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 March 31, 1999
[ ] TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
Commission File No. 0-27210
Tech Electro Industries, Inc.
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(Name of Small Business Issuer in its Charter)
Texas 75-2408297
- ----------------------------------- ------------------------
(State or other jurisdiction of (I.R.S Employer
incorporation of organization) Identification No.)
477 Madison Avenue, 24th Floor, New York, New York 10022
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Address of principal executive office
(212) 583-0900
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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 March 31, 1999, 4,928,209 shares of Common Stock were outstanding.
1
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THIS DOCUMENT IS PREPARED AND FILED UNDER THE REQUIREMENTS OF REGULATION S-B OF
THE SECURITIES AND EXCHANGE COMMISSION, EFFECTIVE JULY 31, 1992.
<TABLE>
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INDEX
Item Page
<S> <C>
Part I - Financial Statements
Item 1 - Financial Statements (unaudited)
Consolidated Balance Sheets at March 31, 1999 and
December 31, 1998. . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for
the Periods Ended March 31, 1999 and 1998. . . . . 5
Consolidated Statements of Cash Flows for the
Periods Ended March 31, 1999 and 1998. . . . . . . 6
Notes to Consolidated Financial Statements . . . . 7
Item 2 - Management's Discussions and Analysis
of and Plan of Operations. . . . . . . . . . 12
Part II - Other Information
Item 1 - Legal Proceedings . . . . . . . . . . . . 17
Item 2 - Changes in Securities . . . . . . . . . . 17
Item 3 - Defaults Upon Senior Securities . . . . . 17
Item 4 - Submission of Matters to a
Vote of Securities Holders. . . . . . . . 17
Item 5 - Other Information . . . . . . . . . . . . 17
Item 6 - Exhibits and Reports on Form 8-K. . . . . 17
Signatures. . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
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Tech Electro Industries, Inc., and Subsidiaries
Consolidated Balance Sheets
ASSETS
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(Unaudited)
Mar 31, 1999 Dec 31, 1998
----------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . $ 454,092 $ 1,399,060
Accounts and notes receivable
Trade, net of allowance for doubtful accounts
of $28,600 and $305,077 respectively. . . . . 990,632 2,879,528
Notes . . . . . . . . . . . . . . . . . . . . 263,289 305,659
Related party . . . . . . . . . . . . . . . . 222,344 -
Other . . . . . . . . . . . . . . . . . . . . 16,837 13,489
Inventories, net. . . . . . . . . . . . . . . 1,385,588 3,356,539
Prepaid expenses and other. . . . . . . . . . 122,914 331,893
----------------- -------------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . 3,455,696 8,286,168
----------------- -------------
NET PROPERTY AND EQUIPMENT. . . . . . . . . . 315,273 897,824
----------------- -------------
OTHER ASSETS
Notes receivable. . . . . . . . . . . . . . . 9,844 7,031
Contract rights, net. . . . . . . . . . . . . - 4,608,349
Deferred financing costs. . . . . . . . . . . - 199,193
Other . . . . . . . . . . . . . . . . . . . . 6,827 182,029
----------------- -------------
TOTAL OTHER ASSETS. . . . . . . . . . . . . . 16,671 4,996,602
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TOTAL ASSETS. . . . . . . . . . . . . . . . . $ 3,787,640 $ 14,180,594
================= =============
</TABLE>
See Notes to Consolidated Financial Statements
3
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<TABLE>
<CAPTION>
Tech Electro Industries, Inc., and Subsidiaries
Consolidated Balance Sheets
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(Unaudited)
Mar 31, 1999 Dec 31, 1998
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<S> <C> <C>
CURRENT LIABILITIES:
Current portion of credit facility obligations . . . . $ 300,000 $ 8,198,654
Current portion of long-term debt. . . . . . . . . . . - 215,300
Accounts payable-trade . . . . . . . . . . . . . . . . 467,627 3,349,682
Accrued liabilities. . . . . . . . . . . . . . . . . . 100,797 1,354,335
Deferred service liability . . . . . . . . . . . . . . - 1,646,949
Other liabilities. . . . . . . . . . . . . . . . . . . - 333,975
----------------- --------------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . 868,424 15,098,895
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . - 53,204
----------------- --------------
TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . . 868,424 15,152,099
MINORITY INTEREST IN SUBSIDIARY. . . . . . . . . . . . - 2,054,633
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value;. . . . . . . . . . . 121,588 177,488
1,000,000 shares authorized, 121,588 and 177,488
Class A issued and outstanding in 1999 and 1998,
respectively; liquidation preference of $638,337 and
931,812 in 1999 and 1998 respectively
Common stock, $.01 par value;. . . . . . . . . . . . . 49,282 47,992
10,000,000 shares authorized, 4,928,209 and 4,799,177
shares issued and outstanding during 1999 and 1998;
respectively
Additional paid-in capital . . . . . . . . . . . . . . 10,888,495 3,165,843
