-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K8NC5FlOmw2LyU6JAuER/p3AWBqaiHk3PzqRRY00hZJrTse1cfuHBPrsEXrKW8if CMywN94zy7ufuiePnis/hQ== 0000849354-99-000003.txt : 19990505 0000849354-99-000003.hdr.sgml : 19990505 ACCESSION NUMBER: 0000849354-99-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 DATE AS OF CHANGE: 19990504 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOLF ENTERTAINMENT INC CENTRAL INDEX KEY: 0000849354 STANDARD INDUSTRIAL CLASSIFICATION: 7377 IRS NUMBER: 112990598 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-18303 FILM NUMBER: 99595862 BUSINESS ADDRESS: STREET 1: 6540 S PECOS ROAD STREET 2: SUITE 103 CITY: LAS VEGAS STATE: NV ZIP: 89120 BUSINESS PHONE: 7024547900 MAIL ADDRESS: STREET 1: 6540 S PECOS RD STREET 2: SUITE 103 CITY: LAS VEGAS STATE: NV ZIP: 89120 FORMER COMPANY: FORMER CONFORMED NAME: LEC TECHNOLOGIES INC DATE OF NAME CHANGE: 19970604 FORMER COMPANY: FORMER CONFORMED NAME: LEASING EDGE CORP DATE OF NAME CHANGE: 19950718 FORMER COMPANY: FORMER CONFORMED NAME: TJ SYSTEMS CORP DATE OF NAME CHANGE: 19920703 10-K 1 10-K FOR PERIOD ENDED 12/31/98 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) X Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended December 31, 1998. Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the transition period to . Commission File No. 0-18303 GOLF ENTERTAINMENT, INC. (formerly known as LEC TECHNOLOGIES, INC.) (Exact name of registrant as specified in its charter) Delaware No. 11-2990598 (State or other jurisdiction of (I.R.S. Employer Identifi- incorporation or organization) cation No.) 6540 South Pecos Road, Suite 103, Las Vegas NV 89120 (Address of principal executive offices) (Zip Code) Issuer's telephone number (702) 454-7900 (Including area code) Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, Par Value $0.01 Per Share Series A Convertible Preferred Stock Common Stock Purchase Warrants Class C Common Stock Purchase Warrants Class D Common Stock Purchase Warrants Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K(229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting stock held by non- affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing: As of March 11, 1999, the approximate market value of the common stock (based upon the NASDAQ closing price of $0.75 of stated shares on that date) held by non- affiliates was $852,809. APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No (APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: As of March 11, 1999, the issuer had 1,715,491 shares of common stock, par value $0.01 per share, outstanding. Documents incorporated by reference: None. GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES (FORMERLY KNOWN AS LEC TECHNOLOGIES, INC.) 1998 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
PAGE PART I Item 1. BUSINESS 2 Item 2. PROPERTIES 8 Item 3. LEGAL PROCEEDINGS 8 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 9 Item 6. SELECTED FINANCIAL DATA 9 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 10 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 15 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 42 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 43 Item 11. EXECUTIVE COMPENSATION 44 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 45 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 45 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 46
PART I ITEM 1: BUSINESS General Golf Entertainment, Inc. (formerly known as LEC Technologies, Inc.) and subsidiaries (LEC Leasing, Inc. or "LEC"; Superior Computer Systems, Inc. or "SCS"; Pacific Mountain Computer Products, Inc. or "PMCPI"; Atlantic Digital International, Inc. or "ADI"; LEC Distribution, Inc.; and, TJ Computer Services, Inc.)(collectively, the "Company" or "Golf") is currently a technology services company, providing solutions that help organizations reduce technology cost and risk, primarily through the leasing, distribution and remarketing of high technology equipment. Such equipment generally consists of midrange computer systems, telecommunications systems, system peripherals (terminals, printers, communications controllers, etc.) and point-of-sale systems. As an independent organization, the Company provides customers with technical, financial and product alternatives, irrespective of hardware platform or manufacturer. In addition to working with its customers to develop strategies governing when to acquire equipment, upgrade existing equipment and order new equipment to take advantage of current technology, the Company also acts as an outlet for the equipment being displaced. The Company's business is diversified by customer, customer type, equipment type, equipment manufacturer, and geographic location of its customers and subsidiaries. The Company's customers include "Fortune 1000" corporations or companies of similar size as well as smaller corporations. A significant portion of the Company's business is with long-term, repeat customers. Three customers of the Company, Tiffany & Co., Bed, Bath & Beyond and The Hertz Corporation, respectively, accounted for approximately 17.2%, 7.6%, 2.3% of consolidated revenues for the year ended December 31, 1998, 15.0%, 9.2% and 3.7% of consolidated revenues for the year ended December 31, 1997 and 25.0%, 12.8% and 7.4% of consolidated revenues for the year ended December 31, 1996. However, the Company does not believe its businesses are dependent on any single customer or on any single source for the purchasing, selling or leasing of equipment. The Company's services are organized into three groups of related businesses, and are provided generally through separate business units, although there is a significant amount of interrelated activities. The three business groups are as follows: Leasing Services: Leasing, remarketing, financial engineering, consulting and third-party maintenance and systems integration services for midrange systems, telecommunications equipment, point- of-sale systems and system peripherals. The business unit through which the Company conducts its leasing services business is LEC, a wholly-owned subsidiary of Golf Entertainment, Inc. Distribution Services: Sale of terminals, printers, communications controllers, supplies, technical consulting and third-party maintenance services. Business units comprising distribution services are SCS and PMCPI, wholly-owned subsidiaries of Golf Entertainment, Inc. Remarketing Services: Remarketing of previously leased equipment, displaced equipment, and used equipment purchased from other lessors or brokers. This unit also has consignment relationships with certain customers to assist such organizations in the sale of their used equipment. Business units comprising remarketing services include LEC, SCS, PMCPI and ADI, a wholly-owned subsidiary of Golf Entertainment, Inc., which specializes in the acquisition and remarketing of used computer equipment on both a domestic and international basis. The Company's leasing operations are conducted primarily through its principal office in Las Vegas, Nevada and its distribution and remarketing operations are conducted primarily through its subsidiaries' offices located in Minneapolis, Minnesota, Woodland Hills, California and Atlanta, Georgia. Each business unit is directed by its own management team and has its own sales and operations support personnel. Each management team reports directly to the Office of the President, which is responsible for overall corporate control and coordination, as well as strategic planning. Coordination of the business units is also accomplished through shared services, such as legal, risk management and accounting. The business units maintain their own direct marketing force to manage their customer base and to market their own as well as other units' services. In its business operations, the Company attempts to cross- sell services where and when appropriate. The Company was founded in 1980 under the name TJ Computer Services, Inc. ("TJCS"). In 1989, all of the outstanding common stock of TJCS was acquired by Harrison Development, Inc., an inactive public corporation organized in Colorado, which then changed its name to TJ Systems Corporation. In October 1991, the Company reincorporated in the State of Delaware and in June 1995 changed its name to Leasing Edge Corporation. In March 1997, the Company's shareholders approved a change in the Company's name to LEC Technologies, Inc. to more accurately reflect the evolving nature of the Company's business. In February 1999, the Company's shareholders approved a change in the Company's name to Golf Entertainment, Inc. The executive offices of the Company are located at 6540 S. Pecos Road, Suite 103, Las Vegas, Nevada, 89120, and its telephone number is (702) 454-7900. The Company's Plans in the Golf and Leisure Time Industry In November 1998, the Board of Directors of the Company authorized management to examine strategic opportunities for the Company, including opportunities in the golf and leisure time industry. The Board of Directors also authorized management to engage an investment banking firm to advise it concerning strategic alternatives in connection with its computer businesses (see Note 17 of Notes to Consolidated Financial Statements). General The Company intends to focus primarily on acquiring and consolidating the ownership of existing golf ranges and golf centers. The Company believes that the fragmented ownership of golf ranges and centers, currently characteristic of the industry in the United States, coupled with Mr. Farrell's extensive business experience in negotiating and financing acquisition opportunities, offer it an opportunity for growth. The Company intends to enhance these existing golf facilities by adding amenities and improving management and operating systems. The Company also will develop new golf recreational facilities, and may acquire other golf related businesses. The Company intends that its facilities will be centered around a driving range and will provide a variety of golf practice areas for pitching, putting, chipping and sand play. The Company intends that its facilities will be user-friendly for all levels of golfer and will appeal to the entire family. Each driving range will, generally, permit night play and limited year round use. Each facility will offer instructional programs for men, women and juniors, and will be staffed with professional instructors. Most facilities will include a clubhouse that will house a full line pro-shop, a snack bar, a miniature golf course(s) and batting cages. Where feasible, the Company intends that the facilities will include par-3 or executive- length (shorter than a regulation-length) golf courses. The Company's revenues will be derived from selling balls to be used on the driving range, charging for rounds of miniature golf, charging for the use of the batting cages, selling golf equipment, golf apparel and related accessories through the pro-shop, fees for instructional programs and from food and beverage sales. The Company will seek to realize economies of scale at its facilities through centralized management information systems, accounting, cash management and purchasing programs. The Company may also seek long-term management contracts to operate golf courses and golf related facilities. Business Strategy The Company's goal is to become a leading consolidator, owner and operator of golf related recreational facilities in the United States. The Company intends to accomplish this goal by focusing its activities principally on acquiring and consolidating the ownership of operating facilities that have the potential for revenue growth through the expansion and upgrading of those facilities to include better amenities, more efficient management and more effective marketing strategies. The Company also intends to develop new golf recreational facilities in attractive markets and may acquire other golf related businesses. On April 6, 1999, the Company announced the appointment of Mr. John Rooney as the Company's new president effective April 19, 1999. Mr. Rooney has been involved in the golf industry for over 15 years and, as President of the Rooney Golf Group, he has been involved in the ownership, development and management of golf facilities throughout the United States. Mr. Rooney will have overall responsibility for the operations of the Company's business. Mr. Farrell, as Chairman and Chief Executive Officer of the Company, will focus his activities on raising additional equity capital, securing debt facilities for the Company, and identifying and negotiating acquisitions for the Company. Forward-Looking Statements Statements about the Company's expectations, including future revenues, earnings, its ability to compete effectively and to maintain market share, to adapt to changes in its customers' technology requirements, and all other statements in this Report on Form 10-KSB, including Management's Discussion and Analysis of Financial Condition and Results of Operation, and other Company communications other than historical facts, are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934, and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. Since these statements involve risks and uncertainties and are subject to change at any time, the Company's actual results could differ materially from expected results. Reference is made to "Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995" in Item 7 of this Report on Form 10-K. Leasing Services Management estimates that the world-wide market for high technology equipment approximates $400 billion annually and that approximately ten percent represents leasing activities. The computer equipment leasing industry consists of many products and services loosely divided into several major submarkets. These submarkets include mainframe and midrange computer equipment, microcomputer sales and network design, local area networks, point-of-sale equipment, disaster recovery services and other engineering and technical support services. The Company believes that the size of the computer equipment leasing market reflects the rapid technological improvements in and the development of new equipment as well as the advantages that leasing offers over equipment purchasing, including off-balance sheet financing, lower monthly payments and cash requirements, protection against technological obsolescence and ease of disposal of equipment at the end of the lease term. Historically, the industry was dominated by the manufacturers of mainframe computer equipment and their captive or related leasing companies. However, the introduction of new and more powerful microcomputers offering increased capability at reduced prices has led to an increase in the demand for midrange and microcomputer hardware, software, accessories and related services. Business users are employing, at an increasing rate, midrange and microcomputer networks to perform applications previously requiring a mainframe computer. This increase in technological capability and the relatively high cost of mainframe systems has resulted in a fundamental shift in the demand for information systems and services, creating new opportunities for more efficient, flexible and competitive lessors and distributors of midrange and microcomputers and related equipment. The Company's structured lease transactions provide customers with a full range of new and used data processing equipment, including midrange central processing units, peripherals, point-of-sale systems and telecommunications equipment produced by major manufacturers. By emphasizing a full range of products and manufacturers and by maintaining a balanced client base, the Company maximizes its leasing opportunities while providing stability to its lease portfolio. Through its leasing transactions, the Company serves as an intermediary between end users of high technology equipment and sources of financing for equipment purchases. The Company purchases new equipment directly from the manufacturer and obtains used equipment from its customer base and from the nationwide secondary market for used data processing and telecommunications equipment. Management's experience in the secondary market, coupled with the Company's portfolio of equipment under lease, enables the Company to tailor systems to customer's specific needs by combining new and used equipment configurations at competitive prices. Similarly, the Company is often able to facilitate new lease transactions by either buying, remarketing or trading in a prospective customer's existing equipment. A significant amount of the equipment leased by the Company consists of equipment manufactured by IBM, including computer systems, such as midrange central processing units, and computer peripherals, such as disk and tape drives, control units, printers, and work stations. The Company considers the leasing of IBM equipment to be generally advantageous because of the large national IBM customer base and equipment aftermarket, IBM's policy of supporting its users with software and maintenance services, and IBM's reputation in the computer equipment marketplace. In a typical leasing transaction, the Company cultivates a customer relationship, develops an understanding of the customer's requirements and then delivers what the customer needs in the form of an advantageous lease financing structure. The terms and conditions of the lease are negotiated and, if accepted by the customer, a master lease agreement is executed and the equipment to be leased is secured either from a manufacturer, reseller or from the Company's inventory. The Company arranges nonrecourse financing secured by the equipment by selling the future lease rentals on a discounted basis. The discount rate reflects the credit standing of the lessee, the length of the lease and the total amount financed. The Company typically receives between 85% and 95% of its equipment cost through nonrecourse financing. The difference between the cost of the equipment and the amount received