<PAGE> 1
Registration No. 333-_________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORMS S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
TMCI ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3444 77-0413814
(State of other jurisdiction of (Primary standard industrial (IRS employer identification
incorporation or prganization) classification code number) number)
</TABLE>
1875 DOBBINS DRIVE
SAN JOSE, CA 95133
408-272-5700
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
ROLANDO LOERA
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
TMCI ELECTRONICS, INC.
1875 DOBBINS DRIVE
SAN JOSE, CA 95133
408-272-5700
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------
COPY TO:
MICHAEL W. PROZAN, ESQ.
TCMI ELECTRONICS, INC.
1875 DOBBINS DRIVE
SAN JOSE, CA 95133
408-272-5700
----------------
Approximate date of commencement of proposed sale to public:
As soon as practicable after the Registration
Statement becomes effective.
If any of the securites being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
(facing page continues)
<PAGE> 2
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
Title of Each Class Maximum Maximum
of Securities Being Amount to be Offering Price Aggregate Amount of
Registered Registered Per Unit(1) Offering Price(1) Registration Fee
- ------------------------- ------------- -------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Common Stock 404,539 $ 5.4375 $2,199,680.25 $ 648.91
Issued in Trinity
Acquisition
Common Stock 1,100,000 5.4375 5,437,500 1,604.06
Underlying Convertible
Debentures
Class B Warrants 300,000 0.01 0.01 0.85
Common Stock 300,000 5.50 1,650,000 486.75
Underlying
Class B Warrants
Common Stock 36,154 5.4375 196,587.38 57.99
Issuable as
Placement Fee
Warrants Issuable 72,308 0.01 723.08 0.21
as Placement Fee
Common Stock 72,308 5.59 404,201.72 119.24
Underlying Fee
Warrants
Common Stock 5,000 5.4375 27,187.5 8.02
Issuable as Exercise
Fee
Warrants Issuable as 10,000 0.01 100.00 0.01
Exercise Fee
Common Stock 10,000 6.80 68,000 20.06
Underlying Exercise
Fee Warrants
--------- ---------- ------------- ---------
Total $9,983,979.94 2,946.1
========= ========== ============= =========
</TABLE>
(1) Estimated pursuant to Rule 457(c) solely for the purpose of calculating
the filing fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS AMENDMENT TO THE
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS AMENDMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE> 3
Subject to Completion, Dated May 8, 1998
PROSPECTUS
1,928,008 SHARES OF COMMON STOCK ($.001 PAR VALUE)
300,000 CLASS B WARRANTS TO PURCHASE COMMON STOCK
82,308 WARRANTS ISSUABLE AS A FEE IN CONNECTION WITH
THE PLACEMENT OF CERTAIN SECURITIES
-------
TMCI ELECTRONICS, INC.
Certain security holders of TMCI Electronics, Inc. (the "Company"), a
Delaware corporation, are offering up to 1,928,008 shares of its Common Stock,
par value $.001 per share ("Common Stock"), 404,539 of which were issued in
connection with the acquisition of Trinity Electronics, Inc.; up to 1,100,004 of
which are issuable upon the conversion of the Company's 5%, $275,000 in
principal amount, Convertible Subordinated Debentures Due 2001 (the
"Debentures"); up to 300,000 Class B Warrants (the "Class B Warrants"); up to
300,000 shares of Common Stock underlying the Class B Warrants issuable in
connection with the Debenture placement; 36,154 shares of Common Stock issuable
as part of the fee for the placement of the Debentures; 72,308 warrants (the
"Fee Warrants") issuable as part of the fee for the placement of the Debentures;
up to 72, 308 shares of Common Stock underlying the Fee Warrants; up to 10,000
warrants (the "Exercise Warrants" and, with the Fee Warrants, the "Compensation
Warrants") issuable as a fee upon exercise of the Class B Warrants; up to 10,000
shares of Common Stock underlying the Exercise Warrants; and up to 5,000 shares
of Common Stock issuable as fee upon the exercise of the Class B Warrants. Each
Class B Warrant entitles the holder to purchase one share of Common Stock at
$5.50 per share from the date of issuance until March 5, 2001. The Class B
Warrants are redeemable by the Company for $.01 per Warrant, at any time, upon
thirty (30) days' prior written notice, if the fair market value of the Common
Stock is at least $8.75 per share, as defined. The Compensation Warrants are
issuable at an exercise price of 125% of the fair market value of the common
stock of the Company on the date of issuance (fair market value of $4 15/32 per
share for the Fee Warrants, to be determined for the Exercise Warrants), are non
callable, and expire three years from the date of issuance. In the event that
the selling security holders tranfer any of the warrants being registered
hereunder prior to exercise, the Company will be selling the underlying Common
Stock directly to purchasers of the warrants that choose to exercise the
warrants. See "Description of Securities."
The Registration Statement covering the securities offered hereby will be
maintained in effect, and the securities may be sold thereunder by the selling
security holders until February 9, 2000 (the "Offer Period"). The selling
security holders have advised the Company that they may sell the securities
offered hereby directly or through brokers or dealers, from time to time on the
open market during the Offer Period. Such sales may be made at the market price
in one or more transactions in the NASDAQ Stock Market, or in private
transactions at prices determined through negotiation. At the end of the Offer
Period, securities not sold will return to the status of restricted stock which
may be sold at the time pursuant to the provisions of Rule 144 under the
Securities Act of 1933, as amended.
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK
AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT. SEE "RISK FACTORS", WHICH BEGINS ON PAGE 7, AND,
FOR THE CLASS B WARRANTS, "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
1
<PAGE> 4
<TABLE>
<CAPTION>
PROCEEDS TO THE
PRICE TO PUBLIC FEES COMPANY
--------------- ------- ---------------
<S> <C> <C> <C>
Common Stock Issued in
Trinity Acquisition (1) N/A N/A
Common Stock Received
Upon Conversion of the
Debentures (1) (2) N/A
Class B Warrants (1) (2) N/A
Common Stock Underlying
Class B Warrants $ 1,650,000 66,000(3) $1,584,000
Common Stock (Debenture
Placement Fee) (1) N/A N/A
Fee Warrants (1) N/A N/A
Common Stock Underlying
Fee Warrants $ 323,126.38 N/A $ 323,126.38
Common Stock (Warrant
Exercise Fee) (1) N/A N/A
Exercise Warrants $ 59,000 N/A $ 59,000
Common Stock Underlying
Exercise Warrants (4) N/A (4)
------------- ------- -------------
Total (5) $2,032,126.38 $66,000 $1,966,216.38
============= ======= =============
</TABLE>
NOTES
(1) These securities are being sold on behalf of selling security holders. The
Company will not derive any proceeds from these sales.
(2) In connection with the issuance of the Debentures and the Class B
Warrants, the Company paid a fee of $ 176,000; gave a $66,000 credit
toward the purchase of one quarter of one of its 5%, $275,000 in principal
amount Convertible Subordinated Debentures; will issue 36,154 shares of
Common Stock; and will issue warrants to purchase up to 72,308 shares of
Common Stock.
(3) In connection with the exercise of the Class B Warrants (excluding Class B
Warrants issued to the Finder or its affiliates), the Company will pay a
warrant exercise fee equal of (I) cash equal to 4% of the amount paid to
exercise the Class B Warrants; (ii) shares of Common Stock equal to 5% of
the number of shares of common stock issued in connection with the Class B
Warrant exercise; and (iii) warrants to purchase Common Stock equal to 10%
of the shares issued upon exercise of the Class B Warrants (all excluding
Class B Warrants exercised by the Finder or its affiliates).
(4) The exercise price if the exercise warrants will be 125% of the average of
the closing bid and ask prices for the common stock on the five trading
days preceding the date of the exercise of the Class B Warrants. On April
24, 1998, the Common Stock closed at $5.375, so that any Exercise Warrants
issued on that day would have had an exercise price of $6.71875.
(5) Fees included are only the cash fee paid as an exercise fee for the
Class B Warrants
The date of this Prospectus is _______ ___, 1998.
2
<PAGE> 5
NOTE ON FORWARD-LOOKING STATEMENTS
Certain information set forth in this Prospectus includes "Forward-Looking
Statements" within the meaning of the Private Securities Reform Act of 1995 and
is subject to certain risks and uncertainties, including those identified under
the caption "Risk Factors." Readers are cautioned not to place undue reliance on
these statements, which speak only as of the date hereof. The Company undertakes
no obligation to release publicly any revisions to these forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect unanticipated events or developments.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports and other information with the Securities and Exchange Commission (the
"Commission"). The reports and other information filed by the Company can be
inspected and copied without charge at the Commission, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following
regional offices of the Commission: Seven World Trade Center, 13th Floor, New
York, New York 10048, and Northwest Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained
from the Public Reference Section of the Commission, Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Registration
statements and other documents and reports that are filed electronically through
the Electronic Data Gathering, Analysis and Retrieval System (including the
Registration Statement) are publicly available through the Commission's web site
on the Internet (http://www.sec.gov).
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement for a more complete description of the matter involved, each such
statement being qualified in its entirety by such reference. The Company will
provide without charge to each person who receives this Prospectus, upon written
or oral request of such person, a copy of any of the information that is
incorporated by reference herein (excluding exhibits to the information that is
incorporated by reference unless the exhibits are themselves specifically
incorporated by reference) by contacting the Company at TMCI Electronics, Inc.,
1875 Dobbins Drive, San Jose, CA 95133, telephone (408) 272-5700, attention:
Chief Financial Officer.
3
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including information contained under the caption "Risk Factors,"
and financial statements, including notes thereto, appearing elsewhere in this
Prospectus.
THE COMPANY
OVERVIEW
TMCI Electronics, Inc. ("TMCI") provides custom manufacturing,
value-added and distribution services to original equipment manufacturers
("OEMs") through its four subsidiaries: Touche Manufacturing Company, Inc.
("Touche"), Touche Electronics, Inc., ("TEI"), Enterprise Industries, Inc.
("EII") and Trinity Electronics, Inc. ("Trinity," collectively, with Touche, TEI
and EII, the "Subsidiaries" and the Subsidiaries, collectively with TMCI, the
"Company"). The customers of the Company are concentrated into four (4)
different segments: (1) mini and mainframe computers; (2) telecommunications
equipment; (3) semiconductor manufacturing test equipment; and (4) medical test
equipment.
The principal executive offices of the Company are located at 1875
Dobbins Drive, San Jose, California 95133 and its telephone number is (408)
272-5700.
SEE "RISK FACTORS," "MANAGEMENT," "BUSINESS" AND "CERTAIN TRANSACTIONS"
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED IN EVALUATING THE
COMPANY AND ITS BUSINESS.
4
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered(1)(2) ......................................................... 1,928,008 shares
Class B Warrants Offered ........................................................... 300,000 Class B Warrants
Fee Warrants Offered................................................................ 82,308 Compensation Warrants
Shares of Common Stock Outstanding Prior to Offering (1)............................ 4,196,406 shares
Shares of Common Stock Outstanding After Offering(2)(3)............................. 5,719,875 shares
Use of Net Proceeds................................................................. See "Use of Proceeds"
Nasdaq SmallCap Market Symbols
Common Stock........................................................................ TMEI
Class A Warrants.................................................................... TMEIW
</TABLE>
- ---------------
(1) Includes 404,539 shares currently outstanding and being registered for
sale.
(2) Excludes up to 2,672,000 shares of Common Stock issuable upon exercise of
the Class A Warrants and 128,000 Units issuable upon exercise of the Unit
Purchase Option issued to the underwriter in the March 1996 Offering or
the securities underlying the Units.
(3) Assumes that the Debentures are converted into the maximum 1,100,004
shares and that all Class B and Compensation Warrants are exercised.
5
<PAGE> 8
SELECTED FINANCIAL INFORMATION
The following selected historical financial information of the Company is
qualified by reference to and should be read in conjunction with the financial
statements and notes thereto included elsewhere herein. The selected financial
information set forth below for each of the fiscal years ended December 31, 1997
and December 31, 1996 is derived from financial statements contained in this
prospectus. The selected financial information for the years December 31, 1995
and December 31, 1994 is derived from financial statements of the Company
audited by Moore Stephens, P.C., independent public accountants, which are
included in the prospectus for the public offering of the Company completed on
March 11, 1996. The selected financial data for the year ended December 31, 1993
is derived from unaudited financial statements of the Company which are not
included in documents filed with the Securities and Exchange Commission.
Selected Financial Data (in thousands except for per share data)
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------------------------------------
1997 1996 1995(1) 1994(1) 1993(1)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Net Sales $ 38,947 $ 26,140 $ 28,099 $ 20,869 $ 14,391
Net Income 1,136 148 473 420 248
Net Income per Common Share
from Operations-Basic(2) 0.31 0.05 0.25 0.22 0.08
Net Income per Common Share
from Operations-Diluted(2) 0.28 0.05 0.25 0.22 0.08
Balance Sheet Data
Total Assets 28,543 15,482 12,412 9,332 6,982
Total Long Term Obligation 4,168 2,501 2,757 2,682 2,576
Shareholders' Equity 13,299 8,639 2,180 957 257
</TABLE>
(1) For comparative purposes, the amounts have been combined to give
retroactive effect to the acquisition by TMCI of all of the outstanding
common stock of Touche and TEI.
(2) See Note 3 to the financial statements for an explanation of the basis
used to calculate net income per share and weighted average common shares
and share equivalents.
6
<PAGE> 9
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE
OF RISK. ONLY THOSE PERSONS ABLE TO LOSE THEIR ENTIRE INVESTMENT SHOULD PURCHASE
THESE SECURITIES. PRIOR TO MAKING AN INVESTMENT DECISION, PROSPECTIVE INVESTORS
SHOULD CAREFULLY READ THIS PROSPECTUS AND CONSIDER, ALONG WITH OTHER MATTERS
REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS:
FORWARD LOOKING STATEMENTS
When used in this Prospectus, the words "believes", "anticipates",
"expects" and similar expressions are intended to identify in certain
circumstances, forward-looking statements. Such statements are subject to a
number of risks and uncertainties that could cause actual results to differ
materially from those projected, including the risks described in the "Risk
Factors" section. Given these uncertainties, prospective investors are cautioned
not to place undue reliance on such statements. The Company also undertakes no
obligation to update these forward-looking statements.
OPERATING RISKS
NO ASSURANCE OF FUTURE PROFITABILITY
Although the Company has a combined rolling backlog at December 31,
1997 of approximately $18 million, no assurance can be given that the future
operations of the Company or its subsidiaries will be profitable. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CUSTOMER CONCENTRATION; ORDER FLOW
The largest customers of the Company are Lam Research Corporation and
Tandem Computers Incorporated. Sales to these customers accounted for 12% and
14%, respectively, of the revenues of the Company for the year ended December
31, 1997. For the same period, sales to the Company's nine largest customers
accounted for approximately 57% of net sales.
The Company is dependent upon continued revenues from its top
customers. Any material delay, cancellation or reduction of orders from these or
other significant customers could have an adverse material effect on the
Company's results of operations. The percentage of the Company's sales to its
major customers may fluctuate from period to period.
FLUCTUATIONS IN OPERATING RESULTS
A number of factors affect the Company's operating results, including
the mix of turnkey and manufacturing projects, capacity utilization, price
competition, the degree of automation that can be used in the assembly process,
the efficiencies that can be achieved by the Company in managing inventories and
fixed assets, the timing of orders from major customers, fluctuations in demand
for customer products, the timing of expenditures in anticipation of increased
sales, customer product delivery requirements, increased costs and shortages of
components or labor. Changes in any of these factors in any given period could
materially impact the operating results of the Company during that period.
7
<PAGE> 10
MANAGEMENT OF GROWTH
The Company experienced substantial growth in 1997 with revenues
increasing 49% from the fiscal year ended December 31, 1996 to the fiscal year
December 31, 1997. Such growth stretches the Company's infrastructure as well as
its managerial, financial, manufacturing, and sales personnel. While current
management has substantial experience in the industry, the ability of management
to handle such growth will be critical to the success of the Company. No
assurance can be given that the Company can continue to grow at its current rate
or that the infrastructure of the Company can sustain such rapid growth.
DEPENDENCE UPON CUSTOMER MARKETS
The Company's business depends exclusively upon contracts and orders
from original equipment manufacturers ("OEMs") of electronic equipment. These
OEMs manufacture computers, semiconductor test equipment, telecommunications
equipment and medical equipment. The markets for the products sold by these
customers is particularly volatile. Further, the products manufactured by these
customers are subject to rapid technological change and obsolescence. Changes in
the market for customer products have and will continue to materially impact
that results of the Company. Accordingly, any material change in the markets
serviced by the Company could have a material effect on the Company's results.
See "Management's Discussion and Analysis of Financial Condition ad Results of
Operations" and "Business."
RISK OF INVENTORY OBSOLESCENCE
The products manufactured by the OEMs serviced by the Company are being
upgraded and enhanced on a continuous basis by these OEMs. As a result of this
process, the inventory maintained by the Company may become obsolete. Such
obsolescence may cause the Company to have excess supplies of unusable inventory
which could have a material adverse effect on the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business."
DEPENDENCE ON MANAGEMENT
The Company's business is principally dependent on certain key
management personnel for the operation of its business. In particular, Rolando
Loera has played the primary role in the promotion, development and management
of the Company. The Company entered into an employment agreement with Mr. Loera
on March 5, 1996 for a period of five years, with an automatic five year
extension in the absence of notice to the contrary from either party. If the
employment by the Company of Mr. Loera, or if Mr. Loera becomes unable to
perform his duties, the Company may be adversely affected. The Company has
obtained key-man life insurance on Mr. Loera in the amount of $1 million. The
Company will be the owner and beneficiary of the insurance policy. Further, the
Company is adding additional managerial personnel. See "Use of Proceeds,"
"Business" and "Management."
8
<PAGE> 11
SUBSTANTIAL COMPETITION
The Company encounters substantial competition from domestic and
foreign businesses. Many of such entities have substantially greater financial
resources, technical expertise and managerial capabilities than the Company. See
"Business -- Competition."
NO ASSURANCES THAT RECENT ACQUISITIONS WILL BE PROFITABLE
Since November, 1996, the Company made the following significant
acquisitions: a wire cable and harness manufacturing business, a metal stamping
business and an electronic parts distributor. No assurances can be made the
Company will be able to fully integrate its recent acquisitions into its current
operations, or that any of the acquisitions will be profitable for the Company.
See "Business" and "Legal Proceedings."
UNSPECIFIED FUTURE ACQUISITIONS
The Company is actively seeking additional acquisitions to enhance
its ability to serve its existing customers, expand its customer base and
accelerate its growth. No assurance can be given that the Company will be able
to locate suitable acquisition candidates or that if candidates are located that
an acquisition can be negotiated and consummated or that if an acquisition
actually occurs that the target candidate can be successfully integrated into
the Company and can be profitable. See "Business."
POSSIBLE NEED FOR ADDITIONAL FINANCING
The Company intends to fund its operations and other capital needs for
the next twelve (12) months substantially from operations and its line of credit
facility, but such funds may not be sufficient for these purposes. The Company
may require substantial amounts for its future expansion, operating costs and
working capital. There can be no assurance that such financing will be
available, or that it will be available on acceptable terms. In addition, any
additional financing may be on terms which may cause current shareholders of the
Company to suffer significant dilution. See "Use of Proceeds."
VOTING CONTROL BY MANAGEMENT; POTENTIAL ANTI-TAKEOVER EFFECT
Assuming none of the securities being registered thereunder are
acquired by the officers, directors and principal stockholders of the Company,
they beneficially own approximately 36% of the Company's Common Stock.
Accordingly, such persons, with the votes of the holders of approximately an
additional 14% of the Company's Common Stock, may be able to approve major
corporate transactions including amending the Certificate of Incorporation of
the Company or the sale of substantially all of the Company's assets, may be
able to elect all of the directors of the Company, and may be able to control
the Company's affairs. This voting control may have the effect of delaying or
preventing a change in control of the Company and may adversely affect the
rights of the holders of the shares of Common Stock of the Company. In addition,
the Company is subject to a State of Delaware statute regulating business
combinations which may also hinder or delay a change of control. See
"Management" and "Principal Stockholders."
9
<PAGE> 12
POTENTIAL CONFLICTS OF INTEREST ON THE PART OF CERTAIN EXECUTIVE OFFICERS OF THE
COMPANY
In addition to acting as Chairman, President and Chief Executive
Officer of the Company, Rolando Loera is also the sole owner of Touche
Properties, Inc. ("TPI"), a real estate company which owns and leases the real
property located at 1881-1899 Dobbins Drive (the "Property") to Touche
Electronics, Inc.("TEI") and Touche Manufacturing Company, Inc. ("Touche"), two
wholly-owned subsidiaries of the Company. The rent payments made by TEI and
Touche to TPI amounted to approximately $576,144, $576,144 and $477,640 in 1997,
1996 and 1995, respectively. The Company occupied this space prior to its
initial public offering of securities in 1996. See "Certain Transactions."
SUBSTANTIAL ENVIRONMENTAL REGULATION
Substantial environmental laws have been enacted in the United States
and California in response to public concern over environmental deterioration.
These laws and the implementing regulations affect nearly every activity of the
Company. The principal federal legislation which has the most significant effect
on the Company's business includes the following: The Comprehensive
Environmental Response, Compensation and Liability Act; The Resource
Conservation and Recovery Act; The Clean Air Act; The Safe Drinking Water Act;
The Emergency Planning and Community Right-to-Know Act; The Clean Water Act and
The Toxic Substance Control Act. Failure by the Company to comply with
applicable federal and state environmental regulations could result in the
Company incurring substantial fines and penalties and/or having restraining
orders issued against it. To the best of the Company's knowledge, its operations
currently comply with governmental regulations. See "Business - Regulation."
STOCK MARKET RISKS
DILUTIVE EFFECT OF SECURITIES BEING REGISTERED. The shares being
registered for sale hereunder constitute a total approximately 43% of the total
currently outstanding Common Stock of the Company (including shares issued in
the acquisition of Trinity Electronics, Inc. which are already outstanding,
assuming conversion of the Debentures at the rate most favorable to the holders
thereof and exercise of the warrants issued in connection with the placement of
the Debentures whether as a fee or otherwise but excluding the exercise of the
Class A Warrants and underwriter's Unit Purchase Option). The sale of the shares
being registered hereunder into the market in a short period of time could have
a depressive effect on the stock price of the Company.
SECURITIES UNDERLYING CLASS A WARRANTS. In connection with its public
offering in March, 1996 and a related bridge loan financing, the Company issued
2,672,000 warrants to purchase Common Stock at an exercise price of $5.50 per
share and an underwriters Unit Purchase Option representing the right to acquire
128,000 Units each unit consisting of one Class A Warrant and one share of
Common Stock. Accordingly, upon exercise of all Class A Warrants and the Unit
Purchase Option, there will be an additional 2,800,000 shares of Common Stock of
the Company issued and outstanding.
10
<PAGE> 13
ADDITIONAL ISSUANCES. The Company is authorized to issue up 25,000,000. After
reserving a total of 4,123,462 shares of Common Stock for issuance upon the
exercise of the Class A Warrants, the exercise of the Unit Purchase Option, the
conversion of the Debentures, the exercise of the Class B Warrants, the issuance
of all Common Stock payable as a fee for the Debenture placement and Class B
Warrant exercise and the issuance of Common Stock upon exercise of all warrants
issued as a fee for the Debenture placement or Class B Warrant exercise, the
Company will have 16,818,780 shares of authorized but unissued capital stock
available for issuance without further shareholder approval. The Company is
actively seeking acquisition candidates and intends to issue common stock as at
least part of the consideration for such acquisitions. As a result, any issuance
of additional shares of common stock may cause current shareholders of the
Company to suffer additional dilution which may adversely affect the market.
NO ASSURANCE THAT THE COMPANY CAN MAINTAIN A CURRENT REGISTRATION STATEMENT AND
QUALIFY FOR SALE UNDER APPLICABLE STATE SECURITIES LAWS. In order for (i)
holders of Common Stock to sell the sell the Common Stock being registered
hereunder; (ii) Debenture holders to sell Common Stock received upon the
conversion of the Debentures; (iii) the Company to issue Common Stock upon the
exercise of any outstanding warrants sold by Debenture holders or the finder; or
(iv) the warrant holders to sell the Common Stock received upon the exercise of
the outstanding warrants, there must be a (i) a current prospectus relating to
the securities offered hereby under an effective registration statement filed
with the Securities and Exchange Commission, and (ii) a qualification for sale
or exempt therefrom under applicable state securities laws of the jurisdictions
in which the various holders of securities reside. There can be no assurance,
however, that the Company will be successful in maintaining a current
registration statement. After a registration statement or post-effective
amendment thereto becomes effective, it may require updating by the filing of
one or more post-effective amendments. The Company intends to qualify the sale
of the Common Stock in a limited number of states as may reasonably be requested
by the Debenture holders prior to the filing of the registration statement,
although certain exemptions under certain state securities ("Blue Sky") laws may
permit the securities to be transferred to purchasers in other states. The
selling security holders will be prevented from selling Common Stock or warrants
in those states where exemptions are unavailable and the Company has failed to
qualify the Common Stock and warrants. See "Description of Securities."
MARKET MAKER'S INFLUENCE ON THE MARKET MAY HAVE ADVERSE CONSEQUENCES
Dominant Market Maker. Although it has no legal obligation to do so,
Biltmore Securities, Inc. ("Biltmore") has made a market in the Company's
securities since completion of the initial public offering of the Common Stock
of the Company in March, 1996. The Company believes that it is the dominant
market maker for the Common Stock of the Company. The price and liquidity of
such securities may be affected by the degree, if any, of Biltmore's
participation in the market, inasmuch as a significant amount of such securities
may be sold to customers of Biltmore. Such customers subsequently may engage in
transactions for the sale or purchase of such securities through or with
Biltmore. These market making activities may be discontinued at any time or from
time to time by Biltmore without obligation or prior notice. If a dominating
influence at such time, Biltmore's discontinuance may adversely affect the price
and liquidity of the securities.
To the extent that Biltmore solicits the exercise of the Class A
Warrants, Biltmore may be prohibited pursuant to the requirements of Regulation
M under the Exchange Act from engaging in market-making activities during such
solicitation and for a period of up to five days preceding such solicitation. As
a result, Biltmore may be unable to continue to provide a market for the
Company's securities during certain periods while the Warrants are exercisable.
See "Description of Securities
11
<PAGE> 14
Legal Matters. Biltmore has been involved in the following matters with federal
and state regulators. Although the Company is not aware of any other pending or
threatened actions, further action may result in preventing Biltmore from acting
as a market maker with respect to the Company's securities.
SEC Action. On or about May 22, 1995, Biltmore and Elliott
Loewenstern and Richard Bronson (principals of Biltmore) and the Securities and
Exchange Commission agreed to an offer of settlement (the "Offer of Settlement")
in connection with a complaint filed by the Commission in the United States
District Court for the Southern District of Florida alleging violations of the
federal securities laws, Section 17(a) of the Securities Act of 1933, Section
10(b) and 15(c) of the Securities Exchange Act of 1934, and Rules 10b-5, 10b-6
and 15c1-2 promulgated thereunder. The complaint also alleged that in connection
with the sale of securities in three (3) IPOs in 1992 and 1993, Biltmore engaged
in fraudulent sales practices. The proposed Offer of Settlement was consented to
by Biltmore and Messrs. Loewenstern and Bronson without admitting or denying the
allegations of the complaint. The Offer of Settlement was approved by Judge
Gonzales on June 6, 1995. Pursuant to the final judgment (the "Final Judgment"),
Biltmore:
- was required to disgorge $1,000,000 to the Commission, which
amount was paid in four (4) equal installments on or before
June 22, 1995;
- agreed to the appointment of an independent consultant
("Consultant").
On July 10, 1995, the action as against Messrs. Loewenstern and Bronson
was dismissed with prejudice. Mr. Bronson has agreed to a suspension from
associating in any supervisory capacity with any broker, dealer, municipal
securities dealer, investment advisor or investment company for a period of
twelve (12) months, dating from the beginning of such suspension. Mr.
Loewenstern has agreed to a suspension from associating in any supervisory
capacity with any broker, dealer, municipal securities dealer, investment
advisor or investment company for a period of twelve (12) months commencing upon
the expiration of Mr. Bronson's suspension. Both suspensions have been
completed.
State Action.
INDIANA. On ______________ the State of Indiana commenced an
action seeking, among other things, to revoke Biltmore's license to do, business
in Indiana. The complaint alleged that Biltmore offered and/or sold securities
that were neither registered nor exempt, engaged in dishonest or unethical
practices in the securities business, failed to reasonably supervise its agents
and violated the antifraud provisions of the Indiana Securities Act. The action
was settled without any admission, finding or judgment against Biltmore of any
violation of the Indiana Securities Act and Biltmore agreed to, among other
things, resolve certain customer claims, the payment of a fine and costs and
restrictions with respect to the sale of securities to Indiana residents. Among
other things, Biltmore agreed that it will not sell any securities to Indiana
residents (i) for which Biltmore has served as lead underwriter or as a member
of the selling syndicate; or (ii) for which Biltmore is a market maker. Under
the terms of the settlement agreement, Biltmore continues to maintain its
license in the State of Indiana. The Company does not intend to seek
qualification for the sale of securities in the State of Indiana.
12
<PAGE> 15
ARKANSAS. On July 18, 1997, the State of Arkansas, Securities
Department issued a consent order in lieu of the filing of a compliant as
settlement of all claims against Biltmore Securities and Elliot A. Loewenstern.
The claims related to certain practices constituting violations of the Arkansas
Securities Act including promising customers price appreciation, failing to
disclose negative information regarding stocks, representing that they know of
"inside information" and using high pressure sales tactics during the period
February 1992 to October 1993. Biltmore and Mr. Loewenstern consented to the
entry of the order without admitting or denying any wrongdoing or violation. The
consent order censured Biltmore Securities and Elliott A. Loewenstern and
required that they pay the amount of $25,000 for costs and expenses relating to
the proceedings. The consent order also required that Biltmore deliver to the
Commissioner of Securities a copy of the final report prepared by the
independent consultant. Biltmore and Mr. Lownenstern have fully complied with
all terms of the consent order.
CALIFORNIA. On September 10, 1997, the State of California
issued a Notice of Intention to Issue Order Revoking Biltmore's Broker-Dealer
Certificate based on public interest concerns as a result of Biltmore being
subject to enforcement orders issued by the Securities and Exchange Commission,
the Arkansas Securities Department and the Indiana Securities Division. Biltmore
intends to request a hearing and contest the accusation. Such proceeding, if
ultimately successful may adversely affect the market for and liquidity of the
Company's securities if additional broker-dealers do not make a market in the
Company's securities.
In the event that Biltmore is unable to act as a market maker for the
Company's stock, and additional brokers do not make a market in the Company's
securities, the market for and liquidity of the Company's securities may be
adversely affected. In the event that other broker dealers fail to make a market
in the Company's securities, the possibility exists that the market for and the
liquidity of the Company's securities may be adversely affected to such an
extent that public security holders may not have anyone to purchase their
securities when offered for sale at any price. FOR ADDITIONAL INFORMATION
REGARDING BILTMORE, INVESTORS MAY CALL THE NATIONAL ASSOCIATION OF SECURITIES
DEALERS, INC. AT (800) 289-9999.
13
<PAGE> 16
SELLING SECURITY HOLDERS
The securities registered hereunder are being offered for the accounts of the
security holders of the Company listed below (the "Selling Security Holders").
Patrick McQuade is the president of Trinity Electronics, Inc., which became a
subsidiary of the Company on December 22, 1997. M.J. Segal & Company, Inc. and
Private Investors Equity Group acted as a finder in connection with the
Debenture placement. Joshua Captial Partners is an affiliate of M.J. Segal &
Company, Inc. Otherwise, no Selling Security Holder has held any office with or
had a material relationship with the Company or its affiliates within the past
three years.
COMMON STOCK
<TABLE>
<CAPTION>
COMMON STOCK OWNED SECURITIES SECURITIES
SECURITY HOLDER PRIOR TO OFFERING OFFERED OWNED AFTER OFFERING
- --------------- ------------------ ---------- --------------------
<S> <C> <C> <C>
Patrick McQuade 404,539(1) 404,539 0
Leonardo, L.P. 583,336(2) 583,336 0
GAM Arbitrage Investments, Inc. 58,334(2) 58,334 0
AG Super Fund International Partners, Inc. 58,334(2) 58,334 0
Raphael, L.P. 116,667(2) 116,667 0
Ramius Fund, L.P. 116,667(2) 116,667 0
Hathaway Partners Investment L.P. 116,667(2) 116,667 0
Jiwat T. Mahtani and Pushpa J. Mahtani 29,167(2) 29,167 0
Frank Brosens 116,667(2) 116,667 0
North Star Partners, L.P. 58,334(2) 58,334 0
Trust Company of America FBO PAC 116,667(2) 116,667 0
Joshua Capital Partners, L.P. 29,167(2) 29,167 0
M. J. Segal and Company, Inc./
Private Investors Equity Group 123,462(3) 123,462 0
Total 1,928,008 1,928,008 0
</TABLE>
(1) Shares held by Mr. McQuade are currently being held in escrow as security
for the representations and warranties made by Mr. McQuade and Trinity
Electronics, Inc. in connection with the acquisition of Trinity
Electronics, Inc. by the Company on December 22, 1997. Pursuant to the
terms of the Escrow Agreement and assuming no alleged breaches of the
representations and warranties by Mr. McQuade or Trinity Electronics, Inc.
in connection with the acquisition, 35% of the Common Stock being held in
escrow will be released from escrow and available for sale on December 22,
1998; 25% of the Common Stock being held in escrow will be released from
escrow and available for sale by him on December 22, 1999; 25% of the
Common Stock being held in escrow will be released from escrow and
available for sale on December 22, 2000; and 15% of the Common Stock being
held in escrow will be released from escrow and available for sale on
December 22, 2001. The shares exclude options to purchase 12,000 shares of
common stock granted to Mr. McQuade on April 21, 1998.
(2) These shares include shares issuable upon conversion of the Debentures and
upon exercise of the Class B Warrants.
(3) Includes all shares issuable as a fee for the placement of the Debentures
and exercise of the Class B Warrants as well as shares issuable upon
exercise of all Compensation Warrants issuable as part of the fee for the
placement of the Debentures and exercise of the Class B Warrants.
14
<PAGE> 17
USE OF PROCEEDS
Proceeds received from the sale of the Debentures were used to repay a
note issued in connection with the acquisition of Trinity Electronics, Inc. and
added to general working capital. Proceeds received upon the exercise of the
warrants will be added to general working capital.
DILUTION UPON EXERCISE OF THE CLASS B WARRANTS
As of December 31, 1997, the Company had a net tangible book value of
$6,532,583(1), or $1.61 per share (based on the Company having 4,057,758 shares
outstanding as of that date). Net tangible book value per share means the
tangible assets of the Company, less all liabilities, divided by the number of
shares of Common Stock outstanding. After giving effect to the exercise of the
Class B Warrants at a price of $5.50 per share, and deducting the cash portion
of the warrant exercise fee of $66,000 (4% of the exercise price of all
outstanding Class B Warrants), pro forma net tangible book value would have been
$8,160,583, or $1.86 per share. The result will be an immediate increase in net
tangible book value per share of $0.25 to existing shareholders and an immediate
dilution to new investors of $3.64 per share. Dilution is determined by
subtracting net tangible book value per share after the offering from the
offering price to investors. The following table illustrates this dilution:
<TABLE>
<S> <C>
Exercise price of the Warrants $5.50
Net tangible book value per share, before the offering $1.61
Increase per share attributable to the sale by the Company of the
shares offered hereby $0.25
Pro forma net tangible book value per share, after the offering $1.86
Dilution per share to exercising Class B Warrant holders $3.64
</TABLE>
The above table assumes exercise of all of the outstanding Class B
Warrants.
The foregoing table applies only to the Class B Warrants and not to the Common
Stock (i) being sold by the selling security holder, (ii) received upon
conversion of the Debentures, or (iii) received as a fee for the Debenture
placement, whether directly or as a result of the exercise of the Compensation
Warrants.
(1) The carrying value of goodwill has been excluded from the determination of
the net tangible book value.
15
<PAGE> 18
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is quoted on the NASDAQ SmallCap market. The
following table sets forth the reported high and low bid quotation for the
Common Stock of the Company for the periods indicated. Such quotations reflect
inter dealer prices, without retail mark up, mark down or commission and may not
necessarily reflect actual transactions.
<TABLE>
<CAPTION>
Common Stock
-------------------------
High Low
------- -------
<S> <C> <C>
1996
First Quarter $ 8.375 $ 6.50
Second Quarter $ 9.50 $ 8.375
Third Quarter $ 9.50 $ 6.50
Fourth Quarter $ 7.00 $ 4.75
1997
First Quarter $ 6.75 $ 4.50
Second Quarter $ 7.00 $ 4.50
Third Quarter $ 6.25 $ 4.50
Fourth Quarter $ 6.19 $ 4.00
1998
First Quarter $ $
</TABLE>
On March 16, 1998, the closing bid price of the Company's Common Stock as
reported on the NASDAQ SmallCap Market system was $5.66. As of March 12, 1998,
there were approximately 38 holders of record of the Company's Common Stock. The
Company has not paid any dividends on its common stock in the past three years
and anticipates retaining future earnings, if any, to finance the growth of the
Company.
On February 10, 1998, the Company raised $3.3 million through the sale of
its 5%, $275,000 principal amount, Convertible Subordinated Debentures. Such
securities were issued in reliance of Rule 506 of Regulation D promulgated by
the U.S. Securities and Exchange Commission pursuant to its authority under the
Securities Act of 1933, as amended, in as much as all investors were accredited
investors as defined in Regulation D. See Item 7 Management's Discussion and
Analysis of Financial Condition and Results of Operations; Subsequent Events.
16
<PAGE> 19
BUSINESS
OVERVIEW, FORMATION, AND ACQUISITIONS
TMCI Electronics, Inc. ("TMCI") provides custom manufacturing and
value-added services to original equipment manufacturers ("OEMs") through its
four subsidiaries: Touche Manufacturing Company, Inc. ("Touche"), Touche
Electronics, Inc., ("TEI"), Enterprise Industries, Inc. ("EII") and Trinity
Electronics, Inc. ("Trinity," collectively, with Touche, TEI and EII, the
"Subsidiaries" and the Subsidiaries, collectively with TMCI, the "Company"). The
customers of the Company are concentrated into four (4) different segments: (1)
mini and mainframe computers; (2) telecommunications equipment; (3)
semiconductor manufacturing test equipment; and (4) medical test equipment. The
Company manufactures products pursuant to customer specifications after
receiving orders from customers. The principal executive offices of the Company
are located in San Jose, California.
TMCI was incorporated in the State of Delaware on December 7, 1995 for
the purpose of acquiring the businesses of Touche and TEI in anticipation of a
public offering. Touche and TEI were principally owned by Rolando Loera, the
President and Chief Executive Officer of the TMCI. TMCI acquired all of the
issued and outstanding shares of common stock of Touche and TEI on March 11,
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 and its other wholly owned subsidiaries
described below.
The Company actively seeks to enhance its growth through strategic
acquisitions and has made three material acquisitions following its formation as
discussed below. Future acquisitions, if any, will be made only if the Company
can find candidates which fit into its strategic goals and corporate structure.
San Jose Division of Pen Interconnect, Inc. On November 1, 1996, the
Company and TEI purchased the net assets of the San Jose Division of Pen
Interconnect, Inc., a manufacturer of wire cable and harness assemblies, for a
total purchase price of three million three hundred thousand dollars
($3,300,000) consisting of two million dollars ($2,000,000 ) in cash, nine
hundred thousand dollars ($900,000) in two promissory notes and fifty three
thousand six hundred sixty nine (53,669) shares of common stock of TMCI valued
at $7.4532 per share determined as the average of the last reported sales price
of the common stock of TMCI for the 20 trading days prior to November 1, 1996.
In addition, the Company agreed to pay an additional six hundred thousand
dollars ($600,000) in eighty thousand five hundred three (80,503) shares of
common stock of TMCI valued at $7.45 per share, subject to the performance of
the acquired division in accordance with the terms of an earn out agreement.
Following the closing of the transaction, a dispute arose regarding the value of
certain inventory which resulted in certain adjustments to the foregoing
purchase price. See Legal Proceedings.
