<PAGE> 1
REGISTRATION NO. 333-52171
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM 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 ORGANIZATION) CLASSIFICATION CODE NUMBER) NUMBER)
</TABLE>
1875 DOBBIN DRIVE
SAN JOSE, CA 95133
408-272-5700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROLANDO LOERA
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
TMCI ELECTRONICS, INC.
1875 DOBBIN DRIVE
SAN JOSE, CA 95133
408-272-5700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPY TO:
MICHAEL W. PROZAN, ESQ.
TMCI ELECTRONICS, INC.
1875 DOBBIN 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 securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post effective amendment filed pursuant to Rule 462(d)
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. [ ]
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.
(facing page continues)
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<PAGE> 2
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES BEING AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED PER UNIT(1) PRICE(1) REGISTRATION FEE(2)
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Common Stock Issued in
Trinity Acquisition.... 404,539 $5.4375 $ 2,199,680.81 $ 648.91
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Common Stock Underlying
Convertible
Debentures............. 1,100,004 5.4375 5,981,250.00 1,764.48
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Class B Warrants....... 300,000 0.01 3,000.00 0.89
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Common Stock Underlying
Class B Warrants....... 300,000 5.50 1,650,000.00 486.75
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Common Stock Issuable as
Placement Fee.......... 36,159 5.4375 196,614.56 58.00
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Warrants Issuable as
Placement Fee.......... 72,189 0.01 721.89 0.21
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Common Stock Underlying
Fee Warrants........... 72,189 5.59 403,536.51 119.04
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Common Stock Issuable as
Exercise Fee........... 14,688 5.4375 79,866.00 23.56
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Warrants Issuable as
Exercise Fee........... 29,375 0.01 293.75 0.09
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Common Stock Underlying
Exercise Fee
Warrants............... 29,375 6.80 199,750.00 58.93
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Total........ $10,714,713.52 $3,160.86
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</TABLE>
(1) Estimated pursuant to Rule 457(c) solely for the purpose of calculating the
filing fee.
(2) $214.76 submitted herewith; $2946.10 was previously paid.
<PAGE> 3
PROSPECTUS
DATED JULY , 1998
1,555,390 SHARES OF COMMON STOCK ($0.001 PAR VALUE)
300,000 CLASS B WARRANTS TO PURCHASE COMMON STOCK
101,564 WARRANTS ISSUABLE AS A FEE IN CONNECTION WITH THE PLACEMENT OF CERTAIN
SECURITIES
401,564 SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF WARRANTS
------------------------
TMCI ELECTRONICS, INC.
Certain security holders (the "Selling Security Holders") of TMCI
Electronics, Inc., a Delaware corporation (the "Company") are offering up to
1,555,390 shares of the $0.001 par value common stock of the Company (the
"Common Stock") and 401,564 warrants (the "Warrants") to purchase Common Stock
of the Company. In addition, the Company is offering up to 401,564 shares of
Common Stock issuable upon exercise of the Warrants. Of the shares of Common
Stock offered by the Selling Security Holders, 404,539 of the shares were issued
in connection with the acquisition of Trinity Electronics, Inc. by the Company;
up to 1,100,004 are issuable in connection with the conversion of $3.3 million
in principal the 5%, $275,000 in principal amount Convertible Subordinated
Debentures of the Company Due 2001 (the "Debentures"); 36,159 shares of Common
Stock issuable as a placement fee for the Debentures; and up to 14,688
shares of Common Stock issuable as an exercise fee upon exercise of the
Class B Warrants. Of the Warrants offered by the Selling Security Holders, up to
300,000 Warrants are Class B Warrants (the "Class B Warrants") issuable to
holders of the Debentures upon the satisfaction of certain conditions; 72,189
Warrants are fee warrants (the "Fee Warrants") issuable as part of the fee for
the placement of the Debentures; and up to 29,375 Warrants are exercise warrants
(the "Exercise Warrants" and, together with the Fee Warrants, the "Compensation
Warrants") issuable as a fee upon exercise of the Class B Warrants. In the event
that the Selling Security Holders exercise rather than sell all or any portion
of the foregoing warrants, they will be selling the Common Stock received upon
exercise of the warrants directly into the market.
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 $0.01 per Class B Warrant,
upon thirty (30) days' prior written notice, at any time that the fair market
value (as defined) of the Common Stock is at least $8.75 per share. 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, exercise price of
$5.59, to be determined for the Exercise Warrants), are non callable, and expire
three years from the date of issuance. 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 (the "Securities Act").
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 5, 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.
<TABLE>
<CAPTION>
PRICE TO PROCEEDS TO THE
PUBLIC FEES COMPANY
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<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>
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(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 incurred a fee of $ 176,000 and a non accountable expense
allowance of $66,000, the payment of which resulted in a disbursement of
$172,250 in cash and an assignment of $68,750 in escrow which resulted in
the issue of one quarter of one of its 5%, $275,000 in principal amount
Convertible Subordinated Debentures to an affiliate of one of the parties to
the Non Circumvention and Finder's Fee Agreement; will issue 36,159 shares
of Common Stock; and will issue Fee Warrants to purchase up to 72,189 shares
of Common Stock.
(3) In connection with the exercise of the Class B Warrants (excluding Class B
Warrants issued to the holder of the quarter Debenture issued as a result of
the assignment of certain amounts payable in connection with the placement
of the Debentures), the Company will pay a warrant exercise fee equal to (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.
(4) The exercise price of 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 JULY , 1998.
<PAGE> 4
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." The Company's actual results, performance or
achievements could differ materially from those expressed in, or implied by,
these forward looking statements. 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 except as may be required by law.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports and other information with the Securities and Exchange Commission (the
"Commission"). The reports and other information filed by the Company can be
inspected and copied without charge at the Commission, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following
regional offices of the Commission: Seven World Trade Center, 13th Floor, New
York, New York 10048, and Northwest Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained
from the Public Reference Section of the Commission, Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Registration
statements and other documents and reports that are filed electronically through
the Electronic Data Gathering, Analysis and Retrieval System (including the
Registration Statement) are publicly available through the Commission's web site
on the Internet (http://www.sec.gov).
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement for a more complete description of the matter involved, each such
statement being qualified in its entirety by such reference. The Company will
provide without charge to each person who receives this Prospectus, upon written
or oral request of such person, a copy of any of the information that is
incorporated by reference herein (excluding exhibits to the information that is
incorporated by reference unless the exhibits are themselves specifically
incorporated by reference) by contacting the Company at TMCI Electronics, Inc.,
1875 Dobbin Drive, San Jose, CA 95133, telephone (408) 272-5700, attention:
Chief Financial Officer.
2
<PAGE> 5
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 significant 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 primarily into four
(4) different segments: (1) mini and mainframe computers; (2) telecommunications
equipment; (3) semiconductor capital equipment; and (4) medical test equipment.
The principal executive offices of the Company are located at 1875 Dobbin
Drive, San Jose, California 95133 and its telephone number is (408) 272-5700.
SEE "RISK FACTORS," "MANAGEMENT," "BUSINESS" AND "CERTAIN TRANSACTIONS" FOR
A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED IN EVALUATING THE
COMPANY AND ITS BUSINESS.
THE OFFERING
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Common Stock Offered(1)(2)(3)............................... 1,956,954 shares
Class B Warrants Offered.................................... 300,000 Class B Warrants
Compensation Warrants Offered............................... 101,564 Compensation Warrants
Shares of Common Stock Outstanding Prior to Offering(1)..... 4,196,406 shares
Shares of Common Stock Outstanding After Offering(2)(3)..... 6,153,360 shares
Use of Net Proceeds......................................... See "Use of Proceeds"
Nasdaq SmallCap Market Symbols
Common Stock................................................ TMEI
Class A Warrants............................................ TMEIW
</TABLE>
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(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.
3
<PAGE> 6
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 in this prospectus. 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 Commission.
SELECTED FINANCIAL DATA (IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL QUARTERS ENDED
MARCH 31,
(UNAUDITED) YEARS ENDED DECEMBER 31
--------------------- -----------------------------------------------
1998 1997 1997 1996 1995(1) 1994(1) 1993(1)
--------- --------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data
------- ------- ------- ------- ------- ------- -------
Net Sales................................. $10,200 $ 7,443 $38,947 $26,140 $28,099 $20,869 $14,391
Net Income................................ 169 307 1,136 148 473 420 248
Net Income per Common Share from
Operations-Basic (2).................... 0.04 0.09 0.31 0.05 0.25 0.22 0.08
Net Income Per Common Share from
Operations-Diluted(2)................... 0.04 0.08 0.28 0.05 0.25 0.22 0.08
Balance Sheet Data
Total Assets.............................. 34,680 18,176 28,543 15,482 12,412 9,332 6,982
Total Long Term Obligations............... 9,163 3,117 4,168 2,501 2,757 2,682 2,576
Shareholder's Equity...................... 16,468 9,246 13,299 8,639 2,180 957 257
</TABLE>
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(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.
4
<PAGE> 7
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 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 covered by Section 27A of the
Securities Act. 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 forward looking statements. The Company also undertakes no
obligation to update these forward-looking statements except as required by law.
OPERATION RISKS
No Assurance of Future Profitability
Although the Company had 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 in future years in as much
as no assurance can be given that the Company will continue to secure such
backlog or that it can continue to operate profitably in the event that orders
are not sufficient to fully utilize the Company's available resources. 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.
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.
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 ended
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
5
<PAGE> 8
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 capital equipment, telecommunications
equipment and medical test equipment. The markets for the products sold by these
customers are 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 had and will continue to have a material
impact on the results of operations of the Company. See "Management's Discussion
and Analysis of Financial Condition and 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 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 results of operations and
financial condition Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business."
Dependence on Management
The Company 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 Mr. Loera leaves the Company for
any reason, the Company may be adversely affected. The Company has obtained
key-man life insurance on Mr. Loera in the amount of $1 million. The Company
will be the owner and beneficiary of the insurance policy. See "Use of
Proceeds," "Business" and "Management."
Substantial Competition
The Company encounters substantial competition from domestic and foreign
businesses. Many of such entities have substantially greater financial
resources, technical expertise and managerial capabilities than the Company. See
"Business -- Competition."
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
As of the date hereof, the officers, directors and principal stockholders
of the Company, they beneficially own approximately 37% of the Company's Common
Stock. Accordingly, such persons, with the votes of the holders of approximately
an additional 13% 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
6
<PAGE> 9
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."
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 company which owns the real property located at 1881-1899 Dobbin
Drive (the "Property") and leases it 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
The Company is subject to extensive and evolving federal, sate and local
environmental and land use laws and regulations. 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.
The Company cannot predict what new environmental laws or regulations may
be enacted in the future, prospective interpretations of existing laws and
regulations or the cost of compliance to the Company of such prospective laws,
regulations and interpretations. See "Business -- Regulation."
ACQUISITION RISKS
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 these recent acquisitions into its
current operations, or that any of these acquisitions will be profitable for the
Company. See "Business" and "Legal Proceedings."
Uncertainty of Pending Acquisitions
The Company has announced its intention to acquire Pen Interconnect, Inc.
and the SMA Microsystems companies. No assurance can be given that the Company
will complete these acquisitions. In addition, if both acquisitions are
completed, the Company would increase its revenues by approximately 75% and have
locations in Salt Lake City, Utah and Raleigh, North Carolina. The operating
results of the Company may be negatively impacted as it integrates the
manufacturing, sales, and administration of these entities into its operations.
Moreover, there can be no assurance that the acquisitions will be profitable for
the Company. See "Business -- Overview, Formation and Acquisitions."
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. Even if the Company locates such candidates, no
assurance can be given that the acquisition can be negotiated and consummated.
Finally, even if the Company
7
<PAGE> 10
completes an acquisition, no assurance can be given that the acquired entity can
be successfully integrated into the Company or that it will be profitable. See
"Business."
STOCK MARKET RISKS
DILUTION
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 being registered hereunder 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 depress the price of the Common Stock of the Company.
Dilutive Effect of 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 amounting to a total of 67%
of the currently issued and outstanding shares of the Company.
Dilutive Effect of Additional Issuances. The Company is authorized to issue
up 25,000,000. After reserving a total of 4,352,415 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 16,451,169 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 or an exemption from registration,
and (ii) a qualification for sale or exemption 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 Warrants and the Common Stock in California,
Connecticut, New Jersey and New York in an amount equal to the amounts held by
Selling Security Holders resident in those states prior to the effectiveness 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.
Moreover, in the event that the Selling Security Holders transfer the Warrants,
the Company will only be able to issue Common Stock upon the exercise of a
Warrant if a registration statement is in effect in that particular state or an
exemption exists from registration. The Selling Security Holders are party to a
registration rights agreement with the Company and
8
<PAGE> 11
may have a cause of action against the Company in the event the Company fails to
abide by the terms of that agreement. Purchasers of the Class B Warrants from
the Selling Security Holders who are not party to the agreement would have no
rights under that agreement. 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, The
Midas Group ("Midas") (previously known as and filed to do business as Biltmore
Securities, Inc. ("Biltmore" and together with Midas, "Midas/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 Midas/ Biltmore 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 the participation of Midas/Biltmore in the market, inasmuch
as a significant amount of such securities may be sold to customers of
Midas/Biltmore. Such customers subsequently may engage in transactions for the
sale or purchase of such securities through or with Midas/Biltmore. These market
making activities may be discontinued at any time or from time to time by
Midas/Biltmore without obligation or prior notice. The discontinuance of market
making activities by Midas/ Biltmore may adversely affect the price and
liquidity of the securities.
To the extent that Midas/Biltmore solicits the exercise of the Class A
Warrants, Midas/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, Midas/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."
Legal Matters. Biltmore has been involved in the following matters with
federal regulators, state regulators, and the National Association of Securities
Dealers. Although the Company is not aware of any other pending or threatened
actions, further action may result in preventing Midas/Biltmore from acting as a
market maker with respect to the Company's securities.
Commission 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, Section 10(b) and
15(c) of the Exchange Act, 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 agreed,
among other things:
- to disgorge $1,000,000 to the Commission, which amount was paid in four
(4) equal installments on or before June 22, 1995;
- to the appointment of an independent consultant ("Consultant") to review
the policies, practices and procedures of Biltmore in six areas of
compliance relating to sales practices; to formulate such policies,
practices and procedures as the Consultant deems necessary with respect
to sales practices; to deliver a report on such matters to the SEC and
the president of Biltmore; to prepare an appropriate manual of
supervisory procedures and compliance (or amend such existing manual as
may be necessary); and to formulate policies and procedures with respect
to training of new hires and ongoing training of existing employees.
- to the appointment of an independent auditor to conduct four (4) special
reviews of the policies, practices and procedures of Midas/Biltmore at
six month intervals, the first such review to take place six months after
the delivery of the Consultant's report.
On July 10, 1995, the court dismissed with prejudice the action against
Messrs. Loewenstern and Bronson. Mr. Bronson agreed to a suspension from
associating in any supervisory capacity with any broker,
9
<PAGE> 12
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 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.
On December 19, 1996, the Consulted completed the report and delivered it
to Biltmore. Biltmore has implemented the recommendations in the report and is
currently being monitored by the independent auditor.
State Actions.
INDIANA. In September, 1994, 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. In April, 1997,
Biltmore settled the action without any admission, finding or judgment against
it 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.
ARKANSAS. On July 18, 1997, the State of Arkansas, Securities Department
issued a consent order in lieu of the filing of a complaint as settlement of all
claims against Biltmore 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 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. The Company understands
that 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 Commission, the Arkansas Securities Department and the
Indiana Securities Division. A hearing on the matter has been scheduled for July
20, 1998. 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.
NASD ACTIONS.
In 1995, District Business Conduct Committee Number 7 of the NASD issued a
Statement of Complaint (No. CO7950037) against Biltmore and certain of its
principals and former account executives alleging violations of the NASD's Rules
of Fair Practice in connection with the issuance of certain warrants to
employees of Biltmore in late 1993 as compensation which were subsequently sold
to customers of Biltmore. The NASD alleged that the sale of these warrants by
Biltmore employees from their personal accounts (or accounts in which they had a
financial interest) should have been disclosed to customers. Biltmore has filed
an answer denying the allegations and intends to vigorously defend this matter.
In March, 1998, Biltmore submitted an Acceptance, Waiver and Consent
("AWC") to the NASD relating to certain customer agreements. Pursuant to the
terms of the AWC, Biltmore will consent to the entry of an Order providing for a
fine of $20,000 and a censure. The Order is based upon allegations that certain
10
<PAGE> 13
customer agreements contained improper language in the arbitration clauses used
by Biltmore and improper affirmative defenses raised in certain arbitrations
relating to punitive damages. Biltmore had disputed the finding of these
allegations but it ultimately determined to resolve this matter to avoid the
cost, distraction and uncertainty of litigation. Biltmore submitted the AWC
without admitting or denying the allegations contained therein. The NASD still
needs to approve the AWC.
In May, 1998, the Department of Enforcement of the NASD initiated a
complaint against Biltmore, Elliot Lowenstern and Richard Bronson (CO7980026).
The complaint alleges that Biltmore violated SEC Rule 10b-5 and NASD Rules of
Conduct in connection with the issuance of warrants in lieu of cash bonuses to
certain employees. The complaint further alleges that the warrants were, in
turn, sold to customers of Biltmore in late 1994 and early 1995. The NASD
alleges that the relevant parities omitted to disclose material facts
surrounding the receipt of the warrants in lieu of cash payments by the
employees. Biltmore intends to defend these allegations.
With respect to the disposition of the NASD matters referred to above, if
the NASD prevails, fines could be levied against Midas/Biltmore and its
principals. Further, if the NASD prevails, Midas/Biltmore would be vulnerable to
sanctions which can be a censure, suspension, revocation of its license, or
revocation of its membership with the NASD.
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 such event, the possibility exists that the market for
and the liquidity of the Company's securities will be adversely affected to such
an extent that public security holders would 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.
11
<PAGE> 14
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 which became a subsidiary
of the Company on December 22, 1997. The Company engaged M.J. Segal & Company,
Inc. and Private Investors Equity Group, Inc. to act as finders in connection
with the Debenture placement pursuant to the terms of a Non Circumvention and
Finder's Fee Agreement. The Company has been advised by the parties to the Non
Circumvention and Finder's Fee Agreement that the Debentures were offered
through Private Investors Equity Group, Inc., a member of the National
Association of Securities Dealers, Inc. primarily by M.J. Segal, a registered
representative, licensed with Private Investors Equity Group, Inc. M.J. Segal is
the president of M.J. Segal & Co., Inc. and the general partner of Joshua
Capital Partners. 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. This table assumes that all of the Warrants being registered
are exercised by the Selling Security Holders.
<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........................... 116,666(2) 116,666 0
Ramius Fund, L.P....................... 116,666(2) 116,666 0
Hathaway Partners Investment L.P....... 116,666(2) 116,666 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
Private Investors Equity Group....... 152,411(3) 152,411 0
Total........................ 1,956,954 1,956,954 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 in
connection with the acquisition of Trinity 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 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 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.
(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. M.J. Segal
& Co., Inc. has indicated that it will assign its right to receive
compensation under the Non Circumvention and Finder's Fee Agreement to
Private Investors Equity Group, Inc. Private Investors Equity Group, Inc.
has advised the Company that it will not be transferring the securities to
or selling the securities for the benefit of M.J. Segal or any other party.
12
<PAGE> 15
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 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 per share to existing shareholders and an
immediate dilution of $3.64 per share to new investors. 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.
13
<PAGE> 16
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is quoted on the NASDAQ SmallCap market under
the symbol "TMEI." 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
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............................................. $5.875 $4.00
Second Quarter............................................ $6.125 $3.50
</TABLE>
On June 9, 1998, the closing bid price of the Company's Common Stock as
reported on the NASDAQ SmallCap Market system was $4.25. 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, Due
2001. Such securities were issued in reliance on Rule 506 of Regulation D
promulgated by the Commission pursuant to its authority under the Securities Act
of 1933, 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."
14
<PAGE> 17
BUSINESS
OVERVIEW, FORMATION, AND ACQUISITIONS
TMCI Electronics, Inc. ("TMCI") provides custom manufacturing and
value-added services to original equipment manufacturers ("OEMs") through its
four significant 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 capital 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 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, has made three material acquisitions following its formation as
discussed below and has publicly announced the signing of letters of intent for
two acquisitions 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 the form of 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.
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
merger agreement was effective October 1, 1997. 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 15
<PAGE> 18
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 will be released from escrow in the amount of 35% 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.
Letter of Intent to Acquire the SMA Companies. On April 15, 1998, the
Company announced the signing of a letter of intent to acquire SMA Microsystems,
LLC and SMA Telcom, LLC (the "SMA Companies"), two Raleigh, North Carolina based
providers of systems integration for the computer and telecommunications
industry for a price of $7.5 million in an unspecified combination of cash and
stock. The Company is currently renegotiating the terms of the letter of intent.
No assurance can be given that the Company will complete the acquisition of the
SMA Companies or, that if an acquisition is completed, that the Company will be
able to successfully integrate the SMA Companies into its operations.
Letter of Intent to Acquire Pen Interconnect, Inc. On June 17, 1998, the
Company announced the signing of a letter of intent to acquire Pen Interconnect,
Inc. ("Pen"), a publicly traded, Salt Lake City, Utah based manufacturer of
electronic board assemblies, power supplies and custom molded cables. The
Company will issue 0.625 shares of its common stock for each outstanding share
of Pen in a tax free reorganization. No assurance can be given that the Company
will complete the acquisition of Pen or that, if an acquisition is completed,
that the Company will be able to successfully integrate Pen into its operations.
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>
16
<PAGE> 19
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.
Focus Resources. With the increased level of competition and the pace of
product change in the electronics industry, use of custom 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 MARKETS 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 capital 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 Capital Equipment. The Company markets its product
manufacturing and service capabilities in the semiconductor capital 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 for major producers in the
semiconductor. 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.
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<PAGE> 20
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 the entire production line. Each custom order possesses 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
higher initial 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 markets 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.
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
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<PAGE> 21
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 believes that it will improve margins 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.
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 capital 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 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 Company believes that its future
growth depends on its ability to maintain relationships with major existing
customers. The Company intends to maintain these relationships and 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
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<PAGE> 22
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 financial exposure primarily as a result of
order reschedulings.
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 of 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 Lam Research Corporation and
Tandem Computers Incorporated amounted to approximately 12% and 14%
respectively, of the Company's 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.
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<PAGE> 23
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
The Company is subject to extensive and evolving federal, state and local
environmental and land use laws and regulations. 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.
The Company cannot predict what new environmental laws or regulations may
be enacted in the future, prospective interpretations of existing laws and
regulations or the cost of compliance to the Company of such prospective laws,
regulations and interpretations.
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.
DESCRIPTION OF PROPERTY
Touche leases approximately 224,000 square feet of factory manufacturing
space in three adjacent buildings which are equipped with state-of-the-art metal
fabrication equipment. Touche leases approximately 123,000 square feet at 1875
Dobbin Drive, San Jose, California 95133, which consists of 113,000 square feet
in manufacturing space and approximately 10,000 square feet of office space. In
addition, TEI leases approximately 78,000 square feet of manufacturing space at
1881 - 1899 Dobbin Drive, San Jose, California 95133. Touche leases
approximately 22,000 square feet of manufacturing space at 1565-C Mabury Road,
San Jose, California 95133. EII leases approximately 126,000 square feet of
combined office and manufacturing space in a light industrial building at 7500
Tyrone Avenue, Van Nuys, California. The Company negotiates all lease agreements
on a triple net basis with landlords.
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<PAGE> 24
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 assets of 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>
QUARTER ENDED YEAR ENDED
MARCH 31 DECEMBER 31,
------------- -----------------------
1998 1997 1996 1995
------------- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales......................................... 100% 100% 100% 100%
Cost of Goods Sold............................ 73.4 73.8 77.4 77.2
----- ----- ----- -----
Gross Profit.................................. 26.6 26.2 22.6 22.8
Operating Expenses............................ 20.8 20.9 20.6 16.7
----- ----- ----- -----
Income From Operations........................ 5.7 5.3 2.0 6.1
----- ----- ----- -----
Net Other Expenses............................ 2.9 0.6 1.4 2.5
Income Before Provision for Income Taxes...... 2.8 4.7 0.6 3.6
Provision for Income Taxes.................... 1.2 1.8 0.0 1.9
----- ----- ----- -----
Net Income.................................... 1.7 2.9 0.6 1.7
===== ===== ===== =====
</TABLE>
All figures rounded to the nearest one tenth of one percent.
RESULTS OF OPERATIONS FOR THE FISCAL QUARTER ENDED MARCH 31, 1998
The results of operations utilizes the consolidated results from all
subsidiaries 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
prospectus.
NET SALES
Net sales increased by approximately $2,757,000 or 37% to $10,200,000 from
$7,443,000 for the quarter ended March 31, 1998 as compared to the quarter ended
March 31, 1997. The sales increase resulted primarily from the acquisition of
Trinity as well as an increase in sales by TEI. However, the Company did not
ship as much as anticipated as a result of a slowdown in the semiconductor
capital equipment industry which caused customers in that industry to reschedule
their orders for delivery in the second and third quarters of the year. The
Company currently anticipates that the slowdown in the semiconductor capital
equipment market segment will continue through at least the second quarter of
1999.
GROSS PROFIT
Gross profit increased approximately $469,000 or 21% to $2,710,000 from
$2,241,000 for the quarter ended March 31, 1998 as compared to the quarter ended
March 31, 1997. As a percentage of sales, gross profit decreased approximately
3% to 27% from 30% for the quarter ended March 31, 1998 as compared to the
quarter ended March 31, 1997. The gross profit of $2,241,000 for the quarter
ended March 31, 1997 is different from the $2,838,943 originally reported in the
Company's 10-QSB for the quarter ended March 31, 1997 as a result of a
reallocation of certain overhead items from operating expenses to cost of goods
sold.
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<PAGE> 25
Gross profit increased as a result of the acquisition of Trinity and an increase
in sales at TEI. Gross profit as a percentage of sales decreased primarily as a
result of the slowdown in the semiconductor capital equipment industry. In
response to slowing demand in the semiconductor capital equipment market, Touche
and TEI reduced their labor force during the quarter ended March 31, 1998.
OPERATING EXPENSES
General and administrative expenses increased approximately $401,000 or 19%
to $2,126,000 from $1,725,000 for the quarter ended March 31, 1998 as compared
to the quarter ended March 31, 1997. The operating expenses of $1,725,000 for
the period ended March 31, 1997 is different than the $2,323,000 originally
reported in the Company's 10-QSB for the fiscal quarter ended March 31, 1997 as
a result of a reallocation of certain overhead items from operating expenses to
cost of goods sold. As a percentage of sales, the Company's general and
administrative expenses decreased 2% to 21% from 23% for the quarter ended March
31, 1998, as compared to the quarter ended March 31, 1997. The increase in
operating expenses was primarily a result of an increase in amortization expense
from goodwill, and the addition of new management personnel to support
significant growth.
OPERATING INCOME
Operating income increased approximately $69,000 or 13% to $585,000 from
$516,000 for the quarter ended March 31, 1998 as compared to the quarter ended
March 31, 1997. Operating income increased as a result of an increase in
revenues from the Company's acquisition of Trinity offset in part by an increase
in operating expenses.
OTHER INCOME [EXPENSE]
Other expenses increased approximately $294,000 to $295,000 from $1,000 in
the quarter ended March 31, 1998 as compared with the quarter ended March 31,
1997. The increase in other expenses was primarily due to (1) an increase in
interest paid of $201,000 resulting from increased borrowings under the
Company's credit facility in order to finance inventory; and (2) a non cash
finance charge of $129,000 resulting from the issuance of $3.3 million of the
Company's 5%, $275,000 in principal amount, Convertible Subordinated Debentures
Due 2001, offset in part by an increase of $30,000 in other income.
NET INCOME
Net income decreased by approximately $138,000 or 45% to $169,000 from
$307,000 for the quarter ended March 31, 1998 as compared to the quarter ended
March 31, 1997. The decrease in net income was primarily due to an increase in
interest paid to finance inventory and non cash finance charges relating to the
debenture placement, which was partially offset by an increase in income from
operations.
RESULTS OF OPERATIONS -- FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMPARED WITH THE FISCAL YEAR ENDED DECEMBER 31, 1996
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 to 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 of 1997.
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
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<PAGE> 26
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 to 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 to 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.
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. This 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 in the
fiscal year ended December 31, 1997 as compared to the fiscal year ended
December 31, 1996 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 to the
fiscal year ended December 31, 1996. The increase in net income before taxes 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 to the
fiscal year ended December 31, 1995. The decline in net sales
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<PAGE> 27
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.
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 assets 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. Pro forma
income tax expense for the year ended December 31, 1996 gives effect to the loss
of S corporation status on a combined basis prior to March 5, 1996.
NET INCOME
Income before taxes decreased to approximately $840,300 or 83% to $167,336
from $1,007,616 for the fiscal year ended December 31, 1996, as compared to 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash Required to Fund Operating Activities. The Company required cash to
fund operating activities of approximately $2,019,000 in the fiscal quarter
ended March 31, 1998 as compared to required cash to fund operating activities
of approximately $1,252,000 in the fiscal quarter ended March 31, 1997. The
increase resulted primarily from an increase in inventory of $2,265,000, an
increase in prepaid expenses of $559,000, an decrease in accounts payable of
$712,000 and a decrease in income taxes payable of $265,000 offset primarily by
a decrease in accounts receivable of $1,019,000.
