United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2001.
or
[ ] Transition Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Commission File Number 0-18303
GOLF ENTERTAINMENT, INC.
(formerly known as LEC TECHNOLOGIES, INC.)
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
11-2990598
(I.R.S. Employer Identification Number)
1008 S. Clayton St.
Springdale, AR 72762
(Address of principal executive offices, including zip code)
(479) 751-2300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, Par Value $0.01 per share,
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 405of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
form 10-K or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-
affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the stock was sold, or the
average bid and asked prices of such stock, as of a specified date
within 60 days prior to the date of filing: As of December 31, 2001, the
approximate market value of the common stock based upon the NASD closing
price of $0.065 of stated shares (6,000,072) on that date held by non-
affiliates was $390,005.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
As of December 31, 2002, the issuer had 9,043,004 shares of common
stock, par value $0.01 per share, outstanding.
Documents incorporated by reference: None
PART I.
Items 1. & 2. 4
Reporting Of Subsequent Events 4
Business and Properties 4
Corporate History 4
Growth Strategy 4
Description of Business 5
Marketing Opportunity 5
The Challenge 6
Our Services 6
Sales & Marketing 6
Technology & Operations 7
Competition 8
Government Regulation 9
Employees 16
Subsequent Material Events 16
Important Risk Factors 18
Properties 30
Item 3. Legal Proceedings 30
Item 4. Submission of Matters to a Vote of Security Holders 31
PART II.
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 32
Item 6. Management's Discussion and Analysis of Financial
Condition; Results & Plans of Operations 34
Item 7. Financial Statements 37
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 37
PART III.
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act 38
Item 10. Executive Compensation 41
Item 11. Security Ownership of Certain Beneficial Owners and
Management 43
Item 12. Certain Relationships and Related Transactions 44
PART IV.
Item 13. Exhibits and Reports on Form 8-K 45
Signature 46
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 24A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements
appear in a number of places including Items 1 and 2 "Business and
Properties," Item 6 "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and Item 9 Directors, Executive
Officers, Promoters and Control Persons; compliance with Section 16(a)
of the Exchange Act.
These statements regard our ability to procure funds necessary to
remain a viable entity; the continuity of operations of prime provider
of network programming: Hispanic Television Network (HTVN); our belief
that we will become profitable and start generating monthly operating
profits in fiscal year 2002; our intention to continue the expansion of
our operations, particularly those of low-power television station
acquisitions and new construction projects; our intention to acquire
full or low power stations in major Hispanic markets; seasonal revenue
fluctuations that (among other things) may increase revenues during
future holiday seasons; our expectations that any licenses we acquire
through the FCC will be renewed in the future; our expectations
regarding the exact number of restricted shares that will become freely
tradable at any time; the potential growth patterns and immigration
patterns of the Mexican origin and Hispanic population in geographical
areas we intend to expand into; the continued growth in Spanish language
television advertising both in absolute terms and relative to
advertising directed to other constituencies; the continued growth in
Hispanic spending both in absolute terms and relative to spending by
other constituencies; the continued use of the Spanish language by
Hispanics; the number of Hispanic households we will reach after the
completion of certain anticipated acquisitions; our ability to provide a
strong alternative to the Univision, Telemundo, and Telefuturo networks;
our intention to produce original programming and thus differentiate our
Company from other Spanish language television providers; our ability to
reduce production expenditures and costs each year by utilizing our in-
house staff; the benefits to our sales force from the use of our in-
house research department; our ability to maintain tight control over
our operating expenses by utilizing our master control, network
programming, finance, human resources and management information system
functions; our belief that we can expediently deliver our belief that
Mexican Hispanics will respond favorably to a television network that
tailors its programming to their tastes; our development of a network
advertising team to solicit regional and national advertisers and
national advertising agencies and our maintenance of account executives
at each of our stations for soliciting local and national advertising;
our beliefs regarding the merits of certain lawsuits filed against us
and our intention to vigorously defend against them; the effects of our
audit committee, and, our corporate governance and compensation
committees.
Such statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "estimates," "will,"
"should," "plans" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of
strategy. Readers are cautioned that any such forward-looking statements
are not guarantees of future performance and involve significant risks
and uncertainties, and that actual results could differ materially from
those projected in the forward-looking statements. Factors that could
cause actual results to differ materially include, but are not limited
to, those discussed under "RISK FACTORS" immediately below. As a result,
these forward-looking statements represent the Company's judgment as of
the date of this Annual Report.
The Company does not express any intent or obligation to update
these forward-looking statements. Given these uncertainties, readers are
cautioned not to place undue reliance on such forward-looking
statements. We encourage any shareholder or potential shareholder to
perform their own due-diligence prior to considering any investment in
the common or preferred stock issued by the Company.
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES.
REPORTING OF SUBSEQUENT EVENTS
Certain items in this report refer to events occurring after December 31,
2001 and are reported in the context of "subsequent events." These events are
reported in this context and format so as to more fully explain the current
and former status of the Company, in light of the circumstances then and now
present. These statements are not necessarily captioned as "subsequent events,"
but are identifiable as such by reading them in the context of passages of the
report immediately preceding and following such statements.
A. BUSINESS
In this Annual Report on Form 10-K, we will refer to Golf
Entertainment, Inc., a Delaware corporation, as "Golf," "the Company,"
"we," "us," and "our." These terms include by reference, all of the
current and former subsidiary corporations we have owned either all, or
a significant interest in, since becoming a reporting company.
CORPORATE HISTORY
The Company was founded in 1980 under the name TJ Computer
Services, Inc. ("TJ CS"). In 1989, all of the outstanding common stock
of TJ CS was acquired by Harrison Development, Inc., an inactive public
corporation organized in Colorado, which then changed its name to TJ
Systems Corporation. In October 1991, the Company reincorporated in the
State of Delaware and in June 1995 changed its name to Leasing Edge
Corporation. In March 1997, the Company's stockholders approved a change
in the Company's name to LEC Technologies, Inc. to more accurately
reflect the evolving nature of the Company's business. In February 1999,
the Company's stockholders approved a change in the Company's name to
Golf Entertainment, Inc. to reflect the re-orientation of the Company.
As the Company expanded in the mid-1990's it made a series of
acquisitions or became the sole shareholder in other corporate entities.
These entities and their states of incorporation include: Pacific
Mountain Computer Products, Inc.(PMCPI) (Nevada); LEC Leasing, Inc.
(LEC)(Nevada); LEC Distribution, Inc., (LECD)(Nevada); Atlantic Digital
International, Inc. (ADI)(Nevada); Superior Computer Systems, Inc.
(SCSI)(Minnesota). When the company refocused its business goals in
January 2000, two more wholly owned subsidiaries emerged: GolfBZ.Com,
Inc. (GBZ)(Georgia) and Traditions Acquisition Corporation
(TAC)(Oklahoma). The Company began moving its corporate headquarters
from Georgia to Springdale, Arkansas in January 2002.
The Corporate Office of Golf Entertainment, Inc., is 1008 S.
Clayton Street, Springdale, Arkansas 72762 and our telephone number is
479-751-2300. Our facsimile line is 479-751-2273.
GROWTH STRATEGY
The Company has undergone a series of important changes since 1999.
In December 1999 the Company formally departed the financial services
industry in an attempt to take advantage of the emergence of what is
generally termed the "dot com" era. The strategy of the Company at that
point was to enter the entertainment sector by establishing itself as an
operator of upscale golf courses. The Company developed and operated an
internet web site that listed numerous golf course properties across the
United States. The entry into the entertainment sector proved
unprofitable for the Company.
By April 6, 2001, the Company had determined that numerous failures
of much better positioned "dot com" companies had tainted its efforts to
utilize the internet as a marketing tool for golf courses. The Company
had formed a subsidiary, Traditions Acquisition LLC and failed in an
attempt to make an Edmond, Oklahoma golf course venture profitable.
On April 6, 2001, the Company filed a form 8K with the SEC stating
its intention to cease active operations, which it did. In the ensuing
period from then until December 31, 2001, the Company became current in
all required SEC filings, maintained trading of its common and preferred
stock issues and undertook exploration of various options that might
enable it to resume operations in a profitable way, or, at least resume
operations in a venture which would present some opportunity to regain
share value.
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With entertainment being the stated focus of the Company, a plan
emerged to reenter that sector from a new perspective: television
broadcasting. The Company lacked assets and cash with which to purchase
an ongoing operation. Using the value of its stock, however, the Company
negotiated the purchase of various items of broadcast equipment and the
right to conclude the purchase of a FCC licensed television broadcast
station from a non-profit trust. Although the bid price of the Company's
common stock was approximately $0.04/share during negotiations, the
Company struck an acquisition bargain, previously reported on a Form 8K
filing, whereby 3.75 million shares of stock were exchanged for assets
valued at $1.028 million dollars. Additionally, in a related
transaction, the Company converted $85,000 of debt into equity.
In smaller communities (under 50,000) the Company has studied, with
pre-immigration populations being primarily Anglo, the immigration
patterns of Hispanics are markedly similar in the communities we have
studied as expansion cities. As relatively large numbers of Hispanic
workers move to these expanding cities, they tend to create well
geographically defined "islands" in their activities.
The core element of our growth strategy is to identify as many
"islanded" Hispanic population centers as is feasible, study their
growth trends, and when they meet the criteria for support of a LPTV
operation, either build a station in their community or acquire a
station in their community. Our approach is to combine quality network
programming with local news and advertisements. We selected Hispanic
Television Network, Inc., as a national program provider because their
orientation is biased toward viewers of a Mexican ethnic origin.
DESCRIPTION OF BUSINESS
We emerged on January 1, 2002 as the first Spanish language
television broadcaster in the state of Arkansas. Management has since
developed a growth strategy that revolves around either building or
acquiring additional "low power television" stations (LPTV) throughout
the south.
The fastest growing ethnic population in the United States, as of
the last official U.S. Census, is Hispanic. Much of this population
growth has been attributed to an immigrant labor force filling entry
level jobs in the food processing, manufacturing, agriculture and
service industries. The site of the Company's first station is an area
of Arkansas that has been noted as having the fastest growing Hispanic
population in the United States. The Company has used this opportunity
to fine tune programming, marketing, sales and operations.
Conventional "full power" broadcasters often invest millions or
tens of millions of dollars to enter already crowded, competitive
markets in dense populations centers. Our strategy is to find areas
where there is a need and a market for a low-cost, low-power TV station,
establish our presence, and rely on larger numbers of small stations
rather than smaller numbers of large stations to secure revenue. An
additional advantage of our strategy is that we are unlikely to enter a
market where we have direct competition. If competition develops, we
should already have a lead market position in that community. Our
vulnerability to competition, when viewed as a risk to our revenue
stream, is reduced through spreading out in a large geographical area
such as the South and Southeastern United States.
Our business is broadcasting, program content production and
program origination. We sell commercial airtime and provide contract
production services in order to generate revenues.
MARKETING OPPORTUNITY
We view our position as unique. The FCC mandated mission of
commercial broadcasters has always been and continues to be service to
the public. In our situation we accomplish this goal by providing
quality news, information and entertainment to a clearly identifiable
ethnic group. The social pressures and challenges created by a rapid
influx of a Hispanic population into an established population base has
created problems, opportunities and challenges for both groups.
5
Although, as is the case of our Northwest Arkansas operations, there are
local Spanish language printed media and radio stations available,
television is a more immediate and powerful medium to reach these
audiences. Our marketing opportunities have been and continue to be
obvious: we're first in our market area with television; our commercial
ad prices are equivalent to AM radio ad prices (about 25% of full-power
TV ad prices) and we are providing unique local programming. Advertisers
are attracted to us because they can purchase extremely effective
advertisements at costs which are well below full-power conventional TV
ads. Our in-house production capacity eliminates any need to rely on
third party providers of ad content.
As the Hispanic population continues to immigrate into smaller
American communities, many of which are agrarian or semi-rural, there
will be an ongoing need to provide to them local news, information and
entertainment. With that, in each community, will arise the opportunity
for local businesses to reach this new economy through affordable
television advertising.
We view our mission as incorporating educational, religious, and
entertainment programming into a balanced daily package, and serve the
public interest by making information and entertainment available at no
cost to the viewer.
THE CHALLENGE
In order to be fully successful we face a series of interrelated
challenges. The first is financial. In order to grow and meet our
business plan goals, we need to secure financing through private
placement of debt, equity or both. Our expansion plans, though they will
result in a series of properties of significant value, are not subject
to conventional financing schemes. We are unable to obtain bank loans,
SBA financing or similar financing. We must find the means to accomplish
a private placement of significant proportion.
Next, once we obtain financing, we must implement our growth
strategy. This entails close interaction between personnel of diverse
skills, backgrounds and capabilities. We will, if successful, evolve
into a mini-network of related stations in a widespread geographical
marketplace. We will need great flexibility and creativity in our
approaches to management. We believe we have a core management team
that can meet these challenges.
Presently, we believe we are the only Company in the U.S. which is
engaging in this type of business plan - one where we are combining
niche-market network programming with local and regional advertising
opportunities.
OUR SERVICES
We offer turnkey television productions that span the range from
:30 second TV ads through 90-minute documentaries. We have a robust
talent base, in-house production capability, online and digital editing
systems and complete Spanish/English translation services. Our
production capacity covers both English and Spanish language
productions.
SALES & MARKETING
Sales
We currently sell our services directly through sales
representatives and indirectly through advertising agencies. We recently
formed an alliance with a multi-city Chamber of Commerce whereby we
offer new Chamber members free advertising time as part of a membership
package. In turn, the Chamber has provided us with the opportunity for
inclusion in their newsletters and direct mailings. We view this
relationship as a model that we can build on as we enter our expansion
cities.
Our direct sales professionals focus primarily on small to mid-
sized retail and service providers who are seeking to attract new
Hispanic customers, or, widen their market penetration in the Hispanic
6
community. Presently we have a customer base that covers automobile sales,
legal services and general retail sales.
Marketing
The goal of our marketing plan is to establish our station
identities and create sales opportunities. Our efforts have been and
will continue to be targeted in market segments and geographic markets
where we believe there is opportunity for penetration and where we will
have no direct television competition.
We intend to continually seek new ways to reach potential
advertisers that are learning about Hispanic marketing opportunities. We
also seek to establish Golf as a strong independent programming
provider. Through a combination of advertising and direct promotion, we
intend to expand our advertiser base, strengthen our customer
relationships and capture market share. We plan to continue to develop
a variety of broadcast programs that emphasize regional and national
issues and activities.
We intend to build a Carrier Class backbone featuring station to
hub broadband internet connectivity. Eventually, we will incorporate
virtual private networks, video on demand, video program distribution,
and hub-distributed local ad insertion.
Our marketing plan includes the utilization of an experienced sales
force to reach our advertising customers. In addition, we intend to
capitalize on the "first-to-market" effect for our stations in various
markets throughout the United States. This allows us to open multiple
markets at the same time and to reduce our cash flow requirements. This
is so because a local advertising and production staff is responsible
for the customer in its territory. Our initial cost outlay will be
limited to the construction of the physical plant including transmitter,
tower and production facilities. With the advent of digital technology,
the requirement for equipment in local market projects is significantly
reduced. The complexity of operating non-linear editing suites has been
markedly reduced by our decision to rely on Applied Magic's "Screenplay"
line of non-linear editors. This technology has been demonstrated to
reduce our initial station investment by at least $100,000 when
considering the reduced training requirement. The work product output is
digital or analog, and can be ported from distant stations back to our
Springdale hub via the internet, tape transmission or satellite
transmission. Additionally, the system can be geared to local-only
commercial insertions.
TECHNOLOGY & OPERATIONS
The technology of television is rapidly evolving as the FCC
mandated conversion to digital television progresses. Current broadcast
equipment and systems, frequently referred to in trade literature as
"legacy systems" are still in widespread use. As digital TV transmission
systems come of age between now and 2006, "legacy equipment" will remain
in use. Presently, the Company utilizes an array of both digital and
analog equipment in a hybrid production environment. The Company, as an
LPTV operation, is not necessarily immediately subject to the FCC
mandated conversion that affects full-power licensees. Nevertheless, in
order to satisfy the technical requirements of most cable TV carriers,
if the Company wishes to obtain carriage on any one specific cable
system in the future, it must be able to provide a digital signal in
addition to the analog signal it broadcasts over the air.
The emergence of analog to digital conversion equipment is
sufficiently mature to assure the Company that it can easily provide
dual signals in all planned expansion markets. Our technical strategy is
one of digital production platforms, which we are now doing, converted
to analog output for transmission. The in-house adoption of digital
technology standards has great benefits that offset any cost
differences. For example, the Company plans to establish its own
operations center in Springdale, Arkansas and connect with all other
stations via broadband internet. This would allow sales and production
staff anywhere in the nation with access to broadband to transmit video
data to Springdale, and vice versa. In our mid-range plan, this will
7
allow us to create our own regional news programs and eventually
network-class signal distribution from computer based hubs, all carried
via broadband internet. This strategy will allow us connectivity and
information exchange previously reserved to companies with access to
satellite signal delivery.
Digital video technology is already mature and several generations
removed from the initial digital systems. Equipment prices continue to
drop as digital comes of age. We believe our growth strategy can
capitalize on these emerging technologies and we plan to make them an
integral part of our expansion and development plans.
COMPETITION
The television broadcast industry is highly competitive. We compete
for advertiser revenue, a share of viewing households, and programming
material. The financial success of our television stations is, and will
continue to be dependent on audience acceptance and revenues from
advertisers within each station's geographic market. Our stations
compete for, and will continue to compete for revenues with other
television stations in their respective markets. This applies as well
with other advertising media, such as newspapers, radio, magazines,
outdoor advertising, transit advertising, yellow page directories,
direct mail and local cable systems. Some competitors are part of larger
companies with substantially greater financial resources than we have.
HTVN has competition in the Spanish-language television market in
the form of rival networks Univision and Telemundo. Currently, Univision
has an 84% market audience share whereas Telemundo has a 13% market
audience share. Competition in the broadcast industry occurs primarily
in individual markets. Therefore, our strategy is to emerge into markets
where we have no direct local competition, and, an ethnic target
audience that is primarily of Mexican origin.
Our experience thus far indicates that as we enter a new market, if
there is an existing AM or FM radio station or stations broadcasting in
Spanish, such stations will be our principal competition. By offering
parity rates, however, we have a powerful advertising tool. Given the
choice, for example, of spending $10.00 for a :30 second ad spot, most
advertisers prefer the television station over radio due to the duality
of the TV medium. Radio offers only an aural signal as opposed to
televisions video and audio feed.
The broadcasting industry is continuously faced with technological
change and innovation and the possible rise in popularity of competing
entertainment and communications media. The rules and the policies of
the FCC also encourage increased competition among different electronic
communications media. As a result, we may experience increased
competition from other free or pay systems that deliver entertainment
programming directly to consumers and this could possibly materially,
adversely affect our operations and results. For example, commercial
television broadcasting may face future competition from interactive
video and data services that provide two-way interaction with commercial
video programming. This would include information and data services that
may be delivered by commercial television stations, cable television,
direct broadcast satellites, multi-point distribution systems, multi-
channel multi-point distribution systems, Class A low-power television
stations, digital television and radio technologies, or other
video delivery systems.
Audience & Other Factors Affecting Competition
Factors that are material to a television station's competitive
position include signal coverage, local program acceptance, network
affiliation, audience characteristics, assigned frequency and strength
of local competition. Although there is competition for our target
market, we believe that we possess certain competitive advantages over
our competitors, including:
Our Focus on the Mexican Hispanic Market
8
Unlike our main competitors, we are committed to our affiliated
network. HTVN's approach has been and continues to be focusing primarily
on the Mexican Hispanic market, which we believe is grossly under-
served. In spite of the fact that Mexican Hispanics represent roughly
65.2% of the total Hispanic population in the U.S., our competitors do
not focus to any special degree on this group's specific cultural likes
and dislikes. We believe that this market will respond favorably to
television programming content that tailors its content to their tastes.