Receivable from shareholder. . . . . . . . . . . . . . - (25,000)
Accumulated Deficit. . . . . . . . . . . . . . . . . . (8,140,149) (6,392,461)
----------------- --------------
Total stockholders' equity. . . . . . . . . . . . . . 2,919,216 (3,026,138)
----------------- --------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY. . . . . . . $ 3,787,640 $ 14,180,594
================= ==============
</TABLE>
See Notes to Consolidated Financial Statements
4
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<TABLE>
<CAPTION>
Tech Electro Industries, Inc., and Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended March 31, 1999 and 1998
(Unaudited)
Three Months Ended
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1999 1998
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<S> <C> <C>
REVENUES
Sales $ 2,442,950 $ 1,996,589
Service revenue 2,775,147 -
------------------ ------------------
5,218,097 1,996,589
COST OF REVENUES
Cost of goods sold 2,448,011 1,340,421
Direct servicing expense 1,586,638 -
------------------ ------------------
4,034,649 1,340,421
------------------ ------------------
Gross profit 1,183,448 656,168
OPERATING EXPENSES
Selling, general and administrative expenses 2,606,852 756,086
Provision for slow moving inventory 185,430 15,116
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2,792,282 771,202
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Loss from operations (1,608,834) (115,034)
Other income (expense):
Interest income 13,696 25,424
Interest expense (132,397) (6,639)
Loss on sale of fixed assets (2,170) -
------------------ ------------------
Total other income (expense) (120,871) 18,785
Minority share of subsidiary loss - 16,463
------------------ ------------------
Loss before provision for taxes (1,729,705) (79,786)
Income tax expense - -
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NET LOSS $ (1,729,705) $ (79,786)
================== ==================
Loss attributable to
common stockholders $ (1,747,688) $ (110,980)
================== ==================
Basic and diluted net loss per share
attributable to common shareholders $ (0.37) $ (0.03)
================== ==================
Number of weighted average shares of
common stock outstanding (basic and diluted) 4,808,415 3,638,292
================== ==================
</TABLE>
See Notes to Consolidated Financial Statements
5
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<TABLE>
<CAPTION>
Tech Electro Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For The Three Months Ended March 31, 1999 and 1998
(unaudited)
Mar 31, 1999 Mar 31,1998
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<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $ (1,729,705) $ (79,786)
Adjustments to reconcile net loss to
cash provided (used) by operations:
Compensation expense 18,496 -
Depreciation and amortization adjustment 218,353 14,076
Provision for slow moving inventory 185,430 15,116
Bad debt reserve 160,600 -
Loss on sale of fixed assets 2,170 -
Amortization of deferred financing costs 18,494 -
Minority interest share of subsidiary - (16,463)
Changes in operating assets and liabilities, net of effects of
assets and liabilities resulting from the de-consolidation of USCG:
Accounts receivable-trade 326,400 31,891
Other receivables (3,348) (9,727)
Inventory 296,264 90,815
Prepaid expenses and other (21,535) (63,088)
Other assets 15,694 -
Accounts payable 43,824 30,686
Accrued liabilities 980,757 (511,213)
Deferred service liability (199,163) -
----------------- -------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 312,731 (497,693)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (17,501) (10,280)
Sale of property and equipment 21,512 -
Payments on note receivable 39,557 9,442
Purchase of marketable securities - (57,361)
Advance to related party (222,344) -
Business acquisition, net of cash acquired - (415,127)
Cash in de-consolidated subsidiary (316,262) -
----------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (495,038) (473,326)
CASH FLOWS FROM FINANCING ACTIVITIES
Credit facility obligations (750,827) -
Repayment of short-term debt (36,834) (250,000)
Proceeds from sale of preferred stock,
common stock and warrants - 474,030
Dividends paid - 5,462
Shareholder receivable 25,000 -
----------------- -------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (762,661) 229,492
----------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (944,968) (741,527)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 1,399,060 1,918,754
----------------- -------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 454,092 $ 1,177,227
================= =============
</TABLE>
See Notes to Consolidated Financial Statements
6
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TECH ELECTRO INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and in accordance with the instructions per Item 310(b) of Regulation SB.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
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. In February 1999, the
Company agreed to extend the exercise period to March 2000 at the same exercise
price of $2.50 per share.
