U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
X Annual report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1997.
Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period to .
Commission File No. 0-18303
LEC TECHNOLOGIES, INC. (formerly known as Leasing Edge Corporation)
(Name of small business issuer in its charter)
Delaware No. 11-2990598
(State or other jurisdiction of (I.R.S. Employer Identifi-
incorporation or organization) cation No.)
6540 South Pecos Road, Suite 103, Las Vegas NV 89120
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (702) 454-7900
(Including area code)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, Par Value $0.01 Per Share
Series A Convertible Preferred Stock
Common Stock Purchase Warrants
Class C Common Stock Purchase Warrants
Class D Common Stock Purchase Warrants
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No .
Check if there is no disclosure in this form of delinquent filers in
response to Item 405 of Regulation S-B, and if no disclosure will be
contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-KSB or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $30,714,624
State the aggregate market value of the voting stock held by non-
affilates computed by reference to the price at which the stock was
sold, or the average bid and asked prices of such stock, as of a
specified date within the past 60 days: As of February 27, 1998, the
the approximate market value of the common stock (based upon the NASDAQ
closing price of $0.75 of stated shares on that date) held by non-
affiliates was $3,225,614.
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of February 27,
1998, the issuer had 4,704,069 shares of common stock, par value $0.01
per share, outstanding.
Documents incorporated by reference: None.
Transitional Small Business Disclosure Format: Yes[ ] No[X]
LEC TECHNOLOGIES INC. AND SUBSIDIARIES
1997 ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. DESCRIPTION OF BUSINESS 2
Item 2. DESCRIPTION OF PROPERTY 8
Item 3. LEGAL PROCEEDINGS 8
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 9
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 9
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION 10
Item 7. CONSOLIDATED FINANCIAL STATEMENTS 15
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 42
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT 43
Item 10. EXECUTIVE COMPENSATION 44
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 45
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. EXHIBITS AND REPORTS ON FORM 8-K 46
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PART I
ITEM 1: DESCRIPTION OF BUSINESS
General
LEC Technologies, Inc. and subsidiaries (collectively, the "Company" or
"LEC") is a technology services company, providing solutions that help
organizations reduce technology cost and risk, primarily through the
leasing, distribution and remarketing of high technology equipment.
Such equipment generally consists of midrange computer systems,
telecommunications systems, system peripherals (terminals, printers,
communications controllers, etc.) and point-of-sale systems.
As an independent organization, the Company provides customers with
technical, financial and product alternatives, irrespective of hardware
platform or manufacturer. In addition to working with its customers to
develop strategies governing when to acquire equipment, upgrade existing
equipment and order new equipment to take advantage of current
technology, LEC also acts as an outlet for the equipment being
displaced.
LEC's business is diversified by customer, customer type, equipment
type, equipment manufacturer, and geographic location of its customers
and subsidiaries. The Company's customers include "Fortune 1000"
corporations or companies of similar size as well as smaller
corporations. A significant portion of the Company's business is with
long-term, repeat customers. Three customers of the Company, Tiffany &
Co., Bed, Bath & Beyond and The Hertz Corporation, respectively,
accounted for approximately 15.0%, 9.2%, 3.7%, and 25.0%, 12.8% and 7.4%
of consolidated revenues for the years ended December 31, 1997 and 1996.
However, the Company does not believe its businesses are dependent on
any single customer or on any single source for the purchasing, selling
or leasing of equipment.
The Company's services are organized into three groups of related
businesses, and are provided generally through separate business units,
although there is a significant amount of interrelated activities. The
three business groups are as follows:
Leasing Services: Leasing, remarketing, financial engineering,
consulting and third-party maintenance and systems integration
services for midrange systems, telecommunications equipment, point-
of-sale systems and system peripherals. The Company conducts its
leasing services business under the trade name Leasing Edge
Corporation.
Distribution Services: Sale of terminals, printers, communications
controllers, supplies, technical consulting and third-party
maintenance services. Business units comprising distribution
services are Superior Computer Systems, Inc. ("SCS") and Pacific
Mountain Computer Products, Inc. ("PMCPI"), wholly-owned
subsidiaries of LEC Technologies, Inc.
Remarketing Services: Remarketing of previously leased equipment,
displaced equipment, and used equipment purchased from other
lessors or brokers. This unit also has consignment relationships
with certain customers to assist such organizations in the sale of
their used equipment. Business units comprising remarketing
services include Leasing Edge Corporation, SCS, PMCPI and Atlantic
Digital International ("ADI"), a 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.
The Company's leasing operations are conducted primarily through its
principal office in Las Vegas, Nevada and its distribution and
remarketing operations are conducted primarily through its subsidiaries'
offices located in Minneapolis, Minnesota, Woodland Hills, California
and Atlanta, Georgia.
Each business unit is directed by its own management team and has its
own sales and operations support personnel. Each management team
reports directly to the Office of the President, which is responsible
for overall corporate control and coordination, as well as strategic
planning. Coordination of the business units is also accomplished
through shared services, such as legal, risk management and accounting.
The business units maintain their own direct marketing force to manage
their customer base and to market their own as well as other units'
services. In its business operations, the Company attempts to cross-
sell services where and when appropriate.
The Company was founded in 1980 under the name TJ Computer Services,
Inc. ("TJCS"). In 1989, all of the outstanding common stock of TJCS was
acquired by Harrison Development, Inc., an inactive public corporation
organized in Colorado, which then changed its name to TJ Systems
Corporation. In October 1991, the Company reincorporated in the State
of Delaware and in June 1995 changed its name to Leasing Edge
Corporation. In March 1997, the Company's shareholders approved a
change in the Company's name to LEC Technologies, Inc. to more
accurately reflect the evolving nature of the Company's business. The
executive offices of the Company are located at 6540 S. Pecos Road,
Suite 103, Las Vegas, Nevada, 89120, and its telephone number is (702)
454-7900.
Forward-Looking Statements
Statements about the Company's expectations, including future revenues,
earnings, its ability to compete effectively and to maintain market
share, to adapt to changes in its customers' technology requirements,
and all other statements in this Report on Form 10-KSB, including
Management's Discussion and Analysis or Plan of Operation and Note 11 of
Notes to Consolidated Financial Statements "Management's Plans", and
other Company communications other than historical facts, are "forward-
looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Act of 1934, and the
Company intends that such forward-looking statements be subject to the
safe harbors created thereby. Since these statements involve risks and
uncertainties and are subject to change at any time, the Company's
actual results could differ materially from expected results. Reference
is made to "Safe Harbor Statement under the Private Securities
Litigation Reform Act of 1995" in Item 6 of this Report on Form 10-KSB.
Leasing Services
Management estimates that the world-wide market for high technology
equipment approximates $400 billion annually and that approximately ten
percent represents leasing activities. The computer equipment leasing
industry consists of many products and services loosely divided into
several major submarkets. These submarkets include mainframe and
midrange computer equipment, microcomputer sales and network design,
local area networks, point-of-sale equipment, disaster recovery services
and other engineering and technical support services. The Company
believes that the size of the computer equipment leasing market reflects
the rapid technological improvements in and the development of new
equipment as well as the advantages that leasing offers over equipment
purchasing, including off-balance sheet financing, lower monthly
payments and cash requirements, protection against technological
obsolescence and ease of disposal of equipment at the end of the lease
term.
Historically, the industry was dominated by the manufacturers of
mainframe computer equipment and their captive or related leasing
companies. However, the introduction of new and more powerful
microcomputers offering increased capability at reduced prices has led
to an increase in the demand for midrange and microcomputer hardware,
software, accessories and related services. Business users are
employing, at an increasing rate, midrange and microcomputer networks to
perform applications previously requiring a mainframe computer. This
increase in technological capability and the relatively high cost of
mainframe systems has resulted in a fundamental shift in the demand for
information systems and services, creating new opportunities for more
efficient, flexible and competitive lessors and distributors of midrange
and microcomputers and related equipment.
The Company's structured lease transactions provide customers with a
full range of new and used data processing equipment, including midrange
central processing units, peripherals, point-of-sale systems and
telecommunications equipment produced by major manufacturers. By
emphasizing a full range of products and manufacturers and by
maintaining a balanced client base, the Company maximizes its leasing
opportunities while providing stability to its lease portfolio. Through
its leasing transactions, the Company serves as an intermediary between
end users of high technology equipment and sources of financing for
equipment purchases.
The Company purchases new equipment directly from the manufacturer and
obtains used equipment from its customer base and from the nationwide
secondary market for used data processing and telecommunications
equipment. Management's experience in the secondary market, coupled
with the Company's portfolio of equipment under lease, enables the
Company to tailor systems to customer's specific needs by combining new
and used equipment configurations at competitive prices. Similarly, the
Company is often able to facilitate new lease transactions by either
buying, remarketing or trading in a prospective customer's existing
equipment.
A significant amount of the equipment leased by the Company consists of
equipment manufactured by IBM, including computer systems, such as
midrange central processing units, and computer peripherals, such as
disk and tape drives, control units, printers, and work stations. The
Company considers the leasing of IBM equipment to be generally
advantageous because of the large national IBM customer base and
equipment aftermarket, IBM's policy of supporting its users with
software and maintenance services, and IBM's reputation in the computer
equipment marketplace.
In a typical leasing transaction, the Company cultivates a customer
relationship, develops an understanding of the customer's requirements
and then delivers what the customer needs in the form of an advantageous
lease financing structure. The terms and conditions of the lease are
negotiated and, if accepted by the customer, a master lease agreement is
executed and the equipment to be leased is secured either from a
manufacturer, reseller or from the Company's inventory. The Company
arranges nonrecourse financing secured by the equipment by selling the
future lease rentals on a discounted basis. The discount rate reflects
the credit standing of the lessee, the length of the lease and the total
amount financed. The Company typically receives between 85% and 95% of
its equipment cost through nonrecourse financing. The difference
between the cost of the equipment and the amount received through the
nonrecourse financing is referred to as the Company's "equity position"
in the equipment. The Company usually finances its equity position in
a lease through internally generated funds and recourse bank borrowings.
The Company retains ownership of the equipment during the term of the
lease. Upon expiration of the lease term, the Company seeks to maximize
the realization of the residual value of the leased equipment through
its remarketing activities on either a wholesale or retail basis.
Equipment lease terms generally range from monthly to five years, with
data processing and telecommunications equipment leases typically
spanning two to four years. Additions to the lease portfolio frequently
result from a competitive bidding process. Substantially all leases are
noncancelable, require the lessee to protect the equipment, at their
cost, with the manufacturer's maintenance contract and place the risk
of loss or damage to the equipment on the lessee.
