SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10Q-SB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED:
JUNE 30, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM _____ TO _____
Commission File No. 0-18303
- -----------------------------------------------------------------
LEC TECHNOLOGIES, INC.
_________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware No. 11-2990598
- -------------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6540 S. Pecos Road, Las Vegas, Nevada 89120
- -------------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
(702) 454-7900
- --------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Applicable only to issuers involved in bankruptcy proceedings
during the preceding five years:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
July 31, 1998: 4,704,069 common shares.
Traditional Small Business Disclosure Format (Check one): Yes [ ];
No [X]
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1998 (Unaudited)
and December 31, 1997 3
Consolidated Statements of Operations - for the three
and six months ended June 30, 1998 and 1997 (Unaudited) 5
Consolidated Statements of Cash Flows - for the six months
ended June 30, 1998 and 1997 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis or
Plan of Operations 11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
(a) Exhibits
(b) Reports on Form 8-K
</TABLE>
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited) (Audited)
----------- ------------
<S> <C> <C>
ASSETS:
Cash $ 287,219 $ 208,639
Receivables - net of allowance
for doubtful accounts of $271,978
and $157,405 2,438,920 2,372,159
Notes receivable - employees 71,502 176,311
Inventory, net 1,970,495 2,039,685
Leased assets:
Operating leases, net 13,223,528 15,284,177
Sales-type and direct
financing leases 8,024,927 7,738,825
Furniture and equipment - net of
accumulated depreciation of
$356,919 and $310,378 503,306 363,970
Other assets 460,134 272,338
Goodwill, net of accumulated
amortization of $159,611 and
$134,543 592,428 617,496
---------- ----------
TOTAL ASSETS $27,572,459 $29,073,600
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
(continued)
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited) (Audited)
----------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 4,432,416 $ 3,823,522
Accrued liabilities 873,792 492,325
Notes payable and lines of credit 3,492,799 3,128,764
Nonrecourse and recourse discounted
lease rentals 15,086,495 15,905,823
Other liabilities 118,458 244,796
---------- ----------
TOTAL LIABILITIES 24,003,960 23,595,230
---------- ----------
STOCKHOLDERS' EQUITY:
Series A convertible preferred
stock, $.01 par value; 1,000,000
shares authorized, 380,000 shares
issued; 229,016 shares outstanding 2,290 2,290
Common stock, $.01 par value;
25,000,000 shares authorized,
4,882,269 and 4,882,269 shares
issued and 4,704,069 and 4,789,069
shares outstanding at June 30, 1998
and December 31, 1997, respectively 48,823 48,823
Additional paid-in capital 10,382,421 10,382,421
Accumulated deficit (6,585,148) (4,716,732)
---------- ---------
3,848,386 5,716,732
Common stock held in treasury, at
cost; 178,200 and 93,200 shares
at June 30, 1998 and December 31,
1997, respectively (211,137) (144,682)
Note receivable from stockholders (68,750) (93,750)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 3,568,499 5,478,370
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $27,572,459 $29,073,600
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Operating leases $1,588,014 $2,373,559 $ 3,697,574 $4,598,780
Sales-type leases 287,099 6,393 631,571 6,393
Finance income 194,568 96,204 372,109 174,713
Direct sales 112,163 1,031,581 943,093 1,378,987
--------- --------- ---------- ---------
Total revenues from
leasing operations 2,181,844 3,507,737 5,644,347 6,158,873
Distribution sales 4,361,562 5,029,354 9,065,330 9,854,141
Other 2,051 2,090 3,396 6,866
--------- --------- ---------- ---------
Total revenues 6,545,457 8,539,181 14,713,073 16,019,880
--------- --------- ---------- ---------
Costs and expenses:
Operating leases 1,127,729 1,475,378 2,248,716 3,015,454
Sales-type leases 193,068 1,700 472,003 1,700
Interest expense 329,770 323,991 664,497 646,778
Direct sales 154,510 953,790 1,122,878 1,234,393
Write down of inventory
and residual values 1,109,294 - 1,109,294 -
--------- --------- ---------- ---------
Total costs from
leasing operations 2,914,371 2,754,859 5,617,388 4,898,325
Distribution cost of
sales 3,567,763 4,269,530 7,545,887 8,419,207
Selling, general and
administrative expenses 1,876,693 1,257,222 3,098,143 2,235,112
Interest expense 738,501 152,439 320,071 282,344
--------- --------- ---------- ---------
Total costs and expenses 8,497,328 8,434,050 16,581,489 15,834,988
--------- --------- ---------- ---------
Income (loss) before
income taxes (1,951,871) 105,131 (1,868,416) 184,892
Provision for income
taxes - - - -
--------- --------- --------- ---------
Net income (loss) $(1,951,871) $ 105,131 $(1,868,416) $ 184,892
========= ========= ========= =========
Earnings(loss) per common
share $ (0.41) $ 0.01 $ (0.40) $ 0.01
========= ========= ========= =========
Earnings(loss) per common
share asuuming dilution $ (0.41) $ 0.01 $ (0.40) $ 0.01
========= ========= ========= =========
</TABLE>
The accompanying notes are integral part of these consolidated financial
statements.
