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Registration No. 33-80973
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TMCI ELECTRONICS, INC.
(Name of small business issuer 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 and telephone number of principal executive offices)
1875 DOBBIN DRIVE
SAN JOSE, CA 95133
(Address of principal place of business or
intended principal place of business)
ROLANDO LOERA
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
TMCI ELECTRONICS, INC.
1875 DOBBIN DRIVE
SAN JOSE, CA 95133
408-272-5700
(Name, address and telephone number of agent for service)
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COPY TO:
FREDERICK W. LONDON, ESQ.
GOULD & WILKIE
ONE CHASE MANHATTAN PLAZA
NEW YORK, NY 10005-1401
(212) 344-5680
(212) 809-6890 FAX
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Approximate date of commencement of proposed sale to public:
As soon as practicable after the amendment to the
Registration Statement becomes effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
(facing page continues)
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THE REGISTRANT HEREBY AMENDS THIS AMENDMENT TO THE REGISTRATION
STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE
UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES
THAT THIS AMENDMENT TO THE REGISTRATION STATEMENT SHALL THEREAFTER BECOME
EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR
UNTIL THIS AMENDMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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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 April 10, 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 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 April 9, 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 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 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, 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
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substantial purchase price reduction or, in the alternative, other remedies and
damages as provided by law.
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)........................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 Offering or the securities
underlying the Units.
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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 Offering. The Company can make no
assurances that the combination of these companies will prove as successful as
the subsidiaries were independently.
NO ASSURANCE OF FUTURE PROFITABILITY OR PAYMENT OF DIVIDENDS
Although Touche and TEI had a combined rolling backlog at December 31,
1996 of approximately $10 million, no assurance can be given that the future
operations of the Company or its subsidiaries will be profitable. Should the
operations of the Company or its subsidiaries remain profitable, it is likely
that the Company or its subsidiaries would retain much or all of the earnings
in order to finance future growth and expansion. Therefore, the Company does
not presently intend to pay dividends.
DEPENDENCE UPON MAJOR CUSTOMERS
The largest customers of Touche and TEI are Lam Research Corporation,
Tandem Computers Incorporated and Hewlett-Packard Company. Sales to these
customers accounted for 28%, 24% and 13%, respectively, of the combined
revenues of Touche and TEI for the year ended December 31, 1996.
The contracts relating to these sales are terminable upon short notice
and none of these customers is obligated to continue to use Touche or TEI
product services at all or at existing prices. In addition, these customers
could demand price concessions from Touche and/or TEI which could adversely
affect profits and profit margins. The termination by these customers of their
relationship with Touche and/or
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TEI or a substantial decrease in prices paid by these customers would have a
material adverse effect upon the business, properties, financial condition,
results of operations and prospects of the Company.
The dependence on major customers subjects Touche and TEI to
significant financial risk in the operation of their business should a major
customer terminate, for any reason, its business relationship with Touche or
TEI. In such an event, the financial condition of the Company may be adversely
affected and the Company may be required to obtain additional financing, of
which there is no assurance.
The continuing ability of Touche and TEI to maintain these customer
relationships and to build new relationships is dependent, among other things,
upon their ability to maintain the high quality standards demanded by their
customers.
RISK OF INVENTORY OBSOLESCENCE
The products manufactured by the original equipment manufacturers
(OEMs) which are serviced by the Company are being upgraded and enhanced on a
continuous basis by these OEMs. As a result of this process, the inventory
maintained by the Company may become obsolescent. Such obsolescence may cause
the Company to have excess supplies of unusable inventory which could have a
material adverse effect on the Company.
DISPUTE RELATING TO PEN ACQUISITION
Subsequent to the closing of the 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, other remedies and damages as provided by law.
IMMEDIATE AND SUBSTANTIAL DILUTION
An investor in this offering will experience immediate and substantial
dilution of $1.82 (33.09%) per share. Prior to the offering, the Company had a
net tangible book value of $8,638,830 or $2.47 per share, derived from the
Company's December 31, 1996 combined balance sheet and based upon 3,499,772
shares being outstanding as of that date. After projecting the effect of the
possible sale of the shares offered hereby at an assumed offering price of
$5.50 per share and after deducting warrant solicitation fees and estimated
offering expenses, pro forma net tangible book value would have been
$22,701,990 or $3.68 per share. The result will be an immediate increase in net
tangible book value per share of $1.21 to existing shareholders and an
immediate dilution to new investors of $1.82 per share. See "Dilution."
LITIGATION INVOLVING MARKET MAKER
Although Biltmore Securities, Inc. ("Biltmore") is not the sole market
maker in the Company's securities, from time to time it may be the dominant
market maker in such securities. Biltmore is involved in litigation which may
adversely affect its abilities to make a market in the Company's securities.
The Company has been advised by Biltmore that on or about May 22,
1995, Biltmore and Elliot Loewenstern and Richard Bronson, principals of
Biltmore, and the Commission agreed to an offer of
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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 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
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Auditor is also authorized to conduct a review, on a random basis and without
notice to Biltmore, to certify that any persons associated with Biltmore who
have been suspended or barred by any Commission order are complying with the
terms of such orders.
On July 10, 1995, the action as against Messrs. Loewenstern and
Bronson was dismissed with prejudice. Mr. Bronson has agreed to a suspension
from associating in any supervisory capacity with any broker, dealer, municipal
securities dealer, investment advisor or investment company for a period of
twelve (12) months, dating from the beginning of such suspension. Mr.
Loewenstern has agreed to a suspension from associating in any supervisory
capacity with any broker, dealer, municipal securities dealer, investment
advisor or investment company for a period of twelve (12) months commencing
upon the expiration of Mr. Bronson's suspension.
In the event that the requirements of the foregoing judgment adversely
affect Biltmore's ability to act as a market maker for the Company's stock, and
additional brokers do not make a market in the Company's securities, the market
for and liquidity of the Company's securities may be adversely affected. In the
event that other broker dealers fail to make a market in the Company's
securities, the possibility exists that the market for and the liquidity of the
Company's securities may be adversely affected to such an extent that public
security holders may not have anyone to purchase their securities when offered
for sale at any price. In such event, the market for, liquidity and prices of
the Company's securities may not exist. FOR ADDITIONAL INFORMATION REGARDING
BILTMORE, INVESTORS MAY CALL THE NATIONAL ASSOCIATION OF SECURITIES DEALERS,
INC. AT (800) 289-9999.
Recent State Action Involving Biltmore -- Possible Loss of Liquidity
The State of Indiana has commenced an action seeking, among other
things, to revoke Biltmore's license to do business in such state. The hearing
in this matter was scheduled for October 7, 1996 and has been adjourned pending
settlement discussions. Such proceeding, if ultimately successful, may
adversely affect the market for and liquidity of the Company's securities if
additional broker-dealers do not make a market in the Company's securities.
Moreover, should Indiana investors purchase any of the securities sold in this
Offering from Biltmore prior to the possible revocation of Biltmore's license
in Indiana, such investors will not be able to resell such securities in such
state through Biltmore but will be required to retain a new broker-dealer firm
for such purpose. The Company cannot ensure that other broker-dealers will make
a market in the Company's securities. In the event that other broker-dealers
fail to make a market in the Company's securities, the possibility exists that
the market for and the liquidity of the Company's securities may be adversely
affected to an extent that public security holders may not have anyone to
purchase their securities when offered for sale at any price. In such event,
the market for, liquidity and prices of the Company's securities may not exist.
The Company does not intend to seek qualification for the sale of the
Securities in the State of Indiana. It should be noted that although Biltmore
may not be the sole market maker in the Company's securities, it will most
likely be the dominant market maker in the Company's securities.
POSSIBLE NEED FOR ADDITIONAL FINANCING
The Company intends to fund its operations and other capital needs for
the next twelve (12) months substantially from operations, but there can be no
assurance that such funds will be sufficient for these purposes. The Company
may require substantial amounts for its future expansion, operating costs and
working capital. There can be no assurance that such financing will be
available, or that it will be available on acceptable terms. See "Use of
Proceeds."
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DEPENDENCE ON MANAGEMENT
The Company's business is principally dependent on certain key
management personnel for the operation of its business. In particular, Rolando
Loera has played the primary role in the promotion, development and management
of the Company. If the employment by the Company of Mr. Loera terminates, or he
is unable to perform his duties, the Company may be adversely affected. The
Company has obtained key-man life insurance on Mr. Loera in the amount of $1
million. The Company will be the owner and beneficiary of the insurance policy.
See "Use of Proceeds," "Business" and "Management."
SUBSTANTIAL COMPETITION
The Company encounters substantial competition from domestic
businesses. Nearly all of such entities have substantially greater financial
resources, technical expertise and managerial capabilities than the Company
and, consequently, the Company may be at a substantial competitive disadvantage
in the conduct of its business. See "Business."
RECENT AND POSSIBLE FUTURE ACQUISITIONS
The Company has recently acquired a wire cable and harness
manufacturing business and a metal stamping business. No assurances can be made
that either combination will be successful. In addition, a dispute has arisen
with respect to the valuation of certain assets acquired in the wire cable and
harness manufacturing business acquisition and no assurance can be given as to
the outcome of such dispute. In the event that any of the Warrants are
exercised, the Company may use the bulk of any such proceeds in its acquisition
activities. No assurances can be made that such funds will enable the Company
to expand its base or realize profitable consolidated operations. In addition,
the Company's shareholders may not have the opportunity to review the financial
statements of any of the companies that may be acquired or have the opportunity
to vote on any proposed acquisitions. Should such funds not be utilized in its
acquisitions activities, the Company intends to utilize any proceeds for
working capital purposes. See "Use of Proceeds" and "Business."
