SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT ON FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 19, 1998
Tech Electro Industries, Inc.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 0-2408297 75-2408297
- ---------------------------- -------------------- -------------------
(State or other (Commission File No.) (IRS Employer ID No.)
jurisdiction of incorporation)
2941 Main Street, Suite 300-B, Santa Monica, California 90405
- ------------------------------------------------------- --------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (310) 396-1782
<PAGE>
TECH ELECTRO INDUSTRIES, INC.
D R A F T
FORM 8-K/A
AMENDMENT NO. 1 TO
CURRENT REPORT ON FORM 8-K
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION, AND EXHIBITS.
(A) CONSOLIDATED FINANCIAL STATEMENTS OF U.S. COMPUTER GROUP INC. AND
SUBSIDIARIES
Independent Auditors' Report
Consolidated Balance Sheet as of February 28, 1998
Statement of Consolidated Operations for the Year Ended
February 28, 1998
Consolidated Statement of Changes in Shareholders' Deficiency
for the Year Ended February 28, 1998
Statement of Consolidated Cash Flows for the Year Ended
February 28, 1998
Notes to Consolidated Financial Statements for the Year Ended
February 28, 1998
(B) CONSOLIDATED FINANCIAL STATEMENTS OF U.S. COMPUTER GROUP INC. AND
SUBSIDIARIES
Report of Independent Auditors
Consolidated Balance Sheet as of February 28, 1997
Consolidated Statement of Operations for the Year Ended
February 28, 1997
Consolidated Statement of Shareholders' Equity (Deficit) for the
Year Ended February 28, 1997
Consolidated Statement of Cash Flows for the Year Ended
February 28, 1997
Notes to Consolidated Financial Statements
(C) PRO FORMA FINANCIAL STATEMENTS.
Introductory Paragraph
Unaudited Pro Forma Consolidated Statement of
Operations for the Year Ended December 31, 1997
Unaudited Pro Forma Consolidated Statement of
Operations for the Three Months Ended March 31, 1998
Unaudited Consolidated Balance Sheet as of March 31, 1998
Notes to Unaudited Pro Forma Consolidated Balance
Sheet as of March 31, 1998
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
U.S. Computer Group Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of U.S. Computer
Group Inc. and Subsidiaries (the "Company") as of February 28, 1998, and the
related consolidated statements of operations, shareholders' deficiency and cash
flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of February 28,
1998, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
May 29, 1998
(June 11, 1998 as to Note 6)
<PAGE>
U.S. COMPUTER GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1998
- -------------------------------------------------------------------------------
ASSETS (Note 6)
CURRENT ASSETS:
Cash $9,873
Accounts receivable - net of allowance for
doubtful accounts of $428,952 (Note 15) 1,853,294
Inventories (Notes 2 and 3) 1,773,596
Deferred sales costs (Note 2) 196,581
Prepaid expenses and other current assets 238,906
---------
Total current assets 4,072,250
PROPERTY AND EQUIPMENT - Net (Notes 2 and 4) 667,408
EXCESS OF COSTS OVER FAIR VALUE OF NET ASSETS
ACQUIRED - Net (Note 2) 487,515
DEFERRED FINANCING COSTS - Net (Note 2) 251,663
OTHER ASSETS 234,450
----------
TOTAL ASSETS $5,713,286
==========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of credit facility
obligations (Notes 6 and 17) $70,000
Current portion of note payable (Note 7) 61,626
Current portion of long-term debt (Note 8) 147,547
Accounts payable 2,093,610
Accrued liabilities (Note 14) 1,083,987
Deferred service liability (Note 5) 1,364,317
Acquisition deposit payable (Note 17) 500,000
---------
Total current liabilities 5,321,087
See notes to consolidated financial statements
<PAGE>
U.S. COMPUTER GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
FEBRUARY 28, 1998
- -------------------------------------------------------------------------------
CREDIT FACILITY OBLIGATIONS (Notes 6 and 17) 6,540,063
NOTE PAYABLE (Note 7) 38,950
LONG-TERM DEBT (Note 8) 198,453
DEFERRED LEASE INCENTIVE (Note 16) 94,473
----------
Total liabilities 12,193,026
----------
COMMITMENTS AND CONTINGENCIES (Note 16)
REDEEMABLE PREFERRED STOCK, series D, $1,000 par value;
1,000 shares authorized; 181,349 shares issued and
outstanding, redemption value and liquidation
preference of $267,622 (Note 10) 267,622
----------
REDEEMABLE COMMON STOCK, 2,737 SHARES AT $1.95 PER SHARE (Note 14) 5,337
----------
SHAREHOLDERS' DEFICIENCY (Notes 1, 11 and 17):
Preferred stock, series A, B and C, $100 par
value; 1,000, 2,000 and 3,500 shares
authorized, respectively;
no shares outstanding --
Redeemable preferred stock, series E, $1,000 par
value; 5,000 shares authorized; 2,000 shares
issued and outstanding, redemption value and
liquidation preference of $2,000,000
(Notes 9 and 17) 2,000,000
Common stock, .00001 par value; 1,500,000
shares authorized; 674,073 shares issued
and outstanding 7
Treasury stock, 18,196 shares, at cost (100,217)
Notes receivable from shareholders (Note 12) (184,434)
Additional paid-in capital 3,256,697
Accumulated deficit (11,724,752)
----------
Total shareholders' deficiency (6,752,699)
----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY $5,713,286
==========
See notes to consolidated financial statements
<PAGE>
U.S. COMPUTER GROUP INC. AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
YEAR ENDED FEBRUARY 28, 1998
- -------------------------------------------------------------------------------
TRADE SALES - Net of sales returns and allowances $7,101,281
SERVICE REVENUES 17,155,971
----------
Total sales and revenues (Notes 2 and 15) 24,257,252
COST OF SALES AND REVENUES 11,156,915
DIRECT SERVICING EXPENSES 10,626,351
GENERAL AND ADMINISTRATIVE EXPENSES 5,341,688
----------
Operating loss (2,867,702)
INTEREST EXPENSE (Net of interest income of $ 13,037) 926,998
OTHER INCOME (49,800)
----------
Loss before provision for income taxes (3,744,900)
PROVISION FOR INCOME TAXES (Note 13) 3,000
----------
NET LOSS $(3,747,900)
==========
See notes to consolidated financial statements
<PAGE>
U.S. COMPUTER GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIENCY
YEAR ENDED FEBRUARY 28, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Preferred
Shares Preferred Shares Preferred
Outstanding Stock Outstanding Stock Common Shares Common Treasury
Series D Series D Series E Series E Outstanding Treasury Stock Stock
------- -------- -------- --------- ----------- -------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
MARCH 1, 1997 317,357 $468,334 - $- 674,073 828 $7 $(7,866)
Net loss for the year
ended February 28, 1998 - - - - - - - -
Dividends on redeemable
preferred stock - - - - - - - -
Common stock
redeemed - - - - - 17,368 - (92,351)
Forgiveness of debt
and interest for
related party - - - - - - - -
Issuance of
preferred stock - - 2,000 2,000,000 - - - -
Accrued interest on notes
receivable from
shareholders - - - - - - - -
Transfer to redeemable
preferred stock, Series D (317,357) (468,334) - - - - - -
Transfer to redeemable
Common stock - - - - - - - -
------- -------- ----- ---------- ------- ------ ---- ---------
BALANCE,
FEBRUARY 28, 1998 - $ - 2,000 $2,000,000 674,073 18,196 $7 $(100,217)
======= ======== ===== ========== ======= ====== ==== =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
U.S. COMPUTER GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIENCY (Continued)
YEAR ENDED FEBRUARY 28, 1998
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Notes
Receivable Additional Total
from Paid-in Accumulated Shareholders'
Shareholders Capital Deficiency Deficiency
--------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
BALANCE,
MARCH 1, 1997 $(173,179) $1,669,853 $(7,939,881) $(5,982,732)
Net loss for the year
ended February 28, 1998 - - (3,747,900) (3,747,900)
Dividends on redeemable
preferred stock - - (36,971) (36,971)
Common stock
redeemed - - - (92,351)
Forgiveness of debt
and interest for
related party - 1,592,181 - 1,592,181
Issuance of
preferred stock - - - 2,000,000
Accrued interest on notes
receivable from
shareholders (11,255) - - (11,255)
Transfer to redeemable
preferred stock, series D - - - (468,334)
Transfer to redeemable
Common stock - (5,337) (5,337)
--------- ---------- ------------ -----------
BALANCE,
FEBRUARY 28, 1998 $(184,434) $3,256,697 $(11,724,752) $(6,752,699)
========= ========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
U.S. COMPUTER GROUP INC. AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
YEAR ENDED FEBRUARY 28, 1998
- -------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,747,900)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 285,444
Amortization of excess of costs over fair
value of net assets acquired 79,867