The Company believes it provides its clients with superior customer
service and creative solutions for their data processing,
telecommunications and technical support needs. The Company develops
close partnership relationships with its customers; by listening
carefully, the Company's management and employees are better able to
understand the Company's customers' complex data processing requirements
and deliver quick response, high impact and competitively priced
solutions appropriate for each environment and circumstance. Close
client relationships and the expertise and experience of management
allow the Company to assist customers in their leasing decisions
regarding data processing or other technological equipment. The Company
frequently participates, early on, in a customer's decision-making
process regarding the type of equipment to acquire to meet its needs and
also helps in developing a customized leasing structure. The Company
believes that this strategy leads to customer satisfaction, encourages
a loyal customer base and contributes to repeat business.
The Company offers to customers a full range of new and used computer
and telecommunications equipment manufactured by a variety of major
manufacturers, including IBM, Unisys, AT&T, Sun Microsystems, DEC and
Tandem. Over the last few years, the Company has strategically
diversified its lease portfolio to include equipment such as computer
storage hardware, point-of-sale and telecommunications equipment; the
Company believes these to be less susceptible to rapid technological
obsolescence than large computer central processing units. The Company
further believes that an expanded equipment base mitigates the risks of
obsolescence associated with a specific type of equipment, as well as
reducing the Company's reliance on any one particular manufacturer.
The Company's leasing customers are generally creditworthy corporations
and other organizations that have significant data processing and tele-
communication needs. These financial profiles allow the Company to
structure lower rate, long-term nonrecourse financing transactions with
various financial institutions on competitive terms. Moreover, non-
recourse financing limits the Company's financial exposure on lease
transactions, thereby further enabling the Company to expand its lease
portfolio and customer base.
Distribution Services
Management estimates that the distribution market for the products
offered by its distribution subsidiaries, SCS and PMCPI, is
approximately $225 million annually. The principal products offered by
SCS and PMCPI are midrange peripheral equipment, including TWINAX and
COAX terminals, ASCII terminals, desktop and network printers, emulation
boards, remote controllers and network adapters. In addition to
equipment sales, the Company's distribution subsidiaries provide
customers with technical consulting and third-party maintenance
services.
Approximately 70 percent of the distribution subsidiaries' revenues
related to new equipment are derived from sales to resellers and
approximately 30 percent represents direct sales to end users. Both SCS
and PMCPI secure their end-user customers through cold calls, referrals,
trade journal advertising and the cross-selling of the Company's leasing
customers. Reseller customers are primarily generated through a nation-
wide on-line system and direct advertising via facsimile machine.
Both SCS and PMCPI are IBM Business Partners and Authorized
Distributors; PMCPI also has contractual relationships with Lexmark
Printer Company, IDEAssociates, Perle Systems, DataSouth Corporation,
Hewlett Packard Corporation and BOS. SCS and PMCPI are highly dependent
on their suppliers, the manufacturers. Most manufacturers extend terms
of net 30 days or provide an inventory line of credit for purposes of
ordering equipment. Any event of default on any credit facility offered
by a manufacturer could materially and adversely affect the Company's
ability to acquire equipment for resale.
In May of 1997, SCS and IBM Printing Systems Company ("PSC") entered
into a letter agreement whereby SCS agreed to manage PSC's Try-Buy
Program (the "Try-Buy Program"). The Try-Buy Program allows qualified
prospective purchasers of certain PSC printers to test such printers for
a sixty-day trial period. At the end of such period, the user may
return the printer(s) to SCS or purchase the trial unit(s). In the
event of a return, SCS may sell the unit "as is" to a different customer
or refurbish the unit for future use under the Try-Buy Program. The
Company believes that PSC's selection of SCS as the Try-Buy Program
manager demonstrates PSC's confidence in SCS' ability to deliver PSC's
products on a timely basis as well as SCS' technical expertise in
addressing customer inquiries during the trial period.
Remarketing Services
The Company's remarketing services consist of the remarketing of
previously leased equipment, displaced equipment, and used equipment
purchased from other lessors and brokers. Each of the Company's
business units (Leasing Edge Corporation, SCS, PMCPI and ADI) engage in
remarketing activities primarily related to their respective businesses,
although specific sales often result from coordinated efforts. In
addition to the remarketing of IBM peripheral equipment, SCS also has
consignment relationships with certain customers to assist such
organizations in the disposal of their displaced equipment. ADI cur-
rently specializes in the acquisition and remarketing of Digital
Equipment Corporation equipment on both a domestic and an international
basis. The Company intends to expand ADI's product offering in 1998 to
include equipment manufactured by Sun Microsystems, IBM and Hewlett
Packard.
Competition
The Company competes as a lessor and as a dealer of new and used
computer and selected other high technology equipment with different
firms, many of which are larger and better known than the Company and
which possess substantially greater financial resources than that of the
Company. While its competitive methodologies will vary by business
unit, in general, the Company competes mainly on the basis of terms
offered in its transactions, its quick response and reliability in
meeting its commitments, its manufacturers' independence, its long-term
relationships with its customers and its ability to develop and offer
alternative solutions and options to high technology equipment users.
The Company's competition with respect to leasing services includes
equipment manufacturers such as IBM, AT&T, DEC and Amdahl, other
equipment dealers, brokers and leasing companies (including captive or
related leasing companies of IBM and AT&T) as well as financial
institutions, including branches or divisions of national, regional and
local commercial banks and other commercial lending firms. The Company
also competes with other small, independent leasing companies as well as
individuals and firms that act as leasing brokers and other
institutions. Primarily as a result of rapid technological changes,
competition has increased in the leasing industry and the number of
companies offering competitive services, such as technical consulting
and other high technology equipment leasing, has increased. Competitive
alliances have also impacted the leasing industry. Management believes
that the level of competition will continue to increase in the future.
SCS and PMCPI compete with other authorized distributors of midrange
peripherals as well as equipment manufacturers. In the IBM terminal
distribution market, SCS and PMCPI are two of the six authorized IBM
distributors. All authorized distributors receive identical discounts
for their products, so the Company and its competitors have equal
opportunity to sell such products. Many times, availability of product
in inventory is a determining factor in a sale. SCS and PMCPI compete
primarily on the basis of product knowledge, price, availability and
their long standing customer relationships.
ADI competes with numerous other used equipment brokers and dealers as
well as with the remarketing activities of lessors. ADI competes
primarily on the basis of price and relationship selling.
Other
The Company does not own any patents, trademarks, licenses or franchises
which would be considered significant to the Company's business.
The Company's business is not seasonal, however, quarter-to-quarter
results from operations can vary significantly.
The amount of backlog orders is not significant to an understanding of
the Company's business.
The Company is not required to carry significant amounts of inventory
either for delivery requirements or to assure continuous availability of
equipment related to its leasing operations. With respect to the
Company's distribution operations, product availability is often a
significant factor in generating sales.
At December 31, 1997, the Company had 48 full-time employees. None of
the Company's employees is represented by a union. The Company believes
that relations with its employees are good.
ITEM 2: DESCRIPTION OF PROPERTY
The Company leases approximately 5,250, 10,000, 7,500 and 1,100 square
feet of office and warehouse space in Las Vegas, NV, Minneapolis, MN,
Woodland Hills, CA and Atlanta, GA, respectively, under lease agreements
expiring individually through 2002. Each respective lease agreement
requires the Company to pay all costs of operations, including real
property taxes, in addition to the basic rent. All of the Company's
leased properties are in good condition.
ITEM 3: LEGAL PROCEEDINGS
There are no pending legal proceedings which require disclosure pursuant
to Item 103 of Regulation S-B.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the Nasdaq SmallCap tier of The
Nasdaq Stock Market under the symbol LECE. The following table sets
forth the high and low sales price quotations of the Company's common
stock for the periods indicated.
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1997 1996
Fiscal Quarter HIGH LOW HIGH LOW
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First Quarter $1.25 $0.88 $2.94 $1.56
Second Quarter $1.50 $0.63 $2.75 $1.38
Third Quarter $1.44 $0.75 $2.38 $1.69
Fourth Quarter $1.19 $0.59 $2.00 $1.00
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As of February 27, 1998 the Company had approximately 425 shareholders
of record.
The Company has not previously paid cash dividends on its common stock
and does not intend to pay such dividends for the foreseeable future.
The Company's Second Loan Modification Agreement, efective february 5,
1998, (the "Second Loan Modification Agreement") with Bank of America
National Trust and Savings Association ("Bank of America") also
restricts the payment of such dividends.
In September of 1997, the Company sold 156,250 shares of common stock at
a price of $0.80 per share to an accredited investor. The sale of such
securities was exempt from registration under the Securities Act of
1933, as amended, pursuant to Section 4(2) thereof and Regulation D
promulgated thereunder.
American Stock Transfer & Trust Company, 40 Wall Street, New York, NY
10022 is the Company's registrar and transfer agent with respect to its
common stock and preferred stock and registrar, transfer agent and
warrant agent with respect to the Company's warrants.
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
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.
For a description of the Company's other accounting practices, see Note
1 of Notes to Consolidated Financial Statements. The following analysis
of the Company's financial condition and operating results should be
read in conjunction with the accompanying consolidated financial
statements including the notes thereto.
Results of Operations
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues
Total revenues from leasing operations decreased 7.7% from $14,178,580
for the year ended December 31, 1996 to $13,085,616 for the year ended
December 31, 1997, a decrease of $1,092,964. The decrease in revenues
is primarily due to the 1996 renewal, upgrade and consolidation of
several existing operating leases into a smaller number of new leases,
three of which were accounted for as sales-type leases pursuant to SFAS
No. 13 (see Note 2 of Notes to Consolidated Financial Statements for a
description of the Company's lease accounting policies). As compared to
other lease transactions, sales-type leases result in a greater
percentage of the related revenue 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. During 1997, two similar renewal/upgrade
transactions were consumated, which resulted in the Company recording
revenue from sales-type leases of approximately $2.1 million.
Management anticipates that total revenues from leasing operations in
1998 when compared to 1997 will reflect a similar decrease. The Company
does not expect to regularly enter into transactions of this size in the
future.
Revenue from the portfolio base of operating leases decreased 11.1% from
$9,694,905 for the year ended December 31, 1996 to $8,618,861 for the
year ended December 31, 1997, a decrease of $1,076,044. The decrease in
operating lease revenue is due primarily to a change in the mix of
leases written, principally as a result of the lease renewals referred
to previously. The Company anticipates that the majority of its 1998
lease additions will be classified as either direct financing leases or
as operating leases.
