As filed with the Securities and Exchange Commission on August 3, 2000
Registration No. _________________
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Tech Electro Industries, Inc.
(Name of small business issuer in its charter)
Texas 5065 75-2408297
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or Organization) Classification Code Number)Identification Number)
275 North Franklin Turnpike, Suite 230, Ramsey, NJ 07446 (201) 760-9900
(Address of principal executive offices) Telephone Number
William Tan Kim Wah
Tech Electro Industries, Inc.
275 North Franklin Turnpike, Suite 230
Ramsey, NJ 07446
(201) 760-9900
(201) 760-9901 fax
(Name, address and phone number for agent for service)
Copy to:
Carl A. Generes
Attorney-at-Law
4315 West Lovers Lane
Dallas, Texas 75209
(214) 352-8674
(214) 352-4135 (Fax)
Approximate date of proposed sale to the public: As soon as practicable
after the effective date of this registration statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [x] 33-98662.
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<S><C> <C> <C> <C> <C>
|-----------------------|------------------|--------------------|---------------------|------------------|
|Title of each class of | Amount to be | Proposed maximum | Proposed maximum | Registration Fee |
|securities to be | registered (1)(2)| offering price per | aggregate offering | |
|registered | | share (3) | price | |
| | | | | |
| Common stock (4) | 250,000 shares | $0.73 (5) | $ 182,500.00 | $ 48 |
| Common stock (6) | 3,279,581 shares | $0.75 (7) | $2,459,685.00 | $ 649 |
| Common stock (8) | 1,000,000 shares | $1.75 (9) | $1,750,000.00 | $ 462 |
| Common stock (10) | 1,000,000 shares | $2.50(11) | $2,500,000.00 | $ 660 |
| Common stock (12) | 1,953,000 shares | $3.30 (13) | $6,444,900.00 | (14) |
| Common stock (15) | 6,021,860 shares | $0.531 (16) | $3,197,608.00 | $ 844 |
| Common stock (17) | 187,500 shares | $0.75 (18) | $ 140,625.00 | $ 37 |
| | | | | |
|Total | 13,691,941 | | $16,675,318.00 | $2,700 |
| | shares | | | |
|-----------------------|------------------|--------------------|---------------------|------------------|
</TABLE>
(1) This registration statement covers 7,670,081 shares of common stock that
may be acquired by option and warrant holders upon exercise of warrants and
options described herein and the resale of said 7,670,081 shares by such option
and warrant holders and 6,021,860 outstanding shares owned by selling
shareholders.
(2) Plus such indeterminate numbers of shares of common stock as may be
issuable by reason of the operation of the anti-dilution provisions of the
options and warrants.
(3) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457.
(4) Shares issuable upon exercise of warrants.
(5) The exercise price of the warrants.
(6) Shares issuable upon exercise warrants..
(7) The exercise price of the warrants.
(8) Shares issuable upon exercise of non-employee options.
(9) The exercise price of the options.
(10) Shares issuable upon exercise of non-employee options.
(11) The exercise price of the options.
(12) Shares issuable upon exercise of warrants.
(13) The exercise price of the warrants.
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(14) Shares included in earlier effective registration statement number
33-98662 for which, for purposes of these shares, this registration statement is
a post-effective amendment.
(15) Shares owned by selling shareholders.
(16) Estimated solely for the purposes of calculating the registration fee
under Rule 457(c).
(17) Shares issuable upon exercise of employee warrants.
(18) The exercise price of the warrants.
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PRELIMINARY PROSPECTUS
(subject to completion)
TECH ELECTRO INDUSTRIES, INC.
13,691,941 SHARES OF COMMON STOCK
This prospectus covers an aggregate of 6,021,860 outstanding shares of our
common stock, which will be sold, from time to time by some of our existing
shareholders. We will not receive any money from these shareholders when they
sell their shares of common stock.
We are also registering 7,670,081 shares of our common stock for issuance
upon exercise of outstanding warrants and options and for resale of any such
shares by the warrantholders and optionholders identified on page 5 of this
prospectus. We will receive the proceeds from any exercise of a warrant or
option. However, we will not receive the proceeds from any resale of shares
issued upon the exercise of warrants or options. See "Use of Proceeds" on page
4.
Our common stock is traded on the NASD Over-the-Counter Bulletin Board
under the symbol "TELE". On July 27, 2000, the last reported sale price of our
common stock was $0.531 per share. We have issued and outstanding 8,103,139
shares of common stock.
The securities offered hereby are speculative and involve a high degree of
risk. You should read "Risk Factors," beginning on page 2.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
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August 3, 2000
THE COMPANY
Tech Electro Industries, Inc. is a Texas corporation. Our executive offices
are located at 275 North Franklin Turnpike, Suite 230, Ramsey, NJ 07446,
telephone number (201) 760-9900; (201) 760-9901 (Fax).
Tech Electro Industries' business is conducted through its two wholly owned
subsidiaries, Universal Battery Corporation and AlphaNet Hospitality Systems,
Inc.
Universal Battery sells and distributes a broad line of industrial and
retail batteries. It is an authorized battery distributor, on a non-exclusive
basis, for Panasonic USA, Varta USA and Duracell, USA. Universal Battery also
sells and distributes to OEMs various types of electronic components such as
resistors, capacitors and relays that are installed in electronic equipment.
AlphaNet sells private in-room facsimile machines and 24-hour unattended
"self-serve" business centers to hotels around the world. AlphaNet's core
product, the InnFax(R) facsimile machine, can be found in over 50,000 hotel
rooms. The Office(TM) self serve business center provides hotel guests with
24-hour convenient access to various business office services such as personal
computers loaded with popular software, printing, faxing and photocopying.
RISK FACTORS
An investment in our shares as offered in this prospectus involves a high
degree of risk. In deciding whether to purchase shares of our common stock, you
should carefully consider the following risk factors, in addition to other
information contained in this prospectus. This prospectus also contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those discussed here. Factors that could
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<PAGE>
cause or contribute to differences in our actual results include those discussed
in this section, as well as those discussed elsewhere in this prospectus.
We have a history of net losses. We expect to continue to incur net losses
and we may not achieve or maintain profitability.
We have an accumulated deficit of $9,871,547 as of December 31, 1999 and
$9,746,112 as of March 31, 2000, with net losses of $3,428,634 for year ended
1999, $4,975,911 for year ended 1998 and loss before provision for extraordinary
gain of $430,880 for the three months ended March 31, 2000. We also expect to
incur additional operating losses in future periods. We cannot guarantee that we
will be able to achieve or sustain significant periods of profitability in the
future.
We will need additional capital in the future. If additional capital is not
available to us, we will have to curtail or cease operations.
We intend to fund our operations and other capital needs for the next
twelve months substantially from cash on hand and generated from operations. We
will need substantial funds for operating costs and working capital during the
next twelve months. We will also need funds for future expansion of our
operations. We cannot guarantee, however, that existing funds, and those
generated from operations, will be sufficient. Further, we cannot guarantee that
future additional financing, if required, will be available on acceptable terms,
if at all.
We depend on a limited number of suppliers for the battery products we
sell. The lost of one or more of these suppliers would seriously hurt our
business.
Our subsidiary, Universal Battery, has a close, non-exclusive relationship
with Panasonic Battery Sales Group of Matsushita Electric Corp. of America, the
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main supplier of the battery products we sell. If our relationship with
Panasonic ended, Universal Battery's business would be adversely effected. We
have been and we expect to continue to be reliant on a limited number of
suppliers, and the loss of any of these suppliers of our battery products could
adversely effect our financial condition and results of operations.
We are attempting to develop and market new products. If we do not develop
commercially successful products, we may be unprofitable or forced to cease
operations.
Universal Battery distributes standard industrial and retail batteries and
passive electronic components. AlphaNet provides to hotels private in-room
facsimile machines and office centers for use by hotel guests. These core
businesses have not been profitable or at times only marginally profitable.
Unless we successfully develop and market new products, we will not achieve any
degree of success and may go out of business.
If our key employees do not continue to work for us, our business will be
harmed because competition for replacements is intense.
Our performance is substantially dependent on Randy Hardin, our CEO at
Universal Battery and Ian Kindred, our COO at AlphaNet to continue to work for
us and to market our existing products and to develop new product lines.
Our future success and growth also depends on our continuing ability to
identify, hire, train and retain other highly qualified technical, managerial
and sales personnel. Since competition for such personnel is intense, we cannot
guarantee that we will be able to attract, assimilate or retain other highly-
qualified technical, managerial or sales personnel in the future. If we cannot
attract and retain the necessary technical, managerial or sales personnel our
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business, operating results or financial condition could be adversely effected.
We have certain conflicts of interest due to part-time management and
relationships.
William Tan Kim Wah devotes only part-time services to us and has other
employment and business interests to which he devotes attention and will
continue to do so, resulting in conflicts of interest for his attention to our
business. These conflicts of interest could have a material adverse impact on
our business.
The exercise of outstanding warrants and options will cause immediate and
possibly significant dilution in the net tangible book value of your shares.
If the holders of our warrants and options decide to exercise all or part
of their warrants and options, you will experience immediate and possibly
significant dilution in the net tangible book value of your shares. The market
price of our common stock could also decline upon the resale of the common stock
received upon exercise of the warrants or options.
USE OF PROCEEDS
We will receive the proceeds upon exercise of any of the warrants or
options covered by this prospectus. We will devote any such proceeds to our then
working capital needs. If all the warrants and options are exercised, we will
receive $13,477,710 in aggregate exercise proceeds, as follows:
Warrants and Per share Aggregate
Options for exercise price Proceeds
----------- -------------- --------
250,000 shares $0.73 $ 182,500
3,467,081 shares $0.75 $2,600,310
1,000,000 shares $1.75 $1,750,000
1,000,000 shares $2.50 $2,500,000
1,953,000 shares $3.30 $6,444,900
We will not receive the proceeds from any resale of shares that are
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acquired by the warrant or optionholders upon their exercise of warrants or
options covered by this prospectus. Also, we will not receive the proceeds from
the sale of our shares by our selling shareholders.
SELLING SHAREHOLDERS
We are registering for sale shares that are issued and outstanding and
owned by certain existing shareholders. We are registering for resale the shares
that may be issued upon exercise of outstanding warrants and options. As used
hereinafter, the term "selling shareholder" includes those warrant and
optionholders who may exercise their warrants and options and who may resell the
shares they receive upon the exercise of their warrants and options. However, as
of the date of this prospectus, none of these persons has exercised any warrant
or option.
The following table includes certain information about the selling
shareholders for whom we are registering the shares for resale to the public.
<TABLE>
<S> <C> <C> <C>
|------------------------|------------------------|-------------------------|------------------------|
| Name |Shares of common | Shares of common | Number of shares to be |
| |stock that may be | stock directly owned | owned after the |
| |acquired upon exercise | as of the date of this | offering |
| |of warrants or options | prospectus and included | |
| |and resold to the public| in this offering | |
|------------------------|------------------------|-------------------------|------------------------|
|William Tan Kim Wah (1) | 100,000 | 75,000 | -0- |
|------------------------|------------------------|-------------------------|------------------------|
|Steven Scott (2) | 87,500 | 64,500 | -0- |
|------------------------|------------------------|-------------------------|------------------------|
|Wooi Hou Tan (3) | 333,000 | 333,000 | -0- |
|------------------------|------------------------|-------------------------|------------------------|
|Jason Tan | 334,000 | 334,000 | -0- |
|------------------------|------------------------|-------------------------|------------------------|
|Mutsuko Gomi | 333,000 | 333,000 | -0- |
|------------------------|------------------------|-------------------------|------------------------|
|Placement & | 1,150,000 | 283,000 | -0- |
|Acceptance, Inc. (4) | | | |
|------------------------|------------------------|-------------------------|------------------------|
|Equator Holdings (5) | 180,000 | 205,000 | -0- |
|------------------------|------------------------|-------------------------|------------------------|
|Synergy Systems | 180,000 | 205,000 | -0- |
|------------------------|------------------------|-------------------------|------------------------|
|Eurasia Securities, Ltd.| 180,000 | 205,000 | -0- |
|------------------------|------------------------|-------------------------|------------------------|
</TABLE>
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<TABLE>
<S> <C> <C> <C>
|------------------------|------------------------|-------------------------|------------------------|
|Asean Broker Ltd. | 180,000 | 205,000 | -0- |
|------------------------|------------------------|-------------------------|------------------------|
|Fleet Security | 180,000 | 205,000 | -0- |
|Investment, Ltd(6) | | | |
|------------------------|------------------------|--------------------------------------------------|
|Ventures International | 727,273 | 727,273 | -0- |
| Ltd. (7) | | | |
|------------------------|------------------------|-------------------------|------------------------|
|Gin Securities, Ltd. | 581,818 | 581,818 | -0- |
|------------------------|------------------------|-------------------------|------------------------|
|Jenny Jechart | 509,091 | 509,091 | -0- |
|------------------------|------------------------|-------------------------|------------------------|
|Hae Jong Yoo | 218,182 | 218,182 | -0- |
|------------------------|------------------------|-------------------------|------------------------|
|Appel Investments | 116,703 | -0- | -0- |
|------------------------|------------------------|-------------------------|------------------------|
|Alpha Net Funding, LLC | 76,514 | -0- | -0- |
| (8) | | | |
|------------------------|------------------------|-------------------------|------------------------|
|Caspic International | 250,000 | -0- | -0- |
|------------------------|------------------------|-------------------------|------------------------|
|Stephen & Elizabeth | -0- | 20,400 | -0- |
|Davies | | | |
|------------------------|------------------------|-------------------------|------------------------|
|Hi-Tel Group, Inc. | -0- | 68,000 | -0- |
|------------------------|------------------------|-------------------------|------------------------|
|Stanford Leland | -0- | 9,000 | -0- |
|------------------------|------------------------|-------------------------|------------------------|
|Joel M. Marcus I.T. | -0- | 13,600 | -0- |
|------------------------|------------------------|-------------------------|------------------------|
|Sadasuke Gomi (9) | -0- | 2,150 | -0- |
|------------------------|------------------------|-------------------------|------------------------|
|Matzuda Corporation | -0- | 13,600 | -0- |
|------------------------|------------------------|-------------------------|------------------------|
|Roy Schwartz | -0- | 10,800 | -0- |
|------------------------|------------------------|-------------------------|------------------------|
|Telstar Entertainment | -0- | 136,000 | -0- |
|Group | | | |
|------------------------|------------------------|-------------------------|------------------------|
|Allan Wolf, Jr. | -0- | 94,000 | -0- |
|------------------------|------------------------|-------------------------|------------------------|
|Steven Schulz, Inc., | -0- | 25,000 | -0- |
|Pension Trust | | | |
|------------------------|------------------------|-------------------------|------------------------|
|Peter Banner | -0- | 20,000 | -0- |
|------------------------|------------------------|-------------------------|------------------------|
|Capital Resource | -0- | 15,000 | -0- |
|Group | | | |
|------------------------|------------------------|-------------------------|------------------------|
|Donna Gilbert | -0- | 10,446 | -0- |
|------------------------|------------------------|-------------------------|------------------------|
</TABLE>
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<TABLE>
<S> <C> <C> <C>
|------------------------|------------------------|-------------------------|------------------------|
|Pricewaterhouse | -0- | 1,100,000 | -0- |
|Coopers, Inc. | | | |
|------------------------|------------------------|-------------------------|------------------------|
</TABLE>
(1) Mr. Tan is the President and CEO of Tech Electro Industries. He owns
(i) directly 75,000 shares of Tech Electro Industries common stock,
(ii) indirectly 283,000 shares of common stock that are held by
Placement & Acceptance, Inc., of which Mr. Tan is an officer and
director and (iii) indirectly 727,273 shares of common stock that are
held by Ventures International, Ltd., of which Mr. Tan is an officer
and director. See footnotes 5 and 7 below. Placement & Acceptance,
Inc. also owns 5,000 Tech Electro Industries Units. Each Unit consists
of one share of common and one share of Series A Convertible preferred
stock. Mr. Tan also holds an employee stock option to purchase 400,000
shares of common stock.
(2) Mr. Scott is the former Executive Vice President and a former director
of Tech Electro Industries.
(3) Wooi Hou Tan is the adult son of William Tan Kim Wah.
(4) William Tan Kim Wah is an officer and director of this company. See
footnote 1 above.
(5) MeeMee Tan, Secretary of Tech Electro Industries, is an officer and
director of Equator Holdings.
(6) Sadasuke Gomi, a director of Tech Electro Industries, is a director of
this company.
(7) William Tan Kim Wah is an officer and director of this company. See
footnote 1 above.
(8) Jenny Jechart is an officer and director of this company.
(9) Sadasuke Gomi is a director of Tech Electro Industries. See footnote
(6) above.
This prospectus also covers the 1,953,000 shares underlying warrants that
were previously registered and sold by Tech Electro Industries in 1995 under
registration statement number 33-98662.
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PLAN OF DISTRIBUTION
The shares of common stock currently owned by the selling shareholders and
that may be acquired upon exercise of warrants or options may be sold from time
to time by the selling stockholders in one or more transactions at fixed prices,
at market prices at the time of sale, at varying prices determined at the time
of sale or at negotiated prices. The selling stockholders may offer their shares
of common stock in one or more of the following transactions:
- on any national securities exchange or quotation service at which
the common stock may be listed or quoted at the time of sale,
including the over-the-counter market on the Over-the-Counter
Bulletin Board,
- in private transactions,
- through options,
- by pledge to secure debts and other obligations, or a combination
of any of the above transactions. If required, we will distribute
a supplement to this prospectus to describe material changes in
the terms of the offering.
The shares of common stock described in this prospectus may be sold from
time to time directly by the selling stockholders. Alternatively, the selling
stockholders may from time to time offer shares of common stock to or through
underwriters, broker/dealers or agents. The selling stockholders and any
underwriters, broker/dealers or agents that participate in the distribution of
the shares of common stock may be deemed to be "underwriters" within the meaning
of the Securities Act of 1933.
Any profits on the resale of shares of common stock and any compensation
received by any underwriter, broker/dealer or agent may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933.
