SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] 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
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2941 Main Street, Santa Monica, California 90405
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Address of principal executive office
(310) 396-1782
-------------------------
Issuer's telephone number
Check whether the issuer has (1) filed all reports required by Section 13 or
15(d) of the Exchange Act during the past 12 months, and (2) been subject to
such filing requirements for the past ninety (90) days. Yes ( X ) No ( )
As of June 30, 1998, 4,143,026 shares of Common Stock were outstanding.
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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.
INDEX
Item Page
Part I - Financial Statements
Item 1 - Financial Statements (unaudited)
Condensed Consolidated Balance Sheet at
June 30, 1998 and 1997........................................3
Condensed Consolidated Statement of Income for
the Periods Ended June 30, 1998 and
and 1997......................................................5
Condensed Consolidated Statement of Cash Flows
for the Periods Ended June 30, 1998 and
1997..........................................................6
Notes to Condensed Consolidated Financial
Statements....................................................7
Item 2 - Management's Discussions and
Analysis of Financial Condition and
Results of Operations........................................13
Part II - Other Information
Item 1 - Legal Proceedings...................................20
Item 2. Changes in Securities...............................20
Item 3. Defaults Upon Senior Securities.....................20
Item 4. Submission of Matters to a
Vote of Securities Holders........................20
Item 5. Other Information...................................20
Item 6. Exhibits and Reports on Form 8-K....................20
Signatures............................................................21
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Tech Electro Industries, Inc., and Subsidiaries
Consolidated Balance Sheet
ASSETS
(Unaudited)
Jun 30,1998 Dec 31, 1997
----------- ------------
CURRENT ASSETS
Cash and cash equivalents $1,641,249 $1,918,604
Marketable securities 119,425 96,063
Accounts and notes receivable
Accounts receivable-trade, net of
allowance for doubtful accounts of
$489,730 and $16,000 respectively 2,584,765 974,604
Notes 220,000 362,153
Other 57,067 34,942
Deferred sales costs 193,448 --
Inventories 3,855,688 1,801,034
Prepaid expenses 634,806 211,351
----------- -----------
TOTAL CURRENT ASSETS 9,306,448 5,398,751
----------- -----------
NET PROPERTY AND EQUIPMENT 973,936 308,884
----------- -----------
OTHER ASSETS
Contract rights 5,300,146 --
Deferred financing costs 254,675 --
Goodwill 3,904,821 --
Notes receivable 70,936 49,997
Deposit on future acquisition 37,409 500,000
Other assets 260,799 290
----------- ----------
TOTAL OTHER ASSETS 9,828,786 550,287
----------- ----------
TOTAL ASSETS $20,109,170 $6,257,922
=========== ==========
See Notes to Consolidated Financial Statements
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Tech Electro Industries, Inc., and Subsidiaries
Consolidated Balance Sheet
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(Unaudited)
Jun 30, 1998 Dec 31, 1997
------------ ------------
CURRENT LIABILITIES:
Current portion of credit
facility obligations $ 251,001 $ --
Current portion of notes payable 414,485 425,000
Current portion of long term debt 164,147 --
Accounts payable-trade 2,931,034 467,822
Accrued liabilities 890,551 548,273
Deferred service liability 1,440,422 --
Dividends payable -- 28,432
------------ ------------
TOTAL CURRENT LIABILITIES 6,091,640 1,469,527
LONG TERM LIABILITIES:
CREDIT FACILITY OBLIGATIONS 7,206,019 --
DEFERRED LEASE INCENTIVE 33,634 --
LONG TERM DEBT 115,911 --
NOTE PAYABLE LONG TERM 38,950 --
------------ ------------
TOTAL LIABILITIES 13,486,154 1,469,527
MINORITY INTEREST IN SUBSIDIARY 2,130,987 29,202
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 193,140 319,934
1,000,000 shares authorized, 65,000 Class
B issued and outstanding on December 31,
1997, liquidation preference of $341,250,
zero shares outstanding on June 30, 1998;
193,140 and 254,934 Class A issued and
outstanding on June 30, 1998 and
December 31, 1997 respectively;
liquidation preference $1,013,985 and
$1,338,404 respectively
Common stock, $.01 par value; 41,430 34,985
10,000,000 shares authorized, 4,143,026
shares issued and outstanding on June 30,
1998 and 3,498,407 shares issued and
outstanding on December 31, 1997.