The Company required net cash to fund operating activities of $1,129,241 in
the fiscal year ended December 31, 1997. The requirements were mainly
attributable to
25
<PAGE> 28
$885,329 in accounts receivable and $3,881,696 in inventory, offset primarily
by an increase in accounts payable of $466,548 and $478,150 in income taxes
payable.
Capital Equipment Expenditures. During the quarters ended March 31,
1998 and March 31, 1997, the Company invested approximately $480,865 and
$224,163, respectively, to purchase capital equipment (net of equipment
acquired in acquisitions) which was funded through long-term borrowings and
current operations. During the fiscal years ended December 31, 1997 and
December 31, 1996, the Company invested approximately $664,740 and $1,114,694,
respectively, to purchase capital equipment (net of equipment acquired in
acquisitions) 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.
During the fiscal year ended December 31, 1997 and December 31, 1996, the
Company invested 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 projected capital expenditure requirements of
approximately $1,800,000 for the calendar year ending December 31, 1998. This
increase will be supported by increased internal operations and bank borrowings.
CASH FROM INVESTING ACTIVITIES.
Cash used in investing activities remained relatively constant at
$1,110,000 for the fiscal quarter ended March 31, 1998 as compared to $1,098,000
for the fiscal quarter ended March 31, 1997 and included the purchase of
equipment, other assets, and the acquisition of a metal stamping company.
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 from stockholders and a reduction of $450,224 in the amount spent for
the purchase of equipment offset by an increase 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 FROM FINANCING ACTIVITIES.
Cash generated from financing activities increased approximately $996,000
or 44% to $3,262,000 for the fiscal quarter ended March 31, 1998 as compared to
$2,266,000 for the fiscal quarter ended March 31, 1997. Cash increased as result
of credit line advances of $4,900,000, note issuance of $5,813,000 (both from
Fleet Capital discussed below) and $3,300,000 from the issuance of Debentures
(discussed below) offset by note repayments of $10,389,000 and credit line
repayments of $361,000.
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 of $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.
Sale of Debentures. On February 10, 1998, the Company closed an offering of
three Units, each Unit consisting of four of its 5%, $275,000 principal amount
Convertible Subordinated Debentures due 2001 and the obligation to issue 300,000
Class B Warrants to purchase common stock of the Company under certain
circumstances (the "Class B 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
$4.46875 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 738,462 shares nor more than 1,100,004 shares of
common stock upon conversion of the Debentures.
26
<PAGE> 29
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 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 Class B
Warrants with the Commission.
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 expense allowance
which resulted in the payment of $172,250 in cash and an assignment of $68,750
in escrow which resulted in the issuance of one quarter of one Debenture. As
additional consideration for the placement of the Debentures, the Agreement
calls for (1) the issuance of the number of shares of common stock 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 73,846 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.
Upon exercise of any Class B Warrants issued in the offering, the Agreement
provides that the finders shall receive a cash fee equal to 4% of the amount
received upon exercise of such Class B 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
parties to the Agreement 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 31, 1998, the Company was eligible to borrow up to
$13,260,000 under the Fleet Facility and had borrowed $12,076,758. 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. 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%.
27
<PAGE> 30
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%; (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%.
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 quarter of 1998 further
tightened cash flow. Accordingly, in the event the Company experiences
additional order reschedulings or other unanticipated developments, it may
require further cash to fund operating activities during 1998.
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.
YEAR 2000 COMPLIANCE
The Company recognizes the issues resulting from its existing computer
programs being written using two digits rather than four digits to define the
applicable year. In the year 2000, the Company's date sensitive computer
programs may recognize "00" as 1900 rather than 2000. Systems that fail to
properly recognize such information will likely generate erroneous data or cause
a system to fail in either case causing a disruption of operations such as
inability to process customer transactions. Management has initiated a program
to prepare its computer systems for the year 2000 by the beginning of 1999.
Costs will be expensed as incurred and currently are not expected to be
material. However, significant uncertainty exists concerning the potential costs
and effects associated with any year 2000 compliance program.
Although management anticipates that its systems and applications will be
year 2000 compliant on a timely basis, there can be no assurance that the
systems of other companies on which the Company's systems rely will be year 2000
compliant in the same time frame. Confirmations will be requested from the
Company's primary processing vendors and customers that plans are being
developed to address processing of transactions in the year 2000. Any such
failure on the part of other companies with whom the Company transacts business
to be year 2000 compliant on a timely basis may have an adverse impact on the
operations of the Company.
28
<PAGE> 31
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 45 Chairman, President and Chief Executive Officer; Director
Edmund J. Becmer 39 Vice President -- Chief Financial Officer
Livino D. Ribaya, Jr. 50 Vice President -- Manufacturing
Frank Ramirez, III 42 Vice President -- Engineering
Charles E. Shaw 53 Vice President -- Corporate Development; 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.
Edmund J. Becmer. Mr. Becmer joined the Company in May, 1998. From March
1996 to May, 1998, Mr. Becmer practiced with the New Jersey based accounting
firm of Moore Stephens, P.C. From August 1995 to March 1996, he worked as an
independent consultant. From August 1993 to July 1995 he served as the
controller of First City Industries, Inc. a New York, New York holding company
with subsidiaries in manufacturing, commercial real estate and residential real
estate. Mr. Becmer holds a B.A. degree in accounting from San Diego State
University.
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.
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
1992. 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, Corporate Development
and a Director of the Company since May, 1998. From 1995 to May, 1998, he held
the offices of Chief Financial Officer and Director. He has held a similar
position with Touche since 1993. Prior to that time, he was President and Chief
Executive Officer of Compro Business Solutions, Inc., a business and management
consulting firm
29
<PAGE> 32
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
LL.M. in Taxation from the New York University School of Law and is a certified
specialist in Taxation Law by the State Bar of California Board of Legal
Specialization.
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 served as
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
capital 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 electromechanical engineering at the Polytechnical Institute in
Kharkov, Russia.
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
---------------- SECURITIES UNDERLYING
NAME OF INDIVIDUAL POSITION WITH COMPANY YEAR SALARY OPTIONS/SARS(#)
------------------ --------------------- ---- -------- ---------------------
<S> <C> <C> <C> <C>
Rolando Loera.................... Chairman, 1997 $225,000(1) 200,000
President and CEO 1996 225,000(1) 100,000
1995 150,000
Livino Ribaya, Jr. .............. Vice President, 1997 110,000 10,000
Manufacturing
</TABLE>
- ---------------
(1) Pursuant to the terms of his employment agreement, Mr. Loera was entitled to
a $100,000 bonus. He relinquished this bonus in 1997 and 1996.
30
<PAGE> 33
OPTION SAR IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- -------------------------------------------------------------------------------------- POTENTIAL REALIZABLE VALUE
(C) AT ASSUMED ANNUAL
(B) % OF TOTAL RATES OF STOCK PRICE
NUMBER OF OPTIONS/SARS APPRECIATION FOR
SECURITIES GRANTED TO (D) OPTION TERM
UNDERLYING EMPLOYEES IN EXERCISE PRICE (E) ---------------------------
(A) OPTIONS/SARS FISCAL YEAR OR BASE PRICE EXPIRATION (F) (G)
NAME GRANTED ($/SH) PER SHARE DATE 5% 10%
---- ------------ ------------ -------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rolando Loera.............. 200,000 60% $5.3625 7/08/07 $674,489.48 $1,709,288.78
Livino Ribaya.............. 10,000 3% $4.875 7/08/07 $ 30,658 $ 77,694
</TABLE>
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)
Livino Ribaya........... -0- -0- 10,000/0 0/0
</TABLE>
- ---------------
(1) The closing price for the common stock of the Company on December 31, 1997
was $4.00 per share.
EMPLOYMENT AGREEMENTS
The Loera Agreement. The Company has entered into an employment agreement
("Loera 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 Loera 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
Loera 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 TPI 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 Loera 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 Loera 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 Loera 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
31
<PAGE> 34
supplemental retirement benefits to replace benefits under any qualified plan
for the remaining term of the Loera Agreement to the extent permitted by law.
The Becmer Agreement. The Company has entered into an employment agreement
(the "Becmer Agreement") effective as of May 1, 1998 with Edmund Becmer. The
term of employment commenced on May 18, 1998 and will expire on the fifth
anniversary thereof. The annual salary under the Agreement is $150,000. This
salary shall be increased annually in an amount to be determined by the Chief
Executive Officer or the Board of Directors. Mr. Becmer is to be paid an annual
bonus, to be determined the sole and absolute discretion of the Chief Executive
Officer in Mr. Becmer's first year of employment and thereafter by criteria
established by the Board of Directors.
The Becmer Agreement provides that the Company shall grant Mr. Becmer
options to purchase 65,000 shares of its Common Stock at an exercise price equal
to the closing price of the Common Stock on the trading day closest to the
effective date of the Becmer Agreement. In addition, among other things, the
Becmer Agreement provides 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 Becmer Agreement further provides for an automobile
allowance of $500 per month and other fringe benefits commensurate with his
duties and responsibilities.
Pursuant to the Becmer Agreement, employment may be terminated by the
Company with or without cause. Termination by the Company without cause subjects
the Company to liability for liquidated damages in an amount equal to 90 days of
the terminated executive's then current salary payable in bi weekly
installments, and expenses actually incurred by Mr. Becmer in relocating to New
Jersey up to $5,000.
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.
DIRECTOR COMPENSATION
The Company pays its outside directors $1,000 plus travel expenses for
attendance at outside meetings. In addition, the Company grants each director
options to purchase 10,000 shares of common stock annually for their service in
that capacity.
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.
32
<PAGE> 35
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 (a previous director of the Company) 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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the Company's
Common Stock as of June 17, 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>
NUMBER PERCENTAGE
NAME AND ADDRESS(1) POSITION WITH COMPANY OF SHARES OF SHARES(2)
------------------- --------------------- ----------- ------------
<S> <C> <C> <C>
Rolando Loera................... Chairman, President and 836,906(3) 19%
Chief Executive Officer;
Director
Patrick McQuade................. President, Trinity Electronics, Inc. 404,539 9.6
Livino Ribaya................... Vice President, Manufacturing 84,680(4) 2
Thomas Chaffin.................. Director 20,000(5) *
Robert Loera.................... Director, Controller 20,000(5) *
Charles Shaw.................... Director, Vice President of Corporate 20,000(5) *
Development
Robert Fink..................... Director 10,000(5)
Boris Lipkin.................... Director 10,000(5)
Rolando Loera................... Trustee for Touche Employee 27,280(6) *
Stock Ownership Plan
All Officers and Directors as a 1,151,226(7) 27
Group (9 persons).............
</TABLE>
- ---------------
* Less than 1%.
(1) Unless otherwise noted, c/o TMCI Electronics, Inc., 1875 Dobbin Drive, San
Jose, CA 95133.
(2) Does not include the exercise or conversion of any outstanding derivative
securities.
(3) Includes options to purchase 149,306 shares of Common Stock subject to
outstanding options which have vested as of June 17, 1998.
(4) Includes 10,000 shares subject to options which have currently vested.
(5) All shares are subject to options which have vested.
(6) Mr. Loera shares voting power with respect to these shares.
(7) Includes 119,180 shares and vested options to purchase 4,500 shares owned by
an certain additional executive officer of the Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TEI leases approximately 78,000 square feet of space located at 1881 - 1899
Dobbin Drive, San Jose, California from Touche Properties, Inc. ("TPI"), a
company wholly owned by Rolando Loera, Chairman, President and Chief Executive
Officer of the Company, pursuant to a lease agreement dated November 1,
33
<PAGE> 36
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.
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 June, 1998, Rolando Loera made
a payment of $350,000 on this loan.
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. In addition, Mr. Loera made a payment of $150,000
towards this loan in 1997. Accordingly, the outstanding principal balance on the
loan was $111,984 at December 31, 1997. During 1998, certain additional advances
were made to a foundation controlled by Mr. Loera in the amount of approximately
$150,000; Mr. Loera paid $150,000 to the Company in June, 1998 towards these
additional advances.
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.
34
<PAGE> 37
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 May 6, 1998 there were
4,196,416 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 is obligated to issue 25,000 Class B Warrants per Debenture for
each Debenture held by one of the purchasers on the earlier to occur of (I) the
first anniversary of the Closing Date or (ii) the date which is three months
after the effective date of the Registration Statement. Accordingly, 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 $0.01 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 the 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.
The Class B Warrants are exerciseable at any time after their issuance
until expiration. Holders of the Debentures have registration rights requiring
the Company to maintain an effective registration statement effective as to the
Class B Warrants and underlying Common Stock throughout the Offer Period.
Legally, the Class B Warrants can only be exercised when there is a current
effective registration statement covering the
35
<PAGE> 38
shares of Common Stock underlying the Class B Warrants or an applicable
exemption from registration. If the Company: (i) does not or is unable to
maintain a current effective registration statement both with the Commission and
in the state in which the Class B Warrant holder resides or (ii) applicable
state and federal exemptions are not available, the Class B Warrant holders will
be unable to exercise the Class B Warrants and the Class B Warrants would become
valueless. Parties to the Registration Rights Agreement with the Company may
have recourse pursuant to the terms of that agreement. 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 72,189 warrants as partial payment for its fee
for the placement of the Debentures (the "Fee Warrants") and up to 29,375
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 & Co., Inc. 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.
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 --
36
<PAGE> 39
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
1,201,539 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. A non affiliate of the Company may resell
securities without such volume limitations provided that such securities have
been held for at least a two year period. Assuming no exercise of any
outstanding Warrants or conversion of the Debentures, the Company had 4,196,416
shares of Common Stock outstanding as of May 6, 1998.
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 is 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
37
<PAGE> 40
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 an earn out agreement entered
into in connection with the acquisition 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, PII agreed to cancel two promissory worth nine hundred
thousand dollars ($900,000) and accrued interest as well as to 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.
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 February 20, 1998, of Moore Stephens,
P.C., independent certified public accountants, and upon the authority of such
firm as experts in accounting and auditing.
38
<PAGE> 41
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
Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995....................................... F-3
Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995.......................... F-4
Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995....................................... F-5
Notes to Financial Statements............................... F-6
Index to Financial Statements for the period ended March 31,
1998...................................................... F-26
Index to Trinity Financial Statements....................... F-33
</TABLE>
39
<PAGE> 42
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> 43
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
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
=========== ===========
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-2
<PAGE> 44
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
[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-3
<PAGE> 45
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------------
NUMBER OF ADDITIONAL
STOCKHOLDERS' PAID-IN RETAINED TOTAL
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-4
<PAGE> 46
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
[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)
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-5
<PAGE> 47
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 capital 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.
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.
F-6
<PAGE> 48
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-7
<PAGE> 49
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 $1,000,000 promissory
note was personally guaranteed by the Chief Executive Officer 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.
F-8
<PAGE> 50
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. BUSINESS ACQUISITIONS (CONTINUED)
[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.
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
F-9
<PAGE> 51
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. BUSINESS ACQUISITIONS (CONTINUED)
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,
--------------------------
1997 1996
----------- -----------
<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>
5. INVENTORY
Inventory consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
---------- ----------
<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.
F-10
<PAGE> 52
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
---------- ----------
<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.
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.
F-11
<PAGE> 53
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
---------- ----------
<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; $1,000,000 of which is personally guaranteed
by the Chief Executive Officer of the Company............. 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 --
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.
F-12
<PAGE> 54
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. NOTES PAYABLE (CONTINUED)
Current maturities on long-term debt at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
<S> <C>
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>
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.
F-13
<PAGE> 55
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES (CONTINUED)
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<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>
The components of the deferred tax liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
--------- ---------
<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>
1997 1996 1995
---- ---- ----
<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.
F-14
<PAGE> 56
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-15
<PAGE> 57
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
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
F-16
<PAGE> 58
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
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
F-17
<PAGE> 59
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
17. STOCKHOLDERS' EQUITY (CONTINUED)
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.
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
F-18
<PAGE> 60
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
17. STOCKHOLDERS' EQUITY (CONTINUED)
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,
--------------------------
1997 1996 1995
------- ---- -------
<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>
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,
----------------------
1997 1996
---------- --------
<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.
F-19
<PAGE> 61
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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>
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.
F-20
<PAGE> 62
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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>
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].
F-21
<PAGE> 63
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
22. SUBSEQUENT EVENTS (CONTINUED)
The Debentures are convertible at the option of the holder at a variable
conversion price ranging from $3.00 to $4.46875 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
738,462 shares nor more than 1,100,004 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 incurred a finder's
fee in the amount of $176,000 and a non accountable expense allowance pursuant
to the terms of a Non Circumvention and Finder's Fee Agreement between the
Company and M.J. Segal & Co., Inc. and Private Investors Equity Group, Inc. [the
"Agreement"] which resulted in the payment of $172,250 in cash and the
assignment of $68,750 in escrow which resulted in the issuance 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 Company, Inc.
and Private Investors Equity Group, Inc. 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 73,846 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 Company and
Private Investors Equity Group, Inc. 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 the
parties to the Agreement 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 days preceding the transaction, shall be non
callable and shall expire three years from the date of issuance. To date, all
compensation payable to Private Investors Equity Group, Inc. and M.J. Segal &
Co., Inc. pursuant to the terms of the Non Circumvention and Finder's Fee
Agreement has been paid to or assigned by Private Investors Equity Group, Inc.
The Company understands that M.J. Segal & Co., Inc. will assign all of its right
to receive compensation under the Agreement to Private Investors Equity Group,
Inc. prior to the payment of any further compensation.
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
F-22
<PAGE> 64
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
23. EVENTS SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT AUDITORS
[UNAUDITED] (CONTINUED)
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-23
<PAGE> 65
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-24
<PAGE> 66
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-25
<PAGE> 67
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL QUARTER ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets
December 31, 1997...................................... F-27
March 31, 1998 (Unaudited)............................. F-27
Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31, 1998 and 1997............. F-28
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 1998 and 1997............. F-27
Notes to Consolidated Financial Statements (Unaudited)...... F-30
</TABLE>
F-26
<PAGE> 68
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash...................................................... $ 446,402 $ 312,682
Accounts Receivable, Net.................................. 3,257,337 3,950,341
Inventory................................................. 12,158,968 9,721,050
Deferred Income Taxes..................................... 117,912 183,376
Prepaid Expenses and Other Current Assets................. 722,222 182,968
Notes Receivable -- Stockholders.......................... 43,383 39,312
----------- -----------
Total Current Assets.............................. 16,746,225 14,389,729
----------- -----------
Property and Equipment, Net................................. 8,933,758 6,583,260
=========== ===========
Other Assets:
Notes Receivable -- Stockholders.......................... 144,293 144,292
Due from Stockholders..................................... 111,984 111,984
Due from Related Party.................................... 497,379 469,878
Other Assets.............................................. 1,043,370 277,439
Goodwill, Net............................................. 7,203,367 6,766,564
----------- -----------
Total Other Assets................................ 9,000,393 7,770,157
----------- -----------
Total Assets...................................... $34,680,376 $28,743,146
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts Payable and Accrued Expenses..................... $ 4,150,979 $ 4,050,925
Line of Credit............................................ 4,585,508 3,856,268
Notes Payable -- Current Portion.......................... 747,384 2,055,256
Promissory Note Stockholder............................... 312,348 1,313,493
----------- -----------
Total Current Liabilities......................... 9,796,219 11,275,942
=========== ===========
Long Term Liabilities:
Notes Payable -- Net of Current Portion................... 6,663,219 3,607,877
Convertible Debentures.................................... 3,300,000 --
Deferred Income Taxes..................................... 573,338 560,180
----------- -----------
Total long -- Term Liabilities.................... 10,536,557 4,168,057
----------- -----------
Total Liabilities................................. 20,332,776 15,443,999
=========== ===========
Commitment and Contingencies................................ -- --
Stockholders' Equity:
Common Stock -- $.001 par value, 25,000,000 shares
authorized, 4,196,416 issued and outstanding as of
March 31, 1998 and 4,057,758 as of December 31, 1997... 4,196 4,057
Additional Paid in Capital................................ 11,769,186 10,890,233
Retained Earnings......................................... 2,574,218 2,404,857
----------- -----------
Total Stockholders' Equity........................ 14,347,600 13,299,147
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $34,680,376 $28,743,146
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-27
<PAGE> 69
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
Sales, Net.................................................. $10,199,819 $7,442,688
Cost of Goods Sold.......................................... 7,489,357 5,202,144
Gross Profit.............................................. 2,710,462 2,240,544
Operating Expenses.......................................... 1,610,192 1,434,694
Depreciation................................................ 349,046 248,500
Amortization................................................ 166,595 41,456
Income from Operations.................................... 584,629 515,894
Other Income [Expense]:
Non-cash Finance Charge................................... (129,093) --
Interest Expense.......................................... (315,263) (114,042)
Other Income.............................................. 145,405 115,456
Interest Income -- Related Parties........................ 4,071 --
Total Other [Expense]..................................... (294,881) 1,414
Income Before Provision for Income taxes.................. 289,748 517,308
Provision for Income Taxes................................ 120,387 210,447
Net Income................................................ $ 169,361 $ 306,861
Earnings Per Share:
Earnings Per Share -- Basic............................... $ .04 $ .09
Earnings Per Share -- Fully Diluted....................... $ .04 $ .08
Weighted Average Number of Shares and Common Stock
Equivalents............................................... 4,150,197 3,515,829
</TABLE>
See notes to consolidated financial statements.
F-28
<PAGE> 70
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 1997
------------ -----------
<S> <C> <C>
Operating Activities
Net Income................................................ $ 169,361 $ 306,862
Adjustments to reconcile net income to net cash from
operations:
Depreciation........................................... 349,046 248,500
Amortization........................................... 166,595 41,456
Deferred income taxes.................................. 78,621 56,169
Non-cash financing charge.............................. 129,093 --
Reversal of Bad Debt Provision......................... (129,199) --
Charges in Assets and Liabilities:
[Increase] decrease in:
Accounts receivable, trade........................ 1,019,133 (177,489)
Inventory......................................... (2,265,337) (1,167,523)
Prepaid expenses and other current assets......... (559,042) (47,812)
Increase (decrease) In:
Accounts payable and accrued expenses............. (712,057) (512,601)
Income taxes payable.............................. (265,005) --
------------ -----------
Total Adjustments.................................... (2,184,081) (1,558,707)
------------ -----------
Net cash provided by (used in) operating activities......... (2,018,791) (1,251,845)
------------ -----------
Investing Activities:
Purchases other assets.................................... (262,105) --
Purchase of equipment..................................... (480,865) (224,163)
Note receivable -- Other.................................. -- 50,000
Business acquisition, net of cash acquired................ (366,600) (923,389)
------------ -----------
Net cash provided by (used in) investing activities......... (1,109,570) (1,097,552)
------------ -----------
Financing activities:
Credit line Advances...................................... 4,899,758 2,613,044
Credit line Repayments.................................... (361,000) (822,200)
Debt repayment............................................ -- (65,952)
Repayment of notes payable................................ (10,389,471) --
Proceeds from Convertible Debentures...................... 3,300,000 --
Notes payable proceeds.................................... 5,812,794 541,596
Net cash provided by (used in) financing activities......... 3,262,081 2,266,488
------------ -----------
Net Increase [decrease] in cash............................. 133,720 (82,909)
------------ -----------
Cash -- Beginning of Period................................. 312,682 145,845
------------ -----------
Cash -- End of Periods...................................... $ 446,402 $ 62,936
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-29
<PAGE> 71
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 March 31, 1998
and the results of its operations for the three 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"], Trinity Electronics, Inc., and Try-Die, Inc.
[collectively, the "Company"]. All significant intercompany 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>
MARCH 31,
1998
-----------
<S> <C>
Raw Materials........................................... $ 6,786,795
Work in process......................................... 4,640,489
Finished Goods.......................................... 731,681
-----------
Total......................................... $12,158,965
===========
</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.
The Debentures are convertible into common stock at the option of the
holder at a variable conversion price ranging from $3.00 to $4.46875 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 738,462 shares nor more than 1,100,004 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
F-30
<PAGE> 72
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 payment of $172,250 in cash and the
assignment of $68,750 in escrow. The assignment of $68,750 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 M.J. Segal and Associates
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 73,846
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, 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 of shares issued upon such exercise; and warrants equal to 10% of the
number of shares issued upon such 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 dates preceding the transaction, shall be non callable, and shall
expire three years from the date of issuance.
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 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
F-31
<PAGE> 73
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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%.
Management believes that its current financial position, together with
available borrowings under the Company's various credit facilities will be
sufficient to meet the Company's anticipated operating needs and projected
capital expenditure requirements for the next twelve months.
6. TRY-DIE, INC. ACQUISITION
Effective, February 1, 1998, the Company acquired 100% of the capital stock
of Try-Die, Inc., a metal stamping manufacturer, located in Los Angeles,
California for a total purchase price of $1,000,000, which included payment of
$250,000 in cash and $750,000 in common stock of TMCI, based on $5.409 per share
for a total number of shares of 138,658. Try-Die will become a wholly owned
subsidiary of Enterprise Industries.
F-32
<PAGE> 74
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-34
Balance Sheet of Trinity Electronics, Inc. as of September
30, 1997 (unaudited) and December 31, 1996................ F-35
Statement of Operations for Trinity Electronics, Inc. for
the nine months ended September 30, 1997 and 1996,
respectively (unaudited) and for the fiscal years
ended December 31, 1996 and 1995, respectively............ F-36
Statement of Stockholder's Equity for Trinity Electronics,
Inc. the nine months ended September 30, 1997 (unaudited)
and for the fiscal years ended December 31, 1996 and 1995,
respectively.............................................. F-37
Statement of Cash Flows for Trinity Electronics, Inc. for
the nine months ended September 30, 1997 and 1996,
respectively (unaudited) and for the fiscal years ended
December 31, 1996 and 1995, respectively.................. F-38
Notes to Financial Statements............................... F-39
Pro Forma Condensed Combined Financial Statements Basis of
Presentation (unaudited).................................. F-43
Pro Forma Condensed Combined Balance Sheet as of September
30, 1997 (unaudited)...................................... F-44
Pro Forma Condensed Combined Income Statement for the Nine
Months Ended September 30, 1997 (unaudited)............... F-45
Pro Forma Condensed Combined Income Statement for the Fiscal
Year Ended December 31, 1996 (unaudited).................. F-46
Notes to Pro Forma Condensed Combined Financial Statements
(unaudited)............................................... F-47
</TABLE>
F-33
<PAGE> 75
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholder of
Trinity Electronics, Inc.
San Jose, California
We have audited the accompanying balance sheet of Trinity Electronics, Inc.
as of December 31, 1996, and the related statements of operations, stockholder's
equity, and cash flows for each of the two years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 Trinity Electronics, Inc. as
of December 31, 1996, and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
New York, New York
March 22, 1998
F-34
<PAGE> 76
TRINITY ELECTRONICS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
[UNAUDITED]
<S> <C> <C>
Current Assets:
Cash...................................................... $ 610,176 $ 850,000
Accounts Receivable -- [Net of Allowance for Doubtful
Accounts of $10,398 and $4,398]........................ 296,854 196,081
Inventory................................................. 443,392 414,389
Prepaid Expenses and Other Current Assets................. 9,062 5,181
Advance -- Related Party.................................. -- 1,150
---------- ----------
Total Current Assets.............................. 1,359,484 1,466,801
---------- ----------
Property, Plant and Equipment -- Net........................ 13,829 18,359
---------- ----------
Total Assets...................................... $1,373,313 $1,485,160
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts Payable and Accrued Expenses..................... $ 189,709 $ 180,497
Due to Stockholder........................................ 19,972 45,246
Accrued Profit-Sharing.................................... 39,492 51,365
Dividend Payable -- Stockholder........................... 441,694 --
Note Payable -- Related Party -- Current Portion.......... 5,359 4,384
---------- ----------
Total Current Liabilities......................... 696,226 281,492
Long-Term Liability:
Note Payable -- Related Party -- Net of Current Portion... 6,246 9,740
---------- ----------
Total Liabilities................................. 702,472 291,232
Commitments and Contingencies............................... -- --
Stockholder's Equity:
Common Stock, No Par Value, 100,000 Shares Authorized,
15,000 Shares Issued and Outstanding................... 51,184 51,184
Retained Earnings......................................... 619,657 1,142,744
---------- ----------
Total Stockholder's Equity........................ 670,841 1,193,928
---------- ----------
Total Liabilities and Stockholder's Equity........ $1,373,313 $1,485,160
========== ==========
</TABLE>
See Notes to Financial Statements.
