SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
Amendment No. 1
[X] QUARTERLY REPORT PURSUANT TO SECTON 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
[ ] 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.)
275 N Franklin Turnpike, Ste 230, Ramsey, New Jersey 07446
----------------------------------------------------------------
(Address of principal executive office
(201) 760-9900
----------------------------
(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, 2000, 8,118,815 shares of Common Stock were outstanding.
1
<PAGE>
INDEX
Page
PART I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2000 (unaudited)
and December 31, 1999................................................3
Consolidated Statements of Operations for the periods
ended June 30, 2000 and 1999 (unaudited).............................5
Consolidated Statements of Cash Flows for the periods
ended June 30, 2000 and 1999 (unaudited).............................7
Notes to Consolidated Financial Statements...........................9
Item 2. Management's Discussion and Analysis or Plan of Operation.....13
PART II - Other Information............................................18
Item 1. Legal Proceedings..........................................18
Item 2. Changes in Securities......................................19
Item 3. Defaults Upon Senior Securities............................19
Item 4. Submission of Matters to a Vote of Securities Holders......19
Item 5. Other Information..........................................19
Item 6. Exhibits and Reports on Form 8-K...........................19
Signature..............................................................19
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
June 30, 2000 Dec 31, 1999
------------- -------------
CURRENT ASSETS
Cash and cash equivalents....................$ 847,633 $ 894,261
Certificate of deposit....................... 265,586 260,294
Accounts and notes receivable
Trade, net of allowance for doubtful
accounts of $266,328 and $282,498 in
2000 and 1999, respectively............... 3,118,992 3,352,887
Notes..................................... - 180,146
Other..................................... 26,945 67,901
Inventories, net ............................ 1,730,600 1,611,358
Prepaid expenses and other current assets.... 800,356 601,257
----------- ----------
Total current assets................... 6,790,112 6,968,104
----------- ----------
PROPERTY AND EQUIPMENT
Facsimile and business center equipment...... 7,568,411 8,175,530
Other equipment.............................. 1,030,939 959,814
Furniture and fixtures....................... 225,833 214,271
Vehicles..................................... 45,262 14,262
Leasehold improvements....................... 76,680 51,378
----------- ----------
8,947,125 9,415,255
Less accumulated depreciation and
amortization.............................. (1,392,587) (1,426,888)
----------- ----------
Net property and equipment............. 7,554,538 7,988,367
----------- ----------
OTHER ASSETS
Notes receivable, net of current portion..... 5,469 7,031
Deferred financing costs, net................ 540,907 688,875
Other........................................ 16,800 26,461
---------- ----------
Total other assets..................... 563,176 722,367
---------- ----------
TOTAL ASSETS......................................$14,907,826 $15,678,838
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
- Continued -
3
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TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Continued
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
June 30, 2000 Dec 31, 1999
------------- ------------
CURRENT LIABILITIES
Line of credit...............................$ 1,072,512 $ 389,532
Current portion of long-term debt............ 597,058 2,316,796
Current portion of Capital lease............. 2,940 -
Trade accounts payable....................... 1,451,602 1,846,642
Accrued liabilities.......................... 837,252 948,687
Other current liabilities.................... 44,119 44,119
---------- ----------
Total current liabilities............. 4,005,483 5,545,776
---------- ----------
LONG-TERM DEBT, less current portion.............. 2,505,895 2,556,174
CAPITAL LEASE, less current portion............... 14,348 -
EXCESS OF NET ASSETS OF COMPANIES ACQUIRED
OVER COST, NET............................... 3,772,930 4,033,132
--------- ----------
Total liabilities..................... 10,298,656 12,135,082
COMMITMENTS AND CONTINGENCIES (Note M)
STOCKHOLDERS' EQUITY
Preferred stock - $1.00 par value; 1,000,000
shares authorized; 119,588 Class A issued
and outstanding; liquidation preference
of $627,837 .............................. 119,588 119,588
Common stock - $0.01 par value; 50,000,000
shares authorized; 8,118,815 and 7,034,684
shares issued and outstanding in 2000 and
1999, respectively........................ 81,188 70,347
Additional paid-in capital................... 14,388,134 13,225,368
Accumulated deficit.......................... (9,979,740) (9,871,547)
---------- ----------
Total stockholders' equity............ 4,609,170 3,543,756
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........$ 14,907,826 $15,678,838
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
4
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TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Periods Ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
