SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
Commission File No. 0-27210
Tech Electro Industries, Inc.
--------------------------------------------------------
(Name of Small Business Issuer in its Charter)
Texas 75-2408297
- - -------------------------------- ----------------------
(State or other jurisdiction of (I.R.S Employer
incorporation of organization) Identification No.)
477 Madison Avenue, 24th Floor, New York, New Your 10022
--------------------------------------------------------
Address of principal executive office
(212) 583-0900
---------------------------
Issuer's telephone number
Check whether the issuer has (1) filed all reports required by Section 12 or
15(d) of the Exchange Act during the past 12 months, and (2) been subject to
such filing requirements for the past ninety (90) days. Yes ( X ) No ( )
As of September 30, 1998, 4,398,203 shares of Common Stock were outstanding.
1
<PAGE>
THIS DOCUMENT IS PREPARED AND FILED UNDER THE REQUIREMENTS OF
REGULATION S-B OF THE SECURITIES AND EXCHANGE COMMISSION, EFFECTIVE
JULY 31, 1992.
INDEX
Item Page
Part I - Financial Statements
Item 1 - Financial Statements (unaudited)
Consolidated Balance Sheets at September 30, 1998 and
December 31, 1997................................................3
Consolidated Statements of Operations for
the Periods Ended September 30, 1998 and 1997....................5
Consolidated Statements of Cash Flows for the
Periods Ended September 30, 1998 and 1997........................6
Notes to Consolidated Financial Statements.......................7
Item 2 - Management's Discussion and Analysis of financial condition
and results of operations.......................................13
Part II - Other Information
Item 1 - Legal Proceedings......................................23
Item 2 - Changes in Securities..................................23
Item 3 - Defaults Upon Senior Securities........................23
Item 4 - Submission of Matters to a
Vote of Securities Holders.............................23
Item 5 - Other Information......................................23
Item 6 - Exhibits and Reports on Form 8-K.......................23
Signatures...............................................................24
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Tech Electro Industries, Inc., and Subsidiaries
Consolidated Balance Sheets
ASSETS
(Unaudited)
Sep 30, 1998 Dec 31, 1997
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 1,445,584 $ 1,918,604
Marketable securities - 96,063
Accounts and notes receivable
Accounts receivable-trade, net of
allowance for doubtful accounts of
$505,277 and $16,000 respectively 2,252,673 974,604
Notes 220,000 362,153
Other 147,062 34,942
Deferred sales costs 238,668 -
Inventories 3,748,350 1,801,034
Prepaid expenses 667,005 211,351
------------ ------------
TOTAL CURRENT ASSETS 8,719,342 5,398,751
------------ ------------
NET PROPERTY AND EQUIPMENT 930,809 308,884
------------ ------------
OTHER ASSETS
Contract rights, net of accumulated
amortization of $271,803 5,164,244 -
Deferred financing costs 226,934 -
Goodwill 3,826,484 -
Notes receivable 66,755 49,997
Deposit on future acquisition - 500,000
Other assets 288,587 290
------------ ------------
TOTAL OTHER ASSETS 9,573,004 550,287
------------ ------------
TOTAL ASSETS $ 19,233,155 $ 6,257,922
============ ============
See Notes to Consolidated Financial Statements
3
<PAGE>
Tech Electro Industries, Inc., and Subsidiaries
Consolidated Balance Sheets
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
Sep 30, 1998 Dec 31, 1997
------------ ------------
CURRENT LIABILITIES
Current portion of credit facility
obligations $ 334,668 $ -
Current portion of notes payable 274,678 425,000
Current portion of long term debt 182,041 -
Accounts payable-trade 3,142,355 467,822
Accrued liabilities 1,091,535 548,273
Deferred service liability 1,605,395 -
Dividends payable - 28,432
------------ -----------
TOTAL CURRENT LIABILITIES 6,630,672 1,469,527
LONG TERM LIABILITIES
Credit facility obligations 7,089,888 -
Deferred lease incentive 22,731 -
Long term debt 78,529 -
------------ -----------
TOTAL LIABILITIES 13,821,820 1,469,527
MINORITY INTEREST IN SUBSIDIARY 2,030,631 29,202
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value; 186,338 319,934
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 September 30, 1998;
186,338 and 254,934 Class A issued
and outstanding on September 30, 1998
and December 31, 1997 respectively;
liquidation preference $978,275 and
$1,338,404 respectively
Common stock, $.01 par value; 43,982 34,985
10,000,000 shares authorized, 4,398,203
shares issued and outstanding on
September 30, 1998 and 3,498,407 shares