F-35
<PAGE> 77
TRINITY ELECTRONICS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------- -----------------------
1997 1996 1996 1995
----------- ----------- ---------- ----------
[UNAUDITED] [UNAUDITED]
<S> <C> <C> <C> <C>
Sales -- Net.................................... $3,309,654 $2,817,191 $3,628,465 $3,574,704
Cost of Goods Sold.............................. 2,010,177 1,731,692 2,244,173 2,296,536
---------- ---------- ---------- ----------
Gross Profit.................................. 1,299,477 1,085,499 1,384,292 1,278,168
Operating Expenses:
Officer's Salary.............................. 110,000 390,000 520,000 424,000
Other Salaries and Wages...................... 291,340 227,648 312,252 269,969
Other Expenses................................ 220,779 177,313 233,939 209,186
---------- ---------- ---------- ----------
Total Operating Expenses.............. 622,119 794,961 1,066,191 903,155
---------- ---------- ---------- ----------
Income from Operations.......................... 677,358 290,538 318,101 375,013
Other Income [Expense]:
Interest Income............................... 5,160 16,437 23,506 13,637
Interest Expense -- Related Party............. (533) (886) (1,145) (1,421)
---------- ---------- ---------- ----------
Total Other Income.................... 4,627 15,551 22,361 12,216
Income Before Provision for Income Taxes........ 681,985 306,089 340,462 387,229
Provision for Income Taxes.................... 6,040 4,440 6,032 5,891
---------- ---------- ---------- ----------
Net Income............................ $ 675,945 $ 301,649 $ 334,430 $ 381,338
========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-36
<PAGE> 78
TRINITY ELECTRONICS, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------- TOTAL
NUMBER OF RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
--------- ------- ---------- -------------
<S> <C> <C> <C> <C>
Balance -- December 31, 1994....................... 15,000 $51,184 $ 509,092 $ 560,276
Net Income for the Year Ended December 31, 1995.... -- -- 381,338 381,338
Dividends Paid..................................... -- -- (17,269) (17,269)
Balance -- December 31, 1995....................... 15,000 51,184 873,161 924,345
Net Income for the Year Ended December 31, 1996.... -- -- 334,430 334,430
Dividends Paid..................................... -- -- (64,847) (64,847)
Balance -- December 31, 1996....................... 15,000 51,184 1,142,744 1,193,928
Net Income for the Nine Months Ended September 30,
1997 [Unaudited]................................. -- -- 675,945 675,945
Dividends Paid [Unaudited]......................... -- -- (757,338) (757,338)
Dividends Payable [Unaudited]...................... -- -- (441,694) (441,694)
Balance -- September 30, 1997 [Unaudited].......... 15,000 $51,184 $ 619,657 $ 670,841
</TABLE>
See Notes to Financial Statements.
F-37
<PAGE> 79
TRINITY ELECTRONICS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------------- ---------------------
1997 1996 1996 1995
----------- ----------- -------- ---------
[UNAUDITED] [UNAUDITED]
<S> <C> <C> <C> <C>
Operating Activities:
Net Income................................ $ 675,945 $301,649 $334,430 $ 381,338
Adjustments to Reconcile Net Income to Net
Cash Provided by Operations:
Depreciation.............................. 4,759 4,525 6,036 10,035
Loss on Disposal of Equipment............. 157 -- -- --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable.................... (100,773) 96,112 124,630 (81,224)
Inventory.............................. (29,003) (74,464) (80,550) (71,256)
Prepaid Expenses and Other Assets...... (3,881) (1,588) (2,338) 5,040
Interest Receivable.................... -- (11,914) 8,333 (8,333)
Increase [Decrease] in:
Accounts Payable and Accrued
Expenses............................. (2,549) 290,683 22,394 13,836
Income Taxes Payable................... (112) (2,962) (2,850) 2,962
Due to Related Party................... (25,274) (16,349) (10,031) (2,176)
--------- -------- -------- ---------
Total Adjustments................. (156,676) 284,043 65,624 (131,116)
--------- -------- -------- ---------
Net Cash -- Operating Activities............ 519,269 585,692 400,054 250,222
========= ======== ======== =========
Investing Activities:
Cash Placed on Deposit.................... -- -- -- (300,000)
Repayment of Deposit...................... -- -- 300,000 --
Cash Paid for Equipment................... (386) (10,687) (16,971) (11,455)
Advance to Related Party.................. -- -- (1,150) --
Repayment by Related Party................ 1,150 -- -- --
--------- -------- -------- ---------
Net Cash -- Investing Activities............ 764 (10,687) 281,879 (311,455)
Financing Activities:
Payments of Long-Term Debt................ (2,519) (3,039) (4,088) (3,813)
Dividends Paid............................ (757,338) (64,847) (64,847) (17,269)
Net Cash -- Financing Activities.......... (759,857) (67,886) (68,935) (21,082)
Net [Decrease] Increase in Cash........... (239,824) 507,119 612,998 (82,315)
--------- -------- -------- ---------
Cash -- Beginning of Periods................ 850,000 237,002 237,002 319,317
Cash -- End of Periods.................... $ 610,176 $744,121 $850,000 $ 237,002
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the periods for:
Interest............................... $ 533 $ 886 $ 1,145 $ 1,421
Income Taxes................................ $ 6,152 $ 7,402 $ 8,882 $ 1,420
</TABLE>
Supplemental Schedule of Non-Cash Investing and Financing Activities:
A dividend payable to the sole stockholder, in the amount of $441,694 has been
accrued as of September 30, 1997.
See Notes to Financial Statements.
F-38
<PAGE> 80
TRINITY ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
Trinity Electronics, Inc. [the "Company"] was incorporated October 6, 1989.
The Company's revenues are predominantly generated from purchase and
distribution of board level components including capacitors, resistors, board to
board interconnects and back plane interconnects. The Company also provides
cable assembly services to its customers. The Company sells primarily to
original equipment manufacturers and contract manufacturers located in northern
California.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents -- Cash equivalents are comprised of certain
highly liquid investments with a maturity of three months or less when
purchased. At September 30, 1997 and December 31, 1996, there were no cash
equivalents.
Allowance for Doubtful Accounts -- The Company has provided for an
allowance for doubtful accounts on the basis of a review for collectibility of
accounts receivable at the end of each financial statement period. The allowance
for doubtful accounts amounted to $10,398 and $4,398 at September 30, 1997 and
December 31, 1996, respectively.
Inventory -- Inventory, which consists of finished goods, is recorded at
the lower of cost or market. Cost is determined using the first-in, first-out
method. Inventory at September 30, 1997 was determined using an estimated gross
profit percentage.
Property, Plant and Equipment and Depreciation -- Property, plant and
equipment is stated at cost. Depreciation is computed utilizing the
straight-line method generally over the estimated useful life of five to seven
years.
Income Taxes -- The Company has elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code. Under those provisions, the Company
does not pay federal corporate income taxes on its taxable income. Instead, the
stockholder is liable for federal income taxes on the Company's taxable income.
The Company is, however, responsible for California state income tax at the rate
of 1.5% of taxable income. Deferred income taxes are not material.
Risk Concentrations -- Financial instruments that potentially subject the
Company to concentrations of credit risk include cash, cash equivalents and
accounts receivable arising from its normal business activities. The Company
places its cash and cash equivalents with high credit quality financial
institutions located in the western United States. The Company periodically has
money in a financial institution 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 $602,315 and $1,201,711 at
September 30, 1997 and December 31, 1996, respectively. The Company does not
require collateral or other security to support financial instruments subject to
credit risk.
Accounts receivable are primarily composed of balances due from customers
in northern California.
Regarding accounts receivable, the Company believes that credit risk is
limited due to the collection history with the Company's customer base. The
Company routinely monitors receivables aging and payments by customers, and
based upon factors surrounding the credit risk of its customers, establishes an
allowance for uncollectible accounts and, as a consequence, believes that its
accounts receivable credit risk exposure beyond such allowance is limited. Such
assessment may be subject to change in the near term.
Advertising -- The Company expenses advertising costs as incurred. Total
advertising costs charged to expense amounted to $2,477, $3,055, $2,410 and
$1,084 for the nine months ended September 30, 1997 and 1996 and the years ended
December 31, 1996 and 1995, respectively.
F-39
<PAGE> 81
TRINITY ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
3. PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Machinery and Equipment.............................. $ 71,293 $ 70,908
Motor Vehicle........................................ -- 20,957
-------- --------
Totals............................................... 71,293 91,865
Less: Accumulated Depreciation....................... (57,464) (73,506)
-------- --------
Totals..................................... $ 13,829 $ 18,359
======== ========
</TABLE>
Depreciation expense amounted to $4,759, $4,525, $6,036 and $10,035 for the
nine months ended September 30, 1997 and 1996 and the years ended December 31,
1996 and 1995, respectively.
4. NOTE PAYABLE -- RELATED PARTY
Note payable, uncollateralized, to the Company's sole stockholder is
payable in monthly installments of $436, including interest of 7.0% per annum.
Payments commenced January 15, 1995. Maturities of this debt at December 31,
1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
<S> <C>
1997............................................. $ 4,384
1998............................................. 4,700
1999............................................. 5,040
-------
Total.................................... $14,124
=======
</TABLE>
Interest expense amounted to $533, $886, $1,145 and $1,421 for the nine
months ended September 30, 1997 and 1996 and the years ended December 31, 1996
and 1995, respectively.
5. RELATED PARTY TRANSACTIONS
The Company had only one stockholder, Mr. P. McQuade, during the periods
covered by these financial statements. Transactions between Mr. P. McQuade and
the Company included:
[a] Payment of interest and principle on a note payable [See Note 4].
[b] Reimbursement of expenses incurred. The amounts payable at September
30, 1997 and December 31, 1996 were $19,972 and $45,246, respectively
[disclosed as "Due to Stockholder"].
F-40
<PAGE> 82
TRINITY ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
The Company had an operating lease on its premises until December 1996.
From then, it occupied its premises on a month-to-month basis only.
Rent expense amounted to $32,319, $25,227, $33,886 and $31,441 for the nine
months ended September 30, 1997 and 1996 and the years ended December 31, 1996
and 1995, respectively.
The Company had no other material commitments or contingent liabilities.
7. EMPLOYEE PROFIT-SHARING PLAN
The Company had an approved defined contribution profit-sharing plan
covering employees that had completed 1,000 hours of service and were actively
employed at the end of the fiscal year. The Company contributed to the plan on a
discretionary basis and each employees' account vested 100% over six years
service. As of October 1, 1997, the plan was terminated as a result of the
acquisition of the Company and accordingly all employees were 100% vested. The
Company contributions charged to expense were $39,492, $38,524, $51,365 and
$41,423 for the nine months ended September 30, 1997 and 1996 and the years
ended December 31, 1996 and 1995, respectively.
8. SUBSEQUENT EVENTS
On December 22, 1997, the Company merged with and into TMCI/Trinity
Acquisition Corp., a wholly owned subsidiary of TMCI Electronics, Inc. ["TMCI"].
The merger agreement is effective as of October 1, 1997. TMCI paid the sole
stockholder 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 extended to April 15, 1998 and
$2,000,000 in common stock of TMCI resulting in the issuance of 404,539 shares
of the common stock of TMCI. 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 stockholder of Trinity and as security for
the performance of the sole stockholder of Trinity of his obligations pursuant
to an Employment Agreement entered into in connection with the merger.
9. UNAUDITED INTERIM STATEMENT
The financial statements as of September 30, 1997 and for the nine months
ended September 30, 1997 and 1996 are unaudited; however, in the opinion of
management all adjustments [consisting solely of normal recurring adjustments]
necessary to make the financial statements not misleading have been made. The
results of the interim periods are not necessarily indicative of the results to
be obtained for a full fiscal year.
10. 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
F-41
<PAGE> 83
TRINITY ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. NEW AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS (CONTINUED)
statements in the initial year of its application. SFAS No. 131 is not expected
to have a material impact on the Company.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
In assessing the fair value of financial instruments, the Company is
required to make assumptions, which are based on estimates of market conditions
and risks existing at that time. For the financial instruments, including cash,
accounts receivable, accounts payable, amounts due to and from related parties,
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.
F-42
<PAGE> 84
TMCI ELECTRONICS, INC.
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
[UNAUDITED]
The following pro forma condensed combined balance sheet as of September
30, 1997 and the condensed combined statements of operations for the nine months
ended September 30, 1997 and the year ended December 31, 1996, give effect to
TMCI Electronics, Inc. and Subsidiaries [the "Company"] acquiring through its
TMCI/Trinity Acquisition Corp. subsidiary, all of the common stock of Trinity
Electronics, Inc. ["Trinity"] for a purchase price of $4,290,000.
The pro forma information is based on the historical financial statements
of the Company and the aforementioned acquired company, giving effect to the
transactions under the purchase method of accounting and the assumptions and
adjustments in the accompanying notes to the pro forma financial statements.
The pro forma balance sheet at September 30, 1997 gives effect to the
transaction as if it occurred on the balance sheet date.
The pro forma statements of operations for the nine months ended September
30, 1997 and for the year ended December 31, 1996, gives effect to these
transactions as if they occurred at the beginning of the respective periods
presented.
The pro forma condensed combined financial statements have been prepared by
the Company's management based upon the historical financial statements of the
Company and Trinity. These pro forma condensed combined financial statements may
not be indicative of the results that actually would have occurred if the
acquisitions had been in effect on the dates indicated. The pro forma condensed
combined financial statements should be read in conjunction with the historical
financial statements and notes contained elsewhere herein, and in the Company"s
registration statement on Form 10-K and the Company's quarterly reports on Form
10-Q.
F-43
<PAGE> 85
TMCI ELECTRONICS, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
[UNAUDITED]
ASSETS
<TABLE>
<CAPTION>
HISTORICALS
------------------------
TMCI PRO FORMA PRO FORMA
----------- ---------- -----------
<S> <C> <C> <C> <C>
Current Assets:
Cash...................................... $ 112,076 $ 610,176 $ (461,666)[3] $ 260,586
Accounts Receivable [Net]................. 5,260,122 296,854 -- 5,556,976
Inventory................................. 7,938,699 443,392 -- 8,382,091
Deferred Income Taxes..................... 68,748 -- -- 68,748
Prepaid Expenses and Other Current
assets.................................. 523,856 9,062 (6,219)[1] 526,699
Notes Receivable - Stockholders........... 204,197 -- -- 204,197
----------- ---------- ---------- -----------
Total Current Assets............ 14,107,698 1,359,484 (467,885) 14,999,297
Property and Equipment [Net].............. 5,381,313 13,829 36,171[1] 5,431,313
OTHER ASSETS:
Due from Stockholders and Related Party... 699,148 -- -- 699,148
Other Assets.............................. 22,895 -- -- 22,895
Goodwill.................................. 2,797,324 -- 3,583,000 6,380,324
----------- ---------- ---------- -----------
Total Other Assets.............. 3,519,367 -- 3,583,000 7,102,367
----------- ---------- ---------- -----------
Total Assets.................... $23,008,378 $1,373,313 $3,151,286 $27,532,977
=========== ========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Accounts Payable and Accrued Expenses..... $ 3,845,085 $ 229,201 $ 39[1] $ 4,074,325
Notes Payable and Capital Lease
Obligation -- Current Portion........... 4,145,112 5,359 2,290,000[4] 6,440,471
Due to Affiliate.......................... 27,503 461,666 (461,666)[3] 27,503
----------- ---------- ---------- -----------
Total Current Liabilities....... 8,017,700 696,226 1,828,373 10,542,299
----------- ---------- ---------- -----------
Long-Term Liabilities:
Notes Payable and Capital Lease
Obligation -- Net of Current Portion.... 4,184,419 6,246 (6,246)[1] 4,184,419
Deferred Income Taxes..................... 556,973 -- -- 556,973
----------- ---------- ---------- -----------
Total Long-Term Liabilities..... 4,741,392 6,246 (6,246) 4,741,392
----------- ---------- ---------- -----------
Total Liabilities............... 12,759,092 702,472 1,822,127 15,283,691
Stockholders' Equity...................... 10,249,286 670,841 1,329,159[2,4] 12,249,286
----------- ---------- ---------- -----------
Total Liabilities and
Stockholders' Equity.......... $23,008,378 $1,373,313 $3,151,286 $27,532,977
=========== ========== ========== ===========
</TABLE>
See Notes to Pro Forma Condensed Combined Financial Statements.
F-44
<PAGE> 86
TMCI ELECTRONICS, INC.
PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997.
[UNAUDITED]
<TABLE>
<CAPTION>
HISTORICALS
------------------------
TMCI PRO FORMA ADJUSTMENTS PRO FORMA
----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Sales....................... $27,773,034 $3,309,654 $ -- $ -- $31,082,688
Cost of Goods Sold.............. 17,572,573 2,010,177 -- -- 19,582,750
Gross Profit.................. 10,200,461 1,299,477 -- -- 11,499,938
Operating Expenses.............. 7,865,808 622,119 179,000[5] -- 8,666,927
Income From Operations........ 2,334,653 677,358 (179,000) -- 2,833,011
Other Income [Expense].......... (231,282) 4,627 (155,000)[6] -- (381,655)
Income Before Provision for
Income Taxes............... 2,103,371 681,985 (334,000) -- 2,451,356
Provision for Income Taxes...... 792,914 6,040 139,000[7] -- 937,954
Net Income.................... $ 1,310,457 $ 675,945 $(473,000) $ -- $ 1,513,402
Net Income Per Share -
Basic...................... $ .37 $ .39
Net Income Per Share -
Diluted.................... $ .33 $ .36
Weighted Average Shares
Outstanding - Basic........... 3,515,829 3,920,368
Weighted Average Shares
Outstanding - Diluted......... 3,854,791 4,259,330
</TABLE>
See Notes to Pro Forma Condensed Combined Financial Statements.
F-45
<PAGE> 87
TMCI ELECTRONICS, INC.
PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED
DECEMBER 31, 1996
[UNAUDITED]
<TABLE>
<CAPTION>
HISTORICALS
------------------------
TMCI PRO FORMA ADJUSTMENTS PRO FORMA
----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Sales....................... $26,139,828 $3,628,465 $ -- $ -- $29,768,293
Cost of Goods Sold.............. 20,237,746 2,244,173 -- -- 22,481,919
Gross Profit.................. 5,902,082 1,384,292 -- -- 7,286,374
Operating Expenses.............. 5,377,132 1,066,191 238,900[5] -- 6,682,223
Income From Operations........ 524,950 318,101 (238,900) -- 604,151
Other Income [Expense].......... (357,614) 22,361 (206,000)[6] -- (541,253)
Income Before Provision for
Income Taxes............... 167,336 340,462 (444,900) -- 62,898
Provision for Income Taxes...... 18,999 6,032 (40,000) -- (14,969)
Net Income.................... $ 148,337 $ 334,430 $(404,900) $ -- $ 77,867
Net Income Per Share -
Basic...................... $ .05 $ .02
Net Income Per Share -
Diluted.................... $ .05 $ .02
Weighted Average Shares
Outstanding - Basic........... 2,865,445 3,269,984
Weighted Average Shares
Outstanding - Diluted......... 3,197,599 3,602,138
</TABLE>
See Notes to Pro Forma Condensed Combined Financial Statements.
F-46
<PAGE> 88
TMCI ELECTRONICS, INC.
NOTES TO PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
[UNAUDITED]
1. To adjust to market assets acquired and liabilities assumed.
2. To eliminate equity accounts of acquired enterprise in the amount of
$671,000 and record the issuance of common stock.
3. To reflect payment of dividends to stockholder.
4. To record consideration paid of $1,000,000 in cash from draw down of line of
credit, $1,290,000 in promissory notes and issuance of 404,539 shares with a
fair value of $2,000,000 in exchange for all of the common stock of Trinity
which gives rise to goodwill of $3,583,000 calculated as follows:
<TABLE>
<S> <C>
Purchase Price.............................................. $4,290,000
Less:Assets in Excess of Liabilities Acquired -- At Book
Value..................................................... 671,000
Adjustments to Fair Market Value -- Net..................... 36,000
Goodwill.................................................. $3,583,000
</TABLE>
5. To record amortization of goodwill over 15 years utilizing the straight-line
method. Calculated as follows:
<TABLE>
<S> <C>
Goodwill.................................................... $3,583,000
Life........................................................ 15
Annual Amortization......................................... $ 238,900
Nine Month Amortization..................................... $ 179,000
</TABLE>
6. To record interest expense on indebtedness, incurred related to the
acquisition at 9%:
<TABLE>
<S> <C>
Annual...................................................... $206,000
Nine Month Expense.......................................... $155,000
</TABLE>
7. To reflect additional income tax [benefit] expense:
<TABLE>
<S> <C>
Annual...................................................... $(40,000)
Nine Month Expense.......................................... $139,000
</TABLE>
F-47
<PAGE> 89
- ------------------------------------------------------
- ------------------------------------------------------
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.................... 3
Risk Factors.......................... 5
Use of Proceeds....................... 13
Dilution.............................. 13
Price Range of Common Stock and
Dividend Policy..................... 14
Business.............................. 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Management............................ 29
Principal Stockholders................ 33
Certain Transactions.................. 33
Description of Securities............. 35
Plan of Distribution.................. 37
Legal Proceedings..................... 37
Legal Matters......................... 38
Experts............................... 38
Index to Audited Financial
Statements.......................... 39
Report of Independent Auditors........ F-1
Index to Interim Financial
Statements.......................... F-26
Index to Financial Statements......... F-26
Index to Trinity Electronics, Inc..... F-33
- --------------------------------------------
- --------------------------------------------
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
1,956,954 SHARES OF COMMON STOCK
INCLUDING COMMON STOCK ISSUABLE UPON
CONVERSION OF CERTAIN DEBENTURES
AND EXERCISE OF CERTAIN WARRANTS
---------------
300,000 CLASS B WARRANTS
101,564 COMPENSATION WARRANTS
TMCI ELECTRONICS, INC.
PROSPECTUS
JULY , 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 90
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............................. $ 3,160.86
NASD Registration and Filing Fee............................ 1,000
Nasdaq Listing and Filing Fee............................... 19,569.84
Financial Printing.......................................... 8,000
Transfer Agent Fees......................................... -0-
Accounting Fees and Expenses................................ 5,000
Legal Fees and Expenses..................................... 2,500
Blue Sky Fees and Expenses.................................. 5,000
Miscellaneous............................................... 3,000
----------
Total............................................. $47,230.70
==========
</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:
<TABLE>
<S> <C>
(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.
</TABLE>
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.
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
II-1
<PAGE> 91
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.
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.
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<PAGE> 92
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.
On or about April 1, 1998, the Company issued 18,860 shares to Pen
Interconnect, Inc. in connection with a share value guaranty given with respect
to the November, 1996 acquisition and December, 1997 settlement.
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.
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>
<C> <S>
1.0 Non Circumvention and Finder's Fee Agreement.(a)
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.(a)
3.3 Certificate of Secretary for amendment to Bylaws dated
December 22, 1997(a)
3.4 Amendment to the bylaws dated December 22, 1997.(a)
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.(a)
4.3 Securities Purchase Agreement.(c)
4.4 Form of Convertible Debenture.(d)
4.5 Registration Rights Agreement.(c)
5.0 Opinion of Rosenblum, Parish & Isaacs, P.C.(a)
10.0 Employment Agreement, Rolando Loera, dated December 28,
1995.(b)
10.05 Employment Agreement, Edmund Becmer, effective May 1, 1998.
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.(a)
10.5 Touche Manufacturing Company, Inc. Employee Stock Ownership
Plan.(b)
</TABLE>
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<PAGE> 93
<TABLE>
<C> <S>
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.(a)
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.(c)
23.1 Consent of Moore Stephens, P.C.(a)
</TABLE>
- ---------------
<TABLE>
<S> <C>
a. Filed herewith.
b. Incorporated by reference to the Registration Statement on
Form SB-2 (No. 0973) as originally filed with the Securities
and Exchange Commission (the "SEC") on December 29, 1995.
c. Previously filed.
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.
</TABLE>
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;
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<PAGE> 94
(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.
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<PAGE> 95
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 July 16, 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 Chairman, President, Chief July 16, 1998
- ----------------------------------- Executive Officer, Director
Rolando Loera [Principal Executive Officer]
/s/ Edmund Becmer Vice President, Chief Financial July 16, 1998
- ----------------------------------- Officer [Principal Financial
Edmund Becmer Officer]
/s/ Charles E. Shaw Vice President, Corporate July 16, 1998
- ----------------------------------- Development, Director
Charles E. Shaw
/s/ Robert Loera Controller, Secretary, Director July 16, 1998
- ----------------------------------- [Principal Accounting Officer]
Robert Loera
/s/ Thomas F. Chaffin Director July 16, 1998
- -----------------------------------
Thomas F. Chaffin
/s/ Robert C. Fink Director July 16, 1998
- -----------------------------------
Robert C. Fink
/s/ Boris Lipkin Director July 16, 1998
- -----------------------------------
Boris Lipkin
</TABLE>
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<PAGE> 96
INDEX TO EXHIBITS
<TABLE>
<C> <S>
1.0 Non Circumvention and Finder's Fee Agreement.(a)
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.(a)
3.3 Certificate of Secretary for Amendment to Bylaws dated
December 22, 1997(a)
3.4 Amendment to the bylaws dated December 22, 1997.(a)
4.0 Specimen Copy of Common Stock Certificate.(b)
4.1 Form of Class B Warrant Agreement.(b)
4.2 Form of Compensation Warrant Agreement.(a)
4.3 Securities Purchase Agreement.(c)
4.4 Form of Convertible Debenture.(d)
4.5 Registration Rights Agreement.(c)
5.0 Opinion of Rosenblum, Parish & Isaacs, P.C.(a)
10.0 Employment Agreement, Rolando Loera, dated December 28,
1995.(b)
10.05 Employment Agreement, Edmund Becmer, effective May 1, 1998.
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.(a)
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.(a)
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.(c)
23.1 Consent of Moore Stephens, P.C.(a)
</TABLE>
- ---------------
<TABLE>
<S> <C>
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. Previously filed.
</TABLE>
<PAGE> 97
<TABLE>
<S> <C>
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.
</TABLE>
<PAGE> 1
Exhibit 1.0
NON-CIRCUMVENTION AND FINDER'S FEE AGREEMENT
This Non Circumvention and Finder's Fee Agreement (this "Agreement") is made
this day of September, 1997, (Effective Date").
BETWEEN:
TMCI Electronics, Inc. and Its Subsidiaries
AND
M.J. Segal & Company, Inc. / PRIVATE INVESTORS EQUITY GROUP (SIPC)
WITNESSETH:
WHEREAS THE PARTIES HERETO AGREE AND COVENANT AS FOLLOWS:
1. Engagement. TMCI Electronics, Inc., agrees to engage PRIVATE INVESTORS
EQUITY GROUP (SIPC) a member of the National Association of Securities Dealers
(NASD) and M.J. Segal & Company, Inc., hereinafter collectively referred to as
"MJS", as a finder for the purpose of locating investment capital for TMCI
Electronics, Inc., and its subsidiaries herein after collectively referred to as
"TMEI".
2. Non Disclosure. "MJS" agrees to abide by the terms of that certain Non
Disclosure Agreement in the form attached hereto as Exhibit "A".
3. Non Circumvention.
<PAGE> 2
The parties recognize that names of Prospects as defined in Section 6 of
this Agreement are confidential and are the exclusive property of "MJS". "TMEI"
will not enter into any agreements nor any direct or indirect negotiations or
transactions (excluding negotiations or transactions conducted through "MJS"
with such Prospects, their employees, officers, directors, or affiliates,
thereof without the specific written approval of "MJS" for a period of two years
following the Effective Date. "TMEI" will not circumvent to attempt to
circumvent "MJS" the transactions with Prospects contemplated by this Agreement.
4. Warranties.
a. "TMEI" warrants and represents to "MJS" that in connection with the
sale of securities contemplated by this Agreement, it will not make any written
or oral communications which include an untrue statement of material fact or
omit to state a material fact necessary in order to make the statements made, in
light of the circumstances which they were made, not misleading.
b. "MJS" warrants and represents that in connection with the sale of
securities contemplated by this Agreement, it will not make any written or oral
communication which include an untrue statement of material fact or omit to
state a material fact necessary in order to make the statements made, in light
if the circumstances under which they were made, not misleading, has or will
obtain all necessary Broker Dealer licenses necessary to fulfill its obligations
under this Agreement and will not otherwise violate the federal securities law
or any other laws in fulfilling its obligations under this Agreement; provided,
however that "MJS" shall not be responsible for Blue Sky filings required to be
made by "TMEI" as a result of the transactions contemplated by this Agreement.
5. Indemnification.
a. "TMEI" will indemnify "MJS", "MJS"'s officers, directors, partners
and each person controlling "MJS" within the meaning of Section of the
Securities Act of 1933, as amended, against all expenses, losses, damages, or
liabilities (or actions in respect thereof)
2
<PAGE> 3
incurred in settlement of any litigation, commences or threatened arising out of
or based on any breach or alleged breach of the warranty contained in Section
4.a. "TMEI" will reimburse "MJS", its officers and directors and each person
controlling "MJS" for any legal and any other expenses reasonable incurred as
such expenses are incurred in connection with investigating, preparing or
defending of any such claim loss damage liability or action.
