SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT*
UNDER THE SECURITIES ACT OF 1933
TECH ELECTRO INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
2941 Main Street, Suite 300-B, Santa Monica, California 90405
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(Address, including zip code, of registrant's principal executive offices)
(310) 396-1782
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(Registrant's telephone number, including area code)
Texas 75-2408297
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
5065
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(Primary Standard Industrial
Classification Code Number)
WILLIAM KIM WAH TAN
President, Chief Executive Officer
and Chairman of the Board
TECH ELECTRO INDUSTRIES, INC.
2941 Main Street, Suite 300-B
Santa Monica, California 90405
(310) 396-1782
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(Name and address, including zip code, and telephone number,
including area code, of agent for service)
Copies of Communications to:
ROBERT E. BRAUN, ESQ.
JEFFER, MANGELS, BUTLER & MARMARO LLP
2121 Avenue of the Stars, 10th Floor
Los Angeles, California 90067
(310) 203-8080
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Approximate Date of Commencement of Proposed Sale to the Public: As soon as
possible after the Registration Statement is declared effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: ( X )
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. ( )
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. ( )
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. ( )
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. ( )
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CALCULATION OF REGISTRATION FEE
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Title of Each Proposed Maximum Proposed Maximum
Class of Securities Amount To Offering Price Per Aggregate Offering Amount of
To Be Registered Be Registered (1) Security (2) Price Registration Fee
- -------------------------------- ---------------------- -------------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Securities Underlying
Representative's Purchase 30,000 Shares of
Option Units Consisting of (i) Common Stock
Shares of Common Stock and
(ii) Shares of Class A Preferred 30,000 Shares of Class
Stock A Preferred Stock $10.725 $ 321,750 $94.92
Common Stock underlying Class 60,000 Shares of
A Preferred Stock Common Stock $ -- $ -- $ --
Redeemable Class A Warrants
underlying Representative's 30,000 Redeemable
Purchase Option Class A Warrants $ 0.13 $ 3,900 $ 1.15
Shares of Common Stock
underlying Redeemable Class A 31,800 Shares of
Warrants Common Stock $3.30 $ 104,940 $30.96
Common Stock underlying 2,150,000 Shares of
Options Common Stock $2.00(3) $4,300,000 $1,268.50
2,712,398 Shares of
Common Stock Common Stock $2.00(3) $5,424,796 $1,600.31
TOTAL REGISTRATION FEE....................................................................................................$2,995.84
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(1) Pursuant to Rule 416, there are also being registered such additional
securities as may be required for issuance pursuant to the
anti-dilution provisions of the Redeemable Class A Warrants, Options,
and Class A Preferred Stock.
(2) Calculated pursuant to Rule 457(c), (g) and (i).
(3) Based on the average high and low market price of the Registrant's
Common Stock on August 28, 1998, as quoted in The Nasdaq SmallCap
Market.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
* Pursuant to Rule 429, the enclosed Prospectus constitutes a combined
Prospectus also relating to securities covered by Registration Statement No.
33-98662 (345,000 shares of Redeemable Class A Warrants and the 365,700 shares
of Common Stock issuable upon exercise of such Redeemable Class A Warrants,
345,000 shares of Common Stock underlying 345,000 Units, 345,000 shares of Class
A Preferred Stock and the 690,000 shares of Common Stock underlying such shares
of Class A Preferred Stock, and 1,600,000 Redeemable Class A Warrants held by
certain Securityholders and the 1,696,000 shares of Common Stock issuable upon
exercise of such Redeemable Class A Warrant), and a post-effective amendment to
said Registration Statement.
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TECH ELECTRO INDUSTRIES, INC.
CROSS REFERENCE SHEET
Item Number and Heading in Location
Form SB-2 Registration Statement in Prospectus
================================================= =====================================================
<S> <C>
1. Front of the Registration Statement and Outside
Front Cover Page of Prospectus........................... Facing Page and Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front Cover and Outside Back Cover Pages of
Prospectus............................................... Prospectus
3. Summary Information and Risk Factors..................... Prospectus Summary; Risk Factors
4. Use of Proceeds.......................................... Use of Proceeds
5. Determination of Offering Price.......................... Not Applicable
6. Dilution................................................. Not Applicable
7. Selling Security Holders................................. Selling Security Holders
8. Plan of Distribution..................................... Plan of Distribution
9. Legal Proceedings........................................ Business
10. Directors, Executive Officers, Promoters and
Control Persons.......................................... Management; Certain Transactions; Risk Factors
11. Security Ownership of Certain Beneficial Owners Security Ownership of Certain Beneficial Owners and
and Management........................................... Management
12. Description of Securities................................ Description of Securities
13. Interest of Named Experts and Counsel.................... Not Applicable
14. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities........... Not Applicable
15. Organization Within Last Five Years...................... The Company; Business
16. Description of Business.................................. Business; Prospectus Summary; Risk Factors;
Management's Discussion and Analysis
17. Management's Discussion and Analysis or Plan
of Operations............................................ Management's Discussion and Analysis
18. Description of Property ................................. Business
19. Certain Relationships and Related Transactions........... Certain Relationships and Related Transactions
20. Market for Common Equity and Related
Stockholder Matters...................................... Market for Common Equity and Related Stockholder
Matters; Description of Securities
21. Executive Compensation................................... Management; Executive Compensation
22. Financial Statements..................................... Financial Statements
23. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure................... Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
</TABLE>
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PROSPECTUS September 4, 1998
Tech Electro Industries, Inc.
1,600,000 Redeemable Class A Warrants and
1,696,000 Shares of Common Stock issuable upon exercise
of the Redeemable Class A Warrants
345,000 additional Redeemable Class A Warrants and
365,700 Shares of Common Stock issuable upon exercise of the
345,000 Redeemable Class A Warrants
345,000 Units
345,000 Shares of Common Stock underlying the 345,000 Units
345,000 Class A Preferred Stock underlying the 345,000 Units and
690,000 Shares of Common Stock issuable upon conversion of the
345,000 Class A Preferred Stock
30,000 Option Units underlying Representative's Purchase Option
30,000 additional Redeemable Class A Warrants underlying
Representative's Purchase Option
31,800 Shares of Common Stock issuable upon exercise of the Redeemable
Class A Warrants underlying
Representative's Purchase Option
30,000 Shares of Common Stock underlying Representative's Purchase Option
30,000 Shares of Class A Preferred Stock underlying Representative's
Purchase Option
60,000 Shares of Common Stock issuable upon conversion of the
30,000 Shares of Class A Preferred Stock
2,712,398 Shares of Common Stock
2,150,000 Shares of Common Stock underlying Options to Purchase
Shares of Common Stock
This Prospectus relates to 1,600,000 Redeemable Class A Warrants (the
"Redeemable Warrants") of Tech Electro Industries, Inc., a Texas corporation
(the "Company"), held by nine holders of record (the "Securityholders") and the
1,696,000 shares of Common Stock, $.01 par value ("Common Stock"), issuable upon
the exercise of the Securityholders' Redeemable Warrants. The Securityholders'
Redeemable Warrants were issued to certain investors in a private placement by
the Company in October 1995 and January 1996. See "Plan of Distribution." Each
Securityholder's Redeemable Warrant entitles the holder to purchase, at an
exercise price of $3.50, subject to adjustment, one share of Common Stock. The
Securityholders' Redeemable Warrants are currently exercisable at any time
through January 25, 2000, and subject to redemption by the Company for $.10 per
Securityholders' Redeemable 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 price of the
Securityholders' Redeemable Warrants was reduced to $3.30 per share based on the
placement of 1,000,000 shares of Common Stock issued in December 1997 described
below. In addition, the conversion rate was adjusted so that each Redeemable
Warrant is exercisable for 1.06 shares of Common Stock.
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This Prospectus also relates to (a) 345,000 additional Redeemable Class A
Warrants and the 365,700 shares of Common Stock issuable upon exercise of such
Redeemable Class A Warrants (the "Public Warrants"), with the same terms as the
Securityholders' Redeemable Warrants, and (b)(i) 345,000 units, with each unit
consisting of one share of Common Stock and one share of Class A Preferred Stock
(the "Units"), (ii) 345,000 shares of Common Stock underlying such Units, (iii)
345,000 shares of Class A Preferred Stock underlying such Units, and (iv)
690,000 shares of Common Stock issuable upon conversion of such Class A
Preferred Stock, which Public Warrants and Units were sold by the Company in an
underwritten public offering (the "Offering"). The Offering was conducted
pursuant to a January 26, 1996 registration statement under the Securities Act
of 1933, as amended (the "1933 Act"), registering the aforementioned 345,000
Public Warrants and 345,000 Units.
This Prospectus also relates to 30,000 option units identical to the Units
(the "Option Units"), which includes 30,000 shares of Common Stock and 30,000
shares of Class A Preferred Stock underlying the Option Units, as well as the
60,000 shares of Common Stock underlying the latter 30,000 shares of Class A
Preferred Stock. This Prospectus also relates to 30,000 additional Redeemable
Class A Warrants with the same terms as the Public Warrants (the "Option
Warrants") which are also issuable upon exercise of the Representative's
Purchase Option (as hereinafter defined) and 31,800 shares of Common Stock
issuable upon exercise of the Option Warrants. The Option Units and Option
Warrants were received by the managing underwriter, PCM Securities, Ltd. (the
"Representative") of the Offering pursuant to a Representative's purchase option
(the "Representative's Purchase Option"), exercisable for a four-year period
commencing January 23, 1997 at exercise prices of $10.725 per Option Unit and
$0.13 per Option Warrant, respectively. The Securityholders' Redeemable
Warrants, the Public Warrants and the Option Warrants, all of which are subject
to the same terms are sometimes collectively referred to herein as the
"Warrants."
Finally, this Prospectus also relates to 2,712,398 shares of Common Stock
and an additional 2,150,000 shares of Common Stock underlying 2,150,000 options
(the "Options"), each to purchase one share of Common Stock. 1,000,000 of the
Options are exercisable until March 10, 1999 at a price of $2.50 per share and
1,000,000 of the Options are exercisable until December 12, 1998 at a price of
$1.75 per share. 1,100,000 shares of Common Stock and 1,000,000 Options were
issued on February 11, 1997 by the Company to six accredited investors (the
"Investors") pursuant to Regulation S, as adopted by the Securities and Exchange
Commission (the "Commission"), and 1,000,000 shares of Common Stock and
1,000,000 Options were issued on December 12, 1997 to three accredited investors
pursuant to Regulation S, as adopted by the Commission. In addition, 237,378
shares of Common Stock and 150,000 Options were issued as compensation to
executive officers and employees of the Company in February, May and August
1998, and 375,000 shares were issued in a private placement to certain investors
in April-August 1998 (such persons receiving the foregoing shares are
collectively referred to herein as the "Additional Securityholders"). The
150,000 Options issued to officers are exercisable for a period ending February
20, 2001 at an exercise price of $5.00 per share.
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The Securityholders, the Representative, the Investors and the Additional
Securityholders and their respective securities offered hereby are sometimes
collectively referred to herein as the "Selling Securityholders" and the
"Selling Securityholders' Securities," respectively. The Selling
Securityholders' Securities, including the Common Stock issuable upon exercise
of the Securityholders' Redeemable Warrants, together with the Public Warrants,
are sometimes collectively referred to herein as the "Securities."
The Common Stock, Units, Class A Preferred Stock and Warrants of the
Company are traded on the Nasdaq Small Cap Market under the symbols TELE, TELEU,
TELEP and TELEW, respectively. On August 24, 1998, the last sales price of the
Company's Common Stock, Units and Warrants was $2.06, $6.50, and $.56,
respectively. The Class A Preferred Stock has been traded with the Units and has
not been separately quoted.
The securities offered by the Selling Securityholders by this Prospectus
may be sold from time to time by the Selling Securityholders or by their
transferees. The distribution of the Selling Securityholders' Securities offered
hereby may be effected in one or more transactions that may take place on the
over-the-counter market, including ordinary brokers' transactions, privately
negotiated transactions or through sales to one or more dealers for resale of
such Selling Securityholders' Securities as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. Usual and customary or specifically negotiated
brokerage fees or commissions may be paid by the Selling Securityholders.
The Selling Securityholders, and intermediaries through whom such
Securities are sold, may be deemed underwriters within the meaning of the 1933
Act, with respect to the Securities offered, and any profits realized or
commissions received may be deemed underwriting compensation.
With the exception of the exercise price of the Securityholders' Redeemable
Warrants, the Option Units, the Option Warrants, and the Options, the Company
will not receive any of the proceeds from the sale of Securities offered hereby.
In the event all of the Securityholders' Redeemable Warrants, the Option Units,
the Option Warrants and Options are exercised, the Company will receive gross
proceeds of $10,605,650. See "Selling Securityholders," "Plan of Distribution,"
and "Use of Proceeds." The Company will pay all of the expenses of this
Prospectus estimated at approximately $40,000.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. FOR INFORMATION
REGARDING CERTAIN RISKS RELATING TO THE COMPANY, SEE "RISK FACTORS" ON PAGES
10 TO 15.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. These reports, proxy statements and other
information can be inspected and copied at prescribed rates at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following Regional Offices of the Commission:
The Chicago Regional Office, Northwest Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511 and the New York Regional Office, 7
World Trade Center, 12th Floor, New York, New York 10048. Such reports, proxy
statements and other information filed by the Company can also be inspected at
the offices of the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006. Copies of such materials can also be
obtained by mail at prescribed rates upon written request addressed to the
Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the Commission's web site
(http://www.sec.gov).
The Company has filed with the Commission a registration statement under
the Securities Act with respect to the Securities registered hereby. This
Prospectus omits certain information contained in said registration statement as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock, reference is made
to the registration statement, including the exhibits thereto. Statements
contained herein concerning the contents of any contract or any other document
are not necessarily complete, and in each instance, reference is made to such
contract or other document filed with the Commission as an exhibit to the
registration statement, or otherwise, each such statement being qualified in all
respects by such reference. The registration statement, including exhibits and
schedules thereto, may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of such materials can be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates and at the Commission's web site.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in or incorporated by reference into this Prospectus. Except where
otherwise indicated, all share and per share data and information included in
this Prospectus relating to the number of shares of Common Stock assume no
exercise of (i) the Warrants, (ii) the Representative's Purchase Option, (iii)
the Options, or (iv) the options available for grant under the Company's 1995
Incentive Stock Option Plan and/or 1997 Incentive Stock Option Plan; and assume
no conversion of the Class A Preferred Stock into shares of Common Stock.
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THE COMPANY
The Company was incorporated in Texas on January 10, 1992, to acquire a
privately-held business enterprise, Computer Components Corporation ("CCC"). On
January 31, 1992, the Company acquired all of the outstanding stock of CCC, a
Texas corporation formed in 1968. CCC was the survivor in a merger with Dunbar
Associates, Inc. ("Dunbar"), also a Texas corporation, which was formed in 1963.
In June, 1996, the Company acquired 100% of the issued and outstanding shares of
capital stock of Very Brite Technologies, Inc. ("VBT"). On October 29, 1996, the
Company incorporated Universal Battery Corporation ("UBC"), a Texas corporation,
of which the Company 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, 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. In March 1998,
the Company acquired a controlling interest in US Computer Group Inc. ("USCG"),
a New York corporation formed on January 22, 1988. References to the "Company"
include CCC, Dunbar, VBT, UBC and USCG and their subsidiaries, unless the
context indicates otherwise. The Company's offices are located at 2941 Main
Street, Suite 300-B, Santa Monica, California 90405; its telephone number is
(310) 396-1782.
CCC, directly and through its subsidiaries, is engaged in the business of
importation, distribution and sale of electronic components used in the
manufacture and assembly of high-technology products such as computers, oil
field test equipment, medical instrumentation and uninterruptable power supply
systems, among others. CCC also distributes batteries and battery products. CCC
is an authorized distributor, on a non-exclusive basis, for two product
groupings of Matsushita Electric Corporation of America ("Panasonic"). One group
of Panasonic products includes power supplies, printers, buzzers and other
miscellaneous products. The other group of Panasonic products sold by CCC
include nickel cadmium, lithium, alkaline and leadacid batteries. CCC is also a
non-exclusive distributor of battery products manufactured by Varta Batteries,
Inc. ("Varta"). CCC also operates under noncontractual, long-term relationships
(exceeding 10 years) with other vendors located in Taiwan, the Philippines and
Japan from whom it imports non-proprietary electronic components and batteries
marketed under its Texas state registered trademark, "Nikko", and its own name,
"Tech Electro Industries". CCC recently began distributing electro mechanical
devices and transformers produced in The People's Republic of China and Hong
Kong.
USCG is a provider of a broad range of information technology ("IT")
services, products and solutions to companies located primarily in the
metropolitan markets of New York and Philadelphia and surrounding areas.
USCG offers its clients a single source for a wide variety of IT services which
include maintenance and repair, new and used equipment sales, short-term
equipment rentals, network integration, software support, relocation services,
contingency planning, business recovery services, and training. USCG's clients
include Fortune 1000 companies as well as a variety of middle market clients.
From 1992 through 1996, USCG was named one of the nation's Top 500 Fastest
Growing Privately Held Companies by INC. Magazine.
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USCG's IT services fall into three basic categories: maintenance of
computer systems, resale of computer products, and complete system solutions.
USCG's core business is providing on-call computer hardware maintenance services
for users of midrange equipment manufactured by Digital Equipment Corporation,
IBM, Sun Microsystems, Inc. and many leading brand personal computers makers. In
this regard, USCG also acts as a value added reseller of computer hardware such
as workstations, networking and communications equipment, servers and related
software. USCG's relationships with established aggregators of computer hardware
such as Ingram Micro, Inc., MicroAge Computer Centers, Inc. and Tech Data enable
it to provide customers with competitive pricing and quick deliveries of
computer hardware. In addition, USCG provides complete system solutions for
clients by providing consulting and technical services in the areas of network
integration, contingency planning, software support, remote information center
services and training services.
USCG serves clients primarily in the New York to Philadelphia metropolitan
corridor through its office locations in New York City, Long Island, New Jersey
and Philadelphia. Each facility is fully-equipped with in-house testing,
computer room and PC lab environments, warm site command centers for contingency
planning and extensive on-site parts inventory. Services are provided by a team
of experienced specialists including field service engineers, systems analysts,
programmers, technicians and customer service representatives.
On July 15, 1998, the Company announced that it had entered into a
definitive agreement with DenAmerica, the owner and franchisor of the Black-eyed
Pea restaurant chain and a leading franchisee of Denny's restaurants, for the
merger of DenAmerica 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, DenAmerica shareholders will receive in exchange for
each share of Common Stock of DenAmerica $4.00 in cash and $0.90 in newly-issued
preferred stock of the Company. The consummation of the merger is contingent
upon satisfactory completion of mutual due diligence efforts, financing and
other conditions.
THE OFFERING
Common Stock Offered hereby 6,680,198(1)
Common Stock Outstanding as of August 10, 1998 4,163,308
Securities underlying Representative's
Purchase Option:
Option Warrants Offered 30,000
Option Units Offered 30,000
Class A Preferred Stock underlying Option Units 30,000
Nasdaq Small Cap Market Symbols:
Common Stock TELE
Class A Preferred Stock TELEP
Warrants TELEW
Units TELEU
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(1) Includes (i) 1,696,000 shares of Common Stock issuable upon exercise of
the Securityholders' Redeemable Warrants, (ii) 30,000 shares of Common
Stock underlying the Option Units issued pursuant to the
Representative's Purchase Option, (iii) 31,800 shares of Common Stock
issuable upon exercise of the Option Warrants, (iv) 60,000 shares of
Common Stock underlying Class A Preferred Stock underlying the Option
Units, (v) 2,100,000 shares of Common Stock, issued to investors, (vi)
2,000,000 shares of Common Stock underlying the Options which were also
issued to investors, (vii) 237,398 shares of Common Stock issued to
executives and employees of the Company, (viii) 150,000 shares of
Common Stock underlying the Options which were also issued to such
executives, and (ix) 375,000 shares of Common Stock issued to investors
who have purchased shares in a private placement.
