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 March 31, 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.
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(Name of Small Business Issuer in its Charter)
Texas 75-2408297
------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
477 Madison Avenue, 24th Floor, New York, New York 10022
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(Address of principal executive office
(212) 583-0900
----------------------------
(Issuer's telephone number)
Check whether the issuer has (1) filed all reports required by Section 12 or
15(d) of the Exchange Act during the past 12 months, and 2) been subject to such
filing requirements for the past ninety (90) days. Yes [ X ] No [ ]
As of March 31, 2000, 8,103,039 shares of Common Stock were outstanding.
<PAGE>
THIS DOCUMENT IS PREPARED AND FILED UNDER THE REQUIREMENTS OF REGULATIONS S-B OF
THE SECURITIES AND EXCHANGE COMMISSION, EFFECTIVE JULY 31, 1992.
INDEX
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Page
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PART I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet at March 31, 2000 (unaudited)
and December 31, 1999. . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the three
months ended March 31, 2000 and 1999 (unaudited) . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 and 1999 (unaudited) . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . F-9
Item 2. Management's Discussion and Analysis or Plan of Operation.. 15
PART II - Other Information. . . . . . . . . . . . . . . . . . . . . 18
Item 1. Legal Proceedings.. . . . . . . . . . . . . . . . . . . . . 18
Item 2. Changes in Securities.. . . . . . . . . . . . . . . . . . . 18
Item 3. Defaults Upon Senior Securities.. . . . . . . . . . . . . . 18
Item 4. Submission of Matters to a Vote of Securities Holders.. . . 18
Item 5. Other Information.. . . . . . . . . . . . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 19
Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
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2
<PAGE>
PART I - FINANCIAL INFORMATION
- ----------------------------------
Item 1. Financial Statements
<TABLE>
<CAPTION>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
Mar 31, 2000 Dec 31, 1999
------------ --------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . $ 695,090 $ 894,261
Certificate of deposit . . . . . . . . . 262,940 260,294
Accounts and notes receivable
Trade, net of allowance for doubtful
accounts of $281,028 and $282,498 in
2000 and 1999, respectively . . . . . . 3,424,597 3,352,887
Notes . . . . . . . . . . . . . . . . 180,146 180,146
Other . . . . . . . . . . . . . . . . 46,711 67,901
Inventories, net . . . . . . . . . . . 1,951,219 1,611,358
Prepaid expenses and other current assets 416,131 601,257
------------ --------------
Total current assets. . . . . . . . . 6,976,834 6,968,104
------------ --------------
PROPERTY AND EQUIPMENT
Facsimile and business center equipment 8,156,196 8,175,530
Other equipment . . . . . . . . . . . . 1,040,225 959,814
Furniture and fixtures . . . . . . . . 214,841 214,271
Vehicles . . . . . . . . . . . . . . . 14,262 14,262
Leasehold improvements . . . . . . . 73,232 51,378
------------ --------------
9,498,756 9,415,255
Less accumulated depreciation and
amortization . . . . . . . . . . . . (1,779,271) (1,426,888)
------------ --------------
Net property and equipment. . . . . . 7,719,485 7,988,367
------------ --------------
OTHER ASSETS
Notes receivable, net of current portion 6,250 7,031
Deferred financing costs, net . . . . . . 694,704 688,875
Other . . . . . . . . . . . . . . . . . . 23,943 26,461
------------ --------------
Total other assets. . . . . . . . . . 724,897 722,367
------------ --------------
TOTAL ASSETS. . . . . . . . . . . . . . . . $ 15,421,216 $ 15,678,838
============= ==============
</TABLE>
The accompanying footnotes are an integral part of these
consolidated financial statements.
