SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number: 333-61533
PROFORMANCE RESEARCH ORGANIZATION, INC.
(Name of small business issuer in its charter)
DELAWARE 84-1334921
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5335 WEST 48TH AVENUE, DENVER, COLORADO 80212
(Address of principal executive offices including zip code)
Issuer's telephone number, including area code: (303)458-1000
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: NONE
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to the filing requirements for the past 90 days. Yes ___ No _X_
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will 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-KSB or any amendment to
this Form 10-KSB.[X]
Issuer's revenues for its most recent fiscal year. $189,740
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 15, 1999: N/A (See Item 5)
Number of shares outstanding of registrant's Common Stock, no par value,
as of June 15, 1999: 4,220,661 (See Item 11)
Documents incorporated by reference: NONE
Transitional Small Business Disclosure Format (check one): Yes No X
Exhibit index on consecutive page 19 Page 1 of 40 Pages
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
THE COMPANY
Proformance Research Organization, Inc. ("P.R.O." or the "Company")
earns revenue from three sources: (1) providing golf instruction services to
recreational golfers wishing to improve their game or corporate clients
utilizing the Destination Golf Schools (discussed below) as part of incentive
programs or entertaining venues; (2) training of golf instructors for
certification and to maintain accreditation with the Professional Golf
Association of America (the "PGA"); and (3) sales of golf related products such
as instructional materials and golf equipment, either produced by the Company or
as a reseller of products produced by third parties. P.R.O. provides golf
instruction through three primary avenues - (1) golf schools located at
independent resorts, to which students generally travel for intensive 2-5 day
programs ("Destination Golf Schools"), (2) franchised learning centers designed
to cater primarily to local clientele for hourly lessons ("Learning Centers")
and (3) training of golf instructors for teaching certification, which training
is conducted at P.R.O. headquarters, Destination Golf Schools and Learning
Centers.
P.R.O. currently has nine Destination Golf Schools under contract for
full or partial year operation. In addition, P.R.O. is currently operating one
Learning Center. P.R.O. leases the facilities for its Destination Golf Schools
at existing golf courses or resorts. This arrangement permits P.R.O. to offer
first rate golf facilities at relatively low facilities cost and enables P.R.O.
to take advantage of the course's or resort's marketing efforts, visibility and
facility quality. P.R.O. currently markets its own line of instructional video
tapes and booklets, tied to the curriculum taught at its Destination Golf
Schools and Learning Centers. P.R.O. has signed an agreement to market, on a
non-exclusive basis, the Dimension Z Golf line of golf clubs. In addition,
P.R.O. has been granted non-exclusive distribution rights to the FILA line of
golf bags, hats, gloves and miscellaneous golf-related products. P.R.O. intends
to utilize the Slazenger(R) Fitting System at P.R.O. facilities for the purposes
of distributing custom fit putters to P.R.O. students.
P.R.O. believes that it is distinguished from its competitors on the
basis of the quality of its facilities, its unique curriculum, and its
experienced management team and staff. P.R.O.'s curriculum is geared toward the
marketing premise that ideas accepted on the professional golf tours are
accepted by recreational golfers. The basis of P.R.O.'s curriculum is physical
fitness and focus on the mental approach to the game, which the Company believes
are currently popular among golfers on the professional tours.
CORPORATE HISTORY
The Company was founded in Colorado in January 1991 under the name
World Associates, Inc. It formed a subsidiary in Delaware in February 1996
originally called Team Family, Inc., which changed its name to Proformance
Research Organization, Inc. in January 1997. The Company merged into this
subsidiary effective July 31, 1998, thereby effecting a reincorporation (the
"Reincorporation"). Also, each P.R.O. Property, Inc., a Colorado corporation
("PPI"), is a wholly-owned subsidiary of the Company. All references to the
Company herein include the predecessor corporation and PPI.
Golf instruction operations commenced in the summer of 1996 with the
association of Dave Bisbee and the licensing of certain rights to golf
instruction materials from Mr. Bisbee and Sport Solutions, Inc. See "ITEM 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Sports Solutions, Inc. ("SSI")
License" and "Dave Bisbee Distribution Agreement." The Company then negotiated
and signed agreements with various golf courses to operate their golf schools at
such courses, beginning with an agreement with Keystone Ranch Resort in March
1997 (which has since expired). As outlined above, the Company now has nine
Destination Golf Schools and one Learning Center in operation.
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INDUSTRY BACKGROUND
The National Golf Foundation, a non-profit golf research organization
(the "NGF"), conducts various surveys and studies of golfers in the United
States. According to excerpts from various studies by the NGF, there were
approximately 26.5 million golfers in the United States age 12 and over,
compared with 19.9 million golfers in 1986, an increase of 33%. Approximately 12
million of these golfers are between the age of 18 and 39, 5.0 million are
between age 40 and 49 and 6.5 million were over age 50. Approximately 5.6
million U.S. golfers are "avid" golfers, defined as those who play at least 25
rounds of golf per year. Today's typical golfer is male, 39 years old, has a
household income of $63,300 and plays 21 rounds per year. In 1996, golfers spent
about $15.1 billion on equipment, related merchandise and playing fees, compared
to $7.8 billion in 1986. Non-golfers spent an additional $1.25 billion on
golf-related items in 1996.
STRATEGY
The Company believes that the three most important criteria used by
golfers to select a school are: (1) location, (2) price, and (3) product. Key
elements of P.R.O.'s strategy are (1) to increase the number of its Destination
Golf Schools and Learning Centers in the U.S., (2) to stimulate demand for its
instructor training and certification program, (3) to expand the products
available for the Company to market, through marketing arrangements with
independent golf product manufacturers, (4) to expand, through one or more
majority-owned subsidiaries, into golf course management and development and (5)
to expand its business into new geographic territories. There can be no
assurances that the Company will be able to successfully execute its strategy.
o INCREASE THE NUMBER OF ITS DESTINATION GOLF SCHOOLS AND LEARNING
CENTERS. The Company believes that the most important consideration for
a golfer deciding which golf school to attend is location. The Company
believes that it can attract more students by offering more locations.
In expanding to new locations, the Company intends to add sites that
are consistent with its current high quality of facilities. The Company
intends to maintain a relatively low overhead cost structure by
negotiating site contracts with rent based on the number of students
attending the school. The Company believes that its existing student
booking and billing operations can service a substantial increase in
volume of students, and that economies of scale can be achieved in
advertising and other marketing expenses as new sites are added. The
Company currently has nine Destination Golf Schools and one Learning
Center under contract. The Company has incurred significant expenses
for site development, personnel and advertising relating to these
sites. The Company has attempted to locate its sites in different
geographic regions with varying golf seasons, which the Company hopes
will reduce the effect of seasonality on its business. As described
more fully below, the Company may expand by acquiring existing golf
school operations.
O STIMULATE DEMAND FOR ITS INSTRUCTOR TRAINING AND CERTIFICATION PROGRAM.
The Company is attempting to gain brand name recognition of its
instructor training and certification program. In addition to gaining
revenues from training golf instructors, the Company intends to
maintain a certified instructor membership program with a one-time
membership fee plus annual dues, designed to help PGA-certified
professionals maintain their PGA accreditation.
O EXPAND THE PRODUCTS AVAILABLE FOR THE COMPANY TO MARKET. In addition to
marketing its own line of golf instructional products, the Company
recently entered into a non-exclusive agreement with Dimension Z Golf
to market their brand of golf clubs. In addition, P.R.O. has an
agreement with FILA to market their bags, hats, gloves and
miscellaneous golf products through its Destination Golf Schools and
Learning Centers. The Company intends to seek additional golf-related
products to market through these channels. In addition, P.R.O. will be
utilizing the Slazenger(R) Fitting System at P.R.O. facilities for the
purposes of distributing custom fit putters to P.R.O. students.
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o EXPAND INTO GOLF COURSE MANAGEMENT AND DEVELOPMENT. The Company
recently established PRO Property, Inc. ("PPI") as a subsidiary to
pursue opportunities in golf course management and development. With
the assistance of Vic Kline, the Company's strategy is to exploit its
knowledge and expertise in the golf business by exploring new lines of
business, such as managing existing golf courses owned by third parties
and development of new golf courses under lease agreements on land
owned by third parties. Any such facilities could serve as sites for
additional Destination Golf Schools or Learning Centers. The Company
intends to conduct this business through one or more majority-owned
subsidiaries with stock ownership offered to management responsible for
the site. In addition, financing of any such opportunities may require
debt or equity financing at the subsidiary level. See "ITEM 1.
BUSINESS--Golf Course Development and Management Strategy" and "ITEM 9.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT - Key Employees and
Consultants."
o EXPAND ITS BUSINESS INTO NEW GEOGRAPHIC TERRITORIES. The Company
intends to establish Destination Golf Schools or Learning Centers at
additional sites within the U.S. and at appropriate sites outside the
U.S. The Company currently has an agreement with Sunkyong U.S.A. to
represent P.R.O. in the Republic of Korea on an exclusive basis and to
make introductions throughout the Pacific Rim on a non-exclusive basis,
for Destination Golf School, Learning Center franchising and product
sales opportunities. See "--International Operations" below.
THE P.R.O. SCHOOLS
P.R.O.'s strategy is to operate its Destination Golf Schools at
high-quality existing resorts that have golf facilities. P.R.O. currently has
nine Destination Golf Schools and one Learning Center under contract for
operation during all or portions of each year. Following is a list of the
Company's sites and sites under development, along with the date the site became
available to students and the season the site is open. Fees for Destination Golf
Schools are paid in advance and range from $364 for a 2-day school (excluding
lodging) at Brooks Golf Club at Lake Okoboji, Iowa, to $1,392 for a 4-day school
(including lodging) at Wildfire Golf Course at Desert Ridge in Phoenix, Arizona.
Fees for Learning Centers are based on private instruction and range from $47.00
to $100.00 per lesson.
P.R.O.'s schools have been recognized by the PGA of America, which
allows P.R.O. to employ, and in turn offer instruction by, PGA-accredited
teachers. At its Destination Golf Schools and Learning Centers, P.R.O.
instructors teach a system developed by Dave Bisbee that combines instruction in
all areas of golf technique with instruction in mental aspects of the game and
physical conditioning to improve play. Instructors assess the student's skill
level and learning style, developing a personal golfer profile for
individualized instruction. At P.R.O. Destination Golf Schools, access to a golf
course on site is included in each 2-, 3- or 4-day package. See "ITEM 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" for information regarding the
distribution agreement with Mr.
Bisbee.
