As Filed with the Securities and Exchange Commission on December 5, 1996
Registration No. 33-93274
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Post-Effective Amendment No. 3 to
Form S-2
on Form SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
LEASING EDGE CORPORATION
(Exact name of registrant as specified in its charter)
-------------------
Delaware 7377 11-2990598
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
6540 South Pecos Road
Suite 103
Las Vegas, Nevada 89120
(702) 454-7900
(Address including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Michael F. Daniels Copies of communications to:
6540 South Pecos Road Stephen M. Davis, Esq.
Suite 103 Werbel & Carnelutti
Las Vegas, Nevada 89120 A Professional Corporation
(702) 454-7900 711 Fifth Avenue
(Name, address, including zip code, New York, New York 10022
and telephone number including area (212) 832-8300
code, of agent for service)
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
-------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
LEASING EDGE CORPORATION
CROSS-REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-B
<TABLE>
<CAPTION>
Form SB-2 Item Number and Caption Location in Prospectus
- --------------------------------------------------- -------------------------------------------
<C> <S> <S>
1. Front of Registration Statement and Outside
Front Cover Page of Prospectus................ Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus................................. Inside Front Cover Page
3. Summary Information and Risk Factors.......... Prospectus Summary; Risk Factors
4. Use of Proceeds............................... Use of Proceeds
5. Determination of Offering Price............... Risk Factors; The Company Offering; Selling
Stockholder and Plan of Distribution
6. Dilution...................................... Not Applicable
7. Selling Stockholders.......................... Not Applicable
8. Plan of Distribution.......................... Outside Front Cover Page; The Company
Offering; Selling Stockholder and Plan
of Distribution
9. Legal Proceedings............................. Business
10. Directors, Executive Officers,Promoters and
Control Persons............................... Management
11. Security Ownership of Certain Beneficial
Owners and Management......................... Security Ownership of Certain Beneficial
Owners and Management
12. Description of Securities to be Registered.... Prospectus Summary; The Company Offering;
Description of Capital Stock and Warrants;
Price Range of Stock
13. Interests of Named Experts and Counsel........ Not Applicable
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................... Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities
15. Organization within Last Five Years........... Business
16. Description of Business....................... Business
17. Management's Discussion and Analysis or Plan
of Operation.................................. Management's Discussion and Analysis or
Plan of Operation
18. Description of Property....................... Business
19. Certain Relationships and Related
Transactions.................................. Certain Relationships and Related
Transactions
20. Market for Common Equity and Related
Stockholder Matters........................... Market for Common Equity and Related
Stockholder Matters
21. Executive Compensation........................ Executive Compensation
22. Financial Statements.......................... Financial Statements
</TABLE>
<PAGE>
SUBJECT TO COMPLETION
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
PROSPECTUS Subject to Completion Dated December 5, 1996
LEASING EDGE CORPORATION
1,000,000 Shares of Common Stock
-------------------
This Prospectus relates to 1,000,000 shares of Common Stock of Leasing
Edge Corporation (the "Company") which are to be issued by the Company pursuant
to the exercise of the Company's outstanding Class B Common Stock Purchase
Warrants (the "Class B Warrants"). The Class B Warrants entitle the holder
thereof to purchase one share of the Company's Common Stock, par value $.01 per
share (the "Common Stock"), at an exercise price of $1.00 per share (the shares
of Common Stock issuable upon such exercise of the Class B Warrants are herein
referred to as the "Shares"). The Company has reduced the exercise price of the
Warrants from $2.125 per share to $1.00 per share of Common Stock.
Outstanding Warrants are redeemable at any time for $.001 each by the
Company on 30 days' notice to the holders thereof. The Company presently intends
to call all of the Class B Warrants for redemption prior to January 15, 1997.
Although the Warrants remain exercisable during the 30-day notice period, any
holder who does not exercise his Warrants prior to their redemption will forfeit
his right to purchase the underlying Common Stock. The Company entered into a
Warrant Agency Agreement, dated as of July 15, 1995 (the "Warrant Agency
Agreement") with American Stock Transfer & Trust Company, as warrant agent,
which governs the specific terms and conditions of the Warrants. See
"Description of Capital Stock and Warrants."
The Company's Common Stock and the Class B Warrants are traded on the
National Association of Securities Dealers' Automated Quotation ("Nasdaq")
Small-Cap System under the symbols "LECE" and "LECEL", respectively. On November
15, 1996, the last reported sale price on the Nasdaq Small-Cap System for the
Common Stock was $1.44 per share and for the Class B Warrants $.25 per share.
See "Price Range of Common Stock." The Company estimates that its expenses in
connection with this offering will approximate $350,000.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND SHOULD NOT BE PURCHASED BY ANYONE WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. SEE "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSION
NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is December __, 1996.
<PAGE> 1
No dealer, salesperson or other person has been authorized to give any
information or to make any representations, other than those contained or
incorporated by reference in this Prospectus, in connection with the offering
contained herein and, if given or made, such information must not be relied upon
as having been authorized by the Company or the Selling Stockholder. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any of the securities offered hereby in any jurisdiction to any person to
whom it is unlawful to make such offer in such jurisdiction. Neither the
delivery of this Prospectus nor any sale made hereunder shall under any
circumstances create any implication that there has been no change in the affair
of the Company since the date hereof.
AVAILABLE INFORMATION
A registration statement on Form SB-2 in respect of the Securities offered
by this Prospectus (the "Registration Statement") has been filed with the
Securities and Exchange Commission (the "Commission"), 450 Fifth Street, N.W.,
Washington, D.C. 20549, under the Securities Act of 1933, as amended (the
"Act"). This Prospectus does not contain all of the information contained in
such Registration Statement, certain portions of which have been omitted
herefrom pursuant to the rules and regulations of the Commission. The Company is
subject to the information requirements of the Securities Exchange Act of 1934
(the "Exchange Act") and the rules and regulations promulgated thereunder and in
accordance therewith file reports, proxy statements and other information with
the Commission. These reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549; and at the regional offices of the Commission at 7 World Trade
Center, New York, New York 10007; and Suite 1400, Northwestern Atrium Center,
500 West Madison Street, Chicago, Illinois 60661. Copies of such material can be
obtained from the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Company will provide without charge to each person to whom this
Prospectus is delivered a copy of any or all such documents which are
incorporated herein by reference (other than exhibits to such documents unless
such exhibits are specifically incorporated by reference into the documents that
this Prospectus incorporates). Written or oral requests for copies should be
directed to: Leasing Edge Corporation, Investor Relations, 6540 South Pecos
Road, Suite 103, Las Vegas, Nevada 89120, (702) 454-7900.
The Company's Common Stock and the Class B Warrants are traded on the
National Association of Securities Dealers' Automated Quotation ("Nasdaq")
Small-Cap System. All reports and other information concerning the Company can
be inspected at the National Association of Securities Dealers, Inc., Listing
Department, 1735 K Street, N.W., Washington, D.C. 20006.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Description Page
- ----------- ----
<S> <C>
Prospectus Summary........................................................................... 2
Terms of the Offering........................................................................ 3
Risk Factors................................................................................. 5
The Offering................................................................................. 7
Use of Proceeds.............................................................................. 8
Determination of Offering Price.............................................................. 9
Dividend Policy.............................................................................. 9
Plan of Distribution......................................................................... 9
Price Range of Common Stock and Related Stockholder Matters.................................. 10
Selected Financial Data...................................................................... 11
Management's Discussion or Plan of Operation................................................. 12
Business..................................................................................... 18
Management................................................................................... 22
Executive Compensation....................................................................... 23
Security Ownership of Certain Beneficial Owners and Management............................... 25
Certain Relationships and Related Transactions............................................... 26
Description of Capital Stock and Class B Warrants............................................ 26
Certain Federal Income Tax Considerations.................................................... 27
Legal Matters................................................................................ 28
Experts...................................................................................... 29
Disclosure of Commission Position on Indemnification for Securities Act Liabilities.......... 29
Index to Financial Statements................................................................ 30
</TABLE>
<PAGE> 2
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
financial statements (including the notes thereto) and other information
appearing elsewhere in this Prospectus or incorporated herein by reference.
The Company
Leasing Edge Corporation (the "Company") buys, sells, leases and remarkets
a wide variety of information processing and communication equipment, including
midrange computers, telecommunications systems, peripherals, point-of-sale
systems, local area networks and select high technology and other capital
equipment produced by a variety of manufacturers, such as IBM, Unisys, AT&T, Sun
Microsystems, DEC and Tandem. The Company's customers are primarily large
corporations that meet the Company's high credit standards and that possess
significant and continuing information processing and telecommunications needs.
Through its wholly-owned subsidiary, Pacific Mountain Computer Products,
Inc. ("Pacific Mountain" or "PMCPI"), the Company is an authorized distributor
of IBM and other manufacturer's terminal, controller, printer and protocol
converter products. Pacific Mountain's main business is sales of those products
to retail customers and wholesalers. The Company also leases such products to
customers who desire to lease by acquiring the products at favorable discounts
facilitated by its relationship with Pacific Mountain.
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. Unless the context otherwise
requires, the term the "Company" as used in this Prospectus refers to Leasing
Edge Corporation and its wholly-owned subsidiaries. The Company's principal
offices are located at 6540 South Pecos Road, Suite 103, Las Vegas, Nevada,
89120, and its telephone number is (702) 454-7900.
<PAGE> 3
The Offering
<TABLE>
<S> <S>
Securities Offered by the Company: 1,000,000 shares of Common Stock underlying the Class B Warrants.
Exercise Price: Each Warrant entitles the holder to subscribe to purchase one
share of Common Stock (the "Warrant Right") at $1.00 per share.
The Company reduced the Exercise Price for the Class B Warrants
from $2.125 per share of Common Stock to $1.00 per share of
Common Stock, subject to adjustment (the "Exercise Price")
commencing with the date of this Prospectus. The Exercise
Price is payable in cash.
Warrant Agent: American Stock Transfer & Trust Company (the "Warrant Agent").
Terms of the Class B Warrants: The Company may redeem the outstanding Class B Warrants at a
redemption price of $.001 per Warrant on 30 days' notice at
any time. See "The Offering." The number of shares of Common
Stock which may be purchased upon exercise of the Class B
Warrants and the Exercise Price for such shares will be adjusted
upon the occurrence of certain events, including any stock split,
stock dividend, reverse stock split or reclassification affecting
the Common Stock.
Intended Redemption of Class B Warrants: The Class B Warrants are redeemable at any time for $.001 each.
The Company intends to redeem all of the Class B Warrants by
5:00 p.m., New York Time, prior to January 15, 1997 (the
"Redemption Date") by providing 30 days' notice of redemption to
the Class B Warrant holders. Although the Class B Warrants remain
exercisable during the 30 day notice period, any holder who does
not exercise his Class B Warrants prior to the date of redemption
will forfeit his right to purchase the underlying Common Stock.
Listing of the Shares: The outstanding shares of Common Stock and the Class B Warrants
are listed on the Nasdaq Small-Cap System under the symbols "LECE"
and "LECEL", respectively.
Use of Proceeds: The net proceeds of the Offering will be used for general corporate
purposes. See "Use of Proceeds."
Risk Factors: The purchase of the Company's Common Stock involves certain risks.
See "Risk Factors."
</TABLE>
<PAGE> 4
Summary Financial Information
INCOME STATEMENT DATA:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
Year Ended December 31, (unaudited)
-------------------------- --------------------------
1994(1) 1995 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues............................................. $19,767,845 $18,150,157 $14,312,632 $16,002,259
Costs and expenses................................... 24,236,417 17,948,813 13,765,526 15,901,089
Net income (loss).................................... (4,129,161) 201,344 343,525 101,170
Net income (loss) per common share................... $ (3.12) $ (0.01) 0.06 (0.02)
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
At September 30, 1996
(unaudited)
------------------------------
Actual As Adjusted(3)
----------- --------------
<S> <C> <C>
Cash.......................................................... $ 113,081 $ 763,081
Total assets.................................................. 27,418,418 28,068,418
Notes payable and lines of credit............................. 3,579,479 3,579,479
Nonrecourse and recourse discounted lease rentals(2).......... 16,068,062 16,068,062
Stockholders' equity.......................................... 6,308,974 6,958,974
- -------------------
<F1> As restated due to certain charges recognized by the Company in 1994,
including a writedown of inventory and residual values of $1,118,000 and
other charges aggregating $2,638,000. See also "Management's Discussion
and Analysis or Plan of Operation - Restatement of Previously Issued
Financial Statements".
<F2> Represents borrowings from financial institutions secured by the
assignment of future lease revenues underlying leased equipment and
related rights. In the event of a default by a lessee, the financial
institution has rights against the lessee and the equipment, but generally
has no recourse against the Company.
<F3> As adjusted to reflect the exercise of all 1,000,000 Class B Warrants at
an exercise price of $1.00 per Share resulting in net proceeds to the
Company of $650,000. There can be no assurances that any of the Class B
Warrants will be exercised.
</TABLE>
<PAGE> 5
RISK FACTORS
The purchase of the securities offered hereby involves certain risks.
Accordingly, prospective investors should carefully consider, along with other
matters referred to herein, the following risk factors relating to the Company
and this offering.
Cash Intensive Operations; Immediate Need for Additional Financing. Since
equipment the Company leases must be paid for by the Company prior to leasing,
the Company requires a substantial amount of cash for its leasing activities.
The Company's growth has been significantly dependent upon its ability to borrow
funds or raise equity or debt financing to acquire additional equipment for
lease. Historically, the Company has derived most of the funds necessary for the
purchase of equipment from nonrecourse financing and the remainder from
internally generated funds, recourse indebtedness i.e., bank borrowings and
existing cash. The Company and its lead bank have orally agreed to convert its
revolving credit line of $2,500,000 to a term loan requiring repayment over time
through April, 1997, which date can be extended to January, 1998 under certain
circumstances. There is no assurance that the Company and its lead bank will
execute definitive documentation reflecting the terms of the oral agreement. The
Company is presently seeking debt and/or equity financing. Should the Company
fail to receive adequate equity or debt financing in the immediate future, the
Company's growth will be materially and adversely affected and its present level
of operations may be reduced. In addition, there is no assurance that financial
institutions will continue to finance the Company's 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 adequate financing, it will be on terms favorable to the Company.
Realization of Residual Values; 1994 and 1995 Write-Downs. At the
inception of each lease, the Company establishes the residual value of the
leased equipment, which is the estimated market value of the equipment at the
end of the initial lease term. The Company's cash flow depends to a great extent
on its ability to realize the residual value of leased equipment after the
initial term of its leases with its customers. Historically, the Company has
realized its estimated investment in residual values through (i) renegotiation
of the leases during their term to add or modify equipment; (ii) renewal or
extension of the original leases; (iii) leasing equipment to a new user; or (iv)
sale of the equipment. Equipment may be returned to the Company at the end of an
initial or extended lease term when it may not be possible for the Company to
resell or re-lease the equipment on favorable terms. Developments in the high
technology equipment market tend to occur at rapid rates, adding to the risk of
obsolescence and shortened product life cycles which could affect the Company's
ability to realize the residual value of such equipment. In addition, if the
lessee defaults on a lease, the financial institution that provided nonrecourse
financing may foreclose on its security interest in the leased equipment and the
Company may not realize any portion of such residual value. If the residual
value in any equipment cannot be realized after the initial lease term, the
recorded investment in the equipment must be written down, resulting in lower
cash flow and reduced earnings. In 1995 and 1994, the Company reduced recorded
residual values and inventory by approximately $210,000 and $1,118,000,
respectively, to their estimated net realizable values. There can be no
assurance that the Company will not experience further material residual value
or inventory write-downs in the future.
Dependence Upon Major Customers. The Company's three largest customers
accounted for approximately 13.1%, 11.5% and 10.2% of the Company's consolidated
revenues in 1995 and the same three customers accounted for, in the aggregate,
approximately 50% of consolidated revenues for the year ended December 31, 1994.
If one of these three customers were to discontinue leasing with the Company and
if the Company would be unable to replace substantially all of this business,
the Company's future financial results would be materially and adversely
affected.
Reliance Upon Major Suppliers. Pacific Mountain is highly dependent on its
suppliers, the manufacturers from which Pacific Mountain purchases its
equipment. Most manufacturers extend terms of net 30 days or provide a line of
credit to Pacific Mountain for purposes of ordering equipment. Additionally,
Pacific Mountain maintains a $500,000 line of credit with a financial
institution, subject to possible downward adjustment through a formula
calculation, secured by the assets of Pacific Mountain and guaranteed by the
Company. Any event of default on any credit facility offered by a manufacturer
could materially affect Pacific Mountain's ability to acquire equipment for
resale.
<PAGE> 6
Quarterly and Annual Fluctuations in Operating Results. It is often
difficult to predict when a particular leasing transaction will be consummated.
The timing of new lease transactions, combined with the effects of lease
accounting practices, may result in significant revenue and income fluctuations
from quarter to quarter or from year to year.
Volatility of Stock Price and Depth of Trading Market. The Company's
Common Stock trades on the Nasdaq Small Cap System. The market price of the
Company's Common Stock, like the shares of many other small cap companies, has
been and may continue to be volatile. General conditions in the computer
hardware and equipment leasing industries may have a significant impact on the
market price of the Company's Common Stock.
Effect of Tax Laws. The amount of equipment acquired by computer,
telecommunications and point-of-sale equipment users through leasing rather than
purchasing is dependent, in part, upon the favorable federal income tax
treatment applied to the lessor and lessee. At present, the lessor is generally
permitted to depreciate such equipment on a five-year basis and interest
payments on nonrecourse debt are deducted in calculating taxable income. The
lessee is generally permitted deductions for lease payments in calculating
taxable income, and such lease payments are not a preference item for purposes
of calculating the lessee's alternative minimum tax. Any changes in the current
federal income tax treatment of leases for lessors and/or lessees could have a
material adverse effect upon demand for equipment leases in general and the
Company's lease operations in particular.