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Any shares covered by this prospectus which qualify for sale pursuant to
Rule 144 under the Securities Act of 1933 may be sold under Rule 144 rather than
pursuant to this prospectus. The selling stockholders may not sell all of the
shares. The selling stockholders may transfer, devise or gift such shares by
other means not described in this prospectus.
To comply with the securities laws of certain jurisdictions, the common
stock must be offered or sold only through registered or licensed brokers or
dealers. In addition, in certain jurisdictions, the common stock may not be
offered or sold unless they have been registered or qualified for sale or an
exemption is available and complied with.
Under the Securities Exchange Act of 1934, any person engaged in a
distribution of the common stock may not simultaneously engage in market-making
activities with respect to the common stock for nine business days prior to the
start of the distribution. In addition, each selling stockholder and any other
person participating in a distribution will be subject to the Securities
Exchange Act of 1934 which may limit the timing of purchases and sales of common
stock by the selling stockholders or any such other person. These factors may
affect the marketability of the common stock and the ability of brokers or
dealers to engage in market-making activities.
We will pay all expenses of this registration. These expenses include the
SEC's filing fees and fees under state securities or "blue sky" laws. All
expenses for the issuance of a supplement to this prospectus, when requested by
selling stockholder(s), will be paid by the requesting stockholder(s). The
selling stockholders may pay selling commissions or brokerage fees with respect
to the sale of the shares by them.
MARKET FOR OUR COMMON STOCK
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Our common stock is now traded on the OTC Bulletin Board under the symbol
TELE. Prior to April 7, 1999, our common stock was traded on the NASDAQ Small
Cap Market.
No dividends have been declared or paid on our common stock.
As of June 30, 2000, Tech Electro Industries had 8,103,139 shares of common
stock issued and outstanding and held by 588 shareholders of record.
The following table sets forth the high and low bid prices of the our
common stock on a quarterly basis for the calendar years 1998 and 1999 and for
the first and second quarters of 2000, as reported by the Nasdaq Smallcap Market
and Nasdaq Trading and Market Services:
Calendar Period High Low
1998:
First Quarter......... $3.75 $2.3125
Second Quarter..... $3.50 $2.125
Third Quarter....... $2.6875 $1.25
Fourth Quarter..... $4.00 $0.875
1999:
First Quarter......... $4.625 $0.9375
Second Quarter...... $1.375 $0.25
Third Quarter........ $1.25 $0.6875
Fourth Quarter...... $1.0625 $0.625
2000:
First Quarter....... $2.375 $0.6875
Second Quarter... $0.75 $0.50
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The above quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and notes thereto included elsewhere in
this prospectus. Except for the historical information contained herein, the
discussion in this prospectus contains certain forward looking statements that
involve risks and uncertainties, such as statements of our plans, objectives,
expectations and intentions. The cautionary statements made in this prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this prospectus. These statements include, without
limitation, statements concerning our potential operations and information
relating to Year 2000 matters, described below. Our actual results could differ
materially from those discussed here. Factors that could cause or contribute to
such differences include, without limitation, those factors discussed.
Fiscal year 1999 compared to fiscal year 1998.
Tech Electro Industries results of operations for the year ended December
31, 1999 versus the year ended December 31, 1998 were significantly impacted by
the acquisition of AlphaNet Hospitality Systems, Inc., completed on October 22,
1999, the de-consolidation of US Computer Group, Inc. on February 25, 1999, and
a significant increase in sales at Universal Battery.
Revenues
For the year ended December 31, 1999, Tech Electro had sales of
$18,650,674, a decrease of $6,262,357 or 25.137%, compared to sales of
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$24,913,031 during the same period in 1998. The significant decrease in revenues
was due to the de-consolidation of US Computer Group. US Computer Group had
sales contributing to Tech Electro Industries revenue in the 1999 first quarter
of $3,187,661 and AlphaNet contributed sales of $2,312,191 in the fourth quarter
of 1999.
Universal Battery recorded revenues for the year ended December 31, 1999 of
$13,150,822, compared to $8,006,535 for the same period in 1998, an increase of
$5,144,287 or 64.25%. This increase in revenues was primarily due to
management's decision to shift their focus from components to the battery
industry and the jumpstart program which they started in 1999.
AlphaNet recorded revenues for the fourth quarter 1999 of $2,312,191, with
no contribution in the comparable period in 1998.
Tech Electro Industries recognized a loss from operations of $3,008,196 for
the year ended December 31, 1999, compared to a loss of $4,438,491 during the
same period in the prior year, a decrease in net losses of $1,430,295 or 32.25%.
The decreased loss as compared to 1998 was due primarily to the de-consolidation
of US Computer Group in 1999. US Computer Group's cost of goods sold and direct
servicing cost in 1998 was $17,588,858 compared to $2,496,303 in 1999 and their
general and administrative expenses were $10,564,336 in 1998 to $2,064,840 in
1999. The 1999 loss from operations was mainly attributable to the losses
incurred by AlphaNet for the last quarter of 1999, by US Computer Group during
the first quarter of 1999 and by overhead expenses incurred by the parent
company. The majority of these overhead expenses were salaries, legal and
professional fees. Because of Universal Battery's increased revenues for 1999,
this entity reflected a profit from operations of approximately $276,000 for the
year. Both Universal Battery and Tech Electro Industries incurred expenses
relating to the write off of loans made to US Computer Group that were deemed
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<PAGE>
uncollectible at year end. The amount of these notes that were written off
during 1999 was $472,344.
Cost of Goods Sold and Direct Servicing Costs
Tech Electro Industries cost of goods sold and direct servicing costs
decreased to $13,528,488 in the year ended December 31, 1999 from $17,588,858
during the same period during 1998, a decrease of $4,060,370 (23.08%). The
decrease in cost of goods sold and direct servicing costs is attributable to the
de-consolidation of US Computer Group, which contributed cost of goods sold and
direct servicing costs of $2,496,030 during the first quarter with no
contribution during the remaining period in 1999.
Universal Battery's costs of goods sold increased by $4,455,525 to
$10,577,578 for the year ended December 31, 1999, compared to $6,122,053 for the
same period in 1998. Overall, cost of goods as a percentage of sales increased
to 72.5% in the year ended December 31, 1999, from 70.6% during the same period
in 1998. These increased costs are largely attributable to Universal Battery's
increasing revenues for 1999. Universal Battery has expanded its sales base to
include a large volume customer with a lower profit margin than many of the
other customers. Also, as part of the overall plan for increasing revenues by
concentrating more on batteries and battery related products, the gross margin
has declined because these products have a lower margin than electronic
components. Management believes it has compensated for that loss of margin, and
will continue to do so, with the increases in volume.
AlphaNet's cost of goods sold in the fourth quarter of 1999 was $562,831.
Selling, General and Administrative Expenses
Tech Electro's selling, general and administrative expenses or "S,G &A",
decreased to $6,796,921 for the year ended December 31, 1999, compared to
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<PAGE>
$9,395,513 for the year ended December 31, 1998, a decrease of $2,598,592 or
27.66%. The decrease in selling, general and administrative expenses was due to
de-consolidation operations of US Computer Group, which contributed general and
administrative expenses of $2,064,840 in the first period of 1999, with no
contribution during the remaining period of 1999.
Universal Battery's selling, general and administrative expenses increased
by $167,072 or 7.451% to $2,409,483 for the year ended December 31, 1999,
compared to $2,242,411 during the same period ended December 31, 1998. At
December 31, 1999, Universal Battery incurred a bad debt expense of $272,864 on
a loan that was made to US Computer Group. Had it not been for this bad debt,
Universal Battery S, G & A expenses would have been lower than during 1998.
AlphaNet's selling, general and administrative expenses in the fourth
quarter 1999 was $2,604,454 of which $956,647 was depreciation of revenue
producing assets. The last quarter of 1999 was abnormally high due to
accounting, legal and loan refinancing costs incurred by AlphaNet in connection
with its acquisition by Tech Electro Industries.
Inventory
Universal Battery monitors potential inventory adjustments on an ongoing
basis and increased its inventory allowance periodically throughout Fiscal 1999.
During 1999, Tech Electro Industries recorded an additional provision of
$107,951 for obsolete inventory compared to a provision of $1,250,798 in 1998, a
substantial portion of which was for US Computer Group.
Depreciation and Amortization Expense
Tech Electro Industries incurred $1,225,510 in depreciation and
amortization for the year ending December 31, 1999, compared to $1,116,353 in
1998 an increase of $109,157 or 9.7%. The majority of the depreciation expense
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is attributed to AlphaNet which incurred $967,153. US Computer Group incurred
depreciation and amortization cost of $181,803 in 1999 compared to $1,060,737 in
1998.
Amortization of Excess of Net Assets Acquired over Cost
Tech Electro Industries also has an excess of net assets acquired over cost
which is associated with the purchase of AlphaNet which is being amortized,
$130,101 in 1999.
Interest Expense
Tech Electro Industries incurred $552,536 in interest expense for the year
ended December 31, 1999, compared to $684,120 during the same period in 1998, a
decrease of $131,584 or 19.23%. The majority of the interest expense is
attributable to US Computer Group, which incurred $122,525 in interest the first
quarter and AlphaNet which incurred $370,530 in the fourth quarter of 1999.
AlphaNet interest expense was larger than expected due to an interest penalty
for early retirement of an AlphaNet financing arrangement with a third party.
Income Tax Expense
The expected income tax benefit for 1999 and 1998 resulting from the net
loss has a 100% valuation allowance recorded against it for both periods due to
the uncertainty of generating future taxable revenue.
Liquidity
As of December 31, 1999, Tech Electro Industries, on a consolidated basis,
had cash and cash equivalents of $894,261. By comparison on December 31, 1998,
Tech Electro Industries had approximately $1,399,060 in cash and cash
equivalents.
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Cash Flow From Operations
Cash provided by operations for 1999 was $290,669 compared to cash used in
operations of $1,833,921 in 1998. The major components of cash flows from
operations in 1999 included a decrease of $702,657 in inventory due to
management watching inventory turnover, an increase of $387,316 in prepaid
expenses due to advance payments to foreign vendors. Capitalization of loan
costs increased to $228,768 due to refinancing of several loans. Accrued
liabilities increased $867,803 due to property tax liability, accrued vacation,
bonuses, salary, and accrued note interest.
Cash Flow From Investing Activities
Cash used by investing activities in 1999 was $2,154,980 compared to
$195,653 in 1998. We used $994,235 to an acquire AlphaNet compared to
acquisition cost of $188,613 in 1998. In 1999, Tech Electro Industries purchased
$260,294 in short term investments, advanced US Computer Group $472,344 in loans
which we had to write off and the cash decreased from the de-consolidation of US
Computer Group was $316,262.
Cash Flow From Financing Activities
Cash provided by financing activities was $1,359,512 and $1,510,030 in 1999
and 1998 respectively. We received proceeds on sale of common stock of
$1,448,750 and proceeds from long term debt in the amount of $2,375,000. In
1999, we used cash of $1,060,557 from our current bank lines of credit and
$1,428,681 from long-term debt in 1999.
We expect to fund future cash needs through operations, our lines of credit
and raising additional capital as necessary.
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Inflation
Tech Electro Industries has not been materially effected by inflation.
while we do not anticipate inflation affecting our operations, increases in
labor and supply prices could impact our ability to compete.
Quarter ended March 31, 2000 compared to quarter ended March 31, 1999
Recent developments
The results of operations for the three months ended March 31, 2000 does
not include US Computer Group operations, while the comparative period of 1999
includes two months of US Computer Group operations.
Tech Electro Industries was advised on March 22, 2000 that Coast Business
Credit, a Division of Southern Pacific Bank, declared that US Computer Group has
defaulted on certain loans from Coast and demanded full payment. US Computer
Group was advised verbally by Coast's attorney that it had foreclosed and sold
all of US Computer Group's assets that were pledged to secure loans from Coast.
Coast has demanded that Tech Electro Industries pay Coast $361,740 on its
guarantees and has filed suit against Tech Electro Industries in US District
Court for the Central District of California to collect this amount. We are
attempting to negotiate a compromise of Coast's claim. We believe US Computer
Group has no assets or business and that Tech Electro Industries investment in
US Computer Group has zero value.
On April 28, 2000, the American Arbitration Association awarded an
ex-employee of Universal Battery $375,865 due to breach of his employment
agreement. Universal Battery has paid the award to the ex-employee. The outcome
is reflected in our March 31, 2000 quarterly financials.
Results of Operations
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Currently, Tech Electro Industries operations are conducted through our
subsidiaries, Universal Battery Corporation, and AlphaNet Hospitality Systems.
Revenues
For the three month period ended March 31, 2000, we had revenues of
$5,730,795, an increase of $512,698 or 9.825% from sales of $5,218,097 for the
three month period ended March 31, 1999.
Universal Battery had revenues of $3,689,554 for the three month ended
March 31, 2000 compared to revenue of $2,030,436 during the same period ended
March 31, 1999, an increase of $1,659,118 or 81.71%. The increase is related to
the increasing sales in batteries and related products.
AlphaNet contributed revenues of $2,041,241 for the first quarter of 2000,
with no contribution in the same period of 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 or 18.31%.
The decrease is attributed to the de-consolidation of US Computer Group which
contributed $2,694,228 in 1999.
Increased sales at Universal Battery resulted in an increase of cost of
revenues during the period ended March 31, 2000. Universal Battery's cost of
revenues increased $1,335,548 or 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.
AlphaNet cost of revenues was $406,462 for the three months ended March 31,
2000 and no comparison in 1999.
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Gross Profit
Tech Electro Industries 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 or 105.73%. Universal Battery contributed
$799,953 compared to $491,817 during the similar period in 1999, an increase of
$308,136 or 62.65%. AlphaNet 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 Universal Battery 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 Universal Battery is
attributable to the focus on battery and battery-related products, which produce
a lower profit margin than component sales.
Operating Expenses
Tech Electro Industries operating expenses, consisting of selling, general
and administrative 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. Universal
Battery operating expenses increased to $691,101 in the first quarter of 2000
compared to $662,012 for the same period in 1999, an increase of $29,089 or
4.39%. Selling, general and administrative expenses increased because of legal
fees, wages and travel expenses. AlphaNet incurred $1,260,808 in operating
expenses at March 31, 2000 with no comparison in 1999, with similar factors as
Universal Battery, legal, communications, wages and advertising.
Depreciation and Amortization
Tech Electro Industries 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 AlphaNet depreciation of revenue assets.
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Interest Expense and Financing Fees
Tech Electro Industries 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 or 75.60%. The significant increase in interest
expense is attributable to AlphaNet, 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. Tech Electro Industries 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 estimate fair value of
the net assets acquired over the purchase price paid for AlphaNet. 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
Tech Electro Industries 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 AlphaNet acquisition. The note was
settled with $500,000 cash and 1,100,000 common shares in February 2000.
Inventory
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Tech Electro Industries continually reviews its inventory allowance
procedures and policies and will make adjustments as necessary. During the
period ended March 31, 2000, we set aside $3,000 as a reserve for inventory
allowance, compared to $185,430 for the same period in 1999.
Purchase Order Backlog
As of March 31, 2000, Universal Battery purchase order backlog was
approximately $2,217,909, compared to $2,636,411 on the same date in 1999, a
decrease of $418,502 or 15.87%. Generally, the purchase order backlog represents
orders received from customers but not shipped, typically at the request of the
customer. Universal Battery monitors its purchase order backlog to help analyze
sales trend and to gauge future sales potential.
Liquidity
As of March 31, 2000 Tech Electro Industries on a consolidated basis had
cash and cash equivalents of $695,090 compared to $894,261 at December 31, 1999.
The change in our cash and cash equivalents reflects the increased inventory,
purchase of property and equipment.
We used cash from operations of $249,678 to buy inventory during the three
month period ended March 31, 2000 compared to cash provided by operations of
$312,731 for the same period in 1999.
We used cash from investing activities of $123,605 in the first quarter of
2000 compared to $495,038 in 1999. The cash was used to purchase new property
and equipment .
We used cash from financing activities of $174,130 in the three month
period ended March 31, 2000 compared to $762,661 in 1999. During the quarter
ended March 31, 2000 Tech Electro Industries received $214,993 of net proceeds
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under its line of credit. Universal Battery established a new credit line and
has an additional $1,043,613 available on their credit line at March 31, 2000.
Tech Electro Industries organized repayment of their acquisition debt and
recognized a gain in connection with this settlement and refinancing
transactions.
Inflation
We have not been materially effected by inflation. While we do not
anticipate inflation will affect our operations, increases in labor and supply
costs could impact our ability to compete.
International Currency Fluctuation
Since the majority of goods that Universal Battery purchases are from Asia,
it is subject, like its competitors, to international currency fluctuation. The
management of Universal Battery does not believe that the fluctuation in
currency presents a serious threat to it's operations.
DESCRIPTION OF BUSINESS
General Business History
Tech Electro Industries was incorporated under the laws of the State of
Texas on January 10, 1992, for the purpose of acquiring 100% of the capital
stock of Computer Components Corporation, a Texas corporation. Computer
Components has, since its inception in 1968, operated as a distributor of
electronic components and, in 1980, expanded into the battery. assembly and
distribution business.
On October 29, 1996, we incorporated Universal Battery Corporation, a Texas
corporation, for the purpose of expanding into new markets for batteries and
battery products. In June 1999, we merged Universal Battery into Computer
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Components and in July 2000 changed Computer Component's name to Universal
Battery Corporation.
In March, 1998, we completed the acquisition of a controlling interest in
US Computer Group, a company that provided a broad range of information
technology services and products. On February 25, 1999, Telstar Entertainment,
then the second largest shareholder of U S Computer Group, contributed
additional capital to US Computer Group through the purchase of additional
shares, making Telstar the largest shareholder. Effective February 25, 1999 we
ceased reporting US Computer Group's financial results in our consolidated
financial statements. We have written off our entire investment in US Computer
Group. In March 2000, a US Computer Group bank creditor foreclosed on all of US
Computer Group's assets, effectively terminating all of US Computer Group's
operations. We guaranteed a portion of the US Computer Group bank indebtedness.
