U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission file number: 0-19644
Sierra-Rockies Corporation
--------------------------
(Name of small business issuer in its charter)
CALIFORNIA 33-0300193
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
Holly Sugar Building - Suite 330, 2 N. Cascade Avenue,Colorado Springs, CO 80903
(Address of Principal Executive Office) (Zip Code)
Issuer's telephone number: (719) 520-1800
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities 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 ___ No _X_
Check if there is no disclosure of delinquent filers in response 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. [ ]
State issuer's revenues for its most recent fiscal year: $95,000
The aggregate market value of the voting stock held by non-affiliates
(11,957,784 shares of Common Stock) was $358,734 as of December 31, 1996. The
stock price for computation purposes was $.03, based on the closing sale price
for the Registrant's Common Stock on NASDAQ Bulletin Board on December 31, 1996.
This value is not intended to be a representation as to the value or worth of
the Registrant's shares of Common Stock. The number of shares of non-affiliates
of the Registrant has been calculated by subtracting shares held by persons
affiliated with the Registrant from outstanding shares. The number of shares
outstanding of the Registrant's Common Stock as of June 30, 1997 was 17,393,048
shares.
<PAGE>
SIERRA-ROCKIES CORPORATION
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INDEX TO ANNUAL REPORT
ON FORM 10-KSB
Page
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PART I
Item 1. DESCRIPTION OF BUSINESS.......................................... 3
Item 2. DESCRIPTION OF PROPERTIES........................................ 8
Item 3. LEGAL PROCEEDINGS................................................ 9
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDER............... 9
PART II
Item 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.............................................. 10
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................. 11
Item 7. FINANCIAL STATEMENTS............................................. 13
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................. 13
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS - COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT.............................................................. 13
Item 10. EXECUTIVE COMPENSATION........................................... 15
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT....................................................... 17
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 19
Item 13. EXHIBITS AND REPORTS ON FORM 8-K................................. 21
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PART I
The matters addressed in this report on Form 10-KSB, with the exception of
the historical information presented, contain forward-looking statements
involving risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under the heading "Certain
Factors That May Affect Future Results" in the Business section (Item 1) and
elsewhere in this report.
Item 1. DESCRIPTION OF BUSINESS
(a) Prior Business Development. Sierra-Rockies Corporation, a
California corporation (the "Company") was organized in 1988, under the name,
"TJB Enterprises, Inc." as a blind pool/blank check company formed for the
purposes of seeking a merger with a private company.
On September 24, 1991, TJB Enterprises, Inc. consummated an Agreement and
Plan of Reorganization whereby it acquired 100% of the outstanding stock of
Gallery Rodeo of Beverly Hills, Inc., a California corporation, Gallery Rodeo of
Lake Arrowhead, Inc., a California corporation, and Gallery Rodeo of Taos, Inc.,
a New Mexico corporation. Concurrent with this transaction, the Company changed
its name to Gallery Rodeo International, Inc. The Company operated as a fine art
retailer and publisher since 1991, although it also acquired hotel and gaming
properties.
Effective May 9, 1996 the Company sold its art subsidiaries in order to
concentrate on hotel, gaming and related businesses. At the shareholders meeting
held September 20, 1996 the shareholders approved a name change to
Sierra-Rockies Corporation.
(b) Current Business of Issuer. The Company currently owns and operates
a hotel and gaming property in Cripple Creek, Colorado, and continues to develop
the property. Additionally, the Company operates a small construction company
through a wholly-owned subsidiary, Sierra-Rockies Development Corporation, which
specializes in the installation of manufactured houses, and is entering the
hotel management business through another wholly-owned subsidiary, Sierra
Hospitality Services Corporation.
Sale of Retail Art Business
The Company entered into an asset purchase agreement dated March 31,
1996 with the Company's President, pursuant to which the Company sold its retail
art business and related subsidiaries to the President effective May 9, 1996.
The Company sold and terminated its involvement in the Company's art operation
in exchange for a promissory note in the principal amount of $1,000,000, bearing
interest at the rate of 8% per annum, payable quarter commencing February 1,
1997, with all principal and accrued interest due and payable in May, 2001.
Payment of the note may be made in the form of cash, securities of the Company,
other securities acceptable to the Company, or combinations thereof. The note is
secured by 4,000,000 shares of stock in the Company.
Under present management, the Company has focused on its hotel and
gaming business and entered the construction industry, with particular emphasis
upon manufactured housing installation.
The Company's name was changed to Sierra-Rockies Corporation effective
the 15th day of November, 1996 and the Company's executive offices relocated to
2 N. Cascade Avenue, Holly Sugar Building, Suite 330, Colorado Springs, CO,
80903. The telephone number is 719/520-1800 and the telecopy number is
719/520-1824.
<PAGE>
Real Property Development - The Bloomer Property
On May 17, 1994, the Company purchased a 90% ownership interest in 13
contiguous lots located in Cripple Creek, Colorado (the "Bloomer Property"). The
Bloomer Property was acquired by the Company for a total purchase price of
$370,000 consisting of the following: (1) $75,000 cash paid to the seller; (2) a
promissory note in the principal amount of $120,000 in favor of seller, payable
without interest in 24 equal monthly installments of $5,000; and (3) 350,000
shares of restricted Common Stock of the Company.
For purposes of determining the purchase price, the Company determined the fair
market value of the restricted Common Stock of the Company was $.50 per share.
The Company financed the $75,000 cash payment pursuant to a promissory note made
by the Company and Mr. Thomas Harris, a former director of the Company, with
such promissory note being secured by a Deed of Trust on the property. The lots
consist of two lots within the town's legalized gaming district, with the 11
remaining lots zoned for business buffer. On June 20, 1995, the Company entered
into an agreement for the sale of the Bloomer property and buildings located
thereon. Under the terms of the agreement, the buyer purchased the Bloomer
Property at a price of $1,160,000 with payment to the Company in the form of
$150,000 on close of escrow ($15,000 of which was paid on June 30, 1995 with the
remaining $135,000 to be paid at closing); three promissory notes with an
aggregate principal amount of $624,000 (bearing interest 8.5% and due May 27,
1998) and assumption by the buyer of existing indebtedness of $385,000. Interest
is paid monthly. The notes are secured by the property. This transaction closed
in May, 1996.
