 30,
1996, as compared to cash used in the amount of approximately $1,231,400 for
the nine month periods ended September 30, 1995.
During the nine month period ended September 30, 1996, the Company's
property, plant, and equipment increased by approximately $1,048,400.
Management has projected no significant capital expenditure requirements for
the remainder of fiscal 1996. During the nine month period ended September 30,
1996, the Company spent approximately $539,000 of cash to purchase capital
assets. The remainder of the 1996 expenditures have been financed through
capital lease obligations.
Management believes that its current financial position, together
with available borrowings under the Company's various credit facilities will
be sufficient to meet the Company's anticipated operating needs and projected
capital assets purchase requirements for the next twelve months. The Company's
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current financial situation, including bank support, appears to be adequate to
meet its current operating needs and projected asset purchases.
Certain statements made above relating to plans, objectives and
economic performance go beyond historical information and may provide an
indication of future results. To such extent, they are forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and 21E of the Securities Exchange Act of 1934, as amended, and each
is subject to factors that could cause actual results to differ from those in
the forward looking statement. Such factors include but are not limited to,
the assumption that no material changes in general market conditions will
occur and the assumption that the Company does not incur any unanticipated
expenditures.
BUSINESS
OVERVIEW
TMCI Electronics, Inc. (the "Company") was incorporated in the State
of Delaware on December 7, 1995 for the purpose of acquiring the businesses of
Touche Manufacturing, Inc. ("Touche") and Touche Electronics, Inc. ("TEI").
The principal executive offices of the Company, Touche and TEI are located in
San Jose, California. Touche and TEI were principally owned by Rolando Loera,
the President and Chief Executive Officer of the Company. The Company acquired
all of the issued and outstanding shares of common stock of Touche and TEI on
March 5, 1996 from Mr. Loera and all of the minority shareholders of Touche
and TEI pursuant to the terms of certain Stock Purchase Agreements dated
December 28, 1995 (the "Stock Purchase Agreements").
Following the exchange of common stock of Touche and TEI contemplated
by the Stock Purchase Agreements, the Company's business became that of Touche
and TEI. The Company now derives its revenues from the operation of its wholly
owned subsidiaries, including Touche and TEI.
Touche and TEI provide custom manufacturing and value-added services,
respectively, to original equipment manufacturers ("OEMs"). Their customers
are concentrated into four (4) different segments of the Information
Technology Industry and include manufacturers of mini, mainframe, micro and
personal computers, telecommunications equipment, semiconductor manufacturing
test equipment and medical test equipment. Touche and TEI do not manufacture
or produce any products that are sold to customers from inventory; all of
their products are manufactured to customer specifications and all value-added
services are performed to the specifications of the customer.
TOUCHE MANUFACTURING COMPANY, INC.
Touche manufactures custom designed fabricated metal cabinets or
enclosures for OEMs that produce computers, telecommunications equipment,
semiconductor manufacturing test equipment and medical test equipment. These
products are used by the OEMs to house various types of electronic components.
Touche is a full service manufacturing facility for such products. As such,
Touche's engineering and design personnel work closely with each customer to
design and build an initial prototype of the specified cabinet or enclosure.
Based upon the actual production of the prototype, its design and
specifications are reviewed and a cost effective manufacturing process is
developed. All of the various manufacturing processes, which include metal
shearing, punching, bending and welding, as well as machining, detailing, zinc
plating, painting and final assembly are provided in-house by Touche. All of
the raw materials used to manufacture these products are readily available
from numerous suppliers at
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competitive prices. By controlling the various manufacturing processes
in-house, Touche is able to provide its customers custom manufactured metal
cabinets or enclosures in a timely, efficient and cost-effective manner. The
full service manufacturing capability enables Touche to derive a competitive
advantage over manufacturers that have to sub-contract for one or more of the
various manufacturing processes. All of Touche's products are manufactured to
specific customer requirements pursuant to contracts or purchase orders with
the respective customers. Approximately 75% of Touche's manufacturing is
performed on a mass production basis for metal cabinets or enclosures, while
the remaining 25% is in developing prototype products for future development
by its customers.
TOUCHE ELECTRONICS, INC.
In late 1992, a number of Touche's customers expressed an interest in
identifying methods of reducing their own manufacturing costs. This desire led
the management of Touche to examine its existing manufacturing capabilities
and to consider other types of services that could be offered to its customers
in conjunction with its manufacturing of custom designed fabricated metal
cabinets or enclosures. Accordingly, in early 1993 TEI was formed as a sister
company to Touche. TEI provides value-added turnkey services to many of
Touche's OEM customers. Today, these services are primarily the installation
of cable and harness assemblies into the products manufactured by Touche and
also into enclosure products manufactured by other local enclosure
manufacturers that do not have the in-house capability to provide such
services. All of TEI's value-added turnkey services are provided pursuant to
contracts or purchase orders with its customers.
The custom manufacturing of fabricated metal cabinets or enclosures
combined with the capability to provide cable and harness assembly services
enables Touche and TEI to attract and retain customer business that they may
not have otherwise obtained, thereby enhancing their competitive position in
the marketplace.
CUSTOMER PRODUCT SERVICES
Touche and TEI work with their respective customers in designing and
engineering products and in helping to develop prototypes for such products
before production manufacturing. The following processes are involved in
providing these services: shearing, bending, sheet metal, welding, machining,
detailing, zinc plating, painting and assembly. These services are currently
provided to a wide range of computer manufacturing companies,
telecommunications equipment manufacturing companies, semiconductor test
equipment manufacturing companies and medical test equipment manufacturing
companies throughout the Silicon Valley area.
The businesses of Touche and TEI, in providing customers with custom
designed and manufactured products or services, relate to four major market
areas:
Computer Systems. Touche and TEI manufacturing and assembly
businesses provide a full complement of manufacturing capabilities for mini
and mainframe computers, microcomputers and personal computers. Even though
this segment of the information technology industry is being reshaped by
evolutionary changes in semiconductor design and memory capacity, the Company
intends to increase its marketing efforts in these areas. However, the
Company's principal focus will remain in commercial markets.
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Telecommunications Equipment. The changes in the basic structure of
the telecommunications segment of the information technology industry are
reflected in the recently adopted legislation that allows for wireless
communications and cable operators to offer telephone service over coaxial
connections to the home. The information superhighway is expected to provide
new avenues into the home. The use of coaxial cable and fiber optics will give
companies the bandwidth necessary to deliver hundreds of channels of voice,
data, and video services. Based on the changing conditions within the
industry, telecommunications equipment is forecast to continue to grow at an
above average annual rate. Touche and TEI believe that, with their present and
future manufacturing and service capabilities, they are well positioned to
take on the competitive challenges of this growing industry. Penetration of
this market segment is considered a more long term goal for the Company.
Marketing activities in this segment are directly in line with the Company's
current development of manufacturing facilities for the production of specific
types of wire and cable that is used in the computer systems segment of the
information technology industry.
Test Equipment. Touche and TEI intend to market their product
manufacturing and service capabilities in test equipment market areas. The
Company's target customers are principally large and medium-sized corporations
that specialize in the design and development of scientific measurement and
production devices that may be used by major producers in the semiconductor
industry who design and manufacture wafers that produce computer chips and the
like. The Company will continue to explore and expand new opportunities with
its customer base and look to refine the diversification of its production
capabilities in designing and manufacturing products within this market
segment as well as others.
Medical Equipment. Touche and TEI intend to continue marketing their
manufacturing and cable harness assembly services, respectively, to existing
and prospective OEMs of medical equipment. The Company targets customers with
strong track records in the design, development and production of
sophisticated medical diagnostic and analysis equipment, such as MRI
equipment, which is used in hospital and medical clinics by medical doctors to
assist in their diagnoses of otherwise very serious and complicated patient
medical problems. The Company believes that this segment of the information
technology industry will grow, offering increased opportunities to companies
like Touche and TEI which are positioned to provide cost-effective
manufacturing services at competitive prices.
PEN INTERCONNECT INC.
On November 12, 1996, TEI acquired the net assets (accounts
receivable, inventory and capital equipment) of the San Jose-based wire cable
and harness manufacturing division of Pen Interconnect Inc.
("PII").
The acquired division is a wire cable harness manufacturer, producing
different types of cable and harnesses that are used by TEI and other
subcontractors in the production or original equipment products. TEI intends
to continue such business by operating it as a division.
The consideration paid for the acquisition consisted of (a) $2.0
million in cash; (b) two promissory notes in the principal amounts of $500,000
and $400,000, respectively; and (c) 134,172 shares of the Company's Common
Stock. The notes bear interest at the prime rate plus .5% and are payable over
periods of 48 and 24 months, respectively. TMCI may also be obligated to issue
up to an additional 13,417 shares of Common Stock in the event certain overdue
accounts receivable are collected.
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Subsequent to the closing of the foregoing acquisition, a dispute has
arisen as to the value of the inventory included in the assets acquired. The
Company has initiated and arbitration proceeding in an effort to resolve this
dispute and is seeking a rescission of the transaction.
ENTERPRISE INDUSTRIES, INC.
On January 24, 1997, the Company acquired all of the outstanding
shares of capital stock of Enterprise Industries, Inc. ("EII"), a North
Hollywood, California based metal stamping manufacturing business. The
purchase price consisted of $1,000,000 in cash and the issuance of 96,560
shares of the Company's Common Stock. EII will continue to operate under its
present name as a wholly-owned subsidiary of the Company. The President of
Enterprise Industries, Inc. has signed a five (5) year employment contract
with the company to manage that company's operations.
The principal executive offices of the Company are located at 1875
Dobbin Drive, San Jose, California 95133 and its telephone number is (408)
272-5700.
SEE "RISK FACTORS," "MANAGEMENT," "BUSINESS" AND "CERTAIN
TRANSACTIONS" FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED
IN EVALUATING THE COMPANY AND ITS BUSINESS.
MAJOR CUSTOMERS
Touche and TEI's customers include various information technology
industry related companies, such as Hewlett Packard Company, Lam Research
Corporation, Tandem Computers Incorporated, Applied Materials, Inc., KLA
Instruments Corporation, Varian Associates, Inc. and Teradyne, Inc. For the
year ended December 31, 1996, revenues derived from three customers (Lam
Research Corporation, Tandem Computers Incorporated and Hewlett Packard
Company) amounted to approximately 28%, 24% and 13%, respectively, of total
revenue, excluding intercompany sales. For the year ended December 31, 1995,
revenue from these three customers amounted to 33%, 18% and 19%, respectively,
of total revenue, excluding intercompany sales. For the year ended December
31, 1994, revenue from these three customers amounted to approximately 29%,
26% and 13% of total revenue, excluding intercompany sales. As the sales
arrangements with these customers are terminable upon short notice, the loss
of any of them would have a material adverse impact on the Company's revenues
and profits, given the significant percentage of revenues derived from these
customers. The Company believes, however, that the expansion of services
offered to these customers through the Company's vertical expansion will
contribute toward the on-going relationship with these customers.
MANUFACTURING
Touche and TEI's engineering, production and assembly facilities have
adequate space for their current operations, and also for the planned
implementation of clean room assembly, wire cable harness manufacturing and
metal stamping, and are capable of fabricating and assembling computers,
telecommunications equipment, semiconductor manufacturing test equipment and
medical test equipment. Touche and TEI maintain a comprehensive manufacturing,
assembly and quality control inspection program to ensure that all products
meet exacting customer requirements for performance and quality workmanship
prior to delivery. Touche and TEI are in the business of fabricating
custom-designed metal enclosures. This product and service cannot be
homogenized into one operation or manufacturing approach for its entire
production line. With each custom order received from a customer comes a
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different list of requirements for manufacturing design, process and finish.
In addition, the manufacturing environment allows for the manufacture of both
prototype and production of the various types of customer products. To support
its operations, Touche and TEI have purchased a wide variety of sophisticated
automated machinery and shop equipment, components, tools and supplies from
proven outside vendors, distributors and service organizations.
MARKETING AND SALES
Touche and TEI's marketing strategy focuses on developing long-term
relationships with producers of computers, telecommunication equipment,
semiconductor manufacturing test equipment and medical test equipment. Touche
and TEI's customer base consists of manufacturers of computers, medical
equipment and test equipment markets and Touche and TEI intend to expand over
the next few years this customer base to include a greater number of
manufacturers of telecommunications equipment. Telecommunications equipment
sales is an area in which little has been done to penetrate the market on the
local level. However, the Company's marketing efforts will continue to reflect
the evolution of the principal industry segments of the information technology
industry.
Touche and TEI will continue to focus and concentrate on major
existing customers and to pursue new business from other potential customers
in evolving segments of the information technology industry. The ability of
the Company to maintain its relationships with its major existing customers
shall remain a significant factor in determining the future growth of the
Company. The Company intends to achieve growth through competitive pricing
strategies, expansion of existing turnkey capabilities and more aggressive
direct sales efforts. As a result of the limited and focused target market,
Touche and TEI's marketing efforts will rely primarily on direct sales
efforts, which will emphasize the Company's design-engineering and quality
control manufacturing capabilities.
Touche and TEI's sales activities are handled by a combination of
direct sales personnel and limited use of independent sales representatives,
who may also sell products of the Company's competitors. Because of the
complexity and analysis involved in the customer's design and purchase
decision, management emphasizes active interaction between the direct sales
staff, its independent sales representatives and the buyer or engineer
throughout the selling process.
SOURCES OF SUPPLY, MAJOR SUPPLIERS AND BACKLOG
The largest supplier of Touche and TEI is Lassen Electronics, Inc.
