<PAGE> 1
U.S. Securities and Exchange Commission
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
---------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-27510
TMCI ELECTRONICS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 77-0413814
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1875 DOBBIN DRIVE, SAN JOSE,CA 95133
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(Address of principal executive offices) (Zip Code)
(408) 272-5700
Registrant's telephone number
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. As of August 12, 1998 there were
4,215,276 shares of Common Stock, par value $.001, issued and outstanding
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TMCI ELECTRONICS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets
December 31, 1997.......................................... 3
June 30, 1998 (Unaudited).................................. 3
Consolidated Statements of Operations (Unaudited)
Six Months Ended June 30, 1998 and 1997.................... 4
Three Months Ended June 30, 1998 and 1997.................. 4
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30 1998 and 1997..................... 5
Notes to Consolidated Financial Statements (Unaudited)......... 6
Item 2. Management's Discussion and Analysis....................... 8
PART II -- OTHER INFORMATION
Item 6. Exhibit and Reports on Form 8-K........................... 11
Signatures ................................................................. 12
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except for per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS:
Current Assets:
Cash $ 142 $ 313
Accounts Receivable, Net 3,624 3,950
Inventory 10,733 9,721
Refundable Income Taxes 691 --
Deferred Income Taxes 604 183
Prepaid Expenses and Other Current Assets 686 183
Notes Receivable - Stockholders 50 39
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Total Current Assets 16,530 14,390
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Property and Equipment, Net 9,886 6,583
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Other Assets:
Notes Receivable - Stockholders 130 144
Due from Stockholder 117 112
Due from Related Party 147 470
Other Assets 1,070 277
Goodwill, Net 7,249 6,767
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Total Other Assets 8,713 7,770
------- -------
Total Assets $35,129 $28,743
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts Payable and Accrued Expenses $ 3,719 $ 4,051
Line of Credit 5,593 3,856
Notes Payable - Current Portion 1,503 2,055
Promissory Notes Stockholder -- 1,313
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Total Current Liabilities 10,815 11,276
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Long Term Liabilities:
Notes Payable - Net of Current Portion 7,083 3,608
Convertible Debentures 1,467 --
Deferred Income Taxes 694 560
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Total Long-Term Liabilities 9,244 4,168
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Total Liabilities 20,059 15,444
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Commitment and Contingencies -- --
------- -------
Stockholders' Equity:
Common Stock - $.001 par value, 25,000,000 shares authorized,
4,215,276 issued and outstanding as of June 30, 1998 and
4,057,758 as of December 31, 1997 4 4
Additional Paid in Capital 13,994 10,890
Retained Earnings 1,072 2,405
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Total Stockholders' Equity 15,070 13,299
------- -------
Total Liabilities and Stockholders' Equity $35,129 $28,743
======= =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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TMCI ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except for per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales, Net $ 8,727 $ 9,602 $ 18,927 $ 17,044
Cost of Goods Sold 8,568 7,346 17,022 12,833
----------- ----------- ----------- -----------
Gross Profit 159 2,256 1,905 4,211
Operating Expenses 864 1,226 2,031 2,375
Depreciation 442 278 790 527
Amortization 196 48 363 89
----------- ----------- ----------- -----------
Income (Loss) from Operations (1,343) 704 (1,279) 1,220
----------- ----------- ----------- -----------
Other Income (Expense):
Non-cash Finance Charge (246) -- (375) --
Interest Expense (394) (119) (709) (234)
Other Income 62 35 209 147
Interest Income - Related Parties 10 4 14 8
----------- ----------- ----------- -----------
Total Other (Expense) (568) (80) (861) (79)
----------- ----------- ----------- -----------
Income (Loss) Before Provision for Income Taxes (1,911) 624 (2,140) 1,141
Provision (Benefit) for Income Taxes (723) 228 (809) 438
----------- ----------- ----------- -----------
Net Income (Loss) $ (1,188) $ 396 $ (1,331) $ 703
=========== =========== =========== ===========
Earnings (Loss) Per Share:
Basic $ (.28) $ .11 $ (.32) $ .20
=========== =========== =========== ===========
Diluted $ (.28) $ .10 $ (.32) $ .18
=========== =========== =========== ===========
Weighted Average Number of Shares 4,215,276 3,515,829 4,182,736 3,515,829
=========== =========== =========== ===========
Weighted Average Number of Shares and
Common Stock Equivalents 5,093,187 3,955,313 5,068,715 3,955,313