In this regard, the said bank creditor has demanded that we pay $361,740 to the
bank pursuant to the guarantee and has filed suit to enforce its guarantee. We
are currently attempting to negotiate a settlement of the bank's claims. On
October 26, 1999, we completed the acquisition of AlphaNet Hospitality Systems,
Inc. We paid a combination of cash, promissory note and assumption of
indebtedness for a total consideration value of $3,500,000. We paid $1,400,000
cash that was raised in a private placement through the sale of our common stock
and warrants. We issued a $2,100,000 non-interest bearing four-month promissory
note to the seller as part of the purchase price.
On March 8, 2000, we paid in full the $2,100,000 note by paying to the
seller $500,000 in cash and 1,100,000 shares of our common stock. The $500,000
cash was borrowed from an entity affiliated with our president. See discussion
under Certain Relationships and Related Transactions, page 43.
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Universal Battery Corporation
Universal Battery's operations have historically consisted of: (i) sale of
battery and battery assembly systems and contract manufacturing or kitting
systems; (ii) sale of passive electronic components; (iii) sale of other
products, such as AC transformers, ceramic sound sources, battery chargers, etc.
Our products are sold to original equipment manufacturers (OEMs) and
distributors for use in the manufacture and sale of high-technology products,
such as computers, oil field equipment, medical instrumentation, uninterruptible
power supply systems, and security equipment among others. Universal Battery is
an authorized distributor, on a non-exclusive basis, for two product groupings
of Panasonic, USA , Varta, USA and Duracell, USA. Varta, based in Germany, is a
manufacturer of battery products. Panasonic is a subsidiary of Matsushita
Electric Corp. of Japan. Universal Battery also operates under noncontractual,
long-term relationships (many exceeding 10 years) with other vendors located in
Taiwan, Hong Kong, China, Korea and Japan from whom it imports non-proprietary
electronic components and batteries marketed under its registered trademark,
"NIKKO","UBC", "Tech Electro Industries" and, occasionally, under the name of
the Asian vendor. Universal Battery has also added, within the last two years,
vendors of electro magnetic devices, battery charging and electro mechanical
devices from The People's Republic of China.
Batteries
Universal Battery sells and distributes, under agreements with Panasonic
and Varta, a broad line of industrial (as opposed to consumer-retail) batteries.
The batteries sold and distributed by Universal Battery include sealed
lead-acid, nickel-cadmium, lithium, carbon-zinc, nickel metal hydride and
alkaline batteries. In addition to the sales of individual batteries, we
assemble and sell battery packs consisting of assembled groups of batteries
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combined physically and electrically into a single unit. We are a Panasonic
authorized modification center and, in that capacity, create custom-designed
battery packs meeting specifications of individual customers. In addition to
providing the services necessary to produce battery packs, such as welding and
assembly, Universal Battery supplies materials such as wiring, connectors, buss
bars and casings. Completed battery packs are assembled to order in nearly all
instances and we maintain little or no inventory of completed packs, although
components for assembly of packs are maintained. Universal Battery also offers
customers battery packs assembled in China to the customers' specifications. We
maintain a broad inventory of various sizes of batteries and components utilized
in battery package production to serve customer needs for immediate pack design
and assembly.
On December 8, 1999, Universal Battery launched an e-commerce site,
www.ubcbattery.com, enabling consumers to purchase an extensive selection of
battery and battery related products. Our e-commerce site will augment current
sales and marketing channels, affording us the opportunity to reach out to a
segment of the battery market not currently being served by our direct sales
force.
Contract Manufacturing and Kitting Operations
For the past several years we have sold various types of electronic
components to United States-based customers. The components are delivered to the
customer's facility in Mexico, where Mexican sub-contractors insert these
components into parted circuit PC boards to customer specifications. After such
assembly, the PC boards are shipped back to the United States for assembly into
the customer's final product.
We are currently pursuing a number of projects and believe that kitting
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operations represent an opportunity for us to reach new customers.
Electronic Components
Universal Battery imports and sells to OEMs and distributors the following
electronic components for use in the manufacture, repair and modification of
electronic equipment:
Resistors. Carbon film, metal film and metal oxide resistors in both leaded
and chip, surface mount, configurations.
Capacitors. Polyester, polypropylene and polycarbonate metalized film, film
and foil, inductive and non-inductive, aluminum electrolytic and ceramic
capacitors, leaded and chip.
Relays. AC and direct current relays, usually for operations at less than
20 amperes contact rating and 50 volts DC coil operation.
Other Product Sales
Universal Battery sells to OEMs and distributors or retail suppliers the
following other products:
Sound sources. Piezo and inductive drive "sounders" for the production of
alarm signals in security systems.
Transformers. 120-volt AC household and business wall plug transformers for
reduction of power line voltage to low voltage, 12 to 24 volts AC, applications
as utilized by household and business electrical devices.
Battery chargers. Various battery chargers used in consumers and business
applications.
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Universal Battery relies primarily on sales personnel and representatives,
and has undertaken only minimal advertising in trade publications. As of June
30, 2000, Universal Battery employed a direct sales force of four outside
salesmen and five inside "customer service" representatives.
Equipment
Universal Battery owns the majority of the equipment utilized in its
design, manufacturing and assembly operations. This includes specialized
equipment such as small electric welders, sonic welder, computer aided design
computer programs, computer driven battery analyzers, battery chargers,
heat-shrink ovens, strip-chart recorders, timers, multimeters and hand tools
utilized in operations. Additional manufacturing equipment capable of automated
epoxy dispensing and automated "connector to wire" attachment, is also owned. An
insignificant amount of small equipment is leased. Universal Battery owns the
computer hardware and software required for its accounting, sales, inventory and
management and the office furniture and equipment as necessary to operate the
business.
Our equipment consist of readily available items and could be replaced
without significant cost or disruption to business activities.
Customers
Our customer base is relatively broad. Universal Battery maintains a
computer database of over one thousand active and inactive customers, all of
whom are believed to be potential customers for our products. We believe,
however, that the loss of a major customer or group of related customers would
have a materially adverse effect on our operations.
Employees
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As of June 30, 2000, our workforce consisted of 21 full time employees.
Technology
Universal Battery's electronic products are all relatively low technology.
We believe these products are not subject to sudden obsolescence since they
represent basic elements common to a wide variety of existing electronic circuit
designs. At the same time, there can be no assurance that advances and changes
in technology, manufacturing processes and other factors will not affect the
market for our products.
Competition
Universal Battery competes in the sale of our batteries and battery packs
with many companies located in the United States, Mexico and Asia. In sales of
its electronic components, we face competition from many large electronic
distributors as well as from factory direct sale outlets throughout the United
States as well as other importers and exporters in Asia. Many of our competitors
are substantially larger and have greater resources than we do.
Environmental Matters
We believe that we comply with all relevant federal, state, and local
environmental regulations and do not expect to incur any significant costs to
maintain compliance with such regulations in the foreseeable future.
Patents and Trademarks
Although we are the owner of the trademark "NIKKO" in Texas for batteries
and electronic components, that trademark is not regarded as essential or
necessary for the marketing of our products. We do depend, in part, on the
patents and trademarks of our vendors and suppliers, over which we have little
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control. It is possible that the loss of these marks, or the deregulation of
their value, could have an adverse effect on our business.
Sources and Availability of Materials
With the exception of battery products and certain electronic components
described below, Universal Battery purchases its raw materials, such as wire,
metals and packaging materials, from a number of local sources and is not
dependent on any single source for raw materials. Except as noted below, it is
our belief that the loss of any single supplier would not adversely affect our
business. All raw materials utilized by us are readily available from many
sources.
Universal Battery enjoys a close and beneficial non-exclusive relationship
with a single supplier of a substantial portion of its battery products, the
Panasonic Battery Sales Group of Matsushita Electric Corp. of America .
Universal Battery is a certified Panasonic Modification Center for the
production of battery packs. We have also established relationships with other
battery manufacturers from which we have purchased substantial numbers of
batteries. The loss of any of these relationships could have a materially
adverse effect on our business.
Governmental Matters
Except for usual and customary business licenses, permits and regulations,
Universal Battery's business is not subject to governmental regulations or
approval of its products.
ALPHANET HOSPITALITY SYSTEMS, INC.
Founded in 1992, AlphaNet Hospitality Systems Inc. is a leading supplier of
business and connectivity solutions to the hospitality industry. Among
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AlphaNet's products are: InnFax(R), the private in-room facsimile and business
service; InnConnect(TM), the company's new high-speed Internet access product
for hotel guest and meeting rooms; InnPhone(R), an advanced two-line cordless
telephone developed exclusively for hotels; and The Office(R), a 24-hour
unattended "self-serve" hotel business center. AlphaNet's products can be found
in hundreds of hotels around the world serving tens of thousands of guestrooms.
Products
InnFax(R): AlphaNet's core product, InnFax, provides business travelers
staying at leading hotels with a private, in-room fax machine. Users may send
and receive faxes with complete confidentiality and at their convenience, on a
unique, private fax number which is disabled on check-out so that the next guest
has a different and unique number. In addition, the guest has access to a range
of information services and in-room printing of the hotel bill. The latest
InnFax(R) machine, the IBC-5000, provides the benefits of the InnFax(R) service
with the additional features of plain paper PC printing and copying.
InnFax(R) service is based on AlphaNet's patent-protected technologies,
combining the facilities of the public switched telephone network with
conventional radio frequency paging into a unique communications capability.
This technology provides hotels with the capability of offering private in-room
fax service, even in single-line rooms, without the significant capital
expenditures otherwise required to rewire the hotel and upgrade telecom systems
to make in-room fax possible.
The Office(TM): The Office(TM) is an unattended "self-service" hotel
business center. Credit card activated, The Office provides hotel guests with
24- hour convenient access to various office services. Hotel guests can utilize
a personal computer loaded with popular business software, have access to the
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Internet and Email, as well as document printing, faxing and photocopying, all
without ever having to leave the hotel. For hotels, particularly those within
the fast growing mid-market/ limited service sector, The Office(TM) allows them
to meet the needs of business travelers without the expense of added staff.
InnConnect(TM): In July of 1999, AlphaNet entered into a sales and
marketing agreement with a high-speed internet provider engaged in the
installation and operation of high-speed Internet access systems, chiefly
utilizing Digital Subscriber Line technology. The agreement provides for
AlphaNet to sell and market high-speed Internet access for hotel guest and
meeting rooms, across the US and Canada. InnConnect(TM) is AlphaNet's private
label for the services sold under the agreement with a high-speed internet
provider.
InnConnect(TM) provides hotel guests with the same fast and reliable
Internet connection that they are accustomed to having in their offices and
which cannot be achieved via a dial-up connection using a standard hotel
dataport. Moreover, InnConnect(TM) takes the unprecedented stress off hotels'
PBX systems that dial-up connections create, and that leads to both guest
dissatisfaction and higher hotel operating costs.
InnPhone(R): AlphaNet has continued to evolve as a single-source provider
of business and connectivity solutions to the hospitality industry with its
introduction of InnPhone(R), an advanced two-line cordless phone. With
InnPhone(R), hotel guests will be able to roam around their room or suite while
on the phone without being tied to fixed telephone.
Equipment
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AlphaNet purchases fax machines and office equipment from a leading brand
name manufacturer in Japan. The manufacturer modifies facsimile machines to
AlphaNet specifications. This allows the facsimile machines to operate as a part
of a communications network so that business travelers or other individuals
residing in hotel rooms can send and receive fax transmissions.
AlphaNet also leases fax machines to hotels using third party lease
arrangements. Hotels sign multi-year lease agreements with third party lease
companies for fax machines, an alternative to having AlphaNet owned equipment on
site. The leased equipment connects to AlphaNet communications and billing
system. Approximately 10% of the installed fax machines are leased.
The equipment necessary for The Office product line is obtained from brand
name manufacturers and software suppliers and deployed in hotels under contract.
The Office products contain modifications to allow for activity tracking, and
summarized individual usage for billing purposes that is provided to AlphaNet
and the hotel.
AlphaNet acts as a sales agent for both its InnConnect and InnPhone
products.
Client Base
AlphaNet sells its product line at both chain/management company and
individual property levels. Among its 370 hotel clients are properties
represented by more than 20 brands, such as Hyatt, Marriott, Loews, Fairmont,
and Sheraton, to name a few. AlphaNet's InnFax service can be found in every
"Business Class" room of the Hyatt chain and in many leading luxury properties
such as The Waldorf-Astoria, Plaza Hotel, New York Palace Hotel and The Mansion
on Turtle Creek.
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Employees
AlphaNet is headquartered in Ramsey, New Jersey, a suburb of New York City,
and maintains a significant office in Toronto, Canada and a small depot repair
facility in Colorado Springs. AlphaNet's sales and marketing, management and
support staff are located in New Jersey. Operations, customer service, R&D and
finance are in the Toronto facility. The three sales managers and the inside
sales representative work from their homes, as do three installation managers
located in New York, Chicago and the Washington, DC area. AlphaNet employs a
total of 37 people.
Sales and Marketing
AlphaNet sells its products and services through a direct sales force
comprised of three regional sales managers and an inside sales representative,
led by the Vice President of Marketing. The regional sales managers, working
from their homes in New York, Chicago and San Jose, California, each are
respectively responsible for the Eastern, Central and Western United States and
Canada. In addition, senior management of AlphaNet takes an active roll in sales
and sales management.
Our sales force is supported by trade advertising and extensive use of
highly targeted direct mail. AlphaNet also typically exhibits at two major
industry trade shows each year.
Patents and Trademarks
AlphaNet holds a number patents allowing individual fax machines to work in
concert with communications networks. None are material to our business.
InnFax(R) and InnPhone(R) are copyrighted by AlphaNet. The Office(TM) and
InnConnect(R) are AlphaNet registered trademarks.
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Competition
In part due to our first to market advantage and proven technology and
support capabilities, AlphaNet does not have significant competition to its
InnFax business. The market for high-speed Internet access is very competitive,
with some 30 providers. There are two established competitors to AlphaNet's The
Office product and many distributors of hotel telephones.
Sources and Availability of Services
AlphaNet relies upon the facilities and services of various telephone and
communications common carriers. Those relationships are defined under contract
by multi year agreements that have, and continue to, satisfy AlphaNet's needs.
AlphaNet relies on one manufacturer to provide it with fax machines.
Government Matters
Except for the usual and customary business licenses and regulations,
AlphaNet's business is not subject to governmental regulations or approval of
its products.
PROPERTY
AlphaNet occupies leased office space in Toronto, 7,300 square feet, New
Jersey, 2600 square feet and Colorado, 400 square feet. The "per month" lease
cost are as follows:
Toronto $11,420
New Jersey $ 4,200
Colorado $ 550
The Toronto property is on a month to month lease. The New Jersey lease
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expires on July 31, 2001. The Colorado lease expires on March 1, 2001. Tech
Electro Industries' executive offices are also located in the New Jersey offices
leased by AlphaNet and for which Tech Electro Industries pays a portion of the
monthly lease costs.
Universal Battery leases an industrial office building complex and parking
facility owned by La Taste Enterprises, a family partnership of Craig D. La
Taste, former director and former President of Universal Battery. The property
includes approximately 23,000 square feet of office and warehouse building and
7,000 square feet of open fenced and paved parking and storage areas. We have
entered into a lease effective March 1, 2000 for five years at a rate of $8,400
per month. The building space includes approximately 4,000 square feet of office
space, 4,000 square feet of assembly space used in Universal Battery's battery
pack business, with the balance of the space dedicated to warehousing, storage,
shipping and receiving operations.
MANAGEMENT
The following table sets forth certain information concerning the executive
officers and directors of Tech Electro Industries:
Principal Occupation Age
William Kim Wah Tan Investor, President, Chief Executive Officer, 57
and Chairman of the Board
Ian Colin Edmonds Vice President and Director 28
Sadasuke Gomi Investor and Director 29
Julie A. Sansom-Reese Interim Chief Financial Officer and Chief 37
Financial Officer of Universal Battery
Mee Mee Tan Secretary 26
William Kim Wah Tan was elected President, Chief Executive Officer,
39
<PAGE>
Director, and Chairman of the Board of Directors of Tech Electro Industries in
February 1997. Mr. Tan has been active as an entrepreneur in the fields of
finance, general insurance, property development and management for the past
twenty years. He has held senior management positions in a number of financing,
insurance, textile, property development and related businesses. Mr. Tan is the
father of Mee Mee Tan.
Ian Colin Edmonds, Vice President and director of Tech Electro Industries.
Mr. Edmonds is a graduate of the University of Denver, where he received a
bachelors degree in Marketing and minor in Statistics in June 1996. Following
graduation and through December 1997, he was Assistant Product Manager at
Information Handling Services, a private information-technology firm, in Denver,
Colorado. Mr. Edmonds has served as a director of Tech Electro Industries since
July 1997. Mr. Edmonds was elected Vice President in February 1999.
Sadasuke Gomi was elected Director of Tech Electro Industries in February
1997. Mr. Gomi is a graduate of Meii University in Japan, where he received a
bachelor's degree in commerce in 1995. During the past five years, Mr. Gomi's
principal occupation has been that of a private investor, as well as a student.
Julie A. Sansom-Reese was named Interim Chief Financial Officer of Tech
Electro Industries in November 1999. Since August 1986, she has served as CFO of
Universal Battery. She served as CFO of Tech Electro Industries from 1992
through June 1996. She earned a BA from Texas Tech University in August 1986.
Mee Mee Tan is the Secretary of Tech Electro Industries. She holds a BS
degree in Marketing and a minor in Statistics from the University of Denver,
Colorado. Prior to joining us, Ms. Tan was an intern at Prudential Securities in
Denver, Colorado. She is the daughter of William Kim Wah Tan.
No family relationship exists among any of the executive officers or
40
<PAGE>
directors, except that William Kim Wah Tan is the father of Mee Mee Tan.
Significant Employees
The following table sets forth-certain information concerning significant
employees of Tech Electro Industries wholly owned subsidiaries.
Age Position
Randy Hardin 40 President and CEO of Universal Battery
Ian Kindred 52 Vice President of AlphaNet
Randy T. Hardin is Chief Executive Officer of Universal Battery. He has
been an officer of Universal Battery since November 1996. From 1991 to 1996, Mr.
