SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10Q-SB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED:
JUNE 30, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM _____ TO _____
Commission File No. 0-18303
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LEC TECHNOLOGIES, INC.
_________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware No. 11-2990598
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6540 S. Pecos Road, Las Vegas, Nevada 89120
- -------------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
(702) 454-7900
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Applicable only to issuers involved in bankruptcy proceedings
during the preceding five years:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
July 31, 1997: 4,632,811 common shares.
Traditional Small Business Disclosure Format (Check one): Yes [ ];
No [X]
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1997 (Unaudited)
and December 31, 1996 3
Consolidated Statements of Operations - for the three
and six months ended June 30, 1997 and 1996 (Unaudited) 5
Consolidated Statements of Cash Flows - for the six months
ended June 30, 1997 and 1996 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis or
Plan of Operations 11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
(a) Exhibits
(b) Reports on Form 8-K
</TABLE>
PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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June 30, December 31,
1997 1996
(Unaudited) (Audited)
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ASSETS:
Cash $ 196,233 $ 412,340
Receivables - net of allowance
for doubtful accounts of $138,667
and $170,699 2,424,310 1,096,868
Notes receivable - employees 190,525 199,185
Inventory, net 2,652,428 2,210,674
Leased assets:
Operating leases, net 17,241,646 17,617,934
Sales-type and direct
financing leases 4,991,817 4,927,894
Furniture and equipment - net of
accumulated depreciation of
$327,931 and $304,495 175,959 157,112
Other assets 294,324 397,712
Goodwill, net of accumulated
amortization of $109,475 and
$84,408 642,564 667,631
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TOTAL ASSETS $28,809,806 $27,687,350
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
(continued)
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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<CAPTION>
June 30, December 31,
1997 1996
(Unaudited) (Audited)
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 3,937,460 $ 2,946,365
Accrued liabilities 658,670 401,569
Notes payable and lines of credit 3,574,927 3,881,882
Nonrecourse and recourse discounted
lease rentals 15,221,204 14,808,581
Other liabilities 100,705 410,763
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TOTAL LIABILITIES 23,492,966 22,449,160
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STOCKHOLDERS' EQUITY:
Series A convertible preferred
stock, $.01 par value; 1,000,000
shares authorized, 380,000 shares
issued; 229,016 shares outstanding 2,290 2,290
Common stock, $.01 par value;
25,000,000 shares authorized,
4,726,019 and 4,407,019 shares
issued and 4,632,819 and 4,340,919
shares outstanding at June 30, 1997
and December 31, 1996, respectively 47,261 44,071
Additional paid-in capital 10,367,092 10,437,915
Accumulated deficit (4,861,371) (5,046,263)
---------- ----------
5,555,272 5,438,013
Common stock held in treasury, at
cost; 93,200 and 66,100 shares
at June 30, 1997 and December 31,
1996, respectively (144,682) (106,073)
Note receivable from stockholders (93,750) (93,750)
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TOTAL STOCKHOLDERS' EQUITY 5,316,840 5,238,190
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $28,809,806 $27,687,350
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended Six Months Ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
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Revenues:
Operating leases $2,373,559 $2,490,734 $ 4,598,780 $5,081,948
Sales-type leases 6,393 304,124 6,393 304,124
Finance income 96,204 56,242 174,713 117,380
Direct sales 1,031,581 316,200 1,378,987 875,524
--------- --------- ---------- ---------
Total revenues from
leasing operations 3,507,737 3,167,300 6,158,873 6,378,976
Distribution sales 5,029,354 1,484,210 9,854,141 3,047,743
Other 2,090 12,449 6,866 13,582
--------- --------- ---------- ---------
Total revenues 8,539,181 4,663,959 16,019,880 9,440,301
--------- --------- ---------- ---------
Costs and expenses:
Operating leases 1,475,378 1,749,313 3,015,454 3,562,021
Sales-type leases 1,700 210,761 1,700 210,761
Interest expense 323,991 310,002 646,778 648,512
Direct sales 953,790 399,800 1,234,393 782,000
--------- --------- ---------- ---------
Total costs from
leasing operations 2,754,859 2,669,876 4,898,325 5,203,294
Distribution cost of
sales 4,269,530 1,297,807 8,419,207 2,660,437
Selling, general and
administrative expenses 1,257,222 849,251 2,235,112 1,549,626
Interest expense 152,439 90,422 282,344 174,405
--------- --------- ---------- ---------
Total costs and expenses 8,434,050 4,907,356 15,834,988 9,587,762
--------- --------- ---------- ---------
Income (loss) before
income taxes 105,131 (243,397) 184,892 (147,461)
Provision for income
taxes - - - -
--------- --------- --------- ---------
Net income (loss) $ 105,131 $ (243,397) $ 184,892 $ (147,461)
========= ========= ========= =========
Earnings per common
share $ 0.01 $ (0.09) $ 0.01 $ (0.08)
========= ========= ========= =========
Weighted average common
shares outstanding 4,838,644 3,508,967 4,746,380 3,319,143
========= ========= ========= =========
</TABLE>
The accompanying notes are integral part of these consolidated financial
statements.
