U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X Annual report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1998.
Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period to .
Commission File No. 0-18303
GOLF ENTERTAINMENT, INC. (formerly known as LEC TECHNOLOGIES, INC.)
(Exact name of registrant as specified in its charter)
Delaware No. 11-2990598
(State or other jurisdiction of (I.R.S. Employer Identifi-
incorporation or organization) cation No.)
6540 South Pecos Road, Suite 103, Las Vegas NV 89120
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (702) 454-7900
(Including area code)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, Par Value $0.01 Per Share
Series A Convertible Preferred Stock
Common Stock Purchase Warrants
Class C Common Stock Purchase Warrants
Class D Common Stock Purchase Warrants
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K(229.405 of this chapter) is not contained
herein, and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K. [X]
State the aggregate market value of the voting stock held by non-
affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the stock was sold, or the
average bid and asked prices of such stock, as of a specified date
within 60 days prior to the date of filing: As of March 11, 1999, the
approximate market value of the common stock (based upon the NASDAQ
closing price of $0.75 of stated shares on that date) held by non-
affiliates was $852,809.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court.
Yes No
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: As of March
11, 1999, the issuer had 1,715,491 shares of common stock, par value
$0.01 per share, outstanding.
Documents incorporated by reference: None.
GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS LEC TECHNOLOGIES, INC.)
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. BUSINESS 2
Item 2. PROPERTIES 8
Item 3. LEGAL PROCEEDINGS 8
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 9
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 9
Item 6. SELECTED FINANCIAL DATA 9
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATION 10
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 15
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 42
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT 43
Item 11. EXECUTIVE COMPENSATION 44
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 45
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 45
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K 46
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PART I
ITEM 1: BUSINESS
General
Golf Entertainment, Inc. (formerly known as LEC Technologies, Inc.) and
subsidiaries (LEC Leasing, Inc. or "LEC"; Superior Computer Systems,
Inc. or "SCS"; Pacific Mountain Computer Products, Inc. or "PMCPI";
Atlantic Digital International, Inc. or "ADI"; LEC Distribution, Inc.;
and, TJ Computer Services, Inc.)(collectively, the "Company" or "Golf")
is currently a technology services company, providing solutions that
help organizations reduce technology cost and risk, primarily through
the leasing, distribution and remarketing of high technology equipment.
Such equipment generally consists of midrange computer systems,
telecommunications systems, system peripherals (terminals, printers,
communications controllers, etc.) and point-of-sale systems.
As an independent organization, the Company provides customers with
technical, financial and product alternatives, irrespective of hardware
platform or manufacturer. In addition to working with its customers to
develop strategies governing when to acquire equipment, upgrade existing
equipment and order new equipment to take advantage of current
technology, the Company also acts as an outlet for the equipment being
displaced.
The Company's business is diversified by customer, customer type,
equipment type, equipment manufacturer, and geographic location of its
customers and subsidiaries. The Company's customers include "Fortune
1000" corporations or companies of similar size as well as smaller
corporations. A significant portion of the Company's business is with
long-term, repeat customers. Three customers of the Company, Tiffany &
Co., Bed, Bath & Beyond and The Hertz Corporation, respectively,
accounted for approximately 17.2%, 7.6%, 2.3% of consolidated revenues
for the year ended December 31, 1998, 15.0%, 9.2% and 3.7% of
consolidated revenues for the year ended December 31, 1997 and 25.0%,
12.8% and 7.4% of consolidated revenues for the year ended December 31,
1996. However, the Company does not believe its businesses are
dependent on any single customer or on any single source for the
purchasing, selling or leasing of equipment.
The Company's services are organized into three groups of related
businesses, and are provided generally through separate business units,
although there is a significant amount of interrelated activities. The
three business groups are as follows:
Leasing Services: Leasing, remarketing, financial engineering,
consulting and third-party maintenance and systems integration
services for midrange systems, telecommunications equipment, point-
of-sale systems and system peripherals. The business unit through
which the Company conducts its leasing services business is LEC, a
wholly-owned subsidiary of Golf Entertainment, Inc.
Distribution Services: Sale of terminals, printers, communications
controllers, supplies, technical consulting and third-party
maintenance services. Business units comprising distribution
services are SCS and PMCPI, wholly-owned subsidiaries of Golf
Entertainment, Inc.
Remarketing Services: Remarketing of previously leased equipment,
displaced equipment, and used equipment purchased from other
lessors or brokers. This unit also has consignment relationships
with certain customers to assist such organizations in the sale of
their used equipment. Business units comprising remarketing
services include LEC, SCS, PMCPI and ADI, a wholly-owned subsidiary
of Golf Entertainment, Inc., which specializes in the acquisition
and remarketing of used computer equipment on both a domestic and
international basis.
The Company's leasing operations are conducted primarily through its
principal office in Las Vegas, Nevada and its distribution and
remarketing operations are conducted primarily through its subsidiaries'
offices located in Minneapolis, Minnesota, Woodland Hills, California
and Atlanta, Georgia.
Each business unit is directed by its own management team and has its
own sales and operations support personnel. Each management team
reports directly to the Office of the President, which is responsible
for overall corporate control and coordination, as well as strategic
planning. Coordination of the business units is also accomplished
through shared services, such as legal, risk management and accounting.
The business units maintain their own direct marketing force to manage
their customer base and to market their own as well as other units'
services. In its business operations, the Company attempts to cross-
sell services where and when appropriate.
The Company was founded in 1980 under the name TJ Computer Services,
Inc. ("TJCS"). In 1989, all of the outstanding common stock of TJCS was
acquired by Harrison Development, Inc., an inactive public corporation
organized in Colorado, which then changed its name to TJ Systems
Corporation. In October 1991, the Company reincorporated in the State
of Delaware and in June 1995 changed its name to Leasing Edge
Corporation. In March 1997, the Company's shareholders approved a
change in the Company's name to LEC Technologies, Inc. to more
accurately reflect the evolving nature of the Company's business. In
February 1999, the Company's shareholders approved a change in the
Company's name to Golf Entertainment, Inc. The executive offices of the
Company are located at 6540 S. Pecos Road, Suite 103, Las Vegas, Nevada,
89120, and its telephone number is (702) 454-7900.
The Company's Plans in the Golf and Leisure Time Industry
In November 1998, the Board of Directors of the Company authorized
management to examine strategic opportunities for the Company, including
opportunities in the golf and leisure time industry. The Board of
Directors also authorized management to engage an investment banking
firm to advise it concerning strategic alternatives in connection with
its computer businesses (see Note 17 of Notes to Consolidated Financial
Statements).
General
The Company intends to focus primarily on acquiring and consolidating
the ownership of existing golf ranges and golf centers. The Company
believes that the fragmented ownership of golf ranges and centers,
currently characteristic of the industry in the United States, coupled
with Mr. Farrell's extensive business experience in negotiating and
financing acquisition opportunities, offer it an opportunity for growth.
The Company intends to enhance these existing golf facilities by adding
amenities and improving management and operating systems. The Company
also will develop new golf recreational facilities, and may acquire
other golf related businesses. The Company intends that its facilities
will be centered around a driving range and will provide a variety of
golf practice areas for pitching, putting, chipping and sand play. The
Company intends that its facilities will be user-friendly for all levels
of golfer and will appeal to the entire family. Each driving range
will, generally, permit night play and limited year round use. Each
facility will offer instructional programs for men, women and juniors,
and will be staffed with professional instructors. Most facilities will
include a clubhouse that will house a full line pro-shop, a snack bar,
a miniature golf course(s) and batting cages. Where feasible, the
Company intends that the facilities will include par-3 or executive-
length (shorter than a regulation-length) golf courses. The Company's
revenues will be derived from selling balls to be used on the driving
range, charging for rounds of miniature golf, charging for the use of
the batting cages, selling golf equipment, golf apparel and related
accessories through the pro-shop, fees for instructional programs and
from food and beverage sales. The Company will seek to realize
economies of scale at its facilities through centralized management
information systems, accounting, cash management and purchasing
programs. The Company may also seek long-term management contracts to
operate golf courses and golf related facilities.
Business Strategy
The Company's goal is to become a leading consolidator, owner and
operator of golf related recreational facilities in the United States.
The Company intends to accomplish this goal by focusing its activities
principally on acquiring and consolidating the ownership of operating
facilities that have the potential for revenue growth through the
expansion and upgrading of those facilities to include better amenities,
more efficient management and more effective marketing strategies. The
Company also intends to develop new golf recreational facilities in
attractive markets and may acquire other golf related businesses. On
April 6, 1999, the Company announced the appointment of Mr. John Rooney
as the Company's new president effective April 19, 1999. Mr. Rooney has
been involved in the golf industry for over 15 years and, as President
of the Rooney Golf Group, he has been involved in the ownership,
development and management of golf facilities throughout the United
States. Mr. Rooney will have overall responsibility for the operations
of the Company's business. Mr. Farrell, as Chairman and Chief Executive
Officer of the Company, will focus his activities on raising additional
equity capital, securing debt facilities for the Company, and
identifying and negotiating acquisitions for the Company.
Forward-Looking Statements
Statements about the Company's expectations, including future revenues,
earnings, its ability to compete effectively and to maintain market
share, to adapt to changes in its customers' technology requirements,
and all other statements in this Report on Form 10-KSB, including
Management's Discussion and Analysis of Financial Condition and Results
of Operation, and other Company communications other than historical
facts, are "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Act
of 1934, and the Company intends that such forward-looking statements be
subject to the safe harbors created thereby. Since these statements
involve risks and uncertainties and are subject to change at any time,
the Company's actual results could differ materially from expected
results. Reference is made to "Safe Harbor Statement under the Private
Securities Litigation Reform Act of 1995" in Item 7 of this Report on
Form 10-K.
Leasing Services
Management estimates that the world-wide market for high technology
equipment approximates $400 billion annually and that approximately ten
percent represents leasing activities. The computer equipment leasing
industry consists of many products and services loosely divided into
several major submarkets. These submarkets include mainframe and
midrange computer equipment, microcomputer sales and network design,
local area networks, point-of-sale equipment, disaster recovery services
and other engineering and technical support services. The Company
believes that the size of the computer equipment leasing market reflects
the rapid technological improvements in and the development of new
equipment as well as the advantages that leasing offers over equipment
purchasing, including off-balance sheet financing, lower monthly
payments and cash requirements, protection against technological
obsolescence and ease of disposal of equipment at the end of the lease
term.
Historically, the industry was dominated by the manufacturers of
mainframe computer equipment and their captive or related leasing
companies. However, the introduction of new and more powerful
microcomputers offering increased capability at reduced prices has led
to an increase in the demand for midrange and microcomputer hardware,
software, accessories and related services. Business users are
employing, at an increasing rate, midrange and microcomputer networks to
perform applications previously requiring a mainframe computer. This
increase in technological capability and the relatively high cost of
mainframe systems has resulted in a fundamental shift in the demand for
information systems and services, creating new opportunities for more
efficient, flexible and competitive lessors and distributors of midrange
and microcomputers and related equipment.
The Company's structured lease transactions provide customers with a
full range of new and used data processing equipment, including midrange
central processing units, peripherals, point-of-sale systems and
telecommunications equipment produced by major manufacturers. By
emphasizing a full range of products and manufacturers and by
maintaining a balanced client base, the Company maximizes its leasing
opportunities while providing stability to its lease portfolio. Through
its leasing transactions, the Company serves as an intermediary between
end users of high technology equipment and sources of financing for
equipment purchases.
The Company purchases new equipment directly from the manufacturer and
obtains used equipment from its customer base and from the nationwide
secondary market for used data processing and telecommunications
equipment. Management's experience in the secondary market, coupled
with the Company's portfolio of equipment under lease, enables the
Company to tailor systems to customer's specific needs by combining new
and used equipment configurations at competitive prices. Similarly, the
Company is often able to facilitate new lease transactions by either
buying, remarketing or trading in a prospective customer's existing
equipment.
A significant amount of the equipment leased by the Company consists of
equipment manufactured by IBM, including computer systems, such as
midrange central processing units, and computer peripherals, such as
disk and tape drives, control units, printers, and work stations. The
Company considers the leasing of IBM equipment to be generally
advantageous because of the large national IBM customer base and
equipment aftermarket, IBM's policy of supporting its users with
software and maintenance services, and IBM's reputation in the computer
equipment marketplace.
In a typical leasing transaction, the Company cultivates a customer
relationship, develops an understanding of the customer's requirements
and then delivers what the customer needs in the form of an advantageous
lease financing structure. The terms and conditions of the lease are
negotiated and, if accepted by the customer, a master lease agreement is
executed and the equipment to be leased is secured either from a
manufacturer, reseller or from the Company's inventory. The Company
arranges nonrecourse financing secured by the equipment by selling the
future lease rentals on a discounted basis. The discount rate reflects
the credit standing of the lessee, the length of the lease and the total
amount financed. The Company typically receives between 85% and 95% of
its equipment cost through nonrecourse financing. The difference
between the cost of the equipment and the amount received through the
nonrecourse financing is referred to as the Company's "equity position"
in the equipment. The Company usually finances its equity position in
a lease through internally generated funds and recourse bank borrowings.
The Company retains ownership of the equipment during the term of the
lease. Upon expiration of the lease term, the Company seeks to maximize
the realization of the residual value of the leased equipment through
its remarketing activities on either a wholesale or retail basis.
Equipment lease terms generally range from monthly to five years, with
data processing and telecommunications equipment leases typically
spanning two to four years. Additions to the lease portfolio frequently
result from a competitive bidding process. Substantially all leases are
noncancelable, require the lessee to protect the equipment, at their
cost, with the manufacturer's maintenance contract and place the risk
of loss or damage to the equipment on the lessee.
The Company believes it provides its clients with superior customer
service and creative solutions for their data processing,
telecommunications and technical support needs. The Company develops
close partnership relationships with its customers; by listening
carefully, the Company's management and employees are better able to
understand the Company's customers' complex data processing requirements
and deliver quick response, high impact and competitively priced
solutions appropriate for each environment and circumstance. Close
client relationships and the expertise and experience of management
allow the Company to assist customers in their leasing decisions
regarding data processing or other technological equipment. The Company
frequently participates, early on, in a customer's decision-making
process regarding the type of equipment to acquire to meet its needs and
also helps in developing a customized leasing structure. The Company
believes that this strategy leads to customer satisfaction, encourages
a loyal customer base and contributes to repeat business.
The Company offers to customers a full range of new and used computer
and telecommunications equipment manufactured by a variety of major
manufacturers, including IBM, Unisys, AT&T, Sun Microsystems, DEC and
Tandem. Over the last few years, the Company has strategically
diversified its lease portfolio to include equipment such as computer
storage hardware, point-of-sale and telecommunications equipment; the
Company believes these to be less susceptible to rapid technological
obsolescence than large computer central processing units. The Company
further believes that an expanded equipment base mitigates the risks of
obsolescence associated with a specific type of equipment, as well as
reducing the Company's reliance on any one particular manufacturer.
The Company's leasing customers are generally creditworthy corporations
and other organizations that have significant data processing and tele-
communication needs. These financial profiles allow the Company to
structure lower rate, long-term nonrecourse financing transactions with
various financial institutions on competitive terms. Moreover, non-
recourse financing limits the Company's financial exposure on lease
transactions, thereby further enabling the Company to expand its lease
portfolio and customer base.