Hardin was the National Sales Manager of MK Battery, Inc., a distributor of
sealed batteries. Mr. Hardin is a graduate of Texas A&M University where he
received a B.A. in Political Science/Marketing in 1982.
Ian Kindred is Vice President of AlphaNet. He joined AlphaNet in 1992 to
create and manage its InnFax operations, engineering and customer service in
North America.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table sets forth information for the fiscal year ended
December 31, 1999, 1998, and 1997 concerning compensation of the Chief Executive
Officer (no other executive officer of Tech Electro Industries received salary
and bonus compensation of at least $100,000) for services in all capacities to
Tech Electro Industries and its subsidiaries or divisions in the fiscal year
ended December 31, 1999:
41
<PAGE>
SUMMARY COMPENSATION TABLE
--------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
------------------------ ---------------------------------
Awards Payouts
---------- --------- ------ ----- ----------- ---------- ------------ --------
Name and Fiscal Salary Bonus Other Restricted Securities LTIP
Principal Year ($) ($) Annual stock Underlying Payouts
Position Ended Compensation award(s) Options/ ($)
Dec. 31 ($) ($) SARs (#)
---------- --------- ------ ----- ----------- ---------- ------------ --------
William 1999 0 0 0 400,000 0
Tan Kim
Wah, 1998 0 0 0 $244,620 100,000 0
Chairman (1a) (1b)
of the 1997 N/A N/A N/A $393,750 N/A N/A
Board, (1b)
President
and CEO
of TEI
---------- -------- ------- ----- ----------- ---------- ------------ --------
(1a) On November 18, 1998, we agreed on an annual compensation of $360,000
including expenses, effective February 1998, for Mr. Tan's services. On December
15, 1998, we issued to Mr. Tan 400,000 shares of common stock, in lieu of
payment of Mr. Tan's 1998 accrued salary in consideration for services provided
by Mr. Tan. On December 22, 1999, Tech Electro Industries and Mr. Tan rescinded
the issuance of these shares to him. Mr. Tan returned the shares to Tech Electro
Industries and has waived all compensation due him for his said services to Tech
Electro Industries.
(1b) On February 1998, Tech Electro Industries agreed to pay Mr. Tan
$10,000 per month for services rendered in 1997 as Chairman of the Board,
President and Chief Executive Officer. On February 20, 1998, we issued to Mr.
Tan 100,000 shares of common stock, valued at $2.25 per share, in lieu of
payment of Mr. Tan's 1997 accrued salary, and an additional 75,000 shares of
common stock in repayment of expenses and advances incurred by Mr. Tan. On
December 22, 1999, Tech Electro Industries and Mr. Tan rescinded the issuance of
the said 100,000 shares to him. Mr. Tan returned the shares to us and has waived
42
<PAGE>
all compensation due him for his said services to Tech Electro Industries.
Concurrently with the issuance of the foregoing shares, Tech Electro Industries
granted to Mr. Tan options to acquire 100,000 shares of Common Stock, which
options were exercisable over a period of two years from the date of issuance,
at an exercise price of $5.00 per share. In 1999, the exercise period for these
options was extended to October 31, 2001 and the exercise price reduced to $0.75
per share.
Aggregate Option Grants in Last Fiscal Year - Individual Grants
(a) (b) (c) Exercise Price Expiration Date
Shares Percent of Total
Name Underlying Options Granted to
Options Employees in Fiscal
Granted Year
William
Kim Wah Tan 400,000 32% $0.75 November 15, 2004
EMPLOYEE INCENTIVE STOCK OPTIONS
Tech Electro Industries has adopted three employee incentive stock option
plans, the (i) 1995 Incentive Stock Option Plan, (ii) 1999 Stock Option Plan and
the 2000 Incentive Stock Option Plan. There are outstanding options for (i)
117,750 shares granted under the 1995 Plan (ii) 1,300,000 shares granted under
the 1999 Plan and (iii) 27,000 shares granted under the 2000 Plan. There are an
additional 1,973,000 shares available for the granting of options under the 2000
Plan. All of the said shares under the 1995 Plan, the 1999 Plan and the 2000
Plan have been registered with the Securities and Exchange Commission on Form
S-8, Commission File No.333-41556.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Universal Battery leases its office and warehouse premises from La Taste
43
<PAGE>
Enterprises, a partnership comprised of Craig D. La Taste and members of his
family. The current lease is for a term ending February 28, 2005 and provides
for an annual base rent of $100,800.
On October 26, 1999, Tech Electro Industries completed the acquisition of
AlphaNet. As part of this transaction, we 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. 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 is an
interest only loan 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 warrants to purchase 116,703 shares of common
stock exercisable at $0.75 per share. The warrants expire on October 20, 2004.
We engaged Placement & Acceptance, Inc. 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 Placement &
Acceptance. Placement & Acceptance received fees of $112,000, inclusive of
expenses, for acting as sales agent in the placement. Tech Electro Industries
also engaged Placement & Acceptance in October, 1999 to effect a private
placement of securities to raise $1,400,000 for our acquisition of AlphaNet.
Placement & Acceptance received a placement fee of warrants to purchase 500,000
shares in consideration for services rendered. In addition, we retained
Placement & Acceptance to refinance the outstanding AlphaNet indebtedness
required to complete the acquisition. Placement & Acceptance received a
placement fee of warrants to purchase 550,000 shares of common stock in
consideration for services rendered. All of these warrants are exercisable at
$0.75 per share and expire on October 20, 2004.
44
<PAGE>
On February 25, 2000, we renegotiated and settled in full our $2.1 million
promissory note payable to PricewaterhouseCoopers, Inc., Trustee of the Estate
of AlphaNet Telecom Inc. that composed part of the purchase price of our
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 to
PricewaterhouseCoopers, Inc. 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 August 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, we also
issued to Caspic International warrants to purchase 250,000 shares of common
stock at $0.73 per share exercisable immediately, with an expiration date of
February 25, 2005.
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following table sets forth information concerning the beneficial
ownership of our common stock and preferred stock as of July 10, 2000, by (i)
each person who is known by us to own beneficially more than 5% of the common
stock, (ii) each director of Tech Electro Industries, (iii) each of the
executive officers of Tech Electro Industries, and (iv) all directors and
executive officers of Tech Electro Industries as a group.
------------------ ------------ --------- ------------ --------- -------
Common Series A
Stock Stock
------ --------
Amount Amount
and and
Nature of Nature of % of
Beneficial % of Beneficial % of Voting
Name and Address Ownership(1) Class(2) Ownership(1) Class(2) Power(3)
------------------- ------------ --------- ------------ --------- --------
William Tan 3,467,546 42.79% 5,000 4.18% 13.45%
Kim Wah, President Direct (through
and CEO and Indirect ownership of
No. 18 Jalan Sri (4) 5,000 units)
45
<PAGE>
Semantan 1
Damansara Heights
50490
Kuala Lumpur
Malaysia
------------------- ------------ --------- ------------ --------- --------
Gin Securities,Ltd. 1,163,636(5) 14.36% 0 0 7.18%
11 Jalan Medang Direct
Bukit Bandaraya
59100 Kuala Lumpur
Malaysia
------------------ ------------ --------- --------- --------- --------
Pricewaterhouse 1,100,000 13.57% 0 0 13.57%
Coopers, Inc. Direct
145 King Street W
Toronto Ontario
Canada
M5H 1V8
------------------ ------------ --------- --------- --------- --------
Jenny Jechart 1,094,696(6) 13.51% 0 0 6.28%
10724 Wilshire Blvd. Direct and
Los Angeles,CA 90024 Indirect
------------------ ------------ --------- --------- --------- --------
Jason Tan Highway 668,000(7) 8.24% 0 0 4.12%
Wisma Cosway#12-02, Direct
Jln.
Raja Chulan
50200 Kuala Lumpur,
Maylysia
------------------ ------------ --------- --------- --------- --------
Wooi Hou Tan 666,000(8) 8.21% 0 0 4.11%
First Floor Flat Direct
53 Gloucester Road
London, England SW74QN
United Kingdom
------------------ ----------- --------- --------- --------- --------
Mutsuko Gomi 666,000(8) 8.21% 0 0 4.11%
1367-31 Kawana Direct
Ito-Shi,
Japan 414
------------------ ----------- --------- --------- --------- --------
Craig D. La Taste 542,979(9) 6.70% 0 0 6.42%
4300 Wiley Post Rd. Direct
Dallas, TX 75244
USA
------------------ ----------- --------- --------- --------- --------
Mee Mee Tan, 535,000(10) 6.61% 0 0 2.53%
Secretary Direct and
477 Madison Ave, Indirect
24th Floor
New York, NY 10022
------------------ ----------- --------- --------- --------- --------
Sadasuke Gomi, 487,150(11) 6.01% 0 0 2.56%
Director
477 Madison Avenue
24th Floor
46
<PAGE>
New York, N Y 10022
------------------ ------------ --------- --------- --------- --------
Ian Colin Edmonds 200,000(12) 2.47% 0 0 0
Vice President and
Director
477 Madison Ave,
24th Floor
New York, NY 10022
------------------ ------------ --------- --------- --------- --------
All Directors 4,689,696 57.97% 5,000 2.70% 20.10%
and Executive
Officers as a Group
(4 persons)
(1) Except as otherwise indicated and subject to
applicable community property and similar
laws, we assume that each named person has
the sole voting and investment power with
respect to his or her shares, other than
shares subject to options.
(2) Percent of class is based on the number of
shares outstanding as of July 10, 2000. In
addition, shares which a person had the right
to acquire within 60 days are also deemed
outstanding in calculating the percentage
ownership of the person but not deemed
outstanding as to any other person. Does not
include shares issuable upon exercise of any
warrants, options or other convertible rights
which are not exercisable within 60 days from
July 10, 2000.
(3) In order to reflect the voting rights of the
common stock and preferred stock as of July
10, 2000 based on shares which a holder has
47
<PAGE>
the right to acquire within 60 days, if such
right has not been exercised as of the Record
Date. However, all shares which a holder has
the right to acquire within 60 days, are
accounted for in the percentage of class
calculations for each of the individual type
of securities accounted for in this table.
See footnote 2 above.
(4) Includes (i) 75,000 shares directly held by
Mr. Tan, (ii) options to acquire 500,000
shares of common stock, (iii) 288,000 shares
of common stock, options to purchase 100,000
shares of common stock and 1,050,000 warrants
to purchase common stock held by Placement &
Acceptance, Inc., a company of which Mr. Tan
is a director and officer, (iv) 727,273
shares of common stock and 727,273 warrants
to purchase shares of common stock held by
Ventures International, Ltd., a company of
which Mr. Tan is a director and officer, and
(v) 5,000 Units, with each Unit convertible
into one share of common stock and one share
of preferred stock, of which one share of
preferred stock is convertible into two
shares of common stock.
(5) Includes (i) 581,818 shares of common stock
and (ii) 581,818 warrants.
48
<PAGE>
(6) Includes (i) 509,091 shares of common stock,
(ii) 509,091 warrants and (iii) 76,514
warrants owned by AlphaNet Funding, LLC of
which Ms. Jechart is the principal.
(7) Includes options to acquire 334,000 shares of
common stock.
(8) Includes options to acquire 333,000 shares of
common stock.
(9) Mr. La Taste has direct ownership of 433,732
shares of common stock, and as a partner of
La Taste Enterprise, he is owner of 16,667
shares of common stock which shares have been
included in the percent of shares shown
herein. In addition, Mr. La Taste has been
granted options to acquire 35,000 shares of
common stock; 26,250 of such options are
exercisable immediately, and are included in
the percent of shares shown herein. Mr. La
Taste's wife, Jacqueline Green La Taste, is
the owner of 24,213 shares of common stock
which she received in 1994 as an inheritance.
Mr. La Taste disclaims any beneficial
interest in these shares. Mr. La Taste's
children are beneficiaries of the La Taste
Children's Trust, which owns 46,317 shares of
common stock Mr. La Taste also disclaims any
beneficial interest in these shares.
49
<PAGE>
(10) Includes (i) 205,000 shares and the options
to acquire 180,000 shares of common stock
attributed to her through Equator Holdings,
Inc. a company of which Ms. Tan is a director
and officer and (ii) options held directly by
Ms. Tan to acquire 150,000 shares of common
stock..
(11) Includes (i) 2,150 shares held directly by
Mr. Gomi, (ii) 205,000 shares and options to
acquire 180,000 shares attributed to him
through Fleet Security Investments, Inc. of
which Mr. Gomi is a director and (iii) an
option granted to Gomi to acquire 100,000
shares.
(12) Represents shares underlying options
currently exercisable by Mr. Edmonds.
DESCRIPTION OF COMMON STOCK
Tech Electro Industries has authority to issue 50,000,000 shares of common
stock, par value $0.01 per share. Holders of common stock are entitled to one
vote per share and to receive dividends or other distributions when and if
declared by the board of directors. As of the date of this prospectus, there
were 8,103,139 shares of common stock outstanding. Also as of such date, we had
outstanding 120,588 shares Series A preferred stock, each share of which is
convertible into two shares of common stock.
LEGAL MATTERS
Law Office of Carl A. Generes will pass upon the validity of the common
stock offered by this prospectus.
50
<PAGE>
EXPERTS
The financial statements of Tech Electro Industries as of December 31, 1999
and December 31,1998, included in this prospectus, have been audited by King,
Griffin & Adamson P.C. independent certified public accountants, to the extent
and for the periods set forth in their report thereon included in our Annual
Report on Form 10-KSB for the year ended December 31, 1999, incorporated herein
by reference, and are incorporated herein in reliance upon such report given
upon the authority of said firm as experts in auditing and accounting.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the documents that we incorporate by reference,
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended and Section 21E of the Securities Exchange
Act of 1934, as amended. Any statements about our expectations, beliefs, plans,
objectives, assumptions or future events or performance are not historical facts
and may be forward-looking. These statements are often, but not always, made
through the use of words or phrases like "anticipate", "estimate", "plans",
"projects", "continuing", "ongoing", "expects", "management believes", "the
Company believes", "the Company intends", "we believe", "we intend" and similar
words or phrases. Accordingly, these statements involve estimates, assumptions
and uncertainties which could cause actual results to differ materially from
those expressed in them. Any forward-looking statements are qualified in their
entirety by reference to the factors discussed in this prospectus or
incorporated by reference.
Because the factors discussed in this prospectus or incorporated herein by
reference could cause actual results or outcomes to differ materially from those
expressed in any forward-looking statements made by us or on behalf of us, you
should not place undue reliance on any such forward-looking statements. Further,
51
<PAGE>
any forward-looking statement speaks only as of the date on which it is made,
and we undertake no obligation to update any forward-looking statement or
statements to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time, and it is not possible for us to predict which
will arise. In addition, we cannot assess the impact of each factor on our
business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking
statements.
WHERE YOU CAN GET MORE INFORMATION
We are a reporting company and file annual, quarterly and current reports,
proxy statements and other information with the SEC. You may read and copy these
reports, proxy statements and other information at the SEC's public reference
rooms in Washington, D.C., New York, NY and Chicago, IL. You can request copies
of these documents by writing to the SEC and paying a fee for the copying cost.
Please call the SEC at 1-800-SEC-0330 for more information about the operation
of the public reference rooms. Our SEC filings are also available at the SEC's
website at "http:\\www.sec.gov."
52
<PAGE>
INDEX TO FINANCIAL STATEMENTS
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
Years ended December 31, 1999 And 1998
And
Quarterly periods ended March 31, 2000 and 1999
Page
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Statement of Operations for the year ended December 31, 1999 .....F-2
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants ......................F-4
Financial Statements
Consolidated Balance Sheets as of December 31, 1999 and 1998 ..........F-5
Consolidated Statements of Operations
for the years ended December 31, 1999 and 1998 ........................F-7
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999 and 1998 ........................F-8
Consolidated Statements of Cash Flows
for the years ended December 31, 1999 and 1998 ........................F-10
Notes to Consolidated Financial Statements ............................F-12
Consolidated Balance Sheet at March 31, 2000 (unaudited)
and December 31, 1999 .................................................F-30
Consolidated Statements of Operations for the three
months ended March 31, 2000 and 1999 (unaudited) ......................F-32
Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 and 1999 (unaudited) ......................F-34
Notes to Consolidated Financial Statements ............................F-36
ALPHANET HOSPITALITY SYSTEMS, INC.
Report of Independent Certified Public Accountants ......................F-42
Financial Statements
Balance Sheet as of September 30, 1999 and December 31, 1998 ..........F-43
Statements of Operations for the nine months ended
September 30, 1999 and the year ended December 31, 1998 ...............F-44
Statements of Changes in Stockholders' Equity for the nine months
ended September 30, 1999 and the year ended December 31, 1998 .........F-45
Statements of Cash Flows for the nine months ended
September 30, 1999 and the year ended December 31, 1998 ...............F-46
Notes to Financial Statements .........................................F-47
F-1
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Year Ended December 31, 1999
Effective October 26, 1999, Tech Electro Industries, Inc. ("Tech Electro" or
"Company") completed an acquisition of AlphaNet Hospitality Systems, Inc.
("AlphaNet"). The historical financial statements prior to the acquisition
transaction are those of Tech Electro.
For accounting purposes, the acquisition of AlphaNet is accounted for using the
purchase method of accounting. See Note C to the Consolidated Financial
Statements for a more complete discussion.
The unaudited pro forma statements of operations for the year ended December 31,
1999 reflect the acquisition as if the transaction were consummated on January
1, 1999.
The unaudited pro forma statements are not necessarily indicative of the results
that would have been reported has such events actually occurred on the dates
specified, nor is it necessarily indicative of the future results of the
combined entities. The unaudited pro forma statements of operations should be
read in conjunction with the separate historical financial statements of the
Company and AlphaNet and related notes appearing elsewhere in this registration
statement.