through the nonrecourse financing is referred to as the Company's "equity position" in the equipment. The Company usually finances its equity position in a lease through internally generated funds and recourse bank borrowings. The Company retains ownership of the equipment during the term of the lease. Upon expiration of the lease term, the Company seeks to maximize the realization of the residual value of the leased equipment through its remarketing activities on either a wholesale or retail basis. Equipment lease terms generally range from monthly to five years, with data processing and telecommunications equipment leases typically spanning two to four years. Additions to the lease portfolio frequently result from a competitive bidding process. Substantially all leases are noncancelable, require the lessee to protect the equipment, at their cost, with the manufacturer's maintenance contract and place the risk of loss or damage to the equipment on the lessee. The Company believes it provides its clients with superior customer service and creative solutions for their data processing, telecommunications and technical support needs. The Company develops close partnership relationships with its customers; by listening carefully, the Company's management and employees are better able to understand the Company's customers' complex data processing requirements and deliver quick response, high impact and competitively priced solutions appropriate for each environment and circumstance. Close client relationships and the expertise and experience of management allow the Company to assist customers in their leasing decisions regarding data processing or other technological equipment. The Company frequently participates, early on, in a customer's decision-making process regarding the type of equipment to acquire to meet its needs and also helps in developing a customized leasing structure. The Company believes that this strategy leads to customer satisfaction, encourages a loyal customer base and contributes to repeat business. The Company offers to customers a full range of new and used computer and telecommunications equipment manufactured by a variety of major manufacturers, including IBM, Unisys, AT&T, Sun Microsystems, DEC and Tandem. Over the last few years, the Company has strategically diversified its lease portfolio to include equipment such as computer storage hardware, point-of-sale and telecommunications equipment; the Company believes these to be less susceptible to rapid technological obsolescence than large computer central processing units. The Company further believes that an expanded equipment base mitigates the risks of obsolescence associated with a specific type of equipment, as well as reducing the Company's reliance on any one particular manufacturer. The Company's leasing customers are generally creditworthy corporations and other organizations that have significant data processing and tele- communication needs. These financial profiles allow the Company to structure lower rate, long-term nonrecourse financing transactions with various financial institutions on competitive terms. Moreover, non- recourse financing limits the Company's financial exposure on lease transactions, thereby further enabling the Company to expand its lease portfolio and customer base. Distribution Services Management estimates that the distribution market for the products offered by its distribution subsidiaries, SCS and PMCPI, is approximately $225 million annually. The principal products offered by SCS and PMCPI are midrange peripheral equipment, including TWINAX and COAX terminals, ASCII terminals, desktop and network printers, emulation boards, remote controllers and network adapters. In addition to equipment sales, the Company's distribution subsidiaries provide customers with technical consulting and third-party maintenance services. Approximately 70 percent of the distribution subsidiaries' revenues related to new equipment are derived from sales to resellers and approximately 30 percent represents direct sales to end users. Both SCS and PMCPI secure their end-user customers through cold calls, referrals, trade journal advertising and the cross-selling of the Company's leasing customers. Reseller customers are primarily generated through a nation- wide on-line system and direct advertising via facsimile machine. SCS and PMCPI both have contractual distribution relationships with IBM; PMCPI also has contractual relationships with Lexmark Printer Company, IDEAssociates, Perle Systems, DataSouth Corporation, Hewlett Packard Corporation and BOS. SCS and PMCPI are highly dependent on their suppliers, the manufacturers. Most manufacturers extend terms of net 30 days or provide an inventory line of credit for purposes of ordering equipment. Any event of default on any credit facility offered by a manufacturer could materially and adversely affect the Company's ability to acquire equipment for resale. Remarketing Services The Company's remarketing services consist of the remarketing of previously leased equipment, displaced equipment, and used equipment purchased from other lessors and brokers. Each of the Company's business units (LEC, SCS, PMCPI and ADI) engage in remarketing activities primarily related to their respective businesses, although specific sales often result from coordinated efforts. In addition to the remarketing of IBM peripheral equipment, SCS also has consignment relationships with certain customers to assist such organizations in the disposal of their displaced equipment. ADI currently specializes in the acquisition and remarketing of Digital Equipment Corporation equipment and, to a lesser extent, equipment manufactured by Sun Microsystems, IBM and Hewlett Packard. Competition The Company competes as a lessor and as a dealer of new and used computer and selected other high technology equipment with different firms, many of which are larger and better known than the Company and which possess substantially greater financial resources than that of the Company. While its competitive methodologies will vary by business unit, in general, the Company competes mainly on the basis of terms offered in its transactions, its quick response and reliability in meeting its commitments, its manufacturers' independence, its long-term relationships with its customers and its ability to develop and offer alternative solutions and options to high technology equipment users. The Company's competition with respect to leasing services includes equipment manufacturers such as IBM, AT&T, DEC and Amdahl, other equipment dealers, brokers and leasing companies (including captive or related leasing companies of IBM and AT&T) as well as financial institutions, including branches or divisions of national, regional and local commercial banks and other commercial lending firms. The Company also competes with other small, independent leasing companies as well as individuals and firms that act as leasing brokers and other institutions. Primarily as a result of rapid technological changes, competition has increased in the leasing industry and the number of companies offering competitive services, such as technical consulting and other high technology equipment leasing, has increased. Competitive alliances have also impacted the leasing industry. Management believes that the level of competition will continue to increase in the future. SCS and PMCPI compete with other authorized distributors of midrange peripherals as well as equipment manufacturers. All authorized distributors receive identical discounts for their products, so the Company and its competitors have equal opportunity to sell such products. Many times, availability of product in inventory is a determining factor in a sale. SCS and PMCPI compete primarily on the basis of product knowledge, price, availability and their long standing customer relationships. ADI competes with numerous other used equipment brokers and dealers as well as with the remarketing activities of lessors. ADI competes primarily on the basis of price and relationship selling. Other The Company does not own any patents, trademarks, licenses or franchises which would be considered significant to the Company's business. The Company's business is not seasonal, however, quarter-to-quarter results from operations can vary significantly. The amount of backlog orders is not significant to an understanding of the Company's business. The Company is not required to carry significant amounts of inventory either for delivery requirements or to assure continuous availability of equipment related to its leasing operations. With respect to the Company's distribution operations, product availability is often a significant factor in generating sales. At December 31, 1998, the Company had 34 full-time employees. None of the Company's employees is represented by a union. The Company believes that relations with its employees are good. ITEM 2: PROPERTIES The Company leases approximately 5,250 and 1,100 square feet of office space in Las Vegas, NV and Alpharetta, GA, respectively, under lease agreements expiring individually through 2002. Each respective lease agreement requires the Company to pay all costs of operations, including real property taxes, in addition to the basic rent. All of the Company's leased properties are in good condition. ITEM 3: LEGAL PROCEEDINGS In 1996, the Company acquired all of the outstanding common stock of Superior Computer Services, Inc. ("SCS") for 59,927 shares of the Company's common stock, valued at $400,000, and two $100,000 non- interest bearing notes. Pursuant to the terms of the related Stock Acquisition Agreement, the Company agreed to recompute the portion of the purchase price represented by the Company's common stock based on the average of the stock's closing price for the five consecutive trading days ended December 1, 1998. If such "Recomputed Value", as defined, was less than $400,000, the Company agreed to either (i) issue to the sellers additional shares of common stock such that the aggregate value of the total shares issued equaled $400,000 or (ii) pay the sellers an equivalent amount of cash. Due to significant operating losses at SCS, the Company has refused to issue such additional shares or cash. As a result, the two former shareholders of SCS have filed separate lawsuits against the Company seeking the Company's performance under the Stock Acquisition Agreement. The Company, in turn, has countersued the former shareholders, asserting breach of fiduciary duty, breach of contract, fraud and fraudulent inducement. Due to the uncertainty of the ultimate resolution of this matter, the consolidated financial statements as of December 31, 1998 do not reflect any provision for this litigation. In the event that the Company is unsuccessful in its defense and counterclaim, the Company's approximate financial exposure, excluding attorney's fees and costs, is $356,000. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock trades on the Nasdaq SmallCap tier of The Nasdaq Stock Market under the symbol GECC. The following table sets forth the high and low sales price quotations of the Company's common stock for the periods indicated. The quotations were retroactively adjusted to reflect the one for four reverse stock split which became effective on September 15, 1998.
1998 1997 Fiscal Quarter HIGH LOW HIGH LOW First Quarter $3.63 $1.88 $5.00 $3.52 Second Quarter $4.25 $2.13 $6.00 $2.52 Third Quarter $2.00 $0.63 $5.76 $3.00 Fourth Quarter $1.69 $0.53 $4.76 $2.36
As of March 11, 1999 the Company had approximately 425 shareholders of record. The Company has not previously paid cash dividends on its common stock and does not intend to pay such dividends for the foreseeable future. American Stock Transfer & Trust Company, 40 Wall Street, New York, NY 10022 is the Company's registrar and transfer agent with respect to its common stock and preferred stock and registrar, transfer agent and warrant agent with respect to the Company's warrants. ITEM 6: SELECTED FINANCIAL DATA The following financial information is derived from the consolidated financial statements of the Company and its wholly owned subsidiaries for the periods indicated. The information set forth in the following table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation" appearing in Item 7 of this report and the Company's consolidated financial statements and notes thereto appearing in Item 8 of the report. All per share data has been retroactively adjusted to reflect the one-for-four reverse stock split which became effective on September 15, 1998 and the one-for-eight reverse stock split which became effective on February 24, 1994. For the Year Ended December 31, (In thousands, except per share data) 1998 1997 1996 1995 1994 Revenues $30,623 $30,715 $21,237 $18,150 $19,768 Net income(loss) (3,202) 330 (1,398) 201 (4,129) Net income(loss) per common share (2.63) 0.09 (1.80) (0.04) (12.48) Total assets 26,381 29,074 27,687 27,285 30,832 Discounted lease rentals 15,450 15,906 14,809 16,260 20,718 Total liabilities 23,929 23,595 22,449 21,410 26.630 Total stockholders' equity 2,452 5,478 5,238 5,875 4,202 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Overview The Company's services are organized into three groups of related businesses, and are provided generally through separate business units, although there is a significant amount of interrelated activities. The three business groups are as follows: Leasing Services: Leasing, remarketing, financial engineering, consulting and third-party maintenance and systems integration services for midrange systems, telecommunications equipment, point- of-sale systems and system peripherals. The Company conducts its leasing services business through LEC Leasing, Inc., a wholly-owned subsidiary of Golf Entertainment, Inc. Distribution Services: Sale of terminals, printers, communications controllers, supplies, technical consulting and third-party maintenance services. Business units comprising distribution services are SCS and PMCPI, wholly-owned subsidiaries of Golf Entertainment, Inc. Remarketing Services: Remarketing of previously leased equipment, displaced equipment, and used equipment purchased from other lessors or brokers. This unit also has consignment relationships with certain customers to assist such organizations in the sale of their used equipment. Business units comprising remarketing services include LEC, SCS, PMCPI and ADI, a wholly-owned subsidiary of Golf Entertainment, Inc., which specializes in the acquisition and remarketing of used computer equipment on both a domestic and international basis. Accounting Practices Accounting Classification of Leases: Reported earnings are significantly impacted by the accounting classification of leases. The Company's lease portfolio is comprised of sales-type, direct financing and operating leases. The Company classifies each lease at inception in accordance with Statement of Financial Accounting Standards No. 13, as amended and interpreted. Sales-type and direct financing leases are those leases which transfer substantially all of the costs and risks of ownership of the equipment to the lessee. Operating leases are those leases in which substantially all of the benefits and risks of ownership of the equipment are retained by the lessor. The accounting treatment and resulting impact on the financial statements differs significantly during the term of the lease, depending on the type of lease classification. Under sales-type leases, the present value of the minimum lease payments calculated at the rate implicit in the lease is recorded as revenue and the cost of the equipment less the present value of the estimated unguaranteed residual value is recorded as leasing costs at lease inception. Consequently, a significant portion of the gross profit on the lease transaction is recognized at lease inception. Under direct financing leases, the excess of the aggregate minimum lease payments plus the estimated unguaranteed residual over the cost of the equipment is recorded as unearned interest income at lease inception. Such amount is then recognized monthly over the lease term as a constant percentage of the related asset. There are no costs and expenses related to direct financing leases since revenue is recorded on a net basis. Under operating leases, the monthly lease rental is recorded as revenue ratably over the lease term. The cost of the related equipment is recorded as leased assets and is depreciated over the lease term to the estimated unguaranteed residual value. Regardless of the classification of a lease transaction and the resultant accounting treatment during the lease term, the aggregate gross profit recognized during the lease term is identical. Residual Values: The Company's cash flow depends to a great extent on its ability to realize the residual value of leased equipment after the initial term of the lease by re-leasing or selling such equipment. The Company's financial results would be materially and adversely affected if the residual value of the equipment could not be realized when returned to the Company because of technological obsolescence or for any other reason. Estimated residual values for leased equipment vary, both in amount and as a percentage of the original equipment cost, depending upon many factors, including the type and manufacturer of the equipment, the Company's experience with the type of equipment and the term of the lease. In estimating future residual values, the Company relies on both its own experience and upon third-party estimates of future market value where available. The Company reviews its estimated residual values at least annually and reduces them as necessary. At the time of expiration of a lease, the Company remarkets the equipment and records the proceeds from the sale (in the event of a sale) or the present value of the lease rentals (in the event of a sales-type lease) as revenue and records the net book value of the related equipment as a cost of sale