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Six Months Ended
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June 30, June 30,
1997 1996
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CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 184,892 $ (147,461)
Adjustments to reconcile net
income (loss) to cash provided
by operating activities:
Depreciation and amortization 3,063,957 3,595,754
Change in assets and liabilities
due to operating activities:
Increase in accounts
receivable (1,327,442) (740,364)
(Increase) decrease in
inventory (183,681) 513,787
Increase (decrease) in
accounts payable 991,095 (196,862)
Increase in accrued
liabilities 257,101 112,661
All other operating activities (428,795) (128,801)
----------- ----------
Total adjustments 2,372,235 3,156,175
----------- ----------
Net cash provided by operating
activities 2,557,127 3,008,714
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales, transfers and disposals of
inventory and equipment 2,077,671 558,802
Purchases of inventory for lease (4,923,505) (3,943,295)
Purchases of furniture and equipment (42,283) (32,625)
Decrease in notes receivable 8,660 -
Additions to net investment in
sales-type and direct finance leases (1,007,685) (336,119)
Sales-type and direct financing
lease rentals received 892,357 869,192
----------- ----------
Net cash used in investing activities (2,994,785) (2,884,045)
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</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
(Continued)
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Six Months Ended
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June 30, June 30,
1997 1996
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from nonrecourse and
recourse discounted lease rentals $ 4,820,673 $ 4,508,090
Payments on nonrecourse and recourse
discounted lease rentals (4,408,050) (5,247,196)
Proceeds from notes payable 584,107 485,157
Payments on notes payable (891,062) (281,047)
Proceeds from exercise of stock
options - 37,125
Proceeds from sale of stock - 467,515
Proceeds from exercise of warrants 269,000 -
Deferred equity transaction costs - (76,822)
Purchase of treasury stock (38,609) -
Preferred stock dividends paid (114,508) (114,508)
----------- ----------
Net cash provided by (used in)
financing activities 221,551 (221,686)
----------- ----------
Net decrease in cash (216,107) (97,017)
Cash at beginning of period 412,340 209,084
----------- ----------
Cash at end of period $ 196,233 $ 112,067
=========== ==========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for:
Interest $ 880,559 $ 799,523
=========== ==========
Income taxes $ - $ 5,061
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of LEC Technologies, Inc. (formerly, Leasing Edge
Corporation) and its wholly owned subsidiaries, collectively
referred to as the "Company". All material intercompany accounts
and transactions have been eliminated. Certain reclassifications
have been made to prior years' amounts to conform with current
period presentation.
Basis of Presentation
In the opinion of the Company, the accompanying unaudited
Consolidated Financial Statements contain all adjustments necessary
to present fairly the results of its operations for the three and
six months ended June 30, 1997 and 1996 and its cash flows for the
six months ended June 30, 1997. It is suggested that this report
be read in conjunction with the Company's audited financial
statements included in the Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1996. The operating results for the
three and six months ended June 30, 1997 and cash flows for the six
months ended June 30, 1997 are not necessarily indicative of the
results that will be achieved for the full fiscal year or for
future periods.
