Form 10Q LAW ENFORCEMENT ASSOCIATES CORP - AID Filed: August 14, 2008 (period: June 30, 2008) Quarterly report filed by small businesses |
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2008
Commission File No. 000-49907
Law Enforcement Associates Corporation
(Name of Small Business Issuer in Its Charter)
Nevada | 56-2267438 |
(Employer Identification Number) | |
2609 Discovery Drive Suite 125, Raleigh, North Carolina 27616
(Address of principal executive offices) (Zip Code)
(919) 872-6210
(Issuer's Telephone Number, Including Area Code)
Check whether the Issuer: (1) has filed all reports required 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 30 days:
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of accelerated filer and large accelerated filer in Rule 12b-12 of the Exchange Act (Check one)
Large Accelerated filer __ | Accelerated filer __ | Non-accelerated filer __ | Smaller Reporting Company X |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes __ No X
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the close of the period covered by this report: 25,782,433 Shares of Common Stock (no par value).
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PART I: FINANCIAL INFORMATION | ||
Item 1 - | Financial Statements | |
Item 2 - | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3 - | Quantitative and Qualitative Disclosures About Market Risk | |
Item 4T - | Controls and Procedures | |
PART II: OTHER INFORMATION | ||
Item 1 - | Legal Proceedings | |
Item 2 - | Changes in Securities | |
Item 3 - | Defaults Upon Senior Securities | |
Item 4 - | Submission of Matters to a Vote of Security Holders | |
Item 5 - | Other Information | |
Item 6 - | Exhibits |
2
This Report contains certain forward-looking statements, including the plans and objectives of management for the business, operations, and economic performance of Law Enforcement Associates Corp. (the “Company”). These forward-looking statements generally can be identified by the context of the statement or the use of words such as the Company or its management “believes,” “anticipates,” “intends,” “expects,” “plans” or words of similar meaning. Similarly, statements that describe the Company’s future operating performance, financial results, plans, objectives, strategies, or goals are forward-looking statements. Although management believes that the assumptions underlying the forward-looking statements are reasonable, these assumptions and the forward-looking statements are subject to various factors, risks and uncertainties, many of which are beyond the control of the Company. Accordingly, actual results could differ materially from those contemplated by the forward-looking statements. In addition to the other cautionary statements relating to certain forward-looking statements throughout this Report, attention is directed to “Business — Cautionary Information Regarding Forward-Looking Statements” below for discussion of some of the factors, risks and uncertainties that could affect the outcome of future results contemplated by forward-looking statements.
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LAW ENFORCEMENT ASSOCIATES CORPORATION
Consolidated Balance Sheets
June 30, | December 31, | |||||||
2008 | 2007 | |||||||
Assets | (Unaudited) | (Audited) | ||||||
Current assets: | ||||||||
Cash | $ | 41 | $ | 325,244 | ||||
Trade accounts receivable (net of allowance for doubtful | ||||||||
accounts of $20,000 and $33,205 at June 30, 2008 | ||||||||
and December 31, 2007, respectively) | 712,689 | 713,067 | ||||||
Inventories | 1,500,810 | 1,256,346 | ||||||
Prepaid expenses | 67,301 | 38,187 | ||||||
Deferred tax asset-current | 90,219 | 769,338 | ||||||
Total current assets | 2,371,060 | 3,102,182 | ||||||
Property and equipment, net | 199,923 | 257,025 | ||||||
Other assets: | ||||||||
Intangibles, net | 2,770,243 | 2,883,542 | ||||||
Deferred tax asset less current portion | 1,042,694 | 296,147 | ||||||
Total other assets | 3,812,937 | 3,179,689 | ||||||
Total assets | $ | 6,383,920 | $ | 6,538,896 |
The accompanying notes are an integral part of the financial statements.