BROAD DISCRETION IN APPLICATION OF PROCEEDS
The management of the Company has broad discretion to adjust the
application and allocation of the net proceeds of this offering in order to
address changed circumstances and opportunities. As a result of the foregoing,
the success of the Company will be substantially dependent upon the discretion
and judgment of the management of the Company with respect to the application
and allocation of the net proceeds hereof. Pending use of such proceeds, any
proceeds of this offering will be invested by the Company in temporary,
short-term interest-bearing obligations. See "Use of Proceeds," "Business" and
"Management."
VOTING CONTROL; POTENTIAL ANTI-TAKEOVER EFFECT
Assuming none of the Warrants are exercised, the officers, directors
and principal stockholders of the Company beneficially own approximately 26.59%
of the Company's Common Stock. Accordingly, such persons may, with the votes of
the holders of an additional 23.41% of the Company's Common Stock, be able to
approve major corporate transactions including amending the Certificate of
Incorporation of the Company or the sale of substantially all of the Company's
assets, and may be able to elect all of
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the directors of the Company and to control the Company's affairs. This voting
control may have the effect of delaying or preventing a change in control of
the Company and may adversely affect the rights of the holders of the shares of
Common Stock of the Company. In addition, the Company is subject to a State of
Delaware statute regulating business combinations which may also hinder of
delay a change of control.
SUBSTANTIAL REGULATION
Substantial environmental laws have been enacted in the United States
and California in response to public concern over environmental deterioration.
These laws and the implementing regulations affect nearly every activity of the
Company. The principal federal legislation which has the most significant
effect on the Company's business includes the following: The Comprehensive
Environmental Response, Compensation and Liability Act; The Resource
Conservation and Recovery Act; The Clean Air Act; The Safe Drinking Water Act;
The Emergency Planning and Community Right-to-Know Act; The Clean Water Act and
The Toxic Substance Control Act. Failure by the Company to comply with
applicable federal and state environmental regulations could result in the
Company incurring substantial fines and penalties and/or having restraining
orders issued against it. See "Business - Regulation."
LIMITATION ON DIRECTOR LIABILITY
As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation limits the liability of directors to the Company
or its stockholders for monetary damages for breach of a director's fiduciary
duty, except for liability in four specific instances. These are for (i) any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional
misconduct or knowing violation of law, (iii) unlawful payments of dividends or
unlawful stock purchases or redemptions as provided in Section 174 of the
Delaware General Corporation Law, or (iv) any transaction from which the
director derived an improper personal benefit. As a result of the Company's
charter provision and Delaware law, stockholders may have more limited rights
to recover against directors for breach of fiduciary duty than as existing
prior to the enactment of the laws. See "Management - Limitation on Liability
of Directors."
REQUIREMENTS OF CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION IN
CONNECTION WITH THE EXERCISE OF THE WARRANTS WHICH MAY NOT BE EXERCISABLE AND
MAY THEREFORE BE VALUELESS
The Company will be able to issue shares of its Common Stock upon the
exercise of the Warrants and the Unit Purchase Option only if (i) there is a
current prospectus relating to the securities offered hereby under an effective
registration statement filed with the Securities and Exchange Commission, and
(ii) such Common Stock is then qualified for sale or exempt therefrom under
applicable state securities laws of the jurisdictions in which the various
holders of Warrants reside. There can be no assurance, however, that the
Company will be successful in maintaining a current registration statement.
After a registration statement or post-effective amendment thereto becomes
effective, it may require updating by the filing of one or more post-effective
amendments. A post-effective amendment is required (i) anytime after nine (9)
months subsequent to the effective date of the registration statement or most
recent post-effective amendment thereto when any information contained in the
prospectus is over sixteen (16) months old; (ii) when facts or events have
occurred which represent a fundamental change in the information contained in
the registration statement; or (iii) when any material change occurs in the
information relating to the plan or distribution of the securities registered
by such registration statement. The Company intends to qualify the sale of the
Common Stock in a limited number of states, although certain
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exemptions under certain state securities ("Blue Sky") laws may permit the
Warrants to be transferred to purchasers in states other than those in which
the Warrants were initially qualified. The Company will be prevented, however,
from issuing Common Stock upon exercise of the Warrants in those states where
exemptions are unavailable and the Company has failed to qualify the Common
Stock issuable upon exercise of the Warrants. The Company may decide not to
seek, or may not be able to obtain qualification of the issuance of such Common
Stock in all of the states in which the ultimate purchasers of the Warrants
reside. In such a case, the Warrants of those purchasers will expire and have
no value if such warrants cannot be exercised or sold. Accordingly, the market
for the Warrants may be limited because of the Company's obligation to fulfill
both of the foregoing requirements. See "Description of Securities."
ADDITIONAL AUTHORIZED SHARES AVAILABLE FOR ISSUANCE MAY ADVERSELY AFFECT THE
MARKET
The Company is authorized to issue 25,000,000 shares of its Common
Stock, $.001 par value per share. If all of the Warrants are exercised, there
will be a total of 6,268,332 shares of Common stock issued and outstanding.
However, this number does not include the exercise of the Unit Purchase Option
granted to the underwriter in the Company's initial public offering which
represents the right to acquire 128,000 Units at $8.25 per Unit. After
reserving a total of 128,000 shares of Common Stock for issuance upon the
exercise of the foregoing Unit Purchase Option, and 128,000 shares of Common
Stock for issuance upon exercise of the Warrants included in said Unit Purchase
Option and 100,000 shares for issuance upon the exercise of other options, the
Company will have 18,375,668 shares of authorized but unissued capital stock
available for issuance without further shareholder approval. As a result, any
issuance of additional shares of common stock may cause current shareholders of
the Company to suffer significant dilution which may adversely affect the
market. See "Dilution" and "Description of Securities."
WARRANTS SUBJECT TO REDEMPTION
The Warrants became exercisable commencing March 5, 1997. Each Class A
Warrant entitles the holder to purchase one share of Common Stock at $5.50 per
share during the four year period commencing March 5, 1997. The Class A
Warrants are redeemable by the Company for $.01 per Warrant, at any time after
March 5, 1997, upon thirty (30) days' prior notice, if the average closing
price or bid price of the Common Stock, as reported by the Nasdaq equals or
exceeds $8.75 per share, for any twenty (20) consecutive trading days within a
period of thirty (30) consecutive trading days ending within five (5) days
prior to the date of the notice of redemption. Upon thirty (30) days' written
notice to all holders of the Class A Warrants, the Company shall have the right
to reduce the exercise price and/or extend the term of the Class A Warrants in
compliance with the requirements of Rule 13e-4 to the extent applicable. See
"Description of Securities."
MARKET MAKER'S INFLUENCE ON THE MARKET MAY HAVE ADVERSE CONSEQUENCES
Although it has no legal obligation to do so, Biltmore from time to
time in the future may make a market in and otherwise effect transactions in
the Company's securities. To the extent Biltmore acts as market maker in the
securities, it may be a dominating influence in that market. The price and
liquidity of such securities may be affected by the degree, if any, of
Biltmore's participation in the market, inasmuch as a significant amount of
such securities may be sold to customers of Biltmore. Such customers
subsequently may engage in transactions for the sale or purchase of such
securities through or with Biltmore. Such market making activities, if
commenced, may be discontinued at any time or from
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time to time by Biltmore without obligation or prior notice. If a dominating
influence at such time, Biltmore's discontinuance may adversely affect the
price and liquidity of the securities.
Further, unless granted an exemption by the Securities and Exchange
Commission to its Rule 10b- 6, Biltmore may be prohibited from engaging in any
market making activities with regard to the Company's securities for the period
from two or nine business days prior to any solicitation of the exercise of
Warrants until the later of the termination of such solicitation activity or
the termination, by waiver or otherwise, of any right that Biltmore may have to
receive a fee for the exercise of Warrants following the solicitation. As a
result, Biltmore may be unable to continue to provide a market for the
Company's securities under certain periods while the Warrants are exercisable
which may adversely affect the price and liquidity of the securities.
EXERCISE OF WARRANTS MAY HAVE DILUTIVE EFFECT ON MARKET
The Class A Warrants to be issued in connection with this offering
will provide, during their term, an opportunity for the holder to profit from a
rise in the market price, of which there is no assurance, with resulting
dilution in the ownership interest in the Company held by the then present
shareholders. Holders of the Warrants most likely would exercise the Warrants
and purchase the underlying Common Stock at a time when the Company may be able
to obtain capital by a new offering of securities on terms more favorable than
those provided by such Warrants, in which event the terms on which the Company
may be able to obtain additional capital would be affected adversely.