Real Property Development - Wandering Star Project
Products and Services
In May, 1993, the Company purchased 10 contiguous lots in Cripple
Creek, Colorado, to be the site of the Company's proposed Wandering Star Hotel
and Casino project (the "Wandering Star"). The Wandering Star is located within
Cripple Creek's approved gaming district, situated along Highway 67, the only
paved road carrying traffic into Cripple Creek. The Company anticipates
Wandering Star, when completed, will add 206 hotel rooms to a local market that
has currently approximately 340 hotel rooms, and which the Company estimates can
support approximately 1500 rooms. In addition, the Company expects that the
casino floor area of the Wandering Star, at approximately 24,000 square feet,
will be approximately three times larger than the average casino floor area in
the town of Cripple Creek. The Company has designed the project to constitute a
full service hotel with food service, conference facilities, shops, fitness
facilities, and other amenities. The Company has not determined whether it will
operate the casino portion of the project itself, lease it to an operator, or
approach potential joint venture partners.
Development
Preliminary construction estimates indicate the cost of completion of
the Wandering Star to be approximately $25 million, excluding furniture,
fixtures, and equipment. In order to complete the Wandering Star, the Company
will need to seek additional third party financing in the form of equity
investments and/or debt. There can be no assurance that the Company will be able
to obtain such financing on terms acceptable to the Company, or at all.
Major Customers
The Wandering Star project will not depend upon any large or major
customers, but rather upon numerous individuals attracted to Cripple Creek and
Colorado for tourism and/or gaming.
<PAGE>
Government Regulation
The planned casino will be regulated by the State of Colorado.
Additionally, liquor license approvals will be necessary from both state and
local authorities. No assurance can be made that the necessary licenses will be
obtained.
The application of the Company for approval of the building of the
Wandering Star project was granted in November, 1996 by the City of Cripple
Creek, subject to height variance authorization. The Company is currently
preparing, through its architects, the height variance application. The Company
will not commence seeking financing sources as discussed above until final
governmental approval of its application for the Certificate of Appropriateness
has been obtained. Additionally, the property currently contains 2 houses. The
Company must obtain approvals to move houses from a portion of the Company's
property prior to developing the hotel/casino on the property, which potentially
may be designated as historical structures requiring compliance with additional
regulations. No assurance can be made that these final approvals will be
obtained.
Competition
There are approximately 25 casinos located in Cripple Creek, one stand
alone hotel and one significant hotel/casino. Most of the casinos are relatively
small gaming operations only, although the Holiday Inn Express consists of 62
rooms with expansion plans, the older Imperial Hotel contains 27 rooms with
expansion plans, and a 50 room expansion is proposed for the 16 room Best
Western Hotel and Casino. The new Double Eagle Hotel and Casino consists of 130
rooms. Competition in the gaming industry also comes from gaming districts in
Black Hawk and Central City, Colorado, as well as facilities nationwide in
Nevada, Mississippi, New Jersey, and other sources.
Business Outlook
The Company feels that the key to the construction and operation of the
Wandering Star project is obtaining financing, and the Company also believes
that the success of the project will depend on the continued expansion of the
Cripple Creek gaming and tourism markets. Considering the foregoing, the Company
on a preliminary basis has reviewed several joint venture or merger prospects,
but has not entered into any agreements or letters of intent to acquire or merge
with any particular company. There can be no assurance that the Company will be
successful in obtaining financing or have sufficient resources to construct the
Wandering Star without such financing or that the company will be able to
operate successfully and profitably the project once built.
Subsidiary - Sierra-Rockies Development Corporation
Products and Services
On August 1, 1996, the Company's wholly-owned Nevada subsidiary,
entered into a management agreement with Superior Homes Development Corporation,
a construction company specializing in the installation of manufactured homes.
Under the agreement, the Company initially operated the construction company at
fee of 2% of gross sales of the managed business, providing full management
services. The contract also granted the Company an option to purchase assets of
the construction company, which option was exercised in September, 1996, and the
purchase closed on November 1, 1996. Consideration for the purchase was
forgiveness of accrued management fees of $4,211.17, 150,000 shares of the
Company's Common Stock, and a $112,321.34 credit to Purchaser for obligations
assumed or paid pursuant to management agreement. The acquisition permits the
Company to install manufactured houses in the Colorado Springs, Colorado area,
as well to utilize in-house construction personnel and resources in connection
with the Wandering Star project discussed above.
<PAGE>
Product Development
The Company has an on-going program of expanding its manufactured home
installation services to include site preparation and garage construction in
order to improve its sales and to increase its regional share of the
manufactured home installation market. The Company maintains contact with major
local dealers in order to broaden not only the sources, but also the
availability, of new and existing business. As the Company is dependent upon its
relationships with dealers and manufactured housing subdivisions, the importance
of broadening its customer base is significant, especially in view of the
seasonality of the home business. The Company also intends to incorporate into
the activities of this subsidiary as much of the construction coordination and
management of the Wandering Star project as possible, consistent with good
construction management practice.
Major Customers
The Company is presently dependent upon one manufactured home
dealership in Colorado Springs for the majority of its installation work under
what essentially is a requirements contract, although it performs installation
and related constriction for individual customers and other dealers.
Government Regulations
The Company is subject to governmental regulations regarding employee
licensing, building codes and employment laws standard in the construction
industry.
Competitive Conditions
The construction industry as it pertains to manufactured home
installation is characterized by intense competition involving many companies
which have experience in various aspects of the installation of manufactured
housing. The Company feels it is competitive in the local Colorado Springs
market, in part due to the combination of its requirements contract with its
major customer. which makes its overall pricing more competitive, and renders it
less susceptible to the seasonal fluctuations of the construction business
overall, governmental construction approvals and length of time to obtain such
approvals and customer financing.
In marketing its services, the Company faces competition from existing
companies with services which are similar, and from smaller firms providing
portions of the services packaged by the Company. There is no assurance that the
Company will be able to retain its requirements contract or expand its customer
base to other dealerships for manufactured homes.