<TABLE>
<CAPTION>
SITE NAME ADDRESS DATE OPENED SEASON LEASE EXPIRES
- --------- ------- ----------- ------ -------------
<S> <C> <C> <C> <C>
DESTINATION GOLF SCHOOLS
Mission Inn 10400 County Road 48 February 1999 Mid-February June 19991<F1>
Golf & Tennis Club1<F1> Howey in the Hills, Florida to late-June
Wildfire Golf Course at 5225 East Pathfinder September 1997 Mid-September September 1999
Desert Ridge Phoenix, Arizona to mid-May
Haymaker Golf Course P.O. Box 2995 May 1999 May to mid- October 1999
Steamboat Springs, October
Colorado
Pole Creek Golf Club P.O. Box 3348 April 1999 April to November 1999
Winter Park, Colorado November
Carlton Oaks Country Club 9200 Inwood Drive March 1998 Year Round November 2000
4
<PAGE>
<CAPTION>
SITE NAME Address Date Opened Season Lease Expires
<S> <C> <C> <C> <C>
Santee, California
(San Diego area)
Rhodes Ranch 7881 South Durango Drive March 1998 Mid-September December 1999
Las Vegas, Nevada to mid-May
Brooks Golf Club 1405 Highway 71 June 1998 Mid-May to September 2000
Lake Okoboji, Iowa mid-September
Omni Tucson National2<F2> 2727 W. Club Drive March 19992<F2> Mid-September
Tucson, Arizona to mid-May
Bardmoor Golf Club 7919 Bardmoor Boulevard January 1999 Mid-September April 2000
Largo, Florida to mid-May
(St. Petersburg area)
LEARNING CENTERS
Plum Creek Golf & 311 Players Club Drive June 1998 April to December 1999
Country Club Castle Rock, Colorado September
<FN>
<F1>
1 The renewal of the lease is in process.
<F2>
2 Site under contract but not yet open; date indicates planned opening date.
</FN>
</TABLE>
DESTINATION GOLF SCHOOLS
Wildfire Golf Course at Desert Ridge is owned by Crown Golf Properties,
Inc. ("Crown"), which owns or operates 30 golf facilities worldwide. Through
expansion of its relationship with Crown, opening Destination Golf Schools at
facilities in the U.S. or abroad owned by other parties, and potential
acquisitions of existing golf schools, the Company currently plans to expand to
as many as 60 total sites within the next five years. P.R.O. is currently in
negotiation with other golf resort owners to open additional Destination Golf
Schools in Myrtle Beach, South Carolina; Palm Springs, California; Aspen,
Colorado; and San Francisco, California. There can be no assurances that P.R.O.
will be able to identify and enter into contracts with any additional sites.
P.R.O. contracts with the owners of each facility to provide a golf
school at the existing golf facility and pays rent for the use of a portion of
the facility. Certain golf facilities prefer to outsource the golf school
function rather than be responsible for the overhead of establishing,
maintaining and marketing a golf school, and to date the Company has had success
in negotiating site agreements with ten facilities (nine Destination Golf
Schools and one Learning Center). In addition, P.R.O.'s operation of a golf
school at an existing facility provides the facility with higher visibility
through P.R.O.'s advertising efforts and additional revenue through guest
nights, rounds of golf, meals, merchandise and other purchases by P.R.O. golf
school students. Due to this mutually-beneficial arrangement, the rent charged
P.R.O. for using the facilities has been relatively low, allowing P.R.O. to
maintain low operating costs while offering its students high-quality
facilities. In addition, this arrangement permits P.R.O. to offer first rate
golf facilities at relatively low facilities cost and enables P.R.O. to take
advantage of the course's or resort's marketing efforts, visibility and facility
quality without incurring the enormous capital requirements and advertising
budgets needed to establish, maintain and market such facilities. Initially, the
Company entered into leases that provided for fixed monthly rental, however, the
Company's current lease fee at six of its sites are based on the number of
students attending schools at the site, thereby reducing the Company's fixed
expenses. The Company pays a fixed rent at the other four sites. There can be no
assurances that the Company will continue to enter into variable rent leases.
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LEARNING CENTERS
In contrast to Destination Golf Schools, which are located at
independent resorts with golf courses, Learning Centers are located or proposed
to be located at other independent sites where golf instruction might be
available, such as driving ranges, golf equipment stores and golf courses
oriented to a local clientele. P.R.O. currently operates one Learning Center. In
the U.S., P.R.O. intends to lease and operate Learning Centers, but
internationally intends to franchise locally-owned and operated Learning
Centers. Management believes that, in addition to receiving direct revenue from
Learning Centers, an increased local presence from Learning Centers would
increase the visibility of its name and curriculum and result in referrals to
its Destination Golf Schools. To encourage such referrals, P.R.O. may pay a
referral bonus to Learning Center staff for referred students who attend
Destination Golf Schools.
ACQUISITIONS AND SITE START-UP COSTS
Management of the Company believes that there are many single and
multiple location golf school operations whose owners may see certain advantages
to being part of a larger organization with several locations. Approximately
$500,000 of the net proceeds from the Company's initial public offering, which
is expected to close in June 1999, has been allocated for acquisitions.
Management believes that it can acquire such existing golf schools using a
combination of stock and cash. As of the date of this report, there are no
understandings, agreements, or arrangements for any acquisitions.
The expenses associated with opening new sites pertain to recruiting
and training instructors and staff, rent, and advertising. These start-up costs
of establishing these new facilities are incurred in advance of advertising the
sites and booking students into the sites. Having established an infrastructure
for its Destination Golf School and Learning Center operations, management
believes that the Company can now achieve economies of scale in certain of its
operations, in particular advertising, student bookings, and billing. A portion
of the net proceeds from the Company's initial public offering has been
allocated for site start-up costs. See "ITEM 6. MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATIONS."
INSTRUCTOR CERTIFICATION
In addition to providing instruction for recreational golfers, P.R.O.
has developed an instructor certification program to enable instructors to
fulfill in part their annual accreditation requirements to maintain PGA of
America membership. Instructor certification involves a 4-day in-depth workshop
to become certified in P.R.O.'s system. Upon completion of the training, the
participant becomes certified as a P.R.O. Certified Instructor. The fee for this
training is $5,000 and is paid in advance. Once certified, the Certified
Instructor automatically becomes eligible to distribute P.R.O.
instruction-related products and services, receives commissions for referring
students to Destination Golf Schools and may be contracted with to teach in
P.R.O. schools. The cost of membership in P.R.O.'s Certified Instructor program
is a $5,000.00 initiation fee and $1,000.00 in annual dues to be paid
semi-annually.
DISTRIBUTOR MEMBERSHIP
As of June 10, 1999, P.R.O. has agreements with 12 Distributors
nationwide to facilitate the sales of packages of golf instruction into the
corporate market (called the Premium Links program). P.R.O. intends to continue
to establish a network of Distributor Members in defined geographical locations.
These Distributors have non-exclusive marketing rights to P.R.O.'s Premium Links
programs within their territory. P.R.O. has identified 100 territories. For the
marketing rights to these programs, the Distributor pays a one-time fee of
$25,000 which entitles the Distributor to an extensive training as well as the
programs, products, and services that P.R.O. has created with a rolling
commission schedule of up to 25% payable to the Distributor on the sale of
Premium Links programs. As of December 31, 1998, P.R.O. had received deposits
from four Distributors totaling $115,000. As of June 10, 1999, P.R.O. had
received the $25,000 fee from all 12 of the Distributors. The fees have been
accounted for as deferred revenue on P.R.O.'s financial statements.
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PRODUCT SALES
In addition to golf instruction services, P.R.O. sells its own line of
golf instructional videos, books and training aids. A key component of P.R.O.'s
strategy for growth is to expand into marketing of golf-related products for
independent manufacturers. On July 21, 1998, P.R.O. signed a one-year
distributor agreement with Renaissance Golf Products Inc. granting P.R.O.
non-exclusive distribution rights to the FILA line of golf goods including but
not limited to golf clubs, bags, balls, gloves, head wear, head covers, travel
cases, umbrellas, and towels (the "FILA Agreement"). Under the FILA Agreement,
P.R.O. has non-exclusive distribution rights in connection with its Destination
Golf Schools, Learning Centers and certified instructors, as well as the rights
to appoint sub-distributors at such facilities. P.R.O. does not intend to renew
the FILA Agreement. P.R.O. is also a non-exclusive distributor of golf clubs
manufactured by Dimension Z Golf.
In addition, P.R.O. will be utilizing the Slazenger(R) Fitting System
at P.R.O. facilities for the purposes of distributing custom fit putters to
P.R.O. students. The Company proposes to have the equipment for this custom club
fitting at all Destination Golf Schools and Learning Center locations. A portion
of the net proceeds from the Company's initial public offering has been
allocated for this type of equipment as well as an inventory of the items
mentioned in the preceding paragraph.
GOLF COURSE DEVELOPMENT AND MANAGEMENT STRATEGY
A key component of the Company's expansion strategy is to enter into
the business of developing and managing golf facilities, such as courses and
driving ranges. In addition to receiving management fees at any such facilities,
the Company may be able to locate Destination Golf Schools or Company-managed
Learning Centers at any such facilities. The Company, through PPI, is currently
in negotiation with the owner of one site who intends to develop a golf course
on that site, for management of the golf course.
The near-term plans for that site call for construction of a golf
practice facility first and later a golf course. The golf practice facility
would be more than the typical driving range. The proposal includes landing
areas for the range that resemble conditions typically found on a golf course,
chipping greens, and putting greens. Approximately $1,000,000 of the net
proceeds from the Company's initial public offering has been allocated for this
project. As of June 22, 1999, the Company does not have a signed agreement with
the owner of the site and the approvals necessary from local authorities for the
proposed facility construction.
There can be no assurance that the Company will be successful in its
negotiations relative to this site or any future sites, or, if successful, when
such sites will become operational. The golf course development and management
business involves significantly greater capital requirements than the Company's
current instruction and product marketing lines of business. There can be no
assurance that such capital will be available to the Company at all, at an
acceptable cost or on a basis that is timely relative to the schedules of
particular projects. If the Company is unable to raise capital, through debt or
equity markets, at appropriate times and acceptable costs, the Company may be
unable to take advantage of any available development and management
opportunities. If the Company is able to raise capital, shareholders may suffer
dilution of their ownership.
INTERNATIONAL OPERATIONS
On May 6, 1997, P.R.O. signed a five-year agreement with Sunkyong
U.S.A. (the "Sunkyong Agreement"), under which Sunkyong U.S.A. agreed to
represent P.R.O. in the Republic of Korea ("South Korea") on an exclusive basis
and to provide introductions to parties on a non-exclusive basis throughout the
Pacific Rim relating to product sales, Learning Center franchises and
Destination Golf School opportunities at sites in the Pacific Rim. Details with
respect to each site and fees to be paid to Sunkyong U.S.A. are to be negotiated
on a site-by-site basis. The Sunkyong Agreement provides that Sunkyong U.S.A.
has the option to purchase up to 10,000 shares of P.R.O. common stock at a price
of $5.00 per share for each Destination Golf School site, up to 32 sites in
total. Sites are subject to Company approval. If all 32 sites are opened within
the 5-year term of the Sunkyong Agreement, the Company may be obligated to issue
320,000 additional shares of common stock. P.R.O. intends to contract with other
companies to introduce
7
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additional products to Sunkyong U.S.A. for them to identify potential marketers
of such products. Several companies have already communicated to the Company
their desire to access distribution in the Pacific Rim.
However, due to the current business and financial conditions in Asia
generally and South Korea in particular, the Company has done no significant
business to date under the Sunkyong Agreement, and expects to do no significant
business under that agreement until such time as Asian business and financial
conditions improve. No assurance can be given as to when that recovery will
occur or that P.R.O. will have any significant operations in Asia in the
foreseeable future.
