UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee Required)
or
For the Fiscal Year Ended December 31, 1997
[ ] TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
Commission File No. 0-27210
Tech Electro Industries, Inc.
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(Name of Small Business Issuer in its Charter)
Texas 75-2408297
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State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
4300 Wiley Post Rd., Dallas, Texas 75244-2131
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Address of principal executive office Zip Code
Issuer's telephone number: (972) 239-7151
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
Common Stock, $0.01 Par Value
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(Title of Class)
Class A Preferred Stock, $1.00 Par Value
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(Title of Class)
Units, consisting of one (1) share of Common
Stock and one (1) share of Class A Preferred Stock
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(Title of Class)
Redeemable Class A Warrants
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(Title of Class)
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Check whether the issuer has (i) filed all reports required by Section 13 or
15(d) of the Exchange ACT during the past 12 months, and (ii) been subject to
such filing requirements for the past ninety (90) days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The Company's revenue for Fiscal Year ended December 31, 1997 was $6,666,837.
As of March 5, 1998, 3,765,139 shares of Common Stock were outstanding and the
aggregate market value of the Common Stock (based on the latest price of known
transactions on the Nasdaq Small Cap Issues Market) held by non-affiliates
(2,606,417 shares) was approximately $7,167,600.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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THIS DOCUMENT IS PREPARED AND FILED UNDER THE REQUIREMENTS OF
REGULATION S-B OF THE SECURITIES AND EXCHANGE COMMISSION, EFFECTIVE
JULY 31, 1992.
Part I
Item 1. Description of Business
General
Tech Electro Industries, Inc. ( "TEI" or the "Company" ) was incorporated
under the laws of the State of Texas on January 10, 1992, for the purpose of
acquiring 100% of the capital stock of Computer Components Corporation ( "CCC"
), its direct, wholly-owned subsidiary. The business carried on by CCC consists
of the business begun in 1963 under the name Dunbar Associates, Inc. ( "Dunbar"
), and the business carried on by CCC since its inception in 1968. Dunbar
initially operated as an "engineering representative" organization and in 1974
expanded into importing electronic components. Dunbar terminated over 90% of its
"representative" activities in 1984. CCC has, since its inception, operated as a
distributor of electronic components and, in 1980, expanded into the battery
assembly business. In 1991, Dunbar was merged into CCC. Mr. Craig D. La Taste is
the founder of both Dunbar and CCC, both of which are predecessors of the
Company.
In June, 1996 the Company acquired 100% of the issued and outstanding
shares of capital stock of Vary Brite Technologies, Inc., ("VBT") a Texas
corporation engaged in designing and engineering specialized products
incorporating recent advances in technologies related to light emitting diodes
("LED"), a lighting device used in industrial and commercial products.
On October 29, 1996 the Company incorporated Universal Battery Corporation
("UBC"), a Texas corporation, for the purpose of expanding into new markets for
batteries and battery products. TEI initially owned 67% of the issued and
outstanding capital shares of UBC with the balance owned by Randy Hardin, a
director and officer of UBC. In February 1997, the Company's interest in UBC was
transferred to CCC in accordance with the internal reorganization of the Company
described below.
In February, 1997 TEI, in an internal reorganization, transferred to CCC
all of its shares of VBT and UBC, as a result of which all present operations of
the Company are carried on by CCC and through, VBT, as a wholly-owned
subsidiary, and UBC, as a majority-owned subsidiary.
References to the Company refer to the combined operations of TEI, CCC, VBT
and UBC except where otherwise indicated.
On March 19, 1998, the Company completed the acquisition of a controlling
interest in US Computer Group, Inc., a computer maintenance, systems solution
and information technology partner headquartered in Farmingdale, NY with annual
revenues in excess of $25 million. See, "Recent Acquisition." The description of
the Company and its operations contained herein do not include any of the
operations of US Computer Group, Inc.
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Business of the Company and its Subsidiaries
The Company's operations have historically consisted of three operations:
(i) Sale of battery and battery assembly systems for use as "stand-by" power for
electronic and/or electrical systems that may encounter a loss of alternating
current ("AC") power from a cognizant utility; (ii) Stocking and sale of passive
and active electronic components, AC magnetic components and batteries from Asia
to original equipment manufacturers ("OEMs") and distributors in the United
States, Mexico and other countries; (iii) Stocking and sales of products, such
as AC transformers, ceramic sound sources, batteries and battery chargers,
utilized by "Security" market installers and distributors.
The Company is engaged in the business of importing, distributing and
selling electronic components used in the manufacture and sale of
high-technology products, such as computers, oil field equipment, medical
instrumentation and uninterruptable power supply ("UPS") systems, among others.
The Company is an authorized distributor, on a non-exclusive basis, for two
product groupings of Panasonic, USA ("Panasonic"), Varta, USA ("Varta") and
Duracell, USA. Varta, based in Germany, is a manufacturer of battery products.
Panasonic is a subsidiary of Matsushita Electric Corp. of Japan. The Company
also operates under noncontractual, long-term relationships (many exceeding 10
years) with other vendors located in Taiwan, Hong Kong, China, Korea and Japan
from whom it imports non-proprietary electronic components and batteries
marketed under its registered trademark, "NIKKO","UBC", "Tech Electro
Industries" and, occasionally, under the name of the Asian vendor. The Company
has also added, within the last two years, vendors of electro magnetic devices,
battery charging and electro mechanical devices from The People's Republic of
China.
With its acquisition of VBT in June 1996, the Company offers lighting
products developed for and utilizing LEDs in a distinctively packaged module
which offers advantages over traditional incandescent bulbs, primarily
consisting of increased reliability, lower power consumption and customized
light output.
The UBC division intends to sell batteries and battery products under the
name of Universal Battery Corporation in addition to the foregoing names.
Operations
Electronic Components
The Company imports and sells to OEM's and distributors the following
electronic components for use in the manufacture, repair and modification of
electronic equipment:
RESISTORS. Carbon film, metal film and metal oxide resistors in both
leaded and chip (surface mount) configurations.
CAPACITORS. Polyester, polypropylene and polycarbonate metalized film,
film and foil (inductive and non-inductive), aluminum electrolytic and
ceramic capacitors (leaded and chip).
RELAYS. AC and direct current ("DC") relays, usually for operations at
less than 20 amperes contact rating and 50 volts DC coil operation.
SOUND SOURCES. Piezo and inductive drive "sounders" for the production
of alarm signals in security systems.
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TRANSFORMERS. 120 volt AC household and business wall plug transformers
for reduction of power line voltage to low voltage (12 to 24 volts AC)
applications as utilized by household and business electrical devices.
Batteries
The Company sells and distributes, under agreements with Panasonic and
Varta, a broad line of industrial (as opposed to consumer-retail) batteries. The
batteries sold and distributed by the Company include sealed lead-acid,
nickel-cadmium, lithium, carbon-zinc, nickel metal hydride and alkaline
batteries. The Company also imports a line of sealed lead-acid batteries for
sale under the brand name of "NIKKO" and "Tech Electro Industries, Inc.," which
batteries are manufactured in Taiwan under a technology agreement between the
manufacturer and a Japanese battery company. In addition to the sales of
individual batteries, the Company sells "battery packs" consisting of assembled
groups of batteries combined physically and electrically into a single unit. The
Company is a Panasonic certified MOD center ("Modification Center") and, in that
capacity, creates custom-designed battery packs meeting specifications of
individual customers. In addition to providing the services necessary to produce
battery packs, such as welding and assembly, the Company supplies materials such
as wiring, connectors, buss bars and casings. CCC utilizes brands of batteries
other than Panasonic and Varta (such as Saft(R) and Eveready(R)) as requested by
customers. Completed battery packs are assembled to order in nearly all
instances and the Company maintains little or no inventory of completed packs,
although components for assembly of packs are maintained. The Company also
offers customers battery packs assembled in China to the customers'
specifications. The Company maintains a broad inventory of various sizes of
batteries and components utilized in battery package production to serve
customer needs for immediate pack design and assembly.
On October 29, 1996 the Company incorporated UBC to expand the Company's
operations into new markets for batteries and battery products. UBC is 67% owned
by CCC and 33% by Randy T. Hardin, Vice President of marketing for UBC. For the
past fourteen years Mr. Hardin has been engaged in marketing and sales in the
battery industry. CCC will continue to service its present battery customers and
UBC will develop new markets in the Cable Television ("CATV") industry,
motorcycle battery distributors, marine and electronics as well as other OEM
customers. UBC will also supply Panasonic products as well as battery packs
manufactured by CCC.
Commencing in February 1997, CCC was appointed as a distributor of
Panasonic-brand retail consumer batteries. CCC distributes retail batteries to a
variety of retail merchants and outlets.
Contract Manufacturing and Kitting Operations; Bonded Warehouse
Contract Manufacturing and Kitting Operations
For the past several years the Company has sold various types of electronic
components to United States-based customers with these goods being delivered,
"in bond," to the customer's facility in Mexico located on the Texas/Mexico
border for transit into Mexico, where local Mexican facilities acting as
subcontractors to the United States-based customers insert these components into
parted circuit ("PC") boards to customer specifications. After such assembly,
these parts are assembled into the PC boards and shipped back to the United
States. The customers own or lease these Mexican facilities which are utilized
for the manufacturing of parts or subparts which are generally subsequently
shipped back to the United States for assembly into the customer's final
product. The Mexican manufacturing process normally consists of the attachment
and electrical testing of various electronic components to PC boards in
accordance with detailed engineering specifications.
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Management of the Company believes that the Company has the ability to use
certain under-utilized resources to expand its business in this area, including:
available warehouse space; an in-house U.S. Customs' Class III warehouse
certification; direct computer "ABI" (Automatic Broker Interface) communications
with U.S. Customs' headquarters in Washington, D.C.; extensive knowledge of the
components market; site location on Addison Airport (an official U.S. "Port of
Entry", Port Code 5584); Customs' personnel and offices on Addison Airport and
aircraft availability contiguous to the Company's offices and hangars. The
combination of these resources allows the Company to facilitate delivery of raw
materials to Mexico and finished goods to Dallas. As a result of these
observations, the Company will seek to expand the sales of contract
manufacturing.
The Company accepts orders to purchase, store, collate and ship electronic
components and materials needed to manufacture certain electronic motor speed
devices. This kitting program is intended to consolidate the shipping of
materials, furnished by many different vendors, to the manufacturing facility so
as to enable the manufacturer to have all required materials on hand at the same
time.
The materials and components listed in the customer's bill-of-materials, as
well as the approved suppliers thereof, are typically supplied to the Company by
the customer. Upon purchasing the required materials for the project,
collecting, assembling and delivering the same to the pre-selected common
carrier for the transit of the products to Mexico, the Company submits
appropriate invoicing to the customer for the cost of all products purchased
from various vendors, plus a mark-up on the cost of the goods. In those
situations where the Company was the vendor, as opposed to an "outside vendor,"
that mark-up may be reduced.
The Company is currently pursuing a number of projects and believes that
kitting operations represent an opportunity for it to reach new customers.
Bonded Warehouse
A portion of the Company's warehousing space is licensed as a U.S. Customs,
Class III, Bonded Warehouse (approximately 23,000 cubic feet). This facility
enables the Company to process shipments of foreign made components into and out
of the United States duty-free. The Company can thus deliver foreign made
products to its American customers who manufacture in Mexico with no U.S.
customs duties applicable (a customer servicing) and with "overnight" shipments
from the Company's Dallas warehouse. The Company believes that this facility
affords the Company a significant competitive advantage in providing an
additional service to customers at limited additional cost.
The United States, Canada and Mexico are parties to the North American Free
Trade Agreement ("NAFTA"). NAFTA is intended to reduce trade barriers and may
result in reducing or eliminating import duties on goods produced in any of the
countries to the agreement and exported to any of the other countries. While the
Company has not realized material benefits from NAFTA, the Company believes that
NAFTA will ultimately have a beneficial effect on the Company's business,
primarily due to the growth of electronics manufacturing activities in Mexico
along the Southern border of the United States and adjacent to the Texas and New
Mexico borders.
U.S. Customs
The Company's computer is "modem" coupled to the U.S. Customs' computers in
Virginia via Automatic Broker Interface ("ABI"), which allows the Company now to
handle import and export customs functions that, in the past, required
employment of a local independent Customer Broker. The Company's offices and
buildings are physically adjacent to Addison Airport, Addison, Texas, which is
designated a "Port of Entry" by the U.S. Customs. A U.S. Custom's Port Director
is now stationed on Addison Airport in close proximity to the Company's offices.
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The Company's interface with U.S. Customs and its proximity to Addison
Airport allow the Company to realize savings in transit time of shipments of
foreign goods to the United States by five days to a week, as well as
significant reductions in preparation of paperwork for outbound shipments. The
Company believes these advantages assist the Company's in competing for
customers who are sensitive to time delays in shipments.
Marketing
The Company relies primarily on sales personnel and representatives, and
has undertaken only minimal advertising in trade publications. At December 31,
1997, the Company employed a direct sales force of eight outside salesmen and
six inside "customer service" representatives. This represents an increase of
twenty-five percent in the number of sales personnel from December 31, 1996. In
addition to Company personnel, the Company in 1997 utilized sales engineering
representatives, numbering six at year-end 1997, compared to four at December
31, 1996.
Machinery and Equipment
The Company, through CCC, VBT and UBC, owns the majority of the equipment
utilized in its design, manufacturing and assembly operations with the remaining
equipment leased by CCC, VBT and UBC. This includes specialized equipment such
as small electric welders, a sonic welder, computer aided design ("CAD")
computer programs, computer driven battery analyzers, battery chargers,
heat-shrink ovens, strip- chart recorders, timers, multimeters and hand tools
utilized in operations.
