Form 10QSB for TECH ELECTRO INDUSTRIES INC/TX filed on Aug 14 1998
For the quarterly period ended June 30, 1998
As of June 30, 1998, 4,143,026 shares of Common Stock were outstanding.
Tech Electro Industries, Inc., and Subsidiaries
Consolidated Balance Sheet
ASSETS
(Unaudited)
Jun 30,1998 Dec 31, 1997
----------- ------------
CURRENT ASSETS
Cash and cash equivalents $1,641,249 $1,918,604
Marketable securities 119,425 96,063
Accounts and notes receivable
Accounts receivable-trade, net of
allowance for doubtful accounts of
$489,730 and $16,000 respectively 2,584,765 974,604
Notes 220,000 362,153
Other 57,067 34,942
Deferred sales costs 193,448 --
Inventories 3,855,688 1,801,034
Prepaid expenses 634,806 211,351
----------- -----------
TOTAL CURRENT ASSETS 9,306,448 5,398,751
----------- -----------
NET PROPERTY AND EQUIPMENT 973,936 308,884
----------- -----------
OTHER ASSETS
Contract rights 5,300,146 --
Deferred financing costs 254,675 --
Goodwill 3,904,821 --
Notes receivable 70,936 49,997
Deposit on future acquisition 37,409 500,000
Other assets 260,799 290
----------- ----------
TOTAL OTHER ASSETS 9,828,786 550,287
----------- ----------
TOTAL ASSETS $20,109,170 $6,257,922
=========== ==========
See Notes to Consolidated Financial Statements
3
Tech Electro Industries, Inc., and Subsidiaries
Consolidated Balance Sheet
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(Unaudited)
Jun 30, 1998 Dec 31, 1997
------------ ------------
CURRENT LIABILITIES:
Current portion of credit
facility obligations $ 251,001 $ --
Current portion of notes payable 414,485 425,000
Current portion of long term debt 164,147 --
Accounts payable-trade 2,931,034 467,822
Accrued liabilities 890,551 548,273
Deferred service liability 1,440,422 --
Dividends payable -- 28,432
------------ ------------
TOTAL CURRENT LIABILITIES 6,091,640 1,469,527
LONG TERM LIABILITIES:
CREDIT FACILITY OBLIGATIONS 7,206,019 --
DEFERRED LEASE INCENTIVE 33,634 --
LONG TERM DEBT 115,911 --
NOTE PAYABLE LONG TERM 38,950 --
------------ ------------
TOTAL LIABILITIES 13,486,154 1,469,527
MINORITY INTEREST IN SUBSIDIARY 2,130,987 29,202
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 193,140 319,934
1,000,000 shares authorized, 65,000 Class
B issued and outstanding on December 31,
1997, liquidation preference of $341,250,
zero shares outstanding on June 30, 1998;
193,140 and 254,934 Class A issued and
outstanding on June 30, 1998 and
December 31, 1997 respectively;
liquidation preference $1,013,985 and
$1,338,404 respectively
Common stock, $.01 par value; 41,430 34,985
10,000,000 shares authorized, 4,143,026
shares issued and outstanding on June 30,
1998 and 3,498,407 shares issued and
outstanding on December 31, 1997.