F-2
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
(A)
AlphaNet
Historical Hospitality Pro Forma Pro Forma
1999 Systems, Inc. Adjustments 1999
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
REVENUES..........................................$ 18,650,674 $ 6,883,390 $ - $ 25,534,064
-------------- -------------- ------------- --------------
OPERATING EXPENSES
Depreciation and amortization.................. 1,225,510 3,357,174 - 4,582,684
Other.......................................... 20,433,360 5,002,709 - 25,436,069
-------------- -------------- ------------- --------------
Total operating expenses..................... 21,658,870 8,359,883 - 30,018,753
INTEREST EXPENSE.................................. (552,536) (290,595) - (843,131)
INTEREST INCOME................................... 37,794 - - 37,794
AMORTIZATION OF EXCESS OF NET
ASSETS OF COMPANIES ACQUIRED
OVER COST...................................... 130,101 - - 130,101
AMORTIZATION OF DEFERRED
FINANCING COSTS................................ (154,716) - - (154,716)
OTHER............................................. 118,919 (13,919) - 105,000
AMORTIZATION OF NEGATIVE
GOODWILL....................................... - - 328,125 (B) 328,125
-------------- -------------- ------------- --------------
NET INCOME (LOSS) BEFORE TAXES.................... (3,428,634) (1,781,007) 328,125 (4,881,516)
INCOME TAXES...................................... - - - -
-------------- -------------- ------------- --------------
NET LOSS..........................................$ (3,428,634) $ (1,781,007) $ 328,125 $ (4,881,516)
============== ============== ============= ==============
NET LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS............................$ (3,479,086) $ (4,931,968)
============== ==============
LOSS PER WEIGHTED AVERAGE
COMMON SHARE OUTSTANDING
(basic and diluted)............................$ (.63) $ (.89)
============== ==============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING (basic and
diluted)....................................... 5,509,527 5,509,527
============== ==============
</TABLE>
----------------
(A) To reflect the operations of AlphaNet Hospitality Systems, Inc. prior to its
acquisition on October 26, 1999.
(B) To reflect the amortization of negative goodwill assuming the Company had
acquired AlphaNet Hospitality Systems, Inc. on January 1, 1999.
F-3
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders and Board of Directors
Tech Electro Industries, Inc. and Subsidiaries
We have audited the consolidated balance sheets of Tech Electro Industries,
Inc. and Subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tech Electro
Industries, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
KING GRIFFIN & ADAMSON P.C.
February 11, 2000, except for Note R for which the date is March 22, 2000
Dallas, Texas
F-4
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
ASSETS
1999 1998
---------- ------------
CURRENT ASSETS
Cash and cash equivalents.....................$ 894,261 $ 1,399,060
Certificate of deposit........................ 260,294 -
Accounts and notes receivable
Trade, net of allowance for doubtful
accounts of $282,498 and $305,077 in
1999 and 1998, respectively................. 3,352,887 2,879,528
Notes....................................... 180,146 305,659
Other....................................... 67,901 13,489
Inventories, net ........................... 1,611,358 3,356,539
Prepaid expenses and other.................. 601,257 331,893
---------- ----------
Total current assets..................... 6,968,104 8,286,168
---------- ----------
PROPERTY AND EQUIPMENT
Facsimile and business center equipment....... 8,175,530 -
Other equipment............................... 959,814 1,305,001
Furniture and fixtures........................ 214,271 458,897
Vehicles...................................... 14,262 216,201
Leasehold improvements........................ 51,378 327,810
---------- ----------
9,415,255 2,307,909
Less accumulated depreciation and
amortization................................ (1,426,888) (1,410,085)
---------- ----------
Net property and equipment................ 7,988,367 897,824
---------- ----------
OTHER ASSETS
Notes receivable, net of current portion...... 7,031 7,031
Contract rights, net.......................... - 4,608,349
Deferred financing costs, net................. 688,875 199,193
Other ........................................ 26,461 182,029
---------- ----------
Total other assets........................ 722,367 4,996,602
---------- ----------
TOTAL ASSETS.....................................$15,678,838 $14,180,594
=========== ===========
The accompanying footnotes are an integral part of these
consolidated financial statements.
- Continued -
F-5
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Continued
December 31, 1999 and 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
------------ ------------
CURRENT LIABILITIES
Lines of credit.......................... $ 389,532 $ 8,198,654
Current portion of long-term debt........ 2,316,796 215,300
Trade accounts payable................... 1,846,642 3,349,682
Accrued liabilities...................... 948,687 1,354,335
Deferred service liability............... - 1,646,949
Other liabilities........................ 44,119 333,975
----------- ------------
Total current liabilities......... 5,545,776 15,098,895
----------- ------------
LONG-TERM DEBT, less current portion.......... 2,556,174 53,204
EXCESS OF NET ASSETS OF COMPANIES ACQUIRED
OVER COST................................ 4,033,132 -
----------- ------------
Total liabilities................. 12,135,082 15,152,099
MINORITY INTEREST IN SUBSIDIARY............... - 2,054,633
COMMITMENTS AND CONTINGENCIES (Note Q)
STOCKHOLDERS' EQUITY
Preferred stock - $1.00 par value; 1,000,000
shares authorized; 119,588 and 177,488
Class A issued and outstanding in 1999 and
1998, respectively; liquidation preference
of $627,837 and $931,812 in 1999 and 1998,
respectively............................. 119,588 177,488
Common stock - $0.01 par value; 10,000,000
shares authorized; 7,034,684 and 4,799,177
shares issued and outstanding during 1999
and 1998, respectively.................... 70,347 47,992
Additional paid-in capital................... 13,225,368 3,165,843
Receivable from shareholder.................. - (25,000)
Accumulated deficit.......................... (9,871,547) (6,392,461)
------------ ------------
Total stockholders' equity............. 3,543,756 (3,026,138)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...... $ 15,678,838 $ 14,180,594
============ ============
The accompanying footnotes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1999 and 1998
1999 1998
REVENUES ------------ ------------
Sales .............................. $ 13,150,822 $ 11,541,122
Service Revenue...................... 5,499,852 13,371,909
------------ ------------
18,650,674 24,913,031
COST OF REVENUES
Cost of goods sold................... 10,469,627 11,327,817
Direct servicing costs............... 3,058,861 6,261,041
------------ ------------
13,528,488 17,588,858
GROSS PROFIT........................... 5,122,186 7,324,173
OPERATING EXPENSES
Selling, general and administrative.. 6,796,921 9,395,513
Inventory obsolescence provision..... 107,951 1,250,798
Depreciation and amortization........ 1,225,510 1,116,353
------------ ------------
8,130,382 11,762,664
LOSS FROM OPERATIONS................... (3,008,196) (4,438,491)
OTHER INCOME (EXPENSES)
Interest income...................... 37,794 98,529
Interest expense..................... (552,536) (684,120)
Realized gain on sale of marketable
securities................. - 71,439
Amortization of excess of net assets
of companies acquired over cost... 130,101 -
Amortization of deferred financing costs (154,716) (52,470)
Other .............................. 118,919 -
------------- ------------
(420,438) (566,622)
MINORITY INTEREST SHARE OF LOSS OF SUBSIDIARY - 29,202
------------- ------------
LOSS BEFORE PROVISION FOR INCOME TAXES. (3,428,634) (4,975,911)
PROVISION FOR INCOME TAXES............. - -
------------- ------------
NET LOSS............................... $ (3,428,634) $ (4,975,911)
------------- ------------
Net loss attributable to common stockholders $ (3,479,086) $ (5,058,245)
============= ============
Basic and diluted net loss per share
attributable to common shareholders $ (.63) $ (1.26)
============= ============
Number of weighted-average shares of common
stock outstanding (basic and diluted).. 5,509,527 4,012,377
============= ============
The accompanying footnotes are an integral part of these
consolidated financial statements.
F-7
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1999 and 1998
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Accumulated
Preferred Stock Common Stock Additional Deficit)
Number of Number of paid-in Shareholder Retained Marketable
Shares Amount Shares Amount Capital Receivable Earnings Securities Total
--------- -------- --------- -------- ---------- ------------ ------------ ---------- -----------
Balances at
January 1, 1998 319,934 $319,934 3,498,407 $34,985 $5,713,866 $ - $(1,334,216) $ 24,624 $4,759,193
Issuance of common
stock for cash and
receivable - - 331,250 3,312 659,188 - - - 662,500
Conversions of
preferred stock
into common stock (142,446) (142,446) 284,892 2,849 139,597 - - - -
Repayment of
shareholder loan - - 100,000 1,000 99,000 (25,000) - - 75,000
Common stock issued
for compensation - - 551,650 5,516 765,257 - - - 770,773
Dividends paid by
issuance of common
stock - - 32,978 330 82,004 - (82,334) - -
Minority shareholder
portion of share-
holders deficit
in connection with
acquisition of U.S.
Computer Group - - - - (4,293,069) - - - (4,293,069)
Comprehensive income:
Net loss for 1998 - - - - - - (4,975,911) - -
Net unrealized loss
on marketable
securities - - - - - - - (24,624) -
Total comprehensive
income - - - - - - - - (5,000,535)
--------- -------- --------- ------ ---------- ---------- ---------- --------- -----------
Balances at
December 31, 1998 177,488 177,488 4,799,177 47,992 3,165,843 (25,000) (6,392,461) - (3,026,138)
Issuance of common
stock for cash - - 2,214,014 22,141 1,426,609 - - - 1,448,750
</TABLE>
The accompanying footnotes are an integral part of this
consolidated financial statement.
F-8
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - Continued
Years ended December 31, 1999 and 1998
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Accumulated
Preferred Stock Common Stock Additional Deficit)
Number of Number of paid-in Shareholder Retained Marketable
Shares Amount Shares Amount Capital Receivable Earnings Securities Total
--------- -------- --------- -------- ---------- ------------ ------------ ---------- -----------
Conversions of
preferred stock
into common stock (57,900) (57,900) 115,800 1,158 56,742 - - - -
Common stock issued
as repayment on loan
from shareholder - - 108,000 1,080 113,669 - - - 114,749
Cash received on
shareholder receivable - - - - - 25,000 - - 25,000
Common stock issued
for compensation - - 135,446 1,354 138,547 - - - 139,901
Dividends paid by
issuance of common - - 47,247 472 49,980 - (50,452) - -
stock
Common stock issued
for services - - 15,000 150 13,209 - - - 13,359
Common stock contributed
by President and CEO
of TEI - - (400,000) (4,000) 4,000 - - - -
De-consolidation of
USCG - - - - 7,597,929 - - - 7,597,929
Stock options issued
to employees below
fair market value
recorded as
compensation - - - - 77,652 - - - 77,652
Warrants issued
with debt - - - - 581,188 - - - 581,188
Net loss for 1999 - - - - - - (3,428,634) - (3,428,634)
--------- -------- --------- ------- ---------- ----------- ------------ --------- -----------
Balances at
December 31,1999 119,588 $119,588 7,034,684 $70,347 $13,225,368 $ - $(9,871,547) $ - $3,543,756
--------- -------- --------- ------- ---------- ----------- ------------ --------- -----------
</TABLE>
The accompanying footnotes are an integral part of these
consolidated financial statements.
F-9
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999 and 1998
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES ----------- -----------
Net loss ....................................... $(3,428,634) $(4,975,911)
Adjustments to reconcile net loss to net cash
provided by (used by) operating activities:
Stock issued for compensation........... 139,901 308,523
Stock issued for services............... 13,359 -
Stock options issued to employees recorded
as compensation..................... 77,652 -
Depreciation and amortization of property
and equipment....................... 1,056,545 256,406
Provision for bad debts................. 98,163 289,077
Provision for obsolete inventory........ 107,951 1,250,798
Loss on sale of fixed assets............ 2,170 -
Minority interest share of
loss of subsidiary.................. - (29,202)
Amortization of contract rights......... 168,965 859,947
Amortization of deferred financing costs 154,716 52,470
Amortization of excess of net assets
of companies acquired over cost...... (130,101) -
Change in operating assets and liabilities
(net of effects of acquisitions and
de-consolidation)
(Increase)decrease -
Accounts receivable - trade...... (425,634) (373,562)
Accounts receivable - other...... (54,412) 21,453
Inventories...................... 702,657 (1,045,849)
Prepaid expenses and other....... (387,316) 118,364
Deferred financing costs......... (249,565) -
Other assets..................... 5,551 52,711
Increase(decrease) in -
Trade accounts payable........... 1,822,942 1,061,772
Accrued liabilities.............. 867,803 84,595
Deferred service liability....... - 262,919
Other liabilities................ (252,044) -
Dividends payable................ - (28,432)
----------- -----------
Net cash provided by (used by) operating activities 290,669 (1,833,921)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment......... (173,799) (177,939)
Proceeds on sale of property and equipment.. 21,512 -
Cash paid for acquired subsidiary,
net of cash in subsidiary................ (994,235) (188,613)
Payments received on notes receivable....... 40,442 99,460
Sale (purchase) of short term investments... (260,294) 71,439
Advances on notes receivable................ (472,344) -
Cash in de-consolidation of subsidiary...... (316,262) -
----------- -----------
Net cash used by investing activities............ (2,154,980) (195,653)
----------- -----------
The accompanying footnotes are an integral part of these
consolidated financial statements.
F-10
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
Years ended December 31, 1999 and 1998
1999 1998
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net activity on bank lines of credit........ (1,060,557) 752,591
Repayment of long-term debt................. (1,428,681) -
Proceeds of long-term debt.................. 2,375,000 -
Payments on loans from other banks.......... - (178,072)
Advances on loans from affiliates........... - 411,000
Proceeds from stockholder loans............. - 75,000
Cash received on shareholder receivable..... 25,000 -
Payments on redeemed preferred stock of USCG - (212,989)
Net proceeds on sale of common and
preferred shares......................... 1,448,750 662,500
------------- -------------
Net cash provided by financing activities..... 1,359,512 1,510,030
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS..... (504,799) (519,544)
Cash and cash equivalents at beginning
of year ................................. 1,399,060 1,918,604
------------- -------------
Cash and cash equivalents at end of year...... $ 894,261 $ 1,399,060
============= =============
SUPPLEMENTAL DISCLOSURES OF INTEREST PAID..... $ 553,000 $ 680,000
============= =============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Preferred stock conversions
into common stock........................ $ 57,900 $ 142,446
============= =============
Issuance of common stock for
settlement of note payable............... $ 114,749 $ 100,000
============= =============
Dividends paid through issuance
of common stock......................... $ 50,452 $ 82,334
============= =============
Receivable from shareholder................ $ - $ 25,000
============= =============
Write off of notes receivable from USCG.... $ 472,344 $ -
============= =============
Warrants issued and capitalized as
deferred financing costs................ $ 581,188 $ -
============= =============
The accompanying footnotes are an integral part of these
consolidated financial statements.
F-11
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION
Tech Electro Industries, Inc. ("TEI") was formed on January 10, 1992 as a
Texas corporation. On March 19, 1998, TEI acquired 51% of the common stock of
U.S. Computer Group ("USCG"). The acquisition was accounted for as a purchase
and accordingly, the consolidated statements of operations include the
operations of USCG from the acquisition date through February 24, 1999. On
February 25, 1999, Telstar Entertainment ("Telstar") contributed additional
capital to USCG through the purchase of additional shares resulting in Telstar
becoming the largest shareholder of USCG. Effective February 25, 1999, USCG has
been accounted for under the equity method in the consolidated financial
statements of TEI. As TEI's proportionate share of USCG losses has exceeded it's
original investment in USCG prior to the de-consolidation, there has been no
equity income/loss effect recorded by TEI during the period that USCG has been
accounted for under the equity method. 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.
Its 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. USCG provides maintenance services for midrange equipment
manufactured by Digital Equipment Corporation, IBM, Sun Microsystems, Inc. and
many leading brand personal computers, the sale of new and used computer
equipment, network integration and design services, disaster recovery, business
relocation services and internet-based training services. USCG's computer
maintenance and sales customers are located primarily in New York, New Jersey
and Pennsylvania. AHS provides in-room facsimile and business center services to
the hotel industry for their business travelers through licensing agreements.
AHS generated services revenue 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 B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
TEI, CCC, AHS and USCG, (for the period that USCG was accounted for as a
subsidiary). All significant intercompany transactions and balances have been
eliminated in consolidation. The consolidated group is referred to as the
"Company".
Cash and Cash Equivalents
The Company considers all unrestricted cash on hand and in banks,
certificates of deposit and other highly-liquid investments with maturities of
three months or less, when purchased, to be cash and cash equivalents for
purposes of the Statements of Cash Flows.
F-12
<PAGE>
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Certificate of Deposit
At December 31, 1999, the Company's subsidiary CCC has pledged a $150,000
standby letter of credit with one of their major vendors. The Company has a 120
day certificate of deposit which secures the standby letter of credit.
Inventories
Inventories consist primarily of electronic components, materials used in
the assembly of batteries into "packs" and computer systems and hardware which
support the Company's computer maintenance service contracts. All items are
stated at the lower of cost or market. Cost related to electronic components and
battery packing inventory is determined by the average cost method by specific
part. Cost related to inventory used in computer maintenance is determined using
the first-in, first-out method. Reserves are established for slow moving items.
Property and Equipment
Property and equipment are carried at cost. Depreciation and amortization
of equipment is provided using the straight line method over the estimated
useful lives of the assets ranging from three to ten years. Assets held under
capital leases and leasehold improvements are amortized on a straight-line basis
over the shorter of the lease term or the estimated useful life of the related
asset. Depreciation and amortization expense of property and equipment
recognized during 1999 and 1998 including depreciation on facsimile and business
equipment, amounted to $1,056,545 and $256,406, respectively.
Expenditures for major renewals and betterments that extend the useful
lives of property and equipment are capitalized. Expenditures for maintenance
and repairs are charged to expense as incurred.
Contract Rights
Contract rights represent the value assigned to maintenance and servicing
contracts acquired in connection with the acquisition of USCG. The contract
rights of $5,468,296 are amortized on a straight-line basis over their estimated
average life of 5 years. Amortization expense of contract rights for the years
ended December 31, 1999 and 1998 was $168,965 and $859,947, respectively. During
1999 these contract rights were removed from the financial statements as part of
the USCG de-consolidation.
