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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
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AMENDMENT NO. 1
TO
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
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AMERICAN CUSTOM COMPONENTS, INC.
(Name of Small Business Issuer in Its Charter)
NEVADA 81-0478643
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3310 W. MACARTHUR BOULEVARD
SANTA ANA, CALIFORNIA 92704
(Address of Principal Executive Offices) (Zip Code)
(714) 662-2080
(Registrant's Telephone Number, Including Area Code)
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
(None)
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $0.001
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Title of Class
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TABLE OF CONTENTS
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PART I
Item 1 Description of Business.
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Item 3 Description of Property.
Item 4 Security Ownership of Certain Beneficial Owners and
Management.
Item 5 Directors, Executive Officers, Promoters and Control
Persons.
Item 6 Executive Compensation.
Item 7 Certain Relationships and Related Transactions.
Item 8 Description of Securities.
PART II
Item 1 Market Price of and Dividends on the Registrant's
Common Equity and Other Shareholder Matters.
Item 2 Legal Proceedings.
Item 3 Changes In and Disagreements With Accountants.
Item 4 Recent Sales of Unregistered Securities.
Item 5 Indemnification of Directors and Officers.
PART F/S
Financial Statements.
PART III
Item 1 Index to Exhibits.
Item 2 Description of Exhibits.
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS
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American Custom Components, Inc., a Nevada corporation ("ACC-NV" or the
"Company"), was incorporated on December 31, 1991 as Rainbow Bridge Services,
Inc. ("Rainbow"). Effective August 15, 1997, Rainbow, which had no assets or
operations, acquired all of the outstanding common stock of American Custom
Components, Inc., a California corporation incorporated on April 18, 1994
("ACC-CA"). Following the acquisition, Rainbow changed its name to American
Custom Components, Inc. In October 1997, the Company acquired ninety-eight
percent (98%) of the issued and outstanding stock of Caribbean Electronics,
Ltd., a St. Lucian corporation incorporated on February 13, 1986 ("CEL").
Effective January 31, 1998, the Company acquired all of the outstanding common
stock of K5 Plastics, Inc., a California corporation incorporated on February 8,
1983 ("K5"). The Company is a holding company for its three (3) subsidiaries,
ACC-CA, CEL, and K5.
Through its subsidiaries, the Company is engaged in the business of providing
electronic assemblies (connectors and related parts) for use in multiple
applications ranging from general commodities such as industrial supply products
to specialized components such as high technology computer and peripheral
interconnect systems. The Company offers design, assembly/test and shipment of a
wide variety of connector components and offers the design, assembly and test of
specialized tooling for use in the production of various injected plastic molded
products. The Company also offers low cost subcontract assembly in its off shore
production facility. The Company has targeted five major market segments that
all benefit from the Company's offerings. Those segments are:
Telecommunication-Industrial-Medical-Computer Peripheral-General Products
The Company offers its technology customers a solution to many of their
electronic connector needs. The primary products offered are connector and
interconnect systems and a variety of metal tools used in the production of
injected plastic components. Components used in the connector and interconnect
systems include plastic housings which are designed, tooled and produced
in-house, thereby reducing production costs.
Services include designing and building custom tooling for plastic injection
molding applications and designing and manufacturing interconnect components
using injected plastic housings and metal contacts.
The Company offers the customer low cost and fast turnaround on designs, samples
and production of both standard and custom interconnect systems. The Company
believes that its competitive advantage is its ability to provide system level
design support, faster than the competition, in a market that traditionally
relies on "catalog sales." The Company provides services and products that
create fast time-to-volume for its customers. Its strategy is to identify the
weaknesses of the competition, offer products and services that satisfy customer
needs and penetrate selected market niches using its core competence for
competitive advantage. Customers currently include Motorola, Western Digital,
Iomega, Allied Manufacturers, Mattel, Polaris Pools, Calluna, GE Fanuc, Hughes
Aircraft, Thermador, Smartflex, Westlock, Medtrex, Linear Technology, Furon and
Adflex.
The Company's strategy is to continue to expand its custom connector and
subcontract assembly business in Santa Ana, California and to continue expanding
its 12,000 square foot manufacturing capability in St. Lucia. The Company
intends to use the St. Lucia plant to assemble and distribute products for
worldwide customers and to undertake manufacturing and molding. The Company
intends to manufacture critical molds and tooling at the Santa Ana facility and
ship them to the St. Lucia plant for use in volume production.
The corporate offices of the Company and its subsidiaries are located at 3310 W.
MacArthur Boulevard, Santa Ana, California 92704. The telephone number is (714)
662-2080.
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THE ELECTRONICS CONNECTOR MARKETPLACE
According to Ken Fleck in ELECTRONIC BUYERS NEWS, the worldwide electronic
connector sales by end-use equipment were approximately $23.4 billion in 1997
and will be approximately $24.9 billion in 1998. Virtually every electric or
electronic product utilizes electronic connectors of varying sophistication. To
date, the Company's principal activities in the electronic connector marketplace
have principally focused in the computer disk drive segment of that marketplace.
In recent years, this computer disk drive industry has been driven by extremely
high competitive pressures in terms of storage capacity, performance and
pricing, among other factors, and is characterized by frequent new product
introductions, short product life spans, and the need for high quality and
reliability. The Company seeks to address this market with quick response times,
which the Company also sells to other segments such as industrial and
telecommunications components.
Electronic connectors are generally comprised of contact material, generally
metallic, to transmit electric current, and insulating materials such as nylon,
to hold the contact material in proper positioning, to link the connector to
another connector or component and to insulate the contact material. Connectors
must be designed to accommodate the number and size of electrical contacts to be
joined, voltage and current, and to fit space and other requirements. Precise
manufacturing tolerances and quality control are essential, since electrical
short circuits or open circuits caused by a connector can render equipment
inoperable or cause expensive damage.
The Company's product cycle includes the following major stages: sales;
engineering and design; sourcing; tooling; manufacturing; packaging and
delivery, and to a lesser extent, contract customer repair work.
MARKETING AND SALES
The Company's sales efforts are primarily directed by the key managers of each
of the respective services; molding, mold tooling operations, sub contract
services, and connector/interconnect assemblies. The Company's marketing
strategy has been based on providing rapid design, engineering, tooling, molding
and assembly for its clients' custom connector requirements. To date, the
primary market for the Company's products has been disk drive manufacturers, but
the Company has also diversified its marketing to aerospace firms building
electronic assemblies for the U.S. military, and tooling for injected plastic
mold parts.
The Company primarily sells its products through numerous manufacturers
representatives, which can be terminated at any time. All sales orders are
subject to approval by the Company. No marketing or sales efforts are made
through subsidiaries of the Company.
MANUFACTURING, PACKAGING AND DELIVERY
The connector manufacturing process primarily consists of injection molding and
assembly. Where possible, and to provide higher quality and output, the Company
manufactures its own packaging materials. Since most of the Company's products
are small, many shipments can be made via overnight delivery services or counter
to counter airline freight to non-local customers. The Company seeks to
manufacture its products to applicable specification requirements.
In October 1997 the Company acquired a 12,000 square foot assembly plant in
Vieux Fort, St. Lucia. The Company has used and intends to use the St. Lucia
plant to assemble for worldwide customers. The Company intends to manufacture
critical molds and tooling at the Santa Ana facility and ship them to the St.
Lucia plant by overnight delivery service. The St. Lucia plant also performs
subcontract assembly services.
In addition to its own manufacturing requirements, which are satisfied by ACC-CA
and K5, the Company also designs and manufactures tools for outside customers.
The principal components of the Company's products include nylon and contact
materials such as brass, copper, nickel, gold, silver, aluminum, steel, tin,
solder, and nuts, screws and bolts. Prior to acceptance by the Company, all
materials and components undergo quality assurance procedures. All materials and
components used in the Company's products are available from several sources.
Although availability of such materials has been adequate to date, no assurance
can be given that cost increases or material shortages or allocations imposed by
suppliers in the future will not have a materially adverse effect on the
operations of the Company.
The Company's principal suppliers include Central MN Tool and Stamping, Inc.,
Electronic Plating Services, Fry Steel Co., Hasco Internorm Corp., Nascal
Interplex, Inc., Phantom Tool and Die, Plastic Resources, Inc., Precision
Components, Safe Plating, Inc., and Skyler International.
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CUSTOMERS OF THE COMPANY
The Company currently has five customers that in the aggregate represent 65% of
the total sales for its last two fiscal years. One of its five major customers
filed for protection under the federal bankruptcy laws subsequent to March 31,
1997. The Company has collected substantially all of its open accounts
receivable from such customer. The Company anticipates that it will continue to
rely upon these customers during the fiscal year ending March 31, 1999.
The Company has diversified its customer base and, in fact, over the last six
months as much as 65% of total sales were to customers other than the five
mentioned above.
SIGNIFICANT ACQUISITIONS
In October 1997, the Company acquired ninety-eight percent (98%) of the issued
and outstanding stock of Caribbean Electronics, Ltd., a St. Lucian corporation,
for $25,000 cash, a $100,000 note at an interest rate of 8% per annum, and 8,333
"restricted" shares of the Company's common stock. In connection with the
acquisition, the Company also assumed certain accounts payable of approximately
$25,000. Caribbean Electronics, Ltd. is an electronic parts assembly business
located on the island of St. Lucia. The acquisition was accounted for as a
purchase. The acquisition of Caribbean Electronics, Ltd. included acquisition of
a manufacturing and assembly facility which the Company intends to utilize for
its existing and new customers.
Effective January 31, 1998 the Company acquired K5 Plastics, Inc. ("K5"), a
tooling and mold manufacturer through the purchase of one hundred percent (100%)
of its issued and outstanding shares of stock. The Company acquired K5 for
$42,000 in cash, a $50,000 note at an interest rate of 10% per annum, and 25,000
shares of "restricted" common stock. Also, the Company delivered 60,000 warrants
with an exercise price of $3.00. Of these warrants, 30,000 are exercisable at
any time in the next two to five years and the remaining 30,000 are exercisable
at any time in the next three to six years. The Company has also assumed a K5
note payable to Union Bank of California in the amount of approximately $12,000
bearing an interest rate of 11% per annum and a line of credit to Union Bank of
California with an outstanding principal balance of approximately $50,000 at an
adjustable interest rate currently at 11.25%.
Management does not currently have any plans or arrangements for additional
acquisitions or other new ventures.
PATENTS AND OTHER INTELLECTUAL PROPERTY
The Company and its subsidiaries generally own the design rights for the
connectors it manufactures, but does not generally rely upon patent protection
for its connectors but rather believes that the short lifespan and time to
market for products provides sufficient intellectual property protection for its
products. There can be no assurance that competitors of the Company do not have
competing patents which may preclude certain aspects of the Company's designs,
that competitors may reverse engineer and create competitive products to those
of the Company or that other technological protection can be obtained for the
Company's products. No assurance can be given that patents will be granted on
future patent applications. The Company has one trademark application pending.
GOVERNMENT REGULATION
The Company believes it is in compliance with federal, state and local
regulations with respect to environmental protection. The Company does not
anticipate that costs of compliance with such regulations will have a material
effect on its capital expenditures, earnings or competitive position.
The Company, through its CEL subsidiary, operates in a foreign jurisdiction and,
as set forth in the auditor's report, is exposed to certain risks associated
therewith. These risks include currency differences and fluctuations, political
events and the status of relationships among governments, labor restrictions,
and overall market and economic conditions. Specifically, it is imperative that
the government of St. Lucia continue to support business on the island through
training and assisting in appeasing union negotiators as well as continue to
make improvements to roads, communication, and port facilities. Asian economic
volatility has currently slowed sales growth within the market. Management
believes that its marketing plan and the marketing plans of its major customers
are well positioned to deal with such uncertainties.
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EMPLOYEES
The Company and its subsidiaries have approximately 100 employees (42 of which
are primarily part-time), including two officers, seven administrative
personnel, four in engineering, 79 in manufacturing, and eight in quality
control. Sales and marketing is undertaken primarily by four external sales
representation firms. Other than officers and directors, none of the Company's
subsidiaries have employees.
RESEARCH AND DEVELOPMENT
The Company expended approximately $190,000 in fiscal year 1998 for research and
development activities related to its manufacturing processes. Of such amount,
approximately $50,000 was reimbursed to the Company from its customers. None of
the Company's subsidiaries expended material sums for research and development.
COMPETITION
THE CONNECTOR BUSINESS
The electronic connector business consists of a few very large entities, each
with annual sales over $1 billion per year. These companies include AMP, Berg,
Robinson Nugent, Molex, and many smaller companies with annual revenues between
$10 million and $100 million. The Company is small compared to the marketplace,
and competes against its larger competitors by offering "custom application"
components in a shorter time and for a lower cost. The Company is able to
compete on cost as a result of its off-shore manufacturing. In the event,
however, that its more-adequately financed and larger competition were to focus
their efforts on shorter turn-around times, they could materially erode the
Company's market share and have a material adverse effect on the Company's
financial performance.
THE TOOLING BUSINESS
The Company entered the plastic tooling business when it acquired K5. K5 was in
the business of selling tooling services and mold making to a set of customers
at the time of the acquisition, and the Company continues to support and expand
the outside customer base inherited in the acquisition. The Company also uses
the capabilities of K5 for its in-house manufacturing of tools used in the
production of plastic components used in final assemblies.
The tooling industry consists of competitors that make their own tooling for
their own use, as well as small to medium sized companies that sell to outside
customers. The majority of the competition in the tooling segment are very small
machine shops, privately held and located in the United States. The Company,
through K5, offers a unique set of capabilities with very fast turn around times
that give customers a quick time-to-market. However, existing customers could
elect to vertically integrate and provide the now-subcontracted services
in-house, a move which, if followed by a substantial number of the Company's
customers, could have a materially adverse effect on the Company's financial
performance.
SUBCONTRACT SERVICES BUSINESS
The Company entered the subcontract services business when it acquired CEL. CEL
was in the business of providing subcontract manufacturing services to outside
customers. The Company uses CEL both as an in-house manufacturing plant with low
cost labor as well as a plant to service outside customers inherited in the
acquisition.
Competition in the Caribbean region is minimal, with most of the competition for
these services coming from the Far East. The Company uses the CEL facilities for
shipment to customers located in the European Economic Community as the island
nation is a protectorate of Great Britain and participates in the European
Trading Community. If competitors were to locate on the island of St. Lucia, the
Company could be effected by the reduced skilled labor available to the Company.
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YEAR 2000 DISCLOSURE
In the fiscal year ended March 31, 1998, the Company began the process of
identifying, evaluating, and implementing changes to its computer programs
necessary to address the Year 2000 issue. The Company has currently addressed
its internal Year 2000 issue by modification of existing programs and
conversions to new programs. While the Company is confident that it has
successfully completed the assessment and remediation of its computer software,
there can be no assurance that the necessary modifications and conversions will
be adequate or completely thorough, which could have a material adverse effect
on its results of operations. The total cost to the Company associated with the
required modifications and conversions was not material to the Company's results
of operations and financial position and was expensed as incurred.
ITEM 2 - MANAGEMENT'S DISCUSSION OF ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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The following discussion contains certain forward-looking statements that are
subject to business and economic risks and uncertainties, and the Company's
actual results could differ materially from those forward-looking statements.
The following discussion regarding the financial statements of the Company
should be read in conjunction with the financial statements and notes thereto.
OVERVIEW
The Company, together with its subsidiaries, has its primary operations located
in Santa Ana, California where it is currently engaged in the business of
designing and manufacturing electronic components and plastic injection tools
for computers, disk drives, computer systems, military applications, medical,
telecommunications and certain industrial devices. In August 1997, the Company
(which at the time was named Rainbow Bridge Services, Inc., a Nevada corporation
("Rainbow")) acquired all of the outstanding common stock of ACC-CA in a
business combination described as a "reverse acquisition." As such, the
historical financial statements are those of ACC-CA and the accounts of Rainbow
have been reflected in the consolidated financial statements from the August
1997 date of the acquisition. In October 1997, the Company acquired ninety-eight
percent (98%) of the issued and outstanding stock of Caribbean Electronics, Ltd.
("CEL"), an electronic components manufacturer, housed in a leased 12,000 square
foot assembly plant located on the island of St. Lucia. As of January 31, 1998,
the Company acquired one-hundred percent (100%) of the issued and outstanding
stock and assumed certain debts of K5 Plastics, Inc., a California corporation
("K5"), a mold and tooling manufacturer and a previous vendor.
K5 has been consolidated with the Company's Santa Ana facility.
RESULTS OF OPERATIONS
REVENUES
During the fiscal years ended March 31, 1998 and 1997, the Company's revenues
were derived principally from the following products:
i. Electrical components for disk drives
ii. Military and industrial connectors
For the year ended March 31, 1998, revenues were $2,583,094. This is an increase
of 4.4% from $2,473,095 recorded for the year ended March 31, 1997. The increase
was due to increased sales efforts arising from the Company's external sales
force. For the fiscal year ended March 31, 1996, revenues were $718,748.