GOVERNMENT REGULATION
Federal Communications Commission Licenses
Television broadcasting is a regulated industry and is subject to
the jurisdiction of the FCC under the Communications Act of 1934, as
amended from time to time. The Communications Act prohibits the
operation of television broadcasting stations except under a license
issued by the FCC. The Communications Act empowers the FCC, among other
things:
to issue, revoke and modify broadcast licenses;
to decide whether to approve a change of ownership or control of
station licenses;
to regulate the equipment used by stations; and
to adopt and implement regulations to carry out the provisions of
the Communications Act.
Failure to observe FCC or other governmental rules and policies can
result in the imposition of various sanctions, including monetary
forfeitures, the grant of short, or less than maximum, license renewal
terms or, for particularly egregious violations, the denial of a license
renewal application, the revocation of a license or denial of FCC
consent to acquire additional broadcast properties.
License Grants & Renewals
Television broadcast licenses are granted for a maximum period of
eight years upon a finding by the FCC that the "public interest,
convenience and necessity" would be served thereby. Television licenses
are subject to renewal upon application to the FCC, which is required
under the Communications Act to grant the renewal application if it
finds that the station: (1) has served the public interest, convenience
and necessity; (2) has committed no serious violations of the
Communications Act or the FCC's rules; and (3) has committed no other
violations of the Communications Act or the FCC's rules which would
constitute a pattern of abuse. If the FCC cannot make such a finding, it
may deny a renewal application, and only then may the FCC accept other
applications to operate the station of the former licensee. Under the
Telecommunications Act of 1996 ("1996 Act"), as implemented in the FCC's
rules, a competing application for authority to operate a station and
replace the incumbent licensee may not be filed against a renewal
application and considered by the FCC in deciding whether to grant a
renewal application. FCC licenses generally are renewed. Although there
can be no assurance that our current licenses will be renewed, we are
not aware of any facts or circumstances that would prevent such license
renewals.
We are acquiring the FCC license of KVAQ-LP. We may, in the
future, operate stations under local marketing agreements. In that
event, we would be required to file applications requesting FCC
authorization to assign these stations to Golf. Although, we can offer
no assurances that we will file license applications for any such
stations during 2002. There can be no assurances that these planned
license applications will be granted, although we are not aware of any
facts or circumstances that would prevent the granting of such licenses.
License Transfer & Assignments
9
The Communications Act prohibits the assignment of a broadcast
license or transfer of control of a broadcast licensee without the prior
approval of the FCC. In determining whether to permit the assignment or
transfer of control of, or the grant or renewal of, a broadcast license,
the FCC considers a number of factors pertaining to the licensee,
including:
compliance with various rules limiting common ownership of media
properties;
the character of the licensee and those persons holding
attributable interests therein; and
compliance with the Communications Act's limitations on alien
ownership.
Character generally refers to the likelihood that the licensee or
applicant will comply with applicable law and regulation. Attributable
interests generally refers to the level of ownership or other
involvement in station operations that would result in the FCC
attributing ownership of that station or other media outlets to the
person or entity in determining compliance with FCC ownership
limitations.
To obtain the FCC's prior consent to assign a broadcast license or
transfer control of a broadcast licensee, an application must be filed
with the FCC. If the application involves a substantial change in
ownership or control, the application must be placed on public notice
for a period of no less than 30 days during which petitions to deny the
application or other objections may be filed by interested parties,
including certain members of the public. If the FCC grants the
application, interested parties have no less than 30 days from the date
of public notice of the grant to seek reconsideration or review of that
grant by the full commission or, as the case may be, a court of
competent jurisdiction. The full FCC has an additional 10 days to set
aside on its own motion any action taken by the FCC's staff acting under
delegated authority. When passing on an assignment or transfer
application, the FCC is prohibited from considering whether the public
interest might be served by an assignment or transfer to any party other
than the assignee or transferee specified in the application.
Multiple & Cross Ownership Restrictions
The FCC imposes significant restrictions on certain positional and
ownership, or "attributable", interests that a single entity can hold in
broadcast television stations, cable systems and other media. These
rules limit the number of television stations that a single entity can
own, control or influence in both national and local markets, and also
limit the permissible ownership combinations involving television
stations and other types of media, such as radio, cable and newspapers.
Under the FCC's rules, officers, directors and equity holders who
own 5% or more of the outstanding voting stock of a licensee are deemed
to have an "attributable" interest in the Company. Certain institutional
investors who exert no control or influence over a licensee may,
however, own up to 20% of the outstanding voting stock before their
interest will be attributed. Nonvoting stockholders, minority voting
stockholders in companies controlled by a single majority stockholder,
and holders of options and warrants are generally exempt from
attribution under current rules. However, under the FCC's new equity-
debt plus rule, a party will be deemed to be attributable if it owns a
non-voting interest exceeding 33% of the total asset value (including
debt and equity) of the licensee and it either provides 15% of the
station's weekly programming or owns an attributable interest in another
broadcast station, cable system or daily newspaper in the market, even
if there is a single majority shareholder.
Under the FCC's rules, an individual or entity may hold
attributable interests in an unlimited number of television stations
nationwide, subject to the restriction that no individual or entity may
have an attributable interest in television stations reaching, in the
aggregate, more than 35% of the national viewing audience. For purposes
of this calculation, stations in the UHF band, which covers channels
14 - 69, are attributed, with only 50% of the households attributed to
stations in the VHF band, which covers channels 2 - 13. Under its
recently revised ownership rules, if an entity has attributable
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interests in two television stations in the same market, the FCC will
count the audience reach of that market only once for purposes of
applying the national ownership cap.
In 1998, the FCC relaxed it "television duopoly" rule, which
previously barred any entity from having an attributable interest in two
television stations with overlapping service areas. The FCC's new
television duopoly rule permits a party to have attributable interests
in two television stations without regard to signal contour overlap
provided the stations are licensed to separate Designated Market Areas
("DMA"), as determined by Nielsen. In addition, the new rule permits
parties to own up to two television stations in the same DMA as long as
at least eight independently owned and operating full-power television
stations remain in the market at the time of acquisition, and at least
one of the two stations is not among the top four ranked stations in the
DMA based on specified audience share measures. The FCC also may grant a
waiver of the television duopoly rule if one of the two television
stations is a "failed" or "failing" station, if the proposed transaction
would result in the construction of an un-built television station, or
if extraordinary public interest factors are present.
In 1998, the FCC also relaxed its "one-to-a-market" rule, which
restricts the common ownership of television and radio stations in the
same market. One entity may now own up to two television stations and
six radio stations in the same market provided that: (1) 20 independent
voices (including certain newspapers and a single cable system) will
remain in the relevant market following consummation of the proposed
transaction, and (2) the proposed combination is consistent with the
television duopoly and local radio ownership rules. If fewer than 20 but
more than 9 independent voices will remain in a market following a
proposed transaction, and the proposed combination is consistent with
the FCC's rules, a single entity may have attributable interests in up
to two television stations and four radio stations. If neither of these
various "independent voices" tests are met, a party generally may have
an attributable interest in no more than one television station and one
radio station in a market. The FCC's rules restrict the holder of an
attributable interest in a television station from also having an
attributable interest in a daily newspaper or cable television system
serving a community located within the coverage area of that television
station.
Although the FCC's recent revisions to its broadcast ownership
rules became effective on November 16, 1999, several petitions have been
filed at the FCC seeking reconsideration of the new rules. The Company
cannot predict the outcome of these reconsideration requests.
Restrictions on Foreign Ownership
The Communications Act prohibits the issuance of broadcast licenses
to, or the holding of a broadcast license by foreign citizens or any
corporation of which more than 20% of the capital stock is owned of
record or voted by non-U.S. citizens or their representatives or by a
foreign government or a representative thereof, or by any corporation
organized under the laws of a foreign country. The Communications Act
also authorizes the FCC to prohibit the issuance of a broadcast license
to, or the holding of a broadcast license by, any corporation controlled
by any other corporation of which more than 25% of the capital stock is
owned of record or voted by aliens. The FCC has interpreted these
restrictions to apply to other forms of business organizations,
including partnerships.
Programming & Broadcast Operations
The Communications Act requires broadcasters to serve the public
interest, convenience and necessity. The FCC has gradually restricted or
eliminated many of the more formalized procedures it had developed to
promote the broadcast of programming responsive to the needs of the
station's community of license. Licensees continue to be required,
however, to present programming that is responsive to community
problems, needs and interests and to maintain certain records
demonstrating such responsiveness. Complaints from listeners concerning
a station's programming will be considered by the FCC when it evaluates
the licensee's renewal application, but these complaints may be filed
and considered at any time.
11
Stations must also pay regulatory and application fees and follow
various FCC rules that regulate, among other things:
political advertising;
children's programming;
commercial advertising on children's programming;
the broadcast of obscene or indecent programming;
sponsorship identification; and
technical operations and equal employment opportunity requirements.
Failure to observe these or other rules and policies can result in
the imposition of various sanctions, including monetary forfeitures, the
grant of short or less than the maximum renewal terms, or for
particularly egregious violations, the denial of a license renewal
application or the revocation of a license.
Must-Carry/Retransmission Consent Agreements
As part of the Cable Television Consumer Protection and Competition
Act of 1992, television broadcasters are required to make triennial
elections to exercise either "must-carry" or "retransmission consent"
rights with respect to their carriage by cable systems in each
broadcaster's local market. By electing must-carry rights, a broadcaster
demands carriage on a specified channel on cable systems within its
television market or DMA. Alternatively, if a broadcaster chooses to
exercise retransmission consent rights, it can negotiate the terms under
which the cable system will carry its broadcast signal.
The United States Supreme Court upheld the validity of the must-
carry rules in a 1997 decision. These must-carry rights are not absolute
and their exercise is dependent on a variety of factors, including: (i)
the number of active channels on the cable system; (ii) the location and
size of the cable system; and (iii) the amount of programming on a
broadcast station that duplicates the programming of another broadcast
station carried by the cable system. Therefore, under certain
circumstances, a cable system may decline to carry a given station.
Under the FCC's rules, television stations were required to make
their election between must-carry and retransmission consent status by
October 1, 1999, for the period from January 1, 2000 through December
31, 2002. Television stations that failed to make an election by the
specified deadline were deemed to have elected must-carry status for the
relevant three-year period. LPTV stations, generally, do not have must-
carry rights unless they meet the criteria established by the FCC as
"qualified LPTV" stations. Our current broadcast operations meet that
criteria. We have endeavored, informally, to obtain cable carriage on
the largest cable system in Northwest Arkansas, Cox Communications. We
anticipate formalizing our request for basic-tier, must-carry status on
that system in the second quarter. We do not anticipate carriage by Cox
unless we pursue formal administrative relief from the FCC or the
federal courts.
Review of Must-Carry Rules
FCC regulations implementing the Cable Television Consumer
Protection and Competition Act of 1992 require each full-power
television broadcaster to elect, at three year intervals beginning
October 1,1993, to either:
require carriage of its signal by cable systems in the station's
market, which is referred to as must carry rules; or,
negotiate the terms on which such broadcast station would
permit transmission of its signal by the cable systems within
its market, which is referred to as retransmission consent.
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The United States Supreme Court upheld the must-carry rules in a
1997 decision. These must carry rights are not absolute, and their
exercise is dependent on a variety of factors such as:
the number of active channels on the cable system;
the location and size of the cable system; and
the amount of programming on a broadcast station that duplicates
the programming of another broadcast station carried by the cable
system.
Therefore, under certain circumstances, a cable system may choose
to decline to carry a given station. We can offer no assurances,
however, that we will obtain such carriage.
Local Marketing Agreements (LMA's)
We anticipate that, from time to time, we will enter into local
marketing agreements, or LMAs, generally in connection with pending
station acquisitions. By using LMAs, we can provide programming and
other services to a station that we intend to acquire before we receive
all applicable FCC and other governmental approvals that are necessary
to consummate that assignment.
FCC rules and policies generally permit LMAs if the station
licensee retains ultimate responsibility for and control of the
applicable station, including finances, personnel, programming and
compliance with the FCC's rules and policies. We cannot be sure that we
will be able to air all of our scheduled programming on a station with
which we have LMAs or that we will receive the anticipated revenue from
the sale of advertising for such programming.
For purposes of its national and local multiple ownership rules,
the FCC attributes LMAs that involve more than 15% of the brokered
station's weekly program time. Thus, if an entity owns one television
station in a market and has a qualifying LMA with another station in the
same market, this arrangement must comply with all of the FCC's
ownership rules including the television duopoly rule. LMA arrangements
entered into prior to November 5, 1996 are grand fathered until 2004.
LMAs entered into on or after November 5, 1996 have until approximately
August 2001 to comply with this requirement. Petitions for
reconsideration have been filed against the FCC order that adopted these
requirements.
Digital Television Services
In the event that we are successful in acquiring either a full-
power TV station or a license to construct one, the Digital Television
Services rules will apply to our operations.
The FCC has adopted rules for implementing digital television
service in the United States. Implementation of digital television will
improve the technical quality of television signals and provide
broadcasters the flexibility to offer new services, including high-
definition television and data broadcasting. The FCC has established
service rules and adopted a table of allotments for digital television.
The table of digital allotments provides each existing television
station licensee or permittee with a second broadcast channel to be used
during the transition to digital television, conditioned upon the
surrender of one of the channels at the end of the digital television
transition period.
The digital television implementing rules permit broadcasters to
use their assigned digital spectrum to provide a variety of ancillary or
supplemental services including, for example, data transfer,
subscription video, interactive materials, and audio signals, subject to
the requirement that they continue to provide at least one free, over-
the-air television service. The FCC has established May 1, 2002 as the
deadline for initiation of digital television service for all television
stations and 2006 as the date that television broadcasters must return
their analog license to the FCC unless specified conditions exist, that
in effect limit the public's access to digital television in a
13
particular market. These dates are subject to biennial reviews that will
evaluate the progress of the DTV transition, including the rate of
consumer acceptance. The FCC also has adopted rules that require
broadcasters to pay a fee of 5% of gross revenues received from
ancillary or supplementary uses of the digital spectrum for which they
receive subscription fees or compensation other than advertising
revenues derived from free over-the-air broadcasting services.
Equipment and other costs associated with the digital television
transition, including the necessity of temporary dual-mode operations,
will impose some near-term financial costs on television stations
providing the services. The potential also exists for new sources of
revenue to be derived from digital television. We cannot predict the
overall effect the transition to digital television might have on our
business.
Satellite Home Viewer Improvement Act
If we are successful in acquiring a full-power station or license
to construct a full power station, other regulations could affect us as
well.
The Satellite Home Viewer Improvement Act ("SHVIA") enables
satellite carriers to provide more television programming to
subscribers. Specifically, SHVIA: (1) provides a statutory copyright
license to enable satellite carriers to retransmit a local television
broadcast station into the station's local market (i.e., provide "local-
into-local" service); (2) permits the continued importation of distant
network signals (i.e., network signals that originate outside of a
satellite subscriber's local television market or DMA) for certain
existing subscribers; (3) provides broadcast stations with
retransmission consent rights; and (4) mandates carriage of broadcast
signals on a "local-into-local" basis after a phase-in period. "Local
markets" are defined to include both a station's DMA and its county of
license.
SHVIA requires that, with several exceptions, satellite carriers
may not retransmit the signal of a television broadcast station without
the express authority of the originating station. Such express
authorization is not needed, however, when satellite carriers retransmit
a station's signal into its local market (i.e., provide local-into-local
transmissions) prior to May 28, 2000. This retransmission can occur
without the station's consent. Beginning May 29, 2000, however, a
satellite carrier must obtain a station's consent before retransmitting
its signal within the local market. Additional exceptions to the
retransmission consent requirement exist for noncommercial stations,
certain superstations and broadcast stations that have asserted their
must-carry rights.
In addition, SHVIA permits satellite carriers to provide distant or
nationally broadcast programming to subscribers in "unserved" households
(i.e., households are unserved by a particular network if they do not
receive a signal of at least Grade B intensity from a station affiliated
with that network) until December 31, 2004. However, satellite
television providers can retransmit the distant signals of no more than
two stations per day for each television network.
SHVIA also provides for mandatory carriage of all television
broadcast stations by satellite carriers, effective January 1, 2002,
under certain circumstances. Effective January 1, 2002, a satellite
carrier that retransmits one local television broadcast station into its
local market under a retransmission consent agreement, must carry upon
request all television broadcast stations in that same market. Satellite
carriers are not required, however, to carry the signal of a station
that substantially duplicates the programming of another station in the
market, and are not required to carry more than one affiliate of the
same network in a given market unless the television stations are
located in different states.
In addition, SHVIA requires the FCC to commence a rulemaking
proceeding that extends the network non-duplication, syndicated
exclusivity and sports blackout rules to the satellite retransmission of
nationally distributed "superstations." The FCC already has initiated
several rulemaking proceedings, as required by SHVIA, to implement
certain aspects of this Act.
14
Children's Television Act
The FCC's rules limit the amount of commercial matter that may be
broadcast during programming designed for children 12 years of age and
younger to 12 minutes per hour on weekdays and 10.5 minutes per hour on
weekends. Violations of the children's commercial limitations may result
in monetary fines or non- renewal of a station's broadcast license. FCC
rules further require television stations to serve the educational and
informational needs of children 16 years old and younger through the
stations' own programming as well as through other means. The FCC has
guidelines for processing television station renewals under which
stations are found to have complied with the children's programming
requirements if they broadcast three hours per week of "core" children's
educational programming, which among other things, must have as a
significant purpose serving the educational and informational needs of
children 16 years of age and younger. A television station that the FCC
finds not to have complied with the "core" programming processing
guideline could face sanctions, including monetary fines and the
possible non-renewal of its broadcasting license, if it has not
demonstrated compliance with the children's programming requirements in
other ways. The FCC has indicated its intent to strictly enforce its
children's television rules. Full power television broadcasters must
file periodic reports with the FCC to document their compliance with
foregoing obligations, LPTV stations, however, are exempt from these
regulations.
Low-Power Television (LPTV)
Low-power television stations are regarded by the FCC as having
secondary status to full-power television stations and are subject to
being displaced by changes in full-power stations resulting from digital
television allotments. On November 29, 1999, Congress enacted the
Community Broadcasters Protection Act, which created a new "Class A"
low-power television station. Class A low-power television stations are
entitled to protection from future displacement by full-power television
stations under certain circumstances. The FCC has adopted rules
governing the extent of interference protection that must be afforded to
Class A stations and the eligibility criteria for these stations.
Most of the stations that we are purchasing, negotiating to
purchase or anticipate building or which we may operate or have
agreements to purchase are or will be low-power television stations, and
we have not requested Class A status for any such existing or
anticipated stations. We cannot predict how the establishment of this
new Class A status will impact our operations.
In addition, the U.S. Congress and the FCC have under
consideration, and in the future may consider and adopt new laws,
regulation and policies regarding a wide variety of matters that could
affect, directly or indirectly, the operation, ownership and
profitability of our broadcast stations. Any such changes could result
in the loss of audience share and advertising revenues for such station,
and affect our ability to acquire additional broadcast stations or
finance such acquisitions. In addition to the issues noted above, such
changes may include:
spectrum use fees;
political advertising rates;
potential restrictions on the advertising of certain products
(beer, wine and hard liquor);
further revisions in the FCC's cross-interest, multiple ownership
and attribution policies;
foreign ownership of broadcast licenses;
technical and frequency allocation matters; and
DTV tower siting issues.
The FCC also has initiated a notice of inquiry to examine whether
additional public interest obligations should be imposed on DTV
licensees. We cannot predict the resolution of these issues or other
issues discussed above, although their outcome could, over a period of
time, affect, either adversely or favorably, the broadcasting industry
generally or us specifically.