In March 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 was
accounted for as a purchase, and USCG's results of operations have been included
in the Company's consolidated operations from acquisition through February 25,
1999.
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On February 25, 1999, Telstar Entertainment ("Telstar"), the second largest
shareholder of U.S. Computer Group, Inc. ("USCG"), agreed to contribute
additional capital to USCG through the purchase of additional shares as well as
advances under a loan agreement. The purchase was consummated on March 12, 1999
making Telstar the largest shareholder of USCG. Effective February 25, 1999 the
Company ceased reporting USCG's financial results in its consolidated financial
statements, and began using the equity method to account for its 43.04% minority
interest in the subsidiary going forward.
NOTE C - DE-CONSOLIDATION OF USCG
Through February 25, 1999, the consolidated losses of USCG exceeded the
Company's investment in USCG by approximately $3.34 million, therefore, the
Company suspended the equity method of accounting for its investment in USCG,
and no additional losses have been charged to operations. In addition, the
de-consolidation of USCG resulted in a net credit to additional paid-in capital
of $7,631,563.
Following is an unaudited summary of financial position and results of
operations of USCG:
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<CAPTION>
(unaudited) (unaudited)
March 31, 1999 March 31, 1998
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<S> <C> <C>
Current assets $ 3,401,359 $ 4,409,761
Property, plant and equipment (net) 521,470 673,608
Other assets (net) 712,010 1,018,456
---------------- ----------------
Total assets 4,634,839 6,101,825
Current liabilities 7,282,002 4,673,242
Long-term debt 7,058,592 7,271,747
Deferred credits (14,588) 49,593
---------------- ----------------
Total liabilities 14,326,006 11,994,582
Stockholders' equity (9,691,167) (5,892,757)
Three Months Ended
------------------
(unaudited) (unaudited)
March 31, 1999 March 31, 1998
---------------- ---------------
Revenue $ 4,705,165 $ 5,791,630
Gross profit 916,856 674,365
Net loss (1,409,361) (802,793)
</TABLE>
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The following unaudited pro forma consolidated results for the three month
periods ended March 31, 1999 and 1998 assumes the de-consolidation of USCG
occurred as of January 1, 1998:
<TABLE>
<CAPTION>
Period Ended
----------------------------------
March 31, 1999 March 31, 1998
---------------- ----------------
<S> <C> <C>
Revenues (unaudited) $ 2,030,436 $ 1,996,589
Net loss (unaudited) (236,293) (79,786)
Loss per share (unaudited)
(Basic and diluted) $ (.06) $ (.03)
</TABLE>
NOTE D - DIVIDENDS
Dividends were declared on March 8, 1999 for Class A Preferred Stock at $0.0975
per share. This dividend was paid in the form of common stock at the rate of
.056 shares of common for each share of preferred. The dividend was payable on
March 31, 1999 to stockholders of record at the close of business of February
28, 1999. In addition, dividends paid during the quarters ended March 31, 1999
and 1998 were $17,983 and $28,432 respectively. No dividends were payable at
March 31, 1999.
NOTE E - INVENTORIES
Inventories consist of the following at March 31, 1999:
Computer parts, electronic components and
packing materials $2,231,059
Less valuation reserves 845,471
----------
$1,385,588
==========
NOTE F - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at March 31, 1999:
Machinery and equipment $468,126
Leasehold improvements 40,560
Furniture and fixtures 192,187
Automobiles 14,262
--------
715,135
Less accumulated depreciation & amortization 399,862
--------
$315,273
========
9
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NOTE G - CREDIT LINE
The Company's $1,000,000 line of credit 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 March 31, 1999 and 1998 the outstanding balance was $300,000 and
$175,000 respectively.
The Company has been informed by its lender that it is in violation of certain
covenants in the line of credit agreement relating to the use of funds. As a
result, the Company is not able to be advanced funds above the $300,000
currently outstanding. The Company is currently seeking alternative sources of
capital.
