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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee required)
For the fiscal year ended December 31, 1997
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required)
For the transition period from to
Commission File No. 001-11935
BLACK ROCK GOLF CORPORATION
(Exact Name of registrant as specified in its charter)
DELAWARE 84-1336891
(State or other jurisdiction of IRS Employer
incorporation or organization) Identification No.)
6786 SOUTH REVERE PARKWAY, SUITE 150D,
ENGLEWOOD, COLORADO 80112
(Address of principal executive offices)
(303) 799-9901
(Issuer's Telephone Number, Including Area Code)
Securities Registered under Section 12(b) of the Exchange Act: NONE
Securities Registered Pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of Class)
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 such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B 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 the Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $6,884,110
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The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant based on the average of the closing bid and ask
price of the registrant's common stock as reported on the Nasdaq SmallCap Market
on March 18, 1998 was $819,502. Shares of common stock held by each officer,
director and each person who owns 5% or more of the outstanding common stock
have been excluded.
The number of shares outstanding of the registrant's Common Stock, $0.001 par
value, was 3,150,000 at March 18, 1998.
Documents incorporated by reference: None
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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FORWARD-LOOKING STATEMENTS
In addition to historical information, this discussion and analysis
contains forward-looking statements that are subject to risks and uncertainties
that could cause actual results to differ materially from those anticipated,
including but not limited to, (i) delays in the delivery of the Company's
products, (ii) infomercials and other marketing channels producing worse than
anticipated sales, and (iii) the risks and uncertainties described in reports
and other documents filed by the Company with the Securities and Exchange
Commission, including the Prospectus dated July 19, 1996 and the Company's
Registration Statement on Form SB-2 (No. 333-4890-D).
PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
The Company designs, develops and markets innovative, premium quality
golf clubs that together with instructional programs are intended to improve
golfers' scores. In response to public demand for longer hitting golf clubs, the
Company developed and introduced in February 1995 the Killer Bee(R) driver (the
"Killer Bee"), which as of January 1, 1998, is offered in extra length shafts of
45, 46, 47, 48, 49, and 50 inch. In August 1995, the Company introduced matching
3 and 7 fairway woods. The Company introduced its first titanium driver in
August 1996. In December 1996, the Company introduced the BeeLine(TM) line of
long-shafted putters. The first model in the BeeLine is the Mile-Hi. The Company
introduced the "Stinger" irons in March 1997. The irons range from 3 through 9
iron, pitching wedge, sand wedge, and lob wedge. Also during 1997, the Company
introduced a 5 wood and a 9 wood.
The Company retains a professional golf club designer, who together
with Professional Golf Association ("PGA") Senior Tour professional, Rocky
Thompson, and former PGA Tour professional, Jackson D. Rule, Jr., design and
test the Company's golf clubs. The Company's clubs are designed to improve the
game of both average and accomplished golfers. The Company's best selling club,
the Killer Bee, has a light, extra-long graphite shaft and oversized club head.
The increased length of the shaft helps generate greater club head speed in
order to increase driving distance. The overall light weight and head design of
the Killer Bee are engineered to assist golfers in maintaining accuracy, despite
the extra length of the Killer Bee. The 3, 5, 7 and 9 woods also have
extra-length graphite shafts and oversized club heads which are designed to
increase distance and maintain accuracy. In keeping with the Company's "niche"
of extra length clubs, the Stinger irons are also extra length and make the
transition from longer shafted woods to the irons easier for the golfer. The
Company believes that, for many players, the longer shaft BeeLine Mile-Hi putter
will prove to be easier to use and result in better putting performance.
The Company markets its products primarily through infomercials, direct
mailing, telemarketing and other direct marketing techniques. In 1995 the
Company developed a marketing and distribution system, ProShop Direct(SM),
whereby it sells golf clubs through pro shops and specialty retailers. The pro
shops and specialty retailers maintain the Company's clubs for demonstration by
prospective customers before purchasing. Customers then order the clubs directly
through the Company's 800 telephone number. The program appeals to participants
because they do not incur advertising and shipping costs and minimal investment
is required for inventory of the clubs.
The Company also markets golf accessories, including shirts, hats, golf
bags and umbrellas, to increase the awareness of the Company and its clubs.
The Company's strategy is to design, develop and market a range of
innovative, premium quality golf clubs that have distinctive performance
attributes, together with instructional systems. The Company pursues this
strategy by:
o Designing and developing premium quality clubs accompanied by
instructional systems sold at competitive prices.
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o Broadening its customer base through ProShop Direct, as well as
direct marketing techniques.
o Maintaining strong relationships with existing customers to enhance
marketing of new products.
o Monitoring growth segments within the golf industry and quickly
responding to potential market opportunities.
o Outsourcing various functions to third party experts to maintain
lower overhead.
INDUSTRY BACKGROUND
During 1997, gross retail sales of golf clubs in the United States were
estimated to be approximately $2.59 billion. In excess of 200 domestic and
international golf club manufacturers meet the equipment needs of the golfing
public. There are many manufacturers that market premium quality golf clubs
priced substantially higher than the Company's product line, and which have
earned a significant portion of market share. Approximately 15% of industry-wide
domestic golf equipment sales are made through pro shops located at golf
courses, with the remaining sales generated from off-site specialty stores,
general sporting good stores, catalogs and other marketing channels.
Over the past 30 years, golf club design and manufacturing processes
have evolved rapidly. Improved materials, technologies, testing and
manufacturing processes have resulted in new club designs that have been
successfully introduced to the marketplace. Some of the most significant product
innovations have featured graphite shafts, metal club heads and oversized club
heads, each of which is integrated into the Company's drivers and fairway woods.
A recent technological breakthrough has been the introduction of titanium alloys
in driver heads. Titanium heads are lighter and stronger than steel heads which
enables manufacturers to increase head size and lengthen the shaft of the club
without increasing the weight of the club.
It is widely recognized by golfers that longer clubs generate greater
club head speed and thus longer drives; however, historically, these longer
clubs were heavier and thus more difficult to control, thereby sacrificing
accuracy. Through the use of lighter materials, manufacturers have increased the
"standard" length of drivers from 43 inches to between 43 1/2 and 44 inches,
without increasing the weight of drivers. In 1995, several manufacturers
introduced 45 inch titanium head drivers and the Company introduced the 46 inch
and 48 inch Killer Bee drivers, which are respectively 2 and 4 inches longer
than traditional drivers. In 1996, a few manufacturers introduced 46 inch
drivers with very large titanium heads. The Company now offers the full line of
Killer Bee drivers in titanium and stainless steel.
In 1996, the industry transitioned from stainless steel drivers to
titanium drivers, the main advantage of titanium being that it is stronger and
lighter than steel. As a result, a club head can be made larger and lighter and
still remain strong enough to withstand the impact of hitting a golf ball. A few
major manufacturers have developed titanium irons, which they brought to market
in 1997. At this time, the Company does not have any plans for titanium irons.
The Company believes that titanium will continue to be an important material for
the golf industry, primarily in woods.
COMPANY BACKGROUND
The concept behind the Company was based on Rocky Thompson's success on
the PGA Senior Tour. Mr. Thompson, a 25-year veteran of the PGA Tour, was
recognized as one of the shortest drivers on the PGA Tour. After he began using
an extra-length driver in 1990, Mr. Thompson became one of the longer drivers on
the PGA Senior Tour, won three PGA Senior Tour events, led the PGA Senior Tour
in birdies for three years and earned more than $3,000,000 in official prize
money. Before switching to an extra- length driver, Mr. Thompson's 25 years on
the PGA tour generated less than $150,000 in prize money and his participation
in 611 PGA Tour events without a win.
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Extra-length drivers enable golfers to generate greater club head
speed, which in turn results in longer drives. The key to designing an
extra-length driver, that is also easy to control to help maintain accuracy, is
reducing overall club weight in both the head and the shaft. The Company
contracted with an independent professional club designer to work with Messrs.
Thompson and Rule in order to produce light, extra-length 45, 46, 47, 48, 49 and
50 inch drivers that both average and accomplished golfers could hit for extra
distance without sacrificing accuracy.
In addition to recognizing the importance of a premium performance golf
club, the Company also recognized that many golfers desire not only a club, but
also guidance on how a club can improve performance and score. As a result, the
Company developed its instructional system featuring Rocky Thompson's tips for
hitting longer and straighter drives. In response to some golfers' desire for
aesthetically pleasing clubs, the Company took great care in designing the
appearance of the Killer Bee, fairway woods, BeeLine putters and Stinger irons.
These clubs also are easily recognizable to promote greater awareness of the
Company and its clubs.
The Company believes that the Killer Bee drivers, fairway woods,
BeeLine putters and Stinger irons can capitalize on the popular trend towards
extra-length clubs through their innovative design, competitive prices and
marketing.
The Company's predecessor, Black Rock Ventures, LLC (the "LLC"),
operated as a Colorado limited liability company from its formation in June 1994
until it was reorganized into a Delaware corporation effective as of April 1,
1996. The Company was incorporated in February 1996.
OPERATING STRATEGY
The Company's strategy has evolved from 1996 through 1997 to place
primary emphasis on continued development of the consumer database through
direct marketing methods while recognizing the important role retailers play in
market penetration and inventory management.
Set forth below are several important elements of the Company's
business strategy which include designing innovative premium quality clubs,
effective marketing, understanding customers, identifying new market
opportunities, outsourcing certain functions and maintaining relationships with
quality suppliers.
Premium Quality Clubs; Competitive Pricing; Instructional Systems. The
Company focuses on designing and developing innovative, premium quality golf
clubs that are attractively designed and generally priced slightly below most
comparable clubs. The Company also provides customers with instructional systems
on how to effectively use the Company's clubs to help lower golf scores. See
"--Products and Pricing."
Effective Marketing. The Company markets its products through
distributors, infomercials, direct mail, telemarketing, catalog sales and print
advertising. The Company has developed a unique program to market its clubs,
ProShop Direct. ProShop Direct was designed to exploit potential market
opportunities through golf course pro shops and specialty retailers. See
"--Marketing and Sales."
Understanding Customers. The Company primarily sells its clubs directly
to consumers instead of through retailers; therefore, the Company focuses on
developing relationships with and understanding its customers so that the
Company can better serve the current and future golf equipment needs of these
existing customers. The Company attempts to achieve this end by accumulating
certain demographic data concerning its customers, including age, address,
frequency of playing golf, frequency of play on public and private courses,
handicap and driving distance. The Company believes that its customer list and
demographic data are critical elements that help the Company market additional
golf equipment and accessories in an efficient and cost effective manner, in
contrast to manufacturers which sell primarily to retailers and cannot readily
identify the ultimate consumer.
Monitor Golf Market and Recognize Demand. The Company's business
strategy emphasizes identifying and monitoring growth segments within the golf
industry and quickly responding to potential market opportunities by designing,
developing and marketing products intended to satisfy these growing segments. To
accomplish this
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end, the Company relies on its contacts on the PGA Senior Tour, the
approximately 2,200 golf pro shops and 900 specialty retailers which carry the
Company's clubs through ProShop Direct, and its customer demographic data.
Outsourcing; Focused Management; Low Overhead; Quality Suppliers. The
Company outsources several important functions, including club design, technical
support, infomercial media, general advertising, public relations, fulfillment
and shipping. During 1996, the Company outsourced assembly of clubs. During
1997, the Company started to assemble clubs in-house in order to better manage
the inventory. Through this approach, management of the Company is able to
devote more time to strategic planning and marketing. The core areas that the
Company currently performs in-house include customer service, inbound and
outbound telemarketing, commercial sales, media management, marketing
management, inventory management and accounting. See "--Manufacturing and
Assembling."
The Company's strategy also emphasizes establishing long-term
relationships with suppliers and contractors. The Company believes that
maintaining long-term relationships with high quality and reliable suppliers and
contractors will help produce premium quality golf clubs, bring the clubs to
market in a timely manner, and save money in the long term by not having to
regularly expend time, energy and money for finding and developing new
relationships with other suppliers and contractors. See "--Manufacturing and
Assembling."
PRODUCTS AND PRICING
The Company's current product line consists of extra-length drivers of
six different lengths in stainless steel and titanium heads, four extra-length
fairway woods in stainless steel heads, a line of long shafted putters, and
extra length irons which are premium quality clubs priced slightly below most of
the competition.
Killer Bee. During 1997, the Company continued to market its original
Killer Bee driver design. The Company believes that a key distinguishing feature
of the Killer Bee is that its extra-length graphite shaft and club head weigh
less than traditional drivers, increasing club head speed without sacrificing
control. In February 1997, the Company introduced the proprietary Bull Whip(TM)
shaft design coupled with the redesigned stainless steel and titanium driver
heads utilizing the Company's patent pending Parabolic Arch Reinforcement. The
Company believes that the Bull Whip technology incorporated into its proprietary
shaft design can increase club head speed up to 5% over the original Killer Bee
design. The Company also believes that its patent pending Parabolic Arch
Reinforcement head design reduces distortion at impact by stiffening the overall
structure of the head. The Company believes the Parabolic Arch Reinforcement
results in up to 5% increase in energy transfer at collision. In early 1998 the
Company expanded its line of Bull Whip Killer Bees to include 45, 46, 47, 48,
49, and 50 inch shafts with stainless steel or titanium heads. Titanium is
stronger and lighter than stainless steel as well as more expensive. Utilizing
titanium for golf club head design allows more flexibility in weight
distribution and the ability to make the club head larger while maintaining or
reducing weight. The Company believes titanium golf club heads will continue to
be an important product in the golf industry and, as a result, will continue
emphasis in marketing its oversize titanium Killer Bee drivers. The Bull Whip
Killer Bee drivers with stainless steel heads retail from $199.95 while the
titanium models retail from $299.95 for the 45 inch and 46 inch base models. In
1998, the Company introduced the "Progressive" program which provides the
existing customer base with a one time opportunity to buy up to a longer shaft
than they currently use at a 40% discount.
Fairway Woods. In August 1995, the Company introduced extra-length
fairway woods designed to complement the original Killer Bee drivers. The 3 wood
is equipped with a 44 inch shaft, the 5 wood has a 43 inch shaft, and the 7 wood
has a 42 inch shaft. The Company introduced a 41 inch shaft 9 wood during May of
1997 and a 43 inch shaft 5 wood in December of 1997. The Company believes that
the design of the 3, 5, 7, and 9 woods enables golfers to hit longer shots than
with conventional 3, 5, 7, and 9 woods. All four fairway woods incorporate
stainless steel heads with the Company's proprietary Bull Whip shaft design. The
fairway woods retail at $199.95 each.
BeeLine Long Putters. The long putter is a relatively new concept which
is being used to varying degrees on all of the major golf tours. However, the
concept has not been widely accepted among amateur golfers. The
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Company believes that there has been a gradual trend toward the use of
extra-length putters and that this trend has been slowed by the lack of
understanding and lack of guidance concerning the use of extra-length putters.
In response, the Company has introduced four extra-length putter designs under
the BeeLine name and a videotaped instructional "putting system" developed by
Rocky Thompson. In November 1996, the Company began marketing its first BeeLine
putter, the Mile-Hi, through infomercials. The other three models, Mighty Mel,
Rock-A-Long, and Rocky-T, are marketed through ProShop Direct. All three models
are available in 46, 48, 50, and 52 inch lengths and retail for $119.95. During
1998, the Company plans to introduce a standard length putter model.
Stinger Irons. The Company introduced a set of irons for the first time
in 1997. The "Stinger Irons" are extra length clubs in keeping with the
Company's philosophy. The Company expects that most of the sales from this
product will be generated from the existing customer base rather than to new
customers. These clubs are available in 3 through 9 irons and pitching, sand,
and lob wedges for a total of 10 clubs in the full set. The clubs began shipping
in March 1997 and are priced slightly below clubs of comparable quality. During
1998, the Company will introduce three new individual wedges at a retail price
of $59.95 each or $169.95 for all three.
Instructional Systems. The Company believes that providing golfers with
premium quality clubs is only part of the equation for improving golf
performance and lowering scores. The Company believes that golfers also desire
instructional systems designed to improve their games. As a result, the Company
has produced videotapes that feature PGA Senior Tour participant Rocky Thompson
and provide a "system" for hitting better drives. The Company has also produced
an instructional system for the putters. The Company's instructional systems are
included with the Company's clubs and are intended to give additional value to
the clubs.
MARKETING AND SALES
The Company's marketing efforts are twofold: Direct Marketing and
ProShop Sales.
Direct Marketing
Infomercials. An infomercial is a paid advertising television program
used in direct marketing campaigns. The Company's infomercials are approximately
28 minutes in length and consist of three separate 7.5-minute segments and three
2-minute commercials or "calls to action." In early 1996 the Company filmed an
infomercial featuring PGA Senior Tour and Ladies Tour participants Rocky
Thompson and Karen Weiss, former National Football League quarterbacks John
Brodie and Pat Haden, and former major league baseball players Rollie Fingers
and Randy Hundley. This infomercial demonstrates the use of the Killer Bee and
emphasizes the potential for longer distance by using the Company's clubs. The
infomercial also includes testimonials from satisfied customers and highlights
the clubs' distinctive features. This infomercial was first aired on April 13,
1996. In November 1996, the Company started airing the BeeLine Long Putter
infomercial with Rocky Thompson selling the 46, 48, 50 and 52 inch Mile-Hi
putting system. During February 1997, the Company started airing its infomercial
selling the Killer Bee titanium driver with the Bull Whip shaft technology. The
Company updates its infomercials periodically to keep them new and exciting. As
of February 1998, the Company introduced its Progressive Discount Program in its
newest infomercial, "License to Kill." All other infomercials are no longer
airing. The Company believes that the golfers' search for distance off the tee
and the offer of a 40% discount on the purchase of a second longer Killer Bee
driver will create a significant increase in initial sales and residual sales,
as well as create additional customers in its database.