Purchases from this vendor accounted for 8.8% of the combined purchases of
Touche and TEI in fiscal 1996.
The raw materials, such as sheet metal, metal frames and other
electrical wire or cable components used in the development and manufacture of
Touche and TEI's customer products, are generally available from domestic
suppliers at competitive prices; fabrication of certain major components may
be subcontracted for on an as-needed basis. With the exception of other
material requirements, sheet metal may be purchased on an as-needed basis
under a consignment arrangement with suppliers. Touche and TEI do not have any
long term contracts for new materials. Touche and TEI have not experienced any
significant difficulty in obtaining adequate supplies to perform under their
respective contracts.
Touche and TEI have established operating policies that require the
development and maintenance of a second vendor source for purchasing materials
and supplies that are needed to perform under contract for their customers.
This purchasing requirement focuses on the prevention of potential problems
that
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might otherwise originate from a single supplier's financial condition. Such
policies allow greater flexibility in keeping purchasing costs down and
greater assurance that raw material is available in order to meet customer
contract and delivery requirements.
At December 31, 1995, Touche and TEI's combined backlog was
approximately $8 million. Touche and TEI do not believe that their combined
rolling backlog at any particular time is necessarily indicative of their
future business or performance.
CUSTOMER SERVICE AND SUPPORT
Touche and TEI handle all customer service-related inquiries or
complaints through the sales staff who have been assigned to handle and manage
account relationships. This requirement enables the salesperson to monitor and
control the quality of production during the entire manufacturing process,
which is designed to help prevent production problems before shipment is made
to customers. Such efforts are supported by Touche and TEI's engineering
departments which are directly involved in the development process of the
products.
To ensure that adequate support is given to customers, each
salesperson has formal sales training augmented by direct participation in the
manufacturing process at Touche and TEI's facility and also in the
installation and acceptance tests at the customer's facility.
PATENT, TRADEMARK, COPYRIGHT AND PROPRIETARY RIGHTS
The Company does not have any patent or copyright applications
pending, because the Company does not offer or provide any original design
work that is not otherwise proprietary to the product design-engineering of
their customers. The Company owns common law trademark rights to its "Touche"
trademark and servicemark.
COMPETITION
The information technology industry (computers, telecommunications
equipment, semiconductor manufacturing test equipment and medical test
equipment) is highly competitive, involves rapid technological change and is
characterized by substantial competition. Touche and TEI's competitors range
from small firms to mid-sized local companies. Competition is generally based
on several factors, including quality of work, reputation, price and marketing
approach. Touche and TEI are established in the industry and maintain a strong
competitive presence by delivering high-quality work in a timely fashion
within the customer's budget constraints.
Touche and TEI offer full-service facility capabilities to customers,
which includes the capability of taking the development of an enclosure from
conception, to design, to prototype, to full fabrication of the finished
product. This process offers better control over quality, turnaround time and
delivery. This process also enables Touche and TEI to price their products
based on marketing its services as a full-service facility compared to
competitors who may offer the same services, but at different locations that
may be less efficient and less cost-effective to a customer.
Because of the continuing change by OEMs from manufacturers to
design-engineering and marketing organizations, companies like Touche and TEI
are receiving a much greater share of the overall manufacturing task of
products that are designed for manufacture by their customers. The process
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itself removes more and more of the subcontracting and replaces it with a
prime contractor status gradually eliminating the need for submitting joint
subcontracting work proposals. By the Company reducing the number of
subcontractors, the customers benefit from the reduction in the turnaround
time and the maintenance of more efficient and quality based manufacturers.
The creation and maintenance of a "one-stop shop" manufacturing environment is
believed to be advantageous to Touche and TEI's success as an effective
competitor in the industry.
NEW PRODUCT SERVICE LINES OF BUSINESS
To continue to respond to their customers' needs and to strengthen
and diversify their competitive position in the marketplace, Touche and TEI
intend to introduce the additional services listed below. Neither Touche nor
TEI has derived any revenues to date from these services.
Clean Room Assembly. This new service is designed to generate
additional business from existing customers that have asked TEI to provide
clean room assembly capabilities for certain specialized products. These
customers include OEMs as well as other local enclosure manufacturers that are
currently customers of TEI. This service is directly linked to the value-added
services currently provided by TEI. The implementation of this service is not
expected to be a significant cost to TEI and is being funded out of its
current cash flow. Additional space will not be required for this service and
TEI expects that it will hire one or two additional employees that are
experienced in clean room assembly.
Metal Stamping. The introduction of this manufacturing process will
be achieved through the acquisition of an existing company that engages in job
stamping, metal stamping or other stamped and pressed metal end products or
through the development of in-house capacity if such manufacturing processes
are needed by its customers. The Company completed the acquisition of
Enterprise Industries, Inc., a metal stamping business located in North
Hollywood, California, in January 1997.
GOVERNMENT REGULATION
Substantial environmental laws have been enacted in the United States
and California in response to public concern over environmental deterioration.
These laws and the implementing regulations affect nearly every activity of
Touche and TEI. The principal federal and state legislation which has the most
significant effect on the Company's business includes the following: The
Comprehensive Environmental Response, Compensation and Liability Act; The
Resource Conservation and Recovery Act; The Clean Air Act; The Safe Drinking
Water Act; The Emergency Planning and Community Right-to-Know Act; The Clean
Water Act; and The Toxic Substance Control Act. Failure by the Company, Touche
or TEI to comply with applicable federal and state environmental regulations
could result in the Company incurring substantial fines and penalties and/or
having restraining orders issued against it.
EMPLOYEES
As of December 31, 1996, Touche and TEI employed approximately 283
persons, including the officers of the Company, all of whom are full-time
employees and none of whom are subject to collective bargaining agreements. Of
these full-time employees, 35 are engaged in administration and finance, 230
in manufacturing, engineering and production, 7 in marketing and sales and 11
in operations and development. Many of Touche and TEI's employees have
overlapping responsibilities in these job descriptions.
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The Company believes that its combined future success will depend in
large measure upon the continued ability of Touche and TEI to recruit and
retain technical personnel. Competition for qualified technical personnel is
significant, particularly in the geographic area in which the Company, Touche
and TEI are located. Touche and TEI have never experienced a work stoppage.
The Company, Touche and TEI believe that their relationships with their
employees are good.
FACILITIES
Touche leases approximately 145,000 square feet of factory
manufacturing space in two adjacent buildings which are equipped with
state-of-the-art metal fabrication equipment. Touche leases approximately
123,000 square feet at 1875 Dobbin Drive, San Jose, California 95133, which
consists of 113,000 square feet in manufacturing space and approximately
10,000 square feet of office space. The 1875 Dobbin Drive lease term commenced
on January 1, 1993 and ends on April 20, 2013. In addition, TEI leases
approximately 78,000 square feet of manufacturing space at 1881-1899 Dobbin
Drive, San Jose, California 95133. The 1881-1889 Dobbin Drive lease term
commenced on November 1, 1993 and ends on November 30, 2013. Touche leases
approximately 22,000 square feet of manufacturing space at 1565-C Mabury Road,
San Jose, California 95133. The 1565-C Mabury Road lease term commenced on
July 1, 1995 and expires on August 31, 1998. All lease agreements are
negotiated on a triple net basis with landlords.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of the Company are as
follows:
NAME AGE POSITION
Rolando Loera 43 Chairman, President and Chief
Executive Officer; Director
Livino D. Ribaya, Jr. 48 Vice President - Manufacturing
Frank Ramirez III 41 Vice President - Engineering
Charles E. Shaw 52 Vice President - Chief Financial
Officer; Director
Robert Loera 30 Controller and Secretary; Director
Thomas F. Chaffin 39 Director
Dominic A. Polimeni 50 Director
Each of the directors of the Company holds office until the next
annual meeting of stockholders, or until their successors are elected and
qualified. At present, the Company's bylaws provide for not less than one
director nor more than five directors. Currently, there are five directors in
the Company. The bylaws permit the Board of Directors to fill any vacancy and
such director may serve until the next annual meeting of shareholders or until
his successor is elected and qualified. The bylaws have been amended to
provide for the next annual meeting of shareholders to be held in May, 1997.
Officers serve at the discretion of the Board of Directors. There are no
family relationships among any officers or directors of the Company except
that Robert Loera is the brother of Rolando Loera. The officers of the Company
devote full time to the business of the Company. See "Certain Transactions."
The principal occupation and business experience for each officer and
director of the Company for at least the last five years are as follows:
ROLANDO LOERA: Mr. Rolando Loera has been Chairman, President, Chief
Executive Officer and a Director of the Company since December 1995 and has
held similar positions with Touche since September 1992. Prior to that he was
Chief Financial Officer of a predecessor of Touche for eight years. Mr. Loera
holds a bachelor of arts degree in Business Administration from the University
of Washington. Mr. Loera is also the principal stockholder of Touche and TEI.
LIVINO D. RIBAYA, JR.: Mr. Ribaya has been Vice President -
Manufacturing of the Company since December 1995 and has held the same
position with Touche since September 1992. Prior to that
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he was employed by a predecessor to Touche since 1978 in a variety of
positions. Mr. Ribaya has a B.S. in Mechanical Engineering from the Mauja
Institute of Technology, Manila, Philippines.
FRANK RAMIREZ III: Mr. Ramirez has been Vice President - Engineering
of the Company since December 1995 and has held the same position with Touche
since 1978. Prior to that he was employed by a predecessor to Touche since
1978 in a variety of positions. Mr. Ramirez has an A.A. degree in Mechanical
Drafting from San Jose City College.
CHARLES E. SHAW: Mr. Shaw has been Vice President, Chief Financial
Officer and a Director of the Company since December 1995 and has held the
same position with Touche since 1993. Prior to that he was President and Chief
Executive Officer of Compro Business Solutions, Inc., a business and
management consulting firm established by Mr. Shaw in 1992. From 1988 until
1992, he served as Vice President and Chief Financial Officer of Douglas
Broadcasting, Inc. a $51 million radio broadcast network. Mr. Shaw has a B.S.
in Business Administration from the City University of New York, a Masters of
Business Administration from New York University and a L.L.B. from LaSalle Law
School.
ROBERT LOERA: Mr. Robert Loera has been Controller, Secretary and a
Director of the Company since December 1995 and has been Controller of Touche
since June 1992. Mr. Robert Loera is Rolando Loera's brother. Mr. Robert Loera
has a B.S. in Business Administration from the University of Washington.
DOMINIC A. POLIMENI: Mr. Polimeni has been a Director of the Company
since March 1996. Mr. Polimeni has been President, Chief Operating Officer and
a Director of Questron Technology, Inc., a distributor of electronic
fasteners, since March 1995 and Chairman and Chief Executive Officer of that
company since February 1996. Since May 1996, Mr. Polimeni has been a director
of Healthcare Imaging Services, Inc., a publicly held company based in
Middletown, New Jersey which provides healthcare management and services. Mr.
Polimeni has been a Managing Director of Gulfstream Financial Group, Inc., a
privately held financial consulting and investment banking firm, since August
1990. Prior to that he held the position of Chief Financial Officer of Arrow
Electronics, Inc. ("Arrow") for four (4) years. He also held several other
positions, including general management positions, with Arrow over an
eight-year period. Prior to that he practiced as a Certified Public Accountant
for more than 12 years and was a Partner in the New York office of Arthur
Young & Company. He has also held the position of Chief Operating Officer of
Fugazy Express, Inc., a New York based transportation company in its start-up
phase. He holds a bachelor of business administration degree from Hofstra
University.
THOMAS F. CHAFFIN: Mr. Chaffin has been a Director of the Company and
a member of the Audit Committee of the Board of Directors since January 1997.
He has been a partner in the law firm of Rosenblum Parish & Isaacs, San Jose,
CA since January 1995. During the period 1988-1995, Mr. Chaffin was a partner
in the law firm of Berliner, Cohen, San Jose, CA. He holds a bachelor's degree
in accounting from the University of California, Santa Barbara and earned a
J.D. with honors from the University of San Francisco School of Law. He also
holds a LL.M. in Taxation from the New York University School of Law and is a
certified specialist in Taxation Law by the State Bar of California Board of
Legal Specialization.
EXECUTIVE COMPENSATION
The Company had made no compensation payments as of December 31,
1995, excluding the grant of a stock option to Rolando Loera described below.
The following table sets forth remuneration paid by
-32-
<PAGE>
Touche and TEI during fiscal years 1993, 1994 and 1995, to the named officers
and directors of the Company. For the periods shown, no other executive
officer received remuneration in excess of $100,000 per annum.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Securities
Name of Individual or Compensation Underlying Other
Number of Persons in Group Position with Company Year Salary Bonus Options/SARs(#) Compensation
- -------------------------- --------------------- ---- ------ ----- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Rolando Loera Chairman, President 1995 $225,000 -0- 100,000 -0-
and Chief Executive 1994 $150,000 -0- -0- -0-
Officer; Director 1993 $140,648 -0- -0- -0-
</TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f)
% of Total
Number of Option/SARs
Securities Granted to Exercise or
Underlying Options/ Employees in Base Price Market Expiration
Name SARs Granted Fiscal Year ($/sh) Price/Share Date
- ---- ------------ ----------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Rolando Loera 100,000 100% $3.75 $3.75(1) December 21, 2005
</TABLE>
- ---------------
(1) The Company's Common Stock was not publicly traded on the date of grant of
the option. The Company's Board of Directors determined that the then fair
market value of the Common Stock was $3.75 per share.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Options/SARs at Options/SARs at
Acquired on Value FY-End(#) FY-End($)
Name Exercise(#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ----------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Rolando Loera -0- -0- 0/100,000 0/$493,750(1)
</TABLE>
- ----------------------
(1) No market for the Company's Common Stock existed on December 31, 1995. The
value of the unexercised in-the-money option was determined using the average
of the bid and the asked price of the Company's Common Stock as of March 29,
1996.