- Continued -
F-3
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<CAPTION>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Continued
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
Mar 31, 2000 Dec 31, 1999
-------------- --------------
<S> <C> <C>
CURRENT LIABILITIES
Line of credit . . . . . . . . . . . . . . . . . . . . . . . $ 604,525 $ 389,532
Current portion of long-term debt . . . . . . . . . . . . . . . . . 700,621 2,316,796
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . 1,679,012 1,846,642
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . 1,126,992 948,687
Other current liabilities . . . . . . . . . . . . . . . . . . . . . 44,119 44,119
-------------- --------------
Total current liabilities. . . . . . . . . . . . . . . . . 4,155,269 5,545,776
-------------- --------------
LONG-TERM DEBT, less current portion . . . . . . . . . . . . . . 2,531,487 2,556,174
EXCESS OF NET ASSETS OF COMPANIES ACQUIRED
OVER COST, NET . . . . . . . . . . . . . . . . . . . . . . . 3,903,031 4,033,132
-------------- --------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . 10,589,787 12,135,082
COMMITMENTS AND CONTINGENCIES (Note N)
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; 8,103,139 and 7,034,684
shares issued and outstanding in 2000 and
1999, respectively. . . . . . . . . . . . . . . . . . . . . . . . 81,031 70,347
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 14,376,922 13,225,368
Accumulated deficit . . . . . . . . . . . . . . . . . . .. . (9,746,112) ( 9,871,547)
-------------- --------------
Total stockholders' equity . . . . . . . . . . . . . . . . 4,831,429 3,543,756
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . $ 15,421,216 $ 15,678,838
============== ==============
</TABLE>
The accompanying footnotes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2000 and 1999
(Unaudited)
2000 1999
------------- ------------
<S> <C> <C>
REVENUES
Revenues . . . . . . . . . . . . . . . . . . . . $ 5,730,795 $ 2,442,950
Service revenue. . . . . . . . . . . . . . . . . . - 2,775,147
------------- ------------
5,730,795 5,218,097
COST OF REVENUES
Cost of revenues . . . . . . . . . . . . . . . . 3,296,063 2,448,011
Direct servicing costs . . . . . . . . . . . . . . - 1,586,638
------------- ------------
3,296,063 4,034,649
------------- ------------
GROSS PROFIT . . . . . . . . . . . . . . . . . . . 2,434,732 1,183,448
OPERATING EXPENSES
Selling, general and administrative . . . . . . . 1,861,428 2,388,499
Inventory obsolescence provision . . . . . . . . . 3,000 185,430
Depreciation and amortization of property
and equipment . . . . . . . . . . . . . . . . . 390,640 218,353
Lawsuit settlement . . . . . . . . . . . . . . . 400,086 -
Amortization of excess of net assets
of companies acquired over cost . . . . . . . . (130,101) -
------------- ------------
2,525,053 2,792,282
------------- ------------
LOSS FROM OPERATIONS . . . . . . . . . . . . . . . . (90,321) (1,608,834)
OTHER INCOME (EXPENSES)
Interest income . . . . . . . . . . . . . . . . . 7,968 13,696
Interest expense . . . . . . . . . . . . . . . . (200,012) (113,903)
Amortization of deferred financing cost . . . . . (157,725) (18,494)
Other 9,210 (2,170)
------------- ------------
(340,559) (120,871)
LOSS BEFORE PROVISION FOR INCOME TAXES AND
EXTRAORDINARY GAIN . . . . . . . . . . . . . . . . (430,880) (1,729,705)
PROVISION FOR INCOME TAXES . . . . . . . . . . . . - -
------------- ------------
LOSS BEFORE EXTRAORDINARY GAIN . . . . . . . . . . (430,880) (1,729,705)
EXTRAORDINARY GAIN . . . . . . . . . . . . . . . . . 568,750 -
------------- ------------
NET INCOME (LOSS). . . . . . . . . . . . . . . . . $ 137,870 $(1,729,705)
------------- ------------
Net income (loss) attributable to common
stockholders $ 125,435 $(1,747,688)
============= ============
</TABLE>
The accompanying footnotes are an integral part of these
consolidated financial statements.