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------
June 30, June 30,
1998 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ (1,868,416) $ 184,892
Adjustments to reconcile net
income (loss) to cash provided
by operating activities:
Depreciation and amortization 2,320,325 3,063,957
Write down of inventory, residual
values and other 1,329,554 -
Change in assets and liabilities
due to operating activities:
Increase in accounts
receivable (66,761) (1,327,442)
(Increase) decrease in
inventory 103,958 (183,681)
Increase (decrease) in
accounts payable 608,894 991,095
Increase in accrued
liabilities 381,467 257,101
All other operating activities (314,134) (428,795)
----------- ----------
Total adjustments 4,363,303 2,372,235
----------- ----------
Net cash provided by operating
activities 2,494,887 2,557,127
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales, transfers and disposals of
inventory and equipment 1,318,409 2,077,671
Purchases of inventory for lease (2,404,708) (4,923,505)
Purchases of furniture and equipment (185,877) (42,283)
Decrease in notes receivable (51,791) 8,660
Additions to net investment in
sales-type and direct finance leases (2,078,026) (1,007,685)
Sales-type and direct financing
lease rentals received 1,507,434 892,357
----------- ----------
Net cash used in investing activities (1,894,559) (2,994,785)
----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
(Continued)
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------
June 30, June 30,
1998 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from nonrecourse and
recourse discounted lease rentals $ 3,493,537 $ 4,820,673
Payments on nonrecourse and recourse
discounted lease rentals (4,312,865) (4,408,050)
Proceeds from notes payable 829,048 585,107
Payments on notes payable (465,013) (891,062)
Proceeds from exercise of warrants - 269,000
Purchase of treasury stock (66,455) (38,609)
Preferred stock dividends paid - (114,508)
----------- ----------
Net cash provided by (used in)
financing activities (521,748) 221,551
----------- ----------
Net increase (decrease) in cash 78,580 (216,107)
Cash at beginning of period 208,639 412,340
----------- ----------
Cash at end of period $ 287,219 $ 196,233
=========== ==========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for:
Interest $ 947,620 $ 880,559
=========== ==========
Income taxes $ 19,790 $ -
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of LEC Technologies, Inc. (formerly, Leasing Edge
Corporation) and its wholly owned subsidiaries, collectively
referred to as the "Company". All material intercompany accounts
and transactions have been eliminated. Certain reclassifications
have been made to prior years' amounts to conform with current
period presentation.
Basis of Presentation
In the opinion of the Company, the accompanying unaudited
Consolidated Financial Statements contain all adjustments necessary
to present fairly the results of its operations for the three and
six months ended June 30, 1998 and 1997 and its cash flows for the
six months ended June 30, 1998. It is suggested that this report
be read in conjunction with the Company's audited financial
statements included in the Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997. The operating results for the
three and six months ended June 30, 1998 and cash flows for the six
months ended June 30, 1998 are not necessarily indicative of the
results that will be achieved for the full fiscal year or for
future periods.
Note 2. Earnings Per Share
Basic and diluted earnings (loss) per share are computed in
accordance with SFAS No. 128 "Earnings Per Share". The following
EPS amounts reflect EPS as computed under SFAS No. 128:
Three Months Ended
------------------------
June 30, June 30,
1998 1997
--------- ---------
Shares outstanding at
beginning of period 4,704,069 4,659,919
Effect of issuance of common
stock for services - -
Exercise of "B" warrants - -
Purchase of treasury stock - (17,714)
--------- ---------
Weighted average common
shares outstanding 4,704,069 4,642,205
========= =========
Net income (loss) $(1,951,871) $ 105,131
Preferred stock dividends - (57,254)
---------- ---------
Net earnings (loss) available to
common shareholders $(1,951,871) $ 47,877
========= =========
Earnings (loss) per common share $ (0.41) $ 0.01
========= =========
Weighted average common
shares outstanding 4,704,069 4,642,205
Effect of common shares
issuable upon exercise of
dilutive stock options - 196,439
--------- ---------
Weighted average common shares
outstanding assuming dilution 4,704,069 4,838,644
========= =========
Earnings (loss) per common share
assuming dilution $ (0.41) $ 0.01
========== =========
Six Months Ended
------------------------
June 30, June 30,
1998 1997
--------- ---------
Shares outstanding at
beginning of period 4,789,069 4,340,919
Effect of issuance of common
stock for services - 37,293
Exercise of "B" warrants - 248,193
Purchase of treasury stock (65,039) (8,906)
--------- ---------
Weighted average common
shares outstanding 4,724,030 4,617,499
========= =========
Net income (loss) $(1,868,416) $ 184,892
Preferred stock dividends - (114,508)
---------- ---------
Net earnings (loss) available to
common shareholders $(1,868,416) $ 70,384
========= =========
Earnings (loss) per common share $ (0.40) $ 0.02
========= =========
Weighted average common
shares outstanding 4,724,030 4,617,499
Effect of common shares
issuable upon exercise of
dilutive stock options - 128,881
--------- ---------
Weighted average common shares
outstanding assuming dilution 4,724,030 4,746,380
========= =========
Earnings (loss) per common share
assuming dilution $ (0.40) $ 0.01
========== =========
Note 3. Notes Payable and Revolving Lines of Credit
In October of 1997, PMCPI and Merrill Lynch Business Financial
Services, Inc. ("Merrill Lynch") replaced PMCPI's prior line of
credit (the "Merrill Line of Credit") with a term note in the
amount of $443,848 (the "Merrill Note"). The Merrill Line of
Credit was replaced by the Merrill Note in anticipation of the
Company entering into a new $1.7 million revolving line of credit
facility with Finova Capital Corporation (the "Finova Line") that
would have been secured by the inventory and accounts receivable of
both PMCPI and SCS. Subsequent to executing the Merrill Note, the
Company reevaluated the terms and conditions of the Finova Line and
determined it was too costly and that it did not sufficiently
address the Company's liquidity needs. Consequently, the Company
negotiated a term out of the remaining obligation, effective June
16, 1998, whereby the then outstanding principal and accrued
interest balance of approximately $420,000 would be amortized to
zero as of March 1, 1998. As of June 30, 1998, the amount
outstanding on the Merrill Note was $415,911. The Merrill Note is
guaranteed by the Company and is secured by the inventory and
accounts receivable of PMCPI.
