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Registration No. 33-80973
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE
AMENDMENT NO. 3 ON FORM S-1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
TMCI ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 3444 77-0413814
(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, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
ROLANDO LOERA
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
TMCI ELECTRONICS, INC.
1875 DOBBIN DRIVE
SAN JOSE, CA 95133
408-272-5700
(Name, address, including zip code, and telephone number, including area code,
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
Approximate date of commencement of proposed sale to public:
As soon as practicable after the amendment to the Registration Statement
becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
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.
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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 November 18, 1997
PROSPECTUS
2,672,000 SHARES OF COMMON STOCK ($.001 PAR VALUE)
ISSUABLE UPON THE EXERCISE OF CLASS A WARRANTS
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128,000 UNITS
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 1996 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 November
17, 1997, the closing bid price per share of the Common Stock as reported by
the Nasdaq SmallCap Market was $5.375.
The registration statement of which this Prospectus is a part also
covers 128,000 Units issuable upon the exercise of the Unit Purchase Option
granted to the underwriter in connection with the March 1996 Offering, 128,000
shares of Common Stock included in the Units, 128,000 Warrants included in the
Units and 128,000 shares of Common Stock issuable upon exercise of said
Warrants. See "Description of Securities."
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 1996 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 , 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 Company, 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
arose concerning various aspects of the transaction. On February 14, 1997,
TMCI filed a Demand for Arbitration against PII, seeking a substantial
purchase price reduction or, in the alternative, other remedies and damages as
provided by
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law. For a more detailed discussion of the pending arbitration and related
legal proceedings, see "Legal Proceedings."
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
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Securities Offered(1)(2)..........................................2,672,000 shares
Shares of Common Stock Outstanding Prior to Offering..............3,596,332 shares
Shares of Common Stock Outstanding After Offering(1)(2)(3)........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 Class 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."
(2) Does not include 128,000 Units issuable upon exercise of the Unit
Purchase Option issued to the underwriter in the March 1996 Offering
or the securities underlying the Units.
(3) Assumes exercise of all Class A Warrants.
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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 1996 Offering. On January
24, 1997, the Company acquired all of the issued and outstanding shares of
Common Stock of Enterprise Industries, Inc. ("EII"). The Company now derives
its revenues from the operation of its wholly owned subsidiaries, including
Touche, TEI and EII. Therefore, the performance of the parent company is
measured by and depends entirely upon the activities of its subsidiaries. The
Company can make no assurances that the combination of these companies will
prove as successful as the subsidiaries were independently. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business."
NO ASSURANCE OF FUTURE PROFITABILITY
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.
NO ASSURANCE OF PAYMENT OF DIVIDENDS
No assurance can be made that should the operation of the Company or
its subsidiaries be profitable the Company will pay dividends. Even if the
Company or its subsidiaries do 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. See "Price Range of Common Stock and
Dividend Policy."
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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.
See "Business."
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 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.
DEPENDENCE UPON THE SEMICONDUCTOR MANUFACTURING MARKET
The Company's business depends exclusively upon contracts and orders
from original equipment manufacturers ("OEMs"). These OEMs manufacture
computers, telecommunications equipment and test and medical equipment. The
OEMs sell their products to semiconductor manufacturers for use during product
testing and for use in semiconductor related products that are produced for
sale on the wholesale and retail levels. Accordingly, any material change in
the semiconductor manufacturing market could have a material effect on the
Company's results. See "Management's Discussion and Analysis of Financial
Condition ad Results of Operations" and "Business."
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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business."
DISPUTE RELATING TO PEN ACQUISITION
Subsequent to the closing of the acquisition of the San Jose Division
of Pen Interconnect Inc. ("PII"), a dispute arose concerning various aspects
of the transaction. On February 14, 1997, TMCI filed a Demand for Arbitration
against PII, seeking a substantial purchase price reduction or, in the
alternative,
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other remedies and damages as provided by law. For a more detailed discussion
of the pending arbitration, see "Legal Proceedings."
IMMEDIATE AND SUBSTANTIAL DILUTION
An investor in this offering will experience immediate and
substantial dilution of $2.07 (37.6%) per share. Prior to the offering, the
Company had a net tangible book value of $7,451,962 or $2.07 per share,
derived from the Company's September 30, 1997 combined balance sheet and based
upon 3,596,332 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 $21,515,122 or $3.43 per share. The result will be an immediate
increase in net tangible book value per share of $1.36 to existing
shareholders and an immediate dilution to new investors of $2.07 per share.
See "Dilution."
COMPANY'S FAILURE TO COMPLY WITH CERTAIN COVENANTS ON ITS DEBT
In March 1996, the Company entered into a line of credit and term
loan facility with a financial institution. The facility contains certain
covenants which require the Company, among other things, to maintain minimum
levels of earnings, minimum tangible net worth and certain financial ratios.
As of December 31, 1996, the Company was not in compliance with certain of
these covenants but obtained a waiver from the financial institution of the
required minimum level of earnings, tangible net worth and debt service
coverage ratio. In the event that the Company is not in compliance with such
covenants, the financial institution will be able to declare the Company in
default and to exercise its rights as a secured party. See "Management's
Discussion and Analysis of Financial Condition ad Results of Operations and
Results of Operations -- Liquidity and Capital Resources."
In addition, the line of credit also contains negative covenants
requiring, among other provisions, the consent for the disposition of assets,
acquisition or merger of any business, guaranty of any third party
obligations, capital restructure, and any other distributions or payment of
any dividends in cash or in stock.
There can be no assurance that the Company will be able to maintain
compliance with applicable covenants under the line of credit and term loan
facility in the future.
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. For each of the three months ended
September 30, 1997, the number of the Company's shares traded by Biltmore as a
percentage of the total number of the Company's shares traded was 85%, 67% and
67%, respectively. Biltmore is involved in litigation which may adversely
affect its ability 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 Elliott 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
United States District Court for the Southern District of Florida alleging
violations of the federal
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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. Both suspensions have been
completed.
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 commenced an action seeking, among other things,
to revoke Biltmore's license to do business in such state. The complaint
alleged that Biltmore offered and/or sold securities that were neither
registered nor exempt, engaged in dishonest or unethical practices in the
securities business, failed to reasonably supervise its agents and violated
the antifraud provisions of the Indiana Securities Act. The action was settled
without any admission, finding or judgment against Biltmore of any violation
of the Indiana Securities Act and the Biltmore agreed to, among other things,
resolve certain customer claims, the payment of a fine and costs and
restrictions with respect to the sale of securities to Indiana residents.
Specifically, Biltmore agreed that it will not sell any securities to Indiana
residents (i) which are not listed on the New York Stock Exchange, the
American Stock Exchange or Nasdaq; (ii) for which Biltmore has served as lead
underwriter or as a member of the selling syndicate; or (iii) for which
Biltmore is a market maker. Under the terms of the settlement agreement,
Biltmore continues to maintain its license in the State of Indiana. The
Company does not intend to seek qualification for the sale of securities in
the State of Indiana.
On July 18, 1997, the State of Arkansas, Securities Department issued
a consent order in lieu of the filing of a compliant as settlement of all
claims against Biltmore Securities and Elliot A. Loewenstern. The claims
related to certain practices constituting violations of the Arkansas
Securities Act including promising customers price appreciation, failing to
disclose negative information regarding stocks, representing that they know of
"inside information" and using high pressure sales tactics during the period
February 1992 to October 1993. Biltmore and Mr. Loewenstern consented to the
entry of the order without admitting or denying any wrongdoing or violation.
The consent order censured Biltmore Securities and Elliott A. Loewenstern and
required that they pay the amount of $25,000 for costs and expenses relating
to the proceedings. The consent order also required that Biltmore deliver to
the Commissioner of Securities a copy of the final report prepared by the
independent consultant. All terms of the consent order have been fully
complied with.
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On September 10, 1997, the State of California issued a Notice of
Intention to Issue Order Revoking Biltmore's Broker-Dealer Certificate. The
accusations allege that it is appropriate for Biltmore's broker-dealer license
to be revoked in the public interest as a result of Biltmore being subject to
enforcement orders issued by the Securities and Exchange Commission, the
Arkansas Securities Department and the Indiana Securities Division. Biltmore
intends to request a hearing and contest the accusation. 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.
According to the records of the Central Register Depository
maintained by the National Association of Securities Dealers Regulation, Inc.
("NASDR"), Messrs. Loewenstern and Bronson, the principals of Biltmore, have
46 and 44 recorded incidents respectively, some of which are disciplinary
complaints.
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."
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. The Company entered into an employment agreement with Mr.
Loera on March 5, 1996 for a period of five years, with an automatic five year
extension in the absence of notice to the contrary from either party. In
addition, the Company entered into an employment agreement with Anthony
Magnone, the President of Enterprise Industries, Inc. on January 1, 1997 for a
period of five years. If the employment by the Company of either Mr. Loera or
Mr. Magnone terminates, or if either Mr. Loera or Mr. Magnone becomes 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 -- Competition."
NO ASSURANCES THAT RECENT ACQUISITIONS WILL BE PROFITABLE
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
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<PAGE>
manufacturing business acquisition and no assurance can be given as to the
outcome of such dispute. See "Business" and "Legal Proceedings."
POSSIBLE FUTURE ACQUISITIONS
In the event that any of the Warrants are exercised, the Company may
use the bulk of any such proceeds for future acquisitions; however, no
assurances can be made that such funds will enable the Company to expand its
base or realize profitable consolidated operations. The Company is currently
considering acquiring two companies, a distributor of electronic parts and a
manufacturing and assembling company, both based in Santa Clara county. The
Company has entered into a non-binding letter of intent to acquire the
electronic parts distributor. There can be no assurance that the acquisition
will be successfully completed. 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 allocate 100%
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 BY MANAGEMENT; 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 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 or delay a
change of control. See "Management" and "Principal Stockholders."
SUBSTANTIAL ENVIRONMENTAL 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
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<PAGE>
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."
NO ASSURANCE THAT THE COMPANY CAN MAINTAIN A CURRENT REGISTRATION STATEMENT
AND QUALIFY FOR SALE UNDER APPLICABLE STATE SECURITIES LAWS
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 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
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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 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.
To the extent that Biltmore solicits the exercise of the Warrants,
the Underwriter may be prohibited pursuant to the requirements of Regulation M
under the Exchange Act from engaging in market-making activities during such
solicitation and for a period of up to five days preceding such solicitation.
As a result, Biltmore may be unable to continue to provide a market for the
Company's securities during certain periods while the Warrants are
exercisable.
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
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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.
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.
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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."
POTENTIAL CONFLICTS OF INTEREST ON THE PART OF CERTAIN EXECUTIVE OFFICERS OF
THE COMPANY
In addition to acting as Chairman, President and Chief Executive
Officer of the Company, Rolando Loera is also the sole owner of Touche
Properties, Inc. ("TPI"), a real estate company which owns and leases the real
property located at 1881-1899 Dobbin Drive (the "Property") to TEI and Touche,
two wholly-owned subsidiaries of the Company. The rent payments made by TEI
and Touche to TPI amounted to approximately $576,144, $477,640 and $479,307 in
1996, 1995 and 1994, respectively. In addition, TPI has a loan in the amount
of $1,000,000 on the Property, and TEI and Touche have guaranteed the
satisfaction of TPI's obligations under this loan. See "Certain Transactions."
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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 net proceeds from such exercise, estimated to be
$14,108,160 if all Warrants are exercised, 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, including
the financing of future, acquisitions. The Company is currently considering
acquiring two companies, a distributor of electronic parts and a manufacturing
and assembling company, both based in Santa Clara county. The Company has
entered into a non-binding letter of intent to acquire the electronic parts
distributor; however, there can be no assurance that the acquisition will be
successfully completed. 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. See "RISK
FACTORS--Possible Future Acquisitions."
DILUTION
As of September 30, 1997, the Company had a net tangible book value
of $7,451,962(1), or $2.07 per share (based on the Company having 3,596,332
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
$21,515,122, or $3.43 per share. The result will be an immediate increase in
net tangible book value per share of $1.36 to existing shareholders and an
immediate dilution to new investors of $2.07 (37.6%) 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:
<TABLE>
<S> <C>
Exercise price of the Warrants $5.50
Net tangible book value per share, before the offering $2.07
Increase per share attributable to the sale by the Company
of the shares offered hereby $1.36
Pro forma net tangible book value per share, after the offering $3.43
Dilution per share to new investors $2.07
</TABLE>
The above table assumes exercise of all of the outstanding Warrants.
(1) The carrying value of goodwill has been excluded from the determination of
the net tangible book value.
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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.
Common Stock
-------------
High Low
---- ---
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 $ 4.50
Second Quarter $ 6.875 $ 4.50
Third Quarter $ 6.125 $ 4.50
Fourth Quarter $ 6.1875 $ 4.75
(through November 17)
On November 17, 1997, the closing bid price for the Company's Common
Stock as reported on the NASDAQ SmallCap Market system was $5.375. On that date
there were approximately 44 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.
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, 1997 COMPARED
WITH 1996
The results of operations utilizes the consolidated results from TMCI
Electronics, Inc. and its subsidiaries (collectively, the "Company"). The
discussion below should be read in conjunction with the financial statements
and the notes thereto, that appear elsewhere in this report.