-33-
<PAGE>
EMPLOYMENT AGREEMENT
The Company has entered into an employment agreement ("Agreement")
dated as of December 28, 1995 with Rolando Loera. The term of employment
commenced on March 11, 1996 and will expire on the fifth anniversary thereof.
The annual salary under the Agreement is $225,000. The term of employment will
be automatically extended for an additional five year term in the absence of
notice from either party. This salary may be increased to reflect annual cost
of living increases and may be supplemented by discretionary and performance
increases as may be determined by the Board of Directors except that during
the first three years following the Effective Date, his salary may not exceed
$225,000. Mr. Loera is also eligible to receive an annual bonus of up to
$100,000, payable in four quarterly installments. The Agreement provides that
during the initial three years of the term of employment, an annual bonus of
$100,000 will be awarded to Mr. Loera and that such bonus awards will be used
by Mr. Loera to repay the $303,325 loan TEI to Touche Properties, Inc. See
"Certain Transactions." Bonuses during the remainder of the term of employment
will be at the discretion of the Board of Directors. No objective criteria
have been established for determining the amount of any bonuses for subsequent
years.
The Agreement provides, among other things, for participation in an
equitable manner in any profit-sharing or retirement plan for employees or
executives and for participation in other employee benefits applicable to
employees and executives of the Company. The Agreement further provides for
the use of an automobile and other fringe benefits commensurate with his
duties and responsibilities. The Agreement also provides for benefits in the
event of disability. Under the Agreement, the Company is also obligated to
procure and pay the premiums for a $1 million term life policy and, in the
event of Mr. Loera's death, to use the death benefit under such policy to
purchase from Mr. Loera's estate shares of the Company's Common Stock at its
fair market value.
Pursuant to the Agreement, employment may be terminated by the
Company with cause or by the executive with or without good reason.
Termination by the Company without cause, or by the executive for good reason,
would subject the Company to liability for liquidated damages in an amount
equal to the terminated executive's current salary ($225,000) and a pro rata
portion of his prior year's bonus (up to $100,000) annually, for the remaining
term of the Agreement, payable in equal monthly installments, without any
set-off for compensation received from any new employment. In addition, the
terminated executive would be entitled to continue to participate in and
accrue benefits under all employee benefit plans and to receive supplemental
retirement benefits to replace benefits under any qualified plan for the
remaining term of the Agreement to the extent permitted by law.
STOCK OPTION PLAN
The Company has adopted a stock option plan, effective December 22,
1995. Under such plan, key employees and officers and consultants of the
Company may be granted options to purchase shares of the Company's Common
Stock at their fair market value on the date of grant. The plan provides for
an aggregate of 500,000 options. Options to purchase 100,000 shares at $3.75
per share were granted to Rolando Loera effective December 22, 1995. These
options vest two years from the date of grant and will expire December 2005.
The plan also permits Stock Appreciation Rights to be granted in tandem with
options. Finally, the plan permits awards of Restricted Stock.
Any future awards will be determined by the Board of Directors or a
Committee established by the Board.
-34-
<PAGE>
LIMITATIONS ON LIABILITY OF DIRECTORS
As permitted by Delaware law, the Company's Certificate of
Incorporation includes a provision which provides that a director of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for a breach of fiduciary duty as a director, except (i) for
any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the General Corporation Law of the State of Delaware, which prohibits the
unlawful payment of dividends or the unlawful repurchase or redemption of
stock, or (iv) for any transaction from which the director derives an improper
personal benefit. This provision is intended to afford directors protection
against, and to limit their potential liability for monetary damages resulting
from, suits alleging a breach of the duty of care by a director. As a
consequence of this provision, stockholders of the Company will be unable to
recover monetary damages against directors for action taken by them that may
constitute negligence or gross negligence in performance of their duties
unless such conduct falls within one of the foregoing exceptions. The
provision, however, does not alter the applicable standards governing a
director's fiduciary duty and does not eliminate or limit the right of the
Company or any stockholder to obtain an injunction or any other type of
nonmonetary relief in the event of a breach of fiduciary duty. Management of
the company believes this provision will assist the Company in securing and
retaining qualified persons to serve as directors.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
Company's Common Stock owned on the date of February 28, 1997 by (i) each
person who is known by the Company to own beneficially more than five percent
(5%) of the Company's common stock; (ii) each of the Company's officers and
directors; and (iii) all officers and directors as a group. The percentage of
shares calculations have been based on there being 3,596,332 shares
outstanding on February 28, 1997.
<TABLE>
<CAPTION>
Number Percentage
Name and Address(1) Position With Company of Shares of Shares
- ------------------- --------------------- --------- ---------
<S> <C> <C> <C>
Rolando Loera Chairman, President and Chief 667,600(2) 18.56%
Executive Officer; Director
Frank Ramirez, III Vice President--Engineering 149,360 4.15%
Livino D. Ribaya, Jr. Vice President-- Manufacturing 74,680 2.08%
Charles E. Shaw Vice President, Chief Financial -0- --
Officer; Director
Robert Loera Controller and Secretary; -0- --
Director
Thomas F. Chaffin Director -0- --
c/o Rosenblum, Parish
& Isaacs
160 West Santa Clara St.,
15th Floor
San Jose, CA 95113
</TABLE>
-35-
<PAGE>
<TABLE>
<CAPTION>
Number Percentage
Name and Address(1) Position With Company of Shares of Shares
- ------------------- --------------------- --------- ---------
<S> <C> <C> <C>
Dominic A. Polimeni Director 37,340 1.04%
c/o Gulfstream Financial
Group, Inc.
6400 Congress Avenue,
Suite 200
Boca Raton, FL 33487
Rolando Loera Trustee for Touche Employee 27,280 *
Stock Ownership Plan
All Officers and Directors as 956,260 26.59%
a Group (7 Persons)
</TABLE>
* Less than 1%
(1) Unless otherwise noted, c/o TMCI Electronics, Inc., 1875 Dobbin Drive,
San Jose, CA 95133.
(2) Does not include options to purchase 100,000 shares of Common Stock of
the Company granted to Rolando Loera which vest on December 21, 1997.
-36-
<PAGE>
CERTAIN TRANSACTIONS
The Company was incorporated in the State of Delaware on December 7,
1995, under the name TMCI Electronics, Inc. A predecessor of the Company was
organized under the laws of the State of California ("TMCI California") on
September 26, 1995 and was merged into the Company on December 28, 1995.
Mr. Loera was originally issued 600,000 shares of TMCI California's
common stock for $1,000. Upon the merger of TMCI California into the Company,
Mr. Loera was issued 600,000 shares of the Company's Common Stock in exchange
for his shares of TMCI California.
On March 16, 1994, $50,000 and on April 1, 1994, $25,000 was advanced
to Touche by Frank Ramirez III and Livino Ribaya, Jr., employees of Touche and
TEI, in exchange for convertible promissory notes bearing interest at 7.382%
and 6.75% per annum and payable in monthly installments of $920 and $979,
respectively, through 2009. Identical loans were made to TEI on the same dates
by the same employees. In June 1995, $25,000 was advanced to each of Touche
and TEI by Jose Antonio Agredano in exchange for a convertible promissory note
bearing interest at 10% per annum and payable in monthly installments of $950.
All of these notes were converted into shares of Touche and TEI immediately
prior to the Effective Date of the Stock Purchase Agreements described below.
The Company entered into Stock Purchase Agreements dated as of
December 28, 1995 (the "Stock Purchase Agreements") with Rolando Loera,
Chairman, President and Chief Executive Officer of the Company, and Rolando
Loera as Trustee for the Touche Employee Stock Ownership Plan pursuant to
which the Company has acquired all of the issued and outstanding stock of
Touche and TEI in exchange for the issuance of 893,600 shares of the Company's
Common Stock. Immediately prior to the close as of the public offering on
March 11, 1996, Messrs. Jose Antonio Agredano, Frank Ramirez III and Livino
Ribaya, Jr. exercised their right to acquire shares of Touche and TEI which
they converted into 74,680, 149,360 and 74,680 shares of the Company,
respectively. The remaining 594,880 shares were issued to Rolando Loera and to
the Touche Employee Stock Ownership Plan.
TEI leases approximately 78,000 square feet of space located at
1881-1899 Dobbin Drive, San Jose, California from Touche Properties, Inc.
("TPI"), a company wholly owned by Rolando Loera, Chairman, President and
Chief Executive Officer of the Company, pursuant to a lease agreement dated
November 1, 1993. In addition, TEI leases space to subtenants. Touche is one
subtenant. The other two subtenants are unaffiliated with the Company. Rent
expense amounted to approximately $161,000. Such amounts represent payments by
TEI and Touche to TPI, exclusive of any subtenant payments.
In connection with its acquisition of 1881-1899 Dobbin Drive (the
"Property"), TPI borrowed $1,000,000 from the Small Business Administration.
This loan bears interest at 6.359% per annum, matures on January 1, 1994 and
is secured by a first mortgage on the Property. Touche and TEI, inter alia,
have guaranteed the satisfaction of TPI's obligations under this loan.
TPI also borrowed $303,325 from Touche in December, 1993. This loan
bears interest at 10% per annum, and principal and interest are payable in
equal monthly installments until satisfied. The principal balance on the loan
increased as a result of certain expenses of TPI advanced by Touche. The
outstanding balance of the loan as of December 31, 1995 was $440,000.
-37-
<PAGE>
In addition, in 1993 Touche made loans to Rolando Loera aggregating
$87,190.39. This loan bears interest at 10% per annum and is payable in
monthly installments of $1,000. Certain additions were made to the principal
amount of the loan in fiscal 1995 to account for payments of certain personal
expenses of Rolando Loera by Touche. Accordingly, the outstanding principal
balance on the loan was $232,000 at December 31, 1995.
-38-
<PAGE>
DESCRIPTION OF SECURITIES
UNITS
Each Unit consists of one share of the Company's Common Stock, $.001
par value per share, and one Class A Warrant. The Common Stock and Class A
Warrants are detachable and traded separately immediately upon issuance.
COMMON STOCK
The authorized capital stock of the Company consists of 25,000,000
shares of Common Stock, $.001 par value per share. There are presently
3,596,332 issued and outstanding shares of Common Stock. As of February 28,
1997, there were approximately 20 stockholders of record of the Company.
Holders of the Common Stock do not have preemptive rights to purchase
additional shares of Common Stock or other subscription rights. The Common
Stock carries no conversion rights and is not subject to redemption or to any
sinking fund provisions. All shares of Common Stock are entitled to share
equally in dividends from sources legally available therefor when, as and if
declared by the Board of Directors and, upon liquidation or dissolution of the
Company, whether voluntary or involuntary, to share equally in the assets of
the Company available for distribution to stockholders. All outstanding shares
of Common Stock are validly authorized and issued, fully paid and
nonassessable, and all shares to be sold and issued as contemplated hereby,
will be validly authorized and issued, fully paid and nonassessable. The Board
of Directors is authorized to issue additional shares of Common Stock, not to
exceed the amount authorized by the Company's Certificate of Incorporation,
and to issue options and warrants for the purchase of such shares, on such
terms and conditions and for such consideration as the Board may deem
appropriate without further stockholder action. The above description
concerning the Common Stock of the Company does not purport to be complete.
Reference is made to the Company's Certificate of Incorporation and bylaws
which are available for inspection upon proper notice at the Company's
offices, as well as to the applicable statutes of the State of Delaware for a
more complete description concerning the rights and liabilities of
stockholders.
Each holder of Common Stock is entitled to one vote per share on all
matters on which such stockholders are entitled to vote. Since the shares of
Common Stock do not have cumulative voting rights, the holders of more than
fifty percent (50%) of the shares voting for the election of directors can
elect all the directors if they choose to do so and, in such event, the
holders of the remaining shares will not be able to elect any person to the
Board of Directors.
CLASS A WARRANTS
There are currently 2,672,000 Class A Warrants ("Warrants")
outstanding. Each Warrant entitles the holder to purchase one share of Common
Stock at $5.50 per share during the four year period which commenced March 5,
1997. The Common Stock underlying the Warrants will, upon exercise of the
Warrants, be validly issued, fully paid and nonassessable. The Class A
Warrants are redeemable by the Company for $.01 per Warrant, at any time after
March 5, 1997, upon thirty (30) days' prior written notice, if the average
closing price or bid price of the Common Stock, as reported by Nasdaq, equals
or exceeds $8.75 per share, for any twenty (20) consecutive trading days
within a period of thirty (30) consecutive days ending within five (5) days
prior to the date of the notice of redemption. Upon thirty (30) days' prior
written notice to all holders of the Class A Warrants, the Company shall have
the right to reduce the exercise price and/or extend the term of the Class A
Warrants.
-39-
<PAGE>
The Warrants can only be exercised when there is a current effective
registration statement covering the shares of Common Stock underlying the
Warrants. If the Company does not or is unable to maintain a current effective
registration statement the Warrant holders will be unable to exercise the
Warrants and the Warrants may become valueless. Moreover, if the shares of
Common Stock underlying the Warrants are not registered or qualified for sale
in the state in which a Warrant holder resides, such holder might not be
permitted to exercise the Warrants. See "Risk Factors--Requirements of Current
Prospectus and State Blue Sky Registration in Connection with the Exercise of
the Warrants Which May Therefore Be Valueless."