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LAW ENFORCEMENT ASSOCIATES CORPORATION
Consolidated Balance Sheets
June 30, | December 31, | |||||||
2008 | 2007 | |||||||
Liabilities and Stockholders' Equity | (Unaudited) | (Audited) | ||||||
Current liabilities: | ||||||||
Trade accounts payable | $ | 573,893 | $ | 570,975 | ||||
Line of credit | 175,000 | 200,000 | ||||||
Accrued expenses | 305,482 | 357,413 | ||||||
Customer deposits | 40,812 | 24,533 | ||||||
Total current liabilities | 1,095,187 | 1,152,921 | ||||||
Total liabilities | 1,095,187 | 1,152,921 | ||||||
Commitments and Contingencies | ||||||||
Common stock, subject to possible redemption | ||||||||
1,200,000 shares, at redemption value | 1,389,272 | 1,338,170 | ||||||
Stockholders' equity: | ||||||||
Common stock, $0.001 par value, 50,000,000 authorized, | ||||||||
25,782,433 issued and outstanding at June 30, 2008 | ||||||||
and December 31, 2007 | 25,782 | 25,782 | ||||||
Treasury stock at cost, 595 shares of common stock held by | ||||||||
the Company | (625 | ) | (625 | ) | ||||
Paid in capital in excess of par | 4,995,595 | 4,995,595 | ||||||
Retained earnings/(accumulated deficit) | (1,121,291 | ) | (972,947 | ) | ||||
Total stockholders' equity | 3,899,461 | 4,047,805 | ||||||
Total liabilities and stockholders' equity | $ | 6,383,920 | $ | 6,538,896 |
The accompanying notes are an integral part of the financial statements.
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LAW ENFORCEMENT ASSOCIATES CORPORATION
Consolidated Statements of Operations and Retained Earnings
for the Six Months Ended June 30, 2008 and 2007
2008 | 2007 | |||||||
(Unaudited) | (Unaudited) | |||||||
Net sales | $ | 3,828,359 | $ | 3,777,036 | ||||
Cost of sales | 2,499,910 | 2,298,037 | ||||||
Gross profit | 1,328,449 | 1,478,999 | ||||||
Research and development | 39,892 | 40,620 | ||||||
Operating expenses | 1,406,544 | 1,389,375 | ||||||
Total operating expenses | 1,446,436 | 1,429,995 | ||||||
Operating income (loss) | (117,987 | ) | 49,004 | |||||
Other income (expense): | ||||||||
Loss on sale of assets | (43,666 | ) | 0 | |||||
Other income | 6,606 | 0 | ||||||
Interest income | 1,320 | 1,035 | ||||||
Interest expense | (10,943 | ) | (701 | ) | ||||
Interest accretion | (51,102 | ) | 0 | |||||
Total other income (expense) | (97,785 | ) | 334 | |||||
Net income (loss) before income taxes | (215,772 | ) | 49,338 | |||||
Income tax provision (benefit) | (67,428 | ) | 9,319 | |||||
Net income (loss) | $ | (148,344 | ) | $ | 40,019 | |||
Earnings per weighted average share, basic | $ | (0.01 | ) | $ | 0.00 | |||
Weighted average number of shares | 25,782,433 | 25,294,809 |
The accompanying notes are an integral part of the financial statements.
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LAW ENFORCEMENT ASSOCIATES CORPORATION
Consolidated Statements of Operations and Retained Earnings
for the Three Months Ended June 30, 2008 and 2007
2008 | 2007 | |||||||
(Unaudited) | (Unaudited) | |||||||
Net sales | $ | 1,848,700 | $ | 2,011,982 | ||||
Cost of sales | 1,327,259 | 1,308,175 | ||||||
Gross profit | 521,441 | 703,807 | ||||||
Research and development | 30,688 | 16,548 | ||||||
Operating expenses | 662,238 | 709,619 | ||||||
Total operating expenses | 692,926 | 726,167 | ||||||
Operating loss | (171,485 | ) | (22,360 | ) | ||||
Other income (expense): | ||||||||
Loss on sale of assets | (43,666 | ) | 0 | |||||
Interest income | 308 | 1,035 | ||||||
Interest expense | (5,368 | ) | (329 | ) | ||||
Interest accretion | (25,551 | ) | 0 | |||||
Total other income (expense) | (74,277 | ) | 706 | |||||
Net loss before provision for income taxes | (245,762 | ) | (21,654 | ) | ||||
Income tax benefit | (78,824 | ) | (6,770 | ) | ||||
Net loss | $ | (166,938 | ) | $ | (14,884 | ) | ||
Earnings per weighted average share, basic | $ | (0.01 | ) | $ | 0.00 | |||
Weighted average number of shares | 25,782,433 | 25,336,719 |
The accompanying notes are an integral part of the financial statements.