Net Sales
The Company's net sales increased approximately $5,482,200 or 104% to
$10,728,640 from $5,246,434 in the third quarter ended September 30, 1997, as
compared with the third quarter ended September 30, 1996. The growth in third
quarter sales was due primarily to a significant increase in existing as well
as new customer orders, and in part to new product services provided by the
two business acquisitions. As a percentage of sales, the Company's
semiconductor, computer, medical and telecommunications equipment market sales
were less concentrated, representing approximately 43%, 42%, 10% and 5%,
respectively, in the third quarter ended September 30, 1997, as compared with
28%, 59%, 8% and 5%, respectively, in the third quarter ended September 30,
1996.
In contrast, the Company's net sales increased approximately
$7,276,500 or 36% to $27,773,034 from $20,496,567 for the nine month period
ended September 30, 1997, as compared with the nine month period ended
September 30, 1996. The results continue to reflect significant growth and
continuing diversity of operations through the acquisition of the wire cable
and metal stamping manufacturing businesses as new product services continue
to be introduced and added to consolidated operations. During the third
quarter, the Company received a significant order from a medical equipment
manufacturer.
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Gross Profit
The Company's gross profit increased approximately $1,846,900 or 85%
to $4,014,741 from $2,167,860 in the third quarter ended September 30, 1997,
as compared with the third quarter ended September 30, 1996. However, as a
percentage of sales, the Company's gross profit decreased approximately 4% to
37% from 41% in the third quarter ended September 30, 1997, as compared with
the third quarter ended September 30, 1996. The decrease in gross profit, as a
percentage of sales, was primarily due to rescheduled delivery dates of one of
the Company's customer product lines, which resulted in the increase and
maintenance of a slightly higher inventory level during the third quarter
ended September 30, 1997. In contrast, the Company's gross profit increased
approximately $3,201,700 or 46% to $10,200,461 from $6,998,727 for the nine
month period ended September 30, 1997, as compared with the nine month period
ended September 30, 1996. As a percentage of sales, gross profit increased
approximately 3% to 37% from 34% for the nine month period ended September 30,
1997, as compared with the nine month period ended September 30, 1996. The
nine month period increase in gross profit is primarily due to production
yields and labor efficiencies, and the acquisition of wire cable and metal
stamping businesses which have allowed the Company to reduce material costs
and to tighten controls on costs, which it has been able to achieve through
the successful acquisition and integration of the wire cable and stamping
manufacturing businesses into its operations.
Operating Expenses
General and administrative expenses increased approximately $977,300
or 51% to $2,899,896 from $1,922,557 in the third quarter ended September 30,
1997, as compared with the third quarter ended September 30, 1996. As a
percentage of sales, general and administrative expenses decreased
approximately 10% to 27% from 37% for the third quarter ended September 30,
1997, as compared with the third quarter ended September 30, 1996, which is in
line with improving and maintaining departmental efficiencies in the third
quarter ended September 30, 1997, as compared with the third quarter ended
September 30, 1996.
In contrast, the Company's general and administrative expenses
increased approximately $2,065,500 or 36% to $7,865,808 from $5,800,330 for
the nine month period ended September 30, 1997, as compared with the nine
month period ended September 30, 1996. As a percentage of sales, the Company's
general and administrative expenses remained unchanged at 28% for the nine
month period ended September 30, 1997, as compared with the nine month period
ended September 30, 1996. The stability of this percentage for the nine month
period ended September 30, 1997, was primarily attributable to third quarter
increase in sales, which offset the increases in personnel, building rental
costs, repairs and maintenance, promotions and increases in management
positions and other related business operations.
Interest Expense
The Company's interest expense for the third quarter ended September
30, 1997 was approximately $184,900, representing an increase of approximately
$138,400 over the third quarter ended September 30, 1996. In contrast,
interest expense for the nine month period ended September 30, 1997 was
approximately $419,100, representing an increase of approximately $172,400
from the nine month period ended September 30, 1996. The Company's interest
expense increased during the third quarter and nine month period ended
September 30, 1997, due to an increase in short term cash requirements
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which resulted in increased bank borrowings in the third quarter and nine
month period ended September 30, 1997, as compared to the third quarter and
nine month period ended September 30, 1996.
Other Income [Expense]
The Company's other expenses increased approximately $134,700 to
$152,623 from $17,916 in the third quarter ended September 30, 1997, as
compared with the third quarter ended September 30, 1996. The increase was
primarily due to a net decrease of approximately $1,700 on the sale of
equipment, a net decrease of approximately $25,600 in interest income, and a
net increase of approximately $138,400 in interest expenses recognized, offset
by a net increase of approximately $31,000 in other income. In contrast, the
Company's other expenses decreased approximately $247,000 to $(231,282) from
$(478,291) in the nine month period ended September 30, 1997, as compared with
the nine month period ended September 30, 1996. The decrease in other expenses
was primarily due to a net decrease of approximately $462,100 in a one-time
financing charge on certain bridge loans that were incurred by the Company in
the first quarter of 1996, and a net increase of approximately $146,800 in
other income, primarily due to interest and rental income, and one time
refunds from utilities, and Workmens' Compensation, a net increase of
approximately $172,400 in interest expense, offset by a net decrease of
approximately $138,200 on the sale of equipment, and a net decrease of
approximately $53,600 in interest income recognized in the nine month period
ended September 30, 1996.
Net Income
Net income increased approximately $434,900 or 252% to $607,671 from
$172,741 in the third quarter ended September 30, 1997, as compared with the
third quarter ended September 30, 1996. The third quarter increase in net
income was primarily due to: (1) a net increase in income from operations of
approximately $896,500, and (2) offset by a net increase in other expenses of
approximately $134,700, and a net increase in the provision for income taxes
of approximately $299,900. In contrast, the Company's net income increased
approximately $845,100 or 182% to $1,310,457 from $465,370 for the nine month
period ended September 30, 1997, as compared with the nine month period ended
September 30, 1996.
The nine month period increase in net income was due primarily to:
(1) a net increase in income from operations of approximately $1,136,300, and
(2) a net decrease in other expenses of approximately $247,000, offset by a
net increase in the provision for income taxes of approximately $548,200.
Liquidity and Capital Resources
The Company has a long-term revolving line of credit with
Manufacturers Bank ("Mfrs."), which was renewed on June 1, 1997 for an
additional year, and bears interest at Mfrs.' base rate plus 1/4%. This
facility, which has been increased by $1,100,000, allows the Company to borrow
up to $5,500,000 based on a stipulated percentage of contractually defined
eligible trade accounts receivable. The Company had approximately $3,205,000
in outstanding borrowings under the line of credit as of September 30, 1997.
In addition, the Company and Mfrs. have agreed to a term loan facility of up
to $5,500,000 available for equipment purchases, which will bear interest at
Mfrs.' base fixed rate of 8.75% per annum. There were approximately $4,214,800
outstanding borrowings under this facility as of September 30, 1997, with a
remaining availability of approximately $1,285,200 under the equipment line
and approximately $2,295,000 under the revolving line of credit at September
30, 1997.
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The Company's working capital increased by approximately $2,053,500
from $4,036,532 to $6,089,998 in the nine month period ended September 30,
1997. The increase resulted primarily from an increase in accounts receivable
of approximately $2,733,300, an increase in inventory of approximately
$2,768,000, an increase in prepaid expenses of approximately $263,300, an
increase in notes receivable of approximately $193,500, offset by an increase
in accounts payable of approximately $915,800, an increase in short-term bank
borrowings of approximately $2,620,000, and a decrease in cash of
approximately $33,800.
The Company required cash to fund operating activities of
approximately ($1,825,600) in the nine month period ended September 30, 1997,
as compared to required cash to fund operating activities of approximately
($375,500) in the nine month period ended September 30, 1996. Cash used in
investing and financing activities, includes the purchase of equipment, debt
reduction, acquisition of Enterprise Industries, Inc., note payable proceeds,
bank short-term borrowings, repayment of bridge note payable, and an increase
in third party loans, was approximately $1,791,800 and $1,821,100 in the nine
months ended September 30, 1997 and September 30, 1996, respectively.
During the nine month period ended September 30, 1997 and September
30, 1996, the Company spent approximately $488,600 and $321,700, respectively,
to purchase capital equipment which was funded through long-term borrowings
and current operations. Additionally, management expects the Company's level
of future capital expenditures to increase at a level that is consistent with
the Company's projected growth and operations. Management has projected
capital expenditure requirements of approximately $2,000,000 for the calendar
year ending December 31, 1997. This increase will be supported by increased
bank borrowings and internal operations.
Management believes that its current financial position, together
with the available borrowings under the Company's available borrowings under
its various short and long-term credit facilities will be sufficient to meet
the Company's anticipated operating needs and projected capital expenditure
requirements through the year ending December 31, 1997.
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RESULTS OF OPERATIONS-FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED WITH 1995
The Results of Operations discussion utilizes the consolidated
results in 1996 compared to the combined results in 1995 from the operating
subsidiaries (Touche and TEI) prior to their acquisition by the Company
eliminating inter-company transactions. The Capital Resources and Liquidity
section and the Inflation section relates to the Company with its wholly-owned
subsidiaries.
The following table sets forth the statements of operations of the
Company for the periods indicated:
Years Ended
December 31,
1 9 9 6 1 9 9 5
------- -------
Consolidated Combined
Sales $ 26,139,828 $ 28,098,919
Cost of goods sold 17,092,231 19,991,649
---------- ----------
Gross Profit 9,047,597 8,107,270
Operating expenses 8,522,647 6,384,946
--------- ---------
Income from Operations 524,950 1,722,324
------- ---------
Other Income 189,704 40,394
Interest Income 69,742 9,726
Interest Income - Related Party 29,276 29,276
Interest Expense (323,679) (615,881)
Non-Cash Finance Charge (462,122) (287,878)
Gain on Sale of Equipment 139,465 109,655
------- -------
Total Other Expense (357,614) (714,708)
-------- --------
Income Before Provision for
Income Taxes 167,336 1,007,616
Provision for Income Taxes 18,669 534,200
------ -------
Net Income $ 148,377 $ 473,416
============= ============
Revenue decreased approximately $1,950,100 or 7% to $26,139,828 from
$28,089,919 for the fiscal year ended December 31, 1996, as compared with the
fiscal year ended December 31, 1995. The decline in revenue was due primarily
to significant order cancellations and rescheduling of orders by one of the
Company's major customers, which resulted from (1) a change in local market
conditions, and (2) a general slowdown in the semiconductor manufacturing
marketplace which also impacted the industry as a whole. The Company believes
that while current market trends are showing signs of significant improvement,
through increased backlog orders, new contracts, and new customers there can
be no future assurance that the economy and industry will continue to be
strong or that OEMs will continue increasing their outsourcing to contracting
manufacturers such as the Company.
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The information technology industry continues to place greater
demands on the products produced by Touche's and TEI's customers. In turn,
these demands have placed greater demands on enclosure manufacturing,
value-added assembly, and cable and harness manufacturing and installation
services provided by the Company. Furthermore, diversity in the manufacturing
processes, through vertical integration into value-added assembly and cable
and harness manufacturing and installation elements of the business, continues
to provide the Company with the ability to grow and to capitalize on new
business opportunities that were not previously available.
Inasmuch as the Company's three largest customers accounted for
approximately 65% of revenues for the fiscal year ended December 31, 1996,
with the largest accounting for 28% of such revenues, the disruption or loss
of any one or a significant amount of their business as a customer could have
a material adverse impact on the total revenues of the Company.
Gross profit increased approximately $940,327 or 12% to $9,047,597
from $8,107,270 for the fiscal year ended December 31, 1996, as compared to
the fiscal year ended December 31, 1995. As a percentage of sales, gross
profit increased approximately 6% to 35% from 29% for the fiscal year ended
December 31, 1996, as compared to the fiscal year ended December 31, 1995. The
increase is primarily due to adjustments in operations and efficiencies which
continue to play a major role in the Company's growth and general operation.
However, the Company's gross profit margin may be materially impacted by the
diversity of its operations which are constantly modified in order to meet the
changing growth demands of the competitive market bidding processes with its
customers. In addition, the Company believes that its expansion into the
manufacture of wire cable and harness assemblies will enable it to lower its
production costs to more competitive and acceptable industry levels. The
Company's further expansion into metal stamping is also expected to reduce
costs. However, the Company's gross profit margins may also be materially
impacted by the pricing of product services which is directly affected by
increases in direct labor and material cost.
Operating expenses increased approximately $2,137,701 or 33% to
$8,522,647 from $6,384,946 for the fiscal year ended December 31, 1996, as
compared to the fiscal year ended December 31, 1995.
This increase was primarily due to two factors: (1) an investment in
infrastructure to support planned growth, including two new operating
divisions, plus the acquisition of the San Jose Division of Pen Interconnect,
Inc., which included (2) additional personnel, building rent costs, repairs,
professional fees, promotions of certain engineers to management positions and
other related items.
Interest expense decreased approximately $292,200 or 47% to $323,679
from $615,881 for the fiscal year ended December 31, 1996, as compared to the
fiscal year ended December 31, 1995. Interest expense decreased during the
fiscal year ended December 31, 1996 due to a substantial reduction in
outstanding long term debt, capital lease obligations, and bank borrowings, as
compared to December 31, 1995.