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GROSS MARGINS
The Company realized a gross margin of $1,059,399 reported for the year ended
March 31, 1998. This is an increase of 47.2% over $719,652 for the year ended
March 31, 1997. The increase is due to a shift of some final assembly operations
from Southern California to the plant in St. Lucia, which provided a lower cost
of labor and favorable overall economic conditions for the region. The gross
margin as a percentage of revenues was 41% for the year ended March 31, 1998 and
29% for the year ended March 31, 1997. The Company realized a gross margin of
$256,659 for the fiscal year ended March 31, 1996. The gross margin as a
percentage of revenues was 36% for the fiscal year ended March 31, 1996.
Operating income was a negative $672,998 for the year ended March 31, 1998. This
is a decrease of 558% from $147,019 recorded for the year ended March 31, 1997.
The decrease is due to a decrease in sales volume during the last three months
of the fiscal year. Selling, general, and administrative (SG&A) expenses were
increased during the second and third quarter in response to indications of
continued increasing sales. The reaction time to correct this expense increase
resulted in lower income from operations, which also resulted in a decreased net
income. Operating income was a negative $71,758 for the fiscal year ended March
31, 1996.
OPERATING COSTS AND EXPENSE
Operating costs and expenses increased by $1,159,764 (203%) for the year ended
March 31, 1998 as compared to the year ended March 31, 1997. The increase was
due primarily to the increased cost of sales associated with sales commissions
to representatives and the hiring of certain key personnel. These new employees
come from some of the Company's largest customers, bringing with them certain
knowledge specific to the industry. Operating costs and expenses increased by
$244,216 (74%) for the fiscal year ended March 31, 1997 as compared to the
fiscal year ended March 31, 1996.
OTHER OPERATING EXPENSE
Total other operating expenses, consisting primarily of bad debt expense,
payroll taxes, rent, telephone and utilities, printing, and office supplies,
increased by $296,050 (226%) for the year ended March 31, 1998 as compared to
the year ended March 31, 1997. This increase was due in large part to the
conversion of a significant percentage of the Company's labor force from
independent contractors to Company employees. Total other operating expenses
decreased by $11,555 (8%) for the fiscal year ended March 31, 1997 as compared
to the fiscal year ended March 31, 1996.
NET INCOME
Net income for the year ended March 1998 was a negative $773,263 compared to
$77,342 for the year ended March 1997, a 1100% decrease. As stated earlier, this
decrease was due primarily to a decreased sales volume during the last three
months of the fiscal year while SG&A expenses were increased during the second
and third quarter in response to indications of continued increasing sales.
ASSETS AND LIABILITIES
Total assets increased from $759,145 as of the year ended March 1997 to
$1,486,046 as of the year ended March 1998. This increase of 95% was due
primarily to the inclusion of assets as a result of the acquisitions of CEL and
K5. Inventory increased from $75,410 as of the year ended March 1997 to $227,465
(201%) as of the year ended March 1998 due to a slow down in shipments during
the first quarter of 1998. Net property and equipment increased from $245,556 as
of the year ended March 1997 to $750,371 (a 205% increase) as of the year ended
March 1998 primarily as a result of the acquisitions described above.
Total liabilities increased from $791,276 for the period ended March 1997 to
$1,119,606 (a 41% increase) for the period ended March 1998 due to an increase
in accounts payable (an increase from $238,708 to $456,977, or 91%) and the
addition of notes payable, net of current portion. The accounts payable increase
resulted from increased trade payables as the CEL and K5 acquisitions occurred.
The other increase in total liabilities came from the creation of notes payable
during the reverse merger.
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SHAREHOLDERS EQUITY
Shareholders Equity increased from a negative $32,131 as of the period ended
March 1997 to $366,440 as of the period ended March 1998. This increase of 1240%
reflects the negative earnings reported for the period ended March 1998
($773,263) and the issuance of shares and related additional paid-in capital
raised during the fiscal year from private offerings of the Company's securities
($1,171,834).
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 1998
Sales for the six months ended September 1998 were $832,011. Gross profit was
$410,614, or 49.35%, an increase of 8.3% over the period ended March 31, 1998.
The Company's net income was a negative $57,794.
Sales continued to decline following the end of the 1998 fiscal year, primarily
due to a slow down in the marketplace. The decrease in sales occurred faster
than the Company could adjust the SG&A costs, thus resulting in a net loss for
the period. However, overhead expenses were reduced as a percentage of sales.
Total assets increased from $1,486,046 to $1,712,961, while inventory was
reduced from $227,465 to $161,643. Owners equity increased from $366,440 to
$616,146.
LIQUIDITY AND CAPITAL RESOURCES
In August 1997, the Company (which at the time was designated Rainbow Bridge
Services, Inc., a Nevada corporation ("Rainbow")) acquired all of the
outstanding common stock of American Custom Components, Inc., a California
corporation ("ACC-CA") in a business combination described as a "reverse
acquisition". For accounting purposes, the acquisition has been treated as the
acquisition of Rainbow (the Company) by ACC-CA. Immediately prior to the
acquisition, Rainbow had 832,752 shares of stock outstanding. As part of the
reorganization, the Company issued 7,447,000 shares to the shareholders of
ACC-CA in exchange for 7,447 shares of common stock in ACC-CA. In addition, the
Company issued options to purchase 1,100,000 shares of its common stock to
certain consultants and employees. The Company subsequently changed its name
from Rainbow to American Custom Components, Inc., a Nevada corporation. The
Company is currently experiencing growth beyond its financial resources. The
Company intends to acquire additional funds through establishing a bank lending
relationship and additional equity financing. Although management currently is
negotiating with several funding sources, no specific plans or arrangements have
been made for said financing. There can be no assurance that the Company will be
successful in obtaining any such funding.
In October 1997, the Company acquired ninety-eight percent (98%) of the issued
and outstanding stock of Caribbean Electronics, Ltd., a St. Lucian corporation
("CEL"), for $25,000 cash, a $100,000 note payable with interest at 8% per
annum, and 8,333 "restricted" shares of the Company's common stock. In
connection with the acquisition, the Company also assumed certain accounts
payable of approximately $25,000. Caribbean Electronics, Ltd. is an electronic
contract assembly business located on the island of St. Lucia.
The acquisition was accounted for as a purchase.
Effective January 31, 1998 the Company acquired K5 Plastics, Inc. ("K5"), a
tooling and mold manufacturer through the purchase of one hundred percent (100%)
of its issued and outstanding shares of stock. The Company acquired K5 for
$42,000 in cash, a $50,000 note at an interest rate of 10% per annum, and 25,000
shares of "restricted" common stock. Also, the Company delivered 60,000 warrants
with an exercise price of $3.00. Of these warrants, 30,000 are exercisable at
any time in the next two to five years and the remaining 30,000 are exercisable
at any time in the next three to six years. The Company has also assumed a K5
note payable to Union Bank of California in the amount of approximately $12,000
bearing an interest rate of 11% per annum and a line of credit to Union Bank of
California with an outstanding principal balance of approximately $50,000 at an
adjustable interest rate currently at 11.25%.
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In connection with a private offering of securities which was made by the
Company in the Third Calendar Quarter of 1997, the Company entered into three
(3) Note Purchase Agreements with accredited purchasers under Rule 504 of
Regulation D promulgated under the Securities Act of 1933 wherein the purchasers
purchased an aggregate of $374,700 in Notes convertible at the greater of (i)
83% of the closing bid price of the Company's common stock, or (i) $4.98. As of
the date hereof, all of the Notes have been converted into an aggregate of
75,241 shares of the Company's Common Stock.
In connection with a private offering of securities which was made by the
Company in the Fourth Calendar Quarter of 1997 and the First Quarter of 1998,
the Company sold an aggregate of 245,000 "restricted" shares of Common Stock to
accredited investors under Rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933 at a price of $1.75 per share, resulting in net proceeds
to the Company of $428,750.
In connection with a private offering of securities which was made by the
Company in the First and Second Calendar Quarters of 1998, the Company sold an
aggregate of 49,514 "restricted" shares of Common Stock to accredited investors
under Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933 at
a price of $1.75 per share, resulting in net proceeds to the Company of $86,650.
In connection with a private offering of securities which was made by the
Company in the Second Calendar Quarter of 1998, the Company sold 80,000 shares
of Common Stock to accredited investors under Rule 504 of Regulation D and
Section 4(2) of the Securities Act of 1933 at a price of $1.25 per shares,
resulting in net proceeds to the Company of $100,000.
In connection with a private offering of securities which was made by the
Company in the Second Calendar Quarter of 1998, the Company sold 225,000
"restricted" shares of Common Stock to accredited investors under rule 506 of
Regulation D and Section 4(2) of the Securities Act of 1933 at a price of $0.70
per share, resulting in net proceeds to the Company of $112,500.
In addition to current liabilities of $846,131 at March 31, 1998, the Company
has $273,475 of long term debt. The March 31, 1998 outstanding debt has been
increased by $328,330 (42%) since March 31, 1997.
During fiscal 1998, the Company continued its management plan of diversification
of its product lines into emerging markets through continued acquisitions and
new products development. This plan was begun with the establishment of the St.
Lucia production facilities. The objective of the expansion program is to
achieve a geographic and economic relationship with the emerging markets. While
there can be no assurance that such funding can be obtained, the Company plans
to finance future acquisitions through both capital raised from future private
placements as well as through the direct issuance of the Company's common stock.
PROPOSED FUTURE OPERATIONS
The Company has historically been engaged in the business of design and
manufacture of electronic components and interconnect systems for the computer
disk drive industry. The Company's Management has recently determined to broaden
the Company's business plan from a disk drive connector manufacturer to now
offering its technology customers a more complete solution to their interconnect
and systems integration needs and to penetrating additional market places. The
Company designs its products to customer specifications using sophisticated
engineering facilities; manufactures its molds and other necessary tooling; and
manufacturing components and assemblies.
FORWARD LOOKING STATEMENTS
Certain of the statements contained in this report involve risks and
uncertainties. The future results of the Company could differ materially from
those statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this report. While the
Company believes that these statements are accurate, the Company's business is
dependent upon general economic conditions and various conditions specific to
technology-based industries. Accordingly, future trends and results cannot be
predicted with certainty.
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It is imperative that the St. Lucia government continues to support business on
the island through training and assisting in appeasing union negotiators as well
as continues to make improvements to roads, communication and port facilities.
Asian economic volatility has currently slowed sales growth within the market.
To date, the Company has not experienced any problems relating to currency
translation nor does management anticipate any problems in the future.
Notwithstanding the foregoing, however, there exists certain risks related to
currency translation and there can be no assurances that these risks, if they
materialize, will not have a material adverse effect on the operations and
earnings of the Company.
While the Company plans to acquire/develop additional sales and gain synergy
from acquisitions, difficulties and expenses may be encountered in integrating
the newly acquired operations with those of the Company already in place.
The Company has not experienced a material adverse impact of such risks and
uncertainties and does not anticipate such an impact. However, no assurance can
be given that such risks and uncertainties will not affect the Company's future
results of operations or its financial position.
ITEM 3 - DESCRIPTION OF PROPERTY
- --------------------------------
Effective November 1, 1995, the Company began leasing approximately 4,050 square
feet of administrative office and warehouse space in Anaheim, California at a
monthly rental rate of approximately $2,171.00. The premises were sublet to a
tenant in an amount equal to the Company's obligations under the lease. The
lease expired October 31, 1998, and the Company has no further obligations
related to the Anaheim premises.
Effective December 1, 1997, the Company began leasing approximately 12,185
square feet of administrative office, warehouse, and manufacturing space in
Santa Ana, California at a monthly rental rate of approximately $6,702.00 per
month. The rent increases to approximately $6,945 and $7,185 in years two and
three, respectively, of the lease. The lease expires November 30, 2000.
In September 1997 the Company acquired a 12,000 square foot manufacturing
facility in St. Lucia in connection with its acquisition of Caribbean
Electronics, Inc.
In connection with the acquisition of K5 in January 1998, the Company assumed an
obligation for a lease of approximately 3,000 square feet in Huntington Beach,
California. The monthly rental is approximately $1,760 per month and runs
through February 2000. The Company is currently seeking to sublet or be released
from this obligation by the existing landlord.
Management believes that the Company had adequate insurance coverage on all of
its owned properties.
ITEM 4 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The following table sets forth, as of November 12, 1998, certain information
with respect to the Company's equity securities believed by the Company to be
owned of record or beneficially by (i) each Director of the Company; (ii) each
person who owns beneficially more than 5% of each class of the Company's
outstanding equity securities; and (iii) all Directors and Executive Officers as
a group.
<TABLE>
<CAPTION>
Title Percent of
of Class Name and Address of Beneficial Owner Common Stock Outstanding
- -------- ------------------------------------ ------------ -----------
<S> <C> <C> <C>
Common Stock Martin Anthony Walk 5,492,000 40.76%
177 Promontory West
Newport Beach, CA 92660
Common Stock Oxford International, Inc. 3,000,000(1) 22.27%
7979 Old Georgetown Road, Suite 800
Bethesda, MD 20814
Common Stock John Groom 1,100,000(2) 7.60%
3301 W. MacArthur Blvd
Santa Ana, CA 92704
Common Stock John Fritch 1,000,000(3) 6.9%
3301 W. MacArthur Blvd
Santa Ana, CA 92704
Common Stock M. Richard Cutler 75,821 0.7%
610 Newport Center Drive, Suite 800
Newport Beach, CA 92660
Common Stock Steve Kakuk 25,000(4) 0.2%
3301 W. MacArthur Blvd
Santa Ana, CA 92704
All Directors and Officers as a Group (3) 2,175,821 14.1%
========= =====
- ---------------------
</TABLE>
10
<PAGE>
(1) An aggregate of 3,000,000 shares of "restricted" common stock were
issued to Oxford International, Inc. ("Oxford") pursuant to a signed
Term Sheet dated June 1, 1998. The terms of purchase of the shares have
not been finalized and are still being negotiated between Oxford and the
Company. The Company anticipates that all or some of these shares may be
cancelled.
(2) Includes warrants to acquire 1,000,000 shares of common stock at an
exercise price of $0.375 per share, exercisable until October 13, 2004.
In the event of Mr. Groom's voluntary resignation as an employee of the
Company, the Company shall have to right to terminate 41,667 warrants
for each month between Mr. Groom's last full month of employment and
January 1, 2000.
(3) Includes warrants to acquire 1,000,000 shares of common stock at an
exercise price of $0.375 per share, exercisable until October 13, 2004.
In the event of Mr. Fritch's voluntary resignation as an employee of the
Company, the Company shall have to right to terminate 41,667 warrants
for each month between Mr. Fritch's last full month of employment and
January 1, 2000.
(4) Does not include an aggregate of 60,000 warrants held by Mr. Kakuk to
purchase common stock of the Company at a purchase price of $3.00 per
share. Of these warrants, 30,000 are exercisable at any time in the next
2 to 5 years and the remaining 30,000 are exercisable at any time in the
next three to six years.
The Company believes that the beneficial owners of securities listed above,
based on information furnished by such owners, have sole investment and voting
power with respect to such shares, subject to community property laws where
applicable. Beneficial ownership is determined in accordance with the rules of
the Commission and generally includes voting or investment power with respect to
securities. Shares of stock subject to options or warrants currently
exercisable, or exercisable within 60 days, are deemed outstanding for purposes
of computing the percentage of the person holding such options or warrants, but
are not deemed outstanding for purposes of computing the percentage of any other
person.
ITEM 5 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
- ---------------------------------------------------------------------
The following table sets forth the names and ages of the current directors and
executive officers of the Company, the principal offices and positions with the
Company held by each person and the date such person became a director or
executive officer of the Company. The executive officers of the Company are
elected annually by the Board of Directors. The directors serve one year terms
and until their successors are elected. The executive officers serve terms of
one year or until their death, resignation or removal by the Board of Directors.
There are no family relationships between any of the directors and executive
officers. In addition, there was no arrangement or understanding between any
executive officer and any other person pursuant to which any person was selected
as an executive officer.
The directors, executive officers, and significant employees of the Company are
as follows:
Name Age Positions
- ---- --- ---------
John Groom 52 Director, President, Chief Executive Officer
(1998)
John Fritch 51 Chairman of the Board, Chief Financial
Officer, Secretary (1998)
M. Richard Cutler 41 Director (1998)
Steve Kakuk 63 General Manager, Tooling and Mold Operations
(1998)
JOHN GROOM joined the Company as its President in January 1998 and assumed the
position of Chief Executive Officer in June 1998. From July 1996 until November
1997, Mr. Groom was Senior Vice President of Operations, Division Plant Manager
and Chief Technical Officer for CMC Industries, Inc., a telecommunications
manufacturing firm. From November 1995 until June 1996, Mr. Groom was Executive
Director, Operations of JTS Corp., a computer disk drive designer and
manufacturer. From April 1987 until November 1995, Mr. Groom held numerous
positions at Seagate Technology International, a disk drive manufacturer, most
recently holding the position of Senior Director of Engineering after promotion
from his position as Director of Engineering, Far East Operations. Mr. Groom
brings years of international management with operations development experience
and extensive business knowledge of Singapore, Malaysia, Hong Kong, Indonesia,
Taiwan, Japan, Korea and India.