Distribution Services
Management estimates that the distribution market for the products
offered by its distribution subsidiaries, SCS and PMCPI, is
approximately $225 million annually. The principal products offered by
SCS and PMCPI are midrange peripheral equipment, including TWINAX and
COAX terminals, ASCII terminals, desktop and network printers, emulation
boards, remote controllers and network adapters. In addition to
equipment sales, the Company's distribution subsidiaries provide
customers with technical consulting and third-party maintenance
services.
Approximately 70 percent of the distribution subsidiaries' revenues
related to new equipment are derived from sales to resellers and
approximately 30 percent represents direct sales to end users. Both SCS
and PMCPI secure their end-user customers through cold calls, referrals,
trade journal advertising and the cross-selling of the Company's leasing
customers. Reseller customers are primarily generated through a nation-
wide on-line system and direct advertising via facsimile machine.
SCS and PMCPI both have contractual distribution relationships with IBM;
PMCPI also has contractual relationships with Lexmark Printer Company,
IDEAssociates, Perle Systems, DataSouth Corporation, Hewlett Packard
Corporation and BOS. SCS and PMCPI are highly dependent on their
suppliers, the manufacturers. Most manufacturers extend terms of net 30
days or provide an inventory line of credit for purposes of ordering
equipment. Any event of default on any credit facility offered by a
manufacturer could materially and adversely affect the Company's ability
to acquire equipment for resale.
Remarketing Services
The Company's remarketing services consist of the remarketing of
previously leased equipment, displaced equipment, and used equipment
purchased from other lessors and brokers. Each of the Company's
business units (LEC, SCS, PMCPI and ADI) engage in remarketing
activities primarily related to their respective businesses, although
specific sales often result from coordinated efforts. In addition to
the remarketing of IBM peripheral equipment, SCS also has consignment
relationships with certain customers to assist such organizations in the
disposal of their displaced equipment. ADI currently specializes in the
acquisition and remarketing of Digital Equipment Corporation equipment
and, to a lesser extent, equipment manufactured by Sun Microsystems, IBM
and Hewlett Packard.
Competition
The Company competes as a lessor and as a dealer of new and used
computer and selected other high technology equipment with different
firms, many of which are larger and better known than the Company and
which possess substantially greater financial resources than that of the
Company. While its competitive methodologies will vary by business
unit, in general, the Company competes mainly on the basis of terms
offered in its transactions, its quick response and reliability in
meeting its commitments, its manufacturers' independence, its long-term
relationships with its customers and its ability to develop and offer
alternative solutions and options to high technology equipment users.
The Company's competition with respect to leasing services includes
equipment manufacturers such as IBM, AT&T, DEC and Amdahl, other
equipment dealers, brokers and leasing companies (including captive or
related leasing companies of IBM and AT&T) as well as financial
institutions, including branches or divisions of national, regional and
local commercial banks and other commercial lending firms. The Company
also competes with other small, independent leasing companies as well as
individuals and firms that act as leasing brokers and other
institutions. Primarily as a result of rapid technological changes,
competition has increased in the leasing industry and the number of
companies offering competitive services, such as technical consulting
and other high technology equipment leasing, has increased. Competitive
alliances have also impacted the leasing industry. Management believes
that the level of competition will continue to increase in the future.
SCS and PMCPI compete with other authorized distributors of midrange
peripherals as well as equipment manufacturers. All authorized
distributors receive identical discounts for their products, so the
Company and its competitors have equal opportunity to sell such
products. Many times, availability of product in inventory is a
determining factor in a sale. SCS and PMCPI compete primarily on the
basis of product knowledge, price, availability and their long standing
customer relationships.
ADI competes with numerous other used equipment brokers and dealers as
well as with the remarketing activities of lessors. ADI competes
primarily on the basis of price and relationship selling.
Other
The Company does not own any patents, trademarks, licenses or franchises
which would be considered significant to the Company's business.
The Company's business is not seasonal, however, quarter-to-quarter
results from operations can vary significantly.
The amount of backlog orders is not significant to an understanding of
the Company's business.
The Company is not required to carry significant amounts of inventory
either for delivery requirements or to assure continuous availability of
equipment related to its leasing operations. With respect to the
Company's distribution operations, product availability is often a
significant factor in generating sales.
At December 31, 1998, the Company had 34 full-time employees. None of
the Company's employees is represented by a union. The Company believes
that relations with its employees are good.
ITEM 2: PROPERTIES
The Company leases approximately 5,250 and 1,100 square feet of office
space in Las Vegas, NV and Alpharetta, GA, respectively, under lease
agreements expiring individually through 2002. Each respective lease
agreement requires the Company to pay all costs of operations, including
real property taxes, in addition to the basic rent. All of the
Company's leased properties are in good condition.
ITEM 3: LEGAL PROCEEDINGS
In 1996, the Company acquired all of the outstanding common stock of
Superior Computer Services, Inc. ("SCS") for 59,927 shares of the
Company's common stock, valued at $400,000, and two $100,000 non-
interest bearing notes. Pursuant to the terms of the related Stock
Acquisition Agreement, the Company agreed to recompute the portion of
the purchase price represented by the Company's common stock based on
the average of the stock's closing price for the five consecutive
trading days ended December 1, 1998. If such "Recomputed Value", as
defined, was less than $400,000, the Company agreed to either (i) issue
to the sellers additional shares of common stock such that the aggregate
value of the total shares issued equaled $400,000 or (ii) pay the
sellers an equivalent amount of cash. Due to significant operating
losses at SCS, the Company has refused to issue such additional shares
or cash. As a result, the two former shareholders of SCS have filed
separate lawsuits against the Company seeking the Company's performance
under the Stock Acquisition Agreement. The Company, in turn, has
countersued the former shareholders, asserting breach of fiduciary duty,
breach of contract, fraud and fraudulent inducement. Due to the
uncertainty of the ultimate resolution of this matter, the consolidated
financial statements as of December 31, 1998 do not reflect any
provision for this litigation. In the event that the Company is
unsuccessful in its defense and counterclaim, the Company's approximate
financial exposure, excluding attorney's fees and costs, is $356,000.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock trades on the Nasdaq SmallCap tier of The
Nasdaq Stock Market under the symbol GECC. The following table sets
forth the high and low sales price quotations of the Company's common
stock for the periods indicated. The quotations were retroactively
adjusted to reflect the one for four reverse stock split which became
effective on September 15, 1998.
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1998 1997
Fiscal Quarter HIGH LOW HIGH LOW
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First Quarter $3.63 $1.88 $5.00 $3.52
Second Quarter $4.25 $2.13 $6.00 $2.52
Third Quarter $2.00 $0.63 $5.76 $3.00
Fourth Quarter $1.69 $0.53 $4.76 $2.36
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As of March 11, 1999 the Company had approximately 425 shareholders of
record.
The Company has not previously paid cash dividends on its common stock
and does not intend to pay such dividends for the foreseeable future.
American Stock Transfer & Trust Company, 40 Wall Street, New York, NY
10022 is the Company's registrar and transfer agent with respect to its
common stock and preferred stock and registrar, transfer agent and
warrant agent with respect to the Company's warrants.
ITEM 6: SELECTED FINANCIAL DATA
The following financial information is derived from the consolidated
financial statements of the Company and its wholly owned subsidiaries
for the periods indicated. The information set forth in the following
table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operation" appearing in
Item 7 of this report and the Company's consolidated financial
statements and notes thereto appearing in Item 8 of the report. All per
share data has been retroactively adjusted to reflect the one-for-four
reverse stock split which became effective on September 15, 1998 and the
one-for-eight reverse stock split which became effective on February 24,
1994.
For the Year Ended December 31,
(In thousands, except per share data)
1998 1997 1996 1995 1994
Revenues $30,623 $30,715 $21,237 $18,150 $19,768
Net income(loss) (3,202) 330 (1,398) 201 (4,129)
Net income(loss) per
common share (2.63) 0.09 (1.80) (0.04) (12.48)
Total assets 26,381 29,074 27,687 27,285 30,832
Discounted lease
rentals 15,450 15,906 14,809 16,260 20,718
Total liabilities 23,929 23,595 22,449 21,410 26.630
Total stockholders'
equity 2,452 5,478 5,238 5,875 4,202
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Overview
The Company's services are organized into three groups of related
businesses, and are provided generally through separate business units,
although there is a significant amount of interrelated activities. The
three business groups are as follows:
Leasing Services: Leasing, remarketing, financial engineering,
consulting and third-party maintenance and systems integration
services for midrange systems, telecommunications equipment, point-
of-sale systems and system peripherals. The Company conducts its
leasing services business through LEC Leasing, Inc., a wholly-owned
subsidiary of Golf Entertainment, Inc.
Distribution Services: Sale of terminals, printers, communications
controllers, supplies, technical consulting and third-party
maintenance services. Business units comprising distribution
services are SCS and PMCPI, wholly-owned subsidiaries of Golf
Entertainment, Inc.
Remarketing Services: Remarketing of previously leased equipment,
displaced equipment, and used equipment purchased from other
lessors or brokers. This unit also has consignment relationships
with certain customers to assist such organizations in the sale of
their used equipment. Business units comprising remarketing
services include LEC, SCS, PMCPI and ADI, a wholly-owned subsidiary
of Golf Entertainment, Inc., which specializes in the acquisition
and remarketing of used computer equipment on both a domestic and
international basis.
Accounting Practices
Accounting Classification of Leases: Reported earnings are
significantly impacted by the accounting classification of leases. The
Company's lease portfolio is comprised of sales-type, direct financing
and operating leases. The Company classifies each lease at inception in
accordance with Statement of Financial Accounting Standards No. 13, as
amended and interpreted. Sales-type and direct financing leases are
those leases which transfer substantially all of the costs and risks of
ownership of the equipment to the lessee. Operating leases are those
leases in which substantially all of the benefits and risks of ownership
of the equipment are retained by the lessor.
The accounting treatment and resulting impact on the financial
statements differs significantly during the term of the lease, depending
on the type of lease classification. Under sales-type leases, the
present value of the minimum lease payments calculated at the rate
implicit in the lease is recorded as revenue and the cost of the
equipment less the present value of the estimated unguaranteed residual
value is recorded as leasing costs at lease inception. Consequently, a
significant portion of the gross profit on the lease transaction is
recognized at lease inception. Under direct financing leases, the
excess of the aggregate minimum lease payments plus the estimated
unguaranteed residual over the cost of the equipment is recorded as
unearned interest income at lease inception. Such amount is then
recognized monthly over the lease term as a constant percentage of the
related asset. There are no costs and expenses related to direct
financing leases since revenue is recorded on a net basis. Under
operating leases, the monthly lease rental is recorded as revenue
ratably over the lease term. The cost of the related equipment is
recorded as leased assets and is depreciated over the lease term to the
estimated unguaranteed residual value. Regardless of the classification
of a lease transaction and the resultant accounting treatment during the
lease term, the aggregate gross profit recognized during the lease term
is identical.
Residual Values: The Company's cash flow depends to a great extent
on its ability to realize the residual value of leased equipment after
the initial term of the lease by re-leasing or selling such equipment.
The Company's financial results would be materially and adversely
affected if the residual value of the equipment could not be realized
when returned to the Company because of technological obsolescence or
for any other reason. Estimated residual values for leased equipment
vary, both in amount and as a percentage of the original equipment cost,
depending upon many factors, including the type and manufacturer of the
equipment, the Company's experience with the type of equipment and the
term of the lease. In estimating future residual values, the Company
relies on both its own experience and upon third-party estimates of
future market value where available. The Company reviews its estimated
residual values at least annually and reduces them as necessary. At the
time of expiration of a lease, the Company remarkets the equipment and
records the proceeds from the sale (in the event of a sale) or the
present value of the lease rentals (in the event of a sales-type lease)
as revenue and records the net book value of the related equipment as a
cost of sale or lease.
For a description of the Company's other accounting practices, see Note
1 of Notes to Consolidated Financial Statements. The following analysis
of the Company's financial condition and operating results should be
read in conjunction with the accompanying consolidated financial
statements including the notes thereto.
Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues
Total revenues from leasing operations decreased 5.2% from $13,085,616
for the year ended December 31, 1997 to $12,401,501 for the year ended
December 31, 1998, a decrease of $684,115. The decrease in revenues is
primarily due a decrease in revenue from the Company's portfolio base of
operating leases and a decrease in direct sales revenues, partially
offset by increases in sales-type lease revenues and lease-related
finance income.
Revenue from the portfolio base of operating leases decreased 20.3% from
$8,618,861 for the year ended December 31, 1997 to $6,869,524 for the
year ended December 31, 1998, a decrease of $1,749,337. This decrease
in operating lease revenue is due primarily to a combination of an
increase in the number of direct finance leases written and the early
termination of certain operating leases purchased by a customer. Direct
sales of off-lease equipment decreased 28.2% from $1,882,638 for the
year ended December 31, 1997 to $1,350,945 for the year ended December
31, 1998, a decrease of $531,693. This decrease in sales of off-lease
equipment is due primarily to the technological obsolescence, and
therefore salability, of approximately $900,000 of off-lease equipment.
Finance income increased 66.8% from $475,140 for the year ended December
31, 1997 to $792,499 for the year ended December 31, 1998, an increase
of $317,359. This increase in finance income is the result of a change
in the mix of leases written from primarily operating leases to direct
financing leases. The accounting classification of a lease transaction
(see Note 2 of Notes to Consolidated Financial Statements for a
description of the Company's lease accounting policies) is a function of
the pricing of the transaction combined with the estimated end-of-lease
residual value (i.e., if the estimated end-of-lease residual value is
less than ten percent of equipment cost, the lease classification will
most likely be direct financing). Revenue from sales-type leases
increased 60.7% from $2,108,977 for the year ended December 31, 1997 to
$3,388,533 for the year ended December 31, 1998, an increase of
$1,279,556. This increase in sales-type lease revenue was due to the
renewal, upgrade and consolidation of certain existing leases into new
leases which were accounted for as sales-type pursuant to SFAS No. 13.
As compared to other lease transactions, sales-type leases result in a
greater percentage of the related revenue and expense from the
transaction being recognized at lease inception. Consequently, revenue
recognized subsequent to lease inception consists only of the finance
income element of the transaction.
Distribution sales, representing the activity of ADI, SCS and PMCPI,
increased 3.4% from $17,612,586 for the year ended December 31, 1997 to
$18,214,475 for the year ended December 31, 1998, an increase of
$601,889. The increase in distribution sales was primarily attributable
to an increase in sales volumes at ADI and PMCPI of approximately $3.4
million and .6 million, respectively, partially offset by a decrease in
sales volumes at SCS of approximately $3.4 million. The sales decrease
at SCS was primarily attributable to sales staff turnover. The sales
increases at ADI and PMCPI were both attributable to the expansion of
each entities' sales staff and, with respect to ADI, the addition of new
product lines.
Costs and Expenses
Total costs from leasing operations decreased 0.8% from $10,535,365 for
the year ended December 31, 1997 to $10,447,789 for the year ended
December 31, 1998, a decrease of $87,576. The decrease in total costs
from leasing operations was due primarily to a decrease in operating
lease depreciation of $1,167,766 partially offset by the write down to
their net realizable values of certain off-lease equipment of
$1,205,029. The decrease in operating lease depreciation was consistent
with the decrease in operating lease revenue. Gross profit from leasing
operations (total revenues from leasing operations less total costs from
leasing operations) decreased 23.4% from $2,550,251 for the year ended
December 31, 1997 to $1,953,712 for the year ended December 31, 1998, a
decrease of $596,539. Gross margin (gross profit from leasing
operations as a percentage of total revenues from leasing operations)
decreased to 15.8% from 19.5% due to the foregoing.