Income tax expense declined primarily due to the decrease in taxable
income as well as the utilization of net operating loss carry forwards. Pro
forma income tax expense for the year ended December 31, 1996 gives effect to
the loss of the S corporation on a combined basis prior to March 5, 1996.
Income before income taxes decreased approximately $840,300 or 83% to
$167,336 from $1,007,616 for the fiscal year ended December 31, 1996, as
compared with the fiscal year ended December 31, 1995. The decline in income
before taxes was primarily due to a substantial increase in
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the Company's operating expenses (as discussed above) which increased 33% for
the fiscal year ended December 31, 1996 over the prior fiscal year.
Net Income after taxes decreased by approximately $325,100 or 69% to
$148,337 from $473,416 for the fiscal year ended December 31, 1996, as
compared to the fiscal year ended December 31, 1995. The decrease was
primarily due to two factors: (1) an increase in financing charges of $174,244
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 produced nominal income
during the fiscal year ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a long-term revolving line of credit with
Manufacturers Bank ("Mfrs."), which as of December 31, 1996, had an interest
rate of Mfrs.' base rate plus 1/2% and permitted the Company to borrow up to
$4,000,000 based on a stipulated percentage of contractually defined eligible
trade accounts receivable. The Company had $585,000 in outstanding borrowings
under the line of credit; the unused portion of the line of credit was
$3,415,000 as of December 31, 1996. The Company was in default of certain
covenants at December 31, 1996 in which it received a waiver from its bank
(See Note 10 to Notes to Financial Statements). The loan agreement was renewed
on May 1, 1997 and Management renegotiated the agreement and its underlying
covenants to the benefit of the Company. In addition, the Company and Mfrs.
have agreed to a term facility of up to $2,500,000 available for equipment
purchase, which will bear interest at Mfrs.' base rate plus 1%. There was
approximately $1,691,700 in term debt outstanding at December 31, 1996.
On March 11, 1996, the Company closed an Initial Public Offering of
its securities resulting in new proceeds of approximately $5.7 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 and the
purchase of a business.
The Company's working capital increased by approximately $2,916,600
or 260% from $1,119,957 to $4,036,532 for the fiscal year ended December 31,
1996, as compared to the fiscal year ended December 31, 1995. This increase
resulted primarily from an increase in inventory of approximately $1,991,300,
a decrease in accounts payable of approximately $1,885,700, and a decrease in
the line of credit draw down of approximately $1,059,600.
The Company required cash to fund operating activities of
approximately $724,200 in the fiscal year ended December 31, 1996, as compared
to generating cash from operating activities of approximately $1,285,000 in
the fiscal year ended December 31, 1995. Additional cash was required to pay
for inventory buildup, a reduction in accounts payable, and an increase in
prepaid expenses. Required cash in the amount of approximately $555,800 was
provided by net operating, investing, and financing activities, which included
cash generated from normal operations, sale and purchase of equipment, debt
reduction, acquisition of a business, and proceeds from the initial public
offering in the fiscal year ended December 31, 1996, as compared to cash
generated in the amount of approximately $685,800 for the fiscal year ended
December 31, 1995.
During the fiscal year ended December 31, 1996, the Company's
property, plant, and equipment increased by approximately $1,533,000. During
the fiscal year ended December 31, 1996, the Company
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spent approximately $1,115,000 of cash to purchase capital equipment. The
remainder of the 1996 expenditures have been financed through bank borrowings.
In addition, the Company spent $2,000,000 in cash to purchase the net
assets of the San Jose Division of Pen Interconnect, see "BUSINESS-Pen
Interconnect Inc.," which was utilized from the net proceeds of the Company's
March 1996 initial public offering. Use of such funds depleted available cash
proceeds, however, the Company feels that its existing balances are adequate
and that the increase in cash generated as a result of this new division as
well as from its core business will compensate for the usage of such funds.
The Company's inventory increased by approximately $1,275,000 for the
fiscal year ended December 31, 1996, as compared to the fiscal year ended
December 31, 1995. The increase in inventory was due primarily to the
Company's need to revise its forecast downward to reflect a general slow-down
of the overall industry coupled with a revised sales forecast.
The Company's accounts receivable decreased by approximately
$1,992,000 for the fiscal year ended December 31, 1996, as compared to the
fiscal year ended December 31, 1995. The decrease in accounts receivable was
primarily due to a significant increase in collections coupled with a decline
in related sales. Such decline was not the result of significant changes with
respect to credit terms, collection efforts or credit utilization.
Management feels that its current financial position, together with
available increased borrowings under the Company's various credit facilities
will be sufficient to meet the Company's anticipated needs and projected
capital assets purchase requirements for the next twelve months.
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 not material changes in general market conditions will
occur and the assumption that the Company does not incur any unanticipated
expenditures.
INFLATION
Touche and TEI have continued to experience the benefits of a low
inflation economy locally, regionally and nationally. However, Touche and TEI
enter into mostly short-term fixed price contracts and a large portion of
these contracts is labor intensive. Accordingly, the short-term contracts are
less susceptible to inflationary pressures and may have less of an impact on
the eventual profitability of the contracts.
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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 Company, 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.
On January 24, 1997, the Company acquired all of the issued and
outstanding shares of common stock of Enterprise Industries, Inc. ("EII"), a
metal stamping manufacturing business. The Company now derives its revenues
from the operation of its wholly owned subsidiaries, including Touche, TEI and
EII.
The Company provides custom manufacturing and value-added services,
respectively, to original equipment manufacturers ("OEMs"). Its 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. The Company does 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 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.
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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.
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, taken from the proceeds of the
March 1996 offering and the issuance of 96,560 shares of the Company's Common
Stock pursuant to the terms of a certain Stock Purchase Agreement dated
January 1, 1997. EII provides a broad array of metal stamping manufacturing
service capabilities. EII will continue to operate under its present name as a
wholly-owned subsidiary of the Company, providing services in its existing
market as well as augmenting those manufacturing and turnkey services that are
currently being offered by Touche and TEI to their respective customers. The
President of EII has signed a five (5) year employment contract with the
Company to manage EII's operations.
CUSTOMER PRODUCT SERVICES
The Company works with its 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 business of the Company, in providing customers with custom
designed and manufactured products or services, relates to four major market
areas:
Computer Systems. The Company's 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
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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 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. The Company believes that, with its present and
future manufacturing and service capabilities, it is 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. The Company intends to market its 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. The Company intends to continue marketing its
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, taken from the proceeds of the March 1996 offering; (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.
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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.
Subsequent to the closing of the foregoing acquisition, a dispute
arose concerning various aspects of the transaction. On February 14, 1997,
TMCI filed a Demand for Arbitration against PII, seeking a substantial
purchase price reduction or, in the alternative, other remedies and damages as
provided by law. For a more detailed discussion of the pending arbitration,
see "Legal Proceedings."
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.
MAJOR CUSTOMERS
The Company'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
The Company's engineering, production and assembly facilities have
adequate space for its 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. The Company maintains 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. The Company is 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
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, The Company has purchased a wide variety of sophisticated
automated machinery and shop equipment, components, tools and supplies from
proven outside vendors, distributors and service organizations.
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<PAGE>
MARKETING AND SALES
The Company's marketing strategy focuses on developing long-term
relationships with producers of computers, telecommunication equipment,
semiconductor manufacturing test equipment and medical test equipment. The
Company's customer base consists of manufacturers of computers, medical
equipment and test equipment markets and the Company intends 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.
The Company 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, the Company's
marketing efforts will rely primarily on direct sales efforts, which will
emphasize the Company's design-engineering and quality control manufacturing
capabilities.
The Company'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 the Company 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
the Company'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, TEI and EII have not
experienced any significant difficulty in obtaining adequate supplies to
perform under their respective contracts.
Touche, TEI and EII 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 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.
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<PAGE>
At December 31, 1996, Touche and TEI's combined backlog was
approximately $10 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, TEI and EII 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, TEI and EII'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, TEI and EII's facilities 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. The Company'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. The Company is established in the industry and maintains a strong
competitive presence by delivering high-quality work in a timely fashion
within the customer's budget constraints.
The Company offers 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 the Company to price its 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, TEI and
EII are receiving a much greater share of the overall manufacturing task of
products that are designed for manufacture by their customers. The process
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
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<PAGE>
of a "one-stop shop" manufacturing environment is believed to be advantageous
to the Company's success as an effective competitor in the industry.
NEW PRODUCT SERVICE LINES OF BUSINESS
To continue to respond to its customers' needs and to strengthen and
diversify its competitive position in the marketplace, the Company intends to
introduce the additional service listed below. Neither the Company has not
derived any revenues to date from this service, and other services to be
provided by the recent acquisitions.
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.
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
the Company. 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, TEI or EII 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, the Company 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 the Company's employees have
overlapping responsibilities in these job descriptions.
The Company believes that its combined future success will depend in
large measure upon the continued ability of Touche, TEI and EII to recruit and
retain technical personnel. Competition for qualified technical personnel is
significant, particularly in the geographic area in which the Company, Touche,
TEI and EII are located. Touche, TEI and EII have never experienced a work
stoppage. The Company, Touche, TEI and EII believe that their relationships
with their employees are good.
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<PAGE>
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 from Touche Properties, Inc., a company
wholly owned by Rolando Loera, Chairman, President and Chief Executive Officer
of the Company. The 1881-1899 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 of the foregoing lease agreements are on a triple net
basis with landlords. EII leases approximately 21, 600 square feet of combined
office and manufacturing space in three separate adjacent light industrial
buildings in North Hollywood, California. Two of the three buildings are
leased on a month-to-month basis. The lease for the third building expires on
April 5, 2001.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Rolando Loera 44 Chairman, President and Chief
Executive Officer; Director
Livino D. Ribaya, Jr. 49 Vice President - Manufacturing
Frank Ramirez III 42 Vice President - Engineering
Charles E. Shaw 53 Vice President - Chief Financial
Officer; Director
Robert Loera 31 Controller and Secretary; Director
Thomas F. Chaffin 40 Director
Dominic A. Polimeni 51 Director
</TABLE>
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 of
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. 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.
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 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.
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<PAGE>
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 and
since September 1997, a director of Nu Horizons Electronics Corp. 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.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth remuneration paid by the Company,
Touche and TEI during fiscal years 1994, 1995 and 1996, 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(1)
- -------------------------- --------------------- ---- ------ ----- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Rolando Loera Chairman, President 1996 $225,000 -0- -0- 14,900
and Chief Executive 1995 $225,000 -0- 100,000 10,200
Officer; Director 1994 $150,000 -0- -0- -0-
</TABLE>
No options were granted to Mr. Loera during 1996.
- -----------
(1) Includes payments for Company car and employer 401K contributions.
AGGREGATED OPTIONS/SAR's EXERCISED IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Options/SARs at Options/SARs at
Acquired on Value FY-End(#) FY-End($)
Name Exercise(#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Rolando Loera -0- -0- 0/100,000 0/$593,000(1)
</TABLE>
- ----------------------
(1) 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
December 31, 1996.
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 5, 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.
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<PAGE>
Loera to repay the $473,952 loan by TEI to Touche Properties, Inc. See
"Certain Transactions." The 1996 bonus was relinquished by the President and
no payments were made to Touche Properties, Inc. during 1996. 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.
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,
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<PAGE>
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.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company 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.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
Company's Common Stock owned as of November 12, 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 executive 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 November 12, 1997.
<TABLE>
<CAPTION>
Number Percentage
Name and Address(1) Position With Company of Shares of Shares(2)
- ------------------- --------------------- --------- ----------
<S> <C> <C> <C>
Rolando Loera Chairman, President and Chief 767,600(3) 20.77%
Executive Officer; Director
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
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<PAGE>
<CAPTION>
Number Percentage
Name and Address(1) Position With Company of Shares of Shares
- ------------------- --------------------- --------- ----------
<S> <C> <C> <C>
Dominic A. Polimeni Director -0- --
c/o Gulfstream Financial
Group, Inc.
6400 Congress Avenue,
Suite 200A
Boca Raton, FL 33487
Rolando Loera Trustee for Touche Employee 27,280(4) *
Stock Ownership Plan
All Officers and Directors as 1,018,920 27.57%
a Group (7 Persons)(5)
</TABLE>
* Less than 1%
(1) Unless otherwise noted, c/o TMCI Electronics, Inc., 1875 Dobbin
Drive, San Jose, CA 95133.
(2) Includes options to purchase 100,000 shares of Common Stock of the
Company granted to Rolando Loera which vest on December 21, 1997.
(3) Includes options to purchase 100,000 shares which vest on
December 21, 1997.
(4) Mr. Loera shares investment power with respect to these shares.
(5) Includes 224,040 shares issued by certain executive officers of the
Company.
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<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.
On December 30, 1996, the Company made loans in the principal amounts
of $95,986, $34,479 and $32,761, respectively to Frank Ramirez III, Jose A.
Agredano and Livino Ribaya, Jr. Such loans shall be repaid over ten years
bearing interest at 10% per annum.
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 $576,144 in 1996. 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.
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<PAGE>
TPI also borrowed $303,325 from TEI 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, 1996 was $473,952.