2000 1999 2000 1999
REVENUES ---- ---- ---- ----
Revenues $5,667,467 $2,526,774 $11,374,960 $ 4,944,415
Service revenue - - - 2,775,147
--------- --------- ---------- ---------
5,667,467 2,526,774 11,374,960 7,719,562
COST OF REVENUES
Cost of revenues 3,490,688 1,982,475 6,786,751 4,430,486
Direct servicing costs - - - 1,586,638
--------- --------- ---------- ---------
3,490,688 1,982,475 6,786,751 6,017,124
--------- --------- ---------- ---------
GROSS PROFIT 2,176,779 544,299 4,588,209 1,702,438
OPERATING EXPENSES
Selling, general and administrative 1,953,255 539,160 3,814,699 2,927,659
Inventory obsolescence provision 3,000 15,500 6,000 200,930
Depreciation and amortization of
property and equipment 284,483 18,782 675,107 237,135
Lawsuit settlement - - 400,086 -
Amortization of excess of net assets
of companies acquired over cost (130,101) - (260,202) -
--------- -------- --------- ---------
2,110,637 573,442 4,635,690 3,365,724
--------- -------- --------- ---------
INCOME (LOSS) FROM OPERATIONS 66,142 (29,143) (47,481) (1,663,286)
OTHER INCOME (EXPENSES)
Interest income 3,753 18,297 11,721 31,993
Interest expense (202,051) (8,315) (402,063) (140,712)
Amortization of deferred financing
cost (153,798) - (311,523) -
Other 63,695 28,260 96,207 51,399
--------- -------- --------- ---------
(288,401) 38,242 (605,658) (57,320)
--------- -------- --------- ---------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES AND EXTRAORDINARY GAIN (222,259) 9,099 (653,139) (1,720,606)
PROVISION FOR INCOME TAXES - - - -
--------- -------- --------- ---------
INCOME LOSS BEFORE EXTRAORDINARY GAIN (222,259) 9,099 (653,139) (1,720,606)
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
-Continued-
5
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - Continued
For the Periods Ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
EXTRAORDINARY GAIN - - 568,750 -
--------- -------- --------- ---------
NET INCOME (LOSS) $ (222,259) $ 9,099 $ (84,389) $(1,720,606)
========= ======== ========= ==========
Net income (loss) attributable to
common stockholders $ (233,527) $ (1,484) $ (108,092) $(1,749,172)
--------- -------- --------- ----------
Basic and diluted net loss before
extraordinary gain per share
attributable to common shareholders $ (0.03) - $ (0.08) $ (0.36)
--------- -------- --------- ----------
Basic and diluted extraordinary gain
attributable to common shareholders - - $ 0.07 -
========= ========== ========= ==========
Basic and diluted net loss
per share attributable to common
shareholders $ (0.03) - $ (0.01) $ (0.36)
========= ========== ========= ==========
Number of weighted-average shares of
common stock outstanding (basic
and diluted) 7,694,004 4,936,514 7,904,323 4,872,439
========= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Periods Ended June 30, 2000 and 1999
(Unaudited)
Six Month Ended
------------------
June 30, 2000 June 30, 1999
CASH FLOWS FROM OPERATING ACTIVITIES -------------- -------------
Net loss $ (84,389) $(1,720,606)
Adjustments to reconcile net loss to net
cash provided by (used by) operating activities:
Common stock issued for compensation............... (45,000) 18,496
Depreciation and amortization of property
and equipment................................... 675,107 237,092
Provision for bad debts............................ (16,170) 160,826
Provision for obsolete inventory................... 6,000 105,142
Loss on sale of property and equipment............. - 2,170
Extraordinary gain on note retirement ............. (568,750) -
Amortization of deferred financing costs........... 311,521 18,494
Amortization of excess of net assets
of companies acquired over cost................. (260,202) -
Change in operating assets and liabilities
Accounts receivable - trade.................. 250,065 (239,743)
Accounts receivable - other.................. 40,956 (39,897)
Inventories.................................. (125,242) 629,868
Prepaid expenses and other current assets.... (199,099) (70,333)
Other assets................................. 9,661 9,064
Trade accounts payable....................... (395,040) 362,247
Accrued liabilities.......................... (111,435) 1,112,095
Deferred service liability................... - (199,163)
---------- ----------
Net cash provided by (used by) operating activities..... (512,017) 385,752
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment.................. (300,021) (21,287)
Proceeds on sale of property and equipment........... 76,031 21,512
Payments received on notes receivable................ 101,562 39,557
Write-off of notes receivable........................ 80,146 -
Advance to related party ............................ - (222,397)
Purchase of certificate of deposit................... (5,292) -
Cash in de-consolidation of subsidiary............... - (316,262)
---------- ----------
Net cash used by investing activities................... (47,574) (498,877)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net activity on line of credit....................... 682,980 (750,827)
Repayment of long-term debt.......................... (670,017) (36,834)
Proceeds from long-term debt......................... 500,000 -
Cash received on shareholder receivable.............. - 25,000
---------- ----------
Net cash provided by (used by) financing activities.... 512,963 (762,661)
---------- ----------
The accompanying notes are an integral part of these
consolidated financial statements.
