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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
OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
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
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Commission File Number 0-22709
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TRANSITION ANALYSIS COMPONENT TECHNOLOGY, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 13-3391820
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(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
22681 Old Canal Road, Yorba Linda CA 92887-4608
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(Address of principal executive (Zip Code)
offices)
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
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Securities registered pursuant to Section 12(g) of the Act: Common
Stock, par value $.01 per share.
Common Stock $.01 par value
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 27, 1999 was $1,832,094.
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 registrant's 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. [X]
State issuer's revenues for its most recent fiscal year: $4,512,274
The number of shares of common stock, $.01 par value, outstanding as of
September 27, 1999 was 598,734
Transitional small business disclosure format Yes No X
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Exhibit List on Page 35
TABLE OF CONTENTS
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<TABLE>
<S> <C>
Part I
Item 1 - Description of Business .................................................. 3
Item 2 - Description of Property .................................................. 7
Item 3 - Legal Proceedings ........................................................ 7
Item 4 - Submission of Matters to a Vote of Security Holders ...................... 7
Part II
Item 5 - Market for Registrant's Common Stock and Related
Stockholder Matters ...................................................... 8
Item 6 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................ 9
Item 7 - Financial Statements ..................................................... 18
Item 8 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ................................................. 34
Part III
Item 9 - Directors and Executive Officers of the Registrant ...................... 34
Item 10 - Executive Compensation .................................................. 34
Item 11 - Security Ownership of Certain Beneficial Owners and
Management .............................................................. 34
Item 12 - Certain Relationships and Related Transactions .......................... 34
Part IV
Item 13 - Exhibits List and Reports on Form 8-K ................................... 35
SIGNATURES ................................................................................ 36
</TABLE>
<PAGE>
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 June 30, 1997, when the common stock of the
Company was distributed by Zing to its shareholders. 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 valuable 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, 1999, TACTech services were
subscribed to by eighty five (85) customers located in the United States, two
(2) customers located in Canada and sixteen (16) customers located outside the
continental United States. Approximately 85% of the Company's revenues are
derived from military projects, primarily through government contractors and
subcontractors. U.S. government agencies themselves account for approximately
16% of the Company's revenues in the aggregate.
The TACTech data bases and libraries contain the nomenclature and
general description for over 133,000 individual military semiconductor devices
and over 326,000 commercial/ industrial devices. TACTech's military library
generally includes all standard microcircuits and discrete devices with catalog
specifications. The data bases are instantly 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.
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TACTech's proprietary software allows its customers to receive
information from TACTech's library in useable 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 alternate 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 subscriber's 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.
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's 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.
Competition
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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.
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Sales, Licensing and Customer Support
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TACTech maintains marketing, customer service and customer training
representatives in its Yorba Linda, California headquarters and marketing
representatives located in San Diego, New Orleans 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 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) the
TACTech basic site service which provides subscribers with a real-time
electronic semiconductor database library; and (2) the TACTRAC service, which
consists of the basic TACTech library service combined with proprietary software
tools to process the configuration and indenturing of customers' bills of
materials and to enable the customer to view solutions, analyses and reports.
In the fiscal year ended June 30, 1999, sales to one customer of the
Company exceeded 10% of the Company's revenue. Sales to the Company's five
largest customers in fiscal 1999 and 1998 accounted for approximately 33 percent
and 17 percent, respectively, of the Company's revenues. Arrow Electronics,
pursuant to agreement with TACTech, 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.
TACTech's sales outside the United States are as follows:
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998
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<S> <C> <C>
Canada $ 62,300 $ 33,900
Europe 459,600 187,300
Mid East 86,300 37,800
Far East 48,000 19,600
Total $ 656,200 $ 278,600
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</TABLE>
The basic TACTech service 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
customer database configuration loading and for users of the analysis and report
generation software.
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The training program covers two areas: operational and 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
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TACTech has adopted a series of layered and acquisitional security
measures and techniques to minimize risks from natural disasters and
unauthorized access, including 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.
Source of Data Bases
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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
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TACTech maintains copyright protection for its computer software and
related data base service and claims proprietary trade secret protection for its
data analysis techniques 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
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TACTech's development efforts principally focus on augmenting TACTech's
existing customer interface design, particularly to enhance ease of Internet
use, new information products, the further development of the commercial
component library, system security and the programming and maintaining of
TACTech's hardware and software.
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Employees
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As of June 30, 1999, TACTech employed forty (40) persons -- seventeen
(17) persons in software development, data base maintenance and computer
maintenance; three (3) persons in data processing; eleven (11) persons in sales,
marketing and customer support; and nine (9) persons in administrative roles.
None of TACTech's employees is covered by a collective bargaining agreement.