The terms of the Second Loan Modification Agreement, effective
February 5, 1998 (the "Second Loan Modification Agreement") between
the Company and Bank of America National Trust & Savings
Association ("Bank of America") govern the Company's debt
obligation due January 1, 1998 to Bank of America (the "Term
Loan"). At February 5, 1998, the amount of unpaid principal on the
Term Loan was $1,366,365 and the interest rate was 12.5%. The
terms of the Second Loan Modification Agreement require the Company
to make monthly principal 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 $3.5 million as of June
30, 1998; restrictions on the payment of cash dividends on shares
of the Company's common stock; restrictions on incurring additional
indebtness and creating additional liens on the Company's property;
and limitations on unfinanced capital expenditures (as defined).
In November 1995, the Company entered into a letter agreement with
Excel Bank N.A. (Excel") (formerly Union Chelsea National Bank)
whereby Excel agreed to make available to the Company a $250,000
line of credit (the "Equity Line") to be used to fund the Company's
equity investment in certain leases discounted by Excel (i.e., the
difference between the cost of the leased equipment and the
discounted present value of the minimum lease payments assigned to
Excel). Borrowings under the Equity Line are evidenced by term
notes and require monthly payments of principal and interest over
a period equal to the term of the related discounted lease with a
final balloon payment of between 30 and 50 percent depending on the
lease term. Interest rates on the term notes are at the applicable
discounted lease rate plus 1.75%. In July 1996 and December of
1997, Excel increased its maximum commitment under the Equity Line
to $1,000,000 and $2,500,000, respectively. Such maximum
commitment is reduced by the amount of outstanding recourse
discounted lease rentals funded by Excel, borrowings outstanding
under the ADI credit line and an outstanding capital lease
obligation of approximately $500,000, $489,571 and $101,229,
respectively, at June 30, 1998. At June 30, 1998 , the Company had
outstanding term notes and available credit under the Equity Line
of $1,368,595 and $40,605, 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 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
indebtness or to create any additional liens on it's 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. As of June 30, 1998, loans in the
amount of $489,571 were outstanding under the ADI Credit Agreement.
NOTE 4. Impact of Recently Issued Accounting Standards
In June of 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 requires companies to classify items of other com-
prehensive income by their nature in a financial statement and
display the accumulated balance of the other comprehensive income
separately from retained earnings and additional paid-in capital in
the equity section of a statement of financial position and is
effective for financial statements issued for fiscal years
beginning December 15, 1997. The Company adopted SFAS 130 in the
quarter ended March 31, 1998. As of June 30, 1998, the Company had
no other comprehensive income.
In June of 1997, FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosure About Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 establishes additional
standards for segment reporting and is effective for fiscal years
beginning after December 15, 1997. The Company is currently
assessing the impact of implementation of SFAS 131.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION
Overview
The Company was originally founded in 1980 under the name TJ
Computer Services, Inc. ("TJCS"). In 1989, all of the outstanding
common stock of TJCS was acquired by Harrison Development, Inc., an
inactive public corporation organized in Colorado, which then
changed its name to TJ Systems Corporation. In October 1991, the
Company reincorporated in the State of Delaware and in June 1995,
changed its name to Leasing Edge Corporation. In March 1997, the
Company's shareholders approved a change in the Company's name to
LEC Technologies, Inc. Unless the context otherwise requires, the
term the "Company" as used herein refers to LEC Technologies, Inc.
and its wholly owned subsidiaries.
The Company's services are organized into three groups of
related businesses and are provided generally through separate
business units, although there is a significant amount of
interrelated activities. The three business units are as follows:
Leasing Services: Leasing, remarketing, financial
engineering, consulting and third-party maintenance and
systems integration services for midrange systems, tele-
communications equipment, point-of-sale systems and system
peripherals. The Company conducts its leasing services
business under the trade name Leasing Edge Corporation.
Distribution Services: Sale of terminals, printers,
communications controllers, supplies, technical consulting and
third-party maintenance services. Business units comprising
Distribution services are SCS and PMCPI, wholly-owned
subsidiaries of LEC Technology, Inc.