15
The foregoing summary of FCC and other governmental regulations is
not intended to be comprehensive. For further information concerning the
nature and extent of federal regulation of broadcast stations, you
should refer to the Communications Act, the Telecommunications Act,
other Congressional acts, FCC rules and the public notices and rulings
of the FCC.
EMPLOYEES
As of April 12, 2001, we had 6 full time and 4 part-time employees.
Our employees are not represented by any collective bargaining
organization, and we have never experienced a work stoppage. We believe
that our relations with our employees are satisfactory.
SUBSEQUENT MATERIAL EVENTS
Recent Events
On February 4, 2002, Ronald G. Farrell resigned from the Board of
Directors citing a non-specific disagreement with the Board's management
philosophy and procedures. In his resignation he did not request a form
8-K memorializing his resignation and none was filed.
As part of the process of reviewing historical operations,
Management determined that there were previously unknown and hence
unreported liabilities (See Item 3, Legal Proceedings). Additionally, as
the result of investigating the circumstances related to the unreported
liabilities Management learned that a number of former corporate
divisions existed, were the general assets and liabilities of the
Company and instituted steps to correct various legal deficiencies.
In March, 2002, after his resignation, we replaced Mr. Farrell with
former Company director and CEO Michael F. Daniels, who became an
outside director and chairman of the Audit Committee. Mr. Daniels and
the Company have previously been in litigation (1999/2000) regarding his
employment contract when he was severed from the Company. The past
differences between the Company and Mr. Daniels were favorably resolved.
Prior to returning to the Board of Directors, any material issues or
potential material issues were resolved favorably.
The Company is seeking to recruit three additional outside
Directors. All current and incoming directors appointed by the existing
Board are serving with the understanding that each must stand for re-
election at the next Shareholder Meeting. We anticipate calling such a
meeting in mid-year, 2002, pending our ability to prepare and file an
adequate and timely Proxy Statement.
Former Divisions
As of this filing, Management has determined that there are a known
total of seven (7) corporate entities of which the Company is the sole
owner of all issued and outstanding common stock, thereby making these
corporations wholly owned subsidiary divisions of the Company. In the
case of GolfBZ.Com, the Company is undertaking to determine the exact
nature of the divestiture of its interest in GolfBZ.Com, Inc. These
entities are:
LEC Leasing, Inc. (a Nevada corporation)
Traditions Acquisition Corporation (unknown incorporation state)
Pacific Mountain Computer Products, Inc. (Nevada)
LEC Distribution, Inc. (a Nevada corporation)
Atlantic Digital International, Inc. (a Nevada corporation)
Superior Computer Products, Inc. (a Minnesota corporation)
GolfBZ.Com, Inc., (a Georgia Corporation)
As of this filing, it appears that GolfBZ.Com, Inc., was sold for
the sum of ten ($10.00) dollars to the former CEO of Golf Entertainment,
Inc., in a private transaction that has been reported by the Company
16
thus far as three materially different but not necessarily mutually
exclusive transactions. The Company is investigating the nature of the
sale, the basis for the valuation assigned to the transaction and
whether further clarification is required as to how the transaction will
be reported. No corporate minute or resolution has been located as of
this filing authorizing such sale, establishing a valuation nor have the
purported sale proceeds been booked, accordingly, the Company is
reporting GolfBZ.Com, Inc., as if it were or is still a wholly owned
subsidiary of the Company. We do not view this transaction as a
"material transaction" in that GolfBZ had no identifiable revenues; has
a history of losses and few physical assets appear to have been
transferred with the sale. No Form 8K was filed by the Company at the
time of the transaction nor any other event related to the above listed
corporate divisions.
The other enumerated corporate divisions all were operating
companies at one time or another with reported revenues, assets and
liabilities. Although they have previously been reported as closed, the
Company has learned that the method of "closure" was legally
insufficient to insulate it from material liabilities.
Prior Defective Corporate Closures
These closure defects have not previously been reported. The method
the Company previously used for closure was abandonment. As a result,
the corporate charters of the affected entities were each revoked,
leaving the Company with a general liability for their operations. In
turn, this has led to approximately $225,000 of previously unreported
liabilities accruing to the general contingent liability of the
Company. The Company is presently engaged in the process of reinstating
each corporate charter in order to either sell the corporations, or,
conclude their existence in the manner set forth in the state statutes
of the chartering state. (See Item 3, Legal Proceedings).
On July 21, 2000, Golf Entertainment, Inc. launched an Internet
based business GolfBZ.com, Inc. GolfBZ's business was to broker golf-
related business via the Internet by soliciting buyers and sellers of
golf courses, driving ranges, manufacturers, distributors and being paid
a commission upon the closing of a transaction. On or about May 10,
2001, Golf Entertainment, Inc. sold its golf brokerage business as
discussed below.
On May 24, 2000, Traditions Acquisition Corporation, a wholly owned
subsidiary of Golf Entertainment, Inc., ceased to do business.
Traditions Acquisition Corporation ceased all operations of the
Traditions Golf Club in Edmond, Oklahoma and began procedures to
dissolve. The subsidiary's recorded assets of $387,353 and recorded
liabilities of $401,460 were written down to $-0-. Pursuant to the terms
of the lease agreement, by which Traditions Acquisition Corporation had
leased the Traditions Golf Club facility, all future lease payments
would become due from Traditions Acquisition Corporation upon
termination of that lease. The owner of the facility terminated the
lease agreement effective May 23, 2000. The total remaining lease
liability of Traditions Acquisition Corporation is $888,000. This
liability is not guaranteed by Golf Entertainment, Inc. Traditions
Acquisition Corporation is currently in the process of dissolution,
according to a report previously filed by the Company.
Management has implemented a file monitoring and tracking system to
assure that future corporate franchise tax filings are made on a timely
basis. We believe that our response is sufficient to assure that the
likelihood of further similar occurrences is substantially reduced.
Failure to File Franchise Tax Returns in Delaware
In April, 2001, Management learned that timely franchise tax
filings had not been made for the Company in Delaware for years ending
2000 and 2001. Accordingly, the State of Delaware's Secretary of State
estimated and assessed franchise taxes for those periods based on a
method of computation that yielded the highest possible tax computation.
This resulted in a franchise tax being estimated in the amount of
$298,032.14, which sum was not previously reported by the Company. Upon
computation, at the rate most favorable to the Company, the actual
17
franchise taxes believed to be owed total less than $500. The Company is
presently preparing and will file Franchise Tax Returns for Delaware and
report in subsequent reports, the actual taxes owed and paid.
Management has implemented a file monitoring and tracking system to
assure that future corporate franchise tax filings are made on a timely
basis. We believe that our response is sufficient to assure that the
likelihood of further similar occurrences is substantially reduced.
Variance in Past Reports of Certain Transactions
The disposition of GolfBZ.Com, Inc., has previously been reported
as follows on the last (FY 2000) Annual Report of the Company: "Due to
the cessation of business by Golf Entertainment, Inc. on April 6, 2001,
the Company sold its subsidiary, GolfBZ.com, Inc., and the related
intangible assets to Ronald G. Farrell, the Company's Chairman and Chief
Executive Officer, on May 10, 2001 in consideration for advancement of
funds to allow for the audit of the Company's financial statements of
$25,000 and other consideration including uncompensated management
services."
The same transaction, however, was reported on a subsequent form
10-Q (3rd Quarter, 2001) as follows: On April 30, 2001, the Company sold
its interest in GolfBZ.com, Inc. to Ronald G. Farrell, the Company's
Chairman and Chief Executive Officer. The overhead expenses of
GolfBZ.com, Inc. were $40,405 for the four months ended April 30, 2001.
These amounts are included in Discontinued Operations. The Company did
not record a gain or loss on the transaction."
Subsequently, the Company was provided with a bill of sale by and
between the Company and Ronald G. Farrell, wherein GolfBZ.Com, Inc., was
purportedly sold for $10. The Company is endeavoring to determine the
actual circumstances of this sale and may file such amendment or
amendments in the future as are required in order to fully disclose the
transaction or conform its prior reporting to the actual circumstances.
Management does not believe the variances to be material in terms of the
Company's reporting obligations.
IMPORTANT RISK FACTORS
In addition to the other information in this Annual Report, the
following risk factors, among others, should be considered carefully in
evaluating the Company and its business. This risk factor information
has not previously been incorporated into our Quarterly or Annual
reports and we encourage all readers to carefully review this section.
These are risk factors we have thus far identified which we feel deserve
your careful consideration.
On April 6, 2001, the Company experienced critical liquidity needs
resulting from the following factors and filed a Form 8-K memorializing
the cessation of active operations of the Company. This filing was the
result of, among other things:
An inability to obtain adequate funds from the public markets;
An inability to enter into a strategic partnership;
An inability to complete a structured financing on acceptable terms
to us;
An inability to generate significant revenues from its operations;
and,
An inability to reduce expense levels sufficiently to operate at a
profit.
The Company presently has insufficient revenues under contract for
fiscal 2002, and has a liquidity shortfall that impairs its ability to
meet its current operating cash flow requirements in the near term. As
of March 31, 2002, the Company has less than $10,000 in cash available
to meet its operating cash requirements. The Company requires a cash
inflow of approximately $20,000 per month inclusive of scheduled debt
repayments to meet its current obligations as they become due.
18
The Company is presently unable to project its monthly revenues,
however, and its cash flow from revenues in the recent past has not
historically been sufficient to meet its current cash needs. If the
Company fails to meet these obligations as they become due, it could
lose the ability to broadcast its signal and might be required to cease
operations. The expected operating losses, coupled with a lack of
liquidity could cause immediate doubt about the Company's ability to
continue as a going concern. The Company is however, maintaining an on-
going effort to locate sources of additional funding, without which the
Company will not be able to remain a viable entity. Further, no
financing arrangements are currently under contract and there are no
assurances that the Company will be able to obtain adequate financing.
As discussed below, the Company has approximately $500,000 of debt that
is currently due. While the Company is seeking an extension of the
maturity of these debts because of its inability to repay the
indebtedness, failure to secure such an extension or obtain additional
financing could lead to the immediate demand for repayment. Such a
demand would likely cause a substantial impairment of operations.
The Company, in fiscal 2002, intends to acquire or construct
approximately 20 low-power stations in minor Hispanic markets. In view
of the difficulty the Company has encountered in raising the necessary
capital for the expansion, the Company cautions that this expansion plan
and the anticipated revenues resulting from a successful expansion plan
are wholly contingent on successful financing efforts. While the cost of
each individual location is estimated at $200,000, a sum which is, in
scale, substantially less than that required to bring a full-power
station on line, the Company has no definite means of obtaining those
sums. Absent that financing, the Company's expansion plan is likely to
be unworkable. Additionally, the Company faces the problem of obtaining
FCC licensure for these anticipated new stations. While management
believes that LPTV licenses are available in the target markets, there
is no assurance that the FCC will issue one or more such licenses to the
Company. If the FCC does not issue a license for a community the Company
seeks to operate in, the options available are to acquire an existing
LPTV or full-power station. Any such acquisition will likely be
substantially more costly that building a new station. Another option is
to contract directly with a local cable TV provider in the market and
find a cost-effective means of delivering the signal to the head-end of
the cable provider (a process referred to as "cablecasting"). Unless a
carrier class broadband internet line (5 mbits/second or greater) is
available, it is unlikely that the Company can deliver a signal to the
target market on a cost effective basis.
Management believes the best approach to generate local advertising
sales is through Company operated sales programs that are co-located
with the expansion stations. In cases of adjacent but separate markets
in which buying patterns indicate crossover, the Company will formulate
regional marketing plans that allow for multi-station advertising. There
is no assurance, however, that such strategies will result in
significant advertising revenue. Management intends to increase rates as
stations mature and viewership increases. This increased focus on
generating advertising is expected to have a significant positive affect
upon sales. In addition, the Company has added a focus to secure
carriage agreements with cable companies through a program development
plan whereby each new station will broadcast local programming
sufficient to meet FCC "qualified LPTV" status for the individual
station, thereby making available to the Company "must-carry" status for
local cable providers. Securing distribution on a cable system can have
the dual benefit of increasing viewership (and thus making the station
more attractive to advertisers). Cable companies, historically, force
qualified LPTV programmers to petition the FCC for mandated carriage.
This process, while not unusual, does not guarantee that any one
particular station will ever be carried on any given cable TV system.
Additionally, the costs associated with filing a regulatory complaint
are uncertain and may result only in a loss to the Company.
If the Company is able to obtain the required financing to pursue
its expansion business plan, future operating results depend upon a
number of factors, including but not limited to the strength of the
national economy, the local economies where the Company's stations and
affiliates are located, the amount of advertising spent - especially the
amount of advertising spent for television, and the amount of
advertising directed toward the Hispanic population. The Company's
ability to attract the available advertising is dependent upon, among
19
other things, its station's audience rating, its ability to provide
interesting programming, local market competition from other television
stations and other advertising media, and its ability to acquire and
retain television stations to carry its programming.
On the expense side, the Company has minimized its recurring
monthly expenses in almost every expense category, especially in the
areas of payroll and programming. Additionally, current management has
restructured the sales department and attracted sales people with
experience selling advertising time on low-power stations as well as
restructuring compensation for sales executives and managers from a
salary based compensation to more of a commission based compensation.
This change in policy will tie salesperson compensation directly to
results.
WE HAVE HAD A HISTORY OF LOSSES, WE EXPECT LOSSES IN THE FUTURE, AND
THERE CAN BE NO ASSURANCE THAT WE WILL BE PROFITABLE IN THE FUTURE.
For our fiscal year ended December 31, 2001, we incurred net losses
of $66,463.55. Continuing losses may continue, although we believe at a
much lesser level than FY 2002. If our revenues do not increase
substantially we may never become profitable. Even if we do achieve
profitability, we may not sustain profitability on a quarterly or annual
basis in the future.
WE WILL REQUIRE ADDITIONAL FINANCING, BUT WE MAY BE UNABLE TO OBTAIN IT
ON FAVORABLE TERMS OR AT ALL.
We require immediate additional funding to continue operations
through 2002 and beyond 2002 we expect that we will continue to require
additional financing to fund our operations. We are maintaining an on-
going effort to locate sources of additional financing. However, there
can be no assurance that we will be successful in locating such sources.
Our ability to obtain additional financing will be subject to a
number of factors, including our operating performance, the terms of
existing indebtedness, and general economic and market conditions. We
cannot be certain that we will be able to obtain additional financing on
acceptable terms, if at all. We currently have outstanding a debt
financing arrangement that imposes great restrictions on our ability to
procure additional debt financing. Further, if we issue additional
equity securities to raise capital, our stockholders may experience
significant dilution and the new securities may have rights, preferences
or privileges greater than those of our existing stockholders. If we
cannot obtain additional financing when needed, we may not be able to
fund our operations or to remain in business, which could result in a
total loss of your investment.
OUR LIMITED HISTORY OF OPERATIONS AS A SPANISH LANGUAGE BROADCASTING AND
PROGRAMMING OPERATION MAKES AN EVALUATION OF OUR BUSINESS AND FINANCIAL
FORECASTING DIFFICULT.
Prior to the acquisition of broadcast assets of The Genesis Trust
on December 31, 2001 we did not conduct any Spanish language or other
television broadcasting. Our limited history of operations as a Spanish
language TV broadcaster makes it difficult to evaluate our business and
our prospects. Because of our limited operating history, you may have
difficulty in accurately forecasting our results. You must consider our
business and prospects in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of operation.
Such risks include a business plan that has not been completely proven
and the management of possible rapid growth. To address these risks, we
must successfully undertake most of the following activities:
Continue to raise sufficient amounts of funds to satisfy expenses
and continue the pursuit of our business plan;
Expand our network of stations by entering into relationships with
existing television stations obtain exclusive access in which to
broadcast our programming, or identifying and consummating suitable
acquisitions, or, obtaining licensing authority from the Federal
Communications Commission to build new stations or a combination of
any of these;
20
Develop and procure distribution agreements with cable and digital
companies to increase our viewer bases and increase advertising
revenues, including successfully negotiating "must carry"
agreements in light of our anticipated "qualified LPTV" status;
Develop or procure appealing and interesting local programming, and
thus develop and increase our viewer bases;
Sell advertising to be featured on our station or stations;
Continue to develop the strength and quality of our operations;
Implement and successfully execute our business and marketing
strategy;
Respond to competitive developments;
Respond to changes in our regulatory environment;
Respond to technological changes;
Withstand any general or local economic downturns that may affect
us; and
Attract, retain and motivate qualified personnel.
There can be no assurance that we will be successful in undertaking
such activities. Our failure to address successfully our risks could
materially and adversely affect our business, prospects, financial
condition and results of operations.
WE ARE CONTROLLED BY A SMALL GROUP OF EXISTING STOCKHOLDERS, WHOSE
INTERESTS MAY DIFFER FROM THOSE OF OTHER STOCKHOLDERS.
A small number of individuals and a trust beneficially own, in the
aggregate, a significant majority of our issued and outstanding common
stock. As a result, these stockholders will be able to control the
outcome of all matters requiring stockholder approval, including:
the election of our directors;
future issuances of our common stock and other equity securities;
our incurrence of debt;
amendments to our certificate of incorporation and bylaws; and
decisions about acquisitions, sales of assets, mergers and similar
transactions.
There may be circumstances in which the interests of these
stockholders may conflict with the interests of our other stockholders.
In addition, because some investors may choose not to purchase our
common stock because of this control by our existing stockholders, the
price of common stock may be depressed.
OUR PENDING ACQUISITIONS ARE SUBJECT TO A NUMBER OF CONDITIONS, AND WE
MAY NOT BE ABLE TO COMPLETE THEM IN A TIMELY MANNER, IF AT ALL.
We have stated our intent to acquire or build up to 20 low power
television stations in fiscal year 2002. The completion of these
acquisitions is subject to a number of conditions, including:
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the approval by the Federal Communications Commission (the "FCC")
of the transfer to us of the stations' broadcast licenses without
imposing conditions or restrictions, which are not acceptable to
us;
the procurement of needed financing; and
the expiration of the waiting period required by the Department of
Justice and under U.S. antitrust laws in a few limited cases.
Because these conditions have not been met as of the date of this
Annual Report, there can be no assurance that we will successfully
complete these acquisitions. The stations subject to these acquisitions
or construction projects are or will be located in Tulsa, OK; Oklahoma
City, OK; Mena, AR; Pine Bluff, AR; West Memphis, AR; Jackson, MS;
Vicksburg, MS; Shelbyville, TN; Albertville, AL; Heflin, AL; Cummings,
GA; Vienna, GA; Our failure to complete a large number of these
acquisitions would significantly reduce our carriage and have an adverse
affect on our profitability.
OUR INABILITY TO INTEGRATE SUCCESSFULLY PENDING AND FUTURE ACQUISITIONS
COULD HARM OUR BUSINESS.
We will face significant challenges in integrating the stations we
have agreed to acquire, as well as future acquisitions, which will
divert our management's attention and our resources from other business
concerns. One of the stations subject to our proposed acquisitions
currently has an English-language format; the other has been off-air for
a significant period of time, and we expect most of the stations we
acquire through purchase in the future will have an English-language
format. Integrating these stations with our Spanish-language television
network will require us to convert their existing format to a Spanish
language format. This conversion will require significant investments of
our financial and management resources. We expect to incur losses for a
period of time after a format change because of the time required to
hire new employees, obtain programming, build ratings and enhance
station loyalty. There can be no assurance that we will be successful in
integrating new stations and changing formats, even though we will incur
substantial costs and losses in our attempts to do so. Our inability to
integrate our networks or pending and any future acquisitions could
materially adversely affect our prospects, financial condition and
results of operations.