With regard to any violation or alleged violations of any federal or state
securities laws of "TMEI" or any breach of the warranty of "TMEI" is set forth
in Section 4.1 f this Agreement, "TMEI" shall indemnify and defend "MJS" to the
extent it is s party to any threatened, pending or completed action suit or
proceeding by reason of the fact that it has acted as a finder for "TMEI"
provided however that "TMEI" shall not be required to indemnify or defend "MJS"
for any action or threatened action arising out of the breach of the warranty by
"MJS" contained in Section 4.b. hereof.
b. "MJS" will indemnify "TMEI". Each of its directors, officers,
employees, each person who controls "TMEI" within the meaning of Section 15 of
the Securities Act of 1933 as amended against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or abased on any
breach or alleged breach of the warranty contained in Section4.b. "MJS" will
reimburse "TMEI" such directors, officers, persons or control persons for any
legal or any other expenses reasonable incurred as such expenses are incurred in
connections with investigating or defending any such claim, loss, damage,
liability, or action provided, however that "MJS" shall not be required to
indemnify or defend "TMEI" for any action or threatened action arising out of
the breach of the warranty by "TMEI" contained in Section 4.a. hereof.
c. Each party entitled to indemnification under this Section (the
"INDEMNIFIED PARTY") shall give notice to the party required to provide
indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity any be sought, and shall
permit the Indemnifying Party to assume the sole and entire defense of any such
claim or any litigation resulting therefrom provided that counsel for the
3
<PAGE> 4
Indemnifying Party who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its obligations under this Agreement
unless the failure to give such notices is materially prejudicial to an
indemnifying Party's ability to defend such action an provide further , that the
Indemnifying Party shall not assume the defense for matters as to which there is
a conflict of interest. The indemnified Party shall cooperate in defense of the
claim in any manner reasonably requested by the Indemnifying Party. No
Indemnifying Party consent to entry of any judgment or renter into any
settlement which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such Indemnified Party of a release form all
liability in respect to such claim or litigation.
d. Notwithstanding any provisions to the contrary, the duties to
reimburse for any legal expense reasonably incurred in connection with
investigating, preparing, or defending of any such claim, loss, damage,
liability, or action provided for this Section shall only apply (i) to the
extent the Indemnifying Party is precluded form assuming the defense is due to a
conflict of interest described above or (ii) if the Indemnifying Party has
failed to assume the defense of the Indemnified Party.
6. Prospects.
a. "MJS" shall submit in writing to "TMEI" the names of up to one
hundred fifty (150) proposed investors that it desires to approach on behalf of
"TMEI". It is intended that the investors are not major investment bankers who
are readily accessible to "TMEI". Thus for example "MJS" will not be permitted
to identify Merrill Lynch or Morgan Stanley as proposed investors. It is
contemplated the names will not be submitted at one time, but rather is a series
of writings, In the event that "TMEI" has had prior discussions are both active
an reasonably documented at the time "TMEI" recovers the foregoing notice with
respect to such potential investors, then "TMEI" shall notify "MJS" in writing
of such prior contact within three business days of receipt of the foregoing
notice an such notice shall contain reasonable documentation of the pre-existing
discussions. Unless such notice is sent, potential investors submitted to "TMEI"
4
<PAGE> 5
by "MJS" shall be considered prospects ("Prospects") for proposes of this
Agreement. "MJS" shall not make a definitive presentation or discuss "TMEI" in
any material manner until a proposed investor becomes a Prospect. "TMEI"
reserves the right to accept of reject a subscription to purchase securities
from a Prospect if acceptance of such subscription would violate any law,
provided, however that in the event "TMEI" rejects a subscription "TMEI" shall
obtain an opinion of counsel "TMEI" indicating that acceptance if such
subscription would violate the law, specifying the laws which would be violated.
7. Investment Capital and Compensation.
a. With regard to the services of "MJS" as a finder in connection with
raising cash proceeds (all such cash proceeds hereinafter "Investment Capital")
for "TMEI" from the sales of securities or other financial instrument,
including, but not limited to, debt instruments (excluding subordinated debt) to
a Prospect, "MJS" shall receive a finder's fee in the form of cash, Common Stock
of "TMEI" and warrants to purchase Common Stock of "TMEI", paid by "TMEI" at the
time of any closing based upon the formula set forth in paragraph 7.b.(i)-(iii).
This formula shall be applied to the cumulative, aggregate Investment Capital
delivered to "TMEI" by, or on behalf of, Prospects for two years from the
Effective Date. With respect to investment Capital received upon the exercise of
warrants. "MJS" shall be entitled to receive compensation hereunder thorough the
expiration date of the warrants.
b. For the Investment Capital raised from the sale of securities or
other financial instruments, excluding both subordinated debt and exercise of
warrants to purchase Common Stock, "MJS" shall receive the following
compensation.
(i) In cash "MJS" shall receive:
2% of the first $1,200,000 of Investment Capital; plus
6% of the amount of Investment Capital between $1,100,000 and
$2,200,000; plus
8% of the amount of Investment Capital between $2,200,000 and
$5,000,000; plus
10% of all amounts Investment Capital over $5,000,000
5
<PAGE> 6
Further, if "MJS" provides at least $9,900,000 of Investment Capital by the
Closing Date specified in the Term Sheet attached hereto as Exhibit B (the
"Closing Date"), then "MJS" shall receive a non-accountable expense allowance of
2% of the Investment Capital raised.
(ii) In addition to he foregoing cash compensation, upon the closing of
each transaction providing Investment Capital, excluding both subordinated debt
and the exercise of warrants to purchase Common Stock, ""MJS"" shall be entitled
to an amount of Common Stock of "TMEI" equal to 5% of the Investment Capital
raised on the particular transaction divided by the average of the closing bud
and ask prices for "TMEI" Common Stock on the five trading days immediately
prior to the closing of the sale of the securities or other financial
instruments (the Fair Market Value); provided, however that in the event that
the security or other financial is convertible into common stock of "TMEI" then
"MJS" shall be entitled to am amount of common stock equal to 5% of the
investment capital raised in the transaction divided by the conversion price
stated in the security or other financial instrument.
(iii) In addition to the cash and Common Stock described above to be
received upon the closing of a transaction providing Investment Capital,
excluding both subordinated debt and the exercise of warrants, "MJS" shall
receive the number of warrants to purchase Common Stick equal to 10% of the sum
of (a) the number of shares of Common Stock sold in the transaction; or (b) the
number of shares of Common Stock issuable upon the conversion based upon the
stated conversion of any debenture or other instrument issued in exchange for
the Investment Capital. Any warrants issued pursuant to this Subsection 7.b(iii)
shall have an exercise price of 125% of the average of the bid and asked price
for "TMEI" over the five trading days prior to closing of the transaction
pursuant to which the warrants are issued, shall be non callable, and shall
expire three (3) years from the date of their issuance.
c. In the event that a Prospect exercises a warrant issued in connection
with Investment Capital raised for "TMEI" then "MJS" shall be entitled to (I) a
cash fee 4% of the
6
<PAGE> 7
Investment Capital from such; (ii) Common Stock equal 5% of the number of shares
issued upon such exercise; compensation fort the exercise for the exercise of
warrants shall not apply to warrants by "MJS" and shall terminate three years
from the date of their issuance. Any warrants issued pursuant to this subsection
7.c. shall have an exercise price of 125% of the average of the bid and asked
price for "TMEI" over the five trading priors to the closing of the transaction
pursuant to which the warrants are issued, shall be non callable, and shall
expire three (3) years from the date of their issuance.
8. Escrow AccountAn escrow account, to be administered by financial
institution with at least $100,000,000 in assets, will be established to receive
investor's funds and provide for the orderly disbursement of funds, finder's
fees, and securities at the initial closing and/or subsequent closings. The
parties agree to share equally the costs of administering the escrow provided,
however, that in the event the cost of an escrow exceeds $1,000, then, "TMEI"
will pay all costs in excess of $2,000 without any contribution from "MJS".
"TMEI" agrees to provide written notification to the Escrow Agent to disburse
finder's fees to "MJS" in accordance with this Agreement.
All fees, costs, expense and remuneration of "MJS" will be paid and payable only
out of funds deposited into escrow at such time as the transaction closed and
funds are dispersed to TMCI. In the event that securities or other financial
instruments are to be delivered to "MJS" at the closing of an investment
transaction, they shall be deposited into escrow prior to such closing. It is
expressly contemplated that multiple closings will take place under this
Agreement and that at each closing "MJS" shall receive all cash fees and
securities, due to it for such investment capital as is raised in the
transaction then being closed.
9. Resale Restrictions. "MJS" agrees not to sell any Common Stock of "TMEI"
that it receive pursuant tot his Agreement whether directly or as a result of
the exercise of conversion of any security for a periods of twelve months
following the receipt of such Common Stock. For purposes of this provision for
Common Stock to be received upon the exercise or conversion of
7
<PAGE> 8
options, warrants, rights, debenture, or other derivative securities, the twelve
month holding period shall commence upon receipt of the security which may e
exercised for or converted into Common Stock.
10. Registration Rights.
a. At such time as "TMEI" prepares a registration statement for filing
with the Securities and Exchange Commission for any Common Stock issued or to be
issued in connection with he transaction contemplated b Exhibit B (Term Sheet)
attached hereto hem "TMEI" shall use its best efforts to register any of its
securities held by "MJS".
b. Except as provided on Section 10.a., if (but without any obligation
to do so) "TMEI" proposes to register any of its stock or other securities under
the Federal Securities Act of 1933, as amended, ("Act") in connection with the
public offering of such securities solely for cash (other than (i) a
registration relating solely to the sale of securities to employees of "TMEI"
pursuant to a stock option, stock purchase or similar plan, (ii) a registration
of any form which does not include substantially the same information as would
be required to be included in a registration statement covering the sale of
Common Stock, or (iii) a registration relating solely to Securities and Exchange
Commission Rule 145), "TMEI" shall each such time,
(1) promptly give "MJS" written notice of such registration; and
(2) include in such registration and in any underwriting involved
therein any of the common Stock of "TMEI" held by "MJS" specified in a written
request or requests of "MJS" made within thirty (30) days after such written
notice was given by "TMEI" to "MJS."
c. If the registration of which "TMEI" gives notice pursuant to this
Section is for a registered public offering involving an underwriting, then
"TMEI" shall so advise "MJS" as part of the written notice, In connection with
any offer involving an underwriting of shares initiated by "TMEI" or by other
shareholders of "TMEI" having registration rights, "TMEI" shall but be required
hereunder to include "MJS" Common Stock in such underwritings unless "MJS"
8
<PAGE> 9
accepts the terms of the underwriting as agreed upon between "TMEI" and the
underwriters selected by it, and then only in such quantity as will not, in the
opinion of the underwrited, jeopardize the success of the offering by "TMEI" or
"TMEI" shareholders demanding such registration. If the total amount of
securities that the underwriters reasonable believe compatible with the success
of the offering, then "TMEI" shall be required to include in the offering only
that number of securities pursuant to piggyback registration rights which the
underwriters believe will not jeopardize the success of the offering (the
securities so included pursuant to piggyback registration to be apportioned
among the selling shareholder elected to include in such registration in such
other proportions as shall mutually be agreed to by such selling shareholders.)
Nothing in this section will affect or extend the requirement that "MJS" hold
any common stock of "TMEI" owned buy out for a period of twelve months upon
earlier the receipt of (a) such Common Stock or (b) warrants exercised for the
purchase of such Common Stock, such warrants issued pursuant to Section 7
hereof.
11. Term Sheet. Attached as Exhibit those this Agreements at term sheet
which has been approved by the Board of Directors of "TMEI" which specifies the
amount of capital for which "MJS" is hereby being engaged as a finder and the
primary term thereof.
12. Term and Termination.This Agreement shall terminate in two years from
the Effective Date. Upon termination, all rights and obligations hereunder shall
terminate except Sections 5, 13, 17 and 19 which shall survive termination of
this Agreement, Section 7.c. shall survive until the lapse of the exercise
period for any warrant sold to Prospects in connection with Investment capital,
following the Effective Date.
13. Damages.
a. Failure to Close. In the event that "MJS" places at Lease $1,100,000
into escrow or before October 31, 1997 and "TMEI" refuses to accept the
subscriptions. Then "MJS" shall receive the full compensation specified in
Section 7 if "TMEI"'s refusal to accept such subscription is for reasons beyond
its control. For purposes of this Section, the term "beyond its
9
<PAGE> 10
control" shall be limited to (1) any action be federal, state or regulatory
organization which bars "TMEI" from accepting such subscription; or (2) any
unanticipated material change in he business of "TMEI" which requires updated
disclosure to the Prospect and the Prospect fails to reaffirm the Prospect's
desire to invest after being informed of such material change, provided however,
that in no instance shall any event be considered "beyond the control" of "TMEI"
if such event arises from a breach of a representation or warranty made to
either "MJS" or a Prospect (investor) by "TMEI".
b. Termination of Offering In the event that "TMEI" terminates the
offering at any time after it has received $1,100,000 and before the earlier of
either (1) the day it receives $9,900,000 pursuant to this Agreement or (2) two
years from he Effective Date, the n "MJS" shall receive a non accountable
expense allowance o f 2% of the amount of Investment Capital actually raised for
and accepted by "TMEI" as of the date of the termination of the offering
described in the Term Sheet attached hereto as Exhibit B.
14. Arbitration. Any dispute arising under or pursuant to or affecting the
subject matter of this Agreement shall be submitted for resolution to Judicial
Arbitration and Mediation Services ("JAMS") in the County of Santa Clara,
California. The Parties shall retain the right to a private trial by jury before
a JAMS employee. Such employee shall be a former judge of any court of
California. Such right to trail by jury shall apply only to the extent such
right would apply absent in this Section 13. Discovery and other procedural
matters shall be governed as thought the proceeding were an arbitration. The
purposes of this Section 14 is to provide a mechanism to quickly and
inexpensively resolve all disputes that my arise under this Agreement. Any
judgment upon the award may be confirmed and entered in any court having
jurisdiction thereof, The arbitrators(s) shall be required to, in all
determinations apply California law. Further the arbitrator(s) are afforded the
jurisdiction to provide and order all provisional remedies, including without
limitation, injunctive relief, writs for recovery of possession or such similar
relief as may be necessary to protect the interest of either of the parties or
their property rights. In he event that it is determined that the arbitrators(s)
do not have the jurisdiction to grant those remedies
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<PAGE> 11
conferred upon them by this Provision and requested by the parties, then such
remedies shall be reserved to a court of competent jurisdiction. The parties
shall divide evenly between themselves all reasonably anticipate fees and other
expenses associated with such arbitration, before submitting any such matter
arbitration and each shall make any and all reasonably anticipated payments in
equals proportion to the other part, before submitting any such matter to
arbitration. The parties stipulate that the JAMS employee may be appointed as a
judge pro tempore of the Superior Court of Santa Clara County if required top
carry out the terms of this provision. The arbitrator shall issue findings of
fact and conclusions of law which shall be circulated to the parties prior to
issuance.
15. No Representation or Warranty. This Agreement does not constitute a
representation or warranty that "MJS" will be able to locate sources of capital
for "TMEI" or that such capital will be available on terms set forth in Exhibit
B hereto.
16. Notices. All notices, claims, determinations or other communications
required or permitted to be given hereunder shall be in writing and shall be
given personally, telegraphed, telexed, sent by facsimile transmission or sent
by prepaid air courier or certified, registered or express mail, postage
prepaid. Any such notice shall be deemed to have been given (a) when received,
if delivered in person, telegraphed, telexed, sent facsimile and confirmed in
writing within three (3) Business Days thereafter present by prepaid air courier
or (b) three (3) business days following the mailing thereof, if mailed by
verified first class mail, postage prepaid, return receipt requested, in any
such case as follows (or to such other address or addresses as a party may have
advised the other in the manner provided in this Section 16):
If to the Purchase:
TMCI Electronics, Inc.
1875 Dobbin Drive
San Jose, California 95133
Attention: Rolando Loera, CEO
11
<PAGE> 12
With a copy to:
Rosenblum, Parish & Isaacs
160 West Santa Clara Street, 15th Floor
San Jose, California 95113
Attention: Thomas Chaffin
If to "MJS":
M.J. Segal and Company, Inc.
3603 Dunn Drive, Suite 301
Los Angeles, California 90034
Attention: M.J. Segal, President
17. Amendment. This Agreement may be amended, superseded, cancelled,
renewed, or extended and the terms hereof may be waived only by a written
instrument signed by the parties or in the case of a waiver, by the party
waiving compliance. No delay on the party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof. The rights an remedies of
any parties based upon, arising out of or otherwise in respect of any inaccuracy
in or breach of any representation, warranty covenant or agreement contained in
this Agreement shall in no way be limited by the fact that the act, omission,
occurrence or other state of facts upon which any claim of any such inaccuracy
agreement contained in this Agreement (or in any other agreement the parties as
to which there is no inaccuracy or breach).
18. Governing Law.This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without regard to
principles of conflicts of law.
19. Counterparts. Agreement may be executed by the parties hereto facsimile
transmission in separate counterparts, each of which when so executed and
delivered shall be an original, and all
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<PAGE> 13
such counterparts shall together constitute one and the same instrument. Each
counterpart may constitute a number of copies hereof signed by less than all but
together signed by all of the parties hereto.
20. Severability. If any provision or any portion or provision of this
Agreement or the application of such provision or any portion thereof to any
Person or circumstances, shall be held invalid or unenforceable, the remaining
portion of such provision and the remaining provisions of this Agreement or the
application of such provision or portion of such provision as is held invalid or
unenforceable to persons or circumstances other than those as to which is held
are invalid or unenforceable, shall not affected thereby.
21. Assignment. This agreement is not assignable, by operation of law or
otherwise, with the express written consent of the non-assigning party.
[Remainder of this page left intentionally blank]
# # # #
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<PAGE> 14
Signature Page
SIGNED AND WITNESSED THIS ___ day of ______________, 199________.
WITNESS
ACCEPTED AND AGREED THIS ____ day of ______________, 199________.
TMCI ELECTRONICS, INC.
BY: ___________________________ BY: _______________________
Rolando Loera
It's Chairman/President
and Chief Executive Officer
ACCEPTED AND AGREED THIS ___________ DAY OF ______________, 199__.
M.J. Segal & Company, Inc. PRIVATE INVESTORS EQUITY GROUP
MEMBER OF THE NASD (SPIC)
By: _____________________________ By: ______________________________
M.J. Segal Leonard A. Robbins
Its President Its President
<PAGE> 1
EXHIBIT 3.2
TMCI ELECTRONICS, INC.
CERTIFICATION OF ASSISTANT SECRETARY
RE: AMENDMENT OF BYLAWS
I, the undersigned Thomas F. Chaffin, hereby certify that I am the duly
elected and acting Assistant Secretary of TMCI Electronics, Inc., a Delaware
corporation (the "Company"); and further certify that, pursuant to resolutions
of the Board of Directors of the Company, duly approved and adopted by unanimous
written consent effective April 5, 1996, Section 2.02 of Article II of the
Bylaws of the Company was amended to read in full as follows:
"Section 2.02. Annual Meeting. An annual
meeting of stockholders shall be held either
within or without the State of Delaware, at such
time and place as the Board of Directors may
designate in the call or in a waiver of notice
thereof, on the second Wednesday in May in each
year commencing in 1997 for the purpose of
electing directors and for the transaction of
such other business as may properly be brought
before the meeting."
IN WITNESS WHEREOF, I have subscribed by name and affixed the seal of
this corporation effective April 5, 1996.
________________________________________
Thomas F. Chaffin, Assistant Secretary
2
<PAGE> 1
EXHIBIT 3.3
TMCI ELECTRONICS, INC.
CERTIFICATE OF ASSISTANT SECRETARY
RE: AMENDMENT OF BYLAWS
I, the undersigned Thomas F. Chaffin, hereby certify that I am the duly elected
and acting Assistant Secretary of TMCI Electronics, Inc., a Delaware corporation
(the "Company"); and further certify that, pursuant to resolutions of the Board
of Directors of the Company, duly approved and adopted by unanimous written
consent effective November 11, 1997, Section 3.02 of Article III of the Bylaws
of the Company was amended to read in full as follows:
"Section 3.02. Number. The number of directors
which shall constitute the whole Board shall not
be less than one more than nine and be such as
shall be determined from time to time by the
Board of Directors. Unless and until changed by
the Board of Directors, the number of directors
shall be seven. Directors need not be
stockholders. Any directors may may resign at
any time by giving written notice to the
Corporation; such resignation shall take effect
immediately upon receipt by the Corporation if
no time is specified therein, or at such later
time as such director may specify. The directors
shall be elected at the annual meeting of the
stockholders, except as provided in Section3.03,
and each director shall be elected to serve
until such director's successor has been
elected."
IN WITNESS WHEREOF, I have subscribed by name and affixed the seal of this
corporation effective December 22, 1997.
________________________________________
Thomas F. Chaffin, Assistant Secretary
3
<PAGE> 1
EXHIBIT 3.4
TMCI ELECTRONICS, INC.
CERTIFICATION OF ASSISTANT SECRETARY
RE: AMENDMENT OF BYLAWS
I, the undersigned Thomas F. Chaffin, hereby certify that I am the duly elected
and acting Assistant Secretary of TMCI Electronics, Inc., a Delaware corporation
(the "Company"); and further certify, pursuant to a resolution of the Board of
Directors of the Company, duly approved and adopted by unanimous written consent
effective December 1, 1997, and in accordance with Article II of the Bylaws,
said resolution was subsequently approved by the shareholders at the annual
shareholder meeting of the Company on December 22, 1997, that Section 3.11 of
Article III of the Bylaws of the Company was added to Article III of the bylaws
and reads in full as follows:
Section 3.11. Classified Board of Directors. The directors shall
be divided into three classes with the term of office of one class expiring each
year. Accordingly, Class I directors shall serve until the next annual meeting
of shareholders, Class II directors shall serve until the second succeeding
annual meeting of shareholders and Class III directors shall serve until the
third succeeding annual meeting of shareholders. Thereafter, each director shall
serve until the next election of the class for which such director was chosen."
IN WITNESS WHEREOF, I have subscribed by name and affixed the seal of this
corporation effective December 22, 1997.
________________________________________
Thomas F. Chaffin, Assistant Secretary
4
<PAGE> 1
EXHIBIT 4.2
[ ]WARRANT AGREEMENT
AGREEMENT, dated as of this ____ day of __________, 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, the Company, M.J. Segal & Co., Inc. and Private Investors
Equity Group, Inc. entered into a Non Circumvention and Finders Fee Agreement on
September 22, 1997 (the "Non Circumvention and Finder's Fee Agreement") for,
among other things, warrants to be issued in the event that M.J. Segal & Co.,
Inc. and Private Investors Equity Group, Inc. procured Investment Capital (as
defined in the Non Circumvention and Finder's Fee Agreement);
WHEREAS, in connection with a private offering (the "Offering"), the
parties to the Non Circumvention and Finder's Fee Agreement procured $3,231,250
in Investment Capital through the issuance by the Company of (3) units, each
unit (a "Unit") consisting of four (4) convertible subordinated debentures (the
"Debentures") each in the principal amount of $275,000; 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
issuable pursuant to the terms of the Non Circumvention and Finder's Fee
Agreement, 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 otherwise requires:
a. "Common Stock" shall mean the common stock of the Company of
which at the date hereof consists of 25,000,000 authorized shares, $0.001 par
value per share, and shall also include any capital stock of any class of the
Company thereafter authorized
5
<PAGE> 2
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 8(c) hereof, the 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 [$ ] per share for each Warrant, subject to adjustment from time
to time pursuant to the provisions of Section 8 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. "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.
g. "Transfer Agent" shall mean American Stock Transfer & Trust
Company, as the Company's transfer agent, or its authorized successor, as such.
h. "Warrant Certificate" shall mean a certificate substantially
in the form annexed to this Agreement evidencing one or more Warrants.
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<PAGE> 3
i. "Warrant Expiration Date" shall mean 5:00 P.M. (New York time)
on [ ], 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 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 8.
(b) Upon execution of this Agreement, Warrant Certificates
representing the number of Warrants issued pursuant to the Non-Circumvention and
Finder's Fee Agreement 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 [ ] 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.
7
<PAGE> 4
3. Form and Execution of Warrant Certificates.
(a) The [ ] 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 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.
[ ] Warrant Certificates shall be numbered serially with the letters W[ ]. 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
8
<PAGE> 5
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.
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.
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<PAGE> 6
(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 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
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<PAGE> 7
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.
8. Adjustments Upon Changes in Capital Structure.
(a) Stock Splits and Like Events. If a stock dividend, stock
split or reverse stock split, or reclassification occurs prior to the expiration
or exercise of all or any part of the Warrants, then the aggregate number and/or
class of shares then subject to the Warrants and the exercise price prior to
such occurrence shall be appropriately adjusted by the Company. Such adjustment
shall have the result that if the Registered Holder were to exercise a portion
of the Warrants subsequent to such occurrence, then Registered Holder shall have
paid the same aggregate exercise price to exercise such portion of the Warrant
and shall then hold the same class and aggregate number of shares as if the
Registered Holder had exercised such portion of the Warrant immediately prior to
such occurrence.
(b) 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 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 $0.05 in the Purchase Price then in effect hereunder.
11
<PAGE> 8
9. 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 8 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:
(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.
10. 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
<PAGE> 9
11. 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.
12. 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
(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.
13. 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.
14. 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
13
<PAGE> 10
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.
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.
14
<PAGE> 11
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 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.
15. 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.
15
<PAGE> 12
16. 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
17. 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.
18. 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
16
<PAGE> 13
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.
19. 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.
20. Counterparts. This Agreement may be executed in several
counterparts, which taken together shall constitute a single document.
17
<PAGE> 14
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
18
<PAGE> 15
EXHIBIT A
[Form of Face of Class B Warrant Certificate]
No. [ ] [ ]
VOID AFTER[ ]
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
[ ] 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,
$0.001 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 [ ] (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.
1
<PAGE> 16
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.
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 [ ].
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.
2
<PAGE> 17
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.
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.
3
<PAGE> 18
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
4
<PAGE> 19
[Form of Reverse of Class B Warrant Certificate]
SUBSCRIPTION FORM
To Be Executed by the Registered Holder in Order to Exercise Warrants
THE UNDERSIGNED REGISTERED HOLDER hereby irrevocably elects to exercise
_____ Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in the name of
____________________________________________
(please insert taxpayer identification or other identifying number)
and be delivered to
____________________________________________
____________________________________________
____________________________________________
____________________________________________
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below:
____________________________________________
____________________________________________
____________________________________________
(Address)
_________________________________
(Date)
_________________________________
(Taxpayer Identification Number)
SIGNATURE GUARANTEED
ASSIGNMENT
5
<PAGE> 20
Fleet Capital Corporation
March 26, 1998
Page 6
To Be Executed by the Registered Holder in Order to Assign Warrants
FOR VALUE RECEIVED, __________________ hereby sells, assigns and
transfers unto
____________________________________________
(please insert taxpayer identification or other identifying number)
____________________________________________
____________________________________________
____________________________________________
____________________________________________
(please print or type name and address)
of the Warrants represented by this Warrant Certificate, and hereby irrevocably
constitutes and appoints _______________________________ Attorney to transfer
this Warrant Certificate on the books of the Company, with full power of
substitution in the premises.
_________________________________
(Date)
SIGNATURE GUARANTEED
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OF THE
AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE OR
MIDWEST STOCK EXCHANGE.
6
<PAGE> 21
Fleet Capital Corporation
March 26, 1998
Page 7
Exhibit 10.05
This Employment Agreement (this "Agreement") is hereby entered into effective as
of this ___ day of May, 1998 (the "Effective Date"), by and between TMCI
Electronics, Inc., a Delaware corporation and where the context requires, its
subsidiaries (collectively, the "Employer") and Edmund Becmer ("Becmer")
(collectively the "Parties").
BACKGROUND
A. The Employer wishes to employ Becmer as Vice President and Chief
Financial Officer ("CFO") of the Employer.
B. Becmer wishes to be employed by the Employer as CFO of the Employer.
AGREEMENT
The Parties hereby agree as follows:
ARTICLE I
TERM OF EMPLOYMENT
1.1 Period of Employment. The Employer hereby employs Becmer and Becmer
hereby accepts employment with the Employer for a period of five (5) years,
beginning on _________, 1998, subject to Article VIII.
1.2 Employment Term Defined. As used herein, the phrase the employment
term (the "Employment Term") refers to the entire period of employment of Becmer
by the Employer hereunder, whether for the periods provided above or as extended
by mutual agreement between the parties.
ARTICLE II
DUTIES AND OBLIGATIONS OF Becmer
2.1 General Duties. Becmer shall serve as Chief Financial Officer of the
Employer. In his capacity as Chief Financial Officer, Becmer shall do and
perform all services, acts, or things necessary or advisable as an executive of
the Employer in charge
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<PAGE> 22
Fleet Capital Corporation
March 26, 1998
Page 8
of the financial affairs of the Employer, subject at all times to the policies
set by the Employer's Board of Directors or Chief Executive Officer. Included in
such duties are the following:
Supervise accounting and financial reporting staff; prepare monthly,
quarterly and annual financial statements and reports; supervise SEC reporting
and NASDAQ compliance; monitor and analyze the Company, division, and department
operating budgets; analyze expenses and recommend cost efficiencies; maintain
control and accountability of company assets; development of financial controls,
policies and procedures; cash-planning and management; manage investor
relations; tax planning and compliance; coordinate selection of and relationship
with independent outside auditors; create a review process of accounting methods
and procedures; evaluate acquisitions and other special projects as designated
by Chief Executive Officer.
2.2 Devotion to Employer's Business. Becmer shall devote his entire
professional efforts and full ability, and attention to the business of the
Employer during the Employment Term. Becmer shall not engage in any other duties
or pursuits whatsoever, or directly or indirectly render any services of a
business, commercial, or professional nature to any other person or
organization, whether for compensation or otherwise, without the prior written
consent of the Chief Executive Officer of the Employer. However, the expenditure
of reasonable amounts of time for educational, charitable, or professional
activities, shall not be deemed a breach of the Agreement if those activities do
not materially interfere with the services required under the Agreement.