Remarketing Services: Remarketing of previously leased
equipment, displaced equipment, and used equipment purchased
from other lessors or brokers. This unit also has consignment
relationships with certain customers to assist such
organizations in the sale of their used equipment. Business
units comprising remarketing services include Leasing Edge
Corporation, SCS, PMCPI and ADI, a wholly-owned subsidiary of
LEC Technologies, Inc., which specializes in the acquisition
and remarketing of used computer equipment on both a domestic
and an international basis.
Accounting Practices
Accounting Classification of Leases: Reported earnings are
significantly impacted by the accounting classification of leases.
The Company's lease portfolio is comprised of sales-type, direct
financing and operating leases. The Company classifies each lease
at inception in accordance with Statement of Financial Accounting
Standards No. 13, as amended and interpreted. Sales-Type and
direct financing leases are those leases which transfer
substantially all the costs and risk of ownership of the equipment
to the lessee. Operating leases are those leases which
substantially all of the benefits and risks of ownership of the
equipment are retained by the lessor.
The accounting treatment and resulting impact on the financial
statements differs significantly during the term of the lease,
depending on the type of lease classification. Under sales-type
leases, the present value of the minimum lease payments calculated
at the rate implicit in the lease is recorded as revenue and the
cost of the equipment less the present value of the estimated
unguaranteed residual value is record as leasing costs at lease
inception. Consequently, a significant portion of the gross profit
on the lease transaction is recorded as leasing costs at lease
inception. Consequently, a significant portion of the gross profit
on the lease transaction is recognized at lease inception. Under
direct financing leases, the excess of aggregate minimum lease
payments plus the estimated unguaranteed residual over the cost the
equipment is recorded as unearned interest income at lease
inception. Such amount is then recognized monthly over the lease
term as a constant percentage of the related asset. There are no
costs and expenses related to direct financing leases since revenue
is recorded on a net basis. Under operating leases, the monthly
lease rental is recorded as revenue ratably over the lease term.
The cost of the related equipment is recorded as leased assets and
is depreciated over the lease term to the estimated unguaranteed
residual value. Regardless of the classification of a lease
transaction and the resultant accounting treatment during the lease
term, the aggregate gross profit recognized during the lease term
is identical.
Residual Values: The Company's cash flow depends to a great
extent on its ability to realize the residual value of leased
equipment after the initial term of the lease by re-leasing or
selling such equipment. The Company's financial results would be
materially and adversely affected if the residual value of the
equipment could not be realized when returned to the Company
because of technological obsolescence or for any other reason.
Estimated residual values for leased equipment vary, both in amount
and as a percentage of the original equipment cost, depending upon
many factors, including the type and manufacturer of the equipment,
the Company's experience with the type of equipment and the term of
the lease. in estimating future residual values, the Company
relies on both its own experience and upon third-party estimates of
future market value where available. The Company reviews its
estimated residual values at least annually and reduces them as
necessary. At the time of expiration os a lease, the Company
remarkets the equipment and records the proceeds from the sale (in
the event os a sale) or the present value of the lease rentals (in
the event of a sale-type lease as revenue and records the net book
value of the related equipment as a cost of sale or lease.
Results of Operations
Six Months Ended June 30, 1998 Compared to Six Months Ended June
30, 1997
Revenues
Total revenues from leasing operations decreased 8.4% from
$6,158,873 for the six months ended June 30, 1997 to $5,644,347 for
the six months ended June 30, 1998, a decrese of $514,526. The
decrease in lease revenues is primarily due to decreases in revenue
from the portfolio base of operating leases and in direct sales of
off-lease equipment, partially offset by increases in finance
income and in sales-type lease revenues.
Revenue from the portfolio base of operating leases decreased 19.6%
from $4,598,780 for the six months ended June 30, 1997 to
$3,697,574 for the six months ended June 30, 1998, a decrease of
$901,206. This decrease in operating lease revenue is due
primarily to a combination of an increase in the number of direct
finance leases written and the early termination of certain
operating leases purchased by a customer. Direct sales of off-
lease equipment decreased 31.6% from $1,378,987 for the six months
ended June 30, 1997 to $934,093 for the six months ended June 30,
1998, a decrease of $435,894. This decrease in sales of off-lease
equipment is due primarily to a decrease in the volume of lease
terminations during the first six months of 1998 as compared to
1997. Finance income increased 113.0% from $174,713 for the six
months ended June 30, 1997 to $372,109 for the six months ended
June 30, 1998, an increase of $197,396. This increase in finance
income is the result of a change in the mix of leases written from
primarily operating leases to direct financing leases. The
accounting classification of a lease transaction is a function of
the pricing of the transaction combined with the estimated end-of-
lease residual value (i.e., if the estimated end-of-lease residual
value is less than ten percent of equipment cost, the lease
classification will most likely be direct financing). Revenue from
sales-type leases increased from $6,393 for the six months ended
June 30, 1997 to $631,571 for the six months ended June 30, 1998,
an increase of $625,178. This increase in sales-type lease revenue
was due to the renewal, upgrade and consolidation of certain
existing operating leases into new leases which were accounted for
as sales-type pursuant to SFAS No. 13. As compared to other lease
classifications, sales-type leases result in a greater percentage
of the related revenue and expense from the transaction being
recognized at lease inception. Consequently, the revenue
recognized subsequent to lease inception consists only of the
finance income element of the transaction.