=========== =========== =========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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TMCI ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Operating Activities;
Net Income (Loss) $ (1,331) $ 703
Adjustments to Reconcile Net Income (Loss) to
Net Cash from Operations:
Depreciation 790 527
Amortization 363 91
Refundable Income Taxes (691) --
Deferred Income Taxes (254) 220
Non-cash Financing Charge 375 --
Reversal of Bad Debt Provision (102) --
Charges in Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable 585 (874)
Inventory (839) (2,137)
Prepaid Expenses and Other Current Assets (530) (71)
Increase (Decrease) In:
Accounts Payable and Accrued Expenses (474) (364)
Income Taxes Payable (264) 68
-------- --------
Total Adjustments (1,041) (2,540)
Net Cash Provided By (Used in) Operating Activities (2,372) (1,837)
-------- --------
Investing Activities:
Purchase of Other Assets (922) --
Purchase of Equipment (1,805) (489)
Note Receivable - Other 306 --
Business Acquisition, Net of Cash Acquired (367) (1,109)
-------- --------
Net Cash Provided By (Used in) Investing Activities (2,788) (1,598)
-------- --------
Financing Activities:
Credit Line Advances 13,289 3,703
Credit Line Repayments (7,697) (1,759)
Debt Repayment (11,170) (2,860)
Proceeds from Convertible Debentures 3,300 --
Notes Payable Proceeds 7,267 4,235
-------- --------
Net Cash Provided By (Used in) Financing Activities 4,989 3,319
-------- --------
Net Increase (Decrease) in Cash (171) (116)
Cash - Beginning of Period 313 145
-------- --------
Cash - End of Period $ 142 $ 29
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
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TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) BASIS OF REPORTING
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, such statements include all adjustments
(consisting only of normal recurring items) which are considered necessary for a
fair presentation of the financial position of the Company as of June 30, 1998
and the results of its operations for the three and six month period then ended.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year.
It is suggested that these financial statements be read in conjunction with the
financial statement and notes for the year ended December 31, 1997 included in
the Company's Annual Report on Form 10-K.
The consolidated financial statements include the accounts of TMCI Electronics,
Inc. ["TMCI"], and its wholly-owned subsidiaries, Touche Manufacturing Company,
Inc. ["Touche"], Touche Electronics, Inc. ["TEI"], Enterprise Industries,
Inc.["EII"], and Trinity Electronics, Inc., [collectively, the "Company"]. All
significant inter-company balances and transactions have been eliminated in
consolidation.
2) INCOME PER SHARE
Income per share of common stock is based on weighed average number of common
shares outstanding and common stock equivalents, if dilutive for each period
presented.
3) INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
June 30,
1998
-------
(in thousands)
<S> <C>
Raw Materials $ 5,606
Work in process 3,858
Finished Goods 1,269
-------
Total $10,733
-------
</TABLE>
4) 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.
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The Debentures are convertible into common stock 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 or 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 usable 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
issuance. The Company is obligated to register the common stock underlying the
Debentures and the Warrants with the Securities and Exchange Commission.
As a result of the above transaction, the Company recorded a discount on the
convertible debentures and additional paid-in capital in the amount of
$1,412,534 in connection with the beneficial conversion feature of the
subordinated debentures. Accordingly, the discount is being amortized over two
(2) years when the convertible debentures are first convertible at 70 percent
the market price of the common stock.
As a result of the above transaction, the Company recorded a discount on the
convertible debentures and additional paid-in-capital in the amount of $837,000
in connection with the value of the warrants. Accordingly, the discount is being
amortized over three (3) years when the warrants expire.
The Company recorded a non-finance charge of $375,411 for the six months ended
June 30, 1998 in connection with the amortization of the beneficial conversion
feature of the convertible debentures and the amortization associated with the
value of the warrants.
In connection with the foregoing issuance, the Company incurred a finder's fee
in the amount of $176,000 in cash pursuant to terms of a Non Circumvention and
Finder's Fee Agreement, (the "Agreement") and a $66,000 non-accountable expense
allowance which resulted in the disbursement of $172,250 and an assignment of
$68,750 in escrow for the convenience of the Company which resulted in the
issuance 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 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. 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.