Additional manufacturing equipment, capable of automated epoxy dispensing
and automated "connector to wire" attachment, is also owned by the Company. The
Company's computer hardware (DEC Mainframe and multiple PC's and terminals
hardwired thereto) and software, required for its accounting, sales, inventory
and management controls is Company owned. Office furniture and equipment, as
necessary to operate the business, are also listed among Company assets.
The Company's machinery and equipment consists of readily available items
and can be replaced without significant cost or disruption to business
activities.
Customers
CCC's customer base is relatively broad. CCC sold goods to more than two
hundred fifty (250) different customers during the year ended December 31, 1997.
CCC maintains a computer data base of over one thousand active and potentially
active customers, all of whom are believed to be potential customers for CCC's
products. The Company does not believe that the loss of any single customer or
group of related customers would have a materially adverse effect on its
operations.
During the year ending December 31, 1997, VBT had sales in the amount of
$368,478.
UBC, which was incorporated on October 29, 1996, had sales of $1,491,567
during the year ended December 31, 1997.
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During the year ended December 31, 1997, two of the Company's customers
accounted for approximately 21% of the Company's total sales. The Company does
not expect a reduction in sales to these customers; however, no assurance can be
given that sales will remain at the same level.
Employees
The Company currently employs thirty-three employees, including five
clerical employees (one of whom is employed at VBT), nine inside sales personnel
(two of whom are employed at VBT), six employees in the assembly functions,
three warehousing employees and five outside sales personnel.
Technology
CCC's electronic products are all relatively "low" technology. The Company
believes these products are not subject to sudden obsolescence since they
represent basic elements common to a wide variety of existing electronic circuit
designs. At the same time, there can be no assurance that advances and changes
in technology, manufacturing processes and other factors will not affect the
market for the Company's products. The Company is a Panasonic certified
modification center.
CCC and UBC sell and distribute, under agreements with Panasonic, Varta and
Duracell, a broad line of industrial and consumer batteries. The types of
batteries sold distributed by CCC and UBC include sealed lead-acid,
nickel-cadmium, lithium, carbon-zinc, nickel metal hydride and alkaline
batteries. The Company also imports a line of sealed lead-acid, alkaline, carbon
zinc, nickel metal hydride, lithium and nickel-cadmium batteries for sale under
the brand name of "NIKKO" and "UBC". These batteries are manufactured in Asia,
typically under technology agreements with local manufacturers. The Company also
assembles "battery packs" consisting of assembled groups of batteries combined
physically and electrically into a single unit.
VBT's products are highly technical and involve both specialty design
engineering and techniques developed by VBT to construct LED modules which
maximize and customize the light output of LEDs at a reasonable price to the
customer.
Competition
The Company competes in sales of its batteries and battery packs with many
companies located in the United States, Mexico and Asia. In sales of its
electronic components, the Company faces competition from many large electronic
distributors as well as from factory direct sale outlets throughout the United
States as well as other importers and exporters in Asia. Many competitors of the
Company are substantially larger and have greater resources than the Company.
The Company does not consider itself a significant factor in the electronic
component and battery business.
Environmental Matters
The Company believes it is in material compliance with all relevant
federal, state, and local environmental regulations and does not expect to incur
any significant costs to maintain compliance with such regulations in the
foreseeable future.
Patents and Trademarks
Although the Company is the owner in Texas of the trademark "NIKKO" for
batteries and electronic components, that trademark is not regarded as essential
or necessary for the marketing of the Company's products. The Company does
depend, in part, on the patents and trademarks of its vendors and suppliers,
over which it has little control. It is possible that the loss of these marks,
or the deregulation of their value, could have an adverse effect on the
Company's business.
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Sources and Availability of Materials
With the exception of battery products and certain electronic components
described below, the Company purchases its raw materials, such as wire, metals
and packaging materials, from a number of local sources and is not dependent on
any single source for raw materials. Except as noted below, the Company believes
that the loss of any single supplier would not adversely affect the Company's
business. All raw materials utilized by the Company are readily available from
many sources.
The Company enjoys a close and beneficial non-exclusive relationship with a
single supplier of a substantial portion of its battery products, the Panasonic
Battery Sales Group of Matsushita Electric Corp. of America ("Panasonic"). The
Company is a certified Panasonic Modification Center for the production of
battery packs. Although the Company has established relationships with other
battery manufacturers and sells their products, the loss of this relationship
with Panasonic could have a material adverse effect on the Company.
In addition to the Company's relationship with Panasonic, Nippon Electric
Corporation is the Company's largest supplier of electronic component parts. The
loss of this supplier could have a material adverse effect on the Company. The
Company believes this supplier also sells component parts to the Company's
competitors.
Research and Development
During each of the last two Fiscal Years the Company did not expend in
excess of Ten Thousand Dollars ($10,000.00) on research and development of
products. During Fiscal Year 1997, VBT did not capitalize research, development
or engineering costs, and such costs were expensed during the period of their
occurrence.
Governmental Matters
Except for usual and customary business and tax licenses and permits, and
the licenses and permits described elsewhere in this Form 10-KSB, no
governmental approval is required for the principal products/services of
Company, nor does Company know of any existing or probable governmental
regulations affecting Company's activities.
Recent Acquisition
On March 19, 1998, Tech Electro Industries, Inc. (the "Company")
consummated the acquisition of newly-issued shares of common stock equaling,
after issuance, 51% of the issued and outstanding common stock of US Computer
Group, Inc. US Computer Group is a computer maintenance, systems solution and
information technology partner headquartered in Farmingdale, NY with annual
revenues in excess of $25 million.
The transaction was originally announced on December 19, 1997, at which
time the Company had agreed to purchase a 62% interest in US Computer Group from
Telstar Holdings Ltd. Since the date of that announcement, the Company, US
Computer Group and Telstar Holdings have entered into an Amended and Restated
Stock Purchase Agreement which was executed and consummated on March 19, 1998.
The purchase consideration for the interest in US Computer Group was $1 million,
paid in cash. In connection with the acquisition, US Computer Group issued to
Telstar Holdings shares of its newly authorized Series E Preferred Stock with a
stated value of $2,000,000 in consideration for the conversion of loans made by
Telstar Holdings to US Computer Group. The Company obtained the funds for the
acquisition through a private placement of shares pursuant to Regulation S of
the Securities Act of 1933, as amended, which was previously reported on Form
8-K.
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As part of this transaction, the Company has named three of the five
members to the Board of Directors of US Computer Group.
Impact of the Year 2000 Issue
Many computer systems currently record years in a two-digit format. Such
computer systems, if not modified, will be unable to properly recognize dates
beyond the year 1999. This inability to recognize the year 2000 is commonly
referred to as the "Year 2000 Issue".
The Company is in the process of identifying all significant applications
that will require modification to ensure Year 2000 compliance. The Company has
not yet prepared enhancements of the software in its older systems to the extent
that Year 2000 compliance requires a software modification; however the Company
intends to take such action if it determines that such action will be required
in its internal operations or requested by its customers. The Company currently
anticipates that the cost to the Company of such software enhancements,
including installation costs and related expenses, will total approximately
$50,000 to $100,000. This expense is not anticipated to be material to the
Company's financial position or future results of operations in any given year,
although there can be no assurance that presently unforeseen computer
programming difficulties will not arise.
Item 2. Description of Property
CCC and UBC occupy an industrial office building complex and parking
facility owned by La Taste Enterprises, a partnership of Craig D. La Taste, a
director and former President of the Company and currently president of CCC, and
members of his family, and leased to the Company. The Company utilizes the
entire property, which includes approximately 16,000 square feet of office and
warehouse building and 15,000 square feet of open fenced and paved parking and
storage areas. CCC has entered into a lease to expand its use of these premises
on adjacent land, which lease terminates on December 31, 2001, at a base rental
of $5,600 per month.
The building space includes approximately 4,000 square feet of office
space, 4,000 square feet of manufacturing and assembly space used in the
Company's battery pack business, with the balance of the space dedicated to
warehousing, storage, shipping and receiving operations. The premises occupied
by the Company, including the facilities used by CCC and UBC are adequate to
serve its present and foreseeable future needs.
VBT occupies in Garland, Texas (a suburb of Dallas) approximately 1,875
square feet of manufacturing engineering and office space which it leases from
an unaffiliated lessor for $1,310.00 per month. VBT currently leases this
property on a month-to-month basis, and believes that it will be able to
continue to utilize the facilities for the foreseeable future. While the space
is suitable for engineering and design and sample manufacturing, the Company and
VBT believe that this space is inadequate for manufacturing anticipated
production orders. VBT upon receipt of such orders will seek adequate facilities
which are readily obtainable at reasonable rental rates in the area. In the
absence of such requirements, VBT believes adequate space is readily available
to service its needs.
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TEI maintains administrative office space in Santa Monica, California,
consisting of approximately 300 square feet at a base monthly rental of $500 per
month on a month-to month basis.
The Company also maintains a representative office in Hong Kong for the
purpose of providing a liaison with its vendors and customers in Asia.
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Part II
Item 5. Market for Company's Common Equity and Related Stockholders Matters
The common stock of the Company commenced quotation on the OTC Bulletin
Board under the symbol "TEIL" in late December, 1992. Until the third quarter of
1995 no substantial public trading market had developed for the common stock of
the Company. Following the public offering of securities of the Company (See
below) in January, 1996, the common stock and other securities of the Company
commenced trading on the NASDAQ SMALL CAP ISSUES under the following listing
symbols:
NASDAQ Symbols
Units ................... TELU
Common Stock ............ TELE
Class A Preferred Stock . TELEP
Warrants ................ TELEW
In August, 1995 the stockholders of the Company approved a one (1) for six
(6) reverse split of the Company's Common Stock which became effective on
December 4, 1995. In connection with the reverse split, the par value of the
Common Stock was changed to $0.01 per share from $0.001 per share. As a result
of the reverse split, as of December 5, 1995 the Company had issued and
outstanding 1,088,275 shares of common capital stock, par value $0.01 per share.
In December 1995, two holders aggregating ownership of 130,010 shares of Common
Stock exchanged those shares of Common Stock for 65,000 shares of Class B
Preferred Stock, par value $1.00 per share.
On January 26, 1996 the Company consummated a publicly underwritten
offering of 300,000 Units, each Unit consisting of one share of Common Stock,
Par Value $0.01 ("Common Stock") and one share of Class A Preferred Stock, Par
Value $1.00 per share ("Preferred Stock"). The offering also included the sale
of 345,000 Redeemable Class A Warrants ("Warrants") (including 45,000 sold to
underwriters with the offering, and an additional 30,000 units, 30,000 warrants
sold to the underwriters in the offering at a price of $410.72 per Unit and
$0.13 per Warrant, pursuant to the Company's agreement with the Underwriter).
Until July 26, 1996, shares of the Common Stock and Preferred Stock comprising a
Unit were not separately transferable, but could only be traded as a Unit. The
Common Stock and Class A Preferred Stock may now be separately traded. Effective
January 26, 1997, each share of Class A Preferred Stock is convertible into two
shares of Common Stock, subject to adjustment under certain conditions. The
Company may require conversion of the Preferred Stock if the average closing bid
price of the Common Stock equals or exceeds $5.25, subject to adjustment, for 30
consecutive trading days. Dividends on the Preferred Stock accrue at the annual
rate of 36 3/4 cents per share and are payable quarterly in arrears on the last
day of March, June, October and December of each year. At the option of the
Company, dividends are payable either in cash or shares of Common Stock. The
number of shares of Common Stock to be issued is based on the market price of
the Common Stock on the next trading day following the record date for
determining shareholders entitled to receive such dividend. Fractional shares
are rounded up to whole shares. The liquidation preference applicable to each
share of the Preferred Stock is equal to the sum of (i) $5.25 and (ii) the
amount of accrued and unpaid dividends thereon.
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Simultaneously with the sale of the Units and Warrants described above, the
Company registered for public distribution an aggregate of 1,600,000 Redeemable
Class A Warrants. Each Warrant entitles the holder to purchase, at an exercise
price of $3.50, subject to adjustment, one share of Common Stock. The Warrants
are exercisable at any time commencing July 27, 1996 through January 26, 2000.
Commencing July 27, 1996 the Warrants are subject to redemption by the Company
for $0.10 per Warrant, upon 30 days' written notice, if the average closing bid
price of the Common Stock exceeds $5.25 per share (subject to adjustment in each
case) for any 30 consecutive trading days prior to the notice of redemption. On
December 9, 1997, the exercise of the warrants was reduced to $3.30 per share
based on the placement of $1,000,000 shares of common stock in October 1997
described below.
On February 12, 1997, the Company consummated the sale to six accredited
foreign investors an aggregate of 1,100,000 shares of common stock and options
to purchase for a period of thirteen (13) months an additional One Million
(1,000,000) shares of Common Stock at a price of $2.15 per share. The aggregate
purchase price for the shares and options was $1,870,000. The private sale was
conducted pursuant to Regulation S, as adopted by the Securities and Exchange
Commission. Placement and Acceptance, Inc., a British Virgin Islands
corporation, ("PAI") arranged the placement. PAI is controlled by Mr. William
Kim Wah Tan, the Company's Chairman of the Board, President and Chief Executive
Officer. PAI received no consideration for the placement. In March 1998, the
Company and the holders of the options agreed to extend the term of the options
issued pursuant to this offering to March 10, 1999, and to increase the exercise
price of the options to $2.50 per share, subject to adjustment in the case of
issuance of capital stock by the Company at below market prices.