Distribution sales, representing the activity of ADI, SCS and
PMCPI, decreased 0.6% from $9,123,615 for the six months ended June
30, 1997 to $9,065,330 for the six months ended June 30, 1998, a
decrease of $58,285. The decrease in distribution sales activity
is attributable to a decrease in sales volumes at SCS of
approximately $1.6 million partially offset by increased sales
volumes at ADI and PMCPI of approximately $1.2 million and $.4
million, respectively. The sales decrease at SCS was primarily
attributable to sales staff turnover. As a result of the foregoing
and certain other factors, the Company installed a new management
team and added additional sales staff in May 1998. The sales
increases at ADI and PMCPI were both attributable to the expansion
of each entities' sales staff and, with respect to ADI, the
addition of new product lines.
Costs and Expenses
Total costs from leasing operations increased 14.7% from $4,898,325
for the six months ended June 30, 1997 to $5,617,388 for the six
months ended June 30, 1998, an increase of $719,063. The increase
in total costs from leasing operations was primarily due to the
write-down to their net realizable values of certain off-lease
equipment of $1,109,294 and an increase in cost of sales associated
with the sales-type lease transactions referred to previously of
$470,303, partially offset by a decrease in depreciation expense
related to operating leases of $766,738. The decrease in operating
lease depreciation is related to a combination of the early lease
terminations and the change in the mix of leases written as
referred to previously.
Gross profit from leasing operations (total revenues from leasing
operations less total costs from leasing operations) decreased
97.9% from $1,260,548 for the six months ended June 30, 1997 to
$26,959 for the six months ended June 30, 1998, a decrease of
$1,233,589. Gross margin (gross profit from leasing operations as
a percentage of total revenues from leasing operations) decreased
to 0.5% from 20.5% due to the foregoing.
Leasing costs associated with the portfolio base of operating
leases decreased 25.4% from $3,015,454 for the six months ended
June 30, 1997 to $2,248,716 for the six months ended June 30, 1998,
a decrease of $766,738. The decrease in costs from this segment of
the Company's lease portfolio is due primarily to the early
termination/buy-out of certain operating leases and the lease
renewal/upgrades mentioned previously. Gross profit on operating
leases decreased 8.5% from $1,583,326 for the six months ended June
30, 1997 to $1,448,858 for the six months ended June 30, 1998, a
decrease of $134,168.
Direct sales costs (leasing costs with respect to the sale of
equipment off lease and leases with dollar buy-out options treated
as sales) decreased 9.0% from $1,234,393 for the six months ended
June 30, 1997 to $1,122,878 for the six months ended June 30, 1998,
a decrease of $111,515 but increased as a percentage of related
revenue to 119.1% from 89.5%. The increase in costs as a
percentage of revenue is due to residual value realization more
closely matching stated values in 1997 as compared to 1998.
Distribution cost of sales of decreased 1.9% from $7,688,681 for
the six months ended June 30, 1997 to $7,545,887 for the six months
ended June 30, 1998, a decrease of $142,794. Gross margin on
distribution sales increased to 16.8% in 1998 from 15.7% in 1997
due to an increase in comparative sales volume of certain higher
margin products.
Selling, general and administrative expenses increased 38.6% from
$2,235,112 for the six months ended June 30, 1997 to $3,098,143 for
the six months ended June 30, 1998, an increase of $863,031. The
increase in selling, general and administrative expenses was due
primarily to increased staffing levels at ADI, SCS and LEC
Technologies, Inc. (parent company), an increase in reserve for bad
debts of $156,600 and accrued severence pay due the former
President of SCS. Selling, general and administrative expenses
increased from 14.6% of total revenues in 1997 to 21.1% of total
revenues in 1998.
Interest expense on non-lease related indebtedness increased
$37,727, or 13.4%. The increase is due to higher average debt
levels and interest rates.
The consolidated financial statements do not reflect a provision
for income taxes due to the utilization of net operating loss
carryforwards and changes in the related valuation allowance. At
June 30, 1998, the Company had unexpired net operating loss
carryforwards of approximately $5,600,000 which can be utilized to
offset future taxable income, if any.
Net Earnings
As a result of the foregoing, the Company recorded a net loss of
$1,868,416 for the six months ended June 30, 1998 as compared to
net income of $184,892 for the six months ended June 30, 1997.
Three Months Ended June 30, 1998 Compared to Three Months Ended
June 30, 1997
Revenues
Total revenues from leasing operations decreased 37.8% from
$3,507,737 for the quarter ended June 30, 1997 to $2,181,844 for
the quarters ended June 30, 1998, a decrese of $1,325,893. The
decrease in lease revenues is primarily due to decreases in revenue
from the portfolio base of operating leases and in direct sales of
off-lease equipment, partially offset by increases in finance
income and in sales-type lease revenues.