Amortization of deferred financing costs 39,575
Provision for the allowance for doubtful
accounts receivable 152,481
Loss on disposal of fixed assets 19,269
Forgiveness of interest to related party 262,181
Accrued interest on notes receivable from
shareholders (11,255)
Changes in assets and liabilities:
Accounts receivable 1,012,231
Inventories 597,146
Deferred sales costs 120,034
Prepaid expenses and other current assets (58,767)
Deferred financing costs (291,238)
Other assets (136,976)
Accounts payable (241,999)
Accrued liabilities (55,528)
Deferred service liability (584,087)
Acquisition deposit payable 500,000
Deferred lease incentive (54,935)
----------
Net cash used in operating activities (2,114,457)
----------
CASH FLOWS FROM INVESTING ACTIVITIES -
Additions to property and equipment (243,140)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of credit facility obligations (15,840,320)
Proceeds from credit facility obligations 17,600,383
Payments of note payable (24,424)
Repayments on long-term debt (196,866)
Borrowings from issuance of long-term debt 234,941
Repayments of loans to shareholder (100,000)
Borrowings from shareholder 730,000
Redemption of redeemable preferred stock (200,712)
Dividends on redeemable preferred stock (36,971)
Redemption of common stock (92,351)
----------
Net cash provided by financing activities 2,073,680
----------
NET DECREASE IN CASH (283,917)
CASH, BEGINNING OF YEAR 293,790
----------
CASH, END OF YEAR $9,873
==========
<PAGE>
U.S. COMPUTER GROUP INC. AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS (Continued)
YEAR ENDED FEBRUARY 28, 1998
- -------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest $910,262
==========
Income taxes paid $9,659
==========
Income taxes refunded $(2,202)
==========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
1. The Company issued 2,000 shares of preferred stock, series E, with a par
value of $1,000 per share in exchange for a $2,000,000 subordinated loan
payable to a shareholder.
2. A shareholder forgave a $1,330,000 loan payable, which was accounted for
as additional paid-in capital.
3. A capital lease obligation of $141,348 was incurred when the Company
entered into a lease for new equipment.
4. The Company issued a $125,000 note payable to a former employee to satisfy
an outstanding liability.
See notes to consolidated financial statements.
<PAGE>
U.S. COMPUTER GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 28, 1998
- -------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
The accompanying consolidated financial statements include the accounts of
U.S. Computer Group Inc. and its two wholly-owned subsidiaries, U.S.
Computer Sources, Inc. and U.S. Computer Products, Inc. (collectively, the
"Company").
The Company 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 and business relocation services. The Company's customers are
located primarily in New York, New Jersey and Pennsylvania. During the
year ended February 28, 1998, approximately 71 percent of the Company's
revenue was generated from the maintenance of computer equipment.
During the year ended February 28, 1998, the Company sustained a net loss
of $3,747,900, and had a shareholders' deficiency and working capital
deficiency of $6,752,699 and $1,248,837, respectively, as of February 28,
1998. The Company is dependent upon continuing support from its
shareholders to generate sufficient cash flows to meet its obligations on
a timely basis and to provide working capital to finance operations.
Support from the shareholders has been received in the past, and the
Company's current majority shareholder, Tech Electro Industries, Inc. (see
Note 17), has commited to providing continuing support sufficient to meet
the Company's cash flow and working capital requirements through at least
February 28, 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements
include the financial statements of U.S. Computer Group Inc. and its
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Revenue Recognition and Deferred Sales Costs - 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. Costs incurred that are
directly related to the acquisition of a contract are deferred and charged
to expense on a straight-line basis over the contract period, not to
exceed twelve months. Defered sales costs on the accompanying consolidated
balance sheet represent the unamortized balance of incremental commissions
and bonuses paid to acquire maintenance contracts. Service revenues that
are not under contract are recognized as the service is performed.
Revenue from trade sales is recognized upon shipment.
<PAGE>
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Inventories - Inventories are stated at the lower of cost or market and
consist of electronic components and computer systems which support the
Company's maintenance service contracts. Cost is determined using the
first-in, first-out method.
Property and Equipment - Property and equipment are stated at cost, less
accumulated depreciation and amortization. Equipment under capital leases
is stated at the present value of minimum lease payments. Depreciation is
calculated on the straight-line method over the estimated useful lives of
the assets, as follows:
Machinery and equipment 5 years
Furniture and fixtures 8 years
Automobiles 5 years
Leasehold improvements are amortized over the shorter of the lease term or
the estimated useful life of the related asset. Assets acquired under
capital leases are amortized over the shorter of the lease term or the
estimated useful life of the related asset.
Excess of Costs Over Fair Value of Net Assets Acquired - Excess of costs
over fair value of net assets acquired were previously being amortized on
a straight-line basis over 15 years. The recoverability of the excess of
costs over fair value of net assets acquired were evaluated taking into
consideration operating results and other significant events or changes in
the business environment. The Company has reevaluated the useful life of
these costs and will amortize them over 10 years. This change, effective
March 1, 1997, is being treated as a change in accounting estimate and
will be accounted for prospectively. Accumulated amortization was $159,185
as of February 28, 1998. Based upon the operating plans for the upcoming
year, the Company believes that an impairment does not exist and,
accordingly, has not reduced the excess of costs over the fair value of
net assets acquired.
Deferred Financing Costs - Deferred financing costs are being amortized on
a straight-line basis over the term of the financing agreement.
Accumulated amortization was $39,575 as of February 28, 1998.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of -
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of
the assets exceed the fair value of the assets. Assets to be disposed of
are reported at the lower of the carrying amount or fair value less costs
to sell.
<PAGE>
Stock-Based Compensation - The Company accounts for its stock options
in accordance with the provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees ("APB Opinion No. 25"),
and related interpretations. As such, compensation expense would be
recorded on the date of grant only if and to the extent that the
current market price of the underlying stock exceeded the exercise
price. Accordingly, no compensation expense has been recognized in
the consolidated financial statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation ("SFAS No. 123"), permits entities to recognize as
expense, over the vesting period, the fair value of all stock-based awards
on the date of grant. SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net
income (loss) disclosures for employee stock option grants made in 1995
and future years as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123. Such pro forma disclosure provisions were not
required as no stock options or stock-based compensation awards were
granted since 1992.
Fair Value of Financial Instruments - The following methods and
assumptions were used to estimate the fair values of each class of
financial instruments:
a. Cash, accounts receivable, accounts payable, accrued liabilities and
other current liabilities - The carrying amounts approximate fair
value because of the short-term maturity of these instruments.
b. Credit facility obligations, note payable, long-term debt and
redeemable preferred stock, series D - The carrying amounts
approximate fair value based on the borrowing rates currently
available to the Company for loans with similar terms.
c. Notes receivable from shareholders and redeemable preferred stock,
series E - Due to the nature of these related party transactions, it
is not practicable to estimate the fair value of these instruments.