-continued-
7
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TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For The Periods Ended June 30, 1999 and 2000
(Unaudited)
Six Month Ended
------------------
June 30, 2000 June 30, 1999
-------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS.... (46,628) (875,786)
Cash and cash equivalents at beginning
of period ............................ 894,261 1,399,060
---------- ----------
Cash and cash equivalents at end of period......... $ 847,633 $ 523,274
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Issuance of common stock for
settlement of note payable................. $ 1,031,250 $ -
========== ==========
Dividends paid through issuance
of common stock............................ $ 23,703 $ 36,111
========== ==========
Issuance of common stock for
deferred financing costs $ 163,553 $ -
========== ==========
Acquisition of property and equipment
Through a capital lease $ 17,288 $ -
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
8
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with the instructions per Item 310(b) of
Regulation SB. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the six month period ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000.
NOTE B - ORGANIZATION
Tech Electro Industries, Inc. ("TEI") was formed on January 10, 1992 as a
Texas corporation. TEI's subsidiary, Computer Components Corporation ("CCC"),
stocks and sells electronic components and batteries. Within the battery sales
activity, there is significant value added to the batteries in the assembly of
batteries into "packs". CCC's electronic components sales are generated by
in-house sales staff and sales representatives as well as over the Internet to
customers throughout the United States.
As previously reported, in July 2000, CCC filed with the Office of the
Texas Secretary of State an amendment to its Articles of Incorporation to change
its name to "Universal Battery Corporation". CCC initially understood that its
name change had been approved. However, the Office of the Texas Secretary of
State later advised CCC that its name change was not approved. The reason given
was that "Universal Battery" was similar to another corporation's name that
would need to consent to CCC's proposed name change. CCC is seeking to obtain
such consent.
On October 22, 1999, TEI acquired 100% of the outstanding common stock of
AlphaNet Hospitality Systems, Inc. ("AHS"). The acquisition was accounted for as
a purchase and the operations of AHS are included in the results of operations
of TEI from the acquisition date. AHS provides in-room facsimile and business
center services to the hotel industry through licensing agreements. AHS
generates revenues from its InnFax product line, a patented in-room send and
receive facsimile service and The Office, full service business centers, for
business travelers staying at hotels.
NOTE C - ACQUISITION OF AHS
TEI acquired AHS in October 1999, and accordingly AHS's operations are not
reflected in TEI's six month ended 1999 financials. The following unaudited pro
forma consolidated results for the three and six month period ended June 30,
1999 assumes the acquisition of AHS occurred as of January 1, 1999.
Three Months Ended Six Months Ended
(unaudited) (unaudited)
June 30, 1999 June 30, 1999
------------- -------------
Revenues $ 4,857,392 $ 12,167,817
Net loss (367,969) (2,779,240)
Basic and diluted loss per share $ (0.07) $ (0.57)
(NOTE - Earnings per shares were adjusted for preferred dividends)
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NOTE D - DIVIDENDS
Dividends were declared on February 28 and June 1, 2000, for Class A
Preferred Stock at $0.9375 and $0.7188 per share totaling $12,435 and $11,268
for the periods ending March 31 and June 30, 2000, respectively. This dividend
was paid in the form of common stock at the rate of 0.11 shares of common for
each share of preferred.
The dividend was payable on March 31 and June 30, 2000 to stockholders of
record at the close of business of February 28 and May 31, 2000, respectively.
