<PAGE> 1
REGISTRATION NO. 333-52171 AS FILED
AUGUST 7, 1998
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE EFFECTIVE AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TMCI ELECTRONICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3444 77-0413814
(STATE OF OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NUMBER)
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1875 DOBBIN DRIVE
SAN JOSE, CA 95133
408-272-5700
(ADDRESS, 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
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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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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
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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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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.......... 36,923 5.4375 200,768.81 59.23
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Common Stock Underlying
Fee Warrants........... 73,846 5.836 430,065.26 127.13
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Common Stock Issuable as
Exercise Fee........... 15,000 5.4375 81,562.5 24.06
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Common Stock Underlying
Exercise Fee
Warrants............... 30,000 6.80 204,000 60.18
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Total........ $10,748,249.13 $3,170.33
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(1) Estimated pursuant to Rule 457(c) solely for the purpose of calculating the
filing fee.
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PROSPECTUS
DATED AUGUST , 1998
1,960,312 SHARES OF COMMON STOCK ($0.001 PAR VALUE)
------------------------
TMCI ELECTRONICS, INC.
Certain security holders (the "Selling Security Holders") of TMCI
Electronics, Inc., a Delaware Corporation (the "Company") are offering up to
1,960,312 shares of the $0.001 par value common stock of the Company (the
"Common Stock"). Of the shares of Common Stock offered by the Selling Security
Holders, 404,539 shares were issued in connection with the acquisition of
Trinity Electronics, Inc. by the Company; up to 1,100,004 shares are issuable
in connection with the conversion of the outstanding $3.3 million of the 5%,
$275,000 in principal amount Convertible Subordinated Debentures of the Company
due 2001 (the "Debentures"); 36,923 shares are issuable as a fee in connection
with the placement of the Debentures; up to 15,000 shares are issuable as a fee
for exercise of Class B Warrants (the Class B Warrants are issuable in
connection with the placement of the Debentures, subject to the satisfaction of
certain conditions. See Management's Discussion and Analysis, Liquidity and
Capital Resources); up to 300,000 shares are issuable upon the exercise of
Class B Warrants, up to 73,846 shares are issuable upon the exercise of certain
warrants issuable as a fee for the placement of the Debentures; and up to
30,000 shares are issuable upon the exercise of warrants issuable as a fee upon
the exercise of the Class B Warrants.
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.
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.
THE DATE OF THIS PROSPECTUS IS AUGUST , 1998.
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NOTE ON FORWARD-LOOKING STATEMENTS
Certain information set forth in this Prospectus includes "Forward-Looking
Statements" within the meaning of the Private Securities Reform Act of 1995 and
is subject to certain risks and uncertainties, including those identified under
the caption "Risk Factors." 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
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including information contained under the caption "Risk Factors,"
and financial statements, including notes thereto, appearing elsewhere in this
Prospectus.
THE COMPANY
OVERVIEW
TMCI Electronics, Inc. ("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)............................... 1,960,312 shares
Shares of Common Stock Outstanding as of August 7, 1998..... 4,196,416 shares
Shares of Common Stock Outstanding After Issuance of
Unissued Common Stock Being Registered Hereby(2)(3)....... 6,156,718 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 warrants are issued and exercised.
3
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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)
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FISCAL QUARTERS ENDED
MARCH 31,
(UNAUDITED) YEARS ENDED DECEMBER 31
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1998 1997 1997 1996 1995(1) 1994(1) 1993(1)
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Statement of Operations Data
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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
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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
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RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK. ONLY THOSE PERSONS ABLE TO LOSE THEIR ENTIRE INVESTMENT SHOULD PURCHASE
THESE SECURITIES. 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
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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."
COMPANY'S FAILURE TO COMPLY WITH CERTAIN COVENANTS
ON ITS LOAN AGREEMENT AND NEED FOR ADDITIONAL FINANCING
In March 1998, the Company entered into a line of credit and term loan
facility with Fleet Capital Corporation ("Fleet"). Order reschedulings resulting
from a slowdown in the semiconductor capital equipment market resulted in
reduced sales and a writedown of certain inventory. As a result of this slow
down in sales and writedown of inventory, the Company found itself with loans in
excess of its borrowing base and in violation of certain conditions of its loan
agreement. In connection with this matter, the Chief Executive Officer of the
Company has given his personal guaranty with respect to amounts due by the
Company to the financial institution. Fleet is continuing to advance needed
funds to the Company, although it is not obligated to do so.