Additional paid-in capital 7,008,317 5,713,866
Subscription receivable (222,500) --
Unrealized Gains (Losses)
on marketable securities (575) 24,624
Retained Earnings Accumulated Deficit (2,527,783) (1,334,216)
------------ ------------
Total stockholders' equity 4,492,029 4,759,193
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 20,109,170 $ 6,257,922
============ ============
See Notes to Consolidated Financial Statements
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Tech Electro Industries, Inc., and Subsidiaries
Consolidated Statement of Operations
(Unaudited)
For the Periods Ended June 30, 1998 and 1997
Three Month Ended Year to Date
----------------- ------------
1998 1997 1998 1997
---- ---- ----- ----
Sales and service revenues $7,982,834 $1,483,230 $9,979,422 $2,569,794
Cost of sales and revenue and
direct service expense 6,510,953 1,087,247 7,866,491 1,886,187
---------- ---------- ---------- ----------
Gross profit 1,471,881 395,983 2,112,931 683,607
Selling, general and
administrative expenses 2,398,311 611,151 3,154,397 1,134,640
---------- ---------- ---------- ----------
Loss from operations (926,430) (215,168) (1,041,466) (451,033)
Other income (expense):
Interest income 22,360 35,521 47,785 51,658
Interest expense (173,555) (1,513) (180,194) (16,362)
---------- ---------- ---------- ----------
Total other income (expense) (151,195) 34,009 (132,409) 35,296
Minority share of subsidiary loss 12,737 1,758 29,201 16,226
---------- ---------- ---------- ----------
Loss before provision for taxes (1,064,888) (179,402) (1,144,674) (399,511)
Income tax expense:
Current 3,305 -- 3,305 --
---------- ---------- ---------- ----------
Total income tax expense 3,305 -- 3,305 --
---------- ---------- ---------- ----------
NET LOSS $(1,068,193) $ (179,402)$(1,147,979) $ (399,511)
=========== ========== ========== ==========
Loss attributable to
common stockholders $(1,068,193) $(212,252)$(1,147,979) $(432,362)
=========== ========== ========== ==========
Loss per share $ (0.27) $ (0.09) $ (0.30) $ (0.23)
=========== ========== ========== ==========
Number of weighted average
shares of common shares
outstanding 3,960,601 2,427,575 3,820,717 1,864,425
=========== ========== ========== ==========
See Notes to Consolidated Financial Statements
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Tech Electro Industries, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(unaudited)
Jun 30 1998 Jun 30 1997
------------- ------------
CASH FLOW FROM OPERATING ACTIVITIES
Net Loss (1,147,979) (399,512)
Adjustments to reconcile net Loss to
cash provided (used) by operations
Depreciation and amortization adjustment 168,229 16,499
Provision for slow moving inventory 291,916 15,000
Minority interest share of subsidiary (132,385) (16,226)
Deferred lease incentive (60,839) --
Changes in operating assets and liabilities
(Increase) decrease in:
Acounts receivable-trade 768,133 (507,437)
Other receivables (22,125) (69,725)
Inventory (572,974) (215,553)
Contract rights 135,901 --
Other assets (36,059) --
Deferred expenses (3,012) --
Deferred sales costs 3,133 --
Prepaid expenses (184,549) (140,533)
Increase (decrease) in:
Accounts payable 902,502 101,180
Accrued liabilities (224,996) 84,303
Deferred service liability (173,895) --
------------- -------------
NET CASH USED BY OPERATING ACTIVITIES (288,999) (1,132,004)
CASH FLOWS FROM INVESTING ACTIVITES
Additions to property and equipment (110,879) (76,908)
Purchases of certificates of deposit -- (697,249)
Advances on note receivable 121,214 17,922
Sale (purchase) of marketable securities (48,561) 584,690
Capitalized merger and acquisition costs (37,409)
Business acquisition, net of cash acquired (415,127) 0
------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (490,762) (171,545)
CASH FLOWS FROM FINANCING ACTIVITIES
Credit facility obligations 846,957 0
Proceeds from short term debt -- 53,383
Payments on short term debt -- (347,772)
Repayment of long-term debt (700,083) 0
Proceeds from sale of preferred stock,
common stock and warrants 383,964 1,870,707
Payments on related party borrowing -- (245,000)
Dividends paid (28,432) (32,491)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 502,406 1,298,827
------------- -------------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (277,355) (4,722)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 1,918,604 261,098
------------- -------------
CASH AND EQUIVALENTS AT END OF PERIOD 1,641,249 256,376
============= =============
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Tech Electro Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
Note A - Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with the instructions per Item 310(b) of
Regulation SB. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the six month period ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
Note B - Organization
Tech Electro Industries, Inc. ("TEI" or the "Company") 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, TEI filed a Form SB-2 Registration Statement and completed a
public offering the net proceeds of which amounted to $2,043,891 including
warrants.