Enterprise Industries, Inc. On January 24, 1997, the Company acquired all
of the issued and outstanding shares of common stock of Enterprise Industries,
Inc., a metal stamping and manufacturing company, in exchange for one million
five hundred thousand dollars ($1,500,000) consisting of one million dollars
($1,000,000) in cash and ninety six thousand five hundred sixty (96,560) shares
of common stock of TMCI valued at $5.18 per share determined as the average of
the closing prices for TMCI common stock for the 10 trading days prior to
January 1, 1997.
17
<PAGE> 20
Trinity Electronics, Inc. On December 22, 1997, Trinity Electronics,
Inc., a distributor of board level electronic component parts, merged with and
into TMCI/Trinity Acquisition Corp., a wholly owned subsidiary of the Company.
The parties negotiated October 1, 1997 as the effective date for accounting
purposes. The sole shareholder of Trinity received a total of four million two
hundred ninety thousand dollars ($4,290,000) consisting of one million dollars
($1,000,000) in cash, one million two hundred ninety thousand dollars
($1,290,000) in two promissory notes and four hundred four thousand five hundred
thirty-nine shares (404,539) of TMCI common stock valued at $4.94 per share
determined as the average closing price of common stock of TMCI for the ten
trading days prior to September 4, 1997. The notes pay interest in the amount of
9% per annum. The $1,000,000 note was personally guaranteed by Rolando Loera,
the Chief Executive Officer of the Company, was due March 9, 1998 and was paid
without penalty. The $290,000 note was due April 15, 1998 and was paid without
penalty. The shares are being held in escrow pursuant to the terms of an escrow
agreement as security for the representations of Trinity and its sole
shareholder made in the merger agreement and are being released from escrow in
the amount of 25% one year following the closing, 25% two years following the
closing, 25% three years following the closing and 15% four years following the
closing. In connection with this merger, the Company received approximately
$3,583,000 in goodwill which is being amortized over 15 years. Following the
merger, TMCI /Trinity Acquisition Corp. changed its name to Trinity Electronics,
Inc.
18
<PAGE> 21
FINANCIAL INFORMATION ABOUT PRODUCT LINES
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Sales to Unaffiliated Customers
Manufacturing $ 18,952,842 $ 17,823,148 $ 23,264,194
Wire and Cable 0 866,334 10,075,420
Turnkey 9,146,077 7,450,346 5,607,052
------------ ------------ ------------
Total $ 28,098,919 $ 26,139,828 $ 38,946,666
============ ============ ============
Sales to Affiliates
Manufacturing $ 4,649,012 $ 3,712,554 $ 2,077,246
Wire and Cable 0 0 1,062,571
Turnkey 0 0 0
------------ ------------ ------------
Total $ 4,649,012 $ 3,712,554 $ 3,139,817
============ ============ ============
Operating Profit (loss)
Manufacturing $ 1,680,311 $ 451,988 $ 808,755
Wire and Cable 0 144,848 846,273
Turnkey 42,013 (71,886) 397,476
------------ ------------ ------------
Total $ 1,722,234 $ 524,950 $ 2,052,504
============ ============ ============
Identifiable Assets
Manufacturing $ 8,452,937 $ 8,914,649 $ 16,999,053
Wire and Cable 3,959,230 2,536,886 4,811,000
Turnkey 0 4,030,092 6,933,093
------------ ------------ ------------
Total $ 12,412,167 $ 15,481,627 $ 28,743,146
============ ============ ============
</TABLE>
DESCRIPTION OF BUSINESS
GENERAL MARKET FOR CONTRACT MANUFACTURING SERVICES
The Company focuses on selling products and services to OEMs interested
in utilizing custom manufacturers. OEMs have been increasing their use of custom
manufacturers in order to reduce their investment and focus their resources.
Reduce Investment. Advances in technology of electronic products and
increases in unit volumes require OEMs to invest more heavily in internal
manufacturing through increased working capital, capital equipment, labor,
systems and infrastructure. Use of contract manufacturers such as the Company
allows OEMs to maintain advanced manufacturing capabilities while minimizing
overall resource requirements.
19
<PAGE> 22
Focus Resources. With the increased level of competition and the pace of
product change in the electronics industry, use of contract manufacturers such
as the Company enables OEMs to focus more sharply on their own core competencies
where they add the greatest value such as product development and marketing.
TARGET MARKET FOR THE COMPANY
The Company provides its custom manufactured products to a wide range of
companies that manufacture: (1) mini and mainframe computers; (2)
telecommunications equipment; (3) semiconductor test equipment; and (4) medical
test equipment, primarily in the Silicon Valley area.
Computer Systems. The Company's manufacturing and assembly businesses
provide a full complement of manufacturing capabilities for mini and mainframe
computers. As the industry is being reshaped by evolutionary changes in
semiconductor design and memory capacity, OEMs are outsourcing more of their
manufacturing of their metal cabinets and enclosures. The Company focuses
primarily on commercial markets.
Telecommunications Equipment. Based on the changing conditions within the
telecommunications industry, the Company believes that the need for
telecommunications equipment will continue to grow at an above average annual
rate. The Company actively markets itself to this industry and believes that,
with its present and future manufacturing and service capabilities, it is well
positioned to service this growing industry. Marketing activities in this
segment are directly in line with the Company's acquisition of facilities for
the production of specific types of wire and cable contained in products used by
the telecommunications equipment industry.
Semiconductor Test Equipment. The Company markets its product
manufacturing and service capabilities in the semiconductor test equipment
market areas. The Company targets principally large and medium-sized
corporations that specialize in the design and development of scientific
measurement and production test 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 used within
this market segment.
Medical Test Equipment. The Company markets its manufacturing and cable
harness assembly services to existing and prospective OEMs of medical test
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 serious and
complicated patient medical problems. The Company believes that this industry
will grow, offering increased opportunities to companies which are positioned to
provide cost-effective manufacturing and value added services at competitive
prices.
20
<PAGE> 23
OPERATIONS OF THE COMPANY
BUSINESS CONDUCTED BY SUBSIDIARIES
The Company provides its manufacturing services through Touche and EII,
its turnkey and cable and harness assembly services through TEI with a limited
portion provided by Trinity, and its distribution services through Trinity.
MANUFACTURING. The manufacture and fabrication of custom-designed metal
enclosures cannot be homogenized into a single 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 manufacturing operations, the Company maintains a wide
variety of sophisticated automated machinery and shop equipment, tools, and
supplies.
Touche Manufacturing Company, Inc. Touche manufactures custom designed
fabricated metal cabinets and enclosures for OEMs to house various types of
electronic components. As a full service manufacturing facility, 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
development of the prototype, the Company develops a cost effective
manufacturing process. Touche provides all of the manufacturing processes in
house, which includes metal shearing, punching, bending and welding, as well as
machining, detailing, zinc plating, painting and final assembly. All 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 provides its customers with custom manufactured metal
cabinets or enclosures in a timely and cost-effective manner, giving Touche a
competitive advantage over other manufacturers that have to sub-contract for one
or more of the various manufacturing processes. Approximately 75% of Touche's
manufacturing is performed on a volume production basis for metal cabinets or
enclosures, while the remaining 25% is in developing prototype products for
future use by its customers.
Enterprise Industries, Inc. EII provides production metal stamping,
precision machining and electrical discharge manufacturing services to OEMs.
Because EII has tool and die capability, use of its services generally requires
a higher up front costs for the production of the tools with correspondingly
lower per unit production costs than the processes used by Touche. EII services
clients in automotive, furniture, hardware, audio components, and aerospace
industries in addition to servicing clients in the core industries serviced by
the Company and is focusing its marketing efforts on the target market of the
Company. Recently, EII moved from a 25,000 square foot facility into a 126,000
square foot facility to accommodate anticipated growth.
CABLE AND HARNESS ASSEMBLY The Company produces discrete wire
harnesses, flat cables, round cables, round to flat ribbon cables, ground plane
cables, RGB, coaxial, triaxial, power and signal cables. Cable assembly involves
the bundling of wires which may or may not be of different materials, gauges,
with different insulations in one length. Harness assembly involves the bundling
of wires in multiple configurations which may or may not be of different
materials and gauges with different insulations.
21
<PAGE> 24
Turnkey Division. TEI provides value added turnkey services to many of
Touche's OEM customers. These services are primarily the installation of cable
and harness assemblies into the products manufactured by Touche and OEMs that do
not have the in-house capability to provide such services. In 1996, TEI added
clean room assembly at the request of its customers as part of its strategy to
expand its value added services. All of TEI's value-added turnkey services are
provided pursuant to contracts or purchase orders with its customers.
Cable and Harness Division. To obtain better prices for the cable and
harness material installed by the Turnkey Division, TEI acquired the net assets
(accounts receivable, inventory and capital equipment) of the San Jose based
division of Pen Interconnect, Inc. The acquired division produces different
types of wire cable and harnesses installed by TEI and other companies in metal
cabinets and enclosures. The cable and harness division both produces cable for
use by TEI in the Turnkey Division and sells cable to OEMs and other contract
manufacturers.
DISTRIBUTION
Trinity Electronics, Inc. Trinity is primarily a passive electronics
distributor of board level electronic components including capacitors,
resistors, board to board interconnects, back plane interconnects and D-subs to
OEMs and contract manufacturers. Trinity primarily sells to instrumentation
industry accounts. Trinity provides just-in-time, bin stocking, and KanBan
inventory services to its distribution customers. In addition, Trinity provides
cable assembly services to its customers at competitive prices using franchise
lines for assemblies. Sales of electronic parts to OEMs are approximately 55% of
the revenues of Trinity. Sales of assembled cable both to OEMs and contract
manufacturers are approximately 30% of the revenues of Trinity. Sales of
electronic parts to contract manufacturers are approximately 15% of the revenues
of Trinity. In addition to revenues generated from the operations of Trinity,
the Company expects to see additional benefits through better pricing on
connectors used by the cable and harness division of TEI and introductions to
OEM customers of Trinity that may be interested in utilizing the contract
manufacturing services of the Company.
NEW PRODUCT SERVICE LINES OF BUSINESS
In 1996, TEI added clean room assembly internally as well as cable and
harness assembly through its acquisition of the San Jose Division of Pen
Interconnect, Inc.
In 1997, the Company added metal stamping and tool and die capability
through its acquisition of EII as well as distribution of board level electronic
components through the acquisition of Trinity.
22
<PAGE> 25
MARKETING AND SALES
The marketing strategy of the Company focuses on developing long-term
relationships with OEMs in its target market of computers, telecommunications
equipment, semiconductor test equipment and medical test equipment. The Company
intends to focus its marketing efforts on a greater number of manufacturers of
telecommunications equipment, provided, however, that the marketing efforts of
the Company will continue to reflect the evolution of OEMs from different
segments of the technology industry to use contract manufacturers.
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 its core industry focus. EII will focus its efforts on expanding its
business in the core industry segments of Touche and TEI. The ability of the
Company to maintain relationships with major existing customers remains a
significant factor in determining 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
supplemented by sales representatives in geographic areas where the Company does
not have a physical presence. As a result of the limited and focused target
market, the marketing efforts of the Company will rely primarily on direct sales
efforts, which will emphasize its design-engineering and quality control
manufacturing capabilities.
Sales activities of the Company are handled by a combination of direct
sales personnel and limited use of independent sales representatives. 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.
CUSTOMER SERVICE AND SUPPORT
The Company handles all customer service-related inquiries through the
sales staff who have been assigned to handle and manage account relationships.
This requirement enables the salesperson to monitor and control the quality of
production during the entire manufacturing process, which is designed to help
prevent production problems before shipment is made to customers. Such efforts
are supported by the engineering department of the appropriate Subsidiary which
is 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 the appropriate facility.
WORKING CAPITAL PRACTICES
Because the Company produces custom designed products, it orders
inventory to fulfill existing orders resulting in minimal financial exposure.
23
<PAGE> 26
SOURCES OF SUPPLY, MAJOR SUPPLIERS AND BACKLOG
The largest supplier of the Company is Teredyne Connection Systems, Inc.
Purchases from this vendor accounted for approximately 7.6% of the combined
purchases of the Company in calendar 1997.
The raw materials, such as sheet metal, wire and cable, and electronic
components used in the development and manufacture of 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. The Company does
not have any material long term contracts for new materials. The Company has not
experienced any significant difficulty in obtaining adequate supplies to perform
under its 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, 1997, the Company had a firm backlog approximately
$18,000,000. The Company does not believe that its combined rolling backlog at
any particular time is necessarily indicative of its future business or
performance.
MAJOR CUSTOMERS
Touche and TEI's major customers include various technology industry
related companies, such as Hewlett Packard Company, Lam Research Corporation,
Tandem Computers Inc., KLA Instruments, and Varian Associates, Inc. For the year
ended December 31, 1997, revenues derived from two customers (Lam Research
Corporation and Tandem Computers Incorporated) amounted to approximately 12% and
14% respectively, of total revenue, excluding intercompany sales. Due to the
growth in sales to other customers, reliance on major customers represents a
substantial shift from 1996 when the Company had three customers each accounting
for over 10% of its business individually and 65% of its business in the
aggregate. As the sales arrangements with these customers are terminable upon
short notice, the loss of any one of them would have a material adverse impact
on the revenues and profits of the Company, given the significant percentage of
revenues derived from these customers. Although the Company cannot control the
needs of these customers, the Company believes that expansion of services
offered by the Company will strengthen its relationship with these customers.
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 trademark rights to its "Touche" trademark and servicemark.
24
<PAGE> 27
COMPETITION
Manufacturing of enclosures for electronic equipment is a fragmented,
highly competitive industry, and involves rapid change. Competitors of the
Company range from small firms able to provide only a few of the services
provided by the Company to substantially bigger, better financed competitors
able to provide more value added services. Competition is generally based on
several factors, including services provided, quality of work, reputation,
price, and marketing approach.
The Company is established in the industry and maintains a strong
competitive presence by delivering high-quality work in a timely fashion within
the customer's budget constraints with enhanced ability to deliver value added
services.
Because of the continuing change by OEMs from manufacturers to
design-engineering, electronics value added, and marketing organizations,
contract manufacturers are receiving a much greater share of the overall
manufacturing task of products that are designed for manufacture by their
customers. The process itself removes more and more of the subcontracting and
replaces it with a prime contractor status gradually eliminating the need for
submitting joint subcontracting work proposals. By 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
Company believes that the creation and maintenance of a "one-stop shop"
manufacturing environment makes it an effective competitor in the industry.
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,
TEI and EII.
The principal federal and state legislation which has the most significant
effect on the Company's business includes the following: The Comprehensive
Environmental Response; The Compensation and Liability Act; The Resource
Conservation and Recovery Act; The Clean Air Act; The Safe Drinking Water Act;
The Emergency Planning and Community Right-to-Know Act; The Clean Water Act; and
The Toxic Substance Control Act. Failure by the Company to comply with
applicable federal and state environmental regulations could result in the
Company incurring substantial fines and penalties and/or having restraining
orders issued against it.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 585
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, 114 are engaged in administration and finance, 457 in
manufacturing, engineering and production, and 14 in marketing and sales. Many
employees of the Company have overlapping responsibilities in these job
descriptions. The Company has never experienced a work stoppage. The Company
believes that its relationships with its employees are good.
25
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
On March 5, 1996, the Company acquired Touche and TEI pursuant to certain
Stock Purchase Agreements executed on December 28, 1995. Prior to that time, the
Company had no operations.
The Company's strategy has been to expand its core and value added
business by increasing its product offerings to satisfy the needs of its
customers and their growing demand for more outsourcing of contract
manufacturing services. On November 1, 1996, TEI acquired the San Jose cable and
harness manufacturing division of Pen Interconnect, Inc. On January 1, 1997, the
Company acquired Enterprise Industries, Inc., a metal stamping business.
Effective October 1, 1997, the Company acquired the operations of Trinity
Electronics, Inc., ("Trinity") a passive distributor of board level electronic
components; Trinity formally merged with a wholly owned subsidiary of the
Company on December 22, 1997.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Sales 100% 100% 100%
Costs of Goods Sold 73.8 77.4 77.2
-------- -------- --------
Gross Profit 26.2 22.6 22.8
Operating Expenses 20.9 20.6 16.7
-------- -------- --------
Income From Operations 6.1 2.0 5.3
Net Other Expenses 0.6 1.4 2.5
Income Before Provision for Income Taxes 4.7 0.6 3.6
Provision for Income Taxes 1.8 0.0 1.9
-------- -------- --------
Net Income 2.9 0.06 1.7
======== ======== ========
</TABLE>
All figures rounded to the nearest one tenth of one percent.
26
<PAGE> 29
RESULTS OF OPERATIONS - FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMPARED WITH THE FISCAL YEAR ENDED DECEMBER 31, 1996
The results of operations utilizes the consolidated results of the
Company. The discussion below should be read in conjunction with the financial
statements and the notes thereto that appear elsewhere in this report.
NET SALES
The Company's net sales increased approximately $12,806,838 or 49% to
$38,946,666 from $26,139,828 in the fiscal year ended December 31, 1997, as
compared with the fiscal year ended December 31, 1996. Sales growth was due to a
significant increase in sales volume through both existing as well as new
customer orders, and significant growth and continued diversity of operations
through the acquisition of the cable and harness and metal stamping
manufacturing businesses at the end of 1996 and beginning of 1997, respectively,
as new product services continue to be introduced and added to consolidated
operations. In addition, the acquisition of Trinity Electronics, Inc., effective
October 1, 1997 for accounting purposes, impacted positively on the fourth
quarter.
Inasmuch as the Company's two largest customers accounted for
approximately 26% of revenues for the fiscal year ended December 31, 1997, with
the largest accounting for 14% of such revenues, the disruption or loss of a
significant amount of business of either customer could have a material adverse
impact on the total revenues of the Company. The Company has reduced dependency
of the major customers substantially; in 1996, the three largest customers of
the Company accounted for 65% of total revenues of the Company.
GROSS PROFIT
The Company's gross profit increased approximately $4,288,536 or 73% to
$10,190,618 from $5,902,082 in the fiscal year ended December 31, 1997, as
compared with the fiscal year ended December 31, 1996. As a percentage of sales,
the Company's gross profit increased 3.6% to 26.2% from 22.6 in the fiscal year
ended December 31, 1997, as compared with the fiscal year ended December 31,
1996. The increase in gross profit is primarily due to increased sales and the
acquisition and successful integration of the cable and harness and metal
stamping businesses. 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 demands of the competitive market bidding processes
with its customers.
OPERATING EXPENSES
General and administrative expenses increased approximately $2,760,982 or
51% to $8,138,114 from $5,337,132 in the fiscal year ended December 31, 1997, as
compared with the fiscal year ended December 31, 1996. As a percentage of sales,
general and administrative expenses remained constant at approximately 21% for
the fiscal year ended December 31, 1997, as compared with the fiscal year ended
December 31, 1996. The dollar increase in general and administrative expenses
resulted primarily from increased overhead and transaction costs associated with
the acquisitions.
27
<PAGE> 30
OTHER INCOME [EXPENSE]
The Company's other expenses decreased approximately $127,060 or 36% to
$230,554 from $357,614 in the fiscal year ended December 31, 1997, as compared
with the fiscal year ended December 31, 1996. The decrease was primarily due to
the elimination of a one time non-cash finance charge in the amount of $462,122
on certain bridge loans incurred by the Company in 1996 and an increase of
$102,121 in other income, offset by an increase of $274,697 in interest expense
used to finance increases in inventory, the nonreocurrence of $69,742 in
interest income and a reduction of $138,224 in gains from the sale of equipment.
INCOME TAX EXPENSE
Income tax expense increased $666,765 to $685,764 from $18,999 as a
result of a substantial increase in income from operations and the full
utilization of net operating loss carry forwards in the prior year.
NET INCOME
Net income before taxes increased approximately $1,654,614 to $1,821,950
from $167,336 in the fiscal year ended December 31, 1997, as compared with the
fiscal year ended December 31, 1996. The increase in net income was due
primarily to: (1) a net increase in income from operations of approximately
$1,654,614 resulting from increased sales and sales from recently acquired
companies, and (2) a net decrease in other expenses of approximately $127,060.
Net income after taxes increased approximately $987,849 to $1,136,186
from $148,387 for the fiscal year ended December 31, 1997 compared to the fiscal
year ended December 31, 1996.
RESULTS OF OPERATIONS - FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMPARED WITH THE FISCAL YEAR ENDED DECEMBER 31, 1995
The Results of Operations discussion utilizes the consolidated results in
1996 compared to the combined results in 1995 from the operating subsidiaries
(Touche and TEI) prior to their acquisition by the Company, eliminating
inter-company transactions.
NET SALES
Net sales 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 net sales 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. This general slowdown impacted the industry as a whole.
28
<PAGE> 31
GROSS PROFIT
Gross profit decreased approximately $499,702 or 8% to $5,902,082 from
$6,401,784 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
remained constant during the period the fiscal year ended. The decrease is
primarily due to the corresponding reduction in sales.
OPERATING EXPENSES
Operating expenses increased approximately $697,672 or 14% to $5,377,132
from $4,679,460 for the fiscal year ended December 31, 1996, as compared to the
fiscal year ended December 31, 1995. This increase was primarily due to 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 additional personnel, building rent costs,
repairs, professional fees, promotions of certain engineers to management
positions and other related items.
OTHER INCOME [EXPENSE]
Interest expense decreased approximately $292,202 or 47% to $323,679 from
$615,881 for the fiscal year ended December 31, 1996, as compared to the fiscal
year ended December 31, 1995. Interest expense decreased during the fiscal year
ended December 31, 1996 due to a substantial reduction in outstanding long term
debt, capital lease obligations, and bank borrowings, as compared to December
31, 1995.
INCOME TAX EXPENSE
Income tax expense declined primarily due to the decrease in taxable
income as well as the utilization of net operating loss carry forwards. Proforma
income tax expense for the year ended December 31, 1996 gives effect to the loss
of the S corporation on a combined basis prior to March 5, 1996.
NET INCOME
Income before income taxes decreased approximately $840,300 or 83% to
$167,336 from $1,007,616 for the fiscal year ended December 31, 1996, as
compared with the fiscal year ended December 31, 1995. The decline in income
before taxes was primarily due to: (1) an increase in financing charges of
$174,244 on certain bridge loans that were made by the Company in the fourth
quarter of 1995 to help fund its initial public offering, and (2) increased
operating expenses incurred to fund two new divisions which produced nominal
income during the fiscal year ended December 31, 1996.
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.
29
<PAGE> 32
LIQUIDITY AND CAPITAL RESOURCES
In June, 1997, the Company renewed and increased its long-term revolving
line of credit ("Revolving Line") with Manufacturers Bank ("Mfrs."). The
Revolving Line bears interest at Mfrs.' base rate plus 1/4%. This facility
allows the Company to borrow up to $5,750,000 based on a stipulated percentage
of contractually defined eligible trade accounts receivable. The Company had
approximately $3,856,268 in outstanding borrowings under the Revolving Line and
nothing available (based on the eligible trade accounts) as of December 31,
1997. In addition, the Company and Mfrs. have agreed to a line of credit
facility of up to $2,000,000 available for equipment purchases, which bears
interest at Mfrs. base fixed rate of 8.75% per annum (the "Equipment Line"). The
Company had approximately $1,214,814 outstanding and $785,186 available under
the Equipment Line as of December 31, 1997.
The Company's working capital decreased by approximately $922,745 from
$4,036,532 to $3,113,787 in the fiscal year ended December 31, 1997 as compared
to the fiscal year ended December 31, 1996. The decrease resulted primarily from
an increase in amounts outstanding under the line of credit of $3,271,268, an
increase in the current portion notes payable of $2,571,882 and an increase in
accounts payable of $1,121,683 offset by an increase in accounts receivable of
approximately $1,423,525, an increase in inventory of approximately $4,550,389,
and an increase in cash of $166,837. The high level of accounts receivable at
December 31, 1997 as compared to December 31, 1996, is due primarily to a
significant increase in sales. The significant increase in inventory during the
same period is due to both an increase in sales and a change in product mix to
products coupled with an increased use of raw materials and longer production
cycles.
The net cash required to fund operating activities increased by $398,944
or 55% to $1,129,241 from $730,297 in the fiscal year ended December 31, 1997,
as compared to the fiscal year ended December 31, 1996. The change primarily
represents an increase of $613,333 in depreciation and amortization expense, an
increase of $2,876,872 in accounts receivable, an increase of $2,864,028 in
accounts payable, and an increase of $2,606,601 in inventory, offset primarily
by the elimination of a $462,122 one time non cash finance charge in 1996, and
an increase of $736,318 in income taxes payable.
Cash used in investing activities remained relatively constant at
$2,942,319 in the fiscal year ended December 31, 1997 as compared with
$3,064,495 in the fiscal year ended December 31, 1996. Fluctuations in cash used
in investing activities included an increase of $179,276 for repayment of
advances by stockholders and a reduction of $450,224 in the amount spent for the
purchase of equipment offset by an increase in of $258,312 for the purchase of
other assets, a reduction of $193,650 for the proceeds from the sale of
equipment and an increase of $147,996 in cash used for the purchase of
businesses.
Cash generated from financing activities increased $999,432 or 31% to
$4,238,397 from $3,238,965 in the fiscal year ended December 31, 1997 compared
to the fiscal year ended December 31, 1996. The change resulted from an increase
of $1,987,990 in amounts outstanding under the line of credit, an increase of
$2,341,328 of proceeds from notes payable, the non recurrence of a one time
charge of $1,000,000 in 1996 for the repayment of certain bridge notes and the
elimination $734,742 of obligations under the Company's capital lease
obligations, offset by the one time impact of $6,036,798 from the proceeds of
the public offering in 1996, and an increase of $1,317,551 in repayment of notes
payable.
During the fiscal year ended December 31, 1997 and December 31, 1996, the
Company spent approximately $2,496,925 and $643,451, respectively, to purchase
capital equipment, financed through equipment contracts. Additionally,
management expects the Company's level of future capital expenditures to
increase at a level that is consistent with the Company's projected growth and
operations. Management has
30
<PAGE> 33
projected capital expenditure requirements of approximately $1,800,000 for the
calendar year ending December 31, 1998. This increase will be supported by
increased bank borrowings and internal operations.
The Company experienced tighter cash flow in the fourth quarter of 1997
as a result of increasing inventory and receivables from increased sales and a
change of product mix. Accordingly, management believes that it will need new
sources of funding either through increased equity investment or an expanded
line of credit facility in order to meet the Company's anticipated operating
needs and projected capital expenditure requirements through the fiscal year
ending December 31, 1998, excluding acquisition related expenses. See the
following discussion on sale of debentures and new Fleet Capital Line of Credit.
SUBSEQUENT EVENTS
Sale of Debentures. On February 10, 1998, the Company closed an offering
of 3 Units, each Unit consisting of 4 of its 5%, $275,000 principal amount
Convertible Subordinated Debentures due February 10, 2001 (the "Debentures") and
100,000 Class B Warrants to purchase common stock of the Company (the
"Warrants") for a total of $3.3 million. Interest on the Debentures accrues
quarterly and is payable annually. Proceeds from the sale of the Debentures were
used to repay the $1,000,000 note issued in connection with the Trinity
acquisition; the remainder of the proceeds went to working capital.
The Debentures are convertible into Common Stock of the Company at the
option of the holder, at a variable conversion price ranging from $3.00 to $5.50
per share, depending on the market value of the Common Stock of the Company at
the time of the notice of conversion. Accordingly, the Company may be required
to issue no less than 600,000 shares nor more than 1,100,000 shares of common
stock upon conversion of the Debentures.
In addition, the Company is issuing 25,000 Warrants per Debenture for
each Debenture outstanding as of the earlier to occur of the one year
anniversary of the closing date of the sale of the Debentures or the date three
months following the registration of the Common Stock issuable upon conversion
of the Debentures and upon the exercise of the Warrants. The Warrants have an
exercise price of $5.50 per share, subject to adjustment for dilutive issuances.
The Company is obligated to register the Common Stock underlying the Debentures
and the Warrants with the Securities and Exchange Commission.
31
<PAGE> 34
In connection with the foregoing issuance, the Company paid a finder's fee
of $176,000 in cash pursuant to terms of a Non Circumvention and Finder's Fee
Agreement (the "Agreement") and a $66,000 credit toward the purchase of one
quarter of one Debenture. The Agreement calls for (1) the issuance of the number
of shares of common stock to the finders equal to 5% of the principal amount of
the securities sold divided by the greater of (a) any stated conversion price in
the Debenture and (b) the average of the closing bid and asked prices of the
Common Stock of the Company for the five trading days prior to the closing and,
(2) in this case, a number of warrants equal to 10% of the number of shares
issuable based on the Stated Conversion Price as defined in the Agreement, to be
determined between 60,000 and 110,000. The warrants are to be issued at 125% of
the average of the closing of the bid and asked prices of the common stock of
the Company for the five trading days preceding their issuance, are non callable
and expire three years from their date of issuance.
The Agreement also provides that upon exercise of any Class B Warrants
issued in the offering, the finders shall receive a cash fee equal to 4% of the
amount received upon exercise of the Warrants; Common Stock equal to 5% of the
number of shares issued upon such exercise; and warrants equal to 10% of the
number of shares issued upon such exercise (excluding warrants exercised by the
finders or their affiliates). The warrants shall have an exercise price of 125%
of the average of the bid and asked prices for the Company on the five trading
dates preceding the transaction, shall be non callable, and shall expire three
years from the date of issuance.
Fleet Capital Line of Credit. On March 2, 1998, the Company entered into
a Loan and Security Agreement with Fleet Capital Corporation (the "Fleet
Facility") providing for borrowings of up to $25,000,000 based on certain
formulas contained within the Loan and Security Agreement. The Company paid a
finder's fee of $250,000 and a loan fee of $250,000 in connection with the
transaction. As of March 10, 1998, the Company was eligible to borrow up to
$17,222,691 under the Fleet Facility and had borrowed $10,347,841. Borrowings
were in the form of two Term Loans ("Term Loan A" and "Term Loan B,"
respectively), an equipment loan (the Equipment Loan, together with the Term
Loans, the "Fixed Loans") and revolving credit loans (the "Revolving Credit
Loans"). Term Loan A is in the principal amount of $4.7 million and accrues
interest at the rate of prime plus 0.5%. Term Loan B is in the principal amount
of $2.0 million and accrues interest at the rate of prime plus 1.5%. The
Equipment Loan is in the principal amount of $4.0 million and accrues interest
at the rate of prime plus 0.5%.
The Revolving Credit Loans are in such amount as the Company elects, up
to the borrowing base permitted by the Loan and Security Agreement and accrue
interest at the rate of 0.25% plus prime. As of March 10, 1998, the Company had
$3,647,841 available for borrowing. The Fixed Loans are payable in monthly
installments of principal and interest with principal amortizing over a seven
year period and the balance due on March 2, 2003; interest only on the Revolving
Credit Loans is payable monthly with the principal due upon termination of the
Loan and Security Agreement. Interest on the Fixed Loans and Revolving Credit
Loans is adjusted daily. Interest on the Fixed Loans may be adjusted downward by
0.25% each year for two years if the Company meets certain performance criteria
as reflected in its audited financial statements for the fiscal years ended
December 31, 1998 and December 31, 1999, respectively. Interest on the Revolving
Credit Loan may be adjusted downward by 0.25% only once if the Company meets the
performance criteria as reflected in its audited financial statements for the
fiscal year ended December 31, 1998. In addition, if the Company meets the
conditions specified for December 31, 1998, it may, at its option, have the
interest rate on (1) the Revolving Credit Loan converted into LIBOR plus 2.5%;
(2) Term Loan A and the Equipment Loan converted into LIBOR plus 2.75%; and (3)
Term Loan B converted into LIBOR plus 3.75%. Effective March 26, 1998, the
parties amended the agreement to provide that the Company may elect to convert
the interest rate on (i) the Revolving Credit Loans to bear interest at the rate
of LIBOR plus 2.75%;
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<PAGE> 35
(ii) Term Loan A and the Equipment Loan to bear interest at the rate of LIBOR
plus 3%; and (iii) Term Loan B to bear interest at the rate of LIBOR plus 4%.
NEW AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. Earlier application is permitted. Reclassification of financial statements
for earlier periods provided for comparative purposes is required. SFAS no. 130
is not expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 changes how operating segments
are reported in annual financial statements and requires the reporting of
selected financial information about operating segments in interim financial
reports issued to shareholders. SFAS 131 is effective for periods beginning
after December 15, 1997, and comparative information for earlier years is to be
restated. SFAS No. 131 need not be applied to interim financial statements in
the initial year of its application.
SFAS No. 131 is not expected to have a material impact on the Company.
INFLATION
The Company continues to experience the benefits of a low inflation
economy locally, regionally and nationally. However, the Company enters into
mostly short-term fixed price contracts and a large portion of these contracts
are labor intensive. Accordingly, the short-term contracts are less susceptible
to inflationary pressures.
33
<PAGE> 36
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of the Company are as
follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Rolando Loera 44 Chairman, President and Chief Executive Officer; Director
Livino D. Ribaya, Jr. 50 Vice President-Manufacturing
Frank Ramirez, III 42 Vice President-Engineering
Charles E. Shaw 53 Vice President-Chief Financial Officer; Director
Robert Loera 31 Controller and Secretary; Director
Thomas F. Chaffin 40 Director
Robert Fink 63 Director
Boris Lipkin 50 Director
</TABLE>
Mr. Shaw serves until the next annual meeting of shareholders or until
his successor is elected and qualified. Mssrs. Fink, Lipkin and Robert Loera
serve until the 1999 annual meeting or until their successors are elected and
qualified. Mssrs. Chaffin and Rolando Loera serve until the 2000 annual meeting
or until their successors are elected and qualified. At present, the Company's
bylaws provide for not less than one director nor more than nine directors.
Currently, there are six 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 and Rolando Loera are brothers.
The principal occupation and business experience for each executive
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
B.A. 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> 37
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. During 1988 through 1992, he
served as Vice President and Chief Financial Officer of Douglas Broadcasting,
Inc. a $51 million radio broadcast network. Mr. Shaw has a B.S. in Business
Administration from the City University of New York, a Masters of Business
Administration from New York University and a 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.
Thomas F. Chaffin. Mr. Chaffin has been a Director of the Company and a
member of the Audit Committee of the Board of Directors since January 1997. He
has been a partner in the law firm of Rosenblum Parish & Isaacs, San Jose, CA
since January 1995. During the period 1988-1995, Mr. Chaffin was a partner in
the law firm of Berliner, Cohen, San Jose, CA. He holds a bachelor's degree in
accounting from the University of California, Santa Barbara and earned a J.D.
with honors from the University of San Francisco School of Law. He also holds a
L.L.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.
Robert C. Fink. Mr. Fink has been a Director of the Company since
November 1997. From 1993 until his retirement in December, 1997, Mr. Fink has
been Senior Vice President of Corporate Support and Chief Operating Officer of
Lam Research Corporation, a manufacturer of semiconductor processing equipment.
From 1988 to 1993 he served as President of Drytek, Inc., a former subsidiary of
General Signal Corporation. From 1984 to 1988, he was a Director of VLSI
Operation (North America) for ITT Corporation's Semiconductor Division. Prior to
1984, Mr. Fink served for 12 years as Director of World Wide Manufacturing
Resources for General Instrument Corporation's Microelectronics Division. Mr.
Fink has been a Director of Uniphase Corporation since April 1995, a Director of
Consilium, Inc. since January 1996 and a Director of CVC, Inc. since 1997.
Boris Lipkin. Mr. Lipkin has been a Director of the Company since
November 1997. Mr. Lipkin has been President of the Track Division and Corporate
Vice President of Silicon Valley Group, Inc., a San Jose, CA based semiconductor
test equipment company, since 1995. From 1992 to 1995 he was Vice President and
General Manager of Varian Associates, a semiconductor equipment company. From
1978 to 1992 he served in various management and engineering positions at IBM's
Fishkill, New York facility. Mr. Lipkin received a Master of Science Degree in
electro mechanical engineering at the Polytechnical Institute in Kharkov,
Russia.
35
<PAGE> 38
EXECUTIVE COMPENSATION
Below the following table sets forth remuneration paid by the Company
during fiscal years 1995, 1996 and 1997, to the named officers and directors of
TMCI. For the periods shown, no other executive officer received remuneration in
excess of $100,000 per annum.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual
Compensation Number of
Name of ------------------ Securities Underlying
Individual Position with Company Year Salary Options/SARs(#)
- ---------- --------------------- ---- ------- ---------------------
<S> <C> <C> <C> <C>
Rolando Loera Chairman, 1997 $225,000 200,000
President and CEO 1996 225,000 100,000
1995 150,000
</TABLE>
Option SAR in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of Securities % of total options/SARs
Underlying Options/SARS granted to employees in Exercise Price or Expiration
Name Granted Fiscal Year ($/sh) base price per share Date
- ------------- ----------------------- ------------------------ -------------------- ----------
<S> <C> <C> <C> <C>
Rolando Loera 200,000 60% $5.3625 7/08/07
</TABLE>
<TABLE>
<CAPTION>
Potential Realizable Value at Assumed
Annual Rates of Stock Price Appreciation
for Option Term.
----------------------------------------
(a) (f) (g)
Name 5% 10%
- ------------- -------------- ---------------
<S> <C> <C>
Rolando Loera $674,489.48 $ 1,709,288.78
</TABLE>
36
<PAGE> 39
Aggregated Options/SAR Exercised in Last Fiscal Year
and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Options/SARs at Options/SARs at
Acquired on Value FY-End(#) FY-End($)
Name Exercise(#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ----------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Rolando Loera -0- -0- 100,000/200,000 $25,000/0(1)
</TABLE>
(1) The closing price for the common stock of the Company on December 31, 1997
was $4.00 per share.
EMPLOYMENT AGREEMENT
The Company has entered into an employment agreement ("Agreement") dated
as of December 28, 1995 with Rolando Loera. The term of employment commenced on
March 11, 1996 and will expire on the fifth anniversary thereof. The annual
salary under the Agreement is $225,000. The term of employment will be
automatically extended for an additional five year term in the absence of notice
from either party. This salary may be increased to reflect annual cost of living
increases and may be supplemented by discretionary and performance increases as
may be determined by the Board of Directors except that during the first three
years following the Effective Date, his salary may not exceed $225,000. Mr.
Loera is also eligible to receive an annual bonus of up to $100,000, payable in
four quarterly installments. The Agreement provides that during the initial
three years of the term of employment, an annual bonus of $100,000 will be
awarded to Mr. Loera and that such bonus awards will be used by Mr. Loera to
repay the $303,325 loan TEI to Touche Properties, Inc. referred to in the
Certain Relationships and Related Transactions section below. Mr. Loera
relinquished his bonuses in 1996 and 1997. 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.
37
<PAGE> 40
STOCK PLANS
The Company adopted its 1995 Stock Option Plan, effective December 22,
1995 (the "1995 Plan"). Under the 1995 Plan, key employees, officers and
consultants of the Company may be granted options to purchase shares of the
Company's Common Stock at its fair market value on the date of grant. The plan
provides for an aggregate of 500,000 options.
The Company adopted the 1997 Stock Option Plan, effective December 1,
1997 (the "1997 Plan"). Under the 1997 Plan, employees, officers, directors 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 1,000,000 options.
Any future awards will be determined by the Board of Directors or a
Committee established by the Board.
The Company adopted its 1997 Employee Stock Purchase Plan effective
December 1, 1997. Under such plan, employees of the Company, including executive
officers, may defer up to 20% of their annual compensation for the purchase of
Common Stock of the Company at a price of 85% of the fair market value of the
common stock on the date of issuance. The plan provides for the issuance of up
to 250,000 shares.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires that directors and officers of
the Company and persons who beneficially own more than 10% of the Common Stock
file with the SEC initial reports of beneficial ownership and reports of changes
in beneficial ownership and reports of changes in beneficial ownership of the
common Stock of the Company. Directors, officers and greater than 10% beneficial
owners are required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely on a review of the Forms 3 and 4 and amendments thereto
filed during the recently completed fiscal year and Forms 5 and amendments
thereto with respect to the most recently completed fiscal year, the following
individuals failed to file reports required pursuant to Section 16(a) of the
Securities Exchange Act of 1934, as amended, on a timely basis.
Rolando Loera, Charles Shaw, Livino Ribaya, Frank Ramirez, Robert Loera,
Tom Chaffin, and Dominic Polimeni each failed to file one report on a timely
basis representing one transaction.