11
<PAGE>
JOHN FRITCH joined the Company's Board of Directors in January of 1998, and
became its Chairman, Chief Financial Officer, and Secretary in June 1998. From
April 1997 until May 1998 he has been the Director of Materials at Hughes Data
Systems, a computer integration firm. From September 1996 until April 1997 Mr.
Fritch was Director of Corporate Materials for Sanmina Corporation, a contract
manufacturer in the telecommunications industry. From May 1995 until May 1996,
Mr. Fritch was Senior Vice President of JTS Corporation, a disk drive
manufacturer. From October 1994 until May 1995, Mr. Fritch was Vice President of
Commodity Management for Conner Peripherals, Inc., a disk drive manufacturer.
>From June 1986 until October 1994, Mr. Fritch was Director of Commodity
Management for Western Digital Corporation, a disk drive manufacturer. Mr.
Fritch is a graduate of Pepperdine University's Graduate School of Business and
Management and is currently active as a University Adjunct Instructor at the
University of Phoenix Graduate School of Business. He is a member is good
standing with NYU's Delta Mu Delta Society.
M. RICHARD CUTLER has been a Director of the Company since June 1998. Mr. Cutler
founded the Law Offices of M. Richard Cutler in 1996. Mr. Cutler has practiced
in the general corporate and securities area since his graduation from law
school. Mr. Cutler is a graduate of Brigham Young University (B.A., magna cum
laude, 1981); and Columbia University School of Law (J.D. 1984). While at
Columbia, Mr. Cutler was honored as a Harlan Fiske Stone Scholar, was Managing
Editor of the Columbia Journal of Law and Social Problems, and received a
Recognition of Achievement with Honors in Foreign and International Law, Parker
School of Foreign and Comparative Law. Mr. Cutler was admitted to the State Bar
of Texas in 1984 and the State Bar of California in 1990. After law school, Mr.
Cutler joined the national law firm of Jones, Day, Reavis & Pogue where he
practiced in the corporate, securities and mergers and acquisitions departments.
Mr. Cutler subsequently spent five years in the corporate and securities
department of Akin, Gump, Strauss, Hauer & Feld, a Dallas law firm. After moving
to the west coast, Mr. Cutler was with the Los Angeles office of Kaye, Scholer,
Fierman, Hayes & Handler, a New York based law firm, where he continued his
general business and securities practice. In 1991, Mr. Cutler founded the law
firm of Horwitz, Cutler & Beam, where he practiced corporate and securities law
for five years before forming his present business. Mr. Cutler has been admitted
to the U.S. Federal District Courts, Central and Northern Districts of
California, as well as the U.S. Court of Appeals, Ninth Circuit.
STEVE KAKUK joined the Company as the General Manager, Tooling and Mold
Operations in January of 1998 when K5, of which Mr. Kakuk was the founder and
controlling owner, was acquired by the Company. Mr. Kakuk has over thirty years
experience in all aspects of manufacturing management, including product design,
prototyping, and tooling design and is proficient in all phases of plastic mold
making. Mr. Kakuk's previous experience includes the formation of an
international partnership known as Humbros, Inc., as well as founding and
growing a Downey, California molding and moldmaking business known as K.R.K. Mr.
Kakuk attended the Los Angeles Trade Technical Institute where he received
certification in plastics.
ITEM 6 - EXECUTIVE COMPENSATION
- -------------------------------
Under the terms of his employment contract, John Groom is entitled to receive
the following compensation in 1998: (i) a cash bonus of $30,000, (ii) salary at
the annual rate of $110,000 per year for the period from January 1, 1998 through
March 31, 1998, (ii) salary at the annual rate of $135,000 per year for the
period from April 1, 1998 through June 30, 1998, and (iii) salary at the annual
rate of $175,000 per year for the period from July 1, 1998 through December 31,
1998. As of October 30, 1998, Mr. Groom has voluntarily elected to defer the
cash bonus, and has been paid salary in the aggregate sum of $67,116, resulting
in total deferred bonus and salary compensation of $82,464. On October 13, 1998,
Mr. Groom was granted warrants to acquire 1,000,000 shares of the Company's
Common Stock at an exercise price of $0.375 exercisable until October 13, 2004.
In the event of Mr. Groom's voluntary resignation as an employee of the Company,
the Company shall have to right to terminate 41,667 warrants for each month
between Mr. Groom's last full month of employment and January 1, 2000.
12
<PAGE>
John Fritch entered into a consulting agreement with the Company effective March
1, 1998 at an annual rate of $139,360 per year. Subsequently, effective April 1,
1998, Mr. Fritch entered into an employment agreement with the Company whereby
he is to receive an annual salary of $175,000 per year beginning April 1, 1998,
subject, however, to an offset for amounts paid to him under his consulting
agreement, which remains in effect as long as his salary is deferred under his
employment agreement. As of October 30, 1998, Mr. Fritch has been paid the sum
of $56,300 under the terms of his consulting agreement, and has deferred the sum
of $36,607. He has accrued an aggregate of $102,083 in deferred salary under his
employment agreement, offset by the sum of $44,686 paid under his consulting
contract during the applicable period, resulting in an aggregate of $57,397 in
deferred salary compensation under his employment agreement. On October 13,
1998, Mr. Fritch was granted warrants to acquire 1,000,000 shares of the
Company's Common Stock at an exercise price of $0.375 exercisable until October
13, 2004. In the event of Mr. Fritch's voluntary resignation as an employee of
the Company, the Company shall have to right to terminate 41,667 warrants for
each month between Mr. Fritch's last full month of employment and January 1,
2000.
In July 1998, Mr. Cutler received an aggregate of 50,000 shares of "restricted"
Common Stock as compensation for serving as a Director.
No other Officer or Director receives or has received any compensation from the
Company, other than reimbursement for direct out-of-pocket expenses in
connection with attendance at meetings of the Board of Directors.
SUMMARY COMPENSATION TABLE
The Summary Compensation Table shows certain compensation information for
services rendered in all capacities during each of the prior three (3) fiscal
years. Other than as set forth herein, no executive officer's salary and bonus
exceeded $100,000 in any of the applicable years. The following information
includes the dollar value of base salaries, bonus awards, the number of stock
options granted and certain other compensation, if any, whether paid or
deferred.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation Long Term Compensation
---------------------------------- ---------------------------------------------------
Awards Payouts
----------------------- -------------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
POSITION YEAR ($) ($) ($) ($) SARS (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John Groom 1998 129,693 30,000 -0- -0- 1,000,000 -0- -0-
John Fritch 1998 110,190 -0- 11,613 -0- 1,000,000 -0- -0-
M. Richard Cutler 1998 -0- -0- -0- 50,000 -0- -0- -0-
Martin Anthony Walk 1998 7,924 -0- -0- -0- -0- -0- -0-
1997 20,485 -0- -0- -0- -0- -0- -0-
1996 31,500 -0- -0- -0- -0- -0- -0-
Inge Lundegaard 1998 65,383 -0- -0- -0- -0- -0- -0-
1997 19,696 -0- -0- -0- -0- -0- -0-
1996 27,393 -0- -0- -0- -0- -0- -0-
Michael Robert Orton 1998 45,914 -0- -0- -0- 100,000 -0- -0-
</TABLE>
13
<PAGE>
<TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<CAPTION>
NUMBER OF SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/SAR'S GRANTED
OPTIONS/SAR'S GRANTED TO EMPLOYEES IN EXERCISE OF BASE
NAME (#) FISCAL YEAR PRICE ($/SH) EXPIRATION DATE
- -------------------------- ----------------------- ----------------------- ----------------------- ------------------------
<S> <C> <C> <C> <C>
John Groom -0- -0- N/A N/A
John Fritch -0- -0- N/A N/A
Michael Robert Orton 100,000 100% $0.01 N/A
</TABLE>
<TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<CAPTION>
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING VALUE OF UNEXERCISED
OPTIONS/SARS AT FY-END IN-THE-MONEY OPTION/SARS
SHARES ACQUIRED ON (#) AT FY-END ($)
NAME EXERCISE (#) VALUE REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------ ----------------------- -------------------- --------------------------- ----------------------------
<S> <C> <C> <C> <C>
John Groom -0- -0- -0- -0-
John Fritch -0- -0- -0- -0-
Michael Robert Orton 100,000 35,740 -0- -0-
</TABLE>
COMPENSATION OF DIRECTORS
In July 1998, Mr. Cutler received an aggregate of 50,000 shares of "restricted"
Common Stock as compensation for serving as a Director.
No other Officer or Director receives or has received any compensation from the
Company, other than reimbursement for direct out-of-pocket expenses in
connection with attendance at meetings of the Board of Directors.
ITEM 7 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
In August 1997, the Company (which at the time was designated Rainbow Bridge
Services, Inc., a Nevada corporation ("Rainbow")) acquired all of the
outstanding common stock of American Custom Components, Inc., a California
corporation ("ACC-CA") in a business combination described as a "reverse
acquisition". For accounting purposes, the acquisition has been treated as the
acquisition of Rainbow (the Company) by ACC-CA. The Company's historical
financial statements are those of ACC-CA, and the accounts of Rainbow have been
reflected in the consolidated financial statements from the August 1997 date of
the acquisition. Immediately prior to the acquisition, Rainbow had 832,752
shares of stock outstanding. As part of the reorganization, the Company issued
7,447,000 shares to the shareholders of ACC-CA in exchange for 7,447 shares of
common stock in ACC-CA. Such shares include the shares owned by the officers and
directors of the Company at the time of the transaction. In addition, the
Company issued options to purchase 1,100,000 shares of its common stock to
certain consultants and employees, including 900,000 options issued to The
Michelson Group.
14
<PAGE>
In August 1997 the Company entered into a consulting agreement with The
Michelson Group for financial consulting pursuant to which the Company issued to
The Michelson Group 900,000 options to purchase common stock and pays The
Michelson Group $6,000 per month in consulting fees through the period ending
August 1999. The consulting agreement requires that the Company obtain the
consent of The Michelson Group for the issuance of additional shares or the
incurrence of additional indebtedness other than in the ordinary course of
business.
In March 1998, Pegasus, Inc. loaned the Company the sum of $100,000 to assist
with temporary cash flow needs. The loan was repaid in full in April 1998. At
the dates of the loan and its repayment, Pegasus, Inc. was controlled by Martin
Tony Walk, majority shareholder and then officer of the Company. There were no
written documents evidencing the transaction.
Mr. Cutler serves as legal counsel to the Company and, as such, receives
compensation for such services at his normal and customary hourly rates.
ITEM 8 - DESCRIPTION OF SECURITIES
- ----------------------------------
COMMON STOCK
The Company's Articles of Incorporation authorize the issuance of 24,000,000
shares of Common Stock, $0.001 par value per share, of which 13,473,340 shares
were issued and outstanding as of November 12, 1998. Holders of shares of Common
Stock are entitled to one vote for each share on all matters to be voted on by
the stockholders. Holders of Common Stock have no cumulative voting rights.
Holders of shares of Common Stock are entitled to share ratably in dividends, if
any, as may be declared, from time to time by the Board of Directors in its
discretion, from funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, the holders of shares of
Common Stock are entitled to share pro rata all assets remaining after payment
in full of all liabilities. Holders of Common Stock have no preemptive rights to
purchase the Company's common stock. There are no conversion rights or
redemption or sinking fund provisions with respect to the common stock. All of
the outstanding shares of Common Stock are fully paid and non-assessable.
PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of 1,000,000
shares of preferred stock, $0.001 par value, none of which are issued and
outstanding. The Company's Board of Directors has authority, without action by
the shareholders, to issue all or any portion of the authorized but unissued
preferred stock in one or more series and to determine the voting rights,
preferences as to dividends and liquidation, conversion rights, and other rights
of such series. The issuance of prefered stock may also include restricing
dividends on the common stock, dilute the voting power of the common stock,
and/or impair the liquidation rights of the holders of common stock.
TRANSFER AGENT
The transfer agent for the Common Stock is Alpha Tech Stock Transfer, 4505 S.
Wasatch Boulevard, Suite 205, Salt Lake City, Utah 84124.
15
<PAGE>
PART II
ITEM 1 - MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
- ----------------------------------------------------------------------------
MARKET INFORMATION
>From July 1997, the Company's Common Stock was quoted without price (name only)
under the symbol "RBBS" on the Nasdaq Electronic Bulletin Board. On October 20,
1997, following the acquisition of American Custom Components, Inc., a
California corporation, by Rainbow Bridge Services, Inc., a Nevada corporation,
the Company's Common Stock began trading under the symbol "ACCM".
The following table sets forth the high and low bid prices for shares of the
Company Common Stock for the periods noted, as reported by the National Daily
Quotation Service and the NASD Non-NASDAQ Bulletin Board. Quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
BID PRICES
YEAR PERIOD HIGH LOW
---- ------ ---- ---
1997 Third Quarter............................ 11.625 3.00
Fourth Quarter........................... 9.5 5.00
1998 First Quarter............................ 5.5 4.125
Second Quarter........................... 4.75 1.422
Third Quarter............................ 2.438 0.50
Fourth Quarter........................... 0.75 0.375
(through November 12, 1998)
STOCKHOLDERS
As of November 12, 1998, the Company had 13,473,340 shares of Common Stock
outstanding and held by approximately 105 shareholders of record.
DIVIDENDS
The Company has not paid cash dividends on its Common Stock in the past and does
not anticipate doing so in the foreseeable future.
ITEM 2 - LEGAL PROCEEDINGS
- --------------------------
The Company is presently, has been, and may from time to time be involved in
various claims, lawsuits, disputes with third parties, actions involving
allegations of discrimination, or breach of contract actions incidental to the
operation of its business. The Company is not currently involved in any such
litigation which it believes could have a materially adverse effect on its
financial condition or results of operations.
ITEM 3 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
- ------------------------------------------------------
Effective October 24, 1997, Kelly & Company, Certified Public Accountants, were
engaged by the Company as their principal accountant to audit the Company's
financial statements. There have been no changes in accountants or disagreements
of the type required to be reported under this Item 3 between the Company and
its independent auditors since their date of engagement, nor during the
Company's two most recent fiscal years or any later interim period.
16
<PAGE>
ITEM 4 - RECENT SALES OF UNREGISTERED SECURITIES
- ------------------------------------------------
In connection with a private offering of securities which was made by the
Company in the third quarter of 1997, the Company entered into three (3) Note
Purchase Agreements under Rule 504 of Regulation D promulgated under the
Securities Act of 1933 wherein the purchaser, a limited partnership "accredited"
as that term is defined under Regulation D, purchased an aggregate of $374,700
in Notes convertible at the greater of (i) 83% of the closing bid price of the
Company's common stock, or (i) $4.98. As of the date hereof, all of the Notes
have been converted into an aggregate of 75,241 shares of the Company's Common
Stock.
In connection with a private offering of securities which was made by the
Company in the Fourth Quarter of 1997 and the First Quarter of 1998, the Company
sold an aggregate of 245,000 "restricted" (as that term is defined under Rule
144 of the Securities Act of 1933) shares of Common Stock under Rule 506 of
Regulation D and Section 4(2) of the Securities Act of 1933 to "accredited"
investors at a price of $1.75 per share, resulting in net proceeds to the
Company of $428,750.
In August 1997, the Company acquired all of the outstanding common stock of ACC
in a business combination described as a "reverse acquisition". As part of the
reorganization, the Company issued 7,447,000 shares to the shareholders of ACC
in exchange for 7,447 shares of common stock in ACC. Such shares include the
shares owned by officers and directors of the Company as set forth in the
Section "Security Ownership of Certain Beneficial Owners and Management"
hereunder. In addition, the Company issued options to purchase 1,100,000 shares
of its common stock to certain consultants and employees, including 900,000
options issued to The Michelson Group. All of the issuances were under an
exemption under Section 4(2) of the Securities Act of 1933.
In December 1997, the Company issued 8,333 shares of "restricted" (as that term
is defined under Rule 144 of the Securities Act of 1933) common stock to George
Kimble in connection with the acquisition of Caribbean Electronics, Ltd. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The issuance was exempt under
Section 4(2) of the Securities Act of 1933.
In January 1998, the Company issued 25,000 shares of "restricted" (as that term
is defined under Rule 144 of the Securities Act of 1933) common stock to Steve
Kakuk in connection with the acquisition by the Company of K5 Plastics, Inc. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The issuance was exempt under
Section 4(2) of the Securities Act of 1933.
In January 1998, the Company issued 3,500 shares of "restricted" (as that term
is defined under Rule 144 of the Securities Act of 1933) common stock to Hal
Gardner in consideration for the cancellation of note indebtedness. The issuance
was exempt under Section 4(2) of the Securities Act of 1933.