Business Outlook and Company Diversification Efforts
The Company intends to expand its customer base. The Company feels the
demand for manufactured housing is growing in the Colorado Springs area and also
upon a regional basis. Accordingly, the Company hopes to expand its business
through dealers in manufactured houses throughout the region through its
contacts with dealers and manufacturers of the units. The Company also
anticipates an involvement in the Wandering Star project for this subsidiary as
that project evolves, especially with respect to the moving of structures
located upon the project real estate and the management of the construction of
the project once final planning commences, and coordination among architects,
contractors, suppliers and governmental authorities.
Employees
The Company has 5 full-time employees and no part-time or contract
employees.
<PAGE>
Subsidiary - Sierra Hospitality Services Corporation
Products and Services
On November 25, 1996, the Company formed a new subsidiary, Sierra
Hospitality Corporation, a Colorado corporation, to become the Company's vehicle
for an entry into the hotel and hospitality services business. The Company
intends to engage in this field through the acquisition of hotel and motel
properties and the management of its own properties and those of third parties.
Product Development
The Company feels it is positioned to take advantage of the expertise
of its direct and contract employees experience and connections in this arena,
especially in connection with the development of the Wandering Star project
discussed above. The Company feels it further augmented its entry into the
hospitality service sector through the hiring of an employee with appropriate
business experience to develop an initial strategy for implementation in 1997
which would enable the Company to establish management contracts, as well as
ownership or joint ventures of hotels and motels. However, no assurance can be
made that the Company will be able to enter successfully this competitive
market.
Major Customers
Since the Company's entry into the hotel and hospitality services
business has just commenced and is in the planning stages, no major customers
exist. However, it is anticipated that initially, the Company will depend upon a
very limited number of customers until the base of its business can be
broadened.
Government Regulations
Governmental regulations, such as zoning, liquor licensing, health and
building may pertain to the acquisition, management, and /or construction of
hotel facilities in various local jurisdictions
Competitive Conditions
The Company is entering a highly competitive market in the ownership
and management of hotels and motor inn properties. Despite the extensive
background and experience in hotel management and operation background of its
personnel, cannot be assured it will be able to compete with more experienced
and better financed competitors. Once the Company has identified its market area
of emphasis, it will be in a better position to evaluate competition and its
chances of competitive success.
Business Outlook and Company Diversification Efforts
As stated above, the Company is in the process of analyzing the
business it is entering with this subsidiary and the identification of a niche
within which the Company would fit given the constraints placed upon it by its
size and the resources which can be devoted to the hotel and related service
industry. The Company plans, in general, to operate hotel properties in diverse
geographic regions so as not to become dependent upon the economic or seasonal
pressures which may be experienced in more narrowly defined areas of operation.
Employees
The Sierra Hospitality Services Corporation subsidiary has one full
time employee, supported by contract employees under the Company's management
services contract with InnerCircle Group Incorporated.
<PAGE>
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Continued Operating Losses
While the Company recorded a loss for 1996 of $(1,497,686), and a
profit of $144,815 for 1995, the Company has had a history of losses. In 1996,
management, in consultation with its accountants, elected to incur certain
charges with respect to its May 1996 transaction with prior management. At
December 31, 1996, the Company had negative working capital of $(751,317) (as
Total Current Liabilities exceeded Total Current Assets by that amount), an
accumulated deficit of $(5,383,662), and shareholders' equity of $705,193.
Because of, among other things, the lack of substantial operating history with
respect to the Company's ventures into the gaming, construction, and hotel
industries on which to base its anticipated expenses and revenues, the Company
may continue to incur further losses. There is no assurance that the Company's
operations will be successful or profitable in the future.
Uncertainties & Lack of Revenue from Gaming and Hotel Operations
While the Company has expended substantial resources for the
development of gaming properties and anticipates the same for hotel properties,
there can be no assurance that the Company will be successful in generating
revenues from gaming or hotel operations in the near future, despite the
Company's obligation to service substantial amounts of debt. Risk of failure to
obtain gaming approval from governmental authorities, increased competition and
unanticipated economic (adverse) conditions may affect the success of the
Company's Wandering Star project.
Current Financial Structure & Need for Additional Financing
The Company's financial structure is partially dependent upon the use of short
term debt financing which totaled $849,105 as of December 31, 1996. When this
amount is added to $711,839 in long term debt, the Company had $1,560,944 in
liabilities as of December 31, 1996 compared to $705,193 in stockholders' equity
as of that date. While the Company's management has substantially reduced short
term debt from that of December 31, 1995, and believes that its financial
policies have been prudent based upon its current projections and plans and that
its cash, capital resources, and cash from its construction operations should be
sufficient to meet its liquidity and financing requirements in 1997 (other than
third party financing necessary to complete the Wandering Star or fund hotel
acquisitions), the Company's reliance upon its current debt structure imposes
significant financial risks on the company. Management intends to address its
concerns in this area through its reduction of overhead, including its
management contract with InnerCircle Group Incorporated, reduction in employee
base, primarily in its construction subsidiary, and a further restructuring of
its short-term debt. There can be no assurance that the Company will be
successful in continuing to meet its cash requirements or in raising a
sufficient amount of additional capital for the Wandering Star or its planned
hotel acquisitions, or if it is successful, that the Company will be able to
achieve these objectives on reasonable terms in light of the Company's current
circumstances.
Item 2. DESCRIPTION OF PROPERTY
Executive Offices
The Company's executive offices are located in an approximately 4,787
square-foot facility at 2 North Cascade, Holly Sugar Building, Suite 330,
Colorado Springs, Colorado 80903, pursuant to its management contract with
InnerCircle Group Incorporated.
<PAGE>
Wandering Star Project
In May, 1993, the Company purchased fee title to the 10 contiguous lots
in Cripple Creek, Colorado in three separate transactions for an aggregate
purchase price of $2,150,000, consisting of $150,000 cash, 1,750,000 shares of
Common Stock of the Company valued at approximately $0.82 per share, and
promissory notes of the Company in the aggregate principal amount of $562,000
due and payable at dates ranging from January 1995 to June 1995, and bearing
interest at rates ranging from 10% to 16% per annum. Such promissory notes are
collateralized by first and second deeds of trust on the property. A portion of
the notes were refinanced or extended at various times in 1995 and 1996. The
outstanding principal balance on such notes on December 31, 1996 was $1,153,839.
