<PAGE> 1
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 June 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.
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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
-----------------------------------------------------------------------------
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 June 30, 1999, 4,939,709 shares of Common Stock were outstanding.
<PAGE> 2
THIS DOCUMENT IS PREPARED AND FILED UNDER THE REQUIREMENTS OF REGULATION S-B OF
THE SECURITIES AND EXCHANGE COMMISSION, EFFECTIVE JULY 31, 1992.
INDEX
<TABLE>
<CAPTION>
Item Page
<S> <C>
Part I - Financial Statements
Item 1 - Financial Statements
Consolidated Balance Sheets at June 30, 1999 and
December 31, 1998 3
Consolidated Statements of Operations for
the Periods Ended June 30, 1999 and 1998 5
Consolidated Statements of Cash Flows for the
Periods Ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis
or Plan of Operation 11
Part II - Other Information
Item 1 - Legal Proceedings 16
Item 2 - Changes in Securities 16
Item 3 - Defaults Upon Senior Securities 16
Item 4 - Submission of Matters to a
Vote of Securities Holders 16
Item 5 - Other Information 16
Item 6 - Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Tech Electro Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1999 Dec 31, 1998
------------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 523,274 $ 1,399,060
Accounts and notes receivable
Trade, net allowance for doubtful accounts of $28,600
and $305,077 respectively 1,556,549 2,879,528
Notes 486,887 305,659
Other 53,386 13,489
Inventories, net of reserves 1,132,272 3,356,539
Prepaid expenses and other 171,712 331,893
----------- -----------
TOTAL CURRENT ASSETS 3,924,080 8,286,168
----------- -----------
NET PROPERTY AND EQUIPMENT 300,320 897,824
----------- -----------
OTHER ASSETS
Notes receivable 9,063 7,031
Contract rights, net -- 4,608,349
Deferred financing costs -- 199,193
Other 2,180 182,029
----------- -----------
TOTAL OTHER ASSETS 11,243 4,996,602
----------- -----------
TOTAL ASSETS $ 4,235,643 $14,180,594
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 4
Tech Electro Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1999 Dec 31, 1998
------------- ------------
<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 786,050 3,349,682
Accrued liabilities 232,135 1,354,335
Deferred service liability -- 1,646,949
Other liabilities -- 333,975
------------ ------------
TOTAL CURRENT LIABILITIES 1,318,185 15,098,895
LONG TERM DEBT -- 53,204
------------ ------------
TOTAL LIABILITIES 1,318,185 15,152,099
MINORITY INTEREST IN SUBSIDIARY -- 2,054,633
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 120,588 177,488
1,000,000 shares authorized, 120,588 and 177,488
Class A issued and outstanding in 1999 and 1998, respectively; liquidation
preference of $633,087 and $931,812 in 1999 and 1998 respectively
Common stock, $.01 par value;
10,000,000 shares authorized, 4,939,709 and 4,799,177 49,397 47,992
shares issued and outstanding during 1999 and 1998
respectively
Additional paid-in capital 10,889,106 3,165,843
Receivable from shareholder -- (25,000)
Accumulated deficit (8,141,633) (6,392,461)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 2,917,458 (3,026,138)
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 4,235,643 $ 14,180,594
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 5
Tech Electro Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Periods Ended June 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Sales and service revenue $ 2,555,034 $ 7,982,834 $ 7,773,131 $ 9,979,422
Cost of sales and revenue and
direct service expense 1,997,975 6,510,953 6,218,054 7,866,491
----------- ----------- ----------- -----------
Gross profit 557,059 1,471,881 1,555,077 2,112,931
OPERATING EXPENSES
Selling, general &
administrative expenses 557,942 2,398,311 3,164,794 3,154,397
----------- ----------- ----------- -----------
Loss from operations (883) (926,430) (1,609,717) (1,041,466)
Other income (expense):
Interest income 18,297 22,360 31,993 47,785
Interest expense (8,315) (173,555) (140,712) (180,194)
Realized gains (losses) -- -- (2,170) --
----------- ----------- ----------- -----------
Total other income (expense) 9,982 (151,195) (110,889) (132,409)
Minority share of subsidiary loss -- 12,737 -- 29,201
----------- ----------- ----------- -----------
Income (loss) before taxes 9,099 (1,064,888) (1,720,606) (1,144,674)
Income tax expense -- 3,305 -- 3,305
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 9,099 $(1,068,193) $(1,720,606) $(1,147,979)
=========== =========== =========== ===========
Loss attributable to
common stockholders $ (1,484) (1,075,871) $(1,749,172) (1,189,551)
=========== =========== =========== ===========
Basic and diluted net
loss per share attributable
to common shareholders $ 0.00 $ (0.27) $ (0.36) $ (0.31)
=========== =========== =========== ===========
Number of weighted average
shares of common stock out-
standing (basic and diluted) 4,936,514 3,960,601 4,872,439 3,820,717
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE> 6