Including certain real property which the Chief Executive Officer is
obligated to pledge as a security for the amount outstanding in excess of its
borrowing base, the Company believes that Fleet has full security for its
advances to the Company. In the future, if Fleet believes that it does not have
adequate security for the advances, it may be able to declare the Company in
default and to exercise its rights as a secured party. See "Management's
Discussion and Analysis of Financial Condition ad Results of Operations and
Results of Operations--Subsequent Events."
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
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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. The Company has no formal procedures for
approving related party transactions. Accordingly, future transactions may not
be approved by the Board of Directors and may not be on terms that are no less
favorable than those that could be obtained from an unaffiliated third party.
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
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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 all warrants with the underlying Common Stock 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 4,760,312 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 16,043,282 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; or (iii) the warrant recipients 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 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 in those states
where exemptions are unavailable and the Company has failed to qualify the
Common Stock
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"PENNY STOCK" REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKET ABILITY
OF SECURITIES
The Securities and Exchange Commission ("Commission") has adopted
regulations which generally define "penny stock" to be any equity security that
has a market price (as defined) less than $5.00 per share or an exercise price
of less than $5.00 per share, subject to certain exceptions. Although the
Company's securities trade below $5.00 per share, they are currently exempt from
the definition of "penny stock" based upon their being listed on the Nasdaq
SmallCap Market. If the Company's securities are removed from listing on Nasdaq
at any time they may become subject to rules that impose additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors (generally, those
person with assets in excess of $1,000,000 or annual income exceeding $200,000,
or $300,000 together with their spouse). For transactions covered by these
rules, the broker-dealer must make a special suitability determination for the
purchase of such securities and have received the purchaser's written consent to
the transaction prior to the purchase. Additionally, for any transaction
involving a penny stock, unless exempt, the rules require the delivery, prior to
the transaction, of a risk disclosure document mandated by the Commission
relating to the penny stock market. The broker-dealer also must disclose the
commissions payable go both the broker-dealer and the registered representative,
current quotations for the securities, and, if the broker-dealers the sole
market maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. Finally, monthly statements must be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks. Consequently, the "penny
stock" rules may restrict the ability of broker-dealers to sell the Company's
securities and may affect the ability of purchasers in this offering to sell the
Company's securities in the secondary market.
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 had been scheduled for July
20, 1998. Biltmore has advised the Company that it agreed to relinquish its
license to do business in California for a period of one year which the Company
believes will expire in July, 1999.
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 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....... 155,409(3) 155,409 0
Total........................ 1,960,312 1,960,312 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 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 assigned its right to receive compensation under the Non Circumvention
and Finder's Fee Agreement to Private Investors Equity Group, Inc. Except
for M.J. Segal, its registered representative, Private Investors Equity
Group, Inc. has advised the Company that it will not be transferring or
selling the securities for the benefit of M.J. Segal & Co., Inc. or any of
its affiliates.
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.
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; Liquidity and Capital Resources."
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. The amount of imputed interest
between October 1, 1997 and December 22, 1997 on the total consideration paid
for Trinity was not material to the net income of the Company for the year ended
December 31, 1997. 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. A pro forma statement of operations showed combined revenues for the SMA
Companies of $13 million for fisal 1997. 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.
17
<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 first quarter of
1999.
GROSS PROFIT
Gross profit decreased approximately $209,000 to $1,746,000 from
$1,955,000 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
9% to 17% from 26% for the quarter ended March 31, 1998 as compared to the
quarter ended March 31, 1997. Gross profit for the quarter ended March 31, 1998
decreased by approximately $965,000 from the $2,711,000 originally reported by
the Company in its 10-Q for the quarter ended March 31, 1998 to $1,746,000 as a
result of a restatement due to an inventory overstatement of approximately
$520,000 that occurred in March, 1998 and a reclassification of approximately
$445,000 of indirect labor costs to costs of goods sold during the quarter. The
gross profit of $1,955,000 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. In addition, gross profit for
the quarter ended March 31, 1997 decreased by approximately $285,000 from the
$2,241,000 originally reported by the Company in its 10-Q for the quarter ended
March 31, 1998 to $1,955,000 as result of a reclassification of additional
indirect labor costs to costs of goods sold during the quarter.