"PENNY STOCK" REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY OF
SECURITIES
The Securities and Exchange Commission ("Commission") has adopted
regulations which generally define "penny stock" to be any equity security that
has a market price (as defined) less than $5.00 per share or an exercise price
of less than $5.00 per share, subject to certain exceptions. The Company's
securities are currently exempt from the definition of "penny stock" based upon
their being listed on the Nasdaq SmallCap Market. If the Company's securities
are removed from listing on Nasdaq at any time they may become subject to rules
that impose additional sales practice requirements on broker-dealers who sell
such securities to persons other than established customers and accredited
investors (generally, those person with assets in excess of $1,000,000 or
annual income exceeding $200,000, or $300,000 together with their spouse). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities and have received
the purchaser's written consent to the transaction prior to the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
rules require the delivery, prior to the transaction, of a risk disclosure
document mandated by the Commission relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Finally, monthly statements must be sent disclosing recent
price information for the penny stock held in the account and information on
the limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell the Company's securities and may
affect the ability of purchasers in this offering to sell the Company's
securities in the secondary market.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET
Certain of the Company's currently outstanding shares of common stock
are "restricted securities" and, in the future, may be sold upon compliance
with Rule 144, adopted under the Securities Act of 1933, as amended. Rule 144
provides, in essence, that a person holding "restricted securities" for a
period of one year may sell only an amount every three months equal to the
greater of (a) one percent of the Company's issued and outstanding shares, or
(b) the average weekly volume of sales during the four calendar weeks preceding
the sale. The amount of "restricted securities" which a person who is not an
affiliate of the Company may sell is not so limited, since non-affiliates may
sell without volume limitation their shares held for two years if there is
adequate current public information available concerning the Company. Assuming
that there is no exercise of any issued and outstanding Warrants, the Company
will have 3,596,332 shares of its Common Stock issued and outstanding, of which
1,224,332 shares are "restricted securities" and 2,372,000 are publicly traded
shares. Therefore, during each three month period, beginning June 4, 1996, a
holder of restricted securities who has held them for at least the one year
period may sell under Rule 144 a number of shares up to 12,243 shares.
Nonaffiliated persons who hold for the two-year period described above may sell
unlimited shares once their holding period is met. Notwithstanding the above,
the current officers, directors and principal stockholders have agreed, except
as noted below, not to sell, transfer, assign or issue any securities of the
Company for a period of twenty-four (24) months ending March 5, 1998, without
the consent of Biltmore. These restrictions have been released by Biltmore with
respect to a portion of such securities. The Company has also agreed not to
issue any additional securities other than as contemplated by this Prospectus
for a period of twenty-four (24) months without the consent of Biltmore.
Prospective investors should be aware that the possibility of sales
may, in the future, have a depressive effect on the price of the Company's
Common Stock in any market which may develop and, therefore, the ability of any
investor to market his shares may be dependent directly upon the number of
shares that are offered and sold. Affiliates of the Company may sell their
shares during a favorable movement in the market price of the Company's Common
Stock which may have a depressive effect on its price per share. See
"Description of Securities."
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USE OF PROCEEDS
There can be no assurance that any of the Warrants will be exercised.
In the event holders of Warrants elect to exercise the Warrants, Management
anticipates that the proceeds from such exercise would be contributed to
working capital of the Company. Nonetheless, the Company may at the time of
exercise allocate a portion of the proceeds to any other corporate purposes.
Accordingly, investors who exercise their Warrants will entrust their funds to
management, whose specific intentions regarding the use of such funds are not
presently and specifically known.
DILUTION
As of December 31, 1996, the Company had a net tangible book value of
$8,638,830, or $2.47 per share (based on the Company having 3,499,772 shares
outstanding as of that date), derived from the Company's balance sheet as of
that date. Net tangible book value per share means the tangible assets of the
Company, less all liabilities, divided by the number of shares of Common Stock
outstanding. After giving effect to the exercise of the Warrants at a price of
$5.50 per share, after deducting warrant solicitation fees and estimated
offering expenses, pro forma net tangible book value would have been
$22,701,990, or $3.68 per share. The result will be an immediate increase in
net tangible book value per share of $1.21 to existing shareholders and an
immediate dilution to new investors of $1.82 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>
<CAPTION>
<S> <C>
Exercise price of the Warrants $5.50
Net tangible book value per share, before the offering $2.47
Increase per share attributable to the sale by the Company of the
shares offered hereby $1.21
Pro forma net tangible book value per share, after the offering $3.68
Dilution per share to new investors $1.82
The above table assumes exercise of all of the outstanding Warrants.
</TABLE>
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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.
<TABLE>
<CAPTION>
Common Stock
-------------------
High Low
------- -------
<S> <C> <C>
1996:
First Quarter $ 8.375 $ 6.50
Second Quarter $ 9.50 $ 8.375
Third Quarter $ 9.50 $ 6.50
Fourth Quarter $ 7.00 $ 4.75
1997:
First Quarter $ 6.75 $ 4.50
Second Quarter $ 5.375 $ 5.00
(through April 9, 1997)
</TABLE>
On April 9, 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 32 holders of record of Common Stock (including entities
which hold stock in street name on behalf of other beneficial owners).
The Company has not paid any cash dividends on its Common Stock to
date. The Company anticipates that for the foreseeable future it will follow a
policy of retaining earnings, if any, in order to finance the expansion and
development of its business. Payment of dividends is within the discretion of
the Company's Board of Directors and will depend upon the earnings, capital
requirements and operating and financial condition of the Company, among other
factors.
Other than the foregoing, the Company does not anticipate the
declaration or payment of any dividends in the foreseeable future. There can be
no assurance that cash dividends of any kind will ever be paid.
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.
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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 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:
<TABLE>
<CAPTION>
Years Ended
December 31,
1996 1995
------------ ------------
Consolidated Combined
<S> <C> <C>
Sales $ 26,139,828 $ 28,089,919
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
============ ============
</TABLE>
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FISCAL 1996 COMPARED TO FISCAL 1995
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 out-sourcing to contracting
manufacturers such as the Company.
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.
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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.
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) a one-time financing charge of approximately $462,100 on
certain bridge loans that were made by the Company in the fourth quarter of
1995 to help fund its initial public offering, and (2) increased operating
expenses incurred to fund two new divisions which 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 expires May 1, 1997, and bears interest at
Mfrs.' base rate plus 1/2%. This facility permits the Company to borrow up to
$4,000,000 based on a stipulated percentage of contractually defined eligible
trade accounts receivable. The Company had $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). Management has since renegotiated
the loan agreements and its underlying covenants to the benefit of the Company.
In addition, the Company and TMCI have agreed to a term facility of up to
$2,500,000 available for equipment purchase, which will bear interest at TMCI's
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 $1,275,100, a decrease
in accounts payable of approximately $2,397,500, 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.
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<PAGE>
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 spent approximately
$1,115,000 of cash to purchase capital assets. The remainder of the 1996
expenditures have been financed through bank borrowings.
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.
BUSINESS
OVERVIEW
TMCI Electronics, Inc. (the "Company") was incorporated in the State
of Delaware on December 7, 1995 for the purpose of acquiring the businesses of
Touche Manufacturing, Inc. ("Touche") and Touche Electronics, Inc. ("TEI"). The
principal executive offices of the Company, Touche and TEI are located in San
Jose, California. Touche and TEI were principally owned by Rolando Loera, the
President and Chief Executive Officer of the Company. The Company acquired all
of the issued and outstanding shares of common stock of Touche and TEI on March
5, 1996 from Mr. Loera and all of the minority shareholders of Touche and TEI
pursuant to the terms of certain Stock Purchase Agreements dated December 28,
1995 (the "Stock Purchase Agreements").
Following the exchange of common stock of Touche and TEI contemplated
by the Stock Purchase Agreements, the Company's business became that of Touche
and TEI. The Company now derives its revenues from the operation of its wholly
owned subsidiaries, including Touche and TEI.
Touche and TEI provide custom manufacturing and value-added services,
respectively, to original equipment manufacturers ("OEMs"). Their customers are
concentrated into four (4) different segments of the Information Technology
Industry and include manufacturers of mini, mainframe, micro and personal
computers, telecommunications equipment, semiconductor manufacturing test
equipment and medical test equipment. Touche and TEI do not manufacture or
produce any products that are sold to
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<PAGE>
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.
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.
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<PAGE>
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 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
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<PAGE>
technology industry will grow, offering increased opportunities to companies
like Touche and TEI which are positioned to provide cost-effective
manufacturing services at competitive prices.
PEN INTERCONNECT INC.
On November 12, 1996, TEI acquired the net assets (accounts
receivable, inventory and capital equipment) of the San Jose-based wire cable
and harness manufacturing division of Pen Interconnect Inc. ("PII").
The acquired division is a wire cable harness manufacturer, producing
different types of cable and harnesses that are used by TEI and other
subcontractors in the production or original equipment products. TEI intends to
continue such business by operating it as a division.
The consideration paid for the acquisition consisted of (a) $2.0
million in cash; (b) two promissory notes in the principal amounts of $500,000
and $400,000, respectively; and (c) 134,172 shares of the Company's Common
Stock. The notes bear interest at the prime rate plus .5% and are payable over
periods of 48 and 24 months, respectively. TMCI may also be obligated to issue
up to an additional 13,417 shares of Common Stock in the event certain overdue
accounts receivable are collected.
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.
ENTERPRISE INDUSTRIES, INC.
