SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Year Ended September 30, 1997
Commission File Number: 33-7811-NY
---------------
Grafix Time Corporation
(Exact name of registrant as specified in its charter)
New York 93-0943925
---------------------- ---------------------------
(State of Incorporation) (I.R.S. Employer I.D. Number)
2901 Suffolk Court East, Suite 130, Ft. Worth, Texas 76133
----------------------------------------------------------
(Address of principal executive offices and Zip Code)
(817) 923-7224
--------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None.
Securities registered pursuant to Section 12(g) of the Exchange Act: None.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: [ ] YES [X] NO
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB: [X]
Registrant's revenues for its most recent fiscal year (ended September 30,
1997): $3,685,321
Aggregate market value of voting stock held by non-affiliates, and method of
computation:
$693,750, based on approximately 3,700,000 Common Shares held by non-affiliates
and an average bid/ask price of $.1875 per Share (NASDAQ Bulletin Board) during
the 90 days prior to date of this report.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock:
16,062,886 common shares were outstanding as of September 30, 1997.
Documents incorporated by reference: Form 8-K filed January 27, 1998.
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Form 10-KSB
- --------------------------------------------------------------------------------
GRAFIX TIME CORPORATION
Form 10-KSB for the Fiscal Year ended September 30, 1997
Table of Contents
Page of Report
--------------
PART I.
Item 1. Description of Business. 3
Business Development 3
Business of Registrant 3
Item 2. Description of Property 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 6
Market Information 6
Holders 6
Dividends 6
Item 6. Management's Discussion and Analysis or Plan of Operation 6
Item 7. Financial Statements 7 and
8-20
Item 8. Changes In and Disagreements With Accountants 7
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons 21
Item 10. Executive Compensation 22
Item 11. Security Ownership of Certain Beneficial Owners and Management 23
Item 12. Certain Relationships and Related Transactions 23
Item 13. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
2
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PART I.
Item 1. Description of Business.
(a) Business Development. Grafix Time Corporation (the "Company") was
originally incorporated as "Mont Blanc Resources, Inc." under the laws of the
State of New York on April 16, 1986. The Company's name was changed to Grafix
Time Corporation on December 11, 1989. Through June, 1991, the Company was in
the fashion sports watch and electronic jewelry distribution business. These
product lines were sold in June, 1991. In April, 1991, the Company acquired the
rights to develop and market a unique sunglass product known as Industrial
Strength Eyewear ("ISE"). In September, 1993, the Company discontinued its
efforts to develop and market the ISE product line, due to product manufacturing
problems and lack of capital resources. The Company sold the ISE product line in
February, 1994. During June, 1995 the Company negotiated an Asset Purchase
Agreement ("APA") with Sports Equipment Technology Company, Inc., a
privately-held Colorado corporation doing business as Carrera(R) Golf ("SETCO"),
whereby the Company would purchase the assets and assume the liabilities of
SETCO, subject to approval of the terms of the APA by the shareholders of the
Company and SECTO. The terms of the APA were approved by the shareholders of the
Company on August 25, 1995, and by the shareholders of SETCO on January 2, 1996,
at which date the merger of the Company and SETCO was deemed effective.
(b) Business of the Registrant. The Company has successfully negotiated
settlement of all liabilities, including those acquired by virtue of the APA
with SETCO. During the fiscal year ended September 30, 1996, the Company
obtained additional financing that was used to develop the Carrera Golf product
lines. In addition, the Company finalized an exclusive distribution agreement
with Citizen Trading Group of Japan ("Citizen"), and obtained its first orders
for golf products from Citizen. During the fiscal year ended September 30, 1997,
the Company expanded its line of golf products, entered into new distribution
agreements with distributors in Asia, and continued to supply golf clubs, bags,
and accessories to Citizen.
(1) Principal products or services and their markets. The Company
designs, develops, assembles and distributes high-quality golf products, golf
clothing and golf accessories worldwide utilizing the Carrera(R) trademark and
logo, pursuant to an exclusive licensing agreement with Carrera Optyl GmbH, a
subsidiary of Safilo SpG ("Safilo"), owner of the "Carrera" brand name. The
Company, in conjunction with Citizen and Safilo, has begun to establish the
Carrera Golf name as a leading prestige brand in the golf industry. The
Company's market for its products is the upscale golfing market worldwide.
3
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(2) Distribution methods. The Company has entered into an exclusive
distribution agreement with Citizen, for distribution of the Company's products
in Japan. In addition, the Company has entered into distribution agreements with
established distributors in other overseas markets, to initiate the marketing of
the Carrera Golf products. Management will focus on distributors with
credentials in the golf and apparel businesses. The Company intends to begin its
domestic U.S. marketing plan this year.
(3) Status of any publicly announced new products. The Company has not
publicly announced the roll-out of its products, except for the Company's
announcements of its first Citizen orders. As of the date of this report, the
Company has designed and produced several lines of golf clubs, bags, apparel,
and other golf products. The Company's newest golf club, the 711 TI Plasma
driver, has been well received in the Japanese market. The Company has entered
into an agreement with Tom Stites & Associates, Ft. Worth, Texas, to design and
and develop additional new lines of golf clubs for the Company.
(4) Competition, the Company's competitive position in the industry,
and methods of competition. The golf products industry is intensely competitive,
and the Company competes with numerous companies that provide golf clubs,
apparel and accessories. The market for golf products and accessories that the
Company sells, including golf clubs, bags, apparel, and gloves (excluding balls,
shoes, umbrellas, and novelty clubs) is approximately $2.375 billion per year.
