SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTON 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 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 October 31, 2000, 8,148,656 shares of Common Stock were outstanding.
1
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INDEX
Page
PART I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2000 (unaudited)
and December 31, 1999................................................3
Consolidated Statements of Operations for the periods
ended September 30, 2000 and 1999 (unaudited)........................5
Consolidated Statements of Cash Flows for the periods
ended September 30, 2000 and 1999 (unaudited)........................7
Notes to Consolidated Financial Statements...........................9
Item 2. Management's Discussion and Analysis or Plan of Operation.....11
PART II - Other Information............................................17
Item 1. Legal Proceedings..........................................17
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
Signature..............................................................18
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
September 30, December 31,
2000 1999
------------- -------------
CURRENT ASSETS
Cash and cash equivalents....................$ 633,509 $ 894,261
Certificate of deposit....................... 151,314 260,294
Accounts and notes receivable
Trade, net................................ 4,800,833 3,352,887
Notes..................................... - 180,146
Other..................................... 62,426 67,901
Inventories, net ............................ 1,972,225 1,611,358
Prepaid expenses and other current assets.... 706,647 601,257
----------- ----------
Total current assets................... 8,326,954 6,968,104
----------- ----------
PROPERTY AND EQUIPMENT
Facsimile and business center equipment...... 7,587,714 8,175,530
Other equipment.............................. 1,051,490 959,814
Furniture and fixtures....................... 227,944 214,271
Vehicles..................................... 46,262 14,262
Leasehold improvements....................... 77,325 51,378
----------- ----------
8,990,735 9,415,255
Less accumulated depreciation and
amortization.............................. (1,714,179) (1,426,888)
----------- ----------
Net property and equipment............. 7,276,556 7,988,367
----------- ----------
OTHER ASSETS
Notes receivable, net of current portion..... 4,269 7,031
Deferred financing costs, net................ 407,062 688,875
Other........................................ 16,517 26,461
---------- ----------
Total other assets..................... 427,848 722,367
---------- ----------
TOTAL ASSETS......................................$ 16,031,358 $15,678,838
========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
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TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Continued
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
September 30, December 31,
2000 1999
------------- ------------
CURRENT LIABILITIES
Line of credit...............................$ 1,717,754 $ 389,532
Current portion of long-term debt............ 600,622 2,316,796
Current portion of capital lease payable..... 3,044 -
Trade accounts payable....................... 2,356,064 1,846,642
Accrued liabilities.......................... 586,434 948,687
Other current liabilities.................... 44,119 44,119
---------- ----------
Total current liabilities............. 5,308,037 5,545,776
---------- ----------
LONG-TERM DEBT, less current portion.............. 2,479,362 2,556,174
CAPITAL LEASE PAYABLE, less current portion....... 13,532 -
EXCESS OF NET ASSETS OF COMPANIES ACQUIRED
OVER COST, NET............................... 3,642,829 4,033,132
---------- ----------
Total liabilities..................... 11,443,760 12,135,082
STOCKHOLDERS' EQUITY
Preferred stock - $1.00 par value; 1,000,000 shares
authorized; 120,588 (unaudited)and 119,588 Class A
issued and outstanding at September 30, 2000 and
December 31, 1999, respectively; liquidation
preference of $633,087 (unaudited) and $627,837 at
September 30, 2000 and December 31,
1999, respectively.............................. 120,588 119,588
Common stock - $0.01 par value; 50,000,000
shares authorized; 8,148,656 (unaudited)
and 7,034,684 shares issued and
outstanding at September 30, 2000 and
December 31, 1999, respectively................. 81,487 70,347
Additional paid-in capital....................... 14,398,022 13,225,368
Accumulated deficit.............................. (10,012,499) (9,871,547)
---------- ----------
Total stockholders' equity............ 4,587,598 3,543,756
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........$ 16,031,358 $15,678,838
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
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TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
2000 1999 2000 1999
REVENUES --------- --------- ---------- ----------
Revenues..............................$6,993,580 $4,272,788 $18,368,540 $ 9,217,203
Service revenue....................... - - - 2,775,147
--------- --------- ---------- ----------