On January 24, 1997, the Company acquired all of the outstanding
shares of capital stock of Enterprise Industries, Inc. ("EII"), a North
Hollywood, California based metal stamping manufacturing business. The purchase
price consisted of $1,000,000 in cash and the issuance of 96,560 shares of the
Company's Common Stock. EII will continue to operate under its present name as
a wholly-owned subsidiary of the Company. The President of Enterprise
Industries, Inc. has signed a five (5) year employment contract with the
company to manage that company's operations.
The principal executive offices of the Company are located at 1875
Dobbin Drive, San Jose, California 95133 and its telephone number is (408)
272-5700.
SEE "RISK FACTORS," "MANAGEMENT," "BUSINESS" AND "CERTAIN
TRANSACTIONS" FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED IN
EVALUATING THE COMPANY AND ITS BUSINESS.
MAJOR CUSTOMERS
Touche and TEI's customers include various information technology
industry related companies, such as Hewlett Packard Company, Lam Research
Corporation, Tandem Computers Incorporated, Applied Materials, Inc., KLA
Instruments Corporation, Varian Associates, Inc. and Teradyne, Inc. For the
year ended December 31, 1996, revenues derived from three customers (Lam
Research Corporation, Tandem Computers Incorporated and Hewlett Packard
Company) amounted to approximately 28%, 24%
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<PAGE>
and 13%, respectively, of total revenue, excluding intercompany sales. For the
year ended December 31, 1995, revenue from these three customers amounted to
33%, 18% and 19%, respectively, of total revenue, excluding intercompany sales.
For the year ended December 31, 1994, revenue from these three customers
amounted to approximately 29%, 26% and 13% of total revenue, excluding
intercompany sales. As the sales arrangements with these customers are
terminable upon short notice, the loss of any of them would have a material
adverse impact on the Company's revenues and profits, given the significant
percentage of revenues derived from these customers. The Company believes,
however, that the expansion of services offered to these customers through the
Company's vertical expansion will contribute toward the on-going relationship
with these customers.
MANUFACTURING
Touche and TEI's engineering, production and assembly facilities have
adequate space for their current operations, and also for the planned
implementation of clean room assembly, wire cable harness manufacturing and
metal stamping, and are capable of fabricating and assembling computers,
telecommunications equipment, semiconductor manufacturing test equipment and
medical test equipment. Touche and TEI maintain a comprehensive manufacturing,
assembly and quality control inspection program to ensure that all products
meet exacting customer requirements for performance and quality workmanship
prior to delivery. Touche and TEI are in the business of fabricating
custom-designed metal enclosures. This product and service cannot be
homogenized into one operation or manufacturing approach for its entire
production line. With each custom order received from a customer comes a
different list of requirements for manufacturing design, process and finish. In
addition, the manufacturing environment allows for the manufacture of both
prototype and production of the various types of customer products. To support
its operations, Touche and TEI have purchased a wide variety of sophisticated
automated machinery and shop equipment, components, tools and supplies from
proven outside vendors, distributors and service organizations.
MARKETING AND SALES
Touche and TEI's marketing strategy focuses on developing long-term
relationships with producers of computers, telecommunication equipment,
semiconductor manufacturing test equipment and medical test equipment. Touche
and TEI's customer base consists of manufacturers of computers, medical
equipment and test equipment markets and Touche and TEI intend to expand over
the next few years this customer base to include a greater number of
manufacturers of telecommunications equipment. Telecommunications equipment
sales is an area in which little has been done to penetrate the market on the
local level. However, the Company's marketing efforts will continue to reflect
the evolution of the principal industry segments of the information technology
industry.
Touche and TEI will continue to focus and concentrate on major
existing customers and to pursue new business from other potential customers in
evolving segments of the information technology industry. The ability of the
Company to maintain its relationships with its major existing customers shall
remain a significant factor in determining the future growth of the Company.
The Company intends to achieve growth through competitive pricing strategies,
expansion of existing turnkey capabilities and more aggressive direct sales
efforts. As a result of the limited and focused target market, Touche and TEI's
marketing efforts will rely primarily on direct sales efforts, which will
emphasize the Company's design-engineering and quality control manufacturing
capabilities.
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<PAGE>
Touche and TEI's sales activities are handled by a combination of
direct sales personnel and limited use of independent sales representatives,
who may also sell products of the Company's competitors. Because of the
complexity and analysis involved in the customer's design and purchase
decision, management emphasizes active interaction between the direct sales
staff, its independent sales representatives and the buyer or engineer
throughout the selling process.
SOURCES OF SUPPLY, MAJOR SUPPLIERS AND BACKLOG
The largest supplier of Touche and TEI is Lassen Electronics, Inc.
Purchases from this vendor accounted for 8.8% of the combined purchases of
Touche and TEI in fiscal 1996.
The raw materials, such as sheet metal, metal frames and other
electrical wire or cable components used in the development and manufacture of
Touche and TEI's customer products, are generally available from domestic
suppliers at competitive prices; fabrication of certain major components may be
subcontracted for on an as-needed basis. With the exception of other material
requirements, sheet metal may be purchased on an as-needed basis under a
consignment arrangement with suppliers. Touche and TEI do not have any long
term contracts for new materials. Touche and TEI have not experienced any
significant difficulty in obtaining adequate supplies to perform under their
respective contracts.
Touche and TEI have established operating policies that require the
development and maintenance of a second vendor source for purchasing materials
and supplies that are needed to perform under contract for their customers.
This purchasing requirement focuses on the prevention of potential problems
that might otherwise originate from a single supplier's financial condition.
Such policies allow greater flexibility in keeping purchasing costs down and
greater assurance that raw material is available in order to meet customer
contract and delivery requirements.
At December 31, 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 and TEI handle all customer service-related inquiries or
complaints through the sales staff who have been assigned to handle and manage
account relationships. This requirement enables the salesperson to monitor and
control the quality of production during the entire manufacturing process,
which is designed to help prevent production problems before shipment is made
to customers. Such efforts are supported by Touche and TEI's engineering
departments which are directly involved in the development process of the
products.
To ensure that adequate support is given to customers, each
salesperson has formal sales training augmented by direct participation in the
manufacturing process at Touche and TEI's facility and also in the installation
and acceptance tests at the customer's facility.
PATENT, TRADEMARK, COPYRIGHT AND PROPRIETARY RIGHTS
The Company does not have any patent or copyright applications
pending, because the Company does not offer or provide any original design work
that is not otherwise proprietary to the product
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<PAGE>
design-engineering of their customers. The Company owns common law trademark
rights to its "Touche" trademark and servicemark.
COMPETITION
The information technology industry (computers, telecommunications
equipment, semiconductor manufacturing test equipment and medical test
equipment) is highly competitive, involves rapid technological change and is
characterized by substantial competition. Touche and TEI's competitors range
from small firms to mid-sized local companies. Competition is generally based
on several factors, including quality of work, reputation, price and marketing
approach. Touche and TEI are established in the industry and maintain a strong
competitive presence by delivering high-quality work in a timely fashion within
the customer's budget constraints.
Touche and TEI offer full-service facility capabilities to customers,
which includes the capability of taking the development of an enclosure from
conception, to design, to prototype, to full fabrication of the finished
product. This process offers better control over quality, turnaround time and
delivery. This process also enables Touche and TEI to price their products
based on marketing its services as a full-service facility compared to
competitors who may offer the same services, but at different locations that
may be less efficient and less cost-effective to a customer.
Because of the continuing change by OEMs from manufacturers to
design-engineering and marketing organizations, companies like Touche and TEI
are receiving a much greater share of the overall manufacturing task of
products that are designed for manufacture by their customers. The process
itself removes more and more of the subcontracting and replaces it with a prime
contractor status gradually eliminating the need for submitting joint
subcontracting work proposals. By the Company reducing the number of
subcontractors, the customers benefit from the reduction in the turnaround time
and the maintenance of more efficient and quality based manufacturers. The
creation and maintenance of a "one-stop shop" manufacturing environment is
believed to be advantageous to Touche and TEI's success as an effective
competitor in the industry.
NEW PRODUCT SERVICE LINES OF BUSINESS
To continue to respond to their customers' needs and to strengthen and
diversify their competitive position in the marketplace, Touche and TEI intend
to introduce the additional service listed below. Neither Touche nor TEI has
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.
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<PAGE>
GOVERNMENT REGULATION
Substantial environmental laws have been enacted in the United States
and California in response to public concern over environmental deterioration.
These laws and the implementing regulations affect nearly every activity of
Touche and TEI. The principal federal and state legislation which has the most
significant effect on the Company's business includes the following: The
Comprehensive Environmental Response, Compensation and Liability Act; The
Resource Conservation and Recovery Act; The Clean Air Act; The Safe Drinking
Water Act; The Emergency Planning and Community Right-to-Know Act; The Clean
Water Act; and The Toxic Substance Control Act. Failure by the Company, Touche
or TEI to comply with applicable federal and state environmental regulations
could result in the Company incurring substantial fines and penalties and/or
having restraining orders issued against it.
EMPLOYEES
As of December 31, 1996, Touche and TEI employed approximately 283
persons, including the officers of the Company, all of whom are full-time
employees and none of whom are subject to collective bargaining agreements. Of
these full-time employees, 35 are engaged in administration and finance, 230 in
manufacturing, engineering and production, 7 in marketing and sales and 11 in
operations and development. Many of Touche and TEI's employees have overlapping
responsibilities in these job descriptions.