On June 1, 1996, pursuant to a Stock Exchange Agreement, TEI acquired
100% of the outstanding shares of Vary Brite Technologies, Inc. (VBT) 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 been adjusted to include the
operations of VBT as these operations are immaterial to the consolidated
operations of the Company. Accordingly, the accompanying consolidated statements
of operations include, the operations of VBT from June 1, 1996 forward. The
assets and liabilities acquired were also immaterial to the consolidated balance
sheet of the Company.
On October 29, 1996, TEI incorporated Universal Battery Corporation
(UBC) as a 67% owned subsidiary.
Effective February 10, 1997, pursuant to Regulation S as promulgated by
the Securities and Exchange Commission, TEI sold 1,100,000 shares of its common
stock and options to acquire 1,000,000 shares of common stock for $1,870,000,
for a combined price of $1.70 net to the Company. The options were issued with
an exercise price of $2.15 per share and expire thirteen months from the date of
issuance. In February 1998 the terms on the options were extended to March 1999
and the exercise price was increased to $2.50 per share.
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Note C - Acquisition
On March 19, 1998, the Company completed the acquisition of 51% of the
issued and outstanding common stock of U.S. Computer Group Inc ("USCG"). The
purchase consideration for the interest was $1,000,000 paid in cash. The
acquisition has been accounted for as a purchase. The excess of the aggregate
purchase price over the fair market value of assets acquired and liabilities
assumed of $3,984,815 will be amortized over 15 years. Contract rights acquired
of $5,436,047 will be amortized on a straight-line basis over the respective
contract lives.
The summary of the fair value of assets acquired and liabilities assumed is as
follows:
Current assets $ 4,672,250
Fixed assets 642,408
Contract rights and other assets 5,912,160
Goodwill 3,984,815
Current liabilities (4,543,524)
Long-term liabilities (7,433,939)
Minority interest (2,234,170)
-----------
$ 1,000,000
============
The following pro forma consolidated results for the quarter and six months
ending June 30, 1998 and 1997 assumes USCG acquisition occurred as of January 1,
1997.
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
Revenues $ 5,924,379 $ 6,013,189 $ 13,429,868 $ 13,454,754
Net loss $ (333,679) $ ( 522,198) $ (1,052,780) $ (1,913,623)
Loss per share
(Basic and
diluted) $ (0.08) $ (0.22) $ (0.28) $ (1.03)
Note D - Dividends
Dividends were declared on May 20, 1998 for Class A Preferred Stock at
$0.0975 per share. This dividend was paid in the form of common stock at the
rate of .0313 shares of common for each share of preferred. The dividend was
payable on June 30, 1998 to stockholders of record at the close of business of
May 3, 1998. In addition, dividends paid during the quarter ended June 30, 1998
was $7,678. No dividends were paid for the quarter ended June 30, 1997. No
dividends were payable at June 30, 1998.
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Note E - Inventories
Inventories consist of the following at June 30, 1998:
Computer parts, electronic components and
packing materials $4,618,204
Less valuation reserves 762,516
---------
$3,855,688
=========
The Company increased its inventory allowance by $120,000 in the second
quarter due to the reduction in business from a major customer by its
subsidiary Computer Components Corporation. This inventory allowance consists
of specialized inventory the Company has in stock for this customer.
Note F - Property and Equipment
Property and equipment consists of the following at June 30, 1998:
Machinery and equipment $ 1,211,183
Leasehold improvements 320,511
Furniture and fixtures 396,904
Automobiles 312,250
---------
2,240,848
Less accumulated depreciation & amortization 1,266,912
---------
$ 973,936
=========
Included in property and equipment at June 30, 1998 is $404,561 of
equipment and furniture acquired under capital leases. Accumulated amortization
of such equipment and furniture was $219,488 at June 30, 1998.
Note G - Credit Facility Obligations
At June 30, 1998, the Company's subsidiary, USCG, maintained a
revolving loan ("the Agreement") with a financial institution, with the maximum
borrowings allowable equal to the lesser of $10,000,000 outstanding at any one
time or the sum of 80 percent of the amount of the USCG's eligible receivables,
as defined in the Agreement. In addition to the revolving loan, USCG also
maintains a term loan with the same financial institution in the principle
amount of $ 500,000 ("Term Loan") plus a term loan in the principal amount of
$500,000 (the "Term Loan"). Borrowings under the Agreement are secured by an
interest in all of the USCG's owned accounts receivable, inventory, equipment,
investment property and general intangibles.