Note 2. Earnings Per Share
Earnings per common and common equivalent share are computed based
on the weighted average number of common and common equivalent
shares outstanding during the three and six month periods ended
June 30, 1997. Dilutive stock options included in the number of
common and common equivalent shares are based on the treasury stock
method. Antidilutive stock options are excluded from the weighted
average share calculation.
Note 3. Notes Payable and Revolving Lines of Credit
On October 31, 1996, the Company's revolving line of credit
agreement with Bank of America Nevada matured and was subsequently
replaced with a term loan agreement (the "Amended Agreement")
effective February 28, 1997. The Amended Agreement expires on
August 15, 1997 (the "Initial Expiration Date"); however, the
Initial Expiration Date may be further extended at the Company's
option to January 1, 1998 (the "Optional Expiration Date"), subject
to the Company's satisfaction of certain conditions. Terms of the
Amended Agreement require the Company to make monthly graduated
principal reductions in an aggregate of $500,000 through August 15,
1997 or, if the Company exercises its extension option, in an
aggregate of $1,110,000 through January 1, 1998. The Amended
Agreement provides for interest at Bank of America's prime rate
plus four percent and is collateralized by certain personal
property. Restrictive covenants under the Amended Agreement
include the maintenance of consolidated tangible net worth, as
defined, of at least $4.5 million; restrictions on the payment of
cash dividends on shares of the Company's common stock; and
limitations on unfinanced capital expenditures, as defined. As of
June 30, 1997, the Company had satisfied all conditions necessary
through such date to extend the Amended Agreement to the Optional
Expiration Date. At June 30, 1997, the Company had outstanding
borrowings under the Amended Agreement of $2,026,365 and the
interest rate was 12.5 percent.
In January 1995, Pacific Mountain Computer Products, Inc. ("PMCPI")
entered into a revolving credit agreement with Merrill Lynch
Financial Services, Inc. (the "Merrill Line"). Borrowings under
the Merrill Line are limited to the lesser of $500,000 or an amount
equal to 80 percent of PMCPI's accounts receivable, as defined,
plus 60 percent of inventory, as defined. The Merrill Line is
secured by accounts receivable and inventory of PMCPI and is
guaranteed by the Company. The Merrill Line expires August 31,
1997.
At June 30, 1997, PMCPI had outstanding borrowings under the
Merrill Line of $496,875 and the interest rate with respect to the
line was 9.5 percent. Average borrowings outstanding under the
revolving credit agreement during the six months ended June 30,
1997 were $499,972 and the weighted average interest rate was
approximately 9.38 percent. Maximum borrowings outstanding under
the revolving credit agreement during such period were $510,000.
In November 1995, the Company entered into a letter agreement with
Union Chelsea National Bank (UCNB) whereby UCNB agreed to make
available to the Company a $250,000 line of credit (the "Equity
Line") to be used to fund the Company's equity investment in
certain leases discounted by UCNB (i.e., the difference between the
cost of the leased equipment and the discounted present value of
the minimum lease payments assigned to UCNB). Borrowings under the
Equity Line are evidenced by term notes and require monthly
payments of principal and interest over a period equal to the term
of the related discounted lease with a final balloon payment of
between 30 and 50 percent depending on the lease term. Interest
rates on the term notes are at the applicable discounted lease rate
plus 1.75%. In July 1996, UCNB increased its maximum commitment
under the Equity Line to $1,000,000. At June 30, 1997, the Company
had outstanding term notes and available credit under the Equity
Line of $972,333 and $27,667, respectively.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION
Overview
The Company was originally founded in 1980 under the name TJ
Computer Services, Inc. ("TJCS"). In 1989, all of the outstanding
common stock of TJCS was acquired by Harrison Development, Inc., an
inactive public corporation organized in Colorado, which then
changed its name to TJ Systems Corporation. In October 1991, the
Company reincorporated in the State of Delaware and in June 1995,
changed its name to Leasing Edge Corporation. In March 1997, the
Company's shareholders approved a change in the Company's name to
LEC Technologies, Inc. Unless the context otherwise requires, the
term the "Company" as used herein refers to LEC Technologies, Inc.
and its wholly owned subsidiaries.