or lease. For a description of the Company's other accounting practices, see Note 1 of Notes to Consolidated Financial Statements. The following analysis of the Company's financial condition and operating results should be read in conjunction with the accompanying consolidated financial statements including the notes thereto. Results of Operations Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Revenues Total revenues from leasing operations decreased 5.2% from $13,085,616 for the year ended December 31, 1997 to $12,401,501 for the year ended December 31, 1998, a decrease of $684,115. The decrease in revenues is primarily due a decrease in revenue from the Company's portfolio base of operating leases and a decrease in direct sales revenues, partially offset by increases in sales-type lease revenues and lease-related finance income. Revenue from the portfolio base of operating leases decreased 20.3% from $8,618,861 for the year ended December 31, 1997 to $6,869,524 for the year ended December 31, 1998, a decrease of $1,749,337. This decrease in operating lease revenue is due primarily to a combination of an increase in the number of direct finance leases written and the early termination of certain operating leases purchased by a customer. Direct sales of off-lease equipment decreased 28.2% from $1,882,638 for the year ended December 31, 1997 to $1,350,945 for the year ended December 31, 1998, a decrease of $531,693. This decrease in sales of off-lease equipment is due primarily to the technological obsolescence, and therefore salability, of approximately $900,000 of off-lease equipment. Finance income increased 66.8% from $475,140 for the year ended December 31, 1997 to $792,499 for the year ended December 31, 1998, an increase of $317,359. This increase in finance income is the result of a change in the mix of leases written from primarily operating leases to direct financing leases. The accounting classification of a lease transaction (see Note 2 of Notes to Consolidated Financial Statements for a description of the Company's lease accounting policies) is a function of the pricing of the transaction combined with the estimated end-of-lease residual value (i.e., if the estimated end-of-lease residual value is less than ten percent of equipment cost, the lease classification will most likely be direct financing). Revenue from sales-type leases increased 60.7% from $2,108,977 for the year ended December 31, 1997 to $3,388,533 for the year ended December 31, 1998, an increase of $1,279,556. This increase in sales-type lease revenue was due to the renewal, upgrade and consolidation of certain existing leases into new leases which were accounted for as sales-type pursuant to SFAS No. 13. As compared to other lease transactions, sales-type leases result in a greater percentage of the related revenue and expense from the transaction being recognized at lease inception. Consequently, revenue recognized subsequent to lease inception consists only of the finance income element of the transaction. Distribution sales, representing the activity of ADI, SCS and PMCPI, increased 3.4% from $17,612,586 for the year ended December 31, 1997 to $18,214,475 for the year ended December 31, 1998, an increase of $601,889. The increase in distribution sales was primarily attributable to an increase in sales volumes at ADI and PMCPI of approximately $3.4 million and .6 million, respectively, partially offset by a decrease in sales volumes at SCS of approximately $3.4 million. The sales decrease at SCS was primarily attributable to sales staff turnover. The sales increases at ADI and PMCPI were both attributable to the expansion of each entities' sales staff and, with respect to ADI, the addition of new product lines. Costs and Expenses Total costs from leasing operations decreased 0.8% from $10,535,365 for the year ended December 31, 1997 to $10,447,789 for the year ended December 31, 1998, a decrease of $87,576. The decrease in total costs from leasing operations was due primarily to a decrease in operating lease depreciation of $1,167,766 partially offset by the write down to their net realizable values of certain off-lease equipment of $1,205,029. The decrease in operating lease depreciation was consistent with the decrease in operating lease revenue. Gross profit from leasing operations (total revenues from leasing operations less total costs from leasing operations) decreased 23.4% from $2,550,251 for the year ended December 31, 1997 to $1,953,712 for the year ended December 31, 1998, a decrease of $596,539. Gross margin (gross profit from leasing operations as a percentage of total revenues from leasing operations) decreased to 15.8% from 19.5% due to the foregoing. Leasing costs associated with the portfolio base of operating leases decreased 20.7% from $5,641,067 for the year ended December 31, 1997 to $4,473,301 for the year ended December 31, 1998, a decrease of $1,167,766. The decrease in costs from this segment of the Company's lease portfolio is due primarily to the early termination/buy-out of certain operating leases and the lease renewals/upgrades mentioned previously. Gross profit on operating leases decreased 19.5% from $2,977,794 for the year ended December 31, 1997 to $2,396,223 for the year ended December 31, 1998, a decrease of $581,571. Gross margin from operating leases increased from 34.6% for the 1997 period to 34.9% for the 1998 period as a result of the foregoing. Direct sales costs (leasing costs with respect to the sale of off-lease equipment and leases with dollar buyout options treated as sales) decreased 18.1% from $1,806,939 for the year ended December 31, 1997 to $1,479,925 for the year ended December 31, 1998, a decrease of $327,014. Direct sales costs increased as a percentage of the related revenue to 109.5% from 96.0%. The increase in costs as a percentage of revenue is due to residual value realization more closely matching stated values in 1997 as compared to 1998. Distribution cost of sales increased 434% from $14,686,695 for the year ended December 31, 1997 to $15,330,762 for the year ended December 31, 1998, an increase of $644,067. Distribution cost of sales relates to the distribution sales of ADI, SCS and PMCPI. Gross margin on distribution sales decreased slightly to 15.8% for the year ended December 31, 1998 from 16.6% for the year ended December 31, 1997. Selling, general and administrative expenses increased 58.4% from $4,549,586 for the year ended December 31, 1997 to $7,206,266 for the year ended December 31, 1998, an increase of $2,656,680. The increase in selling, general and administrative expenses was due primarily to increased staffing levels at ADI, SCS and the parent company and the recording of an impairment loss of $567,360 related to the carrying value of the goodwill associated with the acquisitions of SCS and PMCPI. Interest expense on non-lease related indebtedness increased 37.0% from $613,447 for the year ended December 31, 1997 to $840,464 for the year ended December 31, 1998, an increase of $227,017. The increase in interest expense on non-lease related indebtedness was due primarily to interest costs associated with inventory flooring arrangements at SCS. Net Income As a result of the foregoing, the Company recorded a net loss of $3,202,265 for the year ended December 31, 1998 as compared to net income of $329,531 for the year ended December 31, 1997. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Revenues Total revenues from leasing operations decreased 7.7% from $14,178,580 for the year ended December 31, 1996 to $13,085,616 for the year ended December 31, 1997, a decrease of $1,092,964. The decrease in revenues is primarily due to the 1996 renewal, upgrade and consolidation of several existing operating leases into a smaller number of new leases, three of which were accounted for as sales-type leases pursuant to SFAS No. 13 (see Note 2 of Notes to Consolidated Financial Statements for a description of the Company's lease accounting policies). As compared to other lease transactions, sales-type leases result in a greater percentage of the related revenue and expense from the transaction being recognized at lease inception. Consequently, revenue recognized subsequent to lease inception consists only of the finance income element of the transaction. During 1997, two similar renewal/upgrade transactions were consummated, which resulted in the Company recording revenue from sales-type leases of approximately $2.1 million. Management anticipates that total revenues from leasing operations in 1998 when compared to 1997 will reflect a similar decrease. The Company does not expect to regularly enter into transactions of this size in the future. Revenue from the portfolio base of operating leases decreased 11.1% from $9,694,905 for the year ended December 31, 1996 to $8,618,861 for the year ended December 31, 1997, a decrease of $1,076,044. The decrease in operating lease revenue is due primarily to a change in the mix of leases written, principally as a result of the lease renewals referred to previously. The Company anticipates that the majority of its 1998 lease additions will be classified as either direct financing leases or as operating leases. Distribution sales, representing the activity of ADI, SCS and PMCPI, increased 150.2% from $7,038,154 for the year ended December 31, 1996 to $17,612,586 for the year ended December 31, 1997, an increase of $10,574,432. The increase in distribution sales was due primarily to the acquisition of SCS on November 1, 1996 and the formation of ADI in January of 1997. SCS' revenues for the two-month period ended December 31, 1996 were $1,478,792 as compared to revenues of $9,416,880 for the twelve months ended December 31, 1997. SCS and PMCPI are distributors of computer peripherals and data communications equipment. Costs and Expenses Total costs from leasing operations decreased 16.6% from $12,631,385 for the year ended December 31, 1996 to $10,535,365 for the year ended December 31, 1997, a decrease of $2,096,020. The decrease in total costs from leasing operations was due primarily to a 1996 fourth quarter charge of $889,000 to reduce the carrying amount of certain off-lease equipment and the estimated unguaranteed residual values of equipment on lease (see Note 16 of Notes to Consolidated Financial Statements) due to changed market conditions together with a decrease in depreciation expense on operating leases of $1,239,953. The decrease in operating lease depreciation was consistent with the decrease in operating lease revenue. Gross profit from leasing operations (total revenues from leasing operations less total costs from leasing operations) increased 64.8% from $1,547,195 for the year ended December 31, 1996 to $2,550,251 for the year ended December 31, 1997, an increase of $1,003,056. Gross margin (gross profit from leasing operations as a percentage of total revenues from leasing operations) increased to 19.5% from 10.9% due to the foregoing. Leasing costs associated with the portfolio base of operating leases decreased 18.0% from $6,881,020 for the year ended December 31, 1996 to $5,641,067 for the year ended December 31, 1997, a decrease of $1,239,953. The decrease in costs from this segment of the Company's lease portfolio is due primarily to the lease renewals/upgrades mentioned above which were accounted for as sales-type leases. Gross profit on operating leases increased 5.8% from $2,813,885 for the year ended December 31, 1996 to $2,977,794 for the year ended December 31, 1997, an increase of $163,909. Gross margin from operating leases increased from 29.0% for the 1996 period to 34.5% for the 1997 period as a result of the foregoing. Direct sales costs (leasing costs with respect to the sale of off-lease equipment and leases with dollar buyout options treated as sales) increased 47.6% from $1,224,406 for the year ended December 31, 1996 to $1,806,939 for the year ended December 31, 1997, an increase of $582,533. This increase in direct sales costs was directly related to a year-to-year increase in the volume of leases coming to term. Direct sales costs decreased as a percentage of the related revenue to 96.0% from 107.6%. The decrease in costs as a percentage of revenue is due to residual value realization more closely matching stated values in 1997 as compared to 1996. Distribution cost of sales increased 137.2% from $6,190,582 for the year ended December 31, 1996 to $14,686,695 for the year ended December 31, 1997, an increase of $8,496,113. Distribution cost of sales relates to the distribution sales of ADI, SCS and PMCPI. The increase in distribution cost of sales is directly related to the acquisition of SCS in November of 1996 and the formation of ADI in January of 1997. Gross margin on distribution sales increased to 16.6% for the year ended December 31, 1997 from 12.0% for the year ended December 31, 1996 due primarily to an increase in the contribution margin generated from sales of used equipment and sales of new equipment directly to end users. In both instances, the Company is able to realize higher margins than those realized through sales to other resellers. Selling, general and administrative expenses increased 33.2% from $3,416,093 for the year ended December 31, 1996 to $4,549,586 for the year ended December 31, 1997, an increase of $1,133,493. The increase in selling, general and administrative expenses was due primarily to the acquisition of SCS and the formation of ADI. Interest expense on non-lease related indebtedness increased 54.3% from $397,656 for the year ended December 31, 1996 to $613,447 for the year ended December 31, 1997, an increase of $215,791. The increase in interest expense on non-lease related indebtedness was due primarily to interest costs associated with inventory flooring arrangements at SCS and an increase in the interest rate on the Company's then outstanding indebtedness to Bank of America from approximately 10.5% in 1996 to approximately 12.5% in 1997. Net Income As a result of the foregoing, the Company recorded net income of $329,531 for the year ended December 31, 1997 as compared to a net loss of $(1,398,316) for the year ended December 31, 1996. Liquidity and Capital Resources In October of 1997, PMCPI and Merrill Lynch Business Financial Services, Inc. ("Merrill Lynch") replaced PMCPI's prior line of credit (the "Merrill Line of Credit") with a term note in the amount of $443,848 (the "Merrill Note"). Subsequently, the Company negotiated a term out of the remaining obligation, effective June 16, 1998, whereby the then outstanding principal and accrued interest balance of approximately $420,000 would be amortized to zero as of March 1, 1999. On February 9, 1999, the Company and Merrill Lynch entered into a letter agreement whereby the Merrill Note was amended to provide for lesser monthly principal payments such that the then outstanding principal and accrued interest balance of approximately $215,000 would be amortized to zero as of June 1, 1999. The Merrill Note is guaranteed by the Company and is secured by inventory and accounts receivable of PMCPI (collectively, the "Merrill Collateral"). In November of 1995, the Company entered into a letter agreement with Excel Bank N.A. ("Excel") (formerly Union Chelsea National Bank) whereby Excel agreed to make available to the Company a $250,000 line of credit (the "Equity Line") to be used to fund the Company's equity investment in certain leases discounted by Excel (i.e., the difference between the cost of the leased equipment and the discounted present value of the minimum lease payments assigned to Excel). Borrowings under the Equity Line are evidenced by term notes and require monthly payments of principal and interest over a period equal to the term of the related discounted lease with a final balloon payment of between 30 and 50 percent depending on the lease term. Borrowings under the Equity Line are secured by the Company's residual interest in the equipment under lease and are guaranteed by the Company. Interest rates on the term notes are at the applicable discounted lease rate plus 1.75%. In addition, a fee equal to 15% of the original loan amount is due at maturity which amount is accrued ratably over the life of the loan. The unaccrued portion thereof at December 31, 1998 was $133,455. In July of 1996 and December of 1997, Excel increased its maximum commitment under the Equity Line to $1,000,000 and $2,500,000, respectively. Such maximum commitment is reduced by the amount of outstanding recourse discounted lease rentals funded by Excel and an outstanding capital lease obligation of approximately $960,256 and $78,535, respectively, at December 31, 1998. At December 31, 1998, the Company had outstanding term notes and available credit under the Equity Line of $1,479,072 and $0 respectively. In September 1998, two of the Company's wholly owned subsidiaries, LEC Leasing, Inc. and ADI, entered into a joint credit facility with Finova Capital Corporation in the aggregate amount of $3,000,000 (the "Finova Credit Facility"). The joint credit facility consists of a $1.5 million term loan (the Finova Term Loan") applicable to LEC Leasing, Inc. and a $1.5 revolving credit facility (the "Finova Revolver") applicable to ADI. The Finova Term Loan requires monthly principal payments of $25,000 plus interest at the prime rate plus 400 basis points from October 1, 1998 through September 1, 2001, at which time all remaining principal and accrued interest is due. Proceeds from the Finova Term Loan were used to repay the Company's outstanding indebtedness to bank of America National trust and Savings Association in the amount of $1,366,365 and for general corporate purposes. The Finova Term Loan is secured by all of the personal property, tangible and intangible, of LEC Leasing, Inc. and ADI and is guaranteed by the Company. At December 31, 1998, the amount outstanding under the Finova Term Loan was $1,425,000. Proceeds from the Finova Revolver were used to repay ADI's revolving credit agreement