<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1995 Commission file number 0-15419
------------- -------
TCS ENTERPRISES, INC.
---------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-3826310
------------------------ --------------------------------
(State of Incorporation) (IRS Employer Identification Number)
10525 Vista Sorrento Parkway, Suite 101
San Diego, California 92121-2799
------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 452-8000
------------------------
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
---- ----
As of June 30, 1995, the registrant had outstanding 5,823,025 shares of
common stock, no par value.
Transitional small business disclosure format. Yes No X
------- ------
<PAGE>
TCS ENTERPRISES, INC.
1995 FORM 10-QSB QUARTERLY REPORT
QUARTER ENDED JUNE 30, 1995
INDEX
PART I
Page
----
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
PART II
Item 6. Exhibits and Reports on Form 8-K 27
(i)
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TCS ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
<TABLE>
<CAPTION>
June 30, 1995 December 31, 1994
----------------- -------------------
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $0 $0
Restricted cash 38,000 398,000
Mortgage loans held for sale 1,956,000 146,000
Accounts receivable 85,000 113,000
Current portion of notes receivable from related parties 282,000 278,000
Other current assets 125,000 195,000
----------------- -------------------
Total current assets 2,486,000 1,130,000
Property and equipment, net 174,000 229,000
Notes receivable from related parties, net of current portion 449,000 403,000
Noncurrent net assets of discontinued operations 0 67,000
Other assets, net 82,000 30,000
----------------- -------------------
$3,191,000 $1,859,000
----------------- -------------------
----------------- -------------------
</TABLE>
(Continued)
1
<PAGE>
TCS ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, 1995 December 31, 1994
----------------- ------------------
(Unaudited) (Audited)
<S> <C> <C>
Current liabilities:
Cash overdraft $39,000 $25,000
Warehouse lines payable 1,896,000 143,000
Current portion of long-term debt 12,000 343,000
Accounts payable 1,085,000 1,006,000
Accrued payroll and related taxes 244,000 260,000
Accrued commissions 46,000 54,000
Current net liabilities of discontinued operations 441,000 383,000
----------------- ------------------
Total current liabilities 3,763,000 2,214,000
Long-term debt, net of current portion 58,000 33,000
----------------- ------------------
Total liabilities 3,821,000 2,247,000
Stockholders' equity:
Common stock, no par value, authorized 30,000,000 shares,
issued and outstanding 5,823,000 shares at
March 31, 1995 and December 31, 1994 10,317,000 10,214,000
Accumulated deficit (10,499,000) (10,154,000)
Less notes receivable from stockholders (448,000) (448,000)
----------------- ------------------
Total stockholders' equity (630,000) (388,000)
----------------- ------------------
$3,191,000 $1,859,000
----------------- ------------------
----------------- ------------------
</TABLE>
The accompanying notes are an integral part of the unaudited financial
statements.
2
<PAGE>
TCS ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
June 30, 1995 June 30, 1995 June 30, 1994 June 30, 1994
-------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Income:
Loan fees $523,000 $869,000 $582,000 $1,583,000
Gain on sale of servicing 67,000 102,000 421,000 677,000
Interest 51,000 94,000 30,000 146,000
Management fees 150,000 301,000 0 1,000
Earnings (loss) from investments 3,000 3,000 4,000 (2,000)
Other 12,000 16,000 (27,000) (14,000)
-------------- --------------- ---------------- ----------------
806,000 1,385,000 1,010,000 2,391,000
-------------- --------------- ---------------- ----------------
Expenses:
Salaries, wages and related taxes $305,000 $636,000 $567,000 $1,286,000
Commissions 303,000 564,000 529,000 1,128,000
General and administrative 176,000 285,000 408,000 783,000
Promotion, entertainment and travel 6,000 14,000 44,000 85,000
Occupancy 99,000 193,000 105,000 217,000
Interest 19,000 32,000 58,000 133,000
-------------- --------------- ---------------- ----------------
$908,000 $1,724,000 $1,711,000 $3,632,000
-------------- --------------- ---------------- ----------------
Loss from continuing operations before taxes
and minority interest (102,000) (339,000) (701,000) (1,241,000)
Income taxes 6,000 6,000 8,000 8,000
-------------- --------------- ---------------- ----------------
Loss from continuing operations before
minority interest (108,000) (345,000) (709,000) (1,249,000)
Minority interest in (income) loss of subsidiary 0 0 (6,000) 39,000
-------------- --------------- ---------------- ----------------
Loss from continuing operations (108,000) (345,000) (715,000) (1,210,000)
Discontinued operations, net of income tax:
Loss from discontinued operations 0 0 (956,000) (1,479,000)
-------------- --------------- ---------------- ----------------
Net loss ($108,000) ($345,000) ($1,671,000) ($2,689,000)
-------------- --------------- ---------------- ----------------
-------------- --------------- ---------------- ----------------
</TABLE>
3 (Continued)
<PAGE>
TCS ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
June 30, 1995 June 30, 1995 June 30, 1994 June 30, 1994
-------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Loss per common share:
Continuing operations ($0.02) ($0.06) ($0.14) ($0.24)
Discontinued operations 0.00 0.00 (0.18) (0.28)
-------------- --------------- ---------------- ----------------
Net loss ($0.02) ($0.06) ($0.32) ($0.52)
-------------- --------------- ---------------- ----------------
-------------- --------------- ---------------- ----------------
</TABLE>
The accompanying notes are an integral part of the unaudited financial
statements.