Tech Electro Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Periods Ended June 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------------
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $(1,720,606) $(1,147,979)
Adjustments to reconcile net loss to cash provided "used" by operations:
Compensation expense 18,496 --
Depreciation and amortization adjustment 237,092 168,229
Provision for slow moving inventory 105,142 291,916
Bad debt reserve 160,826 --
Loss on sale of fixed assets 2,170 --
Minority interest share of subsidiary -- (132,385)
Amortization of deferred financing costs 18,494 --
Deferred lease incentive -- (60,839)
Changes in operating assets and liabilities (Increase) decrease in:
Accounts receivable-trade (239,743) 768,133
Other receivables (39,897) (22,125)
Inventory 629,868 (572,974)
Contract rights -- 135,901
Other assets 9,064 (36,059)
Deferred expenses -- (3,012)
Deferred sales costs -- 3,133
Prepaid expenses and other (70,333) (184,549)
Increase (decrease) in:
Accounts payable 362,247 902,502
Accrued liabilities 1,112,095 (224,996)
Deferred service liability (199,163) (173,895)
----------- -----------
NET CASH PROVIDED "USED" BY OPERATING ACTIVITIES 385,752 (288,999)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (21,287) (110,879)
Sale of property and equipment 21,512 --
Advances on note receivable 39,557 121,214
Sale (purchase) of marketable securities -- (48,561)
Advance to related party (222,397) --
Capitalized merger and acquisitions costs -- (37,409)
Business acquisition, net of cash acquired -- (415,127)
Cash in de-consolidated subsidiary (316,262) --
----------- -----------
NET CASH PROVIDED "USED" BY INVESTING ACTIVITIES (498,877) (490,762)
CASH FLOWS FROM FINANCING ACTIVITIES
Credit facility obligations (750,827) 846,957
Repayment of long-term debt (36,834) (700,083)
Proceeds from sale of preferred stock,
Common stock and warrants -- 383,964
Dividends paid -- (28,432)
Shareholder receivable 25,000 --
----------- -----------
NET CASH PROVIDED "USED" BY FINANCING ACTIVITIES (762,661) 502,406
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (875,786) (277,355)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 1,399,060 1,918,604
----------- -----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 523,274 $ 1,641,249
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE> 7
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and in accordance with the instructions per Item 310(b) of Regulation SB.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the six month period ended June 30, 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 1,100,00 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.
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.
7
<PAGE> 8
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 - 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:
<TABLE>
<CAPTION>
(unaudited) (unaudited)
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Current assets $ 3,536,693 $ 4,767,799
Property, plant and equipment (net) 477,192 640,157
Other asset (net) 915,571 974,115
------------ ------------
Total assets $ 4,929,456 $ 6,382,071
------------ ------------
Current liabilities $ 6,731,128 $ 4,785,422
Long-term debt 8,093,098 7,871,288
Deferred credits (32,545) -0-
------------ ------------
Total liabilities $ 14,791,681 $ 12,656,710
------------ ------------
Stockholders' deficit $ (9,862,255) $ (6,274,639)
============ ============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------- -------------------------------
(unaudited) (unaudited)
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue $4,199,163 $5,945,085 $8,904,147 $7,693,192
Gross Profit 3,253,607 3,797,552 6,560,220 4,977,887
Net loss 169,375 271,264 1,578,737 449,407
</TABLE>
NOTE D - DIVIDENDS
Dividends for the three months ended March 31, 1999 and June 30, 1999 were
declared at $0.0975 and $0.09 per share, respectively. Total dividends declared
and paid for these periods were $17,983 and $10,583, respectively totaling
$28,566. Dividends paid for the six months ending June 30, 1998 totaled $36,111.
NOTE E - INVENTORIES
Inventories consist of the following at June 30, 1999:
<TABLE>
<S> <C>
Batteries, electronic components and
Assembly materials $ 1,897,455
Less valuation reserves (765,183)
-----------
$ 1,132,272
===========
</TABLE>
8
<PAGE> 9
NOTE F - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at June 30, 1999:
<TABLE>
<S> <C>
Machinery and equipment $ 469,662
Furniture and fixtures 192,434
Leasehold improvements 42,563
Automobiles 14,262
---------
718,921
Less accumulated depreciation (418,601)
---------
Total $ 300,320
=========
</TABLE>
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 June 30, 1999 and 1998 the outstanding balance was $300,000 and
$352,530 respectively.
The lender has informed the Company that it is in violation of certain covenants
in the line of credit agreement relating to the use of funds. As a result, the
lender did not renew the Companies line of credit but had agreed verbally not to
call its loan since the Company is currently working on finalizing a line of
credit with Foothill Capital Corporation.