The Company's services are organized into three groups of related
businesses and are provided generally through separate business
units, although there is a significant amount of interrelated
activities. The three business units are as follows:
Leasing Services: Leasing, remarketing, financial engineering,
consulting and third-party maintenance and systems integration
services for midrange systems and systems peripherals. The Company
conducts its leasing services business under the trade name Leasing
Edge Corporation.
Distribution Services: Sale of terminals, printers, controllers,
supplies, technical consulting and third-party maintenance
services. Business units comprising Distribution Services are
Superior Computer Systems, Inc. ("SCS") and PMCPI.
Remarketing Services: Remarketing of previously leased equipment,
displaced equipment, and used equipment purchased from other
lessors or brokers. This unit also has consignment relationships
with certain customers to assist such organizations in the sale of
their used equipment. Business units comprising Remarketing
Services include Leasing Edge Corporation, SCS, PMCPI and Atlantic
Digital International ("ADI"), a division of Leasing Edge
Corporation, which specializes in the acquisition and remarketing
of Digital Equipment Corporation equipment on both a domestic and
an international basis.
Six Months Ended June 30, 1997 Compared to Six Months Ended June
30, 1996
Revenues
Total revenues from leasing operations decreased $220,103, or 3.5%,
during the first six months of 1997 compared to the prior year
period due primarily to a decrease in revenue from the portfolio
base of operating leases of $483,168, or 9.5%, and a decrease in
sales-type lease revenue of $297,731, or 97.9%, partially offset by
an increase in direct sales revenues of $503,463, or 57.5%.
Distribution sales increased from $3,047,,743 for the six months
ended June 30, 1996 to $9,854,141 for the 1997 period due primarily
to the acquisition of SCS in November 1996 and the formation of ADI
in January 1997.
Costs and Expenses
Total costs from leasing operations as a percentage of leasing
revenue was 79.5% for the six months ended June 30, 1997 compared
with 81.6% for the prior year period. Gross profit from leasing
operations (total revenues from leasing operations less total costs
from leasing operations) increased $84,866, or 7.2%. Gross margin
(gross profit from leasing operations as a percentage of total
revenues from leasing operations) improved to 20.5% from 18.4%.
Leasing costs associated with the portfolio base of operating
leases decreased $546,567, or 15.3%. Gross profit on operating
leases increased by $63,399 due primarily to the addition of
certain month-to-month leases. Such leases generally have a higher
profit margin than other operating leases since the equipment has
often already been depreciated to zero.
Direct sales costs (leasing costs with respect to the sale of
equipment off lease and leases with dollar buyout options treated
as sales) increased $452,393, or 57.9% and increased slightly as a
percentage of related revenue to 89.5% from 89.3%.
Distribution cost of sales of $8,419,207 represents a $5,758,770
increase over the prior year period due to the aforementioned
acquisition of SCS and formation of ADI. Gross margin on
distribution sales increased to 14.6% in 1997 from 12.7% in 1996
due to an increase in comparative sales volume of certain higher
margin products.
Selling, general and administrative expenses increased $685,486 in
the 1997 period compared to the prior year period due primarily to
increased staffing levels resulting from the acquisition of SCS and
the formation of ADI. Selling, general and administrative expenses
decreased from 16.4% of total revenues in 1996 to 14.0% of total
revenues in 1997.
Interest expense on non-lease related indebtedness increased
$107,939, or 61.9%. The increase is due to higher average debt
levels and interest rates.
The consolidated financial statements do not reflect a provision
for income taxes due to the utilization of net operating loss
carryforwards and changes in the related valuation allowance. At
June 30, 1997, the Company had unexpired net operating loss
carryforwards of approximately $3,800,000 which can be utilized to
offset future taxable income, if any.
Net Earnings
As a result of the foregoing, the Company recorded net income of
$184,692 for the six months ended June 30, 1997 as compared to a
net loss of $147,461 for the six months ended June 30, 1996.