4
<PAGE>
TCS ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months
-----------------------------------
Ended Ended
June 30, 1995 June 30, 1994
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations ($345,000) ($1,210,000)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 47,000 50,000
(Earnings) loss from investments in partnerships (3,000) 2,000
Minority interest in loss of subsidiary 0 (39,000)
Note receivable from related party 0 0
Decrease (increase) in:
Mortgage loans held for sale (1,810,000) 6,134,000
Accounts receivable 28,000 79,000
Other current assets 70,000 156,000
Other assets (49,000) 77,000
Increase (decrease) in:
Accounts payable 79,000 278,000
Accrued payroll and related taxes (16,000) (69,000)
Accrued commissions (8,000) (64,000)
--------------- ----------------
Net cash provided by (used in) continuing operations (2,007,000) 5,394,000
Net cash provided by (used in) discontinued operations 125,000 (2,018,000)
--------------- ----------------
Net cash provided by (used in) operating activities (1,882,000) 3,376,000
--------------- ----------------
Cash flows from investing activities:
Purchases of property & equipment 0 (67,000)
Disposal of property and equipment 8,000 0
Issuance of notes receivable from related parties (51,000) 0
Collection of notes receivable from related parties 1,000 131,000
Collection of notes receivable from stockholders 0 2,000
--------------- ----------------
Net cash provided by (used in) investing activities (42,000) 66,000
--------------- ----------------
</TABLE>
(Continued)
5
<PAGE>
TCS ENTERPRISES, INC., AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(Unaudited)
<TABLE>
<CAPTION>
Six Months
-----------------------------------
Ended Ended
June 30, 1995 June 30, 1994
--------------- ---------------
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in warehouse lines payable 1,753,000 (5,991,000)
Collection of additional paid in capital 103,000 0
Proceeds from issuance of notes payable 32,000 262,000
Proceeds from issuance of related party debt 0 1,900,000
Repayments of long-term debt (338,000) (5,000)
--------------- ---------------
Net cash provided by (used in) financing activities 1,550,000 (3,834,000)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents (374,000) (392,000)
Cash and cash equivalents, beginning of period 373,000 1,093,000
--------------- ---------------
Cash and cash equivalents, end of period ($1,000) $701,000
--------------- ---------------
--------------- ---------------
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest $32,000 $148,000
Income taxes 6,000 9,000
</TABLE>
The accompanying notes are an integral part of the unaudited financial
statements.
6
<PAGE>
TCS ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated
Financial Statements
(1) ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of TCS
Enterprises, Inc. and its wholly-owned and majority-owned subsidiaries (the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation.
During 1994, the Company experienced significant operating losses in most
of its subsidiaries. As a result of losses in 1994 and prior years, at June 30,
1995 the Company has a deficit in stockholders' equity and negative working
capital. The Company experienced severe liquidity problems caused, in part, by
operating losses in its cultured dairy products, publishing and environmental
subsidiaries. At June 30, 1995, TCS Mortgage, Inc. is in violation of certain
covenants of its warehouse line of credit and does not meet the Federal Home
Loan Mortgage Corporation ("FHLMC") minimum capital requirement. Management is
unable to predict what action, if any will be taken by the warehouse lenders or
FHLMC. It is management's intent to remedy these issues. Management is
currently discussing plans to alleviate liquidity problems, however, is unable
to predict the outcome of those discussions or determine when the Company will
increase its capital base. As described below, during the fourth quarter of
1994, management implemented a plan to dispose of the Company's governmental
consulting, environmental, cultured dairy products and publishing businesses.
These actions have reduced expenses and operating losses as well as focused
management's efforts on the Company's mortgage-banking and real estate
management activities.
DISCONTINUED OPERATIONS
During the fourth quarter of 1994, the Company's management decided to
discontinue its governmental consulting operations, and sell its wholly-owned
subsidiary, TCS Governmental Consulting, Inc. ("Governmental"). Effective
November 1, 1994, the Company sold an 80.5% interest in Governmental to
Governmental's president in exchange for a note for $50,000.
<PAGE>
During the fourth quarter of 1994, the Company's management decided to
discontinue its environmental consulting operations, and sell its wholly-owned
subsidiary, TCS Environmental, Ltd., a British Virgin Islands international
business company ("Environmental"). Effective October 20, 1994, the Company
sold a 100% interest in Environmental to Santa Anita Produce, Inc., an Arizona
corporation ("Santa Anita") in exchange for cancellation of $1,250,000 note
payable to Santa Anita (see Note 3).
During the fourth quarter of 1994, the Company's management decided to
discontinue the operations of its wholly-owned subsidiary TCS Ventura Dairy
Products, Inc. ("Ventura"). On January 30, 1995, the Company sold substantially
all of Ventura's assets and certain liabilities to Ventura's management for
approximately $52,000 cash and notes aggregating approximately $181,000.
Substantially all of the cash and payments on approximately $130,000 of the
notes were used to satisfy obligations to certain of Ventura's suppliers.