MARKETING
P.R.O. markets its products and services primarily through advertising
campaigns in various media. To date, P.R.O. has had a limited marketing budget.
A key component of P.R.O.'s strategy is to use a portion of the proceeds from
the Company's initial public offering (approximately $1,000,000) for an expanded
advertising campaign to stimulate additional awareness and recognition of P.R.O.
and its services and products. P.R.O.'s marketing department has conducted
research on the circulation, reader characteristics, and editorial content of
various golf publications. P.R.O.'s advertising and article placement strategy
is intended to provide national exposure, credibility and demand in the golf
market. P.R.O.'s marketing strategy is planned to be broad based, combining
advertising in golf publications, such as Golf Digest, with cross-over
advertising in other media intended to reach targeted demographic and
psychographic groups. These media include high-end business and travel
publications as well as electronic media. P.R.O. currently advertises in the
Ambassador, an in-flight magazine on all TWA flights, as well as the America
West in flight magazine nationwide. Management intends to use proceeds from the
Company's offering for larger ads running for consecutive months to establish
some degree of name recognition with its targeted audience. The Company has also
purchased time on The Golf Channel to air a one-minute advertisement narrated by
nationally recognized golf personality Ben Wright. In addition, the Company
hopes to take advantage of the marketing efforts of Renaissance, FILA, Dimension
Z, Slazenger and the operators of its Destination Golf School sites, as well as
any future strategic alliances to expose P.R.O. to a wider audience at no cost
to the Company.
A part of P.R.O.'s marketing execution strategy is to contact
publications with articles of interest to the golfing public. As an example, the
February 1997 issue of Golf Illustrated featured an article on the "Player's
Edge" Instructional System, including the mental and physical programs, by Dave
Bisbee, the Executive Director of P.R.O.
The Company believes that, historically, recreational golfers have
accepted and adopted ideas used on the professional golf tours. The Company
intends to market its schools by keying on the physical and mental components of
its curriculum in conjunction with the widespread use of fitness vans that now
travel with the PGA Tour and the fact that many PGA Tour professionals now use
sports psychologists as part of their normal preparation. In addition, P.R.O. is
currently in discussion with a number of PGA Tour professionals to find one or
more spokesmen for the Company. There can be no assurance that the Company will
be able to engage a PGA Tour professional to act as a spokesman. In addition,
the Company expects that engaging a PGA Tour professional would involve
significant compensation to such individual, in the form of cash, stock,
options, or other compensation.
One target of P.R.O.'s marketing efforts relating to its Destination
Golf Schools is executive training programs for the corporate market. P.R.O. has
created incentive packages for corporations to reward performance, entertain
clients or as incentives for sales projects. P.R.O. has conducted 30 such
programs to date, with an average attendance of 10 people. P.R.O. marketing
staff attempts to make direct contact with the corporate market through
advertising in trade journals, appearances at trade shows, and telephone calls.
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INTELLECTUAL PROPERTY
The Company owns the registered trademarks P.R.O., Proformance Research
Organization, CGT and CGTA. While the Company has licensed the rights to use
Player's Edge, Mental Edge, and P.A.R. System, which are registered trademarks
owned by Dave Bisbee and Sports Solutions, Inc., the Company emphasizes the
"P.R.O." trademark on its line of instructional video tapes and booklets tied to
the curriculum taught at its Destination Golf Schools and learning Centers. See
"ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Sports Solutions,
Inc. License" and "- Dave Bisbee Distribution Agreement."
COMPETITION
The golf instruction market is highly fragmented, with lessons
available at a vast number of local golf courses, driving ranges and golf shops,
as well as a large number of destination golf schools. The Company's Destination
Golf Schools and Learning Centers compete with all of these sources of golf
instruction. Shaw Guides, an Internet travel information source that compiles
golf instruction facilities lists hundreds of different sources of golf
instruction in the U.S. Many of the local sites with which P.R.O.'s schools
compete have greater local name recognition and resources than the Company.
P.R.O.'s Destination Golf Schools compete with several destination golf schools
operated throughout the U.S., including John Jacobs Golf Schools, David
Leadbetter Golf Academy, Nicklaus/Flick Game Improvement, Arnold Palmer Golf
Academy and Golf Digest Schools. Many of the schools with which the Company's
Destination Golf Schools compete have greater resources, a larger number of
sites, more prestigious locations or affiliations with well-known and respected
golfers or golf instructors than the Company. For example, John Jacobs Golf
Schools has 30 schools and Golf Digest Schools offer instruction at 15 sites.
While the Company's management believes that the Company's program is unique in
its emphasis on the mental approach to golf and its emphasis on physical
conditioning, there can be no assurances that the Company will be able to
compete in the marketplace.
EMPLOYEES
As of May 1, 1999, the Company had 22 full-time and 4 part-time
employees. None of the Company's employees is represented by a labor union. The
Company believes that its relationship with its employees is good.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases approximately 6,200 square feet of space for
administrative, office, and marketing functions in Denver, Colorado, through
September 30, 1999. The Company's rent is currently approximately $2,500 per
month. The Company believes that this property will be sufficient to meet its
needs for the duration of the lease.
ITEM 3. LEGAL PROCEEDINGS.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
9
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of June 22, 1999, no public market exists for the Company's shares.
As of June 15, 1999, there were 194 record holders of the Company's
Common Stock, including shares held by the Company as treasury shares.
During the last two fiscal years, no cash dividends have been declared
on the Company's Common Stock.
RECENT SALES OF UNREGISTERED SECURITIES
During 1998, the Company has issued and sold the unregistered
securities as described below.
The Company issued 135,213 shares of Common Stock valued at $193,305 as
inducements for loan funds received to an employee of the Company and his family
members (all of whom are accredited investors), accredited investor customers of
the Global Financial Group, Inc., the underwriter of the Company's pending
public offering, and other accredited investors (some of whom are past or
present business associates of Company employees).
The Company issued 2,502 shares of Common Stock for services valued at
$3,578 to one individual.
The Company sold 378,700 shares of Series A Preferred Stock for
$541,000 in cash to accredited investor customers of Global Financial Group,
Inc. and other accredited investors (some of whom are past or present business
associates of Company employees or family members of Company employees).
The Company issued 70,000 shares of Series A Preferred Stock in payment
of debentures in the total amount of $100,000 to two individuals.
The Company issued 123,000 warrants to purchase Common Stock at $6.00
per share as inducements for making bridge loans to the Company to accredited
investor customers of Global Financial Group, Inc., a non-accredited business
associate of an employee, and a non-accredited investor who had made similar
types of investments in the past.
The sale and issuance of securities in the transactions described above
were deemed to be exempt from registration under the Securities Act by virtue of
Section 4(2). Appropriate legends were affixed to the stock certificates issued
in the above transactions. Similar legends were imposed in connection with any
subsequent sales of any such securities. The securities were offered and sold by
the Company without any underwriters, except for the Global Financial Group,
Inc. assistance noted above. All of the purchasers were deemed to be
sophisticated with respect to an investment in securities of the Company by
virtue of their financial condition and/or relationship to members of management
of the Company. For sales made with the assistance of Global Financial Group,
Inc., Global was paid a cash sales commission of 10% of the cash consideration
received by the Company and warrants to purchase Common Stock. These warrants
were later returned to the Company by Global for cancellation.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW
P.R.O. provides golf instruction through three primary avenues - golf
schools located at resorts, to which students generally travel for intensive 2-4
day programs ("Destination Golf Schools"), learning centers designed to cater
primarily to local clientele for hourly lessons ("Learning Centers"), and
training of golf instructors for teaching certification. P.R.O. currently has
nine Destination Golf Schools under contract for full or partial year operation,
and
10
<PAGE>
is currently operating one Learning Center. The Company expected to be financed
in January of 1998 and the delay in financing created a cash-flow problem due to
the financial commitments that had been made to each of these facilities.
P.R.O. leases the facilities for its Destination Golf Schools at
existing golf courses or resorts, allowing P.R.O. to offer first rate golf
facilities at relatively low facilities cost and allowing P.R.O. to take
advantage of the course's or resort's marketing efforts, visibility and facility
quality. P.R.O. began operation of Destination Golf Schools at the locations and
dates indicated below: Mission Inn Golf & Tennis Club, Howey in the Hills,
Florida, February 1999; Haymaker, Steamboat Springs, Colorado, May 1999; Pole
Creek Golf Club, Winter Park, Colorado, April 1999; Wildfire Golf Course at
Desert Ridge ("Wildfire"), Phoenix, Arizona, September 1997; Carlton Oaks
Country Club, San Diego area, California, March 1998; Brooks Golf Club, Lake
Okoboji, Iowa, June 1998; Bardmoor Golf Club, St. Petersburg, Florida, January
1999; and Tucson National, Tucson, Arizona, March 1999. In addition, P.R.O.
began operation of a Learning Center at the Plum Creek Golf and Country Club,
Castle Rock, Colorado in June 1998.
P.R.O. is currently in negotiation to open additional Destination Golf
Schools in Myrtle Beach, South Carolina; Orlando, Florida; Palm Springs,
California; Aspen, Colorado; and San Francisco, California. Such negotiations,
however, are still in process and there is no assurance that any of these
locations will become P.R.O. instructional facilities.
P.R.O.'s Destination Golf Schools and Learning Centers have opened at
varying times over the past two years, and most of the Destination Golf Schools
are closed during local off-seasons. As a result of changes in the number of
facilities open from period to period, closing certain of the Destination Golf
Schools during local off-seasons, and overall seasonality of the golf business,
results of operations for any particular period may not be indicative of the
results of operations for any other period.
The Company has made a strategic decision to open several sites for its
Destination Golf Schools and Learning Centers, despite the fact that there are
significant one-time and recurring expenses associated with opening each site,
and despite the fact that its existing sites were not operating at capacity.
Originally, most site contracts for P.R.O.'s Destination Golf Schools
provided for a fixed amount of monthly rent. P.R.O. has subsequently negotiated
a per-student rent for six of its ten site contracts, reducing the Company's
fixed costs.
For each Destination Golf School and Learning Center, the Company hires
a site manager and a number of certified instructors based on anticipated
demand. The Company offers 6 levels of instructor certification. Site managers
are required to complete level 4 certification, and certified instructors are
required to complete level 2 certification. Although level 2 certification can
be achieved in a single session, level 4 certification requires at least one
additional session. The Company provides training for its site managers and
certified instructors at Company expense.
For a brief time, the Company marketed a line of books and related
products in the family self-help market, under the name Team Family(TM). The
Company discontinued that line of business in 1996, and devoted its full
resources to its current golf operations. The Company's audited financial
statements have been adjusted to exclude the effect of the discontinued
operations, and the Company's results of operations for the years ended December
31, 1997 and 1998 each include a loss of $3,063 related to the estimated loss on
the anticipated disposition of the assets related to the Team Family line of
business. See the Financial Statements and the Note entitled "Discontinued
Operations" in the Notes to the Financial Statements.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1998
TOTAL REVENUE. The Company had total revenue of $119,072 for the year
ended December 31, 1997, compared to $189,740 of total revenue for the year
ended December 31, 1998. The increase in total revenue was attributable
primarily to the increase in the number of Destination Golf School and Learning
Center sites operating in the 1998 period. During the first ten months of 1997,
the Company had one Destination Golf School - Keystone, Colorado - open for a
total of four months. During the year ended December 31, 1998, the Company had
several sites open during
11
<PAGE>
portions of that year: Wildfire (Phoenix); Carlton Oaks (San Diego area); Rhodes
Ranch (Las Vegas); Keystone; Brooks (Lake Okoboji); Huff House (Catskills);
Scottsdale Learning Center; and Plum Creek (Denver area) Learning Center.
