SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
X Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1996.
___ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period ______ to ______.
Commission File No. 0-18303
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LEC TECHNOLOGIES, INC. (formerly known as Leasing Edge Corporation)
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(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 Identifi-
incorporation or organization) cation No.)
6540 South Pecos Road, Suite 103, Las Vegas NV 89120
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (702) 454-7900
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(Including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, Par Value $0.01 Per Share
Series A Convertible Preferred Stock
Common Stock Purchase Warrants
Class B Common Stock Purchase Warrants
Class C Common Stock Purchase Warrants
Class D Common Stock Purchase Warrants
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
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 .
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Check if there is no disclosure in this form of delinquent filers in
response to Item 405 of Regulation S-B, and if no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $21,237,400
As of March 12, 1997, the Registrant had 4,726,028 shares of Common Stock,
par value $0.01 per share, outstanding and the approximate market value of
the common stock (based upon the NASDAQ closing price of $1.03 of stated
shares on that date) held by non-affiliates was $4,446,281.
Documents incorporated by reference: None.
Transitional Small Business Disclosure Format: Yes[ ] No [X]
LEC TECHNOLOGIES INC. AND SUBSIDIARIES
1996 ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
PAGE
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PART I
Item 1. DESCRIPTION OF BUSINESS 2
Item 2. DESCRIPTION OF PROPERTY 8
Item 3. LEGAL PROCEEDINGS 8
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 9
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 9
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION 10
Item 7. CONSOLIDATED FINANCIAL STATEMENTS 15
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 42
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT 43
Item 10. EXECUTIVE COMPENSATION 44
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 45
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. EXHIBITS AND REPORTS ON FORM 8-K 46
PART I
ITEM 1: DESCRIPTION OF BUSINESS
General
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LEC Technologies, Inc. (with its subsidiaries, the "Company" or "LEC") is a
technology services company, providing solutions that help organizations
reduce technology cost and risk, primarily through the leasing,
distribution and remarketing of high technology equipment. Such equipment
generally consists of midrange computer systems, telecommunications systems,
system peripherals (terminals, printers, communications controllers, etc.)
and point-of-sale systems.
As an independent organization, the Company provides customers with
technical, financial and product alternatives, irrespective of hardware
platform or manufacturer. In addition to working with its customers to
develop strategies governing when to acquire equipment, upgrade existing
equipment and order new equipment to take advantage of current technology,
LEC also acts as an outlet for the equipment being displaced.
LEC's business is diversified by customer, customer type, equipment type,
equipment manufacturer, and geographic location of its customers and
subsidiaries. The Company's customers include "Fortune 1000" corporations
or companies of similar size as well as smaller corporations. A significant
portion of the Company's business is with long-term, repeat customers.
Three customers of the Company, Tiffany & Co., Bed, Bath & Beyond and The
Hertz Corporation, respectively, accounted for approximately 25.0%, 12.8%,
7.4%, and 11.5%, 13.1% and 10.2% of consolidated revenues for the years
ended December 31, 1996 and 1995. However, the Company does not believe its
businesses are dependent on any single customer or on any single source for
the purchasing, selling or leasing of equipment.
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 groups are as follows:
Leasing Services: Leasing, remarketing, financial engineering,
consulting and third-party maintenance and systems integration
services for midrange systems, telecommunications equipment, point-
of-sale systems and system peripherals. The Company conducts its
leasing services business under the trade name Leasing Edge
Corporation.
Distribution Services: Sale of terminals, printers, communications
controllers, supplies, technical consulting and third-party
maintenance services. Business units comprising Distribution Services
are Superior Computer Systems, Inc. ("SCS") and Pacific Mountain
Computer Products, Inc. ("PMCPI"), wholly-owned subsidiaries of LEC
Technologies, Inc.
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.
The Company's leasing operations are conducted primarily through its
principal office in Las Vegas, Nevada and its distribution and remarketing
operations are conducted primarily through its subsidiaries' offices located
in Minneapolis, Minnesota, Woodland Hills, California and Atlanta, Georgia.
Each business unit is directed by its own management team and has its own
sales and operations support personnel. Each management team reports
directly to the Office of the President, which is responsible for overall
corporate control and coordination, as well as strategic planning.
Coordination of the business units is also accomplished through shared
services, such as legal, risk management and accounting.
The business units maintain their own direct marketing force to manage their
customer base and to market their own as well as other units' services. In
its business operations, the Company attempts to cross-sell services where
and when appropriate.
The Company was 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. to more accurately reflect the evolving nature of the Company's
business. The executive offices of the Company are located at 6540 S. Pecos
Road, Suite 103, Las Vegas, Nevada, 89120, and its telephone number is (702)
454-7900.
Forward-Looking Statements
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Statements about the Company's expectations, including future revenues,
earnings, its ability to compete effectively and to maintain market share,
to adapt to changes in its customers' technology requirements, and all other
statements in this Report on Form 10-KSB, including Management's Discussion
and Analysis or Plan of Operation and Note 11 of Notes to Consolidated
Financial Statements "Management's Plans", and other Company communications
other than historical facts, are "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Act of 1934, and the Company intends that such forward-looking
statements be subject to the safe harbors created thereby. Since these
statements involve risks and uncertainties and are subject to change at any
time, the Company's actual results could differ materially from expected
results. Reference is made to "Safe Harbor Statement under the Private
Securities Litigation Reform Act of 1995" in Item 6 of this Report on Form
10-KSB.
Leasing Services
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Management estimates that the world-wide market for high technology
equipment approximates $400 billion annually and that approximately ten
percent represents leasing activities. The computer equipment leasing
industry consists of many products and services loosely divided into several
major submarkets. These submarkets include mainframe and midrange computer
equipment, microcomputer sales and network design, local area networks,
point-of-sale equipment, disaster recovery services and other engineering
and technical support services. The Company believes that the size of the
computer equipment leasing market reflects the rapid technological
improvements in and the development of new equipment as well as the
advantages that leasing offers over equipment purchasing, including off-
balance sheet financing, lower monthly payments and cash requirements,
protection against technological obsolescence and easy disposal of possibly
unwanted equipment at the end of the lease term.
Historically, the industry was dominated by the manufacturers of mainframe
computer equipment and their captive or related leasing companies. However,
the introduction of new and more powerful microcomputers offering increased
capability at reduced prices has led to an increase in the demand for
midrange and microcomputer hardware, software, accessories and related
services. Business users are employing, at an increasing rate, midrange and
microcomputer networks to perform applications previously requiring a
mainframe computer. This increase in technological capability and the
relatively high cost of mainframe systems has resulted in a fundamental
shift in the demand for information systems and services, creating new
opportunities for more efficient, flexible and competitive lessors and
distributors of midrange and microcomputers and related equipment.
The Company's structured lease transactions provide customers with a full
range of new and used data processing equipment, including midrange central
processing units, peripherals, point-of-sale systems and telecommunications
equipment produced by major manufacturers. By emphasizing a full range of
products and manufacturers and by maintaining a balanced client base, the
Company maximizes its leasing opportunities while providing stability to its
lease portfolio. Through its leasing transactions, the Company serves as an
intermediary between end users of high technology equipment and sources of
financing for equipment purchases.
The Company purchases new equipment directly from the manufacturer and
obtains used equipment from its customer base and from the nationwide
secondary market for used data processing and telecommunications equipment.
Management's experience in the secondary market, coupled with the Company's
portfolio of equipment under lease, enables the Company to tailor systems to
customer's specific needs by combining new and used equipment configurations
at competitive prices. Similarly, the Company is often able to facilitate
new lease transactions by either buying, remarketing or trading in a
prospective customer's existing equipment.
A significant amount of the equipment leased by the Company consists of
equipment manufactured by IBM, including computer systems, such as midrange
central processing units, and computer peripherals, such as disk and tape
drives, control units, printers, and work stations. The Company considers
the leasing of IBM equipment to be generally advantageous because of the
large national IBM customer base and equipment aftermarket, IBM's policy of
supporting its users with software and maintenance services, and IBM's
reputation in the computer equipment marketplace.
In a typical leasing transaction, the Company cultivates a customer
relationship, develops an understanding of the customer's requirements and
then delivers what the customer needs in the form of an advantageous lease
financing structure. The terms and conditions of the lease are negotiated
and, if accepted by the customer, a master lease agreement is executed and
the equipment to be leased is secured either from a manufacturer, reseller
or from the Company's inventory. The Company arranges nonrecourse financing
secured by the equipment by selling the future lease rentals on a discounted
basis. The discount rate reflects the credit standing of the lessee, the
length of the lease and the total amount financed. The Company typically
receives between 85% and 95% of its equipment cost through nonrecourse
financing. The difference between the cost of the equipment and the amount
received through the nonrecourse financing is referred to as the Company's
"equity position" in the equipment. The Company usually finances its equity
position in a lease through internally generated funds and recourse bank
borrowings. The Company retains ownership of the equipment during the term
of the lease. Upon expiration of the lease term, the Company seeks to
maximize the realization of the residual value of the leased equipment
through its remarketing activities on either a wholesale or retail basis.
Equipment lease terms generally range from monthly to five years, with data
processing and telecommunications equipment leases typically spanning two to
four years. Additions to the lease portfolio frequently result from a
competitive bidding process. Substantially all leases are noncancelable,
require the lessee to protect the equipment, at their cost, with the
manufacturer's maintenance contract and place the risk of loss or damage to
the equipment on the lessee.
The Company believes it provides its clients with superior customer service
and creative solutions for their data processing, telecommunications and
technical support needs. The Company develops close partnership
relationships with its customers; by listening carefully, it is better able
to understand its customers' complex data processing requirements and
deliver quick response, high impact and competitively priced solutions
appropriate for each environment and circumstance. Close client
relationships and the expertise and experience of management allow the
Company to assist customers in their leasing decisions regarding data
processing or other technological equipment. The Company frequently
participates, early on, in a customer's decision-making process regarding
the type of equipment to acquire to meet its needs and also helps in
developing a customized leasing structure. The Company believes that this
strategy leads to customer satisfaction, encourages a loyal customer base
and contributes to repeat business.