Distribution sales, representing the activity of ADI, SCS and PMCPI,
increased 150.2% from $7,038,154 for the year ended December 31, 1996 to
$17,612,586 for the year ended December 31, 1997, an increase of
$10,574,432. The increase in distribution sales was due primarily to
the acquisition of SCS on November 1, 1996 and the formation of ADI in
January of 1997. SCS' revenues for the two-month period ended December
31, 1996 were $1,478,792 as compared to revenues of $9,416,880 for the
twelve months ended December 31, 1997. SCS and PMCPI are distributors
of computer peripherals and data communications equipment.
Costs and Expenses
Total costs from leasing operations decreased 16.6% from $12,631,385 for
the year ended December 31, 1996 to $10,535,365 for the year ended
December 31, 1997, a decrease of $2,096,020. The decrease in total
costs from leasing operations was due primarily to a 1996 fourth quarter
charge of $889,000 to reduce the carrying amount of certain off-lease
equipment and the estimated unguaranteed residual values of equipment on
lease (see Note 16 of Notes to Consolidated Financial Statements) due to
changed market conditions together with a decrease in depreciation
expense on operating leases of $1,239,953. The decrease in operating
lease depreciation was consistent with the decrease in operating lease
revenue. Gross profit from leasing operations (total revenues from
leasing operations less total costs from leasing operations) increased
64.8% from $1,547,195 for the year ended December 31, 1996 to $2,550,251
for the year ended December 31, 1997, an increase of $1,003,056. Gross
margin (gross profit from leasing operations as a percentage of total
revenues from leasing operations) increased to 19.5% from 10.9% due to
the foregoing.
Leasing costs associated with the portfolio base of operating leases
decreased 18.0% from $6,881,020 for the year ended December 31, 1996 to
$5,641,067 for the year ended December 31, 1997, a decrease of
$1,239,953. The decrease in costs from this segment of the Company's
lease portfolio is due primarily to the lease renewals/upgrades
mentioned above which were accounted for as sales-type leases. Gross
profit on operating leases increased 5.8% from $2,813,885 for the year
ended December 31, 1996 to $2,977,794 for the year ended December 31,
1997, an increase of $163,909. Gross margin from operating leases
increased from 29.0% for the 1996 period to 34.5% for the 1997 period as
a result of the foregoing.
Direct sales costs (leasing costs with respect to the sale of off-lease
equipment and leases with dollar buyout options treated as sales)
increased 47.6% from $1,224,406 for the year ended December 31, 1996 to
$1,806,939 for the year ended December 31, 1997, an increase of
$582,533. 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 decreased as a percentage of the related revenue to 96.0%
from 107.6%. The decrease in costs as a percentage of revenue is due to
residual value realization more closely matching stated values in 1997
as compared to 1996.
Distribution cost of sales increased 137.2% from $6,190,582 for the year
ended December 31, 1996 to $14,686,695 for the year ended December 31,
1997, an increase of $8,496,113. 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 acquisition of SCS
in November of 1996 and the formation of ADI in January of 1997. Gross
margin on distribution sales increased to 16.6% for the year ended
December 31, 1997 from 12.0% for the year ended December 31, 1996 due
primarily to an increase in the contribution margin generated from sales
of used equipment and sales of new equipment directly to end users. In
both instances, the Company is able to realize higher margins than those
realized through sales to other resellers.
Selling, general and administrative expenses increased 33.2% from
$3,416,093 for the year ended December 31, 1996 to $4,549,586 for the
year ended December 31, 1997, an increase of $1,133,493. The increase
in selling, general and administrative expenses was due primarily to the
acquisition of SCS and the formation of ADI.
Interest expense on non-lease related indebtedness increased 54.3% from
$397,656 for the year ended December 31, 1996 to $613,447 for the year
ended December 31, 1997, an increase of $215,791. 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 from approximately 10.5% in 1996 to
approximately 12.5% in 1997 (see Liquidity and Capital Resources below
and Note 7 of Notes to Consolidated Financial Statements).
Net Income
As a result of the foregoing, the Company recorded net income of
$329,531 for the year ended December 31, 1997 as compared to a net loss
of $(1,398,316) for the year ended December 31, 1996.
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 March 27, 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, the financial condition and,
consequently, the operations of the Company could be materially and
adversely affected.
The Second Loan Modification Agreement governs 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, a term note and an outstanding capital
lease obligation of approximately $258,030, $160,838 and $122,982,
respectively, at December 31, 1997. At December 31, 1997, the Company
had outstanding term notes and available credit under the Equity Line of
$1,049,133 and $709,017, 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 27, 1998, loans in the amount of $330,263 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 December
31, 1997, the Company had approximately $917,656 in cash and
availability under the Excel 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. During 1997 and 1996, the Company reduced residual values and
off-lease equipment inventory by approximately $75,331 and $1,099,089,
respectively, to their net realizable values. There can be no assurance
that the Company will not experience further material residual value or
inventory write-downs in the future.
The Company intends to continue to retain residual ownership of all the
equipment it leases. As of December 31, 1997, the Company had a total
net investment in lease transactions of $23.0 million compared to $22.5
million as of December 31, 1996. The estimated residual value of the
Company's portfolio of leases expiring between January 1, 1998 and
December 31, 2003 totals $9,106,063, although there can be no assurance
that the Company will be able to realize such residual value in the
future. As of December 31, 1997, 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 $ 3,726,363
1999 1,572,600
2000 3,067,000
2001 701,100
2002 and thereafter 39,000
Total $ 9,106,063
</TABLE>
Leased equipment expenditures of $9,872,360 for the year ended December
31, 1997 were financed through the discounting of $10,530,281 of
noncancelable lease rentals to various financial institutions. The
difference of $657,921 reflects the refinancing of existing leases
either at the end of their original lease term or in connection with a
renewal/upgrade.
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 itss 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 Excel Equity Line and the Excel 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.
Recently Issued Accounting Standards
In June of 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130").
SFAS No. 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 is currently assessing the impact of SFAS No. 130 on the
Company's financial statements for the years ended December 31, 1997 and
1996 and believes that SFAS No. 130 will not result in comprehensive
income different from net income as reported in the accompanying
financial statements.
In June of 1997, the FASB issued Statement of Financial Accounting
Standards No, 131, "Disclosure About Segments of an Enterprise and
Related Information" ("SFAS No. 131"). SFAS No. 131 establishes
additional standards for segment reporting in financial statements and
is effective for fiscal years beginning after December 15, 1997. The
Company is currently assessing the impact of SFAS No. 131 on the
Company's financial statements for the years ended December 31, 1997 and
1996.
Safe Harbor Statement under the
Private Securities Litigation Reform Act of 1995
Certain statements herein and in the future filings by the Company with
the Securities and Exchange Commission and in the Company's written and
oral statements made by or with the approval of an authorized executive
officer constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, and the Company intends that such
forward-looking statements be subject to the safe harbors created
thereby. The words and phrases "looking ahead", "we are confident",
"should be", "will be", "predicted", "believe", "expect", and
"anticipate" and similar expressions identify forward-looking
statements. These and other similar forward-looking statements reflect
the Company's current views with respect to future events and financial
performance, but are subject to many uncertainties and factors relating
to the Company's operations and business environment which may cause the
actual results of the Company to be materially different from any future
results expressed or implied by such forward-looking statements.
Examples of such uncertainties include, but are not limited to, changes
in customer demand and requirements, the mix of leases written, the
availability and timing of external capital, the timing of the Company's
realization of its recorded residual values, new product announcements,
continued growth of the semiconductor industry, trend of movement to
client/server environment, interest rate fluctuations, changes in
federal income tax laws and regulations, competition, unanticipated
expenses and delays in the integration of newly-acquired businesses,
industry specific factors and worldwide economic and business
conditions. With respect to economic conditions, a recession can cause
customers to put off new investments and increase the Company's bad debt
experience. The mix of leases written in a quarter is a direct result
of a combination of factors, including, but not limited to, changes in
customer demands and/or requirements, new product announcements, price
changes, changes in delivery dates, changes in maintenance policies and
the pricing policies of equipment manufacturers, and price competition
from other lessors. The Company undertakes no obligation to publicly
update or revise any forward-looking statements whether as a result of
new information, future events or otherwise.
ITEM 7: CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report - KPMG Peat Marwick LLP 16
Consolidated Balance Sheets As Of December 31, 1997 and 1996 17
Consolidated Statements of Operations For The Years Ended
December 31, 1997 and 1996 19
Consolidated Statements of Cash Flows For The Years Ended
December 31, 1997 and 1996 20
Consolidated Statements of Stockholders' Equity For The
Years Ended December 31, 1997 and 1996 22
Notes To Consolidated Financial Statements 23
The consolidated financial statements of the Company are filed under
this Item 7 pursuant to Regulation S-B. Financial statement schedules
are omitted because either they are not required under the instructions,
are inapplicable, or the information is included elsewhere in the
financial statements.
Independent Auditors' Report
The Stockholders and Board of Directors
LEC Technologies, Inc.