Three Months Ended June 30, 1997 Compared to Three Months Ended
June 30, 1996
Revenues
Total revenues from leasing operations increased $340,437, or
10.7%, in the second quarter of 1997 compared to the prior year
quarter due primarily to an increase in direct sales revenue of
$715,381, or 226.2%, partially offset by decreases in revenue from
the portfolio base of operating leases of $117,175, or 4.7%, and in
revenue from sales-type leases of $297,731, or 97.9%. Such changes
were primarily attributable to the decision of certain of the
Company's lease customers to purchase equipment previously under
lease at the end of the applicable lease term rather than renewing
or extending the lease.
Distribution sales increased 238.9% to $5,029,354 from the prior
year quarter's $1,484,210 due to the aforementioned acquisition of
SCS and formation of ADI.
Costs and Expenses
Total costs from leasing operations as a percentage of leasing
revenue decreased to 78.5% for the quarter ended June 30, 1997 as
compared to 84.3% for the prior year quarter. Gross profit from
leasing operations increased $225,454, or 51.4%, due primarily to
increases in gross profit from the portfolio base of operating
leases and direct sales of $156,760 and $161,391, respectively,
partially offset by a decrease in gross profit from sales-type
leases of $88,670. The improvement in gross profit related to the
operating lease portfolio resulted primarily from the extension of
certain leases on a month-to-month basis. Such extensions
generally yield a higher profit margin since the related equipment
has often already been depreciated to its fair market value. The
increase in gross profit related to direct sales activity was due
to residual value realization exceeding stated values by $77,791 in
the second quarter of 1997; in the 1996 quarter, stated values
exceeded residual realization by $83,600. Gross margin from
leasing operations improved to 21.5% from 15.7% as a result of the
foregoing.
Distribution cost of sales of $4,269,530 represents a $2,971,723
increase over the prior year quarter due to the acquisition of SCS
and the formation of ADI. Gross margin on distribution sales
improved to 15.1% for the quarter ended June 30, 1997 as compared
to 12.6% for the quarter ended June 30, 1996 due to an increase in
comparative sales volume of certain higher margin products.
Selling, general and administrative expenses increased 48.0%, to
$1,257,222 for the 1997 quarter as compared to $849,251 for the
comparable prior year period due to the acquisition of SCS and the
formation of ADI. Such expenses, however, decreased as a
percentage of total revenues to 14.7% from the prior year's 18.2%.
Interest expense on non-lease related indebtedness increased
$62,017, or 68.6%, due to higher average debt levels and interest
rates.
Net Earnings
As a result of the foregoing, the Company recorded net income of
$105,131 for the quarter ended June 30, 1997 as compared to a net
loss of $243,397 for the quarter ended June 30, 1996.
Liquidity and Capital Resources
Since equipment the Company leases must be paid for by the Company
prior to leasing, the Company requires a substantial amount of cash
for its leasing activities. The Company's growth has been
significantly dependent upon its ability to borrow funds or raise
equity or debt financing to acquire additional equipment for lease.
Historically, the Company has derived most of the funds necessary
for the purchase of equipment from nonrecourse financing and the
remainder from internally generated funds, recourse indebtedness
and existing cash. At June 30, 1997, the Company had approximately
$223,900 in cash and in availability under its bank lines.
On October 31, 1996, the Company's revolving line of credit
agreement with Bank of America Nevada matured and was subsequently
replaced with a term loan agreement (the "Amended Agreement")
effective February 28, 1997. The Amended Agreement expires on
August 15, 1997 (the "Initial Expiration Date"); however, the
Initial Expiration Date may be further extended at the Company's
option to January 1, 1998 (the "Optional Expiration Date"), subject
to the Company's satisfaction of certain conditions. Terms of the
Amended Agreement require the Company to make monthly graduated
principal reductions in an aggregate of $500,000 through August 15,
1997 or, if the Company exercises its extension option, in an
aggregate of $1,110,000 through January 1, 1998. The Amended
Agreement provides for interest at Bank of America's prime rate
plus four percent and is collateralized by certain personal
property. Restrictive covenants under the Amended Agreement
include the maintenance of consolidated tangible net worth, as
defined, of at least $4.5 million; restrictions on the payment of
cash dividends on shares of the Company's common stock; and
limitations on unfinanced capital expenditures, as defined. As of
June 30, 1997, the Company had satisfied all conditions necessary
through such date to extend the Amended Agreement to the Optional
Expiration Date. At June 30, 1997, the Company had outstanding
borrowings under the Amended Agreement of $2,026,365 and the
interest rate was 12.5 percent.
