SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED:
MARCH 31, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM _____ TO _____
Commission File No. 0-18303
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LEC TECHNOLOGIES, INC.
_________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware No. 11-2990598
- -------------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6540 S. Pecos Road, Las Vegas, Nevada 89120
- -------------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
(702) 454-7900
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Applicable only to issuers involved in bankruptcy proceedings
during the preceding five years:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
April 30, 1998: 4,704,069 common shares.
Transitional Small Business Disclosure Format (Check one): Yes [ ];
No [X]
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1998
(Unaudited) and December 31, 1997 3
Consolidated Statements of Operations -
for the three months ended
March 31, 1998 and 1997 (Unaudited) 5
Consolidated Statements of Cash Flows -
for the three months ended March 31, 1998
and 1997 (Unaudited) 6
Notes to Consolidated Financial Statements
(Unaudited) 8
Item 2. Management's Discussion and Analysis
of Financial Condition or Plan of Operations 11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
(a) Exhibits
(b) Reports on Form 8-K
</TABLE>
PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited)
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ASSETS:
Cash $ 576,630 $ 208,639
Receivables - net of allowance
for doubtful accounts of
$157,405 for both periods 2,140,310 2,372,159
Notes receivable - employees 187,495 176,311
Inventory, net 2,235,666 2,039,685
Investment in leased assets:
Operating leases, net 13,524,582 15,284,177
Sales-type and direct financing 7,792,885 7,738,825
Furniture and equipment - net of
accumulated depreciation of
$329,758 and $310,378 387,856 363,970
Other assets 416,386 272,338
Goodwill, net of accumulated
amortization of $147,077 and
$134,543, respectively 604,962 617,496
---------- ----------
TOTAL ASSETS $27,866,772 $29,073,600
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
(continued)
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited)
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 2,953,799 $ 3,823,522
Accrued liabilities 595,513 492,325
Notes payable and lines of credit 3,410,394 3,128,764
Nonrecourse and recourse discounted
lease rentals 15,251,918 15,905,823
Other liabilities 217,032 244,796
---------- ----------
TOTAL LIABILITIES 22,428,656 23,595,230
---------- ----------
STOCKHOLDERS' EQUITY:
Series A convertible preferred
stock, $.01 par value; 1,000,000
shares authorized, 380,000 shares
issued; 229,016 shares outstanding 2,290 2,290
Common stock, $.01 par value;
25,000,000 shares authorized,
4,882,269 and 4,882,269 shares issued
and 4,704,069 and 4,789,069 shares
outstanding at March 31, 1998
and December 31, 1997, respectively 48,823 48,823
Additional paid-in capital 10,325,167 10,382,421
Accumulated deficit (4,633,277) (4,716,732)
---------- ----------
5,743,003 5,716,802
Common stock held in treasury, at
cost; 178,200 and 93,200 shares (211,137) (144,682)
Note receivable from stockholder (93,750) (93,750)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 5,438,116 5,478,370
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $27,866,772 $29,073,600
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended
----------------------
March 31, March 31,
1998 1997
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Revenues:
Operating leases $2,109,560 $2,225,221
Sales-type leases 344,472 -
Finance income 177,541 78,509
Direct sales 830,930 347,406
--------- ---------
Total revenues from
leasing operations 3,462,503 2,651,136
Distribution sales 4,703,768 4,464,959
Other 1,345 4,776
--------- ---------
Total revenues 8,167,616 7,120,871
--------- ---------
Costs and expenses:
Operating leases 1,120,987 1,540,076
Sales-type leases 278,935 -
Interest expense 334,727 322,787
Direct sales 968,368 280,603
--------- ---------
Total costs from
leasing operations 2,703,017 2,143,466
Distribution cost of
sales 3,978,124 3,789,849
Selling, general and
administrative expenses 1,221,450 977,890
Interest expense 181,570 129,905
--------- ---------
Total costs and expenses 8,084,161 7,041,110
--------- ---------
Income before
income taxes 83,455 79,761
Provision for income
taxes - -
--------- ---------
Net income $ 83,455 $ 79,761
========= =========
Earnings per common
share $ 0.01 $ 0.01
========= =========
Earnings per common share
assuming dilution $ 0.01 $ 0.01
========= =========
</TABLE>
The accompanying notes are integral part of these consolidated financial
statements.