ITEM 2 - DESCRIPTION OF PROPERTY
The Company leases an 11,500 square feet facility in Yorba Linda,
California at a current cost of $6,660 per month. The lease expires in 2002. 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 also
leases 1,366 square feet of office space in San Diego, California at the average
annual rental of approximately $27,000. The lease will expire in 2001. Rental
expense in 2000 will aggregate $113,000; and in 2001 it will aggregate $118,000.
In 2002, after the San Diego lease expires, rental expense will be $96,000 and
for the three months of the 2003 fiscal year until the Yorba Linda lease is due
to expire, rental expense will be $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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PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCK HOLDER MATTERS
The Common Stock of the Company is traded in the over-the-counter
("bulletin board") 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. Quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and may not represent actual transactions.
<TABLE>
<CAPTION>
High Low
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<S> <C> <C>
Fiscal Year Ending June 30, 1998
First Quarter $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 $7.50 $5.50
Second Quarter 9.50 4.50
Third Quarter 12.00 6.50
Fourth Quarter 11.00 5.00
</TABLE>
As of September 27, 1999, there were 598,734 shares of Common Stock
outstanding owned by 48 holders of record and approximately 562 beneficial
holders.
No cash dividends have been paid on the Company's Common Stock for the
fiscal years ended June 30, 1999 and 1998. The present policy of the Company is
to retain earnings to provide funds for the operations and expansion of its
business. Under an existing bank credit facility, the Company is forbidden to
pay dividends without the consent of the bank.
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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. Although 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. Therefore, the inclusion herein
of 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, 1999, 1998 and 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,
1999 1998
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<S> <C> <C>
Revenues 100.0% 100.0%
Selling, general and administrative expenses 92.8 117.4
Depreciation of equipment 2.0 2.1
Amortization of software development costs and
acquisition costs .4 .4
Interest expense 1.4 1.2
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Income (loss) before income taxes 3.4 (21.1)
Net income (loss) 3.4% (21.1)%
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</TABLE>
Results of Operations - Fiscal Year Ended June 30, 1999
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Compared to Fiscal Year Ended June 30, 1998
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The Company realized net income of $150,484 or $0.25 per share (basic)
and $0.24 per share (diluted) for the fiscal year ended June 30, 1999 as
compared to a loss of $735,000 or $1.25 per share (basic and diluted) for the
fiscal year ended June 30, 1998.
Revenues increased $1,029,000, or 30%, during the fiscal year ended
June 30, 1999 from $3,483,000 in the 1998 fiscal year. This increase in revenue
was primarily attributable to the conversion of customers from TACTech service
to the TACTRAC service, and the increase in the subscription prices and fees
associated with the TACTRAC service.
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<PAGE>
Selling, general and administrative expenses increased approximately
$103,000 to $4,190,000 for the current fiscal year as compared to $4,087,000 for
the prior year. The net dollar increase of $103,000 was primarily attributable
to the following factors: (1) salaries and related costs associated with the RAC
acquisition and ongoing costs related to the continued development and upgrading
of the TACTRAC software amounting to $75,000 and $105,000, respectively, and (2)
selling and related expenses incurred to promote and increase sales of the
TACTRAC product which amounted to $282,000. These increases were offset by a
reduction of legal and professional expense and relocation of facilities in the
prior fiscal year amounting to $337,000 and $45,000, respectively.
Depreciation for the fiscal year ended June 30, 1999 was approximately
$90,400 as compared to approximately $73,300 for the prior year. The Company
depreciates its capital assets over a five year period, recording only one half
year depreciation in the year of acquisition. The Company acquired capital
assets in fiscal 1999 and fiscal 1998 in the approximate amounts of $89,300 and
$119,000, respectively, and pursuant to its depreciation policy, recorded an
increase of $17,100 in fiscal 1999 as compared to the prior reporting period.
Interest expense, which increased by $22,000 to $63,000 from $41,000 in
1998, is attributable to amounts borrowed pursuant to the Company's bank line of
credit to fund operations and purchases of computer and related equipment.
The current provision for income taxes for the fiscal year ended June
30, 1999 was offset by a deferred tax benefit resulting from carryforward net
operating losses of approximately $208,000 and because of other timing
differences between book and taxable income. There is however, a current tax
liability of $98,000 at June 30, 1999. There was no provision for income taxes
for the fiscal year ended June 30, 1998 because of the reported loss for that
year. At June 30, 1999 and 1998, deferred tax assets of $348,000 and $317,000
were offset by the valuation allowances of $250,000 and $317,000, respectively.
Results of Operations - Fiscal Year Ended June 30, 1998
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Compared to Fiscal Year Ended June 30, 1997
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The Company sustained 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 fiscal year ended June 30, 1998 is primarily
attributable to an increase in selling, general and administrative expenses due
primarily to professional fees incurred by the Company in the Company's lawsuit,
subsequently terminated, seeking injunctive relief against a competitor and a
former employee, the cost of programming consultants incurred related to 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 1997.
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The current revenue increase in 1998 over 1997 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
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<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
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</TABLE>
Approximately $584,000 of the revenue increase was generated by higher
subscription prices attributable to the TACTRAC products.
