UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission File Number 0-22709
TRANSITION ANALYSIS COMPONENT TECHNOLOGY, INC.
(Exact name of small business issuer as specified in its charter)
California 13-3391820
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
22700 Savi Ranch Parkway, Yorba Linda CA 92657
(Address of principal executive offices) (Zip Code)
Registrant s telephone number, including
area code (714) 974-7676 Securities
registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------------------------
Common Stock, $.01 Par Value
---------------------------- -------------------------------------
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share.
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes: _X_ No: ___
The aggregate market value of the voting common stock held by non-affiliates of
the registrant, computed by reference to the average of bid and asked price of
the stock as of September 24, 1998 was $1,869,369.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrants knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $3,483,000
The number of shares of common stock, $.01 par value, outstanding as of
September 28, 1998 was 598,734.
Transitional small business disclosure format Yes ___ No _X_
Exhibit List on Page __
<PAGE>
TABLE OF CONTENTS
PART I .................................................................... 3
ITEM 1 - DESCRIPTION OF BUSINESS.................................... 3
ITEM 2 - DESCRIPTION OF PROPERTY.................................... 6
ITEM 3 - LEGAL PROCEEDINGS.......................................... 6
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 6
PART II .................................................................... 7
ITEM 5 - MARKET FOR REGISTRANTS COMMON STOCK
AND RELATED STOCK HOLDER MATTERS.................. 7
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............... 7
ITEM 7 - FINANCIAL STATEMENTS....................................... 13
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE............ 29
PART III .................................................................... 29
PART IV .................................................................... 29
ITEM 13 - EXHIBITS LIST AND REPORTS ON FORM 8-K..................... 29
SIGNATURES................................................................... 31
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS
General
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Transition Analysis Component Technology, Inc. ("TACTech" or the
"Company") was incorporated in Delaware in 1987 and was owned 90% by Zing
Technologies, Inc. ("Zing") until such 90% interest was spun off to Zing's
shareholders on June 30, 1997. TACTech is a semiconductor information service
company which licenses proprietary computer software tools combined with
electronic semiconductor availability libraries and data bases that are utilized
by various segments of the Department of Defense, the defense/aerospace
industry, and industrial users of semiconductors and manufacturers and
distributors of semiconductors. When accessed by customers, the libraries and
data bases provide subscribers with tools for determining the availability of
semiconductors showing the manufacturers actively producing the subject
semiconductor and the projected life cycle (obsolescence) of such
semiconductors. The system identifies functionally interchangeable devices, when
available, from various manufacturers. At present, the Company's libraries and
data bases are utilized by its customers primarily in connection with designing,
engineering, manufacturing and maintaining electronic systems applications. As
of June 30, 1998, TACTech services were subscribed to by one hundred and seven
(107) customers located in the United States, two (2) customers located in
Canada and fifteen (15) customers located outside the continental United States.
Approximately 95% of the Company's revenues are derived from military projects,
primarily through government contractors and subcontractors. Government agencies
account for less than 10% of the Company's revenues in the aggregate.
The TACTech data bases and libraries contain the nomenclature and general
description for over 128,000 individual military semiconductor devices and over
248,000 commercial or industrial devices (the portion of the TACTech library
consisting of information on commercial or industrial devices is hereafter
referred to as the "Commercial Library"). TACTech's military library generally
includes all standard microcircuits and discrete devices with military standard
specifications. The data bases are updated at TACTech's headquarters and
delivered on a real-time, on-line basis. TACTech software provides a description
and general specifications of each microcircuit and discrete device in the
TACTech library thereby allowing the user to identify functionally
interchangeable devices from various manufacturers and to upgrade and rank
devices according to packaging, quality levels, projected production life cycle
and availability based on changes in technology and sources of supply. All
semiconductors listed in TACTech's library are ranked by reference to such
factors.
TACTech has developed proprietary analysis procedures and software to
provide a production life cycle projection assessment rating for each device
type (microcircuit, diode and transistor) contained in its library. TACTech's
production life cycle projections are determined by tracking specific
device-type attribute values such as speed, density, packaging, manufacturing
process, design-in acceptance and available sources of supply.
TACTech's proprietary software allows its customers to receive information
from TACTech's library in useable electronic formats through a personal computer
with modem access or through the Internet. The system allows for device type
information searches to be conducted on a form, fit and function equivalent
basis and/or alternative technology basis. Updates to TACTech's information
library are available to TACTech's customers on a real-time, on-line basis.
Information searches can be conducted by the customer on a base number search,
through parametric product description and by generic part number
identification. TACTech provides an automatic electronic discontinuance
notification service through its built-in software, which automatically notifies
the subscriber of changes in semiconductor availability with reference to the
specific subscribers bill(s) of materials. In addition, the TACTech systems
allow contractors and designers to screen out obsolete semiconductors and
provide for the more predictable manufacturing and better maintenance of
equipment, thus helping to ensure a longer operational life of equipment.
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TACTech provides an information service that allows the user to convert
most military specification semiconductors to their closest industrial
equivalent. The conversion is based on electrical functionality as well as
packaging availability.
The Company generates revenues primarily through license agreements for
its data base services pursuant to which it receives subscription fees. These
agreements are generally for terms of 12 months, but may be canceled by either
party upon 30 days notice.
On September 22, 1997, the Company issued 44,904 shares of its common
stock for all the issued shares of Research Analysis Corporation ("RAC"). In
addition, each of the two RAC selling shareholders received three-year
employment agreements with the Company and stock options. Each employment
agreement provides for an annual base salary and certain employee benefits up to
an aggregate of $200,000; and an incentive bonus up to $100,000 annually,
measured by the Company achieving certain targeted sales goals. Options for
44,904 shares of the Company common stock in the aggregate were also granted to
the RAC selling shareholders at an exercise price of $3.00 per share which vest
over a three-year period at the rate of 14,968 shares per year. The right to
exercise these options is subject to incremental vesting as (and if) the Company
achieves certain targeted sales goals. These options were not granted pursuant
to the Company's 1997 Option Plan.
The Company believes that it has achieved synergies as a result of the
application of RACs search engine technology (which accounted for approximately
65% of RAC's revenues in RAC's 1997 fiscal year) to the Company's military and
commercial systems componentry data bases and search engine technology, and that
the RAC acquisition enabled the Company to offer improved data retrieval
services to the Company's customers.
With the acquisition of RAC, TACTech developed and released its new
information service called "TACTRAC". TACTRAC is a server software in a
relational database for the processing and handling of all configuration bill of
materials (BOMs) indenturing and part availability data. This includes a
sophisticated set of software applications for handling the data issues
associated with changing availability including product announcements and
discontinuances.
