SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED:
SEPTEMBER 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
- -------------------------------------- -----------------------
(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.
October 31, 1997: 4,789,069 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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PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1997 (Unaudited)
and December 31, 1996 3
Consolidated Statements of Operations - for the three
and nine months ended September 30, 1997 and 1996
(Unaudited) 5
Consolidated Statements of Cash Flows - for the nine months
ended September 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
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(Unaudited) (Audited)
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ASSETS:
Cash $ 231,366 $ 412,340
Receivables - net of allowance
for doubtful accounts of $118,803
and $170,699 2,499,058 1,096,868
Notes receivable - employees 185,317 199,185
Inventory, net 2,668,524 2,210,674
Leased assets:
Operating leases, net 16,166,236 17,617,934
Sales-type and direct
financing leases 7,623,449 4,927,894
Furniture and equipment - net of
accumulated depreciation of
$326,566 and $304,495 309,134 157,112
Other assets 558,015 397,712
Goodwill, net of accumulated
amortization of $122,009 and
$84,408 630,030 667,631
---------- ----------
TOTAL ASSETS $30,871,129 $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
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(Unaudited) (Audited)
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 4,315,218 $ 2,946,365
Accrued liabilities 1,202,134 401,569
Notes payable and lines of credit 3,170,542 3,881,882
Nonrecourse and recourse discounted
lease rentals 16,300,089 14,808,581
Other liabilities 238,752 410,763
---------- ----------
TOTAL LIABILITIES 25,226,735 22,449,160
---------- ----------
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,
4,882,269 and 4,407,019 shares
issued and 4,789,069 and 4,340,919
shares outstanding at September 30,
1997 and December 31, 1996,
respectively 48,823 44,071
Additional paid-in capital 10,565,066 10,437,915
Accumulated deficit (4,733,353) (5,046,263)
---------- ----------
5,882,826 5,438,013
Common stock held in treasury, at
cost; 93,200 and 66,100 shares
at September 30, 1997 and
December 31, 1996, respectively (144,682) (106,073)
Note receivable from stockholders (93,750) (93,750)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 5,644,394 5,238,190
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $30,871,129 $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)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ----------------------
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
1997 1996 1997 1996
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Revenues:
Operating leases $1,890,367 $2,393,681 $ 6,656,202 $7,475,629
Sales-type leases 2,102,584 2,417,359 2,108,977 2,721,483
Finance income 138,505 78,727 313,218 196,107
Direct sales 129,380 366,451 1,341,312 1,241,975
--------- --------- ---------- ---------
Total revenues from
leasing operations 4,260,836 5,256,218 10,419,709 11,635,194
Distribution sales 4,961,235 1,299,348 14,815,376 4,347,091
Other 8,400 6,392 15,266 19,974
--------- --------- ---------- ----------
Total revenues 9,230,471 6,561,958 25,250,351 16,002,259
--------- --------- ---------- ----------
Costs and expenses:
Operating leases 1,366,019 1,670,252 4,381,473 5,232,273
Sales-type leases 1,683,434 1,890,665 1,685,134 2,101,426
Interest expense 326,502 356,184 973,280 1,004,696
Direct sales 186,387 383,262 1,420,780 1,165,262
--------- --------- ---------- ---------
Total costs from
leasing operations 3,562,342 4,300,363 8,460,667 9,503,657
Distribution cost of
sales 4,233,347 1,101,683 12,652,554 3,762,120
Selling, general and
administrative expenses 1,146,140 808,530 3,381,252 2,358,156
Interest expense 160,624 102,751 442,968 277,156
--------- --------- ---------- ----------
Total costs and expenses 9,102,453 6,313,327 24,937,441 15,901,089
--------- --------- ---------- ----------
Income (loss) before
income taxes 128,018 248,631 312,910 101,170
Provision for income
taxes - - - -
--------- --------- --------- ---------
Net income (loss) $ 128,018 $ 248,631 $ 312,910 $ 101,170
========= ========= ========= =========
Earnings per common
share $ 0.01 $ 0.05 $ 0.03 $ (0.02)
========= ========= ========= =========
Weighted average common
shares outstanding 5,150,714 4,009,807 5,063,624 3,471,250
========= ========= ========= =========
</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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Nine Months Ended
--------------------------
September 30, September 30,
1997 1996