NOTE E - INVENTORIES
Inventories consist of the following at June 30, 2000:
Electronic components, batteries and assembly
materials.............................................$ 2,015,478
Facsimile and business center inventory...................... 118,397
Inventory obsolescence reserve............................... (403,275)
------------
$ 1,730,600
============
NOTE F - LINE OF CREDIT
Line of credit at June 30, 2000 consists of the following:
$3,000,000 line of credit with bank,
payable on demand, with interest
payable monthly at prime plus 2%
(11.5% at June 30, 2000),
maturing August, 2002 and secured by
accounts receivable, inventories,
equipment and intangibles of CCC.
Pursuant to borrowing base formulas,
as of June 30, 2000 additional
borrowings of $488,583 are available
under the line of credit....................................$1,072,512
==========
NOTE G - LONG-TERM DEBT
Long-term debt at June 30, 2000 consists of the following:
Promissory note to financing company,
with interest payable monthly at 12%,
principal due at maturity August 25,2000
and secured by stock of AHS ................................$ 500,000
Installment notes payable to leasing
company, due in monthly installments
ranging from $3,695 to $3,004,
including interest at rates from
14.50% to 14.52%, current portion of
debt which matures October 2002,
collateralized by facsimile and
business center equipment of AHS ........................... 227,953
10
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NOTE G - LONG-TERM DEBT (continued)
Note payable to financing company,
with interest payable monthly at 20.5%,
principal due at maturity (October 2001),
guaranteed by TEI, with first lien on
all AHS assets and second lien on AHS
common stock................................................ 2,375,000
----------
3,102,953
----------
Less current maturities.................................. (597,058)
----------
Long-term portion........................................$2,505,895
==========
NOTE H - 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 income(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. TEI's common stock equivalents are not included in
the diluted loss per share for June 30, 2000 and 1999 as they are antidilutive.
Therefore, diluted and basic loss per share is identical. Net loss per share for
the six month period ended June 30, 2000 and 1999 has been decreased (increased)
for dividends on preferred stock.
NOTE I - WARRANTS AND STOCK OPTIONS
On February 16, 2000, TEI agreed to extend to March 10, 2002 the exercise
date of options to purchase 1,000,000 shares, originally granted in connection
with an equity offering, exercisable at $2.50 per share.
On February 24, 2000, TEI issued Caspic International, Inc. 250,000
warrants for providing a $500,000 loan. The warrants are exercisable at $0.73
per share with an expiration date of February 25, 2005. The warrants were
recorded at fair value using the Black-Scholes model as deferred financing fees,
totaling $163,554. The warrants are being amortized over three months, the
initial maturity period of the loan. (See Note L)
On June 24, 2000, the Board of Directors adopted the 2000 Incentive Stock
Option Plan (the "2000 ISOP"). At June 30, 2000 there are 27,000 options issued
and outstanding under the 2000 ISOP. These options are exercisable at $0.7188
per share with an expiration date of June 26, 2003. There are an additional
1,973,000 shares available for grant under the 2000 ISOP. All the shares under
the 2000 ISOP have been registered with the Securities and Exchange Commission
on Form S-8.
NOTE J - EXCESS OF NET ASSETS OF COMPANIES ACQUIRED OVER COST
The deferred credit results from the excess of the estimated fair value of
the net assets acquired over the purchase price paid for AHS. After application
to all non current assets acquired, this amount totaling $4,163,233 is being
amortized using the straight-line method over 8 years. Amortization for the six
month period ended June 30, 2000 was $260,202.
11
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NOTE K - EXTRAORDINARY GAIN
TEI recognized an extraordinary gain of $568,750 in connection with the
retirement of a $2,100,000 note payable. The note was paid with $500,000 cash
and 1,100,000 common shares of TEI on February 25, 2000. The shares and related
debt settlement were recorded at the trading price of the common stock on the
payment date, which was $0.9375 per share.
NOTE L - RELATED PARTIES
On October 26, 1999, TEI completed the acquisition of AHS. As part of this
transaction, TEI arranged for a $2,525,000 credit facility through an agent,
Appel Investments, Inc. ("Appel"), for AHS to refinance its existing
indebtedness. William Tan Kim Wah is President and CEO of TEI, and his brother,
Kim Yeow Tan is an officer of Appel. $1,525,000 of the said indebtedness was
refinanced through Appel directly. In conjunction with Appel's $1,525,000 loan
to refinance AHS indebtedness, AHS paid a loan origination fee of $150,737. As
additional consideration for the refinancing, Appel received warrants to
purchase 116,703 shares of common stock of TEI, exercisable at $0.75 per share.