COST OF REVENUE. Cost of revenues for the year ended December 31, 1997
was $95,545 or 80% of total revenue, compared to $353,268 or 186% of total
revenue for the year ended December 31, 1998. Cost of revenue consists primarily
of instructor salaries. The increase in cost of revenue as a percentage of total
revenue in 1998 was due primarily to hiring of instructors for the Company's new
sites, which operated below capacity. Opening of several sites was delayed, and
revenue at open sites was negatively impacted, by the effects of an unusually
wet winter in January, February and March 1998. See "Seasonality" below.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, consisting primarily of marketing and advertising
expenses, expenses associated with recruiting and training P.R.O.'s Destination
Golf School and Learning Center site managers and instructors, salaries for
administrative, sales and marketing staff, and rent at the Company's
headquarters, increased from $628,214 for the year ended December 31, 1997 to
$2,057,805 for the year ended December 31, 1998. The increase was due primarily
to expenses associated with recruiting and training instructors for the new
sites, expenses associated with opening the new sites and rent at the new sites,
and establishing its Distributor Membership program. The Company believes that
its long-term cost structure will be more advantageous with site rentals based
on fixed fees, and signed its new leases on this basis. However, the Company is
currently operating below capacity at all of its sites. The Company determined
to lower its short-term cost structure by negotiating a per-student rent for six
of its ten its summer sites. Although this decreases the Company's fixed costs,
if student volume is increased at the sites with per student rents, the
Company's costs could actually be higher at those sites than at sites with fixed
rents.
The Company made a strategic decision to renegotiate the rent at some
of its sites because the Company hopes to receive financing that will allow it
to engage in its planned advertising campaign by July 1999. Most of the fixed
rent sites are winter sites. The Company hopes that engaging in the planned
advertising campaign will allow volume at the fixed rent sites to be sufficient
to support the fixed fee rents. However, there can be no assurance that
financing will be received in time to engage in such advertising campaign in
time to achieve sufficient volume at these sites to offset the fixed fee rents,
or that such advertising campaign, if begun, will result in increased student
volume.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Results for the year ended December 31, 1997 reflect the operation of
the Keystone Destination Golf School for three months and the Wildfire
Destination Golf School for four months. Results for the year ended December 31,
1996 reflect the Company's live test of its instructor certification program to
produce data regarding its marketability and franchising methods. As a result of
the change in the nature of the Company's operations from period to period, the
comparison between the 1997 and 1996 periods may not necessarily be meaningful.
Total revenue for 1997 was $119,072 as compared to $188,455 for 1996.
Revenue in 1997 was derived primarily from the operation of P.R.O. Destination
Golf Schools at Keystone and Wildfire, for three and four months respectively.
Revenue in 1996 was derived primarily from the instructor certification program.
Cost of revenue was $95,545 or 80.2% of sales in 1997, compared to
$7,251 or 3.8% of sales in 1996. Cost of revenue in 1997 related to revenue from
Destination Golf Schools and consisted primarily of site rental fees and
instructor salaries. Cost of revenue in 1996 related primarily to revenue from
the instructor certification program, a classroom program which was conducted in
the Company's headquarters at no additional facilities cost. Costs of this
program were primarily instructor salaries and program materials.
Selling, general and administrative expenses consisted primarily of
marketing and advertising expenses, expenses associated with recruiting and
training P.R.O.'s Destination Golf School and Learning Center site managers and
instructors, salaries for administrative, sales and marketing staff, and rent at
the Company's headquarters. Selling, general and administrative expenses
increased to $678,214 in 1997 from $366,496 in 1996, an increase of 85%. These
expenses were greater in 1997 because the Company was in the process of
identifying sites for its Destination Golf
12
<PAGE>
Schools and Learning Centers, establishing sites, training staff for the new
sites, and advertising its new facilities. These start-up costs of establishing
these new facilities are incurred in advance of advertising the sites and
booking students into the sites. Having established an infrastructure for its
Destination Golf School and Learning Center operations, management believes that
the Company can now achieve economies of scale in certain of its operations, in
particular advertising, student bookings, and billing.
LIQUIDITY AND CAPITAL RESOURCES
The cash requirements of funding P.R.O.'s operations and expansion have
exceeded cash flow from operations. The Company has satisfied its capital needs
primarily through debt and equity financing. The Company continually explores
raising additional capital through such means. The Company has an agreement with
an entity controlled by a member of its Board of Directors under which such
entity will subscribe for any Shares not otherwise subscribed for in the
offering. See "ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Weiner
Subscription Agreement."
Of the Company's $189,413 in long-term indebtedness outstanding as of
December 31, 1998, $160,000 bears interest at a fixed rate of 12% and is due in
2002. Such indebtedness is convertible into Common Stock of the Company at a
rate of $1.43 per share. Such indebtedness may be prepaid by the Company upon 30
days' notice. The Company presently does not intend to call such indebtedness
for prepayment. The remainder of the Company's long-term indebtedness relates to
a note for an automobile which bears interest at the rate of 8.9% and is payable
in 42 monthly installments.
At December 31, 1998, short-term notes payable was $1,040,577. The
Company has allocated $550,000 of the proceeds from its initial public offering
for the repayment of short-term debt.
The proceeds from the Company's initial public offering have been
allocated primarily for expansion and growth types of purposes, such as site
development for a new golf practice facility, advertising, the costs of opening
new facilities, acquisitions, and product inventory. Only $550,000 has been
allocated for repayment of short-term debt and bridge loans. Accordingly, it
will become necessary for the Company's existing operations to be able to
generate enough cash to cover existing commitments and obligations, such as
lease rent for the facilities, instructors' salaries, and officers' salaries.
The Company is obligated, pursuant to a five-year employment agreement to pay
William D. Leary, the President of the Company, an annual salary of $120,000.
See "ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Leary Employment
Agreement."
The Company believes that the proceeds from its initial public
offering, in conjunction with its existing cash balances and anticipated cash
from operations, will be sufficient to meet the Company's current working
capital needs for at least the next twelve months. However, there can be no
assurance that the Company will not need to raise additional capital sooner,
particularly to take advantage of any expansion opportunities, not currently
anticipated, that may become available. In such event, there can be no assurance
that additional capital will be available at all, at an acceptable cost, or on a
basis that is timely to allow the Company to finance any such opportunities.
As stated in the auditors' report on the Financial Statements, the
Company incurred a net loss of $2,133,279 for the 1998 fiscal year, and at
December 31, 1998, its current liabilities exceeded current assets by $1,663,880
and its total liabilities exceeded total assets by $1,786,624. These factors,
among others, raise substantial doubt about the Company's ability to continue as
a going concern. See the Note entitled "Continuing Losses, Deficit in Equity and
Negative Working Capital" in the Notes to the Financial Statements.
SEASONALITY
Throughout much of the U.S., the golf business is seasonal, operating
primarily in the summer and additionally in the spring and fall. However, in
much of the Southern U.S., golf is played either year-round or all year except
for the summer. This is primarily due to an outdoor playing season limited by
inclement weather or excessive heat. The Company believes that business at its
Destination Golf Schools will be seasonal with increased activity in the winter
as students take winter vacations to warm weather destinations, and decreased
activity in the summer. In particular, the Company expects decreased revenues
from Destination Golf School operations in May and September each year. The
13
<PAGE>
Company closes down many of its warm weather sites in May, with the staff of
those sites moving to a summer site, and closes its summer sites in September
with the staff returning to their warm weather sites. In each case, there is
expected to be a one week lag between when one site closes and the other site
opens. For example, the Company's site manager and certified instructors for
Wildfire will generally move to Pole Creek or Haymaker for the summer and the
staff from Rhodes Ranch in Las Vegas will move to Lake Okoboji, Iowa for the
summer. Of the Company's nine current Destination Golf Schools, three facilities
will close during the summer (Phoenix, Tucson and Las Vegas), three will be open
only during the summer (Winter Park, Steamboat Springs and Lake Okoboji, Iowa),
and the remaining three will be open year-round (San Diego, St. Petersburg and
Orlando). Also, the Company's operations are subject to the effects of inclement
weather from time to time even during the seasons that they are open. In
particular, in January and February 1998, the Company's facility in Phoenix was
closed for an unusually high number of days and the opening of the Company's
facilities in San Diego and St. Petersburg were delayed due to the effects of El
Nino. The timing of any new facility openings, the seasons any such facilities
are open, the effects of unusual weather patterns and the seasons in which
students are inclined to attend golf schools are expected to cause the Company's
future results of operations to vary significantly from quarter to quarter.
Accordingly, period-to-period comparisons will not necessarily be meaningful and
should not be relied on as indicative of future results. In addition, the
Company's business and results of operations could be materially and adversely
affected by future weather patterns that cause its sites to be closed, either
for an unusually large number of days or on particular days on which the Company
had booked a special event or a large number of students. Because most of the
students at the Company's Destination Golf Schools attend the school on
vacation, the student may not be able to or interested in rescheduling
attendance at one of the Company's sites. As a result, student-days lost to
inclement weather may truly represent a loss, rather than merely a deferral, of
revenue.
IMPACT OF THE YEAR 2000
Management of the Company believes that it is prepared for Year 2000
problems. It has assessed its operational procedures. Reservations for the
Company's golf schools are generally made four to eight weeks ahead of time. A
student provides the Company with a credit card number for payment. The Company
processes the credit card payment. Immediately thereafter, the Company sends a
written confirmation of the reservation and payment to the student.
Approximately ten days before the attendance date, the Company sends another
confirmation/itinerary to the student. While software is used for reservation
processing, administrative operations, and certain banking operations such as
credit card processing, physical records of all of these functions are also kept
in individual student files and appropriate office files. The Company has been
informed by substantially all of its business application software suppliers
that their software is Year 2000 compliant. The Company is planning to maintain
additional physical records beginning in the fall of 1999 and continuing into
the first part of 2000 as a safeguard.
Accordingly, the Company expects that the advent of the millennium will
have only a minimal adverse effect on its business, operating results and
financial condition, due to additional physical record keeping efforts. However,
there can be no assurances that Year 2000 problems will not occur. The Year 2000
problem may affect other entities with which the Company transacts business or
on which students of its golf schools depend, such as airlines and hotels. While
the Company is unable to send questionnaires to each and every airline and hotel
that its students may use, the Company has been tracking the ability of the
airline and hotel industries to book reservations for the year 2000. Such
reservations are now being made. Published reports indicate that the
reservations are being made without problems. Accordingly, while the Company
cannot predict the effect of the Year 2000 problem on such entities or its
consequent impact on the Company, management believes that any adverse effect on
the Company will not be material.
ITEM 7. FINANCIAL STATEMENTS.
Please refer to the pages beginning with F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not Applicable.