Dependence on Key Executive. The Company is highly dependent on the
services of Michael F. Daniels, its Chief Executive Officer and President. While
the Company has procured "key man" insurance coverage in the amount of $500,000
on Mr. Daniels' life and has entered into an employment agreement with Mr.
Daniels expiring in June 2000, the loss of the services of Mr. Daniels could
have a material adverse effect on the Company since no assurance can be given
that an adequate replacement for Mr. Daniels could be found in a reasonable
period of time.
Competition. The computer leasing and distribution industries are
extremely competitive and are composed of numerous competitors, many of which
are larger and have substantially greater resources, financial and otherwise,
than the Company.
Dividend Policy. The Company does not currently pay cash dividends on its
Common Stock and does not anticipate paying such dividends at any time in the
future. The Company's borrowing facility currently prohibits the payment of cash
dividends on the Company's Common Stock.
Shares Eligible For Future Sale. The Company has 6,306,345 shares of its
Common Stock underlying currently exercisable options and warrants, including
1,000,000 shares underlying the Class B Warrants. Additionally, the Company's
officers and directors are holders of 556,138 currently outstanding shares of
Common Stock which are eligible for resale in the public market subject, where
applicable, to the volume limitations and other requirements of Rule 144 adopted
under the Act. Sales of a substantial number of shares of Common Stock in the
public market following this offering, or the perception that such sales could
occur, could materially adversely affect the market price of the Common Stock.
Adverse Effect of Redemption of Class B Warrants. The Class B Warrants are
subject to redemption by the Company, in whole or in part, at a price of $.001
each, on at least 30 days prior written notice. The Company presently intends to
call for redemption prior to January 15, 1997 all of the Class B Warrants. Upon
the giving of such notice of redemption, holders of the Class B Warrants will
lose their right to exercise the Class B Warrants, except during such 30-day
notice of redemption period. Upon receipt of a notice of redemption of the Class
B Warrants, the holders thereof would be required to (i) exercise the Class B
Warrants and pay the exercise price at a time which it may be disadvantageous
for them to do so; (ii) sell the Class B Warrants at the then market price, if
any, when they might otherwise wish to hold the Class B Warrants; or (iii)
accept the redemption price which is likely to be substantially less than the
market value of the Class B Warrants at the time of redemption. See "Description
of Capital Stock and Class B Warrants."
<PAGE> 7
NASDAQ Listing Requirements. In order to maintain a company's listing on
the NASDAQ System, a company must satisfy certain criteria. There can be no
assurance that the Company will not fail to satisfy one or more of these
criteria at some future time. In such event, the Company's listed securities
will be subject to delisting from the NASDAQ System. Trading, if any, in the
listed securities would therefore be conducted in the over-the-counter market in
what are commonly referred to as the "pink sheets." As a result, an investor may
find it more difficult to dispose of, or to obtain accurate quotations as to the
value of the Company's securities. In addition, if the Company's securities are
delisted, they would be subject to a Securities and Exchange Commission rule
that imposes additional sales practice requirements on broker-dealers who sell
such securities to persons other than established customers and accredited
investors (generally, persons or institutions with assets in excess of
$1,000,000 or annual income exceeding $200,000 or $300,000 together with their
spouse.) For transactions covered by this rule, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Consequently, the
rule may affect the ability of broker-dealers to sell the Company's securities
and may affect the ability of purchasers in this offering to sell their
securities in the secondary market.
Current Prospectus and State Registration Required to Exercise Class B
Warrants. Holders of the Class B Warrants will be able to exercise the Class B
Warrants only if a current prospectus relating to the shares of Common Stock
underlying the Class B Warrants is then in effect and only if such securities
are qualified for sale or exempt from qualification under the applicable
securities laws of the state in which the various holders of Class B Warrants
reside. Although the Company will use its best efforts to maintain the
effectiveness of a current prospectus covering the shares of Common Stock
underlying the Class B Warrants, there can be no assurance that the Company will
be able to do so. Holders of Class B Warrants may reside in jurisdictions in
which the shares of Common Stock underlying the Class B Warrants are not
registered or qualified during the period when the Class B Warrants are
exercisable. In that event, the Company will be unable to issue shares of Common
Stock to those persons desiring to exercise their Class B Warrants unless and
until such securities could be qualified or registered or an exemption to such
qualification exists in such jurisdiction. No assurance can be given that the
Company will be able to effect any required registration or qualification.
THE OFFERING
The Company is offering for sale 1,000,000 shares of Common Stock issuable
pursuant to the exercise of Class B Warrants. Common Stock issuable pursuant to
the exercise of Class B Warrants may be purchased from the Company through the
proper exercise of the Class B Warrants by the registered holder thereof in
accordance with the terms and conditions of the warrant certificate and as
described in this Prospectus. Certificates representing shares of Common Stock
purchased by the exercise of the Class B Warrants will be delivered promptly to
the warrant holder after proper exercise. The shares of Common Stock issuable
upon exercise of the Class B Warrants will be, when issued in accordance with
the warrant certificate, fully paid and nonassessable.
<PAGE> 8
USE OF PROCEEDS
There is no basis for determining how many Class B Warrants will be
exercised or, consequently, the net proceeds which will be received by the
Company following the Offering. If all of the Class B Warrants are exercised the
Company would receive approximately $1,000,000 of gross proceeds. The Company
expects the total expenses of the Offering to be approximately $350,000 plus
commissions paid to Soliciting Brokers (as herein defined), if any. See "Plan of
Distribution". There can be no assurances that any of the Class B Warrants will
be exercised.
The Company intends to use any net proceeds received from the exercise of
Class B Warrants for general corporate purposes, including, depending upon the
amount of proceeds raised, payment of accounts payable, investments in equipment
for lease transactions and possible acquisitions. Pending the application of any
proceeds received in the Offering, the Company intends to invest such proceeds
in federal government securities, certificates of deposit, interest-bearing
savings accounts, or other short-term investment grade securities, such as
money-market funds or other similar instruments.
<PAGE> 9
DETERMINATION OF OFFERING PRICE
The offering price of the Company's securities being registered pursuant
to this Offering was determined by the Company's Board of Directors based on
factors such as the current and past market prices of the Common Stock and does
not necessarily bear a relationship to the assets, book value or earnings of the
Company. In light of the recent decrease in the market price of the Company's
Common Stock, the Company reduced the Exercise Price from $2.125 per share to
$1.00 per share by a resolution of the Company's Board of Directors on October
30, 1996.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain earnings for use in its business
and does not anticipate paying cash dividends on Common Stock in the foreseeable
future. The Company is party to a loan agreement which prohibits it from paying
cash dividends on its Common Stock.
PLAN OF DISTRIBUTION
The shares of Common Stock issuable upon the exercise of the Class B
Warrants will be issued and delivered, from time to time, by the Company's
Warrant Agent, American Stock Transfer and Trust Company, upon the exercise of
each of the Class B Warrants in accordance with their terms. In connection with
the Offering, a financial advisory fee of up to $50,000 (plus reimbursement of
out of pocket expenses) will be paid to the Company's financial consultants,
Williamson & Associates, upon the exercise of certain percentages of the Class B
Warrants. Although it presently has not done so, the Company reserves the right
to employ brokers in connection with the Offering to solicit the exercise of the
Class B Warrants (the "Soliciting Brokers"). The Soliciting Brokers will receive
commissions of up to ten percent (10%) of the proceeds raised from the exercise
of the Class B Warrants. Certain directors or officers of the Company may assist
in the Offering, but such persons will not receive any commissions or
compensation other than their normal directors' fees or employment compensation.
<PAGE> 10
PRICE RANGE OF COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock is presently traded on the Nasdaq Small-Cap
System under the symbol "LECE." Between July 20, 1995 and October 5, 1995 the
Company's Common Stock was traded on the OTC Bulletin Board by NASD
broker-dealers pursuant to Rule 15c2-11 of the Exchange Act under the symbol
"LECE". From August 23, 1994 to July 19, 1995 the Common Stock was quoted on
Nasdaq NMS and was quoted on the Nasdaq Small-Cap System from January 1, 1994 to
August 22, 1994. The following table sets forth for the periods indicated below
the high and low bid prices of the Common Stock (i) as furnished by Nasdaq
Small-Cap System from October 6, 1995 through November 15, 1996, (ii) as quoted
on the OTC Bulletin Board from July 20, 1995 through October 5, 1995, (iii) as
furnished by Nasdaq NMS from August 23, 1994 through July 19, 1995 and (iv) as
furnished by the Nasdaq Small-Cap System from January 1, 1994 to August 22,
1994. Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission and may not necessarily represent actual transactions.
The quotations have been retroactively adjusted to reflect the one for eight
reverse stock split which became effective on February 24, 1994.
<TABLE>
<CAPTION>
Bid Prices
------------------
High Low
------ -------
<S> <C> <C>
1994
- ----
First Quarter....................................... $ 4.88 $ 3.52
Second Quarter...................................... 5.19 4.06
Third Quarter....................................... 4.94 4.06
Fourth Quarter...................................... 4.69 2.62
1995
- ----
First Quarter....................................... $ 3.31 $ 1.47
Second Quarter...................................... 2.00 1.00
Third Quarter....................................... 1.94 1.06
Fourth Quarter ..................................... 2.13 1.38
1996
- ----
First Quarter....................................... $ 2.94 $ 1.56
Second Quarter...................................... 2.75 1.375
Third Quarter....................................... 2.38 1.69
Fourth Quarter (Through November 15, 1996).......... 1.62 1.00
</TABLE>
On November 15, 1996, the last reported sales price for the Common Stock
as quoted on the Nasdaq Small-Cap System was $1.44 per share. As of November 15,
1996, there were approximately 220 record holders of Common Stock. Such number
does not include persons whose shares are held of record by a bank, brokerage
house or clearing agency, but does include such banks, brokerage house and
clearing agencies.
<PAGE> 11
SELECTED FINANCIAL DATA
The following financial data is derived from the consolidated financial
statements of the Company for the periods indicated. The Company's consolidated
financial statements as of December 31, 1994 (as restated) and 1995 and for the
years then ended have been audited by KPMG Peat Marwick LLP, the Company's
independent certified public accountants. The information for the nine months
ended September 30, 1995 and 1996 is unaudited and has been derived from the
Company's quarterly financial statements. The information set forth in the
following table should be read in conjunction with "Management's Discussion and
Analysis or Plan of Operation" and the Company's consolidated financial
statements and notes thereto.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------ -----------------------------
(Unaudited)
INCOME STATEMENT DATA: 1994(1) 1995 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 19,767,845 $ 18,150,157 $ 14,312,632 $ 16,002,259
Costs and expenses 24,236,417 17,948,813 13,765,526 15,901,089
Net income (loss) (4,129,161) 201,344 343,525 101,170
Net income (loss) per common share $ (3.12) $ (0.01) $ 0.06 $ (0.02)
</TABLE>
<TABLE>
<CAPTION>
At December 31, At September 30,
--------------------------- ----------------
1994(1) 1995 1996
----------- ----------- ----------------
(Unaudited)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash $ 479,118 $ 209,084 $ 113,081
Total assets 30,832,237 27,285,125 27,418,418
Notes payable and lines of credit 1,494,705 3,236,954 3,579,479
Nonrecourse and recourse discounted lease rentals(2) 20,717,986 16,260,002 16,068,062
Stockholders' equity 4,202,277 5,874,926 6,308,974
<FN>
- -------------------
<F1> As restated due to certain charges recognized by the Company in 1994
including a write-down of inventory and residual values of $1,118,000 and
other charges aggregating $2,638,000. See also "Management's Discussion
and Analysis or Plan of Operation - Restatement of Previously Issued
Financial Statements".
<F2> Represents borrowings from financial institutions secured by the
assignment of future lease revenues, underlying leased equipment and
related rights. In the event of a default by a lessee, the financial
institution has rights against the lessee and the equipment but generally
has no recourse against the Company.
</FN>
</TABLE>
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Accounting Practices
Accounting Classification of Leases. Reported business and 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 its inception in accordance with
Statement of Financial Accounting Standards No. 13, as amended and interpreted.
Sales-type and direct financing leases are those leases which transfer
substantially all of the costs and risks of ownership of the equipment to the
lessee. Operating leases are those leases in which substantially all 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 transaction. Under sales-type leases, at lease inception, the present
value of the minimum lease payments calculated at the interest rate implicit in
the lease is recorded as leasing revenues. The cost of the equipment less the
present value of the estimated residual value is recorded as leasing costs and a
dealer profit is recognized at the inception of the lease. Under direct
financing leases, at lease inception, the minimum lease payments and the
unguaranteed residual are recorded as gross leased assets. Unearned interest
income, consisting of the excess of the gross minimum lease payments and
unguaranteed residual over the cost of the equipment, is amortized to leasing
revenues over the lease term to produce a constant percentage return on the
investment. Under operating leases, the monthly rental is recorded as leasing
revenue. The cost of equipment is recorded as leased assets and is depreciated
over the lease term to an estimated residual value. Regardless of the
classification of lease transactions and their accounting treatment during the
lease term, the aggregate operating income at the end of the lease term is
identical for each of the three lease classifications.
The Company has experienced a shift in the composition of its lease
portfolio from mostly direct finance leases to primarily operating leases, with
some sales type leases. This has been an outgrowth of customer demand for
shorter term leases which do not meet the accounting criteria for a capital
lease and are therefore classified as operating leases as well as the maturation
and renewal of certain leases which have resulted in sales-type lease
classification because the fair market value and carrying value of equipment at
the end of the initial lease term are different.
Substantially all of the leases classified as sales type are with existing
customers and have been consummated at or near the end of the initial lease
term.
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 future
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 recording estimated future residual
values, the Company also relies upon independent third-party estimates of future
market value. The Company reviews its estimated residual values at least
annually and reduces them if necessary. At the time of expiration of a lease,
the Company remarkets the equipment and records the proceeds from sale (in the
event of a sale) or the present value of lease rentals (in the event of a
sales-type lease) as revenue and records residual value as a cost of sale or
lease. See "Risk Factors - Realization of Residual Values; 1994 and 1995
Write-Downs."
<PAGE> 13
For a description of the Company's other accounting practices, see Note 1
of Notes to Consolidated Financial Statements. This analysis of the Company's
financial condition and operating results should be reviewed in conjunction with
the accompanying consolidated financial statements including the notes thereto.
Results of Operations
Restatement of Previously Issued Financial Statements. In 1995, the
Company discovered certain errors in its previously issued consolidated
financial statements related to the misclassification of certain lease
transactions and errors in the recording of direct sales activity, residual
values and certain equity transactions. The aggregate amount of these errors
resulted in a reduction in previously reported retained earnings at December 31,
1993 of $1,895,092 and an increase in previously reported net loss for the year
ended December 31, 1994 of $1,999,486. The correction of such errors resulted in
a reduction in previously reported total assets of $3,175,008, an increase in
previously reported total liabilities of $686,913 and a decrease in previously
reported net stockholders' equity of $3,861,921 at December 31, 1994. The
Company has made all adjustments to the consolidated financial statements for
the year ended December 31, 1994 and periods prior to January 1, 1994 which the
Company believes are necessary for a fair presentation of such statements.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Total revenues from leasing operations decreased $2,775,611 or
17.6% during 1995 compared to the prior year. The decrease in revenues is
primarily due to a large lease transaction with a major customer in 1994 which
was accounted for as a sales-type lease. As compared to other lease
transactions, sales type leases result in a greater percentage of the related
revenue from the transaction being recognized at lease inception. The Company
does not expect to regularly enter into transactions of this size in the future.
Revenue from the portfolio base of operating leases increased $582,575 or
5.9%. Competition and shorter average lease terms have caused the Company to
infuse a greater percentage of equity into its lease transactions. These
variables have resulted in a change in the classification of leases written by
the Company from capital leases to operating leases. The Company expects to see
this trend continue in the future.
Distribution sales, representing the activity of Pacific Mountain,
increased $1,157,923, or 29.2%, between periods primarily due to 1995 revenue
reflecting a full year of operations whereas 1994 reflects operations for the
period from May 6, 1994 (date of acquisition) to December 31, 1994. Pacific
Mountain is a distributor of computer peripherals and data communications
equipment.
Cost and Expenses. Total costs from leasing operations as a percentage of
leasing revenue was 83.0% for the year ended December 31, 1995 compared with
93.6% for the prior year. Gross profit from leasing operations (total leasing
revenues from leasing operations less total costs from leasing operations)
increased $1,204,507 or 119.7%. The decrease in leasing costs is primarily due
to higher expenses associated with the large 1994 sales-type lease transaction
noted above in addition to a 1994 writedown of inventory and residual values to
their net realizable values due to changed market conditions. Gross margin
(gross profit from leasing operations as a percentage of total revenues from
leasing operations) improved to 17.0% from 6.4% due to the foregoing.
Leasing costs associated with the portfolio base of operating leases
increased $223,652 or 3.3%. Gross profit on operating leases increased by
$358,923 to 33.7% from 32.1%. The increase is due primarily to the Company's
implementation of strategic price increases on this segment of its lease
portfolio.
Direct sales costs (leasing costs with respect to the sale of equipment
off lease and leases with dollar buyout options treated as sales) decreased
$376,565 or 17.8% and decreased as a percentage of related revenue to 94.5% from
143.4%. The decrease in costs as a percentage of revenue is due to residual
value realization more closely matching stated values in 1995 as compared to
1994.
Distribution cost of sales of $4,454,861 relates to distribution sales of
Pacific Mountain and represent a $1,063,066 or 31.3% increase over the prior
year. Gross margin on distribution sales decreased to 13.1% in 1995 from 14.6.%
in 1994 due to a decrease in comparative sales volume of certain higher margin
products.
<PAGE> 14
Selling, general and administrative expenses decreased $3,456,581 in 1995
compared to the prior year due primarily to approximately $2,638,000 of
non-recurring charges recorded in 1994. During the fourth quarter of 1994, the
Company decided to relocate its corporate headquarters to Clark County, Nevada.