2.3 Uniqueness of Becmer's Services. Becmer hereby represents and agrees
that the services to be performed under the terms of this contract are of a
special, unique, unusual, extraordinary, and intellectual character that gives
them a peculiar value, the loss of which cannot be reasonably or adequately
compensated in damages in an action at law. Becmer therefore expressly agrees
that the Employer, in addition to any other rights or remedies that the Employer
may possess, shall be entitled to injunctive and other equitable relief to
prevent or remedy a breach of the Agreement by Becmer.
2.4 Confidentiality.
(a) Becmer acknowledges and agrees that during the Employment Term and
in the course of the discharge of Becmer's duties hereunder, Becmer shall have
access to and become acquainted with information concerning the operation and
processes of the Employer, including without limitation, financial, personnel,
sales, scientific, and other
8
<PAGE> 23
Fleet Capital Corporation
March 26, 1998
Page 9
information that is owned by the Employer regularly used in the operation of the
Employer's business and not readily known or available to the public or in
Employer's industry and that such information constitutes the Employer's trade
secrets (the "Trade Secrets").
(b) Becmer specifically agrees that he shall not misuse, misappropriate,
or disclose the Trade Secrets, directly or indirectly, to any other person or
use them in any way, either during the Employment Term or, except as is required
in the course of Becmer's employment hereunder, for one (1) year thereafter.
(c) Becmer acknowledges and agrees that the sale or unauthorized use or
unauthorized disclosure of the Trade Secrets obtained by Becmer during the
course of Becmer's employment under this Agreement, including information
concerning the Employer's current or future and proposed work, services, or
products, the fact that any such work, services, or products are planned, under
consideration, or in production, as well as any descriptions thereof,
constitutes unfair competition, provided such information is not known or
available to the public or generally known in employer's industry. Becmer agrees
not to engage in unfair competition with the Employer, either during the
Employment Term or for one (1) year thereafter.
(d) Becmer further agrees that all files, records, documents, drawings,
specifications, equipment, and similar items relating to the Employer's
business, whether prepared by Becmer or others, are and shall remain exclusively
the property of the Employer and that they shall be removed from the premises of
Employer only with the express prior written consent of the Employer, as
appropriate.
(e) During the Employment Term and for a period of six (6) months
thereafter, in order to enable the Employer and its subsidiaries to maintain
stable work forces and to operate its business, Becmer agrees that he will not
solicit or encourage (nor will he direct or encourage anyone under his authority
or control to solicit or encourage) any of the employees of the Employer or its
subsidiaries to work elsewhere.
ARTICLE III
OBLIGATIONS OF EMPLOYER AND PARENT
3.1 General Description. The Employer shall provide Becmer with the
compensation, incentives, benefits, and business expense reimbursement specified
elsewhere in this Agreement.
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<PAGE> 24
Fleet Capital Corporation
March 26, 1998
Page 10
3.2 Office and Staff. The Employer shall provide Becmer with a private
office, secretarial services, office equipment, supplies, and other facilities
and services, suitable to Becmer's position and adequate for the performance of
his duties as reasonably determined by the Employer's Chief Executive.
ARTICLE IV
COMPENSATION OF BECMER
4.1 Annual Salary. As compensation for the services to be performed
hereunder, Becmer shall receive a salary at the rate of One Hundred Fifty
Thousand Dollars ($150,000) per year, payable biweekly during the Employment
Term. Becmer shall receive annual compensation increases as determined by
Employer's Chief Executive Officer and/or Board of Directors. Becmer's pay shall
commence two (2) weeks prior to the commencement of his full-time duties.
4.2 Bonus. Employer shall pay to Becmer, an annual bonus. Such bonus
shall be paid not later than March 31 of the year following the year to which it
applies. Such bonus shall be determined by Company's Board of Directors based
upon criteria established by Board. During the first year of employment, the
bonus will be determined by the Employer's Chief Executive Officer, in his sole
and absolute discretion
4.3 Tax Withholding. The Employer shall have the right to deduct or
withhold from the compensation due to Becmer hereunder any and all sums required
for federal income and Social Security taxes and all state or local taxes now
applicable or that may be enacted and become applicable in the future.
ARTICLE V
INCENTIVES
5.1 Moving Expenses. The Employer shall pay to Becmer the sum of Ten
Thousand Dollars ($10,000) on the Effective Date of this Agreement as
compensation for moving expenses.
ARTICLE VI
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Fleet Capital Corporation
March 26, 1998
Page 11
BENEFITS
6.1 Annual Vacation. Becmer shall be entitled to three (3) weeks of
vacation time each calendar year with full pay. Vacation shall accrue monthly at
end of each month at the rate of 1/12 of the annual vacation beginning on the
Effective Date. No more than 20 days of unused vacation shall accrue at any
time.
6.2 Illness. Becmer shall be entitled to sick leave with full pay in
accordance with the same terms and conditions given to other employees/senior
management.
6.3 Participation in Parent's Stock Option Plan, Employee Stock
Ownership Plan, and 401(k) Savings Plan. Becmer shall participate in the
Employer's Stock Option Plan, Employee Stock Ownership Plan, 401(k) Savings
Plan, on the same terms and conditions as all other similarly situated employees
or where appropriate as determined by the Employer's Board of Directors in its
sole discretion. The Employer shall issue to Becmer an option to purchase
sixty-five thousand (65,000) shares of its Common Stock pursuant to its 1997
Stock Option Plan on the Effective Date of this Agreement. Such options shall be
issued at the fair market value of Employer's Stock on the trading date closest
to the Effective Date and shall vest 25% on the first anniversary of the
Effective Date and one-third of balance on the second anniversary date of the
Effective Date for the 3 following years, provided employee is employed by
employer on such date.
6.4 Medical, Dental, Disability; Life Insurance. The Employer agrees to
include Becmer and Becmer's spouse and children in the coverage of its medical,
dental, disability, and life insurance.
6.5 Professional Dues; Continuing Legal Education. Employer or its
subsidiaries shall pay reasonable costs of continuing education, association
dues, and other reasonable professional expenses.
6.6 Allowance for Automobile. The Employer shall provide Becmer with an
allowance of Five Hundred Dollars ($500) per month for the purchase or lease,
insurance, and all operating expenses of an automobile of Becmer's choice.
ARTICLE VII
BUSINESS EXPENSES
7.1 Reimbursement of Business Expenses.
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Fleet Capital Corporation
March 26, 1998
Page 12
(a) The Employer shall promptly reimburse Becmer for all reasonable
business expenses incurred by Becmer in connection with the business of the
Employer, including but not limited to travel expenses (including those related
to relocation), temporary lodging, meals and car rental expenses, and the
expense of a cellular telephone, all as subject to the approval of Employer.
(b) Each such expense shall be reimbursable only if Becmer furnishes to
the Employer adequate records and other documentary evidence of the expense, as
required by the Internal Revenue Service.
ARTICLE VIII
TERMINATION OF EMPLOYMENT
8.1 Termination of Employment. This Agreement shall be terminable at the
will of the Employer with or without cause, upon the death or disability of
Becmer, or at the will of Becmer. Upon termination all duties and obligations
under this agreement shall cease, except paragraphs 2.4, 7.1, 8.2, and Article
IX. Disability shall mean an inability to perform the employee's material duties
for 90 consecutive days due to illness, injury, or otherwise.
(a) Cause. Cause shall include:
(i) Theft, embezzlement, fraud, dishonesty,
misappropriation or conversion of funds or property committed against the
Employer; or
(ii) Conduct which constitutes unfair competition with the
Employer or breaches a fiduciary or contractual duty to the Employer.
(iii) Failure to devote all or substantially all of one's
full professional time, attention, energies and abilities to one's employment
for the Employer, which failure is not cured within two (2) weeks after the
Employer has given the Employee written notice of the failure;
(iv) Breach of the terms or conditions of this Agreement,
which breach is not cured within two (2) weeks after the Employer has given the
Employee written notice of the breach;
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Fleet Capital Corporation
March 26, 1998
Page 13
(v) Dereliction of duties, as determined by the Chief
Executive Officer of the Employer in good faith after notice and a reasonable
opportunity to cure; or
(vi) Inducement of any customer, consultant, employee or
supplier of the Employer to breach any contract with the Employer or cease its
business relationship with the Employer.
8.2 Impact of Certain Terminations. In the event that the Employer
terminates Becmer without cause, Becmer shall receive an amount equal to 90 days
salary on the date of such termination, payable biweekly beginning from the
first regularly scheduled pay period after the date of termination and
continuing until all amounts have been paid in full. In addition, if Employer
terminates Becmer without cause, Employer shall pay such expenses actually
incurred by Becmer in relocating to New Jersey; provided however, such
reimbursement shall not exceed $5,000.
ARTICLE IX
GENERAL PROVISIONS
9.1 Notices. All notices, requests, demands and other communications
required or permitted to be given hereunder shall be in writing and shall be
given personally, telegraphed, telexed, sent by facsimile transmission or sent
by prepaid air courier or certified, registered or express mail, postage
prepaid. Any such notice shall be deemed to have been given (a) when received,
if delivered in person, telegraphed, telexed, sent by facsimile transmission and
confirmed in writing within three (3) business days thereafter or sent by
prepaid air courier or (b) three (3) business days following the mailing
thereof, if mailed by certified first class mail, postage prepaid, return
receipt requested, in any such case as follows (or to such other address or
addresses as a party may have advised the other in the manner provided in this
Section 9.1):
If to the Employer:
TMCI Electronics, Inc.
1875 Dobbin Drive
San Jose, California 95133
Attention: Rolando Loera
With a copy to:
13
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Fleet Capital Corporation
March 26, 1998
Page 14
Rosenblum, Parish & Isaacs, P.C.
160 West Santa Clara Street, 15th Floor
San Jose, California 95113
Attention: Thomas F. Chaffin, Esq.
If to Becmer:
Edward Becmer
_____________________________________
_____________________________________
9.2 Entire Agreement. This Agreement contains the entire agreement and
understanding concerning the subject matter hereof between the Parties and
supersedes and replaces all prior negotiations and proposed agreements, written
and oral. Becmer acknowledges that no other party, or any agent or attorney of
any other party has made any promise, representation, or warranty whatsoever,
express or implied, not contained herein, concerning the subject matter hereof,
to induce him to execute this Agreement, and acknowledges that he has not
executed this Agreement in reliance upon any such promise, representation or
warranty not contained herein.
9.3 Modifications. Any modification of this Agreement shall only be
effective if it is in writing and signed by the party to be charged.
9.4 Effect of Waiver. The failure of any party to insist on strict
compliance with any of the terms, covenants, or conditions of the Agreement by
any other party shall not be deemed a waiver of that term, covenant, or
condition, nor shall any waiver or relinquishment of any right or power at any
one time or times be deemed a waiver or relinquishment of that right or power
for all or any other times.
9.5 Partial Invalidity. If any provision of this Agreement is held to be
invalid or unenforceable by a court of competent jurisdiction under a given
circumstance, then the remaining provisions shall remain, nevertheless, in full
force and effect under such circumstance. The Parties agree to renegotiate in
good faith the term held invalid or unenforceable and to be bound by the
mutually agreed substitute provision under such circumstances in order to give
the most approximate effect intended by the Parties. If the parties are unable
to timely agree upon a substitute provision, then the court shall impose a
substitute provision to give such approximate effect.
14
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Fleet Capital Corporation
March 26, 1998
Page 15
9.6 Governing Law. This Agreement shall be governed by, interpreted
under, construed and enforced in accordance with the laws of the State of
California, excluding any choice of law principles which could cause the law of
any other jurisdiction to be applied. The parties agree that any suit or
proceeding in connection with, arising out of or relating to this Agreement
shall be instituted only in a court (whether federal or state) located in San
Jose, California, and the Parties, for the purpose of any such suit or
proceeding, irrevocably submit to the jurisdiction of any such court in any such
suit or proceeding. The Parties hereby agree that service of process may be
effected in the same manner as notice is given pursuant to Section 9.1.
9.7 Arbitration. The Parties agree to negotiate in good faith in an
attempt to resolve any disputes or controversies arising out of or related to or
affecting the subject matter of this Agreement. Any dispute arising out of or
relating to or affecting the subject matter of this Agreement not resolved by
negotiation shall be submitted for resolution to JAMS/Endispute ("JAMS") in San
Jose, California. Such JAMS employee shall be a former judge of any court of
California. Discovery and other procedural matters shall be governed as though
the proceeding were an arbitration. The purpose of this Section 9.7 is to
provide a mechanism to quickly and inexpensively resolve all disputes that may
arise under this Agreement. Any judgment upon the award may be confirmed and
entered in any court having jurisdiction thereof. The arbitrator(s) shall be
required to, in all determinations, apply California law. The arbitrator(s) are
afforded the jurisdiction to order any provisional remedies, including, without
limitation, injunctive relief. The Employer shall pay all reasonably anticipated
fees and other expenses of JAMS associated with such arbitration (excluding
attorneys fees, costs and expenses of Becmer), before submitting any such matter
to arbitration, provided, however, that in the event that Employer is the
prevailing party in such arbitration, the arbitrator shall award the Employer
the costs of arbitration, including reasonable attorneys fees. The Parties
stipulate that the JAMS employee may be appointed as a judge pro tempore of the
Superior Court of Santa Clara County if required to carry out the terms of this
provision.
9.8 Attorneys Fees and Costs. In the event of a judicial proceeding as a
result of this Agreement, the prevailing party shall be entitled to attorney's
fees and costs and other out-of-pocket expenses borne by the prevailing party.
9.9 Counterparts. This Agreement may be executed by facsimile
transmission in counterparts which shall be deemed originals and which together
shall constitute one instrument.
15
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Fleet Capital Corporation
March 26, 1998
Page 16
AUTHORIZED SIGNATURES
For the purpose of binding the Parties to the above Agreement, the
parties or their duly authorized representatives have signed their names below
as of the Effective Date.
The "Employer" "Becmer"
TMCI ELECTRONICS, INC. EDMUND BECMER
_______________________ _______________________
ROLANDO LOERA, EDMUND BECMER
CHIEF EXECUTIVE OFFICER
16
<PAGE> 1
July 16, 1998
EXHIBIT 5.0
TMCI Electronics, Inc.
1875 Dobbin Drive
San Jose, CA 95133
Re: Registration Statement 333-52171 on Form S-1
Ladies and Gentlemen:
We refer to Pre-Effective Amendment No. 1 to Registration Statement No.
333-52171 (the "Registration Statement") being filed concurrently by TMCI
Electronics, Inc., a Delaware corporation (the "Company") with the Securities
and Exchange Commission under the Securities Act of 1933, as amended (the
"Act"). The Registration Statement pertains to shares of the Company's $0.001
par value common stock (the "Common Stock") and to certain warrants to purchase
Common Stock (the "Warrants").
There are three classes of Warrants being registered, Class B Warrants,
Class C Warrants (referred to as "Fee Warrants" in the Registration Statement),
and Class D Warrants (referred to as "Exercise Warrants" in the Registration
Statement). None of the Class B, Class C, and Class D Warrants have been issued
to date. The shares of Common Stock issuable upon exercise of the Warrants (the
"Underlying Warrant Shares") are being registered as well. The Registration
Statement pertains to a total of 300,000 Class B Warrants, 72,189 Class C
Warrants, 29,375 Class D Warrants, and 401,564 Underlying Shares. We note that
the Underlying Shares may be resold either by the selling security holders
described in the Registration Statement or by the Company in the event that the
selling security holders choose to sell the Warrants.
Of the Common Stock being registered other than the Underlying Shares,
404,539 shares (the "Merger Shares") are currently outstanding, having been
issued in connection with the Company's acquisition of Trinity Electronics, Inc
("Trinity"), a California corporation. The balance of the Common Stock being
registered, a total of 1,150,851 shares (the "Future Shares") has not been
issued as of this date. All of the shares of Common Stock being registered
are being registered for resale by their holders rather than by the Company.
We serve as outside legal counsel to the Company and in such capacity we
have examined the following documents and records:
1. The Company's certificate of incorporation as amended through this
date;
2. The Company's bylaws as amended to date;
3. Board Actions dated September 22, 1997, and January 30, 1998;
4. Certificate of Assistant Secretary regarding the foregoing;
5. Form of Common Stock Certificate;
6. Forms of agreements covering the Class B and Class C Warrants; and
7. The October 1, 1997, Merger Agreement and Plan of Reorganization
covering the merger of Trinity into a wholly-owned subsidiary of the
Company.
We have assumed for the purposes of this opinion that the signatures on
documents and instruments examined by us are authentic, that each document is
what it purports to be, and that
<PAGE> 2
all documents submitted to us as copies conform with the originals, which facts
we have not independently verified.
This opinion relates solely to the laws of the State of California and
the federal law of the United States, and we express no opinion with respect to
the effect or application of any other laws. Special rulings of authorities
administering such laws or opinions of other counsel have not been sought or
obtained.
This Opinion Letter is governed by, and to be interpreted in accordance
with, the Legal Opinion Accord of the ABA Section of Business Law (the
"Accord"). As a consequence, it is subject to a number of qualifications
(including, without limitation, and with respect to each opinion rendered below,
the "General Qualifications" as defined in the Accord), exceptions, definitions,
limitations on coverage, and other limitations, all as more particularly
described in the Accord, and should be read in conjunction with the Accord. This
Opinion Letter also is governed by, and to be interpreted in accordance with,
the "California Provisions" and the "California Generic Exception," as defined
in The Business Law Section of the State Bar of California Report on the
Third-Party Legal Opinion Report of the ABA Section of Business Law (the
"California Report"), and is therefore subject to a number of additional
qualifications, exceptions and understandings, all as more particularly
described in the California Report, and should be read in conjunction with the
California Report.
Based upon our examination of and in reliance upon the foregoing and
subject to the limitations set forth below, we are of the opinion that as of the
date hereof:
1. The Warrants, when issued for the consideration and in the manner described
in the Registration Statement, will be legally issued.
2. The Merger Shares are legally issued, fully paid, and non-assessable.
3. The Future Shares and Underlying Shares, when issued for the consideration
and in the manner described in the Registration Statement, will be legally
issued, fully paid, and non-assessable.
This opinion is rendered solely in connection with the Registration
Statement and may not be used for other purposes. We hereby consent to the
filing of this opinion as Exhibit 5 to the Registration Statement and to the
reference to this firm under the heading "Legal Maters" in the Prospectus
contained therein. This consent is not to be construed as an admission that we
are a person whose consent is required to be filed with the Registration
Statement under the provisions of Section 7 of the Act.
Rosenblum, Parish & Isaacs, P.C.
By /s/ Rosenblum, Parish & Isaacs
--------------------------------
Member of the Firm
<PAGE> 1
EXHIBIT 10.4
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL / COMMERCIAL SINGLE-TENANT LEASE - NET
(Do not use this form for Multi-Tenant property)
1. BASIC PROVISIONS ("BASIC PROVISIONS")
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only,
August 29 , 1997, is made by and between FLOWSERVE CORPORATION, A New York
corporation ("LESSOR") AND ENTERPRISE INDUSTRIES, INC., a California Corporation
("LESSEE"), (collectively the "PARTIES," or individually a "PARTY").
1.2 Premises: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known by the street address of 7500 Tyrone Avenue, Van Nuys , located in the
County of Los Angeles , State of California , and generally described as
(described briefly the nature of the property) approximately 126,152 square feet
of building and improvement located on approximately 330,184 square feet of land
"PREMISES"). (See Paragraph 2 for further provisions.)
1.3 TERM: 12 Years and -n- months ("ORIGINAL TERM") commencing September
1, 1997 ("Commencement Date") and ending August 31, 2009 ("Expiration Date").
(See Paragraph 3 for further provisions.)
1.4 EARLY POSSESSION: any time prior to September 1, 1997 ("EARLY
POSSESSION DATE"). (See Paragraphs 3.2 and 3.3 for further provisions.)
1.5 BASE RENT: $ 40,000 per month ("BASE RENT"), payable on the 1st day
of each month commencing September 1, 1997, except that rent for September, 1997
shall be pro rated based on the actual date occupancy commences (See Addendum
Paragraphs) (See Paragraph 4 for further provisions.)
[ ] If this box is checked, there are provisions in the Lease for the Base Rent
to be adjusted.
1.6 BASE RENT PAID UPON EXECUTION: $ -0- . as Base Rent for the period.
1.7 SECURITY DEPOSIT: $______ ("SECURITY DEPOSIT").(See Paragraph 5 for
further provisions).
1.8 PERMITTED USE:any lawful use (See Paragraph 6 for further
provisions).
1.9 INSURING PARTY: Lessor is the "INSURING PARTY" unless otherwise
stated herein.(See Paragraph 8 for further provisions.) (See Addendum
Paragraphs)
1.10 REAL ESTATE BROKERS: The following real estate brokers
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
<PAGE> 2
Fleet Capital Corporation
March 26, 1998
Page 18
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represents
[ ] Lessor exclusively ("LESSOR'S BROKER"); [ ] both Lessor and Lessee, and
Tony Magnone
represents
[ ] Lessee exclusively ("LESSEE'S BROKER"); [X] both Lessee and Lessor.
(See Paragraph 15 for further provisions.)
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed by ________ ("GUARANTOR"). (See Paragraph 37 for further provisions.)
1.12 ADDENDA. Attached hereto is and Addendum or Addenda consisting of
Paragraphs 1 through 18 and Exhibits A & B all of which constitute a part of
this Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby Leases to Lessee, and Lessee hereby Leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set for in this Lease. Unless otherwise provided
herein, any statement of square footage set forth in the Lease , or that may
have been used in calculating rental, is an approximation which Lessor and
Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 CONDITION. Lessor shall deliver the Premise to Lessee clean and free
of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, fire sprinkler system,. lighting, air conditioning, heating, and
loading doors, if any, in the Premises, other than those constructed by Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within thirty
(30) days after the Commencement Date, correction of that non-compliance shall
be the obligation of the Lessee at Lessee's sole cost and expense. (See Addendum
Paragraph)
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor
warrants to Lessee that the improvements on the Premises comply with all
applicable covenants or restrictions of record and applicable building codes,
regulations and ordinances in effect on the Commencement Date. Said warranty
does not apply to the use to which Lessee will put the Premises or to any
Alterations or Utility Installations (as defined on Paragraph 7.3(a)) made or to
be made by Lessee. If the Premises do not comply with said warranty, Lessor
shall, except as otherwise provided in the Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify the same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within six (6)
months following the Commencement Date, correction of that non-compliance shall
be the obligation of Lessee at Lessee sole cost and expense.
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that is has
been advised by the Brokers to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable Law, as
defined in Paragraph 6.3) and the present and future suitability of the Premises
for Lessee's intended use, (b) that Lessee as and such investigation and/or term
of this Lease, and (c) that neither Lessor, nor any of Lessor's agents has made
any oral or written representations or warranties with respect to the said
matters other than as set forth in the Lease.
2.5 LESSEE PRIOR OWNER/OCCUPANT. The warranties made by Lessor in the
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee as the owner or occupant of the Premises. In such
event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warrants.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this
Lease, however, (including but not limited to the obligations to pay Real
Property Taxes and insurance premiums and to maintain the Premises) shall be in
effect during such period. Any such early possession shall not affect nor
advance the Expiration Date of the Original.
3.3 DELAY IN POSSESSION. If for any reason, Lessor cannot deliver
possession of the Premises to the Lessee as agreed herein by the Early
Possession Date, if one is specified in Paragraph 1.4, or, if early Possession
Date if specified, by the Commencement Date, Lessor shall not be subject to any
liability therefore, not shall such failure affect the validity of this Lease,
or the obligations or Lessee hereunder, or extend the term hereof, but in such
case, Lessee shall not except as otherwise provided herein, be obligated to pay
rent or perform any other obligation of Lessee under the terms of this Lease
until Lessor delivers possession of the Premises to Lessee. If possession of the
Premises is not delivered with sixty (60) days after the Commencement Date,
Lessee may, at its option, by notice in writing to Lessor with ten (10) days
thereafter, cancel this Lease, in which event the Parties shall be discharged
from all obligations
18
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Fleet Capital Corporation
March 26, 1998
Page 19
hereunder; provided, however, that if such written notice by Lessee is not
received by Lessor with said ten (10) day period, Lessee's actually commences,
if possession is not tendered to Lessee when required by this Lease and Lessee
does not terminate this Lease, as aforesaid, the period free of the obligation
to pay Base Rent, if any, the Lessee would otherwise have enjoyed shall run from
the date of delivery of possession and continue for a period equal to what
Lessee would otherwise have enjoyed under the terms hereof, but minus any days
of delay cause by the acts, changes or omissions, of Lessee.
4. RENT.
4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent or
charges, as the same may be adjusted from time to time, to be received by Lessor
in lawful money of the United States, without offset or deduction, on or before
the day on which it is due under the terms of this Lease. Base Rent and all
other rent and charges for any period during the term hereof which is for less
than one (1) full calendar month shall be prorated based upon the actual number
of days of the calendar month involved. Payment of Base Rent and other charges
shall be made to Lessor at its address stated herein or to such other persons or
at such other addresses as Lessor may from time to time designate in writing to
Lessee.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charge due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain
all or any portion of said Security Deposit for the payment of any amount due
Lessor or to reimburse or compensate Lessor any liability, cost, expense, loss
or damage (including attorneys' fees) which Lessor may suffer or incur by reason
thereof. If Lessor uses or applies all or any portion of said Security Deposit,
Lessee shall within ten (10) days after written request therefore deposit moneys
with Lessor sufficient to restore said Security Deposit to the full amount
required by this Lease. Any time the Base Rent increases during the term of this
Lease, Lessee shall, upon written request from Lessor, deposit additional moneys
with Lessor sufficient to maintain the same ratio between the Security Deposit
and the Base Rent as those amounts are specified in the Basic Provisions. Lessor
shall not be required to keep all or any part of the Security Deposit separate
from its general accounts. Lessor shall, at the expiration or earlier
termination of the term hereof and after Lessee has vacated the Premises, return
to Lessee (or, at Lessor's option, to the last assignee, if an, or Lessee's
interest herein), that portion of the Security Deposit not used or applied by
Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the
Security Deposit shall be considered to be held in trust, to bear interest or
other increments for its use, or to be prepayment for any moneys to be paid be
Lessee under this Lease.
6. USE
6.1 USE. Lessee shall use and occupy the Premises only for the purposes
set forth in Paragraph 1.8, or any other use which is comparable thereto, and
for no other purpose. Lessee shall not use or permit the use of the Premises in
a manner that creates waste or a nuisance, or that disturbs owners and/or
occupants of, or causes damage to, neighboring Premises or properties. Lessor
hereby agrees to not unreasonably withhold or delay its consent to any written
request by Lessee, Lessees assignees or subtenants, and by prospective assignees
and subtenants of the Lessee, its assignees and subtenants, for a modification
of said permitted purpose for which the Premises may be used or occupied, so
long as the same will not impair the structure integrity of the improvements on
the Premises, the mechanical or electrical systems therein, is not significantly
more burdensome to the Premises and the improvements thereon, and is otherwise
permissible pursuant to this Paragraph 6. If Lessor elects to withhold such
consent, Lessor shall within five (5) business days give a written notification
of same, which notice shall include an explanation of Lessor's reasonable
objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCES" as used in this Lease shall mean any product, substance, chemical,
material or waste whose, nature, quantity and or/intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, whether by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for liability of Lessor to any government agency or
third party under any applicable statute or common law theory. Hazardous
Substances shall include, but not limited to, Hydrocarbons, Petroleum, gasoline,
crude oil or any products, by-products or fractions thereof. Lessee shall not
engaged in any activity in, on or about the Premises which constitutes a
Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner at
Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph
6.3). "REPORTABLE USE" shall mean (i) the installation or use of any above or
below ground storage tank, (ii) the generation, possession, storage, use,
transportation, or disposal of a Hazardous Substance that requires a permit
from, or with respect to which a report, notice, registration, or business plan
is required to be filed with, any governmental authority. Reportable Use shall
also include Lessee's being responsible for the presence in, on or about the
Premises of a Hazardous Substance with respect to the which any Applicable Law
requires that a notice be given to persons entering or occupying the Premises or
neighboring properties. Notwithstanding the foregoing, Lessee may, without
Lessor's prior consent, but in compliance with all Applicable Law, use any
ordinary and customary materials reasonably required to be used by Lessee in the
normal course of Lessee's business permitted on the Premises, so long as such
use is not a Reportable Use and does not expose the Premises or neighboring
properties to any meaningful risk of contamination or damage or expose Lessor to
any liability therefore. In addition, Lessor may (but without any obligation to
do so) condition its consent to the use or presence of any Hazardous Substance,
activity or storage tank by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or
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liability therefrom or therefor, including, but not limited to, the installation
(and removal on or before Lease expiration or earlier termination) or reasonably
necessary protective modifications to the Premises (such a concrete encasements)
and/or the deposit of an additional Security Deposit under Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance, or a condition involving or
resulting from same, has come to be located in, on, under or about the Premises,
other than as previously consented to by Lessor, Lessee shall immediately give
written notice of such fact to Lessor. Lessee shall also immediately give Lessor
a copy of any statement, report, notice, registration, application, permit,
business plan, license, claim, action, or proceeding given to, or received from
any governmental authority or private party, or persons entering or occupying
the Premises, concerning the presence, spill, release, discharge of, or exposure
to any Hazardous Substance or contamination in, on, or about the Premises,
including but not limited to all such documents as may be involved in any
Reportable Uses involving the Premises.