The Company believes that its combined future success will depend in
large measure upon the continued ability of Touche and TEI to recruit and
retain technical personnel. Competition for qualified technical personnel is
significant, particularly in the geographic area in which the Company, Touche
and TEI are located. Touche and TEI have never experienced a work stoppage. The
Company, Touche and TEI believe that their relationships with their employees
are good.
FACILITIES
Touche leases approximately 145,000 square feet of factory
manufacturing space in two adjacent buildings which are equipped with
state-of-the-art metal fabrication equipment. Touche leases approximately
123,000 square feet at 1875 Dobbin Drive, San Jose, California 95133, which
consists of 113,000 square feet in manufacturing space and approximately 10,000
square feet of office space. The 1875 Dobbin Drive lease term commenced on
January 1, 1993 and ends on April 20, 2013. In addition, TEI leases
approximately 78,000 square feet of manufacturing space at 1881-1899 Dobbin
Drive, San Jose, California 95133. The 1881-1899 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 lease agreements are on a triple
net basis with landlords.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of the Company are as
follows:
NAME AGE POSITION
---- --- --------
Rolando Loera 43 Chairman, President and Chief
Executive Officer; Director
Livino D. Ribaya, Jr. 48 Vice President - Manufacturing
Frank Ramirez III 41 Vice President - Engineering
Charles E. Shaw 52 Vice President - Chief Financial
Officer; Director
Robert Loera 30 Controller and Secretary; Director
Thomas F. Chaffin 39 Director
Dominic A. Polimeni 50 Director
Each of the directors of the Company holds office until the next
annual meeting of stockholders, or until their successors are elected and
qualified. At present, the Company's bylaws provide for not less than one
director nor more than five directors. Currently, there are five directors 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. 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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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.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual ------------
Compensation Securities
Name of Individual or --------------- 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 $150,000 -0- -0- -0-
</TABLE>
No options were granted to Mr. Loera during 1996.
- --------------
(1) Includes payments for Company car and employer 401K contributors.
<TABLE>
<CAPTION>
AGGREGATED OPTIONS/SAR EXERCISED IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Options/SARs at Options/SARs at
Acquired on Value FY-End(#) FY-End($)
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 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,
-32-
<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.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
Company's Common Stock owned on the date of February 28, 1997 by (i) each
person who is known by the Company to own beneficially more than five percent
(5%) of the Company's common stock; (ii) each of the Company's officers and
directors; and (iii) all officers and directors as a group. The percentage of
shares calculations have been based on there being 3,596,332 shares outstanding
on February 28, 1997.
<TABLE>
<CAPTION>
Number Percentage
Name and Address(1) Position With Company of Shares of Shares
- ---------------- --------------------- --------- ---------
<S> <C> <C> <C>
Rolando Loera Chairman, President and Chief 667,600(2) 18.56%
Executive Officer; Director
Frank Ramirez, III Vice President--Engineering 149,360 4.15%
Livino D. Ribaya, Jr. Vice President--Manufacturing 74,680 2.08%
Charles E. Shaw Vice President, Chief Financial -0- --
Officer; Director
Robert Loera Controller and Secretary; -0- --
Director
Thomas F. Chaffin Director -0- --
c/o Rosenblum, Parish
& Isaacs
160 West Santa Clara St.,
15th Floor
San Jose, CA 95113
Dominic A. Polimeni Director -0- --
c/o Gulfstream Financial
Group, Inc.
6400 Congress Avenue,
Suite 200
Boca Raton, FL 33487
Rolando Loera Trustee for Touche Employee 27,280(3) *
Stock Ownership Plan
</TABLE>
-33-
<PAGE>
<TABLE>
<CAPTION>
Number Percentage
Name and Address(1) Position With Company of Shares of Shares
- ---------------- --------------------- --------- ---------
<S> <C> <C> <C>
All Officers and Directors 918,920 25.55%
as a Group (7 Persons)
</TABLE>
* Less than 1%
(1) Unless otherwise noted, c/o TMCI Electronics, Inc., 1875 Dobbin Drive, San
Jose, CA 95133.
(2) Does not include options to purchase 100,000 shares of Common Stock of the
Company granted to Rolando Loera which vest on December 21, 1997.
(3) Mr. Loera shares investment power with respect to these shares.
-34-
<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 Copany issued 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.
-35-
<PAGE>
TPI also borrowed $303,325 from Touche in December, 1993. This loan
bears interest at 10% per annum, and principal and interest are payable in
equal monthly installments until satisfied. The principal balance on the loan
increased as a result of certain expenses of TPI advanced by Touche. The
outstanding balance of the loan as of December 31, 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.
-36-
<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. There are presently
3,596,332 issued and outstanding shares of Common Stock. As of February 28,
1997, there were approximately 20 stockholders of record of the Company.
Holders of the Common Stock do not have preemptive rights to purchase
additional shares of Common Stock or other subscription rights. The Common
Stock carries no conversion rights and is not subject to redemption or to any
sinking fund provisions. All shares of Common Stock are entitled to share
equally in dividends from sources legally available therefor when, as and if
declared by the Board of Directors and, upon liquidation or dissolution of the
Company, whether voluntary or involuntary, to share equally in the assets of
the Company available for distribution to stockholders. All outstanding shares
of Common Stock are validly authorized and issued, fully paid and
nonassessable, and all shares to be sold and issued as contemplated hereby,
will be validly authorized and issued, fully paid and nonassessable. The Board
of Directors is authorized to issue additional shares of Common Stock, not to
exceed the amount authorized by the Company's Certificate of Incorporation, and
to issue options and warrants for the purchase of such shares, on such terms
and conditions and for such consideration as the Board may deem appropriate
without further stockholder action. The above description concerning the Common
Stock of the Company does not purport to be complete. Reference is made to the
Company's Certificate of Incorporation and bylaws which are available for
inspection upon proper notice at the Company's offices, as well as to the
applicable statutes of the State of Delaware for a more complete description
concerning the rights and liabilities of stockholders.
Each holder of Common Stock is entitled to one vote per share on all
matters on which such stockholders are entitled to vote. Since the shares of
Common Stock do not have cumulative voting rights, the holders of more than
fifty percent (50%) of the shares voting for the election of directors can
elect all the directors if they choose to do so and, in such event, the holders
of the remaining shares will not be able to elect any person to the Board of
Directors.
CLASS A WARRANTS
There are currently 2,672,000 Class A Warrants ("Warrants")
outstanding. Each Warrant entitles the holder to purchase one share of Common
Stock at $5.50 per share during the four year period which commenced March 5,
1997. The Common Stock underlying the Warrants will, upon exercise of the
Warrants, be validly issued, fully paid and nonassessable. The Class A Warrants
are redeemable by the Company for $.01 per Warrant, at any time after March 5,
1997, upon thirty (30) days' prior written notice, if the average closing price
or bid price of the Common Stock, as reported by Nasdaq, equals or exceeds
$8.75 per share, for any twenty (20) consecutive trading days within a period
of thirty (30) consecutive days ending within five (5) days prior to the date
of the notice of redemption. Upon thirty (30) days' prior written notice to all
holders of the Class A Warrants, the Company shall have the right to reduce the
exercise price and/or extend the term of the Class A Warrants.
-37-
<PAGE>
The Warrants can only be exercised when there is a current effective
registration statement covering the shares of Common Stock underlying the
Warrants. If the Company does not or is unable to maintain a current effective
registration statement the Warrant holders will be unable to exercise the
Warrants and the Warrants may become valueless. Moreover, if the shares of
Common Stock underlying the Warrants are not registered or qualified for sale
in the state in which a Warrant holder resides, such holder might not be
permitted to exercise the Warrants. See "Risk Factors--Requirements of Current
Prospectus and State Blue Sky Registration in Connection with the Exercise of
the Warrants Which May Therefore Be Valueless."
Warrant certificates may be exchanged for new certificates of
different denominations, and may be exercised or transferred by presenting them
at the offices of the Transfer Agent. Holders of the Warrants may sell the
Warrants if a market exists rather than exercise them. However, there can be no
assurance that a market will develop or continue as to such Warrants. If the
Company is unable to qualify its common stock underlying such Warrants for sale
in certain states, holders of the Company's Warrants in those states will have
no choice but to either sell such Warrants or allow them to expire.
Each Warrant may be exercised by surrendering the Warrant certificate,
with the form of election to purchase on the reverse side of the Warrant
certificate properly completed and executed, together with payment of the
exercise price to the Warrant Agent. The Warrants may be exercised in whole or
from time to time in part. If less than all of the Warrants evidenced by a
Warrant certificate are exercised, a new Warrant certificate will be issued for
the remaining number of Warrants.
Holders of the Warrants are protected against dilution of the equity
interest represented by the underlying shares of common stock upon the
occurrence of certain events, including, but not limited to, issuance of stock
dividends. If the company merges, reorganizes or is acquired in such a way as
to terminate the Warrants, the Warrants may be exercised immediately prior to
such action. In the event of liquidation, dissolution or winding up of the
Company, holders of the Warrants are not entitled to participate in the
Company's assets.
