SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10Q-SB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED:
SEPTEMBER 30, 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
- --------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Applicable only to issuers involved in bankruptcy proceedings
during the preceding five years:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
October 31, 1998: 1,176,017 common shares.
Traditional Small Business Disclosure Format (Check one): Yes [ ];
No [X]
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1998 (Unaudited)
and December 31, 1997 3
Consolidated Statements of Operations - for the three
and nine months ended September 30, 1998
and 1997 (Unaudited) 5
Consolidated Statements of Cash Flows - for the nine months
ended September 30, 1998 and 1997 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis or
Plan of Operations 11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
(a) Exhibits
(b) Reports on Form 8-K
</TABLE>
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited) (Audited)
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<S> <C> <C>
ASSETS:
Cash $ 392,305 $ 208,639
Receivables - net of allowance
for doubtful accounts of $373,478
and $157,405 3,138,129 2,372,159
Notes receivable - employees 103,531 176,311
Inventory, net 2,345,133 2,039,685
Leased assets:
Operating leases, net 12,402,462 15,284,177
Sales-type and direct
financing leases 9,108,410 7,738,825
Furniture and equipment - net of
accumulated depreciation of
$387,587 and $310,378 579,474 363,970
Other assets 692,589 272,338
Goodwill, net of accumulated
amortization of $172,145 and
$134,543 579,894 617,496
---------- ----------
TOTAL ASSETS $29,341,927 $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>
September 30, December 31,
1998 1997
(Unaudited) (Audited)
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 4,116,950 $ 3,823,522
Accrued liabilities 873,722 492,325
Notes payable and lines of credit 3,957,219 3,128,764
Nonrecourse and recourse discounted
lease rentals 16,652,961 15,905,823
Other liabilities 76,695 244,796
---------- ----------
TOTAL LIABILITIES 25,677,547 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,
1,176,017 and 1,220,567 shares
issued and 1,176,017 and 1,197,267
shares outstanding at September 30,
1998 and December 31, 1997,
respectively 47,041 48,823
Additional paid-in capital 10,173,066 10,382,421
Accumulated deficit (6,558,017) (4,716,732)
---------- ---------
3,664,380 5,716,802
Common stock held in treasury, at
cost; 0 and 93,200 shares at
September 30, 1998 and December 31,
1997, respectively - (144,682)
Note receivable from stockholders - (93,750)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 3,664,380 5,478,370
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $29,341,927 $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)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ----------------------
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Operating leases $1,541,097 $1,890,367 $ 5,238,671 $6,656,202
Sales-type leases 2,756,962 2,102,584 3,388,533 2,108,977
Finance income 197,052 138,505 569,161 313,218
Direct sales 326,461 129,380 1,269,554 1,341,312
--------- --------- ---------- ---------
Total revenues from
leasing operations 4,821,572 4,260,836 10,465,919 10,419,709
Distribution sales 5,563,225 4,633,987 14,628,555 13,757,602
Other 1,096 8,400 4,492 15,266
--------- --------- ---------- ---------
Total revenues 10,385,893 8,903,223 25,098,966 24,192,577
--------- --------- ---------- ---------
Costs and expenses:
Operating leases 1,119,479 1,366,019 3,368,195 4,381,473
Sales-type leases 1,475,879 1,683,434 1,947,882 1,685,134
Interest expense 330,951 326,502 995,448 973,280
Direct sales 304,630 186,387 1,427,508 1,420,780
Write down of inventory
and residual values 192,410 - 1,301,704 -
--------- --------- ---------- ---------
Total costs from
leasing operations 3,423,349 3,562,342 9,040,737 8,460,667
Distribution cost of
sales 4,770,348 3,906,099 12,316,235 11,594,780
Selling, general and
administrative expenses 1,791,053 1,146,140 4,889,196 3,381,252
Interest expense 374,012 160,624 694,083 442,968
--------- --------- ---------- ---------
Total costs and expenses 10,358,762 8,775,205 26,940,251 23,879,667
--------- --------- ---------- ---------
Income (loss) before
income taxes 27,131 128,018 (1,841,285) 312,910
Provision for income
taxes - - - -
--------- --------- --------- ---------
Net income (loss) $ 27,131 $ 128,018 $(1,841,285) $ 312,910
========= ========= ========= =========
Earnings(loss) per common
share $ 0.02 $ 0.06 $ (1.56) $ 0.12
========= ========= ========= =========
Earnings(loss) per common
share asuuming dilution $ 0.02 $ 0.05 $ (1.56) $ 0.11
========= ========= ========= =========
</TABLE>
The accompanying notes are integral part of these consolidated financial
statements.