6,993,580 4,272,788 18,368,540 11,992,350
COST OF REVENUES
Cost of revenues...................... 4,657,752 3,448,920 11,444,503 7,879,406
Direct servicing costs................ - - - 1,586,638
--------- --------- ---------- ----------
4,657,752 3,448,920 11,444,503 9,466,044
--------- --------- ---------- ----------
GROSS PROFIT............................... 2,335,828 823,868 6,924,037 2,526,306
OPERATING EXPENSES
Selling, general and administrative... 1,625,196 1,028,714 5,408,701 3,956,373
Inventory obsolescence provision...... 3,000 15,000 9,000 215,930
Depreciation and amortization of
property and equipment............. 345,246 17,391 1,020,353 254,526
Lawsuit settlement.................... 199,000 - 549,086 -
Amortization of excess of net assets
of companies acquired over cost.... (130,101) - (390,303) -
--------- --------- ---------- ----------
2,042,341 1,061,105 6,596,837 4,426,829
--------- --------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS.............. 293,487 (237,237) 327,200 (1,900,523)
OTHER INCOME (EXPENSES)
Interest income....................... 4,456 15,581 16,177 47,574
Interest expense...................... (246,768) (11,940) (648,831) (152,652)
Amortization of deferred financing
costs.............................. (102,649) - (445,366) 18,494
Other................................. 29,902 6,098 76,109 39,003
--------- --------- ---------- ----------
(315,059) 9,739 (1,001,911) (47,581)
--------- --------- ---------- ----------
LOSS BEFORE PROVISION FOR
INCOME TAXES AND EXTRAORDINARY GAIN.... (21,572) (227,498) (674,711) (1,948,104)
PROVISION FOR INCOME TAXES................. - - - -
--------- --------- ---------- ----------
LOSS BEFORE EXTRAORDINARY GAIN............. (21,572) (227,498) (674,711) (1,948,104)
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - Continued
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ----------
EXTRAORDINARY GAIN........................ - - 568,750 -
--------- --------- --------- ----------
NET LOSS.................................. $ (21,572) $ (227,498) $ (105,961) $(1,948,104)
========= ========= ========= ==========
Net loss attributable to
common stockholders...................$ (32,859) $ (238,351) $ (140,952) $(1,987,523)
========= ========= ========= ==========
Basic and diluted net loss before
extraordinary gain per share
attributable to common shareholders...$ 0.00 $ (0.04) $ (0.09) $ (0.39)
Basic and diluted extraordinary gain
attributable to common shareholders...$ - $ - $ .07 $ -
--------- --------- --------- ----------
Basic and diluted net loss
per share attributable to common
shareholders..........................$ 0.00 $ (0.04) $ (0.02) $ (0.39)
========= ========= ========= ==========
Number of weighted-average shares of
common stock outstanding (basic
and diluted).......................... 8,128,730 5,414,026 7,979,526 5,050,140
========= ========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
------------------
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES ---------- ----------
Net loss..............................................$ (105,961) $(1,948,104)
Adjustments to reconcile net loss to net
cash used by operating activities:
Common stock issued for compensation............. (45,000) 404,454
Depreciation and amortization of property
and equipment................................. 1,020,353 254,483
Provision for bad debts.......................... 353,976 161,576
Provision for obsolete inventory................. (194,549) 120,142
Write-off of notes receivable.................... 80,146 -
Loss on sale of property and equipment........... - 2,170
Extraordinary gain on retirement of note payable. (568,750) -
Amortization of deferred financing costs......... 445,366 18,494
Amortization of excess of net assets
of companies acquired over cost............... (390,303) -
Change in operating assets and liabilities
Accounts receivable - trade................ (1,801,922) (1,155,689)
Accounts receivable - other................ 5,475 (38,448)
Inventories................................ (166,318) 648,677
Prepaid expenses and other current assets.. (105,390) (220,413)
Other assets............................... 9,944 10,176
Trade accounts payable..................... 509,422 787,864
Accrued liabilities........................ (362,253) 1,072,980
Deferred service liability................. - (199,163)
---------- ----------
Net cash used by operating activities................. (1,315,764) (80,801)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment................ (367,285) (21,287)
Proceeds from sale of property and equipment....... 76,031 21,512
Payments received on notes receivable.............. 102,762 39,557
Advance to related party .......................... - (472,397)
Proceeds from sale of certificate of deposit....... 108,980 -
Cash in de-consolidation of subsidiary............. - (316,262)
Increase in restricted cash........................ - (1,400,000)
---------- ----------
Net cash used by investing activities................. (79,512) (2,148,877)
---------- ----------
The accompanying notes are an integral part of these
consolidated financial statements.