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 1996 to account for payments of certain personal
expenses of Rolando Loera by Touche. Accordingly, the outstanding principal
balance on the loan was $238,166 at December 31, 1996.
In 1995, Touche owed Textron Financial approximately $401,700 which
Antonio Zertuche, Touche's landlord, agreed to repay in exchange for Touche's
promissory note to make monthly installments of approximately $6,322,
including interest at 11.5% per annum, maturing December 1996. In January
1996, the Company refinanced the note, and issued a new note for approximately
$291,000 which is the difference between the Company's original note payable
of approximately $401,700 and its cancellation of an outstanding note
receivable from the landlord of approximately $99,000, plus approximately
$11,600 in the overpayment of property taxes on leased property located at
1875 Dobbin Drive, San Jose, California. The new note payable was satisfied in
March 1996, from the proceeds of the initial public offering (IPO).
-43-
<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
The authorized capital stock of the Company consists of 25,000,000
shares of Common Stock, $.001 par value per share. As of November 12, 1997
there were 3,596,332 issued and outstanding shares of Common Stock and
approximately 44 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.
The Warrants can only be exercised when there is a current effective
registration statement covering the shares of Common Stock underlying 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
-44-
<PAGE>
of the Warrants. If the Company does not or is unable to maintain a current
effective registration statement, including audited financial statements for
companies acquired, the Warrant holders will be unable to exercise the
Warrants and the Warrants may become valueless. 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.
UNIT PURCHASE OPTION
Biltmore Securities, Inc. ("Biltmore") is the holder of a unit
purchase option to purchase up to 128,000 Units at a price of $8.25 per Unit.
The unit purchase option was issued to Biltmore in connection with the
Company's initial public offering in March 1996 in consideration of the
payment of $128. Each Unit consists of one share of the Company's Common
Stock, $.001 par value per share, and one Class A Warrant. The option is
exercisable during the four year period which commenced March 5, 1997.
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
-45-
<PAGE>
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.
PLAN OF DISTRIBUTION
The shares of Common Stock to which this Prospectus relates are being
registered exclusively for issuance upon the exercise of the Warrants. Each
Warrant, when exercised, entitles the holder thereof to receive one share of
Common Stock upon the payment of the exercise price of $5.50 per share. The
Warrants are exercisable for a four year period beginning on March 5, 1997.
See "Description of Securities - Class A Warrants." The expenses relating to
the exercise of the Warrants will be borne by the Company and are anticipated
to be approximately $587,840. No underwriting discounts or commissions are
payable in connection with the exercise of the Warrants.
-46-
<PAGE>
LEGAL PROCEEDINGS
Subsequent to the closing of the acquisition of the San Jose Division
of Pen Interconnect ("PII"), a dispute arose concerning various aspects of the
transaction. On February 14, 1997, TMCI filed a Demand for Arbitration against
PII, seeking a substantial purchase price reduction or, in the alternative,
other remedies and damages as provided by law. TMCI is seeking such remedies
based upon a failure of consideration furnished by PII and upon
misrepresentations of PII, in particular, in overstating the value of
inventory, in substantially changing the financial conditions, prior to TMCI
taking over operations and to the detriment of TMCI, and in failing to
disclose certain accounts payable. Management has suspended all payments to
PII, including payments due under the promissory notes, aggregating $900,000.
Pen has sought to accelerate the promissory notes. Management, after
consultation with legal counsel, believes that it will prevail in all material
aspects of the dispute. Accordingly, at December 31, 1996, the Company has
classified the promissory notes as maturing under the original terms provided
therein. An arbitrator has been selected and agreed upon by all parties to the
arbitration proceedings.
None of the Company, Touche, TEI or EII 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.
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, 1996 and
1995, and the related Statements of Operations, Stockholders' Equity and Cash
Flows for each of the three fiscal years in the period ended December 31,
1996, included in the Registration Statement and this Prospectus have been
included herein in reliance on the report dated March 12, 1997, except as to
Note 10, for which date is March 27, 1997, of Moore Stephens, P.C.,
independent certified public accountants, and upon the authority of such firm
as experts in accounting and auditing.
-47-
<PAGE>
TMCI ELECTRONICS, INC.
- -------------------------------------------------------------------------------
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
[UNAUDITED]
- -------------------------------------------------------------------------------
The following pro forma condensed combined balance sheet as
of September 30, 1996 and the condensed combined statements of operations for
the nine months ended September 30, 1996 and the year ended December 31, 1995,
give effect to TMCI Electronics, Inc. and Subsidiaries [the "Company"]
acquiring through its Touche Electronics, Inc. subsidiary, substantially all of
the operating assets of Pen Interconnect, Inc. San Jose Division ["PII"] for a
purchase of $3,300,000.
The pro forma information is based on the historical
financial statements of the Company and the aforementioned acquired company,
giving effect to the transactions under the purchase method of accounting and
the assumptions and adjustments in the accompanying notes to the pro forma
financial statements.
The pro forma balance sheet at September 30, 1996 gives
effect to the transaction as if it occurred on the balance sheet date.
The pro forma statements of operations for the nine months
ended September 30, 1996 and for the year ended December 31, 1995, gives effect
to these transactions as if they occurred at the beginning of the respective
periods presented.
The pro forma condensed combined financial statements have
been prepared by the Company 's management based upon the historical financial
statements of the Company and PII. These pro forma condensed combined financial
statements may not be indicative of the results that actually would have
occurred if the acquisitions had been in effect on the dates indicated. The pro
forma condensed combined financial statements should be read in conjunction
with the historical financial statements and notes contained elsewhere herein,
and in the Company's registration statement on Form SB-2, 10-KSB and the
Company's quarterly reports on Form 10-QSB.
P-1
<PAGE>
<TABLE>
<CAPTION>
TMCI ELECTRONICS, INC.
- ---------------------------------------------------------------------------------------------------------------------------
PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1996.
[UNAUDITED]
- ---------------------------------------------------------------------------------------------------------------------------
HISTORICALS
-------------------------------
PRO FORMA PRO FORMA
TMCI --------- ---------
ELECTRONICS, INC. PII ADJUSTMENTS COMBINED
----------------- --- ----------- --------
<S> <C> <C> <C> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash $ 2,147,314 $ -- $ (2,000,000)[3] $147,314
Accounts Receivable [Net] 1,691,391 675,020 (254,072)[1] 2,112,339
Inventory 5,091,630 1,565,458 (849,208)[1] 5,807,880
Prepaid Expenses and Other Current
Assets 382,105 34,177 (30,133)[1] 386,149
-------------- -------------- -------------- ---------------
TOTAL CURRENT ASSETS 9,312,440 2,274,655 (3,133,413) 8,453,682
-------------- -------------- -------------- ---------------
PROPERTY AND EQUIPMENT [NET] 3,447,871 638,373 (470,378)[1] 3,615,866
-------------- -------------- -------------- ---------------
OTHER ASSETS:
Due from Stockholder and Related Party 578,009 -- -- 578,009
Other Assets 734 99,139 (99,139)[1] 734
Goodwill -- -- 2,576,544 [3] 2,576,544
-------------- -------------- -------------- ---------------
TOTAL OTHER ASSETS 578,743 99,139 2,477,405 3,155,287
-------------- -------------- -------------- ---------------
TOTAL ASSETS $ 13,339,054 $ 3,012,167 $ (1,126,386) $ 15,224,835
============== ============== ============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Accounts Payable and Accrued
Expenses $ 2,421,093 $ 334,042 $ 229,000 [1] $ 2,984,135
Notes Payable and Capital Lease
Obligation - Current Portion 446,329 -- -- 446,329
-------------- -------------- -------------- ---------------
TOTAL CURRENT LIABILITIES 2,867,422 334,042 229,000 3,430,464
-------------- -------------- -------------- ---------------
LONG-TERM LIABILITIES:
Notes Payable and Capital Lease
Obligation - Net of Current Portion 1,617,779 22,739 900,000 [3] 2,540,518
Deferred Income Taxes 405,383 -- -- 405,383
-------------- -------------- -------------- ---------------
TOTAL LONG-TERM LIABILITIES 2,023,162 22,739 900,000 2,945,901
-------------- -------------- -------------- ---------------
TOTAL LIABILITIES 4,890,584 356,781 1,129,000 6,376,365
STOCKHOLDERS' EQUITY 8,448,470 2,655,386 (2,255,386) [2,3] 8,848,470
-------------- -------------- -------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 13,339,054 $ 3,012,167 $ (1,126,386) $ 15,224,835
============== ============== ============== ===============
</TABLE>
P-2
<PAGE>
<TABLE>
<CAPTION>
TMCI ELECTRONICS, INC.
- ---------------------------------------------------------------------------------------------------------------------------
PRO FORMA CONDENSED COMBINED INCOME STATEMENT FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996.
[UNAUDITED]
- ----------------------------------------------------------------------------------------------------------------------------
HISTORICALS
--------------------
TMCI PRO FORMA ADJUSTMENTS PRO FORMA
---- --------------------- ---------
ELECTRONICS, INC. PII DR CR COMBINED
----------------- --- -- -- --------
<S> <C> <C> <C> <C> <C>
NET SALES $ 20,496,567 $ 4,973,239 $ 1,551,484[5] $ -- $ 23,918,322
COST OF GOODS SOLD 13,497,840 3,817,955 -- 1,551,484 [5] 15,764,311
---------------- -------------- -------------- ------------- ---------------
GROSS PROFIT 6,998,727 1,155,284 1,551,484 1,551,484 8,154,011
---------------- -------------- -------------- ------------- ---------------
OPERATING EXPENSES 5,170,226 584,630 -- 86,499 [6] 5,668,357
DEPRECIATION AND
AMORTIZATION 630,104 17,863 128,850[4] -- 776,817
---------------- -------------- -------------- ------------- ---------------
TOTAL OPERATING
EXPENSES 5,800,330 602,493 128,850 86,499 6,445,174
---------------- -------------- -------------- ------------- ---------------
INCOME FROM OPERATIONS 1,198,397 552,791 1,680,334 1,637,983 1,708,837
OTHER INCOME [EXPENSE] (478,291) (75,949) -- 42,351 [7] (511,889)
----------------- -------------- -------------- ------------- ---------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 720,106 476,842 1,680,334 1,680,334 1,196,948
PROVISION FOR INCOME
TAXES 254,736 125,381 -- -- 380,117
----------------- -------------- -------------- ------------- --------------
NET INCOME $ 465,370 $ 351,461 $ 1,680,334 $ 1,680,334 $ 816,831
================ ============== ============== ============= ===============
NET INCOME PER SHARE $ .15 $ .27
================ ===============
WEIGHTED AVERAGE SHARES
OUTSTANDING 3,016,403 3,070,072
================ ===============
</TABLE>
P-3
<PAGE>
<TABLE>
<CAPTION>
TMCI ELECTRONICS, INC.
- ----------------------------------------------------------------------------------------------------------------------------
PRO FORMA CONDENSED COMBINED INCOME STATEMENT FOR THE YEAR ENDED
DECEMBER 31, 1995.
[UNAUDITED]
- ----------------------------------------------------------------------------------------------------------------------------
HISTORICALS
------------------
TMCI PRO FORMA ADJUSTMENTS PRO FORMA
ELECTRONICS, INC. PII DR CR COMBINED
----------------- --- -- -- --------
<S> <C> <C> <C> <C> <C> <C>
NET SALES $ 28,098,919 $ 5,130,004 $ 2,576,310[5] $ -- $ 30,652,613
COST OF GOODS SOLD 19,991,649 4,001,985 -- 2,576,310 [5] 21,417,324
---------------- -------------- -------------- ------------- ---------------
GROSS PROFIT 8,107,270 1,128,019 2,576,310 2,576,310 9,235,289
---------------- -------------- -------------- ------------- ---------------
OPERATING EXPENSES 5,417,984 738,275 -- 75,215 [6] 6,081,044
DEPRECIATION AND
AMORTIZATION 966,962 23,817 171,800[4] -- 1,162,579
---------------- -------------- -------------- ------------- ---------------
TOTAL OPERATING
EXPENSES 6,384,946 762,092 171,800 75,215 7,243,623
---------------- -------------- -------------- ------------- ---------------
INCOME FROM OPERATIONS 1,722,324 365,927 2,748,110 2,651,525 1,991,666
OTHER INCOME [EXPENSE] (714,708) (140,084) -- 96,585 [7] (758,207)
---------------- -------------- -------------- ------------- ---------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 1,007,616 225,843 2,748,110 2,748,110 1,233,459
PROVISION FOR INCOME
TAXES 534,200 90,337 -- -- 624,537
---------------- -------------- -------------- ------------- --------------
NET INCOME $ 473,416 $ 135,506 $ 2,748,110 $ 2,748,110 $ 608,922
================ ============== ============== ============= ===============
NET INCOME PER SHARE $ .25 $ .31
================ ===============
WEIGHTED AVERAGE SHARES
OUTSTANDING 1,893,600 1,947,269
================ ===============
</TABLE>
P-4
<PAGE>
TMCI ELECTRONICS, INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
[UNAUDITED]
- -------------------------------------------------------------------------------
[1] To adjust to market assets acquired and liabilities assumed.