Borrowings under the agreement bear interest at a rate equal to the
prime rate plus 2 percent per year, but in no event less than 9 percent per
year. The revolving loan matures on September 30, 2000, subject to automatic
renewal terms of one year each. As of June 30, 1998, $6,457,020 was outstanding
under the revolving loan.
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Interest on the Term Loan is payable beginning on October 31, 1998 in
equal monthly installments of $14,000 plus a payment of the unpaid principal
balance on September 30, 2000. As of June 30, 1998, $500,000 was outstanding
under the term loan.
The terms of the Agreement provided for minimum monthly interest
charges, an initial loan fee of 1 percent of the maximum dollar amount of the
loan, an anniversary fee of .5 percent of the maximum dollar amount and a
quarterly facility fee of $5,000. Certain financial and nonfinancial covenants
are required to be met. At June 30, 1998, covenants relating to tangible net
worth and audited financial statement deadlines were in default, however, the
financial institution has provided waivers of such covenants.
In addition, the USCG has a "floorplan" credit line arrangement with a
finance corporation which provides for financing of up to $ 250,000 to support
inventory purchases from a specific vendor. The floorplan credit line agreement
does not provide for interest terms as amount outstanding are required to be
paid timely. As collateral security of the payment under the loan agreement,
USCG granted the finance corporation a security interest in the assets of USCG.
As of June 30, 1998, accounts payable includes approximately $93,380 related to
this inventory financing.
Note H - Deferred Service Liability
The deferred service liability of $ 1,440,422 on the accompanying
consolidated balance sheet represents maintenance contract revenues billed but
not yet earned. The terms of the Company's service maintenance contracts provide
for a period of service ranging from one to twelve months. Contracts are
automatically renewed by the Company unless the customer provides 90 days notice
of termination. The deferred service liability is amortized on a straight-line
basis over the term of the related contracts. As of June 30, 1998, the Company
had a service maintenance contract base with an aggregate balance of
approximately $ 16,639,710.
Note I - 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
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 1998 and 1997 as they are antidilutive. Therefore, diluted and basic
loss per share is identical. Net loss per share for the six months ended June
30,1997 has been increased for accrued dividends on preferred stock totaling
$32,850. There were no accrued dividends as of June 30, 1998.
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Note J - Long-Term Debt
As of June 30, 1998, long-term debt consists of the following:
Capital lease obligations (a) $ 221,246
Automobile loans (b) 58,812
---------
$ 280,058
Less current installments of long-term debt 164,147
---------
$ 115,911
=========
a) Various capital lease obligations with interest ranging from 10 to
12.22 percent payable in monthly installments through August 2000. The
capital lease obligations are secured by the related underlying
equipment and furniture.
b) Various automobile loans with interest rates ranging from 9.89 to
11.5 percent payable in monthly installments through February 2001. The
monthly loan payments, including interest, range from $ 324 to $ 522.
The automobile loans are secured by the related automobiles.
Note K - Minority Interest
Minority interest of $ 2,130,987 at June 30, 1998 represents the
minority interest in USCG's series D and series E redeemable preferred stock
which remain outstanding at June 30, 1998.
USCG's series D preferred stock outstanding of $ 133,814 are
cumulative, non-voting shares that were originally issued in connection with a
business acquisition. In September, 1997, a redemption agreement was signed with
the preferred shareholder, which calls for 14 monthly payments of $ 33,452 or
22,668 shares of series E Preferred stock which will fully redeem all
outstanding preferred shares by October, 1998. Cumulative dividends of 8 percent
will continue to be paid on the remaining balance. The liquidation preference of
series D preferred stock is equal to the remaining redemption price of
$ 133,814.
In connection with the acquisition of USCG by the Company, USCG also
issued 2,000 shares of series E redeemable preferred stock with a par value of
$ 1,000 per share. Cumulative dividends are payable on the stock annually
beginning December 31, 1998, in cash at a rate of 7 percent per share or 12
percent, if paid in additional shares of series E preferred stock. The series E
preferred stock is redeemable by the Company at any time. The liquidation
preference of the preferred stock is equal to the remaining redemption price of
$ 2,000,000.
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Note L - Warrants and Stock Options
During February 1997, in connection with common stock issued for cash,
the Company entered into an agreement which called for the reorganization of its
subsidiaries. The agreement provide that Tech Electro Industries, Inc. remit
eighty-four percent of all proceeds received from the exercise of warrants and
options existing at that time to its subsidiary, CCC, for funding of expansions
and growth. At June 30, 1998, 1,945,000 warrants subject to the agreement were
outstanding with an exercise price of $3.30 per warrant. The warrants expire on
January 26, 2000. In addition, at June 30, 1998, 1,000,000 options subject to
the agreement were outstanding. The options have an exercise price of $2.50 per
share and will expire on March 10, 1999. In December 1997, the Company issued an
additional 1,000,000 options to purchase common stock at $1.75 per share. These
option proceeds are not subject to remittance to CCC.