Management believes there are currently more than 50 companies manufacturing and
marketing golf equipment which have annual golf equipment sales of at least $1
million each. The Company also believes that the 10 largest golf equipment
manufacturers account for a substantial majority of all wholesale golf equipment
sales. Most of the Company's competitors have greater capital resources and
brand name identification in the golf business than the Company; however,
management believes that the Carrera(R) name is recognized worldwide for
high-quality, premium products.
The Company has not yet established a competitive position in the
industry, and may not be able to do so in the United States in the foreseeable
future, due primarily to the high costs of penetrating the U.S. market.
Worldwide, the "golf products" category has been one of the fastest growing
industry segments the past 10 years. Most analysts predict that this upward
trend will continue into the next century, albeit at a somewhat slower pace.
Management has initially focused its sales and distribution efforts on the
Japanese and southeast Asian markets. The Company has successfully designed,
developed, assembled and distributed several line of premium golf products
carrying the Carrera(R) logo and trademark, through its relationship with
Citizen. The Company intends competes in the category of premium golf products.
The Company has successfully acquired the exclusive license to use the
Carrera(R) name in connection with the marketing of golf products. The Company
continues its efforts to design and develop unique, top-quality lines of golf
clubs, apparel and accessories, and believes it can successfully market those
products worldwide to the target consumer group that has above average
disposable income.
(5) Sources of raw materials. Raw materials for all of the Company's
proposed products are readily available from many sources worldwide.
4
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(6) Dependence on one or a few major customers. The Company currently
has one major customer: Citizen. Over 90 percent of the Company's sales as of
the date of this report derive from the Company's relationship with Citizen.
Loss of the Citizen contract or relationship would severely impact the Company.
The Company may in the future rely upon one or a few major distributors for
distribution of the Company's products in Asia and/or Europe.
(7) Patents, trademarks, licenses, and royalty agreements. By virtue
of its licensing agreement with Safilo, the Company has acquired the exclusive,
long-term license to use the well-known Carrera(R) name on its golf products.
This licensing agreement runs through December 31, 2001, with automatic renewal
for an additional five-year period, unless terminated earlier by the terms of
the agreement. Under this agreement, the Company is obligated to pay royalties
each year. Loss of this agreement would negatively impact the Company's sales
and income.
(8) Government approval. No government approval is required for the
Company's products.
(9) Effect of government regulations on the business. None.
(10) Research and development expenses. For the fiscal year ended
September 30, 1997, the Company spent $46,550 on research and development. For
the fiscal year ended September 30, 1996, the Company spent $345,297 for
research and development on the Carrera product lines.
(11) Costs of environmental compliance. None.
(12) Employees. As of the date of this report, the Company had two
full-time and four part-time employees.
Item 2. Description of Property.
The Company does not own any real property. The Company leases office space
pursuant to a lease agreement with Power Fade, Fort Worth, Texas. Under the
terms of the lease, the Company pays $ 1,390 per month for use of office and
warehouse space. The Company's office is located at 2901 Suffolk Court East,
Suite 130, Fort Worth, Texas 76133. The telephone number is (817) 923-7224; the
facsimile number is (817) 923-7339.
Item 3. Legal Proceedings.
The Company is subject to threats of lawsuits from suppliers, former
employees, and other sources that are common in the industry. On or about
December 9, 1997, Rohinton R. Karani, the Company's former President, filed a
lawsuit against the Company and its majority shareholder in the Court of Common
Pleas, Cuyahoga county, Ohio. Mr. Karani has advanced theories of breach of
contract, breach of implied contract, promissory estoppel, conversion, the Ohio
Wage Payment Statute, breach of implied covenant of good faith and fair dealing,
wrongful discharge, tortious interference with a contractual or business
relationship, and conspiracy against the Company and its majority shareholder.
Mr. Karani is seeking $2.5 million in damages and declaratory relief. The
Company is vigorously contesting Mr. Karani's claims, and has filed an Answer
and Counterclaim.
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Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted for shareholder approval during the fourth
quarter of the fiscal year covered by this report.
PART II.
Item 5. Market for Common Equity and Related Stockholder Matters.
(a) Market information. The Company's Common Stock is traded on the NASDAQ
Bulletin Board under the symbol CRRA. Through September 30, 1995, the Company's
trading symbol was GFIX. The range of high and low bids for the Company's common
stock for the past two fiscal years, adjusted for the 1:40 reverse split
approved subsequent to September 30, 1995:
Quarter Ended Low Bid High Bid
- ------------- ------- --------
December 31, 1995 .25 2.50
March 31, 1996 1.25 2.50
June 30, 1996 1.00 2.50
September 30, 1996 .75 2.25
December 31, 1996 .125 1.25
March 31, 1997 .25 .875
June 30, 1997 .1875 .625
September 30, 1997 .125 .75
The foregoing high and low bid information was obtained from various
over-the-counter brokers that have effected trades in the Company's securities.
The quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
(b) Holders. As of September 30, 1997 there were approximately 275
shareholders of record of the Company.
(c) Dividends. As of September 30, 1997, the Company had not declared any
dividends on its Common Stock since inception. The Company did declare a 40
percent stock dividend on November 28, 1995. The Company does not intend to pay
any cash dividends on its common stock in the foreseeable future.
Item 6. Management's Discussion and Analysis or Plan of Operation.
As of the date of this report, the Company is in the early operating stage.
