U.S. 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, 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.
--------------------------------------------------------
(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
-----------------------------------------------------------------------------
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, 1999, 5,474,848 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.
INDEX
Item Page
Part I - Financial Statements
Item 1 - Financial Statements
Consolidated Balance Sheets at September 30, 1999 (unaudited)
and December 31, 1998 . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for
the Periods Ended September 30, 1999 and 1998 (unaudited) . 5
Consolidated Statements of Cash Flows for the
Periods Ended September 30, 1999 and 1998 (unaudited) . . . 6 - 7
Notes to Consolidated Financial Statements (unaudited). . . 8
Item 2 - Management's Discussion and Analysis
of Plan of Operation . . . . . . . . . . . . . . . . 13
Part II - Other Information
Item 1 - Legal Proceedings . . . . . . . . . . . . . . . . . 18
Item 2 - Changes in Securities . . . . . . . . . . . . . . . 18
Item 3 - Defaults Upon Senior Securities . . . . . . . . . . 18
Item 4 - Submission of Matters to a
Vote of Securities Holders. . . . . . . . . . . . . 18
Item 5 - Other Information . . . . . . . . . . . . . . . . . 18
Item 6 - Exhibits and Reports on Form 8-K. . . . . . . . . . 18
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Tech Electro Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
ASSETS
------
(Unaudited)
Sept 30, 1999 Dec 31, 1998
CURRENT ASSETS ------------- ------------
Cash and cash equivalents . . . . . . . . . . . . $350,708 $1,399,060
Restricted cash . . . . . . . . . . . . . . . . . 1,400,000 --
Accounts and notes receivable . . . . . . . . . .
Trade, net of allowance for doubtful accounts
of $23,505 and $305,077 respectively . . . . . . 2,471,745 2,879,528
Notes . . . . . . . . . . . . . . . . . . . . . 736,887 305,659
Other . . . . . . . . . . . . . . . . . . . . . . 51,937 13,489
Inventories, net of reserves . . . . . . . . . . 1,098,463 3,356,539
Prepaid expenses and other . . . . . . . . . . . 321,792 331,893
--------- ---------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . 6,431,532 8,286,168
--------- ---------
NET PROPERTY AND EQUIPMENT . . . . . . . . . . . 282,929 897,824
--------- ---------
OTHER ASSETS
Notes receivable . . . . . . . . . . . . . . . 7,969 7,031
Contract rights, net . . . . . . . . . . . . . . -- 4,608,349
Deferred financing costs . . . . . . . . . . . . -- 199,193
Other . . . . . . . . . . . . . . . . . . . . . 2,162 182,029
--------- -----------
TOTAL OTHER ASSETS . . . . . . . . . . . . . . . 10,131 4,996,602
--------- -----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . $6,724,592 $14,180,594
========== ===========
See Notes to Consolidated Financial Statements
3
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Tech Electro Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(Unaudited)
Sept 30, 1999 Dec 31, 1998
CURRENT LIABILITIES ------------- ------------
Current portion of credit facility obligations . . . $642,237 $8,198,654
Current portion of long-term debt . . . . . . . . . -- 215,300
Accounts payable-trade . . . . . . . . . . . . . . . 1,211,668 3,349,682
Accrued liabilities . . . . . . . . . . . . . . . . 189,644 1,354,335
Deferred service liability . . . . . . . . . . . . . -- 1,646,949
Deferred share subscriptions . . . . . . . . . . . . 1,430,000 --
Deferred receivables . . . . . . . . . . . . . . . . 3,375 --
Other liabilities . . . . . . . . . . . . . . . . . 97,000 333,975
---------- ----------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . 3,573,924 15,098,895
LONG TERM DEBT . . . . . . . . . . . . . . . . . . -- 53,204
---------- ----------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . 3,573,924 15,152,099
MINORITY INTEREST IN SUBSIDIARY . . . . . . . . . . -- 2,054,633
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value; . . . . . . . .
1,000,000 shares authorized, 119,588 and 177,488
Class A issued and outstanding in 1999 and 1998,
respectively; liquidation preference of $627,837
and $931,812 in 1999 and 1998 respectively 119,588 177,488
Common stock, $.01 par value; . . . . . . . . . . .