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CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 312,910 $ 101,170
Adjustments to reconcile net
income to cash provided
by operating activities:
Depreciation and amortization 4,460,007 5,285,647
Change in assets and liabilities
due to operating activities:
Increase in accounts
receivable (1,402,190) (456,199)
(Increase) decrease in
inventory (124,675) 461,837
Increase (decrease) in
accounts payable 1,368,853 (589,287)
Increase in accrued
liabilities 800,565 101,016
All other operating activities (563,069) (104,620)
----------- ----------
Total adjustments 4,539,491 4,698,394
----------- ----------
Net cash provided by operating
activities 4,852,401 4,799,564
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales, transfers and disposals of
inventory and equipment 3,461,165 2,047,679
Purchases of inventory for lease (6,588,512) (4,326,793)
Purchases of furniture and equipment (52,535) (41,682)
Decrease in notes receivable 13,868 -
Additions to net investment in
sales-type and direct finance leases (4,391,873) (4,344,940)
Sales-type and direct financing
lease rentals received 1,560,715 1,349,928
----------- ----------
Net cash used in investing activities (5,997,172) (5,315,808)
----------- ----------
</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)
<TABLE>
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Nine Months Ended
--------------------------
September 30, September 30,
1997 1996
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from nonrecourse and
recourse discounted lease rentals $ 8,622,984 $ 8,430,655
Payments on nonrecourse and recourse
discounted lease rentals (7,131,476) (8,622,595)
Proceeds from notes payable 726,860 651,279
Payments on notes payable (1,438,200) (308,754)
Proceeds from exercise of stock
options - 37,125
Proceeds from sale of stock 125,000 467,515
Proceeds from exercise of warrants 269,000 55,592
Deferred equity transaction costs - (118,814)
Purchase of treasury stock (38,609) -
Preferred stock dividends paid (171,762) (171,762)
----------- ----------
Net cash provided by (used in)
financing activities 963,797 420,241
----------- ----------
Net decrease in cash (180,974) (96,003)
Cash at beginning of period 412,340 209,084
----------- ----------
Cash at end of period $ 231,366 $ 113,081
=========== ==========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for:
Interest $ 1,353,860 $ 1,255,256
=========== ==========
Income taxes $ - $ 34,061
=========== ==========
</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
nine months ended September 30, 1997 and 1996 and its cash flows
for the nine months ended September 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 nine months ended September 30, 1997 and cash
flows for the nine months ended September 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 nine month periods ended
September 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
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 September 30, 1997, the Company had $231,366
in cash and $28,317 in availability under its various 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. Terms of the Amended Agreement
require the Company to make monthly graduated principal reductions
in an aggregate of $1,110,000 through December 15, 1997 with the
remaining unamortized principal balance of approximately $1,376,365
due and payable on 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. At September 30, 1997, the Company had
outstanding borrowings under the Amended Agreement of $1,676,365
and the interest rate was 12.5 percent.
The Company has been unable to find a lender to replace Bank of
America and will not have the resources necessary to make the
January 1, 1998 balloon payment of $1,376,365. Accordingly, the
Company and Bank of America have reached a conceptual agreement to
extend the Amended Agreement to fully amortize the remaining
indebtedness over an additional eighteen month period. Proposed
terms of the conceptual agreement would require the Company to make
monthly payments of principal and interest of approximately $53,267
from January 15, 1998 through June 15, 1998; monthly principal and
interest payments of $77,291 from July 15, 1998 through December
15, 1998; and, monthly principal and interest payments of $126,371
from January 1, 1999 through June 15, 1999. Although the Company
and Bank of America have reached this conceptual understanding,
there can be no assurance that the Amended Agreement will be
restructured as proposed until such time as the related definitve
documents are executed. In the event that the Amended Agreement is
not so restructured, Bank of America has all of its rights and
remedies under the related security agreement and ancilliary
documents, including foreclosure.
