As Filed with the Securities and Exchange Commission on June___, 1996
Registration No. 33-93274
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Post-Effective Amendment No. 2 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 Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
---------------------
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 McMillin & 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 code, (212) 832-8300
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. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=========================================================================================================
Proposed Proposed
Maximum Maximum Amount of
Title of Each Class of Amount Offering Price Aggregate Registration
Securities to be Registered to be Registered Per Unit (1) Offering Price (1) Fee
<S> <C> <C> <C> <C>
Common Stock, $.01 par value (2) 4,092,687 shares $2.125 $8,696,960 $4,281(3)
=========================================================================================================
<FN>
- -------------------
<F1> Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933, as amended.
<F2> Shares issuable from time to time upon exercise of the Class A Common
Stock Purchase Warrants and Class B Common Stock Purchase Warrants to
purchase Common Stock at an assumed exercise price of $2.125, plus an
indeterminate number of shares of Common Stock which may become issuable
pursuant to the anti-dilution provisions of the Warrants.
<F3> This amount has been previously paid.
</FN>
</TABLE>
-------------------
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.
PROSPECTUS
LEASING EDGE CORPORATION
4,092,687 Shares of Common Stock
This Prospectus relates to 4,092,687 shares of Common Stock of Leasing
Edge Corporation (the "Company") which are to be issued by the Company
pursuant to the exercise of up to (i) 3,092,687 of the Company's outstanding
Class A Common Stock Purchase Warrants (the "Class A Warrants") and (ii)
1,000,000 of the Company's outstanding Class B Common Stock Purchase Warrants
(the "Class B Warrants"). Each of the Class A Warrants and the Class B
Warrants (together, the "Warrants") entitles 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 $2.125 per share (the shares of Common Stock
issuable upon such exercise of the Class A Warrants and the Class B Warrants
are herein referred to as the "Class A Warrant Shares" and the "Class B
Warrant Shares", respectively, and together, as the "Shares"). The Company
has reduced the exercise price of the Warrants from $3.00 per share to $2.125
per share of Common Stock. The Warrants are exercisable until August 7,
1997.
Outstanding Warrants are redeemable at any time for $.001 each by the
Company on 30 days' notice to the holders thereof. Although the Warrants
remain exercisable during the 30-day notice period, any holder who does not
exercise his Warrants prior to either their redemption or expiration, as the
case may be, will forfeit his right to purchase the underlying Common Stock.
The Company presently intends to call all of the Class A Warrants for
redemption prior to August 1, 1996. 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, the Class A Warrants and the Class B
Warrants are traded on the National Association of Securities Dealers'
Automated Quotation ("Nasdaq") Small-Cap System under the symbols "LECE",
"LECEZ" and "LECEL", respectively. On June 7, 1996, the last reported sale
price on the Nasdaq Small-Cap System for the Common Stock was $1.75 per share,
for the Class A Warrants was $0.13 per share, and for the Class B Warrants
$0.81 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 June __, 1996.
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, the Class A Warrants 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 3
Terms of the Offering 4
Risk Factors 6
The Offering 8
Use of Proceeds 8
Determination of Offering Price 9
Dividend Policy 9
Plan of Distribution 9
Market Price For Common Equity and Related Stockholder Matters 10
Management's Discussion or Plan of Operation 13
Capitalization 18
Selected Financial Data 19
Business 20
Description of Property 23
Management 23
Executive Compensation 24
Security Ownership of Certain Beneficial Owners and Management 28
Certain Relationships and Related Transactions 27
Description of Capital Stock and Warrants 27
Certain Federal Income Tax Considerations 29
Legal Matters 29
Experts 29
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities 29
Index to Financial Statements 30
</TABLE>
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.
The Offering
Securities Offered by
the Company: 4,092,687 shares of Common Stock underlying
the Warrants.
Exercise Price: Each Warrant entitles the holder to
subscribe to purchase one share of Common
Stock (the "Warrant Right") at $2.125 per
share (the "Exercise Price"). On April 26,
1996 the Company reduced the Exercise Price
for the Warrants from $3.00 per share of
Common Stock to $2.125 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 Warrants: The Class A Warrants and the Class B
Warrants shall be exercisable at any time
after issuance until 5:00 P.M. New York
Time, on August 7, 1997, at which time they
will expire. The Company may redeem the
outstanding Class A and 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 A Warrants and 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 A
Warrants: The Class A Warrants are redeemable at any
time for $.001 each. The Company intends to
redeem all of the Class A Warrants by August
1, 1996 by providing 30 days' notice of
redemption to the Class A Warrant holders.