issued and outstanding on December 31 1997
Additional paid-in capital 7,002,903 5,713,866
Unrealized gains on marketable securities - 24,624
Subscriptions receivable (107,500) -
Retained Earnings (Accumulated Deficit) (3,755,019) (1,334,216)
------------ ------------
Total stockholders' equity 3,370,704 4,759,193
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 19,223,155 6,257,922
============ ============
See Notes to Consolidated Financial Statements
4
<PAGE>
Tech Electro Industries, Inc., and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For the Periods Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Three Months Ended Year to Date
----------------- ------------
1998 1997 1998 1997
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Sales and service revenues $ 7,033,198 $ 2,184,170 $ 17,012,622 $ 4,753,654
Cost of sales and revenues and
direct service expense 5,577,262 1,587,858 13,443,753 3,474,045
-------------- ------------- ------------- ------------
Gross profit 1,455,936 596,312 3,568,869 1,279,609
Selling, general and
administrative expenses 2,313,120 705,230 5,467,518 1,827,790
-------------- ------------- ------------- ------------
Loss from operations (857,184) (108,918) (1,898,649) (548,181)
Other income (expense):
Interest income 21,403 18,044 69,188 69,702
Interest expense (218,116) (7,197) (398,311) (24,680)
Other (151,663) - (151,663) -
-------------- ------------- ------------- ------------
Total other income (expense) (348,376) 10,847 (480,786) 45,022
Minority share of subsidiary loss - 13,316 29,201 29,541
-------------- ------------- ------------- ------------
Loss before provision for taxes (1,205,560) (84,755) (2,350,234) (473,618)
Income tax expense:
Current 4,015 - 7,320 7,455
-------------- ------------- ------------- ------------
Total income tax expense 4,015 - 7,320 7,455
-------------- ------------- ------------- ------------
NET LOSS $ (1,209,575) $ (84,755) $ (2,357,554) $ (481,073)
============== ============= ============= ============
Loss attributable to
common stockholders $ (1,226,345) $ (117,605) $ (2,423,117) $ (579,623)
============== ============= ============= ============
Loss per share(base and diluted) $ (0.28) $ (0.09) $ (0.60) $ (0.44)
============== ============= ============= ============
Number of weighted average
shares of common shares
outstanding 4,386,239 1,308,275 4,063,940 1,308,275
============== ============= ============= ============
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
Tech Electro Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Sep 30 1998 Sep 30 1997
------------- -------------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $ (2,357,554) $ (481,073)
Adjustments to reconcile net
loss to cash used by
operations
Depreciation and amortization adjustment 317,688 22,462
Provision for slow moving inventory 348,666 56,117
Minority interest share of subsidiary (232,741) (29,541)
Deferred lease incentive (71,742) -
Changes in operating assets and liabilities
(Increase) decrease in:
Accounts receivable-trade 1,100,225 (424,967)
Other receivables (112,120) (611,518)
Inventory (538,140) (415,363)
Contract rights 271,803 -
Other assets (48,093) -
Deferred expenses 24,729 -
Deferred sales costs (42,087) -
Prepaid expenses (216,748) (201,070)
Increase (decrease) in:
Accounts payable 1,113,823 21,379
Accrued liabilities (546,062) 82,294
Deferred service liability (8,922) -
------------- -------------
NET CASH USED BY OPERATING ACTIVITIES (997,275) (1,981,280)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (138,874) (112,670)
Purchases of certificates of deposit - (491,669)
Advances on note receivable 125,395 27,086
Sale of marketable securities 71,439 943,677
Business acquisition, net of cash acquired (415,127) -
------------- -------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (357,167) 366,424
CASH FLOWS FROM FINANCING ACTIVITIES
Credit facility obligations 814,493 -
Payments on short term debt - (72,772)
Proceeds from long-term debt - (247,939)
Repayment of long-term debt (898,328) -
Proceeds from sale of preferred stock,
common stock and warrants 993,689 1,870,707
Dividends paid (28,432) (59,945)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 881,422 1,490,051
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (473,020) (124,805)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 1,918,604 261,973
------------- -------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 1,445,584 $ 137,168
============= =============
See Notes to Consolidated Financial Statements
6
<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 nine month period ended September 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.