Income Taxes - The Company accounts for income taxes through the
recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the Company's
consolidated financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the
differences between the financial accounting and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
3. INVENTORIES
Inventories consist of the following at February 28, 1998:
Parts to service maintenance contracts $4,214,209
Less valuation reserves 2,440,613
----------
$1,773,596
==========
<PAGE>
Inventories of $115,826 are included in other assets on the accompanying
consolidated balance sheet. This amount represents the portion of
inventory which is not expected to be sold or used in the next twelve
months and is presented net of valuation reserves.
4. PROPERTY AND EQUIPMENT - NET
Property and equipment - net consists of the following at February 28,
1998:
Machinery and equipment $ 775,767
Leasehold improvements 252,008
Furniture and fixtures 179,996
Automobiles 276,046
----------
1,483,817
Less accumulated depreciation and amortization 816,409
----------
$ 667,408
==========
Depreciation and amortization of property and equipment amounted to
$285,444 in fiscal year 1998. Included in property and equipment at
February 28, 1998 is $404,599 of equipment and furniture under capital
leases. Accumulated amortization of such equipment and furniture was
$196,359 at February 28, 1998.
5. DEFERRED SERVICE LIABILITY
The deferred service liability of $1,364,317 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 of twelve months. Contracts are
automatically extended 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 February
28, 1998, the Company had a service maintenance contract base with an
aggregate balance of approximately $16,398,000.
6. CREDIT FACILITY OBLIGATIONS
On September 9, 1997, the Company entered into a loan agreement (the
"Agreement") with a financial institution and repaid its obligation under
a previous credit agreement. On February 24, 1998, certain terms of the
Agreement were amended. The Agreement provides for a revolving loan 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
Company's eligible receivables, as defined in the Agreement, other than
maintenance contract receivables, plus 4.25 times the average total
monthly computer maintenance contract collections to be calculated on a
trailing twelve month moving average, plus a term loan in the principal
<PAGE>
amount of $500,000 (the "Term Loan"). Borrowings under the Agreement are
secured by an interest in all of the Company'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 (10.5 percent at February 28, 1998), 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 February 28, 1998, $6,110,063 was outstanding under the revolving
loan.
The interest on the Term Loan is payable beginning on October 31, 1998 in
equal monthly installments of $14,000, and the principal balance of the
Term Loan is payable on September 30, 2000. As of February 28, 1998,
$500,000 was outstanding under the Term Loan.
The terms of the Agreement provide 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. The Company may terminate the Agreement
at any time by paying an early termination fee. Certain financial and
nonfinancial covenants are required to be met. At February 28, 1998,
covenants relating to tangible net worth and audited financial statement
deadlines were in default; however, on June 11, 1998, the financial
institution provided waivers of such covenants through May 31, 1999 and
July 15, 1998, respectively, (see Note 17) in exchange for additional
compensation, an increase in the early termination fee, and extension of
the Agreement for one year.
The maximum amount outstanding under the Company's credit agreements
during fiscal year 1998 was approximately $6,695,000, average borrowings
were approximately $5,200,000 and the weighted average interest rate was
10.9 percent.
In addition, the Company 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 amounts outstanding
are required to be paid in approximately thirty days. As collateral
security for the payments under the loan agreement, the Company granted
the finance corporation a security interest in the assets of the Company.
As of February 28, 1998, accounts payable includes approximately $211,000
related to this inventory financing.
Maturities on financial institution obligations are as follows:
Year Ended
February 28,
1999 $ 70,000
2000 168,000
2001 6,372,063
----------
$6,610,063
==========
<PAGE>
7. NOTE PAYABLE
The note payable to a former employee of $100,576, on the accompanying
consolidated balance sheet, bears interest at 8 percent per year and is
payable in twenty-four equal monthly installments, including principal and
interest, commencing on October 15, 1997. This note had an original
balance of $125,000.
8. LONG-TERM DEBT
As of February 28, 1998, long-term debt consists of the following:
Capital lease obligations (a) $273,758
Automobile loans (b) 72,242
--------
346,000
Less current installments of long-term debt 147,547
--------
$198,453
========
(a) The Company has various capital lease obligations with annual
interest rates ranging from 10 to 12.22 percent payable in monthly
installments through August 2000. The monthly lease payments,
including interest, range from $698 to $7,370. The capital lease
obligations are secured by the related underlying equipment and
furniture.
(b) The Company has various automobile loans with annual 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.
Maturities on long-term debt are as follows:
Year Ending
February 28,
1999 $147,547
2000 158,054
2001 40,399
--------
$346,000
========
<PAGE>
At February 28, 1998, future minimum capital lease payments are as
follows:
Year Ending February 28,
1999 $154,078
2000 130,030
2001 12,240
--------
Total minimum lease payments 296,348
Less amount representing interest 22,590
--------
Present value of future minimum lease payments 273,758
Less current installments 113,828
--------
Obligations under capital leases excluding
current installments $159,930
========
9. RELATED PARTY TRANSACTION
The Company had outstanding $3,330,000 in subordinated loans payable to a
shareholder at February 28, 1998. The subordinated loans bore interest at
rates ranging from 8 to 10 percent. Subsequent to February 28, 1998, as a
requirement of the purchase of 51 percent of the Company by Tech Electro
Industries, Inc. (see Note 17), the shareholder converted $2,000,000 of
subordinated loans into 2,000 shares of series E redeemable preferred
stock (non-voting) with a par value of $1,000 per share. Cumulative
dividends are payable annually beginning December 31, 1998 in cash at a
rate of 7 percent, or 12 percent if paid in additional shares of series E
redeemable preferred stock. It is the Company's option to pay dividends
in either form. The series E preferred stock is redeemable, at the
Company's option, at any time after issuance, as set forth in the amended
certificate of incorporation. The shareholder forgave the remaining
loan balance of $1,330,000 and $262,181 of related accrued interest.
The Company is accounting for this transaction as if it had occurred on
February 28, 1998. The liabilities forgiven have been accounted for as
additional paid-in capital.
10. REDEEMABLE PREFERRED STOCK
The series D preferred stock (preferred stock) are cumulative, non-voting
shares that were originally issued in connection with a business
acquisition. In September 1997, a redemption agreement was signed with
the preferred shareholder, which calls for 14 monthly payments of $33,452
for 22.668 shares of series D preferred stock which will fully redeem all
outstanding preferred shares by October 1998. Dividends will continue to
be paid on the remaining balance at a rate of 8 percent per year as set
forth in the certificate of incorporation. The amount redeemed during
fiscal year 1998 aggregated $200,712. The liquidation preference of the
preferred stock as of February 28, 1998 is the remaining redemption price
of $267,622.
<PAGE>
11. STOCK OPTIONS
In 1992, the Company granted options to purchase 31,907 shares of common
stock to two of its officers at an exercise price of $1.567 per share. The
officers who were granted these options resigned from the Company and all
of the options granted were canceled in December 1997. No options were
granted or exercised during fiscal year 1998 (see Note 16).
12. NOTES RECEIVABLE FROM SHAREHOLDERS
The Company has three notes due from shareholders aggregating $184,434 at
February 28, 1998, which have been recorded as a separate component of
shareholders' deficiency on the accompanying consolidated balance sheet.
Interest on the notes bear interest at a rate of 7.5 percent per year. The
notes require payment to be made before December 31, 2001.
13. PROVISION FOR INCOME TAXES
The provision for income taxes for fiscal year 1998 is comprised of the
following:
State and
Federal Local Total
Current $ - $3,000 $3,000
Deferred - - -
------- ---------- ------
$ - $3,000 $3,000
======= ========== ======
Income tax expense for fiscal year 1998 differed from amounts computed by
applying the United States Federal income tax rate of 34 percent to the
loss before provision for income taxes due to the increase in the
valuation allowance, permanent differences and state taxes.