During the fourth quarter of 1994, the Company's management decided to
discontinue its publishing operations, conducted through its wholly-owned
subsidiary, TCS Publishing, Inc. ("Publishing"). On December 30, 1994, the
Company signed a letter of intent with an unrelated publishing company (the
"Buyer") whereby the Buyer will acquire Publishing's rights under certain
contracts and certain of Publishing's assets. As consideration, the Buyer will
complete the publishing of certain of Publishing's uncompleted contracts. The
Company will retain substantially all the assets and liabilities of Publishing,
consisting principally of accounts receivable and deferred revenue.
The Notes to Unaudited Consolidated Financial Statements exclude
discontinued operations unless stated otherwise.
The consolidated balance sheets are presented as of June 30, 1995 and
December 31, 1994. The consolidated statements of operations are presented for
the six months
8
<PAGE>
ended June 30, 1995 and 1994. The consolidated statements of cash flows are
presented for the same periods.
The unaudited consolidated financial statements do not include certain
financial presentations normally required under generally accepted accounting
principles. It should be understood that accounting measurement at interim
dates inherently involves greater reliance on estimates than at year end. The
results of operations for the six months ended June 30, 1995 and 1994 are not
indicative of results that can be expected for the full year.
The consolidated interim financial statements included herein are
unaudited; however, they contain adjustments, consisting of normal recurring
accruals, which, in the opinion of the Company, are necessary to present fairly
the consolidated financial position of the Company at June 30, 1995 and the
consolidated results of operations for the six months ended June 30, 1995 and
1994 and its consolidated cash flows for the same period.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are stated at the lower of cost or market in
the aggregate. Cost is determined on an individual loan basis and includes
nonrefundable fees and direct costs associated with the origination of loans.
Market is determined by outstanding commitments and prevailing market prices.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost. Depreciation is provided for
using the straight-line basis with estimated useful life of seven years for
furniture and five years for equipment. Leasehold improvements are amortized on
a straight-line basis over the shorter of their useful lives or the terms of the
lease.
9
<PAGE>
BROKERED LOAN FEES
Loan fees include direct origination fees and brokered loan fees.
Deferred origination fees and expenses are recognized at the time a loan is sold
and servicing released. Brokered loan fees represent fees received by the
Company for "placing" a loan with a lender, whereby no further obligations
exist. The fee is recognized when the borrower and lender sign a loan
commitment and the loan is funded.
GAIN ON SALE OF SERVICING
Gains on sale of servicing represent service release premiums on loans
originated in-house. The gain on sale of servicing is recognized as the loan
is sold out of the warehouse and no discount is taken since the fee is received
at the same time.
INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes". SFAS 109 requires a change from the deferred method of accounting for
income taxes of APB Opinion 11 to the asset and liability method of accounting
for income taxes. Under the asset and liability method of SFAS 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Effective January 1, 1993, the Company adopted SFAS 109. The
adoption of SFAS 109 did not have a material effect on the Company's financial
position or results of operations.
Pursuant to the deferred method under APB Opinion 11, which was applied in
1992 and prior years, deferred income taxes are recognized for income and
expense items
10
<PAGE>
that are reported in different years for financial reporting purposes and income
tax purposes using the tax rate applicable in the year of the calculation.
Under the deferred method, deferred taxes are not adjusted for subsequent
changes in tax rates.
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share is computed by dividing net earnings
(loss) by the weighted average number of common shares outstanding and common
stock equivalents, if dilutive. Common stock equivalents consist of shares
issuable upon the exercise of stock options and warrants. Fully dilutive
earnings per share for the periods presented is the same as primary earnings per
share. See Exhibit 11.1 for the computation of earnings (loss) per share.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an initial maturity of six months
or less to be cash and cash equivalents.
RECLASSIFICATIONS
The 1994 financial statements have been reclassified to conform with 1995
presentation.
(3) RELATED PARTY TRANSACTIONS
In March, 1993, the Company assisted with the transfer of real estate
located in Tijuana, B.C., Mexico between Weslow, Ltd., a California Limited
Partnership ("Seller") and SDB Offshore, Ltd., A Bahamian corporation ("Buyer").
The majority owner of the Buyer is Hector Lomeli Villalobos who, along with
immediate family members, controls Santa Anita. Santa Anita became the majority
owner of the Company in 1994. Subsequent to the transaction, a minority
shareholder of the Seller became an employee of the Company and in September
1993, was appointed to the Company's Board of Directors. This individual has
also maintained an ownership interest in the real estate through ownership of a
minority interest in the Buyer. In consideration for the
11
<PAGE>
Company's role in bringing the parties together, negotiating financing on behalf
of the Buyer, and performing other activities in connection with the sale, the
Company received a fee of $1,350,000 in the form of an unsecured note from the
Buyer. The Buyer paid $350,000 on the note in December, 1993. The balance of
the note was due in six consecutive monthly equal installments of principal and
interest, at 8% per annum, beginning on July 31, 1994. All unpaid principal and
interest was due on December 31, 1994. At June 30, 1995, the balance past due
under the note is $276,000. Concurrently the Company entered into a management
agreement with the Buyer to provide technical assistance and management services
for a term of six years, renewable annually thereafter by mutual agreement.