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 1998 revenue increase.
Selling, general and administrative expenses during fiscal 1998
increased to approximately $4,087,000 from $1,863,000 for 1997. 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. As a result of these
agreements, approximately $600,000 contributed to the increase
in selling and general administrative expenses for 1998.
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.
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o Included in the total dollar increase were costs primarily
related to the ongoing development of the Company's database
relating to commercial components as represented by increases in
personnel costs as well as increases 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 1997. 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 $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 1997.
There was no provision for income taxes for the fiscal year ended June
30, 1998 because of the reported loss. In 1997 the Company filed its 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.
Trends
Core Business.
TACTech's intention is to position itself as the leading supplier of
information and tools to fill the increasing need of the marketplace for more
efficient obsolescence management in electronic system designs and modernization
efforts that require long production and sustainment cycles. Although a
declining U.S. military budget may result in a reduction in new program awards,
the total number or dollar value of expenditures for maintenance, repair and
operations is increasing to sustain the deployment of existing military systems.
TACTech believes that Department of Defense imperatives aimed at modernizing
existing systems will make TACTech's services more valuable as a means of
reducing and managing the incidence of technological obsolescence and assisting
designers in identifying the best solution options for semiconductor content in
electronic systems.
New Market Opportunities.
Management also believes that the expertise TACTech has developed in
the military and aerospace market to rapidly distribute reliable semiconductor
availability, compatibility and obsolescence data to the affected engineering
community will also be valuable to the general commercial and industrial markets
and could become an integral tool on an enterprise-wide basis to help control
design and inventory costs of systems that incorporate semiconductor components.
The expansion of the Company's focus to include a larger number of commercial
and industrial components and to present its services to an enterprise-wide
audience potentially expands the market which the Company may penetrate. There
can be no assurance, however, that the Company will be able, on a cost-effective
basis or at all, to
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<PAGE>
develop a commercial or industrial market or to broaden its current reach
principally among systems design engineers.
As part of this expanded focus, TACTech was selected by SAP, A.G., the
world's largest provider of enterprise resource planning solutions, as a
featured development partner in SAP's new internet portal and ecommerce project,
known as "mySAP.com." The Company hopes that the project, which was the focus of
a September 1999 convention in Philadelphia, attended by more than 10,000
industry executives representing millions of corporate users of SAP's systems,
will present TACTech with a fundamentally new and large long-term market for its
services beyond its traditional base of electronics component systems design
engineers. The Company's board of directors holds the view that TACTech will
have to make substantial capital investments in both the depth and breadth of
its services and in additional management and other personnel in order to
attempt to capitalize on the new SAP- related opportunity. There is no
assurance, however, that TACTech will be able to obtain the necessary capital to
make such investments or, if such investments are made, that TACTech will be
successful in growing its business into the new market.
Liquidity and Capital Resources
In fiscal 1999, cash from operations was used to purchase computer and
related equipment, reduce borrowings under a line of credit and provide working
capital.
In fiscal 1998, the Company used proceeds from a line of credit to fund
operations and for the acquisition of computer related equipment.
Internal cash flow generated by the operations of the Company, together
with borrowings under the Company's $1.5 million credit facility (see Note 6 of
Notes to Consolidated Financial Statements), should be sufficient for the
Company to meet its short-term working capital and capital expenditure
requirements for its current core business. It is likely that the Company will
be required to make other financing arrangements upon the expiration of its
present credit facility. At August 31, 1999 approximately $780,000 remains
available under the credit facility.
Management believes that the combination of internally generated cash
and capital available under existing bank lines of credit will not, however, be
sufficient to enable the Company to achieve the market expansion contemplated by
the Company's strategic plan. Additional capital will be required to expand the
Company's product depth, and to strengthen marketing staff and senior
management, particularly to address the commercial and industrial market and to
enable the Company to focus marketing efforts on enterprise-wide solutions. The
Company is actively exploring means to secure the necessary capital as equity,
including through the public securities markets.
Separately, TACTech's management continues to explore ways to establish
marketing and selling relationships, both domestically and internationally, and
from time-to-time evaluates potential acquisitions of business, products and
technologies.
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Termination of Business Combination Discussions
During the 1999 fiscal year and for a few months thereafter, TACTech
had been engaged in substantive discussions concerning a possible merger with
and into another entity, as a result of which the shareholders of TACTech would
have received a combination of cash and shares of common stock of the acquiring
company having an aggregate value of approximately $21 per TACTech share. Late
in the summer of 1999, negotiations relating to the possible merger were
terminated when the Company's controlling shareholders advised the TACTech board
of directors that they would not agree to the contemplated transaction and when
the board determined that (1) volatility in the market price of the shares of
the potential acquiror since the inception of the negotiations could jeopardize
the value the board had originally hoped the TACTech shareholders would receive;
and (2) the Company could generate greater shareholder values by remaining
independent and proceeding to develop its long-term strategic plan, particularly
in light of the new market opportunities presented by the Company's expanded
focus and the potential relationship with SAP and its other portal development
partners.