- Continued -
F-5
<PAGE>
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<CAPTION>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - Continued
For the Three Months Ended March 31, 2000 and 1999
(Unaudited)
2000 1999
------------- -----------
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Basic and diluted net loss before extraordinary gain
per share attributable to common shareholders $ (0.05) $ (0.37)
============== ===========
Basic and diluted extraordinary gain attributable
to common shareholders . . . . . . . . . . . . . . $ 0.07 $ -
============== ===========
Basic and diluted net income (loss) per share
attributable to common shareholders $ 0.02 $ (0.37)
============== ===========
Number of weighted-average shares of common
stock outstanding (basic and diluted) 7,688,722 4,808,415
============== ===========
</TABLE>
The accompanying footnotes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Three Months Ended March 31, 2000 and 1999
(Unaudited)
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES -------------- ------------
<S> <C> <C>
Net income (loss). . . . . . . . . . . . . . . . . . $ 137,870 $ (1,729,705)
Adjustments to reconcile net income (loss) to net
cash provided by (used by) operating activities:
Shares issued for compensation (45,000) 18,496
Depreciation and amortization of property
and equipment 390,640 218,353
Provision for bad debts 4,100 160,600
Provision for obsolete inventory 3,000 185,430
Loss on sale of property and equipment - 2,170
Extraordinary gain on note retirement (568,750) -
Amortization of deferred financing costs 157,725 18,494
Amortization of excess of net assets
of companies acquired over cost (130,101) -
Change in operating assets and liabilities
(Increase)decrease -
Accounts receivable - trade. . . . . . . . . (75,810) 326,400
Accounts receivable - other. . . . . . . . . 21,190 (3,348)
Inventories. . . . . . . . . . . . . . . . . (342,861) 296,264
Prepaid expenses and other current assets. . 185,126 (21,535)
Other assets . . . . . . . . . . . . . . . . 2,518 15,694
Increase(decrease) in -
Trade accounts payable . . . . . . . . . . . (167,630) 43,824
Accrued liabilities. . . . . . . . . . . . . 178,305 980,757
Deferred service liability . . . . . . . . . - (199,163)
-------------- --------------
Net cash provided by (used by) operating activities. (249,678) 312,731
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment. . . . . . . . (158,696) (17,501)
Proceeds on sale of property and equipment . . . . 36,938 21,512
Payments received on notes receivable. . . . . . . 781 39,557
Advance to related party . . . . . . . . . . . . . - (222,344)
Purchase of certificate of deposit . . . . . . . . (2,646) -
Cash in de-consolidation of subsidiary . . . . . . - (316,262)
-------------- --------------
Net cash used by investing activities. . . . . . . . (123,623) (495,038)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net activity on line of credit . . . . . . . . . . 214,993 (750,827)
Repayment of long-term debt. . . . . . . . . . . . (540,863) (36,834)
Proceeds from long-term debt.. . . . . . . . . . . 500,000 -
Cash received on shareholder receivable. . . . . . - 25,000
-------------- --------------
Net cash provided by (used by) financing activities. 174,130 (762,661)
-------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS. . . . . . (199,171) (944,968)
</TABLE>
The accompanying footnotes are an integral part of these
consolidated financial statements.
F-7
<PAGE>
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<CAPTION>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For The Three Months Ended March 31, 1999 and 2000
(Unaudited)
2000 1999
------------ -----------
<S> <C> <C>
Cash and cash equivalents at beginning
of period. . . . . . . . . . . . . . . . . 894,261 1,399,060
------------- ----------
Cash and cash equivalents at end of period . $ 695,090 $ 454,092
============= ==========
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 $ 12,435 $ 17,983
============= ==========
Fair value of warrants issued and recorded
as deferred financing costs $ 163,554 $ -
============= ==========
</TABLE>
The accompanying footnotes are an integral part of these
consolidated financial statements.
F-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 three month period ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
NOTE B - ORGANIZATION
Tech Electro Industries, Inc. ("TEI") was formed on January 10, 1992 as a Texas
corporation. The Company's subsidiary, Computer Components Corporation ("CCC"),
stocks and sells electronic components. A significant portion of CCC's business
is involved in the stocking and sale of 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.
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 the Company 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 TheOffice, full service business
centers, for business travelers staying at hotels.
NOTE C - CONSOLIDATION OF AHS
The Company acquired AHS in October 1999, and thus AHS results are not
reflected in the Company's first quarter 1999 financials. The following
unaudited pro forma consolidated results for the three month period ended March
31, 1999 assumes the acquisition of AHS occurred as of January 1, 1999:
(unaudited)
March 31, 2000
--------------
Revenues $ 7,335,734
Net loss (2,263,187)
Basic and diluted loss per
share $ (0.47)
F-9
<PAGE>
NOTE D - DIVIDENDS
Dividends were declared on March 8, 2000 for Class A Preferred Stock at $0.0975
per share totaling $12,435. 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, 2000 to stockholders of record at the close of business
of February 28, 2000.