In January 1998, the Company issued 10,000 shares of "restricted" (as that term
is defined under Rule 144 of the Securities Act of 1933) common stock to Frank
Liger for services in connection with introducing the Company to new technology
clients. The issuance was exempt under Section 4(2) of the Securities Act of
1933.
In February 1998, the Company issued 10,000 shares of "restricted" (as that term
is defined under Rule 144 of the Securities Act of 1933) common stock to MRC
Legal Services Corporation, the Company's securities counsel, in consideration
for certain legal services. The issuance was exempt under Section 4(2) of the
Securities Act of 1933.
In connection with a private offering of securities which was made by the
Company in the First and Second Quarters of 1998, the Company sold an aggregate
of 49,514 "restricted" (as that term is defined under Rule 144 of the Securities
Act of 1933) shares of Common Stock under Rule 506 of Regulation D and Section
4(2) of the Securities Act of 1933 to "accredited" investors at a price of $1.75
per share, resulting in net proceeds to the Company of $86,650.
In July 1998, the Company issued 50,000 shares of "restricted" (as that term is
defined under Rule 144 of the Securities Act of 1933) common stock to MRC Legal
Services Corporation, as compensation to M. Richard Cutler for serving on the
Company's Board of Directors. The issuance was exempt under Section 4(2) of the
Securities Act of 1933.
17
<PAGE>
In April 1998, the Company issued a convertible Note to Sinecure Holdings, Inc.,
an "accredited" (as that term is defined under Regulation D) purchaser under
Rule 504 of Regulation D promulgated under the Securities Act of 1933. The
principal amount of the Note was $7,304. The Note was converted into an
aggregate of 2,000 shares of the Company's Common Stock.
In May 1998, the Company sold 80,000 shares of its Common Stock for an aggregate
sum of $100,000 to Dremer Holdings, Inc., an "accredited" purchaser under Rule
504 of Regulation D promulgated under the Securities Act of 1933.
In May 1998, the Company issued 8,571 shares of "restricted" (as that term is
defined under Rule 144 of the Securities Act of 1933) common stock to MRC Legal
Services Corporation, the Company's securities counsel, in consideration for
certain legal services. The issuance was exempt under Section 4(2) of the
Securities Act of 1933.
In June 1998, the Company issued an aggregage of 40,000 shares of "restricted"
(as that term is defined under Rule 144 of the Securities Act of 1933) common
stock to Harold James Prow and Miguel Gill, two (2) employees of the Company, in
exchange for certain deferred compensation. The issuance was exempt under
Section 4(2) of the Securities Act of 1933.
In June 1998, the Company issued an aggregate of 10,000 shares of "restricted"
(as that term is defined under Rule 144 of the Securities Act of 1933) common
stock to Hal Gardner in exchange for interest compensation on a promissory note
held by Mr. Gardner. The issuance was exempt under Section 4(2) of the
Securities Act of 1933.
In June 1998, the Company issued an aggregate of 450,000 shares of "restricted"
(as that term is defined under Rule 144 of the Securities Act of 1933) common
stock under Rule 506 of Regulation D and Section 4(2) of the Securities Act of
1933 to Primex U.S.A., Inc., an "accredited" purchaser as that term is defined
under Regulation D. Of those shares, Primex has purchased 225,000 shares at
$0.50 per share, resulting in net proceeds to the Company of $112,500, and has
agreed to return the balance of the shares to the Company to be returned to its
treasury. In connection with this sale, the Company issued 5,000 shares of
"restricted" common stock to Christopher S. Bromley as a finders fee.
In connection with an anticipated sale of securities to Oxford International,
Inc. ("Oxford") under Rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933, the Company issued 3,000,000 shares of "restricted"
common stock to Oxford in July 1998. As of the date hereof, the terms of
purchase of the shares have not been finalized and are still being negotiated
between Oxford and the Company. The Company anticipates that all or some of
these shares may be cancelled.
In September 1998, the Company sold an aggregate of 21,429 "restricted" (as that
term is defined under Rule 144 of the Securities Act of 1933) common stock under
Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933 to Greg
Harris, Jeng Ching Hung, and George Brook, for $0.70 per share, resulting in net
proceeds to the Company of $15,000.
ITEM 5 - INDEMNIFICATION OF DIRECTORS AND OFFICERS
- --------------------------------------------------
The Corporation Laws of the State of Nevada and the Company's Bylaws provide for
indemnification of the Company's Directors for liabilities and expenses that
they may incur in such capacities. In general, Directors and Officers are
indemnified with respect to actions taken in good faith in a manner reasonably
believed to be in, or not opposed to, the best interests of the Company, and
with respect to any criminal action or proceeding, actions that the indemnitee
had no reasonable cause to believe were unlawful. Furthermore, the personal
liability of the Directors is limited as provided in the Company's Articles of
Incorporation.
Beginning in December, 1997, the Company maintains a policy of Directors and
Officers Liability Insurance with an aggregate coverage limit of $1,000,000.
18
<PAGE>
PART F/S
FINANCIAL STATEMENTS
- --------------------
The Financial Statements required by this Item are included at the end of this
report beginning on Page F-1.
<PAGE>
AMERICAN CUSTOM COMPONENTS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years ended
March 31, 1998 and 1997
<PAGE>
AMERICAN CUSTOM COMPONENTS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Report of Independent Auditors........................................... 1
Consolidated Financial Statements of American Custom Components, Inc.:
Consolidated Balance Sheets as of
March 31, 1998 and 1997............................................ 2
Consolidated Statements of Operations for the years
ended March 31, 1998 and 1997...................................... 3
Consolidated Statements of Shareholders'
Equity (Deficit) for the years ended
March 31, 1998 and 1997............................................ 4
Consolidated Statements of Cash Flows for the years
ended March 31, 1998 and 1997...................................... 5
Notes to Consolidated Financial Statements............................... 7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Board of Directors
American Custom Components, Inc.
We have audited the accompanying consolidated balance sheets of American Custom
Components, Inc. and its subsidiaries as of March 31, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity (deficit)
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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Custom Components, Inc. and its subsidiaries as of March 31, 1998 and
1997, and the results of their operations and cash flows for the years then
ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 9, 11, and 19 to
the financial statements, the Company (1) operates in an extremely competitive
industry in which sales volumes may be adversely affected by foreign as well as
domestic events, (2) has suffered significant losses from operations (3) has a
significant net working capital deficiency, (4) is unable to meet its debt
service requirements, (5) has adverse financial ratio, (6) and needs to seek new
sources or methods of financing. The preceding matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 19. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Kelly & Company
Kelly & Company
Newport Beach, California
July 6, 1998
F-1
<PAGE>
<TABLE>
AMERICAN CUSTOM COMPONENTS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 and 1997
- --------------------------------------------------------------------------------
<CAPTION>
ASSETS
1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 131,118 $ -
Accounts receivable, net 80,174 432,577
Inventories 227,465 75,410
------------ ------------
Total current assets 438,757 507,987
Property and equipment, net 750,371 245,556
Other assets 296,918 5,602
------------ ------------
TOTAL ASSETS $ 1,486,046 $ 759,145
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 456,977 $ 238,708
Bank overdraft - 47,735
Line of credit 40,179 -
Notes payable, current 346,575 504,833
Income taxes payable 2,400 -
------------ ------------
Total current liabilities 846,131 791,276
Notes payable, net of current portion 273,475 -
------------ ------------
TOTAL LIABILITIES 1,119,606 791,276
------------ ------------
Commitments and contingencies
Shareholders' equity (deficit):
Preferred stock ($0.001 par value; 1,000,000
shares authorized; no shares issued and
and outstanding at March 31, 1998 and
1997, respectively. - -
Common stock ($0.001 par value; 25,000,000
shares authorized; 9,730,826 and 8,279,752
shares issued and outstanding as of
March 31, 1998 and 1997, repectively) 9,731 8,280
Additional paid-in capital 1,297,623 127,240
Accumulated deficit (940,914) (167,651)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 366,440 (32,131)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 1,486,046 $ 759,145
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE>
AMERICAN CUSTOM COMPONENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1998 1997
------------ ------------
Net sales $ 2,583,094 $ 2,473,085
Cost of sales 1,523,695 1,753,433
------------ ------------
Gross profit 1,059,399 719,652
------------ ------------
Operating costs and expenses:
Wages and salaries 349,632 296,670
Options compensation expense 36,740 -
Selling and promotion 372,247 69,489
Insurance 70,787 27,929
Professional fees 165,959 27,891
Depreciation and amortization expense 120,890 19,724
Research and development 189,162 -
Other operating expenses 426,980 130,930
------------ ------------
1,732,397 572,633
------------ ------------
Income (loss) from operations (672,998) 147,019
Other expense:
Interest expense 97,865 68,877
------------ ------------
Income (loss) before provision for taxes (770,863) 78,142
Provision for income taxes 2,400 800
------------ ------------
NET INCOME (LOSS) ($ 773,263) $ 77,342
============ ============
EARNINGS (LOSS) PER SHARE - BASIC ($ 0.09) $ 0.01
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC 8,660,555 7,447,000
============ ============
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
<TABLE>
AMERICAN CUSTOM COMPONENTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
<CAPTION>
ACC, Inc. ACC, Inc.
(A California Corporation) (A Nevada Corporation)
---------------------------- ----------------------------
Additional
Common Common Common Common Paid-In Accumulated
Shares Stock Shares Stock Capital Deficit Total
------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1996 7,200 $ 18,414 - - - ($244,993) ($226,579)
Issuance of additional
shares in a 1,000 for
1 stock split 7,192,800 - - - - - -
Shares outstanding prior to
reverse acquisition - - 832,752 $833 ($833) - -
Shares issued in the reverse
acquisition of ACC, Inc.
(a Nevada corporation) (7,200,000) (18,414) 7,447,000 7,447 10,967 - -
------------- ------------- ------------- ------------- ------------- ------------- -------------
BALANCE, MARCH 31, 1996,
AS RESTATED - - 8,279,752 8,280 10,134 (244,993) (236,579)
Contributed capital - - - - 117,106 - 117,106
Net income - - - - - 77,342 77,342
------------- ------------- ------------- ------------- ------------- ------------- -------------
BALANCE, MARCH 31, 1997 - - 8,279,752 8,280 127,240 (167,651) (32,131)
Issuance of shares through
Private Placement - - 280,000 280 489,720 - 490,000
Issuance of shares from exercise
of warrants and options granted
to consultants to raise
capital - - 900,000 900 1,566,000 - 1,566,900
Grant of options at below fair
market value to consultant
to raise capital - - - - 643,000 - 643,000
Shares and warrants issued
in conjunction with acquisitions - - 33,333 33 109,717 - 109,750
Issuance of shares from exercise
of options granted to officers - - 100,000 100 36,640 - 36,740
Shares issued to consultants for
legal and marketing services - - 20,000 20 81,100 - 81,120
Shares issued on conversion
of debt - - 78,741 79 380,790 - 380,869
Cost associated with warrants
and options granted to
consultants to raise capital - - - - (2,218,600) - (2,218,600)
Issuance of shares for cash - - 39,000 - 82,016 - 82,055
Net loss - - - - - (773,263) (773,263)
------------- ------------- ------------- ------------- ------------- ------------- -------------
BALANCE, MARCH 31, 1998 - - 9,730,826 $9,731 $1,297,623 ($940,914) $366,440
============= ============= ============= ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
<TABLE>
AMERICAN CUSTOM COMPONENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<CAPTION>
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) ($ 773,263) $ 77,342
Adjustments to reconcile income (loss) to net cash
provided by operating activities:
Depreciation and amortization 120,890 19,724
Uncollectable accounts receivable 162,996 25,652
Compensation expense resulting from
the granting of options 35,740 -
Decrease (increase) in assets:
Accounts receivable 189,407 (422,747)
Inventories (152,055) (64,100)
Other assets (301,619) 300
Increase in liabilities:
Accounts payable 219,070 91,164
Line of credit 40,179 -
Income taxes payable 1,600 -
------------ ------------
CASH USED IN OPERATING ACTIVITIES (457,055) (272,665)
------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of property and equipment (615,402) (67,393)
------------ ------------
CASH USED IN INVESTING ACTIVITIES (615,402) (67,393)
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Principal reduction of notes payable (128,122) (164,212)
Proceeds from notes payable 243,338 342,143
Issuance of common stock 1,136,094 117,106
------------ ------------
CASH PROVIDED BY FINANCING ACTIVITIES 1,251,310 295,037
------------ ------------
Net INCREASE (decrease) in cash 178,853 (45,021)
Bank overdraft, beginning of year (47,735) (2,714)
------------ ------------
CASH (BANK OVERDRAFT) END OF YEAR $ 131,118 ($ 47,735)
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
AMERICAN CUSTOM COMPONENTS, INC.
STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE YEAR ENDED MARCH 31, 1997
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
1998 1997
------------ ------------
Cash paid during the year:
State minimum income tax $ 2,400 $ 800
Interest $ 97,865 $ 68,877
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
Loss due to obsolescence of tooling and molds:
Increase cost of goods sold $ 47,184 $ 29,905
Decrease in property and equipment, net ($ 47,184) ($ 29,905)
Non-cash portion of the purchase cost of acquisitions:
Assets acquired $ 401,950 -
Notes payable issued ($ 150,000) -
Value of stock warrants issued ($ 142,200) -
Stock issued ($ 109,750) -
Shares issued on the conversion of debt:
Reduction of debt $ 380,869 -
Issuance of shares ($ 380,869) -
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
AMERICAN CUSTOM COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
PRINIPLES OF CONSOLIDATION
The consolidated financial statements include the American Custom Components
(a Nevada corporation)(the "Company") and its wholly owned operating
subsidiaries, K-5 Plastics, Inc. ("K-5") and American Custom Components
("ACC") (both are California corporations) and Caribbean Electronics, Ltd.
("CEL") (a Windward Islands corporation). All significant intercompany
transactions have been eliminated.
In August 1997, the Company (which at the time was named Rainbow Bridge
Services, Inc., a Nevada corporation ("Rainbow")) acquired all of the
outstanding common stock of ACC in a business combination described as a
"reverse acquisition". As a "reverse acquisition", the historical financial
statements are those of ACC.
OPERATIONS AND REVENUE RECOGNITION
The Company is engaged in the business of designing and manufacturing
electronic connectors for computer, telecommunications, military, industrial
and medical electronic devices. The Company also performs electronic
assembly on behalf of certain of its customers. The production process takes
place at its facilities in Santa Ana, California and the island country of
Saint Lucia in the Windward Island chain in the Caribbean Sea. Revenue is
recognized at the time goods are shipped.
BUSINESS COMBINATIONS
During the year ended March 31, 1998, the Company acquired CEL and K-5. Both
acquisitions have been accounted for using the purchase method, and
accordingly, the results of operations of the acquired businesses have been
included in the Company's consolidated financial statements since their
acquisition. The assets and liabilities of these businesses were recorded in
the consolidated financial statements at their estimated fair market values
as of the acquisition dates. The excess of the purchase price over the net
assets is recorded as goodwill (See Note 14).
F-7
<PAGE>
AMERICAN CUSTOM COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
-----------------------------------------------------
CASH AND EQUIVALENTS
The Company invests portions of its excess cash in highly liquid
investments. The Company maintains cash balances in bank accounts, which
exceeded federally insured limits by $31,118 and $0 at March 31, 1998 and
1997, respectively; however, the Company has not experienced any losses in
such accounts.
ACCOUNTS RECEIVABLE
Outstanding trade accounts receivable are due primarily from
technology-based customers. The Company had three customers, each of which
individually represent in excess of 10% and in the aggregate 83 % and 63 %
of the Company's outstanding trade accounts receivable at March 31, 1998 and
1997, respectively. The Company periodically reviews outstanding customer
trade accounts receivable to ensure that the balances represent their
estimated fair values and closely monitors the extension of credit (See Note
11 - Concentrations Concentration of Sales). The Company had an allowance
for uncollectible accounts of $124,284 and $0 at March 31, 1998 and 1997,
respectively. Bad debt expense at March 31, 1998 and 1997 was $162,996 and
$25,652, respectively, and is included in other operating expenses.
INVENTORIES
Inventories are stated at the lower of cost or market, generally on an
average cost basis which approximates the first in - first out method of
valuation. Management regularly monitors inventories for excess or obsolete
items and makes any valuation corrections when such adjustments are
required.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the expected useful lives noted below.
Expenditures for normal maintenance and repairs are charged to operations.
Renewals and betterments that materially extend the life of the assets are
capitalized. The cost and related accumulated depreciation of assets are
removed from the accounts upon retirement or other disposition; any
resulting profit
F-8
<PAGE>
AMERICAN CUSTOM COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
-----------------------------------------------------
PROPERTY AND EQUIPMENT, CONTINUED
or loss is reflected in the statement of operations. Leasehold improvements
are amortized over their estimated useful lives or the anticipated terms of
the related leases, whichever is shorter.