Leasing costs associated with the portfolio base of operating leases
decreased 20.7% from $5,641,067 for the year ended December 31, 1997 to
$4,473,301 for the year ended December 31, 1998, a decrease of
$1,167,766. The decrease in costs from this segment of the Company's
lease portfolio is due primarily to the early termination/buy-out of
certain operating leases and the lease renewals/upgrades mentioned
previously. Gross profit on operating leases decreased 19.5% from
$2,977,794 for the year ended December 31, 1997 to $2,396,223 for the
year ended December 31, 1998, a decrease of $581,571. Gross margin from
operating leases increased from 34.6% for the 1997 period to 34.9% for
the 1998 period as a result of the foregoing.
Direct sales costs (leasing costs with respect to the sale of off-lease
equipment and leases with dollar buyout options treated as sales)
decreased 18.1% from $1,806,939 for the year ended December 31, 1997 to
$1,479,925 for the year ended December 31, 1998, a decrease of $327,014.
Direct sales costs increased as a percentage of the related revenue to
109.5% from 96.0%. The increase in costs as a percentage of revenue is
due to residual value realization more closely matching stated values in
1997 as compared to 1998.
Distribution cost of sales increased 434% from $14,686,695 for the year
ended December 31, 1997 to $15,330,762 for the year ended December 31,
1998, an increase of $644,067. Distribution cost of sales relates to
the distribution sales of ADI, SCS and PMCPI. Gross margin on
distribution sales decreased slightly to 15.8% for the year ended
December 31, 1998 from 16.6% for the year ended December 31, 1997.
Selling, general and administrative expenses increased 58.4% from
$4,549,586 for the year ended December 31, 1997 to $7,206,266 for the
year ended December 31, 1998, an increase of $2,656,680. The increase
in selling, general and administrative expenses was due primarily to
increased staffing levels at ADI, SCS and the parent company and the
recording of an impairment loss of $567,360 related to the carrying
value of the goodwill associated with the acquisitions of SCS and PMCPI.
Interest expense on non-lease related indebtedness increased 37.0% from
$613,447 for the year ended December 31, 1997 to $840,464 for the year
ended December 31, 1998, an increase of $227,017. The increase in
interest expense on non-lease related indebtedness was due primarily to
interest costs associated with inventory flooring arrangements at SCS.
Net Income
As a result of the foregoing, the Company recorded a net loss of
$3,202,265 for the year ended December 31, 1998 as compared to net
income of $329,531 for the year ended December 31, 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues
Total revenues from leasing operations decreased 7.7% from $14,178,580
for the year ended December 31, 1996 to $13,085,616 for the year ended
December 31, 1997, a decrease of $1,092,964. The decrease in revenues
is primarily due to the 1996 renewal, upgrade and consolidation of
several existing operating leases into a smaller number of new leases,
three of which were accounted for as sales-type leases pursuant to SFAS
No. 13 (see Note 2 of Notes to Consolidated Financial Statements for a
description of the Company's lease accounting policies). As compared to
other lease transactions, sales-type leases result in a greater
percentage of the related revenue and expense from the transaction being
recognized at lease inception. Consequently, revenue recognized
subsequent to lease inception consists only of the finance income
element of the transaction. During 1997, two similar renewal/upgrade
transactions were consummated, which resulted in the Company recording
revenue from sales-type leases of approximately $2.1 million.
Management anticipates that total revenues from leasing operations in
1998 when compared to 1997 will reflect a similar decrease. The Company
does not expect to regularly enter into transactions of this size in the
future.
Revenue from the portfolio base of operating leases decreased 11.1% from
$9,694,905 for the year ended December 31, 1996 to $8,618,861 for the
year ended December 31, 1997, a decrease of $1,076,044. The decrease in
operating lease revenue is due primarily to a change in the mix of
leases written, principally as a result of the lease renewals referred
to previously. The Company anticipates that the majority of its 1998
lease additions will be classified as either direct financing leases or
as operating leases.
Distribution sales, representing the activity of ADI, SCS and PMCPI,
increased 150.2% from $7,038,154 for the year ended December 31, 1996 to
$17,612,586 for the year ended December 31, 1997, an increase of
$10,574,432. The increase in distribution sales was due primarily to
the acquisition of SCS on November 1, 1996 and the formation of ADI in
January of 1997. SCS' revenues for the two-month period ended December
31, 1996 were $1,478,792 as compared to revenues of $9,416,880 for the
twelve months ended December 31, 1997. SCS and PMCPI are distributors
of computer peripherals and data communications equipment.
Costs and Expenses
Total costs from leasing operations decreased 16.6% from $12,631,385 for
the year ended December 31, 1996 to $10,535,365 for the year ended
December 31, 1997, a decrease of $2,096,020. The decrease in total
costs from leasing operations was due primarily to a 1996 fourth quarter
charge of $889,000 to reduce the carrying amount of certain off-lease
equipment and the estimated unguaranteed residual values of equipment on
lease (see Note 16 of Notes to Consolidated Financial Statements) due to
changed market conditions together with a decrease in depreciation
expense on operating leases of $1,239,953. The decrease in operating
lease depreciation was consistent with the decrease in operating lease
revenue. Gross profit from leasing operations (total revenues from
leasing operations less total costs from leasing operations) increased
64.8% from $1,547,195 for the year ended December 31, 1996 to $2,550,251
for the year ended December 31, 1997, an increase of $1,003,056. Gross
margin (gross profit from leasing operations as a percentage of total
revenues from leasing operations) increased to 19.5% from 10.9% due to
the foregoing.
Leasing costs associated with the portfolio base of operating leases
decreased 18.0% from $6,881,020 for the year ended December 31, 1996 to
$5,641,067 for the year ended December 31, 1997, a decrease of
$1,239,953. The decrease in costs from this segment of the Company's
lease portfolio is due primarily to the lease renewals/upgrades
mentioned above which were accounted for as sales-type leases. Gross
profit on operating leases increased 5.8% from $2,813,885 for the year
ended December 31, 1996 to $2,977,794 for the year ended December 31,
1997, an increase of $163,909. Gross margin from operating leases
increased from 29.0% for the 1996 period to 34.5% for the 1997 period as
a result of the foregoing.
Direct sales costs (leasing costs with respect to the sale of off-lease
equipment and leases with dollar buyout options treated as sales)
increased 47.6% from $1,224,406 for the year ended December 31, 1996 to
$1,806,939 for the year ended December 31, 1997, an increase of
$582,533. This increase in direct sales costs was directly related to
a year-to-year increase in the volume of leases coming to term. Direct
sales costs decreased as a percentage of the related revenue to 96.0%
from 107.6%. The decrease in costs as a percentage of revenue is due to
residual value realization more closely matching stated values in 1997
as compared to 1996.
Distribution cost of sales increased 137.2% from $6,190,582 for the year
ended December 31, 1996 to $14,686,695 for the year ended December 31,
1997, an increase of $8,496,113. Distribution cost of sales relates to
the distribution sales of ADI, SCS and PMCPI. The increase in
distribution cost of sales is directly related to the acquisition of SCS
in November of 1996 and the formation of ADI in January of 1997. Gross
margin on distribution sales increased to 16.6% for the year ended
December 31, 1997 from 12.0% for the year ended December 31, 1996 due
primarily to an increase in the contribution margin generated from sales
of used equipment and sales of new equipment directly to end users. In
both instances, the Company is able to realize higher margins than those
realized through sales to other resellers.
Selling, general and administrative expenses increased 33.2% from
$3,416,093 for the year ended December 31, 1996 to $4,549,586 for the
year ended December 31, 1997, an increase of $1,133,493. The increase
in selling, general and administrative expenses was due primarily to the
acquisition of SCS and the formation of ADI.
Interest expense on non-lease related indebtedness increased 54.3% from
$397,656 for the year ended December 31, 1996 to $613,447 for the year
ended December 31, 1997, an increase of $215,791. The increase in
interest expense on non-lease related indebtedness was due primarily to
interest costs associated with inventory flooring arrangements at SCS
and an increase in the interest rate on the Company's then outstanding
indebtedness to Bank of America from approximately 10.5% in 1996 to
approximately 12.5% in 1997.
Net Income
As a result of the foregoing, the Company recorded net income of
$329,531 for the year ended December 31, 1997 as compared to a net loss
of $(1,398,316) for the year ended December 31, 1996.
Liquidity and Capital Resources
In October of 1997, PMCPI and Merrill Lynch Business Financial Services,
Inc. ("Merrill Lynch") replaced PMCPI's prior line of credit (the
"Merrill Line of Credit") with a term note in the amount of $443,848
(the "Merrill Note"). Subsequently, the Company negotiated a term out
of the remaining obligation, effective June 16, 1998, whereby the then
outstanding principal and accrued interest balance of approximately
$420,000 would be amortized to zero as of March 1, 1999. On February 9,
1999, the Company and Merrill Lynch entered into a letter agreement
whereby the Merrill Note was amended to provide for lesser monthly
principal payments such that the then outstanding principal and accrued
interest balance of approximately $215,000 would be amortized to zero as
of June 1, 1999. The Merrill Note is guaranteed by the Company and is
secured by inventory and accounts receivable of PMCPI (collectively, the
"Merrill Collateral").
In November of 1995, the Company entered into a letter agreement with
Excel Bank N.A. ("Excel") (formerly Union Chelsea National Bank) whereby
Excel agreed to make available to the Company a $250,000 line of credit
(the "Equity Line") to be used to fund the Company's equity investment
in certain leases discounted by Excel (i.e., the difference between the
cost of the leased equipment and the discounted present value of the
minimum lease payments assigned to Excel). Borrowings under the Equity
Line are evidenced by term notes and require monthly payments of
principal and interest over a period equal to the term of the related
discounted lease with a final balloon payment of between 30 and 50
percent depending on the lease term. Borrowings under the Equity Line
are secured by the Company's residual interest in the equipment under
lease and are guaranteed by the Company. Interest rates on the term
notes are at the applicable discounted lease rate plus 1.75%. In
addition, a fee equal to 15% of the original loan amount is due at
maturity which amount is accrued ratably over the life of the loan. The
unaccrued portion thereof at December 31, 1998 was $133,455. In July of
1996 and December of 1997, Excel increased its maximum commitment under
the Equity Line to $1,000,000 and $2,500,000, respectively. Such
maximum commitment is reduced by the amount of outstanding recourse
discounted lease rentals funded by Excel and an outstanding capital
lease obligation of approximately $960,256 and $78,535, respectively, at
December 31, 1998. At December 31, 1998, the Company had outstanding
term notes and available credit under the Equity Line of $1,479,072 and
$0 respectively.
In September 1998, two of the Company's wholly owned subsidiaries, LEC
Leasing, Inc. and ADI, entered into a joint credit facility with Finova
Capital Corporation in the aggregate amount of $3,000,000 (the "Finova
Credit Facility"). The joint credit facility consists of a $1.5 million
term loan (the Finova Term Loan") applicable to LEC Leasing, Inc. and a
$1.5 revolving credit facility (the "Finova Revolver") applicable to
ADI.
The Finova Term Loan requires monthly principal payments of $25,000 plus
interest at the prime rate plus 400 basis points from October 1, 1998
through September 1, 2001, at which time all remaining principal and
accrued interest is due. Proceeds from the Finova Term Loan were used
to repay the Company's outstanding indebtedness to bank of America
National trust and Savings Association in the amount of $1,366,365 and
for general corporate purposes. The Finova Term Loan is secured by all
of the personal property, tangible and intangible, of LEC Leasing, Inc.
and ADI and is guaranteed by the Company. At December 31, 1998, the
amount outstanding under the Finova Term Loan was $1,425,000.
Proceeds from the Finova Revolver were used to repay ADI's revolving
credit agreement with Excel Bank, N.A. The Finova Revolver is secured
by all of the personal property, both tangible and intangible, of ADI
and LEC Leasing, Inc. and is guaranteed by the Company. At December 31,
1998, amounts outstanding under the Finova Revolver were $762,223 and
the interest rate was 10.25%.
Restrictive covenants under the Finova Credit Facility include the
maintenance of consolidated net worth (as defined) of at least $3.5
million through December 31, 1998; $3.75 million from January 1, 1999
through June 30, 1999; $4.0 million from July 1, 1999 through December
31, 1999; and $4.5 million from January 1, 2000 through the expiration
of the agreement; restrictions on incurring additional indebtedness and
creating additional liens on LEC Leasing, Inc.'s personal property; and
limitations on unfinanced capital expenditures (as defined). See
"Subsequent Event" section of this Item and Note 17 of Notes to
Consolidated Financial Statements.
Due to the fact that the equipment the Company leases must be paid for
by the Company prior to leasing, the Company requires a substantial
amount of cash for its leasing activities. The Company's growth has
been significantly dependent upon its ability to borrow funds or raise
equity or debt financing to acquire additional equipment for lease.
Historically, the Company has derived most of the funds necessary for
the purchase of equipment from nonrecourse financing and the remainder
from internally generated funds, recourse indebtedness and existing
cash. Consequently, the Company is continuously seeking debt and/or
equity financing to fund the growth of its lease portfolio. However,
should the Company fail to receive additional equity financing or
refinance its existing debt in 1999, the Company's portfolio growth and
resultant cash flows could be materially and adversely affected. In
addition, there is no assurance that financial institutions will
continue to finance the Company's future leasing transactions on a
nonrecourse basis or that the Company will continue to attract customers
that meet the credit standards of its nonrecourse financing sources or
that, if it receives such additional financing for future lease
transactions, it will be on terms favorable to the Company. At December
31, 1998, the Company had approximately $391,705 in cash and
availability under the Excel Equity Line.
At the inception of each lease, the Company establishes the residual
value of the leased equipment, which is the estimated market value of
the equipment at the end of the initial lease term. The Company's cash
flow depends to a great extent on its ability to realize the residual
value of leased equipment after the initial term of its leases with its
customers. Historically, the Company has realized its recorded
investment in residual values through (i) renegotiation of the lease
during its term to add or modify equipment; (ii) renewal or extension of
the original lease; (iii) leasing equipment to a new user after the
initial lease term; or (iv) sale of the equipment. Each of these
alternatives impacts the timing of the Company's cash realization of
such recorded residual values. Equipment may be returned to the Company
at the end of an initial or extended lease term when it may not be
possible for the Company to resell or re-lease the equipment on
favorable terms. Developments in the high technology equipment market
tend to occur at rapid rates, adding to the risk of obsolescence and
shortened product life cycles which could affect the Company's ability
to realize the residual value of such equipment. In addition, if the
lessee defaults on a lease, the financial institution that provided
nonrecourse financing may foreclose on its security interest in the
leased equipment and the Company may not realize any portion of such
residual value. If the residual value in any equipment cannot be
realized after the initial lease term, the recorded investment in the
equipment must be written down, resulting in lower cash flow and reduced
earnings. For the years ended December 31, 1998, 1997 and 1996, the
Company reduced residual values and off-lease equipment inventory by
approximately $1,205,029, $75,331 and $1,099,089, respectively, to their
net realizable values. There can be no assurance that the Company will
not experience further material residual value or inventory write-downs
in the future.