For the life of the Warrants, the holders thereof are given the
opportunity, at nominal cost, to profit from a rise in the market price of the
common stock of the company. The exercise of the Warrants will result in the
dilution of the then book value of the Common Stock of the Company held by the
public investors and would result in a dilution of their percentage ownership
of the Company. The terms upon which the Company may obtain additional capital
may be adversely affected through the period that the Warrants remain
exercisable. The holders of these Warrants may be expected to exercise them at
a time when the Company would, in all likelihood, be able to obtain equity
capital on terms more favorable than those provided for by the Warrants.
Because the Warrants included in the Units being offered hereby may be
transferred, it is possible that the Warrants may be acquired by persons
residing in states where the Company has not registered, or is not exempt from
registration such that the shares of common stock underlying the Warrants may
not be sold or transferred upon exercise of the Warrants. Warrant holders
residing in those states would have no choice but to attempt to sell their
Warrants or to let them expire unexercised. Also, it is possible that the
Company may be unable, for unforeseen reasons, to cause a registration
statement covering the shares underlying the Warrants to be in effect when the
Warrants are exercisable. In that event, the Warrants may expire unless
extended by the Company as permitted by the Warrant because a registration
statement must be in effect, including audited financial statements for
companies acquired, in order for warrantholders to exercise their Warrants.
-38-
<PAGE>
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. This 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 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.
-39-
<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. 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.
None of the Company, Touche or TEI is a party to any other significant
legal proceedings and, to the best of the Company's information, knowledge and
belief, none is contemplated or has been threatened.
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,
included in the Registration Statement and this Prospectus have been included
herein in reliance on the report dated March 12, 1997, of Moore Stephens, P.C.,
independent certified public accountants, and upon the authority of such firm
as experts in accounting and auditing.
-40-
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors........................................... F-1
Consolidated Balance Sheet as of December 31, 1996....................... F-2 - F-3
Statements of Operations for the years ended December 31, 1996 and 1995 F-4
Statements of Stockholders' Equity....................................... F-5
Statements of Cash Flows for the years ended December 31, 1996 and 1995 F-6 - F-7
Notes to Financial Statements............................................ F-8 - F-19
</TABLE>
. . . . . . . . . . .
<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 the related
statements of operations, stockholders' equity, and cash flows for each of the
two 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 the results
of their operations and their cash flows for each of the two 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>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
CURRENT ASSETS:
Cash $ 145,845
Accounts Receivable - Net 2,526,816
Inventory 5,170,661
Prepaid Expenses and Other Current Assets 272,587
Deferred Income Taxes 187,991
Other Receivables 63,669
Notes Receivable - Stockholders 10,706
-----------
TOTAL CURRENT ASSETS 8,378,275
PROPERTY AND EQUIPMENT - NET 3,638,300
-----------
OTHER ASSETS:
Notes Receivable - Stockholders 155,520
Due from Stockholder 238,167
Due from Related Party 473,952
Other Assets 48,152
Goodwill 2,549,261
-----------
TOTAL OTHER ASSETS 3,465,052
TOTAL ASSETS $15,481,627
===========
</TABLE>
See Notes to Financial Statements.
F-2
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses $ 2,929,242
Due to Affiliate 30,634
Line of Credit 585,000
Notes Payable 796,867
-----------
TOTAL CURRENT LIABILITIES 4,341,743
-----------
LONG-TERM LIABILITIES:
Notes Payable - Net of Current Portion 2,064,273
Deferred Income Taxes 436,781
-----------
TOTAL LONG-TERM LIABILITIES 2,501,054
-----------
TOTAL LIABILITIES 6,842,797
-----------
COMMITMENTS AND CONTINGENCIES --
-----------
STOCKHOLDERS' EQUITY:
Common Stock, $.001 Par Value, 25,000,000 Shares
Authorized, 3,499,772 Issued and Outstanding 3,500
Additional Paid-in Capital 7,366,659
Retained Earnings 1,268,671
-----------
TOTAL STOCKHOLDERS' EQUITY 8,638,830
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $15,481,627
===========
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1996 1995
------------ ------------
[CONSOLIDATED] [COMBINED]
<S> <C> <C>
SALES - NET $ 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 [EXPENSE]:
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 18,999 534,200
------------ ------------
NET INCOME $ 148,337 $ 473,416
============ ============
EARNINGS PER SHARE:
Net Income Per Share $ .05 $ .25
============ ============
PRO FORMA NET INCOME [SEE NOTE 21] [UNAUDITED]:
Income Before Provision for Income Taxes $ 167,336 $ 1,007,616
Pro Forma Income Taxes 6,000 509,100
------------ ------------
PRO FORMA NET INCOME [UNAUDITED] $ 161,336 $ 498,516
============ ============
PRO FORMA NET INCOME PER SHARE [UNAUDITED]:
Income Before Provision for Income Tax Per Share $ .06 $ .53
Pro Forma Income Tax Per Share -- .27
------------ ------------
PRO FORMA NET INCOME PER SHARE $ .06 $ .26
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES 2,865,445 1,893,600
============ ============
See Notes to Financial Statements.
F-4
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK
------------------------- ADDITIONAL TOTAL
NUMBER OF PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
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>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
[CONSOLIDATED] [COMBINED]
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 148,337 $ 473,416
----------- -----------
Adjustments to Reconcile Net Income to
Net Cash [Used for] Provided by Operations:
Depreciation and Amortization 839,724 702,056
Deferred Income Taxes (15,465) 201,272
[Gain] on Sale of Equipment (139,465) --
Amortization of Deferred Loan Fees 28,500 114,000
Non-Cash Finance Charge 462,122 287,878
Provision for Bad Debts 85,000 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 1,991,543 (1,855,640)
Inventory (1,275,095) (800,439)
Prepaid Expenses (130,027) (104,192)
Other Receivables (63,669) --
Increase [Decrease] in:
Accounts Payable and Accrued Expenses (2,397,500) 2,087,105
Income Taxes Payable (258,168) 179,145
----------- -----------
Total Adjustments (872,500) 811,185
----------- -----------
NET CASH - OPERATING ACTIVITIES - FORWARD (724,163) 1,284,601
----------- -----------
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 (1,114,964) (343,956)
Proceeds from Sale of Equipment 197,650 --
Acquisition Costs (74,292) --
Acquisition of Cable Company (2,000,000) --
Advance Under Note Receivable 98,989 8,698
Due to Affiliate 4,914 --
----------- -----------
NET CASH - INVESTING ACTIVITIES - FORWARD $(3,070,629) $ (505,274)
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
[CONSOLIDATED] [COMBINED]
<S> <C> <C>
NET CASH - OPERATING ACTIVITIES - FORWARDED $ (724,163) $ 1,284,601
----------- -----------
NET CASH - INVESTING ACTIVITIES - FORWARDED (3,070,629) (505,274)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from Public Offering 6,036,798 --
Advances Under Line of Credit 2,684,742 51,513
Repayments of Line of Credit (3,744,318) --
Proceeds of Note Payable 2,018,190 137,085
Repayment of Bridge Loans (1,000,000) --
Repayment of Note Payable (2,021,705) (625,827)
Repayment of Capital Lease Obligations (734,742) (251,886)
Payments of Deferred Offering Costs -- (292,986)
Proceeds from Bridge Loans -- 1,000,000
Advance from Affiliates -- (100,182)
Advances Under Convertible Promissory Notes -- 6,144
Repayment of Convertible Promissory Note -- (18,432)
Common Stock Issued -- 1,000
----------- -----------
NET CASH - FINANCING ACTIVITIES 3,238,965 (93,571)
----------- -----------
NET [DECREASE] INCREASE IN CASH (555,827) 685,756
CASH - BEGINNING OF YEARS 701,672 15,916
----------- -----------
CASH - END OF YEARS $ 145,845 $ 701,672
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the years for:
Interest $ 316,567 $ 578,492
Income Taxes $ 468,419 $ 156,707
</TABLE>
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
See Note 4 with respect to acquisition of business.
See Note 15 for information on related party transactions.
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-7
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
[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 a
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.
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-8
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #2
- -------------------------------------------------------------------------------
[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 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 and $11,874 for the
years ended December 31, 1996 and 1995, 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 at December 31, 1996.
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 has been established. The Company believes that
its accounts receivable credit risk exposure beyond such allowance is limited.
Such assessment may be subject to change in the near term.
The Company had sales to three unrelated customers in the computer industry
approximating $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. The loss of one or more of these customers may have
a severe impact on the Company in the near term.
F-9
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #3
- -------------------------------------------------------------------------------
[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 [See Note 20B - Subsequent Events - 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,
------------
1996 1995
---- ----
<S> <C> <C>
Total Revenues $31,891,096 $33,228,923
Net Income $ 445,153 $ 608,922
Net Income Per Share $ .15 $ .31
</TABLE>
[5] INVENTORY
Inventory consisted of the following:
<TABLE>
<CAPTION>
December 31,
1996
-----------
<S> <C>
Raw Materials $ 3,015,968
Work-in Process 1,465,951
Finished Goods 688,742
-----------
TOTAL $ 5,170,661
----- ===========
</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.
