<PAGE> 1
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1999.
or
[ ] Transition Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 For
the Transition Period from __________ to ____________.
Commission File Number 0-18303
GOLF ENTERTAINMENT, INC.
(formerly known as LEC TECHNOLOGIES, INC.)
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
11-2990598
(I.R.S. Employer Identification Number)
2500 Northwinds Parkway, Suite 175
3 Northwinds Center
Alpharetta, Georgia 30004-2245
(Address of principal executive offices, including zip code)
(770) 667-9890
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, Par Value $0.01 per share, registered on NASDAQ
Series A Convertible Preferred Stock
Common Stock Purchase Warrants
Class C Common Stock Purchase Warrants
Class D Common Stock Purchase Warrants
<PAGE> 2
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 is not contained herein, and will not be contained, to the
best of 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 29, 2000, the approximate market value of the common stock (based
upon the NASDAQ closing price of $0.3125 of stated shares on that date) held by
non-affiliates was $1,000,535.
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 29, 2000, the
issuer had 3,201,711 share of common stock, par value $0.01 per share,
outstanding.
Documents incorporated by reference: None
ii
<PAGE> 3
GOLF ENTERTAINMENT, INC.
(FORMERLY KNOWN AS LEC TECHNOLOGIES, INC.)
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C> <C>
PART I
Item 1. Business 4
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Securities Holders 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholders' Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 19
PART III
Item 10. Directors and Executive Officers of the Registrant 20
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain Beneficial Owners
and Management 25
Item 13. Certain Relationships and Related Transactions 27
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K. 27
</TABLE>
iii
<PAGE> 4
GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS LEC TECHNOLOGIES, INC.)
1999 ANNUAL REPORT ON FORM 10-K
PART I
ITEM 1. BUSINESS
GENERAL
Golf Entertainment, Inc. (formerly known as LEC Technologies, Inc.) and its
operating subsidiary (Traditions Acquisition Corporation) and its non-operating
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; TJ Computer Services, Inc)
(collectively, the "Company" or "Golf") is currently in the business of owning
and operating golf entertainment facilities, and is pursuing other
opportunities within the golf industry as it relates to Internet ".com"
businesses.
Mr. Ronald G. Farrell introduced in late 1998 a plan to re-orient the Company
from the equipment leasing business to the golf industry, including owning and
operating golf courses, as well as other golf related businesses. On February
17, 1999, the stockholders of the Company approved the issuance of convertible
debentures to an investment company managed by Mr. Farrell, as well as the
change of the Company's name to Golf Entertainment, Inc. from LEC Technologies,
Inc. The Company sold substantially all of the assets associated with its
former line of business in December 1999. The Company has refocused its golf
business in the first quarter of 2000 to emphasize opportunities relating to
golf Internet business. See Item 7, "Future Plans."
PRIOR HISTORY OF THE COMPANY
The Company was founded in 1980 under the name TJ Computer Services, Inc. ("TJ
CS"). In 1989, all of the outstanding common stock of TJ CS 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
stockholders 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 stockholders approved a change in the Company's
name to Golf Entertainment, Inc. to reflect the re-orientation of the Company.
4
<PAGE> 5
The Company's former line of business has been leasing business equipment. The
equipment generally has been midrange computer systems, telecommunications
systems, system peripherals (terminals, printers, communications controllers,
etc.) and point-of-sale systems. The Company has provided customers with
technical, financial and product alternatives, of various hardware platforms or
manufacturers, and has assisted customers with equipment upgrades or selling
used equipment.
The Company's leasing operations were conducted primarily through its principal
office in Las Vegas, Nevada and its distribution and remarketing operations
were conducted primarily through its subsidiaries' offices located in
Minneapolis, Minnesota, Woodland Hills, California and Atlanta, Georgia. These
locations have all been closed.
The Company ceased doing the leasing business because that business was not
profitable. The Company lost $3,202,265 in the year ended December 31, 1998,
recorded net income of $329,531 in the year ended December 31, 1997, and had a
loss of $1,398,316 in the year ended December 31, 1996. (See "SELECTED
FINANCIAL DATA" herein).
GOLF ENTERTAINMENT BUSINESS
During 1999, the Company proceeded with its announced intention to become
involved in the golf entertainment business by purchasing an existing golf
facility.
During 1999, Golf Entertainment's business was to develop new golf recreational
facilities, and potentially to acquire other golf-related businesses.
Facilities were to be centered around a driving range and will provide a
variety of golf practice areas for pitching, putting, chipping and sand play,
and will be user-friendly for all levels of golfer and will appeal to the
entire family. Certain driving ranges may permit night play and limited
year round use. Each facility may 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 and a snack bar,
a miniature golf course(s) and batting cages. Where feasible, the facilities
should include par-3 or executive-length (shorter than a regulation-length)
golf courses. Golf Entertainment's 1999 revenues were derived from selling
balls to be used on the driving range, charging for rounds of golf, selling
golf equipment, golf apparel and related accessories through the pro shop, fees
for instructional programs and from food and beverage sales. Golf Entertainment
has sought to realize economies of scale at its facilities through centralized
management information systems, accounting, cash management and purchasing
programs.
The Company has refocused its golf business in the first quarter of 2000 to
emphasize opportunities relating to golf Internet business.
5
<PAGE> 6
SEASONALITY
During 1999, sales at the Company's golf facility were seasonal with higher
revenue in the warmer months. Likewise, the Company expects its golf Internet
business to generate higher revenue in the warmer months.
COMPETITION
The Company's golf facility faces competition from a number of sources from
local owner/operator facilities as well as national entities. However, certain
economic conditions within the golf range and golf course markets have
adversely affected the availability of financing future acquisitions for the
Company.
The Company expects less competition initially in its golf Internet business.
EMPLOYEES
As of December 31, 1999, the Company employed 26 full time and part time
employees at Traditions Golf Club and 4 full time employees at its corporate
headquarters. None of its employees are represented by a union. The Company
believes that relations with its employees are favorable.
ACQUISITIONS
The Company completed its first strategic acquisition during 1999.
On May 22, 1999, Traditions Acquisition Corporation, a wholly-owned subsidiary
of Golf Entertainment, Inc, acquired substantially all of the assets except for
real estate of Golf Traditions I, Ltd., a partnership that developed
Traditions Golf Club in Edmond, Oklahoma. Traditions Golf Club has a 4,500
yard, 18 hole, par 60 executive length golf course, a 20 acre practice range of
80 tees with multiple target greens, an 18 hole practice putting course, a
mini-course for juniors, a pro shop and a club house. The total complex is
approximately 1 year old and encompasses approximately 120 acres. The purchase
price for the purchased assets, approximately $454,073, were equal to the
liabilities assumed, approximately $454,073. The purchase method of accounting
was used to establish and record a new cost basis for the assets acquired and
liabilities assumed. Concurrently, the Company entered into a ground lease for
a 4-year term with two (2) additional term options of two (2) years each for
$24,000 per month.
The operating results for the acquisition have been included in the Company's
consolidated financial statements since the date of acquisition.
6
<PAGE> 7
SALE/DISPOSAL OF LEASING BUSINESS
On September 24, 1999, the Company and Somerset Capital Group, Ltd., a
corporation organized under the laws of the State of Connecticut (the "Buyer")
entered into a Purchase and Sale Agreement (the "Purchase Agreement") for the
sale to Buyer of substantially all of the Company's leases of business
equipment (the "Lease Portfolio"), the business equipment which is subject to
those leases and certain other business equipment (collectively, the "Purchased
Assets"). The purchase price was $3,559,500, consisting of cash in the amount
of $524,500, which was, after offsets, paid at Closing, a promissory note in
the amount of approximately $75,000, the assumption of certain recourse debt,
and the assumption or repayment of the outstanding indebtedness owed to Excel
Bank, N.A. and Finova Capital Corporation (the "Lenders") up to a maximum
amount of $2,635,000. The Buyer also assumed all non-recourse debt
(approximately $12,500,000) which encumbered the Purchased Assets. The purchase
price was reduced by the extent that the Company took in new revenue from June
30, 1999 from leases that were not specifically excluded, and to the extent
that revenue from June 30, 1999 from certain recurring sources exceeds the sum
of $55,000 per month for two months, and fully for the months thereafter.
In addition, on September 24, 1999, the Company engaged the Buyer as the
managing agent of the Purchased Assets.
