SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED:
MARCH 31, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM _____ TO _____
Commission File No. 0-18303
- -----------------------------------------------------------------
GOLF ENTERTAINMENT, INC.
_________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware No. 11-2990598
- -------------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6540 S. Pecos Road, Las Vegas, Nevada 89120
- -------------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
(702) 454-7900
- --------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports 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 [ ]
Applicable only to issuers 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 sections 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 issuers:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
April 30, 1999: 1,715,492 common shares.
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1999
(Unaudited) and December 31, 1998 3
Consolidated Statements of Operations -
for the three months ended
March 31, 1999 and 1998 (Unaudited) 5
Consolidated Statements of Cash Flows -
for the three months ended March 31, 1999
and 1998 (Unaudited) 6
Notes to Consolidated Financial Statements
(Unaudited) 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of
Security Holders 16
Item 5. Other Information. 16
Item 6. Exhibits and Reports on Form 8-K 16
(a) Exhibits
(b) Reports on Form 8-K
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1999 1998
(Unaudited) (Audited)
----------- ------------
ASSETS:
Cash $ 177,205 $ 391,705
Receivables - net of allowance
for doubtful accounts of $304,367
at March 31, 1999 and December 31,
31, 1998, respectively 975,887 2,577,260
Notes receivable - employees 165,862 143,376
Inventory, net of reserve for
obsolescence of $940,533 and
$1,086,608 at March 31, 1999 and
December 31, 1998, respectively 1,495,987 1,862,981
Investment in leased assets:
Operating leases, net 11,469,956 11,787,960
Sales-type and direct financing 8,417,034 8,454,844
Furniture and equipment - net of
accumulated depreciation of
$454,430 and $425,465 at March 31,
1999 and December 31, 1998,
respectively 523,741 552,706
Other assets 557,177 610,335
---------- ----------
TOTAL ASSETS $23,782,849 $26,381,167
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
(continued)
GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1999 1998
(Unaudited) (Audited)
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 2,535,584 $ 3,611,164
Accrued liabilities 471,751 745,418
Notes payable and lines of credit 3,802,205 4,016,584
Nonrecourse and recourse discounted
lease rentals 14,766,583 15,450,421
Other liabilities 93,228 105,198
---------- ----------
TOTAL LIABILITIES 21,669,351 23,928,785
---------- ----------
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,
1,715,492 and 1,410,393 shares issued
and outstanding at March 31, 1999
and December 31, 1998, respectively 17,155 14,104
Additional paid-in capital 10,462,164 10,354,985
Accumulated deficit (8,368,111) (7,918,997)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 2,113,498 2,452,382
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $23,782,849 $26,381,167
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
----------------------
March 31, March 31,
1999 1998
---------- ----------
Revenues:
Operating leases $1,493,704 $2,109,560
Sales-type leases - 344,472
Finance income 255,330 177,541
Direct sales 130,717 830,930
--------- ---------
Total revenues from
leasing operations 1,879,751 3,462,503
Distribution sales 1,266,655 4,703,768
Other - 1,345
--------- ---------
Total revenues 3,146,406 8,167,616
--------- ---------
Costs and expenses:
Operating leases 584,788 1,120,987
Sales-type leases - 278,935
Interest expense 331,843 334,727
Direct sales 115,311 968,368
--------- ---------
Total costs from
leasing operations 1,031,942 2,703,017
Distribution cost of
sales 1,313,640 3,978,124
Selling, general and
administrative expenses 1,123,985 1,221,450
Interest expense 125,953 181,570
--------- ---------
Total costs and expenses 3,595,520 8,084,161
--------- ---------
Net income $( 449,114) $ 83,455
========= =========
Earnings per common share $ (0.28) $ 0.01
========= =========
Earnings per common share
assuming dilution $ (0.28) $ 0.01
========= =========
The accompanying notes are integral part of these consolidated financial
statements.
GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
--------------------------
March 31, March 31,
1999 1998
------------ -----------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income(loss) $ (449,114) $ 83,455
Adjustments to reconcile net
income to cash provided
by operating activities:
Depreciation and amortization 650,270 1,152,902
Stock compensation expense 37,500 -
Change in assets and liabilities
due to operating activities:
Decrease in accounts
receivable 1,601,373 231,849
Decrease in inventory 638,054 398,523
Decrease in accounts
payable (552,695) (869,723)
(Decrease) increase in
accrued liabilities (273,667) 103,188
All other operating activities 4,670 (171,812)
----------- ----------
Total adjustments 2,105,505 844,927
----------- ----------
Net cash provided by operating
activities 1,656,391 928,382
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales, transfers and disposals of
inventory and equipment 7,530 1,078,443
Purchases of inventory for lease (525,374) (948,509)
Purchases of furniture and equipment - (43,267)
(Increase) decrease in notes receivable (22,486) (11,184)
Additions to net investment in
sales-type and direct financing leases (841,964) (864,817)
Sales-type and direct financing
lease rentals received 859,774 724,927
----------- ----------
Net cash used in investing activities (522,520) (64,407)
----------- ----------
The accompanying notes are an integral part of these consolidated
financial statements.
(Continued)
GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
--------------------------
March 31, March 31,
1999 1998
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from nonrecourse and
recourse discounted lease rentals 1,459,552 1,709,026
Payments on nonrecourse and recourse
discounted lease rentals (2,143,390) (2,362,931)
Proceeds from notes payable 79,176 513,307
Payments on notes payable (816,439) (231,677)
Sale of common stock 72,730 -
Purchase of treasury stock - (66,455)
Preferred stock dividends paid - (57,254)
----------- ----------
Net cash provided by (used in)
financing activities (1,348,371) (495,984)
----------- ----------
Net increase (decrease) in cash (214,500) 367,991
Cash at beginning of period 391,705 208,639
----------- ----------
Cash at end of period $ 177,205 $ 576,630
=========== ==========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for:
Interest $ 457,796 $ 479,187
=========== ==========
Income taxes $ - $ 16,850
=========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation: The accompanying consolidated
financial statements include the accounts of Golf Entertainment,
Inc. (formerly known as LEC Technologies, Inc.) and its wholly
owned 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"). All material intercompany accounts and
transactions have been eliminated. Certain reclassifications have
been made to prior years' amounts to conform with current period
presentation.
Nature of Operations: Golf Entertainment, Inc. 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.
Basis of Presentation: In the opinion of the Company, the
accompanying unaudited Consolidated Financial Statements contain
all adjustments necessary to present fairly the results of its
operations and its cash flows for the three months ended March 31,
1999 and 1998. It is suggested that this report be read in
conjunction with the Company's audited financial statements
included in the Annual Report on Form 10-K for the fiscal year
ended December 31, 1998. The operating results and cash flows for
the three months ended March 31, 1999 are not necessarily
indicative of the results that will be achieved for the full fiscal
year or for future periods.
Note 2. Earnings Per Share
Basic and diluted earnings (loss) per share are computed in
accordance with SFAS No. 128, "Earnings Per Share". The following
earnings per share ("EPS") amounts reflect EPS as computed under
SFAS No. 128 (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):
March 31, March 31,
1999 1998
---------- ----------
Shares outstanding at
beginning of period 1,410,393 1,197,267
Sale of common stock 155,984 -
Issuance of common stock for
services 31,111 -
Purchase of treasury stock - (11,214)
--------- ---------
Weighted average common shares
outstanding 1,597,488 1,186,053
========= =========
Net income (loss) $ (449,114) $ 83,455
Preferred stock dividends - (57,254)
--------- ---------
Net earnings available to
common shareholders $ (449,114) $ 26,201
========= =========
Earnings (loss) per common share $ (0.28) $ 0.02
========= =========
Weighted average common shares
outstanding 1,597,488 1,186,053
Effect of common shares
issuable upon exercise of
dilutive stock options - 59,959
--------- ---------
Weighted average common shares
outstanding assuming dilution 1,597,488 1,246,012
========= =========
Earnings (loss) per common
share assuming dilution $ (0.28) $ 0.02
========= =========
Note 3. 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 March 31, 1999 was $121,020. 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 $849,776
and $65,344, respectively, at March 31, 1999. At March 31, 1999,
the Company had outstanding term notes and available credit under
the Equity Line of $1,453,471 and $131,409, 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 March 31, 1999, the amount
outstanding under the Finova Term Loan was $1,373,279.
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 March 31, 1999, amounts outstanding under the
Finova Revolver were $213,767 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 March 31, 1999.
