U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[x/] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
Commission file number 0-27510
TMCI Electronics, Inc.
(Name of small business issuer in its charter)
Delaware 77-0413814
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
1875 Dobbin Drive, San Jose, CA 95133
(Address of principal executive offices)(Zip Code)
Issuer's telephone number (408) 272-5700
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Units
(Title of Class)
Common Stock, par value $.001 per share
(Title of Class)
Class A Warrants
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No
The registrant has been unable to file the financial statements required to be
with the registrant's current report on Form 8-K dated November 27, 1996.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
State issuer's revenues for its most recent fiscal year. $26,139,828
State the aggregate market value of the voting stock held by non-affiliates
computed by such reference to the price at which the stock was sold, or the
average bid and asked prices of such stock, as of a specified date within the
past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act):
$15,675,428 as of March 20, 1997
State the number of shares outstanding of each issuer's classes of common
equity, as of the latest practicable date. 3,596,332 as of March 20, 1997.
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
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PART I
This Form 10-KSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results and the timing of
certain events could differ materially from those projected in the
forward-looking statements as a result of difficulties in product development,
sales, competition, changes in the economy and other unforeseen events. In the
event that this annual report is used in connection with an investment in TMCI
Electronics, Inc., prospective investors should carefully consider the
possibility that forward-looking statements discussed herein may differ
materially from the actual operating results.
Item 1. 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 Touche and TEI
as its wholly owned subsidiaries.
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 purchased the net assets of the San Jose, California Division
of Pen Interconnect, Inc., Salt Lake City, Utah, a manufacturer of wire cable,
pursuant to the terms of the Asset Purchase Agreement dated November 1, 1996
(the "Asset Purchase Agreement"). Following the acquisition of the net assets
contemplated by the Asset Purchase Agreement, the San Jose Division of Pen
Interconnect, Inc. became an operating division of TEI, a wholly owned
subsidiary of the Company (See Item 3. Legal Proceedings).
TEI's new operating cable division provides the Company with more
diversity and cost-effective production capabilities which enables the Company
to be more competitive in the manufacture, assembly, and delivery of products
and services to OEM customers.
In January 1997, the Company acquired the capital stock of Enterprise
Industries, Inc., a metal stamping business (See Item 6. Management's Discussion
and Analysis and Plan of Operations).
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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 with 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 the manufacture 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.
Since its formation in early 1993, TEI has provided installation of cable
and harness assembly service to OEM customers. In an effort to obtain better
prices for the wire cable and harness materials being assembled, on November 1,
1996, TEI acquired the net assets (accounts receivable, inventory and capital
equipment) of Pen Interconnect, Inc.'s ("PII") San Jose-based wire cable and
harness manufacturing division. The acquired division produces 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 the business
as one of its divisions.
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. By bringing the wire cable manufacturing
capability in-house, combined with the installation of cable and harness
assembly services (value-added turnkey services), TEI is placed in a much
stronger position to compete more effectively in the marketplace against
competitive companies. With the addition of the wire cable manufacturing
capability, TEI now believes that it has the capacity and competitive edge over
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its rivals, and a step up with its customers in delivering products and services
in a very cost-conscious and price sensitive industry.
The asset purchase and integration of the wire cable manufacturing
business into TEI is treated as an operating division. Therefore, TEI will
continue operating with two separate divisions:
Turnkey Division: Provider of cable and harness assembly and installation
services
Cable Division: Manufacturer of wire cable that is used to produce
cable and harness for installation.
The contract manufacturing of custom-fabricated metal cabinets or
enclosures, combined with the capability to manufacture wire cable and to use
and provide this same cable and harness assembly services, enables Touche and
TEI to attract and retain customer business that they would not have otherwise
obtained, thereby enhancing their competitive position in the marketplace.
Subsequent to the purchase of the assets of the San Jose Division of Pen
Interconnect, Inc., a dispute develop over the valuation of inventory which is
currently scheduled to be resolved by Arbitration Proceedings (See Item 3. Legal
Proceedings).
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 business of Touche and TEI, in providing customers with custom
designed and manufactured products or services, comprises 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.
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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.