Also, on September 24, 1999, the Company entered into an agreement with the
Buyer whereby the Buyer will assist the Company in disposing of certain leases
of equipment to Net Grocer, Inc. in exchange for 25% of the proceeds from such
sale. The Buyer has also agreed that, to the extent the proceeds of such sale
are insufficient to payoff amounts owed with respect to such leases, the Buyer
will pay 25% of such deficiency, up to $75,000.
The Sale was completed on December 31, 1999, and the Company has ceased its
equipment leasing business. The management agreement terminated as of that
date.
ITEM 2. PROPERTIES
The following table sets forth certain information with respect to the
Company's headquarters and the location of significant operations as of March
29, 2000.
<TABLE>
<CAPTION>
GENERAL APPROXIMATE TYPE OF
LOCATION CHARACTER SQUARE FOOTAGE INTEREST
- -------- --------- -------------- --------
<S> <C> <C> <C>
Alpharetta, GA (Headquarters) Office 3,196 Leased
Edmond, OK Golf Course Leased
</TABLE>
The Company believes its properties are in generally good condition, well
maintained and suitable for their intended use.
7
<PAGE> 8
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 had refused to issue such additional shares or cash. As a result, the
two former shareholders of SCS had filed separate lawsuits against the Company
seeking the Company's performance under the Stock Acquisition Agreement. The
Company, in turn, countersued the former shareholders, asserting breach of
fiduciary duty, breach of contract, fraud and fraudulent inducement. During the
second quarter of 1999, the disputes were settled and the Company issued
210,000 shares of common stock to the two former shareholders. Also, the
consolidated financial statements as of December 31, 1999 reflect a provision
for an additional obligation of $10,000.
On July 1, 1999, the former chief executive office of the Company and another
former employee of the Company filed a Complaint for Arbitration before the
American Arbitration Association. The Complaint claims the Plaintiffs were
improperly terminated by the Company, and that they are entitled to an
unspecified amount of actual and punitive damages. On or about July 22, 1999,
the Company answered, denying the allegations and submitting counterclaims
against the former chief executive office for failure to repay monies owed and
breaches of other duties to the Company. On the same day, the Company answered
the other former employee's Complaint, and denied the allegations of that other
former employee. The arbitration proceeding is to be presented in a hearing
scheduled for June 13, 2000. The Company cannot reasonably estimate any outcome
of the arbitration.
The Company is also involved in legal proceedings from time to time in the
ordinary course of its business. There are no such currently pending
proceedings, which are expected to have a material adverse effect on the
Company.
8
<PAGE> 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted during the fourth quarter of 1999 to a
vote of security holders of the Company through the solicitation of proxies and
voted on at the annual meeting of stockholders on December 27, 1999:
1. To consider and vote upon a proposal to approve and adopt a Purchase and
Sale Agreement dated as of September 24, 1999 between the Company and
Somerset Capital Group, Ltd., as described in "Sale/Disposition of Leasing
Business" above.
2. To elect three (3) directors for the Company.
3. To consider and act upon a proposal to amend the Company's 1997 Stock
Option Plan to increase the number of shares issuable under the Company's
1997 Stock Option Plan.
4. To approve a change to the Company's Certificate of Incorporation to
provide for a staggered board of directors by dividing the directors of
the Company into three classes, the term of office of those of the first
class to expire at the next annual meeting, the second class one year
thereafter, and the third class two years after the next annual meeting,
and at each annual election held after such classification and election,
directors will be chosen for the full term of their class of director.
5. The approval of Goldstein Golub Kessler LLP as independent auditors for
the Company for the year ended December 31, 1999.
At the Annual Meeting, the following items were approved and adopted:
1. The stockholders approved the sale of the Company's leasing business to
Somerset Capital Group, Ltd., and authorized the Company's chief executive
officer to enter into such a transaction.
2. The slate of Directors was elected.
3. The Company's 1997 Stock Option Plan was amended to increase the number of
shares issuable under the Company's 1997 Stock Option Plan.
4. The change to the Company's Certificate of Incorporation to provide for a
staggered board of directors by dividing the directors of the Company into
three classes, the term of office of those of the first class to expire at
the next annual meeting, the second class one year thereafter, and the
third class two years after the next annual meeting, and at each annual
election held after such classification and election, directors will be
chosen for the full term of their class of director was approved and
adopted.
9
<PAGE> 10
5. Goldstein Golub Kessler LLP was approved as independent auditors for the
Company for the year ended December 31, 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock trades on the Nasdaq Bulletin Board of the Nasdaq
Stock Market under the symbol GECC.OB. 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.
<TABLE>
<CAPTION>
1999 1998
FISCAL QUARTER HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
First Quarter $1.19 $0.69 $3.63 $1.88
Second Quarter $2.00 $0.69 $4.25 $2.13
Third Quarter $0.97 $0.75 $2.00 $0.63
Fourth Quarter $1.03 $0.50 $1.69 $0.53
</TABLE>
As of March 29, 2000, the Company had approximately 207 shareholders of record
of its $0.01 par value common stock and approximately 26 shareholders of record
of its $0.01 par value preferred stock.
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.
On August 17, 1999, the Company was notified by the Nasdaq SmallCap Market that
the Company did not comply with the bid price requirement, as set forth in
Nasdaq Marketplace Rule 4310 ( c) (04). On January 28, 2000, the Company's
common stock was delisted and became immediately eligible to trade on the OTC
Bulletin Board. The Company has requested and received a hearing before the
Nasdaq Listing and Hearing Review Council regarding its listing. The Review
Council is scheduled to review the Company's status in its July 2000 docket.
The Company is actively pursuing with Nasdaq the continuance of the Company's
re-listing. Currently, the Company's common stock is trading on the Nasdaq OTC
Bulletin Board. The Company is not in compliance with Nasdaq SmallCap listing
requirements.
10
<PAGE> 11
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 period
indicated. The information set fort in the following table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" 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)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Revenues $ 585 $ -- $ -- $ -- $ --
Net Income/
(Loss) from
Operations (1,364) -- -- -- --
Discontinued
Operations (1,432) (3,202) 330 (1,398) 201
Gain on Disposal 48 -- -- -- --
Extraordinary Gain 385 -- -- -- --
NET INCOME/
(LOSS) (2,412) (3,202) 330 (1,398) 201
NET INCOME/
(LOSS) PER
COMMON SHARE (1.10) (2.63) 0.09 (1.80) (0.04)
NET INCOME/
(LOSS) PER
COMMON SHARE-
DILUTED (1.10) (2.63) 0.08 (1.80) (0.04)
Total Assets 1,610 26,381 29,074 27,687 27,285
Total Liabilities 992 23,929 23,595 22,449 21,410
Total Stockholders'
Equity 618 2,452 5,478 5,238 5,875
</TABLE>
11
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes thereto included elsewhere
in Item 8 of this report.
OVERVIEW
On December 31, 1999, the Company sold to Somerset Capital Group, Ltd. (the
"Buyer") substantially all of the Company's leases of business equipment (the
"Lease Portfolio"), the business equipment, which is subject to those leases,
and certain other business equipment. The purchase price was $3,559,500,
consisting of cash in the amount of $524,500, less offsets, a promissory note
in the amount of approximately $75,000, and the assumption of the outstanding
indebtedness owed to the Company's lenders up to a maximum of $2,635,000.
Additionally, the Buyer assumed all nonrecourse and recourse debt, except for
the amounts owed Excel Bank related to the NetGrocer leases, which encumbers
the leases and equipment (approximately $12,500,000). The sale was finalized on
December 31, 1999.
With the sale completed on December 31, 1999, the Company has ceased its
equipment leasing business and other technology related businesses and
continues to pursue its new golf entertainment business strategy.
USE OF PROCEEDS
The net proceeds to the Company from the sale, after paying certain legal,
accounting and other expenses associated therewith, were approximately $14,000
in cash and a $75,000 promissory note. The net proceeds were used for general
corporate purposes, including repaying Excel Bank, N.A. for certain recourse
debt not being assumed by the Buyer. The net proceeds were not received until
December 31, 1999 and have not been used for its golf business.
During 1999, the Company proceeded with its announced intention to become
involved in the business of owning and operating golf entertainment facilities.
Mr. Ronald G. Farrell introduced in late 1998 a plan to re-orient the Company
from its existing equipment leasing business to one that owns and operates golf
courses. On February 17, 1999, the stockholders of the Company approved the
issuance of convertible debentures to an investment company managed by Mr.