In October 1997, the Company entered into an agreement with PAI to place an
additional 1,000,000 shares of Common Stock and options to purchase for a
one-year period an additional One Million (1,000,000) shares of Common Stock at
an exercise price of $1.75 per share, subject to adjustment in the case of the
issuance of capital stock by the Company at below market prices. The aggregate
purchase price for the stock and options was $1,600,000. PAI received a
commission of $112,000 upon consummation of the sale, which closed on December
12, 1997. The private sale was made to three accredited investors pursuant to
Regulation S, as in effect at the time of the sale. The Company anticipates that
the net proceeds of the placement of Common Stock and options to acquire Common
Stock will be used primarily to fund acquisitions and investments, and for
general working capital purposes.
-12-
<PAGE>
The following table sets forth the high and low prices of the Company's
common stock on a quarterly basis for the calendar years 1995, 1996 and 1997.
Calendar Period Common Stock Price
--------------- ------------------
High Low
1995: ---- -----
First Quarter ............................... $3.75 $2.25
Second Quarter ................................ $2.75 $0.75
Third Quarter ................................. $3.00 $1.08
Fourth Quarter ................................ $2.75 $1.50
1996:
First Quarter ................................. $4.00 $2.125
Second Quarter ................................ $1.875 $0.625
Third Quarter ................................. $1.50 $0.75
Fourth Quarter ................................ $2.25 $1.375
1997:
First Quarter ................................. $3.25 $1.625
Second Quarter................................. $2.75 $1.50
Third Quarter.................................. $2.50 $1.375
Fourth Quarter................................. $4.375 $1.625
No dividends have been paid on the Common Stock. Subsequent to January 31,
1996, the effective sale date of the Class A and Class B Preferred Stock, unless
all accrued and unpaid dividends on the Class A and Class B Preferred Stock have
been paid in cash or common stock for a dividend period, no dividends may be
declared or paid or set aside for payment or other distribution made upon the
Common Stock.
During Fiscal Year 1997, shareholders of record of the Class A and Class B
Preferred Stock on February 28, May 31, August 31 and December 15 of said year
were paid a dividend of nine (9) cents per share on the payment date for such
dividend period. Preferred Stock holders of both Class A and Class B of record
date February 28, 1998 will receive a dividend of approximately 0.04 shares of
Common Stock per share payable March 31, 1998.
The closing price of the Common Stock of the Company as reported on the
NASDAQ Small Cap Issues on March 31, 1998, by brokers making a market, was
$3.38.
As of March 31, 1998, there were approximately 575 beneficial holders of
the common stock of the Company.
-13-
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto, and is qualified in its
entirety by the foregoing and by the other more detailed financial information
included elsewhere in this Report.
Results of Operations
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996. The Company's sales for the
year ended December 31, 1997 (Fiscal 1997) were $6,666,837, an increase of 73.6%
from sales of $3,840,075 in the year ended December 31, 1996 (Fiscal 1996). The
increase in sales was attributable primarily to increased sales of the Company's
import products of approximately 27.5%, from $2,335,047 in Fiscal 1996 compared
to $2,975,618 in Fiscal 1997, which was due, in part, to an increase in sales
from the Company's batteries and battery assembly line of approximately 27.7%,
from $1,410,842 in Fiscal 1996 compared to $1,801,740 in Fiscal 1997.
Management of the Company believes the decrease in battery and battery
assembly sales in Fiscal 1997 was due to a decline in usage by existing
customers, and by failure of the Company to attract new customers to replace
those sales. During Fiscal 1997, the Company took several steps to enhance
marketing and sales of battery assembly products; however, it is not yet clear
whether those steps will result in significant improvement of sales of batteries
and battery assemblies.
A substantial portion of the increase in sales by the Company in the year
ended December 31, 1997 compared to the year ended December 31, 1996 were the
result of the first full year of operations of UBC, which recorded sales of
$1,491,567 during the year ended December 31, 1997. UBC had negligible sales in
the year ended December 31, 1996. In addition, CCC recorded sales of $4,806,792
during the year ended December 31, 1997 compared to approximately $3,840,000
during the year ended December 31, 1996, primarily from expanded marketing
activities.
The Company's gross profit margin in Fiscal 1997 decreased to 26.5% from
29.1% in Fiscal 1996. The decrease in gross profit margin was due largely to the
assumption by the Company of the distributorship of Panasonic battery products
in February 1997, the operations of which are conducted primarily by UBC. Under
its agreement to become a distributor of these products, the Company was
obligated to provide discounts and rebates at rates in excess of those normally
offered by the Company. The Company determined to accept these terms in order to
expand UBC's market penetration and to give UBC access to new opportunities. UBC
is no longer is obligated to provide these incentives and is revising its
product prices and terms; however, there can be no assurance that UBC will be
able to effect price increases and adjust terms without reducing its customer
base and impacting sales.
The Company monitors potential inventory adjustments on an ongoing basis
and increased its inventory allowance periodically throughout Fiscal 1997.
During Fiscal 1997, the Company increased its reserve for obsolete and
slow-moving inventory to $470,600, from $182,300 at December 31, 1996. A
substantial portion of this increased allowance was provided for in the last
three months of Fiscal 1997, and reflects the Company's decision to analyze its
inventory allowance on the basis of sales in recent periods. The Company
continually reviews its inventory allowance procedures and policies and will
continue to adjust allowances as appropriate.
VBT, a wholly owned subsidiary of the CCC, is engaged in design and
engineering specialized products incorporating recent advances in technologies
related to LED's, a lighting device used in industrial and commercial products.
During Fiscal 1997, VBT focused on developing new products and seeking new
market opportunities. For the year ended December 31, 1997, VBT contributed
sales of approximately $368,500 to the sales of the Company. Although there can
be no assurance that VBT will realize substantial sales in the foreseeable
future, the Company believes that VBT will have opportunity to effect sales in
1998 and subsequent years based on its development activities in Fiscal 1997.
VBT generated a loss of approximately $107,800 during the year ended December
31, 1997.
-14-
<PAGE>
On October 26, 1996, the Company formed a subsidiary corporation, UBC, for
the purpose of expanding into new markets for batteries and battery products.
During Fiscal 1997, UBC recorded substantial development and startup costs,
including substantial payroll expenses and purchases of inventory, as it
established personnel and systems to support anticipated sales. UBC generated a
loss of approximately $144,600 in Fiscal 1997.
On March 19, 1998, Tech Electro Industries, Inc. (the "Company")
consummated the acquisition of newly-issued shares of common stock equaling,
after issuance, 51% of the issued and outstanding common stock of US Computer
Group, Inc. US Computer Group a computer maintenance, systems solution and
information technology partner headquartered in Farmingdale, NY with annual
revenues in excess of $25 million.
The transaction was originally announced on December 19, 1997, at which
time the Company had agreed to purchase a 62% interest in US Computer Group from
Telstar Holdings Ltd. Since the date of that announcement, the Company, US
Computer Group and Telstar Holdings have entered into an Amended and Restated
Stock Purchase Agreement which was executed and consummated on March 19, 1998.
The purchase consideration for the interest in US Computer Group was $1 million,
paid in cash. In connection with the acquisition, US Computer Group issued to
Telstar Holdings shares of its newly authorized Series E Preferred Stock with a
stated value of $2,000,000 in consideration for the conversion of loans made by
Telstar Holdings to US Computer Group. The Company obtained the funds for the
acquisition through a private placement of shares pursuant to Regulation S of
the Securities Act of 1933, as amended, which was previously reported on Form
8-K.
General and administrative expenses for Fiscal 1997 increased to $2,886,132
from $1,308,176 in Fiscal 1996, due primarily to increased salaries and legal
costs, some of which are associated with expansion of the Company's operations,
including acquisition of US Computer Group, Inc., which was consummated in March
1998. Salaries paid by the Company increased to approximately $1,186,000 in the
year ended December 31, 1997 compared to $566,800 in the year ended December 31,
1996, an increase of approximately 109%. In addition, the Company paid $462,250
in non-cash compensation in the form of restricted stock grants to certain of
its senior execution. See Item 10. -- Execution of Compensation. Almost all of
the increase in salaries is associated with office employees, including
additional sales and clerical staff. Legal fees during the period ending
December 31, 1997 were approximately $157,800, an increase of 170% from legal
expenses of approximately $59,400 in the year ended December 31, 1996. The
increase in legal fees was due primarily to increased administrative and
regulatory burdens.
The Company generated additional interest income in Fiscal 1997 compared to
Fiscal 1996 as a result of investments of funds received in the Company's public
offering. See, "Market for the Company's Common Equity and Related Stockholders
Matters."
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995. The Company's sales for the
year ended December 31, 1996 (Fiscal 1996) were $3,840,075, an increase of 8.37%
from sales of $3,543,357 in the year ended December 31, 1995 (Fiscal 1995). The
increase in sales was attributable primarily to increased sales of the Company's
import products of approximately 16.3%, from $2,007,436 in Fiscal 1995 compared
-15-
<PAGE>
to $2,335,047 in Fiscal 1996, which was offset, in part, by a reduction in sales
from the Company's batteries and battery assembly line of approximately 3%, from
$1,454,934 in Fiscal 1995 compared to $1,410,842 in Fiscal 1996.
Management of the Company believes the decrease in battery and battery
assembly sales in Fiscal 1996 was due to a decline in usage by existing
customers, and by failure of the Company to attract new customers to replace
those sales. During Fiscal Year 1996, the Company took several steps to enhance
marketing and sales of battery assembly products; however, it is not yet clear
whether those steps will result in significant improvement of sales of batteries
and battery assemblies.
The increase in sales in Fiscal 1996 was impacted by the Company's decision
in Fiscal 1995 to emphasize the sale of imported passive and active electronic
components and imported batteries. These products generally bear a higher profit
margin, which the Company believes will, over time, generate greater sales and
profits. The Company continues to believe that increasing sales of import
products will, ultimately, produce greater sales and profits.
The Company's gross profit margin in Fiscal 1996 increased to 29.1% from
27.4% in Fiscal 1995. The increase in gross profit margin was due largely to the
increase in the gross profit margin of import products, which increased from
26.3% in Fiscal 1995 to 29% in Fiscal 1996, as well as an increase in the gross
margin of batteries and battery assemblies, which increased from 25.4% in Fiscal
1995 to 27.7% in Fiscal 1996.
The Company monitors potential inventory adjustments on an ongoing basis
and increased its inventory allowance periodically throughout Fiscal 1996.
During Fiscal 1996, the Company increased its reserve for obsolete and
slow-moving inventory to $182,300, from $43,500 at December 31, 1995. A
substantial portion of this increase allowance was provided in the last three
months of Fiscal 1996. The Company is actively reviewing its inventory allowance
procedures and policies and will adjust allowances as appropriate.
In June, 1996 the Company acquired 100% of the issued and outstanding
shares of capital stock of VBT a Texas corporation engaged in design and
engineering specialized products incorporating recent advances in technologies
related to LED's, a lighting device used in industrial and commercial products.
During Fiscal 1996, VBT contributed only marginally to the sales of the Company.
On October 29, 1996 the Company formed a subsidiary corporation, UBC, for
the purpose of expanding into new markets for batteries and battery products.
UBC generated a loss of approximately $38,000 in Fiscal 1996.
General and administrative expenses for Fiscal 1996 increased to $1,308,176
from $838,111 in Fiscal 1995, due primarily to legal, accounting and related
costs associated with expansion of the Company's operations, including
acquisition of VBT and formation of UBC, additional salaries and overhead
requirements relating to VBT and UBC, as well as substantially increased
advertising and marketing expenditures.
The Company realized additional interest income in Fiscal 1996 compared to
Fiscal 1995 as a result of investments of funds received in the Company's public
offering. See, "Market for the Company's Common Equity and Related Stockholders
Matters."
-16-
<PAGE>
Liquidity and Capital Resources
The Company maintains a large inventory of products for off-the-shelf sales
to its customers. In addition, many of the Company's overseas vendors require
advance payments on inventory shipments. The combination of these factors had
historically caused the Company to seek working capital through bank and
shareholder loans. In order to reduce reliance on borrowings and in order to
generate additional funds for expansion of operations, marketing and
advertising, the Company consummated a publicly underwritten offering of
securities in January 1996 for which the Company raised $2,043,891 (including
funds from the sale of warrants), net of offering and other costs of $465,024.
In addition, in February 1997, the Company consummated a private sale of
securities to six accredited foreign investors, from which it raised $1,870,000
by the Company, and in December 1997, a private sale of securities to three
accredited investors, from which it raised $1,600,000, in each case prior to
expenses. See, "Market for the Company's Common Equity and Related Stockholders
Matters."
Net cash used by operating activities was $1,627,283 in Fiscal 1997,
compared to net cash used by operating activities of $658,029 for Fiscal 1996.
The increase in cash used by operations in Fiscal 1997 was mainly due to
increased purchases of inventory, and increased general and administrative
expenses associated with the Company's expansion, as well as the payment of
bonuses to key employees of CCC.