Summary Financial Data
The summary financial data in the table are derived from the consolidated
financial statements and related notes thereto of the Company. The data should
be read in conjunction with the consolidated financial statements and the
related notes contained elsewhere herein.
Summary of Selected Consolidated Financial Information
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<CAPTION>
Years Ended December 31, Six Months Ended June 30,
(Audited) (Unaudited)
1997 1996 1998 1997
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<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $6,666,837 $3,840,075 $9,979,422 $2,569,794
Total operating expenses 3,174,432 1,446,976 3,154,397 1,134,640
Loss from operations (1,413,350) (331,419) (1,041,466) (451,033)
Net loss (1,299,581) (336,562) (1,147,979) (399,511)
Net loss per common share (0.59) (0.36) (0.30) (0.23)
Balance Sheet Data:
Current assets 5,398,751 3,382,767 9,306,448 4,749,395
Working capital 3,929,224 2,487,945 3,214,808 3,950,331
Total assets 6,257,922 3,690,885 20,109,170 5,114,999
Total liabilities 1,469,527 894,822 13,486,154 799,064
Stockholders' equity 4,759,193 2,719,130 4,492,029 4,255,228
</TABLE>
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Forward-Looking Statements
When included in this Prospectus, the words "expects,"
"intends,""anticipates," "plans," "projects" and "estimates," and analogous or
similar expressions are intended to identify forward-looking statements. Such
statements, which include statements contained in "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," are inherently subject to a variety of
risks and uncertainties that could cause actual results to differ materially
from those reflected in such forward-looking statements. For a discussion of
certain of such risks, see "Risk Factors." These forward-looking statements
speak only as of the date of this Prospectus. The Company expressly disclaims
any obligation or undertaking to release publicly any updates or revisions to
any forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THE PROSPECTUS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS
BEFORE MAKING AN INVESTMENT. THIS PROSPECTUS 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 PROSPECTUS SHOULD BE READ AS BEING APPLICABLE TO ALL
RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE
DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE HEREIN.
RISKS CONCERNING THE COMPANY
Limited Control and Influence on the Company. The current officers and
directors, including the controlling beneficial shareholders of the Company in
the aggregate, directly or beneficially, currently own approximately 37.73% of
the total outstanding Common Stock (26.80% of the voting power). As a result,
these individuals will probably be able to elect a majority of the Company's
directors and thereby control the management policies of the Company, as well as
determine the outcome of corporate actions requiring shareholder approval by
majority action, regardless of how other shareholders of the Company, including
holders of shares of Class A Preferred Stock, may vote. Such ownership of Common
Stock may have the effect of delaying, deferring or preventing a change in
control of the Company and may adversely affect the voting rights of holders of
Common Stock and the Class A Preferred Stock.
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Limitation of Liability of Directors. As permitted by the Texas Business
Corporation Act, the Company's Articles of Incorporation, as amended,
eliminates, with certain exceptions, the personal liability of its directors to
the Company and its shareholders for monetary damages as a result of a breach of
fiduciary duty. Such a provision makes it more difficult to assert a claim and
obtain damages from a director in the event of a breach of his fiduciary duty.
Article 2.02-1 of the Texas Business Corporation Act provides that a corporation
has the power to (i) indemnify directors, officers, employees and agents of the
corporation against judgments, fines and amounts paid in settlement in
connection with suits, actions and proceedings and against certain expenses
incurred by such parties if specified standards of conduct are met: and (ii)
purchase and maintain insurance on behalf of any of the foregoing parties
against liabilities incurred by such parties in the foregoing capacities. The
Bylaws of the Company provide for indemnification of its officers and directors
against expenses actually and necessarily incurred by them in connection with
the defense of any action, suit or proceeding in which they are made parties by
reason of being or having been officers or directors of the Company; except in
relation to matters as to which any such director or officer is adjudged in such
action, suit or proceeding to be liable for gross negligence or willful
misconduct in the performance of duty. However, such indemnification is not
exclusive of any other rights to which those indemnified may be entitled under
any bylaw, agreement, vote of shareholders or otherwise.
Dependence on Key Personnel. The success of the Company depends to a
significant extent upon the performance of its key officers, the loss of one or
more of whom could have a material adverse effect on the Company. The Company
believes that its future success also will depend in large part upon its ability
to attract and retain highly skilled managerial, technical and sales and
marketing personnel, who are in demand. There can be no assurance that the
Company will be successful in attracting and retaining such personnel.
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RISKS CONCERNING CCC
Lack of Liquidity. CCC stocks a large inventory of standard products for
immediate shipment upon receipt of customer purchase orders. Maintaining a large
inventory, Management believes, gives CCC a competitive edge. It has, in the
past, caused a liquidity problem from time to time, requiring CCC to obtain
short term loans to cover cash shortages. Craig D. La Taste, a Director of CCC,
and his spouse, have made working capital loans to CCC in the past to cover
these temporary cash shortfalls. Management expects that CCC may continue to
experience this liquidity problem from time to time. There can be no assurance
CCC will be able to borrow money from affiliates or others to resolve any future
cash shortage problems. Dependence on Two Suppliers/Non-Exclusive Relationship;
Potential Future Competition. CCC 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"). CCC is a certified Panasonic Modification Center for the
production of battery packs. Although CCC 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 CCC. CCC
believes Panasonic also sells battery products to CCC's competitors. Panasonic
has expanded its own battery manufacturing operation to include alkaline and
lead-acid batteries. Panasonic's parent company also has a battery pack assembly
operation in Japan which CCC believes does not compete in the battery pack
market which CCC serves. However, should Panasonic establish a battery pack
operation in conjunction with its United States battery manufacturing operation,
CCC would be forced to compete directly against Panasonic, a firm with much
greater financial and other resources than CCC. There is no assurance that CCC
would be able to compete successfully in such an environment. The loss of this
supplier could have a material adverse effect on CCC unless CCC is able to
arrange for alternate suppliers in the event of such loss.
CCC also enjoys a beneficial non-exclusive relationship with an affiliate
of Nippon Electric Corporation, which is CCC's largest supplier of electronic
component parts. The loss of this supplier could have a material adverse effect
on CCC. CCC believes this supplier also sells component parts to CCC's
competitors.
Foreign Manufacturing and Trade Regulation. A significant number of the
components sold by CCC are manufactured outside the United States and purchased
by CCC from foreign manufacturers located in Asia and Pacific Rim countries. As
a result, CCC and its ability to sell at competitive prices could be adversely
affected by increases in tariffs or duties, changes in trade treaties, currency
fluctuations, strikes or delays in air or sea transportation, and possible
future United States legislation or executive branch policies with respect to
pricing and import quotas on products from foreign countries. CCC's ability to
be competitive in or with the sales of imported components could also be
affected by other governmental actions and changes in policies related to, among
other things, anti-dumping legislation. Except for currency fluctuations, CCC
does not believe that these factors adversely impact its business at present.
There can be no assurance that such factors will not materially adversely affect
CCC in the future. Currency fluctuation has from time to time adversely affected
CCC's results of operations.
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Changes in Technologies. CCC's business is dependent upon the continued use
of standard electronic component parts, i.e., resistors, capacitors, relays,
inductors, etc., in various types of electronic and electrical equipment,
including computers, uninterruptable power systems, telecommunications equipment
and medical instrumentation systems, among others. The majority of the
electronic parts sold by CCC are primarily "passive" devices subject to minimal
obsolescence factors. Changes in manufacturing techniques from "leaded/thru
hole" forms to "chip/surface mount" configurations is having an impact on the
product-line mix which CCC has available for its customers. The result
anticipated is a reduced growth of the older manufacturing forms with a
concomitant increase in growth in the sales of the new manufacturing forms. CCC
believes it, and the industry, will experience a positive effect in overall
business activity as a result of this transition. No assurances can be given
that this transition will be beneficial to CCC.
Competition. CCC is a relatively small company in an industry that has many
large companies. CCC faces significant competition from regional firms. Most
competitors are substantially larger and have greater financial resources than
CCC. There is no assurance that CCC can compete profitably with such other
companies on a long-term basis.
Related Party Transactions. CCC leases office and warehouse space from La
Taste Enterprises, a partnership comprised of members of the Craig D. La Taste
family. Mr. La Taste is a director of CCC and significant shareholder of the
Company.
RISKS CONCERNING USCG
History of Losses; Working Capital Deficiency; Dependence on Stockholder
Financing. USCG has a history of losses including net losses of approximately
$3,257,651 and $3,747,900 for the fiscal years ended February 28, 1997 and 1998,
respectively. There can be no assurance that USCG will be able to operate
profitably in the future. As a 51% shareholder of USCG, the Company may be
adversely affected by USCG's inability to operate profitably in the future.
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Project Risks. The nature of USCG's engagements exposes USCG to a variety
of risks. Many of USCG's engagements involve projects that are critical to the
operations of its clients' businesses. USCG's failure or inability to meet a
client's expectations in the performance of its services or to do so in the time
frame required by such client could result in a claim for substantial damages
against USCG, regardless of USCG's responsibility for such failure. Service
providers, such as USCG, are in the business of employing people and placing
them in the workplace of other businesses. Therefore, USCG is also exposed to
liability with respect to actions taken by its employees while on assignment,
such as damages caused by employee errors and omissions, misuse of client
proprietary information, misappropriation of funds, discrimination and
harassment, theft of client property, other criminal activity or torts and other
claims. Although USCG intends to obtain general liability insurance coverage,
there can be no assurance that such coverage will be available on reasonable
terms or in sufficient amounts to cover one or more large claims, or that the
insurer will not disclaim coverage as to any future claim. The successful
assertion of one or more large claims against USCG that exceed available
insurance coverage or changes in USCG's insurance policies, including premium
increases or the imposition of large deductible or co-insurance requirements,
could have a material adverse effect on USCG's results of operations, financial
condition and business.
Dependence on Continued Authorization to Resell and Provide
Manufacturer-authorized Services. USCG's future success with IT service
offerings and product sales depends in part on its continued authorization as a
service provider and its continued status as a certified reseller of certain
hardware and software products. Without such sales and service authorizations,
USCG would be unable to provide the range of services and products currently
offered by USCG. In general, the agreements between USCG and such manufacturers
include termination provisions, some of which are immediate. There can be no
assurance that such manufacturers will continue to authorize USCG as an approved
reseller or service provider, and the loss of one or more of such authorizations
could have a material adverse effect on USCG's results of operations, financial
condition and business.
Dependence on Suppliers. Although USCG has not experienced significant
problems with its suppliers of hardware, software and peripherals, there can be
no assurance that such relationships will continue or that, in the event of a
termination of its relationships with any given supplier, it would be able to
obtain alternative sources of supply without a material disruption in USCG's
ability to provide products and services to its clients. Furthermore, as is
typical in the industry, USCG receives credits or allowances from many
manufacturers for market development which are used to offset a portion of
USCG's cost of products sold. Changes in the availability, structure or timing
of these credits or allowances or any material disruption in USCG's supply of
products could have a material adverse effect on USCG's results of operations,
financial condition and business.
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Rapid Technological Change; Dependence on New Solutions. The IT service
industry is characterized by rapid technological change, evolving industry
standards, changing client preferences and new product and service
introductions. USCG's success will depend in part on its ability to develop IT
solutions that keep pace with continuing changes in the IT service industry.
There can be no assurance that USCG will be successful in adequately addressing
these developments on a timely basis or that, if these developments are
addressed, USCG will be successful in the marketplace. In addition, there can be
no assurance that products or technologies developed by others will not render
USCG's services non-competitive or obsolete. USCG's failure to address these
developments could have a material adverse effect on USCG's results of
operations, financial condition and business. See "Business-- Services."
Risks Relating to Year 2000. Although the Company has initiated a
comprehensive project to prepare its computer systems for the year 2000 and
plans to have changes to critical systems completed by the first quarter of
1999, based on information currently available from the Company's internal
assessment of modifications that can be made and conversions which are not
available, the Company believes that the likelihood of a material adverse impact
to the Company as a result of internal year 2000 problems is remote. Because
USCG has a large base of customers with equipment and software that may be
prompted to upgrade their systems in anticipation of the year 2000 change, the
Company's maintenance operations may be adversely affected by the year 2000
problem. However, the Company believes that any upgrades by USCG's clients could
positively impact USCG's resale and computer solutions operations.
RISKS CONCERNING THE SECURITIES OF THE COMPANY
Possible Volatility of Securities Prices. The Stock market has from time to
time experienced significant price and volume fluctuations that may be unrelated
to the operating performance of any particular company. The market prices of the
securities of many publicly-traded companies in the computer industry have in
the past been and can be expected in the future to be especially volatile.
Factors such as the Company's operating results, announcements by the Company or
its competitors concerning technological innovations, new products or systems
may have a significant impact on the market price of the Company's securities.
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Lack of Public Market; Possible Delisting of Securities from the Nasdaq
Stock Market; Risks of Low-Priced or Penny Stock. Although the Units, Common
Stock, Class A Preferred Stock and Warrants have been traded on the Nasdaq
SmallCap Market, there can be no assurance such markets will be sustained. While
the Company's Units, Common Stock, Class A Preferred Stock and Warrants meet the
current Nasdaq continued listing requirements, there can be no assurance that
the Company will continue to meet such continued listing requirements. Nasdaq
has occasionally increased the continuing listing requirements. If the Company
is in the future unable to satisfy Nasdaq's continued listing requirements, its
securities may be delisted from Nasdaq and the liquidity and price of the
Company's securities could be impaired. The Company has been advised by Nasdaq
that it is currently reviewing the Company's status as a listed company and has
asked the Company to provide a compliance plan for continued listing. If Nasdaq
delisting occurs, trading of the Company's securities, if any, would thereafter
be conducted in the over-the-counter market in the so-called "pink sheets" or
the "Electronic Bulletin Board" of the National Association of Securities
Dealers, Inc. ("NASD"). As a consequence of such delisting, an investor could
find it more difficult to dispose of, or to obtain accurate quotations of the
price of the Company's securities. Additionally, if the Company's securities
were delisted from Nasdaq, they will become subject to Rule 15g-9 under the 1934
Act. Such rule would adversely affect the ability of purchasers in this Offering
to sell any of the securities acquired hereby in the secondary market.
Rule 15g-9 requires additional disclosure, relating to the market for penny
stocks, in connection with trades in any stock defined as a penny stock. The
Commission defines a penny stock to be any equity security that has a market
price of less than $5.00 per share (exclusive of commissions), subject to
certain exceptions. Such exceptions include any equity security listed on Nasdaq
and any equity security issued by an issuer that has (i) net tangible assets of
at least $2,000,000, if such issuer has been in continuous operation for three
years, (ii) net tangible assets of at least $5,000,000, if such issuer has been
in continuous operation for less than three years, or (iii) average annual
revenue of at least $6,000,000, if such issuer has been in continuous operation
for less than three years. Unless an exemption is available, the regulations
require the delivery, prior to any transaction involving a penny stock, of a
disclosure schedule explaining the penny stock market and the risks associated
therewith.
In addition, if the Company's securities are not quoted on Nasdaq, or the
Company does not have $2,000,000 in net tangible assets, trading in the Common
Stock would be covered by Rules 15g-1 through 15g-6 under the 1934 Act for
non-Nasdaq and non-exchange listed securities. Under such rules, broker/dealers
who recommend such securities to persons other than established customers and
accredited investors must make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to a transaction
prior to sale. Securities also are exempt from these rules if the market price
is at least $5.00 per share.
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Although the Company's securities are, as of the date of this Prospectus,
outside the definitional scope of penny stocks as they are listed on Nasdaq, in
the event the Company's securities were subsequently to become characterized as
penny stocks, the market liquidity for the Company's securities could be
severely affected. In such an event, the regulations on penny stocks could limit
the ability of broker/dealers to sell the Company's securities and thus the
ability of purchasers of the Company's securities to sell their securities in
the secondary market.
No Dividends Anticipated on Common Stock. The Company has not paid any
dividends on its Common Stock to date. The Company does not currently intend to
declare or pay any dividends on its Common Stock in the foreseeable future, but
plans to retain earnings, if any, for development and expansion of its business
operations. Dividends, however, on the Class A and Class B 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 each March, June, October and December of each year,
either in cash or Common Stock at the option of the Company. Unless all accrued
and unpaid dividends on the Class A and Class B Preferred Stock have been paid
in cash for a dividend period, no cash dividends may be declared or paid or set
aside for payment or other distribution made upon the Common Stock.
Potential Adverse Effect of Redemption of Warrants. The Warrants may be
currently redeemed by the Company at a redemption price of $0.10 per Warrant
upon 30 days' prior written notice if the average bid price per share of the
Common Stock is $5.25 or greater (subject to adjustment) for 30 consecutive
trading days prior to the notice of redemption. Redemption of the Warrants could
force the holders to: (i) exercise the Warrants and pay the exercise price
therefor at a time when it may be disadvantageous for the holders to do so; (ii)
to sell the Warrants at the then current market price when they might otherwise
hold the Warrants, or, (iii) to accept the redemption price, which, at the time
the Warrants are called for redemption, is likely to be substantially less than
the market value of the Warrants. The Company will not call the Warrants for
redemption unless a current effective registration statement (and Prospectus) is
in effect under the 1933 Act with respect to the shares of Common Stock issuable
upon exercise thereof. The Company presently intends to use its best efforts to
keep this Prospectus current to the extent required by the federal securities
laws, which will enable the Warrants to be immediately exercised even if not
called for redemption.
Current Prospectus and State Registration Required to Exercise Warrants.
The purchasers of the Warrants will only be able to exercise the Warrants if:
(i) a current Registration Statement under the 1933 Act relating to the Common
Stock is qualified for sale or exempt from qualification under the 1933 Act and;
(ii) such Common Stock is qualified for sale or exempt from qualification under
the applicable securities laws of the states in which the various holders of the
Warrants reside. Although the Company will use its best efforts to maintain the
effectiveness of the current Registration Statement covering the Common Stock
issuable upon the exercise of the Warrants, there can be no assurance the
Company will be able to continue to do so. The value of the Warrants may be
greatly reduced if a current Registration Statement covering the Common Stock
issuable upon the exercise of the Warrants is not kept effective or if such
Common Stock is not qualified or exempt from qualification in the states in
which the holders of the Warrants reside.
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Authorization of Preferred Stock. The Company's Articles of Incorporation,
as amended, authorize the issuance of 1,000,000 shares of "blank check"
preferred stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. As of August 10, 1998,
there were 185,338 shares of Class A Preferred Stock outstanding, all of which
may be voted with other classes of voting stock of the Company. In addition,
the Class A Preferred Stock are currently convertible at the option of the
holder and under certain circumstances at the option of the Company, into two
shares of Common Stock of the Company. Accordingly, the Board of Directors is
empowered, without shareholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect the
voting power or other rights of the holders of the Company's Common Stock. In
the event of issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. In addition, the Company has entered into an agreement
to acquire by merger DenAmerica Corp., which acquisition contemplates the
issuance of a significant number of shares of a new series of preferred stock.
See "Business - DenAmerica Acquisition." Accordingly, there can be no assurance
that preferred stock of the Company will not be issued at some time in the
future.
USE OF PROCEEDS
With the exception of the exercise price of the Securityholders' Redeemable
Warrants, the Option Units, the Option Warrants, and the Options, the Company
will not receive any proceeds from the sale of securities offered hereby. It is
currently anticipated that the net proceeds from the exercise of the
Securityholders' Redeemable Warrants, the Option Units, the Option Warrants, and
the Options, estimated at approximately $10,500,000, will be added to the
general funds of the Company and used for working capital and other general
corporate purposes. The Company has agreed to contribute to Computer Components
Corporation, its wholly-owned subsidiary, eighty-four percent (84%) of the net
proceeds from the exercise of the Securityholders' Redeemable Warrants, the
Option Units, the Option Warrants, and the Options issued on February 11, 1997.