Farrell, as well as the change of the Company's name to Golf Entertainment,
Inc. from LEC Technologies, Inc.
12
<PAGE> 13
GOLF ENTERTAINMENT BUSINESS
During 1999, the Company proceeded with its announced intention to become
involved in the golf entertainment business by purchasing an existing golf
facility. The Company has refocused its golf business in the first quarter of
2000 to emphasize opportunities relating to golf Internet business. See Item 1.
BUSINESS "Golf Entertainment Business" above.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
REVENUES
Total revenues for the year ended December 31, 1999 from the golf business were
$585,482 comprised entirely of revenues from the Company's Traditions Golf
Club. Traditions Golf Club operations were acquired in May 1999. Total revenues
were $8,111,716 and $30,623,016 for the years ended December 31, 1999 and 1998,
respectively from the discontinued leasing business. For financial statement
purposes for the year ended December 31, 1999, all leasing revenues are shown
net of leasing expenses as discontinued operations.
COSTS AND EXPENSES
Total non-leasing costs and expenses for the year ended December 31, 1999 were
$751,185, comprised of $96,645 related to cost of sales related to revenues from
golf operations and $654,540 of selling, general and administrative expenses
related to the operations of the Traditions Golf Club, including depreciation
expense of $40,428 and interest expense of $11,827. Total expenses directly
related to the leasing business were $9,592,508 and $25,778,551 for the years
ended December 31, 1999 and 1998, respectively. For financial statement purposes
for the year ended December 31, 1999, all leasing expenses are shown net of
leasing revenues as discontinued operations.
Corporate expense decreased 83.4% from $7,206,266 for the year ended December
31, 1998 to $1,198,739 for the year ended December 31, 1999, a decrease of
$6,007,254. The decrease in corporate expense is attributable to a decrease in
staffing levels between periods, consolidation of operations to Alpharetta,
Georgia and a concentrated effort by the Company's new management to reduce
general expenses, net interest income of $5,771 and depreciation expense of
$56,179.
Traditions Golf Club results were in line with expectations of a facility in
its first full 12 months of operations. The subsidiary reported a net loss from
operations of $165,703. The Company is evaluating incremental revenue streams,
including additional tournament event play, and cost control.
13
<PAGE> 14
DISCONTINUED OPERATIONS
Loss from discontinued operations increased 100.00% from $-0- for the year
ended December 31, 1998 to $1,432,446 for the year ended December 31, 1999, an
increase of $1,432,446. The increase in the loss from discontinued operations
between periods is due the sale of the leasing portfolio at December 31, 1999
and to the write down of inventory and residual values related to the Company's
leasing operations recorded in the 1999 period. The Company recorded a net loss
on discontinued operations of $1,480,792 and a gain on disposal of the
discontinued operations' net fixed assets of $48,346.
The consolidated financial statements do not reflect a provision for income
taxes due to the utilization of net operating loss carryforwards and changes in
the related valuation allowance. At December 31, 1999, the Company had
unexpired net operating loss carryforwards of approximately $7,000,000, which
can be utilized to offset future taxable income, if any.
NET EARNINGS
As a result of the foregoing, the Company recorded a net loss of $2,411,691 for
the year ended December 31, 1999 as compared to a net loss of $3,202,265 for
the year ended December 31, 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
(Note: The discussion below pertains to the Company's discontinued leasing
business.)
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
14
<PAGE> 15
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
15
<PAGE> 16
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 4.34% 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.
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
16
<PAGE> 17
then outstanding principal and accrued interest balance of approximately
$420,000 would be amortized to zero as of March 1, 1998. 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 balance of approximately $215,000 would be
amortized to zero as of June 1, 1999. The Merrill Note was guaranteed by the
Company and was secured by the inventory and accounts receivable of PMCPI.
During December 1999, the Company was able to reach a Settlement Agreement with
Merrill Lynch, whereby the Company will pay monthly installments over a 16
month period, beginning in April 2000. As of December 31, 1999, the amount
outstanding to Merrill Lynch was $125,000.
In March 1999, LEC Leasing, Inc. and Pinacor, Inc. entered into an agreement
whereby $175,000 of accounts payable obligations were converted into a
non-interest bearing term note payable in monthly installments of $20,000. At
September 30, 1999, LEC Leasing, Inc. was in payment default under the note
agreement. On October 12, 1999, the court entered a judgement against LEC
Leasing, Inc. and certain of the Company's other subsidiaries in the amount of
$228,777 plus interest on behalf of Pinacor, Inc. On December 31, 1999, all
outstanding balances with Pinacor, Inc. were satisfied at the closing of the
Sale of the leasing business to Somerset.
In March 1999, LEC Leasing, Inc. and IBM Corporation entered into an agreement
whereby $347,884 of accounts payable obligations were converted into an 8% term
note payable in monthly installments of $20,000. On November 12, 1999, the
Company and IBM reached an agreement, subject to appropriate documentation, to
substantially reduce the obligation and amend the repayment terms. As of
December 31, 1999, the balance owed IBM is $50,000, due in quarterly
installments of $12,500 beginning on March 31, 2000.
In November 1999, the Company finalized its lease negotiations in conjunction
with its relocation to Alpharetta, Georgia. As part of the negotiations, the
Company and landlord agreed to a build-out allowance. Actual costs of the
build-out were greater than the allowance. The Company paid for the build-out
with a combination of cash and a note payable to the landlord of $15,980 to be
repaid over 5 years (lease term) at 10%. As of December 31, 1999, the Note
Payable balance was $15,566.
Based on the Company's proceeds from the sale of its lease portfolio and the
elimination of the related indebtedness combined with the anticipated purchase
by LEC Acquisition LLC of the Company's 6% Convertible Debentures and the
conversion thereof into shares of the Company's restricted common stock,
management believes that it has adequate capital resources to continue its
operations at the present level for at least the next twelve months.
The Company believes that inflation has not been a significant factor in its
business.
The Company did not suffer any adverse consequences as a result of any "Y2K"
problems.
17
<PAGE> 18
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.
FUTURE PLANS
During 1999, the Company pursued its efforts 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 the extensive business
experience of the Company's CEO, Ronald G. Farrell, in negotiating and
financing acquisition opportunities, offers an opportunity for growth. However,
certain economic conditions within the golf range and golf course markets have
adversely affected the availability of financing future acquisitions for the
Company.
The Company has begun to focus on the Internet business as it relates to the
golf industry. The Company is developing its own potential web site and
evaluating other opportunities for acquisition.
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 availability and
timing of external capital, 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 leisure time activities
and adversely affect the Company's revenue. 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.
18
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Index to Consolidated Financial Statements
PAGE
<S> <C>
Independent Auditors' Report - Goldstein Golub Kessler LLP 29
Independent Auditors' Report - KPMG LLP 30
Consolidated Balance Sheets as of December 31, 1999 and 1998 31
Consolidated Statements of Operations For The Years Ended
December 31, 1999, 1998 and 1997 32
Consolidated Statements of Cash Flows For The Years Ended
December 31, 1999, 1998 and 1997 33-34
Consolidated Statements of Stockholders' Equity For The
Years Ended December 31, 1999, 1998 and 1997 35
Notes To Consolidated Financial Statements 36-56
</TABLE>
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Inapplicable.
19
<PAGE> 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Ronald G. Farrell 56 Chairman of the Board, Chief
Executive Officer and President
Larry M. Segall 44 Director
John F. Chiste 43 Director
Scott A. Lane 35 Chief Financial Officer
</TABLE>
BIOGRAPHICAL INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS
Ronald G. Farrell. Mr. Farrell, age 56, has served as the Chairman of the
Board, and Chief Executive Officer of the Company since November 20, 1998, and
as President since August 16, 1999. From July, 1992 through December, 1996, Mr.
Farrell served as Chairman and CEO of Computer Integration Corp., a publicly
traded company. 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 roll-up transactions. During the ten
years from 1985 to 1995, Mr. Farrell directed the acquisition of fourteen
companies and was instrumental in four public offerings.
Larry M. Segall. Mr. Segall, age 44, has served as a Director of the Company
since November, 1989. Mr. Segall has been the Chief Financial Officer of
Vitamin Shoppe Industries, Inc. since October, 1997, and the Chief Financial
Officer, Secretary and Treasurer of its new e-commerce online subsidiary,
Vitamin Shoppe.com, Inc. since June, 1999. From 1985 to 1996, Mr. Segall held a
number of financial management positions and was Vice President, Treasurer and
Controller of Tiffany & Co. In 1997, he was Senior Vice President -
Merchandising Planning for Tiffany & Co. and was responsible for worldwide
strategic sales, merchandising and product planning, including product
development, product sourcing/replenishment, internal manufacturing, inventory
management and distribution resource planning. From 1983 to 1985 he was the
Controller of Murijani International Ltd. From 1977 to 1983 he was employed by
Deloitte & Touche LLP.