The Company offers to customers a full range of new and used computer and
telecommunications equipment manufactured by a variety of major
manufacturers, including IBM, Unisys, AT&T, Sun Microsystems, DEC and
Tandem. Over the last few years, the Company has strategically diversified
its lease portfolio to include equipment such as computer storage hardware,
point-of-sale and telecommunications equipment; the Company believes these
to be less susceptible to rapid technological obsolescence than large
computer central processing units. The Company further believes that an
expanded equipment base mitigates the risks of obsolescence associated with
a specific type of equipment, as well as reducing the Company's reliance on
any one particular manufacturer.
The Company's leasing customers are creditworthy corporations and other
organizations that have significant data processing and telecommunication
needs. These financial profiles allow the Company to structure lower rate,
long-term nonrecourse financing transactions with various financial
institutions on competitive terms. Moreover, nonrecourse financing limits
the Company's financial exposure on lease transactions further enabling the
Company to expand its lease portfolio and customer base.
Distribution Services
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Management estimates that the distribution market for the products offered
by its distribution subsidiaries, SCS and PMCPI, is approximately $225
million annually. The principal products offered by SCS and PMCPI are
midrange peripheral equipment, including TWINAX and COAX terminals, ASCII
terminals, desktop printers, emulation boards, remote controllers and
network adapters. In addition to equipment sales, the Company's
distribution subsidiaries provide customers with technical consulting and
third-party maintenance services.
Approximately 70 percent of the distribution subsidiaries' revenues related
to new equipment are derived from sales to resellers and approximately 30
percent represents direct sales to end users. Both SCS and PMCPI secure
their end user customers through cold calls, referrals, trade journal
advertising and the cross-selling of the Company's leasing customers.
Reseller customers are primarily generated through a nationwide on-line
system and direct advertising via facsimile machine.
Both SCS and PMCPI are IBM Business Partners and Authorized Distributors;
PMCPI also has contractual relationships with Lexmark Printer Company,
IDEAssociates, Perle Systems, DataSouth Corporation, Hewlett Packard
Corporation and BOS. SCS and PMCPI are highly dependent on their suppliers,
the manufacturers. Most manufacturers extend terms of net 30 days or
provide an inventory line of credit for purposes of ordering equipment. Any
event of default on any credit facility offered by a manufacturer could
materially affect the Company's ability to acquire equipment for resale.
Remarketing Services
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The Company's remarketing services consist of the remarketing of previously
leased equipment, displaced equipment, and used equipment purchased from
other lessors and brokers. Each of the Company's business units (Leasing
Edge Corporation, SCS, PMCPI and ADI) engage in remarketing activities
primarily related to their respective businesses, although specific sales
often result from coordinated efforts. In addition to remarketing of IBM
peripheral equipment, SCS also has consignment relationships with certain
customers to assist such organizations in the disposal of their displaced
equipment. ADI, a division of Leasing Edge Corporation, specializes in the
acquisition and remarketing of Digital Equipment Corporation equipment on
both a domestic and an international basis.
Competition
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The Company competes as a lessor and as a dealer of new and used computer
and selected other high technology equipment with different firms, many of
which are larger and better known than the Company with substantially
greater financial resources. While its competitive methodologies will vary
by business unit, in general, the Company competes mainly on the basis of
terms offered in its transactions, its quick response and reliability in
meeting its commitments, its manufacturers' independence, its long-term
relationships with its customers and its ability to develop and offer
alternative solutions and options to high technology equipment users.
The Company's competition with respect to leasing services includes
equipment manufacturers such as IBM, AT&T, DEC and Amdahl, other equipment
dealers, brokers and leasing companies (including captive or related leasing
companies of IBM and AT&T) as well as financial institutions, including
branches or divisions of national, regional and local commercial banks and
other commercial lending firms. The Company also competes with other small,
independent leasing companies as well as individuals and firms that act as
leasing brokers and other institutions. Primarily as a result of rapid
technological changes, competition has increased in the leasing industry and
the number of companies offering competitive services, such as technical
consulting and other high technology equipment leasing, has increased.
Competitive alliances have also impacted the leasing industry. Management
believes that the level of competition will continue to increase in the
future.
SCS and PMCPI compete with other authorized distributors of midrange
peripherals as well as equipment manufacturers. In the IBM terminal
distribution market, SCS and PMCPI are two of the six authorized IBM
distributors. All authorized distributors receive identical discounts for
their products, so the Company and its competitors have equal opportunity to
sell such products. Many times, availability of product in inventory is a
determining factor in a sale. SCS and PMCPI compete primarily on the basis
of product knowledge, price, availability and their long standing customer
relationships.
ADI competes with numerous other used equipment brokers and dealers as well
as with the remarketing activities of lessors. ADI competes primarily on
the basis of price and relationship selling.
Other
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The Company does not own any patents, trademarks, licenses or franchises
which would be considered significant to the Company's business.
The Company's business is not seasonal, however, quarter-to-quarter results
from operations can vary significantly.
The amount of backlog orders is not significant to an understanding of the
Company's business.
The Company is not required to carry significant amounts of inventory either
for delivery requirements or to assure continuous availability of equipment
related to its leasing operations. With respect to the Company's
distribution operations, product availability is often a significant factor
in generating sales.
At December 31, 1996, the Company had 36 full-time employees. None of the
Company's employees is represented by a union. The Company believes that
relations with its employees are good.
ITEM 2: DESCRIPTION OF PROPERTY
The Company leases approximately 5,250, 10,000, 7,500 and 1,100 square feet
of office and warehouse space in Las Vegas, NV, Minneapolis, MN, Woodland
Hills, CA and Atlanta, GA, respectively, under lease agreements expiring
individually through 2002. Each respective lease agreement requires the
Company to pay all costs of operations, including real property taxes, in
addition to the basic rent. All of the Company's leased properties are in
good condition.
ITEM 3: LEGAL PROCEEDINGS
There are no pending legal proceedings which require disclosure pursuant to
Item 103 of Regulation S-B.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the Nasdaq SmallCap tier of The Nasdaq
Stock Market under the symbol LECE. The following table sets forth the high
and low sales price quotations of the Company's common stock for the periods
indicated.
<TABLE>
<CAPTION>
1996 1995
Fiscal Quarter HIGH LOW HIGH LOW
-------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $2.94 $1.56 $3.31 $1.47
Second Quarter $2.75 $1.38 $2.00 $1.00
Third Quarter $2.38 $1.69 $1.94 $1.06
Fourth Quarter $2.00 $1.00 $2.13 $1.38
</TABLE>
As of March 7, 1997 the Company had approximately 425 shareholders of
record.
The Company has not previously paid cash dividends on its common stock and
does not intend to pay such dividends for the foreseeable future. The
Company's bank agreement also restricts the payment of such dividends.
In December 1996, the Company acquired all of the outstanding common stock
of SCS in exchange for 239,708 shares of unregistered common stock and a
$200,000 non-interest bearing note payable. Such shares were issued in
reliance upon Section 4(2) of the Securities Act of 1933, as amended.
American Stock Transfer & Trust Company, 40 Wall Street, New York, NY 10022
is the Company's registrar and transfer agent with respect to its common
stock and preferred stock and registrar, transfer agent and warrant agent
with respect to the Company's warrants.
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues
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Total revenues from leasing operations increased $1,177,038 or 9.0% during
1996 compared to the prior year. The increase in revenues is primarily due
to the renewal, upgrade and consolidation of several existing leases into a
smaller number of new leases, three of which were accounted for as sales-
type leases pursuant to SFAS No. 13 (see Note 2 of Notes to Consolidated
Financial Statements for a description of the Company's lease accounting
policies). As compared to other lease transactions, sales-type leases
result in a greater percentage of the related revenue from the transaction
being recognized at lease inception. The Company cannot expect to regularly
enter into transactions of this size in the future.
Revenue from the portfolio base of operating leases decreased $789,950 or
7.5%. The decrease in operating lease revenue is due primarily to a change
in the mix of leases written, principally as a result of the lease renewals
referred to previously. The Company anticipates that the majority of its
1997 lease additions will be classified as operating leases.
Distribution sales, representing the activity of SCS and PMCPI, increased
$1,910,205, or 37.3%, between periods due primarily to the acquisition of
SCS on November 1, 1996. SCS' revenues for the two-month period ended
December 31, 1996 were $1,478,792. SCS and PMCPI are distributors of
computer peripherals and data communications equipment.
Costs and Expenses
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Total costs from leasing operations as a percentage of leasing revenue was
89.0% for the year ended December 31, 1996 compared with 83.0% for the prior
year. Gross profit from leasing operations (total revenues from leasing
operations less total costs from leasing operations) decreased $643,141 or
29.1%. The decrease in gross profit is primarily due to a fourth quarter
increase in the Company's reserves for inventory and lease residual
obsolescence of $889,337 due to changed market conditions. Gross margin
(gross profit from leasing operations as a percentage of total revenues from
leasing operations) decreased to 11.0% from 17.0% due to the foregoing.
Leasing costs associated with the portfolio base of operating leases
decreased $69,178 or 1.0%. Gross profit on operating leases decreased by
$720,772 to 29.0% from 33.7%. The decrease in gross profit from this
segment of the Company's lease portfolio is due primarily to the lease
renewals mentioned above.
Direct sales costs (leasing costs with respect to the sale of equipment off
lease and leases with dollar buyout options treated as sales) decreased
$512,242 or 29.5% and increased as a percentage of related revenue to 107.6%
from 95.0%. The increase in costs as a percentage of revenue is due to
residual value realization more closely matching stated values in 1995 as
compared to 1996.