Competition
TACTech competes with many data service companies which possess greater
financial and human resources and which offer a greater variety of services than
does TACTech. However, TACTech believes that it offers its customers a unique
set of information services that have been specially developed to assist the
military/aerospace and industrial market in solving problems relating to the
management of diminishing sources of supply and technological obsolescence, as
they pertain to semiconductor devices.
TACTech believes that the TACTRAC product is one of the few information
tools available that combines specific configuration design identity with system
level bill of material indenturing breakdown from which the information
generated allows customers to make pro-active decisions regarding potential
problems concerning obsolete components.
Sales, Licensing and Customer Support
TACTech maintains marketing, customer service and customer training
representatives in its Yorba Linda, California headquarters and marketing
representatives located in San Diego, New Orleans, Louisiana and Valhalla, New
York. TACTech markets its data services through highly trained and highly
specialized marketing personnel who contact prospective customers directly.
TACTech also promotes its services and identifies prospective customers through
participation in conferences and conventions dedicated predominantly or
exclusively to the issue of shrinking availability of semiconductor products due
to a diminishing number of manufacturing sources for specified products, or due
to technological obsolescence. Video sales aids and literature describing
TACTech's data services are also utilized in its
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marketing programs. The Company is presently exploring strategic marketing
relationships with a number of global organizations that provide supply chain
solutions.
TACTech's license agreements fall into two broad categories: (1) TACTech
basic site service ("Basic Site License") which encompasses electronic
semi-conductor library and database and (2) TACTRAC consisting of a Basic Site
License, together with a combination of proprietary software tools for the
processing and handling of all configuration customer bill of materials
indenturing and a workstation application that allows the customer to view
solutions, analyses and reports.
Customers access the Company's services through direct modem connections
or via the Internet.
The Company is seeking ways to realize greater efficiencies for delivering
its services through the Internet and World Wide Web by augmenting and
simplifying the use of its existing graphical user interface. The Company plans
to pursue the entry into marketing alliances aimed at penetrating the
commercial/industrial market.
In the fiscal year ended June 30, 1998, no customer of the Company
accounted for more than 10% of the Company's revenue. Sales to the Company's
five largest customers in fiscal 1998 and 1997 accounted for approximately 17
percent and 27 percent, respectively, of the Company's revenues. Pursuant to its
agreement with Arrow Electronics, Arrow Electronics is the sole electronic
component distributor that is permitted to use the Company's services. The
Company's management believes that if the Company were to lose Arrow Electronics
as a customer, the Company would be able to replace the business lost from Arrow
Electronics with business from other electronic component distributors.
TACTechs sales outside the United States are as follows:
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997
--------------------------------------
<S> <C> <C>
Canada $ 33,900 $ 24,000
Europe 187,300 92,900
Mid East (Israel) 37,800 36,000
Far East (Japan) 19,600 4,800
--------------------------------------
Total $ 278,600 $ 157,700
======================================
</TABLE>
The Basic Site License subscription price provides for free on-site training for
two representatives of the customer. The TACTRAC licensing agreement provides
for an optional one-time up front fee to provide training for database
configuration loading for the Database Server Software and training in the use
of the TACTRAC Workstation Software.
The training program covers two areas: operational/conceptual understanding of
the software program's capability and application training for integrating the
licensed software into the subscribers system.
Once on line, a subscriber may call TACTech for technical assistance, at the
subscriber's cost, or use e-mail to obtain assistance. The Company's license
agreements expressly disclaim any warranty, express or implied, for the accuracy
of its databases.
Security Measures
TACTech has adopted a series of layered and sequential security measures
and techniques to minimize risks from natural disasters and unauthorized access,
including, without limitation, redundant file storage, access control procedures
and strong encryption of data and data transmission. The Company also controls
system access and allows its clients to apply a second level of security codes
that protect their private files.
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<PAGE>
Source of Data Bases
Information for TACTech's data bases and libraries is acquired from the
private and governmental sectors, including semiconductor manufacturers, defense
contractors and the unclassified records of the U.S. Government and its
agencies. Approximately two-thirds of TACTech's information for its data bases
comes from numerous companies in the private sector which generally make such
information available to persons having a recognized need for such information.
The remaining information is obtained from governmental sources which can be
accessed pursuant to the Freedom of Information Act.
Copyrights, Trademarks and Licenses
TACTech maintains copyright and trade secret protection for its computer
software and related data base service, including through customer licensing
agreements. TACTech is a registered trademark of the Company. The Company does
not hold any patents to any of the technology incorporated in its software or
data services.
Software Development and Enhancements
TACTech's development efforts principally focus on augmenting TACTech's
existing customer interface design (the GUI on the Internet and World Wide Web),
new information products, the further development of the Commercial Library,
system security and the programming and maintaining of TACTech's hardware and
software.
Employees
As of June 30, 1998, TACTech employed thirty-six (36) persons -- seventeen
(17) persons in software development, data base maintenance and computer
maintenance personnel; three (3) persons in data processing; eight (8) persons
in sales, marketing and customer support; and eight (8) persons in
administrative roles. None of TACTech's employees are covered by a collective
bargaining agreement.
ITEM 2 - DESCRIPTION OF PROPERTY
At June 30, 1997, TACTech was leasing a facility in Yorba Linda,
California from Arrow Electronics on a month-to-month basis at a cost of $3,500
per month. The Company leased a new facility of approximately 11,500 square feet
in Yorba Linda commencing on October 1, 1997 for a period of five (5) years at a
current cost of $6,660 per month. In addition, the Company bears its allocable
portion of the property's common area maintenance which cannot exceed 106% of
the previous year's common area maintenance charge. All of the facility is in
productive use. The Company, by virtue of its acquisition of RAC, assumed a
lease for 1,366 square feet of office space in San Diego, California. This lease
has a three year term ending April 30, 1999 with an option to renew for an
additional three years. Current annual rent is $18,072 plus the tenant's share
of operating expenses. Future rent will be determined by mutual agreement tied
to market rent. Pursuant to the non-cancelable leases, the aggregate annual
minimum rental under these leases for each of the subsequent five years is
approximately $97,000, $86,000, $92,000, $96,000 and $24,000.