7
<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 nine
months ending September 30, 1998 and 1997 assumes the USCG acquisition
occurred as of January 1, 1997.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------- ----------------------------------
Sep 30, 1998 Sep 30, 1997 Sep 30, 1998 Sep 30, 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 7,033,198 $ 13,859,120 $ 17,012,622 $ 31,039,341
Net loss $(1,209,575) $ (3,891,753) $ (2,357,554) $ (9,606,087)
Loss per share
(Basic and diluted) $ (0.28) $ (2.97) $ (0.60) $ (7.34)
</TABLE>
Note D - Dividends
Dividends were declared on August 19, 1998 for Class A Preferred Stock at
$0.09 per share. This dividend was paid in the form of common stock at the rate
of .048 shares of common for each share of preferred. The dividend was payable
on September 30, 1998 to stockholders of record at the close of business of
August 31, 1998. In addition, dividends paid during the quarter ended September
30, 1998 were $16,770. No dividends were paid for the quarter ended September
30, 1997. No dividends were payable at September 30, 1998.
8
<PAGE>
Note E - Inventories
Inventories consist of the following at September 30, 1998:
Computer parts, electronic components and
packing materials $4,567,616
Less valuation reserves 819,266
----------
$3,748,350
==========
Note F - Property and Equipment
Property and equipment consists of the following at September 30, 1998:
Machinery and equipment $ 1,228,974
Leasehold improvements 320,510
Furniture and fixtures 407,109
Automobiles 312,250
----------
2,268,843
Less accumulated depreciation & amortization 1,338,034
----------
$ 930,809
==========
Included in property and equipment at September 30, 1998 is $404,599 of
equipment and furniture acquired under capital leases. Accumulated amortization
of such equipment and furniture was $236,834 at September 30, 1998.
Note G - Credit Facility Obligations
On September 9, 1997, USCG entered into a loan agreement with Coast
Business Credit, subsequently amended on February 24, 1998 and March 19, 1998,
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 other than
maintenance contract receivables as defined in the loan agreement, plus 4.25
times the average total monthly computer maintenance contract collections to be
calculated on a trailing twelve month moving average, as well as a term loan in
the principal amount of $500,000. At September 30, 1998, the maximum
borrowings available were $7,581,000. 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.
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 September 30, 1998, $6,420,233 was outstanding under the
revolving loan.
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 September 30, 1998, $986,000 was outstanding under
the term loan.
9
<PAGE>
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 September 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 amounts 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 September 30, 1998, accounts payable includes approximately $147,440
related to this inventory financing.
Note H - Line of Credit
During the third quarter, CCC increased its credit line from $750,000 to
$1,000,000. The line is payable on demand with interest at prime plus one
half percent, maturing June 30, 1999 and secured by accounts receivable,
inventory, machinery and equipment and a $250,000 certificate of deposit. At
September 30, 1998 and 1997 the outstanding balance was $210,000 and $275,000
respectively.
Note I - Deferred Service Liability
The deferred service liability of $ 1,605,395 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 September 30, 1998, the
Company had a service maintenance contract base with an aggregate balance of
approximately $ 15,852,894.
Note J - 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 nine months ended
September 30, 1998 and 1997 has been increased for accrued dividends on
preferred stock totaling $65,563 and $98,550. There were no accrued dividends
as of September 30, 1998.
10
<PAGE>
Note K - Long-Term Debt
As of September 30, 1998, long-term debt consists of the following:
Capital lease obligations (a) $ 202,396
Automobile loans (b) 58,174
---------
$ 260,570
Less current installments of long-term debt 182,041
---------
$ 78,529
=========
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 L - Minority Interest
Minority interest of $ 2,030,631 at September 30, 1998 represents the
minority interest in USCG's series D and series E redeemable preferred stock
which remain outstanding at September 30, 1998.
USCG's series D preferred stock outstanding of $ 33,458 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 $ 33,458.
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.
11
<PAGE>
Note M - 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 September 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 September 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 N - Restricted Cash
At September 30, 1998, CCC and subsidiaries maintained cash on hand
totaling $710,015. These funds are restricted for use by CCC. TEI may draw
upon this cash for certain specified uses including the payment of preferred
stock dividends or funding future acquisitions.
12
<PAGE>
Item 2. Management's Discussion and Analysis of financial condition and results
of operations.
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and notes thereto included
elsewhere in this Form 10-QSB. Except for the historical information contained
herein, the discussion in this Form 10-QSB contains certain forward looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Form 10-QSB should be read as being applicable to all
related forward-looking statements wherever they appear in this Form 10-QSB.
These statements include, without limitation, statements concerning the
potential operations and results of the Company and information relating to Year
2000 matters, described below. The Company's actual results could differ
materially from those discussed here. Factors that could cause or contribute to
such differences include, without limitation, those factors discussed herein and
in the Company's Annual Report on Form 10-KSB for the year ended December 31,
1997.