The warrants expire on October 20, 2004. The remaining $1,000,000 of the said
$2,525,000 indebtedness was refinanced through AHS Funding LLC, a financing
company whose principal, Jenny Jechart, is also a shareholder of TEI. In
conjunction with AHS Funding LLC's $1,000,000 to finance AHS indebtedness, AHS
paid a loan origination fee of $98,828. As additional consideration, AHS Funding
LLC received warrants to purchase 76,514 shares of TEI common stock exercisable
at $0.75 per share. The warrants vest immediately and expire on October 20,
2004. These warrants were recorded at fair value using the Black-Scholes model
as deferred financing fees, and are being amortized over the life of the
respective loans. The total facility of $2,525,000 arranged through Appel bears
interest at 20.5% per annum, and is payable monthly with the principal due in
full on October 21, 2001.
TEI engaged Placement & Acceptance, Inc. ("PAI"), a British Virgin Islands
corporation, to effect a private placement of securities, which was consummated
in December 1997. William Tan Kim Wah is a director and shareholder of PAI. PAI
received fees of $112,000, inclusive of expenses, for acting as sales agent in
the placement. TEI also engaged PAI in October, 1999 to effect a private
placement of securities for TEI's acquisition of AHS. PAI received a placement
fee of warrants to purchase 500,000 shares of common stock. In addition, TEI
retained PAI to refinance the outstanding AHS indebtedness required to complete
the acquisition. PAI received a placement fee of warrants to purchase 550,000
shares of common stock in consideration for services rendered. These warrants
are exercisable at $0.75 per share and expire on October 20, 2004. These
warrants were recorded at fair value using the Black-Scholes model as deferred
financing fees, and are being amortized over the life of the respective loans.
On February 24, 2000, TEI renegotiated and paid in full its $2,100,000
promissory note that composed part of the purchase price of the acquisition of
AHS by the payment of $500,000 cash and the issuance of 1,100,000 shares of
common stock.
The $500,000 cash was raised by a loan from Caspic International, Inc.
William Tan Kim Wah is also a director and shareholder of Caspic International,
Inc. The loan is due on November 25, 2000, bears an interest rate of 12% per
annum payable monthly and is secured by a pledge of the shares of capital stock
of AHS. As additional consideration for the loan, TEI also issued warrants to
purchase 250,000 shares of common stock at $0.73 per share, exercisable
immediately, with an expiration date of February 23, 2005. (See Note I)
12
<PAGE>
NOTE M - COMMITMENTS AND CONTINGENCIES
Commitments
AHS has entered into an agreement with a leasing company which requires AHS
to pay $5 per machine each month for two years, which represents the estimated
residual value at the end of a four-year leasing contract. The future minimum
payments under this agreement at June 30, 2000 are as follows:
2000............................................... $ 111,612
2001............................................... 117,413
2002............................................... 32,281
------------
$ 261,306
============
Guarantees
In March 1998, TEI completed the acquisition of a controlling interest
in US Computer Group, ("USCG") a company that provided a broad range of
information technology services and products. On February 25, 1999, Telstar
Entertainment ("Telstar"), the second largest shareholder of USCG, contributed
additional capital to USCG through the purchase of additional shares, making
Telstar the largest shareholder of USCG. Effective February 25, 1999 TEI ceased
reporting USCG's financial results in its consolidated financial statements and
uses the equity method to account for its minority interest. On October 20, 1999
TEI guaranteed a payment made by Telstar to USCG totaling $100,000 for working
capital. In March 2000, an USCG bank creditor foreclosed on all of USCG's
assets, effectively terminating all of USCG's operations. TEI has guaranteed a
portion of the USCG bank indebtedness. On June 7, 2000, Coast sued TEI in the US
District Court for the Central District of California, Case No. CV-00-06115 NM
(RZx), to collect $361,740 plus interest, attorney fees and costs.
SUBSEQUENT EVENT
After the filing of the original Form 10-QSB, TEI settled the Coast lawsuit by
paying Coast $199,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis should be read in conjunction with TEI's
Consolidated Financial Statements and notes thereto included elsewhere in this
Form 10-QSB/A. Except for the historical information contained herein, the
discussion in this Form 10-QSB/A contains certain forward looking statements
that involve risks and uncertainties, such as statements of TEI'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/A. These statements include,
without limitation, statements concerning the potential operations and results
of the Company described below. TEI's actual results could differ materially
from these discussed here. Factors that could cause or contribute to such
differences include, without limitation, those factors discussed herein and in
TEI's Annual Report on Form 10-KSB for the year ended December 31, 1999.