ITEM 3 - LEGAL PROCEEDINGS
The Company is not party to any material pending legal proceedings nor, to
the Company's knowledge, is any material legal proceeding threatened.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE>
PART II
ITEM 5 - MARKET FOR REGISTRANTS COMMON STOCK
AND RELATED STOCK HOLDER MATTERS
The Common Stock of the Company is traded in the over-the-counter market
for securities that do not meet the Nasdaq Small Cap Market listing requirements
under the symbol "TRZA." The following table sets forth the high and low closing
prices of the Company's Common Stock (after only limited trading):
<TABLE>
<CAPTION>
High Low
- --------------------------------------------------------------------------------
<S> <C> <C>
Fiscal Year Ending June 30, 1998
First Quarter, commencing 1st day of
trading July 25, 1997 $ 8.50 $ 0.93
Second Quarter 8.50 4.00
Third Quarter 8.00 4.62
Fourth Quarter 8.00 4.50
Fiscal Year Ending June 30, 1999
First Quarter (through September 25, 1998) 8.00 5.67
</TABLE>
As of September 22, 1997, there were 598,734 shares of Common Stock
outstanding and 898 beneficial owners, including 81 holders of record.
No cash dividends have been paid on the Company's Common Stock for the
fiscal years ended June 30, 1998. The present policy of the Company is to retain
earnings to provide funds for the operations and expansion of its business.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis below should be read in conjunction with the
Financial Statements of the Company and the Notes thereto included elsewhere in
this report. In addition to historical information, the following discussion and
analysis contains forward-looking statements that involve risks and
uncertainties within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act, which are intended to be covered by the safe
harbors created thereby. These risks and uncertainties include, without
limitation, the factors disclosed in this Item 6. Therefore, the Company
believes that the assumptions underlying these forward-looking statements are
reasonable, there can be no assurance that they will prove to be accurate. Thus,
the inclusion herein of such forward-looking information should not be regarded
as a representation by the Company or any other person that the objectives and
plans of the Company will be achieved.
Analysis of Financial Condition and Results of Operations covers the
fiscal years ended June 30, 1998 and June 30, 1997.
The following table expresses certain items from the Company's statements
of operations as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
1998 1997
--------------------------
<S> <C> <C>
Revenues 100.0% 100.0%
Selling, general and administrative expenses 117.4 84.5
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
Depreciation of equipment 2.1 1.8
Amortization of software development
costs and acquisition costs .4 --
Interest expense 1.2 --
--------------------------
Income (loss) before income taxes (21.1) 13.7
Charges in lieu of income tax -- 4.7
--------------------------
Net income (loss) (21.1)% 9.0%
==========================
</TABLE>
Results of Operations - Fiscal Year Ended June 30, 1998
Compared to Fiscal Year Ended June 30, 1997
The Company reported a loss of $735,000 or $1.25 per share for the fiscal
year ended June 30, 1998 as compared to net income of $199,000 or $.36 per share
for the fiscal year ended June 30, 1997.
The loss for the current year is primarily attributable to an increase of
selling general and administrative expenses due primarily to professional fees
incurred by the Company in the Company's lawsuit seeking injunctive relief
against a competitor and a former employee, the cost of programming consultants
incurred in connection with the enhancement of the RAC search engine technology
and certain management incentive bonuses.
Revenues increased $1,277,000, or 58% during the fiscal year ended June
30, 1998 from $2,206,000 for the comparable 1997 period.
The Company generates revenues primarily through licensing agreements.
TACTech's license agreements fall into two broad categories: (1) TACTech basic
site service ("Basic Site License") which provides for an electronic
semi-conductor library and database and (2) TACTRAC which consists of (i) a
Basic Site License and (ii) a combination of proprietary software tools
consisting of Database Server Software (a relational database application for
the processing and handling of all configuration customer bill of materials
indenturing), a back-end engine and TACTRAC Workstation Software (a Windows(C)
front-end workstation application that allows the customer to view solutions,
analysis and reports). The Basic Site License and Workstation Software
agreements are generally for terms of twelve months and may be canceled by
either party upon 30 days notice. The current period's revenue increase is
attributed, in part, to an increase in the number of licenses and in part
because they are generating greater revenues per subscriber at June 30, 1998 as
compared to June 30, 1997.
<TABLE>
<CAPTION>
Year Ended June 30,
1998 1997
--------------------------
<S> <C> <C>
Subscribers at beginning of period.................. 95 73
Subscribers who did not renew....................... (17) (12)
Subscribers added during period..................... 29 34
--------------------------
Subscribers at end of period........................ 107 95
==========================
</TABLE>
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<PAGE>
Approximately $584,000 of the revenue increase was generated by higher
subscription prices attributable to the TACTRAC products which enhanced the
Company's capability of incorporating the search engine technology acquired in
the RAC acquisition.
Prior to the acquisition, RAC principally derived revenues from consulting
services and customer-specific projects under cost plus fixed fee contracts with
the Department of Defense and government contractors. Such revenues contributed
approximately $198,000 to the current year's increase.
Selling, general and administrative expenses during fiscal 1998 increased
to approximately $4,087,000 from $1,863,000 for the prior comparable period.
This increase of approximately $2,224,000 is primarily attributed to the
following:
o Coincident to the acquisition of RAC in September 1997, the two RAC
selling shareholders received employment agreements. Each employment
agreement provided for an annual base salary (including certain
employee benefits) up to an aggregate of $200,000 and an incentive
bonus up to $100,000 annually, measured by the Company achieving
certain targeted sales goals. The annual period for such measurement
commenced on September 1, 1997 and as the targeted performance levels
became probable of achievement, appropriate provisions for the maximum
incentive bonuses were recorded equally between the third and fourth
quarter of the current fiscal year. These agreements resulted in an
approximately $600,000 increase in the current period's selling and
general administrative expenses.
o Other increases in costs are primarily attributable to the RAC
acquisition and include rent and utilities, professional fees,
telephone, insurance, travel and other general administrative expenses
of approximately $143,000.
o $264,000 of legal and professional fees incurred as the result of the
commencement by the Company of a lawsuit seeking injunctive relief to
enjoin a former employee from using trade secrets and a competitor for
breaching a non-solicitation agreement.
o Programming costs of $266,000 relating to augmenting the Company's
existing customer interface design as well as adopting RAC's component
analysis technology to the Company's component database technology.
o Included in the total dollar increase were costs primarily related to
the ongoing development of the Company's Commercial Library represented
by increases in personnel costs and in marketing and selling expenses
in the approximate amount of $313,000.
Depreciation for the fiscal year ended June 30, 1998 was approximately
$73,300 as compared to approximately $40,000 for the prior comparable period.
The Company depreciates its capital assets over a five year period recording one
half year depreciation in the year of acquisition. The Company acquired capital
assets in fiscal 1998 and fiscal 1997 in the amounts of approximately $119,000
and $153,000, respectively, and, pursuant to its depreciation policy, recorded
an increase of approximately $23,000 in fiscal 1998 as compared to the prior
reporting period. The acquisition of RAC in September 1997 accounted for the
balance of the increase in depreciation expense in the amount of approximately
$11,000.