In particular, the Company has successfully developed golf clubs and other
products, and has obtained and filled numerous orders from Citizen. Management
anticipates continuing to develop products and product lines; this will result
in continuing research and development expenses. Management anticipates
significant sales and marketing expenses in the future, particularly as the
Company introduces its products into the U.S. market.
6
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The Company, as of the date of this report, has experienced a positive
change in its financial condition, as a result of obtaining additional equity
financing and as a result of its ongoing relationship with Citizen. Please see
the Company's Report on Form 8-K filed with the Securities and Exchange
Commission on March 12, 1997. In particular, total assets have increased from
$949,189 at September 30, 1996 to $1,986,716 for September 30, 1997, primarily
as a result of financing activities. Total liabilities increased by $1,102,825
(78.5%); most of those liabilities relate to fulfilment of orders in process.
The Company reported dramatically increased sales of $3,302,881 for the fiscal
year ended September 30, 1997, up from $292,310 for the prior fiscal year.
Management attributes this significant increase to introduction of new products
in Japan, and the benefit of fulfilling sales for an entire fiscal year. The
Company also reported a net loss of $(118,447), or $(.01) per share, for the
fiscal year ended September 30, 1997, compared with a net loss of $ (1,399,727),
or $(.59) per share, for the same period the prior fiscal year.
Subsequent to September 30, 1996, the Company installed new financial
management and obtained additional funding from a principal shareholder,
primarily to enable the Company to fulfill Citizen orders. General and
administrative expenses have been reduced dramatically. Management now
anticipates reporting positive net income from operations on a continuing basis.
The Company's new management has met with Citizen on numerous occasions,
and is confident that the Citizen relationship is strong. Citizen introduced a
new line of Carrera golf products, the 711 TI Plasma driver and the 711 IC
Titanium Plasma Irons, in May, 1997. Citizen has projected orders of $6.5
million from the Company for calendar 1998. Management anticipates changing its
fiscal year-end to December 31 as soon as practicable, and projects pre-tax
earnings of $ 1,500,000 for the calendar and fiscal year ending December 31,
1998.
The Company is developing a sales and marketing strategy for the United
States market, and is continuing to develop sales in other overseas markets.
Costs associated with U.S. marketing can be substantial, and may affect the
Company's earnings.
Item 7. Financial Statements.
Pages 8 through 20, following, contain the audited financial statements of
the Company for the fiscal year ended September 30, 1997, and audited by James
E. Scheifley & Associates, Certified Public Accountants, Englewood, Colorado.
Item 8. Changes In and Disagreements With Accountants.
None.
(The remainder of this page is intentionally left blank)
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INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Grafix Time Corporation
(D/B/A Carrera Golf)
We have audited the balance sheet of Grafix Time Corporation as of September 30,
1997, and the related statements of operations, changes in stockholders' equity,
and cash flows for each of the two years in the period then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Grafix Time Corporation as of
September 30, 1997, and the related statements of operations, changes in
stockholders' equity, and cash flows for each of the two years in the period
then ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 12 to the
financial statements, the Company has suffered recurring losses and negative
cash flows from operations, and has negative working capital and a
stockholders'deficit. These factors raise substantial doubt about its ability to
continueas a going concern. Management's plans in regard to these matters are
also discussed in Note 12. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ James E. Scheifley & Associates, P.C.
James E. Scheifley & Associates, P.C.
Certified Public Accountants
Englewood, Colorado
November 7, 1997
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<TABLE>
<CAPTION>
Grafix Time Corporation D/B/A Carrera Golf
Balance Sheet
September 30, 1997
<S> <C>
Assets
- ------
Current Assets:
Cash ................................................................ 215,085
Accounts receivable ................................................. 431,678
Inventory ........................................................... 1,137,862
Employee advances ................................................... 7,000
------------
Total current assets ........................................... 1,791,625
Property and equipment, at cost, net of
accumulated depreciation of $4,663 ..................................... 10,880
Trade name license, at cost, net of
accumulated amortization of $15,789 .................................... 184,211
-----------
Total assets ................................................... 1,986,716
-----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
Current liabilities:
Notes payable-current portion ....................................... 110,000
Note payable - bank line of credit .................................. 939,000
Note payable - stockholder .......................................... 500,000
Note payable - related party ........................................ 225,000
Accounts payable .................................................... 312,923
Accrued expenses .................................................... 38,717
Provision for sales returns ......................................... 382,440
-----------
Total current liabilities ...................................... 2,508,080
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized,
-0- shares issued and outstanding ................................. --
Common stock, $.001 par value, 50,000,000 shares authorized,
16,062,866 shares issued and outstanding .......................... 16,083
Additional paid-in capital .......................................... 11,155,930
Accumulated deficit ................................................. (11,693,357)
-----------
Stockholders' deficit .......................................... (521,364)
-----------
Total Liabilities and Stockholders' Equity .......................... 1,986,716
-----------
</TABLE>
See accompanying notes to financial statements.