NOTE H - 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 1999 and 1998 as they are antidilutive. Therefore, diluted
and basic loss per share is identical. Net loss per share for the three months
ended March 31, 1999 and 1998 has been increased for dividends on preferred
stock totaling $17,983 and $28,432 respectively. There were no accrued
dividends as of March 31, 1999.
NOTE I - 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. At March 31, 1999, 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 March 31, 1999, 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, 2000. In December 1997, the Company
issued an additional 1,000,000 options to purchase common stock at $1.75 per
share. These options are not subject to the reorganization agreement.
NOTE J - RELATED PARTIES
On January 12, 1999, Tech Electro Industires, Inc. agreed to loan USCG $222,344
for working capital requirements. The loan bears interest at 8% per annum and
matures March 12, 2000, with annual options to extend for one year each through
March 12, 2004. The loan was unanimously approved by the Company's board of
directors.
NOTE K - CONTINGENCIES
In March of 1999, Martin Frank, a former executive of CCC, requested arbitration
in Texas against CCC and TEI claiming damages for breach of contract. In
relation to this matter, the Company is vigorously defending itself and
considers the case without merit. At this time the Company cannot predict the
outcome of this matter, which may have an adverse effect on the Company.
10
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NOTE L - SUBSEQUENT EVENT
On April 7, 1999, the Company was informed by Nasdaq that its
securities were de-listed effective April 7, 1999, for failure to file a timely
annual report on Form 10-KSB. The Company believes that it meets or exceeds all
requirements for continued listing on the Nasdaq Stock Market. The Company
timely filed a Form 12b-25 extension and filed its Form 10-KSB with the
Securities Exchange Commission on April 15, 1999. The Company has appealed the
decision. The Company is currently trading on the OTC Bulletin Board of the
Nasdaq Stock Market.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION.
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and notes thereto included elsewhere
in this Form 10-QSB. Except for the historical information contained herein,
the discussion in this Form 10-QSB contains certain forward looking statements
that involve risks and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. The cautionary statements made in this
Form 10-QSB should be read as being applicable to all related forward-looking
statements wherever they appear in this Form 10-QSB. 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, 1999.
RECENT DEVELOPMENTS
The results of operations for the three months ended March 31, 1999 includes two
months of USCG operations, while the comparative period of 1998 includes no
operations of USCG.
On February 25, 1999, Telstar Entertainment ("Telstar"), the second largest
shareholder of USCG, agreed to contribute additional capital to USCG through the
purchase of additional shares as well as advances under a loan agreement. The
purchase was consummated on March 12, 1999 making Telstar the largest
shareholder of USCG. Effective February 25,1999, the Company will cease
reporting USCG's financial results in its consolidated financial statements, and
use the equity method to account for its minority interest in the subsidiary.
On April 7, 1999, the Company was informed by NASDAQ that its securities will be
de-listed effective April 7, 1999, for failure to file a timely annual report on
Form 10-KSB. The Company believes that it meets or exceeds all requirements for
continued listing on the NASDAQ Stock Market. The Company has appealed the
decision. The Company is currently trading on the OTC Bulletin Board, on The
NASDAQ Stock Market. The Company cannot predict what impact, if any, this
action will have on the Company or trading in the Company's Securities.
RESULTS OF OPERATIONS
Currently, the Company's operations are conducted through its subsidiaries,
Computer Components Corporation ("CCC"), Very Brite Technologies ("VBT"),
Universal Battery Corporation ("UBC"), and US Computer Group, Inc. ("USCG").
The financial results of the Company for the three month period ended March 31,
1999 were significantly impacted by USCG. Effective February 25, 1999, the
Company ceased reporting USCG's financial results in its consolidated financial
statements, and began using the equity method to account for its minority
interest in the subsidiary going forward. For the three month period ended
March 31, 1999, USCG contributed losses of $1,493,412.
12
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Through February 25, 1999, the consolidated losses of USCG exceeded the
Company's investment in USCG by approximately $3.34 million, therefore, the
Company suspended the equity method of accounting for its investment in USCG,
and no additional losses have been charged to operations.
REVENUES
For the three month period ended March 31, 1999, the Company had revenues,
comprised of sales and service revenues, of $5,218,097, an increase of
$3,221,508 (161.35%) from sales of $1,996,589 for the three month period ended
March 31, 1998.