FAILURE OF NEW STATIONS TO PRODUCE PROJECTED CASH FLOWS COULD HARM OUR
FINANCIAL RESULTS AND EXPECTED GROWTH.
The failure of our new stations to generate operating cash flow
within the expected time periods could harm our financial results and
our expected growth. We expect that new stations generally will take a
few years to generate significant operating cash flow as we incur
significant expenses to:
convert the station to a Spanish language format;
acquire programming;
improve technical facilities;
hire new personnel; and
market the new stations to local Hispanic viewers and advertisers.
Additionally, there may be a period before we start generating
revenues because it requires time to gain viewer awareness of new
station programming and to attract advertisers. Accordingly, we expect
to incur losses, resulting in part from such expenses, and to experience
a delay in our realization of operating revenue.
OUR ACQUISITION & CONSTRUCTION PROJECTS COULD ALSO EXPOSE US TO OTHER
ADDITIONAL RISKS.
22
Our acquisitions could also expose us to other additional risks not
already discussed. Such risks include the following:
Potential unknown liabilities associated with acquired businesses;
Impairment of relationships with employees and advertisers as a
result of any integration of new management personnel;
Maintenance of uniform standards, controls, procedures and
policies; and
Additional expenses associated with amortization of acquired
intangible assets.
There can be no assurance that we would be successful in overcoming
these risks or any other problems encountered in connection with such
acquisitions. Due to all of the foregoing, any future acquisition may
materially and adversely affect our business, results of operations,
financial condition and cash flows. Moreover, we expect that we will be
required to obtain additional financing to complete our acquisitions.
There can be no assurance that such financing will be available on
acceptable terms. In addition, if we issue stock to complete any future
acquisitions, existing stockholders will experience ownership dilution.
OUR INABILITY TO OBTAIN FCC LICENSES OR ACQUIRE ADDITIONAL DISTRIBUTION
THROUGH ACQUISITION OF EXISTING STATIONS COULD LIMIT OUR GROWTH.
Our growth depends on our ability to obtain low-power TV licenses,
acquire existing LPTV stations, or enter into agreements with existing
stations to sell us airtime on an exclusive basis in order to broadcast
our programming, and/or acquire additional television stations in
markets that have a substantial Hispanic population. Currently, we
intend to expand HTVN, our Spanish language network, through cable
distribution and an increase in the number of affiliates rather than
through new acquisitions to which we have not already agreed, although
acquisitions remain a possible means for expansion.
Several factors may affect our ability to enter into airtime
purchase agreements of relationships with stations that will broadcast
our programming, including the following:
the perception that prospective stations have of the quality of our
programming, how it compares to alternative programming, and its
ability to appeal to and draw large audiences of viewers;
the willingness of prospective affiliates that currently broadcast
in an English-language format to convert to a Spanish-language
format; and
the willingness of competitors to offer their programming on terms
with which we are unable to compete.
the negotiations for revenue sharing with us.
Many factors may affect our ability to acquire an existing station
in any particular market, including the following:
desired stations might not be available for purchase;
many competing acquirers have greater resources than we have to
make such acquisitions;
we might not have the financial resources necessary to acquire
additional stations;
we might be unable to obtain FCC approval of the assignments or
transfers of control of FCC licenses; and
the law limits the number and location of broadcasting properties
that any one person or entity, including its affiliates, may own,
which could limit our ability to acquire additional stations.
Many factors may also affect our ability to enter into cable and
satellite arrangements, including the following:
23
we might not have the financial resources to make the necessary
upgrades to our equipment to meet the needs of the cable companies;
cable companies may not have space available on their systems to
include our programming.
In addition to FCC approval for the transfer of the FCC licenses of
acquired stations, the Department of Justice may review future
acquisitions to determine whether they should be challenged under
federal antitrust laws. Acquisitions may be challenged if the Justice
Department believes a pending acquisition will have an anti-competitive
effect or is otherwise not in the public interest. The Justice
Department is particularly concerned when a proposed buyer already owns
one or more television stations in the market of the station the buyer
is seeking to acquire. In general, the Justice Department has closely
reviewed acquisitions that would result in the buyer having a market
share in excess of 40% of advertising revenues, even if the acquisition
otherwise complies with FCC requirements. The filing of petitions or
complaints by our competitors or others with respect to any acquisition
could result in the FCC or the Justice Department refusing to allow us
to complete that acquisition or imposing conditions to their approval
that may limit the benefits of that acquisition to us.
OUR FAILURE TO MANAGE OUR GROWTH PROPERLY COULD ADVERSELY AFFECT OUR
BUSINESS.
Our market segment, and, our business has been growing at a rapid
pace, and we intend to continue the expansion of our operations for the
foreseeable future. Our growth has placed significant demands on our
management, personnel, systems and resources. Additional growth will
further strain these resources. In order to manage our growth
effectively, we must continue to invest in our stations and programming,
and we must continue to expand, train and manage our work force. We must
also continue to improve and coordinate our managerial, operational and
financial controls and our reporting systems and other procedures. Our
failure to manage the growth of our business effectively could
materially adversely affect our results of operations and financial
condition.
OUR INABILITY TO ACQUIRE AND DISTRIBUTE PROGRAMMING THAT ATTRACTS A
SIGNIFICANT AUDIENCE WILL ADVERSELY AFFECT OUR BUSINESS AND OPERATIONS.
The market shares for our Spanish-language television network and
its stations depend on our ability to acquire and distribute programming
which attracts a significant audience. The failure of our programming to
attract viewers will impair our ability to attract advertisers, and
generate revenues and profits. Although we intend to make significant
investments in programming, there can be no assurance that our
programming will achieve or maintain satisfactory viewer ship levels in
the future.
We presently obtain much of our programming for our Spanish-
Language television programming from a sole network source: Hispanic
Television Network, Inc. (HTVN). The loss of a principal program
supplier could temporarily render us without sufficient programming to
target the Mexican-Hispanic audience. If such programming were to become
unavailable or unsuccessful for any reason (including political or
economic instability, foreign government regulations, or other trade
barriers in Mexico), there can be no assurance that we could obtain or
produce alternative programming of equivalent type and popularity or on
as favorable terms. As a result, any significant interruption in the
supply or success of our programming could materially adversely affect
our financial condition and results of operations. HTVN is a fully
reporting company and has recently reported significant revenue
shortfalls, continued financial difficulties, etc., and there can be no
assurance of long-term continuity of programming availability from HTVN,
nor any other similar source of programming.
Approximately 95% of HTVN's broadcast hours comprise our current
programming. We obtain this programming without cost by carrying revenue
producing commercials aired by HTVN from which HTVN retains all
revenues. This arrangement results in marked reduction of our most
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significant operating costs. We may be exposed in the future to
increased programming costs that could adversely affect our operating
results. HTVN's potential inability to acquire popular syndicated
programming could harm our ratings and revenues.
OUR INABILITY TO SELL ADVERTISING TIME ON OUR NETWORKS WILL ADVERSELY
AFFECT OUR REVENUES AND OUR BUSINESS.
Our business depends on our ability to sell advertising time. Our
ability to sell advertising time will depend, in large part, on our
audience ratings and on the overall level of demand for television
advertising. A downturn in the economy could reduce the overall demand
for advertising, and therefore adversely affect our ability to generate
advertising revenues. A decline in our ratings (as a result of
competition, a lack of popular programming or changes in viewer
preferences) would also adversely affect our revenues. In addition,
because we are focusing our business on a Spanish-language television
viewership, our ratings will depend upon:
the desire of Spanish-speaking persons in the target markets to
view Spanish-language programming;
the growth of the Spanish-speaking audience by continued
immigration and the continued use of Spanish among Hispanics in the
U.S.; and
the continued availability and reasonable cost of Spanish-language
programming.
Should any of these factors change, we could lose part of our
target audience, resulting in a decline in ratings and a loss of
advertising revenues.
Our ability to sell advertising time will also depend on the level
of demand for television advertising. Historically, the demand for
advertising in most forms of media has fluctuated with the general
condition of the economy. Television broadcasters are also exposed to
the general economic conditions of the local regions in which they
operate. Moreover, we believe that advertising is a discretionary
business expense. As a result, we believe that spending on advertising
tends to decline disproportionately during economic recession or
downturn as compared to other types of business spending. Consequently,
a recession or downturn in the United States economy or the economy of
an individual geographic market in which we own or operate television
stations would likely materially adversely affect our advertising
revenues and, therefore, our results of operations.
In addition, seasonal revenue fluctuations are common in the
television broadcasting industry and our revenues will likely reflect
seasonal patterns with respect to advertiser expenditures. Advertising
typically increases during the Thanksgiving and Christmas holiday season
and decreases after the start of a new year. As a result, we expect to
have higher advertising revenues in the fourth quarter and lower
advertising revenues in the first quarter. Because our operating costs
are more ratably spread throughout the year, the impact of this
seasonality on our operating income may result in significant
fluctuations in our financial performance.
OUR ADVERTISING CONTRACTS ARE OF LIMITED DURATION.
Our contracts to sell advertising are limited in duration to no
more than thirteen (13) weeks per contract period.
WE FACE COMPETITION FROM MANY SOURCES THAT COULD ADVERSELY AFFECT OUR
BUSINESS AND OUR PROSPECTS.
The television broadcasting industry is highly competitive. Our
current and planned television stations will face competition for
audience share and advertising revenue from other Spanish-language and
English-language television broadcasters. For example, in Northwest
Arkansas, KVAQ-LP which is not carried on one major cable system but is
carried on a smaller cable system, faces competition from two Spanish
25
language network feeds that are carried on both cable systems.
Additionally, the proliferation of direct broadcast satellite television
systems serves as a form of competition. We also face competition from
Spanish-language and English-language radio broadcasters and other media
including newspapers, magazines, computer on-line services, movies and
other forms of entertainment and advertising. Many of our competitors
have greater financial and other resources than we have.
Technological innovation and the resulting proliferation of
programming alternatives, such as independent broadcast stations, cable
television and other multi-channel competitors, pay-per-view and VCRs
have fragmented television viewing audiences and subjected television
broadcast stations to new types of competition. During the past decade,
cable television and independent stations have captured an increasing
market share and overall viewer ship of general market broadcast network
television has declined.
In the Spanish-language television broadcast market, we face
significant competition from Univision Communications, Inc. and
Telemundo Group, Inc. Both Univision and Telemundo operate Spanish-
language broadcast networks in the U.S. and both have substantially
greater audience shares than we have. In each of the markets where we
own and operate television stations for our Spanish language network,
our station competes directly with one or both of a full-power Univision
or Telemundo station. In addition, these competing Univision and
Telemundo stations have operated in their markets longer than our
stations. Univision also owns Galavision, a Spanish-language cable
network that is reported to serve approximately 2.5 million Hispanic
subscribers, representing approximately 55% of all Hispanic households
that subscribed to cable television in 1999. Both Grupo Televisa, S.A.
de C.V., or Televisa, and Corporation Venezolana de Television, C.A, or
Venevision, have entered into long-term contracts to supply Spanish-
language programming to the Univision and Galavision networks. Televisa
is the largest supplier of Spanish-language programming in the world.
Through these program license agreements, Univision has the right of
first refusal to air in the U.S. all Spanish-language programming
produced by Televisa and Venevision. These supply contracts currently
provide Univision with a competitive advantage in obtaining programming
originating from Mexico and in targeting U.S. Hispanics of Mexican
origin, our target audience. As we expand into new markets with a
combination of local and network programming, in many cases, we will be
entering markets that Univision and Telemundo have already penetrated
via cable and direct satellite broadcasting systems.
We also compete with English-language broadcasters for Hispanic
viewers, including the four principal English-language television
networks, ABC, CBS, NBC and Fox, and, in certain cities, the UPN and WB
networks. In addition, most of these networks, and other English-
language networks, have begun producing Spanish-language programming and
simulcasting certain programming in English and Spanish. Several cable
programming networks, including HBO, ESPN and CNN, provide Spanish-
language services as well. There can be no assurance that current
Spanish-language television viewers will continue to watch Spanish-
language programming rather than English-language programming or
Spanish-language simulcast programming. Increased competition for
viewers and revenues may materially adversely affect our financial
condition or future results of operations.
We intend to focus our Spanish-language television expansion on
Mexican Hispanics because we believe that our competitors, principally
Univision and Telemundo, are focusing their networks on other Hispanic
ethnic groups. However, each of Univision and Telemundo has a larger
network and greater financial, programming and other resources than we
have, and they may, at any time, attempt to change the focus of their
networks to Mexican Hispanics. The successful penetration of this market
segment by Univision, Telemundo or any other existing or potential
competitor could harm our business and prospects. Our principal
expansion targets are currently primarily Mexican immigrants by way of
ethnic origin. There can be no assurance, however, that the Mexican
origin population will remain as extant as it presently is and is
forecast as being throughout our planned term.
26
OUR INDUSTRY IS SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION, WHICH MAY
ADVERSELY AFFECT OUR BUSINESS AND OPERATIONS.
The television broadcasting industry is subject to extensive and
changing governmental regulations. These regulations require that each
television broadcaster must operate in compliance with a license issued
by the FCC. Each of our proposed television stations must operate
pursuant to one or more licenses issued by the FCC that expire at
different times. We must apply to renew these licenses, and third
parties may challenge those applications. Although we have no reason to
believe that our licenses, if granted, will not be renewed in the
ordinary course, there can be no assurance that our licenses will be
renewed. In addition, the FCC must consent to any assignment or transfer
of control of a station's licenses. Our inability to obtain FCC consent
for the transfer of the licenses of any station we seek to acquire in
the future (including those stations we have agreed to acquire) will
adversely affect our growth strategy. The FCC's failure to renew our
existing licenses or to consent to the transfer of licenses for stations
we may seek to acquire would harm our business and results of
operations.
The FCC recently adopted regulations and standards requiring
television broadcasters to provide digitally transmitted television
signals by 2002 and to cease providing analog transmissions by 2006. The
digital signal regulations and timeline that have been adopted and
enacted by the FCC more strictly apply to full-power stations. However,
we anticipate that the FCC will enact regulations and standards
requiring low-power stations to transmit a digital signal in the near
future. Our operated station and the stations we anticipate acquiring
have not completed the conversion. We expect to incur significant
capital expenditures to enable these stations to broadcast a digital
signal. These costs may not be offset by increased revenues.
Our current and planned stations are classified by the FCC as "low-
power" stations. Both low-power and translator stations generally
operate at significantly lower levels of power than full-power stations.
Under FCC rules, these stations operate on a secondary basis, and,
therefore, are subject to displacement in order to license a full-power
station. In addition, the FCC has acknowledged that channel allotment
for digital broadcast stations may displace low power television
stations, particularly in larger television markets. The displacement of
one or more of our low power stations by full power stations would
adversely affect our business. The FCC has established a Class A status
to protect lower power TV stations. We have not filed for Class A status
for any station.
NEW FCC REGULATIONS COULD HARM OUR ABILITY TO OBTAIN CABLE CARRIAGE FOR
OUR STATIONS' DIGITAL BROADCAST SIGNALS.
Pursuant to the must-carry provisions of the Cable Television
Consumer Protection and Competition Act of 1992, a broadcaster may
demand carriage of its broadcast signal, on a specific channel, on cable
systems within its market. Our television stations will rely on must-
carry rights to obtain cable carriage of their analog broadcast signals.
The FCC has initiated a rulemaking proceeding to determine whether the
current must-carry obligation applies only to the carriage of analog
television signals or whether it also requires cable systems to carry
digital broadcast signals during and after the transition from analog to
digital broadcasting. It is currently unclear what, if any, digital
must-carry rights television broadcast stations will have during and
after the transition. The FCC's failure to adopt digital must-carry
rights could harm our ability to obtain cable carriage for our digital
operations.
MOST OF OUR EXECUTIVES ARE NEW TO THE COMPANY AND INTEGRATING OUR
MANAGEMENT TEAM MAY INTERFERE WITH OUR OPERATIONS.
Most of our executive officers have recently joined us. Our chief
executive officer and chief operating officer assumed their positions in
January 2002 and our interim chief financial officer joined the Company
in January 2002. To become integrated into the Company, these
individuals must spend a significant amount of time developing
interpersonal relationships, learning our business model and
establishing a management system, in addition to their regular duties.
27
The integration of our management team and other new personnel has
resulted and may continue to result in disruptions of our ongoing
operations. In addition, although many of our senior management team
have experience in the Spanish language television broadcasting
industry, Spanish language program production, and Spanish language
advertising sales, only a minority of our management team has experience
in operating a Spanish language network. This lack of experience among
all of our management may hurt our efforts to implement our strategy.
OUR INABILITY TO HIRE AND RETAIN KEY PERSONNEL THAT ARE IN LIMITED
SUPPLY WILL IMPAIR OUR BUSINESS AND GROWTH.
We depend on the services of our senior management, station
managers and other key personnel. In addition, the success of our growth
strategy depends in part on our ability to attract and retain qualified
managers and personnel for newly acquired stations. Experienced and
qualified managers and other personnel (especially bilingual employees)
are in limited supply, and we may need to pay higher compensation than
we expect to pay to attract and retain these individuals. The loss of
the services of our executive officers, managers and key personnel, or
our inability to hire new managers and personnel, could materially
adversely affect our business and results of operations.
OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW MAY HINDER A THIRD
PARTY FROM ACQUIRING US, DESPITE THE POSSIBLE BENEFIT TO OUR
STOCKHOLDERS.
Certain provisions of our certificate of incorporation and Delaware
law could hinder a third party from acquiring us, even if doing so would
benefit our stockholders. For example, our certificate of incorporation
permits our board of directors to issue one or more series of preferred
stock that may have rights and preferences superior to those of our
common stock. The ability to issue preferred stock could have the effect
of delaying or preventing a third party from acquiring us. In addition,
Section 203 of the Delaware General Corporation Law limits future
business combination transactions with stockholders owning 15% or more
of our common stock if our board of directors has not approved the
transactions. These provisions could discourage takeover attempts and
could adversely affect the price of our common stock.
WE HAVE ENGAGED IN A NUMBER OF BARTER TRANSACTIONS THAT WE MAY BE UNABLE
TO RECOGNIZE AS REVENUES.
We have historically engaged in a substantial number of barter
transactions, and we expect to continue to enter into barter
transactions in the future. Barter transactions consist of arrangements
in which we exchange advertising time on our station for goods or other
services. Under current accounting rules and our revenue recognition
policy, we may not report these barter transactions as revenue unless we
are able to measure reliably the cash value of these transactions. For
the value of our barter transactions to be measured reliably, we must
conduct a sufficient number of cash-only transactions that are similar
to the barter transactions in scope, size and prominence of the
advertising time sold. To date, we have not reported any barter
transactions as revenue. Our inability to measure reliably the cash
value of our barter transactions in the future would prevent us from
including the value of the bartered advertising time in our revenues. In
addition, because barter transactions do not generate cash, we may not
be able to fund our operations if we are unable to increase our cash
revenues.
The accounting practice of recognizing barter transactions as
revenue if the value of those transactions can be reliably measured has
recently come under increased scrutiny by the Securities and Exchange
Commission. If the current accounting policies change, we may be unable
to recognize revenue from barter transactions even if we can reliably
measure the value of those transactions. Our inability to recognize
revenues from these transactions will decrease our revenues and possibly
the price of our common stock.
THE PRICE OF OUR COMMON STOCK MAY BE EXTREMELY VOLATILE.
28
The market price of our common stock has been and may continue to
be highly volatile, as has been the case with the securities of many
other small capitalization companies. Additionally, in recent years, the
securities markets have experienced a high level of price and volume
volatility and the market prices of securities for many companies
(particularly small capitalization companies) have experienced wide
fluctuations that have not necessarily been related to the operating
performances or underlying asset values of those companies. There can be
no assurance as to the prices at which our common stock will trade in
the future, although they may continue to fluctuate significantly.