Under the agreement, the Company is to supervise the development of the
industrial park, operate, manage, and lease the property, and assist the Buyer
in the conduct of its daily business activities. The Company began receiving a
management fee of $50,000 per month in July 1994. In July 1995, the contract
was terminated and the Company earned a termination fee of $150,000.
During 1994, the Company borrowed under various note agreements an
aggregate of $2,375,000 from Santa Anita. The notes bear interest from 10.1 to
10.5 percent and have maturties ranging from November 1995 to July 1995. Such
notes, together with accrued interest of approximately $125,000 were forgiven by
Santa Anita in connection with the sale of Environmental to Santa Anita (Note 1)
and the purchase of stock by Santa Anita as described below.
On October 20, 1994, the Company sold 625,000 restricted shares of the
Company's stock to Santa Anita in exchange for cancellation of $1,250,000 owed
to Santa Anita under various notes described above. The market value of the
shares on that date was approximately $1,175,000. The share certificates have
not been issued, however, the shares are considered issued and outstanding.
Concurrently, the Company granted warrants to purchase 175,000 shares of common
stock.
12
<PAGE>
The Company is a partner in a general partnership in which it has agreed to
subordinate any indebtedness from the partnership to a bank. At June 30, 1995
the balance of the subordinated debt is zero. In connection with this, the
Company has guaranteed $125,000 of the partnership note to the bank.
Notes receivable from related parties totaled $731,000 at June 30, 1995.
Notes receivable includes a note with a principal balance of $276,000 as
described above. Another note, with a principal balance of $200,000, bears
interest at the rate of 8.25% per annum, principal and all accrued interest is
payable in full in April 1999. The note is secured by 100,000 shares of the
Company's common stock. Another note, with a principal balance of $35,000,
bears interest at 12% per annum and is payable in monthly installments of
principal and interest of $504 commencing April 1990. The note is secured by a
second deed of trust. The note issued in connection with the sale of
Governmental (Note 1) has a principal balance of $50,000 bears interest at prime
and is payable in quarterly interest only payments commencing January 1996.
Principal and any unpaid interest is due in November 1999. The notes issued in
connection with the sale of Ventura (Note 1) have a principal balance of $52,000
and bear interest at 8.5% per annum. Interest only is payable monthly beginning
March 1, 1995 through February 1, 1996. Beginning March 1, 1996 and continuing
until March 1, 1999 interest and principal are payable monthly. The remaining
notes, with a combined balance of $118,000, bear interest at 8.25% and are due
in full in September 1998.
In prior years, four executive officers exercised options for 481,355
shares of the Company's common stock. Notes receivable totaling $479,000 were
issued by these officers as payment. The notes bear interest at 8.25% interest
payable annually with remaining principal of $436,000 due on September 20, 1998
and $12,000 due November 1, 1998. The notes are secured by approximately
433,000 shares of the Company's common stock and are shown as a reduction of
stockholders' equity in the accompanying
13
<PAGE>
consolidated balance sheets. At June 30, 1995 and December 31, 1994, the
outstanding principal amount of these notes is $448,000.
(4) PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1995 and December 31, 1994 is comprised
of the following:
<TABLE>
<CAPTION>
June 30, 1995 Dec. 31, 1994
------------- -------------
<S> <C> <C>
Furniture and fixtures $298,000 $330,000
Equipment 888,000 906,000
Leasehold improvements 369,000 369,000
------------- -------------
1,555,000 1,605,000
Less accumulated depreciation
and amortization 1,381,000 1,376,000
------------- -------------
$174,000 $229,000
------------- -------------
------------- -------------
</TABLE>
(5) WAREHOUSE LINES PAYABLE
The Company finances its mortgage loans held for sale through warehouse
lines of credit. Mortgage loans held for sale secure such lines of credit. It
is expected that in the normal course of business, warehouse lines of credit
that expire will be renewed or replaced.
At June 30, 1995 and December 31, 1994, the Company had a warehouse line of
credit as follows:
<TABLE>
<CAPTION>
June 30, 1995 Dec. 31, 1994
------------- -------------
<S> <C> <C>
Warehouse line of credit of $6,700,000 at
December 31, 1994. Interest at prime plus .5%
original expiration of March 15, 1994, with
extensions available at the sole discretion of the
lender, secured by a first priority interest in
collateral and a compensating balance requirement.
(The line was extended by the lender in
March 1994 and is now subject to an immediate
notice of cancellation by the lender. On
February 1, 1995 the credit limit was decreased
to $2,000,000) 1,896,000 143,000
------------- -------------
$1,896,000 $143,000
------------- -------------
------------- -------------
</TABLE>
14
<PAGE>
(6) LONG-TERM DEBT
Long-term debt at June 30, 1995 and December 31, 1994, is summarized as
follows:
<TABLE>
<CAPTION>
June 30, 1995 Dec. 31, 1994
------------- -------------
<S> <C> <C>
$331,000 note payable, secured by various
assets, and a $197,000 compensating
balance. Interest payable monthly at 6%,
due April 8, 1995. $0 $331,000
Other notes payable 70,000 45,000
------------- -------------
70,000 376,000
Less: current portion (12,000) (343,000)
------------- -------------
Long-term debt, net of current portion $58,000 $33,000
------------- -------------
------------- -------------
</TABLE>
(7) COMMITMENTS AND CONTINGENCIES
The Company leases all of its office space under operating leases. At June
30, 1995, the minimum rental payments due under the Company's leases are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1995 $16,000
1996 3,000
-----
Total minimum lease obligations $19,000
-------
-------
</TABLE>
Minimum lease payments do not include contingent rental payable under
operating leases which are based on increases in certain cost-of-living indices.
