<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 March 31, 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 March 31, 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 MARCH 31, 1995
INDEX
PART I
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
PART II
Item 6. Exhibits and Reports on Form 8-K 28
</TABLE>
(i)
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TCS ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
<TABLE>
<CAPTION>
March 31, 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 817,000 146,000
Accounts receivable 58,000 113,000
Current portion of notes receivable from related parties 278,000 278,000
Other current assets 157,000 195,000
---------------- -----------------
Total current assets 1,348,000 1,130,000
Property and equipment, net 196,000 229,000
Notes receivable from related parties, net of current portion 454,000 403,000
Noncurrent net assets of discontinued operations 0 67,000
Other assets, net 81,000 30,000
---------------- ----------------
$ 2,079,000 $ 1,859,000
================ ================
</TABLE>
(Continued)
1
<PAGE>
TCS ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, 1995 December 31, 1994
---------------- -----------------
(Unaudited) (Audited)
<S> <C> <C>
Current liabilities:
Cash overdraft $ 12,000 $ 25,000
Warehouse lines payable 796,000 143,000
Current portion of long-term debt 12,000 343,000
Accounts payable 1,003,000 1,006,000
Accrued payroll and related taxes 288,000 260,000
Accrued commissions 108,000 54,000
Current net liabilities of discontinued operations 424,000 383,000
---------------- -----------------
Total current liabilities 2,643,000 2,214,000
Long-term debt, net of current portion 61,000 33,000
---------------- -----------------
Total liabilities 2,704,000 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 10,214,000 10,214,000
Accumulated deficit (10,391,000) (10,154,000)
Less notes receivable from stockholders (448,000) (448,000)
---------------- -----------------
Total stockholders' equity (625,000) (388,000)
---------------- -----------------
$ 2,079,000 $ 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
-------------------------------------
Ended Ended
March 31, 1995 March 31, 1994
---------------- ----------------
<S> <C> <C>
Revenue:
Loan fees $ 346,000 $ 1,001,000
Gain on sale of servicing 35,000 256,000
Interest 43,000 116,000
Management fees 151,000 1,000
Loss from investments 0 (6,000)
Other 4,000 13,000
---------------- ----------------
579,000 1,381,000
---------------- ----------------
Expenses:
Salaries, wages and related taxes 331,000 719,000
Commissions 261,000 599,000
General and administrative 109,000 375,000
Promotion, entertainment and travel 8,000 41,000
Occupancy 94,000 112,000
Interest 13,000 75,000
---------------- ----------------
816,000 1,921,000
---------------- ----------------
Loss from continuing operations before taxes and
minority interest (237,000) (540,000)
Income Taxes 0 0
---------------- ----------------
Loss from continuing operations before minority interest (237,000) (540,000)
Minority interest in loss of subsidiary 0 45,000
---------------- ----------------
Loss from continuing operations (237,000) (495,000)
Discontinued operations, net of income tax:
Loss from discontinued operations 0 (523,000)
---------------- ----------------
Net loss $ (237,000) $ (1,018,000)
================ ================
</TABLE>
(Continued)
3
<PAGE>
TCS ENTERPRISES, INC., AND SUBSIDIARIES
Consolidated Statements of Operations, Continued
(Unaudited)
<TABLE>
<CAPTION>
Three Months
-------------------------------------
Ended Ended
March 31, 1995 March 31, 1994
---------------- ----------------
<S> <C> <C>
Loss per common share:
Continuing operations $ (0.04) $ (0.10)
Discontinued operations 0.00 (0.10)
---------------- ----------------
Net loss $ (0.04) $ (0.20)
================ ================
</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>
Three Months
-------------------------------------
Ended Ended
March 31, 1995 March 31, 1994
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations $ (237,000) $ (1,018,000)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 25,000 24,000
Loss from investments in partnerships 0 6,000
Minority interest in loss of subsidiary 0 (45,000)
Note receivable from related party (51,000) 0
Decrease (increase) in:
Mortgage loans held for sale (671,000) 4,070,000
Accounts receivable 55,000 (85,000)
Other current assets 38,000 84,000
Other assets (51,000) 49,000
Increase (decrease) in:
Accounts payable (3,000) 716,000
Accrued payroll and related taxes 28,000 67,000
Accrued commissions 54,000 (243,000)
---------------- ----------------
Net cash provided by (used in) continuing operations (813,000) 3,625,000
Net cash provided by (used in) discontinued operations 108,000 (452,000)
---------------- ----------------
Net cash provided by (used in) operating activities (705,000) 3,173,000
---------------- ----------------
Cash flows from investing activities:
Purchases of property & equipment 0 (20,000)
Disposal of property and equipment 8,000 0
Collection of notes receivable from related parties 0 9,000
Collection of notes receivable from stockholders 0 2,000
---------------- ----------------
Net cash provided by (used in) investing activities 8,000 (9,000)
---------------- ----------------
</TABLE>
(Continued)
5
<PAGE>
TCS ENTERPRISES, INC., AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(Unaudited)
<TABLE>
<CAPTION>
Three Months
-------------------------------------
Ended Ended
March 31, 1995 March 31, 1994
---------------- ----------------
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in warehouse lines payable 653,000 (3,956,000)
Proceeds from issuance of notes payable 28,000 0
Repayments of long-term debt (331,000) (20,000)
---------------- ----------------
Net cash provided by (used in) financing activities 350,000 (3,976,000)
---------------- ----------------
Net increase (decrease) in cash and cash equivalents (347,000) (812,000)
Cash and cash equivalents, beginning of period 373,000 1,093,000
---------------- ----------------
Cash and cash equivalents, end of period $ 26,000 $ 281,000
================ ================
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest $ 13,000 $ 86,000
Income taxes 0 0
</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 March
31, 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 March 31, 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 with the Company's
majority shareholder, as well as third parties; 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.