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
March 31, March 31,
1998 1997
------------ -----------
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CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 83,455 $ 79,761
Adjustments to reconcile net
income to cash provided
by operating activities:
Depreciation and amortization 1,152,902 1,560,253
Change in assets and liabilities
due to operating activities:
(Increase) decrease in
accounts receivable 231,849 (668,311)
Decrease in inventory 398,523 432,784
Decrease in accounts
payable (869,723) (299,371)
(Decrease) increase in
accrued liabilities 103,188 (16,556)
All other operating activities (171,812) (203,214)
----------- ----------
Total adjustments 844,927 805,585
----------- ----------
Net cash provided by operating
activities 928,382 885,346
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales, transfers and disposals of
inventory and equipment 1,078,443 798,048
Purchases of inventory for lease (948,509) (2,776,510)
Purchases of furniture and equipment (43,267) (51,325)
(Increase) decrease in notes receivable (11,184) 4,116
Additions to net investement in
sales-type and direct financing leases (864,817) -
Sales-type and direct financing
lease rentals received 724,927 424,749
----------- ----------
Net cash used in investing activities (64,407) (1,600,922)
----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
(Continued)
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
March 31, March 31,
1998 1997
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from nonrecourse and
recourse discounted lease rentals 1,709,026 2,376,707
Payments on nonrecourse and recourse
discounted lease rentals (2,362,931) (2,121,823)
Proceeds from notes payable 513,307 477,886
Payments on notes payable (231,677) (435,419)
Proceeds from exercise of warrants - 269,000
Purchase of treasury stock (66,455) -
Preferred stock dividends paid (57,254) (57,254)
----------- ----------
Net cash provided by (used in)
financing activities (495,984) 509,097
----------- ----------
Net increase (decrease) in cash 367,991 (206,479)
Cash at beginning of period 208,639 412,340
----------- ----------
Cash at end of period $ 576,630 $ 205,861
=========== ==========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for:
Interest $ 144,460 $ 397,122
=========== ==========
Income taxes $ 16,850 $ -
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of LEC Technologies, Inc. (formerly, Leasing Edge
Corporation) and its wholly owned subsidiaries, collectively
referred to as the "Company". All material intercompany accounts
and transactions have been eliminated. Certain reclassifications
have been made to prior years' amounts to conform with current
period presentation.
Basis of Presentation
In the opinion of the Company, the accompanying unaudited
Consolidated Financial Statements contain all adjustments necessary
to present fairly the results of its operations and its cash flows
for the three months ended March 31, 1998 and 1997. It is
suggested that this report be read in conjunction with the
Company's audited financial statements included in the Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1997.
The operating results and cash flows for the three months ended
March 31, 1998 are not necessarily indicative of the results that
will be achieved for the full fiscal year or for future periods.
Note 2. Earnings Per Share
Basic and diluted earnings (loss) per share are computed in
accordance with SFAS No. 128, "Earnings Per Share". The following
EPS amounts reflect EPS as computed under SFAS No. 128:
March 31, March 31,
1998 1997
--------- ---------
Shares outstanding at
beginning of period 4,789,069 4,340,919
Effect of issuance of common
stock for services - 6,028
Exercise of "B" warrants - 56,011
Purchase of treasury stock (44,856) -
--------- ---------
Weigted average common
shares outstanding 4,744,213 4,402,949
========= =========
Net income
$ 83,455 $ 79,761
Preferred stock dividends (57,254) (57,254)
--------- ---------
Net earnings available to
common shareholders $ 26,201 $ 22,507
========= =========
Earnings per common share $ 0.01 $ 0.01
========= =========
Weighted average common
shares outstanding 4,744,213 4,402,949
Effect of common shares
issuable upon exercise of
dilutive stock options 239,835 35,294
--------- ---------
Weighted average common shares
outstanding assuming dilution 4,984,048 4,438,243
========= =========
Earnings per common share
assuming dilution $ 0.01 $ 0.01
========= =========
Note 3. Notes Payable and Lines of Credit
In October of 1997, PMCPI and Merrill Lynch Business Financial
Services, Inc. ("Merrill Lynch") replaced PMCPI's prior line of
credit (the "Merrill Line of Credit") with a term note in the
amount of $443,848 (the "Merrill Note"). The Merrill Line of
Credit was replaced by the Merrill Note in anticipation of the
Company entering into a new $1.75 million revolving line of credit
facility with Finova Capital Corporation (the "Finova Line") that
would have been secured by the inventory and accounts receivable of
both PMCPI and SCS. Subsequent to executing the Merrill Note, the
Company reevaluated the terms and conditions of the Finova Line and
determined it was too costly and that it did not sufficiently
address the Company's liquidity needs. Consequently, the Company
is currently negotiating a reinstatement of the prior line of
credit with Merrill Lynch or, in the event the line of credit is
not reinstated, a term out of the remaining obligation. The Merrill
Note is guaranteed by the Company and is secured by inventory and
accounts receivable of PMCPI (collectively, the "Merrill
Collateral").