Robert Fink and Boris Lipkin each failed to report on a timely basis
representing their election to the Board of Directors and no transactions.
38
<PAGE> 41
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 March 16, 1998 by (i) each person who is known
by the Company to own beneficially more than five percent (5%) of the Company's
common stock; (ii) each of the Company's executive officers named in the
compensation table and directors; and (iii) all officers and directors as a
group:
<TABLE>
<CAPTION>
Name and Position Number Percentage
Address(1) With Company Of Shares of Shares(2)
- -------------------- ------------------------------------ ------------ ------------
<S> <C> <C> <C>
Rolando Loera Chairman, President and Chief 805,889(3) 19%
Executive Officer; Director
Patrick McQuade President, Trinity Electronics, Inc. 404,539 10
Thomas Chaffin Director 10,000(4) *
Robert Loera Director, Controller 10,000(4) *
Charles Shaw Director, Chief Financial Officer 10,000(4) *
Dominic A. Polimeni Director 10,000(4) *
Robert Fink Director 0
Boris Lipkin Director 0
Rolando Loera Trustee for Touche Employee
Stock Ownership Plan 27,280(5) *
All Officers and
Directors as a
Group (9 persons) 1,084,429 26%
</TABLE>
- ----------
* Less than 1%
(1) Unless otherwise noted, c/o TMCI Electronics, Inc., 1875 Dobbins Drive,
San Jose, CA 95133.
(2) Does not include the exercise or conversion of any outstanding derivative
securities.
(3) Includes options to purchase 138,889 shares of Common Stock subject to
outstanding options which have vested as of March 1, 1998.
(4) All shares are subject to options which have vested.
(5) Mr. Loera shares voting power with respect to these shares
(6) Includes 224,040 shares and vested options to purchase 14,500 shares owned
by certain additional executive officers of the Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TEI leases approximately 78,000 square feet of space located at 1881-1899
Dobbins 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 subleases space to Touche. Rent expense amounted to approximately
$576,144 in 1997. In connection with its acquisition of 1881-1899 Dobbins Drive,
TPI borrowed $1,000,000 from the Small Business Administration which was
guaranteed by Touche and TEI. The loan was repaid in full in March, 1998.
39
<PAGE> 42
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. In 1997,
TPI paid $67,743 toward the retirement of this loan. The outstanding balance of
the loan as of December 31, 1997 was $469,878.
In addition, in 1993 Touche made loans to Rolando Loera aggregating
$87,190.39. This loan bears interest at 10% per annum and is payable in monthly
installments of $1,000. Certain additions were made to the principal amount of
the loan in fiscal 1995 to account for payments of certain personal expenses of
Rolando Loera by Touche. Accordingly, the outstanding principal balance on the
loan was $111,984 at December 31, 1997. In 1997, Mr. Loera paid $150,000 toward
the retirement of these loans.
During 1996, the Company advanced $95,986 to Frank Ramirez, III at 10%
interest amortizing over a 10 year period. As of December 31, 1997, Mr. Ramirez
owed the Company $106,037.
During 1997, the Company sold approximately $5,821,576 in products and
services to Lam Research Corporation. Mr. Robert Fink, a director of the
Company, retired as Senior Vice President of Corporate Support and Chief
Operating Officer of Lam Research Corporation in December 1997.
During 1997, the Company sold approximately $2,038,749 worth of products
and services to Silicon Valley Group Inc. Mr. Boris Lipkin, a director of the
Company is president of the Track Division and Corporate Vice President of
Silicon Valley Group Inc. The Company sold products to Silicon Valley Group,
Inc. for many years prior to Mr. Lipkin joining the board.
40
<PAGE> 43
DESCRIPTION OF SECURITIES
COMMON STOCK
The authorized capital stock of the Company consists of 25,000,000
shares of Common Stock, $.001 par value per share. As of December 31, 1997 there
were 4,057,758 issued and outstanding shares of Common Stock and approximately
40 stockholders of record of the Company. Holders of the Common Stock do not
have preemptive rights to purchase additional shares of Common Stock or other
subscription rights. The Common Stock carries no conversion rights and is not
subject to redemption or to any sinking fund provisions. All shares of Common
Stock are entitled to share equally in dividends from sources legally available
therefor when, as and if declared by the Board of Directors and, upon
liquidation or dissolution of the Company, whether voluntary or involuntary, to
share equally in the assets of the Company available for distribution to
stockholders. All outstanding shares of Common Stock are validly authorized and
issued, fully paid and nonassessable, and all shares to be sold and issued as
contemplated hereby, will be validly authorized and issued, fully paid and
nonassessable. The Board of Directors is authorized to issue additional shares
of Common Stock, not to exceed the amount authorized by the Company's
Certificate of Incorporation, and to issue options and warrants for the purchase
of such shares, on such terms and conditions and for such consideration as the
Board may deem appropriate without further stockholder action. The above
description concerning the Common Stock of the Company does not purport to be
complete. Reference is made to the Company's Certificate of Incorporation and
bylaws which are available for inspection upon proper notice at the Company's
offices, as well as to the applicable statutes of the State of Delaware for a
more complete description concerning the rights and liabilities of stockholders.
Each holder of Common Stock is entitled to one vote per share on all
matters on which such stockholders are entitled to vote; provided, however, that
cumulative voting rights may exist in the event that the Company qualifies as a
California pseudo foreign corporation at the time of the record date for its
annual meeting in any given year pursuant to Section 2115 of the California
General Corporation law, and at least one shareholder seeks to utilize such
rights in the manner set forth in Section 708 of the California General
Corporation law. In the event that cumulative voting is not utilized, holders of
Common Stock get one vote for each director being elected so that the holders of
more than 50% of the Common Stock voting can elect directors. In the event that
cumulative voting rights apply, holders of Common Stock are entitled to cast the
number of votes equal to the number of directors being elected multiplied by the
number of shares of Common Stock held by such shareholder and are entitled to
distribute such votes among the candidates as they deem appropriate.
CLASS B WARRANTS
The Company may issue up to 300,000 Class B Warrants (the "Class B
Warrants") in connection with its obligation under the Securities Purchase
Agreement relating to the Debentures. Each Class B Warrant entitles the holder
to purchase one share of Common Stock at $5.50 per share from its date of
issuance until March 5, 2001. The Common Stock underlying the Class B Warrants
will, upon exercise of the Class B Warrants, be validly issued, fully paid and
nonassessable. The Class B Warrants are redeemable by the Company for $.01 per
Class B Warrant, at any time one year after their issuance, upon thirty (30)
days' prior written notice, if the average closing sale price or average closing
bid price of the Common Stock, as reported by Nasdaq, equals or exceeds $8.75
per share, for any twenty (20) consecutive trading days within a period of
thirty (30) consecutive days ending within five (5) days prior to the date of
the notice of redemption. Upon thirty (30) days' prior written notice to all
holders of the Class B Warrants, the Company shall have the right to reduce the
exercise price and/or extend the term of the Class B Warrants.
41
<PAGE> 44
The Class B Warrants can only be exercised when there is a current effective
registration statement covering the shares of Common Stock underlying the Class
B Warrants. If the Company does not or is unable to maintain a current effective
registration statement both with the Securities and Exchange Commission and in
the state in which the Class B Warrant holder resides, including audited
financial statements for companies acquired, the Class B Warrant holders will be
unable to exercise the Class B Warrants and the Class B Warrants may become
valueless. See "Risk Factors--Requirements of Current Prospectus and State Blue
Sky Registration in Connection with the Exercise of the Class B Warrants Which
May Therefore Be Valueless."
Class B Warrant certificates may be exchanged for new certificates of
different denominations, and may be exercised or transferred by presenting them
at the offices of the Transfer Agent. Holders of the Class B Warrants may sell
the Class B Warrants if a market exists rather than exercise them. However,
there can be no assurance that a market will develop or continue as to such
Class B Warrants. If the Company is unable to qualify its common stock
underlying such Class B Warrants for sale in certain states, holders of the
Company's Class B Warrants in those states will have no choice but to either
sell such Class B Warrants or allow them to expire.
Each Class B Warrant may be exercised by surrendering the Class B
Warrant certificate, with the form of election to purchase on the reverse side
of the Class B Warrant certificate properly completed and executed, together
with payment of the exercise price to the Class B Warrant Agent. The Class B
Warrants may be exercised in whole or from time to time in part. If less than
all of the Class B Warrants evidenced by a Class B Warrant certificate are
exercised, a new Class B Warrant certificate will be issued for the remaining
number of Class B Warrants.
Holders of the Class B Warrants are protected against dilution of the
equity interest represented by the underlying shares of common stock upon the
occurrence of certain events, including, but not limited to, issuance of stock
dividends. If the company merges, reorganizes or is acquired in such a way as to
terminate the Class B Warrants, the Class B Warrants may be exercised
immediately prior to such action. In the event of liquidation, dissolution or
winding up of the Company, holders of the Class B Warrants are not entitled to
participate in the Company's assets.
COMPENSATION WARRANTS
The Company may issue up to 72,308 warrants as partial payment for its
fee for the placement of the Debentures (the "Fee Warrants") and up to 10,000
warrants in connection the exercise of the Class B Warrants (the "Exercise
Warrants", collectively with the Fee Warrants, the "Compensation Warrants")
pursuant to its obligation under the Non Circumvention and Finder's Fee
Agreement by and among the Company, M.J. Segal and Associates and Private
Investors Equity Group, Inc. Each Fee Warrant entitles the holder to purchase
one share of Common Stock at $5.59 per share for a period of three years
following the date of issuance. Each Exercise Warrant entitles the holder to
purchase one share of Common Stock of the Company at a price of 125% of the fair
market value of the Common Stock on the date of the exercise of the underlying
Class B Warrant for a period of three years following its date of issuance. Fair
market value for purposes of determining the exercise price of the Exercise
Warrants is defined as the average of the bid and ask prices for the Common
Stock of the Company over the five trading days prior to the exercise of the
Class B Warrants. The Common Stock underlying the Compensation Warrants will,
upon exercise of the Compensation Warrants, be validly issued, fully paid and
nonassessable. The Compensation Warrants are non callable.
42
<PAGE> 45
The Compensation Warrants can only be exercised when there is a current
effective registration statement covering the shares of Common Stock underlying
the Compensation Warrants. If the Company does not or is unable to maintain a
current effective registration statement both with the Securities and Exchange
Commission and in the state in which the Compensation Warrant holder resides,
including audited financial statements for companies acquired, the Compensation
Warrant holders will be unable to exercise the Compensation Warrants and the
Compensation Warrants may become valueless. See "Risk Factors--Requirements of
Current Prospectus and State Blue Sky Registration in Connection with the
Exercise of the Compensation Warrants Which May Therefore Be Valueless."
Compensation Warrant certificates may be exchanged for new certificates
of different denominations, and may be exercised or transferred by presenting
them at the offices of the Transfer Agent. Holders of the Compensation Warrants
may sell the Compensation Warrants if a market exists rather than exercise them.
However, there can be no assurance that a market will develop or continue as to
such Compensation Warrants. If the Company is unable to qualify its Common Stock
underlying such Compensation Warrants for sale in certain states, holders of the
Company's Compensation Warrants in those states will have no choice but to
either sell such Compensation Warrants or allow them to expire.
Each Compensation Warrant may be exercised by surrendering the
Compensation Warrant certificate, with the form of election to purchase on the
reverse side of the Compensation Warrant certificate properly completed and
executed, together with payment of the exercise price to the Compensation
Warrant Agent. The Compensation Warrants may be exercised in whole or from time
to time in part. If less than all of the Compensation Warrants evidenced by a
Compensation Warrant certificate are exercised, a new Compensation Warrant
certificate will be issued for the remaining number of Compensation Warrants.
PLAN OF DISTRIBUTION
The Common Stock which is the subject of this registration statement is
being registered for sale from time to time by the selling security holders in
the open market through one or more broker dealers at prevailing market prices
and standard commissions or in privately negotiated transactions.
RESTRICTED SHARES ELIGIBLE FOR FUTURE SALE
1,203,818 of the Company's currently outstanding shares of Common Stock
not being registered for sale hereunder are "restricted securities" and, in the
future, may be sold upon compliance with Rule 144, adopted under the Securities
Act of 1933, as amended. Rule 144 provides, in essence, that a person holding
"restricted securities" for a period of one year may sell only an amount every
three months equal to the greater of (a) one percent of the Company's issued and
outstanding shares, or (b) the average weekly volume of sales during the four
calendar weeks preceding the sale. The amount of "restricted securities" which a
person who is not an affiliate of the Company may sell is not so limited, since
non-affiliates may sell without volume limitation their shares held for two
years if there is adequate current public information available concerning the
Company. Assuming no exercise of any outstanding Warrants or conversion of the
Debentures, the Company had 4,057,758 shares of Common Stock outstanding as of
December 31, 1997. Non-affiliated persons who hold for the two-year period
described above may sell unlimited shares once their holding period is met.
43
<PAGE> 46
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the securities of the Company is
American Stock Transfer & Trust Company located at 40 Wall Street, New York, New
York 10005.
REPORTS TO SECURITY HOLDERS
The Company will furnish to holders of its Common Stock and Warrants
annual reports containing audited financial statements. The Company may issue
other unaudited interim reports to its security holders as it deems appropriate.
LEGAL PROCEEDINGS
The Company and its subsidiaries are not a party to any significant legal
proceedings and, to the best of the Company's information, knowledge and belief,
none is contemplated by any governmental authority.
Subsequent to the closing of the acquisition of the San Jose Division of
Pen Interconnect, Inc. ("PII"), a dispute arose regarding various aspects of the
transaction. On February 14, 1997, the Company 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. The Company sought
such remedies based upon overstatement of the value of inventory in connection
with the acquisition, a substantial change in the operation of the division
prior to the acquisition and failure to disclose certain accounts payable to the
Company.
On December 5, 1997, the Company and PII entered into a settlement
agreement pursuant to which PII agreed to cancel the earn out agreement which
eliminated the ability of PII to receive up to an additional six hundred
thousand dollars ($600,000) in the form of eighty thousand five hundred three
(80,503) shares of the common stock of the Company. In addition, EII agreed to
cancel two promissory worth nine hundred thousand dollars ($900,000) and accrued
interest as well as release Rolando Loera from his personal guaranty thereon in
exchange for one hundred thirty two thousand twenty three (132,023) shares of
common stock of the Company. The Company delivered an additional five thousand
three hundred sixty seven (5,367) shares of its common stock in satisfaction of
its obligation to issue additional common stock for collection of certain
accounts receivable of PII pursuant to the Asset Purchase Agreement. Further,
the Company released fifty three thousand six hundred sixty nine (53,669) shares
of its common stock owned by PII and being held in escrow as security for the
obligations of PII under the Asset Purchase Agreement. The Company waived
certain additional claims against PII in the amount $77,000. Finally, PII agreed
to cooperate with the Company in obtaining an audit of the acquired division so
that the Company could file the necessary financial statements with the
Securities and Exchange Commission.
LEGAL MATTERS
The validity of the securities being offered hereby have been passed upon
for the Company by Rosenblum, Parish & Isaacs, P.C., 160 West Santa Clara
Street, Suite 1500, San Jose, California 95133.
44
<PAGE> 47
EXPERTS
The financial statements of the Company as of December 31, 1997 and
1996, and the related Statements of Operations, Stockholders' Equity and Cash
Flows for each of the three fiscal years in the period ended December 31, 1997,
included in the Registration Statement and this Prospectus have been included
herein in reliance on the report dated Feburary 20, 1998, of Moore Stephens,
P.C., independent certified public accountants, and upon the authority of such
firm as experts in accounting and auditing
45
<PAGE> 48
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
================================================================================
<TABLE>
<S> <C>
Report of Independent Auditors................................................................ F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996.................................. F-2 - F-3
Statements of Operations for the Years Ended December 31, 1997,
1996 and 1995............................................................................... F-4
Statements of Stockholders' Equity for the Years Ended December 31,
1997, 1996 and 1995......................................................................... F-5
Statements of Cash Flows for the Years Ended December 31, 1997,
1996 and 1995 .............................................................................. F-6 - F-7
Notes to Financial Statements................................................................. F-8 - F-25
</TABLE>
-------------------
<PAGE> 49
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 sheets of TMCI
Electronics, Inc. and its subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the two years in the period ended December 31, 1997. We have
also audited the combined statements of operations, stockholders' equity, and
cash flows for the year ended December 31, 1995. 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 financial position of TMCI Electronics,
Inc. and its subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
New York, New York
February 20, 1998
F-1
<PAGE> 50
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1 9 9 7 1 9 9 6
------------ ------------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash $ 312,682 $ 145,845
Accounts Receivable - Net 3,950,341 2,526,816
Inventory 9,721,050 5,170,661
Prepaid Expenses and Other Current Assets 182,968 272,587
Deferred Income Taxes 183,376 187,991
Other Receivables -- 63,669
Notes Receivable - Stockholders 39,312 10,706
------------ ------------
TOTAL CURRENT ASSETS 14,389,729 8,378,275
------------ ------------
PROPERTY AND EQUIPMENT - NET 6,583,260 3,638,300
------------ ------------
OTHER ASSETS:
Notes Receivable - Stockholders 144,292 155,520
Due from Stockholder 111,984 238,167
Due from Related Party 469,878 473,952
Other Assets 277,439 48,152
Goodwill 6,766,564 2,549,261
------------ ------------
TOTAL OTHER ASSETS 7,770,157 3,465,052
------------ ------------
TOTAL ASSETS $ 28,743,146 $ 15,481,627
============ ============
</TABLE>
See Notes to Financial Statements.
F-2
<PAGE> 51
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1 9 9 7 1 9 9 6
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses $ 4,050,925 $ 2,929,242
Due to Affiliate -- 30,634
Line of Credit 3,856,268 585,000
Notes Payable 2,055,256 796,867
Promissory Notes to a Stockholder 1,313,493 --
------------ ------------
TOTAL CURRENT LIABILITIES 11,275,942 4,341,743
------------ ------------
LONG-TERM LIABILITIES:
Notes Payable - Net of Current Portion 3,607,877 2,064,273
Deferred Income Taxes 560,180 436,781
------------ ------------
TOTAL LONG-TERM LIABILITIES 4,168,057 2,501,054
------------ ------------
TOTAL LIABILITIES 15,443,999 6,842,797
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
------------ ------------
STOCKHOLDERS' EQUITY:
Common Stock, $.001 Par Value, 25,000,000
Shares Authorized, 4,057,758 and
3,499,772 Issued and Outstanding as of
December 31, 1997 and 1996, Respectively 4,057 3,500
Additional Paid-in Capital 10,890,233 7,366,659
Retained Earnings 2,404,857 1,268,671
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 13,299,147 8,638,830
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 28,743,146 $ 15,481,627
============ ============
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE> 52
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1 9 9 7 1 9 9 6 1 9 9 5
------------ ------------ ------------
[CONSOLIDATED] [COMBINED]
<S> <C> <C> <C>
SALES - NET $ 38,946,666 $ 26,139,828 $ 28,098,919
COST OF GOODS SOLD 28,756,048 20,237,746 21,697,135
------------ ------------ ------------
GROSS PROFIT 10,190,618 5,902,082 6,401,784
OPERATING EXPENSES 8,138,114 5,377,132 4,679,460
------------ ------------ ------------
INCOME FROM OPERATIONS 2,052,504 524,950 1,722,324
------------ ------------ ------------
OTHER INCOME [EXPENSE]:
Other Income 291,825 189,704 40,394
Interest Income -- 69,742 9,726
Interest Income - Related Party 74,756 29,276 29,276
Interest Expense (598,376) (323,679) (615,881)
Non-Cash Finance Charge -- (462,122) (287,878)
Gain on Sale of Equipment 1,241 139,465 109,655
------------ ------------ ------------
TOTAL OTHER [EXPENSE] (230,554) (357,614) (714,708)
------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,821,950 167,336 1,007,616
PROVISION FOR INCOME TAXES 685,764 18,999 534,200
------------ ------------ ------------
NET INCOME $ 1,136,186 $ 148,337 $ 473,416
============ ============ ============
BASIC EARNINGS PER SHARE $ .31 $ .05 $ .25
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES 3,627,582 2,865,445 1,893,600
------------ ------------ ------------
DILUTED EARNINGS PER SHARE:
Incremental Shares from Assumed Conversion of
Options and Warrants 387,362 332,154 --
------------ ------------ ------------
ADJUSTED WEIGHTED AVERAGE SHARES 4,014,944 3,197,599 1,893,600
============ ============ ============
DILUTED EARNINGS PER SHARE $ .28 $ .05 $ .25
============ ============ ============
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 53
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY
================================================================================
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------- ADDITIONAL TOTAL
NUMBER OF PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1994
[COMBINED] 600,000 $ 600 $ 279,829 $ 676,610 $ 957,039
Finance Charge Incurred on Bridge
Notes Payable -- -- 750,000 -- 750,000
Net Income for the Year Ended
December 31, 1995 -- -- -- 473,416 473,416
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 1995
[COMBINED] 600,000 600 1,029,829 1,150,026 2,180,455
Issuance of Common Stock in
Connection with Exchange of
Shares under Common Control 594,880 595 (595) -- --
Issuance of Common Stock to
Former Convertible Debt Holders 298,720 299 165,927 -- 166,226
Issuance of Common Stock to
Bridge Lenders 400,000 400 (400) -- --
Transfer of Subchapter S Retained
Earnings of Acquired Company to
Additional Paid-in Capital -- -- 29,692 (29,692) --
Net Proceeds from Initial Public
Offering and Issuance of Common
Stock 1,472,000 1,472 5,742,340 -- 5,743,812
Issuance of Common Stock in
Connection with Acquisition 134,172 134 399,866 -- 400,000
Net Income for the Year Ended
December 31, 1996 -- -- -- 148,337 148,337
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 1996
[CONSOLIDATED] 3,499,772 3,500 7,366,659 1,268,671 8,638,830
Issuance of Common Stock in
Connection with Acquisitions 501,099 501 2,499,499 -- 2,500,000
Issuance of Common Stock in
Connection with Settlement 137,390 137 1,023,994 -- 1,024,131
Cancellation of Common Stock in
Connection with Settlement (80,503) (81) 81 -- --
Net Income for the Year Ended
December 31, 1997 -- -- -- 1,136,186 1,136,186
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 1997
[CONSOLIDATED] 4,057,758 $ 4,057 $ 10,890,233 $ 2,404,857 $ 13,299,147
============ ============ ============ ============ ============
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE> 54
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1 9 9 7 1 9 9 6 1 9 9 5
------------ ------------ ------------
[CONSOLIDATED] [COMBINED]
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 1,136,186 $ 148,337 $ 473,416
------------ ------------ ------------
Adjustments to Reconcile Net Income to
Net Cash [Used for] Provided by Operations:
Depreciation and Amortization 1,453,057 839,724 702,056
Deferred Income Taxes 128,014 (15,465) 201,272
[Gain] on Sale of Equipment (1,241) (139,465) --
Amortization of Deferred Loan Fees -- 28,500 114,000
Non-Cash Finance Charge -- 462,122 287,878
Provision for Bad Debts 67,077 85,000 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (885,329) 1,991,543 (1,855,640)
Inventory (3,881,696) (1,275,095) (800,439)
Prepaid Expenses (48,812) (130,027) (104,192)
Other Receivables -- (63,669) --
Interest Income on Notes Receivable - Stockholder (41,195) (6,134) --
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 466,548 (2,397,500) 2,087,105
Income Taxes Payable 478,150 (258,168) 179,145
------------ ------------ ------------
Total Adjustments (2,265,427) (878,634) 811,185
------------ ------------ ------------
NET CASH - OPERATING ACTIVITIES - FORWARD (1,129,241) (730,297) 1,284,601
------------ ------------ ------------
INVESTING ACTIVITIES:
Repayments from and [Advances] to Stockholder 150,000 (29,276) --
Purchase of Other Assets (277,034) (18,722) --
Advances Note Receivable - Stockholders -- (128,794) (170,370)
Incorporation Fees -- -- 354
Purchase of Equipment (664,740) (1,114,964) (343,956)
Proceeds from Sale of Equipment 4,000 197,650 --
Purchase of Businesses - Net of Cash Acquired (2,222,288) (2,074,292) --
Advance Under Note Receivable -- 98,989 8,698
Repayments from Related Party 67,743 4,914 --
------------ ------------ ------------
NET CASH - INVESTING ACTIVITIES - FORWARD $ (2,942,319) $ (3,064,495) $ (505,274)
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE> 55
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1 9 9 7 1 9 9 6 1 9 9 5
------------ ------------ ------------
[CONSOLIDATED] [COMBINED]
<S> <C> <C> <C>
NET CASH - OPERATING ACTIVITIES - FORWARDED $ (1,129,241) $ (730,297) $ 1,284,601
------------ ------------ ------------
NET CASH - INVESTING ACTIVITIES - FORWARDED (2,942,319) (3,064,495) (505,274)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from Public Offering -- 6,036,798 --
Advances Under Line of Credit 4,672,732 2,684,742 51,513
Repayments of Line of Credit (1,454,597) (3,744,318) --
Proceeds of Notes Payable 4,359,518 2,018,190 137,085
Repayment of Bridge Loans -- (1,000,000) --
Repayment of Note Payable (3,339,256) (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)
Other -- -- (11,288)
------------ ------------ ------------
NET CASH - FINANCING ACTIVITIES 4,238,397 3,238,965 (93,571)
------------ ------------ ------------
NET [DECREASE] INCREASE IN CASH 166,837 (555,827) 685,756
CASH - BEGINNING OF YEARS 145,845 701,672 15,916
------------ ------------ ------------
CASH - END OF YEARS $ 312,682 $ 145,845 $ 701,672
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the years for:
Interest $ 563,658 $ 316,567 $ 578,492
Income Taxes $ 159,920 $ 468,419 $ 156,707
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
The following table sets forth property and equipment costs which were
completely financed through equipment contracts:
<TABLE>
<S> <C> <C> <C>
$ 2,496,925 $ 643,451 $ 124,035
</TABLE>
See Note 4 with respect to the purchase of businesses.
See Note 14 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 exchange of shares.
See Notes to Financial Statements.
F-7
<PAGE> 56
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
================================================================================
[1] FINANCIAL STATEMENT PRESENTATION, ORGANIZATION AND NATURE OF OPERATIONS
The financial statements presented include the results of operations of the
parent company, TMCI Electronics, Inc. ["TMCI"], and its wholly-owned
subsidiaries, Touche Manufacturing, Inc. ["Touche"], Touche Electronics, Inc.
["TEI"], Enterprise Industries, Inc. ["Enterprise" or "EII"] and Trinity
Electronics, Inc. ["Trinity"] [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 amounts have been eliminated for all periods
presented.
[2] BASIS OF PRESENTATION
The combined financial statements for the period ended December 31, 1995 give
retroactive effect to the acquisition by TMCI 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. The separate results of TEI and Touche have been combined on an as-if
pooling basis consistent with that of consolidated financial statements giving
retroactive effect to the issuance of 27,280 shares of the Company's common
stock to the stockholders of TEI, and 567,600 shares of the Company's common
stock to the stockholders of Touche. Additionally, the S corporation equity
section of TEI has been reclassified to additional paid-in capital. No
adjustment of assets to "fair value" had been recorded and all intercompany
balances and transactions were eliminated. The accompanying combined financial
statements for 1995 became the historical financial statements upon issuance of
financial statements 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, 1997 and 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 method. The Company reviews inventory items and charges earnings if it
is determined that such inventory has become obsolete. During the years ended
December 31, 1997, 1996 and 1995, the Company charged $78,000, $40,000 and $-0-,
respectively.
PROPERTY AND EQUIPMENT AND DEPRECIATION - Property and equipment is stated at
cost. Depreciation is computed utilizing the straight-line method over the
estimated useful lives of the assets which range from 5 to 7 years.
F-8
<PAGE> 57
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #2
================================================================================
[3] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
GOODWILL AMORTIZATION - Goodwill is amortized utilizing the straight-line method
over a period of 15 years. Total accumulated amortization as of December 31,1997
and 1996 was $275,198 and $27,593, respectively.
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 - The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards ["SFAS"] No. 128, "Earnings per
Share"; which is effective for financial statements issued for periods ending
after December 15, 1997. Accordingly, earnings per share data in the financial
statements for the year ended December 31, 1997, have been calculated in
accordance with SFAS No. 128. Prior periods earnings per share data have been
recalculated as necessary to conform prior years data to SFAS No. 128.
SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings
per Share," and replaces its primary earnings per share with a new basic
earnings per share representing the amount of earnings for the period available
to each share of common stock outstanding during the reporting period. SFAS No.
128 also requires a dual presentation of basic and diluted earnings per share on
the face of the statement of operations for all companies with complex capital
structures. Diluted earnings per share reflects the amount of earnings for the
period available to each share of common stock outstanding during the reporting
period, while giving effect to all dilutive potential common shares that were
outstanding during the period, such as common shares that could result from the
potential exercise or conversion of securities into common stock.
The computation of diluted earnings per share does not assume conversion,
exercise, or contingent issuance of securities that would have an antidilutive
effect on earnings per share [i.e., increasing earnings per share or reducing
loss per share]. The dilutive effect of outstanding options and warrants and
their equivalents are reflected in dilutive earnings per share by the
application of the treasury stock method which recognizes the use of proceeds
that could be obtained upon exercise of options and warrants in computing
diluted earnings per share. It assumes that any proceeds would be used to
purchase common stock at the average market price during the period. Options and
warrants will have a dilutive effect only when the average market price of the
common stock during the period exceeds the exercise price of the options or
warrants.
The 1995 weighted average number of shares gives retroactive effect for the
shares issued in the business combination [See Note 2 ].
Securities that could potentially dilute earnings per share in the future are
disclosed in Note 22.
ADVERTISING - The Company expenses advertising costs as incurred. Total
advertising costs charged to expense amounted to $15,613, $18,316 and $11,874
for the years ended December 31, 1997, 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.
F-9
<PAGE> 58
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #3
================================================================================
[3] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
IMPAIRMENT - Certain long-term assets of the Company, including goodwill, are
reviewed when changes in circumstances warrant as to whether their carrying
value has become impaired, pursuant to guidance established in Statement of
Financial Accounting Standards ["SFAS"] No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Management
considers assets to be impaired if the carrying value exceeds the future
projected cash flows from related operations [undiscounted and without interest
charges]. If impairment is deemed to exist, the assets will be written down to
fair value.
RISK CONCENTRATIONS - Financial instruments that potentially subject the Company
to concentrations of credit risk include cash and accounts receivable arising
from its normal business activities. The Company places its cash 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
$490,000 and $191,000 at December 31, 1997 and 1996, respectively.
The Company's extension of credit to its customers, which are primarily located
in the Silicon Valley, California, results in accounts receivable arising from
its normal business activities. The Company does not require collateral from its
customers, but routinely assesses the financial strength of its customers. Based
upon factors surrounding the credit risk of its customers and the Company's
historical collection experience, an allowance for uncollectible accounts
amounting to $160,356 and $93,279 has been established at December 31, 1997 and
1996, respectively. The Company believes that its accounts receivable credit
risk exposure beyond such allowance is limited. Such assessment may be subject
to change in the near term.
The Company had sales to two unrelated customers in the computer industry
approximating $5,494,000, $4,548,000 representing 14% and 12%, respectively, of
the Company's total net sales for the year ended December 31, 1997. 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.
RECLASSIFICATIONS - Previously, the Company classified as operating expenses
certain overhead items relating to inventory and cost of goods sold. Commencing
in 1997, the Company is classifying all overhead items into costs of goods sold,
and prior year cost of sales amounts have been reclassified to reflect this
change. As a result of this reclassification, cost of goods sold increased in
the approximate amount of $3,146,000 and $1,705,000 for the years ended 1996 and
1995, respectively. Such change had no effect on previously reported net income
or earnings per share. Certain other items in the 1996 and 1995 financial
statements have been reclassified to conform to the 1997 presentation.
F-10
<PAGE> 59
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #4
================================================================================
[4] BUSINESS ACQUISITIONS
[A] TRINITY ELECTRONICS, INC. - On December 22, 1997, the Company completed the
merger of Trinity Electronics, Inc., a California corporation ["Trinity"] with
and into TMCI/Trinity Acquisition Corp., a wholly owned subsidiary of the
Company [the "Merger"].The merger agreement is effective as of October 1, 1997.
The Company paid a total consideration of $4,290,000 in connection with the
Merger, including $1,000,000 in cash, $1,000,000 in a promissory note due March
9, 1998, $290,000 in a promissory note due January 4, 1998 and $2,000,000 in
common stock of the Company resulting in the issuance of 404,539 shares of the
common stock of the Company. The common stock issued in connection with the
Merger is being held in escrow as security for the representations and
warranties of Trinity and the sole shareholder of Trinity and as security for
the performance of the sole shareholder of Trinity of his obligations pursuant
to the Employment Agreement [See Note 16] entered into in connection with the
Merger. The Company acquired assets of approximately $962,000 and assumed
certain liabilities of approximately $255,000. 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 October 1, 1997. Goodwill
of approximately $3,583,000 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 $61,749 was recorded for the period ended
December 31, 1997 and accumulated amortization amounted to $61,749 at December
31, 1997.
[B] 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 common
stock issued in connection with the acquisition is being held in escrow for a
period of two years pending any final adjustments and unrecorded items with
respect to the book value of Enterprise's assets and liabilities as well as
certain representations and warranties made by the seller as defined in the
agreement. Any final adjustments would be recorded against goodwill. The Company
utilized the purchase method and acquired assets of approximately $1,623,000 and
assumed liabilities of approximately $323,000 resulting in goodwill of
approximately $274,000. The goodwill is being amortized utilizing the
straight-line method over a period of 15 years. Amortization expense of $18,267
was recorded for the period ended December 31, 1997 and accumulated amortization
amounted to $18,267 at December 31, 1997. At the same time, the Company entered
into an employment contract with the President of Enterprise [See Note 16].
[C] PEN INTERCONNECT, INC. - 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 of which 80,503 shares were held in escrow subject to the
outcome of an earn out agreement entered into between the Company and Pen
Interconnect, Inc. The promissory notes in the amount of $900,000 were
subsequently exchanged for 132,023 shares of the Company's common stock in
connection with the settlement. See following discussion on the exchange of the
promissory notes for common stock and cancellation of common shares below. 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. In addition,
during December 1997, $142,412 was recorded as an adjustment to goodwill as a
result of the settlement discussed below. Amortization expense of $167,589 and
$27,593 was recorded for the period ended December 31, 1997 and 1996, and
accumulated amortization amounted to $195,182 and $27,593 at December 31, 1997
and 1996, respectively.
F-11
<PAGE> 60
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #5
================================================================================
[4] BUSINESS ACQUISITIONS [CONTINUED]
[C] PEN INTERCONNECT, INC. [CONTINUED] - On December 5, 1997, the Company
settled its outstanding litigation with Pen Interconnect, Inc. ["Pen"] relating
to the asset purchase agreement entered into on November 1, 1996 [the
"Agreement"] pursuant to which the Company purchased certain assets from Pen.
The litigation involved a claim by the Company that the inventory purchased
pursuant to the Agreement had a value of $716,249 rather than the $1,596,905
value given to the inventory in the Agreement. As consideration for release of
the claim by the Company, Pen cancelled its earn out agreement [the "Earn Out
Agreement"] that the Company entered into on November 1, 1996 in connection with
the Agreement. Among other things, cancellation of the Earn Out Agreement
resulted in the cancellation of 80,503 shares of the common stock of the Company
issued to Pen and in the cancellation of the ability of Pen to receive an
additional $600,000 in consideration based on the performance of the division
sold to the Company pursuant to the Agreement. In addition, Pen cancelled
approximately $900,000 in principal amount and approximately $85,000 in accrued
interest on two notes [the "Notes"] issued in connection with the Agreement.
Further, Pen released Rolando Loera, the Chief Executive Officer of the Company
from the personal guaranty that he gave on the Notes and terminated an action
that it filed in the Superior Court of Santa Clara County California to enforce
said guaranty. Finally, Pen agreed to cooperate with the Company in obtaining an
audit of the division of Pen acquired by the Company so that the Company could
file the necessary financial statements with the Securities and Exchange
Commission.
In connection with the settlement of its claim, the Company delivered 132,023
shares of its common stock in exchange for the cancellation of the Notes. In
addition, the Company released from escrow 53,669 shares that it had been
holding as security for the representations and warranties made by Pen in the
Agreement. Further, the Company delivered to Pen an additional 5,367 shares of
its common stock in satisfaction of its obligation to issue additional common
stock for the collection of the accounts receivable in the Agreement. Finally,
the Company waived certain additional claims with respect to approximately
$77,000 in other undisclosed liabilities.
The following pro forma unaudited information presents the results of the
combined operations of TMCI Electronics, Inc., Enterprise, Trinity and San Jose
Division of Pen Interconnect, Inc., treating all as if they were a subsidiary of
TMCI Electronics, Inc. for the entire years ended December 31, 1997 and 1996
with pro forma adjustments as if the acquisition had been consummated as of the
beginning of 1996. This pro forma information does not purport to be indicative
of what would have occurred had the acquisitions been made as of January 1, 1996
and 1997 or results which may occur in the future.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1 9 9 7 1 9 9 6
------------ ------------
<S> <C> <C>
Total Revenues $ 42,292,876 $ 38,534,769
Net Income $ 1,371,614 $ 634,049
Net Income Per Share - Basic $ .35 $ .16
Net Income Per Share - Diluted $ .32 $ .16
</TABLE>
F-12
<PAGE> 61
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #6
================================================================================
[5] INVENTORY
Inventory consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1 9 9 7 1 9 9 6
---------- ----------
<S> <C> <C>
Raw Materials $6,231,925 $3,015,968
Work-in Process 2,409,901 1,465,951
Finished Goods 1,079,224 688,742
---------- ----------
TOTALS $9,721,050 $5,170,661
========== ==========
</TABLE>
[6] NOTES RECEIVABLE - STOCKHOLDERS
During 1996, the Company had advanced $166,226 to three stockholders bearing
interest at 10% with a 10 year amortization period commencing December 1, 1997.
During the year ended December 31, 1997, the Company recorded $17,378 in
interest income and the total advances increased to $183,604.
[7] PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------
1 9 9 7 1 9 9 6
------------ ------------
<S> <C> <C>
Machinery and Equipment $ 8,341,241 $ 5,036,652
Furniture and Fixtures 992,909 620,838
Transportation Equipment 268,525 223,397
Leasehold Improvements 451,608 117,699
------------ ------------
Totals 10,054,283 5,998,586
Less: Accumulated Depreciation 3,471,023 2,360,286
------------ ------------
TOTALS $ 6,583,260 $ 3,638,300
============ ============
</TABLE>
Depreciation expense amounted to $1,205,452, $812,131 and $702,056 for the years
ended December 31, 1997, 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, 1997
and 1996, the balance due the Company amounted to $469,878 and $473,952,
respectively. Interest income on these amounts approximated $35,000 for each of
the years ended December 31, 1997, 1996 and 1995.
[9] DUE FROM STOCKHOLDER - NONCURRENT
The December 31, 1997 and 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. Interest income on these
amounts approximated $20,000 for each of the years ended December 31, 1997, 1996
and 1995. The cumulative balance outstanding of these notes was $111,984 and
$238,167 at December 31, 1997 and 1996, respectively.
F-13
<PAGE> 62
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #7
================================================================================
[10] LINES OF CREDIT
In June 1997, the Company renewed and re-negotiated a new credit agreement with
its bank. The new credit agreement increased the Company's lines of credit to
$5,500,000, increased its term debt by $2,000,000, and allowed the Company to
refinance its existing long-term debt obligations based on a reduced interest
rate. The new and existing credit facilities bear interest at rates ranging from
prime plus .50% to prime plus .25%, are collateralized by all corporate assets
and have been used to pay off the former line of credit and other debt
aggregating approximately $3,200,000. The available portion of the line of
credit was $-0- [based upon eligible accounts receivable] at December 31, 1997.
This new credit agreement requires the Company, among other things, to maintain
minimum levels of earnings, tangible net worth and certain minimum financial
ratios. Effective December 31, 1997, the Company was not in compliance with
certain covenants with its bank and subsequently cured such defaults as a result
of the Company's refinancing of the line [See Note 23]. The line of credit
contained 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, 1997 and 1996 was 9.24 percent and 11.3
percent, respectively.