The Company will expense all of the costs it incurred in negotiating
the prospective termination in the first quarter of the 2000 fiscal year.
Impact of Inflation
In fiscal 1999 and fiscal 1998, inflation did not have a significant
impact on the operations of the Company.
Impact of Year 2000
Nearly every aspect of a modern organization is supported by
information technology. As a result, the unavailability of computer services or
errors in data processing would have a considerable impact on most businesses.
Many computer systems and electronic devices process dates using two
digits instead of four. Therefore all dates within these systems are assumed to
be 20th century. By January 1, 2000, and sometimes even sooner, unless these
systems' deficiencies in this area are addressed and resolved, these systems
could miscalculate dates or fail completely, which could result in disruption of
business operations controlled by such systems and devices.
The following discussion is based on management's best estimates, which
were derived using numerous assumptions of future events, including the
continuing availability of basic utilities and other resources, the availability
of trained personnel at reasonable cost, and the ability of third parties to
cure noncompliant software and hardware. There can be no guarantee that these
assumptions will prove accurate and, accordingly, the actual results may
materially differ from those anticipated.
Evaluation Efforts
TACTech has finished its assessment and upgrade of all systems that
could be affected by the Year 2000 problem. This includes software developed
specifically for license or sale, software developed
- 14 -
<PAGE>
for in-house use, third-party software and hardware used by TACTech, and
telecommunications systems. Additional testing however, will continue on these
systems as a safety precaution.
In addition, TACTech is gathering Year 2000 compliance information from
its significant vendors and suppliers. Furthermore, TACTech is also actively
gathering Year 2000 compliance information from its customers.
Readiness and Compliance Plan
TACTech's Year 2000 compliance efforts fall into four major areas:
Information Technology (including production software, internal software and
hardware), Telecommunications Systems, Compliance by Vendors, and Compliance by
Customers.
Information Technology
Production Software - TACTRAC and TACTech Basic Site Services
TACTech currently markets information services based on two different
sets of software, one relating to the TACTRAC service, and one relating to
TACTech's basic library service.
TACTRAC. - TACTech has evaluated its TACTRAC software for Year 2000
readiness and concludes that the TACTRAC software which is used by the
subscriber is fully Year 2000 compliant. However, information updates to the
TACTRAC software are part of the TACTRAC service. These updates are dependent
upon software that runs at TACTech's headquarters in Yorba Linda, California.
This software had been evaluated and had been determined to be only partially
Year 2000 compliant. TACTech determined that an operating system software
upgrade and compiler software upgrade were necessary to bring this software to
Year 2000 compliance. These upgrades were finished and successfully tested in
May 1999.
Basic Library Services - TACTech had evaluated its basic library
services software for Year 2000 readiness and concluded that this software was
only partially Year 2000 compliant. TACTech determined that an operating system
software upgrade and compiler upgrade were necessary to bring this software to
Year 2000 compliance. This upgrade was completed and successfully tested in May
1999.
Internal IT Systems
TACTech has evaluated all of its internal IT Systems software and has
performed the necessary upgrades or modifications to ensure that 100% of its
systems are fully Year 2000 compliant.
TACTech has evaluated all of its internal IT Systems hardware that is
critical for continued business operations and has determined that it falls into
the following categories:
a) Approximately 80% of its hardware is fully Year 2000 compliant.
- 15 -
<PAGE>
b) Approximately 20% of its hardware is not fully Year 2000 compliant
and will require manually setting the date to January 1, 2000. This
fix is easily performed on any system after January 1, 2000. For
continued business operations, this equipment is considered to be
Year 2000 compliant.
Telecommunications Systems
In early January 1999, TACTech replaced its PBX telephone system and
its voice mail system with new models that are fully Year 2000 compliant.
Vendor Compliance
TACTech is actively requesting Year 2000 compliance certificates from
its vendors. TACTech has grouped its vendor list into high, medium, and low risk
groups depending on the potential impact to TACTech if the vendor is not Year
2000 compliant. To date, TACTech has received responses as illustrated in the
following table:
<TABLE>
<S> <C>
High Risk Vendors 100%
Medium Risk Vendors 55%
Low Risk Vendors 26%
</TABLE>
Not every vendor who replied is fully 100% Year 2000 compliant.
However, all vendors have stated they will be fully compliant by year's end.
Customer Compliance
TACTech is also requesting similar compliance certifications from its
customers. To date, TACTech has received responses from 60% of its customers.
TACTech cannot guarantee that all of its customers will either be Year 2000
compliant, or will comply with TACTech's request for certification.