The Company intends to continue to retain residual ownership of all the
equipment it leases. As of December 31, 1998, the Company had a total
net investment in lease transactions of $20.2 million compared to $23.0
million as of December 31, 1997. The estimated residual value of the
Company's portfolio of leases expiring between January 1, 1999 and
December 31, 2003 totals $6,508,221, although there can be no assurance
that the Company will be able to realize such residual value in the
future. As of December 31, 1998, the estimated residual value of the
Company's portfolio of leases by year of lease termination was as
follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1999 $ 1,318,321
2000 3,205,700
2001 1,903,200
2002 70,000
2003 11,000
Total $ 6,508,221
</TABLE>
Leased equipment expenditures of $9,349,500 for the year ended December
31, 1998 were financed through the discounting of $8,898,725 of
noncancelable lease rentals to various financial institutions. The
remaining $450,775 was funded from a combination of debt and available
cash.
Based on the Company's anticipated residual value realization, existing
credit availability under the Excel Equity Line, and the anticipated
contribution margin from the Company's distribution services units,
management believes that the Company will have adequate capital
resources to continue its operations at the present level for at least
the next twelve months. Management further believes that the Company's
existing credit lines will be renewed as they come due.
The Company believes that inflation has not been a significant factor in
its business.
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium approaches. Independent
of such issues, management of the Company initiated an information
systems project to standardize all of the Company's hardware and
software systems. The systems selected by management are Year 2000
compliant. The implementation of such systems was completed in 1998.
The implementation of these systems did not have a significant effect on
the Company's earnings.
Recently Issued Accounting Standards
Management does not believe that any recently issued but not yet adopted
accounting standards will have a material effect on the Company's
results of operations or on the reported amounts of its assets and
liabilities upon adoption.
Subsequent Event
There have been extended negotiations between the Company and LEC
Technologies, Ltd., a Nevada corporation whose sole shareholder is
Michael F. Daniels, the former Chairman and Chief Executive Officer and
a current Director of the Company, regarding a Stock Purchase Agreement
whereby Mr. Daniels would purchase the common stock of each of the
Company's operating subsidiaries for an aggregate of $2,075,000 and the
assumption of certain liabilities, including those related to the Excel
Equity Line and the Finova Credit Facility, subject to the approval of
the Company's shareholders. If concluded, in connection therewith, the
Company will receive a release of its guarantees from both Excel Bank,
N.A. and Finova Capital Corporation.
The Company intends to focus primarily on acquiring and consolidating
the ownership of existing golf ranges and golf centers. The Company
believes that the fragmented ownership of golf ranges and centers,
currently characteristic of the industry in the United States, coupled
with Mr. Farrell's extensive business experience in negotiating and
financing acquisition opportunities, offer it an opportunity for growth.
The Company intends to enhance these existing golf facilities by adding
amenities and improving management and operating systems. The Company
also will develop new golf recreational facilities, and may acquire
other golf related businesses. The Company intends that its facilities
will be centered around a driving range and will provide a variety of
golf practice areas for pitching, putting, chipping and sand play. The
Company intends that its facilities will be user-friendly for all levels
of golfer and will appeal to the entire family. Each driving range
will, generally, permit night play and limited year round use. Each
facility will offer instructional programs for men, women and juniors,
and will be staffed with professional instructors. Most facilities will
include a clubhouse that will house a full line pro-shop, a snack bar,
a miniature golf course(s) and batting cages. Where feasible, the
Company intends that the facilities will include par-3 or executive-
length (shorter than a regulation-length) golf courses. The Company's
revenues will be derived from selling balls to be used on the driving
range, charging for rounds of miniature golf, charging for the use of
the batting cages, selling golf equipment, golf apparel and related
accessories through the pro-shop, fees for instructional programs and
from food and beverage sales. The Company will seek to realize
economies of scale at its facilities through centralized management
information systems, accounting, cash management and purchasing
programs. The Company may also seek long-term management contracts to
operate golf courses and golf related facilities.
Safe Harbor Statement under the
Private Securities Litigation Reform Act of 1995
Certain statements herein and in the future filings by the Company with
the Securities and Exchange Commission and in the Company's written and
oral statements made by or with the approval of an authorized executive
officer constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, and the Company intends that such
forward-looking statements be subject to the safe harbors created
thereby. The words and phrases "looking ahead", "we are confident",
"should be", "will be", "predicted", "believe", "expect", and
"anticipate" and similar expressions identify forward-looking
statements. These and other similar forward-looking statements reflect
the Company's current views with respect to future events and financial
performance, but are subject to many uncertainties and factors relating
to the Company's operations and business environment which may cause the
actual results of the Company to be materially different from any future
results expressed or implied by such forward-looking statements.
Examples of such uncertainties include, but are not limited to, changes
in customer demand and requirements, the mix of leases written, the
availability and timing of external capital, the timing of the Company's
realization of its recorded residual values, new product announcements,
continued growth of the semiconductor industry, trend of movement to
client/server environment, interest rate fluctuations, changes in
federal income tax laws and regulations, competition, unanticipated
expenses and delays in the integration of newly-acquired businesses,
industry specific factors and worldwide economic and business
conditions. With respect to economic conditions, a recession can cause
customers to put off new investments and increase the Company's bad debt
experience. The mix of leases written in a quarter is a direct result
of a combination of factors, including, but not limited to, changes in
customer demands and/or requirements, new product announcements, price
changes, changes in delivery dates, changes in maintenance policies and
the pricing policies of equipment manufacturers, and price competition
from other lessors. The Company undertakes no obligation to publicly
update or revise any forward-looking statements whether as a result of
new information, future events or otherwise.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report - Goldstein Golub Kessler LLP 16
Independent Auditors' Report - KPMG LLP 17
Consolidated Balance Sheets As Of December 31, 1998 and 1997 18
Consolidated Statements of Operations For The Years Ended
December 31, 1998, 1997 and 1996 20
Consolidated Statements of Cash Flows For The Years Ended
December 31, 1998, 1997 and 1996 21
Consolidated Statements of Stockholders' Equity For The
Years Ended December 31, 1998, 1997 and 1996 23
Notes To Consolidated Financial Statements 26
The consolidated financial statements of the Company are filed under
this Item 8 pursuant to Regulation S-X. Financial statement schedules
are omitted because either they are not required under the instructions,
are inapplicable, or the information is included elsewhere in the
financial statements.
Independent Auditors' Report
The Board of Directors and Stockholders
Golf Entertainment, Inc.
We have audited the accompanying consolidated balance sheet of Golf
Entertainment, Inc. (formerly LEC Technologies, Inc.) and Subsidiaries
as of December 31, 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit 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 audit provides 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 Golf
Entertainment, Inc. (formerly LEC Technologies, Inc.) and Subsidiaries
as of December 31, 1998, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Goldstein Golub Kessler LLP
New York, New York
February 26, 1999
Independent Auditors' Report
The Stockholders and Board of Directors
LEC Technologies, Inc.
We have audited the accompanying consolidated balance sheet of LEC
Technologies, Inc. (formerly Leasing Edge Corporation) and subsidiaries
as of December 31, 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years
in the two year period ended December 31, 1997. 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 LEC
Technologies, Inc. and subsidiaries as of December 31, 1997, and the
results of their operations and their cash flows for each of the years
in the two year period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Las Vegas, Nevada
March 27, 1998
GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS:
Cash $ 391,705 $ 208,639
Receivables - net of allowance for
doubtful accounts of $304,367 and
$157,405 at December 31, 1998 and
1997, respectively 2,577,260 2,372,159
Notes receivable - employees 143,376 176,311
Inventory, net of reserve for
obsolescence of $1,086,608 and
$102,102 at December 31, 1998 and
1997, respectively 1,862,981 2,039,685
Investment in leased assets:
Operating leases, net 11,787,960 15,284,177
Sales-type and direct financing leases 8,454,844 7,738,825
Furniture and equipment - net of
accumulated depreciation of
$425,465 and $310,378 at December 31,
1998 and 1997, respectively 552,706 363,970
Other assets 610,335 272,338
Goodwill, net of accumulated
amortization of $752,039 and $134,543
at December 31, 1998 and 1997,
respectively - 617,496
---------- ----------
TOTAL ASSETS $26,381,167 $29,073,600
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
(continued)
GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
LIABILITIES:
Accounts payable $ 3,611,164 $ 3,823,522
Accrued liabilities 745,418 492,325
Notes payable and lines of credit 4,016,584 3,128,764
Nonrecourse and recourse discounted
lease rentals 15,450,421 15,905,823
Other liabilities 105,198 244,796
---------- ----------
TOTAL LIABILITIES 23,928,785 23,595,230
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A convertible preferred
stock, $.01 par value; 1,000,000 shares
authorized, 380,000 shares issued;
229,016 shares outstanding 2,290 2,290
Common stock, $.01 par value; 25,000,000
shares authorized, 1,410,393 and
1,220,568 shares issued and 1,410,393
and 1,197,268 shares outstanding at
December 31, 1998 and 1997,
respectively 14,104 12,206
Additional paid-in capital 10,354,985 10,419,038
Accumulated deficit (7,918,997) (4,716,732)
---------- ----------
2,452,382 5,716,802
Common stock held in treasury, at
cost; 0 and 23,300 shares at
December 31, 1998 and 1997, respectively - (144,682)
Notes receivable from stockholders - (93,750)
---------- -----------
TOTAL STOCKHOLDERS' EQUITY 2,452,382 5,478,370
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $26,381,167 $29,073,600
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1998 1997 1996
----------- ---------- -----------
<S> <C> <C> <C>
Revenues:
Operating leases $ 6,869,524 $ 8,618,861 $ 9,694,905
Sales-type leases 3,388,533 2,108,977 2,721,483
Finance income 792,499 475,140 285,121
Direct sales 1,350,945 1,882,638 1,137,686
Other - - 339,385
---------- ---------- ----------
Total revenues from
leasing operations 12,401,501 13,085,616 14,178,580
Distribution sales 18,214,475 17,612,586 7,038,154
Other 7,040 16,422 20,666
---------- ---------- ----------
Total revenues 30,623,016 30,714,624 21,237,400
---------- ---------- ----------
Costs and expenses:
Operating leases 4,473,301 5,641,067 6,881,020
Sales-type leases 1,197,882 1,685,134 2,101,426
Interest expense 1,341,652 1,326,894 1,325,444
Direct sales 1,479,925 1,806,939 1,224,406
Write down of inventory and
residual values 1,205,029 75,331 1,099,089
---------- ---------- ----------
Total costs from
leasing operations 10,447,789 10,535,365 12,631,385
Distribution cost of sales 15,330,762 14,686,695 6,190,582
Selling, general and
administrative expenses 7,206,266 4,549,586 3,416,093
Interest expense 840,464 613,447 397,656
---------- ---------- ----------
Total costs and expenses 33,825,281 30,385,093 22,635,716
---------- ---------- ----------
Net income (loss) $(3,202,265) $ 329,531 $(1,398,316)
========== ========== ==========
Earnings(loss) per common share $ (2.63) $ 0.09 $ (1.80)
========== ========== ==========
Earnings(loss) per common share
assuming dilution $ (2.63) $ 0.08 $ (1.80)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
GOLF ENTERTAINMENT, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997
AND 1996
<TABLE>
<CAPTION>
Notes Total
Preferred Stock Common Stock Additional
Receivable Stock-
----------------- ------------------- Paid-in
Accumulated Treasury From holders
Shares Amount Shares Amount Capital
Deficit Stock Stockholders Equity
------- -------- -------- --------- ----------
- - ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
<C> <C> <C>
Balance at
December 31, 1995 229,016 $ 2,290 3,132,319 $ 31,324 $9,526,259
$(3,647,947) $ (12,000) $ (25,000) $ 5,874,926
One-for-four reverse
stock split (2,349,239) (23,492) 23,492
-
Sale of common stock 220,031 2,200 856,078
858,278
Exercise of stock
options 31,844 318 174,823
(68,750) 106,391
Exercise of "A"
warrants 6,873 69 (69)
-
Acquisition of SCS 59,927 599 119,401
120,000
Purchase of treasury
stock
(94,073) (94,073)
Preferred stock
dividends (229,016)
(229,016)
Net loss
(1,398,316) (1,398,316)
- - --------------------------------------------------------------------------------
- - ---------------------
Balance at
December 31, 1996 229,016 2,290 1,101,755 11,018 10,470,968
(5,046,263) (106,073) (93,750) 5,238,190
- - --------------------------------------------------------------------------------
- - ---------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(Continued)
GOLF ENTERTAINMENT, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997
AND 1996
<TABLE>
<CAPTION>
Notes Total
Preferred Stock Common Stock Additional
Receivable Stock-
----------------- ------------------- Paid-in
Accumulated Treasury From holders
Shares Amount Shares Amount Capital
Deficit Stock Stockholders Equity
------- -------- -------- --------- ----------
- - ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
<C> <C> <C>
Balance at
December 31, 1996 229,016 $ 2,290 1,101,755 $ 11,018 $10,470,968
$(5,046,263) $(106,073) $ (93,750) $ 5,238,190
Sale of common stock 39,063 391 124,609
125,000
Issuance of common
stock for services 12,500 125 46,750
46,875
Exercise of "B"
warrants 67,250 672 (672)
-
Stock option compen-
sation expense 6,399
6,399
Purchase of treasury
stock
(38,609) (38,609)
Preferred stock
dividends (229,016)
(229,016)
Net income
329,531 329,531
- - --------------------------------------------------------------------------------
- - ---------------------
Balance at
December 31, 1997 229,016 $ 2,290 1,220,568 $ 12,206 $10,419,038
$(4,716,732) $(144,682) $ (93,750) $ 5,478,370
- - --------------------------------------------------------------------------------
- - ---------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
GOLF ENTERTAINMENT, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997
AND 1996
<TABLE>
<CAPTION>
Notes Total
Preferred Stock Common Stock Additional
Receivable Stock-
----------------- ------------------- Paid-in
Accumulated Treasury From holders
Shares Amount Shares Amount Capital
Deficit Stock Stockholders Equity
------- -------- -------- --------- ----------
- - ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
<C> <C> <C>
Balance at
December 31, 1997 229,016 $ 2,290 1,220,568 $ 12,206 $10,419,038
$(4,716,732) $(144,682) $ (93,750) $ 5,478,370
Exercise of stock
options 234,375 2,344 146,637
148,981
Purchase of treasury
stock
(66,454) (66,454)
Write-off of
shareholder notes
receivable
93,750 93,750
Retirement of
treasury stock (44,550) (446) (210,690)
211,136 -
Net loss
(3,202,265) (3,202,265)
- - --------------------------------------------------------------------------------
- - ---------------------
Balance at
December 31, 1998 229,016 $ 2,290 1,410,393 $ 14,104 $10,354,985
$(7,918,997) $ - $ - $ 2,452,382
================================================================================
=====================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $(3,202,265) $ 329,531 $(1,398,316)
Adjustments to reconcile net
income (loss) to net cash pro-
vided by operating activities:
Depreciation and amortization 5,242,149 5,757,672 6,986,608
Write down of inventory,
residual values and other 1,455,378 75,331 1,189,981
Stock option compensation
expense 148,981 53,274 -
Change in assets and
liabilities, net of effects
of acquisition:
Increase in receivables (205,101) (1,275,291) (60,503)
(Increase) decrease in
inventory 721,923 (135,879) (354,532)
Increase (decrease) in
accounts payable (212,358) 877,157 (446,485)
Increase (decrease) in
accrued liabilities 253,093 33,502 (52,583)
All other operating
activities (513,690) (309,593) 302,564
--------- --------- ---------
Net cash provided by
operating activities 3,688,110 5,405,704 6,166,734
--------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Sales and disposals of off-
lease inventory 2,799,055 1,734,074 2,786,579
Purchases of inventory for lease (4,025,540) (6,253,853) (5,579,587)
Purchases of furniture and
equipment (303,992) (132,908) (52,277)
(Increase) decrease in notes
receivable (123,665) 22,874 (50,435)
Purchase of SCS, net of
cash acquired - - 80,957
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
(Continued)
GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Additions to net investment
in sales-type and direct
financing leases (5,323,960) (3,618,507) (4,504,865)
Sales-type and direct financing
lease rentals received 3,107,094 2,251,582 1,763,154
---------- ---------- ----------
Net cash used in
investing activities (3,871,008) (5,996,738) (5,556,474)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from nonrecourse and re-
course discounted lease rentals 8,898,725 10,530,281 9,186,720
Payments on nonrecourse and re-
course discounted lease rentals (9,351,127) (9,433,039)(10,638,141)
Proceeds from notes payable 3,133,020 1,051,373 817,647
Payments on notes payable (2,245,200) (1,944,911) (363,905)
Proceeds from exercise of stock
options - - 106,391
Proceeds from sale of stock, net - 125,000 858,278
Proceeds from exercise of warrants - 269,000 55,592
Deferred equity transaction costs - - (106,497)
Purchase of treasury stock (66,454) (38,609) (94,073)
Preferred stock dividends paid - (171,762) (229,016)
--------- ---------- ---------
Net cash provided by (used in)
financing activities 365,964 387,333 (407,004)
--------- --------- ---------
Net increase (decrease) in cash 183,066 (203,701) 203,256
Cash at beginning of year 208,639 412,340 209,084
--------- ---------- ---------
Cash at end of year $ 391,705 $ 208,639 $ 412,340
========= ========= ==========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for:
Interest $2,078,748 $1,875,196 $ 1,729,001
========= ========= ==========
Income taxes $ 43,627 $ 3,750 $ 29,826
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nature of Operations: Golf Entertainment, Inc. (formerly known as LEC
Technologies, Inc.) and subsidiaries (LEC Leasing, Inc. or "LEC"; Superior
Computer Systems, Inc. or "SCS"; Pacific Mountain Computer Products, Inc. or
"PMCPI"; Atlantic Digital International, Inc. or "ADI"; LEC Distribution,
Inc.; and, TJ Computer Services, Inc.)(collectively, the "Company" or "Golf")
is currently a technology services company, providing solutions that help
organizations reduce technology cost and risk. The Company is primarily
engaged in the buying, selling, and leasing of data processing and other high
technology equipment and related services.