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<PAGE> 25
Gross profit percentage for the quarter ended decreased primarily as a result
of: (1) an increase in direct labor due to certain inefficiencies as a result of
the slowdown in the semiconductor capital equipment industry; and (2) an
increase in overhead as a result of (a) an increase in depreciation expense on
capital equipment used in the manufacturing process and (b) an increase in
indirect labor costs. 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 decreased approximately $242,000 to
$1,682,000 from $1,440,000 for the quarter ended March 31, 1998 as compared to
the quarter ended March 31, 1997. Operating expenses for the quarter ended March
31, 1998 decreased by approximately $445,000 from the $2,126,000 originally
reported by the Company in its 10-Q for the quarter ended March 31, 1998 to
$1,682,000 as a result of a reclassification of approximately $445,000 of
indirect labor costs to costs of goods sold. The operating expenses of
$1,440,000 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. In addition, operating expenses for the quarter
ended March 31, 1997 decreased by approximately $285,000 from the $1,434,000
originally reported by the Company in its 10-Q for the quarter ended March 31,
1998 to $1,149,000 as result of a reclassification of additional indirect labor
costs to costs of goods sold. As a percentage of sales, the Company's general
and administrative expenses decreased 4% to 11% from 15% 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 the
Company's infrastructure and growth.
OPERATING INCOME
Operating income decreased approximately $451,000 or 87% to $65,000 from
$516,000 for the quarter ended March 31, 1998 as compared to the quarter ended
March 31, 1997. Operating income for the quarter ended March 31, 1998 decreased
by approximately $520,000 from the $585,000 originally reported by the Company
in its 10-Q for the quarter ended March 31, 1998 to $65,000 as a result of a
restatement due to an inventory overstatement that occurred in March 1998.
Operating income decreased as a result of an increase in costs of goods sold due
to a slow down in the semiconductor capital equipment industry and an increase
in operating expenses offset in part by an increase in revenues from the
Company's acquisitions.
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 (LOSS)
Net income decreased by approximately $450,000 to a loss of $143,000 from
net income of $307,000 for the quarter ended March 31, 1998 as compared to the
quarter ended March 31, 1997. Net income for the quarter ended March 31, 1998
decreased by approximately $312,000 from net income of $169,000 originally
reported by the Company in its 10-Q for the quarter ended March 31, 1998 to a
net loss of $143,000 as a result of a restatement due to an inventory
overstatement of approximately $520,000 that occurred in March 1998 offset by an
income tax change of approximately $208,000. The decrease in net income was
primarily due to a decrease in gross profit as a result of the slowdown in the
semiconductor capital equipment industry, an increase in interest paid to
finance inventory and non cash finance charges relating to the debenture
placement.
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
23
<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
24
<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 $1,745,000, 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. Inventory for the quarter
ended March 31, 1998 decreased by approximately $520,000 from the increase of
$2,265,000 originally reported by the Company in its 10-Q for the Quarter ended
March 31, 1998 to an increase of $1,745,000 as a result of a restatement due to
an inventory overstatement that occurred in March 1998.
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
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<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 for the convenience of the Company 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 capital to fund operating activities during 1998. Such sources
of capital are expected to include additional advances from Fleet and/or
additional investments from third parties. The Company is actively seeking
investment capital from third parties at this time.
SUBSEQUENT EVENTS
As of July 29, 1998, the Company exceeded its borrowing amount under the
Fleet Facility by $509,000. In connection with this excess borrowing, the Chief
Executive Officer personally guaranteed the amounts due to Fleet under the Fleet
Facility. Fleet is continuing to advance funds to the Company. Fleet has
maintained a reserve under the Fleet Facility with respect to inventory until
such time as the Company implements certain inventory controls. The Company has
had such controls in place since the end of June, 1998 and is currently
arranging for Fleet to test the inventory controls and release the reserve. At
such time as Fleet releases the reserve, the outstanding obligations of the
Company are not expected to exceed the Company's borrowing base under the Fleet
Facility.
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
The Company has no formal procedures for approving related party
transactions. Accordingly, future transactions may not be approved by the Board
of Directors and may not be on terms that are no less favorable than those that
could be obtained from an unaffiliated third party. Moreover, except as noted
below, neither ongoing transactions nor past transactions have been approved by
the Board of Directors.
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. The Company believes that these transactions are on terms
at least as favorable to it as could be obtained from an unaffiliated third
party.