Warrant certificates may be exchanged for new certificates of
different denominations, and may be exercised or transferred by presenting
them at the offices of the Transfer Agent. Holders of the Warrants may sell
the Warrants if a market exists rather than exercise them. However, there can
be no assurance that a market will develop or continue as to such Warrants. If
the Company is unable to qualify its common stock underlying such Warrants for
sale in certain states, holders of the Company's Warrants in those states will
have no choice but to either sell such Warrants or allow them to expire.
Each Warrant may be exercised by surrendering the Warrant
certificate, with the form of election to purchase on the reverse side of the
Warrant certificate properly completed and executed, together with payment of
the exercise price to the Warrant Agent. The Warrants may be exercised in
whole or from time to time in part. If less than all of the Warrants evidenced
by a Warrant certificate are exercised, a new Warrant certificate will be
issued for the remaining number of Warrants.
Holders of the Warrants are protected against dilution of the equity
interest represented by the underlying shares of common stock upon the
occurrence of certain events, including, but not limited to, issuance of stock
dividends. If the company merges, reorganizes or is acquired in such a way as
to terminate the Warrants, the Warrants may be exercised immediately prior to
such action. In the event of liquidation, dissolution or winding up of the
Company, holders of the Warrants are not entitled to participate in the
Company's assets.
For the life of the Warrants, the holders thereof are given the
opportunity, at nominal cost, to profit from a rise in the market price of the
common stock of the company. The exercise of the Warrants will result in the
dilution of the then book value of the Common Stock of the Company held by the
public investors and would result in a dilution of their percentage ownership
of the Company. The terms upon which the Company may obtain additional capital
may be adversely affected through the period that the Warrants remain
exercisable. The holders of these Warrants may be expected to exercise them at
a time when the Company would, in all likelihood, be able to obtain equity
capital on terms more favorable than those provided for by the Warrants.
Because the Warrants included in the Units being offered hereby may
be transferred, it is possible that the Warrants may be acquired by persons
residing in states where the Company has not registered, or is not exempt from
registration such that the shares of common stock underlying the Warrants may
not be sold or transferred upon exercise of the Warrants. Warrant holders
residing in those states would have no choice but to attempt to sell their
Warrants or to let them expire unexercised. Also, it is possible that the
Company may be unable, for unforeseen reasons, to cause a registration
statement covering the shares underlying the Warrants to be in effect when the
Warrants are exercisable. In that event, the Warrants may expire unless
extended by the Company as permitted by the Warrant because a registration
statement must be in effect, including audited financial statements for
companies acquired, in order for warrantholders to exercise their Warrants.
-40-
<PAGE>
RESTRICTED SHARES ELIGIBLE FOR FUTURE SALE
1,224,332 of the Company's currently outstanding shares of common
stock are "restricted securities" and, in the future, may be sold upon
compliance with Rule 144, adopted under the Securities Act of 1933, as
amended. Rule 144 provides, in essence, that a person holding "restricted
securities" for a period of one year may sell only an amount every three
months equal to the greater of (a) one percent of the Company's issued and
outstanding shares, or (b) the average weekly volume of sales during the four
calendar weeks preceding the sale. The amount of "restricted securities" which
a person who is not an affiliate of the Company may sell is not so limited,
since non-affiliates may sell without volume limitation their shares held for
two years if there is adequate current public information available concerning
the Company. Assuming no exercise of any outstanding Warrants, the Company has
3,596,332 shares of Common Stock outstanding. Therefore, during each three
month period, beginning June 4,1996, a holder of restricted securities who has
held them for at least the one year period may sell under Rule 144 a number of
shares up to 12,243 shares. Non-affiliated persons who hold for the two-year
period described above may sell unlimited shares once their holding period is
met. Notwithstanding the above, the current officers, directors and principal
stockholders have agreed, except as noted below, not to sell, transfer, assign
or issue any securities of the Company for a period of twenty-four (24) months
ending March 5, 1998 without the consent of Biltmore Securities, Inc., the
underwriter in the March 1996 public offering ("Biltmore"). Biltmore has
released the foregoing lock-up with respect to certain of the shares held by
officers and directors and may, in its discretion, release additional shares
from time to time. The Company has also agreed not to issue any additional
securities other than as contemplated by this Prospectus for a period of
twenty-four (24) months ending March 5, 1998 without the consent of Biltmore.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the securities of the Company is
American Stock Transfer & Trust Company located at 40 Wall Street, New York,
New York 10005.
REPORTS TO SECURITYHOLDERS
The Company will furnish to holders of its Common Stock and Warrants
annual reports containing audited financial statements. The Company may issue
other unaudited interim reports to its securityholders as it deems
appropriate.
LEGAL PROCEEDINGS
Subsequent to the closing of the PEN acquisition, a dispute has
arisen as to the value of the inventory included in the assets acquired. The
Company has initiated an arbitration proceeding in an effort to resolve this
dispute and is seeking a rescission of the transaction.
None of the Company, Touche or TEI is a party to any other
significant legal proceedings and, to the best of the Company's information,
knowledge and belief, none is contemplated or has been threatened.
-41-
<PAGE>
LEGAL MATTERS
The validity of the securities being offered hereby have been passed
upon for the Company by Gould & Wilkie, One Chase Manhattan Plaza, New York,
NY 10005.
EXPERTS
The financial statements of the Company as of December 31, 1995,
included in the Registration Statement and this Prospectus have been included
herein in reliance on the report dated February 13, 1996, of Moore Stephens,
P.C., formerly known as Mortenson and Associates, P.C., independent certified
public accountants, and upon the authority of such firm as experts in
accounting and auditing.
-42-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Report of Independent Auditors...........................................F-1
Consolidated and Combined Balance Sheets
as of September 30, 1996
(unaudited) and December 31, 1995........................................F-2
Consolidated and Combined Statements of Operations
for the nine months ended
September 30, 1996 and 1995 (unaudited)
and years ended December 31, 1995 and 1994...............................F-4
Consolidated and Combined Statements of
Stockholders' Equity.....................................................F-6
Consolidated and Combined Statements of
Cash Flows for the nine months ended
September 30, 1996 and 1995 (unaudited)
and years ended December 31, 1995 and 1994...............................F-7
Notes to Financial Statements...........................................F-10
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
TMCI Electronics, Inc.
San Jose, California
We have audited the accompanying combined balance sheet of
TMCI Electronics, Inc., Touche Manufacturing Company, Inc. and Touche
Electronics, Inc. as of December 31, 1995 and the related combined statements
of operations, stockholders' equity and cash flows for each of the two years
in the period ended December 31, 1995. These combined financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on the balance sheet based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the balance sheet is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred
to above present fairly, in all material respects, the combined financial
position of TMCI Electronics, Inc., Touche Manufacturing Company, Inc., and
Touche Electronics, Inc. as of December 31, 1995 and the combined results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
February 13, 1996
F-1
<PAGE>
TMCI ELECTRONICS, INC.
- --------------------------------------------------------------------------------
BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED
SEPTEMBER 30, DECEMBER 31,
------------- ------------
1 9 9 6 1 9 9 5
------- -------
(UNAUDITED)
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash $ 2,147,314 $ 701,672
Accounts Receivable - Net 1,691,391 4,182,411
Inventory 5,091,630 3,179,317
Due from Related Party 100,000 100,000
Note Receivable - Other -- 98,989
Prepaid Expenses and Other
Current Assets 352,405 167,016
Deferred Income Taxes 29,700 164,960
------ -------
TOTAL CURRENT ASSETS 9,412,440 8,594,365
--------- ---------
PROPERTY AND EQUIPMENT - NET 3,447,871 2,918,677
--------- ---------
OTHER ASSETS:
Due from Stockholder 238,167 232,033
Due from Related Party 239,842 344,676
Deferred Loan Fees - Net -- 28,500
Deferred Offering Costs -- 292,986
Other Assets 734 930
--- ---
TOTAL OTHER ASSETS 478,743 899,125
------- -------
TOTAL ASSETS $13,339,054 $12,412,167
=========== ===========
</TABLE>
See Notes to Financial Statements.
F-2
<PAGE>
TMCI ELECTRONICS, INC.
- --------------------------------------------------------------------------------
BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED COMBINED
SEPTEMBER 30, DECEMBER 31,
------------- ------------
1 9 9 6 1 9 9 5
------- -------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses $ 2,421,092 $ 4,814,964
Due to Affiliate -- 25,720
Line of Credit -- 1,644,576
Notes Payable - Current Portion 395,875 459,539
Capital Lease Obligations -
Current Portion 50,454 256,237
Convertible Promissory Notes -
Current Portion -- 15,204
Income Taxes Payable -- 258,168
------------ -------
TOTAL CURRENT LIABILITIES 2,867,422 7,474,408
--------- ---------
LONG-TERM LIABILITIES:
Bridge Notes Payable -- 537,878
Notes Payable - Net
of Current Portion 1,394,241 1,198,116
Capital Lease Obligations
- Net of Current Portion 223,538 478,505
Convertible Promissory Notes
- Net of Current Portion -- 113,590
Deferred Income Taxes 405,383 429,215
------- -------
TOTAL LONG-TERM LIABILITIES 2,023,162 2,757,304
--------- ---------
TOTAL LIABILITIES 4,890,584 10,231,712
--------- ----------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Common Stock, $.001 Par Value,
25,000,000 Shares Authorized;
3,365,600 Issued and Outstanding
at September 30, 1996, and
600,000 Issued and
Outstanding at December 31, 1995 3,366 600
Additional Paid-in Capital 6,829,708 1,029,829
Retained Earnings 1,615,396 1,150,026
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 8,448,470 2,180,455
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $13,339,054 $12,412,167
=========== ===========
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
TMCI ELECTRONICS, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMBINED
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------------------- ------------------------------
CONSOLIDATED COMBINED
1 9 9 6 1 9 9 5 1 9 9 5 1 9 9 4
------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
SALES - NET $20,496,567 $20,543,000 $28,098,919 $20,869,434
COST OF GOODS SOLD 13,497,840 14,418,419 19,991,649 14,950,750
----------- ----------- ----------- -----------
GROSS PROFIT 6,998,727 6,124,581 8,107,270 5,918,684
OPERATING EXPENSES 5,800,330 4,546,855 6,384,946 4,938,454
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 1,198,397 1,577,726 1,722,324 980,230
----------- ----------- ----------- -----------
OTHER INCOME [EXPENSE]:
Net Other Income [Expense] 37,397 (3,825) 40,394 109,865
Interest Income 53,624 29,961 39,002 35,022
Interest Expense (246,655) (447,328) (615,881) (602,733)
Non-Cash Finance Charge (462,122) -- 287,878 --
Gain on Sale of Equipment 139,465 (2,828) 109,655 835
----------- ----------- ----------- -----------
TOTAL OTHER [EXPENSE] (478,291) (424,020) (714,708) (457,011)
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 720,106 1,153,706 1,007,616 523,219
PROVISION FOR INCOME TAXES 254,736 394,677 534,200 103,577
----------- ----------- ----------- -----------
NET INCOME $ 465,370 $ 759,029 $ 473,416 $ 419,642
=========== =========== =========== ===========
EARNINGS PER SHARE
NET INCOME PER SHARE $0.15 $0.40 $0.25 $0.22
===== ===== ===== =====
F-4
<PAGE>
PRO FORMA NET INCOME [SEE NOTE 22] [UNAUDITED]:
Income Before Provision for Income Taxes $720,106 $1,153,706 $1,007,616 $523,219
Pro Forma Income Taxes 254,736 458,377 509,100 209,288
-------- ---------- ---------- --------
PRO FORMA NET INCOME $465,370 $ 695,329 $ 498,516 $313,931
======== ========== ========== ========
PRO FORMA NET INCOME PER SHARE [UNAUDITED]
Income Before Provision for Income
Tax Per Share $0.24 $0.61 $0.53 $0.28
Pro Forma Income Tax Per Share 0.09 0.24 0.27 0.11
---- ---- ---- ----
PRO FORMA NET INCOME PER SHARE 0.15 0.37 0.26 0.17
---- ---- ---- ----
WEIGHTED AVERAGE NUMBER OF SHARES 3,016,403 1,893,600 1,893,600 1,893,600
========= ========= ========= =========
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
TMCI ELECTRONICS, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
------------ ADDITIONAL TOTAL
NUMBER PAID-IN RETAINED STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------ ------- -------- ---------------
<S> <C> <C> <C> <C> <C>
Balance-January 1, 1994 -- $ -- $ -- $256,968 $256,968
Issuance of Common Stock
November 6, 1995 and
exchange of Shares Among
Entities under Common
Control [Reflected
Retroactively 600,000 600 279,829 -- 280,429
------- ----- -------- ---------- --------
-See Note 19B and C]
BALANCE-JANUARY 1, 1994 600,000 600 279,829 256,968 537,397
Net Income for the Year Ended
December 31, 1994 -- -- -- 419,642 419,642
---------- ------ ---------- -------- --------
BALANCE-DECEMBER 31, 1994 600,000 600 279,829 676,610 957,039
Finance Charge Incurred on
Bridge Notes Payable -- -- 750,000 -- 750,000
Net Income for the Year Ended
December 31, 1995 -- -- -- 473,416 473,416
---------- ------ ------------- ----------- -----------
BALANCE-DECEMBER 31, 1995 600,000 600 1,029,829 1,150,026 2,180,455
Net Income for the Nine Months
September 30, 1996 -- -- -- 465,370 465,370
Net Proceeds in connection with
initial public offering and