The Company measures the return on its expenditures on infomercials
through the Media Efficiency Ratio ("MER"). MER is the generation of a specific
amount of sales for every $1.00 expended on media time. For example, the
Company's MER for the fiscal years ended December 31, 1997 and 1996 were .78 and
1.09, respectively. The Company's MER for each of the fiscal years ended
December 31, 1997 and 1996 was less than break even. The Company believes the
expanded distribution of its products at the Pro Shop and retail levels as well
as the expanded product offering contributed to the reductions in infomercial
sales and the associated MER. As a result, as of December 31, 1997, the Company
has expensed the cost of producing all infomercials. The Company's projected
break-even point for MER is 1.9, exclusive of general and administrative costs
as well as the cost to produce the infomercial. If the Company's break-even
point is achieved, the infomercial pays for itself and
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creates greater public awareness of the Company and its clubs, thereby
potentially increasing sales through other Company marketing channels and sales
of other Company clubs. The Company expects that the break-even point will not
be achieved and the infomercial will act as subsidized advertising.
During 1997 and 1996, infomercials generated approximately $1,316,000
(19%) and $2,577,000 (29%), respectively, of the Company's net revenues.
Direct Mail and Direct Response Print Ads. The Company maintains a
customer list that contains certain demographic data concerning its customers.
The Company intends to continue to directly market the Company's golf clubs and
accessories to its customers because this marketing technique is cost efficient
with low overhead and low variable costs. In addition, the Company believes that
this marketing technique is effective because it specifically targets existing
customers of the Company and not the general public. The Company runs direct
response ads in golf publications. These are generally full page, four color ads
directing the consumer to call the Company on its 800 number to place their
order. These marketing efforts produce less than 5% of total sales.
ProShop Direct. Some members of the golfing public consider responding
to an infomercial or other direct marketing technique directly. However, the
Company believes that a substantial number of golfers consider purchasing clubs
only after they have seen and used the clubs. In order to attract the latter
type of golfer, the Company implemented its ProShop Direct program which allows
potential customers to see, feel, and use the clubs. Approximately 2,200 golf
pro shops and 900 retailers (generally high-end public and semi-private
facilities and high volume driving ranges and practice facilities) carry the
Company's clubs for demonstration for club members and the general public. After
trying the clubs, the customer can order the clubs through the Company's
dedicated 800 telephone number and, generally within a few business days after
the order, receive the clubs. Because the customer has already seen and/or used
the clubs, no 30-day money-back guarantee is offered to customers who purchase
through ProShop Direct.
ProShop Direct is designed to appeal to pro shops and retailers because
they do not (i) incur advertising or shipping costs, (ii) require significant
investment in the clubs, (iii) lose sales because of lack of inventory, and (iv)
have their prices undercut because the clubs are sold at the same price as
offered on infomercials. In addition, golf pros and retailers have an
opportunity to earn commissions on sales through ProShop Direct and additional
commissions through direct add-on sales to customers who purchase additional
Company clubs through other marketing channels provided that the customer
originally purchased his first Company club through ProShop Direct. The benefits
to the Company include (i) earning a greater profit margin than through other
distribution channels, (ii) a lower rate of returned clubs because returns occur
solely from club defects, and (iii) additional exposure from being displayed at
pro shops and retailers. Currently, the Company has enlisted approximately 2,200
pro shops participating in ProShop Direct and continues to actively enlist
additional pro shops. The Company now services approximately 900 retail accounts
through the ProShop Direct sales organization. These accounts include such
catalog retailers as Edwin Watts, Golf Day and Golfsmith who actively inventory
the Company's products for resale.
During 1997 and 1996, the Company generated approximately $3,325,723
(48%) and $4,099,614 (46%) of net revenues, respectively, from ProShop Direct.
The Company intends to further develop and expand ProShop Direct by continuing
to enlist additional pro shops and retailers to join the program. The Company
has designated certain employees to provide sales and logistical support to pro
shops and retailers to increase sales through ProShop Direct. However, because
ProShop Direct is a relatively new marketing program and relies heavily on the
success of the Company's direct marketing programs to create consumer awareness,
the Company is uncertain of the level of sales that will be generated in the
future through ProShop Direct.
Other Marketing Efforts
Public Relations. The Company has contracted with a public relations
firm to increase the exposure of the Company's clubs and Rocky Thompson. Several
articles featuring the Killer Bee and Rocky Thompson have been published in
nationally distributed magazines, which the Company believes have helped
increase sales. The
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Company also believes that it derives substantial benefit from Rocky Thompson's
appearances playing with the Killer Bee and wearing "Killer Bee" apparel.
International Markets. The Company recognizes that there are
significant international opportunities for the marketing of its clubs. While
the Company has not expended substantial resources to penetrate these markets
because its focus is on the United States market, the Company estimates that it
generated approximately $323,000 and $411,000 of international sales during 1996
and 1997, respectively. The Company has developed distribution channels in
Canada, Sweden, Switzerland, Singapore, and Malaysia and is actively pursuing
distribution channels in additional foreign countries. Although the Company
believes that the international markets present additional sales opportunities,
there can be no assurance that the Company will be able to effectively penetrate
these markets. During the 4th quarter of 1997, the Company signed an exclusive
distribution agreement with American Business Consulting (ABC) of Japan, through
Big Mat Enterprises in California, for distribution rights in the Japanese
market. The Company believes there is a significant sales opportunity for 1998
and is currently negotiating the 1998 agreement. During 1997, ABC generated
approximately $170,000 of sales for the Company.
PRODUCT DESIGN AND DEVELOPMENT
The Company believes that producing innovative, premium quality golf
clubs is crucial to its success. To further this end, the Company has hired
management and consultants with considerable experience and expertise in the
sport of golf. Jackson D. Rule, Jr., Chairman of the Board, President and Chief
Executive Officer of the Company, participated on the PGA Tour for six years,
and still makes infrequent appearances on the PGA Senior Tour. Rocky Thompson, a
director of the Company and promoter of the Company's clubs, played 25 years on
the PGA Tour and has played on the PGA Senior Tour since 1989.
In order to maintain lower fixed costs, the Company does not perform
in-house research and development and instead works closely with an independent
professional club designer and a small group of high quality manufacturers and
suppliers to help develop components for the Company's new products. The design
process starts with the Company's management who generate ideas for new clubs
and then develop a general club design. The Company then provides the general
design to its independent professional club designer who possesses the expertise
required to formulate technical and aesthetic club specifications. After the
specifications have been prepared, the Company's management and the club
designer work in tandem with the Company's manufacturers and suppliers to make
any necessary design modifications to better ensure the proper manufacture of
the components and assembly of the clubs. After prototypes have been produced,
the independent designer tests the club structurally and functionally, together
with the Company's management. Based upon such testing, the designer and
management determine if any design modifications are necessary or if production
of the club is ready to commence.
The Company enjoys a good relationship with its independent
professional club designer. While the Company does not have a binding agreement
with the club designer, in the event that the Company's relationship with the
club designer terminates, the Company believes that its business and financial
condition would not be materially adversely affected because the Company
believes that it could find suitable replacements to provide technical design
expertise.
The Company's expenses for product design and development in 1997 and
1996 were approximately $24,000 and $39,000, respectively. The Company remains
focused on designing and developing new products that it believes are
competitive based upon a combination of factors, such as performance, ease of
use, aesthetic design and price.
MANUFACTURING AND ASSEMBLING
Like many of its competitors, the Company contracts out the manufacture
of the components of its clubs to reputable golf club manufacturers. The
Company's primary head manufacturer and sole shaft manufacturer are based in
Taiwan and Korea, respectively. The Company also has a secondary source
available for the supply of heads located in Taiwan and has commenced
discussions with alternative suppliers of heads and shafts. The
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Company believes that it could obtain its components from alternative foreign
and domestic head and shaft suppliers, although it might initially require
several months for such alternative suppliers to provide the Company with such
components.
Generally, the Company experiences an approximate 60 to 90 day lag
between the order and delivery of club heads and an approximately 30 day lag
between the order and delivery of club shafts. In the event that the Company
loses its present sources of supply or delivery of the components is materially
delayed beyond the 30-day period for club shafts, or the approximate 90 day
period for club heads, the Company would sustain at least a temporary shortage
of components or clubs, which could have a material adverse affect on the
Company's business and operating results. In order to mitigate the potential of
a material delay in supply and to respond to the potential for a significant
unanticipated increase in customer orders, the Company tracks inventory and
generally carries additional components to accommodate approximately one month
of sales. In addition, the Company must provide at least three months prior
notice to cancel any purchase orders. As of December 31, 1997, the Company had
noncancelable commitments to purchase approximately $118,000 of club components.
In June 1997, the Company moved the assembly of all product to its
facility in Englewood, Colorado. The Company hired experienced club builders and
feels it can produce the needed quantities of products to meet forecasted
demands.
The Company offers a 30-day money-back guarantee for all clubs sold
through direct marketing channels. When the customer has had an opportunity to
see or try the club prior to purchase, such as through ProShop Direct or a
purchase through a retailer, the clubs do not carry a 30-day money-back
guarantee. In addition, the Company offers a one-year manufacturer's defect
warranty on all clubs. The Company experiences some shaft breakage due to the
nature of composite graphite shaft tolerances. The Company repairs these clubs
at no cost to the customer while the club is under the one year manufacturer's
defect warranty. The Company uses only top quality graphite shafts and believes
the breakage to be within expectations. The Company's breakage remains at
approximately the industry average of 1.5%.
COMPETITION
The Company competes in the premium quality segment of the golf club
industry. The market for premium quality golf clubs is highly competitive. The
Company believes that it competes with over 100 domestic golf club equipment
companies. A number of established companies in this market have far greater
financial, marketing, manufacturing, assembly, personnel and other resources
than the Company, in addition to greater experience. The competition for
extra-length clubs is comprised of approximately 25 manufacturers of titanium
head, graphite shaft drivers and fairway woods. The Company believes that its
main competition for its premium quality extra-length metal woods are either
manufacturers of extra-length woods (generally made of titanium or graphite) or
traditional length metal woods and includes Callaway Golf Company, Taylor Made
Co., American Brands Inc. (Titleist, Cobra), Karsten Manufacturing Corporation
(Ping), Wilson Sporting Goods Company, Spalding and Evenflo Companies Inc., Skis
Rossignol (France) (Cleveland Golf), MacGregor Golf Company, Diawa Corporation
and Mizuno Corporation of America, and many other large, medium, and small-sized
golf equipment companies who market through various distribution channels. In
addition, the Company also faces competition from other direct marketers of golf
equipment and new companies that enter the market with new technologies,
materials, designs and marketing approaches.
The golf club industry has been generally characterized by rapid and
widespread imitation of popular golf club designs developed by new or existing
companies. Occasionally, new products with innovative designs meet with great
acceptance by the golfing public which, in turn, leads to unanticipated changes
in consumer preferences. Many purchasers of premium quality clubs desire
equipment that features the most recent and advanced technological innovations
and aesthetic designs. As a result, purchasing decisions are often a result of
highly subjective preferences which may be influenced by many factors, including
advertising, media, product endorsements and the use of clubs by popular touring
professionals. As a result, clubs that are popular for one season have no
assurance of maintaining their popularity.
8
<PAGE> 11
The Company is aware of substantial efforts being made by at least 25
companies to market extra-length titanium head drivers. The Company believes
that it can compete through the selection of niche products and its direct
marketing approach of infomercials and print ads, selling directly to the
customer and at the same time driving retail sales for its 2,200 pro shop and
900 retailer distributors. The Company's market share of the golf equipment
industry is less than 1% of the total U.S. domestic market, which was estimated
to be approximately $2.59 billion during 1997. The Company does not directly pay
any individual to endorse its products.
INTELLECTUAL PROPERTY
The Company is currently using the following marks which are registered
in the United States Patent and Trademark office ("USPTO"): Black Rock
Driver(R)(Registration No. 1,962,884, filed March 19, 1996), KILLER
BEE(R)(Registration No. 1,966,455, filed March 20, 1996), KILLER BEE and
Design(R)(Registration No. 1,997,989, filed September 3, 1996) and BULL
WHIP(R)(Registration No. 2,140,571, filed on December 17, 1996) as trademarks on
golf equipment and accessories. KILLER BEE and Design(R)is also used as a
trademark on golf clothing and accessories.
The Company has also filed registrations in the USPTO for the mark
BLACK ROCK as a trademark for golf equipment, clothing and accessories, and as a
service mark for the company. In September 1997, the USPTO served the Company
with an Office Action which did not recommend the BLACK ROCK marks for
registration based on a prior alleged similar mark. The Company has timely filed
a response to Office Action in the USPTO, and it is anticipated that the Company
will receive a response from the USPTO sometime in the second half of 1998.
The Company has filed an Intent-to-Use application with the USPTO for
MONGO DRIVER (Application No. 75/270002, filed April 7, 1997). The Company
received a "Notice of Allowance" from the USPTO for the MONGO DRIVER mark on
March 24, 1998. To continue with the registration of that mark, the Company will
have to file an Affidavit of Actual Use on MONGO DRIVER or an extension of time
on or before September 24, 1998.
The Company believes that these marks are gaining name recognition, and
will continue to gain additional recognition as more equipment is sold and the
names are seen more frequently by the public. The Company believes that the
marks are important in marketing and achieving visibility for the Company's
products.
In January 1997, the Company filed a patent application with the USPTO
for the infrastructure (the "Parabolic Arch Reinforcement") of its titanium and
stainless steel driver heads. The Parabolic Arch Reinforcement reinforces the
club head and makes it more rigid, which reduces the loss of energy at impact.
As of April 2, 1998, the patent is still pending.
SEASONALITY
The Company believes that its operating results will be affected by
seasonal demand for golf clubs, which would generate higher sales in the spring
and summer. In addition, the Company believes that it will generate a certain
amount of holiday season related sales during the fourth quarter. As a result,
sales and thus income from operations would be lowest in the first and fourth
quarters because fixed operating costs generally are spread throughout the year.
The Company plans to address the potential effects of seasonality by tracking
sales and orders and adjusting inventory needs for demand and the time of year.
EMPLOYEES
As of December 31, 1997, the Company had 26 full-time employees and 4
part-time employees. Management believes that its relations with its employees
are generally good. None of the Company's employees are represented by unions.
9
<PAGE> 12
ITEM 2. PROPERTIES
The Company entered into a three-year lease which expires June 30, 1999
for its principal executive offices in Englewood, Colorado. This facility, which
is located in the Denver metropolitan area, consists of approximately 14,000
square feet of space. The monthly rent throughout the term of the lease is
approximately $16,050.
In addition, the Company has subleased its previous principal executive
offices, which is an approximately 5,000 square foot facility in Englewood,
Colorado. This sublease terminates on November 30, 2000. The Company entered
into a five-year lease for this facility which expires December 31, 2000. The
Company has the option to terminate the lease as of December 31, 1998; however,
exercise of this option to terminate will result in the Company's forfeiture of
$10,000 of its security deposit. The current monthly rental payment for this
facility is approximately $4,000, and the lease requires annual increases in the
monthly rental payment of approximately 3.5% commencing each January. This
monthly rent is substantially the same as the sublease tenant pays the Company.
ITEM 3. LEGAL PROCEEDINGS
American Cable Advertising Litigation. On July 16, 1997, American Cable
Advertising, Inc. filed suit against the LLC in Texas state court. On or about
August 28, 1997, the Company removed the case to the United States District
Court for the Western District of Texas, San Antonio Division. The case is
styled as American Cable Advertising, Inc. v. Black Rock Ventures, L.L.C.,
SA97CA1097.
The dispute between the parties stems from a contractual agreement
wherein American Cable Advertising, Inc. ("ACA") procured media air time for the
Company's infomercials. ACA claims there are monies due and owing to it for
infomercials that were placed, but for which the Company has not paid. ACA
claims approximately $80,000 is due and owing. The Company asserted a
counterclaim for amounts it believes it overpaid to ACA. On its counterclaim,
the Company claims approximately $110,000 for reimbursement of excess monies it
paid to ACA.
The parties have held settlement discussions and it is presently
unclear whether this matter will be settled, or proceed in the litigation
process.
Merrill Corporation Litigation. On October 7, 1997, Merrill Corporation
("Merrill") filed suit against the Company in Arapahoe County District Court,
State of Colorado. The case is styled as Merrill Corporation v. Black Rock Golf
Corporation, 97 CV 2874, Division 4.
Merrill acted as the Company's financial printer in connection with the
initial public offering of the Company's common stock in 1996. At the conclusion
of the financial printing service, Merrill sent an invoice to the Company in the
approximate amount of $185,000. The Company did not pay the invoice on the basis
that Merrill provided the Company with a fixed fee bid for the project in the
amount of $70,000. The case is currently scheduled for trial on November 2,
1998.