20
<PAGE> 21
John F. Chiste. Mr. Chiste, age 43, has been the Treasurer and Chief Financial
Officer Bluegreen Corp. since November, 1997. From May, 1994 to October, 1997,
he was the Chief Financial Officer of Computer Integration Corp. Prior to that,
Mr. Chiste was Chief Financial Officer of Sports/Leisure, Inc. from May, 1992
to December, 1992. Prior to his employment by Sports/Leisure, Inc., Mr. Chiste
was employed by Ernst & Young, LLP for 13 years, most recently as a Senior
Manager. Mr. Chiste is a Certified Public Accountant.
Scott A. Lane. Mr. Lane, age 35, became the Chief Financial Officer of the
Company in March 2000. Prior to joining the Company, Mr. Lane was with BWAY
Corporation as a project manager since May 1998. From November 1991 through May
1998, Mr. Lane held progressive management positions in accounting with Turner
Broadcasting System, Inc. From June 1986 to November 1991, Mr. Lane was with a
large local public accounting firm in Atlanta. Mr. Lane is a Certified Public
Accountant.
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, 1999. No other executive officer received annual compensation in excess of
$100,000 in any of the three fiscal years ended December 31, 1999. This
information includes the dollar value of base salaries, bonuses, awards, the
number of stock options granted and certain other compensation, if any, whether
paid or deferred.
(A) SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name of Individual and Other Annual
Principal Position Fiscal Year Salary ($) Bonus ($) Compensation ($)
- ------------------ --------------------------------------------------------------
<S> <C> <C> <C> <C>
Ronald G. Farrell 1999 $353,976 -- --
Chairman & CEO 1998 -- -- --
Michael F. Daniels 1999 $134,448 -- $ --(1)
President (1) 1998 $326,385 -- $ 34,573(2)
1997 $336,519 -- $181,653(2)
William J. Vargas 1999 $110,250 -- $ 19,028(3)
CFO & Secretary 1998 $123,417 -- --
1997 $128,871 -- --
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
Restricted Securities All Other
Name of Individual and Fiscal Stock Underlying Annual
Principal Position Year Awards($) Options/SARs(#) Compensation
- ------------------ ---- -------------------------------------------
<S> <C> <C> <C> <C>
Ronald G. Farrell 1999 -- 200,000 --
Chairman & CEO 1998 -- 300,000 --
Michael F. Daniels 1999 -- --(5) --(4)
President 1998 -- 200,000(5) 2,500(4)
1997 -- --(5) 4,750(4)
William J. Vargas 1999 -- --(5) --(4)
CFO & Secretary 1998 -- 77,500(5) 1,825(4)
1997 -- --(5) 4,750(4)
</TABLE>
(1) Michael F. Daniels served as the Company's Chairman & CEO during the
period January 1, 1996 through November 20, 1998. Mr. Daniels resigned
as President of the Company in March, 1999. Mr. Daniels employment
agreement with one of the Company's subsidiaries was terminated in May
1999. Mr. Daniels has begun an arbitration process seeking the unpaid
balance of the contract. See Item 3. Legal Proceedings.
(2) Consists of commission income based upon realization of excess
residual values related to leases entered into prior to May 15, 1993.
(3) Represents amounts paid as a consultant during the fourth quarter of
1999.
(4) Represents Company matching contribution to 401(k) Profit Sharing Plan.
(5) 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 147,531 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.
22
<PAGE> 23
(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 200,000 72.7% $0.75 5/25/04
Michael F.
Daniels -- -- -- --
William J.
Vargas -- -- -- --
</TABLE>
(C) AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR
END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised
Underlying In-The-Money
Options/SAR's Options/SAR's
At Fiscal At Fiscal
Shares Year End(#) Year End($)
Acquired Value Exercisable/ Exercisable/
Name On Exercised Realized Unexercisable Unexercisable
- ---- ------------ -------- ------------- -------------
<S> <C> <C> <C> <C>
Ronald G.
Farrell -- -- 300,000/200,000 $28,000/$56,000
Michael F.
Daniels -- -- -- --
William J.
Vargas -- -- 2,500/-0-(1) $2,175/-0-
</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.
The last sales price for the Company's Common Stock on the Nasdaq SmallCap
Market on December 31, 1999 was $0.97.
23
<PAGE> 24
(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 dated November 30, 1998 and effective January 1, 1999
through December 31, 2003, as amended. Mr. Farrell's compensation under such
agreement was originally $240,000 through December 31, 1999, and increases by
10% per year thereafter, but was amended in May, 1999 to an annual salary of
$360,000 through December 31, 1999, with annual 10% increases, due to increased
responsibility associated with the Company's golf operations. In addition, Mr.
Farrell is eligible to receive an annual bonus, payable quarterly, based on
Company performance. Such bonus may not exceed Mr. Farrell's base salary for
such respective fiscal year. Mr. Farrell was also granted the option to
purchase a total of 300,000 shares of the Company's Common Stock, vesting in
100,000 share increments on each of December 31, 1999, December 31, 2000 and
December 31, 2001. Pursuant to such employment agreement, if Mr. Farrell should
die during the term thereof, a death benefit equal to eighteen months salary
(currently $540,000) shall be paid to his estate. Mr. Farrell may be terminated
for cause.
Michael F. Daniels served as the Company's President under an employment
agreement dated October 1, 1998 and initially set to expire September 30, 2001.
Mr. Daniels resigned as President of the Company in March, 1999, and was
terminated from all remaining positions with the Company and its subsidiaries
in May, 1999. Mr. Daniels' compensation under his employment agreement was set
at $350,000 per annum and he was eligible for a bonus based on company
performance. In previous employment agreements, Mr. Daniels was entitled to
receive commissions equal to 25% of the net proceeds realized by the Company in
excess of the expected residual value of equipment subject to leases which
commenced prior to May 15, 1993 and for which Mr. Daniels was the lead
salesperson. Certain promissory notes executed by Mr. Daniels also provide that
the Company can offset against any amounts to be paid to Mr. Daniels any amount
that Mr. Daniels owes the Company. The Company has not paid Mr. Daniels since
his termination in May, 1999. Mr. Daniels has commenced an arbitration
proceeding against the Company for payment of amounts allegedly due under his
employment agreement, and the Company is vigorously defending that matter.
William J. Vargas served as the Company's Chief Financial Officer, Treasurer
and Secretary under an employment agreement dated July 1, 1995 and originally
expiring June 30, 2000. Mr. Vargas' compensation under such agreement is
$135,000 per annum. Mr. Vargas resigned from the Company effective December 1,
1999, and remained on a contract basis thereafter to perform certain services
for the Company.
24
<PAGE> 25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 15, 2000, 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 and the nominee for Director,
(iii) each executive officer of the Company earning more than $100,000 during
the year ended December 31, 1999 and (iv) all executive officers and Directors
as a group:
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Beneficial Percentage of
Beneficial Owner (1) Ownership (2) Class (3)
-------------------------- ----------------- --------------
<S> <C> <C>
LEC Acquisition LLC 1,274,599(4) 39.8%
Ronald G. Farrell 500,000(5) 15.6%
William J. Vargas 46,500(6) 1.5%
Larry M. Segall 83,844(7) 2.6%
L. Derrick Ashcroft 58,650(8) 1.8%
Richard D. Falcone 33,500(9) 1.0%
John F. Chiste 10,000(10) 0.3%
Snow, Becker, Krauss, LLC 135,000(11) 4.2%
All Directors and
Executive Officers
as a Group (6 persons) 732,494 22.8%
</TABLE>
(1) The address for all individuals identified herein is 2500 Northwinds
Parkway, Three Northwinds Center # 175, Alpharetta, Georgia 30004.
25
<PAGE> 26
(2) 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.
(3) Based on 3,201,711 shares of Common Stock outstanding as of March 15, 2000.