[11] NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1 9 9 7 1 9 9 6
---------- -----------
<S> <C> <C>
Notes payable to financial institution with monthly payments of $55,168
including principal and interest at .25% above prime, maturing
November 1, 2001, collateralized by all corporate assets $1,914,815 $ 1,691,747
Promissory notes to a stockholder [the former owner of Trinity] in the amount of
$1,313,493 bearing interest at 9% per annum; maturing in
April 1998 and March 1998; unsecured. 1,313,493 --
Bridge loan to financial institution; bears interest at 10.5%; refinanced in
February 1998; collateralized by equipment; [See Note 22]. 1,000,000 --
Notes payable to financial institution with monthly payments of $20,061
principal and interest bearing interest at prime plus .25%; maturing
November 2001; collateralized by machinery and equipment. 696,593 --
Notes payable to financial institution with monthly payments of $4,675 with
interest only at 8.75% until January 1998 convertible into term
debt; maturing August 2002; collateralized by machinery and equipment. 620,520 --
Note payable to financial institution with monthly payments of $12,381 interest
only; bearing interest at prime plus .25%; convertible into term debt in
January 1998; maturing August 2002, collateralized by
machinery. 594,294 --
---------- -----------
Totals - Forward $6,139,715 $ 1,691,747
</TABLE>
F-14
<PAGE> 63
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #8
================================================================================
[11] NOTES PAYABLE [CONTINUED]
<TABLE>
<CAPTION>
December 31,
------------------------
1 9 9 7 1 9 9 6
----------- ----------
<S> <C> <C>
Totals - Forwarded $ 6,139,715 $1,691,747
Note payable to financing company with monthly payments of $12,435 principal and
interest; bearing interest at 8.7%; maturing May 2002;
collateralized by machinery. 540,326 --
Note payable to a financing company with monthly payments of $5,461; bearing
interest at 11.2%; maturing February 2001; collateralized by
equipment. 168,209 --
Note payable to financial institution with monthly payments of $4,181 principal
and interest bearing interest at 9.5% per annum; maturing
May 2001; collateralized by machinery and equipment. 128,376 --
Note payable to financial institution with monthly payments of $6,293 including
principal and interest at 8.35% per annum; matures March
2001; collateralized by machinery and equipment -- 269,393
Promissory notes in the amounts of $500,000 and $400,000 issued in connection
with the acquisition of the cable company, bears interest at the prime rate
plus .5% with monthly payments of $33,276, exchanged for common stock of the
Company in November 1997
[See Note 4C] -- 900,000
----------- ----------
Totals 6,976,626 2,861,140
Less: Current Portion including Promissory Note to a Stockholder 3,368,749 796,867
----------- ----------
NONCURRENT PORTION $ 3,607,877 $2,064,273
=========== ==========
</TABLE>
The prime rate was 8.50% at December 31, 1997.
Current maturities on long-term debt at December 31, 1997 are as follows:
<TABLE>
<S> <C>
December 31,
1998 $3,368,749
1999 1,129,854
2000 1,147,843
2001 1,033,239
2002 296,941
Thereafter --
----------
TOTAL $6,976,626
==========
</TABLE>
F-15
<PAGE> 64
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #9
================================================================================
[12] BRIDGE NOTES PAYABLE
In November and December 1995, the Company borrowed an aggregate of $1,000,000
in bridge loans, as evidenced by four promissory notes of $250,000 each bearing
a rate of eight percent [8%] simple interest. The loans matured on the
consummation of the public offering of the Company's securities [See Note 17C].
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 Company 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 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
statements of operations.
[13] INCOME TAXES
Commencing March 5, 1996, the Company filed 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.
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1 9 9 7 1 9 9 6 1 9 9 5
---------- ---------- ----------
<S> <C> <C> <C>
Current Tax Expense:
Federal $ 554,581 $ 126,644 $ 354,200
State 3,200 10,120 66,900
---------- ---------- ----------
Totals 557,781 136,764 421,100
Less: Benefit of Net Operating Loss Carryforward -- (102,300) (86,100)
---------- ---------- ----------
Total Current Provision 557,781 34,464 335,000
---------- ---------- ----------
Deferred:
Federal 93,748 40,658 203,800
State 34,235 (56,123) (4,600)
---------- ---------- ----------
Total Deferred Provision 127,983 (15,465) 199,200
---------- ---------- ----------
TOTAL PROVISION FOR TAXES $ 685,764 $ 18,999 $ 534,200
========== ========== ==========
</TABLE>
F-16
<PAGE> 65
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #10
================================================================================
[13] INCOME TAXES [CONTINUED]
The components of the deferred tax liability are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1 9 9 7 1 9 9 6
--------- ---------
<S> <C> <C>
Deferred Tax Asset:
Alternative Minimum Tax Credits $ 29,626 $ 59,717
Bad Debt Allowance 63,876 37,441
Inventory Capitalization 30,746 21,230
Unused State Tax Credit 59,128 69,603
--------- ---------
Deferred Tax Asset - Current 183,376 187,991
Deferred Tax Liabilities:
Excess Tax Over Book Accumulated Depreciation - Non-Current (560,180) (436,781)
--------- ---------
NET DEFERRED TAX LIABILITIES $(376,804) $(248,790)
========= =========
</TABLE>
A reconciliation between the Company's effective tax rate and the U.S. statutory
rate follows:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
<S> <C> <C> <C>
U.S. Statutory Rate Applied to Pretax Income 34% 34% 34%
State Tax Provision - Net of Federal Tax Benefit 5 6 6
Effect of S Corporation Operations -- 13 2
Net Operating Loss Carryforward -- (42) --
Other (1) -- 11
----- ----- -----
TOTAL EFFECTIVE TAX RATE 38% 11% 53%
===== ===== =====
</TABLE>
As of December 31, 1996, the Company utilized the remaining balance of its net
operating loss carryforward as an offset to its federal and state income tax
expense.
[14] RELATED PARTY TRANSACTIONS
In 1995, Touche owed Textron Financial approximately $401,700 which Antonio
Zertuche, Touche's landlord, agreed to repay in exchange for Touche's promissory
note to make monthly installments of approximately $6,322, including interest at
11.5% per annum, maturing December 1996. In January 1996, the Company refinanced
the note, and issued a new note for approximately $291,000 which is the
difference between the Company's original note payable of approximately $401,700
and its cancellation of an outstanding note receivable from the landlord of
approximately $99,000, plus approximately $11,600 in the overpayment of property
taxes on leased property located at 1875 Dobbin Drive, San Jose, California. The
new note payable was satisfied in March 1996, from the proceeds of the initial
public offering.
In addition to acting as Chairman, President and Chief Executive Officer of the
Company, Rolando Loera is also the sole owner of Touche Properties, Inc.
["TPI"], a real estate company which owns and leases the real property located
at 1881-1899 Dobbin Drive [the "Property"] to TEI and Touche, two wholly-owned
subsidiaries of the Company. The rent payments made by TEI and Touche to TPI
amounted to approximately $576,144, $576,144 and $477,640 for the years ended
1997, 1996 and 1995, respectively.
F-17
<PAGE> 66
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #11
================================================================================
[15] EMPLOYEE STOCK PURCHASE PLAN, EMPLOYEES' STOCK OWNERSHIP PLAN AND
EMPLOYEES' DEFINED CONTRIBUTION PLAN
The Board of Directors adopted the Company's 1997 Employee Stock Purchase Plan
effective December 1, 1997 approved by the stockholders on December 22, 1997.
Under such plan, employees of the Company, including executive officers may
defer up to 20% of their annual compensation for the purchase of common stock of
the Company at a price of 85% of the fair market value of the common stock on
the date of issuance. The plan provides for the issuance of up to 250,000
shares.
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 TMCI as determined annually by the directors
and stockholders. As of December 31, 1997 and 1996, the Plan owned approximately
.7% and .8%, respectively, of TMCI'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 contributions which were
charged to expense for the years ended December 31, 1997, 1996 and 1995 were
$4,026, $5,036 and $1,945, respectively.
[16] COMMITMENTS AND CONTINGENCIES
CONSTRUCTION CONTRACT - In December 1997, Enterprise entered into a construction
contract in the amount of $488,532 to demolish and remove an existing building
and to construct an addition to its primary facility. Enterprise anticipates
that the contract will be paid with cash generated from operations.
OPERATING LEASES - The Company leases its production and administrative
facilities. This obligation extends through April 2013. 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, Touche' Properties, Inc. which is 100% owned by the Company's
sole stockholder. The leases commenced in November 1993 and November 1996 and
expire in November 2013. In addition, the Company's newly acquired wholly-owned
subsidiary, Trinity will be entering into a new lease agreement with Touche
Properties, Inc. The agreement has not been drafted nor executed as of February
20, 1998 and accordingly, the below future minimum lease payments do not include
such payments in the related party leases.
Minimum lease payments for the next five years and thereafter [not including the
CPI increases] are:
<TABLE>
<CAPTION>
Related Party Third Party
Leases Leases
------------- ------------
<S> <C> <C>
1998 $ 576,144 $ 1,125,227
1999 576,144 1,104,045
2000 576,144 1,104,045
2001 576,144 950,160
2002 576,144 950,160
Thereafter 6,289,572 8,766,840
------------- ------------
TOTALS $ 9,170,292 $ 14,000,477
============= ============
</TABLE>
Total rent expense amounted to $1,901,356, $1,038,626 and $730,417 for the years
ended December 31, 1997, 1996 and 1995, respectively.
The Company has minimum future sublease rental income due in the amount of
$45,000 in 1998
F-18
<PAGE> 67
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #12
================================================================================
[16] COMMITMENTS AND CONTINGENCIES [CONTINUED]
EMPLOYMENT AGREEMENTS - In connection with the merger of Trinity Electronics,
Inc. with and into a wholly owned subsidiary of the Company, TMCI/Trinity
Acquisition Corp. ["New Trinity"] entered into an employment agreement with the
President of Trinity Electronics, Inc. and New Trinity [the "Trinity Employment
Agreement"]. The Trinity Employment Agreement calls for the president of New
Trinity to serve in that capacity for five years at an annual salary of $150,000
per year with an annual bonus [payable in quarterly installments] of not less
than $25,000 per year. In addition to other benefits offered to all employees,
the president of New Trinity shall receive an auto allowance of $1,450 per
month. In the event of voluntary termination by the president of New Trinity or
termination for cause or malfeasance as defined in the employment agreement,
then the president of New Trinity is subject to a covenant not to compete, as
more fully detailed in the employment agreement, for the shorter of (i) two
years from the date of termination of employment or (ii) five years from the
effective date of the employment agreement.
In connection with the acquisition of all of the outstanding shares of
Enterprise, a California corporation, the Company entered into an employment
agreement with the chief executive officer of Enterprise [the "Enterprise
Employment Agreement"]. The Enterprise Employment Agreement calls for the chief
executive officer of Enterprise to serve in that capacity for a term of five
years starting at an annual salary of $50,000 and increasing in increments to
$105,000 by the year 2001 with an annual bonus of 1% of sales of Enterprise and
a 10% earn out provision as defined in the agreement. The agreement is
terminable at the will of either party. In addition, to other benefits offered
to all employees, the chief executive officer of Enterprise shall receive an
auto allowance of $550 per month. In the event of termination other than for
cause or malfeasance, as defined, by the Company, then the chief executive
officer shall receive $100,000 if termination occurs in the first year, $75,000
if termination occurs in the second year, and $50,000 if termination occurs in
the third, fourth or fifth years.
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 1997 and 1996 bonus was relinquished by the President. Bonuses
during the remainder of the term of employment will be at the discretion of the
Board of Directors.
The Agreement provides, among other things, for participation in an equitable
manner in any profit-sharing or retirement plan for employees or executives and
for participation in other employee benefits applicable to employees and
executives of the Company. The Agreement further provides for the use of an
automobile and other fringe benefits commensurate with his duties and
responsibilities. The Agreement also provides for benefits in the event of
disability.
If employment by the Company of Mr. Loera terminates or Mr. Loera becomes unable
to perform his duties, the Company may be adversely affected.
F-19
<PAGE> 68
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #13
================================================================================
[17] 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
12.
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] 1997 STOCK OPTION PLAN -The Board of Directors adopted the Company's 1997
Stock Option Plan, effective December 1, 1997, approved by the stockholders on
December 22, 1997. 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 1,000,000 options. There were no options granted as of December 31,
1997.
Any future awards will be determined by the Board of Directors or a Committee
established by the Board.
1995 STOCK OPTION PLAN - The Company has adopted a stock option plan, effective
December 22, 1995. Under such plan, key employees and officers and consultants
of the Company will be granted options to purchase shares of the Company's
common stock at their fair market value on the date of grant. The plan provides
for an aggregate of 500,000 options. On December 22, 1995, the Company's
president was granted options to purchase 100,000 shares of common stock at
$3.75 per share. The options vest two years from the date of grant and will
expire in December 2005. The Plan also permits stock appreciation rights to be
granted in tandem with options.
F-20
<PAGE> 69
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #14
================================================================================
[17] STOCKHOLDERS' EQUITY [CONTINUED]
[F] 1995 STOCK OPTION PLAN [CONTINUED] - A summary of the activity under the
plan is as follows:
<TABLE>
<CAPTION>
Weighted Average
Remaining Weighted-
Contractual Average
Shares Life Exercise Price
---------- ---------------- --------------
<S> <C> <C> <C>
BALANCE - DECEMBER 31, 1994 --
Granted 100,000 10 Years $3.75
Exercised --
Forfeited/Expired --
----------
OUTSTANDING - DECEMBER 31, 1995 100,000 10 Years $3.75
Granted --
Exercised --
Forfeited/Expired --
----------
OUTSTANDING - DECEMBER 31, 1996 100,000 9 Years $3.75
Granted 324,500 10 Years $4.88
Exercised --
Forfeited/Expired --
----------
OUTSTANDING - DECEMBER 31, 1997 424,500 9.1 Years $4.61
==========
EXERCISABLE - DECEMBER 31, 1997 391,166 9.2 Years $4.69
==========
</TABLE>
The weighted-average fair value of options granted during the year ended
December 31, 1997 and 1996 was $2.79 and $2.77, respectively.
No compensation cost was recognized in the periods presented. Had compensation
cost for the Company's stock options issued to employees been determined based
per share 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 basic earnings per share would have been decreased,
on a pro forma basis, by approximately $344,900 or $.10 per share and $138,500,
or $.05 per share for the years ended December 31, 1997 and 1996, respectively,
which is based upon the amortization of the 1997 and 1995 fair value. The effect
on 1995 earnings was immaterial. The fair value of stock options granted to
employees used in determining the pro forma amounts is estimated at $904,000 and
$277,000 during 1997 and 1995 using the Black-Scholes option-pricing model for
the pro forma amounts with the following weighted average assumptions:
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
<S> <C> <C> <C>
Risk-free Interest Rate 6.00% N/A 5.87%
Expected Life 6 Years N/A 6 Years
Expected Volatility 52.57% N/A 82.07%
Expected Dividends None None None
</TABLE>
F-21
<PAGE> 70
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #15
================================================================================
[17] STOCKHOLDERS' EQUITY [CONTINUED]
[F] 1995 STOCK OPTION PLAN [CONTINUED] - Net income and net earnings per share
as reported, and on a pro forma basis as if compensation cost had been
determined on the basis of fair value pursuant to SFAS No. 123 is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1 9 9 7 1 9 9 6
---------- ----------
<S> <C> <C>
Net Income:
As Reported $1,136,186 $148,337
Pro Forma $ 791,286 $ 9,837
Basic Earnings Per Share:
As Reported $ .31 $ .05
Pro Forma $ .22 $ --
Diluted Earnings Per Share:
As Reported $ .28 $ .05
Pro Forma $ .20 $ --
</TABLE>
The Company has agreed to sell to its underwriter, or their designees, for an
aggregate purchase price of $128, an option ["Underwriter's Unit Purchase
Option"] to purchase up to an aggregate of 128,000 Units. The Underwriter's Unit
Purchase Option shall be exercisable during the four-year period commencing one
(1) year after the effective date of the Company's initial public offering. The
Underwriter's Unit Purchase Option may not be assigned, transferred, sold or
hypothecated by the underwriter after the Effective Date, except to officers or
partners of the underwriters or any of the underwriter and selling group members
in this offering. Any profits realized by the underwriter upon the sale of the
units issuable upon exercise of the Underwriter's Unit Purchase Option may be
deemed to be additional underwriting compensation. The exercise price of the
units issuable upon exercise of the Underwriter's Unit Purchase Option during
the period of exercisability shall be $8.25. The exercise price of the
Underwriter's Unit Purchase Option and the number of shares covered thereby are
subject to adjustment in certain events to prevent dilution. For the life of the
Underwriter's Unit Purchase Option, the holders thereof are given, at a nominal
cost, the opportunity to profit from a rise in the market price of the Company's
units, common stock and warrants with a resulting dilution in the interest of
other stockholders. The Company may find it more difficult to raise capital for
its business if the need should arise while the Underwriter's Unit Purchase
Option is outstanding. At any time when the holders of the Underwriter's Unit
Purchase Option might be expected to exercise it, the Company would probably be
able to obtain additional capital on more favorable terms.
[18] FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective December 31, 1995, the Company adopted Statement of Financial
Accounting Standards No. 107, "Disclosure About Fair Value of Financial
Instruments," which requires disclosing fair value to the extent practicable for
financial instruments which are recognized or unrecognized in the balance sheet.
The fair value of the financial instruments disclosed herein is not necessarily
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences of realization or settlement.
The following table summarizes financial instruments by individual balance sheet
classifications:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------------- -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due from Stockholder $ 88,167 $ 88,167 $ 238,167 $ 238,167
Note Receivable - Stockholders $ 144,292 $ 144,292 $ 166,226 $ 166,226
Due from Related Party $ 469,878 $ 469,878 $ 473,952 $ 473,952
Notes Payable - Net of Current Portion $(3,570,985) $(3,570,985) $(2,064,273) $(2,064,273)
</TABLE>
F-22
<PAGE> 71
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #16
================================================================================
[18] FAIR VALUE OF FINANCIAL INSTRUMENTS [CONTINUED]
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.
[19] NEW AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ["FASB"] has issued Statement of
Financial Accounting Standards ["SFAS"] No. 130, "Reporting Comprehensive
Income." SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. Earlier application is permitted. Reclassification of financial statements
for earlier periods provided for comparative purposes is required. SFAS No. 130
is not expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after December 15,
1997, and comparative information for earlier years is to be restated. SFAS No.
131 need not be applied to interim financial statements in the initial year of
its application. SFAS No. 131 is not expected to have a material impact on the
Company.
[20] QUARTERLY FINANCIAL DATA [UNAUDITED]
The following quarterly financial data is unaudited, but in the opinion of
management includes all necessary adjustments for a fair presentation of the
interim results.
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31,
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Fiscal 1997:
Revenues $7,442,688 $9,601,706 $10,728,640 $11,173,632
Gross Profit $2,240,544 $2,574,789 $ 3,152,147 $ 2,223,139
Net Income $ 306,862 $ 395,924 $ 607,671 $ (174,271)
Net Income Per Share - Basic $ .09 $ .11 $ .17 $ (.06)
Net Income Per Share - Diluted $ .08 $ .10 $ .16 $ (.06)
Fiscal 1996:
Revenues $7,730,465 $7,519,668 $ 5,246,434 $ 5,643,261
Gross Profit $1,403,476 $1,592,279 $ 1,536,535 $ 1,369,793
Net Income $ 20,345 $ 272,285 $ 172,741 $ (317,034)
Net Income Per Share - Basic $ .02 $ .08 $ .05 $ (.10)
Net Income Per Share - Diluted $ .02 $ .08 $ .05 $ (.10)
Fiscal 1995:
Revenues $7,177,975 $7,626,704 $ 7,295,213 $ 5,999,027
Gross Profit $1,769,692 $1,630,678 $ 1,830,317 $ 1,171,096
Net Income $ 439,659 $ (15,779) $ 236,325 $ (186,789)
Net Income Per Share - Basic $ .24 $ (.01) $ .12 $ (.10)
Net Income Per Share - Diluted $ .24 $ (.01) $ .12 $ (.10)
</TABLE>
F-23
<PAGE> 72
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #17
================================================================================
[21] LITIGATION
On May 12, 1997, Electronics Manufacturing Systems, Inc., a Delaware corporation
with its principal place of business in the State of Colorado, filed a complaint
in the Superior Court for the County of Santa Clara, action No. CV766138,
against Touche Electronics, Inc. Electronic Manufacturing Systems, Inc. ["EMS"]
claims damages for breach of contract and common counts, under the theories of
an open book account, money owed, and an account stated. Their claims arise out
of an alleged purchase order dated January 8, 1996 from Touche Electronics, Inc.
for the customized construction, ordering, and delivery of parts and components
for custom assemblies. EMS claims that TEI cancelled the purchase order on or
about July 22, 1996. They further assert that they have not been successful in
reselling many of the custom assemblies and parts. EMS seeks the principal sum
of $236,691, plus interest thereon at the legal rate from the date of the
alleged breach. TEI has filed an answer to the complaint and currently is
defending the action. A non-binding judicial arbitration will be held on this
matter in mid April 1998. The Company is currently defending its position
vigorously and believes that the results of operations and financial position
will not be materially impacted.
[22] SUBSEQUENT EVENTS
CONVERTIBLE DEBENTURES - On February 10, 1998, the Company closed an offering of
three of its debenture units for a total offering price of $3.3 million. Each
unit consists of four of the Company's 5% $275,000 Convertible Subordinated
Debentures due February 10, 2001 [the "Debentures"] and 100,000 Class B Warrants
to purchase common stock of the Company [the "Warrants"]. Interest on the
Debentures accrues quarterly and is payable annually. The Debentures are
subordinated to other Senior Indebtedness as such term is defined in the
Debenture. A portion of the proceeds were used to repay the bridge loan [See
Note 11].
The Debentures are convertible at the option of the holder at a variable
conversion price ranging from $3.00 to $5.50 per share depending on the market
value of the common stock of the Company at the time of the notice of
conversion. Accordingly, the Company may be required to issue no less than
600,000 shares nor more than 1,100,000 shares upon conversion of the principal
amount of the Debentures.
In addition, the Company is issuing 25,000 Class B Warrants per Debenture
[subject to adjustment for reclassification, capital reorganization or other
change of the outstanding shares of common stock of the Company] for each
Debenture outstanding as of the earlier to occur of the one year anniversary of
the closing or the date three months following the registration of the common
stock issuable upon conversion of the Debentures and upon the exercise of the
Warrants. The Warrants have an exercise price of $5.50 per share subject to
adjustment for dilutive issuances.
In connection with the foregoing issuance, the Company paid a finder's fee to
M.J. Segal and Associates in the amount of $176, 000 pursuant to the terms of a
Non Circumvention and Finder's Fee Agreement between the Company and M.J. Segal
and Associates [the "Agreement"]. In addition, the Company gave M.J. Segal a
$66,000 credit toward the purchase of one quarter of a Debenture. The Non
Circumvention and Finder's Fee Agreement calls for the issuance of the number of
shares of common stock to M.J. Segal and Associates equal to 5% of the principal
amount of the securities sold divided by the greater of (i) any stated
conversion price in the debenture and (ii) average of the closing bid and asked
prices for the common stock of the Company for the five trading days prior to
closing and, in this case, a number of warrants equal to 10% of the number of
shares issuable based on the Stated Conversion Price [to be determined 60,000
and 110,000].
The Non Circumvention and Finder's Fee Agreement also provides that upon
exercise of any Warrants issued in the offering, M.J. Segal and Associates shall
receive a cash fee equal to 4% of the amount received upon exercise of the
Warrants; common stock equal to 5% of the number or shares issued upon such
exercise; and warrants equal to 10% of the number of shares issued upon exercise
[excluding warrants exercised by M.J. Segal and Associates or its affiliates].
The warrants shall have an exercise price of 125% of the average of the bid and
asked prices for the Company on the five trading days preceding the transaction,
shall be non callable and shall expire three years from the date of issuance.
F-24
<PAGE> 73
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, SHEET #18
================================================================================
[23] EVENTS SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT AUDITORS
[UNAUDITED]
NEW LINE OF CREDIT - On March 2, 1998, the Company entered into a Loan and
Security Agreement with Fleet Capital Corporation [the "Fleet Line"] providing
for borrowings of up to $25,000,000 based on certain formulas contained within
the Loan and Security Agreement. As of March 10, 1998, the Company was eligible
to borrow up to $17,222,691 under the Fleet Line and had borrowed $10,347,841.
In addition, the former line of credit was repaid, certain notes payable were
satisfied and a promissory note to the stockholder [the former owner of Trinity]
was repaid. Borrowings were in the form of two Term Loans ["Term Loan A" and
"Term Loan B," respectively, an equipment loan [the Equipment Loan, together
with the Term Loans, the "Fixed Loans"] and revolving credit loans [the
"Revolving Credit Loans"]. Term Loan A is in the principal amount of $4.7
million and bears interest at the rate of prime plus 0.5%. Term Loan B is in the
principal amount of $2.0 million and bears interest at the rate of prime plus
1.5%. The Equipment Loan is in the principal amount of $4.0 million and bears
interest at the rate of prime plus 0.5%. The Revolving Credit Loans are in such
amount as the Company elects, up to the borrowing base permitted by the Loan and
Security Agreement and bear interest at the rate of 0.25% plus prime. As of
March 10, 1998, the Company had $3,647,841 outstanding under the Revolving
Credit Loans. The Fixed Loans are payable in monthly installments of principal
and interest with principal amortizing over a seven year period and the balance
due on March 2, 2003; interest only on the Revolving Credit Loans is payable
monthly with the principal due upon termination of the Loan and Security
Agreement. Interest on the Fixed Loans and Revolving Credit Loans is adjusted
daily. Interest on the Fixed Loans may be adjusted downward by 0.25% each year
for two years if the Company meets certain performance criteria as reflected in
its audited financial statements for the fiscal years ended December 31, 1998
and December 31, 1999, respectively. Interest on the Revolving Credit Loan may
be adjusted downward by 0.25% only once if the Company meets the performance
criteria as reflected in its audited financial statements for the fiscal year
ended December 31, 1998. In addition, if the Company meets the conditions
specified for December 31, 1998, it may, at its option, have the interest rate
on (i) the Revolving Credit Loan converted into LIBOR plus 2.5%; (ii) Term Loan
A and the Equipment Loan converted into LIBOR plus 2.75%; and (iii) Term Loan B
converted into LIBOR plus 3.75%.
-----------------
F-25
<PAGE> 74
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
TMCI Electronics, Inc.
San Jose, California
Our report on the consolidated financial statements of TMCI
Electronics, Inc. is referenced on Page F-1 and included in this Form 10-K. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed on page F-27 of this Form 10-K.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
MOORE STEPHENS, P. C.
Certified Public Accountants.
New York, New York
February 20, 1998
F-26
<PAGE> 75
TMCI ELECTRONICS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
================================================================================
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------------------ ---------- ---------- ------------ ----------
Balance at Charged to
Beginning Cost and Balance at
Description of Period Expenses Deductions End of Period
- ------------------------------------ ---------- ---------- ------------ --------------
<S> <C> <C> <C> <C>
Valuation Reserved Deducted in
the Balance Sheet from the Asset
to Which it Applies:
1997 Allowance for Doubtful
Accounts $ 93,279 $ 67,077 $ -- $160,356
======== ========== ============ ========
1996 Allowance for Doubtful
Accounts $ 8,279 $ 85,000 $ -- $ 93,279
======== ========== ============ ========
1995 Allowance for Doubtful
Accounts $ 8,279 $ -- $ -- $ 8,279
======== ========== ============ ========
</TABLE>
F-27
<PAGE> 76
================================================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION
WITH THE OFFER MADE HEREBY. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH AN OFFER WOULD BE UNLAWFUL. ANY MATERIAL MODIFICATION OF THE OFFERING
WILL BE ACCOMPLISHED BY MEANS OF AN AMENDMENT TO THE REGISTRATION STATEMENT.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary .......................................................
Risk Factors .............................................................
Use of Proceeds ..........................................................
Dilution .................................................................
Price Range of Common Stock and Dividend Policy ..........................
Management's Discussion and Analysis of
Financial Condition and Results of Operations ..........................
Business .................................................................
Management ...............................................................
Principal Stockholders ...................................................
Certain Transactions .....................................................
Description of Securities ................................................
Plan of Distribution .....................................................
Legal Proceedings ........................................................
Legal Matters ............................................................
Experts ..................................................................
Index to Financial Statements ............................................
Report of Independent Auditors ........................................... F-1
</TABLE>
----------------------
Shares of Common Stock
Issuable Upon Conversion of Certain
Debentures and Exercise
of Certain Warrants
----------------------
300,000 Class B Warrants
82,308 Compensation Warrants
TMCI ELECTRONICS, INC.
PROSPECTUS
__________, 1998
================================================================================
<PAGE> 77
PART TWO
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an itemization of fees and expenses, payable from the
net proceeds of the offering, incurred by the Company in connection with the
issuance and distribution of the securities of the Company being offered hereby.
All fees and expenses are estimated except the SEC, NASD and Nasdaq Registration
and Filing Fees.
<TABLE>
<S> <C>
SEC Registration and Filing Fee...................... $[ ]
NASD Registration and Filing Fee..................... -0-
Nasdaq Listing and Filing Fee........................ [ ]
Financial Printing................................... 1,000
Transfer Agent Fees.................................. -0-
Accounting Fees and Expenses......................... 5,000
Legal Fees and Expenses.............................. [ ]
Blue Sky Fees and Expenses........................... 5,000
Miscellaneous........................................ 3,000
TOTAL....................................... $
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Certificate of Incorporation and the Bylaws of TMCI Electronics, Inc.,
a Delaware Corporation (the "Company") both contain provisions which reduce the
potential personal liability of directors for certain monetary damages and
provide for indemnity of directors and other persons.
The provision limiting the liability of a director for breach of a
fiduciary duty by a director eliminates such liability to the Company and its
shareholders to the maximum extent permissible by Delaware law. This limitation
does not limit or eliminate the liability of a director:
(i) for any breach of the director's duty of loyalty to the corporation
or its stockholders;
(ii) for acts or omissions not in good faith or which involved
intentional misconduct or a knowing violation of law;
(iii) for certain unlawful dividend payments, stock purchases or stock
redemptions as more fully described in Section 174 of the Delaware
General Corporation Law; or;
(iv) for any transaction from which the director derived an improper
personal benefit.
The indemnification provisions are intended to increase the protection
provided directors and, thus, increase the Company's ability to attract and
retain qualified persons to serve as directors. The increased risk of litigation
combined with the possibility that the Company's insurance policy may not cover
specific acts or omissions, serves as a deterrent to qualified personnel serving
on the Board of Directors. The Company believes that the added protection
against personal liability provided by the limitation on personal liability in
its articles of incorporation and bylaws will help it retain its current
directors and attract new directors in the future.
II-1
<PAGE> 78
The provisions regarding indemnification provide, in essence, that the
Company will indemnify its directors against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonable
incurred in connection with any action, suit or proceeding arising out of the
director's status as a director of the Company, including actions brought by or
on behalf of the Company (shareholder derivative actions) to the maximum extent
permitted by law.
Delaware law requires that the person to be indemnified "acted in good
faith and in a manner the person reasonably believed to be in the best interest
of the corporation and, in the case of a criminal proceeding, had no reason to
believe the conduct of the person was unlawful." In addition, because the
Company is located in San Jose, California, the Company may be a California
pseudo foreign corporation under Section 2115 of the California General
Corporation Law based on certain criteria set forth therein. If, in fact, at the
time of any action for which indemnification is sought, the Company is a
California pseudo foreign corporation, the standards set forth under the
California General Corporation Law would be applicable. Currently, the standards
for indemnification are the same under the California and Delaware laws. No
assurance can be given that they will remain the same.
The provisions diminish the potential rights of action which might
otherwise be available to shareholders by limiting the liability of officers and
directors to the maximum extent allowable under Delaware law and by affording
indemnification against most damages and settlement amounts paid by a director
of the Company in connection with any shareholders' derivative action. However,
the provisions do not have the effect of limiting the right of a shareholder to
enjoin a director from taking actions in breach of his fiduciary duty, or to
cause the Company to rescind actions already taken, although as a practical
matter courts may be unwilling to grant such equitable remedies in circumstances
in which such actions have already been taken. In the opinion of the Securities
and Exchange Commission, indemnification for liabilities arising under the
Securities Act of 1933, as amended, is contrary to public policy and, therefore,
is unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information sets forth all securities of the Company sold
by it within the past three (3) years, which securities were not registered
under the Securities Act of 1933, as amended:
The Company was incorporated in the State of Delaware on December 7,
1995. The Company has authorized capital of 25,000,000 shares of common stock,
$.001 par value. As of December 31, 1997, there were 4,057,758 shares of common
stock issued and outstanding.
On December 28, 1995, the Company issued 600,000 shares of its Common
Stock to Rolando Loera, Chairman, Chief Executive Officer and President of the
Company pursuant to the merger of the predecessor of the Company into the
Company in exchange for the cancellation of an equal number of shares in the
predecessor company. The predecessor corporation was organized under the laws of
California on September 26, 1995 and had conducted no operations prior to the
merger. See "Principal Stockholders" and "Description of Securities."
The Company issued 893,600 shares of its Common Stock to Rolando Loera
and Rolando Loera, Trustee for Touche's Employee Stock Ownership Plan and three
officers of the Company (Jose Antonio Agredano, Frank Ramirez III and Livino
Ribaya, Jr.) pursuant to Stock Purchase Agreements dated as of December 28, 1995
in exchange for all of the issued and outstanding stock of Touche and TEI.
II-2
<PAGE> 79
In November 1995, the Company borrowed $1,000,000 in a bridge loan at
the rate of eight percent (8%) simple annual interest, which was paid at the
closing of the public offering from the net proceeds of the public offering.
400,000 shares of Common Stock and 1,200,000 Class A Warrants were issued to the
lenders which were identical to the Class A Warrants included in the Units
offered by the Company in its initial public offering completed in March, 1996.
The Shares of Common Stock, Class A Warrants and the shares of Common Stock
underlying the Class A Warrants were registered in connection with that
offering. The Company did not receive any of the proceeds from the sale of the
securities offered by the note holders. The Class A Warrants are redeemable upon
certain conditions. Should the Class A Warrants offered by the note holders be
exercised, of which there is no assurance, the Company will receive the proceeds
therefrom aggregating up to an additional $6,600,000.
On November 1996, the Company issued 134,172 shares of Common Stock in
connection with the acquisition of certain assets from Pen Interconnect, Inc.
On January 1997, the Company issued 96,560 shares of Common Stock in
connection with the acquisition of Enterprise Industries, Inc.
On December 5, 1997, the Company issued 137,390 shares of Common Stock
to Pen Interconnect, Inc. in connection with the settlement of certain
litigation regarding the acquisition of certain assets of Pen Interconnect, Inc.
in November, 1996. In addition, 80,503 shares previously issued to Pen
Interconnect, Inc. were cancelled.
On December 22, 1997, the Company issued 404,539 shares of its Common
Stock in connection with the acquisition of Trinity Electronics, Inc.
On February 10, 1998, the Company issued $3.3 million in principal
amount of its 5%, $275,000 Convertible Subordinated Debentures. The terms of the
issuance are incorporated by reference from the discussion in the Subsequent
Events portions of the Management's Discussion and Analysis Section of the
Registration Statement.
On March 26, 1998, the Company issued 138,648 shares of Common Stock to
the principal shareholder of Try-Die Incorporated ("Try-Die") in connection with
the acquisition of Try-Die.
The Company has relied on Section 4(2) of the Securities Act of 1933,
as amended, for its private placement exemption, such that the sales of the
securities were transactions by an issuer not involving any public offering.
II-3
<PAGE> 80
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following is a list of Exhibits filed herewith by TMCI Electronics,
Inc. as part of the S-1 Registration Statement and related Prospectus:
<TABLE>
<S> <C>
1.0 Non Circumvention and Finder's Fee Agreement. (c)
3.0 Certificate of Incorporation, filed with Delaware Secretary of State on
December 7, 1995.(b)
3.1 By-laws.(b)
3.2 Certificate of Secretary for amendment to Bylaws dated April 6, 1996.(c)
3.3 Ammendment to the bylaws dated December 22, 1997.(c)
4.0 Specimen Copy of Common Stock Certificate.(b)
4.1 Form of Class B Warrant Agreement.(a)
4.2 Form of Compensation Warrant Agreement (c)
4.3 Securities Purchase Agreement. (a)
4.4 Form of Convertible Debenture. (d)
4.5 Registration Rights Agreement. (a)
5.0 Opinion of Rosenblum, Parish & Isaacs, P.C. (c)
10.0 Employment Agreement, Rolando Loera, dated December 28, 1995.(b)
10.1 Lease Agreement dated January 1, 1993 relating to 1875 Dobbins Drive,
San Jose, CA.(b)
10.2 Lease Agreement dated October 25, 1993 relating to 1881-1899 Dobbins
Drive San Jose CA.(b)
10.3 Lease Agreement dated June 21, 1995 relating to 1565-C Mabury Road,San
Jose, CA.(b)
10.4 Lease Agreement dated August 29, 1997 relating to 7500 Tryone Avenue,
Van Nuys, CA (c)
10.5 Touche Manufacturing Company, Inc. Employee Stock Ownership Plan.(b)
10.6 Form of 5% 275,000 in principal amount Secured Convertible Promissory
Debenture (d)
10.7 Asset Purchase Agreement dated November 1, 1996 by and among Pen
Interconnect, Inc., Touche Electronics,Inc. and TMCI Electronics,
Inc.(e)
10.8 Stock Purchase Agreement dated effective as of January 1, 1997 by and
among TMCI Electronics, Inc. and the Shareholders of Enterprise
Industries, Inc.(f)
10.9 Merger Agreement and Plan of Reorganization by and among TMCI
Electronics, Inc., TMCI/Trinity Acquisition Corp., Trinity Electronics,
Inc. and Patrick McQuade, dated December 22, 1997.(g)
10.10 Loan and Security Agreement with Fleet Capital Corporation dated
March 2, 1998. (d)
10.11 Amendment to Loan and Security Agreement dated March 26, 1998. (c)
10.12 1995 Stock Option Plan.(b)
10.13 1997 Employee Stock Option Plan. (h)
10.14 1997 Employee Stock Purchase Plan. (i)
21.0 Subsidiaries of the Registrant. (a)
23.1 Consent of Moore Stephens, P.C.(c)
</TABLE>
a. Filed herewith.
b. Incorporated by reference to the Registration Statement on Form SB-2 (No.
33-80973) as originally filed with the Securities and Exchange Commission
(the "SEC") on December 29, 1995.
c. To be filed by amendment.
d. Incorporated by reference from the Registrant's Form 10-K filed with the
SEC on April 1, 1998.
e. Incorporated by reference to Exhibit 2.0 the Registrant's Form 8-K filed
with the Securities and Exchange Commission on November 27, 1997.
f. Incorporated by reference to Exhibit 2.0 the Registrant's Form 8-K filed
with the Securities and Exchange Commission on February 7, 1997.
g. Incorporated by reference to Exhibit 2.0 to the Registrant's Form 8-K
filed with the Securities and Exchange Commission on January 6, 1998.
h. Incorporated by reference to Appendix C to the Definitive Proxy Statement
as filed with the SEC on December 3, 1997.
i. Incorporated by reference to Appendix D to the Definitive Proxy Statement
as filed with the SEC on December 3, 1997
II-4
<PAGE> 81
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to
participating broker-dealers, at the closing, certificates in such denominations
and registered in such names as required by the participating broker-dealers, to
permit prompt delivery to each purchaser.
The undersigned Registrant also undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by
section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts
or events arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change
in the information set forth in the registration
statement;
(iii)To include any material information
with respect to the plan of distribution not
previously disclosed in the registration statement or
any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or preceding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-5
<PAGE> 82
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this amendment to the registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in San
Jose, California, on May 8, 1998.
TMCI ELECTRONICS, INC.