In January 1995, Pacific Mountain Computer Products, Inc. ("PMCPI")
entered into a revolving credit agreement with Merrill Lynch
Financial Services, Inc. (the "Merrill Line"). Borrowings under
the Merrill Line are limited to the lesser of $500,000 or an amount
equal to 80 percent of PMCPI's accounts receivable, as defined,
plus 60 percent of inventory, as defined. The Merrill Line is
secured by accounts receivable and inventory of PMCPI and is
guaranteed by the Company. The Merrill Line expires August 31,
1997.
At June 30, 1997, PMCPI had outstanding borrowings under the
Merrill Line of $496,875 and the interest rate with respect to the
line was 9.5 percent. Average borrowings outstanding under the
revolving credit agreement during the six months ended June 30,
1997 were $499,972 and the weighted average interest rate was
approximately 9.38 percent. Maximum borrowings outstanding under
the revolving credit agreement during such period were $510,000.
In November 1995, the Company entered into a letter agreement with
Union Chelsea National Bank (UCNB) whereby UCNB agreed to make
available to the Company a $250,000 line of credit (the "Equity
Line") to be used to fund the Company's equity investment in
certain leases discounted by UCNB (ie., the difference between the
cost of the leased equipment and the discounted present value of
the minimum lease payments assigned to UCNB). Borrowings under the
Equity Line are evidenced by term notes and require monthly
payments of principal and interest over a period equal to the term
of the related discounted lease with a final balloon payment of
between 30 and 50 percent depending on the lease term. Interest
rates on the term notes are at the applicable discounted lease rate
plus 1.75%. In July 1996, UCNB increased its maximum commitment
under the Equity Line to $1,000,000. At June 30, 1997, the Company
had outstanding term notes and available credit under the Equity
Line of $972,333 and $27,667, respectively.
At the inception of each lease, the Company establishes the
residual value of the leased equipment, which is the estimated
market value of the equipment at the end of the initial lease term.
The Company's cash flow depends to a great extent on its ability to
realize the residual value of leased equipment after the initial
term of its leases with its customers. Historically, the Company
has realized its recorded investment in residual values through (i)
renegotiation of the lease during its term to add or modify
equipment; (ii) renewal or extension of the original lease; (iii)
leasing equipment to a new user after the initial lease term; or,
(iv) sale of the equipment. Each of these alternatives impacts the
timing of the Company's cash realization of such recorded residual
values. Equipment may be returned to the Company at the end of an
initial or extended lease term when it may not be possible for the
Company to resell or re-lease the equipment on favorable terms.
Developments in the high technology equipment market tend to occur
at rapid rates, adding to the risk of obsolescence and shortened
product life cycles which could affect the Company's ability to
realize the residual value of such equipment. In addition, if the
lessee defaults on a lease, the financial institution that provided
nonrecourse financing may foreclose on its security interest in the
leased equipment and the Company may not realize any portion of
such residual value. If the residual value in any equipment cannot
be realized after the initial lease term, the recorded investment
in the equipment must be written down, resulting in lower cash flow
and reduced earnings. There can be no assurance that the Company
will not experience material residual value or inventory write-
downs in the future.
The Company intends to continue to retain residual ownership of all
the equipment it leases. As of June 30, 1997 the Company had a
total net investment in lease transactions of $22.2 million
compared to $22.5 million as of December 31, 1996. The estimated
residual value of the Company's portfolio of leases expiring
between July 1, 1997 and December 31, 2001 totals $9,431,557,
although there can be no assurance that the Company will be able to
realize such residual value in the future. As of June 30, 1997,
the estimated residual value of the Company's portfolio of leases
by year of lease termination is as follows:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
1997 $ 2,677,305
1998 2,019,852
1999 1,678,500
2000 2,354,800
2001 701,100
----------
Total $ 9,431,557
==========
</TABLE>
Leased equipment expenditures of $5,931,190 for the six months
ended June 30, 1997 were financed through the discounting of
$4,820,673 of noncancelable lease rentals to various financial
institutions, borrowings under the Company's Equity Line and
available cash.