NOTE E - INVENTORIES
Inventories consist of the following at March 31, 2000:
Electronic components, batteries and assembly
Materials. . . . . . . . . . . . . . . . . . . . . $ 1,929,183
Facsimile and business center inventory . . . . . . 435,878
Inventory obsolescence reserve. . . . . . . . . . . . (413,842)
------------
$ 1,951,219
============
NOTE F - NOTES RECEIVABLE
Notes receivable consist of the following at March 31, 2000:
Note receivable from a preferred stock
shareholder, due March 31, 1999 and
extended month-to-month thereafter,
bearing interest at 10.5%, interest
payments due quarterly, secured by
common stock of the Company . . . . . . . . . $ 180,146
Notes receivable, jointly and severally
from two minority shareholders with
interest at 6%, payable monthly at $312.50
plus interest, matures November 2001,
unsecured. . . . . . . . . . . . . . . . . . . . . 6,250
------------
Less current maturities . . . . . . . . . . . . (180,146)
------------
Long-term portion . . . . . . . . . . . . . . . . $ 6,250
============
NOTE G - LINE OF CREDIT
Line of credit at March 31, 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% at March 31, 2000), maturing
August, 2002 and secured by
accounts receivable, inventories,
equipment and intangibles of CCC.
Pursuant to borrowing base formulas,
as of March 31, 2000 additional
borrowings of $1,043,613 are available
under the line of credit. . . . . . . . . . . $ 604,525
============
F-10
<PAGE>
NOTE H - LONG-TERM DEBT
Long-term debt at March 31, 2000 consists of the following:
Promissory note to financing company,
with interest payable monthly at 12%,
principal due at maturity May 2000,
secured by stock of AHS . . . . . . . . . . . .$ 500,000
Non-interest bearing, unsecured note
payable to an investment company,
lump sum payment due at maturity on
June, 2000 . . . . . . . . . . . . . . . . . . . . 107,000
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 . . . . . . . . 93,621
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 . . . . . . . . . . . . . . . . . . . 940,600
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. . . . . . . . . . . . . . . . . . . 1,434,400
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%, maturing at
various dates though October 2002,
collateralized by facsimile and
business center equipment of AHS. . . . . . . . 156,487
-------------
Less current maturities . . . . . . . . . . . . . (700,621)
-------------
Long-term portion . . . . . . . . . . . . . . . $ 2,531,487
=============
NOTE I - 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. The Company's common stock equivalents are not
included in the diluted loss per share for March 31, 2000 and 1999 as they are
antidilutive. Therefore, diluted and basic loss per share is identical. Net
F-11
<PAGE>
NOTE I - INCOME(LOSS) PER SHARE (continued)
income(loss) per share for the three month period ending March 31, 2000 and 1999
has been decreased(increased) for dividends on preferred stock totaling $12,435
and $17,983, respectively.
NOTE J - WARRANTS AND STOCK OPTIONS
On February 16, 2000, the Company agreed to extend the exercise date of
1,000,000 options originally granted in connection with an equity offering by
two years to March 10, 2002, at the original exercise price of $2.50.
On February 24, 2000, the Company issued Caspic International, Inc. 250,000
warrants for providing a $500,000 loan. The warrants were issued at $0.73 with
a expiration date of February 25, 2005. The warrants were recorded at fair value
using the Black-Scholes model, and recorded as deferred financing fees, totaling
$163,554. The warrants are being amortized over three months, the initial
maturity period of the loan. (See Note M)
NOTE K - 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 March 31, 2000 was $130,101.
NOTE L - EXTRAORDINARY GAIN
The Company recognized an extraordinary gain of $568,750 in connection with the
retirement of a $2,100,000 note payable. The note was settled with $500,000
cash and 1,100,000 million common shares of the Company on February 25, 2000.
The shares and related debt settlement were recorded at the trading price of the
common stock on the date of the settlement which was $0.9375.