The Company will pay all the expenses of this Prospectus, estimated to be
approximately $40,000.
MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER 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 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 ...................... TELEU
Common Stock ............... TELE
Class A Preferred Stock..... TELEP
Warrants ................... TELEW
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The following table sets forth the high and low prices of the Company's
common stock on a quarterly basis for the calendar years 1996, 1997 and first
quarter of 1998.
Common Stock Price Warrants Units
================== ================ ================
Calendar Period High Low High Low High Low
- ------------------ ----- ------ ----- ----- ---- -----
1996:
First Quarter... $4.00 $2.1 $1.00 $0.25 $9.00* $2.50
Second Quarter.. $1.875 $0.6 $0.688 $0.188 $5.75 $2.38
Third Quarter... $1.50 $0.7 $0.50 $0.063 $3.50 $2.00
Fourth Quarter.. $2.25 $1.3 $0.75 $0.031 $6.25 $2.56
1997:
First Quarter... $3.25 $1.6 $1.125 $0.378 $9.00 $5.25
Second Quarter.. $2.75 $1.5 $0.75 $0.323 $8.63 $4.63
Third Quarter... $2.50 $1.3 $0.688 $0.25 $7.88 $5.50
Fourth Quarter.. $4.375 $1.6 $1.375 $0.313 $12.13 $5.25
1998:
First Quarter... $3.938 $2.3 $1.188 $0.563 $12.50 $7.00
Second Quarter.. $3.188 $2.3 $1.031 $0.563 $10.38 $7.00
* Statistics are not available for the full period.
The Class A Preferred Stock has been traded with the Units and has not been
separately quoted.
The Company has not paid any dividends on its Common Stock since its
inception and has no current plans to pay dividends on the Common Stock in the
foreseeable future. In addition, the Company's ability to pay cash dividends is
restricted by the Company's current credit facilities, and future borrowings may
contain similar restrictions. The Company intends to reinvest future earnings,
if any, in the development and expansion of its business. Any future
determination to pay dividends on the Common Stock will depend upon the
Company's results of operations, financial condition and capital requirements
and such otherfactors deemed relevant by the Company's Board of Directors.
Subsequent to January 31, 1996, the effective sale date of the Class A Preferred
Stock, unless all accrued and unpaid dividends on the Class A 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.
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The Company is required to pay quarterly dividends at an annual rate of
$37.75 on each outstanding share of the Company's Series A Preferred Stock.
Such dividends, at the option of the Company, may be cash or in shares of the
Company's Common Stock. During Fiscal Year 1997, shareholders of record of the
Class A 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. H holders of Class A on record date February 28,
1998 received a dividend of approximately 0.04 shares of Common Stock per share.
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 31,
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.
The closing price of the Common Stock of the Company as reported on the
NASDAQ Small Cap Issues on August 31, 1998, by brokers making a market, was
$1.875.
As of August 31, 1998, there were approximately 578 beneficial holders of
the common stock of the Company, nine holders of record of the Warrants, and one
holder of record of the Units.
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 the related notes thereto and the other
financial information included elsewhere in this Prospectus. When used in the
following discussions, the words "believes", "anticipates", "intends", "expects"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties, which could
cause actual results to differ materially from those projected, including, but
not limited to, those set forth in "Risk Factors." readers are cautioned not to
place undue reliance on forward-looking statements, which speak only as of the
date hereof.
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), lost a major customer, resulting in a $120,000 write-off from
inventory (an increase cost of goods) 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, which private placement was
completed in August 1998.
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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, DEN shareholders will receive in exchange
for each share of DEN common stock $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.
RESULTS OF OPERATIONS
Operations of the Company and its Subsidiaries.
THREE-MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE-MONTHS ENDED JUNE 30, 1997
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.
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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, CCC was advised that a major
customer had experienced a change in key management and would cease operations
supplied by CCC. 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 approximately $500,000 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 $4,903,494 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. 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 noted above.
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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 of
CCC but not shipped, typically at the request of the customer. CCC 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 quarter 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 quarter 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
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.
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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
$2,569,794 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 73.40% 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.
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.
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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.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996.
REVENUES
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
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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.
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.
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, 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. ("USCG"). USCG is a computer
maintenance, systems solution and information technology partner headquartered
in Farmingdale, New York 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 USCG from Telstar
Holdings Ltd. Since the date of that announcement, the Company, USCG 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 USCG was $1 million, paid in cash. In connection with the
acquisition, USCG 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 USCG. 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.
INVENTORY
The Company monitors its inventory quantities on an ongoing basis and
provides for inventory obsolescence accordingly. 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.
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GENERAL AND ADMINISTRATIVE EXPENSES
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 USCG. 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.
INTEREST.
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."
LIQUIDITY AND CAPITAL RESOURCES
CCC 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
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expenses. 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
August 1998. The proceeds from this private placement were used for working
capital. 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. 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.
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.
On September 9, 1997, USCG entered into a loan agreement, which was
subsequently amended on February 24, 1998 and March 19, 1998, 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. The loan agreement
also provides for a term loan in
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the principal amount of $500,000 and a temporary bridge loan in the 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 year each. The principal 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.
The principal on the temporary bridge loan is payable in equal monthly
installments of $13,889, plus a payment of the unpaid balance due on the earlier
of August 31, 2001 or the maturity date. 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.
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."
On March 31, 1997, the Company paid in full 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 matured on June
30, 1998.
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.
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.
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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 additional working capital.
On July 15, 1998, the Company announced that it had entered into a
definitive merger agreement with DenAmerica Corp. ("DenAmerica"), the owner and
franchisor of the Black-eyed Pea restaurant chain and a leading franchisee of
Denny's restaurants, providing for the merger of DenAmerica 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, DenAmerica shareholders will
receive in exchange for each share of DenAmerica common stock $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
DenAmerica. 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 DenAmerica 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 DenAmerica, subordinated debt of
the Company or combination of those two and other sources. See "Business --
DenAmerica Acquisition."
Management believes that the Company's financial resources are sufficient
to meet its projected cash requirements.
INFLATION
The Company has not been materially affected by inflation in the United
States. 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.
YEAR 2000 COMPLIANCE AND COSTS
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.
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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.
While the Company has plans to address the problems related to its own
Products within the coming year, there can be no assurance that the costs of
bringing these systems into compliance will not be significantly greater than
expected or that compliance will be achieved in a timely manner. In addition,
there can be no assurance that the Company's current products do not contain
undetected errors or defects associated with Year 2000 date functions that may
result in material costs to the Company. Moreover, even if the Company's
products and services satisfy such requirements, the products and services
provided to the Company's customers may not be Year 2000 compliant. An adverse
impact on such customers due to the Year 2000 issue could also have a material
adverse effect on the Company's business, financial condition and results of
operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income" ("SFAS No. 130"), which establishes new
guidance for the reporting and display of comprehensive income and its
components. The Company believes the adoption of SFAS No. 130 will have no
impact on the Company's net income or stockholders' equity.
In July 1997, the FASB issued Statement #No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This Statement expands
Certain reporting and disclosure requirements for segments from current
standards. In February 1998, the FASB issued Statement #No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This Statement
revises employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans. The
Company is not required to adopt these Statements until December 1998 and does
not expect the adoption of these standards to result in material changes to
previously reported amounts.
In June 1998, the FASB issued Statement #No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The Statement establishes
accounting and reporting standards requiring that all derivative instruments
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The Statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting
criteria are met. The accounting provisions for qualifying hedges allow a
derivative's gains and losses to offset related results on the hedged item in
the income statement, and requires that the Company must formally document,
designate, and assess the effectiveness of transactions that qualify for hedge
accounting. The Company is not required to adopt this Statement until January
2000. The Company has not determined its method or timing of adopting this
Statement or the impact on its financial statements. However, when adopted,
this Statement could increase volatility in reported earnings and other
comprehensive income of the Company.
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BUSINESS
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 Very 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.
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, New York with
annual revenues in excess of $25 million. See "Recent Acquisition." US Computer
Group, Inc. and its wholly-owned subsidiaries (collectively, "USCG") provide of
a broad range of information technology ("IT") services, products and solutions
to companies located primarily in the metropolitan markets of New York and
Philadelphia and surrounding areas. USCG offers its clients a single source for
a wide variety of IT services which include maintenance and repair, new and used
equipment sales, short-term equipment rentals, network integration, software
support, relocation services, contingency planning, business recovery services,
and training. USCG's clients include Fortune 1000 companies as well as a
variety of middle market clients.
References to the Company refer to the combined operations of TEI, USCG,
CCC, VBT and UBC and their subsidiaries, except where otherwise indicated.
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BUSINESS OF CCC AND ITS SUBSIDIARIES
CCC'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.
CCC 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. CCC 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. CCC 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. CCC 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.
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OPERATIONS
Electronic Components
CCC 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.
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
CCC 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 CCC include sealed lead-acid, nickel-cadmium,
lithium, carbonzinc, nickel metal hydride and alkaline batteries. CCC 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, CCC sells
"battery packs" consisting of assembled groups of batteries combined physically
and electrically into a single unit. CCC 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,
CCC 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 CCC maintains little or no inventory of
completed packs, although components for assembly of packs are maintained. CCC
also offers customers battery packs assembled in China to the customers'
specifications. CCC 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.
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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
For the past several years CCC 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
sub-contractors 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.
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.
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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.
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.
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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 believes, however, that the loss of a major customer or
group of related customers may 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.
During the year ended December 31, 1997, two of the Company's customers
accounted for approximately 21% of the Company's total sales. In May 1998, CCC
was advised that a major customer had experienced a change in certain
management. The Company expects that the loss of this customer will result in a
reduction of sales of approximately $500,000 during the remainder of the
Company's fiscal year 1998. See "Management's Discussion and Analysis of
Financial Condition--Results of Operations."
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EMPLOYEES
CCC and its subsidiaries currently employ thirty-three employees, including
five clerical employees (one of whom is employed at VBT), eleven inside sales
personnel (four of whom are employed at VBT), six employees in the assembly
functions, two warehousing employees and six 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
CCC and its subsidiaries compete 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, CCC 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 CCC are substantially larger and have greater resources than CCC.
CCC does not consider itself a significant factor in the electronic component
and battery business.
ENVIRONMENTAL MATTERS
CCC 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.
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PATENTS AND TRADEMARKS
Although CCC 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. CCC 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 CCC's business.
SOURCES AND AVAILABILITY OF MATERIALS
With the exception of battery products and certain electronic components
described below, CCC 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, CCC believes that the
loss of any single supplier would not adversely affect CCC's business. All raw
materials utilized by CCC are readily available from many sources.
CCC 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"). CCC 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 CCC'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 CCC. CCC believes
this supplier also sells component parts to CCC's competitors.
RESEARCH AND DEVELOPMENT
During each of the last two Fiscal Years CCC 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 herein, 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.
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BUSINESS OF USCG
INFORMATION TECHNOLOGY INDUSTRY BACKGROUND
Many organizations have become increasingly dependent on the use of IT as a
competitive tool in today's business environment. With increased competition,
globalization, deregulation and rapid technological advances, organizations are
being forced to make fundamental changes to their business by improving their
products and services, strengthening client relationships and reducing costs.
There is a need to access and distribute data on a real-time basis throughout an
organization and between organizations. This has led to the rapid growth in
network computing infrastructures, which connect numerous and geographically
dispersed end-users via local and wide area networks. This growth has been
driven by the emergence of industry standard hardware, software and
communications tools as well as the significant improvement in performance
capacity and utility of such network-based equipment and applications.
Since information processing is the backbone of many businesses, there is a
growing market for IT service providers that can provide competitive product and
value added services to ensure that the complex technology infrastructure
performs reliably. Furthermore, the ability to integrate and deploy new
information technologies in a cost-effective manner is critical for businesses
to compete successfully in today's rapidly changing business environment.
Internal computer departments often cannot keep up with the rapidity of
technological change and companies, therefore, increasingly seek outside
sources, such as USCG, for assistance. The Company believes that the trend
towards the outsourcing of IT management functions is driven by the significant
costs associated with hiring, training and maintaining a full service internal
MIS staff.
BUSINESS STRATEGY
On March 19, 1998, the Company completed the acquisition of a controlling
interest in USCG, which provides a broad range of information technology
services, products and solutions to companies located primarily in the
metropolitan markets of New York and Philadelphia and surrounding areas. The
Company's business objective is to take advantage of the rapid growth in the IT
industry and expand USCG's relationship with its customers by providing
additional services.
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INFORMATION TECHNOLOGY SERVICES
USCG began its operations as a rapidly growing provider of computer
maintenance services. Over the years, USCG has evolved from strictly a
"break/fix" maintenance organization to a provider of a variety of value added
services including network design, consulting and integration, disaster recovery
and training. To more effectively operate its diverse service offerings, USCG's
services are divided into three separate service groups:
o COMPUTER MAINTENANCE represents USCG's core business of
providing computer repair services to companies under
contractual arrangements.
o COMPUTER PRODUCTS concerns the sale of new and used computer
hardware. USCG acts as a reseller of such equipment but,
through its relationships with established aggregators and
resellers, USCG is able to avoid the inventory costs
associated with typical resellers or aggregators.
o COMPUTER SOLUTIONS represents USCG's network integration
services. These services comprise configuration, delivery and
installation of local and wide area networks, and the ongoing
support and monitoring of network operating systems.
COMPUTER MAINTENANCE SERVICES
Maintenance and Warranty Programs. USCG's computer maintenance services
remain its core business. USCG provides warranty and maintenance services on
minicomputers, PCs, and peripherals. USCG's experience in this area encompasses
a wide array of systems platforms, from Digital Equipment Corporation and IBM
midrange computers to Sun Microsystems and IBM workstations to a range of PC
products. This cross-platform experience has honed USCG's capabilities in
supporting cross-platform applications, connectivity, inter-operability, and
multi-protocols.
USCG services both new and used equipment. As a service provider to
mid-sized clients with high standards for performance and service, USCG gained
the necessary skills and experience for mission-critical operations. This
experience, plus authorizations from major PC product manufacturers such as
Dell, Compaq, and Hewlett Packard, enable USCG to provide on-site and carry-in
service on most brand-name computer systems.
As part of its general maintenance services, USCG offers warranty and post
warranty maintenance, warranty upgrades and extension to manufacturers' warranty
offerings. USCG's premium services in the maintenance area includes 24 hour a
day, seven day a week coverage with two hour on-site response.
Several of the key elements of USCG's relationship with each of its
customers are guarantees which include:
Guaranteed response times Guaranteed repair or equipment replacement
Guaranteed up-time.
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The guarantees are based on the customers' requirements for service and
support. USCG attempts to provide flexible maintenance agreements to meet
customers' needs, including time and material contracts, fixed-price repair,
equipment relocations, installations, de-installation, and loaner options.
PARTS MANAGEMENT
USCG maintains at its four locations inventories of current serviceable
spare parts, full systems, and peripherals. These readily available parts enable
USCG to provide expedited parts service. If a part is unavailable, USCG can
provide a full loaner system to eliminate downtime. USCG augments its supply
through an array of parts providers throughout the United States. Manufacturers'
online parts management and information systems are used to streamline parts
ordering and tracking processes.
RELOCATION SUPPORT SERVICES
To further facilitate its customers' online applications, USCG provides
relocations support services. In general, USCG will provide a dedicated
relocation coordinator who will:
Survey and evaluate a new site Handle all de-installation and
re-installation activities, such as verification of equipment operations prior
to de-installation Disconnect all cables, buses, and cabinets Supervise all
equipment packing and unpacking Perform diagnostic system verification Run
diagnostics after re-installation to ensure proper operations
USCG's relocation support services also include logistical assistance such
as the selection and qualification of moving contractors, arrangement of
temporary storage, and insurance administration.
Computer Products. USCG acts as a reseller of such equipment but, through
its relationships with established aggregators and resellers, USCG is able to
avoid the inventory costs associated with typical resellers or aggregators. USCG
believes that by acting as a provider of hardware as well as maintenance
services, USCG is better able to maintain relationships with clients as their
computer systems become obsolete and are replaced.
NEW AND USED EQUIPMENT SALES
USCG provides an array of new and used equipment, ranging from name-brand
personal computers to midrange computer systems and peripherals. USCG is
authorized to resell AST, Apple, Compaq, Dell, Epson, Hewlett-Packard, IBM,
Lexmark, and Toshiba equipment. All used equipment must meet quality control
standards before it can be resold to customers. For all equipment sales, USCG
offers its customers delivery, setup, and installation options, as well as
warranty upgrades.
The Company's relationships with established aggregators of computer
hardware such as Ingram Micro, Inc., MicroAge Computer Centers, Inc. and Tech
Data enable it to provide customers with competitive pricing and quick
deliveries of computer hardware without many of the risks associated with
maintaining extensive inventories of hardware for resale.
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NETWORK INTEGRATION AND SYSTEM SOLUTIONS
Business Analysis and Strategic Solutions. The core component of USCG's
network integration and systems solutions group is its business analysis and
strategic planning capabilities. The goal of this service is to identify and
evaluate business needs and recommend the optimum solution. USCG's business
analysis and strategic solutions services include:
NEEDS ANALYSIS - to identify information systems solutions, hardware,
and software
DEVELOPMENT OF FUNCTIONAL SPECIFICATIONS - to show clients what
custom systems will look like prior to actual development
RE-ENGINEERING SERVICES - to take the results of an operational
review and make changes to the operation prior to system
implementation
Office Automation and General Applications. These services offer assistance
to clients regarding their use of general software applications. Recognizing
that office automation is becoming a core aspect of corporate culture, USCG's
consultants assist clients in understanding the implementation and benefits of
various software applications. The consultants are able to take off-the-shelf
products and apply them for maximum customized results.
Network Integration. USCG maintains a team of network engineers provides a
range of network design and implementation services. Because of USCG's roots as
a maintenance provider on midrange systems, it has developed expertise in
multi-platform connectivity and communications. USCG is able to address the
needs of many environments, from standalone PCs to local area networks to
multiple offices connected over a WAN. Networking services include:
- Local area network implementation
- Wide area network implementation
- Multi-platform connectivity
- Multi-vendor solutions
- Network topology design and documentation
- Network troubleshooting and performance tuning
- Network operations reviews
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Business Recovery Services. USCG's prime goal in providing
disaster/business recovery services is protecting network operations in the
event of a natural or man-made disaster, power outage, or other contingency.
USCG handles all aspects of disaster support and system backup, from reloading
the operating system and application software to restoring the system to its
original log-in state.
USCG offers three business recovery services designed to complement one
another:
Business recovery facilities in Manhattan, Long Island, New Jersey,
and Pennsylvania - Each facility is designed as a temporary site for
companies to relocate their key personnel in the case of a disaster.
Each site offers access to computers, hardware, software, and support
for IBM, Digital, Sun, and client/server environments, as well as for
all LAN environments.
Replace program - For an annual subscription fee, USCG guarantees
replacement of damaged computer equipment within 72 hours. This
includes installation and integration support.
Off-site data storage - USCG provides secure off-site magnetic media
storage, which provides clients critical backup for all their
computer files. USCG offers media pickup and delivery 24 hours a day,
every day of the year.
SALES AND MARKETING
USCG's sales and marketing efforts focus on middle market and larger
organizations that have extensive IT needs. Targeted markets include financial
services, law firms, technology and other IT intensive organizations.
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MARKETING
A comprehensive marketing program to support the launching of new
capabilities and services is being developed. Traditionally,
USCG's marketing efforts focused on telemarketing (done by a
dedicated telemarketer) as well as mailings and occasional trade show
and association event participation. USCG's telemarketing function will be
integrated with the restructured sales force and will focus on new accounts and
sales of new services and capabilities to the existing base. Mailings and
broadcast fax will be used to support both the account recruitment and business
development efforts. Regional trade show and associations are being identified
and participation in events such as Technology for Education seminars, school
district technology events, regional and local business association, etc. will
be utilized as part of USCG's marketing program. USCG's public relations,
coordinated by an outside consultant, will be linked to the marketing program.