(4) The Company has granted LEC Acquisition LLC a warrant to purchase 6%
Convertible Debentures of the Company in the principal amount of $1,429,170
which are convertible into shares of Common Stock. LEC Acquisition LLC has
purchased 1,236,099 shares pursuant to such convertible debentures. The number
of shares of Common Stock reflected in the Table does not include the remaining
3,527,801 shares which are 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. Mr. Farrell has disclaimed beneficial ownership of shares owned by LEC
Acquisition, LLC.
(5) Includes options to purchase 500,000 shares of Common Stock granted to Mr.
Farrell, 300,000 shares, which are currently exercisable.
(6) Includes options to purchase 2,500 shares of Common Stock granted to Mr.
Vargas, which are currently exercisable.
(7) Includes options to purchase 30,000 shares of Common Stock granted to Mr.
Segall, which are currently exercisable.
(8) Includes options to purchase 25,000 shares of Common Stock granted to Mr.
Ashcroft, which are currently exercisable. Mr. Ashcroft was not renominated as a
director of the Company. However, he remained a director through the end of the
Annual Meeting.
(9) Includes options to purchase 30,000 shares of Common Stock granted to Mr.
Falcone, which are currently exercisable. Mr. Falcone was not renominated as a
director of the Company. However, he remained a director through the end of the
Annual Meeting.
(10) Includes options to purchase 10,000 shares of Common Stock granted to Mr.
Chiste, which are currently exercisable.
26
<PAGE> 27
(11) The Company has been informed that Snow Becker Krauss PC has granted a
proxy to Mr. Farrell to vote such shares through July 7, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has granted LEC Acquisition LLC a warrant to purchase 6% Convertible
Debentures of the Company in the principal amount of $1,429,170 which are
convertible into shares of Common Stock. LEC Acquisition LLC has purchased
1,236,099 shares pursuant to such convertible debentures. The number of shares
of Common Stock reflected in the Table does not include the remaining 3,527,801
shares which are 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. Mr. Farrell has disclaimed beneficial ownership of shares owned by LEC
Acquisition, LLC.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as a part of this report:
(a) (1) The Consolidated Financial Statements included in Item 8
hereof and set forth on pages 32-59.
(2) The Financial Statement Schedules listed in the Index to
the Financial Statement Schedules.
(3) The exhibits listed in the Index to Exhibits.
(b) Reports on Form 8-K.
The company did not file any Reports on Form 8-K during the fourth quarter of
1999.
27
<PAGE> 28
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 14, 2000 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 14, 2000 By: /s/ Ronald G. Farrell
---------------------------------
Ronald G. Farrell
Chief Executive Officer and Director
(Principal Executive Officer)
Date: April 14, 2000 By: /s/ Scott A. Lane
---------------------------------
Scott A. Lane
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: April 14, 2000 By: /s/ Larry M. Segall
---------------------------------
Larry M. Segall
Director
Date: April 14, 2000 By: /s/ John F. Chiste
---------------------------------
John F. Chiste
Director
28
<PAGE> 29
Independent Auditors' Report
The Board of Directors and Stockholders
Golf Entertainment, Inc.
We have audited the accompanying consolidated balance sheets of Golf
Entertainment, Inc. (formerly LEC Technologies, Inc.) and Subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the years 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 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 Golf Entertainment,
Inc. (formerly LEC Technologies, Inc.) and Subsidiaries as of December 31, 1999
and 1998, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ Goldstein Golub Kessler LLP
New York, New York
April 5, 2000
29
<PAGE> 30
Independent Auditors' Report
The Board of Directors and Stockholders
LEC Technologies, Inc.
We have audited the accompanying consolidated statement of operations,
stockholders' equity, and cash flows of LEC Technologies, Inc. and subsidiaries
for the year ended December 31, 1997. 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 results of operations and cash flows of
LEC Technologies, Inc. and subsidiaries for the year ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ KMPG LLP
Las Vegas, Nevada
March 27, 1998
30
<PAGE> 31
GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Cash 40,619 391,705
Receivables, net of allowance for doubtful
Accounts of $6,339 5,891 --
Notes and accounts receivable, other 329,833 143,376
Inventory 19,721 --
Assets related to discontinued operations 616,002 25,293,380
Furniture and equipment, net of accumulated
Depreciation of $165,650 and $425,465 596,870 552,706
Other assets 950 --
----------- -----------
TOTAL ASSETS 1,609,886 26,381,167
=========== ===========
LIABILITIES
Accounts payable 269,592 --
Accrued liabilities 205,653 --
Notes payable and lines of credit 168,362 --
Liabilities related to discontinued
operations 290,941 23,928,785
Other liabilities 57,254 --
----------- -----------
TOTAL LIABILITIES 991,802 23,928,785
----------- -----------
STOCKHOLDERS' EQUITY
Series A convertible preferred stock, $0.01 par
value, 1,000,000 shares authorized, 380,000
shares issued; 228,516 and 229,016 shares
outstanding at December 31, 1999 and 1998,
respectively 2,285 2,290
Common stock, $0.01 par value, 25,000,000
shares authorized, 3,201,711 and 1,410,393
shares issued and outstanding at December
31, 1999 and 1998, respectively 32,017 14,104
Additional paid-in capital 10,914,470 10,354,985
Accumulated deficit (10,330,688) (7,918,997)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 618,084 2,452,382
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY 1,609,886 26,381,167
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE> 32
GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenue 585,482 -- --
Cost of Revenue 96,645 -- --
Selling, general & administrative 1,750,901 -- --
Depreciation and amortization 96,607 -- --
Interest expense, net 5,771 -- --
---------- ---------- ----------
1,853,279 -- --
---------- ---------- ----------
Loss from continuing operations (1,364,442) -- --
Income/(Loss) from discontinued
operations (1,480,792) (3,202,265) 329,531
Gain on disposal 48,346 -- --
---------- ---------- ----------
Net Income/(Loss) before extraordinary item (2,796,888) (3,202,265) 329,531
Extraordinary income-gain on forgiveness
of debt 385,197 -- --
---------- ---------- ----------
Net Income/(Loss) (2,411,691) (3,202,265) 329,531
========== ========== ==========
Loss per share from continuing operations (0.62) -- --
Income/(Loss) per share from discontinued
Operations (0.68) (2.63) 0.09
Gain per share on disposal 0.02 -- --
Extraordinary gain per share 0.18 -- --
---------- ---------- ----------
Earnings (Loss) per common share (1.10) (2.63) 0.09
---------- ---------- ----------
Earnings (Loss) per common share - diluted (1.10) (2.63) 0.08
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE> 33
GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) (2,411,691) (3,202,265) 329,531
Adjustments to reconcile net loss to cash provided
by operating activities:
Depreciation & Amortization 2,785,366 5,242,149 5,757,672
Write down of inventory and residual values 694,630 1,455,378 75,331
Stock compensation expense 96,564 148,981 53,274
Gain on disposal (49,024) -- --
Forgiveness of debt (385,197) -- --
Change in assets and liabilities due to operating
activities, net of acquisition and disposition:
(Increase) decrease in accounts receivable 2,919,397 (205,101) (1,275,291)
(Increase) decrease in inventory 445,599 721,923 (135,879)
Increase (decrease) in accounts payable (3,341,572) (212,358) 877,157
Increase (decrease) in accrued liabilities (539,765) 253,093 33,502
Increase (decrease) in other liabilities (47,944) (513,690) (309,593)
---------- ---------- ----------
Total adjustments 2,578,054 6,890,375 5,076,173
---------- ---------- ----------
Net cash provided by operating activities 166,363 3,688,110 5,405,704
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales and disposals of off-lease inventory -- 2,799,055 1,734,074
Proceeds from sales of furniture, fixtures and equipment 7,820 -- --
Investments in acquisition -- -- --
Purchases of furniture and equipment (73,623) (303,992) (132,908)
Decrease in notes receivable-employees 143,376 -- --
Increase in notes receivable (379,833) (123,665) 22,874
Additions to net investment in sales-type and direct
financing leases -- (5,323,960) (3,618,507)
Sales-type and direct financing lease rentals received 1,846,830 3,107,094 2,251,582
---------- ---------- ----------
Net cash provided by (used in) investing activities 1,544,570 (3,871,008) (5,996,738)
---------- ---------- ----------
</TABLE>
33
<PAGE> 34
<TABLE>
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from nonrecourse and recourse discounted lease
rentals -- 8,898,725 10,530,281