There is no depreciation being taken on the property.
Each lot referred to above is approximately 25 feet by 110 feet. The
Wandering Star is in compliance with all existing zoning requirements. Based
upon current budget estimates obtained by the Company, the Company feels
construction of the project will cost approximately $25 million to complete
excluding furniture, fixtures, and equipment. The Company will need to seek
additional third party financing in the form of equity investments and/or the
incurrence of additional debt. There can be no assurance that the Company will
be able to obtain such financing.
Item 3. LEGAL PROCEEDINGS
The Company knows of no material pending legal proceedings to which the
Company or any of its subsidiaries is a party or of which any of its properties
is a subject, and no such proceedings are known to the Company to be
contemplated by governmental authorities.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of the shareholders of
the Company at the Company's annual meeting on September 20, 1996 and approved:
1. Change of the name of the Company from Gallery Rodeo International, Inc.
to Sierra-Rockies Corporation;
(a) For: 8,816,836
(b) Against: 36,700
(c) Abstaining: 63,883
2. Designation of 500,000 shares of stock as Preferred Stock;
(a) For: 8,815,006
(b) Against: 48,480
(c) Abstaining: 53,933
3. 1-for-10 reverse stock split, to be implemented at management's
discretion.
(a) For: 8,780,099
(b) Against: 137,010
(c) Abstaining: 310
<PAGE>
4. Election of Directors.
(a) Kenneth M. Cahill
(i) For: 8,541,977
(ii) Withhold: 375,442
(b) Darel A. Tiegs
(i) For: 8,542,027
(ii) Withhold: 375,392
(c) J. Royce Renfrow
(i) For: 8,541,927
(ii) Withhold: 375,492
(d) James A. Humpal
(i) For: 8,541,977
(ii) Withhold: 375,442
(e) Stephen M. Thompson
(i) For: 8,517,017
(ii) Withhold: 400,402
(f) Ray L. Bouchard
(i) For: 8,541,977
(ii) Withhold: 375,442
PART II
Item 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Principal Market or Markets. The Company's stock is traded on the
over-the-counter market, and is presently quoted on the NASDAQ OTC Bulletin
Board. The following table sets forth the high and low bid prices of the Common
Stock during the two years ended December 31, 1996 on the NASDAQ OTC Bulletin
Board. The prices are believed to be representative interdealer quotations,
without
<PAGE>
retail mark-up, mark-down or commissions, and may not represent prices at which
actual transactions occurred.
Bid
-----------------
High Low
Quarter Ended March 31, 1996 $.12 $.10
Quarter Ended June 30, 1996 $.125 $.105
Quarter Ended September 30, 1996 $.09 $.07
Quarter Ended December 31, 1996 $.05 $.03
Bid
-----------------
High Low
Quarter Ended March 31, 1995 $5/8 $5/16
Quarter Ended June 30, 1995 $3/8 $1/8
Quarter Ended September 30, 1995 $3/8 $1/8
Quarter Ended December 31, 1995 $9/32 $1/8
(b) Approximate Number of Holders of Common Stock. The number of
holders of record of the Company's Common Stock at June 30, 1997, was
approximately 767.
(c) Dividends. The Company has followed the policy of re-investing
earnings in the business, and, consequently, has not paid any cash dividends. At
the present time, no change in this policy is under consideration by the Board
of Directors. The payment of cash dividends in the future will be determined by
the Board of Directors in light of conditions then existing, including the
Company's earnings, financial requirements and conditions, opportunities for
re-investing earnings, business conditions and other factors.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following summarizes the Company's results of operations and
financial conditions, and should be read in conjunction with the financial
statements:
(a) Liquidity and Capital Resources
There are several components which affect the Company's ability to meet
its financial needs, including funds generated from operations, levels of
accounts receivable and inventories, capital expenditures, short-term borrowing
capacity, and the ability to obtain long-term capital on reasonable terms. At
the end of 1996, the Company's working capital was $(751,317), an increase of
$724,578 from December 31, 1995. The increase is primarily attributable to the
sale of the art subsidiaries.
The following is long-term debt. There is no current portion of
long-term debt due as of December 31, 1996.
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Description Principle Amount
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1. Note in the amount of $200,000 payable bearing interest at 12.5% per annum, payable $200,000
in monthly interest-only payments of $2,000.00, with final principal and interest due
February, 1998. Note collateralized by a First Deed of Trust on the Company's Wandering
Star property.
2. Note in the amount of $150,000 payable bearing interest at 15% per annum, payable in 150,000
monthly interest only payments of $1,875, with final principal and interest due February
9, 1998. Note collateralized by a First Deed of Trust on the Company's Wandering Star
property.
3. Note in the amount of $341,838.80 payable bearing interest at 12% per annum, payable 341,839
in monthly interest only payments of $3,418.39, with final principal and interest due
January 15, 1998. Note collateralized by a Third Deed of Trust on the Company's
Wandering Star property.
4. 10% Debenture of $20,000 due November, 1999 convertible to the Company's Common Stock 20,000
at an exercise price of $1.50 per share
Total $711,839
Less: Current Maturities - 0 -
Total Long-Term Debt as of December 31, 1996 $711,839
</TABLE>
In order to meet its obligations at maturity with respect to the
outstanding principal and interest on such notes payable, the Company may be
required to restructure the terms of such notes and/or refinance such notes
through additional third-party debt and/or equity financing. The Company can
make no assurance that it will be able to restructure such notes or alter the
ultimate terms thereof. In addition, there can be no assurance that the Company
will be successful in obtaining such third-party financing, or that anticipated
cash from operations will render refinancing unnecessary.