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<TABLE>
<CAPTION>
Grafix Time Corporation D/B/A Carrera Golf
Statements of Operations
For the Years Ended September 30, 1997 and 1996
1997 1996
---- ----
<S> <C> <C>
Sales, net ................................................................. 3,302,881 292,310
Cost of sales .............................................................. 2,089,192 181,653
----------- -----------
Gross margin ............................................................... 1,213,689 110,657
Other costs and expenses:
Selling, general and administrative ...................................... 1,331,700 1,074,805
Research and development .................................................. 46,550 345,297
----------- -----------
Sub-total, other costs and expenses ................................... 1,378,250 1,420,102
----------- -----------
Income (loss) from operations .............................................. (164,561) (1,309,445)
Other income and expense:
Gain (loss) on disposal of inventory ..................................... 96,545 (91,800)
Interest expense .......................................................... (113,124) (27,732)
----------- -----------
Sub-total, other income and expense ................................... (16,579) (119,532)
----------- -----------
Income (loss) before income taxes and
extraordinary item ....................................................... (181,140) (1,428,977)
Income taxes ............................................................... (21,315) (29,250)
----------- -----------
Income (loss) before extraordinary item .................................... (159,825) (1,399,727)
Extraordinary item:
Forgiveness of debt, net of income taxes .................................. 41,378 56,780
----------- -----------
Net income (loss) .......................................................... (118,447) (1,342,947)
----------- -----------
Earnings (loss) per share:
Income (loss) before extraordinary item ................................... (0.01) (0.59)
Extraordinary item ....................................................... 0.00 0.02
----------- -----------
Net income (loss) per share ................................................ (0.01) (0.57)
----------- -----------
Weighted average shares outstanding ........................................ 16,062,886 2,379,050
----------- -----------
</TABLE>
See accompanying notes to financial statements.
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<TABLE>
<CAPTION>
Grafix Time Corporation D/B/A Carrera Golf
Statement of Changes in Stockholders' Equity
Years Ended September 30, 1997 and 1996
Common Stock Preferred Stock
---------------------- ----------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance, September 30, 1995 ................. 2,474,086 2,474 -- --
---------- -------- ------- ---------
Common stock issued for cash and
services - October, 1995, $1.00 per
share ....................................... 11,686 12 -- --
Common stock issued for services
- - December, 1995, $1.00 per share ........... 56,000 56 -- --
Merger with SETCO - January 1, 1996 ......... -- -- -- --
Common stock issued for services
- - March 1996, $1.00 per share ............... 41,500 41 -- --
Common stock issued for services
- - March 1996, $1.00 per share ............... 13,760 14 -- --
Cash sale of preferred stock - April
1996 $2.00 per share ........................ -- -- 500,000 5,000
Common stock issued for services
- - June, 1996, $1.00 per share ............... 16,620 17 -- --
Net (loss) for year ......................... -- -- -- --
---------- -------- ------- ---------
Balance, September 30, 1996 ................. 2,613,621 2,614 500,000 5,000
Common stock issued for services ............ 206,026 206 -- --
Conversion of debt to common
stock ....................................... 604,961 605 -- --
Conversion of preferred stock into
shares of common stock ...................... 12,000,000 12,000 (500,000) (5,000)
Issuance of common stock for
outstanding subscriptions ................... 538,378 538 -- --
Net income for the year ..................... -- -- -- --
---------- -------- ------- ---------
Balance, September 30, 1997 ................. 16,062,886 16,063 -- --
<CAPTION>
Paid in Accumulated Stock
Capital Deficit Subscription Total
------- ----------- ------------ -----
<S> <C> <C> <C> <C>
Balance, September 30, 1995 ................. 9,585,829 (10,231,963) 482,375 (181,285)
---------- -------- ------- ---------
Common stock issued for cash and
services - October, 1995, $1.00 per
share ....................................... 11,654 -- -- 11,686
Common stock issued for services
- - December, 1995, $1.00 per share ........... 55,944 -- -- 56,000
Merger with SETCO - January 1, 1996 ......... 338,230 -- (290,000) 48,230
Common stock issued for services
- - March 1996, $1.00 per share ............... 41,459 -- -- 41,500
Common stock issued for services
- - March 1996, $1.00 per share ............... 13,736 -- -- 13,750
Cash sale of preferred stock - April
1996 $2.00 per share ........................ 875,500 -- -- 880,500
Common stock issued for services
- - June, 1996, $1.00 per share ............... 16,503 -- -- 16,520
Net (loss) for year ......................... -- (1,342,947) -- (1,342,947)
---------- -------- ------- ---------
Balance, September 30, 1996 ................. 10,918,855 (11,574,910) 192,375 (456,066)
Common stock issued for services ............ 45,343 -- -- 45,549
Conversion of debt to common
stock ....................................... 5,995 -- -- 7,600
Conversion of preferred stock into
shares of common stock ...................... (7,000) -- -- --
Issuance of common stock for
outstanding subscriptions ................... 191,737 -- (192,375) --
Net income for the year ..................... -- (118,447) -- (118,447)
---------- -------- ------- ---------
Balance, September 30, 1997 ................. 11,155,930 (11,693,357) -- (521,364)
</TABLE>
See accompanying notes to financial statements.