Additional paid-in capital 7,008,317 5,713,866
Subscription receivable (222,500) --
Unrealized Gains (Losses)
on marketable securities (575) 24,624
Retained Earnings Accumulated Deficit (2,527,783) (1,334,216)
------------ ------------
Total stockholders' equity 4,492,029 4,759,193
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 20,109,170 $ 6,257,922
============ ============
See Notes to Consolidated Financial Statements
4
Tech Electro Industries, Inc., and Subsidiaries
Consolidated Statement of Operations
(Unaudited)
For the Periods Ended June 30, 1998 and 1997
Three Month Ended Year to Date
----------------- ------------
1998 1997 1998 1997
---- ---- ----- ----
Sales and service revenues $7,982,834 $1,483,230 $9,979,422 $2,569,794
Cost of sales and revenue and
direct service expense 6,510,953 1,087,247 7,866,491 1,886,187
---------- ---------- ---------- ----------
Gross profit 1,471,881 395,983 2,112,931 683,607
Selling, general and
administrative expenses 2,398,311 611,151 3,154,397 1,134,640
---------- ---------- ---------- ----------
Loss from operations (926,430) (215,168) (1,041,466) (451,033)
Other income (expense):
Interest income 22,360 35,521 47,785 51,658
Interest expense (173,555) (1,513) (180,194) (16,362)
---------- ---------- ---------- ----------
Total other income (expense) (151,195) 34,009 (132,409) 35,296
Minority share of subsidiary loss 12,737 1,758 29,201 16,226
---------- ---------- ---------- ----------
Loss before provision for taxes (1,064,888) (179,402) (1,144,674) (399,511)
Income tax expense:
Current 3,305 -- 3,305 --
---------- ---------- ---------- ----------
Total income tax expense 3,305 -- 3,305 --
---------- ---------- ---------- ----------
NET LOSS $(1,068,193) $ (179,402)$(1,147,979) $ (399,511)
=========== ========== ========== ==========
Loss attributable to
common stockholders $(1,068,193) $(212,252)$(1,147,979) $(432,362)
=========== ========== ========== ==========
Loss per share $ (0.27) $ (0.09) $ (0.30) $ (0.23)
=========== ========== ========== ==========
Number of weighted average
shares of common shares
outstanding 3,960,601 2,427,575 3,820,717 1,864,425
=========== ========== ========== ==========
See Notes to Consolidated Financial Statements
5
Tech Electro Industries, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(unaudited)
Jun 30 1998 Jun 30 1997
------------- ------------
CASH FLOW FROM OPERATING ACTIVITIES
Net Loss (1,147,979) (399,512)
Adjustments to reconcile net Loss to
cash provided (used) by operations
Depreciation and amortization adjustment 168,229 16,499
Provision for slow moving inventory 291,916 15,000
Minority interest share of subsidiary (132,385) (16,226)
Deferred lease incentive (60,839) --
Changes in operating assets and liabilities
(Increase) decrease in:
Acounts receivable-trade 768,133 (507,437)
Other receivables (22,125) (69,725)
Inventory (572,974) (215,553)
Contract rights 135,901 --
Other assets (36,059) --
Deferred expenses (3,012) --
Deferred sales costs 3,133 --
Prepaid expenses (184,549) (140,533)
Increase (decrease) in:
Accounts payable 902,502 101,180
Accrued liabilities (224,996) 84,303
Deferred service liability (173,895) --
------------- -------------
NET CASH USED BY OPERATING ACTIVITIES (288,999) (1,132,004)
CASH FLOWS FROM INVESTING ACTIVITES
Additions to property and equipment (110,879) (76,908)
Purchases of certificates of deposit -- (697,249)
Advances on note receivable 121,214 17,922
Sale (purchase) of marketable securities (48,561) 584,690
Capitalized merger and acquisition costs (37,409)
Business acquisition, net of cash acquired (415,127) 0
------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (490,762) (171,545)
CASH FLOWS FROM FINANCING ACTIVITIES
Credit facility obligations 846,957 0
Proceeds from short term debt -- 53,383
Payments on short term debt -- (347,772)
Repayment of long-term debt (700,083) 0
Proceeds from sale of preferred stock,
common stock and warrants 383,964 1,870,707
Payments on related party borrowing -- (245,000)
Dividends paid (28,432) (32,491)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 502,406 1,298,827
------------- -------------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (277,355) (4,722)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 1,918,604 261,098
------------- -------------
CASH AND EQUIVALENTS AT END OF PERIOD 1,641,249 256,376
============= =============
6
Tech Electro Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
Note A - Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with the instructions per Item 310(b) of
Regulation SB. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the six month period ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
Note B - Organization
Tech Electro Industries, Inc. ("TEI" or the "Company") was formed on
January 10, 1992 as a Texas corporation. On January 31, 1992, TEI acquired 100%
of the outstanding common stock of Computer Components Corporation (CCC). In
February, 1996, TEI filed a Form SB-2 Registration Statement and completed a
public offering the net proceeds of which amounted to $2,043,891 including
warrants.