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TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
------------------
2000 1999
CASH FLOWS FROM FINANCING ACTIVITIES ---------- ---------
Payments on capital lease.......................... (712) -
Net activity on line of credit..................... 1,328,222 (255,590)
Repayment of long-term debt........................ (692,986) (36,834)
Proceeds from long-term debt....................... 500,000 -
Cash received on shareholder receivable............ - 25,000
Proceeds from sale of preferred stock, common
stock and warrants.............................. - 18,750
Deferred share subscription........................ - 1,430,000
---------- ----------
Net cash provided by financing activities............. 1,134,524 1,181,326
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS............. (260,752) (1,048,352)
Cash and cash equivalents at beginning
of period........................................ 894,261 1,399,060
---------- ----------
Cash and cash equivalents at end of period............$ 633,509 $ 350,708
========== ==========
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...............................$ 34,991 $ 36,111
========== ==========
Issuance of common stock for financing costs.....$ 163,553 $ -
========== ==========
Acquisition of property and equipment
through capital lease.........................$ 17,288 $ -
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
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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 for the nine month period ended September 30, 2000. The results for the
nine month period ended September 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"),
doing business as Universal Battery, 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
to customers throughout the United States.
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 nine month period ended September, 1999 financials. The
following unaudited proforma consolidated results for the three and nine month
period ended September 30, 1999 assumes the acquisition of AHS occurred as of
January 1, 1999.
(unaudited) (unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1999
------------ -------------
Revenues................................. $ 6,361,018 $ 18,528,835
Net loss................................. (978,438) (3,729,112)
Basic and diluted loss per share
attributable to common shareholders.... $ (0.18) $ (0.74)
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NOTE D - LOSS PER SHARE
Basic net loss per share is computed by dividing net loss, increased by the
preferred stock dividends of $11,287 and $10,853 for the three month periods
ending September 30, 2000 and 1999 and $34,991 and $39,419 for the nine month
periods ending September 30, 2000 and 1999, respectively by the weighted average
number of common shares outstanding for the period. Diluted net loss per share
is computed by dividing net 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 the three and
nine month periods ended September 30, 2000 and 1999 as they are antidilutive.
NOTE E - 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 were amortized over three months, the initial
maturity period of the loan. (See Note G)
On June 24, 2000, the Board of Directors adopted the 2000 Incentive Stock
Option Plan (the "2000 ISOP"). At September 30, 2000, there are 52,000 options
issued and outstanding under the 2000 ISOP. These options are exercisable at
$0.7188 per share with an expiration date three years from date of issuance.
There are an additional 1,948,000 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.
On October 12, 2000 TEI announced the extension of the expiration date of
all Class A Warrants from December 1, 2000 to November 30, 2001. Each warrant
has an exercise price of $3.30 per share and entitles the holder to purchase
1.06 shares of the common stock. Thus, a warrant holder would surrender the
warrant agreement and remit $3.498 for 1.06 shares. In respect to any fractional
shares, TEI shall pay to the warrant holder an amount in cash equal to the
fraction multiplied by the fair market value of the fractional share.
NOTE F - 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 G - RELATED PARTIES
In connection with the purchase of AHS, TEI incurred certain debt. 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.
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The $500,000 cash was raised by a loan from Caspic International, Inc.
William Tan Kim Wah, the President, CEO and a significant shareholder of TEI 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. TEI is currently negotiating an extension of the
maturity date with Caspic International, Inc. (See Note E)
NOTE H - LITIGATION
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 began
using the equity method to account for its minority interest. In March 2000,
Coast Business Credit, Inc., ("Coast"), USCG's senior bank creditor, foreclosed
on all of USCG's assets, effectively terminating all of USCG's operations. TEI
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. TEI settled this lawsuit on September 20, 2000 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. 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 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. 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 nine months ended September 30, 2000 do
not include US Computer Group ("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 nine months ended
September 30, 2000 include nine months of AHS activity with no operations of AHS
for the comparative 1999 nine month period.
As previously discussed, TEI was advised on March 22, 2000 that Coast
Business Credit, Inc. ("Coast"), has declared that USCG defaulted on certain
11
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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 with Coast by paying $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
September 30, 2000 this settlement had been paid in full.
In August 2000, CCC launched its first retail branch known as Battery World
in Oklahoma City, Oklahoma. While the main focus of Battery World is industrial
accounts, the operation will also service the higher margin retail market.