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<TABLE>
<CAPTION>
Grafix Time Corporation D/B/A Carrera Golf
Statement of Cash Flows
Years Ended September 30, 1997 and 1996
1997 1996
---- ----
<S> <C> <C>
Net income (loss) ............................................................... (118,447) (1,342,947)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization .............................................. 13,635 6,817
Stock issued for services .................................................. 45,549 129,436
Changes in assets and liabilities:
(Increase) decrease in accounts receivable ................................. (431,678) 47,500
(Increase) decrease in employee advances ................................... 31,185 (38,185)
(Increase) decrease in inventory ........................................... (739,169) (398,893)
(Increase) decrease in prepaids ............................................ -- 16,900
(Increase) decrease in merchandise deposits ................................ 279,066 (279,066)
(Increase) decrease in other assets ........................................ 9,807 (9,807)
Increase (decrease) in accounts payable and accrued
expenses .................................................................. (153,977) 205,120
Increase (decrease) in customer deposits ................................... (55,198) 437,638
---------- ----------
Total adjustments ..................................................... (1,000,780) 117,660
Net cash provided by (used in) operating activities ............................. (1,119,227) (1,225,287)
Cash flows from investing activities:
Acquisition of plant and equipment ............................................ -- (15,543)
Licensing agreement obtained .................................................. -- (50,000)
Advances to affiliate ......................................................... -- --
Advances to officer ........................................................... -- --
Net cash provided by (used in) investing activities (65,543) Cash flows from
investing activities:
Proceeds from notes payable - stockholder ..................................... 815,600 454,000
Proceeds from note payable - bank ............................................ 939,000 --
Proceeds from note payable - related party ................................... 225,000 --
Repayment of notes payable ..................................................... (660,000) (17,000)
Preferred stock issued for cash ............................................... -- 880,500
Common stock issued for cash ................................................... -- 10,000
Common stock subscribed for cash ............................................... -- --
Repayment of officers' loans ................................................... -- (22,800)
Net cash provided by (used in) financing activities ............................. 1,319,600 1,304,700
Increase (decrease) in cash ..................................................... 200,373 13,870
Cash and cash equivalents, beginning of period .................................. 14,712 842
Cash and cash equivalents, end of period ........................................ 215,085 14,712
Supplemental cash flow information:
Cash paid for interest ........................................................ 71,811 --
Cash paid for income taxes ..................................................... -- --
Non-cash investing activities:
Notes converted into common stock ............................................. 507,600 --
Licensing agreement included in accounts payable .............................. -- 100,000
</TABLE>
See accompanying notes to financial statements.
12
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Grafix Time Corporation D/B/A Carrera Golf
Notes to Financial Statements
September 30, 1997
Note 1. Organization and Summary of Significant Accounting Policies:
The Company was incorporated in New York on April 16, 1986. The Company
previously operated under the names "Mont Blanc Resources, Inc." and "Movies
Marketing, Inc." Its previous business was the distribution of fashion sports
watches and electronic jewelry. These product lines were sold in June 1991.
During April 1991 the Company acquired the rights to continue development of and
begin marketing a unique sunglass product known as "ISE", Industrial Strength
Eyewear. During September 1993, due to product manufacturing problems and
exhaustion of capital reserves, the Company discontinued its efforts to develop
and market the ISE product line and began searching for a buyer for the
business. The sale of the business was completed during February 1994.
On January 2, 1996, the Company completed an asset purchase agreement with
K.W.A.T., Inc. (formerly Sports Equipment Technology Company, Inc., SETCO), a
Colorado development stage corporation engaged in design, manufacture and sale
of golf related equipment and apparel using the licensed trade name "Carrera".
Prior to the merger, SETCO was controlled by certain individuals who also
controlled the Company. Accordingly, the merger was accounted for as a
recapitalization of companies under common control, which most resembles the
"pooling of interests" method of accounting. The Company issued 800,000 shares
of its restricted common stock to effect the asset purchase. SETCO's most
significant asset at the merger date was a license agreement with Carrera
International, Inc. for the rights to use its trade name in connection with
marketing the company's products.
The Company's operations and sales of golf related equipment and apparel
commenced during January, 1996.
Use of Estimates:
Management of the Company uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could vary from the estimates that management uses.
Inventories:
Inventories of golf equipment and apparel are stated at the lower of cost or
market. Cost is determined using the first-in, first-out method.
Equipment and Depreciation:
Equipment is recorded at cost and is depreciated based upon estimated useful
lives using the straight-line method. Estimated useful lives are 5 years.
Depreciation charged to operations was $3,485 and $1,554 for the years ended
September 30, 1997 and 1996, respectively.
13
<PAGE>
Trade Name License:
The Company has a licensing agreement for the use of the trade name "Carrera" in
connection with the manufacture and distribution of golf equipment and apparel
worldwide. The agreement calls for payment of $200,000 of which $100,000 had
been paid at September 30, 1996 with the remaining $100,000 paid in February,
1997. The agreement also calls for minimum royalty payments beginning January,
1997.
The cost of the licensing agreement has been capitalized and is being amortized
over the life of the agreement (19 years). Amortization charged to operations
was $10,526 and $5,263 for the years ended September 30, 1997 and 1996,
respectively.
Earnings Per Share:
Primary per share amounts are based on the weighted average number of common
shares outstanding. Equivalent shares arising from the assumed conversion of
debentures were not considered in 1996 as their effect would be anti-dilutive.
Revenue Recognition:
Revenue is recognized at the time the product is shipped. A provision for sales
returns is estimated in the period corresponding to the original sale based on
actual returns experienced in prior periods.
Cash:
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
Research and Development Costs:
Research and development costs are charged to expense as incurred. Costs charged
to expense were $46,550 and $345,927 for the years ended September 30, 1997 and
1996, respectively.
Financial Instruments:
The Company's short term financial instruments consist of cash and cash
equivalents, accounts receivable/payable, and notes payable. The carrying
amounts of such financial instruments approximate fair value because of the
short term maturities of these instruments.
Concentration of Credit Risk:
During the years ended September 30, 1997 and September 30, 1996, approximately
95% and 98% of the Company's sales were made to Citizen Trading Company (a
foreign customer). At September 30, 1997 the Company held an account receivable
of $325,360 from this customer and at September 30, 1996 the Company held a
deposit of $55,198 from this customer. Loss of this customer would have a severe
negative economic impact on the Company's operations.