Major wins, strategic alliances, acquisitions, etc. will be part of the PR
efforts and will increase name recognition of USCG. An aggressive program is
being launched to market the existing base. This includes VIP account programs
to increase loyalty and provide recognition for our top revenue providing
customers. A customer newsletter, a VIP newsletter, technology white papers,
product introductions, etc. will all be used as means of creating and
maintaining a constant flow of communications between the company and their
customer base.
As of July 31, 1998, USCG had approximately 19 sales and marketing
personnel, as well as a customer support and customer administration
organization containing approximately 16 additional employees. The customer
administration and support organization supports both sales and USCG's clients
in areas ranging from contract preparation, contract renewal, sub-contract
administration and sales reporting.
CLIENTS
USCG has a diverse client base consisting of over 1,400 customers with no
customer accounting for more than 5% of total revenues. USCG's clients include
Fortune 1000 companies as well as a variety of middle market clients.
COMPETITION
The markets for USCG's services are characterized by intense competition
and there are little or no barriers to entry. USCG's competitors vary in size
and in the scope of services offered. Primary competitors generally include
service groups of computer equipment manufacturers or resellers, consulting and
systems integrators, applications development firms, temporary staffing firms
and other IT service providers. Traditionally, the largest service providers
have principally focused on providing full-service solutions to Fortune 500
companies. However, a number of IT service companies such as Perot Systems
Corporation, Technology Solutions Corp., Cambridge Technology Partners, and
Condor Technology Group have expanded or begun to expand into the broader
markets in which USCG typically has operated.
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USCG believes that the primary competitive factors for the provision of IT
services include price, customer service, technical expertise and quality,
breadth of service offerings, reliability and security, adherence to industry
standards, reputation, product availability, and geographic coverage. USCG's
success will depend heavily upon its ability to provide high quality services on
a timely basis. Other factors that will affect USCG's success in this market
include USCG's continued ability to attract additional experienced technical,
marketing, sales, and management talent, and the expansion of worldwide support,
training and service capabilities. Increased competition may result in greater
pricing pressure, which could adversely affect USCG's gross margins, results of
operations and cash flow.
Many of USCG's current and potential competitors have longer operating
histories and financial, sales, marketing, technical and other resources
substantially greater than those of USCG. As a result, such competitors may be
able to adapt more quickly to changes in customer needs or to devote greater
resources than USCG to the sales of IT products and services. Such competitors
also could attempt to increase their presence in USCG's markets by forming
strategic alliances with other competitors or increasing their efforts to gain
and retain market share through competitive pricing. As the market for IT
services has matured, competition for quality technical personnel has continued
to intensify, resulting in increased personnel costs for many IT service
providers. Such competition may adversely affect USCG's gross profits, margins,
results of operations and financial condition. There can be no assurance that
USCG will be able to continue to compete successfully with existing or new
competitors.
HUMAN RESOURCES
USCG believes that its future success will depend in large part on its
ability to attract and retain highly skilled technical, managerial, and sales
personnel. Competition for such personnel, in particular for experienced
technical personnel who possess the skills and experience necessary to meet the
staffing requirements of USCG's clients, is intense, and USCG competes in the
market for such personnel against numerous companies, including larger, more
established companies with significantly greater financial resources than USCG.
USCG has at times experienced difficulty in recruiting qualified personnel, and
there can be no assurance that USCG will be successful in attracting and
retaining skilled personnel. The inability of USCG to attract and retain other
qualified employees could have a material adverse effect on USCG's business.
As of July 31, 1998, USCG has approximately 196 employees, all of which are
full-time employees. Of these employees, approximately 59 are administrative
personnel, 19 are sales personnel and 118 are technical personnel. None of the
employees are represented by a labor union, and USCG considers its relations
with employees to be good.
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RECENT DEVELOPMENTS
ACQUISITION OF DENAMERICA CORP.
On July 15, 1998, the Company announced that it had entered into a
definitive merger agreement with DenAmerica Corp. ("DenAmerica"), the owner and
franchisor of the Black-eyed Pea restaurant chain and a leading franchisee of
Denny's restaurants, providing for the merger of DenAmerica 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, DenAmerica shareholders will
receive in exchange for each share of DenAmerica common stock $4.00 in cash and
$0.90 in newly-issued preferred stock of the Company for a total consideration
of approximately $77.5 million. The Company is expected to retain most of the
management, administrative and operations personnel of DenAmerica. 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 DenAmerica 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 DenAmerica, subordinated debt of the
Company or combination of those two and other sources.
DESCRIPTION OF PROPERTY
CCC, VBT 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. Currently, the landlord
of the premises is constructing a warehouse of approximately 9,600 square feet
on the premises. The Company plans to lease such warehouse from the landlord by
early October 1998. Rent payment for the lease of the warehouse has not been
fixed at this time. The Company believes that the premises occupied by the
Company, including the facilities used by CCC, VBT and UBC, are adequate to
serve its present and foreseeable future needs.
USCG leases approximately 21,600 square feet of space at its Farmingdale,
New York headquarters. The lease provides for monthly payments of approximately
$17,000 and calls for additional annual payments for taxes and other
pass-through expenses. The current lease term expires on December 31, 1998. It
is USCG's intention to renew the lease upon expiration of the term of the lease.
49
<PAGE>
In addition, USCG has opened three satellite offices in order to more
effectively service the territories in which USCG operates. These offices
consist of (i) an 8,500 square foot office in New York City, New York which
expires in January 2008 and provides for current monthly rental payments of
$12,750 with schedule increases in rent to approximately $16,300 per month in
February 2003, plus certain pass through expenses (ii) a 6,500 square foot
facility in Carlsdadt, New Jersey, which expires in August 1999, is subject to a
four year renewal option, and provides for monthly payments of $3,556 subject to
annual inflation adjustments, and (iii). a 5,428 square foot facility in Fort
Washington, Pennsylvania which expires in January 2001 (subject to USCG's right
to extend for an additional two year term) and provides for monthly rent of
approximately $4,100, subject to annual inflation adjustments, plus certain pass
through expenses. In addition, USCG also has a lease for a 5,000 square foot
office in New York City which expires in June 2002 and provides for current
monthly rental payments of approximately $18,000 with scheduled adjustments in
rent to approximately $9,600 and $10,400 per month in July 1999 and November
2000, respectively, plus certain pass through expenses. USCG is currently
subletting such lease pursuant to which USCG is recovering monthly $9,400
through April 2000 and $10,212 through June 2002 from the sublease.
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.
LEGAL PROCEEDINGS
In the ordinary course of business, the Company is subject to various legal
proceedings and claims. In the opinion of management, the amount of ultimate
liability with respect to these proceedings will not materially affect the
financial position, results of operations or cash flow of the Company.
50
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) The following table sets forth, as of August 10, 1998, the only persons
known to the Company to be the beneficial owners of more than 5% of the
Company's Common Stock and Series A Stock:
<TABLE>
<CAPTION>
Common Series A
Stock Stock
Amount and Amount and
Nature of Nature of % of
Beneficial % of Beneficial % of Voting
Name and Address Ownership(1) Class(2) Ownership(1) Class(2) Power(3)
- ---------------- ------------ -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C>
William Kim Wah 465,000 10.62% 5,000 2.70% 5.75%
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 476,649 11.38% 0 0 10.36%
4300 Wiley Post Rd. Direct(5)
Dallas, TX 75244
USA
Synergy System 385,000 8.86% 0 0 4.71%
Limited Direct(6)
3A Lauderdale Road
Maida Vale
London W9 1LT
United Kingdom
Equator Holdings, 385,000 8.86% 0 0 4.71%
Inc. Direct(6)
Block 126 #19-372
Bukit Merah View
Singapore 151126
Fleet Security 385,000 8.86% 0 0 4.71%
Investment Ltd. Direct(6)
P.O. Box 901
Road Town
British Virgin
Islands
Asean Broker 385,000 8.86% 0 0 4.71%
Limited Direct(6)
Flat 1, 51 Queens
Gate Terrace
London, SW7 5PL
United Kingdom
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Common Series A
Stock Stock
Amount Amount
and and
Nature of Nature of % of
Beneficial % of Beneficial % of Voting
Name and Address Ownership(1) Class(2) Ownership(1) Class(2) Power(3)
- ------------------- ----------- -------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Eurasia Securities, 385,000 8.86% 0 0 4.71%
Ltd. Direct(6)
No. 11 Jalan
Medang
Bukit Bandaraya
59100 Kuala
Lumpur
Malaysia
Jason Tan Highway 668,000(7) 14.85% 0 0 7.68%
Wisma Cosway #12-
02, Jln. Raja
Chulan
50200 Kuala
Lumpur
Malaysia
Wooi Hou Tan 666,000(8) 14.81% 0 0 7.66%
First Floor Flat
53 Gloucester Road
London, England
SW74QN
United Kingdom
Mutsuko Gomi 666,000(8) 14.81% 0 0 7.66%
1367-31 Kawana Ito-
Shi
Japan 414
</TABLE>
52
<PAGE>
(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 as of
August 10, 1998. 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 and Series
A Stock as of August 10, 1998, 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 August 10, 1998. 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 (i) 175,000 shares directly held by Mr. Tan, (ii) options to
acquire 100,000 shares of common stock exercisable within 60 days of
August 10, 1998, (iii) 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 August 10, 1998, (iv) 75,000 shares held by Placement &
Acceptance, Inc., and (v) 5,000 Units, with each Unit convertible
within 60 days of August 10, 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
433,732 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.
26,250 of such options are exercisable within 60 days of August 10,
1998, and are included in the percent of shares shown herein. Mr. La
Taste's wife, Jacqueline Green La Taste, is the owner of 24,213
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 August 10, 1998.
53
<PAGE>
(8) Includes options to acquire 333,000 shares of common stock
exercisable within 60 days of August 10, 1998.
(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 August 10, 1998:
Common Series A
Stock Stock
Amount Amount
and and
Nature of Nature of % of
Beneficial % of Beneficial % of Voting
Name and Address Ownership(1) Class(2) Ownership(1) Class(2) Power(3)
- ---------------- ------------ -------- ------------ -------- --------
William Kim Wah 465,000 10.62% 5,000 2.70% 5.75%
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 476,649 11.38% 0 0 10.36%
4300 Wiley Post Direct(5)
Rd.
Dallas, TX 75244
Sadasuke Gomi 385,000 8.86% 0 0 4.71%
2941 Main Street Indirect(6)
Suite 300-B
Santa Monica, CA
90405
Kim Yeow Tan 385,000(7) 8.86% 0 0 4.71%
2941 Main Street
Suite 300-B
Santa Monica, CA
90405
Steven E. Scott 100,000(8) 2.37% 0 0 *
2941 Main Street
Suite 300-B
Santa Monica, CA
90405
54
<PAGE>
Common Series A
Stock Stock
Amount Amount
and and
Nature of Nature of % of
Beneficial % of Beneficial % of Voting
Name and Address Ownership(1) Class(2) Ownership(1) Class(2) Power(3)
- ---------------- ------------ -------- ------------ -------- --------
Ian Colin 0 0 0 0 0
Edmonds
2941 Main Street
Suite 300-B
Santa Monica, CA
90405
David Kaye 5,000 * 0 0 *
2941 Main Street
Suite 300-B
Santa Monica, CA
90405
All Directors and 1,816,649 37.73% 5,000 2.70% 26.80%
Executive Officers
as a Group (7 persons)
* Less than 1%.
55
<PAGE>
(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 as of
August 10, 1998. 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 and Series
A Stock as of August 10, 1998, 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 August 10, 1998. 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 (i) 175,000 shares directly held by Mr. Tan, (ii) options to
acquire 100,000 shares of common stock exercisable within 60 days of
August 10, 1998, (iii) 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 August 10, 1998, (iv) 75,000 shares held by Placement &
Acceptance, Inc., and (v) 5,000 Units, with each Unit convertible
within 60 days of August 10, 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
433,732 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.
26,250 of such options are exercisable within 60 days of August 10,
1998, and are included in the percent of shares shown herein. Mr. La
Taste's wife, Jacqueline Green La Taste, is the owner of 24,213
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 August 10, 1998.
56
<PAGE>
(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 August 10, 1998.
(8) Includes options to acquire 50,000 shares of common stock exercisable
within 60 days of August 10, 1998.
MANAGEMENT
(a) At August 10, 1998, the following persons served as directors and
executive officers of TEI:
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) Director (1) 1997
Kim Yeow Tan (58) Director 1997
Steven E. Scott (49) Executive Vice President 1997
and Director
Ian Colin Edmonds (25) Director 1997
David Kaye (61) Chief Financial Officer
Mee Mee Tan (22) Secretary
(1) Mr. Gomi served as a Vice President and Corporate Secretary of TEI until
his resignation in February 1998.
All directors of the 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 the 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.
57
<PAGE>
(c) Significant and Key Employees:
Julie A. Sansom-Reese, (35) Chief Financial Officer of CCC.
Stephen Davies (47) President, Chief Executive Officer
and Director of USCG.
Alexander Voda, Jr. (43) Senior Vice President,Chief Financial
Officer, Treasurer and Secretary of USCG
(d) Business Experience:
WILLIAM KIM WAH TAN, Chairman of the Board, Chief Executive Officer,
President and director. Mr. Tan was elected to these offices on February 11,
1997. 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, Director. Mr. Kim Yeow Tan was elected director and
vice-president of TEI on 2/11/97, and resigned as VP on February 16, 1998. 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. He has served as director since February 11, 1997.
Mr. Gomi, age 26, is a graduate of Mejii University in Japan, where he received
a bachelor's degree in commerce. Mr. Gomi served as Vice President and Corporate
Secretary of the Company from February 11, 1997 until February 1998..
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.
58
<PAGE>
CRAIG D. LA TASTE, President and director of CCC. Mr. La Taste, age 71, was
born in Dallas, Texas. Mr. La Taste 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. Mr. La Taste served as Chairman of the Board, President and
Chief Executive Officer of TEI on 2/11/97. He was replaced in these offices by
Mr. William Kim Wah Tan.
JULIE A. SANSOM-REESE, Treasurer of CCC. Ms. Sansom-Reese, age 35, was born
in Midland, Texas, and 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, has been employed as
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. Mr. Kaye was appointed Chief Financial Officer of TEI in
January, 1998. 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.
STEPHEN DAVIES, age 47, founded USCG and has served as the President, Chief
Executive Officer and a director of USCG since its inception. Prior to founding
USCG, Mr. Davies spent approximately 13 years with Barclays Bank in the United
Kingdom, where he held a variety of positions, including Corporate Manager at
the Hanover Square (London) branch. Mr. Davies holds an M.A. degree from Oxford
University.
ALEXANDER VODA, JR., age 43, joined USCG as its Chief Financial Officer in
December 1996 after four years as controller of Ikon Office Solutions, a New
York based office technology provider. From 1981 to 1992, Mr. Voda served as
Director of Finance and Controller at Ferranti Venus, Inc., a designer and
manufacturer of custom power supplies primarily for military applications. Mr.
Voda holds a B.S. in Accounting from St. John's University and is a certified
public accountant.
No family relationship exist among any of the executive officers or
directors of the Company 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.
59
<PAGE>
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 $100,000, and to all executive officers as a group.
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
--------------------------------------- ------------------------------------------------
Awards Payouts
------------------------------- --------------
Name and Fiscal Year Salary($) Bonus($) Other Annual Restricted Securities
Principal Ended Compensation stock award(s) Underlying
Position December 31 ($)(1) ($) Options/SARs(#) LTIP Payouts($)
- -------------- ----------- -------- -------- ------------ ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
William Kim 1997 0 0 0 $393,750(2) 100,000(2) 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
1995 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
Taste
President,
Computer
Components
Corporation*
1996 $60,000 0 $4,649 0 35,000 $99,651
1995 $41,999.89 0 $1,774 0 0 0
Steven Scott 1997 $75,000 0 0 $112,500(3) 50,000(2) 0
Executive
Vice
President
and Director
1996 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
</TABLE>
*Mr. La Taste served as Chairman of the Board, President and Chief
Executive Officer of TEI until February 11, 1997.
60
<PAGE>
(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, as compensation 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 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.
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.
61
<PAGE>
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 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.
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.
OPTION GRANTS IN 1997. The Company did not grant any options under either the
1997 Plan or the 1995 Plan in fiscal 1997.
OPTION EXERCISES IN 1997 AND CURRENT OPTION VALUES. No options were exercised by
the Named Executives during the last fiscal year. The following table provides
certain information concerning unexercised options held as of December 31, 1997,
by the Named Executives who held options at the end of 1997:
62
<PAGE>
<TABLE>
<CAPTION>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END VALUES
(d) (e)
Number of Securities Underlying Value of Unexercised
Unexercised In-the-Money
(a) (b) (c) Options at Options at
Shares Acquired Value December 31, 1997(#) December 31, 1997($)(1)
Name Upon Exercise Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William Kim Wah Tan 0 0 0 0 0 0
Craig D. La Taste 0 0 17,500 17,500 37,187.50 37,187.50
Steven Scott 0 0 0 0 0 0
</TABLE>
(1) The value of the "in-the-money" options represents the difference
between $1.00, the exercise price of such options, and $3.125, the
closing sale price of the Common Stock on December 31, 1997.
SELLING SECURITYHOLDERS
In addition to the securities issuable pursuant to the Representative's
Purchase Option as set forth following the table below, an aggregate of
4,862,398 shares of Common Stock may be offered for resale by the following
Selling Securityholders. These shares of Common Stock include: (i) 1,100,000
shares of Common Stock issued to the Investors, (ii) 1,000,000 shares of Common
Stock underlying the Options issued to the Investors, (iii) 1,375,000 shares of
Common Stock issued to certain other investors, (iv) 1,000,000 shares of Common
Stock underlying Options issued to investors, and (v) 237,398 shares of Common
Stock held by and 150,000 shares of Common Stock underlying Options issued to
certain officers, directors and employees of the Company. In addition to the
foregoing shares of Common Stock, an aggregate of 1,696,000 shares of common
stock may be offered for resale upon the exercise of the Securityholders'
Redeemable Warrants.
Except as set forth below, there are no material relationships between any
of the Selling Securityholders and the Company or any of its predecessors or
affiliates, nor have any such material relationships existed within the past
three years. No Selling Securityholder will beneficially own any Selling
Securityholders' Securities of the Company if all of the Selling
Securityholders' Securities offered hereby are sold.
63
<PAGE>
Number of
Number of Shares of Amount of
Shares of Common Stock Shares of
Common Stock Covered Common Stock
Beneficially by this After
Selling Securityholder Owned(1) Prospectus(1) Offering(1)(14)
- --------------------------------- ------------ ------------ --------------
Synergy System Limited 385,000(2) 385,000(2) 0
Equator Holdings, Inc. 385,000(2) 385,000(2) 0
Fleet Security Investment Ltd.(3) 385,000(2) 385,000(2) 0
Asean Broker Limited 385,000(2) 385,000(2) 0
Eurasia Securities, Ltd. (4) 385,000(2) 385,000(2) 0
Placement & Acceptance, Inc. (5) 190,000(6) 190,000(6) 0
Jason Tan Highway 668,000(7) 668,000 0
Wooi Hon Tan 666,000(8) 666,000 0
Mutsuko Gomi 666,000(9) 666,000 0
William Kim Wah Tan (5) 465,000(10) 465,000 0
Steven Scott (13) 100,000(11) 100,000 0
Roy G. Schwartz 30,000 30,000 0
Allan E. Wolf, Jr. 25,000 25,000 0
Stanford Leland 25,000 25,000 0
The Matzuda Corporation 10,000 10,000 0
Hi-Tel Group, Inc. 50,000 50,000 0
Lawrence S. Marcus 10,000 10,000 0
Timothy Hassel 25,000 25,000 0
Stephen & Elizabeth Davies (15) 15,000 15,000 0
Telstar Holdings, Ltd. 100,000 100,000 0
Palm Bay Capital 50,000 50,000 0
Merchant Enterprises, Ltd. 35,000 35,000 0
David Kaye (16) 5,000 5,000 0
Peter Banner 7,398 7,398 0
(1) Does not include beneficial ownership of shares of Common Stock
underlying the currently exercisable Securityholders' Redeemable
Warrants since such shares are covered under a separate heading in
the table above.