[2] To eliminate equity accounts of acquired enterprise.
[3] To record consideration paid of $2,000,000 in cash, $900,000 in
promissory notes and issuance of 134,172 shares with a fair value of
$400,000 in exchange for substantially all of the assets and liabilities
of the San Jose Division of Pen Interconnect which gives rise to
goodwill of $2,577,000 calculated as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchase Price $ 3,300,000
Less: Assets in Excess of Liabilities Acquired 723,000
---------------
GOODWILL $ 2,577,000
-------- ===============
</TABLE>
[4] To record amortization of goodwill over 15 years utilizing the
straight-line method. Calculated as follows:
<TABLE>
<CAPTION>
<S> <C>
Goodwill $ 2,577,000
Life 15
---------------
ANNUAL AMORTIZATION $ 171,800
------------------- ===============
</TABLE>
[5] To eliminate intercompany sales and costs of goods sold.
[6] To adjust operating expenses of the San Jose Division of Pen
Interconnect to reflect a reduction of management salaries in the amount
of $75,215 and $86,499 for the year ending December 31, 1995 and for the
period ending September 30, 1996, respectively.
[7] To record gain on sale of equipment.
. . . . . . . . . . . . . . .
P-5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
TMCI Electronics, Inc.
San Jose, California
We have audited the accompanying consolidated balance sheet
of TMCI Electronics, Inc. and its subsidiaries as of December 31, 1996 and
1995, and the related statements of operations, stockholders' equity, and cash
flows for each of the three fiscal years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of TMCI Electronics, Inc. and its subsidiaries as of December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
three fiscal years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
March 12, 1997, Except as to
Note 10, for which date is March 27, 1997
F-1
<PAGE>
<TABLE>
<CAPTION>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated Consolidated Combined
September 30, December 31, December 31,
------------- ------------ -------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
ASSETS: (unaudited)
CURRENT ASSETS: ---------
Cash $ 112,076 $ 145,845 $ 701,672
Accounts Receivable - Net 5,260,122 2,526,816 4,182,411
Inventory 7,938,699 5,170,661 3,179,317
Deferred Income Taxes 68,748 187,991 164,960
Prepaid Expenses and Other Current Assets 451,289 272,587 167,016
Other Receivables 72,567 63,669 98,989
Notes Receivable - Stockholders 204,197 10,706 100,000
---------------- ---------------- ---------------
TOTAL CURRENT ASSETS 14,107,698 8,378,275 8,594,365
---------------- ---------------- ---------------
PROPERTY AND EQUIPMENT - NET 5,381,313 3,638,300 2,918,677
---------------- ---------------- ---------------
OTHER ASSETS:
Notes Receivable - Stockholders -- 155,520 --
Due from Stockholder 200,196 238,167 232,033
Due from Related Party 498,952 473,952 344,676
Other Assets 22,895 48,152 930
Deferred Loan Fees - Net -- -- 28,500
Deferred Offering Costs -- -- 292,986
Goodwill 2,797,324 2,549,261 --
---------------- ---------------- ---------------
TOTAL OTHER ASSETS 3,519,367 3,465,052 899,125
---------------- ---------------- ---------------
TOTAL ASSETS $ 23,008,378 $ 15,481,627 $ 12,412,167
================ ================ ===============
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated Consolidated Combined
September 30, December 31, December 31,
------------- ------------ ------------
1997 1996 1995
---- ---- ----
(unaudited)
---------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses $ 3,845,085 $ 2,929,242 $ 4,814,964
Line of Credit 3,204,968 585,000 1,644,576
Notes Payable 940,144 796,867 459,539
Capital Lease Obligations - Current Portion -- -- 256,237
Convertible Promissory Notes - Current Portion -- -- 15,204
Income Taxes Payable - Current Portion -- -- 258,168
Due to Affiliate 27,503 30,634 25,720
---------------- ---------------- ---------------
TOTAL CURRENT LIABILITIES 8,017,700 4,341,743 7,474,408
---------------- ---------------- ---------------
LONG-TERM LIABILITIES:
Notes Payable - Net of Current Portion 4,184,419 2,064,273 1,198,116
Deferred Income Taxes 556,973 436,781 429,215
Bridge Notes Payable -- -- 537,878
Capital Lease Obligations - Net of Current Portion -- -- 478,505
Convertible Promissory Notes - Net of Current Portion -- -- 113,590
---------------- ---------------- ---------------
TOTAL LONG-TERM LIABILITIES 4,741,392 2,501,054 2,757,304
---------------- ---------------- ---------------
TOTAL LIABILITIES 12,759,092 6,842,797 10,231,712
---------------- ---------------- ---------------
COMMITMENTS AND CONTINGENCIES -- -- --
---------------- ---------------- ---------------
STOCKHOLDERS' EQUITY:
Common Stock, $.001 Par Value, 25,000,000 Shares Authorized, 3,596,332 Issued
and Outstanding as of September 30, 1997 and 3,499,772 as of December
31, 1996 and 600,000 as
of December 31, 1995 3,597 3,500 600
Additional Paid-in Capital 7,666,561 7,366,659 1,029,829
Retained Earnings 2,579,128 1,268,671 1,150,026
---------------- ---------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 10,249,286 8,638,830 2,180,455
---------------- ---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 23,008,378 $ 15,481,627 $ 12,412,167
================ ================ ===============
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED YEARS ENDED
----------------- -----------
SEPTEMBER 30, DECEMBER 31,
------------- ------------
1 9 9 7 1 9 9 6 1 9 9 6 1 9 9 5 1 9 9 4
------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED) [CONSOLIDATED] [COMBINED] [COMBINED]
------------ -------- --------
[CONSOLIDATED]
------------
<S> <C> <C> <C> <C> <C>
SALES - NET $ 27,773,034 $ 20,496,567 $ 26,139,828 $ 28,098,919 $ 20,869,434
COST OF GOODS SOLD 17,572,573 13,497,840 17,092,231 19,991,649 14,950,750
-------------- -------------- -------------- ------------- -------------
GROSS PROFIT 10,200,461 6,998,727 9,047,597 8,107,270 5,918,684
OPERATING EXPENSES 7,865,808 5,802,637 8,522,647 6,384,946 4,938,454
-------------- -------------- -------------- ------------- -------------
INCOME FROM OPERATIONS 2,334,653 1,196,090 524,950 1,722,324 980,230
-------------- -------------- -------------- ------------- -------------
OTHER INCOME [EXPENSE]:
Other Income 186,530 39,704 189,704 40,394 109,865
Interest Income -- 53,624 69,742 9,726 35,022
Interest Income - Related Party -- -- 29,276 29,276 --
Interest Expense (419,053) (246,655) (323,679) (615,881) (602,733)
Non-Cash Finance Charge -- (462,122) (462,122) (287,878) --
Gain on Sale of Equipment 1,241 139,465 139,465 109,655 835
-------------- -------------- -------------- ------------- -------------
TOTAL OTHER [EXPENSE] (231,282) (475,984) (357,614) (714,708) (457,011)
-------------- -------------- -------------- ------------- -------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 2,103,371 720,106 167,336 1,007,616 523,219
PROVISION FOR INCOME TAXES 792,914 254,736 18,999 534,200 103,577
-------------- -------------- -------------- ------------- -------------
NET INCOME $ 1,310,457 $ 465,370 $ 148,337 $ 473,416 $ 419,642
=============== =============== =============== ============== ==============
EARNINGS PER SHARE:
Net Income Per Share $ .31 $ .15 $ .05 $ .25 $ .22
=============== =============== =============== ============== ==============
PRO FORMA NET INCOME
[SEE NOTE 22] [UNAUDITED]:
Income Before Provision
for Income Taxes $ 167,336
Pro Forma Income Taxes 6,000
--------------
PRO FORMA NET INCOME
[UNAUDITED] $ 161,336
===============
PRO FORMA NET INCOME PER SHARE
[UNAUDITED]:
Income Before Provision for
Income Tax Per Share $ .06
Pro Forma Income Tax Per Share --
--------------
PRO FORMA NET INCOME PER SHARE $.06
====
WEIGHTED AVERAGE NUMBER OF SHARES 5,393,166 3,016,403 2,865,445 1,893,600 1,893,600
============== ============== ========= ========= =========
See Notes to Financial Statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL TOTAL
-------------- ------------ -------
NUMBER OF PAID-IN RETAINED STOCKHOLDERS'
--------- ------- -------- -------------
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 - See Note 18 B] 600,000 600 279,829 -- 280,429
------------ ------------ ------------- -------------- -------------
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
[COMBINED] 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
[COMBINED] 600,000 600 1,029,829 1,150,026 2,180,455
Issuance of Common Stock in
Connection with Exchange of
Shares under Common Control 594,880 595 (595) -- --
Issuance of Common Stock to
Former Convertible Debt Holders 298,720 299 165,927 -- 166,226
Issuance of Common Stock to
Bridge Lenders 400,000 400 (400) -- --
Transfer of Subchapter S Retained
Earnings of Acquired Company to
Additional Paid-in Capital -- -- 29,692 (29,692) --
Net Proceeds from Initial Public
Offering and Issuance of Common
Stock 1,472,000 1,472 5,742,340 -- 5,743,812
Issuance of Common Stock in
Connection with Acquisition 134,172 134 399,866 -- 400,000
Net Income for the Year Ended
December 31, 1996 -- -- -- 148,337 148,337
------------ ------------ ------------- -------------- -------------
BALANCE - DECEMBER 31, 1996
[CONSOLIDATED] 3,499,772 $ 3,500 $ 7,366,659 $ 1,268,671 $ 8,638,830
============ ============ ============= ============== =============
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
1 9 9 7 1 9 9 6 1 9 9 6 1 9 9 5 1 9 9 4
------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED) [CONSOLIDATED] [COMBINED] [COMBINED]
------------ -------- --------
[CONSOLIDATED]
------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 1,310,457 $ 465,370 $ 148,337 $ 473,416 $ 419,642
-------------- ------------- -------------- --------------- ---------------
Adjustments to Reconcile Net Income to
Net Cash [Used for] Provided by Operations:
Depreciation and Amortization 959,083 595,257 839,724 702,056 604,599
Deferred Income Taxes 239,434 (38,572) (15,465) 201,272 25,052
[Gain] on Sale of Equipment (1,241) (139,465) (139,465) -- (835)
Amortization of Deferred Loan Fees -- 28,500 28,500 114,000 22,500
Non-Cash Finance Charge -- 462,122 462,122 287,878 --
Provision for Bad Debts -- -- 85,000 -- --
Contribution to ESOP Plan -- -- -- -- 50,000
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (2,424,887) 1,436,215 1,991,543 (1,855,640) (305,608)
Inventory (2,542,737) (1,912,313) (1,275,095) (800,439) (1,177,426)
Prepaid Expenses (180,564) (110,389) (130,027) (104,192) (26,955)
Other Receivables -- -- (63,669) -- --
Note Receivable - Other -- -- -- -- (102,142)
Employee Advances -- -- -- -- (61)
Advance Under Note Receivable -- -- -- -- 5,019
Increase [Decrease] in:
Accounts Payable and
Accrued Expenses 356,236 (904,029) (2,397,500) 2,087,105 886,278
Income Taxes Payable 458,646 (258,168) (258,168) 179,145 44,174
------------- ------------- ------------- -------------- --------------
Total Adjustments (3,136,030) (840,842) (872,500) 811,185 24,595
-------------- ------------- ------------- -------------- --------------
NET CASH - OPERATING ACTIVITIES (1,825,573) (375,472) (724,163) 1,284,601 444,237
----------- ------------- ------------- -------------- --------------
INVESTING ACTIVITIES:
Advances to Related Party -- -- (29,276) -- --
Purchase of Other Assets -- -- (18,722) -- --
Advances Note Receivable - Stockholders -- -- (128,794) (170,370) --
Advances Due from Stockholder -- -- (6,134) -- --
Incorporation Fees -- -- -- 354 --
Purchase of Equipment (650,390) (538,989) (1,114,964) (343,956) (171,297)
Proceeds from Sale of Equipment 4,000 197,650 197,650 -- 7,000
Acquisition Costs -- -- (74,292) -- --
Acquisition of Cable Company -- -- (2,000,000) -- --
Advance Under Note Receivable -- -- 98,989 8,698 --
Due to Affiliate -- -- 4,914 -- --
Note Receivable -- 103,103 -- -- --
Due from Stockholder -- (6,134) -- -- --
Collection of Stockholder Note Receivable -- -- -- -- 25,527
Business Acquisition, Net
of Cash Acquired (1,129,064) -- -- -- --
--------------- ------------ ------------- -------------- --------------
NET CASH-INVESTING ACTIVITIES $ (1,775,454) $ (244,370) $ (3,070,629) $ (505,274) $ (138,770)
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
1 9 9 7 1 9 9 6 1 9 9 6 1 9 9 5 1 9 9 4
------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED) [CONSOLIDATED] [COMBINED] [COMBINED]
------------ -------- --------
[CONSOLIDATED]
------------
<S> <C> <C> <C> <C> <C>
NET CASH-OPERATING ACTIVITIES $ (1,825,573) $ (375,472) $ (724,163) $ 1,284,601 $ 444,237
-FORWARDED --------------- -------------- ---------------- -------------- --------------
NET CASH-INVESTING ACTIVITIES (1,775,454) (244,370) (3,070,629) (505,274) (138,770)
-FORWARDED -------------- -------------- --------------- --------------- --------------
FINANCING ACTIVITIES:
Proceeds from Public Offering -- 5,810,594 6,036,798 -- --
Advances Under Line of Credit 4,668,135 1,381,129 2,684,742 51,513 --
Repayments of Line of Credit (2,101,300) (3,025,705) (3,744,318) -- (351,835)
Proceeds of Note Payable 4,234,973 -- 2,018,190 137,085 1,651,092
Repayment of Bridge Loans -- -- (1,000,000) -- --
Repayment of Note Payable -- -- (2,021,705) (625,827) (1,198,241)
Repayment of Capital Lease
Obligations -- -- (734,742) (251,886) (315,100)
Payments of Deferred Offering
Costs -- -- -- (292,986) --
Proceeds from Bridge Loans -- -- -- 1,000,000 --
Advance from Affiliates -- -- -- (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 --
Debt Repayment (3,234,550) (1,100,534) -- -- --
Line of Credit, Net -- -- -- -- --
Payment of Deferred Loan Costs -- -- -- -- (165,000)
Repayment of Bridge Note Payable -- (1,000,000) -- -- --
-------------- -------------- --------------- --------------- --------------
NET CASH - FINANCING ACTIVITIES 3,567,258 2,065,484 3,238,965 (93,571) (316,454)
-------------- -------------- --------------- --------------- --------------
NET [DECREASE] INCREASE IN CASH (33,769) 1,445,642 (555,827) 685,756 (10,987)
CASH - BEGINNING OF YEARS/PERIODS 145,845 701,672 701,672 15,916 26,903
-------------- -------------- --------------- --------------- --------------
CASH - END OF YEARS/PERIODS $ 112,076 $ 2,147,314 $ 145,845 $ 701,672 $ 15,916
=============== ============== ================ =============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the years/periods for:
Interest $ -- $ -- $ 316,567 $ 578,492 $ 581,332
Income Taxes $ -- $ -- $ 468,419 $ 156,707 $ 36,449
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,
1996 $ 643,451
1995 $ 124,035
1994 $ 209,002
</TABLE>
See Note 4 with respect to acquisition of business. See Note 15 for
information on related party transactions.