As a result of the anticipated move, it was determined that the Company's former
Chairman and Chief Executive Officer would no longer provide consulting services
to the Company and, accordingly, the present value of the payments due him under
his severance agreement, amounting to approximately $538,000 was expensed. In
September 1995, the Company settled its remaining obligation under this
agreement for a $160,000 cash payment and the forgiveness of a $54,000 note
receivable resulting in a gain of approximately $247,000 which has been
reflected in the accompanying consolidated statement of operations for the year
ended December 31, 1995 as a reduction in selling, general and administrative
expenses. Additionally, in connection with the structuring of the current
President's compensation agreement, the Company accrued, as of December 31,
1994, an award of 300,000 shares of the Company's common stock, valued at
$732,000 for discretionary commissions. The President's new employment agreement
does not provide for any future stock awards of this nature. Furthermore,
previously recorded deferred compensation of $214,000, net of 1994 amortization
of $63,000, was expensed. Finally, the Company incurred $1,154,000 of consulting
and other expense in 1994 all of which were paid with the Company's common
stock.
Interest expense on non-lease related indebtedness increased $86,029, or
44.8%, The increase is due to higher average debt levels partially offset by
slightly lower interest rates.
During 1994, the Company recorded an income tax benefit of $339,411 due to
recognition of deferred tax assets resulting from net operating losses. The 1995
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 December 31, 1995, the Company had unexpired net
operating loss carryforwards of approximately $4,000,000 which can be utilized
to offset future taxable income, if any (see Note 5 of Notes to Consolidated
Financial Statements).
Net Earnings. As a result of the foregoing, the Company recorded net
income of $201,344 during the year ended December 31, 1995 as compared to a net
loss of $4,129,161 in 1994.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995
Revenues. Total revenues from leasing operations increased $1,743,499, or
17.6%, during the first nine months of 1996 compared to the prior year period
due primarily to a large lease transaction with a major customer which was
accounted for as a sales-type lease, resulting in a significant percentage of
the related revenue from the transaction being recognized at the inception of
the lease, partially offset by a decrease in revenue from the portfolio base of
operating leases of $403,282, or 5.1%; and a decrease in direct sales revenue of
$270,321, or 17.6%. The decrease in operating lease revenue resulted from the
expiration of certain month to month leases which were not replaced with new
lease transactions.
Distribution sales decreased 1.2%, to $4,347,091 for the 1996 period as
compared to $4,400,963 for 1995. The decrease in year to date distribution sales
was due primarily to decreased unit sales in the third quarter.
Costs and Expenses. Total costs from leasing operations as a percentage of
leasing revenue was 81.5% for the nine months ended September 30, 1996, compared
to 81.7% for the prior year period. Gross profit from leasing operations (total
revenues from leasing operations less total costs from leasing operations)
increased $337,687 or 18.6%, due primarily to an increase in gross profit from
sales-type lease transactions of $513,511 combined with a decrease in portfolio
interest expense of $147,082, partially offset by a decrease in gross profit
from the portfolio base of operating leases of $324,436. Gross margin from
leasing operations (gross profit from leasing operations as a percentage of
total revenues from leasing operations) increased to 18.5% from 18.3% due to the
foregoing.
<PAGE> 15
Leasing costs associated with the portfolio base of operating leases
decreased $78,846, or 1.5%. Gross profit on operating leases decreased by
$324,436, or 12.6%., due primarily to the expiration of certain month-to-month
leases. Such leases generally have a higher profit margin than other operating
leases since the equipment has often already been depreciated to zero.
Direct sales costs (leasing costs with respect to the sale of equipment
off lease and leases with dollar buyout options treated as sales) decreased
$256,345 or 18.0% and as a percentage of the related revenue approximated the
prior period's 92.8%.
Distribution cost of sales of $3,762,120 relates to distribution sales of
Pacific Mountain and represent a $19,295 or 0.5% decrease from the prior year.
Gross margin on distribution sales decreased to 13.5% in 1996 from 14.1% in 1995
due to a decrease in comparative sales volume of certain higher margin products.
Selling, general and administrative expensed increased $660,012, or 38.9%,
in the 1996 period compared to 1995 due primarily to a one-time gain of
approximately $247,000 recorded in 1995 related to the settlement of the
Company's obligations under a severance agreement with the Company's former CEO
combined with an increase in 1996 staffing levels and the write-off an
uncollectible receivable.
Interest expense on non-lease related indebtedness increased $89,034, or
47.3%, due to higher average debt levels partially offset by slightly lower
interest rates.
Three Months Ended September 30, 1996 Compared to Three Months Ended
September 30, 1995
Revenues. Total revenues from leasing operations increased $1,842,774, or
53.9%, in the third quarter of 1996 compared to the prior year quarter due to
the large sales-type lease transaction previously discussed partially offset by
a decrease in revenue from the portfolio base of operating leases of $141,965,
or 5.6%, and a decrease in direct sales revenue of $479,658, or 56.3%. As with
the nine months, the decrease in operating lease revenue was due primarily to
the expiration of certain month-to-month leases which were not replaced by
similar lease transactions.
Distribution sales decreased 15.5%, to $1,299,348, from the prior year
quarter's $1,537,706 due to decreased unit sales.
Costs and Expenses. Total costs from leasing operations as a percentage of
leasing revenue increased to 81.7% for the quarter ended September 30, 1996 as
compared to 79.3% for the prior year quarter. Gross profit from leasing
operations increased $255,581, or 36.2%, due to an increase in gross profit from
sales-type lease transactions of $544,499 partially offset by a decrease in
gross profit from the portfolio base of operating leases of $229,317. Gross
margin from leasing operations decreased to 18.3% from 20.7% due to the
foregoing.
Leasing costs associated with the portfolio base of operating leases
increased $87,352, or 5.5%. Gross profit on operating leases decreased $229,317
due to the expiration of certain month-to-month leases as previously noted.
Distribution cost of sales decreased $233,809, or 17.5%, to $1,101,683
from the prior year quarter's $1,335,492. Gross margin on distribution sales
increased to 15.2% in 1996 from 13.2% in 1995 as a result of an improved focus
on sales of higher margin products.
Selling, general and administrative expenses increased $254,232, or 45.8%,
in the 1996 period compared to the prior year due to the previously mentioned
one-time gain of $247,000 recorded in 1995.
<PAGE> 16
Interest expense on non-lease related indebtedness of $102,751 was
consistent with the prior year's $94,474.
The 1996 consolidated financial statements do not reflect a provision for
income taxes due to the utilization of net operating loss carryforwards and
changes in the related valuation allowance. At September 30, 1996, the Company
had unexpired net operating loss carryforwards of approximately $3,850,000 which
can be utilized to offset future taxable income, if any.
Net Earnings. As a result of the foregoing, the Company recorded net
income for the three and nine month periods ended September 30, 1996 of $248,631
and $101,170, respectively, as compared to net income of $171,325 and $343,525
for the corresponding 1995 periods.
Liquidity and Capital Resources
As discussed in Note 3 to the Consolidated Financial Statements, the
Company's $2,500,000 revolving line of credit agreement (the "Agreement") with
Bank of America expired on October 31, 1996 and was not renewed. The Company and
Bank of America have orally agreed to restructure the credit facility as a term
note (the "Tentative Agreement") with an initial expiration date of April 1,
1997; such expiration date may be further extended to January 1, 1998, subject
to the Company's satisfaction of certain conditions. Proposed terms of the
Tentative Agreement require the Company to make a one-time principal payment of
$123,600 upon execution of the definitive agreement; monthly principal payments
of $40,000 plus accrued interest from December 1, 1996 through April 1, 1997;
and to use its best efforts to replace Bank of America with alternative
financing. Bank of Amercia has agreed to waive the consolidated minimum tangible
net worth covenant through April 1, 1997, the initial expiration date of the
Tentative Agreement. There can be no assurance that the Company and Bank of
America will execute definitive documentation reflecting the terms of the
Tentative Agreement. The Company has held preliminary discussions with several
financing sources who have indicated an initial interest in replacing Bank of
America although there can be no assurance that any such financing source will
agree to replace Bank of America. Should the Company fail to receive adequate
equity or debt financing in the immediate future, the Company's growth will be
materially and adversely affected and its present level of operations may be
reduced. See "Risk Factors -- Cash Intensive Operations - Immediate Need for
Additional Financing."
Since equipment the Company leases must be paid for by the Company prior
to leasing, the Company requires a substantial amount of cash for its leasing
activities. The Company's growth has been significantly dependent upon its
ability to borrow funds or raise equity or debt financing to acquire additional
equipment for lease. Historically, the Company has derived most of the funds
necessary for the purchase of equipment from nonrecourse financing and the
remainder from internally generated funds, recourse indebtedness and existing
cash. At September 30, 1996, the Company had approximately $614,049 in cash and
availability under its credit lines.
At the inception of each lease, the Company establishes the residual value
of the leased equipment, which is the estimated market value of the equipment at
the end of the initial lease term. The Company's cash flow depends to a great
extent on its ability to realize the residual value of leased equipment after
the initial term of its leases with its customers. Historically, the Company has
realized its recorded investment in residual values through (i) renegotiation of
the lease during its terms 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 the nonrecourse
financing may foreclose on its security interest in the leased equipment and the
Company may not realize any portion of such residual value. If the residual
value in any equipment cannot be realized after the initial lease term, the
recorded investment in the equipment must be written down, resulting in reduced
earnings. There can be no assurance that the Company will not experience
material residual value or inventory write-downs in the future.
<PAGE> 17
The Company intends to continue to retain residual ownership of all the
equipment it leases. As of September 30, 1996, the Company had a total net
investment in lease transactions of $24.0 million compared to $24.2 million as
of December 31, 1995. The estimated residual value of the Company's portfolio of
leases expiring between October 1, 1996 and December 31, 2001 total $9,619,386,
although there can be no assurance that the Company will be able to realize such
residual value in the future. As of September 30, 1996, 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>
1996 $ 485,000
1997 4,455,119
1998 1,646,867
1999 919,500
2000 1,504,800
2001 608,100
-----------
Total $ 9,619,386
===========
</TABLE>
Leased equipment expenditures of $8,671,733 for the nine months ended
September 30, 1996 were financed through the discounting of $8,430,655 of
noncancelable lease rentals to various financial institutions.
The Company believes that inflation has not been a significant factor in
its business.
Based on the Company's anticipated residual value realization,
distribution sales, and the anticipated refinancing of the Bank of America
credit line, management believes that it will have adequate capital resources to
continue its operations for at least the next twelve months, although, as stated
above, should the Company fail to receive adequate debt or equity financing in
the immediate future, the Company's growth will be materially and adversely
affected and its present level of operations may be reduced.
<PAGE> 18
BUSINESS
General. The Company buys, sells, leases and remarkets a wide variety of
information processing and communication equipment, including midrange
computers, telecommunications systems, peripherals, point-of-sale systems, local
area networks and select high technology and other capital equipment produced by
a variety of manufacturers, such as IBM, Unisys, AT&T, Sun Microsystems, DEC and
Tandem. The Company's leasing customers are primarily large corporations that
meet the Company's high credit standards and that possess significant
information processing and telecommunications needs. The Company is also a
distributor of IBM terminal, controller, printer and protocol converter
products.
Leasing Industry Overview. According to a survey conducted in 1994, The
Computer Dealer and Lessors Association (the "CDLA"), the international trade
organization which represents companies that lease, buy and sell new and used
computers and other high technology equipment, the computer equipment leasing
industry was estimated to be a $21.4 billion industry in 1995 consisting of many
products and services loosely divided into several major submarkets. These
submarkets include mainframe and midrange computer equipment, microcomputer
sales and network design, local area networks, point-of-sale equipment, disaster
recovery services and other engineering and technical support services. The
Company believes that the size of the leasing market reflects the rapid
technological improvements in and the development of new equipment as well as
the advantage that leasing offers over equipment purchasing, including lower
monthly payments and cash requirements, protection against technological
obsolescence and easy disposal of possibly unwanted equipment at the end of the
lease term.
Historically, the industry was dominated by the manufacturers of mainframe
computer equipment. However, the introduction of new and more powerful
microcomputers offering increased capability at reduced prices has led to an
increase in the demand for midrange and microcomputer hardware, software,
accessories and related services. Business users are employing, at an increasing
rate, midrange and microcomputer networks. This increase in technological
capability and the relatively high cost of mainframe systems has resulted in a
fundamental shift in the demand for information systems and services, creating
new opportunities for more efficient distributors of midrange and microcomputers
and related equipment.
Strategy. The Company has achieved the growth of its lease portfolio by
implementing the following key strategies:
Customer Service and Responsiveness. The Company believes it provides its
clients with superior customer service and long term solutions for their data
processing, telecommunications and technical support needs. The Company has
close partnership relationships with its clients enabling it to identify each
client's complex data processing requirements and develop flexible, integrated
leasing solutions in response. Close client relationships and the expertise and
experience of management allow the Company to assist customers in their leasing
decisions regarding data processing or other technological equipment. In this
respect, the Company not only frequently participates in a customer's decision
regarding the type of equipment to acquire to meet its needs, but also helps in
developing a leasing structure. The Company believes that this strategy
encourages a loyal customer base and repeat business.
Diversification of Equipment and Manufacturers. The Company offers to
customers a full range of new and used computer and telecommunications equipment
manufactured by a variety of major manufacturers, including IBM, Unisys, AT&T,
Sun Microsystems, DEC and Tandem. Over the last few years, the Company has
strategically diversified its lease portfolio activities to include equipment
such as computer storage hardware, point-of-sale systems and telecommunications
equipment; the Company believes these to be less susceptible to rapid
technological obsolescence than large, centralized computer processing units.
The Company further believes that an expanded equipment base mitigates the risks
of obsolescence of a specific type of equipment, as well as reducing the
Company's reliance on any one particular manufacturer.
<PAGE> 19
Select Customers. The Company's customers are creditworthy corporations
and other organizations that have significant data processing and
telecommunication needs. These corporations enable the Company to structure
long-term nonrecourse financing transactions with various financial institutions
on competitive terms. Moreover, lower rate, nonrecourse financing limits the
Company's financial exposure on those lease transactions further enabling the
Company to expand its lease portfolio and customer base.
Leasing. The Company provides customers through structured lease
transactions with a full range of new and used data processing equipment,
including midrange central processing units, peripherals, point-of-sale systems
and telecommunications equipment produced by major manufacturers. By emphasizing
a full range of products and manufacturers and by maintaining a balanced client
base, the Company maximizes its leasing opportunities while providing stability
to its total lease portfolio.
The Company believes leasing offers certain advantages for its clients
over equipment purchasing, including off-balance sheet financing, lower monthly
payments and cash requirements, protection against technological obsolescence
and easy disposal of equipment at the end of the lease term. Through its leasing
transactions, the Company serves as an intermediary between end users of high
technology equipment and sources of financing for equipment purchases.
In a typical leasing transaction, the Company cultivates a customer
relationship, develops an understanding of the customer's requirements and then
delivers what the customer needs in the form of an advantageous lease financing
structure. The terms and conditions of the lease are negotiated and, if accepted
by the customer, a master lease agreement is executed and the equipment to be
leased is secured either from a manufacturer, reseller or from the Company's
inventory. The Company arranges nonrecourse financing secured by the equipment
by selling the future lease rentals on a discounted basis. The discount rate
reflects the credit standing of the lessee, the length of the lease and the
total amount financed. The Company typically receives between 85% and 95% of its
equipment cost through nonrecourse financing. The difference between the cost of
the equipment and the amount received through the nonrecourse financing is
referred to as the Company's "equity position" in the equipment. The Company
usually finances its equity position in a lease through internally generated
funds and recourse bank borrowings. The Company retains ownership of the
equipment during the term of the lease. Upon expiration of the lease term, the
Company seeks to maximize the realization of the residual value of the leased
equipment through its remarketing activities on either a wholesale or retail
basis.
Equipment lease terms generally range from monthly to five years, with
data processing and telecommunications equipment leases typically spanning two
to four years. Additions to the lease portfolio frequently result from a
competitive bidding process. Substantially all leases are noncancelable, require
the lessee to protect the equipment, at their cost, with the manufacturer's
maintenance contract and place the risk of loss or damage to the equipment on
the lessee.
Distribution. Pacific Mountain provides its customers with
state-of-the-art mid-range peripheral equipment manufactured by a variety of
major manufacturers, including IBM, Hewlett Packard, Epson, Pearle, Data South
and IDEA. Approximately one-half of Pacific Mountain's business involves retail
sales and the other half is sold to resellers in the wholesale market. Pacific
Mountain secures its customers through cold calls, referrals, advertising in
trade journals and advertising to the reseller market through fax and on-line
system.
Pacific Mountain typically buys products from a variety of manufacturers,
for which Pacific Mountain maintains the status of authorized distributor. Most
equipment is bought for inventory and is sold on a continual basis to its
customer base at terms ranging from prepayment to net 30 days. The average
inventory turnover is approximately 60 days. The Company believes that the
synergy between Pacific Mountain and the Company is such that it becomes more
advantageous to the customer to transact business with the Company or Pacific
Mountain to take advantage of flexibility of acquisition (by or lease) and one
stop shopping.
<PAGE> 20
Suppliers. The Company purchases new equipment directly from the
manufacturer and obtains used equipment from its customer base and from the
nationwide secondary market for used data processing and telecommunications
equipment. Management's experience in the secondary market, coupled with the
Company's portfolio of equipment under lease, enables the Company to tailor
systems to customers' specific needs by combining new and used equipment
configurations at competitive prices. Similarly, the Company is often able to
facilitate new lease transactions by either buying, remarketing or trading in a
prospective customer's existing equipment.
A significant amount of the equipment leased by the Company consists of
equipment manufactured by IBM, including computer systems, such as midrange
central processing units, and computer peripherals, such as disk and tape
drives, control units, printers and work stations. The Company considers the
leasing of IBM equipment to be generally advantageous because of the large
national IBM customer base and equipment aftermarket, IBM's policy of supporting
its users with software and maintenance services, and IBM's reputation in the
computer equipment marketplace.