Distribution cost of sales of $6,190,582 relates to distribution sales of
SCS and PMCPI and represents a $1,735,721 or 39.0% increase over the prior
year. Gross margin on distribution sales decreased to 12.0% in 1996 from
13.1% in 1995 due to a greater percentage of total distribution sales
resulting from sales to resellers.
Selling, general and administrative expenses increased $1,011,399 in 1996
compared to the prior year due primarily to the acquisition of SCS and the
addition of certain sales and administrative personnel. In addition, in
1995, the Company recorded a gain of approximately $247,000 resulting from
the settlement of a severance agreement with the Conmpany's former CEO which
has been reflected in the accompanying consolidated statement of operations
for the year ended December 31, 1995 as a reduction in selling, general and
administrative expenses.
Interest expense on non-lease related indebtedness increased $119,604 or
43.0%. The increase is due to higher average debt levels partially offset
by slightly lower interest rates.
Net Earnings
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As a result of the foregoing, the Company recorded a net loss of $1,398,316
for the year ended December 31, 1996 as compared to net income of $201,344
for the year ended December 31, 1995.
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 December 31, 1996, the Company had
approximately $785,539 in cash and availability under its bank lines.
On October 31, 1996, the Company's revolving line of credit agreement with
Bank of America 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
to an aggregate of $500,000 through August 15, 1997 or, if the Company
exercises its extension option, to an aggregate of $1,110,000 through
January 1, 1998. The Amended Agreement provides for interest at Bank of
America's prime rate plus two percent through the Initial Expiration Date,
increasing to prime plus four percent thereafter and is collaterallized by
certain personal property. At December 31, 1996, the Company was not in
compliance with certain covenants under the revolving line of credit
agreement. Such covenants were subsequently modified or deleted in the
Amended Agreement. Restrictive covenants under the Amended Agreement
include the maintenance of consolidated tangible net worth, as defined, of
at least $4.5 million beginning March 31, 1997; restrictions on the payment
of cash dividends on shares of the Company's common stock; and limitations
on unfinanced capital expenditures, as defined. At December 31, 1996, the
Company had outstanding borrowings under the prior revolving line of credit
agreement of $2,476,365.
In January 1995, PMCPI entered into a revolving credit agreement (the
"Merrill Line") with Merrill Lynch Financial Services, Inc. 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 April 30, 1997. At December 31, 1996, PMCPI had
outstanding borrowings under the Merrill Line of $499,937.
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). On July 18,
1996, the Equity Line was increased to $1,000,000. 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 1.25%. At December 31, 1996, the
Company had outstanding term notes and available credit under the Equity
Line of $626,801 and $373,199, respectively.
The Company is continuously seeking debt and/or equity financing to fund the
growth of its lease portfolio. However, should the Company fail to receive
additional equity financing or refinance its existing debt in 1997, the
Company's portfolio growth and resultant cash flows could be materially and
adversely affected. In addition, there is no assurance that financial
institutions will continue to finance the Company's future leasing
transactions on a nonrecourse basis or that the Company will continue to
attract customers that meet the credit standards of its nonrecourse
financing sources or that, if it receives such additional financing for
future lease transactions, it will be on terms favorable to the Company.
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.
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. In 1996 and 1995, the
Company reduced residual values and inventory by approximately $1,100,000
and $210,000, respectively, to their net realizable values. There can be no
assurance that the Company will not experience further 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 December 31, 1996, the Company had a total net
investment in lease transactions of $22.5 million compared to $24.2 million
as of December 31, 1995. The estimated residual value of the Company's
portfolio of leases expiring between January 1, 1997 and December 31, 2001
totals $9,682,686, although there can be no assurance that the Company will
be able to realize such residual value in the future. As of December 31,
1996, 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 $ 4,699,219
1998 1,663,867
1999 1,178,200
2000 1,533,300
2001 608,100
-----------
Total $ 9,682,686
===========
</TABLE>
Leased equipment expenditures of $10,084,452 for fiscal year 1996 were
financed through the discounting of $9,186,720 of noncancelable lease
rentals to various financial institutions. The remaining $897,732 was
funded from a combination of debt, equity transactions and available cash.
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 forward-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 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 specific 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 customer 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.
ITEM 7: CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report - KPMG Peat Marwick LLP 16
Consolidated Balance Sheets As Of December 31, 1996 and 1995 17
Consolidated Statements of Operations For The Years Ended
December 31, 1996 and 1995 19
Consolidated Statements of Cash Flows For The Years Ended
December 31, 1996 and 1995 20
Consolidated Statements of Stockholders' Equity For The
Years Ended December 31, 1996 and 1995 22
Notes To Consolidated Financial Statements 23
The consolidated financial statements of the Company are filed under this
Item 7 pursuant to Regulation S-B. Financial statement schedules are
omitted because either they are not required under the instructions, are
inapplicable, or the information is included elsewhere in the financial
statements.
Independent Auditors' Report
The Stockholders and Board of Directors
LEC Technologies, Inc.
We have audited the accompanying consolidated balance sheets of LEC
Technologies, Inc. (formerly Leasing Edge Corporation) and subsidiaries as
of December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the years then ended.
These consolidated financial statements are the responsibility of the
Company's management. Our resonsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of LEC
Technologies, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
Las Vegas, Nevada
March 12, 1997 /s/ KPMG Peat Marwick LLP
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
----------- ------------
<S> <C> <C>
ASSETS:
Cash $ 412,340 $ 209,084
Receivables - net of allowance for
doubtful accounts of $170,699 and
$12,000 at December 31, 1996 and
1995, respectively 1,096,868 434,321
Notes receivable - employees 199,185 148,750
Inventory, net 2,210,674 1,336,747
Investment in leased assets:
Operating leases, net 17,617,934 21,026,590
Sales-type and direct financing leases 4,927,894 3,165,539
Furniture and equipment - net of
accumulated depreciation of
$304,495 and $266,478 at Decemeber 31,
1996 and 1995, respectively 157,112 148,366
Other assets 397,712 413,847
Goodwill, net of accumulated
amortization of $84,408 and $50,235
at December 31, 1996 and 1995,
respectively 667,631 401,881
----------- -----------
TOTAL ASSETS $27,687,350 $27,285,125
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(continued)
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
LIABILITIES:
Accounts payable $ 2,946,365 $ 1,576,165
Accrued liabilities 401,569 311,734
Notes payable and lines of credit 3,881,882 3,236,954
Nonrecourse and recourse discounted
lease rentals 14,808,581 16,260,002
Other liabilities 410,763 25,344
----------- -----------
TOTAL LIABILITIES 22,449,160 21,410,199
----------- -----------
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;
12,500,000 shares authorized,
4,407,019 and 3,132,319 shares issued
and 4,340,919 and 3,129,319 shares
outstanding at December 31, 1996 and
1995, respectively 44,071 31,324
Additional paid-in capital 10,437,915 9,526,259
Accumulated deficit (5,046,263) (3,647,947)
----------- -----------
5,438,013 5,911,926
Common stock held in treasury, at
cost; 66,100 and 3,000 shares at
December 31, 1996 and 1995, respectively (106,073) (12,000)
Notes receivable from stockholders (93,750) (25,000)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 5,238,190 5,874,926
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $27,687,350 $27,285,125
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Revenues:
Operating leases $ 9,694,905 $ 10,484,855
Sales-type leases 2,721,483 360,489
Finance income 285,121 339,005
Direct sales 1,137,686 1,827,190
Other 360,051 10,669
------------ ------------
Total revenues from
leasing operations 14,199,246 13,022,208
Distribution sales 7,038,154 5,127,949
------------ ------------
Total revenues 21,237,400 18,150,157
------------ ------------
Costs and expenses:
Operating leases 6,881,020 6,950,198
Sales-type leases 2,101,426 310,640
Interest expense 1,325,444 1,524,036
Lease incentive amortization - 79,932
Direct sales 1,224,406 1,736,648
Write down of inventory and
residual values 1,099,089 209,752
------------ ------------
Total costs from
leasing operations 12,631,385 10,811,206
Distribution cost of sales 6,190,582 4,454,861
Selling, general and
administrative expenses 3,416,093 2,404,694
Interest expense 397,656 278,052
------------ ------------
Total costs and expenses 22,635,716 17,948,813
------------ ------------
Income (loss) before
income taxes (1,398,316) 201,344
Provision for income taxes - -
------------ ------------
Net income (loss) $ (1,398,316) $ 201,344
============ ============
Loss per common share $ (0.45) $ (0.01)
============ ============
Weighted average common
shares outstanding 3,625,655 2,907,279
============ ============
</TABLE>
The accompanying notes are integral part of these consolidated financial
statements.