Deferred Financing Costs
Deferred financing costs are amortized on a straight-line basis over the
original term of the financing agreement ranging from one to five years.
Amortization was $154,716 and $52,470 for the years ended December 31, 1999 and
1998, respectively. During 1999, a portion of the deferred financing costs were
removed from the financial statements as part of the USCG de-consolidation.
Income Taxes
The Company utilizes the asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax assets and
liabilities are computed annually for differences between the financial
F-13
<PAGE>
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
statements and tax basis of assets and liabilities that will result in taxable
or deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense or
benefit is the tax payable or refundable for the period plus or minus the change
during the period in deferred tax assets and liabilities.
Long-Lived Assets
The Company accounts for the impairment and disposition of long-lived
assets in accordance with Statement of Financial Accounting Standards (SFAS) No.
121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
Be Disposed Of. In accordance with SFAS No. 121, long-lived assets are reviewed
for events or changes in circumstances which indicate that their carrying value
may not be recoverable. There was no impairment of the value of such assets for
the years ended December 31, 1999 and 1998.
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 December 31, 1999 was $130,101.
Revenue Recognition
Service revenues generated under service maintenance contracts are
recognized on a straight-line basis over the contract period, which is in
proportion to the costs expected to be incurred in performing services under the
contract. Estimated losses on contracts, if any, are charged against earnings in
the period in which such losses are identified. Service revenues that are not
under contract are recognized as the service is performed. Revenue from product
sales including computer equipment and electronic components is recognized upon
shipment.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB
Opinion No. 25, compensation expense for employees is based on the excess, if
any, on the date of grant, between the fair value of TEI's stock over the
exercise price.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
("EITF") Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." All transactions in which goods or services are the consideration
received for the issuance of equity instruments are accounted for based on the
F-14
<PAGE>
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more reliably measurable. The measurement date
of the fair value of the equity instrument issued is the earlier of the date on
which the counterparty's performance is complete or the date on which it is
probable that performance will occur.
Reclassifications
Certain 1998 amounts have been reclassified to conform with the 1999
presentation.
Loss per Share
Basic net loss per share is computed by dividing net loss 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. The Company's
common stock equivalents are not included in the diluted loss per share for 1999
and 1998 as they are antidilutive. Therefore, diluted and basic loss per share
is identical. Net loss per share has been increased for dividends on preferred
stock totaling $50,452 and $82,334 for 1999 and 1998, respectively.
Use of Estimates and Assumptions
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could vary from the estimates that were
used.
Recent Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") during the fiscal year ended December 31, 1998. SFAS 131 establishes
standards for reporting information regarding operating segments in annual
financial statements and requires selected information for those segments to be
presented in interim financial reports. SFAS 131 also establishes standards for
related disclosures about products and services and geographic areas. Operating
segments are identified as components of an enterprise about which separate
discrete financial information is available for evaluation by the chief
operating decision maker, or decision making group, in making decisions about
how to allocate resources and assess performance.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133", which establishes accounting and reporting standards for
derivative instruments. SFAS No. 137 is effective for all fiscal quarters for
all fiscal years beginning after June 15, 2000. The adoption of SFAS 137 is not
expected to have a significant impact on the Company's results of operations.
F-15
<PAGE>
NOTE C - ACQUISITIONS
On March 19, 1998, the Company completed the acquisition of 51% of the
issued and outstanding common stock of USCG (being new stock issued by USCG).
The purchase consideration for this transaction was $1,000,000 paid in cash. The
acquisition has been accounted for as a purchase. Negative equity related to the
minority interest shareholders at the date of purchase of $4,293,068 was
recorded as a contra to additional paid-in capital.
The summary of the fair value of assets acquired and liabilities assumed is
as follows:
Current assets...................................... $ 4,131,186
Fixed assets........................................ 667,408
Contract rights..................................... 5,468,296
Other assets........................................ 486,113
Current liabilities................................. (5,000,983)
Long-term liabilities............................... (6,777,466)
Minority interest in preferred stock................ (2,267,622)
Purchased deficit................................... 4,293,068
------------
$ 1,000,000
============
Acquisition costs net of cash acquired in USCG amounted to $188,613.
The following unaudited pro forma consolidated information for the year
ended December 31, 1998 assumes the USCG acquisition occurred as of January 1,
1998:
Year Ended
December 31, 1998
(unaudited)
Revenues.............................................. $ 30,005,656
Net loss.............................................. $ (5,731,981)
Loss per share (basic and diluted).................... $ (1.43)
On October 26, 1999, the Company completed the acquisition of 100% of the
issued and outstanding common stock of AHS. The purchase consideration totaled
$3,500,000 through a combination of cash of $1,400,000, promissory note of
$2,100,000, in addition to assuming debt of $2,375,000. The acquisition has been
accounted for as a purchase. The excess of net assets of companies acquired over
cost of $4,163,233 was recorded, as the purchase price was less than the
estimated fair value of net assets acquired. The fair value of fixed assets was
recorded based on an appraised value.
A summary of the fair value of assets acquired and liabilities assumed is
as follows:
Current assets........................................ $ 2,526,927
Fixed assets.......................................... 8,543,822
Current liabilities................................... (1,834,495)
Long-term liabilities................................. (1,573,021)
Excess of net assets of companies acquired over cost.. (4,163,233)
------------
$ 3,500,000
============
F-16
<PAGE>
NOTE C - ACQUISITIONS (Continued)
The following unaudited pro forma consolidated results of operations for
the years ended December 31, 1999 and 1998 assumes the AHS acquisition occurred
as of January 1, 1998.
1999 1998
(Unaudited) (Unaudited)
------------ ------------
Revenues............................ $ 25,534,064 $ 33,480,355
Net loss............................ $ (4,881,516) $ (7,322,573)
Loss per share (basic and diluted).. $ (.89) $ (1.82)
NOTE D - INVENTORIES
Inventories at December 31, 1999 and 1998, consist of the following:
1999 1998
------------ ------------
Computer components for
maintenance contracts................ $ - $ 2,527,808
Electronic components.................. 2,212,181 2,550,129
Inventory obsolescence reserve......... (600,823) (1,721,398)
------------ ------------
$ 1,611,358 $ 3,356,539
============ ============
NOTE E - NOTES RECEIVABLE
Notes receivable consist of the following at December 31, 1999 and 1998:
1999 1998
------------ ------------
Notes receivable from a minority
shareholder; interest at 6%, unpaid
interest accrues monthly and adds to
principal. These notes were removed
from the financial statements as part
of the USCG de-consolidation..............$ - $ 81,909
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............... 180,146 220,000
Notes receivable, jointly and severally
from two minority shareholders with
interest at 6%, payable monthly at $312.50
plus interest, matures November 2001,
unsecured................................. 7,031 10,781
------------ ------------
187,177 312,690
Less current maturities................ (180,146) (305,659)
------------ ------------
Long-term portion......................$ 7,031 $ 7,031
============ ============
F-17
<PAGE>
NOTE F - LINES OF CREDIT
Lines of credit at December 31, 1999 and 1998 consist of the following:
1999 1998
------------ ------------
$10,000,000 line of credit with bank,
bearing interest at prime plus 2%,
maturing September 30, 2001 and
secured by accounts receivable,
inventory and equipment. This note
was removed as part of the USCG
de-consolidation..........................$ - $ 7,362,654
$1,000,000 line of credit with bank
payable on demand with interest at
prime plus 1/2%, maturing June 30,
1999 and secured by accounts
receivable, inventory and equipment....... - 836,000
$3,000,000 line of credit with bank
payable on demand, with interest
payable monthly at prime plus 2%
(10.50% at December 31, 1999),
maturing August, 2002 and secured by
accounts receivable, inventories,
equipment and intangibles of CCC.
Pursuant to borrowing base formulas,
as of December 31, 1999 additional
borrowings of $1,018,168 are available
under the line of credit.................. 389,532 -
------------ ------------
$ 389,532 $ 8,198,654
============ ============
NOTE G - LONG TERM DEBT
Long-term debt at December 31, 1999 and 1998 consists of the following:
1999 1998
------------ ------------
Note payable to a former employee
bears interest at 8 percent per year,
payable in twenty-four equal monthly
installments including principal and
interest and matures on September 15,
1999..................................... $ - $ 49,225
Various capital lease obligations
payable in monthly installments through
July 2000. The monthly lease payments,
including interest, range from $4,427 to
$8,017. The capital lease obligations
are secured by the related underlying
equipment and furniture................... - 167,865
F-18
<PAGE>
NOTE G - LONG-TERM DEBT (Continued)
Capital lease obligation payable in
monthly installments through December
2000. The capital lease is secured by
certain facsimile equipment............. 19,491 -
Various automobile loans with annual
interest rates ranging from 9.9% to
11.5% payable in monthly installments
through February 2001. The monthly
loan payments, including interest,
range from $324 to $522. The
automobile loans are secured by the
related automobiles...................... - 51,414
Non-interest bearing note payable to
former Trustee of AHS, lump sum
payment due at maturity on February,
2000, secured by stock of AHS
(see additional discussion in Note R).... 2,100,000 -
Non-interest bearing, unsecured note
payable to an investment company,
lump sum payment due at maturity on
June, 2000............................... 107,000 -
Note payable to financing company,
with interest payable monthly at 20.5%,
and principal due at maturity
(October 2001), guaranteed by TEI,
with first lien on all AHS assets
and second lien on AHS common stock
(see additional discussion in Note H).... 940,600 -
Note payable to financing company,
with interest payable monthly at 20.5%,
and principal due at maturity
(October 2001), guaranteed by TEI,
with first lien on all AHS assets
and second lien on AHS common stock
(see additional discussion in Note H).... 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......... 271,479 -
------------ ------------
4,872,970 268,504
------------ ------------
Less current maturities.................. (2,316,796) (215,300)
------------ ------------
$ 2,556,174 $ 53,204
============ ============
F-19
<PAGE>
NOTE G - LONG-TERM DEBT (Continued)
Maturities on long-term debt are as follows:
Year ended
December 31,
------------
2000................................. $ 2,316,796
2001................................. 2,479,317
2002................................. 76,857
------------
$ 4,872,970
============
NOTE H - RELATED PARTY TRANSACTIONS
Lease Agreements
The Company leases its Texas office and warehouse space, approximately
16,000 square feet, from a partnership consisting of members of the family of a
shareholder. Rent paid to the partnership for the building lease was $67,200 for
the years ended December 31, 1999 and 1998. In addition, commencing March 1,
2000, the Company will lease warehouse space, approximately 7,800 square feet,
adjacent to their building from the same partnership for five years.
At December 31, 1999, future minimum rental commitments for facilities
under the non-cancelable operating lease agreement (including the additional
commitment in effect March 1, 2000) were as follows:
2000............................................... $ 131,200
2001............................................... 101,900
2002............................................... 100,800
2003............................................... 100,800
2004............................................... 100,800
------------
Total.............................................. $ 535,500
============
During January 1999, the Company loaned USCG $222,344 for working capital
requirements. The loan bears interest at 8% and matures March 12,2000, with
annual options to extend for one year periods through March 12, 2004. On August
26, 1999, the Company loaned USCG an additional $250,000 for working capital
requirements. The loan bears interest at the prime rate plus 1%. During December
1999, the Company determined that these loans were uncollectible and therefore,
these receivables were written off. Such amounts have been included with
selling, general and administrative expenses in the accompanying consolidated
statements of operations.
During July 1999, the Company issued 108,000 shares of common stock with a
fair market value $114,749 to a stockholder of TEI in settlement of a $56,000
note payable. The excess of the fair market value of the stock over the note has
been recorded as compensation expense during the year ended December 31, 1999.
In addition, this stockholder contributed 400,000 shares of TEI common stock to
the Company. Such stock was immediately cancelled.
F-20
<PAGE>
NOTE H - RELATED PARTY TRANSACTIONS (Continued)
During 1999, the Company borrowed $1,525,000 from a finance company that
has an officer who is a relative of TEI's president. The Company paid a loan
origination fee of $150,737. 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
116,703 shares of TEI common stock exercisable at $0.75 per share. The warrants
vest immediately and expire on October 20, 2004.
During 1999, the Company 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.
Also during 1999, the Company engaged an investment company, of which the
Company's president is a director and shareholder to act as sales agent in a
private placement. The investment company received a placement fee of 500,000
warrants in consideration for these services rendered. In addition, the Company
retained the investment company to refinance certain outstanding indebtedness.
The investment company received a fee of 550,000 warrants in consideration for
these services rendered. All of the aforementioned 1,050,000 warrants are
exercisable at $0.75 per share and expire on October 20, 2004.
NOTE I - DECONSOLIDATION OF USCG
Through February 25, 1999, the consolidation losses of USCG exceeded the
Company's investment in USCG by approximately $3,340,000 million. Therefore, in
conformity with the equity method of accounting for its investment in USCG, no
additional losses have been charged to operations after February 25, 1999. In
addition, the de-consolidation of USCG resulted in a net credit to additional
paid-in capital of $7,597,929.
Following is an unaudited summary of financial position and results of
operations of USCG:
December 31, December 31,
1999 1998
(Unaudited) (Unaudited)
------------ ------------
Current assets.............................. $ 3,671,255 $ 3,840,774
Property, plant and equipment, net.......... 384,290 558,268
Other assets, net........................... 673,243 779,661
------------ ------------
Total assets......................... 4,728,788 5,178,703
Current liabilities......................... 7,017,569 6,336,940
Long-term debt.............................. 6,719,136 7,119,882
------------ ------------
Total liabilities.................... 13,736,705 13,456,822
------------ ------------
Stockholders' deficit....................... $ (9,007,917) $ (8,278,119)
============= =============
F-21
<PAGE>
NOTE I - DECONSOLIDATION OF USCG (Continued)
Year Ended
December 31, December 31,
1999 1998
(Unaudited) (Unaudited)
------------ ------------
Revenue............................... $ 15,446,564 $ 18,075,264
Gross profit.......................... 11,866,508 11,572,130
------------ ------------
Net loss................................ $ (1,818,664) $ (2,362,635)
============ ============
NOTE J - MINORITY INTEREST
Minority interest of $2,054,633 at December 31, 1998, represents the
minority interest in USCG's series D and series E redeemable preferred stock
which remains outstanding at December 31, 1998. The Series E preferred stock was
issued as a requirement of a shareholder to convert a loan due from USCG to
preferred stock prior to the acquisition of 51% of the common stock of USCG by
the Company (See additional discussion in Note A).
NOTE K - STOCKHOLDERS' EQUITY
The preferred stock bears cumulative dividends of 36 3/4 cents per share
payable annually and has a liquidation preference of $5.25 per share. Through
December 31, 1999 the Company has paid all dividends which have accrued on the
preferred stock. The voting rights are equal to common shares, other than with
respect to certain matters; generally amending the rights or powers of the
preferred stock. The preferred stock is convertible at the option of the holder
into two shares of common stock subject to adjustment (the "Conversion Rate")
(as more fully described in the Certificate of Designation) at any time after
one year from the date of issue. The Company may compel conversion at the
Conversion Rate at any time after one year from the date of issue if the closing
market price of the common stock is $5.25 or higher for 30 consecutive trading
days. During 1999, 57,900 shares of preferred stock were converted into common
stock.
NOTE L - INCOME TAXES
Deferred tax assets and liabilities at December 31, 1999 and 1998 consist
of the following:
1999 1998
------------ ------------
Current deferred tax asset............. $ 517,436 $ 749,188
Current deferred tax liability......... (80,069) -
Valuation allowance.................... (437,367) (749,188)
------------ ------------
Net current deferred tax asset......... $ - $ -
============ ============
Non-current deferred tax asset......... $ 3,251,779 $ 1,979,549
Non-current deferred tax liability..... (19,570) (1,741,498)
Valuation allowance.................... (3,232,209) (238,051)
------------ ------------
Net non-current deferred tax asset..... $ - $ -
============ ============
F-22
<PAGE>
NOTE L - INCOME TAXES (Continued)
The current deferred tax asset results primarily from the provision for
inventory obsolescence and doubtful accounts and certain accrued liabilities
which are not currently deductible for federal income tax purposes. The current
deferred tax liability results from capitalized loan costs that are expensed
immediately for tax purposes. The non-current deferred tax liability arises from
the accelerated methods of depreciation of assets for federal income tax
purposes. The non-current deferred tax asset results primarily from the net
operating loss carry forward. The net operating loss available at December 31,
1999 amounts to approximately $9,400,000 and begins to expire in 2011. A portion
of the net operating losses are limited subject to section 382 of the Internal
Revenue Code. The current and net non-current deferred tax assets have a 100%
valuation allowance due to the uncertainty of generating future taxable income.
The Company's income tax benefit for the years ended December 31, 1999 and 1998
differed from the statutory federal rate of 34 percent as follows:
1999 1998
------------ ------------
Statutory rate applied to loss
before income taxes..................... $ (1,165,736) $ (1,691,810)
Increase (decrease) in income taxes
resulting from:
Amounts not deductible for federal
income tax purposes, and other...... 55,405 6,877
State income taxes, net of federal
income tax effect................... (97,386) (146,509)
Increase in valuation allowance....... 2,682,337 364,363
Net assets purchased.................. 339,737 1,467,079
Net liability removed through
de-consolidation of USCG.......... (1,814,357) -
------------ ------------
Income tax expense...................... $ - $ -
============ ============
NOTE M - CREDIT CONCENTRATIONS AND SIGNIFICANT CUSTOMERS
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, a certificate of
deposit, and accounts and notes receivable.
Cash and certificates of deposit are at risk to the extent that they exceed
Federal Deposit Insurance Corporation insured amounts. To minimize this risk,
the Company places its cash and cash equivalents and other short-term
investments with high quality financial institutions.
The Company recognizes revenue upon shipment of goods or delivery of
services and does not maintain any set policy regarding the customer's right of
return. Customer requests to return products for refund or credit are handled on
an individual basis at the discretion of management. The refunds or credits in
1999 and 1998 were not significant to the results of operations of the Company.