Organization: The Company was originally founded in 1980 under the name TJ
Computer Services, Inc. ("TJCS"). In 1989, all of the outstanding common
stock of TJCS was acquired by Harrison Development, Inc., an inactive public
corporation organized in Colorado, which then changed its name to TJ Systems
Corporation. In October 1991, the Company reincorporated in the State of
Delaware and in June 1995, changed its name to Leasing Edge Corporation. On
March 12, 1997, the Company's shareholders' approved a change in the
Company's name to LEC Technologies, Inc. In February 1999, the Company's
shareholders approved a change in the Company's name to Golf Entertainment,
Inc.
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Intercompany accounts and transactions have
been eliminated in consolidation.
Use of Estimates
The preparation of these consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. For lease accounting, this includes the
estimated fair market value at lease termination of the related equipment,
commonly referred to as "residual value". Residual values are established at
lease inception at amounts equal to the estimated value to be received from
the equipment following termination of the initial lease, as determined by
management. In estimating such values, management considers all relevant
information and circumstances regarding the equipment and the lessee,
including historical experience by equipment type and manufacturer, adjusted
for known trends. On at least an annual basis, management assesses the
realizability of recorded residual values and, if necessary, establishes a
reserve to reduce the recorded values to their estimated net realizable
value. Actual results could differ from those estimates.
The following table reflects changes in the Company's estimated reserve for
doubtful accounts for each of the three years in the period ended December
31, 1998:
<TABLE>
<CAPTION>
Balance at Balance at
Beginning of End of
Period Expense Write-off Period
<S> <C> <C> <C> <C>
1996 $ 12,000 $158,699 $ - $ 170,699
1997 170,699 (13,294) - 157,405
1998 157,405 250,350 103,388 304,367
</TABLE>
Lease Accounting
See Note 2 "Lease Accounting Policies" for a description of lease accounting
policies, lease revenue recognition and related costs.
Inventory
Inventory of equipment that has come off lease is valued at the lower of cost
or market based on specific identification. Inventory of equipment held for
distribution is stated at the lower of cost (first in, first out) or market.
Goodwill
Goodwill, which represents the excess of purchase price over the fair value
of net assets acquired, is amortized on a straight-line basis over 15 years.
Nonrecourse Financing
The Company assigns the rentals under its leases to financial institutions
and other lenders primarily on a nonrecourse basis. The Company receives a
cash amount equal to the discounted value of the minimum lease payments. In
the event of a default by a lessee, the lender has a security interest in the
underlying leased equipment but has no recourse against the Company.
Proceeds from discounted lease rentals are recorded as nonrecourse discounted
lease rentals. Under sales-type and direct financing leases, leased assets
and nonrecourse discounted lease rentals are reduced as lessees make payments
under the lease to financial institutions. Under operating leases, leasing
revenue is recorded and nonrecourse discounted lease rentals are reduced as
lessees make rental payments to financial institutions. The Company has no
restrictive arrangements with these financial institutions as a result of the
nonrecourse borrowings.
Revenue Recognition
Leasing activities: See Note 2 "Lease Accounting Policies" for a description
of lease revenue recognition.
Direct sales: Revenue from direct sales is generated from the remarketing of
equipment off lease and leases with dollar buyout options treated as sales.
Revenue and related cost of sales is recognized at the time title to the
equipment transfers to the customer.
Distribution sales: Revenue from distribution sales is generated from the
resale of equipment purchased for inventory. Revenue and related cost of
sales is recognized at the time title to the equipment transfers to the
customer, generally upon shipment.
Furniture and Equipment
Furniture and equipment are recorded at cost. Expenditures that materially
increase the life of the assets are capitalized. Ordinary repairs and
maintenance are charged to expense as incurred.
Depreciation and amortization are provided on the straight-line method over
the following useful lives:
Computer equipment 3 to 5 years
Furniture and office equipment 5 to 7 years
Leasehold improvements Term of lease
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Management periodically evaluates the carrying value of its long-lived
assets, including operating leases, furniture and equipment and intangible
assets. Whenever events or changes in circumstances indicate that the
carrying value of such assets may not be recoverable, the Company recognizes
an impairment loss for the difference between the carrying value and the
estimated net future cash flows attributable to such asset. As a result of
current period operating losses at SCS and PMCPI, management determined that
the carrying value of the goodwill associated with the acquisition of these
entities exceeded the estimated net future cash flows attributable to them
and, consequently, recorded an impairment loss of $567,360 at December 31,
1998. Management believes that no material impairment in the carrying value
of long-lived assets existed at December 31, 1997.
Income Taxes
The Company uses the asset and liability method to account for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. The measurement of deferred tax assets is reduced, if necessary, by
a valuation allowance for any tax benefits which may not ultimately be
realized.
Stock Option Plans
Prior to January 1, 1996, the Company accounted for its stock option plans in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), and related
interpretations. As such, compensation would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which permits entities to recognize as
expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
Earnings Per Share
Basic and diluted earnings (loss) per share are computed in accordance with
SFAS No. 128, "Earnings Per Share".
Recently Issued Accounting Standards
Management does not believe that any recently issued but not yet adopted
accounting standards will have a material effect on the Company's results of
operations or on the reported amounts of its assets and liabilities upon
adoption.
Reclassification
Certain reclassifications have been made in the 1997 and 1996 financial
statements to conform to the 1998 presentation.
NOTE 2: LEASE ACCOUNTING POLICIES
SFAS No. 13 requires that a lessor classify each lease as either a direct
financing, sales-type or operating lease.
Leased Assets
Direct financing and sales-type leases - Direct financing and sales-type
leased assets consist of the future minimum lease payments plus the present
value of the estimated unguaranteed residual less unearned finance income
(collectively referred to as the net investment).
Operating Leases - Operating leased assets consist of the equipment cost less
accumulated depreciation.
Revenue, Costs and Expenses
Direct Financing Leases - Revenue consists of interest earned on the present
value of the lease payments and residual and is included in finance income in
the accompanying Consolidated Statements of Operations. Revenue is
recognized periodically over the lease term as a constant percentage return
on the net investment. There are no costs and expenses related to direct
financing leases since revenue is recorded on a net basis.
Sales-type Leases - Revenue consists of the present value of the total
contractual lease payments and is recognized at lease inception. Costs and
expenses consist of the equipment's net book value at lease inception, less
the present value of the residual. Interest earned on the present value of
the lease payments and the residual, which is recognized periodically over
the lease term as a constant percentage return on the net investment, is
included in finance income in the accompanying Consolidated Statements of
Operations.
Operating Leases - Revenue consists of the contractual lease payments and is
recognized on a straight-line basis over the lease term. Costs and expenses
are principally depreciation on the equipment which is recognized on a
straight-line basis over the term of the lease to the Company's estimate of
the equipment's residual value.
NOTE 3: LEASED ASSETS
The components of the net investment in sales-type and direct financing
leases as of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Total future minimum lease payments $8,512,941 $7,448,044
Estimated unguaranteed residual
values of leased equipment 1,036,200 1,225,500
Less unearned finance income (1,094,297) ( 934,719)
Total $ 8,454,844 $ 7,738,825
</TABLE>
Future minimum lease payments on sales-type and direct financing leases as of
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1999 $3,913,154
2000 3,021,649
2001 1,330,621
2002 235,059
2003 12,458
$8,512,941
</TABLE>
Assets under operating leases are as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Equipment at cost or net
realizable value $19,598,081 $26,777,702
Accumulated depreciation ( 7,810,121) (11,493,525)
Total $11,787,960 $15,284,177
</TABLE>
Depreciation expense related to operating leases was $4,473,301, $5,641,067
and $6,881,020 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Future minimum lease rentals on operating leases are due as follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1999 $ 5,089,123
2000 2,801,163
2001 671,975
2002 8,136
2003 2,034
$ 8,572,431
</TABLE>
The estimated residual value of the Company's portfolio of leases
(including sales-type, direct financing and operating) by year of lease
termination are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1999 $1,318,321
2000 3,205,700
2001 1,903,200
2002 70,000
2003 11,000
$6,508,221
</TABLE>
NOTE 4: Acquisition of Superior Computer Systems, Inc. ("SCS")
On November 1, 1996, the Company acquired all of the common stock of SCS, a
distributor of computer peripherals, for 59,927 shares of the Company's
common stock and two $100,000 non-interest bearing notes,payable at various
dates through November 1997. The acquisition was accounted for by the
purchase method of accounting. The excess of the total acquisition cost over
the fair value of net assets acquired of $299,923 was recorded as goodwill
and was being amortized over 15 years. All of the unamortized balance of the
goodwill related to this acquisition was written off during the year ended
December 31, 1998. The Consolidated Statement of Operations for the year
ended December 31, 1996 includes SCS's results of operations for the period
November 1, 1996 through December 31, 1996.
The following unaudited pro forma consolidated results of operations assume
that the acquisition occurred on January 1, 1996 and reflect the historical
operations of the purchased business adjusted for amortization of goodwill
resulting from the acquisition.
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended
December 31, 1996
(Unaudited)
<S> <C>
Total revenues 32,203
Net loss (1,522)
Loss per share (1.82)
</TABLE>
The pro forma results of operations are not necessarily indicative of the
actual results of operations that would have occurred had the acquisition
been made at the beginning of the period, or of results which may occur in
the future.
NOTE 5: INCOME TAXES
Total income tax expense (benefit) differed from the "expected" income tax
expense (benefit) determined by applying the statutory federal income tax
rate of 35% for the years ended December 31 as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Computed "expected" income tax
expense (benefit) $(1,120,793) $ 115,336 $(489,411)
Change in valuation allowance
for deferred tax assets 1,115,340 (119,701) 93,181
Nondeductible expenses 5,453 4,635 396,230
Total tax expense - - -
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and tax liabilities at December 31, 1998
and 1997 are presented below:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
<S> <C> <C>
Deferred Tax Assets
Allowances for doubtful accounts,
inventory obsolescence and
residual value realization not
currently deductible $ 544,941 $ 117,428
Expenses accrued for financial
statement purposes, not
currently deductible 576,450 576,450
Net operating loss carryforwards 1,859,444 1,374,967
--------- ---------
Total gross deferred tax assets 2,980,835 2,068,845
Valuation allowance (1,364,097) (248,757)
--------- ---------
Net deferred tax assets 1,616,738 1,820,088
--------- ---------
Deferred Tax Liabilities
------------------------
Basis difference for sales-type and
direct financing leases for
financial statement purposes and
operating leases for tax purposes 409,446 218,719
Basis difference for operating
leases, principally due to
depreciation 1,207,292 1,601,369
--------- ---------
Total deferred tax liabilities 1,616,738 1,820,088
--------- ---------
Net deferred taxes - -
========= =========
</TABLE>
The Company has recorded a valuation allowance in accordance with the
provisions of SFAS No. 109 "Accounting for Income Taxes" to reflect the
estimated amount of deferred tax assets which may not be realized. In
assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. At December
31, 1998 and 1997, the Company determined that $1,364,097 and $248,757,
respectively, of tax benefits did not meet the realization criteria.
At December 31, 1998, the Company has net operating loss carryforwards for
Federal income tax purposes of approximately $5,300,000 which are available
to offset future taxable income, if any, through 2013.
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, 1998 and 1997 were $15,450,421 and $15,905,823 respectively of
which $960,256 and $258,030 are recourse, respectively. Interest expense on
discounted lease rentals for the years ended December 31, 1998, 1997 and 1996
was $1,341,652, $1,326,894 and $1,325,444, respectively.
Principal and interest payments required on discounted lease rentals as of
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1999 $ 8,914,098
2000 5,796,390
2001 2,001,374
2002 243,195
2003 14,492
Total 16,969,549
Less interest (1,519,128)
Principal amount $15,450,421
</TABLE>
NOTE 7: NOTES PAYABLE AND LINES OF CREDIT
In October of 1997, PMCPI and Merrill Lynch Business Financial Services, Inc.
("Merrill Lynch") replaced PMCPI's prior line of credit (the "Merrill Line of
Credit") with a term note in the amount of $443,848 (the "Merrill Note").
Subsequently, the Company negotiated a term out of the remaining obligation,
effective June 16, 1998, whereby the then outstanding principal and accrued
interest balance of approximately $420,000 would be amortized to zero as of
March 1, 1999. On February 9, 1999, the Company and Merrill Lynch entered
into a letter agreement whereby the Merrill Note was amended to provide for
lesser monthly principal payments such that the then outstanding principal
and accrued interest balance of approximately $215,000 would be amortized to
zero as of June 1, 1999. The Merrill Note is guaranteed by the Company and
is secured by inventory and accounts receivable of PMCPI (collectively, the
"Merrill Collateral").