At February 28, 1998, deferred tax assets, net of deferred tax
liabilities, are as follows:
Deferred
Tax Assets/
(Liabilities)
Net operating loss carryforwards $ 2,189,079
Inventories 1,025,220
Accounts receivable 180,160
Property and equipment (147,441)
-----------
Net deferred tax assets 3,247,018
Less valuation allowance (3,247,018)
-----------
$ -
===========
<PAGE>
The valuation allowance reduces deferred tax assets to management's best
estimate of net deferred tax assets which more likely than not will be
realized.
At February 28, 1998, the Company has net operating loss tax carryforwards
of approximately $5,200,000, which expire through fiscal year 2013.
However, certain limitations would apply as a result of the acquisition by
Tech Electro Industries, Inc. (see Note 17).
The Company has been notified that its New York State income tax returns
for fiscal years 1993 through 1996 have been selected for examination.
Management believes any liability resulting from this examination would
not be material to the Company's financial position or results of
operations.
14. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Savings Plan (the "Plan"). Participants in the
Plan may contribute up to 15 percent of compensation, but not in excess of
the maximum allowed under the Internal Revenue Code. The Plan provides for
matching contributions equal to a percentage of the participants'
contributions as determined each year by the Company. In fiscal 1998, the
Company did not make any matching contributions.
Certain participants in the Plan hold as an investment in the Plan shares
of the Company's common stock. Terminated employees have the option to
require the Company to purchase the shares at the most recent fair value
of the Company's common stock as determined as a result of an independent
valuation. During fiscal year 1998, employees were given the option to
redeem shares at $6.20 per share for a limited period of time. During
fiscal year 1998, 17,368 shares were redeemed by the Company at a
redemption value of $92,351. As of February 28, 1998, the Company has
received notice from employees that 2,737 shares will be required to be
redeemed for a redemption value of $5,337, or $1.95 per share, which
represents the fair value of the Company's common stock resulting from the
most recent independent valuation.
The Plan is currently under examination by the Department of Labor ("DOL")
for plan years 1993 through 1996. Management believes that the outcome of
the examination will not have a material adverse effect on the Company's
financial position or results of operations.
15. BUSINESS AND CREDIT CONSIDERATIONS
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of trade receivables. The
Company's customers are dispersed across many industries and are located
principally in New York, New Jersey and Pennsylvania.
During fiscal year 1998, 7 customers accounted for approximately 14
percent of the Company's annual sales. At February 28, 1998, 10 customers
had accounts receivable balances which in the aggregate represented
approximately 44 percent of the total net receivables, and 1 customer had
an accounts receivable balance which represented 11 percent of the total
net receivables. The Company estimates an allowance for doubtful accounts
based on the creditworthiness of its customers, as well as general
economic conditions. Consequently, an adverse change in those factors
could affect the Company's estimate of its bad debts. The Company, as a
policy, does not require collateral from its customers.
<PAGE>
16. COMMITMENTS AND CONTINGENCIES
Litigation - At February 28, 1998, the Company is a defendant in one
lawsuit arising in the ordinary course of business. It is the opinion
of management of the Company that it has meritorious defenses against
all outstanding claims, which the Company will vigorously pursue, and the
outcome will not have a significant adverse effect on the Company's
financial position or results of operations.
Operating Leases - The Company is obligated under lease agreements for
warehouse, office facilities and certain equipment. Rent expense for
operating leases approximated $742,000 for fiscal year 1998. The Company
entered into a new lease in the current year to replace office facilities
concurrently under lease. The Company received certain lease incentives,
including a rent holiday. The Company also entered into two sublease
agreements for a portion of its office facilities and provided certain
lease incentives. The Company provided use of the premises for the first
four months of the sublease as a rent holiday. In connection with a lease
agreement previously entered into for certain office space, the Company
received certain lease incentives, including a rent holiday. The net value
of these incentives and other rent escalation clauses is being amortized
over the life of the respective lease terms on a straight-line basis. As
of February 28, 1998, the long-term balance of this incentive was $94,473
and is reflected as deferred lease incentive on the accompanying
consolidated balance sheet.
At February 28, 1998, future minimum operating lease payments are as
follows:
Year Ending
February 28,
1999 $ 685,245
2000 372,169
2001 318,849
2002 278,050
2003 and thereafter 1,159,434
----------
$2,813,747
==========
At February 28, 1998, future minimum rentals to be received under
noncancelable subleases are as follows:
Year Ending
February 28,
1999 $105,218
2000 135,608
2001 121,715
2002 122,549
2003 and thereafter 40,850
--------
$525,940
========
<PAGE>
Employment Contract - As of February 28, 1998, the Company had an
employment contract with an officer, entered into in March 1994, which
provided for annual base compensation of $200,000 plus a bonus. The
officer was entitled to receive annual increases no less than the increase
in the consumer price index. To date, no increases had been taken. The
bonus was based upon a specified calculation utilizing an adjusted
profit figure, as defined in the employment agreement.
Subsequent to February 28, 1998, the Company entered into a new employment
contract with the same officer noted above for a period of three years.
The contract provides for a base salary of $225,000 plus bonus, which may
be increased from time to time at the discretion of the Board of
Directors. The bonus is based upon a specified calculation, taking into
account the Company's adjusted consolidated earnings, as defined in the
employment contract. The Company also granted the officer an option to
purchase up to 250,000 shares of the Company's stock at an exercise price
of $1.47 per share, subject to various provisions, as defined in the
employment agreement.
17. SUBSEQUENT EVENTS
On March 18, 1998, the Company further amended the Agreement (see Note 6)
with the financial institution to provide for an additional loan ("Bridge
Loan") of $500,000. The Bridge Loan is included as a part of the total
maximum borrowings of the Company. The bridge loan bears interest at a
rate equal to the prime rate plus 3.5 percent. Interest on the Bridge Loan
is payable monthly commencing September 1998. The entire principal balance
is due in September 2000 or August 2001 if the Agreement is renewed.
On March 20, 1998, Tech Electro Industries, Inc. ("Tech Electro"), a
public company, purchased 678,937 newly issued shares of the Company's
stock for $1,000,000 (the "Purchase"). The Purchase represents a 51
percent ownership interest in the Company. Prior to year end, Tech Electro
had deposited $500,000 with the Company which is recorded as an
acquisition deposit payable on the accompanying consolidated balance
sheet.
On March 20, 1998, The Telstar Entertainment Group Plc (formerly Telstar
Holdings Limited) ("Telstar") a shareholder of the Company, converted a
$2,000,000 subordinated loan into preferred stock of the Company. The
conversion was required as a term of the Purchase. The additional loan
principal of $1,330,000 and accrued interest of $262,181 payable to
Telstar as of February 28, 1998 was forgiven and accounted for as
additional paid-in capital for the year ended February 28, 1998 (see Note
9).
<PAGE>
U.S. COMPUTER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF FEBRUARY 28, 1997
TOGETHER WITH AUDITORS' REPORT
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
of U.S. Computer Group, Inc.:
We have audited the accompanying consolidated balance sheet of U.S. Computer
Group, Inc. (a New York Corporation) and subsidiaries as of February 28, 1997,
and the related consolidated statements of operations and changes in
shareholders' equity (deficit) and cash flows for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides 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 U.S. Computer Group,
Inc. and subsidiaries as of February 28, 1997, and the results of their
operations and cash flows for the year then ended in conformity with generally
accepted accounting principles.
October 29, 1997
Melville, New York
-1-
<PAGE>
U.S. COMPUTER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1997
ASSETS
CURRENT ASSETS:
Cash $293,790
Accounts receivable, net of allowance for doubtful
accounts of $276,471 3,018,006
Inventories 2,370,742
Prepaid expenses and other current assets 180,142
Deferred costs, net 316,615
------------
Total current assets 6,179,295
PROPERTY AND EQUIPMENT, net 728,981
EXCESS COSTS OVER FAIR VALUE OF ASSETS ACQUIRED, net 567,382
OTHER ASSETS 97,471
------------
$7,573,129
============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt $94,604
Accounts payable 2,335,609
Accrued liabilities 1,264,515
Deferred service liability 1,948,404
Current portion of bank obligations 150,000
Current portion of subordinated loan payable
to shareholder 100,000
------------
Total current liabilities 5,893,132
BANK OBLIGATIONS 4,700,000
LONG-TERM DEBT 213,321
DEFERRED LEASE INCENTIVE 149,408
NOTE PAYABLE 200,000
SUBORDINATED LOAN PAYABLE TO SHAREHOLDER 2,400,000
------------
Total liabilities 13,555,861
------------
The accompanying notes to consolidated financial
statements are an integral part of this statement.