Cost of Year 2000 Compliance
TACTech estimates that the total cost of achieving Year 2000 compliance
will be approximately $20,000. The bulk of these costs are for new versions and
upgrades to software and operating systems and telephone equipment. Personnel
and labor costs are included in salaries and are not included in this total. In
addition, other software and operating system upgrades are already paid for by
ongoing maintenance contracts and are not included in the above total. To date,
TACTech has spent approximately $12,400 for its Year 2000 compliance efforts.
Contingency Plan
Since TACTech believes that its production software, information
technology systems, hardware and telecommunications systems are Year 2000
compliant, it has not developed and does not plan to develop a contingency plan
for noncompliant software, information technology systems, hardware and
telecommunications systems.
- 16 -
<PAGE>
Management believes that TACTech's ability to assemble and acquire the
update component data used in the basic TACTech library service and by its more
robust TACTRAC service is facilitated by, but is not dependent upon, electronic
data processing and telecommunications systems. If such systems were to fail as
a result of the advent of January 1, 2000 without its data suppliers having
achieved Year 2000 compliance, TACTech could, and will if necessary, continue to
obtain such data through available printed documentation as it has done in the
past and continues to do presently.
TACTech provides its component compatibility and other information
through routine telephone and Internet connections. If TACTech's current
Internet service provider is unable to provide a certificate of compliance prior
to January 1, 2000, TACTech will select another provider from among the hundreds
of other such providers, many of whom are expected to have achieved Year 2000
compliance before such date. If Internet access is unavailable from any source,
at either the customer's site or at TACTech, direct telephone data transmission
will continue to be available.
In the event that one or more of TACTech's vendors does not appear that
they will be Year 2000 compliant in time, TACTech will take steps to determine
the business risk to TACTech this vendor represents, and will take the
appropriate action at that time. Such action may include terminating the
relationship with the vendor and establishing a relationship with a different
vendor that provides similar goods or services and is also Year 2000 compliant.
- 17 -
<PAGE>
ITEM 7 - FINANCIAL STATEMENTS
Transition Analysis Component Technology, Inc.
Index to Financial Statements
Years ended June 30, 1999 and 1998
Page
<TABLE>
<S> <C>
Report of Independent Auditors...........................................19
Audited Consolidated Financial Statements
Consolidated Balance Sheets..............................................20
Consolidated Statements of Operations....................................21
Consolidated Statements of Stockholders' Equity (Deficiency).............22
Consolidated Statements of Cash Flows....................................23
Notes to Consolidated Financial Statements...............................24
</TABLE>
- 18 -
<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, 1999 and 1998,
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, 1999 and 1998, 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
September 24, 1999,
White Plains, New York
- 19 -
<PAGE>
Transition Analysis Component Technology, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30
1999 1998
----------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 212,188 $ 120,204
Accounts receivable, less allowance of $40,000 in 1999
and $20,000 in 1998 960,086 754,442
Prepaid expenses and other current assets 60,560 63,593
Deferred tax asset 98,000 -
----------------------------------------
Total current assets 1,330,834 938,239
Furniture and equipment 758,341 669,056
Less: accumulated depreciation 497,423 407,031
----------------------------------------
260,918 262,025
Other assets:
Security deposits 83,379 81,723
Software development costs-net 47,106 59,946
Excess of costs over fair value of net assets acquired, net of
accumulated amortization of $10,323 45,983 51,614
Total assets $ 1,768,220 $ 1,393,547
----------------------------------------
----------------------------------------
Liabilities and stockholders' equity (deficiency) Current liabilities:
Accounts payable and accrued expenses $ 315,890 $ 411,225
Accrued compensation expense 373,384 332,257
Accrued income taxes 98,000 -
Deferred income 531,080 300,683
Revolving line of credit 570,000 -
----------------------------------------
Total current liabilities 1,888,354 1,044,165
Long-term obligation - revolving line of credit - 620,000
Contingencies (Note 10)
Stockholders' equity (deficiency):
Common stock (par value $.01 per share);
Authorized 5,000,000 as of June 30, 1999 and
June 30, 1998; issued 598,734 as of June 30,
1999 and June 30, 1998 5,987 5,987
Additional paid-in capital 552,779 552,779
Accumulated deficit (678,900) (829,384)
Total stockholders' equity (deficiency) (120,134) (270,618)
----------------------------------------
Total liabilities and stockholders' equity (deficiency) $ 1,768,220 $ 1,393,547
----------------------------------------
----------------------------------------
</TABLE>
See accompanying notes.