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5) 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 June 30, 1998, the Company
had borrowed approximately $14,000,000 under the Fleet Facility. 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 $4.5 million and accrues interest at the rate of
prime plus 0.5%. Term Loan B is in the principal amount of $1.8 million and
accrues interest at the rate of prime plus 1.5%. The Equipment Loan is in the
principal amount of $2.0 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 June 30, 1998, the Company had $435,000
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%.
On March 26, 1998, the Company and Fleet entered into the First Amendment to the
Loan and Security Agreement (the "First Amendment") in connection with the
acquisition of Try-Die Incorporated. Among other things, the First Amendment
provides that the Company may elect to convert the interest rate on (1) the
Revolving Credit Loans into LIBOR plus 2.75%; (2) Term Loan A and the Equipment
Loans into LIBOR plus 3%; and (3) Term Loan B into LIBOR plus 4%.
6) SUBSEQUENT EVENT
As of July 29, 1998, the Company exceeded its borrowing amount under the Fleet
Facility by $509,000. In connection with this excess borrowing, the chief
executive officer personally guaranteed the amounts due to Fleet under the
Fleet Facility. In addition, the Company was in violation of its cash flow
covenant under the Loan and Security Agreement as of June 30, 1998. The
Company has received a waiver with respect to this covenant. Fleet is
continuing to advance funds to the Company.
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Item 2. Management's Discussion and Analysis
GENERAL
The information in this discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements are
subject to certain risks and uncertainties that could cause actual results to
differ from those projected. These risks and uncertainties include, but are not
limited to, those described below. The Company undertakes no obligation to
publicly release the results of any revisions to these forward-looking
statements which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
OVERVIEW
The Company's strategy has been to expand its core and value added business to
satisfy its customers and their growing demand for more outsourcing of contract
manufacturing services. 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. Effective February 1, 1998, the
Company acquired Try-Die Incorporated ("Try-Die"), a metal stamping company.
RESULTS OF OPERATIONS
The result of operations utilizes the consolidated results from Touche
Manufacturing Co., Inc. ("Touche"), Touche Electronics, Inc.("TEI") Enterprise
Industries, Inc. ("Enterprise") and Trinity after their acquisition by the
Company, eliminating intercompany transactions. The discussion below should be
read in conjunction with the financial statements and the notes thereto that
appear elsewhere in this report.
NET SALES
Net sales decreased by approximately $875,000 or 9% to $8,727,000 from
$9,602,000 for the quarter ended June 30, 1998 as compared to the quarter ended
June 30, 1997. Sales decreased primarily due to a decline in sales by Touche and
TEI as a result of the slow-down in the semiconductor capital equipment market
segment. The slowdown caused many Touche and TEI customers to reschedule their
orders for delivery in the third quarter and fourth quarters of the year. The
Company currently anticipates that the slow-down in the semiconductor capital
equipment market will continue through at least the first quarter of 1999. In
contrast, the Company's net sales increased approximately $1,883,000 or 11% to
$18,927,000 from $17,044,000 for the six month period ended June 30, 1998, as
compared with the six month period ended June 30, 1997. The increase is
primarily due to the acquisitions of Trinity and a short-run metal stamping
manufacturing business, as new business lines were included in consolidated
operations in 1998 as compared to 1997, offset by a decline in sales due to the
slow down in the semiconductor capital equipment market segment.
GROSS PROFIT
Gross profit decreased approximately $2,097,000 to $159,000 from $2,256,000 for
the quarter ended June 30, 1998 as compared to the quarter ended June 30, 1997.
As a percentage of sales, gross profit decreased approximately 22% to 2% from
24% for the quarter ended June 30, 1998 as compared to the quarter ended June
30, 1997. The gross profit of $2,256,000 for the period ended June 30, 1997 is
different than the $3,347,000 reported in the Company's 10-Q for the fiscal
quarter ended June 30, 1997 as a result of a reallocation of certain items from
operating expenses to cost of goods sold. Gross profit decreased as a result of
certain obsolete and slow moving inventory writedowns in the amount of $830,000
which were recorded in
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the second quarter of 1998 due to the slowdown in the semiconductor capital
equipment market segment and management's valuation of certain slow moving
items. In response to slowing demand in the semiconductor capital equipment
market, Touche and TEI continued to reduce their respective labor forces during
the quarter ended June 30, 1998. Gross profit decreased $2,306,000 or 55% to
$1,905,000 from $4,211,000 for the six months ended June 30, 1998 as compared to
the same period in 1997. The decline in the gross profit is attributable to the
reasons discussed above for the three months ended June 30, 1998, except for the
following items in the first quarter of 1998 as compared to the same period in
1997: (1) an increase in direct labor due to certain inefficiencies as a result
of the slow down in the semiconductor capital equipment industry, and (2) an
increase in overhead due to (a) an increase in depreciation expense on equipment
placed in service in the manufacturing process and (b) an increase in indirect
labor.
