SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Quarterly Period Ended: June 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Act of
1934
For the Transition Period From to .
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Commission File Number: 33-7811-NY
Grafix Corporation
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(Exact name of registrant as specified in its charter)
Delaware 93-0943925
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(State of Incorporation) (I.R.S. Employer I.D. Number)
8250 S. Akron St., Ste. 203, Englewood, CO 80112
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(Address of principal executive offices and Zip Code)
(800) 789-7736
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(Registrant's telephone number, including area code)
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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant's classes of
common stock:
16,063,420 common shares were outstanding as of June 30, 1998.
<PAGE>
PART I. Item 1. Unaudited Condensed Consolidated Financial Statements.
<TABLE>
<CAPTION>
Grafix Corporation D/B/A Carrera Golf
Balance Sheet
June 30, 1998
(Unaudited)
ASSETS
June 30, 1998
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<S> <C>
CURRENT ASSETS
Cash ........................................................................ $ 71,508
Accounts Receivable ......................................................... 192,792
Due from Employees .......................................................... 4,900
Inventory ................................................................... 1,366,507
Misc. Costs Applied ......................................................... 0
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Total Current Assets ................................................... 1,635,707
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PROPERTY AND EQUIPMENT, at cost, net of accumulated depreciation of
$3,971 ................................................................... ....... $ 11,513
TRADE NAME LICENSE, at cost, net of accumulated amortization of $15,789 .......... $ 184,211
TOTAL ASSETS ..................................................................... $ 1,831,431
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LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable - current portion ............................................. $ 500,000
Note payable - LOC Huntington Bank .......................................... 1,350,000
Note payable - related party short term ..................................... 544,000
Accounts payable and accrued expenses ....................................... 380,703
Payroll taxes payable ....................................................... 10,750
Provision for sales returns ................................................. 256,986
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Total Current Liabilities .............................................. 3,042,439
STOCKHOLDERS' DEFICIT:
Common stock, $.001 par value, 50,000,000 shares authorized, 16,063,420 shares
issued and outstanding ................................................. 16,063
Paid-In Capital ............................................................. 11,155,930
Accumulated Deficit ......................................................... (11,777,317)
Current Deficit ............................................................. (605,684)
Total Shareholders' Deficit ............................................ (1,211,008)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT ...................................... $ 1,831,431
============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Grafix Corporation
D/B/A Carrera Golf
Statement of Operations
For the Three and Nine Months Ended June 30, 1998 and 1997
(Unaudited)
Three months ended Nine months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales ................................. $ 350,626 $ 644,476 $ 1,440,838 $ 1,871,965
Sales Discounts ....................... 1,070 0 42,592 0
---------- ---------- ---------- ----------
Net Sales ............................. 349,556 644,476 1,398,246 1,871,965
---------- ---------- ---------- ----------
Cost of Goods ......................... 220,144 457,716 912,642 1,159,917
---------- ---------- ---------- ----------
Gross Margin .......................... 129,412 186,760 485,604 712,048
---------- ---------- ---------- ----------
Selling, General and Administrative
Expenses ........................... 310,966 252,965 954,066 991,594
---------- ---------- ---------- ----------
Income (loss) from Operations ......... (181,554) (66,205) (468,462) (279,546)
Interest Expense ...................... 18,067 12,144 137,221 46,275
---------- ---------- ---------- ----------
Other Expense ......................... 0 0 0 (96,645)
---------- ---------- ---------- ----------
Pre-Tax Income (Loss) ............ (199,620) (78,349) (605,684) (229,176)
---------- ---------- ---------- ----------
Income Taxes .......................... 0 0 0 21,315
---------- ---------- ---------- ----------
Extraordinary Item(s) ................. 0 0 0 (41,378)
Net income (loss) ................ (199,620) (78,349) (605,684) (209,113)
---------- ---------- ---------- ----------
Earnings (loss) per share ............. $ (0.01) $ (0.01) $ (0.04) $ (0.02)
========== ========== ========== ==========
Weighted average shares
outstanding ........................... 16,063,402 11,604,873 16,063,402 11,604,873
========== ========== ========== ==========
</TABLE>
<PAGE>
PART I. Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
(1) Overview
Grafix Corporation d/b/a Carrera Golf (the "Company") is a Delaware
corporation that owns a license (the "Carrera License") to manufacture,
sell and distribute golf products (golf clubs, bags, accessories and
apparel) under the Carrera brand name worldwide. The Company originally
obtained a Carrera license by purchasing the assets of Sports Equipment
Technology Company ("SETCO") in January, 1996. This transaction was
accounted for as a merger, and is more fully discussed in the Company'
Form 10-KSB for the fiscal year ended September 30, 1996, and the notes
to the financial statements filed therewith. The financial statements
filed as a part of the Company's Report on Form 10-QSB for the quarter
ended December 31, 1995 have been adjusted to reflect the SETCO merger.
All references to the Company's past activities include the activities
of SETCO.
In January, 1997, the Company obtained a new long-term Carrera License
from Carrera Optyl Marketing GmbH, a subsidiary of Safilo Group GmbH,
Italy ("Safilo"). Safilo had acquired the Carrera brand name through
bankruptcy proceedings in Germany. The Carrera License runs for five
years, with an additional automatic renewal of 5 years. The Carrera
License obligates the Company to pay Safilo a royalty on sales, and
includes annual minimum royalties.