(2) Includes, in each case, options to acquire 180,000 shares of Common
Stock which are currently exercisable.
(3) Mr. Sadusuke Gomi, Vice President and director of the Company, is a
director of Fleet Security Investment Ltd. Mr. Gomi also served as
Secretary of the Company from February 1997 until February 1998.
(4) Mr. Kim Yeow Tan, a director of the Company, is a director of Eurasia
Securities, Ltd. Mr. Tan also served as Vice President of the Company
from February 1997 until July 1997.
64
<PAGE>
(5) Mr. William Kim Wah Tan, a director and officer of Placement &
Acceptance, Inc., is the Chairman of the Board, President, Chief
Executive Officer and a director of the Company.
(6) Includes options to acquire 100,000 shares of Common Stock which are
currently exercisable, 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.
(7) Includes options to acquire 334,000 shares of Common Stock which are
currently exercisable.
(8) Includes options to acquire 333,000 shares of Common Stock which are
currently exercisable.
(9) Includes options to acquire 333,000 shares of common stock which are
currently exercisable.
(10) Includes 190,000 shares held by Placement & Acceptance, Inc., of
which Mr. Tan is a director and officer.
(11) Includes options to acquire 50,000 shares of Common Stock which are
currently exercisable.
(12) The Selling Securityholder will either sell the Warrants or exercise
some or all of the Warrants and sell the underlying Common Stock.
(13) Mr. Scott is the Executive Vice President and a director of the
Company.
(14) Assumes that the Selling Securityholder sells all of the Securities
held by it.
(15) Mr. Davies is the President, Chief Executive Officer and Director of
USCG, a subsidiary of the Company.
(16) Mr. Kaye is the Chief Financial Officer of the Company.
In addition to the foregoing Selling Securityholders, the Representative
holds a Representative's Purchase Option to purchase 30,000 Option Units and
30,000 Option Warrants, all of which are being offered hereby. Each unit
consists of one share of Common Stock and one share of Class A Preferred Stock.
If the Option Warrants and the Option Units included in this Prospectus were
fully exercised, the Representative would acquire 61,800 shares of Common Stock
and 30,000 shares of Class A Preferred Stock, the latter of which are
convertible into two shares of Common Stock each. This Prospectus covers the
sale of all of the Securities underlying the Representative's Purchase Option
and all underlying Warrants and Class A Preferred Stock. Set forth below are the
holders of the Representative's Purchase Option covered by this Prospectus.
65
<PAGE>
Number of Representative's
Name Purchase Option
- ------------------- --------------------------
PCM Securities, Ltd. 30,000
Information set forth in the tables regarding the securities owned by each
Selling Securityholder is provided to the best knowledge of the Company based on
information furnished to the Company by the respective Selling Securityholder
and/or available to the Company through its stock transfer records.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 10,000,000 shares
of Common Stock, $.01 par value, and 1,000,000 shares of Preferred Stock, $1.00
par value.
As of August 10, 1998, there were (i) 4,163,308 shares of Common Stock
outstanding held of record by 578 stockholders and (ii) 185,338 shares of Class
A Preferred Stock outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
to be voted upon by the stockholders. Subject to preferences that may be
applicable to the holders of outstanding shares of Preferred Stock, if any, the
holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Board of Directors out of funds
legally available therefor. See "Dividend Policy". In the event of liquidation,
dissolution or winding up of the Company, and subject to the prior distribution
rights of the holders of outstanding shares of Preferred Stock, if any, the
holders of shares of Common Stock shall be entitled to receive pro rata all of
the remaining assets of the Company available for distribution to its
stockholders. The Common Stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are fully
paid and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by the laws of the State of Texas, without further action by the Company's
stockholders, to provide for the issuance of up to 1,000,000 shares of Preferred
Stock in one or more series, to establish from time to time the number of shares
to be included in each such series, to fix the designations, powers, preferences
and rights of the shares of each such series and any qualifications, limitations
or restrictions thereof, and to increase or decrease the number of shares of any
such series (but not below the number of shares of such series then outstanding)
without any further vote or action by the stockholders. The Board of Directors
may authorize and issue Preferred Stock with voting or conversion rights that
could adversely affect the voting power or other rights of the holders of
Shares.
66
<PAGE>
The Class A Preferred Stock ranks senior to the Common Stock. Holders of
the Class A Preferred Stock have no preemptive rights with respect to any shares
of capital stock of the Company or any other securities of the Company
convertible into or carrying rights or options to purchase any such shares. The
Class A Preferred Stock is not subject to any sinking fund or other obligation
of the Company to redeem or retire the Class A Preferred Stock. Except for
certain matters identified in the Certificate of Designation, as amended, the
Class A Preferred Stock vote with other classes of voting stock of the Company
on matters coming to a vote before the holders of all voting stock of the
Company. Each share of Class A Preferred Stock is entitled to one vote. Upon the
liquidation, dissolution or winding up of the Company, whether voluntarily or
involuntarily, the holders of the Class A Preferred Stock are entitled to
receive, out of the assets of the Company available for distribution to
shareholders after satisfying claims of creditors but before any payment or
distribution of assets is made to holders of the Common Stock or another stock
of the Company ranking junior to the Class A Preferred Stock upon liquidation, a
liquidating distribution in the amount of $5.25 per share of Class A Preferred
Stock, plus an amount in cash per share of Class A Preferred Stock equal to
accrued and unpaid dividends thereon (whether or not declared) to and including
the date of distribution.
In the second quarter of 1998, all of the 65,000 outstanding shares of
Series B Preferred Stock were converted and retired by the Company.
UNITS AND WARRANTS
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. While
the Common Stock and Class A Preferred Stock may now be separately traded, to
the best of the Company's knowledge, such securities are currently traded only
as part of a Unit.
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.
67
<PAGE>
TRANSFER AGENT
Securities Transfer Corporation is the transfer agent and registrar for the
shares of capital stock of TEI.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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. PAI received fees of $112,000, inclusive of
expenses, for acting as sales agent in the placement. PAI is controlled by Mr.
William Kim Wah Tan, the Company's Chairman of the Board, President and Chief
Executive Officer.
CHANGES IN AND DISAGREEMENTS 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, at such time the Company was never accepted as a client by Deloitte &
Touche, LLP. Recently, Deloitte & Touche, LLP has reviewed the financial
statements of USCG, and the Company consulted with Deloitte & Touche, LLP 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.
PLAN OF DISTRIBUTION
The Selling Securityholders (or pledges, donees, transferees or successors
in interest) may sell all or a portion of the respective Selling
Securityholders' Securities held by them from time to time while the
registration statement of which this Prospectus is a part remains effective. The
aggregate proceeds to the Selling Securityholders from the sale of the
respective Selling Securityholders' Securities offered by the Selling
Securityholders hereby will be the prices at which such securities are sold,
less any commissions. There is no assurance that the Selling Securityholders
will sell any or all of the Selling Securityholders' Securities offered hereby.
68
<PAGE>
The Selling Securityholders' Securities may be sold by the Selling
Securityholders in transactions on the NASDAQ Small Cap Market, in negotiated
transactions, or by a combination of these methods, at fixed prices that may be
changed, at market prices prevailing at the time of sale, at prices related to
such market prices or at negotiated prices or through the writing of options on
the Selling Securityholders' Securities. The Selling Securityholders may elect
to engage a broker or dealer to effect sales in one or more of the following
transactions: (a) block trades in which the broker or dealer so engaged will
attempt to sell the Selling Securityholders' Securities as agent but may
position and resell a portion of the block as principal to facilitate the
transaction, (b) purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus, and (c) ordinary
brokerage transactions and transactions in which the broker solicits purchasers.
In effecting sales, brokers and dealers engaged by the Selling Securityholders
may arrange for other brokers or dealers to participate. Brokers or dealers may
receive commissions or discounts from the Selling Securityholders in amounts to
be negotiated (and, if such broker-dealer acts as agent for the purchaser of
such Selling Securityholders' Securities, from such purchaser). Broker-dealers
may agree with the Selling Securityholders to sell a specified number of such
Selling Securityholders' Securities at a stipulated price per Selling
Securityholder's Security, and to the extent that such broker-dealer is unable
to do so, acting as agent for the Selling Securityholders to purchase as
principal any unsold Selling Securityholders' Securities at the price required
to fulfill the broker-dealer commitment to the Selling Securityholders.
Broker-dealers who acquire Selling Securityholders' Securities as principal may
thereafter resell such Selling Securityholders' Securities from time to time in
transactions (which may involve crosses and block transaction and sales to and
through other broker-dealers, including transactions of the nature described
above) in the over-the-counter market, or otherwise at prices and on terms then
prevailing at the time of sale, at prices then related to the then-current
market price or in negotiated transactions and, in connection with such resales,
may pay to or receive from the purchasers of such Selling Securityholders'
Securities commissions as described above.
The Selling Securityholders and any broker-dealers or agents that
participate with the Selling Securityholders in sales of the Selling
Securityholders' Securities may be deemed to be "underwriters" within the
meaning of the Securities Act of 1933 in connection with such sales. In such
event, any commissions received by such broker-dealers or agent and any profit
on the resale of the Selling Securityholders' Securities purchased by them may
be deemed to be underwriting commissions or discounts under the Securities Act
of 1933.
The Company will pay all expenses incidental to this offering and sale of
the Selling Securityholders' Securities to the public other than selling
commissions and fees.
69
<PAGE>
The Selling Securityholders have been advised that during the time they are
engaged in "distribution" (as defined under Regulation M under the Securities
Exchange Act of 1934, as amended) of the securities covered by this Prospectus,
they must comply with Regulation M under the Securities Exchange Act of 1934, as
amended, and pursuant thereto: (i) shall not engage in any stabilization
activity in connection with the Company's securities; and (ii) shall not bid for
or purchase any securities of the Company or attempt to include any person to
purchase any of the Company's securities other than as permitted under the
Securities Exchange Act of 1934, as amended. Any Selling Securityholders who are
"affiliated purchasers" of the Company, as defined in Regulation M, have been
further advised that they and their affiliates must coordinate their sales under
this Prospectus and otherwise with the Company and any other "affiliated
purchasers" of the Company for purposes of Regulation M. The Selling
Securityholders must also furnish each broker through which Selling
Securityholders' Securities are sold copies of this Prospectus.
LEGAL OPINION
The validity of certain of the Securities offered hereby will be passed
upon for the Company by Jeffer, Mangels, Butler & Marmaro LLP, Los Angeles,
California.
EXPERTS
The financial statements of the Company as of December 31, 1997 and 1996
and for each of the years in the two-year period ended December 31, 1997,
included in this Prospectus and Registration Statement have been audited by King
Griffin & Adamson P.C. (formerly King, Burns & Company, P.C.), independent
auditors, as indicated in their report with respect thereto, and are included
herein in reliance upon such report given upon the authority of said firm as
experts in accounting and auditing.
The financial statements of USCG as of February 28, 1998 and 1997 and for
each of the two years in the period ended February 28, 1998, included in this
prospectus and the related schedules included elsewhere in the Registration
Statement, have been audited by Deloitte & Touche, LLP, independent auditors, as
stated in their reports appearing herein and elsewhere in the Registration
Statement and have been so included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
70
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Unaudited Proforma Consolidated Financial Statements
Unaudited Statement of Operations for the year ended
December 31, 1997 F-2
Unaudited Statement of Operations for the six-month period ended
June 30, 1998 F-3
Tech Electro Industries, Inc.
Report of Independent Certified Public Accountants F-4
Financial Statements
Balance Sheets as of December 31, 1997 and 1996 F-5
Statements of Operations for the years ended
December 31, 1997 and 1996 F-7
Statements of Changes in Stockholders' Equity for the
years ended December 31, 1997 and 1996 F-8
Statements of Cash Flows for the years ended
December 31, 1997 and 1996 F-10
Notes to Financial Statements for the years ended
December 31, 1997 and 1996 F-12
Balance Sheet as of June 30, 1998 (unaudited) F-25
Statements of Operations for the six months ended
June 30, 1998 (unaudited) F-27
Statements of Cash Flows for the six months ended
June 30, 1998 (unaudited) F-28
Notes to Financial Statements for the six months ended
June 30, 1998 (unaudited) F-29
US Computer Group, Inc.
Report of Independent Certified Public Accountants F-36
Financial Statements
Balance Sheet as of February 28, 1998 F-37
Statement of Operations for the year ended
February 28, 1998 F-39
Statement of Changes in Stockholders' Equity for the
year ended February 28, 1998 F-40
Statement of Cash Flows for the year ended
February 28, 1998 F-42
Notes to Financial Statements for the year ended
February 28, 1998 F-44
Report of Independent Certified Public Accountants F-56
Financial Statements
Balance Sheet as of February 28, 1997 F-57
Statement of Operations for the year ended
February 28, 1997 F-59
Statement of Changes in Stockholders' Equity for the
year ended February 28, 1997 F-60
Statement of Cash Flows for the year ended
February 28, 1997 F-61
Notes to Financial Statements for the year ended
February 28, 1997 F-62
F-1
<PAGE>
Tech Electro Industries, Inc. and Subsidiaries
Pro Forma Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
TELE USCG
12/31/97 02/28/98 Adjustments Total
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
NET SALES AND SERVICE REVENUES $6,666,837 $24,257,252 $30,924,089
COST OF SALES AND REVENUES AND DIRECT SERVICING EXPENSES 4,905,755 21,783,266 26,689,021
----------- ----------- ----------
GROSS PROFIT 1,761,082 2,473,986 4,235,068
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,174,432 5,341,688 809,259 (A) 9,325,379
----------- ----------- ----------
LOSS FROM OPERATIONS (1,413,350) (2,867,702) (5,090,311)
OTHER INCOME (EXPENSES)
Interest income 99,862 13,037 (45,456) (B) 67,443
Interest expense (30,072) (940,035) (970,107)
Realized loss on sale of marketable securities (31,667) 0 (31,667)
Gain on foreign exchange 9,668 0 9,668
Other 18,247 49,800 68,047
----------- ----------- ----------
66,038 (877,198) (856,616)
MINORITY INTEREST SHARE OF LOSS OF SUBSIDIARY 47,731 0 47,731
----------- ----------- ----------
LOSS BEFORE INCOME TAXES (1,299,581) (3,744,900) (5,899,196)
----------- ----------- ----------
PROVISION FOR INCOME TAXES 0 3,000 3,000
----------- ----------- ----------
NET LOSS $(1,299,581) $(3,747,900) (5,902,196)
=========== =========== ==========
Net loss attributable to common shareholders $(1,405,419) $(6,008,034)
=========== ==========
Basic and diluted net loss per share attributable to
common shareholders $ (0.59) $ (2.52)
=========== ==========
Number of weighted-average shares
of common stock outstanding (basic and diluted) 2,382,814 $ 2,382,814
=========== ==========
</TABLE>
(A) To reflect amortization of goodwill and contract rights acquired assuming
the Company had acquired USCG on January 1, 1997.
(B) To reflect effects of cash used for acquisition of USCG from interest
earning investments.
F-2
<PAGE>
Information to be added
F-3
<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-4
<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-5
<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-6
<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-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>
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-8
<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-9
<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-10
<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-11
<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-12
<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-13
<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-14
<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-15
<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-16
<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-17
<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-18
<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-19
<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-20
<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-21
<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-22
<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-23
<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-24
<PAGE>
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
F-25
<PAGE>
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
F-26
<PAGE>
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
F-27
<PAGE>
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
============= =============
F-28
<PAGE>
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.
F-29
<PAGE>
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.
F-30
<PAGE>
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.
F-31
<PAGE>
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.
F-32
<PAGE>
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.
F-33
<PAGE>
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.
F-34
<PAGE>
U.S. COMPUTER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF FEBRUARY 28, 1998
TOGETHER WITH AUDITORS' REPORT
F-35
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
U.S. Computer Group Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of U.S. Computer
Group Inc. and Subsidiaries (the "Company") as of February 28, 1998, and the
related consolidated statements of operations, shareholders' deficiency and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of February 28,
1998, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
May 29, 1998
(June 11, 1998 as to Note 6)
F-36
<PAGE>
U.S. COMPUTER GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1998
- -------------------------------------------------------------------------------
ASSETS (Note 6)
CURRENT ASSETS:
Cash $9,873
Accounts receivable - net of allowance for
doubtful accounts of $428,952 (Note 15) 1,853,294
Inventories (Notes 2 and 3) 1,773,596
Deferred sales costs (Note 2) 196,581
Prepaid expenses and other current assets 238,906
---------
Total current assets 4,072,250
PROPERTY AND EQUIPMENT - Net (Notes 2 and 4) 667,408
EXCESS OF COSTS OVER FAIR VALUE OF NET ASSETS
ACQUIRED - Net (Note 2) 487,515
DEFERRED FINANCING COSTS - Net (Note 2) 251,663
OTHER ASSETS 234,450
----------
TOTAL ASSETS $5,713,286
==========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of credit facility
obligations (Notes 6 and 17) $70,000
Current portion of note payable (Note 7) 61,626
Current portion of long-term debt (Note 8) 147,547
Accounts payable 2,093,610
Accrued liabilities (Note 14) 1,083,987
Deferred service liability (Note 5) 1,364,317
Acquisition deposit payable (Note 17) 500,000
---------
Total current liabilities 5,321,087
See notes to consolidated financial statements
F-37
<PAGE>
U.S. COMPUTER GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
FEBRUARY 28, 1998
- -------------------------------------------------------------------------------
CREDIT FACILITY OBLIGATIONS (Notes 6 and 17) 6,540,063
NOTE PAYABLE (Note 7) 38,950
LONG-TERM DEBT (Note 8) 198,453
DEFERRED LEASE INCENTIVE (Note 16) 94,473
----------
Total liabilities 12,193,026
----------
COMMITMENTS AND CONTINGENCIES (Note 16)
REDEEMABLE PREFERRED STOCK, series D, $1,000 par value;
1,000 shares authorized; 181,349 shares issued and
outstanding, redemption value and liquidation
preference of $267,622 (Note 10) 267,622
----------
REDEEMABLE COMMON STOCK, 2,737 SHARES AT $1.95 PER SHARE (Note 14) 5,337
----------
SHAREHOLDERS' DEFICIENCY (Notes 1, 11 and 17):
Preferred stock, series A, B and C, $100 par
value; 1,000, 2,000 and 3,500 shares
authorized, respectively;
no shares outstanding --
Redeemable preferred stock, series E, $1,000 par
value; 5,000 shares authorized; 2,000 shares
issued and outstanding, redemption value and
liquidation preference of $2,000,000
(Notes 9 and 17) 2,000,000
Common stock, .00001 par value; 1,500,000
shares authorized; 674,073 shares issued
and outstanding 7
Treasury stock, 18,196 shares, at cost (100,217)
Notes receivable from shareholders (Note 12) (184,434)
Additional paid-in capital 3,256,697
Accumulated deficit (11,724,752)
----------
Total shareholders' deficiency (6,752,699)
----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY $5,713,286
==========
See notes to consolidated financial statements
F-38
<PAGE>
U.S. COMPUTER GROUP INC. AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
YEAR ENDED FEBRUARY 28, 1998
- -------------------------------------------------------------------------------
TRADE SALES - Net of sales returns and allowances $7,101,281
SERVICE REVENUES 17,155,971
----------
Total sales and revenues (Notes 2 and 15) 24,257,252
COST OF SALES AND REVENUES 11,156,915
DIRECT SERVICING EXPENSES 10,626,351
GENERAL AND ADMINISTRATIVE EXPENSES 5,341,688
----------
Operating loss (2,867,702)
INTEREST EXPENSE (Net of interest income of $ 13,037) 926,998
OTHER INCOME (49,800)
----------
Loss before provision for income taxes (3,744,900)
PROVISION FOR INCOME TAXES (Note 13) 3,000
----------
NET LOSS $(3,747,900)
==========
See notes to consolidated financial statements
F-39
<PAGE>
U.S. COMPUTER GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIENCY
YEAR ENDED FEBRUARY 28, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Preferred
Shares Preferred Shares Preferred
Outstanding Stock Outstanding Stock Common Shares Common Treasury
Series D Series D Series E Series E Outstanding Treasury Stock Stock
------- -------- -------- --------- ----------- -------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
MARCH 1, 1997 317,357 $468,334 - $- 674,073 828 $7 $(7,866)
Net loss for the year
ended February 28, 1998 - - - - - - - -
Dividends on redeemable
preferred stock - - - - - - - -
Common stock
redeemed - - - - - 17,368 - (92,351)
Forgiveness of debt
and interest for
related party - - - - - - - -
Issuance of
preferred stock - - 2,000 2,000,000 - - - -
Accrued interest on notes
receivable from
shareholders - - - - - - - -
Transfer to redeemable
preferred stock, Series D (317,357) (468,334) - - - - - -
Transfer to redeemable
Common stock - - - - - - - -
------- -------- ----- ---------- ------- ------ ---- ---------
BALANCE,
FEBRUARY 28, 1998 - $ - 2,000 $2,000,000 674,073 18,196 $7 $(100,217)
======= ======== ===== ========== ======= ====== ==== =========
</TABLE>
See notes to consolidated financial statements.