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, and Varian Associates, Inc, and Teradyne, Inc. For the year ended
December 31, 1996, revenues derived from three customers (Lam Research
Corporation, Tandem Computers Incorporated and Hewlett Packard Company) amounted
to approximately 28%, 24% and 13%, respectively, of total revenue, excluding
intercompany sales. For the year ended December 31, 1995, revenue from 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
continues to believe, 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, which includes the newly acquired
cable harness manufacturing business, and also the planned acquisition of metal
stamping and the future implementation of clean room assembly. Touche and TEI
continue to be capable of fabricating and assembling computers,
telecommunications equipment, semiconductor manufacturing test equipment and
medical test equipment. Touche and TEI continue to 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.
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Marketing and Sales
Touche and TEI's marketing strategy continue to be focused on developing
long-term relationships with producers of computers, telecommunications
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 continues to make great strides in the
telecommunications area, and it is expected that its 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 continue to rely primarily on its direct sales efforts, which
emphasizes the Company's design-engineering and quality control manufacturing
capabilities.
Touche and TEI's sales activities continue to be 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 suppliers of Touche and TEI are Teradyne Connection Systems
and Lassen Electronics. Purchases from this vendor accounted for approximately
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.
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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, along with an inside sales support staff that provides daily
support services to the sales staff. The inside sales support staff works
directly with sales staff by handling customer complaints and coordinating
timely delivery of materials, and ensuring a timely delivery of products to
customers. This support requirement allows the salesperson to monitor and
control the quality of production during the entire manufacturing process, which
is designed to help prevent production problems before shipment is made to
customers. Such efforts are supported by Touche and TEI's engineering
departments which are directly involved in the development process of the
products.
To ensure that adequate support is given to customers, each salesperson
has formal sales training augmented by direct participation in the manufacturing
process at Touche and TEI's facility and also in the installation and acceptance
tests at the customer's facility.
Patent, Trademark, Copyright and Proprietary Rights
The Company does not have any patent or copyright applications pending,
because the Company does not offer or provide any original design work that is
not otherwise proprietary to the product design-engineering of their customers.
The Company owns common law trademark rights to its "Touche" trademark and
service mark.
Competition
The information technology industry (computers, telecommunications
equipment, semiconductor manufacturing test equipment, and medical test
equipment) remains highly competitive, and continues to involve 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 include 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 larger 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.
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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.
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.
Item 2. Description of Property
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
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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 (See
Note 17 in the Notes to Financial Statements).
Item 3. 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 [See Note 11].
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.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the security holders during
the fourth quarter of the fiscal year covered by this report.
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock is traded on the NASDAQ Small Cap Market under
the symbol "TMEI."
The following table sets forth the reported high and low bid quotations of
the Common Stock for the periods indicated. Such quotations reflect inter-dealer
prices without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
Common Stock
High Low
1996:
First Quarter $ 8.375 $ 6.50
Second Quarter $ 9.50 $8.375
Third Quarter $ 9.50 $ 6.50
Fourth Quarter $ 7.00 $ 4.75
1997:
First Quarter $ 6.75 $6.375
(through March 20, 1997)
On March 20, 1997, the closing bid price for the Company's Common Stock as
reported on the NASDAQ Smallcap Market system was $5.75. On that date there were
approximately 30 holders of record of Common Stock (including entities which
hold stock in street name on behalf of other beneficial owners).
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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.
Item 6. Management's Discussion and Analysis and Plan of Operation
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.
Plan of Operations
The Company intends to continue the operation of Touche and TEI and to
introduce new competitive products and services for its existing and prospective
customers. These products and services, which include Clean Room Assembly, Metal
Stamping, and Wire Cable and Harness Assemblies Manufacturing, will be developed
in-house or through the acquisition of an existing company or companies.
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 net assets (accounts receivable, inventory and capital equipment) of the San
Jose based wire and cable harness manufacturing division of Pen Interconnect,
Inc. In January 1997, the Company acquired Enterprise Industries, Inc., a metal
stamping business.
Results of Operations
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.
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The following table sets forth the statements of operations of the Company
for the periods indicated:
Years Ended
December 31,
1 9 9 6 1 9 9 5
Consolidated Combined
Sales $ 26,139,828 $28,089,919
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
============ ==========
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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.
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
11
<PAGE>
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.
Capital Resources and Liquidity
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.