Although the Class A Warrants remain
exercisable during the 30 day notice period,
any holder who does not exercise his Class A
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,
Class A Warrants and the Class B Warrants
are listed on the Nasdaq Small-Cap System
under the symbols "LECE", "LECEZ" 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."
Summary Financial Information
<TABLE>
<CAPTION>
Three Months Ended March 31,
INCOME STATEMENT DATA: Year Ended December 31, (unaudited)
--------------------------- ----------------------------
1994(1) 1995 1995 1996
------- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $19,767,845 $18,150,157 $4,919,489 $4,803,326
Costs and expenses 24,236,417 17,948,813 4,791,172 4,707,390
Net income (loss) (4,129,161) 201,344 76,991 95,936
Net income (loss) per common share $ (3.12) $ (0.01) $ 0.01 $ 0.01
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
At March 31, 1996
(unaudited)
-----------------------------
Actual As Adjusted(3)
------ --------------
<S> <C> <C>
Cash $ 201,585 $ 8,548,545
Total assets 26,172,277 34,519,237
Notes payable and lines of credit 3,212,391 3,212,391
Nonrecourse and recourse discounted lease rentals(2) 15,017,800 15,017,800
Stockholders' equity 5,913,608 14,260,568
<FN>
- -------------------
<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 4,092,687 Warrants at an
exercise price of $2.125 per Share resulting in net proceeds to the
Company of $8,346,960. There can be no assurances that any of the
Warrants will be exercised.
</FN>
</TABLE>
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.
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.
Cash Intensive Operations; Need for Cash. 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 March
31, 1996, the Company had approximately $524,000 in cash and in availability
under its bank lines. The Company is presently seeking debt and/or equity
financing. Should the Company fail to receive adequate equity or debt
financing during the next nine months, the Company's growth could be
materially and adversely affected. 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.
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.
Quarterly 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.
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 of 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 7,924,292 shares of
its Common Stock underlying currently exercisable options and warrants,
including 4,092,687 shares underlying the Warrants. Additionally,
the Company's officers and directors are holders of 541,138 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 Warrants. The 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 August 1, 1996 all of the Class A Warrants. Upon the
giving of such notice of redemption, holders of the Warrants will lose their
right to exercise the Warrants, except during such 30-day notice of redemption
period. Upon receipt of a notice of redemption of the Warrants, the holders
thereof would be required to (i) exercise the Warrants and pay the exercise
price at a time which it may be disadvantageous for them to do so; (ii) sell
the Warrants at the then market price, if any, when they might otherwise wish
to hold the Warrants; or (iii) accept the redemption price which is likely to
be substantially less than the market value of the Warrants at the time of
redemption. See "Description of Capital Stock and Warrants."
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 Warrants.
Holders of the Warrants will be able to exercise the Warrants only if a
current prospectus relating to the shares of Common Stock underlying the
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 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 Warrants, there can be no
assurance that the Company will be able to do so. Holders of Warrants may
reside in jurisdictions in which the shares of Common Stock underlying the
Warrants are not registered or qualified during the period when the Warrants
are exercisable. In that event, the Company will be unable to issue shares of
Common Stock to those persons desiring to exercise their 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 4,092,687 shares of Common Stock
issuable pursuant to the exercise of Warrants. Common Stock issuable pursuant
to the exercise of Warrants may be purchased from the Company through the
proper exercise of the 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 Warrants will be delivered promptly to the warrant
holder after proper exercise. The shares of Common Stock issuable upon
exercise of the Warrants will be, when issued in accordance with the warrant
certificate, fully paid and nonassessable.
USE OF PROCEEDS
There is no basis for determining how many Warrants will be exercised
or, consequently, the net proceeds which will be received by the Company
following the Offering. If all of the Warrants are exercised the Company
would receive approximately $8.7 million of gross proceeds. The Company
expects the total expenses of the Offering to be approximately $350,000.
There can be no assurances that any of the Warrants will be exercised.
The Company intends to use any net proceeds received from the exercise
of Warrants for general corporate purposes, including 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.