By: /s/ ROLANDO LOERA
----------------------------------
Rolando Loera
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROLANDO LOERA President, Chief May 8, 1998
- ------------------------- Executive Officer, Director
Rolando Loera [Principal Executive Officer]
/s/ CHARLES E. SHAW Vice President, Chief Financial May 8, 1998
- ------------------------- Officer, Director [Principal
Charles E. Shaw Financial Officer]
/s/ ROBERT LOERA Controller, Secretary, Director May 8, 1998
- ------------------------- [Principal Accounting Officer]
Robert Loera
- ------------------------- Director May 8, 1998
Thomas F. Chaffin
- ------------------------- Director May 8, 1998
Robert C. Fink
/s/ BORIS LIPKIN
- ------------------------- Director May 8, 1998
Boris Lipkin
</TABLE>
<PAGE> 83
INDEX TO EXHIBITS
<TABLE>
<S> <C>
1.0 Non Circumvention and Finder's Fee Agreement. (c)
3.0 Certificate of Incorporation, filed with Delaware Secretary of State on
December 7, 1995.(b)
3.1 By-laws.(b)
3.2 Certificate of Secretary for amendment to Bylaws dated April 6,
1996.(c)
3.3 Amendment to the bylaws dated December 22, 1997.(c)
4.0 Specimen Copy of Common Stock Certificate.(b)
4.1 Form of Class B Warrant Agreement.(a)
4.2 Form of Compensation Warrant Agreement (c)
4.3 Securities Purchase Agreement. (a)
4.4 Form of Convertible Debenture. (d)
4.5 Registration Rights Agreement. (a)
5.0 Opinion of Rosenblum, Parish & Isaacs, P.C. (c)
10.0 Employment Agreement, Rolando Loera, dated December 28, 1995.(b)
10.1 Lease Agreement dated January 1, 1993 relating to 1875 Dobbins Drive,
San Jose, CA.(b)
10.2 Lease Agreement dated October 25, 1993 relating to 1881-1899 Dobbins
Drive San Jose CA.(b)
10.3 Lease Agreement dated June 21, 1995 relating to 1565-C Mabury Road,San
Jose, CA.(b)
10.4 Lease Agreement dated August 29, 1997 relating to 7500 Tryone Avenue,
Van Nuys, CA (c)
10.5 Touche Manufacturing Company, Inc. Employee Stock Ownership Plan.(b)
10.6 Form of 5% 275,000 in principal amount Secured Convertible Promissory
Debenture (d)
10.7 Asset Purchase Agreement dated November 1, 1996 by and among Pen
Interconnect, Inc., Touche Electronics,Inc. and TMCI Electronics,
Inc.(e)
10.8 Stock Purchase Agreement dated effective as of January 1, 1997 by and
among TMCI Electronics, Inc. and the Shareholders of Enterprise
Industries, Inc.(f)
10.10 Loan and Security Agreement with Fleet Capital Corporation dated
March 2, 1998. (d)
10.11 Amendment to Loan and Security Agreement dated March 26, 1998. (c)
10.12 1995 Stock Option Plan.(b)
10.13 1997 Employee Stock Option Plan. (h)
10.14 1997 Employee Stock Purchase Plan. (i)
21.0 Subsidiaries of the Registrant. (a)
23.1 Consent of Moore Stephens, P.C.(c)
</TABLE>
a. Filed herewith.
b. Incorporated by reference to the Registration Statement on Form SB-2 (No.
33-80973) as originally filed with the Securities and Exchange Commission
(the "SEC") on December 29, 1995.
c. To be filed by amendment.
d. Incorporated by reference from the Registrant's Form 10-K filed with the
SEC on April 1, 1998.
e. Incorporated by reference to Exhibit 2.0 the Registrant's Form 8-K filed
with the Securities and Exchange Commission on November 27, 1997.
f. Incorporated by reference to Exhibit 2.0 the Registrant's Form 8-K filed
with the Securities and Exchange Commission on February 7, 1997.
g. Incorporated by reference to Exhibit 2.0 to the Registrant's Form 8-K
filed with the Securities and Exchange Commission on January 6, 1998.
h. Incorporated by reference to Appendix C to the Definitive Proxy Statement
as filed with the SEC on December 3, 1997.
i. Incorporated by reference to Appendix D to the Definitive Proxy Statement
as filed with the SEC on December 3, 1997
<PAGE> 1
Exhibit 4.1
CLASS B WARRANT AGREEMENT
AGREEMENT, dated as of this ____ day of March, 1998, by and
between TMCI ELECTRONICS, INC., a Delaware corporation ("Company"), and
American Stock Transfer & Trust Company, as Warrant Agent (the "Warrant
Agent").
WITNESSETH:
WHEREAS, in connection with a private offering (the "Offering")
of up to five (5) units, each unit (a "Unit") consisting of four (4)
convertible subordinated debentures (the "Debentures") each in the
principal amount of $275,000, the Company will issue up to 500,000 Class
B Warrants (the "Warrants"); and
WHEREAS, at the Company's option, up to an additional four (4)
Units may be issued in the Offering, which could result in the issuance
of up to an additional 400,000 Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on behalf
of the Company, and the Warrant Agent is willing to so act, in
connection with the issuance, registration, transfer, exchange and
redemption of the Warrants, the issuance of certificates representing
the Warrants, the exercise of the Warrants, and the rights of the
holders thereof;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the
terms and provisions of the Warrants and the certificates representing
the Warrants and the respective rights and obligations thereunder of the
Company, the holders of certificates representing the Warrants and the
Warrant Agent, the parties hereto agree as follows:
1. Definitions. As used herein, the following terms shall
have the following meanings, unless the context shall otherwise require:
(a) "Common Stock" shall mean the common stock of the
Company of which at the date hereof consists of 25,000,000 authorized
shares, $.001 par value per share, and shall also include any capital
stock of any class of the Company thereafter authorized which shall not
be limited to a fixed sum or percentage in respect to the rights of the
holders thereof to participate in dividends and in the distribution of
assets upon the voluntary liquidation, dissolution or winding up of the
Company; provided, however, that the shares issuable upon exercise of
the Warrants shall include (i) only shares of such class designated in
the Company's Certificate of Incorporation as Common Stock on the date
of the original issue of the Warrants; or (ii) in the case of any
reclassification, change, consolidation, merger, sale or conveyance of
the character referred to in Section 9(c) hereof, the
<PAGE> 2
stock, securities or property provided for in such section; or (iii) in
the case of any reclassification or change in the outstanding shares of
Common Stock issuable upon exercise of the Warrants as a result of a
subdivision or combination or a change in par value, or from par value
to no par value, or from no par value to par value, such shares of
Common Stock as so reclassified or changed.
(b) "Corporate Office" shall mean the office of the
Warrant Agent (or its successor) at which at any particular time its
principal business shall be administered, which office is located at the
date hereof at 40 Wall Street, New York, NY 10005.
(c) "Exercise Date" shall mean, as to any Warrant, the
date on which the Warrant Agent shall have received both (a) the Warrant
Certificate representing such Warrant, with the exercise form thereon
duly executed by the Registered Holder (as defined below) thereof or his
attorney duly authorized in writing, and (b) payment in cash, or by
official bank or certified check made payable to the Company, of an
amount in lawful money of the United States of America equal to the
applicable Purchase Price (as defined below).
(d) "Initial Warrant Exercise Date" shall mean the date of
this Agreement.
(e) "Purchase Price" shall mean the purchase price per
share to be paid upon exercise of each Warrant in accordance with the
terms hereof, which price shall be $5.50 per share for each Warrant,
subject to adjustment from time to time pursuant to the provisions of
Section 9 hereof, and subject to the Company's right, in its sole
discretion, upon thirty (30) days' written notice, to reduce the
Purchase Price upon notice to all warrant holders.
(f) "Redemption Price" shall mean the price at which the
Company may, at its option, redeem the Warrants, in accordance with the
terms hereof, which price shall be $0.01 per Warrant.
(g) "Registered Holder" shall mean as to any Warrant and
as of any particular date, the person in whose name the certificate
representing the Warrant shall be registered on that date on the books
maintained by the Warrant Agent pursuant to Section 6.
(h) "Transfer Agent" shall mean American Stock Transfer &
Trust Company, as the Company's transfer agent, or its authorized
successor, as such.
(i) "Warrant Certificate" shall mean a certificate
substantially in the form annexed to this Agreement evidencing one or
more Warrants.
(j) "Warrant Expiration Date" shall mean 5:00 P.M. (New
York time) on March 5, 2001, or the Redemption Date as defined in
Section 8, whichever is earlier; provided that if such date shall in the
State of New York be a holiday or a day on which banks are authorized or
required to close, then 5:00 P.M. (New York time) on the next following
day which in the State of New York is
-2-
<PAGE> 3
not a holiday or not a day on which banks are authorized or required to
close. Upon notice to all warrantholders, the Company shall have the
right to extend the warrant expiration date.
2. Warrants and Issuance of Warrant Certificates.
(a) A Warrant initially shall entitle the Registered
Holder of the Warrant representing such Warrant to purchase one share of
Common Stock upon the exercise thereof, in accordance with the terms
hereof, subject to modification and adjustment as provided in Section 9.
(b) Upon execution of this Agreement, Warrant Certificates
representing the number of Warrants sold pursuant to the Subscription
Agreements shall be executed by the Company and delivered to the Warrant
Agent. Upon written order of the Company signed by its President or a
Vice President and by its Secretary or an Assistant Secretary, the
Warrant Certificates shall be countersigned, issued, and delivered by
the Warrant Agent.
(c) From time to time, up to the Warrant Expiration Date,
the Transfer Agent shall countersign and deliver stock certificates in
required whole number denominations representing up to an aggregate of
900,000 shares of Common Stock, subject to adjustment as described
herein, upon the exercise of Warrants in accordance with this Agreement.
(d) From time to time, up to the Warrant Expiration Date,
the Warrant Agent shall countersign and deliver Warrant Certificates in
required whole number denominations to the persons entitled thereto in
connection with any transfer or exchange permitted under this Agreement;
provided that no Warrant Certificates shall be issued except (i) those
initially issued hereunder; (ii) those issued on or after the Initial
Warrant Exercise Date, upon the exercise of fewer than all Warrants
represented by any Warrant Certificate, to evidence any unexercised
warrants held by the exercising Registered Holder; (iii) those issued
upon any transfer or exchange pursuant to Section 6; (iv) those issued
in replacement of lost, stolen, destroyed or mutilated Warrant
Certificates pursuant to Section 7; and (v) those issued at the option
of the Company, in such form as may be approved by its Board of
Directors, to reflect any adjustment or change in the Purchase Price,
the number of shares of Common Stock issuable upon exercise of the
Warrants or the Redemption Price therefor made pursuant to Section 9
hereof.
3. Form and Execution of Warrant Certificates.
(a) The Class B Warrant Certificate shall be substantially
in the form annexed hereto as Exhibit A (the provisions of which are
hereby incorporated herein) and may have such letters, numbers or other
marks of identification or designation and such legends, summaries or
endorsements printed, lithographed or engraved thereon as the Company
may deem appropriate and as are not inconsistent with the provisions of
this Agreement, or as may be required to comply with any law or with any
rule or regulation made pursuant thereto or with any rule or regulation
of any stock exchange on which the Warrants may be listed, or to conform
to usage or to the requirements of
-3-
<PAGE> 4
Section 2(b). The Warrant Certificates shall be dated the date of
issuance thereof (whether upon initial issuance, transfer, exchange or
in lieu of mutilated, lost, stolen or destroyed Warrant Certificates)
and issued in registered form. Class B Warrant Certificates shall be
numbered serially with the letter WB. In the event that a registration
statement under the Securities Act of 1933 (the "Securities Act") is not
in effect at the time of the issuance of the Warrants, each Warrant
Certificate shall bear the following restrictive legend:
"The Warrants evidenced by this certificate and the securities issuable
upon exercise of such Warrants have not been registered under the
Securities Act of 1933 (the "Securities Act"). The Warrants may neither
be sold, assigned or transferred or exercised in the absence of an
effective registration statement under the Securities Act relating to
such securities or an opinion of counsel satisfactory to the issuer to
the effect that an exemption from registration is applicable."
(b) Warrant Certificates shall be executed on behalf of
the Company by its President, or any Vice President and by its Secretary
or an Assistant Secretary, by manual signatures or by facsimile
signatures printed thereon, and shall have imprinted thereon a facsimile
of the Company's seal. Warrant Certificates shall be manually
countersigned by the Warrant Agent and shall not be valid for any
purpose unless so countersigned. In case any officer of the Company who
shall have signed any of the Warrant Certificates shall cease to be an
officer of the Company or to hold the particular office referenced in
the Warrant Certificate before the date of issuance of the Warrant
Certificates or before countersignature by the Warrant Agent and issue
and delivery thereof, such Warrant Certificates may nevertheless be
countersigned by the Warrant Agent, issued and delivered with the same
force and effect as though the person who signed such Warrant
Certificates had not ceased to be an officer of the Company or to hold
such office. After countersignature by the Warrant Agent, Warrant
Certificates shall be delivered by the Warrant Agent to the Registered
Holder without further action by the Company, except as otherwise
provided by Section 4 hereof.
4. Exercise. Each Warrant may be exercised by the Registered
Holder thereof at any time on or after the Initial Warrant Exercise
Date, but not after the Warrant Expiration Date, upon the terms and
subject to the conditions set forth herein and in the applicable Warrant
Certificate. A Warrant shall be deemed to have been exercised
immediately prior to the close of business on the Exercise Date and the
person entitled to receive the securities deliverable upon such exercise
shall be treated for all purposes as the holder of those securities upon
the exercise of the Warrant as of the close of business on the Exercise
Date. As soon as practicable on or after the Exercise Date, the Warrant
Agent shall deposit the proceeds received from the exercise of a Warrant
and shall notify the Company in writing of the exercise of the Warrants.
Promptly following, and in any event within five (5) business days after
the Exercise Date, the Warrant Agent, on behalf of the Company, shall
cause to be issued and delivered by the Transfer Agent, to the person or
persons entitled to receive the same, a certificate or certificates for
the securities deliverable upon such exercise registered in the name of
such person (plus a certificate for any remaining unexercised Warrants
of the Registered Holder). Upon the exercise of any Warrant and
clearance of the funds received, the Warrant Agent shall promptly remit
the payment received upon exercise of the Warrant (the "Warrant
Proceeds") to the Company or as the Company may direct in writing.
-4-
<PAGE> 5
5. Reservation of Shares; Listing; Payment of Taxes, etc.
(a) The Company covenants that it will at all times
reserve and keep available free of preemptive rights out of its
authorized and unissued Common Stock, solely for the purpose of issuance
upon exercise of the rights to purchase shares of Common Stock issuable
upon exercise of the Warrants, the maximum number of shares of Common
Stock as shall from time to time be sufficient to provide for the
exercise of all outstanding Warrants. The Company covenants that all
shares of Common Stock which shall be issuable upon exercise of the
Warrants shall, at the time of delivery, be duly and validly issued,
fully paid, nonassessable, free of all preemptive rights and free from
all taxes, liens and charges with respect to the issue thereof and that
upon issuance such shares shall be listed on a national securities
exchange or eligible for inclusion in an automated quotation system, if
any, on which the other shares of outstanding Common Stock of the
Company are then listed or eligible for inclusion.
(b) The Company covenants that if any of the securities to
be reserved for the purpose of exercise of Warrants hereunder require
registration with, or approval of, any governmental authority under any
federal securities law before such securities may be validly issued or
delivered, then the Company will, in good faith and as expeditiously as
reasonably possible, register such securities or obtain such approval
and it will use its best efforts to obtain appropriate approvals or
registrations under state "blue sky" securities laws. With respect to
any such securities, however, Warrants may not be exercised by, or
shares of Common Stock issued to, any Registered Holder in any state in
which such exercise would be unlawful.
(c) The Company shall pay all documentary, stamp or
similar taxes and other governmental charges that may be imposed with
respect to the issuance of Warrants, or the issuance or delivery of any
shares upon exercise of the Warrants; provided, however, that if the
shares of Common Stock are to be delivered in a name other than the name
of the Registered Holder of the Warrant Certificate representing any
Warrant being exercised, then no such delivery shall be made unless the
person requesting the same has paid to the Warrant Agent the amount of
transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized for
such time as it is acting as such to requisition the Company's Transfer
Agent from time to time for certificates representing shares of Common
Stock issuable upon exercise of the Warrants, and the Company will
authorize the Transfer Agent to comply with all such proper
requisitions. The Company will file with the Warrant Agent a statement
setting forth the name and address of the Transfer Agent of the Company
for shares of Common Stock issuable upon exercise of the Warrants.
6. Exchange and Registration of Transfer.
(a) Warrant Certificates may be exchanged for other
Warrant Certificates representing an equal aggregate number of Warrants
of the same class or may be transferred in whole
-5-
<PAGE> 6
or in part. Warrant Certificates to be exchanged shall be surrendered to
the Warrant Agent at its Corporate Office, and upon satisfaction of the
terms and provisions hereof, the Company shall execute and the Warrant
Agent shall countersign, issue and deliver in exchange therefor the
Warrant Certificate or Certificates which the Registered Holder making
the exchange shall be entitled to receive.
(b) The Warrant Agent shall keep at its office books in
which, subject to such reasonable regulations as it may prescribe, it
shall register Warrant Certificates and the transfer thereof in
accordance with its regular practice. Upon due presentment for
registration of transfer of any Warrant Certificate at such office, the
Company shall execute and the Warrant Agent shall issue and deliver to
the transferee or transferees a new Warrant Certificate or Certificates
representing an equal aggregate number of Warrants.
(c) With respect to all Warrant Certificates presented for
registration or transfer, or for exchange or exercise, the subscription
form on the reverse thereof shall be duly endorsed, or be accompanied by
a written instrument or instruments of transfer and subscription, in
form satisfactory to the Company and the Warrant Agent, duly executed by
the Registered Holder or his attorney-in-fact duly authorized in
writing.
(d) All Warrant Certificates surrendered for exercise or
for exchange in case of mutilated Warrant Certificates shall be promptly
canceled by the Warrant Agent and thereafter retained by the Warrant
Agent until termination of this Agreement or resignation as Warrant
Agent, or disposed of or destroyed, at the direction of the Company.
(e) Prior to due presentment for registration of transfer
thereof, the Company and the Warrant Agent may deem and treat the
Registered Holder of any Warrant Certificate as the absolute owner
thereof and of each Warrant represented thereby (notwithstanding any
notations of ownership or writing thereon made by anyone other than a
duly authorized officer of the Company or the Warrant Agent) for all
purposes and shall not be affected by any notice to the contrary.
7. Loss or Mutilation. Upon receipt by the Company and the
Warrant Agent of evidence reasonably satisfactory to them of the loss,
theft, destruction or mutilation of any Warrant Certificate and (in case
of loss, theft or destruction) of indemnity satisfactory to them, and
(in the case of mutilation) upon surrender and cancellation thereof, the
Company shall execute and the Warrant Agent shall (in the absence of
notice to the Company and/or Warrant Agent that the Warrant Certificate
has been acquired by a bona fide purchaser) countersign and deliver to
the Registered Holder in lieu thereof a new Warrant Certificate of like
tenor representing an equal aggregate number of Warrants. Applicants for
a substitute Warrant Certificate shall comply with such other reasonable
regulations and pay such other reasonable charges incidental to such
loss, theft, destruction or mutilation as the Warrant Agent may
prescribe.
-6-
<PAGE> 7
8. Redemption.
(a) Subject to the provisions of paragraph 2(e) hereof and
to the Company not being in default under this Agreement or the
Debentures, on not less than thirty (30) days' notice given at any time
after the effective date of a registration statement with respect to the
Warrants and the Common Stock underlying such Warrants, the Warrants may
be redeemed, at the option of the Company, at a redemption price of
$0.01 per Warrant, provided the Market Price of the Common Stock
issuable upon exercise of the Warrants shall equal or exceed $8.75 (the
"Target Price"). Market Price for the purpose of this Section 8 shall
mean (i) the average closing bid price for any twenty (20) consecutive
trading days within a period of thirty (30) consecutive trading days
ending within five (5) days prior to the date of the notice of
redemption, which notice shall be mailed no later than five (5) days
thereafter, of the Common Stock as reported by the National Association
of Securities Dealers, Inc. Automatic Quotation System or (ii) the last
reported sale price, for twenty (20) consecutive trading days within a
period of thirty (30) consecutive trading days ending within five (5)
days of the date of the notice of redemption, which notice shall be
mailed no later than five (5) days thereafter, on the primary exchange
on which the Common Stock is traded, if the Common Stock is traded on a
national securities exchange.
(b) If the conditions set forth in Section 8(a) are met,
and the Company desires to exercise its right to redeem the Warrants, it
shall mail a notice of redemption to each of the Registered Holders of
the Warrants to be redeemed, first class, postage prepaid, not later
than the thirtieth day before the date fixed for redemption, at their
last address as shall appear on the records maintained pursuant to
Section 6(b). Any notice mailed in the manner provided herein shall be
conclusively presumed to have been duly given whether or not the
Registered Holder receives such notice.
(c) The notice of redemption shall specify (i) the
redemption price, (ii) the date fixed for redemption, (iii) the place
where the Warrant Certificates shall be delivered and the redemption
price paid, and (iv) that the right to exercise the Warrant shall
terminate at 5:00 P.M. (New York time) on the business day immediately
preceding the date fixed for redemption. The date fixed for the
redemption of the Warrant shall be the Redemption Date. No failure to
mail such notice nor any defect therein or in the mailing thereof shall
affect the validity of the proceedings for such redemption except as to
a Registered Holder (a) to whom notice was not mailed or (b) whose
notice was defective and then only to the extent that the Registered
Holder is prejudiced thereby. An affidavit of the Warrant Agent or of
the Secretary or an Assistant Secretary of the Company that notice of
redemption has been mailed shall, in the absence of fraud, be prima
facie evidence of the facts stated therein.
(d) Any right to exercise a Warrant shall terminate at
5:00 P.M. (New York time) on the business day immediately preceding the
Redemption Date. On and after the Redemption Date, holders of the
Warrants shall have no further rights except to receive, upon surrender
of the Warrant, the Redemption Price.
-7-
<PAGE> 8
(e) From and after the Redemption Date, the Company shall,
at the place specified in the notice of redemption, upon presentation
and surrender to the Company by or on behalf of the Registered Holder
thereof of one or more Warrant Certificates evidencing Warrants to be
redeemed, deliver or cause to be delivered to or upon the written order
of such Holder a sum in cash equal to the Redemption Price of each such
Warrant. From and after the Redemption Date and upon the deposit or
setting aside by the Company of a sum sufficient to redeem all the
Warrants called for redemption, such Warrants shall expire and become
void and all rights hereunder and under the Warrant Certificates, except
the right to receive payment of the redemption price, shall cease.
9. Adjustment of Exercise Price and Number of Shares of Common
Stock or Warrants.
(a) Subject to the exceptions referred to in Section 9(e)
below, in the event the Company shall, at any time or from time to time
after the date hereof, sell any shares of Common Stock for a
consideration per share less than the Market Price of the Common Stock
(as defined in Section 8) on the date of the sale or issue any shares of
Common Stock as a stock dividend to the holders of Common Stock, or
subdivide or combine the outstanding shares of Common Stock into a
greater or lesser number of shares (any such sale, issuance, subdivision
or combination being herein called a "Change of Shares"), then, and
thereafter upon each further Change of Shares, the Purchase Price in
effect immediately prior to such Change of Shares shall be changed to a
price (including any applicable fraction of a cent) determined by
multiplying the Purchase Price in effect immediately prior thereto by a
fraction, the numerator of which shall be the sum of the number of
shares of Common Stock outstanding immediately prior to the issuance of
such additional shares and the number of shares of Common Stock which
the aggregate consideration received (determined as provided in
subsection 9(f) below) for the issuance of such additional shares would
purchase at such current market price per share of Common Stock, and the
denominator of which shall be the sum of the number of shares of Common
Stock outstanding immediately after the issuance of such additional
shares. Such adjustment shall be made successively whenever such an
issuance is made and no such adjustment shall be made which results in
an increase in the Purchase Price.
Upon each adjustment of the Purchase Price pursuant
to this Section 9, the total number of shares of Common Stock
purchasable upon the exercise of each Warrant shall be such number of
shares (calculated to the nearest tenth) purchasable at the Purchase
Price in effect immediately prior to such adjustment multiplied by a
fraction, the numerator of which shall be the Purchase Price in effect
immediately prior to such adjustment and the denominator of which shall
be the Purchase Price in effect immediately after such adjustment.
(b) In case of any reclassification, capital
reorganization or other change of outstanding shares of Common Stock, or
in case of any consolidation or merger of the Company with or into
another corporation (other than a consolidation or merger in which the
Company is the continuing corporation and which does not result in any
reclassification, capital reorganization or other change of outstanding
shares of Common Stock), or in case of any sale or conveyance to another
corporation of the property of the Company as, or substantially as, an
entirety (other than a sale/leaseback, mortgage or other financing
transaction), the Company shall cause the successor
-8-
<PAGE> 9
corporation to execute and deliver to the Holder an agreement providing
for each holder of a Warrant then outstanding to have the right
thereafter, by exercising such Warrant, to purchase the kind and number
of shares of stock or other securities or property (including cash)
receivable upon such reclassification, capital reorganization or other
change, consolidation, merger, sale or conveyance by a holder of the
number of shares of Common Stock that might have been purchased upon
exercise of such Warrant immediately prior to such reclassification,
capital reorganization or other change, consolidation, merger, sale or
conveyance. Any such agreement shall include provision for adjustments
that shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 9. The Company shall not effect
any such consolidation, merger or sale unless prior to or simultaneously
with the consummation thereof the successor (if other than the Company)
resulting from such consolidation or merger or the corporation
purchasing assets or other appropriate corporation or entity shall
assume, by written instrument executed and delivered to the Warrant
Agent, the obligation to deliver to the holder of each Warrant such
shares of stock, securities or assets as, in accordance with the
foregoing provisions, such holders may be entitled to purchase and the
other obligations under this Agreement. The foregoing provisions shall
similarly apply to successive reclassification, capital reorganizations
and other changes of outstanding shares of Common Stock and to
successive consolidations, mergers, sales or conveyances.
(c) After each adjustment of the Purchase Price pursuant
to this Section 9, the Company will promptly prepare a certificate
signed by the President or a Vice President, and by the Secretary or an
Assistant Secretary, of the Company setting forth: (i) the Purchase
Price as so adjusted, (ii) the number of shares of Common Stock
purchasable upon exercise of each Warrant after such adjustment, and, if
the Company shall have elected to adjust the number of Warrants, the
number of Warrants to which the registered holder of each Warrant shall
then be entitled, and the adjustment in Redemption Price resulting
therefrom, and (iii) a brief statement of the facts accounting for such
adjustment. The Company will promptly file such certificate with the
Warrant Agent and cause a brief summary thereof to be sent by certified
mail, postage pre-paid, to each registered holder of Warrants at his
last address as it shall appear on the registry books of the Warrant
Agent. No failure to mail such notice nor any defect therein or in the
mailing thereof shall affect the validity thereof except as to the
holder to whom the Company failed to mail such notice, or except as to
the holder whose notice was defective. The affidavit of an officer of
the Warrant Agent or the Secretary or an Assistant Secretary of the
Company that such notice has been mailed shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
(d) For purposes of Section 9(a) and 9(b) hereof, the
following provisions (i) to (vii) shall also be applicable:
(i) The number of shares of Common Stock
outstanding at any given time shall include shares of Common Stock owned
or held by or for the account of the Company and the sale or issuance of
such treasury shares or the distribution of any such treasury shares
shall not be considered a Change of Shares for purposes of said
sections.
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<PAGE> 10
(ii) No adjustment of the Purchase Price shall be
made unless such adjustment would require an increase or decrease of at
least $.05 in such price; provided that any adjustments which by reason
of this subsection (ii) are not required to be made shall be carried
forward and shall be made at the time of and together with the next
subsequent adjustment which, together with any adjustment(s) so carried
forward, shall require an increase or decrease of at least $.05 in the
Purchase Price then in effect hereunder.
(iii) In case of (1) the sale by the Company for
cash of any rights or warrants to subscribe for or purchase, or any
options for the purchase of, Common Stock or any securities convertible
into or exchangeable for Common Stock without the payment of any further
consideration other than cash, if any (such convertible or exchangeable
securities being herein called "Convertible Securities"), or (2) the
issuance by the Company, without the receipt by the Company of any
consideration therefor, of any rights or warrants to subscribe for or
purchase, or any options for the purchase of, Common Stock or
Convertible Securities, in each case, if (and only if) the consideration
payable to the Company upon the exercise of such rights, warrants, or
options shall consist of cash, whether or not such rights, warrants or
options, or the right to convert or exchange such Convertible
Securities, are immediately exercisable, and the price per share for
which Common Stock is issuable upon the exercise of such rights,
warrants or options or upon the conversion or exchange of such
Convertible Securities (determined by dividing (x) the minimum aggregate
consideration payable to the Company upon the exercise of such rights,
warrants or options, plus the consideration received by the Company for
the issuance or sale of such rights, warrants or options, plus, in the
case of such Convertible Securities, the minimum aggregate amount of
additional consideration, if any, other than such Convertible
Securities, payable upon the conversion or exchange thereof, by the
total maximum number of shares of Common Stock issuable upon (y) the
exercise of such rights, warrants or options or upon the conversion or
exchange of such Convertible Securities issuable upon the exercise of
such rights, warrants or options) is less than the fair market value of
the Common Stock on the date of the issuance or sale of such rights,
warrants or options, then the total maximum number of shares of Common
Stock issuable upon the exercise of such rights, warrants or options or
upon the conversion or exchange of such Convertible Securities (as of
the date of the issuance or sale of such rights, warrants or options)
shall be deemed to be outstanding shares of Common Stock for purposes of
Sections 9(a) and 9(b) hereof and shall be deemed to have been sold for
cash in an amount equal to such price per share.
(iv) In case of the sale by the Company for cash of
any Convertible Securities, whether or not the right of conversion or
exchange thereunder is immediately exercisable, and the price per share
for which Common Stock is issuable upon the conversion or exchange of
such Convertible Securities (determined by dividing (x) the total amount
of consideration received by the Company for the sale of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, other than such Convertible Securities, payable
upon the conversion or exchange thereof, by (y) the total maximum number
of shares of Common Stock issuable upon the conversion or exchange of
such Convertible Securities) is less than the fair market value of the
Common Stock on the date of the sale of such Convertible Securities,
then the total maximum number of shares of Common Stock issuable upon
the conversion or exchange of such Convertible Securities (as of the
date of the sale of such Convertible
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<PAGE> 11
Securities) shall be deemed to be outstanding shares of Common Stock for
purposes of Sections 9(a) and 9(b) hereof and shall be deemed to have
been sold for cash in an amount equal to such price per share.
(v) In case the Company shall modify the rights of
conversion, exchange or exercise of any of the securities referred to in
subsection (iii) above or any other securities of the Company
convertible, exchangeable, or exercisable for shares of Common Stock,
for any reason other than an event that would require adjustment to
prevent dilution, so that the consideration per share received by the
Company after such modification is less than the market price on the
date prior to such modification, the Purchase Price to be in effect
after such modification shall be determined by multiplying the Purchase
Price in effect immediately prior to such event by a fraction, of which
the numerator shall be the number of shares of Common Stock outstanding
multiplied by the market price on the date prior to the modification
plus the number of shares of Common Stock which the aggregate
consideration receivable by the Company for the securities affected by
the modification would purchase at the market price and of which the
denominator shall be the number of shares of Common Stock outstanding on
such date plus the number of shares of Common Stock to be issued upon
conversion, exchange, or exercise of the modified securities at the
modified rate. Such adjustment shall become effective as of the date
upon which such modification shall take effect.
(vi) On the expiration of any such right, warrant
or option or the termination of any such right to convert or exchange
any such Convertible Securities, the Purchase Price then in effect
hereunder shall forthwith be readjusted to such Purchase Price as would
have obtained (a) had the adjustments made upon the issuance or sale of
such rights, warrants, options or Convertible Securities been made upon
the basis of the issuance of only the number of shares of Common Stock
theretofore actually delivered (and the total consideration received
therefor) upon the exercise of such rights, warrants, or options or upon
the conversion or exchange of such Convertible Securities and (b) had
adjustments been made on the basis of the Purchase Price as adjusted
under clause (a) for all transactions (which would have affected such
adjusted Purchase Price) made after the issuance or sale of such rights,
warrants, options or Convertible Securities.
(vii) In case of the sale for cash of any shares of
Common Stock, any Convertible Securities, any rights or warrants to
subscribe for or purchase, or any options for the purchase of, Common
Stock or Convertible Securities, the consideration received by the
Company therefor shall be deemed to be the gross sales price therefor
without deducting therefrom any expense paid or incurred by the Company
or any underwriting discounts or commissions or concessions paid or
allowed by the Company in connection therewith.
(e) No adjustment to the Purchase Price of the Warrants or
to the number of shares of Common Stock purchasable upon the exercise of
each Warrant will be made, however,
(i) upon the sale or exercise of the Warrants, any
presently outstanding options or warrants and any warrants issuable upon
exercise of the unit purchase option issued to the underwriter in the
Company's March 1996 public offering; or
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<PAGE> 12
(ii) upon issuance or sale of Common Stock or other
securities of the Company in proposed transactions disclosed in the
Schedules to the Securities Purchase Agreement relating to the Offering;
or
(iii) upon the issuance or sale of Common Stock or
Convertible Securities upon the exercise of any rights or warrants to
subscribe for or purchase, or any options for the purchase of, Common
Stock or Convertible Securities, whether or not such rights, warrants or
options were outstanding on the date of the original sale of the
Warrants or were thereafter issued or sold; or
(iv) upon the issuance or sale of Common Stock upon
conversion or exchange of any Convertible Securities, whether or not any
adjustment in the Purchase Price was made or required to be made upon
the issuance or sale of such Convertible Securities and whether or not
such Convertible Securities were outstanding on the date of the original
sale of the Warrants or were thereafter issued or sold; or
(v) upon the issuance or sale of Common Stock or
Convertible Securities in an exempt transaction unless the issuance or
sale price is less than 85% of the fair market value of the Common Stock
on the date of issuance, in which case the adjustment shall only be for
the difference between 85% of the fair market value and the issue or
sale price; or
(vi) upon the issuance or sale of Common Stock or
Convertible Securities to shareholders of any corporation which merges
and/or consolidates into or is acquired by the Company or from which the
Company acquires assets and some or all of the consideration consists of
equity securities of the Company, in proportion to their stock holdings
of such corporation immediately prior to the acquisition but only if no
adjustment is required pursuant to any other provision of this Section
9; or
(vii) upon the issuance or exercise of options or
upon the issuance or grant of stock awards granted to the Company's
directors, employees or consultants under a plan or plans adopted by the
Company's Board of Directors and approved by its stockholders (but only
to the extent that the aggregate number of shares excluded hereby and
issued after the date hereof shall not exceed ten percent (10%) of the
Company's Common Stock at the time of issuance). For the purposes of
determining whether the consideration received by the Company is less
than the Market Price in connection with any issuance of stock to the
Company's directors, employees or consultants under plans adopted by the
Company's Board of Directors and approved by its stockholders, the
consideration received shall be deemed to be the amount of compensation
to the director, employee or consultant reported by the Company in
connection with such issuance.
(viii) upon the issuance of Common Stock to the
Company's directors, employees or consultants under a plan or plans
which are qualified under the Internal Revenue Code.
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<PAGE> 13
(f) As used in this Section 9, the term "Common Stock"
shall mean and include the Company's Common Stock authorized on the date
of the original issue of the Units and shall also include any capital
stock of any class of the Company thereafter authorized which shall not
be limited to a fixed sum or percentage in respect of the rights of the
holders thereof to participate in dividends and in the distribution of
assets upon the voluntary liquidation, dissolution or winding up of the
Company; provided, however, that the shares issuable upon exercise of
the Warrants shall include only shares of such class designated in the
Company's Certificate of Incorporation as Common Stock on the date of
the original issue of the Units, or (i) in the case of any
reclassification, change, consolidation, merger, sale or conveyance of
the character referred to in Section 9(c) hereof, the stock, securities
or property provided for in such section or (ii) in the case of any
reclassification or change in the outstanding shares of Common Stock
issuable upon exercise of the Warrants as a result of a subdivision or
combination or a change in par value, or from par value to no par value,
or from no par value to par value, such shares of Common Stock as so
reclassified or changed.
(g) Any determination as to whether an adjustment in the
Purchase Price in effect hereunder is required pursuant to Section 9, or
as to the amount of any such adjustment, if required, shall be binding
upon the holders of the Warrants and the Company if made in good faith
by the Board of Directors of the Company.
(h) If and whenever the Company shall grant to the holders
of Common Stock, as such, rights or warrants to subscribe for or to
purchase, or any options for the purchase of, Common Stock or securities
convertible into or exchangeable for or carrying a right, warrant or
option to purchase Common Stock, the Company shall concurrently
therewith grant to each Registered Holder as of the record date for such
transaction of the Warrants then outstanding, the rights, warrants or
options to which each Registered Holder would have been entitled if, on
the record date used to determine the stockholders entitled to the
rights, warrants or options being granted by the Company, the Registered
Holder were the holder of record of the number of whole shares of Common
Stock then issuable upon exercise (assuming, for purposes of this
Section 9(j), that exercise of Warrants is permissible during periods
prior to the Initial Warrant Exercise Date) of his Warrants. Such grant
by the Company to the holders of the Warrants shall be in lieu of any
adjustment which otherwise might be called for pursuant to this Section
9.
10. Fractional Warrants and Fractional Shares.
(a) If the number of shares of Common Stock purchasable
upon the exercise of each Warrant is adjusted pursuant to Section 9
hereof, the Company nevertheless shall not be required to issue
fractions of shares, upon exercise of the Warrants or otherwise, or to
distribute certificates that evidence fractional shares. In such event,
the Company may at its option elect to round up the number of shares to
which the Holder is entitled to the nearest whole share or to pay cash
in respect of fractional shares in accordance with the following: With
respect to any fraction of a share called for upon any exercise hereof,
the Company shall pay to the Holder an amount in cash equal to such
fraction multiplied by the current market value of such fractional
share, determined as follows:
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<PAGE> 14
(i) If the Common Stock is listed on a National
Securities Exchange or admitted to unlisted trading privileges on such
exchange or listed for trading on the NASDAQ Quotation System, the
current value shall be the last reported sale price of the Common Stock
on such exchange on the last business day prior to the date of exercise
of this Warrant or if no such sale is made on such day, the average of
the closing bid and asked prices for such day on such exchange; or
(ii) If the Common Stock is not listed or admitted
to unlisted trading privileges, the current value shall be the mean of
the last reported bid and asked prices reported by the National
Quotation Bureau, Inc. on the last business day prior to the date of the
exercise of this Warrant; or
(iii) If the Common Stock is not so listed or
admitted to unlisted trading privileges and bid and asked prices are not
so reported, the current value shall be an amount determined in such
reasonable manner as may be prescribed by the Board of Directors of the
Company.
11. Warrant Holders Not Deemed Stockholders. No holder of
Warrants shall, as such, be entitled to vote or to receive dividends or
be deemed the holder of Common Stock that may at any time be issuable
upon exercise of such Warrants for any purpose whatsoever, nor shall
anything contained herein be construed to confer upon the holder of
Warrants, as such, any of the rights of a stockholder of the Company or
any right to vote for the election of directors or upon any matter
submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action (whether upon any recapitalization,
issue or reclassification of stock, change of par value or change of
stock to no par value, consolidation, merger or conveyance or
otherwise), or to receive notice of meetings, or to receive dividends or
subscription rights, until such Holder shall have exercised such
Warrants and been issued shares of Common Stock in accordance with the
provisions hereof.
12. Rights of Action. All rights of action with respect to this
Agreement are vested in the respective Registered Holders of the
Warrants, and any Registered Holder of a Warrant, without consent of the
Warrant Agent or of the holder of any other Warrant, may, in his own
behalf and for his own benefit, enforce against the Company his right to
exercise his Warrants for the purchase of shares of Common Stock in the
manner provided in the Warrant Certificate and this Agreement.