We have audited the accompanying consolidated balance sheets of LEC
Technologies, Inc. (formerly Leasing Edge Corporation) and subsidiaries
as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the
years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our resonsibility is to
express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of LEC
Technologies, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Las Vegas, Nevada
March 27, 1998
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
----------- ------------
<S> <C> <C>
ASSETS:
Cash $ 208,639 $ 412,340
Receivables - net of allowance for
doubtful accounts of $157,405 and
$170,699 at December 31, 1997 and
1996, respectively 2,372,159 1,096,868
Notes receivable - employees 176,311 199,185
Inventory, net of reserve for
obsolescence of $102,102 and
$816,290 at December 31, 1997 and
1996, respectively 2,039,685 2,210,674
Investment in leased assets:
Operating leases, net 15,284,177 17,617,934
Sales-type and direct financing leases 7,738,825 4,927,894
Furniture and equipment - net of
accumulated depreciation of
$310,378 and $304,495 at December 31,
1997 and 1996, respectively 363,970 157,112
Other assets 272,338 397,712
Goodwill, net of accumulated
amortization of $134,543 and $84,408
at December 31, 1997 and 1996,
respectively 617,496 667,631
---------- ----------
TOTAL ASSETS $29,073,600 $27,687,350
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
(continued)
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
LIABILITIES:
Accounts payable $ 3,823,522 $ 2,946,365
Accrued liabilities 492,325 401,569
Notes payable and lines of credit 3,128,764 3,881,882
Nonrecourse and recourse discounted
lease rentals 15,905,823 14,808,581
Other liabilities 244,796 410,763
---------- ----------
TOTAL LIABILITIES 23,595,230 22,449,160
---------- ----------
STOCKHOLDERS' EQUITY:
Series A convertible preferred
stock, $.01 par value; 1,000,000 shares
authorized, 380,000 shares issued;
229,016 shares outstanding 2,290 2,290
Common stock, $.01 par value; 25,000,000
and 12,500,000 shares authorized,
4,882,269 and 4,407,019 shares issued
and 4,789,069 and 4,340,919 shares
outstanding at December 31, 1997 and
1996, respectively 48,823 44,071
Additional paid-in capital 10,382,421 10,437,915
Accumulated deficit (4,716,732) (5,046,263)
---------- ----------
5,716,802 5,438,013
Common stock held in treasury, at
cost; 93,200 and 66,100 shares at
December 31, 1997 and 1996, respectively (144,682) (106,073)
Notes receivable from stockholders (93,750) (93,750)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 5,478,370 5,238,190
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $29,073,600 $27,687,350
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1997 1996
---------- -----------
<S> <C> <C>
Revenues:
Operating leases $ 8,618,861 $ 9,694,905
Sales-type leases 2,108,977 2,721,483
Finance income 475,140 285,121
Direct sales 1,882,638 1,137,686
Other - 339,385
---------- ----------
Total revenues from
leasing operations 13,085,616 14,178,580
Distribution sales 17,612,586 7,038,154
Other 16,422 20,666
---------- ----------
Total revenues 30,714,624 21,237,400
---------- ----------
Costs and expenses:
Operating leases 5,641,067 6,881,020
Sales-type leases 1,685,134 2,101,426
Interest expense 1,326,894 1,325,444
Direct sales 1,806,939 1,224,406
Write down of inventory and
residual values 75,331 1,099,089
---------- ----------
Total costs from
leasing operations 10,535,365 12,631,385
Distribution cost of sales 14,686,695 6,190,582
Selling, general and
administrative expenses 4,549,586 3,416,093
Interest expense 613,447 397,656
---------- ----------
Total costs and expenses 30,385,093 22,635,716
---------- ----------
Income (loss) before
income taxes 329,531 (1,398,316)
Provision for income taxes - -
---------- ----------
Net income (loss) $ 329,531 $(1,398,316)
========== ==========
Earnings (loss) per common share $ 0.02 $ (0.45)
========== ==========
Earnings (loss) per common share
assuming dilution $ 0.02 $ (0.45)
========== ==========
</TABLE>
The accompanying notes are integral part of these consolidated financial
statements.
LEC TECHNOLOGIES, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997
AND 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
Notes Receiv- Total
----------------- ------------------- Paid-in
Accumulated Treasury able From Stockholders'
Shares Amount Shares Amount Capital
Deficit Stock Stockholders Equity
-------- ------- --------- -------- ----------
- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
<C> <C> <C>
Balance at
December 31, 1995 229,016 $ 2,290 3,132,319 $ 31,324 $9,526,259
$(3,647,947) $ (12,000) $ (25,000) $ 5,874,926
Sale of common stock 880,125 8,801 849,477
858,278
Exercise of stock
options 127,375 1,274 173,867
(68,750) 106,391
Exercise of "A"
warrants 27,492 275 (275)
-
Acquisition of SCS 239,708 2,397 117,603
120,000
Purchase of treasury
stock
(94,073) (94,073)
Preferred stock
dividends (229,016)
(229,016)
Net loss
(1,398,316) (1,398,316)
- --------------------------------------------------------------------------------
- -------------------------
Balance at
December 31, 1996 229,016 2,290 4,407,019 44,071 10,437,915
(5,046,263) (106,073) (93,750) 5,238,190
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(Continued)
LEC TECHNOLOGIES, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997
AND 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
Notes Receiv- Total
----------------- ------------------- Paid-in
Accumulated Treasury able From Stockholders'
Shares Amount Shares Amount Capital
Deficit Stock Stockholders Equity
-------- ------- --------- -------- ----------
- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
<C> <C> <C>
Balance at
December 31, 1996 229,016 $ 2,290 4,407,019 $ 44,071 $10,437,915
$(5,046,263) $(106,073) $ (93,750) $5,238,190
Sale of common stock 156,250 1,562 123,438
125,000
Issuance of common
stock for services 50,000 500 46,375
46,875
Exercise of "B"
warrants 269,000 2,690 (2,690)
-
Stock option compen-
sation expense 6,399
6,399
Purchase of treasury
stock
(38,609) (38,609)
Preferred stock
dividends (229,016)
(229,016)
Net income
329,531 329,531
- --------------------------------------------------------------------------------
- -------------------------
Balance at
December 31, 1997 229,016 $ 2,290 4,882,269 $ 48,823 $10,382,421
$(4,716,732) $(144,682) $ (93,750) $5,478,370
================================================================================
=========================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1997 1996
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 329,531 $(1,398,316)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 5,757,672 6,986,608
Write down of inventory, residual
values and other 75,331 1,189,981
Stock option compensation expense 53,274 -
Change in assets and liabilities,
net of effects of acquisition:
Increase in receivables (1,275,291) (60,503)
Increase inventory (135,879) (354,532)
Increase (decrease) in
accounts payable 877,157 (446,485)
Increase (decrease) in
accrued liabilities 33,502 (52,583)
All other operating activities (309,593) 302,564
--------- ---------
Net cash provided by operating
activities 5,405,704 6,166 734
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales and disposals of off-lease
inventory and equipment 1,734,074 2,786,579
Purchases of inventory for lease (6,253,853) (5,579,587)
Purchases of furniture and equipment (132,908) (52,277)
(Increase) decrease in notes receivable 22,874 (50,435)
Purchase of SCS, net of cash acquired - 80,957
Additions to net investment in
sales-type and direct financing leases (3,618,507) (4,504,865)
Sales-type and direct financing
lease rentals received 2,251,582 1,763,154
----------- ----------
Net cash used in investing activities (5,996,738) (5,556,474)
----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
(Continued)
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1997 1996
----------- ----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from nonrecourse and
recourse discounted lease rentals 10,530,281 9,186,720
Payments on nonrecourse and recourse
discounted lease rentals (9,433,039) (10,638,141)
Proceeds from notes payable 1,051,373 817,647
Payments on notes payable (1,944,911) (363,905)
Proceeds from exercise of stock
options - 106,391
Proceeds from sale of stock, net 125,000 858,278
Proceeds from exercise of warrants 269,000 55,592
Deferred equity transaction costs - (106,497)
Purchase of treasury stock (38,609) (94,073)
Preferred stock dividends paid (171,762) (229,016)
----------- ----------
Net cash provided by (used in)
financing activities 387,333 (407,004)
---------- ----------
Net increase (decrease) in cash (203,701) 203,256
Cash at beginning of period 412,340 209,084
---------- ----------
Cash at end of period $ 208,639 $ 412,340
=========== ==========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for:
Interest $ 1,875,196 $ 1,729,001
========== ==========
Income taxes $ 3,750 $ 29,826
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nature of Operations: LEC Technologies, Inc. and subsidiaries (formerly
known as Leasing Edge Corporation)(collectively, the "Company" or "LEC") is
a technology services company, providing solutions that help organizations
reduce technology cost and risk. The Company is primarily engaged in the
buying, selling, and leasing of data processing and other high technology
equipment and related services.
Organization: The Company was originally founded in 1980 under the name TJ
Computer Services, Inc. ("TJCS"). In 1989, all of the outstanding common
stock of TJCS was acquired by Harrison Development, Inc., an inactive public
corporation organized in Colorado, which then changed its name to TJ Systems
Corporation. In October 1991, the Company reincorporated in the State of
Delaware and in June 1995, changed its name to Leasing Edge Corporation. On
March 12, 1997, the Company's shareholders' approved a change in the
Company's name to LEC Technologies, Inc.
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. Intercompany accounts
and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of these consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during
the reporting period. For lease accounting, this includes the
estimated fair market value at lease termination of the related
equipment, commonly referred to as "residual value". Residual
values are established at lease inception at amounts equal to the
estimated value to be received from the equipment following
termination of the initial lease, as determined by management. In
estimating such values, management considers all relevant
information and circumstances regarding the equipment and the
lessee, including historical experience by equipment type and
manufacturer, adjusted for known trends. On at least an annual
basis, management assesses the realizability of recorded residual
values and, if necessary, establishes a reserve to reduce the
recorded values to their estimated net realizable value. Actual
results could differ from those estimates.
Lease Accounting
See Note 2 "Lease Accounting Policies" for a description of lease
accounting policies, lease revenue recognition and related costs.
Inventory
Inventory of equipment that has come off lease is valued at the
lower of cost or market based on specific identification. Inventory
of equipment held for distribution is stated at the lower of cost
(first in, first out) or market.
Goodwill
Goodwill, which represents the excess of purchase price over the
fair value of net assets acquired, is amortized on a straight-line
basis over 15 years.
Nonrecourse Financing
The Company assigns the rentals under its leases to financial
institutions and other lenders primarily on a nonrecourse basis.
The Company receives a cash amount equal to the discounted value of
the minimum lease payments. In the event of a default by a lessee,
the lender has a security interest in the underlying leased
equipment but has no recourse against the Company. Proceeds from
discounted lease rentals are recorded as nonrecourse discounted
lease rentals. Under sales-type and direct financing leases,
leased assets and nonrecourse discounted lease rentals are reduced
as lessees make payments under the lease to financial institutions.
Under operating leases, leasing revenue is recorded and nonrecourse
discounted lease rentals are reduced as lessees make rental
payments to financial institutions. The Company has no restrictive
arrangements with these financial institutions as a result of the
nonrecourse borrowings.
Revenue Recognition
Leasing activities: See Note 2 "Lease Accounting Policies" for a
description of lease revenue recognition.
Direct sales: Revenue from direct sales is generated from the
remarketing of equipment off lease and leases with dollar buyout
options treated as sales. Revenue and related cost of sales
is recognized at the time title to the equipment transfers to the
customer.
Distribution sales: Revenue from distribution sales is generated
from the resale of equipment purchased for inventory. Revenue and
related cost of sales is recognized at the time title to the
equipment transfers to the customer, generally upon shipment.
Furniture and Equipment
Furniture and equipment are recorded at cost. Expenditures that
materially increase the life of the assets are capitalized.
Ordinary repairs and maintenance are charged to expense as
incurred.
Depreciation and amortization are provided on the straight-line
method over the following useful lives:
Computer equipment 3 to 5 years
Furniture and office equipment 5 to 7 years
Leasehold improvements Term of lease
Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of
Management periodically evaluates the carrying value of its long-
lived assets, including operating leases, furniture and equipment
and intangible assets. Whenever events or changes in circumstances
indicate that the carrying value of such assets may not be
recoverable, the Company recognizes an impairment loss for the
difference between the carrying value and the estimated net future
cash flows attributable to such asset. Management believes that no
material impairment in the carrying value of long-lived assets
existed at December 31, 1997 or 1996.