Reliance Upon Major Suppliers. Pacific Mountain is highly dependent on its
suppliers, the manufacturers. Most manufacturers extend terms of net 30 days or
provide a line of credit to Pacific Mountain for purposes of ordering equipment.
Additionally, Pacific Mountain maintains a $500,000 line of credit with a
financial institution, subject to possible downward adjustment through a formula
calculation, secured by the assets of Pacific Mountain and guaranteed by the
Company. Any event of default on any credit facility offered by a manufacturer
could materially affect Pacific Mountain's ability to acquire equipment for
resale.
Remarketing of Leased Equipment and Dealer Activity. The Company's cash
flow depends to a great extent upon the Company's ability to realize the
residual value of leased equipment upon expiration of the lease term.
Historically, the Company has realized its recorded investment in residual
values through the renegotiating of leases during their terms to add or modify
equipment; renewal or extension of the original lease; leasing of equipment to a
new user; or sale of the equipment.
The types of equipment purchased by the Company may be subject to
short-term or long-term adjustment in fair market value due to advancing
technology or functional obsolescence, and thus there can be no assurance as to
the Company's ability to realize the recorded residual values of the Company's
equipment. See "Risk Factors - Realization of Residual Values." In recording the
estimated residual value of equipment to be received upon sale or re-lease of
equipment for financial accounting purposes, the Company generally relies upon
independent third-party estimates and internal history to determine the future
market value and reduces such estimated amounts in recognition of the risks
associated with the future disposition of such equipment.
Customers and Marketing. The Company's leasing customers are primarily
corporations and other organizations that have significant data processing and
telecommunications needs and that meet the Company's credit standards. The
Company's principal objective is to selectively engage in lease transactions
with customers whose creditworthiness permits the Company to maximize the use of
long-term, competitive rate nonrecourse financing. Three customers of the
Company, Bed Bath & Beyond, Tiffany & Co. and the Hertz Corporation accounted
for 13.1%, 11.5% and 10.2% of the Company's consolidated revenues in 1995 and
the same three customers accounted for, in the aggregate, approximately 50% of
consolidated revenues for the year ended December 31, 1994.
The Company's marketing strategy is customer and relationship driven,
emphasizing business partnering, relationship selling, quick response to
customer requests for proposals, and a willingness and ability to offer flexible
lease terms. Management's experience in the computer and leasing industry,
knowledgeable and educated sales professionals and the ability to adjust to
changes in the market place enables the Company to assist users of high-tech
equipment to better manage their assets. The Company's sales and marketing staff
provides comparisons of new and used equipment and lease and purchase options to
determine the best strategy for each new customer. The Company's marketing goal
is to evaluate all options available to a customer to form a strategic solution
that best meets the customer's specific needs and objectives.
<PAGE> 21
The Company has equipment on lease throughout the United States. The
Company's sales representatives market the Company's services primarily though
referrals, personal or telephone sales calls and direct mailing.
Competition. The technology leasing industry is highly competitive,
fragmented and is comprised of numerous competitors, many of which are larger
and better known than the Company with substantially greater financial
resources. These competitors include national technology leasing companies, such
as IBM Credit Corporation and Comdisco, Inc., as well as manufacturers of
equipment, branches or divisions of national, regional and local commercial
banks, savings and loan institutions and other commercial lending firms. The
Company also competes with other small, independent leasing companies as well as
individuals and firms that act as leasing brokers and other institutions. The
Company competes on the basis of customer service, its long-term relationships
with its customers and competitive pricing. There is no assurance that the
Company can continue to compete successfully in the computer leasing industry.
Employees. As of October 31, 1996, the Company, including its
subsidiaries, employed twenty-three individuals on a full-time basis. The
full-time employees consist of ten direct marketing personnel (including the
Company's President) and thirteen managerial, administrative and clerical
personnel. The number of employees currently employed by the Company is believed
to be sufficient to support the Company's short-term anticipated growth and the
Company intends to expand its employee base as the need arises.
Properties. The Company leases approximately 5,250 square feet of office
space in Las Vegas, Nevada for use as its executive offices and the leasing
segment of its business. The initial lease term expires June 30, 2002. The lease
may, subject to its terms, be extended for one five-year period ending June 30,
2007. Basic rent under the lease is $8,138 per month, subject to annual
adjustment equal to a proportional increase in a consumer price index. The
Company must also pay all costs of operations, including real property taxes, in
addition to the basic rent.
The Company also leases approximately 7,500 square feet of office and
warehouse space for use by Pacific Mountain. The lease expires January 31, 2000
and has a current gross monthly rental of $5,248. The lease may be extended for
one five-year period ending January 31, 2005. The Company believes that its
facilities provide adequate space for its operations for the foreseeable future.
<PAGE> 22
MANAGEMENT
Directors and Executive Officers. The names and ages of the directors and
executive officers of the Company and their positions with the Company, are as
follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <S>
Michael F. Daniels 48 Chairman of the Board, President
and Chief Executive Officer
Larry M. Segall 41 Director
L. Derrick Ashcroft 68 Director
William G. McMurtrey 57 Director
David C. Ward 55 Director
William J. Vargas 37 Vice President-Finance, Chief
Financial Officer and Treasurer
</TABLE>
Michael F. Daniels. Mr. Daniels has served as Chairman of the Board of
Directors, President and Chief Executive Officer since April 1994 and as a
Director of the Company since 1983. He served as Chief Operating Officer from
March 1993 to April 1994 and as Senior Vice-President-Marketing for more than
five years prior thereto. From 1970 to 1983 he was a Senior Systems Engineer
with Metropolitan Life Insurance Company.
Larry M. Segall. Mr. Segall has served as a director of the Company since
November 1989. Mr. Segall has been employed by Tiffany & Co. since 1985 and is
currently its Vice President - Treasurer and Controller. From 1983 to 1985 he
was Controller of Murjani International Ltd. From 1977 to 1983 he was employed
as an auditor with Touche Ross & Co.
L. Derrick Ashcroft. Mr. Ashcroft has served as a Director since August
1994. From 1988 to 1995 he was Chairman of the Board of Cardiopet, Inc., an
animal diagnostic firm and from 1986 through 1988 he served as Chairman and
President of Ashcroft Rubin, Inc., an equipment leasing company specializing in
tax-driven equipment leases. He also currently serves as a Director on the
Board's of Tatatech, Inc., a high tech venture capital firm and Telco
Technologies, Inc., a telecommunications services company. Mr. Ashcroft is a
graduate of Oxford University, England.
William G. McMurtrey. Mr. McMurtrey has served as a Director of the
Company since June 1994 and as President of Pacific Mountain since 1978. From
1974 to 1978, Mr. McMurtrey was a Regional Vice President for Telex Corporation
and from 1967 to 1974 he was a Branch Manager for the Honeywell Corporation.
David C. Ward. Dr. Ward has served as a Director of the Company since May
1995. Dr. Ward has been a faculty member, Department of Genetics and Molecular
Biographics and Biochemistry, Yale University School of Medicine since 1971 and
a Professor since 1982. He is a business advisor to Integrated Genetics, Genzyme
Corporation, Seq, Inc., Anco Rx and the Canadian Medical Research Council.
William J. Vargas. Mr. Vargas has served as Vice President-Finance, Chief
Financial Officer and Treasurer since May 1995 and as Secretary since February
1996. From July 1993 through January 1995 Mr. Vargas was the Senior Director of
Finance for Fitzgeralds Casino/Hotel in Las Vegas, Nevada and from February 1995
through April 1995 he was an independent financial consultant. From July 1990 to
December 1991 and from January 1992 to July 1993 he was the Chief Financial
Officer of Electronic Data Technologies and Sport of Kings, Inc., respectively,
two publicly traded gaming companies. From July 1984 to July 1990 he was
employed as an auditor with Arthur Andersen & Co.
<PAGE> 23
Officers serve at the discretion of the Board of Directors. All Directors
hold office for one year terms and until the election and qualification of their
successors. The Company has a Key Employee Stock Option Committee and a Director
Stock Option Committee consisting of Messrs. Segall and Ashcroft and Messrs.
Daniels and McMurtrey, respectively. The Stock Option Committees are responsible
for the granting of stock options under the Company's 1991, 1993 and 1994 Stock
Option Plans. The Company has an Audit Committee consisting of Messrs. Segall
and Ashcroft. The Board of Directors did not have a standing nomination
committee or committee performing similar functions during the year ended
December 31, 1995.
EXECUTIVE COMPENSATION
The compensation paid and/or accrued to the Chief Executive Officer of the
Company for services rendered to the Company during the three fiscal years ended
December 31, 1995 is presented in the following table. No other executive
officer received annual compensation in excess of $100,000 in any of the three
years ended December 31, 1995.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
--------------------------------------------------
Annual Compensation Awards Payouts
------------------------------------- ----------------------- ------------------------
Name of
Individual Securities Long
and Other Restricted Underlying Term
Principal Fiscal Annual Stock Options/ Incentive All Other
Position Year Salary Bonus Compensation Awards SARs(#) Payouts Compensation
---------- ------ -------- ----------- ------------ ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael F. Daniels 1995 $254,808 $ 25,000(1) $198,987(2) - 79,000 - $4,500(3)
President & CEO 1994 $188,314 $732,000(4) $192,148(2) - - - $4,500(3)
1993 $146,652 - $199,149(2) - 15,625 - -
<FN>
- -------------------
<F1> Consists of accrued bonus pursuant to employment contract.
<F2> Consists of commission income based upon realization of excess residual
values related to leases entered into prior to May 15, 1993.
<F3> Represents company matching contribution to 401(k) Profit Sharing Plan.
<F4> Consists of 300,000 shares of restricted common stock at a quoted market
price of $2.44 granted in lieu of discretionary commissions.
</FN>
</TABLE>
<PAGE> 24
Option/SAR Grants in Last Fiscal year
<TABLE>
<CAPTION>
Percent
Number of of Total
Securities Options/SAR's
Underlying Granted Exercise
Options/SAR's to Employees or Base Expiration
Name Granted (#) In Fiscal Year Price ($/Sh) Date
---- ------------- -------------- ------------ ----------
<S> <C> <C> <C> <C>
Michael F. Daniels 50,000 27.4% $1.06 5-03-00
29,000 15.9% $1.06 8-14-00
</TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End
Option/SAR Values
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised
Underlying In-The-Money
Options/SAR's Options/SAR's
Shares At Fiscal At Fiscal
Acquired Year End (#) Year End ($)
on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
---- -------- -------- -------------- ---------------
<S> <C> <C> <C> <C>
Michael F. Daniels 0 0 101,250/79,000 $93,436/$49,573
</TABLE>
Directors Compensation
Each non-employee director of the Company is paid $1,000 per month. In
addition, each director is entitled to participate in the Company's 1991 and
1993 Director Stock Option Plan and in the 1994 Stock Option Plan. During 1995,
the Company granted an aggregate of 67,500 options to non-employee directors at
an exercise price of $1.06 per share, which was the market value of the
Company's common stock on the date of grant. The Company does not pay its
directors any additional fees for committee participation.
Employment Contracts
Michael F. Daniels serves as the Company's President and Chief Executive
Officer under an employment agreement dated July 1, 1995 and expiring June 30,
2000. Mr. Daniels is compensated at a rate of $250,000 per annum and is eligible
for a bonus based on company performance. In addition, Mr. Daniels is entitled
to receive commissions equal to 25% of the net proceeds realized by the Company
from any subsequent sale or lease of certain equipment subject to leases which
commenced prior to May 15, 1993 in excess of the residual value of such
equipment.
<PAGE> 25
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of November 15, 1996, certain
information concerning those persons known to the Company, based on information
obtained from such persons, with respect to the beneficial ownership (as such
term is defined in Rule 13d-3 under the Securities Act of 1934) of shares of
Common Stock, $0.01 par value, of the Company by (i) each person known by the
Company to be the owner of more than 5% of the outstanding shares of Common
Stock, (ii) each Director of the Company or, (iii) each executive officer named
in the Summary Compensation Table and (iv) all executive officers and Directors
as a group:
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Beneficial Percentage of
Beneficial Owner (1) Ownership (2) Class (3)
-------------------- ----------------- -------------
<S> <C> <C>
Michael F. Daniels 539,625 (4) 12.9%
William G. McMurtrey 178,888 (5) 4.4%
L. Derrick Ashcroft 152,500 (6) 3.7%
Larry M. Segall 266,875 (7) 6.3%
David C. Ward 40,000 (8) 1.0%
Select Media, Inc. 248,000 (9) 5.8%
All Directors and Executive Officers
as a Group (6 persons) 1,220,388 26.1%
- -------------------
<F1> The address for all individuals identified herein is 6540 S. Pecos Road,
Suite 103, Las Vegas, Nevada 89120.
<F2> Unless otherwise noted, the Company believes that all persons named in the
table have sole investment power with respect to all shares of Common
Stock beneficially owned by them. A person is deemed to be the beneficial
owner of securities that can be acquired by such person within 60 days
from the date hereof upon the exercise of warrants or options or upon the
conversion of convertible securities. Each beneficial owner's percentage
ownership is determined by assuming that options or warrants or shares of
Convertible Preferred Stock that are held by such person (but not those
held by any other person) and which are exercisable or convertible within
60 days from the date hereof have been exercised or converted.
<F3> Based on 4,011,211 shares of Common Stock outstanding as of November 15,
1996.
<F4> Includes options to purchase 180,250 shares of Common Stock granted to Mr.
Daniels which are currently exercisable.
<F5> Includes options to purchase 40,000 shares of Common Stock granted to Mr.
McMurtrey which are currently exercisable.
<F6> Includes options to purchase 147,500 shares of Common Stock granted to Mr.
Ashcroft which are currently exercisable.
<F7> Includes options to purchase 254,000 shares of Common Stock granted to Mr.
Segall which are currently exercisable.
<F8> Includes options to purchase 30,000 shares of Common Stock granted to Mr.
Ward which are currently exercisable.
<F9> Includes options to purchase 248,000 shares of Common Stock which are
currently exercisable.
</TABLE>
<PAGE> 26
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Segall, a director of the Company, is also an officer of Tiffany &
Co., which is also one of the Company's customers. Mr. Segall receives no cash
or other remuneration from the Company other than a fee for his services as a
director and participation in the Director Stock Option plans. The Company
believes that the terms of its lease arrangements with Tiffany & Co. are fair
and have been reached on an arms-length basis.
DESCRIPTION OF CAPITAL STOCK AND CLASS B WARRANTS
The Company is authorized to issue 12,500,000 shares of Common Stock, par
value $.01 per share.
Preferred Stock. The Company's Certificate of Incorporation authorizes the
Company to issue an aggregate of 1,000,000 shares of preferred stock. Under the
Certificate of Incorporation, the Board of Directors has the power, without
further action by the stockholders, to designate the relative rights and
preferences of the Company's preferred stock, when and if issued. Such rights
and preferences could include preferences as to liquidation, redemption and
conversion rights, voting rights, dividends or other preferences, any of which
may be dilutive of the interest of the holders of the Common Stock. The issuance
of preferred stock may have the effect of delaying or preventing a change in
control of the Company and may have an adverse effect on the rights of the
holders of the Common Stock.
In 1993, the Company issued a new series of preferred stock, par value
$.01 per share, consisting of 380,000 shares of Series A Convertible Preferred
Stock ("Series A Preferred Stock"). The Series A Preferred Stock is convertible
at any time at the option of the holder, unless previously redeemed, into shares
of Common Stock of the Company at the Conversion Price then in effect (or 1.75
shares of Common Stock for each share of Series A Preferred Stock). The Series A
Preferred Stock will automatically convert into Common Stock at the Conversion
Price then in effect if the closing price for the Series A Preferred Stock
equals or exceeds $13.00 per share for 10 consecutive trading days. Upon
conversion of a share prior to the close of business on August 4, 1998, the
stockholder will receive, in addition to the Common Stock, one Warrant per share
of Common Stock received in such conversion.
Upon the optional conversion of shares of Series A Preferred Stock which
occurs between the date in any quarter on which dividends accrue prior to such
date for the succeeding quarter, the holder of such shares of Series A Preferred
Stock shall also be entitled to receive a conversion bonus equal to $0.25 per
share of Series A Preferred Stock so converted. The Series A Preferred Stock may
be redeemed for cash at any time at the option of the Company, in whole or in
part, at $10.00 per share, plus accrued and unpaid dividends to the redemption
date. Except as specifically provided, the Series A Preferred Stock is
nonvoting. Its liquidation preference is $10.00 per share, plus accrued and
unpaid dividends. Annual cumulative dividends are paid at the rate of $1.00 per
share of Series A Preferred Stock, accruing from the date of first issuance,
payable quarterly in arrears each March 31, June 30, September 30 and December
31, when, as and if declared by the Company's Board of Directors.
Common Stock. At November 15, 1996, there were 4,011,211 shares of Common
Stock outstanding held of record by approximately 220 stockholders. At November
15, 1996, an additional 6,306,345 shares of Common Stock were issuable upon
exercise of outstanding options and warrants and 400,778 shares of Common Stock
were issuable upon conversion of the Company's Series A Convertible Preferred
Stock (229,016 shares outstanding at November 15, 1996). The holders of Common
Stock are entitled to one vote for each share held of record on all matters
submitted to a vote of stockholders, including the election of directors. The
holders of Common Stock are entitled to any dividends that may be declared by
the Board of Directors out of funds legally available therefor, subject to the
prior rights of holders of the Company's Series A Preferred Stock and holders of
other series of preferred stock, if any, and the Company's contractual
restrictions against the payment of dividends on Common Stock. See "Price Range
of Common Stock and Related Stockholder Matters" and "Dividend Policy." In the
event of liquidation or dissolution of the Company, holders of Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities
and the liquidation preferences of any outstanding shares of preferred stock.
<PAGE> 27
Holders of Common Stock have no preemptive rights and have no right to
convert their Common Stock into any other securities. All of the outstanding
shares of Common Stock are fully paid and nonassessable. The Common Stock is not
subject to call or assessment, has no preemptive conversion or cumulative voting
rights and is not subject to redemption.