13. Agreement of Warrant Holders. Every holder of a Warrant, by
his acceptance thereof, consents and agrees with the Company, the
Warrant Agent and every other holder of a Warrant that:
(a) The Warrants are transferable only on the registry
books of the Warrant Agent by the Registered Holder thereof in person or
by his attorney duly authorized in writing and only if the Warrant
Certificates representing such Warrants are surrendered at the office of
the Warrant Agent, duly endorsed or accompanied by a proper instrument
of transfer satisfactory to the Warrant Agent and the Company in their
mutual discretion, together with payment of any applicable transfer
taxes; and
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<PAGE> 15
(b) The Company and the Warrant Agent may deem and treat
the person in whose name the Warrant Certificate is registered as the
holder of the Warrants represented thereby for all purposes, and neither
the Company nor the Warrant Agent shall be affected by any notice or
knowledge to the contrary, except as otherwise expressly provided in
Section 7 hereof.
14. Cancellation of Warrant Certificates. If the Company shall
purchase or acquire any Warrant or Warrants, the Warrant Certificate or
Warrant Certificates evidencing the same shall thereupon be delivered to
the Warrant Agent and canceled by it and retired. The Warrant Agent
shall also cancel Common Stock following exercise of any or all of the
Warrants represented thereby or delivered to it for transfer, split up,
combination or exchange.
15. Concerning the Warrant Agent. The Warrant Agent acts
hereunder as agent and in a ministerial capacity for the Company, and
its duties shall be determined solely by the provisions hereof. The
Warrant Agent shall not, by issuing and delivering Warrant Certificates
or by any other act hereunder be deemed to make any representations as
to the validity, value or authorization of the Warrant Certificates or
the Warrants represented thereby or of any securities or other property
delivered upon exercise of any Warrant or whether any stock issued upon
exercise of any Warrant is fully paid and nonassessable.
The Warrant Agent shall not at any time be under any duty
or responsibility to any holder of Warrant Certificates to make or cause
to be made any adjustment of the Purchase Price or the Redemption Price
provided in this Agreement, or to determine whether any fact exists
which may require any such adjustments, or with respect to the nature or
extent of any such adjustment, when made, or with respect to the method
employed in making the same. It shall not (i) be liable for any recital
or statement of facts contained herein or for any action taken, suffered
or omitted by it in reliance on any warrant Certificate or other
document or instrument believed by it in good faith to be genuine and to
have been signed or presented by the proper party or parties, (ii) be
responsible for any failure on the part of the Company to comply with
any of its covenants and obligations contained in this Agreement or in
any Warrant Certificate, or (iii) be liable for any act or omission in
connection with this Agreement except for its own negligence or wilful
misconduct.
The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company) and shall incur
no liability or responsibility for any action taken, suffered or omitted
by it in good faith in accordance with the opinion or advice of such
counsel.
Any notice, statement, instruction, request, direction,
order or demand of the Company shall be sufficiently evidenced by an
instrument signed by its President, any Vice President, its Secretary,
or Assistant Secretary, (unless other evidence in respect thereof is
herein specifically prescribed). The Warrant Agent shall not be liable
for any action taken, suffered or omitted by it in accordance with such
notice, statement, instruction, request, direction, order or demand
reasonably believed by it to be genuine.
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<PAGE> 16
The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its
reasonable expenses hereunder; it further agrees to indemnify the
Warrant Agent and save it harmless against any and all losses, expenses
and liabilities, including judgments, costs and counsel fees, for
anything done or omitted by the Warrant Agent in the execution of its
duties and powers hereunder except losses, expenses and liabilities
arising as a result of the Warrant Agent's negligence or wilful
misconduct.
The Warrant Agent may resign its duties and be discharged
from all further duties and liabilities hereunder (except liabilities
arising as a result of the Warrant Agent's own negligence or wilful
misconduct), after giving thirty (30) days' prior written notice to the
Company. At least fifteen (15) days prior to the date such resignation
is to become effective, the Warrant Agent shall cause a copy of such
notice of resignation to be mailed to the Registered Holder of each
Warrant Certificate at the Company's expense. Upon such resignation, or
any inability of the Warrant Agent to act as such hereunder, the Company
shall appoint a new warrant agent in writing. If the Company shall fail
to make such appointment within a period of fifteen (15) days after it
has been notified in writing of such resignation by the resigning
Warrant Agent, then the Registered Holder of any Warrant Certificate may
apply to any court of competent jurisdiction in the State of New York
for the appointment of a new warrant agent. Any new warrant agent,
whether appointed by the Company or by such a court, shall be a bank or
trust company having a capital and surplus, as shown by its last
published report to its stockholders, of not less than $10,000,000 or a
stock transfer company. After acceptance in writing of such appointment
by the new warrant agent is received by the Company, such new warrant
agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named herein as the
Warrant Agent, without any further assurance, conveyance, act or deed;
but if for any reason it shall be necessary or expedient to execute and
deliver any further assurance, conveyance, act or deed, the same shall
be done at the expense of the Company and shall be legally and validly
executed and delivered by the resigning Warrant Agent. Not later than
the effective date of any such appointment the Company shall file notice
thereof with the resigning Warrant Agent and shall forthwith cause a
copy of such notice to be mailed to the Registered Holder of each
Warrant Certificate.
Any corporation into which the Warrant Agent or any new
warrant agent may be converted or merged or any corporation resulting
from any consolidation to which the Warrant Agent or any new warrant
agent shall be a party or any corporation succeeding to the trust
business of the Warrant Agent shall be a successor warrant agent under
this Agreement without any further act, provided that such corporation
is eligible for appointment as successor to the Warrant Agent under the
provisions of the preceding paragraph. Any such successor warrant agent
shall promptly cause notice of its succession as warrant agent to be
mailed to the Company and to the Registered Holder of each Warrant
Certificate.
The Warrant Agent, its subsidiaries and affiliates, and
any of its or their officers or directors, may buy and hold or sell
Warrants or other securities of the Company and otherwise deal with the
Company in the same manner and to the same extent and with like effects
as though it were
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<PAGE> 17
not the Warrant Agent. Nothing herein shall preclude the Warrant Agent
from acting in any other capacity for the Company if so authorized by
the Company or for any other legal entity.
16. Modification of Agreement. The Warrant Agent and the Company
may by supplemental agreement make any changes or corrections in this
Agreement (i) that they shall deem appropriate to cure any ambiguity or
to correct any defective or inconsistent provision or manifest mistake
or error herein contained; or (ii) that they may deem necessary or
desirable and which shall not adversely affect the interests of the
holders of Warrant Certificates; provided, however, that this Agreement
shall not otherwise be modified, supplemented or altered in any respect
except with the consent in writing of the Registered Holders of Warrant
Certificates representing not less than fifty percent (50%) of the
Warrants then outstanding; and provided, further, that no change in the
number or nature of the securities purchasable upon the exercise of any
Warrant, or the Purchase Price therefor, or the acceleration of the
Warrant Expiration Date, shall be made without the consent in writing of
the Registered Holder of the Warrant Certificate representing such
Warrant, other than such changes as are specifically prescribed by this
Agreement as originally executed or are made in compliance with
applicable law.
17. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be made in person
or mailed first class registered or certified mail, postage prepaid, by
overnight delivery by a reputable courier company or by fax as follows:
if to the Company:
TMCI Electronics, Inc.
1875 Dobbin Drive
San Jose, CA 95133
Fax#: 408-254-1537
Attention: Michael W. Prozan, Esq.
if to the Warrant Agent:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
Fax#: 718-921-8355
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<PAGE> 18
18. Governing Law. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of New York without
regard to the principles of conflict of laws. Each party hereby
irrevocably submits to the non-exclusive jurisdiction of the state and
federal courts sitting in the City of New York, borough of Manhattan,
for the adjudication of any dispute hereunder or in connection herewith
or with any transaction contemplated hereby or discussed herein, and
hereby irrevocably waives, and agrees not to assert in any suit, action
or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is
brought in an inconvenient forum or that the venue of such suit, action
or proceeding is improper. Each party hereby irrevocably waives personal
service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof to such party at
the address for such notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and
notice thereof. Nothing contained herein shall be deemed to limit in any
way any right to serve process in any manner permitted by law. If any
provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
19. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the Company and the Warrant Agent, and their
respective successors and assigns, and the holders from time to time of
Warrant Certificates. Nothing in this Agreement is intended or shall be
construed to confer upon any other person any right, remedy or claim, in
equity or at law, or to impose upon any other person any duty, liability
or obligation.
20. Termination. This Agreement shall terminate at the close of
business on the Warrant Expiration Date of all the Warrants or such
earlier date upon which all Warrants have been exercised, except that
the Warrant Agent shall account to the Company for cash held by it and
the provisions of Section 15 hereof shall survive such termination.
21. Counterparts. This Agreement may be executed in several
counterparts, which taken together shall constitute a single document.
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<PAGE> 19
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed as of the date first above written.
TMCI ELECTRONICS, INC.
By: ______________________________
Its
AMERICAN STOCK TRANSFER
& TRUST COMPANY
By: ______________________________
Its
Authorized Officer
-19-
<PAGE> 1
Exhibit 4.3
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (the "AGREEMENT"), dated as of
February____, 1998, by and among TMCI Electronics, Inc., a Delaware corporation,
located at 1875 Dobbin Drive, San Jose, California 95133 (the "COMPANY"), and
the investors listed on the Schedule of Buyers attached hereto (individually, a
"BUYER" and collectively, the "BUYERS").
WHEREAS:
A. The Company and the Buyers are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Rule 506 of Regulation D ("REGULATION D") as promulgated by the United States
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "1933 ACT");
B. The Company has authorized the issue of 5% Convertible Subordinated
Debentures (the "DEBENTURES"), substantially in the form attached hereto as
Exhibit A, which shall be convertible into shares of the Company's Common Stock,
$.001 par value per share (the "COMMON STOCK") (as converted, the "CONVERSION
SHARES"), and the issue of warrants (the "WARRANTS") pursuant to a Warrant
Agreement, substantially in the form attached hereto as Exhibit B, to purchase
shares of Common Stock (the "WARRANT SHARES");
C. The Company is offering to sell, upon the terms and conditions stated
in this Agreement, up to five (5) Units at $1,100,000 per Unit. Each Unit
consists of four (4) Debentures, each in the principal amount of $275,000 which
pay interest of five percent (5%) per annum. The holder of each Debenture will,
subject to the conditions set forth herein, be issued Warrants to purchase
25,000 shares of Common Stock;
D. Subject to the terms and conditions set forth in this Agreement, the
Buyers may have the right to purchase up to four (4) additional Units (the
"ADDITIONAL UNITS").
E. Contemporaneously with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement
substantially in the form attached hereto as Exhibit C (the "REGISTRATION RIGHTS
AGREEMENT") pursuant to which the Company has agreed to provide certain
registration rights under the 1933 Act and the rules and regulations promulgated
thereunder, and applicable state securities laws.
<PAGE> 2
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Buyers hereby
agree as follows:
1. PURCHASE AND SALE OF DEBENTURES AND WARRANTS.
a. Purchase of Debentures. Subject to satisfaction (or waiver) of
the conditions set forth in Sections 6(a) and 7(a), the Company shall issue and
sell to the Buyers and the Buyers severally shall purchase from the Company the
number of Units set forth opposite each Buyer's name on the Schedule of Buyers
(the "INITIAL CLOSING"). Subject to the satisfaction (or waiver) of the
conditions set forth in Sections 1(c), 6(b) and 7(b), at the option of each
Buyer, the Company shall issue and sell to the Buyers the Additional Units (the
"ADDITIONAL CLOSINGS"). The Initial Closing and the Additional Closing
collectively are referred to in this Agreement as the "CLOSINGS." The purchase
price (the "PURCHASE PRICE") for each Unit at each of the Closings shall be
$1,100,000.
b. The Initial Closing Date. The date and time of the Initial
Closing (the "INITIAL CLOSING DATE") shall be 10:00 a.m. Eastern Time, within
five (5) business days following the date hereof, subject to satisfaction (or
waiver) of the conditions to the Initial Closing set forth in Sections 6(a) and
7(a) (or such later date as is mutually agreed to by the Company and the
Buyers). The Initial Closing shall occur on the Initial Closing Date at the
offices of Gould & Wilkie, One Chase Manhattan Plaza, New York, New York 10005,
or at such other location as is mutually agreed to by the Company and the
Buyers.
c. The Additional Closing Date. The date and time of the
Additional Closing (the "ADDITIONAL CLOSING DATE") shall be 10:00 a.m. Eastern
Time, on the date specified in an Additional Unit Notice (as defined below),
subject to satisfaction (or waiver) of the conditions to the Additional Closing
set forth in Sections 6(b) and 7(b) and the conditions set forth in this
paragraph, or such later date as is mutually agreed to by the Company and the
Buyers. For 120 days after the Initial Closing Date, but subject to the
requirements of Sections 6(b) and 7(b), each Buyer may purchase Additional Units
by delivering written notice to the Company (an "ADDITIONAL UNIT NOTICE") at
least seven days but not more than 20 days (the "ADDITIONAL UNIT NOTICE DATE")
prior to the Additional Closing Date set forth in such Buyer's Additional Unit
Notice. Each Additional Unit Notice shall set forth (i) the number of Additional
Units to be purchased by such Buyer at such Additional Closing, the aggregate
Purchase Price for such Additional Units and (ii) the date selected by the Buyer
for the Additional Closing Date. The Additional Closing shall occur on the
Additional Closing Date at the offices of Gould & Wilkie, One Chase Manhattan
Plaza, New York, New York 10005, or at such other location as is mutually agreed
to by the Company and the Buyers. The Initial Closing Date and the Additional
Closing Date collectively are referred to in this Agreement as the "CLOSING
DATES."
<PAGE> 3
d. Form of Payment. On each of the Closing Dates, (i) each Buyer
shall pay the Purchase Price to IBJ Schroder Bank & Trust Company (the "ESCROW
AGENT") for the Units to be sold to such Buyer at the respective Closing, by
wire transfer of immediately available funds in accordance with the following
instructions:
Wire to:
IBJ Schroder Bank & Trust Company, as For Credit to the Account:
Escrow Agent IBJ Schroder Bank, as Escrow Agent
One State Street for TMCI Electronics, Inc.
New York, New York 10004 Account No. ES317
Routing No. 026007825 Attn: Corporate Trust Department
(Reference: TMCI Electronics, Inc. -
"Buyer Name")
and (ii) the Company shall deliver to each Buyer certificates (in
the denominations such Buyer shall request) representing such principal amount
of Debentures which such Buyer is then purchasing (as indicated opposite such
Buyer's name on the Schedule of Buyers), duly executed on behalf of the Company
and registered in the name of such Buyer or its designee.
Each Buyer and the Company hereby agree that the funds from
payment of the Purchase Price shall be held in escrow by the Escrow Agent and
invested in its money market account until the Escrow Agent has received
notification from the Company, consisting of a facsimile copy of the
certificates representing the Debentures that have been issued in the Buyers'
names along with a written certification by the Company's counsel that the
certificates representing the Debentures the Buyer is then purchasing have been
placed with an overnight delivery service for expedited delivery to the Buyer.
Upon receipt of said documentation, the Company shall instruct the Escrow Agent
to disburse the funds in accordance with its instructions. The Buyers and the
Company hereby acknowledge and agree that the Escrow Agent is acting solely as
an escrow agent in connection with the transaction, has not participated in the
offer or sale of the Units, has conducted no investigation of the transaction or
of either party, has not provided any advice nor made any representation or
warranty with respect to this Agreement and/or the transaction and has not
advised or made any representation or warranty with respect to the transaction's
compliance with federal, state or foreign law.
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<PAGE> 4
e. Delivery of Warrants. Subject to satisfaction of the
conditions set forth in this Section 1(e), the Company shall deliver to the
Buyers Warrants as set forth below. Upon the earlier to occur (the "WARRANT
DELIVERY DATE") of (i) the first anniversary of the Closing Date or (ii) the
date which is three months after the date the Registration Statement (as that
term is defined in the Registration Rights Agreement) becomes effective, each
Buyer that holds any Debentures on such date shall be entitled to receive
Warrants from the Company in an amount equal to 25,000 for each Debenture held
by such Buyer. On the Warrant Delivery Date, the Buyers shall notify the Company
in writing (the "WARRANT DELIVERY NOTICE") of (i) the principal amount of
Debentures then held by such Buyer; (ii) the number of Warrants to which such
Buyer is entitled to receive; and (iii) the address to which the Company shall
send such Warrants. Within three Business Days of receipt of the Warrant
Delivery Notice, the Company shall deliver to each Buyer at such address
indicated in the Warrant Delivery Notice certificates representing such number
of Warrants to which such Buyer is then entitled, duly executed on behalf of the
Company and registered in the name of such Buyer or its designee.
2. BUYER'S REPRESENTATIONS AND WARRANTIES.
Each Buyer represents and warrants with respect to only itself
that:
a. Investment Purpose. Such Buyer (i) is acquiring the Units, the
Debentures and the Warrants, (ii) upon conversion of the Debentures, will
acquire the Conversion Shares then issuable and (iii) upon exercise of the
Warrants, will acquire the Warrant Shares then issuable (the Debentures, the
Warrants, the Conversion Shares and the Warrant Shares are collectively referred
to herein as the "SECURITIES"), for its own account for investment only and not
with a view towards, or for resale in connection with, the public sale or
distribution thereof, except pursuant to sales registered or exempted under the
1933 Act; provided, however, that such Buyer reserves the right to dispose of
the Securities at any time in accordance with or pursuant to a registration
statement or an exemption under the 1933 Act.
b. Accredited Investor Status. Such Buyer is an "accredited
investor" as that term is defined in Rule 501(a)(3) of Regulation D under the
1933 Act.
c. Reliance on Exemptions. Such Buyer understands that the
Securities are being offered and sold to it in reliance on specific exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying in part upon the truth and accuracy of, and
such Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of such Buyer
to acquire such Securities.
d. Information. Such Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Securities
which have been requested by such Buyer, including all SEC Documents (as defined
below). Such Buyer and its advisors, if any, have been afforded the
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<PAGE> 5
opportunity to review materials and to ask questions of the Company. Neither
such inquiries nor any other due diligence investigations conducted by such
Buyer or its advisors, if any, or its representatives shall modify, amend or
affect such Buyer's right to rely on the Company's representations and
warranties contained in Section 3. Such Buyer understands that its investment in
the Securities involves a high degree of risk. Such Buyer has specifically
reviewed the risk factors set forth in the Company's Annual Report on Form
10-KSB, as amended, for the fiscal year ended December 31, 1996. Such Buyer has
sought such accounting, legal and tax advice as it has considered necessary to
make an informed investment decision with respect to its acquisition of the
Securities.
e. No Government Review. Such Buyer understands that no United
States federal or state authority or agency or any other governmental authority
or agency has passed on or made any recommendation or endorsement of the
Securities or the fairness or suitability of the investment in the Securities
nor have such authorities passed upon or endorsed the merits of the offering of
the Securities.
f. Transfer or Resale. Such Buyer understands that except as
provided in the Registration Rights Agreement: (i) the Securities have not been
and are not being registered under the 1933 Act or any state securities laws,
and may not be offered for sale, sold, assigned or transferred unless (A)
subsequently registered thereunder, (B) such Buyer shall have delivered to the
Company an opinion of counsel, in a generally acceptable form, to the effect
that such Securities to be sold, assigned or transferred may be sold, assigned
or transferred pursuant to an exemption from such registration, or (C) such
Buyer provides the Company with reasonable assurance that such Securities can be
sold, assigned or transferred pursuant to Rule 144 promulgated under the 1933
Act (or a successor rule thereto) ("RULE 144"); (ii) any sale of the Securities
made in reliance on Rule 144 may be made only in accordance with the terms of
Rule 144 and further, if Rule 144 is not applicable, any resale of the
Securities under circumstances in which the seller (or the person through whom
the sale is made) may be deemed to be an underwriter (as the term is defined in
the 1933 Act) may require compliance with some other exemption under the 1933
Act or the rules and regulations of the SEC thereunder; and (iii) neither the
Company nor any other person is under any obligation to register such Securities
under the 1933 Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder.
g. Legends. Such Buyer understands that the certificates or other
instruments representing the Debentures and the Warrants and, until such time as
the sale of the Conversion Shares and the Warrant Shares have been registered
under the 1933 Act, as contemplated by the Registration Rights Agreement, the
certificates representing the Conversion Shares and the Warrant Shares, except
as set forth below, shall bear a restrictive legend in substantially the
following form (and a stop-transfer order may be placed against transfer of such
stock certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR
-5-
<PAGE> 6
INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN
OPINION OF COUNSEL, IN FORM AND SUBSTANCE REASONABLY ACCEPTABLE TO TMCI
ELECTRONICS, INC., THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID
ACT.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of any Security upon which it is
stamped if, unless otherwise required by state securities laws, (i) such
Security is registered for sale under the 1933 Act, (ii) in connection with a
sale transaction, such holder provides the Company with an opinion of counsel,
in form and substance reasonably acceptable to the Company, to the effect that a
public sale, assignment or transfer of such Security may be made without
registration under the 1933 Act, or (iii) such holder provides the Company with
reasonable assurances that such Security can be sold pursuant to Rule 144
without any restriction as to the number of securities acquired as of a
particular date that can then be immediately sold. Each Buyer acknowledges,
covenants and agrees to sell all Securities, including those Securities
represented by a certificate(s) from which the legend has been removed, only
pursuant to (i) a registration statement with respect to which the Buyer has
been notified (and the Buyer has not received any notice to the contrary) is
effective under the 1933 Act, or (ii) advice of counsel that such sale is exempt
from registration required by Section 5 of the 1933 Act.
h. Authorization; Enforcement. This Agreement and the
Registration Rights Agreement have been duly and validly authorized, executed
and delivered on behalf of such Buyer and are valid and binding agreements of
such Buyer enforceable in accordance with their terms, subject as to
enforceability to general principles of equity and to applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation and other similar laws
relating to, or affecting generally, the enforcement of applicable creditors
rights and remedies.
i. Trading Restrictions. During the period of thirty days prior
to and including the Closing Date, such Buyer and its affiliates have not,
directly or indirectly, entered into any short position or similar hedge of the
Common Stock and have not used shares of Common Stock to cover any such short
position or similar hedge.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each of the Buyers that:
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<PAGE> 7
a. Organization and Qualification. The Company and each of its
subsidiaries (a complete list of which is set forth in Schedule 3(a)) are
corporations duly organized and validly existing in good standing under the laws
of the jurisdictions in which they are incorporated, and have the requisite
corporate power to own their properties and to carry on their respective
businesses as now being conducted. The Company and each of its subsidiaries are
duly qualified as foreign corporations to do business and are in good standing
in every jurisdiction in which the nature of the business conducted by them
makes such qualification necessary, except to the extent that the failure to be
qualified or be in good standing would not have a Material Adverse Effect. As
used in this Agreement, "MATERIAL ADVERSE EFFECT" means any material adverse
effect on the business, properties, assets, operations, results of operations,
liabilities, financial condition or prospects of the Company and its
subsidiaries, taken as a whole, or on the transactions contemplated hereby.
b. Authorization; Enforcement; Compliance with Other Instruments.
(i) The Company has the requisite corporate power and authority to enter into
and perform this Agreement (including the Irrevocable Transfer Agent
Instructions, as defined in Section 5), the Registration Rights Agreement, the
Debentures, and the Warrant Agreement (collectively, the "TRANSACTION
DOCUMENTS"), and to issue the Securities in accordance with the terms hereof and
thereof, (ii) the execution and delivery of the Transaction Documents by the
Company and the consummation by it of the transactions contemplated thereby,
including without limitation the issuance of the Debentures, the issuance of the
Conversion Shares upon conversion thereof, the issuance of the Warrants and the
issuance of the Warrant Shares upon exercise thereof, have been duly authorized
by the Company's Board of Directors and no further consent or authorization is
required by the Company, its Board of Directors or its stockholders, (iii) the
Transaction Documents have been duly executed and delivered by the Company, and
(iv) each of the Transaction Documents constitutes a valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, except as such enforceability may be limited by general principles of
equity or applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation or similar laws relating to, or affecting generally, the enforcement
of creditors' rights and remedies.
c. Capitalization. As of the date hereof, the authorized capital
stock of the Company consists of (i) 25,000,000 shares of Common Stock, of which
4,006,238 shares are issued and outstanding, 1,750,000 shares are reserved and
available for issuance pursuant to the Company's stock option and purchase plans
as listed on Schedule 3(c) and the options and other rights to acquire shares as
listed on Schedule 3(c), 2,800,000 shares are reserved and available for
issuance upon exercise of the Class A Warrants to purchase Common Stock at the
exercise prices set forth in Schedule 3(c) (the "CLASS A WARRANTS"), subject to
adjustment in accordance with the terms of the Warrant Agreement relating to the
Class A Warrants, and no other shares are reserved and available for issuance
pursuant to securities (other than the Debentures, the Warrants and the Class A
Warrants) exercisable or exchangeable for, or convertible into, shares of Common
Stock. All of such outstanding shares have been, or upon issuance in accordance
with the terms of the relevant governing instrument will be, validly issued and
are fully paid and nonassessable. Except as disclosed in Schedule 3(c), no
shares of Common Stock are subject to preemptive rights or any
-7-
<PAGE> 8
other similar rights or any liens or encumbrances suffered or permitted by the
Company or were issued in violation of the 1933 Act or applicable state
securities laws. Except as disclosed in Schedule 3(c), as of the date of this
Agreement, (i) there are no outstanding options, warrants, scrip, rights to
subscribe to, call or commitments of any character whatsoever relating to, or
securities or rights convertible into or exchangeable for, any shares of capital
stock of the Company or any of its subsidiaries, or contracts, commitments,
understandings or arrangements by which the Company or any of its subsidiaries
is or may become bound to issue additional shares of capital stock of the
Company or any of its subsidiaries or options, warrants, scrip, rights to
subscribe to, call or commitments of any character whatsoever relating to, or
securities or rights convertible into or exchangeable for, any shares of capital
stock of the Company or any of its subsidiaries, (ii) there are no outstanding
debt securities, (iii) there are no agreements or arrangements under which the
Company or any of its subsidiaries is obligated to register the sale of any of
their securities under the 1933 Act (except the Registration Rights Agreement)
and (iv) there are no outstanding securities of the Company or any of its
subsidiaries which contain any redemption or similar provisions, and there are
no contracts, commitments, understandings or arrangements by which the Company
or any of its subsidiaries is or may become bound to redeem or purchase a
security of the Company or any of its subsidiaries. Except as disclosed in
Schedule 3(c), there are no securities or instruments containing anti-dilution
or similar provisions that will be triggered by the issuance of the Securities
as described in this Agreement, the Debentures or the Warrant Agreement. The
Company has furnished to the Buyers true and correct copies of the Company's
Certificate of Incorporation, as amended and as in effect on the date hereof
(the "CERTIFICATE OF INCORPORATION"), and the Company's By-laws, as in effect on
the date hereof (the "BY-LAWS"), and the terms of all securities convertible
into or exercisable for Common Stock and the material rights of the holders
thereof in respect thereto.
d. Issuance of Securities. The Debentures are duly authorized for
issuance and sale to the Buyers by the Company pursuant hereto. 3,300,000 shares
of Common Stock (subject to adjustment pursuant to the Company's covenant set
forth in Section 4(f)) have been duly authorized and reserved for issuance upon
conversion of the Debentures. Upon issuance in accordance with the terms and
conditions of this Agreement and the Debentures, the Conversion Shares will be
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges with respect to the issue thereof with the holders being entitled to all
rights accorded to a holder of Common Stock. The Warrants are duly authorized
for issuance and sale to the Buyers by the Company pursuant hereto. 900,000
shares of Common Stock (subject to adjustment pursuant to the Company's covenant
set forth in Section 4(f)) have been duly authorized and reserved for issuance
upon exercise of the Warrants. Upon exercise in accordance with the terms and
conditions of this Agreement and the Warrant Agreement, the Warrant Shares will
be validly issued, fully paid and nonassessable and free from all taxes, liens
and charges with respect to the issue thereof with the holders being entitled to
all rights accorded to a holder of Common Stock. Assuming the accuracy of the
representations of the Buyers set forth in the this Agreement, the issuance by
the Company of the Securities is exempt from registration under the 1933 Act.
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<PAGE> 9
e. No Conflicts. Except as disclosed in Schedule 3(e), the
execution, delivery and performance of the Transaction Documents by the Company
and the consummation by the Company of the transactions contemplated thereby
(including, without limitation, the reservation for issuance and issuance of the
Conversion Shares and the Warrant Shares) will not (i) result in a violation of
the Certificate of Incorporation or the By-laws, (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company or any of its subsidiaries is a party, or (iii)
result in a violation of any law, rule, regulation, order, judgment or decree
(including federal and state securities laws and regulations and the rules and
regulations of the principal market or exchange on which the Common Stock is
traded or listed) applicable to the Company or any of its subsidiaries or by
which any property or asset of the Company or any of its subsidiaries is bound
or affected, except to the extent that matters within clauses (ii) and (iii)
immediately above would not have a Material Adverse Effect. Except as disclosed
in Schedule 3(e), neither the Company nor its subsidiaries is in violation of
any term of or in default under (i) the Certificate of Incorporation or the
By-laws or their organizational charter or by-laws, respectively, or (ii) any
contract, agreement, mortgage, indebtedness, indenture, instrument, judgment,
decree or order or any statute, rule or regulation applicable to the Company or
its subsidiaries, except to the extent that such violation or default would not
have a Material Adverse Effect. The business of the Company and its subsidiaries
is not being conducted, and shall not be conducted, in violation of any law,
ordinance, rule or regulation of any governmental entity. Except as specifically
contemplated by this Agreement and as required under the 1933 Act, the Company
is not required to obtain any consent, authorization or order of, or make any
filing or registration with, any court or governmental agency in order for it to
execute, deliver or perform any of its obligations under or contemplated by the
Transaction Documents in accordance with the terms thereof. Except as disclosed
in Schedule 3(e), all consents, authorizations, orders, filings and
registrations which the Company is required to obtain pursuant to the preceding
sentence have been obtained or effected on or prior to the date hereof. The
Company and its subsidiaries are unaware of any facts or circumstances which
might give rise to any of the foregoing. The Company is not in violation of the
listing requirements of the Nasdaq SmallCap Market or the Nasdaq National
Market, as applicable, as in effect on the date hereof and on each of the
Closing Dates and is not aware of any facts which would reasonably lead to
delisting of the Common Stock by the Nasdaq SmallCap Market or the Nasdaq
National Market, as applicable, in the foreseeable future.
f. SEC Documents; Financial Statements. Except as set forth on
Schedule 3(f), since March 5, 1996, the Company has filed all reports,
schedules, forms, statements and other documents required to be filed by it with
the SEC pursuant to the reporting requirements of the Securities Exchange Act of
1934, as amended (the "1934 ACT") (all of the foregoing and all exhibits
included therein and financial statements and schedules thereto and documents
incorporated by reference therein being hereinafter referred to as the "SEC
DOCUMENTS"). The Company has delivered to each Buyer or its respective
representatives true and complete copies of the SEC Documents. Except as set
forth on Schedule 3(f), as of their respective dates, the SEC Documents complied
in all material respects with the requirements of the 1934 Act and the rules and
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<PAGE> 10
regulations of the SEC promulgated thereunder applicable to the SEC Documents,
and none of the SEC Documents, at the time they were filed with the SEC,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Except as set forth on Schedule 3(f), as of their respective dates,
the financial statements of the Company included in the SEC Documents complied
as to form in all material respects with applicable accounting requirements and
the published rules and regulations of the SEC with respect thereto. Such
financial statements have been prepared in accordance with generally accepted
accounting principles, consistently applied, during the periods involved (except
(i) as may be otherwise indicated in such financial statements or the notes
thereto, or (ii) in the case of unaudited interim statements, to the extent they
may exclude footnotes or may be condensed or summary statements) and fairly
present in all material respects the consolidated financial position of the
Company and its subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended (subject,
in the case of unaudited statements, to normal year-end audit adjustments). No
other information provided by or on behalf of the Company to the Buyers which is
not included in the SEC Documents, taken as a whole in light of the SEC
Documents, including, without limitation, information referred to in Section
2(d), contains any untrue statement of a material fact or omits to state any
material fact necessary in order to make the statements therein, in the light of
the circumstance under which they are or were made, not misleading.
g. Absence of Certain Changes. Except as disclosed in Schedule
3(g), since September 30, 1997 there has been no material adverse change and no
material adverse development in the business, properties, operations, financial
condition or results of operations of the Company. The Company has not taken any
steps, and does not currently expect to take any steps, to seek protection
pursuant to any bankruptcy law nor does the Company or any of its subsidiaries
have any knowledge or reason to believe that its creditors intend to initiate
involuntary bankruptcy proceedings.
h. Absence of Litigation. There is no action, suit, proceeding,
inquiry or investigation before or by any court, public board, government
agency, self-regulatory organization or body pending or, to the knowledge of the
Company or any of its subsidiaries, threatened against or affecting the Company
or the Common Stock or any of its subsidiaries except as expressly set forth in
Schedule 3(h).
i. Acknowledgment Regarding Buyers' Purchase of Units, Debentures
and Warrants. The Company acknowledges and agrees that each of the Buyers is
acting solely in the capacity of arm's length purchaser with respect to the
Transaction Documents and the transactions contemplated thereby. The Company
further acknowledges that no Buyer is acting as a financial advisor or fiduciary
of the Company (or in any similar capacity) with respect to the Transaction
Documents and the transactions contemplated thereby and any advice given by any
of the Buyers or any of their respective representatives or agents in connection
with the Transaction Documents and the transactions contemplated thereby is
merely incidental to such Buyer's purchase of the Securities. The Company
further represents to each Buyer that the Company's decision to enter
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<PAGE> 11
into the Transaction Documents has been based solely on the independent
evaluation by the Company and its representatives.
j. No Undisclosed Liabilities. Except as disclosed on Schedule
3(j), no material event, liability, development or circumstance has occurred or
exists, with respect to the Company or its subsidiaries or their respective
business, properties, prospects, operations or financial conditions, that would
be required to be disclosed by the Company under applicable securities laws on a
registration statement (including by way of incorporation by reference) filed
with the SEC relating to an issuance and sale by the Company of its Common Stock
and which has not been publicly announced.
k. No General Solicitation. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the 1933 Act) in connection with the offer or sale of the
Securities.
l. No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of any of
the Securities under the 1933 Act or cause the offering of the Securities
pursuant to this Agreement to be integrated with prior offerings by the Company
for purposes of the 1933 Act or any applicable stockholder approval provisions,
including, without limitation, under the rules and regulations of the Nasdaq
SmallCap Market or the Nasdaq National Market, as applicable, nor will the
Company or any of its subsidiaries take any action or steps that would require
registration of the Securities under the 1933 Act or cause the offering of the
Securities to be integrated with other offerings.
m. Employee Relations. Neither the Company nor any of its
subsidiaries is involved in any union labor dispute nor, to the knowledge of the
Company or any of its subsidiaries, is any such dispute threatened. Neither the
Company nor any of its subsidiaries is a party to a collective bargaining
agreement, and the Company and its subsidiaries believe that relations with
their employees are good. Each of the Company and its subsidiaries is in
compliance in all material respects with the applicable provisions of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the
regulations and published interpretations thereunder. None of the following
events has occurred or is reasonably expected to occur that when taken together
with all other such events could reasonably be expected to result in a Material
Adverse Effect: (i) any "reportable event," as defined in Section 4043 of ERISA
or the regulations issued thereunder, with respect to any "employee pension
benefit plan" as such term is defined in Section 3 of ERISA (other than a
Multiemployer Plan (as defined below)) subject to the provisions of Title IV of
ERISA or Section 412 of the Internal Revenue Code of 1986, as amended (the
"CODE"), or Section 302 of ERISA (a "PLAN"); (ii) the adoption of any amendment
to a Plan that would require the provision of security pursuant to Section
401(a)(29) of the Code or Section 307 of ERISA; (iii) the existence with respect
to any Plan of an "accumulated funding deficiency" (as defined in
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<PAGE> 12
Section 412 of the Code or Section 302 of ERISA), whether or not waived; (iv)
the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of
an application for a waiver of the minimum funding standard with respect to any
Plan; (v) the incurrence of any liability under Title IV of ERISA with respect
to the termination of any Plan or the withdrawal or partial withdrawal of the
Company or any of its subsidiaries from any Plan or "multiemployer plan" as
defined in Section 4001(a)(3) of ERISA ("MULTIEMPLOYER PLAN"); (vi) the receipt
by the Company or any of its subsidiaries from the Pension Benefit Guaranty
Corporation or a plan administrator of any notice relating to the intention to
terminate any Plan or Plans or to appoint a trustee to administer any Plan;
(vii) the receipt by the Company or any of its subsidiaries of any notice
concerning the imposition of liability to a Multiemployer Plan as a result of a
complete or partial withdrawal from such Multiemployer Plan, as such terms are
defined in Part I of Subtitle E of Title IV of ERISA or of a determination that
a Multiemployer Plan is, or is expected to be, insolvent or in reorganization,
within the meaning of Title IV of ERISA; and (viii) the occurrence of a
"prohibited transaction" with respect to which the Company or any of its
subsidiaries is a "disqualified person" (within the meaning of Section 4975 of
the Code) and with respect to which the Company or such subsidiary would be
liable for the payment of an excise tax.
n. Intellectual Property Rights. To the knowledge of the Company,
the Company and its subsidiaries own or possess adequate rights or licenses to
use all trademarks, trade names, service marks, service mark registrations,
service names, patents, patent rights, copyrights, inventions, licenses,
approvals, governmental authorizations, trade secrets and rights to conduct
their respective businesses as now conducted, except to the extent that the
failure to possess such rights or licenses would not have a Material Adverse
Effect. The Company and its subsidiaries do not have any knowledge of any
infringement by the Company or its subsidiaries of any trademarks, trade name
rights, patents, patent rights, copyrights, inventions, licenses, service names,
service marks, service mark registrations, trade secret or other similar rights
of others, and, except as set forth on Schedule 3(n), there is no claim, action
or proceeding being made or brought against, or to the Company's knowledge,
being threatened against, the Company or any of its subsidiaries regarding any
trademarks, trade names, patents, patent rights, invention, copyright, license,
service names, service marks, service mark registrations, trade secret or other
infringement; and the Company and its subsidiaries are unaware of any facts or
circumstances which might give rise to any of the foregoing, except for such
facts and circumstances which would not have a Material Adverse Effect.
o. Environmental Laws. (i) The Company and its subsidiaries (x)
are in compliance with any and all applicable foreign, federal, state and local
laws and regulations relating to the protection of human health and safety or
emissions, discharges, releases, threatened releases, removal, remediation or
abatement of pollutants, contaminants, chemicals or industrial, hazardous or
toxic substances or wastes into or in the environment (including without
limitation air, surface water, ground water or land), or otherwise used in
connection with the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of pollutants, contaminants, hazardous
or toxic substances or wastes, as defined under such applicable laws
("ENVIRONMENTAL LAWS"), (y) have received all permits, licenses or other
approvals required of them under applicable
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<PAGE> 13
Environmental Laws to conduct their respective businesses and (z) are in
compliance with all terms and conditions of any such permit, license or
approval, except to the extent that the matters within clauses (x), (y) or (z)
above would not have a Material Adverse Effect.
(ii) There is no substance designated a "hazardous substance" by
any Environmental Law, including asbestos, petroleum, urea formaldehyde
insulation and petroleum by-products ("HAZARDOUS SUBSTANCE") present at any of
the real property currently owned or leased by the Company or any of its
subsidiaries, except to the extent that such presence could not reasonably be
expected to have a Material Adverse Effect; and with respect to such real
property, there has not occurred (x) any release or, to the knowledge of the
Company, any threatened release of a Hazardous Substance or (y) any discharge
or, to the knowledge of the Company, threatened discharge of any Hazardous
Substance into the ground, surface or navigable waters which discharge or
threatened discharge violates any federal, state, local or foreign laws, rules
or regulations concerning water pollution.
(iii) None of the Company or any of its subsidiaries has disposed
of, transported, or arranged for the transportation or disposal of any Hazardous
Substance where such disposal, transportation or arrangement would give rise to
liability pursuant to any Environmental Law other than any such liabilities that
could not reasonably be expected to have a Material Adverse Effect.
(iv) There are no underground storage tanks, asbestos-containing
materials, polychlorinated biphenyls or urea formaldehyde insulation at any of
the real property currently owned or leased by the Company or any of its
subsidiaries in violation of any Environmental Law.
p. Title. The Company and its subsidiaries have good and
marketable title in fee simple to all real property and good and marketable
title to all personal property owned by them, except to the extent that the
failure to have good and marketable title would not have a Material Adverse
Effect, in each case free and clear of all liens, encumbrances and defects
except such as are described in Schedule 3(p) or such as do not materially
affect the value of such property and do not interfere with the use made and
proposed to be made of such property by the Company or any of its subsidiaries.