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,398,316) $ 201,344
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 6,986,608 7,112,213
Write down of inventory, residual
values and other 1,189,981 209,752
Change in assets and liabilities,
net of effects of acquisition:
(Increase) decrease in
accounts receivable (60,503) 475,931
Increase in inventory (354,532) (469,069)
Increase in accounts payable (446,485) (264,549)
Increase in accrued liabilities (52,583) (951,395)
All other operating activities 302,564 (107,468)
----------- -----------
Net cash provided by operating
activities 6,166,734 6,206,759
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales, transfers and disposals of
inventory and equipment 2,786,579 1,498,724
Purchases of inventory for lease (5,579,587) (6,868,120)
Purchases of furniture and equipment (52,277) (51,307)
Increase in notes receivable (50,435) (135,250)
Purchase of SCS, net of cash acquired 80,957 -
Additions to net investment in
sales-type and direct financing leases (4,504,865) (400,252)
Sales-type and direct financing
lease rentals received 1,763,154 2,242,791
----------- -----------
Net cash used in investing activities (5,556,474) (3,713,414)
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(Continued)
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from nonrecourse and
recourse discounted lease rentals 9,186,720 6,013,957
Payments on nonrecourse and recourse
discounted lease rentals (10,638,141) (10,471,941)
Proceeds from notes payable 817,647 3,810,203
Payments on notes payable (363,905) (2,022,129)
Proceeds from exercise of stock
options 106,391 -
Proceeds from sale of stock, net 858,278 445,534
Proceeds from exercise of warrants 55,592 -
Deferred equity transaction costs (106,497) (308,987)
Purchase of treasury stock (94,073) -
Preferred stock dividends paid (229,016) (230,016)
------------ ------------
Net cash used in financing activities (407,004) (2,763,379)
------------ ------------
Net increase (decrease) in cash 203,256 (270,034)
Cash at beginning of period 209,084 479,118
------------ ------------
Cash at end of period $ 412,340 $ 209,084
============ ============
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for:
Interest $ 1,729,001 $ 1,837,559
============ ============
Income taxes $ 29,826 $ 7,750
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Notes
Preferred Stock Common Stock Additional Receivable Common Total
--------------- -------------- Paid in Accumulated Treasury From Stock Stockholders'
Shares Amount Shares Amount Capital Deficit Stock Stockholders Subscribed Equity
------ ------ ------ ------ ---------- ----------- -------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1994 230,016 $2,300 1,670,454 $16,705 $ 7,658,463 ($3,849,291) ($ 12,000) ($92,500) $ 478,600 $4,202,277
Conversion of
preferred stock (1,000) (10) 1,750 17 (7) -
Sale of common stock 499,999 5,000 440,534 445,534
Issuance of common
stock pursuant to
guaranteed return
agreement 165,672 1,657 (1,657) -
Issuance of common
stock 242,944 2,430 476,170 (478,600) -
Common stock for
services 529,500 5,295 1,137,167 1,142,462
Common stock for
debt 22,000 220 45,605 45,825
Reduction of note
from stockholder 67,500 67,500
Preferred stock
dividend (230,016) (230,016)
Net income 201,344 201,344
---------------------------------------------------------------------------------------------------------
Balance at December
31, 1995 229,016 2,290 3,132,319 31,324 9,526,259 (3,647,947) (12,000) (25,000) - 5,874,926
Sale of common stock 880,125 8,801 849,477 858,278
Exercise of stock
options 127,375 1,274 173,867 (68,750) 106,391
Exercise of "A"
warrants 27,492 275 (275) 0
Acquisition of SCS 239,708 2,397 117,603 120,000
Purchase of treasury
stock (94,073) (94,073)
Preferred stock
dividend (229,016) (229,016)
Net loss (1,398,316) (1,398,316)
---------------------------------------------------------------------------------------------------------
Balance at December
31, 1996 229,016 $2,290 4,407,019 $44,071 $10,437,915 ($5,046,263) ($106,073) ($93,750) $ 0 $5,238,190
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nature of Operations: LEC Technologies, Inc. (formerly known as Leasing
Edge Corporation)(with its subsidiaries, the "Company" or "LEC") is a
technologies services company, providing solutions that help organizations
reduce technology cost and risk. The Company is primarily engaged in the
buying, selling, and leasing of data processing and other high technology
equipment and related services.
Organization: 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. On
March 12, 1997, the Company's shareholders' approved a change in the
Company's name to LEC Technologies, Inc.
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. Intercompany accounts
and transactions have been eliminated in consolidation.
Use of Estimates
----------------
The preparation of these consolidated 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 revenue and expenses during
the reporting period. For lease accounting, this includes the
estimated fair market value at lease termination of the related
equipment, commonly referred to as "residual value". Residual
values are established at lease inception at amounts equal to the
estimated value to be received from the equipment following
termination of the initial lease (which in certain circumstances
includes anticipated re-lease proceeds), as determined by
management. In estimating such values, management considers all
relevant information and circumstances regarding the equipment and
the lessee, including historical experience by equipment type and
manufacturer, adjusted for known trends. On at least an annual
basis, management assesses the realizability of recorded residual
values and, if necessary, establishes a reserve to reduce the
recorded values to their estimated net realizable value. Actual
results could differ from those estimates.
Lease Accounting
----------------
See Note 2 "Lease Accounting Policies" for a description of lease
accounting policies, lease revenue recognition and related costs.
Inventory
---------
Inventory of equipment that has come off lease is valued at the
lower of depreciated cost or market based on specific
identification. Inventory of equipment held for distribution is
stated at the lower of cost (first in, first out) or market.
Goodwill
--------
Goodwill, which represents the excess of purchase price over the
fair value of net assets acquired, is amortized on a straight-line
basis over 15 years. The Company assesses the recoverability of
this intangible asset by determining whether the amortization of
the goodwill balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired
operation. The amount of goodwill impairment, if any, is measured
based on projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds. The
assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved. In
Management's opinion, the recorded unamortized goodwill balance at
December 31, 1996 of $667,631 is recoverable through the
undiscounted future operating cash flows of the acquired entities.
Nonrecourse Financing
---------------------
The Company assigns the rentals under its leases to financial
institutions and other lenders primarily on a nonrecourse basis.
The Company receives a cash amount equal to the discounted value of
the minimum lease payments. In the event of a default by a lessee,
the lender has a security interest in the underlying leased
equipment but has no recourse against the Company. Proceeds from
discounted lease rentals are recorded as nonrecourse discounted
lease rentals. Under sales-type and direct financing leases,
leased assets and nonrecourse discounted lease rentals are reduced
as lessees make payments under the lease to financial institutions.
Under operating leases, leasing revenue is recorded and nonrecourse
discounted lease rentals are reduced as lessees make rental
payments to financial institutions. The Company has no restrictive
arrangements with these financial institutions as a result of the
nonrecourse borrowings.
Revenues
--------
Leasing activities: See Note 2 "Lease Accounting Policies" for a
description of lease revenue recognition.
Direct sales: Revenue from direct sales is generated from the
remarketing of equipment off lease and leases with dollar buyout
options treated as sales. Revenue and related cost of sales is
recognized at the time title to the equipment transfers to the
customer.
Distribution sales: Revenue from distribution sales is generated
from the resale of equipment purchased for inventory. Revenue and
related cost of sales is recognized at the time title to the
equipment transfers to the customer, generally upon shipment.
Furniture and Equipment
-----------------------
Furniture and equipment are recorded at cost. Expenditures that
materially increase the life of the assets are capitalized.
Ordinary repairs and maintenance are charged to expense as
incurred. When assets are sold or otherwise disposed of, the cost
and related accumulated depreciation are removed from the accounts
and any resulting gain or loss is included in other income
(expense).
Depreciation and amortization are provided on the straight-line
method over the following useful lives:
Computer equipment 3 to 5 years
Furniture and office equipment 5 to 7 years
Leasehold improvements Term of lease
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
-----------------------------------------------------------------------
The Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of", on January 1, 1995. 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 the assets to future net cash
flows expected to be generated by the asset. If such assets are
considered impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the asset exceeds 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.
Income Taxes
------------
The Company uses the asset and liability method to account for
income taxes. 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. The measurement of
deferred tax assets is reduced, if necessary, by a valuation
allowance for any tax benefits which may not ultimately be
realized.
Stock Option Plans
------------------
Prior to January 1, 1996, the Company accounted for its stock
option plans 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 would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise
price. On January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation", 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, SFAS
No. 123 also allows entities to continue to apply the provisions of
APB No. 25 and provide pro forma net income and pro forma earnings
per share 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 No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
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 each period. 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 weigted average share calculation.
Reclassification
----------------
Certain reclassifications have been made in the 1995 financial
statements to conform to the 1996 presentation.
NOTE 2: LEASE ACCOUNTING POLICIES
-------------------------
Statement of Financial Accounting Standards No. 13 requires that a
lessor account for each lease by either the direct financing,
sales-type or operating method.
Leased Assets
-------------
Direct financing and sales-type leases - Direct financing and
sales-type leased assets consist of the present value of the
minimum lease payments plus the present value of the residual less
unearned finance income (collectively referred to as the net
investment).
Operating Leases - Operating leased assets consist of the equipment
cost, less the amount depreciated to date.
Revenue, Costs and Expenses
Direct Financing Leases - Revenue consists of interest earned on
the present value of the lease payments and residual and is
included in finance income in the accompanying Consolidated
Statements of Operations. Revenue is recognized periodically over
the lease term as a constant percentage return on the net
investment. There are no costs and expenses related to direct
financing leases since revenue is recorded on a net basis.
Sales-type Leases - Revenue consists of the present value of the
total contractual lease payments and is recognized at lease
inception. Costs and expenses consist of the equipment's net book
value at lease inception, less the present value of the residual.
Interest earned on the present value of the lease payments and the
residual, which is recognized periodically over the lease term as a
constant percentage return on the net investment, is included in
finance income in the accompanying Consolidated Statements of
Operations.
Operating Leases - Revenue consists of the contractual lease
payments and is recognized on a straight-line basis over the lease
term. Costs and expenses are principally depreciation on the
equipment which is recognized on a straight-line basis over the
term of the lease to the Company's estimate of the equipment's
residual value.
NOTE 3: LEASED ASSETS
-------------
The components of the net investment in sales-type and direct
financing leases as of December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Total future minimum lease payments $4,670,997 $2,590,220
Estimated unguaranteed residual
values of leased equipment 797,300 848,700
Less unearned finance income (540,403) (273,381)
---------- ----------
Total $4,927,894 $3,165,539
========== ==========
</TABLE>
Future minimum lease payments on sales-type and direct financing
leases as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1997 $1,915,046
1998 1,483,363
1999 875,035
2000 306,151
2001 91,402
----------
$4,670,997
==========
</TABLE>
Assets under operating leases are as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Equipment at cost or net
realizable value $29,056,736 $33,626,174
Accumulated depreciation (11,438,802) (12,599,584)
--------------------------
Total $17,617,934 $21,026,590
==========================
</TABLE>
Depreciation expense related to operating leases was $6,881,020 and
$6,950,198 for the years ended December 31, 1996 and 1995,
respectively.