Note M - Subsequent Event
On July 10, 1998, the Company entered into an Agreement and Plan of
Merger with DenAmerica Corp. (DEN) to acquire all of the outstanding capital
stock of DEN. Under the terms of the agreement, the holders of each share of DEN
will receive $4.00 in cash and newly issued preferred stock of the Company worth
$.90 per share. The proposed merger is subject to various contingencies
including financing, regulatory approvals and other matters.
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Item 2. Management's Discussion and Analysis or Plan of Operation.
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and notes thereto included
elsewhere in this Form 10-QSB. Except for the historical information contained
herein, the discussion in this Form 10-QSB contains certain forward looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Form 10-QSB should be read as being applicable to all
related forward-looking statements wherever they appear in this Form 10-QSB. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, without
limitation, those factors discussed herein and in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997.
Recent Developments
During the period ended June 30, 1998, a number of developments
occurred which had a significant impact on the operations and results of the
Company, including the following:
In May 1998, Computer Components Corporation, a wholly-owned subsidiary
of the Company (CCC), was notified of a reduction in business from a major
customer, resulting in a $120,000 write-off from inventory (an increase of cost
of goods sold) for the month of June 1998.
On April 8, 1998, the Company commenced a private placement of 375,000
shares of Company common stock for $750,000, the private placement was
completed in July 1998.
On July 10, 1998, the Company entered into an Agreement and Plan of
Merger with DenAmerica Corp. (DEN) to acquire all of the outstanding capital
stock of DEN. Under the terms of the agreement, the holders of each share of DEN
will receive $4.00 in cash and newly issued preferred stock of the Company worth
$.90 per share. The proposed merger is subject to various contingencies
including financing, regulatory approvals and other matters.
In addition, the financial results of the Company for the six months
ended June 30, 1998 were significantly impacted by the acquisition of a majority
interest in US Computer Group, Inc., (USCG) which was consummated on March 19,
1998. Because the acquisition of USCG took place during the final portion of the
quarter ended March 31, 1998, the period ending June 30, 1998 is the first
period in which the operations of USCG are reflected in the results of
operations of the Company.
THREE-MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE-MONTHS ENDED JUNE 30, 1997
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Results of Operations
As noted above, the Company's results of operations for the second
quarter of 1998, compared to the second quarter of 1997, were significantly
impacted by the operations of USCG, which was acquired after the second quarter
of 1997, and for which there are no comparable results in the first quarter of
1997.
Revenues
For the three month period ending June 30, 1998, the Company had sales
of $7,982,834, an increase of $6,499,604 (438.21%) from sales of $1,483,230 for
the three month period ending June 30, 1997. The significant increase in sales
was due to sales originated by USCG and its subsidiaries, which together
contributed sales of $5,913,279 to the Company's revenues for the three month
period ending June 30, 1998. Neither USCG nor its subsidiaries had sales
contributing to the Company's revenues in the comparable period in 1997.
Excluding sales of USCG, the Company recorded sales of $2,069,555, for the three
month period ending June 30, 1998, or an increase of $586,325 (39.53%) from the
three month period ending June 30, 1997.
The Company recognized a loss from operations of $926,430 (unaudited)
for the three month period ending June 30, 1998, compared to a loss of $215,168
during the same period in the prior year, an increase in losses of $711,262
(330.56%). The Company's increased loss was due to increases in cost of goods
sold and general and administrative expenses. The cost of goods sold rose to
$6,510,953 in the second quarter of 1998 from $1,087,247 in the second quarter
of 1997, an increase of 5,423,706 (498.85%). The Company's general and
administrative expenses rose to $2,398,311 for the three month period ending
June 30, 1998 from $611,151 for the same period in 1997, an increase of
1,787,160 (292.43%). The increase in cost of goods sold and a substantial
portion of the increase in general and administrative expenses can be attributed
to the consolidation of the operations of USCG and its subsidiaries, which
contributed cost of goods sold of $4,903,494 and general and administrative
expenses of $1,181,427 for the second quarter of 1998, with no contribution in
the same period in 1997. Additionally, in May 1998, Computer Components
Corporation, a wholly owned subsidiary of the Company (CCC) was advised that a
major customer had experienced a change in certain management. This development
caused CCC to record a reduction in inventory of $120,000 in June 1998. The
Company expects that the loss of this customer will result in a reduction
of sales of $1,000,000 during the remainder of the Company's fiscal year.