- 20 -
<PAGE>
Transition Analysis Component Technology, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended June 30
1999 1998
----------------------------------------
<S> <C> <C>
Revenues $ 4,512,274 $ 3,482,788
Selling, general and administrative expenses 4,189,512 4,087,410
Depreciation of equipment 90,391 73,303
Amortization of software development costs and
acquisition costs 18,471 15,392
Interest expense 63,416 41,683
Income (loss) before income taxes 150,484 (735,000)
Provision for income taxes - -
----------------------------------------
Net income (loss) $ 150,484 $ (735,000)
----------------------------------------
----------------------------------------
Net income (loss) per common share-basic $ 0.25 $ (1.25)
----------------------------------------
----------------------------------------
Net income (loss) per common share-diluted $ 0.24 $ (1.25)
----------------------------------------
----------------------------------------
Average number of outstanding shares-basic 598,734 586,106
----------------------------------------
========================================
Average number of outstanding shares-diluted 621,434 586,106
----------------------------------------
----------------------------------------
</TABLE>
See accompanying notes.
- 21 -
<PAGE>
Transition Analysis Component Technology, Inc.
Consolidated Statements of Stockholders' Equity (Deficiency)
<TABLE>
<CAPTION>
Total
Additional Stockholders'
Common Paid-In Accumulated Equity
Stock Capital Deficit (Deficiency)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at June 30, 1997 prior to
distribution $ 152 $ 554,571 $ (94,384) $ 460,339
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
(Note 1) 449 111,812 112,261
Net loss (735,000) (735,000)
-----------------------------------------------------------------------------
Balance at June 30, 1998 5,987 552,779 (829,384) (270,618)
Net income 150,484 150,484
-----------------------------------------------------------------------------
Balance at June 30, 1999 $ 5,987 $ 552,779 $ (678,900) $ (120,134)
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
</TABLE>
See accompanying notes.
- 22 -
<PAGE>
Transition Analysis Component Technology, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended June 30
1999 1998
----------------------------------------
<S> <C> <C>
Operating activities
Net income (loss) $ 150,484 $ (735,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 90,392 73,303
Amortization 18,471 15,392
Provision for losses in accounts receivable 20,000 15,000
Deferred taxes (98,000) -
Changes in operating assets and liabilities:
Accounts receivable (225,644) (261,711)
Prepaid expenses and other current assets 3,033 (52,893)
Accounts payable and accrued expenses (95,335) 227,102
Accrued compensation 41,127 233,951
Accrued income taxes 98,000 -
Accrued income tax due former parent company - (169,815)
Deferred income 230,397 220,778
Security deposits (1,656) (80,357)
----------------------------------------
Net cash provided by (used in) operating activities 231,269 (514,250)
Investing activities
Cost related to RAC acquisition, net of cash received - 11,448
Purchases of equipment (89,285) (119,176)
Additions to software development - (10,726)
----------------------------------------
Net cash used in investing activities (89,285) (118,454)
----------------------------------------
Financing activities
Proceeds from line of credit 225,000 620,000
Reduction of borrowings (275,000) -
----------------------------------------
Net cash provided by (used in) financing activities (50,000) 620,000
----------------------------------------
Net increase (decrease) in cash 91,984 (12,704)
Cash at beginning of year 120,204 132,908
----------------------------------------
Cash at end of year $ 212,188 $ 120,204
----------------------------------------
----------------------------------------
</TABLE>
See accompanying notes.
- 23 -
<PAGE>
Transition Analysis Component Technology, Inc.
Notes to Consolidated Financial Statements
June 30, 1999
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.
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
- 24 -
<PAGE>
Transition Analysis Component Technology, Inc.
Notes to Consolidated Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
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 fiscal year 1998 after
giving effect to pro forma adjustments for compensation accruals and income
taxes. The number of shares used in the computations of net loss per common
share is 598,734.
<TABLE>
<CAPTION>
Year ended
June 30, 1998
----------------------
<S> <C>
Revenue $ 3,565,855
Net (loss) income $ (775,000)
Net (loss) income per common share -
basic and diluted $ (1.29)
</TABLE>
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
- 25 -
<PAGE>
Transition Analysis Component Technology, Inc.
Notes to Consolidated Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
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. The Company
operates as one business segment.
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 library subscription service is recognized
monthly. Revenue from the enhanced TACTRAC Health Model 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. Revenue from one customer
was 10% of total revenue for 1999. Revenues from no one customer exceeded 10% of
total revenue for 1998. U.S. government agencies accounted for approximately 16%
of revenues for 1999. Sales to foreign customers, primarily located in Europe,
accounted for approximately 15% of revenue for 1999.
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 $23,540 and $10,700 at June 30, 1999 and 1998,
respectively.
- 26 -
<PAGE>
Transition Analysis Component Technology, Inc.
Notes to Consolidated Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
Advertising Costs
Advertising costs are charged to expense in the year incurred and totaled
$96,600 and $8,500 for the years ended June 30, 1999 and 1998, respectively.
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 (Loss) Per Common Share
Basic income (loss) per share is calculated by dividing net income (loss) by the
weighted-average number of common shares outstanding during the period. The
diluted income (loss) per share computation includes the dilutive effect, if
any, of shares which would be issuable upon the exercise of outstanding stock
options, reduced by the number of shares assumed to be purchased by the Company
from the resulting proceeds at the average market price during the period.