On December 1, 1997, the remaining principal balance of
approximately $394,000 outstanding under the Merrill Note plus
accrued interest became due and payable. As of May 15, 1998, PMCPI
has not made the December 1, 1997 payment. Although no demand for
payment has been made by Merrill Lynch to date, PMCPI is currently
in payment default under the terms of the Merrill Note and Merrill
Lynch may exercise any of the rights and remedies available to it
under the Merrill Note, the original agreements with respect to the
Merrill Line of Credit, or otherwise available to it at law or in
equity. Such rights and remedies include demanding immediate
payment from PMCPI or the Company (pursuant to the Company
Guarantee) of the amounts due under the Merrill Note and
foreclosure on the Merrill Collateral. Although the Company
believes that its current negotiations with Merrill Lynch will be
successful, there can be no assurance that the Company will be
successful in its efforts to reinstate the Merrill Line of Credit
or negotiate a term out upon terms satisfactory to the Company. In
the event that Merrill Lynch were to demand immediate payment by
PMCPI or the Company of the amounts due and payable under the
Merrill Note, an event of default would exist under the Second Loan
Modification Agreement (as hereinafter defined) and the Company's
liquidity and financial condition and, consequently, the business
operations of the Company could be materially and adversely
affected.
The terms of the Second Loan Modification Agreement, effective
February 5, 1998 (the "Second Loan Modification Agreement") between
the Company and Bank of America National Trust & Savings
Association ("Bank of America") govern the Company's debt
obligation due January 1, 1998 to Bank of America (the "Term
Loan"). At February 5, 1998, the amount of unpaid principal on the
Term Loan was $1,366,365 and the interest rate was 12.5%. The
terms of the Second Loan Modification Agreement require the Company
to make monthly pricipal payments of $45,546 plus interest at the
prime rate plus 400 basis points from January 15, 1998 through June
15, 1998; monthly principal payments of $72,873 plus interest at
the prime rate plus 500 basis points from July 15, 1998 through
December 15, 1998; monthly principal payments of $109,309 plus
interest at the prime rate plus 600 basis points from January 15,
1999 through May 15, 1999; and to pay all remaining unpaid
principal, accrued and unpaid interest, and any unpaid fees and
expenses on June 15, 1999. The Term Loan is secured by all of the
personal property, tangible and intangible, of the Company and its
wholly-owned subsidiary, TJ Computer Services, Inc. (dba Leasing
Edge Corporation). Restrictive covenants under the Second Loan
Modification Agreement include the maintenance of consolidated
tangible net worth (as defined) of at least $4.5 million;
restrictions on the payment of cash dividends on shares of the
Company's common stock; restrictions on incurring additional
indebtedness and creating additional liens on the Company's
property; and limitations on unfinanced capital expenditures (as
defined).
In November of 1995, the Company entered into a letter agreement
with Excel Bank N.A. ("Excel") (formerly Union Chelsea National
Bank) whereby Excel agreed to make available to the Company a
$250,000 line of credit (the "Equity Line") to be used to fund the
Company's equity investment in certain leases discounted by Excel
(i.e., the difference between the cost of the leased equipment and
the discounted present value of the minimum lease payments assigned
to Excel). Borrowings under the Equity Line are evidenced by term
notes and require monthly payments of principal and interest over
a period equal to the term of the related discounted lease with a
final balloon payment of between 30 and 50 percent depending on the
lease term. Interest rates on the term notes are at the applicable
discounted lease rate plus 1.75%. In July of 1996 and December of
1997, Excel increased its maximum commitment under the Equity Line
to $1,000,000 and $2,500,000, respectively. Such maximum
commitment is reduced by the amount of outstanding recourse
discounted lease rentals funded by Excel, borrowings outstanding
under the ADI credit line and an outstanding capital lease
obligation of approximately $245,000, $250,763 and $112,220,
respectively, at March 31, 1998. At March 31, 1998, the Company
had outstanding term notes and available credit under the Equity
Line of $1,280,311 and $572,328, respectively.
On March 9, 1998, ADI entered into a $500,000 Revolving Credit
Agreement (the "ADI Credit Agreement") with Excel for general
corporate purposes. Pursuant to the ADI Credit Agreement, Excel
has agreed, subject to certain conditions, to make advances to ADI
from time to time prior to October 15, 1998 of up to $500,000.