USCG contributed 161.27%, $3,187,661, in sales and service revenues for the
first quarter of 1999. Excluding revenues from USCG, the Company's other
subsidiaries ,CCC, UBC and VBT recorded sales of $2,030,436 for the three month
period ended March 31, 1999, compared to $1,996,589 for the same period ended
March 31, 1998, an increase of $33,847 (1.7%).
CCC had revenues of $819,006 for the three months ended March 31, 1999 compared
to revenues of $1,295,316 during the same period ended March 31, 1998, a
decrease of $476,310 (36.77%). The decrease is directly related to the loss of
Sunbeam who moved operations overseas.
Sales revenues at UBC increased dramatically due to management's decision to
focus sales efforts on battery and battery related products. During the period
ended March 31, 1999 UBC began selling several new products including the Exide
Corporation's line of sealed lead acid batteries. Revenues increased $468,795
(71.31%) to $1,126,200 for the first quarter of 1999, compared to revenues of
$657,405 for the same period in 1998.
VBT reported revenues for the quarter ended March 31, 1999 of $85,230 compared
to $43,867 for the same period in 1998, an increase of 41,363 (94.29%).
COST OF REVENUES
The cost of revenues rose to $4,034,649 in first quarter of 1999, from
$1,340,421 in the same period during 1998, an increase of $2,694,228 (201%).
The increase in cost of revenues can be attributed to the consolidation of the
operations of USCG and its subsidiaries, which contributed costs of revenues of
$2,496,030 for the first quarter of 1999, with no contribution in the same
period in 1998. Excluding USCG's costs of revenues, cost of goods sold was
$1,538,619 in the first quarter of 1999, compared to $1,340,421, or an increase
of $198,198 (14.79%) from the first quarter of 1998.
Increased sales at UBC resulted in an increase in cost of revenues during the
period ended March 31, 1999. UBC's cost of revenues increased $384,276 (72.97%)
to $910,906 for the first quarter of 1999, compared to cost of revenues of
$526,630 for the same period in 1998.
Cost of revenues for the Company, as a percentage of revenues rose to 77.32% in
the first quarter of 1999 from 67.14% in the first quarter of 1998. This
increase is attributable to the consolidation of USCG through February 25, 1999
and increased costs of goods sold at CCC.
13
<PAGE>
GROSS PROFIT
The Company recorded a gross profit of $1,183,448 for the three months ended
March 31, 1999 compared to $656,168 during the first quarter of 1998, an
increase of $527,280 (80.36%).
Of the $1,183,448 in gross profit, CCC and subsidiaries contributed
$491,817 compared to $656,168 during the similar period in 1998, a decrease of
$164,351 (25.05%). USCG and subsidiaries contributed $691,631 during the first
quarter of 1999 with no contribution made during the same period in 1998.
Gross profit as a percentage of revenues for CCC and its subsidiaries decreased
to 24.22% for the three months ended March 31, 1999, compared to 32.86% for the
same period in 1998. The decreasing gross profit margin of CCC is largely
attributable to management's decision to focus sales efforts on battery and
battery-related products, which produce a lower profit margin than component
sales.
OPERATING EXPENSES
The Company's operating expenses, consisting of selling, general and
administrative expenses and a provision for slow moving inventory, increased to
$2,792,282 for the three month period ended March 31, 1999 from $771,202 for the
same period in 1998, (355.59%). Selling, general and administrative expenses on
a standalone basis dramatically increased to $2,606,852 from $756,086 (344.78%).
This increase was due primarily to costs associated with operations of USCG and
its subsidiaries, which contributed selling, general and administrative expenses
of $1,944,840 for the first quarter of 1999, with no contribution in the same
period in 1998. Excluding the selling, general and administrative expenses of
USCG, TEI, CCC and subsidiaries contributed $662,012 in selling, general and
administrative expenses in the first quarter of 1999, compared to $756,086,a
decrease of $94,074 (12.44%). Selling, general and administrative expenses
decreased at CCC because of management initiating cost reduction programs
through the fourth quarter of 1998. As a result CCC and its subsidiaries are
showing a profit for the first quarter of 1999, (that is, excluding expenses at
the Tech Electro Industries, Inc. level.)
INVENTORY
Inventory allowance has been increased to provide reserves for obsolescence of
computer component parts. The Company continually reviews its inventory
allowance procedures and policies and will make adjustments as necessary.
During the period ended March 31, 1999, the Company set aside $185,430 as a
reserve for inventory allowance, compared to $15,116 in the same period in 1998.