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
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Nine Months Ended
--------------------------
Sep. 30, Sep. 30,
1998 1997
------------ -----------
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CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ (1,841,285) $ 312,910
Adjustments to reconcile net
income (loss) to cash provided
by operating activities:
Depreciation and amortization 3,499,994 4,460,007
Write down of inventory, residual
values and other 1,398,304 -
Change in assets and liabilities
due to operating activities:
Increase in accounts
receivable (765,970) (1,402,190)
(Increase) decrease in
inventory (52,852) (124,675)
Increase in
accounts payable 293,428 1,368,853
Increase in accrued
liabilities 381,397 800,565
All other operating activities (588,352) (563,069)
----------- ----------
Total adjustments 4,165,949 4,539,491
----------- ----------
Net cash provided by operating
activities 2,324,664 4,852,401
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales, transfers and disposals of
inventory and equipment 1,707,501 3,461,165
Purchases of inventory for lease (3,412,690) (6,588,512)
Purchases of furniture and equipment (292,882) (52,535)
Decrease in notes receivable (83,820) 13,868
Additions to net investment in
sales-type and direct finance leases (3,886,437) (4,391,873)
Sales-type and direct financing
lease rentals received 2,318,192 1,560,715
----------- ----------
Net cash used in investing activities (3,650,136) (5,997,172)
----------- ----------
</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>
Nine Months Ended
--------------------------
Sep. 30, Sep. 30,
1998 1997
------------ -----------
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from nonrecourse and
recourse discounted lease rentals $ 8,087,379 $ 8,622,984
Payments on nonrecourse and recourse
discounted lease rentals (7,340,241) (7,131,476)
Proceeds from notes payable 2,771,781 726,860
Payments on notes payable (1,943,326) (1,438,200)
Proceeds from exercise of warrants - 269,000
Proceeds from sale of stock - 125,000
Purchase of treasury stock (66,455) (38,609)
Preferred stock dividends paid - (171,762)
----------- ----------
Net cash provided by (used in)
financing activities 1,509,138 963,797
----------- ----------
Net increase (decrease) in cash 183,666 (180,974)
Cash at beginning of period 208,639 412,340
----------- ----------
Cash at end of period $ 392,305 $ 231,366
=========== ==========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for:
Interest $ 1 631,552 $ 1,353,860
=========== ==========
Income taxes $ 35,279 $ -
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of LEC Technologies, Inc. (formerly, Leasing Edge
Corporation) and its wholly owned subsidiaries, collectively
referred to as the "Company". All material intercompany accounts
and transactions have been eliminated. Certain reclassifications
have been made to prior years' amounts to conform with current
period presentation.