Total rental expense under all operating leases, including discontinued
operations, for the six months ended June 30, 1995 and 1994 was $157,000 and
$288,000, respectively.
Because of the nature of their activities, the Company and its subsidiaries
are subject to pending and threatened legal actions which arise out of the
normal course of business. In the opinion of management, the disposition of all
such matters will not have a material adverse effect on the consolidated
financial statements.
The Company is a party to a line of credit agreement whereby it may have to
provide up to $25,000 in short-term advances to an investee company. The
Company has also guaranteed $125,000 of the investee company's bank debt.
15
<PAGE>
(8) COMPENSATING BALANCE ARRANGEMENTS
The Company is required to maintain compensating balances for its warehouse
line and for certain debt. At June 30, 1995 and December 31, 1994, cash of
$37,000 and $67,000 respectively, was on deposit in a special bank account to
meet the warehouse line requirements and at December 31, 1994 $331,000 of the
Company's cash was restricted to meet certain other debt requirements. In
January 1995, the restricted cash of $331,000 was used to retire the maturing
debt.
(9) EMPLOYEE BENEFIT PLANS
On October 6, 1983, the directors and shareholders of the Company adopted
the Company's 1983 employee stock option plan, the purpose of which was to
advance the interests of the Company by providing officers, directors, and key
employees an incentive to serve and continue service with the Company. This
plan provided for the grant of options to purchase up to 3,000,000 shares of the
Company's common stock. On August 4, 1993, the directors approved an amendment
to the 1983 plan accelerating the vesting of any options granted on or after
August 4, 1993 in the event of a change in control of the Company. The 1983
plan expired in 1993 and no further options may be granted under this plan.
On December 15, 1986, the directors of the Company adopted the Company's
1986 employee non-qualified stock option plan which provides for the grant of
options to purchase up to 230,000 shares of the Company's common stock. On May
25, 1994, the shareholders approved certain amendments to the 1986 plan in order
to: (i) increase the authorized number of shares issuable under the Nonqualified
Plan from 230,000 to 400,000 and (ii) create a sub-plan to permit non-employee
directors to participate in the Nonqualified Plan under a formula award. The
sub-plan calls for the annual grant of eight thousand (8,000) nonqualified
Options to each non-employee board member on the date of the first Board meeting
after the annual meeting of the Shareholders. Such Options vest at a rate of
500 shares for each board or committee meeting that the non-
16
<PAGE>
employee board member attends. The strike price of the Option is one hundred
ten percent (110%) of the closing market price of the Company's stock, rounded
up to the nearest 1/16 percent, on the first meeting date of the Board of
Directors subsequent to the non-employee board director's election or
appointment to the Board. For those non-employee directors who are members of
the Board of Directors on August 4, 1993, the price of the Option is one hundred
ten percent (110%) of the closing price of the Company's common stock, rounded
up to the nearest 1/16 percent, on August 4, 1993.
On June 9, 1993, the directors and shareholders of the Company adopted the
Company's 1993 employee stock option plan, the purpose of which is to advance
the interests of the Company by providing officers, directors and key management
employees with an incentive to serve and to continue service with the Company.
Under the 1993 plan, up to 3,000,000 shares of the Company's common stock may be
issued upon exercise of any granted incentive stock options, nonqualified stock
options, or stock appreciation rights.
Terms and conditions of the plans (including price, exercise date, and
number of shares) are determined by a committee of the Board of Directors which
administers the plans. For options granted, the exercise price specified by the
committee generally must be 100 percent of the fair market value of the
Company's common stock as of the date of grant. In case of termination of
employment, grants not yet exercisable are subject to forfeiture, and
exercisable options are generally forfeited six months after the date of
termination.
17
<PAGE>
At June 30, 1995, the following options to acquire common stock were
outstanding:
<TABLE>
<CAPTION>
Total
Plan Options Options Exercise
Year Granted Exercisable Price
---------------------------------------------------------------
<S> <C> <C> <C>
1983 260,000 260,000 1.859
1983 100,000 100,000 5.000
1986 24,000 2,000 1.650
1986 64,000 31,500 1.860
1986 16,000 3,500 3.300
1986 8,000 1,500 2.070
1993 20,000 20,000 2.750
--------------------------------
492,000 418,500
--------------------------------
--------------------------------
</TABLE>
Options vest at different times for different employees over a period from the
date of grant up to ten years subsequent. Options generally expire ten years
from the date of grant.
The Company has adopted a Stock Bonus and 401 (k) Retirement Plan, which is
organized under Section 401(k) of the Internal Revenue Code, allowing employees
who have completed one year of service and have reached age 21 to participate.
Eligible employees are allowed to contribute up to 15 percent of their
compensation on a pre-tax basis subject to the maximum allowed by the Internal
Revenue Code. Under certain conditions, the Company will make a matching
contribution of 50% of the first six percent contributed by the employee. A
participant's right to Company contributions vests over a five or seven year
period, based on the participant's date of service.