Oklahoma City will serve as the primary distribution hub for Battery World and
will service Oklahoma, Kansas and the Texas panhandle. This 3200 square foot
facility has approximately 1200 square feet of retail space and 2000 square feet
of warehouse space. CCC projects that Battery World will generate $500,000 in
revenues for fiscal year 2001 which will increase to $750,000 in 2002. CCC
management believes that gross margins at Battery World should meet or exceed
current margins on its existing sales.
On October 12, 2000, TEI announced the extension of the expiration date of
the Class A Warrants from December 1, 2000 to November 30, 2001. Each warrant
has an exercise price of $3.30 per share and entitles the holder to purchase
1.06 shares of the Tech Electro Industries Common Stock. Thus, a warrant holder
would surrender the warrant agreement and remit $3.498 for 1.06 shares. In
respect to any fractional shares, TEI shall pay to the warrant holder an amount
in cash equal to the fraction multiplied by the fair market value of the
fractional share.
On October 23, 2000, AlphaNet Hospitality Systems Inc. announced that it
has selected the full line of Marquis Series telephones by TeleMatrix Inc. for
sale to hotels worldwide. This alliance builds upon an existing agreement
through which AlphaNet marketed TeleMatrix's Cordless phones under the InnPhone
brand name. The new agreement is part of a larger strategic alliance between the
companies, whereby AlphaNet will become a premier distributor for TeleMatrix.
The TeleMatrix phones will be marketed globally as InnPhonePlus to hotel chains
and independents, not just properties where AlphaNet currently provides its
other products and services. AlphaNet will sell TeleMatrix's entire line of
guestroom telephones.
RESULTS OF OPERATIONS
Currently, Tech Electro Industries, Inc.'s ("TEI") operations are conducted
through its subsidiaries, Computer Components Corporation ("CCC"), doing
business as Universal Battery and AlphaNet Hospitality Systems Inc. ("AHS").
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999.
REVENUES
For the three month period ended September 30, 2000, TEI had revenues of
$6,993,580 compared to $4,272,788 for the similar period ended September 30,
1999, an increase of $2,720,792 (63.7%).
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CCC and AHS had revenues of $5,400,148 and $1,593,432 for the three month
period ended September 30, 2000, respectively, compared to revenues of
$4,272,788 and none for the similar period in 1999, respectively. CCC's increase
in revenues is attributable to a number of factors. CCC's battery and related
product sales continue to grow due to CCC's entrance into other battery markets,
including consumer, medical and security. In addition, CCC has started to use
direct shipping for larger volume orders which has enabled CCC to compete with
the larger market items. Also, during the third quarter of 2000, CCC's largest
customer, Schumacher Electric Corp., added a new product to its existing product
lineup, resulting in CCC's customer significantly increasing its purchase order
volume.
COST OF REVENUES
For the three month period ended September 30, 2000, TEI's cost of revenues
increased to $4,657,752 compared to cost of revenues of $3,448,920 for the
similar period in 1999, an increase of $1,208,832 (35.0%).
CCC's and AHS's cost of revenues totaled $4,324,867 and $332,885 for the
three month period ended September 30, 2000, compared to $3,448,920 and none for
the similar period in 1999, respectively. Increased revenues at CCC during the
three month period ended September 30, 2000 compared to the similar period in
1999, resulted in an increase in the cost of revenues during the three month
period ended September 30, 2000 compared to the similar period in 1999. Cost of
revenues as a percentage of revenues for CCC decreased slightly to 80.08%
compared to 80.72% for the similar period in 1999. This decrease was largely
attributable to the increased volume of direct shipments from CCC's suppliers to
their customers.
GROSS PROFIT
For the three month period ended September 30, 2000, TEI recorded a gross
profit of $2,335,828 compared to $823,868 for the similar period in 1999, an
increase of $1,511,960 (183.52%).
CCC's and AHS's gross profit totaled $1,075,281 and $1,260,547 for the
three month period ended September 30, 2000, compared to $823,868 and none for
the similar period in 1999, respectively.
Gross profit as a percentage of revenue for the three month period ended
September 30, 2000 for CCC increased slightly to 19.91% compared to 19.28% for
the similar period in 1999. The increase was largely attributable to lower
overhead costs associated with the direct shipments to their customers.