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees, lenders, and ground Lessor, if any, and the
Premises, harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorney's and consultant's fees arising cut of or involving any Hazardous
Substances or storage tank brought onto the Premises by or for Lessee or under
Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but
not limited to, the effects of any contamination or injury to person, property
or the environment created or suffered by Lessee, and the cost of investigation
(including consultant's and attorney's fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any contamination therein involved,
and shall survive the expiration or earlier termination of this Lease. No
termination cancellation or release agreement entered into by Lessor and Lessee
shall release Lessee from its obligations under this Lease with respect to
Hazardous Substances or storage tanks, unless specifically so agreed by Lessor
in writing at the tie of such agreement. (See Addendum Paragraph)
6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this
Lease, Lessee, shall, at Lessee's sole and cost expense, fully diligently and in
a timely manner, comply with all "APPLICABLE LAW," which term is used in this
Lease to include all laws, rules, regulations, ordinances, directives,
covenants, easements and restrictions or record, permit, the requirements of any
applicable fire insurance underwriter or rating bureau, and the recommendations
of Lessor's engineers and/or consultants, relating in any manner to the
Premises, (including but not limited to matters pertaining to (i) industrial
hygiene, (ii) environment conditions on, in, under or about the Premises,
including soil and groundwater conditions, and (iii) the use, generation,
manufacture, production, installation, maintenance, removal, transportation,
storage, spill or release of any Hazardous Substance or storage tank), now in
effect or which may hereafter come into effect, and whether or not reflecting a
change in policy from any previously existing policy. Lessee shall, within five
(5) days after receipt of Lessor's written request, provide Lessor with copies
of all documents and information, including, but not limited to, permits,
registration, manifests, applications, reports and certificates, evidencing
Lessee's compliance with any Applicable Law specified by Lessor, and shall
immediately upon receipt notify Lessor in writing (with copies of any documents
involved) of any threatened or actual claim, notice, citation, warning,
complaint, or report pertaining to or involving failure by Lessee or the
Premises to comply with any Applicable law.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as defined in
Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in the
case of an emergency, and otherwise at reasonable times, for the purpose of
inspecting the condition of the Premises and for verifying compliance by Lessee
with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to
employ experts and/or consultants in connection therewith and/or to advise
Lessor with respect to Lessee's activities, including but not limited to the
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance or storage tank on or from the Premises. The costs and
expenses of any such inspections shall be paid by the Party requesting same,
unless a Default or Breach of this Lease, violation of Applicable Law, or a
contamination, caused or materially contributed to by Lessee is found to exist
or be imminent, or unless the inspection is requested or ordered by a government
authority as the result of any such existing or imminent violation or
contamination. In any such case, Lessee shall upon request reimburse Lessor or
Lessor's Lender, as the case may be for the costs and expenses of such
inspections.
7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Lessor's
warranty as to condition), 2.3 (Lessor's warranty as to compliance with
covenants, etc.), 7.2 (Lessor's obligations to repair). 9 (damage and
destruction), and 14 (condemnation), Lessee shall, at Lessee's sole cost and
expense and at all times, keep the Premises and every part thereof in good
order, condition and repair, structural and non-structural (whether or not such
portion of the Premises requiring repairs, or the means of repairing the same,
are reasonably or readily accessible to Lessee, and whether or not the need for
such repairs occurs as result of the Lessee's use, any prior use, the elements
or the age of such portion of the Premises), including, without limiting the
generality of the foregoing, all equipment or facilities serving the Premises,
such as plumbing, heating, air conditioning, ventilating, electrical, lighting
facilities, boilers, fired or unfired pressure vessels, fire sprinkler and/or
standpipe and hose or other automatic fire extinguishing system, including fire
alarm and/or smoke detection systems and equipment, fire hydrants, fixtures,
walls (interior and exterior), foundations, ceilings, roofs, floors, windows,
doors, plate glass, skylights landscaping, driveways, parking lots fences,
retaining walls, signs, sidewalks and parkways located in, on, about, or
adjacent to the Premises. Lessee shall not cause or permit any Hazardous
Substance to be spilled or released in, on, under or about the Premises
(including through the plumbing or sanitary sewer system) and shall promptly, at
Lessee's expense; take all investigatory and/or remedial action reasonably
recommended, whether or not formally ordered or required, for the cleanup of any
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contamination of, and for the maintenance, security and/or monitoring of the
Premises, the elements surrounding same, or neighboring properties, that was
caused or materially contributed to by Lessee, or pertaining to or involving any
Hazardous Substance and/or storage tank brought onto the Premises by or Lessee
or under its control. Lessee, in keeping the Premises in good order, condition
and repair, shall exercise and perform good maintenance practice. Lessee's
obligations shall include restoration, replacements or renewals when necessary
to keep the Premises and all improvements thereon or a part thereof in good
order, condition and state of repair. If Lessee occupies the Premises for seven
(7) years or more, Lessor may require Lessee to repaint the exterior of the
buildings on the Premises reasonably required, but not more frequently than once
every seven (7) years. (See Addendum Paragraph)
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain contract, with copies to Lessor, in customary form and substance for,
and with contractors specializing and experienced in, the inspection,
maintenance and service of the following equipment and improvements, if any,
located on the Premises: (i) heating, air conditioning and ventilation
equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler
and/or standpipe and hose or other automatic fire extinguishing systems,
including fire alarm and/or smoke detection, (iv) landscaping and irrigation
systems, (v) roof covering and drain maintenance and (vi) asphalt and parking
lot maintenance. (See Addendum Paragraph)
7.2 LESSOR'S OBLIGATIONS. Except for the warranties and agreements of
Lessor contained on Paragraphs 2.2 (relating to condition of Premises), 2.3
(relating to compliance with covenants, restrictions and building code), 9
(relating to destruction of Premises) and 14 (relating to condemnation of the
Premises), it is intended be the Parties hereto the Lessor have no obligation,
in any manner whatsoever, to repair and maintain the Premises, the improvements
located thereon, or the equipment therein, whether structural or non structural,
all of which obligations are intended to be that of the Lessee under Paragraph
7.1 hereof. It is the intention of the Parties that the terms of this Lease
govern the respective obligations of the Parties as to maintenance and repair of
the Premises. Lessee and Lessor expressly waive the benefit of any statute now
or hereafter in effect to the extent it is inconsistent with the terms of the
Lease with respect to, or which affords Lessee the right to make repairs at the
expense of Lessor or to terminate this Lease by reason of any needed repairs.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS. (See Addendum
Paragraph)
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" is used in this Lease to refer to all carpeting, window
coverings, air lines, power panels, electrical distribution, security, fire
protection systems, communication systems, lighting fixtures, heating,
ventilating, and air conditioning equipment, plumbing, and fencing in, on or
about the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and
equipment that can be removed without doing material damage to the Premises. The
term "ALTERATIONS" shall mean any modification of the improvements on the
Premises from that which are provided by Lessor under the terms of this Lease,
other than Utility Installations or Trade Fixtures, whether by addition or
deletion. "LESSEE OWNED ALTERATION AND/OR UTILITY INSTALLATIONS" are defined as
Alterations and/or Utility Installations made be Lessee that are not yet owned
by Lessor as defined in Paragraph 7.4(a). Lessee shall not make any Alterations
or Utility Installations, in on, under or about the Premises with Lessor's Prior
written consent. Lessee may, however, make non-structural Utility Installations
to the Interior of the Premises (excluding the roof), as long as they are not
visible from the outside, do not involve puncturing, relocating or removing the
roof or any existing walls, and the cumulative cost thereof during the term of
this Lease as extended does not exceed $25,000.
(b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with proposed detailed plans. All consents
given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific
consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable
permits required by governmental authorities, (ii) the furnishing of copies of
such permits together with a copy of the plans and specifications for the
Alteration or Utility Installation to Lessor prior to commencement of the work
thereon, and (iii) the compliance by Lessee with all conditions of said permits
in prompt and expeditious manner. Any Alterations or Utility Installations by
Lessee during the term of this Lease shall be done in a good and workmanlike
manner, with good and sufficient materials, and in compliance with all
Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor
with as-built plans and specifications therefor. Lessor may (but without
obligation to do so) conditions its consent to any requested Alteration and
Utility Installation that costs $10,000 or more upon Lessee's providing Lessor
with a lien and completion bond in an amount equal to one and one-half times the
estimated cost of such Alteration or Utility Installation and/or upon Lessee's
posting an additional Security Deposit with Lessor under Paragraph 36 hereof.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to do for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanics' or materialmen's lien against the Premised or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on or about the Premises, and Lessor shall have the
right to post notices of non-responsibility in or on the Premises as provided
by law. If Lessee shall, in good faith, contest the validity of any such lien,
claim or demand, then Lessee shall, at its sole expense defend and protect
itself, Lessor and the Premises against the same and shall pay and satisfy any
such adverse judgment that may be rendered thereon before the enforcement
thereof against the Lessor or the Premises. If Lessor shall require, Lessee
shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal
to one and one-half times the amount of such contested lien claim or demand,
indemnifying Lessor against liability for the same, as required by law for the
holding of the Premises free from the effect of such lien or claim. In addition,
Lessor may require Lessee to pay Lessor's attorney's fees and costs in
participating in such action if Lessor shall decide it is to its best interest
to do so.
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal
or become the owner thereof as hereinafter provided in this Paragraph 7.4, all
Alterations and Utility Additions made to the Premises by Lessee shall be the
property of and owned
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by Lessee, but considered a part of the Premises. Lessor may, at any time and at
its option, elect in writing to Lessee to be the owner of all or any specified
part of the Lessee Owned Alterations and Utility Installations. Unless otherwise
instructed per subparagraph 7.4(b) hereof, all Lessee Owned Alterations and
Utility Installations shall, at the expiration or earlier termination of this
Lease, become the property of Lessor and remain upon and be surrendered by
Lessee with the Premises.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may
require that any or all Lessee Owned Alterations or Utility Installations be
removed by the expiration or earlier termination of this Lease, notwithstanding
the installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the end of the last day of the Lease term or any earlier termination date, with
all of the improvements, parts and surfaces thereof cleaned and free of debris
and in good operating order, condition and state of repair, ordinary wear and
tear excepted. "ORDINARY WEAR AND TEAR" shall not include any damage or
deterioration that would have been prevented by good maintenance practice or by
Lessee performing all of its obligations under this Lease. Except as otherwise
agreed or specified in writing by Lessor, the Premises, as surrendered, shall
include the utility Installations. The obligation of Lessee shall include the
repair of any damage occasioned by the installation, maintenance or removal of
Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility
Installations, as well as the removal of any storage tank installed by or for
Lessee, and the removal , replacement, or remediation or any soil, material or
ground water contaminated by Lessee, all as may then be required by Applicable
Law and/or good service practice. Lessee's Trade Fixtures shall remain the
property of Lessee and shall be removed by Lessee subject to its obligation to
repair and restore the Premises per this Lease.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT FOR INSURANCE. Regardless of whether the Lessor or Lessee is
the Insuring Party, Lessee shall pay for all insurance required under this
Paragraph 8 except to the extent of the cost attributable to liability insurance
carried by Lessor in excess of $1,000,000 per occurrence. Premiums for policy
periods commencing prior to or extending beyond the Lease term shall be prorated
to correspond to the Lease term. Payment shall be made by Lessee to Lessor with
ten (10) days following receipt of an invoice for any amount.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force
during the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee and Lessor (as an additional insured) against claims for
bodily, personal injury and property damage based upon, involving or arising out
of the ownership, use, occupancy, or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "Additional Insured-Managers or Lessors or Premises" Endorsement. The
policy shall not contain any intra-insured exclusions as between insured persons
or organization, but shall include coverage for liability assumed under this
Lease as an "insured contract" for the performance of Lessee's indemnity
obligations under this Lease. The limits of said insurance required by this
Lease or as carried by Lessee shall not, however, limit the liability of Lessee
nor relieve Lessee of any obligation hereunder. All insurance is to be carried
by Lessee shall be primary to and not to contributory with any similar insurance
carried by Lessor, whose insurance shall be considered excess insurance only.
(b) CARRIED BY LESSOR. In the event Lessor is the Insuring Party,
Lessor shall also maintain liability insurance described Paragraph 8.2(a),
above, in addition to, and not in lieu of, the insurance required to be
maintained by Lessee. Lessee shall not be names as an additional insured
therein.
8.3 PROPERTY INSURANCE - BUILDING IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain
and keep in force during the term of this Lease a policy or policies in the name
of Lessor, with loss payable to Lessor and to the holders of any mortgages,
deeds of trust or ground Leases on the Premises ("LENDER(S)"), insuring loss or
damage to the Premises. The amount of such insurance shall be equal to the full
replacement cost of the Premises, as the same shall exist from time to time, or
the amount required by Lenders, but in no event more than the commercially
reasonable and available insurable value thereof if, by reason of the unique or
age of the improvements involved, such latter amount is less than full
replacement cost. If Lessor is the Insuring Party, however, Lessee Owned
Alterations and Utility Installations shall be insured by Lessee under Paragraph
8.4 rather than by Lessor. If the coverage is available and commercially
appropriate, such policy or policies shall insure against all risks of direct
physical loss or damage (except that perils of flood and/or earthquake unless
required by a Lender), including coverage for any additional costs resulting
from debris removal and unreasonable amounts of coverage for the enforcement of
any ordinance or law regulating the reconstruction or replacement of any
undamaged sections of the Premises required to be demolished or removed by
reason of the enforcement or any building, zoning, safety, or land use laws as
the result of a covered cause of loss. Said policy or policies shall also
contain and agreed valuation provision in lieu of any coinsurance clause, waiver
of subrogation, and inflation guard protection causing an increase in the annual
property insurance coverage amount by a factor of not less than the adjusted
U.S. Department of Labor Consumer Price Index for All Urban Consumers for the
city nearest to where the Premises are located. If such insurance coverage has a
deductible clause, the deductible amount shall not exceed $1,000 per occurrence,
and Lessee shall be liable for such deductible amount in the event of an Insured
Loss, as defined in Paragraph 9.1(c).
(b) RENTAL VALUE. The Insuring Party shall, in addition, obtain
and keep in force during the term of this Lease a policy or policies in the name
of Lessor, with loss payable to Lessor and Lenders), insuring the loss or the
full rental and other charges
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Page 23
payable by Lessee to Lessor under this Lease for one (1) year (including all
real estate taxes, insurance costs, and any scheduled rental increases). Said
insurance shall provide that in the event the Lease terminated by reason of an
insured loss, the period of indemnity for such coverage shall be extended beyond
the date of the completion of repairs or replacement of the Premises, to provide
for full year's loss of rental revenues from the date of any sic loss. Said
insurance shall contain and agreed valuation provision in lieu of any
coinsurance clause, and the amount of coverage shall be adjusted annually to
reflect the projected rental income, property taxes, insurance premium cost and
other expenses, if any, otherwise payable by Lessee, for the next twelve (12)
month period. Lessee shall be liable for any deductible amount in the event of
such loss.
(d) TENANT'S IMPROVEMENTS. If the Lessor is the Insuring Party,
The Lessor shall not be required to insure Lessee Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease, If Lessee is the Insuring Party, The policy
carried be Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations
and Utility Installations.
8.4. LESSEE'S PROPERTY INSURANCE. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain insurance
coverage on all of Lessee's personal property, Lessee Owned Alterations and
Utility Installations in, on or about the Premises similar in coverage to that
carried by the Insuring Party under Paragraph 8.3. Such insurance shall be full
replacement cost coverage with a deductible of not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used by Lessee for the
replacement of personal property or the restoration of Lessee Owned Alterations
and Utility Installations. Lessee shall be the Insuring Party with respect to
the insurance required by this Paragraph 8.4 and shall provide Lessor with
written evidence that such insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintaining during the policy term a "General Policyholders Rating"
of at least B+, V, or such other ratings as may be required by Lender having a
lien on the Premises, as set forth in the most current issue of "Best's
Insurance Guide." Lessee shall not do or permit to be done anything which shall
invalidate the insurance policies referred to in this Paragraph 8. If Lessee is
the Insuring Party, Lessee shall cause to be delivered to Lessor certified as
required by this Lease. No such policy shall be cancelable for subject to
modification except after thirty (30) days prior written notice to Lessor.
Lessee shall at least thirty (30) days prior to the expiration of such policies,
furnish Lessor with evidence of renewals or "insurance binders" evidencing
renewal thereof , or Lessor may order such insurance and charge the cost thereof
to Lessee, which amount shall be payable by Lessee to Lessor upon demand. If the
Insuring Party shall fail to procure and maintain the insurance required to be
carried by the Insuring Party under this Paragraph 8, the other Party may, but
shall not be required to, procure and maintain the same, but at Lessee's
expense.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve
the other, and waive their entire right to recover damages (whether in contract
or in tort) against the other, for loss of or damage to the Waiving Party's
property arising out of accident to the perils required to be insured against
under Paragraph 8. The effect of such releases and waivers of the right to
recover damages shall not be limited by the amount of insurance carried or
required, or by any deductibles applicable thereto.
8.7 INDEMNITY. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents. Lessor's masier or ground Lessor, partners and
Lenders from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, permits, attorney's and consultant's fees,
expenses and/or liabilities arising out of, involving, or in dealing with, the
occupancy of the Premises by Lessee, the conduct of Lessee's business, any act,
omission or neglect of Lessee, its agents, contractors, employees or invitees,
and out of any Default or Breach by Lessee in the performance in a timely manner
of any obligation on Lessee's part to be performed under this Lease. The
foregoing shall include, but not be limited to, the defense or pursuit of any
claim or any action or proceeding involved therein and whether or not (in the
case of claims made against Lessor) litigated and/or reduced to judgment, and
whether well founded or not. In case an action or proceeding be brought against
Lessor by reason of any or the foregoing matter, Lessee upon notice from Lessor
shall defend the same at Lessee's expense by counsel reasonably satisfactory to
Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not
have first paid any such claim in order to be so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury us caused by or
results from fire, steam, electricity, gas, water, or rain, or from the
breakage, leakage, obstruction or other defects results from conditions arising
upon the Premises or upon other portions of the building of which the Premises
are a part, or from other sources or places, and regardless or whether the cause
of such damage or injury or the means or repairing the same is accessible or
not. Lessor shall not be liable for any damages arising from any act or neglect
of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of
this Lease, Lessor shall under no circumstances be liable for injury to Lessee's
business or for any loss of income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to
the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, the repair cost of which damage or destruction is less
than 50% if the then
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Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction
to the Premises, other than Lessee Owned Alterations and Utility Installations
the repair cost of which damage or destruction is 50% or more of the then
Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(c) "INSURED LOSS" shall mean damage or destruction to
improvements owned on the Premises, other than Lessee Owned Alterations and
Utility Installations, which was caused by an event required to be covered by
the insurance described in Paragraph 8.3(a), irrespective of any deductible
amounts or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of applicable building codes,
ordinances or laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the present of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that is
an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee Owned Alteration and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost continue
in full forces and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make the insurance
proceeds are not sufficient to effect such repair, the purpose. Party shall
promptly contribute the shortage in proceeds (except as to the deductible which
is Lessee's responsibility) as and when required to complete said repairs. In
the event, however, the shortage in proceeds was sue to the fact that, by reason
of the unique nature of the improvements, full replacement cost insurance was
not commercially reasonable and available, Lessee provides Lessor with the funds
to cover same, or adequate assurance proceeds or to fully restore the unique
aspects of the Premises unless Lessee provides Lessor with the funds to cover
same, or adequate assurance thereof, within ten (10) days following receipt of
written notice of such shortage and request therefor. If Lessor receives said
funds or adequate assurance thereof with said ten (10) day period, the party
responsible for making the repairs shall complete them as soon as reasonably
possible and this Lease shall remain in full force and effect. If Lessor does
not receive such funds or assurance within said period, Lessor may nevertheless
elect by written notice to Lessee within ten (10) days thereafter to make such
restoration and repair as is commercially reasonable with Lessor paying any
shortage in proceeds, in which case this Lease shall remain in full force and
effect. If in such case Lessor does not so elect, then this Lease shall
terminate in sixty (60) days following the occurrence of the damage or
destruction. Unless otherwise agreed, Lessee shall in no event have any right to
reimbursement from Lessor for any funds contributed by Lessee to repair any such
damage or destruction. Premises Partial Damage due to flood or earthquake shall
be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that
there may be some insurance coverage, but the net proceeds of any such insurance
shall be made available for the repairs if made by either Party.
9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that
is not an insured Loss occurs, unless caused by negligent or will act of Lessee
(in which event Lessee shall make the repairs at Lessee's expense and this Lease
shall continue in full force and effect, but subject to Lessor's rights under
Paragraph 13), Lessor may at Lessor's option, either: (i) give written notice to
Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such damage of Lessor's desire to terminate this Lease as of the
date sixty (60) days following the giving of such notice. In the event Lessor
elects to give written notice to Lessor of Lessee's commitment to pay for the
repair of such damage totally at Lessee's expense and without reimbursement from
Lessor. Lessee shall provide Lessor with the require funds or satisfactory
assurance thereof within their (30) days following Lessee's said commitment. In
such event this Lease shall continue in full force and effect, and Lessor shall
proceed to make such repairs as soon as reasonably possible and the required
funds are available. If Lessee does not give such notice and provide the funds
or assurance thereof with the times specified above, this Lease shall terminate
as of the date specified in Lessor's notice of termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor, shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 8.6.
9.5. DAMAGE NEAR END OF TERM. If at any time, during the last six (6)
months of the term of this Lease, there is damage for which the cost to repair
exceeds one (1) month's Base Rent, whether or not and Insured Loss, Lessor may,
at Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by, within twenty (20) days following the occurrence of the damage, or
before the expiration of the time provided in such option for its exercise,
whichever is earlier ("EXERCISE PERIOD"), (i) exercising such option and (ii)
providing Lessor with any shortage in insurance proceeds (or adequate assurance
thereof) needed to make the repairs. If Lessee duly exercises such option during
said Exercise Period and provides Lessor with funds (or adequate assurance
thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's
expense repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option and
provide such funds or assurance during said Exercise Period, then Lessor may at
Lessor's option terminate this Lease as of the expiration of said
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sixty (60) day period following the occurrence of such damage by giving written
notice to Lessee of Lessor's election to do so within ten (10) days after the
expiration of the Exercise Period, notwithstanding any term or provision in the
grant of option to the contrary.
9.6 ABATEMENT OF RENT; LESSEE REMEDIES.
(a) In the event of damage described in Paragraph 9.2 (Partial
Damage - Insured), whether or not Lessor or Lessee repairs or restores the
Premises, the Base Rent, Real property Taxes, insurance premiums, and other
charges, if any, payable by Lessee hereunder for the period during which such
damage, its repair or the restoration continues (not to exceed the period for
which rental value insurance is required under Paragraph 8.3(b)), shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired. Except for abatement of Base Rent, Real Property Taxes, insurance
premiums, and other charges, if any, as aforesaid, all other obligations of
Lessee hereunder shall be performed by Lessee, and Lessee shall have no claims
against Lessor for any damages suffered by reason of any such repair or
restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises under the Provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's election
to terminate this Lease on a date not less than sixty (60) days following the
giving of such notice. If Lessee gives such notice to Lessor and such Lenders
and such repair or restoration is not commences within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
said notice. If Lessor or a Lender commences the repair or restoration of the
Premises within thirty (30) days after receipt of such notice, this Lease shall
continue in full force and effect. "COMMENCE" as used in this Paragraph shall
mean wither the unconditional authorization of the preparation of the required
plans, or the beginning of the actual work on the Premises, whichever first
occurs.
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Conditions
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable Law
and this Lease shall in continue if full force and effect, but subject to
Lessor's rights under Paragraph 13), Lessor may at Lessor's option either (i)
investigate and remediate such Hazardous Substance Condition, if required, as
soon as reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) if the estimated cost to investigate
and remediate such conditions exceeds twelve (12) times the monthly Base Rent or
$100,000, whichever is greater, give written notice to Lessee within thirty (30)
days after receipt by Lessor of knowledge of the occurrence of such Hazardous
Substance Condition or Lessor's desire to terminate this Lease as of the date
sixty (60) days following the giving of such notice. In the event Lessor elects
to give such notice of Lessor's intention to terminate this Lease, Lessee shall
have the right within ten (10) days after the receipt of such notice to give
written notice to Lessor of Lessee's commitment to pay for the investigation and
remediation of such Hazardous Substance Condition totally at Lessee's expense
and without reimbursement from Lessor except to the extent of an amount equal to
twelve (12) times the then monthly Base Rent or $100,000, whichever is greater.
Lessee shall provide Lessor with the funds required of Lessee or satisfactory
assurance thereof with thirty (30) days following Lessee's said commitment. In
such event this Lease shall continue in full force and effect, and Lessor shall
proceed to make such investigation and remediation as soon as reasonably
possible and the required funds are available. If Lessee does not give such
notice and provide the required funds or assurance thereof within the times
specified above, this Lease shall terminate as of the date specified in Lessor's
notice of termination. If a Hazardous Substance Condition occurs for which
Lessee is not legally responsible, there shall be abatement of Lessee's
obligation under this Lease to the same extent as provided in Paragraph 9.6(a)
for a period of not to exceed twelve (12) months. (See Addendum Paragraph)
9.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of the Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance Base Rent and any other advance payments made by Lessee to Lessor,
Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit
as has not been, or is not then required to be, used by Lessor under the terms
of this Lease.
9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Premises during the term of this
Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least
ten (10) days prior to the delinquency date of the applicable installment.
Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes
have been paid. If any such taxes to be paid by Lessee shall cover any period of
time prior to or after the expiration or earlier termination of the term hereof,
Lessee's share of such taxes shall be prorated to cover only the period of time
within the tax fiscal year this Lease is in effect, and Lessor shall reimburse
Lessee for any overpayment after such proration. If Lessee shall fail to pay any
Real Property Taxes required by this Lease to be paid by Lessee, Lessor shall
have the right to pay the same and Lessee shall reimburse Lessor therefor upon
demand.
(b) ADVANCE PAYMENT. In order to insure payment when due and
before delinquency of any or all Real Property Taxes, Lessor reserves the right,
at Lessor's option, to estimate the current Real Property Taxes applicable to
the Premises, and to require such current year's Real Property Taxes to be paid
in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the
installment due, at least twenty (20) days prior to the applicable delinquency
date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor
elects to require payment monthly in advance, the monthly in advance, the
monthly payment shall be that equal
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monthly amount which, over the number of months that remaining before the month
in which the applicable tax installment would become delinquent (and without
interest thereon), would provide a fund large enough to fully discharge before
delinquency the estimated installment of taxes to be paid. When the actual
amount of the applicable tax bill is known, the amount of such equal monthly
advance payment shall be adjusted as taxes to be paid. When the actual amount of
the applicable tax bill is known, the amount of such equal monthly advance
payment shall be adjusted as required to provide the find needed to pay the
applicable taxes before delinquency. If the amount paid to Lessor by Lessee
under the provisions of this Paragraph are insufficient to discharge the
obligations of Lessee to pay such Real Property Taxes as the same become due,
Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are
necessary to pay such Real Property Taxes as the same become due, Lessee shall
pay to Lessor, upon Lessor's demand, such additional sums as are necessary to
pay such Real Property Taxes as the same become due, Lessee shall pay to Lessor,
upon Lessor's demand, such additional sums as are necessary to pay such
obligations. All moneys paid to Lessor under this paragraph may be intermingled
with other moneys of Lessor and shall not bear interest. In the event of a
Breach by Lessee in the performance of the obligations of Lessee under this
Lease, then any balance funds paid to Lessor under the provisions of their
Paragraph may, subject to proration as provided in Paragraph 10.1(a), at the
option of Lessor, be treated as an additional Security Deposit under Paragraph
5. (See Addendum Paragraph)
10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL
PROPERTY TAXES" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Premises by any authority
having the direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire, street, drainage or
other improvement district thereof, levied against legal or equitable interest
of Lessor in the Premises or in the real property of which the Premises area
part, Lessor's right to rent or other income therefrom, and/or Lessor's business
of leasing the Premises. The term "REAL PROPERTY TAXES" shall also include any
tax, fee, levy, assessment or charge, or any increase therein, imposed by reason
of events occurring, or changes in applicable law taking effect, during the term
of this Lease, including but not limited to a change in the ownership of the
Premises or in the improvements thereon, the execution of this Lease, or any
modification, amendment or transfer thereof, and whether or not contemplated by
the Parties.
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's ability shall be an equitable proportion of the Real Property Taxes for
all of the land and improvements included with the tax parcel assessed, such
proportion to be determined by Lessor from the respective valuations assigned in
the assessor's work sheets or supply other information as may be reasonably
available. Lessor's reasonable determination thereof, in good faith, shall be
conclusive.
10.4 PERSONAL PROPERTY TAX. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal property
to be assessed and billed separately from the real property of Lessor. If any
Lessee's said personal Property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee with ten (10) days
after receipt of a written statement setting forth the taxes applicable to
Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b).