Class B Warrants. Each Class B Warrant entitles the holder to purchase one
share of Common Stock at an exercise price of $1.00 per share. The Class B
Warrants are exercisable from January 1, 1996 and expire on August 7, 1997. The
exercise price and the number of shares issuable upon exercise of the Class B
Warrants are subject to automatic adjustment in certain events, including the
issuance of Common Stock as a dividend on shares of Common Stock, subdivisions
or combinations of the Common Stock or similar events. Except as stated in the
preceding sentence, the Class B Warrants do not contain provisions protecting
against dilution resulting from the sale of additional shares of Common Stock
for less than the exercise price of the Class B Warrants or the current market
price of the Company's securities.
The outstanding Class B Warrants will be redeemable, in whole or in part,
at the option of the Company at any time, upon not fewer than 30 days' notice,
at a redemption price equal to $.001 per Class B Warrant. The Company presently
intends to redeem all of the Class B Warrants by January 15, 1997 by providing
30 days' prior written notice of redemption to the Class B Warrant holders. The
Class B Warrants remain exercisable during the 30 day notice period, however,
any holder who does not exercise the Class B Warrants prior to redemption will
forfeit his right to purchase the underlying common stock.
Holders of Class B Warrants may exercise their Class B Warrants for the
purchase of shares of Common Stock only if a current Prospectus relating to such
shares is then in effect and only if such shares are qualified for sale, or
deemed to be exempt from qualification, under applicable state securities laws.
The Company may decide not to seek, or may not be able to obtain, qualification
for the issuance of such Common Stock in all of the states in which the ultimate
purchasers of the Class B Warrants reside, in such case, the Class B Warrants of
such purchasers may have no value if such Class B Warrants cannot be exercised.
The Company will use its best efforts to maintain a current Prospectus relating
to such shares of Common Stock at all times when the market price of the Common
Stock exceeds the Exercise Price of the Class B Warrants until the Expiration
Date of the Class B Warrants, although there can be no assurance that the
Company will be able to do so.
The Company has instructed its Transfer Agent to reserve from its
authorized but unissued shares a sufficient number of shares of Common Stock for
issuance on exercise of the Class B Warrants. During the period in which a Class
B Warrant is exercisable, exercise of such Class B Warrant may be effected by
delivery of the Class B Warrant, duly endorsed for exercise and accompanied by
payment of the Exercise Price and any applicable taxes or governmental charges,
to the Warrant Agent. The shares of Common Stock issuable on exercise of the
Class B Warrants will be, when issued in accordance with the Class B Warrants,
fully paid and nonassessable.
The holders of the Class B Warrants have no rights as stockholders until
they exercise their Class B Warrants.
Transfer Agent and Warrant Agent. American Stock Transfer & Trust Company
is the transfer agent and registrar for the Company's Common Stock and will be
the transfer agent, registrar and Warrant Agent for the Class A Class B
Warrants.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion does not address certain federal income tax
consequences that are the result of special rules, such as those that apply to
life insurance companies, tax-exempt entities, foreign corporations, and
non-resident alien individuals. In addition, the discussion does not address
alternative minimum tax considerations and is limited to investors who will hold
Class B Warrants as "capital assets" (generally, property held for investment)
within the meaning of Section 1221 of the Internal Revenue Code of 1986, as
amended (the "Code"). This discussion is based on relevant provisions of the
Code, the Treasury Regulations promulgated thereunder (the "Regulations"),
revenue rulings published in the Internal Revenue Bulletin and judicial
decisions in effect at the date of this Prospectus. There can be no assurance
that future changes in applicable law or administrative and judicial
interpretations thereof will not adversely affect the tax consequences discussed
herein. THE TAX TREATMENT TO A HOLDER MAY VARY DEPENDING ON SUCH HOLDER'S
PARTICULAR SITUATION. POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS
AS TO THE TAX TREATMENT THAT MAY BE ANTICIPATED TO RESULT FROM THE OWNERSHIP OR
DISPOSITION OF CLASS B WARRANTS OR COMMON STOCK IN THEIR PARTICULAR
CIRCUMSTANCES, INCLUDING THE APPLICATION OF FOREIGN, STATE OR LOCAL TAX LAWS OR
ESTATE AND GIFT TAX CONSIDERATIONS.
<PAGE> 28
Exercise of Class B Warrants. Upon the exercise of a Class B Warrant, a
holder will not recognize gain or loss and will have a tax basis in the Class B
Warrant Shares issuable upon such exercise equal to the tax basis of the Class B
Warrant plus the Exercise Price. The holding period for the Class B Warrant
Shares will begin on the day after the date of exercise.
Redemption, Sale or Expiration of Class B Warrants. On redemption, sale or
expiration of a Class B Warrant, the holder will recognize gain or loss equal to
the difference between the amount realized on the redemption, sale or expiration
and the holder's tax basis in the Class B Warrant. A holder's tax basis in a
Class B Warrant generally will equal the basis of the Class B Warrant upon its
issuance to or acquisition by the holder. Such gain or loss will be capital gain
or loss and would be long-term capital gain or loss if the holding period were
to exceed one year.
State and Local Income Taxes. Holders of Class B Warrants may be liable
for state and local income taxes with respect to the sale, exchange or
redemption of Class B Warrants. Prospective investors are advised to consult
their own tax advisors as to the state, local and other tax consequences of
acquiring, holding and disposing of Class B Warrants.
LEGAL MATTERS
The legality of the issuance of the Securities offered hereby have been
passed upon by Werbel & Carnelutti, A Professional Corporation, 711 Fifth
Avenue, New York, New York 10022.
<PAGE> 29
EXPERTS
The audited consolidated financial statements of Leasing Edge Corporation
and subsidiaries as of and for the years ended December 31, 1995 and 1994 (as
restated), included in this Prospectus and in Amendment No. 3 to the
Registration Statement, have been examined by KPMG Peat Marwick LLP, independent
certified public accountants, and are included herein in reliance upon the
report of said firm given upon their authority as experts in accounting and
auditing.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
<PAGE> 30
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report- KPMG Peat Marwick LLP
Consolidated Balance Sheets As of December 31, 1995 and 1994 (as Restated)
Consolidated Statements of Operations For The Years Ended December 31, 1995
and 1994 (as Restated)
Consolidated Statements of Cash Flows For The Years Ended December 31, 1995
and 1994 (as Restated)
Consolidated Statements of Stockholders' Equity For The Years Ended
December 31, 1995 and 1994 (as Restated)
Notes to Consolidated Financial Statements
Consolidated Balance Sheet as of September 30, 1996 (unaudited)
Consolidated Statements of Operations for the Three and Ninth Months Ended
September 30, 1996 and September 30, 1995 (unaudited)
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1996 and September 30, 1995 (unaudited)
Notes to Consolidated Financial Statements (unaudited)
</TABLE>
<PAGE> 31
Independent Auditors' Report
The Board of Directors
Leasing Edge Corporation
We have audited the accompanying consolidated balance sheets of Leasing Edge
Corporation and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our resonsibility is to express an
opinion on the consolidated financial statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Leasing Edge
Corporation and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, during 1995
management discovered certain errors in the 1994 consolidated financial
statements. Accordingly, the previously issued financial statements as of and
for the year ended December 31, 1994 have been restated to correct these errors.
Las Vegas, Nevada
March 11, 1996, except
for the third paragraph
of Note 7 which is as of
March 27, 1996 /s/ KPMG Peat Marwick LLP
LEASING EDGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
(As Restated)
------------ -------------
<S> <C> <C>
ASSETS:
Cash $ 209,084 $ 479,118
Receivables - net of allowance for doubtful accounts of $12,000 and
$80,000 at December 31, 1995 and 1994, respectively 434,321 910,252
Notes receivable - employees 148,750 -
Inventory, net 1,336,747 708,319
Investment in leased assets:
Operating leases, net 21,026,590 22,976,503
Sales-type and direct financing leases 3,165,539 5,008,078
Lease incentives - 79,932
Furniture and equipment - net of accumulated depreciation of
$266,478 and $419,515 at Decemeber 31, 1995 and 1994, respectively 148,366 149,001
Other assets 413,847 89,012
Goodwill, net of accumulated amortization of $50,235 and $20,094 at
December 31, 1995 and 1994, respectively 401,881 432,022
-----------------------------
TOTAL ASSETS $ 27,285,125 $ 30,832,237
=============================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(continued)
LEASING EDGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
(As Restated)
------------ -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 1,576,165 $ 1,840,714
Accrued liabilities 311,734 2,459,591
Notes payable and lines of credit 3,236,954 1,494,705
Nonrecourse and recourse discounted lease rentals 16,260,002 20,717,986
Other liabilities 25,344 116,964
-----------------------------
TOTAL LIABILITIES 21,410,199 26,629,960
-----------------------------
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, $.01 par value; 1,000,000 shares
authorized, 380,000 shares issued; 229,016 and 230,016 shares
outstanding at December 31, 1995 and 1994, respectively 2,290 2,300
Common stock, $.01 par value; 10,000,000 shares authorized, 3,132,319
and 1,670,454 shares issued and 3,129,319 and 1,667,454 shares
outstanding at December 31, 1995 and 1994, respectively 31,324 16,705
Common stock subscribed - 478,600
Additional paid-in capital 9,526,259 7,658,463
Accumulated deficit (3,647,947) (3,849,291)
-----------------------------
5,911,926 4,306,777
Common stock held in treasury, at cost; 3,000 shares (12,000) (12,000)
Note receivable from stockholder (25,000) (92,500)
-----------------------------
TOTAL STOCKHOLDERS' EQUITY 5,874,926 4,202,277
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 27,285,125 $ 30,832,237
=============================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
LEASING EDGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1995 1994
(As Restated)
------------ -------------
<S> <C> <C>
Revenues:
Operating leases $ 10,484,855 $ 9,902,280
Sales-type leases 633,544 4,322,488
Direct finance leases 65,950 99,743
Direct sales and other 1,837,859 1,473,308
------------------------------
Total revenues from leasing operations 13,022,208 15,797,819
Distribution sales 5,127,949 3,970,026
------------------------------
Total revenues 18,150,157 19,767,845
------------------------------
Costs and expenses:
Operating leases 6,950,198 6,726,546
Sales-type leases 310,640 3,060,546
Interest expense 1,524,036 1,622,182
Lease incentive amortization 79,932 150,614
Direct sales 1,736,648 2,113,213
Write down of inventory and residual values 209,752 1,118,223
------------------------------
Total costs from leasing operations 10,811,206 14,791,324
Distribution cost of sales 4,454,861 3,391,795
Selling, general and administrative expenses 2,404,694 5,861,275
Interest expense 278,052 192,023
------------------------------
Total costs and expenses 17,948,813 24,236,417
------------------------------
Income (loss) before income taxes 201,344 (4,468,572)
Provision for income taxes - (339,411)
------------------------------
Net income (loss) $ 201,344 $ (4,129,161)
==============================
Earnings (loss) per common share $ (0.01) $ (3.12)
==============================
Weighted average common shares outstanding 2,907,279 1,408,302
==============================
</TABLE>
The accompanying notes are integral part of these consolidated financial
statements.
LEASING EDGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1995 1994
(As Restated)
------------ --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 201,344 $ (4,129,161)
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
Depreciation and amortization 7,112,213 6,939,267
Write down of inventory and residual values 209,752 1,118,223
Deferred income taxes - (339,411)
Stock option compensation expense - 496,405
Stock compensation expense - 989,813
Change in assets and liabilities due to operating activities:
(Increase) decrease in accounts receivable 475,931 (175,860)
Increase in inventory (469,069) (753,997)
Increase in notes receivable (135,250) -
(Decrease) increase in accounts payable (264,549) 968,873
(Decrease) increase in accrued liabilities (951,395) 1,947,917
All other operating activities (134,187) 114,620
-------------------------------
Total adjustments 5,843,446 11,305,850
-------------------------------
Net cash provided by operating activities 6,044,790 7,176,689
-------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales, transfers and disposals of inventory and equipment 1,498,724 5,470,819
Purchases of inventory for lease (6,868,120) (13,597,825)
Purchases of furniture and equipment (51,307) (70,651)
Purchase of Pacific Mountain, net of cash acquired - (104,327)
Additions to net investment in sales-type and direct finance leases (400,252) (4,671,541)
Sales-type and direct financing lease rentals received 2,242,791 4,498,330
-------------------------------
Net cash used in investing activities (3,578,164) (8,475,195)
-------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(Continued)
LEASING EDGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 1994
------------ --------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from nonrecourse and recourse discounted lease rentals 6,013,957 15,037,620
Payments on nonrecourse and recourse discounted lease rentals (10,471,941) (13,919,787)
Proceeds from notes payable 3,810,203 218,178
Payments on notes payable (2,022,129) (54,175)
Proceeds from exercise of stock options - 78,220
Proceeds from sale of stock 445,534 195,000
Proceeds from common stock subscriptions - 478,600
Deferred equity transaction costs (282,268) -
Purchase of treasury stock - (12,000)
Preferred stock dividends paid (230,016) (258,860)
-------------------------------
Net cash used in financing activities (2,736,660) 1,762,796
-------------------------------
Net increase (decrease) in cash (270,034) 464,290
Cash at beginning of period 479,118 14,828
-------------------------------
Cash at end of period $ 209,084 $ 479,118
===============================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 1,837,559 $ 1,743,579
===============================
Income taxes $ 7,750 $ 13,813
===============================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
LEASING EDGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 (AS RESTATED)
<TABLE>
<CAPTION>
Total
Preferred Stock Common Stock Additional Retained Stock- Deferred Common Stock-
--------------- ----------------- Paid in Earnings Treasury holder Compens- Stock holders'
Shares Amount Shares Amount Capital (Deficit) Stock Notes ation Subscribed Equity
------- ------ --------- ------- ---------- --------- --------- -------- -------- ---------- ----------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1993,
as previously
reported 296,465 $2,965 1,135,854 $11,358 $6,262,434 $2,328,747 - ($92,500) ($276,675) - $8,236,329
Prior period
adjustments (28,750) (288) (128,512) (1,895,092) (2,023,892)
--------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1993,
as restated 296,465 2,965 1,107,104 11,070 6,133,922 433,655 - (92,500) (276,675) - 6,212,437
Conversion of
preferred stock (66,449) (665) 116,715 1,168 (503) -
Acquisition of
PMCPI 88,888 889 115,778 116,667
Exercise of
stock options 69,000 690 297,260 297,950
Common stock for
services 228,000 2,280 987,533 989,813
Common stock for
interest 9,375 94 35,062 35,156
Purchase of
treasury stock (12,000) (12,000)
Sale of common
stock 51,372 514 194,486 195,000
Common stock
subscribed 478,600 478,600
Preferred stock
dividend (105,075) (153,785) (258,860)
Stock compensation
expense 276,675 276,675
Net loss (4,129,161) (4,129,161)
--------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1994 230,016 2,300 1,670,454 16,705 7,658,463 (3,849,291) (12,000) (92,500) - 478,600 4,202,277
Conversion of
preferred stock (1,000) (10) 1,750 17 (7) -
Sale of common
stock 499,999 5,000 440,534 445,534
Issuance of common
stock pursuant to
guaranteed return
agreement 165,672 1,657 (1,657) -
Issuance of common
stock 242,944 2,430 476,170 (478,600) -
Common stock for
services 529,500 5,295 1,137,167 1,142,462
Common stock for
debt 22,000 220 45,605 45,825
Reduction of note
from stockholder 67,500 67,500
Preferred stock
dividend (230,016) (230,016)
Net income 201,344 201,344
--------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1995 229,016 $2,290 3,132,319 $31,324 $9,526,259 ($3,647,947) ($12,000) ($25,000) - - $5,874,926
==============================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
LEASING EDGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The Company is primarily engaged in buying, selling and leasing data
processing and other high technology equipment. The Company's objective is to
conduct substantially all of its lease transactions with customers whose credit
worthiness enables the Company to assign to various financial institutions the
related lease rentals on a nonrecourse basis. Accordingly the Company's
customers are primarily large corporations or other organizations that have
significant data processing and telecommunication needs that meet the Company's
credit standards.
The Company is also a distributor of IBM terminal, controller, printer and
protocol converter products. These products are marketed nationally through
resellers and on the west coast through direct end-user sales by the Company's
California based subsidiary, Pacific Mountain Computer Products, Inc., (PMCPI).
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principals of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries TJCS, PMCPI and Maxel,
Inc. (an inactive corporation). Intercompany accounts and
transactions have been eliminated.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. For lease
accounting, this includes the estimate of residual values, as
described below. Actual results could differ from those estimates.
Lease Accounting Policies
-------------------------
The Company's lease transactions are classified as either sales-
type, direct financing, or operating leases. The Company classifies
each lease at its inception in accordance with Statement of
Financial Accounting Standards No. 13 "Accounting for Leases", as
amended and interpreted. Sales-type and direct financing leases are
those leases which transfer substantially all of the costs and risks
of ownership of the equipment to the lessee. Generally, the Company
classifies a lease as a sales-type or direct financing if the
present value of the rental payments is at least 90% of the fair
market value of the leased equipment at lease inception. Operating
leases are those leases in which substantially all the benefits and
risks of ownership of the equipment are retained by the lessor.
The lease accounting methods used by the Company are:
Sales-Type Leases
-----------------
At lease inception, the present value of the minimum lease payments
calculated at the interest rate implicit in the lease is recorded as
leasing revenues. The cost of the equipment less the present value
of the estimated residual value is recorded as leasing costs and a
dealer profit is recognized at the inception of the lease. The
minimum lease payments plus the unguaranteed residual value are
recorded as gross leased assets. Unearned interest income,
consisting of the excess of the gross leased assets over their
present values, is amortized to leasing revenues over the lease term
to produce a constant percentage return on the investment.