The Company is a party, from time to time, in litigation incident to
its business. The Company is not aware of any current or pending litigation that
it believes will have a material adverse effect on the Company's results of
operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq SmallCap Market
under the symbol "BLRK" and the Boston Stock Exchange under the symbol "BLR."
The following table reflects the range of high and low bid prices for each
period indicated as reported by the Nasdaq SmallCap Market.
<TABLE>
<CAPTION>
CALENDAR YEAR 1996 High Low
---- ---
<S> <C> <C>
Third quarter (from July 19, 1996 through September 30, 1996) 7-1/2 3-1/4
Fourth quarter 4-3/4 1-1/8
CALENDAR YEAR 1997
First Quarter 4-1/4 1-3/8
Second Quarter 2-5/16 1-5/8
Third Quarter 2-1/8 5/8
Fourth Quarter 1-3/8 5/16
</TABLE>
The closing bid price of the Company's Common Stock as reported by the
Nasdaq SmallCap Market on March 18, 1998 was $0.38.
As of March 18, 1998 there were approximately 700 stockholders of
record of the Company's Common Stock, including shares held in street name by
various brokerage firms.
The Company has not, since inception, paid any dividends on its Common
Stock and the Company does not anticipate the payment of dividends on such stock
in the foreseeable future.
In October 1997, the Company issued debentures in the principal amount
of $200,000 to four of its existing stockholders, one of who is an executive
officer and director of the Company, at an annual interest rate of 10%. All
principal plus accrued interest is payable on the first to occur of (i) two
years after the date of the debenture, or (ii) on or within fifteen business
days after the date the Company receives proceeds from any public or private
sale of its securities after October 1997. These debentures are unsecured. In
conjunction with these debentures, 100,000 warrants were issued at an exercise
price exceeding fair market value at the date of issuance. The warrants entitle
the holders thereof to purchase 100,000 shares of common stock at $1.00 per
share for a period of five years commencing October 15, 1997. The warrants and
warrant shares may not be sold or transferred until October 16, 1998. The
warrants have not been exercised as of the date hereof. The Company entered into
revenue royalty agreements with the holders of the Company's $200,000 debentures
issued in October 1997. Each debenture holder is to receive .125% of the
Company's gross sales from its Jump Start to Golf product, for a total revenue
royalty payment of .5%. In each case, the issuance of securities by the Company
was undertaken pursuant to Section 4(2) of the Securities Act of 1933, as
amended.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information, this discussion and analysis
contains forward-looking statements. Such statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
anticipated, including but not limited to, (i) delays in the delivery of the
Company's products, (ii) infomercials and other marketing channels producing
worse than anticipated sales, and (iii) the risks and uncertainties described in
reports and other documents filed by the Company with the Securities and
Exchange Commission, including the Prospectus dated July 19, 1996 and the
Company's Registration Statement on Form SB-2 (No. 333-4890-D).
11
<PAGE> 14
RESULTS OF OPERATIONS
The net loss for the year ended December 31, 1997 was $2,666,175
compared to a net loss of $1,806,338 for the year ended December 31, 1996.
The most significant contribution to the 1997 net loss was the negative
impact on sales by the USGA ruling on March 7, 1997 concerning punchmarks and
grooves on the faces of the Company's drivers and fairway woods. On February 5,
1997, the Company was notified by the USGA of its intention to issue a letter
ruling deeming the Company's drivers and fairway woods did not conform to USGA
guidelines on punchmarks and groves on the club head face. On March 7, 1997, the
USGA ruling ("the USGA ruling ) was issued. This ruling was successfully
appealed and a decision in the Company's favor was rendered by the USGA
executive committee on April 11, 1997.
As a result of the USGA ruling, the Company returned approximately
10,000 driver, 3 and 7 wood club heads to its club head manufacturer for
modification to bring the club heads into conformity with the initial USGA
ruling. This caused an acute shortage of available conforming product for sale.
Also, distributors of the Company's products returned the non-conforming clubs.
Without modified conforming inventory available for sale until mid-April 1997,
retail distributorships did not commit their inventory dollars to the Company's
products during the February through April inventory restocking period for their
1997 golf club products.
Contributing to the net loss for the year ended December 31, 1997 was
the decline in sales produced from the Company's direct-response infomercial
advertising programs. The Company's primary objective for direct-response
infomercial advertising is to direct club sales to retail/green grass
distributorships. The 1997 infomercial sales per dollar of media cost was less
than realized in 1996 partially due, in management's belief, to the negative
impact of the USGA ruling. Management believes the golfing community has been
adequately notified of the Company's successful appeal of the USGA ruling, and
the original ruling will not have a material adverse impact on 1998 sales. The
selling season for the Company begins in early February and peaks in the early
summer months. While management believes the USGA ruling had a significant
negative effect on sales, that effect cannot be quantified.
The Company developed new model clubs for its 1997 selling season. As a
result of the new club designs for 1997, the Company had approximately 30,000
1996 model clubs in inventory at December 31, 1996. These clubs were sold as
close-out clubs in 1997 and produced approximately $1.4 million in sales with
associated cost of goods of approximately $1.3 million.
The significant contributions to the 1996 net loss were the negative
impact on sales by the late delivery of inventory of new product offerings and
much lower than expected sales from infomercials as a result of the increasing
popularity of titanium club heads. Deliveries of the Company's new clubs,
titanium drivers and the 3 wedge system, were approximately 30 to 45 days behind
schedule in 1996. This delay resulted in the Company missing an opportunity to
sell these clubs during the 1996 golf season in the northern part of the United
States. In addition, infomercial sales per dollar of media costs was lower than
realized in the past partially because the Company had other marketing channels
through which customers could purchase its products, namely, green grass pro
shops and specialty retail outlets.
Contributing to the net loss for the year ended December 31, 1996 was
the effect of the USGA ruling. As a result of the USGA ruling, distributors
returned non-conforming clubs producing a net loss of $52,000 (returned clubs
less cost of goods sold). In addition, the Company recorded a $64,000 reserve to
cover the costs of the USGA ruling and subsequent successful appeal, including
legal fees and repairing those clubs returned by customers to be modified for
conformance with the USGA ruling.
Revenues and expenses for the year ended December 31, 1997 were less
than revenues and expenses for the year ended December 31, 1996 because of (i)
the USGA rulings impact on sales, and (ii) the Company's efforts to reduce
expenses as a result of fewer sales, primarily through a reduction in
advertising expense.
12
<PAGE> 15
TWELVE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THE TWELVE MONTHS ENDED
DECEMBER 31, 1996
Net Sales
<TABLE>
<CAPTION>
Year Ended December 31 Increase/(Decrease)
--------------------------- ---------------------
Marketing Channel 1997 1996 Amount %
- ----------------------------- ----------- ----------- ------------- ----
<S> <C> <C> <C> <C>
Consumer Direct Response $ 3,146,961 $ 4,501,551 $(1,354,590) (30)%
ProShop Direct 1,922,394 4,099,614 (2,177,220) (53)%
ProShop Direct - Close-outs 1,403,329 -- 1,403,329 100%
International 411,426 323,014 88,412 27%
----------- ----------- ----------- ----
Total Net Sales $ 6,884,110 $ 8,924,179 $(2,040,069) (23)%
=========== =========== =========== ====
</TABLE>
Consumer Direct Response. Consumer sales is comprised of sales from
infomercials, print advertising, magazines and outbound telemarketing. The
Company experienced a media efficiency ratio ("MER"), infomercial net sales per
dollar of media cost, of .78 during 1997 compared to 1.09 in 1996. The reduced
MER was partially the result of the Company's competing for titanium driver
sales with manufacturers who introduced the titanium clubs to the marketplace
such as Callaway, Taylor Made and Cobra. Another negative impact to the MER was
the sale of the 30,000 close out clubs which resulted in distributors selling
these clubs for $99.95 each (steel headed drivers and fairway woods) while the
Company was selling the new titanium driver for $349.95. Net sales from
infomercials decreased approximately $1,261,000 in 1997, from $2,577,000 in 1996
to $1,316,000 in 1997. Due to the lower than expected MER in the first half of
1997, infomercial air time for the last half of 1997 was reduced to $457,000
compared to $911,000 for the same period in 1996. Sales from the remaining
marketing channels within the consumer group remained approximately at the same
level as in 1996.
ProShop Direct. Management believes the decrease in sales in 1997 for
the green grass and specialty retailers was caused by the USGA ruling. The
selling season for the green grass and specialty retail outlets begins in
February and peaks in early summer. Due to the initial USGA ruling, the Company
returned approximately 10,000 driver, 3 and 7 fairway wood club heads to its
manufacturer in Taiwan for modification to bring the club heads into conformity
with the initial USGA ruling. This caused an acute shortage of available
conforming product for sale. In addition, distributors of the Company's products
returned the clubs considered to be non-conforming. With only a minor quantity
of modified conforming inventory available for sale through mid-April 1997, the
retail distributorships could not commit their inventory dollars to the
Company's products during the February through April inventory restocking period
for new products. Retail customers who ordered the Company's products during and
shortly after the Orlando, Florida PGA show which was held in late January 1997,
became discouraged the Company could not fill the back order of clubs in a
timely manner and they starting canceling orders. The majority of the modified
products did not arrive at the Company's warehouse until the end of May 1997.
ProShop Direct - Close outs. In 1997, the Company redesigned its
product line incorporating its BULL WHIP(R)shaft coupled with the redesigned
stainless steel and titanium driver heads utilizing the Company's patent pending
Parabolic Arch Reinforcement. With the new club design, the Company had
remaining in inventory approximately 30,000 1996 model clubs. In 1997, the
Company sold substantially all of its remaining inventory of 1996 model clubs at
a substantial discount to various specialty retailers of close out clubs at a
margin of approximately 6%. The Company did not have close-out clubs for sale in
1996 because its club design for 1995 remained intact for 1996.
International. In September 1997, the Company signed a distributor
agreement with a California company for the sale of the Company's products in
Japan. The agreement expired on December 31, 1997 and is currently being
renegotiated with the distributor. There is no assurance of the outcome of the
negotiations. Sales during the agreement period amounted to approximately
$170,000. Management believes the USGA ruling also had a negative impact on
international sales. The Company's international distributors could not purchase
the modified products until May 1997 due to the non-availability of the
products. The international selling season coincides with that of the United
States as the vast majority of the Company's domestic sales are in the northern
hemisphere.
13
<PAGE> 16
All Marketing Channels. In April 1997, the Company added a full set of
irons, 3 iron through the lob wedge (10 club sets) to its product base. The
Company had net units sold, after returns, of approximately 500 units which
produced net sales of approximately $363,000. In late 1997, a 5 wood was added
to the Company's product line which the Company expects to produce increased
sales during 1998. Also, in November of 1996 the Company introduced its long
putter which added net units sold, after returns, of 3,675 during 1997 producing
net sales of approximately $337,000 compared to 381 units sold in 1996 for net
sales of approximately $45,000. In December 1997 the Company introduced its Jump
Start to Golf product, a product and instructional program designed to supplant
the first three lessons a beginning golfer would normally pay to a teaching golf
professional. This product did not initially meet the needed results for
continuance during the market test completed in December 1997. Additional
testing for its viability as a new product for sale by the Company will be
undertaken in 1998.
As in the past, the Company's driver, both titanium and steel headed,
continues to be the sales leader of products offered by the Company. During
1997, driver sales accounted for approximately 59% of total unit sales, fairway
woods were approximately 22%, long putters approximately 13% and the remaining
6% was for sales of iron sets and wedges.
Gross Profit Margin
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Net sales $6,884,110 $8,924,179
Cost of goods sold 3,850,945 3,702,663
---------- ----------
Gross profit margin $3,033,165 $5,221,516
========== ==========
% Gross profit margin 44% 59%
</TABLE>
Net sales for close-out clubs during 1997 amounted to $1,403,329 and
the associated cost of goods amounted to $1,316,832 which produced a gross
profit margin of approximately 6%. By excluding the net sales and cost of goods
sold for the close-out sales, the 1997 gross profit margin is $2,945,668 on
adjusted net sales of $5,479,781 producing a 54% gross profit margin. During the
fourth quarter of 1997, the Company was offering significant discounts, for the
purpose of generating cash, to its existing customer base which further eroded
the 1997 gross profit margin. The cost of the Company's titanium driver compared
to its sales price has also tended to reduce the Company's gross profit margin.
Advertising
<TABLE>
<CAPTION>
Year Ended December 31 Increase/(Decrease)
--------------------------- --------------------
Expense Category 1997 1996 Amount %
- --------------------------- ----------- ----------- ----------- ---
<S> <C> <C> <C> <C>
Infomercial air time $ 1,684,220 $ 2,373,479 $ (689,259) (29)%
Infomercial production cost 474,955 462,431 12,524 3%
Shipping and dubbing 55,025 144,897 (89,872) (62)%
Magazine and catalog
advertising 223,169 236,579 (13,410) (6)%
Direct mailers 289,562 540,976 (251,414) (46)%
----------- ----------- ----------- ----
Totals $ 2,726,931 $ 3,758,362 $(1,031,431) (27)%
=========== =========== =========== ====
</TABLE>
The Company experienced a lower than anticipated MER during the first
half of 1997, therefore, expenditures for infomercial air time in the last half
of 1997 was reduced to $457,000 compared to $911,000 in the last half of 1996.
The MER for 1997 was a .78 compared to a 1.09 MER in 1996. Management attributes
a portion of the reduced MER to the USGA ruling. Infomercial air time is
considered to be subsidized advertising in that the
14
<PAGE> 17
infomercial is intended to drive potential customers to the green grass and
specialty retail outlets after viewing the infomercial. There still is a
substantial number of infomercial viewers who will buy direct from the
infomercial due to the Company's implementing the four pay option which allows
the customer to spread payments for their purchase equally over a four month
period. Infomercial production costs for 1997 were approximately the same as the
expenditures incurred in 1996. In February 1996 the Company produced an
infomercial for its steel headed driver and in June a titanium driver
infomercial was produced. The titanium driver infomercial was produced due to
titanium club heads popularity in the golf club marketplace. In 1997 the Company
produced a titanium driver infomercial and the Jump Start to Golf infomercial.
In 1998, the Company has produced a driver infomercial that touts the longer
shafts and also encourages existing customers to buy into the progressive
program. Magazine and catalog advertising dollars remained essentially constant
for the years 1997 and 1996 because the Company utilized the same magazine and
catalog advertisers for both years.
The shipping and dubbing costs have a direct correlation to the number
of infomercials aired in the different venues (Golf Channel, Fox Sports
Southwest, etc.) and markets. In the latter part of 1997 the majority of the
infomercials were being aired over the Golf Channel where only one tape is
needed for national airing. The dubbing costs entail inserting a toll free 800
number on the tapes which relates to a specific venue, i.e., Golf Channel,
Sports Southwest, etc. Since the shipping portion of the tapes also directly
relates to the different venues airing the infomercials, the fewer the venues
the less cost for shipping and dubbing expenses.
During 1996 the Company utilized the services of an independent
advertising agency to compose, produce and distribute all of its direct mail
advertising pieces including the BUZZ, the Company's quarterly newsletter, and
other specific mailers to its customer base soliciting sales for the Company's
golf clubs. In 1997, the Company utilized an independent marketing contractor to
assist the Company in producing the direct mailing advertising pieces. During
1997, the Company utilized the BUZZ newsletter, issued on a quarterly basis, to
advertise to its customer base any new product offerings and other golf products
for sale by the Company. A portion of the savings in 1997 are attributed to the
independent contractor having lower overhead costs compared to that of the
larger advertising agency. Other efficiencies implemented by both the
independent contractor and the Company, such as shopping for reduced printing
costs from independent printing shops helped reduce costs in 1997.
Marketing
<TABLE>
<CAPTION>
Year Ended December 31 Increase/(Decrease)
----------------------- ------------------
Expense Category 1997 1996 Amount %
- ---------------- --------- --------- --------- -----
<S> <C> <C> <C> <C>
Marketing $ 103,643 $ 233,617 $(129,974) (56)%
========= ========= ========= =====
</TABLE>
During 1996, the Company utilized individual brochures of the Company's
products to solicit green grass pro shops to carry the Company's product line.
These brochures were composed and produced by an independent advertising agency.
The Company's ProShop Direct staff then inserted the various brochures into a
four colored packet and mailed to potential pro shop distributors. In 1997, the
Company discontinued producing individual brochures and instead developed a
marketing piece combined with a catalog of the Company's products including
pricing information. The new catalog was produced using an independent marketer
which substantially reduced the Company's marketing costs.