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.
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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.
Item 7. Financial Statements
The financial statements required under this item are attached to
this report.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure - None
13
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PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons:
Compliance with Section 16(a) of the Exchange Act.
A. 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
Dominic A. Polimeni 50 Director
Thomas F. Chaffin 39 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
such director's 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 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
positions 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 an LL.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 involved with acquisitions,
divestitures, corporate finance and corporate management for more than fifteen
years. Previously, he practiced as a CPA for more than twelve years. Since
October of 1994, Mr. Polimeni has been the Chairman and Chief Executive Officer
of Quest Electronic Hardware, Inc., a distributor of fasteners and electronic
hardware sold to electronic equipment manufacturers. Mr. Polimeni has also been
the President and Chief Operating Officer of Questron Technology, Inc., a
publicly traded company which owns Quest, since March 31, 1995 and Chairman and
Chief Executive Officer of Questron since February, 1996. He has also been a
Managing Director of Gulfstream Financial Group, Inc., a financial consulting
and investment banking firm, since 1990. He held the position of Chief Financial
Officer of Arrow Electronics, Inc., an international electronics distribution
company traded on the New York Stock Exchange, for four years from 1986 to 1990.
He also held several other positions, including general management positions,
with Arrow over an eight-year period from 1981 to 1990. He has held the position
of Chief Operating Officer of Fugazy Express, Inc., a New York based
transportation company, in its start-up phase, and was a Partner in the New York
office of Arthur Young & Company. He holds a BBA 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.
Mr. Chaffin 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 an 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.
B. Compliance with Section 16(a)
Section 16 (a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who owe more ;than 10% of a
registered class of the Company's equity securities, to file reports of
ownership of equity securities of the Company with the Securities Exchange
Commission and the National Association of Securities Dealers. Officers,
directors and greater-than-ten
15
<PAGE>
percent shareholders are required by SEC regulation to furnish the Company with
copies of all Section 16 (a) forms that they file.
Based solely on a review of the copies of Forms 3, 4, and 5 and amendments
thereto furnished to the Company, or written representations from certain
reporting persons that such persons have filed on a timely basis all reports
required by Section 16 (a), and without researching or making any inquiry
regarding delinquent Section 16 (a) filings, the Company believes that, during
the fiscal year ended December 31, 1996, an initial Statement of Beneficial
Ownership on Form 3 was filed on a non-timely basis by Mr. Polimeni and Thomas
F. Chaffin and that a Change of Beneficial Ownership on Form 4 was filed on a
non-timely basis by Rolando Loera.
Item 10. Executive Compensation
The following table sets forth remuneration paid by the Company, Touche
and TEI during fiscal years 1994, 1995 and 1996 to the named officers and
directors of the Company. For the periods shown, no other executive officer
received remuneration in excess of $100,000 per annum.
Summary Compensation Table
Long Term
Compensation
Name of Individual or Annual Securities
Number of Compensation Underlying Other
Persons in GroupPosition with CompanyYear Salary Bonus Options/SARs(#) Compens
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 $150,000 -0- -0- -0-
No options were granted to Mr. Loera during 1996.
(1) Includes payments for Company car and employer 401K contributions.
Aggregated Options/SAR Exercised in Last Fiscal Year and FY-End Option/SAR
Values
Number of SecuritiesValue of Unexercised
Underlying Unexercised In-the-Money
Shares Options/SARs at Options/SARs at
Acquired on Value FY-End(#) FY-End($)
Name Exercise(#)Realized($) Exercisable/ Exercisable/
Unexercissable Unexercisable
Rolando Loera -0- -0- 0/100,000 0/593,000.00(1)
(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.
16
<PAGE>
Employment Agreement
The Company has entered into an employment agreement ("Agreement") dated
as of December 28, 1995 with Rolando Loera. The term of employment commenced on
March 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. Loera to
repay the $473,952 loan TEI to Touche Properties, Inc. referred to in Item 12
below. 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.
17
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
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.
:
Name and Position Number Percentage
Address(1) With Company Of SharesOf Shares(2)
Rolando Loera Chairman, President and Chief Executive
Officer; Director 667,600(2) 18.56%
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 Officer;
Director -0- -0-
Robert Loera Controller and Secretary; Director -0- -0-
Dominic A. Polimeni Director 37,340 1.04%
c/o Gulfstream Financial
Group, Inc.