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LAW ENFORCEMENT ASSOCIATES CORPORATION
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2008 and 2007
2008 | 2007 | |||||||
(Unaudited) | (Unaudited) | |||||||
Cash flows from operating activities | ||||||||
Net income (loss) | $ | (148,344 | ) | $ | 40,019 | |||
Adjustments to reconcile net income to net cash provided | ||||||||
by operations: | ||||||||
Depreciation and amortization | 151,503 | 121,599 | ||||||
Put option discount expense | 51,102 | 0 | ||||||
Deferred taxes | (67,428 | ) | 9,501 | |||||
Loss on sale of assets | 43,666 | 0 | ||||||
Change in allowance for doubtful accounts | (13,205 | ) | 0 | |||||
Change in inventory reserves | (64,437 | ) | 0 | |||||
Common stock issued for services | 0 | 84,240 | ||||||
(Increase) decrease in assets: | ||||||||
Trade accounts receivable | 13,583 | (58,105 | ) | |||||
Inventories | (180,027 | ) | (173,037 | ) | ||||
Refundable income taxes | 0 | 10,070 | ||||||
Prepaid insurance and other assets | (29,114 | ) | (36,229 | ) | ||||
Increase (decrease) in liabilities: | ||||||||
Trade accounts payable and accrued expenses | (49,013 | ) | 145,665 | |||||
Customer deposits | 16,279 | 13,131 | ||||||
Net cash provided (used) by operating activities | (275,435 | ) | 156,854 | |||||
Cash flows from investing activities: | ||||||||
Payments for deferred charges | 0 | 413 | ||||||
Proceeds from sale of property and equipment | 6,000 | 0 | ||||||
Capital expenditures | (30,768 | ) | (26,799 | ) | ||||
Net cash provided (used) in investing activities | (24,768 | ) | (26,386 | ) | ||||
Cash flows financing activities: | ||||||||
Net payments under line of credit agreement | (25,000 | ) | 0 | |||||
Payments on long-term debt | 0 | (40,000 | ) | |||||
Net cash provided (used) in financing activities | (25,000 | ) | (40,000 | ) | ||||
Net increase (decrease) in cash | (325,203 | ) | 90,468 | |||||
Cash at beginning of the period | 325,244 | 452,124 | ||||||
Cash at end of the period | $ | 41 | $ | 542,592 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest expense | $ | 10,943 | $ | 702 | ||||
Cash paid for income taxes | $ | 0 | 0 |
The accompanying notes are an integral part of the financial statements.
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LAW ENFORCEMENT ASSOCIATES CORPORATION
Notes to Consolidated Financial Statements
(unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared by Law Enforcement Associates Corporation (the “Company”). Certain information and accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Although management of the Company believes the disclosures contained herein are adequate to make the information presented not misleading, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10KSB for the fiscal year ended December 31, 2007.
Management believes the accompanying consolidated financial statements contain all adjustments, consisting of only normal recurring accruals and adjustments which, in the opinion of management, are necessary to present fairly its financial position as of June 30, 2008 and 2007. These consolidated financial statements are not necessarily indicative of results to be expected for the full year.
Organization and Operations
Law Enforcement Associates Corporation (originally Academy Resources, Inc.) was formed on December 3, 2001 when the Company acquired all the outstanding stock of Law Enforcement Associates, Inc., a New Jersey company, incorporated in 1972, doing business in North Carolina.
The operations of the Company consist of manufacturing and providing surveillance and intelligence gathering products and vehicle inspection equipment. Products are used by law enforcement agencies, the military, security and correctional organizations.
Principles of Consolidation
The consolidated financial statements include the accounts of Law Enforcement Associates Corporation and its wholly-owned subsidiaries Law Enforcement Associates, Inc. and Law Enforcement Associates Holding Company, Inc. All intercompany transactions have been eliminated in consolidation. The consolidated statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the United States of America. Management of the Company has determined that the Company’s operations are comprised of one reportable segment as that term is defined in SFAS No.131. Therefore, no separate segment disclosures have been included in the accompanying notes to the consolidated financial statements.
Fair Value of Financial Instruments
The Company’s financial instruments include cash, accounts receivable and accounts payable. Due to the short-term nature of these instruments, the fair value of these instruments approximates their recorded value.
Trade Accounts Receivable
Trade accounts receivable are carried at their estimated collectible amount. Trade credit is generally extended on a short-term basis; thus, trade receivables do not bear interest. The Company reports trade accounts receivable net of an allowance for doubtful accounts equal to the estimated losses to be incurred. Estimated losses are based on actual collection experience and management’s evaluation of the current status of existing trade receivables.