Basis of Presentation
In the opinion of the Company, the accompanying unaudited
Consolidated Financial Statements contain all adjustments necessary
to present fairly the results of its operations for the three and
nine months ended September 30, 1998 and 1997 and its cash flows
for the nine months ended September 30, 1998. 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
for the three and nine months ended September 30, 1998 and cash
flows for the nine months ended September 30, 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 (all share
data has been adjusted to reflect the one-for-four reverse stock
split which became effective on September 15, 1998):
Three Months Ended
------------------------
Sep. 30, Sep. 30,
1998 1997
--------- ---------
Shares outstanding at
beginning of period 1,176,017 1,158,205
Effect of issuance of common
stock - 9,341
--------- ---------
Weighted average common
shares outstanding 1,176,017 1,167,546
========= =========
Net income $ 27,131 $ 128,018
Preferred stock dividends - (57,254)
---------- ---------
Net earnings available to
common shareholders $ 27,131 $ 70,764
========= =========
Earnings per common share $ 0.02 $ 0.06
========= =========
Weighted average common
shares outstanding 1,176,017 1,167,546
Effect of common shares
issuable upon exercise of
dilutive stock options 7,280 120,599
--------- ---------
Weighted average common shares
outstanding assuming dilution 1,183,297 1,288,144
========= =========
Earnings per common share
assuming dilution $ 0.02 $ 0.05
========== =========
Nine Months Ended
------------------------
Sep. 30, Sep. 30,
1998 1997
--------- ---------
Shares outstanding at
beginning of period 1,197,267 1,085,230
Effect of issuance of common
stock - 13,542
Exercise of "B" warrants - 63,801
Purchase of treasury stock (17,941) (3,759)
--------- ---------
Weighted average common
shares outstanding 1,179,326 1,158,813
========= =========
Net income (loss) $(1,841,285) $ 312,910
Preferred stock dividends - (171,762)
---------- ---------
Net earnings (loss) available to
common shareholders $(1,841,285) $ 141,148
========= =========
Earnings (loss) per common share $ (1.56) $ 0.12
========= =========
Weighted average common
shares outstanding 1,179,326 1,158,813
Effect of common shares
issuable upon exercise of
dilutive stock options - 107,746
--------- ---------
Weighted average common shares
outstanding assuming dilution 1,179,326 1,266,559
========= =========
Earnings (loss) per common share
assuming dilution $ (1.56) $ 0.11
========== =========
Note 3. Notes Payable and Revolving 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 $1.7 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
negotiated a term out of the remaining obligation, effective June
16, 1998, whereby the then outstanding principal and accrued
interest balance of approximately $420,000 would be amortized to
zero as of March 1, 1998. As of September 30, 1998, the amount
outstanding on the Merrill Note was $315,173. The Merrill Note is
guaranteed by the Company and is secured by the inventory and
accounts receivable of PMCPI.
In September 1998, two of the Company's wholly owned subsidiaries,
LEC Leasing, Inc. and Atlantic Digital International, Inc. (ADI),
entered into a joint credit facility with Finova Capital
Corporation in the aggregate amount of $3 million. The joint
credit facility consists of a $1.5 million term loan (the "Finova
Term Loan") applicable to LEC Leasing, Inc. and a $1.5 million
revolving credit facility (the "Finova Revolver") applicable to
ADI.
The Finova Term Loan requires monthly principal payments of $25,000
plus interest at prime plus 400 basis points from October 1, 1998
through September 1, 2001 at which time all remaining principal and
accrued interest is due. Proceeds from the Finova Term Loan were
used to repay the Company's outstanding indebtedness to Bank of
America National Trust & Savings Association in the amount of
$1,366,365 and for general corporate purposes. The Finova Term
Loan is secured by all of the personal property, tangible and
intangible, of LEC Leasing, Inc. and ADI and is guaranteed by the
Company. Restrictive covenants under the Finova Term Loan include
the maintenance of consolidated net worth (as defined) of at least
$3.5 million through December 31, 1998; $3.75 million from January
1, 1999 through June 30, 1999; $4.0 million from July 1, 1999
through December 31, 1999; and $4.5 million from January 1, 2000
through the expiration of the agreement; restrictions on incurring
additional indebtness and creating additional liens on LEC
Leasing's personal property; and limitations on unfinanced capital
expenditures (as defined).
Proceeds from the Finova Revolver were used to repay ADI's
revolving credit agreement with Excel Bank, N.A. The Finova
Revolver is secured by the is secured by all of the personal
property, both tangible and intangible, of ADI, LEC Leasing, Inc.
and is guaranteed by the Company. At September 30, 1998, amounts
otstanding under the Finova Revolver were $473,830 and the interest
rate was 10.25%.