issuance of Common Shares 2,765,600 2,766 5,799,879 -- 5,802,645
--------- ----- --------- ------------- ---------
BALANCE-SEPTEMBER 30, 1996 -
(UNAUDITED) 3,365,600 $3,366 $6,829,708 $1,615,396 $8,448,470
========= ====== ========== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
TMCI ELECTRONICS, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMBINED
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------- ------------
CONSOLIDATED COMBINED
1 9 9 6 1 9 9 5 1 9 9 5 1 9 9 4
------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 465,370 $ 759,029 $ 473,416 $ 419,642
---------- ---------- ----------- -----------
Adjustments to Reconcile Net Income to
Net Cash Provided by Operations:
Depreciation and Amortization 595,257 518,899 702,056 604,599
Deferred Income Taxes (38,572) 373,998 201,272 25,052
[Gain] on Sale of Equipment (139,465) 2,828 -- (835)
Amortization of Deferred Loan Fees 28,500 -- 114,000 22,500
Non-Cash Finance Charge 462,122 -- 287,878 --
Contribution to ESOP Plan -- -- -- 50,000
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 1,436,215 (167,368) (1,855,640) (305,608)
Inventory (1,912,313) (515,703) (800,439) (1,177,426)
Prepaid Expenses (110,389) (149,342) (104,192) (26,955)
Employee Advances -- (7,273) -- (61)
Advance Under Note Receivable -- -- 8,698 5,019
Note Receivable-Other 103,103 (92,222) -- (102,142)
Increase [Decrease] in:
Accounts Payable and Accrued Expenses (904,029) 453,371 2,087,105 886,278
Income Taxes Payable (258,168) (28,972) 179,145 44,174
---------- ---------- ----------- -----------
Total Adjustments (737,739) 388,216 819,883 24,595
---------- ---------- ----------- -----------
NET CASH - OPERATING ACTIVITIES-FORWARD (272,369) 1,147,245 1,293,299 444,237
---------- ---------- ----------- -----------
INVESTING ACTIVITIES:
Advances Under Stockholders
Note Receivable (6,134) (24,394) (170,370) --
Collection of Stockholder
Note Receivable -- -- -- 25,527
Incorporation Fees -- -- 354 --
F-7
<PAGE>
Acquisition of Equipment (538,989) (340,161) (343,956) (171,297)
Proceeds from Sale of Equipment 197,650 4,000 -- 7,000
---------- ---------- ----------- -----------
NET CASH - INVESTING ACTIVITIES FORWARD (347,473) (360,555) (513,972) (138,770)
---------- ---------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from public offering 5,810,594 -- -- --
Payments for Deferred Offering Costs -- -- (292,986) --
Proceeds from Bridge Loan Payable -- -- 1,000,000 --
Repayment of Bridge Loans Payable (1,000,000) -- -- --
Line of Credit, Net (1,644,576) (493,596) 51,513 (351,835)
Proceeds of Note Payable -- 50,000 137,085 1,651,092
Payment of Deferred Loan Costs -- -- -- (165,000)
Repayment of Note Payable (1,100,534) (563,770) (625,827) (1,198,241)
Repayment of Capital Lease Obligations -- -- (251,886) (315,100)
Advance with Affiliates -- 228,782 (100,182) (78,452)
Advances Under Convertible Promissory Notes -- -- 6,144 150,000
Repayment of Convertible Promissory Note -- -- (18,432) (8,918)
Common Stock Issued -- -- 1,000 --
---------- ---------- ----------- -----------
NET CASH-FINANCING ACTIVITIES-FORWARD 2,065,484 (778,624) (93,571) (316,454)
NET CASH-OPERATING ACTIVITIES-FORWARDED (272,369) 1,147,245 1,293,299 444,237
NET CASH-INVESTING ACTIVITIES-FORWARDED (347,473) (360,555) (513,972) (138,770)
NET CASH FINANCING ACTIVITIES-FORWARDED 2,065,484 (778,624) (93,571) (316,454)
---------- ---------- ----------- -----------
NET INCREASE [DECREASE] IN CASH 1,445,642 8,066 685,756 (10,987)
CASH-BEGINNING OF PERIODS 701,672 15,917 15,916 26,903
---------- ---------- ----------- -----------
CASH-END OF PERIODS $2,147,314 $23,983 $701,672 $15,916
========== ========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid during the periods for:
Interest -- -- $578,492 $581,332
Income Taxes -- -- $156,707 $36,449
</TABLE>
F-8
<PAGE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
The following table sets forth property and equipment costs which were
completely financed through equipment contracts:
December 31,
1995 $124,035
1994 $209,002
In November 1995, the Company incurred a non-cash finance charge of
$750,000 in connection with bridge financing, of which $287,878 was charged to
operations at December 31, 1995 [See Note 12.]
See Note 19 for information about the Stock Purchase Agreement and
exchange of shares.
During 1995, Touche contributed 16,667 shares of their stock valued at
$50,000 to settle a liability to their Employee Stock Ownership Plan [See Note
17].
See Notes to Financial Statements.
F-9
<PAGE>
TMCI ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
[amounts related to September 30, 1996 are unaudited]
- --------------------------------------------------------------------------------
[1] FINANCIAL STATEMENT PRESENTATION, ORGANIZATION AND NATURE OF OPERATIONS
Subsequent to December 31, 1995, the entities noted below executed an exchange
of shares among entities under common control and common management
immediately prior to a public offering of securities [See Note 19C].
The effects of this recapitalization and merger are reflected retroactively in
these combined financial statements.
The balance sheet as of December 31, 1995 is presented on a combined basis and
includes TMCI Electronics, Inc. ["TMCI"], Touche Manufacturing, Inc.
["Touche"], and Touche Electronics, Inc. ["TEI"] [collectively, the
"Company"]. The financial statements for the year ended December 31, 1995
include the results of operations, cash flows and changes in stockholders'
equity for Touche and TEI for the twelve months then ended; and the results of
operations, cash flows and changes in stockholders' equity for TMCI from
September 26, 1995 [date of incorporation] to December 31, 1995 [See Note 2].
The combined financial statements for the year ended December 31, 1994 include
the results of operations, cash flows and changes in stockholders' equity for
Touche and TEI.
All significant intercompany transactions have been eliminated for all periods
presented.
The Company manufactures custom-fabricated metal enclosures for manufacturers
of computers, telecommunications equipment, semiconductor manufacturing test
equipment and medical test equipment. The Company also assembles and installs
wire cable harnesses used in custom-fabricated metal enclosures for
manufacturers of computers, telecommunications test equipment and medical test
equipment.
The unaudited consolidated and combined financial statements for the nine
months ended September 30, 1996 and 1995 have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION - TMCI was incorporated on September 26, 1995, under the
laws of the State of California. At the date of incorporation, there was no
issuance of, nor subscriptions for, its capital stock.
The Company entered into Stock Purchase Agreements [the "Agreements"] [See
Note 19C] with the stockholders of Touche and TEI to acquire all of their
issued and outstanding stock. The consummation of the Agreements occurred
immediately prior to the effective date of the Company's proposed public
offering.
USE OF 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
F-10
<PAGE>
TMCI ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
[amounts related to September 30, 1996 are unaudited]
- --------------------------------------------------------------------------------
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.
CASH EQUIVALENTS - Cash equivalents are comprised of certain highly liquid
investments with a maturity of three months or less when purchased. At
December 31, 1995, there were no cash equivalents.
INVENTORY - Inventory is recorded at the lower of cost or market. Cost, which
includes materials, labor and overhead, is determined using the first-in,
first-out basis method.
PROPERTY AND EQUIPMENT AND DEPRECIATION - Property and equipment is stated at
cost. Depreciation is computed utilizing the straight-line method over the
estimated useful lives of the assets.
The Company is the lessee of machinery and equipment under capital leases
expiring in various years through 2000. These assets, which have been included
in property and equipment, are recorded at the lower of the present value of
the minimum lease payments or the fair value of the asset. The assets are
depreciated over the lower of their related lease terms or their estimated
productive lives. Depreciation of assets under capital leases is included in
depreciation expense for the year ended December 31, 1995.
DEFERRED LOAN COSTS - Deferred loan costs are being amortized over the term of
the loan using the straight-line method.
DEFERRED OFFERING COSTS - Amounts paid or accrued for costs associated with
the anticipated public offering [See Note 23B] will be expensed and not
recorded as a reduction of the net proceeds, if the offering is not
consummated.
RISK CONCENTRATIONS - Financial instruments that potentially subject the
Company to concentrations of credit risk include cash and cash equivalents and
accounts receivable arising from its normal business activities. The Company
places its cash and cash equivalents with high credit quality financial
institutions located in the Western United States.
The Company periodically has money in financial institutions that is subject
to normal credit risk beyond insured amounts. This credit risk, representing
the excess of the bank's deposit liabilities reported by the bank over the
amounts that would have been covered by federal insurance, amounted to
approximately $669,000 at December 31, 1995.
The Company's extension of credit to its customers, which are primarily
located in the Silicon Valley, California, results in accounts receivable
arising from its normal business activities. The Company does not require
collateral from its customers, but routinely assesses the financial strength
of its customers. Based upon factors surrounding the credit risk of its
customers and the Company's historical collection experience, an allowance for
uncollectible accounts amounting to $8,279 has been established. The Company
believes that its accounts receivable credit risk exposure beyond such
allowance is limited. Such assessment may be subject to change in the near
term.
The Company had sales to three unrelated customers in the computer industry
approximating 33%, 18% and 19%, respectively, of the Company's total net sales
for the year ended December 31, 1995. For the year ended December 31, 1994,
sales to these three unrelated
F-11
<PAGE>
TMCI ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
[amounts related to September 30, 1996 are unaudited]
- ------------------------------------------------------------------------------
customers approximated 29%, 26% and 13%, respectively. The loss of one or more
of these customers may have a severe impact on the Company in the near term.
See also other risk factors set forth in the Prospectus.
PRO FORMA EARNINGS PER SHARE - Historical earnings per share will not be
indicative of the continuing capital structure of the Company upon the
consummation of the reorganization described in Note 19C. The 1,893,600
shares, used in the computations of earnings per share, as if they were
outstanding for all periods presented, give effect to the following
transactions: (i) the issuance of 600,000 shares to the majority stockholder
in December 1995, (ii) the conversion of convertible debt into 298,720 shares
of common stock, (iii) the issuance of 400,000 shares of common stock to
bridge lenders and (iv) the recapitalization and stock exchange among the
companies, certain individuals and the Touche Employee Stock Ownership Plan,
resulting in the issuance of 594,880 shares of common stock by the Company.
[3] INVENTORY
Inventory consists of the following:
September 30, December 31,
1 9 9 6 1 9 9 5
---------------- ---------------
Raw Materials $2,431,492 $1,400,311
Work-in-Process:
Materials 1,475,712 1,309,528
Direct Labor 334,731 212,510
Overhead 275,576 256,968
Finished Goods 574,120
---------- ----------
TOTAL $5,091,631 $3,179,317
- ----- ========== ==========
[4] NOTE RECEIVABLE - OTHER
As of December 31, 1995, the Company had advanced $98,989 to the landlord of
its warehouse and office facilities. This note is payable in monthly
installments of $2,215, including interest at 10% per annum, and matures in
August 1999. In January 1996, the Company refinanced a note payable, whereby
the landlord assumed the outstanding balance of the note [See Note 9]. In
consideration of the transaction, the Company canceled the outstanding note
receivable from the landlord and executed a note payable to the landlord in
the amount of approximately $291,000.
[5] PROPERTY AND EQUIPMENT AND DEPRECIATION AND AMORTIZATION
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
December 31,
1 9 9 5
---------------
<S> <C>
Machinery and Equipment $ 3,859,253
F-12
<PAGE>
TMCI ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
[amounts related to September 30, 1996 are unaudited]
- -----------------------------------------------------------------------------------------------------------------------
Furniture and Fixtures 478,248
Transportation Equipment 166,676
Leasehold Improvements 69,533
------
Total 4,573,710
Less: Accumulated Depreciation and Amortization (1,655,033)
-----------
TOTAL $ 2,918,677
----- ===========
</TABLE>
Depreciation and amortization expense amounted to $702,056 and $604,599 for
the years ended December 31, 1995 and 1994, respectively. Property and
equipment is depreciated using the straight-line method for financial
statement purposes and an accelerated method for tax over their estimated
productive lives. The estimated productive lives range from 5 to 7 years.
The following is a summary of property held under capital leases, which have
been included in property and equipment as set forth above. Amortization
expense on property under capital lease is included in depreciation expense:
<TABLE>
<CAPTION>
December 31,
1 9 9 5
--------------
<S> <C>
Machinery and Equipment $ 1,062,251
Auto 77,496
Office Equipment 158,013
-----------
Total Property Held Under Capital Lease 1,297,760
Less: Accumulated Amortization (469,442)
-----------
NET $ 828,318
--- ============
</TABLE>
Amortization of property held under capital lease is calculated using the
straight-line method while an accelerated method is used for tax purposes.
Amortization is calculated over the lesser of the assets' estimated productive
life, or the lease term.
[6] DUE FROM RELATED PARTY
The Company has amounts due from an entity controlled by the majority
stockholder of the Company with interest to 10% per annum. At December 31,
1995, the balance due the Company amounted to $444,676. Interest income on
these amounts approximated $30,000 for each of the years ended December 31,
1995 and 1994. In addition, the entity borrowed $1,000,000 from the Small
Business Administration. The Company has guaranteed amounts due under the
loan.