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. The reduction in the Exercise Price from $3.00 per share to
$2.125 per share was approved by a resolution of the Company's Board of
Directors on April 26, 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 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 Warrants in accordance with their terms. The Company has not employed any
underwriters, brokers or dealers in connection with the Offering and no
underwriting commissions, fees or discounts will be paid in connection with
the Offering, other than a financial advisory fee up to $150,000 (plus
reimbursement of out-of-pocket expenses) and 90,000 shares of Common Stock
payable to the Company's financial consultant, Williamson & Associates, upon
the exercise of certain percentages of the 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.
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 May 30, 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 (Through April 30, 1996) $2.75 $1.69
</TABLE>
On June 7, 1996, the last reported sales price for the Common Stock as
quoted on the Nasdaq Small-Cap System was $1.75 per share. As of June 10,
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.
CAPITALIZATION
The following table sets forth the capitalization of the Company at
March 31, 1996.
<TABLE>
<S> <C>
Debt:
Notes payable and lines of credit $ 3,212,391
Nonrecourse and recourse discounted lease rentals (1) 15,017,800
-----------
Total debt 18,230,191
-----------
Stockholders' equity:
Series A Convertible Preferred Stock, par value $.01
per share; 1,000,000 shares authorized, 380,000
shares issued; 229,016 outstanding 2,290
Common Stock, par value $.01 per share; 10,000,000
shares authorized, 3,132,319 shares issued and
3,129,319 shares outstanding(2) 31,324
Additional paid in capital 9,469,005
Accumulated deficit (3,552,011)
-----------
5,950,608
Common Stock held in treasury, at cost; 3,000 shares (12,000)
Notes receivable from stockholders (25,000)
-----------
Total stockholders' equity 5,913,608
-----------
Total capitalization $24,143,799
===========
<FN>
- -------------------
<F1> 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.
<F2> Does not include (i) shares of Common Stock reserved at March 31, 1996,
for issuance pursuant to the Company's stock option plans, (ii) shares
of Common Stock reserved at March 31, 1996 for issuance upon conversion
of outstanding shares of Series A Preferred Stock and exercise of
outstanding warrants, and (iii) shares of Common Stock issuable upon
exercise of the Warrants.
</FN>
</TABLE>
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 three months ended March 31, 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>
Three Months Ended
Year Ended December 31, March 31,
(Unaudited)
------------------------- ------------------------
1994(1) 1995 1995 1996
------- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues $19,767,845 $18,150,157 $4,919,489 $ 4,803,326
Costs and expenses 24,236,417 17,948,813 4,791,172 4,707,390
Net income (loss) (4,129,161) 201,344 76,991 95,936
Net income (loss) per common share ($3.12) $(0.01) $0.01 $0.01
</TABLE>
<TABLE>
<CAPTION>
At December 31, At March 31,
------------------------- ------------
1994(1) 1995 1996
------- ---- ----
(Unaudited)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash $ 479,118 $ 209,084 $ 201,585
Total assets 30,832,237 27,285,125 26,172,277
Notes payable and lines of credit 1,494,705 3,236,954 3,212,391
Nonrecourse and recourse discounted
lease rentals(2) 20,717,986 16,260,002 15,017,800
Stockholders' equity 4,202,277 5,874,926 5,913,608
<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>
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."
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.
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.
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
o $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.
Three Months Ended March 31, 1996 Compared to Three Months Ended March
31, 1995
Revenues. Total revenues from leasing operations decreased $106,127 or
3.2% in the first quarter of 1996 compared to the prior year quarter due
primarily to a decrease in revenue from the portfolio base of operating leases
of $120,952 or 4.5% partially offset by an increase in direct sales revenues
of $63,498 or 12.8%. 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 slightly, from $1,600,553 for the first
quarter of 1995 to $1,590,517 for the 1996 period.
Costs and Expenses. Total costs from leasing operations as a percentage
of leasing revenue was 78.9% for the quarter ended March 31, 1996, compared
with 82.7% for the prior year quarter. Gross profit from leasing operations
(total revenues from leasing operations less total costs from leasing
operations) increased $104,022 or 18.1%. The decrease in leasing costs is
primarily due to a decrease in interest expense on recourse and non-recourse
debt between periods of $161,990, or 32.4%. This decrease results from the
use of the effective interest method to record interest expense on such
indebtedness. Gross margin (gross profit from leasing operations) improved to
21.1% from 17.3% due to the foregoing.