During the year ended December 31, 1997, the Company realized $3,339,500
from the sale of common stock and, at December 31, 1997, had utilized $450,000
of its existing line of credit to purchase inventory and supplies. During the
year ended December 31, 1997, the Company expended $592,772 to repay bank loans
and to repay loans from affiliates, and paid $100,684 in dividends on its
preferred stock. As a result of these activities, the Company recorded net cash
provided by financing activities of $3,072,044 in the year ended December 31,
1997. The Company utilized $500,000 of cash in Fiscal 1997 as a deposit in the
acquisition of US Computer Group, Inc., and utilized $320,000 to extend a loan
to the holder of the Company's Series B Preferred Stock. This loan matures on
September 5. 1998, and is secured by marketable securities. During Fiscal 1997,
the Company realized approximately $1,156,000 in cash and cash equivalents from
the maturity of certificates of deposit and sales of marketable securities.
During Fiscal 1996, the Company used funds of $32,220 to pay down loans
from banks and shareholders. In addition, as noted above, the Company raised
$2,009,976 from the sale of common and preferred stock, and the Company also
raised $93,915 from the sale of warrants. The Company also paid $109,500 in
dividends. These activities resulted in net cash provided by financing
activities of $1,963,671. A significant portion of cash used in Fiscal 1996,
$1,012,704, which was used to purchase marketable securities, principally
treasury securities and certificates of deposit, resulted from cash generated in
its public offering.
At December 31, 1996, the Company had net working capital of $2,487,945,
which had increased by year end December 31, 1997 to $3,929,244. This increase
was primarily a result of the consummation of two private placements of common
stock under Regulation S which were consummated in February and in December,
respectively. See, "Market for Common Equity and Related Stockholder Matters."
The Company paid in full on March 31, 1997 a loan of $200,000 due to
NationsBank Texas, N.A. This note was secured by a $214,336 certificate of
deposit as well as a personal guarantee. In addition, the Company owed at
December 31, 1997 $425,000 under a $750,000 line of credit at Texas Central
Bank, secured by inventory and automotive equipment. This loan matures on June
30, 1998.
-17-
<PAGE>
At December 31, 1996, the Company owed an aggregate of $245,000 to the
President of the Company, his wife and a family Partnership. These unsecured
notes were due on March 31, 1997 and were repaid on that date.
In December 1997, the Company announced that it had entered into an
agreement to acquire a controlling interest in U.S. Computer Group, Inc.
("USCG") a New York corporation specializing in the design, installation and
maintenance of computer systems and networks. The Company and USCG consummated
the transaction on March 19, 1998. As part of the transaction, the Company
invested $1,000,000 in USCG, the funds for which were obtained from a private
placement to three foreign accredited investors in December 1997. See,
"Description of Business - Recent Acquisition" and "Market for the Company's
Common Equity and Related Stockholder Matters."
Forward-Looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important factors could cause the Company's actual results to differ
materially from those projected in forward-looking statements made by, or on
behalf of, the Company:
-- Factors related to increased competition from existing and new
competitors, including price reductions and increased spending on marketing and
product development; and limitations on the Company's opportunities to enter
into and/or renew agreements with vendors and customers.
-- The Company's inability to manage its growth and to adapt its
administrative, operational and financial control systems to the needs of the
expanded entity; and the failure of management to anticipate, respond to and
manage changing business conditions.
-- The failure of the Company or its partners to successfully utilize
international markets; and risks inherent in doing business on an international
level, such as laws governing content that differ greatly from those in the
U.S., unexpected changes in regulatory requirements, political risks, export
restrictions, export controls relating to technology, tariffs and other trade
barriers, fluctuations in currency exchange rates, issues regarding intellectual
property and potentially adverse tax consequences.
-- The amount and rate of growth in the Company's marketing and general and
administrative expenses; the implementation of additional pricing programs; and
the impact of unusual items resulting from the Company's ongoing evaluation of
its business strategies, asset valuations and organizational structures.
-- Difficulties or delays in the development, production, testing and
marketing of products, including, but not limited to, a failure to ship new
products and technologies when anticipated.
-- The acquisition of businesses, fixed assets and other assets and
acquisition related risks, including successful integration and management of
acquired technology, operations and personnel, the loss of key employees of the
acquired companies, and diversion of management attention from other ongoing
business concerns; the making or incurring of any expenditures and expenses; and
any revaluation of assets or related expenses.
-- The ability of the Company to diversify its sources of revenue through
the introduction of new products and services and through the development of new
revenue sources.
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<PAGE>
-- The effects of, and changes in, trade, monetary and fiscal policies,
laws and regulations, other activities of governments, agencies and similar
organizations, and social and economic conditions, such as trade restrictions or
prohibitions, inflation and monetary fluctuations, import and other charges, or
federal, state, local and other taxes.
-- The Company's continued ability to attract and retain skilled and
qualified personnel.
-- Adoption of new, or changes in, accounting policies, practices and
estimates and the application of such policies, practices and estimates.
-- The effects of any activities of parties with which the Company has an
agreement or understanding, including any issues affecting any investment or
joint venture in which the Company has an investment; the amount, type and cost
of the financing which the Company has, and any changes to that financing.
Year 2000 Compliance and Costs
The Company is in the process of identifying operating and application
software challenges related to the year 2000. The Company has not yet prepared
enhancements of the software in its older systems to the extent that Year 2000
compliance requires a software modification; however the Company intends to take
such action if it determines that such action will be required in its internal
operations or requested by its customers. The Company currently anticipates that
the cost to the Company of such software enhancements, including installation
costs and related expenses, will total approximately $50,000 to $100,000. This
expense is not anticipated to be material to the Company's financial position or
future results of operations in any given year, although there can be no
assurance that presently unforeseen computer programming difficulties will not
arise.
Item 7. Financial Statements
Information required by this item appears in the Consolidated Financial
Statements and Report of Independent Certified Public Accountants of Tech
Electro Industries, Inc. and Subsidiaries contained herein.
Item 8. Change in and Disagreement with Accountants on Accounting and Financial
Disclosure
On February 13, 1998, the Company retained King Griffin & Adamson P.C. as
its independent public accountants. The engagement of King Griffin & Adamson
P.C. was approved by the Company's Board of Directors. The Company had announced
on Form 8-K filed on June 27, 1997, that it had engaged Deloitte & Touche, LLP;
however, the Company was never accepted as a client by Deloitte & Touche, LLP,
and the Company has determined not to retain Deloitte & Touche, LLP as its
independent public accountants. Deloitte & Touche, LLP has not audited any
financial statements nor reviewed any interim financial information of the
Company or any subsidiary of the Company, nor has the Company consulted with
Deloitte & Touche, LLP as to any accounting principles or practices, financial
statements or disclosures, or auditing scopes or procedures, except for a brief
consultation ($3,400) in coordination with King Griffin & Adamson P.C. regarding
financial statement disclosure.
As previously disclosed, King Griffin & Adamson P.C., and its predecessor,
King, Burns & Company, P.C. audited the Company's financial statements for the
fiscal years ended December 31, 1996 and 1995. For the Company's fiscal years
ended December 31, 1996 and 1995, the financial statements did not contain an
adverse opinion or a disclaimer of opinion, nor were they qualified or modified
as to uncertainty, audit scope, or accounting principles by King Griffin &
Adamson P.C., or its predecessor King, Burns & Company, P.C.
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<PAGE>
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons
(a) At December 31, 1997 the following persons served as
directors of Company:
Name and Age Position with Company Director Since
------------ --------------------- --------------
William Kim Wah Tan (55) Chairman of the Board, 1997
President, Chief Executive
Officer and Director
Sadasuke Gomi (26) Vice President, Secretary 1997
and Director (1)
Kim Yeow Tan (58) Director 1997
Steven E. Scott (49) Executive Vice President 1997
and Director
Ian Colin Edmonds (25) Director 1997
______________________
(1) Mr. Gomi served as a Corporate Secretary of TEI until his resignation in
February 1998.
All directors of Company are elected at the annual shareholder meeting and
serve as such directors until the next annual meeting of shareholders. Directors
may be re-elected at such succeeding annual meeting so as to succeed themselves.
All employees of Company who are also directors do not receive compensation for
serving as such directors. Outside (non-employee) directors receive Five Hundred
Dollars ($500.00) compensation for attendance at director meetings.
(b) Executive Officers of Company:
William Kim Wah Tan was elected Chairman of the Board, President, Chief
Executive Officer and director of the Company on February 11, 1997.
Kim Yeow Tan was elected director and Vice-President of the Company on
February 11, 1997. Mr. Kim Yeow Tan resigned as Vice-President of the Company in
July 1997.
Sadasuke Gomi was elected director, Vice-President, and Secretary of the
Company on February 11, 1997. Mr. Gomi resigned as Secretary of the Company on
February 16, 1998.
Steven Scott was appointed Executive Vice President of the Company in May
1997. He was elected a director of the Company in July 1997.
David Kaye was appointed Chief Financial Officer of the Company in January
1998.
Mee Mee Tan was appointed Secretary of the Company in February 1998. Ms.
Tan is the daughter of Mr. Kim Wah Tan.
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<PAGE>
Craig D. La Taste, (71), served as Chairman of the Board, President and
Chief Executive Officer of the Company throughout Fiscal 1996. He resigned as
Chairman of the Board, President and Chief Executive Officer of the Company on
February 11, 1997. He was replaced in these offices by Mr. William Kim Wah Tan.
Mr. La Taste is President and a director of CCC, VBT and UBC.
(c) Significant and Key Employees:
Julie A. Sansom-Reese, (35) Chief Financial Officer of CCC.
Randy Hardin (37) Vice-President of UBC.
Jim Thompson (59) Vice-President of VBT.
Bernard Silverman (43) Vice-President of VBT.
(d) Business Experience:
WILLIAM KIM WAH TAN, Chairman of the Board, Chief Executive Officer,
President and director. For the past twenty years, Mr. William Kim Wah Tan has
been active as an entrepreneur in the fields of finance, general insurance,
property development and management. Mr. William Kim Wah Tan has held senior
management positions in a number of financing, insurance, textile, property
development and related businesses. He is the brother of Mr. Kim Yeow Tan.
KIM YEOW TAN, Vice-President and director. Mr. Kim Yeow Tan is a graduate
of the Malayan Teachers Training College and holds a Bachelor of Science Degree
in Business Administration from Century University, United States. For the past
fifteen years, Mr. Kim Yeow Tan has been active as an entrepreneur in the fields
of finance, general insurance, property development and management. Mr. Kim Yeow
Tan has held senior management positions in finance companies, insurance
companies, textile and property development and related businesses. He is the
brother of Mr. William Kim Wah Tan.
SADASUKE GOMI, director. Mr. Gomi, age 26, is a graduate of Mejii
University in Japan, where he received a bachelor's degree in commerce. Mr.
Gomi, in addition to serving as Corporate Secretary, also serves as a Vice
President and director of the Company.
STEVEN SCOTT, Executive Vice President and a director of the Company. Prior
to joining the Company, Mr. Scott, age 49, was a Senior Vice President for Sales
at Dean Witter Reynolds Incorporated, a broker-dealer and investment banker from
November 1995 through March 1997. Prior to that position, he served as a Senior
Vice President - Sales at Prudential Securities from June 1994 to November 1997,
and as a Senior Vice President - Sales for H.J. Meyers & Co., Inc. prior to June
1994. Mr. Scott was appointed Executive Vice President in May 1997 and was
elected a director of the Company in July 1997.
IAN COLIN EDMONDS, director. Mr Edmonds, age 25, is a graduate of the
University of Denver, where he received a bachelors degree in June, 1996.
Following graduation and through December 1997, he was assistant product manager
at Information Handling Services in Denver, Colorado. Mr. Edmonds has served as
a director of the Company since July 1997.
CRAIG D. LA TASTE, President and director, CCC. Mr. La Taste is 71 years
old, and was born in Dallas, Texas. Mr. La Taste received a public school
education in Dallas and earned a BSEE degree from Southern Methodist University,
Dallas, Texas. From 1963 to July, 1991, Mr. La Taste was President of Dunbar
Associates, Inc., a Dallas, Texas-based electronic components sales firm, which
merged into CCC. From 1985 to the present, Mr. La Taste has served as President
and director of CCC. Mr. La Taste is also President and a director of VBT and
UBC.
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<PAGE>
JULIE A. SANSOM-REESE, Treasurer, CCC. Ms. Sansom-Reese, aged 35, was born
in Midland, Texas, and received a public school education in Odessa, Texas. Ms.
Sansom-Reese attended Odessa Junior College, Odessa, Texas, and the University
of Texas of the Permian Basin, Odessa, Texas. Ms. Sansom- Reese earned a B.A.
degree in Business from Texas Tech University, Lubbock, Texas. Since August,
1986, Ms. Sansom-Reese has served as Comptroller and Treasurer of Computer
Components Corporation, the Company's subsidiary.
DAVID KAYE, Chief Financial Officer. Mr. Kaye, age 61, is a certified
public accountant and served as President and Chairman of the Board of Kaye
Kotts Associates, Inc., a tax mediation firm, from 1989 to February 1998, when
the firm ceased operations. Mr. Kaye currently operates IRS Solutions, a tax
mediation firm, in addition to serving as Chief Financial officer of the
Company. Kaye, Kotts & Associates, Inc., filed for protection under Chapter 11
(reorganization) of the federal bankruptcy laws, which case was converted to a
chapter 7 (liquidation) in February 1998.
MEE MEE TAN, age 22, is a graduate of the University of Denver majoring in
marketing. She is the daughter of Mr. William Kim Wah Tan.
No family relationship exist among any of the executive officers or
directors of Company or persons nominated or chosen to become directors or
executive officers, except that Messrs. Kim Yeow Tan and William Kim Wah Tan are
brothers, and Mee Mee Tan is the daughter of Mr. William Kim Wah Tan.