Payments on nonrecourse and recourse discounted lease
rentals (2,182,856) (9,354,127) (9,433,039)
Proceeds from notes payable 15,980 3,133,020 1,051,373
Payments on notes payable (275,973) (2,245,200) (1,944,911)
Proceeds from sale of stock 380,830 -- 125,000
Proceeds from exercise of warrants -- -- 269,000
Purchase of treasury stock -- (66,454) (38,609)
Preferred stock dividends paid -- -- (171,762)
---------- ---------- -----------
Net cash provided by (used in) financing activities (2,062,019) 365,964 387,333
---------- ---------- -----------
Net increase (decrease) in cash (351,086) 183,066 (203,701)
Cash at beginning of period 391,705 208,639 412,340
Cash at end of period 40,619 391,705 208,639
========== ========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest 1,302,841 2,078,748 1,875,196
Income Taxes -- 43,627 3,750
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE> 35
GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------- --------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
------ ------ ------ ------ ---------- ------------
<S> <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)
Sale of common stock 39,063 391 124,609
Issuance of common stock for
services 12,500 125 46,750
Exercise of "B" warrants 67,250 672 (672)
Stock compensation expense 6,399
Purchase of treasury stock
Preferred stock dividends (229,016)
Net income, 1997 329,531
-------------------------------------------------------------------------
Balance at December 31, 1997 229,016 2,290 1,220,568 12,206 10,419,038 (4,716,732)
Exercise of stock options 234,375 2,344 146,637
Purchase of treasury stock
Write-off of shareholder notes
receivables
Retirement of treasury stock (44,550) (446) (210,690)
Net loss, 1998 (3,202,265)
-------------------------------------------------------------------------
Balance at December 31, 1998 229,016 2,290 1,410,393 14,104 10,354,985 (7,918,997)
Conversion of preferred stock
to common (500) (5) 219 2 3
Stock compensation expense 110,000 1,100 95,464
Issuance of stock in lieu of
payment 345,000 3,450 96,549
Sale of stock 1,336,099 13,361 367,469
Net loss, 1999 (2,411,691)
-------------------------------------------------------------------------
Balance at December 31, 1999 228,516 2,285 3,201,711 32,017 10,914,470 (10,330,688)
=========================================================================
<CAPTION>
NOTES
RECEIVABLE TOTAL
TREASURY FROM STOCKHOLDERS'
STOCK STOCKHOLDERS EQUITY
-------- ------------ ------------
<S> <C> <C> <C>
Balance at December 31, 1996 (106,073) (93,750) 5,238,190
Sale of common stock 125,000
Issuance of common stock for
services 46,875
Exercise of "B" warrants --
Stock compensation expense 6,399
Purchase of treasury stock (38,609) (38,609)
Preferred stock dividends (229,016)
Net income, 1997 329,531
------------------------------------
Balance at December 31, 1997 (144,682) (93,750) 5,478,370
Exercise of stock options 148,981
Purchase of treasury stock (66,454) (66,454)
Write-off of shareholder notes
receivables 93,750 93,750
Retirement of treasury stock 211,136 --
Net loss, 1998 (3,202,265)
------------------------------------
Balance at December 31, 1998 -- -- 2,452,382
Conversion of preferred stock
to common --
Stock compensation expense 96,564
Issuance of stock in lieu of
payment 99,999
Sale of stock 380,830
Net loss, 1999 (2,411,691)
------------------------------------
Balance at December 31, 1999 -- -- 618,084
====================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE> 36
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;
TJ Computer Services, Inc.; and Traditions Acquisition Corporation)
(collectively, the "Company" or "Golf") is in the process of entering the
business of owning and operating Golf Entertainment facilities and developing
and acquiring golf related Internet companies. Mr. Ronald G. Farrell introduced
in late 1998 a plan to re-orient the Company from the equipment leasing business
to the golf industry, including owning and operating golf courses, as well as
other opportunities in Internet ".com" businesses. On February 17, 1999, the
stockholders of the Company approved the issuance of convertible debentures to
an investment company managed by Mr. Farrell, as well as the change of the
Company's name to Golf Entertainment, Inc. from LEC Technologies, Inc.
The Company's former line of business has been leasing business equipment. The
equipment generally has been midrange computer systems, telecommunications
systems, system peripherals (terminals, printers, communications controllers,
etc.) and point-of-sale systems. The Company has provided customers with
technical, financial and product alternatives, of various hardware platforms or
manufacturers, and has assisted customers with equipment upgrades or selling
used equipment.
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.
Allowance for Doubtful Accounts
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,
1999.
<TABLE>
<CAPTION>
Balance at Balance at
Beginning of End of
Period Expense Write-off Period
------------- ------- --------- -----------
<S> <C> <C> <C> <C>
1997 170,699 (13,294) -- 157,405
1998 157,405 250,350 103,388 304,367
1999 304,367 62,878 360,906 6,339
</TABLE>
36
<PAGE> 37
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.
Revenue Recognition
Golf based revenue is recorded when services are performed.
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.
Inventory of merchandise and perishables held at Traditions Golf course is
valued at the lower of cost or market utilizing the first in, first out basis.
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:
<TABLE>
<S> <C>
Computer equipment 3 to 5 years
Furniture and office equipment 5 to 7 years
Leasehold improvements Term of lease
</TABLE>
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 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 during the year ended December 31, 1998.
37
<PAGE> 38
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 1998 and 1997 financial
statements to conform to the 1999 presentation.
38
<PAGE> 39
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.
39
<PAGE> 40
NOTE 3: ACQUISITION OF TRADITIONS GOLF CLUB
On May 22, 1999, Traditions Acquisition Corporation, a wholly-owned subsidiary
of Golf Entertainment, Inc. acquired substantially all of the assets except for
real estate of Golf Traditions I, Ltd., a partnership that developed Traditions
Golf Club in Edmond, Oklahoma. Traditions Golf Club has a 4,500 yard, 18 hole,
par 60 executive length golf course, a 20 acre practice range of 80 tees with
multiple target greens, an 18 hole practice putting course, a mini-course for
juniors, a pro shop and a club house. The Company assumed liabilities in the
amount of $454,073, which was equal to the total assets of the acquired
business. The purchase method of accounting was used to establish and record a
new cost basis for the assets acquired and liabilities assumed. Concurrently,
the Company entered into a ground lease for a 4-year term with two (2)
additional term options of two (2) years each for $24,000 per month. This lease
is accounted for as an operating lease.
The operating results for the acquisition have been included in the Company's
consolidated financial statements since the date of acquisition.
The following unaudited proforma results assume the acquisition of Traditions
Golf Club occurred at the beginning of the year ended December 31, 1999.
<TABLE>
<S> <C>
Net sales 888,009
Net expenses 2,468,877
Discontinued operations (1,480,792)
Gain on disposal 48,346
Extraordinary item 385,197
----------
Net loss (2,628,117)
Basic earnings per share (1.20)
Diluted earnings per share (1.20)
</TABLE>
NOTE 4: DISCONTINUED OPERATIONS
In 1998, the Board of Directors determined that, in light of the significant
losses from the Company's equipment leasing business and the sizeable
indebtedness of the Company from that business, that it was in the best interest
of the Company that its equipment leasing business be sold and the Company
should develop a golf entertainment business. The Directors agreed to the sale
to repay indebtedness incurred in connection with the Company's equipment
leasing business and to generate capital for the development of the golf
entertainment business. The sale was consummated on December 31, 1999. The
Company received approximately $14,000 in cash (after deducting expenses of
approximately $315,000), plus a note receivable of $75,000 with monthly payments
of $2,834 through June 2002 . These funds were used to pay ongoing expenses of
the Company and repay Excel Bank, N.A. for certain recourse debt not being
assumed by the Buyer. Furthermore, the Buyer has assumed approximately
$12,500,000 of debt associated with the Company's business equipment leases and
approximately $2,600,000 of senior secured debt.
Revenue related to the discontinued operations was $8,102,630, $30,623,016 and
$30,714,624 for the years ended December 31, 1999, 1998 and 1997, respectively.
At December 31, 1999, the Company had approximately $150,000 of lease inventory,
$466,000 of leased assets and approximately $290,000 of related lease
liabilities.