In November 1995, the Company entered into a letter agreement with
Excel Bank N.A. (Excel") (formerly Union Chelsea National Bank)
whereby Excel agreed to make available to the Company a $250,000
line of credit (the "Equity Line") to be used to fund the Company's
equity investment in certain leases discounted by Excel (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 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 and an outstanding capital
lease obligation of approximately $800,000 and $90,002,
respectively, at September 30, 1998. At September 30, 1998 , the
Company had outstanding term notes and available credit under the
Equity Line of $1,518,226 and $91,772, respectively.
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 com-
prehensive income by their nature in a financial statement and
display the accumulated balance of the 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 December 15, 1997. The Company adopted SFAS 130 in the
quarter ended March 31, 1998. As of June 30, 1998, the Company had
no other comprehensive income.
In June of 1997, 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 units are as follows:
Leasing Services: Leasing, remarketing, financial
engineering, consulting and third-party maintenance and
systems integration services for midrange systems, tele-
communications 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 Technology, 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 an 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 the costs and risk of ownership of the equipment
to the lessee. Operating leases are those leases 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 record as leasing costs at lease
inception. Consequently, a significant portion of the gross profit
on the lease transaction 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 aggregate minimum lease
payments plus the estimated unguaranteed residual over the cost 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 os a lease, the Company
remarkets the equipment and records the proceeds from the sale (in
the event os a sale) or the present value of the lease rentals (in
the event of a sale-type lease as revenue and records the net book
value of the related equipment as a cost of sale or lease.
Results of Operations
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
Revenues
Total revenues from leasing operations increased 0.4% from
$10,419,709 for the nine months ended September 30, 1997 to
$10,465,919 for the nine months ended September 30, 1998, an
increase of $46,210. The increase in lease revenues is primarily
due to increases in finance income and sales-type lease revenues,
partially offset by decreases in revenue from the portfolio base of
operating leases and in direct sales of off-lease equipment.
Revenue from the portfolio base of operating leases decreased 21.3%
from $6,656,202 for the nine months ended September 30, 1997 to
$5,238,671 for the nine months ended September 30, 1998, a decrease
of $1,417,531. This decrease in operating lease revenue is due
primarily to a combination of an increase in the number of direct
finance leases written and the early termination of certain
operating leases purchased by a customer. Direct sales of off-
lease equipment decreased 5.3% from $1,341,312 for the nine months
ended September 30, 1997 to $1,269,554 for the nine months ended
September 30, 1998, a decrease of $71,758. This decrease in sales
of off-lease equipment is due primarily to a decrease in the volume
of lease terminations during the first nine months of 1998 as
compared to 1997. Finance income increased 81.7% from $313,218 for
the nine months ended September 30, 1997 to $569,161 for the nine
months ended September 30, 1998, an increase of $255,943. This
increase in finance income is the result of a change in the mix of
leases written from primarily operating leases to direct financing
leases. The accounting classification of a lease transaction is a
function of the pricing of the transaction combined with the
estimated end-of-lease residual value (i.e., if the estimated end-
of-lease residual value is less than ten percent of equipment cost,
the lease classification will most likely be direct financing).
Revenue from sales-type leases increased from $2,108,977 for the
nine months ended September 30, 1997 to $3,388,533 for the nine
months ended September 30, 1998, an increase of $1,279,556. This
increase in sales-type lease revenue was due to the renewal,
upgrade and consolidation of certain existing operating leases into
new leases which were accounted for as sales-type pursuant to SFAS
No. 13. As compared to other lease classifications, sales-type
leases result in a greater percentage of the related revenue and
expense from the transaction being recognized at lease inception.
Consequently, the revenue recognized subsequent to lease inception
consists only of the finance income element of the transaction.