15
<PAGE> 18
Sales, General and Administrative Expense
<TABLE>
<CAPTION>
Year Ended December 31 Increase/(Decrease)
------------------------- ---------------------
Expense Category 1997 1996 Amount %
- -------------------------- ---------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Labor and related expenses $1,061,053 $ 907,152 $ 153,901 17%
Commissions 328,054 442,002 (113,948) (26)%
Credit card processing 84,527 151,502 (66,975) (44)%
Insurance 89,962 48,332 41,630 86%
Legal, accounting and
consulting fees 176,626 182,360 (5,734) (3)%
Rent 188,459 120,441 68,018 56%
Travel and entertainment 42,829 61,085 (18,256) (30)%
Inbound telemarketing 79,397 209,429 (130,032) (62)%
Postage/office supplies 71,392 96,244 (24,852) (26)%
Contract labor 96,038 39,710 56,328 142%
Telephone 57,285 75,070 (17,785) (24)%
Bad debts 109,858 162,065 (52,207) (32)%
Other selling, general and
administrative 321,952 402,354 (80,402) (20)%
---------- ---------- ---------- ----
Totals $2,707,432 $2,897,746 $ (190,314) (7)%
========== ========== ========== ====
</TABLE>
The labor and related expense increase in 1997 as compared to 1996 is
the result of adding executive officers, an MIS director and a national sales
manager to the staff after the first quarter of 1996. Also, in 1997 sales
representatives in the ProShop Direct department changed from a commission only
basis to a salary basis and commission. In January 1997, the Company hired a
Chief Operating Officer to fill a newly created position. In May 1997 an
executive officer of the Company resigned and in June 1997 the Company's media
director left the employment of the Company.
The reduced commission expense and credit card processing fees in 1997
as compared to 1996 are the direct result of the reduced sales in 1997. The
increase to insurance expense in 1997 is due to the Company having a full year
of officers and directors insurance versus six months of premiums in 1996. The
decrease in legal, accounting and consulting fees in 1997 as compared to 1996 is
due to a decrease in consulting fees for the design of the Company's golf clubs.
Rent expense increased in 1997 as compared to 1996 as a result of the Company
relocating its office/warehouse facilities from a 4,866 square foot facility to
a 14,083 square foot facility on July 1, 1996. The additional square footage was
needed for an expanded warehouse due to new product offerings and to house the
increase in the Company's staff. Travel and entertainment expense was reduced in
1997 as compared to 1996 primarily as a result of an overseas trip in 1996 by
the Company's design/quality control consultant and a Company officer for visits
to the Company's manufacturing contractors. The Company believes that similar
visits will only be needed every other year for reviewing quality control during
the manufacturing process.
The reduction for inbound telemarketing expense is the result of fewer
infomercials being aired in 1997 as compared to 1996. In addition, the Company
changed third party telemarketing firms in 1997. In 1996, the telemarketing firm
handled not only the sales calls generated from infomercials and magazine
advertising but also provided a substantial portion of the Company's fulfillment
process and customer service calls.
Postage and office supplies decreased in 1997 from 1996 primarily as a
result of the decreased overnight mailing costs associated with the Company's
initial public offering during 1996. In addition, the Company accomplished more
price comparison shopping for the purchase of its office supplies. Contract
labor during 1997 increased as a result of engaging outside software consultants
to assist the Company in generating improved management information systems and
to program the needed systems to enter the Company's internet web site to
enhance future sales through this medium. Telephone expenses decreased as a
result of the Company's connecting
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<PAGE> 19
directly to its long distance carrier versus connecting through the local
exchange company and having them connect long distance calls to the Company's
long distance carrier.
Bad debt expense decreased in 1997 from 1996 primarily due to fewer
sales generated by the green grass pro shop and specialty retail outlets. Other
expenses decreased primarily as a result of fewer promotional items needed to
attract potential retail distributors (e.g., one free club for every ten clubs
purchased) during 1997 since the retail customer base was already established in
1997 and was being built in 1996.
Depreciation and Amortization
<TABLE>
<CAPTION>
Year Ended December 31 Increase/(Decrease)
---------------------- -------------------
Expense Category 1997 1996 Amount %
- ------------------ -------- -------- -------- -----
<S> <C> <C> <C> <C>
Amortization $ 2,001 $ 41,062 $(39,061) (95)%
Depreciation 104,618 59,081 45,537 77%
-------- -------- -------- -----
Totals $106,619 $100,143 $ 6,476 6%
======== ======== ======== =====
</TABLE>
All organization costs associated with the LLC were written off in 1996
in conjunction with the reorganization. Also, the remaining equity interests
granted to the LLC's Manager were amortized in full at the time of the
reorganization in 1996. Depreciation expense increased in 1997 due to the
significant purchases in 1996 which resulted in a full year of depreciation in
1997 and a half year of depreciation in 1996.
Other Income and Expenses
<TABLE>
<CAPTION>
Year Ended December 31 Increase/(Decrease)
---------------------- --------------------
Expense Category 1997 1996 Amount %
- ---------------------- --------- -------- -------- ------
<S> <C> <C> <C> <C>
Interest income $ 12,230 $ 55,617 $(43,387) (78)%
Interest expense (67,304) (86,939) 19,635 23%
Other income (expense) 359 (6,664) 7,023 105%
-------- -------- -------- -----
Totals $(54,715) $(37,986) $(16,729) (44)%
======== ======== ======== =====
</TABLE>
The decrease to interest income in 1997 from 1996 was the result of
expending the remaining excess initial public offering proceeds for inventory
and media purposes. The reduction to interest expense is due to no debt issuance
costs incurred in 1997 while 1996 had approximately $55,000 of debt issuance
costs associated with the sale of debentures on May 23, 1996. The debt issuance
costs reduction was offset by interest expense associated with the Company's
revolving line of credit in 1997.
Income Tax Expense
The Company accrued no income tax expense for the years ended December
31, 1997 and 1996 because of the net losses generated in those years.
LIQUIDITY AND FINANCIAL RESOURCES
<TABLE>
<CAPTION>
Cash Flow Components 1997 1996
----------- -----------
<S> <C> <C>
Net cash used in operating activities $(2,238,202) $(2,678,435)
Net cash provided by (used in) investing
activities 1,236,267 (1,610,382)
Net cash provided by financing activities 768,370 4,425,785
----------- -----------
Net (decrease) increase in cash $ (233,565) $ 136,968
=========== ===========
</TABLE>
The Company recorded net losses of $2,666,175 and $1,806,338 in 1997 and
1996, respectively, and consumed $2,238,202 and $2,678,435 of cash in operations
in 1997 and 1996, respectively. Stockholders' equity decreased
17
<PAGE> 20
from $3,683,135 at December 31, 1996 to $1,048,778 at December 31, 1997. The
Company's recurring losses from operations, and rapidly changing market
conditions, including the USGA ruling in 1997, has made it difficult for the
Company to achieve its sales forecasts. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. The 1997 financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. In response, the Company has engaged an investment banking
firm which assisted the Company in securing an increase in its line of credit
facility from $800,000 to $1,500,000. The new line of credit was secured on
February 20, 1998. As of March 25, 1998, the Company had outstanding $812,669 on
this new credit facility. Borrowings are subject to certain asset based
borrowing limitations. There were no amounts available on this revolving line of
credit due to borrowing limitations at March 25, 1998. Cash receipts after March
25, 1998 continuing to the next borrowing date by the Company, is immediately
used to pay down the outstanding balance on the line of credit, thereby allowing
an increase to the available borrowing base. The investment banking firm is
assisting the Company in its attempts to obtain a bridge loan of $600,000. Also,
the investment banking firm is assisting the Company in its attempt to raise
additional equity capital financing through a private placement. There can be no
assurance that the investment banking firm will be successful in its attempt to
assist the Company in securing the bridge loan or the private placement.
Management's plans include budgeted improved operating results in 1998
through increased sales in its international market, primarily Japan, and
through its corporate logo program. The corporate logo program is placing a
corporation's logo and corporate colors on the club shafts which are then used
by the corporations for prizes, promotions or for sale through their company
stores. The Company has also introduced its progressive program which gives its
existing customer base a 40% discount on a driver purchase, encouraging the
customer to find the driver club length best suited to their driving abilities.
This program is budgeted to produce additional sales through its current
customer base. The Company's infomercial has also been improved to emphasize
that the longer shaft increases club head speed and therefore produces longer
drives. The longer shaft is what made the Company's products known and accepted
in the golfing industry. This concept is projected to drive customers to green
grass pro shops and specialty retail stores, thereby increasing sales for these
marketing channels. In late November 1997, the Company introduced a 5 wood to
its product line and in the second quarter of 1998 will introduce new wedges and
a standard length putter. These new products are also expected to increase
sales.
Through improved planning procedures the Company anticipates savings
in its assembly process, in shipping costs for its club components from overseas
and from its shipping costs of clubs to its customers. The assembly of the
Company's clubs was not fully in place at the Company's facilities in Englewood,
Colorado until June 1997, after the majority of clubs had been assembled by an
outsourcing third party. As a result, only a portion of the anticipated annual
savings of $100,000 was realized in 1997. The Company believes it will realize
the full annual savings during 1998. In addition to the cost savings anticipated
for the club assembly process, the Company believes it will be able to better
manage its finished goods inventory and improve on quality control during the
assembly process. The transition period for outsourcing the fulfillment process
exceeded the Company's expectations, therefore the full savings anticipated
during 1997 was not realized. The outsourcing is now fully in place and annual
savings of $150,000 is expected to be realized in 1998. The Company redesigned
its boxes which resulted in shipping cost savings. Through more timely ordering
of club components, the majority of these products are now able to be shipped by
ocean vessel rather than by air. Ocean cargo costs are approximately one third
that of air freight costs.
The Company believes it will also be able to realize savings in the
media infomercial area. The Company's infomercial production costs for 1998 are
expected to be $200,000 compared to $474,955 in 1997. These savings will be
realized because only one infomercial is being produced for 1998 with an initial
cost of $140,000, leaving $60,000 available for refinements to various
infomercials already produced by the Company, should the need arise, and for the
creation of spot television ads (e.g., 30 second & 60 second spots). The Company
also negotiated lower production costs to provide for incentive payments which
payments depend on the success of the infomercial. In 1997, the comparable
driver infomercial production cost was $307,945 due in part to the short time
frame involved for completion of the infomercial. During 1997 the Company also
produced an infomercial for its Jump Start to Golf product for a cost of
$167,010 which costs will not be repeated during 1998.
18
<PAGE> 21
The overall cash flow during the twelve month period ending December
31, 1998 depends primarily on the Company meeting its sales forecasts and
securing the bridge and equity financing in a timely manner. There can be no
assurance that the Company will be successful in achieving its sales forecasts
or in the securing of the bridge and/or equity financings.
During 1997, management believes the growth of the Company's operations
were hindered by the USGA ruling. The Company had a net loss of $2,666,175 in
1997 and inventory increased by $367,966. During the early part of 1997, the
Company ordered inventory based on forecasted sales. When 1997 sales failed to
meet expectations, the Company was unable to reduce inventory purchases because
of its requirement to give its suppliers 90 days notice when canceling orders.
In addition, because the Company did not plan any major modification to its
product line in 1998, there was no need to reduce inventory on a close out
basis. Accounts payable and accrued expenses increased by $376,254 in 1997 from
1996 due to the Company's attempts to conserve cash. During 1996, the Company's
sales grew dramatically. Accounts receivable increased by $218,375 primarily due
to the Company's efforts in recruiting additional wholesale outlets through its
ProShop Direct program. Inventory increased by $1,207,224 in 1996 from 1995 as a
result of the Company's expanded product line (3 wedge system, titanium driver,
ladies driver, Asian steel and titanium clubs and long putters). Deliveries of
the titanium driver and 3 wedge system were approximately 30 to 45 days behind
schedule in 1996 which resulted in the Company missing an opportunity to sell
these clubs in the northern part of the United States. These increases of
approximately $1,400,000 in accounts receivable and inventory in 1996 were
partially offset by an increase in accounts payable and accrued expenses of
$668,037. All 1996 model clubs in inventory at December 31, 1996 were sold at a
gross profit margin of approximately 6% in early 1997. The Company recorded a
net loss of $1,806,338 in 1996.
In 1997, the Company expended the remainder of the unused proceeds from
the Company's initial public offering remaining at December 31, 1996. In 1996,
$1,610,382 of net cash used in investing activities was primarily the result of
investing the unused proceeds from the Company's initial public offering at
December 31, 1996, and capital expenditures of $340,617 due to the increase in
employees (primarily computers, software and furniture and fixtures).
Financing activities during 1997 consisted of net borrowings of
$419,540 on the Company's revolving line of credit which was obtained in May
1997, issuance of $200,000 in debentures and net proceeds of $148,830 from notes
payable to related parties ($173,000 borrowed from an executive officer of the
Company and payments of $24,170 for the note payable converted from accounts
payable) which were used to finance a portion of the Company's operations.
Financing activities during 1996 consisted of the issuance of $800,000
in debentures, drawing $148,500 from the Company's $150,000 line of credit and
securing a short term loan of $60,000 to purchase a telephone system and
cubicles for the Company's leased office/warehouse facilities. All of the above
debt instruments along with accrued interest were paid with a portion of the
initial public offering proceeds. In addition, the Company repaid the Koala
Ventures, LLC loan with proceeds from the Company's initial public offering.
On July 19, 1996, the Company completed its initial public offering of
common stock. A total of 1,150,000 shares were sold in this offering. Gross
proceeds from the offering were $5,750,000 and net proceeds were $4,470,053.
At December 31, 1997 the Company had outstanding $956,746 of debt
securities consisting of $419,540 from its revolving line of credit, $337,206 in
notes payable to related parties which includes $164,206 of accounts payable
that was converted to a note payable and $200,000 in debentures. The original
amount transferred from accounts payable to notes payable was $188,376 with
$24,170 being repaid during 1997. There was no debt outstanding at December 31,
1996.
SEASONALITY
The Company believes that its operating results will be affected by
seasonal demand for golf clubs, which would generate higher sales in the spring
and summer. In addition, the Company believes that it will generate a
19
<PAGE> 22
certain amount of holiday season sales during the fourth quarter. As a result,
sales and thus income from operations would be lowest in the first and fourth
quarters because fixed operating costs generally are spread throughout the whole
year. The Company addresses the potential effects of seasonality by tracking
sales and orders and adjusting perceived inventory needs for demand and the time
of year.
INFLATION
The amounts presented in the financial statements do not provide for
the effect of inflation on the Company's operations or its financial position.
Amounts shown for equipment and for costs and expenses reflect historical cost
and do not necessarily represent replacement cost or charges to operations based
on replacement cost. Net loss would be higher than reported if the effects of
inflation were reflected either by charging operations with amounts that
represent replacement costs or by using other inflation adjustments. The Asian
financial crisis and devaluing of its currencies has reduced the Company's cost
of procuring club heads and club shafts from that which was experienced in the
past which is expected to reduce its cost of goods sold in 1998.
TAX BENEFIT
As of December 31, 1997 the Company had available to offset future
federal and state taxable income, net operating loss carryforwards ("NOL") of
approximately $4.4 million, which expire in 2011 and 2012.
IMPACT OF YEAR 2000 ISSUE
An issue exists for all companies that rely on computers as the year
2000 approaches. The "Year 2000" problem is the result of computer programs
being written using two digits rather than four to identify the applicable year.
Any of the Company's programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. The Company
anticipates that it will be able to test its entire system using its internal
programming staff and outside computer consultants and intends to make any
necessary modifications to prevent disruption to its operations. Costs in
connection with any such modifications are not expected to be material.
NEW ACCOUNTING STANDARDS
The Company accounts for its stock option plan under the provisions of
APB 25, Accounting for Stock Issued to Employees, and the Company has adopted
the disclosure only provisions of Statement of Accounting Financial Standards
No. 123, Accounting for Stock Based Compensation. Accordingly, no compensation
cost has been recognized for employee stock options granted during 1997 and
1996. There were 5,000 non-employee options granted on July 9, 1996 with a
weighted average fair market value of $4.86 per share (Black-Scholes model) and
8,000 options granted to non-employees on October 21, 1996 with a weighted
average fair market value of $4.37 per share (Black-Scholes model). A total of
$59,260 has been expensed for the period ended December 31, 1996 based on fair
market value on the grant date as required by FASB Statement 123.
In June 1997, the FASB issued Statement No 130, "Reporting
Comprehensive Income." Statement No. 130 requires the Company to classify items
of comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings (loss) and additional paid-in-capital in the financial statements. The
Company's comprehensive income items are not currently material; accordingly,
the effect of adopting this statement is not expected to be significant when it
becomes effective for 1998.
In 1997, the FASB issued Statement No 128, "Earnings Per Share."
Statement No. 128 replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effect of options,
warrants and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. The effect of
restatement of Statement No. 128 does not have a material impact on the
financial statements.
20
<PAGE> 23
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are included herein commencing
on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jackson D. Rule, Jr 59 Chairman of the Board, President and
Chief Executive Officer
Christopher B. Cooper 39 Chief Operating Officer and Director
Gerald D. Fick 58 Chief Financial Officer, Treasurer and Secretary
Jay D. Chazanoff 52 Director (2)
John W. Cullen 59 Director (1)
William J. Elsner 46 Director (1)(2)
Gerard A. Maglio 51 Director
Hugh "Rocky" D. Thompson 59 Director
Michael J. Timbers 56 Director (2)
</TABLE>
(1) Member of Audit Committee
(2) Member of Compensation Committee
Jackson D. Rule, Jr. founded the Company in June 1994. Since March
1996, Mr. Rule has served as Chairman of the Board, President and Chief
Executive Officer of the Company. From June 1994 to March 1996, Mr. Rule served
as managing member of Koala, the former manager of the LLC. From June 1991 to
August 1995, Mr. Rule spent a majority of his business time as President of
Tele-Trend Communications, Inc. ("TTC"), a reseller of long distance and other
telecommunication services, until Tele-Trend Communications, LLC ("Tele-Trend")
was acquired in August 1995 by Phoenix Network, Inc. ("Phoenix"). Mr. Rule
served as a vice president of Phoenix from August 1995 to March 1996. Mr. Rule
was involved in the formation, capitalization and operation of several start-up
companies from 1986 to June 1991.