10,000,000 shares authorized, 5,474,848 and 4,799,177
shares issued and outstanding in 1999 and 1998
respectively 54,748 47,992
Additional paid-in capital . . . . . . . . . . . . . 11,356,316 3,165,843
Receivable from shareholder . . . . . . . . . . . . -- (25,000)
Accumulated deficit . . . . . . . . . . . . . . . . (8,379,984) (6,392,461)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . 3,150,668 (3,026,138)
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY . . . . . . $6,724,592 $14,180,594
========== ===========
See Notes to Consolidated Financial Statements
4
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Tech Electro Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Periods Ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Sept 30 Nine Months Ended Sept 30
-------------------------- -------------------------
1999 1998 1999 1998
REVENUES
Sales and service revenue $4,278,886 $7,033,198 $12,052,017 $17,012,622
Cost of sales and revenue and
direct service expense 3,463,920 5,577,262 9,681,974 13,443,753
---------- ---------- ---------- ----------
Gross profit 814,966 1,455,936 2,370,043 3,568,869
OPERATING EXPENSES
Selling, general &
administrative expenses 1,046,105 2,313,120 4,210,899 5,467,518
---------- ---------- --------- ---------
Loss from operations (231,139) (857,184) (1,840,856) (1,898,649)
Other income (expense)
Interest income 15,581 21,403 47,574 69,188
Interest expense (11,940) (218,116) (152,652) (398,311)
Other -- (151,663) (2,170) (151,663)
----------- ---------- ----------- -----------
Total other income (expense) 3,641 (348,376) (107,248) (480,786)
Minority share of subsidiary loss -- -- -- 29,201
----------- ---------- ----------- -----------
Loss before taxes (227,498) (1,205,560) (1,948,104) (2,350,234)
Income tax expense -- 4,015 -- 7,320
----------- ---------- ----------- -----------
NET LOSS $(227,498) $(1,209,575) $(1,948,104) $(2,357,554)
========== ============ ============ ============
Loss attributable to
common stockholders $(238,351) $(1,226,345) $(1,987,523) $(2,423,117)
=========== =========== =========== ===========
Basic and diluted net
loss per share attributable
to common shareholders $ (0.04) $ (0.28) $ (0.39) $ (0.60)
=========== ============ =========== ===========
Number of weighted average
shares of common stock out-
standing (basic and diluted) 5,414,026 4,386,239 5,050,140 4,063,940
=========== ============ =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
5
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Tech Electro Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Periods Ended September 30, 1999 and 1998
(Unaudited)
Nine Months Ended
-----------------
Sept 30, 1999 Sept 30, 1998
CASH FLOW FROM OPERATING ACTIVITIES ------------- -------------
Net loss $(1,948,104) $(2,357,554)
Adjustments to reconcile net loss to
Cash used by operations:
Shares issued for compensation 404,454 -
Depreciation and amortization 254,483 317,688
Provision for slow moving inventory 120,142 348,666
Bad debt reserve 161,576 -
Loss on sale of fixed assets 2,170 -
Minority interest share of subsidiary - (232,741)
Amortization of deferred financing costs 18,494 -
Deferred lease incentive - (71,742)
Changes in operating assets and liabilities
(Increase) decrease in:
Accounts receivable-trade (1,155,689) 1,100,225
Other receivables (38,448) (112,120)
Inventories 648,677 (538,140)
Contract rights - 271,803
Other assets 10,176 (48,093)
Deferred expenses - 24,729
Deferred sales costs - (42,087)
Prepaid expenses and other (220,413) (216,748)
Increase (decrease) in:
Accounts payable 787,864 1,113,823
Accrued liabilities 1,072,980 (546,062)
Deferred service liability (199,163) (8,922)
----------- -----------
NET CASH USED BY OPERATING ACTIVITIES (80,801) (997,275)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (21,287) (138,874)
Sale of property and equipment 21,512 -
Advances on note receivable 39,557 125,395
Sale of marketable securities - 71,439
Advance to related parties (472,397) -
Business acquisition, net of cash acquired - (415,127)
Cash in de-consolidated subsidiary (316,262) -
Increase in restricted cash (1,400,000) -
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (2,148,877) (357,167)
CASH FLOWS FROM FINANCING ACTIVITIES
Credit facility obligations (255,590) 814,493
Repayment of long-term debt (36,834) (898,328)
Proceeds from sale of preferred stock,
common stock and warrants 18,750 993,689
Dividends paid - (28,432)
Shareholder receivable 25,000 -
Deferred share subscription 1,430,000 -
----------- -----------
6
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Tech Electro Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Periods Ended September 30, 1999 and 1998
(Unaudited)
(Continued)
Nine Months Ended
-----------------
Sept 30, 1999 Sept 30, 1998
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,181,326 881,422
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,048,352) (473,020)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 1,399,060 1,918,604
----------- -----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 350,708 $1,445,584
=========== ===========
See Notes to Consolidated Financial Statements
7
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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 nine month period ended September 30, 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.