Revenue from the portfolio base of operating leases decreased 33.1%
from $2,373,559 for the quarter ended June 30, 1997 to $1,588,014
for the quarter ended June 30, 1998, a decrease of $785,545. This
decrease in operating lease revenue is due primarily to a
combination of an increase in the number of direct finance leases
written and the early termination of certain operating leases
purchased by a customer. Direct sales of off-lease equipment
decreased 89.1% from $1,031,581 for the quarter ended June 30, 1997
to $112,163 for the quarter ended June 30, 1998, a decrease of
$919,418. This decrease in sales of off-lease equipment is due
primarily to a decrease in the volume of lease terminations during
the second quarter of 1998 as compared to the second quarter of
1997. Finance income increased 102.2% from $96,204 for the quarter
ended June 30, 1997 to $194,568 for the quarter ended June 30,
1998, an increase of $98,364. This increase in finance income is
the result of a change in the mix of leases written from primarily
operating leases to direct financing leases. The accounting
classification of a lease transaction is a function of the pricing
of the transaction combined with the estimated end-of-lease
residual value (i.e., if the estimated end-of-lease residual value
is less than ten percent of equipment cost, the lease
classification will most likely be direct financing). Revenue from
sales-type leases increased from $6,393 for the quarter ended June
30, 1997 to $287,099 for the quarter ended June 30, 1998, an
increase of $280,706. This increase in sales-type lease revenue
was due to the renewal, upgrade and consolidation of certain
existing operating leases into new leases which were accounted for
as sales-type pursuant to SFAS No. 13. As compared to other lease
classifications, sales-type leases result in a greater percentage
of the related revenue and expense from the transaction being
recognized at lease inception. Consequently, the revenue
recognized subsequent to lease inception consists only of the
finance income element of the transaction.
Distribution sales decreased 6.4% from $4,658,656 for the quarter
ended June 30, 1997 to $4,361,562 for the quarter ended June 30,
1998, a decrease of $297,094. The decrease in distribution sales
activity is attributable to the previouly discussed decrease in
sales volumes at SCS partially offset by increased sales volumes at
ADI and PMCPI. The sales decrease at SCS was primarily attributa-
ble to sales staff turnover. As a result of the foregoing and
certain other factors, the Company installed a new management team
and added additional sales staff in May 1998. The sales increases
at ADI and PMCPI were both attributable to the expansion of each
entities' sales staff and, with respect to ADI, the addition of new
product lines.
Costs and Expenses
Total costs from leasing operations increased 5.8% from $2,754,859
for the quarter ended June 30, 1997 to $2,914,371 for the quarter
ended June 30, 1998, an increase of $159,512. The increase in
total costs from leasing operations was primarily due to the write-
down to their net realizable values of certain off-lease equipment
of $1,109,294 and an increase in cost of sales associated with the
sales-type lease transactions referred to previously of $191,368,
partially offset by a decrease in depreciation expense related to
operating leases of $347,649 and a decrease in costs of sales
associated with the sale of off-lease equipment of $799,280. The
decrease in operating lease depreciation is related to a
combination of the early lease terminations and the change in the
mix of leases written as referred to previously.
Gross profit from leasing operations (total revenues from leasing
operations less total costs from leasing operations) decreased
197.3% from $752,878 for the quarter ended June 30, 1997 to a loss
of $732,527 for the quarter ended June 30, 1998, a decrease of
$1,485,405. Gross margin (gross profit from leasing operations as
a percentage of total revenues from leasing operations) decreased
to a negative 33.6% from 21.5% due to the foregoing.
Leasing costs associated with the portfolio base of operating
leases decreased 23.6% from $1,475,378 for the quarter ended June
30, 1997 to $1,127,729 for the quarter ended June 30, 1998, a
decrease of $347,649. The decrease in costs from this segment of
the Company's lease portfolio is due primarily to the lease
renewal/upgrades mentioned previously. Gross profit on operating
leases decreased 48.8% from $898,181 for the quarter ended June 30,
1997 to $460,285 for the quarter ended June 30, 1998, a decrease of
$437,896.
Direct sales costs decreased 83.8% from $953,790 for the quarter
ended June 30, 1997 to $154,510 for the quarter ended June 30,
1998, a decrease of $799,280 but increased as a percentage of
related revenue to 137.8% from 92.5%. The increase in costs as a
percentage of revenue is due to residual value realization more
closely matching stated values in 1997 as compared to 1998.
Distribution cost of sales of decreased 8.5% from $3,898,832 for
the quarter ended June 30, 1997 to $3,567,763 for the quarter ended
June 30, 1998, a decrease of $331,069. Gross margin on
distribution sales increased to 18.2% in 1998 from 16.3% in 1997
due to an increase in comparative sales volume of certain higher
margin products.
Selling, general and administrative expenses increased 49.3% from
$1,257,222 for the quarter ended June 30, 1997 to $1,876,693 for
the quarter ended June 30, 1998, an increase of $619,471. The
increase in selling, general and administrative expenses was due
primarily to increased staffing levels at ADI, SCS and LEC
Technologies, Inc. (parent company), an increase in reserve for bad
debts of $156,600 and accrued severence pay due the former
President of SCS. Selling, general and administrative expenses
increased from 15.4% of total revenues in 1997 to 28.7% of total
revenues in 1998.
Interest expense on non-lease related indebtedness decreased
$13,938, or 9.1%. The increase is due to lower average debt levels
in the current quarter as compared to the year-age quarter.