From 1962 to 1967, Mr. Rule was a professional golfer on the PGA Tour.
In 1967, Mr. Rule joined Integrated Resources Equity Corporation ("IREC") as a
Managing Executive. In 1973, Mr. Rule became President of IREC. From 1980 to
1985, Mr. Rule served as Chairman of the Board of IREC and also as President of
Integrated Resources Energy Group, Inc. Mr. Rule organized Integrated Resources,
Inc.'s ("Integrated Resources") exploration, financing and drilling
subsidiaries. From 1986 through 1988, Mr. Rule served as the Director of
Institutional Sales and a Director of Far East Marketing for Integrated
Resources. During his employment with, and after leaving, Integrated Resources,
Mr. Rule began raising capital for small start-up businesses through Western
Equities Corporation for which he served as President and was a principal
shareholder. In February 1990,
21
<PAGE> 24
Integrated Resources filed a petition for bankruptcy under Chapter 11 of the
United States Bankruptcy Code and its plan of reorganization was confirmed in
November 1994.
Christopher B. Cooper has served as Chief Operating Officer and as a
director of the Company since January 1997. From July 1996 to January 1997, Mr.
Cooper worked as an independent consultant to the Company. From September 1980
to June 1996, Mr. Cooper was employed by Square Two. At Square Two, Mr. Cooper
served as Sr. Vice President Product Development from January 1994 to July 1996,
Chief Operating Officer from July 1991 to January 1994 and Vice President of
Production/Sales from February 1982 to July 1991. Mr. Cooper also served as
Secretary of Square Two from February 1982 to January 1996. Mr. Cooper is a 1980
graduate of Muhlenberg College in Allentown, Pennsylvania.
Gerald D. Fick has served as Chief Financial Officer, Treasurer and
Secretary of the Company since April 1996. From July 1991 to August 1995, Mr.
Fick served as Chief Financial Officer of TTC, until Tele-Trend was acquired in
August 1995 by Phoenix. From August 1995 to March 1996, Mr. Fick served as
operations manager of Phoenix's Denver Technological Center location. From
September 1990 to June 1991, Mr. Fick worked as an independent financial and
business consultant in the telecommunications industry. From August 1988 to
August 1990, Mr. Fick served as Vice President, Chief Financial Officer and
General Manager of Integrated Telecom Systems, Inc., a telecommunications
equipment sales organization. From August 1983 to July 1988, Mr. Fick served as
Vice President and Chief Financial Officer of GVNW, Inc., a national consulting
firm in the telecommunications area, and The KREG Corporation, an affiliate of
GVNW, Inc. From 1976 through 1983, Mr. Fick served as Vice President and Chief
Financial Officer of ConTel Corp.'s 13-state western region, which had assets in
excess of $1 billion.
Gerard A. Maglio has served as a director of the Company since March
1996. From October 1991 to the present, Mr. Maglio has served as President and
been the principal shareholder of Maglio & Associates, Inc., a consulting firm
with primary emphasis on telecommunications and cable television. From April
1993 to August 1995, Mr. Maglio spent a majority of his business time as Vice
President of Marketing of TTC, until Tele-Trend was acquired in August 1995 by
Phoenix. From February 1992 to April 1993, Mr. Maglio served as President,
Residential Division - Digital Music Express for International Cablecasting
Technologies, Inc., where he was responsible for overseeing the development of a
30-channel start-up premium digital audio service used in cable television. From
September 1988 to December 1991, Mr. Maglio served as Senior Vice President of
Marketing and Programming of the Cable Division of United Artists. Mr. Maglio
previously served as President of CTAM, the cable industry's marketing society.
Jay D. Chazanoff has served as a director of the Company since July
1996. From March 1995 to the present, Mr. Chazanoff has served as Chairman of
the Board of Millennium Capital Management LLC, a privately held merchant and
investment banking firm. From December 1994 to March 1995, Mr. Chazanoff worked
as a management and financial consultant. From March 1992 to November 1994, Mr.
Chazanoff served as President and Chief Operating Officer of Integrated
Resources and from January 1985 through February 1992 as Senior Executive Vice
President of Integrated Resources. In February 1990, Integrated Resources filed
a petition for bankruptcy under Chapter 11 of the United States Bankruptcy Code
and its plan of reorganization was confirmed in November 1994. From 1986 to the
present, Mr. Chazanoff has served as President and director and been the sole
shareholder of Carpar Corp., which serves as the general partner of a limited
partnership, which, in turn, serves as the general partner of Berkeley Western
Associates, L.P. ("Berkeley"), whose sole business is the ownership of a
14-story office building in Berkeley, California. Berkeley filed a petition for
bankruptcy under Chapter 11 of the United States Bankruptcy Code in January 1993
and its plan of reorganization was confirmed in November 1994.
John W. Cullen has served as a director of the Company since July 1996.
Since January 1991, Mr. Cullen has been managing his personal investments.
William J. Elsner has served as a director of the Company since July
1996. Since October 1995, Mr. Elsner has been self-employed and managing his
personal investments. Since May 1989, Mr. Elsner has served as a director of
United International Holdings, Inc. ("UIH"). From July 1992 to October 1995, Mr.
Elsner served as Chief Executive Officer of UIH and from May 1989 to July 1992,
he served as President of UIH. Mr. Elsner served
22
<PAGE> 25
as a director of United International Holdings, a Colorado general partnership
of which UIH was a subsidiary prior to UIH's initial public offering, from
September 1989 until the partnership dissolved in December 1993. Mr. Elsner also
served as a director of United Artists from 1989 until December 1991.
Hugh "Rocky" D. Thompson assisted in founding the Company in June 1994,
has been promoting the Company's products since that time, and has served as a
director since July 1996. Mr. Thompson has been a professional golfer since
1964, has been a participant on the PGA Senior Tour since 1989 and was a
participant on the PGA Tour from 1964 to 1988 (18 years as a full-time
participant and seven years as a part-time participant). Since 1971, Mr.
Thompson has served as Vice President and been a principal shareholder of Toco,
Inc., a corporation that owns real estate in and operates two retail stores in
Toco, Texas. Since 1983, Mr. Thompson has served as the mayor of Toco, Texas, a
town of approximately 200 people.
Michael J. Timbers has served as a director of the Company since July
1996. Since February 1989, Mr. Timbers has served as Chief Executive Officer of
IHS Group, which consists of a number of information companies with aggregate
annual revenues of approximately $300 million, and from February 1989 to May
1996, Mr. Timbers also served as President of IHS Group. Until 1996, Mr. Timbers
also served as Chairman of AVO International, which consists of a group of
companies that produce high quality electrical test and measurement equipment
with aggregate annual revenues of approximately $85 million.
CLASSIFICATION OF DIRECTORS
The directors comprising the Board of Directors are divided into three
classes. Messrs. Chazanoff, Cullen and Maglio will stand for election at the
annual meeting of stockholders to be held in 1998, Messrs. Elsner, Rule and
Thompson will stand for election at the annual meeting of stockholders to be
held in 1999, and Messrs. Cooper and Timbers will stand for election at the
annual meeting of stockholders to be held in 2000. Directors can be removed only
for cause and only by a majority vote of the other directors or by the vote of
stockholders owning at least 80% of the voting power of the Company. Officers
are chosen and serve at the discretion of the Board of Directors. There are no
family relationships among the directors and executive officers of the Company.
COMMITTEES OF THE BOARD
The Audit Committee recommends to the Board of Directors the
appointment of the independent certified public accountants for the following
year and reviews the scope of the audit, the independent certified public
accountants' report and the independent certified public accountants' comments
relative to the adequacy of the Company's system of internal controls and
accounting policies.
The Compensation Committee is responsible for making determinations
regarding salaries, bonuses and other compensation for the Company's executive
officers, including decisions with respect to stock option grants to the
Company's directors, executive officers, employees and other key individuals
pursuant to the Plan (as hereinafter defined).
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers, and persons who own
more than ten percent of a registered class of the Company's equity securities,
to file with the Commission initial reports of ownership and reports of changes
in ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater than ten percent stockholders are required by
Commission regulation to furnish the Company with copies of all Section 16(a)
forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and representations that no other reports
were required, during the fiscal year ended December 31, 1997, all Section 16(a)
filing requirements applicable to its officers, directors and greater than ten
percent beneficial owners were complied with; except that (i) one transaction
which should have previously been reported on Form 3 was subsequently reported
on Form 5 by Christopher B. Cooper, Chief Operating Officer of the Company; (ii)
six
23
<PAGE> 26
transactions which should have previously been reported on Forms 4 were
subsequently reported on Form 5 by Jackson D. Rule, Jr., President, Chief
Executive Officer, and Chairman of the Board of Directors of the Company.
ITEM 10. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Directors who are also employees of the Company are not separately
compensated for serving on the Board of Directors except that they are eligible
to receive options to purchase Common Stock of the Company under the Plan (as
are other Company employees, non-employee directors and other key individuals)
and are reimbursed for related travel expenses. Non-employee directors are
compensated through participation in the Plan and reimbursement for related
travel expenses. The Company currently does not pay directors' fees for
attendance at Board of Directors and committee meetings.
COMPENSATION OF EXECUTIVE OFFICERS
Summary of Compensation
The following table shows for the fiscal years ending December 31, 1997
and 1996, compensation awarded or paid to, or earned by the Company's Chief
Executive Officer. No other executive officer received compensation exceeding
$100,000 during 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------------
Securities
Underlying
Name and Options/ All Other
Principal Position Year Salary ($) Bonus ($) SARs (#) Compensation
------------------ ---- ---------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Mr. Jackson D. Rule, Jr. 1997 120,000 -0- -0- -0-
Chairman of the Board,
President and Chief 1996 78,018 -0- 20,000 -0-
Executive Officer
</TABLE>
Employment Agreements
The Company has entered into employment agreements with Jackson D.
Rule, Jr. and Rocky Thompson. The employment agreement with Jackson D. Rule, Jr.
provides for an initial annual base salary of $120,000. Mr. Rule's employment
agreement, which expires on April 30, 1999, may be terminated by the Company
"for cause" and by Mr. Rule for a material breach of the employment agreement by
the Company. He also will be restricted from competing with the Company until
after April 30, 1999. In the event that the Company terminates the employment
agreement, the Company is required to pay Mr. Rule $10,000 every month until May
1999 in consideration of Mr. Rule not competing with the Company until that
time. In the event that Mr. Rule terminates the employment agreement, the
Company is required to pay him $4,500 every month until May 1999 in
consideration of Mr. Rule not competing with the Company until that time.
The employment agreement with Mr. Thompson requires him to promote the
Company's products and provides for (i) a nominal annual salary, and (ii) upon
the occurrence of each of the following events, the grant of an option to
purchase 5,000 shares of Common Stock, under and subject to the Plan and any
successor plan, exercisable at the market value of the Common Stock on the date
of such event: Mr. Thompson (a) wins a PGA Senior Tour Event, (b) is one of the
top five money winners on the PGA Senior Tour in any year, and (c) leads the
24
<PAGE> 27
PGA Senior Tour in birdies in any year. Mr. Thompson's employment agreement
expires on April 30, 2001, does not require him to devote a fixed amount of time
on the Company's affairs, and may be terminated by the Company "for cause" and
by Mr. Thompson for a material breach of the employment agreement by the
Company.
Stock Option Grants and Exercises
The Company grants options to its executive officers under its 1996
Stock Option Plan (the "Plan"). For the fiscal year ended December 31, 1997,
there were no options granted to the Chief Executive Officer.
The following table shows, for the fiscal year ended December 31, 1997,
certain information regarding options exercised by, and held at year
end by the Chief Executive Officer.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997 AND
VALUE OF OPTIONS AT END OF FISCAL YEAR 1997
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at End of Fiscal Options/SARs at end of
1997 (#) Fiscal 1997 ($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) (1) Unexercisable Unexercisable
---- --------------- ---------------- ------------------------ ----------------------
<S> <C> <C> <C> <C>
Jackson D. Rule, Jr. -- -- 5,000 / 15,000 0
</TABLE>
(1) Value realized is based on the fair market value of the Company's Common
Stock on the date of exercise minus the exercise price and does not
necessarily indicate that the optionee sold such stock.
STOCK OPTION PLAN
In March 1996, the Company's Board of Directors adopted and the
stockholders approved the Plan. Under the Plan, incentive stock options
("ISOs"), as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), may be granted to key employees of the Company, and
non-qualified options may be granted to key employees, directors, independent
contractors and other key individuals of the Company. A total of 200,000 shares
of Common Stock have been reserved for issuance under the Plan. The Plan is
administered by the Compensation Committee of the Board of Directors, which,
subject to the terms of the Plan, has the authority to determine the material
terms and provisions under which options are granted, including the individuals
to whom such options may be granted, exercise prices and numbers of shares
subject to options, the time or times during which options may be exercised, and
certain other terms and conditions of the options granted.
The exercise price of ISOs granted under the Plan may not be less than
the fair market value of the Common Stock of the Company on the date of grant
and, in the case of ISOs granted to holders of more than 10% of the voting stock
of the Company or any subsidiary, not less than 110% of the fair market value of
the Common Stock of the Company on the date of grant. As determined by the
Compensation Committee, the exercise price of non-qualified options also may not
be less than the fair market value of the Common Stock of the Company on the
date of grant. ISOs granted to holders of more than 10% of the voting stock of
the Company or any subsidiary may not be exercised later than five years from
the date of grant, and all other options granted under the Plan may not be
exercised later than ten years from the date of grant. The aggregate fair market
value (determined at the time of grant) of shares issuable upon the exercise of
ISOs granted to an optionee under all stock option plans of the Company or any
subsidiary that become exercisable for the first time during any one calendar
year may not exceed $100,000 or the amount of the limitation set forth in
Section 422 of the Code or its successor provision.
No stock option may be transferred by an optionee other than by will or
the laws of descent and distribution, except pursuant to a qualified domestic
relations order as defined in the Code or the Employee Retirement Income
Security Act of 1974, as amended, or rules promulgated thereunder. During the
lifetime of an
25
<PAGE> 28
optionee, the option may be exercisable only by the optionee except that in the
event of the legal disability of an optionee, the guardian or personal
representative of the optionee may exercise the option. In the event of
termination of employment, including by reason of death or disability, the
optionee or the optionee's guardian or personal representative shall be entitled
to exercise the option for a period of no more than three months after such
termination to the extent such options were exercisable by the optionee on the
date of such termination, unless otherwise determined by the Compensation
Committee of the Board of Directors.
Options granted under the Plan generally provide for the payment of the
exercise price in cash and may provide for the payment of the exercise price by
delivery to the Company of shares of Common Stock already owned by the optionee
having a fair market value equal to the exercise price of the options being
exercised, or by a combination of such methods, provided that the optionee has
held such shares of Common Stock for at least six months prior to the date of
exercise. Therefore, if so provided in an optionee's options, such optionee may
tender shares of Common Stock to purchase additional shares of Common Stock and
may theoretically exercise all of his stock options with no additional
investment other than the purchase of his original shares. Any unexercised
options that expire or that terminate upon an employee ceasing to be employed by
the Company become available again for issuance under the Plan.
As of March 18, 1998, options to purchase 109,000 shares of Common
Stock remain outstanding under the Plan, of which no options have been exercised
and 91,000 shares remained available for grant thereunder.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's voting securities as of March 18, 1998 by:
(i) each director; (ii) the Chief Executive Officer; (iii) all executive
officers and directors of the Company as a group; and (iv) all those known by
the Company to be beneficial owners of more than five percent (5%) of any class
of its voting securities. Unless otherwise indicated, the Company believes that
each of the persons indicated below has sole voting and investment power with
respect to the shares owned by such person.
<TABLE>
<CAPTION>
Number of Shares Percent of
Name and Address of Beneficial Owner(1) Beneficially Owned Outstanding Shares(2)
- --------------------------------------- ------------------ ---------------------
<S> <C> <C>
Jackson D. Rule, Jr 401,022(3) 12.11%
Jay D. Chazanoff 39,650(4) 1.25%
John W. Cullen 18,561 0.59%
William J. Elsner 130,578 4.15%
Gerard A. Maglio 191,372 6.08%
Michael J. Timbers 19,540 0.62%
Hugh "Rocky" D. Thompson 345,938 10.98%
Christopher B. Cooper 0 --
G. Schneider Holdings Co. 214,787(5) 6.76%
4643 South Ulster, Suite 1300
Denver, Colorado
All executive officers and directors as a group 1,147,161(3)(4) 34.42%
(10 persons)
</TABLE>
(1) Unless otherwise indicated below, (i) the persons in the table above have
sole voting and investment power with respect to all shares shown as
beneficially owned by them, and (ii) the address for each beneficial owner
is c/o the Company, 6786 South Revere Parkway, Suite 150D, Englewood,
Colorado 80112.
(2) Percentage of ownership is based on 3,150,000 shares of Company Common
Stock outstanding as of March 18, 1998.