Inventories
Inventories are stated at the lower of cost or market on the first-in, first-out basis. Provisions are made to reduce potentially excess, obsolete or slow-moving inventories to their net realizable value. Costs associated with shipping and handling of inventory are included in inventory cost and charged to cost of sales when inventory is shipped.
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LAW ENFORCEMENT ASSOCIATES CORPORATION
Notes to Consolidated Financial Statements
(unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective periods. Depreciation is computed over the estimated useful lives of the related assets using the straight-line methods for financial statement purposes.
Revenue Recognition
The Company recognizes revenues when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, title has transferred, the price is fixed and collection is reasonably assured. All of the Company’s sales are final and customers do not have a right to return the product. Most customers are charged shipping fees, which are recorded as a component of net sales. Training revenue is recorded as the service is provided.
Income Taxes
Deferred income taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes: An Interpretation of FASB Statement No. 109 (“FIN No. 48”), on January 1, 2007. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109. FIN No. 48 prescribes a recognition threshold and measurement principles for the financial statement recognition and measurement of tax positions taken or expected to be taken on a tax return. The Company reviewed its tax positions and determined that no adjustment was needed upon adoption of FIN No. 48.
The Company’s policy is to recognize interest expense related to unrecognized tax benefits in interest expense and penalties in other expense.
Net Income Per Share
Basic earnings per share is computed by dividing the Company’s consolidated net income by the weighted-average number of shares of common stock and common stock equivalents (primarily outstanding options and warrants). Common stock equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options and warrants, using the treasury stock method. There are no common stock equivalents for the Company at June 30, 2008.
Product Warranty
The Company provides a provision for estimated warranty repairs. The accrued warranty provision was $55,487 and $59,911 at June 30, 2008 and December 31, 2007, respectively.
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LAW ENFORCEMENT ASSOCIATES CORPORATION
Notes to Consolidated Financial Statements
(unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising
The Company expenses the production costs of advertising as incurred, except for direct-response advertising, which is capitalized and amortized over its expected period of future benefits within the calendar year. During the six months ended June 30, 2008 and 2007, advertising costs were $47,263 and $30,280, respectively. All advertising costs are included in operating expenses in the accompanying consolidated statements of operations.
Research and Development
The Company expenses research and development costs as incurred. The Company incurred product development expense of $39,892 and $40,620 for the six months ended June 30, 2008 and 2007, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides guidance for using fair value to measure assets and liabilities and requires additional disclosure about the use of fair value measures, the information used to measure fair value, and the effect fair value measurements have on earnings. SFAS 157 does not require any new fair value measurements. SFAS 157 for financial assets and financial liabilities is effective for the Company beginning January 1, 2008. On January 1, 2009, the beginning of the next fiscal year, the standard will also apply to non-financial assets and non-financial liabilities of the Company. The adoption of SFAS 157 for financial assets and financial liabilities did not have a material impact on the Company’s consolidated financial statements. FASB Staff Position SFAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”) delays the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Management is evaluating the impact that SFAS 157 will have on its non-financial assets and non-financial liabilities. The Company believes that the impact of these items upon adoption will not be material to its consolidated financial statements.
In February 2007, the FASB issued SFAS No., 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment to FASB Statements No. 115 (“SFAS 159”). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. SFAS No. 159 is effective for the Company beginning January 1, 2008. The adoption of SFAS 159 did not have a material effect on the Company’s consolidated financial statements as management did not elect the fair value measurement option under the provisions of SFAS 159 for any of the Company’s financial assets or liabilities.
In December 2007, the Financial Accounting Standards Board (“FASB”) issued FASB Statements No.141 (revised 2007), “Business Combinations” (“FAS 141(R)”) and No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“FAS 160”). These standards aim to improve, simplify, and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements. The provisions of FAS 141 (R) and FAS 160 are effective for the fiscal year beginning after December 15, 2008. The Company believes that the impact of these items upon adoption will not be material to its consolidated financial statements.
11
LAW ENFORCEMENT ASSOCIATES CORPORATION
Notes to Consolidated Financial Statements
(unaudited)
2. INVENTORIES
Inventories consist of the following at June 30, 2008 and December 31, 2007:
June 30, | December 31, | |||||||
2008 | 2007 | |||||||
Raw Materials | $ | 662,838 | $ | 625,247 | ||||
Work-in-process | 164,531 | 90,098 | ||||||
Finished goods | 673,441 | 541,001 | ||||||
$ | 1,500,810 | $ | 1,256,346 |
The provision for excess, obsolete or slow-moving was $135,428 and $199,865 at June 30, 2008 and December 31, 2007, respectively.
3. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, at June 30, 2008 and December 31, 2007:
June 30, | December 31, | ||||||||
Useful Life | 2008 | 2007 | |||||||
Office furniture & equipment | 5 to 7 years | $ | 95,905 | $ | 107,623 | ||||
Leasehold improvements | 7 years | 14,218 | 5,139 | ||||||
Vehicles | 3 to 5 years | 101,129 | 101,129 | ||||||
Machinery & equipment | 5 to 7 years | 291,420 | 459,032 | ||||||
502,672 | 672,922 | ||||||||
Less accumulated depreciation | 302,749 | 415,898 | |||||||
$ | 199,923 | $ | 257,025 |
Depreciation expense for the six months ended June 30, 2008 and 2007 was $38,205 and $39,174, respectively.
4. INCOME TAXES
In accordance with SFAS 109, deferred income taxes and benefits are provided for the results of operations of the Company for the tax effects of temporary differences and carry-forwards that give rise to significant portion of deferred tax assets and liabilities.
On January 15, 2008, Raymond James Financial, Inc. through its subsidiary, Sirchie Acquisition Company, LLC, acquired 51% interest (13,149,334 shares) in Law Enforcement Associates from Sirchie Finger Print Laboratories, Inc. and John Carrington. Based on the change in ownership, the Company’s net operating loss carry forward may be subject to certain limitations in any one year. Therefore, these net operating loss carryforwards have been classified as long-term in the consolidated balance sheet at June 30, 2008.
12
LAW ENFORCEMENT ASSOCIATES CORPORATION
Notes to Consolidated Financial Statements
(unaudited)
4. INCOME TAXES (Continued)
Current tax expense (benefit) is the only component present in the provision for income taxes in the accompanying statement of operations. A reconciliation of the statutory federal income tax rate and effective rate is as follows at June 30:
2008 | 2007 | |||||||
Statutory federal income tax rate | 34 | % | 34 | % | ||||
State income tax - net of federal benefit | 1 | % | 3 | % | ||||
Other | (4 | %) | 4 | % | ||||
Effective tax rate | 31 | % | 41 | % |
The Company is no longer subject to U.S. Federal and State examinations by tax authorities for years before 2004.
5. LEASE COMMITMENTS
Facility
The Company formally leased its office and manufacturing facility from Sirchie Finger Print Laboratories, Inc. Rent expense incurred under this lease for the six months ended June 30, 2008 and 2007 was $32,237 and $86,300, respectively. This lease was terminated during the 1st quarter of 2008.
On December 15, 2007, the Company entered into a lease with Zabarsky Investments Ltd. L.P. The Company currently leases approximately 6,000 square feet of space for our recently acquired van division at approximately $4,750 per month. The lease term is 60 months. Rent expense incurred under this lease for the six months ended June 30, 2008 was $28,500.
Effective March 2008, the Company moved its headquarters from the Youngsville facility and entered into a lease with Zabarsky Investments Ltd. L.P. The Company currently leases approximately 10,000 square feet of space for our new Raleigh, North Carolina headquarters at approximately $7,900 per month. The lease term is 60 months. Rent expense incurred under this lease for the six months ended June 30, 2008 was $39,583.
The following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of June 30, 2008:
Remainder of 2008 | $ | 80,20 | ||
2009 | 160,415 | |||
2010 | 160,415 | |||
2011 | 160,415 | |||
2012 | 153,782 | |||
Later years | 8,631 | |||
Total minimum payments required | $ | 723,866 |
13
LAW ENFORCEMENT ASSOCIATES CORPORATION
Notes to Consolidated Financial Statements
(unaudited)
6. CONCENTRATION OF RISK
At December 31, 2007 and various times during 2008 and 2007, the Company maintained deposits in excess of Federal Deposit Insurance Corporation insured limits.
For the six months ended June 30, 2008 and 2007, sales to one customer accounted for 17% and 17% of total sales, respectively.
7. INTANGIBLE ASSETS
Patent costs include the acquired costs of obtaining patents. Costs for patents are capitalized and amortized over the estimated useful life of the patents, usually 15 years, using the straight-line method. In the event a patent is superseded, the unamortized cost will be written off immediately. Trade names, marketing list, and drawings/designs are tested at least annually for impairment under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. The Company has determined that no impairment exists on the trade name, marketing list, and drawings/designs based on the undiscounted future cash flows generated by these assets.