Item 10. Executive Compensation
The following table sets forth the aggregate cash compensation paid by the
Company during its year ended December 31, 1997, to the CEO of the Company and
each of the Company's executive officers whose total cash compensation from the
Company exceeded $100,000, and to all executive officers as a group.
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<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term Compensation
---------------------------------------------------------
Annual Compensation Awards Payouts
------------------------------------- ---------------------------------------------------------
Name and Fiscal Year Salary ($) Bonus ($) Other Annual Restricted Securities LTIP All other
Principal Ended Compensation stock Underlying Payouts compen-
Position December ($)(1) award(s) ($) Options/SAR's ($) sation ($)
31 (#)
- --------- ----------- ---------- -------- ------------ ----------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William Kim 1997 0 0 0 $393,750(2) 100,000(2) 0 0
Wah Tan
Chairman of
the Board,
President and
Chief
Executive
Officer
1996 N/A N/A N/A N/A N/A N/A N/A
1995 N/A N/A N/A N/A N/A N/A N/A
Craig D. La 1997 $75,000 $50,000 $1,391 0 0 0 0
Taste
President,
Computer
Components
Corporation*
1996 $60,000 0 $4,649 0 35,000 $99,651 0
1995 $41,999.89 0 $1,774 0 0 0 0
Steven Scott 1997 $75,000 0 0 $112,500(3) 50,000(2) 0 0
Executive
Vice
President
and Director
1996 N/A N/A N/A N/A N/A N/A N/A
1995 N/A N/A N/A N/A N/A N/A N/A
________________________
</TABLE>
[FN]
*Mr. La Taste served as Chairman of the Board, President and Chief Executive
Officer of TEI until February 11, 1997.
(1) Represents non-cash compensation in the form of use of a car and related
expenses and life insurance.
(2) In February 1997, the Company agreed to pay Mr. Tan $10,000 per month for
services as the Company's Chairman of the Board, President and Chief Executive
Officer. Mr. Tan agreed to accrue such salary and did not receive any cash
compensation in fiscal 1997. On February 20, 1998, the Company issued to Mr. Tan
100,000 shares of common stock, valued at $2.25 per share, and compen sation for
services rendered to the Company, and an additional 75,000 shares of Common
Stock in repayment of expenses and advances incurred by Mr. Tan on behalf of the
Company. Concurrently with the issuance of the foregoing shares, the Company
granted to Mr. Tan options to acquire 100,000 shares of common stock, which
options are exercisable over a period of two years from the date of issuance, at
an exercise price of $5.00 per share.
(3) On February 20, 1998, the Company issued to Mr. Steven Scott, Executive Vice
President of the Company, 50,000 shares of common stock, valued at $2.25 per
share, as consideration for services rendered to the Company. Concurrently with
the issuance of the foregoing shares, the Company granted to Mr. Scott options
-23-
<PAGE>
to acquire an additional 50,000 shares of common stock, exercisable over a
period of two years from the date of issuance, at an exercise price of $5.00.
</FN>
On February 11, 1997, CCC and Craig D. La Taste entered into an employment
agreement replacing an agreement previously entered into by the Company and Mr.
La Taste on February 1, 1996. The Agreement has a term commencing on January 1,
1997 and terminating on December 31, 2002, and provides for, among other things,
minimum compensation of $75,000 during the year ending December 31, 1997, and
rising to $120,000 per year during the years ending December 31, 2000 and 2001.
The Agreement also provides that if Mr. La Taste's employment is terminated by
CCC without cause, Mr. La Taste will be entitled to receive the amount remaining
unpaid for the full term of the Agreement, plus an amount equal to twice that
sum.
Deferred Compensation
In 1981, Dunbar Associates, Inc. established a non-qualified deferred
compensation plan for the benefit of its corporate officers. Computer Components
Corporation assumed such liability upon the merger with Dunbar Associates, Inc.
The accrued benefits under such plan were payable to Craig D. La Taste, the
Company's Chairman of the Board, President and Chief Executive Officer through
Fiscal 1996. The amount accrued under such plan at December 31, 1995 was
$99,651. Such amount was paid to Mr. La Taste on December 10, 1996. There were
no contributions to the plan during the year ended December 31, 1997.
Incentive Stock Option Plans
1995 INCENTIVE STOCK OPTION PLAN. On August 16, 1995, shareholders of the
Company adopted the 1995 Incentive Stock Option Plan (the "Plan") covering
125,000 shares of Common Stock of the Company. Under the Plan, the Board of
Directors may grant to officers and key employees of the Company "incentive
stock options" (intended to qualify as such under the provisions of Section 422
of the Internal Revenue Code of 1986, as amended) to purchase the number of
shares of Common Stock covered by such options through December 31, 1996. During
Fiscal 1996 119,000 options were granted under the Plan. No options were granted
under the Plan in Fiscal 1997.
1997 INCENTIVE STOCK OPTION PLAN. On July 12, 1996 the Company's Board of
Directors approved and adopted the 1997 Incentive Stock Option Plan for an
aggregate of 250,000 shares of common stock. The 1997 Incentive Stock Option
Plan was adopted by the Shareholders of the Company at its annual meeting on
July 18, 1997. No options have been granted under the 1997 Plan. The 1997 Plan
is substantially identical to the 1995 Plan except as to the number of options
(250,000) and the expiration date of granting of options under the 1997 Plan is
December 31, 1999. The 1997 Plan was ratified at the Company's annual meeting of
shareholders in July 1997.
The Company did not grant any options under either the 1997 Plan or the
1995 Plan in fiscal 1997.
The Board of Directors will administer the Plans and have the power to
determine eligibility to receive options, the terms of any options including the
exercise price, the number of shares subject to the options, the vesting
schedule and the term of any such options. The exercise price of all options
granted under the Plan must be at least equal to the fair market value of the
shares of Common Stock on the date of grant. For those holders of Common Stock
possessing more than 10% of the voting power of the Company's outstanding Common
Stock, the exercise price of any option granted must equal at least 110% of the
fair market value on the grant date and the maximum term of the option must not
exceed five years. The terms of all other options granted under the Plan may not
exceed 10 years.
-24-
<PAGE>
The Company has not adopted any other deferred compensation or retirement
program for its employees. It may in the future adopt a pension plan, profit
sharing plan, employee stock ownership plan, stock bonus or some other deferred
compensation and/or retirement program.
Item 11. Security Ownership of Certain Beneficial Owners and Management
(a) The following table sets forth, as of the Record Date, the only persons
known to the Company to be the beneficial owners of more than 5% of the
Company's Common Stock, Series A Stock, and Series B Stock:
<TABLE>
<CAPTION>
Common Series A Series B
Stock Stock Stock
----------- ----------- -----------
Amount Amount Amount
and and and
Nature of Nature of Nature of % of
Beneficial % of Beneficial % of Beneficial % of Voting
Name and Address Ownership(1) Class(2) Ownership(1) Class(2) Ownership(1) Class(2) Power(3)
- ---------------- ------------ -------- ------------ -------- ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
William Kim Wah 465,000 11.59% 5,000 1.78% 0 0 10.37%
Tan Direct and (through
No. 18 Jalan Sri Indirect(4) ownership of
Semantan 1 5,000 units)
Damansara Heights
50490
Kuala Lumpur
Malaysia
Craig D. La Taste 433,722 11.37%
4300 Wiley Post Rd. Direct(5) 0 0 0 0 9.67%
Dallas, TX 75244
USA
Synergy System 385,000 10.01%
Limited Direct(6) 0 0 0 0 8.58%
3A Lauderdale Road
Maida Vale
London W9 1LT
United Kingdom
Equator Holdings, 385,000 10.01%
Inc. Direct(6) 0 0 0 0 8.58%
Block 126 #19-372
Bukit Merah View
Singapore 151126
Fleet Security 385,000 10.01%
Investment Ltd. Direct(6) 0 0 0 0 8.58%
P.O. Box 901
Road Town
British Virgin
Islands
</TABLE>
-25-
<PAGE>
<TABLE>
<CAPTION>
Common Series A Series B
Stock Stock Stock
------------ ------------ ------------
Amount Amount Amount
and and and
Nature of Nature of Nature of % of
Beneficial % of Beneficial % of Beneficial % of Voting
Name and Address Ownership(1) Class(2) Ownership(1) Class(2) Ownership(1) Class(2) Power(3)
- ---------------- ------------ -------- ------------ -------- ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Asean Broker 385,000 10.01% 0 0 0 0 8.58%
Limited Direct(6)
Flat 1, 51 Queens
Gate Terrace
London, SW7 5PL
United Kingdom
Eurasia Securities, 385,000 10.01%
Ltd. Direct(6) 0 0 0 0 8.58%
No. 11 Jalan
Medang
Bukit Bandaraya
59100 Kuala
Lumpur
Malaysia
Jason Tan Highway 668,000(7) 17.47% 0 0 0 0 14.89%
Wisma Cosway #12-
02, Jln. Raja
Chulan
50200 Kuala
Lumpur
Malaysia
Wooi Hou Tan 666,000(8) 17.47% 0 0 0 0 14.89%
Fikrst Floor Flat
53 Gloucester Road
London, England
SW74QN
United Kingdom
Mutsuko Gomi 666,000(8) 17.47% 0 0 0 0 14.89%
1367-31 Kawana Ito-
Shi
Japan 414
</TABLE>
________________________
[FN]
(1) Except as otherwise indicated and subject to applicable community
property and similar laws, the Company assumes that each named person
has the sole voting and investment power with respect to his or her
shares (other than shares subject to options).
(2) Percent of class is based on the number of shares outstanding on the
Record Date. In addition, shares which a person had the right to
acquire within 60 days are also deemed outstanding in calculating the
percentage ownership of the person but not deemed outstanding as to any
other person. Does not include shares issuable upon exercise of any
warrants, options or other convertible rights issued by the Company
which are not exercisable within 60 days from the date hereof.
-26-
<PAGE>
(3) In order to reflect the voting rights of the Common Stock, Series A
Stock and Series B Stock as of the Record Date, the above percentage is
not based on shares which a holder has the right to acquire within 60
days, if such right has not been exercised as of the Record Date.
However, all shares which a holder has the right to acquire within 60
days are accounted for in the percentage of class calculations for each
of the individual type of securities accounted for in this table. See
footnote 2 above.
(4) Includes options to acquire 100,000 shares of common stock exercisable
within 60 days of March 15, 1998, and options held by Placement &
Acceptance, Inc., a company of which Mr. Tan is a director and officer,
to acquire 100,000 shares of common stock which are exercisable within
60 days of March 15, 1998, and 5,000 Units, with each Unit convertible
within 60 days of March 15, 1998, into one share of common stock and
one share of Preferred Stock, of which one share of Preferred Stock is
convertible into two shares of common stock.
(5) Mr. La Taste, a Director of the Company has direct ownership of 417,055
shares of Common Stock, and as of March 1, 1995, as a partner of La
Taste Enterprises (with his two children), he is owner of 16,667 shares
of Common Stock which shares have been included in the percent of
shares shown herein. In addition, Mr. La Taste has been issued 35,000
options, each to acquire one share of Common Stock. 8,750 of such
options are currently exercisable and are included in the percent of
shares shown herein. Mr. La Taste's wife, Jacqueline Green La Taste, is
the owner of 24,212 shares of Common Stock which she received in 1994
as an inheritance. Mr. La Taste disclaims any beneficial interest in
these shares. Mr. La Taste's children are beneficiaries of the La Taste
Children's Trust which owns 46,317 shares of Common Stock of the
Company. Mr. La Taste also disclaims any beneficial interest in these
shares.
(6) Includes, in each case, options to acquire 180,000 shares of Common
Stock which are currently exercisable.
(7) Includes options to acquire 334,000 shares of common stock exercisable
within 60 days of March 15, 1998.
(8) Includes options to acquire 333,000 shares of common stock exercisable
within 60 days of March 15, 1998.
</FN>
(b) The following table sets forth the number of shares of
Common Stock of the Company owned by each director and by all directors and
officers as a group as of March 5, 1998:
<TABLE>
<CAPTION>
Common Series A Series B
Stock Stock Stock
------------ ------------ ------------
Amount Amount Amount
and and and
Nature of Nature of Nature of % of
Beneficial % of Beneficial % of Beneficial % of Voting
Name and Address Ownership(1) Class(2) Ownership(1) Class(2) Ownership(1) Class(2) Power(3)
- ---------------- ------------ -------- ------------ -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
William Kim Wah 465,000 11.59% 5,000 1.78% 0 0 10.37%
Tan Direct and (through
No. 18 Jalan Sri Indirect(4) ownership of
Semantan 1 5,000 units)
Damansara
Heights
50490 Kuala
Lumpur
Craig D. La Taste 433,722 11.37%
4300 Wiley Post Direct(5) 0 0 0 0 9.67%
Rd.