14
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, their positions
and ages are as follows:
NAME AGE POSITIONS
William D. Leary 40 President, Treasurer and
Director
Robert B. Lange 72 Director
John C. Weiner 70 Director
The Company's bylaws provide for a Board of Directors ranging from 1 to
9 members, with the exact number to be specified by the Board. The number is
currently fixed at 3 directors. All directors hold office until the annual
meeting of stockholders next following their election, and until their
successors have been elected and qualified.
Officers serve at the discretion of the Board of Directors.
There are no family relationships between any directors or executive
officers of the Company. Directors of the Company receive no compensation to
date for their service as directors. Set forth below are brief descriptions of
recent employment and business experience of the Company's officers and
directors.
WILLIAM D. LEARY. From January 1993 until the present time, Mr. Leary
has been the President of the Company. From May 1986 until January 1993, Mr.
Leary was the President and CEO of the Innova Corporation, a golf distribution
company. Mr. Leary was employed as a linebacker by the Denver Broncos of the
National Football League from May 1983 to December 1984. From January 1985
through May 1986, Mr. Leary was rehabilitating from an injury that ended his
football career and was employed as a golf teaching professional in the United
States, Japan, Austria and Switzerland. Mr. Leary graduated with a B.S. in
general education from Mesa College, Grand Junction, Colorado in May 1983.
ROBERT B. LANGE. Mr. Lange has been a director of the Company since
1995. From 1955 to 1972, Mr. Lange was employed as President and CEO of Lange
Ski Boot. Mr. Lange sold Lange Ski Boot in 1970, and since that time has been
working as an independent consultant. Mr. Lange graduated with a BA degree in
Economics from Harvard University in the spring of 1949 and earned his MBA from
SMU in 1951.
JOHN C. WEINER. Mr. Weiner has been a director of the Company since
1995. Since 1982, Mr. Weiner has been Chairman of the Board of JCW Investments,
Inc. and JCW Ventures. From 1971 to 1982, Mr. Weiner was founder and President
of Trident Investment Management, Inc., a public and private pension and other
investment account management service. Mr. Weiner sold Trident Investment
Management to Pacific Inland Bancorp in 1982. From 1956 to 1969, Mr. Weiner was
employed by Moody's Investors Service, serving as President and Chief Executive
Officer from 1966 until 1969. Mr. Weiner studied engineering at Westminster
College and Yale University from 1945 to 1946; received a B.A. in pre-med and
finance from Ripon College in 1948; received a B.S. in finance and economics
from the University of Chicago in 1950; and studied finance at Northwestern
University from 1950 to 1952.
KEY EMPLOYEES AND CONSULTANTS
In addition to the foregoing directors and officers, the following
individuals are key employees of or consultants to the Company.
CHARLES "VIC" KLINE. Mr. Kline is a current and two-time Director of
the PGA. Mr. Kline is currently on the PGA Properties Committee of the PGA. He
is also a five-time Colorado PGA Section President and five-time Player
15
<PAGE>
of the Year. Mr. Kline is a past Colorado Open and Rocky Mountain Open champion.
Mr. Kline has agreed to join the Company's Board of Directors upon completion of
the offering.
DR. ART DICKINSON. Dr. Dickinson is a past Sports Medicine Supervisor
of the United States Olympic Team, and is a past department head and professor
of exercise physiology and biomechanics at the University of Colorado. His
professional associations include: Past President, Rocky Mountain Region,
College of Sports Medicine; National Football League.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
No directors, officers, or beneficial owners of more than ten percent
of securities of the Company reported to the Company any transactions involving
the securities during the fiscal year ended December 31, 1998. Accordingly,
there is no disclosure of any such transactions contained in this report.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information for the Chief Executive
Officer ("CEO") of the Company, William D. Leary. No disclosure need be provided
for any executive officer, other than the CEO, whose total annual salary and
bonus for the last completed fiscal year did not exceed $100,000. Accordingly,
no other executive officers of the Company are included in the table.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
SECURITIES
OTHER RESTRICTED UNDERLYING
NAME AND ANNUAL STOCK OP- ALL OTHER
PRINCIPAL COMPEN- AWARD(S) TIONS/SARS LTIP COMPEN-
POSITION YEAR SALARY($) BONUS($) SATION ($) ($) ($) PAYOUTS ($) SATION ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William D. 1998 60,000(1)<F1> -0- -0- -0- -0- -0- -0-
Leary 1997 -0- -0- -0- -0- -0- -0- -0-
<FN>
<F1>
(1) The Company and William D. Leary, an officer and director of the Company, entered into an Employment
Agreement dated July 1, 1998 (the "Employment Agreement"). The Employment Agreement is for a five-year
term and provides for salary to Mr. Leary in the amount of $120,000 annually. As of December 31, 1998, the
Company had not paid any salary to Mr. Leary. The compensation due to Mr. Leary, pursuant to the terms of
the Employment Agreement, of $60,000 has been treated as an accrued expense on the Company's financial
statements and offset against amounts owed to the Company by Mr. Leary. See "ITEM 12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
</FN>
</TABLE>
The Company does not have any employment contracts with any of its
officers or directors, except for Mr. Leary. See "ITEM 12. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS." Such persons are employed by the Company on an at
will basis, and the terms and conditions of employment are subject to change by
the Company. Mr. Leary, the Company's chief executive officer, was not granted
any stock options during the fiscal years ended December 31, 1998 or 1997. He
had no stock options at December 31, 1998.
The Company does not have any employment contracts with any of its
officers or directors, except for Mr. Leary. Such persons are employed by the
Company on an at will basis, and the terms and conditions of employment are
subject to change by the Company.
STOCK OPTION PLANS
The Company has no stock option plans.
16
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth certain information regarding ownership
by each officer and director, and all officers and directors as a group, as well
as all persons who own greater than 5% of the Company's outstanding shares, as
of June 15, 1999, and as adjusted to reflect the sale of shares offered by the
Company in its initial public offering, which as of June 22, 1999 had not
closed. The number of shares shown below reflects the conversion of Series A
Preferred Stock and Series B Preferred Stock into Common Stock .
<TABLE>
Percentage of Shares
Beneficially Owned (2)<F2> (3)<F3>
---------------------------------------------
Number of Shares Before After
Name of Beneficial Owner (1)<F1> Beneficially Owned Offering Offering
<S> <C> <C> <C>
William D. Leary (4)<F4>...................... 1,856,400 44.0% 35.6%
Leah Leary (5)<F5>............................ 946,200 22.4% 18.1%
William Childs (6)<F6>........................ 560,000 13.1% 10.6%
Louis G. Royston.............................. 231,940 5.5% 4.4%
Robert B. Lange .............................. 154,000 3.6% 2.9%
John C. Weiner (7)<F7>........................ 52,500 1.2% 1.0%
All executive officers and directors as a
group (3 persons) (7)<F7>(8)<F8>.............. 2,062,900 48.9% 35.6%
- ---------------
<FN>
<F1>
(1) To the Company's knowledge, except as set forth in the footnotes to this
table and subject to applicable community property laws, each person named
in the table has sole voting and investment power with respect to the
shares set forth opposite such person's name. The address of each of the
persons in this table is as follows: c/o Proformance Research Organization,
Inc., 5335 West 48th Avenue, Denver, Colorado 80212.
<F2>
(2) Where persons listed on this table have the right to obtain additional
shares of Common Stock through the exercise of outstanding options or
warrants or the conversion of convertible securities within 60 days from
June 15, 1999, these additional shares are deemed to be outstanding for the
purpose of computing the percentage of Common Stock owned by such persons,
but are not deemed to be outstanding for the purpose of computing the
percentage owned by any other person. Based on 4,220,661 shares of Common
Stock outstanding as of June 15, 1999, and 5,220,661 shares of Common Stock
outstanding after the Company's initial public offering.
<F3>
(3) Assumes no exercise of Placement Agent's over-allotment option in the
Company's initial public offering. If the over-allotment option is
exercised in full, the Company will sell an aggregate of 1,150,000 shares
of Common Stock in its initial public offering.
<F4>
(4) Includes 50,000 shares owned by Sean Leary and Keenan Leary, minor children
of William D. Leary and Leah Leary. Includes 896,200 shares owned by Leah
Leary, the wife of William D. Leary. William D. Leary has voting control
over the shares owned by Leah Leary pursuant to a Voting Trust Agreement.
<F5>
(5) Includes 50,000 shares owned by Sean Leary and Keenan Leary. Excludes
910,200 shares owned by William D. Leary. William D. Leary has voting
control over shares owned by Leah Leary pursuant to a Voting Trust
Agreement.
<F6>
(6) Includes 70,000 shares issuable upon conversion of a convertible debenture.
<F7>
(7) Assumes sale of no shares pursuant to the Weiner Subscription Agreement. Up
to 1,000,000 shares in the Company's initial public offering could be sold
pursuant to the Weiner Subscription Agreement. If all shares sold in the
initial public offering are sold pursuant to the Weiner Subscription
Agreement, John C. Weiner would beneficially own 1,052,500 shares, or 20.2%
of the shares outstanding, after the initial public offering.
17
<PAGE>
<F8>
(8) Includes 50,000 shares owned by Sean Leary and Keenan Leary and 896,200
shares owned by Leah Leary.
</FN>
</TABLE>
CHANGES OF CONTROL
The Company is not aware of any events which could result in a change
of control of the Company. In the event that no shares are sold in the Company's
offering and Mr. Weiner, pursuant to the terms of the Weiner Subscription
Agreement purchases the 1,000,000 shares offered, John C. Weiner would
beneficially own 1,052,500 shares, or 20.2% of the shares outstanding, after the
offering.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
WEINER SUBSCRIPTION AGREEMENT. On July 15, 1998, the Company entered
into a binding Subscription Agreement (the "Weiner Subscription Agreement") with
Proformance Research Organization/Weiner, Inc. and/or Vanguard 21st Century
Weiner Inc. ("PROW"). John C. Weiner is President and the sole shareholder of
PROW and is a director of the Company. Under the Weiner Subscription Agreement,
PROW agreed, on or before the final day of the Company's initial public
offering, to subscribe for and purchase at $5.00 per Share all Shares not
otherwise subject to subscriptions accepted by P.R.O. as of such date pursuant
to the initial public offering.
SHAREHOLDER LOANS. As of December 31, 1998, Greg Blaydes, a shareholder
of the Company, had advanced $13,048 in general and administrative expenses to
the Company.
SPORTS SOLUTIONS, INC. ("SSI") LICENSE. Dave Bisbee owns 50% of the
capital stock of SSI and is a key employee of the Company. In exchange for a
minimum of $10,000.00 per year of SSI services, P.R.O. originally had a
non-exclusive Licensing Agreement with SSI to represent the "Mental Edge(TM)"
video. Under its current arrangement, the Company purchases the videos as needed
from SSI at a wholesale price and resells them to its customers.
DAVE BISBEE DISTRIBUTION AGREEMENT. In addition, to the agreement with
SSI, P.R.O. has a Distribution Agreement with Dave Bisbee to sell products and
services produced by him including, but not limited to the "Player's Edge(TM)
Instructional Series" and the Instructor Certification Workbook/Learning Center
Business Plan for an indefinite period. Mr. Bisbee was issued 87,500 shares of
Common Stock of the Company in exchange for these exclusive world-wide
distribution rights.