The Company has issued warrants to purchase shares of common stock to
former employees of the Company. Management has determined that the value of
these warrants is not material. Accordingly, no value has been attributed to the
warrants in the accompanying consolidated financial statements. At June 30,
1995, the following warrants were outstanding:
18
<PAGE>
<TABLE>
<CAPTION>
Number of Exercise Expiration
Shares Price Date
--------- -------- -----------
<S> <C> <C>
1,000,000 $5.00 August 17, 1995
24,000 $3.50 June 15, 1996
100,000 $2.00 October 26, 1996
100,000 $2.25 February 25, 1997
200,000 $6.00 February 25, 1997
200,000 $8.00 February 25, 1997
175,000 $3.00 October 20, 1999
65,000 $1.875 September 28, 2003
</TABLE>
(10) INCOME TAXES
The Company adopted FASB Statement No. 109, Accounting for Income Taxes, as
of January 1, 1993. The adoption of FASB 109 did not have a material effect on
the Company's financial position or results of operations. A valuation
allowance of $3,205,000 has been recognized to offset the deferred tax assets as
realization of such assets is uncertain.
At December 31, 1994 the Company had available federal net operating loss
carryforwards and investment tax credits of $4,821,000 and $33,000,
respectively. The net operating loss carryforwards are subject to certain
annual limitations due to the changes in majority ownership of the Company.
Following are the expiration dates of the federal net operating loss and
investment tax credit carryforwards:
<TABLE>
<CAPTION>
Net operating Investment tax
loss carryforwards credit carryforwards
---------------------- ------------------------
<S> <C> <C>
2000 $0 $3,000
2001 0 23,000
2002 0 7,000
2003 0 0
2004 0 0
2005 373,000 0
2006 2,158,000 0
2007 185,000 0
2008 139,000 0
2009 1,966,000 0
---------------------- ------------------------
4,821,000 33,000
---------------------- ------------------------
---------------------- ------------------------
</TABLE>
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1995, COMPARED
TO SIX MONTHS ENDED JUNE 30, 1994
RESULTS OF OPERATION
The Company is engaged, through its wholly-owned subsidiaries, in real
estate related financial services. The Company believes that it is positioned
for future growth and profitability and has aggressively worked to form the new
profile and business plan. Prior to 1995, the Company was involved in a varied
base of operations and in 1994 committed to turning the Company into a
vertically integrated entity focusing on real estate and related industries.
During the fourth quarter of 1994, the Company elected to dissolve or close
several lines of business. In October, the Board of Directors approved the sale
of TCS Environmental, Ltd. to its majority shareholder, Santa Anita Produce,
Inc. The Company was unable to sustain TCS Environmental to the point that it
would provide profits and cash flow to the entity. The nature of the waste-
water treatment business is such that it requires intensive start-up capital
and the Company was not in a position to provide it. The sale also reduced the
debt of the Company as the consideration for the sale was relief of debt.
In November, the Board approved the sale of 80.5% of TCS Governmental
Consulting, Inc. Once again it was decided that this business did not fit the
profile of a real estate related, financial services company. The stock was
sold to Joel M. Strobl who had been the President of that subsidiary since its
inception in 1985.
In December, management entered into negotiations to sell its dairy
products company, TCS Ventura Dairy Products, Inc.. This subsidiary also
required substantial capital and did not fit the new business profile. The sale
of substantially all of the assets of TCS Ventura was completed in January 1995.
20
<PAGE>
Also in December, management entered into negotiations to sell the assets
of TCS Publishing, Inc. To date, the sale has not closed, although the buyer
has completed substantially all of their responsibilities under the contract and
management expects to sign final documentation shortly.
The financial statements for 1994 have been revised to conform with the
1995 presentation. The activity from TCS Governmental Consulting, Inc., TCS
Environmental, Ltd., TCS Ventura Dairy Products, Inc. and TCS Publishing, Inc.
is presented under a single line as "discontinued operations". The following
discussion relates to continuing operations only.
Total revenues decreased $1,006,000 or 42.1 percent for the six months
ended June 30, 1995 as compared to 1994. Total expenses decreased $1,908,000 or
52.5 percent for same period. The decrease in revenues was primarily due to the
decline in mortgage activity for single family residential loans throughout the
country and especially in Southern California. With the increase in interest
rates in early 1994, the activity previously generated in the refinance market
slowed considerably. The decrease in expenses is also related to the decreased
mortgage activity. Related to the drop in loan fees, commissions paid to loan
agents decreased. In addition, the Company reduced its workforce throughout the
year and discretionary costs were reduced or eliminated.
Loan fees decreased $714,000 or 45.1% for the six months ended June 30,
1995 over 1994 and gains on sales of servicing decreased $575,000 or 84.9
percent for the same period. Gains on sale of servicing represent release
premiums on loans originated in-house. The gain is recognized when the funded
loan is sold out of the warehouse. The decrease in this area is due to the
decreased activity by TCS Mortgage of its mortgage banking activities, (i.e.
funding fewer mortgage loans in-house). Related to this drop in loan activity,
commission expense decreased $564,000 or 50.0% for the period 1995 over 1994.