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.
8
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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.
The Board of Computer Components Corporation (CCC) decided to merge its
subsidiary companies, UBC and VBT into CCC due to the similarity of operations.
The State of Texas approved the merger of the subsidiaries on June 21, 1999.
NOTE C - DECONSOLIDATION 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:
(unaudited) (unaudited)
Sept 30, 1999 Sept 30, 1998
------------- -------------
Current assets $4,012,850 $4,825,032
Property, plant and equipment (net) 433,407 602,639
Other asset (net) 671,381 938,459
---------- ----------
Total assets $5,117,638 $6,366,130
---------- ----------
Current liabilities $7,108,942 $5,753,002
Long-term debt 6,873,726 7,230,099
Deferred credits -0- -0-
----------- ----------
Total liabilities $13,982,668 $12,983,101
----------- -----------
Stockholders' deficit $(8,865,030) $(6,616,971)
============ ============
Three Months Ended Nine Months Ended
------------------ -----------------
(unaudited) (unaudited)
Sept 30, 1999 Sept 30, 1998 Sept 30, 1999 Sept 30, 1998
------------- ------------- ------------- -------------
Revenue $3,331,457 $5,315,946 $12,235,604 $13,009,138
Gross Profit 2,733,218 3,773,849 9,293,438 8,751,736
Net loss 99,347 236,307 1,678,084 685,714
9
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NOTE D - PREFERRED STOCK DIVIDENDS
Dividends for the three months ended March 31, June 30, and September 30,
1999 were declared at $0.0975, $0.09, and $0.09 per share, respectively. Total
dividends which were issued in common stock in lieu of cash and had a market
value of $17,983, $10,583, $10,853 respectively totaling $39,419. Dividends paid
for the nine months ending September 30, 1998 totaled $52,881 were paid in
common stock as well.
NOTE E - INVENTORIES
Inventories consist of the following at September 30, 1999:
Batteries, electronic components and
Assembly materials $1,825,037
Less valuation reserves (726,574)
----------
$1,098,463
==========
NOTE F - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at September 30, 1999:
Machinery and equipment $469,662
Furniture and fixtures 192,434
Leasehold improvements 42,563
Automobiles 14,262
---------
718,921
Less accumulated depreciation (435,992)
---------
Total $282,929
=========
NOTE G - CREDIT LINE
On August 13, 1999, the Company signed a Loan and Security Agreement with
Foothill Capital Corporation. The terms of the agreement allow the Company to
borrow up to a maximum of $500,000 secured by eligible inventory and up to 85%
of its eligible receivables with an overall revolving credit limit of
$3,000,000 ($1,419,417 = amount available as of September 30, 1999). Interest
on the loan balance is at two percent over Wells Fargo Bank prime rate plus .5%
of the unused credit line per annum. The loan is collateralized by all
receivables, inventory, equipment, general intangibles, and other personal
property.
Upon inception, the Company paid in full its prior line of credit with
Texas Central Bank and that agreement was terminated. As of September 30, 1999
the outstanding loan balance with Foothill was $642,237.