Prices for our common stock will be determined in the marketplace and
may be influenced by many factors, including the following:
The depth and liquidity of the markets for our common stock;
Investor perception of us and the industry in which we participate;
and
General economic and market conditions.
FUTURE SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE.
Approximately 11.05 million shares of our common stock were
issuable or were issued and outstanding as of April 1, 2002. Of these
shares, 3.75 million were issued or became issuable in the period of
December 31, 2002 through January 20, 2002 in connection with the
acquisition of various items of equipment, the rights to acquire a
broadcast TV license, etc. We believe that all of these 3.75 million
shares (the "Genesis block") are "restricted securities" as that term is
defined in Rule 144 promulgated under the Act. (We also have other
outstanding restricted securities in much lesser numbers.) Rule 144
provides in general that a person (or persons whose shares are not
aggregated) who has satisfied a one year holding period, may sell within
any three month period, an amount which does not exceed the greater of
1% of the then outstanding shares of our common stock or the average
weekly trading volume during the four calendar weeks before such sale.
Some of our restricted shares, but not the Genesis block, have been
outstanding for over one year and thus have been eligible for sale under
Rule 144. We believe that only a comparatively small number of these
shares have thus far been sold. However, the holders of blocks as large
as approximately .3 million shares of these restricted shares have
indicated to us that they may seek to sell all or some portion of this
number of shares in the near future. Rule 144 also permits the sale of
shares, under certain circumstances, without any quantity limitation, by
persons who are not affiliates of ours and who have beneficially owned
the shares for a minimum period of two years (Rule 144 K).
We have granted registration rights with respect to approximately 5
million of these restricted shares. All of these registration rights are
of the type known as "piggy back" registration rights, meaning that the
holder thereof has a right to have their shares registered only when we
are undertaking a registration on our own initiative and in this
connection the holder has the right to "piggy back" onto this
registration and include their shares in the registration. If these
shares are ever registered, they will be freely tradable and may be sold
without regard to the volume limitations or holding periods under Rule
144. Even if these shares were never registered, they could become
freely tradable at various times after December 31, 2002 by any holder
who is no longer an affiliate of ours. The sale of any restricted shares
may, in the future dilute an investor's percentage of freely tradable
shares and may depress the price of our common stock. Also, if
substantial, such sales might also adversely affect our ability to raise
additional equity capital.
OUR 1999 DELISTING BY NASDAQ ADVERSELY HAS AFFECTED THE PRICE AND
LIQUIDITY OF OUR COMMON STOCK.
The Nasdaq National Market requires that for a company to be listed
on Nasdaq, it must maintain a minimum bid price of $1.00. Because our
common stock did not maintain a bid price of at least $1.00 for a
continuous period of 30 consecutive trading days, on August 17, 1999,
the Company was notified by the Nasdaq SmallCap Market that the Company
did not comply with the bid price requirement, as set forth in Nasdaq
29
Marketplace Rule 4310 (c) (04). On January 28, 2000, the Company's
common stock was delisted and became immediately eligible to trade on
the OTC Bulletin Board. In addition, our net tangible assets (Total
Assets - Total Liabilities - Goodwill) are less than the minimum
required to be relisted on Nasdaq which has delayed and hampered our
efforts to get our stock relisted on Nasdaq. As the result of our being
delisted by Nasdaq, the liquidity and the volume of shares traded of our
stock, the price, and the bid/ask spread has been adversely affected. We
have not applied for relisting as of this report.
WE HAVE NOT PAID CASH DIVIDENDS ON OUR COMMON STOCK WITHIN THE LAST FIVE
YEARS AND DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE.
We have never paid cash dividends on our common stock, and our
board of directors does not anticipate paying cash dividends in the
foreseeable future. We are restricted from declaring and paying
dividends by virtue of certain loan agreements into which we have
entered. Even if we were not so restricted, we currently intend to
retain future earnings to finance the growth of our business. Therefore,
it is unlikely that you will receive any funds from your investment in
our common stock without selling your shares. There can be no assurance
that you will receive a gain on your investment when you sell your
shares or that you will not lose the entire amount of your investment.
B. PROPERTIES
The following table sets forth certain information with respect to
the Company's headquarters as of May 11, 2001.
GENERAL APPROXIMATE TYPE OF
LOCATION CHARACTER SQUARE FOOTAGE INTEREST
-----------------------------------------------------------------------
Springdale, AR Office/Studio 6,000 Leased
The Company believes its property is in generally good condition,
well maintained and suitable for its intended use. The premises include
executive offices and a broadcast television studio.
ITEM 3. LEGAL PROCEEDINGS.
In March, 2002, the Company was notified by a former Company
director and officer, Michael F. Daniels, that he had been made the
subject of a Court Judgment from the state of New Jersey. Upon
investigation the Company learned that their individual judgments were
tied to a judgment rendered against the LEC Leasing, Inc., a division of
the Company. The case, styled State of New Jersey, Department of the
Treasury, Division of Taxation, is docketed in the state's court system
as case 35,953-01, 02 and 03. Mr. Daniels was listed as judgment debtor
by New Jersey on the general theory that he had been an officer of LEC
Leasing, Inc., and as such, had personal liability. The amount of the
judgment is $185,184.45 with accruing interest. Upon investigation, the
Company learned that this judgment consists, primarily, of estimated tax
returns for periods in 1999 which were prepared and filed in the name of
LEC Leasing by New Jersey tax officials. The Company is the sole
shareholder of the common stock of LEC Leasing, Inc., and operated the
entity as its subsidiary during periods in which the Company did
business in New Jersey as a leasing service. The Company does not
believe it owes the state of New Jersey any past taxes; believes that
all such required reports were filed in a timely fashion and intends to
vigorously defend its position and the position of its former employee.
As the Company undertook to investigate the circumstances
surrounding the New Jersey judgment, it learned it also has a state tax
lien of record in the Commonwealth of Kentucky, dated December 12, 2001,
again for periods in 1999. Like New Jersey, Kentucky estimated taxes
then prepared and filed estimated returns in the name of LEC Leasing,
Inc. The estimated claim of Kentucky is approximately $6,000, in case
30
number 000321065. The Company does not believe it owes the Commonwealth
of Kentucky any past taxes; believes that all such required reports were
filed in a timely fashion and intends to vigorously defend its position.
The Oklahoma Tax Commission has likewise filed Tax Warrants
totaling $14,442.75 for periods in 1998 through March, 2000. As in the
case of New Jersey and Kentucky, the State of Oklahoma has created
estimates of taxes, prepared and then filed returns in the name of LEC
Leasing and then proceeded to execute on such claims. In Oklahoma, the
matter is docketed as Z413795279. The Company does not believe it owes
the state of Oklahoma any past taxes; believes that all such required
reports were filed in a timely fashion and intends to vigorously defend
its position.
In each of the tax cases there is a common element: the taxing
authority claiming that it had not received reports; that the Company
had previously filed reports and that there was or is a rational basis
for the Company or its subsidiary to owe taxes. The Company believes
that these previously unreported liabilities do not constitute valid
obligations of the Company, but, has included them in its financial
statements pending resolution.
These events were immediately reported to the Company's auditors
for the affected period. Upon examination of the events the auditors
were asked to either affirm their audits, qualify their audits or
disavow their audits for FY 1999 and FY 2000. The auditors, Goldman
Golub Kessler, responded that it was their belief that these events were
not material and that there was no need to restate the financial
statements for the reported periods. The Company believes these events
occurred as the result of its departure from the leasing business in
December, 1999. When the Company sold its lease portfolios it sent
notices and letters to approximately one-hundred state and local taxing
authorities, advising them that the Company, and its various divisions,
had sold its lease portfolios on December 31, 1999 to Somerset Capital
Ltd. New Jersey, Oklahoma and Kentucky were mailed such notices. Prior
to the sale, Somerset had functioned as a management agent for the
Company, managing these portfolios. Accordingly, it is the position of
the Company that these liabilities, while substantial in their dollar
amount, are not predicated upon any lawful taxes owed or actual
liability of the Company and have occurred as the result of no fault or
liability of the Company. The Company has not previously reported these
matters because a.) it had no knowledge of them until March 2002, and,
b.) had a reasonable basis to believe it had closed all such tax
accounts in a timely and responsible fashion. The Company believes that
these matters will be settled on terms favorable to the Company, and, as
noted above, the Company does not believe it owes the claimant states
any past taxes; believes that all such required reports were filed in a
timely fashion and intends to vigorously defend its position. The
Company has implemented internal audit and management controls which it
believes are reasonably calculated and designed to reduce similar risks
in the future.
The New Jersey judgment is of concern to the Company in that it
could be made the subject of an execution proceeding whereby the entire
assets of the Company are at risk. In the event of such a circumstance,
the Company would remove such litigation to a federal court and seek
injunctive relief while the underlying issue of liability is determined.
Accordingly, in terms of risk management, the Company believes it is
taking all reasonable measures to defend its position and protect its
assets.
The Company has also involved in legal proceedings from time to
time arising out of the ordinary course of its prior business. There are
no such currently pending proceedings, which are expected to have a
material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders for approval in 2001 nor
was there a shareholder's meeting held in 2001.
31
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
As of December 31, 2001, the Company had approximately 136
shareholders of record of its $0.01 par value common stock and
approximately 25 shareholders of record of its $0.01 par value
preferred stock.
American Stock Transfer & Trust Company, 40 Wall Street, New York,
NY 10022 is the Company's registrar and transfer agent with respect to
its common stock and preferred stock and registrar, transfer agent and
warrant agent with respect to the Company's warrants.
On August 17, 1999, the Company was notified by the Nasdaq SmallCap
Market that the Company did not comply with the bid price requirement,
as set forth in Nasdaq Marketplace Rule 4310 ( c) (04). On January 28,
2000, the Company's common stock was delisted and became immediately
eligible to trade on the OTC Bulletin Board.
Our common stock is included and quoted on the NASD OTC Bulletin
Board under the symbol "GECC," and our preferred stock is traded under
the symbol "GECCP." The following table sets forth, for the periods
presented, the high and low closing bid quotations on the OTC Bulletin
Board. The bid quotations reflect inter-dealer prices without adjustment
for retail markups, markdowns or commissions and may not reflect actual
transactions.
Common Stock
CLOSING BID PRICES
HIGH LOW
2001:
First Quarter Ended March 31 $0.12 $0.005
Second Quarter Ended June 30 $0.09 $0.04
Third Quarter Ended September 30 $0.09 $0.02
Fourth Quarter Ended December 31 $0.10 $0.04
2000:
First Quarter Ended March 31 $1.00 $0.31
Second Quarter Ended June 30 $0.56 $0.19
Third Quarter Ended September 30 $0.66 $0.20
Fourth Quarter Ended December 31 $0.28 $0.09
Penny Stock Trading Rules
Our common stock is subject to the "penny stock" trading rules. The
penny stock trading rules impose additional duties and responsibilities
upon broker-dealers recommending the purchase of a penny stock (by a
purchaser that is not an accredited investor as defined by Rule 501(a)
promulgated under the Securities Act of 1933, as amended) or the sale of
a penny stock. Among such duties and responsibilities, with respect to a
purchaser who has not previously had an established account with the
broker-dealer, the broker-dealer is required to (i) obtain information
concerning the purchaser's financial situation, investment experience,
and investment objectives, (ii) make a reasonable determination that
transactions in the penny stock are suitable for the purchaser and the
purchaser (or his independent adviser in such transactions) has
32
sufficient knowledge and experience in financial matters and may be
reasonably capable of evaluating the risks of such transactions,
followed by receipt of a manually signed written statement which sets
forth the basis for such determination and which informs the purchaser
that it is unlawful to effectuate a transaction in the penny stock
without first obtaining a written agreement to the transaction.
Furthermore, until the purchaser becomes an established customer (i.e.,
having had an account with the dealer for at least one year or the
dealer having effected for the purchaser three sales of penny stocks on
three different days involving three different issuers), the broker-
dealer must obtain the purchaser's written agreement for the penny stock
which sets forth the identity and number of shares or units of the
security to be purchased prior to confirmation of the purchase. A dealer
is obligated to provide certain information disclosures to the purchaser
of a penny stock, including (i) a generic risk disclosure document which
is required to be delivered to the purchaser before the initial
transaction in a penny stock, (ii) a transaction-related disclosure
prior to effecting a transaction in the penny stock (i.e., confirmation
of the transaction) containing bid and asked information related to the
penny stock and the dealer's and salesperson's compensation (i.e.,
commissions, commission equivalents, markups and markdowns) in
connection with the transaction, and (iii) the purchaser-customer must
be furnished account statements, generally on a monthly basis, which
include prescribed information relating to market and price information
concerning the penny stocks held in the account. The penny stock trading
rules do not apply to those transactions in which a broker-dealer or
salesperson does not make any purchase or sale recommendation to the
purchaser or seller of the penny stock.
Compliance with the penny stock trading rules may affect the
ability to resell the common stock by a holder principally because of
the additional duties and responsibilities imposed upon the broker-
dealers and salespersons recommending and effecting sale and purchase
transactions in such securities. In addition, many broker-dealers will
not effect transactions in penny stocks, except on an unsolicited basis,
in order to avoid compliance with the penny stock trading rules. The
penny stock trading rules consequently may materially limit or restrict
the liquidity typically associated with other publicly traded equity
securities. Therefore, the holder of penny stocks may be unable to
obtain on resale the quoted bid price because a dealer or group of
dealers may control the market in such securities and may set prices
that are not based totally on competitive forces. Furthermore, at times
there may be a lack of bid quotes which may mean that the market among
dealers is not active, in which case a holder of penny stocks may be
unable to sell such securities. In addition, because market quotations
in the over-the-counter market are often subject to negotiation among
dealers and often differ from the price at which transactions in
securities are effected, the bid and asked quotations of securities
traded in the over-the-counter market may not be reliable.
Dividend Policy
Our dividend policy is to retain any future earnings to support the
expansion of our operations. Our Board of Directors does not intend to
pay cash dividends on the common or preferred stock in the foreseeable
future. Any future cash dividends will depend on future earnings,
capital requirements, our financial condition and other factors deemed
relevant by our Board of Directors.
Recent Sales of Unregistered Securities
During the quarter ended December 31, 2001, we issued or became
obligated to issue 3,750,000 shares of our common stock pursuant to a
private offering whereby we agreed to exchange our shares for broadcast
television, office furnishings and equipment, and the rights to complete
purchase of a UHF television station and license from a non-profit
entity, Christians Incorporated for Christ, Inc. In this transaction, we
acquired a balloon note of $291,000 which is the final payment on KVAQ-
LP, the TV station; we acquired a note payable of $17,000 to an
individual secured by specific items of equipment we acquired; and we
acquired the equipment subject to its mortgage to our former CEO and
director Ron Farrell, in the approximate amount of $135,000. Although we
33
are not obligated to pay any sums to Mr. Farrell under the terms of his
note, we did acquire the equipment subject to his mortgage. In the
borrower defaults, we could be held liable for the unpaid sums.
Accordingly, we have included this as a contingent liability.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Certain statements set forth below under this caption constitute
"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Please refer to page 1 of this
Annual Report on Form 10-KSB for additional factors relating to such
statements.
RESULTS OF OPERATIONS
Overview
During 2001, our business activities consisted of winding down our
internet based golf course marketing operations and disengaging from
previous business operations. On April 6, 2001, the Company effectively
ceased active business operations. During the ensuing period, the
Company continued to collect revenues from discontinued operations and
file required reports with the SEC. We undertook to then refocus on a
change of course that would provide some potential for profitability,
enhanced share value and liquidity of our stock.
Since December 31, 2001, our main activities have consisted of
acquisition of equipment, facilities, an FCC broadcast license, hiring
of management and other key personnel, raising of funds, development of
management systems, deployment of our equipment and build out of a new
studio facility. On January 1, 2002, we resumed normal business
operations.
Our losses, as well as our negative operating cash flow have been
significant to date. We expect both to continue until we can generate a
customer base through the efforts of our direct sales force that will
generate revenues to fund our operating expenses. After we initiate
service in our proposed market areas, we expect to have positive
operating margins by increasing the number of customers and selling of
additional capacity or services without significantly increasing related
capital expenditures or operating costs. Our ability to generate
positive cash flow will depend on capital expenditures in new market
areas, competition in our current market areas and any potential adverse
regulatory developments.
Factors Affecting Future Operations
Our ability to expand effectively will depend upon, among other
things, monitoring operations, controlling costs, maintaining regulatory
compliance, raising capital to pay expenses and fund acquisitions,
interconnecting between stations, maintaining effective quality
controls, securing FCC licenses or making TV station acquisitions on
favorable terms, refinement of our accounting systems and attracting,
assimilating and retaining qualified technical and administrative
personnel and management. Failure to retain senior management, key
staff, expand our customer base, purchase adequate equipment, secure FCC
licenses or acquire existing TV stations would cause delays in expansion
of our operations. Failure to meet the expectations of our customers
could have a material adverse effect on our business.
Our method of utilizing a single national network in a broadcast
environment has only been commercially used on a limited basis. We
selected this network, HTVN, because we believe it complements our
existing programming goals and fits well with our own programming
development plans. We anticipate pursuing operations synergy with HTVN
through our ability to develop and deliver national-class programs in
Spanish. If this program development plan does not perform as expected
or, should HTVN suffer a business failure, we may be unable to provide
the type and level of programming that we now expect. In that event, our
business, financial condition and results of operations may be
materially adversely affected.
34
The planned expansion of our business will require significant
capital to fund capital expenditures, working capital needs, debt
service and the cash flow deficits generated by operating losses and
current cash balances will not be sufficient to fund the current
business plan. Our principal capital expenditure requirements will
include:
employee salaries and benefits
FCC license application and related engineering fees
tower and production facility leases
production equipment and non-linear editing hardware and software
debt service
general operating expenses
Part of our strategy is to utilize an advertising agency network to
expand our customer base and achieve greater market penetration more
rapidly. We believe that by implementing this strategy, we can
capitalize on our agencies familiarity with their market area, customer
affiliations, financial strength, their experienced personnel and
minimize our requirement for sales staff training and cost-of-sales
expenditures. We are in the process of entering into various agency
agreements for our production services and airtime in various markets
throughout the southern United States. This allows us to open multiple
markets at the same time and to reduce our cash flow requirements since
the distributor is responsible for the customer build-out capital
expenditures and the recurring monthly expenses for their territory. Our
initial cost outlay will be limited to the construction of the
distribution layer in the territory, which will be offset by the initial
distribution fee charged to the distributor.
We are also currently seeking additional debt and/or equity
financing to fund liquidity needs. In the event that we are unable to
obtain additional funds or to obtain funds on acceptable terms or in
sufficient amounts, we will be required to delay the development of our
network or take other actions. This could have a material adverse effect
on our business, operating results and financial condition and ability
to achieve sufficient cash flow to service debt requirements and meet
operating expenditures.
Revenues
We offer our advertising customers a full range of creative
services, turnkey solutions for television advertising ranging from :30
second spots through infomercial length productions. We market these
services currently to small and medium-sized businesses with future
plans to offer our services to regional advertisers as geographical
expansion permits. We seek to attract these customers through a superior
product offering, excellent creative and customer services and a
competitive pricing structure. We anticipate that our competitors may
reduce their prices as increased competition begins to reduce their
market penetration. We expect to remain competitive if market prices
decline.
Operating Costs
The costs required to operate and maintain our broadcast operations
includes real estate leases for our studio and office operations center,
airtime charges as we complete the purchase of KVAQ-LP. We experience
higher than average electric utility costs due to the nature of our
operations.
Sales, General and Administrative Costs
We incur costs related to the selling, marketing and promotion of
our products and services. These costs include the costs of personnel as
well as promotional costs to develop brand awareness of the Golf name.