Recent Developments
The financial results of the Company for both the three and nine months
ended September 30, 1998 were significantly impacted by the acquisition
(accounted for as a purchase) 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 September 30, 1998 is the second period in which the operations
of USCG are reflected in the results of operations of the Company.
During the period ended September 30, 1998, a number of other developments
occurred which had a significant impact on the operations and results of the
Company, including the following:
In August of 1998, the Company opened an office in New York. Effective
November 1, 1998, this will be the Company's new headquarters.
Effective September 15, 1998, USCG made extensive cuts in overhead to
better align costs with revenues. USCG laid off approximately 15% of its
workforce. This resulted in savings of approximately $87,000 per month. As a
result of this action, operations for the month of September 1998 approached
break-even before reorganization costs relating to the layoff of approximately
$45,000. While there can be no assurance that such savings will continue,
the Company believes that these changes will better enable USCG to compete
effectively and operate more efficiently.
13
<PAGE>
In October 1998, Mr. Alan R. Andrus assumed the position of COO on a
full-time basis replacing the interim COO. He brings almost thirty years of
experience in the computer service industry. His career started at Grumman
Corporation, where he became President of Grumman Systems Support Corporation,
an independent service organization, servicing businesses nationwide. After
Grumman, he became Senior Vice President at Computerland/Vanstar and then at
Technology Service Solutions, the joint venture between IBM & Kodak. Mr. Andrus
is responsible for managing and overseeing the day to day operations of the
company and has been brought on board to increase operational efficiencies,
reduce costs and oversee the integration of acquisitions.
USCG signed a contract with Street Technologies, a provider of Internet
based training and launched the "USC Learning Center". Investment has been made
in this new venture in the form of a salesperson, and the Learning Center was
officially launched at the end of September.
As earlier reported, the Company entered into an Agreement on July 10, 1998
for the acquisition of DenAmerica Corporation ("DenAmerica"), the largest
franchisee of Denny's restaurants and the owner of the Black-eyed Pea chain of
restaurants. The Company agreed to pay to the holders of each share a total of
$4.90 in cash and newly issued preferred stock worth $0.90 per share. On October
1, 1998, DenAmerica announced that it had agreed to modify the terms of its
agreement with Tech Electro Industries, Inc. The modification would allow the
Company the option to pay either $3.00 in cash and $1.90 in newly-issued Company
preferred stock or $4.00 in cash and $0.90 in newly issued Company preferred
stock, for each share of DenAmerica common stock.
On October 27, 1998, Tech Electro Industries, Inc. announced the
termination of the proposed Den America acquisition, citing failure of
certain financial contingencies. The company is considering its options in
light of DenAmerica's decision.
As part of the Company's relocation of executive office functions to New
York, the Company announced on November 6, 1998 that David Kaye, formerly the
Company's Chief Financial Officer, would no longer be employed by the Company.
The Company is currently considering potential successors to Mr. Kaye.
THREE-MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE-MONTHS ENDED
SEPTEMBER 30, 1997
Results of Operations
As noted above, the Company's results of operations for the third quarter
of 1998, compared to the third quarter of 1997, were significantly impacted by
the operations of USCG, which was acquired by the Company on March 19, 1998 (the
end of the first quarter) and is not included in the results of operations for
the third quarter of 1997.
Revenues
For the three month period ending September 30, 1998, the Company had sales
of $7,033,198, an increase of $4,849,028 (222.01%) from sales of $2,184,170 for
the three month period ending September 30, 1997.
14
<PAGE>
The significant increase in revenues was due to sales originated by USCG
and its subsidiaries, which together contributed sales of $5,315,946 to the
Company's revenues for the three month period ending September 30, 1998.
Additionally USCG gained new contracts or additional business in the amount of
$765,427. However, USCG also had cancellations of contracts totaling $1,339,109,
thus, the net effect on USCG revenues for this period was a loss of $573,682.
USCG had significant uplifts in major contracts with New Jersey Transit, IBM
Business Recovery Systems, OAO Technology Solutions, National MS Society and
West Hudson Hospital. USCG also signed new contracts with HBO, American
Institute of Physics, Queensborough Community College and Temple University.
However, USCG also lost significant contracts with OAO Technology, Perot
Systems, Gestetner Corporation, Sun Chemical, Brookhaven Science Laboratories,
Syosset Schools, Natwest Markets, and GlenCove Schools due to either the clients
no longer using the equipment USCG serviced or losing the contracts when sent
out to bid.
In light of the revenues lost, USCG made extensive cuts in overhead to
better align costs with revenues. As discussed above, USCG laid off
approximately 15% of its workforce on September 15, 1998. As a result of this
action, operations for September were break-even before reorganization costs
relating to the layoff of approximately $45,000. While there can be no
assurances that such savings will be continuing, the Company believes that these
changes will better enable USCG to operate more efficiently as well as compete
more effectively in the marketplace.