Net Earnings
As a result of the foregoing, the Company recorded a net loss of
$1,951,871 for the quarter ended June 30, 1998 as compared to net
income of $105,131 for the quarter ended June 30, 1997.
Liquidity and Capital Resources
In October of 1997, PMCPI and Merrill Lynch Business Financial
Services, Inc. ("Merrill Lynch") replaced PMCPI's prior line of
credit (the "Merrill Line of Credit") with a term note in the
amount of $443,848 (the "Merrill Note"). The Merrill Line of
Credit was replaced by the Merrill Note in anticipation of the
Company entering into a new $1.7 million revolving line of credit
facility with Finova Capital Corporation (the "Finova Line") that
would have been secured by the inventory and accounts receivable of
both PMCPI and SCS. Subsequent to executing the Merrill Note, the
Company reevaluated the terms and conditions of the Finova Line and
determined it was too costly and that it did not sufficiently
address the Company's liquidity needs. Consequently, the Company
negotiated a term out of the remaining obligation, effective June
16, 1998, whereby the then outstanding principal and accrued
interest balance of approximately $420,000 would be amortized to
zero as of March 1, 1998. As of June 30, 1998, the amount
outstanding on the Merrill Note was $415,911. The Merrill Note is
guaranteed by the Company and is secured by the inventory and
accounts receivable of PMCPI.
The terms of the Second Loan Modification Agreement, effective
February 5, 1998 (the "Second Loan Modification Agreement") between
the Company and Bank of America National Trust & Savings
Association ("Bank of America") govern the Company's debt
obligation due January 1, 1998 to Bank of America (the "Term
Loan"). At February 5, 1998, the amount of unpaid principal on the
Term Loan was $1,366,365 and the interest rate was 12.5%. The
terms of the Second Loan Modification Agreement require the Company
to make monthly principal 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 $3.5 million as of June
30, 1998; restrictions on the payment of cash dividends on shares
of the Company's common stock; restrictions on incurring additional
indebtness and creating additional liens on the Company's property;
and limitations on unfinanced capital expenditures (as defined).
In November 1995, the Company entered into a letter agreement with
Excel Bank N.A. (Excel") (formerly Union Chelsea National Bank)
whereby Excel agreed to make available to the Company a $250,000
line of credit (the "Equity Line") to be used to fund the Company's
equity investment in certain leases discounted by Excel (i.e., the
difference between the cost of the leased equipment and the
discounted present value of the minimum lease payments assigned to
Excel). Borrowings under the Equity Line are evidenced by term
notes and require monthly payments of principal and interest over
a period equal to the term of the related discounted lease with a
final balloon payment of between 30 and 50 percent depending on the
lease term. Interest rates on the term notes are at the applicable
discounted lease rate plus 1.75%. In July 1996 and December of
1997, Excel increased its maximum commitment under the Equity Line
to $1,000,000 and $2,500,000, respectively. Such maximum
commitment is reduced by the amount of outstanding recourse
discounted lease rentals funded by Excel, borrowings outstanding
under the ADI credit line and an outstanding capital lease
obligation of approximately $500,000, $489,571 and $101,229,
respectively, at June 30, 1998. At June 30, 1998 , the Company had
outstanding term notes and available credit under the Equity Line
of $1,368,595 and $40,605, 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 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
indebtness or to create any additional liens on it's 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. As of June 30, 1998, loans in the
amount of $489,571 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 indebtness and existing cash.
Consequently, the Company is continuously seeking debt and/or
equity financing to fund the growth of its lease portfolio.
However, should the Company fail to receive additional equity
financing or refinance its existing debt in 1998, the Company's
portfolio growth and resultant cash flows could be materially and
adversely affected. In addition, there is no assurance that
financial institutions will continue to finance the Company's
future leasing transactions on a nonrecourse basis or that the
Company will continue to attract customers that meet the credit
standards of its nonrecourse financing sources or that, if it
receives such additional financing for future lease transactions,
it will be on terms favorable to the Company. At June 30, 1998,
the Company had approximately $327,824 in cash on hand and credit
availability under the Equity Line.
At the inception of each lease, the Company establishes the
residual value of the leased equipment, which is the estimated
market value of the equipment at the end of the initial lease term.
the Company's cash flow depends to a great extent on its ability to
realize the residual value leased equipment after the initial term
of its leases with its customers. Historically, the Company has
realized its recorded investment in residual values through (i)
renegotiation of the lease during its term to add or modify
equipment; (ii) renewal or extension of the original lease; (iii)
leasing equipment to a new user after the initial lease term; or
(iv) sale of the equipment. Each of these alternatives impacts the
timing of the Company's cash realization of such recorded residual
values. Equipment may be returned to the Company at the end of an
initial or extended lease term when it may not be possible for the
Company to resell or re-lease the equipment on favorable terms.
Developments in the high technology equipment market tend to occur
at rapid rates, adding to the risk of obsolescence and shortened
product life cycles which could affect the Company's ability to
realize the residual value of such equipment. In addition, if the
lessee defaults on a lease, the financial institution that provided
nonrecourse financing may foreclose on its security interest in the
lease equipment and the Company may not realize any portion of the
residual value. If the residual value in any equipment cannot be
realized after the initial lease term, the recorded investment in
the equipment must be written down, resulting in lower cash flow
and reduced earnings. There can be no assurance that the Company
will not experience material residual value or inventory write-
downs in the future.