Intangible assets consist of the following at June 30, 2008 and December 31, 2007:
June 30, | December 31, | ||||||||
Estimated Life | 2008 | 2007 | |||||||
Patents | 15 years | $ | 747,961 | $ | 747,961 | ||||
Trade name | 25 years | 1,400,000 | 1,400,000 | ||||||
Drawings/designs | 10 years | 411,000 | 411,000 | ||||||
AVS Marketing List | 12 years | 470,000 | 470,000 | ||||||
AVS Engineered Drawings | 15 years | 230,000 | 230,000 | ||||||
AVS Trade Name | 15 years | 190,000 | 190,000 | ||||||
3,448,961 | 3,448,961 | ||||||||
Less accumulated amortization | 678,718 | 565,419 | |||||||
Total intangibles, net | $ | 2,770,243 | $ | 2,883,542 |
Amortization expense for the six months ended June 30, 2008 and 2007 was $113,298 and $82,425, respectively. Estimated future amortization expense is as follows at June 30, 2008:
Year | Amount | |||
Remainder of 2008 | $ | 113,298 | ||
2009 | 226,597 | |||
2010 | 226,597 | |||
2011 | 226,597 | |||
2012 | 226,597 | |||
Future Years | 1,750,557 | |||
$ | 2,770,243 |
14
LAW ENFORCEMENT ASSOCIATES CORPORATION
Notes to Consolidated Financial Statements
(unaudited)
8. | LINE OF CREDIT |
The Company had a $750,000 line of credit with a bank, which bears interest at LIBOR (2.46% and 4.60% at June 30, 2008 and December 31, 2007, respectively) plus 3%. Substantially all the assets of the Company are pledged to secure the line. The line requires maintenance of a minimum net worth of $3.5 million. At June 30, 2008 and December 31, 2007, the Company had $175,000 and $200,000, respectively outstanding on the line of credit.
The Company’s existing line of credit matured in May 2008. The Company is currently in negotiations with other financial institutions to secure another line of credit. No assurance can be given that we will be able to obtain financing on acceptable terms, if at all. As we generally obtain all of our funding from operations, a decrease in revenue could negatively impact our short and long term liquidity. A change in the current political situation or a decrease in military spending could result in decreased sales of some of our products.
9. PROFIT SHARING PLAN
The Company has a 401(k) Profit Sharing Plan (the “Plan”) to provide retirement benefits for its eligible employees. Eligible employees may contribute up to the maximum annual amount as set periodically by the Internal Revenue Service. The Plan provides for a discretionary employer match of up to 6% of the employees’ compensation. The Company recognized expense of $41,176 and $29,196 for employer discretionary matches for the six months ended June 30, 2008 and 2007, respectively. Additionally, the Plan provides for a discretionary profit sharing contribution. Such contributions to the Plan are allocated among eligible participants in the proportion of their salaries to the total salaries of all participants. The Company did not accrue a profit sharing contribution for the six months ended June 30, 2008 and 2007.
10. ROYALTY COMMITMENTS
In August 2006, the Company obtained a license to use certain marks of a licensor in connection with products that the Company sells. The agreement is set to expire on April 30, 2010 and calls for royalties based on the number of products sold. The agreement further specifies that the Company be obligated to pay the licensor minimum guaranteed royalties as follows at June 30, 2008:
Year | Amount | |||
Remainder of 2008 | $ | 40,000 | ||
2009 | 126,667 | |||
2010 | 50,000 | |||
Total | $ | 216,667 |
Royalty expense for the six months ended June 30, 2008 was $13,000.
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LAW ENFORCEMENT ASSOCIATES CORPORATION
Notes to Consolidated Financial Statements
(unaudited)
11. | REDEEMABLE COMMON STOCK |
On October 16, 2007, the Company acquired certain assets of Advanced Vehicle Systems, LLC, a Florida Limited Liability Company (“AVS”). The Company purchased all of AVS' designs, drawings, name and intellectual property rights. As part of the purchase price, the Company provided the seller a put option on 1,200,000 shares. This put option gives the seller the right to sell up to 1,200,000 shares back to the Company for $1.25 per share on August 1, 2009.