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. The Company believes that these transactions
are on terms at least as favorable to it as could be obtained from an
unaffiliated third party.
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. The Company believes that these transactions are on terms
at least as favorable to it as could be obtained from an unaffiliated third
party.
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. The Company believes that this transaction was on
terms at lease as favorable to it as could be obtained from an unaffiliated
third party. On June 30, 1998, the Company forgave $23,000 of this loan, the
then current portion.
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. The Company
believes that these transactions are on terms at least as favorable to it as
could be obtained from an unaffiliated third party.
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. The Company believes
that these transactions are on terms at least as favorable to it as could be
obtained from an unaffiliated third party.
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.
35
<PAGE> 38
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
36
<PAGE> 39
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.
37
<PAGE> 40
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>
38
<PAGE> 41
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> 42
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> 43
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> 44
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> 45
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> 46
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> 47
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> 48
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. The amount of imputed interest
between October 1, 1997 and December 27, 1997 on the total consideration paid
for Trinity was not material to the net income of the Company of the year ended
December 31, 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> 49
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> 50
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> 51
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> 52
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
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> 59
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> 60
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> 61
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> 62
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 for the convenience of the Company 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> 63
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> 64
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> 65
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> 66
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> 67
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................................................. 11,638,968 9,721,050
Deferred Income Taxes..................................... 325,450 183,376
Prepaid Expenses and Other Current Assets................. 722,222 182,968
Notes Receivable -- Stockholders.......................... 43,383 39,312
----------- -----------
Total Current Assets.............................. 16,433,763 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...................................... $34,367,914 $28,743,146
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts Payable and Accrued Expenses..................... $ 3,403,595 $ 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......................... 9,048,835 11,275,942
=========== ===========
Long Term Liabilities:
Notes Payable -- Net of Current Portion................... 7,410,603 3,607,877
Convertible Debentures.................................... 1,179,466 --
Deferred Income Taxes..................................... 573,338 560,180
----------- -----------
Total long -- Term Liabilities.................... 9,163,407 4,168,057
----------- -----------
Total Liabilities................................. 18,212,242 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................................ 13,899,720 10,890,233
Retained Earnings......................................... 2,261,756 2,404,857
----------- -----------
Total Stockholders' Equity........................ 16,155,672 13,299,147
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $34,367,914 $28,743,146
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-27
<PAGE> 68
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.......................................... 8,453,357 5,487,144
Gross Profit.............................................. 1,746,462 1,955,544
Operating Expenses.......................................... 1,166,192 1,149,694
Depreciation................................................ 349,046 248,500
Amortization................................................ 166,595 41,456
Income from Operations.................................... 64,629 515,894
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 (Loss) Before Provision for Income taxes........... (230,252) 517,308
Provision for (Benefit) Income Taxes...................... 87,151 210,447
Net (Loss) Income......................................... $ (143,101) $ 306,861
Earnings Per Share:
Earnings (Loss) Per Share -- Basic........................ $ (.04) $ .09
Earnings (Loss) Per Share -- Diluted...................... $ (.04) $ .08
Weighted Average Number of Shares and Common Stock
Equivalents............................................... 4,872,721 3,515,829
</TABLE>
See notes to consolidated financial statements.
F-28
<PAGE> 69
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 (Loss) Income......................................... $ (143,101) $ 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.................................. (128,917) 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......................................... (1,745,337) (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.................................... (1,875,690) (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> 70
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......................................... 4,120,489
Finished Goods.......................................... 731,681
-----------
Total......................................... $11,638,968
===========
</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> 71
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 for the convenience of the Company. 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> 72
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> 73
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> 74
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> 75
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> 76
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> 77
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> 78
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> 79
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> 80
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> 81
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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
- ------------------------------------------------------
- ------------------------------------------------------
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.......................... 7
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
Certain Relationships and Related
Transactions........................ 33
Description of Securities............. 35
Plan of Distribution.................. 36
Legal Proceedings..................... 36
Legal Matters......................... 37
Experts............................... 37
Index to Audited Financial
Statements.......................... 38
Report of Independent Auditors........ F-1
Index to Financial Statements......... F-26
Index to Trinity Electronics, Inc..... F-33
- --------------------------------------------
- --------------------------------------------
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
1,960,312 SHARES OF COMMON STOCK
INCLUDING COMMON STOCK ISSUABLE UPON
CONVERSION OF CERTAIN DEBENTURES
AND EXERCISE OF CERTAIN WARRANTS
---------------
TMCI ELECTRONICS, INC.