-2-
<PAGE>
U.S. COMPUTER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
FEBRUARY 28, 1997
REDEEMABLE PREFERRED STOCK, series D, $1,000
par value, 1,000 shares authorized,
468.334 shares issued and outstanding,
redemption value and liquidation
preference of $468,334 468,334
------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock, series A, B and C, authorized
1,000, 2,000 and 3,500 shares, respectively,
$100 par, no shares outstanding Common stock, -
$.00001 par value, 1,500,000 shares authorized,
674,073 shares issued 7
Treasury stock, 828 shares, at cost (7,866)
Additional paid-in capital 1,669,853
Accumulated deficit (7,939,881)
Notes receivable from shareholders (173,179)
------------
Total shareholders' deficit (6,451,066)
------------
$7,573,129
============
The accompanying notes to consolidated financial
statements are an integral part of this statement.
-3-
<PAGE>
U.S. COMPUTER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 28, 1997
TRADE SALES, net of sales returns and allowances $7,837,346
SERVICE REVENUES 16,676,105
------------
Total sales and revenues 24,513,451
COST OF SALES AND REVENUES 11,754,620
DIRECT SERVICING EXPENSES 10,086,768
GENERAL AND ADMINISTRATIVE EXPENSES 5,272,840
------------
Operating loss (2,600,777)
INTEREST EXPENSE, net of interest income of $23,006 645,499
------------
Loss before provision for income taxes (3,246,276)
PROVISION FOR INCOME TAXES 11,375
------------
Net loss $(3,257,651)
============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
-4-
<PAGE>
U.S. COMPUTER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED FEBRUARY 28, 1997
<TABLE>
<CAPTION>
Notes Total
Common Shares Additional Receivable Shareholders'
---------------------- Common Treasury Paid-in Accumulated From Equity
Outstanding Treasury Stock Stock Capital Deficit Shareholders (Deficit)
----------- -------- ------- --------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, MARCH 1, 1996,
as restated 674,073 - $7 $ - $1,669,853 $(4,629,208) $(180,174) $(3,139,522)
Net loss for the year
ended February 28, 1997 - - - - - (3,257,651) - (3,257,651)
Dividends on redeemable
preferred stock - - - - - (53,022) - (53,022)
Common stock redeemed - 828 - (7,866) - - - (7,866)
Decrease in notes
receivable from
shareholders - - - - - - 6,995 6,995
----------- -------- ------- --------- ---------- ----------- ------------ -----------
BALANCES, FEBRUARY
28, 1997, as restated 674,073 828 $7 $(7,866) $1,669,853 $(7,939,881) $(173,179) $(6,451,066)
=========== ======== ======= ========= ========== =========== ============ ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
-5-
<PAGE>
U.S. COMPUTER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED FEBRUARY 28, 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,257,651)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 266,906
Amortization of excess cost over fair
value of assets acquired 45,943
Provision for the allowance for doubtful accounts 189,418
Changes in assets and liabilities:
Accounts receivable 568,488
Inventories 1,392,882
Prepaid expenses and other current assets (20,499)
Deferred costs (61,678)
Accounts payable (728,056)
Accrued liabilities (1,055,074)
Deferred service liability 256,972
Deferred lease incentive (25,253)
Other assets 84,897
-----------
Net cash used by operating activities (2,342,705)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (141,036)
-----------
Net cash used by investing activities (141,036)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on long-term debt (88,880)
Borrowings from issuance of long-term debt 66,220
Repayments of bank obligations (135,000)
Proceeds from bank obligations 1,350,000
Repayments of loans to shareholder (500,000)
Borrowings from shareholder 1,900,000
Proceeds from note payable 200,000
Redemption of redeemable preferred stock (158,804)
Dividends on redeemable preferred stock (53,022)
Redemption of common stock (7,866)
-----------
Net cash provided by financing activities 2,572,648
-----------
NET INCREASE IN CASH 88,907
CASH, BEGINNING OF YEAR 204,883
-----------
CASH, END OF YEAR $293,790
===========
CASH PAID DURING THE YEAR FOR:
Interest $435,854
===========
Income taxes $12,054
===========
The accompanying notes to consolidated financial
statements are an integral part of this statement.
-6-
<PAGE>
U.S. COMPUTER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Description of business and current operations
U.S. Computer Group, Inc. and subsidiaries (the "Company") provides
maintenance for equipment manufactured by Digital Equipment Corporation,
IBM, Sun Microsystems, Inc. and leading brand PCs, the sale of new and
used computer equipment, network integration and design services,
disaster recovery and business relocation services. The Company's
customers are located primarily in New York, New Jersey and Pennsylvania.
Approximately 69% of the Company's revenue was generated from the
maintenance of computer equipment during the year ended February 28,
1997.
During the year ended February 28, 1997, the Company sustained a net loss
of $3,257,651 and reflected an accumulated deficit as of February 28,
1997 of $7,939,881. The Company has instituted a program of cost
containment to improve profitability and has received support from its
shareholders with additional funding to support cash flow. During the
coming year, the Company has plans to continue cost containment measures
to improve cash flow and is establishing revised bank financing
arrangements to assist with this effort.
(2) Summary of significant accounting policies
(a) Principles of consolidation
The consolidated financial statements include the financial statements of
the Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(b) Use of estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare the consolidated financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(c) Inventories
Inventories are stated at the lower of cost or market and consist of
electronic components and computer systems which support the Company's
maintenance contracts. Cost is determined using the first-in, first-out
method. (See Note 2j).
(d) Property and equipment
Property and equipment are stated at cost. Equipment under capital leases
are stated at the present value of minimum lease payments. Depreciation
is calculated on the straight-line method over the estimated useful lives
of the assets as follows:
-7-
<PAGE>
Machinery and equipment 5 years
Furniture and fixtures 8 years
Automobiles 5 years
Leasehold improvements are amortized over the shorter of the lease term
or estimated useful life of the asset. Assets acquired under capital
leases are amortized over the term of the lease.
(e) Excess costs over fair value of assets acquired
Excess costs over the fair value of net assets acquired is being
amortized on a straight-line basis over 15 years. Accumulated
amortization was approximately $76,000 as of February 28, 1997. The
recoverability of the excess cost over the fair value of net assets
acquired is evaluated taking into consideration operating results and
other significant events or changes in the business environment. Based
upon the operating plans for the upcoming year, the Company believes that
an impairment does not exist and, accordingly, has not reduced the excess
cost over the fair value of net assets acquired.
(f) Impairment of long-lived assets and long-lived assets to be
disposed of
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" (Statement 121) on March 1,
1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net
cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair
value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell. Adoption of this
Statement did not have a material impact on the Company's financial
position, results of operations or liquidity.
(g) 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. Costs
incurred that are directly related to the acquisition of a contract are
deferred and charged to expense on a straight-line basis over the
contract period, not to exceed twelve months. Deferred costs on the
accompanying consolidated balance sheet represent the unamortized balance
of incremental commissions and bonuses paid to acquire maintenance
contracts. Service revenues that are not under contract are recognized as
the service is performed. Revenue from trade sales is recognized upon
shipment. (See Note 2j).