Income Taxes
The Company uses the asset and liability method to account for
income taxes. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. The measurement of
deferred tax assets is reduced, if necessary, by a valuation
allowance for any tax benefits which may not ultimately be
realized.
Stock Option Plans
Prior to January 1, 1996, the Company accounted for its stock
option plans in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), and related interpretations. As such,
compensation would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise
price. On January 1, 1996, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), which permits entities
to recognize as expense over the vesting period the fair value of
all stock-based awards on the date of grant. Alternatively, SFAS
No. 123 also allows entities to continue to apply the provisions of
APB No. 25 and provide pro forma net income and pro forma earnings
per share disclosures for employee stock option grants made in 1995
and future years as if the fair-value-based method defined in SFAS
No. 123 had been applied. The Company has elected to continue to
apply the provisions of APB No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
Earnings Per Share
Basic and diluted earnings (loss) per share are computed in
accordance with SFAS No. 128, "Earnings Per Share".
Impact of Recently Issued Accounting Standards
In June of 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"). SFAS No. 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 is currently assessing the impact of SFAS No. 130 on the
Company's financial statements for the years ended December 31,
1997 and 1996 and believes that SFAS No. 130 will not result in
comprehensive income different from net income as reported in the
accompanying financial statements.
In June of 1997, the FASB issued SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information" ("SFAS No.
131"). SFAS No. 131 establishes additional standards for segment
reporting in financial statements and is effective for fiscal years
beginning after December 15, 1997. The Company is currently
assessing the impact of SFAS No. 131 on the financial statements
for the years ended December 31, 1997 and 1996.
Reclassification
Certain reclassifications have been made in the 1996 financial
statements to conform to the 1997 presentation.
NOTE 2: LEASE ACCOUNTING POLICIES
SFAS No. 13 requires that a lessor account for each lease by either
the direct financing, sales-type or operating method.
Leased Assets
Direct financing and sales-type leases - Direct financing and
sales-type leased assets consist of the future minimum lease
payments plus the present value of the estimated unguaranteed
residual less unearned finance income (collectively referred to as
the net investment).
Operating Leases - Operating leased assets consist of the equipment
cost less accumulated depreciation.
Revenue, Costs and Expenses
Direct Financing Leases - Revenue consists of interest earned on
the present value of the lease payments and residual and is
included in finance income in the accompanying Consolidated
Statements of Operations. Revenue is recognized periodically over
the lease term as a constant percentage return on the net
investment. There are no costs and expenses related to direct
financing leases since revenue is recorded on a net basis.
Sales-type Leases - Revenue consists of the present value of the
total contractual lease payments and is recognized at lease
inception. Costs and expenses consist of the equipment's net book
value at lease inception, less the present value of the residual.
Interest earned on the present value of the lease payments and the
residual, which is recognized periodically over the lease term as
a constant percentage return on the net investment, is included in
finance income in the accompanying Consolidated Statements of
Operations.
Operating Leases - Revenue consists of the contractual lease
payments and is recognized on a straight-line basis over the lease
term. Costs and expenses are principally depreciation on the
equipment which is recognized on a straight-line basis over the
term of the lease to the Company's estimate of the equipment's
residual value.
NOTE 3: LEASED ASSETS
The components of the net investment in sales-type and direct
financing leases as of December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Total future minimum lease payments $7,448,044 $4,670,997
Estimated unguaranteed residual
values of leased equipment 1,225,500 797,300
Less unearned finance income ( 934,719) ( 540,403)
Total $ 7,738,825 $ 4,927,894
</TABLE>
Future minimum lease payments on sales-type and direct financing
leases as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1998 $3,173,468
1999 2,492,875
2000 1,224,521
2001 372,979
2002 and thereafter 184,201
$7,448,044
</TABLE>
Assets under operating leases are as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Equipment at cost or net
realizable value $26,777,702 $29,056,736
Accumulated depreciation (11,493,525) (11,438,802)
Total $15,284,177 $17,617,934
</TABLE>
Depreciation expense related to operating leases was $5,641,067 and
$6,881,020 for the years ended December 31, 1997 and 1996,
respectively.
Future minimum lease rentals on operating leases are due as
follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1998 $ 5,153,505
1999 3,691,355
2000 1,406,379
2001 66,705
2002 13,689
$10,331,633
</TABLE>
The estimated residual value of the Company's portfolio of leases
(including sales-type, direct financing and operating) by year of
lease termination are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1998 $3,726,363
1999 1,572,600
2000 3,067,000
2001 701,100
2002 and thereafter 39,000
$9,106,063
</TABLE>
NOTE 4: Acquisition of Superior Computer Systems, Inc. ("SCS")
On November 1, 1996, the Company acquired all of the common stock
of SCS, a distributor of computer peripherals, for 239,708 shares
of the Company's common stock and two $100,000 non-interest bearing
notes, payable at various dates through November 1997. The
acquisition was accounted for by the purchase method of accounting.
The excess of the total acquisition cost over the fair value of net
assets acquired of $299,923 was recorded as goodwill and is being
amortized over 15 years. The Consolidated Statement of Operations
for the year ended December 31, 1996 includes SCS's results of
operations for the period November 1, 1996 through December 31,
1996.
The following unaudited pro forma consolidated results of
operations assume that the acquisition occurred on January 1, 1996
and reflect the historical operations of the purchased business
adjusted for amortization of goodwill resulting from the
acquisition.
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended
December 31, 1996
(Unaudited)
<S> <C>
Total revenues 32,203
Net loss (1,522)
Loss per share (0.46)
</TABLE>
The pro forma results of operations are not necessarily indicative
of the actual results of operations that would have occurred had
the acquisition been made at the beginning of the period, or of
results which may occur in the future.
NOTE 5: INCOME TAXES
Total income tax expense (benefit) differed from the "expected"
income tax expense (benefit) determined by applying the statutory
federal income tax rate of 35% for the years ended
December 31 as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Computed "expected" income tax
expense (benefit) $ 115,336 $ (489,411)
Change in valuation allowance
for deferred tax assets (119,701) 93,181
Nondeductible expenses 4,365 396,230
Total tax expense - -
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and tax liabilities
at December 31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
<S> <C> <C>
Deferred Tax Assets
Allowances for doubtful accounts,
inventory obsolescence and
residual value realization not
currently deductible $ 117,428 $ 450,447
Expenses accrued for financial
statement purposes, not
currently deductible 576,450 576,450
Net operating loss carryforwards 1,374,967 1,498,762
--------- ---------
Total gross deferred tax assets 2,068,845 2,525,659
Valuation allowance (248,757) (368,458)
--------- ---------
Net deferred tax assets 1,820,088 2,157,201
--------- ---------
Deferred Tax Liabilities
------------------------
Basis difference for sales-type and
direct financing leases for
financial statement purposes and
sales for tax purposes 218,719 342,507
Basis difference for operating
leases, principally due to
depreciation 1,601,369 1,814,694
--------- ---------
Total deferred tax liabilities 1,820,088 2,157,201
--------- ---------
Net deferred taxes - -
========= =========
</TABLE>
The Company has recorded a valuation allowance in accordance with
the provisions of SFAS No. 109 "Accounting for Income Taxes" to
reflect the estimated amount of deferred tax assets which may not
be realized. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. At
December 31, 1997 and 1996, the Company determined that $248,757
and $368,458, respectively, of tax benefits did not meet the
realization criteria.
At December 31, 1997, the Company has net operating loss
carryforwards for Federal income tax purposes of approximately
$3,900,000 which are available to offset future taxable income, if
any, through 2009.
NOTE 6: NONRECOURSE AND RECOURSE DISCOUNTED LEASE RENTALS
The Company assigns the rentals of its leases to financial
institutions at fixed rates on a nonrecourse or, to a lesser
extent, on a recourse basis but retains the residual rights. In
return for future lease payments, the Company receives a discounted
cash payment. Discounted lease rentals as of December 31, 1997 and
1996 were $15,905,823 and $14,808,581 respectively of which
$258,030 and $196,518 are recourse, respectively. Interest expense
on discounted lease rentals for the years ended December 31, 1997
and 1996 was $1,326,894 and $1,325,444, respectively.
Principal and interest payments required on discounted lease
rentals as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1998 $ 8,195,787
1999 6,154,015
2000 2,626,387
2001 439,684
2002 and thereafter 185,600
Total 17,601,473
Less interest (1,695,650)
Principal amount $15,905,823
</TABLE>
NOTE 7: NOTES PAYABLE AND LINES OF CREDIT
The Company and Bank of America National Trust and Savings
Association ("Bank of America") have entered into a Second Loan
Modification Agreement, effective February 5, 1998, (the "Second
Loan Modification Agreement") governing 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 addition, a fee equal to 15%
of the original loan amount is due at maturity which amount is
accrued ratably over the life of the loan. The unaccrued portion
thereof at December 31, 1997 was $117,080. 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, a term note and an
outstanding capital lease obligation of approximately $258,030,
$160,838 and $122,982, respectively, at December 31, 1997. At
December 31, 1997, the Company had outstanding term notes and
available credit under the Equity Line of $1,049,133 and $909,017,
respectively.
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 March 27, 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, the financial condition and, consequently, the
operations of the Company could be materially and adversely
affected.
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 27, 1998, loans in
the amount of $330,263 were outstanding under the ADI Credit
Agreement.
In connection with the Company's 1994 acquisition of PMCPI, the
Company issued a $250,000 non-interest bearing note payable to
PMCPI's sole shareholder. At December 31, 1996, the remaining
obligation on such note, discounted at an imputed rate of 8.5%, was
$50,000. The note was paid in full at its maturity date of
January 1, 1997.
In connection with the Company's acquisition of SCS, the Company
issued to each of SCS' two shareholders a $100,000 non-interest
bearing note payable due in varying installments through November
1997. At December 31, 1996, the remaining obligation due on such
notes, discounted at an imputed rate of 10.0%, was $194,385. The
notes were paid in full in 1997.