Direct Financing Leases
-----------------------
At lease inception, the minimum lease payments and the unguaranteed
residual value are recorded as gross leased assets. Unearned
interest income, consisting of the excess of the gross minimum lease
payments and unguaranteed residual value over the cost of the
equipment, is amortized to leasing revenues monthly to produce a
constant yield over the term of the lease. Residual values are
estimated at lease inception equal to the estimated value to be
received from the equipment following termination of the lease
(which in certain circumstances includes anticipated re-lease
proceeds), as determined by management. In estimating such values,
management considers all relevant information regarding the
equipment and the lessee.
Operating Leases
----------------
Leasing revenue consists principally of monthly rentals. The cost of
equipment is depreciated on a straight-line basis over the lease
term to an amount equal to the estimated residual value at the lease
termination date. Residual values are established at lease inception
equal to the estimated value to be received from the equipment
following termination of the initial lease (which in certain
circumstances includes anticipated re-lease proceeds), as determined
by management. In estimating such values, management considers all
relevant information and circumstances regarding the equipment and
the lessee. Because revenue, depreciation expense and the resultant
profit margin before interest expense are recorded on a
straight-line basis, and interest expense on discounted lease
rentals is incurred on the interest method, profit is lower in the
early years of the term of an operating lease and higher in later
years.
Residual Values
---------------
Residual values are established at lease inception equal to the
estimated value to be received from the equipment following
termination of the initial lease (which in certain circumstances
includes anticipated re-lease proceeds), as determined by
management. In estimating such values, management considers all
relevant information and circumstances regarding the equipment and
the lessee. On at least an annual basis, management assesses the
realizability of recorded residual values and, if necessary,
establishes a reserve to reduce the recorded values to net
realizable value.
Inventory
---------
Inventory of equipment that has come off lease is valued at the
lower of cost or market based on specific identification. Inventory
of equipment held for distribution is stated at the lower of cost
(first in, first out) or market.
Goodwill
--------
The Company's acquisition of PMCPI in 1994 has been accounted for as
a purchase in which the excess of the purchase price over the fair
market value of net tangible assets acquired is recorded as goodwill
and is being amortized on a straight-line basis over 15 years. In
accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets To Be Disposed Of, the
Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over
its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The amount of
goodwill impairment, if any, is measured based on projected
discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. In Management's
opinion, the recorded unamortized goodwill balance at December 31,
1995 of $401,881 is recoverable through the undiscounted future
operating cash flows of the acquired entity.
Nonrecourse Financing
---------------------
The Company assigns the rentals under its leases to financial
institutions and other lenders primarily on a nonrecourse basis. The
Company receives a cash amount equal to the discounted value of the
minimum lease payments. In the event of a default by a lessee, the
lender has a security interest in the underlying leased equipment
but has no recourse against the Company. Proceeds from discounted
lease rentals are recorded as nonrecourse discounted lease rentals.
Under sales-type and direct financing leases, leased assets and
nonrecourse discounted lease rentals are reduced as lessees make
payments under the lease. Under operating leases, leasing revenue is
recorded and nonrecourse discounted lease rentals are reduced as
lessees make rental payments to financial institutions. The Company
has no restrictive arrangements with these financial institutions as
a result of the nonrecourse borrowings.
Direct Sales
------------
Revenue from direct sales is generated from the marketing of the
Company's inventory of computer equipment and the remarketing of the
unguaranteed residuals at lease termination. Revenues and costs of
direct sales of equipment sold are recognized at the time title to
the equipment transfers to the customer.
Furniture and Equipment
-----------------------
Furniture and equipment are recorded at cost. Expenditures that
materially increase the life of the assets are capitalized. Ordinary
repairs and maintenance are charged to expense as incurred. When
assets are sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in other income (expense).
Depreciation and amortization are provided on the straight-line
method over the following useful lives:
Computer equipment 3 to 5 years
Furniture and office equipment 5 to 7 years
Leasehold improvements Term of lease
Income Taxes
------------
Deferred tax liabilities and assets are recognized for the future
tax consequences attributable to temporary differences between
financial reporting bases and the tax bases of the Company's assets
and liabilities at enacted rates expected to be in effect when such
amounts are realized or settled. The effect on deferred tax assets
and liabilities of a change in tax rate is recognized in income in
the period that includes the enactment date.
Earnings Per Share
------------------
Earnings per common and common equivalent share are computed based
on the weighted average number of common and common equivalent
shares outstanding during each period. Dilutive stock options
included in the number of common and common equivalent shares are
based on the treasury stock method.
Reclassification
----------------
Certain reclassifications have been made in the 1994 financial
statements to conform to the 1995 presentation.
NOTE 2: PRIOR PERIOD ADJUSTMENT
In 1995, the Company discovered certain errors in its previously
issued consolidated financial statements related to the
misclassification of certain lease transactions and errors in the
recording of direct sales activity, residual values and certain
equity transactions. The aggregate amount of these errors resulted
in a reduction in previously reported retained earnings at December
31, 1993 of $1,895,092, and an increase in previously reported net
loss for the year ended December 31, 1994 of $1,999,486. The
correction of such errors resulted in a reduction in previously
reported total assets of $3,175,008, an increase in previously
reported total liabilities of $686,913 and a decrease in previously
reported net stockholders' equity of $3,861,921 at December 31,
1994. The following table presents the effect of the prior period
adjustments on previously reported 1994 results of operations:
<TABLE>
<CAPTION>
1994 1994 1994
As Previously Prior Period as
Reported Adjustments Restated
------------- ------------ ------------
<S> <C> <C> <C>
Total revenues $ 19,885,789 $ (117,944) $ 19,767,845
Total expenses 23,435,248 801,169 24,236,417
Loss before benefit for income taxes (3,549,459) (919,113) (4,468,572)
Benefit for income taxes (1,419,784) (1,080,373) (339,411)
----------------------------------------------
Net loss $ (2,129,675) $ (1,999,486) $ (4,129,161)
==============================================
Net loss per share $ (1.67) $ (1.45) $ (3.12)
==============================================
</TABLE>
The tax effect of the prior period adjustment to retained earnings
at December 31, 1993 reduced net deferred taxes to a $339,411 net
deferred tax liability. Accordingly, the deferred tax effect of the
prior period adjustment to 1994 resulted in an increase in the
valuation allowance for deferred tax assets in excess of deferred
tax liabilities.
The Company has made all adjustments to the consolidated financial
statements for the year ended December 31, 1994 and periods prior to
January 1, 1994 which the Company believes are necessary for a fair
presentation of such statements.
NOTE 3: LEASE ACTIVITIES
The components of the net investment in sales-type and direct
financing leases are as follows at December 31:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Total future minimum lease payments $ 2,590,220 $ 4,508,023
Estimated unguaranteed residual values of
leased equipment 848,700 1,058,053
Less unearned income (273,381) (557,998)
--------------------------
Total $ 3,165,539 $ 5,008,078
==========================
</TABLE>
Future minimum lease rentals on sales-type and direct financing
leases are due as follows:
<TABLE>
<CAPTION>
As of December 31,
-------------------------
1995 1994
----------- -----------
<S> <C> <C>
Years ending December 31,
1995 $ - $ 2,276,733
1996 1,905,426 1,755,747
1997 427,062 307,182
1998 257,732 168,361
-------------------------
Total $ 2,590,220 $ 4,508,023
=========================
</TABLE>
Assets under operating leases are as follows at December 31:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Equipment at cost or net realizable value $ 33,626,174 $ 33,740,093
Accumulated depreciation (12,599,584) (10,763,590)
----------------------------
Total $ 21,026,590 $ 22,976,503
============================
</TABLE>
Depreciation expense related to operating leases was $6,950,198 and
$6,726,546 for the years ended December 31, 1995 and 1994,
respectively.
Future minimum lease rentals on operating leases are due as follows:
<TABLE>
<CAPTION>
As of December 31,
----------------------------
1995 1994
------------ ------------
<C> <C> <C>
Years ending December 31,
1995 $ - $ 8,870,268
1996 8,163,422 6,291,812
1997 4,641,084 3,035,850
1998 1,929,875 613,709
1999 873,663 -
2000 315,241 -
----------------------------
Total $ 15,923,285 $ 18,811,639
============================
</TABLE>
The estimated residual value of the Company's portfolio of leases
(including sales-type, direct financing and operating) by year of
lease termination are as follows:
<TABLE>
<CAPTION>
As of December 31,
----------------------------
1995 1994
------------ ------------
<C> <C> <C>
Years ending December 31,
1995 $ - $ 2,827,400
1996 3,670,700 3,602,500
1997 3,679,000 3,471,000
1998 1,830,500 1,257,500
1999 389,000 -
2000 996,000 -
----------------------------
Total $ 10,565,200 $ 11,158,400
============================
</TABLE>
NOTE 4: Acquisition of Pacific Mountain Computer Products, Inc.
On May 6, 1994, the Company acquired all of the common stock of
PMCPI, a distributor of computer peripherals, for 88,888 shares of
the Company's common stock and $400,000 in a transaction accounted
for by the purchase method of accounting. Of the $400,000 portion of
the purchase price, $150,000 was paid at closing and the balance is
a non-interest bearing note which has been discounted at an imputed
interest rate of 8.5 percent and is payable at various dates through
January 1997. The excess of the total acquisition cost over the fair
value of net assets acquired of $452,116 was recorded as goodwill
and is being amortized over 15 years. The Consolidated Statement of
Operations for the year ended December 31, 1994 (As Restated)
includes PMCPI's results of operations for the period May 6, 1994
through December 31, 1994.
The following unaudited proforma consolidated results of operations
assume that the acquisition occurred on January 1, 1994 and reflect
the historical operations of the purchased business adjusted for
amortization of goodwill resulting from the acquisition.
(In 000's except per share data)
<TABLE>
<CAPTION>
Year ended
December 31, 1994
-----------------
<S> <C>
Net revenues 21,456
Net loss (4,184)
Loss per share (3.09)
</TABLE>
The proforma results of operations are not necessarily indicative of
the actual results of operations that would have occurred had the
acquisition been made at the beginning of the period, or of results
which may occur in the future.
NOTE 5: INCOME TAXES
Total income tax expense (benefit) differed from the "expected"
income tax expense (benefit) determined by applying the statutory
federal income tax rate of 34% for the years ended December 31 as
follows:
<TABLE>
<CAPTION>
1995 1994
---------- ------------
<C> <C> <C>
Computed "expected" income tax expense
(benefit) $ 68,457 $ (1,519,314)
Change in valuation allowance for
deferred tax assets (767,104) 1,042,381
Nondeductible expenses 698,647 137,522
--------------------------
Total tax expense - (339,411)
==========================
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and tax liabilities
at December 31, 1994 and 1995 are presented below:
<TABLE>
<CAPTION>
December 31, December 31,
1994 1995
------------ ------------
<S> <C> <C>
Deferred Tax Assets
-------------------
Allowances for doubtful accounts, inventory obsolescence and
residual value realization not deducted $ 573,006 $ 75,396
Expenses accrued for financial statement purposes, not deducted 549,011 394,060
Net operating loss carryforwards 2,273,836 1,394,786
----------------------------
Total gross deferred tax assets 3,395,853 1,864,242
Valuation allowance (1,042,381) (275,277)
----------------------------
Net deferred tax assets 2,353,472 1,588,965
----------------------------
Deferred Tax Liabilities
------------------------
Expenses deducted for tax purposes but not deducted for
financial statement purposes 27,177 -
Basis difference for sales-type and direct financing leases
for financial statement purposes and sales for tax purposes 502,199 344,947
Basis difference for operating leases, principally due to
depreciation 1,824,096 1,244,018
----------------------------
Total deferred tax liabilities 2,353,472 1,588,965
----------------------------
Net deferred taxes - -
============================
</TABLE>
The Company has recorded a valuation allowance in accordance with
the provisions of Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes" to reflect the estimated amount of
deferred tax assets which may not be realized. In assessing the
realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary
differences become deductible.
At December 31, 1995, the Company has net operating loss
carryforwards for Federal income tax purposes of approximately
$4,000,000 which are available to offset future taxable income, if
any, through 2009.
NOTE 6: NONRECOURSE AND RECOURSE DISCOUNTED LEASE RENTALS
The Company assigns the rentals of its leases to financial
institutions at fixed rates on a nonrecourse or, to a lesser extent,
on a recourse basis but retains the residual rights. In return for
future lease payments, the Company receives a discounted cash
payment. Discounted lease rentals as of December 31, 1995 and 1994
were $16,260,002 and $20,717,986 respectively of which $182,688 and
$182,568 are recourse, respectively. Interest expense on discounted
lease rentals for the years ended December 31, 1995 and 1994 was
$1,524,036 and $1,622,182, respectively.
Principal and interest payments required on discounted lease rentals
are as follows:
<TABLE>
<CAPTION>
As of December 31,
----------------------------
1995 1994
------------ ------------
<C> <C> <C>
Years ending December 31,
1995 $ - $ 11,006,415
1996 9,802,474 7,953,041
1997 4,989,520 3,311,481
1998 2,064,050 779,703
1999 838,869 -
2000 284,877 -
----------------------------
Total 17,979,790 23,050,640
Less Interest (1,719,788) (2,332,654)
----------------------------
Principal amount $ 16,260,002 $ 20,717,986
============================
</TABLE>
NOTE 7: NOTES PAYABLE AND LINES OF CREDIT
On July 11, 1995, the Company entered into a Revolving Line of
Credit Agreement (the "Agreement") with Bank of America, Nevada.
Borrowings under the Agreement, as amended, are limited to the
lesser of $2.5 million ($2.7 million through May 10, 1996); sixty
percent (60%) of the Company's Equity Position in approved leases,
as defined; or twenty-five percent (25%) of the residual value of
leased equipment, as defined. The revolving credit agreement
provides for interest at Bank of America's prime interest rate plus
two percent, is collateralized by certain personal property of the
Company and requires the Company to pay an unused commitment fee
equal to one half of one percent of the unused portion of the line,
calculated on a weighted-average basis. Restrictive covenants under
the Agreement, as amended, include the maintenance of consolidated
tangible net worth, as defined, of at least $6.5 million; a
consolidated ratio of total liabilities, as defined, to tangible net
worth of no greater than 1.0:1.0; and a restriction on the payment
of cash dividends on shares of the Company's common stock. The
Agreement expires on June 30, 1996. At December 31, 1995, the
Company did not meet the consolidated tangible net worth covenant.
Bank of America has granted the Company a waiver of this covenant
through June 30, 1996 (the expiration date of the Agreement).
In July 1995, the Company borrowed $1,370,652 under the Agreement to
repay principal and accrued interest and cancel a revolving credit
facility with its predecessor bank. At December 31, 1995, the
Company had outstanding borrowings under the Agreement of $2.7
million and the interest rate with respect to the Agreement was 10.5
percent. Average borrowings outstanding under the revolving line of
credit during 1995 were $2,335,882 and the weighted average interest
rate was 10.7 percent. Maximum borrowings outstanding under the
revolving line of credit during 1995 were $2.7 million.
In January 1995, PMCPI entered into a revolving credit agreement
(the "Merrill Line") with Merrill Lynch Financial Services, Inc.
Borrowings under the Merrill Line are limited to the lesser of
$500,000 or an amount equal to 80 percent of PMCPI's accounts
receivable, as defined, plus 60 percent of inventory, as defined.
The Merrill Line is secured by accounts receivable and inventory of
PMCPI and is guaranteed by the Company. Subsequent to December 31,
1995, the Merrill Line borrowing base calculation was modified to be
more consistent with PMCPI's operations and the line was extended
through June 30, 1996. The change in the borrowing base calculation
increases PMCPI's credit availability under the Merrill Line by
approximately $160,000.
At December 31, 1995, PMCPI had outstanding borrowings under the
Merrill Line of $332,424 and the interest rate with respect to the
line was 9.5 percent. Average borrowings outstanding under the
revolving credit agreement during 1995 were $402,993 and the
weighted average interest rate was 9.9 percent. Maximum borrowings
outstanding under the revolving credit agreement during 1995 were
$459,906.
In November 1995, the Company entered into a letter agreement with
Union Chelsea National Bank (UCNB) whereby UCNB 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 UCNB (ie., the difference between the cost of
the leased equipment and the discounted present value of the minimum
lease payments assigned to UCNB). 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 1.25%.
At December 31, 1995, the Company had outstanding term notes and
available credit under the Equity Line of $62,264 and $187,736,
respectively.
In connection with the Company's acquisition of PMCPI in 1994, the
Company issued a non-interest bearing $250,000 note payable to
PMCPI's sole shareholder. The note is payable in varying
installments at varying dates through January 1997. At December 31,
1995, the remaining obligation on such note, discounted at an
imputed interest rate of 8.5%, was $95,939.
Notes payable and lines of credit consist of the following at
December 31,
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Revolving line of credit agreement with Bank of America, with
floating interest rate, currently at 10.5 percent $ 2,700,000 $ -
Revolving line of credit agreement with Merrill Lynch, with
floating interest rate, currently at 9.5 percent 332,424 -
Secured notes payable to UCNB, payable in installments through
November, 1999 with fixed interest rates between 9.75 and
10.0 percent, secured by leased equipment 62,264 -
Notes payable to Shareholder, due January 1997, with imputed
interest at 8.5 percent 95,939 236,916
Revolving line of credit agreement with UCNB, due 1995, with
variable interest rate of prime plus 2.5 percent - 972,363
Term loan payable to UCNB, due 1995, with variable interest
rate of prime plus 2.5 percent - 163,777
Other 46,327 121,649
--------------------------
$ 3,236,954 $ 1,494,705
==========================
</TABLE>
NOTE 8: COMMITMENTS AND CONTINGENCIES
a) Lease Agreements
The Company leases office and warehouse space under operating
leases expiring individually through 2002. The following is a
schedule by year of future minimum rental payments required as
of December 31, 1995 under these operating leases that have
initial or remaining noncancelable lease terms in excess of
one year:
<TABLE>
<C> <C>
Years ending December 31,
1996 $ 160,626
1997 160,626
1998 160,626
1999 160,626
2000 102,898
Thereafter 146,475
---------
Total $ 891,877
=========
</TABLE>
Rental expense on operating leases was $143,581 and $79,976
for the years ended December 31, 1995 and 1994, respectively.
b) Employment Contracts
The Company has employment agreements with certain of its
executive officers and management personnel with remaining
terms of approximately five years at amounts equal to their
current levels of compensation. Under these agreements, the
employee is entitled to receive other employee benefits of the
Company, including medical and life insurance coverage. The
agreements may be terminated by either the Company or the
employee at any time or for any reason. If an agreement is
terminated due to the death of an employee, a death benefit
equal to six months salary shall be paid to the employee's
estate. The employment agreement of the Company's President
and Chief Executive Officer includes additional compensation
in the form of a bonus based on Company performance. The
Company's annual expense under these agreements is
approximately $696,000.