The Company intends to continue to retain residual ownership of all
the equipment it leases. As of June 30, 1998 the Company had a
total net investment in lease transactions of $21.2 million
compared to $23.0 million as of December 31, 1997. The estimated
residual value of the Company's portfolio of leases expiring
between July 1, 1998 and December 31, 2003 totals $7,298,004,
although there can be no assurance that the Company will be able to
realize such residual value in the future. As of June 30, 1998,
the estimated residual value of the Company's portfolio of leases
by year of lease termination is as follows:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
1998 $ 1,213,304
1999 1,654,800
2000 3,172,400
2001 1,176,500
2002 70,000
2003 11,000
----------
Total $ 7,298,004
==========
</TABLE>
Leased equipment expenditures of $4,482,734 for the six months
ended June 30, 1998 were financed through the discounting of
$3,493,537 of noncancelable lease rentals to various financial
institutions, borrowings under the Company's Equity Line and
available cash.
Based on the Company's anticipated residual value realization and
distribution sales, management believes that it will have adequate
capital resources to continue its operations at the present level
for at least the next twelve months. Management further believes
that its existing credit lines will be renewed as they come due.
The Company believes that inflation has not been a significant
factor in its business.
The Company is aware of the issues associated with the programming
code in existing computer systems as the millennium approaches.
Independent of such issues, management of the Company has initiated
an information systems project to standardize all of the Company's
hardware and software systems. The systems selected by management
are Year 2000 compliant. the implementation of such systems is
anticipated to be completed in 1998. Management does not believe
that such implementation will have a significant effect on the
Company's earnings.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 requires companies to classify items of other
comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in
the equity section of a statement of financial position and is
effective for financial statements issued for fiscal years
beginning December 15, 1997. The Company adopted SFAS 130 in the
quarter ended March 31, 1998. As of June 30, 1998, the Company had
no other comprehensive income.
In June of 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosure About Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 establishes additional
standards for segment reporting and is effective for fiscal years
beginning after December 15, 1997. The Company is currently
assessing the impact of implementation of SFAS 131.
Safe Harbor Statement under the
Private Securities Litigation Reform Act of 1995
Certain statements herein and in the future filings by the Company
with the Securities and Exchange Commission and in the Company's
written and oral statements made by or with the approval of an
authorized executive officer constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934, and
the Company intends that such forward-looking statements be subject
to the safe-harbors created thereby. The words and phrases
"looking ahead", "we are confident", "should be", "will be",
"predicted", "believe", "expect" and "anticipate" and similar
expressions identify forward-looking statements. These and other
similar forward-looking statements reflect the Company's current
views with respect to future events and financial performance, but
are subject to many uncertainties and factors relating to the
Company's operations and business environment which may cause the
actual results of the Company to be materially different from any
future results expressed or implied by such forward-looking
statements. Examples of such uncertainties include, but are not
limited to, changes in customer demand and requirements, the mix of
leases written, the availability and timing of external capital,
the timing and method of the Company's realization of its recorded
residual values, new product announcements, continued growth of the
semiconductor industry, trend of movement to client/server
environment, interest rate fluctuations, changes in federal income
tax laws and regulations, competition, unanticipated expenses and
delays in the integration of newly-acquired businesses, industry
specific factors and worldwide economic and business conditions.
With respect to economic conditions, a recession can cause
customers to put off new investments and increase the Company's bad
debt experience. The mix of leases written in a quarter is a
direct result of a combination of factors, including, but not
limited to, changes in customers demands and/or requirements, new
product announcements, price changes, changes in delivery dates,
changes in maintenance policies and the pricing policies of
equipment manufacturers, and price competition from other lessors.
The Company undertakes no obligation to publicly update or revise
any forward-looking statements whether as a result of new
information, future events or otherwise.
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statement re Computation of Per Share
Earnings.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None.
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
LEC Technologies, Inc.
(Registrant)
Date: August 18, 1997 /s/Michael F. Daniels
Michael F. Daniels, President
and Chief Executive Officer
(Principal Executive Officer)
Date: August 18, 1997 /s/ William J. Vargas
William J. Vargas, V.P.- Finance
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 287,219
<SECURITIES> 0
<RECEIVABLES> 2,710,898
<ALLOWANCES> 271,978
<INVENTORY> 1,970,495
<CURRENT-ASSETS> 0<F1>
<PP&E> 860,225
<DEPRECIATION> 356,919
<TOTAL-ASSETS> 27,572,459
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 3,492,799
0
2,290
<COMMON> 48,823
<OTHER-SE> 3,798,273
<TOTAL-LIABILITY-AND-EQUITY> 27,572,459
<SALES> 10,008,423
<TOTAL-REVENUES> 14,713,073
<CGS> 8,668,765
<TOTAL-COSTS> 13,163,275
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 114,573
<INTEREST-EXPENSE> 320,071
<INCOME-PRETAX> (1,868,416)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,868,416)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,868,416)
<EPS-PRIMARY> (0.40)
<EPS-DILUTED> (0.40)
</TABLE>