35
In addition, we incur operating costs such as customer service,
creative services, billing and collections, data processing, general
management, accounting, office leases, administrative functions,
depreciation and financing costs. Areas that will require more personnel
as our customer base grows include creative services, technical
management, news department staff and on-air talent, accounting, billing
and information systems. These areas have required upfront capital
expenditures and operating costs in our expansion stage.
Capital Expenditures
Our main capital expenditure to date has been in the area of
building out our studio and operations center. Our studios and
operations center is constructed in Springdale, Arkansas.
Programming Distribution
Our KVAQ channel 20 transmitter now serves a test-bed population
within a 360-degree coverage area radiating outward 40 miles from
approximately 2.5 miles northeast of the Springdale Municipal airport.
The KVAQ transmitter is located atop Franklin Mountain. We repeat out
transmissions through Ozark Wireless Cable of Springdale, Arkansas on
their system. This results in our signal being simulcast on UHF TV
channel 71 as an unencrypted signal. We reach small areas of eastern
Oklahoma and southwest Missouri on either UHF channels 20 or 71 with an
effective radiated power output of approximately 14.7 kW.
A future broadcast transmission distribution location will
typically provide signal coverage in a similar geographical area.
Creative Services
We have significant in-house production capacity for a wide range
of video projects in both English and Spanish. We presently are
developing three one-hour programs intended for national distribution.
Of the programs, one is related to fishing, another to wrestling and the
final is a children's show. We anticipate entering to one or more
agreements whereby these programs are aired on a national Spanish
language network with our revenue derived from selling sponsorships and
advertising time.
Discussion of Period Ended December 31, 2001
During the period ended December 31, 2001, we had revenues of
approximately $53,000derived from income related to discontinued leasing
operations. For the twelve months ended September 30, 2001, the Company
had no significant revenues (other than interest and financing income)
since discontinuance of the Traditions Golf Club operation in May 2000.
Income Taxes
Due to net losses, no provision for income taxes was necessary for
2001.
At December 31, 2001, we had net operating loss carry-forwards of
approximately $9,700,000, which will expire at various dates beginning
in 2017. Because such carry-forwards can only be used to offset future
taxable income, a valuation allowance has been provided until it is more
likely than not that taxable income will be generated.
Liquidity and Capital Resources
For the period ended December 31, 2001, we financed our activities
from borrowings and private placement sale of our convertible debt
securities. Net cash used by operating activities totaled $82,949 in
the period April 21, 2001 through December 31, 2001. Cash flows provided
36
by financing activities were approximately $80,000 during the period
ended December 31, 2001. During the period ended December 31, 2001, we
had a net cash increase of approximately $5,000..
On December 31, 2001, we completed a private placement offering of
3,750,000 shares of our restricted common stock, which, for the purposes
of this transaction, was valued at $0.27/share thereby establishing a
value of $1,028.000 for the transaction. The transaction was contingent
upon a "strike price" of at least $0.27/share being reached within
thirty (30) days following December 31, 2001. The strike price was
reached in the stated period and the transaction was then finalized. In
order to accomplish this transaction, we acquired debt in the principal
amount of $291,000 which represents the final payment due on the
acquisition of KVAQ-LP; we acquired equity in KVAQ-LP equaling $19,000
cash; we acquired a note payable of approximately $17,000 to an
individual which represents a loan involving two of three commercial
watercraft listed in the acquisition package; we acquired a contingent
liability of $140,000 which represents a mortgage on the acquired assets
to our former CEO and director, Ronald G. Farrell.
Planned Financing Activities
We are also currently seeking additional debt and/or equity
financing to fund liquidity needs. In the event that we are unable to
obtain additional funds or to obtain funds on acceptable terms or in
sufficient amounts, we will be required to delay the development of our
television operations or take other actions. This could have a material
adverse effect on our business, operating results and financial
condition and ability to achieve sufficient cash flow to service debt
requirements and meet operating expenditures.
Later in 2002 we will rely on Rule 506 of Regulation D promulgated
under and Sections 4(2) and 4(6) of, the Securities Act of 1933, as
amended, for exemption from the registration requirements of this Act as
well as applicable state securities laws while seeking placement of up
to $15,000,000 of debt, equity or a combination of both in order to fund
acquisitions and pay the costs of building out the first phase of our
television station expansion project.
In this offering each potential purchaser of the common stock will
be furnished information concerning our operations, and each will have
the opportunity to verify the information supplied. Additionally, we
will obtain obtained a signed representation from each such person in
connection with the offer of our common stock of his, her or its intent
to acquire such stock for the purpose of investment only, and not with a
view toward the subsequent distribution thereof. The certificates
evidencing the common stock will be stamped with a legend restricting
transfer of the securities represented thereby, and we will issue stop
transfer instructions to our transfer agent and registrar of the common
stock. No commissions will be paid on any of the above planned stock
transactions.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Financial Statement Schedule filed as
a part of this Annual Report on Form 10-KSB are listed on the Index to
Consolidated Financial Statements and Consolidated Financial Statement
Schedule on page F-1. The notes accompanying the statements are an
integral part of the statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Although there were no changes during fiscal 2001, on April 8, 2001
we dismissed Goldstein Golub Kessler LLP as our independent auditor. On
April 2, 2002, we retained Jim Slayton, CPA as our interim independent
auditor.
37
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The directors and executive officers of the Company as of March 30,
2001 are as follows:
NAME AGE POSITION
----------------------------------------------------------------------
Dr. Tim Brooker 46 CEO, Chairman of the Board
John Dodge 52 General Counsel,
Senior Vice President
Jim Bolt 48 Chief Operating Officer,
Vice President
Loren Pederson 49 Interim Chief Financial
Officer, Secretary &
Treasurer ., Director
Annette Gore 43 Director
Mike Daniels 48 Director
DR. TIM BROOKER is the Chairman of the Board and Chief Executive
Officer of the Company. He was appointed to the Board and elected as CEO
on December 31, 2001. Dr. Brooker holds graduate degrees in public
administration, public policy, international commerce and diplomacy; he
holds a dual-doctorate in Public Sector Administration and
Psychotherapy. He is a recognized expert in the field of performance
based budgeting. He has taught business management and public
administration at the university level since 1982. In the last five
years, he developed and hosted a daily AM radio talk show in addition to
his other pursuits.
JOHN DODGE is Senior Vice President & General Counsel of the
Company. He was admitted to the practice of law in Arkansas in 1978 and
is licensed to practice before the Arkansas Supreme Court; the 8th
Circuit Court of Appeals and the United States Supreme Court. In the
last five years he has engaged in the general practice of law with
emphasis in corporate, business and securities law. Additionally, he has
served as a sitting municipal Judge on a part-time basis.
JIM BOLT is Vice President & Chief Operating Officer of the
Company. He is a professional journalist with extensive background in
print and video media. His experience in the previous five years has
been in media development, supervision of editorial, newsgathering and
marketing operations for two Spanish language regional publications
based in Arkansas. Mr. Bolt has produced and edited feature length video
documentaries in English and Spanish. Additionally, he has served on a
part-time basis as a consultant to companies seeking to establish
themselves as public entities.
LOREN PEDERSON is the Secretary/Treasurer and Interim Chief
Financial Officer of the Company. He has extensive experience in small-
business management, marketing, financial report preparation, budgeting
and cost analysis operations. Mr. Pederson also serves as a Director of
the Company.
ANNETTE GORE is a Director of the Company. She is a licensed Real
Estate Broker in northwest Arkansas. Ms. Gore holds numerous
recognitions from national marketing organizations such as Century 21,
for retail marketing achievements and excellence. Her experience is
38
primarily in sales and marketing of high-value residential and
commercial real properties. As an outside Director, she serves on the
Audit Committee.
RONALD G. FARRELL served as Chairman of the Board of Directors and
Chief Executive Officer of the Company from November 1998 until December
31, 2001. 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. Mr. Farrell departed the Board of Directors on February 4,
2002
MICHAEL F. DANIELS served as President of the Company from April
1994 until November 1998. He previously served as Chairman of the Board
of Directors and Chief Executive Officer from April of 1994 to November
of 1998. He was a Director of the Company from 1983 until November
1998. 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. Mr. Daniels left the Company following a change of
control in 1998. He returned to the Board of Directors as an Outside
Director in 2002. Mr. Daniels chairs the Audit Committee.
SERVICE OF MANAGEMENT
The authorized number of directors of the Company is presently
fixed at seven. Each director serves for a term of one year that expires
at the following annual stockholders' meeting. Each officer serves at
the pleasure of the Board of Directors and until a successor has been
qualified and appointed. Currently, our entire Board of Directors will
be subject to re-election or replacement at the Company's planned 2002
Annual Meeting.
MEETINGS OF BOARD OF DIRECTORS
During 2001, the Board of Directors held 2 meetings and executed 2
written consents in lieu thereof. All directors attended more than 75%
of the Board of Directors meetings and all directors executed the
written consents when required in order to comply with the bylaws.
COMPENSATION OF DIRECTORS
The Company pays cash or cash equivalent compensation for costs
incurred for attendance at directors meetings or participation in
directors' functions. Outside Directors receive an annual stipend of
$12,000 in cash, stock, or a combination of both. Employee Directors do
not receive a stipend.
BOARD COMMITTEES
AUDIT COMMITTEE: During 2001, we did not have an Audit
Committee. On February 5, 2002, our Board approved an Audit Committee
Charter. Currently, Annette Gore and Michael Daniels serve as Audit
Committee members. The primary function of the Audit Committee is to
assist the Board of Directors in fulfilling its oversight
responsibilities by reviewing: the financial reports and other financial
information provided by us to any governmental body or the public; our
systems of internal controls regarding finance, accounting, legal
compliances and ethics that management and the Board have established;
and our auditing, accounting and financial reporting processes.
Consistent with this function, the Audit Committee should encourage
continuous improvement of, and should foster adherence to, our policies,
procedures and practices at all levels. The Audit Committee's primary
duties and responsibilities are to:
Serve as an independent and objective party to monitor our
financial reporting process and internal control system.
Review and appraise the audit efforts of our independent auditors
and internal auditing department.
39
Provide an open avenue of communication among the independent
auditors, financial and internal auditing department.
COMPENSATION COMMITTEE. We did not have a formal Compensation
Committee during 2001. We anticipate forming such a committee to make
recommendations to the Board concerning compensation of our executive
officers.
LIMITATIONS OF DIRECTORS' AND OFFICERS' LIABILITY
Section 145 of the Delaware General Corporation Law permits a
corporation, under specified circumstances, to indemnify its directors,
officers, employees or agents against expenses (including attorneys
fees), judgments, fines and amounts paid in settlements actually and
reasonably incurred by them in connection with any action, suit or
proceeding brought by third parties by reason of the fact that they were
or are directors, officers, employees or agents of the corporation, if
such directors, officers, employees or agents acted in good faith and in
a manner they reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reason to believe their conduct was unlawful. In a
derivative action, i.e., one by or in the right of the corporation,
indemnification may be made only for expenses actually and reasonably
incurred by directors, officers, employees or agents in connection with
the defense or settlement of an action or suit, and only with respect to
a matter as to which they shall have acted in good faith and in a manner
they reasonably believed to be in or not opposed to the best interests
of the corporation, except that no indemnification shall be made if such
person shall have been adjudged liable to the corporation unless and
only to the extent that the court in which the action or suit was
brought shall determine upon application that the defendant directors,
officers, employees or agents are fairly and reasonably entitled to
indemnity for such expenses despite such adjudication of liability.
Expenses for the defense of any action for which indemnification
may be available may be advanced by the Registrant under certain
circumstances. The general effect of the foregoing provisions may be to
reduce the circumstances which an officer or director may be required to
bear the economic burden of the foregoing liabilities and expenses.
Directors and officers will be covered by liability insurance
indemnifying them against damages arising out of certain kinds of claims
which might be made against them based on their negligent acts or
omissions while acting in their capacity as such.
Insofar as indemnification for liabilities arising under the Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person
of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of
such issue.
POLICY REGARDING TRANSACTIONS WITH OFFICERS AND DIRECTORS
Our policy regarding any future transactions with our directors,
officers, employees or affiliates is that such transactions be approved
in advance by a majority of our Board, including a majority of the
disinterested members of the Board, and be on terms no less favorable to
us than we could obtain from non-affiliated parties. The executive staff
are charged with the responsibility of cross-notification of directors
in the event that any transaction or proposed transaction might either
involve a director or does involve a director. The goal of this policy
is to avoid even the appearance of impropriety in transactions involving
staff or directors.
40
It is the policy of the Company to avoid where feasible entering
into agreements or contracts for the provisions of materials, services,
supplies or equipment by any officer or director, or member of their
immediate or other close family. In the event of such transactions, the
subject officer or director shall be completely isolated from every
phase of any such transaction.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF
1934
Section 16(a) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), requires that the Company's officers and
directors, and person who own more than ten percent of a registered
class of the Company's equity securities, file reports of ownership and
changes in ownership with the Securities and Exchange Commission and
furnish the Company with copies of all such Section 16(a) forms. Based
solely on its review of the copies of such forms received by it and
written representations from certain reporting person, the Company
believes that, during fiscal 2000, each of its officers, directors and
greater than ten percent stockholders complied with all such applicable
filing requirements.
ITEM 10. 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, 2001. No other executive officer
received annual compensation in excess of $100,000 in any of the three
fiscal years ended December 31, 2001. This information includes the
dollar value of base salaries, bonuses, awards, the number of stock
options granted and certain other compensation, if any, whether paid or
deferred.
SUMMARY COMPENSATION TABLE
Name of Individual and Other Annual
Principal Position Fiscal Year Salary ($) Bonus ($) Compensation ($)
------------------------ --------------- ---------- ------------- -----------------------
Ronald G. Farrell 2001
Chairman & CEO 2000 $201,000 -- --
1999 $353,976 -- --
Dr. Tim Brooker 2001 -- -- --
Chairman & CEO 2000 -- -- --
1999 -- -- --
Scott A. Lane 2001 -- -- --
CFO & Secretary 2000 $ 66,668 -- --
1999 -- -- --
Restricted Securities All Other
Name of Individual and Fiscal Stock Underlying Annual
Principal Position Year Awards($) Options/SARs(#) Compensation
-------------------------------------------------------------------------------------------------------
Ronald G. Farrell 2001 -- -- --
Chairman & CEO 2000 -- 2,000,000(1) --
1999 200,000 --
Dr. Tim Brooker 2001 -- -- --
Chairman & CEO 2000 -- -- --
1999 -- -- --
Scott A. Lane 2001 -- 50,000 --
CFO & Secretary 2000 -- -- --
1999 -- -- --
41
(1) Mr. Farrell resigned from his executive position with the Company
on December 31, 2001, thereby voluntarily terminating his employment
agreement. That agreement in turn terminated the previously granted
stock option package referred to in FY2000 by virtue of cessation of
employment.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No new options or other reportable new stock acquisition rights
were granted in the fiscal year ending December 31, 2001. Management
anticipates that stock options and stock acquisition rights will be
created in fiscal 2002 as part of the ordinary conduct of business.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR END OPTION/SAR VALUES
Number of Value of
Securities Unexercised
Underlying In-The-Money
Options/SAR's Options/SAR's
At Fiscal At Fiscal
Shares Year End(#) Year End($)
Acquired Value Exercisable/ Exercisable/
Name On Exercised Realized Unexercisable Unexercisable
----------------------------------------------------------------------------------------------------------------
Ronald G.
Farrell ---- ---- 400,000/100,000 -0-/-0-
Scott A.
Lane ---- ---- -0-/50,000 -0-/-0-
The last sales price for the Company's Common Stock on the OTC
Bulletin Board on December 31, 2001 was $0.09/share.
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.
OTHER PLANS
The Company has no other deferred compensation, pension or
retirement plans in which executive officers participate. However, we
are currently in the process of adopting a Stock Incentive Plan to
attract, motivate, reward and retain our officers, directors, key
employees and consultants. Additionally, in 2002, we will adopt a
deferred compensation plan for executive staff whereby their salaries
are tied to profit levels and revenue goals.
EMPLOYMENT AND SIMILAR AGREEMENTS
Employment Contracts
42
Ronald G. Farrell served as the Company's Chief Executive Officer
under an employment agreement dated November 30, 1998 and effective
January 1, 1999 through December 31, 2003, as amended. Mr. Farrell's
compensation under such agreement was originally $240,000 through
December 31, 1999, and increases by 10% per year thereafter, but was
amended in May, 1999 to an annual salary of $360,000 through December
31, 1999, with annual 10% increases, due to increased responsibility
associated with the Company's golf operations. Mr. Farrell's contract
was extended on November 30, 2000 through December 31, 2005 under the
same terms and conditions. In addition, Mr. Farrell is eligible to
receive an annual bonus, payable quarterly, based on Company
performance. Such bonus may not exceed Mr. Farrell's base salary for
such respective fiscal year. Mr. Farrell was granted the option to
purchase a total of 2,000,000 shares of the Company's Common Stock in
lieu of cash compensation for the six months between July 1, 2000 and
December 31, 2000. The option grant vests immediately and is exercisable
for 10 years. Mr. Farrell was also granted the option to purchase a
total of 300,000 shares of the Company's Common Stock, vesting in
100,000 share increments on each of December 31, 1999, December 31, 2000
and December 31, 2001. Pursuant to such employment agreement, if Mr.
Farrell should die during the term thereof, a death benefit equal to
eighteen months salary (currently $594,000) shall be paid to his estate.
Mr. Farrell may be terminated for cause. Mr. Farrell's employment
contract was terminated by joint agreement December 31, 2001 at 3 p.m.
and the Company views the share option package of 2,000,000 shares as
extinguished upon his resignation.
In addition to the provisions of our certificate of incorporation
and our bylaws, we have entered into an indemnification agreement with
each of our officers and directors. Under the terms of these agreements,
we will indemnify each officer and director to the fullest extent
authorized and permitted under our certificate of incorporation, our
bylaws and Delaware law. These agreements contemplate that we may obtain
insurance to fund some or all of our potential exposure under these
agreements.
These agreements contemplate the appointment of a reviewing party,
which will consist of non-officer directors. The reviewing party could
find that indemnification is not warranted if it determines that: an
indemnified party received an improper personal benefit; amounts
advanced to the indemnified party were not approved by stockholders; the
indemnified party engaged in conduct that was not in good faith or was
an intentional or willful misconduct or knowing violation of the law; or
our certificate of incorporation prohibits such indemnification. Any
decision by the reviewing party relating to the above matters will be
conclusive and binding. In the event that there is a change of control,
however, such power will vest in a special, independent counsel who
shall make such determinations.
Management anticipates entering into various employment contracts
in fiscal 2002 as part of the ordinary conduct of business.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of January 1, 2001, certain
information concerning those persons known to the Company, based on
information obtained from such persons, with respect to the beneficial
ownership (as such term is defined in Rule 13d-3 under the Securities
Exchange Act of 1934) of shares (the "Common Stock") of common stock,
$0.01 par value, of the Company by (i) each person known by the Company
to be the owner of more than 5% of the outstanding Common Stock, (ii)
each Director of the Company and the nominee for Director, (iii) each
executive officer of the Company earning more than $100,000 during the
year ended December 31, 2001 and (iv) all executive officers and
Directors as a group:
43
Amount and Nature
Name and Address of of Beneficial Percentage of
Beneficial Owner (1) Ownership (2) Class (3)
------------------------------- --------------------------- ------------------
LEC Acquisition LLC 2,912,932 (4) 55%
Ronald G. Farrell 665,000 (5) 12%
All Directors and
Executive Officers
as a Group --- 67%
(1) The address for all individuals identified herein is 9925
Haynes Bridge Road, Suite 200, PMB #226, Alpharetta, Georgia 30004.