F-10
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #4
- -------------------------------------------------------------------------------
[7] PROPERTY AND EQUIPMENT AND DEPRECIATION AND AMORTIZATION
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
December 31,
1996
----------
<S> <C>
Machinery and Equipment $5,036,652
Furniture and Fixtures 620,838
Transportation Equipment 223,397
Leasehold Improvements 117,699
----------
Total 5,998,586
Less: Accumulated Depreciation and Amortization 2,360,286
----------
TOTAL $3,638,300
----- ==========
</TABLE>
Depreciation and amortization expense amounted to $812,131 and $702,056 for the
years ended December 31, 1996 and 1995, 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. At December 31,
1996, the balance due the Company amounted to $473,952. Interest income on
these amounts approximated $30,000 for each of the years ended December 31,
1996 and 1995. 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 at December 31, 1996.
[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 20A]. 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.
F-11
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #5
- -------------------------------------------------------------------------------
[11] NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31,
1996
-----------
<S> <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 20B] $ 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
-----------
Total 2,861,140
Less: Current Portion 796,867
-----------
NONCURRENT PORTION $ 2,064,273
------------------ ===========
</TABLE>
The prime rate was 8.25% at December 31, 1996.
Current maturities on long-term debt at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
December 31,
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.
F-12
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #6
- ------------------------------------------------------------------------------
[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.
[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,
------------
1996 1995
--------- ---------
<S> <C> <C>
Current Tax Expense:
Federal $ 126,644 $ 354,200
State 10,120 66,900
--------- ---------
Totals 136,764 421,100
Less: Benefit of Net Operating Loss Carryforward (102,300) (86,100)
--------- ---------
Total Current Provision 34,464 335,000
--------- ---------
Deferred:
Federal 40,658 203,800
State (56,123) (4,600)
--------- ---------
Total Deferred Provision (15,465) 199,200
--------- ---------
TOTAL PROVISION FOR TAXES $ 18,999 $ 534,200
------------------------- ========= =========
</TABLE>
F-13
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #7
- -------------------------------------------------------------------------------
[14] INCOME TAXES [CONTINUED]
The components of the deferred tax liability as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred Tax Asset:
Alternative Minimum Tax Credits $ 59,717
Bad Debt Allowance 37,441
Inventory Capitalization 21,230
Unused State Tax Credit 69,603
---------
Deferred Tax Asset - Current 187,991
Deferred Tax Liabilities
Excess Tax Over Book Accumulated Depreciation -
Non-Current (436,781)
---------
NET DEFERRED TAX LIABILITIES $(248,790)
---------------------------- =========
</TABLE>
A reconciliation between the Company's effective tax rate and the U.S.
statutory rate follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
U.S. Statutory Rate Applied to Pretax Income 34% 34%
State Tax Provision - Net of Federal Tax Benefit 6 6
Effect of S Corporation Operations 13 2
Net Operating Loss Carryforward (42) --
Other -- 11
--- --
TOTAL EFFECTIVE TAX RATE 11% 53%
------------------------ === ==
</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
During 1995, the Company had advanced $98,989 to a company 100% owned by the
Company's sole stockholder. This note was payable in monthly installments of
$2,215, including interest at 10% per annum, maturing in August 1999. In
January 1996, the Company refinanced a note payable, whereby the landlord
assumed the outstanding balance of the note. In consideration of the
transaction, the Company canceled the outstanding note receivable from the
landlord and executed a note payable to the landlord in the amount of
approximately $291,000 which was satisfied in March 1996.
[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, the Plan owned
approximately .8% 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 and 1995
contributions were $5,036 and $1,945, respectively.
F-14
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #8
- -------------------------------------------------------------------------------
[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.
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 and $730,417 for the years ended
December 31, 1996 and 1995, 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.
F-15
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #9
- -------------------------------------------------------------------------------
[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.
[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-16
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #10
- -------------------------------------------------------------------------------
[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,
------------
1996 1995
---- ----
<S> <C> <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>
December 31,
1996
-----------
<S> <C>
Net Income:
As Reported $ 148,337
---------
Pro Forma $ 9,837
---------
Net Income Per Share:
As Reported $ .05
---------
Pro Forma $ --
---------
</TABLE>
F-17
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #11
- -------------------------------------------------------------------------------
[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 as of December 31, 1996:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
-------- -------
<S> <C> <C>
Due from Stockholder $ 238,167 $ 238,167
Note Receivable - Stockholders $ 166,226 $ 166,226
Due from Related Party $ 473,952 $ 473,952
Notes Payable - Net of Current Portion $2,064,273 $2,064,273
</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 EVENTS
[A] 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 an employment
contract with the President of Enterprise.
[B] 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
December 31, 1996, the Company has classified the promissory notes as maturing
under the original terms provided therein [See Note 11].
F-18
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #12
- -------------------------------------------------------------------------------
[21] PRO FORMA INCOME TAXES [UNAUDITED]
As of December 31, 1995, the Conversion of Debt to Equity, Stock Purchase
Agreements, and Public Offering [See Notes 2, 18C and 18D] had not occurred.
The pro forma effect of the income tax expense on the Company's net income if
all of these events had occurred at the beginning of the fiscal years presented
is shown on the combined statement of operations. The pro forma tax amounts
have been computed based on statutory rates in effect for the periods
presented.
[22] NEW AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ["FASB"] 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.
. . . . . . . . . . . . .
F-19
<PAGE>
===============================================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION
WITH THE OFFER MADE HEREBY. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER
THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH AN OFFER WOULD BE UNLAWFUL. ANY MATERIAL
MODIFICATION OF THE OFFERING WILL BE ACCOMPLISHED BY MEANS OF AN AMENDMENT TO
THE REGISTRATION STATEMENT.
---------------------
TABLE OF CONTENTS
---------------------
Page
Prospectus Summary..........................................................3
Risk Factors................................................................7
Use of Proceeds............................................................16
Dilution...................................................................16
Price Range of Common Stock and Dividend
Policy...................................................................17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations...............................................................17
Business...................................................................21
Management.................................................................29
Principal Stockholders.....................................................33
Certain Transactions.......................................................35
Description of Securities..................................................37
Legal Proceedings..........................................................40
Legal Matters..............................................................40
Experts....................................................................40
Index to Financial Statements................................................
Report of Independent Auditors............................................F-1
===============================================================================
===============================================================================
2,672,000 Shares of Common Stock
Issuable Upon Exercise of
Class A Warrants
-------------
128,000 Units
TMCI ELECTRONICS,
INC.
------------
PROSPECTUS
------------
April , 1997
===============================================================================
<PAGE>
PART TWO
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation and By-laws contain
provisions which reduce the potential personal liability of directors for
certain monetary damages and provide for indemnity of directors and other
persons. The Company is unaware of any pending or threatened litigation against
the Company or its directors that would result in any liability for which such
director would seek indemnification or similar protection.
Such indemnification provisions are intended to increase the
protection provided directors and, thus, increase the Company's ability to
attract and retain qualified persons to serve as directors. Because directors
liability insurance is only available at considerable cost and with low dollar
limits of coverage and broad policy exclusions, the Company does not currently
maintain a liability insurance policy for the benefit of its directors although
the Company may attempt to acquire such insurance in the future. The Company
believes that the substantial increase in the number of lawsuits being
threatened or filed against corporations and their directors and the general
unavailability of directors liability insurance to provide protection against
the increased risk of personal liability resulting from such lawsuits have
combined to result in a growing reluctance on the part of capable persons to
serve as members of boards of directors of public companies. The Company also
believes that the increased risk of personal liability without adequate
insurance or other indemnity protection for its directors could result in
overcautious and less effective direction and management of the Company.
Although no directors have resigned or have threatened to resign as a result of
the Company's failure to provide insurance or other indemnity protection from
liability, it is uncertain whether the Company's directors would continue to
serve in such capacities if improved protection from liability were not
provided.
The provisions affecting personal liability do not abrogate a
director's fiduciary duty to the Company and its shareholders, but eliminate
personal liability for monetary damages for breach of that duty. The provisions
do not, however, eliminate or limit the liability of a director for failing to
act in good faith, for engaging in intentional misconduct or knowingly
violating a law, for authorizing the illegal payment of a dividend or
repurchase of stock, for obtaining an improper personal benefit, for breaching
a director's duty of loyalty (which is generally described as the duty not to
engage in any transaction which involves a conflict between the interest of the
Company and those of the director) or for violations of the federal securities
laws. The provisions also limit or indemnify against liability resulting from
grossly negligent decisions including grossly negligent business decisions
relating to attempts to change control of the Company.
The provisions regarding indemnification provide, in essence, that the
Company will indemnify its directors against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with any action, suit or proceeding arising out of the
director's status as a director of the Company, including actions brought by or
on behalf of the Company (shareholder derivative actions). The provisions do
not require a showing of good faith. Moreover, they do not provide
indemnification for liability arising out of willful misconduct, fraud, or
dishonesty, for "short-swing" profits violations under the federal securities
laws, or for the receipt of illegal remuneration.
II-1
<PAGE>
The provisions diminish the potential rights of action which might
otherwise be available to shareholders by limiting the liability of officers
and directors to the maximum extent allowable under Delaware law and by
affording indemnification against most damages and settlement amounts paid by a
director of the Company in connection with any shareholders' derivative action.