NOTE H - LOSS PER SHARE
Diluted net loss per share is computed by dividing net income (loss)
adjusted for preferred dividends by the weighted average number of common shares
and common stock equivalents outstanding for the period. The Company's common
10
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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 and nine months ended
September 30, 1999 and 1998 has been increased for dividends on preferred stock
totaling $10,853, $39,419 and $16,770, $52,281 respectively.
NOTE I - STOCKHOLDERS' EQUITY, 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 June 30, 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 also 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 additional 1,000,000 options to purchase common stock at $1.75 per share.
These options are not subject to the reorganization agreement. In July, 1999,
the Company agreed to extend the Class A Warrants until December 1, 2000 at the
same price of $3.30 per share.
During July 1999, the Company issued 23,048 shares of common stock in lieu
of cash to certain consultants for their services. Also, during July 1999 the
Company issued 365,000 shares of common stock to certain employees as
compensation, of which William Tan, President of the Company, received 270,000
shares.
In August 1999 the Company approved a stock option to its subsidiary
Computer Components Corporation key and long term employees of 344,250 shares
with an exercisable price of $1.00 over a period of three years to be granted
immediately.
NOTE J - RELATED PARTIES
On January 12, 1999, Tech Electro Industries, Inc. agreed to loan USCG
$222,334 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
periods through March 12, 2004. The Company's board of directors unanimously
approved the loan.
During July 1999 William Tan, President of the Company, purchased 108,000
shares of common stock valued at $81,000.
On August 26, 1999, Computer Components Corporation loaned USCG $250,000 on
behalf of TEI for working capital requirements. The loan bears interest rate of
1% above Foothill Capital Corporation and the principal will be paid once USCG
receives proceeds of bridge financing. The loan also includes payment of 2 1/2%
of pre-IPO USCG stock to be issued as additional consideration. The Company's
board of directors unanimously approved the loan.
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. Should this matter be settled unfavorably it could
materially affect the financial condition and results of operations of the
Company.
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NOTE L - NASDAQ DELISTING
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 timely filed a Form 12b-25 extension and
filed its Form 10-KSB with the Securities and 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.
NOTE M - SUBSEQUENT EVENTS
On October 22, 1999, TEI acquired all of the issued and outstanding shares
of capital stock of AlphaNet Hospitality Systems, Inc., (AHS) a Delaware
corporation, and certain intellectual property, copyrights and trademarks
utilized in AHS's business from PricewaterhouseCoopers, Inc. as ("Trustee") of
the Estate of AlphaNet Telecom Inc, a bankrupt company for $3.5 million and
assumed all liabilities. AHS is the leading provider of in-room
facsimile/photocopier/printer and unattended business center services in
premium hotels. The Company paid the Trustee $1.4 million in cash, and a $2.1
million non-interest bearing four-month promissory note which is payable on
February 21, 2000 and is secured by a pledge of the shares to the Trustee.
Additionally, as part of this transaction, due to a change of control, TEI
arranged for a $2,525,000 credit facility for AHS to refinance it indebtedness.
The Company raised the $1.4 million cash from the private placement sale of
2,036,364 shares of common stock of the Company and five-year warrants to
purchase a like number of shares of common stock, exercisable at $0.75 per
shares. The purchasers of these Company shares and warrants include a company
affiliated with William Tan, President of the Company.
The purchase method of accounting was used for this acquisition and the
Company will include the operations of AHS in its Consolidated Statement of
operations effective October 22, 1999.
12
<PAGE>
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 and the Company's annual Form 10KSB for the years
ended December 31, 1998 and 1997. Except for the historical information con-
tained herein, the discussion in this Form 10-QSB contains certain forward look-
ing statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary state-
ments 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 herein. 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
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 used 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.
On July 7, 1999, the Company announced that the Board of Directors voted to
extend Class A Warrants until December 1, 2000 under the same terms and
conditions previously in force.
RESULTS OF OPERATIONS
The financial results of the Company for the three month period ended
September 30, 1999 do not include the results of USCG. As previously discussed,
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.
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.
13
<PAGE>
THREE-MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998.