CHANGE IN CONTROL
In January, 1994, the Company's former Chairman and President sold
2,550,000 shares of common stock and warrants to purchase an additional 700,000
shares of the Company's common stock to Santa Anita Produce, Inc., an Arizona
corporation ("Santa Anita"). The total purchase price was $2,550,000, paid
through cancellation of
7
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indebtedness the shares, and the assumption by Santa Anita of certain other
debt incurred in connection with the Chairman's original acquisition of the
shares. As a result of this transaction, Santa Anita acquired control of the
Company.
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.
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 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
8
<PAGE>
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 March 31, 1995 and
December 31, 1994. The consolidated statements of operations are presented for
the three months ended March 31, 1995 and 1994. The consolidated statements of
cash flows are presented for the same periods.
The United States dollar is both the reporting currency and the functional
currency of the Company. During 1995 and 1994, no transactions were denominated
in foreign currencies.
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 three months ended March 31, 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 March 31, 1995 and the
consolidated results of operations for the three months ended March 31, 1995 and
1994 and its consolidated cash flows for the same period.
9
<PAGE>
(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.
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
10
<PAGE>
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 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 three
months or less to be cash and cash equivalents.
11
<PAGE>
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. As discussed in Note 1, 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 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
March 31, 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.
Beginning in July 1994, the Company receives a management fee of $50,000 per
month.
12
<PAGE>
During June, July and August of 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.
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 March 31, 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 $732,000 at March 31, 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 $36,000,
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
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<PAGE>
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
principally at 8.25%, 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 consolidated balance sheets. At March
31, 1995 and December 31, 1994, the outstanding principal amount of these notes
is $448,000.
(4) PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1995 and December 31, 1994 is comprised
of the following:
<TABLE>
<CAPTION>
Mar. 31, 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 1,359,000 1,376,000
------------- -------------
$ 196,000 $ 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.
14
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At March 31, 1995 and December 31, 1994, the Company had a warehouse line
of credit as follows:
<TABLE>
<CAPTION>
Mar. 31, 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) 796,000 143,000
------------- -------------
$ 796,000 $ 143,000
============= =============
</TABLE>
(6) LONG-TERM DEBT
Long-term debt at March 31, 1995 and December 31, 1994, is summarized as
follows:
<TABLE>
<CAPTION>
Mar. 31, 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 77,000 45,000
------------- -------------
77,000 376,000
Less: current portion (12,000) (343,000)
------------- -------------
Long-term debt, net of current portion $ 61,000 $ 33,000
============= =============
</TABLE>
15
<PAGE>
(7) COMMITMENTS AND CONTINGENCIES
The Company leases all of its office space under operating leases. At
March 31, 1995, the minimum rental payments due under the Company's leases are
as follows:
<TABLE>
<CAPTION>
<S> <C>
1995 $ 24,000
1996 3,000
----------
Total minimum lease obligations $ 27,000
==========
</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 three months ended March 31, 1995 and 1994 was $82,000 and
$140,000, 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.
(8) COMPENSATING BALANCE ARRANGEMENTS
The Company is required to maintain compensating balances for its warehouse
line and for certain debt. At March 31, 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
16
<PAGE>
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-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
17
<PAGE>
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 three months after the date of
termination.
At March 31, 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
18
<PAGE>
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 March 31,
1995, the following warrants were outstanding:
<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 $2,384,000 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
19
<PAGE>
net operating loss carryforwards are subject to certain annual limitations
due to the changes in majority ownership of the Company during fiscal years
1992 and 1994. 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>
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995, COMPARED
TO THREE MONTHS ENDED MARCH 31, 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.