40
<PAGE> 41
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>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" income tax
expense (benefit) $ (844,092) $(1,120,793) $ 115,336
Change in valuation allowance
for deferred tax assets 809,429 1,115,340 (119,701)
Nondeductible expenses 34,663 5,453 4,365
----------- ----------- -----------
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, 1999 and 1998 are
presented below:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Deferred Tax Assets
Allowances for doubtful accounts,
inventory obsolescence and
residual value realization not
currently deductible $ 712,884 $ 544,941
Expenses accrued for financial
statement purposes, not
currently deductible -0- 576,450
Net operating loss carryforwards 1,460,642 1,859,444
------------ ------------
Total gross deferred tax assets 2,173,526 2,980,835
Valuation allowance (2,173,526) (1,364,097)
------------ ------------
Net deferred tax assets -0- 1,616,738
------------ ------------
</TABLE>
41
<PAGE> 42
<TABLE>
<CAPTION>
Deferred Tax Liabilities
<S> <C> <C>
Basis difference for sales-type and
direct financing leases for
financial statement purposes and
operating leases for tax purposes -0- 409,446
Basis difference for operating
leases, principally due to
depreciation -0- 1,207,292
----------- -----------
Total deferred tax liabilities -0- 1,616,738
----------- -----------
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, 1999 and 1998, the Company determined that
$2,173,526 and $1,364,097, respectively, of tax benefits did not meet the
realization criteria.
At December 31, 1999, the Company has net operating loss carryforwards for
Federal income tax purposes of approximately $7,000,000 which are available to
offset future taxable income, if any, through 2019.
NOTE 6: NONRECOURSE AND RECOURSE DISCOUNTED LEASE RENTALS
The Company assigned the rentals of its leases to financial institutions at
fixed rates on a nonrecourse or, to a lesser extent, on a recourse basis but
retained the residual rights. In return for future lease payments, the Company
received a discounted cash payment. Discounted lease rentals as of December 31,
1999 and 1998 were $115,941 and $15,450,421 respectively of which $115,941 and
$960,256 are recourse, respectively. Interest expense on discounted lease
rentals for the years ended December 31, 1999 and 1998 was $838,584 and
$1,341,652, respectively.
Principal and interest payments required on discounted lease rentals as of
December 31, 1999 are $115,941 for the year ending December 31, 2000.
42
<PAGE> 43
NOTE 7: NOTES PAYABLE, LINES OF CREDIT AND OBLIGATIONS UNDER CAPITAL LEASE
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"). The balance due on the Merrill Note is $125,000 as of December 31,
1999.
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, 1999, the Company had outstanding term notes and available
credit under the Equity Line of $0 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.
43
<PAGE> 44
The Finova Term Loan requires a 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, 1999, the amount outstanding under the Finova Term Loan was $-0-.
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, 1999, the amounts outstanding
under the Finova Revolver were $-0-.
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 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 was guaranteed by the Company and was secured by a lien
on the receivables, inventory and equipment of ADI. Under the ADI Credit
Agreement, ADI 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.
44
<PAGE> 45
In November 1999, the Company finalized its lease negotiations in conjunction
with its relocation to Alpharetta, Georgia. As part of the negotiations, the
Company and landlord agreed to a build-out allowance. Actual costs of the
build-out were greater than the allowance. The Company paid for the build-out
with a combination of cash and a note payable to the landlord of $15,980 to be
repaid over 5 years (lease term) at 10%. As of December 31, 1999, the Note
Payable balance was $15,566.
Notes payable and lines of credit consist of the following at December 31,
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<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 $ -0- $ 1,425,000
Revolving line of credit agreement with Finova Capital Corporation, with
floating interest rate of prime plus 2.0 percent -0- 762,223
Term note with IBM Corporation, due in quarterly installments of $12,500
through December 31, 2000 with interest rate at 0.0 percent 50,000 -0-
Term note with Merrill Lynch, due in varying monthly installments beginning
from March 1, 2000 of $5,000 for 6 months, $7,500 for the next 6 months,
$10,000 for the remainder 5 payments with interest rate at 0.0 percent 125,000 216,464
Secured notes payable to Excel Bank, payable in installments through
November, 1999 with fixed interest rates between 9.75 and 10.0 percent,
secured by leased equipment -0- 1,479,072
Term note payable to Northwinds Center, LP, payments of $340 including
interest at 10%, due October 31, 2004 15,566 -0-
</TABLE>
45
<PAGE> 46
<TABLE>
<S> <C> <C>
Term note payable to Associates Leasing,
Inc., payments of $8,248 including interest
at 7.14%, due December 1, 2001 101,894 -0-
Term note payable to Associates Leasing,
Inc., payments of $392 including interest
at 10.25%, due December 1, 2001 4,600 -0-
Term note payable to Associates Leasing,
Inc., payments of $640 including interest
at 10.25%, due December 1, 2001 7,503 -0-
Term note payable to Associates Leasing,
Inc., payments of $227 including interest
at 10.2%, due September 1, 2002 4,575 -0-
Term note payable to New Holland Credit
Company, payments of $1,257 including
interest at 10.5%, due July 1, 2002 21,866 -0-
Term note payable to Toyota Motor Credit
Corporation, payments of $295 including
interest at 9.25%, due July 1, 2002 7,850 -0-
Other -0- 133,825
----------- -----------
$ 338,874 $ 4,016,584
=========== ===========
</TABLE>
Required annual principal payments as of December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000 $ 173,931
2001 146,080
2002 11,746
2003 3,554
2004 3,563
----------
Total $ 338,874
==========
</TABLE>
46
<PAGE> 47
Obligation under Capital Lease
As part of the Traditions acquisition, the Company assumed a certain capital
lease obligation related to the assets acquired. The capital lease has specific
imputed interest rates and payment obligations. As of December 31, 1999, the
total obligation under capital lease is $4,488.
Obligations under capital lease consist of the following at December 31,
<TABLE>
<CAPTION>
1999 1998
----------- ------
<S> <C> <C>
Southwestern Bell Financial Services,
payments of $361 including interest at
19.5%, due February 1, 2001 $ 4,488 $-0-
</TABLE>
Required annual lease payments as of December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000 $ 3,783
2001 705
-----------
Total $ 4,488
===========
</TABLE>
NOTE 8: COMMITMENTS AND CONTINGENCIES
a) Lease Agreements
The Company leases its office space under an operating lease expiring October
2004. The minimum future rental payments required as of December 31, 1999 under
the operating lease are:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C> <C>
2000 $ 74,557
2001 76,800
2002 79,106
2003 81,477
2004 69,753
----------
Total $ 381,693
==========
</TABLE>
Rental expense on operating leases was $344,883, $301,658, and $267,552 for the
years ended December 31, 1999, 1998, and 1997, respectively.
47
<PAGE> 48
b) Employment Contracts
The Company has employment agreements with one of its executive officers with
remaining terms of approximately four years. Under this agreement, the employee
is entitled to receive other employee benefits of the Company, including medical
and life insurance coverage. If the agreement is terminated due to the death of
an employee, a death benefit equal to eighteen months salary shall be paid to
the employee's estate, currently $540,000. The Company may terminate for cause.
The Company's annual expense under these agreements is approximately $360,000.
The annual base salary under such agreement was $240,000 for the period January
1, 1999 through December 31, 2000, but was amended in May, 1999 to an annual
salary of $360,000 through December 31, 1999, with annual 10% increases
thereafter, due to increased responsibility associated with the Company's
operations. 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.
NOTE 9: RELATED PARTY TRANSACTIONS
a) Company's Board of Directors
A current 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 leasing business customers. Another former director of the
Company was formerly the Chief Operating Officer of NetGrocer, Inc., one of the
Company's leasing business 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. were fair and were reached on an arms-length basis.
b) 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
In 1999, the Company issued 110,000 shares of restricted common stock for
compensation. The fair market value of the shares at the date of issue was
$96,564 and was expensed in 1999.
48
<PAGE> 49
Also in 1999, the Company issued 345,000 shares of restricted common stock in
lieu of payment. The fair market value of the shares at the date of issue was
$99,999.
Also in 1999, 5 shares of the Company's preferred stock were converted into 219
shares of common stock. There was no economic effect to the company.
Also in 1999, LEC Acquisition LLC exercised its option to acquire 1,236,099
shares of common stock in exchange for its convertible notes. The fair market
value of the shares at the dates of issue was $370,830.
Also in 1999, other 6% convertible notes were exercised at the stated option
rate of $0.10 per share. 10,000 shares were issued.
On September 15, 1998, the Company's shareholders 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.
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, 1999 and 1998 there were 228,516 and 229,016 shares of preferred
stock outstanding, respectively. Also, at December 31, 1999 and 1998 there were
1,506,544 and 1,509,840 warrants outstanding, respectively.