The Company was in the product research and development stage until
approximately July, 1996. In early 1996, the Company successfully
consummated a distributorship agreement with Citizen Trading Group,
Tokyo, Japan ("Citizen"), for distribution of all Carrera Golf products
in Japan. Citizen placed its first order with the Company in July,
1996. As of December 31, 1997, Citizen was the Company's primary
customer, accounting for over 90 percent of the Company's sales.
On April 6, 1998, the Board of Directors elected Mr. Monte Ahuja as
Chairman, and named Kent D. Krausman president and CEO of the Company.
On July 30, 1998, the Company effected a reincorporation in Delaware by
merging with Grafix Corporation. The Company's Board of Directors and
shareholders approved a 1:3 reverse split of the Company's issued and
outstanding common stock effective August 1, 1998. On August 10, 1998,
the Company filed a Report on Form 8-K detailing the corporate changes
referenced above. That Report is incorporated herein by reference.
(2) Results of Operations
The Company has successfully designed and developed golf clubs, bags,
accessories and apparel for sale under the Carrera brand name. The
Company's primary customer is Citizen; however, management has
developed a marketing plan for 1998 and beyond that contemplates sales
in Asia, Europe, and the United States. The Company's marketing plan is
dependent upon continuing the relationship with Citizen, and upon
obtaining other sources of financing. The Company has established
assembly and other operations in Denver, Colorado, and has realized
initial sales in the United States as of the date of this report.
<PAGE>
Third Quarter 1998 (Ended June 30, 1998) Compared to Third Quarter 1997
Sales
The Company reported net sales of $ 349,556 for the quarter ended June
30, 1998, compared with sales of $ 644,476 for the same period the
prior year. Management attributes this decrease to the Asian economic
recession which began in late 1997, and is ongoing. Virtually all golf
equipment companies that realize sales in Asia have reported
significant sales declines as a result of the Asian recession. The
Company is particularly susceptible to this economic downturn, as
Citizen accounts for over 90 percent of the Company's sales. Management
previously adopted a diversification strategy so that the Company would
not be as dependent on Citizen. Management continues to implement that
strategy, which includes but is not limited to introduction of products
in Canada, the U.S., Europe, and South/Central America, as well as
development and introduction of the Company's line of apparel.
Costs and Expenses
The Company reported selling, general, and administrative expenses of $
310,966 for the third fiscal quarter of 1998, an increase of $ 58,001
(22.9%) from the same period the prior year. Principal expenditure
increases included advertising, travel, salaries, professional fees,
and research and development, as the Company geared up to introduce its
products in other markets. The Company also paid interest expenses of $
18,067 for the quarter ended June 30, 1998, compared with interest
expenses of $ 12,144 for the same period the prior year.
Net Loss
The Company reported a net loss of $ (199,620), or $ (.01) per share,
for the quarter ended June 30, 1998, compared with a net loss of $
(78,349) for the same period the prior year. Management attributes the
net loss directly to the Asian economic recession, which accounted for
decreased sales to Citizen during the quarter.
Financial Condition, Liquidity and Capital Resources
At June 30, 1998, the Company reported approximately $1.6 million in
cash, accounts receivable, and inventory (at cost). The Company also
reported over $ 2.3 million in short-term notes payable. Assuming
normal collection of accounts receivable and inventory replacement, the
Company can, for the short term, continue to service its debt. Although
Citizen has made orders for June, July, August, and September, 1998,
there is no assurance that Citizen will continue to make orders or
increase orders of the Company's products, or that the Asian economic
crisis will improve in the immediate future. Mr. Ahuja, the Company's
Chairman, has provided much of the Company's operating capital (or
guarantees for loans for working capital). The Company is continuing
its efforts to raise financing from other sources; however, there is no
guarantee that such efforts will be successful. It is unlikely that the
Company will survive in the long term if Citizen does not establish a
consistent pattern of monthly orders, and/or if the Company's financing
efforts are unsuccessful.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
The Company's Board of Directors and shareholders approved a 1:3 reverse
split of the Company's issued and outstanding common stock, effective August 1,
1998.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On July 15, 1998, a shareholders owning a majority of the then-issued and
outstanding common stock of the Company voted to approve a 1:3 reverse split of
the Company's issued and outstanding common stock, effective August 1, 1998.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
The Company filed a Report on Form 8-K on August 10, 1998, reporting the
1:3 reverse split of the Company's issued and outstanding common stock,
reincorporation of the Company in Delaware, change of the Company's name to
Grafix Corporation, and naming of new officer and directors (Item 5).
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 CORPORATION
August 12, 1998 By: /S/ KENT D. KRAUSMAN
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Kent D. Krausman, President, CEO, Treasurer, and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 71,508
<SECURITIES> 0
<RECEIVABLES> 192,792
<ALLOWANCES> 0
<INVENTORY> 1,366,507
<CURRENT-ASSETS> 1,635,707
<PP&E> 11,513
<DEPRECIATION> 3,971
<TOTAL-ASSETS> 1,831,431
<CURRENT-LIABILITIES> 3,042,439
<BONDS> 0
0
0
<COMMON> 16,063
<OTHER-SE> 11,155,930
<TOTAL-LIABILITY-AND-EQUITY> 1,831,431
<SALES> 350,626
<TOTAL-REVENUES> 349,556
<CGS> 220,144
<TOTAL-COSTS> 310,966
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,067
<INCOME-PRETAX> (199,620)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (199,620)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