The Company accounts for redeemable common stock in accordance with Emerging Issue Task Force D-98 “Classification and Measurement of Redeemable Securities.” Securities that are redeemable for cash or other assets are classified outside of permanent equity if they are redeemable at the option of the holder. The Company accretes changes in the redemption value over the period from the date of issuance using the interest method.
12. | CONSULTING AGREEMENTS |
On May 3, 2007, the Company entered into an agreement with an entity to act as the placement agent and financial advisor to the Company. This entity identifies prospective purchasers of debt and/or equity securities to be issued by the Company and prospective companies to be purchased or acquired by the Company either by debt and/or equity securities or by assets acquired by the Company. Pursuant to the terms of the agreement, the entity will be compensated for successful security placements and services rendered in connection with acquisitions by the Company upon the closing of each sale of securities by the Company. This entity shall act as the Company’s exclusive placement agent and exclusive financial advisor for a period of 120 days beginning on the effective date of the agreement. Thereafter, the entity shall act as the Company’s non-exclusive placement agent and non-exclusive financial advisor until terminated by either party upon 10 days notice to the other party.
Upon execution of this agreement the Company issued 130,000 shares of restricted common stock for the entity’s due diligence and advisory efforts. Additionally, the Company shall pay this entity a monthly fee of $5,000 until the agreement is terminated. For the six months ended June 30, 2008, the Company incurred $37,412 in consulting fees. The Company terminated this agreement during the 2nd quarter of 2008.
In July 2007, the Company entered into an agreement with an entity to act as its public relations firm in an effort to market the new Graffiti Cam. The term of the agreement is for one year commencing on August 1, 2007. The Company will pay a monthly fee of $20,000 plus out-of-pocket costs until the agreement is terminated. The agreement can be terminated by either party with 90 days advance notice to the other party. For the six months ended June 30, 2008, the Company recognized $69,573 in consulting fees. The Company terminated this agreement during the 1st quarter of 2008.
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ITEM 2. RESULTS OF OPERATIONS
Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007.
Revenues
Revenues for the three months ended June 30, 2008, were $1,848,700 as compared to $2,011,982 for the three months ended June 30, 2007, which represents a decrease of $163,282 (8.1%). The decrease in revenues is due to the recognition timing of a recurring large federal government order. The Company recognized this recurring order in the first quarter of 2008 versus the second quarter of 2007.
Gross Profit
Gross profit for the three months ended June 30, 2008 was $521,441 as compared to $703,807 for the three months ended June 30, 2007, a decrease of $182,366 (25.9%). As a percentage of net sales, our gross margin was 28.2% for the quarter as compared to 35.0% in the same period last year. The decrease in gross margin percentage is due to an increase in costs related to the new surveillance vehicle division ramp-up. Management expects gross margin to return to historical levels during the 3rd quarter as we continue to ship surveillance vehicle orders.
Operating Expenses
Operating Expenses incurred for the three months ended June 30, 2008 were $692,926 as compared to $726,167 for the three months ended June 30, 2007, a decrease of $33,241 (4.6%). The majority of the decrease resulted from stock compensation issued to a third party during the 2nd quarter of 2007. This decrease was partially offset by an increase in consulting expense and amortization expense as compared to the same period last year. Management expects consulting fees to reduce significantly for the remainder of 2008 due to the termination of two consulting agreements. The increase in amortization is due to acquired intangible assets during the 4th quarter of 2007. As a percentage of revenue, total operating expenses (including research and development expenses) was 37.5% compared to 36.1% for the comparative period.
Income and Earnings Per Share
Our net loss for the three months ended June 30, 2008 was ($166,938) compared to a net loss of ($14,884) for the three months ended June 30, 2007, an increase of $152,054. This increase in our net loss is attributable to the factors outlined above, as well as non-cash interest expense incurred of approximately $25,000 related to the interest accretion of the AVS put option. The Company also recognized a loss on the sale of assets of approximately $44,000. The Company sold aging test equipment to a third party during the 2nd quarter of 2008. Net income per weighted average share was ($0.01) for the three months ended June 30, 2008, as compared to $0.00 for the three months ended June 30, 2007.
Net income for the 2nd Quarter was affected by several non-cash items including amortization ($56,649), depreciation ($18,765), interest accretion ($25,551), and loss on sale of assets ($43,666). For the three months ended June 30, 2008, non-cash items totaled $144,631 versus $61,105 during the same period last year.
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007.