Notes payable and lines of credit consist of the following at
December 31,
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Term loan with Bank of America, with
interest at prime plus 4.0 percent,
due in varying installments through
June 15, 1999 $1,366,365 $ 2,476,365
Term note with Merrill Lynch, due
December 1, 1997, with floating
interest rate, currently at 9.25
percent 401,614 -
Revolving line of credit agreement
with Merrill Lynch, with floating
interest rate of prime plus 1.0
percent - 499,937
Secured notes payable to Excel,
payable in installments through
November, 1999 with fixed interest
rates between 9.75 and 10.0 percent,
secured by leased equipment 1,049,133 626,801
Term note payable to Excel, due
January 29, 1998, with floating
interest rate of prime plus 2.5
percent 160,838 -
Acquisition notes payable, with
imputed interest ranging from 8.5 to
10 percent, due in varying
installments through November 1997 - 244,385
Other 150,814 34,394
--------- ---------
$3,128,764 $3,881,882
========= =========
</TABLE>
Required annual principal payments as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $1,612,663
1999 1,076,261
2000 418,837
2001 19,115
2002 1,888
---------
Total $3,128,764
=========
</TABLE>
NOTE 8: COMMITMENTS AND CONTINGENCIES
a) Lease Agreements
The Company leases office and warehouse space under operating
leases expiring individually through 2002. The following is
a schedule by year of future minimum rental payments required
as of December 31, 1997 under these operating leases that have
initial or remaining noncancelable lease terms in excess of
one year:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1998 $228,083
1999 210,808
2000 210,808
2001 137,540
2002 51,386
Thereafter -
Total $838,625
</TABLE>
Rental expense on operating leases was $267,552 and $206,342
for the years ended December 31, 1997 and 1996, respectively.
b) Employment Contracts
The Company has employment agreements with certain of its
executive officers and management personnel with remaining
terms of approximately four years. Under these agreements,
the employee is entitled to receive other employee benefits of
the Company, including medical and life insurance coverage.
The agreements may be terminated by either the Company or the
employee at any time or for any reason. If an agreement
is terminated due to the death of an employee, a death benefit
equal to six months salary shall be paid to the employee's
estate. The employment agreement of the Company's President
and Chief Executive Officer includes additional compensation
in the form of a bonus based on Company performance. The
Company's annual expense under these agreements is
approximately $930,000.
NOTE 9: RELATED PARTY TRANSACTIONS
a) Company's Board of Directors
A member of the Company's Board of Directors was formerly an
officer of Tiffany & Co., a major customer of the Company.
Such individual did not have approval authority over lease
transactions on behalf of Tiffany & Co.
b) Other Transactions
Included in notes receivable from shareholders in the
accompanying consolidated balance sheets at December 31, 1997
and 1996 is a $25,000 note receivable from a current officer
for the purchase of Company common stock.
c) Aggregate Effect of Transactions with Related Parties
The Board of Directors of the Company has reviewed the
aggregate effect on operations of the above-described
transactions and concluded that such transactions were in the
best interest of the Company and on terms as fair to the
Company as could have been obtained from unaffiliated parties.
NOTE 10: STOCKHOLDERS' EQUITY
During the year ended December 31, 1997, the Company sold 156,250
shares of common stock to an individual in a private placement
transaction for proceeds of $125,000.
Also in 1997, the Company issued an aggregate of 50,000 shares of
restricted common stock to two individuals in connection with their
employment at ADI. The fair market value of the shares at date of
issue was $46,875 and was expensed in 1997.
During the year ended December 31, 1996, the Company sold an
aggregate of 880,125 shares of common stock to two investment
groups in private placement transactions. The proceeds of these
transactions, net of related costs of $131,692, was $858,278.
In 1996, the Company issued 239,708 shares of restricted common
stock in connection with the Company's acquisition of SCS.
A. SERIES A CONVERTIBLE PREFERRED STOCK
In August of 1993, the Company completed the sale of 380,000 shares
of Series A Convertible Preferred Stock. The Preferred Stock is
convertible at the holders option at any time into 1.75 shares of
common stock at a conversion price of $5.68 per share. If the
Series A Preferred Stock is converted on or prior to August 4,
1998, the holder will receive ten (10) warrants to purchase 1/8th
share of common stock for each share of Series A Preferred Stock
converted. Outstanding Series A Preferred Stock is redeemable by
the Company at $10.00 per share plus accrued and unpaid dividends.
The Series A Preferred Stock pays dividends in arrears at an annual
rate of $1.00 per share. A conversion bonus equal to $0.25 per
share of Series A Preferred Stock converted shall be payable to any
holder who converts such shares after the date in any calendar
quarter on which dividends accrue and prior to such date for the
succeeding calendar quarter.
At December 31, 1997 and 1996 there were 229,016 shares of
preferred stock and 1,509,840 warrants outstanding.
Preferred stock dividends of $171,762 and $229,016 were paid from
additional paid in capital in 1997 and 1996, respectively. Accrued
and unpaid preferred stock dividends were $114,508 and $57,254 at
December 31, 1997 and 1996, respectively.
B. WARRANTS AND STOCK OPTIONS
Warrants
In August of 1995, the Company registered 3,092,687 Class A Common
Stock Purchase Warrants and 1,000,000 Class B Common Stock Purchase
Warrants, together with the underlying common shares. Each of the
warrants entitles the holder thereof to purchase one share of the
Company's common stock at an exercise price of $3.00 per share.
On July 9, 1996, the Company reduced the exercise price of the
Class A Common Stock Purchase Warrants and called for redemption,
effective at the close of business on August 9, 1996, all of the
Class A warrants. The Company received gross proceeds of $55,592
from the exercise of 27,492 Class A warrants. All costs related to
redeeming the Class A warrants in excess of the exercise proceeds
were expensed in 1996.
On December 15, 1996, the Company reduced the exercise price of the
Class B Common Stock Purchase Warrants and called for redemption,
effective at the close of business on January 15, 1997, all of the
Class B warrants. Subsequent to December 31, 1996, 269,000 Class
B Common Stock Purchase Warrants were exercised resulting in gross
proceeds to the Company of $269,000. All costs related to
redeeming the Class B warrants in excess of the exercise proceeds
were expensed in 1996.
During the year ended December 31, 1996, the Company issued an
aggregate of 2,319,993 Class C Common Stock Purchase Warrants
and an aggregate of 2,319,993 Class D Common Stock Purchase
Warrants at exercise prices of $1.625 and $1.75, respectively, in
connection with two private placements of common stock. In
September of 1997, the Company's Board of Directors voted to reduce
the exercise price of the warrants to $1.25. Each of the warrants
entitle the holders thereof to purchase one share of the Company's
common stock at the exercise prices referred to above and expire on
April 30, 1999. At December 31, 1997, none of the Class C or Class
D warrants had been exercised.
Stock Options
1) Key Employee and Director
The Company has five stock option plans covering an aggregate
of 2,687,500 shares of common stock which provide for the
granting of incentive stock options and/or nonqualified stock
options to employees and directors to purchase shares of
common stock. Options granted to employees generally vest
over a three to five year period and expire five years from
the date of grant. Options granted to directors are
immediately vested and expire ten years from the date of
grant. Under the stock option plans, the exercise price of
each option at issuance equals the market price of the
Company's common stock on the date of grant.
Additionally, an officer of the Company has 58,125 options to
acquire common stock at an exercise price of $0.08 per share.
The options were granted in 1993 in lieu of prospective
commissions and were subject to a three year vesting.
The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock
option plans in the consolidated financial statements. Had
compensation cost for the Company's stock option plans been
determined consistent with SFAS No. 123, the Company's net
earnings (loss) available to common stockholders and earnings
(loss) per common weighted average share would have been
reduced to the pro forma amounts indicated below (in
thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net earnings (loss) available to
common stockholders:
As reported $ 101 $(1,627)
Pro forma (123) (1,836)
Earnings (loss) per common
weighted average share:
As reported $ 0.02 $ (0.45)
Pro forma (0.03) (0.51)
</TABLE>
For purposes of calculating the compensation cost consistent
with SFAS No. 123, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-
pricing model with the following weighted average assumptions
used for grants in 1997 and 1996, respectively: dividend yield
of 0.0% for each year; expected volatility of 35 percent and
19 percent; risk free interest rates of 5.96% and 5.94%; and
expected lives of three years and five years.
Additional information on shares subject to options is as
follows:
<TABLE>
<CAPTION>
1997 1996
---------------------- --------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding at
beginning of
year 1,214,625 $ 1.62 419,625 $ 1.36
Granted 2,100,000 0.75 800,000 0.75
Exercised - - - -
Forfeited (2,759,000) 0.76 (5,000) (1.06)
--------- ------- --------- -------
Outstanding at
end of year 555,625 0.68 1,214,625 1.62
========= ======= ========= =======
Options exer-
cisable at
year end 168,292 0.52 719,625 1.52
========= ======= ========= =======
Weigted average
fair value of
options granted
during the year $ 0.25 $ 0.45
===== =====
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------
Weighted
Average Weighted
Number Remaining Average
Range of exercise of Contractual Exercise
prices Shares Life Price
---------------------------------------------------------
<S> <C> <C> <C>
$0.08 58,125 5.7 yrs $ 0.08
0.75 497,500 4.1 yrs 0.75
------- ---------- -------
555,625 4.3 yrs $ 0.68
======= ========== =======
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
--------------------------
Weighted
Number Average
Range of exercise of Exercise
prices Shares Price
------------------------------------------------------
<S> <C> <C>
$0.08 58,125 $ 0.08
0.75 110,167 0.75
------- --------
168,292 $ 0.52
======= ========
</TABLE>
2) Other Options
Options granted to other than employees/directors are
accounted for based on the fair value method pursuant to SFAS
No. 123 utilizing the Black-Scholes option-pricing method.
The amount charged to expense in 1997 for such options was
$6,399.
In August 1997, the Company granted an aggregate of 150,000
options (50,000 at an exercise price of $0.75 and 100,000 at
an exercise price of $1.00) to an unaffiliated company for
services. Such options were immediately vested and expire in
August 1999. Subsequent to December 31, 1997, the grant was
modified to eliminate the 100,000 options having the $1.00 per
share exercise price.
In October 1996, the Company granted 50,000 stock options to
an individual at an exercise price of $1.56. Such options
were immediately vested and expire April 7, 1998.
In 1995, the Board of Directors of the Company approved the
issuance of options covering 275,000 shares of common stock to
two companies for services. The exercise price of the
options was $1.38 per share which was equal to the quoted
market value of the Company's common stock at the date of
grant. Such options were immediately vested and expire on
March 6, 2000. During the year ended December 31, 1996,
77,000 of such options were exercised.
In addition, the Board of Directors approved the issuance of
options covering an aggregate of 150,000 shares of common
stock to an existing shareholder and to one of the Company's
Directors as an inducement to such individuals to provide the
Company a short term loan during its transition and relocation
from Hauppauge, New York to Las Vegas, Nevada. The exercise
price of such options ranged from $1.31 to $1.69 per share;
such prices were equal to the quoted market value of the
Company's common stock at the date of grant. Such options
were immediately vested and expire on various dates through
June 7, 2000.
Also in 1995, the Company issued options covering 25,000
shares of the Company's common stock to an individual at an
exercise price of $1.38. Such options were immediately vested
and were exercised during 1996.
In 1993, the Company issued options covering 25,375 shares of
the Company's common stock at an exercise price of $1.38.