Dallas, TX 75244
</TABLE>
-27-
<PAGE>
<TABLE>
<CAPTION>
Common Series A Series B
Stock Stock Stock
------------ ------------ ------------
Amount Amount Amount
and and and
Nature of Nature of Nature of % of
Beneficial % of Beneficial % of Beneficial % of Voting
Name and Address Ownership(1) Class(2) Ownership(1) Class(2) Ownership(1) Class(2) Power(3)
- ---------------- ------------ -------- ------------ -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Sadasuke Gomi 385,000 10.01% 0 0 0 0 8.58%
2941 Main Street Indirect(6)
Suite 300-B
Santa Monica, CA
90405
Kim Yeow Tan 385,000(7) 10.01% 0 0 0 0 8.58%
2941 Main Street
Suite 300-B
Santa Monica, CA
90405
Steven E. Scott 100,000(8) 2.62% 0 0 0 0 *
2941 Main Street
Suite 300-B
Santa Monica, CA
90405
Ian Colin 0 0 0 0 0 0 *
Edmonds
2941 Main Street
Suite 300-B
Santa Monica, CA
90405
David Kaye 0 0 0 0 0 0 *
2941 Main Street
Suite 300-B
Santa Monica, CA
90405
All Directors and 1,815,396 42.46% 5,000 1.78% 0 0 40.70%
Executive Officers
as a Group (7
persons)
</TABLE>
_________________________
[FN]
(1) Except as otherwise indicated and subject to applicable community
property and similar laws, the Company assumes that each named person
has the sole voting and investment power with respect to his or her
shares (other than shares subject to options).
(2) Percent of class is based on the number of shares outstanding on the
Record Date. In addition, shares which a person had the right to
acquire within 60 days are also deemed outstanding in calculating the
percentage ownership of the person but not deemed outstanding as to any
other person. Does not include shares issuable upon exercise of any
warrants, options or other convertible rights issued by the Company
which are not exercisable within 60 days from the date hereof.
(3) In order to reflect the voting rights of the Common Stock, Series A
Stock and Series B Stock as of the Record Date, the above percentage is
not based on shares which a holder has the right to acquire within 60
-28-
<PAGE>
days, if such right has not been exercised as of the Record Date.
However, all shares which a holder has the right to acquire within 60
days are accounted for in the percentage of class calculations for each
of the individual type of securities accounted for in this table. See
footnote 2 above.
(4) Includes options to acquire 100,000 shares of common stock exercisable
within 60 days of March 15, 1998, and options held by Placement &
Acceptance, Inc., a company of which Mr. Tan is a director and officer,
to acquire 100,000 shares of common stock which are exercisable within
60 days of March 15, 1998, and 5,000 Units, with each Unit convertible
within 60 days of March 15, 1998, into one share of common stock and
one share of Preferred Stock, of which one share of Preferred Stock is
convertible into two shares of common stock.
(5) Mr. La Taste, a Director of the Company has direct ownership of 417,055
shares of Common Stock, and as of March 1, 1995, as a partner of La
Taste Enterprises (with his two children), he is owner of 16,667 shares
of Common Stock which shares have been included in the percent of
shares shown herein. In addition, Mr. La Taste has been issued 35,000
options, each to acquire one share of Common Stock. 8,750 of such
options are currently exercisable and are included in the percent of
shares shown herein. Mr. La Taste's wife, Jacqueline Green La Taste, is
the owner of 24,212 shares of Common Stock which she received in 1994
as an inheritance. Mr. La Taste disclaims any beneficial interest in
these shares. Mr. La Taste's children are beneficiaries of the La Taste
Children's Trust which owns 46,317 shares of Common Stock of the
Company. Mr. La Taste also disclaims any beneficial interest in these
shares.
(6) All shares held by Mr. Gomi are attributed to him through Fleet
Security Investments, Inc., of which Mr. Gomi is a director. This sum
also includes options to acquire 180,000 shares of common stock
exercisable within 60 days of March 5, 1998.
(7) All shares held by Mr. Kim Yeow Tan are attributed to him through
Eurasia Securities, Inc., of which Mr. Kim Yeow Tan is a director. This
sum also includes options to acquire 180,000 shares of common stock
exercisable within 60 days of March 5, 1998.
(8) Includes options to acquire 50,000 shares of common stock exercisable
within 60 days of March 5, 1998.
</FN>
Item 12. Certain Relationships and Related Transactions
Craig D. La Taste, while Chairman of the Board, President and Chief
Executive Officer and a director of TEI, guaranteed personally a $200,000
promissory note of TEI to Nations Bank on March 31, 1996. The note was secured
by a certificate of deposit held by the Company in a principal amount exceeding
the amount of the debt. The loan was paid in full in March 1997. See,
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity."
CCC is also the maker of two unsecured notes given to evidence cash loans
in like amounts in favor of Jacqueline La Taste, wife of Craig D. La Taste, in
the aggregate principal amount of $245,000. The first note is the principal
amount of $145,000, with interest accruing and payable monthly at 10.25% per
annum. The second note is in the principal amount of $100,000, with interest
accruing and payable monthly at the rate of 9.5% per annum. The loan was paid in
full in March, 1997. See, "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Liquidity."
The Company leases its office and warehouse premises from La Taste
Enterprises, a partnership comprised of Mr. La Taste and members of his family.
The current lease is for a term ending December 31, 2001 and provides for an
annual base rent of $67,200.
The Company engaged Placement & Acceptance, Inc. ("PAI"), a British Virgin
Islands corporation, to effect a private placement of securities which was
consummated in December 1997. See "Market for the Company's Equity and Related
Stockholder Matters." PAI received fees of $112,000, inclusive of expenses, for
acting as sales agent in the placement.
-29-
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
a. The following exhibits pursuant to Rule 601 of Regulation SB are
incorporated by reference to Company's Registration Statement on Form SB-2,
Commission File No. 33-98662, filed on October 30, 1995, and amended on January
5, 1996 and January 23, 1996.
3.1 Articles of Incorporation, as amended (incorporated by reference
to the Company's Registration Statement on Form SB-2, Commission
File No. 33-98662, filed on October 30, 1995 and amended on
January 5, 1996 and January 23, 1996).
3.2 Certificate of Designation (incorporated by reference to the
Company's Registration Statement on Form SB-2, Commission File
No. 33-98662, filed on October 30, 1995 and amended on January
5, 1996 and January 23, 1996).
3.2A Amended Certificate of Designation (incorporated by reference to
the Company's Registration Statement on Form SB-2, Commission
File No. 33-98662, filed on October 30, 1995 and amended on
January 5, 1996 and January 23, 1996).
3.3 Bylaws (incorporated by reference to the Company's Registration
Statement on Form SB-2, Commission File No. 33-98662, filed on
October 30, 1995 and amended on January 5, 1996 and January 23,
1996).
4.4 Warrant Agreement (incorporated by reference to the Company's
Registration Statement on Form SB-2, Commission File No.
33-98662, filed on October 30, 1995 and amended on January 5,
1996 and January 23, 1996).
10.1 Sales Agent Agreement between the Company and Placement &
Acceptance, Inc., dated February 10, 1997 (incorporated by
reference to the Company's Annual Report on Form 10- KSB for the
year ended December 31, 1996).
10.2 Subscription Agreement between the Company and Placement &
Acceptance, Inc., dated February 10, 1997 (incorporated by
reference to the Company's Annual Report on Form 10- KSB for the
year ended December 31, 1996).
10.3 Subscription Agreement between the Company and Synergy System
Limited, dated February 10, 1997, with option to purchase shares
of Company common stock (incorporated by reference to the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996).
10.4 Subscription Agreement between the Company and Equator Holdings
Inc., dated February 10, 1997, with option to purchase shares of
Company common stock (incorporated by reference to the Company's
Annual Report on Form 10-KSB for the year ended December 31,
1996).
10.5 Subscription Agreement between the Company and Fleet Security
Investment Ltd, dated February 10, 1997, with option to purchase
shares of Company common stock (incorporated by reference to the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996).
-30-
<PAGE>
10.6 Subscription Agreement between the Company and Asian Brokers
Limited, dated February 10, 1997, with option to purchase shares
of Company common stock (incorporated by reference to the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996).
10.7 Subscription Agreement between the Company and Eurasia
Securities Ltd, dated February 10, 1997, with option to purchase
shares of Company common stock (incorporated by reference to the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996).
10.8 Employment Agreement between Computer Components Corporation and
Craig D. La Taste, entered into February 11, 1997 (incorporated
by reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1996).
10.9 Sales Agent Agreement between the Company and Placement &
Acceptance, Inc., dated October 16, 1997 (incorporated by
reference to the Company's Current Report on Form 8-K, filed
January 5, 1998).
21 Subsidiaries of Issuer
27 Financial Data Schedule
No annual report or proxy material has been sent to security holders of the
Company. The Company intends to send an Annual Report to its security holders
subsequent to the date of the filing of this report on this Form. The Company
undertakes that it shall furnish copies of such material to the Commission when
it is sent to security holders.
b. Reports on Form 8-K.
No reports on Form 8-K were filed in the last quarter of the period
covered by this Report.
-31-
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
DECEMBER 31, 1997 AND 1996
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS
FILED ON FORM 10-KSB
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1997 AND 1996
Page
----
Report of Independent Certified Public Accountants F-3
Financial Statements
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-4
Consolidated Statements of Operations
for the years ended December 31, 1997 and 1996 F-6
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1997 and 1996 F-7
Consolidated Statements of Cash Flows
for the years ended December 31, 1997 and 1996 F-9
Notes to Consolidated Financial Statements F-11
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders and Board of Directors
Tech Electro Industries, Inc. and Subsidiaries
We have audited the consolidated balance sheets of Tech Electro Industries, Inc.
and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tech Electro
Industries, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
KING GRIFFIN & ADAMSON P.C.
Dallas, Texas
March 3, 1998, except for Note P for which the date is March 19, 1998
F-3
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
1997 1996
---------- ----------
CURRENT ASSETS
Cash and cash equivalents $1,918,604 $261,973
Marketable securities
(including restricted certificate
of deposit of $214,336 in 1996) 96,063 1,151,836
Accounts and notes receivable
Trade,
net of allowance for doubtful accounts
of $16,000 and $4,500 in 1997 and
1996, respectively 974,604 357,674
Notes 362,153 15,000
Other 34,942 22,209
Inventory 1,801,034 1,493,132
Prepaid expenses and other 211,351 80,943
---------- ----------
Total current assets 5,398,751 3,382,767
---------- ----------
PROPERTY AND EQUIPMENT
Machinery and equipment 412,941 316,732
Furniture and fixtures 178,735 147,359
Vehicles 21,943 21,943
Leasehold improvements 32,534 --
---------- ----------
646,153 486,034
Less accumulated depreciation
and amortization (337,269) (293,882)
---------- ----------
Net property and equipment 308,884 192,152
---------- ----------
OTHER ASSETS
Notes receivable 49,997 113,538
Deposit on future acquisition 500,000 -
Other 290 2,428
---------- ----------
Total other assets 550,287 115,966
---------- ----------
TOTAL ASSETS $6,257,922 $3,690,885
========== ==========
The accompanying footnotes are an integral part of these
consolidated financial statements.
- Continued -
F-4
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Continued
December 31, 1997 and 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
----------- -----------
CURRENT LIABILITIES
Notes payable to banks $425,000 $347,772
Notes payable to related party -- 245,000
Trade accounts payable 467,822 267,125
Accrued liabilities 548,273 21,466
Dividends payable 28,432 13,459
----------- -----------
Total current liabilities 1,469,527 894,822
----------- -----------
MINORITY INTEREST IN SUBSIDIARY 29,202 76,933
COMMITMENTS AND CONTINGENCIES
(Notes E, F, J, M and N)
STOCKHOLDERS' EQUITY
Preferred stock - $1.00 par value; 1,000,000
shares authorized; 65,000 Class B issued
and outstanding in 1997 and 1996, liquidation
preference of $341,250; 254,934 and 300,000
Class A issued and outstanding in 1997 and
1996, respectively; liquidation preference
of $1,338,404 319,934 365,000
Common stock - $0.01 par value; 10,000,000
shares authorized, 3,498,407 and 1,308,275
shares issued and outstanding during 1997
and 1996, respectively 34,985 13,083
Additional paid-in capital 5,713,866 2,350,202
(Accumulated deficit) retained earnings (1,334,216) 66,049
Net unrealized gain (loss),
marketable securities 24,624 (75,204)
----------- -----------
4,759,193 2,719,130
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,257,922 $3,690,885
=========== ===========
The accompanying footnotes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1997 and 1996
1997 1996
----------- -----------
SALES $6,666,837 $3,840,075
COST OF GOODS SOLD 4,905,755 2,724,518
----------- -----------
GROSS PROFIT 1,761,082 1,115,557
OPERATING EXPENSES
Selling, general and administrative 2,886,132 1,308,176
Provision for slow moving inventory 288,300 138,800
----------- -----------
3,174,432 1,446,976
LOSS FROM OPERATIONS (1,413,350) (331,419)
OTHER INCOME (EXPENSES)
Interest income 99,862 86,828
Interest expense (30,072) (58,566)
Realized loss on sale of marketable
securities (31,667) -
Gain on foreign exchange 9,668 -
Other 18,247 -
----------- -----------
66,038 28,262
MINORITY INTEREST SHARE OF LOSS OF SUBSIDIARY 47,731 6,062
----------- -----------
LOSS BEFORE INCOME TAXES (1,299,581) (297,095)
INCOME TAX EXPENSE -- 39,467
----------- -----------
NET LOSS $(1,299,581) $(336,562)
=========== ===========
Net loss attributable to common shareholders $(1,405,419) $(459,521)
=========== ===========
Basic and diluted net loss per share
attributable to common shareholders $(0.59) $(0.36)
=========== ===========
Number of weighted-average shares
of common stock outstanding
(basic and diluted) 2,382,814 1,281,974
=========== ===========
The accompanying footnotes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
(Accumulated
Preferred Stock Common Stock Additional Deficit)
Number of Number of paid-in Retained Marketable
Shares Amount Shares Amount Capital Earnings Securities Total
------ ------ --------- ------- -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
January 1, 1996 65,000 $65,000 1,008,275 $10,083 $630,806 $525,570 $ - $1,231,459
Allocation of capital to
minority interest owner
resulting from dispro-
portionate contributions
of capital on formation
of UBC - - - - (81,495) - - (81,495)
Issuance of 600,000
warrants - - - - 60,000 - - 60,000
Public offering
300,000 Units 300,000 300,000 300,000 3,000 1,706,976 - - 2,009,976
345,000 Warrants - - - - 33,915 - - 33,915
Net loss for the year - - - - - (336,562) - (336,562)
Net unrealized loss
on marketable
securities - - - - - - (75,204) (75,204)
Dividends paid - - - - - (122,959) - (122,959)
------- -------- --------- ------- -------- --------- ---------- ----------
Balances at
December 31, 1996 365,000 $365,000 1,308,275 $13,083 $2,350,202 $66,049 $(75,204) $2,719,130
</TABLE>
The accompanying footnotes are an integral part of these
consolidated financial statements.