[7] DUE FROM STOCKHOLDER
The December 31, 1995 balance due from the stockholder is comprised of two
unsecured promissory notes due on demand from the Company's president.
Each of the notes due from the Company's president calls for interest payable
at 10% per annum. The cumulative balance outstanding of these notes was
$232,033 at December 31, 1995.
F-13
<PAGE>
TMCI ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
[amounts related to September 30, 1996 are unaudited]
- -----------------------------------------------------------------------------
[8] LINE OF CREDIT
In March 1994, the Company entered into a loan and security agreement with a
financial institution providing for the Company to borrow up to 80% of its
eligible accounts receivable, as defined in the agreement, up to a maximum
$3,867,000. Interest on this credit line is calculated at prime plus 3.5%.
Prime at December 31, 1995 was 8.5%. The line of credit agreement, which
contains certain standard covenants, is collateralized by all of the assets of
the Company and has been guaranteed by the majority stockholder of the Company
and an affiliate [See Note 20C].
[9] NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31,
1 9 9 5
--------------
<S> <C>
Notes payable to financial institution in monthly installments of $18,883 plus
interest at the bank's prime rate plus 3.5% [Prime was 8.5% at December 31,
1995]; guaranteed by the majority stockholder of the Company and two related
companies; due April 1999. $603,540
Note payable to financing company with monthly payments of $228 including
principal and interest at 12.00% per annum;
due October 1997; collateralized by automotive equipment. 4,471
Note payable to financing company with monthly payments of $280 including
principal and interest at 10.75% per annum;
due January 1998; collateralized by automotive equipment. 6,255
Note payable to financing company with monthly payments of $362 including
principal and interest at 9.87% per annum;
due December 1998; collateralized by automotive equipment. 11,967
Note payable to financing company with monthly payments of $14,709 including
principal and interest at 7.9% per annum;
due November 1998; collateralized by machinery and equipment. 430,652
Note payable to financing company with monthly payments of $6,005 including
principal and interest at 10.75% per annum; due April 2004; collateralized
by property held by an affiliated entity [See Note 4]. 395,714
Note payable to individual with monthly payments of $1,057 per month including
interest at 9.82% per annum; due July 1999. This note is convertible into
74,680 shares of Company common stock [See Note 19C and 20A]. 38,174
Note payable to financing company with monthly payments of $1,606 including
principal and interest at 11.09% per annum; due January 2000; collateralized
by machinery and equipment. 69,060
Note payable to financing company with monthly payments of $2,454 including
principal and interest at 8.5% per annum; due December 1999;
F-14
<PAGE>
TMCI ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
[amounts related to September 30, 1996 are unaudited]
- --------------------------------------------------------------------------------
collateralized by machinery and equipment. 97,822
----------
Total 1,657,655
Less: Current Portion 459,539
-----------
NONCURRENT PORTION $1,198,116
==========
</TABLE>
Current maturities on long-term debt at December 31, 1995 are as follows:
Due by
December 31,
- ------------
1996 $ 459,539
1997 475,002
1998 373,785
1999 95,995
2000 49,503
Thereafter 203,831
----------
TOTAL $1,657,655
----- ==========
Interest expense amounted to $615,881 and $602,733 for the years ended
December 31, 1995 and 1994, respectively.
[10] CAPITAL LEASE OBLIGATIONS
The Company has entered into various capital leases for machinery and
equipment [See Note 5]. The following table sets forth the future minimum
lease payments during the next five years for leases in effect at December 31,
1995:
Year ending
- -----------
1996 $320,156
1997 249,735
1998 146,201
1999 87,488
2000 51,034
Thereafter --
--------
Total Minimum Lease Payments 854,614
Imputed Interest (119,872)
--------
Present Value of Minimum Lease Payments 734,742
Current Portion (256,237)
--------
LONG-TERM CAPITAL LEASE OBLIGATION $478,505
---------------------------------- ========
[11] OTHER LIABILITIES
Pursuant to a purchase agreement with the previous owner of the operating
assets of the business, consummated in September 1992, the Company will
assume, and has agreed to perform and pay when due, all of the liabilities,
obligations, and contracts of the previous owner as of August 31, 1992, and
any additional liabilities arising in the ordinary course of
F-15
<PAGE>
TMCI ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
[amounts related to September 30, 1996 are unaudited]
- --------------------------------------------------------------------------------
business. Accrued expenses include management's estimate of their liability
under this purchase agreement of approximately $112,000.
[12] BRIDGE NOTES PAYABLE
In November and December 1995, the Company borrowed an aggregate of $1,000,000
in bridge loans, as evidenced by four promissory notes of $250,000 each
bearing a rate of eight percent [8%] simple interest. The loans mature on the
earlier of one year from inception or the consummation of a public offering of
the Company's securities [See Note 20B]. As additional consideration, solely
for making the loans, the Company granted the lenders the right to receive an
aggregate of 200,000 units ["Bridgeholder's Units"]. Each Bridgeholder's Unit
consists of (i) two shares of Common Stock, (ii) two Class A Redeemable Common
Stock Purchase Warrants ["Class A Warrants"] and (iii) two Class B Redeemable
Common Stock Purchase Warrants ["Class B Warrants"]. The Lenders may exercise
the right to receive the Bridgeholder's Units by delivering the notice thereof
to the Company at any time after the effective date of the offering. The
holders of the Bridge Units agreed not to sell, pledge, hypothecate, encumber
or otherwise dispose of any of the Bridge Units for a period of thirteen
months following the effective date of the offering. The Company has valued
these units at $3.75 per unit. This valuation represents a fifty percent
discount from the price at which options were granted to the Company's
president on December 22, 1995 [See Note 19D]. Such discount was reflected due
to restrictions imposed on the holders of the Bridge Units as to the
salability of the units issued. The Company has accounted for the $750,000
value of the Bridgeholder's Units as debt issue costs to be amortized by the
interest method over the expected life of the promissory notes. For the year
ended December 31, 1995, amortization of $287,878 of such costs is reflected
in the statement of operations while the bridge loans in the balance sheet are
presented net of the remaining $462,122 of unamortized charges at that date.
[13] CONVERTIBLE PROMISSORY NOTES
On March 16, 1994 and April 1, 1994, the Company received advances of $100,000
and $50,000 respectively from two employees of the Company, in the form of
convertible promissory notes, bearing interest at 7.38% and 6.75% per annum,
and payable in monthly installments of $920 and $979, respectively, through
2009. Maturities of the convertible promissory notes are as follows:
1996 $ 15,204
1997 17,388
1998 19,620
1999 13,468
2000 11,518
Thereafter 51,596
--------
TOTAL $128,794
----- ========
These notes may be converted into a maximum of 224,040 shares of the Company's
stock [See Notes 19C and 20A].
[14] INCOME TAXES
TMCI and Touche are Subchapter C corporations subject to the tax provisions
under that section of the Internal Revenue Code.
F-16
<PAGE>
TMCI ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
[amounts related to September 30, 1996 are unaudited]
- --------------------------------------------------------------------------------
TEI elected to be taxed under the provision of Subchapter S of the Internal
Revenue Code. Under those provisions, the Company does not pay federal
corporate income taxes on its taxable income. Instead, the stockholders are
liable for federal and state income taxes on the Company's taxable income. The
Company is, however, responsible for California state income tax at the rate
of 2 1/2% of taxable income with a minimum tax of $800. The Company's S
corporation election will be terminated upon the consummation of a public
offering of its securities [See Note 20B].
Deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts, and consist primarily of depreciation, inventory
capitalization, allowance for bad debts, contribution deductions, and the
alternative minimum tax.
The components of the provision for income taxes are as follows:
December 31,
1 9 9 5 1 9 9 4
--------- ---------
CURRENT TAX EXPENSE:
Federal $354,200 $ --
State 66,900 2,503
-------- --------
Totals 421,100 2,503
Less: Benefit of Net Operating Loss Carryforward (86,100) --
-------- --------
TOTAL CURRENT PROVISION 335,000 2,503
-------- --------
DEFERRED:
Federal 203,800 60,035
State (4,600) 41,039
-------- --------
TOTAL DEFERRED PROVISION 199,200 101,074
-------- --------
TOTAL PROVISION FOR TAXES $534,200 $103,577
------------------------- ======== ========
The components of the deferred tax liability as of December 31, 1995 are as
follows:
Deferred Tax Asset:
Alternative Minimum Tax Credits $ 29,700
Non-Cash Financing Charge 115,200
Inventory Capitalization 20,060
--------
164,960
Valuation Allowance --
--------
Deferred Tax Asset - Current 164,960
Deferred Tax Liabilities
Excess Tax Over Book Accumulated Depreciation -
[14] INCOME TAXES [CONTINUED]
Non-Current 429,215
--------
F-17
<PAGE>
TMCI ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
[amounts related to September 30, 1996 are unaudited]
- --------------------------------------------------------------------------------
NET DEFERRED TAX LIABILITIES $264,255
---------------------------- ========
A reconciliation between the Company's effective tax rate and the U.S.
statutory rate follows:
1 9 9 5 1 9 9 4
------- -------
U.S. Statutory Rate Applied to Pretax Income 34% 34%
State Tax Provision - Net of Federal Tax Benefit 6 6
Effect of S Corporation Operations 2 (10)
Other 11 (10)
-- ---
TOTAL EFFECTIVE TAX RATE 53% 20%
------------------------ == ==
[15] NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1995, the Company utilized the remaining balance of its
federal and state net operating loss carryforwards as an offset to its federal
and state income tax expense.
[16] RELATED PARTY TRANSACTIONS
A substantial portion of the Company's production and administrative
facilities are leased from an affiliate which is 100% owned by the Company's
sole stockholder. The lease commenced in November 1993 and expires on November
30, 2013. Minimal rentals under this lease over the next five years and
thereafter are approximately as follows:
1996 $ 377,000
1997 507,200
1998 507,200
1999 507,200
2000 507,200
Thereafter 6,551,100
----------
TOTAL $8,956,900
----- ==========
As of December 31, 1995 and 1994, the Company owed the affiliate $25,720 and
$65,720, respectively, for unpaid rentals.
[17] EMPLOYEES' STOCK OWNERSHIP PLAN
Effective as of January 1, 1993, Touche adopted a Noncontributory Employees'
Stock Ownership Plan ["the Plan"] covering all full-time employees who have
met certain service requirements. It provides for discretionary contributions
by Touche as determined annually by the directors and stockholders.
For the year ended December 31, 1994, Touche incurred an obligation to the
ESOP Plan of $50,000. The 1994 obligation was satisfied in 1995 when Touche
contributed 16,667 shares of their stock to the Plan. As of December 31, 1995
and 1994, the Plan owned approximately 10% and 8%, respectively, of Touche's
outstanding shares.
F-18
<PAGE>
TMCI ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
[amounts related to September 30, 1996 are unaudited]
- --------------------------------------------------------------------------------
[18] COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - The Company signed a twenty [20] years and eight [8] months
lease commencing September 1, 1992 for its manufacturing and office
facilities. The base rent beginning on the commencement date and continuing
through April 30, 2003 is $470,160 per year. Annual rental increases on each
January 1st shall be adjusted per the average annual Consumer Price Index -
San Francisco/Oakland/San Jose Metropolitan Area. Beginning on May 1, 2003 and
continuing through the remaining lease term, the base rent will be the
prevailing market rate.
The Company is leasing various office equipment on 24 to 36 month leases. At
the end of each lease, they are subject to a fair market value purchase
option.
Minimum lease payments for the next 5 years and thereafter [not including the
CPI increases] are:
1996 $ 470,160
1997 470,160
1998 470,160
1999 470,160
2000 470,160
Thereafter 5,798,640
---------
TOTAL $ 8,149,440
----- =========
Rent expense amounted to $730,417 and $608,420 for the years ended December
31, 1995 and 1994, respectively.
EQUIPMENT ACQUISITION - In 1995, the Company entered into two agreements to
purchase machinery and equipment totaling $457,553. As of December 1995, the
Company had not yet taken delivery of this equipment.
EMPLOYMENT AGREEMENT - The Company has entered into an employment agreement
["Agreement"] dated as of December 28, 1995 with its president. The term of
employment will commence upon the effective date of the public offering [See
Note 19C] and will expire on the fifth anniversary thereof. The annual salary
under the Agreement is $225,000. The term of employment will be automatically
extended for an additional five year term in the absence of notice from either
party. This salary may be increased to reflect annual cost of living increases
and may be supplemented by discretionary and performance increases as may be
determined by the Board of Directors except that during the first three years
following the effective date, his salary may not exceed $225,000. The
president is also eligible to receive an annual bonus of up to $100,000,
payable in four installments. The Agreement provides that during the initial
three years of the term of employment, an annual bonus of $100,000 will be
awarded to the president and that such bonus awards will be used by him to
repay certain indebtedness [See Note 6]. Bonuses during the remainder of the
term of employment will be at the discretion of the Board of Directors.
The Agreement provides, among other things, for participation in an equitable
manner in any profit-sharing or retirement plan for employees or executives
and for participation in other employee benefits applicable to employees and
executives of the Company. The Agreement further provides for the use of an
automobile and other fringe benefits commensurate with
F-19
<PAGE>
TMCI ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
[amounts related to September 30, 1996 are unaudited]
- --------------------------------------------------------------------------------
his duties and responsibilities. The Agreement also provides for benefits in
the event of disability.