Although the Company currently has no available credit facilities, the
Company believes that, based on its current projections, its cash, capital
resources and cash from operations should be sufficient to meets its liquidity
and financing requirements in 1997, other than third-party financing necessary
to complete the development of its Wandering Star project or hotel acquisitions
by its hospitality subsidiary. The Company can make no assurance, however, that
it will meet its current projections.
The Company is currently negotiating potential restructuring of the
debt on the Wandering Star in order to obtain more favorable terms while
producing additional working capital for use in its anticipated hotel
acquisition program. Although the Company anticipates the negotiations will be
finalized in the near future, management is confident the holders of the
existing debt on the Wandering Star will agree to appropriate extensions prior
to such debt's maturity in 1998.
(b) Results of Operations
Total revenues for the year ended December 31, 1996 were $95,000, a
decrease of $4,422.213, compared with the year ended December 31, 1995. In 1996,
management, in consultation with its accountants, elected to incur certain
charges with respect to its May 1996 transaction with prior management. The
decrease from 1995 to 1996 was primarily due to the sale of the Company's art
operation and the short period in 1996 in which the Company received income form
its construction subsidiary.
Cost of sales as a percentage of total revenue was 89.3 percent, and
41.5 percent in 1996 and 1995, respectfully. Increase in the cost of sales
percentage from 1995 to 1996 was primarily the result of
<PAGE>
1995 revenue generated from the consolidated art gallery subsidiaries and 1996
revenue generated from the consolidated construction business.
Gross profits were $10,164, or 10.7 percent of sales in 1996, compared to
$5,139,034 or 80.4 percent of sales in 1995.
Selling, general and administrative expenses in 1996 were $560,154.
Selling, general and administrative expenses as a percentage of total revenues
were 589.6 percent and 74.8 percent and 1996 and 1995, respectively. General and
administrative expense costs include all corporate overhead, management fees,
all occupancy costs and interest. Selling expenses include advertising, sales
commissions, brochures and other promotional material and certain salary
expenses. While general and administrative expenses are primarily fixed
expenses, the Company achieved a reduction in these expenses, primarily due to
savings from its management contract with InnerCircle Group Incorporated which
eliminated direct expenses.
Interest expense (net of interest income) of 1996 was $273,301 compared
to interest expense (net of interest income) of $320,292 in 1995. The decrease
of interest expense of $46,991 during the year resulted primarily from reduction
of debt.
As a result, the Company recorded a $(1,497,686) loss before income
taxes in 1996, compared to $147,215 in earnings before income taxes in 1995,
resulting in net loss of $(1,497,686) in 1996, compared to net earnings of
$144,815 in 1995 after provision for income taxes. Earnings per share in 1996
were $(.08) per share, compared to less than $.01 per share in 1995.
Item 7. FINANCIAL STATEMENTS
The report of the independent auditors on the financial statements
appears at Page 26, and the financial statements and most of the financial
statements appear at Pages F-1 through F-16 hereof. These financial
statements and related financial information required to be filed hereunder are
incorporated herein by reference.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS -
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
(a) Directors and Executive Officers. The names and ages of the
Directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position Since
---- --- -------- -----
<S> <C> <C>
Kenneth M. Cahill 60 Chairman of the Board of Directors, President and 5/96
Chief Executive Officer
J. Royce Renfrow 54 Secretary and Director 5/96
Darel A. Tiegs 53 Vice President and Director 5/96
James A. Humpal 42 Treasurer and Director 5/96
Stephen M. Thompson 48 Director 9/91
Raymond Bouchard 50 Director 5/96
</TABLE>
<PAGE>
The Directors serve until the next annual meeting of shareholders, or
until their successors are elected.
The following sets forth information concerning the principal
occupations and business experience of each of the officers and Directors of the
Company:
Kenneth M. Cahill, Chairman of the Board, President and Chief Executive
Officer. Mr. Cahill joined the Company as Director, Chief Executive Officer and
President in May of 1996. From 1980 to May 1996, Mr. Cahill served as Director
of Operations for Larken, Inc., a hotel operator. Mr. Cahill directed Larken's
day-to-day marketing and training initiatives for over 76 hotels. In 1984, Mr.
Cahill formed Arcadia, Inc., where, as its Chief Executive Officer, he
concentrated Arcadia's efforts in the areas of gaming and hospitality. Since May
1996, Mr. Cahill has also served as a Vice President of InnerCircle Group
Incorporated, a management and consulting company. Since June 1996, Mr. Cahill
has also served as a Director and as the President and CEO of Eclipse
Corporation, a publicly-traded company involved in the real estate and
manufactured housing industries.
Darel A. Tiegs, Director and Vice President. Mr. Tiegs joined the
Company in May of 1996. From 1972 to 1975, Mr. Tiegs was an officer with Norwest
Bank, where he gained extensive experience in all facts of the banking industry.
After leaving the banking industry, Mr. Tiegs spent from 1975 to 1985 as owner
of his own real estate and development company, developing residential projects
as well as commercial projects, with an emphasis on medical facilities. From
1984 to the present, he has been President and part owner of Superior Homes, a
company specializing in the construction, warranty work and installation of
modular homes. Since June 1996, Mr. Tiegs has also served as a Director and as
Vice President of Eclipse Corporation, a publicly-traded company involved in the
real estate and manufactured housing industries.
J. Royce Renfrow, Director, Corporate Secretary and General Counsel.
Mr. Renfrow joined the Company as General Counsel, Corporate Secretary and
Director in May, 1996. Mr. Renfrow practiced law in a small firm specializing in
real estate and corporate law from 1969 until May 1996. From 1969 to the
present, Mr. Renfrow has served as President and as General Counsel for Speedway
Gas and Oil Co., Inc., a small firm which provides management services for oil
and gas companies. From 1989 to 1992, Mr. Renfrow served as Vice President and
General Counsel of a small, privately-held medical start-up company, MedLogic
Global Corporation. From May 1996 until the present, Mr. Renfrow has served as
Corporate Secretary and General Counsel to InnerCircle Group Incorporated, a
management consulting company. Since June 1996, Mr. Renfrow has also served as a
Director, General Counsel and Corporate Secretary of Eclipse Corporation, a
publicly-traded company involved in the real estate and manufactured housing
industries.