(2) Unless otherwise noted, the Company believes that all persons
named in the table have sole investment power with respect to all shares
of common stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities that can be acquired by such person
within 60 days from the date hereof upon the exercise of warrants or
options or upon the conversion of convertible securities. Each
beneficial owner's percentage ownership is determined by assuming that
options or warrants or shares of Series A Convertible Preferred Stock
that are held by such person (but not those held by any other person)
and which are exercisable or convertible within 60 days from the date
hereof have been exercised or converted.
(3) Based on 5,293,004 shares of Common Stock outstanding as of
January 1, 2001.
(4) The Company granted LEC Acquisition LLC a warrant to purchase
6% Convertible Debentures of the Company in the principal amount of
$1,429,170 which are convertible into shares of Common Stock. LEC
Acquisition LLC has purchased 2,759,432 shares pursuant to such
convertible debentures for $827,830. LEC Acquisition LLC has purchased
38,500 shares on the open market for $38,285. The number of shares of
Common Stock reflected in the Table includes 500,000 shares available
under a warrant issued by the Company on April 25, 2000. LEC Acquisition
LLC terminated the Debenture Agreement with the Company on August 12,
2000. Mr. Farrell, as the managing partner of LEC Acquisition LLC,
exercises voting control over shares held by LEC Acquisition LLC.
Additionally, pursuant to the terms of the operating agreement of the
LLC, RGF Investments, Inc., a member of the LLC, will receive and Mr.
Farrell may receive shares of Common Stock at such time as the LLC
distributes shares of Common Stock to its members. Mr. Farrell has
disclaimed beneficial ownership of shares owned by LEC Acquisition, LLC.
(5) Includes options to purchase 500,000 shares of Common Stock
granted to Mr. Farrell, 400,000 shares, which are currently
exercisable. Also includes 115,000 shares owned by Sports M&A.com, Inc.,
a corporation which Mr. Farrell is the sole stockholder. Mr. Farrell
served as Chairman and CEO of the Company during fiscal year 2001.
The last sales price for the Company's Common Stock on the OTC Bulletin
Board on December 31, 2001 was $0.09.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH FORMER CHAIRMAN/CEO
In the 4th Quarter, 2001, The Company acquired physical property
from a non-profit entity that is subject to a mortgage given by The
Genesis Trust of Bentonville, Arkansas in favor of Ronald G. Farrell,
the former Chairman of the Board and CEO of the Company. This
transaction occurred following the appointment, in accordance with
company bylaws, by Mr. Farrell of two additional directors, the holding
of a meeting of the Board and the acquisition subject to the mortgage to
Mr. Farrell. This transaction has been described above in detail.
44
PART IV.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) The following exhibits are filed with this Annual Report; or,
have been filed with the Annual Report for FY 2001, and are
incorporated herein by reference:
Exhibit
Number Description
-------- -------------------
1.1 Form 8-K, dated January 8, 2002.
1.2 Form 8-K dated April 6, 2001
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.*****
10.2 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.******
(F* ) Incorporated by reference to the Company's Registration
Statement on Form S-2, as filed with the Securities and Exchange
Commission on June 10, 1993, Registration No. 33-64246.
(F**) Incorporated by reference to the Company's Post Effective
Amendment No. 1 on Form S-2 to its Registration Statement on Form S-2,
as filed with the Securities and Exchange Commission on August 1, 1995,
Registration No. 33-93274.
(F***) Incorporated by reference to the Company's 1995 Annual Report
on Form 10-KSB/A, as filed with the Securities and Exchange Commission
on April 23, 1996, Commission File No. 0-18303.
(F****) Incorporated by reference to the Company's 1994 Proxy
Statement, Commission File No. 0-18303.
(F*****) Incorporated by reference to the Company's 1996 Proxy
Statement, Commission File No. 0-18303.
(F******) Incorporated by reference to the Company's Registration
Statement on Form S-8/S-3, as filed with the Securities and Exchange
Commission on June 11, 1997, Commission File No. 333-28921.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934 the Registrant has duly caused this
Annual Report on Form 10-KSB to be signed on its behalf by the
undersigned, thereunto duly authorized.
April 12, 2002 GOLF ENTERTAINMENT, INC.
BY: /S/ Dr. Tim Brooker
--------------------
Dr. Tim Brooker,
Chairman of the Board/CEO
Pursuant to the requirements of 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.
Name Title Date
-------------------------------------------------------------------------------
/S/ Dr. Tim Brooker Chairman of the Board of Directors April 12, 2002
- ----------------- and Chief Executive Officer
Dr. Tim Brooker
/S/ John Dodge Senior Vice President and April 12, 2002
--------------- General Counsel
John Dodge
/S/ Jim Bolt Chief Operating Officer and April 12, 2002
-------------- Chief Accounting Officer
Jim Bolt
/S/ Loren Pederson Director April 12, 2002
------------------
Loren Pederson
/S/ Annette Gore Director April 12, 2002
- ---------------
Annette Gore
/S/ Michael F. Daniels Director April 12, 2002
- ----------------------------
Michael F. Daniels
46
GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
TABLE OF CONTENTS
-----------------
PAGE
----
INDEPENDENT AUDITORS REPORT F-1
BALANCE SHEET F-2
BALANCE SHEET F-3
STATEMENT OF OPERATIONS F-4
STATEMENT OF CASH FLOWS F-5-6
STATEMENT OF STOCKHOLDERS' EQUITY F-7
NOTES TO FINANCIAL STATEMENTS F-8-23
James E. Slayton, CPA
2858 WEST MARKET STREET
SUITE C
AKRON, OHIO 44333
1-330-864-3553
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Golf Entertainment, Inc.
e have audited the accompanying consolidated balance sheets of Golf
Entertainment, Inc. (formerly LEC Technologies, Inc.) and Subsidiaries as of
December 31, 2001 and 2000, and the related consolidated statements of
operations, stockholders' equity/(deficit), and cash flows for each of the
three years in the period ended December 31, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Golf
Entertainment, Inc. (formerly LEC Technologies, Inc.) and Subsidiaries as of
December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000
in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred losses from operations, has a
working capital deficiency and a stockholders' deficiency that raise
substantial doubt about its ability to continue as a going concern.
Management's plan in regard to these matters is also described in Note 1. The
financial statements do not include any adjustments that may result from this
uncertainty.
/s/ James E. Slayton
-----------------------------
James E. Slayton, CPA
Ohio License ID# 04-1-15582
F-1
GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
ASSETS
CURRENT ASSETS
Cash 7,581 1,914
Prepaid expenses -- 25,352
Notes and accounts receivable, other -- --
---------- ----------
Total current assets 7,581 27,266
---------- ----------
FURNITURE AND EQUIPMENT, net of accumulated
depreciation of -0- and 124,611 as of
December 31, 2001 and 2000, respectively 1,028,030 226,075
---------- ----------
OTHER ASSETS
Assets related to discontinued operations -- 173,990
---------- ----------
TOTAL ASSETS 1,035,611 201,256
========== ==========
The accompanying notes and independent auditors' report should be read in
conjunction with the consolidated financial statements.
F-2
GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
LIABILITIES
CURRENT LIABILITIES
Accounts payable 139,448 149,768
Accrued liabilities 13,492 29,196
Notes payable -- 105,000
Current maturities of long-term debt -- 22,252
------------ ------------
Total current liabilities 152,940 306,216
------------ ------------
LONG-TERM DEBT 348,750 10,017
------------ ------------
OTHER LIABILITIES
Liabilities related to discontinued operations -- 39,750
Other liabilities -- 57,254
------------ ------------
Total other liabilities -- 97,004
------------ ------------
TOTAL LIABILITIES 501,690 413,237
------------ ------------
STOCKHOLDERS' EQUITY/(DEFICIT)
Series A convertible preferred stock, $0.01 par
value, 1,000,000 shares authorized, 380,000
shares issued; 228,516 shares outstanding
at December 31, 2001 and 2000
respectively 2,285 2,285
Common stock, $0.01 par value, 25,000,000
shares authorized, 9,043,044 and 5,293,044
shares issued and outstanding at December
31, 2001 and 2000, respectively 90,430 52,930
Additional paid-in capital 12,310,214 11,535,349
Accumulated deficit (11,869,008) (11,802,545)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY/(DEFICIT) 533,921 (211,981)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY/(DEFICIT) 1,035,611 201,256
============ ============
The accompanying notes and independent auditors' report should be read in
conjunction with the consolidated financial statements.
F-3
GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
2001 2000 1999
-------- ---------- ----------
Selling, general & administrative 82,949 1,148,971 522,076
Depreciation and amortization -- 55,837 56,179
Impairment charge -- 128,267 --
Interest expense, net 7,082 5,174 265
-------- ---------- ----------
90,031 1,338,249 (578,520)
-------- ---------- ----------
Loss from continuing operations (90,031) (1,338,249) (578,520)
Loss from discontinued operations (7,936) (260,652) (2,266,714)
Gain/(Loss) on disposal (24,997) 14,107 48,346
-------- ---------- ----------
Net Loss before extraordinary item (122,964) (1,584,794) (2,796,888)
Extraordinary income-gain on forgiveness
of debt 56,501 112,937 385,197
-------- ---------- ----------
Net Loss (66,463) (1,471,857) (2,411,691)
======== ========== ==========
Loss per share from continuing operations (.014) (0.29) (0.26)
Loss per share from discontinued operations 0.00 (0.06) (1.04)
Gain per share on disposal .003 0.00 0.02
Extraordinary gain per share .006 0.03 0.18
-------- ---------- ----------
Loss per common share - basic (.007) (0.32) (1.10)
========= ========== ==========
Loss per common share - diluted (.007) (0.32) (1.10)
========= ========== ==========
The accompanying notes and independent auditors' report should be read in
conjunction with the consolidated financial statements.
F-4
GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
2001 2000 1999
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (66,463) (1,471,857) (2,411,691)
Adjustments to reconcile net loss to cash provided
by operating activities:
Depreciation & Amortization -- 84,795 2,785,366
Write down of inventory and residual values -- 147,700 694,630
Stock compensation expense -- 161,792 96,564
Gain on disposal 24,997 -- (49,024)
Write-off of notes receivable 305,324 --
Impairment charge -- 128,267 --
Forgiveness of debt -- (112,937) (385,197)
Change in assets and liabilities due to
operating activities:
(Increase) decrease in accounts receivable -- -- 2,919,397
(Increase)decrease in prepaid expenses 25,352 (25,352) --
Decrease in inventory -- -- 445,599
Increase (decrease) in accounts payable 10,320 78,996 (3,341,572)
Increase (decrease) in accrued liabilities (15,703) (139,402) (539,765)
Increase (decrease) in other liabilities 113,977 -- (47,944)
Decrease in assets disposed of -- 387,684 --
Forgiveness of debt (56,501) (401,734) --
---------- ---------- ----------
Total adjustments 102,443 615,133 2,578,054
---------- ---------- ----------
Net cash provided by (used in) operating activities 35,980 (856,724) 166,363
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales and disposals of off-lease inventory -- -- --
Proceeds from sales of furniture, fixtures and
equipment -- 47,700 7,820
Purchases of furniture and equipment -- (6,039) (73,623)
Decrease in notes receivable-employees -- -- 143,376
Decrease (increase) in notes receivable -- 49,509 (379,833)
Additions to net investment in sales-type and
direct financing leases -- -- --
Sales-type and direct financing lease rentals
received 141,768 292,012 1,846,830
---------- ---------- ----------
Net cash provided by (used in) investing activities 141,768 383,182 1,544,570
---------- ---------- ----------
F-5
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from nonrecourse and recourse discounted
lease rentals -- -- --
Payments on nonrecourse and recourse discounted lease
rentals -- (2,182,856)
Proceeds from notes payable 96,250 134,500 15,980
Payments on notes payable (268,331) (162,989) (275,973)
Proceeds from sale of stock 480,000 380,830
Purchase of treasury stock -- --
---------- ---------- ----------
Net cash provided by (used in) financing activities (172,081) 451,511 (2,062,019)
---------- ---------- ----------
Net increase (decrease) in cash 5,667 (22,031) (351,086)
Cash at beginning of period 1,914 23,945 391,705
Cash at end of period 7,581 1,914 40,619
======== ========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest 14,658 15,745 1,302,841
Income Taxes -- -- --
The accompanying notes and independent auditors' report should be read in
conjunction with the consolidated financial statements.
F-6
GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY/(DEFICIT)
AS OF DECEMBER 31, 2001
NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE TOTAL
---------------- ------------------ PAID-IN ACCUMULATED TREASURY FROM STOCKHOLDERS'
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 receivables 93,750 93,750
Retirement of treasury
stock (44,550) (446) (210,690) 211,136 --
Net loss, 1998 (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
Conversion of preferred
stock to common (500) (5) 219 2 3 --
Stock compensation
expense 110,000 1,100 95,464 96,564
Issuances of stock in
lieu of payment 345,000 3,450 96,549 99,999
Sale of stock 1,336,099 13,361 367,469 -- -- 380,830
Net loss, 1999 (2,411,691) (2,411,691)
------- ----- --------- ------ ---------- ----------- -------- ------- ----------
Balance at December 31,
1999 228,516 2,285 3,201,711 32,017 10,914,470 (10,330,688) -- -- 618,084
Issuance of stock for
services 78,000 780 73,988 74,768
Issuance of stock for
settlements 375,000 3,750 83,274 87,024
Sale of stock 1,638,333 16,383 463,617 -- -- 480,000
Net loss, 2000 (1,471,857) (1,471,857)
------- ----- --------- ------ ---------- ----------- -------- ------- ----------
Balance at December 31,
2000 228,516 2,285 5,293,044 52,930 11,535,349 (11,802,545) -- -- (211,981)
======= ===== ========= ====== ========== =========== ======== ======= ==========
The accompanying notes and independent auditors' report should be read in
conjunction with the consolidated financial statements.
F-7
GOLF ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nature of Operations: Golf Entertainment, Inc. and subsidiaries (LEC Leasing,
Inc. or "LEC"; Superior Computer Systems, Inc. or "SCS"; Pacific Mountain
Computer Products, Inc. or "PMCPI"; Atlantic Digital International, Inc. or
"ADI"; LEC Distribution, Inc; TJ Computer Services, Inc.; Traditions
Acquisition Corporation and GolfBZ.com, Inc. or "GolfBZ") (collectively, the
"Company" or "Golf") has ceased doing business as of April 6, 2001. Mr.
Ronald G. Farrell introduced in late 1998 a plan to re-orient the Company
from the equipment leasing business to the golf industry, including owning
and operating golf courses, as well as other opportunities in Internet ".com"
businesses. On February 17, 1999, the stockholders of the Company approved
the issuance of convertible debentures to an investment company managed by
Mr. Farrell, as well as the change of the Company's name to Golf
Entertainment, Inc. from LEC Technologies, Inc. On April 6, 2001, the Board
of Directors decided to cease operations of the Company.
The Company's former line of business was leasing business equipment.
Organization: The Company was originally founded in 1980 under the name TJ
Computer Services, Inc. ("TJCS"). In 1989, all of the outstanding common
stock of TJCS was acquired by Harrison Development, Inc., an inactive public
corporation organized in Colorado, which then changed its name to TJ Systems
Corporation. In October 1991, the Company reincorporated in the State of
Delaware and in June 1995, changed its name to Leasing Edge Corporation. On
March 12, 1997, the Company's shareholders' approved a change in the
Company's name to LEC Technologies, Inc. In February 1999, the Company's
shareholders approved a change in the Company's name to Golf Entertainment,
Inc.
On December 31, 2001, the Company acquired a significant amount of assets in
a non-cash transaction. The assets generally consist of broadcast television
equipment, and the rights to purchase a broadcast television a non-profit
entity. The value of the assets is approximately $1,028,030 subject to a
note of $291,000. The assets were acquired at a public auction held December
25,2001. The Company acquired the assets for 3,750,000 shares of its common
stock.
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. Intercompany accounts and transactions have
been eliminated in consolidation.
Allowance for Doubtful Accounts
The following table reflects changes in the Company's estimated reserve for
doubtful accounts for each of the three years in the period ended December
31, 2000.
F-8
Balance at Balance at
Beginning of End of
Period Expense Write-off Period
------------ --------- --------- ----------
1999 $304,367 $ 62,878 $ 360,906 $ 6,339
2000 $ 6,339 $ -0- $ 6,339 $ -0-
2001 $ -0- $ -0- $ -0- $ -0-
Use of Estimates
The preparation of these consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
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.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As shown in the accompanying
consolidated financial statements, the Company has incurred a net loss of
$66,463 in 2001. In addition, the Company has a stockholders' deficiency of $
at December 31, 2000. The Company's ability to continue as a going concern is
dependent upon its ability to obtain additional financing and the attainment of
an adequate level of profitable operations. Management believes that the action
it is taking will provide the opportunity for the Company to continue as a
going concern.
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 the review of the remaining
fixed assets of the Company, primarily used computer equipment, management has
recorded an impairment charge of $128,267 during the year ended December 31,
2000. There was no impairment charge during the year ended December 31, 2001.
As a result of operating losses at SCS and PMCPI, management determined that
the carrying value of the goodwill associated with the acquisition of these
entities exceeded the estimated net future cash flows attributable to them and,
consequently, recorded an impairment loss of $567,360 during the year ended
December 31, 1998.
F-9
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 loss per share are computed in accordance with SFAS No. 128,
"Earnings Per Share". Potential common shares have not been included in the
computation of diluted earnings per share because the effect would be
antidilutive.
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 1999 and 1998 financial
statements to conform to the 2000 presentation.
QUARTERLY INFORMATION
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
MARCH 31, 2000 JUNE 30, 2000 SEPTEMBER 30, 2000 DECEMBER 31, 2000 DECEMBER 31, 2000
-------------- ------------- ------------------ ----------------- -----------------
Net loss (716,626) (207,156) (374,046) (174,029) (1,471,85?)
Loss per share (0.19) (0.04) (0.06) (0.03) (0.32)
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.
F-10
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,
which are included in assets related to discontinued operations, as of December
31 are as follows:
2000 1999
---------- ----------
Total future minimum lease payments $ 181,523 $ 502,707
Less unearned finance income (7,533) (36,705)
---------- ----------
Total $ 173,990 $ 466,002
========== ==========
Future minimum lease payments on sales-type and direct financing leases as of
December 31, 2000 are as follows:
Years ending December 31,
2001 $150,892
2002 30,631
--------
$181,523
========
F-11
There are no future minimum lease rentals on operating leases due to sale of
the lease portfolio.
NOTE 4: ACQUISITION OF TRADITIONS GOLF CLUB
On May 22, 1999, Traditions Acquisition Corporation, a wholly-owned subsidiary
of Golf Entertainment, Inc, acquired substantially all of the assets except for
real estate of Golf Traditions I, Ltd., a partnership that developed Traditions
Golf Club in Edmond, Oklahoma. Traditions Golf Club has a 4,500 yard, 18 hole,
par 60 executive length golf course, a 20 acre practice range of 80 tees with
multiple target greens, an 18 hole practice putting course, a mini-course for
juniors, a pro shop and a club house. The purchase price for the acquisition
was approximately $454,073, and was equal to the liabilities assumed,
approximately $454,073. The purchase method of accounting was used to
establish and record a new cost basis for the assets acquired and liabilities
assumed. Concurrently, the Company entered into a ground lease for a 4-year
term with two (2) additional term options of two (2) years each for $24,000 per
month. This lease is accounted for as an operating lease.
The operating results for the acquisition have been included in the Company's
consolidated financial statements since the date of acquisition.
The following unaudited proforma results assume the acquisition of Traditions
Golf Club occurred at the beginning of the year ended December 31, 1999.