On June 1, 1996, pursuant to a Stock Exchange Agreement, TEI acquired
100% of the outstanding shares of Vary Brite Technologies, Inc. (VBT) by issuing
50,000 shares of its common stock. The business combination was accounted for
using the pooling method. The historical consolidated statements of operations
prior to the date of the combination have not been adjusted to include the
operations of VBT as these operations are immaterial to the consolidated
operations of the Company. Accordingly, the accompanying consolidated statements
of operations include, the operations of VBT from June 1, 1996 forward. The
assets and liabilities acquired were also immaterial to the consolidated balance
sheet of the Company.
On October 29, 1996, TEI incorporated Universal Battery Corporation
(UBC) as a 67% owned subsidiary.
Effective February 10, 1997, pursuant to Regulation S as promulgated by
the Securities and Exchange Commission, TEI sold 1,100,000 shares of its common
stock and options to acquire 1,000,000 shares of common stock for $1,870,000,
for a combined price of $1.70 net to the Company. The options were issued with
an exercise price of $2.15 per share and expire thirteen months from the date of
issuance. In February 1998 the terms on the options were extended to March 1999
and the exercise price was increased to $2.50 per share.
7
Note C - Acquisition
On March 19, 1998, the Company completed the acquisition of 51% of the
issued and outstanding common stock of U.S. Computer Group Inc ("USCG"). The
purchase consideration for the interest was $1,000,000 paid in cash. The
acquisition has been accounted for as a purchase. The excess of the aggregate
purchase price over the fair market value of assets acquired and liabilities
assumed of $3,984,815 will be amortized over 15 years. Contract rights acquired
of $5,436,047 will be amortized on a straight-line basis over the respective
contract lives.
The summary of the fair value of assets acquired and liabilities assumed is as
follows:
Current assets $ 4,672,250
Fixed assets 642,408
Contract rights and other assets 5,912,160
Goodwill 3,984,815
Current liabilities (4,543,524)
Long-term liabilities (7,433,939)
Minority interest (2,234,170)
-----------
$ 1,000,000
============
The following pro forma consolidated results for the quarter and six months
ending June 30, 1998 and 1997 assumes USCG acquisition occurred as of January 1,
1997.
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
Revenues $ 5,924,379 $ 6,013,189 $ 13,429,868 $ 13,454,754
Net loss $ (333,679) $ ( 522,198) $ (1,052,780) $ (1,913,623)
Loss per share
(Basic and
diluted) $ (0.08) $ (0.22) $ (0.28) $ (1.03)
Note D - Dividends
Dividends were declared on May 20, 1998 for Class A Preferred Stock at
$0.0975 per share. This dividend was paid in the form of common stock at the
rate of .0313 shares of common for each share of preferred. The dividend was
payable on June 30, 1998 to stockholders of record at the close of business of
May 3, 1998. In addition, dividends paid during the quarter ended June 30, 1998
was $7,678. No dividends were paid for the quarter ended June 30, 1997. No
dividends were payable at June 30, 1998.
8
Note E - Inventories
Inventories consist of the following at June 30, 1998:
Computer parts, electronic components and
packing materials $4,618,204
Less valuation reserves 762,516
---------
$3,855,688
=========
The Company increased its inventory allowance by $120,000 in the second
quarter due to the reduction in business from a major customer by its
subsidiary Computer Components Corporation. This inventory allowance consists
of specialized inventory the Company has in stock for this customer.
Note F - Property and Equipment
Property and equipment consists of the following at June 30, 1998:
Machinery and equipment $ 1,211,183
Leasehold improvements 320,511
Furniture and fixtures 396,904
Automobiles 312,250
---------
2,240,848
Less accumulated depreciation & amortization 1,266,912
---------
$ 973,936
=========
Included in property and equipment at June 30, 1998 is $404,561 of
equipment and furniture acquired under capital leases. Accumulated amortization
of such equipment and furniture was $219,488 at June 30, 1998.