BACKGROUND AND RECENT DEVELOPMENTS
The results of operations for the six months ended June 30, 2000 does not
include USCG operations, while the comparative period of 1999 includes two
months of USCG operations. As AHS was acquired as a purchase in October 1999,
the financial statements for the six months ended June 30, 2000 include six
months of AHS activity with no operations of AHS for the comparative 1999 six
months.
13
<PAGE>
As previously discussed, TEI was advised on March 22, 2000 that Coast
Business Credit, Inc. ("Coast"), has declared that USCG defaulted on certain
loans from Coast and has demanded full payment by USCG for all such loans. TEI
was advised verbally by Coast's attorney that it had foreclosed and sold all of
USCG's assets that were pledged to secure loans from Coast. TEI guaranteed a
portion of those loans. On June 7, 2000, Coast sued TEI in the US District Court
for the Central District of California, Case No. CV-00-06115 NM (RZx), to
collect $361,740 plus interest, attorney fees and costs. On September 20, 2000,
TEI settled this lawsuit by paying Coast $199,000.
On April 28, 2000, the American Arbitration Association awarded an
ex-employee of CCC's $375,865 due to breach of his employment agreement. As of
June 30, 2000 $225,000 relating to this settlement had been paid. The remaining
$150,865 was paid in full on August 1, 2000.
RESULTS OF OPERATIONS
Currently, TEI's operations are conducted through its subsidiaries, CCC and
AHS.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999.
REVENUES
For the three month period ended June 30, 2000, TEI had revenues of
$5,667,467 compared to $2,526,774 for the similar period ended June 30, 1999, an
increase of $3,140,693 (124.30%).
Revenues of CCC totaled $3,421,711 and of AHS totaled $2,245,756 for the
three months ended June 30, 2000, compared to revenues of $2,526,774 and $0,
during the similar period in 1999. CCC's sales increase is related to the
increasing sales in batteries and related products as well as entering other
battery markets, including consumer, medical and security. Also, CCC has begun
direct shipping to certain customers which require large volume on a particular
item which has enabled CCC to compete with the larger market items.
COST OF REVENUES
For the three month period ended June 30, 2000, TEI's cost of revenues
increased to $3,490,688 compared to cost of revenues of $1,982,475 for the
similar period in 1999, an increase of $1,508,213 (76.08%).
Increased sales at CCC and AHS resulted in an increase in the cost of
revenues during the three month period ended June 30, 2000. However, in the 2nd
quarter of 2000, CCC received better prices from their suppliers resulting in
cost of revenues as a percentage of revenue decreasing to 61.59% in the 2nd
quarter of 2000, compared to 78.46% for the similar period in 1999.
GROSS PROFIT
For the three month period ended June 30, 2000, TEI recorded a gross profit
of $2,176,779 compared to $544,299 for the similar period in 1999, an increase
of $1,632,480 (299.92%).
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For the three month period ended June 30, 2000, gross profit as a
percentage of revenue for CCC decreased to 20.41% compared to 21.54% for the
similar period in 1999. The decreasing gross profit margin of CCC is
attributable to the focus on battery and battery-related products, which produce
a lower profit margin than component sales. Also, CCC has been direct shipping
to their customers and these orders typically have a lower margin due to larger
volume and CCC having lower overhead costs associated with such orders.
OPERATING EXPENSES
For the three month period ended June 30, 2000, TEI's operating expenses,
consisting mainly of selling, general and administrative, depreciation and
amortization expenses increased to $2,110,637 compared to $573,442 for the
similar period in 1999, an increase of $1,537,195 (268.06%).
The increase in the selling, general and administrative expenses was
attributable to an increase of $677,150 in legal fees, advertising and travel
costs at CCC, and $1,217,887 in recruiting fees, due diligence fees,
communications, and wages at AHS during the second quarter. For the similar
period in 1999 AHS had no operating expenses included in the financial
statements.
For the three month period ended June 30, 2000, TEI incurred $284,483 in
depreciation and amortization compared to $18,782 for the similar period in
1999, an increase of $265,701 (1,414.65%). The increase is largely attributable
to AHS's depreciation of revenue assets of $225,184.