In October 1997, Pacific Mountain Computer Products, Inc. ("PMCPI")
and Merrill Lynch Financial Services, Inc. replaced PMCPI's prior
line of credit with a term note (the "Merrill Note"). Terms of the
Merrill Note require the Company to make principal payments of
$25,000 plus accrued interest at prime plus one percent (currently
9.5%) on October 20 and November 1, 1997 with the remaining
principal balance of approximately $394,000 plus accrued interest
due December 1, 1997. Such restructuring was done in anticipation
of the Company entering into a new $1.75 million revolving line of
credit facility with Finova Capital Corporation (the "Finova Line")
that would have been secured by the inventory and accounts
receivable of both PMCPI and SCS. Subsequent to executing the
Merrill Note, the Company reevaluated the terms and conditions of
the proposed Finova Line and determined that it was too costly and
that it did not sufficiently address the Company's liquidity needs.
As a result, the Company is currently negotiating a reinstatement
of the prior line of credit with Merrill Lynch. However, there can
be no assurance that the Company will be successful in its efforts.
In November 1995, the Company entered into a letter agreement with
Excel Bank N.A. ("Excel")(formerly Union Chelsea National Bank)
whereby Excel 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 Excel (ie., the
difference between the cost of the leased equipment and the
discounted present value of the minimum lease payments assigned to
Excel). 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, Excel increased
its maximum commitment under the Equity Line to $1,000,000. At
September 30, 1997, the Company had outstanding term notes and
available credit under the Equity Line of $971,683 and $28,317,
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.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
Revenues
Total revenues increased 57.8% from $16,002,259 for the nine-month
period ended September 30, 1996 to $25,250,351 for the nine-month
period ended September 30, 1997, an increase of $9,248,092. Total
revenues from leasing operations decreased 10.4% from $11,635,194
during the nine-month period ended September 30, 1996 to
$10,419,709 for the nine-month period ended September 30, 1997, a
decrease of $1,215,485. The decrease in revenues from leasing
operations was due primarily to a decrease in revenue from the
portfolio base of operating leases of $819,427, or 11.0%, and a
decrease in sales-type lease revenue of $612,506, or 22.5%,
partially offset by increases in finance income and direct sales
revenues of $117,111, or 59.7%, and $99,337, or 8.0%, respectively.
Such revenue decreases were primarily attributable to the Company's
repayment of approximately $825,000 of bank indebtedness pursuant
to the Company's loan agreement with Bank of America (see
"Liquidity and Capital Resources"). Such payments prevented the
Company from investing the proceeds from the sale of off-lease
equipment into new lease transactions to the extent it may
otherwise have been able to.
Distribution sales increased 240.8% from $4,347,091 for the nine-
month period ended September 30, 1996 to $14,815,376 for the
comparable 1997 period, an increase of $10,468,285, 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 81.2% for the nine months ended September 30, 1997
compared with 81.7% for the prior year period. Gross profit from
leasing operations (total revenues from leasing operations less
total costs from leasing operations) decreased 8.1% from $2,131,537
for the nine-month period ended September 30, 1996 to $1,959,042
for the nine-month period ended September 30, 1997, a decrease of
$172,495. Gross margin (gross profit from leasing operations as a
percentage of total revenues from leasing operations) improved to
18.8% for the nine-month period ended September 30, 1997 from 18.3%
for the comparable 1996 period.
Leasing costs associated with the portfolio base of operating
leases decreased 16.3% from $5,232,273 for the nine-month period
ended September 30, 1996 to $4,381,473 for the nine-month period
ended September 30, 1997, a decrease of $850,800. Such decrease
was consistent with the decrease in total revenues from operating
leases. Gross profit on operating leases increased by 1.4% from
$2,243,356 for the nine-month period ended September 30, 1996 to
$2,274,729, an increase of $31,373. The increase in gross profit
on operating leases was 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 21.9% from $1,165,262 for the nine-month period
ended September 30, 1996 to $1,420,780 for the nine-month period
ended September 30, 1997, an increase of $255,518 and increased as
a percentage of related revenue to 105.9% from 93.8%. Of the
increase in direct sales costs, $93,201 was due to increased sales
volumes and $162,317 was due to the realization of residual values
at amounts less than capitalized costs.
Distribution cost of sales increased 236.3% from $3,762,120 for the
nine-month period ended September 30, 1996 to $12,652,554 for the
nine-month period ended September 30, 1997, an increase of
$8,890,434. The increase in distribution cost of sales is
primarily due to the aforementioned acquisition of SCS and
formation of ADI. Gross margin on distribution sales improved to
14.6% in the 1997 period from 13.5% in the 1996 period due to an
increased focus on generating higher margin sales.