At September 30, 1997 the Company maintained a cash balance of approximately
$110,000 in excess of the FDIC coverage limit at one bank.
Advertising Costs:
The Company's policy is to expense advertising costs at first showing.
Advertising and promotion costs of $ 74,436 and $ 211,831 were charged to
operations during the years ended September 30, 1997 and 1996, respectively.
14
<PAGE>
Note 2. Inventory:
Inventory is comprised of the following at September 30, 1997:
Raw materials $ 850,802
Finished goods 257,060
---------
Total inventory $1,137,862
Note 3. Employee Advances:
The Company has made unsecured non-interest bearing advances to certain
employees which are payable on demand.
Note 4. Notes Payable:
Notes payable consist of the following at September 30, 1997:
Unsecured notes to ten different note holders with
interest at 12%. These notes were due and paid
in full in October, 1997 $110,000
Note 5. Note Payable - Bank Line of Credit:
At September 30, 1997 the Company had been advanced $939,000 against a
$1,000,000 credit line facility with a bank. The credit line bears interest at
the bank's prime rate (8.5% at October 31, 1997), expires on May 31, 1998 and is
personally guaranteed by the Company's principal shareholder.
Note 6. Note Payable - Stockholder:
The Company has been advanced $500,000 by its principal stockholder at September
30, 1997. The unsecured advance is payable on demand and bears interest at the
rate of 10% per annum. If the principal is not paid within five days after
demand, the note will be considered in default and a late charge of the greater
of $250 or 5% of the principal balance plus accrued interest will come due.
In addition, the default interest rate will increase to 15%.
Note 7. Note Payable - Related Party:
A company affiliated with the Company's principal stockholder has made a
$225,000 advance at October 31, 1997. The unsecured advance is payable on demand
and bears interest at the rate of 10% per annum. If the principal is not paid
within five days after demand the note will be considered in default and a late
charge of the greater of $250 or 5% of the principal balance plus accrued
interest will come due. In addition, the default interest rate will increase to
15%.
15
<PAGE>
Note 8. Stockholders' Equity:
During the periods covered by these financial statements and in periods prior
thereto, the Company issued shares of common stock without registration under
the Securities Act of 1933. Although the Company believes that the sales did not
involve a public offering of its securities and that the Company did comply with
the "safe harbor" excemptions from registration under Section 4(2), it could
still be liable for rescission of the sales if such exceptions were found not to
apply.
On March 5, 1996 the remaining $150,000 of a 1993 debenture issue along with
accrued interest was converted into 127,860 shares of the Company's restricted
common stock The Company had recorded this transaction as a subscription to
common stock of $182,375 in the financial statements for the year ended
September 30, 1995.
During the year ended September 30, 1996, the Company's Board of Directors
approved a 1.4 share for 1 share stock split and a 1 share for 40 share reverse
stock split for its common stock. All share and per share amounts included in
the financial statements and footnotes thereto have been restated to reflect the
stock splits.
During the year ended September 30, 1996, the Company issued 11,666 shares of
common stock for cash aggregating $10,000 and services of 1,666, and 56,000
shares of common stock for services valued at $56,000, which is equivalent on a
per share basis to the price paid by the purchaser for cash. In addition, the
Company issued 41,500 shares of common stock for services pursuant to a Form S-8
registration. The shares were valued at the bid price of $1.00 per share on the
date of issuance. The Company also issued 13,750 shares of restricted common
stock to certain individuals who accepted the Company's notes for an aggregate
amount of $340,000 in cash (see Note 4). Finally, the Company issued 16520
shares of is restricted common stock for services valued at $16,250 ($1.00 per
share).
On January 2, 1996, the Company issued 800,000 shares of its restricted common
stock to effect asset purchase of SETCO in a recapitalization of companies under
common control. The transaction most resembles the "pooling of interests" method
of accounting (see Note 1).
During the year ended September 30, 1996, the Company sold 500,000 shares of its
$.01 par value Series A preferred stock to a private investor for $2.00 per
share. The Company realized net proceeds of $880,500 from the transaction. The
preferred stock carries a 7% cumulative annual dividend and is convertible into
common stock at the option of the holder for a 25% ownership interest in the
Company upno the attainment of certain financial results or a firm underwriting
commitment for $5,000,000 or more of equity financing. During the year ended
September 30, 1997 the investor converted the 500,000 shares of preferred stock
into 12,000,000 shares of the Company's stock.
During the year ended September 30, 1997 the Company issued 206,026 shares of
its common stock for services valued at $45,549.
Note holders were issued 604,961 shares of common stock during the year ended
September 30, 1997 in conjunction with repayment of the notes.
The Company issued 638,378 shares of common stock in exchange for outstanding
subscriptions during the year ended September 30, 1997.
16
<PAGE>
Note 9. Commitments:
The Company leases an office/warehouse location in Fort Worth, Texas under the
terms of a sublease agreement which requires monthly rent of $1,390 per month
and expires on April 12, 1997. Rent charged to operations was $4,170 and $17,695
during the years ended September 30, 1997 and 1996, respectively. Future rental
commitments are $8,896 for the year ending September 30, 1998.
In addition, the Company's licensing agreement discussed in Note 1 requires the
following royalty payments beginning January 1, 1997 and continuing through
December 31, 2014:
6% on net sales up to $7,500,000
5.5% in excess of $7,500,000 to $15,000,000
5% on net sales in excess of $15,000,000
The Company paid $72,500 in royalty payments during the year ended September 30,
1997. Additional royalty payments of approximately $125,500 have been waived by
Carrera for the year ended September 30, 1997.