(3) Includes warrants to purchase 162,500 shares of common stock.
26
<PAGE> 29
(4) Includes warrants to purchase 20,000 shares of Common Stock.
(5) Includes warrants to purchase 25,000 shares of common stock held by Gene
Schneider, General Partner of G. Schneider Holdings Co.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Messrs. Rule (President, Chief Executive Officer and Chairman of the
Board of Directors of the Company) and Thompson (a director of the Company)
founded the Company in June 1994. Koala Ventures, LLC ("Koala") served as the
manager of the Company when the Company operated as the LLC. Messrs. Rule and
Maglio (director of the Company) and Linley White were the managing members of
Koala and thus responsible for the direction and supervision of the Company
before the Company was reorganized from a Colorado limited liability company
into a Delaware corporation effective as of April 1, 1996.
Upon the LLC's formation in June 1994, Koala and Mr. Thompson were
granted equity interests in the LLC which entitled them to a 37% and 10%
respective share of the LLC's profits and distributions, but only after all of
the investors members of the LLC received a return of their capital
contributions in full. Messrs. Rule, Maglio, White and Elsner (a director of the
Company) and G. Schneider Holdings Co. (a stockholder of the Company) originally
owned 32%, 32%, 16%, 5% and 15% of Koala, respectively. Effective as of January
1, 1996, Koala amended and restated its operating agreement. The effect of such
amendments was that Messrs. Rule, Maglio and White had their member interest
reduced by 2.4%, 2.4% and 1.2% respectively, and Mr. Hoffer (former Executive
Vice President of the Company) received a 6% member interest in Koala in return
for his $100 capital contribution. Pursuant to the Company's reorganization on
April 1, 1996, Koala and Mr. Thompson exchanged their equity interest in the LLC
for 646,526 and 184,454 shares of the Company's Common Stock, respectively.
In May 1996, Koala liquidated and dissolved, and as part of its plan of
liquidation and dissolution, it distributed 646,526 shares of Common Stock of
the Company to its six members based upon their capital accounts and member
interest. As a result of this distribution, Messrs. Rule, Maglio, White, Hoffer,
and Elsner and G. Schneider Holdings Co. received 191,372; 191,372; 95,686;
38,792; 32,325; and 96,979 shares of Common Stock of the Company, respectively.
During 1997 and 1996, the Company sold $77,752 and $96,244,
respectively, of golf clubs to Parade Golf Products, Inc. of Quebec, Canada. An
executive officer and 50% owner of Parade Golf is the father of a former
executive officer and director of the Company. The officer and director resigned
from the Company in May 1997.
On December 6, 1996, the Company entered into an agreement with IHS to
handle all of the Company's fulfillment and warehousing requirements. The
Company paid $147,269 and $7,433 during 1997 and 1996, respectively, for
services under this agreement. An executive officer of IHS is a member of the
board of directors of the Company.
From July 1996 to January 1997, Christopher B. Cooper worked as an
independent consultant to the Company. The Company paid $21,843 during that
period for services provided by Mr. Cooper. Mr. Cooper has been employed as
Chief Operating Officer of the Company and has served as a director of the
Company since January 1997.
In October 1997, the Company issued debentures in the principal amount
of $200,000 to four of its existing stockholders, one of who is an executive
officer and director of the Company, at an annual interest rate of 10%. All
principal plus accrued interest is payable on the first to occur of (i) two
years after the date of the debenture, or (ii) on or within fifteen business
days after the date the Company receives proceeds from any public or private
sale of its securities after October 1997. These debentures are unsecured. In
conjunction with these debentures, 100,000 warrants were issued at an exercise
price exceeding fair market value at the date of issuance. The warrants entitle
the holders thereof to purchase 100,000 shares of common stock at $1.00 per
share for a period of five years commencing October 15, 1997. The warrants and
warrant shares may not be sold or transferred until October 16, 1998. The
warrants have not been exercised as of the date hereof. The Company entered into
revenue royalty
27
<PAGE> 30
agreements with the holders of the Company's $200,000 debentures issued in
October 1997. Each debenture holder is to receive .125% of the Company's gross
sales from its Jump Start to Golf product, for a total revenue royalty payment
of .5%.
On October 27, 1997, the Company converted accounts payable due to
Information Handling Services ("IHS") of $188,376 to an unsecured promissory
note with an annual interest rate of 8.5%, compounded daily. IHS provides
fulfillment and warehousing services for the Company. This note is to be repaid
at the rate of $2,500 per week. On February 20, 1998 the weekly amount to be
repaid was increased to $10,000. At December 31, 1997, the principal amount
outstanding was $164,206. This note matures in June 1998. An executive officer
of IHS is a member of the board of directors of the Company.
In November and December 1997, the Company secured operating loans in
the amount of $173,000 from an executive officer and director of the Company
with an annual interest rate of 3.5% over the prime rate of 8.5% at December
31, 1997. During January and February 1998, additional funds of $102,000 were
borrowed by the Company under similar terms from this same individual for total
outstanding principal at February 20, 1998 of $275,000. The loans are in the
form of unsecured promissory notes. The principal plus all accrued interest is
payable on whichever event occurs first, (i) out of the proceeds of any new
loan to the Company; or (ii) out of the proceeds of any new equity raised by
the Company (see Note 6, Commitments and Contingencies, Investment Banker
Agreement). In connection with the unsecured promissory note, the Company
issued warrants to purchase 137,500 shares of Common Stock at an exercise price
exceeding fair market value at the date of issuance. The warrants entitle the
holder thereof to purchase shares of common stock at $.75 per share any time
prior to the close of business on February 27, 2001.
The Company has a policy that all transactions with affiliated entities
or persons will be on terms no less favorable than could be obtained from
unrelated parties and all transactions between the Company and its officers,
directors, principal stockholders and affiliates will be approved by a majority
of disinterested directors. The Company believes that all of the above described
transactions contained terms at least as favorable as could have been obtained
from unrelated parties.
28
<PAGE> 31
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
2.1* Exchange Memorandum dated February 23, 1996, regarding the
reorganization of the Registrant from a Colorado limited
liability company to a Delaware corporation (the "Exchange
Memorandum")
2.2* Amendment to the Exchange Memorandum
2.3* Articles of Dissolution of Black Rock Ventures, LLC
3.1* Certificate of Incorporation of the Company
3.2* Bylaws of the Company
4.1* Form of Bridge Warrant
4.2*** Form of Amendment to Bridge Warrant
4.3* Certificate of Designations, Rights and Preferences of Series
A Redeemable and Convertible Preferred Stock of Black Rock
Golf Corporation
4.4** Form of Underwriter's Warrant
10.1* 1996 Stock Option Plan
10.2* Licensing Agreement between S2 Golf Inc. and the Company dated
January 1, 1996
10.3* Employment Agreement between the Company and Jackson D. Rule,
Jr. dated April 10, 1996
10.4* Employment Agreement between the Company and Rocky Thompson
dated April 1, 1996
10.5* Line of Credit Agreement between the Company and MegaBank of
Arapahoe dated August 11,
10.6* Assignment of Trademarks between the Company and Koala
Ventures, LLC
10.7* Sales Agency Agreement between the Company and Hampshire
Securities Corporation dated May 9, 1996
11.1+ Computation of per share earnings (loss)
16.1* Letter of Freeborn and Peters to Causey, Demgen and Moore
dated May 21, 1996
16.2* Letter of Causey, Demgen and Moore concerning change of the
Company's principal accountants dated May 22, 1996
16.3** Letter from Freeborn and Peters to Causey, Demgen and Moore
dated June 21, 1996
16.4** Letter from Causey, Demgen and Moore concerning change of the
Company's principal accountants dated June 24, 1996
27.1 Financial Data Schedule
27.2 Financial Data Schedule, restated loss per share
27.3 Financial Data Schedule, restated loss per share
- ----------
* Incorporated by reference to the Company's Registration Statement Form SB-2
filed May 24, 1996 (Registration No. 333-4890-D)
** Incorporated by reference to the Company's Pre-Effective Amendment No. 1 to
the Registration Statement on Form SB-2 filed June 26, 1996 (Registration
No. 333-4890-D)
*** Incorporated by reference to the Company's Pre-Effective Amendment No. 2 to
the Registration Statement on Form SB-2 filed July 16, 1996 (Registration
No. 333-4890-D)
+ The data for the computation of per share loss appears in the Consolidated
Statement of Operation included in the Company's Consolidated Financial
Statements
(b) REPORTS ON FORM 8-K: None
29
<PAGE> 32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BLACK ROCK GOLF CORPORATION
By: /s/ Jackson D. Rule, Jr.
--------------------------------------
Jackson D. Rule, Jr.
Chairman of the Board, President
and Chief Executive Officer
Date: April 7, 1998
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jackson D. Rule, Jr. Chairman of the Board, President
- ---------------------------------- and Chief Executive Officer April 7, 1998
Jackson D. Rule, Jr.
/s/ Gerald D. Fick Chief Financial Officer, Treasurer April 7, 1998
- ---------------------------------- and Secretary (Principal) Financial
Gerald D. Fick and Accounting Officer)
/s/ Christopher B. Cooper Chief Operating Officer April 7, 1998
- ---------------------------------- and Director
Christopher B. Cooper
/s/ Jay D. Chazanoff Director April 7, 1998
- ----------------------------------
Jay D. Chazanoff
Director
- ----------------------------------
John W. Cullen
/s/ William J. Elsner Director April 7, 1998
- ----------------------------------
William J. Elsner
/s/ Gerard A. Maglio Director April 7, 1998
- ----------------------------------
Gerard A. Maglio
/s/ Michael J. Timbers Director April 7, 1998
- ----------------------------------
Michael J. Timbers
/s/ Hugh "Rocky" D. Thompson Director April 7, 1998
- ----------------------------------
Hugh "Rocky" D. Thompson
</TABLE>
30
<PAGE> 33
BLACK ROCK GOLF CORPORATION
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors F-2
Financial Statements
Balance Sheets F-3
Statements of Operations F-4
Statements of Changes in Stockholders'/Members' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
</TABLE>
F-1
<PAGE> 34
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Black Rock Golf Corporation
We have audited the accompanying balance sheets of Black Rock Golf Corporation
as of December 31, 1997 and 1996, and the related statements of operations,
changes in stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Black Rock Golf Corporation at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepting accounting
principles.
As discussed in Note 1 to the financial statements, the Company's recurring
losses from operations raise substantial doubt about its ability to continue as
a going concern. Management's plans in regard to these matters are described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Denver, Colorado
March 25, 1998
F-2
<PAGE> 35
BLACK ROCK GOLF CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 31,414 $ 264,979
Restricted cash 50,000 --
Investments in U S Treasury Bills -- 1,300,966
Security deposits 41,620 106,825
Accounts receivable net of $118,868 and $61,338 of reserve for
doubtful accounts at December 31, 1997 and 1996,
respectively 197,846 422,191
Inventory 2,212,893 1,844,927
Prepaid expenses 93,146 83,475
----------- -----------
Total current assets 2,626,919 4,023,363
Property and equipment, at cost:
Computer equipment, software, furniture and fixtures 411,095 341,711
Less accumulated depreciation (161,950) (57,332)
----------- -----------
249,145 284,379
Other assets:
Infomercial development costs (Note 2) 10,000 76,667
Organizational costs, net of $3,501 and $1,500 of
amortization at December 31, 1997 and 1996, respectively 6,499 8,500
Other assets 166,603 170,259
----------- -----------
Total assets $ 3,059,166 $ 4,563,168
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 805,836 $ 628,644
Accrued expenses - in litigation (Note 8) 135,000 135,000
Accrued expenses 93,597 32,911
Warranty reserves 19,209 83,478
Revolving line of credit (Note 3) 419,540 --
Notes payable, related parties (Note 3) 337,206 --
----------- -----------
Total current liabilities 1,810,388 880,033
Debentures, related parties (Note 3) 200,000 --
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, par value $.001 per share, 1,000,000 shares
authorized, no shares are issued and outstanding at
December 31, 1997 and 1996, respectively (Note 5) -- --
Common stock, par value $.001 per share, 10,000,000 shares
authorized, 3,150,000 issued and outstanding at
December 31, 1997 and 1996, respectively (Note 5) 3,150 3,150
Common stock to be issued, 15,909 shares (Note 6) 16 --
Capital in excess of par value 5,518,125 5,486,323
Accumulated deficit (4,472,513) (1,806,338)
----------- -----------
Total stockholders' equity 1,048,778 3,683,135
----------- -----------
Total liabilities and stockholders' equity $ 3,059,166 $ 4,563,168
=========== ===========
</TABLE>
See accompanying notes
F-3
<PAGE> 36
BLACK ROCK GOLF CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Net sales $ 6,884,110 $ 8,924,179
Cost of goods sold 3,850,945 3,702,663
----------- -----------
Gross profit 3,033,165 5,221,516
Operating expenses:
Advertising 2,726,931 3,758,362
Marketing 103,643 233,617
Sales, general and administrative expense 2,707,432 2,897,746
Depreciation and amortization 106,619 100,143
----------- -----------
Total operating expenses 5,644,625 6,989,868
Other income and expenses:
Interest income 12,230 55,617
Interest expense (67,304) (86,939)
Other expense 359 (6,664)
----------- -----------
Total other income and expenses (54,715) (37,986)
Loss before income taxes (2,666,175) (1,806,338)
Federal and state income taxes (Note 4) -- --
----------- -----------
Net loss $(2,666,175) $(1,806,338)
=========== ===========
Basic loss per common share (Note 2) $ (0.85) $ (0.72)
=========== ===========
Diluted loss per common share (Note 2) $ (0.85) $ (0.70)
=========== ===========
Weighted average number of common shares outstanding during the
year (Note 2) 3,150,000 2,519,863
=========== ===========
Weighted average number of common and common equivalent shares
outstanding during the year (Note 2) 3,150,000 2,563,699
=========== ===========
</TABLE>
See accompanying notes
F-4
<PAGE> 37
BLACK ROCK GOLF CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------ CAPITAL IN
NUMBER OF PAR EXCESS OF ACCUMULATED
SHARES VALUE PAR VALUE DEFICIT TOTAL
-------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 -- $ -- $ 1,308,100 $ (347,940) $ 960,160
Issuance of shares to former LLC
member interests at July 19,1996 2,000,000(1) 2,000 (349,940) 347,940 --
Issuance of shares on July 19, 1996
in connection with initial public
offering 1,150,000 1,150,000 1,150 5,748,850 -- 5,750,000
Less: costs associated with
initial public offering -- -- (1,279,947) -- (1,279,947)
Fair value of non-employee options
granted in 1996 (Note 5) -- -- 59,260 -- 59,260
Net loss -- -- -- (1,806,338) (1,806,338)
----------- ----------- ----------- ----------- -----------
Balance December 31, 1996 3,150,000 3,150 5,486,323 (1,806,338) 3,683,135
Common stock to be issued (Note 6) 15,909 16 31,802 -- 31,818
Net loss -- -- -- (2,666,175) (2,666,175)
----------- ----------- ----------- ----------- -----------
Balance December 31, 1997 3,165,909 $ 3,166 $ 5,518,125 $(4,472,513) $ 1,048,778
=========== =========== =========== =========== ===========
</TABLE>
(1) Reflects the issuance of 1,747,368 shares of common stock and automatic
conversion of 252,632 shares of preferred stock into common stock pursuant
to the reorganization of the Company from a Colorado Limited Liability
company to a Delaware corporation.
See accompanying notes
F-5
<PAGE> 38
BLACK ROCK GOLF CORPORATION
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------
1997 1996
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,666,175) $(1,806,338)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 106,619 100,143
Advertising expense for common stock to be issued (Note 6) 31,818 --
Issuance of stock options to non-employees -- 59,260
Loss on disposal of assets -- 6,664
Realized gain on sale of investments (4,685) (34,355)
Unrealized gains on investments -- (1,846)
Changes in operating assets and liabilities:
Security deposits 65,205 (22,662)
Accounts receivable 224,345 (218,375)
Inventory (367,966) (9,671)
Prepaid expenses (9,671) (53,734)
Infomercial development costs 66,667 (76,667)
Other assets 3,656 (101,459)
Accounts payable 315,568 558,188
Accrued expenses - in litigation -- 135,000
Accrued expenses 60,686 (25,151)
Warranty reserve (64,269) 10,121
----------- -----------
Net cash used in operating activities (2,238,202) (2,678,435)
INVESTING ACTIVITIES
Purchase of computer equipment, software, furniture and fixtures (69,384) (340,617)
Organizational costs -- (10,000)
Proceeds from asset disposal -- 5,000
Cost of securities purchased -- (8,631,426)
Gross proceeds from maturities of securities 1,305,651 7,366,661
----------- -----------
Net cash provided by (used in) investing activities 1,236,267 (1,610,382)
FINANCING ACTIVITIES
Revolving line of credit, net borrowings 419,540 148,500
Proceeds from notes payable, related parties 173,000 --
Repayments of notes payable, related parties (24,170) --
Bank loan -- 60,000
Repay loan payable to Koala Ventures, LLC -- (44,268)
Proceeds from issuance of debentures, related parties 200,000 800,000
Repayment of debt -- (1,008,500)
Proceeds from initial public offering, net -- 4,470,053
----------- -----------
Net cash provided by financing activities 768,370 4,425,785
----------- -----------
Net (decrease) increase in cash (233,565) 136,968
Cash at beginning of period 264,979 128,011
----------- -----------
Cash at end of period $ 31,414 $ 264,979
=========== ===========
Supplemental schedule of additional cash flow information:
Cash paid during the year for interest $ 66,600 $ 32,109
=========== ===========
</TABLE>
F-6
<PAGE> 39
BLACK ROCK GOLF CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. BUSINESS OPERATIONS AND ORGANIZATION
Black Rock Golf Corporation (the "Company" or "BRGC") designs, develops
and markets innovative premium quality golf clubs together with instructional
systems intended to improve golfers' scores. The Company's end users are located
throughout the United States, Canada and select European and Asian countries who
primarily purchase goods through the Company's sales to U. S. distributors.