In November of 1995, the Company entered into a letter agreement with Excel
Bank N.A. ("Excel") (formerly Union Chelsea National Bank) whereby Excel
agreed to make available to the Company a $250,000 line of credit (the
"Equity Line") to be used to fund the Company's equity investment in certain
leases discounted by Excel (i.e., the difference between the cost of the
leased equipment and the discounted present value of the minimum lease
payments assigned to Excel). Borrowings under the Equity Line are evidenced
by term notes and require monthly payments of principal and interest over a
period equal to the term of the related discounted lease with a final balloon
payment of between 30 and 50 percent depending on the lease term. Borrowings
under the Equity Line are secured by the Company's residual interest in the
equipment under lease and are guaranteed by the Company. Interest rates on
the term notes are at the applicable discounted lease rate plus 1.75%. In
addition, a fee equal to 15% of the original loan amount is due at maturity
which amount is accrued ratably over the life of the loan. The unaccrued
portion thereof at December 31, 1998 was $133,455. In July of 1996 and
December of 1997, Excel increased its maximum commitment under the Equity
Line to $1,000,000 and $2,500,000, respectively. Such maximum commitment is
reduced by the amount of outstanding recourse discounted lease rentals funded
by Excel and an outstanding capital lease obligation of approximately
$960,256 and $78,535, respectively, at December 31, 1998. At December 31,
1998, the Company had outstanding term notes and available credit under the
Equity Line of $1,479,072 and $0 respectively.
In September 1998, two of the Company's wholly owned subsidiaries, LEC
Leasing, Inc. and ADI, entered into a joint credit facility with Finova
Capital Corporation in the aggregate amount of $3,000,000 (the "Finova Credit
Facility"). The joint credit facility consists of a $1.5 million term loan
(the Finova Term Loan") applicable to LEC Leasing, Inc. and a $1.5 revolving
credit facility (the "Finova Revolver") applicable to ADI.
The Finova Term Loan requires monthly principal payments of $25,000 plus
interest at the prime rate plus 400 basis points from October 1, 1998 through
September 1, 2001, at which time all remaining principal and accrued interest
is due. Proceeds from the Finova Term Loan were used to repay the Company's
outstanding indebtedness to bank of America National Trust and Savings
Association in the amount of $1,366,365 and for general corporate purposes.
The Finova Term Loan is secured by all of the personal property, tangible and
intangible, of LEC Leasing, Inc. and ADI and is guaranteed by the Company.
At December 31, 1998, the amount outstanding under the Finova Term Loan was
$1,425,000.
Proceeds from the Finova Revolver were used to repay ADI's revolving credit
agreement with Excel Bank, N.A. The Finova Revolver is secured by all of the
personal property, both tangible and intangible, of ADI and LEC Leasing, Inc.
and is guaranteed by the Company. At December 31, 1998, amounts outstanding
under the Finova Revolver were $762,223 and the interest rate was 10.25%.
Restrictive covenants under the Finova Credit Facility include the
maintenance of consolidated net worth (as defined) of at least $3.5 million
through December 31, 1998; $3.75 million from January 1, 1999 through June
30, 1999; $4.0 million from July 1, 1999 through December 31, 1999; and $4.5
million from January 1, 2000 through the expiration of the agreement;
restrictions on incurring additional indebtedness and creating additional
liens on LEC Leasing, Inc.'s personal property; and limitations on unfinanced
capital expenditures (as defined). The Company was not in compliance with
these covenants at December 31, 1998.
On March 9, 1998, ADI entered into a $500,000 Revolving Credit Agreement (the
"ADI Credit Agreement") with Excel for general corporate purposes. Pursuant
to the ADI Credit Agreement, Excel has agreed, subject to certain conditions,
to make advances to ADI from time to time prior to October 15, 1998 of up to
$500,000. Amounts repaid under the ADI Credit Agreement may be reborrowed
until October 15, 1998, the date that the loans under the ADI Credit
Agreement mature. The loans under the ADI Credit Agreement bear interest at
the prime rate plus 2.5%. Accrued interest, if any, will be payable monthly,
beginning on April 1, 1998. The ADI Credit Agreement is guaranteed by the
Company and is secured by a lien on the receivables, inventory and equipment
of ADI. Under the ADI Credit Agreement, ADI has agreed not to incur any
additional indebtedness or to create any additional liens on its property
other than under the ADI Credit Agreement. Upon consummation of the ADI
Credit Agreement, Excel reduced its maximum commitment under the Equity Line
to $2,000,000 and transferred the $160,838 term note to the ADI Credit
Agreement. In September 1998, the then outstanding balance under the ADI
Credit Agreement of $492,563 was paid in full from the proceeds of the
$3,000,000 Finova Credit Facility discussed above.
In connection with the Company's 1994 acquisition of PMCPI, the Company
issued a $250,000 non-interest bearing note payable to PMCPI's sole
shareholder. At December 31, 1996, the remaining obligation on such note,
discounted at an imputed rate of 8.5%, was $50,000. The note was paid in
full at its maturity date of January 1, 1997.
In connection with the Company's acquisition of SCS, the Company issued to
each of SCS' two shareholders a $100,000 non-interest bearing note payable
due in varying installments through November 1997. At December 31, 1996,
the remaining obligation due on such notes, discounted at an imputed rate
of 10.0%, was $194,385. The notes were paid in full in 1997.
Notes payable and lines of credit consist of the following at December 31,
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Term loan with Finova Capital
Corporation, with interest at prime
plus 4.0 percent, payable in monthly
installments of $25,000 plus
interest, due September 1, 2001 $1,425,000 $ -
Revolving line of credit agreement
with Finova Capital Corporation,
with floating interest rate of prime
plus 2.0 percent 762,223 -
Term loan with Bank of America, with
interest at prime plus 4.0 percent,
due in varying installments through
June 15, 1999, paid off in 1998 - 1,366,365
Term note with Merrill Lynch, due
June 1, 1999, with floating
interest rate, currently at 9.25
percent 216,464 401,614
Secured notes payable to Excel,
payable in installments through
November, 1999 with fixed interest
rates between 9.75 and 10.0 percent,
secured by leased equipment 1,479,072 1,049,133
Term note payable to Excel, due
January 29, 1998, with floating
interest rate of prime plus 2.5
percent - 160,838
Other 133,825 150,814
--------- ---------
$4,016,584 $3,128,764
========= =========
</TABLE>
Required annual principal payments as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $2,009,339
2000 921,386
2001 1,083,968
2002 1,891
----------
Total $4,016,584
=========
</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, 1998 under these
operating leases that have initial or remaining noncancelable lease terms in
excess of one year:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1999 $152,390
2000 154,306
2001 56,412
Total $363,108
</TABLE>
Rental expense on operating leases was $301,658, $267,552 and $206,342 for
the years ended December 31, 1998, 1997 and 1996, respectively.
b) Employment Contracts
The Company has employment agreements with certain of its executive officers
and management personnel with remaining terms of approximately four years.
Under these agreements, the employee is entitled to receive other employee
benefits of the Company, including medical and life insurance coverage. The
agreements may be terminated by either the Company or the employee at any
time or for any reason. If an agreement is terminated due to the death of an
employee, a death benefit equal to six months salary shall be paid to the
employee's estate. The Company's annual expense under these agreements is
approximately $802,000. In addition, effective January 1, 1999 through
December 31, 2003, the Company entered into an employment agreement with the
Company's Chief Executive Officer. The annual base salary under such
agreement is $240,000 for the period January 1, 1999 through December 31,
2000, and increases by 10% per year thereafter. In addition, pursuant to the
terms of the agreement, such officer is eligible to receive an annual bonus
equal to five percent (5%) of the Company's operating income for the year.
Such bonus may not exceed such officer's base salary for each respective
fiscal year. Pursuant to such employment agreement, if such officer should
die during the term thereof, a death benefit equal to the portion, if any, of
his base salary for the period up to the date of death which remains unpaid
and eighteen months salary ($360,000, at his current base salary) shall be
paid to his estate.
NOTE 9: RELATED PARTY TRANSACTIONS
a) Company's Board of Directors
A director of the Company is currently the Chief Financial Officer of Vitamin
Shoppe Industries, Inc. and was formerly an officer of Tiffany & Co., two of
the Company's customers. Another director of the Company was formerly the
Chief Operating Officer of Netgrocer, Inc., one of the Company's customers.
Neither director received any cash or other remuneration from the Company
other than their fees as directors and participation in the Company's stock
option plans. The Company believes that the terms of its lease arrangements
with Vitamin Shoppe Industries, Inc., Tiffany & Co. and Netgrocer, Inc. are
fair and have been reached on an arms-length basis.
b) Other Transactions
Included in notes receivable from shareholders in the accompanying
consolidated balance sheets at December 31, 1997 is a $25,000 note receivable
from a current officer for the purchase of Company common stock. Such note
was written off in 1998 in connection with the officer's revised employment
contract.
c) Aggregate Effect of Transactions with Related Parties
The Board of Directors of the Company has reviewed the aggregate effect on
operations of the above-described transactions and concluded that such
transactions were in the best interest of the Company and on terms as fair to
the Company as could have been obtained from unaffiliated parties.
NOTE 10: STOCKHOLDERS' EQUITY
On September 15, 1998, the Company's shareholder's approved a one-for-four
reverse stock split. All share data have been retroactively adjusted to give
effect to the reverse split as of the first date presented.
During the year ended December 31, 1997, the Company sold 39,063 shares of
common stock to an individual in a private placement transaction for proceeds
of $125,000.
Also in 1997, the Company issued an aggregate of 12,500 shares of restricted
common stock to two individuals in connection with their employment at ADI.
The fair market value of the shares at date of issue was $46,875 and was
expensed in 1997.
During the year ended December 31, 1996, the Company sold an aggregate of
220,031 shares of common stock to two investment groups in private placement
transactions. The proceeds of these transactions, net of related costs of
$131,692, was $858,278.
In 1996, the Company issued 59,927 shares of restricted common stock in
connection with the Company's acquisition of SCS.
A. SERIES A CONVERTIBLE PREFERRED STOCK
In August of 1993, the Company completed the sale of 380,000 shares of Series
A Convertible Preferred Stock. The Preferred Stock is convertible at the
holders option at any time into 0.4375 shares of common stock at a conversion
price of $22.72 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 1/32nd share of common stock for each share of Series A Preferred
Stock converted at an exercise price of $36.80 per share. Outstanding Series
A Preferred Stock is redeemable by the Company at $10.00 per share plus
accrued and unpaid dividends. The Series A Preferred Stock pays dividends in
arrears at an annual rate of $1.00 per share. A conversion bonus equal to
$0.25 per share of Series A Preferred Stock converted shall be payable to any
holder who converts such shares after the date in any calendar quarter on
which dividends accrue and prior to such date for the succeeding calendar
quarter.
At December 31, 1998 and 1997 there were 229,016 shares of preferred stock
and 1,509,840 warrants outstanding.
Preferred stock dividends of $171,762 and $229,016 were paid from additional
paid in capital in 1997 and 1996, respectively. Accrued and unpaid preferred
stock dividends were $57,254 and $114,508 at December 31, 1998 and 1997,
respectively.
B. WARRANTS AND STOCK OPTIONS
Warrants
In August of 1995, the Company registered 3,092,687 Class A Common Stock
Purchase Warrants and 1,000,000 Class B Common Stock Purchase Warrants,
together with the underlying common shares. Each of the warrants entitles
the holder thereof to purchase one-quarter share of the Company's common
stock at an exercise price of $12.00 per share.
On July 9, 1996, the Company reduced the exercise price of the Class A Common
Stock Purchase Warrants and called for redemption, effective at the close of
business on August 9, 1996, all of the Class A warrants. The Company
received gross proceeds of $55,592 from the exercise of 27,492 Class A
warrants. All costs related to redeeming the Class A warrants in excess of
the exercise proceeds were expensed in 1996.
On December 15, 1996, the Company reduced the exercise price of the Class B
Common Stock Purchase Warrants and called for redemption, effective at the
close of business on January 15, 1997, all of the Class B warrants.
Subsequent to December 31, 1996, 269,000 Class B Common Stock Purchase
Warrants were exercised resulting in gross proceeds to the Company of
$269,000. All costs related to redeeming the Class B warrants in excess of
the exercise proceeds were expensed in 1996.
During the year ended December 31, 1996, the Company issued an aggregate of
2,319,993 Class C Common Stock Purchase Warrants and an aggregate of
2,319,993 Class D Common Stock Purchase Warrants at exercise prices of $1.625
and $1.75, respectively, in connection with two private placements of common
stock. In September of 1997, the Company's Board of Directors voted to
reduce the exercise price of the warrants to $1.25. Each of the warrants
entitle the holders thereof to purchase one-quarter share of the Company's
common stock at an exercise price of $5.00 per share and expire on April 30,
1999. At December 31, 1998, none of the Class C or Class D warrants had been
exercised.
On November 30, 1998, the Company and LEC Acquisition LLC, a limited
liability company whose managing partner is Ronald G. Farrell, the Company's
Chairman and Chief Executive Officer, entered into a Subscription Agreement
whereby LEC Acquisition LLC was granted a one year warrant to purchase 6%
Convertible Debentures up to an aggregate principal amount of $1,429,170.
The 6% Convertible Debentures are convertible into up to an aggregate of
4,763,901 shares of the Company's common stock, such conversion being subject
to shareholder approval. On February 17, 1999, the Company's shareholders
approved a resolution authorizing the Company to issue such shares upon
conversion of the 6% Convertible Debentures. At December 31, 1998, none of
the 6% Convertible Debentures had been issued.
Stock Options
1) Key Employee and Director
The Company has five stock option plans covering an aggregate of 671,875
shares of common stock which provide for the granting of incentive stock
options and/or nonqualified stock options to employees and directors to
purchase shares of common stock. Options granted to employees generally vest
over a three to five year period and expire five years from the date of
grant. Options granted to directors are immediately vested and expire ten
years from the date of grant. Under the stock option plans, the exercise
price of each option at issuance equals the market price of the Company's
common stock on the date of grant.
Additionally, an officer of the Company has 14,531 options to acquire common
stock at an exercise price of $0.32 per share. The options were granted in
1993 in lieu of prospective commissions and were subject to a three year
vesting.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plans in the consolidated financial
statements. Had compensation cost for the Company's stock option plans been
determined consistent with SFAS No. 123, the Company's net earnings (loss)
available to common stockholders and earnings (loss) per common weighted
average share would have been reduced to the pro forma amounts indicated
below (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net earnings (loss) available
to common stockholders:
As reported $(3,202) $ 101 $(1,627)
Pro forma (3,457) (123) (1,836)
Earnings (loss) per common
weighted average share:
As reported $ (2.63) $ 0.09 $ (1.80)
Pro forma (2.84) (0.11) (2.03)
</TABLE>
For purposes of calculating the compensation cost consistent with SFAS No.
123, the fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants in 1998, 1997 and 1996, respectively:
dividend yield of 0.0% for each year; expected volatility of 52 percent, 35
percent and 19 percent; risk free interest rates of 5.83%, 5.96% and 5.94%;
and expected lives of one year, three years and five years.