Based on the Company's anticipated residual value realization and
distribution sales, management believes that it will have adequate
capital resources to continue its operations at the present level
for at least the next twelve months. Management further believes
that its existing credit lines will be renewed as they come due.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" (SFAS No. 128) and Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital
Structure" (SFAS No. 129). SFAS No. 128 supercedes APB Opinion No.
15 and specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS"). It replaces the
presentation of "primary EPS" with a presentation of "basic EPS"
and "fully diluted EPS" with "diluted EPS". Basic EPS excludes
dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock and is
computed similarly to fully diluted EPS under APB Opinion No. 15.
The following proforma EPS amounts reflect EPS as calculated under
SFAS No. 128:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- --------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
--------- --------- --------- --------
<S> <C> <C> <C> <C>
"Basic EPS"
Net income $ 105,131 $(243,397) $ 184,892 $(147,461)
Preferred stock
dividends (57,254) (57,254) (114,508) (114,508)
-------- -------- -------- --------
Earnings available
to common
shareholders $ 47,877 $(300,651) $ 70,384 $(261,969)
======== ======== ======== ========
Weighted average
common shares
outstanding 4,642,205 3,508,967 4,617,499 3,319,143
========= ========= ========= =========
Basic EPS $ 0.01 $ (0.09) $ 0.02 $ (0.08)
======== ======== ======== ========
"Diluted EPS"
Earnings available
to common
shareholders $ 47,877 $(300,651) $ 70,384 $(261,969)
======== ======== ======== ========
Weighted average
common shares
outstanding 4,642,205 3,508,967 4,617,499 3,319,143
Weighted average
incremental common
shares issuable
upon exercise of
stock options 196,439 - 128,881 -
--------- --------- --------- ---------
Adjusted weighted
average common
shares outstanding 4,838,644 3,508,967 4,746,380 3,319,143
========= ========= ========= =========
Diluted EPS $ 0.01 $ (0.09) $ 0.01 $ (0.08)
======== ======== ======== ========
</TABLE>
SFAS No. 129 is basically a consolidation of previously issued
disclosure requirements about an entity's financial structure and,
as such, it is not anticipated that its adoption will necessitate
significant revisions to the Company's current disclosures. Both
SFAS No. 128 and SFAS No. 129 are effective for financial
statements issued after December 15, 1997. Earlier adoption is not
permitted.
The Company believes that inflation has not been a significant
factor in its business.
Safe Harbor Statement under the
Private Securities Litigation Reform Act of 1995
Certain statements herein and in the future filings by the Company
with the Securities and Exchange Commission and in the Company's
written and oral statements made by or with the approval of an
authorized executive officer constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934, and
the Company intends that such forward-looking statements be subject
to the safe-harbors created thereby. The words and phrases
"looking ahead", "we are confident", "should be", "will be",
"predicted", "believe", "expect" and "anticipate" and similar
expressions identify forward-looking statements. These and other
similar forwrd-looking statements reflect the Company's current
views with respect to future events and financial performance, but
are subject to many uncertainties and factors relating to the
Company's operations and business environment which may cause the
actual results of the Company to be materially different from any
future results expressed or implied by such forward-looking
statements. Examples of such uncertainties include, but are not
limited to, changes in customer demand and requirements, the mix of
leases written, the availability and timing of external capital,
the timing and method of the Company's realization of its recorded
residual values, new product announcements, continued growth of the
semiconductor industry, trend of movement to client/server
environment, interest rate fluctuations, changes in federal income
tax laws and regulations, competition, unanticipated expenses and
delays in the integration of newly-acquired businesses, industry
specfic factors and worldwide economic and business conditions.
With respect to economic conditions, a recession can cause
customers to put off new investments and increase the Company's bad
debt experience. The mix of leases written in a quarter is a
direct result of a combination of factors, including, but not
limited to, changes in customers demands and/or requirements, new
product announcements, price changes, changes in delivery dates,
changes in maintenance policies and the pricing policies of
equipment manufacturers, and price competition from other lessors.