OPERATING EXPENSES
General and administrative expenses decreased approximately $362,000 or 30% to
$864,000 from $1,226,000 for the quarter ended June 30, 1998 as compared to the
quarter ended June 30, 1997. The operating expenses of $2,375,000 for the period
ended June 30, 1997 is different than the $4,966,000 reported in the Company's
10-Q for the fiscal quarter ended June 30, 1997 as a result of a reallocation of
certain items from operating expenses to cost of goods sold. As a percentage of
sales, the Company's general and administrative expenses decreased 3% to 10%
from 13% for the quarter ended June 30, 1998 as compared to the quarter ended
June 30, 1997. The decrease in operating expenses as a percentage of sales was
primarily due to management's efforts to reduce operating expenses, offset by an
increase in expenses from the above noted acquisitions, and the addition of new
management to support the Company's infrastructure and growth. General and
administrative expenses decreased $344,000 or 3% as a percentage of sales for
the six months ended June 30, 1998 as compared to the same period in 1997. The
decrease in operating expenses as a percentage of sales is due to the reasons
discussed above for the three months ended June 30, 1998. As a result of the
continued slow down in the semiconductor capital equipment market, management is
continuing to review operating expenses to reduce overhead where appropriate.
OTHER INCOME (EXPENSE)
Other expense increased approximately $486,000 to $566,000 from $80, in the
quarter ended June 30, 1998 as compared with the quarter ended June 30, 1997.
The increase in other expenses was primarily due to an increase in interest paid
of $275,000 resulting from increased borrowings under the Company's credit
facility in order to finance inventory and a non-cash finance charge of $246,000
resulting from the issuance of the Company's convertible subordinated
debentures. Other income decreased $854,000 to $861,000 from $79 for the six
months ended June 30, 1998 as compared to the same period in 1997. The decline
in other income is attributable to the reasons discussed above for the three
months ended June 30, 1998.
NET INCOME (LOSS)
Net income decreased by approximately $(1,584,000) to a loss of $(1,188,000)
from net income of $396,000 for the quarter ended June 30, 1998 as compared to
the quarter ended June 30, 1997. The decrease in net income was primarily due to
an increase in the cost of goods sold in the amount of $1,222,000, an increase
in interest expense and non-cash finance charges relating to the placement of
the convertible debentures. Net income decreased approximately $2,034,000 to a
loss of $1,331,000 from net income of $703,000 for the six-month period ended
June 30, 1998 as compared with the six-month period ended June 30, 1997. The
six-month period decrease in income was primarily due to the reasons discussed
above for the three months ended June 30, 1998.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased by approximately $2,601,000 to
$5,715,000 from $3,114,000 in the fiscal quarter ended June 30, 1998 as compared
to the fiscal year ended December 31, 1997. The increase resulted primarily from
an increase in inventory of approximately $1,012,000, recording of refundable
income taxes of $691,000, an increase in deferred income taxes of $421,000,
offset primarily by an increase in borrowings under the credit facility of
$1,737,000. The increase in inventory is due to the Company's acquisition of a
metal stamping company in the first quarter of 1998, a change in product mix to
more electronics which require a greater investment in raw materials as well as
the need to hold inventories for a longer than expected period as a result of
rescheduled orders by customers of Touche and TEI.
The Company used cash to fund operating activities in the amount of
approximately $2,372,000 in the period ended June 30, 1998 as compared to
required cash to fund operating activities of approximately $1,837,000 in the
same period in 1997. The increase resulted primarily from the loss in the
period, the recording of refundable income taxes and an increase in deferred
taxes due to the availability of net operating loss carrybacks, offset by a
decline in inventory due to writedowns and management's policy to reduce any
excess amounts of inventory. Cash used in investing activities increased
primarily due to an increase in the purchase of equipment and other assets for
the Southern California facility as well as an increase in other assets as a
result of prepaid loan fees, offset by a decline in cash used in business
acquisitions.