6400 Congress Avenue
Suite 200
Boca Raton, FL 33487
Thomas S. Chaffin
Rosenblum, Parish and Isaacs
1600 W. Santa Clara Street.
San Jose, CA 95113 -0- -0-
Rolando Loera Trustee for Touche Employee Stock
Ownership Plan 27,280 --%
All Officers and Directors
as a Group (7 persons) 956,260 26.59%
* Less than 1%
(1) Unless otherwise noted, c/o TMCI Electronics, Inc., 1875 Dobbin Drive,
San Jose, CA 95133.
(2) Mr. Loera shares investment power with respect to 21,000 of these shares.
Does not include options to purchase 100,000 shares of Common Stock
granted to Rolando Loera which vest on December 21, 1997.
18
<PAGE>
Item 12. Certain Relationships and Related Transactions
The Company was incorporated in the State of Delaware on December 7, 1995,
under the name TMCI Electronics, Inc. A predecessor of the Company was organized
under the laws of the State of California ("TMCI California") on September 26,
1995 and was merged into the Company on December 28, 1995.
Mr. Loera was originally issued 600,000 shares of TMCI California's common
stock for $1,000. Upon the merger of TMCI California into the Company, Mr. Loera
was issued 600,000 shares of the Company's Common Stock in exchange for his
shares of TMCI California.
On March 16, 1994, $50,000 and on April 1, 1994, $25,000 was advanced to
Touche by Frank Ramirez III and Livino Ribaya, Jr., employees of Touche and TEI,
in exchange for convertible promissory notes bearing interest at 7.382% and
6.75% per annum and payable in monthly installments of $920 and $979,
respectively, through 2009. Identical loans were made to TEI on the same dates
by the same employees. In June 1995, $25,000 was advanced to each of Touche and
TEI by Jose Antonio Agredano in exchange for a convertible promissory note
bearing interest at 10% per annum and payable in monthly installments of $950.
All of these notes were converted into shares of Touche and TEI immediately
prior to the Effective Date of the Stock Purchase Agreements described below.
On December 30, 1996, the Company 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.
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.
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<PAGE>
In addition, in 1993 Touche made loans to Rolando Loera aggregating
$87,190.39. Such loans bear 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.
Item 13. Exhibits and Reports on Form 8-K.
(a) Financial Statements and Exhibits.
1. The financial statements listed on the accompanying index to financial
statements are filed as part of this annual report.
2. 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)
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 Touch 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
Guarantees 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)
10.10Touche Manufacturing Company, Inc. Employee Stock Option Plan.(c)
10.11Convertible Promissory Notes, as amended, and Stock Purchase
Option Agreements, as amended, of Touche Manufacturing Company,
Inc. and Touche Electronics, Inc.(b)
21.0 Subsidiaries of the Registrant.(d)
27.0 Financial Data Schedule.
20
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(a) Incorporated by reference to Amendment No. 2 to the Registration
Statement, ad 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 Registrant's 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) Asset Purchase Agreement dated November 1, 1996 by and among Pen
Interconnect, Inc., Touche Electronics, Inc. and TMCI
Electronics, Inc., incorporated by reference to Exhibit 1.0 to
the Registrant's Form 8-K filed with the Securities and Exchange
Commission on November 27, 1996.
(f) Stock Purchase Agreement dated effective as of January 1, 1997 by
and among TMCI Electronics, Inc. and the Shareholders of
Enterprise Industries, Inc., incorporated by reference Exhibit
2.0 the Registrant's Form 8-K filed with the Securities and
Exchange Commission on February 7, 1997.
21
<PAGE>
SIGNATURE PAGE
In accordance with Section 13(a) or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TMCI Electronics, Inc.