NOTE 9: RELATED PARTY TRANSACTIONS
a) Company's Board of Directors
A member of the Company's Board of Directors is also an
officer of Tiffany & Co., a major customer of the Company.
Such individual does not have approval authority over lease
transactions on behalf of Tiffany & Co.
During 1995, a member of the Company's Board of Directors,
through a private company, loaned the Company $250,000 to
provide bridge financing during the Company's transition and
relocation from Hauppauge, New York to Las Vegas, Nevada. Such
amount was repaid in 1995. Such Director received options
covering 50,000 shares of common stock at an exercise price of
$1.31 per share which was equal to the quoted market value of
the Company's common stock at the date of grant. Such options
were immediately vested.
b) Loans to Employees
During 1995, the Company loaned $148,750 to six employees
enabling them to meet obligations associated with their
relocation to Nevada. Such loans are evidenced by promissory
notes, are due and payable June 30, 2000 and bear interest at
8.0 percent.
c) Other Transactions
Prior to the Company's relocation to Nevada in July 1995, the
Company leased office space from a partnership owned by an
officer and an outside director of the Company. The Company
paid rent of $22,190 and $38,000 to such partnership for the
years ended December 31, 1995 and 1994, respectively.
The accompanying consolidated balance sheets reflect a $25,000
and $92,500 reduction in stockholders' equity at December 31,
1995 and 1994, respectively, related to notes receivable from
current and former officers for acquisition of common stock.
In 1994, the Company purchased 3,000 shares of common stock
from the Company's former CEO and Chairman for $12,000. The
purchase price was equal to the quoted market price on the
purchase date.
d) Aggregate Effect of Transactions with Related Parties
The Board of Directors of the Company has reviewed the
aggregate effect on income of the above-described transactions
and concluded at the time such transactions were entered into
that they were in the best interest of the Company and on
terms as fair to the Company as could have been obtained from
unaffiliated parties.
NOTE 10: STOCKHOLDERS' EQUITY
During the year ended December 31, 1995, the Company sold 499,999
shares of common stock to two investment groups in private
placements. The proceeds of the transactions, net of related costs
of $53,466, was $445,534.
During the year ended December 31, 1995, the Company issued 529,500
shares of common stock for services received in 1994 and valued at
$1,142,462. Such amount was recorded in accrued liabilities at
December 31, 1994.
In May 1995, the Company issued 165,672 shares of common stock to
certain shareholders pursuant to guaranteed return provisions
related to certain 1994 private placement stock sales. At December
31, 1995, the Company had no further obligation to issue additional
shares to such investors nor to any other entity.
A. SERIES A CONVERTIBLE PREFERRED STOCK
In August 1993 the Company completed the sale of 380,000 shares of
Series A Convertible Preferred Stock. The Preferred Stock is
convertible at the holders option at any time into 1.75 shares of
common stock at a conversion price of $5.68 per share. If the Series
A Preferred Stock is converted on or prior to August 4, 1998, the
holder will receive ten (10) warrants to purchase 1/8th share of
common stock for each share of Series A Preferred Stock converted.
Outstanding Series A Preferred Stock is redeemable by the Company at
$10.00 per share plus accrued and unpaid dividends. The Series A
Preferred Stock pays dividends in arrears at an annual rate of $1.00
per share. A conversion bonus equal to $0.25 per share of Series A
Preferred Stock converted shall be payable to any holder who
converts such shares after the date in any calendar quarter on which
dividends accrue and prior to such date for the succeeding calendar
quarter.
The remaining number of outstanding shares of preferred stock at
December 31, 1995 and 1994 are 229,016 and 230,016, respectively.
There were 1,509,840 and 1,499,840 warrants outstanding at December
31, 1995 and 1994, respectively.
In 1994, preferred stock dividends were paid from retained earnings
and additional paid in capital in the amounts of $153,785 and
$105,075, respectively. Preferred stock dividends of $230,016 were
paid from additional paid in capital in 1995.
B. WARRANTS AND STOCK OPTIONS
Warrants
In August 1995, the Company registered 3,092,687 Class A Common
Stock Purchase Warrants and 1,000,000 Class B Common Stock Purchase
Warrants, together with the underlying common shares. Each of the
warrants entitles the holder thereof to purchase one share of the
Company's common stock at an exercise price of $3.00 per share. As
of December 31, 1995, 3,084,800 of the Class A and 1,000,000 of the
Class B warrants have been issued, at no cost to the recipient, and
none of the warrants have been exercised.
Stock Options
1) Key Employee and Director
On September 19, 1991, the Stockholders of the Company
approved the Key Employee Stock Option Plan and the Director
Stock Option Plan at the Company's annual meeting. On October
27, 1992 the options under both plans (78,125 common shares
under the Key Employee Plans and 15,625 common shares under
the Director Plan) were granted and are exercisable at an
option price of $4.00 per share. All options were granted at
exercise prices equal to the market value of the Company's
common stock on the date of grant and expire ten years from
such date. Options underlying both plans are immediately
vested.
On June 24, 1993, the Stockholders of the Company approved the
Key Employee Stock Option Plan and Director Stock Option Plan
at the Company's annual meeting. On November 22, 1993 the
options under both plans (34,375 common shares under the Key
Employee Plan and 9,375 shares under the Director Plan) were
granted and are exercisable at $3.52 per share. All options
were granted at exercise prices equal to the market value of
the Company's common stock on the date of grant and expire ten
years from such date. Options underlying both Plans are
immediately vested.
On May 24, 1994, the Stockholders of the Company approved the
1994 Stock Option Plan at the Company's annual meeting. On May
4, 1995 and August 15, 1995, 202,500 and 47,500 options,
respectively, (182,500 common shares to Key Employees and
67,500 common shares to Directors) were granted and are
exercisable at $1.06 per share. All options were granted at
exercise prices equal to the market value of the Company's
common stock on the date of grant and expire ten years from
such date. Options granted to key employees provide for
ratable vesting over a four-year period and expire five years
from the date of grant. Options granted to directors are
immediately vested and expire ten years from the date of
grant.
2) Other Options
In 1995, the Board of Directors of the Company approved the
issuance of options covering 275,000 shares of common stock to
two companies for services. The exercise price of such options
was $1.38 per share which was equal to the quoted market value
of the Company's common stock at the date of grant. Such
options were immediately vested and expire on March 6, 2000.
In addition, the Board of Directors approved the issuance of
options covering an aggregate of 150,000 shares of common
stock to an existing shareholder and to one of the Company's
Directors as an inducement to such individuals to provide the
Company a short term loan during its transition and relocation
from Hauppauge, New York to Las Vegas, Nevada. The exercise
price of such options ranged from $1.31 to $1.69 per share;
such prices were equal to the quoted market value of the
Company's common stock at the date of grant. Such options were
immediately vested and expire on various dates through June 7,
2000.
Also in 1995, the Company issued options covering 25,000
shares of the Company's common stock to an individual at an
exercise price of $1.38. Such options were immediately vested
and expire on December 31, 1996.
During the year ended December 31, 1994, the Company granted
60,000 stock options for consulting services at an exercise
price of $1.00. The difference between the market value of the
Company's common stock on the grant date and the exercise
price, $202,800, was expensed in 1994. All of these options
were exercised during 1994.
An officer of the Company has 58,125 options to acquire the
Company's common stock at an exercise price of $0.08 per
share. The options were granted in lieu of prospective
commissions and were subject to a three year vesting. The
difference between the market value of the Company's common
stock on the grant date and the exercise price, $316,200, was
recorded as deferred compensation in 1993. During the fourth
quarter of 1994, the remaining unamortized deferred
compensation of approximately $214,000 was charged to
operations in conjunction with the cancellation of the
officer's employment agreement to which the options related.
Also in 1994, the Company granted 4,000 options to a Director
of the Company for incremental director-related services at an
exercise price of $0.08. The difference between the market
value of the Company's common stock on the grant date and the
exercise price, $16,930, was expensed in 1994. All of these
options were exercised during 1994.
In 1993, the Company issued options covering 25,375 shares of
the Company's common stock at an exercise price of $1.38. Such
options were immediately vested and expire on December 31,
1996.
The following is a summary of changes in outstanding options
for the two years ended December 31, 1995:
<TABLE>
<CAPTION>
Options Option Price
------- --------------
<S> <C> <C>
Options outstanding at December 31, 1993 221,000 $ .08 - 4.00
Options granted 89,000 .08 - 4.00
Options exercised (69,000) .08 - 4.00
Options expired or cancelled - -
--------------------------
Options outstanding at December 31, 1994 241,000 .08 - 4.00
Options granted 700,000 1.06 - 1.69
Options exercised - -
Options expired or cancelled (93,250) 3.52 - 4.00
--------------------------
Options outstanding at December 31, 1995 847,750 $ .08 - $4.00
==========================
Options exercisable 665,250 $ .08 - $4.00
==========================
</TABLE>
All options and warrants and their respective exercise prices have
been adjusted to reflect the one-for-eight reverse stock split which
became effective on February 24, 1994.
C. REVERSE STOCK SPLIT
On February 22, 1994, the stockholders of the Company approved a
one-for-eight reverse stock split of the Company's common stock. The
reverse split became effective at the close of business on February
24, 1994. Simultaneously with the reverse split, the number of
authorized shares of Common Stock was changed to 10,000,000.
On the effective date of the reverse split, the Company's Series A
Convertible Preferred Stock was adjusted in accordance with the
terms of the governing certificate of designation so that the
conversion price with respect to each share of Preferred Stock was
changed from $0.71 to $5.68, thereby resulting in the issuance of
1.75 shares of the Company's common stock for each share of
preferred stock converted after such effective date. In addition, on
the effective date of the reverse split, the warrants issuable upon
conversion of the Preferred Stock were adjusted in accordance with
the terms of the governing warrant agreement so that each of the
warrants to be issued upon the conversion of each share of Preferred
Stock will thereafter represent the right to buy 1/8th of a share of
the Company's common stock at an exercise price of $1.15 No
fractional shares will be issued on the conversion of Preferred
Stock or the exercise of the warrants.
D. OTHER
Included in other assets in the accompanying consolidated balance
sheet at December 31, 1995 is $282,268 of deferred costs associated
with pending equity transactions. The Company anticipates that
certain additional costs will be incurred in 1996, including a
success fee payable to the Company's financial advisor. Such
capitalized costs and any additional costs or fees will be netted
against the proceeds upon successful completion of such
transactions.
NOTE 11: MANAGEMENT'S PLANS
The Company is continuously seeking debt and/or equity financing to
fund the growth of its lease portfolio. The Company currently has in
excess of 525,000 vested stock options outstanding with exercise
prices ranging from $.31 to $1.92 below the closing bid price of the
Company's common stock at March 25, 1996. Management anticipates
that a portion of the options will be exercised in the near term
which will augment the Company's cash flows, although there can be
no assurances that any options will be exercised. Additionally, the
Company has approximately 4 million warrants outstanding with an
exercise price of $3.00 per share. The Company has also held
preliminary discussions with its banks regarding increases and
renewals of its existing credit lines and certain modifications in
the borrowing base calculations under such lines. In connection
therewith, the Company and Merrill Lynch have agreed to a new
borrowing base calculation and extension of the facility through
June 30, 1996. This modification increases the Company's credit
availability under the Merrill Lynch line by approximately $160,000.
However, should the Company fail to receive additional debt or
equity financing in 1996, the Company's growth could be materially
and adversely affected. In addition, there is no assurance that
financial institutions will continue to fund 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.
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.
NOTE 12: MAJOR CUSTOMERS
Revenue from leases with three customers of the Company accounted
for 13.1%, 11.5% and 10.2% of consolidated revenues for the year
ended December 31, 1995 and the same three customers accounted for,
in the aggregate, approximately 50% of consolidated revenues for the
year ended December 31, 1994.
NOTE 13: EMPLOYEE BENEFIT PLANS
The Company has a qualified 401(k) Profit Sharing Plan (the "Plan")
covering all employees of the Company, including officers. Employees
are eligible to participate in the Plan upon hire. The plan requires
the Company to match 50% of each dollar contributed by a Plan
participant up to the Participants qualified deferral amount. During
1995 and 1994, the Company contributed its required amounts of
$26,986 and $16,377 to the Plan on behalf of the Plan's
participants.
NOTE 14: SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES
In 1995, 1,000 shares of Series A Convertible Preferred Stock were
converted into 1,750 shares of common stock; 165,672 shares of
common stock were issued pursuant to guaranteed return provisions
related to 1994 private placement stock sales; 22,000 shares of
common stock were issued to satisfy debt of $45,825 and 529,500
shares of common stock were issued for services valued at
$1,630,462. In addition, the Company forgave a $54,000 note
receivable from the Company's former chairman in connection with the
buyout of such individuals retirement agreement.
NOTE 15: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments was made in accordance with Statement of Financial
Accounting Standards No. 107 ("SFAS No. 107"), Disclosures about
Fair Value of Financial Instruments. SFAS No. 107 specifically
excludes certain items from its disclosure requirements such as the
Company's investment in leased assets. Accordingly, the aggregate
fair value amounts presented are not intended to represent the
underlying value of the net assets of the Company.
The carrying amounts at December 31, 1995 for cash, receivables,
accounts payable and accrued liabilities approximate their fair
values due to the short maturity of these instruments. As of
December 31, 1995, recourse discounted lease rentals of $182,688 had
fair values of $184,861. The fair values were estimated utilizing
market rates of comparable debt having similar maturities and credit
quality as of December 31, 1995.
NOTE 16: FISCAL 1994 FOURTH QUARTER CHARGES
As a result of changed market conditions, during the fourth quarter
of 1994, the Company recorded a charge, included in cost of sales,
of approximately $1,118,000 to reduce certain inventory of
previously leased equipment and estimated unguaranteed residual
values of equipment on lease to their net realizable values.
In addition, in the fourth quarter of 1994, the Company recorded
charges totaling approximately $2,638,000, included in selling,
general and administrative expenses in the accompanying 1994
statement of operations, for the following:
<TABLE>
<S> <C>
Severance $ 538,000
Commissions 732,000
Deferred compensation 214,000
Consulting services 1,154,000
----------
$2,638,000
==========
</TABLE>
In accordance with a severance agreement entered into during 1994,
the Company's former Chairman and Chief Executive Officer was to
provide consulting services to the Company during the future term of
the agreement. As a result of the Company's decision in the fourth
quarter of 1994 to relocate to Nevada, such individual will no
longer be available to the Company to provide consulting services.
Accordingly, the present value of the future payments required under
the severance agreement amounting to approximately $538,000 was
expensed in 1994. In September 1995, the Company settled its
remaining obligation under this agreement for a $160,000 cash
payment and the forgiveness of a $54,000 note receivable, resulting
in a gain of approximately $247,000 which has been reflected in the
accompanying consolidated statement of operations for the year ended
December 31, 1995 as a reduction in selling, general and
administrative expenses.
The Company renegotiated and replaced the existing employment
agreement with its current President and Chief Executive Officer
with a new agreement effective July 1, 1995. In connection with the
restructuring of his compensation agreement, the Company accrued, as
of December 31, 1994, an award of 300,000 shares of the Company's
common stock valued at $732,000 for discretionary commissions. The
new employment agreement does not provide for future awards of this
nature. Furthermore, previously recorded deferred compensation of
$277,000, including 1994 amortization of $63,000, was expensed.
In 1994, the Company prepaid certain consulting services through the
issuance of common stock and was amortizing such prepaid to expense
as the services were performed. As a result of the Company's
decision to no longer utilize these consultant's services, the
Company expensed the unamortized portion of such prepaid services
amounting to $1,154,000 in December, 1994.