Estimated
Useful Life
-----------
Machinery and equipment 7 years
Tooling and molds 4 years
Office furniture and equipment 7 years
Leasehold improvements 2 years
GOODWILL AND OTHER INTANGIBLES
Intangible assets are recorded at cost and are included in other assets.
Both goodwill and other intangibles are amortized on a straight-line basis
over five years. Amortization expense for the years ended March 31, 1998 and
1997 is $10,303 and $320, respectively.
INCOME TAXES
Deferred income taxes are computed based on the tax liability or benefit in
future years of the reversal of temporary differences in the recognition of
income or deduction of expenses between financial and tax reporting
purposes. The net difference between tax expense and taxes currently payable
would be reflected, if present, on the balance sheet as deferred taxes.
Deferred assets and liabilities are classified as current and non-current
based on the classification of the related asset or liability for financial
reporting purposes, or based on the expected reversal date for deferred
taxes that are not related to an asset or liability (Note 6 - Income Taxes).
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25
ACCOUNTING FOR STOCK ISSUED TO Employees ("APB 25") and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the employee stock options was less than the
market price of the underlying stock on the date of grant, compensation
expense was recorded. The Company has adopted the
F-9
<PAGE>
AMERICAN CUSTOM COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
-----------------------------------------------------
STOCK-BASED COMPENSATION, CONTINUED
disclosure-only provisions of Statement of Financial Accounting Standards
("SFAS") No. 123 - "ACCOUNTING FOR STOCK BASED COMPENSATION'.
EARNINGS (LOSS) PER COMMON SHARE
The Company has adopted the provisions of Statements of Financial Accounting
Standards No. 128, "Earnings Per Share" ("EPS") as of its fiscal year ended
March 31, 1998. Basic EPS is calculated based on the weighted average number
of outstanding shares. The effect of warrants and options on the computation
of Diluted EPS is antidilutive for the year ended March 31, 1998 and
therefore it is not shown. For the year ended March 31, 1997, there were no
dilutive convertible securities issued.
RESEARCH AND DEVELOPMENT COSTS
Company sponsored research and development costs related to both present and
future products are expensed in the year in which they are incurred. Total
expenditures on research and development for fiscal 1998 and 1997 were
$189,162 and $0, respectively.
ADVERTISING COSTS
Advertising costs are expensed as they are incurred and are included in
other operating expenses. Advertising expense was $95,582 and $23,442 for
the years ended March 31, 1998 and 1997, respectively.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-10
<PAGE>
AMERICAN CUSTOM COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
- --------------------------------------------------------------------------------
2. PROPERTY AND EQUIPMENT, NET
---------------------------
Property and equipment, net consist of the following at March 31, 1998 and
1997:
1998 1997
------------ ------------
Machinery and equipment $ 406,731 $ 119,081
Tooling and molds 454,577 194,500
Office furniture and equipment 79,527 30,752
Leasehold improvements 28,316 9,416
------------ ------------
969,151 353,749
Less: accumulated depreciation (218,780) (108,193)
------------ ------------
Total property and equipment, net $ 750,371 $ 245,556
============ ============
Depreciation expense related to plant and equipment was $110,587 and $19,404
in 1998 and 1997, respectively.
3. BANK LINE OF CREDIT
-------------------
In the K-5 acquisition, the Company assumed a line of credit, which is
payable on demand. The maximum amount of credit available under the line of
credit is $50,000; $9,821 was unused as of March 31, 1998. Outstanding
borrowings accrue interest at the bank's prime rate plus 0.75% (9.25% at
March 31, 1998). The line of credit is collateralized by the fixed assets of
the Company's subsidiary ("K-5").
4. NOTES PAYABLE
-------------
<TABLE>
Notes payable consist of the following at March 31, 1998 and 1997:
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Note payable to an individual, with monthly
principal and interest at the rate of 10% per annum,
payable in installments of $6,000 per month,
due in August of 1997. During the year ended
March 31, 1998, the note was paid. - $52,414
</TABLE>
F-11
<PAGE>
AMERICAN CUSTOM COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
4. NOTES PAYABLE, CONTINUED
------------------------
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Note payable to an individual, with monthly
principal and interest at the rate of 12% per
annum, payable each month beginning
April 1, 1999, and ending April 1, 2000. This note
was previously due in October 1997 and the
payment terms were restructured during the year. $273,475 $300,000
Note payable to an individual, with monthly
principal and interest at the rate of 9% per annum,
payable in installments of $1,500 per month, due in
December 2001. The note is unsecured and is
currently in default. 62,618 70,114
Note payable to an individual, with monthly
principal and interest at the rate of 10% per annum,
payable in installments of $4,000 per week,
due in August 1996. The note is unsecured
and is currently in default. 18,897 24,183
Note payable to an individual, with interest at the
rate of 15 % per annum. During the year ended
March 31, 1998, the note was paid. - 13,123
Note payable to an individual, with interest at the
rate of 15 % per annum, due in April 1997. The
note is unsecured and is currently in default. 15,060 33,395
Note payable to an individual, with interest at the
rate of 20% per annum. During the year ended
March 31, 1998, the note was paid. - 6,604
Note payable to an individual, with interest at the
rate of 15 % per annum. During the year ended
March 31, 1998, the note was paid. - 5,000
</TABLE>
F-12
<PAGE>
AMERICAN CUSTOM COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
4. NOTES PAYABLE, CONTINUED
------------------------
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Note payable to an individual, with interest at the
rate of 8% per annum, payable quarterly over
two and one-half years beginning October 15, 1997.
The note is unsecured and is currently in default. $100,000 -
Note payable to an individual, who is a major
shareholder and who was an officer of the Company
at the time of the loan, with interest at the
rate of 10% per annum, payable on or before
July 31, 1998. The note is unsecured and is
currently in default. 50,000 -
Note payable to a related party, payable on demand.
The note was repaid subsequent to year end (See Note 5). 100,000 -
---------- ----------
Total notes payable 620,050 $504,833
Less: current maturities 346,575 504,833
---------- ----------
NOTES PAYABLE, LONG TERM $ 273,475 -
========== ==========
</TABLE>
Future minimum obligations under notes payable at March 31, 1998 are as
follows:
1999 $346,575
2000 273,475
2001 -
2002 -
2003 -
----------
TOTAL OBLIGATIONS $620,050
==========
5. RELATED PARTY TRANSACTIONS
--------------------------
Pegasus, Inc. loaned the Company $100,000 in March 1998 to assist with
temporary cash flow needs. This loan was repaid in April 1998. At the
dates of the loan and its repayment, Pegasus, Inc. was controlled by a major
shareholder and then corporate officer of the Company.
F-13
<PAGE>
AMERICAN CUSTOM COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
- --------------------------------------------------------------------------------
6. INCOME TAXES
------------
The components of the provision for income taxes for the years ended March
31, 1998 and 1997 are:
1998 1997
---- ----
Current expense:
Federal - -
State $2,400 $800
-------- --------
2,400 800
-------- --------
Deferred expense:
Federal - -
State - -
-------- --------
- -
-------- --------
Total provision $2,400 $800
======== ========
Significant components of the Company's deferred income tax assets and
liabilities are as follows at March 31, 1998 and 1997:
1998 1997
---- ----
Deferred income tax assets:
State income taxes $816 $272
Depreciation 1,064 1,425
Net operating loss 338,670 65,708
Allowance for doubtful accounts 53,815 -
--------- ---------
Total deferred income tax asset 394,365 67,405
Valuation allowance (394,365) (67,405)
--------- ---------
NET DEFERRED INCOME TAX LIABILITY - -
========= =========
F-14
<PAGE>
AMERICAN CUSTOM COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FOR THE YEARS ENDED MARCH 31,, 1998 AND 1997
- --------------------------------------------------------------------------------
6. INCOME TAXES, CONTINUED
-----------------------
The effective income tax rate differs from the expected federal statutory
rate as follows:
1998 1997
---- ----
Federal statutory rate (34.0%) 34.0%
Change in federal valuation allowance 33.3 (34.0)
Other 1.0 1.0
------- -------
EFFECTIVE TAX RATE 0.3% 1.0%
======= =======
The federal and state net operating loss carryforwards are $782,836 and
$779,636, respectively. The federal and state net operating loss
carryforwards will begin to expire in 2111 and 2001, respectively.
7. FINANCING AGREEMENT
-------------------
In June 1996, the Company entered a financing (factoring) agreement to
receive cash advances on credit sales not to exceed 91 % of the eligible
accounts receivable. The financing fee was 1% of each individual account
receivable factored for every 10-day period or fraction thereof that the
balance was unpaid. The cumulative maximum amount that was to be advanced
based on the financing agreement could not exceed $150,000. The agreement
was terminated by the Company on January 30, 1997.
8. COMMITMENTS
-----------
OPERATING LEASES
The Company has operating leases for its Santa Ana and Saint Lucia
facilities. The Company entered into the Santa Ana lease in February 1998
with monthly payments of $6,702 through February 2000. There is still an
ongoing operating lease commitment, which terminates in 1999 on the facility
the Company vacated in February 1998. Future minimum lease payments at March
31, 1998 are as follows:
1999 $94,522
2000 73,722
2001 and thereafter -
---------
TOTAL MINIMUM LEASE PAYMENTS $168,244
=========
F-15
<PAGE>
AMERICAN CUSTOM COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
- --------------------------------------------------------------------------------
8. COMMITMENTS, CONTINUED
----------------------
OPERATING LEASES, CONTINUED
Rental expense for the years ended March 31, 1998 and 1997 was $55,642 and
$29,51 1, respectively.
CONSULTING AND EMPLOYMENT ARRANGEMENTS
The Company entered into a consulting agreement with the former owner of CEL
whereby he will receive $1,500 per month for a period of three years, which
began in October 1997.
The Company entered into an employment agreement with the former owner of
K-5 whereby he will receive an annual salary of $72,000 for a period of
three years, which began in February 1998. The agreement contains a
provision for a one-time cash bonus in the amount of $15,000 in the event
that the previous owner is still employed by the Company on January 31,
1999.
9. CONTINGENCIES AND OTHER FACTORS THAT COULD AFFECT FUTURE RESULTS
----------------------------------------------------------------
LACK OF INSURANCE COVERAGE
The Company subsidiary, ACC, operated from its inception in 1994 through
September 1997 without the benefit of general and product liability
insurance coverage. If the Company is held responsible for acts or events
that occurred during the uninsured period that would normally be covered by
general and product liability insurance, it could have. an adverse effect on
operating results. As of this report date, management has no knowledge of
the existence of any such act or event that may have occurred during the
uninsured period. The at-risk period varies by state based on each state's
statute of limitation period.
COMPANY GUARANTEE OF STOCK VALUE
As part of a settlement between major shareholders of the Company's
subsidiary (ACC) in the year ended March 31, 1998 and prior to its reverse
merger, ACC became contingently liable as a guarantor of the value of its
post merger stock price. On April 1,
F-16
<PAGE>
AMERICAN CUSTOM COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
- --------------------------------------------------------------------------------
9. CONTINGENCIES AND OTHER FACTORS THAT COULD AFFECT FUTURE RESULTS, CONTINUED
---------------------------------------------------------------------------
COMPANY GUARANTEE OF STOCK VALUE
1999, to the extent the common stock value per share drops below $3.00,
parties to the settlement must transfer sufficient stock shares to bring the
value of the stock ownership to $975,000. Subject to the parties' inability
to transfer sufficient common stock shares to satisfy the April 1, 1999
guarantee of value, the Company is liable for that unsatisfied portion. As
of March 31, 1998, the market value of the Company's stock was such that
there was no contingent exposure. As of this report date, due to the
decreased market value of its stock, the contingent liability was $446,875.
The parties to this settlement that must satisfy this liability as of the
report date own 6,777,000 common shares. Management feels that there are
adequate shares held by the involved parties to satisfy any contingent
liability.
FACTORS THAT COULD AFFECT FUTURE RESULTS
A substantial portion of the Company's revenues are generated from the
development, manufacture and rapid release of certain connector parts and
assemblies for use in high technology products newly introduced to the
consumer market. In the extremely competitive industrial environment in
which the Company operates, processes are uncertain and complex, requiring
accurate prediction of market trends and demand as well as successful
management of various manufacturing risks inherent in the production of such
products. Additionally, the Company's marketing strategy relies on the
ability of its customers to effectively support sales channels to the end
users. In light of these dependencies, it is reasonably possible that
failure to successfully manage the production process or the marketing
process, a portion of which is not within the Company's control, could have
a severe near-term impact on the Company's sales order growth, revenue
growth, and results of operations.
A combination of the industry wide downward pressure on the prices of
personal computer products due to high inventory levels and the slowdown in
the Asian and other Pacific Rim economies, and the possible loss of sales or
product margin could affect operating results adversely. Management believes
that its marketing plan and the marketing plans of its major customers are
well positioned to deal with such uncertainties.
F-17
<PAGE>
AMERICAN CUSTOM COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
10. LITIGATION
----------
The Company has been named as a defendant in a lawsuit filed by one of its
customers. The lawsuit was generated in the ordinary course of business over
a disagreement related to a mold that the Company was to build for the
customer. While the outcome is still uncertain, management does not believe
that it should result in a materially adverse effect on the Company's
financial position or results of operations.
11. CONCENTRATIONS
--------------
CONCENTRATION OF SOURCE OF SUPPLY
The Company purchased 54% and 74% of its production materials from three
manufacturers for the fiscal year ended March 31, 1998 and 1997,
respectively. Although there are a limited number of manufacturers of
certain particular production materials, management believes that other
suppliers could provide the materials on comparable terms. A change in
suppliers, however, could cause a delay in manufacturing and a possible loss
of sales that would affect operating results adversely.
CONCENTRATION OF SALES
The Company currently has three customers that in the aggregate represent 51
% and 65 % of the total sales for the fiscal years ended March 31, 1998 and
1997, respectively.
12. STOCK OPTIONS AND WARRANTS
--------------------------
During the year ended March 31, 1998, the Company granted warrants to
purchase. 1,000,000 shares of the Company's common stock at $0.01 per share
to consultants who assisted the Company in raising capital. The Company also
granted stock options in July 1997 to purchase 100,000 common shares at
$0.01 per share to an officer of the Company. The stock options were granted
without a qualified stock option plan being in place. Compensation expense
of $35,740 was recorded upon that grant as the options price at grant date
was less than the fair value. The Company issued warrants to purchase 60,000
common shares in the acquisition of K-5. The exercise price for the warrants
is $3.00 per warrant. The exercise price of the warrants was below the value
of the stock market and $142,200 was recorded as part of the consideration.
Warrants to purchase 30,000 of the shares are exercisable through the fourth
year after issue, and the remaining
F-18
<PAGE>
AMERICAN CUSTOM COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
- --------------------------------------------------------------------------------
12. STOCK OPTIONS AND WARRANTS, CONTINUED
-------------------------------------
warrants to purchase 30,000 shares are exercisable in the second through the
fifth year after issue.
The table below summarizes stock options and warrant activity during the
year ended March 31, 1998. There were no stock options or warrants issued
prior to the current year end:
<TABLE>
<CAPTION>
Year ended
March 31, 1998
-------------------------------
Weighted
Average
Options and Exercise
Warrants Price
----------- -----------
<S> <C> <C>
Options and warrants outstanding,
beginning of period - -
Options granted to an officer of the
Company 100,000 $0.37
Options exercised by officer (100,000) $0.37
Options lapsed during the year - -
----------- -----------
OPTIONS OUTSTANDING, END OF PERIOD - -
=========== ===========
Warrants granted to consultants who
assisted in raising capital 1,000,000 $2.22
Warrants granted in business acquisitions 60,000 $3.00
Warrants exercised by consultants (900,000) $2.22
----------- -----------
WARRANTS OUTSTANDING, END OF PERIOD 160,000 $2.51
=========== ===========
</TABLE>
Pro forma information regarding net income per share is required by SFAS
123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method. The fair value of these
options was estimated at the date of grant using a Black-Scholes options
pricing model with the following weighted average assumptions for 1998, with
a risk free interest rate of 5.2%, a dividend yield of 0.0, a volatility
factor of 1.542, and a weighted average expected life of 5.0.
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
F-19
<PAGE>
AMERICAN CUSTOM COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
- --------------------------------------------------------------------------------
12. STOCK OPTIONS AND WARRANTS, CONTINUED
-------------------------------------
including the expected stock price volatility. 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, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma net earnings and earnings per share were as follows:
1998 1997
---- ----
Net earnings (loss) as reported ($773,263) $77,342
Net earnings, pro forma (773,363) 77,342
Earnings (loss) per share, as reported (0.09) 0.01
Earnings per share, pro forma (0.09) 0.01
Weighted average fair value of option
granted during the year 0.38 -
13. CAPITAL TRANSACTION - REVERSE ACQUISITION
-----------------------------------------
On August 15, 1997, Rainbow, a then non-operating company, acquired all of
the outstanding common stock of ACC. For accounting purposes, a purchase
acquisition has been treated as the acquisition of Rainbow by ACC (a reverse
acquisition). In anticipation of this transaction, the Company effected a
1,000-for-I stock split and the 7,200,000 shares post split of common stock
in ACC, were exchanged for 7,447,000 shares of common stock of Rainbow.