with Excel Bank, N.A. The Finova Revolver is secured by all of the personal property, both tangible and intangible, of ADI and LEC Leasing, Inc. and is guaranteed by the Company. At December 31, 1998, amounts outstanding under the Finova Revolver were $762,223 and the interest rate was 10.25%. Restrictive covenants under the Finova Credit Facility include the maintenance of consolidated net worth (as defined) of at least $3.5 million through December 31, 1998; $3.75 million from January 1, 1999 through June 30, 1999; $4.0 million from July 1, 1999 through December 31, 1999; and $4.5 million from January 1, 2000 through the expiration of the agreement; restrictions on incurring additional indebtedness and creating additional liens on LEC Leasing, Inc.'s personal property; and limitations on unfinanced capital expenditures (as defined). See "Subsequent Event" section of this Item and Note 17 of Notes to Consolidated Financial Statements. Due to the fact that the equipment the Company leases must be paid for by the Company prior to leasing, the Company requires a substantial amount of cash for its leasing activities. The Company's growth has been significantly dependent upon its ability to borrow funds or raise equity or debt financing to acquire additional equipment for lease. Historically, the Company has derived most of the funds necessary for the purchase of equipment from nonrecourse financing and the remainder from internally generated funds, recourse indebtedness and existing cash. Consequently, the Company is continuously seeking debt and/or equity financing to fund the growth of its lease portfolio. However, should the Company fail to receive additional equity financing or refinance its existing debt in 1999, the Company's portfolio growth and resultant cash flows could be materially and adversely affected. In addition, there is no assurance that financial institutions will continue to finance the Company's future leasing transactions on a nonrecourse basis or that the Company will continue to attract customers that meet the credit standards of its nonrecourse financing sources or that, if it receives such additional financing for future lease transactions, it will be on terms favorable to the Company. At December 31, 1998, the Company had approximately $391,705 in cash and availability under the Excel Equity Line. At the inception of each lease, the Company establishes the residual value of the leased equipment, which is the estimated market value of the equipment at the end of the initial lease term. The Company's cash flow depends to a great extent on its ability to realize the residual value of leased equipment after the initial term of its leases with its customers. Historically, the Company has realized its recorded investment in residual values through (i) renegotiation of the lease during its term to add or modify equipment; (ii) renewal or extension of the original lease; (iii) leasing equipment to a new user after the initial lease term; or (iv) sale of the equipment. Each of these alternatives impacts the timing of the Company's cash realization of such recorded residual values. Equipment may be returned to the Company at the end of an initial or extended lease term when it may not be possible for the Company to resell or re-lease the equipment on favorable terms. Developments in the high technology equipment market tend to occur at rapid rates, adding to the risk of obsolescence and shortened product life cycles which could affect the Company's ability to realize the residual value of such equipment. In addition, if the lessee defaults on a lease, the financial institution that provided nonrecourse financing may foreclose on its security interest in the leased equipment and the Company may not realize any portion of such residual value. If the residual value in any equipment cannot be realized after the initial lease term, the recorded investment in the equipment must be written down, resulting in lower cash flow and reduced earnings. For the years ended December 31, 1998, 1997 and 1996, the Company reduced residual values and off-lease equipment inventory by approximately $1,205,029, $75,331 and $1,099,089, respectively, to their net realizable values. There can be no assurance that the Company will not experience further material residual value or inventory write-downs in the future. The Company intends to continue to retain residual ownership of all the equipment it leases. As of December 31, 1998, the Company had a total net investment in lease transactions of $20.2 million compared to $23.0 million as of December 31, 1997. The estimated residual value of the Company's portfolio of leases expiring between January 1, 1999 and December 31, 2003 totals $6,508,221, although there can be no assurance that the Company will be able to realize such residual value in the future. As of December 31, 1998, the estimated residual value of the Company's portfolio of leases by year of lease termination was as follows:
Year ending December 31, 1999 $ 1,318,321 2000 3,205,700 2001 1,903,200 2002 70,000 2003 11,000 Total $ 6,508,221
Leased equipment expenditures of $9,349,500 for the year ended December 31, 1998 were financed through the discounting of $8,898,725 of noncancelable lease rentals to various financial institutions. The remaining $450,775 was funded from a combination of debt and available cash. Based on the Company's anticipated residual value realization, existing credit availability under the Excel Equity Line, and the anticipated contribution margin from the Company's distribution services units, management believes that the Company will have adequate capital resources to continue its operations at the present level for at least the next twelve months. Management further believes that the Company's existing credit lines will be renewed as they come due. The Company believes that inflation has not been a significant factor in its business. The Company is aware of the issues associated with the programming code in existing computer systems as the millennium approaches. Independent of such issues, management of the Company initiated an information systems project to standardize all of the Company's hardware and software systems. The systems selected by management are Year 2000 compliant. The implementation of such systems was completed in 1998. The implementation of these systems did not have a significant effect on the Company's earnings. Recently Issued Accounting Standards Management does not believe that any recently issued but not yet adopted accounting standards will have a material effect on the Company's results of operations or on the reported amounts of its assets and liabilities upon adoption. Subsequent Event There have been extended negotiations between the Company and LEC Technologies, Ltd., a Nevada corporation whose sole shareholder is Michael F. Daniels, the former Chairman and Chief Executive Officer and a current Director of the Company, regarding a Stock Purchase Agreement whereby Mr. Daniels would purchase the common stock of each of the Company's operating subsidiaries for an aggregate of $2,075,000 and the assumption of certain liabilities, including those related to the Excel Equity Line and the Finova Credit Facility, subject to the approval of the Company's shareholders. If concluded, in connection therewith, the Company will receive a release of its guarantees from both Excel Bank, N.A. and Finova Capital Corporation. The Company intends to focus primarily on acquiring and consolidating the ownership of existing golf ranges and golf centers. The Company believes that the fragmented ownership of golf ranges and centers, currently characteristic of the industry in the United States, coupled with Mr. Farrell's extensive business experience in negotiating and financing acquisition opportunities, offer it an opportunity for growth. The Company intends to enhance these existing golf facilities by adding amenities and improving management and operating systems. The Company also will develop new golf recreational facilities, and may acquire other golf related businesses. The Company intends that its facilities will be centered around a driving range and will provide a variety of golf practice areas for pitching, putting, chipping and sand play. The Company intends that its facilities will be user-friendly for all levels of golfer and will appeal to the entire family. Each driving range will, generally, permit night play and limited year round use. Each facility will offer instructional programs for men, women and juniors, and will be staffed with professional instructors. Most facilities will include a clubhouse that will house a full line pro-shop, a snack bar, a miniature golf course(s) and batting cages. Where feasible, the Company intends that the facilities will include par-3 or executive- length (shorter than a regulation-length) golf courses. The Company's revenues will be derived from selling balls to be used on the driving range, charging for rounds of miniature golf, charging for the use of the batting cages, selling golf equipment, golf apparel and related accessories through the pro-shop, fees for instructional programs and from food and beverage sales. The Company will seek to realize economies of scale at its facilities through centralized management information systems, accounting, cash management and purchasing programs. The Company may also seek long-term management contracts to operate golf courses and golf related facilities. Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Certain statements herein and in the future filings by the Company with the Securities and Exchange Commission and in the Company's written and oral statements made by or with the approval of an authorized executive officer constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. The words and phrases "looking ahead", "we are confident", "should be", "will be", "predicted", "believe", "expect", and "anticipate" and similar expressions identify forward-looking statements. These and other similar forward-looking statements reflect the Company's current views with respect to future events and financial performance, but are subject to many uncertainties and factors relating to the Company's operations and business environment which may cause the actual results of the Company to be materially different from any future results expressed or implied by such forward-looking statements. Examples of such uncertainties include, but are not limited to, changes in customer demand and requirements, the mix of leases written, the availability and timing of external capital, the timing of the Company's realization of its recorded residual values, new product announcements, continued growth of the semiconductor industry, trend of movement to client/server environment, interest rate fluctuations, changes in federal income tax laws and regulations, competition, unanticipated expenses and delays in the integration of newly-acquired businesses, industry specific factors and worldwide economic and business conditions. With respect to economic conditions, a recession can cause customers to put off new investments and increase the Company's bad debt experience. The mix of leases written in a quarter is a direct result of a combination of factors, including, but not limited to, changes in customer demands and/or requirements, new product announcements, price changes, changes in delivery dates, changes in maintenance policies and the pricing policies of equipment manufacturers, and price competition from other lessors. The Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE Independent Auditors' Report - Goldstein Golub Kessler LLP 16 Independent Auditors' Report - KPMG LLP 17 Consolidated Balance Sheets As Of December 31, 1998 and 1997 18 Consolidated Statements of Operations For The Years Ended December 31, 1998, 1997 and 1996 20 Consolidated Statements of Cash Flows For The Years Ended December 31, 1998, 1997 and 1996 21 Consolidated Statements of Stockholders' Equity For The Years Ended December 31, 1998, 1997 and 1996 23 Notes To Consolidated Financial Statements 26 The consolidated financial statements of the Company are filed under this Item 8 pursuant to Regulation S-X. Financial statement schedules are omitted because either they are not required under the instructions, are inapplicable, or the information is included elsewhere in the financial statements. Independent Auditors' Report The Board of Directors and Stockholders Golf Entertainment, Inc. We have audited the accompanying consolidated balance sheet of Golf Entertainment, Inc. (formerly LEC Technologies, Inc.) and Subsidiaries as of December 31, 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Golf Entertainment, Inc. (formerly LEC Technologies, Inc.) and Subsidiaries as of December 31, 1998, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Goldstein Golub Kessler LLP New York, New York February 26, 1999 Independent Auditors' Report The Stockholders and Board of Directors LEC Technologies, Inc. We have audited the accompanying consolidated balance sheet of LEC Technologies, Inc. (formerly Leasing Edge Corporation) and subsidiaries as of December 31, 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the two year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LEC Technologies, Inc. and subsidiaries as of December 31, 1997, and the results of their operations and their cash flows for each of the years in the two year period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ KPMG LLP Las Vegas, Nevada March 27, 1998 GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, December 31, 1998 1997 ----------- ------------ ASSETS: Cash $ 391,705 $ 208,639 Receivables - net of allowance for doubtful accounts of $304,367 and $157,405 at December 31, 1998 and 1997, respectively 2,577,260 2,372,159 Notes receivable - employees 143,376 176,311 Inventory, net of reserve for obsolescence of $1,086,608 and $102,102 at December 31, 1998 and 1997, respectively 1,862,981 2,039,685 Investment in leased assets: Operating leases, net 11,787,960 15,284,177 Sales-type and direct financing leases 8,454,844 7,738,825 Furniture and equipment - net of accumulated depreciation of $425,465 and $310,378 at December 31, 1998 and 1997, respectively 552,706 363,970 Other assets 610,335 272,338 Goodwill, net of accumulated amortization of $752,039 and $134,543 at December 31, 1998 and 1997, respectively - 617,496 ---------- ---------- TOTAL ASSETS $26,381,167 $29,073,600 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. (continued) GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, December 31, 1998 1997 ----------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Accounts payable $ 3,611,164 $ 3,823,522 Accrued liabilities 745,418 492,325 Notes payable and lines of credit 4,016,584 3,128,764 Nonrecourse and recourse discounted lease rentals 15,450,421 15,905,823 Other liabilities 105,198 244,796 ---------- ---------- TOTAL LIABILITIES 23,928,785 23,595,230 ---------- ---------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Series A convertible preferred stock, $.01 par value; 1,000,000 shares authorized, 380,000 shares issued; 229,016 shares outstanding 2,290 2,290 Common stock, $.01 par value; 25,000,000 shares authorized, 1,410,393 and 1,220,568 shares issued and 1,410,393 and 1,197,268 shares outstanding at December 31, 1998 and 1997, respectively 14,104 12,206 Additional paid-in capital 10,354,985 10,419,038 Accumulated deficit (7,918,997) (4,716,732) ---------- ---------- 2,452,382 5,716,802 Common stock held in treasury, at cost; 0 and 23,300 shares at December 31, 1998 and 1997, respectively - (144,682) Notes receivable from stockholders - (93,750) ---------- ----------- TOTAL STOCKHOLDERS' EQUITY 2,452,382 5,478,370 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $26,381,167 $29,073,600 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, -------------------------------------- 1998 1997 1996 ----------- ---------- ----------- Revenues: Operating leases $ 6,869,524 $ 8,618,861 $ 9,694,905 Sales-type leases 3,388,533 2,108,977 2,721,483 Finance income 792,499 475,140 285,121 Direct sales 1,350,945 1,882,638 1,137,686 Other - - 339,385 ---------- ---------- ---------- Total revenues from leasing operations 12,401,501 13,085,616 14,178,580 Distribution sales 18,214,475 17,612,586 7,038,154 Other 7,040 16,422 20,666 ---------- ---------- ---------- Total revenues 30,623,016 30,714,624 21,237,400 ---------- ---------- ---------- Costs and expenses: Operating leases 4,473,301 5,641,067 6,881,020 Sales-type leases 1,197,882 1,685,134 2,101,426 Interest expense 1,341,652 1,326,894 1,325,444 Direct sales 1,479,925 1,806,939 1,224,406 Write down of inventory and residual values 1,205,029 75,331 1,099,089 ---------- ---------- ---------- Total costs from leasing operations 10,447,789 10,535,365 12,631,385 Distribution cost of sales 15,330,762 14,686,695 6,190,582 Selling, general and administrative expenses 7,206,266 4,549,586 3,416,093 Interest expense 840,464 613,447 397,656 ---------- ---------- ---------- Total costs and expenses 33,825,281 30,385,093 22,635,716 ---------- ---------- ---------- Net income (loss) $(3,202,265) $ 329,531 $(1,398,316) ========== ========== ========== Earnings(loss) per common share $ (2.63) $ 0.09 $ (1.80) ========== ========== ========== Earnings(loss) per common share assuming dilution $ (2.63) $ 0.08 $ (1.80) ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Notes Total Preferred Stock Common Stock Additional Receivable Stock- ----------------- ------------------- Paid-in Accumulated Treasury From holders Shares Amount Shares Amount Capital Deficit Stock Stockholders Equity ------- -------- -------- --------- ---------- - - ------------ ---------- ------------ ----------- Balance at December 31, 1995 229,016 $ 2,290 3,132,319 $ 31,324 $9,526,259 $(3,647,947) $ (12,000) $ (25,000) $ 5,874,926 One-for-four reverse stock split (2,349,239) (23,492) 23,492 - Sale of common stock 220,031 2,200 856,078 858,278 Exercise of stock options 31,844 318 174,823 (68,750) 106,391 Exercise of "A" warrants 6,873 69 (69) - Acquisition of SCS 59,927 599 119,401 120,000 Purchase of treasury stock (94,073) (94,073) Preferred stock dividends (229,016) (229,016) Net loss (1,398,316) (1,398,316) - - -------------------------------------------------------------------------------- - - --------------------- Balance at December 31, 1996 229,016 2,290 1,101,755 11,018 10,470,968 (5,046,263) (106,073) (93,750) 5,238,190 - - -------------------------------------------------------------------------------- - - ---------------------