NOTE M - RELATED PARTIES
On October 26, 1999, the Company completed the acquisition of AlphaNet. As part
of this transaction, the Company arranged for a $2,525,000 credit facility for
AlphaNet to refinance its existing indebtedness; $1,525,000 of the said
indebtedness was refinanced through Appel Investments Inc. ("Appel"). William
Tan Kim Wah's brother, Kim Yeow Tan is an officer of Appel. In conjunction with
Appel's $1,525,000 loan to refinance AlphaNet indebtedness, AlphaNet paid a loan
origination fee of $150,737. The remaining balance of the indebtedness bears
interest at 20.5% per annum. The principal of the indebtedness is due in full
on October 26, 2001. As additional consideration for the refinancing, Appel
Investments Inc. received 116,703 Warrants to purchase the Common Stock of the
Company exercisable at $0.75 per share. The Warrants expire on October 20,
2004. AHS also borrowed $1,000,000 from a finance company that has a principal
who is also a shareholder of TEI. The Company paid an origination fee of
$98,828. The loan requires interest payments monthly at 20.5% per annum. The
principal is due in full on October 21, 2001. As additional consideration the
finance company 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, and recorded as deferred financing fees, and are being
amortized over the life of the respective loans.
F-12
<PAGE>
NOTE M - RELATED PARTIES (continued)
The Company engaged Placement & Acceptance, Inc. ("PAI"), a British Virgin
Islands corporation, to effect a private placement of securities, which was
consummated in December 1997. Mr. Tan is a director and shareholder of PAI. PAI
received fees of $112,000, inclusive of expenses, for acting as sales agent in
the placement. The Company also engaged PAI in October, 1999 to effect a private
placement of securities for the Company's acquisition of AlphaNet. PAI received
a placement fee of 500,000 warrants in consideration for services rendered. In
addition, the Company retained PAI to refinance the outstanding AlphaNet
indebtedness required to complete the acquisition. PAI received a placement fee
of 550,000 warrants in consideration for services rendered. The 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, and recorded as
deferred financing fees, and are being amortized over the life of the respective
loans.
On February 24, 2000, the Company renegotiated and settled in full its
$2,100,000 promissory note with PricewaterhouseCoopers, Inc. (Trustee of the
Estate of AlphaNet Telecom Inc.) that composed part of the purchase price
of the acquisition of AlphaNet. The promissory note was paid in full 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. Mr.
Tan is also a director and shareholder of Caspic International, Inc. The loan
is due on May 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 AlphaNet.
As additional consideration for the loan, the Company also issued warrants to
purchase 250,000 shares of Common Stock at $0.73 per share, exercisable
immediately, with an expiration date of February 25, 2005. (See Note J)
NOTE N - 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 March 31, 2000 are as follows:
2000 . . . . . . . . . . $ 174,702
2001 . . . . . . . . . . 106,798
2002 . . . . . . . . . . 21,744
-------------
$ 303,244
=============
Guarantees
In March, 1998, the Company 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 the Company guaranteed a payment made by Telstar to USCG
totaling $100,000 for working capital. In March 2000, a USCG bank creditor
F-13
<PAGE>
NOTE N - COMMITMENTS AND CONTINGENCIES (continued)
foreclosed on all of USCG's assets, effectively terminating all of USCG's
operations. TEI has guaranteed a portion of the USCG bank indebtedness. In
this regard, the said bank creditor has demanded that TEI pay $361,740 to
the bank pursuant to the guarantee. TEI is investigating its options in
response to these events. Management does not know how much, if any, of the
guarantee amount will ultimately be payable.
NOTE O - SUBSEQUENT EVENTS
On April 28, 2000 the Company was advised that the American Arbitration Board
awarded an ex-employee of CCC $375,865 for breach of the employee's employment
agreement. The liability is reflected in the accompanying financial statements
for the three months ended March 31, 2000 and is to be paid in May 2000.
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, AHS paid the competitor
$50,000 to settle the case and all claims of the competitor. The liability is
reflected in the accompanying financial statements for the three months ended
March 31, 2000 and was paid in April 2000.