The Company was originally organized as a Colorado limited liability
company, Black Rock Ventures, LLC (the "LLC"), and was managed by Koala
Ventures, LLC (the "Manager"). The Manager's responsibilities included the
safekeeping of all funds and assets of the LLC, as well as maintenance of books,
records and reports reflecting all transactions of the LLC. Certain members of
the Manager were also members of the LLC.
Effective April 1, 1996, the LLC reorganized into a Delaware
corporation (a "C" Corporation for tax purposes). All of the members of the LLC
transferred their respective member interests in the LLC to BRGC, in exchange
for shares of BRGC common and preferred stock. The Manager received only common
stock.
The common stock of BRGC has all the rights generally attendant to
common stock, including a right to vote and a right to dividends and other
distributions, although junior to the preferred stock's right to dividends and
other distributions.
The Company completed its initial public offering of common stock on
July 19, 1996. A total of 1,150,000 shares were sold at $5.00 per share. The
unused proceeds from the initial public offering (after repayment of outstanding
debt) were invested in short term U. S. Treasury Bills during 1996 and the first
quarter of 1997, and were utilized for marketing and media, product testing and
design, inventory purchases for existing and new products and for general
corporate and working capital purposes.
The Company recorded net losses of $2,666,175 and $1,806,338 in 1997
and 1996, respectively, and consumed $2,238,202 and $2,678,435 of cash in
operations in 1997 and 1996, respectively. Stockholders' equity decreased to
$1,048,778 at December 31, 1997. The Company's recurring losses from operations,
and rapidly changing market conditions has made it difficult for the Company to
achieve its sales forecasts. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The 1997 financial statements
do not include any adjustments that might result from the outcome of this
uncertainty. In response, the Company has engaged an investment banking firm
which assisted the Company in securing an increase in its line of credit
facility from $800,000 to $1,500,000. Borrowings are subject to certain asset
based limitations (see Note 3). The investment banking firm is also assisting
the Company in its attempt to obtain a bridge loan in the amount of $600,000.
Also, the investment banking firm is assisting the Company in its attempt to
raise additional equity capital through a private placement. There is no
assurance that the investment banking firm will be successful in assisting the
Company in its attempt to secure the bridge loan or the private placement.
Management's plans also include improved operations in 1998. The
Company has budgeted improved operating results through increased sales in its
international market and through its corporate logo program. The Company has
also introduced its progressive program to its current customer base. In this
program, existing customers are provided with a one-time opportunity to buy up
to a longer shaft than they currently use at a 40% discount. The Company's
infomercial has also been changed to point out the fact that a longer shaft will
increase club head speed and therefore produce longer drives. The longer shaft
is what made the Company's products known in the golfing industry. This concept
is projected to drive customers to green grass pro shops and specialty retail
stores, thereby increasing sales for these marketing channels. In late November
1997, the Company
F-7
<PAGE> 40
BLACK ROCK GOLF CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
introduced a 5 wood to its product line and in the second quarter on 1998 will
introduce new wedges and a standard length putter. These new products are also
expected to increase sales.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash
The Company considers all highly liquid investments with original
maturity of three months or less when purchased to be cash equivalents.
Restricted cash is a certificate of deposit used as collateral for payment of
purchases by a distributor of the Company's products.
Prepaid Expenses
Prepaid expenses primarily consist of prepaid advertising, trade show
expense and insurance at December 31, 1997 and prepaid advertising and insurance
at December 31, 1996.
Inventory
Inventory, consisting primarily of golf clubs, is stated at the lower
of cost or market with cost determined on a first-in, first-out (FIFO) basis. At
December 31, 1997 and 1996, inventory consisted of finished goods of $1,040,578
and $1,504,250, respectively, and club components of $1,172,315 and $340,677,
respectively.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful life of the assets,
which is three years for computers, software and telephone equipment, and seven
years for furniture and fixtures. Leasehold improvements are being depreciated
over the remaining lease period which expires June 30, 1999.
Organization Expense
Organization costs are recorded at cost. Amortization is computed using
the straight-line method over five years. Total amortization of organization
costs for 1997 and 1996 amounted to $2,001 and $29,642, respectively. All
organization costs associated with the LLC, in the amount of $28,142 were
written off in 1996 in conjunction with the reorganization.
Equity Interests
The equity interests granted to the LLC's Manager and Service Members
at the time of reorganization were valued at fair market value at the date of
inception as estimated by an independent third party. The Manager's interest was
amortized through March 31, 1996, the date at which the Manager's agreement to
manage the LLC ceased as a result of the reorganization. The Service Members'
interests were capitalized until the showing of the first infomercial and then
were expensed.
Income Taxes
The Company accounts for income taxes under Financial Accounting
Standards Board ("FASB") Statement No. 109 "Accounting for Income Taxes" which
uses the liability method. Under this method, deferred tax assets and
liabilities are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
F-8
<PAGE> 41
BLACK ROCK GOLF CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Advertising Expense
The Company follows the American Institute of Certified Public
Accountants' Statement of Position 93-7, Reporting on Advertising Costs ("SOP").
The Company expenses the cost of television air time as it is incurred. The cost
of producing an infomercial is considered to be direct-response advertising.
However, the Company's infomercial development costs do not meet the SOP's
criteria for capitalization that the direct-response advertising would result in
probable future benefits, and therefore are expensed at the time of the first
airing.
Marketing Expense
Marketing expense consists of the creative development, design and
printing of brochures, catalogs, packet holders and other such expenses used in
the recruitment of new ProShop Direct participants. Commissions and salesperson
salaries are included in sales, general and administrative expenses.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. Management
believes any differences in actual results will not have a material effect on
the financial statements.
Reserve for Warranty
The Company provides, by a current charge to income, an amount it
estimates will be needed to cover future warranty obligations for products sold
during the year. The Company provides a 30 day money back guarantee to the
direct response customer base and a one year manufacturer's warranty against
defects which covers substantially all of the Company's products.
Accounting for Stock Based Compensation
The Company accounts for its stock based compensation arrangements
under the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," (APB 25), and the Company has adopted the
disclosure only provisions of FASB Statement No. 123, "Accounting for Stock
Based Compensation."
Loss Per Share
In 1997, the FASB issued Statement No. 128, "Earnings Per Share."
Statement No. 128 replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effect of options,
warrants and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share.
For 1997 and 1996, basic net loss per common share was computed based
on weighted average number of shares outstanding. The diluted net loss per
common share has been calculated in accordance with Statement No. 128 and
Securities and Exchange Commission Staff Accounting Bulletin ("SAB") 98. SAB 98
requires all common stock equivalents issued during the twelve month period
prior to an initial public offering ("IPO") with an exercise price below the IPO
price to be included in the calculation of diluted earnings per share as if
these common stock equivalents were outstanding for all periods presented when
such stock issuances are considered nominal issuances, even if the result is
anti-dilutive. The Company issued bridge warrants for a price substantially
below the IPO price in the twelve months prior to the IPO, thereby qualifying as
a nominal issuance. The weighted average number of
F-9
<PAGE> 42
BLACK ROCK GOLF CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
shares outstanding for diluted earnings per share in 1996 includes the weighted
average effect of bridge warrants as outstanding from the beginning of the
period through the IPO effective date in accordance with SAB 98. The warrants
have been excluded from the calculation of common stock equivalents subsequent
to the IPO as the effects would be anti-dilutive. The effect of restatement of
Statement No. 128 does not have a material impact on the financial statements.
Comprehensive Income
In June 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income." Statement No. 130 requires companies to classify items of
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings (loss) and additional paid-in capital in the financial statements. The
Company's comprehensive income items are not currently material; accordingly,
the effect of adopting this statement is not expected to be significant when it
becomes effective for fiscal 1998.
Reclassifications
Certain reclassifications have been made to the 1996 financial
statements to conform to the 1997 presentation.
Financial Instruments
The carrying value of accounts receivable, accounts payable and debt
approximate their fair value.
3. DEBT OBLIGATIONS
Revolving Line of Credit
The Company secured a line of credit, which expired in August 1996,
from its banking relationship in the amount of $150,000 with an interest rate of
2% over the prime rate. On July 24, 1996, the outstanding principal balance of
$148,500 plus all accrued interest was paid with a portion of the Company's
initial public offering proceeds. This debt was guaranteed by an executive
officer of the Company.
On April 15, 1997 the Company secured an $800,000 two year revolving
line of credit with a bank secured by substantially all of its assets. The
annual interest rate on this facility was 3.5% above the prime rate. The
agreement included certain financial covenants and a lock box feature which
allowed for all funds deposited to the Company's account first be used to pay
down the outstanding principal and interest on this facility. The principal
amount outstanding at December 31, 1997 was $419,540. On February 20, 1998 the
Company paid $528,654 for all outstanding principal and interest on this
facility and canceled it, with the cancellation penalty being waived. The amount
was repaid using proceeds of a $1,500,000 three year revolving line of credit
with a bank, secured by substantially all of the Company's assets. The annual
interest rate on this facility is 3.5% above the prime rate. The facility allows
the Company to borrow at 75% of its eligible accounts receivable up to
$1,500,000 and 60% of its finished goods inventory up to $750,000. The amount
available for borrowing was $878,818 at the date of the agreement which was
prior to the repayment of $528,654 outstanding on the Company's previous
facility. There were no amounts available on this revolving line of credit due
to borrowing limitations at March 25, 1998. Cash receipts after March 25, 1998
continuing to the next borrowing date by the Company, is immediately used to pay
down the outstanding balance on the line of credit, thereby allowing an increase
to the available borrowing base. The new facility also has an unsecured
principal amount of $240,000 which is to be repaid at $60,000 per month
beginning March 31, 1998. In consideration of the unsecured portion of the
credit facility, the Company issued on February 20, 1998, 120,000 warrants at an
exercise price exceeding fair market value at the date of issuance. The warrants
entitle the holder thereof to purchase 120,000 shares of common stock at $.75
per share at any time prior to the close of business on February 20, 2001.
F-10
<PAGE> 43
BLACK ROCK GOLF CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Debentures
On April 4, 1996, the Company issued debentures in the principal amount
of $400,000 to existing stockholders who elected to participate in the debenture
offering (all stockholders were given an opportunity to participate). The
debentures had an annual interest rate of 10%.
On July 24, 1996, the outstanding principal balance of $400,000 plus
all accrued interest was paid with a portion of the Company's initial public
offering proceeds.
On May 23, 1996, the Company issued debentures in the principal amount
of $400,000 to outside investors at an annual interest rate of 10% On July 23,
1996, the outstanding principal balance of $400,000 plus all accrued interest
was paid with a portion of the Company's initial public offering proceeds.
In October 1997, the Company issued debentures in the principal amount
of $200,000 to four of its existing stockholders, one of who is an executive
officer and director of the Company, at an annual interest rate of 10%. All
principal plus accrued interest is payable on the first to occur of (i) two
years after the date of the debenture, or (ii) on or within fifteen business
days after the date the Company receives proceeds from any public or private
sale of its securities after October 1997. These debentures are unsecured. In
conjunction with these debentures, 100,000 warrants were issued at an exercise
price exceeding fair market value at the date of issuance. The warrants entitle
the holders thereof to purchase 100,000 shares of common stock at $1.00 per
share for a period of five years commencing October 15, 1997. The warrants and
warrant shares may not be sold or transferred until October 16, 1998. The
warrants have not been exercised at December 31, 1997.
Notes Payable
On October 27, 1997, the Company converted accounts payable due to
Information Handling Services ("IHS") of $188,376 to an unsecured promissory
note with an annual interest rate of 8.5%, compounded daily. IHS provides
fulfillment and warehousing services for the Company. This note is to be repaid
at the rate of $2,500 per week. On February 20, 1998 the weekly amount to be
repaid was increased to $10,000. At December 31, 1997, the principal amount
outstanding was $164,206. This note matures in June 1998.
In November and December 1997, the Company secured operating loans in
the amount of $173,000 from an executive officer and director of the Company
with an annual interest rate of 3.5% over the prime rate of 8.5% at December 31,
1997. During January and February 1998, additional funds of $102,000 were
borrowed by the Company on similar terms from this same individual for total
outstanding principal at February 20, 1998 of $275,000. The loans are in the
form of unsecured promissory notes. The principal plus all accrued interest is
payable on whichever event occurs first, (i) out of the proceeds of any new loan
to the Company; or (ii) out of the proceeds of any new equity raised by the
Company (see Note 6, Commitments and Contingencies, Investment Banker
Agreement). In connection with the unsecured promissory note, the Company issued
warrants to purchase 137,500 shares of Common Stock at an exercise price
exceeding fair market value at the date of issuance. The warrants entitle the
holder thereof to purchase shares of common stock at $.75 per share any time
prior to the close of business on February 27, 2001.
4. INCOME TAXES
Effective April 1, 1996, the Company reorganized from a Colorado
Limited Liability Company (the "LLC"), to a Delaware corporation (C corporation
for tax purposes). The LLC was treated as a partnership for income tax purposes,
and as such, no income taxes were paid at the LLC level. The amounts reported
below relate to the corporation subsequent to the reorganization. Significant
components of the Company's deferred tax assets and liabilities are as follows:
F-11
<PAGE> 44
BLACK ROCK GOLF CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 1,658,541 $ 685,123
Sales return allowances 7,165 23,243
Allowance for loss on receivables 44,338 22,879
Other reserve 7,833 46,625
Vacation accrual 449 1,894
----------- -----------
Total deferred tax assets 1,718,326 779,764
Deferred tax liabilities
Prepaid expenses 34,744 67,359
----------- -----------
Total deferred tax liabilities 34,744 67,359
----------- -----------
Net deferred tax assets 1,683,582 712,405
Valuation allowance for deferred assets (1,683,582) (712,405)
----------- -----------
Net deferred assets $ -- $ --
=========== ===========
</TABLE>
At December 31, 1997 and 1996, the Company had a net operating loss
carry-forward of approximately $4.4 million and $1.8 million, respectively, for
federal and state income tax purposes, which expire in 2012 and 2011,
respectively.
5. STOCKHOLDERS' EQUITY
Initial Public Stock Offering
The Company completed its initial public offering of common stock on
July 19, 1996 at $5.00 per share. A total of 1,150,000 shares were sold in this
offering with gross proceeds of $5,750,000. Net proceeds were $4,470,053.
Underwriter Warrants
In connection with the initial public offering of common stock, the
Company agreed to sell to the underwriter for an aggregate purchase price of
$100, warrants to purchase up to 100,000 shares of common stock. The
underwriter's warrants are exercisable for a period of four years commencing one
year from July 19, 1996 at an exercise price per share equal to 120% of the
public offering price per share of $5.00. A new registration statement or
post-effective amendment to the registration statement will be required to be
filed and declared effective before distribution to the public of these warrants
and the shares of common stock underlying such warrants. The underwriter had not
exercised these warrants at December 31, 1997.
Bridge Warrants
On May 23, 1996, 80,000 bridge warrants were issued in conjunction with
the issuance of Company debentures. The bridge warrants entitle the holders
thereof to purchase shares of common stock at $1.00 per share for a period of
five years commencing May 23, 1996. The bridge warrants and warrant shares may
not be sold or transferred for a period of eighteen months after July 19, 1996.
The bridge warrants have not been exercised at December 31, 1997.
Stock Option Plan
Under the Company's Stock Option Plan (the "Plan"), incentive stock
options ("ISOs"), as defined in Section 422 of the Internal Revenue Code of
1986, as amended, may be granted to employees of the Company, and non-qualified
options may be granted to key employees, directors, independent contractors and
other key individuals of
F-12
<PAGE> 45
BLACK ROCK GOLF CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the Company. A total of 200,000 shares of common stock have been reserved for
issuance under the Plan, and 109,000 and 116,000 shares granted under the Plan
were outstanding as of December 31, 1997 and December 31, 1996, respectively.
Options granted during 1997 and 1996 were at an exercise price of $3.00 per
share and $5.00 per share, respectively. The Plan is administered by the
compensation committee of the board of directors.
The exercise price of the ISOs granted under the Plan may not be less
than fair market value of the common stock of the Company on the date of grant,
and, in the case of ISOs granted to holders of at least 10% of the voting stock
of the Company, not less than 110% of the fair market value of the common stock
of the Company on the date of grant.