F-40
<PAGE>
U.S. COMPUTER GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIENCY (Continued)
YEAR ENDED FEBRUARY 28, 1998
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Notes
Receivable Additional Total
from Paid-in Accumulated Shareholders'
Shareholders Capital Deficiency Deficiency
--------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
BALANCE,
MARCH 1, 1997 $(173,179) $1,669,853 $(7,939,881) $(5,982,732)
Net loss for the year
ended February 28, 1998 - - (3,747,900) (3,747,900)
Dividends on redeemable
preferred stock - - (36,971) (36,971)
Common stock
redeemed - - - (92,351)
Forgiveness of debt
and interest for
related party - 1,592,181 - 1,592,181
Issuance of
preferred stock - - - 2,000,000
Accrued interest on notes
receivable from
shareholders (11,255) - - (11,255)
Transfer to redeemable
preferred stock, series D - - - (468,334)
Transfer to redeemable
Common stock - (5,337) (5,337)
--------- ---------- ------------ -----------
BALANCE,
FEBRUARY 28, 1998 $(184,434) $3,256,697 $(11,724,752) $(6,752,699)
========= ========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-41
<PAGE>
U.S. COMPUTER GROUP INC. AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
YEAR ENDED FEBRUARY 28, 1998
- -------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,747,900)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 285,444
Amortization of excess of costs over fair
value of net assets acquired 79,867
Amortization of deferred financing costs 39,575
Provision for the allowance for doubtful
accounts receivable 152,481
Loss on disposal of fixed assets 19,269
Forgiveness of interest to related party 262,181
Accrued interest on notes receivable from
shareholders (11,255)
Changes in assets and liabilities:
Accounts receivable 1,012,231
Inventories 597,146
Deferred sales costs 120,034
Prepaid expenses and other current assets (58,767)
Deferred financing costs (291,238)
Other assets (136,976)
Accounts payable (241,999)
Accrued liabilities (55,528)
Deferred service liability (584,087)
Acquisition deposit payable 500,000
Deferred lease incentive (54,935)
----------
Net cash used in operating activities (2,114,457)
----------
CASH FLOWS FROM INVESTING ACTIVITIES -
Additions to property and equipment (243,140)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of credit facility obligations (15,840,320)
Proceeds from credit facility obligations 17,600,383
Payments of note payable (24,424)
Repayments on long-term debt (196,866)
Borrowings from issuance of long-term debt 234,941
Repayments of loans to shareholder (100,000)
Borrowings from shareholder 730,000
Redemption of redeemable preferred stock (200,712)
Dividends on redeemable preferred stock (36,971)
Redemption of common stock (92,351)
----------
Net cash provided by financing activities 2,073,680
----------
NET DECREASE IN CASH (283,917)
CASH, BEGINNING OF YEAR 293,790
----------
CASH, END OF YEAR $9,873
==========
F-42
<PAGE>
U.S. COMPUTER GROUP INC. AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS (Continued)
YEAR ENDED FEBRUARY 28, 1998
- -------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest $910,262
==========
Income taxes paid $9,659
==========
Income taxes refunded $(2,202)
==========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
1. The Company issued 2,000 shares of preferred stock, series E, with a par
value of $1,000 per share in exchange for a $2,000,000 subordinated loan
payable to a shareholder.
2. A shareholder forgave a $1,330,000 loan payable, which was accounted for
as additional paid-in capital.
3. A capital lease obligation of $141,348 was incurred when the Company
entered into a lease for new equipment.
4. The Company issued a $125,000 note payable to a former employee to satisfy
an outstanding liability.
See notes to consolidated financial statements.
F-43
<PAGE>
U.S. COMPUTER GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 28, 1998
- -------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
The accompanying consolidated financial statements include the accounts of
U.S. Computer Group Inc. and its two wholly-owned subsidiaries, U.S.
Computer Sources, Inc. and U.S. Computer Products, Inc. (collectively, the
"Company").
The Company provides maintenance services for midrange equipment
manufactured by Digital Equipment Corporation, IBM, Sun Microsystems, Inc.
and many leading brand personal computers, the sale of new and used
computer equipment, network integration and design services, disaster
recovery and business relocation services. The Company's customers are
located primarily in New York, New Jersey and Pennsylvania. During the
year ended February 28, 1998, approximately 71 percent of the Company's
revenue was generated from the maintenance of computer equipment.
During the year ended February 28, 1998, the Company sustained a net loss
of $3,747,900, and had a shareholders' deficiency and working capital
deficiency of $6,752,699 and $1,248,837, respectively, as of February 28,
1998. The Company is dependent upon continuing support from its
shareholders to generate sufficient cash flows to meet its obligations on
a timely basis and to provide working capital to finance operations.
Support from the shareholders has been received in the past, and the
Company's current majority shareholder, Tech Electro Industries, Inc. (see
Note 17), has commited to providing continuing support sufficient to meet
the Company's cash flow and working capital requirements through at least
February 28, 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements
include the financial statements of U.S. Computer Group Inc. and its
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Revenue Recognition and Deferred Sales Costs - Service revenues generated
under service maintenance contracts are recognized on a straight-line
basis over the contract period, which is in proportion to the costs
expected to be incurred in performing services under the contract.
Estimated losses on contracts, if any, are charged against earnings in the
Period in which such losses are identified. Costs incurred that are
directly related to the acquisition of a contract are deferred and charged
to expense on a straight-line basis over the contract period, not to
exceed twelve months. Defered sales costs on the accompanying consolidated
balance sheet represent the unamortized balance of incremental commissions
and bonuses paid to acquire maintenance contracts. Service revenues that
are not under contract are recognized as the service is performed.
Revenue from trade sales is recognized upon shipment.
F-44
<PAGE>
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Inventories - Inventories are stated at the lower of cost or market and
consist of electronic components and computer systems which support the
Company's maintenance service contracts. Cost is determined using the
first-in, first-out method.
Property and Equipment - Property and equipment are stated at cost, less
accumulated depreciation and amortization. Equipment under capital leases
is stated at the present value of minimum lease payments. Depreciation is
calculated on the straight-line method over the estimated useful lives of
the assets, as follows:
Machinery and equipment 5 years
Furniture and fixtures 8 years
Automobiles 5 years
Leasehold improvements are amortized over the shorter of the lease term or
the estimated useful life of the related asset. Assets acquired under
capital leases are amortized over the shorter of the lease term or the
estimated useful life of the related asset.
Excess of Costs Over Fair Value of Net Assets Acquired - Excess of costs
over fair value of net assets acquired were previously being amortized on
a straight-line basis over 15 years. The recoverability of the excess of
costs over fair value of net assets acquired were evaluated taking into
consideration operating results and other significant events or changes in
the business environment. The Company has reevaluated the useful life of
these costs and will amortize them over 10 years. This change, effective
March 1, 1997, is being treated as a change in accounting estimate and
will be accounted for prospectively. Accumulated amortization was $159,185
as of February 28, 1998. Based upon the operating plans for the upcoming
year, the Company believes that an impairment does not exist and,
accordingly, has not reduced the excess of costs over the fair value of
net assets acquired.
Deferred Financing Costs - Deferred financing costs are being amortized on
a straight-line basis over the term of the financing agreement.
Accumulated amortization was $39,575 as of February 28, 1998.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of -
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of
the assets exceed the fair value of the assets. Assets to be disposed of
are reported at the lower of the carrying amount or fair value less costs
to sell.
F-45
<PAGE>
Stock-Based Compensation - The Company accounts for its stock options
in accordance with the provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees ("APB Opinion No. 25"),
and related interpretations. As such, compensation expense would be
recorded on the date of grant only if and to the extent that the
current market price of the underlying stock exceeded the exercise
price. Accordingly, no compensation expense has been recognized in
the consolidated financial statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation ("SFAS No. 123"), permits entities to recognize as
expense, over the vesting period, the fair value of all stock-based awards
on the date of grant. SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net
income (loss) disclosures for employee stock option grants made in 1995
and future years as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123. Such pro forma disclosure provisions were not
required as no stock options or stock-based compensation awards were
granted since 1992.
Fair Value of Financial Instruments - The following methods and
assumptions were used to estimate the fair values of each class of
financial instruments:
a. Cash, accounts receivable, accounts payable, accrued liabilities and
other current liabilities - The carrying amounts approximate fair
value because of the short-term maturity of these instruments.
b. Credit facility obligations, note payable, long-term debt and
redeemable preferred stock, series D - The carrying amounts
approximate fair value based on the borrowing rates currently
available to the Company for loans with similar terms.
c. Notes receivable from shareholders and redeemable preferred stock,
series E - Due to the nature of these related party transactions, it
is not practicable to estimate the fair value of these instruments.
Income Taxes - The Company accounts for income taxes through the
recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the Company's
consolidated financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the
differences between the financial accounting and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
3. INVENTORIES
Inventories consist of the following at February 28, 1998:
Parts to service maintenance contracts $4,214,209
Less valuation reserves 2,440,613
----------
$1,773,596
==========
F-46
<PAGE>
Inventories of $115,826 are included in other assets on the accompanying
consolidated balance sheet. This amount represents the portion of
inventory which is not expected to be sold or used in the next twelve
months and is presented net of valuation reserves.
4. PROPERTY AND EQUIPMENT - NET
Property and equipment - net consists of the following at February 28,
1998:
Machinery and equipment $ 775,767
Leasehold improvements 252,008
Furniture and fixtures 179,996
Automobiles 276,046
----------
1,483,817
Less accumulated depreciation and amortization 816,409
----------
$ 667,408
==========
Depreciation and amortization of property and equipment amounted to
$285,444 in fiscal year 1998. Included in property and equipment at
February 28, 1998 is $404,599 of equipment and furniture under capital
leases. Accumulated amortization of such equipment and furniture was
$196,359 at February 28, 1998.
5. DEFERRED SERVICE LIABILITY
The deferred service liability of $1,364,317 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 of twelve months. Contracts are
automatically extended 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 February
28, 1998, the Company had a service maintenance contract base with an
aggregate balance of approximately $16,398,000.
6. CREDIT FACILITY OBLIGATIONS
On September 9, 1997, the Company entered into a loan agreement (the
"Agreement") with a financial institution and repaid its obligation under
a previous credit agreement. On February 24, 1998, certain terms of the
Agreement were amended. The Agreement 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 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
F-47
<PAGE>
amount of $500,000 (the "Term Loan"). Borrowings under the Agreement are
secured by an interest in all of the Company'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 (10.5 percent at February 28, 1998), 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 February 28, 1998, $6,110,063 was outstanding under the revolving
loan.
The interest on the Term Loan is payable beginning on October 31, 1998 in
equal monthly installments of $14,000, and the principal balance of the
Term Loan is payable on September 30, 2000. As of February 28, 1998,
$500,000 was outstanding under the Term Loan.
The terms of the Agreement provide 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. The Company may terminate the Agreement
at any time by paying an early termination fee. Certain financial and
nonfinancial covenants are required to be met. At February 28, 1998,
covenants relating to tangible net worth and audited financial statement
deadlines were in default; however, on June 11, 1998, the financial
institution provided waivers of such covenants through May 31, 1999 and
July 15, 1998, respectively, (see Note 17) in exchange for additional
compensation, an increase in the early termination fee, and extension of
the Agreement for one year.
The maximum amount outstanding under the Company's credit agreements
during fiscal year 1998 was approximately $6,695,000, average borrowings
were approximately $5,200,000 and the weighted average interest rate was
10.9 percent.
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.
As of February 28, 1998, accounts payable includes approximately $211,000
related to this inventory financing.
Maturities on financial institution obligations are as follows:
Year Ended
February 28,
1999 $ 70,000
2000 168,000
2001 6,372,063
----------
$6,610,063
==========
F-48
<PAGE>
7. NOTE PAYABLE
The note payable to a former employee of $100,576, on the accompanying
consolidated balance sheet, bears interest at 8 percent per year and is
payable in twenty-four equal monthly installments, including principal and
interest, commencing on October 15, 1997. This note had an original
balance of $125,000.
8. LONG-TERM DEBT
As of February 28, 1998, long-term debt consists of the following:
Capital lease obligations (a) $273,758
Automobile loans (b) 72,242
--------
346,000
Less current installments of long-term debt 147,547
--------
$198,453
========
(a) The Company has various capital lease obligations with annual
interest rates ranging from 10 to 12.22 percent payable in monthly
installments through August 2000. The monthly lease payments,
including interest, range from $698 to $7,370. The capital lease
obligations are secured by the related underlying equipment and
furniture.
(b) The Company has various automobile loans with annual 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.
Maturities on long-term debt are as follows:
Year Ending
February 28,
1999 $147,547
2000 158,054
2001 40,399
--------
$346,000
========
F-49
<PAGE>
At February 28, 1998, future minimum capital lease payments are as
follows:
Year Ending February 28,
1999 $154,078
2000 130,030
2001 12,240
--------
Total minimum lease payments 296,348
Less amount representing interest 22,590
--------
Present value of future minimum lease payments 273,758
Less current installments 113,828
--------
Obligations under capital leases excluding
current installments $159,930
========
9. RELATED PARTY TRANSACTION
The Company had outstanding $3,330,000 in subordinated loans payable to a
shareholder at February 28, 1998. The subordinated loans bore interest at
rates ranging from 8 to 10 percent. Subsequent to February 28, 1998, as a
requirement of the purchase of 51 percent of the Company by Tech Electro
Industries, Inc. (see Note 17), the shareholder converted $2,000,000 of
subordinated loans into 2,000 shares of series E redeemable preferred
stock (non-voting) with a par value of $1,000 per share. Cumulative
dividends are payable annually beginning December 31, 1998 in cash at a
rate of 7 percent, or 12 percent if paid in additional shares of series E
redeemable preferred stock. It is the Company's option to pay dividends
in either form. The series E preferred stock is redeemable, at the
Company's option, at any time after issuance, as set forth in the amended
certificate of incorporation. The shareholder forgave the remaining
loan balance of $1,330,000 and $262,181 of related accrued interest.
The Company is accounting for this transaction as if it had occurred on
February 28, 1998. The liabilities forgiven have been accounted for as
additional paid-in capital.
10. REDEEMABLE PREFERRED STOCK
The series D preferred stock (preferred stock) 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
for 22.668 shares of series D preferred stock which will fully redeem all
outstanding preferred shares by October 1998. Dividends will continue to
be paid on the remaining balance at a rate of 8 percent per year as set
forth in the certificate of incorporation. The amount redeemed during
fiscal year 1998 aggregated $200,712. The liquidation preference of the
preferred stock as of February 28, 1998 is the remaining redemption price
of $267,622.
F-50
<PAGE>
11. STOCK OPTIONS
In 1992, the Company granted options to purchase 31,907 shares of common
stock to two of its officers at an exercise price of $1.567 per share. The
officers who were granted these options resigned from the Company and all
of the options granted were canceled in December 1997. No options were
granted or exercised during fiscal year 1998 (see Note 16).
12. NOTES RECEIVABLE FROM SHAREHOLDERS
The Company has three notes due from shareholders aggregating $184,434 at
February 28, 1998, which have been recorded as a separate component of
shareholders' deficiency on the accompanying consolidated balance sheet.
Interest on the notes bear interest at a rate of 7.5 percent per year. The
notes require payment to be made before December 31, 2001.
13. PROVISION FOR INCOME TAXES
The provision for income taxes for fiscal year 1998 is comprised of the
following:
State and
Federal Local Total
Current $ - $3,000 $3,000
Deferred - - -
------- ---------- ------
$ - $3,000 $3,000
======= ========== ======
Income tax expense for fiscal year 1998 differed from amounts computed by
applying the United States Federal income tax rate of 34 percent to the
loss before provision for income taxes due to the increase in the
valuation allowance, permanent differences and state taxes.
At February 28, 1998, deferred tax assets, net of deferred tax
liabilities, are as follows:
Deferred
Tax Assets/
(Liabilities)
Net operating loss carryforwards $ 2,189,079
Inventories 1,025,220
Accounts receivable 180,160
Property and equipment (147,441)
-----------
Net deferred tax assets 3,247,018
Less valuation allowance (3,247,018)
-----------
$ -
===========
F-51
<PAGE>
The valuation allowance reduces deferred tax assets to management's best
estimate of net deferred tax assets which more likely than not will be
realized.
At February 28, 1998, the Company has net operating loss tax carryforwards
of approximately $5,200,000, which expire through fiscal year 2013.
However, certain limitations would apply as a result of the acquisition by
Tech Electro Industries, Inc. (see Note 17).
The Company has been notified that its New York State income tax returns
for fiscal years 1993 through 1996 have been selected for examination.
Management believes any liability resulting from this examination would
not be material to the Company's financial position or results of
operations.
14. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Savings Plan (the "Plan"). Participants in the
Plan may contribute up to 15 percent of compensation, but not in excess of
the maximum allowed under the Internal Revenue Code. The Plan provides for
matching contributions equal to a percentage of the participants'
contributions as determined each year by the Company. In fiscal 1998, the
Company did not make any matching contributions.
Certain participants in the Plan hold as an investment in the Plan shares
of the Company's common stock. Terminated employees have the option to
require the Company to purchase the shares at the most recent fair value
of the Company's common stock as determined as a result of an independent
valuation. During fiscal year 1998, employees were given the option to
redeem shares at $6.20 per share for a limited period of time. During
fiscal year 1998, 17,368 shares were redeemed by the Company at a
redemption value of $92,351. As of February 28, 1998, the Company has
received notice from employees that 2,737 shares will be required to be
redeemed for a redemption value of $5,337, or $1.95 per share, which
represents the fair value of the Company's common stock resulting from the
most recent independent valuation.
The Plan is currently under examination by the Department of Labor ("DOL")
for plan years 1993 through 1996. Management believes that the outcome of
the examination will not have a material adverse effect on the Company's
financial position or results of operations.
15. BUSINESS AND CREDIT CONSIDERATIONS
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of trade receivables. The
Company's customers are dispersed across many industries and are located
principally in New York, New Jersey and Pennsylvania.