Selling, general and administrative expenses increased 43.4% from
$2,358,156 for the nine-month period ended September 30, 1996 to
$3,381,252 for the comparable 1997 period, an increase of
$1,023,096. The increase in selling, general and administrative
expenses was due primarily to increased staffing levels resulting
from the acquisition of SCS and the formation of ADI. Selling,
general and administrative expenses decreased from 14.7% of total
revenues for the nine months ended September 30, 1996 to 13.4% of
total revenues for the nine months ended September 30, 1997.
Interest expense on non-lease related indebtedness increased 59.8%
from $277,156 for the nine-month period ended September 30, 1996 to
$442,968 for the nine-month period ended September 30, 1997, an
increase of $165,812. The increase is due to higher interest rates
partially offset by lower average debt levels.
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
September 30, 1997, the Company had unexpired net operating loss
carryforwards of approximately $3,700,000 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
$312,910 for the nine months ended September 30, 1997 as compared
to net income of $101,170 for the nine months ended September 30,
1996.
Three Months Ended September 30, 1997 Compared to Three Months
Ended September 30, 1996
Revenues
Total revenues increased 40.7% from $6,561,958 for the three-month
period ended September 30, 1996 to $9,230,471 for the three-month
period ended September 30, 1997, an increase of $2,668,513. Total
revenues from leasing operations decreased 18.9% from $5,256,218
for the quarter ended September 30, 1996 to $4,260,836 for the
quarter ended September 30, 1997, a decrease of $995,382. The
decrease in revenues from leasing operations was due primarily to
a decrease in revenue from the portfolio base of operating leases
of $503,314, or 21.0%, a decrease in sales-type lease revenue of
$314,775, or 13.0%, and a decrease in direct sales revenues of
$237,071, or 64.7%, partially offset by an increase in finance
income of $59,778, or 75.9%. Such revenue decreases were primarily
attributable to the aforementioned debt repayments.
Distribution sales increased 281.8% from $1,299,348 for the three-
month period ended September 30, 1996 to $4,961,235 for the
comparable 1997 period, an increase of $3,661,887. Such increase
was 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 83.6% for the three months ended September 30, 1997
compared with 81.8% for the prior year period. Gross profit from
leasing operations decreased 26.9% from $955,855 for the three-
month period ended September 30, 1996 to $698,494 for the three-
month period ended September 30, 1997, a decrease of $257,361.
Gross margin declined to 16.4% for the three-month period ended
September 30, 1997 from 18.2% for the comparable 1996 period.
Leasing costs associated with the portfolio base of operating
leases decreased 18.2% from $1,670,252 for the three-month period
ended September 30, 1996 to $1,366,019 for the three-month period
ended September 30, 1997, a decrease of $304,233. Gross profit on
operating leases decreased by 27.5% from $723,429 for the quarter
ended September 30, 1996 to $524,348 for the quarter ended
September 30, 1997, a decrease of $199,081. The decrease in gross
profit on operating leases was due primarily to the aforementioned
decrease in operating lease revenues.
Direct sales costs decreased 51.4% from $383,262 for the three-
month period ended September 30, 1996 to $186,387 for the three-
month period ended September 30, 1997, a decrease of $196,875 and
increased as a percentage of related revenue to 144.1% from 104.6%.
The increase in direct sales costs was due to residual value
realization more closely matching stated values during the third
quarter of fiscal 1996 as compared to the third quarter of fiscal
1997.
Distribution cost of sales increased 284.3% from $1,101,683 for the
three-month period ended September 30, 1996 to $4,233,347 for the
three-month period ended September 30, 1997, an increase of
$3,131,664. The increase in distribution cost of sales is
primarily due to the aforementioned acquisition of SCS and
formation of ADI. Gross margin on distribution sales decreased
slightly to 14.7% in the 1997 period from 15.2% in the 1996 period.
During the 1996 period, a greater percentage of distribution sales
were made directly to endusers than in the 1997 period.
Selling, general and administrative expenses increased 41.8% from
$808,530 for the three-month period ended September 30, 1996 to
$1,146,140 for the comparable 1997 period, an increase of $337,610.