PROSPECTUS
AUGUST, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 89
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> 90
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.
II-2
<PAGE> 91
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.(c)
3.0 Certificate of Incorporation, filed with Delaware Secretary
of State on December 7, 1995.(b)
3.1 By-laws.(b)
3.2 Certificate of Secretary for amendment to Bylaws dated April
6, 1996.(c)
3.3 Certificate of Secretary for amendment to Bylaws dated
December 22, 1997(c)
3.4 Amendment to the bylaws dated December 22, 1997.(c)
4.0 Specimen Copy of Common Stock Certificate.(b)
4.1 Form of Class B Warrant Agreement.(c)
4.2 Form of Compensation Warrant Agreement.(c)
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.(c)
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.(c)
10.5 Touche Manufacturing Company, Inc. Employee Stock Ownership
Plan.(b)
</TABLE>
II-3
<PAGE> 92
<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.(c)
10.12 1995 Stock Option Plan.(b)
10.13 1997 Employee Stock Option Plan.(h)
10.14 1997 Employee Stock Purchase Plan.(i)
21.0 Subsidiaries of the Registrant.(c)
23.1 Consent of Moore Stephens, P.C.(c)
</TABLE>
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<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> 93
(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> 94
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 August 7, 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 August 7, 1998
- ----------------------------------- Executive Officer, Director
Rolando Loera [Principal Executive Officer]
/s/ Edmund Becmer Vice President, Chief Financial August 7, 1998
- ----------------------------------- Officer [Principal Financial
Edmund Becmer Officer]
Vice President, Corporate
- ----------------------------------- Development, Director
Charles E. Shaw
/s/ Robert Loera Controller, Secretary, Director August 7, 1998
- ----------------------------------- [Principal Accounting Officer]
Robert Loera
/s/ Thomas F. Chaffin Director August 7, 1998
- -----------------------------------
Thomas F. Chaffin
Director
- -----------------------------------
Robert C. Fink
/s/ Boris Lipkin Director August 7, 1998
- -----------------------------------
Boris Lipkin
</TABLE>
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<PAGE> 95
INDEX TO EXHIBITS
<TABLE>
<C> <S>
1.0 Non Circumvention and Finder's Fee Agreement.(c)
3.0 Certificate of Incorporation, filed with Delaware Secretary
of State on December 7, 1995.(b)
3.1 By-laws.(b)
3.2 Certificate of Secretary for amendment to Bylaws dated April
6, 1996.(c)
3.3 Certificate of Secretary for Amendment to Bylaws dated
December 22, 1997(c)
3.4 Amendment to the bylaws dated December 22, 1997.(c)
4.0 Specimen Copy of Common Stock Certificate.(b)
4.1 Form of Class B Warrant Agreement.(b)
4.2 Form of Compensation Warrant Agreement.(c)
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.(c)
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.(c)
10.5 Touche Manufacturing Company, Inc. Employee Stock Ownership
Plan.(b)
10.6 Form of 5% 275,000 in principal amount Secured Convertible
Promissory Debenture.(d)
10.7 Asset Purchase Agreement dated November 1, 1996 by and among
Pen Interconnect, Inc., Touche Electronics, Inc. and TMCI
Electronics, Inc.(e)
10.8 Stock Purchase Agreement dated effective as of January 1,
1997 by and among TMCI Electronics, Inc. and the
Shareholders of Enterprise Industries, Inc.(f)
10.9 Merger Agreement and Plan of Reorganization by and among
TMCI Electronics, Inc., TMCI/ Trinity Acquisition Corp.,
Trinity Electronics, Inc. and Patrick McQuade, dated
December 22, 1997.(g)
10.10 Loan and Security Agreement with Fleet Capital Corporation
dated March 2, 1998.(d)
10.11 Amendment to Loan and Security Agreement dated March 26,
1998.(c)
10.12 1995 Stock Option Plan.(b)
10.13 1997 Employee Stock Option Plan.(h)
10.14 1997 Employee Stock Purchase Plan.(i)
21.0 Subsidiaries of the Registrant.(c)
23.1 Consent of Moore Stephens, P.C.(c)
</TABLE>
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<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> 96
<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>