Net sales 888,009
Net expenses 2,083,680
Discontinued operations (1,480,792)
Gain on disposal 48,346
Extraordinary item 385,197
----------
Net loss (2,628,117)
==========
Basic earnings per share (1.20)
Diluted earnings per share (1.20)
NOTE 5: DISCONTINUED OPERATIONS
In 1998, the Board of Directors determined that, in light of the significant
losses from the Company's equipment leasing business and the sizeable
indebtedness of the Company from that business, that it was in the best
interest of the Company that its equipment leasing business be sold and the
Company should develop a golf entertainment business. The Directors agreed to
the Sale to repay indebtedness incurred in connection with the Company's
equipment leasing business and to generate capital for the development of the
golf entertainment business. The Company received approximately $14,000 in cash
(after deducting expenses of approximately $315,000), plus a note receivable of
$75,000 with monthly payments of $2,834 through June 2002. The Company released
the remaining balance of approximately $55,500 in lieu of payment of portfolio
related expenses. These funds were used to pay ongoing expenses of the Company
and repay Excel Bank,
F-12
N.A. for certain recourse debt not being assumed by the Buyer. Furthermore, the
Buyer assumed approximately $12,500,000 of debt associated with the Company's
business equipment leases and approximately $2,600,000 of senior secured debt.
Revenue related to the discontinued leasing operations was $18,239, $8,102,630,
and $30,623,016 for the years ended December 31, 2000, 1999 and 1998,
respectively. At December 31, 2001, the Company had approximately $-0- of lease
inventory, $173,990 of leased assets, and $39,750 of related lease liabilities.
On May 24, 2000, Traditions Acquisition Corporation, a wholly owned subsidiary
of Golf Entertainment, Inc., ceased doing business. Traditions Acquisition
Corporation ceased all operations of the Traditions Golf Club in Edmond,
Oklahoma and began procedures to dissolve. The subsidiary's recorded assets of
$385,384 and recorded liabilities of $401,734 were written down to $-0-.
Pursuant to the terms of the lease agreement, by which Traditions Acquisition
Corporation had leased the Traditions Golf Club facility, all future lease
payments would become due from Traditions Acquisition Corporation upon
termination of that lease. The owner of the facility terminated the lease
agreement effective May 23, 2000. The total remaining lease liability of
Traditions Acquisition Corporation is $888,000. This liability is not
guaranteed by Golf Entertainment, Inc. Traditions Acquisition Corporation is
currently in the process of dissolution. Revenue related to the discontinued
golf operations was $253,234, $585,482 and $-0- for the years ended December
31, 2000, 1999 and 1998, respectively. At December 31, 2000, the Company had
no assets or related golf liabilities.
Due to the cessation of business by Golf Entertainment, Inc. on April 6, 2001,
the Company sold its subsidiary, GolfBZ.com, Inc., and the related intangible
assets to Ronald G. Farrell, the Company's Chairman and Chief Executive
Officer, on May 10, 2001 for $25,000.
NOTE 6: 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:
2001 2000 1999
---------- ---------- ------------
Computed "expected" income tax
expense (benefit) $ (66,463) $ (515,150) $ (844,092)
Change in valuation allowance
for deferred tax assets 66,463 464,952 809,429
Nondeductible expenses -- 50,198 34,663
---------- ---------- ------------
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, 2000 and 1999
are presented below:
F13
December 31, December 31,
2000 2000
------------ ------------
Deferred Tax Assets
Allowances for doubtful accounts,
inventory obsolescence and
residual value realization not
currently deductible $ -- $ --
Net operating loss carryforwards 2,704,941 2,638,478
------------ ------------
Total gross deferred tax assets 2,704,941 2,638,478
Valuation allowance (2,704,941) (2,638,478)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
Deferred Tax Liabilities
Net deferred taxes liabilities $ -- $ --
============ ============
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, 2001 and 2000, the Company determined that $2,704,941 and $2,638,478,
respectively, of tax benefits did not meet the realization criteria.
At December 31, 200, the Company has net operating loss carryforwards for
Federal income tax purposes of approximately $8,365,000 which are available to
offset future taxable income, if any, through 2021.
NOTE 7: NONRECOURSE AND RECOURSE DISCOUNTED LEASE RENTALS
The Company assigned the rentals of its leases to financial institutions at
fixed rates on a nonrecourse or, to a lesser extent, on a recourse basis but
retained the residual rights. In return for future lease payments, the Company
received a discounted cash payment. Discounted lease rentals as of December
31, 2001 and 2000 were $-0- and $-0 respectively of which $-0- and $-0 are
recourse, respectively. Interest expense on discounted lease rentals for the
years ended December 31, 2001 and 2000 was $-0- and $-0-, respectively.
NOTE 8: NOTES PAYABLE AND LINES OF CREDIT
Notes Payable and Lines of Credit
Previously, the Company had a line of credit with Merrill Lynch Business
Financial Services, Inc. During December 1999, the Company was able to reach
a Settlement Agreement with Merrill Lynch, whereby the Company will pay
monthly installments over a 16-month period, beginning in April 2000. During
2000, the Company negotiated a final settlement with Merrill Lynch whereby
the Company paid $24,000 in cash and
F-14
Merrill Lynch forgave the remaining $101,000. As of December 31, 2000, there
was no amount outstanding to Merrill Lynch.
In March 1999, LEC Leasing, Inc. and IBM Corporation entered into an
agreement whereby $347,884 of accounts payable obligations were converted
into an 8% term note payable in monthly installments of $20,000. On November
12, 1999, the Company and IBM reached an agreement, subject to appropriate
documentation, to substantially reduce the obligation and amend the repayment
terms. As of December 31, 2000, the balance owed IBM is $39,750.
In November 1999, the Company finalized its lease negotiations in conjunction
with its relocation to Alpharetta, Georgia. As part of the negotiations, the
Company and landlord agreed to a build-out allowance. Actual costs of the
build-out were greater than the allowance. The Company paid for the build-out
with a combination of cash and a note payable to the landlord of $15,980 to
be repaid over 5 years (lease term) at 10%. As of December 31, 2000, the Note
Payable balance was $12,929.
On November 30, 2000, the Company agreed to sell up to $500,000 of
Convertible Notes to the Company's Chairman/CEO, Ronald G. Farrell. The
balance of the Convertible Notes was $105,000 as of December 31, 2000.
Notes payable and lines of credit consist of the following at December 31,
2001 2000
---------- ----------
Term note payable to Northwinds
Center, LP, payments of $340 including
interest at 10%, due October 31, 2004 -0- 12,929
Term note payable to Imperial Premium,
Finance Company, payments of $1,842
including interest at 17.8%, due
June 25,2001 -0- 10,590
Term note payable to Scott Printing
Corporation, due in monthly installments
Beginning December 1, 2000 of $1,250
For 4 months, $2,500 for 2 months
With interest at 0.0% 1,250 8,750
Demand convertible note payable to
Ronald G. Farrell, interest accruing at
Prime plus 2.0%, due upon demand -0- 105,000
---------- ----------
$ 1,250 $ 137,269
========== ==========
F-15
Required annual principal payments as of December 31, 2000 are as follows:
2002 12,000
2001 $ 127,253
2002 3,217
2003 3,554
2004 3,245
---------
Total $ 149,253
=========
NOTE 9: COMMITMENTS AND CONTINGENCIES
a) Lease Agreements
The Company leases its office space under an operating lease which expires
October 2004. As a result of management's decision to cease business on April
6, 2001, the lease was terminated and there is currently no lease or rental
agreement for office space.
Rental expense on operating leases was $32,942, $74,961, and $344,883 for the
years ended December 31, 2001, 2000, and 1999, respectively. The Company
closed the Office on April6, 2001.
b) Employment Contracts
The Company has employment agreements with one of its executive officers with
remaining terms of approximately five years. Under this agreement, the
employee is entitled to receive other employee benefits of the Company,
including medical and life insurance coverage. If the agreement is terminated
due to the death of an employee, a death benefit equal to eighteen months
salary shall be paid to the employee's estate, currently $594,000. The
Company may terminate for cause. The Company's annual expense under these
agreements is approximately $360,000. The annual base salary under such
agreement was $240,000 for the period January 1, 1999 through December 31,
2000, but was amended in May, 1999 to an annual salary of $360,000 through
December 31, 2000, with annual 10% increases thereafter, due to increased
responsibility associated with the Company's operations. Mr. Farrell's
contract was extended on November 30, 2000 through December 31, 2005 under
the same terms and conditions. Mr. Farrell was granted the option to purchase
a total of 2,000,000 shares of the Company's Common Stock in lieu of cash
compensation for the six months between July 1, 2000 and December 31, 2000.
The option grant vests immediately and is exercisable for 10 years.
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. The employment contracts were canceled on
December 31, 2001. All employees resigned effective December 31, 2001.
The acquisition agreement on December 31, 2001 requires that the Company to
make payments of $1,000 per month.
F-16
NOTE 10: RELATED PARTY TRANSACTIONS
a) Company's Board of Directors
A current director of the Company was formerly the Chief Financial Officer of
Vitamin Shoppe Industries, Inc. and was formerly an officer of Tiffany & Co.,
two of the Company's leasing business former customers. Another former
director of the Company was formerly the Chief Operating Officer of
NetGrocer, Inc., one of the Company's leasing business former customers.
Neither director received any cash or other remuneration from the Company
other than their fees as directors and participation in the Company's stock
option plans. The Company believes that the terms of its lease arrangements
with Vitamin Shoppe Industries, Inc., Tiffany & Co. and NetGrocer, Inc. were
fair and were reached on an arms-length basis.
The Chairman of the Board of Directors and Chief Executive Officer currently
holds $105,000 of the Company's Convertible Demand Notes. Mr. Farrell also
owns all of the stock of a privately-held company that owns 115,000 shares of
the Company's common stock. The Company believes that the terms and
conditions of the financing arrangements were fair.
b) Aggregate Effect of Transactions with Related Parties
The Board of Directors of the Company has reviewed the aggregate effect on
operations of the above-described transactions and concluded that such
transactions were in the best interest of the Company and on terms as fair to
the Company as could have been obtained from unaffiliated parties.
NOTE 11: STOCKHOLDERS' EQUITY
In 2001, the company issued 3,750,000 shares of common stock for assets
purchased at auction for approximately 1,028,000.
In 2000, the company issued 78,000 shares of restricted common stock for
services. The fair market value of the shares on the dates of issue was
$74,768 and was expensed in 2000.
Also in 2000, the Company issued 375,000 shares of restricted common stock for
settlement of legal claims. The fair market value of the shares on the dates
of issue was $87,024 and was expensed in 2000.
Also in 2000, LEC Acquisition LLC acquired 1,523,333 shares of common stock.
The fair market value of the shares at the dates of issue was $457,000.
Also in 2000, Sports M&A.com, Inc. acquired 115,000 shares of the common
stock. The fair market value of the shares at the dates of issue was $23,000.
In 1999, the Company issued 110,000 shares of restricted common stock for
F-17
compensation. The fair market value of the shares at the date of issue was
$96,564 and was expensed in 1999.
Also in 1999, the Company issued 345,000 shares of restricted common stock in
lieu of payment. The fair market value of the shares at the date of issue was
$99,999.
Also in 1999, 5 shares of the Company's preferred stock was converted to 219
shares of common stock. There was no economic effect to the company.
Also in 1999, LEC Acquisition LLC exercised its option to acquire 1,236,099
shares of common stock in exchange for its convertible notes. The fair market
value of the shares at the dates of issue was $370,830.
Also in 1999, other 6% convertible notes were exercised at the stated option
rate of $0.10 per share. 10,000 shares were issued.
On September 15, 1998, the Company's 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.
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 originally convertible in 14 shares of common
stock. Currently, 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 after giving effect to the reverse stock splits of 8 to 1 and 4 to 1
on February 24, 1999 and September 15, 1998, respectively. Outstanding Series
A Preferred Stock is redeemable by the Company at $10.00 per share plus
accrued and unpaid dividends. No warrants are outstanding as of December 31,
2000. 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, 2001 and 2000, there were 228,516 shares of preferred stock
outstanding. Also, at December 31, 2001 and 2000, there were -0- and -0-
warrants outstanding, respectively.
Accrued and unpaid preferred stock dividends were $57,254 at December 31, 2001
and 2000. The preferred stock has unaccrued and unpaid dividends in the
amounts of $457,532 and $457,532 for December 31, 2001 and 2000, respectively.
F-18
B. WARRANTS AND STOCK OPTIONS
Warrants
On November 30, 1998, the Company and LEC Acquisition LLC, a limited liability
company whose managing partner is Ronald G. Farrell, the Company's Chairman
and Chief Executive Officer, entered into a Subscription Agreement whereby LEC
Acquisition LLC was granted a one year warrant to purchase 6% Convertible
Debentures up to an aggregate principal amount of $1,429,170. The 6%
Convertible Debentures are convertible into up to an aggregate of 4,763,901
shares of the Company's common stock, such conversion being subject to
shareholder approval. On February 17, 1999, the Company's shareholders
approved a resolution authorizing the Company to issue such shares upon
conversion of the 6% Convertible Debentures. On November 11, 1999, the Board
of Directors approved an amendment to the Subscription Agreement to extend the
Warrant exercise period to November 29, 2000. On April 25, 2000, the Company
granted to LEC Acquisition, LLC a three year warrant to purchase 500,000
shares of the Common Stock of the Company. On August 12, 2000, LEC Acquisition
LLC formally notified the Company that it was terminating the Debenture
Agreement.
Stock Options
1) Key Employee and Director
Options granted to employees generally vest over a three to five year period
and expire five years from the date of grant. Options granted to directors are
immediately vested and expire ten years from the date of grant. Under the
stock option plans, the exercise price of each option at issuance equals the
market price of the Company's common stock on the date of grant.
Additionally, a former officer of the Company has 14,531 options to acquire
common stock at an exercise price of $0.32 per share. The options were granted
in 1993 in lieu of prospective commissions and were subject to a three-year
vesting.
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):
F-19
2001 2000 1999
Net loss available to common stockholders:
As reported $ (664) $(1,472) $(2,142)
Pro forma (696) (1,793) (2,493)
Loss per common weighted average share:
As reported $(0.007) $ (.32) $ (1.10)
Pro forma (0.009) (.39) (1.14)
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 2000, 1999 and 1998, respectively:
dividend yield of 0.0% for each year; expected volatility of 100 percent, 60
percent and 52 percent; risk free interest rates of 6.00%, 6.00%, and 5.83%;
and expected lives of one year, three years and five years.
Additional information on shares subject to options is as follows:
2001 2000 1999
--------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
--------- -------- ------- -------- -------- --------
Outstanding at
beginning of
year 2,627,030 $ 0.25 690,781 $ 0.97 415,781 $ 1.12
Granted -0- -0- 2,289,999 0.14 275,000 .75
Exercised -0- -0- -0-
Forfeited -0-) 2.59 (83,750) -0-
--------- ------- --------
Outstanding at
end of year 2,627,000 0.27 2,897,020 0.27 690,781 .97
========= ======= ========
Options exer-
cisable at
year end 2,637,030 0.25 2,637,000 0.25 490,781 1.08
========= ======= ========
Weighted average
fair value of
options granted
during the year $ 0.00 $ 0.14 $ 0.75
======== ======== ========
F-20
The following table summarizes information about stock options outstanding at
December 31, 2001:
Options Outstanding
-------------------------
Weighted
Average Weighted
Number Remaining Average
Range of exercise of Contractual Exercise
prices Shares Life Price
--------------------------------------------------------------
$0.10 60,000 9.8 yrs $0.10
0.13 2,090,000 9.8 yrs 0.13
0.20 10,000 9.8 yrs 0.20
0.31 119,999 6.3 yrs 0.31
0.32 14,531 2.7 yrs 0.32
0.69 300,000 7.9 yrs 0.69
0.75 275,000 4.0 yrs 0.75
0.81 20,000 7.8 yrs 0.81
3.00 7,500 1.2 yrs 3.00
---------
2,897,030 8.8 yrs $0.27
=========
Options Exercisable
----------------------
Weighted
Number Average
Range of exercise of Exercise
prices Shares Price
---------------------------------------------
$0.10 60,000 $0.10
0.13 2,000,000 0.13
0.20 10,000 0.20
0.31 49,999 0.31
0.32 14,531 0.32
0.69 200,000 0.69
0.75 275,000 0.75
0.81 20,000 0.81
3.00 7,500 3.00
---------
2,637,030 0.25
=========
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 Company issued a warrant to LEC Acquisition, LLC on April 25, 2000 for
500,000 shares of the Company's Common Stock at the purchase price of $0.20
per share. The warrant's term is for three years. The warrants may be
exercised in whole or in part.
F-21
NOTE 12: MAJOR CUSTOMERS
There are no significant customer relationships remaining after the sale of
the lease portfolio.
NOTE 13: EMPLOYEE BENEFIT PLANS
The Company had a qualified 401(k) Profit Sharing Plan (the "Plan") covering
all employees of the Company, including officers. During 1998, the Company
contributed its required amounts of $49,386 to the Plan on behalf of the
Plan's participants. The plan was terminated in 1999.
NOTE 14: SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES
During the year ended December 31, 2001, the Company issued 3,750,000 shares
of common stock in exchange for assets valued at $1,028,000.
During the year ended December 31, 2000, the Company issued 78,000 shares of
common stock in exchange for services valued at $74,768; issued 375,000 shares
of restricted common stock to satisfy settlement obligations valued at
$87,024.
During the year ended December 31, 1999, the Company issued 110,000 shares of
common stock in exchange for services valued at $96,564; converted $522,884 in
accounts payable obligations into term notes; issued 345,000 shares of
restricted common stock to satisfy accounts payable obligations of $100,000;
and assumed $454,073 in liabilities in exchange for $454,073 in assets to be
used in connection with the operations of the Traditions Golf Club.
During the year ended December 31, 1998, the Company issued 234,375 shares of
common stock pursuant to the cashless exercise of stock options.
NOTE 15: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
was made in accordance with Statement of Financial Accounting Standards,
"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, 2001 and 2000for 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, 2001 and 2000, the carrying amount of recourse discounted lease
rentals of $-0- and $-0-, 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 16: 2001 FOURTH QUARTER CHARGES
There were no fourth quarter charges in the fourth quarter of 2001.
F-22
NOTE 17: 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:
2001 2000 1999
------------ ------------ ------------
Shares outstanding at
beginning of period 5,293,044 3,201,711 1,410,393
Effect of issuance of common
stock for compensation -- 74,434 45,342
Issuance of common stock in
lieu of payment -- -- 175,535
Issuance of common stock for
Settlements -- 165,738
Sale of stock -- 1,212,065 553,873
Conversion of preferred stock -- -- 109
Issuance of common stock
pursuant to private place-
ment transactions -- -- --
Exercise of stock options 3,750,000 -- --
Purchase of treasury stock -- -- --
------------ ------------ ------------
Weighted average common
shares outstanding 5,605,544 4,653,948 2,185,252
============ ============ ============
Net loss $ (66,463) $ (1,471,857) $ (2,185,252)
Preferred stock dividends -- -- --
------------ ------------ ------------
Net loss available to
common shareholders $ (66,463) $ (1,471,857) $ (2,411,691)
============ ============ ============
Loss per common share $ (0.007) $ (0.32) $ (1.10)
============ ============ ============
Weighted average common
shares outstanding 5,605,544 4,653,948 2,185,252
Effect of common shares
issuable upon exercise of
dilutive stock options -- -- --
------------ ------------ ------------
Weighted average common
shares outstanding assuming
dilution 5,605,544 4,653,948 2,185,252
============ ============ ============
Loss per common
share assuming dilution $ (0.007) $ (0.32) $ (1.10)
============ ============ ============
The following potentially dilutive securities were not included in the
computation of dilutive EPS because the effect of doing so would be
antidilutive:
2001 2000 1999
--------- --------- ---------
Options 2,897,030 2,897,030 690,781
Warrants 1,506,544 1,506,544 1,207,075
Convertible preferred stock 99,976 99,976 228,516
Warrants issuable upon conversion
of preferred stock if conversion
occurred prior to August 4, 1998 -- -- --
F-23