14. BUSINESS ACQUISITIONS
---------------------
On October 15, 1997 and January 31, 1998, the Company acquired CEL and K5,
respectively. The acquisitions have been accounted for as business
combinations using the purchase method of accounting. The costs of the
acquisitions were $150,000 for CEL and $318,950 for K5. The acquisition
costs have been allocated on the basis of the estimated fair value of the
assets acquired and the liabilities assumed. The excess of cost over the
fair value of net assets acquired (goodwill) is being amortized on a
straight-line basis over a 5 year period.
F-20
<PAGE>
AMERICAN CUSTOM COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
- --------------------------------------------------------------------------------
14. BUSINESS ACQUISITIONS, CONTINUED
--------------------------------
The following unaudited pro forma summary presents information as if the
acquisitions of CEL and K5 occurred at April 1, 1996. The pro forma
information includes adjustments for additional amortization based on the
goodwill arising from the acquisitions. The pro forma information is
provided for informational purposes only and is based on historical
information and does not necessarily reflect the actual results that would
have occurred, nor is it indicative of future results of operations of the
combined enterprise.
For the Year Ended For the Year Ended
March 31, 1998 March 31, 1997
-------------- --------------
Revenue $2,990,916 $3,168,135
Net income (loss) (804,621) 26,778
15. NET INCOME (LOSS) PER COMMON SHARE
----------------------------------
The computation for earnings per common share at March 31, 1998 and 1997 is
as follows:
For the Year Ended
Basic Loss Per Share March 31, 1998
-------------------- ----------------------------------
Loss per Share
Loss Shares Amount
---- ------ ------
Loss available to
common stockholders ($773,263) 8,660,555 ($0.09)
For the Year Ended
Basic Earnings Per Share March 31, 1997
------------------------ ----------------------------------
Income per Share
Income Shares Amount
------ ------ ------
Income available to
common stockholders $77,342 7,447,000 $0.01
There is no Diluted Earnings Per Share disclosure as the net loss in 1998
was antidilutive, and there were no common stock equivalents outstanding
during 1997.
F-21
<PAGE>
AMERICAN CUSTOM COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
16. NEW PRONOUNCEMENTS
------------------
Management has reviewed the following new pronouncements issued in 1998 and
1997 by the Financial Accounting Standards Board: SFAS 129, DISCLOSURE OF
INFORMATION ABOUT CAPITAL STRUCTURE; SFAS 130, REPORTING ON COMPREHENSIVE
Income; SFAS 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION; and SFAS 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER
POST RETIREMENT BENEFITS. Management believes these pronouncements do not
apply or will not have a material impact to the Company.
17. YEAR 2000 DISCLOSURE
--------------------
In the fiscal year ended March 31, 1998, the Company began the process of
identifying, evaluating, and implementing changes to its computer programs
necessary to address the Year 2000 issue. The Company is currently
addressing its internal Year 2000 issue by modification of existing programs
and conversions to new programs. While the Company is confident that it will
complete the assessment and remediation of its computer software, there can
be no assurance that the necessary modifications and conversions will be
completed in a timely manner, which could have a material adverse effect on
its results of operations. The total cost to the Company associated with the
required modifications and conversions is not expected to be material to the
Company's results of operations and financial position and is being expensed
as incurred.
18. FORM 10-SB FILING
-----------------
In January 1998, the Company's board of directors authorized the filing of a
Form 10-SB with the Securities and Exchange Commission ("SEC"), with the
initial filing made in February 1998. The Company is currently in the
process of responding to a letter of comment issued by the SEC staff. The
Form 10-SB, when it becomes effective, will subject the Company to the
reporting requirements of the Securities and Exchange Act of 1934.
F-22
<PAGE>
American Custom Components, Inc.
Unaudited Fiancial Report for the Six Months Ended September 1998
6 Months
Sep-98
Net Sales $832,011
COGS $421,397
GM $410,614
Operating Exp
Wages
Salaries $144,443
Options Exp $0
Freight $17,891
Selling Promotion $27,385
Insurance $62,771
Professional Fees $101,285
Depr. Amortize $50,000
Research Develop $0
Rent $25,534
Consulting $32,000
Other Expense $7,099
Total Op Exp. $468,408
Income from Ops -$57,794
Other Expense
Interest $0
NIBT -$57,794
Tax $0
NI -$57,794
Earnings Share -$0.01
Wt avg # Shares 8,660,555
Ratio Analysis Income
GM 49.35%
Income from Ops -6.95%
NIBT -6.95%
Tax
NI -6.95%
Assets:
Current:
Cash $98,000
Accounts Rec. $378,379
Prepaid Insurance $16,546
Prepaid Rent $6,937
Inventory $161,643
Total Current Assets $661,505
Net Prop. Plant Eq $700,000
Other Assets $351,456
Long Term Assets $1,051,456
Total Assets $1,712,961
Liabilites:
Current:
Accounts Payable 454,381
Bank Overdraft $0
Line of Credit $38,000
Notes Payable Current $363,570
Income Taxes Pay $0
Total Current Liab. $855,951
Non Current Liab.:
Long Term Debt.
Notes Payable Net $240,864
Total Non Cur. Liab. $240,864
Total Liabilities: $1,096,815
Equity:
Common Stock $9,731
25M authorized
and 8032752 '98 '97
Paid in Capital $1,605,123
Accum RE -$998,708
Net Owner's Equity $616,146
Total Liabilities/Equity $1,712,961
PART III
ITEM 1 - INDEX TO EXHIBITS
- --------------------------
EXHIBIT NO. DESCRIPTION
- ----------- -----------
*(2) Agreement and Plan of Reorganization
(2.1) Amendment to Agreement and Plan of Reorganization
*(3.1) Articles of Incorporation
*(3.2) Certificate of Amendment of Articles of Incorporation
*(3.3) Bylaws
*(4.1) Agreement for the Sale of Convertible Notes to Generation
Capital Associates and Waiver
*(4.2) Escrow Agreement for the Convertible Notes issued to
Generation Capital Associates
*(4.3) Convertible Note issued to Generation Capital Associates dated
October 6, 1997
*(4.4) Convertible Note issued to Generation Capital Associates dated
October 10, 1997
*(4.5) Convertible Note issued to Generation Capital Associates dated
October 20, 1997
*(10.1) Standard Industrial/Commercial Multi-Tenant Lease dated
October 19, 1995 for premises located at 1515 S. Sunkist
Street, Suites E & F, Anaheim, CA.
*(10.2) Commercial Lease subleasing Anaheim property to Com-Quest
dated November 25, 1997.
*(10.3) Promissory Note issued to Don Furness dated December 1, 1995
*(10.4) Michelson Group Corporate Development Agreement dated July 30,
1997
*(10.5) Two (2) Option Agreements to the Michelson Group dated August
22, 1997
*(10.6) Agreement with Greg Bogart dated August 15, 1997
*(10.7) Promissory Note to George Kimble dated October 30, 1997
related to Caribbean Electronics, Inc. Acquisition
*(10.8) Settlement Agreement and General Mutual Release with Charles
L. Rosenblum dated October 13, 1997
*(10.9) Standard Industrial/Commercial Single-Tenant Lease dated
October 16, 1997 for the premises located at 3310 W. MacArthur
Boulevard, Santa Ana, California.
*(10.10) Employment Agreement for Michael R. Orton dated October 20,
1997
(10.11) Amendment to Employment Agreement for Michael R. Orton dated
March 28, 1998
*(10.12) Engagement Agreement for Alpha Tech Stock transfer dated
October 24, 1997
*(10.13) Agreement for the Purchase and Sale of Factory in Malaysia
dated December 11, 1997
(10.14) Employment Agreement for John Groom dated January 1, 1998
*(10.15) Promissory Note to Steve Kakuk dated January 31, 1998 related
to K5 Acquisition
*(10.16) Escrow Agreement dated January 31, 1998 related to K5
Acquisition
*(10.17) Warrant issued to Steve Kakuk dated January 31, 1998 related
to K5 Acquisition
*(10.18) Warrant issued to Steve Kakuk dated January 31, 1998 related
to K5 Acquisition
*(10.19) Employment Agreement for Steve Kakuk dated January 31, 1998
*(10.20) Employment Agreement for Inge Lundegaard dated February 4,
1998
*(10.21) Warrant issued to Ronald J. Richard dated February 6, 1998
*(10.22) Warrant issued to John Fritch dated February 25, 1998
(10.23) Termination of Warrant issued to John Fritch dated March 28,
1998
*(10.24) Stock Purchase Agreement for Acquisition of Caribbean
Electronics, Inc.
*(10.25) Stock Purchase Agreement for Acquisition of K5 Plastics, Inc.
(10.26) Employment Agreement for John Fritch dated May 1, 1998
(continued on next page)
<PAGE>
(10.27) Warrant issued to John Groom dated October 13, 1998
(10.28) Warrant issued to Johh Fritch dated October 13, 1998
*(21) List of Subsidiaries
(23) Consent of Kelly & Company, Inc., Independent Public
Accountants
- --------------------
* Previously Filed
ITEM 2 - DESCRIPTION OF EXHIBITS
- --------------------------------
Not applicable
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
AMERICAN CUSTOM COMPONENTS, INC.
Date: December 8, 1998 By:/s/ John Fritch
--------------------------------
John Fritch
Chairman, Chief Financial Officer
<PAGE>
Exhibit 2.1
AMENDMENT TO
AGREEMENT AND PLAN OF REORGANIZATION
This Amendment to Agreement and Plan of Reorganization ("Amendment") is
effective as of August 15, 1997 and is by and between Rainbow Bridge Services,
Inc., a Nevada corporation (the "Company") and American Custom Components, Inc.,
a California corporation ("ACC").
RECITALS
WHEREAS, the Company and ACC executed that certain Agreement and Plan
of Reorganization (the "Agreement") on August 15, 1997. Capitalized terms used
herein shall have the same meaning and effect as in the Agreement.
WHEREAS, the Agreement contains certain statements, facts, and
circumstances which have changed, and the Company and ACC desire to execute this
Amendment for the purpose of correcting the Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and in reliance upon the representations and warranties
contained herein and in the Agreement, the parties hereto agree as follows:
1. Section 1.02 is restated in its entirety to read as follows:
"1.02 CONSIDERATION. Subject to the terms and conditions of
this Agreement, and in consideration of the assignment and delivery of ACC
Shares to the Company, and the conversion and/or assignment of outstanding
options of ACC, the Company shall at Closing issue to the Shareholders a number
of shares of voting common stock of the Company, $0.001 par value per share (the
"Company Shares"), equal to the number of shares set forth opposite the
Shareholder's name on Schedule 1 attached hereto, or a total of 7,447,000
Company Shares to the Shareholders, and shall issue options to purchase
1,100,000 shares to the person set forth in Exhibit 2.02(b)."
2. Section 2.02(a) is restated in its entirety to read as
follows:
"2.02(a). The authorized capital stock and the issued and
outstanding shares of ACC is 100,000 shares of common stock, of which 7,447
shares are outstanding. All of the issued and outstanding shares of ACC are duly
authorized, validly issued, fully paid and nonassessable."
3. Section 3.02 is restated in its entirety to read as follows:
1
<PAGE>
"3.02. CAPITALIZATION OF THE COMPANY. The authorized capital
stock of the Company consists of 24,000,000 shares of Common Stock, par value
$.001 per share, of which 500,000 shares are outstanding, and 1,000,000 shares
of preferred stock, none of which is outstanding. All outstanding shares are
duly authorized, validly issued, fully paid and non-assessable. Following the
issuance of Company Shares set forth herein and a stock dividend described in
Section 6.02 hereof, the capitalization of the Company shall be 8,247,000 shares
of common stock and options to purchase 1,100,000 additional shares.
4. Section 6.02 is restated in its entirety to read as follows:
"6.02 STOCK DIVIDEND. Within five (5) days of the Closing,
the Company shall effect a Common Stock dividend in the amount of .6 shares for
every 1 share of Common Stock owned by shareholders, resulting in 800,000 shares
outstanding."
5. Schedule 1 is restated in its entirety to read as follows:
NUMBER OF SHARES NUMBER OF
OF ACC SHARES OF
COMMON STOCK COMPANY
NAMES OF OWNED AND COMMON STOCK
SHAREHOLDERS TO BE DELIVERED TO BE RECEIVED
-------------------- -------------------- --------------------
Inge Lundegaard 5,942 5,942,000
Bill Harper 90 90,000
Frank Bower 90 90,000
Greg Bogart 325 325,000
Martin T. Walk 1,000 1,000,000
----- ---------
Totals 7,447 7,447,000"
6. ACC Exhibit 2.02(b) is restated in its entirety to read as
follows:
"OPTIONS AND WARRANTS
Charles Rosenblum has an option to purchase 1% of ACC for $.01
per share, with anti-dilution rights. These options are hereby assigned
and exercisable for shares of the Company.
The Michelson Group has an option to purchase 9% of ACC for
$.01 per share, with anti-dilution rights. These options are hereby
assigned and exercisable for shares of the Company.
In exchange for the options to acquire 100 shares of Michael
Orton has an option to purchase 1% of ACC for $.01 per share, with
anti-dilution rights. These options are hereby assigned and exercisable
for shares of the Company.
2
<PAGE>
Each of these persons has agreed that their anti-dilution
rights are only effective up to the first 10 million in outstanding
shares, and the Company has agreed to fix the number of options
converted into a number based on 10 million outstanding."
All other terms and conditions of the Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties hereto hereby execute this Amendment to
Agreement and Plan of Reorganization effective as of the date first written
above.
RAINBOW BRIDGE SERVICES, INC. AMERICAN CUSTOM COMPONENTS, INC.
By: /s/ Mary Peterson By: /s/ Martin Tony Walk
- ----------------------------- ---------------------------------
By: Mary Peterson By: Martin Tony Walk
Its: President Its: President
3
<PAGE>
Exhibit 10.11
AMENDMENT TO EMPLOYMENT CONTRACT
This Amendment to Employment Contract, dated March 28, 1998, by and
between American Custom Components, Inc., a California corporation ("ACC"), and
Michael R. Orton ("Orton").
WHEREAS, ACC and Orton executed an Employment Contract on October 20,
1997;
WHEREAS, in order to more accurately reflect the terms of the agreement
between the parties, ACC and Orton desire to amend the terms of the Employment
Contract as follows:
1. Article 4: Compensation of Employee, Paragraph 4.3 shall be
restated as follows:
"In addition to the compensation set forth herein and as
agreed to between Orton and the Board of Directors of ACC in July 1997,
ACC agrees to grant to ORTON, said grant to take place within thirty
(30) days of the commencement of his employment, an option to purchase
ONE HUNDRED THOUSAND SHARES (100,000) of ACC common stock at the price
of $.01 per share."
2. Article 4: Compensation to Employee, Paragraph 4.4 shall be
deleted in its entirety.
All other provisions of the Employment Contract shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties hereto hereby execute this Amendment to
Employment Contract as of the date first above written:
American Custom Components, Inc.
a California corporation
By: /s/ Martin Tony Walk By: /s/ Michael Orton
- ------------------------------- ---------------------------
Martin Tony Walk, CEO Michael Orton
EMPLOYMENT CONTRACT
AMERICAN CUSTOM COMPONENTS, INC., a California Corporation, located at
3310 W. MacArthur Blvd., Santa Ana, CA 92704, hereinafter referred to as "ACC"
and JOHN GROOM, hereinafter referred to as "GROOM" in consideration of the
mutual promises made herein, agree as follows:
ARTICLE 1: TERM OF EMPLOYMENT
1.1 ACC hereby employs GROOM and GROOM hereby accepts employment with
ACC for a period of thirty-six (36) months commencing January 1, 1998.
1.2 This agreement may be terminated earlier as herein provided.
ARTICLE 2: DUTIES AND OBLIGATIONS OF EMPLOYEE
2.1 GROOM shall serve as President of ACC. In that capacity, he shall
do and perform all services, acts and things necessary or advisable to fulfill
his duties, including but not limited to the planning, direction and
implementation of worldwide operations for ACC. GROOM shall at all times be
subject to the direction of the policies established by the Board of Directors
of ACC.
2.2 GROOM agrees that he shall devote his entire productive time,
ability and attention to the business of ACC during the term of this agreement,
and shall not act in any commercial or professional capacity of any other person
or organization whether for compensation or otherwise without the express
written consent of ACC.