INTEREST EXPENSE AND FINANCING FEES
During the three month period ended June 30, 2000, TEI incurred $202,051 in
interest expense compared to $8,315 for the similar period in 1999, an increase
of $193,736 (2329.96%).
The increase in interest expense is attributable to a $2,525,000 loan made
to AHS in October, 1999 to refinance existing indebtedness. AHS paid $153,492 in
interest on this loan during in the three month period ended June 30, 2000.
Deferred financing costs are amortized on a straight-line basis over the
original term of the financing agreement. TEI issued warrants to various
lenders, which were recorded at fair value using the Black-Scholes model.
Amortization of these deferred financing costs was $153,798 for the three month
period ended June 30, 2000.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999.
REVENUES
For the six month period ended June 30, 2000, TEI had revenues of
$11,374,960 compared to $7,719,562 for the similar period in 1999, an increase
of $3,655,398 (47.35%).
The increase in revenues is largely attributable to an increase in sales of
CCC of $7,087,963 and AHS of $4,286,997 for the six months ended June 30, 2000
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compared to revenues of $4,531,901 and $0 for the similar period in 1999,
respectively. The CCC sales increase is related to the increasing sales in
batteries and related products. Also, CCC has begun direct shipping to certain
customers which require large volume on a particular item which has enabled CCC
to compete with the larger market items.
COST OF REVENUES
For the six month period ended June 30, 2000, TEI's cost of revenues
increased to $6,786,751 compared to $6,017,124 for the similar period in 1999,
an increase of $769,627 (12.79%).
Increased sales at CCC resulted in an increase in the cost of revenues
during the six month period ended June 30, 2000. Cost of revenues as a
percentage of revenue increased slightly to 79.18% for the first six months of
2000 compared to 77.54% for the similar period in 1999.
Included in the cost of revenues for the six month period ended June 30,
2000 are $1,173,839 for AHS, and none in 1999, and $2,694,228 for USCG in the
six month period ended June 30, 1999, none in 2000.
GROSS PROFIT
For the six month period ended June 30, 2000, TEI recorded a gross profit
of $4,588,209 compared to $1,702,438 for the similar period in 1999, an increase
of $2,885,771 (169.51%).
The increase in gross profit stems from the acquisition of AHS and the
increasing sales from CCC.
For the six month period ended June 30, 2000, gross profit as a percentage
of revenue for CCC decreased slightly to 20.81% compared to 22.32% for the
similar period in 1999. The decreasing gross profit margin of CCC is
attributable to the focus on battery and battery-related products, which produce
a lower profit margin than component sales.
OPERATING EXPENSES
For the six month period ended June 30, 2000, TEI's operating expenses,
consisting mainly of selling, general and administrative, legal settlement,
depreciation and amortization expenses increased to $4,635,690 compared to
$3,365,724 for the similar period in 1999, an increase of $1,269,966 (37.7%).
The increase is attributable to the following: USCG contributed $1,944,840
in selling, general and administrative expenses in the first half of 1999,
compared to none for the similar period in 2000. CCC selling, general and
administrative expenses increased to $1,374,251 in the first half of 2000
compared to $823,543 for the similar period in 1999. This increase is
attributable to an increase in legal fees, advertising and travel costs and the
writing off of a note receivable. AHS incurred $2,478,695 in selling, general
and administrative expenses in the first half of 2000, none in 1999. AHS's
selling and administrative expenses were attributable to communications,
research and development on existing product, and wages.
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For the six month period ended June 30, 2000, TEI incurred $675,107 in
depreciation and amortization expense compared to $237,135 for the similar
period in 1999, an increase of $437,972 (184.69%).
The increase is largely attributable to AHS's depreciation of revenue
assets of $565,542 for the six month period ended June 30, 2000 and USCG
incurring $181,803 in amortization cost for the first half of 1999, none in
2000.
INTEREST EXPENSE AND FINANCING FEES
For the six month period June 30, 2000, TEI incurred $402,063 in interest
expense compared to $140,712 during the similar period in 1999, an increase of
$261,351 (185.73%).
The increase in interest expense is largely attributable to a $2,525,000
loan made to AHS in October, 1999 to refinance existing indebtedness. AHS paid
$322,618 in interest on this loan during the six months ended June 30, 2000,
none in 1999.
Deferred financing costs are amortized on a straight-line basis over the
original term of the financing agreement. TEI issued warrants to various
lenders, which were recorded at fair value using the Black-Scholes model.