Such options were immediately vested and were exercised during
1996.
C. OTHER
Included in other assets in the accompanying consolidated balance
sheet at December 31, 1996 is $269,000 of deferred costs associated
with the Class B Common Stock Purchase Warrants. Such capitalized
costs were netted against the proceeds received in the first
quarter of fiscal 1997.
NOTE 11: MANAGEMENT'S PLANS
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.
NOTE 12: MAJOR CUSTOMERS AND SUPPLIERS
Revenue from leases with three customers of the Company accounted
for 15.0%, 9.2%, and 3.7% and 25.0%, 12.8% and 7.4% of
consolidated revenues for the years ended December 31, 1997 and
1996, respectively.
The Company currently purchases a significant amount of inventory
for resale from a limited number of suppliers in connection with
its distribution operations. Consequently, the Company is
dependent upon the availability of product from and the timeliness
of delivery by such suppliers in fulfilling its customers' orders.
NOTE 13: EMPLOYEE BENEFIT PLANS
The Company has a qualified 401(k) Profit Sharing Plan (the "Plan")
covering all employees of the Company, including officers.
Employees are eligible to participate in the Plan upon hire. The
Plan requires the Company to match 50% of each dollar contributed
by a Plan participant up to the Participants qualified deferral
amount. During 1997 and 1996, the Company contributed its required
amounts of $56,902 and $34,498 to the Plan on behalf of the Plan's
participants.
NOTE 14: SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES
During the year ended December 31, 1997, the Company purchased
computer hardware and software for $140,420 which was funded
through a capital lease obligation.
During the year ended December 31, 1997, operating lease assets of
$1,128,453 were reclassified as sales-type or direct financing
leases due to leases renewals/upgrades.
During the year ended December 31, 1996, the Company issued 67,500
shares of common stock in exchange for a note receivable of $68,750
and acquired all of the outstanding common stock of Superior
Computer Services, Inc. in exchange for 239,708 shares of
restricted common stock and a $200,000 non-interest bearing note
payable.
NOTE 15: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments was made in accordance with Statement of Financial
Accounting Standards, "Disclosures about Fair Value of Financial
Instruments" ("SFAS No. 107"). SFAS No. 107 specifically excludes
certain items from its disclosure requirements such as the
Company's investment in leased assets. Accordingly, the aggregate
fair value amounts presented are not intended to represent the
underlying value of the net assets of the Company.
The carrying amounts at December 31, 1997 for receivables,
accounts payable, accrued liabilities, notes payable and lines of
credit approximate their fair values due to the short maturity of
these instruments. As of December 31, 1997, the carrying amount of
recourse discounted lease rentals of $258,030 approximate their
fair values because the discount rates are comparable to current
market rates of comparable debt having similar maturities and
credit quality.
NOTE 16: 1996 FOURTH QUARTER CHARGES
During the fourth quarter of 1996, the Company recorded a charge of
$889,000 to reduce the carrying amount of certain previously leased
equipment and the estimated unguaranteed residual values of
equipment on lease. These charges resulted from a decrease in the
wholesale market value of the previously leased equipment due to an
increase in availability in excess of current demand. Although
management believes that its recorded residual values are properly
stated, there can be no assurance that the Company will not
experience further material residual value or inventory write-downs
in the future.
NOTE 17: EARNINGS PER COMMON SHARE
In February of 1997, the Financial Accounting Standards Board
issued SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS
No. 128 supercedes APB Opinion No. 15 and specifies the
computation, presentation and disclosure requirements for earnings
per share ("EPS"). It replaces the presentation of "primary EPS"
with a presentation of "basic EPS" and "fully diluted EPS" with
"diluted EPS". Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted
average number of shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted
into common stock and is computed similarly to fully diluted EPS
under APB Opinion No. 15. The following EPS amounts reflect EPS as
computed under SFAS No. 128:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Shares outstanding at
beginning of period 4,340,919 3,129,319
Effect of issuance of common
stock for services 43,698 -
Issuance of common stock
pursuant to private place-
ment transactions 48,801 422,089
Issuance of common stock
related to 1996 acquisition
of SCS - 17,682
Exercise of stock options - 52,049
Exercise of "A" warrants - 10,891
Exercise of "B" warrants 258,682 -
Purchase of treasury stock (18,078) (6,375)
------------ ------------
Weighted average common
shares outstanding 4,674,022 3,625,655
============ ============
Net income (loss) $ 329,531 $ (1,398,316)
Preferred stock dividends (229,016) (229,016)
------------ ------------
Net earnings available to
common shareholders $ 100,515 $ (1,627,332)
============ ============
Earnings (loss) per common
share $ 0.02 (0.45)
============ ============
Weighted average common
shares outstanding 4,674,022 3,625,655
Effect of common shares
issuable upon exercise of
dilutive stock options 155,048 -
----------- ------------
Weighted average common
shares outstanding assuming
dilution 4,829,070 3,625,655
=========== ============
Earnings (loss) per common
share assuming dilution $ 0.02 $ (0.45)
=========== ============
</TABLE>
The following potentially dilutive securities were not included in
the computation of dilutive EPS because the effect of doing so
would be antidilutive:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Options 448,000 1,562,625
Warrants 4,828,716 5,828,716
Convertible preferred stock 400,778 400,778
Warrants issuable upon conversion
of preferred stock if conversion
occured prior to August 4, 1998 286,270 286,270
</TABLE>
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The names, ages and respective positions of the Executive
Officers and Directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Michael F. Daniels 49 Chairman of the Board, President and
Chief Executive Officer
William J. Vargas 38 Vice President - Finance, Chief
Financial Officer, Treasurer and
Secretary
Larry M. Segall 43 Director
L. Derrick Ashcroft 69 Director
</TABLE>
MICHAEL F. DANIELS has served as Chairman of the Board of Directors,
President and Chief Executive Officer since April of 1994 and as a Director
of the Company since 1983. He served as Chief Operating Officer from March
of 1993 to April of 1994 and as Senior Vice President - Marketing for more
than five years prior thereto.
WILLIAM J. VARGAS has served as Vice President - Finance, Chief Financial
Officer and Treasurer since May of 1995 and as Secretary since February of
1996. From July of 1993 to January of 1995 he was the Senior Director of
Finance for Fitzgeralds Casino/Hotel and from February of 1995 through
April of 1995 he was an independent financial consultant. From January of
1992 to July of 1993 he was the Chief Financial Officer of Sport of Kings,
Inc., a publicly traded gaming company.
LARRY M. SEGALL has served as a Director of the Company since November of
1989. Mr. Segall is currently the Chief Financial Officer of Vitamin
Industries, Inc. From 1985 through October 1997, Mr. Segall was employed
by Tiffany & Co. as its Vice President - Treasurer and Controller.
L. DERRICK ASHCROFT has served as a Director of the Company since August of
1994. From 1988 to 1995 he was Chairman of the Board of Cardiopet, Inc.,
an animal diagnostic firm. Mr. Ashcroft is a graduate of Oxford
University, England.
Mr. William G. McMurtrey and Dr. David C. Ward resigned from the Company's
Board of Directors on March 25, 1997 and March 31, 1997, respectively.
Their were no disagreements related to such resignations.
Officers serve at the discretion of the Board of Directors. All Directors
hold office for one year terms and until the election and qualification of
their successors. The Company has a Key Employee Stock Option Committee
and an Audit Committee, each consisting of Messrs. Segall and Ashcroft.
The Board of Directors did not have a standing nomination committee or
committee performing similar functions during the year ended December 31,
1997.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers, directors and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission. Officers, Directors and ten percent shareholders are required
by regulation to furnish the Company with all Section 16(a) forms they
file. Based solely on the Company's copies of such forms received or
written representations from certain reporting persons that no Form 5's
were required for those persons, the Company believes that, during the time
period from January 1, 1996 through December 31, 1997, all filing
requirements applicable to its officers, Directors and greater than ten
percent beneficial owners were complied with.
ITEM 10. EXECUTIVE COMPENSATION
The compensation paid and/or accrued to the Chief Executive Officer of the
Company for services rendered to the Company during the three fiscal years
ended December 31, 1997 and the compensation paid and/or accrued to the
Chief Financial Officer of the Company for services rendered to the Company
during the two fiscal years ended December 31, 1997 is presented in the
following table. No other executive officer received annual compensation
in excess of $100,000 in any of the three fiscal years ended December 31,
1997.
(a) Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------
Other Annual
Name of Individual and Fiscal Salary Bonus Compensation
Principal Position Year ($) ($) ($)
- ---------------------- ------ -------- -------- ------------
<S> <C> <C> <C> <C>
Michael F. Daniels 1997 $336,519 - $181,653 (2)
President & CEO 1996 273,077 - 258,619 (2)
1995 254,808 $ 25,000(1) 198,987 (2)
William J. Vargas 1997 128,871 - -
CFO & Secretary 1996 115,341 - -
</TABLE>
(a) Summary Compensation Table (cont'd)
<TABLE>
<CAPTION>
Long Term Compensation
-------------------------------------
Awards Payouts
------------------------ ----------
Securities Long Term
Restricted Underlying Incentive
Name of Individual and Fiscal Stock Options/SARs Plan
Principal Position Year Awards($) (#) Payouts($)
- ---------------------- ------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Michael F. Daniels 1997 - - (4) -
President & CEO 1996 - 250,000(4) -
1995 - 79,000(4) -
William J. Vargas 1997 - - (4) -
CFO & Secretary 1996 - 70,000(4) -
</TABLE>
(a) Summary Compensation Table (cont'd)
<TABLE>
<CAPTION>
All
Name of Individual and Fiscal Other
Principal Position Year Compensation($)
- ---------------------- ------ ---------------
<S> <C> <C>
Michael F. Daniels 1997 $4,750 (3)
President & CEO 1996 4,750 (3)
1995 4,500 (3)
William J. Vargas 1997 4,750 (3)
CFO & Secretary 1996 1,900 (3)
</TABLE>
(1) Consists of accrued bonus pursuant to employment contract.
(2) Consists of commission income based upon realization of excess
residual values related to leases entered into prior to May 15, 1993.
(3) Represents Company matching contribution to 401(k) Profit Sharing
Plan.
(4) In January of 1997 and August of 1997, Messrs. Daniels and Vargas were
granted stock options aggregating 816,000 and 345,000, respectively.
On December 8, 1997, Messrs. Daniels and Vargas voluntarily rescinded
their respective 1997 option grants, together with all grants received
prior thereto, with the exception of 58,125 stock options received by
Mr. Daniels during 1993. Messrs. Daniels and Vargas received no
compensation for such recissions.