The increase in selling, general and administrative expenses was
due primarily to increased staffing levels resulting from the
acquisition of SCS and the formation of ADI. Selling, general and
administrative expenses increased slightly from 12.3% of total
revenues for the three months ended September 30, 1996 to 12.4% of
total revenues for the three months ended September 30, 1997.
Interest expense on non-lease related indebtedness increased 56.3%
from $102,751 for the three-month period ended September 30, 1996
to $160,624 for the three-month period ended September 30, 1997, an
increase of $57,873. The increase is due to higher interest rates
partially offset by lower average debt levels.
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
September 30, 1997, the Company had unexpired net operating loss
carryforwards of approximately $3,700,000 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
$128,018 for the quarter ended September 30, 1997 as compared to
net income of $248,631 for the quarter ended September 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 September 30, 1997, the Company had $231,366
in cash and $28,317 in availability under its various 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. Terms of the Amended Agreement
require the Company to make monthly graduated principal reductions
in an aggregate of $1,110,000 through December 15, 1997 with the
remaining unamortized principal balance of approximately $1,376,365
due and payable on 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. At September 30, 1997, the Company had
outstanding borrowings under the Amended Agreement of $1,676,365
and the interest rate was 12.5 percent.
The Company has been unable to find a lender to replace Bank of
America and will not have the resources necessary to make the
January 1, 1998 balloon payment of $1,376,365. Accordingly, the
Company and Bank of America have reached a conceptual agreement to
extend the Amended Agreement to fully amortize the remaining
indebtedness over an additional eighteen month period. Proposed
terms of the conceptual agreement would require the Company to make
monthly payments of principal and interest of approximately $53,267
from January 15, 1998 through June 15, 1998; monthly principal and
interest payments of $77,291 from July 15, 1998 through December
15, 1998; and, monthly principal and interest payments of $126,371
from January 1, 1999 through June 15, 1999. Although the Company
and Bank of America have reached this conceptual understanding,
there can be no assurance that the Amended Agreement will be
restructured as proposed until such time as the related definitve
documents are executed. In the event that the Amended Agreement is
not so restructured, Bank of America has all of its rights and
remedies under the related security agreement and ancilliary
documents, including foreclosure.
In October 1997, Pacific Mountain Computer Products, Inc. ("PMCPI")
and Merrill Lynch Financial Services, Inc. replaced PMCPI's prior
line of credit with a term note (the "Merrill Note"). Terms of the
Merrill Note require the Company to make principal payments of
$25,000 plus accrued interest at prime plus one percent (currently
9.5%) on October 20 and November 1, 1997 with the remaining
principal balance of approximately $394,000 plus accrued interest
due December 1, 1997. Such restructuring was done in anticipation
of the Company entering into a new $1.75 million revolving line of
credit facility with Finova Capital Corporation (the "Finova Line")
that would have been secured by the inventory and accounts
receivable of both PMCPI and SCS. Subsequent to executing the
Merrill Note, the Company reevaluated the terms and conditions of
the proposed Finova Line and determined that it was too costly and
that it did not sufficiently address the Company's liquidity needs.
As a result, the Company is currently negotiating a reinstatement
of the prior line of credit with Merrill Lynch. However, there can
be no assurance that the Company will be successful in its efforts.
In November 1995, the Company entered into a letter agreement with
Excel Bank N.A. ("Excel") (formerly Union Chelsea National Bank)
whereby Excel 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 Excel (ie., the
difference between the cost of the leased equipment and the
discounted present value of the minimum lease payments assigned to
Excel). 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, Excel increased
its maximum commitment under the Equity Line to $1,000,000. At
September 30, 1997, the Company had outstanding term notes and
available credit under the Equity Line of $971,683 and $28,317,
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 September 30, 1997 the Company had
a total net investment in lease transactions of $23.8 million
compared to $22.5 million as of December 31, 1996. The estimated
residual value of the Company's portfolio of leases expiring
between October 1, 1997 and December 31, 2002 totals $9,180,105,
although there can be no assurance that the Company will be able to
realize such residual value in the future. As of September 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 $ 1,796,653
1998 2,019,852
1999 1,570,500
2000 3,067,000
2001 701,100
2002 25,000
----------
Total $ 9,180,105
==========
</TABLE>
Leased equipment expenditures of $10,980,385 for the nine months
ended September 30, 1997 were financed through the discounting of
$8,622,984 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 provided that the Company is
able to restructure its debt agreements with Bank of America and
Merrill Lynch as discussed above.