Any real property and facilities held under lease by the Company or any of its
subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company and its
subsidiaries.
q. Insurance. The Company and each of its subsidiaries are
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as management of the Company believes to be
prudent and customary in the businesses in which the Company and its
subsidiaries are engaged. Neither the Company nor any of its subsidiaries has
any reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not have a Material Adverse Effect.
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<PAGE> 14
r. Regulatory Permits. The Company and its subsidiaries possess
all certificates, authorizations, approvals, licenses, easements, rights-of-way,
orders and permits ("PERMITS") issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct their respective businesses,
except to the extent that the failure to possess such certificates,
authorizations and permits would not have a Material Adverse Effect; and neither
the Company nor any such subsidiary has received any notice of proceedings
relating to the revocation or modification of any such Permit.
s. Compliance With Law. Except as set forth on Schedule 3(s),
each of the Company and its subsidiaries has complied with, has not received any
notice of violation of, and has no knowledge of any facts which with or without
notice could reasonably be expected to constitute a violation of, any laws,
ordinances, rules, regulations, orders, judgment, injunctions, awards or decrees
of any governmental entity applicable to the Company and its subsidiaries and
their properties, except for any violation or failure so to comply which could
not reasonably be expected to have a Material Adverse Effect.
t. Internal Accounting Controls. The Company and each of its
subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability, (iii) access to assets is permitted only in accordance with
management's general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
u. No Materially Adverse Contracts, Etc. Neither the Company nor
any of its subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation which in the
reasonable judgment of the Company's officers has or is expected in the future
to have a Material Adverse Effect.
v. Tax Status. Except as set forth on Schedule 3(v), the Company
and each of its subsidiaries has made or filed all federal and state income and
all other tax returns, reports and declarations required by any jurisdiction to
which it is subject (unless and only to the extent that the Company and each of
its subsidiaries has set aside on its books provisions reasonably adequate for
the payment of all unpaid and unreported taxes) and has paid all taxes and other
governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith and has set aside on its books provision
reasonably adequate for the payment of all taxes for periods subsequent to the
periods to which such returns, reports or declarations apply. There are no
unpaid taxes in any material amount claimed to be due by the taxing authority of
any jurisdiction, and the officers of the Company know of no basis for any such
claim.
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<PAGE> 15
w. Dilutive Effect. The Company understands and acknowledges that
the number of Conversion Shares issuable upon conversion of the Debentures and
the number of Warrant Shares issuable upon exercise of the Warrants will
increase under the circumstances set forth in the Debentures and the Warrant
Agreement. The Company further acknowledges that its obligations to issue
Conversion Shares upon conversion of the Debentures and to issue Warrant Shares
upon exercise of the Warrants in accordance with this Agreement, the Debentures
and the Warrant Agreement (subject to the terms and conditions thereof), as the
case may be, are absolute and unconditional regardless of the dilutive effect
that such issuances may have on the ownership interests of other stockholders of
the Company.
x. No Other Agreements. Except as set forth on Schedule 3(x), the
Company has not, directly or indirectly, made any agreements with any Buyers
relating to the terms or conditions of the transactions contemplated by the
Transaction Documents except as set forth in the Transaction Documents.
y. No Material Misstatement. None of the representations or
warranties of the Company contained herein and none of the information contained
in the Schedules hereto furnished by the Company is false or misleading in any
material respect or omits to state a material fact necessary to make the
statements herein or therein not misleading in any material respect.
4. COVENANTS.
a. Best Efforts. Each party shall use its commercially reasonable
efforts timely to satisfy each of the conditions to be satisfied by it as
provided in Sections 6 and 7 of this Agreement.
b. Form D. The Company agrees to file a Form D with respect to
the Securities as required under Regulation D and to provide a copy thereof to
each Buyer promptly after such filing. The Company shall, on or before each of
the Closing Dates, take such action as the Company shall reasonably determine is
necessary to qualify the Securities for, or obtain exemption for the Securities
for, sale to the Buyers at each of the Closings pursuant to this Agreement under
applicable securities or "Blue Sky" laws of the states of the United States and
shall provide evidence of any such action so taken to the Buyers or prior to the
Closing Date.
c. Reporting Status. Until the earlier of (i) the date as of
which the Investors (as that term is defined in the Registration Rights
Agreement) may sell all of the Conversion Shares without restriction pursuant to
Rule 144(k) promulgated under the 1933 Act (or successor thereto), or (ii) the
date on which (A) the Investors shall have sold all of the Conversion Shares and
all of the Warrant Shares and (B) none of the Units, Debentures and Warrants is
outstanding (the "REGISTRATION PERIOD"), the Company shall file all reports
required to be filed with the SEC pursuant to the 1934 Act, and the Company
shall not terminate its status as an issuer required to file
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<PAGE> 16
reports under the 1934 Act even if the 1934 Act or the rules and regulations
thereunder would otherwise permit such termination.
d. Use of Proceeds. The Company will use the proceeds from the
sale of the Units for substantially the same purposes and in substantially the
same amounts as indicated in Schedule 4(d).
e. Financial Information. The Company agrees to send the
following to each Investor (as that term is defined in the Registration Rights
Agreement), during the Registration Period: (i) within two (2) days after the
filing thereof with the SEC, a copy of its Annual Reports on Form 10-KSB, its
Quarterly Reports on Form 10-QSB, any Current Reports on Form 8-K and any
registration statements or amendments filed pursuant to the 1933 Act; (ii) on
the same day as the release thereof, facsimile copies of all press releases
issued by the Company or any of its subsidiaries; and (iii) copies of any
notices and other information made available or given to the stockholders of the
Company generally, contemporaneously with the making available or giving thereof
to the stockholders.
f. Reservation of Shares. The Company shall take all action
necessary to at all times have authorized, and reserved for the purpose of
issuance, no less than 150% of the number of shares of Common Stock needed to
provide for the issuance of the Conversion Shares and the Warrant Shares.
g. Right of First Refusal. Except with respect to the proposed
transactions identified on Schedule 4(g), so long as an aggregate of at least
20% of the Debentures underlying the Units issued at the Closings remains
outstanding, but subject to the exceptions described below, the Company shall
not enter into a binding agreement or otherwise agree with any party for any
equity financing (including any debt financing with an equity component) or
issue any equity securities of the Company or securities convertible or
exchangeable into or for equity securities of the Company (including debt
securities with an equity component) in any form ("FUTURE OFFERINGS") during the
period beginning on the Initial Closing Date and ending on and including the
date which is 365 days after the Initial Closing Date, unless it shall have
first delivered to each Buyer written notice (the "FUTURE OFFERING NOTICE")
describing the proposed Future Offering, including the terms and conditions
thereof, and providing each Buyer an option to purchase up to its Aggregate
Percentage (as defined below), as of the date of delivery of the Future Offering
Notice, in the Future Offering on the same terms and conditions set forth in the
Future Offering Notice (the limitations referred to in this sentence are
collectively referred to as the "CAPITAL RAISING LIMITATION"). For purposes of
this Section 4(g), "AGGREGATE PERCENTAGE" at any time with respect to any Buyer
shall mean the percentage obtained by dividing (i) the aggregate number of
Conversion Shares issued or issuable, as if a conversion occurred on such date,
upon conversion of the Debentures held by such Buyer (without giving effect to
the limitations on conversion contained herein or in the Debentures) and Warrant
Shares issued or issuable, as if exercise occurred on such date, upon exercise
of the Warrants held by such Buyer (without giving effect to the limitations on
exercise contained herein or in the Warrants) by (ii) the aggregate number of
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<PAGE> 17
Conversion Shares issued or issuable, as if a conversion occurred on such date,
upon conversion of the Debentures held by all of the Buyers and Warrant Shares
issued or issuable, as if exercise occurred on such date, upon exercise of the
Warrants held by all of the Buyers. A Buyer can exercise its option to
participate in a Future Offering by delivering written notice thereof to
participate to the Company within ten (10) business days of receipt of a Future
Offering Notice, which notice shall state the quantity of securities being
offered in the Future Offering that such Buyer will purchase, up to its
Aggregate Percentage, and that number of securities it is willing to purchase in
excess of its Aggregate Percentage. In the event that one or more Buyers fail to
elect to purchase up to each such Buyer's Aggregate Percentage then each Buyer
which has indicated that it is willing to purchase a number of securities in
excess of its Aggregate Percentage shall be entitled to purchase its pro rata
portion (based on the relation of (i) the aggregate number of Conversion Shares
issued or issuable, as if a conversion occurred on such date, upon conversion of
the Debentures held by such Buyer (without giving effect to the limitations on
conversion contained herein or in the Debentures) and Warrant Shares issued or
issuable, as if exercise occurred on such date, upon exercise of the Warrants
held by such Buyer (without giving effect to the limitations on exercise
contained herein or in the Warrants) to (ii) the aggregate number of Conversion
Shares issued or issuable, as if a conversion occurred on such date, upon
conversion of the Debentures held by all of the Buyers which are participating
in the Future Offering and Warrant Shares issued or issuable, as if exercise
occurred on such date, upon exercise of the Warrants held by all of the Buyers
which are participating in the Future Offering) of the securities in the Future
Offering which one or more Buyers have not elected to purchase. In the event the
Buyers fail to elect to fully participate in the Future Offering within the
periods described in this Section 4(g), the Company shall have sixty (60) days
thereafter to sell the securities of the Future Offering respecting which such
Buyer's rights were not exercised upon terms and conditions no more favorable to
the purchasers thereof than the terms and conditions specified in the Future
Offering Notice. In the event the Company has not sold such securities of the
Future Offering within such 60-day period, the Company shall not thereafter
issue or sell such securities without first offering such securities to the
Buyers in the manner provided in this Section 4(g). The Capital Raising
Limitation shall not apply to (i) a loan from a commercial bank, (ii) any
transaction involving the Company's issuances of securities (A) as consideration
in a merger or consolidation, (B) in connection with any strategic partnership
or joint venture (the primary purpose of which is not to raise equity capital),
or (C) as consideration for the acquisition of a business, product or license by
the Company, (iii) the issuance of Common Stock in an underwritten public
offering, (iv) the issuance of securities upon exercise or conversion of the
Company's options, warrants or other convertible securities outstanding as of
the date hereof, (v) the grant of additional options or warrants, or the
issuance of additional securities, under any Company stock option or restricted
stock plan for the benefit of the Company's employees, officers, directors or
consultants or (vi) a single issuance by the Company consisting solely of Common
Stock provided that the consideration received by the Company for each such
share of Common Stock issued is not less than the greater of (A) the closing
price of a share of Common Stock on the Nasdaq SmallCap Market or the Nasdaq
National Market, as applicable, on the day prior to the date of issuance of such
shares and (B) the average of the closing prices on the Nasdaq SmallCap Market
or the Nasdaq National Market, as applicable, for the Common Stock for the 20
consecutive trading days immediately preceding the date of issuance of
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<PAGE> 18
such shares. The Buyers shall not be required to participate or exercise their
right of first refusal with respect to a particular Future Offering in order to
exercise their right of first refusal with respect to later Future Offerings.
h. Listing. The Company shall promptly use its best efforts to
secure the listing of all of the Registrable Securities (as defined in the
Registration Rights Agreement) upon the Nasdaq SmallCap Market or the Nasdaq
National Market, as applicable, upon which shares of Common Stock are listed
(subject to official notice of issuance) and shall maintain, so long as any
other shares of Common Stock shall be so listed, such listing of all Registrable
Securities from time to time issuable under the terms of the Transaction
Documents. The Company shall maintain the Common Stock's authorization for
quotation on the Nasdaq SmallCap Market or the Nasdaq National Market, as
applicable. Neither the Company nor any of its subsidiaries shall take any
action which may result in the delisting or suspension of the Common Stock on
the Nasdaq SmallCap Market. The Company shall promptly provide to the Buyers
copies of any notices it receives from the Nasdaq SmallCap Market or the Nasdaq
National Market, as applicable, regarding the continued eligibility of the
Common Stock for listing on such automated quotation system or securities
exchange. The Company shall pay all fees and expenses in connection with
satisfying its obligations under this Section 4(h).
i. Filing of SEC Documents. The Company shall make such filing or
filings with the SEC as are necessary to comply with the 1933 Act and the 1934
Act and to describe the terms of the transaction contemplated by the Transaction
Documents and consummated at such Closing.
j. Sale Restrictions. As long as the Buyers hold Debentures, the
Buyers agree not to enter into any short position involving the Common Stock
(including by selling put equivalent positions, as that term has meaning under
the rules promulgated by the SEC under Section 16(a) of the 1934 Act).
k. Lock-Up Provisions. At any time after the date on which the
Registration Statement with respect to the Securities is declared effective (the
"EFFECTIVE DATE"), the Buyers can sell or otherwise transfer up to 25% of the
Conversion Shares. On and after the 90th day after the Effective Date, the
Buyers can sell or otherwise transfer an additional 25% of the Conversion
Shares. The Buyers agree not to sell or otherwise transfer the remaining 50% of
the Conversion Shares at any time beginning on and including the Initial Closing
Date and ending on a date which is twelve months after the Initial Closing Date;
provided, however, that if the closing price for the Common Stock is $7.50 per
share for any ten (10) consecutive trading days, all of the Conversion Shares
would be freely tradeable. In the event that the Debentures are called for
conversion by the Company, the Conversion Shares received by the Buyers would be
freely tradeable and not be subject to any lock-up provisions.
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<PAGE> 19
5. TRANSFER AGENT INSTRUCTIONS.
The Company shall issue irrevocable instructions to its transfer
agent, and any subsequent transfer agent, to issue certificates, registered in
the name of each Buyer or its respective nominee(s), for (i) the Conversion
Shares in such amounts as specified from time to time by each Buyer to the
Company upon conversion of the Debentures in accordance with the terms and
conditions of the Transaction Documents and (ii) the Warrant Shares in such
amounts as specified from time to time by each Buyer to the Company upon
exercise of the Warrants in accordance with the terms and conditions of the
Transaction Documents (the "IRREVOCABLE TRANSFER AGENT INSTRUCTIONS"). Prior to
registration of the Conversion Shares and the Warrant Shares under the 1933 Act,
all such certificates shall bear the restrictive legend specified in Section
2(g). The Company warrants that, except as set forth in the Transaction
Documents, no instruction other than the Irrevocable Transfer Agent Instructions
referred to in this Section 5, and stop transfer instructions to give effect to
Section 2(f) (prior to registration of the Conversion Shares and Warrant Shares
under the 1933 Act), will be given by the Company to its transfer agent and that
the Securities shall otherwise be freely transferable on the books and records
of the Company as and to the extent provided in this Agreement and the
Registration Rights Agreement. Nothing in this Section 5 shall affect in any way
each Buyer's obligations and agreements set forth in Section 2(g) to comply with
all applicable prospectus delivery requirements, if any, upon resale of the
Conversion Shares or the Warrant Shares. If a Buyer provides the Company with an
opinion of counsel, reasonably satisfactory in form and substance to the
Company, that registration of a resale by such Buyer of any of such Securities
is not required under the 1933 Act, the Company shall permit the transfer, and
promptly instruct its transfer agent to issue one or more certificates in such
name and in such denominations as specified by such Buyer and without any
restrictive legends. The Company acknowledges that a breach by it of its
obligations arising under this Section 5 will cause irreparable harm to the
Buyers by vitiating the intent and purpose of the transaction contemplated
hereby. Accordingly, the Company acknowledges that the remedy at law for a
breach of its obligations under this Section 5 will be inadequate and agrees, in
the event of a breach or threatened breach by the Company of the provisions of
this Section 5, that the Buyers shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach and requiring
immediate issuance and transfer, without the necessity of showing economic loss
and without any bond or other security being required.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
a. Initial Closing Date. The obligation of the Company hereunder
to issue and sell Units to each Buyer at the Initial Closing is subject to the
satisfaction, at or before the Initial Closing Date, of each of the following
conditions, provided that these conditions are for the Company's sole benefit
and may be waived by the Company at any time in its sole discretion by providing
each Buyer with written notice thereof:
(i) Such Buyer shall have executed each of the Transaction
Documents (other than the Debentures and the Warrants) and delivered the same to
the Company.
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<PAGE> 20
(ii) Such Buyer shall have delivered to the Company the
Purchase Price for the Units being purchased by such Buyer at the Initial
Closing by wire transfer of immediately available funds pursuant to the wire
instructions provided by the Company.
(iii) The representations and warranties of such Buyer in
this Agreement shall be true and correct in all material respects as of the date
when made and as of the Initial Closing Date as though made at that time (except
for representations and warranties that speak as of a fixed date), and such
Buyer shall have performed, satisfied and complied in all material respects with
the covenants, agreements and conditions required by the Transaction Documents
to be performed, satisfied or complied with by such Buyer at or prior to the
Initial Closing Date.
(iv) No suit, action or other proceeding shall have been
commenced (and be pending) which seeks to restrain or prohibit or questions the
validity or legality of the transactions contemplated by the Transaction
Documents, nor shall any such suit, action or proceeding be threatened.
(v) All consents, Permits, authorizations, approvals,
waivers and amendments required for the consummation of the transactions
contemplated by the Transaction Documents shall have been obtained.
b. Additional Closing Date. The obligation of the Company
hereunder to issue and sell the Additional Units to each Buyer at the Additional
Closing is subject to the delivery to the Company of the Additional Notice by
the Buyer and the satisfaction, at or before the Additional Closing Date, of
each of the following conditions, provided that these conditions are for the
Company's sole benefit and may be waived by the Company at any time in its sole
discretion by providing each Buyer with written notice thereof:
(i) Such Buyer shall have delivered to the Company the
Purchase Price for the Additional Units being purchased by such Buyer at the
Additional Closing by wire transfer of immediately available funds pursuant to
the wire instructions provided by the Company.
(ii) The representations and warranties of such Buyer in
this Agreement shall be true and correct in all material respects as of the date
when made and as of the Additional Closing Date as though made at that time
(except for representations and warranties that speak as of a specific date),
and such Buyer shall have performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required by the
Transaction Documents to be performed, satisfied or complied with by such Buyer
at or prior to the Additional Closing Date.
(iii) No suit, action or other proceeding shall have been
commenced (and be pending) which seeks to restrain or prohibit or questions the
validity or legality of the transactions contemplated by the Transaction
Documents, nor shall any such suit, action or proceeding be threatened.
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<PAGE> 21
(iv) All consents, Permits, authorizations, approvals,
waivers and amendments required for the consummation of the transactions
contemplated by the Transaction Documents shall have been obtained.
7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.
a. Initial Closing Date. The obligation of each Buyer hereunder
to purchase the Units at the Initial Closing is subject to the satisfaction, at
or before the Initial Closing Date, of each of the following conditions,
provided that these conditions are for each Buyer's sole benefit and may be
waived by such Buyer at any time in its sole discretion by providing the Company
with written notice thereof:
(i) The Company shall have executed each of the
Transaction Documents, and delivered the same to such Buyer.
(ii) The Common Stock shall be authorized for quotation on
the Nasdaq SmallCap Market or the Nasdaq National Market, as applicable; trading
in the Common Stock issuable upon conversion of the Debentures and upon exercise
of the Warrants, which are to be traded on the Nasdaq SmallCap Market or the
Nasdaq National Market, as applicable, shall not have been suspended by the SEC
or The Nasdaq Stock Market, Inc.; and all of the Conversion Shares issuable upon
conversion of the Debentures, and all of the Warrant Shares issuable upon
exercise of the Warrants, to be sold at the Initial Closing shall be listed upon
the Nasdaq SmallCap Market or the Nasdaq National Market, as applicable.
(iii) The representations and warranties of the Company in
this Agreement shall be true and correct in all material respects (except to the
extent that any of such representations and warranties is already qualified as
to materiality in Section 3, in which case, such representations and warranties
shall be true and correct without further qualification) as of the date when
made and as of the Initial Closing Date as though made at that time and the
Company shall have performed, satisfied and complied in all material respects
with the covenants, agreements and conditions required by the Transaction
Documents to be performed, satisfied or complied with by the Company at or prior
to the Initial Closing Date. Such Buyer shall have received a certificate,
executed by the Chief Executive Officer of the Company, dated as of the Initial
Closing Date, to the foregoing effect and as to such other matters as may be
reasonably requested by such Buyer including, without limitation, an update as
of the Initial Closing Date regarding the representation contained in Section
3(c).
(iv) Such Buyer shall have received the opinion of the
Company's counsel dated as of the Initial Closing Date, in form, scope and
substance reasonably satisfactory to such Buyer and in substantially the form of
Exhibit D attached hereto.
(v) The Company shall have executed and delivered to such
Buyer the Debentures (in such denominations as such Buyer shall request) being
purchased by such Buyer at the Initial Closing.
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<PAGE> 22
(vi) The Board of Directors of the Company shall have
adopted resolutions consistent with Section 3(b)(ii) (the "RESOLUTIONS").
(vii) As of the Initial Closing Date, the Company shall
have reserved out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Debentures and the exercise of the
Warrants, a number of shares of Common Stock equal to at least 150% of the
number of shares of Common Stock which would be issuable upon conversion of the
then outstanding Debentures and upon exercise of the then outstanding Warrants,
including for such purposes any Debentures and any Warrants to be issued at such
Closing.
(viii) The Company shall have delivered to such Buyer a
certificate evidencing the incorporation and good standing of the Company and
each subsidiary in such corporation's jurisdiction of incorporation issued by
the Secretary of State of such jurisdiction of incorporation as of a date within
10 days of the Initial Closing.
(ix) The Company shall have delivered to such Buyer a
secretary's certificate certifying as to (a) the Resolutions, (b) the Articles
of Incorporation and (c) Bylaws, each as in effect at the Initial Closing.
(x) The Company shall have delivered to such Buyer such
other documents relating to the transactions contemplated by the Transaction
Documents as such Buyer or its counsel may reasonably request.
(xi) No suit, action or other proceeding shall have been
commenced (and be pending) which seeks to restrain or prohibit or questions the
validity or legality of the transactions contemplated by the Transaction
Documents, nor shall any such suit, action or proceeding be threatened.
(xii) All consents, Permits, authorizations, approvals,
waivers and amendments required for the consummation of the transactions
contemplated by the Transaction Documents shall have been obtained.
b. Additional Closing Date. The option of each Buyer hereunder to
purchase the Additional Units at the Additional Closing is subject to such
Buyer's delivery to the Company of an Additional Unit Notice and the
satisfaction, at or before the Additional Closing Date, of each of the following
conditions, provided that these conditions are for each Buyer's sole benefit and
may be waived by such Buyer at any time in its sole discretion by providing the
Company with written notice thereof:
(i) The Company shall have complied with the requirements
of Section l(c) and all of the Additional Notice Conditions set forth in Section
l(d) shall have been satisfied.
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<PAGE> 23
(ii) The Common Stock shall be authorized for quotation on
the Nasdaq SmallCap Market or the Nasdaq National Market, as applicable; trading
in the Common Stock issuable upon conversion of the Debentures and upon exercise
of the Warrants, which are to be traded on the Nasdaq SmallCap Market or the
Nasdaq National Market, as applicable, shall not have been suspended by the SEC
or The Nasdaq Stock Market, Inc.; and all of the Conversion Shares issuable upon
conversion of the Debentures, and all of the Warrant Shares issuable upon
exercise of the Warrants, to be sold at the Additional Closing shall be listed
upon the Nasdaq SmallCap Market or the Nasdaq National Market, as applicable.
(iii) The representations and warranties of the Company in
this Agreement shall be true and correct in all material respects (except to the
extent that any of such representations and warranties is already qualified as
to materiality in Section 3, in which case, such representations and warranties
shall be true and correct without further qualification) as of the date when
made and as of the Additional Closing Date as though made at that time and the
Company shall have performed, satisfied and complied in all material respects
with the covenants, agreements and conditions required by the Transaction
Documents to be performed, satisfied or complied with by the Company at or prior
to the Additional Closing Date. Such Buyer shall have received a certificate,
executed by the Chief Executive Officer of the Company, dated as of the
Additional Closing Date, to the foregoing effect and as to such other matters as
may be reasonably requested by such Buyer including, without limitation, an
update as of the Additional Closing Date regarding the representation contained
in Section 3(c).
(iv) Such Buyer shall have received the opinion of the
Company's counsel dated as of the Additional Closing Date, in form, scope and
substance reasonably satisfactory to such Buyer and in substantially the form of
Exhibit D attached hereto.
(v) The Company shall have executed and delivered to such
Buyer the Debentures (in such denominations as such Buyer shall request) being
purchased by such Buyer at the Additional Closing.
(vi) The Board of Directors of the Company shall have
adopted, and shall not have amended, the Resolutions.
(vii) As of the Additional Closing Date, the Company shall
have reserved out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Debentures and the exercise of the
Warrants, a number of shares of Common Stock equal to at least 150% of the
number of shares of Common Stock which would be issuable upon conversion of the
then outstanding Debentures and upon exercise of the then outstanding Warrants,
including for such purposes any Debentures and any Warrants to be issued at such
Additional Closing.
(viii) The Company shall have delivered to such Buyer a
certificate evidencing the incorporation and good standing of the Company and
each subsidiary in such corporation's
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<PAGE> 24
jurisdiction of incorporation issued by the Secretary of State of such
jurisdiction of incorporation as of a date within 10 days of the Additional
Closing.
(ix) The Company shall have delivered to such Buyer a
secretary's certificate certifying as to (a) the Resolutions, (b) the
Certificate of Incorporation and (c) Bylaws, each as in effect at the Additional
Closing.
(x) The Company shall have delivered to such Buyer such
other documents relating to the transactions contemplated by this Agreement as
such Buyer or its counsel may reasonably request.
(xi) No suit, action or other proceeding shall have been
commenced (and be pending) which seeks to restrain or prohibit or questions the
validity or legality of the transactions contemplated by the Transaction
Documents, nor shall any such suit, action or proceeding be threatened.
(xii) All consents, Permits, authorizations, approvals,
waivers and amendments required for the consummation of the transactions
contemplated by the Transaction Documents shall have been obtained.
8. INDEMNIFICATION.
a. In consideration of each Buyer's execution and delivery of the
Transaction Documents and acquiring the Securities thereunder and in addition to
all of the Company's other obligations under the Transaction Documents, the
Company shall defend, protect, indemnify and hold harmless each Buyer and each
other holder of the Securities and all of their officers, directors, employees
and agents (including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the "BUYER
INDEMNITEES") from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith (irrespective of whether any such Buyer Indemnitee is a
party to the action for which indemnification hereunder is sought), and
including reasonable attorneys' fees and disbursements (the "BUYER INDEMNIFIED
LIABILITIES"), incurred by any Buyer Indemnitee as a result of, or arising out
of, or relating to (a) any misrepresentation or breach of any representation or
warranty made by the Company in the Transaction Documents or any certificate,
instrument or document delivered pursuant thereto, (b) any breach of any
covenant, agreement or obligation of the Company contained in the Transaction
Documents or any certificate, instrument or document delivered pursuant thereto,
or (c) any cause of action, suit or claim brought or made against such Buyer
Indemnitee and arising out of or resulting from any transaction financed or to
be financed in whole or in part, directly or indirectly, with the proceeds of
the issuance of the Securities. To the extent that the foregoing undertaking by
the Company may be unenforceable for any reason, the Company shall make the
maximum contribution to the payment and satisfaction of each of the Buyer
Indemnified Liabilities which is permissible under applicable law.
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<PAGE> 25
b. In consideration of the Company's execution and delivery of
the Transaction Documents and in addition to all of the Buyers' other
obligations under the Transaction Documents, the Buyers severally and not
jointly (the "Responsible Buyer") shall defend, protect, indemnify and hold
harmless the Company and all of its officers, directors, employees and agents
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the "COMPANY
INDEMNITEES") from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith (irrespective of whether any such Company Indemnitee is a
party to the action for which indemnification hereunder is sought), and
including reasonable attorneys' fees and disbursements (the "COMPANY INDEMNIFIED
LIABILITIES"), incurred by any Company Indemnitee as a result of, or arising out
of, or relating to (a) any misrepresentation or breach of any representation or
warranty made by the Responsible Buyer in the Transaction Documents or any
certificate, instrument or document delivered pursuant thereto, (b) any breach
of any covenant, agreement or obligation of the Responsible Buyer contained in
the Transaction Documents or any certificate, instrument or document delivered
pursuant thereto. To the extent that the foregoing undertaking by the Company
may be unenforceable for any reason, the Buyers shall make the maximum
contribution to the payment and satisfaction of each of the Company Indemnified
Liabilities which is permissible under applicable law.
9. GOVERNING LAW; MISCELLANEOUS.
a. Governing Law. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of New York without regard
to the principles of conflict of laws. Each party hereby irrevocably submits to
the non-exclusive jurisdiction of the state and federal courts sitting in the
City of New York, borough of Manhattan, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, that such suit, action or proceeding is
brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper. Each party hereby irrevocably waives personal service of
process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address for such
notices to it under this Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof. Nothing contained
herein shall be deemed to limit in any way any right to serve process in any
manner permitted by law. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
b. Counterparts. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party. In the
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<PAGE> 26
event any signature page is delivered by facsimile transmission, the party using
such means of delivery shall cause four (4) additional original executed
signature pages to be physically delivered to the other party within five (5)
days of the execution and delivery hereof.
c. Headings. The headings of this Agreement are for convenience
of reference and shall not form part of, or affect the interpretation of, this
Agreement.
d. Severability. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement supersedes all
other prior oral or written agreements between or among the Buyers, the Company,
their affiliates and persons acting on their behalf with respect to the matters
discussed herein, and the Transaction Documents contain the entire understanding
of the parties with respect to the matters covered therein and, except as
specifically set forth therein, neither the Company nor any Buyer makes any
representation, warranty, covenant or undertaking with respect to such matters.
No provision of this Agreement may be amended other than by an instrument in
writing signed by the Company and the holders of at least two-thirds (2/3) of
the Units outstanding, and no provision hereof may be waived other than by an
instrument in writing signed by the party against whom enforcement is sought.
f. Notices. Any notices consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically generated and kept on file by the
sending party); (iii) three (3) days after being sent by U.S. certified mail,
return receipt requested, or (iv) one (1) day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
If to the Company:
TMCI Electronics, Inc.
1875 Dobbin Drive
San Jose, California 95133
Telephone: (408) 272-5700
Facsimile: (408) 254-1537
Attention: Chief Executive Officer
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<PAGE> 27
With copies to:
Gould & Wilkie
One Chase Manhattan Plaza, 58th Floor
New York, New York 10005
Telephone: (212) 344-5680
Facsimile: (212) 809-6890
Attention: Frederick W. London, Esq.
If to the Transfer Agent:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
Telephone: (212) 936-5100
Facsimile: (718) 921-8355
Attention: Joe Wolf
If to a Buyer, to its address and facsimile number on the Schedule of
Buyers, with copies to such Buyer's representatives as set forth on the Schedule
of Buyers.
Each party shall provide five (5) days' prior written notice to the
other party of any change in address or facsimile number or person to whose
attention notices shall be given.
g. Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors and
assigns, including any purchasers of the Units. The Company shall not assign
this Agreement or any rights or obligations hereunder without the prior written
consent of the holders of two-thirds (2/3) of the Units then outstanding. No
Buyer shall assign this Agreement or any rights or obligations hereunder without
the prior written consent of the Company, except that a Buyer may assign some or
all of its rights hereunder to an "affiliate" of such Buyer (as such term is
defined in the 1934 Act), without the consent of the Company; provided, however,
that any such assignment shall not release such Buyer from its obligations
hereunder unless such obligations are assumed by such assignee and the Company
has consented to such assignment and assumption.
h. No Third Party Beneficiaries. This Agreement is intended for
the benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
i. Survival. Unless this Agreement is terminated under Section
9(l), the representations and warranties of the Company and the Buyers contained
in Sections 2 and 3, the agreements and covenants set forth in Sections 4, 5 and
9, and the indemnification provisions set
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<PAGE> 28
forth in Section 8, shall survive each of the Closings. Each Buyer shall be
responsible only for its own representations, warranties, agreements and
covenants hereunder.
j. Publicity. The Company and one representative selected by the
Buyers shall have the right to approve before issuance any press releases or any
other public statements with respect to the transactions contemplated hereby;
provided, however, that the Company shall be entitled, without the prior
approval of any Buyer, to make any press release or other public disclosure with
respect to such transactions as is required by applicable law and regulations
(although each Buyer shall be consulted by the Company in connection with any
such press release or other public disclosure prior to its release and shall be
provided with a copy thereof).
k. Further Assurances. Each party shall do and perform, or cause
to be done and performed, all such further acts and things, and shall execute
and deliver all such other agreements, certificates, instruments and documents,
as the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
l. Termination. In the event that the Initial Closing shall not
have occurred with respect to a Buyer on or before five (5) business days from
the date hereof due to the Company's or such Buyer's failure to satisfy the
conditions set forth in Sections 6 and 7 above (and the nonbreaching party's
failure to waive such unsatisfied condition(s)), the nonbreaching party shall
have the option to terminate this Agreement with respect to such breaching party
at the close of business on such date without liability of any party to any
other party; provided, however, that if this Agreement is terminated pursuant to
this Section 9(l), the Company shall remain obligated to reimburse the
non-breaching Buyers for the expenses described in Section 4(i) above.
m. Finders. Private Investors Equity Group ("Private Investors"),
a member of the National Association of Securities Dealers ("NASD") and M.J.
Segal & Company, Inc. ("Segal") have entered into an agreement with the Company
pursuant to which Private Investors has acted as a finder in connection with
this Offering. The compensation under such agreement will be determined solely
by reference to such agreement. The following description of such compensation
is subject in all respects to the terms of such agreement. Compensation is to be
paid to Private Investors and includes: (a) a cash payment from 2% to 10% of the
gross proceeds from the Offering, depending upon the total amount raised; (b) a
non-accountable expense allowance equal to 2% of the gross proceeds of the
Offering subject to certain conditions; (c) shares of Common Stock with a value
equal to 5% of the gross proceeds of the Offering divided by the stated
conversion price of the Debentures; (d) Warrants to purchase 10% of the number
of shares issuable upon conversion of the Debentures at the Stated Conversion
Price; and (e) additional compensation in the event that any of the Warrants are
exercised. Private Investors may reallow a portion of its compensation to NASD
members or other qualified parties. The Company, Private Investors and Segal
have agreed to indemnify each other in connection with the certain liabilities
under the Securities Act of 1933.
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<PAGE> 29
n. Construction. The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent,
and no rules of strict construction will be applied against any party. Unless
the context otherwise requires: (a) words in the singular include the plural and
in the plural include the singular; (b) "or" is disjunctive but not exclusive;
(c) "including" means "including, without limitation,"; (d) masculine pronouns
include the feminine pronouns and feminine pronouns include the masculine
pronouns; and all references herein to Sections or Exhibits are references to
Sections of or Exhibits to this Agreement unless otherwise specified.
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<PAGE> 30
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Securities Purchase Agreement to be duly executed as of the date first
written above.
COMPANY: BUYERS:
TMCI ELECTRONICS, INC. LEONARDO, L.P.
By: Angelo, Gordon & Co., L.P.
Its: General Partner
By:________________________ By: _______________________________
Name:______________________ Name: Michael L. Gordon
Its:_______________________ Its: Chief Operating Officer
GAM ARBITRAGE INVESTMENTS, INC.
By: Angelo, Gordon & Co., L.P.
Its: Investment Advisor
By: _______________________________
Name: Michael L. Gordon
Its: Chief Operating Officer
AG SUPER FUND INTERNATIONAL
PARTNERS, L.P.
By: Angelo, Gordon & Co., L.P.
Its: General Partner
By: _______________________________
Name: Michael L. Gordon
Its: Chief Operating Officer
RAPHAEL, L.P.
By: _______________________________
Name: Michael L. Gordon
Its: Chief Operating Officer
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<PAGE> 31
RAMIUS FUND, LTD.
By: AG Ramius Partners, L.L.C.
Its: Investment Advisor
By: _______________________________
Name: Michael L. Gordon
Its: Managing Officer
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<PAGE> 32
EXHIBIT A
[Form of Face of Class B Warrant Certificate]
No. WB Class B Warrants
VOID AFTER MARCH 5, 2001
STOCK PURCHASE WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK
TMCI ELECTRONICS, INC.
THIS CERTIFIES THAT FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the
number of Class B Redeemable Common Stock Purchase Warrants ("Warrants")
specified above. Each Warrant initially entitles the Registered Holder
to purchase, subject to the terms and conditions set forth in this
Certificate and the Warrant Agreement (as hereinafter defined), one
fully paid and nonassessable share of Common Stock, $.001 par value
("Common Stock"), of TMCI ELECTRONICS, INC., a Delaware corporation (the
"Company"), at any time between the Initial Warrant Exercise Date (as
herein defined) and the Expiration Date (as hereinafter defined), upon
the presentation and surrender of this Warrant Certificate with the
Subscription Form on the reverse hereof duly executed, at the corporate
office of AMERICAN STOCK TRANSFER AND TRUST COMPANY, as Warrant Agent,
or its successor (the "Warrant Agent"), accompanied by payment of $5.50
(the "Purchase Price") in lawful money of the United States of America
in cash or by official bank or certified check made payable to TMCI
ELECTRONICS, INC.
This Warrant Certificate and each Warrant represented hereby are
issued pursuant to and are subject in all respects to the terms and
conditions set forth in the Warrant Agreement (the "Warrant Agreement")
dated as of _______________, 1998, by and between the Company and the
Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price or the number of shares of Common Stock
subject to purchase upon the exercise of each Warrant represented hereby
are subject to modifications or adjustment.
Each Warrant represented hereby is exercisable at the option of
the Registered Holder, but no fractional shares of Common Stock will be
issued. In the case of the exercise of less than all the Warrants
represented hereby, the Company shall cancel this Warrant Certificate
upon the surrender hereof and shall execute and deliver a new Warrant
Certificate or Warrant Certificates of like tenor, which the Warrant
Agent shall countersign, for the balance of such Warrants.
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<PAGE> 33
The term "Initial Warrant Exercise Date" shall mean the date of
the Warrant Agreement.
The term "Expiration Date" shall mean 5:00 p.m. (New York time)
on March 5, 2001 or such earlier date as the Warrants shall be redeemed.
If such date shall in the State of New York be a holiday or a day on
which the banks are authorized to close, then the Expiration Date shall
mean 5:00 p.m. (New York time) the next following day which in the State
of New York is not a holiday or a day on which banks are authorized to
close.
The Company has covenanted and agreed that it will file a
registration statement and will use its best efforts to cause the same
to become effective and to keep such registration statement current
while any of the Warrants are outstanding. This Warrant shall not be
exercisable by a Registered Holder in any state where such exercise
would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender
hereof by the Registered Holder at the corporate office of the Warrant
Agent, for a new Warrant Certificate or Warrant Certificates of like
tenor representing an equal aggregate number of Warrants, each of such
new Warrant Certificates to represent such number of Warrants as shall
be designated by such Registered Holder at the time of such surrender.
Upon due presentment with any transfer fee in addition to any tax or
other governmental charge imposed in connection therewith, for
registration of transfer of this Warrant Certificate at such office, a
new Warrant Certificate or Warrant Certificates representing an equal
aggregate number of Warrants will be issued to the transferee in
exchange therefor, subject to the limitations provided in the Warrant
Agreement.
Prior to the exercise of any Warrant represented hereby, the
Registered Holder shall not be entitled to any rights of a stockholder
of the Company, including, without limitation, the right to vote or to
receive dividends or other distributions, and shall not be entitled to
receive any notice of any proceedings of the Company, except as provided
in the Warrant Agreement.
This Warrant may be redeemed at the option of the Company, at a
redemption price of $.01 per Warrant, at any time after one (1) year
from the Effective Date, provided the Market Price (as defined in the
Warrant Agreement) for the securities issuable upon exercise of such
Warrant shall equal or exceed $8.75 per share. Notice of redemption
shall be given not later than the thirtieth day before the date fixed
for redemption, all as provided in the Warrant Agreement. On and after
the date fixed for redemption, the Registered Holder shall have no
rights with respect to this Warrant except to receive the $.01 per
Warrant upon surrender of this Certificate.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder
as the absolute owner hereof and of each Warrant represented hereby
(notwithstanding any notations of ownership or writing hereon made by
anyone other than a duly authorized officer of the Company or the
Warrant Agent) for all purposes and shall not be affected by any notice
to the contrary.