Cost of Goods Sold
The Company's cost of goods sold, consisting primarily of inventory,
rose to $6,510,953 in the second quarter of 1998 from $1,087,247 in the second
quarter of 1997, an increase of $5,423,706 (498.85%). A substantial portion of
the increase was due to the impact of USCG and its subsidiaries, which
contributed cost of goods sold of $4,903,492 for the second quarter of 1998,
with no contribution in the same period in 1997. Excluding cost of goods sold
of USCG, the Company recorded cost of goods of $1,607,459 in the second quarter
of 1998, or an increase of $520,212 (47.85%) from the second quarter of 1997. As
mentioned above, CCC recorded an additional $120,000 to cost of goods in
June 1998 due to the write-off of inventory from the reduction in business from
a major customer.
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Cost of goods as a percentage of sales rose to 81.56% in the second
quarter of 1998 from 73.30% in the second quarter of 1997. This increase is
attributable to USCG and its subsidiaries, for which the cost of goods as a
percentage of sales was 82.92% in the second quarter of 1998. Excluding cost of
goods sold of USCG, the cost of goods as a percentage of sales for the rest of
the Company rose to 77.67% in the second quarter of 1998 from 73.30% in the
second quarter of 1997. Again, this increase was substantially due to CCC's
additional $120,000 to cost of goods in June 1998 due to the write-off of
inventory from the reduction in business from a major customer.
General and Administrative Expenses
The Company's general and administrative expenses, consisting primarily
of wages, benefits and related expenses, rose to $2,398,311 for the three month
period ending June 30, 1998 from $611,151 for the same period in 1997, an
increase of $1,787,160 (292.43%). The increase was due primarily to costs
associated with operations of USCG and its subsidiaries, which contributed
general and administrative expenses of $1,181,427 for the second quarter of
1998, with no contribution in the same period in 1997. Excluding general and
administrative expenses of USCG, the Company recorded general and administrative
expenses of $1,216,884 in the second quarter of 1998, or an increase of $605,733
(99.11%) from the second quarter of 1997. Such increase was due primarily to
the cost associated with the DEN acquisition and the integration of USCG into
the Company.
Purchase Order Backlog
At June 30, 1998, Company's purchase order backlog was approximately
$2,231,389, compared to $1,861,570 at June 30, 1997, an increase of 19.87%. Of
the $2,231,389 purchase order backlog at June 30, 1998, $119,024 (5.33%) was
attributable to USCG and $2,112,365 (94.67%) was attributable to the rest of the
Company. Generally, order backlog represents orders received from customers but
not shipped typically at the request of the customer. The Company monitors its
purchase backlog to help analyze sales trends and to gauge future sales
potential.
Interest Expense
The Company incurred $173,555 in interest expense in the second three
months of 1998, compared to $1,513 during the second three months of 1997, an
increase of $172,042 (11,370.92%). The significant increase in interest expense
is attributable to USCG and its subsidiaries, which incurred $162,037 in
interest expense in the second three months of 1998.
Income Tax Expense
The Company incurred $3,305 in income tax expense in the second three
months of 1998, compared to $0 during the second three months of 1997. The
increase in income tax expense was due to the Company's franchise tax for the
state of Texas.
SIX-MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX-MONTHS ENDED JUNE 30, 1997
15
<PAGE>
Results of Operations
The Company's results for operations for the first six months of 1998,
compared to the first six months of 1997, were significantly impacted by the
operations of USCG, which was acquired during the first six months of 1998, and
for which there are no comparable results in the first six months of 1997.
Revenues
For the six month period ending June 30, 1998, the Company had sales of
$9,979,422, an increase of $7,409,628 (or approximately 288.33%) from sales of
$2,569,796 for the six month period ending June 30, 1997. The significant
increase in sales was due to sales originated by USCG and its subsidiaries,
which together contributed sales of $5,913,279 to the Company's revenues for the
six month period ending June 30, 1998. Neither USCG nor its subsidiaries had
sales contributing to the Company's revenues in the comparable period in 1997.
The Company recognized a loss from operations of $1,041,466 (unaudited)
for the six month period ending June 30, 1998, compared to a loss of $451,033
during the same period in the prior year, an increase in losses of $590,433
(130.91%). The Company's increased loss was due to increases in cost of goods
sold and general and administrative expenses. The cost of goods sold rose to
$7,866,491 in the first half of 1998 from $1,886,187 in the first half of 1997,
an increase of 5,980,304 (317.06%). The Company's general and administrative
expenses rose to $3,154,397 for the six month period ending June 30, 1998 from
$1,134,640 for the same period in 1997, an increase of 2,019,757 (178.01%). The
increase in both cost of goods sold and general and administrative expenses can
be attributed to the consolidation of USCG and its subsidiaries, which
contributed cost of goods sold of $4,903,494 and general and administrative
expenses of $1,181,427 for the first half of 1998, with no contribution in the
same period in 1997. Additionally, CCC contributed an additional $120,000
to cost of goods in June 1998 due to the write-off of inventory from the loss of
a major customer.