During fiscal year 1998, 7 customers accounted for approximately 14
percent of the Company's annual sales. At February 28, 1998, 10 customers
had accounts receivable balances which in the aggregate represented
approximately 44 percent of the total net receivables, and 1 customer had
an accounts receivable balance which represented 11 percent of the total
net receivables. The Company estimates an allowance for doubtful accounts
based on the creditworthiness of its customers, as well as general
economic conditions. Consequently, an adverse change in those factors
could affect the Company's estimate of its bad debts. The Company, as a
policy, does not require collateral from its customers.
F-52
<PAGE>
16. COMMITMENTS AND CONTINGENCIES
Litigation - At February 28, 1998, the Company is a defendant in one
lawsuit arising in the ordinary course of business. It is the opinion
of management of the Company that it has meritorious defenses against
all outstanding claims, which the Company will vigorously pursue, and the
outcome will not have a significant adverse effect on the Company's
financial position or results of operations.
Operating Leases - The Company is obligated under lease agreements for
warehouse, office facilities and certain equipment. Rent expense for
operating leases approximated $742,000 for fiscal year 1998. The Company
entered into a new lease in the current year to replace office facilities
concurrently under lease. The Company received certain lease incentives,
including a rent holiday. The Company also entered into two sublease
agreements for a portion of its office facilities and provided certain
lease incentives. The Company provided use of the premises for the first
four months of the sublease as a rent holiday. In connection with a lease
agreement previously entered into for certain office space, the Company
received certain lease incentives, including a rent holiday. The net value
of these incentives and other rent escalation clauses is being amortized
over the life of the respective lease terms on a straight-line basis. As
of February 28, 1998, the long-term balance of this incentive was $94,473
and is reflected as deferred lease incentive on the accompanying
consolidated balance sheet.
At February 28, 1998, future minimum operating lease payments are as
follows:
Year Ending
February 28,
1999 $ 685,245
2000 372,169
2001 318,849
2002 278,050
2003 and thereafter 1,159,434
----------
$2,813,747
==========
At February 28, 1998, future minimum rentals to be received under
noncancelable subleases are as follows:
Year Ending
February 28,
1999 $105,218
2000 135,608
2001 121,715
2002 122,549
2003 and thereafter 40,850
--------
$525,940
========
F-53
<PAGE>
Employment Contract - As of February 28, 1998, the Company had an
employment contract with an officer, entered into in March 1994, which
provided for annual base compensation of $200,000 plus a bonus. The
officer was entitled to receive annual increases no less than the increase
in the consumer price index. To date, no increases had been taken. The
bonus was based upon a specified calculation utilizing an adjusted
profit figure, as defined in the employment agreement.
Subsequent to February 28, 1998, the Company entered into a new employment
contract with the same officer noted above for a period of three years.
The contract provides for a base salary of $225,000 plus bonus, which may
be increased from time to time at the discretion of the Board of
Directors. The bonus is based upon a specified calculation, taking into
account the Company's adjusted consolidated earnings, as defined in the
employment contract. The Company also granted the officer an option to
purchase up to 250,000 shares of the Company's stock at an exercise price
of $1.47 per share, subject to various provisions, as defined in the
employment agreement.
17. SUBSEQUENT EVENTS
On March 18, 1998, the Company further amended the Agreement (see Note 6)
with the financial institution to provide for an additional loan ("Bridge
Loan") of $500,000. The Bridge Loan is included as a part of the total
maximum borrowings of the Company. The bridge loan bears interest at a
rate equal to the prime rate plus 3.5 percent. Interest on the Bridge Loan
is payable monthly commencing September 1998. The entire principal balance
is due in September 2000 or August 2001 if the Agreement is renewed.
On March 20, 1998, Tech Electro Industries, Inc. ("Tech Electro"), a
public company, purchased 678,937 newly issued shares of the Company's
stock for $1,000,000 (the "Purchase"). The Purchase represents a 51
percent ownership interest in the Company. Prior to year end, Tech Electro
had deposited $500,000 with the Company which is recorded as an
acquisition deposit payable on the accompanying consolidated balance
sheet.
On March 20, 1998, The Telstar Entertainment Group Plc (formerly Telstar
Holdings Limited) ("Telstar") a shareholder of the Company, converted a
$2,000,000 subordinated loan into preferred stock of the Company. The
conversion was required as a term of the Purchase. The additional loan
principal of $1,330,000 and accrued interest of $262,181 payable to
Telstar as of February 28, 1998 was forgiven and accounted for as
additional paid-in capital for the year ended February 28, 1998 (see Note
9).
F-54
<PAGE>
U.S. COMPUTER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF FEBRUARY 28, 1997
TOGETHER WITH AUDITORS' REPORT
F-55
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
of U.S. Computer Group, Inc.:
We have audited the accompanying consolidated balance sheet of U.S. Computer
Group, Inc. (a New York Corporation) and subsidiaries as of February 28, 1997,
and the related consolidated statements of operations and changes in
shareholders' equity (deficit) and cash flows for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides 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 U.S. Computer Group,
Inc. and subsidiaries as of February 28, 1997, and the results of their
operations and cash flows for the year then ended in conformity with generally
accepted accounting principles.
October 29, 1997
Melville, New York
F-56
<PAGE>
U.S. COMPUTER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1997
ASSETS
CURRENT ASSETS:
Cash $293,790
Accounts receivable, net of allowance for doubtful
accounts of $276,471 3,018,006
Inventories 2,370,742
Prepaid expenses and other current assets 180,142
Deferred costs, net 316,615
------------
Total current assets 6,179,295
PROPERTY AND EQUIPMENT, net 728,981
EXCESS COSTS OVER FAIR VALUE OF ASSETS ACQUIRED, net 567,382
OTHER ASSETS 97,471
------------
$7,573,129
============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt $94,604
Accounts payable 2,335,609
Accrued liabilities 1,264,515
Deferred service liability 1,948,404
Current portion of bank obligations 150,000
Current portion of subordinated loan payable
to shareholder 100,000
------------
Total current liabilities 5,893,132
BANK OBLIGATIONS 4,700,000
LONG-TERM DEBT 213,321
DEFERRED LEASE INCENTIVE 149,408
NOTE PAYABLE 200,000
SUBORDINATED LOAN PAYABLE TO SHAREHOLDER 2,400,000
------------
Total liabilities 13,555,861
------------
The accompanying notes to consolidated financial
statements are an integral part of this statement.
F-57
<PAGE>
U.S. COMPUTER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
FEBRUARY 28, 1997
REDEEMABLE PREFERRED STOCK, series D, $1,000
par value, 1,000 shares authorized,
468.334 shares issued and outstanding,
redemption value and liquidation
preference of $468,334 468,334
------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock, series A, B and C, authorized
1,000, 2,000 and 3,500 shares, respectively,
$100 par, no shares outstanding Common stock, -
$.00001 par value, 1,500,000 shares authorized,
674,073 shares issued 7
Treasury stock, 828 shares, at cost (7,866)
Additional paid-in capital 1,669,853
Accumulated deficit (7,939,881)
Notes receivable from shareholders (173,179)
------------
Total shareholders' deficit (6,451,066)
------------
$7,573,129
============
The accompanying notes to consolidated financial
statements are an integral part of this statement.
F-58
<PAGE>
U.S. COMPUTER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 28, 1997
TRADE SALES, net of sales returns and allowances $7,837,346
SERVICE REVENUES 16,676,105
------------
Total sales and revenues 24,513,451
COST OF SALES AND REVENUES 11,754,620
DIRECT SERVICING EXPENSES 10,086,768
GENERAL AND ADMINISTRATIVE EXPENSES 5,272,840
------------
Operating loss (2,600,777)
INTEREST EXPENSE, net of interest income of $23,006 645,499
------------
Loss before provision for income taxes (3,246,276)
PROVISION FOR INCOME TAXES 11,375
------------
Net loss $(3,257,651)
============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
F-59
<PAGE>
U.S. COMPUTER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED FEBRUARY 28, 1997
<TABLE>
<CAPTION>
Notes Total
Common Shares Additional Receivable Shareholders'
---------------------- Common Treasury Paid-in Accumulated From Equity
Outstanding Treasury Stock Stock Capital Deficit Shareholders (Deficit)
----------- -------- ------- --------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, MARCH 1, 1996,
as restated 674,073 - $7 $ - $1,669,853 $(4,629,208) $(180,174) $(3,139,522)
Net loss for the year
ended February 28, 1997 - - - - - (3,257,651) - (3,257,651)
Dividends on redeemable
preferred stock - - - - - (53,022) - (53,022)
Common stock redeemed - 828 - (7,866) - - - (7,866)
Decrease in notes
receivable from
shareholders - - - - - - 6,995 6,995
----------- -------- ------- --------- ---------- ----------- ------------ -----------
BALANCES, FEBRUARY
28, 1997, as restated 674,073 828 $7 $(7,866) $1,669,853 $(7,939,881) $(173,179) $(6,451,066)
=========== ======== ======= ========= ========== =========== ============ ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
F-60
<PAGE>
U.S. COMPUTER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED FEBRUARY 28, 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,257,651)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 266,906
Amortization of excess cost over fair
value of assets acquired 45,943
Provision for the allowance for doubtful accounts 189,418
Changes in assets and liabilities:
Accounts receivable 568,488
Inventories 1,392,882
Prepaid expenses and other current assets (20,499)
Deferred costs (61,678)
Accounts payable (728,056)
Accrued liabilities (1,055,074)
Deferred service liability 256,972
Deferred lease incentive (25,253)
Other assets 84,897
-----------
Net cash used by operating activities (2,342,705)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (141,036)
-----------
Net cash used by investing activities (141,036)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on long-term debt (88,880)
Borrowings from issuance of long-term debt 66,220
Repayments of bank obligations (135,000)
Proceeds from bank obligations 1,350,000
Repayments of loans to shareholder (500,000)
Borrowings from shareholder 1,900,000
Proceeds from note payable 200,000
Redemption of redeemable preferred stock (158,804)
Dividends on redeemable preferred stock (53,022)
Redemption of common stock (7,866)
-----------
Net cash provided by financing activities 2,572,648
-----------
NET INCREASE IN CASH 88,907
CASH, BEGINNING OF YEAR 204,883
-----------
CASH, END OF YEAR $293,790
===========
CASH PAID DURING THE YEAR FOR:
Interest $435,854
===========
Income taxes $12,054
===========
The accompanying notes to consolidated financial
statements are an integral part of this statement.
F-61
<PAGE>
U.S. COMPUTER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Description of business and current operations
U.S. Computer Group, Inc. and subsidiaries (the "Company") provides
maintenance for equipment manufactured by Digital Equipment Corporation,
IBM, Sun Microsystems, Inc. and leading brand PCs, the sale of new and
used computer equipment, network integration and design services,
disaster recovery and business relocation services. The Company's
customers are located primarily in New York, New Jersey and Pennsylvania.
Approximately 69% of the Company's revenue was generated from the
maintenance of computer equipment during the year ended February 28,
1997.
During the year ended February 28, 1997, the Company sustained a net loss
of $3,257,651 and reflected an accumulated deficit as of February 28,
1997 of $7,939,881. The Company has instituted a program of cost
containment to improve profitability and has received support from its
shareholders with additional funding to support cash flow. During the
coming year, the Company has plans to continue cost containment measures
to improve cash flow and is establishing revised bank financing
arrangements to assist with this effort.
(2) Summary of significant accounting policies
(a) Principles of consolidation
The consolidated financial statements include the financial statements of
the Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(b) Use of estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare the consolidated financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(c) Inventories
Inventories are stated at the lower of cost or market and consist of
electronic components and computer systems which support the Company's
maintenance contracts. Cost is determined using the first-in, first-out
method. (See Note 2j).
(d) Property and equipment
Property and equipment are stated at cost. Equipment under capital leases
are stated at the present value of minimum lease payments. Depreciation
is calculated on the straight-line method over the estimated useful lives
of the assets as follows:
F-62
<PAGE>
Machinery and equipment 5 years
Furniture and fixtures 8 years
Automobiles 5 years
Leasehold improvements are amortized over the shorter of the lease term
or estimated useful life of the asset. Assets acquired under capital
leases are amortized over the term of the lease.
(e) Excess costs over fair value of assets acquired
Excess costs over the fair value of net assets acquired is being
amortized on a straight-line basis over 15 years. Accumulated
amortization was approximately $76,000 as of February 28, 1997. The
recoverability of the excess cost over the fair value of net assets
acquired is evaluated taking into consideration operating results and
other significant events or changes in the business environment. Based
upon the operating plans for the upcoming year, the Company believes that
an impairment does not exist and, accordingly, has not reduced the excess
cost over the fair value of net assets acquired.
(f) Impairment of long-lived assets and long-lived assets to be
disposed of
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" (Statement 121) on March 1,
1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net
cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair
value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell. Adoption of this
Statement did not have a material impact on the Company's financial
position, results of operations or liquidity.
(g) Revenue recognition
Service revenues generated under service maintenance contracts are
recognized on a straight-line basis over the contract period, which is in
proportion to the costs expected to be incurred in performing services
under the contract. Estimated losses on contracts, if any, are charged
against earnings in the period in which such losses are identified. Costs
incurred that are directly related to the acquisition of a contract are
deferred and charged to expense on a straight-line basis over the
contract period, not to exceed twelve months. Deferred costs on the
accompanying consolidated balance sheet represent the unamortized balance
of incremental commissions and bonuses paid to acquire maintenance
contracts. Service revenues that are not under contract are recognized as
the service is performed. Revenue from trade sales is recognized upon
shipment. (See Note 2j).
F-63
<PAGE>
(h) Stock-based compensation
Prior to March 1, 1996, the Company accounted for its stock options in
accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if and to the extent that the current market price of
the underlying stock exceeded the exercise price. On March 1, 1996, the
Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (Statement 123), which permits
entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, Statement
123 also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income (loss) disclosures for
employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in Statement 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure provisions of Statement 123.
Such pro forma disclosure provisions were not required for fiscal year
1997 as no stock options or stock-based compensation awards were granted
during that year.
(i) Income taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
(j) Prior period adjustments and restatement of previously issued
financial statements
The accumulated deficit balance as of February 28, 1996 has been restated
to properly reflect the treatment of certain transactions. The impact of
these adjustments on the Company's accumulated deficit, as originally
reported, is summarized below:
Accumulated deficit, February 28, 1996
(as previously reported) $ (918,814)
To recognize revenues on a straight-line basis
over the life of the respective contract (2,250,331)
To defer sales costs previously expensed 254,937
To adjust valuation of inventories (1,715,000)
-----------
Accumulated deficit, February 28, 1996 (as restated) $(4,629,208)
===========
In addition, certain accounts in the accompanying consolidated financial
statements as of February 28, 1997 and for the year then ended have been
restated to properly reflect the treatment of the transactions enumerated
above.
F-64
<PAGE>
(3) Inventories
Inventories consist of the following at February 28, 1997:
Parts to service maintenance contracts $4,797,273
Less: valuation reserves 2,426,531
----------
$2,370,742
==========
(4) Property and equipment
Property and equipment, net consists of the following at February 28,
1997:
Machinery and equipment $1,037,530
Leasehold improvements 326,343
Furniture and fixtures 292,874
Automobiles 214,493
----------
1,871,240
Less: accumulated depreciation and
amortization 1,142,259
----------
$ 728,981
==========
Depreciation and amortization of property and equipment amounted to
$266,906 in fiscal year 1997, which includes amortization of capitalized
leases. Included in machinery and equipment at February 28, 1997 is
$356,810 of equipment and furniture under capital leases. Accumulated
amortization of such equipment and furniture was $149,995 at February 28,
1997.
(5) Deferred service liability
The deferred service liability of $1,948,404 on the accompanying
consolidated balance sheet represents maintenance contract revenues
billed but not yet earned.
(6) Financing arrangements
On March 1, 1995, the Company entered into a loan agreement with a
financial institution (original loan agreement) which was amended
effective July 23, 1996. The amended loan agreement (loan agreement)
provides for an available line of credit with the maximum amount
available for borrowings being the lesser of the borrowing base (defined
as 80% of eligible accounts receivable) or $2,650,000. At February 28,
1997, $2,650,000 was outstanding under the line of credit.
F-65
<PAGE>
At February 29, 1996, the Company had outstanding a $300,000 demand note
which in connection with the amendment was considered part of the
outstanding line of credit.
The original loan agreement also provided for a $1,500,000 term loan
payable in graduated installments through March 1, 2000. In connection
with the amended loan agreement, principal payments were suspended until
January 1, 1997 but interest payments were required during the suspension
period. Beginning January 1, 1997, $30,000 a month is to be paid until
July 31, 1997 at which time the unpaid principal is due in full. The
amount outstanding under the term loan as of February 28, 1997 is
$1,200,000.
The loan agreement also provides for a $1,000,000 bullet loan secured by
a standby letter of credit from another financial institution which is
guaranteed by a shareholder of the Company.
Borrowings under the loan agreement for the line of credit and term loan
bore interest at 1/2% above the prime rate, up to and including December
31, 1996, and thereafter bear interest at 3% above the prime rate.
Borrowings under the bullet loan bear interest at 1/2% above the prime
rate. The prime rate was 8.25% at February 28, 1997.
As collateral security for the payment under the loan agreement, the
Company granted its financial institution a lien on and security interest
in all monies and other property of the Company. Borrowings under the
line of credit, term loan and bullet loan are also guaranteed by an
officer, who is a shareholder, of the Company.
All amounts due under the loan agreement were payable on July 31, 1997.
Subsequent to year-end, the amounts outstanding under the loan agreement
have been refinanced (See Note 19). As such, the classification of bank
obligations has been presented in accordance with the terms of the new
loan agreement.
The maximum month-end amount outstanding under the line of credit during
fiscal year 1997 was $2,650,000, average borrowings under the line were
$2,325,000 and the weighted average interest rate was 9.17%.
The loan agreement provides for a commitment fee at the rate of .375% per
year of the unused line of credit. The commitment fee is payable
quarterly.
In addition, the Company has a "floorplan" credit line arrangement with a
finance corporation which provides for financing of up to $350,000 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 timely. As collateral security for the payment
under the loan agreement, the Company granted the finance corporation a
security interest in the assets of the Company. As of February 28, 1997,
accounts payable includes approximately $182,000 related to this
inventory financing.
(7) Note payable
The note payable, to an unrelated consultant, of $200,000 on the
accompanying consolidated balance sheet bears interest at 10% per year
and was payable in full on February 14, 1997. The note has been
F-66
<PAGE>
guaranteed by certain executives of the Company. In March 1997, this note
became subordinate to the bank obligations. As such, and consistent with
the repayment terms of the new loan arrangements, this note payable has
been classified as a long-term obligation.
(8) Long-term debt
As of February 28, 1997, long-term debt consists of the following:
Capital lease obligations (a) $ 230,611
Automobile loans (b) 77,314
-----------
307,925
Less: current installments of
long-term debt 94,604
-----------
$ 213,321
===========
(a) Various capital lease obligations with interest ranging from 10% to
21.79%, payable in monthly installments through fiscal year 2001. The
capital lease obligations are secured by the related equipment.
(b) Various automobile loans with interest rates ranging from 8.75% to
10.6% payable in monthly installments through October 2000. The
automobile loans are secured by the related automobiles.
Maturities on long-term debt for the next five years are as follows:
1998 $ 94,604
1999 100,535
2000 98,551
2001 14,235
2002 and thereafter -
--------
$307,925
========
At February 28, 1997, future minimum capital lease payments in the
aggregate and for each of the five succeeding years are as follows:
1998 $ 85,102
1999 91,892
2000 87,799
2001 11,392
2002 and thereafter -
--------
Total minimum lease payments 276,185
Amount representing interest 45,574
--------
Present value of future minimum
lease payments 230,611
Less: current installments 49,099
--------
Obligations under leases excluding
current installments $181,512
========
F-67
<PAGE>
(9) Subordinated loan payable to shareholder
The Company has outstanding $2,500,000 in demand loans payable to a
shareholder at February 28, 1997. The loans bear interest at rates
ranging from 8% to 10%. Of the $2,500,000 in outstanding loans at
February 28, 1997, $2,400,000 is subordinate to bank obligations (See
Note 6). As such, and consistent with the repayment terms of new loan
arrangements (See Note 19), $2,400,000 of this loan has been classified
as a long-term obligation.