Leasing costs associated with the portfolio base of operating leases
decreased $14,224 or 0.8%. Gross profit on operating leases decreased by
$106,728 to 30.0% from 32.6%. The decrease is 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
$33,935 or 8.2% and decreased as a percentage of related revenue to 68.2% from
83.7%. The decrease in costs as a percentage of revenue is due to residual
value realization more closely matching stated values in 1996 as compared to
1995.
Distribution cost of sales of $1,389,614 relates to distribution sales
of Pacific Mountain and represent a $13,138 or 1.0% increase over the prior
year quarter. Gross margin on distribution sales decreased to 12.6% in 1996
from 14.0% in 1995 due to a decrease in comparative sales volume of certain
higher margin products.
Selling, general and administrative expensed increased $65,245 in the
1996 period compared to the prior year period due primarily to increased
staffing levels.
Interest expense on non-lease related indebtedness increased $47,984 or
133.3%. The increase is due to higher average debt levels partially offset by
slightly lower interest rates.
The March 31, 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 March 31,
1996, the Company had unexpired net operating loss carryforwards of
approximately $3,900,000 which can be utilized to offset future taxable
income, if any.
Net Earnings. As a result of the foregoing the Company recorded net
income of $95,936 during the quarter ended March 31, 1996 as compared to net
income of $76,991 in 1995.
Liquidity and Capital Resources
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 March 31, 1996, the Company had approximately $524,000 in
cash and in availability under its bank lines.
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 of
$2.00 on 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 (which the Company's Board of
Directors has reduced to $2.125 per share commencing with the date of this
Prospectus). 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 equity or debt 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 finance the Company's
future leasing transactions on a nonrecourse basis or that the Company will
continue to attract customers that meet the credit standards of its
nonrecourse financing sources or that, if it receives such additional
financing for future lease transactions, it will be on terms favorable to the
Company.
At 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 lease during its term to add or modify
equipment; (ii) renewal or extension of the original lease; (iii) leasing
equipment to a new user after the initial lease term; or, (iv) sale of the
equipment. Each of these alternatives impacts the timing of the Company's
cash realization of such recorded residual values. Equipment may be returned
to the Company at the end of an initial or extended lease term when it may not
be possible for the Company to resell or re-lease the equipment on favorable
terms. Developments in the high technology equipment market tend to occur at
rapid rates, adding to the risk of obsolescence and shortened product life
cycles which could affect the Company's ability to realize the residual value
of such equipment. In addition, if the lessee defaults on a lease, the
financial institution that provided nonrecourse financing may foreclose on its
security interest in the leased equipment and the Company may not realize any
portion of such residual value. If the residual value in any equipment cannot
be realized after the initial lease term, the recorded investment in the
equipment must be written down, resulting in lower cash flow and reduced
earnings. There can be no assurance that the Company will not experience
material residual value or inventory write-downs in the future.
The Company intends to continue to retain residual ownership of all the
equipment it leases. As of March 31, 1996 the Company had a total net
investment in lease transactions of $23.4 million compared to $24.2 million as
of December 31, 1995. The estimated residual value of the Company's portfolio
of leases expiring between April 1, 1996 and December 31, 2000 totals
$9,910,300, although there can be no assurance that the Company will be able
to realize such residual value in the future. As of March 31, 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 $3,015,800
1997 3,679,000
1998 1,830,500
1999 389,000
2000 996,000
----------
Total $9,910,300
==========
</TABLE>
Leased equipment expenditures of $6,868,120 for fiscal year 1995 were
financed through the discounting of $6,013,957 of noncancelable lease rentals
to various financial institutions. The remaining $854,163 was funded from a
combination of debt, equity transactions and available cash. In addition,
leased equipment expenditures of $1,512,390 for the quarter ended March 31,
1996 were financed through the discounting of $1,541,046 of noncancelable
lease rentals to various financial institutions.
The Company believes that inflation has not been a significant factor in
its business.
In October, 1995, the "FASB" issued SFAS No. 123, "Accounting for Stock-
Based Compensation". This pronouncement permits the Company to choose either
a new fair value based method or the current APB No. 25 intrinsic value based
method of accounting for its stock based compensation arrangements. The
Company intends to retain the intrinsic value based method of accounting for
its stock based compensation arrangements and provide the footnote disclosures
as required by SFAS No. 123 in fiscal 1996. Consequently,implementation of
this pronouncement will not impact the Company's financial position or results
of operations.
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.
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.
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.
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.
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 May 30, 1996, the Company, including its subsidiaries,
employed twenty two individuals on a full-time basis. The full-time employees
consist of nine 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.