Amounts repaid under the ADI Credit Agreement may be reborrowed
until October 15, 1998, the date that the loans under the ADI
Credit Agreement mature. The loans under the ADI Credit Agreement
bear interest at the prime rate plus 2.5%. Accrued interest, if
any, will be payable monthly, beginning on April 1, 1998. The ADI
Credit Agreement is guaranteed by the Company and is secured by a
lien on the receivables, inventory and equipment of ADI. Under the
ADI Credit Agreement, ADI has agreed not to incur any additional
indebtedness or to create any additional liens on its property
other than under the ADI Credit Agreement. Upon consumation of the
ADI Credit Agreement, Excel reduced its maximum commitment under
the Equity Line to $2,000,000 and transferred the $160,838 term
note to the ADI Credit Agreement. As of March 31, 1998, loans in
the amount of $250,763 were outstanding under the ADI Credit
Agreement.
Note 4. Impact of Recently Issued Accounting Standards
In June of 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 requires companies to classify items of other
comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in
the equity section of a statement of financial position and is
effective for financial statements issued for fiscal years
beginning after December 15, 1997. The Company adopted SFAS 130 in
the quarter ended March 31, 1998. As of March 31, 1998, the
Company had no other comprehensive income.
In June of 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosure About Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 establishes additional
standards for segment reporting and is effective for fiscal years
beginning after December 15, 1997. The Company is currently
assessing the impact of implementation of SFAS 131.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION
Overview
The Company was originally founded in 1980 under the name TJ
Computer Services, Inc. ("TJCS"). In 1989, all of the outstanding
common stock of TJCS was acquired by Harrison Development, Inc., an
inactive public corporation organized in Colorado, which then
changed its name to TJ Systems Corporation. In October 1991, the
Company reincorporated in the State of Delaware and in June 1995,
changed its name to Leasing Edge Corporation. In March, 1997, the
Company's shareholders approved a change in the Company's name to
LEC Technologies, Inc. Unless the context otherwise requires, the
term the "Company" as used herein refers to LEC Technologies, Inc.
and its wholly-owned subsidiaries.
The Company's services are organized into three groups of
related businesses, and are provided generally through separate
business units, although there is a significant amount of
interrelated activities. The three business 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 SCS and 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 ADI, a wholly-owned subsidiary of
LEC Technologies, Inc., which specializes in the acquisition
and remarketing of used computer equipment on both a
domestic and international basis.
Accounting Practices
Accounting Classification of Leases: Reported earnings are
significantly impacted by the accounting classification of leases.
The Company's lease portfolio is comprised of sales-type, direct
financing and operating leases. The Company classifies each lease
at inception in accordance with Statement of Financial Accounting
Standards No. 13, as amended and interpreted. Sales-type and
direct financing leases are those leases which transfer
substantially all of the costs and risks of ownership of the
equipment to the lessee. Operating leases are those leases in
which substantially all of the benefits and risks of ownership of
the equipment are retained by the lessor.
The accounting treatment and resulting impact on the financial
statements differs significantly during the term of the lease,
depending on the type of lease classification. Under sales-type
leases, the present value of the minimum lease payments calculated
at the rate implicit in the lease is recorded as revenue and the
cost of the equipment less the present value of the estimated
unguaranteed residual value is recorded as leasing costs at lease
inception. Consequently, a significant portion of the gross profit
on the lease transaction is recognized at lease inception. Under
direct financing leases, the excess of the aggregate minimum lease
payments plus the estimated unguaranteed residual over the cost of
the equipment is recorded as unearned interest income at lease
inception. Such amount is then recognized monthly over the lease
term as a constant percentage of the related asset. There are no
costs and expenses related to direct financing leases since revenue
is recorded on a net basis. Under operating leases, the monthly
lease rental is recorded as revenue ratably over the lease term.
The cost of the related equipment is recorded as leased assets and
is depreciated over the lease term to the estimated unguaranteed
residual value. Regardless of the classification of a lease
transaction and the resultant accounting treatment during the lease
term, the aggregate gross profit recognized during the lease term
is identical.
Residual Values: 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 the lease by re-leasing or
selling such equipment. The Company's financial results would be
materially and adversely affected if the residual value of the
equipment could not be realized when returned to the Company
because of technological obsolescence or for any other reason.