<TABLE>
<CAPTION>
Summary of Option Transaction
-------------------------------------------------
Weighted Average
----------------------------------
Number Fair Market Exercise Contractual
of Options Value (1) Price Life Years
------------ ------------ -------- -----------
<S> <C> <C> <C> <C>
December 31, 1995 -- $ - $-- --
Granted - employee 107,000 1.79 5.00 9.5
Granted - non employee 13,000 2.17 5.00 9.7
Exercised -- -- -- --
Forfeited - employee (4,000) 1.75 5.00 --
--------
December 31, 1996 116,000 1.83 5.00 9.5
Granted - employee 26,000 .36 3.00 9.2
Exercised -- -- -- --
Forfeited - employee (33,000) 1.87 5.00 --
--------
December 31, 1997 109,000 1.47 4.52 8.7
========
Exercisable at December 31, 1997 at a price of $5.00 32,000 $ 1.75 $ 5.00 --
Exercisable at December 31, 1997 at a price of $3.00 -- -- -- --
</TABLE>
(1) Black-Scholes model
During 1997, there were no non-employee options granted. There were
5,000 non-employee options granted on July 9, 1996 with a weighted average fair
market value of $1.75 per share (Black-Scholes model) and 8,000 options granted
to non-employees on October 21, 1996 with a weighted average fair market value
of $2.43 per share (Black-Scholes model). A total of $59,260 was expensed for
the period ended December 31, 1996 based on the fair market value on the grant
date as required by FASB Statement No. 123.
Had compensation cost for the Company's stock options been determined
based on the fair value at the grant date for awards in 1997 and 1996 consistent
with the provisions of Statement No. 123, the Company's net loss would have
changed to the pro forma amounts indicated below:
F-13
<PAGE> 46
BLACK ROCK GOLF CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Net loss reported $ (2,666,175) $ (1,806,338)
Net loss pro forma (2,692,042) (1,827,320)
Basic loss per common equivalent shares-as reported (.85) (.72)
Basic loss per common equivalent shares-pro forma (.85) (.73)
Diluted loss per common equivalent shares-as reported (.85) (.70)
Diluted loss per common equivalent shares-pro forma (.85) (.71)
</TABLE>
The fair value of the options is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1997 and 1996, respectively: risk-free interest
rate of 4.99% and 4.60%, expected life of 5 years for all periods presented,
expected volatility of 30% and 30%, respectively, and a dividend yield of 0% for
all periods presented.
6. COMMITMENTS AND CONTINGENCIES
Inventory Supplies
The Company has two primary suppliers, one for club heads and another
for club shafts. The loss of either of these suppliers could have a material
adverse effect on the Company's business. However, management believes that if
one of these suppliers were not able to meet the Company's supply needs, the
Company would be able to obtain similar goods from alternate suppliers. There
can be no assurance the Company would be successful in obtaining agreements with
alternate suppliers.
The Company has entered into purchase order agreements with the above
suppliers. The Company must give three months notice to cancel any purchase
order. At December 31, 1997 and 1996, noncancelable commitments totaled
approximately $118,000 and $934,000, respectively.
Golf Club Royalties
The Company paid a designer a $3 royalty charge for every driver
produced which uses the Tri-Bar club head design (after July 1996 the design is
no longer in production). Approximately $123,000 was paid to this designer in
1996. The designer of the Company's long putters received a one time design fee
of $3,000 and a continuing $3 royalty for every putter sold up to 7,000 putters
per year, and a $2 royalty per putter thereafter. For 1997 and 1996, there was
approximately $12,800 and $3,000, respectively, paid to the putter designer.
Leases
The Company entered into a three year lease, which commenced on July 1,
1996 for its office facility at 6786 South Revere Parkway, Suite 150D,
Englewood, Colorado. This lease expires on June 30, 1999. On August 1, 1996 the
Company leased an additional 3,644 square feet in this facility. The monthly
rent throughout the term of the lease is approximately $16,050.
The Company entered into a four year and three month sublease, which
commenced on October 1, 1996 for its facility at 12503 East Euclid Drive, Unit
60, Englewood, Colorado. This sublease expires on November 30, 2000. The
aggregate sub-lease receipts over the remaining term of the sub-lease is
$142,556.
Minimum gross payments for lease agreements having initial or
remaining noncancelable terms in excess of one year are as follows (receipts
from sub-lease are not included):
F-14
<PAGE> 47
BLACK ROCK GOLF CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C>
1998 $242,627
1999 147,540
2000 52,455
Thereafter 0
--------
$442,622
========
</TABLE>
Consulting/Assembly Supervision Agreement
The Company entered into an agreement on January 1, 1997 and January 1,
1996 for a $2,000 per month consulting fee and a commission of $.75 per club
sold during 1997 and a commission of $.75 per club assembled during 1996. The
consulting fee is for assistance in the design of the Company's club heads and
golf club shafts and the commission is for supervision and overseeing quality
control during the assembly process of the Company's golf clubs. This agreement
expired on December 31, 1997 and will not be renewed. Amounts due and payable at
December 31, 1997 are $25,904.
Revenue Royalty Agreements
The Company entered into revenue royalty agreements with the holders of
the Company's $200,000 debentures issued in October 1997. The funds from the
debentures were used to test market the Company's Jump Start to Golf product, a
product and instructional program designed to supplant the first three to four
lessons a beginning golfer would normally pay to a teaching golf professional.
Each debenture holder is to receive .125% of the Company's gross sales from its
Jump Start to Golf product, for a total revenue royalty payment of .5%. In
addition, the Company entered into revenue royalty agreements with the producer
of the Jump Start to Golf infomercial for .5% of gross sales from the Jump Start
to Golf product, and a 1.5% revenue royalty to the artists who were featured in
the infomercial. Total royalties for the Jump Start to Golf product is 2.5% of
gross sales.
The Jump Start to Golf product did not initially meet the required
results for continuance during the market test in late 1997, additional testing
for its viability as a new product for sale by the Company will be done in 1998.
Management believes the revenue royalty agreements will not have a material
negative impact on future earnings of the Company.
Investment Banker Agreement
On November 7, 1997, the Company entered into an exclusive agreement
with an investment banker to locate and negotiate for an asset based lender to
increase the line of credit and to locate and negotiate equity/debt financing.
The investment banker is attempting to secure approximately $3,000,000 through a
private placement. There is no assurance that the investment banker will be able
to secure any additional capital for the Company. For these services, the
investment banker is paid $6,500 per month until the closing of the financing
occurs. For debt financing, the closing fee is 3% of the funding amount and for
equity financing the closing fee is 5% of the equity funding. The closing fee
will not be less than $200,000 if such fee is due.
Common Stock To Be Issued
On July 7, 1997, the Company entered into an agreement to purchase
226,000 customer names and addresses from Prime Time Sports TV. Approximately
226,000 names and addresses were purchased for an agreed upon price of $31,818,
in which the agreement called for issuing 15,909 shares of the Company's
restricted common stock at $2.00 per share. At December 31, 1997, the shares had
not been issued.
F-15
<PAGE> 48
BLACK ROCK GOLF CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS
On May 1, 1996, the Company entered into a consulting agreement with a
director and stockholder of the Company. The agreement expired on December 31,
1996. The Company paid approximately $37,000 during 1996 for services provided
under this agreement. In 1997, the Company paid approximately $6,500 in service
fees and reimbursable expenses to this same director and stockholder for
consulting services during the Company's production of its titanium driver
infomercial.
During 1997 and 1996, the Company sold $77,752 and $96,244,
respectively, of golf clubs to Parade Golf Products, Inc. of Quebec, Canada. An
executive officer and 50% owner of Parade Golf is the father of an executive
officer and director of the Company. The officer and director resigned from the
Company in May 1997.
On December 6, 1996, the Company entered into an agreement with IHS to
handle all of the Company's fulfillment and warehousing requirements. The
Company paid $147,269 and $7,433 during 1997 and 1996 respectively for services
under this agreement. An executive officer of IHS is a member of the board of
directors of the Company.
8. LITIGATION
On July 30, 1997, suit was filed against the Company alleging
approximately $80,000 due for infomercial air time during 1995 which the Company
had not been invoiced for until March 1997. The Company believes it has paid for
all infomercial air time run during 1995. On January 22, 1998 the Company
asserted a counterclaim for breach of contract alleging more than $110,000 for
advertising the Company did not approve. The parties are currently in
negotiations for settlement of this litigation. The Company believes that the
resolution of this suit and counterclaim will not have a material adverse affect
on the Company.
In September 1997, suit was filed against the Company alleging
approximately $185,000 due for printing costs of the Company's prospectus for
its initial public offering. The Company believes the amount invoiced is
excessive and the $135,000 reserved in accrued expenses-in litigation on the
balance to be justified by the facts as indicated in the bid from the printer
and the subsequent details included in the printers invoice to the Company. The
Company believes the resolution of this suit will not have a material adverse
affect on the Company.
On March 7, 1997, The United States Golf Association ("USGA") issued a
ruling that certain of the Company's 1995 and 1996 golf clubs did not conform
with USGA rules. Specifically, the USGA ruled that certain decorative markings
on the face of the driver, 3 and 7 fairway woods did not comply with certain
rules of the USGA governing markings on the face of the club head. Approximately
114,000 golf clubs were affected by this ruling. The ruling was not related to
the Company's signature long shafts and did not affect any of the Company's
other clubs or products. The Company appealed this ruling with the USGA
executive committee. On April 11, 1997, the USGA executive committee ruled in
the Company's favor on its appeal. The executive committee decided that the
USGA's interpretation of the decorative markings rule was overly restrictive,
and authorized its staff to revise its internal guidelines to that end.
The Company is a party, from time to time, in litigation incident to
its business. The Company is not aware of any current or pending litigation that
it believes will have a material adverse affect on the Company's results of
operations or financial condition.
9. SUBSEQUENT EVENTS
Opfer Communications, Inc. ("Opfer") produced the Company's 1998 driver
infomercial video for a contract price of $106,000. Opfer will also receive a
commission of 1.5% on gross sales of the Company's drivers over $3,300,000 and a
2.5% commission on driver sales over $5,300,000. Driver sales exclude the
Company's corporate
F-16
<PAGE> 49
BLACK ROCK GOLF CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
logo program, international sales and the demo sales program. The host of the
1998 driver infomercial, Frank Beard, will receive the same commission as Opfer.
On February 27, 1998, the Company was notified by the NASDAQ stock
market that the Company's common stock is not in compliance with NASDAQ's new
minimum bid price, pursuant to NASD Marketplace Rule 4310(c)(04), which became
effective February 23, 1998. The Company has 90 calendar days, which expires May
28, 1998, to comply with this standard. Compliance may be regained by its common
stock trading at or above the minimum requirement of $1.00 per share for at
least 10 consecutive trading days. If the common stock does not regain
compliance within 90 days, NASDAQ will issue a delisting letter which will
identify the review procedures available to the Company. If a delisting letter
is issued, the Company will request a review at that time, which will generally
stay the delisting. Should the review process not be successful, the Company's
common stock would be delisted.
F-17
<PAGE> 50
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
2.1* Exchange Memorandum dated February 23, 1996, regarding the
reorganization of the Registrant from a Colorado limited
liability company to a Delaware corporation (the "Exchange
Memorandum")
2.2* Amendment to the Exchange Memorandum
2.3* Articles of Dissolution of Black Rock Ventures, LLC
3.1* Certificate of Incorporation of the Company
3.2* Bylaws of the Company
4.1* Form of Bridge Warrant
4.2*** Form of Amendment to Bridge Warrant
4.3* Certificate of Designations, Rights and Preferences of Series
A Redeemable and Convertible Preferred Stock of Black Rock
Golf Corporation
4.4** Form of Underwriter's Warrant
10.1* 1996 Stock Option Plan
10.2* Licensing Agreement between S2 Golf Inc. and the Company dated
January 1, 1996
10.3* Employment Agreement between the Company and Jackson D. Rule,
Jr. dated April 10, 1996
10.4* Employment Agreement between the Company and Rocky Thompson
dated April 1, 1996
10.5* Line of Credit Agreement between the Company and MegaBank of
Arapahoe dated August 11,
10.6* Assignment of Trademarks between the Company and Koala
Ventures, LLC
10.7* Sales Agency Agreement between the Company and Hampshire
Securities Corporation dated May 9, 1996
11.1+ Computation of per share earnings (loss)
16.1* Letter of Freeborn and Peters to Causey, Demgen and Moore
dated May 21, 1996
16.2* Letter of Causey, Demgen and Moore concerning change of the
Company's principal accountants dated May 22, 1996
16.3** Letter from Freeborn and Peters to Causey, Demgen and Moore
dated June 21, 1996
16.4** Letter from Causey, Demgen and Moore concerning change of the
Company's principal accountants dated June 24, 1996
27.1 Financial Data Schedule
27.2 Financial Data Schedule, restated loss per share
27.3 Financial Data Schedule, restated loss per share
</TABLE>
- ----------
* Incorporated by reference to the Company's Registration Statement Form SB-2
filed May 24, 1996 Registration No. 333-4890-D)
** Incorporated by reference to the Company's Pre-Effective Amendment No. 1 to
the Registration Statement on Form SB-2 filed June 26, 1996 (Registration
No. 333-4890-D)
*** Incorporated by reference to the Company's Pre-Effective Amendment No. 2 to
the Registration Statement on Form SB-2 filed July 16, 1996 (Registration
No. 333-4890-D)
+ The data for the computation of per share loss appears in the Consolidated
Statement of Operation included in the Company's Consolidated Financial
Statements
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 81,414
<SECURITIES> 0
<RECEIVABLES> 316,714
<ALLOWANCES> (118,868)
<INVENTORY> 2,212,893
<CURRENT-ASSETS> 2,626,919
<PP&E> 411,095
<DEPRECIATION> (161,950)
<TOTAL-ASSETS> 3,059,166
<CURRENT-LIABILITIES> 1,810,388
<BONDS> 200,000
0
0
<COMMON> 3,166
<OTHER-SE> 1,045,612
<TOTAL-LIABILITY-AND-EQUITY> 3,059,166
<SALES> 6,884,110
<TOTAL-REVENUES> 6,884,110
<CGS> 3,850,945
<TOTAL-COSTS> 5,644,625
<OTHER-EXPENSES> (359)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67,304
<INCOME-PRETAX> (2,666,175)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,666,175)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,666,175)
<EPS-PRIMARY> (.85)
<EPS-DILUTED> (.85)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997
<CASH> 35,794 97,332 409,739
<SECURITIES> 0 0 0
<RECEIVABLES> 577,217 985,482 1,237,526
<ALLOWANCES> 0 0 0
<INVENTORY> 2,929,980 2,669,221 1,709,175
<CURRENT-ASSETS> 3,651,594 3,923,923 3,583,248
<PP&E> 405,156 400,092 370,111
<DEPRECIATION> (133,563) (106,612) (80,864)
<TOTAL-ASSETS> 4,043,719 4,490,550 4,286,157
<CURRENT-LIABILITIES> 1,802,311 1,799,424 938,560
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 3,150 3,150 3,150
<OTHER-SE> 2,238,258 2,687,976 3,344,447
<TOTAL-LIABILITY-AND-EQUITY> 4,043,719 4,490,550 4,286,157
<SALES> 6,176,391 4,832,935 2,559,580
<TOTAL-REVENUES> 6,176,391 4,832,935 2,559,580
<CGS> 2,952,668 2,311,545 1,490,076
<TOTAL-COSTS> 4,637,501 3,500,346 1,415,825
<OTHER-EXPENSES> (12,189) (12,162) (10,783)
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 40,136 25,214 0
<INCOME-PRETAX> (1,441,725) (992,008) (335,538)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (1,441,725) (992,008) (335,538)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (1,441,725) (992,008) (335,538)
<EPS-PRIMARY> (.46) (.31) (.11)
<EPS-DILUTED> (.46) (.31) (.11)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1996 SEP-30-1996 JUN-30-1996
<CASH> 264,979 2,015,649 29,541
<SECURITIES> 1,300,986 0 0
<RECEIVABLES> 422,191 623,866 659,143
<ALLOWANCES> (661,338) 0 0
<INVENTORY> 1,844,927 2,260,053 1,489,785
<CURRENT-ASSETS> 4,023,363 5,273,611 2,596,585
<PP&E> 341,711 315,146 128,086
<DEPRECIATION> (57,332) (39,658) (21,209)
<TOTAL-ASSETS> 4,563,168 5,725,632 3,089,370
<CURRENT-LIABILITIES> 880,033 527,944 1,953,346
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 3,150 3,150 2,000
<OTHER-SE> 3,679,985 5,194,538 1,134,024
<TOTAL-LIABILITY-AND-EQUITY> 4,563,168 5,725,632 3,089,370
<SALES> 8,924,179 7,625,983 5,525,238
<TOTAL-REVENUES> 8,924,179 7,625,983 5,525,238
<CGS> 3,702,663 2,948,547 2,052,757
<TOTAL-COSTS> 6,989,868 5,000,665 3,260,093
<OTHER-EXPENSES> 6,664 20,847 (5,099)
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 31,322 32,109 25,265
<INCOME-PRETAX> (1,806,338) (376,109) 192,222
<INCOME-TAX> 0 0 16,358
<INCOME-CONTINUING> (1,806,338) (376,185) 175,864
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (1,806,338) (376,185) 175,864
<EPS-PRIMARY> (.72) (.16) (.09)
<EPS-DILUTED> (.70) (.16) (.06)
</TABLE>