F-7
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
In November 1995, the Company incurred a non-cash finance charge of $750,000
in connection with bridge financing, of which $462,122 and $287,878 was charged
to operations at December 31, 1996 and 1995, respectively [See Note 13].
See Note 2 for information about the Stock Purchase Agreement and exchange
of shares.
See Notes to Financial Statements.
F-8
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES - NOTES TO FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
- ------------------------------------------------------------------------------
[1] FINANCIAL STATEMENT PRESENTATION, ORGANIZATION AND NATURE OF OPERATIONS
The financial statements are presented on a consolidated basis commencing
March 5, 1996 and include the results of operations of the parent company, TMCI
Electronics, Inc. ["TMCI"], and its wholly-owned subsidiaries, Touche
Manufacturing, Inc. ["Touche"], and Touche Electronics, Inc. ["TEI"]
[collectively, the "Company"]. The Company's revenues are predominately
generated from the manufacture and sale of 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 Company sells to original equipment
manufacturers primarily located in the Silicon Valley, California area.
All significant intercompany transactions have been eliminated for all periods
presented.
[2] BASIS OF PRESENTATION
The Company entered into Stock Purchase Agreements [the "Agreements"] with the
stockholders of Touche and TEI to acquire all of their issued and outstanding
stock. The combined financial statements as of and for the period ended
December 31, 1995 give retroactive effect to the acquisition by TMCI
Electronics, Inc. of all of the outstanding common stock of TEI [an S
corporation] and Touche on March 5, 1996. The financial statements of the
Company are presented on a consolidated basis commencing as of such date. Prior
to that date the separate results of TEI and Touche had been combined on an
as-if pooling basis consistent with that of consolidated financial statements
giving retroactive effect to the issuance of 27,280 shares of the Company's
common stock to the stockholders of TEI, and 567,600 shares of the Company's
common stock to the stockholders of Touche. Additionally, the S corporation
equity section of TEI has been reclassified to additional paid-in capital. No
adjustment of assets to "fair value" had been recorded and all intercompany
balances and transactions were eliminated. The accompanying combined financial
statements for 1995 will become the historical financial statements upon
issuance of financial statements for the period subsequent to March 5, 1996.
[3] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 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, 1996, 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. The Company reviews inventory items that have been on
hand for more than 60 days and charges against earnings if it is determined
that such inventory has become obsolete. During the years ended December 31,
1996, 1995 and 1994, the Company charged $40,000, $-0-, and $-0- respectively.
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 which range from 5 to 7 years.
F-9
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES - NOTES TO FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
- -------------------------------------------------------------------------------
[3] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
GOODWILL AND AMORTIZATION - Goodwill is amortized utilizing the straight-line
method over a period of 15 years. When changes in circumstances warrant it, the
Company evaluates the carrying value and the periods of amortization of
goodwill based on the current and expected future non-discounted cash flows of
the entities or assets giving rise to the goodwill.
DEFERRED LOAN COSTS - Deferred loan costs have been amortized over the term of
the loan using the straight-line method which approximates the interest method.
EARNINGS PER SHARE - Earnings per share of common stock is based on the
weighted average number of common shares outstanding for each period presented.
The 1995 and 1994 weighted average number of shares gives retroactive effect
for the shares issued in the business combination [See Note 2]. Common stock
equivalents are included if dilutive.
ADVERTISING - The Company expenses advertising costs as incurred. Total
advertising costs charged to expense amounted to $18,316, $11,874 and $0 for
the years ended December 31, 1996, 1995 and 1994, respectively.
STOCK OPTIONS - The Company accounts for employee stock-based compensation
under the intrinsic value based method as prescribed by Accounting Principles
Board ["APB"] Opinion No. 25. The Company applies the provisions of Statement
of Financial Accounting Standards ["SFAS"] No. 123 to non-employee stock-based
compensation and the pro forma disclosure provisions of that statement to
employee stock-based compensation.
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
$191,000 and $669,000 at December 31, 1996 and December 31, 1995, respectively.
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 $93,279 and $8,279 has been established at December 31,
1996 and 1995, respectively. 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 $7,404,000, $6,285,000 and $3,487,600 representing 28%, 24% and
13%, respectively, of the Company's total net sales for the year ended December
31, 1996. For the year ended December 31, 1995, sales to these three unrelated
customers approximated $9,273,000, $5,058,000 and $5,339,000 representing 33%,
18% and 19%, respectively. For the year ended 1994, sales to these three
unrelated customers approximated $6,052,000, $5,426,100, and $2,713,000
representing 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.
F-10
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES - NOTES TO FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
- -------------------------------------------------------------------------------
[4] BUSINESS ACQUISITION
Effective November 1, 1996, the Company acquired substantially all of the
assets and assumed certain liabilities of Pen Interconnect, Inc.'s San Jose
Division [a manufacturer of wire cable harnesses] for a purchase price of
$3,300,000. The Company acquired assets of approximately $1,309,000 and assumed
certain liabilities of $372,000. The consideration paid consisted of $2,000,000
in cash, $900,000 in promissory notes, and 134,172 shares of TMCI common stock
with an agreed-upon guaranteed value of $400,000 at the date of acquisition.
The acquisition was accounted for utilizing the purchase method and the
operations of the new division are included in the Company's results of
operations from November 1, 1996. Goodwill of approximately $2,577,000 [of
which approximately $214,000 was for legal and accounting costs directly
related to the acquisition] was recorded in connection with the transaction
which is being amortized utilizing the straight-line method over a period of 15
years. Amortization expense of $27,593 was recorded for the period ended
December 31, 1996 and accumulated amortization amounted to $27,593 at December
31, 1996. In addition, the Company entered into agreements whereby based on the
attainment of certain earnings levels the seller can earn additional proceeds
of $700,000. 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. In the event any such future payments will take place, the
amount will be capitalized as part of a goodwill. [See Note 21A - Subsequent
Events Unaudited-Arbitration of Pen Interconnect Acquisition.]
The following pro forma unaudited information presents the results of the
combined operations of TMCI Electronics, Inc. and the San Jose Division of Pen
Interconnect, Inc., treating the latter as if it was a division of Touche'
Electronics, Inc. for the entire years ended December 31, 1996 and 1995, with
pro forma adjustments as if the acquisition had been consummated as of the
beginning of 1995. This pro forma information does not purport to be indicative
of what would have occurred had the acquisition been made as of January 1, 1995
or results which may occur in the future.
<TABLE>
<CAPTION>
Year ended
----------
December 31,
------------
1 9 9 6 1 9 9 5
------- -------
<S> <C> <C>
Total Revenues $ 31,891,096 $ 30,652,613
Net Income $ 445,153 $ 608,922
Net Income Per Share $ .15 $ .31
[5] INVENTORY
</TABLE>
Inventory consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
<S> <C> <C> <C>
Raw Materials $ 4,608,407 $ 3,015,968 $ 1,400,311
Work-in Process 2,332,484 1,465,951 1,779,006
Finished Goods 997,808 688,742 --
---------------- --------------- ---------------
TOTAL $ 7,938,699 $ 5,170,661 $ 3,179,317
----- ================ =============== ===============
</TABLE>
[6] NOTES RECEIVABLE - STOCKHOLDERS
During 1996, the Company had advanced $166,226 to three stockholders bearing
interest at 10% with a 10 year amortization period commencing December 1, 1997.
During 1995, the balance due from stockholders was comprised of two promissory
notes due on demand from the Company's president. The cumulative balance of
these outstanding notes was $232,033 at December 31, 1995.
F-11
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES - NOTES TO FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
- -------------------------------------------------------------------------------
[7] PROPERTY AND EQUIPMENT AND DEPRECIATION AND AMORTIZATION
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
December 31,
------------
1 9 9 6 1 9 9 5
------- -------
<S> <C> <C>
Machinery and Equipment $ 5,036,652 $ 3,859,253
Furniture and Fixtures 620,838 478,248
Transportation Equipment 223,397 166,676
Leasehold Improvements 117,699 69,533
--------------- ---------------
Total 5,998,586 4,573,710
Less: Accumulated Depreciation and Amortization (2,360,286) (1,655,033)
--------------- ---------------
TOTAL $ 3,638,300 $ 2,918,677
----- =============== ===============
</TABLE>
Depreciation and amortization expense amounted to $812,131, $702,056 and
$604,599 for the years ended December 31, 1996, 1995 and 1994, respectively.
[8] 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. The balance due the
Company amounted to $473,952 and $444,676 at December 31, 1996 and 1995,
respectively. Interest income on these amounts approximated $30,000 for each of
the years ended December 31, 1996, 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.
[9] DUE FROM STOCKHOLDER - NONCURRENT
The December 31, 1996 balance due from stockholder is comprised of two
unsecured promissory notes due on demand from the Company's president. Each of
the notes call for interest payable at 10% per annum. The cumulative balance
outstanding of these notes was $238,167 and $232,033 at December 31, 1996 and
1995, respectively.
[10] LINE OF CREDIT
In March 1996, the Company entered into a new line of credit and term loan
facility with a financial institution. The new facilities bear interest rates
ranging from prime plus 1.25% to prime plus .75%, are collateralized by all
corporate assets and was used to pay off the former line of credit and other
debt aggregating approximately $2,800,000. The unused portion of the line of
credit was $3,415,000 [based upon eligible accounts receivable] at December 31,
1996 of which approximately $1,000,000 from the line was used to finance the
acquisition of Enterprise Industries, Inc. [See Note 20]. The new facility
requires the Company, among other things, to maintain minimum levels of
earnings, tangible net worth and certain minimum financial ratios. Effective
December 31, 1996, the Company was not in compliance with certain covenants and
obtained a waiver from the financial institution of the required minimum level
of earnings, tangible net worth, and debt service coverage ratio. The line of
credit also contains negative covenants among other provisions, requiring the
consent for the disposition of assets, acquisition or merger of any business,
guaranty of any third party obligations, capital restructure, and any
distributions or payment of any dividends in cash or in stock. The weighted
average interest rate on short-term borrowings at December 31, 1996 was 11.3
percent. The line of credit is personally guaranteed by the president of the
Company. There can be no assurance that the Company will be able to maintain
compliance with applicable covenants under the line of credit and term loan
facility in the future.