Distribution sales, representing the activity of ADI, SCS and
PMCPI, increased 6.3% from $13,757,602 for the nine months ended
September 30, 1997 to $14,628,555 for the nine months ended
September 30, 1998, an increase of $870,953. The increase in
distribution sales activity is primarily attributable to an
increase in sales volumes at ADI and PMCPI of approximately $2.6
million and $.7 million, respectively, partially offset by
decreased sales volumes at SCS of approximately $2.5 million. The
sales decrease at SCS was primarily attributable to sales staff
turnover. As a result of the foregoing and certain other factors,
the Company installed a new management team and added additional
sales staff in May 1998. The sales increases at ADI and PMCPI were
both attributable to the expansion of each entities' sales staff
and, with respect to ADI, the addition of new product lines.
Costs and Expenses
Total costs from leasing operations increased 6.9% from $8,460,667
for the nine months ended September 30, 1997 to $9,040,737 for the
nine months ended September 30, 1998, an increase of $580,070. The
increase in total costs from leasing operations was primarily due
to the write-down to their net realizable values of certain off-
lease equipment of $1,301,704 and an increase in cost of sales
associated with the sales-type lease transactions referred to
previously of $262,748, partially offset by a decrease in
depreciation expense related to operating leases of $1,013,278.
The decrease in operating lease depreciation is related to a
combination of the early lease terminations and the change in the
mix of leases written as referred to previously.
Gross profit from leasing operations (total revenues from leasing
operations less total costs from leasing operations) decreased
27.3% from $1,959,042 for the nine months ended September 30, 1997
to $1,425,182 for the nine months ended September 30, 1998, a
decrease of $533,860. Gross margin (gross profit from leasing
operations as a percentage of total revenues from leasing
operations) decreased to 13.6% from 18.8% due to the foregoing.
Leasing costs associated with the portfolio base of operating
leases decreased 23.1% from $4,381,473 for the nine months ended
September 30, 1997 to $3,368,195 for the nine months ended
September 30, 1998, a decrease of $1,013,278. 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/upgrades mentioned previously. Gross
profit on operating leases decreased 17.8% from $2,274,729 for the
nine months ended September 30, 1997 to $1,870,476 for the nine
months ended September 30, 1998, a decrease of $404,253.
Direct sales costs (leasing costs with respect to the sale of
equipment off lease and leases with dollar buy-out options treated
as sales) increased 0.5% from $1,420,780 for the nine months ended
September 30, 1997 to $1,427,508 for the nine months ended
September 30, 1998, an increase of $6,728 and increased as a
percentage of related revenue to 112.4% from 105.9%. 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 of increased 6.2% from $11,594,780 for
the nine months ended September 30, 1997 to $12,316,235 for the
nine months ended September 30, 1998, an increase of $721,455.
Gross margin on distribution sales increased slightly to 15.8% in
1998 from 15.7% in 1997 due to an increase in comparative sales
volume of certain higher margin products.
Selling, general and administrative expenses increased 44.6% from
$3,381,252 for the nine months ended September 30, 1997 to
$4,889,196 for the nine months ended September 30, 1998, an
increase of $1,507,944. The increase in selling, general and
administrative expenses was due primarily to increased staffing
levels at ADI, SCS and LEC Technologies, Inc. (parent company), an
increase in reserve for bad debts of $156,600 and accrued severence
pay due the former President of SCS. Selling, general and
administrative expenses increased from 14.0% of total revenues in
1997 to 19.5% of total revenues in 1998.
Interest expense on non-lease related indebtedness increased
$251,115, or 56.7%. The increase is due to higher average debt
levels and interest rates.
The consolidated financial statements do not reflect a provision
for income taxes due to the utilization of net operating loss
carryforwards and changes in the related valuation allowance. At
September 30, 1998, the Company had unexpired net operating loss
carryforwards of approximately $5,600,000 which can be utilized to
offset future taxable income, if any.
Net Earnings
As a result of the foregoing, the Company recorded a net loss of
$1,841,285 for the nine months ended September 30, 1998 as compared
to net income of $312,910 for the nine months ended September 30,
1997.
Three Months Ended September 30, 1998 Compared to Three Months
Ended September 30, 1997
Revenues
Total revenues from leasing operations increased 13.2% from
$4,260,836 for the quarter ended September 30, 1997 to $4,821,572
for the quarter ended September 30, 1998, an increase of $560,736.