The accompanying notes are an integral part of these consolidated financial statements. (Continued) GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Notes Total Preferred Stock Common Stock Additional Receivable Stock- ----------------- ------------------- Paid-in Accumulated Treasury From holders Shares Amount Shares Amount Capital Deficit Stock Stockholders Equity ------- -------- -------- --------- ---------- - - ------------ ---------- ------------ ----------- Balance at December 31, 1996 229,016 $ 2,290 1,101,755 $ 11,018 $10,470,968 $(5,046,263) $(106,073) $ (93,750) $ 5,238,190 Sale of common stock 39,063 391 124,609 125,000 Issuance of common stock for services 12,500 125 46,750 46,875 Exercise of "B" warrants 67,250 672 (672) - Stock option compen- sation expense 6,399 6,399 Purchase of treasury stock (38,609) (38,609) Preferred stock dividends (229,016) (229,016) Net income 329,531 329,531 - - -------------------------------------------------------------------------------- - - --------------------- Balance at December 31, 1997 229,016 $ 2,290 1,220,568 $ 12,206 $10,419,038 $(4,716,732) $(144,682) $ (93,750) $ 5,478,370 - - -------------------------------------------------------------------------------- - - ---------------------
The accompanying notes are an integral part of these consolidated financial statements. GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Notes Total Preferred Stock Common Stock Additional Receivable Stock- ----------------- ------------------- Paid-in Accumulated Treasury From holders Shares Amount Shares Amount Capital Deficit Stock Stockholders Equity ------- -------- -------- --------- ---------- - - ------------ ---------- ------------ ----------- Balance at December 31, 1997 229,016 $ 2,290 1,220,568 $ 12,206 $10,419,038 $(4,716,732) $(144,682) $ (93,750) $ 5,478,370 Exercise of stock options 234,375 2,344 146,637 148,981 Purchase of treasury stock (66,454) (66,454) Write-off of shareholder notes receivable 93,750 93,750 Retirement of treasury stock (44,550) (446) (210,690) 211,136 - Net loss (3,202,265) (3,202,265) - - -------------------------------------------------------------------------------- - - --------------------- Balance at December 31, 1998 229,016 $ 2,290 1,410,393 $ 14,104 $10,354,985 $(7,918,997) $ - $ - $ 2,452,382 ================================================================================ =====================
The accompanying notes are an integral part of these consolidated financial statements. GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------------ 1998 1997 1996 ----------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(3,202,265) $ 329,531 $(1,398,316) Adjustments to reconcile net income (loss) to net cash pro- vided by operating activities: Depreciation and amortization 5,242,149 5,757,672 6,986,608 Write down of inventory, residual values and other 1,455,378 75,331 1,189,981 Stock option compensation expense 148,981 53,274 - Change in assets and liabilities, net of effects of acquisition: Increase in receivables (205,101) (1,275,291) (60,503) (Increase) decrease in inventory 721,923 (135,879) (354,532) Increase (decrease) in accounts payable (212,358) 877,157 (446,485) Increase (decrease) in accrued liabilities 253,093 33,502 (52,583) All other operating activities (513,690) (309,593) 302,564 --------- --------- --------- Net cash provided by operating activities 3,688,110 5,405,704 6,166,734 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Sales and disposals of off- lease inventory 2,799,055 1,734,074 2,786,579 Purchases of inventory for lease (4,025,540) (6,253,853) (5,579,587) Purchases of furniture and equipment (303,992) (132,908) (52,277) (Increase) decrease in notes receivable (123,665) 22,874 (50,435) Purchase of SCS, net of cash acquired - - 80,957
The accompanying notes are an integral part of these consolidated financial statements. (Continued) GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Additions to net investment in sales-type and direct financing leases (5,323,960) (3,618,507) (4,504,865) Sales-type and direct financing lease rentals received 3,107,094 2,251,582 1,763,154 ---------- ---------- ---------- Net cash used in investing activities (3,871,008) (5,996,738) (5,556,474) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from nonrecourse and re- course discounted lease rentals 8,898,725 10,530,281 9,186,720 Payments on nonrecourse and re- course discounted lease rentals (9,351,127) (9,433,039)(10,638,141) Proceeds from notes payable 3,133,020 1,051,373 817,647 Payments on notes payable (2,245,200) (1,944,911) (363,905) Proceeds from exercise of stock options - - 106,391 Proceeds from sale of stock, net - 125,000 858,278 Proceeds from exercise of warrants - 269,000 55,592 Deferred equity transaction costs - - (106,497) Purchase of treasury stock (66,454) (38,609) (94,073) Preferred stock dividends paid - (171,762) (229,016) --------- ---------- --------- Net cash provided by (used in) financing activities 365,964 387,333 (407,004) --------- --------- --------- Net increase (decrease) in cash 183,066 (203,701) 203,256 Cash at beginning of year 208,639 412,340 209,084 --------- ---------- --------- Cash at end of year $ 391,705 $ 208,639 $ 412,340 ========= ========= ========== Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest $2,078,748 $1,875,196 $ 1,729,001 ========= ========= ========== Income taxes $ 43,627 $ 3,750 $ 29,826 ========= ========= ==========
The accompanying notes are an integral part of these consolidated financial statements. GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Nature of Operations: Golf Entertainment, Inc. (formerly known as LEC Technologies, Inc.) and subsidiaries (LEC Leasing, Inc. or "LEC"; Superior Computer Systems, Inc. or "SCS"; Pacific Mountain Computer Products, Inc. or "PMCPI"; Atlantic Digital International, Inc. or "ADI"; LEC Distribution, Inc.; and, TJ Computer Services, Inc.)(collectively, the "Company" or "Golf") is currently a technology services company, providing solutions that help organizations reduce technology cost and risk. The Company is primarily engaged in the buying, selling, and leasing of data processing and other high technology equipment and related services. Organization: The Company was originally founded in 1980 under the name TJ Computer Services, Inc. ("TJCS"). In 1989, all of the outstanding common stock of TJCS was acquired by Harrison Development, Inc., an inactive public corporation organized in Colorado, which then changed its name to TJ Systems Corporation. In October 1991, the Company reincorporated in the State of Delaware and in June 1995, changed its name to Leasing Edge Corporation. On March 12, 1997, the Company's shareholders' approved a change in the Company's name to LEC Technologies, Inc. In February 1999, the Company's shareholders approved a change in the Company's name to Golf Entertainment, Inc. NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of these consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. For lease accounting, this includes the estimated fair market value at lease termination of the related equipment, commonly referred to as "residual value". Residual values are established at lease inception at amounts equal to the estimated value to be received from the equipment following termination of the initial lease, as determined by management. In estimating such values, management considers all relevant information and circumstances regarding the equipment and the lessee, including historical experience by equipment type and manufacturer, adjusted for known trends. On at least an annual basis, management assesses the realizability of recorded residual values and, if necessary, establishes a reserve to reduce the recorded values to their estimated net realizable value. Actual results could differ from those estimates. The following table reflects changes in the Company's estimated reserve for doubtful accounts for each of the three years in the period ended December 31, 1998:
Balance at Balance at Beginning of End of Period Expense Write-off Period 1996 $ 12,000 $158,699 $ - $ 170,699 1997 170,699 (13,294) - 157,405 1998 157,405 250,350 103,388 304,367
Lease Accounting See Note 2 "Lease Accounting Policies" for a description of lease accounting policies, lease revenue recognition and related costs. Inventory Inventory of equipment that has come off lease is valued at the lower of cost or market based on specific identification. Inventory of equipment held for distribution is stated at the lower of cost (first in, first out) or market. Goodwill Goodwill, which represents the excess of purchase price over the fair value of net assets acquired, is amortized on a straight-line basis over 15 years. Nonrecourse Financing The Company assigns the rentals under its leases to financial institutions and other lenders primarily on a nonrecourse basis. The Company receives a cash amount equal to the discounted value of the minimum lease payments. In the event of a default by a lessee, the lender has a security interest in the underlying leased equipment but has no recourse against the Company. Proceeds from discounted lease rentals are recorded as nonrecourse discounted lease rentals. Under sales-type and direct financing leases, leased assets and nonrecourse discounted lease rentals are reduced as lessees make payments under the lease to financial institutions. Under operating leases, leasing revenue is recorded and nonrecourse discounted lease rentals are reduced as lessees make rental payments to financial institutions. The Company has no restrictive arrangements with these financial institutions as a result of the nonrecourse borrowings. Revenue Recognition Leasing activities: See Note 2 "Lease Accounting Policies" for a description of lease revenue recognition. Direct sales: Revenue from direct sales is generated from the remarketing of equipment off lease and leases with dollar buyout options treated as sales. Revenue and related cost of sales is recognized at the time title to the equipment transfers to the customer. Distribution sales: Revenue from distribution sales is generated from the resale of equipment purchased for inventory. Revenue and related cost of sales is recognized at the time title to the equipment transfers to the customer, generally upon shipment. Furniture and Equipment Furniture and equipment are recorded at cost. Expenditures that materially increase the life of the assets are capitalized. Ordinary repairs and maintenance are charged to expense as incurred. Depreciation and amortization are provided on the straight-line method over the following useful lives: Computer equipment 3 to 5 years Furniture and office equipment 5 to 7 years Leasehold improvements Term of lease Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of Management periodically evaluates the carrying value of its long-lived assets, including operating leases, furniture and equipment and intangible assets. Whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable, the Company recognizes an impairment loss for the difference between the carrying value and the estimated net future cash flows attributable to such asset. As a result of current period operating losses at SCS and PMCPI, management determined that the carrying value of the goodwill associated with the acquisition of these entities exceeded the estimated net future cash flows attributable to them and, consequently, recorded an impairment loss of $567,360 at December 31, 1998. Management believes that no material impairment in the carrying value of long-lived assets existed at December 31, 1997. Income Taxes The Company uses the asset and liability method to account for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits which may not ultimately be realized. Stock Option Plans Prior to January 1, 1996, the Company accounted for its stock option plans in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and related interpretations. As such, compensation would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. Earnings Per Share Basic and diluted earnings (loss) per share are computed in accordance with SFAS No. 128, "Earnings Per Share". Recently Issued Accounting Standards Management does not believe that any recently issued but not yet adopted accounting standards will have a material effect on the Company's results of operations or on the reported amounts of its assets and liabilities upon adoption. Reclassification Certain reclassifications have been made in the 1997 and 1996 financial statements to conform to the 1998 presentation. NOTE 2: LEASE ACCOUNTING POLICIES SFAS No. 13 requires that a lessor classify each lease as either a direct financing, sales-type or operating lease. Leased Assets Direct financing and sales-type leases - Direct financing and sales-type leased assets consist of the future minimum lease payments plus the present value of the estimated unguaranteed residual less unearned finance income (collectively referred to as the net investment). Operating Leases - Operating leased assets consist of the equipment cost less accumulated depreciation. Revenue, Costs and Expenses Direct Financing Leases - Revenue consists of interest earned on the present value of the lease payments and residual and is included in finance income in the accompanying Consolidated Statements of Operations. Revenue is recognized periodically over the lease term as a constant percentage return on the net investment. There are no costs and expenses related to direct financing leases since revenue is recorded on a net basis. Sales-type Leases - Revenue consists of the present value of the total contractual lease payments and is recognized at lease inception. Costs and expenses consist of the equipment's net book value at lease inception, less the present value of the residual. Interest earned on the present value of the lease payments and the residual, which is recognized periodically over the lease term as a constant percentage return on the net investment, is included in finance income in the accompanying Consolidated Statements of Operations. Operating Leases - Revenue consists of the contractual lease payments and is recognized on a straight-line basis over the lease term. Costs and expenses are principally depreciation on the equipment which is recognized on a straight-line basis over the term of the lease to the Company's estimate of the equipment's residual value. NOTE 3: LEASED ASSETS The components of the net investment in sales-type and direct financing leases as of December 31 are as follows:
1998 1997 Total future minimum lease payments $8,512,941 $7,448,044 Estimated unguaranteed residual values of leased equipment 1,036,200 1,225,500 Less unearned finance income (1,094,297) ( 934,719) Total $ 8,454,844 $ 7,738,825
Future minimum lease payments on sales-type and direct financing leases as of December 31, 1998 are as follows:
Years ending December 31, 1999 $3,913,154 2000 3,021,649 2001 1,330,621 2002 235,059 2003 12,458 $8,512,941
Assets under operating leases are as follows at December 31:
1998 1997 Equipment at cost or net realizable value $19,598,081 $26,777,702 Accumulated depreciation ( 7,810,121) (11,493,525) Total $11,787,960 $15,284,177
Depreciation expense related to operating leases was $4,473,301, $5,641,067 and $6,881,020 for the years ended December 31, 1998, 1997 and 1996, respectively. Future minimum lease rentals on operating leases are due as follows:
Years ending December 31, 1999 $ 5,089,123 2000 2,801,163 2001 671,975 2002 8,136 2003 2,034 $ 8,572,431
The estimated residual value of the Company's portfolio of leases (including sales-type, direct financing and operating) by year of lease termination are as follows:
Years ending December 31, 1999 $1,318,321 2000 3,205,700 2001 1,903,200 2002 70,000 2003 11,000 $6,508,221
NOTE 4: Acquisition of Superior Computer Systems, Inc. ("SCS") On November 1, 1996, the Company acquired all of the common stock of SCS, a distributor of computer peripherals, for 59,927 shares of the Company's common stock and two $100,000 non-interest bearing notes,payable at various dates through November 1997. The acquisition was accounted for by the purchase method of accounting. The excess of the total acquisition cost over the fair value of net assets acquired of $299,923 was recorded as goodwill and was being amortized over 15 years. All of the unamortized balance of the goodwill related to this acquisition was written off during the year ended December 31, 1998. The Consolidated Statement of Operations for the year ended December 31, 1996 includes SCS's results of operations for the period November 1, 1996 through December 31, 1996. The following unaudited pro forma consolidated results of operations assume that the acquisition occurred on January 1, 1996 and reflect the historical operations of the purchased business adjusted for amortization of goodwill resulting from the acquisition. (In thousands, except per share data)
Year ended December 31, 1996 (Unaudited) Total revenues 32,203 Net loss (1,522) Loss per share (1.82)
The pro forma results of operations are not necessarily indicative of the actual results of operations that would have occurred had the acquisition been made at the beginning of the period, or of results which may occur in the future. NOTE 5: INCOME TAXES Total income tax expense (benefit) differed from the "expected" income tax expense (benefit) determined by applying the statutory federal income tax rate of 35% for the years ended December 31 as follows:
1998 1997 1996 Computed "expected" income tax expense (benefit) $(1,120,793) $ 115,336 $(489,411) Change in valuation allowance for deferred tax assets 1,115,340 (119,701) 93,181 Nondeductible expenses 5,453 4,635 396,230 Total tax expense - - -
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and tax liabilities at December 31, 1998 and 1997 are presented below:
December 31, December 31, 1998 1997 Deferred Tax Assets Allowances for doubtful accounts, inventory obsolescence and residual value realization not currently deductible $ 544,941 $ 117,428 Expenses accrued for financial statement purposes, not currently deductible 576,450 576,450 Net operating loss carryforwards 1,859,444 1,374,967 --------- --------- Total gross deferred tax assets 2,980,835 2,068,845 Valuation allowance (1,364,097) (248,757) --------- --------- Net deferred tax assets 1,616,738 1,820,088 --------- --------- Deferred Tax Liabilities ------------------------ Basis difference for sales-type and direct financing leases for financial statement purposes and operating leases for tax purposes 409,446 218,719 Basis difference for operating leases, principally due to depreciation 1,207,292 1,601,369 --------- --------- Total deferred tax liabilities 1,616,738 1,820,088 --------- --------- Net deferred taxes - - ========= =========
The Company has recorded a valuation allowance in accordance with the provisions of SFAS No. 109 "Accounting for Income Taxes" to reflect the estimated amount of deferred tax assets which may not be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. At December 31, 1998 and 1997, the Company determined that $1,364,097 and $248,757, respectively, of tax benefits did not meet the realization criteria. At December 31, 1998, the Company has net operating loss carryforwards for Federal income tax purposes of approximately $5,300,000 which are available to offset future taxable income, if any, through 2013. NOTE 6: NONRECOURSE AND RECOURSE DISCOUNTED LEASE RENTALS The Company assigns the rentals of its leases to financial institutions at fixed rates on a nonrecourse or, to a lesser extent, on a recourse basis but retains the residual rights. In return for future lease payments, the Company receives a discounted cash payment. Discounted lease rentals as of December 31, 1998 and 1997 were $15,450,421 and $15,905,823 respectively of which $960,256 and $258,030 are recourse, respectively. Interest expense on discounted lease rentals for the years ended December 31, 1998, 1997 and 1996 was $1,341,652, $1,326,894 and $1,325,444, respectively. Principal and interest payments required on discounted lease rentals as of December 31, 1998 are as follows:
Years ending December 31, 1999 $ 8,914,098 2000 5,796,390 2001 2,001,374 2002 243,195 2003 14,492 Total 16,969,549 Less interest (1,519,128) Principal amount $15,450,421
NOTE 7: NOTES PAYABLE AND LINES OF CREDIT In October of 1997, PMCPI and Merrill Lynch Business Financial Services, Inc. ("Merrill Lynch") replaced PMCPI's prior line of credit (the "Merrill Line of Credit") with a term note in the amount of $443,848 (the "Merrill Note"). Subsequently, the Company negotiated a term out of the remaining obligation, effective June 16, 1998, whereby the then outstanding principal and accrued interest balance of approximately $420,000 would be amortized to zero as of March 1, 1999. On February 9, 1999, the Company and Merrill Lynch entered into a letter agreement whereby the Merrill Note was amended to provide for lesser monthly principal payments such that the then outstanding principal and accrued interest balance of approximately $215,000 would be amortized to zero as of June 1, 1999. The Merrill Note is guaranteed by the Company and is secured by inventory and accounts receivable of PMCPI (collectively, the "Merrill Collateral"). In November of 1995, the Company entered into a letter agreement with Excel Bank N.A. ("Excel") (formerly Union Chelsea National Bank) whereby Excel agreed to make available to the Company a $250,000 line of credit (the "Equity Line") to be used to fund the Company's equity investment in certain leases discounted by Excel (i.e., the difference between the cost of the leased equipment and the discounted present value of the minimum lease payments assigned to Excel). Borrowings under the Equity Line are evidenced by term notes and require monthly payments of principal and interest over a period equal to the term of the related discounted lease with a final balloon payment of between 30 and 50 percent depending on the lease term. Borrowings under the Equity Line are secured by the Company's residual interest in the equipment under lease and are guaranteed by the Company. Interest rates on the term notes are at the applicable discounted lease rate plus 1.75%. In addition, a fee equal to 15% of the original loan amount is due at maturity which amount is accrued ratably over the life of the loan. The unaccrued portion thereof at December 31, 1998 was $133,455. In July of 1996 and December of 1997, Excel increased its maximum commitment under the Equity Line to $1,000,000 and $2,500,000, respectively. Such maximum commitment is reduced by the amount of outstanding recourse discounted lease rentals funded by Excel and an outstanding capital lease obligation of approximately $960,256 and $78,535, respectively, at December 31, 1998. At December 31, 1998, the Company had outstanding term notes and available credit under the Equity Line of $1,479,072 and $0 respectively. In September 1998, two of the Company's wholly owned subsidiaries, LEC Leasing, Inc. and ADI, entered into a joint credit facility with Finova Capital Corporation in the aggregate amount of $3,000,000 (the "Finova Credit Facility"). The joint credit facility consists of a $1.5 million term loan (the Finova Term Loan") applicable to LEC Leasing, Inc. and a $1.5 revolving credit facility (the "Finova Revolver") applicable to ADI. The Finova Term Loan requires monthly principal payments of $25,000 plus interest at the prime rate plus 400 basis points from October 1, 1998 through September 1, 2001, at which time all remaining principal and accrued interest is due. Proceeds from the Finova Term Loan were used to repay the Company's outstanding indebtedness to bank of America National Trust and Savings Association in the amount of $1,366,365 and for general corporate purposes. The Finova Term Loan is secured by all of the personal property, tangible and intangible, of LEC Leasing, Inc. and ADI and is guaranteed by the Company. At December 31, 1998, the amount outstanding under the Finova Term Loan was $1,425,000. Proceeds from the Finova Revolver were used to repay ADI's revolving credit agreement with Excel Bank, N.A. The Finova Revolver is secured by all of the personal property, both tangible and intangible, of ADI and LEC Leasing, Inc. and is guaranteed by the Company. At December 31, 1998, amounts outstanding under the Finova Revolver were $762,223 and the interest rate was 10.25%. Restrictive covenants under the Finova Credit Facility include the maintenance of consolidated net worth (as defined) of at least $3.5 million through December 31, 1998; $3.75 million from January 1, 1999 through June 30, 1999; $4.0 million from July 1, 1999 through December 31, 1999; and $4.5 million from January 1, 2000 through the expiration of the agreement; restrictions on incurring additional indebtedness and creating additional liens on LEC Leasing, Inc.'s personal property; and limitations on unfinanced capital expenditures (as defined). The Company was not in compliance with these covenants at December 31, 1998. On March 9, 1998, ADI entered into a $500,000 Revolving Credit Agreement (the "ADI Credit Agreement") with Excel for general corporate purposes. Pursuant to the ADI Credit Agreement, Excel has agreed, subject to certain conditions, to make advances to ADI from time to time prior to October 15, 1998 of up to $500,000. Amounts repaid under the ADI Credit Agreement may be reborrowed until October 15, 1998, the date that the loans under the ADI Credit Agreement mature. The loans under the ADI Credit Agreement bear interest at the prime rate plus 2.5%. Accrued interest, if any, will be payable monthly, beginning on April 1, 1998. The ADI Credit Agreement is guaranteed by the Company and is secured by a lien on the receivables, inventory and equipment of ADI. Under the ADI Credit Agreement, ADI has agreed not to incur any additional indebtedness or to create any additional liens on its property other than under the ADI Credit Agreement. Upon consummation of the ADI Credit Agreement, Excel reduced its maximum commitment under the Equity Line to $2,000,000 and transferred the $160,838 term note to the ADI Credit Agreement. In September 1998, the then outstanding balance under the ADI Credit Agreement of $492,563 was paid in full from the proceeds of the $3,000,000 Finova Credit Facility discussed above. In connection with the Company's 1994 acquisition of PMCPI, the Company issued a $250,000 non-interest bearing note payable to PMCPI's sole shareholder. At December 31, 1996, the remaining obligation on such note, discounted at an imputed rate of 8.5%, was $50,000. The note was paid in full at its maturity date of January 1, 1997. In connection with the Company's acquisition of SCS, the Company issued to each of SCS' two shareholders a $100,000 non-interest bearing note payable due in varying installments through November 1997. At December 31, 1996, the remaining obligation due on such notes, discounted at an imputed rate of 10.0%, was $194,385. The notes were paid in full in 1997. Notes payable and lines of credit consist of the following at December 31,
1998 1997 ------ ------ Term loan with Finova Capital Corporation, with interest at prime plus 4.0 percent, payable in monthly installments of $25,000 plus interest, due September 1, 2001 $1,425,000 $ - Revolving line of credit agreement with Finova Capital Corporation, with floating interest rate of prime plus 2.0 percent 762,223 - Term loan with Bank of America, with interest at prime plus 4.0 percent, due in varying installments through June 15, 1999, paid off in 1998 - 1,366,365 Term note with Merrill Lynch, due June 1, 1999, with floating interest rate, currently at 9.25 percent 216,464 401,614 Secured notes payable to Excel, payable in installments through November, 1999 with fixed interest rates between 9.75 and 10.0 percent, secured by leased equipment 1,479,072 1,049,133 Term note payable to Excel, due January 29, 1998, with floating interest rate of prime plus 2.5 percent - 160,838 Other 133,825 150,814 --------- --------- $4,016,584 $3,128,764 ========= =========
Required annual principal payments as of December 31, 1998 are as follows:
1999 $2,009,339 2000 921,386 2001 1,083,968 2002 1,891 ---------- Total $4,016,584 =========
NOTE 8: COMMITMENTS AND CONTINGENCIES a) Lease Agreements The Company leases office and warehouse space under operating leases expiring individually through 2002. The following is a schedule by year of future minimum rental payments required as of December 31, 1998 under these operating leases that have initial or remaining noncancelable lease terms in excess of one year:
Years ending December 31, 1999 $152,390 2000 154,306 2001 56,412 Total $363,108
Rental expense on operating leases was $301,658, $267,552 and $206,342 for the years ended December 31, 1998, 1997 and 1996, respectively. b) Employment Contracts The Company has employment agreements with certain of its executive officers and management personnel with remaining terms of approximately four years. Under these agreements, the employee is entitled to receive other employee benefits of the Company, including medical and life insurance coverage. The agreements may be terminated by either the Company or the employee at any time or for any reason. If an agreement is terminated due to the death of an employee, a death benefit equal to six months salary shall be paid to the employee's estate. The Company's annual expense under these agreements is approximately $802,000. In addition, effective January 1, 1999 through December 31, 2003, the Company entered into an employment agreement with the Company's Chief Executive Officer. The annual base salary under such agreement is $240,000 for the period January 1, 1999 through December 31, 2000, and increases by 10% per year thereafter. In addition, pursuant to the terms of the agreement, such officer is eligible to receive an annual bonus equal to five percent (5%) of the Company's operating income for the year. Such bonus may not exceed such officer's base salary for each respective fiscal year. Pursuant to such employment agreement, if such officer should die during the term thereof, a death benefit equal to the portion, if any, of his base salary for the period up to the date of death which remains unpaid and eighteen months salary ($360,000, at his current base salary) shall be paid to his estate. NOTE 9: RELATED PARTY TRANSACTIONS a) Company's Board of Directors A director of the Company is currently the Chief Financial Officer of Vitamin Shoppe Industries, Inc. and was formerly an officer of Tiffany & Co., two of the Company's customers. Another director of the Company was formerly the Chief Operating Officer of Netgrocer, Inc., one of the Company's customers. Neither director received any cash or other remuneration from the Company other than their fees as directors and participation in the Company's stock option plans. The Company believes that the terms of its lease arrangements with Vitamin Shoppe Industries, Inc., Tiffany & Co. and Netgrocer, Inc. are fair and have been reached on an arms-length basis. b) Other Transactions Included in notes receivable from shareholders in the accompanying consolidated balance sheets at December 31, 1997 is a $25,000 note receivable from a current officer for the purchase of Company common stock. Such note was written off in 1998 in connection with the officer's revised employment contract. c) Aggregate Effect of Transactions with Related Parties The Board of Directors of the Company has reviewed the aggregate effect on operations of the above-described transactions and concluded that such transactions were in the best interest of the Company and on terms as fair to the Company as could have been obtained from unaffiliated parties. NOTE 10: STOCKHOLDERS' EQUITY On September 15, 1998, the Company's shareholder's approved a one-for-four reverse stock split. All share data have been retroactively adjusted to give effect to the reverse split as of the first date presented. During the year ended December 31, 1997, the Company sold 39,063 shares of common stock to an individual in a private placement transaction for proceeds of $125,000. Also in 1997, the Company issued an aggregate of 12,500 shares of restricted common stock to two individuals in connection with their employment at ADI. The fair market value of the shares at date of issue was $46,875 and was expensed in 1997. During the year ended December 31, 1996, the Company sold an aggregate of 220,031 shares of common stock to two investment groups in private placement transactions. The proceeds of these transactions, net of related costs of $131,692, was $858,278. In 1996, the Company issued 59,927 shares of restricted common stock in connection with the Company's acquisition of SCS. A. SERIES A CONVERTIBLE PREFERRED STOCK In August of 1993, the Company completed the sale of 380,000 shares of Series A Convertible Preferred Stock. The Preferred Stock is convertible at the holders option at any time into 0.4375 shares of common stock at a conversion price of $22.72 per share. If the Series A Preferred Stock is converted on or prior to August 4, 1998, the holder will receive ten (10) warrants to purchase 1/32nd share of common stock for each share of Series A Preferred Stock converted at an exercise price of $36.80 per share. Outstanding Series A Preferred Stock is redeemable by the Company at $10.00 per share plus accrued and unpaid dividends. The Series A Preferred Stock pays dividends in arrears at an annual rate of $1.00 per share. A conversion bonus equal to $0.25 per share of Series A Preferred Stock converted shall be payable to any holder who converts such shares after the date in any calendar quarter on which dividends accrue and prior to such date for the succeeding calendar quarter. At December 31, 1998 and 1997 there were 229,016 shares of preferred stock and 1,509,840 warrants outstanding. Preferred stock dividends of $171,762 and $229,016 were paid from additional paid in capital in 1997 and 1996, respectively. Accrued and unpaid preferred stock dividends were $57,254 and $114,508 at December 31, 1998 and 1997, respectively. B. WARRANTS AND STOCK OPTIONS Warrants In August of 1995, the Company registered 3,092,687 Class A Common Stock Purchase Warrants and 1,000,000 Class B Common Stock Purchase Warrants, together with the underlying common shares. Each of the warrants entitles the holder thereof to purchase one-quarter share of the Company's common stock at an exercise price of $12.00 per share. On July 9, 1996, the Company reduced the exercise price of the Class A Common Stock Purchase Warrants and called for redemption, effective at the close of business on August 9, 1996, all of the Class A warrants. The Company received gross proceeds of $55,592 from the exercise of 27,492 Class A warrants. All costs related to redeeming the Class A warrants in excess of the exercise proceeds were expensed in 1996. On December 15, 1996, the Company reduced the exercise price of the Class B Common Stock Purchase Warrants and called for redemption, effective at the close of business on January 15, 1997, all of the Class B warrants. Subsequent to December 31, 1996, 269,000 Class B Common Stock Purchase Warrants were exercised resulting in gross proceeds to the Company of $269,000. All costs related to redeeming the Class B warrants in excess of the exercise proceeds were expensed in 1996. During the year ended December 31, 1996, the Company issued an aggregate of 2,319,993 Class C Common Stock Purchase Warrants and an aggregate of 2,319,993 Class D Common Stock Purchase Warrants at exercise prices of $1.625 and $1.75, respectively, in connection with two private placements of common stock. In September of 1997, the Company's Board of Directors voted to reduce the exercise price of the warrants to $1.25. Each of the warrants entitle the holders thereof to purchase one-quarter share of the Company's common stock at an exercise price of $5.00 per share and expire on April 30, 1999. At December 31, 1998, none of the Class C or Class D warrants had been exercised. On November 30, 1998, the Company and LEC Acquisition LLC, a limited liability company whose managing partner is Ronald G. Farrell, the Company's Chairman and Chief Executive Officer, entered into a Subscription Agreement whereby LEC Acquisition LLC was granted a one year warrant to purchase 6% Convertible Debentures up to an aggregate principal amount of $1,429,170. The 6% Convertible Debentures are convertible into up to an aggregate of 4,763,901 shares of the Company's common stock, such conversion being subject to shareholder approval. On February 17, 1999, the Company's shareholders approved a resolution authorizing the Company to issue such shares upon conversion of the 6% Convertible Debentures. At December 31, 1998, none of the 6% Convertible Debentures had been issued. Stock Options 1) Key Employee and Director The Company has five stock option plans covering an aggregate of 671,875 shares of common stock which provide for the granting of incentive stock options and/or nonqualified stock options to employees and directors to purchase shares of common stock. Options granted to employees generally vest over a three to five year period and expire five years from the date of grant. Options granted to directors are immediately vested and expire ten years from the date of grant. Under the stock option plans, the exercise price of each option at issuance equals the market price of the Company's common stock on the date of grant. Additionally, an officer of the Company has 14,531 options to acquire common stock at an exercise price of $0.32 per share. The options were granted in 1993 in lieu of prospective commissions and were subject to a three year vesting. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans in the consolidated financial statements. Had compensation cost for the Company's stock option plans been determined consistent with SFAS No. 123, the Company's net earnings (loss) available to common stockholders and earnings (loss) per common weighted average share would have been reduced to the pro forma amounts indicated below (in thousands, except per share data):
1998 1997 1996 Net earnings (loss) available to common stockholders: As reported $(3,202) $ 101 $(1,627) Pro forma (3,457) (123) (1,836) Earnings (loss) per common weighted average share: As reported $ (2.63) $ 0.09 $ (1.80) Pro forma (2.84) (0.11) (2.03)
For purposes of calculating the compensation cost consistent with SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1998, 1997 and 1996, respectively: dividend yield of 0.0% for each year; expected volatility of 52 percent, 35 percent and 19 percent; risk free interest rates of 5.83%, 5.96% and 5.94%; and expected lives of one year, three years and five years. Additional information on shares subject to options is as follows:
1998 1997 ---------------------- -------------------- Weighted Weighted Number Average Number Average of Exercise of Exercise Shares Price Shares Price ---------- -------- ---------- -------- Outstanding at beginning of year 138,906 $ 2.72 303,656 $ 6.48 Granted 511,250 1.95 525,000 3.00 Exercised (234,375) 2.00 - - Forfeited (300,000) 2.19 (689,750) 3.04 --------- --------- Outstanding at end of year 115,781 2.22 138,906 2.72 ========= ========= Options exer- cisable at year end 83,865 1.93 42,073 2.08 ========= ========= Weighted average fair value of options granted during the year $ 0.46 $ 1.00 ===== =====
1996 -------------------- Weighted Number Average of Exercise Shares Price ---------- -------- Outstanding at beginning of year 104,906 $ 5.44 Granted 200,000 3.00 Exercised - - Forfeited (1,250) 4.24 ---------- Outstanding at end of year 303,656 6.48 ========== Options exercisable at year end 179,906 6.08 ========== Weighted average fair value of options granted during the year $ 1.80 =======
The following table summarizes information about stock options outstanding at December 31, 1998:
Options Outstanding -------------------------------- Weighted Average Weighted Number Remaining Average Range of exercise of Contractual Exercise prices Shares Life Price --------------------------------------------------------- $0.10 2,500 4.8 yrs $ 0.10 0.32 14,531 4.7 yrs 0.32 0.81 20,000 9.8 yrs 0.81 3.00 78,750 3.2 yrs 3.00 ------- 115,781 4.6 yrs $ 2.22 =======
Options Exercisable -------------------------- Weighted Number Average Range of exercise of Exercise prices Shares Price ------------------------------------------------------ $0.10 2,500 $ 0.10 0.32 14,531 0.32 0.81 20,000 0.81 3.00 46,834 3.00 ------- 83,865 1.93 =======
2) Other Options Options granted to other than employees/directors are accounted for based on the fair value method pursuant to SFAS No. 123 utilizing the Black-Scholes option-pricing method. The amount charged to expense in 1997 for such options was $6,399. In August 1997, the Company granted an aggregate of 37,500 options (12,500 at an exercise price of $3.00 and 25,000 at an exercise price of $4.00) to an unaffiliated company for services. Such options were immediately vested and expire in August 1999. Subsequent to December 31, 1997, the grant was modified to eliminate the 25,000 options having the $4.00 per share exercise price. In October 1996, the Company granted 12,500 stock options to an individual at an exercise price of $6.24. Such options were immediately vested and expire April 7, 1998. In 1995, the Board of Directors of the Company approved the issuance of options covering 68,750 shares of common stock to two companies for services. The exercise price of the options was $5.52 per share which was equal to the quoted market value of the Company's common stock at the date of grant. Such options were immediately vested and expire on March 6, 2000. During the year ended December 31, 1996, 19,250 of such options were exercised. In addition, the Board of Directors approved the issuance of options covering an aggregate of 37,500 shares of common stock to an existing shareholder and to one of the Company's Directors as an inducement to such individuals to provide the Company a short term loan during its transition and relocation from Hauppauge, New York to Las Vegas, Nevada. The exercise price of such options ranged from $5.24 to $6.76 per share; such prices were equal to the quoted market value of the Company's common stock at the date of grant. Such options were immediately vested and expire on various dates through June 7, 2000. Also in 1995, the Company issued options covering 6,250 shares of the Company's common stock to an individual at an exercise price of $5.52. Such options were immediately vested and were exercised during 1996. In 1993, the Company issued options covering 6,344 shares of the Company's common stock at an exercise price of $5.52. Such options were immediately vested and were exercised during 1996. NOTE 11: MAJOR CUSTOMERS AND SUPPLIERS Revenue from leases with three customers of the Company accounted for 17.2%, 7.6%, and 2.3% of consolidated revenues for the year ended December 31, 1998, 15.0%, 9.2% and 3.7% of consolidated revenues for the year ended December 31, 1997 and 25.0%, 12.8% and 7.4% of consolidated revenues for the year ended December 31, 1996. The Company currently purchases a significant amount of inventory for resale from a limited number of suppliers in connection with its distribution operations. Consequently, the Company is dependent upon the availability of product from and the timeliness of delivery by such suppliers in fulfilling its customers' orders. NOTE 12: EMPLOYEE BENEFIT PLANS The Company has a qualified 401(k) Profit Sharing Plan (the "Plan") covering all employees of the Company, including officers. Employees are eligible to participate in the Plan upon hire. The Plan required the Company to match 50% of each dollar contributed by a Plan participant up to the participant's qualified deferral amount during 1997 and 1996. Effective January 1, 1998, the Plan was amended to reduce the Company's matching percentage to 25% of each participant's contribution. During 1998, 1997 and 1996, the Company contributed its required amounts of $49,386, $56,902 and $34,498 to the Plan on behalf of the Plan's participants. NOTE 13: SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES During the year ended December 31, 1998, the Company issued 234,375 shares of common stock pursuant to the cashless exercise of stock options. During the year ended December 31, 1997, the Company purchased computer hardware and software for $140,420 which was funded through a capital lease obligation. During the year ended December 31, 1997, operating lease assets of $1,128,453 were reclassified as sales-type or direct financing leases due to leases renewals/upgrades. During the year ended December 31, 1996, the Company issued 16,875 shares of common stock in exchange for a note receivable of $68,750 and acquired all of the outstanding common stock of Superior Computer Services, Inc. in exchange for 59,927 shares of restricted common stock and a $200,000 non-interest bearing note payable. NOTE 14: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments was made in accordance with Statement of Financial Accounting Standards, "Disclosures about Fair Value of Financial Instruments" ("SFAS No. 107"). SFAS No. 107 specifically excludes certain items from its disclosure requirements such as the Company's investment in leased assets. Accordingly, the aggregate fair value amounts presented are not intended to represent the underlying value of the net assets of the Company. The carrying amounts at December 31, 1998 and 1997 for receivables, accounts payable, accrued liabilities, notes payable and lines of credit approximate their fair values due to the short maturity of these instruments. As of December 31, 1998 and 1997, the carrying amount of recourse discounted lease rentals of $960,256 and $258,030, respectively, approximate their fair values because the discount rates are comparable to current market rates of comparable debt having similar maturities and credit quality. NOTE 15: 1996 FOURTH QUARTER CHARGES During the fourth quarter of 1996, the Company recorded a charge of $889,000 to reduce the carrying amount of certain previously leased equipment and the estimated unguaranteed residual values of equipment on lease. These charges resulted from a decrease in the wholesale market value of the previously leased equipment due to an increase in availability in excess of current demand. Although management believes that its recorded residual values are properly stated, there can be no assurance that the Company will not experience further material residual value or inventory write-downs in the future. NOTE 16: EARNINGS PER COMMON SHARE In February of 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 supersedes APB Opinion No. 15 and specifies the computation, presentation and disclosure requirements for earnings per share ("EPS"). It replaces the presentation of "primary EPS" with a presentation of "basic EPS" and "fully diluted EPS" with "diluted EPS". Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and is computed similarly to fully diluted EPS under APB Opinion No. 15. The following EPS amounts reflect EPS as computed under SFAS No. 128 for the years ended December 31 (all share and per share amounts have been retroactively adjusted to reflect the one-for-four reverse stock split which became effective on September 15, 1998):
1998 1997 1996 ---------- ---------- ---------- Shares outstanding at beginning of period 1,197,268 1,085,230 782,330 Effect of issuance of common stock for services - 10,925 - Issuance of common stock pursuant to private place- ment transactions - 12,200 105,522 Issuance of common stock related to 1996 acquisition of SCS - - 4,421 Exercise of stock options 32,748 - 13,012 Exercise of "A" warrants - - 2,723 Exercise of "B" warrants - 64,671 - Purchase of treasury stock (13,419) (4,520) (1,594) ---------- ---------- ---------- Weighted average common shares outstanding 1,216,597 1,168,506 906,414 ========== ========== ========== Net income (loss) $(3,202,265) $ 329,531 $(1,398,316) Preferred stock dividends - (229,016) (229,016) ---------- ---------- ---------- Net earnings available to common shareholders $(3,202,265) $ 100,515 $(1,627,332) ========== ========== ========== Earnings (loss) per common share $ (2.63) $ 0.09 $ (1.80) ========== ========== ========== Weighted average common shares outstanding 1,216,597 1,168,506 906,414 Effect of common shares issuable upon exercise of dilutive stock options - 38,762 - ---------- ---------- ---------- Weighted average common shares outstanding assuming dilution 1,216,597 1,207,268 906,414 ========== ========== ========== Earnings (loss) per common share assuming dilution $ (2.63) $ 0.08 $ (1.80) ========== ========== ==========
The following potentially dilutive securities were not included in the computation of dilutive EPS because the effect of doing so would be antidilutive:
1998 1997 1996 ---------- ---------- ---------- Options 9,791 112,000 390,656 Warrants 1,207,179 1,207,179 1,457,179 Convertible preferred stock 100,195 100,195 100,195 Warrants issuable upon conversion of preferred stock if conversion occurred prior to August 4, 1998 71,568 71,568 71,568
NOTE 17: SUBSEQUENT EVENTS In January 1999, the Company sold 236,099 shares of common stock to LEC Acquisition LLC, a limited liability company whose managing partner is Ronald G. Farrell, the Company's Chairman and Chief Executive Officer, in a private placement transaction for proceeds of $70,830. On February 17, 1999, the Company's shareholders approved the issuance of 4,763,901 shares of the Company's common stock upon the conversion of the Company's 6% Convertible Debentures. Also on such date, the Company's shareholders approved a change in the Company's name to Golf Entertainment, Inc. There have been extended negotiations between the Company and LEC Technologies, Ltd., a Nevada corporation whose sole shareholder is Michael F. Daniels, the former Chairman and Chief Executive Officer and a current Director of the Company, regarding a Stock Purchase Agreement whereby Mr. Daniels would purchase the common stock of each of the Company's operating subsidiaries for an aggregate of $2,075,000 and the assumption of certain liabilities, including those related to the Excel Equity Line and the Finova Credit Facility, subject to the approval of the Company's shareholders. If concluded, in connection therewith, the Company will receive a release of its guarantees from both Excel Bank, N.A. and Finova Capital Corporation. The Company intends to focus primarily on acquiring and consolidating the ownership of existing golf ranges and golf centers. The Company believes that the fragmented ownership of golf ranges and centers, currently characteristic of the industry in the United States, coupled with Mr. Farrell's extensive business experience in negotiating and financing acquisition opportunities, offer it an opportunity for growth. The Company intends to enhance these existing golf facilities by adding amenities and improving management and operating systems. The Company also will develop new golf recreational facilities, and may acquire other golf related businesses. The Company intends that its facilities will be centered around a driving range and will provide a variety of golf practice areas for pitching, putting, chipping and sand play. The Company intends that its facilities will be user-friendly for all levels of golfer and will appeal to the entire family. Each driving range will, generally, permit night play and limited year round use. Each facility will offer instructional programs for men, women and juniors, and will be staffed with professional instructors. Most facilities will include a clubhouse that will house a full line pro-shop, a snack bar, a miniature golf course(s) and batting cages. Where feasible, the Company intends that the facilities will include par-3 or executive-length (shorter than a regulation-length) golf courses. The Company's revenues will be derived from selling balls to be used on the driving range, charging for rounds of miniature golf, charging for the use of the batting cages, selling golf equipment, golf apparel and related accessories through the pro-shop, fees for instructional programs and from food and beverage sales. The Company will seek to realize economies of scale at its facilities through centralized management information systems, accounting, cash management and purchasing programs. The Company may also seek long-term management contracts to operate golf courses and golf related facilities. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Form 8-K dated September 14, 1998 regarding the resignation of KPMG Peat Marwick LLP as the Company's principal accountants. PART III ITEM 10: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The names, ages and respective positions of the Executive Officers and Directors of the Company are as follows:
Name Age Position Ronald G. Farrell 55 Chairman of the Board and Chief Executive Officer Michael F. Daniels 50 President William J. Vargas 39 Vice President - Finance, Chief Financial Officer, Treasurer and Secretary Larry M. Segall 44 Director L. Derrick Ashcroft 70 Director Richard D. Falcone 45 Director