21
<PAGE>
TCS Mortgage, Inc. receives prorated interest on loans funded in-house, to
offset interest charges on its warehouse lines. Related to the decreased
mortgage activity, interest income decreased $52,000 or 35.6 percent during the
six months ended June 30, 1995 over 1994. Similarly, interest expense decreased
$101,000 or 75.9% for the same period.
Management fees represent fees earned by TCS Real Estate Services, Inc. for
supervising the development of an industrial park as well as managing and
leasing the property. TCS Real Estate received $50,000 a month as management
fees beginning in July 1994 until the contract was canceled in July 1995.
Earnings from investments reflect the Company's share of Wateridge
Insurance Services which is accounted for under the equity method. Earnings
from investments increased $5,000 or 250.0% for the period 1995 over 1994.
Salaries, wages and related taxes decreased $650,000 or 50.5%, general and
administrative expenses decreased $498,000 or 63.6 percent, and promotion,
entertainment and travel decreased $71,000 or 83.5 percent for the six months
ended June 30, 1995 as compared to the six months ended June 30, 1994. These
decreases are attributable to the benefit of several cost-cutting measures which
were previously identified and implemented by the Company, primarily, the review
of critical personnel and discretionary expenses necessary to support current
operations.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
The Company and its subsidiaries continue to have restricted liquidity.
Working capital decreased $193,000 to a negative $1,277,000 at June 30, 1995
compared to a negative $1,084,000 at December 31, 1994. The use of working
capital was substantially due to operating activities.
The Company identified several changes which were implemented in the fourth
quarter of 1994 which have alleviated the use of working capital by operations.
During 1994, the Company had outstanding approximately $2,500,000 in short term
loans from
22
<PAGE>
related parties. Management negotiated for an extinguishment of these debts as
more particularly described below. The Company also identified additional
assets which were sold to streamline operations and generate working capital.
The Company expected to favorably impact its working capital by collecting
the balance of a note receivable from a related party, Santa Anita Produce,
Inc., during the fourth quarter of 1994. The balance outstanding, plus
additional amounts due, of approximately $400,000 in principal and accrued
interest, was expected to be collected by the end of 1994 but, because of the
severe economic problems in Mexico in December 1994, was not received. The
balance due under the note was assumed by the Painter Group Corporation, an
unrelated third party, in the third quarter. These new developments are more
fully discussed below.
The Company is a partner in one general partnership to which it may have to
provide up to $25,000 in short-term advances in accordance with a line of credit
agreement. The Company has also guaranteed $125,000 of a partnership note to a
bank.
The Company has adopted a Stock Bonus and 401(k) Retirement Plan. For the
plan year ending December 31, 1994, the Company made a matching contribution of
50 percent of the first six percent contributed by the employee. The Company's
contribution for the year ended December 31, 1994 was $31,000. The Company has
not decided if it will make a matching contribution in 1995.
During the fourth quarter of 1994, the Company has completed several
changes that have alleviated the use of working capital.
On November 1, 1994, the Company sold 80.5% of the common stock of TCS
Governmental Consulting, Inc. The shares were sold to the individual who has
been the president of the subsidiary since its inception in 1985. The
subsidiary has experienced losses over the last several years due to the general
economic downturn in Southern California. It is the belief of all involved
parties that the operation may be able to streamline operations and reduce
expenses. The stock was sold at book value in
23
<PAGE>
exchange for a long-term note with quarterly interest payments at prime due
beginning January 1, 1996. The principal and any accrued interest are due in
full November 1, 1999. The note is secured by a pledge of the shares in TCS
Governmental Consulting, Inc. sold by the Company to Joel M. Strobl.
Also effective October 31, 1994, the Company sold TCS Environmental, Ltd.
in its entirety to a related party, Santa Anita Produce, in lieu of debt. In a
three part transaction the following agreements were completed: (i) Santa Anita
purchased TCS Environmental for relief of $1,250,000 of debt, (ii) Santa Anita
purchased 625,000 shares of the Company's common stock for $2.00 per share in
exchange for relief of the remaining $1,250,000 of related party debt, and (iii)
the Company granted 175,000 common stock warrants with a five year term at $3
per share to Santa Anita.
In the fourth quarter of 1994, the Company entered into negotiations to
sell its dairy products operation. It ultimately sold the majority of the
assets to Pacific Dairy Products, Inc. ("PDP") on January 30, 1995. Under the
terms of the sale, PDP paid cash for the year-end inventory of $51,890 and
executed notes for the accounts receivable and the fixed assets. The accounts
receivable note had a stated value of $113,874, but was revised per the
agreement for receivables collected by PDP through June 30, 1995. The revised
balance of the note is $45,315. The stated value of the fixed assets note was
$33,750. This note also was revised and partially paid into escrow to satisfy
creditors. The balance of the note due the Company is $6,174. Both notes bear
interest at 8 1/2% per annum with interest only payments for the first year.
Beginning March 1, 1996 and continuing until March 1, 1999, the notes fully
amortize with interest and principal due monthly.
In December 1994, management entered into negotiations to sell the assets
of TCS Publishing, Inc. The agreement calls for the buyer to pay all costs and
expenses necessary to print, produce and deliver approximately 14 publications
of TCS Publishing, Inc., and to remit, in the future, a royalty payment based on
negotiated sales goals. To
24
<PAGE>
date, the sale has not yet closed, although the buyer has completed
substantially all of their responsibilities under the contract and management
expects to sign final documentation shortly. Once the transaction is finalized,
the Company will be able to recognize deferred revenue associated with the
publications of approximately $350,000.