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 67 Director
William G. McMurtrey 57 Director
David C. Ward 54 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 year 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.
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.
(a) 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> <S> <C> <S> <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 $2.44 granted in lieu of discretionary commissions.
</FN>
</TABLE>
(b) Option/SAR Grants in Last Fiscal year
<TABLE>
<CAPTION>
Percent
Number of of Total
Securities Options/SAR's
Underlying Granted Exercise
Options/SAR's to Employees or Base Expiration
Name Granted (#) In Fiscal Year Price ($/Sh) Date
---- ------------- -------------- ------------ ----------
<S> <C> <C> <C> <C>
Michael F. Daniels 50,000 27.4% $1.06 5-03-00
29,000 15.9% $1.06 8-14-00
</TABLE>
(c) Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year
End Option/SAR Values
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised
Underlying In-The-Money
Options/SAR's Options/SAR's
Shares At Fiscal At Fiscal
Acquired Year End (#) Year End ($)
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>
(d) Directors Compensation
Each non-employee director of the Company is paid $1,000 per month. In
addition, each director is entitled to participate in the Company's 1991 and
1993 Director Stock Option Plan and in the 1994 Stock Option Plan. During
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.
(e) Employment Contracts
Michael F. Daniels serves as the Company's President and Chief Executive
Officer under an employment agreement dated July 1, 1995 and expiring June 30,
2000. Mr. Daniels 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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of April 10, 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 468,125 (4) 14.4%
William G. McMurtrey 145,138 (5) 4.6%
L. Derrick Ashcroft 72,500 (6) 2.3%
Larry M. Segall 66,875 (7) 2.1%
David C. Ward 15,000 (8) (9)
Select Media, Inc. 275,000 (10) 8.8%
All Directors and Executive Officers
as a Group (6 persons) 795,138 23.5%
<FN>
- -------------------
<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 3,129,319 shares of Common Stock outstanding as of April 10,
1996.
<F4> Includes options to purchase 101,250 shares of Common Stock granted to
Mr. Daniels which are currently exercisable and option to purchase
12,500 shares of Common Stock which are exercisable within 60 days
hereof.
<F5> Includes option to purchase 6,250 shares of Common Stock granted to Mr.
McMurtrey which are exercisable within 60 days of the date hereof.
<F6> Includes options to purchase 72,500 shares of Common Stock granted to
Mr. Ashcroft which are currently exercisable.
<F7> Includes options to purchase 54,000 shares of Common Stock granted to
Mr. Segall which are currently exercisable.
<F8> Includes options to purchase 5,000 shares of Common Stock granted to
Mr. Ward which are currently exercisable.
<F9> Represents less than one percent ownership.
<F10> Includes options to purchase 275,000 shares of Common Stock which are
currently exercisable.
</FN>
</TABLE>
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 WARRANTS
The Company is authorized to issue 10,000,000 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 June 10, 1996, there were 3,756,319 shares of Common
Stock outstanding held of record by approximately 220 stockholders. At June
10, 1996, an additional 7,924,292 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 June __, 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.
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 A Warrants. Each Class A Warrant entitles the holder to purchase
one share of Common Stock at an Exercise Price of $2.125 per share. The Class
A Warrants are exercisable from the date of this Prospectus and expire on
August 7, 1997. The Exercise Price and the number of shares issuable upon
exercise of the Class A Warrants are subject to automatic adjustment in
certain events, to the extent that such events occur after the effective date
of the Warrant Agency Agreement, 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 A 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 A Warrants or the current market price of the
Company's securities.
The outstanding Class A 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 A Warrant. The Company
presently intends to redeem all of the Class A Warrants by August 1, 1996 by
providing 30 days' prior written notice of redemption to the Class A Warrant
holders. The Class A Warrants remain exercisable during the 30 day notice
period, however, any holder who does not exercise the Class A Warrants prior
to redemption will forfeit his right to purchase the underlying common stock.
Holders of Class A Warrants may exercise their Class A 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 A Warrants reside, in such case,
the Class A Warrants of such purchasers may have no value if such Class A
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 A Warrants until the Expiration Date of the Class A 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 A Warrants. During the period in which
a Class A Warrant is exercisable, exercise of such Class A Warrant may be
effected by delivery of the Class A 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 A Warrants will be, when issued in
accordance with the Class A Warrants, fully paid and nonassessable.