(10) Redeemable preferred stock
The Series D preferred stock (preferred stock) are cumulative, non-voting
shares that were issued in connection with a business acquisition. The
holders of the preferred stock are entitled to receive cash dividends at
a rate of 8% per year beginning after May 1, 1995. The dividends accrue
daily and are payable quarterly in May, August, November and February.
The preferred stock has a mandatory redemption requirement of 50% of the
preferred shares on February 28, 1996 and the remaining 50% on May 1,
1997. The Company did not comply with the mandatory redemption
requirements. Non-compliance with the mandatory redemption requirements
resulted in an increased dividend rate and the preferred stock becoming
convertible, at the shareholder's option, into 6% of the outstanding
shares of common stock as of the conversion. The dividend rate increased
to the greater of 8% or the prime rate plus 2%. The prime rate at
February 28, 1997 was 8.25%. The Company did begin to redeem the
preferred stock on a monthly basis in July 1996. The amount redeemed
during fiscal year 1997 amounted to $158,804. The liquidation preference
of the preferred stock as of February 28, 1997 is the remaining
redemption price of $486,334.
Subsequent to year-end, a settlement agreement on the remaining
redeemable preferred stock was reached (See Note 19).
(11) Stock options
In 1992, the Company granted options to purchase 31,907 shares of common
stock to two of its officers at an excerise price of $1.567 per share.
The options are excercisable and expire in 10 years from the date of
issuance. No options were granted during fiscal year 1997.
(12) Notes receivable from shareholders
The Company has three notes due from shareholders of $173,179 at February
28, 1997. Interest on the notes range from 8.5% to 9%. The notes require
payment to be made before December 31, 2001. Amounts outstanding at
February 28, 1997, including accrued interest of $22,510, have been
reflected on the accompanying consolidated balance sheet.
(13) Income taxes
The provision for income taxes for fiscal year 1997 is comprised of:
F-68
<PAGE>
State and
Federal local Total
------- --------- -------
Current $ - $11,375 $11,375
Deferred - - -
------ ------- -------
$ - $11,375 $11,375
====== ======= =======
Income tax benefit for fiscal year 1997 differed from the amount computed
by applying the U.S. Federal income tax rate of 34% to pre-tax loss due
to the non-availability of any current benefit arising from the Company's
net operating tax loss carryforward.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities as of February 28, 1997 are as follows:
Deferred tax assets:
Net operating loss carryforwards $1,600,000
Inventory due to valuation reserve 970,000
Accounts receivable due to allowance
for doubtful accounts 111,000
----------
Total gross deferred tax assets $2,681,000
----------
Deferred tax liabilities:
Direct acquisition costs due to
amortization methods (127,000)
Property and equipment due to
depreciation methods (14,000)
----------
Total gross deferred tax liabilities (141,000)
----------
Net deferred tax assets 2,540,000
Less: valuation allowance (2,540,000)
----------
$ -
==========
At February 28, 1997, the Company has net operating loss carryforwards of
approximately $4,000,000 which expire through 2012.
(14) Fair value of financial instruments
Financial Accounting Standards Board Statement No. 107, "Disclosure about
Fair Value of Financial Instruments", defines the fair value of a
financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. The carrying
value of all financial instruments classified as current assets or
liabilities, with the exception of the current installments of long-term
debt, is deemed to approximate fair value because of the short maturity
of these investments.
The long-term debt of $213,321 on the accompanying consolidated balance
sheet approximates fair value. The fair value of such long-term debt was
estimated by discounting future cash flows of the instrument at a rate
currently offered to the Company by the Company's bankers.
F-69
<PAGE>
(15) Employee benefit plan
The Company has a 401(k) Savings Plan (the "Plan"). Participants in the
Plan may contribute up to 15% of compensation, but not in excess of the
maximum allowed under the Internal Revenue Code. The Plan provides for
matching contributions equal to a percentage of the participants'
contributions as determined each year by the Company. In fiscal year
1997, the Company did not make any matching contributions.
Certain participants in the Plan hold as an investment in the Plan shares
of the Company's common stock. Terminated employees have the option to
require the Company to purchase the shares at the most recent fair value
of the Company's common stock as determined as a result of an independent
valuation. During fiscal year 1997, 828 shares were redeemed by the
Company for a redemption value of $7,866. Subsequent to year-end, the
Company has received notice from terminated employees that 16,567 shares
will be required to be redeemed for a redemption value of $102,715, or
$6.20 per share.
(16) Business and credit considerations
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of trade receivables.
The Company's customers are dispersed across many industries and are
located principally in New York, New Jersey and Pennsylvania.
During fiscal year 1997, 11 customers accounted for approximately 15% of
the Company's annual sales. At February 28, 1997, 12 customers had
accounts receivable balances, which in the aggregate represented
approximately 23% of the total net receivables. The Company estimates an
allowance for doubtful accounts based on the creditworthiness of its
customers, as well as general economic conditions. Consequently, an
adverse change in those factors could affect the Company's estimate of
its bad debts. The Company, as a policy, does not require collateral from
its customers.
(17) Sales and revenue considerations
The dominant part of the Company's business has historically been the
provision of on-site maintenance service for computer systems. The
Company provides this service on a contractual basis and enters into one
or two year contracts with equipment users and buys an inventory of spare
parts to support the equipment under contract. As of February 28, 1997,
the Company had a service maintenance contract base with an aggregate
balance of approximately $16 million.
(18) Commitments and contingencies
Legal proceedings
There are two claims and pending legal proceedings that involve
employment related matters. The impact of the final resolution of these
matters on the Company's results of operations or liquidity in a
particular reporting period cannot be estimated. In the opinion of
F-70
<PAGE>
management, there are meritorious defenses to these claims and the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position. Nonetheless, to
avoid the expense and disruption of protracted litigation, the Company
and one of the claimants reached a settlement agreement. The value of the
settlement has been accrued for in the accompanying consolidated
financial statements.
Operating leases
The Company is obligated under lease agreements for warehouse, office
facilities and certain equipment. Rent expense for all operating leases
amounted to approximately $896,000 for fiscal year 1997. In connection
with a lease agreement for certain office space, the Company received use
of the premises for the first ten months of the lease on a "rent-free"
basis. The value of this incentive and other rent escalation clauses is
being amortized over the life of the respective lease terms. As of
February 28, 1997, the balance of this incentive was $149,408, and is
reflected as deferred lease incentive on the accompanying consolidated
balance sheet.
At February 28, 1997, future minimum operating lease payments in the
aggregate and for each of the five succeeding years are as follows:
Operating lease
---------------
1998 $ 828,697
1999 472,153
2000 347,113
2001 329,376
2002 and thereafter 548,960
----------
$2,526,299
===========
Employment contract
The Company has an employment contract with an officer which provides for
annual base compensation of $200,000 plus a bonus. The officer is
entitled to receive annual increases no less than the increase in the
consumer price index. To date, no increases have been taken. The bonus is
based upon a specified calculation taking into account an adjusted profit
figure, as defined in the employment agreement.
(19) Subsequent events
As of February 28, 1997, the Company was engaged in negotiations with
Colonial Commercial Corp., a publicly held corporation, as to a possible
business combination. Such negotiations were terminated in August 1997.
Subsequent to February 28, 1997, the outstanding bank obligations (See
Note 6), the note payable to an unrelated consultant (See Note 7) and the
subordinated loans payable to a shareholder (See Note 9) have been
refinanced. The new financing arrangements provide for a line of credit
F-71
<PAGE>
based upon a borrowing base with a maximum of $10 million. The line of
credit expires three years from the date of closing. Interest on the line
is at 1.75% above the prime rate. The agreement provides for a facility
fee of 1%, an anniversary fee of .50% of $10,000,000 and a quarterly
facility fee of $5,000. Certain financial convenants are required to be
met.
A settlement agreement was reached with the Series D preferred stock (See
Note 10). The terms of the agreement with the Series D preferred
stockholder provide for monthly redemptions of $33,452 and monthly
dividend payments on the unliquidated balance, with the final payment due
in October 1998.
A settlement agreement was also reached with the claimant in one of the
legal proceedings, which has been reflected in general and administrative
expenses in the accompanying consolidated statement of operations for the
year ended February 28, 1997 (See Note 18).
Subsequent to year end, the Company renegotiated the lease for its New
York City facilities, reducing the space leased and the term of the
lease. Over the revised lease term, the Company expects to realize a
reduction in lease payments of approximately $960,000.
F-72
<PAGE>
No dealer, sales representative or other individual has been authorized to
give any information or to make any representation not contained in this
Prospectus in connection with this Offering other than those contained in this
Prospectus and if given or made, such information or representation must not be
relied upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or solicitation of an offer to buy the Common Stock
by anyone in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so or to any person to whom it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create an implication that the
information contained herein is correct as of any time subsequent to its date.
71
<PAGE>
TABLE OF CONTENTS
=================
Page
PROSPECTUS SUMMARY..................................................7
THE OFFERING........................................................8
SUMMARY FINANCIAL DATA..............................................9
RISK FACTORS.......................................................10
USE OF PROCEEDS....................................................15
MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS....................................16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................18
BUSINESS...........................................................26
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT..............................................38
MANAGEMENT.........................................................43
EXECUTIVE COMPENSATION.............................................45
SELLING SECURITYHOLDERS............................................48
DESCRIPTION OF SECURITIES..........................................51
CERTAIN TRANSACTIONS ..............................................52
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS......................52
PLAN OF DISTRIBUTION...............................................53
LEGAL OPINION......................................................54
EXPERTS............................................................54
INDEX TO FINANCIAL STATEMENTS.....................................F-1
72
<PAGE>
6,558,398 Shares of Common Stock
30,000 Warrants
and
31,800 Shares of Common Stock Issuable
Upon Exercise of Warrants
30,000 Units
Consisting of
30,000 Shares of Common Stock
and
30,000 Shares of Class A Preferred Stock
and
60,000 Shares of Common Stock
Issuable Upon Conversion of
Class A Preferred Stock
TECH ELECTRO INDUSTRIES, INC.
----------------
PROSPECTUS
----------------
------------- ----, 1998
73
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
See the information in the Prospectus under "Risk Factors - Limitation of
Liability of Directors" which information is incorporated herein by reference.
Item 25. Other Expenses of Issuance and Distribution.
The following tables sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions and non-accountable expense allowance.
All of the amounts shown are estimates, except the Securities and Exchange
Commission registration and NASD filing fees.
Securities and Exchange Commission registration fee........ $ 2,995.84
Accounting fees and expenses............................... $ 5,000.00
Printing and engraving expenses............................ $ 5,000.00
Transfer agent and registrar (fees and expenses)........... $ 2,000.00
Blue sky fees and expenses (including counsel fees)........ $ 2,000.00
Other legal fees and legal expenses........................ $ 15,000.00
Miscellaneous expenses..................................... $ 8,000.00
--------
Total...................................................... $ 39,995.84
=========
Item 26. Recent Sales of Unregistered Securities.
On April 8, 1998, the Company commenced a private placement of 375,000
shares of the Company's common stock for $2.00 per share to private investors.
No underwriters were used in connection with such private placement and no
commissions were paid. The private placement was exempted from registration
pursuant to Regulation D of the Securities Act of 1933, as amended.
Item 27. Exhibits.
(a) Exhibits
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).
74
<PAGE>
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).
5 Jeffer, Mangels, Butler & Marmaro LLP Legal Opinion(including consent)
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).
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).
75
<PAGE>
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, dated January 5, 1998).
10.10 Amended and Restated Stock Purchase Agreement among Tech Electro
Industries, Inc., US Computer Group, Inc. and Telstar Holding Limited
(incorporated by reference to the Company's Current Report on Form 8-K, dated
March 19, 1998).
21 Subsidiaries of Issuer
23.1 Consent of Jeffer, Mangels, Butler & Marmaro, L.L.P. (contained in its
opinion filed as Exhibit 5 hereto).
23.2 Consent of King, Griffin & Adamson P.C.
23.3 Consent of Deloitte & Touche, LLP
Item 28. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this
Registration Statement:
(i) To include any Prospectus required by
section 10(a)(3) of the Securities Act of
1933;
(ii) To reflect in the Prospectus any facts or
events arising after the effective date of
the Registration Statement (or the most
recent post-effective amendment thereof)
which, individually, or in the aggregate,
represent a fundamental change in the
information set forth in the Registration
Statement; notwithstanding the foregoing,
any increase or decrease in volume of
securities offered (if the total dollar
value of securities offered would not
exceed that which was registered) and any
deviation from the low or high end of the
estimated maximum Offering range may be
reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b)
(ss. 230.424(b) of this Chapter) if, in the
aggregate, the changes in volume and price
represent no more than a 20% change in the
maximum aggregate Offering price set forth
in the "Calculation of Registration Fee"
table in the effective registration
statement; and
76
<PAGE>
(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the Registration
Statement or any material change to such
information in the Registration Statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a
new Registration Statement relating to the
securities offered therein, and the Offering of
such securities at that time shall be deemed to be
the initial bona fide Offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities
being registered which remain unsold at the
termination of the Offering.
Insofar as indemnification for liabilities arising from the Securities Act
of 1933 (the "Act") may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
77
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California on the 13th day of August, 1998.
TECH ELECTRO INDUSTRIES, INC.
By: /s/ William Kim Wah Tan
-------------------------
William Kim Wah Tan,
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Steven
Scott and David Kaye, or either of them, his true and lawful attorney-in-fact
and agent, acting alone, with full powers of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, any Amendments thereto and any Registration Statement for the same
Offering which is effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent, each acting alone,
full powers and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all said attorney-in-fact and agent, acting alone, or his substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons on behalf
of the Company in the capacities and on the dates indicated.
78
<PAGE>
Date Signature
=============== ===================================
August 13 ,1998 /s/ William Kim Wah Tan
-------------------------------------
William Kim Wah Tan
Director, Chairman of the Board,
President and Chief Executive
Officer (principal executive officer)
August 13, 1998 /s/ Kim Yeow Tan
------------------------------------
Kim Yeow Tan
Director
August 6, 1998 /s/ Steven Scott
-----------------------------------
Steven Scott
Executive Vice President
and Director
/s/ Ian Edmonds
-----------------------------------
August 6, 1998 Ian Edmonds
Director
August 21, 1998 /s/ Sadasuke Gomi
-----------------------------------
Sadasuke Gomi
Director
August 21, 1998 /s/ David Kaye
-----------------------------------
David Kaye
Chief Financial Officer, Treasurer
(principal financial and
accounting officer)
79
Exhibit 21
Subsidiaries of Issuer
Computer Components Corporation, wholly-owned by Tech Electro Industries, Inc.
Very Brite Technologies, Inc., wholly-owned by Computer Components Corporation
Universal Battery Corporation, 67% owned by Computer Components Corporation
US Computer Group, Inc., 51% owned by Tech Electro Industries, Inc.
Exhibit 23.1
Jeffer, Mangels, Butler & Marmaro LLP
San Francisco Office
A LIMITED LIABILITY PARTNERSHIP Twelfth Floor
INCLUDING PROFESSIONAL CORPORATIONS One Sansome Street
ATTORNEYS AT LAW San Francisco, California
TELEPHONE:(310) 203-8080 Tenth Floor 94104-4405
FACSIMILE:(310) 203-0567 2121 Avenue of the Stars Telephone:(415) 398-8080
Los Angeles, California 90067-5010 Facsimile:(415) 398-5584
Ref./file no.
September 2, 1998 58519-0005
Tech Electro Industries, Inc.
2941 Main Street
Suite 300-B
Santa Monica, CA 90405
Re: Tech Electro Industries, Inc. -
Registration Statement on Form SB-2
Gentlemen:
At your request, we have examined the Registration Statement on Form
SB-2 (the "Registration Statement"), that Tech Electro Industries, Inc. (the
"Company") intends to file with the Securities and Exchange Commission in
connection with the registration under the Securities Act of 1933, as amended
(the "Act"), of: (i) 2,712,398 shares of the Company's common stock, par value
$0.01 per share ("Common Stock"), (ii) 2,150,000 shares of Common Stock
underlying options, (iii) 30,000 shares of Common Stock and 30,000 shares of
Class A Preferred Stock ("Preferred Stock") underlying the Representative's
Purchase Option Units, and the 60,000 shares of Common Stock issuable upon
conversion of such Preferred Stock, and (iv) 30,000 shares of Redeemable Class A
Warrants ("Warrants") underlying the Representative's Purchase Option, and the
31,800 shares of Common Stock issuable upon exercise of such Warrants
(collectively, the "Shares"), to be offered for resale by certain security-
holders of the Company. We are familiar with the actions taken and proposed to
be taken by you in connection with the authorization and proposed issuance and
sale of the Shares.
It is our opinion that when the Registration Statement has become effective
under the Act, and subject to the appropriate qualification of the Shares by the
appropriate authorities of the various states in which the Shares will be sold
and receipt of payment for the Shares, the Shares will be validly issued, fully
paid and non-assessable, and the shares of Common Stock to be sold upon
conversion of the Preferred Stock or exercise of the Warrants and payment
therefor, will constitute validly issued, fully paid and non-assessable shares
of Common Stock of the Company.
We express no opinion as to compliance with the securities or "blue sky" laws of
any state in which the Preferred Stock, Warrants or Common Stock are proposed to
be offered and sold or as to the effect, if any, which non-compliance with such
laws might have on the validity of issuance of such securities.
<PAGE>
Jeffer, Mangels, Butler & Marmaro LLP
Tech Electro Industries, Inc.
September 2, 1998
Page 2
We hereby consent to use of our name under the heading "Legal Opinion" in the
Prospectus forming a part of the Registration Statement and to use of filing of
this opinion as an exhibit to the Registration Statement and to the filing of
this opinion in connection with such filings or applications by the Company as
may be necessary to register, qualify or establish eligibility for an exemption
from registration or qualification of the Shares under the blue sky laws of any
state or other jurisdiction. In giving this consent, we do not admit that we
are in the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission promulgated thereunder.
The opinions set forth herein are based upon the federal laws of the United
States of America and the laws of the State of California, all as now in effect.
We express no opinion as to whether the laws of any particular jurisdiction
apply, and no opinion to the extent that the laws of any jurisdiction other than
those identified above are applicable to the subject matter hereof.
The information set forth herein is as of the date of this letter. We disclaim
any undertaking to advise you of changes which may be brought to our attention
after the effective date of the Registration Statement.
Respectfully submitted,
/s/ Jeffer, Mangels, Butler & Marmaro
JEFFER, MANGELS, BUTLER & MARMARO LLP
Exhibit 23.2
CONSENT FOR INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in Form SB-2, Registration Statement under the Securities
Act of 1933, of Tech Electro Industries, Inc. and Subsidiaries of our report
dated March 3, 1998, on the financial statements of Tech Electro Industries,
Inc. and Subsidiaries as of December 31, 1997 and 1996 accompanying the
financial statements contained in Form SB-2, and to the use of our name and the
statements with respect to us as appearing under the heading "Experts" in Form
SB-2.
KING GRIFFIN & ADAMSON, P.C.
Dallas, Texas
September 2, 1998
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Tech Electro Industries,
Inc. on Form SB-2 of our report dated May 29, 1998 (June 11, 1998 as to Note 6),
relating to the financial statements of U.S. Computer Group, Inc. for the years
ended February 28, 1998 and 1997 appearing in the Prospectus, which is part of
this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
Jericho, New York /s/ Deloitte & Touche LLP
August 31, 1998