Revenues
Revenues for the six months ended June 30, 2008, were $3,828,359 as compared to $3,777,036 for the six months ended June 30, 2007, which represents an increase of $51,323 (1.3%). The increase in revenues is due to the initial vehicle surveillance orders shipped during the 2nd quarter.
Gross Profit
Gross profit for the six months ended June 30, 2008 was $1,328,449 as compared to $1,478,999 for the six months ended June 30, 2007, a decrease of $150,550 (10.2%). As a percentage of net sales, our gross margin was 34.7% for the six months ended June 30, 2008 as compared to 39.2% in the same period last year. The decrease in gross margin percentage is due to an increase in costs related to the new surveillance vehicle division ramp-up.
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Operating Expenses
Operating Expenses incurred for the six months ended June 30, 2008 were $1,446,436 as compared to $1,429,995 for the six months ended June 30, 2007, an increase of $16,441 (1.1%). The majority of the increase was due to relocation expenses of approximately $30,000 related to the movement of our operations to Raleigh during the 1st quarter. The Company also recognized an increase in consulting fees of approximately $107,000 as compared to the same period last year. The increase in consulting fees represented marketing efforts from the introduction of the Graffiti Cam System. Management expects consulting fees to reduce significantly for the remainder of 2008 due to the termination of two consulting agreements. These increases were partially offset by stock compensation issued to a third party in the amount of approximately $84,000 during the 2nd quarter of 2007. As a percentage of revenue, total operating expenses (including research and development expenses) was 37.7% compared to 37.9% for the comparative period.
Income and Earnings Per Share
Our net loss for the six months ended June 30, 2008 was ($148,344) compared to net income of $40,019 for the six months ended June 30, 2007, a decrease of $188,363. This decrease in net income is attributable to the factors outlined above, as well as non-cash interest expense incurred of approximately $51,000 related to the interest accretion of the AVS put option. During the 2nd quarter, the Company also recognized a loss on the sale of assets of approximately $44,000. Amortization expense increased by approximately $31,000 resulting from acquired intangible assets during the 4th quarter of 2007. Net income per weighted average share was ($0.01) for the six months ended June 30, 2008, as compared to $0.00 for the six months ended June 30, 2007.
Liquidity and Capital Resources
At June 30, 2008, working capital was $1,275,873 as compared with $1,949,261 at December 31, 2007, a decrease of $673,388. During the 2nd quarter, the Company reclassified the majority of our deferred tax asset to a non-current asset. The Company’s $750,000 line of credit with Wachovia Bank matured in May 2008. As of June 30, 2008, the Company had an outstanding balance of $175,000. The Company is currently negotiating with other financial institutions to secure a line of credit.
If we need to obtain capital, no assurance can be given that we will be able to obtain this capital on acceptable terms, if at all. In such an event, this may have a materially adverse effect on our business, operating results and financial condition. If the need arises, we may attempt to obtain funding through the use of various types of short term funding, loans or working capital financing arrangements from banks or financial institutions. As we generally obtain all of our funding from operations, a decrease in revenue could negatively impact our short and long term liquidity. A change in the current political situation or a decrease in military spending could result in decreased sales of some of our products.
Research and Development
In the six months ended June 30, 2008, the Company incurred expenses of $39,892 on research and development as compared to $40,620 in the six months ended June 30, 2007.
Inflation
We believe that the impact of inflation on our operations since our inception has not been material.
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Not applicable.
ITEM 4T. CONTROLS AND PROCEDURES
Our chief executive officer and chief financial officer (the “Certifying Officers”) are responsible for establishing and maintaining disclosure controls and procedures for our company and our subsidiary. Such officers have concluded (based upon an evaluation of these controls and procedures as of the end of the period covered by this report) that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in this report is accumulated and communicated to management, including our principal executive officers as appropriate, to allow timely decisions regarding required disclosure.
The Certifying Officers have also indicated that there were no significant changes in our internal controls or other factors that could significantly affect such controls subsequent to the date of this evaluation, and there were no corrective actions with regard to significant deficiencies and material weaknesses.
Our management, including the Certifying Officers, does not expect that our disclosure controls or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. The design of any systems of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Law Enforcement Associates Corporation | |||
Dated: August 14, 2008 | By: | /s/ Paul Feldman | |
Paul Feldman | |||
President and Chief Executive Officer | |||
By: | /s/ Paul Briggs | ||
Paul Briggs | |||
Chief Financial Officer and Principal Accounting Officer | |||
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