REVENUES
For the three month period ended September 30, 1999, the Company had
revenues of $4,278,886 compared to sales and service revenues of $7,033,198
(which included the sales and service revenues of USCG) during the similar
period ending September 30, 1998, a decrease of $2,754,312 (39.16%). However,
excluding the sales and service revenues of USCG for the similar period in 1998,
the Company's revenues rose to $4,278,886 for the three months ended September
30, 1999 compared to $1,715,127 for the three months ended September 30, 1998 an
increase of $2,563,759 (149.48%).
Sales revenues at CCC increased dramatically due to management's decision
to focus sales efforts on battery and battery related products. The uplift in
sales and profitability is attributable to several factors including: the recent
restructuring of CCC's management and administration, the addition of the new
"Jump Start" battery product and increased sales of battery and battery related
products.
COST OF GOODS SOLD
The cost of goods sold during the third quarter of 1999 decreased by
$2,113,342 (37.89%) to $3,463,920 compared to $5,577,262 during the three months
ended September 30, 1998. The decrease in cost of goods sold can be attributed
to the de-consolidation of the operations of USCG and its subsidiaries, which
contributed costs of revenues of $5,577,262 for the three months ended September
30, 1998, with none during the current period ended September 30, 1999.
Excluding USCG, CCC's cost of goods sold increased to $3,463,920 for the three
months ended September 30, 1999 compared to $1,388,269 during the similar period
in 1998, an increase of $2,075,651 (149.51%).
Increased sales at CCC resulted in an increase in the cost of sales during
the period ended September 30, 1999. Cost of sales for the Company, as a
percentage of revenues rose very modestly to 80.95% in the third quarter of 1999
from 79.3% in the third quarter of 1998.
GROSS PROFIT
The Company recorded a gross profit of $814,966 for the three months ended
September 30, 1999 compared to $1,455,936 during the third quarter of 1998, a
decrease of $640,970 (44.02%). The large decrease in gross profit directly stems
from USCG which contributed $1,129,078 during the three month period ended
September 30, 1998 with no contribution during the current three month period
ended September 30, 1999.
Excluding the gross profit contribution by USCG during the third quarter of
1998, the Company's gross profit increased on stronger revenues to $814,966 for
the three months ended September 30, 1999 from $326,858 for the same period in
1998, an increase of $488,108 (149.33%).
Gross profit as a percentage of revenues for CCC decreased to 19.04% for
the three months ended September 30, 1999 compared to 20.7% during the similar
period in 1998. Excluding USCG's gross profit contribution during the three
months ended September 30, 1998 (with no contribution during the three month
14
<PAGE>
ended September 30 1999), gross profit had a marginally decline. While revenues
increased substantially period over period, the decreasing gross profit margin
of CCC is 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 decreased dramatically by $1,267,015 (54.78%) to
$1,046,105 for the three month period ended September 30, 1999 from the same
period in 1998. This dramatic decrease is due to the de-consolidating of USCG
with no expenses in the third quarter of 1999.
The selling, general and administrative expenses of CCC contributed to
$622,080 in the third quarter of 1999 and $642,187 in 1998. This decrease in
general and administrative expenses was primarily attributable to a reduction in
wages and related expenses when management restructured its organization. As a
result CCC is showing a profit for the third quarter of 1999, that is, excluding
expenses at the Tech Electro Industries, Inc. level.
INTEREST EXPENSE
The Company incurred $11,940 in interest expense during the three months
ended September 30, 1999, compared to $218,116 during the same period in 1998, a
decrease of $206,176. The significant decrease in interest expense is
attributable to USCG and its subsidiaries, which incurred $210,651 in interest
expense during the third quarter of 1998 with no contribution during the period
ending September 30 1999 due to the de-consolidation.
NINE-MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE-MONTHS ENDED
SEPTEMBER 30, 1998
REVENUES
For the nine month period ended September 30, 1999, the Company had
revenues of $12,052,017 compared to $17,012,622 for the nine month period ended
September 30, 1998, a decrease of $4,960,605 (29.16%). Revenues declined as a
result of the de-consolidation of USCG which contributed $11,612,765 in revenues
for the nine months ended September 30, 1998 and contributed $3,220,489 during
the first quarter of 1999 prior to the de-consolidation. Excluding the revenue
contribution by USCG, the Company recorded substantial increases in revenues
which climbed by $3,456,814 (39.03%) to $8,856,671 for the nine months ended
September 30, 1999 compared to $5,399,857 for the same nine month period in
1998. The increase in top line growth is a direct result of management's
decision to focus sales efforts on battery and battery related products at CCC.