The 1998 interest expense is attributable to amounts borrowed pursuant to
the Company's bank line of credit to fund operations and purchases of computer
and related equipment. There were no significant short term borrowings during
the comparable 1997 period.
There was no provision for income taxes for the fiscal year ended June 30,
1998 because of the reported loss. The Company intends to carryforward this loss
for tax purposes. In the comparable 1997 period, the Company filed its
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federal income taxes on a consolidated basis for the fiscal 1997 year with its
former parent, Zing Technologies, Inc. Income taxes were computed on a separate
company basis pursuant to the liability method.
Results of Operations - Fiscal Year Ended June 30, 1997
Compared to Fiscal Year Ended June 30, 1996
TACTech generates revenues primarily through license agreements for its
data base services. These agreements are generally for terms of 12 months, but
may be canceled by either party upon 30 days notice. The number of subscriber
licenses generating revenues was greater by approximately 30% at June 30, 1997
as compared to June 30, 1996. The following data indicates the licensing
activity for each period:
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1996
--------------------------
<S> <C> <C>
Subscribers at beginning of period............. 73 60
Subscribers who did not renew.................. (12) (14)
Subscribers added during period including
renewal subscription........................ 34 27
--------------------------
Subscribers at end of period................... 95 73
==========================
</TABLE>
TACTech earned net income of $199,000 or $.36 per share for the fiscal
year ended June 30, 1997 as compared to net income of $107,000 or $.19 per share
for the fiscal year ended June 30, 1996 (calculated on a pro forma basis as if
the Company was a stand-alone company).
Revenues for the fiscal year ended June 30, 1997 were $2,206,000, as
compared to $1,601,000 for the comparable 1996 period. This represented an
increase of 38%.
This increase in revenue is primarily attributed to a combination of a
larger subscription base and a general increase in subscription services as
subscribers renew. In fiscal 1997 and fiscal 1996, the renewal rate of the
Company's subscribers was approximately 80% and 81%, respectively.
Selling and general and administrative expenses during fiscal year 1997
increased to approximately $1,863,000 from $1,410,000 for the prior comparable
period. The increase is attributable primarily to increases in personnel costs
as demonstrated by the following table:
<TABLE>
<CAPTION>
Number of Employees
Year Ended June 30,
1997 1996
--------------------------
<S> <C> <C>
Sales, marketing, training and customer service... 5 5
Software development, data base maintenance
and computer maintenance....................... 16 9
Data Processing................................... 5 3
General and administrative........................ 8 5
--------------------------
Total............................................. 34 22
==========================
</TABLE>
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Charges in lieu of income taxes in fiscal 1997 amounted to $103,000,
representing an effective tax rate of 34%, as compared to $50,000, with an
effective tax rate of 32% for fiscal 1996.
Trends
TACTech's intention is to position itself to capitalize on the need for
more efficient design service as the Department of Defense budget contracts.
Although a declining U.S. military budget may result in a reduction in the total
number or dollar value of military projects, TACTech believes that Department of
Defense imperatives aimed at design efficiency for those projects will make
TACTech's services more valuable as a means of reducing the incidence of
technological obsolescence and assisting designers in identifying the best
available military industrial practices.
Liquidity and Capital Resources
In fiscal 1998, the Company used proceeds from a line of credit to fund
operations and for the acquisition of computer related equipment. In fiscal
1997, the Company used most of its cash generated from operations for the
acquisition of computers and computer related equipment, for the reduction of
its obligations to Zing and generally for business growth and development.
Internal cash flow generated by the operations of the Company, together
with borrowings under the Company's $1.5 million credit facility, should be
sufficient for the Company to meet its short-term working capital requirements
and capital expenditure requirements. At August 31, 1998 approximately $650,000
remains available under the credit facility. TACTech's management is currently
contemplating an expansion program for the Company which would include, among
other things, expanding its direct sales force, establishing marketing and
selling relationships both domestically and internationally, continued
development of its Commercial Library, and developing and offering additional
value-added services to its customers. In addition, there are no present
understandings, commitments or agreements with respect to any acquisition of
other businesses, products or technologies or any strategic alliances. The
Company may from time to time evaluate potential acquisitions of businesses,
products and technologies or strategic alliances and may in the future issue
securities or require additional equity or debt financings to consummate such
potential acquisitions or strategic alliances.
Impact of Inflation
In fiscal 1998 and fiscal 1997, inflation did not have a significant
impact on the operations of the Company.
Impact of Year 2000
Some of the Company's computer systems and electronic devices are based on
software programs which were written using two digits rather than four to define
the applicable year. As a result of how those computer programs store and
manipulate dates, such systems and devices may assume that all years occur in
the 20th century. This could cause a system failure or miscalculations causing
disruptions of operations, including among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Company has completed an assessment of this problem and will have to
modify or replace portions of its software programs so that its computer systems
will function properly with respect to dates in the year 2000 and thereafter.
The total Year 2000 project cost is estimated at approximately $10,000 and
involves the modification of existing software to remedy internal problems and
to bring customers to compliance. The Company is assuming that its principal
service suppliers (i.e., regional and long distance telephone companies,
Internet service providers, and the semi-conductor manufacturers which provide
data for the Company's databases) will ensure their operability in the Year
2000. The Company cannot ensure its suppliers will do so, and an interruption of
data transmission, either to the Company or by the Company, will have an adverse
effect on the Company's business and financial condition.
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<PAGE>
The project is estimated to be completed no later than December 1998,
which is prior to any anticipated impact on the Company's operating systems. The
Company believes that with modifications to existing software and systems, and
conversions to new software and systems, the Year 2000 issue will not pose
significant operational problems for the Company's computer systems. However, if
such modifications and conversions are not made, or are not completed timely,
the Year 2000 issue could have a material and adverse effect on the Company.
The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on managements best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
There is no guarantee that the systems of the Company's subscribers are
Year 2000 compliant and will be timely converted. A Year 2000 failure by
subscribers could have a material and adverse effect on the Company.
-12-
<PAGE>
ITEM 7 - FINANCIAL STATEMENTS
Transition Analysis Component Technology, Inc.
Consolidated Financial Statements
Years ended June 30, 1998 and 1997
Page
Report of Independent Auditors............................................. 14
Audited Consolidated Financial Statements
Consolidated Balance Sheets................................................ 15
Consolidated Statements of Operations...................................... 16
Consolidated Statements of Stockholders' Equity (Deficiency)............... 17
Consolidated Statements of Cash Flows...................................... 18
Notes to Consolidated Financial Statements................................. 19
-13-
<PAGE>
Report of Independent Auditors
To the Stockholders and Directors of
Transition Analysis Component Technology, Inc.