Additional information on shares subject to options is as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------- --------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding at
beginning of
year 138,906 $ 2.72 303,656 $ 6.48
Granted 511,250 1.95 525,000 3.00
Exercised (234,375) 2.00 - -
Forfeited (300,000) 2.19 (689,750) 3.04
--------- ---------
Outstanding at
end of year 115,781 2.22 138,906 2.72
========= =========
Options exer-
cisable at
year end 83,865 1.93 42,073 2.08
========= =========
Weighted average
fair value of
options granted
during the year $ 0.46 $ 1.00
===== =====
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------
Weighted
Number Average
of Exercise
Shares Price
---------- --------
<S> <C> <C>
Outstanding at beginning of year 104,906 $ 5.44
Granted 200,000 3.00
Exercised - -
Forfeited (1,250) 4.24
----------
Outstanding at
end of year 303,656 6.48
==========
Options exercisable at year end 179,906 6.08
==========
Weighted average fair value of options
granted during the year $ 1.80
=======
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------
Weighted
Average Weighted
Number Remaining Average
Range of exercise of Contractual Exercise
prices Shares Life Price
---------------------------------------------------------
<S> <C> <C> <C>
$0.10 2,500 4.8 yrs $ 0.10
0.32 14,531 4.7 yrs 0.32
0.81 20,000 9.8 yrs 0.81
3.00 78,750 3.2 yrs 3.00
-------
115,781 4.6 yrs $ 2.22
=======
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
--------------------------
Weighted
Number Average
Range of exercise of Exercise
prices Shares Price
------------------------------------------------------
<S> <C> <C>
$0.10 2,500 $ 0.10
0.32 14,531 0.32
0.81 20,000 0.81
3.00 46,834 3.00
-------
83,865 1.93
=======
</TABLE>
2) Other Options
Options granted to other than employees/directors are accounted for based on
the fair value method pursuant to SFAS No. 123 utilizing the Black-Scholes
option-pricing method. The amount charged to expense in 1997 for such
options was $6,399.
In August 1997, the Company granted an aggregate of 37,500 options (12,500 at
an exercise price of $3.00 and 25,000 at an exercise price of $4.00) to an
unaffiliated company for services. Such options were immediately vested and
expire in August 1999. Subsequent to December 31, 1997, the grant was
modified to eliminate the 25,000 options having the $4.00 per share exercise
price.
In October 1996, the Company granted 12,500 stock options to an individual at
an exercise price of $6.24. Such options were immediately vested and expire
April 7, 1998.
In 1995, the Board of Directors of the Company approved the issuance of
options covering 68,750 shares of common stock to two companies for services.
The exercise price of the options was $5.52 per share which was equal to the
quoted market value of the Company's common stock at the date of grant. Such
options were immediately vested and expire on March 6, 2000. During the year
ended December 31, 1996, 19,250 of such options were exercised.
In addition, the Board of Directors approved the issuance of options covering
an aggregate of 37,500 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 $5.24 to $6.76 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 6,250 shares of the
Company's common stock to an individual at an exercise price of $5.52. Such
options were immediately vested and were exercised during 1996.
In 1993, the Company issued options covering 6,344 shares of the Company's
common stock at an exercise price of $5.52. Such options were immediately
vested and were exercised during 1996.
NOTE 11: MAJOR CUSTOMERS AND SUPPLIERS
Revenue from leases with three customers of the Company accounted for 17.2%,
7.6%, and 2.3% of consolidated revenues for the year ended December 31, 1998,
15.0%, 9.2% and 3.7% of consolidated revenues for the year ended December 31,
1997 and 25.0%, 12.8% and 7.4% of consolidated revenues for the year ended
December 31, 1996.
The Company currently purchases a significant amount of inventory for resale
from a limited number of suppliers in connection with its distribution
operations. Consequently, the Company is dependent upon the availability of
product from and the timeliness of delivery by such suppliers in fulfilling
its customers' orders.
NOTE 12: 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 required the Company to match
50% of each dollar contributed by a Plan participant up to the participant's
qualified deferral amount during 1997 and 1996. Effective January 1, 1998,
the Plan was amended to reduce the Company's matching percentage to 25% of
each participant's contribution. During 1998, 1997 and 1996, the Company
contributed its required amounts of $49,386, $56,902 and $34,498 to the Plan
on behalf of the Plan's participants.
NOTE 13: SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES
During the year ended December 31, 1998, the Company issued 234,375 shares of
common stock pursuant to the cashless exercise of stock options.
During the year ended December 31, 1997, the Company purchased computer
hardware and software for $140,420 which was funded through a capital lease
obligation.
During the year ended December 31, 1997, operating lease assets of $1,128,453
were reclassified as sales-type or direct financing leases due to leases
renewals/upgrades.
During the year ended December 31, 1996, the Company issued 16,875 shares of
common stock in exchange for a note receivable of $68,750 and acquired all of
the outstanding common stock of Superior Computer Services, Inc. in exchange
for 59,927 shares of restricted common stock and a $200,000 non-interest
bearing note payable.
NOTE 14: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
was made in accordance with Statement of Financial Accounting Standards,
"Disclosures about Fair Value of Financial Instruments" ("SFAS No. 107").
SFAS No. 107 specifically excludes certain items from its disclosure
requirements such as the Company's investment in leased assets. Accordingly,
the aggregate fair value amounts presented are not intended to represent the
underlying value of the net assets of the Company.
The carrying amounts at December 31, 1998 and 1997 for receivables, accounts
payable, accrued liabilities, notes payable and lines of credit approximate
their fair values due to the short maturity of these instruments. As of
December 31, 1998 and 1997, the carrying amount of recourse discounted lease
rentals of $960,256 and $258,030, respectively, approximate their fair values
because the discount rates are comparable to current market rates of
comparable debt having similar maturities and credit quality.
NOTE 15: 1996 FOURTH QUARTER CHARGES
During the fourth quarter of 1996, the Company recorded a charge of $889,000
to reduce the carrying amount of certain previously leased equipment and the
estimated unguaranteed residual values of equipment on lease. These charges
resulted from a decrease in the wholesale market value of the previously
leased equipment due to an increase in availability in excess of current
demand. Although management believes that its recorded residual values are
properly stated, there can be no assurance that the Company will not
experience further material residual value or inventory write-downs in the
future.
NOTE 16: EARNINGS PER COMMON SHARE
In February of 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 supersedes APB
Opinion No. 15 and specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS"). It replaces the presentation of
"primary EPS" with a presentation of "basic EPS" and "fully diluted EPS" with
"diluted EPS". Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of
shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock and is computed similarly
to fully diluted EPS under APB Opinion No. 15. The following EPS amounts
reflect EPS as computed under SFAS No. 128 for the years ended December 31
(all share and per share amounts have been retroactively adjusted to reflect
the one-for-four reverse stock split which became effective on September 15,
1998):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Shares outstanding at
beginning of period 1,197,268 1,085,230 782,330
Effect of issuance of common
stock for services - 10,925 -
Issuance of common stock
pursuant to private place-
ment transactions - 12,200 105,522
Issuance of common stock
related to 1996 acquisition
of SCS - - 4,421
Exercise of stock options 32,748 - 13,012
Exercise of "A" warrants - - 2,723
Exercise of "B" warrants - 64,671 -
Purchase of treasury stock (13,419) (4,520) (1,594)
---------- ---------- ----------
Weighted average common
shares outstanding 1,216,597 1,168,506 906,414
========== ========== ==========
Net income (loss) $(3,202,265) $ 329,531 $(1,398,316)
Preferred stock dividends - (229,016) (229,016)
---------- ---------- ----------
Net earnings available to
common shareholders $(3,202,265) $ 100,515 $(1,627,332)
========== ========== ==========
Earnings (loss) per common
share $ (2.63) $ 0.09 $ (1.80)
========== ========== ==========
Weighted average common
shares outstanding 1,216,597 1,168,506 906,414
Effect of common shares
issuable upon exercise of
dilutive stock options - 38,762 -
---------- ---------- ----------
Weighted average common
shares outstanding assuming
dilution 1,216,597 1,207,268 906,414
========== ========== ==========
Earnings (loss) per common
share assuming dilution $ (2.63) $ 0.08 $ (1.80)
========== ========== ==========
</TABLE>
The following potentially dilutive securities were not included in the
computation of dilutive EPS because the effect of doing so would be
antidilutive:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Options 9,791 112,000 390,656
Warrants 1,207,179 1,207,179 1,457,179
Convertible preferred stock 100,195 100,195 100,195
Warrants issuable upon conversion
of preferred stock if conversion
occurred prior to August 4, 1998 71,568 71,568 71,568
</TABLE>
NOTE 17: SUBSEQUENT EVENTS
In January 1999, the Company sold 236,099 shares of common stock to LEC
Acquisition LLC, a limited liability company whose managing partner is
Ronald G. Farrell, the Company's Chairman and Chief Executive Officer, in a
private placement transaction for proceeds of $70,830.
On February 17, 1999, the Company's shareholders approved the issuance of
4,763,901 shares of the Company's common stock upon the conversion of the
Company's 6% Convertible Debentures. Also on such date, the Company's
shareholders approved a change in the Company's name to Golf Entertainment,
Inc.
There have been extended negotiations between the Company and LEC
Technologies, Ltd., a Nevada corporation whose sole shareholder is Michael
F. Daniels, the former Chairman and Chief Executive Officer and a current
Director of the Company, regarding a Stock Purchase Agreement whereby Mr.
Daniels would purchase the common stock of each of the Company's operating
subsidiaries for an aggregate of $2,075,000 and the assumption of certain
liabilities, including those related to the Excel Equity Line and the
Finova Credit Facility, subject to the approval of the Company's
shareholders. If concluded, in connection therewith, the Company will
receive a release of its guarantees from both Excel Bank, N.A. and Finova
Capital Corporation.
The Company intends to focus primarily on acquiring and consolidating the
ownership of existing golf ranges and golf centers. The Company believes
that the fragmented ownership of golf ranges and centers, currently
characteristic of the industry in the United States, coupled with Mr.
Farrell's extensive business experience in negotiating and financing
acquisition opportunities, offer it an opportunity for growth. The Company
intends to enhance these existing golf facilities by adding amenities and
improving management and operating systems. The Company also will develop
new golf recreational facilities, and may acquire other golf related
businesses. The Company intends that its facilities will be centered
around a driving range and will provide a variety of golf practice areas
for pitching, putting, chipping and sand play. The Company intends that
its facilities will be user-friendly for all levels of golfer and will
appeal to the entire family. Each driving range will, generally, permit
night play and limited year round use. Each facility will offer
instructional programs for men, women and juniors, and will be staffed with
professional instructors. Most facilities will include a clubhouse that
will house a full line pro-shop, a snack bar, a miniature golf course(s)
and batting cages. Where feasible, the Company intends that the facilities
will include par-3 or executive-length (shorter than a regulation-length)
golf courses. The Company's revenues will be derived from selling balls to
be used on the driving range, charging for rounds of miniature golf,
charging for the use of the batting cages, selling golf equipment, golf
apparel and related accessories through the pro-shop, fees for
instructional programs and from food and beverage sales. The Company will
seek to realize economies of scale at its facilities through centralized
management information systems, accounting, cash management and purchasing
programs. The Company may also seek long-term management contracts to
operate golf courses and golf related facilities.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Form 8-K dated September 14, 1998 regarding the resignation of KPMG Peat
Marwick LLP as the Company's principal accountants.
PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The names, ages and respective positions of the Executive Officers and
Directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Ronald G. Farrell 55 Chairman of the Board and Chief
Executive Officer
Michael F. Daniels 50 President
William J. Vargas 39 Vice President - Finance, Chief
Financial Officer, Treasurer and
Secretary
Larry M. Segall 44 Director
L. Derrick Ashcroft 70 Director
Richard D. Falcone 45 Director
</TABLE>
RONALD G. FARRELL has served as Chairman of the Board of Directors and
Chief Executive Officer of the Company since November 1998. Mr. Farrell is
the founder, Chairman and President of R. G. Farrell, Inc. and RGF
Investments, Inc., both founded in 1985. These companies are wholly-owned
by Mr. Farrell and are engaged in financial consulting in connection with
private placements, public offerings, venture capital transactions, and
leveraged buyout and rollup transactions.
MICHAEL F. DANIELS has served as President of the Company since April 1994
and as Chairman of the Board of Directors and Chief Executive Officer from
April of 1994 to November of 1998. He has been a Director of the Company
since 1983. He served as Chief Operating Officer from March of 1993 to
April of 1994 and as Senior Vice President - Marketing for more than five
years prior thereto.
WILLIAM J. VARGAS has served as Vice President - Finance, Chief Financial
Officer and Treasurer since May of 1995 and as Secretary since February of
1996. From July of 1993 to January of 1995 he was the Senior Director of
Finance for Fitzgeralds Casino/Hotel and from February of 1995 through
April of 1995 he was an independent financial consultant. From January of
1992 to July of 1993 he was the Chief Financial Officer of Sport of Kings,
Inc., a publicly traded gaming company.
LARRY M. SEGALL has served as a Director of the Company since November of
1989. Mr. Segall is currently the Chief Financial Officer of Vitamin
Shoppe Industries, Inc. From 1985 through October 1997, Mr. Segall held
various management positions with Tiffany & Co., most recently as its
Senior Vice President - Merchandising, Planning and Analysis.
L. DERRICK ASHCROFT has served as a Director of the Company since August of
1994. From 1988 to 1995 he was Chairman of the Board of Cardiopet, Inc.,
an animal diagnostic firm. Mr. Ashcroft is a graduate of Oxford
University, England.
RICHARD D. FALCONE has served as a Director of the Company since July 1998.
Mr. Falcone is currently Vice President and Chief Financial Officer of
DataStudy, Inc. From January 1997 through December 1998 he was Vice
President and Chief Operating Officer of Netgrocer, Inc. and from September
1994 through January 1996 he was Vice President and Chief Operating Officer
of National Merchants Management Company. Prior to that he was the Chief
Financial Officer for Bed, Bath & Beyond, Inc. since 1990.
Officers serve at the discretion of the Board of Directors. All Directors
hold office for one year terms and until the election and qualification of
their successors. The Company has a Key Employee Stock Option Committee
and an Audit Committee, each consisting of Messrs. Segall and Ashcroft.
The Board of Directors did not have a standing nomination committee or
committee performing similar functions during the year ended December 31,
1998.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers, directors and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission. Officers, Directors and ten percent shareholders are required
by regulation to furnish the Company with all Section 16(a) forms they
file. Based solely on the Company's copies of such forms received or
written representations from certain reporting persons that no Form 5's
were required for those persons, the Company believes that, during the time
period from January 1, 1998 through December 31, 1998, all filing
requirements applicable to its officers, Directors and greater than ten
percent beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation
paid and/or accrued to each of the Company's executive officers for
services rendered in all capacities to the Company during the three years
ended December 31, 1998. No other executive officer received annual
compensation in excess of $100,000 in any of the three fiscal years ended
December 31, 1998. This information includes the dollar value of base
salaries, bonuses, awards, the number of stock options granted and certain
other compensation, if any, whether paid or deferred.