Excluding the sales of USCG, the Company's other subsidiaries (comprised of
Computer Components Corporation, ("CCC"), Universal Battery Corporation ("UBC")
and Vary Brite Technologies, ("VBT") recorded sales of $1,717,252 for the three
month period ending September 30, 1998, compared to $2,184,170 for the three
month period ending September 30, 1997, a decrease of $466,918 (21.38%).
Computer Components Corporation had revenues of $732,360 for the three
months ended September 30, 1998, compared to revenues of $1,459,643 during the
same period ending September 30, 1997, a decrease of $727,283 (49.8%). As
reported in May 1998, CCC was advised by Sunbeam Corporation that it had
experienced a change in management and would no longer require CCC's goods or
services. The significant drop in CCC revenues was a direct result of losing the
Sunbeam Corporation as a customer, who relocated their facilities to Asia. The
Company expects that the loss of this customer will result in a reduction in
sales during the remainder of the Company's fiscal year, however, management at
CCC has taken measures in response to losing Sunbeam. In July 1998, in an effort
to increase operational efficiencies, CCC began eliminating positions, reducing
current salaries and reducing overhead. By realigning costs with revenues, CCC
anticipates a reduction of general and administrative expenses by approximately
$48,000 per month, by the end of calendar year 1998.
UBC's revenues increased to $967,865 due to strong battery sales for the
third quarter of 1998, compared to revenues of $551,520 for the same period in
1997, an increase of $416,345 (75.5%). VBT reported revenues for the third
quarter of 1998 of $17,028, compared to $174,009 for the same period in 1997, a
decrease of $156,981 (90.2%). The decrease in revenues of VBT was directly
attributable to a delay in shipment of assembled goods to a major customer.
15
<PAGE>
The Company recognized a loss from operations of $857,184 for the three
month period ending September 30, 1998, compared to a loss of $108,918 during
the same period in the prior year, an increase in losses of $748,266 (687%). The
Company's increased loss was due to USCG having a net loss in customer service
contracts, in addition to increases in cost of goods sold and general and
administrative expenses. As discussed earlier, in May 1998, Computer Components
Corporation, a wholly owned subsidiary of the Company (CCC) was advised that the
Sunbeam Corporation had experienced a change in it management. This development
caused CCC to record a reduction in inventory of $120,000 in June 1998. The
Company expects that the loss of this customer will result in a reduction of
sales of $500,000 during the remainder of the Company's fiscal year.
Cost of Goods Sold
The cost of goods sold rose to $5,577,262 in the third quarter of 1998,
from $1,587,858 in the third quarter of 1997, an increase of $3,989,404
(251.24%). The increase in cost of goods sold can be attributed to the
consolidation of the operations of USCG and its subsidiaries, which contributed
cost of goods sold of $4,189,239 for the third quarter of 1998, with no
contribution in the same period in 1997. Excluding cost of goods sold by USCG,
CCC's cost of goods sold was $1,388,023 in the third quarter of 1998, compared
to $1,587,858, or a decrease of $199,835 (12.59%) from the third quarter of
1997.
Cost of goods sold for the Company, as a percentage of sales rose to 79.30%
in the third quarter of 1998 from 72.70% in the third quarter of 1997. This
increase is attributable to the acquisition of USCG and its subsidiaries, for
which the cost of goods as a percentage of sales was 78.81% in the third quarter
of 1998. Cost of goods as a percentage of sales for CCC and its subsidiaries
increased to 80.8% compared to 72.70% during the same three month period in
1997.
Gross Profit
The Company recorded a gross profit of $1,455,936 for the three months
ended September 30, 1998. This was an increase of $859,624 (144.16%) over the
gross profit recorded during the three months ended September 30, 1997 of
$596,312.
Of the $1,455,936 in gross profit, the addition of USCG contributed
$1,126,707 (77.4%).
16
<PAGE>
CCC and its subsidiaries contributed $329,229 towards gross profit for the
three month period ending September 1998, compared to $596,314 for the same
three month period in 1997, a decrease of $267,085 (44.79%). Gross profit as a
percentage of sales for CCC and its subsidiaries decreased to 19.2% for the
three months ended September 30, 1998, compared to 27.3% for the same period in
1997. The decreasing gross profit margin of CCC is largely attributable to a
major customer, Sunbeam Corporation, unexpectedly moving their manufacturing
facilities to Asia, leaving CCC with significant inventories upon which a
"reserve" of over $56,000 was established for potential write-offs. As noted
above, in June 1998, CCC recorded an additional $120,000 in cost of goods sold
as a write-off of inventory resulting from the reduction in business from
Sunbeam Corporation. These items purchased by Sunbeam from CCC were specialized
products used only by Sunbeam and could not be sold to other CCC customers.