-8-
<PAGE>
(h) Stock-based compensation
Prior to March 1, 1996, the Company accounted for its stock options in
accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if and to the extent that the current market price of
the underlying stock exceeded the exercise price. On March 1, 1996, the
Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (Statement 123), which permits
entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, Statement
123 also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income (loss) disclosures for
employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in Statement 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure provisions of Statement 123.
Such pro forma disclosure provisions were not required for fiscal year
1997 as no stock options or stock-based compensation awards were granted
during that year.
(i) Income taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
(j) Prior period adjustments and restatement of previously issued
financial statements
The accumulated deficit balance as of February 28, 1996 has been restated
to properly reflect the treatment of certain transactions. The impact of
these adjustments on the Company's accumulated deficit, as originally
reported, is summarized below:
Accumulated deficit, February 28, 1996
(as previously reported) $ (918,814)
To recognize revenues on a straight-line basis
over the life of the respective contract (2,250,331)
To defer sales costs previously expensed 254,937
To adjust valuation of inventories (1,715,000)
-----------
Accumulated deficit, February 28, 1996 (as restated) $(4,629,208)
===========
In addition, certain accounts in the accompanying consolidated financial
statements as of February 28, 1997 and for the year then ended have been
restated to properly reflect the treatment of the transactions enumerated
above.
-9-
<PAGE>
(3) Inventories
Inventories consist of the following at February 28, 1997:
Parts to service maintenance contracts $4,797,273
Less: valuation reserves 2,426,531
----------
$2,370,742
==========
(4) Property and equipment
Property and equipment, net consists of the following at February 28,
1997:
Machinery and equipment $1,037,530
Leasehold improvements 326,343
Furniture and fixtures 292,874
Automobiles 214,493
----------
1,871,240
Less: accumulated depreciation and
amortization 1,142,259
----------
$ 728,981
==========
Depreciation and amortization of property and equipment amounted to
$266,906 in fiscal year 1997, which includes amortization of capitalized
leases. Included in machinery and equipment at February 28, 1997 is
$356,810 of equipment and furniture under capital leases. Accumulated
amortization of such equipment and furniture was $149,995 at February 28,
1997.
(5) Deferred service liability
The deferred service liability of $1,948,404 on the accompanying
consolidated balance sheet represents maintenance contract revenues
billed but not yet earned.
(6) Financing arrangements
On March 1, 1995, the Company entered into a loan agreement with a
financial institution (original loan agreement) which was amended
effective July 23, 1996. The amended loan agreement (loan agreement)
provides for an available line of credit with the maximum amount
available for borrowings being the lesser of the borrowing base (defined
as 80% of eligible accounts receivable) or $2,650,000. At February 28,
1997, $2,650,000 was outstanding under the line of credit.
-10-
<PAGE>
At February 29, 1996, the Company had outstanding a $300,000 demand note
which in connection with the amendment was considered part of the
outstanding line of credit.
The original loan agreement also provided for a $1,500,000 term loan
payable in graduated installments through March 1, 2000. In connection
with the amended loan agreement, principal payments were suspended until
January 1, 1997 but interest payments were required during the suspension
period. Beginning January 1, 1997, $30,000 a month is to be paid until
July 31, 1997 at which time the unpaid principal is due in full. The
amount outstanding under the term loan as of February 28, 1997 is
$1,200,000.
The loan agreement also provides for a $1,000,000 bullet loan secured by
a standby letter of credit from another financial institution which is
guaranteed by a shareholder of the Company.
Borrowings under the loan agreement for the line of credit and term loan
bore interest at 1/2% above the prime rate, up to and including December
31, 1996, and thereafter bear interest at 3% above the prime rate.
Borrowings under the bullet loan bear interest at 1/2% above the prime
rate. The prime rate was 8.25% at February 28, 1997.
As collateral security for the payment under the loan agreement, the
Company granted its financial institution a lien on and security interest
in all monies and other property of the Company. Borrowings under the
line of credit, term loan and bullet loan are also guaranteed by an
officer, who is a shareholder, of the Company.
All amounts due under the loan agreement were payable on July 31, 1997.
Subsequent to year-end, the amounts outstanding under the loan agreement
have been refinanced (See Note 19). As such, the classification of bank
obligations has been presented in accordance with the terms of the new
loan agreement.
The maximum month-end amount outstanding under the line of credit during
fiscal year 1997 was $2,650,000, average borrowings under the line were
$2,325,000 and the weighted average interest rate was 9.17%.
The loan agreement provides for a commitment fee at the rate of .375% per
year of the unused line of credit. The commitment fee is payable
quarterly.
In addition, the Company has a "floorplan" credit line arrangement with a
finance corporation which provides for financing of up to $350,000 to
support inventory purchases from a specific vendor. The floorplan credit
line agreement does not provide for interest terms as amounts outstanding
are required to be paid timely. As collateral security for the payment
under the loan agreement, the Company granted the finance corporation a
security interest in the assets of the Company. As of February 28, 1997,
accounts payable includes approximately $182,000 related to this
inventory financing.
(7) Note payable
The note payable, to an unrelated consultant, of $200,000 on the
accompanying consolidated balance sheet bears interest at 10% per year
and was payable in full on February 14, 1997. The note has been
-11-
<PAGE>
guaranteed by certain executives of the Company. In March 1997, this note
became subordinate to the bank obligations. As such, and consistent with
the repayment terms of the new loan arrangements, this note payable has
been classified as a long-term obligation.
(8) Long-term debt
As of February 28, 1997, long-term debt consists of the following:
Capital lease obligations (a) $ 230,611
Automobile loans (b) 77,314
-----------
307,925
Less: current installments of
long-term debt 94,604
-----------
$ 213,321
===========
(a) Various capital lease obligations with interest ranging from 10% to
21.79%, payable in monthly installments through fiscal year 2001. The
capital lease obligations are secured by the related equipment.
(b) Various automobile loans with interest rates ranging from 8.75% to
10.6% payable in monthly installments through October 2000. The
automobile loans are secured by the related automobiles.
Maturities on long-term debt for the next five years are as follows:
1998 $ 94,604
1999 100,535
2000 98,551
2001 14,235
2002 and thereafter -
--------
$307,925
========
At February 28, 1997, future minimum capital lease payments in the
aggregate and for each of the five succeeding years are as follows:
1998 $ 85,102
1999 91,892
2000 87,799
2001 11,392
2002 and thereafter -
--------
Total minimum lease payments 276,185
Amount representing interest 45,574
--------
Present value of future minimum
lease payments 230,611
Less: current installments 49,099
--------
Obligations under leases excluding
current installments $181,512
========
-12-
<PAGE>
(9) Subordinated loan payable to shareholder
The Company has outstanding $2,500,000 in demand loans payable to a
shareholder at February 28, 1997. The loans bear interest at rates
ranging from 8% to 10%. Of the $2,500,000 in outstanding loans at
February 28, 1997, $2,400,000 is subordinate to bank obligations (See
Note 6). As such, and consistent with the repayment terms of new loan
arrangements (See Note 19), $2,400,000 of this loan has been classified
as a long-term obligation.
(10) Redeemable preferred stock
The Series D preferred stock (preferred stock) are cumulative, non-voting
shares that were issued in connection with a business acquisition. The
holders of the preferred stock are entitled to receive cash dividends at
a rate of 8% per year beginning after May 1, 1995. The dividends accrue
daily and are payable quarterly in May, August, November and February.
The preferred stock has a mandatory redemption requirement of 50% of the
preferred shares on February 28, 1996 and the remaining 50% on May 1,
1997. The Company did not comply with the mandatory redemption
requirements. Non-compliance with the mandatory redemption requirements
resulted in an increased dividend rate and the preferred stock becoming
convertible, at the shareholder's option, into 6% of the outstanding
shares of common stock as of the conversion. The dividend rate increased
to the greater of 8% or the prime rate plus 2%. The prime rate at
February 28, 1997 was 8.25%. The Company did begin to redeem the
preferred stock on a monthly basis in July 1996. The amount redeemed
during fiscal year 1997 amounted to $158,804. The liquidation preference
of the preferred stock as of February 28, 1997 is the remaining
redemption price of $486,334.