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon, if any such services are not
separately metered to Lessee. Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered with other Premises.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED. (See Addendum Paragraph)
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage, or otherwise transfer or encumber (collectively,
"ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in
the Premises without Lessor's prior written given under and subject to the terms
of Paragraph 36.
(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis, or
twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any transactions
(by way of merger, sale, acquisition, financing, refinancing, transfer,
leveraged buy-out or otherwise), whether or not a formal assignment or
hypothecation of this Lease or Lessee's assets occurs, which results or will
result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an
amount equal to or greater than twenty-five percent (25%) of such Net Worth of
Lessee as it was represented to Lessor at the time of the execution by Lessor of
this Lease or at the time of the most recent assignment to which Lessor has
consented, as it exists immediately prior to said transaction or transaction
constituting such reduction, at whichever time said Net Worth Of Lessee was or
is greater, shall be considered an assignment of this Lease by Lessee to which
Lessor may reasonably withhold its consent. "NET WORTH OF LESSEE" for purposes
of this Lease shall be the net worth of Lessee (excluding any guarantors)
established under generally accepted accounting principles consistently applied.
(d) An assignment or subletting of Lessee's interest in those
Lease without Lessor's specific prior written consent shall, at Lessor's option,
be a Default curable after notice per Paragraph 13.1(c)
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(e) Lessee's remedy for any breach of this Paragraph 12.1 by
Lessor shall be limited to compensatory damages and injunctive relief.
12.2 TERMS AND CONDITIONS TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by such
assignee or Sublessee of the obligations of the Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent or performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall
not constitute a consent to any subsequent assignment or subletting by Lessee or
to any subsequent or successive assignment or subletting by the Sublessee.
However, Lessor may consent to subsequent sublettings and assignments or the
Sublease or any amendments or modifications thereto without notifying Lessee or
anyone else liable on the Lease or Sublease and without obtaining their consent,
and such action shall not relieve such persons from liability under this Lease
or Sublease.
(d) In the event of any Default or Breach of Lessee's obligations
under this Lease including the Sublessee, without first exhausting Lessor's
remedies against any other person or entity responsible therefor to Lessor, or
any security held by Lessor or Lessee.
(e) Each request for consent to an assignment or subletting shall
be in writing accompanied by information relevant to Lessor's determination as
to the financial and operational responsibility and appropriateness of the
proposed assignee or Sublessee, including but not limited to the intended use
and/or required modification of the Premises, if any. Lessee agrees to provide
to Lessor with such other or additional information and/or documentation a may
be reasonably requested by Lessor.
(f) Any assignee of, or Sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such, Sublease, be deemed,
for the benefit of Lessor, to have assumed and agreed to conform and comply with
each and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or Sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or Sublease to which Lessor has specifically consented in writing.
(g)
(h) Lessor, as a condition to giving its consent to assignment or
subletting, may require that the amount and adjustment structure of the rent
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all Subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rental and income and apply same toward Lessee's obligations
under this Lease; provided, however, that until a Breach (as defined in
Paragraph 13.1) shall occur in the performance of Lessee's obligations under
this Lease; provided, however, that until a Breach (as defined in paragraph
13.1) shall occur in the performance of Lessee's obligations under this Lease,
of this or any other assignment of such Sublease to Lessor, not by reason of the
collection of the rents from a Sublease, be deemed liable to the Sublessee for
any failure of Lessee to perform and comply with any of Lessee's obligations to
such Sublease. Lessee hereby irrevocably authorizes and directs any such
Sublessee, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease to pay to
Lessor the rents and other charges due to become due under the Sublease.
Sublessee shall rely upon any such statement and request from Lessor and shall
pay such rents and other charges to Lessor without any obligation or right to
inquire as to whether such Breach exists and notwithstanding
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any notice from or claim from Lessee to the contrary. Lessee shall have no right
or claim against said Sublessee, or, until the Breach has been cured, against
Lessor, for any such rents and other charges so paid by said Sublessee to
Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor at its option and without any obligation to
do so, may require any Sublessee to attorney to Lessor, in which event Lessor
shall undertake the obligations of the Sublessor under such Subleases from the
time of the exercise of said option to the expiration of such Sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such Sublessee to such Sublessor or for any other prior Defaults
or Breaches of such Sublessor under such Sublease.
(c) Any matter to thing requiring the consent of the Sublessor
under a Sublease shall also require the consent of Lessor herein.
(d) No Sublessee shall further assign or sublet all or any part
of the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the Sublessee, who shall have the right to cure the Default
of Lessee within the grace period, if any, specified in such notice. The
Sublessee shall have a right of reimbursement and offset from and against Lessee
for any such Defaults cured by the Sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the
Lessee to observe, comply with or perform any of the terms covenants, conditions
or rules applicable to Lessee under this Lease. A "BREACH" is defined as the
occurrence of any one or more of the following Defaults, and , where a grace
period to cure after a notice is specified herein, the failure by Lessee to cure
such Default prior to the expiration of the applicable grace period, shall
entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to
reoccupy same, or the abandonment of the Premises.
(b) Except s expressly otherwise provided in this Lease, the
failure by Lessee to make any payments of Base Rent or any other monetary
payments required to be made by Lessee hereunder, whether to Lessor or to a
third party, as and when due, the failure by Lessee to provide Lessor with
reasonable evidence of insurance or surety bond required under this Lease, or
the failure of Lessee to fulfill any obligation under this Lease which endangers
or threatens life or property, where such failure continues for a period of
three (3) days following written notice thereof by or on behalf of Lessor to
Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with Applicable Law per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the recession of an unauthorized assignment or
subletting per Paragraph 12.1(b), (iv) a tenancy Statement per Paragraphs 16 or
37, (v) the subordination or non-subordination of this Lease per Paragraph 30,
(vi) the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (viii) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this Lease, where any such failure continues for a period of ten (10) days
following written notice by or on behalf of Lessor to Lessee.
(e) The occurrence of any of the following events: (i) The making
by Lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. " 101 or any successor
stature thereto (unless, in the case of a petition filed against Lessee, the
same is dismissed within sixty (60) days; (iii) the appointment of a trustee or
receiver to take possession of substantially all of Lessee's assets located
other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days; provided, however, in the event that any
provision of this subparagraph (e) is contrary to any applicable law, such
provision shall be of no force effect, and not affect the validity of the
remaining provisions.
(f) The discovery be Lessor that any financial statement given to
Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was
materially false.
(g) If the performance of Lessee's obligation under this Lease is
guaranteed: (i) the death of a guarantor, (ii) the termination of a guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a
guarantor's breach of its guaranty obligation on an anticipatory breach basis,
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any event, to provide Lessor with written
alternative assurance or security, which, when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and guarantors that existed at the time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor at its option,
may require all future payments to be made under this Lease by Lessee to be made
only by cashier's check. In the event of a Breach of this Lease by Lessee, as
defined in Paragraph 13.1, with or without further notice or demand, and without
limiting Lessor in the exercise of any right or remedy which Lessor may have by
reason of such Breach, Lessor may:
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(a) Terminate Lessee's right to Possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
the Lessee shall immediately surrender possession of the Premises to Lessor. In
such event Lessor shall be entitled to recover from Lessee: (i) the worth at the
time of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of awards
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom including but not limited to the cost of recovering
possession of the Premises, expenses reletting, including necessary renovation
and alteration of the Premises, reasonable attorneys' fees, and that portion of
the leasing commission paid by Lessor applicable to the unexpired term of this
Lease. The worth at the time of award of the amount referred to in provision
(iii) of the prior sentence shall be computed by discounting such amount at the
discount rate of the Federal Reserve Bank of San Francisco at the time of award
plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's
Default or Breach of this Lease shall not waive Lessor's right to recover
damages under this paragraph. If termination of this Lease is obtained through
the provisional remedy of unlawful detainer, Lessor shall have the right to
recover in such proceeding the unpaid rent and damages as are recoverable
therein, or Lessor may reserve therein the right to recover all or any part
thereof in a separate suit for such rent and/or damages. If a notice and grace
period required under subparagraphs 13.1(b). (c), or (d) was not previously
give, a notice to pay, rent or quit, or to perform or quit, as the case may be,
given to Lessee under any statute authorizing the forfeiture or Leases for
unlawful detainer shall constitute the applicable notice for grace period
purposes required by subparagraphs 13.1(b), (c) or (d). In such case, the
applicable grace period under subparagraphs 13.1(b). (c), or (d) and under the
unlawful detainer statute shall run concurrently both an unlawful detainer and a
Breach of this Lease entitling Lessor to the remedies provided for in this Lease
and/or said statute.
(b) Continue the Lease and Lessee's right to possession in effect
(in California under California Civil Code Section 1951.4) after Lessee's Breach
and abandonment and recover the rent as it becomes due, provided Lessee had the
right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree are reasonable. Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver to
protect the Lessor's interest under the Lease, shall not constitute a
termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor
for free of abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "INDUCEMENT PROVISIONS," shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such
inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charges, bonus, inducement or
consideration therefore abated, given or paid by Lessor under such and
Inducement Provision shall be immediately due and payable be Lessee to Lessor,
and recoverable by Lessor as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which initiated the operation of this
Paragraph shall not be deemed a waiver of the provisions of this paragraph
unless specifically so stated in writing by Lessor at the time of such
acceptance. (See Addendum Paragraph)
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Lessor by the terms of any ground Lease, mortgage or trust deed covering the
Premises. Accordingly, if any installment of rent or any other sum due from
Lessee shall not be received by Lessor or Lessor's designee within five (5) days
after such overdue amount shall be due, then, without any requirement for notice
to Lessee shall pay to Lessor a late charge equal to six percent (6%) of such
overdue amount. The Parties hereby agree that such late charge represents a fair
and reasonable estimate of the costs Lessor will incur by reason of late payment
by Lessee. Acceptance of such late charge in no event constitute a waiver of
Lessee's Default or Breach with respect to such overdue amount, nor prevent
Lessor from exercising any of the other right sand remedies granted hereunder,
In the event that a late charge is payable hereunder, whether or not collected,
for three (3) consecutive installments of Base Rents, then notwithstanding
Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent
shall, at Lessor's option, become due and payable quarterly in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt by
Lessor, and by the holders of any ground Lease, mortgage or deed of trust
covering the Premises whose name and address shall have been furnished Lessee in
writing for such purpose, of written notice specifying wherein such obligation
of Lessor has not been performed; provided however, that if the nature of
Lessor's obligation is such that more than thirty (30)
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days after such notice are reasonably required for its performance, then Lessor
shall not be in breach of this Lease if performance is commenced within such
thirty (30) day period and thereafter diligently pursued to completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said all
power (all of which are herein called "condemnation"), this Lease shall
terminate as to the part so take as of the date the condemning authority takes
title or possession, whichever first occurs. If more than ten percent (10%) of
the floor area of the Premises, or more than twenty-five percent (25%) of the
land area not occupied by any building, is taken by condemnation, Lessee may, at
Lessee's option, to be exercised in writing within ten (10) days after Lessor
shall have given Lessee written notice of such taking (or in the absence of such
notice, within ten (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority take
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in the same
proportion as the rentable floor area of the Premises taken bears to the total
rentable floor area of the building located on the Premises. No reduction of
Base Rent shall occur if the only portion of the Premises taken is Land on which
there is no building, Any award for the taking of all or any part of the
Premises under the power of eminent domain or any payment under threat of the
exercise of such power shall be the property of Lessor, whether such award shall
be made as compensation for diminution in value of the Leasehold or for the
taking of the fee, or as severance damages; provided however, the such Lessee
shall be entitled to an compensation separately awarded to Lessee for Lessee's
relocation expenses and/or loss of Lessee's trade fixtures. In the event that
this Lease is not terminated by reason of such condemnation, Lessor shall to the
extent of its net severance damages received, over and above the legal and other
expenses incurred by Lessor in the condemnation matter, repair any damage to the
Premises caused by such condemnation, except to the extent that Lessee has been
reimbursed therefor by the condemning authority, Lessee shall be responsible for
the payment of any amount in excess of such net severance damages required to
complete such repair.
15. BROKER'S FEE.
15.1 The Brokers named in Paragraph 1.10 are the procuring causes of
this Lease,
15.2 Upon execution of this Lease by both Parties, Lessor shall pay to
said Brokers jointly or in such separate shares as they may mutually designate
in writing, a fee as set forth in a separate written agreement between Lessor
and said Brokers (or in the event there is no separate written agreement between
Lessor and said Brokers, the sum of $ ) for brokerage services rendered by said
to Lessor in this transaction.
15.3 Unless Lessor and Brokers have otherwise agreed in writing. Lessor
further agrees that: (a) if Lessee exercises any Option (as defined in Paragraph
39.1) or any Option subsequently granted which is substantially similar to an
Option granted to Lessee in this Lease, or (b) if Lessee acquires any rights to
the Premises or other Premises described in this Lease which are substantially
similar to what Lessee would have acquired had an Option herein granted to
Lessee been exercised, or (c) if Lessee remains in possession of the Premises,
with the consent of Lessor, after the expiration of the term of this Lease after
having failed to exercise an Option, or (d) if said Brokers are procuring cause
of any other Lease or sale entered into between the Parties pertaining to the
Premises and/or any adjacent property in which Lessor has an interest, or (e) if
Base Rent is increased, whether by agreement or operation of an escalation
clause herein, then as to any of said transactions, Lessor shall pay said
Brokers a fee in accordance with the schedule of said Brokers in effect at the
time of the execution of this Lease.
15.4 Any buyer or transferee of Lessor's interest in this Lease, whether
such transfer is by agreements or by operation of law, shall be deemed to have
assumed Lessor's obligation under this Paragraph 15. Each Broker shall be a
third Party beneficiary of the provisions of this Paragraph 25 to the extent of
its interest in any commission arising from this Lease and may enforce that
right directly against Lessor and its successors.
15.5 Lessee and Lessor each represent and warrant to the other that it
has no dealings with any person, firm, broker or finder (other than the Brokers
if any named in Paragraph 1.10) in connection with the negotiation of this Lease
and/or the consummation of the transaction contemplated hereby, and that no
broker or other person, firm or entity other than said named Brokers is entitled
to any commission or finder's fee in connection with said transaction. Lessee
and Lessor do each hereby agree to indemnify, protect, defend and hod the other
harmless from and against liability for compensation or charges which may be
claimed by any such unnamed broker finder or other similar Party by reason of
any dealings or actions of the indemnifying Party, including any costs,
expenses, attorney's fees reasonably incurred with respect thereto.
15.6 Lessor and Lessee hereby consent to and approve all agency
relationships including any dual agencies, indicated in Paragraph 1.10.
16. TENANCY STATEMENT.
16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days after
written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "TENANCY STATEMENT" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises, any
part thereof, or their building of which the Premises are a part, Lessee and all
Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchase designated by Lessor such financial statements of Lessee and
such Guarantors as may reasonably required by such lender or purchaser,
including but not
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limited to Lessee's financial statements for the past three (3) years. All such
financial statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or, if
this, is a Sublease of the Lessee; interest in the prior Lease, In the event of
a transfer of Lessor's title or interest in the Premises or in this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in Paragraph 15, upon such transfer or assignment
and delivery of the Security Deposit, as foresaid, the prior Lessor shall be
relieved of al liability with respect to the obligations and/or covenants under
this Lease hereafter to be performed by the Lessor. Subject to the foregoing,
the obligations and/or covenants in this Lease to be performed by the Lessor
shall be binding only upon the Lessor as hereinabove defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within thirty (30)
days following the date on which it was due, shall bear interest from the first
thirty-first (31st) day after it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4.
20. TIME OF ESSENCE. Time of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. The Lease contains all
agreement between the Parties with respect to any matter mentioned herein and no
other prior contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to Brokers that it has made, and
is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premise. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party.
23. NOTICES.
23.1 All notices required or permitted by this Lease shall be in writing
and may new delivered in person (by hand or by messenger or courier service or
may be sent by regular, certified or registered mail; or U.S. Postal Service
Express Mail, with postage prepaid or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph 23.
The addressee noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notices purposes. Either Party may be
written notice to the other specify a difference address for notice purposes,
except that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for the purpose of mailing or delivering notices to
Lessee. A copy of all notices required or permitted to be given to Lessor here
under shall be concurrently transmitted to such Party or Parties at such address
as Lessor may from time to time hereafter designate by written notice to Lessee.
23.2 Any notice sent by registered or certified mail, return receipt
requested shall be deemed given on the date of delivery shown on the receipt
card, or if no delivery date is shown, the postmark thereon. If sent by regular
mail the notice shall be deemed given forty eight (48) hours after the same is
addressed as required herein and mailed with postage prepaid. Notice delivered
by United States Express Mail or overnight courier that guarantees next day
delivery shall be deemed given twenty-four (24) hours after delivery of the same
to the United States Postal Service or courier. If any notice is transmitted by
facsimile transmission or similar means, the same shall be deemed served or
delivered upon telephone confirmation or receipt of the transmission thereof,
provided a copy is also delivered via delivery or mail. If notice is received on
a Sunday or legal holiday, it shall be deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant, or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term covenant or condition hereof. Lessor's
consent to, or approval of any act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a default or breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any preceding default or breach by
Lessee of any provision hereof, other that the failure of Lessee to pay the
particular rent so accepted. Any payment given Lessor by Lessee in connection
there with which such statements and/or conditions shall be of no force or
effect whatsoever unless specifically agreed to in writing by Lessor at or
before the time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute acknowledge an deliver to the other a short from memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees of taxes applicable thereto.
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26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of the
Lease.
27. CUMULATIVE REMEDIES. No remedy or hereunder shall be deemed exclusive
but shall, whenever possible, be cumulative with all other remedies at law or in
equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
Parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground Lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part to any and all advances made on the security thereof, and all to renewals,
modifications, consolidations, replacements and extensions thereof. Lessee agree
that the Lenders holding any such Security Device shall have no duty, liability
or obligation to perform any of the obligations of Lessor under this Lease, but
that in the event of Lessor's default with respect to any such obligation,
Lessee will give any Lenders whose name and address have been furnished Lessee
in writing for such purpose notice of Lessor's default and allow such Lender
thirty (30) days following receipt of such notice for the cure of said default
before invoking any remedies, Lessee may have by reason thereof. If any Lender
shall elect to have this Lease and/or any option granted hereby superiors to the
lien of its Security Device and shall give written notice thereof to Lessee,
this Lease and such Options shall be deemed prior to such Security Device,
notwithstanding the relative dates of the documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agree to attorney to a Lender or any other Party who acquire
ownership of the Premises by reason of a foreclosure of a Security Service, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior Lessor with respect to event occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior Lessor, or (iii) be bound by
prepayment of more than one (1) month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into be
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT") from the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof will not be disturbed so long as Lessee is not in Breach here of
an attorns to the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall
be effective without the execution of any further documents; provided however,
that , upon written request from Lessor or a lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writing as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreements
s is provided for herein.
31. ATTORNEY'S FEES. If any Party or Broker brings an action or proceeding
to enforce the terms hereof or declare rights here under, the Prevailing Party
(as hereafter defined) or Broker in any such proceeding, action , or appeal
thereon , shall be entitled to reasonable attorney's fees. Such fees may be
awarded in the same suit or recovered in a separate suit, whether or not such
action or proceeding is pursued to decision or judgment. The term "PREVAILING
PARTY" shall include, without limitation, a Party or Broker who substantially
obtains or defeats the relief sought, as the case may be , whether by
compromise, settlement, judgment, or the abandonment by the other Party of
Broker if its claim or defense. The attorney's fees award shall not be computed
in accordance with any court fee schedule but shall be as such to fully
reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to
attorney's fees, costs and expenses incurred in the preparation and service of
notice of Default and consultations in connection therewith, whether or not a
legal action is subsequently commenced in connection with such Default or
resulting Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES REPAIRS. Lessee and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchases, Lenders or Lessees and making such alterations,
repairs, improvements or additions to the Premises or to the building of which
they are a part, as Lessor may reasonable deem necessary. Lessor may at any time
place on or about the Premises or building any ordinary "For Sale" signs and
Lessor may at any time during the last one hundred twenty days (120) days of the
term hereof place on or about the Premises any ordinary "For Lease" signs. All
such activities of Lessor shall have be without abatement or liability to
Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntary or involuntary, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
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34. SIGNS. Lessee shall not place any sign upon the Premises, except that
Lessee may with Lessor's prior written consent, install (but not on the roof)
such signs as are reasonably required to advertise Lessee's own business. The
installation of any sign on the Premises by or for Lessee shall be subject to
the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations,
Trade Fixtures and Alterations). Unless otherwise expressly agreed herein,
Lessor reserves all rights to use the roof and the right to install, an all
revenues from the installation of, such advertising signs on the Premises,
including the roof, as do not unreasonably interfere with the conduct of
Lessee's business. (See Addendum Paragraph)
35. TERMINATION; MERGER. Unless specifically stated otherwise, in writing by
Lessor, the voluntary or other surrender of this Lease be Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any Sublease or lesser estate in the
Premises provided, however, Lessor shall in the event of any such surrender
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessors election to have such
event constitute the termination of such interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherein this Lease the consent of a Party a required to an act by or for
the other Party, such consent shall not be unreasonable withheld or delayed.
Lessor's actual reasonable costs an expenses (including but not limited to
architects', attorney's, engineers' or other consultants' fees) incurred in the
consideration of, or response to, a request by Lessee of any Lessor consent
pertaining to this Lease or the Premises, including but not limited to consents
to an assignments, subletting or the presence or use of a Hazardous Substance,
practice or storage tank, shall be paid by Lessee to Lessor upon receipt of an
invoice an supporting documentation therefor. Subject to Paragraph 12.2(e)
(applicable to assignment or subletting), Lessor may, as a condition to
considering any such request by Lessee, require that Lessee deposit with Lessor
an amount of money (in addition to the Security Deposit held under Paragraph 5)
reasonably calculated by Lessor to represent the cost Lessor will incur in
considering and responding to Lessee' request. Except as otherwise provided, any
unused portion of said deposit shall be refunded to Lessee without interest.
Lessor's consent to any act assignment of this Lease or subletting of the
Premises by Lessee shall not constitute an acknowledgment that no default or
breach by Lessee of this Lease exists, not shall such consent be deemed a waiver
of any then existing default or breach, except s may be otherwise specifically
stated in writing by Lessor at the time of such consent.
37. GUARANTOR.
37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11,
the form of the guaranty to be executed by each such guarantor shall be in the
form most recently published by the American Industrial Real Estate Association
and each said guarantor shall have the sale obligations as Lessee under this
Lease including but not limited to the obligation t o provide the Tenancy
Statement and information called for by Paragraph 16.
37.2 It shall constitute a Default of the Lessee under this Lease if any
such Guarantor fails for refuse, upon reasonable request by Lessor to give (a)
evidence of the due execution of the guaranty, and including in the case of a
corporate Guarantor, a certified copy of a resolution of its board of directors
authorizing the making of such guaranty, and including in the case of a
corporate Guarantor, a certified copy of a resolution of its board of directors
authorizing the making of such guaranty, together with a certificate of
incumbency showing the signature of the persons authorized to sign on its
behalf, (b) current financial statements of Guarantors as may from time to time
be requested by Lessor, (c) a tenancy statement, or (d) written confirmation
that the guaranty is still in effect.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises
and the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to al the provisions of this Lease.
39. OPTIONS.
39.1 DEFINITION. As used in this Paragraph 39, the word "OPTION" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any Lease that is Lessee has on other property
of Lessor; (b) the right of first refusal to Lease the Premises or the right of
first offer to Lease the Premises or the right of first refusal to lease other
property of Lessor or the right of first offer to Lease other property of
Lessor; (c) the right to purchase the Premises, or the right of first refusal to
purchase the Premises, or the right of first offer to purchase the Premises, or
the right to purchase other property of Lessor , or the right of first refusal
to purchase other property of Lessor, or the right of first offer to purchase
other property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee
in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof,
and cannot be voluntarily or involuntarily assigned or exercised by any person
or entity other than said original Lessee while the original Lessee is in full
and actual possession of the Premises and without the intention of there after
assigning or subletting, The options, of any herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any Multiple Options
to extend or renew this Lease, a later Option cannot be exercised unless the
prior Options to extend or renew this Lease have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
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(a) Lessee shall have not right to exercise an Option,
notwithstanding any provision in the grant of Option to the Contrary: (i) during
the period commencing with the giving of any notice of Default under Paragraph
13.1 and continuing until he notices Default is cured, to )ii) during the period
of time any monetary obligation due Lessor from Lessee is unpaid (without regard
to whether notice thereof is given Lessee), or (iii) during the time Lessee is
in Breach of this Lease.
40. MULTIPLE BUILDINGS. If the Premises are part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by, keep and observe all
reasonable rules and regulations which Lessor may make from time to time for the
management, safety, care and cleanliness of the grounds, the parking and
unloading of vehicles and the preservation of good order, as well as for the
convenience of other occupants or tenants of such other buildings and their
invitees and that Lessee will pay its fair share of common expenses incurred in
connection there with.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service to or other security
measures, and that Lessor shall have no obligation whatsoever to provide same,
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third Parties.
42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to
grant without the consent or joinder of Lessee, such easements rights and
dedications that Lessor deems necessary and to cause to recordation of parcel
maps and restrictions, so longs as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedications, amp or restrictions.
43. PERFORMANCE UNDER PROTEST. If at anytime a dispute shall arise as to any
amount of sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment under protest and such payment shall not be
regarded as a voluntary payments and there shall survive the right on the part
of said Party to institute suit for recovery of such sum. If it shall be
adjudged that there was legal obligation on the part of said Party to pay such
sum or any part thereof, said Party shall be entitled to recover such sum or so
much thereof as it was not legally required to pay under the provisions of this
Lease.
44. AUTHORITY. If either Party hereto is a corporation, trust, general or
limited partnership, each individual executing this Lease on behalf of such
entity represent sand warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions.
46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to Lease to Lessee.
This Lease is not intended to be binding until executed by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The Parties shall amend
those Lease from time to time to reflect any adjustments that ate made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as my be reasonably required
by an institutional, insurance company, or pension plan, lender in connection
with the obtaining of normal financing or refinancing of the property of which
the Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more
than new person or entity is named herein as either Lessor or Lessee, the
obligations of such Multiple Parties shall be the joint an several
responsibility of all persons or entities herein as such Lessor or Lessee.
See Addendum, attached hereto. For additional provisions.
34
<PAGE> 19
Fleet Capital Corporation
March 26, 1998
Page 35
LESSOR AN LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO, THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN
PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS
APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO
EVALUATED THE CONDITION OF THE PROPERTY AS TO THE
POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS OR
HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL
REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE
BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE
LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OR THIS LEASE OR THE TRANSACTION TO
WHICH IT RELATED; THE PARTIES SHALL RELY SOLELY
UPON THE ADVISE OF THEIR OWN COUNSEL AS THE LEGAL
AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT
PROPERTY IS LOCATED IN A STATE OTHER THAN
CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE
PROPERTY IS LOCATED SHOULD BE CONSULTED.
The Parties hereto have executed this Lease at the place on the dates specified
to their respective signatures.
Executed at___________________________ Executed at__________________________
_____________
on ___________________________________ on___________________________________
by Lessor:____________________________ by Lessor:
______________________________________ _____________________________________
_____________
______________________________________ _____________________________________
_____________
By ___________________________________ By __________________________________
___________ Name Printed:_______________________ Name Printed:_______________
___________________________ Title: ___________________________ Title:__________
________________________________________
By ___________________________________ By __________________________________
___________ Name Printed:_______________________ Name Printed:_______________
___________________________ Title: ___________________________ Title:__________
________________________________________
Address:______________________________________Address:_________________________
_________________________________________________________ ______________
Tel. No. (___) _________ Fax No. (___) _______________ Tel. No. (___)___________
Fax No. (___) _________
NOTICE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call us to make sure you are utilizing the most
current form: American Real Estate Associate, 34 South Figueroa Street, Suite
M-1, Los Angeles, CA 90081. (213) 687-8777. Fax No. (213) 687-8616.
35
<PAGE> 20
Exhibit 10.41
ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL
SINGLE-TENANT LEAST-NET DATED AUGUST 29, 1997
BETWEEN FLOWSERVE CORPORATION AND ENTERPRISE INDUSTRIES, INC.
1. CONSTRUCTION ON PREMISES
It is understood and agreed by the parties that the Lessee
intends to immediately commence and improvements to the property. These
improvements shall include, but not necessarily be limited to, raising the
height of the roof in the North building to 30 feet (10,000 square feet to be
done immediately with work on the remaining 13,000 square feet to be commenced
in approximately twelve months, which additional work for reference purposes is
referred to as "Phase 2"); paint exterior, including courtyard; top coat, seal
and stripe all parking areas; paint , re-floor, replace ceiling titles in
interior office areas; repair and/or paint/seal floors in the shop areas; and
such other work as is required to comply with ADA in conjunction with the above
work. The estimated cost of the above work is approximately $1,215,000.
Lessee will commence preparation of plans for improvements
immediately upon occupancy of the premises. Said plans will be submitted to the
Los Angeles City Department of Building and Safety for approval and Lessee shall
proceed in an expeditious manner to completion of the above work. Lessee shall
submit plans to Lessor for approval not more than 30 days after the Commencement
Date of this Lease. Said plans shall be submitted to Building and Safety and
such other governmental agencies as is appropriate for approval with 15 days
after Lessor's approval of the plans. Construction of the first phase of work
shall commence not later than 15 days after the issuance of a Building Permit
for such purpose by Los Angeles City Department of Building and Safety.