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 alleviated
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 in order to become profitable and did not fit
the new business profile. The sale of substantially all of the assets of TCS
Ventura was completed in January 1995. Also in December, management entered
into negotiations to sell the assets of TCS Publishing, Inc. To date, the sale
has
21
<PAGE>
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 $802,000 or 58.1 percent for the three months
ended March 31, 1995 as compared to 1994. Total expenses decreased $1,105,000
or 57.5 percent for same period. The decrease in revenues was primarily due to
the decline in mortgage activity 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 $655,000 or 65.4% for the three months ended March 31,
1995 over 1994 and gains on sales of servicing decreased $221,000 or 86.3
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 $338,000 or 56.4% for the period 1995 over 1994.
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 $73,000 or 62.9 percent during the
three months ended March
22
<PAGE>
31, 1995 over 1994. Similarly, interest expense decreased $62,000 or 82.7%
for the same period.
TCS Real Estate Services, Inc. accepted delivery of the first completed
building in SIGLO Industrial Park in late 1994. This building is approximately
215,000 square feet in size yet represents only slightly more than ten percent
(10%) of the entire park, after all buildings are completed.
Management fees represent fees earned by TCS Real Estate Services, Inc. for
supervising the development of the industrial park, discussed above, as well as
managing and leasing the property. TCS Real Estate began receiving a monthly
management fee of $50,000 in July 1994.
Earnings from investments reflect the Company's share of Wateridge
Insurance Services which is accounted for under the equity method. Earnings
from investments increased $6,000 or 100.0% for the period 1995 over 1994 as
Wateridge Insurance reported a break-even for the period.
Salaries, wages and related taxes decreased $388,000 or 54.0%, general
and administrative expenses decreased $266,000 or 70.9 percent, and promotion,
entertainment and travel decreased $33,000 or 80.5 percent for the three months
ended March 31, 1995 as compared to the three months ended March 31, 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 $211,000 to a negative $1,295,000 at March 31, 1995
compared to a negative $1,084,000 at December 31, 1994. The use of working
capital was substantially due to operating activities.
23
<PAGE>
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 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 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. Management believes that although the note receivable
is past due, future collections on the note will improve the Company's current
financial position. If the Company is unsuccessful or delayed in collecting
payments due under the note, the Company may be required to further reduce
overhead, pursue sales of certain assets and seek additional financing to the
extent available and necessary.
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.
24
<PAGE>
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 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.
Also effective October 31, 1994, the Company sold TCS Environmental, Ltd.
in its entirety to a related party 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 March 31, 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
25
<PAGE>
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 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.
Although the Company reported a first quarter loss, it expects the second
quarter to report more favorable results. The improvement is 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 the significant operating cuts throughout the
Company 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. Management
26
<PAGE>
believes that collections on receivables from certain related parties will
increase and combined with the cuts made in operating expenses and future
profitability, this trend will reverse. However, it is not possible to
predict that the Company will have positive cash flow or net earnings in
future periods.
27
<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)
<TABLE>
<CAPTION>
<S> <C>
July 19, 1995 /s/ James B. Kylstad
--------------- ------------------------------------------------------
Date James B. Kylstad
Chairman of the Board
Chief Executive Officer
July 19, 1995 /s/ Cheryl B. Dodds
--------------- ------------------------------------------------------
Date Cheryl B. Dodds
Chief Financial Officer
</TABLE>
28
<PAGE>
EXHIBIT 11.1
TCS ENTERPRISES, INC. AND SUBSIDIARIES
Computation of Net Earnings (Loss) Per Share
<TABLE>
<CAPTION>
Three Months
-------------------------------------
Ended Ended
March 31, 1995 March 31, 1994
---------------- ----------------
<S> <C> <C>
PRIMARY:
Averages shares outstanding 5,823,000 5,198,000
Dilutive common stock options
based on the treasury stock method 0 0
Dilutive common stock warrants
based on the treasury stock method 0 0
---------------- ----------------
5,823,000 5,198,000
================ ================
Net earnings (loss) $ (237,000) $ (1,018,000)
================ ================
Net earnings (loss) per share $ (0.04) $ (0.20)
================ ================
</TABLE>
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
DATED MARCH 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 38
<SECURITIES> 0
<RECEIVABLES> 58
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,348
<PP&E> 196
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,079
<CURRENT-LIABILITIES> 2,643
<BONDS> 0
<COMMON> 10,214
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,079
<SALES> 0
<TOTAL-REVENUES> 579
<CGS> 0
<TOTAL-COSTS> 816
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (237)
<INCOME-TAX> 0
<INCOME-CONTINUING> (237)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (237)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