By:/s/Rolando Loera
ROLANDO LOERA
Chairman, President and
Chief Executive Officer
Date: March 26, 1997
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Rolando Loera By:/s/Dominic A. Polimeni
ROLANDO LOERA, Chairman, DOMINIC A. POLIMENI, Director
President and Chief Executive Officer
Date: March 26, 1997 Date: March 26, 1997
By: /s/ Charles E. Shaw By:/s/Thomas F. Chaffin
CHARLES E. SHAW, Vice President THOMAS F. CHAFFIN, Director
Chief Financial Officer, Director
Date: March 26, 1997 Date: March 26, 1997
By: /s/Robert Loera
ROBERT LOERA, Controller, Secretary
and Director
Date: March 26, 1997
22
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
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 1F-4
Statements of Stockholders' Equity.............................. F-5
Statements of Cash Flows for the years ended December 31, 1996 and 1F-6 - F-7
Notes to Financial Statements................................... F-8 - F-19
. . . . . . . . . . .
<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.
- ------------------------------------------------------------------------------
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
See Notes to Financial Statements.
F-2
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996.
- ------------------------------------------------------------------------------
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
See Notes to Financial Statements.
F-3
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
Years ended
December 31,
1 9 9 6 1 9 9 5
------- -------
[Consolidated][Combined]
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>
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
========= ======== ========= ========== ==========
See Notes to Financial Statements.
F-5
</TABLE>
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
Years ended
December 31,
1 9 9 6 1 9 9 5
------- -------
[Consolidated] [Combined]
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)
See Notes to Financial Statements.
F-6
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
Years ended
December 31,
1 9 9 6 1 9 9 5
------- -------
[Consolidated] [Combined]
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
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.
Year ended
December 31,
1 9 9 6 1 9 9 5
------- -------
Total Revenues $31,891,096 $33,228,923
Net Income $ 445,153 $ 608,922
Net Income Per Share $ .15 $ .31
[5] Inventory
Inventory consisted of the following:
December 31,
1 9 9 6
Raw Materials $ 3,015,968
Work-in Process 1,465,951
Finished Goods 688,742
-----------
Total $ 5,170,661
----- ===========
[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:
December 31,
1 9 9 6
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
----- ===========
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:
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
December 31,
1996
Total 2,861,140
Less: Current Portion 796,867
Noncurrent Portion $ 2,064,273
------------------ ===========
The prime rate was 8.25% at December 31, 1996.
Current maturities on long-term debt at December 31, 1996 are as follows:
December 31,
1997 $ 796,867
1998 828,510
1999 699,116
2000 518,138
2001 18,509
Thereafter --
-----------
Total $ 2,861,140
----- ===========
[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:
December 31,
1 9 9 6 1 9 9 5
------- -------
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
------------------------- =========== ===========
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:
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)
---------------------------- ===========
A reconciliation between the Company's effective tax rate and the U.S. statutory
rate follows:
1 9 9 6 1 9 9 5
------- -------
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%
------------------------ ====== ======
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:
Related Party Third Party
Leases Leases
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
----- =========== ===========
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:
Remaining
Contractual Exercise
Shares Price Life Price
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 -- --
------------------------------- ========== =========
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:
December 31,
1 9 9 6 1 9 9 5
Risk-free Interest Rate N/A 5.87%
Expected Life N/A 6 Years
Expected Volatility N/A 82.07%
Expected Dividends None
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:
December 31,
1 9 9 6
Net Income:
As Reported $ 148,337
------------
Pro Forma $ 9,837
------------
Net Income Per Share:
As Reported $ .05
------------
Pro Forma $ --
------------
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:
Carrying Fair
Amount Value
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
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>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> year
<FISCAL-YEAR-END> dec-31-1996
<PERIOD-END> dec-31-1996
<CASH> 145,845
<SECURITIES> 0
<RECEIVABLES> 2,526,816
<ALLOWANCES> 0
<INVENTORY> 5,170,661
<CURRENT-ASSETS> 8,378,275
<PP&E> 3,638,300
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,481,627
<CURRENT-LIABILITIES> 4,341,743
<BONDS> 0
0
0
<COMMON> 3,500
<OTHER-SE> 8,635,330
<TOTAL-LIABILITY-AND-EQUITY> 15,481,627
<SALES> 26,139,828
<TOTAL-REVENUES> 26,139,828
<CGS> 17,092,231
<TOTAL-COSTS> 8,522,647
<OTHER-EXPENSES> 33,935
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 323,679
<INCOME-PRETAX> 167,336
<INCOME-TAX> 18,999
<INCOME-CONTINUING> 148,337
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 148,337
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