James A. Humpal, Director and Treasurer. Mr. Humpal joined the Company in
May of 1996 as Treasurer and Director From 1989 to 1991, Mr. Humpal served as
General Manager of the Holiday Inn-Columbus in Ohio. From 1991 to 1992, he began
work for Larken, Inc., as a General Manager of the Holiday Inn-Tucson in
Arizona. In 1992 and until May 1996, Mr. Humpal served as Vice President of
Operations of Larken, Inc. Since June 1996, Mr. Humpal has also served as
Director and Treasurer of Eclipse Corporation, a publicly-traded company
involved in the real estate and manufactured housing industries.
Stephen M. Thompson, Director. Mr. Thompson initially became a Director
of the Company in September, 1991, and served as former Chairman of the Board,
Chief Executive Officer, and Chief Financial Officer of the Company, until May,
1996. Prior to joining the Company, he was an independent business consultant
for a number of companies from 1985 through 1988, including Wexco International,
a real estate development company, Bio Care, Inc., a biological product
distributor, and First Fidelity
<PAGE>
Exchange, a precious metals marketing concern. Mr. Thompson is the President of
Clipper Industries, a shareholder of the Company, and operates the art galleries
purchased by him from the Company in 1996.
Raymond Bouchard, Director. Mr. Bouchard initially became a Director in
May, 1996. In 1992, Mr. Bouchard was owner and NASD principal of Triad Global
Investment Company, where he worked to set up Tampa Bay's first minority
broker/dealer firm. From 1994 to 1995, he served as Vice President, Mergers and
Acquisitions, of Viking Resources International, a company specializing in
acquisitions of businesses in the recycling industry. From February, 1995 until
the present, Mr. Bouchard has served as President of Corporate Services Group, a
company specializing in consultation involving investment banking and financial
services.
(b) Section 16(a) Beneficial Ownership Reporting Compliance. Clipper
Industries, Inc., failed to timely file Forms 4 and 5 with the Securities
Exchange Commission, as required by Section 16(a). Form 4 for May of 1996 and
December of 1996 was not filed until March 7, 1997. Both Form 4's reflect one
transaction, and Form 5 reflected two transactions.
The Company is aware of no other delinquent filings.
Item 10. EXECUTIVE COMPENSATION
No current executive officer received any compensation during 1996. The
former Chief Executive Officer of the Company, Stephen M. Thompson, received
compensation during 1995 until May 9, 1996 and during 1994. Mr. Thompson was
Chairman of the Board, Chief Executive Officer, and Chief Financial Officer of
the Company until May, 1996. The following table sets forth certain information
concerning all compensation paid by the Company as well as certain other
compensation paid or accrued for the year to the CEO and the former CEO of the
Company during 1996, 1995 and 1994 fiscal years:
<TABLE>
<CAPTION>
Summary Compensation Table
-------------------------- Long-Term
Annual Compensation Comp.
------------------------------------------- -----
Name & Principal Position Shares
------------------------- Fiscal Other Underlying
Year Salary Bonus Compensation Options (#)
---- ------ ----- ------------ -----------
<S> <C> <C> <C> <C>
Kenneth M. Cahill, 1996 -0- -0- * 315,000
CEO & Chairman 1995 -0- -0- * -0-
1994 -0- -0- * -0-
Stephen M. Thompson(3)(4) 1996 $ 25,000.00 -0- *
1995 $ 78,000.00 -0- * 1,000,000
1994 $ 78,000.00 -0- *
Richard Carthew 1996 -0- -0- -0-
Director (1) and V.P. 1995 $143,489.00 -0- * -0-
1994 $221,489.00 -0- * -0-
Kathy Grant (2) 1996 $ 13,187.47 -0- * -0-
Corporate Secretary 1995 $ 40,000.00 -0-
<FN>
* The dollar value of perquisites and other personal benefits was less than
reporting thresholds established by the Securities and Exchange Commission.
(1) Mr. Carthew's term as a director expired on December 21, 1994.
(2) Ms. Grant resigned as Corporate Secretary effective April 26, 1996.
(3) Mr. Thompson resigned as Director, Chairman of the Board, Chief Executive
Officer and Chief Financial Officer effective April 26, 1996, and was reinstated
per Voting Trust Agreement (see Exhibit 9.1).
(4) Options terminated in 1995, unexercised.
</FN>
</TABLE>
<PAGE>
No Directors fees were paid during 1996.
Stock Options
The following table contains information concerning the grant of stock
options made during fiscal 1996 to the named executive officers:
<TABLE>
<CAPTION>
Name Number of Shares % of Total Exercise or Expiration Date
Underlying Options Options Base Price
Granted (#) Granted in
Employees in
Fiscal Year
<S> <C> <C> <C> <C>
Kenneth M. Cahill 315,000 51% Average of June 1, 1997
bid/ask price
as shown on
NASDAQ Bulletin
Board as of
June 26, 1966
Silver Fox Investment Company LLC(1) 200,000 33% Average of July 1, 1997
bid/ask price
as shown on
NASDAQ Bulletin
Board as of
June 30, 1966
Maxpro Corporation(1) 100,000 16% bid/ask price July 1, 1997
as shown on
NASDAQ Bulletin
Board as of
June 30, 1966
<FN>
(1) A company affiliated with Mr. Tiegs.
</FN>
</TABLE>
The following tables set forth information with respect to certain
former executive officers and Directors concerning the exercise of options
during the fiscal year ending December 31, 1996 and unexercised options held as
of the end of that fiscal year:
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
------------------------------------------------------------------------
Name Shares Acquired Number of Value of
on Exercise (#) Value Realized Shares Unexercised
Underlying In-the-Money
Unexercised Options at
Options at FY-End ($)(1)(2)
FY-End (#) (1)
<S> <C> <C> <C> <C>
Kenneth M. Cahill -0- -0- 315,000 ($23,625)
Silver Fox Investment Company LLC(4) -0- -0- 200,000 ($15,000)
Maxpro Corporation(4) -0- -0- 100,000 ($7,500)
<FN>
(1) All options are presently exercisable.