In the normal course of business, the Company extends unsecured credit to
virtually all of its customers. The Company has a broad base of customers
located throughout the United States, which reduces its credit risk. Because of
the credit risk involved, management has provided an allowance for doubtful
accounts which reflects its opinion of amounts
F-23
<PAGE>
NOTE M - CREDIT CONCENTRATIONS AND SIGNIFICANT CUSTOMERS (Continued)
which will eventually become uncollectible. In the event of complete
non-performance by the Company's customers, the maximum exposure to the Company
is the outstanding accounts receivable balance at the date of non-performance.
At December 31, 1999, one accounts receivable account comprised approximately
28% of the total trade accounts receivable balance. Through the date of this
report, substantially all of this amount had been collected. During the year
ended December 31, 1999, one customer accounted for 20% of total revenues while
in 1998 no single customer accounted for in excess of 10% of revenues. CCC has
certain significant suppliers of its battery products and electronic components.
The loss of any of these relationships could have a material adverse effect on
the Company. AHS relies on one manufacturer to provide it with all fax machines.
The loss of this relationship could have a material adverse effect on the
Company.
NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosure About Fair
Value of Financial Instruments", requires disclosure about the fair value of all
financial assets and liabilities for which it is practicable to estimate. At
December 31, 1999 and 1998 the carrying value all of the Company's accounts
receivable, accounts payable and accrued liabilities approximate fair value
because of their short term nature.
Lines of credit and long term debt carrying values approximate fair values
based on the borrowing rates currently available to the Company for loans with
similar terms.
NOTE O - STOCK OPTIONS AND WARRANTS
On July 12, 1996, the Company implemented an Incentive Stock Option Plan
("1997 Plan") in terms of which 250,000 shares of common stock may be issued
through December 31, 1999. During 1997, the 1997 Plan was approved by the
shareholders of the Company. At December 31, 1997, there were no options
outstanding under the 1997 Plan. During 1998, 150,000 options were granted under
the 1997 Plan of which 90,000 options are outstanding at December 31, 1999.
On November 18, 1998, the Board of Directors approved the 1998 Incentive
Stock Plan ("1998 Plan") in terms of which 250,000 shares of common stock may be
issued through May 31, 1999. No options were issued pursuant to the 1998 Plan.
On August 13, 1999, the Board of Directors approved the issuance, to
certain employees, of 341,250 options to purchase TEI common stock. The options
were granted with an exercise price of $1.00 per share, vest immediately and are
exercisable over two years.
On October 11, 1999, the Board of Directors approved the issuance, to
certain employees, of 100,000 options to purchase TEI common stock. The options
were granted with an exercise price of $0.75 per share, vest immediately and are
exercisable over two years for motivation to certain personnel.
On November 3, 1999, the Board of Directors approved the issuance of 87,500
options to purchase TEI common stock. The options were granted to an employee
for prior services, with an exercise price of $0.75 per share, vest immediately
and expire from two to five years.
F-24
<PAGE>
NOTE O - STOCK OPTION PLANS (Continued)
On November 15, 1999, the Board of Directors approved the issuance, to
certain employees, of 1,030,000 options to purchase shares of TEI common stock.
The options were granted with an exercise price of $0.75 per share, expire from
two to five years and the majority vest immediately.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," in accounting for all options granted to employees. Had compensation
cost for the Company's stock based compensation Plans been determined consistent
with FASB statement No. 123, "Accounting for Stock Based Compensation," the
Company's net loss and loss per share would have been increased to the pro forma
amounts indicated below:
Years ended December 31,
1999 1998
------------ --------------
Net loss attributable to
common shareholders
As reported..$ (3,479,086) $ (5,058,245)
Pro forma....$ (4,631,874) $ (5,184,628)
Basic and diluted loss per
share attributable to
common shareholders
As reported...$ (.63) $ (1.26)
Pro forma.....$ (.84) $ (1.29)
During 1998, USCG issued 375,000 options to purchase shares of USCS stock
to Company employees. In accordance with their Plan, 250,000 of these options
issued expire in 7 years and vest 20% immediately and 20% per year over the next
4 years. The remaining 125,000 options expire in 7 years and vest 33 1/3% over
the next 2 years. The fair value of these options has been included in pro-forma
expense amounts disclosed above.
The fair value of each option grant for USCG stock is estimated on the date
of grant using the Black-Scholes option pricing model with the following
assumptions used for grants in 1998: dividend yield of 0 percent; risk free
interest of 6%; and an expected life of 3 years. Because USCG is not a publicly
traded company, it is permitted to use the "minimum value" method, which
excludes the volatility factor from the option-pricing model.
The fair value of each option grant for TEI stock is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
assumptions used for grants in 1998: dividend yield of 0 percent; expected
volatility of 112%; risk free interest rate of 6%; and an expected life of 2
years.
The fair value of each option and warrant grant for TEI stock is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following assumptions used for grants in 1999: dividend yield of 0 percent;
expected volatility of 134%; risk free interest rate of 6%; and an expected life
of 2 to 5 years.
F-25
<PAGE>
NOTE O - STOCK OPTION PLANS (Continued)
A summary of the status of the Company's compensatory stock option plans as
of December 31, 1999 and 1998 and changes during the years ended December 31,
1999 and 1998 are as follows:
Weighted
Average
Exercise Range of
Shares Price Exercise Price
--------- ----- --------------
Outstanding at January 1, 1998... 117,750 $1.18 $1.00 - $1.75
Granted.......................... 150,000 .75 .75 - .75
---------
Outstanding at December 31, 1998. 267,750 .94 .75 - 1.75
Granted.......................... 1,558,750 .80 .75 - 1.00
Forfeitures...................... (6,500) 1.00 1.00 - 1.00
Cancelled........................ (171,250) 1.00 1.00 - 1.00
---------
Outstanding at December 31, 1999. 1,648,750 .82 .75 - 1.19
=========
The following summarizes information about compensatory options outstanding at
December 31, 1999.
At December 31, 1999 the weighted-average remaining contractual life of the
compensatory options outstanding is 3.1 years. The number of exercisable
compensatory options are 1,570,000 and 111,250 with a weighted-average exercise
price of $0.82 and $1.18 at December 31, 1999 and 1998, respectively. The
weighted-average grant date fair value of options issued during 1999 and 1998
totaled $0.79 and $0.84, respectively.
Effective December 12, 1997, the Company adjusted the terms of certain
previously issued warrants. The exercise price was reduced from $3.50 to $3.30
per warrant. Each warrant was also adjusted to entitle the holder the purchase
of 1.06 shares of the Company's common stock. Total warrants outstanding,
relating to this issuance, at December 31, 1999 were 1,953,500. The warrants
expire January 26, 2000 and may be redeemed at $0.10 per warrant on 30 days
written notice if the average price of the common stock exceeds $5.25 per share
for 30 consecutive trading days prior to the notice.
Effective February 12, 1997, the Company sold 1,100,000 shares of common
stock and warrants to acquire 1,000,000 shares of common stock for $1,870,000,
(a combined price of $1.70 net to the Company). The warrants had an exercise
price per share of $2.15. Each warrant originally expired thirteen months from
the date of issuance. On March 1, 1998, the Company and the warrant holders
agreed to amend the original warrant agreement. The amendment adjusted the
exercise price to $2.50 per share, and extended the exercise period to March 10,
1999. On February 11, 1999, the Company agreed to extend the exercise period to
March 10, 2000 at the same exercise price of $2.50 per share.
F-26
<PAGE>
NOTE O - STOCK OPTION PLANS (Continued)
Effective December 12, 1997, the Company sold 1,000,000 shares of common
stock and warrants to acquire 1,000,000 shares of common stock for net proceeds
of $1,470,500, (a combined price of $1.47 net to the Company). The warrants had
an exercise price of $1.75 and expired twelve months from the date of issuance.
On November 12, 1998, the Company agreed to extend the exercise period to
December 12, 1999 at the same exercise price of $1.75 per share. On November 30,
1999, the Company agreed to extend the exercise period to December 12, 2001 at
the same exercise price of $1.75 per share.
As part of the 1999 private placement, each common stock share purchased
included a warrant to purchase an additional share of common stock at $0.75 per
share. A total of 2,036,354 warrants were issued as part of the private
placement. The warrants vested immediately and expire October 20, 2004.
During 1999, the Company issued warrants to purchase 193,217 shares of TEI
common stock associated with loans from two related parties (see additional
discussion in note H). During 1999, the Company also issued warrants to purchase
1,050,000 shares of TEI common stock to a related party for fund raising and the
arrangement of certain debt (see additional discussion in note H).
NOTE P - SEGMENTS
The Company's service maintenance segment represents operations of the
Company's New York subsidiary, USCG (for the period it was consolidated) which
provides computer system maintenance services to customers in New York, New
Jersey and Pennsylvania. The electronics sales segment represents the operations
of the Company's Texas subsidiary, CCC which includes the stocking and sales of
electronic components and batteries. The hospitality service operations of the
Company is the New Jersey subsidiary, AHS which provides private in-room
facsimile and office business center for business travelers. These segments were
identified based on the different nature of the services, location, and, in
general, the type of customers for those services.
A summary of the segment financial information reported to the chief
operating decision maker is as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1999
------------------------------------------------------------------------------
Service Facsimile & Electronic
Maintenance(1) Business Center Sales Adjustment Consolidated
------------ --------------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenue $ 3,187,661 $ 2,312,191 $13,150,822 $ - $18,650,674
Depreciation and
amortization 168,965 979,991 73,448 3,106 1,225,510
Segment profit (loss) (1,493,412) (1,095,523) 276,027 (1,115,726) (3,428,634)
Segment Assets - 10,262,390 5,174,189 242,259 15,678,838
Capital expenditures
by segment 8,774 149,307 9,791 5,927 173,799
</TABLE>
F-27
<PAGE>
NOTE P - SEGMENTS (Continued)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
----------------------------------------------------------------
Service Electronics
Maintenance(2) Sales Adjustment Consolidated
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue $16,906,496 $8,006,535 $ - $ 24,913,031
Depreciation and Amortization 1,052,523 62,908 922 1,116,353
Segment loss (2,845,082) (568,609) (1,562,220) (4,975,911)
Segment Assets 9,363,185 4,668,788 148,621 14,180,594
Capital expenditures by segment 80,338 86,069 11,532 177,939
</TABLE>
(1)Includes the operations for the period from January 1, 1999 through February
25, 1999.
(2)Includes operations for the period from March 19, 1998 through December 31,
1998.
The adjustments represent depreciation and amortization related to
corporate assets, corporate losses, and corporate capital expenditures to
reconcile segment balances to consolidated balances. None of the other
adjustments are significant.
NOTE Q - COMMITMENTS AND CONTINGENCIES
Litigation
A former employee of CCC has filed suit against the Company for breach of
his employment agreement. The case has been presented in an arbitration hearing
and is currently pending. The Company is unable at this time to determine the
amount of any liability if the former employee prevails in the proceeding.
Should this be settled in an adverse manner the amount could be material to the
operations and financial condition of the Company.
The Company has been 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, the
Company has been negotiating a settlement with the competitor. The Company
believes that the litigation will not have a material impact on the Company's
operations or financial condition regardless of whether the case proceeds to
trial or is settled.
Additionally, in the normal course of its business, the Company is subject
to various other litigation. Management of the Company, based on discussions
with its outside legal counsel, does not believe these claims, individually or
in the aggregate, will have a material adverse impact on the Company's financial
position, results of operations or cash flows.
Operating Leases
The Company is obligated under various non-cancelable operating leases
relating to certain office facilities. Minimum future payments on leases having
remaining terms in excess of one year as of December 31, 1999 are as follows:
F-28
<PAGE>
NOTE Q - COMMITMENTS AND CONTINGENCES (Continued)
Years ending
December 31,
2000....................................$ 67,200
2001.................................... 67,200
------------
$ 134,400
============
Rent expense for the years ended December 31, 1999 and 1998 amounted to
approximately $182,000 and $737,000.
Guarantees
On October 20, 1999 the Company guaranteed a payment made by Telstar to
USCG totaling $100,000 for working capital. The Company has also guaranteed
certain USCG debt with it's primary lender totaling $361,740 (see additional
discussion in Note R).
Commitment
The Company has entered into an agreement with a leasing company which
requires the Company to pay $5 per machine each month for two years, which
represents the estimated residual value at the end of a four-year leasing
contract. The future minimum payments under this agreement at December 31, 1999
are as follows:
Year ended
December 31,
2000...............................................$ 232,936
2001............................................... 106,798
2002............................................... 21,744
------------
$ 361,478
============
NOTE R - SUBSEQUENT EVENTS
On March 8, 2000, the Company renegotiated and settled in full its
$2,100,000 promissory note that composed part of the purchase price of its
acquisition of AHS. The promissory note was retired with $500,000 cash and the
issuance of 1,100,000 shares of TEI common stock.
The Company was advised on March 22, 2000 that Coast Business Credit
Industries, Inc. ("Coast"), has declared that USCG has defaulted on certain
loans from Coast and has demanded full payment. 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.
F-29
<PAGE>
<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-30
<PAGE>
<TABLE>
<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-31
<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 $ 125,435 $(1,747,688)
stockholders ============= ============
</TABLE>
The accompanying footnotes are an integral part of these
consolidated financial statements.
- Continued -
F-32
<PAGE>
<TABLE>
<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
------------- -----------
<S> <C> <C>
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-33
<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-34
<PAGE>
<TABLE>
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Directors of
Alphanet Hospitality Systems, Inc.
We have audited the accompanying balance sheets of Alphanet Hospitality Systems,
Inc. as of September 30, 1999 and December 31, 1998, and the related statements
of operations, stockholders' equity (deficit) and cash flows for the nine-month
period ended September 30, 1999 and the year ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alphanet Hospitality Systems,
Inc. as of September 30, 1999 and December 31, 1998, and the results of its
operations and its cash flows for the nine-month period ended September 30, 1999
and the year ended December 31, 1998 in conformity with generally accepted
accounting principles.
KING GRIFFIN & ADAMSON P.C.
Dallas, Texas
November 11, 1999
F-42
<PAGE>
ALPHANET HOSPITALITY SYSTEMS, INC.
BALANCE SHEETS
September 30, 1999 and December 31, 1998
<TABLE>
<S> <C> <C>
ASSETS
September 30, December 31,
1999 1998
CURRENT ASSETS ------------ ------------
Cash $ 405,765 $ 147,575
Accounts receivable, net of allowance for uncollectible
accounts of $316,836 in 1999 and $490,260 in 1998 1,547,784 1,319,945
Inventory 441,124 799,670
Deposits on inventory -- 843,385
Prepaid expenses and other current assets 132,254 100,240
------------ ------------
Total current assets 2,526,927 3,210,815
EQUIPMENT, NET 8,543,822 9,854,769
------------ ------------
Total assets $ 11,070,749 $ 13,065,584
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Current maturities of long-term debt $ 730,693 $ 505,560
Accounts payable 101,217 234,650
Accrued expenses 964,220 1,033,297
Current maturities of capital lease obligations 38,365 295,160
------------ ------------
Total current liabilities 1,834,495 2,068,667
------------ ------------
Long-term debt, less current maturities 1,573,021 1,465,692
Capital lease obligations, less current maturities -- 19,474
Due to parent -- 18,292,252
COMMITMENTS AND CONTINGENCIES (Note 6) -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value; 10,000 shares authorized,
10 issued and outstanding -- --
Additional paid-in capital 18,234,741 10,000
Accumulated deficit (10,571,508) (8,790,501)
------------ ------------
Total stockholders' equity (deficit) 7,663,233 (8,780,501)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 11,070,749 $ 13,065,584
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
ALPHANET HOSPITALITY SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 1999 and
the Year Ended December 31, 1998
September 30, December 31,
1999 1998
----------- -----------
NET REVENUES $ 6,883,390 $ 8,567,324
COST OF REVENUES (1,735,853) (1,346,817)
----------- -----------
GROSS PROFIT 5,147,537 7,220,507
OPERATING EXPENSES
Selling, general and administrative 3,266,856 5,543,705
Depreciation and amortization 3,357,174 4,264,909
----------- -----------
6,624,030 9,808,614
----------- -----------
(LOSS) FROM OPERATIONS (1,476,493) (2,588,107)
OTHER EXPENSE
Interest expense 290,595 151,542
Other 13,919 44,513
----------- -----------
304,514 196,055
----------- -----------
NET (LOSS) $(1,781,007) $(2,784,162)
=========== ===========
F-44
<PAGE>
ALPHANET HOSPITALITY SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Nine Months Ended September 30, 1999 and
the Year ended December 31, 1998
<TABLE>
<CAPTION>
Common Stock Additional
------------ Paid-in Accumulated
Shares Amount Capital Deficit Total
------ --------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1998 10 $ - $ 10,000 $ (6,006,339) $ (5,996,339)
Net loss - - - (2,784,162) (2,784,162)
------ --------- -------------- -------------- -------------
Balances at December 31, 1998 10 - 10,000 (8,790,501) (8,780,501)
Net loss - - - (1,781,007) (1,781,007)
Forgiveness of debt to parent - - 18,224,741 - 18,224,741
------ --------- -------------- -------------- -------------
Balances at September 30, 1999 10 $ - $ 18,234,741 $ (10,571,508) $ 7,663,233
====== ========= ============== ============== =============
</TABLE>
F-45
<PAGE>
ALPHANET HOSPITALITY SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1999 and
the Year Ended December 31, 1998
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,781,007) $ (2,784,162)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation and amortization 3,357,174 4,264,909
Bad debt expense 337,988 477,938
Changes in assets and liabilities
Accounts receivable (565,827) (709,429)
Inventories 358,546 396,236
Deposits 843,385 (843,385)
Prepaid expenses and other current assets (32,014) (4,454)
Accounts payable (133,433) (29,294)
Accrued expenses (69,077) 190,726
------------- -------------
Net cash provided by operating activities 2,315,735 959,085
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of equipment (2,046,227) (5,993,627)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease obligations (276,269) (360,300)
Payments on long-term debt (474,538) (410,762)
Proceeds from long-term debt 807,000 1,995,167
Net (decrease) increase due to parent (67,511) 3,759,609
------------- -------------
Net cash (used in) provided by financing activities (11,318) 4,983,714
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 258,190 (50,828)
CASH AND CASH EQUIVALENTS, beginning of period 147,575 198,403
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 405,765 $ 147,575
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR
Interest $ 291,000 $ 152,000
============= =============
Income taxes $ -- $ --
============= =============
NON-CASH FINANCING ACTIVITIES
Forgiveness of due to parent $ 18,224,741 $ --
============= =============
</TABLE>
F-46
<PAGE>
ALPHANET HOSPITALITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999 and December 31,1998
1. NATURE OF OPERATIONS
Alphanet Hospitality Systems, Inc. (the "Company") was incorporated in the
state of Delaware in September 1991. The Company was formerly the
wholly-owned subsidiary of AlphaNet Telecom, Inc. (ATI), a publicly traded
Canadian company that filed for bankruptcy in February 1999. The Company's
hospitality business activities involve the development, marketing and
provision of specialized facsimile and other message and information
delivery services. These activities are carried on through the Company's
operations in the United States, as well as through the Company's
operations in Canada, and under license agreements in countries outside of
North America. The majority of the Company's operations are conducted in
the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents. The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be
cash equivalents.