Construction of the first phase (which includes raising the roof height to 30
feet for approximately 10,000 square feet of building only) shall be completed
not later than 4 months after issuance of the Building Permit. Lessee shall have
12 months from completion of the first phase of construction to complete the
raising of the roof height to 30 feet on the balance of premises (Phase 2).
Lessor shall have the right to require the Lessee to furnish a performance bond
covering lessee's obligations arising from the improvements.
All costs of the work provided for in this section shall be paid
Lessee and such work shall be performed in compliance with the provisions of
Section 7.3 of the Lease as modified.
2. RENT ABATEMENT AND CREDIT
During the period of construction set forth in Paragraph 1 of
this Addendum, and provided the Lessee has complied with the time periods set
forth therein, all Base Rent payable pursuant to Section 1.5 of the Lease, shall
be abated. This abatement shall not apply to other amounts due from, or to be
paid by, Lessee pursuant to the Lease. Upon conclusion of the construction,
Lessee shall receive a credit for the construction costs to be applied against
the abated rent. To the extent construction costs are less than the abated rent,
Lessee shall pay the
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Fleet Capital Corporation
March 26, 1998
Page 37
difference to Lessor forthwith. To the extent construction costs exceed the
abated rent, Lessee shall not receive a credit. If Lessee shall timely complete
phase 1 of the construction, rent shall continue to be abated during phase 2
construction, provided that Lessee shall diligently complete phase 2 of the
construction. In no event shall Lessee receive an aggregate credit of more than
$960,000.
For purposes of Section 13.3, only those abated rents which
exceed the amount actually expended pursuant to Section 1.1 of this Addendum
shall be subject to recapture.
3. RENT INCREASES
a. Base Rent shall increase to $50,000 per month, commencing on
the second anniversary of the Lease Commencement Date.
B. Base Rent shall be increased annually on the anniversary of
the Commencement Date. The base for computing the adjustment shall be the United
States Department of Labor, Bureau of Labor Statistics Consumer Price Index for
Urban Wage Earners and Clerical Workers, Subgroup "all items" (8/9 = 100), for
the Los Angeles-Long Beach-Anaheim Metropolitan area (the Index herein). The
base rent shall be increased in the same percentage as the year in which and
adjustment last occurred and ending with August of the year in which the
adjustment is to occur. (For the Purpose of the first adjustment, the beginning
Index will be the Index in August of 2000.) If, as a result of such
calculations, the Base Rent increase is less than 2%, the Base Rent shall be
increased, on the adjustment date, by an amount equal to 2% of the Base Rent
than being paid. In no event, shall Base Rent be increased, as a result of such
calculation, by an amount more than 7% of the Base Rent then being paid. Any
excess increase shall not accumulate not may it by applied in future years.
4. INSURING PARTY
Notwithstanding the provisions of Section 1.8 of the Lease,
during the first two years hereof, Lessees shall be the insuring party.
Commencing on the second anniversary of the Lease Commencement Date, Lessor
shall become the insuring party. All provisions of the Lease shall be construed
consistent with such definition.
5. REPAIRS BY LESSOR
Notwithstanding the provisions of Section 7.1 and 7.2 of the
Lease, Lessor shall be responsible for all repairs to the air conditioning,
electrical, fire sprinkler and hydrants, plumbing and roofing systems,
regardless of when the same are discovered. [X] addition, Lessor shall remain
responsible for all repairs for any conditions identified in the Property
Inspection Report previously obtained be Lessee as a part of its attempts to
purchase the building without regard to the thirty day limit specified in
Section 2.2.
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Fleet Capital Corporation
March 26, 1998
Page 38
6. CONVERSION TO GROSS LEASE
On the second anniversary of the Lease Commencement Date this
Lease shall convert to a Gross Lease in that Lessee shall have no obligation to
pay to Lessor any expense related to Lessee's use and occupancy of the building
except rent. Its is specifically understood and agreed that Lessee shall no
longer be responsible for payment of insurance, property taxes, repairs and
maintenance of the facility. Nothing herein shall be construed to obligate
Lessor to pay fro any property taxes or insurance related to Lessee's personal
property, insurance covering Lessee's general liability or for damage to the
premises beyond normal wear and tear when such damage is caused by Lessee.
Effective on the second anniversary of the Lease Commencement
Date, the following provisions of the Lease shall be of no force and effect:
Section 2.2 (to the extent it imposes and obligation upon Lessee to pay for
repair or maintenance to the building), Section 2.3 (to the extent it imposes
any obligation upon Lessee to pay for the repair or maintenance to the
building), Section 7.1 (a), Section 7.1(b), Section 7.2, Section 8.1, Section
10.1(a), Section 10.1(b).
7. LESSOR'S OBLIGATIONS
Notwithstanding any other provisions of the Lease or this
Addendum to the contrary, any obligations imposed upon the Lessee by Paragraphs
2.2, 2.3, 7.1(a), 7.1(b), 7.2 and 8.1, 10.1 (a) , 10.1(b) shall become the
responsibility of Lessor at Lessor's sole cost and expense on the second
anniversary of the Lease Commencement Date.
8. TOXICS AND HAZARDOUS SUBSTANCES
Lessor and Lessee are aware that the property may contain
elevated concentration of hazardous substances as disclosed, in part, by reports
prepared by the parties in conjunction with Lessee's previous attempts to
purchase the property. The parties are continuing to investigate the extent of
such concentrations of substances on the property. Lessor shall take reasonable
or appropriate steps to promptly investigate the extent of the hazardous
substances on the property and to reduce levels of such hazardous substances so
as to not violate applicable regulations subject to the provisions hereof. Such
efforts shall be completed not later than July 1, 1998. Lessor shall not be
required to incur costs in an amount in excess of $100,000 in complying with the
provisions of this Section. However, nothing herein shall be construed in any
manner to relieve Lessee from any liability for any hazardous substances or
toxics on the property which Lessor establishes have been caused solely by the
actions of Lessee.
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Fleet Capital Corporation
March 26, 1998
Page 39
9. DEPOSIT FOR TAXES
Lessor may only exercise the rights granted to it by Section
10.1(b) after Lessee, shall at any time, fail to have complied with the
Provisions of 10.1(a) of the Lease.
10. SUBLEASE
a. Notwithstanding the provisions of Section 12 of the Sublease,
to the extent Lessee desires to sublease the premises, Lessor shall not
unreasonably withhold consent to such transaction.
b. Lessor acknowledges that Lessee is a wholly owned subsidiary
of TMCI Electronics, Inc. Lessor specifically consents to any transfers of
assignment of Lessee's rights hereunder to TMCI provided Lessor has reviewed and
approved the most recent audited annual and unaudited financial statements of
TMCI, and provided that TMCI accepts said assignments or transfer and agrees in
writing to be bound by all terms of this Lease. Lessor further agrees to not be
unreasonably withhold its consents to any other proposed assignment or transfer
which is governed by the provisions of Article 12 of the Lease.
11. LESSOR CONSENT
The provisions of Section 12.3 shall apply only if the matter or
thing requiring the consent of Sublessor would have required the consent of
Lessor in undertaken by Lessee.
12. BROKER FEES
Lessor shall pay to Tony Magnone, as a broker fee, in conformity
with provision sot Article 15 of Lease, equal to 5% of the Base Rent received
during each month of the Lease term or any extensions or renewal thereof whether
by exercise of the option to extend or otherwise. This commission shall be
payable monthly with ten (10) days of receipt of the Base Rent. The commission
shall be paid only on rents actually received by Lessor and no commission shall
be payable on any rents against which Lessee has received a credit as a result
of the costs of construction on the property. In the event Lessee shall exercise
its option to the purchase the property, a commission of 4% of the gross selling
price shall be due an and payable to Tony Magnone upon the successful close of
escrow for such purchase by Lessee. Any assignment or transfer by Lessee of any
of its rights under the Lease or the purchase option shall not defeat or
extinguish the obligation to pay a commission, as provided herein, to Tony
Magnone who shall receive the same commission that would have been due and
payable had the performance by such transfer or assignee been instead by Lessee.
Nothing herein shall be construed as to obligate Lessor to pay any additional
commission or fee to Tony Magnone upon any subsequent sublease, assignment or
transfer of the Lease unless such additional commission or fee shall have been
agreed to in writing by Lessor.
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<PAGE> 24
Fleet Capital Corporation
March 26, 1998
Page 40
13. SIGNAGE
Section 34 of the Lease is modified to provide that Lessee nay
place such reasonable signage upon the property as Lessee shall desire subject
to the provisions of the Paragraph 7 of the Lease. Lessor shall not have any
right to use the roof or to install or allow the installation of any other signs
advertising upon the roof or any other portion of the premises.
14. TRANSFER OF OPTION
The provisions of Section 39.2 of the Lease shall not apply with
respect to any transfer to TMCI, its successors or assigns, or any action which
is deemed a transfer pursuant to Section 12.1(b) of the Lease; provided,
however, nothing contained in the Lease shall abrogate Lessor's rights under
Section 10 of this Addendum.
15. FORCE MAJEURE
If the performance of any act required by this Leas to be
performed by either part is prevented or delayed by reason of any act of God,
strike, lockout, labor troubles, inability to secure materials, restrictive
governmental laws or regulations, or any other cause except financial inability,
that is not the fault of the party required to perform the act, the time for
performance of any act will be extended for a period equivalent to the period of
delay, and performance of the act during this period of delay will be excused.
However, nothing contained in this Section shall excuse the prompt payment of
rent by Lessee as required by this Lease, or the performance of any act rendered
difficult solely because the financial condition of the party required to
perform the act.
16. OPTION TO PURCHASE PROPERTY
Lessor hereby grants to Lessee the exclusive right to purchase
the property which is the subject of this Lease. The perms of the purchase will
be set forth in the Purchase Agreement previously executed between Lessee and
Lessor, a copy of which is attached hereto as Exhibit "A," provided, however,
all times specified therein shall be deemed to run from the date of all notice
of exercise of the option and not from any other date. In the event of any
conflict between the terms of the Purchase Agreemtns and the Lease, including
this Addendum, the terms of the Purchase Agreements shall control.
The option to purchase shall be exercised by Lessee delivering to
Lessor written notice of its exercise of the option. This notice may be
delivered at any time prior to March 1, 1999. If the notice by Lessee of its
exercise of the option is delivered to Lessor on or before September 1, 1998,
and the escrow for the purchase of the property closes on or before January 1,
1999, the purchase price, as defined in Exhibit "A" hereto, shall be $4,750,000.
If the option
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<PAGE> 25
Fleet Capital Corporation
March 26, 1998
Page 41
is exercised after September 1, 1998 and before its expiration, the purchase
price , as provided in Exhibit "A" attached hereto will be $5,250,000. Upon
exercise of the option, the escrow for the purchase must close, in any event, on
or before January 1, 2000. If not exercised, and subject to the terms hereof,
the option shall terminate on March 1, 1999.
This option and the right of first refusal provided elsewhere in
this Addendum, shall evidence by a Memorandum of Options in the form of Exhibit
"B", attached here to, which Memorandum of Option shall be recorded in the
County Recorder of Los Angeles County.
The rights under this option may be assigned by Lessee to TMCI
provided Lessor has reviewed and approved the most recent audited annual and
unaudited financial statements of TMCI.
17. RIGHT OF FIRST REFUSAL
In addition to the option, Lessor grants to Lessee a right of
first refusal to purchase the property. If after the termination of the option
period, Lessor shall receive an offer for the property which it intends to
accept, Lessor shall notify Lessee, in writing of all terms and conditions of
such offer. Lessor shall have 72 hours from receipt of the written notice to
advise Lessor in writing, of its acceptance of the offer. In the event Lessee
accepts the offer, the sale shall be completed by Lessor to Lessee on all terms
and conditions of such offer. If Lessee fails to accept the offer, Lessor shall
be free to sell the property to such third party on such terms and conditions.
If however, any material term or condition of said sale is changed or modified,
Lessor must, again, proceed to Lessee written notice of the new terms and
provide to Lessee a period of 72 hours in which to accept such revised offer.
If for any reason a sale is not concluded, after Lessee shall
have been given notice and an offer is, again, received whether from the
original proposed purchaser or another third party, Lessee shall be again
afforded its rights of first refusal pursuant to this Section.
The parties hereto have executed this Addendum at the place on
the dates specified above to their respective signatures.
Executed at _________________________ Executed at ____________________________
on___________________________________ on _____________________________________
by Lessor: by Lessee:
_____________________________________ ________________________________________
_____________________________________ ________________________________________
By___________________________________ By______________________________________
41
<PAGE> 26
Fleet Capital Corporation
March 26, 1998
Page 42
Name Printed:________________________ Name Printed: __________________________
Title: ______________________________ Title: _________________________________
Tel. No. ( )______ - _____ Address:________________________________
Fax No. ( )______ - _____ __________________________________
Tel. No. ( ) _______- _________
Fax No. ( ) _______- _________
42
<PAGE> 1
Exhibit 10.11
TMCI ELECTRONICS, INC.
TOUCHE MANUFACTURING COMPANY, INC.
TOUCHE ELECTRONICS, INC.
ENTERPRISE INDUSTRIES, INC.
TRINITY ELECTRONICS, INC.
ENTERPRISE ACQUISITION CORPORATION
1875 DOBBIN DRIVE
SAN JOSE, CA 95133
March 26, 1998
Fleet Capital Corporation
200 Glastonbury Boulevard
Glastonbury, CT 06033
Re: First Amendment To Loan And Security Agreement
Gentlemen:
Reference is made to the Loan and Security Agreement dated as of
March 2, 1998 (as amended, the "Loan Agreement"), among Fleet Capital
Corporation, as Lender, and TMCI Electronics, Inc. ("TMCI"), Touche
Manufacturing Company, Inc., Touche Electronics, Inc., Enterprise Industries,
Inc., and Trinity Electronics, Inc. (collectively, the "Existing Borrowers"), as
Borrowers. All capitalized terms used herein that are not otherwise specifically
defined herein shall have the meanings given such terms in the Loan Agreement.
A subsidiary of TMCI, Enterprise Acquisition Corporation ("New
Try-Die") anticipates a merger with Try-Die, Inc. ("Old Try-Die, Inc.") in which
New Try-Die will be the surviving corporation, and New Try-Die anticipates
changing its name to Try-Die, Inc. (such merger and name-change, the "Try-Die
Acquisition"). The Existing Borrowers and New Try-Die have requested that the
Lender agree to make New Try-Die a Borrower under the Loan Agreement and extend
financing and other credit accommodations to New Try-Die.
The Borrowers have also requested that the Lender (i) permit the
Borrowers to elect that Revolving Credit Loans and Term Loans bear interest
based upon the LIBOR Rate, at the rates and on the terms described below; and
(ii) increase the maximum amount of Equipment Loans for the first year of term
of the Loan Agreement, at the rates and on the terms described below. The Lender
has agreed to such modifications to the Loan Agreement, subject to the following
terms and conditions:
1. Consent. Pursuant to Section 8.2.1. of the Loan Agreement, the Lender
consents to the transactions constituting the Try-Die Acquisition, provided that
the Try-Die Acquisition is consummated according to the terms of that certain
Merger Agreement and Plan of Reorganization of Enterprise Acquisition
Corporation, A Wholly-Owned Subsidiary of TMCI
<PAGE> 2
Fleet Capital Corporation
March 26, 1998
Page 44
Electronics, Inc. and Try-Die Incorporated (the "Merger Agreement"), in the form
and substance of the draft Merger Agreement delivered to Lender's counsel by
TMCI's counsel on March 23, 1998. Lender acknowledges the existence of the UCC
financing statement filed by General Electric Capital Corporation with respect
to AlliedSignal, Inc.
2. New Try-Die Designated as a Borrower. New Try-Die is, and hereby
shall be, a Borrower under the Loan Agreement, jointly and severally with the
other Borrowers with respect to all now existing and hereafter arising
Obligations and all references to Borrowers in the Loan Agreement shall mean all
Borrowers, including New Try-Die, jointly and severally. Subject to the terms of
the Loan Agreement, New Try-Die hereby agrees to be, and hereby is, jointly,
severally, unconditionally, and absolutely obligated and liable with the other
Borrowers to pay and perform all the Obligations under the Loan Agreement and
other Loan Documents.
3. Amendments.
a. LIBOR Rate Loans. Section 2.1.5 of the Loan Agreement is
hereby deleted in its entirety and replaced with the following:
"2.1.5 LIBOR Rate Loans. Borrowers may elect, in accordance with
the terms of this Agreement, (a) with respect to Revolving Credit
Loans, or portions thereof, as provided herein, for such Loans to
bear interest based upon the LIBOR Rate, at a rate per annum
equal to two and three-quarters percent (2.75%) plus the LIBOR
Rate for the applicable LIBOR Interest Period, (b) with respect
to Term Loan-A and the Equipment Loans or portions thereof, as
provided herein, for such Loans to bear interest based upon the
LIBOR Rate, at a rate per annum equal to three percent (3.00%)
plus the LIBOR Rate for the applicable LIBOR Interest Period, and
(c) with respect to Term Loan-B or portions thereof, as provided
herein, for such Loans to bear interest based upon the LIBOR
Rate, at a rate per annum equal to four percent (4.00%) plus the
LIBOR Rate for the applicable LIBOR Interest Period. Following
the satisfaction of the conditions to the First Adjustment Date,
the foregoing margins above the LIBOR Rate will be reduced by
one-quarter percent (.25%) and, following the satisfaction of the
conditions to the Second Adjustment Date, the foregoing margins
above the LIBOR Rate will be reduced by an additional one-quarter
percent (.25%)."
b. Equipment Loans. The third and final sentence of Section 1.2.3
of the Loan Agreement is hereby stricken in its entirety and replaced with the
following
"The principal amount of Equipment Loans made hereunder shall not
exceed, in the aggregate, (a) during the period from March 2,
1998 to March 1, 1999, $2,000,000.00; and (b) from and after
March 2, 1999, $1,500,000.00 during
44
<PAGE> 3
Fleet Capital Corporation
March 26, 1998
Page 45
any twelve consecutive months during the Original Term, and shall
not exceed in the aggregate $4,000,000.00 during the Original
Term."
4. Reserve. Pursuant to Section 1.1.1. of the Loan Agreement, Borrowers
acknowledge and agree that Lender has established a reserve in the amount
necessary, in the determination of the Lender, to repay in full the SBA Payoff
Amount (as defined below). This reserve will be maintained by Lender and paid
directly to the Existing Creditor (as defined below) in accordance with the
Payoff Letter (as defined below).
5. Ineligible Collateral. Borrowers agree that, until such time as the
conditions precedent set forth in paragraph 7 below have been satisfied: (i) the
assets of New Try-Die shall be excluded from the definitions of Eligible
Accounts, Eligible Equipment, and Eligible Inventory; and (ii) Borrowers shall
not request that Lender make and Lender shall not, except in its sole
discretion, make Revolving Credit Loans or Term Loans or Equipment Loans to New
Try-Die. Borrowers agree that, until such time as the UCC financing statement
filed by General Electric Capital Corporation with respect to AlliedSignal, Inc.
is removed, all accounts covered by such financing statement shall not be
Eligible Accounts.
6. Conditions Precedent. The Borrowers acknowledge and agree that the
foregoing consent and amendments will not become effective, unless and until all
of the following documents have been fully executed and delivered in form and
substance satisfactory to Lender in all respects and in Lender's sole
discretion:
a. this Letter Agreement;
b. the Endorsement(s) in the forms attached as Exhibit A hereto;
c. UCC-11 or other such results from search firms acceptable to
Lender for all locations where assets of Old Try-Die or New Try-Die may be
located;
d. amendments to the schedules and exhibits to the Loan Documents
to reflect the transactions contemplated hereby;
e. executed and delivered copies of all merger, employment,
consulting and other agreements entered into by any Borrower or any Subsidiary
of a Borrower in connection with the Try-Die Acquisition;
f. a payoff letter (the "Payoff Letter") from El Dorado
Bank/Liberty National Bank (the "Existing Creditor") confirming that it holds
the security interests evidenced by the UCC-1 financing statement numbered
9520060339 filed in favor of Liberty National Bank, SBA Loan Group, on or about
July 13, 1995, and specifying the existing indebtedness of Old Try-Die owing to
the Existing Creditor and that, upon receipt of payment of such amount (such
amount,
45
<PAGE> 4
Fleet Capital Corporation
March 26, 1998
Page 46
including all interest or late charges accruing on or before the date of such
payment, the "SBA Payoff Amount") on or before the date set forth therein, the
Existing Creditor will release any and all liens it holds in the assets of Old
Try-Die;
g. certificates of officers and exhibits thereto in the form
required to be delivered to Lender by the Borrowers in connection with the Loan
Agreement;
h. such litigation, tax lien, and other searches as Lender may
request; and
i. all such other documents and instruments, including without
limitation, corporate legal existence and good standing certificates, certified
resolutions of the directors of the Borrowers, as the Lender may request.
7. Conditions Subsequent. The Borrowers acknowledge and agree that each
of the following documents will be fully executed and delivered to the Lender,
in form and substance satisfactory to Lender in all respects and in Lender's
sole discretion, on or before April 10, 1998:
a. landlord consent and waiver agreements with respect to all
locations of New-Try Die, in the form previously executed on behalf of Lender by
the landlords of the Existing Borrowers;
b. UCC-1 financing statements of New Try-Die, for all locations
in which UCC-1 financing statements are presently filed on behalf of Lender by
the Existing Borrowers and for all locations of New Try-Die and Old Try-Die,
copies of filing receipts or acknowledgments issued to evidence all filings or
recordations necessary to perfect the Liens of Lender in the Collateral,
including, without limitation, with respect to Collateral furnished by New
Try-Die, and UCC-3 amendments reflecting the change in name anticipated by New
Try-Die, in a form acceptable to Lender to ensure that such Liens constitute
first priority valid and perfected Liens; and
c. certificates of casualty insurance policies evidencing
coverage of the assets owned by New Try-Die together with loss payable
endorsements on Lender's standard form of loss payee endorsement naming Lender
as loss payee.
8. Confirmation of Representations and Warranties. The Borrowers
represent and warrant that (a) the representations and warranties made in the
Loan Documents are true, correct and complete on the date hereof; (b) they are
in compliance with all the covenants and agreements contained in the Loan
Documents; and (c) no Default or Event of Default exists or has occurred and is
continuing under the Loan Documents. The Borrowers acknowledge and agree that
they are unconditionally liable for the full, prompt and complete performance
and payment of all Obligations arising under the Loan Documents or otherwise,
without defenses, counterclaims or setoffs of any kind or nature. The Lender, by
entering into this Amendment, does not waive any rights and remedies it may have
under the Loan Documents or otherwise, including, without
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<PAGE> 5
Fleet Capital Corporation
March 26, 1998
Page 47
limitation, arising or resulting from any Default or Event of Default, and all
of such rights and remedies are hereby expressly reserved.
9. Authority. Each Borrower represents and warrants that it is a
corporation duly organized and in good standing under the laws of its state or
other jurisdiction of incorporation and is duly qualified as a foreign
corporation and in good standing in all states or other jurisdictions where the
nature and extent of the business transacted by it or the ownership of assets
makes such qualification necessary, except for those jurisdictions in which the
failure to so qualify would not have a material adverse effect on the financial
condition, results of operation or businesses of Borrower or the rights of
Lender hereunder or under any of the other Financing Documents. Each Borrower
represents and warrants that the execution, delivery and performance of this
Amendment is within the corporate powers of each Borrower, has been duly
authorized and are not in contravention of law or the terms of the certificates
of incorporation, by-laws, or other organizational documentation of such
Borrower, or any indenture, agreement or undertaking to which such Borrower is a
party or by which such Borrower or its property are bound. Each Borrower
represents and warrants that this Amendment constitutes the legal, valid and
binding obligation of each Borrower enforceable in accordance with its terms.
10. Miscellaneous. This Amendment shall be deemed to be a Loan Document
under the Loan Agreement. The Borrowers agree to pay all reasonable attorneys'
fees incurred by Lender in connection with the negotiation and preparation of
this Amendment and the instruments and documents prepared in connection
herewith. This Amendment supersedes all prior correspondence and discussions
relating to the subject matter hereof. This Amendment shall be governed and
construed under the laws of the State of Connecticut and is subject to all the
rights and waivers, including the waiver of jury trial, set forth in the Loan
Agreement. Except as explicitly set forth herein, the Borrowers confirm that the
Loan Agreement and other Loan Documents have not been amended or modified and,
as amended hereby, continue in full force and effect.
11. PREJUDGMENT REMEDY WAIVER; COMMERCIAL TRANSACTION.
EACH BORROWER HEREBY WAIVES RIGHTS AS IT MAY HAVE TO NOTICE AND/OR
HEARING UNDER ANY APPLICABLE FEDERAL OR STATE LAWS INCLUDING, WITHOUT
LIMITATION, CONNECTICUT GENERAL STATUTES SECTION 52-278A, ET SEQ. AS AMENDED,
PERTAINING TO THE EXERCISE BY LENDER OF SUCH RIGHTS AS THE LENDER MAY HAVE,
INCLUDING, BUT NOT LIMITED TO, THE RIGHT TO SEEK PREJUDGEMENT REMEDIES AND/OR
DEPRIVE BORROWERS OF OR AFFECT THE USE OF OR POSSESSION OR ENJOYMENT OF ANY
BORROWER'S PROPERTY PRIOR TO THE RENDITION OF A FINAL JUDGMENT AGAINST ANY
BORROWER. EACH BORROWER FURTHER WAIVES ANY RIGHT IT MAY HAVE TO REQUIRE LENDER
TO PROVIDE A BOND OR OTHER SECURITY AS A PRECONDITION TO OR IN CONNECTION WITH
ANY
47
<PAGE> 6
Fleet Capital Corporation
March 26, 1998
Page 48
PREJUDGMENT REMEDY SOUGHT BY AGENT AND LENDER, AND WAIVE ANY OBJECTION TO THE
ISSUANCE OF SUCH PREJUDGMENT REMEDY BASED ON ANY OFFSETS, CLAIMS, DEFENSES OR
COUNTERCLAIMS TO ANY ACTION BROUGHT BY ANY LENDER. EACH BORROWER HEREBY
REPRESENTS, COVENANTS AND AGREES THAT THE PROCEEDS OF THE LOANS EVIDENCED BY
THIS AGREEMENT SHALL BE USED FOR GENERAL COMMERCIAL PURPOSES AND THAT SUCH LOANS
CONSTITUTE A "COMMERCIAL TRANSACTION" AS DEFINED BY THE STATUTES OF THE STATE OF
CONNECTICUT.
Executed as an instrument under seal as of the date first written above.
WITNESS: TMCI ELECTRONICS, INC.
TOUCHE MANUFACTURING
COMPANY, INC.
TOUCHE ELECTRONICS, INC.
ENTERPRISE INDUSTRIES, INC.
TRINITY ELECTRONICS, INC.
ENTERPRISE ACQUISITION
CORPORATION
______________________________ By:_______________________________________
Name:_____________________________
Title:____________________________
Accepted and Agreed:
FLEET CAPITAL CORPORATION
By:______________________
Name:________________
Title:_______________
48
<PAGE> 7
EXHIBIT A
See attached three endorsements.
<PAGE> 8
ENDORSEMENT TO $4,700,000.00 SECURED PROMISSORY NOTE-A
FOR VALUE RECEIVED, the undersigned hereby endorses and joins as a
Borrower, jointly and severally, in the attached $4,700,000.00 Secured
Promissory Note-A dated March 2, 1998.
ENTERPRISE ACQUISITION CORPORATION
By: _____________________________
Name:
Title:
50
<PAGE> 9
ENDORSEMENT TO $2,000,000.00 SECURED PROMISSORY NOTE-B
FOR VALUE RECEIVED, the undersigned hereby endorses and joins as a
Borrower, jointly and severally, in the attached $2,000,000.00 Secured
Promissory Note-B dated March 2, 1998.
ENTERPRISE ACQUISITION CORPORATION
By: _____________________________
Name:
Title:
51
<PAGE> 10
ENDORSEMENT TO $4,000,000.00 SECURED PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned hereby endorses and joins as a
Borrower, jointly and severally, in the attached $4,000,000.00 Secured
Promissory Note dated March 2, 1998.
ENTERPRISE ACQUISITION CORPORATION
By: _____________________________
Name:
Title:
52
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the use in SEC Registration Statement 333-52171 on Form
S-1 (the "Registration Statement") and the prospectus forming part of the
Registration Statement of our report dated February 20, 1998 on our audits of
the financial statements of TMCI Electronics, Inc. and of our report dated March
22, 1998 on our audit of the financial statements of Trinity Electronics, Inc.
We also consent to the reference to our firm under the caption of "Experts" in
the Registration Statement.
/s/ Moore Stephens, P.C.
---------------------------------
MOORE STEPHENS , PC
Certified Public Accountants
New York, New York
July 10, 1998
- --------
[X] Lessor's obligation applies to years one and two only and is only for
amounts in excess of $5,000 per repair and an aggregate pf $1000,000 for both
years one and two.
53