Changes in the Asian currency markets also adversely affected UBC's gross
margin. UBC was forced to reduce its sales price of some products based upon a
reduced replacement cost of inventory purchased from Asia.
Selling, General and Administrative Expenses
The Company's selling, general and administrative expenses, consisting
primarily of wages, benefits and related expenses rose to $2,313,120 for the
three month period ending September 30, 1998 from $705,230 for the same period
in 1997, an increase of $1,607,890 (228%). The increase was due primarily to
costs associated with operations of USCG and its subsidiaries, which contributed
general and administrative expenses of $1,109,767 for the third 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 $642,907 in the third quarter of 1998, compared to $539,765, or an
increase of $103,142 (5.23%) from the third quarter of 1997. Selling, general
and administrative expenses as a percentage of sales at CCC and its subsidiaries
increased to 37.4% from 24.7% during the same period in 1997. As discussed above
the company has acted accordingly to adjust selling, general and administrative
expenses due to the loss of this Sunbeam.
Inventory
CCC increased its inventory allowance to $207,365 in the three months
ended September 30, 1998 compared to $151,003 in the corresponding period of
1997. The increase of $56,362 was, as stated above, a result of the Sunbeam
Corporation moving their manufacturing facilities to Asia, leaving CCC with
significant inventories upon which a reserve had to be established for potential
write-offs.
17
<PAGE>
Purchase Order Backlog
As of September 30, 1998, Company's purchase order backlog was
approximately $2,405,189, compared to $1,940,858 on September 30, 1997, an
increase of $464,331 (23.9%). Of the purchase order backlog on September 30,
1998, $103,866 (4.32%) was attributable to USCG and $2,301,323 (95.68%) was
attributable to the rest of the Company. Two of CCC's significant clients
accounted for the majority of the increase in the purchase order backlog.
Generally, the purchase order backlog represents orders received from customers
but not shipped, typically at the request of the customer. The Company monitors
its purchase order backlog to help analyze sales trends and to gauge future
sales potential.
Interest Expense
The Company incurred $218,116 in interest expenses during the third quarter
of 1998, compared to $7,197 during the third quarter of 1997, an increase of
$210,919 (2930.65%). The significant increase in interest expense is
attributable to USCG and its subsidiaries, which incurred $210,651 in interest
expenses during the third quarter of 1998.
NINE-MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE-MONTHS ENDED SEPTEMBER 30,
1997
Results of Operations
The Company's results for operations for the first nine months of 1998,
compared to the first nine months of 1997, were significantly impacted by the
operations of USCG, which was acquired during the first quarter of 1998, and for
which there are no comparable results in the first nine months of 1997.
Revenues
For the nine month period ending September 30, 1998, the Company had sales
of $17,012,622, an increase of $12,258,968 (257.89%), from sales of $4,753,654
for the nine month period ending September 30, 1997. The significant increase in
revenues was due to sales originated by USCG and its subsidiaries, which
together contributed sales of $11,229,225 to the Company's revenues for the nine
month period ending September 30, 1998.
The Company recognized a loss from operations of $1,898,649 for the nine
month period ending September 30, 1998, compared to a loss of $548,181 during
the same period in the prior year, an increase in losses of $1,350,468 (246.4%).
The Company's increased loss was due to increases in cost of goods sold and
general and administrative expenses from both USCG and CCC and their
subsidiaries. The cost of goods sold rose to $13,443,753 in the first nine
months of 1998 from $3,474,045 during the same period in 1997, an increase of
$9,969,708 (287.0%). The Company's general and administrative expenses rose to
$5,467,518 for the first nine months ending September 30, 1998, from $1,827,790
for the same period in 1997, an increase of $3,639,728 (199.1%). 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 $9,092,734 and general and administrative expenses of
$2,291,194 for the first nine months of 1998.
18
<PAGE>
CCC's revenues for the nine months ended September 30, 1998 were
$5,783,397, compared to $4,756,454 for the same period ended September 30, 1997,
an increase of $1,026,943 (21.59%). This increase in revenues was primarily due
to the increased battery sales at the CCC subsidiary, UBC, which has been its
primary area of growth. Battery sales at UBC have increased by $1,442,050
(143.69%) to $2,445,607, compared to sales of $1,003,557 during the same period
ending September 30, 1997. In contrast, sales at VBT dropped $127,921 (56.08%)
to $100,177 during the nine-months ended September 30, 1998, compared to
$228,098 during the same period ending September 30, 1997. Sales at CCC
decreased by $287,184 (8.15%) to $3,237,615 for the nine-months ended September
30, 1998 compared to $3,524,799 during the same period ending September 30,
1997.