We have audited the accompanying consolidated balance sheets of Transition
Analysis Component Technology, Inc. ("TACTech") as of June 30, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity
(deficiency) and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of TACTech as of June
30, 1998 and 1997, and the consolidated results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
-----------------
ERNST & YOUNG LLP
September 9, 1998
White Plains, New York
-14-
<PAGE>
Transition Analysis Component Technology, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30
1998 1997
----------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 120,204 $132,908
Accounts receivable, less allowance
of $20,000 in 1998 754,442 419,331
and $5,000 in 1997
Prepaid expenses and other current assets 63,593 10,700
----------------------
Total current assets 938,239 562,939
Furniture and equipment 669,056 500,086
Less: accumulated depreciation 407,031 309,937
----------------------
262,025 190,149
Other assets:
Security deposits 81,723 --
Software development costs-net 59,946 --
Excess of costs over fair value
of net assets acquired, net of
accumulated amortization of $4,692 51,614 --
----------------------
Total assets $1,393,547 $753,088
======================
Liabilities and stockholders' equity (deficiency)
Current liabilities:
Accounts payable and accrued expenses $ 411,225 $ 52,941
Accrued compensation expense 332,257 98,306
Accrued income taxes due former parent company -- 169,815
Deferred income 300,683 79,905
----------------------
Total current liabilities 1,044,165 400,967
Long-term obligation line of credit 620,000 --
Contingencies (Note 9)
Stockholders' equity (deficiency):
Common stock (par value $.01 per share);
Authorized 5,000,000 as of
June 30, 1998 and June 30, 1997;
issued 598,734 as of June 30, 1998
and 553,830 as of June 30, 1997 5,987 5,538
Additional paid-in capital 552,779 440,967
Accumulated deficit (829,384) (94,384)
----------------------
Total stockholders' equity (deficiency) (270,618) 352,121
----------------------
Total liabilities and stockholders'
equity (deficiency) $1,393,547 $753,088
======================
</TABLE>
See accompanying notes.
-15-
<PAGE>
Transition Analysis Component Technology, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended June 30
1998 1997
-------------------------
<S> <C> <C>
Revenues $ 3,482,788 $2,205,679
Selling, general and administrative expenses 4,087,410 1,863,247
Depreciation of equipment 73,303 39,562
Amortization of software development costs
and acquisition costs 15,392 --
Interest expense 41,683 --
-------------------------
Income (loss) before income taxes (735,000) 302,870
Charges in lieu of income taxes -- 103,400
-------------------------
Net income (loss) $ (735,000) $ 199,470
=========================
Net income (loss) per common share-basic and diluted $ (1.25) $ .36
=========================
Number of shares used in computation-basic
and diluted 586,106 553,830
=========================
</TABLE>
See accompanying notes.
-16-
<PAGE>
Transition Analysis Component Technology, Inc.
Consolidated Statements of Stockholders' Equity (Deficiency)
<TABLE>
<CAPTION>
Total
Stockholders'
Additional Accumulated Equity
Common Stock Paid-In Capital Deficit (Deficiency)
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at June 30, 1996 $ 152 $ 848 $(293,854) $(292,854)
Net income 199,470 199,470
Capital contribution of former parent -- 553,723 -- 553,723
--------------------------------------------------------------------
Balance at June 30, 1997 prior to 152 554,571 (94,384) 460,339
distribution
Stock split 5,386 (5,386) -- --
Costs in connection with the distribution
of stock -- (108,218) -- (108,218)
--------------------------------------------------------------------
Balance at June 30, 1997 5,538 440,967 (94,384) 352,121
Shares issued in RAC acquisition 449 111,812 112,261
(Note 1)
Net loss (735,000) (735,000)
--------------------------------------------------------------------
Balance at June 30, 1998 $5,987 $ 552,779 $(829,384) $(270,618)
====================================================================
</TABLE>
See accompanying notes.
-17-
<PAGE>
Transition Analysis Component Technology, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended June 30
1998 1997
----------------------
<S> <C> <C>
Operating activities
Net income (loss) $(735,000) $ 199,470
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation 73,303 39,562
Amortization 15,392
Provision for losses in accounts receivable 15,000
Changes in operating assets and liabilities:
Accounts receivable (261,711) (97,007)
Prepaid expenses and other current assets (52,893) (10,700)
Accounts payable and accrued expenses 227,102 689
Accrued compensation 233,951 59,285
Accrued income tax due former parent company (169,815) 103,400
Deferred income 220,778 20,920
Security deposits (80,357)
----------------------
Net cash (used in) provided by operating activities (514,250) 315,619
Investing activities
Cost related to RAC acquisition, net of cash received 11,448
Purchases of equipment (119,176) (152,829)
Additions to software development (10,726)
----------------------
Net cash used in investing activities (118,454) (152,829)
======================
Financing activities
Proceeds from line of credit 620,000
Net decrease in due to former parent (55,519)
Costs in connection with distribution of stock (108,218)
----------------------
Net cash provided by (used in) financing activities 620,000 (163,737)
----------------------
Net decrease in cash (12,704) (947)
Cash at beginning of year 132,908 133,855
----------------------
Cash at end of year $ 120,204 $ 132,908
======================
</TABLE>
See accompanying notes.
-18-
<PAGE>
Transition Analysis Component Technology, Inc.
Notes to Consolidated Financial Statements
June 30, 1998
1. Organization and Summary of Significant Accounting Policies
Organization
Prior to June 30, 1997, Transition Analysis Component Technology, Inc.
("TACTech" or the "Company") was a 90% owned subsidiary of Zing Technologies,
Inc. ("Zing"), the Company's former parent, and the remaining 10% was owned by
one officer of the Company. TACTech is located in Yorba Linda, California.
The Company filed a registration statement on Form SB-1, which became effective
June 30, 1997, for the purpose of distributing the Common Stock of the Company
which was owned by Zing to the shareholders of Zing (the "Distribution"). In
connection with the Distribution, the Common Stock authorized and outstanding
was split on approximately a 36.436-for-one basis.
Also, in connection with the Distribution, intercompany advances (excluding
income taxes) as of the effective date of the Distribution were converted to
equity and, accordingly, were included within additional paid-in capital.
As of the date of the Distribution, the Company engaged certain employees of
Zing (with the permission of Zing) on a part-time basis to render to the Company
the following services for a cost not to exceed $100,000 per year including: to
advise in the development of the Company's business plan, to advise the Company
with respect to and to negotiate agreements on the Company's behalf, to
coordinate communications with the Company's stockholders, to advise the Company
with respect to and to negotiate acquisitions and financing, to prepare and file
the Company's tax returns and reports required by applicable securities laws and
rules of applicable stock exchanges, to review and supervise the Company's
accounting department and systems from time to time and suggest revisions and
changes thereto, and to perform such further services as such employees may
agree.