Future minimum lease rentals on operating leases are due as follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1997 $ 6,465,149
1998 3,306,786
1999 2,098,210
2000 791,912
2001 44,073
-----------
$12,706,130
===========
</TABLE>
The estimated residual value of the Company's portfolio of leases
(including sales-type, direct financing and operating) by year of
lease termination are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1997 $4,699,219
1998 1,663,867
1999 1,178,200
2000 1,533,300
2001 608,100
----------
$9,682,686
==========
</TABLE>
NOTE 4: Acquisition of Superior Computer Systems, Inc. ("SCS")
------------------------------------------------------
On November 1, 1996, the Company acquired all of the common stock
of SCS, a distributor of computer peripherals, for 239,708 shares
of the Company's common stock and two $100,000 non-interest bearing
notes, payable at various dates through November 1997. The
acquisition was accounted for by the purchase method of accounting.
The excess of the total acquisition cost over the fair value of
net assets acquired of $299,923 was recorded as goodwill and is
being amortized over 15 years. The Consolidated Statement of
Operations for the year ended December 31, 1996 includes SCS's
results of operations for the period November 1, 1996 through
December 31, 1996.
The following unaudited proforma consolidated results of operations
assume that the acquisition occurred on January 1, 1996 and reflect
the historical operations of the purchased business adjusted for
amortization of goodwill resulting from the acquisition.
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended
December 31, 1996
-----------------
<S> <C>
Total revenues 32,203
Net loss (1,522)
Loss per share (0.46)
</TABLE>
The proforma results of operations are not necessarily indicative
of the actual results of operations that would have occurred had
the acquisition been made at the beginning of the period, or of
results which may occur in the future.
NOTE 5: INCOME TAXES
------------
Total income tax expense (benefit) differed from the "expected"
income tax expense (benefit) determined by applying the statutory
federal income tax rate of 34% for the years ended December 31 as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Computed "expected" income tax
expense (benefit) $(475,427) $ 68,457
Change in valuation allowance
for deferred tax assets 205,466 (767,104)
Nondeductible expenses 269,961 698,647
--------- ---------
Total tax expense - -
--------- ---------
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and tax liabilities at
December 31, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Deferred Tax Assets
-------------------
Allowances for doubtful accounts,
inventory obsolescence and
residual value realization not
deductible $ 437,577 $ 75,396
Expenses accrued for financial
statement purposes, not
currently deductible 559,980 394,060
Net operating loss carryforwards 1,455,940 1,394,786
----------- ----------
Total gross deferred tax assets 2,453,497 1,864,242
Valuation allowance (480,743) (275,277)
----------- ----------
Net deferred tax assets 1,972,754 1,588,965
----------- ----------
Deferred Tax Liabilities
------------------------
Basis difference for sales-type and
direct financing leases for
financial statement purposes and
sales for tax purposes 320,589 344,947
Basis difference for operating
leases, principally due to
depreciation 1,652,165 1,244,018
----------- ----------
Total deferred tax liabilities 1,972,754 1,588,965
----------- ----------
Net deferred taxes - -
=========== ==========
</TABLE>
The Company has recorded a valuation allowance in accordance with
the provisions of Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes" to reflect the estimated amount
of deferred tax assets which may not be realized. In assessing the
realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary
differences become deductible.
At December 31, 1996, the Company has net operating loss
carryforwards for Federal income tax purposes of approximately
$4,000,000 which are available to offset future taxable income, if
any, through 2009.
NOTE 6: NONRECOURSE AND RECOURSE DISCOUNTED LEASE RENTALS
-------------------------------------------------
The Company assigns the rentals of its leases to financial
institutions at fixed rates on a nonrecourse or, to a lesser
extent, on a recourse basis but retains the residual rights. In
return for future lease payments, the Company receives a discounted
cash payment. Discounted lease rentals as of December 31, 1996 and
1995 were $14,808,581 and $16,260,002 respectively of which
$196,518 and $182,688 are recourse, respectively. Interest expense
on discounted lease rentals for the years ended December 31, 1996
and 1995 was $1,325,444 and $1,524,036, respectively.
Principal and interest payments required on discounted lease
rentals as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1997 $ 7,882,165
1998 4,671,282
1999 2,947,776
2000 1,095,596
2001 135,493
-----------
Total 16,732,312
Less interest (1,923,731)
-----------
Principal amount $14,808,581
===========
</TABLE>
NOTE 7: NOTES PAYABLE AND LINES OF CREDIT
---------------------------------
On October 31, 1996, the Company's revolving line of credit
agreement with Bank of America 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 to an aggregate of $500,000 through August 15,
1997 or, if the Company exercises its extension option, to an
aggregate of $1,110,000 through January 1, 1998. The Amended
Agreement provides for interest at Bank of America's prime rate
plus two percent through the Initial Expiration Date, increasing to
prime plus four percent thereafter and is collaterallized by
certain personal property. At December 31, 1996, the Company was
not in compliance with certain covenants under the revolving line
of credit agreement. Such covenants were subsequently modified or
deleted in the Amended Agreement. Restrictive covenants under the
Amended Agreement include the maintenance of consolidated tangible
net worth, as defined, of at least $4.5 million beginning March 31,
1997; restrictions on the payment of cash dividends on shares of
the Company's common stock; and limitations on unfinanced capital
expenditures, as defined.
At December 31, 1996, the Company had outstanding borrowings under
the prior revolving line of credit agreement of $2,476,365 and the
interest rate with respect to the line was 10.25 percent. Average
borrowings outstanding under the revolving line of credit during
1996 were $2,573,358 and the weighted average interest rate was
10.27 percent. Maximum borrowings outstanding under the revolving
line of credit during 1996 were $2.7 million.
In January 1995, Pacific Mountain Computer Products, Inc. ("PMCPI")
entered into a revolving credit agreement (the "Merrill Line") with
Merrill Lynch Financial Services, Inc. Borrowings under the
Merrill Line are limited to the lesser of $500,000 or an amount
equal to 80 percent of PMCPI's accounts recievable, 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 April 30,
1997.
At December 31, 1996, PMCPI had outstanding borrowings under the
Merrill Line of $499,937 and the interest rate with respect to the
line was 9.25 percent. Average borrowings outstanding under the
revolving credit agreement during 1996 were $408,324 and the
weighted average interest rate was 9.27 percent. Maximum borrowings
outstanding under the revolving credit agreement during 1996 were
$500,000.
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). On July 18, 1996,
the Equity Line was increased to $1,000,000. 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 1.25%. At December 31, 1996, the Company had outstanding term
notes and available credit under the Equity Line of $626,801 and
$373,199, respectively.
In connection with the Company's acquisition of PMCPI in 1994, the
Company issued a $250,000 non-interest bearing note payable to
PMCPI's sole shareholder. At December 31, 1996, the remaining
obligation on such note, discounted at an imputed interest rate of
8.5%, was $50,000. The note was paid in full at its maturity date
of January 1, 1997.
In connection with the Company's acquisition of SCS, the Company
issued to each of SCS' two shareholders a $100,000 non-interest
bearing note payable due in varying installments through November
1997. At December 31, 1996, the remaining obligation due on such
notes, discounted at an imputed rate of 10.0%, was $194,385.
Notes payable and lines of credit consist of the following at
December 31,
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Term loan with Bank of America, with
interest at prime plus 2.0 percent,
due in varying installments through
August 30, 1997 $2,476,365 $ -
Revolving line of credit agreement
with Bank of America, with variable
interest rate of prime plus 2.0
percent - 2,700,000
Revolving line of credit agreement
with Merrill Lynch, with floating
interest rate, currently at 9.25
percent 499,937 332,424
Secured notes payable to UCNB,
payable in installments through
November, 1999 with fixed interest
rates between 9.75 and 10.0 percent,
secured by leased equipment 626,801 62,264
Acquisition notes payable, with
imputed interest ranging from 8.5 to
10 percent, due in varying
installments through November 1997 244,385 95,939
Other 34,394 46,327
---------- ----------
$3,881,882 $3,236,954
========== ==========
</TABLE>
NOTE 8: COMMITMENTS AND CONTINGENCIES
-----------------------------
a) Lease Agreements
The Company leases office and warehouse space under operating
leases expiring individually through 2002. The following is a
schedule by year of future minimum rental payments required as of
December 31, 1996 under these operating leases that have initial or
remaining noncancelable lease terms in excess of one year:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1997 $258,984
1998 220,770
1999 182,556
2000 107,371
2001 100,536
Thereafter 50,268
--------
Total $920,485
========
</TABLE>
Rental expense on operating leases was $206,342 and $143,581 for
the years ended December 31, 1996 and 1995, respectively.
b) Employment Contracts
The Company has employment agreements with certain of its executive
officers and management personnel with remaining terms of
approximately four years. Under these agreements, the employee is
entitled to receive other employee benefits of the Company,
including medical and life insurance coverage. The agreements may
be terminated by either the Company or the employee at any time or
for any reason. If an agreement is terminated due to the death of
an employee, a death benefit equal to six months salary shall be
paid to the employee's estate. The employment agreement of the
Company's President and Chief Executive Officer includes additional
compensation in the form of a bonus based on Company performance.
The Company's annual expense under these agreements is
approximately $795,000.
NOTE 9: RELATED PARTY TRANSACTIONS
--------------------------
a) Company's Board of Directors
A member of the Company's Board of Directors is also an officer of
Tiffany & Co., a major customer of the Company. Such individual
does not have approval authority over lease transactions on behalf
of Tiffany & Co.
b) Other Transactions
Prior to the relocation of the Company's executive offices to
Nevada in July 1995, the Company leased office space from a
partnership owned by an officer and a former outside director. The
Company paid rent of $22,190 to such partnership for the year ended
December 31, 1995.
Included in notes receivable from shareholders in the accompanying
consolidated balance sheets at December 31, 1996 and 1995 is a
$25,000 note receivable from a current officer for the purchase of
Company common stock.
c) Aggregate Effect of Transactions with Related Parties
The Board of Directors of the Company has reviewed the aggregate
effect on operations of the above-described transactions and
concluded that such transactions were in the best interest of the
Company and on terms as fair to the Company as could have been
obtained from unaffiliated parties.