However, the provisions do not have the effect of limiting the right of a
shareholder to enjoin a director from taking actions in breach of his fiduciary
duty, or to cause the Company to rescind actions already taken, although as a
practical matter courts may be unwilling to grant such equitable remedies in
circumstances in which such actions have already been taken. Also, because the
Company does not presently have directors liability insurance and because there
is no assurance that the Company will procure such insurance or that if such
insurance is procured it will provide coverage to the extent directors would be
indemnified under the provisions, the Company may be forced to bear a portion
or all of the cost of the director's claims for indemnification under such
provisions. If the Company is forced to bear the costs for indemnification, the
value of the Company stock may be adversely affected. In the opinion of the
Securities and Exchange Commission, indemnification for liabilities arising
under the Securities Act of 1933 is contrary to public policy and, therefore,
is unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an itemization of fees and expenses, payable from the
net proceeds of the offering, incurred by the Company in connection with the
issuance and distribution of the securities of the Company being offered
hereby. All fees and expenses are estimated except the SEC, NASD and Nasdaq
Registration and Filing Fees.
SEC Registration and Filing Fee......................................-0-
NASD Registration and Filing Fee.....................................-0-
Nasdaq Listing and Filing Fee........................................-0-
Financial Printing.................................................5,000
Transfer Agent Fees..................................................-0-
Accounting Fees and Expenses.......................................5,000
Legal Fees and Expenses...........................................22,000
Blue Sky Fees and Expenses........................................10,000
Miscellaneous.................................................... 3,000
-------
TOTAL................................................$45,000
=======
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following information sets forth all securities of the Company
sold by it within the past three (3) years, which securities were not
registered under the Securities Act of 1933, as amended:
The Company was incorporated in the State of Delaware on December 7,
1995. The Company has authorized capital of 25,000,000 shares of common stock,
$.001 par value. There are currently 3,499,772 shares of common stock issued
and outstanding. See "Principal Stockholders" and "Description of Securities."
On December 28, 1995, the Company issued 600,000 shares of its Common
Stock to Rolando Loera, Chairman, Chief Executive Officer and President of the
Company pursuant to the merger of the predecessor of the Company into the
Company in exchange for the cancellation of an equal number of shares in the
predecessor company. The predecessor corporation (TMCI Electronics, Inc.) was
organized 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 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following is a list of Exhibits filed herewith by TMCI
Electronics, Inc. as part of the SB-2 Registration Statement and related
Prospectus:
<TABLE>
<CAPTION>
<S> <C>
1.0 Form of Underwriting Agreement.(b)
1.1 Form of Selected Dealers Agreement, as amended.(b)
3.0 Certificate of Incorporation, filed with Delaware Secretary of State on December 7,
1995.(c)
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.(c)
3.3 Certificate of Merger.(c)
4.0 Specimen Copy of Common Stock Certificate.(c)
4.1 Form of Class A Warrant Certificate.(c)
4.2 [Intentionally omitted.]
4.3 Form of Underwriters' Purchase Option, as amended.(b)
4.4 Form of Warrant Agreement, as amended.(b)
5.0 Opinion of Gould & Wilkie.(a)
10.0 Employment Agreement, Rolando Loera, dated December 28, 1995.(c)
10.1 Bridge Loan Agreements and Promissory Notes.(c)
10.2 Subscription Paper, dated November 6, 1995.(c)
10.3 Stock Purchase Agreement, dated December 28, 1995 relating to Touche Manufacturing
Company, Inc.(c)
10.4 Stock Purchase Agreement dated December 28, 1995 relating to Touche Electronics,
Inc.(c)
10.5 Small Business Loan Agreement dated October 26, 1993 with related Guarantee of
Touche Manufacturing Company, Inc., Touche Electronics, Inc. and Rolando Loera.(c)
10.6 Lease Agreement dated January 1, 1993 relating to 1875 Dobbin Drive, San
Jose, CA.(c) 10.7 Lease Agreement dated October 25, 1993 relating to 1881-1899
Dobbin Drive, San Jose, CA.(c)
10.8 Lease Agreement dated June 21, 1995 relating to 1565-C Mabury Road, San Jose, CA.(c)
10.9 1995 Stock Option Plan.(c)
10.10 Touche Manufacturing Company, Inc. Employee Stock Ownership Plan.(c)
10.11 Convertible Promissory Notes, as amended, and Stock Purchase Option Agreements, as
amended, of Touche Manufacturing Company, Inc. and Touche Electronics, Inc.(b)
10.12 Asset Purchase Agreement dated November 1, 1996 by and among Pen Interconnect, Inc.,
Touche Electronics, Inc. and TMCI Electronics, Inc.(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)
21.0 Subsidiaries of the Registrant.(d)
23.0 Consent of Gould & Wilkie is contained as Exh.5.0.(a)
23.1 Consent of Moore Stephens, P.C.
23.2 Consent of Dominic A. Polimeni.(a)
- --------------
(a) Incorporated by reference to Amendment No. 2 to the Registration Statement, as filed with the
SEC on March 4, 1996.
(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 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").
(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.
</TABLE>
II-4
<PAGE>
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to
participating broker-dealers, at the closing, certificates in such
denominations and registered in such names as required by the participating
broker-dealers, to permit prompt delivery to each purchaser.
The undersigned Registrant also undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement;
Provided, however, that paragraphs (a)(1)(i)
and (a)(1)(ii) do not apply if the registration
statement is on Form S-3 or Form S-8, and the
information required to be included in a
post-effective amendment by those paragraphs is
contained in periodic reports filed by the
registrant pursuant to section 13 or section
15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities
offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
preceding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form SB-2 and authorized
this amendment to the registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in San Jose, California, on April 9,
1997. .
TMCI ELECTRONICS, INC.
By: /s/ Rolando Loera
------------------------------
Rolando Loera
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed by the following
persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Rolando Loera Chairman, President, Chief April 9, 1997
- --------------------------- Executive Officer, Director
[Principal Executive Officer]
/s/ Charles E. Shaw Vice President, Chief Financial April 9, 1997
- --------------------------- Officer, Director [Principal
Financial Officer]
/s/ Robert Loera Controller, Secretary, Director April 9, 1997
- --------------------------- [Principal Accounting Officer]
Director
- ---------------------------
Thomas F. Chaffin
/s/ Dominic A. Polimeni Director April 9, 1997
- ---------------------------
Dominic A. Polimeni
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<S> <C>
1.0 Form of Underwriting Agreement.(b)
1.1 Form of Selected Dealers Agreement, as amended.(b)
3.0 Certificate of Incorporation, filed with Delaware Secretary of State on December 7,
1995.(c)
3.1 By-laws.(c)
3.2 Agreement of Merger between TMCI Electronics, Inc., a California corporation, and
TMCI Electronics, Inc., a Delaware corporation.(c)
3.3 Certificate of Merger.(c)
4.0 Specimen Copy of Common Stock Certificate.(c)
4.1 Form of Class A Warrant Certificate.(c)
4.2 [Intentionally omitted.]
4.3 Form of Underwriters' Purchase Option, as amended.(b)
4.4 Form of Warrant Agreement, as amended.(b)
5.0 Opinion of Gould & Wilkie.(a)
10.0 Employment Agreement, Rolando Loera, dated December 28, 1995.(c)
10.1 Bridge Loan Agreements and Promissory Notes.(c)
10.2 Subscription Paper, dated November 6, 1995.(c)
10.3 Stock Purchase Agreement, dated December 28, 1995 relating to Touche Manufacturing
Company, Inc.(c)
10.4 Stock Purchase Agreement dated December 28, 1995 relating to Touche Electronics,
Inc.(c)
10.5 Small Business Loan Agreement dated October 26, 1993 with related Guarantee of
Touche Manufacturing Company, Inc., Touche Electronics, Inc. and Rolando Loera.(c)
10.6 Lease Agreement dated January 1, 1993 relating to 1875 Dobbin Drive, San
Jose, CA.(c) 10.7 Lease Agreement dated October 25, 1993 relating to 1881-1899
Dobbin Drive, San Jose, CA.(c)
10.8 Lease Agreement dated June 21, 1995 relating to 1565-C Mabury Road, San Jose, CA.(c)
10.9 1995 Stock Option Plan.(c)
10.10 Touche Manufacturing Company, Inc. Employee Stock Ownership Plan.(c)
10.11 Convertible Promissory Notes, as amended, and Stock Purchase Option Agreements,
as amended, of Touche Manufacturing Company, Inc. and Touche Electronics, Inc.(b)
10.12 Asset Purchase Agreement dated November 1, 1996 by and among Pen Interconnect, Inc.,
Touche Electronics, Inc. and TMCI Electronics, Inc.(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)
21.0 Subsidiaries of the Registrant.(d)
23.0 Consent of Gould & Wilkie is contained as Exh.5.0.(a)
23.1 Consent of Moore Stephens, P.C.
23.2 Consent of Dominic A. Polimeni.(a)
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(a) Incorporated by reference to Amendment No. 2 to the Registration Statement, as filed with the
SEC on March 4, 1996.
(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 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").
(d) Incorporated by reference to Post-Effective Amendment No. 1 to the Registration Statement, as
filed with the SEC on March 21, 1997.
</TABLE>
<PAGE>
(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>
EXHIBIT 23.1
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Post-Effective Amendment No. 2 to the
Registration Statement (No. 33-80973) on Form SB-2 of our report dated March
12, 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."
On July 1, 1996, the firm Mortenson and Associates, P.C. changed its
name to Moore Stephens, P.C.
MOORE STEPHENS, P.C.
Certified Public Accountants
Cranford, New Jersey
April 9, 1997