The increase in lease revenues is primarily due to increases in
finance income, direct sales of off-lease equipment and sales-type
lease revenues, partially offset by a decrease in operating lease
revenues.
Revenue from the portfolio base of operating leases decreased 18.5%
from $1,890,367 for the quarter ended September 30, 1997 to
$1,541,097 for the quarter ended September 30, 1998, a decrease of
$349,270. This decrease in operating lease revenue is due
primarily to a combination of an increase in the number of direct
finance leases written and the early termination of certain
operating leases purchased by a customer. Direct sales of off-
lease equipment increased 152.3% from $129,380 for the quarter
ended September 30, 1997 to $326,461 for the quarter ended
September 30, 1998, an increase of $197,081. This increase in
sales of off-lease equipment is due primarily to an increase in the
volume of lease terminations during the third quarter of 1998 as
compared to the third quarter of 1997. Finance income increased
42.3% from $138,505 for the quarter ended September 30, 1997 to
$197,052 for the quarter ended September 30, 1998, an increase of
$58,547. This increase in finance income is the result of a change
in the mix of leases written from primarily operating leases to
direct financing leases. The accounting classification of a lease
transaction is a function of the pricing of the transaction
combined with the estimated end-of-lease residual value (i.e., if
the estimated end-of-lease residual value is less than ten percent
of equipment cost, the lease classification will most likely be
direct financing). Revenue from sales-type leases increased from
$2,102,584 for the quarter ended September 30, 1997 to $2,756,962
for the quarter ended September 30, 1998, an increase of $654,378.
This increase in sales-type lease revenue was due to the renewal,
upgrade and consolidation of certain existing operating leases into
new leases which were accounted for as sales-type pursuant to SFAS
No. 13. As compared to other lease classifications, sales-type
leases result in a greater percentage of the related revenue and
expense from the transaction being recognized at lease inception.
Consequently, the revenue recognized subsequent to lease inception
consists only of the finance income element of the transaction.
Distribution sales increased 20.1% from $4,633,987 for the quarter
ended September 30, 1997 to $5,563,225 for the quarter ended
September 30, 1998, an increase of $929,238. The increase in
distribution sales activity is attributable to the previously
discussed increased sales volumes at ADI and PMCPI partially offset
by decreased sales volumes at SCS. The sales decrease at SCS was
primarily attributable to sales staff turnover. As a result of the
foregoing and certain other factors, the Company installed a new
management team and added additional sales staff in May 1998. The
sales increases at ADI and PMCPI were both attributable to the
expansion of each entities' sales staff and, with respect to ADI,
the addition of new product lines.
Costs and Expenses
Total costs from leasing operations decreased 3.9% from $3,562,342
for the quarter ended September 30, 1997 to $3,423,349 for the
quarter ended September 30, 1998, a decrease of $138,993. The
decrease in total costs from leasing operations was primarily due
to a decrease in cost of sales associated with the sales-type lease
transactions referred to previously of $207,555 and a decrease in
depreciation expense related to operating leases of $246,540,
partially offset by the write-down to their net realizable values
of certain off-lease equipment of $192,410 and an increase in costs
of sales associated with the sale of off-lease equipment of
$118,243. The decrease in operating lease depreciation is related
to a combination of the early lease terminations and the change in
the mix of leases written as referred to previously.
Gross profit from leasing operations (total revenues from leasing
operations less total costs from leasing operations) increased
100.2% from $698,494 for the quarter ended September 30, 1997 to
$1,398,223 for the quarter ended September 30, 1998, an increase of
$699,729. Gross margin (gross profit from leasing operations as a
percentage of total revenues from leasing operations) increased to
a 29.0% from 16.4% due to the foregoing.