NOTE 10: STOCKHOLDERS' EQUITY
--------------------
During the year ended December 31, 1996, the Company sold an
aggregate of 880,125 shares of common stock to two investment
groups in private placement transactions. The proceeds of these
transactions, net of related costs of $131,692, was $858,278.
In 1996, the Company issued 239,708 shares of restricted common
stock in connection with the Company's acquisition of SCS.
A. SERIES A CONVERTIBLE PREFERRED STOCK
----------------------------------------
In August 1993, the Company completed the sale of 380,000 shares of
Series A Convertible Preferred Stock. The Preferred Stock is
convertible at the holders option at any time into 1.75 shares of
common stock at a conversion price of $5.68 per share. If the
Series A Preferred Stock is converted on or prior to August 4,
1998, the holder will receive ten (10) warrants to purchase 1/8th
share of common stock for each share of Series A Preferred Stock
converted. Outstanding Series A Preferred Stock is redeemable by
the Company at $10.00 per share plus accrued and unpaid dividends.
The Series A Preferred Stock pays dividends in arrears at an
annual rate of $1.00 per share. A conversion bonus equal to $0.25
per share of Series A Preferred Stock converted shall be payable to
any holder who converts such shares after the date in any calendar
quarter on which dividends accrue and prior to such date for the
succeeding calendar quarter.
At December 31, 1996 and 1995 there were 229,016 shares of
preferred stock and 1,509,840 warrants outstanding.
Preferred stock dividends of $229,016 and $230,016 were paid from
additional paid in capital in 1996 and 1995, respectively.
B. WARRANTS AND STOCK OPTIONS
------------------------------
Warrants
--------
In August 1995, the Company registered 3,092,687 Class A Common
Stock Purchase Warrants and 1,000,000 Class B Common Stock Purchase
Warrants, together with the underlying common shares. Each of the
warrants entitles the holder thereof to purchase one share of the
Company's common stock at an exercise price of $3.00 per share.
On July 9, 1996, the Company reduced the exercise price of the
Class A Common Stock Purchase Warrants and called for redemption,
effective at the close of business on August 9, 1996, all of the
Class A warrants. The Company received gross proceeds of $55,592
from the exercise of 27,492 Class A warrants. All costs related to
redeeming the Class A warrants in excess of the exercise proceeds
were expensed in 1996.
On December 15, 1996, the Company reduced the exercise price of the
Class B Common Stock Purchase Warrants and called for redemption,
effective at the close of business on January 15, 1997, all of the
Class B warrants. Subsequent to December 31, 1996, 269,000 Class B
Common Stock Purchase Warrants were exercised resulting in gross
proceeds to the Company of $269,000. All costs related to
redeeming the Class B warrants in excess of the exercise proceeds
were expensed in 1996.
During the year ended December 31, 1996, the Company issued an
aggregate of 2,319,993 Class C Common Stock Purchase Warrants and
an aggregate of 2,319,993 Class D Common Stock Purchase Warrants at
exercise prices of $1.625 and $1.75, respectively, in connection
with two private placements of common stock. Each of the warrants
entitle the holders thereof to purchase one share of the Company's
common stock at the exercise prices referred to above and expire on
April 30, 1998. At December 31, 1996, none of the Class C or Class
D warrants had been exercised.
Stock Options
-------------
1) Key Employee and Director
On September 19, 1991, the stockholders of the Company approved
the Key Employee Stock Option Plan and the Director Stock
Option Plan at the Company's annual meeting. On October 27,
1992 the options under both plans (78,125 common shares under
the Key Employee Plans and 15,625 common shares under the
Director Plan) were granted and are exercisable at an option
price of $4.00 per share. All options were granted at exercise
prices equal to the market value of the Company's common stock
on the date of grant and expire ten years from such date.
Options underlying both plans are immediately vested.
On June 24, 1993, the stockholders of the Company approved the
Key Employee Stock Option Plan and Director Stock Option Plan
at the Company's annual meeting. On November 22, 1993 the
options under both plans (34,375 common shares under the Key
Employee Plan and 9,375 shares under the Director Plan) were
granted and are exercisable at $3.52 per share. All options
were granted at exercise prices equal to the market value of
the Company's common stock on the date of grant and expire ten
years from such date. Options underlying both Plans are
immediately vested.
On May 24, 1994, the stockholders of the Company approved the
1994 Stock Option Plan at the Company's annual meeting. On May
4, 1995 and August 15, 1995, 202,500 and 47,500 options,
respectively, (182,500 common shares to Key Employees and
67,500 common shares to Directors) were granted and are
exercisable at $1.06 per share. All options were granted at
exercise prices equal to the market value of the Company's
common stock on the date of grant and expire ten years from
such date. Options granted to key employees provide for
ratable vesting over a four-year period and expire five years
from the date of grant. Options granted to directors are
immediately vested and expire ten years from the date of grant.
On July 22, 1996, the stockholders of the Company approved the
1996 Stock Option Plan (the "1996 Plan") at the Company's
annual meeting. During the year ended December 31, 1996,
500,000 options were granted pursuant to the 1996 Plan at
exercise prices equal to the fair market value on the date of
grant, provide for ratable vesting over a three-year period and
expire five years from the date of grant. At December 31,
1996, there were 500,000 shares available for future grant
under the 1996 Plan.
2) Other Options
In 1995, the Board of Directors of the Company approved the
issuance of options covering 275,000 shares of common stock to
two companies for services. The exercise price of the options
was $1.38 per share which was equal to the quoted market value
of the Company's common stock at the date of grant. Such
options were immediately vested and expire on March 6, 2000.
During the year ended December 31, 1996, 77,000 options were
exercised.
In addition, the Board of Directors approved the issuance of
options covering an aggregate of 150,000 shares of common stock
to an existing shareholder and to one of the Company's
Directors as an inducement to such individuals to provide the
Company a short term loan during its transition and relocation
from Hauppauge, New York to Las Vegas, Nevada. The exercise
price of such options ranged from $1.31 to $1.69 per share;
such prices were equal to the quoted market value of the
Company's common stock at the date of grant. Such options were
immediately vested and expire on various dates through June 7,
2000.
Also in 1995, the Company issued options covering 25,000 shares
of the Company's common stock to an individual at an exercise
price of $1.38. Such options were immediately vested and were
exercised during 1996.
During the year ended December 31, 1996, the Company issued
options covering an aggregate of 300,000 shares of common stock
to its non-employee directors. The exercise prices of such
options were equal to the quoted market value of the Company's
common stock on the date of grant. The options were
immediately vested and expire ten years from the date of grant.
An officer of the Company has 58,125 options to acquire the
Company's common stock at an exercise price of $0.08 per share.
The options were granted in lieu of prospective commissions
and were subject to a three year vesting.
In 1993, the Company issued options covering 25,375 shares of
the Company's common stock at an exercise price of $1.38. Such
options were immediately vested and were exercised during 1996.
The per share weighted average fair value of stock options
granted during 1996 and 1995 was $0.45 and $0.35 on the date of
grant using the Black Scholes option-pricing model with the
following weighted average assumptions for 1996 and 1995,
respectively: dividend yield of 0.0% for each year; expected
volatility of 19 percent and 36 percent; risk free interest
rates of 5.94% and 7.47%; and expected lives of five years.
The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company
determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the
Company's net earnings (loss) available to common stockholders
and earnings (loss) per common share would have been reduced to
the pro forma amounts indicated below (in thousands, except per
share data):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net earnings (loss) available to
common stockholders:
As reported (1,627) (29)
Pro forma (1,837) (62)
Loss per common share:
As reported (0.45) (0.01)
Pro forma (0.51) (0.02)
</TABLE>
The pro forma amounts presented above reflect only options
granted in 1996 and 1995. Therefore, the full impact of
calculating compensation costs for stock options under SFAS No.
123 is not reflected in the pro forma earnings available to
common stockholders and pro forma earnings per common share
amounts presented above because compensation cost is reflected
over the options' vesting period and compensation cost for
options granted prior to January 1, 1995 is not considered.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Number Weighted Average
of Exercise
Shares Price
------ ----------------
<S> <C> <C>
Balance at December 31, 1994 241,000 2.70
Granted 700,000 1.25
Exercised - -
Expired or cancelled (96,000) 3.90
------------------------
Balance at December 31, 1995 845,000 1.36
Granted 850,000 1.74
Exercised (127,375) 1.38
Expired or cancelled (5,000) 1.06
------------------------
Balance at December 31, 1996 1,562,625 1.56
========================
</TABLE>
At December 31, 1996, the range of exercise prices and weighted
average remaining contractual life of outstanding options was
$0.08-$4.00 and 4.6 years, respectively.
At December 31, 1996 and 1995, the number of options
exercisable was 1,067,625 and 662,500, respectively, and the
weighted average exercise price of those options was $1.44 and
$1.48, respectively.
C. OTHER
---------
Included in other assets in the accompanying consolidated balance
sheet at December 31, 1996 is $269,000 of deferred costs associated
with pending equity transactions. Such capitalized costs will be
netted against the proceeds received in the first quarter of fiscal
1997.
NOTE 11: MANAGEMENT'S PLANS
------------------
During 1996, the Company expanded the distribution services unit of
its operations through the acquisition of Superior Computer
Systems, Inc. Management believes that certain synergies exist
between SCS and PMCPI in addition to the fact that the fixed costs
of operating this business unit could be leveraged against a
significantly higher revenue base, resulting in more profitable
operations on a consolidated basis. As a result of this
acquisition, management anticipates that 1997 revenues from
distribution services will exceed 50% of the Company's revenues on
a consolidated basis. The Company intends to continue to pursue
its strategy of diversifying the technology services it offers
through the acquisition of other parallel businesses. Accordingly,
management believes that revenues from the leasing services unit of
its operations will continue to decline as a percentage of
consolidated revenues, although management believes that the dollar
amount of such revenues will remain relatively constant in the near
term.