(a) Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------
Other Annual
Name of Individual and Fiscal Salary Bonus Compensation
Principal Position Year ($) ($) ($)
- - ---------------------- ------ -------- -------- ------------
<S> <C> <C> <C> <C>
Ronald G. Farrell 1998 - - -
Chairman & CEO
Michael F. Daniels 1998 $326,385 - $ 34,573 (2)
President (1) 1997 336,519 - 181,653 (2)
1996 273,077 - 258,619 (2)
William J. Vargas 1998 123,417 - -
CFO & Secretary 1997 128,871 - -
1996 115,341 - -
</TABLE>
(a) Summary Compensation Table (cont'd)
<TABLE>
<CAPTION>
Long Term Compensation
------------------------
Awards
------------------------
Securities
Restricted Underlying All Other
Name of Individual and Fiscal Stock Options/SARs Annual
Principal Position Year Awards($) (#) Compensation
- - ---------------------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Ronald G. Farrell 1998 - - -
Chairman & CEO
Michael F. Daniels 1998 - 200,000 (4) 2,500 (3)
President (1) 1997 - - (4) 4,750 (3)
1996 - 62,500 (4) 4,750 (3)
William J. Vargas 1998 - 77,500 (4) 1,825 (3)
CFO & Secretary 1997 - - (4) 4,750 (3)
1996 - 17,500 (4) 1,900 (3)
</TABLE>
(1) Michael F. Daniels served as the Company's Chairman & CEO during the
period January 1, 1996 through November 20, 1998.
(2) Consists of commission income based upon realization of excess
residual values related to leases entered into prior to May 15, 1993.
(3) Represents Company matching contribution to 401(k) Profit Sharing
Plan.
(4) In January of 1997, August of 1997 and January of 1998, Messrs.
Daniels and Vargas were granted stock options to purchase an aggregate
of 404,000 shares and 163,750 shares, respectively. On December 8,
1997, Messrs. Daniels and Vargas voluntarily rescinded their
respective 1997 option grants, together with all grants received prior
thereto, with the exception of 14,531 stock options received by Mr.
Daniels during 1993. In October 1998, Messrs. Daniels and Vargas
voluntarily rescinded their respective 1998 option grants, to the
extent that they had not been exercised, except for 2,500 stock
options received by Mr. Vargas. Messrs. Daniels and Vargas received
no compensation for such rescissions. All share amounts have been
retroactively adjusted to reflect the one-for-four reverse stock split
that was effective September 15, 1998.
(b) Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Number of Percent of
Securities Total
Underlying Options/SAR's Exercise
Options/SAR's Granted to or Base Expiration
Name Granted (#) In Fiscal Year Price($/Sh) Date
- - ----------- ------------- -------------- ----------- ----------
<S> <C> <C> <C> <C>
Ronald G.
Farrell - - - -
Michael F.
Daniels 200,000 (1) 40.7% $0.10 1/30/03
William J.
Vargas 77,500 (1) 15.8% $0.10 1/30/03
</TABLE>
(1) In October 1998, Messrs. Daniels and Vargas voluntarily rescinded any
stock option grants made in 1998, to the extent that they had not been
exercised, with the exception of 2,500 stock option grants made to Mr.
Vargas.
(c) Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year
End Option/SAR Values
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised
Underlying In-The-Money
Options/SAR's Options/SAR's
At Fiscal At Fiscal
Shares Year End (#) Year End ($)
Acquired Value Exercisable/ Exercisable/
Name On Exercise Realized Unexercisable Unexercisable
- - ----------- ----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Ronald G.
Farrell N/A N/A N/A N/A
Michael F.
Daniels 100,000 $53,000 14,531/--- $5,340/---
William J.
Vargas 35,000 $18,550 2,500/--- $1,469/---
$0.00
</TABLE>
The last sales price for the Company's Common Stock on the Nasdaq SmallCap
Market on December 31, 1998 was $0.6875.
(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 stock
option plans. The Company does not pay its directors any additional fees
for committee participation.
(e) Employment Contracts
Ronald G. Farrell serves as the Company's Chief Executive Officer under an
employment agreement effective January 1, 1999 through December 31, 2003.
Mr. Farrell's annual base salary under such agreement is $240,000 for the
period January 1, 1999 through December 31, 2000, and increases by 10% per
year thereafter. In addition, Mr. Farrell is eligible to receive an annual
bonus equal to five percent (5%) of the Company's operating income for the
year. Such bonus may not exceed Mr. Farrell's base salary for such
respective fiscal year. Pursuant to such employment agreement, if Mr.
Farrell should die during the term thereof, a death benefit equal to the
portion, if any, of his base salary for the period up to the date of death
which remains unpaid and eighteen months salary ($360,000, at his current
base salary) shall be paid to his estate.
Michael F. Daniels serves as the Company's President under an employment
agreement dated October 1, 1998 and expiring September 30, 2001. Mr.
Daniels' compensation under such agreement is $350,000 per annum and he is
eligible for a bonus based on company performance. Pursuant to Mr.
Daniels' employment contract, if Mr. Daniels should die during the term
thereof, a death benefit equal to six months salary ($175,000) shall be
paid to his estate.
William J. Vargas serves as the Company's Chief Financial Officer,
Treasurer and Secretary under an employment agreement dated July 1, 1995
and expiring June 30, 2000. Mr. Vargas' compensation under such agreement
is $135,000 per annum.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of January 28, 1999, certain information
concerning those persons known to the Company, based on information
obtained from such persons, with respect to the beneficial ownership (as
such term is defined in Rule 13d-3 under the Securities Exchange Act of
1934) of shares (the "Common Stock") of common stock, $0.01 par value, of
the Company by (i) each person known by the Company to be the owner of more
than 5% of the outstanding Common Stock, (ii) each Director of the Company,
(iii) each executive officer of the Company named in the Summary
Compensation Table and (iv) all executive officers and Directors as a
group:
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Beneficial Own- Percentage of
Beneficial Owner (1) ership (2) Class (3)
- - ---------------------- ------------------ -------------
<S> <C> <C>
LEC Acquisition LLC 236,099 (4) 16.7%
Ronald G. Farrell 0 0.0%
Michael F. Daniels 221,850 (5) 15.7%
William J. Vargas 46,500 (6) 3.3%
Larry M. Segall 58,844 (7) 4.2%
L. Derrick Ashcroft 38,650 (8) 2.7%
Richard D. Falcone 13,500 (9) 1.0%
All Directors and
Executive Officers
as a Group (6 persons) 379,344 26.9%
<F1> The address for all individuals identified herein is 6540 S. Pecos
Road, Suite 103, Las Vegas, Nevada 89120.
<F2> Unless otherwise noted, the Company believes that all persons named in
the table have sole investment power with respect to all shares of
common stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities that can be acquired by such person
within 60 days from the date hereof upon the exercise of warrants or
options or upon the conversion of convertible securities. Each
beneficial owner's percentage ownership is determined by assuming that
options or warrants or shares of Series A Convertible Preferred Stock
that are held by such person (but not those held by any other person)
and which are exercisable or convertible within 60 days from the date
hereof have been exercised or converted.
<F3> Based on 1,410,356 shares of common stock outstanding as of January
28, 1999.
<F4> Does not include 4,763,901 shares issuable to holders of 6%
Convertible Debentures upon conversion. Mr. Farrell, as the managing
partner of LEC Acquisition LLC, exercises voting control over shares
held by LEC Acquisition LLC. Additionally, pursuant to the terms of
the operating agreement of the LLC, RGF Investments, Inc., a member of
the LLC, will receive and Mr. Farrell may receive shares of common
stock at such time as the LLC distributes shares of common stock to
its members.
<F5> Includes options to purchase 14,531 shares of common stock granted to
Mr. Daniels which are currently exercisable.
<F6> Includes options to purchase 2,500 shares of common stock granted to
Mr. Vargas which are currently exercisable.
<F7> Includes options to purchase 5,000 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. Ashcroft which are currently exercisable.
<F9> Includes options to purchase 10,000 shares of common stock granted to
Mr. falcone which are currently exercisable.
</TABLE>
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Segall, a director of the Company, is currently the Chief Financial
Officer of Vitamin Shoppe Industries, Inc. and was formerly an officer of
Tiffany & Co., two of the Company's customers. Mr. Falcone, a director of
the Company, was formerly the Chief Operating Officer of Netgrocer, Inc.,
one of the Company's customers. Neither Mr. Segall nor Mr. Falcone receive
any cash or other remuneration from the Company other than their fees for
as directors and participation in the Company's stock option plans. The
Company believes that the terms of its lease arrangements with Vitamin
Shoppe Industries, Inc., Tiffany & Co. and Netgrocer, Inc. are fair and
have been reached on an arms-length basis.
During the year ended December 31, 1998, the Compensation Committee of the
Board of Directors authorized Mr. Michael F. Daniels, the Company's
President and then Chief Executive Officer, to borrow from the Company a
maximum of $250,000. All such borrowings are evidenced by notes and
require the repayment of interest only at 8% for two years and the
repayment of both interest and principal for three years thereafter. At
December 31, 1998, Mr. Daniels was indebted to the Company in the amount of
$225,593.
ITEM 14: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K:
Form 8-K dated November 20, 1998 regarding the appointment of Ronald
G. Farrell as the Company's Chairman and Chief Executive Officer and
the resignation of Michael F. Daniels from such positions.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
<C> <S>
3.1 Certificate of Incorporation.*
3.2 Certificate of Amendment of Certificate of Incorporation,
dated June 23, 1995.**
3.3 Certificate of Amendment of Certificate of Incorporation,
dated March 20, 1997.******
3.4 By laws.*
4.1 Specimen Common Stock Certificate.*
4.2 Specimen Series A Convertible Preferred Stock Certificate.*
4.3 Specimen Warrant Certificate.*
4.4 Certificate of Designation of Series A Convertible Preferred
Stock.*
4.5 Form of Representative's Warrants.*
4.6 Form of Class C Common Stock Purchase Warrant.*****
4.7 Form of Class D Common Stock Purchase Warrant.*****
4.8 Amended and Restated Warrant Agency Agreement Dated as of
March 3, 1998, between the Company and American Stock
Transfer and Trust Company, as Warrant Agent.*****
10.1 Standard Office Lease - Gross dated April 7, 1995 between
the Company and Jack Cason (relating to office space in
Clark County, Nevada).**
10.2 1991 Directors' Stock Option Plan.*
10.3 1991 Key Employees' Stock Option Plan.*
10.4 1993 Directors' Stock Option Plan.*
10.5 1993 Key Employees' Stock Option Plan.*
10.6 1994 Stock Option Plan.****
10.7 1996 Stock Option Plan.*****
10.8 1997 Stock Option Plan.******
10.9 Form of 1996 Non-Plan Director Stock Option Agreement.******
10.10 Indemnification Agreement dated as of September 5, 1990
between the Company and Michael F. Daniels.*
10.11 Loan Agreement with Bank of America dated July 11, 1995.***
10.12 Amendment No. 1 to Loan Agreement with Bank of America.***
10.13 Amendment No. 2 to Loan Agreement with Bank of America.***
10.14 Amendment No. 3 to Loan Agreement with Bank of America.***
10.15 Amended and Restated Business Loan Agreement with Bank of
America dated February 28, 1997.
10.16 Bank of America Loan Modification Agreement dated July 24,
1997.
10.17 Second Bank of America Loan Modification Agreement dated
February 5, 1998.
10.18 Merrill Lynch Line of Credit Agreement.***
10.19 Amendment No. 1 to Merrill Lynch Line of Credit Agree-
meant.***
10.20 Amendment No. 2 to Merrill Lynch Line of Credit Agree-
meant.***
10.21 Letter Agreement and Collateral Installment Note dated as of
October 8, 1997 with Merrill Lynch Business Financial
Services, Inc.
10.22 Letter Agreement between the Registrant and Excel Bank, N.A.
(formerly Union Chelsea National Bank) dated November 27,
1995.***
10.23 Revolving Credit Agreement with Excel Bank, N.A. dated as
March 8, 1998.
21 List of Subsidiaries.
27 Financial Data Schedule.
<F*> Incorporated by reference to the Company's Registration Statement
on Form S-2, as filed with the Securities and Exchange Commission
on June 10, 1993, Registration No. 33-64246.
<F**> Incorporated by reference to the Company's Post Effective
Amendment No. 1 on Form S-2 to its Registration Statement on Form
S-2, as filed with the Securities and Exchange Commission on
August 1, 1995, Registration No. 33-93274.
<F***> Incorporated by reference to the Company's 1995 Annual Report on
Form 10-KSB/A, as filed with the Securities and Exchange
Commission on April 23, 1996, Commission File No. 0-18303.
<F****> Incorporated by reference to the Company's 1994 Proxy Statement,
Commission File No. 0-18303.
<F*****> Incorporated by reference to the Company's 1996 Proxy Statement,
Commission File No. 0-18303.
<F******> Incorporated by reference to the Company's Registration Statement
on Form S-8/S-3, as filed with the Securities and Exchange
Commission on June 11, 1997, Commission File No. 333-28921.
</TABLE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
GOLF ENTERTAINMENT, INC.
Date: April xx, 1999 By: /s/ Ronald G. Farrell
Ronald G. Farrell, Chief
Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Date: April xx, 1999 By: /s/ Ronald G. Farrell
Chief Executive Officer and
Director
(Principal Executive Officer)
Date: April xx, 1999 By: /s/ William J. Vargas
William J. Vargas, V.P.
Finance (Principal Financial and
Accounting Officer)
Date: April xx, 1999 By: /s/ Michael F. Daniels
Michael F. Daniels, Director
Date: April xx, 1999 By: /s/ Larry M. Segall
Larry M. Segall, Director
Date: April xx, 1999 By: /s/ L. Derrick Ashcroft
L. Derrick Ashcroft, Director
Date: April xx, 1999 By: /s/ Richard D. Falcone
Richard D. Falcone, Director
Exhibit 21.1
List of Subsidiaries
LEC Leasing, Inc.; incorporated in the State of Nevada on May 7, 1998;
doing business as LEC Leasing, Inc.
LEC Distribution, Inc.; incorporated in the State of Nevada on June 23,
1998; doing business as LEC Distribution, Inc.
Pacific Mountain Computer Products, Inc.; incorporated in the State of
California on June 22, 1978; and doing business as Pacific Mountain
Computer Products, Inc.
TJ Computer Services, Inc.; incorporated in the State of New York on March
4, 1980; and doing business as Leasing Edge Corporation.
Superior Computer Systems, Inc.; incorporated in the State of Minnesota on
January 13, 1995; and doing business as Superior Computer Systems, Inc.
Atlantic Digital International, Inc.; incorporated in the State of Nevada
on November 10, 1997; and doing business as Atlantic Digital International,
Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 391,705
<SECURITIES> 0
<RECEIVABLES> 2,881,627
<ALLOWANCES> 304,367
<INVENTORY> 1,862,981
<CURRENT-ASSETS> 0<F1>
<PP&E> 948,171
<DEPRECIATION> 425,465
<TOTAL-ASSETS> 26,381,167
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 4,016,584
0
2,290
<COMMON> 14,104
<OTHER-SE> 2,435,988
<TOTAL-LIABILITY-AND-EQUITY> 26,381,067
<SALES> 19,565,420
<TOTAL-REVENUES> 30,623,016
<CGS> 16,810,687
<TOTAL-COSTS> 25,778,551
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 146,962
<INTEREST-EXPENSE> 840,464
<INCOME-PRETAX> (3,202,265)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,202,265)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,202,265)
<EPS-PRIMARY> (2.63)
<EPS-DILUTED> (2.63)
<FN>
<F1>UNCLASSIFIED BALANCE SHEET
</FN>
</TABLE>