Amortization of these deferred financing costs was $311,523 for the six months
period ended June 30, 2000, compared to none for the similar period in 1999.
EXCESS OF NET ASSETS OF COMPANIES ACQUIRED OVER COST
The deferred credit results from the excess of the estimated fair value of
the net assets acquired over the purchase price paid for AHS. After application
to all non current assets acquired, this amount totaling $4,163,233 is being
amortized using the straight-line method over 8 years. Amortization for the
period ended June 30, 2000, was $260,202 compared to none for the similar period
in 1999.
EXTRAORDINARY GAIN
TEI recognized an extraordinary gain of $568,750 from the retirement of the
PricewaterhouseCoopers, Inc. note of $2,100,000 that composed part of the
purchase price of the AHS acquisition. The note was paid with $500,000 cash and
the issuance of 1,100,000 common shares in February 2000.
INVENTORY
TEI continually reviews its inventory allowance procedures and policies and
will make adjustments as necessary. During the period ended June 30, 2000, TEI
recorded $6,000 as a reserve for inventory allowance, compared to $200,930 for
the similar period in 1999. For the first half of 1999, CCC recorded a $80,930
inventory reserve for slow moving passive components and USCG recorded a
$120,000 reserve prior to the deconsolidation.
LIQUIDITY
TEI had cash and cash equivalents of $847,633 and $523,274 at June 30, 2000
and 1999, respectively.
For the six month period ended June 30, 2000, TEI used cash from operations
of $512,017 compared to cash provided by operations of $385,752 for the similar
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period in 1999. The increase in cash provided by operations is largely due to an
increase in cash, account payables and accrued liabilities.
For the six month period ended June 30, 2000, TEI used cash in investing
activities of $45,574 compared to $498,877 for the similar period in 1999. The
majority of the cash was used to purchase new property and equipment in 2000
whereas during the six month ended June 30, 1999 cash was used primarily for
advances to a related party of $222,397 and the de-consolidating of USCG of
$316,262.
For the six month period ended June 30, 2000, TEI provided cash from
financing activities of $512,963 compared to cash used in financing of $762,661
for the similar period in 1999. During the six months ended June 30, 2000, CCC
received $214,993 of net proceeds under its line of credit. TEI organized
repayment of their acquisition debt and recognized a gain in connection with
this settlement and refinancing transactions.
TEI has a $500,000 note payable due on November 25, 2000 with a 12% per
annum interest rate, TEI is currently negotiating payment arrangements. AHS,
also has a note payable of $2,375,000 with a 20.5% interest rate with a maturity
date of October, 2001. AHS is currently looking into other loan arrangements.
INFLATION
TEI has not been materially effected by inflation. While TEI does not
anticipate inflation affecting TEI's operations, increases in labor and supplies
could impact TEI'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 its operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Martin Frank, a former employee of CCC, filed an arbitration claim with The
American Arbitration Association against CCC and TEI for the breach of his
employment agreement. On April 28, 2000, the Arbitration panel awarded Martin
Frank $375,865. The award has been paid.
AHS was a defendant in a lawsuit filed by a competitor claiming that AHS's
The Office product infringes on a patent assigned to the said competitor. In
order to end this litigation and the resultant legal fees, in April 2000, AHS
paid the competitor $50,000 to settle the case and all claims of the competitor.
On June 7, 2000, Coast sued TEI in the US District Court for the Central
District of California, Case No. CV-00-06115 NM (RZx), to collect $361,740 plus
interest, attorney fees and other related legal costs. Coast claimed that TEI is
liable to Coast on certain TEI guarantees of loans from Coast to USCG. On
September 20, 2000, TEI settled this lawsuit by paying Coast $199,000.
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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.
The deadline for submitting shareholder proposals for inclusion in TEI's
proxy statement and form of proxy for TEI's May 30, 2001, annual meeting of
shareholders is November 30, 2000.
Item 6. Exhibits and Reports on Form 8-K.
As reported in TEI's Form 8-K dated June 26, 2000, TEI's principal
executive offices were relocated to 275 North Franklin Turnpike, Suite 230,
Ramsey, NJ 07446. Telephone number (201) 760-9900. Fax number (201) 760-9901.
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: September, 25 2000
/s/ Julie Sansom-Reese
-----------------------------
Interim Chief Financial Officer
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