2.3 The parties acknowledge and agree that during the term of this
agreement and in the course of his duties at ACC, GROOM shall have access to and
become acquainted with information which is confidential and could be
constituted as ACC's trade secrets. GROOM agrees that during and after the term
of this Agreement, GROOM will not, directly or indirectly, disclose to any third
party, or use or authorize any third party to use, any information relating to
the business or interests of ACC that GROOM knows or has reason to know is
regarded as confidential and valuable to ACC. GROOM acknowledges that such
confidential information constitutes "trade secrets" of ACC as set forth in
Section 3126 of the California Civil Code which shall include, without
limitation, all methods, processes, formulae, compositions, inventions,
machines, computer programs, research projects, customer lists, pricing data,
sources of supply, marketing, production, merchandising systems or plans
associated with ACC's business and all information delivered to ACC or GROOM in
confidence by ACC's clients and customers. GROOM agrees to use his best efforts
and the utmost diligence to guard and protect such trade secrets and
confidential information. The parties acknowledge and agree that in determining
whether information is confidential information and/or a trade secret (as
defined herein), the fact that such information is not marked "confidential"
shall not adversely affect the confidentiality or trade secret status of the
same. GROOM agrees that if his relationship with ACC is terminated for
1
<PAGE>
any reason, GROOM will return to ACC all records and papers and all matter of
whatever nature which bears secret or confidential information of ACC. In the
event of a breach or threatened breach of Section of this Agreement, ACC shall
be entitled to an injunction restraining such breach, without the requirement of
posting bond; but nothing here shall be construed as prohibiting ACC from
pursuing any other remedy available to it as a result of such breach or
threatened breach.
2.4 GROOM hereby represents and agrees that the services to be
performed under the terms of this contract are of a special, unique, unusual,
and intellectual character and as such, are of peculiar value, the loss of which
cannot be adequately compensated by damages in a court of law. GROOM therefore
expressly agrees that ACC, in addition to any other rights and remedies which it
may possess, shall be entitled to injunctive and other equitable relief to
prevent or remedy a breach in this contract by GROOM.
2.5 GROOM agrees and covenants that for a period of three (3) years
following the termination of this Agreement, he shall not compete directly or
indirectly with ACC. Furthermore, GROOM agrees that he shall not directly or
indirectly induce or solicit, or directly or indirectly aid or assist any other
entity, person or otherwise to induce or solicit, current employees, salesmen,
agents, consultants, distributors, representatives, advisors, customers or
suppliers of ACC to terminate their employment or business relations with ACC.
Nothing contained in this Agreement shall prevent GROOM from purchasing less
than one percent (1%) of the issued and outstanding common stock of a
corporation which conducts such business if such stock is registered under the
Securities Act of 1933. GROOM hereby acknowledges and agrees that any violation
of this Section will cause damage to Company in an amount difficult to
ascertain. In the event of a breach or threatened breach of this Section, ACC
shall be entitled to an injunction restraining such breach; but nothing here
shall be construed as prohibiting ACC from pursuing any other remedy available
to it as a result of such breach or threatened breach.
ARTICLE 3: OBLIGATIONS OF EMPLOYER
3.1 ACC agrees to provide GROOM with the compensation, incentives,
benefits and business expense reimbursement specified elsewhere in this
agreement.
3.2 If a dispute or claim shall arise between the parties with respect
to any of the terms or provisions of this Agreement, or with respect to the
performance by any of the parties under this Agreement, then the parties agree
that the dispute shall be arbitrated in Orange County, California before a
single arbitrator, in accordance with the rules of either the American
Arbitration Association ("AAA") or Judicial Arbitration and Mediation Services,
Inc./Endispute ("JAMS/Endispute"). The selection between AAA and JAMS/Endispute
rules shall be made by the claimant first demanding arbitration. The arbitrator
shall have no power to alter or modify any express provisions of this Agreement
or to render any award which by its terms affects any such alteration or
modification. The parties to the arbitration may agree in writing to use
different rules and/or arbitrator(s). In all other respects, the arbitration
shall be conducted in accordance with the California Code of Civil
2
<PAGE>
Procedure, or equivalent. The parties agree that the judgment award rendered by
the arbitrator shall be considered binding and may be entered in any court
having jurisdiction as stated elsewhere in this Agreement. The provisions of
this Paragraph shall survive the termination of this Agreement.
ARTICLE 4: COMPENSATION OF EMPLOYEE
4.1 Subject to the termination of this Agreement as provided herein, as
compensation for the services to be rendered by GROOM hereunder, ACC shall pay
GROOM an Annual Salary at the annual rates as set forth below. Said sum shall
commence to be earned by GROOM on January 1, 1998 and shall be paid in a timely
manner in accordance with the payroll policies of ACC, less normal payroll
deductions.
a. January 1, 1998 thru March 31, 1998: $110,000.00
b. March 31, 1998 thru June 30, 1998: $135,000.00
c. July 1. 1998 thru December 31, 1998: $175,000.00
4.2 Further increases to GROOM's salary beyond stated amounts shall be
at the sole discretion of the Board of Directors, and are subject to the cash
flow and profitability of ACC's operations.
4.3 As additional compensation to GROOM, ACC agrees to confirm a grant
to GROOM previously agreed upon in September, 1997, wherein GROOM is to receive,
within thirty (30) days of the commencement of his employment, an option to
purchase TWO HUNDRED FIFTY THOUSAND SHARES of ACC common stock at the price of
$3.50 per share. Of the options to purchase shares available to GROOM, 25,000
shall vest on January 31, 1998, and the remainder of said options to purchase
shares shall vest monthly at the rate of 6,250 shares per month for a period of
thirty-six months commencing on January 31, 1998. The options shall be
exercisable for a period of three years from vesting.
4.4 GROOM shall be entitled to 20 days of paid vacation per year to be
used by GROOM during the applicable annual period at the discretion of ACC. This
vacation time may be accrued for the term of this contract. Accrued vacation
time may be exchanged for cash at the termination of GROOM's employment with ACC
at the amount equal to his pay rate. GROOM shall be given reasonable time for
court related requirements and commitments.
4.5 ACC shall provide GROOM and his dependents with a fully paid
medical and dental insurance policy comparable to those provided to other
executives in ACC.
4.6 ACC shall provide to GROOM a life insurance policy during the term
of this Agreement in the amount of FIVE HUNDRED THOUSAND DOLLARS ($500,000.00).
4.7 ACC shall pay all reasonable and necessary business expenses for
3
<PAGE>
GROOM including, but not limited to his current office expense in Santa Cruz,
California and relocation expenses if necessary. In reimbursing GROOM for
expenses, the ordinary and usual business guidelines and documentation
requirements shall be adhered to by ACC and GROOM.
4.8 ACC shall pay a bonus of THIRTY THOUSAND DOLLARS ($30,000.00) to
GROOM on March 31, 1998.
4.9 As additional compensation to GROOM, ACC shall pay to GROOM a
commission equal to three percent (3%) of the proceeds received by ACC as a
result of sales to Seagate Technologies and its subsidiaries. Said commission
shall be payable monthly. The terms of this paragraph 4.9 shall survive the
terms of this employment contract in that GROOM shall be entitled to the
commission set forth herein for as long as ACC continues to receive proceeds
from sales to Seagate Technologies and its subsidiaries.
ARTICLE 5: TERMINATION OF EMPLOYMENT
5.1 GROOM may terminate this agreement at any time by rendering sixty
(60) days notice to ACC. ACC shall have the option of retaining the services of
GROOM for such sixty (60) day period or immediately discharging him. In any
event, ACC shall be obligated to pay GROOM his salary for the sixty (60) day
period unless otherwise agreed to by GROOM.
5.2 ACC may terminate this agreement at any time for cause which shall
include a wilful breach or neglect of professional duty and responsibility by
GROOM under this agreement, or, any act of fraud, misrepresentation or moral
turpitude which would prevent the effective performance of GROOM's duties at
ACC.
5.3 Any termination of this agreement by ACC shall be in writing and
shall state the grounds for termination.
5.4 ACC reserves the right to suspend GROOM from his duties. Notice of
any suspension shall be in writing and shall state the cause for suspension. In
the event, ACC suspends GROOM from his duties without terminating him, ACC shall
be obligated to continue GROOM's salary.
ARTICLE 6: MISCELLANEOUS PROVISIONS
6.1 In the event of GROOM's death, ACC agrees to pay to the designated
beneficiary or to GROOM's estate the remaining balance due for GROOM's salary
for the following six months including all options to shares of stock due under
this contract which shall vest during such period.
6.2 In the event of merger of ACC with another business entity, or of
the sale of ACC, this contract shall survive and become the responsibility of
the surviving business entity. In such an event, if GROOM and other ACC
management are not in positions with the surviving business entity which are
substantially similar to their positions immediately prior to said event, and if
4
<PAGE>
GROOM elects to terminate this employment agreement following said event, then
ACC, or its surviving entity, shall pay to GROOM an amount equal to three (3)
times the remaining balance due for GROOM's salary hereunder for the remaining
term of this agreement.
6.3 If any provision in this agreement is held to be unenforceable in a
court of law, the remaining provisions shall nevertheless continue in full force
without being impaired or invalidated in any way.
6.4 The failure of either party to insist on strict compliance with any
of the terms or conditions of this agreement shall not be deemed a waiver or
relinquishment of any rights or power by that party.
6.5 This agreement shall be governed by the laws of the State of
California.
6.6 If any legal action is necessary to enforce the terms of this
agreement, the prevailing party shall be entitled to reasonable attorney's fees
and costs in addition to any other relief to which that party may be entitled.
6.7 This agreement supersedes any and all other agreements either oral
or in writing between the parties hereto and contains all of the covenants and
agreements between the parties with respect to the employment of GROOM by ACC.
6.8 Any modification of this agreement will be effective only if it is
in writing and signed by the party to be charged.
6.9 Any dispute between the parties shall be subject to binding
arbitration.
IN WITNESS WHEREOF, the parties hereto hereby execute this Agreement as
of the date first above written:
/s/ John Groom
--------------------------------
John Groom
/s/ Martin T. Walk
--------------------------------
American Custom Components, Inc.
Martin T. Walk, President
<PAGE>
Exhibit 10.23
TERMINATION OF WARRANT
This Termination of Warrant, dated March 28, 1998, by and between
American Custom Components, Inc., a Nevada corporation ("ACC") and John Fritch
("Fritch").
WHEREAS, ACC executed that certain Warrant ("Warrant") as of February
23, 1998, said Warrant begin acknowledged and accepted by Fritch as of the same
date;
WHEREAS, ACC and Fritch mutually desire to terminate the Warrant in its
entirety and relieve all parties of their obligations thereunder effective as of
the date hereof.
IN WITNESS WHEREOF, the parties hereto hereby execute this Termination
of Warrant as of the date first above written:
American Custom Components, Inc.
a Nevada corporation
By: /s/ Martin Tony Walk By: /s/ John Fritch
- ---------------------------------- ----------------------------
Martin Tony Walk, CEO John Fritch
<PAGE>
Exhibit 10.26
EMPLOYMENT CONTRACT
AMERICAN CUSTOM COMPONENTS, INC., a California Corporation, located at
3310 W. MacArthur Blvd., Santa Ana, CA 92704, hereinafter referred to as "ACC"
and EB (JOHN) FRITCH, hereinafter referred to as "FRITCH" in consideration of
the mutual promises made herein, agree as follows:
ARTICLE 1: TERM OF EMPLOYMENT
1.1 ACC hereby employs FRITCH and FRITCH hereby accepts employment with
ACC for a period of thirty-six (36) months commencing May 1, 1998.
1.2 This agreement may be terminated earlier as herein provided.
ARTICLE 2: DUTIES AND OBLIGATIONS OF EMPLOYEE
2.1 FRITCH shall serve as Chairman of the Board and Chief Financial
Officer of ACC. In that capacity, he shall do and perform all services, acts and
things necessary or advisable to fulfill his duties, including but not limited
to the planning, direction and implementation of business planning and strategic
initiatives for ACC, the duties of the Chief Financial Officer, and will preside
over all activities involving the Board Of Directors. FRITCH shall at all times
be subject to the direction of the policies established by the Board of
Directors of ACC.
2.2 FRITCH agrees that he shall devote his entire productive time,
ability and attention to the business of ACC during the term of this agreement
2.3 The parties acknowledge and agree that during the term of this
agreement and in the course of his duties at ACC, FRITCH shall have access to
and become acquainted with information which is confidential and could be
constituted as ACC's trade secrets. FRITCH agrees that during and after the term
of this Agreement, FRITCH will not, directly or indirectly, disclose to any
third party, or use or authorize any third party to use, any information
relating to the business or interests of ACC that FRITCH knows or has reason to
know is regarded as confidential and valuable to ACC. FRITCH acknowledges that
such confidential information constitutes "trade secrets" of ACC as set forth in
Section 3126 of the California Civil Code which shall include, without
limitation, all methods, processes, formulae, compositions, inventions,
machines, computer programs, research projects, customer lists, pricing data,
sources of supply, marketing, production, merchandising systems or plans
associated with ACC's business and all information delivered to ACC or FRITCH in
confidence by ACC's clients and customers. FRITCH agrees to use his best efforts
and the utmost diligence to guard and protect such trade secrets and
confidential information. The parties acknowledge and agree that in determining
whether information is confidential information and/or a trade secret (as
defined herein), the fact that such information is not marked "confidential"
shall not adversely affect the confidentiality or trade secret status of the
same. FRITCH agrees that if his relationship with ACC is terminated for any
reason, FRITCH will return to ACC all records and papers and all matter of
whatever nature which bears secret or confidential information of ACC. In the
event of a breach or threatened breach of Section of this Agreement, ACC shall
be entitled to an injunction restraining such breach, without the requirement of
posting bond; but nothing here shall be construed as prohibiting ACC from
pursuing any other remedy available to it as a result of such breach or
threatened breach.
<PAGE>
2.4 FRITCH agrees and covenants that for a period of one (1) year
following the termination of this Agreement, he shall not be a major stock
holder or owner of a company that competes directly or indirectly with ACC.
Furthermore, FRITCH agrees that he shall not directly or indirectly induce or
solicit, or directly or indirectly aid or assist any other entity, person or
otherwise to induce or solicit, current employees, salesmen, agents,
consultants, distributors, representatives, advisors, customers or suppliers of
ACC to terminate their employment or business relations with ACC. Nothing
contained in this Agreement shall prevent FRITCH from purchasing less than one
percent (1%) of the issued and outstanding common stock of a corporation which
conducts such business if such stock is registered under the Securities Act of
1933.
ARTICLE 3: OBLIGATIONS OF EMPLOYER
3.1 ACC agrees to provide FRITCH with the compensation, incentives,
benefits and business expense reimbursement specified elsewhere in this
agreement.
3.2 If a dispute or claim shall arise between the parties with respect
to any of the terms or provisions of this Agreement, or with respect to the
performance by any of the parties under this Agreement, then the parties agree
that the dispute shall be arbitrated in Orange County, California before a
single arbitrator, in accordance with the rules of either the American
Arbitration Association ("AAA") or Judicial Arbitration and Mediation Services,
Inc./Endispute ("JAMS/Endispute"). The selection between AAA and JAMS/Endispute
rules shall be made by the claimant first demanding arbitration. The arbitrator
shall have no power to alter or modify any express provisions of this Agreement
or to render any award which by its terms affects any such alteration or
modification. The parties to the arbitration may agree in writing to use
different rules and/or arbitrator(s). In all other respects, the arbitration
shall be conducted in accordance with the California Code of Civil Procedure, or
equivalent. The parties agree that the judgment award rendered by the arbitrator
shall be considered binding and may be entered in any court having jurisdiction
as stated elsewhere in this Agreement. The provisions of this Paragraph shall
survive the termination of this Agreement.
ARTICLE 4: COMPENSATION OF EMPLOYEE
4.1 Subject to the termination of this Agreement as provided herein, as
compensation for the services to be rendered by FRITCH hereunder, ACC shall pay
FRITCH an Annual Salary at the annual rates as set forth below. Said sum shall
commence to be earned by FRITCH on April, 1998 and shall be paid in a timely
manner in accordance with the payroll policies of ACC, less normal payroll
deductions.
c. April 1, 1998 through December 31, 1998: $175,000.00
4.2 Further increases to FRITCH's salary beyond stated amounts shall be
at the sole discretion of the Board of Directors, and are subject to the cash
flow and profitability of ACC's operations.
4.3 As additional compensation to FRITCH, ACC agrees to issue a stock
warrant FRITCH, wherein FRITCH is to receive, a warrant to
purchase ONE MILLION SHARES of ACC common stock at the price to be determined.
The specific terms of the grant will be included in the STOCK WARRANT AGREEMENT.
4.4 FRITCH shall be entitled to 30 days of paid personal time off per
year.. Accrued vacation time may be exchanged for cash at the termination of
FRITCH's employment with ACC at the amount equal to his pay rate. FRITCH shall
be given reasonable time for court related requirements and commitments.
<PAGE>
4.5 ACC shall provide FRITCH and his dependents with a fully paid
executive medical and dental insurance policy comparable to those provided to
other executives in Orange County.