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<PAGE> 34
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
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<PAGE> 35
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed, manually or in facsimile by two of its
officers thereunto duly authorized and a facsimile of its corporate seal
to be imprinted hereon.
TMCI ELECTRONICS, INC.
By: ______________________________
Its
Date: ______________________________
COUNTERSIGNED:
AMERICAN STOCK TRANSFER & TRUST COMPANY,
as Warrant Agent
By: ______________________________
Its
Authorized Officer
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<PAGE> 1
EXHIBIT 4.5
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of February
___, 1998, by and among TMCI Electronics, Inc., a Delaware corporation, located
at 1875 Dobbin Drive, San Jose, California 95133 (the "COMPANY"), and the
investors listed on the Schedule of Buyers attached hereto (each, a "BUYER" and
collectively, the "BUYERS").
WHEREAS:
A. In connection with the Securities Purchase Agreement by and among the
parties of even date herewith (the "SECURITIES PURCHASE AGREEMENT"), the Company
has agreed, upon the terms and subject to the conditions of the Securities
Purchase Agreement, to issue and sell to the Buyers Units ("Units"), each of
which will consist of four (4) 5% Convertible Subordinated Debentures (the
"DEBENTURES"), which will be convertible into shares of the Company's common
stock, $.001 par value per share (the "COMMON STOCK") (as converted, the
"CONVERSION SHARES"). The holder of each Debenture will be issued warrants (the
"WARRANTS") to purchase shares of Common Stock (the "WARRANT SHARES"); and
B. To induce the Buyers to execute and deliver the Securities Purchase
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "1933 ACT"), and
applicable state securities laws:
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
buyers hereby agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the
following meanings:
a. "INVESTOR" means a Buyer and any transferee or assignee
thereof to whom a Buyer assigns its rights under this Agreement and who agrees
to become bound by the provisions of this Agreement in accordance with Section
9.
b. "PERSON" means a corporation, a limited liability company, an
association, a partnership, an organization, a business, a trust, an individual,
a governmental or political subdivision thereof or a governmental agency.
c. "REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing one or more Registration
Statements in compliance with the 1933 Act and pursuant to Rule 415 under the
1933 Act or any successor rule providing for offering securities on a continuous
basis ("RULE 415"), and the declaration or ordering of effectiveness of such
Registration Statement(s) by the United States Securities and Exchange
Commission (the "SEC")
<PAGE> 2
d. "REGISTRABLE SECURITIES" means the Warrants, the Conversion
Shares issued or issuable upon conversion of the Debentures, the Warrant Shares
issued or issuable upon exercise of the Warrants and any shares of Common Stock
issuable pursuant to Section 2(f) hereof (the "PENALTY SHARES") and any shares
of capital stock issued or issuable with respect to the Conversion Shares, the
Warrant Shares or the Penalty Shares as a result of any stock split, stock
dividend, recapitalization, exchange, combination, merger, consolidation,
distribution or similar event or otherwise.
e. "REGISTRATION STATEMENT" means a registration statement of the
Company filed under the 1933 Act.
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings set forth in the Securities Purchase Agreement.
2. REGISTRATION.
a. Mandatory Registration. The Company shall prepare, and, on or
prior to 90 days after the date of the final closing (the "Final Closing Date")
of the issuance and sale of the Units, file with the SEC a Registration
Statement or Registration Statements (as is necessary) on Form S-3 (or, if such
form is unavailable for such a registration, on such other form as is available
for such a registration, subject to the consent of the Investors holding a
majority of the Registrable Securities and the provisions of Section 2(c), which
consent will not be unreasonably withheld), covering the resale of all of the
Registrable Securities, which Registration Statement(s) shall state that, in
accordance with Rule 416 promulgated under the 1933 Act, such Registration
Statement(s) also covers such intermediate number of additional shares of Common
Stock as may become issuable upon conversion of the Debentures and upon exercise
of the Warrants (i) to prevent dilution resulting from stock splits, stock
dividends or similar transactions and (ii) by reason of changes in the
Conversion Price or Conversion Rate of the Debentures and the Exercise Price of
the Warrants in accordance with the terms thereof. Such Registration Statement
shall initially register for resale at least such number of shares of Common
Stock equal to the number of relevant Conversion Shares and Warrant Shares,
subject to adjustment as provided in Section 3(b). Such registered shares of
Common Stock shall be allocated among the Investors pro rata based on the total
number of Registrable Securities issued or issuable as of each date that a
Registration Statement, as amended, relating to the resale of the Registrable
Securities is declared effective by the SEC. The Company shall use its best
efforts to have the Registration Statement(s) declared effective by the SEC as
soon as practicable, but in no event later than 180 days after the Final Closing
Date.
b. Counsel and Investment Bankers. Subject to Section 5, in
connection with any offering pursuant to Section 2, the Investors shall have the
right to select one legal counsel and an investment banker or bankers and
manager or managers to administer their interest in the offering, which
investment banker or bankers or manager or managers shall be reasonably
satisfactory to the Company. The Company shall reasonably cooperate with any
such counsel and
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<PAGE> 3
investment bankers. The fees and expenses of counsel to the Investors shall be
paid by the Investors.
c. Piggy-Back Registrations. If a Registration Statement in
compliance with this Agreement is not effective, and prior to the expiration of
the Registration Period (as hereinafter defined), the Company proposes to file
with the SEC a Registration Statement relating to an offering for its own
account or the account of others under the 1933 Act of any of its securities
(other than (i) a Registration Statement on Form S-4 or Form S-8 or their then
equivalents relating to securities to be issued solely in connection with any
acquisition of any entity or business securities issuable in connection with
stock option or other employee benefit plans or (ii) a Registration Statement
relating to the sale of securities pursuant to Rule 145 promulgated under the
1933 Act), the Company shall promptly send to each Investor who is entitled to
registration rights under this Section 2(c), at least twenty (20) days prior to
the anticipated date of filing, written notice of the Company's intention to
file a Registration Statement and of such Investor's rights under this Section
2(c) and, if within twenty (20) days after receipt of such notice, such Investor
shall so request in writing, the Company shall include in such Registration
Statement the Registrable Securities such Investor requests to be registered,
subject to the priorities set forth in Section 2(d). No right to registration of
Registrable Securities under this Section 2(c) shall be construed to limit any
registration required under Section 2(a). The obligations of the Company under
this Section 2(c) may be waived by Investors holding a majority of the
Registrable Securities. If an offering in connection with which an Investor is
entitled to registration under this Section 2(c) is an underwritten offering,
then each Investor whose Registrable Securities are included in such
Registration Statement shall unless otherwise agreed by the Company, offer and
sell such Registrable Securities in an underwritten offering using the same
underwriter or underwriters and, subject to the provisions of this Agreement, on
the same terms and conditions as other shares of Common Stock included in such
underwritten offering.
d. Priority in Piggy-Back Registration Rights in connection with
Registrations for Company Account. If the registration referred to in Section
2(c) is to be an underwritten public offering and the managing underwriter(s)
advise the Company in writing, that in their reasonable good faith opinion,
marketing or other factors dictate that a limitation on the number of shares of
Common Stock which may be included in the Registration Statement (which may
include a total "cut-back" of all Registrable Securities) is necessary to
facilitate and not adversely affect the proposed offering, then the Company
shall include in such registration: (1) first, all securities the Company
proposes to sell for its own account, (2) second, up to the full number of
securities proposed to be registered for the account of the holders of
securities entitled to inclusion of their securities in the Registration
Statement by reason of demand registration rights, and (3) third, the securities
requested to be registered by the Investors and other holders of securities
entitled to participate in the registration, as of the date hereof, drawn from
them pro rata based on the number each has requested to be included in such
registration.
e. Eligibility for Form S-3. In the event that Form S-3 is not
available for sale by the Investors of the Registrable Securities, then the
Company (i) with the consent of the Investors holding a majority of the
Registrable Securities pursuant to Section 2(a), shall register the sale of the
Registrable Securities on another appropriate form and (ii) the Company shall
undertake
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to register the Registrable Securities on Form S-3 as soon as such form is
available, provided that the Company shall maintain the effectiveness of the
Registration Statement then in effect until such time as a Registration
Statement on Form S-3 covering the Registrable Securities has been declared
effective by the SEC.
f. Liquidated Damages. If pursuant to Section 2(a) a Registration
Statement is not (i) filed with the SEC on or prior to 90 days after the Final
Closing Date or (ii) declared effective within 180 days after the Final Closing
Date (each a "REGISTRATION Default"), the Company agrees to issue to each
Investor as liquidated damages ("LIQUIDATED DAMAGES") that number of shares of
Common Stock which has in the aggregate a Fair Market Value equal to ten percent
(10%) of the principal amount of the Debentures held by such Investor less the
number of shares previously issued by the Company to such Investor pursuant to
this Section 2(f). For purposes of this section 2(f) "FAIR MARKET VALUE" shall
mean the average closing bid price of the Common Stock for the five (5)
consecutive trading days ending on the date of the Registration Default. As of
the date of the cure of all Registration Defaults relating to any particular
Registrable Securities, the accrual of Liquidated Damages with respect to such
Registrable Securities will cease.
3. RELATED OBLIGATIONS.
Whenever an Investor has requested that any Registrable Securities be
registered pursuant to Section 2(c) or at such time as the Company is obligated
to file a Registration Statement with the SEC pursuant to Section 2(a), the
Company will use its best efforts to effect the registration of the Registrable
Securities in accordance with the intended method of disposition thereof and,
pursuant thereto, the Company shall have the following obligations:
a. The Company shall promptly prepare and file with the SEC a
Registration Statement with respect to the Registrable Securities on or prior to
the ninetieth (90th) day after the date of issuance of any Debentures and
Warrants for the registration of Registrable Securities pursuant to Section 2(a)
and use its best efforts to cause such Registration Statement relating to the
Registrable Securities to become effective as soon as possible after such filing
(but in no event later than 180 days after the issuance of any Debentures and
Warrants for the registration of Registrable Securities pursuant to Section
2(a)), and keep such Registration Statement effective pursuant to Rule 415 at
all times until the earlier of (i) the date as of which the Investors may sell
all of the Registrable Securities without restriction pursuant to Rule 144(k)
(or its then equivalent) promulgated under the 1933 Act or (ii) the date on
which (A) the Investors shall have sold all the Registrable Securities and (B)
none of the Debentures and Warrants is outstanding (the "REGISTRATION PERIOD"),
which Registration Statement (including any amendments or supplements thereto
and prospectuses contained therein) shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein, or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading.
b. Subject to Section 3(f), the Company shall prepare and file
with the SEC such amendments (including post-effective amendments) and
supplements to a Registration
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<PAGE> 5
Statement and the prospectus forming a part of such Registration Statement,
which prospectus is to be filed pursuant to Rule 424 promulgated under the 1933
Act, as may be necessary to keep such Registration Statement effective at all
times during the Registration Period, and, during such period, comply with the
provisions of the 1933 Act with respect to the disposition of all Registrable
Securities of the Company covered by such Registration Statement until such time
as such Registrable Securities shall have been disposed of in accordance with
the intended methods of disposition by the seller or sellers thereof as set
forth in such Registration Statement. In the event the number of shares
available under a Registration Statement filed pursuant to this Agreement is
insufficient to cover all of the Registrable Securities, the Company shall amend
such Registration Statement, or file a new Registration Statement (on the short
form available therefor, if applicable), or both, so as to cover all of the
Registrable Securities, in each case, as soon as practicable, but in any event
within fifteen (15) business days after the necessity therefor arises (based on
the market price of the Common Stock and other relevant factors on which the
Company reasonably elects to rely). The Company shall use its best efforts to
cause such amendment and/or new Registration Statement to become effective as
soon as reasonably practicable following the filing thereof. For purposes of the
foregoing provision, the number of shares available under a Registration
Statement shall be deemed "insufficient to cover all of the Registrable
Securities" if at any time the number of Registrable Securities issued or
issuable upon conversion of the Debentures and exercise of the Warrants is
greater than the quotient determined by dividing (i) the number of shares of
Common Stock available for resale under such Registration Statement by (ii) 1.5.
For purposes of the calculation set forth in the foregoing sentence, any
restrictions on the convertibility of the Debentures and the exercise of the
Warrants shall be disregarded and such calculation shall assume that the
Debentures are then convertible into shares of Common Stock at the then
prevailing Conversion Rate (as defined in the certificate representing the
Debentures) and the Warrants are then exercisable into shares of Common Stock at
the prevailing Purchase Price, as applicable (as defined in the Warrant
Agreement).
c. The Company shall furnish to each Investor whose Registrable
Securities are included in any Registration Statement and its legal counsel
without charge (i) promptly after the same is prepared and filed with the SEC at
least one copy of such Registration Statement and any amendment(s) thereto,
including financial statements and schedules, all documents incorporated therein
by reference and all exhibits, the prospectus included in such Registration
Statement (including each preliminary prospectus) and, with regard to such
Registration Statement(s), any correspondence by or on behalf of the Company to
the SEC or the staff of the SEC and any correspondence from the SEC or the staff
of the SEC to the Company or its representatives, (ii) upon the effectiveness of
any Registration Statement, ten (10) copies of the prospectus included in such
Registration Statement and all amendments and supplements thereto (or such other
number of copies as such Investor may reasonably request) and (iii) such other
documents, including any preliminary prospectus, as such Investor may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such Investor.
d. The Company shall use reasonable efforts to (i) register and
qualify the Registrable Securities covered by a Registration Statement under
such other securities or "blue sky" laws of such jurisdictions in the United
States as any Investor reasonably requests, (ii) prepare and
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<PAGE> 6
file in those jurisdictions, such amendments (including post-effective
amendments) and supplements to such registrations and qualifications as may be
necessary to maintain the effectiveness thereof during the Registration Period,
(iii) take such other actions as may be necessary to maintain such registrations
and qualifications in effect at all times during the Registration Period, and
(iv) take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a condition
thereto to (x) qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 3(d), (y) subject itself
to general taxation in any such jurisdiction, or (z) file a general consent to
service of process in any such jurisdiction. The Company shall promptly notify
each Investor who holds Registrable Securities of the receipt by the Company of
any notification with respect to the suspension of the registration or
qualification of any of the Registrable Securities for sale under the securities
or "blue sky" laws of any jurisdiction in the United States or its receipt of
actual notice of the initiation or threatening of any proceeding for such
purpose.
e. In the event Investors who hold a majority of the Registrable
Securities being offered in the offering select underwriters for the offering,
the Company shall enter into and perform its obligations under an underwriting
agreement in usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the underwriters of such
offering; provided, that the Company shall not be obligated to pay any fees,
disbursements or expenses such underwriters incur in connection with such
offering.
f. As promptly as practicable after becoming aware of such event,
the Company shall notify each Investor in writing of the happening of any event
as a result of which the prospectus included in a Registration Statement, as
then in effect, includes an untrue statement of a material fact or omission to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, and promptly prepare a supplement or amendment to such
Registration Statement to correct such untrue statement or omission, and deliver
ten (10) copies of such supplement or amendment to each Investor (or such other
number of copies as such Investor may reasonably request). The Company shall
also promptly notify each Investor in writing (i) when a prospectus or any
prospectus supplement or post-effective amendment has been filed, and when a
Registration Statement or any post-effective amendment has become effective
(notification of such effectiveness shall be delivered to each Investor by
facsimile on the same day of such effectiveness and by overnight mail), (ii) of
any request by the SEC for amendments or supplements to a Registration Statement
or related prospectus or related information, and (iii) of the Company's
reasonable determination that a post-effective amendment to a Registration
Statement would be appropriate. Notwithstanding anything to the contrary in this
Section 3(f), at any time after the Registration Statement has been declared
effective, the Company may delay the disclosure of any information concerning
the Company if the Board of Directors of the Company determines in good faith
that in its reasonable business judgment such disclosure would interfere in any
material respect with any financing, acquisition, corporate reorganization or
other transaction or development involving the Company that in the reasonable
good faith business judgment of such board is a transaction or development that
is or would be material to the Company and, in the opinion of counsel to the
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<PAGE> 7
Company, such disclosure is not otherwise required (a "GRACE PERIOD"); provided,
that the Company shall promptly (i) notify the Investors in writing of the
existence of material non-public information giving rise to a Grace Period and
the date on which the Grace Period will begin, and (ii) notify the Investors in
writing of the date on which the Grace Period ends; and, provided further, that
(A) during any consecutive 120 day period, the Grace Period shall not exceed
thirty (30) calendar days in the aggregate and (B) during any consecutive 365
day period, the Grace Period shall not exceed forty-five (45) calendar days in
the aggregate. For purposes of determining the length of a Grace Period above,
the Grace Period shall begin on and include the date the holders receive the
notice referred to in clause (i) of this Section 3(f) and shall end on and
include the date the holders receive the notice referred to in clause (ii) of
this Section 3(f). Upon expiration of the Grace Period, the Company shall again
be bound by the first sentence of this Section 3(f) with respect to the
information giving rise thereto.
g. The Company shall use its best efforts to prevent the issuance
of any stop order or other suspension of effectiveness of a Registration
Statement, or the suspension of the qualification of any of the Registrable
Securities for sale in any jurisdiction and, if such an order or suspension is
issued, to obtain the withdrawal of such order or suspension at the earliest
possible moment and to notify each Investor who holds Registrable Securities
being sold (and, in the event of an underwritten offering, the managing
underwriters) of the issuance of such order and the resolution thereof or its
receipt of actual notice of the initiation or threat of any proceeding for such
purpose.
h. The Company shall permit each Investor and a single firm of
counsel, initially Kramer, Levin, Naftalis & Frankel or such other counsel as
thereafter designated as selling stockholders' counsel by the Investors who hold
a majority of the Registrable Securities being sold, to review and comment upon
a Registration Statement and all amendments and supplements thereto at least
seven business days prior to their filing with the SEC.
i. At the request of the Investors who hold a majority of the
Registrable Securities being sold, the Company shall use its best efforts to
furnish, on the date that Registrable Securities are delivered to an
underwriter, if any, for sale in connection with the Registration Statement (i)
if required by an underwriter, a letter, dated such date, from the Company's
independent certified public accountants in form and substance as is customarily
given by independent certified public accountants to underwriters in an
underwritten public offering, addressed to the underwriters, and (ii) an
opinion, dated as of such date, of counsel representing the Company for purposes
of such Registration Statement, in form, scope and substance as is customarily
given in an underwritten public offering, addressed to the underwriters and the
Investors.
j. The Company shall make reasonably available for inspection by
(i) any Investor, (ii) any underwriter participating in any disposition pursuant
to a Registration Statement, (iii) one firm of attorneys and one firm of
accountants or other agents retained by the Investors, and (iv) one firm of
attorneys retained by all such underwriters (collectively, the "INSPECTORS") all
pertinent financial and other records, and pertinent corporate documents and
properties of the
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<PAGE> 8
Company (collectively the "RECORDS"), as shall be reasonably deemed necessary by
each Inspector to enable each Inspector to exercise its due diligence
responsibility, and cause the Company's officers, directors and employees to
supply all information which any Inspector may reasonably request for purposes
of such due diligence; provided, however, that each Inspector shall hold in
confidence and shall not make any disclosure (except to an Investor) or use of
any Record or other information which the Company determines in good faith to be
confidential, and of which determination the Inspectors are so notified in
writing, unless (a) the disclosure of such Records is necessary to avoid or
correct a misstatement or omission in any Registration Statement or is otherwise
required under the 1933 Act, (b) the release of such Records is ordered pursuant
to a final, non-appealable subpoena or order from a court or government body of
competent jurisdiction, or (c) the information in such Records has been made
generally available to the public other than by disclosure in violation of this
or any other agreement of which the Inspector has knowledge. The Company shall
not be required to disclose any confidential information in such Record to an
Inspector unless and until such Inspector shall have entered into a
confidentiality agreement with the Company with respect thereto, substantially
in accordance with the provisions of this Section 3(j). Each Investor shall
agree that, upon learning that disclosure of such Records is sought in or by a
court or governmental body of competent jurisdiction or through other means, it
will give prompt notice to the Company and allow the Company, at its expense, to
undertake appropriate action to prevent disclosure of, or to obtain a protective
order for, the Records deemed confidential.
k. The Company shall hold in confidence and not make any
disclosure of information concerning an Investor provided to the Company unless
(i) disclosure of such information is necessary to comply with any federal or
state securities law, (ii) the disclosure of such information is necessary to
avoid or correct a misstatement or omission in any Registration Statement, (iii)
the release of such information is ordered pursuant to a subpoena or other
final, non-appealable order from a court or governmental body of competent
jurisdiction, or (iv) such information has been made generally available to the
public other than by disclosure in violation of this Agreement or any other
agreement. The Company agrees that it shall, upon learning that disclosure of
such information concerning an Investor is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
written notice to such Investor and allow such Investor, at the Investor's
expense, to undertake appropriate action to prevent disclosure of, or to obtain
a protective order for, such information.
l. The Company shall use its best efforts (i) to secure the
inclusion for quotation on the Nasdaq SmallCap Market or the Nasdaq National
Market, as applicable, for all the Registrable Securities covered by a
Registration Statement and, without limiting the generality of the foregoing, to
arrange for at least two market makers to register with the National Association
of Securities Dealers, Inc. as such with respect to such Registrable Securities
or (ii) to cause such Registrable Securities to be listed or traded on each
securities exchange or automated quotation system on which securities of the
same class or series issued by the Company are then listed or traded, if any, if
the listing or trading of such Registrable Securities is then permitted under
the rules of such exchange or automated quotation system. The Company shall pay
all fees and expenses in connection with satisfying its obligation under this
section 3(l).
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<PAGE> 9
m. The Company shall cooperate with the Investors who hold
Registrable Securities being offered and, to the extent applicable, any managing
underwriter or underwriters, to facilitate the timely preparation and delivery
of certificates (not bearing any restrictive legend) representing the
Registrable Securities to be offered pursuant to a Registration Statement and
enable such certificates to be in such denominations or amounts, as the case may
be, as the managing underwriter or underwriters, if any, or, if there is no
managing underwriter or underwriters, the Investors may reasonably request and
registered in such names as the managing underwriter or underwriters, if any, or
the Investors may request.
n. The Company shall provide a transfer agent and registrar for
all such Registrable Securities not later than the effective date of such
Registration Statement.
o. If requested by the managing underwriters or by Investors
holding a majority of the Registrable Securities, the Company shall (i)
immediately incorporate in a prospectus supplement or post-effective amendment
such information as the managing underwriters and the Investors reasonably agree
should be included therein relating to the sale and distribution of Registrable
Securities, including, without limitation, information with respect to the
number of Registrable Securities being sold to such underwriters, the purchase
price being paid therefor by such underwriters and any other terms of the
underwritten (or best efforts underwritten) offering of the Registrable
Securities to be sold in such offering; (ii) make all required filings of such
prospectus supplement or post-effective amendment as soon as notified of the
matters to be incorporated in such prospectus supplement or post-effective
amendment; and (iii) supplement or make amendments to any Registration Statement
if requested by any underwriter of such Registrable Securities or by Investors
holding a majority of the Registrable Securities.
p. The Company shall use its best efforts to cause the
Registrable Securities covered by the applicable Registration Statement to be
registered with or approved by such other governmental agencies or authorities
as may be necessary to consummate the disposition of such Registrable
Securities.
q. The Company shall make generally available to its security
holders as soon as practical, but not later than 90 days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Section 11(a) of the 1933 Act and Rule 158 promulgated thereunder)
covering a twelve-month period beginning not later than the first day of the
Company's fiscal quarter next following the effective date of the Registration
Statement.
r. The Company shall otherwise use its best efforts to comply
with all applicable rules and regulations of the SEC in connection with any
registration hereunder.
s. Within two (2) business days after the Registration Statement
which includes the Registrable Securities is ordered effective by the SEC, the
Company shall deliver, and shall cause legal counsel for the Company to deliver,
to the transfer agent for such Registrable Securities (with copies to the
Investors whose Registrable Securities are included in such
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<PAGE> 10
Registration Statement) confirmation that the Registration Statement has been
declared effective by the SEC in the form attached hereto as Exhibit A.
4. OBLIGATIONS OF THE INVESTORS.
a. At least seven (7) days prior to the first anticipated filing
date of a Registration Statement, the Company shall notify each Investor in
writing of the information the Company requires from each such Investor if such
Investor elects to have any of such Investor's Registrable Securities included
in such Registration Statement. It shall be a condition precedent to the
obligations of the Company to complete the registration pursuant to this
Agreement with respect to the Registrable Securities of a particular Investor
that such Investor shall furnish to the Company such information regarding
itself, the Registrable Securities held by it and the intended method of
disposition of the Registrable Securities held by it as shall be reasonably
required to effect the registration of such Registrable Securities and shall
execute such documents in connection with such registration as the Company may
reasonably request.
b. Each Investor, by such Investor's acceptance of the
Registrable Securities, agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of any
Registration Statement hereunder, unless such Investor has notified the Company
in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from such Registration Statement.
c. In the event any Investor elects to participate in an
underwritten public offering pursuant to Section 2, each such Investor agrees to
enter into and perform such Investor's obligations under an underwriting
agreement, in usual and customary form, including, without limitation, customary
indemnification and contribution obligations (only with respect to violations
which occur in reliance upon and in conformity with information furnished in
writing to the Company by such Investor expressly for use in the Registration
Statement for such underwritten public offering), with the managing underwriter
of such offering and take such other actions as are reasonably required by the
Company in order to expedite or facilitate the disposition of the Registrable
Securities, unless such Investor notifies the Company in writing of such
Investor's election to exclude all of such Investor's Registrable Securities
from such Registration Statement.
d. Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(g) or
the first sentence of 3(f), such Investor will immediately discontinue
disposition of Registrable Securities pursuant to any Registration Statement(s)
covering such Registrable Securities until such Investor's receipt of the copies
of the supplemented or amended prospectus contemplated by Section 3(g) or the
first sentence of 3(f).
e. No Investor may participate in any underwritten registration
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements approved by
the Company and the Investors entitled hereunder to approve such arrangements,
(ii) completes and executes all questionnaires, powers of attorney,
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<PAGE> 11
indemnities, underwriting agreements and other documents reasonably required
under the terms of such underwriting arrangements, and (iii) agrees to pay its
pro rata share of all underwriting discounts and commissions.
5. EXPENSES OF REGISTRATION.
Except as otherwise provided in this Agreement, all expenses
incurred in connection with registrations, filings or qualifications pursuant to
Sections 2 and 3, including, without limitation, all registration, listing and
qualifications fees, printers and accounting fees, and fees and disbursements of
counsel and accountants for the Company shall be paid by the Company, whether or
not any registration statement becomes effective. The fees and disbursements of
counsel for the Investors as provided in Section 2(b) shall be paid by the
Investors.
6. INDEMNIFICATION.
In the event any Registrable Securities are included in a
Registration Statement under this Agreement:
a. To the fullest extent permitted by law, the Company will, and
hereby does, indemnify, hold harmless and defend each Investor who holds such
Registrable Securities, the directors, officers, partners, employees, agents of,
and each Person, if any, who controls, any Investor within the meaning of the
1933 Act or the Securities Exchange Act of 1934, as amended (the "1934 ACT"),
and any underwriter (as defined in the 1933 Act) for the Investors, and the
directors and officers of, and each Person, if any, who controls, any such
underwriter within the meaning of the 1933 Act or the 1934 Act (each, an
"INDEMNIFIED PERSON"), against any losses, claims, damages, liabilities,
judgments, fines, penalties, charges, costs, attorneys' fees, amounts paid in
settlement or expenses, joint or several, (collectively, "CLAIMS") incurred in
investigating, preparing or defending any action, claim, suit, inquiry,
proceeding, investigation or appeal taken from the foregoing by or before any
court or governmental, administrative or other regulatory agency, body or the
SEC, whether pending or threatened, whether or not an indemnified party is or
may be a party thereto ("INDEMNIFIED DAMAGES"), to which any of them may become
subject insofar as such Claims (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon: (i) any untrue
statement or alleged untrue statement of a material fact in a Registration
Statement or any post-effective amendment thereto or in any filing made in
connection with the qualification of the offering under the securities or other
"blue sky" laws of any jurisdiction in which Registrable Securities are offered
("BLUE SKY FILING"), or the omission or alleged omission to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which the statements therein were made, not
misleading, (ii) any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus if used prior to the effective date
of such Registration Statement, or contained in the final prospectus (as amended
or supplemented, if the Company files any amendment thereof or supplement
thereto with the SEC) or the omission or alleged omission to state therein any
material fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading, or
(iii) any violation
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or alleged violation by the Company of the 1933 Act, the 1934 Act, any other
law, including, without limitation, any state securities law, or any rule or
regulation thereunder relating to the offer or sale of the Registrable
Securities pursuant to a Registration Statement (the matters in the foregoing
clauses (i) through (iii) being, collectively, "VIOLATIONS"). Subject to the
restrictions set forth in Section 6(d) with respect to the number of legal
counsel, the Company shall reimburse the Indemnified Persons promptly as such
expenses are incurred and are due and payable, for any reasonable legal fees or
other reasonable expenses incurred by them in connection with investigating or
defending any such Claim. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(a): (i) shall
not apply to a Claim arising out of or based upon a Violation which occurs in
reliance upon and in conformity with information furnished in writing to the
Company by any Indemnified Person or its counsel, agent or representative for
use in connection with the preparation of the Registration Statement or any such
amendment thereof or supplement thereto, if such prospectus was timely made
available by the Company pursuant to Section 3(c); and (ii) shall not apply to
amounts paid in settlement of any Claim if such settlement is effected without
the prior written consent of the Company, which consent shall not be
unreasonably withheld. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of the Indemnified Person
and shall survive the transfer of the Registrable Securities by the Investors
pursuant to Section 9. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(a) with
respect to any preliminary prospectus shall not inure to the benefit of any
Indemnified Person if the untrue statement or omission of material fact
contained in the preliminary prospectus was corrected on a timely basis in the
prospectus, as then amended or supplemented.
b. In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees to severally and not
jointly indemnify, hold harmless and defend, to the same extent and in the same
manner as is set forth in Section 6(a), the Company, each of its directors, each
of its officers who signs the Registration Statement, each Person, if any, who
controls the Company within the meaning of the 1933 Act or the 1934 Act
(collectively and together with an Indemnified Person, an "INDEMNIFIED Party"),
against any Claim or Indemnified Damages to which any of them may become
subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim or
Indemnified Damages arise out of or are based upon any Violation, in each case
to the extent, and only to the extent, that such Violation occurs in reliance
upon and in conformity with written information furnished to the Company by such
Investor for use in connection with such Registration Statement; and, subject to
Section 6(d), such Investor will reimburse any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such Claim; provided, however, that the indemnity agreement contained in this
Section 6(b) and the agreement with respect to contribution contained in Section
7 shall not apply to amounts paid in settlement of any Claim if such settlement
is effected without the prior written consent of such Investor, which consent
shall not be unreasonably withheld; provided, further, however, that the
Investor shall be liable under this Section 6(b) for only that amount of a Claim
or Indemnified Damages as does not exceed the net proceeds to such Investor as a
result of the sale of Registrable Securities pursuant to such Registration
Statement. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of such Indemnified Party and shall
survive the transfer of the Registrable Securities by the Investors pursuant to
Section 9.
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Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(b) with respect to any preliminary
prospectus shall not inure to the benefit of any Indemnified Party if the untrue
statement or omission of material fact contained in the preliminary prospectus
was corrected on a timely basis in the prospectus, as then amended or
supplemented.
c. The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in any distribution, to the same extent as provided
above, with respect to information such persons so furnished in writing
expressly for inclusion in the Registration Statement.
d. Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action or
proceeding (including any governmental action or proceeding) involving a Claim,
such Indemnified Person or Indemnified Party shall, if a Claim in respect
thereof is to be made against any indemnifying party under this Section 6,
deliver to the indemnifying party a written notice of the commencement thereof,
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume control of the defense thereof with counsel
mutually satisfactory to the indemnifying party and the Indemnified Person or
the Indemnified Party, as the case may be; provided, however, that an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel with the fees and expenses to be paid by the indemnifying party, if, in
the reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding. The Company shall
pay reasonable fees for only one separate legal counsel for the Investors, and
such legal counsel shall be selected by the Investors holding a majority in
interest of the Registrable Securities included in the Registration Statement to
which the Claim relates. The Indemnified Party or Indemnified Person shall
cooperate fully with the indemnifying party in connection with any negotiation
or defense of any such action or claim by the indemnifying party and shall
furnish to the indemnifying party all information reasonably available to the
Indemnified Party or Indemnified Person which relates to such action or claim.
The indemnifying party shall keep the Indemnified Party or Indemnified Person
fully apprised at all times as to the status of the defense or any settlement
negotiations with respect thereto. No indemnifying party shall be liable for any
settlement of any action, claim, suit, inquiry, proceeding, investigation or
appeal taken from the foregoing effected without its written consent, provided,
however, that the indemnifying party shall not unreasonably withhold, delay or
condition its consent. No indemnifying party shall, without the consent of the
Indemnified Party or Indemnified Person, consent to entry of any judgment or
enter into any settlement or other compromise which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party or Indemnified Person of a release from all liability in
respect to such action, claim, suit, inquiry, proceeding, investigation or
appeal taken from the foregoing. Following indemnification as provided for
hereunder, the indemnifying party shall be subrogated to all rights of the
Indemnified Party or Indemnified Person with respect to all Persons relating to
the matter for
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which indemnification has been made. The failure to deliver written notice to
the indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Section 6, except to the
extent that the indemnifying party is materially prejudiced in its ability to
defend such action.
e. The indemnification required by this Section 6 shall be made
by periodic payments of the amount thereof during the course of the
investigation or defense, as and when bills are received or Indemnified Damages
are incurred.
f. The indemnity agreements contained herein shall be in addition
to (i) any cause of action or similar right of the Indemnified Party or
Indemnified Person against the indemnifying party or others, and (ii) any
liabilities the indemnifying party may be subject to pursuant to the law.
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that:
(i) no contribution shall be made under circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in
Section 6; (ii) no seller of Registrable Securities guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be
entitled to contribution from any seller of Registrable Securities who was not
guilty of fraudulent misrepresentation; and (ill) contribution by any seller of
Registrable Securities shall be limited in amount to the net amount of proceeds
received by such seller from the sale of such Registrable Securities.
8. REPORTS UNDER THE 1934 ACT.
With a view to making available to the Investors the benefits of
Rule 144 promulgated under the 1933 Act or any other similar rule or regulation
of the SEC that may at any time permit the Investors to sell securities of the
Company to the public without registration ("RULE 144"), the Company agrees to:
a. make and keep public information available, as those terms are
understood and defined in Rule 144;
b. file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act so long as
the Company remains subject to such requirements (it being understood that
nothing herein shall limit the Company's obligations under Section 4(c) of the
Securities Purchase Agreement) and the filing of such reports and other
documents is required for the applicable provisions of Rule 144; and
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<PAGE> 15
c. furnish to each Investor, so long as such Investor owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of the 1934 Act,
(ii) a copy of the most recent annual or quarterly report of the Company and
such other reports and documents so filed by the Company, and (iii) such other
information as may be reasonably requested to permit the Investors to sell such
securities pursuant to Rule 144 without registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The rights under this Agreement shall be automatically assignable
by the Investors to any transferee of all or any portion of Registrable
Securities if: (i) the Company is, within a reasonable time after such transfer
or assignment, furnished with written notice of (a) the name and address of such
transferee or assignee, and (b) the securities with respect to which such
registration rights are being transferred or assigned in accordance with the
terms of the Securities Purchase Agreement; (ii) at or before the time the
Company receives such written notice the transferee or assignee agrees in
writing with the Company to be bound by all of the provisions contained herein,
including providing the Company with a current address for all required notices;
(iii) such transfer shall have been made in accordance with the applicable
requirements of the Securities Purchase Agreement, the Debentures and the
Warrant Agreement; and (iv) such transferee shall be an "accredited investor" as
that term is defined in Rule 501 of Regulation D promulgated under the 1933 Act;
provided, however, that no such transfer shall serve to extend the term of any
obligations of the Company hereunder beyond those obligations owed to the
Buyers.
10. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance
thereof may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with the written consent of the Company
and Investors who hold two-thirds (2/3) of the Registrable Securities. Any
amendment or waiver effected in accordance with this Section 10 shall be binding
upon each Investor and the Company.
11. MISCELLANEOUS.
a. A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
b. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided a
confirmation of transmission is mechanically generated and kept on file by the
sending party); (iii) three (3) days after being sent by U.S. certified mail,
return receipt
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<PAGE> 16
requested; or (iv) one (1) day after deposit with a nationally recognized
overnight delivery service, in each case properly addressed to the party to
receive the same. The addresses and facsimile numbers for such communications
shall be:
If to the Company:
TMCI Electronics, Inc.
1875 Dobbin Drive
San Jose, California
Telephone: 408-272-5700
Facsimile: 408-254-1537
Attention: Chief Executive Officer
With copies to:
Gould & Wilkie
One Chase Manhattan Plaza, 58th Floor
New York, New York 10005
Telephone: 212-344-5680
Facsimile: 212-809-6890
Attention: Frederick W. London, Esq.
If to a Buyer, to its address and facsimile number on the Schedule of
Buyers attached hereto, with copies to such Buyer's counsel as set forth on the
Schedule of Buyers.
Each party shall provide five (5) days prior notice to the other party of any
change in address, phone number or facsimile number or the person to whose
attention notices are to be sent.
c. Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.
d. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of New York without regard to the
principles of conflict of laws. Each party hereby irrevocably submits to the
non-exclusive jurisdiction of the state and federal courts sitting in the City
of New York, borough of Manhattan, for the adjudication of any dispute hereunder
or in connection herewith or with any transaction contemplated hereby or
discussed herein, and hereby irrevocably waives, and agrees not to assert in any
suit, action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it under
this Agreement and agrees that such service shall constitute good and
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<PAGE> 17
sufficient service of process and notice thereof. Nothing contained herein shall
be deemed to limit in any way any right to serve process in any manner permitted
by law. If any provision of this Agreement shall be invalid or unenforceable in
any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
e. This Agreement, the Securities Purchase Agreement, the
Debentures and the Warrant Agreement constitute the entire agreement among the
Company and the Buyers with respect to the subject matter hereof and thereof.
There are no restrictions, promises, warranties or undertakings, other than
those set forth or referred to herein and therein. This Agreement, the
Securities Purchase Agreement, the Debentures and the Warrant Agreement
supersede all prior agreements and understandings among the Company and the
Buyers with respect to the subject matter hereof and thereof.
f. Subject to the requirements of Section 9, this Agreement shall
inure to the benefit of and be binding upon the permitted successors and assigns
of each of the parties hereto and, with respect to Section 6, to the benefit of
the Indemnified Persons and Indemnified Parties.
g. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect, the meaning hereof. Any
reference to "Section __" shall refer to the applicable section of this
Agreement.
h. This Agreement may be executed in two or more identical
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same agreement. This Agreement, once executed by a party,
may be delivered to the other party hereto by facsimile transmission of a copy
of this Agreement bearing the signature of the party so delivering this
Agreement.
i. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
j. All consents and other determinations to be made by the
Investors pursuant to this Agreement shall be made, unless otherwise specified
in this Agreement, by Investors holding a majority of the Registrable
Securities, determined as if all of the Debentures then outstanding have been
converted into, and all of the Warrants have been exercised for, Registrable
Securities.
k. The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent and no rules of
strict construction will be applied against any party.
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<PAGE> 18
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Registration Rights Agreement to be duly executed as of the date first written
above.
COMPANY: BUYER:
TMCI ELECTRONICS, INC.
By: __________________________ ___________________________________
Name: (Print Name)
Title:
___________________________________
(Signature)
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<PAGE> 1
Exhibit 21.0
Subsidiaries of the Registrant
1. Touche Manufacturing Company, a California corporation.
2. Touche Electronics, Inc., a California corporation.
3. Enterprise Industries, Inc., a California corporation.
4. Trinity Electronics, Inc., a California corporation.
5. Try-Die Incorporated, a California corporation.