F-7
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
(Accumulated
Preferred Stock Common Stock Additional Deficit)
Number of Number of paid-in Retained Marketable
Shares Amount Shares Amount Capital Earnings Securities Total
--------- ----------- ---------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
for cash and receivable - $ - 2,100,000 $21,000 $3,319,500 $ - $ - $3,340,500
Conversions of preferred
stock into common stock (45,066) (45,066) 90,132 902 44,164 - - -
Net loss for 1997 - - - - - (1,299,581) - (1,299,581)
Net unrealized gain on
marketable securities - - - - - - 99,828 99,828
Dividends paid - - - - - (100,684) - (100,684)
--------- ----------- ---------- ---------- ----------- ----------- ---------- -----------
319,934 $319,934 3,498,407 $34,985 $5,713,866 $(1,334,216) $24,624 $4,759,193
========= =========== ========== ========== =========== =========== ========== ===========
</TABLE>
The accompanying footnotes are an integral part of these
consolidated financial statements.
F-8
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997 and 1996
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,299,581) $(336,562)
Adjustments to reconcile net loss to net cash
used by operating activities
Depreciation and amortization 43,387 26,180
Provision for bad debts 11,500 -
Provision for slow moving inventory 288,300 138,800
Deferred income taxes - 39,467
Minority interest share of loss in subsidiary (47,731) (6,062)
(Increase) decrease in:
Accounts receivable - trade (628,430) 20,817
Accounts receivable - other (12,733) (3,261)
Inventory (596,202) (458,328)
Prepaid expenses and other (130,408) 38,560
Other assets 2,138 (400)
Increase (decrease) in:
Trade accounts payable 200,697 (19,565)
Accrued liabilities 526,807 1,976
Dividends payable 14,973 -
Deferred compensation - (99,651)
----------- -----------
Net cash used by operating activities (1,627,283) (658,029)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (160,119) (69,853)
Purchase of certificate of deposit - (10,493)
Advances on notes receivable (320,000) -
Advances on note receivable to shareholders - (127,312)
Payments received on note receivable
to shareholder 36,388 35,260
Maturity of certificates of deposit 464,336 -
Net sale (purchase) of marketable securities 691,265 (1,012,704)
Deposit on future acquisition (500,000) -
----------- -----------
Net cash provided (used) by investing activities 211,870 (1,185,102)
----------- -----------
The accompanying footnotes are an integral part of these
consolidated financial statements.
- Continued -
F-9
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
Years ended December 31, 1997 and 1996
1997 1996
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net activity on bank line of credit 425,000 (12,220)
Payments on loans from other banks (347,772) -
Payments on loans from affiliates (245,000) -
Payments on stockholder loans - (20,000)
Proceeds on sale of warrants - 93,915
Net proceeds on sale of common and
preferred shares 3,340,500 2,009,976
Sale of common shares in UBC to
minority stockholders - 1,500
Dividends paid (100,684) (109,500)
----------- -----------
Net cash provided by financing activities 3,072,044 1,963,671
----------- -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS $1,656,631 $120,540
Cash and cash equivalents at beginning of year 261,973 141,433
----------- -----------
Cash and cash equivalents at end of year $1,918,604 $261,973
=========== ===========
SUPPLEMENTAL DISCLOSURES OF
INTEREST AND INCOME TAXES PAID
Interest paid on borrowings $30,072 $58,084
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH
NVESTING AND FINANCING ACTIVITIES
Preferred stock conversions into common stock $45,066 $ -
=========== ===========
The accompanying footnotes are an integral part of these
consolidated financial statements.
F-10
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION
Tech Electro Industries, Inc. ("TEI") was formed on January 10, 1992 as a Texas
corporation. On January 31, 1992, TEI acquired 100% of the outstanding common
stock of Computer Components Corporation ("CCC"). In February, 1996, the Company
filed a Form SB-2 Registration Statement and completed a public offering (see
Note H). The net proceeds from the public offering amounted to $2,043,891,
(including warrants). On June 1, 1996, pursuant to a Stock Exchange Agreement,
the Company acquired 100% of the outstanding common shares of Vary Brite
Technologies, Inc. ("VB") by issuing 50,000 shares of its common stock. The
business combination was accounted for using the pooling method. The historical
consolidated statements of operations prior to the date of the combination have
not be adjusted to include the operations of VB as these operations are
immaterial to the consolidated operations of the Company. Accordingly, the
accompanying consolidated statements of operations include the operations of VB
from June 1, 1996. The assets and liabilities acquired were also immaterial to
the consolidated balance sheets of the Company. On October 29, 1996, TEI
incorporated Universal Battery Corporation ("UBC") as a 67% owned subsidiary.
The Company stocks and sells electronic components, both active and passive. A
significant portion of the Company's business is involved in the stocking and
sale of batteries. Within the battery sales activity there is significant value
added to the batteries in the assembly of batteries into "packs". The Company's
sales are generated by in-house sales staff and sales representatives to
customers throughout the United States.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of TEI,
CCC, VB and UBC. All significant intercompany transactions and balances have
been eliminated in consolidation. The consolidated group is referred to as
"Company".
Cash and Cash Equivalents
The Company considers all unrestricted cash on hand and in banks, certificates
of deposit and other highly-liquid investments with maturities of three months
or less, when purchased, to be cash and cash equivalents for purposes of the
Statements of Cash Flows.
Marketable Securities
Marketable debt and equity securities are carried at market, based upon quoted
market prices. Unrealized gains and losses on trading securities are recognized
in income currently. Unrealized gains and losses on available-for-sale
securities are accumulated in the marketable securities adjustment component of
stockholder's equity. Realized gains and losses are based upon the specific
identification of the securities sold and are recognized in income currently.
F-11
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Inventories
Inventories consist primarily of electronic components and materials used in the
assembly of batteries into "packs". All items are stated at the lower of cost or
market. Cost is determined by the average cost method by specific part.
Inventories at December 31, 1997 and 1996, consist of the following:
1997 1996
----------- -----------
Electronic components $2,211,732 $1,618,690
Pack materials 59,902 56,742
Reserve for slow moving inventory (470,600) (182,300)
----------- -----------
$1,801,034 $1,493,132
=========== ===========
Property and Equipment
Property and equipment are carried at cost. Depreciation and amortization of
property and equipment is provided using the straight line method over the
estimated useful lives of the assets ranging from five to ten years.
Depreciation and amortization expense recognized during 1997 and 1996, amounted
to $43,387 and $26,180, respectively.
Expenditures for major renewals and betterments that extend the useful lives of
property and equipment are capitalized. Expenditures for maintenance and repairs
are charged to expense as incurred.
Income Taxes
The Company utilizes the asset and liability approach to financial accounting
and reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax bases
of assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense or benefit is the tax payable
or refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities.
Loss per Share
The Company adopted SFAS No. 128, "Earnings Per Share", in 1997, which requires
the disclosure of basic and diluted net income (loss) per share. Basic net
income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding for the period. Diluted net
F-12
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
loss per share is computed by dividing net income (loss) by the weighted average
number of common shares and common stock equivalents outstanding for the period.
The Company's common stock equivalents are not included in the diluted loss per
share for 1997 and 1996 as they are antidilutive. Therefore, diluted and primary
loss per share is identical. Net loss per share has been increased for accrued
dividends on preferred stock totaling $105,838 and $122,959 for 1997 and 1996,
respectively.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued two new
statements: SFAS No. 130, "Reporting Comprehensive Income," which requires
enterprises to report, by major component and in total, all changes in equity
from nonowner sources; and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes annual and interim
reporting standards for a public company's operating segments and related
disclosures about its products, services, geographic areas, and major customers.
Both statements are effective for the Company's fiscal year ended December 31,
1998, with earlier application permitted. The effect of adoption of these
statements in 1998, if any, will be limited to the form and content of the
Company's disclosures and will not impact the Company's results of operations or
financial position.
Use of Estimates and Assumptions
Management uses estimates and assumptions in preparing financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could vary from the estimates that were
used.
Included in the accompanying balance sheet are inventories of electronic
components and material used in the assembly of battery packs at a carrying
value of $1,801,034 at December 31, 1997, which includes an estimated reserve
for slow moving items of $470,600. Should demand for the electrical components
prove to be significantly less than anticipated, the ultimate realizable value
of the inventory could be less than the net amount shown in the balance sheet.
Reclassifications
Certain prior year amounts have been reclassified to conform with the 1997
presentation.
F-13
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - NOTES RECEIVABLE
Notes receivable consists of the following at December 31, 1997 and 1996:
1997 1996
---------- ----------
Notes receivable from a minority shareholder;
interest at 6%, unpaid interest accrues
monthly and adds to principal. One note is
payable in full ($30,000) in August 1999. The
second note is payable in monthly payments of
$3,500 including interest through February,
2000. Secured by 1,250 shares of TEI common
stock and all future TEI dividends paid on
the common stock, if any, are to be applied
to principal and interest by the Company on
the debtor's behalf. $77,150 $113,538
Note receivable from a preferred stock
shareholder, due September 5, 1998, bearing
interest at 10.5%, interest payments due
quarterly, secured by 65,000 Class B
preferred shares of the Company and other
common stock. 320,000 -
Notes receivable, jointly and severally from
two minority shareholders with interest at
6%, payable monthly at $312.50 plus interest,
matures November 2001, unsecured. 15,000 15,000
---------- ----------
412,150 128,538
Less current maturities 362,153 15,000
---------- ----------
Long-term portion $49,997 $113,538
========== ==========
NOTE D - MARKETABLE SECURITIES
At December 31, 1997 and 1996, the Company had invested a portion of its cash in
various equity securities and in various certificates of deposit and treasury
securities. These marketable securities are considered available-for-sale
securities.
During 1997, the Company received proceeds amounting to $1,261,451 from the sale
of securities available for sale. The Company realized losses on these sales
totaling $31,667.
F-14
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - MARKETABLE SECURITIES - Continued
For the years ended December 31, 1997 and 1996, total unrealized gains (losses)
amounted to $99,828 and ($75,204), respectively, and are included as a separate
component of stockholders equity.
Amortized cost and fair value of the available-for-sale securities at December
31, 1997 and 1996 are as follows.
1997
----------------------------------------
Amortized Fair Unrealized
Cost Value Gain
----------- ----------- ----------
Certificates of deposit $1,695,287 $1,695,287 $ -
Equity securities (See Note F) 71,439 96,063 24,624
----------- ----------- ----------
1,766,726 1,791,350 24,624
Amounts classified as cash
equivalents (1,695,287) (1,695,287) -
----------- ----------- ----------
$71,439 $96,063 $24,624
=========== =========== ==========
1996
----------------------------------------
Unrealized
Amortized Fair (Losses)
Cost Value Gains
----------- ----------- -----------
Treasury notes (mature July, 1998) $150,000 $149,000 $(1,000)
Treasury bills (mature April, 1997) 493,207 493,500 293
Certificates of deposit (including
restricted certificate of deposit
of $214,336) 464,336 464,336 -
Equity securities (See Note F) 119,497 45,000 (74,497)
----------- ----------- -----------
$1,227,040 $1,151,836 $(75,204)
=========== =========== ===========
F-15
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - NOTES PAYABLE TO BANKS
Notes payable to banks at December 31, 1997 and 1996, consist of the following:
1997 1996
-------- --------
$200,000 term note to bank, due March 31,
1997, with interest due monthly at 7.5% per
annum, secured by a $214,336 certificate of
deposit (see Note F) and personally
guaranteed by a significant shareholder. $ - $200,000
$750,000 line of credit with bank payable on
demand with interest at prime plus 1/2%,
maturing June 30, 1998, and secured by
inventory and equipment. 425,000 147,772
-------- --------
$425,000 $347,772
======== ========
NOTE F - RELATED PARTY TRANSACTIONS
Notes Payable
Notes payable to related party at December 31, 1997 and 1996, consist of the
following:
1997 1996
--------- ---------
Unsecured note payable to related party
(spouse of a significant shareholder);
interest payable at 10.25% in monthly
installments of $1,238, with principal due
on March 31, 1997. $ - $145,000
Unsecured note payable to related party,
(spouse of a significant shareholder);
interest payable at 9.5% in monthly
installments of $792, with principal due on
March 31, 1997. - 100,000
--------- ---------
$ - $245,000
========= =========
F-16
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - RELATED PARTY TRANSACTIONS - Continued
Lease Agreements
The Company leases its office and warehouse space, approximately 16,000 square
feet, from a partnership consisting of members of the family of a significant
shareholder. Rent paid to the partnership for the building lease was $63,200
and $57,600 for the years ended December 31, 1997 and 1996, respectively.