-19-
<PAGE>
Transition Analysis Component Technology, Inc.
Notes to Consolidated Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
Acquisition of Research Analysis Corp.
On September 22, 1997, TACTech acquired the net assets of Research Analysis
Corp. (RAC), consisting primarily of search and report software pursuant to a
merger (the "Merger") of TACTech's newly formed and wholly-owned subsidiary,
with and into RAC. Upon consummation of the Merger, RAC, as the surviving
corporation, became a wholly-owned subsidiary of the Company. Pursuant to the
Merger, the sole shareholders of RAC exchanged all their shares in RAC common
stock for 44,904 unregistered shares of common stock in the Company. The cost of
the acquisition, including the shares given, was approximately $193,000. As a
result of this transaction, the Company recorded approximately $56,000 of costs
in excess of fair value of net assets acquired. which is being amortized over 10
years. The RAC acquisition was accounted for pursuant to the purchase method of
accounting and is effective as of September 1, 1997.
The purchased net assets of RAC were allocated as follows:
<TABLE>
<S> <C>
Cash $ 45,400
Accounts receivable, net 88,400
Furniture and equipment 26,000
Other assets 61,300
Excess of costs over fair value of net assets acquired 56,300
Accounts payable and accrued expenses (84,400)
---------
$ 193,000
=========
</TABLE>
The following unaudited pro forma information has been prepared assuming that
this acquisition had taken place at the beginning of the respective periods
after giving effect to pro forma adjustments for compensation accruals and
income taxes. The number of shares used in the computations of net (loss) income
per common share is 598,734.
<TABLE>
<CAPTION>
Year ended June 30
1998 1997
-------------------------
<S> <C> <C>
Revenue $3,565,855 $2,989,177
Net (loss) income $(775,000) $250,638
Net (loss) income per common share basic and $(1.29) $.42
diluted
</TABLE>
-20-
<PAGE>
Transition Analysis Component Technology, Inc.
Notes to Consolidated Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
General Business Description
TACTech is a semiconductor information service provider which licenses
proprietary computer software tools combined with electronic semiconductor
availability libraries and data bases that are utilized by various segments of
the Department of Defense, the defense/aerospace industry, and industrial users
of high reliability semiconductors and manufacturers and distributors of high
reliability and military grade semiconductors.
RAC principally derived revenues from consulting services and customer-specific
projects under cost plus fixed fee contracts with the Department of Defense and
government contractors related specifically to training services, engineering
support and logistics support. These contractual services deal with issues of
reliability, maintainability, failure analyses, reliability predictions, circuit
card redesign, provisioning and weapons system file data extraction. Since the
acquisition of RAC by TACTech, RAC has continued to refine (and commenced
marketing) "TACTRAC" developed to adapt RAC's component analysis technology,
used in connection with RAC's consulting services, to TACTech's component data
base technology.
Revenue Recognition and Concentration of Credit Risk
Revenue from the Company's Basic Site License agreement for its database
services is recognized monthly. Revenue from the enhanced TACTRAC product is
recognized as follows: Fees for the installation and delivery of the database
information and workstation software into a customer server are recognized upon
completion of the installation and are non refundable. Fees for additional
concurrent user stations are similarly recognized upon installation. Revenues
from no one customer exceeded 10% of total revenue for 1998 and 1997.
Furniture and Equipment
Furniture and equipment is stated at cost and is depreciated using the
straight-line method over five years.
Software Development Costs
The Company begins capitalizing software development costs only after
establishing commercial and technical viability. Software development costs are
amortized using the straight line method over the remaining estimated economic
life of the product, generally five years. Accumulated amortization of software
development costs was $10,700 at June 30, 1998.
-21-
<PAGE>
Transition Analysis Component Technology, Inc.
Notes to Consolidated Financial Statements (continued)
1. Organization and 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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Fair Value of Financial Information
The carrying amounts of cash, accounts receivable, accounts payable and accrued
expenses reasonably approximate fair value due to the short maturity of these
items. The carrying value of the Company's borrowings under its revolving line
of credit, approximates fair value, as the obligation bears interest at a
floating rate.
Net Income Per Common Share
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No. 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented in accordance with and where
appropriate, restated to conform to the SFAS No. 128 requirements.
Impairments
During the year ended June 30, 1997, the Company implemented the provisions of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." The Company records impairment losses on
long-lived assets when events and circumstances indicate that the assets might
be impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those assets. There have been no
such impairment losses through June 30, 1998.
-22-
<PAGE>
Transition Analysis Component Technology, Inc.
Notes to Consolidated Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
Stock-Based Compensation
For the year ended June 30, 1997, the Company implemented the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." As
permitted by SFAS No. 123, the Company has elected to continue to apply the
provisions of Accounting Principle Board Opinion ("APB") No. 25, Accounting for
Stock Issued to Employees and related interpretations. Under APB No. 25, because
the exercise prices of the Company's employee stock options were not less than
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Recent Accounting Pronouncement
In October 1997, the AICPA issued Statement of Position ("SOP") 97-2, Software
Revenue Recognition, which changes the requirements for revenue recognition
effective for transactions that the Company will enter into beginning July 1,
1998. The Company does not believe that the adoption of the SOP will have a
material effect on its 1999 financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year
presentation.
2. Agreements
In April 1993, TACTech entered into a three-year exclusive licensing agreement
with a distributor of electronic components at an annual rate of $108,000 and
this agreement was amended in May 1993 with an expiration date of June 1998 and
the annual rate was increased to $200,000 effective July 1995. As of July 1,
1998, the annual rate was increased to $230,000 and the term extended one year
to June 30, 1999. TACTech has agreed that during the term of this agreement it
would not grant or authorize any other party access to its data bases or
services if such party were in the business of distributing electronic component
parts. The agreement may be renewed for successive one-year periods by mutual
written consent of the parties.
-23-
<PAGE>
Transition Analysis Component Technology, Inc.
Notes to Consolidated Financial Statements (continued)
3. Income Taxes
Through the date of the Distribution, the Company filed a consolidated federal
tax return with its former parent, Zing. Income taxes were computed on a
separate company basis pursuant to the liability method. As a result of the
Distribution, the Company will file its own separate tax return.
The Company records income taxes under the liability method of accounting.
Deferred taxes are provided for temporary differences between the carrying
amount of assets and liabilities for financial reporting purposes and amounts
used for income tax purposes. Deferred tax assets and liabilities are recorded
at the rates expected to be in effect when the temporary differences reverse.