OPERATING EXPENSES
For the three month period ended September 30, 2000, TEI's operating
expenses, consisting mainly of selling, general and administrative, depreciation
and amortization expenses increased to $2,042,341 compared to $1,061,105 for the
similar period in 1999, an increase of $981,236 (92.47%).
CCC's, AHS's, and TEI's selling, general and administrative expenses
totaled $729,611, $760,604 and $134,981, respectively for the three month period
ended September 30, 2000, compared to $525,411, none, and $503,303 for the
similar period in 1999, respectively. The increase in CCC's selling, general and
administrative expenses was largely attributable to increases in legal fees
(including settlements), advertising and travel costs. The decrease in TEI's
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selling, general and administrative expenses was largely attributable to
a decrease in consulting fees.
For the three month period ended September 30, 2000, TEI's depreciation and
amortization expense was $345,246 compared to $17,391 for the similar period in
1999, an increase of $327,855 (1885.20%). The increase is largely attributable
to AHS's depreciation of assets of $321,446.
Amortization of excess of net assets of companies acquired over costs
relates to the acquisition of AHS.
INTEREST EXPENSE AND FINANCING FEES
For the three month period ended September 30, 2000, TEI incurred $246,768
in interest expense compared to $11,940 for the similar period in 1999, an
increase of $234,828 (1,966.74%). The majority of the increase in interest
expense is attributable to the $2,525,000 loan which was obtained to acquire AHS
in October 1999. AHS paid $188,673 in interest on this loan during the three
month period ended September 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 $102,649 for the three month
period ended September 30, 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999.
REVENUES
For the nine month period ended September 30, 2000, TEI had revenues of
$18,368,540 compared to $11,992,350 for the similar period in 1999, an increase
of $6,376,190 (53.17%).
CCC and AHS had revenues of $12,488,111 and $5,880,429 for the nine month
period ended September 30, 2000, respectively, compared to revenues of
$8,856,671 and none for the similar period in 1999, respectively. USCG had
revenues of $3,135,679 for the nine months ended September 30,1999 and none
during the same period for 2000, due to its de-consolidation. CCC's increase in
revenues is attributable to a number of factors. CCC's battery and related
products product sales continue to grow due to CCC's entrance into other battery
markets, including consumer, medical and security. In addition, CCC has started
to use direct shipping for larger volume orders which has enabled CCC to compete
with the larger market items. Also, during the third quarter of 2000, CCC's
largest customer, Schumacher Electric Corp., added a new product to its existing
product lineup,resulting in CCC's customer significantly increasing its purchase
order volume.
COST OF REVENUES
For the nine month period ended September 30, 2000, TEI's cost of revenues
increased to $11,444,503 compared to $9,466,044 for the similar period in 1999,
an increase of $1,978,459 (20.90%).
CCC and AHS's cost of revenues totaled $9,937,779 and $1,506,724 for the
nine month period ended September 30, 2000, compared to $7,063,062 and none
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for the similar period in 1999, respectively. Prior to the de-consolidation of
USCG, USCG contributed $2,402,982 to the costs of revenues for the nine month
period ended September 30, 1999 (none for 2000). Increased revenues at CCC
during the nine month period ended September 30, 2000 compared to the similar
period in 1999,resulted in an increase in the cost of revenues during the nine
month period ended September 30, 2000 compared to the similar period in 1999.
Cost of revenues as a percentage of revenues for CCC decreased slightly to
79.58% compared to 79.70% for the similar period in 1999. This decrease was
largely attributable to the increased volume of direct shipments from CCC's
suppliers to their customers.
GROSS PROFIT
For the nine month period ended September 30, 2000, TEI recorded a gross
profit of $6,924,037 compared to $2,526,306 for the similar period in 1999, an
increase of $4,397,731 (174.08%).
CCC and AHS's gross profit totaled $2,550,332 and $4,373,705 for the nine
month period ended September 30, 2000, compared to $1,797,609 and none for the
similar period in 1999, respectively. USCG's gross profit totaled $728,697 for
the period ended September 30, 1999 (none for 2000).
Gross profit as a percentage of revenue for CCC increased slightly to
20.42% compared to 20.30% for the similar period in 1999. The increase was
largely attributable to lower overhead costs associated with CCC's direct
shipments to their customers and the focus on battery and battery-related
products, which produce a higher profit margin than component sales.