F-12
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES - NOTES TO FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
- -------------------------------------------------------------------------------
[11] NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31,
------------
1 9 9 6 1 9 9 5
------- -------
<S> <C> <C>
Promissory notes in the amounts of $500,000 and $400,000 issued in connection
with the acquisition of the cable company, bearing interest at the prime
rate plus .5% with monthly payments of $33,276, maturing October 31, 1999
and November 1, 1998, respectively, collateralized by the assets of the
cable division and are
in default [See Note 21A] $ 900,000 $ --
Note payable to financing company with monthly payments of $6,293 including
principal and interest at 8.35% per annum; maturing
March 2001; collateralized by machinery and equipment 269,393 --
Notes payable to financial institution with monthly payments of $46,906
including principal and interest at 1.25% above prime, maturing
May 1, 2001, collateralized by all corporate assets 1,691,747 --
Notes payable to financial institution with monthly installments of $18,883
plus interest at the bank's prime rate plus 3.5%; 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 15] -- 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 18D] -- 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
</TABLE>
F-13
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES - NOTES TO FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Note payable to financing company with monthly payments of $2,454 including
principal and interest at 8.5% per annum; due December
1999; collateralized by machinery and equipment -- 97,822
--------------- --------------
<S> <C> <C>
Total 2,861,140 1,657,655
Less: Current Portion 796,867 459,539
--------------- --------------
NON CURRENT PORTION $ 2,064,273 $ 1,198,116
------------------- =============== ==============
</TABLE>
The prime rate was 8.25% and 8.5% at December 31, 1996 and December 31, 1995,
respectively.
Current maturities on long-term debt at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
December 31,
<S> <C> <C>
1997 $ 796,867
1998 828,510
1999 699,116
2000 518,138
2001 18,509
Thereafter --
---------------
TOTAL $ 2,861,140
----- ===============
</TABLE>
[12] OTHER LIABILITIES
Pursuant to a purchase agreement with the previous owner of the operating
assets of the business, consummated in September 1992, the Company assumed, and
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 business. Accrued expenses
include management's estimate of their liability under this purchase agreement
of approximately $68,000.
[13] 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 matured on the
consummation of the public offering of the Company's securities [See Note 18C].
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 taking into
consideration 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 which were amortized by
the straight-line method which approximates the interest method over the life
of the promissory notes. For the year ended December 31, 1996 and 1995,
amortization of $462,122 and $287,878, respectively, of such costs are
reflected in the statement of operations.
F-14
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES - NOTES TO FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
- ------------------------------------------------------------------------------
[14] INCOME TAXES
Commencing March 5, 1996, the Company will file its tax returns on a
consolidated basis with all of its subsidiaries. Prior to March 5, 1996, TMCI
and Touche filed separate Subchapter C corporation tax returns and TEI was
taxed under the provisions of Subchapter S of the Internal Revenue Code.
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:
<TABLE>
<CAPTION>
December 31,
------------
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
<S> <C> <C> <C>
Current Tax Expense:
Federal $ 126,644 $ 354,200 $ --
State 10,120 66,900 2,503
---------------- ---------------- -----------------
Totals 136,764 421,100 2,503
Less: Benefit of Net Operating
Loss Carryforward (102,300) (86,100) --
---------------- ---------------- -----------------
Total Current Provision 34,464 335,000 2,503
---------------- ---------------- -----------------
Deferred:
Federal 40,658 203,800 60,035
State (56,123) (4,600) 41,039
---------------- ---------------- -----------------
Total Deferred Provision (15,465) 199,200 101,074
---------------- ---------------- -----------------
TOTAL PROVISION FOR TAXES $ 18,999 $ 534,200 $ 103,577
------------------------- ================ ================ =================
</TABLE>
The components of the deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Deferred Tax Asset:
Alternative Minimum Tax Credits $ 59,717 $ 29,700
Bad Debt Allowance 37,441 --
Inventory Capitalization 21,230 20,060
Non-Cash Financing Charges -- 115,200
Unused State Tax Credit 69,603 --
---------------- ----------------
Deferred Tax Asset - Current 187,991 164,960
Deferred Tax Liabilities
Excess Tax Over Book
Accumulated Depreciation -
Non-Current (436,781) (429,215)
---------------- ----------------
NET DEFERRED TAX LIABILITIES $ (248,790) $ (264,255)
---------------------------- ================ ================
</TABLE>
F-15
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES - NOTES TO FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
- ------------------------------------------------------------------------------
[14] INCOME TAXES [CONTINUED]
A reconciliation between the Company's effective tax rate and the U.S.
statutory rate follows:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
<S> <C> <C> <C>
U.S. Statutory Rate Applied to Pretax Income 34% 34 % 34 %
State Tax Provision - Net of Federal Tax Benefit 6 6 6
Effect of S Corporation Operations 13 2 (10)
Net Operating Loss Carryforward (42) -- --
Other -- 11 (10)
-------- ------- ------
TOTAL EFFECTIVE TAX RATE 11% 53 % 20 %
------------------------ ======== ======= ======
</TABLE>
As of December 31, 1996, the Company utilized the remaining balance of its net
operating loss carryforward as an offset to its federal and state income tax
expense.
[15] RELATED PARTY TRANSACTIONS
In 1995, Touche owed Textron Financial approximately $401,700 which Antonio
Zertuche, Touche's landlord, agreed to repay in exchange for Touche's
promissory note to make monthly installments of approximately $6,322, including
interest at 11.5% per annum, maturing December 1996. In January 1996, the
Company refinanced the note, and issued a new note for approximately $291,000
which is the difference between the Company's original note payable of
approximately $401,700 and its cancellation of an outstanding note receivable
from the landlord of approximately $99,000, plus approximately $11,600 in the
overpayment of property taxes on leased property located at 1875 Dobbin Drive,
San Jose, California. The new note payable was satisfied in March 1996, from
the proceeds of the initial public offering.
In addition to acting as Chairman, President and Chief Executive Officer of the
Company, Rolando Loera is also the sole owner of Touche Properties, Inc.
("TPI"), a real estate company which owns and leases the real property located
at 1881-1899 Dobbin Drive (the "Property") to TEI and Touche, two wholly-owned
subsidiaries of the Company. The rent payments made by TEI and Touche to TPI
amounted to approximately $576,144, $477,640 and $479,307 in 1996, 1995 and
1994, respectively. In addition, TPI has a loan in the amount of $1,000,000 on
the Property, and TEI and Touche have guaranteed the satisfaction of TPI's
obligations under this loan.
[16] EMPLOYEES' STOCK OWNERSHIP PLAN AND EMPLOYEES' DEFINED CONTRIBUTION PLAN
TMCI has 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. As of December 31, 1996 and 1995, the Plan
owned approximately .8% and 10% respectively of Touche's outstanding shares.
The Company has a voluntary 401(k) savings plan covering all eligible
employees. The Company matches up to 5% of all contributions on a discretionary
basis and each employee vests 100% over 7 years. The Company's 1996, 1995 and
1994 contributions were $5,036, $1,945 and $0, respectively.
[17] COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - The Company leases its production and administrative
facilities. This obligation extends through April 2003. 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.
F-16
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES - NOTES TO FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
- -------------------------------------------------------------------------------
[17] COMMITMENTS AND CONTINGENCIES [CONTINUED]
A 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
leases commenced in November 1993 and November 1996 and expire in November
2013.
Minimum lease payments for the next 5 years and thereafter [not including the
CPI increases] are:
<TABLE>
<CAPTION>
Related Party Third Party
Leases Leases
<S> <C> <C>
1997 $ 576,144 $ 470,160
1998 576,144 470,160
1999 576,144 470,160
2000 576,144 470,160
2001 576,144 470,160
Thereafter 6,865,716 5,406,840
----------------- ---------------
TOTAL $ 9,746,436 $ 7,757,640
----- ================= ===============
</TABLE>
Total rent expense amounted to $1,038,626, $730,417 and $608,420 for the years
ended December 31, 1996, 1995 and 1994, respectively.
EMPLOYMENT AGREEMENT - The Company has entered into an employment agreement
["Agreement] dated as of December 28, 1995 with its president. The term of
employment commenced on March 5, 1996, the effective date of the public
offering 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 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. The 1996 bonus was
relinquished by the President. 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 his duties and
responsibilities. The Agreement also provides for benefits in the event of
disability.
If employment by the Company of Mr. Loera terminates or Mr. Loera becomes
unable to perform his duties, the Company may be adversely affected.
F-17
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES - NOTES TO FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
- -------------------------------------------------------------------------------
[18] 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. 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 its then sole stockholder in exchange for $1,000,
which is reflected retroactively in the statement of stockholders' equity in
connection with the business combination.
[C] PUBLIC OFFERING - On March 11, 1996, the Company closed the initial public
offering of its securities resulting in net proceeds to the Company of
approximately $5,700,000. 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
13.
Effective with the offering, the Company sold the underwriter an option to
purchase up to an aggregate of 128,000 units. Each unit shall be exercisable
during the four-year period commencing one year after March 11, 1996. The
exercise price of the units issuable upon exercise of the underwriter's units
during the period of exercisability shall be $8.25.
[D] CONVERSION OF DEBT-TO-EQUITY - Immediately prior to the public offering,
the holders of the convertible promissory notes exercised the conversion right
of the notes and exchanged them for 298,720 shares of TMCI.
[E] STOCK PURCHASE AGREEMENTS - On December 28, 1995, the Company entered into
Stock Purchase Agreements [the "Agreements"] with the stockholders of Touche
and TEI to acquire all of the issued and outstanding stock of Touche and TEI.
Immediately prior to the public offering, the Company exchanged its shares of
Touche and TEI for 567,600 and 27,280 shares, respectively, of TMCI.
[F] 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-18
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES - NOTES TO FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
- ------------------------------------------------------------------------------
[18] STOCKHOLDERS' EQUITY [CONTINUED]
[F] STOCK OPTION PLAN [CONTINUED] - A summary of the activity under the plan is
as follows:
<TABLE>
<CAPTION>
Remaining
---------
Contractual
-----------
Shares Price Life Exercise Price
------ ----- ---- --------------
<S> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1994 -- $ --
Granted 100,000 3.75 10 Years $ 3.75
Exercised -- --
Forfeited/Expired -- --
--------------- -------------
OUTSTANDING - DECEMBER 31, 1995 100,000 3.75 10 Years $ 3.75
-------------------------------
Granted -- --
Exercised -- --
Forfeited/Expired -- --
--------------- -------------
OUTSTANDING - DECEMBER 31, 1996 100,000 $ 3.75 10 Years $ 3.75
------------------------------- =============== =============
EXERCISABLE - DECEMBER 31, 1996 -- --
------------------------------- =============== =============
</TABLE>
Had compensation cost for the Company's stock options issued to employees been
determined based upon the fair value at the grant date for stock options issued
under these plans pursuant to the methodology prescribed under Statement of
Financial Accounting Standards ["SFAS"] No. 123, Accounting for Stock-Based
Compensation, the Company's net income and earnings per share would have been
decreased, on a pro forma basis, by approximately $138,500, or $.05 per share
for the year ended December 31, 1996 which is based upon the amortization of
the 1995 fair value. The effect on 1995 earnings is immaterial. The fair value
of stock options granted to employees used in determining the pro forma amounts
is estimated at $377,000 during 1995 using the Black-Scholes option-pricing
model for the pro forma amounts with the following weighted average
assumptions:
<TABLE>
<CAPTION>
December 31,
------------
1 9 9 6 1 9 9 5
------- -------
<S> <C>
Risk-free Interest Rate N/A 5.87%
Expected Life N/A 6 Years
Expected Volatility N/A 82.07%
Expected Dividends None
</TABLE>
Net income and net earnings per share as reported, and on a pro forma basis as
if compensation cost had been determined on the basis of fair value pursuant to
SFAS No. 123 is as follows:
<TABLE>
<CAPTION>
<PAGE>
December 31,
------------
1 9 9 6
-------
<S> <C>
Net Income:
As Reported $ 148,337
-----------------
Pro Forma $ 9,837
-----------------
Net Income Per Share:
As Reported $ .05
-----------------
Pro Forma $ --
-----------------
</TABLE>
F-19
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES - NOTES TO FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
- -------------------------------------------------------------------------------
[19] 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:
<TABLE>
<CAPTION>
December 31,
------------
1 9 9 6 1 9 9 5
------- -------
Carrying Fair Carrying Fair
-------- ---- -------- ----
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Due from Stockholder $ 238,167 $ 238,167 $ 232,033 $ 232,033
Note Receivable - Stockholders $ 166,226 $ 166,226 $ 537,878 $ 537,878
Due from Related Party $ 473,952 $ 473,952 $ 344,676 $ 344,676
Notes Payable - Net of Current Portion $ 2,064,273 $ 2,064,273 $ 1,198,116 $ 1,198,116
Convertible Promissory Notes-
Net of Current Portion $ -- $ -- $ 113,590 $ 113,590
</TABLE>
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 8 and does not believe
exposure to loss is likely.
[20] SUBSEQUENT EVENT
ACQUISITION OF ENTERPRISE INDUSTRIES, INC. - On January 24, 1997, the Company
acquired 100% of the outstanding shares of capital stock of Enterprise
Industries, Inc. ["Enterprise"], a North Hollywood, California based metal
stamping manufacturing business for a total purchase price of $1,500,000,
consisting of $1,000,000 in cash and the issuance of 96,560 shares of the
Company's common stock. The Company acquired assets of approximately $1,088,000
and assumed liabilities of approximately $323,000 resulting in goodwill of
approximately $735,000. At the same time the Company entered into a five year
employment contract with the President of Enterprise. If employment by the
Company of the president of Enterprise terminates or if he becomes unable to
perform his duties, the Company may be adversely affected.