4.6 ACC shall provide to FRITCH a life insurance policy during the term
of this Agreement in the amount of FIVE HUNDRED THOUSAND DOLLARS ($500,000.00).
4.7 ACC shall pay all reasonable and necessary business expenses for
FRITCH. In reimbursing FRITCH for expenses, the ordinary and usual business
guidelines and documentation requirements shall be adhered to by ACC and FRITCH.
ARTICLE 5: TERMINATION OF EMPLOYMENT
5.1 FRITCH may terminate this agreement at any time by rendering sixty
(60) days notice to ACC. ACC shall have the option of retaining the services of
FRITCH for such sixty (60) day period or immediately discharging him. In any
event, ACC shall be obligated to pay FRITCH his salary for the sixty (60) day
period unless otherwise agreed to by FRITCH.
5.2 ACC may terminate this agreement at any time for cause which shall
include a willful breach or neglect of professional duty and responsibility by
FRITCH under this agreement, or, any act of fraud, misrepresentation or moral
turpitude which would prevent the effective performance of FRITCH's duties at
ACC.
5.3 Any termination of this agreement by ACC shall be in writing and
shall state the grounds for termination.
5.4 ACC reserves the right to suspend FRITCH from his duties. Notice of
any suspension shall be in writing and shall state the cause for suspension. In
the event, ACC suspends FRITCH from his duties without terminating him, ACC
shall be obligated to continue FRITCH's salary.
ARTICLE 6: MISCELLANEOUS PROVISIONS
6.1 In the event of FRITCH's death, ACC agrees to pay to the designated
beneficiary or to FRITCH's estate the remaining balance due for FRITCH's salary
for the following six months including all options to shares of stock due under
this contract which shall vest during such period.
6.2 In the event of merger of ACC with another business entity, or of
the sale of ACC, this contract shall survive and become the responsibility of
the surviving business entity. In such an event, if FRITCH and other ACC
management are not in positions with the surviving business entity which are
substantially similar to their positions immediately prior to said event, and if
FRITCH elects to terminate this employment agreement following said event, then
ACC, or its surviving entity, shall pay to FRITCH an amount equal to three (3)
times the remaining balance due for FRITCH's salary hereunder for the remaining
term of this agreement.
6.3 If any provision in this agreement is held to be unenforceable in a
court of law, the remaining provisions shall nevertheless continue in full force
without being impaired or invalidated in any way.
6.4 The failure of either party to insist on strict compliance with any
of the terms or conditions of this agreement shall not be deemed a waiver or
relinquishment of any rights or power by that party.
6.5 This agreement shall be governed by the laws of the State of
California.
<PAGE>
6.6 If any legal action is necessary to enforce the terms of this
agreement, the prevailing party shall be entitled to reasonable attorney's fees
and costs in addition to any other relief to which that party may be entitled.
6.7 This agreement supersedes any and all other agreements either oral
or in writing between the parties hereto and contains all of the covenants and
agreements between the parties with respect to the employment of FRITCH by ACC.
6.8 Any modification of this agreement will be effective only if it is
in writing and signed by the party to be charged.
6.9 Any dispute between the parties shall be subject to binding
arbitration.
IN WITNESS WHEREOF, the parties hereto hereby execute this Agreement as
of May 1, 1998:
/s/ John Fritch
--------------------------------
John Fritch
/s/ John Groom
--------------------------------
American Custom Components, Inc.
John Groom
President and Chief Executive Officer
<PAGE>
Exhibit 10.27
WARRANT
For the Purchase of 1,000,000
Shares of Common Stock
of
AMERICAN CUSTOM COMPONENTS, INC.
A Nevada Corporation
THIS CERTIFIES THAT, for value received, John Groom or his/her assigns
(the "Holder"), is entitled to, within the time frame set forth in Section 1
below ("Expiration Date"), but not thereafter, to subscribe for, purchase and
receive up to One Million (1,000,000) fully paid and nonassessable shares of the
common stock (the "Common Stock"), of American Custom Components, Inc., a Nevada
Corporation (the "Company"), at the initial price of $.375 per share, but
subject to adjustment as provided in Section 2 below, (the "Exercise Price"),
upon payment by cashier's check or wire transfer of the Exercise Price for such
shares of the Common Stock to the Company at the Company's offices.
1. EXERCISE OF WARRANT. This Warrant may be exercised in whole or in
part at any time or from time to time before October 13,2004 and before 5:00
p.m., California Time, by presentation and surrender hereof to the Company of a
notice of election to purchase duly executed and accompanied by payment by
cashier's check or wire transfer of the Exercise Price for the number of shares
specified in such election.
2. ADJUSTMENT IN NUMBER OF SHARES.
(A) ADJUSTMENT FOR RECLASSIFICATIONS. In case at any time or
from time to time after the issue date the holders of the Common Stock of the
Company (or any shares of stock or other securities at the time receivable upon
the exercise of this Warrant) shall have received, or, on or after the record
date fixed for the determination of eligible stockholders, shall have become
entitled to receive, without payment therefore, other or additional stock or
other securities or property (including cash) by way of stock split, spin-off,
reclassification, combination of shares or similar corporate rearrangement
(exclusive of any stock dividend of its or any subsidiary's capital stock), then
and in each such case the Holder of this Warrant, upon the exercise hereof as
provided in Section 1, shall be entitled to receive the amount of stock and
other securities and property which such Holder would hold on the date of such
exercise if on the issue date he had been the holder of record of the number of
shares of Common Stock of the Company called for on the face of this Warrant and
had thereafter, during the period from the issue date, to and including the date
of such exercise, retained such shares and/or all other or additional stock and
other securities and property receivable by him as aforesaid during such period,
giving effect to all adjustments called for during such period. In the event of
any such adjustment, the Exercise Price shall be adjusted proportionally.
(B) ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER. In
case of any reorganization of the Company (or any other corporation the stock or
other securities of which are at the time receivable on the exercise of this
Warrant) after the issue date, or in case, after such date, the Company (or any
such other corporation) shall consolidate with or merge into another corporation
or convey all or substantially all of its assets to another corporation, then
and in each such case the Holder of this Warrant, upon the exercise hereof as
provided in Section 1 at any time after the consummation of such reorganization,
consolidation, merger or conveyance, shall be entitled to receive, in lieu of
the stock or other securities or property to which such Holder would be entitled
had the Holder exercised this Warrant immediately prior thereto, all subject to
further adjustment as provided herein; in each such case, the terms of this
Warrant shall be applicable to the shares of stock or other securities or
property receivable upon the exercise of this Warrant after such consummation.
<PAGE>
(C) ADJUSTMENT I CASE OF VOLUNTARY TERMINATION. In case
employee elects to resign before January 1, 2000, the Company has the option to
cancel remaining warrant but only according to the following schedule: Warrants
which cannot be canceled will be four hundred sixteen thousand six hundred sixty
seven (416,667) as the thirteenth day of October, 1998. Warrants which can be
canceled will be at the rate of forty-one thousand six hundred sixty seven
(41,667) warrants per full month remaining until January 1,2000 calculated at
the first of the month after departure from the Company. Example: if employee
resigns the company and last day of employment is June 1, 1999, the warrants the
company can opt to cancel will be forty-one thousand six hundred sixty-seven
(41,667) per month multiplied by the remaining months starting July 1, 1999
through January 1, 2000.
3. RESERVATION OF COMMON STOCK. The Company shall at all times reserve
and keep available out of its authorized but unissued shares of common stock
solely for the purpose of effecting the exercise of this warrant such number of
its shares of common stock as shall from time to time be sufficient to effect
the exercise hereof.
4. REGISTRATION RIGHTS. If the Company at any time proposes to register
any of its securities under the Act, including under an SB-2 Registration
Statement or otherwise, it will each such time give written notice to all
holders of outstanding warrants of its intention so to do. Upon the written
request of a holder or holders of any such warrants given within 30 days after
receipt of any such notice, the Company will use its best efforts to cause all
shares underlying the exercise of such warrants to be registered under the Act
(with the securities which the Company at the time propose to register);
provided, however, that the Company may, as a condition precedent to its
effective such registration, require each Holder to agree with the Company and
the managing underwriter or underwriters of the offering to be made by the
Company in connection with such registration that such Holder will not sell any
securities of the same class or convertible into the same class as those
registered by the Company (including any class into which the securities
registered by the Company are convertible) for such reasonable period after such
registration becomes effective (not exceeding 90 days) as shall then be
specified in writing by such underwriter or underwriters if in the opinion of
such underwriter or underwriters the Company's offering would be materially
adversely affected in the absence of such an agreement. All expenses incurred by
the Company in complying with this Section, including without limitation all
registration and filing fees, listing fees, printing expenses, fees and
disbursements of all independent accountants, or counsel for the Company and the
expense of any special audits incident to or required by any such registration
and the expenses of complying with the securities or blue sky laws of any
jurisdiction shall be paid by the Company.
5. NOTICES. All notices and other communications from the Company to
the Holder of this Warrant shall be mailed by first class registered or
certified mail, postage prepaid, to the address set forth in the records of the
Company.
<PAGE>
6. CHANGE; WAIVER. Neither this Warrant nor any term hereof may be
changed, waived, discharged or terminated orally but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
7. LAW GOVERNING. This Warrant shall be construed and enforced in
accordance with and governed by the laws of California. Any action or proceeding
arising under or pursuant to this Warrant shall be brought in the appropriate
court in the County of Orange, California.
8. ENTIRE AGREEMENT. This Warrant sets forth and includes the entire
obligation of the Company with respect to any warrants held or due to Holder as
of the date hereof, and any other agreement, arrangement, writing, contract,
letter, or agreement dated prior to or of even date herewith shall be null and
void upon execution of this Agreement.
IN WITNESS WHEREOF, the undersigned has caused this Warrant to be
signed as of this 13th day of October, 1998.
AMERICAN CUSTOM COMPONENTS, INC.
a Nevada Corporation
/S/ John Fritch
---------------------------------
By: EB (John Fritch)
Its: Chairman of the Board
Chief Financial Officer
Acknowledged and Accepted:
/S/ John Groom
- ------------------------------
JOHN GROOM
<PAGE>
Exhibit 10.28
WARRANT
For the Purchase of 1,000,000
Shares of Common Stock
of
AMERICAN CUSTOM COMPONENTS, INC.
A Nevada Corporation
THIS CERTIFIES THAT, for value received, EB (John) Fritch or his/her
assigns (the "Holder"), is entitled to, within the time frame set forth in
Section 1 below ("Expiration Date"), but not thereafter, to subscribe for,
purchase and receive up to One Million (1,000,000) fully paid and nonassessable
shares of the common stock (the "Common Stock"), of American Custom Components,
Inc., a Nevada corporation (the "Company"), at the initial price of $.375 per
share, but subject to adjustment as provided in Section 2 below, (the "Exercise
Price"), upon payment by cashier's check or wire transfer of the Exercise Price
for such shares of the Common Stock to the Company at the Company's offices.
1. EXERCISE OF WARRANT. This Warrant may be exercised in whole or in
part at any time or from time to time before October 13, 2004 and before 5:00
p.m., California Time, by presentation and surrender hereof to the Company of a
notice of election to purchase duly executed and accompanied by payment by
cashier's check or wire transfer of the Exercise Price for the number of shares
specified in such election.
2. ADJUSTMENT IN NUMBER OF SHARES.
(A) ADJUSTMENT FOR RECLASSIFICATIONS. In case at any time or
from time to time after the issue date the holders of the Common Stock of the
Company (or any shares of stock or other securities at the time receivable upon
the exercise of this Warrant) shall have received, or, on or after the record
date fixed for the determination of eligible stockholders, shall have become
entitled to receive, without payment therefore, other or additional stock or
other securities or property (including cash) by way of stock split, spinoff,
reclassification, combination of shares or similar corporate rearrangement
(exclusive of any stock dividend of its or any subsidiary's capital stock), then
and in each such case the Holder of this Warrant, upon the exercise hereof as
provided in Section 1, shall be entitled to receive the amount of stock and
other securities and property which such Holder would hold on the date of such
exercise if on the issue date he had been the holder of record of the number of
shares of Common Stock of the Company called for on the face of this Warrant and
had thereafter, during the period from the issue date, to and including the date
of such exercise, retained such shares and/or all other or additional stock and
other securities and property receivable by him as aforesaid during such period,
giving effect to all adjustments called for during such period. In the event of
any such adjustment, the Exercise Price shall be adjusted proportionally.
(B) ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER. In
case of any reorganization of the Company (or any other corporation the stock or
other securities of which are at the time receivable on the exercise of this
Warrant) after the issue date, or in case, after such date, the Company (or any
such other corporation) shall consolidate with or merge into another corporation
or convey all or substantially all of its assets to another corporation, then
and in each such case the Holder of this Warrant, upon the exercise hereof as
provided in Section 1 at any time after the consummation of such reorganization,
consolidation, merger or conveyance, shall be entitled to receive, in lieu of
the stock or other securities or property to which such Holder would be entitled
had the Holder exercised this Warrant immediately prior thereto, all subject to
further adjustment as provided herein; in each such case, the terms of this
Warrant shall be applicable to the shares of stock or other securities or
property receivable upon the exercise of this Warrant after such consummation.
<PAGE>
(C) ADJUSTMENT IN CASE OF VOLUNTARY TERMINATION. In case
employee elects to resign before January 1, 2000, the Company has the option to
cancel remaining warrant but only according to the following schedule: Warrants
which cannot be canceled will be four hundred sixteen thousand six hundred sixty
seven (416,667) as the thirteenth day of October, 1998. Warrants which can be
canceled will be at the rate of forty-one thousand six hundred sixty seven
(41,667) warrants per full month remaining until January 1,2000 calculated at
the first of the month after departure from the Company. Example: if employee
resigns the company and last day of employment is June 1, 1999, the warrants the
company can opt to cancel will be forty-one thousand six hundred sixty-seven
(41,667) per month multiplied by the remaining months starting July 1, 1999
through January 1, 2000.
3. RESERVATION OF COMMON STOCK. The Company shall at all times reserve
and keep available out of its authorized but unissued shares of common stock
solely for the purpose of effecting the exercise of this warrant such number of
its shares of common stock as shall from time to time be sufficient to effect
the exercise hereof.
4. REGISTRATION RIGHTS. If the Company at any time proposes to register
any of its securities under the Act, including under an SB-2 Registration
Statement or otherwise, it will each such time give written notice to all
holders of outstanding warrants of its intention so to do. Upon the written
request of a holder or holders of any such warrants given within 30 days after
receipt of any such notice, the Company will use its best efforts to cause all
shares underlying the exercise of such warrants to be registered under the Act
(with the securities which the Company at the time propose to register);
provided, however, that the Company may, as a condition precedent to its
effective such registration, require each Holder to agree with the Company and
the managing underwriter or underwriters of the offering to be made by the
Company in connection with such registration that such Holder will not sell any
securities of the same class or convertible into the same class as those
registered by the Company (including any class into which the securities
registered by the Company are convertible) for such reasonable period after such
registration becomes effective (not exceeding 90 days) as shall then be
specified in writing by such underwriter or underwriters if in the opinion of
such underwriter or underwriters the Company's offering would be materially
adversely affected in the absence of such an agreement. All expenses incurred by
the Company in complying with this Section, including without limitation all
registration and filing fees, listing fees, printing expenses, fees and
disbursements of all independent accountants, or counsel for the Company and the
expense of any special audits incident to or required by any such registration
and the expenses of complying with the securities or blue sky laws of any
jurisdiction shall be paid by the Company.
5. NOTICES. All notices and other communications from the Company to
the Holder of this Warrant shall be mailed by first class registered or
certified mail, postage prepaid, to the address set forth in the records of the
Company.
<PAGE>
6. CHANGE; WAIVER. Neither this Warrant nor any term hereof may be
changed, waived, discharged or terminated orally but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
7. LAW GOVERNING. This Warrant shall be construed and enforced in
accordance with and governed by the laws of California. Any action or proceeding
arising under or pursuant to this Warrant shall be brought in the appropriate
court in the County of Orange, California.
8. ENTIRE AGREEMENT. This Warrant sets forth and includes the entire
obligation of the Company with respect to any warrants held or due to Holder as
of the date hereof, and any other agreement, arrangement, writing, contract,
letter, or agreement dated prior to or of even date herewith shall be null and
void upon execution of this Agreement.
IN WITNESS WHEREOF, the undersigned has caused this Warrant to be
signed as of this 13th day of October, 1998.
AMERICAN CUSTOM COMPONENTS, INC.
a Nevada Corporation
/S/ John Groom
---------------------------------
By: John Groom
Its: Chief Executive Officer
Acknowledged and Accepted:
/S/ John Fritch
- ------------------------------
EB (JOHN) FRITCH
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated July 6, 1998, in Amendment No. 1 to
the Form 10-SB/A (General Form for Registration of Securities) of American
Custom Components, Inc.
/s/ Kelly & Company
Kelly & Company
Newport Beach, California
December 4, 1998