LEARY EMPLOYMENT AGREEMENT. The Company and William D. Leary, an
officer and director of the Company, entered into an Employment Agreement dated
July 1, 1998 (the "Employment Agreement"). The Employment Agreement is for a
five-year term and provides for salary to Mr. Leary in the amount of $120,000
annually. Under the Employment Agreement, Mr. Leary is prohibited from competing
with the Company for a period of one year from the date of termination of Mr.
Leary's employment. A state court may determine not to enforce or only partially
enforce this non-compete provision. As of December 31, 1998, the Company owed
Mr. Leary $60,000 in accrued salary. The amount receivable from Mr. Leary has
been offset against this amount owed.
ADVANCES TO OFFICER. During 1997 and 1998, the Company advanced varying
amounts to William D. Leary, the President of the Company. The advances are
unsecured and have no set interest or repayment terms. As indicated in "ITEM 10.
EXECUTIVE COMPENSATION," Mr. Leary did not receive any compensation during 1997
and was owed $60,000 for compensation during 1998. The Company has offset the
compensation due to Mr. Leary against amounts owed to the Company by Mr. Leary.
The balance of these advances at December 31, 1997 was $40,300 and at December
31, 1998 was $60,165. These advances were made to enable Mr. Leary to cover
certain personal expenses. This loan shall be repaid by February 16, 2000.
18
<PAGE>
LOANS MADE BY GREG BLAYDES. From December 1997 through February 1998,
Greg Blaydes, the Director of Corporate Development for the Company loaned the
Company a total of $108,000. The loans were originally evidenced by promissory
notes which bore interest at 10% per annum. They were later converted into 12%
bonds, due 2002, which bear interest at 12% per annum and are convertible at the
holder's option into shares of Common Stock at $1.43 per share.
LOANS GUARANTEED BY WILLIAM D. LEARY. From June 15, 1998 through
October 19, 1998, the Company has borrowed a total of $290,000 from five
individuals, one of whom is Louis G. Royston, Jr., an employee. A total of
61,000 shares of Common Stock were issued as inducements for making the loans.
As of December 31, 1998, $30,000 was outstanding. All of the related promissory
notes have been personally guaranteed by William D. Leary and bear interest at
10% per annum. In the event of default by the Company, the debt defaults to Mr.
Leary, who then has 90 days to remit the balance. The Company has allocated
proceeds from its initial public offering to pay these loans.
The Company believes that with the exception of the advances made to
Mr. Leary, the terms of the above-described transactions were no less favorable
to the Company than would have been obtained from a nonaffiliated third party
for similar consideration. However, the Company lacked sufficient disinterested
independent directors to ratify all of the transactions at the time the
transactions were initiated. All ongoing and future transactions between the
Company and officers, directors or 5% shareholders will be made or entered into
on terms that are no less favorable to the Company than those that can be
obtained from unaffiliated third parties, and all such transactions (including
forgiveness of any loans) will be approved by a majority of the independent
members of the Company's board of directors who do not have an interest in the
transactions and who have access, at the Company's expense, to the Company's
independent legal counsel. The Company has agreed with certain state regulatory
authorities that so long as the Company's securities are registered in such
states, or one year from the date the Company's Prospectus for its initial
public offering, whichever is longer, the Company will not make loans to its
officers, directors, employees, or principal shareholders, except for loans made
in the ordinary course of business, such as travel advances, expense account
advances, relocation advances, or reasonable salary advances.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
(a) Exhibits:
<CAPTION>
REGULATION CONSECUTIVE
S-B NUMBER EXHIBIT PAGE NUMBER
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation (1)<F1> N/A
3.2 Bylaws (1)<F1> N/A
4.1 Reference is made to Exhibits 3.1 and 3.2 (1)<F1> N/A
10.1 Distribution Agreement between the Company and Dave Bisbee, dated N/A
August 22, 1996 (1)<F1>
10.2 Distribution Agreement between the Company and William D. Leary (1)<F1> N/A
10.3 Lease between Fernal Inc. and William D. Leary and the Company, dated N/A
May 1, 1997, as amended by an Addendum to Lease between Mach One
and World Associates, Inc. dated April 4, 1998 (1)<F1>
10.4 Common Stock Purchase Agreement with Proformance Research N/A
Organization/Weiner, Inc. dated July 15, 1998 (1)<F1>
10.5 Sublease dated April 21, 1998 between Mach One Corporation and N/A
Proformance Research Organization, Inc. (1)<F1>
19
<PAGE>
<CAPTION>
REGULATION CONSECUTIVE
S-B NUMBER EXHIBIT PAGE NUMBER
<S> <C> <C>
10.6 Employment Agreement between the Company and William D. Leary N/A
dated July 1, 1998 (1)
10.7 Consulting Services Agreement between Sunkyong U.S.A., Inc. and the N/A
Company dated May 6, 1997 (1)
10.8 Distribution Agreement between Renaissance Golf Products Inc. and the N/A
Company dated July 21, 1998 (1)
10.9 Amendment to Common Stock Purchase Agreement with Proformance N/A
Research Organization/Weiner, Inc. dated November 2, 1998 (1)
10.10 Form of Stock Escrow Agreement (1) N/A
27 Financial Data Schedule 39
- ----------------------------
<FN>
<F1>
(1) Incorporated by reference to the exhibits filed with the Registration
Statement on Form SB-2, File No. 333- 61533.
</FN>
</TABLE>
(b) The following reports on Form 8-K were filed during the last quarter of
the period covered by this report: NONE.
20
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
PROFORMANCE RESEARCH ORGANIZATION, INC.
Dated: June 24, 1999 By: /S/ WILLIAM D. LEARY
---------------------------------------
William D. Leary, President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
President, Treasurer and Director
(Principal Executive, Financial and
/s/ William D. Leary Accounting Officer) June 24, 1999
- ------------------------------------------------ --------------------
William D. Leary
/s/ Robert B. Lange Director June 24, 1999
- ------------------------------------------------ --------------------
Robert B. Lange
Director
- ------------------------------------------------
John C. Weiner
</TABLE>
21
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Proformance Research Organization, Inc.
We have audited the accompanying balance sheet of Proformance Research
Organization, Inc. (fka World Associates Inc.) as of December 31, 1998, and the
related statements of operations, stockholders' deficiency, and cash flows for
the years ended December 31, 1998 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Proformance Research
Organization, Inc. (fka World Associates Inc.) as of December 31, 1998, and the
results of its operations, and its cash flows for the years ended December 31,
1998 and 1997, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern.
As shown in the financial statements, the company incurred a net loss of
$2,133,279 for 1998 and has incurred substantial net losses for each of the past
five years. At December 31, 1998, current liabilities exceed current assets by
$1,663,880 and total liabilities exceed total assets by $1,786,624. These
factors, and the others discussed in Note "Continuing Losses, Deficit in Equity
and Negative Working Capital", raise substantial doubt about the company's
ability to continue as a going concern. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classification of liabilities that might be necessary
in the event the company cannot continue in existence.
/s/Stark Tinter & Associates, LLC
Stark Tinter & Associates, LLC
Englewood, Colorado
May 25, 1999
<PAGE>
Proformance Research Organization, Inc.
(fka World Associates Inc.)
Balance Sheet
December 31, 1998
ASSETS
Current assets
Cash $ 4,770
Due from employees 6,209
Note receivable 18,000
Deferred financing costs 96,653
-----------
Total current assets 125,632
Property and equipment - net of accumulated depreciation 68,482
Deferred offering costs 34,626
Other assets 4,663
-----------
$ 233,403
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Accounts payable and accrued expenses $ 484,970
Current portion of long term debt 7,077
Related party payable 18,524
Notes and bonds payable 265,000
Notes and bonds payable, related party 768,500
Deferred revenue and deposits payable 245,441
-----------
Total current liabilities 1,789,512
-----------
Long term debt
Notes and bonds payable 29,413
Bonds payable, related party 160,000
-----------
Total Long term debt 189,413
-----------
Other non-current liabilities
Net liabilities of discontinued operations 41,102
-----------
Commitments and contingencies
Stockholders' deficiency
Preferred stock, Series A, convertible,
cumulative, no stated value,
1,000,000 shares authorized, 857,850
shares issued and outstanding 1,225,500
Preferred stock, Series B, convertible,
cumulative, no stated value,
1,000,000 shares authorized, 648,200 issued
and outstanding 212,800
Common stock, no par value, 10,000,000 shares
authorized, 2,650,810 shares,
issued and outstanding 278,978
Accumulated deficit (3,503,902)
-----------
Total stockholders' deficiency (1,786,624)
-----------
$ 233,403
===========
See accompanying notes to financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
Proformance Research Organization, Inc.
(fka World Associates Inc.)
Statements of Operations
For the years ended December 31, 1998 and 1997
1998 1997
---------------- -------------
<S> <C> <C>
Revenue $ 189,740 $ 119,072
Cost of revenues 353,268 95,545
---------------- -------------
Gross (loss) profit (163,528) 23,527
---------------- -------------
Operating expenses
Sales, general and administrative 1,879,183 678,214
Depreciation 8,810 3,616
---------------- -------------
Total operating expenses 1,887,993 681,830
---------------- -------------
Operating (loss) (2,051,521) (658,303)
Interest expense 78,695 31,632
---------------- -------------
(Loss) from continuing operations (2,130,216) (689,935)
Discontinued operations
(Loss) from operations of Team Family segment,
estimated to be disposed of on or before
December 31, 1999 (3,063) (3,063)
---------------- -------------
Net (Loss) $ (2,133,279) $ (692,998)
================ =============
Per share information
Weighted average shares outstanding 939,287 868,188
================ =============
(Loss) per common share
(Loss) from continuing operations $ (2.27) $ (0.80)
(Loss) from discontinued operations NIL NIL
---------------- -------------
Net (loss) per common share $ (2.27) $ (0.80)
================ =============
</TABLE>
F-3
See accompanying notes to financial statements.
<PAGE>
<TABLE>
Proformance Research Organization, Inc.
(fka World Associates Inc.)
Statements of Stockholders' Deficiency
For the years ended December 31, 1998 and 1997
<CAPTION>
Preferred Stock Preferred Stock
Common Stock Series A Series B
-------------------- ----------------------- ------------------ Accumulated
Shares Amount Shares Amount Shares Amount Deficit Total
--------- -------- ------- ---------- ------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 890,693 $ 82,029 31,000 $ 155,000 135,000 $150,050 $(677,625) $(290,546)
Bonds converted to stock 20,800 104,000 20,000 25,000 129,000
Issuance of stock for cash 63,850 319,250 30,200 37,750 357,000
Stock issued in consideration
for loans received 1,071 11 11
Stock issued in consideration
for services rendered 5,500 55 1,250 6,250 6,305
Net (Loss) for 1997 (692,998) (692,998)
--------- -------- ------- ---------- ------- -------- ------------ ------------
Balance at December 31, 1997 897,534 82,095 116,900 584,500 185,200 212,800 (1,370,623) (491,228)
Issuance of stock for cash
at $5.00 per share 96,300 481,500 481,500
Stock issued in consideration
for loans received at
$4.00 per share 12,500 50,000 50,000
Conversion of shares upon
the Company's merge into
its wholly owned subsidiary 1,638,061 533,000 463,000 -
Issuance of stock for cash
at $1.43 per share 41,650 59,500 59,500
Debt converted to stock
at $1.43 per share 70,000 100,000 100,000
Stock issued in consideration
for loans received at
$1.43 per share 100,213 143,305 143,305
Stock issued in consideration
for services rendered at
$1.43 per share 2,502 3,578 3,578
Net (Loss) for 1998 (2,133,279) (2,133,279)
--------- -------- ------- ---------- ------- -------- ------------ ------------
Balance at December 31, 1998 2,650,810 $278,978 857,850 $1,225,500 648,200 $212,800 $(3,503,902) $(1,786,624)
========= ======== ======= ========== ======= ======== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
Proformance Research Organization, Inc.