(b) Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Number of Percent of
Securities Total
Underlying Options/SAR's Exercise
Options/SAR's Granted to or Base Expiration
Name Granted (#) In Fiscal Year Price($/Sh) Date
- ----------- ------------- -------------- ----------- ----------
<S> <C> <C> <C> <C>
Michael F.
Daniels - - - -
William J.
Vargas - - - -
</TABLE>
(c) Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year
End Option/SAR Values
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised
Underlying In-The-Money
Options/SAR's Options/SAR's
At Fiscal At Fiscal
Shares Year End (#) Year End ($)
Acquired Value Exercisable/ Exercisable/
Name On Exercise Realized Unexercisable Unexercisable
- ----------- ----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Michael F. 0 0 58,125/ $37,200/
Daniels 58,125 $0.00
William J. 0 0 0/0 $0.00/
Vargas $0.00
</TABLE>
(d) Directors Compensation
Each non-employee director of the Company is paid $1,000 per month. In
addition, each director is entitled to participate in the Company's 1991
and 1993 Director Stock Option Plan and in the 1994 Stock Option Plan.
During 1996, the Company granted an aggregate of 300,000 options to non-
employee directors at an exercise price of $1.75 per share, which was the
market value of the Company's common stock on the date of grant. The
Company does not pay its directors any additional fees for committee
participation.
(e) Employment Contracts
Michael F. Daniels serves as the Company's President and Chief Executive
Officer under an employment agreement dated July 1, 1995 and expiring June
30, 2000. Mr. Daniels' compensation under such agreement is $300,000 per
annum and he is eligible for a bonus based on company performance. In
addition, Mr. Daniels is entitled to receive commissions equal to 25% of
the net proceeds realized by the Company in excess of the residual value of
equipment subject to leases which commenced prior to May 15, 1993 and for
which Mr. Daniels was the lead salesperson. Pursuant to Mr. Daniels'
employment contract, if Mr. Daniels should die during the term thereof, a
death benefit equal to six-months salary ($150,000) shall be paid to his
estate.
William J. Vargas serves as the Company's Chief Financial Officer,
Treasurer and Secretary under an employment agreement dated July 1, 1995
and expiring June 30, 2000. Mr. Vargas' compensation under such agreement
is $110,000 per annum.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 27, 1998, certain information
concerning those persons known to the Company, based on information
obtained from such persons, with respect to the beneficial ownership (as
such term is defined in Rule 13d-3 under the Securities Exchange Act of
1934) of shares (the "Common Stock") of common stock, $0.01 par value, of
the Company by (i) each person known by the Company to be the owner of more
than 5% of the outstanding Common Stock, (ii) each Director of the Company,
(iii) each executive officer of the Company named in the Summary
Compensation Table and (iv) all executive officers and Directors as a
group:
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Beneficial Own- Percentage of
Beneficial Owner (1) ership (2) Class (3)
- ---------------------- ------------------ -------------
<S> <C> <C>
Michael F. Daniels 412,500 (4) 8.7%
William J. Vargas 31,000 0.7%
Larry M. Segall 312,875 (5) 6.3%
L. Derrick Ashcroft 255,000 (6) 5.1%
All Directors and
Executive Officers
as a Group (4 persons) 1,011,375 19.0%
<F1> The address for all individuals identified herein is 6540 S. Pecos
Road, Suite 103, Las Vegas, Nevada 89120.
<F2> Unless otherwise noted, the Company believes that all persons named in
the table have sole investment power with respect to all shares of
common stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities that can be acquired by such person
within 60 days from the date hereof upon the exercise of warrants or
options or upon the conversion of convertible securities. Each
beneficial owner's percentage ownership is determined by assuming that
options or warrants or shares of Series A Convertible Preferred Stock
that are held by such person (but not those held by any other person)
and which are exercisable or convertible within 60 days from the date
hereof have been exercised or converted.
<F3> Based on 4,704,069 shares of common stock outstanding as of February
27, 1998.
<F4> Includes options to purchase 58,125 shares of common stock granted to
Mr. Daniels which are currently exercisable.
<F5> Includes options to purchase 300,000 shares of common stock granted to
Mr. Segall which are currently exercisable.
<F6> Includes options to purchase 250,000 shares of common stock granted to
Mr. Ashcroft which are currently exercisable.
</TABLE>
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Segall, a director of the Company, was formerly an officer of Tiffany &
Co., one of the Company's customers. Mr. Segall receives no cash or other
remuneration from the Company other than a fee for his services as a
director and participation in the Company's Director Stock Option Plans.
The Company believes that the terms of its lease arrangements with Tiffany
& Co. are fair and have been reached on an arms-length basis.
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K: None.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
<C> <S>
3.1 Certificate of Incorporation.*
3.2 Certificate of Amendment of Certificate of Incorporation,
dated June 23, 1995.**
3.3 Certificate of Amendment of Certificate of Incorporation,
dated March 20, 1997.******
3.4 By laws.*
4.1 Specimen Common Stock Certificate.*
4.2 Specimen Series A Convertible Preferred Stock Certificate.*
4.3 Specimen Warrant Certificate.*
4.4 Certificate of Designation of Series A Convertible Preferred
Stock.*
4.5 Form of Representative's Warrants.*
4.6 Form of Class C Common Stock Purchase Warrant.*****
4.7 Form of Class D Common Stock Purchase Warrant.*****
4.8 Amended and Restated Warrant Agency Agreement Dated as of
March 3, 1998, between the Company and American Stock
Transfer and Trust Company, as Warrant Agent.*****
10.1 Standard Office Lease - Gross dated April 7, 1995 between
the Company and Jack Cason (relating to office space in
Clark County, Nevada).**
10.2 1991 Directors' Stock Option Plan.*
10.3 1991 Key Employees' Stock Option Plan.*
10.4 1993 Directors' Stock Option Plan.*
10.5 1993 Key Employees' Stock Option Plan.*
10.6 1994 Stock Option Plan.****
10.7 1996 Stock Option Plan.*****
10.8 1997 Stock Option Plan.******
10.9 Form of 1996 Non-Plan Director Stock Option Agreement.******
10.10 Indemnification Agreement dated as of September 5, 1990
between the Company and Michael F. Daniels.*
10.11 Loan Agreement with Bank of America dated July 11, 1995.***
10.12 Amendment No. 1 to Loan Agreement with Bank of America.***
10.13 Amendment No. 2 to Loan Agreement with Bank of America.***
10.14 Amendment No. 3 to Loan Agreement with Bank of America.***
10.15 Amended and Restated Business Loan Agreement with Bank of
America dated February 28, 1997.P
10.16 Bank of America Loan Modification Agreement dated July 24,
1997.P
10.17 Second Bank of America Loan Modification Agreement dated
February 5, 1998.P
10.18 Merrill Lynch Line of Credit Agreement.***
10.19 Amendment No. 1 to Merrill Lynch Line of Credit Agree-
ment.***
10.20 Amendment No. 2 to Merrill Lynch Line of Credit Agree-
ment.***
10.21 Letter Agreement and Collateral Installment Note dated as of
October 8, 1997 with Merrill Lynch Business Financial
Services, Inc.P
10.22 Letter Agreement between the Registrant and Excel Bank, N.A.
(formerly Union Chelsea National Bank) dated November 27,
1995.***
10.23 Revolving Credit Agreement with Excel Bank, N.A. dated as
March 8, 1998.P
21 List of Subsidiaries.
27 Financial Data Schedule.
<F*> Incorporated by reference to the Company's Registration Statement
on Form S-2, as filed with the Securities and Exchange Commission
on June 10, 1993, Registration No. 33-64246.
<F**> Incorporated by reference to the Company's Post Effective
Amendment No. 1 on Form S-2 to its Registration Statement on Form
S-2, as filed with the Securities and Exchange Commission on
August 1, 1995, Registration No. 33-93274.
<F***> Incorporated by reference to the Company's 1995 Annual Report on
Form 10-KSB/A, as filed with the Securities and Exchange
Commission on April 23, 1996, Commission File No. 0-18303.
<F****> Incorporated by reference to the Company's 1994 Proxy Statement,
Commission File No. 0-18303.
<F*****> Incorporated by reference to the Company's 1996 Proxy Statement,
Commission File No. 0-18303.
<F******> Incorporated by reference to the Company's Registration Statement
on Form S-8/S-3, as filed with the Securities and Exchange
Commission on June 11, 1997, Commission File No. 333-28921.
<FP> To be submitted in paper format on Form SE pursuant to Rule 201
of Regulation S-T.
</TABLE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
LEC TECHNOLOGIES, INC.
Date: March 27, 1998 By: /s/ Michael F. Daniels
Michael F. Daniels, President
and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Date: March 27, 1998 By: /s/ Michael F. Daniels
Michael F. Daniels, President and
Chief Executive Officer
(Principal Executive Officer)
Date: March 27, 1998 By: /s/ William J. Vargas
William J. Vargas, V.P.
Finance (Principal Financial and
Accounting Officer)
Date: March 27, 1998 By: /s/ Larry M. Segall
Larry M. Segall, Director
Date: March 27, 1998 By: /s/ L. Derrick Ashcroft, Director
L. Derrick Ashcroft, Director
Exhibit 21.1
List of Subsidiaries
Pacific Mountain Computer Products, Inc.; incorporated in the State of
California on June 22, 1978; and doing business as Pacific Mountain
Computer Products, Inc.
TJ Computer Services, Inc.; incorporated in the State of New York on March
4, 1980; and doing business as Leasing Edge Corporation.
Superior Computer Systems, Inc.; incorporated in the State of Minnesota on
January 13, 1995; and doing business as Superior Computer Systems, Inc.
Atlantic Digital International, Inc.; incorporated in the State of Nevada
on November 10, 1997; and doing business as Atlantic Digital International,
Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 208,639
<SECURITIES> 0
<RECEIVABLES> 2,529,564
<ALLOWANCES> 157,405
<INVENTORY> 2,039,685
<CURRENT-ASSETS> 0<F1>
<PP&E> 674,348
<DEPRECIATION> 310,378
<TOTAL-ASSETS> 29,073,600
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 3,128,764
0
2,290
<COMMON> 48,823
<OTHER-SE> 5,665,689
<TOTAL-LIABILITY-AND-EQUITY> 29,073,600
<SALES> 19,495,224
<TOTAL-REVENUES> 30,714,624
<CGS> 16,493,634
<TOTAL-COSTS> 25,222,060
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (13,294)
<INTEREST-EXPENSE> 613,447
<INCOME-PRETAX> 329,531
<INCOME-TAX> 0
<INCOME-CONTINUING> 329,531
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 329,531
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
<FN>
<F1>UNCLASSIFIED BALANCE SHEET
</FN>
</TABLE>