In July 1995, the Board of Directors of the Company adopted resolutions,
subject to shareholder approval and final documentation, to: (i) effect a
reverse stock split on a one for two basis of all outstanding shares, options
and warrants, and (ii) issue six million eighty-nine thousand five hundred post-
split shares to the Painter Group Corporation, a Delaware corporation, ("Painter
Group") and one hundred thousand shares of preferred stock in exchange for 100%
of the outstanding stock of USA Golf Corporation, a Nevada Corporation ("USA
Golf"). The balance of the preferred shares are to be canceled, thereby leaving
100,000 shares of preferred stock authorized, issued and outstanding. After
this transaction the Painter Group will hold approximately 70% of the
outstanding common shares of the Company.
As additional consideration for the issuance of the Company's common and
preferred shares, the Painter Group has agreed to assume and pay certain
indebtedness owing to the Company from SDB Offshore Ltd. and Santa Anita
Produce, Inc. As consideration for the assumption of the debt, Santa Anita and
Hector Lomeli, an owner of Santa Anita and SDB Offshore, granted irrevocable
proxies for their combined 4,259,254 common shares to Helen Gibbel, President of
the Painter Group, for purposes of voting on the above described stock split and
share issuance.
The final terms of the agreement between the Company and the Painter Group
will be determined shortly and voted upon at the annual shareholder meeting
which the Company expects to hold in mid-October. This transaction will result
in a change of control of the Company and, upon completion, the name of the
Company will be changed to USA Golf Corporation. The Company will continue to
provide real estate related financial services with the primary focus on golf
course properties.
25
<PAGE>
In July 1995, the Company also consented to the removal of its common stock
from the American Stock Exchange (AMEX). This action became necessary because
the Company no longer fully satisfied all the financial and market value
guidelines of the AMEX for continued listing. Management intends to develop a
market for its common stock with the NASDAQ over-the-counter market.
Although the Company reported a first half loss, it hopes to report more
favorable results in the third quarter. The improvement will be due primarily
to the operations of its mortgage operation. Long term interest rates continue
to be low and the Company has increased loan volume. Loans in process are up
significantly over last year and there is less competition in the industry.
This positive trend, combined with savings from the discontinued operations and
the results of the transaction with the Painter Group Corporation, lead to
management's expectation of better results.
Because of the nature of their activities, the Company and its subsidiaries
are subject to pending and threatened legal actions which arise out of the
normal course of business. In the opinion of management, the disposition of all
such matters will not have a material adverse effect on the consolidated
financial statements.
The Company does not know of any other demands, commitments, events or
uncertainties, that will result in decreased liquidity, except for the future
minimum lease payments and the repayment of debt as disclosed in footnote (7)
and (6), respectively, of the Consolidated Financial Statements.
The Company has no present significant commitments for capital
expenditures. Cash flows from operations may not be sufficient to fund current
expenses, although management believes that the third quarter change in
ownership, discussed above, will alleviate the immediate cash deficit and
ultimately restore net worth. However, it is not possible to predict that the
Company will have positive cash flow or net earnings in future periods.
26
<PAGE>
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TCS ENTERPRISES, INC.
---------------------
(Registrant)
Aug 8/95 /s/ Alan Painter
----------------- ------------------------------------------
Date Alan Painter
Chairman of the Board
Chief Executive Officer
9/7/95 /s/ Cheryl B. Dodds
----------------- ------------------------------------------
Date Cheryl B. Dodds
Chief Financial Officer
<PAGE>
TCS ENTERPRISES, INC. AND SUBSIDIARIES
EXHIBIT 11.1
COMPUTATION OF NET EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
June 30, 1995 June 30, 1995 June 30, 1994 June 30, 1994
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
PRIMARY:
Average shares outstanding 5,823,000 5,823,000 5,198,000 5,198,000
Dilutive common stock options
based on the treasury stock method -- -- -- --
Dilutive common stock warrants
based on the treasury stock method -- -- -- --
--------------- -------------- -------------- ---------------
5,823,000 5,823,000 5,198,000 5,198,000
--------------- -------------- -------------- ---------------
--------------- -------------- -------------- ---------------
Net loss ($108,000) ($345,000) ($1,671,000) ($2,689,000)
--------------- -------------- -------------- ---------------
--------------- -------------- -------------- ---------------
Per share loss ($0.02) ($0.06) ($0.32) ($0.52)
--------------- -------------- -------------- ---------------
--------------- -------------- -------------- ---------------
</TABLE>
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-QSB DATED JUNE 30, 1995
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 38
<SECURITIES> 0
<RECEIVABLES> 85
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,486
<PP&E> 174
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,191
<CURRENT-LIABILITIES> 3,763
<BONDS> 0
<COMMON> 10,317
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,191
<SALES> 0
<TOTAL-REVENUES> 1,385
<CGS> 0
<TOTAL-COSTS> 1,724
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (339)
<INCOME-TAX> 6
<INCOME-CONTINUING> (345)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (345)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