As discussed in Note 7, the Company modified its revolving credit
agreement with Bank of America to a term note. Management intends
to continue to seek alternative financing to replace Bank of
America prior to August 15, 1997. However, if the Company is
unsuccessful in its endeavors, management intends to exercise the
extension option available to it, thereby extending the term note
to January 1, 1998.
The Company is continuously seeking debt and/or equity financing to
fund additions to its lease portfolio. However, should the Company
fail to receive additional debt or equity financing in 1997, the
Company's portfolio growth and resultant cash flows could be
materially and adversely affected. In addition, there can be no
assurance that financial institutions will continue to fund the
Company's future leasing transactions on a nonrecourse basis or
that the Company will continue to attract customers that meet the
credit standards of its nonrecourse financing sources or that, if
it receives such additional financing for future lease
transactions, it will be on terms favorable to the Company.
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.
NOTE 12: MAJOR CUSTOMERS
---------------
Revenue from leases with three customers of the Company accounted
for 25.0%, 12.8%, and 7.4% and 11.5%, 13.1% and 10.2% of
consolidated revenues for the years ended December 31, 1996 and
1995, respectively.
NOTE 13: EMPLOYEE BENEFIT PLANS
----------------------
The Company has a qualified 401(k) Profit Sharing Plan (the "Plan")
covering all employees of the Company, including officers.
Employees are eligible to participate in the Plan upon hire. The
Plan requires the Company to match 50% of each dollar contributed
by a Plan participant up to the Participants qualified deferral
amount. During 1996 and 1995, the Company contributed its required
amounts of $34,498 and $26,986 to the Plan on behalf of the Plan's
participants.
NOTE 14: SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
----------------------------------------------------------------------
During the year ended December 31, 1996, the Company issued 67,500
shares of common stock in exchange for a note receivable of $68,750
and acquired all of the outstanding common stock of Superior
Computer Services, Inc. in exchange for 239,708 shares of
restricted common stock and a $200,000 non-interest bearing note
payable.
In 1995, 1,000 shares of Series A Convertible Preferred Stock were
converted into 1,750 shares of common stock; 165,672 shares of
common stock were issued pursuant to guaranteed return provisions
related to 1994 private placement stock sales; 22,000 shares of
common stock were issued to satisfy debt of $45,825 and 529,500
shares of common stock were issued for services valued at
$1,142,462. In addition, the Company forgave a $54,000 note
receivable from the Company's former chairman in connection with
the buyout of such individuals retirement agreement.
NOTE 15: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------------------------
The following disclosure of the estimated fair value of financial
instruments was made in accordance with Statement of Financial
Accounting Standards No. 107 ("SFAS No. 107"), Disclosures about
Fair Value of Financial Instruments. SFAS No. 107 specifically
excludes certain items from its disclosure requirements such as the
Company's investment in leased assets. Accordingly, the aggregate
fair value amounts presented are not intended to represent the
underlying value of the net assets of the Company.
The carrying amounts at December 31, 1996 for receivables, accounts
payable, accrued liabilities, notes payable and lines of credit
approximate their fair values due to the short maturity of these
instruments. As of December 31, 1996, the carrying amount of
recourse discounted lease rentals of $196,518 approximate their
fair values because the discount rates are comparable to current
market rates of comparable debt having similar maturities and
credit quality.
NOTE 16: 1996 FOURTH QUARTER CHARGES
---------------------------
During the fourth quarter of 1996, the Company recorded a charge of
$889,000 to reduce the carrying amount of certain previously leased
equipment and the estimated unguaranteed residual values of
equipment on lease. These charges resulted from a decrease in the
wholesale market value of the previously leased equipment due to an
increase in availability in excess of current demand. Although
management believes that its recorded residual values are properly
stated, there can be no assurance that the Company will not
experience further material residual value or inventory write-downs
in the future.
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The names, ages and respective positions of the Executive Officers
and Directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Michael F. Daniels 48 Chairman of the Board, President and
Chief Executive Officer
William J. Vargas 37 Vice President - Finance, Chief
Financial Officer, Treasurer and
Secretary
Larry M. Segall 42 Director
L. Derrick Ashcroft 68 Director
</TABLE>
MICHAEL F. DANIELS has served as Chairman of the Board of Directors,
President and Chief Executive Officer since April 1994 and as a Director of
the Company since 1983. He served as Chief Operating Officer from March
1993 to April 1994 and as Senior Vice President - Marketing for more than
five years prior thereto. From 1970 to 1983 he was a Senior Systems
Engineer with Metropolitan Life Insurance Company.
WILLIAM J. VARGAS has served as Vice President - Finance, Chief Financial
Officer and Treasurer since May 1995 and as Secretary since February 1996.
From July 1993 to January 1995 he was the Senior Director of Finance for
Fitzgeralds Casino/Hotel and from February 1995 through April 1995 he was an
independent financial consultant. From July 1990 to December 1991 and from
January 1992 to July 1993 he was the Chief Financial Officer of Electronic
Data Technologies, Inc. and Sport of Kings, Inc., respectively, two publicly
traded gaming companies. From 1984 to 1990 he was employed as an auditor
with Arthur Andersen & Co.
LARRY M. SEGALL has served as a Director of the Company since November 1989.
Mr. Segall has been employed by Tiffany & Co. as Controller since 1985 and
is currently its Vice President, Treasurer and Controller. From 1983 to
1985 he was the Controller of Murijani International Ltd. From 1977 to 1983
he was employed as an auditor with Touche Ross & Co.
L. DERRICK ASHCROFT has served as a Director of the Company since August
1994. From 1988 to 1995 he was Chairman of the Board of Cardiopet, Inc., an
animal diagnostic firm and from 1986 to 1988 he was Chairman of the Board
and President of Ashcroft Rubin, Inc., an equipment leasing company
specializing in tax-driven equipment leases. He also currently serves as a
director on the board's of Tatatech, Inc., a high-tech venture capital firm
and Telco Technologies, Inc., a telecommunications services company. Mr.
Ashcroft is a graduate of Oxford University, England.
Mr. William G. McMurtrey and Dr. David C. Ward resigned from the Company's
Board of Directors on March 25, 1997 and March 31, 1997, respectively.
Their were no disagreements related to such resignations.
Officers serve at the discretion of the Board of Directors. All Directors
hold office for one year terms and until the election and qualification of
their successors. The Company has a Key Employee Stock Option Committee and
an Audit Committee consisting of Messrs. Segall and Ashcroft. The Board of
Directors did not have a standing nomination committee or committee
performing similar functions during the year ended December 31, 1996.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers, Directors and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission. Officers, Directors and ten percent shareholders are required
by regulation to furnish the Company with all Section 16(a) forms they file.
Based solely on the Company's copies of such forms received or written
representations from certain reporting persons that no Form 5's were
required for those persons, the Company believes that, during the time
period from January 1, 1995 through December 31, 1996, all filing
requirements applicable to its officers, Directors and greater than ten
percent beneficial owners were complied with.
ITEM 10. EXECUTIVE COMPENSATION
The compensation paid and/or accrued to the Chief Executive Officer of the
Company for services rendered to the Company during the three fiscal years
ended December 31, 1996 and the compensation paid and/or accrued to the
Chief Financial Officer of the Company for services rendered to the Company
during the year ended December 31, 1996 is presented in the following table.
No other executive officer received annual compensation in excess of
$100,000 in any of the three years ended December 31, 1996.
(a) Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------
Other Annual
Name of Individual and Fiscal Salary Bonus Compensation
Principal Position Year ($) ($) ($)
- ---------------------- ------ ------ ----- ------------
<S> <C> <C> <C> <C>
Michael F. Daniels 1996 $273,077 - $258,619 (2)
President & CEO 1995 254,808 $ 25,000(1) 198,987 (2)
1994 188,314 732,000(4) 192,148 (2)
William J. Vargas 1996 115,341 - -
CFO & Secretary
</TABLE>
(a) Summary Compensation Table (cont'd)
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------------------
Awards Payouts
------------------------ ----------
Securities Long Term
Restricted Underlying Incentive
Name of Individual and Fiscal Stock Options/SARs Plan
Principal Position Year Awards($) (#) Payouts($)
- ---------------------- ------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Michael F. Daniels 1996 - 250,000 -
President & CEO 1995 - 79,000 -
1994 - - -
William J. Vargas 1996 - 70,000 -
CFO & Secretary
</TABLE>
(a) Summary Compensation Table (cont'd)
<TABLE>
<CAPTION>
All
Name of Individual and Fiscal Other
Principal Position Year Compensation($)
- ---------------------- ------ ---------------
<S> <C> <C>
Michael F. Daniels 1996 $4,750 (3)
President & CEO 1995 4,500 (3)
1994 4,500 (3)
William J. Vargas 1996 1,900 (3)
CFO & Secretary
<F1> Consists of accrued bonus pursuant to employment contract.
<F2> Consists of commission income based upon realization of excess residual
values related to leases entered into prior to May 15, 1993.
<F3> Represents Company matching contribution to 401(k) Profit Sharing Plan.
<F4> Consists of 300,000 shares of restricted common stock at a quoted
market price of $2.44 granted in lieu of discretionary commissions.