[21] SUBSEQUENT EVENTS [UNAUDITED] - SUBSEQUENT TO THE REPORT DATE OF THE
INDEPENDENT AUDITORS
[A] ARBITRATION OF PEN INTERCONNECT ACQUISITION - Subsequent to the closing of
the acquisition of the San Jose Division of Pen Interconnect, a dispute arose
concerning various aspects of the transaction. On February 14, 1997, TMCI filed
a Demand for Arbitration against Pen, seeking a substantial purchase price
reduction or, in the alternative, other remedies and damages as provided by
law. Management has suspended all payments to Pen, including payments due under
the promissory notes, aggregating $900,000. Pen has sought to accelerate the
promissory notes. Management, after consultation with legal counsel, believes
that it will prevail in all material aspects of the dispute. Accordingly, at
September 30, 1997, the Company has classified the promissory notes as maturing
under the original terms provided therein. An arbitrator has been selected and
agreed upon by all parties to the arbitration proceedings. [See Note 11].
F-20
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES - NOTES TO FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
- -------------------------------------------------------------------------------
[21] SUBSEQUENT EVENTS [UNAUDITED] - SUBSEQUENT TO THE REPORT DATE OF THE
INDEPENDENT AUDITORS [CONTINUED]
[B] LETTER OF INTENT - The Company has entered into a non-binding letter of
intent to acquire the assets and assume the liabilities of a Santa Clara based
distributor of electronic parts. There can be no assurance that the acquisition
will be successfully completed.
[22] PRO FORMA INCOME TAXES [UNAUDITED]
The pro forma income tax amounts presented in 1996 reflect the income tax
expense that would have been recorded if the Company had been combined as of
the beginning of the year and had been taxed as if all companies were a C
corporation.
[23] NEW AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ["FASB"] has also issued Statement of
Financial Accounting Standards ["SFAS"] No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 125
is effective for transfers and servicing of financial assets and extinguishment
of liabilities occurring after December 31, 1996. Earlier application is not
allowed. The provisions of SFAS No. 125 must be applied prospectively;
retroactive application is prohibited. Adoption on January 1, 1997 is not
expected to have a material impact on the Company. The FASB deferred some
provisions of 125, which are not expected to be relevant to the Company.
The Financial Accounting Standards Board ["FASB"] has issued Statement of
Financial Accounting Standards ["SFAS"] No. 128, "Earnings per Share," and SFAS
No. 129, "Disclosure of Information about Capital Structure," in February 1997.
SFAS No. 128 simplifies the earnings per share ["EPS"] calculations required by
Accounting Principles Board ["APB"] Opinion No. 15, and related
interpretations, by replacing the presentation of primary EPS with a
presentation of basic EPS. SFAS No. 128 requires dual presentation of basic and
diluted EPS by entities with complex capital structures. Basic EPS includes no
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution of securities that could share in
the earnings of an entity, similar to the fully diluted EPS of APB Opinion No.
15. SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods; earlier application
is not permitted. When adopted, SFAS No. 128 will require restatement of all
prior-period EPS data presented; however, the Company has not sufficiently
analyzed SFAS No. 128 to determine what effect SFAS No. 128 will have on its
historically reported EPS amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No.
130 is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 is not
expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosure About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
stockholders. SFAS No. 131 is effective for periods beginning after December
15, 1997, and comparative information for earlier years is to be restated. SFAS
No. 131 need not be applied to interim financial statements in the initial year
of its application. SFAS No. 131 is not expected to have a material impact on
the Company.
F-21
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES - NOTES TO FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
- ------------------------------------------------------------------------------
[24] UNAUDITED INTERIM STATEMENTS
The financial statements as of September 30, 1997 and 1996, and for the periods
ended September 30, 1997 and 1996 are unaudited; however, in the opinion of
management all adjustments (consisting solely of normal recurring adjustments)
necessary to a fair presentation of the financial statements for the interim
periods have been made. The results of the interim periods are not necessarily
indicative of the results obtained for full fiscal years.
. . . . . . . . . . . . .
F-22
<PAGE>
<TABLE>
<S> <C>
========================================================== =========================================================
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 2,672,000 Shares of Common Stock
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE Issuable Upon Exercise of
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN Class A Warrants
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 128,000 Units
UNLAWFUL. ANY MATERIAL MODIFICATION OF THE OFFERING
WILL BE ACCOMPLISHED BY MEANS OF AN AMENDMENT TO
THE REGISTRATION STATEMENT. TMCI ELECTRONICS, INC.
TABLE OF CONTENTS
Page
Prospectus Summary.................................... 3 PROSPECTUS
Risk Factors.......................................... 7
Use of Proceeds.......................................18
Dilution..............................................18
Price Range of Common Stock and Dividend
Policy..............................................19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations..........................................20
Business..............................................28
Management............................................36
Principal Stockholders................................40
Certain Transactions..................................42
Description of Securities.............................44 November 18, 1997
Plan of Distribution..................................46
Legal Proceedings.....................................47
Legal Matters.........................................47
Experts...............................................47
Index to Financial Statements.........................48
Pro Forma Condensed Combined Financial
Statements...........................................P-1
Report of Independent Auditors.......................F-1
========================================================== =========================================================
</TABLE>
<PAGE>
PART TWO
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. 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.
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
ITEM 14. 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
II-1
<PAGE>
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.
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 15. 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 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."
II-2
<PAGE>
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 16. 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)
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.(a)
II-3
<PAGE>
3.1 By-laws.(c)
3.2 Agreement of Merger between TMCI Electronics, Inc., a California
corporation, and TMCI Electronics, Inc., a Delaware corporation.(a)
3.3 Certificate of Merger.(a)
4.0 Specimen Copy of Common Stock Certificate.(a)
4.1 Form of Class A Warrant Certificate.(a)
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.(a)
10.1 Bridge Loan Agreements and Promissory Notes.(a)
10.2 Subscription Paper, dated November 6, 1995.(a)
10.3 Stock Purchase Agreement, dated December 28, 1995 relating to Touche
Manufacturing Company, Inc.(a)
10.4 Stock Purchase Agreement dated December 28, 1995 relating to Touche
Electronics, Inc.(a)
10.5 Small Business Loan Agreement dated October 26, 1993 with related
Guarantee of Touche Manufacturing Company, Inc., Touche Electronics,
Inc. and Rolando Loera.(a)
10.6 Lease Agreement dated January 1, 1993 relating to 1875 Dobbin Drive,
San Jose, CA.(a)
10.7 Lease Agreement dated October 25, 1993 relating to 1881-1899 Dobbin
Drive, San Jose, CA.(a)
10.8 Lease Agreement dated June 21, 1995 relating to 1565-C Mabury Road,
San Jose, CA.(a)
10.9 1995 Stock Option Plan.(a)
10.10 Touche Manufacturing Company, Inc. Employee Stock Ownership Plan.(a)
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.(e)
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.(f)
11.0 Computation of Earnings per share.
21.0 Subsidiaries of the Registrant.(d)
23.0 Consent of Gould & Wilkie is contained as Exh.5.0.(c)
23.1 Consent of Moore Stephens, P.C.
23.2 Consent of Dominic A. Polimeni.(c)
(a) Incorporated by reference to the Registration Statement on Form SB-2
(No. 33-80973) as originally filed with the Securities and Exchange
Commission (the "SEC") on December 29, 1995 (the "Registration
Statement").
(b) Incorporated by reference to Amendment No. 1 to the Registration
Statement, as filed with the SEC on February 14, 1996.
(c) Incorporated by reference to Amendment No. 2 to the Registration
Statement, as filed with the SEC on March 4, 1996.
(d) Incorporated by reference to Post-Effective Amendment No. 1 to the
Registration Statement, as filed with the SEC on March 21, 1997.
(e) 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.
II-4
<PAGE>
(f) Incorporated by reference to Exhibit 2.0 the Registrant's Form 8-K
filed with the Securities and Exchange Commission on February 7,
1997.
ITEM 17. 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;
(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 has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in San
Jose, California, on November 12, 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.
<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROLANDO LOERA Chairman, President, Chief November 12, 1997
- --------------------- Executive Officer, Director
Rolando Loera [Principal Executive Officer]
/s/ CHARLES E. SHAW Vice President, Chief Financial November 12, 1997
- --------------------- Officer, Director [Principal
Charles E. Shaw Financial Officer]
/s/ ROBERT LOERA Controller, Secretary, Director November 12, 1997
- --------------------- [Principal Accounting Officer]
Robert Loera
/s/ THOMAS F. CHAFFIN Director November 12, 1997
- ----------------------
Thomas F. Chaffin
/s/ DOMINIC A. POLIMENI Director November 12, 1997
- -----------------------
Dominic A. Polimeni
</TABLE>
<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.(a)
3.1 By-laws.(c)
3.2 Agreement of Merger between TMCI Electronics, Inc., a California
corporation, and TMCI Electronics, Inc., a Delaware corporation.(a)
3.3 Certificate of Merger.(a)
4.0 Specimen Copy of Common Stock Certificate.(a)
4.1 Form of Class A Warrant Certificate.(a)
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.(a)
10.1 Bridge Loan Agreements and Promissory Notes.(a)
10.2 Subscription Paper, dated November 6, 1995.(a)
10.3 Stock Purchase Agreement, dated December 28, 1995 relating to Touche
Manufacturing Company, Inc.(a)
10.4 Stock Purchase Agreement dated December 28, 1995 relating to Touche
Electronics, Inc.(a)
10.5 Small Business Loan Agreement dated October 26, 1993 with related
Guarantee of Touche Manufacturing Company, Inc., Touche Electronics,
Inc. and Rolando Loera.(a)
10.6 Lease Agreement dated January 1, 1993 relating to 1875 Dobbin Drive,
San Jose, CA.(a)
10.7 Lease Agreement dated October 25, 1993 relating to 1881-1899 Dobbin
Drive, San Jose, CA.(a)
10.8 Lease Agreement dated June 21, 1995 relating to 1565-C Mabury Road,
San Jose, CA.(a)
10.9 1995 Stock Option Plan.(a)
10.10 Touche Manufacturing Company, Inc. Employee Stock Ownership Plan.(a)
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.(e)
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.(f)
11.0 Computation of Earnings per share.
21.0 Subsidiaries of the Registrant.(d)
23.0 Consent of Gould & Wilkie is contained as Exh.5.0.(c)
23.1 Consent of Moore Stephens, P.C.
23.2 Consent of Dominic A. Polimeni.(c)
- ------------
(a) Incorporated by reference to the Registration Statement on Form SB-2
(No. 33-80973) as originally filed with the Securities and Exchange
Commission (the "SEC") on December 29, 1995 (the "Registration
Statement").
(b) Incorporated by reference to Amendment No. 1 to the Registration
Statement, as filed with the SEC on February 14, 1996.
(c) Incorporated by reference to Amendment No. 2 to the Registration
Statement, as filed with the SEC on March 4, 1996.
<PAGE>
(d) Incorporated by reference to Post-Effective Amendment No. 1 to the
Registration Statement, as filed with the SEC on March 21, 1997.
(e) 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.
(f) Incorporated by reference to Exhibit 2.0 the Registrant's Form 8-K
filed with the Securities and Exchange Commission on February 7,
1997.
<PAGE>
TCMI ELECTRONICS, INC.
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
Nine Months Ended Year Ended
September 30, 1997 December 31
------------------ -------------------
1996 1995
---- ----
BASIC EPS:
Net income $1,310,457 $ 148,337 $ 473,416
========== ========= =========
Weighted average shares outstanding 3,596,332 2,865,445 1,893,600
========= ========= =========
Basic EPS $ 0.37 $ 0.05 $ 0.25
========== ========= =========
PRO FORMA EPS:
Income before income taxes $ 167,336 $1,007,616
Pro forma income taxes 6,000 509,100
--------- ----------
Pro forma net income $ 161,336 $ 498,516
========= ==========
Weighted average shares outstanding 2,865,445 1,893,600
--------- ---------
Pro forma net income per share $ 0.06 $ 0.26
========= ==========
PRIMARY & FULLY DILUTED EPS
Net Income $1,310,457 $ 148,337 $ 473,416
Addition net income due to
decrease in interest expense, net of 380,357 195,841 --
income taxes
Adjusted net income $1,690,814 $ 344,178 $ 473,416
========== ========= =========
Weighted average number shares 3,515,829 2,865,445 1,893,600
outstanding and common stock
equivalents
Equivalent shares outstanding 1,796,834 1,472,256 --
assuming exercise of the options and
warrants under the modified treasury
stock method
Shares held in escrow in connection 80,503 -- --
with acquisition
Total weighted shares outstanding 5,393,166 4,337,256 1,893,600
and common stock equivalents ========= ========= =========
Primary and Fully Diluted EPS $0.31 $0.08 $0.25
(antidilutive in 1996) ========= ========= =========
<PAGE>
Exhibit 23.1
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Post-Effective Amendment No. 3 on Form S-1
to the Registration Statement on Form SB-2 (No. 33-80973) of our report dated
March 12, 1997, except as to Note 10 for which the date is March 27, 1997, on
our audits of the consolidated financial statements of TMCI Electronics, Inc.
and its subsidiaries. We also consent to the reference to our firm under the
caption "Experts."
/s/ MOORE STEPHENS, P.C.
Certified Public Accountants
Cranford, New Jersey
November 18, 1997