Cost of Goods Sold
The Company's cost of goods sold, consisting primarily of inventory,
rose to $7,866,491 in the first half of 1998 from $1,886,187 in the first half
of 1997, an increase of 5,980,304 (317.06%). The increase was due to the impact
of USCG and its subsidiaries, which contributed cost of goods sold of $4,903,494
for the first half of 1998, with no contribution in the same period in 1997.
Additionally, CCC contributed an additional $120,000 to cost of goods in June
1998 due to the write-off of inventory from the loss of a major customer.
Cost of goods as a percentage of sales rose to 78.83% in the first half
of 1998 from 72.87% in the first half of 1997. This increase is attributable to
USCG and its subsidiaries, for which the cost of goods as a percentage of sales
was 82.92% in the first half of 1998.
16
<PAGE>
General and Administrative Expenses
The Company's general and administrative expenses, consisting primarily
of wages, benefits and related expenses, rose to $3,154,397 for the six month
period ending June 30, 1998 from $1,134,640 for the same period in 1997, an
increase of 2,019,757 (178.01%). The increase was due to costs associated with
operations of USCG and its subsidiaries, which contributed general and
administrative expenses of $1,181,427 for the first half of 1998, with no
contribution in the same period in 1997.
Interest Expense
The Company incurred $180,194 in interest expense in the first half of
1998, compared to $16,362 during the first six months of 1997, an increase of
$163,832 (1001.30%). The significant increase in interest expense is
attributable to USCG and its subsidiaries, which incurred $162,037 in interest
expense in the first half of 1998.
Income Tax Expense
The Company incurred $3,305 in income tax expense in the first six
months of 1998, compared to $0 during the first six months of 1997. The increase
in income tax expense was due to the Company's franchise tax for the state of
Texas.
Liquidity
As of June 30, 1998, the Company had cash and cash equivalents of
$1,641,249 and marketable securities of $119,425. At June 30, 1997 the Company
had cash of $256,315, certificates of deposit of $697,249 and marketable
securities of $698,625. The change in the Company's investment in cash,
certificates of deposit, and securities reflects the liquidation of certificates
of deposit to fund cash needs of the Company, as well as cash and cash
equivalents held by USCG. The Company expects to use these funds as required for
maintenance and expansion of existing operations of CCC, UBC and VBT.
On September 9, 1997, USCG entered into a loan agreement with a
financial institution which provides for a revolving loan with the maximum
borrowings allowable equal to the lesser of $10,000,000 outstanding at any one
time or the sum of 80 percent of the amount of the Company's eligible
receivables, as defined in the loan agreement, other than maintenance contract
receivables, plus 4.25 times the average total monthly computer maintenance
contract collections to be calculated on a trailing twelve month moving average,
plus a term loan in the principal amount of $500,000. Borrowings under the loan
agreement are secured by an interest in all of USCG's owned accounts receivable,
inventory, equipment, investment property and general intangibles. The revolving
loan matures on September 30, 2000, subject to automatic renewal terms of one
17
<PAGE>
year each. The interest on the Term Loan is payable beginning on October 31,
1998 in equal monthly installments of $14,000 plus a payment of the unpaid
principal balance on September 30, 2000. As of June 30, 1998, $500,000 was
outstanding under the term loan and another $500,000 was outstanding under a
bridge term loan extended to USCG shortly after its acquisition by the Company,
for a total of $1,000,000 outstanding.
In addition, the Company has a "floorplan" credit line arrangement with
a finance corporation which provides for financing of up to $250,000 to support
inventory purchases from a specific vendor. The floorplan credit line agreement
does not provide for interest terms as amounts outstanding are required to be
paid in approximately thirty days. As collateral security for the payments under
the loan agreement, the Company granted the finance corporation a security
interest in the assets of the Company.
On April 8, 1998, the Company commenced a private placement of 375,000
shares of Company common stock for $750,000, which placement was completed in
July 1998. The proceeds from this private placement are expected to be used for
working capital.
On April 17, 1998, USCG announced that it had entered into a
non-binding letter of intent to raise up to $20 million in a firm commitment
initial public offering of its common stock. The proceeds of the offering will
be used to, among other things, finance selected acquisitions, repay
indebtedness and provide working capital.