COST OF GOODS SOLD
The cost of goods sold during the nine months of 1999 decreased by
$3,761,779 (27.98%) to $9,681,974 compared to $13,443,753 during the nine months
ended September 30, 1998. The decrease in cost of good sold can be attributed to
the de-consolidation of the operations of USCG and its subsidiaries, which
contributed costs of revenues of $9,090,949 for the nine months ended September
30, 1998, and contributed $2,863,891 during the first quarter of 1999 prior to
the de-consolidation. Excluding USCG, CCC's cost of good sold increased to
15
<PAGE>
$7,059,062 for the nine months ended September 30, 1999 compared to $4,352,804
during the similar period in 1998, an increase of $2,706,258 (62.17%).
Increased sales at CCC resulted in an increase in the cost of sales during
the period ended September 30, 1999. Cost of sales for the Company, as a
percentage of revenues decreased very modestly to 79.70% in the nine months of
1999 from 80.61% in 1998.
GROSS PROFIT
The Company recorded a gross profit of $2,370,043 for the nine months ended
September 30, 1999 compared to $3,568,869 during period ending September 1998, a
decrease of $1,198,826 (33.59%). The large decrease in gross profit stems from
USCG which contributed $2,464,885 during the nine month period ended September
30, 1998, and contributed $572,434 during the first quarter of 1999 prior to the
de-consolidation.
Excluding the gross profit contribution by USCG during the nine month
ending September 1998, the Company's gross profit increase is attributable to
management's decision to focus sales efforts on batteries and related battery
products. CCC's nine month 1999 gross profit increased to $1,797,609 from
$1,103,984 for the same period in 1998, an increase of $693,625 (62.83%).
OPERATING EXPENSES
The Company's operating expenses, consisting of selling, general and
administrative expenses decreased dramatically by $1,256,619 (22.98%) to
$4,210,899 for the nine month period ended September 30, 1999 from $5,467,518
for the same period in 1998. This dramatic decrease is due to the
de-consolidating of USCG with no expenses in the second and third quarter of
1999.
The selling, general and administrative expenses of CCC contributed to
$1,481,973 in the third quarter of 1999 and $1,903,008 in 1998 a decrease of
$421,035 (22.12%). This decrease in general and administrative expenses was
primarily attributable to a reduction in wages and related expenses when
management re-structured its organization. As a result CCC is showing a profit
for the nine months ending September 1999, that is, excluding expenses at the
Tech Electro Industries, Inc. level.
INTEREST EXPENSE
The Company incurred $152,652 in interest expense for the nine months ended
September 30, 1999, compared to $398,311 during the same period in 1998, a
decrease of $245,659 (61.68%). The decrease in interest is due to the
de-consolidation of USCG which contributed $122,468 in the first quarter of 1999
and $307,063 in the nine months ended September 30, 1998.
LIQUIDITY
As of September 30, 1999 the Company had cash and cash equivalents of
$350,708 compared to $1,445,584 during the same nine month period in 1998. The
change in the Company's position in cash and cash equivalents reflects the
de-consolidation of USCG and liquidation of certificates of deposits to fund the
cash needs of CCC and the Company.
16
<PAGE>
The Company used cash from operations of $80,801 for the nine month period
ended September 30, 1999 compared to cash used by operations of $997,275 for the
same period in 1998. The cash used from operations was used for the existing
operations of CCC as well as the operational expenses of TEI.
On February 25, 1999, Telstar Enterainment ("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 larges 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.
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. Management of CCC does not believe that the fluctuation in
currency presents a serious threat to the Company's operations.
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.
17
<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.
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.
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.
18
<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 15, 1999 /s/ Julie Sansom-Reese
-----------------------------
Julie Sansom-Reese
Chief Financial Officer
19
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