LEASING EDGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
(Unaudited) (Audited)
------------- ------------
<S> <C> <C>
ASSETS:
Cash $ 113,081 $ 209,084
Receivables - net of allowance for doubtful
accounts of $95,322 and $12,000 869,116 434,321
Notes receivable - employees 170,154 148,750
Inventory, net 1,126,784 1,336,747
Leased assets:
Operating leases 18,805,016 21,026,590
Sales-type and direct financing 5,177,092 3,165,539
Furniture and equipment - net of accumulated
depreciation of $296,545 and $266,478 159,980 148,366
Other assets 618,620 413,847
Goodwill, net of accumulated amortization of
$73,541 and $50,235 378,575 401,881
------------------------------
TOTAL ASSETS $ 27,418,418 $ 27,285,125
==============================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(continued)
LEASING EDGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
(Unaudited) (Audited)
----------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 986,878 $ 1,576,165
Accrued liabilities 412,750 311,734
Notes payable and lines of credit 3,579,479 3,236,954
Nonrecourse and recourse discounted lease rentals 16,068,062 16,260,002
Other liabilities 62,275 25,344
------------------------------
TOTAL LIABILITIES 21,109,444 21,410,199
------------------------------
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; 12,500,000 shares
authorized, 3,786,811 and 3,132,319 shares issued
and 3,783,811 and 3,129,319 shares outstanding at
September 30, 1996 and December 31, 1995,
respectively 37,869 31,324
Additional paid-in capital 9,852,592 9,526,259
Accumulated deficit (3,546,777) (3,647,947)
------------------------------
6,345,974 5,911,926
Common stock held in treasury, at cost; 3,000
shares (12,000) (12,000)
Note receivable from stockholder (25,000) (25,000)
------------------------------
TOTAL STOCKHOLDERS' EQUITY 6,308,974 5,874,926
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 27,418,418 $ 27,285,125
==============================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
LEASING EDGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- ---------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Operating leases $ 2,393,681 $ 2,535,646 $ 7,475,629 $ 7,878,911
Sales-type leases 2,452,332 17,168 2,849,333 447,737
Direct finance leases 43,754 14,521 68,257 52,751
Direct sales and other 372,843 852,501 1,261,949 1,532,270
-------------------------------------------------------
Total revenues from leasing operations 5,262,610 3,419,836 11,655,168 9,911,669
Distribution sales 1,299,348 1,537,706 4,347,091 4,400,963
-------------------------------------------------------
Total revenues 6,561,958 4,957,542 16,002,259 14,312,632
-------------------------------------------------------
Costs and expenses:
Operating leases 1,670,252 1,582,900 5,232,273 5,311,119
Sales-type leases 1,890,665 - 2,101,426 213,341
Interest expense 356,184 321,318 1,004,696 1,151,778
Direct sales 383,262 808,952 1,165,262 1,421,607
-------------------------------------------------------
Total costs from leasing operations 4,300,363 2,713,170 9,503,657 8,097,845
Distribution cost of sales 1,101,683 1,335,492 3,762,120 3,781,415
Selling, general and administrative expenses 808,530 554,298 2,358,156 1,698,144
Interest expense 102,751 94,474 277,156 188,122
-------------------------------------------------------
Total costs and expenses 6,313,327 4,697,434 15,901,089 13,765,526
-------------------------------------------------------
Income before income taxes 248,631 260,108 101,170 547,106
Provision for income taxes - 88,783 - 203,581
-------------------------------------------------------
Net income $ 248,631 $ 171,325 $ 101,170 $ 343,525
=======================================================
Earnings per common share $ 0.05 $ 0.04 $ (0.02) $ 0.06
=======================================================
Weighted average common shares outstanding 4,009,807 3,136,750 3,710,361 2,844,391
=======================================================
</TABLE>
The accompanying notes are integral part of these consolidated financial
statements.
LEASING EDGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
Sept. 30, Sept. 30,
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 101,170 $ 343,525
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 5,285,647 5,761,458
Deferred income taxes - 186,868
Change in assets and liabilities due to operating activities:
(Increase) decrease in accounts receivable (456,199) 121,423
(Increase) decrease in inventory 461,837 (490,680)
(Decrease) increase in accounts payable (589,287) 136,175
(Decrease) increase in accrued liabilities 101,016 (870,768)
All other operating activities (104,620) (286,885)
--------------------------
Total adjustments 4,698,394 4,557,591
--------------------------
Net cash provided by operating activities 4,799,564 4,901,116
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales, transfers and disposals of inventory and equipment 2,047,679 1,047,065
Purchases of inventory for lease (4,326,793) (5,360,727)
Purchases of furniture and equipment (41,682) (51,322)
Additions to net investment in sales-type and direct
finance leases (4,344,940) -
Sales-type and direct financing lease rentals received 1,349,928 2,066,024
--------------------------
Net cash used in investing activities (5,315,808) (2,298,960)
--------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(Continued)
LEASING EDGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
Sept. 30, Sept. 30,
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from nonrecourse and recourse discounted lease rentals 8,430,655 4,446,682
Payments on nonrecourse and recourse discounted lease rentals (8,622,595) (8,747,785)
Proceeds from notes payable 651,279 3,312,217
Payments on notes payable (308,754) (2,010,423)
Proceeds from exercise of stock options 37,125 -
Proceeds from sale of stock 467,515 445,534
Proceeds from exercise of warrants 55,592 -
Deferred equity transaction costs (118,814) (211,701)
Preferred stock dividends paid (171,762) (172,512)
--------------------------
Net cash used in financing activities 420,241 (2,937,988)
--------------------------
Net decrease in cash (96,003) (335,832)
Cash at beginning of period 209,084 479,118
--------------------------
Cash at end of period $ 113,081 $ 143,286
==========================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 1,255,256 $ 1,294,584
==========================
Income taxes $ 34,061 $ 7,750
==========================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
LEASING EDGE CORPORATION
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
Leasing Edge Corporation (formerly, TJ Systems Corporation) and its wholly owned
subsidiaries, collectively referred to as the "Company". All material
intercompany accounts and transactions have been eliminated. Certain
reclassifications have been made to prior years' amounts to conform with current
period presentation.
Basis of Presentation
In the opinion of the Company, the accompanying unaudited Consolidated Financial
Statements contain all adjustments necessary to present fairly the results of
its operations for the three and nine months ended September 30, 1996 and 1995
and its cash flows for the nine months ended September 30, 1996 and 1995. 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, 1995. The operating results for the three and nine
months ended September 30, 1996 and cash flows for the nine months ended
September 30, 1996 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
Earnings per common and common equivalent share are computed based on the
weighted average number of common and common equivalent shares outstanding
during the three and nine month periods ended September 30, 1996. Dilutive stock
options included in the number of common and common equivalent shares are based
on the treasury stock method.
Note 3. Revolving Line of Credit
On July 11, 1995, the Company entered into a Revolving Line of Credit Agreement
(the "Agreement") with Bank of America Nevada. Borrowings under the Agreement,
as amended, are limited to the lesser of $2.5 million ($2.7 million through May
10, 1996); sixty percent (60%) of the Company's Equity Position in approved
leases, as defined; or twenty-five percent (25%) of the residual value of leased
equipment, as defined. Borrowings under the Agreement bear interest at the
Bank's prime rate plus two percentage (2.0%) points, are collateralized by
certain personal property of the Company and require the Company to pay an
unused commitment fee equal to one-half of one percent of the unused portion of
the line, calculated on a weighted-average basis. Restrictive covenants under
the Agreement include the maintenance of consolidated tangible net worth, as
defined, of at least $6.5 million; a consolidated ratio of total liabilities, as
defined, to tangible net worth of no greater than 1.0:1.0; and a restriction on
the payment of cash dividends on shares of the Company's common stock.
The Agreement, as amended, expired on October 31, 1996. However, the Company and
Bank of America have orally agreed to restructure the facility as a term note
(the "Tentative Agreement") with an initial expiration date of April 1, 1997;
such expiration date may be further extended to January 1, 1998, subject to the
Company's satisfaction of certain conditions. Proposed terms of the Tentative
Agreement require the Company to make a one-time principal payment of $123,600
upon execution of the definitive agreement; to make monthly principal payments
of $40,000 plus accrued interest beginning December 1, 1996 through April 1,
1997; and, to use its best efforts to replace Bank of America with alternative
financing. Bank of America has agreed to waive the consolidated minimum tangible
net worth covenant through April 1, 1997, the initial expiration date of the
Tentative Agreement. There can be no assurance that the Company and Bank of
America will execute definitive documentation reflecting the proposed terms of
the Tentative Agreement.
At September 30, 1996, the Company had outstanding borrowings under the
Agreement of $2.5 million and the interest rate with respect to the Agreement
was 10.25 percent. Average and maximum borrowings under the revolving line of
credit during 1996 were $2.6 million and $2.7 million, respectively, and the
weighted average interest rate was 10.28 percent.
In January 1995, PMCPI entered into a revolving credit agreement (the "Merrill
Line") with Merrill Lynch Financial Services, Inc. Borrowings under the Merrill
Line are limited to the lesser of $500,000 or an amount equal to 80 percent of
PMCPI's accounts receivable, as defined, plus 60 percent of inventory, as
defined. The Merrill Line is secured by accounts receivable and inventory of
PMCPI and is guaranteed by the Company and expires April 30, 1997.
At September 30, 1996, PMCPI had outstanding borrowings under the Merrill Line
of $499,032 and the interest rate with respect to the line was 9.25 percent.
Average borrowings outstanding under the revolving credit agreement during 1996
were approximately $376,000 and the weighted average interest rate was
approximately 9.28 percent. Maximum borrowings outstanding under the revolving
credit agreement during 1996 were $499,032.
In November 1995, the Company entered into a letter agreement with Union Chelsea
National Bank (UCNB) whereby UCNB 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 UCNB (ie., the difference
between the cost of the leased equipment and the discounted present value of the
minimum lease payments assigned to UCNB). 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 1.25%. On July 18, 1996, UCNB increased the amount available under the
Equity Line to $1,000,000.
At September 30, 1996, the Company had outstanding term notes and available
credit under the Equity Line of $491,664 and $508,336, respectively.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware sets
forth the conditions and limitations governing the indemnification of officers,
directors and other persons.
References are made to Article VI of the Company's By-laws, which are
incorporated by reference herein, which provides for indemnification of officers
and directors of the Company to the full extent authorized by the aforesaid
section of the General Corporation Law of the State of Delaware.
Section 102(b) of the General Corporation Law of the State of Delaware
permits corporations to eliminate or limit the personal liability of a director
to the corporation or its stockholders for monetary damages for breach of the
fiduciary duty of care as a director. Reference is made to Article Eighth of the
Company's Restated Certificate of Incorporation, which is incorporated by
reference herein, which limits a director's liability in accordance with the
aforesaid section of the General Corporation Law of the State of Delaware.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the fees and expenses in connection with
the issuance and distribution of the securities being registered hereunder.
Except for the Securities and Exchange Commission ("SEC") registration fee, all
amounts are estimates.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 4,281
Accounting fees and expenses...................................... 15,000
Legal fees and expenses........................................... 30,000
Blue Sky fees and expenses (including filing fees)................ 5,000
Financial advisory fees and expenses.............................. 274,000
Printing and engraving expenses................................... 10,000
Transfer agent and registration fees.............................. 3,500
Miscellaneous..................................................... 8,219
---------
Total........................................................ $ 350,000
=========
</TABLE>
Item 26. Recent Sales of Unregistered Securities
On or about April 30, 1996, the Company offered and sold an aggregate of
600,000 shares of Common Stock, an aggregate of 1,200,000 Class C Common Stock
Purchase Warrants and an aggregate of 1,200,000 Class D Common Stock Purchase
Warrants for a total consideration of $500,000. In addition, on or about
November 1, 1996, the Company offered and sold an aggregate of 200,025 shares of
Common Stock, an aggregate of 799,995 Class C shares and an aggregate of 799,995
Class D shares for total consideration of $350,000 and on or about November 15,
1996 the Company offered and sold an aggregate of 80,100 shares of Common Stock,
an aggregate of 319,998 Class C shares and an aggregate of 319,998 Class D
shares for a total consideration of $139,970. Such securities were not
registered under the Securities Act of 1933, as amended (the "Act"), and were
issued in reliance upon the exemption from registration afforded by Regulation S
promulgated under the Act. All sales therefrom were made to persons outside the
United States and were not United States Persons within the meaning of
Regulation S. No underwriters were used in connection with the foregoing
transaction.
<PAGE> II-1
Item 27. Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
4.1 Company's Certificate of Incorporation, as amended to date.**
4.2 Company's By-Laws.*
4.3 Specimen Common Stock Certificate.*
4.5 Specimen Class B Warrant Certificate.**
4.6 Form of Warrant Agency Agreement dated as of July 15, 1995 between the
Company and American Stock Transfer & Trust Company, as Warrant Agent.**
5.1 Opinion of Werbel & Carnelutti, A Professional Corporation.*
10.1 Standard Office Lease - Gross dated April 7, 1995 between the Company
and Jack Cason (relating to lease of office space in Clark County,
Nevada).**
10.2 Standard Net Lease dated September 2, 1994 between the Company and Warner
Center Business Park Properties III, L.P. (relating to lease of office
space in Woodland Hills, California).***
10.3 1991 Directors Stock Option Plan.*
10.4 1991 Key Employees' Stock Option Plan.*
10.5 1993 Directors Stock Option Plan.*
10.6 1993 Key Employees' Stock Option Plan.*
10.7 1994 Stock Option Plan.*
10.8 Indemnification Agreement dated as of September 5, 1990 between the
Company and Michael F. Daniels.*
10.9 Loan Agreement with Bank of America dated July 11, 1995.***
10.10 Amendment No. 1 to Loan Agreement with Bank of America.***
10.11 Amendment No. 2 to Loan Agreement with Bank of America.***
10.12 Amendment No. 3 to Loan Agreement with Bank of America.***
10.13 Merrill Lynch Line of Credit Agreement.***
10.14 Amendment No. 1 to Merrill Lynch Line of Credit Agreement.***
10.15 Amendment No. 2 to Merrill Lynch Line of Credit Agreement.***
10.16 Letter Agreement between the Registrant and Union Chelsea National Bank
dated November 27, 1995.***
23.1 Consent of Werbel & Carnelutti, A Professional Corporation (included in
Exhibit 5.1).**
23.2 Consent of KPMG Peat Marwick LLP.
24.1 Power of Attorney (Reference is made to the signature page of the
Registration Statement).
<FN>
- -------------------
<F*> Incorporated by reference to the Company's Registration Statement on Form
S-2, as filed with the Securities and Exchange Commission on June 10,
1993, Registration No. 33-64246.
<F**> Incorporated by reference to the Company's Post-Effective Amendment No. 1
on Form S-2 to its Registration Statement on Form S-2, as filed with the
Securities and Exchange Commission on August 1, 1995, Registration No.
33-93274.
<F***> Incorporated by reference to the Company's Annual Report on Form 10-KSB/A,
as filed with the Securities and Exchange Commission on April 23, 1996,
Commission File No. 0-18303.
</FN>
</TABLE>
Item 28. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions described in Item 14 above, or otherwise, the
Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding), is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of competent
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act, and will be governed by the
final adjudication of such issue.
<PAGE> II-2
The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
<PAGE> II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this Amendment No. 3 to
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Las Vegas, State of Nevada on the 5th
day of December, 1996.
LEASING EDGE CORPORATION
By /s/ Michael F. Daniels
---------------------------------------------
Name: Michael F. Daniels
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed below by the following
persons in the capacities indicated on December 5, 1996.
Signature Title
--------- -----
/s/ Michael F. Daniels Chairman, President and Chief Executive Officer
- ---------------------------- (Principal Executive Officer)
Michael F. Daniels
L. Derrick Ashcroft* Director
- ----------------------------
L. Derrick Ashcroft
Larry M. Segall* Director
- ----------------------------
Larry M. Segall
William G. McMurtrey* Director
- ----------------------------
William G. McMurtrey
David C. Ward* Director
- ----------------------------
David C. Ward
/s/ William J. Vargas
- ---------------------------- Vice-President--Finance, Chief Financial
William J. Vargas Officer and Treasurer
(Principal Accounting and Financial Officer)
* By /s/ Michael F. Daniels
- ----------------------------
Michael F. Daniels, attorney-in-fact
<PAGE> II-4
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
4.1 Company's Certificate of Incorporation, as amended to date.**
4.2 Company's By-Laws.*
4.3 Specimen Common Stock Certificate.*
4.5 Specimen Class B Warrant Certificate.**
4.6 Form of Warrant Agency Agreement dated as of July 15, 1995 between the
Company and American Stock Transfer & Trust Company, as Warrant Agent.**
5.1 Opinion of Werbel & Carnelutti, A Professional Corporation.*
10.1 Standard Office Lease - Gross dated April 7, 1995 between the Company
and Jack Cason (relating to lease of office space in Clark County,
Nevada).**
10.2 Standard Net Lease dated September 2, 1994 between the Company and Warner
Center Business Park Properties III, L.P. (relating to lease of office
space in Woodland Hills, California).***
10.3 1991 Directors Stock Option Plan.*
10.4 1991 Key Employees' Stock Option Plan.*
10.5 1993 Directors Stock Option Plan.*
10.6 1993 Key Employees' Stock Option Plan.*
10.7 1994 Stock Option Plan.*
10.8 Indemnification Agreement dated as of September 5, 1990 between the
Company and Michael F. Daniels.*
10.9 Loan Agreement with Bank of America dated July 11, 1995.***
10.10 Amendment No. 1 to Loan Agreement with Bank of America.***
10.11 Amendment No. 2 to Loan Agreement with Bank of America.***
10.12 Amendment No. 3 to Loan Agreement with Bank of America.***
10.13 Merrill Lynch Line of Credit Agreement.***
10.14 Amendment No. 1 to Merrill Lynch Line of Credit Agreement.***
10.15 Amendment No. 2 to Merrill Lynch Line of Credit Agreement.***
10.16 Letter Agreement between the Registrant and Union Chelsea National
Bank dated November 27, 1995.***
23.1 Consent of Werbel & Carnelutti, A Professional Corporation (included
in Exhibit 5.1).**
23.2 Consent of KPMG Peat Marwick LLP.
24.1 Power of Attorney (Reference is made to the signature page of the
Registration Statement).
<FN>
- ------------------------
<F*> Incorporated by reference to the Company's Registration Statement on Form
S-2, as filed with the Securities and Exchange Commission on June 10,
1993, Registration No. 33-64246.
<F**> Incorporated by reference to the Company's Post-Effective Amendment No. 1
on Form S-2 to its Registration Statement on Form S-2, as filed with the
Securities and Exchange Commission on August 1, 1995, Registration No.
33-93274.
<F***> Incorporated by reference to the Company's Annual Report on Form 10-KSB/A,
as filed with the Securities and Exchange Commission on April 23, 1996,
Commission File No. 0-18303.
</FN>
</TABLE>
Exhibit 23.2
We consent to the inclusion of our report dated March 11, 1996, except for
Note 7 which is as of March 27, 1996 relating to the consolidated balance sheets
of Leasing Edge Corporation and subsidiaries as of December 31, 1995 and 1994
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years then ended included herein and to the reference to our
firm under the heading "Experts" in the Post- Effective Amendment No. 3 on Form
SB-2 to the registration statement (No. 33-93274) on Form S-2 of Leasing Edge
Corporation. Our report covering the 1995 and 1994 consolidated financial
statements contains an explanatory paragraph that states that management
discovered certain errors in the 1994 consolidated financial statements.
Accordingly, the previously issued financial statements as of and for the year
ended December 31, 1994 have been restated to correct such errors.
December 3, 1996 /s/ KPMG Peat Marwick LLP