At December 31, 1997, future minimum rental commitments for facilities under
the non-cancelable operating lease agreement were as follows:
1998 $ 67,200
1999 67,200
2000 67,200
2001 67,200
--------
Total $268,800
========
Other
The equity securities owned by the Company at December 31, 1997 and 1996 (See
Note D) and held as collateral by the Company for a note receivable at December
31, 1997 (see Note C) are shares of E> which is a company related to TEI
through common shareholders.
NOTE G - DEFERRED COMPENSATION PLAN
In 1981, the Company instituted a voluntary non-qualified deferred compensation
plan ("Plan") on behalf of the corporate officers. At December 31, 1995, the
accrued benefits of the Plan were payable solely to Craig D. LaTaste, the
Company's then majority shareholder. The benefits were paid in full in 1996.
There were no contributions to the Plan for the years ended December 31, 1997
and 1996 and management does not anticipate further contributions to the Plan.
NOTE H - STOCKHOLDERS' EQUITY
Class A and Class B preferred stock rank equally and are identical in all
respects. The preferred stock bears cumulative dividends of 36 cents per share
payable annually and has a liquidation preference of $5.25 per share. Dividends
in arrears at December 31, 1997 totaled approximately $5,000. The voting rights
are equal to common shares, other than with respect to certain matters;
generally amending the rights or powers of the preferred stock. The preferred
stock is convertible at the option of the holder into two shares of common stock
subject to adjustment (the "Conversion Rate") (as more fully described in the
Certificate of Designation) at any time after one year from the date of issue.
The Company may compel conversion at the Conversion Rate at any time after one
year from the date of issue if the closing market price of the common stock is
$5.25 or higher for 30 consecutive trading days.
F-17
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - STOCKHOLDERS' EQUITY - Continued
During November 1995, through a private placement with certain Selling Security
Holders, 1,000,000 warrants were issued at $.10 per share for $100,000. Each
warrant represented one common share at an exercise price of $3.50 per share. In
addition, in 1996, the Company sold at $0.10 per warrant an additional 600,000
warrants to purchase 600,000 common shares at an exercise price of $3.50 per
share for total cash proceeds of $60,000.
The Company completed a Form SB-2 Registration Statement ("SB2") in February
1996 to issue 300,000 units, each unit comprising 1 common share and 1 class A
preferred share. The offering price was $8.25 per unit resulting in an aggregate
offering price of $2,475,000 before underwriting fees and other costs of
$465,024 (excluding underwriters' over-allotment option of 45,000 units). The
Company received net proceeds on the sale of the units of $2,039,976. Included
in the underwriter's compensation are options to purchase up to 30,000 units and
30,000 warrants, exercisable for a four-year period commencing one year from the
date of the Registration Statement at exercise prices of $10.725 per unit and
$0.13 per warrant, respectively. In connection with the offering, 300,000
warrants (excluding underwriters= over-allotment option) were also separately
offered at $0.10 per warrant exercisable at $3.50 per share. In March 1996, the
underwriters purchased the 45,000 over-allotment warrants. The Company received
a total of $33,915 from the sale of warrants.
Effective December 12, 1997, the Company adjusted the terms of the warrants
outstanding pursuant to the original warrant agreement. The exercise price was
reduced from $3.50 to $3.30 per warrant. Each warrant was also adjusted to
entitle the holder the purchase of 1.06 shares of the Company's common stock.
Total warrants outstanding at December 31, 1997 were 1,945,000. The warrants
expire January 26, 2000 and may be redeemed at $0.10 per warrant on 30 days
written notice if the average price of the common stock exceeds $5.25 per share
for 30 consecutive trading days prior to the notice.
Effective February 12, 1997, the Company sold 1,100,000 shares of common stock
and options to acquire 1,000,000 shares of common stock for $1,870,000, (a
combined price of $1.70 net to the Company), pursuant to Regulations as
promulgated by the Securities and Exchange Commission ("SEC"). The options had
an exercise price per share of $2.15. Each option originally expired thirteen
months from the date of issuance. As of December 31, 1997, none of the options
had been exercised. On March 1, 1998, the Company and the option holders agreed
to amend the original option agreement. The amendment adjusted the exercise
price to $2.50 per share, and extended the exercise period to March 10, 1999.
Effective December 12, 1997, the Company sold 1,000,000 shares of common stock
and options to acquire 1,000,000 shares of common stock for net proceeds of
$1,470,500, (a combined price of $1.47 net to the Company), pursuant to
Regulations as promulgated by the SEC. The options have an exercise price of
$1.75 and expire twelve months from the date of issuance.
F-18
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - INCOME TAXES
Deferred tax assets and liabilities at December 31, 1997 and 1996 consist of the
following:
1997 1996
---------- ---------
Current deferred tax asset $ 179,896 $ 95,326
Current deferred tax liability - -
Valuation allowance (179,896) (95,326)
--------- ---------
Net current deferred tax asset $ - $ -
========== =========
Non-current deferred tax asset $ 470,385 $ 77,523
Non-current deferred tax liability (27,405) (17,503)
Valuation allowance (442,980) (60,020)
--------- ----------
Net non-current deferred tax asset $ - $ -
========== ==========
The current deferred tax asset results primarily from the provision for slow
moving inventories and doubtful accounts which are not currently deductible for
federal income tax purposes. The non-current deferred tax asset results
primarily from the net operating loss carryforward. The net operating loss
available at December 31, 1997 amounts to approximately $1,221,800 and begins to
expire in 2011. The non-current deferred tax liability arises from the
accelerated methods of depreciation of assets for federal income tax purposes.
The current and net non-current deferred tax assets have a 100% valuation
allowance due to the uncertainty of generating future taxable income.
The Company's income tax expense for the years ended December 31, 1997 and 1996
differed from the statutory federal rate of 34 percent as follows:
1997 1996
--------- ---------
Statutory rate applied to loss
before income taxes $(441,858) $(101,012)
Increase (decrease) in income
taxes resulting from:
Amounts not deductible for federal income
tax purposes, and other 11,821 10,702
State income taxes, net of federal income
tax effect (37,493) -
Increase in valuation allowance 467,530 155,346
Less portion applicable to marketable
securities available for sale - (25,569)
--------- ---------
Income tax expense $ - $39,467
========= =========
F-19
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - BUSINESS AND CREDIT CONCENTRATIONS AND SIGNIFICANT CUSTOMERS
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents, certificates of
deposit and accounts and notes receivable.
The Company recognizes revenue upon shipment of goods and billing to a customer
and does not maintain any set policy regarding the customer's right of return.
Customer requests to return products for refund or credit are handled on an
individual basis at the discretion of management. The refunds or credits in 1997
and 1996 were not significant.
In the normal course of business, the Company extends unsecured credit to
virtually all of its customers doing business in the manufacture of various
consumer and industrial electronic goods. The Company's customers are located
throughout the United States. Because of the credit risk involved, management
has provided an allowance for doubtful accounts which reflects its opinion of
amounts which will eventually become uncollectible. In the event of complete
non-performance by the Company's customers, the maximum exposure to the Company
is the outstanding accounts receivable balance at the date of non-performance.
At December 31, 1997, three accounts receivable accounts comprised approximately
46% of the total trade accounts receivable balance. Through the date of this
report, substantially all of this amount had been collected. During the year
ended December 31, 1997 two of the Company's customers accounted for
approximately 21% of total sales.
Cash deposits are at risk to the extent that they exceed Federal Deposit
Insurance Corporation insured amounts. At December 31, 1997, such uninsured
amounts totaled approximately $1,754,000. To minimize this risk, the Company
places its cash and cash equivalents and other short term investments with high
credit quality financial institutions.
NOTE K - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosure About Fair Value
of Financial Instruments", requires disclosure about the fair value of all
financial assets and liabilities for which it is practicable to estimate. At
December 31, 1997 the carrying value all of the Company's financial instruments
approximate fair value.
NOTE L - STOCK OPTION PLANS
Effective July 19, 1995, the Board of Directors, with subsequent approval of the
shareholders on August 16, 1995, adopted the Company=s Incentive Stock Option
Plan ("1995 Plan"). In accordance with the 1995 Plan, 125,000 common shares were
reserved and no grants were to be made under the Plan after December 31, 1996.
The options were granted at fair market value and are exercisable at 25% on the
F-20
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - STOCK OPTION PLANS - Continued
date of grant, 50% one year later, 75% two years later and 100% three years
later and, unless otherwise provided for, may be exercised during a period of
ten years from the date of grant. During 1996, 119,000 options were granted
under the 1995 Plan.
On July 12, 1996, the Company implemented an Incentive Stock Option Plan ("1997
Plan") in terms of which 250,000 shares of common stock may be issued through
December 31, 1999. During 1997, the 1997 Plan was approved by the shareholders
of the Company. At December 31, 1997, there were no options outstanding under
the 1997 Plan.
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, in accounting for its Plans. All options are granted at fair value,
and accordingly, no compensation cost has been recognized for its stock options
in the consolidated financial statements. Had compensation cost for the
Company's stock based compensation Plans been determined consistent with FASB
statement No. 123, Accounting for Stock Based Compensation, the Company's net
loss and loss per share would have been increased to the pro forma amounts
indicated below:
Years ended December 31,
------------------------------
1997 1996
----------- -----------
Net loss attributable
to common shareholders As reported $(1,405,419) $(459,521)
Pro forma $(1,435,171) $(506,240)
Net loss per share
attributable to common
shareholders As reported $ (0.59) $ (0.36)
Pro forma $ (0.60) $ (0.39)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in 1996: dividend yield of 0 percent; expected volatility of 219%; risk
free interest rates ranging from 5.64% to 6.73% over a 13 year period; and an
expected life of 10 years. No grants occurred in 1997.
F-21
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's compensatory stock option plans as of
December 31, 1997 and changes during the years ended December 31, 1997 and 1996
are as follows:
Weighted Range of
Average Exercise
Shares Exercise Price Price
------- -------------- -----------
Outstanding at January 1, 1996 - $ - $ - $ -
Granted in 1996 119,000 1.18 1.00 - 1.75
-------
Outstanding at December 31, 1996 119,000 1.18 1.00 - 1.75
1997 forfeitures (1,250)
--------
Outstanding at December 31, 1997 117,750 1.18 1.00 - 1.75
=======
Options exercisable at
December 31, 1997 58,875 1.18
======
The weighted average remaining contractual life of options outstanding at
December 31, 1997 is 8.6 years.
The weighted average fair value of options granted during 1996 amounted to
$1.61.
NOTE M - YEAR 2000
The Company is currently operating with a computer program which is not
compatible with the year 2000. The year 2000 problem is the result of computer
programs being written using two digits rather than four to define the
applicable year. The Company relies on its computer program in conducting normal
operations. Management estimates that the cost to replace the current software
program should range from $50,000 to $100,000. In the event that an update or
replacement of its current computer system with a system compatible with the
year 2000 by January 1, 2000 does not occur, the operations of the Company could
be adversely effected.
NOTE N - EMPLOYMENT AGREEMENTS
During 1997, the Company entered into employment contracts with two key
employees which expire on December 31, 2001. The agreements provide for, among
other things, minimum compensation of $70,000 and $80,000 each for the year
ending December 31, 1998 rising gradually to $100,000 and $120,000 each for the
year ending December 31, 2001. In the event that the employees are terminated
F-22
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - EMPLOYMENT AGREEMENTS - Continued
without cause, they will be entitled under the contract to receive the amount
remaining unpaid for the full term of the agreement, plus an amount equal to
twice that sum.
NOTE O - SUBSEQUENT EVENTS
On February 6, 1998, the board of directors approved the issuance of 225,000
common shares to two employees for payment of accrued 1997 compensation. In
addition to the shares issued, the Company also granted a total of 150,000
options to purchase the Company's common stock at an exercise price of $5.00.
The options will expire 24 months from the date of grant.
NOTE P - ADDITIONAL SUBSEQUENT EVENT
On March 19, 1998, the Company completed the acquisition of 51% of the issued
and outstanding common stock of U.S. Computer Group, Inc. The purchase
consideration for the interest was $1,000,000 paid in cash.
F-23
<PAGE>
Signatures
In accordance with Section 13 or 15(d) of the Securities Exchange Act the
Company has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: April 8, 1998
Tech Electro Industries, Inc.
By: /s/ William Kim Wah Tan
------------------------------
WILLIAM Kim Wah Tan, President
Pursuant to the requirements of the Securities Exchange Act, of 1934 this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
Signatures Capacity Date
- ---------- -------- ----
/s/ William Kim Wah Tan Chairman, President, March 31, 1998
- -----------------------
William Kim Wah Tan Chief Executive Officer and
Director
/s/ Kim Yeow Tan Vice-President and Director March , 1998
- -----------------------
Kim Yeow Tan
/s/ Sadasuke Gomi Vice-President, Secretary, March 31, 1998
- ----------------------- and Director
Sadasuke Gomi
/s/ Steven Scott Executive Vice President March 31, 1998
- ----------------------- and Director
Steven Scott
/s/ Ian Colin Edmonds Director March 31, 1998
- -----------------------
Ian Colin Edmonds
/s/ David Kaye Chief Financial Officer March 31, 1998
- ----------------------- (Principal Accounting Officer)
David Kaye
-32-
<PAGE>
Exhibit 21
Subsidiaries of Issuer
Computer Components Corporation Wholly-owned by Tech Electro
Industries, Inc.
Vary Brite Technologies, Inc. Wholly-owned by Computer Components
Corporation
Universal Battery Corporation 67% owned by Computer Components
Corporation
-33-
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0
319,934
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