</TABLE>
(b) Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Number of Percent of
Securities Total
Underlying Options/SAR's Exercise
Options/SAR's Granted to or Base Expiration
Name Granted (#) In Fiscal Year Price($/Sh) Date
---- ------------- -------------- ----------- ----------
<S> <C> <C> <C> <C>
Michael F. Daniels 250,000 50.0% $1.75 05-09-01
William J. Vargas 70,000 14.0% 1.75 05-09-01
</TABLE>
(c) Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End
Option/SAR Values
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised
Underlying In-The-Money
Options/SAR's Options/SAR's
At Fiscal At Fiscal
Shares Year End (#) Year End ($)
Acquired Value Exercisable/ Exercisable/
Name On Exercise Realized Unexercisable Unexercisable
---- ----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Michael F. Daniels 0 0 180,250/250,000 $55,218/$0.00
William J. Vargas 0 0 12,500/70,000 $0.00/$0.00
</TABLE>
(d) Directors Compensation
Each non-employee director of the Company is paid $1,000 per month. In
addition, each director is entitled to participate in the Company's 1991 and
1993 Director Stock Option Plan and in the 1994 Stock Option Plan. During
1996, the Company granted an aggregate of 300,000 options to non-employee
directors at an exercise price of $1.75 per share, which was the market
value of the Company's common stock on the date of grant. The Company does
not pay its directors any additional fees for committee participation.
(e) Employment Contracts
Michael F. Daniels serves as the Company's President and Chief Executive
Officer under an employment agreement dated July 1, 1995 and expiring June
30, 2000. Mr. Daniels' compensation under such agreement is $300,000 per
annum and he is eligible for a bonus based on company performance. In
addition, Mr. Daniels is entitled to receive commissions equal to 25% of the
net proceeds realized by the Company in excess of the residual value of
equipment subject to leases which commenced prior to May 15, 1993 and for
which Mr. Daniels was the lead salesperson.
William J. Vargas serves as the Company's Chief Financial Officer, Treasurer
and Secretary under an employment agreement dated July 1, 1995 and expiring
June 30, 2000. Mr. Vargas' compensation under such agreement is $110,000
per annum.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 12, 1997, certain information
concerning those persons known to the Company, based on information obtained
from such persons, with respect to the beneficial ownership (as such term is
defined in Rule 13d-3 under the Securities Act of 1934) of shares of Common
Stock, $0.01 par value, of the Company by (i) each person known by the
Company to be the owner of more than 5% of the outstanding shares of Common
Stock, (ii) each Director of the Company, (iii) each executive officer of
the Company named in the Summary Compensation Table and (iv) all executive
officers and Directors as a group:
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Beneficial Own- Percentage of
Beneficial Owner (1) ership (2) Class (3)
- -------------------- ------------------ -------------
<S> <C> <C>
Michael F. Daniels 633,958 (4) 11.8%
William J. Vargas 66,833 (5) 1.4%
Larry M. Segall 266,875 (6) 5.3%
L. Derrick Ashcroft 152,500 (7) 3.1%
Select Media Ltd. 248,000 (8) 5.0%
All Directors and
Executive Officers
as a Group (4 persons) 1,120,166 19.2%
<F1> The address for all individuals identified herein is 6540 S. Pecos
Road, Suite 103, Las vegas, Nevada 89120.
<F2> Unless otherwise noted, the Company believes that all persons named in
the table have sole investment power with respect to all shares of
common stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities that can be acquired by such person
within 60 days from the date hereof upon the exercise of warrants or
options or upon the conversion of convertible securities. Each
beneficial owner's percentage ownership is determined by assuming that
options or warrants or shares of Series A Convertible Preferred Stock
that are held by such person (but not those held by any other person)
and which are exercisable or convertible within 60 days from the date
hereof have been exercised or converted.
<F3> Based on 4,726,028 shares of common stock outstanding as of March 12,
1997.
<F4> Includes options to purchase 180,250 shares of common stock granted to
Mr. Daniels which are currently exercisable and options to purchase
83,333 shares of common stock which are exercisable within 60 days
from the date hereof.
<F5> Includes options to purchase 12,500 shares of common stock granted to
Mr. Vargas which are currently exercisable and options to purchase
23,333 shares of common stock which are exercisable within 60 days
from the date hereof.
<F6> Includes options to purchase 254,000 shares of common stock granted to
Mr. Segall which are currently exercisable.
<F7> Includes options to purchase 147,500 shares of common stock granted to
Mr. Ashcroft which are currently exercisable.
<F8> Includes options to purchase 198,000 shares of common stock which are
currently exercisable.
</TABLE>
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Segall, a director of the Company, is also an officer of Tiffany & Co.,
one of the Company's customers. Mr. Segall receives no cash or other
remuneration from the Company other than a fee for his services as a
director and participation in the Director Stock Option plans. The Company
believes that the terms of its lease arrangements with Tiffany & Co. are
fair and have been reached on an arms-length basis.
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K: None.
(a) Exhibits
--------
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<C> <S>
3.1 Amended Certificate of Incorporation.**
3.2 By laws as amended.*
4.1 Specimen Series A Convertible Preferred Stock Certificate.*
4.2 Specimen Warrant Certificate.*
4.3 Specimen Common Stock Certificate.*
4.4 Certificate of Designation of Series A Convertible Preferred Stock.*
4.5 Form of Representative's Warrants.*
10.1 Loan Agreement with Bank of America dated July 11, 1995.***
10.2 Amendment No. 1 to Loan Agreement with Bank of America.***
10.3 Amendment No. 2 to Loan Agreement with Bank of America.***
10.4 Amendment No. 3 to Loan Agreement with Bank of America.***
10.5 Merrill Lynch Line of Credit Agreement.***
10.6 Amendment No. 1 to Merrill Lynch Line of Credit Agreement.***
10.7 Amendment No. 2 to Merrill Lynch Line of Credit Agreement.***
10.8 Letter Agreement between the Registrant and Union Chelsea
National Bank dated November 27, 1995.***
10.9 1991 Directors' Stock Option Plan.*
10.10 1991 Key Employees' Stock Option Plan.*
10.11 1993 Directors' Stock Option Plan.*
10.12 1993 Key Employees' Stock Option Plan.*
10.13 Indemnification Agreement dated as of September 5, 1990
between the Registrant and Michael F. Daniels.*
10.14 1994 Stock Option Plan.*
10.15 Employment Agreement dated as of July 1, 1995 between the
Registrant and Michael F. Daniels.***
10.16 1996 Stock Option Plan.****
11 Computation of Earnings per Share.
21 List of Subsidiaries.
27 Financial Data Schedule.
<F*> Incorporated by reference to Registration Statement No. 33-64246.
<F**> Incorporated by reference to Post Effective Amendment No. 1 to
Registration Statement No. 33-93274.
<F***> Incorporated by reference to the Company's 1995 Annual Report on
Form 10-KSB/A, Commission File No. 0-18303.
<F****> Incorporated by reference to the Company's 1996 Proxy Statement.
</TABLE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LEC TECHNOLOGIES, INC.
-------------------------------
Date: March 12, 1997 By: /s/ Michael F. Daniels
- ------------------------------- ------------------------------------
Michael F. Daniels, President
and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
Date: March 12, 1997 By: /s/ Michael F. Daniels
- ------------------------------ ------------------------------------
Michael F. Daniels, President and
Chief Executive Officer
(Principal Executive Officer)
Date: March 12, 1997 By: /s/ William J. Vargas
- ------------------------------ ------------------------------------
William J. Vargas, V.P.
Finance (Principal Financial and
Accounting Officer)
Date: March 12, 1997 By: /s/ Larry M. Segall
- ------------------------------ ------------------------------------
Larry M. Segall, Director
Date: March 12, 1997 By: /s/ L. Derrick Ashcroft, Director
- ------------------------------ ------------------------------------
L. Derrick Ashcroft, Director
ITEM 6
EXHIBIT 11
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS - PRIMARY
EXHIBIT 11
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Shares outstanding at January 1 3,129,319 1,926,641
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 171,173 124,926
Effect of issuance of common stock for
services and other - 974,155
Exercise of stock options 52,049 -
Exercise of Class A Common Stock Purchase
Warrants 10,891 -
Conversion of preferred stock to common - 882
Issuance of common stock pursuant to pri-
vate placements 422,089 -
Purchase of treasury stock (6,375) -
Issuance of common stock related to acqui-
sition of SCS in 1996 and PMCPI in 1995 17,682 5,601
---------- ---------
Weighted average shares outstanding 3,796,828 3,032,205
Less: anti-dilutive common stock equivalents (171,173) (124,926)
---------- ---------
Weighted average shares - primary 3,625,655 2,907,279
========== =========
Net earnings (loss) (1,398,316) 201,344
Preferred stock dividends (229,016) (230,016)
---------- ---------
Net earnings (loss) available to common
shareholders (1,627,332) (28,672)
========== =========
</TABLE>
Fully-diluted earnings per share is not presented because the effect of such
calculation is anti-dilutive.
Exhibit 21.1
List of Subsidiaries
Pacific Mountain Computer Products, Inc.; incorporated in the State of
California on June 22, 1978; and doing business as Pacific Mountain Computer
Products, Inc.
TJ Computer Services, Inc.; incorporated in the State of New York on March
4, 1980; and doing business as TJ Computer Services, Inc.
Superior Computer Systems, Inc.; incorporated in the State of Minnesota on
January 13, 1995; and doing business as Superior Computer Systems, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 412,340
<SECURITIES> 0
<RECEIVABLES> 1,466,752
<ALLOWANCES> 170,699
<INVENTORY> 2,210,674
<CURRENT-ASSETS> 0<F1>
<PP&E> 461,707
<DEPRECIATION> 304,495
<TOTAL-ASSETS> 27,687,350
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 3,881,882
0
2,290
<COMMON> 44,071
<OTHER-SE> 5,391,652
<TOTAL-LIABILITY-AND-EQUITY> 27,687,350
<SALES> 8,175,840
<TOTAL-REVENUES> 21,237,400
<CGS> 7,414,988
<TOTAL-COSTS> 18,821,967
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 158,699
<INTEREST-EXPENSE> 397,656
<INCOME-PRETAX> (1,398,316)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,398,316)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,398,316)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> 0<F2>
<FN>
<F1>UNCLASSIFIED BALANCE SHEET
<F2>FULLY DILUTED EPS NOT PRESENTED AS RESULT OF CALCULATION IS ANTIDILUTIVE
</FN>
</TABLE>