The Company's deferred tax asset consists primarily of accruals not currently
deductible, allowances for accounts receivable and net operating loss
carryforwards.
At June 30, 1998 and 1997, deferred tax assets of $317,000 and $28,000 were
completely offset by valuation allowances.
The reconciliation of the differences between the tax provision and the amounts
computed by applying the statutory Federal income tax rate to pre-tax income at
June 30, 1998 is as follows:
<TABLE>
<CAPTION>
% 000s omitted
-----------------------
<S> <C> <C>
U.S. Federal statutory income tax rate (34.0) $(249.9)
State taxes, net of federal benefit (5.6) (41.6)
Adjustment to valuation allowance 38.5 283.3
Other 1.1 8.2
-----------------------
-- $ --
=======================
</TABLE>
In fiscal 1997, the difference between the tax provision computed at the
statutory rate and the actual rate is due primarily to the effect of the
graduated federal tax rate schedule and state income taxes, net of federal
benefit.
As at June 30, 1998, the Company has a net operating loss carryforward of
approximately $229,000 which expires in 2013.
During the years ended June 30, 1998 and 1997, the Company made state income tax
payments of approximately $28,000 and $1,000, respectively.
-24-
<PAGE>
Transition Analysis Component Technology, Inc.
Notes to Consolidated Financial Statements (continued)
4. Employee Benefit Plans
In fiscal year 1998, the Company adopted a deferred compensation plan ("Plan")
for all employees, which is qualified under Section 401(k) of the Internal
Revenue Code under which the Company's eligible employees are entitled to
participate in the 1998 fiscal year. Under the Plan, contributions to be made by
the Company are at the discretion of the Board of Directors of the Company. The
Company contributed $4,100 in fiscal 1998.
During fiscal year 1997, $1,600 was contributed by the Company under a plan with
its former parent. All funds have been transferred to the Company's Plan. The
Company does not maintain post-retirement benefit plans.
5. Leases
In fiscal year 1997, TACTech rented facilities in Yorba Linda, California on a
month-to-month basis.
The Company leased a new facility of approximately 11,500 square feet in Yorba
Linda commencing on October 1, 1997 for a period of five years. Pursuant to the
new non-cancelable lease, the Company is allocated a portion of the property's
common area maintenance which cannot exceed 106% of the previous years common
area maintenance charge. The lease is collateralized by a security deposit of
$80,000 which is repayable at the rate of $15,823 annually following each
anniversary of the lease commencement until the lease expires. In addition to
the Yorba Linda facilities, the Company by virtue of its acquisition of RAC,
assumed a lease for office space in San Diego. This lease has a three year term
ending April 30, 1999 and provides for additional rent based on the tenants
share of operating expenses in excess of a base year. The Company has an option
to renew for an additional term of three years with the annual rent determined
either by mutual agreement tied to market rent or by outside consultants.
Aggregate rent expense was $84,000 for the fiscal year ended June 30, 1998, as
compared to $46,000 in the fiscal year ended June 30, 1997. Aggregate future
minimum lease payments on the existing leases at June 30, 1998 are approximately
as follows: 1999-$97,000, 2000-$86,000; 2001-$92,000; 2002-$96,000;
2003-$24,000.
-25-
<PAGE>
Transition Analysis Component Technology, Inc.
Notes to Consolidated Financial Statements (continued)
6. Long-Term Obligation
On August 28, 1997, the Company entered into a $1,500,000 revolving credit
facility, with an interest rate equal to the banks prime rate (8.5% at June 30,
1998). The facility has an expiration date of June 30, 2000 and is guaranteed by
Zing. Proceeds from the loan are to be used for working capital and equipment
acquisitions. All the Company's personal property collateralizes the borrowings
under the facility. The unused portion bears a % annual commitment fee. The
Company made interest payments relating to the credit facility of approximately
$29,000 for the fiscal year 1998.
7. Stockholders' Equity
The Company's Board of Directors adopted and the Company's stockholders approved
the Transition Analysis Component Technology, Inc. 1997 Stock Option Plan (as
amended and restated on November 3, 1997, the "Option Plan"). Under the Option
Plan, options to purchase up to 60,000 shares of Company common stock are
available for grant from time to time to key employees of and consultants to the
Company. On November 3, 1997, 26,200 options were granted at an exercise price
of $4.00. 8,800 options became exercisable immediately, 1,800 options are
exercisable in one year and 15,600 options are exercisable in three years.
Options granted under the Option Plan expire ten years after issuance. The
weighted average remaining contractual life of these options is 9.4 years.
In addition to the Company's Option Plan, two key employees of the Company were
granted 44,904 stock options exercisable over a three year period at the rate of
14,968 options per year. These options we granted as a part of the purchase
price in the RAC acquisition and the per share exercise price of these Options
is $3 ("$3 Options"). The right to exercise these options is subject to
incremental vesting as (and if) the Company achieves certain targeted sales
goals. These options expire five years after issuance. The weighted average
remaining contractual life of these options is 4.4 years.
-26-
<PAGE>
Transition Analysis Component Technology, Inc.
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
Pro forma information regarding net loss and loss per share is required by SFAS
No. 123, and has been determined as if the Company had accounted for its stock
options under the fair value method of that statement. The fair value of the $3
and $4 Options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions; risk-free
interest rates of 6.00%; dividend yields of 0%, volatility factors of the
expected market price of the Company's common stock of .683 and 5.239,
respectively; and a weighted-average expected life of the options of 5 and 10
years, respectively. For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options three year vesting
period. The estimated weighted-average fair value per option is approximately
$1.11 and $4.61 for the $3 and $4 Options, respectively. The aggregate pro forma
effect on the Company's operations is as follows:
<TABLE>
<CAPTION>
Year ended
June 30, 1998
-------------
As reported:
<S> <C>
Net loss $(735,000)
Per share: $ (1.25)
Basic and diluted
Pro forma:
Net loss $(757,000)
Per share: $ (1.29)
Basic and diluted
</TABLE>
8. Related Parties
In 1997 and prior years, the Company was allocated a portion of the former
parent company's corporate administration expenses which amounted to $100,000 in
fiscal 1997. As of July 1, 1997, the administrative charge was eliminated and in
lieu thereof by agreement, certain employees of Zing, the former parent were
placed on the Company's payroll for an amount not to exceed $100,000 in the
aggregate. These amounts are included in selling general and administrative
expenses.
The President and Chief Executive Officer of the Company (also an officer of
Zing) has an employment agreement expiring on June 30, 2000, entitling him to a
salary of $80,000 per annum. There is no contractual entitlement to any bonus.