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 Nine Months Ended
-------------------- --------------------
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
1997 1996 1997 1996
--------- --------- --------- --------
<S> <C> <C> <C> <C>
"Basic EPS"
Net income $ 128,018 $ 248,631 $ 312,910 $ 101,170
Preferred stock
dividends (57,254) (57,254) (171,762) (171,762)
-------- -------- -------- --------
Earnings available
to common
shareholders $ 70,764 $ 191,377 $ 141,148 $ (70,592)
======== ======== ======== ========
Weighted average
common shares
outstanding 4,670,183 3,772,157 4,635,254 3,471,250
========= ========= ========= =========
Basic EPS $ 0.02 $ 0.05 $ 0.03 $ (0.02)
======== ======== ======== ========
"Diluted EPS"
Earnings available
to common
shareholders $ 70,764 $ 191,377 $ 141,148 $ (70,592)
======== ======== ======== ========
Weighted average
common shares
outstanding 4,670,183 3,772,157 4,635,254 3,471,250
Weighted average
incremental common
shares issuable
upon exercise of
stock options 480,531 237,650 428,370 -
--------- --------- --------- ---------
Adjusted weighted
average common
shares outstanding 5,150,714 4,009,807 5,063,624 3,471,250
========= ========= ========= =========
Diluted EPS $ 0.01 $ 0.05 $ 0.03 $ (0.02)
======== ======== ======== ========
</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: November 12, 1997 /s/Michael F. Daniels
Michael F. Daniels, President
and Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 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
-------------------------
Sep. 30, Sep. 30,
1997 1996
---------- ----------
<S> <C> <C>
Shares outstanding at beginning
of period 4,632,819 3,756,319
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 480,531 237,650
Effect of issuance of common stock 37,364 15,838
---------- ----------
Weighted average shares - primary 5,150,714 4,009,807
========== ==========
Net income 128,018 248,631
Preferred stock dividends (57,254) (57,254)
---------- ----------
Net earnings available to
common shareholders 70,764 191,377
========== ==========
Primary earnings per common
share 0.01 0.05
========== ==========
</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>
Nine Months Ended
-------------------------
Sep. 30, Sep. 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 428,370 239,111
Effect of issuance of common stock 54,167 341,931
Exercise of "B" warrants 255,205 -
Purchase of treasury stock (15,037) -
---------- ---------
Weighted average shares outstanding 5,063,624 3,710,361
Less: anti-dilutive common stock
equivalents - (239,111)
---------- ---------
Weighted average shares - primary 5,063,624 3,471,250
========== =========
Net income 312,910 101,170
Preferred stock dividends (171,762) (171,762)
---------- ----------
Net earnings available to
common shareholders 141,148 (70,592)
========== ==========
Primary earnings (loss) per common
share 0.03 (0.02)
========== ==========
</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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 231,366
<SECURITIES> 0
<RECEIVABLES> 2,617,861
<ALLOWANCES> 118,803
<INVENTORY> 2,668,524
<CURRENT-ASSETS> 0
<F1> UNCLASSIFIED BALANCE SHEET
<PP&E> 635,700
<DEPRECIATION> 326,566
<TOTAL-ASSETS> 30,871,129
<CURRENT-LIABILITIES> 0
<F1> UNCLASSIFIED BALANCE SHEET
<BONDS> 3,170,542
0
2,290
<COMMON> 48,823
<OTHER-SE> 5,831,713
<TOTAL-LIABILITY-AND-EQUITY> 30,871,129
<SALES> 16,156,688
<TOTAL-REVENUES> 25,250,351
<CGS> 14,073,334
<TOTAL-COSTS> 21,113,331
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (51,896)
<INTEREST-EXPENSE> 442,968
<INCOME-PRETAX> 312,910
<INCOME-TAX> 0
<INCOME-CONTINUING> 312,910
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 312,910
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0
<F2> FULLY DILUTED EPS NOT PRESENTED AS
RESULT OF CALCULATION IS ANTIDILUTIVE
</TABLE>