(2) Market value of underlying securities minus the exercise price. Based on
closing sale price of $.04 per share on the 31st day of December, 1996.
(3) Exercise price equal to $0.125 per share. (4) A company affiliated with Mr.
Tiegs.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Aggregated Option Grants in Previous Fiscal Year
------------------------------------------------
Name Number of Shares % of Total Exercise or Expiration Date
Underlying Options at Options Base Price
FY-End (#) (1) Granted ($/share)
Employees in
FY 1995
<S> <C> <C> <C> <C>
Stephen M. Thompson 500,000 46% $0.45 10/99
Stephen M. Thompson 1,000,000 46% $0.25 10/99
</TABLE>
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial
ownership as of the 31st day of December, 1996 of the Company's common stock by
any person who is known by the Company to be the beneficial owner of more than
five (5%) percent of the Company's voting securities, and by each Director and
by officers and Directors of the Company as a group. Although authorized for
Preferred Shares, the Company has issued only Common Stock.
<TABLE>
<CAPTION>
Name and Address Number of Shares Percentage of Class
<S> <C> <C>
Kenneth M. Cahill - 0 - 0.00%
Holly Sugar Building - Suite 330
2 N. Cascade Avenue
Colorado Springs, CO 80903
Darel A. Tiegs 839,070 (2) 4.82%
Holly Sugar Building - Suite 330
2 N. Cascade Avenue
Colorado Springs, CO 80903
J. Royce Renfrow 423,994 (1) 2.44%
Holly Sugar Building - Suite 330
2 N. Cascade Avenue
Colorado Springs, CO 80903
James A. Humpal - 0 - 0.00%
Holly Sugar Building - Suite 330
2 N. Cascade Avenue
Colorado Springs, CO 80903
Richard Carthew 1,780,188 10.24%
421 N. Rodeo Drive
Beverly Hills, CA 90210
Clipper Industries, Inc. 4,000,000 (3) 23.00%
4223 Las Vegas Blvd. South
Las Vegas, Nevada 89119
Ray Bouchard - 0 - 0.00%
4014 Gunn Highway - Suite 275
Tampa, FL 33624
All Officers and Directors as a Group (5 persons) 5,263,064 (1) (2) (3) 30.26%
<FN>
* Represents less than 1% of the Company's outstanding Common Stock
(1) Represents (i) 12,500 shares held by J. Royce Renfrow, P.C., a professional
corporation of which Mr. Renfrow is the sole shareholder; (ii) 39,205 shares
held by R Lazy J Trust, of which Mr. Renfrow is Trustee and of which the
beneficiaries are members of the Renfrow family, excluding Mr. Renfrow; (iii)
372,089 shares held by Mountainscape Holding Corporation, of which Mount Blanc
Development Corporation (of which Mr. Renfrow owns eighty percent (80%) of the
capital stock and of which he serves as President and as a Director) owns 33.3%
of the capital stock and of which he serves as sole Director, President and
Treasurer; and (iv) an aggregate of 200 shares held by Mr. Renfrow's wife.
(2) Represents 466,981 shares held by The Tiegs Family Trust with Darel A. Tiegs
as Trustee. The beneficiaries under The Tiegs Family Trust are members of the
Tiegs family, excluding Darel A. Tiegs; and (ii) 372,089 shares held by
Mountainscape Holding Corporation, of which 33.3% is owned by the Tiegs Family
Trust..
(3) Represents shares held by Clipper Industries, Inc., a corporation owned by
the Thompson Family Trust with Stephen M. Thompson as Trustee. The beneficiaries
under The Thompson Family Trust are January Lee Thompson and other members of
the Thompson family, excluding Stephen M. Thompson. Mr. Thompson serves as sole
Director, President, and Treasurer of Clipper Industries, Inc. Included
1,000,000 shares of Common Stock Purchasable under options pursuant to Mr.
Thompson's previous employment agreement, and 3,900,000 shares subject to lockup
and escrow agreements with the Company dated May 9, 1996.
</FN>
</TABLE>
<PAGE>
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Change in Management Control of Company
Effective May 9, 1996, pursuant to an Agreement between the Company,
Stephen M. Thompson, Clipper Industries, Inc., and certain other parties, dated
effective as of March 29, 1996 (the "Agreement"), the sale of those assets and
operations of the Company attributable and relating to its art gallery business
was effected in exchange for a Promissory Note payable by Mr. Thompson to the
Company in the principal amount of $1,000,000, bearing interest at the rate of
eight percent (8%) per annum, and due and payable in full in May, 2001 (the
"Note"). Repayment on the Note may be made in the form of cash, securities of
the Company or such other securities as are acceptable to the Company. The Note
is secured by 4,000,000 shares of the Company's Common Stock held by Mr.
Thompson and his affiliates. The Board has determined that it was in the
Company's best interests to divest itself of the art gallery business to focus
its direction exclusively on its hotel and gaming business in order to enhance
the possibility of obtaining financing to develop the hotel and gaming business.
Also in connection with this transaction, the Company has agreed to pay
to Mr. Thompson the amount of approximately $350,000 in cash and has agreed to
issue 1,434,157 shares of the Company's Common Stock to Mr. Thompson, in
exchange for Mr. Thompson's agreement not to compete with the Company in the
gaming business for a period of one year from the closing of this transaction
and for cancellation of any employment agreement with Mr. Thompson or any other
agreement between the Company and Mr. Thompson relating to compensation in any
form to which Mr. Thompson may have been entitled. In consideration of the
cancellation of a promissory note issued by the Company to Mr. Thompson in the
principal amount of $75,000, the Company canceled promissory notes issued by Mr.
Thompson to the Company in the aggregate principal amount of approximately
$75,000. The Company has also granted options to Mr. Thompson, an affiliate of
Mr. Thompson, and Richard Carthew, a shareholder of the Company, to purchase
shares of the company's Common Stock in the event the Company issues shares of
common Stock to a third-party vendor within the two-year period following the
closing of the transactions contemplated in the Agreement. The exercise price of
the options shall be equal to the per share price assigned in any transaction
pursuant to which the Company issues shares of Common Stock to a third-party
vendor in exchange for assets of the third-party vendor. The number of shares
subject to such options shall be a number sufficient to enable the optionees to
retain the same percentage ownership in the Company as they own immediately
following the transactions contemplated by the Agreement. The options expire in
May, 1998.