PURCHASE ORDER BACKLOG
As of March 31, 1999, CCC and subsidiaries' purchase order backlog was
approximately $2,636,411, compared to $1,155,000 during the same period in 1998,
an increase of $1,481,411 (128.26%). 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.
14
<PAGE>
INTEREST EXPENSE
The Company incurred $132,397 in interest expense during the three months ended
March 31, 1999, compared to $6,639 during the same period in 1998, an increase
of $125,758 (1,894.23%). The significant increase in interest expense is
attributable to USCG and its subsidiaries, which incurred $122,526 in interest
expense during the first quarter of 1999 with no contribution during the same
period in 1998.
LIQUIDITY
As of March 31, 1999 the Company had cash and cash equivalents of $454,092. By
comparison, on December 31, 1998 the Company had $1,399,060 in cash and cash
equivalents. The change in the Company's position in cash and cash equivalents
reflects the liquidation of certificates of deposits to fund the cash needs of
CCC, UBC, VBT and the Company.
The Company provided cash from operations of $312,731 for the three month period
ended March 31, 1999 compared to cash used by operations of $497,693 for the
same period in 1998. The cash provided from operations was used for the existing
operations of CCC, UBC, and VBT as well as the operational expenses of TEI.
The Company has been informed by its lender that it is in violation of certain
covenants in the line of credit agreement relating to the use of funds. As a
result, the company is not able to be advanced funds above the $300,000
currently outstanding. The Company is currently seeking alternative sources of
capital and is operating from existing working capital.
On February 25, 1999, Telstar Entertainment ("Telstar"), the second largest
shareholder of USCG, agreed to contribute additional capital to USCG through the
purchase of additional shares as well as advances under a loan agreement. The
purchase was consummated on March 12, 1999 making Telstar the largest
shareholder of USCG. Effective February 25,1999, the Company ceased reporting
USCG's financial results in its consolidated financial statements, and began
using the equity method to account for its 43.04% minority interest in the
subsidiary going forward. The effects of de-consolidation reduced cash by
$316,262.
To assist USCG in streamlining its operations, the Company advanced $222,344 to
USCG during the period ended March 31, 1999. The Company will only support
USCG's operations to the extent that it has the financial resources to do so.
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 the Company's operations.
15
<PAGE>
RISKS RELATING TO YEAR 2000: CCC
CCC and its subsidiaries believe that it has addressed the year 2000 issue in
its entirety and will not face an operational problem. CCC has completed
upgrading its hardware and has begun conversion to year 2000 compliant software.
CCC and its subsidiaries anticipates being fully compliant and functional prior
to the year 2000.
CCC and its subsidiaries' business is dependent on its relationship with its
vendors and manufacturers. There is no assurance that CCC's suppliers and
manufacturers will be year 2000 compliant. This may have a materially adverse
effect on CCC unless CCC is able to arrange for alternate suppliers and
manufacturers if such an event were to occur.
16
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In March of 1999, Martin Frank, a former executive of CCC,
requested arbitration in Texas against CCC and TEI claiming damages
for breach of contract. In relation to this matter, the Company is
vigorously defending itself and considers the case without merit.
At this time the Company cannot predict the outcome of this matter,
which may have an adverse effect on the Company.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities.
The Company has been informed by its lender that it is in violation
of certain covenants in its line of credit agreement relating to
the use of funds. As a result, the Company is not able to advance
funds above the $300,000 currently outstanding. The Company is
currently seeking alternative sources of capital and is operating
from existing working capital.
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.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On March 26, 1999, the Company reported that its previously announced agreement
for the sale of approximately 10% of its interest in US Computer Group had, at
the mutual agreement of TEI and the proposed purchaser, been terminated. The
Company also reported that on February 25, 1999, US Computer Group agreed to
sell to Telstar Holdings, a shareholder of US Computer Group, additional shares
of its common stock. As a result, the Company is no longer the majority
shareholder of US Computer Group, and will no longer report USCG operations in
its consolidated financial statements.
The Company also reported that on march 15, 1999, Mr. Ian Edmonds, a director of
the Company, was appointed Vice President of the Company and concurrently
resigned as a member of the Company's Audit Committee of the board. Mr. Sadasuke
Gomi, a director of the Company, was then appointed to serve on the Company's
Audit committee.
17
<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: May 14, 1999 /s/ Donna L. Gilbert
-----------------------------
Donna L. Gilbert
Chief Financial Officer
18
<PAGE>
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