Notes payable and lines of credit consist of the following at March
31, 1999 and December 31, 1998:
March 31, December 31,
1999 1998
----------- -----------
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 $1,373,279 $1,425,000
Revolving line of credit agreement
with Finova Capital Corporation,
with floating interest rate of prime
plus 2.0 percent 213,767 762,223
Term note with Merrill Lynch, due
June 1, 1999, with floating
interest rate, currently at 9.25
percent 186,464 216,464
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 1,453,471 1,479,072
Term note due Pinacor, Inc., non-
interest bearing, payable in monthly
installments of $20,000, due October
1, 1999 155,000 -
Term note due IBM Corporation, paya-
ble in monthly installments of $20,000
with interest at 8%, due August, 2000 307,884 -
Other 112,340 133,825
--------- ---------
$3,802,205 $4,016,584
========= =========
NOTE 4: SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
During the three months ended March 31, 1999, the Company issued
50,000 shares of common stock in exchange for services valued at
$37,500. Also during such period, $522,884 in accounts payable
obligations were converted into term notes.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION
Overview
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. In March, 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. Unless the context otherwise requires, the
term the "Company" as used herein refers to Golf Entertainment,
Inc. and its wholly-owned subsidiaries.
The Company's current 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.
On April 23, 1999, the Company and LEC Technologies, Ltd.
("LEC Ltd."), a Nevada corporation whose sole shareholder is
Michael F. Daniels, the former Chief Executive Officer and a then
Director of the Company, entered into a Stock Purchase Agreement
whereby LEC Ltd. would acquire all of the common stock of the
Company's operating subsidiaries (LEC, SCS, PMCPI, ADI, LEC
Distribution, Inc. and TJ Computer Services, Inc.) for an aggregate
of $2,075,000. On May 4, 1999, Mr. Daniels advised the Company
that he could not complete the transaction. The Company intends to
continue to look for other buyers for its computer business
operations.
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 the extensive business
experience of the Company's CEO, Ronald G. Farrell, 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
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.
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 in the
Company's Annual Report on Form 10-K for the year ended December
31, 1998. 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.
Three Months Ended March 31, 1999 Compared to Three Months Ended
March 31, 1998
Revenues
Total revenues from leasing operations decreased 45.7% from
$3,462,503 for the three months ended March 31, 1998 to $1,879,751
for the three months ended March 31, 1999, a decrease of
$1,582,752. The decrease in revenues is primarily due to a
decrease in revenue from the portfolio base of operating leases, a
decrease in revenue from sales-type leases and a decrease in direct
sales revenues partially offset by an increase in finance income.
Revenue from the portfolio base of operating leases decreased
29.2% from $2,109,560 for the three months ended March 31, 1998 to
$1,493,704 for the three months ended March 31, 1999, a decrease of
$615,856. This decrease in operating lease revenue is primarily
due to the combination of an increase in the number of direct
finance leases written and the early termination of certain
operating leases purchased by a customer in the first half of
fiscal 1998. The accounting classification of a lease transaction
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 leases classified as sales-type leases decreased
100.0% from $344,472 for the first quarter of 1998 to zero for the
first quarter of 1999. This decrease resulted from the Company not
entering into any renewal/upgrade transactions with its customers
during the current period. Revenue from direct sales of off-lease
equipment decreased 84.3%, from $830,930 for the three months ended
March 31, 1998 to $130,717 for the three months ended March 31,
1999, a decrease of $700,213. This decrease in sales of off-lease
equipment is directly related to a decrease in the volume of leases
coming to the end of their initial terms between periods. Since a
majority of the Company's leases are written for a 36-month term,
the volume of lease terminations in a period is directly related to
the volume of new leases written during the comparable period three
years prior.
Distribution sales decreased 73.1% from $4,703,768 for the
first quarter of 1998 to $1,879,751 for the 1999 period due
primarily to a reduction in distribution sales of the Company's
three distribution subsidiaries and a realignment of the Company's
business.
Costs and Expenses
Total costs from leasing operations decreased 61.8% from
$2,703,017 for the first quarter of 1998 to $1,031,942 for the
comparable 1999 quarter, a decrease of $1,671,075. The decrease in
total costs from leasing operations is due primarily to a decrease
in operating lease depreciation, a decrease in costs associated
with sales-type leases and a decrease in direct sales costs. Gross
profit from leasing operations (total revenues from leasing
operations less total costs from leasing operations) increased
$88,323, or 11.6%. Gross margin from leasing operations (gross
profit from leasing operations as a percentage of total revenues
from leasing operations) increased to 45.1% from 21.9%.