On July 15, 1998, the Company announced that it had entered into a
definitive merger agreement with DenAmerica Corp. (DEN), the owner and
franchisor of the Black-eyed Pea restaurant chain and a leading franchisee of
Denny's restaurants, providing for the merger of DEN into the Company. The
merger agreement terms are similar to those of the letter of intent signed by
the two companies on April 30, 1998. The transaction is expected to be
consummated in November 1998.
Under the terms of the definitive agreement, DEN shareholders will
receive $4.00 in cash and $0.90 in newly-issued preferred stock of the Company.
The Company is expected to retain most of the management, administrative
and operations personnel of DEN. The consummation of the merger is contingent
upon satisfactory completion of mutual due diligence efforts, financing and
other conditions. Should the merger not occur due to the DEN Board of Directors
executing a transaction with another purchaser, a $3 million breakup fee would
be paid to the Company.
The Company expects to fund the cash portion of the consideration for
the merger from debt secured by assets of DEN, subordinated debt of the Company
or combination of those two and other sources.
Inflation
The Company has not been materially effected by inflation, while the
Company does not anticipate inflation affecting the Company's operations,
increases in labor and supplies could impact the Company's ability to compete.
18
<PAGE>
Year 2000
As has been widely reported, there is worldwide concern that Year 2000
technology problems may materially and adversely impact a variety of businesses,
local, national and global economies. The Company, in response to this effort,
has commenced a process of identifying operating and application software
systems that will be impacted by the Year 2000. The Company's preliminary
analysis indicates that the Company will require enhancement of software in
older systems, as well as updating and enhancing various accounting and other
systems. The Company believes that it will complete upgrades of its operating
and application software systems prior to the Year 2000, although competition
for goods and services relating to such upgrades, including computer equipment
and installation expertise, may cause delays in implementation. 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, which will be funded out of the working
capital of the Company. This expense is not anticipated to be material to the
Company's financial position or future results of operations, although there can
be no assurance that presently unforeseen computer programming difficulties will
arise.
The Company has not conducted a systematic evaluation of the Year 2000
compliance of its vendors and customers. As a result, it is possible that the
Company's future performance may be adversely impacted by payment and financial
difficulties experienced by customers, and by shipping, fulfillment and
accounting difficulties experienced by vendors. The Company believes that it has
sufficient resources, including cash reserves and inventory supplies, to
maintain operations during delays in payments or supplies of inventories.
However, the Company is aware that extended difficulties by larger vendors or
customers may have a significant impact; however, it is unable, at this time, to
anticipate the extent of any such impact, were it to occur.
19
<PAGE>
PART II - OTHER INFORMATION.
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
On April 8, 1998, the Company commenced a private placement of 375,000
shares of Company common stock for $750,000, which private placement was
completed in July 1998. All shares were sold through officers and directors of
the Company to less than 35 accredited investors in reliance upon Rule 506 of
the Securities Act of 1933, as amended and all proceeds will go to the Company.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Securities Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
1. The Company filed an Amendment to the Current Report on
Form 8-K, originally filed on February 13, 1998, clarifying
its response to Item 4 regarding changes in certifying
accountant.
2. The Company filed Amendment No. 1 to the Current Report on
Form 8-K, originally filed on March 19, 1998, providing
financial statements and pro forma financial statements of
USCG.
20
<PAGE>
Signatures
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Tech Electro Industries, Inc.
-----------------------------
Date: August 14, 1998 /s/ DAVID KAYE
----------------------
David Kaye
Chief Financial Officer and
Principal Accounting Officer
21
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Jun-30-1998
<CASH> 1,641,249
<SECURITIES> 119,425
<RECEIVABLES> 3,074,495
<ALLOWANCES> 489,730
<INVENTORY> 3,855,688
<CURRENT-ASSETS> 9,306,448
<PP&E> 2,240,858
<DEPRECIATION> 1,266,912
<TOTAL-ASSETS> 20,109,170
<CURRENT-LIABILITIES> 6,091,640
<BONDS> 0
0
193,140
<COMMON> 45,791
<OTHER-SE> 4,253,098
<TOTAL-LIABILITY-AND-EQUITY> 20,109,170
<SALES> 9,979,422
<TOTAL-REVENUES> 9,979,422
<CGS> 7,866,491
<TOTAL-COSTS> 3,154,397
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 180,194
<INCOME-PRETAX> (1,144,674)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,144,674)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,147,979)
<EPS-PRIMARY> (0.30)
<EPS-DILUTED> (0.30)
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