The holders of the Class A Warrants have no rights as stockholders until
they exercise their Warrants.
Class B Warrants. Each Class B Warrant entitles the holder to purchase
one share of Common Stock at an exercise price of $2.125 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
Class B Warrants have the same terms as the Class A Warrants.
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.
For the life of the Class B Warrants, the holders thereof have the
opportunity to profit from a rise in the market for the Company's Common
Stock, with a resulting dilution in the interest of all other stockholders.
So long as the Class B Warrants are outstanding, the terms on which the
Company could obtain additional capital may be adversely affected. The
holders of such Class B Warrants might be expected to exercise them at a time
when the Company could, in all likelihood, be able to obtain any needed
capital by a new offering of securities on terms more favorable than those
provided for by such Warrants.
The holders of the Class B Warrants have no rights as stockholders until
they exercise their 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
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 A 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 A WARRANTS OR COMMON STOCK IN THEIR
PARTICULAR CIRCUMSTANCES, INCLUDING THE APPLICATION OF FOREIGN, STATE OR LOCAL
TAX LAWS OR ESTATE AND GIFT TAX CONSIDERATIONS.
Exercise of Class A Warrants. Upon the exercise of a Class A Warrant, a
holder will not recognize gain or loss and will have a tax basis in the Class
A Warrant Shares issuable upon such exercise equal to the tax basis of the
Class A Warrant plus the Exercise Price. The holding period for the Class A
Warrant Shares will begin on the day after the date of exercise.
Redemption, Sale or Expiration of Class A Warrants. On redemption, sale
or expiration of a Class A 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 A Warrant. A holder's tax
basis in a Class A Warrant generally will equal the basis of the Class A
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 A Warrants may be liable
for state and local income taxes with respect to the sale, exchange or
redemption of Class A 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 A Warrants.
LEGAL MATTERS
The legality of the issuance of the Securities offered hereby will be
passed upon by Werbel McMillin & Carnelutti, A Professional Corporation, 711
Fifth Avenue, New York, New York 10022.
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. 2 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.
INDEX TO FINANCIAL STATEMENTS
Page
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
Interim Consolidated Financial Statements (unaudited)
Consolidated Balance Sheet as of March 31, 1996 (unaudited)
Consolidated Statements of Operations For The Quarters Ended
March 31, 1996 and March 31, 1995 (unaudited)
Consolidated Statements of Cash Flows For The Quarters Ended
March 31, 1996 and March 31, 1995 (unaudited)
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 responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
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
December 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.
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)
Notes receivable from stockholders (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 (benefit) 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 an 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
net 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 & equipment (51,307) (70,651)
Purchase of Pacific Mountain, net of cash acquired - (104,327)
Additions to net investment in sales-type
and direct financing 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.
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 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 provided by (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>
Preferred Stock Common Stock Additional
-------------------------------------------- Paid in
Shares Amount Shares Amount Capital
- ----------------------------------------------------------------------------------------------
<S> <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
Prior period adjustments (28,750) (288) (128,512)
- ----------------------------------------------------------------------------------------------
Balance at December 31, 1993,
as restated 296,465 2,965 1,107,104 11,070 6,133,922
Conversion of preferred stock (66,449) (665) 116,715 1,168 (503)
Acquisition of PMCPI 88,888 889 115,778
Exercise of stock options 69,000 690 297,260
Common stock for services 228,000 2,280 987,533
Common stock for interest 9,375 94 35,062
Purchase of treasury stock
Sale of common stock 51,372 514 194,486
Common stock subscribed
Preferred stock dividend (105,075)
Stock compensation expense
Net loss
-----------------------------------------------------------
Balance at December 31, 1994 230,016 2,300 1,670,454 16,705 7,658,463
Conversion of preferred stock (1,000) (10) 1,750 17 (7)
Sale of common stock 499,999 5,000 440,534
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
Common stock for services 529,500 5,295 1,137,167
Common stock for debt 22,000 220 45,605
Reduction of note from stockholder
Preferred stock dividend (230,016)
Net income
-----------------------------------------------------------
Balance at December 31, 1995 229,016 $2,290 3,132,319 $31,324 $9,526,259
===========================================================