Estimated residual values for leased equipment vary, both in amount
and as a percentage of the original equipment cost, depending upon
many factors, including the type and manufacturer of the equipment,
the Company's experience with the type of equipment and the term of
the lease. In estimating future residual values, the Company
relies on both its own experience and upon third-party estimates of
future market value where available. The Company reviews its
estimated residual values at least annually and reduces them as
necessary. At the time of expiration of a lease, the Company
remarkets the equipment and records the proceeds from the sale (in
the event of a sale) or the present value of the lease rentals (in
the event of a sales-type lease) as revenue and records the net
book value of the related equipment as a cost of sale or lease.
Results of Operations
Three Months Ended March 31, 1998 Compared to Three Months Ended
March 31, 1997
Revenues
Total revenues from leasing operations increased 30.6% from
$2,651,136 for the three months ended March 31, 1997 to $3,462,503
for the three months ended March 31, 1998, an increase of $811,367.
The increase in revenues is primarily due to an increase of
$483,524 in revenue from sales of off-lease equipment together with
a first quarter 1998 renewal, upgrade and consolidation of several
existing operating leases into a new lease which was accounted for
as a sales-type lease pursuant to SFAS No. 13. As compared to
other lease transactions, sales-type leases result in a greater
percentage of the related revenue and expense from the transaction
being recognized at lease inception. Consequently, revenue
recognized subsequent to lease inception consists only of the
finance income element of the transaction.
Revenue from the portfolio base of operating leases decreased 5.2%
from $2,225,221 for the quarter ended March 31, 1997 to $2,109,560
for the quarter ended March 31, 1998, a decrease of $115,661. The
decrease in operating lease revenue is due primarily to a
combination of an increase in the number of direct financing leases
written and the early termination of certain operating leases
purchased by a customer.
Distribution sales, representing the activity of ADI, SCS and
PMCPI, increased 5.3% from $4,464,959 for the quarter ended March
31, 1997 to $4,703,768 for the quarter ended March 31, 1998, an
increase of $238,809. The increase in distribution sales was
attributable to increased sales activity at ADI resulting from the
Company's expansion of this business unit partially offset by
decreased sales at SCS. ADI's revenues for the first quarter of
1997 were $665,980 as compared to $1,365,493 for the first quarter
of 1998, an increase of $699,513 or 105.0%.
Costs and Expenses
Total costs from leasing operations increased 26.1% from $2,143,466
for the quarter ended March 31, 1997 to $2,703,017 for the quarter
ended March 31, 1998, an increase of $559,551. The increase in
total costs from leasing operations was due primarily to an
increase in cost of sales associated with the sale of off-lease
equipment and the sales-type lease transaction referred to
previously, offset by a decrease in depreciation expense on
operating leases. The decrease in operating lease depreciation was
related to the early termination of certain leases as mentioned.
Gross profit from leasing operations (total revenues from leasing
operations less total costs from leasing operations) increased
49.6% from $507,670 for the quarter ended March 31, 1997 to
$759,486 for the quarter ended March 31, 1998, an increase of
$251,816. Gross margin (gross profit from leasing operations as a
percentage of total revenues from leasing operations) increased to
21.9% from 19.1% due to the foregoing.
Leasing costs associated with the portfolio base of operating
leases decreased 27.2% from $1,120,987 for the quarter ended March
31, 1997 to $1,120,987 for the quarter ended March 31, 1998, a
decrease of $419,089. The decrease in costs from this segment of
the Company's lease portfolio is due primarily to the early
termination/buy-out of certain operating leases and the lease
renewal/upgrade mentioned above which was accounted for as a sales-
type lease. Gross profit on operating leases increased 44.3% from
$685,145 for the quarter ended March 31, 1997 to $988,573 for the
quarter ended March 31, 1998, an increase of $303,428.
Direct sales costs (leasing costs with respect to the sale of off-
lease equipment and leases with dollar buyout options treated as
sales) increased 245.1% from $280,603 for the quarter ended March
31, 1997 to $968,368 for the quarter ended March 31, 1998, an
increase of $687,765. This increase in direct sales costs was
directly related to a year-to-year increase in the volume of leases
coming to term. Direct sales costs increased as a percentage of
the related revenue to 116.5% from 80.8%. The increase in costs as
a percentage of revenue is due to residual value realization more
closely matching stated values in 1997 as compared to 1998.
Distribution cost of sales increased 5.0% from $3,789,849 for the
three months ended March 31, 1997 to $3,978,124 for the three
months ended March 31, 1998, an increase of $188,275. Distribution
cost of sales relates to the distribution sales of ADI, SCS and
PMCPI. The increase in distribution cost of sales is directly
related to the increased sales volume of ADI. Gross margin on
distribution sales increased slightly to 15.4% for the quarter
ended March 31, 1998 from 15.1% for the quarter ended March 31,
1997.