OPERATING EXPENSES
For the nine month period ended September 30, 2000, TEI's operating
expenses, consisting mainly of selling, general and administrative, legal
settlement, depreciation and amortization expenses increased to $6,596,837
compared to $4,426,829 for the similar period in 1999, an increase of
$2,170,008(49.02%).
CCC's, AHS's, and TEI's selling, general and administrative expenses
totaled $2,009,862, $2,979,299, and $419,540, respectively for the nine month
period ended September 30, 2000, compared to $1,348,955, none, $2,607,418
(includes USCG) for the similar period in 1999, respectively. The increase in
CCC's selling, general and administrative expenses was largely attributable to
increases in legal fees (including settlements), advertising, travel costs and
the writing off of a note receivable. The decrease in TEI's selling, general and
administrative expenses was largely attributable to the decrease consulting
fees.
For the nine month period ended September 30, 2000, TEI's depreciation and
amortization expense was $1,020,353 compared to $254,526 for the similar period
in 1999, an increase of $765,827 (300.88%). The increase is largely attributable
to AHS's depreciation of assets of $953,932 for the nine month period ended
September 30, 2000 and USCG incurring $181,803 in amortization costs for the
first half of 1999, none in 2000.
Amortization of excess of net assets of companies acquired over costs
relates to the acquisition of AHS.
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INTEREST EXPENSE AND FINANCING FEES
During the nine month period ended September 30, 2000, TEI incurred
$648,831 in interest expense compared to $152,652 for the similar period in
1999, an increase of $496,179 (325.04%). The increase in interest expense is
attributable to a $2,525,000 loan which was obtained to acquire AHS in October
1999. AHS paid $511,291 in interest on this loan during the nine month period
ended September 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 $445,366 for the nine month
period ended September 30, 2000, 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 September 30, 2000,
TEI recorded $9,000 as a reserve for inventory allowance, compared to $215,930
for the similar period in 1999. For the nine months of 1999, CCC recorded a
$95,750 inventory reserve for slow moving passive components and USCG recorded a
$120,000 reserve prior to the de-consolidation.
LIQUIDITY
TEI had cash and cash equivalents of $633,509 and $350,708 at September 30,
2000 and 1999, respectively.
Net cash used cash by operations was $1,315,764 for the nine month period
ended September 30, 2000 compared to $80,801 for the similar period in 1999. The
majority of the cash used during 2000 related to an increase in accounts
receivable of $1,801,922 which was offset by an increase in accounts payable of
$509,422. The 1999 cash used by operating activities was due to larger increases
in accounts receivable than accounts payable.
Net cash used by investing activities for the nine-month period ended
September 30, 2000, was $79,512 compared to $2,148,877 for the similar period in
1999. The majority of the cash was used to purchase new property and equipment
in 2000, offset by proceeds from the sale of property and equipment, a
certificate of deposit and payments received on a note receivable. During the
nine month ended September 30, 1999 cash was used primarily for advances to a
related party of $472,397 and cash in the de-consolidating of USCG of $316,262,
and the increases in restricted cash of $1,400,000.
Net cash provided by financing activities for the nine-month period ended
September 30, 2000, was $1,134,524 compared to $1,181,326 for the similar period
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in 1999. The net cash provided by financing activities for the nine months ended
September 30, 2000 comprised of payments on capital leases, the net change in
activity on the line of credit, and proceeds of $500,000 received from its
long-term debt offset by repayments of $692,986. The net cash provided by
financing activities for the nine months ended September 30, 1999 was mainly
attributable to cash received from deferred common stock subscriptions.
CCC has a $3,000,000 line of credit with a financial institution, payable
on demand, with interest payable monthly at prime plus 2%, maturing August 2000.
At September 30, 2000, $1,717,754 of the line of credit was outstanding, while
$1,129,658 remained available for borrowings under the line of credit.
TEI has a $500,000 note payable due on November 25, 2000 with a 12% per
annum interest rate. TEI is currently negotiating an extension of the maturity
date with Caspic International, Inc.
AHS has a $2,375,000 note payable due on October 2001 with a 20.5% interest
rate with a maturity date of October 2001. AHS is currently seeking alternative
financing.
TEI believes that cash flows provided by its operations and cash flows
available under the line of credit will be sufficient to meet its needs in the
foreseeable future.
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.
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.
None.
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 13, 2000
/s/ Julie Sansom-Reese
-----------------------------
Chief Financial Officer
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