F-14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and notes thereto included elsewhere
in this Form 10-QSB. Except for the historical information contained herein,
the discussion in this Form 10-QSB contains certain forward looking statements
that involve risks and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. The cautionary statements made in this
Form 10-QSB should be read as being applicable to all related forward-looking
statements wherever they appear in this Form 10-QSB. These statements include,
without limitation, statements concerning the potential operations and results
of the Company described below. The Company'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 the Company's Annual Report on Form 10-KSB for the year ended December 31,
1999.
BACKGROUND AND RECENT DEVELOPMENTS
The results of operations for the three months ended March 31, 2000 does 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 three months ended March 31,
2000 include three months of activity with no operations of AHS for the
comparative prior quarter.
The Company was advised on March 22, 2000 that Coast Business Credit, Inc.
("Coast"), has declared that USCG has defaulted on certain loans from Coast and
has demanded full payment by USCG for all indebtedness. The Company 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. Coast has demanded that
the Company pay Coast $361,740 on its guarantees. The Company is investigating
the propriety of Coasts said foreclosure sale of USCG's assets and the validity
of its said demand under the Company guarantees. TEI owns approximately 43% of
USCG's outstanding capital stock.
On April 28, 2000, the American Arbitration Association awarded an ex-employee
of CCC's $375,865 due to breach of his employment agreement. The liability is
reflected in March 2000 financials.
In April 2000, AHS settled their lawsuit filed by a competitor claiming that
AHS's The Office product infringes on a patent assigned to the said competitor
for $50,000. The settlement is reflected in March 2000 financials.
RESULTS OF OPERATIONS
Currently, the Company's operations are conducted through its subsidiaries,
Computer Components Corporation ("CCC"), and AlphaNet Hospitality Systems
("AHS").
REVENUES
For the three month period ended March 31, 2000, the Company had revenues of
$5,730,795 an increase of $512,698 (9.825%) from sales of $5,218,097 for the
three month period ended March 31, 1999. USCG contributed $3,187,661 in
revenues for the period ending March 31, 1999 with no comparison in 2000 since
USCG was de-consolidated in February 1999.
15
<PAGE>
CCC had revenues of $3,689,554 for the three months ended March 31, 2000
compared to revenues of $2,030,436 during the same period ended March 31, 1999,
an increase of $1,659,118 (81.71%). The increase is related to the increasing
sales in batteries and related products.
AHS contributed revenues of $2,041,241 for the first quarter of 2000, with no
contribution in the same period 1999.
COST OF REVENUES
The cost of revenues decreased to $3,296,063 in the first quarter of 2000, from
$4,034,649 in the same period in 1999, a decrease of $738,586 (18.31%). The
decrease is associated with the de-consolidation of USCG, which contributed
$2,694,228 in 1999.
Increased sales at CCC resulted in an increase in the cost of revenues during
the period ended March 31, 2000. CCC's cost of revenues increased $1,335,548
(85.94%) to $2,889,601 for the first quarter of 2000, compared to cost of
revenues of $1,554,053 for the same period in 1999.
Cost of revenues at AHS was $406,462 for the three months ended March 31, 2000
and no comparison in 1999.
GROSS PROFIT
The Company recorded a gross profit of $2,434,732 for the three months ended
March 31, 2000, compared to $1,183,448 during the first quarter of 1999, an
increase of $1,251,284 (105.73%). Of the $1,183,448 at March 31, 1999, USCG
contributed $691,631 and no contribution at March 31, 2000.
CCC contributed $799,953 compared to $491,817 during the similar period in 1999,
an increase of $308,136 (62.65%). AHS contributed $1,634,779 during the first
quarter of 2000, with no contribution made during the same period in 1999.
Gross profit as a percentage of revenue for CCC decreased to 21.68% for the
three months ended March 31, 2000, compared to 24.22% for the same 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
The Company's operating expenses, consisting of selling, general and
administrative, legal settlement, depreciation and amortization expenses
decreased to $2,525,053 for the three month period ended March 31, 2000, from
$2,792,282 for the same period in 1999. For the three month period ending March
31, 1999, USCG contributed $1,944,840 in selling, general and administrative
expenses with no comparison at March 31, 2000. CCC selling, general and
administrative expenses increased to $691,101 in the first quarter of 2000
compared $662,012 for the same period in 1999, an increase of $29,089 (4.39%).