Selling, general and administrative expenses increased 24.9% from
$977,890 for the quarter ended March 31, 1997 to $1,221,450 for the
quarter ended March 31, 1998, an increase of $243,560. The
increase in selling, general and administrative expenses was due
primarily to the expansion of ADI.
Interest expense on non-lease related indebtedness increased 39.8%
from $129,905 for the quarter ended March 31, 1997 to $181,570 for
the quarter ended March 31, 1998, an increase of $51,665. The
increase in interest expense on non-lease related indebtedness was
due primarily to interest costs associated with inventory flooring
arrangements at SCS and an increase in the interest rate on the
Company's outstanding indebtedness to Bank of America.
Net Income
As a result of the foregoing, the Company recorded net income of
$83,455 for the quarter ended March 31, 1998 as compared to net
income of $79,761 for the quarter ended March 31, 1997.
Liquidity and Capital Resources
In October of 1997, PMCPI and Merrill Lynch Business Financial
Services, Inc. ("Merrill Lynch") replaced PMCPI's prior line of
credit (the "Merrill Line of Credit") with a term note in the
amount of $443,848 (the "Merrill Note"). The Merrill Line of
Credit was replaced by the Merrill Note in anticipation of the
Company entering into a new $1.75 million revolving line of credit
facility with Finova Capital Corporation (the "Finova Line") that
would have been secured by the inventory and accounts receivable of
both PMCPI and SCS. Subsequent to executing the Merrill Note, the
Company reevaluated the terms and conditions of the Finova Line and
determined it was too costly and that it did not sufficiently
address the Company's liquidity needs. Consequently, the Company
is currently negotiating a reinstatement of the prior line of
credit with Merrill Lynch or, in the event the line of credit is
not reinstated, a term out of the remaining obligation. The Merrill
Note is guaranteed by the Company and is secured by inventory and
accounts receivable of PMCPI (collectively, the "Merrill
Collateral").
On December 1, 1997, the remaining principal balance of
approximately $394,000 outstanding under the Merrill Note plus
accrued interest became due and payable. As of May 15, 1998, PMCPI
has not made the December 1, 1997 payment. Although no demand for
payment has been made by Merrill Lynch to date, PMCPI is currently
in payment default under the terms of the Merrill Note and Merrill
Lynch may exercise any of the rights and remedies available to it
under the Merrill Note, the original agreements with respect to the
Merrill Line of Credit, or otherwise available to it at law or in
equity. Such rights and remedies include demanding immediate
payment from PMCPI or the Company (pursuant to the Company
Guarantee) of the amounts due under the Merrill Note and
foreclosure on the Merrill Collateral. Although the Company
believes that its current negotiations with Merrill Lynch will be
successful, there can be no assurance that the Company will be
successful in its efforts to reinstate the Merrill Line of Credit
or negotiate a term out upon terms satisfactory to the Company. In
the event that Merrill Lynch were to demand immediate payment by
PMCPI or the Company of the amounts due and payable under the
Merrill Note, an event of default would exist under the Second Loan
Modification Agreement and the Company's liquidity and financial
condition and, consequently, the business operations of the Company
could be materially and adversely affected.
The terms of the Second Loan Modification Agreement, effective
February 5, 1998 between the Company and Bank of America govern the
Company's debt obligation due January 1, 1998 to Bank of America
(the "Term Loan"). At February 5, 1998, the amount of unpaid
principal on the Term Loan was $1,366,365 and the interest rate was
12.5%. The terms of the Second Loan Modification Agreement require
the Company to make monthly pricipal payments of $45,546 plus
interest at the prime rate plus 400 basis points from January 15,
1998 through June 15, 1998; monthly principal payments of $72,873
plus interest at the prime rate plus 500 basis points from July 15,
1998 through December 15, 1998; monthly principal payments of
$109,309 plus interest at the prime rate plus 600 basis points from
January 15, 1999 through May 15, 1999; and to pay all remaining
unpaid principal, accrued and unpaid interest, and any unpaid fees
and expenses on June 15, 1999. The Term Loan is secured by all of
the personal property, tangible and intangible, of the Company and
its wholly-owned subsidiary, TJ Computer Services, Inc. (dba
Leasing Edge Corporation). Restrictive covenants under the Second
Loan Modification Agreement include the maintenance of consolidated
tangible net worth (as defined) of at least $4.5 million;
restrictions on the payment of cash dividends on shares of the
Company's common stock; restrictions on incurring additional
indebtedness and creating additional liens on the Company's
property; and limitations on unfinanced capital expenditures (as
defined).