Cost of Goods Sold
The Company's cost of goods sold rose to $13,443,753 in the first nine
months of 1998 compared to $3,474,045 during the same period in 1997, an
increase of $9,969,708 (286.98%). The increase was due to the impact of USCG and
its subsidiaries, which contributed $9,082,734 to the cost of goods sold for the
first nine months of 1998, with no contribution in the same period in 1997.
Cost of goods as a percentage of sales rose to 79.02% in the first nine
months of 1998, from 73.08% during the same period in 1997. This increase is
attributable to USCG and its subsidiaries, for which the cost of goods as a
percentage of sales was 80.97% in the first nine months of 1998.
At CCC, the costs of goods sold increased by $876,974 (25.24%), to
$4,351,019 for the nine-months ended September 30, 1998, compared to $3,474,045
for the same period in 1997.
Selling, General and Administrative Expenses
The Company's selling, general and administrative expenses, consisting
primarily of wages, benefits and related expenses, rose to $5,467,518 for the
first nine month period ending September 30, 1998, from $1,827,790 for the same
period in 1997, an increase of $3,639,728 (199.13%). The increase in selling,
general and administrative expenses was due to costs associated with operations
of USCG and its subsidiaries, which contributed general and administrative
expenses of $2,291,194 for the first nine months of 1998, with no contribution
during the same period in 1997.
CCC's selling, general and administrative expenses increased by $418,121
(28.18%), to $1,901, 963 for the nine months ended September 30, 1998, compared
to $1,483,842 during the same period ended September 30, 1997. This is due
primarily to an increase in salaries and wages, commissions, and related selling
expenses.
Interest Expense
The Company incurred $398,311 in interest expense during the first nine
months of 1998, compared to $24,680 during the same period in 1997, an increase
of $373,631 (1513.90%). The significant increase in interest expense is
attributable to USCG and its subsidiaries, which incurred $372,688 in interest
expense during the first nine months of 1998, with no contribution during the
same period in 1997.
19
<PAGE>
Liquidity
As of September 30, 1998, the Company had cash and cash equivalents of
$1,445,584. By comparison on September 30, 1997, the Company had approximately
$952,696 in cash and cash equivalents, marketable securities and certificates of
deposits. The change in the Company's investment in cash, certificates of
deposit, and securities reflects not only the cash and cash equivalents of USCG,
but also the liquidation of marketable securities (bonds) to fund the cash needs
of the Company, as well as the sale of all marketable securities. The proceeds
from this sale were $120,363. The Company used these proceeds to pay down
various lines of credit for the existing operations of CCC, UBC and VBT.
On September 9, 1997, USCG entered into a loan agreement with Coast
Business Credit, subsequently amended on February 24, 1998 and March 19, 1998,
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 other than
maintenance contract receivables as defined in the loan agreement, plus 4.25
times the average total monthly computer maintenance contract collections to be
calculated on a trailing twelve month moving average, as well as a term loan in
the principal amount of $500,000. At September 30, 1998, the maximum
borrowings available were $7,581,000. 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 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 September 30, 1998, $986,000 was
outstanding under a bridge term loan extended to USCG shortly after its
acquisition by the Company, in addition to $6,420,233 for a total of $7,406,233
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.
Concurrently with the reorganization of TEI, TEI agreed that cash then held
by CCC and it's subsidiaries, or realized upon the exercising of certain options
and warrants as described below , would be restricted for use by CCC and
it subsidiaries. At September 30, 1998 cash on hand at CCC and its subsidiaries
totaled $710,015. This cash may be used by the parent for certain specified uses
including the payment of preferred stock dividends or funding future
acquisitions. While TEI maintains voting control of CCC, a wholly owned
subsidiary, day to day control of CCC's cash and operations are maintained by
CCC's current management.
TEI is obligated to remit to CCC eighty-four percent (84%) of the proceeds
received from the exercise of certain warrants and options outstanding. The
1,945,000 warrants subject to the agreement have an exercise price of $3.30 per
share and expire on January 26, 2000. In addition 1,000,000 options are subject
to the agreement which have an adjusted exercise price of $2.50 per share and
expire on March 10, 1999.
20
<PAGE>
On April 8, 1998, the Company commenced a private placement of 375,000
shares of Company common stock for gross proceeds of $750,000. Net proceeds
raised to date total $642,500 have been used for general working capital.