Cash provided by financing activities increased as a result of net advances from
the Company's credit line and proceeds from convertible debentures.
During the six months ended June 30, 1998 and June 30, 1997, the Company
invested approximately $1,805,000 and $489,000, respectively, to purchase
capital equipment which was funded through long-term borrowings and current
operations. Additionally, management expects the Company's level of future
capital expenditures to increase at a level that is consistent with the
Company's projected growth and operational projects. Management has projected
capital expenditure requirements of approximately $500,000 for the remaining
portion of fiscal year ending December 31, 1998. This increase will be supported
by proceeds from additional financing or equity and internal operations.
SALE OF DEBENTURES. On February 10, 1998, the Company closed an offering of
three 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 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 or 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 usable 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.
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In connection with the foregoing issuance, the Company paid a finder's fee in
the amount of $176,000 in cash pursuant to terms of a Non Circumvention and
Finder's Fee Agreement (the "Agreement") and a $66,000 non-accountable expense
allowance which resulted in the disbursement of $172,250 and an assignment of
$68,750 in escrow for the convenience of the Company which resulted in the
issuance 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 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 June 30, 1998, the Company had borrowed approximately $14,000,000.
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 June 30, 1998, the Company had $435,000
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%.
On March 26, 1998, the Company and Fleet entered into the First Amendment to the
Loan and Security Agreement (the "First Amendment") in connection with the
acquisition of Try-Die Incorporated. Among other things, the First Amendment
provides that the Company may elect to convert the interest rate on(1) the
Revolving Credit Loans into LIBOR plus 2.75%; (2) Term Loan A and the Equipment
Loans into LIBOR plus 3% and (3) Term Loan B into LIBOR plus 4%.
12
<PAGE> 13
The Company experienced tight 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. Rescheduling of orders in the first half of 1998 further
tightened cash flow. Accordingly, in the event the Company experiences
additional order reschedules or other unanticipated developments, it may require
further capital to fund operating activities during 1998. Such sources of
capital are expected to include additional advances from Fleet and/or additional
investments from third parties. The Company is actively seeking investment
capital from third parties at this time.
SUBSEQUENT EVENT
As of July 29, 1998, the Company exceeded its borrowing amount under the Fleet
Facility by $509,000. In connection with this excess borrowing, the chief
executive officer personally guaranteed the amounts due to Fleet under the Fleet
Facility. In addition, the Company was in violation of its cash flow covenant
under the Loan and Security Agreement as of June 30, 1998. The Company has
received a waiver with respect to this covenant. Fleet is continuing to advance
funds to the Company.
RISKS INHERENT IN THE COMPANY'S BUSINESS
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 six months ended June 30, 1998, sales to
the Company's nine largest customers accounted for approximately 54% 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.
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 those 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.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) This Report contains the following Exhibits as required by Item 601 of
Regulation S-K.
<TABLE>
Exhibit Description
- ------- -----------
<S> <C>
Employment Agreement of Edmund Becmer *
27 Financial Data Schedule
* Incorporated by reference from pre effective
amendment number one to registration statement number
333-52171 filed with the SEC on July 16, 1998.
(b) The Company filed one amended report on Form
8-K on May 26, 1998 with respect to its
acquisition of Trinity Electronics, Inc. on
December 22, 1997.
</TABLE>
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
TMCI Electronics, Inc.
-----------------------------------------
(Registrant)
Date: August 14, 1998 By: /s/ EDMUND J. BECMER
-----------------------------------------
Edmund J. Becmer, Chief Financial Officer
(Principal Financial Officer)
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 142
<SECURITIES> 0
<RECEIVABLES> 3,624
<ALLOWANCES> 65
<INVENTORY> 10,733
<CURRENT-ASSETS> 16,530
<PP&E> 9,886
<DEPRECIATION> 4,249
<TOTAL-ASSETS> 35,129
<CURRENT-LIABILITIES> 10,815
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 15,066
<TOTAL-LIABILITY-AND-EQUITY> 35,129
<SALES> 18,927
<TOTAL-REVENUES> 18,927
<CGS> 17,022
<TOTAL-COSTS> 17,022
<OTHER-EXPENSES> 3,184
<LOSS-PROVISION> 67
<INTEREST-EXPENSE> 1,084
<INCOME-PRETAX> (2,140)
<INCOME-TAX> 810
<INCOME-CONTINUING> (1,331)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,331)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> (.32)
</TABLE>