</TABLE>
(continued)
LEASING EDGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 (AS RESTATED)
<TABLE>
<CAPTION>
Retained Common
Earnings Treasury Stockholder Deferred Stock Stockholders'
(Deficit) Stock Notes Compensation Subscribed Equity
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993,
as previously reported $2,328,747 - ($92,500) ($276,675) - $8,236,329
Prior period adjustments (1,895,092) (2,023,892)
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993,
as restated 433,655 - (92,500) (276,675) - 6,212,437
Conversion of preferred stock -
Acquisition of PMCPI 116,667
Exercise of stock options 297,950
Common stock for services 989,813
Common stock for interest 35,156
Purchase of treasury stock (12,000) (12,000)
Sale of common stock 195,000
Common stock subscribed 478,600 478,600
Preferred stock dividend (153,785) (258,860)
Stock compensation expense 276,675 276,675
Net loss (4,129,161) (4,129,161)
--------------------------------------------------------------------------------
Balance at December 31, 1994 (3,849,291) (12,000) (92,500) - 478,600 4,202,277
Conversion of preferred stock -
Sale of common stock 445,534
Issuance of common stock pursuant
to guaranteed return agreement -
Issuance of common stock (478,600) -
Common stock for services 1,142,462
Common stock for debt 45,825
Reduction of note from stockholder 67,500 67,500
Preferred stock dividend (230,016)
Net income 201,344 201,344
--------------------------------------------------------------------------------
Balance at December 31, 1995 ($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,
-------------------------
Years ending December 31, 1995 1994
---- ----
<S> <C> <C>
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,
--------------------------------
Years ending December 31, 1995 1994
---- ----
<S> <C> <C>
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,
---------------------------------
Years ending December 31, 1995 1994
---- ----
<S> <C> <C>
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
---- ----
<S> <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 (benefit) $ - $ (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
---- ----
<S> <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>
<S> <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:
Severance $ 538,000
Commissions 732,000
Deferred compensation 214,000
Consulting services 1,154,000
----------
$2,638,000
==========
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>
March 31, December 31,
1996 1995
(Unaudited) (Audited)
----------- ------------
<S> <C> <C>
ASSETS:
Cash 201,585 209,084
Receivables - net of allowance for
doubtful accounts of $8,000 and $12,000 708,179 434,321
Notes receivable - employees 148,750 148,750
Inventory, net 766,175 1,336,747
Leased assets:
Operating leases 20,612,682 21,026,590
Sales-type and direct financing 2,746,252 3,165,539
Furniture and equipment - net of accumulated
depreciation of $275,421 and $266,478 140,568 148,366
Other assets 454,441 413,847
Goodwill, net of accumulated
amortization of $58,471 and $50,235 393,645 401,881
---------- ----------
TOTAL ASSETS 26,172,277 27,285,125
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
LEASING EDGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
(Unaudited) (Audited)
----------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable 1,411,055 1,576,165
Accrued liabilities 566,534 311,734
Notes payable and lines of credit 3,212,391 3,236,954
Nonrecourse and recourse discounted
lease rentals 15,017,800 16,260,002
Other liabilities 50,889 25,344
---------- ----------
TOTAL LIABILITIES 20,258,669 21,410,199
---------- ----------
STOCKHOLDERS' EQUITY:
Convertible preferred stock Series A
$.01 par value; 1,000,000 shares
authorized, 380,000 shares issued
and 229,016 shares outstanding 2,290 2,290
Common stock, $.01 par value;
10,000,000 shares authorized,
3,132,319 shares issued and
3,129,319 shares outstanding 31,324 31,324
Additional paid-in capital 9,469,005 9,526,259
Accumulated deficit (3,552,011) (3,647,947)
---------- ----------
5,950,608 5,911,926
Common stock held in treasury,
at cost; 3,000 shares (12,000) (12,000)
Notes receivable from stockholders (25,000) (25,000)
---------- ----------
NET STOCKHOLDERS' EQUITY 5,913,608 5,874,926
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 26,172,277 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
--------------------------------
March 31, March 31,
1996 1995
------------- -------------
<S> <C> <C>
Revenues:
Operating leases 2,591,214 2,712,166
Sales-type leases 49,052 91,731
Direct finance leases 12,086 18,080
Direct sales and other 560,457 496,959
--------- ---------
Total revenue from leasing operations 3,212,809 3,318,936
Distribution sales 1,590,517 1,600,553
--------- ---------
Total revenues 4,803,326 4,919,489
--------- ---------
Costs and expenses:
Operating leases 1,812,708 1,826,932
Interest expense 338,510 500,500
Direct sales 382,200 416,135
--------- ---------
Total costs from leasing operations 2,533,418 2,743,567
Distribution cost of sales 1,389,614 1,376,476
Selling, general and administrative expenses 700,375 635,130
Interest expense 83,983 35,999
--------- ---------
Total costs and expenses 4,707,390 4,791,172
--------- ---------
Income before income taxes 95,936 128,317
Provision for income taxes - 51,326
--------- ---------
Net income 95,936 76,991
========= =========
Earnings per common share 0.01 0.01
========= =========
Weighted average common shares outstanding 3,345,599 2,488,736