Inflation
The Company has not been materially effected by inflation, while the
Company does not anticipate inflation affecting the Company's operations,
increases in labor and supplies could impact the Company's ability to compete.
International Currency Fluctuation
Since the majority of goods that CCC purchases are from Asia, it has been
subject, like its competitors, to international currency fluctuation since the
company's inception. The management of CCC does not believe that the fluctuation
in currency presents a serious threat to company's operations.
Risks Relating to Year 2000: USCG
There is worldwide concern that Year 2000 technology problems may
materially and adversely impact a variety of businesses, local, national and
global economies. USCG, 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 enhancements of software in older systems, as well as updating and
enhancing various accounting and other systems. The most significant year 2000
upgrade will be USCG's accounting software package, which must be upgraded to
become compliant. USCG plans to have the upgraded accounting package in place
and operational by the first quarter of 1999. If USCG's accounting software
package is not on line by November 1999, accounting functions can be temporarily
duplicated in an off the shelf accounting package or managed manually. In
addition, USCG's network operating system must be upgraded. Some of USCG's
server hardware may also have to be upgraded to become compliant.
Finally, some internet software packages may have to be upgraded. However, USCG
will not incur charges for these internet software package upgrades.
USCG's risk of not being ready by the year 2000 is very low. The company
has generated a time line to ensure that all systems are year 2000 compliant. In
the case where certain issues arise which were not uncovered during the
assessment phase, the appropriate personnel will be allocated to remediate the
issue. Accordingly, USCG plans to devote the necessary resources to resolve all
year 2000 issues in a time conscious manner. USCG plans to have changes to
critical systems completed by the first quarter of 1999. Based on information
currently available from USCG's internal assessment of modifications that can be
made and conversions which are not available, the Company believes that the
likelihood of a materially adverse impact to the Company as a result of internal
year 2000 problems is remote. While USCG believes that it will complete upgrades
of its operating and application software systems prior to the year 2000,
competition for goods and services relating to such upgrades, including
computer equipment and installation expertise, may cause delays in
implementation.
21
<PAGE>
The estimated cost to remediate the year 2000 issues is anticipated to be
less than $200,000, 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 difficulties will arise.
Risk Relating to Year 2000: Customers and Vendors
USCG has not conducted a systematic evaluation of the Year 2000 compliance
of its customers and vendors. As a result, it is possible that USCG's future
performance may be adversely impacted by financial difficulties experienced by
customers and by shipping, fulfillment and accounting difficulties experienced
by vendors. USCG believes that it has sufficient resources, including cash
reserves and inventory supplies, to maintain operations during delays in
customer payments or the supply of inventories. 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, should it occur.
Because USCG has a large base of customers with equipment and software that
may be upgrading their systems in anticipation of the year 2000 change, USCG's
maintenance operations could be adversely affected. However, the Company
believes that any upgrades by USCG's clients could positively impact USCG's
resale and computer solutions operations.
Risks Relating to Year 2000: CCC
CCC believes that it has addressed the year 2000 issue and will not face
significant operational problems. In 1997, they hired a Director of MIS to
address these issues. Specifically, CCC has upgraded most of its computer
hardware. During November 1998, CCC management will begin implementing a new
accounting software package which is fully year-2000 compliant and believes that
it will be fully compliant well before the beginning of the year 2000.
22
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Securities Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K
23
<PAGE>
Signature
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Tech Electro Industries, Inc.
-----------------------------
Date: November 14,1998 /s/ Donna L. Gilbert
-----------------------------
Donna L. Gilbert
Chief Accounting Officer
24
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Sep-30-1998
<CASH> 1,445,584
<SECURITIES> 0
<RECEIVABLES> 3,123,874
<ALLOWANCES> 505,277
<INVENTORY> 3,748,350
<CURRENT-ASSETS> 8,826,842
<PP&E> 2,268,844
<DEPRECIATION> 1,338,035
<TOTAL-ASSETS> 19,436,466
<CURRENT-LIABILITIES> 6,630,672
<BONDS> 0
0
186,338
<COMMON> 42,333
<OTHER-SE> 3,355,344
<TOTAL-LIABILITY-AND-EQUITY> 19,436,466
<SALES> 17,012,622
<TOTAL-REVENUES> 17,012,622
<CGS> 13,443,753
<TOTAL-COSTS> 5,467,518
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 398,311
<INCOME-PRETAX> (2,251,743)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,251,743)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,251,743)
<EPS-PRIMARY> (0.55)
<EPS-DILUTED> (0.55)
</TABLE>