Leasing costs associated with the portfolio base of operating
leases decreased 18.0% from $1,366,019 for the quarter ended
September 30, 1997 to $1,119,479 for the quarter ended September
30, 1998, a decrease of $246,540. The decrease in costs from this
segment of the Company's lease portfolio is due primarily to the
lease renewal/upgrades mentioned previously and a change in the mix
of leases written from predominately operating leases to direct
finance leases. Gross profit on operating leases decreased 19.6%
from $524,348 for the quarter ended September 30, 1997 to $421,618
for the quarter ended September 30, 1998, a decrease of $102,730.
Direct sales costs increased 63.4% from $186,387 for the quarter
ended September 30, 1997 to $304,630 for the quarter ended
September 30, 1998, an increase of $118,243 but decreased as a
percentage of related revenue to 93.3% from 144.1%. The decrease
in costs as a percentage of revenue is due to residual value
realization more closely matching stated values in 1998 as compared
to 1997.
Distribution cost of sales of increased 22.1% from $3,906,099 for
the quarter ended September 30, 1997 to $4,770,348 for the quarter
ended September 30, 1998, an increase of $864,249. Gross margin on
distribution sales decreased to 14.3% in 1998 from 15.7% in 1997
due to a decrease in the comparative sales volume of certain higher
margin products.
Selling, general and administrative expenses increased 56.3% from
$1,146,140 for the quarter ended September 30, 1997 to $1,791,053
for the quarter ended September 30, 1998, an increase of $644,913.
The increase in selling, general and administrative expenses was
due primarily to increased staffing levels at ADI, SCS and LEC
Technologies, Inc. (parent company) and an increase in reserve for
bad debts of $216,073. Selling, general and administrative
expenses increased from 12.9% of total revenues in 1997 to 17.2% of
total revenues in 1998.
Interest expense on non-lease related indebtedness increased
$213,388, or 132.8%. The increase is due to higher average debt
levels and interest rates in the current quarter as compared to the
year-ago quarter.
Net Earnings
As a result of the foregoing, the Company recorded net income of
$27,131 for the quarter ended September 30, 1998 as compared to net
income of $128,018 for the quarter ended September 30, 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 $1.7 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
negotiated a term out of the remaining obligation, effective June
16, 1998, whereby the then outstanding principal and accrued
interest balance of approximately $420,000 would be amortized to
zero as of March 1, 1998. As of September 30, 1998, the amount
outstanding on the Merrill Note was $315,173. The Merrill Note is
guaranteed by the Company and is secured by the inventory and
accounts receivable of PMCPI.
In September 1998, two of the Company's wholly owned subsidiaries,
LEC Leasing, Inc. and Atlantic Digital International, Inc. (ADI),
entered into a joint credit facility with Finova Capital
Corporation in the aggregate amount of $3 million. The joint
credit facility consists of a $1.5 million term loan (the "Finova
Term Loan") applicable to LEC Leasing, Inc. and a $1.5 million
revolving credit facility (the "Finova Revolver") applicable to
ADI.
The Finova Term Loan requires monthly principal payments of $25,000
plus interest at prime plus 400 basis points from October 1, 1998
through September 1, 2001 at which time all remaining principal and
accrued interest is due. Proceeds from the Finova Term Loan were
used to repay the Company's outstanding indebtedness to Bank of
America National Trust & Savings Association in the amount of
$1,366,365 and for general corporate purposes. The Finova Term
Loan is secured by all of the personal property, tangible and
intangible, of LEC Leasing, Inc. and ADI and is guaranteed by the
Company. Restrictive covenants under the Finova Term Loan include
the maintenance of consolidated net worth (as defined) of at least
$3.5 million through December 31, 1998; $3.75 million from January
1, 1999 through June 30, 1999; $4.0 million from July 1, 1999
through December 31, 1999; and $4.5 million from January 1, 2000
through the expiration of the agreement; restrictions on incurring
additional indebtness and creating additional liens on LEC
Leasing's personal property; and limitations on unfinanced capital
expenditures (as defined).