At September 30, 1997, the Company had unused letters of credit with a bank
totalling $52,962.
The Company is a defendant in a civil suit filed by its former president. The
suit seeks compensatory and punitive damages of $2.5 million for, among other
claims, breach of contract and improper dismissal. The Company vigorously denies
the allegations and will defend its position aggressively. It is too early in
the proceedings to predict an outcome of the case.
Note 10. Income Taxes:
The Company has adopted Financial Accounting Standards Board Statement No. 109,
Accounting for Income Taxes. Deferred income taxes may arise from temporary
differences resulting from income and expense items reported for financial
accounting and tax purposes in different periods. Deferred taxes are classified
as current or non-current, depending on the classifications of the assets and
liabilities to which the relate. Deferred taxes arising from temporary
differences that are not related to an asset or liability are classified as
current or non-current depending on the periods in which the temporary
differences are expected to reverse. The deferred tax asset related to the
operating loss carryforward of approximately $11,380,000 at September 30, 1997
has been fully reserved. The net operating loss carryforwards expire through
2011.
Note 11. Forgiveness of Debt:
During the year ended September 30, 1997 the Company had $62,693 of prior period
debt forgiven by creditors.
During the year ended September 30, 1996 prior period wages and expenses owed to
a former officer aggregating $86,030 were forgiven by the officer in conjunction
with resignation.
17
<PAGE>
Note 12. Basis of Presentation:
The accompanying financial statements have been prepared on a "going concern"
basis which contemplates the realization of assets and the liquidation of
liabilities in its ordinary course of business.
The Company has incurred operating losses during the years ended September 30,
1997 and 1996 aggregating $118,447 and $1,342,947, respectively, and has
negative equity of $521,364 and a working capital deficit of $716,455 at
September 30, 1997.
During the periods presented presented the Company has not generated positive
cash flow from operations and there can be no assurance that the trend will not
continue. Profitable operations are dependent upon, among other factors, the
Company's ability to obtain equity or debt financing and its ability to
successfully market its products.
The Company is unable to project a level of revenue which would allow a reversal
of its history of operating losses in the near future. In this regard, the
Company is attempting to raise additional equity capital. The Company is also
seeking to expand its customer base and attempting to lower its operating costs.
Note 13. Subsequent Event:
On January 12, 1998, the Company executed a non-exclusive letter of funding
commitment with Merlin Venture Partners of Sunnyvale, California. The Company
filed a Report on Form 8-K with the Securities and Exchange Commission reporting
this letter of commitment on January 27, 1998.
18
<PAGE>
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons.
(a) Directors and executive officers of the Company:
Name Age Position
- ---- --- --------
Raymond E. Theiss 43 Acting President and CEO
Ted Honda 52 Executive Vice President and Director
Kent D. Krausman 38 Vice President, Counsel and Director (as of
November 1, 1997)
Vir Sondhi 65 Chairman, Board of Directors
Stephen E. Duke 45 Director
All directors hold office until the next annual meeting of shareholders or
until their successors are duly elected and qualified. Officers serve at the
pleasure of the board of directors.
Raymond E. Theiss. Mr. Theiss has been the Acting President of the Company since
July, 1997. He is also Vice President and General Counsel of Transtar
Industries, Inc. of Cleveland, Ohio. Mr. Theiss is an attorney, licensed to
practice in Ohio. He earned his B.A. degree in Accounting from Kent State
University. Mr. Theiss also earned an M.A. degree in Economics from Case Western
Reserve University, and a J.D. degree from the Cleveland Marshall College of
Law.
Ted Honda. Mr. Honda has almost 30 years' experience in the golf industry. He
has held various executive positions within the industry, including serving as
Executive Vice President of Cosmo World Corporation from 1985 to 1992. In that
capacity, Mr. Honda was responsible for Cosmo World Corporation's entire
operation outside of Japan. Mr. Honda has also been a board member of The Ben
Hogan Company, and managed that company's daily operations. Mr. Honda was the
Vice Chairman of The Pebble Beach Company, and also managed that company's daily
operations, including preparations for the 1992 U.S. Open. Mr. Honda has served
as the Deputy General Manager of planning and development of General Coast
Enterprises, Inc. ("GCE"). He has been responsible for the acquisition, planning
and construction of eight golf course projects, including three Jack Nicklaus
and five Dye designed courses. Mr. Honda has also served as the General Manager
of the planning department of Olympic Staff Company, Ltd., and was responsible
for the development of custom-made golf clubs and graphite shafts. GCE is the
parent company of Cosmo World and Olympic group. Mr. Honda has also represented
the Japanese interests of some of the top names in professional golf as an
agent. Mr. Honda is responsible for product research and development,
international marketing and distributor relations, and player sponsorship and
endorsements.
Kent D. Krausman. Mr. Krausman has been an officer and director of the Company
since November 1, 1997. He has been a licensed Colorado attorney since May,
1985. Mr. Krausman has owned and operated his own law firm, Krausman LLC, since
January, 1987. His firm specializes in securities, corporate finance, and SEC
reporting. Mr. Krausman acted as special counsel to Sherman & Howard, LLC,
representing TeleCommunications, Inc. in its Bell Atlantic, Liberty Media, and
QVC transactions. From January, 1991 through September, 1993, Mr. Krausman owned
the Galleria Theatre (as well as the smaller Encore Theatre) in the Denver
Center for the Performing Arts. Mr. Krausman was the Chief Operating Officer and
Executive Producer of those facilities, financing and engineering the turnaround
19
<PAGE>
of the facilities from bankruptcy to their current status as one of Denver's
most successful and popular cabaret theatres. Mr. Krausman sold the theatres to
Robert Garner Center Attractions in 1993. Mr. Krausman earned his B.A. degree in
Economics (cum laude, Honors Program) from the University of Denver in 1981. He
earned his Juris Doctor degree from The University of Michigan Law School, Ann
Arbor, Michigan in 1984.