Subsequent to year-end, a settlement agreement on the remaining
redeemable preferred stock was reached (See Note 19).
(11) Stock options
In 1992, the Company granted options to purchase 31,907 shares of common
stock to two of its officers at an excerise price of $1.567 per share.
The options are excercisable and expire in 10 years from the date of
issuance. No options were granted during fiscal year 1997.
(12) Notes receivable from shareholders
The Company has three notes due from shareholders of $173,179 at February
28, 1997. Interest on the notes range from 8.5% to 9%. The notes require
payment to be made before December 31, 2001. Amounts outstanding at
February 28, 1997, including accrued interest of $22,510, have been
reflected on the accompanying consolidated balance sheet.
(13) Income taxes
The provision for income taxes for fiscal year 1997 is comprised of:
-13-
<PAGE>
State and
Federal local Total
------- --------- -------
Current $ - $11,375 $11,375
Deferred - - -
------ ------- -------
$ - $11,375 $11,375
====== ======= =======
Income tax benefit for fiscal year 1997 differed from the amount computed
by applying the U.S. Federal income tax rate of 34% to pre-tax loss due
to the non-availability of any current benefit arising from the Company's
net operating tax loss carryforward.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities as of February 28, 1997 are as follows:
Deferred tax assets:
Net operating loss carryforwards $1,600,000
Inventory due to valuation reserve 970,000
Accounts receivable due to allowance
for doubtful accounts 111,000
----------
Total gross deferred tax assets $2,681,000
----------
Deferred tax liabilities:
Direct acquisition costs due to
amortization methods (127,000)
Property and equipment due to
depreciation methods (14,000)
----------
Total gross deferred tax liabilities (141,000)
----------
Net deferred tax assets 2,540,000
Less: valuation allowance (2,540,000)
----------
$ -
==========
At February 28, 1997, the Company has net operating loss carryforwards of
approximately $4,000,000 which expire through 2012.
(14) Fair value of financial instruments
Financial Accounting Standards Board Statement No. 107, "Disclosure about
Fair Value of Financial Instruments", defines the fair value of a
financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. The carrying
value of all financial instruments classified as current assets or
liabilities, with the exception of the current installments of long-term
debt, is deemed to approximate fair value because of the short maturity
of these investments.
The long-term debt of $213,321 on the accompanying consolidated balance
sheet approximates fair value. The fair value of such long-term debt was
estimated by discounting future cash flows of the instrument at a rate
currently offered to the Company by the Company's bankers.
-14-
<PAGE>
(15) Employee benefit plan
The Company has a 401(k) Savings Plan (the "Plan"). Participants in the
Plan may contribute up to 15% of compensation, but not in excess of the
maximum allowed under the Internal Revenue Code. The Plan provides for
matching contributions equal to a percentage of the participants'
contributions as determined each year by the Company. In fiscal year
1997, the Company did not make any matching contributions.
Certain participants in the Plan hold as an investment in the Plan shares
of the Company's common stock. Terminated employees have the option to
require the Company to purchase the shares at the most recent fair value
of the Company's common stock as determined as a result of an independent
valuation. During fiscal year 1997, 828 shares were redeemed by the
Company for a redemption value of $7,866. Subsequent to year-end, the
Company has received notice from terminated employees that 16,567 shares
will be required to be redeemed for a redemption value of $102,715, or
$6.20 per share.
(16) Business and credit considerations
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of trade receivables.
The Company's customers are dispersed across many industries and are
located principally in New York, New Jersey and Pennsylvania.
During fiscal year 1997, 11 customers accounted for approximately 15% of
the Company's annual sales. At February 28, 1997, 12 customers had
accounts receivable balances, which in the aggregate represented
approximately 23% of the total net receivables. The Company estimates an
allowance for doubtful accounts based on the creditworthiness of its
customers, as well as general economic conditions. Consequently, an
adverse change in those factors could affect the Company's estimate of
its bad debts. The Company, as a policy, does not require collateral from
its customers.
(17) Sales and revenue considerations
The dominant part of the Company's business has historically been the
provision of on-site maintenance service for computer systems. The
Company provides this service on a contractual basis and enters into one
or two year contracts with equipment users and buys an inventory of spare
parts to support the equipment under contract. As of February 28, 1997,
the Company had a service maintenance contract base with an aggregate
balance of approximately $16 million.
(18) Commitments and contingencies
Legal proceedings
There are two claims and pending legal proceedings that involve
employment related matters. The impact of the final resolution of these
matters on the Company's results of operations or liquidity in a
particular reporting period cannot be estimated. In the opinion of
-15-
<PAGE>
management, there are meritorious defenses to these claims and the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position. Nonetheless, to
avoid the expense and disruption of protracted litigation, the Company
and one of the claimants reached a settlement agreement. The value of the
settlement has been accrued for in the accompanying consolidated
financial statements.
Operating leases
The Company is obligated under lease agreements for warehouse, office
facilities and certain equipment. Rent expense for all operating leases
amounted to approximately $896,000 for fiscal year 1997. In connection
with a lease agreement for certain office space, the Company received use
of the premises for the first ten months of the lease on a "rent-free"
basis. The value of this incentive and other rent escalation clauses is
being amortized over the life of the respective lease terms. As of
February 28, 1997, the balance of this incentive was $149,408, and is
reflected as deferred lease incentive on the accompanying consolidated
balance sheet.
At February 28, 1997, future minimum operating lease payments in the
aggregate and for each of the five succeeding years are as follows:
Operating lease
---------------
1998 $ 828,697
1999 472,153
2000 347,113
2001 329,376
2002 and thereafter 548,960
----------
$2,526,299
===========
Employment contract
The Company has an employment contract with an officer which provides for
annual base compensation of $200,000 plus a bonus. The officer is
entitled to receive annual increases no less than the increase in the
consumer price index. To date, no increases have been taken. The bonus is
based upon a specified calculation taking into account an adjusted profit
figure, as defined in the employment agreement.
(19) Subsequent events
As of February 28, 1997, the Company was engaged in negotiations with
Colonial Commercial Corp., a publicly held corporation, as to a possible
business combination. Such negotiations were terminated in August 1997.
Subsequent to February 28, 1997, the outstanding bank obligations (See
Note 6), the note payable to an unrelated consultant (See Note 7) and the
subordinated loans payable to a shareholder (See Note 9) have been
refinanced. The new financing arrangements provide for a line of credit
-16-
<PAGE>
based upon a borrowing base with a maximum of $10 million. The line of
credit expires three years from the date of closing. Interest on the line
is at 1.75% above the prime rate. The agreement provides for a facility
fee of 1%, an anniversary fee of .50% of $10,000,000 and a quarterly
facility fee of $5,000. Certain financial convenants are required to be
met.
A settlement agreement was reached with the Series D preferred stock (See
Note 10). The terms of the agreement with the Series D preferred
stockholder provide for monthly redemptions of $33,452 and monthly
dividend payments on the unliquidated balance, with the final payment due
in October 1998.
A settlement agreement was also reached with the claimant in one of the
legal proceedings, which has been reflected in general and administrative
expenses in the accompanying consolidated statement of operations for the
year ended February 28, 1997 (See Note 18).
Subsequent to year end, the Company renegotiated the lease for its New
York City facilities, reducing the space leased and the term of the
lease. Over the revised lease term, the Company expects to realize a
reduction in lease payments of approximately $960,000.
-17-
<PAGE>
TECH ELECTRO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Introductory Paragraph
Effective March 19, 1998, Tech Electro Industries, Inc. ("TEI") consummated
the acquisition of newly-issued shares of common stock equaling, after issuance,
51% of the issued and outstanding common stock of U.S. Computer Group Inc.