In November of 1995, the Company entered into a letter agreement
with Excel Bank N.A. ("Excel") (formerly Union Chelsea National
Bank) whereby Excel agreed to make available to the Company a
$250,000 line of credit (the "Equity Line") to be used to fund the
Company's equity investment in certain leases discounted by Excel
(i.e., the difference between the cost of the leased equipment and
the discounted present value of the minimum lease payments assigned
to Excel). Borrowings under the Equity Line are evidenced by term
notes and require monthly payments of principal and interest over
a period equal to the term of the related discounted lease with a
final balloon payment of between 30 and 50 percent depending on the
lease term. Interest rates on the term notes are at the applicable
discounted lease rate plus 1.75%. In July of 1996 and December of
1997, Excel increased its maximum commitment under the Equity Line
to $1,000,000 and $2,500,000, respectively. Such maximum
commitment is reduced by the amount of outstanding recourse
discounted lease rentals funded by Excel, borrowings outstanding
under the ADI credit line and an outstanding capital lease
obligation of approximately $245,000, $250,763 and $112,220,
respectively, at March 31, 1998. At March 31, 1998, the Company
had outstanding term notes and available credit under the Equity
Line of $1,280,311 and $572,328, respectively.
On March 9, 1998, ADI entered into a $500,000 Revolving Credit
Agreement (the "ADI Credit Agreement") with Excel for general
corporate purposes. Pursuant to the ADI Credit Agreement, Excel
has agreed, subject to certain conditions, to make advances to ADI
from time to time prior to October 15, 1998 of up to $500,000.
Amounts repaid under the ADI Credit Agreement may be reborrowed
until October 15, 1998, the date that the loans under the ADI
Credit Agreement mature. The loans under the ADI Credit Agreement
bear interest at the prime rate plus 2.5%. Accrued interest, if
any, will be payable monthly, beginning on April 1, 1998. The ADI
Credit Agreement is guaranteed by the Company and is secured by a
lien on the receivables, inventory and equipment of ADI. Under the
ADI Credit Agreement, ADI has agreed not to incur any additional
indebtedness or to create any additional liens on its property
other than under the ADI Credit Agreement. Upon consumation of the
ADI Credit Agreement, Excel reduced its maximum commitment under
the Equity Line to $2,000,000 and transferred the $160,838 term
note to the ADI Credit Agreement. As of March 31, 1998, loans in
the amount of $250,763 were outstanding under the ADI Credit
Agreement.
Due to the fact that the 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.
Consequently, 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 1998, 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. At March 31, 1998,
the Company had approximately $1,148,958 in cash on hand and credit
availability under the Equity Line.
At the inception of each lease, the Company establishes the
residual value of the leased equipment, which is the estimated
market value of the equipment at the end of the initial lease term.
The Company's cash flow depends to a great extent on its ability to
realize the residual value of leased equipment after the initial
term of its leases with its customers. Historically, the Company
has realized its recorded investment in residual values through (i)
renegotiation of the lease during its term to add or modify
equipment; (ii) renewal or extension of the original lease; (iii)
leasing equipment to a new user after the initial lease term; or
(iv) sale of the equipment. Each of these alternatives impacts the
timing of the Company's cash realization of such recorded residual
values. Equipment may be returned to the Company at the end of an
initial or extended lease term when it may not be possible for the
Company to resell or re-lease the equipment on favorable terms.
Developments in the high technology equipment market tend to occur
at rapid rates, adding to the risk of obsolescence and shortened
product life cycles which could affect the Company's ability to
realize the residual value of such equipment. In addition, if the
lessee defaults on a lease, the financial institution that provided
nonrecourse financing may foreclose on its security interest in the
leased equipment and the Company may not realize any portion of
such residual value. If the residual value in any equipment cannot
be realized after the initial lease term, the recorded investment
in the equipment must be written down, resulting in lower cash flow
and reduced earnings. There can be no assurance that the Company
will not experience material residual value or inventory write-
downs in the future.
The Company intends to continue to retain residual ownership of all
the equipment it leases. As of March 31, 1998, the Company had a
total net investment in lease transactions of $21.3 million
compared to $23.0 million as of December 31, 1997. The estimated
residual value of the Company's portfolio of leases expiring
between April 1, 1998 and December 31, 2003 totals $7,888,358,
although there can be no assurance that the Company will be able to
realize such residual value in the future. As of March 31, 1998,
the estimated residual value of the Company's portfolio of leases
by year of lease termination was as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1998 $ 2,197,458
1999 1,646,600
2000 3,138,100
2001 861,200
2002 and thereafter 45,000
Total $ 7,888,358
</TABLE>
Leased equipment expenditures of $1,813,126 for the quarter ended
March 31, 1998 were financed through the discounting of $1,709,026
of noncancelable lease rentals to various financial institutions,
borrowings under the Equity Line and available cash.