Vir Sondhi. Mr. Sondhi is president and Chairman of the Board of NASCO
Industries, Inc., Medina, Ohio, a privately held company. He also serves as a
member of the Board of Directors of Transtar Industries, Inc., a privately-held
company based in Walton Hills, Ohio. Mr. Sondhi is a graduate of the University
of Cambridge (England), and a graduate of the University of California at Los
Angeles. Mr. Sondhi previously served as Senior Vice President of the Bank of
America and Senior Vice President of the Bank of Montreal. He has also served as
Director of International Operations for Huntington National Bank, Cleveland,
Ohio.
Stephen E. Duke. Mr. Duke is currently employed by Transtar Industries, Inc., a
private company headquartered in Walton Hills, Ohio. Mr. Duke was previously
employed at Tremco, Inc., a subsidiary of the B.F. Goodrich Company. Mr. Duke
earned a BSBA degree in Accounting from John Carroll University, Cleveland,
Ohio, in 1974, and an EMBA degree from Baldwin Wallace College in 1992. Mr. Duke
is a licensed certified public accountant.
(b) Other significant employees. None.
(c) Family relationships. None.
(d) Involvement in certain legal proceedings. None.
Item 10. Executive Compensation.
<TABLE>
<CAPTION>
Restricted
Name and principal Salary Bonus Other annual stock Options/ LTIP All other
position Year ($) ($) compensation awards SARs payouts compensation
- ------------------ ---- ------ ----- ------------ ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Raymond E. Theiss, 1997 0 0 30,000 0 0 0 0
President, CEO
Ted Honda, Executive 1997 120,000 0 0 0 0 0 0
Vice President
Kent D. Krausman, Vice 1997 0 0 0 0 0 0 0
President and Counsel
</TABLE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
(a) Security ownership of certain beneficial owners other than management.
The table below sets forth all persons, including groups, known to the Company
to be the beneficial owner of more than five percent (5%) of any class of the
Company's voting securities, as of September 30, 1997:
Monte Ahuja 12,000,000 shares (74.7%)
20
<PAGE>
(b) Security ownership of management. The table below sets forth the number
of shares of each class of the Company's equity securities, or any of its
parents or subsidiaries, beneficially owned by all executive officers and
directors of the Company as of September 30, 1997:
<TABLE>
<CAPTION>
Title of Class Name and Address of Beneficial Owner Amount and Nature of Percent of
Beneficial Owner Class
- -------------- ------------------------------------ -------------------- ----------
<S> <C> <C> <C>
Common Stock Ted Honda 363,462 2.26%
2901 Suffolk Ct. East, #130
Fort Worth, TX 76133
Common Stock Kent D. Krausman 125,000 0.78%
6260 S. University Blvd.
Littleton, CO 80121
</TABLE>
(c) Changes in control. None at September 30, 1997. As part of the
financing agreement with Mr. Ahuja discussed above and disclosed in the
Company's Report on Form 8-K filed with the Securities and Exchange Commission
on March 12, 1997, incorporated by reference herein, the Company issued 12
million shares of its common stock (approximately 75 percent) to Mr. Ahuja.
Item 12. Certain Relationships and Related Transactions. None.
Item 13. Exhibits and Reports on Form 8-K.
The Company filed a Report on Form 8-K on January 27, 1998, reporting
the execution of a funding letter of commitment with Merlin Venture Partners of
Sunnyvale, California.
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.
GRAFIX TIME CORPORATION
By: /S/ RAYMOND E. THEISS
Date: March 3, 1998 Raymond E. Theiss, Acting President
By: /S/ TED HONDA
Date: March 3, 1998 Ted Honda, Executive Vice President and
Director
By: /S/ KENT D. KRAUSMAN
Date: March 3, 1998 Vice President, Counsel and Director
By: /S/ VIR SOHDHI
Date: March 3, 1998 Vir Sondhi, Chairman of the Board of
Director
By: /S/ STEPHEN E. DUKE
Date: March 3, 1998 Stephen E. Duke, Director
21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 215,085
<SECURITIES> 0
<RECEIVABLES> 431,678
<ALLOWANCES> 0
<INVENTORY> 1,137,862
<CURRENT-ASSETS> 1,791,625
<PP&E> 15,543
<DEPRECIATION> 4,663
<TOTAL-ASSETS> 1,986,716
<CURRENT-LIABILITIES> 2,508,080
<BONDS> 0
0
0
<COMMON> 16,083
<OTHER-SE> (521,364)
<TOTAL-LIABILITY-AND-EQUITY> 1,986,716
<SALES> 3,302,881
<TOTAL-REVENUES> 3,302,881
<CGS> 2,089,192
<TOTAL-COSTS> 1,378,250
<OTHER-EXPENSES> (16,579)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (113,124)
<INCOME-PRETAX> (181,140)
<INCOME-TAX> (21,315)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 41,378
<CHANGES> 0
<NET-INCOME> (118,447)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