[19] STOCKHOLDERS' EQUITY
[A] DESCRIPTION OF SECURITIES - The authorized capital stock of the Company
consists of 25,000,000 shares of common stock, $.001 par value per share. The
common stock carries no conversion rights and is not subject to redemption or
to any sinking fund provisions. All shares of common stock are entitled to
share equally in dividends from sources legally available therefor when, as
and if declared by the Board of Directors and, upon liquidation or dissolution
of the Company, whether voluntary or involuntary, to share equally in the
assets of the Company available for distribution to stockholders. All
outstanding shares of common stock are validly authorized and issued, fully
paid and nonassessable.
[B] ISSUANCE OF COMMON STOCK - On November 6, 1995, the Company issued 600,000
shares of its common stock to a sole stockholder in exchange for $1,000.
[C] STOCK PURCHASE AGREEMENTS AND PUBLIC OFFERING - TMCI has entered into
Stock Purchase Agreements [the "Agreements"], dated as of December 28, 1995,
with the stockholders of Touche and TEI to acquire all of the issued and
outstanding stock of Touche and TEI.
Under terms of the Agreements, the President, Chief Executive Officer and
Chairman of TMCI, individually, and as trustee of the Plan, has agreed to
exchange shares of Touche and TEI for 567,600 and 27,280 shares, respectively,
of TMCI.
As previously referred to [See Notes 9 and 13], certain noteholders will
exchange the stock of Touche and TEI received upon conversion of such notes
for 298,720 shares of TMCI [See Note 20A].
In December 1995, the Company filed a registration statement with the
Securities and Exchange Commission for a public offering for 1,280,000 units
["Units"] of its securities at $5.00 per Unit. Each Unit consists of one share
of common stock and one redeemable Class A warrant. Each Class A warrant
entitles the holder to purchase one share of common stock at $5.50 per share
during the four year period commencing one year from the effective date.
The Class A warrants are redeemable under certain conditions.
TMCI's acquisition of Touche and TEI will occur immediately prior to the
effective date of the public offering.
[D] STOCK OPTION PLAN - The Company has adopted a stock option plan, effective
December 22, 1995. Under such plan, key employees and officers and consultants
of the Company will be granted options to purchase shares of the Company's
common stock at their fair market value on the date of grant. The plan
provides for an aggregate of 500,000 options. On December 22, 1995, the
Company's president was granted options to purchase 100,000 shares of common
stock at $3.75 per share. The options vest two years from the date of grant
and will expire in December 2005. The Plan also permits stock appreciation
rights to be granted in tandem with options.
F-20
<PAGE>
TMCI ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
[amounts related to September 30, 1996 are unaudited]
- --------------------------------------------------------------------------------
[20] FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective December 31, 1995, the Company adopted Statement of Financial
Accounting Standards No. 107, "Disclosure About Fair Value of Financial
Instruments," which requires disclosing fair value to the extent practicable
for financial instruments which are recognized or unrecognized in the balance
sheet. The fair value of the financial instruments disclosed herein is not
necessarily representative of the amount that could be realized or settled,
nor does the fair value amount consider the tax consequences of realization or
settlement. The following table summarizes financial instruments by individual
balance sheet classifications as of December 31, 1995:
Carrying Fair
Amount Value
------ -----
Loan Receivable - Stockholder $ 232,033 $ 232,033
Bridge Loan Payable $ 537,878 $ 537,878
Note Payable - Net of Current Portion $ 1,198,116 $ 1,198,116
Convertible Promissory Notes
- Net of Current Portion $ 113,590 $ 113,590
In assessing the fair value of these financial instruments, the Company was
required to make assumptions, which were based on estimates of market
conditions and risks existing at that time. For certain instruments, including
cash, accounts receivable, notes receivable, accounts payable, amounts due to
and from related parties and affiliates, and short-term debt, management
estimates that the carrying amount approximated fair value for the majority of
these instruments because of their short maturities. Management estimates that
the carrying amount of its long-term indebtedness approximates fair value
since the interest rates currently offered to the Company for debt of the same
remaining maturities approximates the average interest rates which the Company
is currently paying. The Company does not believe it is practicable to
estimate the fair value of the guarantee described in Note 6 and does not
believe exposure to loss is likely.
[21] PRO FORMA INCOME TAXES [UNAUDITED]
As of December 31, 1995, the Conversion of Debt to Equity, Stock Purchase
Agreements, and Public Offering [See Note 19] had not occurred. The pro forma
effect of the income tax expense on the Company's net income if all of these
events had occurred at the beginning of the fiscal years presented is shown on
the combined statement of operations. The pro forma tax amounts have been
computed based on statutory rates in effect for the periods presented.
[22] NEW AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ["FASB"] issued Statement of
Financial Accounting Standards ["SFAS"] No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of,"
in March of 1995. SFAS No. 121 established accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used, and for long-lived
assets and certain identifiable intangibles to be disposed of. SFAS No. 121 is
effective for financial statements issued for fiscal years beginning after
December 15, 1995. Adoption of SFAS No. 121 is not expected to have a material
impact on the Company's financial statements.
F-21
<PAGE>
TMCI ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
[amounts related to September 30, 1996 are unaudited]
- --------------------------------------------------------------------------------
The FASB has also issued SFAS No. 123, "Accounting for Stock-Based
Compensation," in October 1995. SFAS No. 123 uses a fair value based method of
accounting for stock options and similar equity instruments as contrasted to
the intrinsic valued based method of accounting prescribed by Accounting
Principles Board ["APB"] Opinion No. 25, "Accounting for Stock Issued to
Employees." The Company has not decided if it will adopt SFAS No. 123 or
continue to apply APB Opinion No. 25 for financial reporting purposes. SFAS
No. 123 will have to be adopted for financial note disclosure purposes in any
event. The accounting requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years that begin after December 15, 1995;
the disclosure requirements of SFAS No. 123 are effective for financial
statements for fiscal years beginning after December 15, 1995.
[23] SUBSEQUENT EVENTS [EVENTS SUBSEQUENT TO THE AUDITORS' REPORT DATED
FEBRUARY 13, 1996 ARE UNAUDITED]
[A] CONVERSION OF DEBT-TO-EQUITY - Immediately prior to the consummation of
the public offering [See Note 23C], the holders of the convertible promissory
notes issued by Touche and TEI [See Notes 9 and 13] exercised the conversion
right of the notes and exchanged them for 298,720 shares of TMCI.
[B] PUBLIC OFFERING - On March 11, 1996, the Company closed the initial public
offering of its securities [See Note 19C] resulting in net proceeds to the
Company of approximately $5,800,000. The Company sold 1,472,000 Units
consisting of one share of common stock, $0.001 par value per share and one
redeemable Class A warrant at a price of $5.00 per Unit. Each Class A warrant
entitles the holder to purchase one share of common stock at a price of $5.50
per share for a period of four years beginning March 5, 1997. The Company may
redeem the Class A warrants any time after March 5, 1997, upon thirty days
written notice, if the average closing price or bid price of the common stock,
as reported by the principal market on which the common stock is quoted or
traded, equals or exceeds $8.75 per share, for any 20 consecutive trading days
ending within five days prior to the date of the notice of redemption. The
Company used a portion of the proceeds from the offering to repay the bridge
notes described in Note 12.
[C] LINE OF CREDIT ARRANGEMENT - In March 1996, the Company arranged for a
line of credit facility and term loan facility with a new financial
institution. The new facilities bear interest rates ranging from prime + .75%
to prime + 1.25% and have been used to pay off the existing line of credit
facilities and other debt aggregating approximately $2,800,000.
[D] RECENT ACQUISITIONS - On November 12, 1996, TEI acquired the net assets
(accounts receivable, inventory and capital equipment) of the San Jose-based
wire cable and harness manufacturing division of Pen Interconnect Inc.
("PII").
The division acquired is a wire cable harness manufacturer, producing
different types of cable and harnesses that are used by TEI and other
subcontractors in the production of original equipment products. TEI intends
to continue such business by operating it as a division.
The consideration paid for the acquisition consisted of (a) $2.0 million in
cash; (b) two promissory notes in the principal amounts of $500,000 and
$400,000, respectively; and (c) 134,172 shares of the Company's Common Stock.
The notes bear interest at the prime rate plus .5% and are payable over
periods of 48 and 24 months, respectively. TMCI may also be obligated to issue
up to an additional 13,417 shares of Common Stock in the event that certain
overdue accounts receivable are collected.
F-22
<PAGE>
TMCI ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
[amounts related to September 30, 1996 are unaudited]
- --------------------------------------------------------------------------------
Subsequent to the closing of the foregoing acquisition, a dispute has arisen
as to the value of the inventory included in the assets acquired. The Company
has initiated an arbitration proceeding in an effort to resolve this dispute
and is seeking a rescission of the transaction.
On January 24, 1997, the Company acquired all of the outstanding shares of
capital stock of Enterprise Industries, Inc. ("EII"), a North Hollywood,
California based metal stamping manufacturing business. The purchase price
consisted of $1,000,000 in cash and the issuance of 96,560 shares of the
Company's Common Stock. EII will continue to operate under its present name as
a wholly-owned subsidiary of the Company. The President of Enterprise
Industries, Inc. has signed a five (5) year employment contract with the
company to manage that company's operations.
. . . . . . . . . . . . .
F-23
<PAGE>
==============================================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE HEREBY. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER
THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH AN OFFER WOULD BE UNLAWFUL. ANY MATERIAL
MODIFICATION OF THE OFFERING WILL BE ACCOMPLISHED BY MEANS OF AN AMENDMENT TO
THE REGISTRATION STATEMENT.
TABLE OF CONTENTS
Page
Prospectus Summary......................................................3
Risk Factors............................................................7
Use of Proceeds........................................................16
Dilution...............................................................16
Price Range of Common Stock and Dividend
Policy...............................................................17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations...........................................................18
Business...............................................................23
Management.............................................................30
Principal Stockholders.................................................35
Certain Transactions...................................................37
Description of Securities..............................................39
Legal Proceedings......................................................41
Legal Matters..........................................................42
Experts................................................................42
Index to Financial Statements............................................
Report of Independent Auditors........................................F-1
==============================================================================
2,672,000 Shares of Common Stock
Issuable Upon Exercise of
Class A Warrants
-------------
TMCI ELECTRONICS,
INC.
-------------
PROSPECTUS
-------------
March , 1997
<PAGE>
PART TWO
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation and By-laws contain
provisions which reduce the potential personal liability of directors for
certain monetary damages and provide for indemnity of directors and other
persons. The Company is unaware of any pending or threatened litigation
against the Company or its directors that would result in any liability for
which such director would seek indemnification or similar protection.
Such indemnification provisions are intended to increase the
protection provided directors and, thus, increase the Company's ability to
attract and retain qualified persons to serve as directors. Because directors
liability insurance is only available at considerable cost and with low dollar
limits of coverage and broad policy exclusions, the Company does not currently
maintain a liability insurance policy for the benefit of its directors
although the Company may attempt to acquire such insurance in the future. The
Company believes that the substantial increase in the number of lawsuits being
threatened or filed against corporations and their directors and the general
unavailability of directors liability insurance to provide protection against
the increased risk of personal liability resulting from such lawsuits have
combined to result in a growing reluctance on the part of capable persons to
serve as members of boards of directors of public companies. The Company also
believes that the increased risk of personal liability without adequate
insurance or other indemnity protection for its directors could result in
overcautious and less effective direction and management of the Company.
Although no directors have resigned or have threatened to resign as a result
of the Company's failure to provide insurance or other indemnity protection
from liability, it is uncertain whether the Company's directors would continue
to serve in such capacities if improved protection from liability were not
provided.
The provisions affecting personal liability do not abrogate a
director's fiduciary duty to the Company and its shareholders, but eliminate
personal liability for monetary damages for breach of that duty. The
provisions do not, however, eliminate or limit the liability of a director for
failing to act in good faith, for engaging in intentional misconduct or
knowingly violating a law, for authorizing the illegal payment of a dividend
or repurchase of stock, for obtaining an improper personal benefit, for
breaching a director's duty of loyalty (which is generally described as the
duty not to engage in any transaction which involves a conflict between the
interest of the Company and those of the director) or for violations of the
federal securities laws. The provisions also limit or indemnify against
liability resulting from grossly negligent decisions including grossly
negligent business decisions relating to attempts to change control of the
Company.
The provisions regarding indemnification provide, in essence, that
the Company will indemnify its directors against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with any action, suit or proceeding arising
out of the director's status as a director of the Company, including actions
brought by or on behalf of the Company (shareholder derivative actions). The
provisions do not require a showing of good faith. Moreover, they do not
provide indemnification for liability arising out of willful misconduct,
fraud, or dishonesty, for "short-swing" profits violations under the federal
securities laws, or for the receipt of illegal remuneration.
II-1
<PAGE>
The provisions diminish the potential rights of action which might
otherwise be available to shareholders by limiting the liability of officers
and directors to the maximum extent allowable under Delaware law and by
affording indemnification against most damages and settlement amounts paid by
a director of the Company in connection with any shareholders' derivative
action. However, the provisions do not have the effect of limiting the right
of a shareholder to enjoin a director from taking actions in breach of his
fiduciary duty, or to cause the Company to rescind actions already taken,
although as a practical matter courts may be unwilling to grant such equitable
remedies in circumstances in which such actions have already been taken. Also,
because the Company does not presently have directors liability insurance and
because there is no assurance that the Company will procure such insurance or
that if such insurance is procured it will provide coverage to the extent
directors would be indemnified under the provisions, the Company may be forced
to bear a portion or all of the cost of the director's claims for
indemnification under such provisions. If the Company is forced to bear the
costs for indemnification, the value of the Company stock may be adversely
affected. In the opinion of the Securities and Exchange Commission,
indemnification for liabilities arising under the Securities Act of 1933 is
contrary to public policy and, therefore, is unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an itemization of fees and expenses, payable from
the net proceeds of the offering, incurred by the Company in connection with
the issuance and distribution of the securities of the Company being offered
hereby. All fees and expenses are estimated except the SEC, NASD and Nasdaq
Registration and Filing Fees.