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 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 six months ended June 30, 1999 and
1998 has been increased for dividends on preferred stock totaling $10,583,
$28,566, and $33,894 and $41,572 respectively.
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 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 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 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.
9
<PAGE> 10
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
affect the financial condition and results of operations of the Company.
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 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 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 August 12, 1999, the Company announced that it is acquiring 100% of Alphanet
Hospitality Systems, Inc. ("AHS") for $5.9 million in cash. AHS is the leading
provider of in-room facsimile/photocopier/printer and unattended business
center services in premium hotels. TEI has secured financing for this
transaction.
The acquisition of AHS is expected to provide positive cash flow and augment
operations. AHS's unaudited EBITDA for the six month period ended June 30, 1999
was approximately $1,475,000 according to AHS financial statements.
10
<PAGE> 11
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 10-KSB for the years ended
December 31, 1998 and 1997. 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 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
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 ceased 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.
The Board of Directors of Computer Components Corporation ("CCC") voted to merge
Universal Battery Corporation ("UBC") and Vary Brite Technology ("VBT") into CCC
due to similarity of business operations. On June 21, 1999, the State of Texas
approved the merger.
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.
11
<PAGE> 12
RESULTS OF OPERATIONS
The financial results of the Company for the three month period ended June 30,
1999 do not include the results of USCG. As previously announced, 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.
THREE-MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999.
REVENUES
For the three month period ended June 30, 1999, the Company had revenues of
$2,555,034 compared to sales and service revenues of $7,982,834 (which included
the sales and service revenues of USCG) during the similar period ending June
30, 1998, a decrease of $5,427,800 (67.99%). However, excluding the sales and
service revenues of USCG for the similar period in 1998, the Company's revenues
rose to $2,555,034 for the three months ended June 30, 1999 compared to
$2,069,554 for the three months ended June 30, 1998, an increase of
$485,480 (23.46%).
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 second quarter of 1999 decreased by $4,512,978
(69.31%) to $1,997,975 compared to $6,510,953 during the three months ended June
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 $4,902,606 for the three months ended June 30,
1998, with no contribution during the current period ended June 30, 1999.
Excluding USCG, CCC's cost of good sold increased to $1,997,975 for the three
months ended June 30, 1999 compared to $1,608,347 during the similar period in
1998, an increase of $389,628 (24.23%).
Increased sales at CCC resulted in an increase in the cost of sales during the
period ended June 30, 1999. Cost of sales for the Company, as a percentage of
revenues rose very modestly to 78.20% in the second quarter of 1999 from 77.71%
in the second quarter of 1998.
12
<PAGE> 13
GROSS PROFIT
The Company recorded a gross profit of $557,059 for the three months ended June
30, 1999 compared to $1,471,881 during the second quarter of 1998, a decrease of
$914,822 (62.15%). The large decrease in gross profit directly stems from
USCG which contributed $1,010,674 during the three month period ended June 30,
1998 with no contribution during the current three month period ended June 30,
1999.
Excluding the gross profit contribution by USCG during the second quarter of
1998, the Company's gross profit increased on stronger revenues to $557,059 for
the three months ended June 30, 1999 from $461,207 for the same period in 1998,
an increase of $95,852 (20.78%).
Gross profit as a percentage of revenues for CCC increased to 21.80% for the
three months ended June 30, 1999 compared to 18.43% during the similar period in
1998. Excluding USCG's gross profit contribution during the three months ended
June 30, 1998 (with no contribution during the three months ended June 30 1999),
gross profit declined marginally by 0.48% to 21.80% from 22.28% respectively.
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 $1,840,376 (76.70%) to
$557,942 for the three month period ended June 30, 1999 from $2,398,311 for the
same period in 1998. This dramatic decrease is due to the de-consolidating of
USCG with no expenses in the second quarter of 1999.
The selling, general and administrative expenses of CCC contributed to the
Company were $424,494 in the second quarter of 1999 and $670,449 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 in the third quarter Of 1998. As a result CCC is showing a profit
for the second quarter of 1999, that is, excluding expenses at the Tech Electro
Industries, Inc. level.
INTEREST EXPENSE
The Company incurred $8,315 in interest expense during the three months ended
June 30, 1999, compared to $173,555 during the same period in 1998, a decrease
of $165,240. The significant decrease in interest expense is attributable to
USCG and its subsidiaries, which incurred $162,036 in interest expense during
the second quarter of 1998 with no contribution during the period ending June
30, 1999 due to the de-consolidation.