("USCG"). The acquisition was accounted for as a purchase and, accordingly, the
purchase price was allocated to the acquired assets and assumed liabilities
based upon their respective fair values. The excess of the purchase price over
the fair value of net assets acquired will be amortized over 15 years on a
straight-line basis. Contract rights acquired will be amortized on a straight-
line basis over a period of 10 years.
The following unaudited pro forma consolidated financial statements give
effect to the acquisition of USCG as if the acquisition occurred on January 1,
1997, and give effect to the amortization of goodwill and contract rights
acquired. The pro forma consolidated statement of operations for the most
recent fiscal year includes TEI's statement of operations for the fiscal year
ended December 31, 1997, and USCG's statement of operations for the fiscal year
ended February 28, 1998. The pro forma statement of operations presented for
the interim period includes the results of operations of both TEI and USCG for
the three months ended March 31, 1998.
The unaudited pro forma consolidated financial information is not
necessarily indicative of the results of operations that would have been
reported had such events occurred on the date specified, nor is it necessarily
indicative of the future results of the consolidated entities. The unaudited
consolidated pro forma financial statements should be read in conjunction with
the historical financial statements of the companies.
<PAGE>
Tech Electro Industries, Inc. and Subsidiaries
Pro Forma Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
TELE USCG
12/31/97 02/28/98 Adjustments Total
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
NET SALES AND SERVICE REVENUES $6,666,837 $24,257,252 $30,924,089
COST OF SALES AND REVENUES AND DIRECT SERVICING EXPENSES 4,905,755 21,783,266 26,689,021
----------- ----------- ----------
GROSS PROFIT 1,761,082 2,473,986 4,235,068
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,174,432 5,341,688 809,259 (A) 9,325,379
----------- ----------- ----------
LOSS FROM OPERATIONS (1,413,350) (2,867,702) (5,090,311)
OTHER INCOME (EXPENSES)
Interest income 99,862 13,037 (45,456) (B) 67,443
Interest expense (30,072) (940,035) (970,107)
Realized loss on sale of marketable securities (31,667) 0 (31,667)
Gain on foreign exchange 9,668 0 9,668
Other 18,247 49,800 68,047
----------- ----------- ----------
66,038 (877,198) (856,616)
MINORITY INTEREST SHARE OF LOSS OF SUBSIDIARY 47,731 0 47,731
----------- ----------- ----------
LOSS BEFORE INCOME TAXES (1,299,581) (3,744,900) (5,899,196)
----------- ----------- ----------
PROVISION FOR INCOME TAXES 0 3,000 3,000
----------- ----------- ----------
NET LOSS $(1,299,581) $(3,747,900) (5,902,196)
=========== =========== ==========
Net loss attributable to common shareholders $(1,405,419) $(6,008,034)
=========== ==========
Basic and diluted net loss per share attributable to
common shareholders $ (0.59) $ (2.52)
=========== ==========
Number of weighted-average shares
of common stock outstanding (basic and diluted) 2,382,814 $ 2,382,814
=========== ==========
</TABLE>
(A) To reflect amortization of goodwill and contract rights acquired assuming
the Company had acquired USCG on January 1, 1997.
(B) To reflect effects of cash used for acquisition of USCG from interest
earning investments.
<PAGE>
Tech Electro Industries, Inc. and Subsidiaries
Pro Forma Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended 03/31/98
------------------------------------------------------
TELE USCG Adjustments Total
<S> <C> <C> <C> <C>
NET SALES AND SERVICE REVENUE $1,996,589 $5,520,000 $7,516,589
COST OF SALES AND REVENUES AND DIRECT
SERVICING EXPENSES 1,355,537 4,632,977 5,988,514
---------- ---------- ----------
GROSS PROFIT 641,052 887,023 1,528,075
Selling, general and administrative 756,086 1,144,997 202,315 (A) 2,103,398
---------- ---------- ----------
LOSS FROM OPERATIONS (115,034) (257,974) (575,323)
Other income (expenses)
Interest income 25,424 3,303 (9,900) (B) 18,827
Interest expense (6,639) (180,054) (186,693)
---------- ---------- ----------
18,785 (176,751) (167,866)
MINORITY INTEREST SHARE OF LOSS
OF SUBSIDIARY 16,463 0 16,463
---------- ---------- ----------
LOSS BEFORE INCOME TAXES (79,786) (434,725) (726,726)
PROVISION FOR INCOME TAXES 0 0 0
---------- ---------- ----------
NET LOSS $ (79,786) $ (434,725) $ (726,726)
========== ========== ==========
Net loss attributable to common
shareholders $ (113,680) $ (750,720)
========== ==========
Basic and diluted net loss per share
attributable to common shareholders $ (0.03) $ (0.20)
========== ==========
Number of weighted-average shares of
common stock outstanding (basic and diluted) 3,638,292 3,638,292
========== ==========
</TABLE>
(A) To reflect amortization of goodwill and contract rights acquired
assuming the Company had acquired USCG on January 1, 1997.
(B) To reflect effects of cash used for acquisition of USCG from interest
earning investments.
<PAGE>
Tech Electro Industries Inc., and Subsidiaries
Consolidated Balance Sheet
(Unaudited)
ASSETS
Mar 31, 1998
------------
CURRENT ASSETS
Cash and cash equivalents $1,177,227
Marketable securities 125,550
Accounts and notes receivable
Accounts receivable-trade, net of
allowance for doubtful accounts of $444,952 3,321,006
Notes 334,378
Other 44,291
Inventories 3,469,100
Deferred sales costs 196,581
Prepaid expenses and other current assets 512,945
-----------
TOTAL CURRENT ASSETS 9,181,078
-----------
NET PROPERTY AND EQUIPMENT 947,511
-----------
OTHER ASSETS
Contract rights 5,436,047
Deferred financing costs 251,663
Goodwill 3,984,815
Notes receivable 67,708
Other assets 226,720
-----------
TOTAL OTHER ASSETS 9,966,953
-----------
TOTAL ASSETS $20,095,542
===========
See Note A to Consolidated Balance Sheet
<PAGE>
Tech Electro Industries, Inc., and Subsidiaries
Consolidated Balance Sheet
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Mar 31,1998
------------
CURRENT LIABILITIES
Current portion of credit facility obligations $70,000
Current portion of notes payable 236,626
Current portion of long-term debt 147,547
Accounts payable trade 2,059,217
Accrued liabilities 1,129,400
Deferred service liabilities 1,614,317
Dividends payable 31,025
-----------
TOTAL CURRENT LIABILITIES 5,288,132
LONG TERM LIABILITIES
CREDIT FACILITY OBLIGATIONS 7,102,063
NOTE PAYABLE 38,950
LONG-TERM DEBT 198,453
DEFERRED LEASE INCENTIVE 94,473
-----------
TOTAL LIABILITIES 12,722,071
MINORITY INTEREST IN SUBSIDIARY 2,246,908
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 298,534
1,000,000 shares authorized, 65,000 Class B
issued and outstanding on March 31, 1998,
liquidation preference of $341,250;
Class A issued and outstanding on March 31,
1998; liquidation preference of $1,226,054
Common stock, $.01 par value; 37,782
10,000,000 shares authorized, 3,778,176
shares issued and outstanding on March 31, 1998
Additional paid-in capital 6,239,304
Unrealized Gains (Losses) on marketable securities (1,250)
Accumulated deficit (1,447,807)
-----------
TOTAL STOCKHOLDERS' EQUITY 5,126,563
----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $20,095,542
===========
See Note A to Consolidated Balance Sheet
<PAGE>
Note A - 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, however, USCG's results of operations for the
nine business days ending March 31, 1998 were not material to the Company and
have not been included in the consolidated statement of operations. 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
a period of 10 years.
The summary of the fair value of assets acquired and liabilities assumed is as
follows:
(Preliminary)
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
===========
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
June 4, 1998 TECH ELECTRO INDUSTRIES, INC.
By: /s/ David Kaye
-----------------------
David Kaye
Chief Financial Officer