Impairments
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, 1999.
- 27 -
<PAGE>
Transition Analysis Component Technology, Inc.
Notes to Consolidated Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
Stock-Based Compensation
The Company applies the recognition and measurement provisions of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and the disclosure provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," in reporting for stock options.
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. The agreement was extended effective July 1, 1999 to December
31, 2000 at the same rate of $230,000. 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.
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 returns for fiscal
years 1999 and 1998.
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.
- 28 -
<PAGE>
Transition Analysis Component Technology, Inc.
Notes to Consolidated Financial Statements (continued)
3. Income Taxes (continued)
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Year ended June 30,
1999 1998
-------------------------------------------
<S> <C> <C>
Current
Federal $ 77,000 $ -
State 21,000 -
-------------------------------------------
98,000
-------------------------------------------
Deferred
Federal (77,000) -
State (21,000) -
-------------------------------------------
(98,000) -
-------------------------------------------
$ - $ -
-------------------------------------------
-------------------------------------------
</TABLE>
Significant components of the Company's deferred taxes are as follows:
<TABLE>
<CAPTION>
June 30,
1999 1998
-------------------------------------------
(000's omitted)
<S> <C> <C>
Net operating losses $ - $ 91
Deferred revenue 210 119
Accruals not currently deductible 122 99
Allowance for doubtful accounts 16 8
-------------------------------------------
Deferred tax asset 348 317
Valuation allowance (250) (317)
Net deferred tax asset $ 98 $ -
-------------------------------------------
-------------------------------------------
</TABLE>
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 is
as follows:
<TABLE>
<CAPTION>
Year ended June 30,
1999 1998
-------------------------------------------
(000's omitted)
<S> <C> <C>
U.S. Federal statutory income tax $ 51.1 $ (249.9)
State taxes, net of federal benefit 9.5 (41.6)
Adjustment to valuation allowance (67.0) 283.3
Other 6.4 8.2
$ - $ -
-------------------------------------------
-------------------------------------------
</TABLE>
During the year ended June 30, 1999, the Company made no income tax payments.
During the year ended June 30, 1998, income tax payments amounted to $28,000.
- 29 -
<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. 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
$9,000 and $4,100 in fiscal years 1999 and 1998, respectively.
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 tenant's
share of operating expenses in excess of a base year. The Company exercised its
option and extended the lease for a two year period ending May 1, 2001 at an
average annual rate of $26,712 per annum. Aggregated rent expense was $127,000
for the fiscal year ended June 30, 1999, as compared to $102,000 in the fiscal
year ended June 30, 1998. Aggregate future minimum lease payments on the
existing leases at June 30, 1999 are approximately as follows: 2000-$113,000;
2001-$114,000; 2002-$96,000 and 2003-$24,000.
6. Revolving Line of Credit
On August 28, 1997, the Company entered into a $1,500,000 revolving line of
credit facility, with an interest rate equal to the bank's prime rate (7.75% at
June 30, 1999). As amended on September 24, 1999, the facility has an expiration
date of July 1, 2000 and is guaranteed by Zing. The Company has agreed not to
incur any indebtedness under the facility on July 1, 2000 without Zing's
consent. Proceeds from the loan are to be used for working capital and equipment
acquisitions. Upon expiration of the facility, the Company may be required to
make other financing arrangements which, if required, manage-
- 30 -
<PAGE>
Transition Analysis Component Technology, Inc.
Notes to Consolidated Financial Statements (continued)
6. Revolving Line of Credit (continued)
ment believes would be available. All the company's personal property
collateralizes the borrowings under the facility. The unused portion bears a
1/2% annual commitment fee. The Company made interest payments relating to the
credit facility of approximately $63,000 and $28,000 for the fiscal years 1999
and 1998, respectively. At July 30, 1999 the balance outstanding under the
revolving line of credit was $720,000.
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 (the
"1997 Plan"). Under the 1997 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. In accordance with a vesting plan, 8,800
options became exercisable immediately, 1,800 options are exercisable in one
year and 15,600 options are exercisable ratably over the next three years. On
April 28, 1999, 9,600 additional options were granted at an exercise price of
$5.75. These options are exercisable at the rate of 33-1/3% per annum on each
anniversary date. Options granted under the 1997 Plan expire ten years after
issuance. The weighted average remaining contractual life of these options is
8.67 years. No options were exercised as of June 30, 1999.
In addition to the Company's 1997 Plan, two key employees of RAC were granted,
pursuant to employment contracts, 44,904 stock options exercisable over a three
year period at the rate of 14,968 options per year. 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. Upon the occurrence of an event or transaction, as defined in the
agreement, except for options that did not previously vest as a result of the
failure to achieve a targeted sales goal, any remaining unvested options become
immediately vested. These options expire five years after issuance. The weighted
average remaining contractual life of these options is 3.3 years. At June 30,
1999, 14,968 of these options were exercisable.