(fka World Associates Inc.)
Statements of Cash Flows
For the years ended December 31, 1998 and 1997
1998 1997
----------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (2,133,279) $ (692,998)
Adjustments to reconcile net loss
to net cash (used in) operating
activities:
Depreciation and amortization 8,810 3,616
Changes in assets and liabilities:
(Increase) in due from employees (6,209) -
(Increase) in note receivable (18,000) -
(Increase) in deferred offering costs (34,626) -
(Increase) in due from officer - (37,796)
Decrease in prepaid expenses - 4,299
Decrease (increase) in other assets 505 (1,855)
Increase in accounts payable and accrued expenses 340,761 125,161
Increase (decrease) in related party payable 18,524 (1,364)
Increase in deferred revenue and deposits payable 234,330 11,111
(Decrease) in liabilities of discontinued operations (14,038) (17,836)
Total adjustments 530,057 85,336
----------------- --------------
Net cash (used in) operating activities (1,603,222) (607,662)
----------------- --------------
Cash flows from investing activities:
Purchase of fixed assets (59,411) (10,288)
----------------- --------------
Net cash (used in) investing activities (59,411) (10,288)
----------------- --------------
Cash flows from financing activities:
Proceeds from notes and bonds payable, related party 1,035,500 65,000
Payment on notes and bonds payable, related party (407,000) -
Common stock issued for inducements 96,653 -
Net proceeds from issuance of common stock - 65
Net proceeds from issuance of preferred stock series A 641,000 429,500
Net proceeds from issuance of preferred stock series B - 62,750
Proceeds from note and bonds payable 299,166 60,081
Payments on note and bonds payable (2,677) -
----------------- --------------
Net cash provided by financing activities 1,662,642 617,396
----------------- --------------
Net increase (decrease) in cash 9 (554)
Beginning - cash 4,761 5,315
----------------- --------------
Ending - cash $ 4,770 $ 4,761
================= ==============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
Proformance Research Organization, Inc.
(fka World Associates Inc.)
Statement of Cash Flows (continued)
For the years ended December 31, 1998 and 1997
Supplemental Cash Flow Information:
1998 1997
---------------- ----------------
<S> <C> <C>
Non-cash Financing activities excluded above-
Preferred Stock, Series A issued for consulting services - 6,000
Common Stock issued for consulting services 3,578 2,320
Common Stock issued as an inducement for notes payable 193,305 25
Preferred Stock, Series A issued for bonds payable converted - 104,000
Preferred Stock, Series B issued for bonds payable converted - 25,000
Notes payable, stockholder converted to bonds payable, stockholder - 50,000
</TABLE>
See accompanying notest to financial statements.
F-6
<PAGE>
Proformance Research Organization, Inc.
(fka World Associates Inc.)
Notes to Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The Company was incorporated in 1993 in Colorado under the name of World
Associates, Inc. The accompanying financial statements for the year ended
December 31, 1997 include the accounts of the Company and its wholly owned
subsidiary Proformance Research Organization, Inc. ("PRO"), a Delaware
corporation. All significant inter-company accounts and transactions have been
eliminated. On July 31, 1998, the Company merged into PRO, with PRO surviving
(see "Merger"), accordingly, these financial statements are not consolidated
after that date.
The Company conducts destination golf schools by contracting with existing
facilities to provide instruction. The Company also earns annual license fees
from distributors in exchange for certain non-exclusive rights.
Revenue recognition
Revenues are recognized in the period when the customer attends the golf school.
Revenues collected in advance of attendance are deferred. Selling and
promotional expenses are charged to expense as incurred. Revenue from license
fees collected pursuant to distributor agreements is deferred until the Company
fulfills all requirements of the agreement.
Depreciation
The cost of equipment is depreciated over the estimated useful lives (5 years)
of the related assets. Depreciation is computed on the straight-line method for
financial reporting purposes.
Use of estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions the affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the balance sheet date and
the reported amounts of revenues and expenses during the reporting periods.
The Company attempts to make reasonably dependable estimates. However,
uncertainties inherent in the estimation process, actual results could differ
from those estimates.
Net loss per share
The net loss per share amounts are based on the weighted average number of
common shares outstanding for the period. Potential common shares and the
computation of diluted earnings per share are not considered as their effect
would be anti-dilutive.
F-7
<PAGE>
Proformance Research Organization, Inc.
(fka World Associates Inc.)
Notes to Financial Statements
(continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Comprehensive loss
There were no items of comprehensive loss for the years ended December 31, 1998
and 1997, and thus net loss is equal to comprehensive loss for those years.
Reclassifications
Certain amounts in the 1997 financial statements have been reclassified to
conform to the 1998 presentation. Such reclassifications had no effect on net
loss as previously reported.
Product Concentration
The Company currently derives most of its revenues from destination golf
schools. The Company expects that these revenues will continue to account for
substantially all of the Company's revenues for the foreseeable future. As a
result, the Company's future operating results are dependent upon continued
market acceptance of destination golf schools and enhancements thereto. There
can be no assurance that these golf schools will achieve continued market
acceptance. A decline in demand for, or market acceptance of, destination golf
schools as a result of competition, technological change or other factors could
have a material adverse effect on the Company's business, operating results and
financial condition.
Fair value
Fair value estimates discussed herein are based upon certain market assumptions
and pertinent information available to management as of December 31, 1998. The
respective carrying value of certain on-balance- sheet financial instruments
approximate their fair values. These financial instruments include cash, notes
receivable, amounts due from and payable to related parties, accounts payable,
accrued expenses and notes and bonds payable. Fair values for their financial
instruments were assumed to approximate carrying values for these financial
instruments because they are short term in nature. The fair value of the
Company's long-term debt approximate its carrying value based on the current
rates offered to the Company for debt of the same remaining maturities.
F-8
<PAGE>
Proformance Research Organization, Inc.
(fka World Associates Inc.)
Notes to Financial Statements
(continued)
PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at cost, less accumulated
depreciation at December 31, 1998:
Furniture and fixtures $31,429
Leasehold improvements 2,353
Equipment 23,413
Vehicle 32,313
--------
89,508
Less: Accumulated depreciation 21,026
--------
Total $68,482
========
For the years ended December 31, 1998 and 1997, depreciation expense charged to
operations was $8,810 and $3,616, respectively.
MERGER
On July 31, 1998, the Company merged into PRO, its subsidiary, with PRO
surviving. On that date, each issued and outstanding share of the Company's
Series A Convertible Preferred Stock was converted into 3.5 shares of Series A
stock of PRO. Also, each issued and outstanding share of the Company's Series B
Convertible Preferred Stock was converted into 3.5 shares of Series B of PRO.
The Company's issued and outstanding Common Stock were converted into 2.8 shares
common stock of PRO. The currently issued and outstanding shares of PRO held by
the Company were cancelled at the effective time of merger.
LEASE OBLIGATION
The Company leases office space under an operating lease arrangement for $2,500
per month. The lease expires on September 30, 1999.
Minimum future lease payments required as of December 31, 1998 under this
non-cancelable operating lease is $30,000.
For the years ended December 31, 1998 and 1997, the amounts charged to
operations for rent expense were $54,086 and $29,088, respectively.
RELATED PARTY TRANSACTIONS
During 1998, the Company advanced various amounts to the president of the
Company. The balance of the advances at December 31, 1998 was $60,165. These
advances are not collateralized and have no set interest or repayment terms.
F-9
<PAGE>
Proformance Research Organization, Inc.
(fka World Associates Inc.)
Notes to Financial Statements
(continued)
RELATED PARTY TRANSACTIONS (CONTINUED)
The Company entered into an employment agreement for the position of President
and Chief Executive Officer on July 1, 1998. The agreement has a five-year term
which expires on June 30, 2003. The base compensation is a minimum of $120,000
per year to be paid on the first and fifteenth of each month. In addition to the
base compensation incentive compensation will be determined by the Compensation
Committee of the Board of Directors and begins on January 1, 1999. During the
term of employment and in the event of termination of employment the employee
cannot directly or indirectly own or manage a similar business within a four
hundred-mile radius. As of December 31, 1998 the Company has not paid any
salaries to this employee, therefore there is an accrued expense of $60,000. The
amount receivable from this officer has been offset against amounts owed.
As of December 31, 1998, the Company owes to a shareholder $13,048 in general
and administrative expenses paid for by the shareholder on behalf of the
Company.
On November 2, 1998 the Company entered into a Common Stock Purchase Agreement.
The agreement provides that the investor will purchase a number of shares of the
Company's common stock equal to the number of common shares not purchased in the
Registration Statement on Form SB-2 filed under the Securities Act of 1933 (see
"Subsequent Events").
NOTES AND BONDS PAYABLE
The following is a summary of notes payable at December 31, 1998:
SHORT-TERM:
8% promissory notes payable,
principal and interest due July
15, 1999, warrant inducements
(see "Stock Warrants"), unsecured $ 250,000
10% promissory note payable,
principal and interest due July 4,
1999, unsecured 10,000
12% convertible bonds payable,
interest payable semi-annually
(in default), convertible
at any time into Series A
Convertible Preferred Stock at
rate of $5 per share, annually
redeemable on the anniversary date
of issuance at the holders option,
unsecured 5,000
---------
$ 265,000
=========
F-10
<PAGE>
Proformance Research Organization, Inc.
(fka World Associates Inc.)
Notes to Financial Statements
(continued)
NOTES AND BONDS PAYABLE (CONTINUED)
The following is a summary of notes payable at December 31, 1998
(continued):
SHORT-TERM, RELATED PARTY:
12% convertible bonds payable
to stockholders, interest payable
semi-annually (currently in default),
convertible at any time into Series A
Convertible Preferred Stock at rate
of $5 per share, annually redeemable
on the anniversary date of issuance at
the holders option, unsecured $ 175,000
8% promissory notes payable to
stockholders, principal and interest
due within five business days of
first available proceeds from the
Company's public offering, common
stock and warrants inducements
(see "Subsequent Events",
"Stockholders' Equity" and "Stock
Warrants"), unsecured 390,000
10% promissory notes payable to
stockholders, principal and interest
due within five business days of
first available proceeds from the
Company's public offering, stock
inducements (see "Stockholders'
Equity"), unsecured 185,000
10% promissory notes payable
to employee, principal and interest
due April 30, 1999 and July 31,
1999, unsecured 18,500
---------
$ 768,500
=========
F-11
<PAGE>
Proformance Research Organization, Inc.
(fka World Associates Inc.)