Management recognizes that certain risks are inherent in the
leasing services portion of its business. Such risks and
assumptions include, but are not limited to, technological
obsolescence associated with equipment the Company currently has on
lease or in inventory, the estimated residual values of such
equipment and the timing of the Company's cash realization of such
residual values. In an effort to mitigate such risks, management
has implemented a plan to expand and diversify the non-leasing
portion of its business. The first step of this plan was the
acquisition of SCS in November of 1996. As a result of the
acquisition, management was able to eliminate certain redundant
administrative tasks at PMCPI, thereby returning PMCPI to
profitability in 1997. A second phase of the Company's strategy
was implemented in January 1997 with the formation of ADI, which
contributed positive earnings to the Company's consolidated
financial results.
The Company intends to continue to pursue its strategy of
diversifying the technology services it offers through the
acquisition of parallel businesses as well as the expansion of its
current product offerings. Accordingly, management believes that
revenues from the leasing services unit of the Company's 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 over the near term.
Management further recognizes that the Company must generate
additional resources or consider modifications of its expansion
plan. To the extent the Company is unable to achieve its funding
plan, either through the cash realization of estimated lease
residuals or the negotiation of expanded credit facilities,
management has contingency plans which include curtailing the rate
of its planned expansion activities and reducing existing
infrastructure costs.
Based on the Company's anticipated residual value realization,
existing credit availability under the Equity Line and the ADI
Credit Agreement, and the anticipated contribution margin from the
Company's distribution services units, management believes that the
Company will have adequate capital resources to continue its
operations at the present level for at least the next twelve
months. Management further believes that the Company's existing
credit lines will be renewed as they come due.
The Company believes that inflation has not been a significant
factor in its business.
The Company is aware of the issues associated with the programming
code in existing computer systems as the millennium approaches.
Independent of such issues, management of the Company has initiated
an information systems project to standardize all of the Company's
hardware and software systems. The systems selected by management
are Year 2000 compliant. The implementation of such systems is
anticipated to be completed in 1998. Management does not believe
that such implementation will have a significant effect on the
Company's earnings.
In June of 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 requires companies to classify items of other
comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in
the equity section of a statement of financial position and is
effective for financial statements issued for fiscal years
beginning after December 15, 1997. The Company adopted SFAS 130 in
the quarter ended March 31, 1998. As of March 31, 1998, the
Company had no other comprehensive income.
In June of 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosure About Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 establishes additional
standards for segment reporting and is effective for fiscal years
beginning after December 15, 1997. The Company is currently
assessing the impact of implementation of SFAS 131.
Safe Harbor Statement under the
Private Securities Litigation Reform Act of 1995
Certain statements herein and in 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 other 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
fluctuatiuons, 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 many
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 competiotion
from other lessors. The Company undertakes no obligation to
publicly update or revise any forward-looking statements whether as
a result of new information, future events or otherwise.
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
None.
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
LEASING EDGE CORPORATION
(Registrant)
Date: May 19, 1998 /s/Michael F. Daniels
Michael F. Daniels, President
and Chief Executive Officer
(Principal Executive Officer)
Date: May 19, 1998 /s/ William J. Vargas
William J. Vargas, V.P.- Finance
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 576,630
<SECURITIES> 0
<RECEIVABLES> 2,297,715
<ALLOWANCES> 157,405
<INVENTORY> 2,235,666
<CURRENT-ASSETS> 0<F1>
<PP&E> 717,614
<DEPRECIATION> 329,758
<TOTAL-ASSETS> 27,866,772
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 3,410,394
0
2,290
<COMMON> 48,823
<OTHER-SE> 5,691,890
<TOTAL-LIABILITY-AND-EQUITY> 27,866,772
<SALES> 5,534,698
<TOTAL-REVENUES> 8,167,616
<CGS> 4,946,492
<TOTAL-COSTS> 6,681,141
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 181,570
<INCOME-PRETAX> 83,455
<INCOME-TAX> 0
<INCOME-CONTINUING> 83,455
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 83,455
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
<FN>
<F1>UNCLASSIFIED BALANCE SHEET
</FN>
</TABLE>