Under the provisions of SFAS No. 123, the Company is required to disclose the
fair value, as defined, of options granted to employees and the related
compensation expense. The fair value of the stock options granted was estimated
at the date of grant using a Black-Scholes option pricing
- 31 -
<PAGE>
Transition Analysis Component Technology, Inc.
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
model. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. In management's opinion, because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate. The existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options. The
fair value of the options granted during the years ended June 30, 1999 and 1998
was determined using the following assumptions; risk-free interest rates of
5.73%-1999, 6.00%-1998; dividend yields of 0%, volatility factors of the
expected market price of the Company's common stock of .913 for 1999 grants and
.683 and 5.239 for 1998 grants, for the $3 and $4 options, respectively, and a
weighted-average expected life of the options of 3 years for the $3 options and
10 years for 1997 Plan options. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options' 3
year vesting period. The estimated weighted-average fair value per option is
approximately $1.11 for the $3 options and $5.12 and $4.61 for 1997 Plan grants
made in 1999 and 1998, respectively. The aggregate pro forma effect on the
Company's operations is as follows:
<TABLE>
<CAPTION>
Years ended June 30,
1999 1998
-----------------------------------------------
<S> <C> <C>
As reported:
Net income (loss) $ 150,484 $ (735,000)
Per share:
Basic $ 0.25 $ (1.25)
Diluted $ 0.24 $ (1.25)
Pro forma:
Net income (loss) $ 118,393 $ (787,483)
Per share:
Basic $ 0.20 $ (1.34)
Diluted $ 0.19 $ (1.34)
</TABLE>
- 32 -
<PAGE>
Transition Analysis Component Technology, Inc.
Notes to Consolidated Financial Statements (continued)
8. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Years ended June 30,
1999 1998
-----------------------------------------------
<S> <C> <C>
Numerator
Numerator for basic and diluted earnings per
share-income/(loss) available to common
stockholders $ 150,484 $ (735,000)
-----------------------------------------------
-----------------------------------------------
Denominator
Denominator for basic earnings per share-
weighted average shares 598,734 586,106
Effect of dilutive options 22,700
-----------------------------------------------
Denominator for diluted earnings per
share-adjusted weighted average shares and
assumed conversions 621,434 586,106
-----------------------------------------------
-----------------------------------------------
Basic $ 0.25 $ (1.25)
-----------------------------------------------
-----------------------------------------------
Diluted $ 0.24 $ (1.25)
-----------------------------------------------
-----------------------------------------------
</TABLE>
9. 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. 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.
- 33 -
<PAGE>
Transition Analysis Component Technology, Inc.
Notes to Consolidated Financial Statements (continued)
9. Related Parties (continued)
The Executive Vice President and General Manager (who is a significant
shareholder of the Company) has an employment agreement that expired 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.
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.
10. 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 Zing's 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 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.
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.
- 34 -
<PAGE>
PART IV
ITEM 13 - EXHIBITS LIST AND REPORTS ON FORM 8-K
The following exhibits are filed with this registration statement, 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 *
10.2 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
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, 1998 with Arrow/Zeus Electronics.
***
11 Statement Re: Computation of Per Share Earnings. (See Note 8 to
Financial Statements on Page 33 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 ended June 30, 1997.
*** Previously filed as an exhibit to Registrant's annual report on Form
10-KSB for the fiscal year ended June 30, 1998.
**** 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
- 35 -
<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 8th day of
October, 1999.
Transition Analysis Component Technology, Inc.
By: 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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C>
Robert E. Schrader President, Chief Executive October 8 , 1999
- ---------------------------- Officer and Chairman of the Board
Robert E. Schrader (Principal Executive Officer)
Martin S. Fawer Treasurer and Director October 8, 1999
- ---------------------------- (Principal Financial Officer)
Martin S. Fawer
Deborah J. Schrader Secretary and Director October 8, 1999
- ----------------------------
Deborah J. Schrader
David Lerner Director October 8, 1999
- ----------------------------
David Lerner
</TABLE>
- 36 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 212,188
<SECURITIES> 0
<RECEIVABLES> 1,000,086
<ALLOWANCES> (40,000)
<INVENTORY> 0
<CURRENT-ASSETS> 1,330,834
<PP&E> 758,341
<DEPRECIATION> (497,423)
<TOTAL-ASSETS> 1,768,220
<CURRENT-LIABILITIES> 1,888,354
<BONDS> 0
0
0
<COMMON> 5,987
<OTHER-SE> (126,121)
<TOTAL-LIABILITY-AND-EQUITY> 1,768,220
<SALES> 4,512,274
<TOTAL-REVENUES> 4,512,274
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,298,374
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63,416
<INCOME-PRETAX> 150,484
<INCOME-TAX> 0
<INCOME-CONTINUING> 150,484
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 150,484
<EPS-BASIC> 0.25
<EPS-DILUTED> 0.24
</TABLE>