Note G - Credit Facility Obligations
At June 30, 1998, the Company's subsidiary, USCG, maintained a
revolving loan ("the Agreement") with a financial institution, with the maximum
borrowings allowable equal to the lesser of $10,000,000 outstanding at any one
time or the sum of 80 percent of the amount of the USCG's eligible receivables,
as defined in the Agreement. In addition to the revolving loan, USCG also
maintains a term loan with the same financial institution in the principle
amount of $ 500,000 ("Term Loan") plus a term loan in the principal amount of
$500,000 (the "Term Loan"). Borrowings under the Agreement are secured by an
interest in all of the USCG's owned accounts receivable, inventory, equipment,
investment property and general intangibles.
Borrowings under the agreement bear interest at a rate equal to the
prime rate plus 2 percent per year, but in no event less than 9 percent per
year. The revolving loan matures on September 30, 2000, subject to automatic
renewal terms of one year each. As of June 30, 1998, $6,457,020 was outstanding
under the revolving loan.
9
Interest on the Term Loan is payable beginning on October 31, 1998 in
equal monthly installments of $14,000 plus a payment of the unpaid principal
balance on September 30, 2000. As of June 30, 1998, $500,000 was outstanding
under the term loan.
The terms of the Agreement provided for minimum monthly interest
charges, an initial loan fee of 1 percent of the maximum dollar amount of the
loan, an anniversary fee of .5 percent of the maximum dollar amount and a
quarterly facility fee of $5,000. Certain financial and nonfinancial covenants
are required to be met. At June 30, 1998, covenants relating to tangible net
worth and audited financial statement deadlines were in default, however, the
financial institution has provided waivers of such covenants.
In addition, the USCG has a "floorplan" credit line arrangement with a
finance corporation which provides for financing of up to $ 250,000 to support
inventory purchases from a specific vendor. The floorplan credit line agreement
does not provide for interest terms as amount outstanding are required to be
paid timely. As collateral security of the payment under the loan agreement,
USCG granted the finance corporation a security interest in the assets of USCG.
As of June 30, 1998, accounts payable includes approximately $93,380 related to
this inventory financing.
Note H - Deferred Service Liability
The deferred service liability of $ 1,440,422 on the accompanying
consolidated balance sheet represents maintenance contract revenues billed but
not yet earned. The terms of the Company's service maintenance contracts provide
for a period of service ranging from one to twelve months. Contracts are
automatically renewed by the Company unless the customer provides 90 days notice
of termination. The deferred service liability is amortized on a straight-line
basis over the term of the related contracts. As of June 30, 1998, the Company
had a service maintenance contract base with an aggregate balance of
approximately $ 16,639,710.
Note I - Loss per Share
The Company adopted SFAS NO. 128, "Earnings Per Share", in 1997, which,
requires the disclosure of basic and diluted net 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
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 1998 and 1997 as they are antidilutive. Therefore, diluted and basic
loss per share is identical. Net loss per share for the six months ended June
30,1997 has been increased for accrued dividends on preferred stock totaling
$32,850. There were no accrued dividends as of June 30, 1998.
10
Note J - Long-Term Debt
As of June 30, 1998, long-term debt consists of the following:
Capital lease obligations (a) $ 221,246
Automobile loans (b) 58,812
---------
$ 280,058
Less current installments of long-term debt 164,147
---------
$ 115,911
=========
a) Various capital lease obligations with interest ranging from 10 to
12.22 percent payable in monthly installments through August 2000. The
capital lease obligations are secured by the related underlying
equipment and furniture.
b) Various automobile loans with interest rates ranging from 9.89 to
11.5 percent 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.
Note K - Minority Interest
Minority interest of $ 2,130,987 at June 30, 1998 represents the
minority interest in USCG's series D and series E redeemab |