The Executive Vice President and General Manager (who is a significant
shareholder of the Company) has an employment agreement expiring on May 1, 1999,
entitling him to a base salary of $120,000 per annum plus five percent
(5%) of the Company's collected revenues, except that one half percent is shared
with other employees and two and a quarter percent is shared with other sales
personnel on certain accounts.
-27-
<PAGE>
Transition Analysis Component Technology, Inc.
Notes to Consolidated Financial Statements (continued)
8. Related Parties (continued)
In December 1996, Zing loaned $100,000 to the Company's Executive Vice President
in exchange for his secured promissory note. The promissory note, which matured
on June 29, 1997, was secured by a first priority security interest in all of
his shares of common stock of the Company. In fiscal 1997, $46,000 was repaid
and in 1998, $43,000 was repaid. The balance of $11,000 as of June 30, 1998 was
paid in full as of July 2, 1998.
Pursuant to the RAC Acquisition, the two selling shareholders received three
year employment agreements. Each employment agreement provides for an annual
base salary and certain employee benefits up to an aggregate of $200,000, and
incentive bonus up to $100,000 annually, measured by the Company achieving
certain targeted sales goals.
9. Contingencies
Pursuant to an indemnification agreement entered into between the Company and
Zing in connection with the distribution by Zing of its TACTech shares of Common
Stock to Zings stockholders (the Distribution), the Company agreed to indemnify
and save harmless Zing and its directors, officers, employees, agents and/or
affiliates for any claims incurred or suffered, directly or indirectly, by them
resulting from or attributable to, among other things, the operation of the
Company or the Distribution. Although the Company is not aware of any pending or
threatened material liability for which it anticipates becoming obligated to
make payments in connection with its obligations to indemnify the Zing, there
can be no assurance that such indemnification obligations could not arise or
that such indemnification obligations would not be material to the Company.
Under the Indemnification Agreement, Zing is required to indemnify the Company
in certain circumstances, which obligation may counterbalance the
indemnification obligations owed by the Company to Zing.
-28-
<PAGE>
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
To be filed by amendment on Form 10-KSB/A or in the Company's definitive proxy
materials on or before the 120th day following the end of the Company's most
recently completed fiscal year.
PART IV
ITEM 13 - EXHIBITS LIST AND REPORTS ON FORM 8-K
The following exhibits are filed with this Report, and this list
constitutes the exhibit index.
(a) Exhibits List.
Exhibit No. Description
- ----------- -----------
3.1 Form of Certificate of Incorporation (amended/restated -
Delaware)*
3.2 Form of By-laws (amended/restated)*
4 Common Stock Certificate*
10.1 Malcolm Baca Employment Contract*
10.3 Intentionally left blank
10.2 Robert E. Schrader Employment Contract*
10.4 Indemnification Agreement*
10.6 Amended and Restated Option Plan****
10.7 Escrow and Distribution Agreement*
10.8 Merger Agreement and Plan of Reorganization among the Company,
Research Analysis Corporation, Research Technology Analysis
Corp., Bruce L. Blackford and Jeff Hanser, dated as of September
1, 1997.**
10.9 Option Agreement dated September 22, 1997 between the Company and
Jeff Hanser.**
10.10 Option Agreement dated September 22, 1997 between the Company and
Bruce L. Blackford.**
10.11 Employment Agreement dated as of September 1, 1997 between the
Company and Jeff Hanser.**
10.12 Employment Agreement between the Company and Bruce L. Blackford
dated as of September 1, 1997.**
10.13 Credit Agreement between the Company and Fleet Bank dated August
28, 1997.**
10.14 Commercial Purpose Master Note from the Company in favor of Fleet
Bank dated August 28, 1997.**
10.15 Security Agreement between Fleet Bank and the Company dated
August 28, 1997.**
-29-
<PAGE>
10.16 Standard Industrial/Commercial Multi-Tenant Lease between Pacific
Gulf Properties, Inc. and the Company dated August 11, 1997.
10.17 Letter Agreement dated April 21, 19998 with Arrow/Zeus
Electronics.***
11 Statement Re: Computation of Per Share Earnings. (See Note 1 to
Financial Statements on Page [ ] of this Report).***
27 Financial data schedule***
99.1 Letter Agreement, dated July 7, 1995 between Transition Analysis
Component Technology, Inc. and Arrow Electronics, Inc.*
99.2 Form of License Agreement and Rider to Agreement, dated May 19,
1993 between Transition Analysis Component Technology, Inc. and
Arrow Electronics, Inc.*
- ----------
* Incorporated by reference from the Company's Registration Statement on Form
SB-1 (No. 333-20709).
** Previously filed as an exhibit to Registrant's annual report on Form 10-KSB
for the fiscal year ending June 30, 1997.
*** Filed herewith.
**** Previously filed with the Company's Form 10-QSB for the fiscal quarter
ended December 31, 1997.
(b) Reports on Form 8-K - Not Applicable.
- -----------------------------------------
-30-
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized on the 6th day of October,
1997.
Transition Analysis Component Technology, Inc.
By: Robert E. Schrader
Robert E. Schrader, President, Chief Executive Officer
and Chairman of the Board
Each person whose signature appears below constitutes and appoints Robert
E. Schrader and Martin S. Fawer, or either of them, each with the power of
substitution, his or her true and lawful attorney-in-fact to sign any amendments
to this report and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each said attorney-in-fact, or his or her
substitute, may do or choose to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
Robert E. Schrader President, Chief Executive September 25, 1998
- ---------------------- Officer and Chairman of the Board
Robert E. Schrader (Principal Executive Officer)
Martin S. Fawer Treasurer and Director September 25, 1998
- ---------------------- (Principal Financial Officer)
Martin S. Fawer
Deborah J. Schrader Secretary and Director September 25, 1998
- ----------------------
Deborah J. Schrader
-31-
Exhibit 10.17
- -------------
April 21, 1998
Mr. Vinnie Vellucci
President Arrow/Zeus Electronics
Suite 401
2900 Westchester Ave.
Purchase, NY 10577
Dear Vinnie,
The new subscription agreement will be one (1) year in duration, beginning
on July 1, 1998, and ending on June 30, 1999.
This agreement will be exclusive to Arrow/Zeus in relation to distributors
of electronic components.
The TACTech system will remain in the identical form as used by Arrow/Zeus
over the past three (3) years.
The cost for the exclusive site agreement will be $230,000 per annum,
billed at a rate of $19,166.66 per month.
Very truly yours,
Transition Analysis of Component
Technology, Inc.
Accepted and Agreed to:
Arrow/Zeus Electronics
By: Robert E. Schrader By: Vinnie Vellucci
-------------------------- -----------------------
Robert E. Schrader Vinnie Vellucci
President and C.E.O.
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