Accounts Receivable. The Company extends unsecured credit in the normal
course of business to virtually all of its customers. Management has
provided an allowance for doubtful accounts which reflects its opinion of
amounts which may ultimately become uncollectible. In the event of
non-performance of accounts receivable, the maximum exposure to the Company
is the recorded amount shown on the balance sheet.
Inventories. Inventories, which consist primarily of facsimile and computer
equipment, are stated at the lower of cost or net realizable value, with
cost being determined on a first-in, first-out basis.
Equipment. Equipment is recorded at cost. Equipment leased under capital
leases are included in equipment. Depreciation and amortization are
calculated on a straight-line basis over the estimated useful lives of the
assets or minimum lease term if shorter as follows:
Years
------
Facsimile and business center equipment 4
Service platform 5 - 10
Furniture, fixtures and office equipment 5
Foreign Currency Translation. Monetary assets and liabilities denominated
in currencies other than the U.S. currency are translated into U.S. dollars
at the rate of exchange prevailing at the year-end. Revenues and expenses
are translated at the average exchange rate for the year. Realized and
unrealized foreign exchange gains and losses are included in income in the
year in which they occur.
F-47
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes. The Company accounts for income taxes in accordance with the
asset and liability method. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax
bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
Revenue Recognition. Revenue from services are recognized when services are
rendered.
Concentrations. The Company maintains cash balances at banks, which may, at
times, exceed federally insured limits. However, management monitors these
balances and does not believe excess risk is present.
Use of Estimates. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
assumptions that affect the reported amounts of certain assets,
liabilities, revenues, and expenses. Actual results could vary from the
estimates that were used in preparing the financial statements.
3. EQUIPMENT
Equipment consisted of the following at September 30, 1999 and December 31,
1998:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Facsimile equipment and business center equipment $ 20,127,338 $ 18,544,798
Service platform 271,465 271,465
Furniture, fixtures and office equipment 814,526 768,562
Capital leases (facsimile equipment) 247,605 247,605
--------------- ---------------
21,460,934 19,832,430
Less: Accumulated depreciation and amortization (12,917,112) (9,977,661)
--------------- ---------------
$ 8,543,822 $ 9,854,769
=============== ===============
</TABLE>
Amortization of capital leases of approximately $46,000 and $62,000 is
included in depreciation and amortization for the nine month period ended
September 30, 1999 and year ended December 31, 1998.
F-48
<PAGE>
4. CAPITAL LEASE OBLIGATIONS
Future minimum annual lease payments under capital leases at September 30,
1999 are as follows:
Year ending September 30, 2000 $ 39,828
Less: Amount representing interest (1,463)
-----------
Present value of net minimum lease payment $ 38,365
===========
Interest rate on capitalized leases is 12.96% and is imputed based on the
lower of Company's incremental borrowing rate at the inception of each
lease or the lessor's implicit rate of return.
Obligations under capital leases are collateralized by certain facsimile
equipment.
F-49
<PAGE>
5. DEBT
Long-term debt at September 30, 1999 and December 31, 1998 consists of the
following:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Installment note payable to leasing company,
due in monthly installments of $48,115, including
interest at 12.84%, maturing June 2002 $ 1,331,874 $ 1,590,225
Installment note payable to leasing company,
due in monthly installments of $7,720, including
interest at 12.86%, maturing June 2002 219,013 -
Installment note payable to leasing company,
due in monthly installments of $16,235, including
interest at 12.83%, maturing June 2002 460,737 -
Installment note payable to leasing company,
due in monthly installments of $3,695, including
interest at 14.50%, maturing June 2002 100,059 121,135
Installment note payable to leasing company,
due in monthly installments of $3,622, including
interest at 14.51%, maturing August 2002 102,857 123,021
Installment note payable to leasing company,
due in monthly installments of $3,004, including
interest at 14.52%, maturing October 2002 89,174 105,497
Installment note payable to leasing company,
due in monthly installments of $31,657, including
interest at 10.75%, maturing January 1999 - 31,374
--------------- ---------------
2,303,714 1,971,252
Less current maturities 730,693 505,560
--------------- ---------------
Long-term debt, less current maturities $ 1,573,021 $ 1,465,692
=============== ===============
All the loans are collaterized by certain facsimile and computer equipment.
Principal payments on long-term debt at September 30, 1999 are as follows:
Year ended September 30:
2000 $ 730,693
2001 831,871
2002 738,184
2003 2,966
-------------
$ 2,303,714
=============
</TABLE>
F-50
<PAGE>
6. COMMITMENTS AND CONTINGENCIES
The Company has entered into an agreement with a leasing company which
requires the Company 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 Company paid the leasing company $151,145 in 1999 and
$133,517 in 1998. The future minimum payments under this agreement at
September 30, 1999 are as follows:
Year ended September 30:
2000 $ 166,693
2001 74,202
2002 34,860
2003 15,115
2004 7,660
Thereafter 6,635
----------
Total $ 305,165
==========
7. INCOME TAXES
The components of income tax expense for the nine month period ended
September 30, 1999 and year ended December 31, 1998 are as follows:
1999 1998
------------ ------------
Current expense $ - $ -
Deferred expense - -
------------ ------------
$ - $ -
============ ============
A reconciliation of the normally expected federal income tax expense
(benefit) based on the U.S. Corporate income tax rate of 34% to actual
expense (benefit) for the nine month period ended September 30, 1999 and
year ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Expected income tax benefit $ 605,542 $ 946,615
Change in valuation allowance (332,126) (109,635)
Operating losses with no current tax benefit (278,967) (1,024,296)
Employee compensation expense not recorded
for book purposes - 145,355
State income tax expense (benefit) - 44,971
Other 5,551 (3,010)
------------- -------------
$ - $ -
============= =============
</TABLE>
F-51
<PAGE>
7. INCOME TAXES (Continued)
The components of the deferred tax assets and liabilities as of September
30, 1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Depreciable assets $ (1,537,756) $ (1,063,517)
Bad debt allowance 110,893 171,591
Inventory reserve 15,750 -
Accrued liabilities 262,826 259,859
Net operating loss carryforwards 1,488,024 1,303,930
Valuation allowance (339,737) (671,863)
------------- -------------
Net deferred tax asset $ - $ -
============= =============
</TABLE>
The Company has net operating loss carryforwards of approximately
$4,250,000 at September 30, 1999 available to offset future taxable income
expiring in 2008 through 2019. A valuation allowance of approximately
$1,488,000 has been established to reduce the net deferred tax asset to
zero because it is likely that the tax asset will not be realized.
Realization is dependent on generating sufficient taxable income prior to
expiration of the loss carryforwards. Certain provisions of the tax law may
limit the net operating loss, capital loss and credit carryforwards
available for use in any given tax year in the event of a significant
change in ownership interest (See Note 9).
8. RELATED PARTY TRANSACTIONS
Effective August 30, 1999, ATI's trustee forgave amounts due to ATI from
the Company totaling $18,224,741. This amount has been recorded as
additional paid-in capital in the accompanying financial statements. This
amount arose from ATI providing working capital to the Company from 1995
through 1998. The amount was non-interest bearing and did not have specific
repayment terms.
The Company expensed $217,834 in the nine month period ended September 30,
1999 and $1,307,004 in the year ended December 31, 1998 for management fees
to ATI associated with a management agreement. The agreement was terminated
after ATI filed for bankruptcy in February 1999.
9. SUBSEQUENT EVENT
The Company was acquired by Tech Electro Industries, Inc., a publicly
traded entity, on October 22, 1999 for $6.025 million, which was comprised
of $1.4 million in cash, $2.1 million in a promissory note and the
assumption of debt of $2.525 million. The acquisition was accounted for
under the purchase method.
F-52
<PAGE>
We have not authorized any dealer, salesperson or other person to give any
information or to make any representations not contained in this prospectus or
any prospectus supplement. You must not rely on any unauthorized information.
This prospectus is not an offer of these securities in any state where an offer
is not permitted. The information in this prospectus is current as of the date
of this prospectus. You should not assume that this prospectus is accurate as of
any other date.
13,691,941 Shares
TECH ELECTRO INDUSTRIES, INC.
TABLE OF CONTENTS
Page
The Company
Risk Factors
Use of Proceeds
Selling Stockholders
Plan of Distribution
Market For Our Common Stock
Management's Discussion And Analysis of Financial Condition And Results
of Operations
Description of Business
Property
Management
Executive Compensation And Other Information
Employee Incentive Stock Options
Certain Relationships and Related Transactions
Security Ownership Of Principal Shareholders and Management
Description Of Common Stock
Legal Matters
Experts
Disclosure Regarding Forward-Looking Statements
Where You Can Get More Information
Index to Consolidated Financial Statements
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
As permitted by Texas law, our Articles of Incorporation as amended
provides that we will indemnify our officers, directors, employees and agents
against attorneys' fees and other expenses and liabilities they incur to defend,
settle or satisfy any civil or criminal action brought against them arising out
of their association with or activities on behalf of us unless, in any such
action, the are adjudged to have acted with gross negligence or to have engaged
in willful misconduct. We may also bear the expenses of such litigation for any
such persons upon their promise to repay such sums if it is ultimately
determined that they are not entitled to indemnification. Such expenditures
could be substantial and may not be recouped, even if we are so entitled.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, we have been informed that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
Pursuant to the Texas Business Corporation Act, our Articles of
Incorporation as amended excludes personal liability on the part of its
directors to Tech Electro Industries for monetary damages based upon any
violation of their fiduciary duties as directors, except as to liability for any
breach of the duty of loyalty, acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, acts in violation
of the Texas Business Corporation Act, or any transaction from which a director
receives an improper personal benefit. This exclusion of liability does not
limit any right which a director may have to be indemnified and does not affect
<PAGE>
any director's liability under federal or applicable state securities laws.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the issuance and distribution of the
securities being registered are set forth in the following table, all amounts
except the registration fee are estimated:
SEC Registration fee........... $ 2,901.00
Legal fees and expenses........ $ 25,000.00
Accounting fees and expenses $ 5,000.00
Printing & Engraving............ $ 5,000.00
Blue Sky fees ......................... $ 5,000.00
Total....................................... $ 42,901.00
ITEM 26. Recent Sales of Unregistered Securities.
14. Effective December 12, 1997, Tech Electro Industries sold in a private
placement 1,000,000 shares of common stock and options to acquire
1,000,000 shares of common stock at $1.75 per share, for an aggregate
consideration of $1,470,500. Tech Electro Industries relied on the
exemption from registration contained in Section 4(2) of the Securities
Act of 1933, as amended, (the "Act").
15. On April 8, 1998, Tech Electro Industries sold in a private placement
446,900 shares of common stock for $662,500 and relied on Section 4(2)
as its exemption from registration under the Act. There were 331,250
shares issued in 1998 and 115,650 shares in 1999, under the terms of the
offering.
16. On November 18 1998, Tech Electro Industries issued 100,000 shares of
common stock to a principal shareholder in repayment of an $100,000
loan. Tech Electro Industries relied on Section 4(2) as its exemption
from registration under the Act.
<PAGE>
17. In 1998, Tech Electro Industries issued 551,650 shares as compensation
to executive officers and reimbursement of out-of-pocket expenses for an
aggregate consideration of $770,773. In 1999, this transaction was
rescinded as to 400,000 of these shares. Tech Electro Industries relied
on Section 4(2) as its exemption from registration under the Act.
18. In October 1999, Tech Electro Industries sold in a private placement
2,036,364 shares of common stock and warrants to purchase a like number
of shares of common stock at $0.75 per share, for an aggregate
consideration of $1,400,000. Tech Electro Industries relied on Section
4(2) as its exemption from registration under the Act.
19. In July 1999, Tech Electro sold in a private placement, 85,000 shares of
common stock for an aggregate consideration of $63,750 and relied on
Section 4(2) as its exemption from registration under the Act.
20. On July 6, 1999 Tech Electro Industries issued 108,000 shares of common
stock to a principal shareholder in repayment of a loan of $114,749.
Tech Electro Industries relied on Section 4(2) as its exemption from
registration under the Act.
21. In 1999, Tech Electro Industries issued 135,446 shares of common stock
to certain employees and consultants as compensation in the amount of
$139,901 for services rendered. Tech Electro Industries relied on
Section 4(2) as its exemption from registration under the Act.
22. On February 25, 2000, Tech Electro Industries paid $500,000 and issued
1,100,000 shares of common stock in full payment of a $2,100,000
promissory note given as part of the purchase price of the capital stock
of AlphaNet. Tech Electro Industries relied on Section 4(2) as its
exemption from registration under the Act in connection with the
issuance of such shares. The closing sale price of the Tech Electro
Industries common stock on February 25, 2000 was $0.9375 per share.
<PAGE>
23. As permitted by its Articles of Incorporation as amended, during 1998
through date hereof, Tech Electro Industries has paid dividends on its
Series A preferred stock by issuing a total of 109,165 shares of common
stock to the preferred stock shareholders. Tech Electro Industries
contends that such payments of dividend in common stock does not require
registration as a sale of securities did not occur.
ITEM 27. EXHIBITS.
Exhibit No. Description
3 Articles of Incorporation and Articles of Amendment to the
Articles of Incorporation of Tech Electro Industries, Inc.*
3.1 Designation Certificate of the preferences, limitations and
relative rights of the preferred stock of Tech Electro
Industries.**
3.2 Articles of Amendment to the Articles of Incorporation filed with
the Texas Secretary of State on May 11, 2000. ***
3.3 Bylaws of Tech Electro Industries, Inc. *
5 Opinion of Law Office of Carl A. Generes.****
23.1 Consent of King Griffin & Adamson, P.C., independent certified
public accountants.****
23.2 Consent of Law Office of Carl A. Generes. Reference is made to
Exhibit 5.
24.1 Power of Attorney. Reference is made to Page II-6.
* Incorporated herein by reference from Exhibit 3.1 to the Registration
Statement of Tech Electro Industries, Inc. on Form SB-2, File No.
33-98662, filed with the Commission on October 30, 1995.
** Incorporated herein by reference from Exhibit 3.2 to Amendments No. 1
and No. 2 to the Registration Statement of Tech Electro Industries, Inc.
on Form SB-2 File No. 33-98662, filed with the Commission on January 5,
1996 and January 23, 1996, respectively.
*** Incorporated herein by reference from Exhibit A to the Information
Statement dated June 8, 2000 of Tech Electro Industries, Inc. filed with
the Commission on June 7, 2000, File No. 0-27210.
**** Filed herewith.
<PAGE>
ITEM 28. UNDERTAKINGS.
We hereby undertake:
(1) To file, during any period in which offers or sales are being made
pursuant to this registration statement, a post-effective amendment to
this registration statement to include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering, and
(4) To deliver or cause to be delivered with the prospectus, to each
person to whom the prospectus is sent or given, the latest annual report
to security holders that is incorporated by reference in the prospectus
and furnished pursuant to and meeting the requirements of Rule 14a-3 or
Rule 14c-3 under the Securities Exchange Act of 1934; and where interim
financial information required to be presented by Article 3 of
Regulation S-X are not set forth in the prospectus, to deliver, or cause
to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by
II-5
<PAGE>
reference in the prospectus to provide such interim financial
information.
We hereby undertake that, for purposes of determining any liability under
the Securities Act of 1933, each filing of the registrant's annual report
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934, that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification by us for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of Tech Electro Industries, Inc. pursuant to the provisions referenced above or
otherwise, we have been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act of
1933, as amended, and is, therefore unenforceable. In the event that a claim for
indemnification against such liabilities, other than the payment by us of
expenses incurred or paid by a director, officer or controlling person of Tech
Electro Industries, Inc. in the successful defense of any action, suit or
proceeding, is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, we will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933, as amended, and will be governed by the final adjudication of such
issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this registration statement
to be signed on its behalf by the undersigned, in Los Angeles, CA on August 2,
2000.
Tech Electro Industries, Inc..
By: /s/ William Tan Kim Wah
-----------------------
William Tan Kim Wah
Chairman, Chief Executive Officer
and President
II-7
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William Tan Kim Wah and Ian Edmonds and
each of them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments, including post-effective
amendments, to this registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or any of
them, or his substitutes or substitute, may lawfully do or cause to be done by
virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
Signature Title Date
/s/ William Tan Kim Wah Chairman, President, Chief Executive August 2, 2000
----------------------- Officer (Principal Executive Officer),
William Tan Kim Wah and Director
/s/ Julie Sansom-Reese Chief Accounting Officer, August 2, 2000
---------------------- (Principal Financial
Julie Sansom-Reese and Accounting Officer)
/s/ Ian Edmonds Vice President and Director August 2, 2000
---------------
Ian Edmonds
/s/ Sadasuke Gomi Director August 2, 2000
-----------------
Sadasuke Gomi
II-8
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
5 Opinion of Law Office of Carl A. Generes.****
23.1 Consent of King Griffin & Adamson, P.C., independent certified
public accountants.****
23.2 Consent of Law Office of Carl A. Generes. Reference is made to
Exhibit 5.
II-9