Selling, general and administrative expenses increased because of legal fees,
wages and travel expenses. AHS incurred $1,260,808 in selling, general and
administrative expenses at March 31, 2000 with no comparison in 1999, which was
attributable to legal, communications, wages and advertising expenses.
The Company incurred $400,086 in legal settlement fees from the Company's two
subsidiaries, (CCC and AHS), for the period ending March 31, 2000. The Company
did not incur any legal settlement fees for the three month period ending March
16
<PAGE>
31, 1999. The CCC lawsuit stemmed from an ex-employee due to the breach of his
employment agreement. The American Arbitration Association awarded a settlement
of $375,865. AHS settled their lawsuit filed by a competitor claiming that AHS's
The Office product infringes on a patent assigned to the said competitor for
$50,000.
DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT
The Company incurred $390,640 in depreciation and amortization for the period
ending March 31, 2000 compared to $218,353 in 1999. The increase of $172,287 is
due to AHS depreciation of revenue assets at March 31, 2000. USCG incurred
$181,803 in amortization costs for the period ending March 31, 1999 which has
been de-consolidated in February 1999.
INTEREST EXPENSE AND FINANCING FEES
The Company incurred $200,012 in interest expense during the three months ended
March 31, 2000, compared to $113,903 during the same period in 1999, an increase
of $86,109 (75.60%). The significant increase in interest expense is
attributable to AHS, which incurred $169,126 in interest expense during the
first quarter of 2000 with no contribution during the same period in 1999.
Deferred financing costs are amortized on a straight-line basis over the
original term of the financing agreement. The Company issued warrants to various
lenders which were recorded at fair value using the Black-Scholes model.
Amortization of these deferred financing costs was $157,725 and $18,494 for the
three months period ending March 31, 2000 and 1999, respectively.
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 March 31, 2000 was $130,101.
EXTRAORDINARY GAIN
The Company 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 settled with $500,000 cash
and 1,100,000 million common shares in February 2000.
INVENTORY
The Company continually reviews its inventory allowance procedures and policies
and will make adjustments as necessary. During the period ended March 31, 2000,
the Company recorded $3,000 as a reserve for inventory allowance, compared to
$185,430 in the same period in 1999. CCC recorded $65,430 as an inventory
reserve for the first quarter of 1999 for slow moving passive components.
USCG recorded $120,000 as a reserve on their inventory for the first quarter
ending in 1999 with no comparison in 2000.
LIQUIDITY
As of March 31, 2000 the Company had cash and cash equivalents of $695,090
compared to $894,261 at December 31, 1999.
The Company used cash from operations of $249,678 for the three month period
ended March 31, 2000 compared to cash provided by operations of $312,731 for the
same period in 1999.
17
<PAGE>
The Company used cash in investing activities of $123,623 in the first quarter
of 2000, compared to $495,038 in 1999. The majority of this cash was used to
purchase new property and equipment in the first quarter of 2000. During the
prior comparative quarter, the cash was used primarily for advances to a related
party of $222,344 and in connection with the de-consolidating of USCG of
$316,262.
The Company provided cash from financing activities of $174,130 in the three
month period ended March 31, 2000 compared to cash used in financing of $762,661
in 1999. During the quarter ended March 31, 2000 the Company received $214,993
of net proceeds under its line of credit. CCC established a new credit line and
has an additional $1,043,613 available on their credit line at March 31, 2000.
The Company organized repayment of their acquisition debt and recognized a gain
in connection with this settlement and refinancing transactions.
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.
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 the Company for
the breach of his employment agreement.
On April 28, 2000, the Arbitration panel awarded Martin Frank $375,865.
The Company does not intend to appeal this award. The Company has not
been advised whether or not Mr. Frank will appeal the award.
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.
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.
18
<PAGE>
Item 5. Other Information.
None.
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: May 19, 2000
/s/ Julie Sansom-Reese
-----------------------------
Interim Chief Financial Officer
19
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<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 695,090
<SECURITIES> 262,940
<RECEIVABLES> 3,424,597
<ALLOWANCES> 281,028
<INVENTORY> 1,951,219
<CURRENT-ASSETS> 6,976,834
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119,588
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