Notes to Financial Statements
(continued)
NOTES AND BONDS PAYABLE (CONTINUED)
The following is a summary of notes payable at December 31, 1998
(continued):
LONG-TERM:
8.90% note payable, principal and
interest of $744 due in 42 monthly
installments beginning August 1998,
collateralized by vehicle $ 23,990
12% convertible bonds payable,
interest payable semi-annually (in
default), convertible at any time
into Series A Convertible Preferred
Stock at rate of $5 per share, annually
redeemable on the anniversary date of
issuance at the holders option, unsecured 12,500
--------
36,490
Less current portion 7,077
--------
$ 29,413
========
LONG-TERM, RELATED PARTY:
12% convertible bonds payable to
stockholders, interest payable semi-
annually (currently in default),
convertible at any time into Series A
Convertible Preferred Stock at rate of
$5 per share, annually redeemable on
the anniversary date of issuance at the
holders option, unsecured $ 160,000
=========
DEFERRED REVENUE AND DEPOSITS PAYABLE
During 1998, the Company entered into a number of distributorship agreements.
These agreements required that the distributor pay to the Company an agreed upon
annual license fee in exchange for a non-exclusive right to sell products
created by or manufactured for the Company in a designated territory, as well
as, training, materials and two-days of sales assistance. The Company collected
deposits of license fees in the amount of $115,000, however, recognition of this
revenue was deferred as all of the requirements of the agreement had not been
fulfilled as of December 31, 1998.
F-12
<PAGE>
Proformance Research Organization, Inc.
(fka World Associates Inc.)
Notes to Financial Statements
(continued)
STOCKHOLDERS' EQUITY
During 1997, the Company issued 1,071 shares of Common Stock as inducements for
loan funds received. Also, during 1997, the Company issued 5,500 shares of
Common Stock and 1,250 shares of Series A Convertible Preferred Stock ("Series
A") in exchange for consulting services rendered. The cost of the services has
been charged to operations.Prior to the Company's merger into its wholly owned
subsidiary (see "Merger"), the Company issued 96,300 shares of Series A at $5.00
per share for cash of $481,500.Also prior to the merger, the Company issued
12,500 shares of Common Stock for $4.00 per share as inducements for loan funds
received.Upon the merger taking place on July 31, 1998 (see "Merger"), the
Company issued 1,638,061 shares of Common Stock, 533,000 shares of Series A and
463,000 of Series B Convertible Preferred Stock ("Series B").During 1998, the
Company issued 41,650 shares of Series A at $1.43 for cash of $59,500. Also
during 1998, the Company converted $100,000 in debt to 70,000 shares of Series
A.
The Company also issued 100,213 shares of Common Stock at $1.43 per share as
inducements for loan funds received.
In addition during 1998, the Company issued 2,502 shares of Common Stock at
$1.43 per share for consulting services rendered. The cost of the services has
been charged to operations and stockholders' equity has been increased by
$3,578.
The Company's Series A and Series B have no voting rights and pay cumulative
dividends at the rate of 0.000492% per share of the Company's pre-tax profits
until such time as the holder shall have received $5 per share. Thereafter, the
dividend rate is 0.00005% of the Company's pre-tax profits. The dividend on the
Series B stock shall be junior in preference to the dividend payable on the
Series A stock and no dividends shall be paid on the Series B stock until the
dividend payable on the Series A stock shall have been declared and paid or a
sum sufficient for payment thereof set apart. There have been no dividends
accrued for 1998 or 1997.
Series A stock and Series B stock is convertible into one share of common stock
at any time at the option of the holder after the date of issuance. Series A
stock will be automatically converted into one share of common stock in February
1999, when the Company's offering document became effective.
F-13
<PAGE>
Proformance Research Organization, Inc.
(fka World Associates Inc.)
Notes to Financial Statements
(continued)
STOCK WARRANTS
As a loan inducement the Company has granted Common Stock Warrants during the
year ended 1998, at a rate of one warrant for each five dollars invested. The
exercise price of each warrant is $6.00 per share. The maximum term of the
warrant is five years. All of 123,000 warrants granted are fully vested.
The Company applies APB Opinion 25 in accounting for the stock compensation
plan. No compensation cost has been recognized for the year ended December 31,
1998. Had the Company elected to account for stock based compensation pursuant
to SFAS No. 123 "Accounting for Stock Based Compensation" net loss and earnings
per share would have been reduced as follows for the year ended December 31,
1998:
AS REPORTED PRO FORMA
Net loss ($2,133,279) ($2,168,452)
============ ============
Basic earnings per share ($2.27) ($2.31)
======= =======
For pro forma disclosures, the options' estimated fair value was amortized over
their expected 5 year life. The fair value for these options was estimated at
the date of grant using an option pricing model. The model requires the input of
highly subjective assumptions. In management's opinion, the existing models do
not provide a reliable single measure of the value of stock options. The
following weighted average assumptions were used to estimate the fair value of
these options: expected price volatility 352.85%, risk free interest rate 4.8%
and expected life of options 5 years.
Following is a summary of the status of the options during the period ended
December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
-------- ---------
<S> <C> <C>
Outstanding at January 1, 1998 - -
Granted 123,000 $6.00
Exercised - -
Forfeited - -
Outstanding at December 31, 1998 123,000 $6.00
======= =======
Options exercisable at December 31, 1998 123,000
=======
Weighted average fair value of options
granted during year $1.43
=====
</TABLE>
F-14
<PAGE>
Proformance Research Organization, Inc.
(fka World Associates Inc.)
Notes to Financial Statements
(continued)
STOCK WARRANTS (CONTINUED)
The status of all options outstanding at December 31, 1998 is 123,000 options
with an exercise price of $6.00, a weighted average remaining contractual life
of 5 years and a weighted average exercise price of $6.00. All of these options
are exercisable at December 31, 1998 at a weighted average exercise price of
$6.00.
DISCONTINUED OPERATIONS
On December 31, 1996, the company adopted a formal plan to dispose of the Team
Family segment of the business, a system of parenting and family development on
videotape and in a booklet. As of December 31, 1998 the disposal has not yet
been completed.
Net liabilities of discontinued operations consisted of the following at
December 31, 1998:
Accounts payable $ 934
Due to distributors 7,300
Short-term note payable 32,868
--------
$ 41,102
========
DESTINATION GOLF SCHOOL AGREEMENTS
The Company has agreements with golf courses located in Arizona, Colorado,
Florida and Nevada. In exchange for $110,000 in annual license fee expense and
other miscellaneous fees varying from course to course, the Company received
supplies, storage and access to golf facilities. The Company's golf school
revenues are generated from schools taught at these locations and these costs
are included in cost of revenues on the income statement.
DEFERRED FINANCING COSTS
During the year ended December 31, 1998, the Company recorded $96,653 in
deferred financing costs as an offset to the common stock issued as inducements
for loan funds received (see "Stockholders' Equity"). One half of the deferred
financing costs were expensed in 1998 and the remaining costs will be expensed
in 1999 in conjunction with the completion of the Initial Public Offering (see
"Subsequent Events" ).
DEFERRED OFFERING COSTS
During the year ended December 31, 1998, the Company incurred $34,626 in
professional fees which relate directly to the initial public offering currently
in process.
F-15
<PAGE>
Proformance Research Organization, Inc.
(fka World Associates Inc.)
Notes to Financial Statements
(continued)
YEAR 2000 COMPLIANCE
The Company has assessed its exposure to date sensitive computer software
programs that may not be operative subsequent to 1999 and has implemented a
requisite course of action to minimize Year 2000 risk and ensure that neither
significant costs nor disruption of normal business operations are encountered.
However, because there is no guarantee that all systems of outside vendors or
other entities affecting the Company's operations will be 2000 compliant, the
Company remains susceptible to consequences of the Year 2000 issue.
INCOME TAXES
Deferred income taxes may arise from temporary differences resulting from income
and expense items reported for financial accounting and tax purposes in
different periods. Deferred taxes are classified as current or non-current,
depending on the classifications of the assets and liabilities to which they
relate. Deferred taxes arising from temporary differences that are not related
to an asset or liability are classified as current or non-current depending on
the periods in which the temporary differences are expected to reverse.
The net operating loss carryforward as of December 31, 1998 is approximately
$3,500,000, which will expire through year 2018. The tax benefit of the loss
carryforward has been offset by a valuation allowance of the same amount. The
expected tax benefit that would result from applying federal statutory tax rates
to the pre-tax loss differs from amounts reported in the financial statements
because of the increase in the valuation allowance.
CONTINUING LOSSES, DEFICIT IN EQUITY AND NEGATIVE WORKING CAPITAL
The financial statements have been prepared in conformity with generally
accepted accounting principles, which contemplates continuation of the company
as a going concern. However, the Company has sustained substantial operating
losses in recent years. In addition, the Company has used substantial amounts of
working capital in its operations. Further, at December 31, 1998, current
liabilities exceeded current assets by $1,663,880 and total liabilities exceed
total assets by $1,786,624.
These circumstances raise substantial doubt about the Company's ability to
continue as a going concern. The ability of the Company to continue operations
as a going concern is dependent upon its success in (1) obtaining additional
capital; (2) paying its obligations timely; and (3) ultimately achieving
profitable operations. The financial statements do not include any adjustments
which might result from the outcome of these uncertainties.
The Company is in the process of completing an offering of common stock for sale
in a Public Offering (see "Subsequent Events"). Management believes this
offering will provide the opportunity to obtain additional capital.
F-16
<PAGE>
Proformance Research Organization, Inc.
(fka World Associates Inc.)
Notes to Financial Statements
(continued)
SUBSEQUENT EVENTS
The Company is in the Process of offering for sale 1,000,000 shares of common
stock in a registered public offering at a price of $5.00 per share. The
offering was deemed effective in February 1999 and is being sold on a best
efforts, all or none basis. Upon successful completion of the offering the
Company anticipates receiving approximately $4,250,000 in net proceeds.
Series A and Series B stock converted to Common Stock at a 1:1 ratio at the
effective date of this offering.
F-17
<PAGE>
Exhibit 27
Financial Data Schedule
28
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET, STATEMENTS OF OPERATIONS, STATEMENTS OF STOCKHOLDERS' DEFICIENCY,
STATEMENTS OF CASH FLOWS, AND THE NOTES THERETO, WHICH MAY BE FOUND ON PAGES F-1
THROUGH F-17 OF THE COMPANY'S FORM 10-KSB FOR THE PERIOD ENDED DECEMBER 31,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 4,770
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 125,632
<PP&E> 89,508
<DEPRECIATION> 21,026
<TOTAL-ASSETS> 233,403
<CURRENT-LIABILITIES> 1,789,512
<BONDS> 189,413
0
1,438,300
<COMMON> 278,978
<OTHER-SE> (3,503,902)
<TOTAL-LIABILITY-AND-EQUITY> 233,403
<SALES> 0
<TOTAL-REVENUES> 189,740
<CGS> 0
<TOTAL-COSTS> 353,268
<OTHER-EXPENSES> 1,887,993
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,695
<INCOME-PRETAX> (2,130,216)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,130,216)
<DISCONTINUED> (3,063)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,133,279)
<EPS-BASIC> (2.27)
<EPS-DILUTED> (2.27)
</TABLE>