13
<PAGE> 14
SIX-MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX-MONTHS ENDED JUNE 30, 1998
REVENUES
For the six month period ended June 30, 1999, the Company had revenues of
$7,773,131 compared to $9,979,422 for the six month period ended June 30, 1998,
a decrease of $2,206,291 (22.1%). Revenues declined as a result of the
de-consolidation of USCG which contributed $6,031,249 in revenues for the six
months ended June 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
$629,612 (15.95%) to $4,577,785 for the six months ended June 30, 1999 compared
to $3,948,173 for the same six 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 first six months of 1999 decreased by
$1,648,437 (21.0%) to $6,218,054 compared to $7,866,491 during the six months
ended June 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 $4,903,494 for the six months ended June 30,
1998 and contributed $2,496,030 during the first quarter of 1999 prior to the
de-consolidation. Excluding USCG, CCC's cost of good sold increased to
$3,595,143 for the six months ended June 30, 1999 compared to $2,962,997 during
the similar period in 1998, an increase of $632,146 (21.3%).
Increased sales at CCC resulted in an increase in the cost of sales during the
period ended June 30, 1999. Cost of sales for the Company, as a percentage of
revenues rose very modestly to 80.0% in the first six months of 1999 from 78.8%
in 1998.
GROSS PROFIT
The Company recorded a gross profit of $1,555,077 for the six months ended June
30, 1999 compared to $2,112,931 during period ending June 1998, a decrease of
$557,854 (26.4%). The large decrease in gross profit directly stems from USCG
which contributed $1,127,755 during the six month period ended June 30, 1998 and
contributed $572,435 during the first quarter of 1999 prior to the
de-consolidation.
Excluding the gross profit contribution by USCG during the six months ending
June 1998, the Company's gross profit decreased due to lower margins in
batteries than electronic components to $982,642 for the six months ended
June 30, 1999 from $985,176 for the same period in 1998, a decrease of
$2,534 (.3%).
OPERATING EXPENSES
The Company's operating expenses, consisting of selling, general and
administrative expenses increased by $10,397 (.3%) to $3,164,794 for the six
month period ended June 30, 1999 from $3,154,397 for the same period in 1998.
This slight increase is due to the de-consolidating of USCG with no expenses in
the second quarter of 1999.
14
<PAGE> 15
The selling, general and administrative expenses of CCC contributed to the
Company $859,892 in the second quarter of 1999 and $1,144,388 in 1998 a decrease
of $284,496 (24.9%). This decrease in general and administrative expenses was
primarily attributable to a reduction in wages and related expenses when
management re-structured its organization in the third quarter of 1998. As a
result CCC is showing a profit for the six months ending June 1999, that is,
excluding expenses at the Tech Electro Industries, Inc. level.
INTEREST EXPENSE
The Company incurred $140,712 in interest expense for the six months ended June
30, 1999, compared to $180,194 during the same period in 1998, a decrease of
$39,482 (21.9%). The decrease in interest is due to the deconsolidation of USCG
which contributed $122,468 in the six months ended June 30, 1999 and $162,037 in
1998 respectively.
LIQUIDITY
As a June 30, 1999 the Company had cash and cash equivalents of $523,274. 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 deconsolidating of USCG and liquidation of certificates of deposits
to fund the cash needs of CCC and the Company.
The Company provided cash from operations of $385,752 for the six month period
ended June 30, 1999 compared to cash used by operations of $288,999 for the same
period in 1998. The cash provided from operations was used for the existing
operations of CCC as well as the operational expenses of TEI.
The Company has been informed by its lender that it is in violation of certain
convenants 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 working on finalizing a line of
credit with Foothill Capital Corporation.
On February 25, 1999, Telstar Entertainment ("Telstar"), the second largest
shareholder of USC, 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 deconsolidation 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. The 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.
15
<PAGE> 16
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 at March 26, 1999, 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.
16
<PAGE> 17
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: August 16, 1999 /s/ William Tan-Kim Wah
-----------------------------
William Tan-Kim Wah
Chief Executive Officer
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 523,274
<SECURITIES> 0
<RECEIVABLES> 1,585,149
<ALLOWANCES> 28,600
<INVENTORY> 1,132,272
<CURRENT-ASSETS> 3,924,080
<PP&E> 300,320
<DEPRECIATION> 418,601
<TOTAL-ASSETS> 4,235,543
<CURRENT-LIABILITIES> 1,318,185
<BONDS> 0
49,397
0
<COMMON> 120,588
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,235,543
<SALES> 7,773,131
<TOTAL-REVENUES> 7,773,131
<CGS> 6,218,054
<TOTAL-COSTS> 3,164,794
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 140,712
<INCOME-PRETAX> (1,720,606)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,720,606)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,720,606)
<EPS-BASIC> (.36)
<EPS-DILUTED> (.36)
</TABLE>