RONALD G. FARRELL has served as Chairman of the Board of Directors and Chief Executive Officer of the Company since November 1998. Mr. Farrell is the founder, Chairman and President of R. G. Farrell, Inc. and RGF Investments, Inc., both founded in 1985. These companies are wholly-owned by Mr. Farrell and are engaged in financial consulting in connection with private placements, public offerings, venture capital transactions, and leveraged buyout and rollup transactions. MICHAEL F. DANIELS has served as President of the Company since April 1994 and as Chairman of the Board of Directors and Chief Executive Officer from April of 1994 to November of 1998. He has been a Director of the Company since 1983. He served as Chief Operating Officer from March of 1993 to April of 1994 and as Senior Vice President - Marketing for more than five years prior thereto. WILLIAM J. VARGAS has served as Vice President - Finance, Chief Financial Officer and Treasurer since May of 1995 and as Secretary since February of 1996. From July of 1993 to January of 1995 he was the Senior Director of Finance for Fitzgeralds Casino/Hotel and from February of 1995 through April of 1995 he was an independent financial consultant. From January of 1992 to July of 1993 he was the Chief Financial Officer of Sport of Kings, Inc., a publicly traded gaming company. LARRY M. SEGALL has served as a Director of the Company since November of 1989. Mr. Segall is currently the Chief Financial Officer of Vitamin Shoppe Industries, Inc. From 1985 through October 1997, Mr. Segall held various management positions with Tiffany & Co., most recently as its Senior Vice President - Merchandising, Planning and Analysis. L. DERRICK ASHCROFT has served as a Director of the Company since August of 1994. From 1988 to 1995 he was Chairman of the Board of Cardiopet, Inc., an animal diagnostic firm. Mr. Ashcroft is a graduate of Oxford University, England. RICHARD D. FALCONE has served as a Director of the Company since July 1998. Mr. Falcone is currently Vice President and Chief Financial Officer of DataStudy, Inc. From January 1997 through December 1998 he was Vice President and Chief Operating Officer of Netgrocer, Inc. and from September 1994 through January 1996 he was Vice President and Chief Operating Officer of National Merchants Management Company. Prior to that he was the Chief Financial Officer for Bed, Bath & Beyond, Inc. since 1990. Officers serve at the discretion of the Board of Directors. All Directors hold office for one year terms and until the election and qualification of their successors. The Company has a Key Employee Stock Option Committee and an Audit Committee, each consisting of Messrs. Segall and Ashcroft. The Board of Directors did not have a standing nomination committee or committee performing similar functions during the year ended December 31, 1998. Compliance with Section 16(a) of the Exchange Act Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers, directors and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, Directors and ten percent shareholders are required by regulation to furnish the Company with all Section 16(a) forms they file. Based solely on the Company's copies of such forms received or written representations from certain reporting persons that no Form 5's were required for those persons, the Company believes that, during the time period from January 1, 1998 through December 31, 1998, all filing requirements applicable to its officers, Directors and greater than ten percent beneficial owners were complied with. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth information with respect to the compensation paid and/or accrued to each of the Company's executive officers for services rendered in all capacities to the Company during the three years ended December 31, 1998. No other executive officer received annual compensation in excess of $100,000 in any of the three fiscal years ended December 31, 1998. This information includes the dollar value of base salaries, bonuses, awards, the number of stock options granted and certain other compensation, if any, whether paid or deferred. (a) Summary Compensation Table
Annual Compensation ------------------------------------- Other Annual Name of Individual and Fiscal Salary Bonus Compensation Principal Position Year ($) ($) ($) - - ---------------------- ------ -------- -------- ------------ Ronald G. Farrell 1998 - - - Chairman & CEO Michael F. Daniels 1998 $326,385 - $ 34,573 (2) President (1) 1997 336,519 - 181,653 (2) 1996 273,077 - 258,619 (2) William J. Vargas 1998 123,417 - - CFO & Secretary 1997 128,871 - - 1996 115,341 - -
(a) Summary Compensation Table (cont'd)
Long Term Compensation ------------------------ Awards ------------------------ Securities Restricted Underlying All Other Name of Individual and Fiscal Stock Options/SARs Annual Principal Position Year Awards($) (#) Compensation - - ---------------------- ------ ---------- ------------ ------------ Ronald G. Farrell 1998 - - - Chairman & CEO Michael F. Daniels 1998 - 200,000 (4) 2,500 (3) President (1) 1997 - - (4) 4,750 (3) 1996 - 62,500 (4) 4,750 (3) William J. Vargas 1998 - 77,500 (4) 1,825 (3) CFO & Secretary 1997 - - (4) 4,750 (3) 1996 - 17,500 (4) 1,900 (3)
(1) Michael F. Daniels served as the Company's Chairman & CEO during the period January 1, 1996 through November 20, 1998. (2) Consists of commission income based upon realization of excess residual values related to leases entered into prior to May 15, 1993. (3) Represents Company matching contribution to 401(k) Profit Sharing Plan. (4) In January of 1997, August of 1997 and January of 1998, Messrs. Daniels and Vargas were granted stock options to purchase an aggregate of 404,000 shares and 163,750 shares, respectively. On December 8, 1997, Messrs. Daniels and Vargas voluntarily rescinded their respective 1997 option grants, together with all grants received prior thereto, with the exception of 14,531 stock options received by Mr. Daniels during 1993. In October 1998, Messrs. Daniels and Vargas voluntarily rescinded their respective 1998 option grants, to the extent that they had not been exercised, except for 2,500 stock options received by Mr. Vargas. Messrs. Daniels and Vargas received no compensation for such rescissions. All share amounts have been retroactively adjusted to reflect the one-for-four reverse stock split that was effective September 15, 1998. (b) Option/SAR Grants in Last Fiscal Year
Number of Percent of Securities Total Underlying Options/SAR's Exercise Options/SAR's Granted to or Base Expiration Name Granted (#) In Fiscal Year Price($/Sh) Date - - ----------- ------------- -------------- ----------- ---------- Ronald G. Farrell - - - - Michael F. Daniels 200,000 (1) 40.7% $0.10 1/30/03 William J. Vargas 77,500 (1) 15.8% $0.10 1/30/03
(1) In October 1998, Messrs. Daniels and Vargas voluntarily rescinded any stock option grants made in 1998, to the extent that they had not been exercised, with the exception of 2,500 stock option grants made to Mr. Vargas. (c) Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End Option/SAR Values
Number of Value of Securities Unexercised Underlying In-The-Money Options/SAR's Options/SAR's At Fiscal At Fiscal Shares Year End (#) Year End ($) Acquired Value Exercisable/ Exercisable/ Name On Exercise Realized Unexercisable Unexercisable - - ----------- ----------- -------- ------------- ------------- Ronald G. Farrell N/A N/A N/A N/A Michael F. Daniels 100,000 $53,000 14,531/--- $5,340/--- William J. Vargas 35,000 $18,550 2,500/--- $1,469/--- $0.00
The last sales price for the Company's Common Stock on the Nasdaq SmallCap Market on December 31, 1998 was $0.6875. (d) Directors Compensation Each non-employee director of the Company is paid $1,000 per month. In addition, each director is entitled to participate in the Company's stock option plans. The Company does not pay its directors any additional fees for committee participation. (e) Employment Contracts Ronald G. Farrell serves as the Company's Chief Executive Officer under an employment agreement effective January 1, 1999 through December 31, 2003. Mr. Farrell's annual base salary under such agreement is $240,000 for the period January 1, 1999 through December 31, 2000, and increases by 10% per year thereafter. In addition, Mr. Farrell is eligible to receive an annual bonus equal to five percent (5%) of the Company's operating income for the year. Such bonus may not exceed Mr. Farrell's base salary for such respective fiscal year. Pursuant to such employment agreement, if Mr. Farrell should die during the term thereof, a death benefit equal to the portion, if any, of his base salary for the period up to the date of death which remains unpaid and eighteen months salary ($360,000, at his current base salary) shall be paid to his estate. Michael F. Daniels serves as the Company's President under an employment agreement dated October 1, 1998 and expiring September 30, 2001. Mr. Daniels' compensation under such agreement is $350,000 per annum and he is eligible for a bonus based on company performance. Pursuant to Mr. Daniels' employment contract, if Mr. Daniels should die during the term thereof, a death benefit equal to six months salary ($175,000) shall be paid to his estate. William J. Vargas serves as the Company's Chief Financial Officer, Treasurer and Secretary under an employment agreement dated July 1, 1995 and expiring June 30, 2000. Mr. Vargas' compensation under such agreement is $135,000 per annum. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of January 28, 1999, certain information concerning those persons known to the Company, based on information obtained from such persons, with respect to the beneficial ownership (as such term is defined in Rule 13d-3 under the Securities Exchange Act of 1934) of shares (the "Common Stock") of common stock, $0.01 par value, of the Company by (i) each person known by the Company to be the owner of more than 5% of the outstanding Common Stock, (ii) each Director of the Company, (iii) each executive officer of the Company named in the Summary Compensation Table and (iv) all executive officers and Directors as a group:
Amount and Nature Name and Address of of Beneficial Own- Percentage of Beneficial Owner (1) ership (2) Class (3) - - ---------------------- ------------------ ------------- LEC Acquisition LLC 236,099 (4) 16.7% Ronald G. Farrell 0 0.0% Michael F. Daniels 221,850 (5) 15.7% William J. Vargas 46,500 (6) 3.3% Larry M. Segall 58,844 (7) 4.2% L. Derrick Ashcroft 38,650 (8) 2.7% Richard D. Falcone 13,500 (9) 1.0% All Directors and Executive Officers as a Group (6 persons) 379,344 26.9% The address for all individuals identified herein is 6540 S. Pecos Road, Suite 103, Las Vegas, Nevada 89120. 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. Based on 1,410,356 shares of common stock outstanding as of January 28, 1999. Does not include 4,763,901 shares issuable to holders of 6% Convertible Debentures upon conversion. Mr. Farrell, as the managing partner of LEC Acquisition LLC, exercises voting control over shares held by LEC Acquisition LLC. Additionally, pursuant to the terms of the operating agreement of the LLC, RGF Investments, Inc., a member of the LLC, will receive and Mr. Farrell may receive shares of common stock at such time as the LLC distributes shares of common stock to its members. Includes options to purchase 14,531 shares of common stock granted to Mr. Daniels which are currently exercisable. Includes options to purchase 2,500 shares of common stock granted to Mr. Vargas which are currently exercisable. Includes options to purchase 5,000 shares of common stock granted to Mr. Segall which are currently exercisable. Includes options to purchase 5,000 shares of common stock granted to Mr. Ashcroft which are currently exercisable. Includes options to purchase 10,000 shares of common stock granted to Mr. falcone which are currently exercisable.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Mr. Segall, a director of the Company, is currently the Chief Financial Officer of Vitamin Shoppe Industries, Inc. and was formerly an officer of Tiffany & Co., two of the Company's customers. Mr. Falcone, a director of the Company, was formerly the Chief Operating Officer of Netgrocer, Inc., one of the Company's customers. Neither Mr. Segall nor Mr. Falcone receive any cash or other remuneration from the Company other than their fees for as directors and participation in the Company's stock option plans. The Company believes that the terms of its lease arrangements with Vitamin Shoppe Industries, Inc., Tiffany & Co. and Netgrocer, Inc. are fair and have been reached on an arms-length basis. During the year ended December 31, 1998, the Compensation Committee of the Board of Directors authorized Mr. Michael F. Daniels, the Company's President and then Chief Executive Officer, to borrow from the Company a maximum of $250,000. All such borrowings are evidenced by notes and require the repayment of interest only at 8% for two years and the repayment of both interest and principal for three years thereafter. At December 31, 1998, Mr. Daniels was indebted to the Company in the amount of $225,593. ITEM 14: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (b) Reports on Form 8-K: Form 8-K dated November 20, 1998 regarding the appointment of Ronald G. Farrell as the Company's Chairman and Chief Executive Officer and the resignation of Michael F. Daniels from such positions. (a) Exhibits
Exhibit Number Description 3.1 Certificate of Incorporation.* 3.2 Certificate of Amendment of Certificate of Incorporation, dated June 23, 1995.** 3.3 Certificate of Amendment of Certificate of Incorporation, dated March 20, 1997.****** 3.4 By laws.* 4.1 Specimen Common Stock Certificate.* 4.2 Specimen Series A Convertible Preferred Stock Certificate.* 4.3 Specimen Warrant Certificate.* 4.4 Certificate of Designation of Series A Convertible Preferred Stock.* 4.5 Form of Representative's Warrants.* 4.6 Form of Class C Common Stock Purchase Warrant.***** 4.7 Form of Class D Common Stock Purchase Warrant.***** 4.8 Amended and Restated Warrant Agency Agreement Dated as of March 3, 1998, between the Company and American Stock Transfer and Trust Company, as Warrant Agent.***** 10.1 Standard Office Lease - Gross dated April 7, 1995 between the Company and Jack Cason (relating to office space in Clark County, Nevada).** 10.2 1991 Directors' Stock Option Plan.* 10.3 1991 Key Employees' Stock Option Plan.* 10.4 1993 Directors' Stock Option Plan.* 10.5 1993 Key Employees' Stock Option Plan.* 10.6 1994 Stock Option Plan.**** 10.7 1996 Stock Option Plan.***** 10.8 1997 Stock Option Plan.****** 10.9 Form of 1996 Non-Plan Director Stock Option Agreement.****** 10.10 Indemnification Agreement dated as of September 5, 1990 between the Company and Michael F. Daniels.* 10.11 Loan Agreement with Bank of America dated July 11, 1995.*** 10.12 Amendment No. 1 to Loan Agreement with Bank of America.*** 10.13 Amendment No. 2 to Loan Agreement with Bank of America.*** 10.14 Amendment No. 3 to Loan Agreement with Bank of America.*** 10.15 Amended and Restated Business Loan Agreement with Bank of America dated February 28, 1997. 10.16 Bank of America Loan Modification Agreement dated July 24, 1997. 10.17 Second Bank of America Loan Modification Agreement dated February 5, 1998. 10.18 Merrill Lynch Line of Credit Agreement.*** 10.19 Amendment No. 1 to Merrill Lynch Line of Credit Agree- meant.*** 10.20 Amendment No. 2 to Merrill Lynch Line of Credit Agree- meant.*** 10.21 Letter Agreement and Collateral Installment Note dated as of October 8, 1997 with Merrill Lynch Business Financial Services, Inc. 10.22 Letter Agreement between the Registrant and Excel Bank, N.A. (formerly Union Chelsea National Bank) dated November 27, 1995.*** 10.23 Revolving Credit Agreement with Excel Bank, N.A. dated as March 8, 1998. 21 List of Subsidiaries. 27 Financial Data Schedule. 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.
SIGNATURES In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GOLF ENTERTAINMENT, INC. Date: April xx, 1999 By: /s/ Ronald G. Farrell Ronald G. Farrell, Chief Executive Officer In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Date: April xx, 1999 By: /s/ Ronald G. Farrell Chief Executive Officer and Director (Principal Executive Officer) Date: April xx, 1999 By: /s/ William J. Vargas William J. Vargas, V.P. Finance (Principal Financial and Accounting Officer) Date: April xx, 1999 By: /s/ Michael F. Daniels Michael F. Daniels, Director Date: April xx, 1999 By: /s/ Larry M. Segall Larry M. Segall, Director Date: April xx, 1999 By: /s/ L. Derrick Ashcroft L. Derrick Ashcroft, Director Date: April xx, 1999 By: /s/ Richard D. Falcone Richard D. Falcone, Director EX-21 2 LIST OF SUBSIDIARIES Exhibit 21.1 List of Subsidiaries LEC Leasing, Inc.; incorporated in the State of Nevada on May 7, 1998; doing business as LEC Leasing, Inc. LEC Distribution, Inc.; incorporated in the State of Nevada on June 23, 1998; doing business as LEC Distribution, Inc. Pacific Mountain Computer Products, Inc.; incorporated in the State of California on June 22, 1978; and doing business as Pacific Mountain Computer Products, Inc. TJ Computer Services, Inc.; incorporated in the State of New York on March 4, 1980; and doing business as Leasing Edge Corporation. Superior Computer Systems, Inc.; incorporated in the State of Minnesota on January 13, 1995; and doing business as Superior Computer Systems, Inc. Atlantic Digital International, Inc.; incorporated in the State of Nevada on November 10, 1997; and doing business as Atlantic Digital International, Inc. EX-27 3 ART. 5 FDS FOR 1998 10-K
5 1 YEAR DEC-31-1998 DEC-31-1998 391,705 0 2,881,627 304,367 1,862,981 0 948,171 425,465 26,381,167 0 4,016,584 0 2,290 14,104 2,435,988 26,381,067 19,565,420 30,623,016 16,810,687 25,778,551 0 146,962 840,464 (3,202,265) 0 (3,202,265) 0 0 0 (3,202,265) (2.63) (2.63) UNCLASSIFIED BALANCE SHEET
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