SEC Registration and Filing Fee....................................-0-
NASD Registration and Filing Fee...................................-0-
Nasdaq Listing and Filing Fee......................................-0-
Financial Printing...............................................5,000
Transfer Agent Fees................................................-0-
Accounting Fees and Expenses.....................................5,000
Legal Fees and Expenses.........................................22,000
Blue Sky Fees and Expenses......................................10,000
Miscellaneous.................................................. 3,000
--------
TOTAL.................................................$45,000
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following information sets forth all securities of the Company
sold by it within the past three (3) years, which securities were not
registered under the Securities Act of 1933, as amended:
The Company was incorporated in the State of Delaware on December 7,
1995. The Company has authorized capital of 25,000,000 shares of common stock,
$.001 par value. There are currently 3,499,772 shares of common stock issued
and outstanding. See "Principal Stockholders" and "Description of Securities."
On December 28, 1995, the Company issued 600,000 shares of its Common
Stock to Rolando Loera, Chairman, Chief Executive Officer and President of the
Company pursuant to the merger of the predecessor of the Company into the
Company in exchange for the cancellation of an equal number of shares in the
predecessor company. The predecessor corporation (TMCI Electronics, Inc.) was
organized
II-2
<PAGE>
under the laws of California on September 26, 1995 and had conducted no
operations prior to the merger. See "Principal Stockholders" and "Description
of Securities."
The Company issued 893,600 shares of its Common Stock to Rolando
Loera and Rolando Loera, Trustee for Touche's Employee Stock Ownership Plan
and three officers of the Company (Jose Antonio Agredano, Frank Ramirez III
and Livino Ribaya, Jr.) pursuant to Stock Purchase Agreements dated as of
December 28, 1995 in exchange for all of the issued and outstanding stock of
Touche and TEI.
In November 1995, the Company borrowed $1,000,000 in a bridge loan
from the Selling Securityholders excluding for this purpose Rolando Loera) at
the rate of eight percent (8%) simple annual interest, which was paid at the
closing of the public offering from the net proceeds of the public offering.
400,000 shares of Common Stock and 1,200,000 Class A Warrants were issued to
the Selling Securityholders which were identical to the Class A Warrants
included in the Units being offered by the Company. The Shares of Common
Stock, Class A Warrants and the shares of Common Stock underlying the Class A
Warrants were registered in connection with that offering. The Company did not
receive any of the proceeds from the sale of the securities offered by the
Selling Securityholders. The Class A Warrants are redeemable upon certain
conditions. Should the Class A Warrants offered by the Selling Securityholders
be exercised, of which there is no assurance, the Company will receive the
proceeds therefrom aggregating up to an additional $6,600,000.
In November 1996, the Company issued 134,172 shares of Common Stock
in connection with the acquisition of certain assets from Pen Interconnect,
Inc.
In January 1997, the Company issued 96,560 shares of Common Stock in
connection with the acquisition of Enterprise Industries, Inc.
The Company has relied on Section 4(2) of the Securities Act of 1933,
as amended, for its private placement exemption, such that the sales of the
securities were transactions by an issuer not involving any public offering.
All of the aforesaid securities have been appropriately marked with a
restricted legend and are "restricted securities," as defined in Rule 144 of
the rules and regulations of the Securities and Exchange Commission,
Washington, D.C. 20549. All of the aforesaid securities were issued for
investment purposes only and not with a view to redistribution, absent
registration. All of the aforesaid persons have been fully informed and
advised concerning the Registrant, its business, financial and other matters.
Transactions by the Registrant involving the sales of these securities set
forth above were issued pursuant to the "private placement" exemptions under
the Securities Act of 1933, as amended, as transactions by an issuer not
involving any public offering. The Registrant has been informed that each
person is able to bear the economic risk of his investment and is aware that
the securities were not registered under the Securities Act of 1933, as
amended, and cannot be re-offered or re-sold until they have been so
registered or until the availability of an exemption therefrom. The transfer
agent and registrar of the Registrant will be instructed to mark "stop
transfer" on its ledgers to assure that these securities will not be
transferred absent registration or until the availability of an exemption
therefrom is determined.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following is a list of Exhibits filed herewith by TMCI
Electronics, Inc. as part of the SB-2 Registration Statement and related
Prospectus:
1.0 Form of Underwriting Agreement.(b)
II-3
<PAGE>
1.1 Form of Selected Dealers Agreement, as amended.(b)
3.0 Certificate of Incorporation, filed with Delaware Secretary of State
on December 7, 1995.(c)
3.1 By-laws.(c)
3.2 Agreement of Merger between TMCI Electronics, Inc., a California
corporation, and TMCI Electronics, Inc., a Delaware corporation.(c)
3.3 Certificate of Merger.(c)
4.0 Specimen Copy of Common Stock Certificate.(c)
4.1 Form of Class A Warrant Certificate.(c)
4.2 [Intentionally omitted.]
4.3 Form of Underwriters' Purchase Option, as amended.(b)
4.4 Form of Warrant Agreement, as amended.(b)
5.0 Opinion of Gould & Wilkie.(a)
10.0 Employment Agreement, Rolando Loera, dated December 28, 1995.(c)
10.1 Bridge Loan Agreements and Promissory Notes.(c)
10.2 Subscription Paper, dated November 6, 1995.(c)
10.3 Stock Purchase Agreement, dated December 28, 1995 relating to
Touche Manufacturing Company, Inc.(c)
10.4 Stock Purchase Agreement dated December 28, 1995 relating to Touche
Electronics, Inc.(c)
10.5 Small Business Loan Agreement dated October 26, 1993 with related
Guarantee of Touche Manufacturing Company, Inc., Touche Electronics,
Inc. and Rolando Loera.(c)
10.6 Lease Agreement dated January 1, 1993 relating to 1875 Dobbin Drive,
San Jose, CA.(c)
10.7 Lease Agreement dated October 25, 1993 relating to 1881-1899 Dobbin
Drive, San Jose, CA.(c)
10.8 Lease Agreement dated June 21, 1995 relating to 1565-C Mabury Road,
San Jose, CA.(c)
10.9 1995 Stock Option Plan.(c)
10.10 Touche Manufacturing Company, Inc. Employee Stock Ownership Plan.(c)
10.11 Convertible Promissory Notes, as amended, and Stock Purchase Option
Agreements, as amended, of Touche Manufacturing Company, Inc. and
Touche Electronics, Inc.(b)
10.12 Asset Purchase Agreement dated November 1, 1996 by and among Pen
Interconnect, Inc., Touche Electronics, Inc. and TMCI Electronics,
Inc., incorporated by reference to Exhibit 1.0 to the Registrant's
Form 8-K filed with the Securities and Exchange Commission on
November 27, 1996.
10.13 Stock Purchase Agreement dated effective as of January 1, 1997 by and
among TMCI Electronics, Inc. and the Shareholders of Enterprise
Industries, Inc., incorporated by reference to Exhibit 2.0 the
Registrant's Form 8-K filed with the Securities and Exchange
Commission on February 7, 1997.
21.0 Subsidiaries of the Registrant.
23.0 Consent of Gould & Wilkie is contained as Exh.5.0.(a)
23.1 Consent of Moore Stephens, P.C.
23.2 Consent of Dominic A. Polimeni.(a)
- -------------
(a) Previously filed on March 4, 1996 with Amendment No. 2 to the
Registration Statement.
(b) Previously filed on February 14, 1996 with Amendment No. 1 to the
Registration Statement.
(c) Previously filed on December 29, 1995 with original Registration
Statement.
II-4
<PAGE>
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to
participating broker-dealers, at the closing, certificates in such
denominations and registered in such names as required by the participating
broker-dealers, to permit prompt delivery to each purchaser.
The undersigned Registrant also undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate,
represent a fundamental change in the information set
forth in the registration statement;
(iii)To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
Provided, however, that paragraphs (a)(1)(i) and
(a)(1)(ii) do not apply if the registration statement
is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports
filed by the registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
preceding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form SB-2 and authorized
this amendment to the registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in San Jose, California, on March 21,
1997.
TMCI ELECTRONICS, INC.
By:/s/ ROLANDO LOERA
------------------------
Rolando Loera
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed by the following
persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROLANDO LOERA Chairman, President, Chief March 21, 1997
- ----------------- Executive Officer, Director
Rolando Loera [Principal Executive Officer]
/s/ CHARLES E. SHAW Vice President, Chief Financial March 21, 1997
- ----------------- Officer, Director [Principal
Charles E. Shaw Financial Officer]
/s/ ROBERT LOERA Controller, Secretary, Director March 21, 1997
- ----------------- [Principal Accounting Officer]
Robert Loera
/s/ THOMAS F. CHAFFIN Director March 21, 1997
- ---------------------
Thomas F. Chaffin
/s/ DOMINIC A. POLIMENI Director March 21, 1997
- -----------------------
Dominic A. Polimeni
<PAGE>
INDEX TO EXHIBITS
1.0 Form of Underwriting Agreement.(b)
1.1 Form of Selected Dealers Agreement, as amended.(b)
3.0 Certificate of Incorporation, filed with Delaware Secretary of State
on December 7, 1995.(c)
3.1 By-laws.(c)
3.2 Agreement of Merger between TMCI Electronics, Inc., a California
corporation, and TMCI Electronics, Inc., a Delaware corporation.(c)
3.3 Certificate of Merger.(c)
4.0 Specimen Copy of Common Stock Certificate.(c)
4.1 Form of Class A Warrant Certificate.(c)
4.2 [Intentionally omitted.]
4.3 Form of Underwriters' Purchase Option, as amended.(b)
4.4 Form of Warrant Agreement, as amended.(b)
5.0 Opinion of Gould & Wilkie.(a)
10.0 Employment Agreement, Rolando Loera, dated December 28, 1995.(c)
10.1 Bridge Loan Agreements and Promissory Notes.(c)
10.2 Subscription Paper, dated November 6, 1995.(c)
10.3 Stock Purchase Agreement, dated December 28, 1995 relating to Touche
Manufacturing Company, Inc.(c)
10.4 Stock Purchase Agreement dated December 28, 1995 relating to Touche
Electronics, Inc.(c)
10.5 Small Business Loan Agreement dated October 26, 1993 with related
Guarantee of Touche Manufacturing Company, Inc., Touche Electronics,
Inc. and Rolando Loera.(c)
10.6 Lease Agreement dated January 1, 1993 relating to 1875 Dobbin Drive,
San Jose, CA.(c)
10.7 Lease Agreement dated October 25, 1993 relating to 1881-1899 Dobbin
Drive, San Jose, CA.(c)
10.8 Lease Agreement dated June 21, 1995 relating to 1565-C Mabury Road,
San Jose, CA.(c)
10.9 1995 Stock Option Plan.(c)
10.10 Touche Manufacturing Company, Inc. Employee Stock Ownership Plan.(c)
10.11 Convertible Promissory Notes, as amended, and Stock Purchase Option
Agreements, as amended, of Touche Manufacturing Company, Inc. and
Touche Electronics, Inc.(b)
10.12 Asset Purchase Agreement dated November 1, 1996 by and among Pen
Interconnect, Inc., Touche Electronics, Inc. and TMCI Electronics,
Inc., incorporated by reference to Exhibit 1.0 to the Registrant's
Form 8-K filed with the Securities and Exchange Commission on
November 27, 1996.
10.13 Stock Purchase Agreement dated effective as of January 1, 1997 by and
among TMCI Electronics, Inc. and the Shareholders of Enterprise
Industries, Inc., incorporated by reference to Exhibit 2.0 the
Registrant's Form 8-K filed with the Securities and Exchange
Commission on February 7, 1997.
21.0 Subsidiaries of the Registrant.
23.0 Consent of Gould & Wilkie is contained as Exh.5.0.(a)
23.1 Consent of Moore Stephens, P.C.
23.2 Consent of Dominic A. Polimeni.(a)
- --------------
(a) Previously filed on March 4, 1996 with Amendment No. 2 to the
Registration Statement.
(b) Previously filed on February 14, 1996 with Amendment No. 1 to the
Registration Statement.
(c) Previously filed on December 29, 1995 with original Registration
Statement.
<PAGE>
EXHIBIT 21.0
SUBSIDIARIES OF TMCI ELECTRONICS
Jurisdiction of Percentage of
Name of Company Incorporation Ownership
--------------- --------------- -------------
1. Touche Manufacturing Company, Inc. CA 100%
2. Touche Electronics, Inc. CA 100%
3. Enterprise Industries, Inc. CA 100%
<PAGE>
EXHIBIT 23.1
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Post-Effective Amendment No. 1 to the
Registration Statement (No. 33-80973) on Form SB-2 of our report dated
February 13, 1996, on our audits of the combined financial statements of TMCI
Electronics, Inc., Touche' Manufacturing Company, Inc. and Touche'
Electronics, Inc. We also consent to the reference to our firm under the
caption "Experts."
On July 1, 1996, the firm Mortenson and Associates, P.C. changed its
name to Moore Stephens, P.C.
MOORE STEPHENS, P.C.
Certified Public Accountants
Cranford, New Jersey
March 19, 1997