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
LEASING EDGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
March 31, March 31,
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 95,936 $ 76,991
---------- ----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,829,887 2,006,325
Deferred income taxes - 51,326
Change in assets and liabilities due to
operating activities:
Increase in accounts receivable (273,858) (84,771)
(Increase) decrease in inventory 345,066 (32,009)
Decrease in accounts payable (165,110) (692,723)
(Decrease) increase in accrued
liabilities 254,800 (631,369)
All other operating activities (15,049) (111,616)
---------- ----------
Total adjustments 1,975,736 505,163
---------- ----------
Net cash provided by operating activities 2,071,672 582,154
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales, transfers and disposals of inventory
and equipment 339,096 237,782
Purchases of inventory for lease (1,512,390) (1,039,537)
Purchases of furniture & equipment (1,145) -
Sales-type and direct financing
lease rentals received 419,287 774,828
---------- ----------
Net cash used in investing activities (755,152) (26,927)
---------- ----------
</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>
Three Months Ended
---------------------------
March 31, March 31,
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from nonrecourse and recourse
discounted lease rentals 1,541,046 1,145,546
Payments on nonrecourse and recourse
discounted lease rentals (2,783,248) (2,915,399)
Proceeds from notes payable 61,694 586,471
Payments on notes payable (86,257) (79,697)
Proceeds from sale of stock - 445,534
Deferred equity transaction costs - -
Preferred stock dividends paid (57,254) (57,504)
---------- ----------
Net cash provided by (used in)
financing activities (1,324,019) (875,049)
---------- ----------
Net decrease in cash (7,499) (319,822)
Cash at beginning of period 209,084 479,118
---------- ----------
Cash at end of period $ 201,585 $ 159,296
========== ==========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for:
Interest $ 412,770 $ 527,299
========== ==========
Income Taxes $ 5,061 $ 5,640
========== ==========
</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 months ended March 31, 1996 and 1995
and its cash flows. 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 and cash flows for the three months ended March 31, 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 month period ending March 31, 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, 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 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 March 31, 1996, 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).
Note 4. Prior Period Adjustment
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 March 31, 1996, the Company had outstanding borrowings
under the Agreement of $2.7 million and the interest rate with respect to the
Agreement was 10.25 percent. Average and maximum borrowings outstanding under
the revolving line of credit during 1996 were $2.7 million and the weighted
average interest rate was 10.34 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 June 30, 1996.
At March 31, 1996, PMCPI had outstanding borrowings under the Merrill Line of
$310,115 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 $331,880 and the weighted average interest rate was
approximately 9.35 percent. Maximum borrowings outstanding under the revolving
credit agreement during 1996 were $337,820.
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 March 31, 1996, the Company
had outstanding term notes and available credit under the Equity Line of
$117,566 and $132,434, respectively.
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 $600,000. 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.
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.*
4.4 Specimen Class A Warrant 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 McMillin & 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 McMillin & 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>
- -------------------
<F1> * 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.
<F2> ** 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.
<F3> *** 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.
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.
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. 2 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 19th day of June, 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. 2 to the Registration Statement has been signed below by the
following persons in the capacities indicated on June 19, 1996.
Signature Title
--------- -----
/s/ Michael F. Daniels Chairman, President and Chief
Michael F. Daniels Executive Officer (Principal
Executive Officer)
L. Derrick Ashcroft* Director
L. Derrick Ashcroft
Larry Segall* Director
Larry 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
Exhibit 23.2
We consent to the use 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 sstatements of operations, stockholders' equity and
cash flows for the years then ended included herein and to the reference to our
firm as experts in accounting and auditing in the Post-Effective Amendment No.
2 on Form SB-2 to the registration statement (No. 33-93274) on Form S-2 of
Leasing Edge Corporation. The report of KPMG Peat Marwick LLP 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 these errors.
June 14, 1996 /s/ KPMG Peat Marwick LLP