49
<PAGE> 50
Accrued and unpaid preferred stock dividends were $57,254 at December 31, 1999
and 1998. The preferred stock has unaccrued and unpaid dividends in the amounts
of $228,516 and $229,016 for December 31, 1999 and 1998, respectively.
B. WARRANTS AND STOCK OPTIONS
Warrants
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. On November 11, 1999, the Board of Directors approved an
amendment to the Subscription Agreement to extend the Warrant exercise period to
November 29, 2000. At December 31, 1999, $370,829 of the 6% Convertible
Debentures had been issued and converted to 1,236,099 shares of common stock.
Stock Options
1) Key Employee and Director
The Company has five stock option plans covering an aggregate of 690,781 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, a former 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.
50
<PAGE> 51
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>
1999 1998 1997
<S> <C> <C> <C>
Net earnings (loss) available to common stockholders:
As reported $ (2,412) $ (3,202) $ 101
Pro forma (2,493) (3,457) (123)
Earnings (loss) per common weighted average share:
As reported $ (1.10) $ (2.63) $ 0.09
Pro forma (1.14) (2.84) (0.11)
</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 1999, 1998 and 1997, respectively: dividend yield
of 0.0% for each year; expected volatility of 60 percent, 52 percent and 35
percent; risk free interest rates of 6.00%, 5.83%, and 5.96%; and expected lives
of one year, three years and five years.
Additional information on shares subject to options is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
year 415,781 $1.12 138,906 $2.72 303,656 $6.48
Granted 275,000 .75 811,250 1.48 525,000 3.00
Exercised -0- (234,375) 2.00 -- --
Forfeited -0- (300,000) 2.19 (689,750) 3.04
------- ------- -------
Outstanding at
end of year 690,781 0.97 415,781 1.12 138,906 2.72
======= ======= =======
</TABLE>
51
<PAGE> 52
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Options exer-
cisable at
year end 490,781 1.08 83,865 1.93 42,073 2.08
======= ====== ======
Weighted average
fair value of
options granted
during the year $0.75 $0.46 $1.00
===== ===== =====
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------
Weighted
Average Weighted
Number Remaining Average
Range of of Contractual Exercise
exercise prices Shares Life Price
------------------------------------------------------------------
<S> <C> <C> <C>
$ 0.10 2,500 3.8 yrs $ 0.10
0.32 14,531 3.7 yrs 0.32
0.69 300,000 8.9 yrs 0.69
0.75 275,000 5.0 yrs 0.75
0.81 20,000 8.8 yrs 0.81
3.00 78,750 2.2 yrs 3.00
-------
690,781 3.0 yrs $ 0.97
=======
</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
0.69 100,000 0.69
0.75 275,000 0.75
0.81 20,000 0.81
3.00 78,750 3.00
-------
490,781 1.08
=======
</TABLE>
52
<PAGE> 53
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
expired 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 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.
NOTE 11: MAJOR CUSTOMERS
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. There are no significant customer relationships remaining after the sale
of the lease portfolio.
NOTE 12: EMPLOYEE BENEFIT PLANS
The Company had a qualified 401(k) Profit Sharing Plan (the "Plan") covering all
employees of the Company, including officers. Employees were 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 and 1997, the Company contributed its required amounts
of $49,386 and 56,902 to the Plan on behalf of the Plan's participants. The plan
was terminated in 1999.
53
<PAGE> 54
NOTE 13: SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 1999, the Company issued 110,000 shares of
common stock in exchange for services valued at $96,564; converted $522,884 in
accounts payable obligations into term notes; issued 345,000 shares of
restricted common stock to satisfy accounts payable obligations of $100,000; and
assumed $454,073 in liabilities in exchange for $454,073 in assets to be used in
connection with the operations of the Traditions Golf Club.
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 lease
renewals/upgrades.
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, 1999 and 1998 for receivables, accounts
payable, accrued liabilities, notes payable and lines of credit approximate
their fair values due to the short maturity of these instruments.
NOTE 15: 1999 FOURTH QUARTER CHARGES
During the fourth quarter of 1999, the Company recorded a charge of $900,000 to
reduce the carrying amount of certain assets related to discontinued operations.
These charges resulted from a decrease in the market value due to obsolescence
of the computer equipment held in storage facilities. Although management
believes that its recorded residual values are properly stated, there can be no
assurance that the Company will not experience further write-downs in the
future.
54
<PAGE> 55
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>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Shares outstanding at
beginning of period 1,410,393 1,197,268 1,085,230
Effect of issuance of common
stock compensation 45,342 -- 10,925
Issuance of common stock in
lieu of payment 175,535 -- --
Sale of stock 553,873 -- --
Conversion of preferred stock 109 -- --
Issuance of common stock
pursuant to private place-
ment transactions -- -- 12,200
Exercise of stock options 32,748 --
Exercise of "B" warrants -- -- 64,671
Purchase of treasury stock -- (13,419) (4,520)
------------ ------------ ------------
Weighted average common
shares outstanding 2,185,252 1,216,597 1,168,506
============ ============ ============
Net income (loss) $ (2,411,691) $ (3,202,265) $ 329,531
Preferred stock dividends -- -- (229,016)
------------ ------------ ------------
Net earnings available to
common shareholders $ (2,411,691) $ (3,202,265) $ 100,515
============ ============ ============
Earnings (loss) per common
share $ (1.10) $ (2.63) $ 0.09
============ ============ ============
</TABLE>
55
<PAGE> 56
<TABLE>
<S> <C> <C> <C>
Weighted average common
shares outstanding 2,185,252 1,216,597 1,168,506
Effect of common shares
issuable upon exercise of
dilutive stock options -- -- 38,762
------------ ------------ ------------
Weighted average common
shares outstanding assuming
dilution 2,185,252 1,216,597 1,207,268
============ ============ ============
Earnings (loss) per common
share assuming dilution $ (1.10) $ (2.63) $ 0.08
============ ============ ============
</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>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Options 690,781 309,791 112,000
Warrants 1,506,544 1,207,179 1,207,179
Convertible preferred stock 228,516 100,195 100,195
Warrants issuable upon conversion
of preferred stock if conversion
occurred prior to August 4, 1998 -- 71,568 71,568
</TABLE>
NOTE 17: SUBSEQUENT EVENTS
In March 2000, the Board approved the Company's business plan to continue in the
golf industry by refocusing its primary activities on opportunities in golf
Internet ".com" businesses from the acquisition of golf ranges and executive par
3 golf courses. The Company has begun to focus on the Internet business as it
relates to the golf industry. The Company is developing its own potential web
site and evaluating other opportunities for acquisition.
56
<PAGE> 57
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
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-
ment.***
</TABLE>
<PAGE> 58
<TABLE>
<S> <C>
10.20 Amendment No. 2 to Merrill Lynch Line of Credit Agree-
ment.***
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 (for SEC use only).
</TABLE>
* 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.
** 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.
*** 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.
**** Incorporated by reference to the Company's 1994 Proxy Statement,
Commission File No. 0-18303.
***** Incorporated by reference to the Company's 1996 Proxy Statement,
Commission File No. 0-18303.
****** 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.
******* Previously filed.
<PAGE> 1
EXHIBIT 21
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.
Traditions Acquisition Corporation; incorporated in the State of Georgia on
April 27, 1999; and doing business as Traditions Golf Club.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS OF GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES AS OF DECEMBER
31, 1999 AND FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-K ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 40,619
<SECURITIES> 0
<RECEIVABLES> 12,230
<ALLOWANCES> 6,339
<INVENTORY> 19,721
<CURRENT-ASSETS> 91,139
<PP&E> 762,520
<DEPRECIATION> 165,650
<TOTAL-ASSETS> 1,609,886
<CURRENT-LIABILITIES> 532,499
<BONDS> 459,303
0
2,285
<COMMON> 32,017
<OTHER-SE> 583,782
<TOTAL-LIABILITY-AND-EQUITY> 1,609,886
<SALES> 585,482
<TOTAL-REVENUES> 585,482
<CGS> 96,645
<TOTAL-COSTS> 96,645
<OTHER-EXPENSES> 1,784,630
<LOSS-PROVISION> 62,878
<INTEREST-EXPENSE> 5,771
<INCOME-PRETAX> (1,364,442)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,364,442)
<DISCONTINUED> (1,432,446)
<EXTRAORDINARY> 385,197
<CHANGES> 0
<NET-INCOME> (2,411,691)
<EPS-BASIC> (1.10)
<EPS-DILUTED> (1.10)
</TABLE>