Proceeds from the Finova Revolver were used to repay ADI's
revolving credit agreement with Excel Bank, N.A. The Finova
Revolver is secured by the is secured by all of the personal
property, both tangible and intangible, of ADI, LEC Leasing, Inc.
and is guaranteed by the Company. At September 30, 1998, amounts
otstanding under the Finova Revolver were $473,830 and the interest
rate was 10.25%.
In November 1995, the Company entered into a letter agreement with
Excel Bank N.A. (Excel") (formerly Union Chelsea National Bank)
whereby Excel agreed to make available to the Company a $250,000
line of credit (the "Equity Line") to be used to fund the Company's
equity investment in certain leases discounted by Excel (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 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 and an outstanding capital
lease obligation of approximately $800,000 and $90,002,
respectively, at September 30, 1998. At September 30, 1998 , the
Company had outstanding term notes and available credit under the
Equity Line of $1,518,226 and $91,772, respectively.
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 indebtness 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 September 30,
1998, the Company had approximately $482,307 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 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
lease equipment and the Company may not realize any portion of the
residual value. If the residual value in any equipment cannot be
realized after the initial lease term, the recorded investment in
the equipment must be written down, resulting in lower cash flow
and reduced earnings. There can be no assurance that the Company
will not experience material residual value or inventory write-
downs in the future.
The Company intends to continue to retain residual ownership of all
the equipment it leases. As of September 30, 1998 the Company had
a total net investment in lease transactions of $21.5 million
compared to $23.0 million as of December 31, 1997. The estimated
residual value of the Company's portfolio of leases expiring
between October 1, 1998 and December 31, 2003 totals $6,672,301,
although there can be no assurance that the Company will be able to
realize such residual value in the future. As of September 30,
1998, 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>
1998 $ 373,301
1999 1,315,800
2000 3,178,700
2001 1,723,500
2002 70,000
2003 11,000
----------
Total $ 6,672,301
==========
</TABLE>
Leased equipment expenditures of $7,229,127 for the nine months
ended September 30, 1998 were financed through the discounting of
$8,087,379 of noncancelable lease rentals to various financial
institutions.
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.
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 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 December 15, 1997. The Company adopted SFAS 130 in the
quarter ended March 31, 1998. As of September 30, 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 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 and method of the Company's realization of its recorded
residual values, new product announcements, continued growth of the
semiconductor industry, trend of movement to client/server
environment, interest rate fluctuations, changes in federal income
tax laws and regulations, competition, unanticipated expenses and
delays in the integration of newly-acquired businesses, industry
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 customers demands and/or requirements, new
product announcements, price changes, changes in delivery dates,
changes in maintenance policies and the pricing policies of
equipment manufacturers, and price competition from other lessors.
The Company undertakes no obligation to publicly update or revise
any forward-looking statements whether as a result of new
information, future events or otherwise.
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statement re Computation of Per Share
Earnings.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
Report on Form 8-K dated 9-14-98.
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
LEC Technologies, Inc.
(Registrant)
Date: November 17, 1998 /s/Michael F. Daniels
Michael F. Daniels, President
and Chief Executive Officer
(Principal Executive Officer)
Date: November 17, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 392,305
<SECURITIES> 0
<RECEIVABLES> 3,511,607
<ALLOWANCES> 373,478
<INVENTORY> 2,345,133
<CURRENT-ASSETS> 0<F1>
<PP&E> 967,061
<DEPRECIATION> 387,587
<TOTAL-ASSETS> 29,341,927
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 3,957,219
0
2,290
<COMMON> 47,041
<OTHER-SE> 3,615,049
<TOTAL-LIABILITY-AND-EQUITY> 29,341,927
<SALES> 15,898,109
<TOTAL-REVENUES> 25,098,966
<CGS> 13,743,743
<TOTAL-COSTS> 21,356,972
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 216,073
<INTEREST-EXPENSE> 694,083
<INCOME-PRETAX> (1,841,285)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,841,285)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,841,285)
<EPS-PRIMARY> (1.56)
<EPS-DILUTED> (1.56)
<FN>
<F1>UNCLASSIFIED BALANCE SHEET
</FN>
</TABLE>