The Company undertakes no obligation to publicly update or revise
any forward-looking statements whether as a result of new
information, future events or otherwise.
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statement re Computation of Per Share
Earnings.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None.
Signatures
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 thereunto duly authorized.
LEC Technologies, Inc.
(Registrant)
Date: August 11, 1997 /s/Michael F. Daniels
Michael F. Daniels, President
and Chief Executive Officer
(Principal Executive Officer)
Date: August 11, 1997 /s/ William J. Vargas
William J. Vargas, V.P.- Finance
(Principal Financial and
Accounting Officer)
ITEM 6
- ------
EXHIBIT 11
- ----------
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE
EARNINGS - PRIMARY
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
June 30, June 30,
1997 1996
---------- ----------
<S> <C> <C>
Shares outstanding at beginning
of period 4,340,919 3,129,319
Effect of common shares issuable
upon exercise of dilutive stock
options net of shares assumed to
be repurchased (at the average
market price) out of exercise
proceeds 196,439 258,754
Effect of issuance of common stock
for services 50,000 -
Exercise of "B" warrants 269,000 -
Purchase of treasury stock (17,714) -
Issuance of common stock - 379,648
---------- ----------
Weighted average shares outstanding 4,838,644 3,767,721
Less: anti-dilutive common stock
equivalents - (258,754)
---------- ---------
Weighted average shares - primary 4,838,644 3,508,967
========== =========
Net income (loss) 105,131) (243,397)
Preferred stock dividends (57,254) (57,254)
---------- ----------
Net earnings available to
common shareholders 47,877 (300,651)
========== ==========
Primary earnings per common
share 0.01 (0.09)
========== ==========
</TABLE>
Fully diluted earnings per share is not presented because the
effect of such calculation is anti-dlutive.
(Continued)
ITEM 6
- ------
EXHIBIT 11
- ----------
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE
EARNINGS - PRIMARY (Continued)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------
June 30, June 30,
1997 1996
---------- ----------
<S> <C> <C>
Shares outstanding at beginning
of period 4,340,919 3,129,319
Effect of common shares issuable
upon exercise of dilutive stock
options net of shares assumed to
be repurchased (at the average
market price) out of exercise
proceeds 128,881 234,298
Effect of issuance of common stock
for services 37,293 -
Exercise of "B" warrants 248,193 -
Purchase of treasury stock (8,906) -
Issuance of common stock - 189,824
---------- ----------
Weighted average shares outstanding 4,746,380 3,553,441
Less: anti-dilutive common stock
equivalents - (234,298)
---------- ---------
Weighted average shares - primary 4,746,380 3,319,143
========== =========
Net income (loss) 184,892 (147,461)
Preferred stock dividends (114,508) (114,508)
---------- ----------
Net earnings available to
common shareholders 70,384 (261,969)
========== ==========
Primary earnings per common
share 0.01 (0.08)
========== ==========
</TABLE>
Fully diluted earnings per share is not presented because the
effect of such calculation is anti-dlutive.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 196,233
<SECURITIES> 0
<RECEIVABLES> 2,562,977
<ALLOWANCES> 138,667
<INVENTORY> 2,652,428
<CURRENT-ASSETS> 0
<F1> UNCLASSIFIED BALANCE SHEET
<PP&E> 503,890
<DEPRECIATION> 327,931
<TOTAL-ASSETS> 28,809,806
<CURRENT-LIABILITIES> 0
<F1> UNCLASSIFIED BALANCE SHEET
<BONDS> 3,574,927
0
2,290
<COMMON> 47,261
<OTHER-SE> 5,505,721
<TOTAL-LIABILITY-AND-EQUITY> 28,809,806
<SALES> 11,233,128
<TOTAL-REVENUES> 16,019,880
<CGS> 9,653,600
<TOTAL-COSTS> 13,317,532
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (32,032)
<INTEREST-EXPENSE> 282,344
<INCOME-PRETAX> 184,892
<INCOME-TAX> 0
<INCOME-CONTINUING> 184,892
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 184,892
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0
<F2> FULLY DILUTED EPS NOT PRESENTED AS
RESULT OF CALCULATION IS ANTIDILUTIVE
</TABLE>