Leasing costs associated with the portfolio base of operating
leases decreased 47.8% from $1,120,987 for the three months ended
March 31, 1998 to $584,788 for the three months ended March 31,
1999, a decrease of $536,199. Gross profit on operating leases
decreased by $79,657 due primarily to the expiration of certain
month-to-month leases. Such leases generally have a higher profit
margin than other operating leases since the equipment has often
already been depreciated to zero.
Direct sales costs (leasing costs with respect to the sale of
equipment off lease and leases with dollar buyout options treated
as sales) decreased 88.1% from $968,368 to $115,311, a decrease of
$853,057 and decreased as a percentage of the related revenue to
88.2% from 116.5%. The decrease in the cost to revenue percentage
is due to residual value realization more closely matching stated
values in 1999 as compared to 1998.
Distribution cost of sales decreased 67.0% from $3,978,124 for
the quarter ended March 31, 1998 to $1,313,640 for the quarter
ended March 31, 1999, a decrease of $2,664,484.
Selling, general and administrative expenses decreased $97,465
in the 1999 period compared to the prior year period due primarily
to decreased staffing levels.
Interest expense on non-lease related indebtedness decreased
$55,617, or 30.6% due to lower average debt levels and interest
rates.
The consolidated financial statements do not reflect a
provision for income taxes due to the utilization of net operating
loss carryforwards and changes in the related valuation allowance.
At March 31, 1999, the Company had unexpired net operating loss
carryforwards of approximately $5,700,000 which can be utilized to
offset future taxable income, if any.
Net Earnings
As a result of the foregoing, the Company recorded a net loss
of $449,114 during the quarter ended March 31, 1999 as compared to
net income of $83,455 in 1998.
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 March 31, 1999 was $121,020. 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 $849,776
and $65,344, respectively, at March 31, 1999. At March 31, 1999,
the Company had outstanding term notes and available credit under
the Equity Line of $1,453,471 and $131,409, 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 March 31, 1999, the amount
outstanding under the Finova Term Loan was $1,373,279.
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 March 31, 1999, amounts outstanding under the
Finova Revolver were $213,767 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 March 31, 1999.
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 March 31, 1999,
the Company had approximately $308,614 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 March 31, 1999, the Company had a
total net investment in lease transactions of $19.9 million
compared to $20.2 million as of December 31, 1998. The estimated
residual value of the Company's portfolio of leases expiring
between April 1, 1999 and December 31, 2003 totals $6,763,560,
although there can be no assurance that the Company will be able to
realize such residual value in the future. As of March 31, 1999,
the estimated residual value of the Company's portfolio of leases
by year of lease termination was as follows:
Year ending December 31,
1999 $ 1,433,560
2000 3,207,700
2001 1,903,300
2002 188,000
2003 11,000
Total $ 6,763,560
Leased equipment expenditures of $1,367,338 for the quarter ended
March 31, 1999 were financed through the discounting of $1,459,552
of noncancelable lease rentals to various financial institutions.
The Company believes that inflation has not been a significant
factor in its business.
Based on the Company's anticipated residual value realization,
management believes that the Company will have adequate capital
resources to continue its operations 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 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 had 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 then 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. On May 4, 1999, Mr. Daniels advised the Company that
he could not complete the transaction. The Company intends to
continue to look for other buyers for its computer business
operations.
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 the extensive business
experience of the Company's CEO, Ronald G. Farrell, 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
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.
On May 5, 1999, Mr. Daniels' employment with the Company and its
subsidiaries was terminated and on May 12, 1999, Mr. Daniels
resigned as a Director of the Company.
Safe Harbor Statement under the
Private Securities Litigation Reform Act of 1995
Certain statements herein and in 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 other 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 many
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.
PART II - OTHER INFORMATION
ITEM 1. 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 March 31, 1999 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.
On February 17, 1999, the Company's shareholders approved the
issuance of 4,763,901 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.
ITEM 5. Other Matters.
On March 26, 1999 Michael F. Daniels resigned as President of
Golf Entertainment, Inc.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
GOLF ENTERTAINMENT, INC.
(Registrant)
Date: May 18, 1999 /s/ Ronald G. Farrell
Ronald G. Farrell, Chief
Executive Officer
(Principal Executive Officer)
Date: May 18, 1999 /s/ William J. Vargas
William J. Vargas, V.P.- Finance
(Principal Financial and
Accounting Officer)