Mr. Thompson and his affiliate, Clipper Industries, Inc., and the
Company's new management have entered into a Voting Trust Agreement, pursuant to
which Mr. Thompson has deposited the 4,000,000 shares of the Company's Common
Stock owned by him and his affiliate into a voting trust (the "Trust"). The
trustee of the Trust is directed to vote the shares in the Trust in favor of the
slate of Directors proposed by the new Directors, Messrs. Cahill, Bouchard,
Tiegs and Renfrow, for a period of nine months following the closing of the
transactions contemplated in the Agreement. The Voting Trust Agreement provides
that the slate of Directors shall include Mr. Thompson.
<PAGE>
InnerCircle Group Management Agreement
In May, 1996 the Company entered into an agreement with InnerCircle Group
Incorporated ("InnerCircle") with respect to the management of the Company.
InnerCircle is a company that provides general managerial services to various
businesses. Kenneth M. Cahill, Darel A. Tiegs, James A. Humpal and J. Royce
Renfrow each own a 25% equity interest in InnerCircle and are employees of
InnerCircle. As employees of InnerCircle, they will be obligated to assume the
following roles in the Company: (1) Kenneth M. Cahill: President/CEO and
Director; (2) Darel A. Tiegs: Vice President and Director; (3) James A. Humpal:
Treasurer and Director; and (4) J. Royce Renfrow: Corporate Secretary/General
Counsel and Director.
Under the agreement, InnerCircle is to provide the following services:
(1) general and administrative business office services, including the use of
Class A office space, as necessary, furniture, equipment, fixtures and
secretarial services; (2) general legal and accounting services necessary for
the day-to-day operation of the Company's offices and activities, not including
outside legal and accounting services; (3) planning, structuring, development
and financing, if applicable, of projects to be considered on behalf of the
Company, including the completion of project approved; and (4) the compliance
with appropriate corporate and securities laws of the state of incorporation of
the Company and the United States, including filing of appropriate reports,
forms and documents with the various regulatory authorities. The agreement was
amended to provide for a Company payment to InnerCircle for such services of
$40,000 per month, effective January 1, 1997. Fees due under said contract are
to be adjusted quarterly, based on the performance of InnerCircle and the
additional duties assumed by InnerCircle. The agreement may be terminated by the
Company with 90 days' notice, or by InnerCircle with 30 days' notice.
Transactions with Microtech Medical Systems, Inc. (Eclipse Corporation)
In August 1996, the Company sold to Eclipse Corporation (formerly
Microtech Medical Systems, Inc.) ("Eclipse"), a corporation controlled by the
Company's Board of Directors, a promissory note dated July 14, 1995, issued by
Elk Creek Partners Limited Partnership, in the principal amount of $500,000. The
Company received from Eclipse $450,000 in cash for this note. The note bears
interest at a rate of ten percent (10%) per annum, payable in equal monthly
installments of $4,166.67. Principle and accrued but unpaid interest under the
note is due and payable in full on July 13, 2000. The note is secured by certain
real property (including a casino building and lot) located in Cripple Creek,
Colorado.
In August 1996, the Company sold to Eclipse a promissory note dated
June 30, 1995, issued by Colorado Escrow, Inc., in the principal amount of
$208,133.34. The Company received $200,000 in cash for this note. The note bears
interest at a rate of seven and one-half percent (7.5%) per annum, payable in
equal monthly installments of $1,300.87. Principle and accrued but unpaid
interest under the note is due and payable in full on November 27, 1997. Kenneth
Cahill, the President and CEO and a Director of the Company, owns, directly or
indirectly, approximately 10% of Colorado Escrow, Inc.
Kenneth M. Cahill is the Chairman of the Board, Chief Executive
Officer, and President of Eclipse, and owns 12,880,000 shares of MMSI common
stock representing approximately 14.75% of its common stock. Darel A. Tiegs and
J. Royce Renfrow each own 6,708,750 shares of MMSI Common Stock (approximately
7.68%, respectively, of the outstanding shares) and are each officers of
Eclipse. James A. Humpal is also an officer of Eclipse.
Transactions with Certain Former Officers
In January, 1993, the Company issued 1,150,000 shares of its restricted
Common Stock to Gary D. Kucher, a then officer of the Company, in consideration
of a promissory note dated January 23, 1993 in favor of the Company in the
amount of $143,750. The balance of the promissory note remains outstanding and
the Company is seeking return of the shares or payment of the note.
<PAGE>
In March, 1996 the Company entered into an agreement with Stephen M.
Thompson, Clipper Industries and certain other parties to be effective May 9,
1996 under which the sale of assets and operations of the Company attributable
and relating to its art gallery business was effected in exchange for a
promissory note payable by Mr. Thompson and Clipper Industries to the Company in
the principal amount of $1,000,000, bearing interest at the rate of 8% per annum
and due and payable in full in May, 2001. The payment on said promissory note to
be paid by Mr. Thompson and/or Clipper Industries in the form of cash,
securities of the Company, or such other securities as are acceptable to the
Company. The promissory note is secured by 4,000,000 shares of the Company's
stock held by Mr. Thompson and/or Clipper Industries, Inc.
Additionally, the Company agreed to pay Mr. Thompson the amount of
approximately $350,000 and issued 1,434,157 shares of the Common Stock to Mr.
Thompson and/or Clipper Industries in exchange for Mr. Thompson's agreement not
to compete with the Company in the gaming business for a period of one year from
the closing of the referenced agreement, for cancellation of any employment
agreement with Mr. Thompson and/or Clipper Industries, Inc., or any other
agreement relating to compensation in any form to which Mr. Thompson and/or
Clipper Industries, Inc., may have been entitled. In consideration for the
cancellation of a promissory note by the Company to Mr. Thompson in the
principal amount of $75,000, the Company canceled promissory notes issued by Mr.
Thompson to the Company in the aggregate principal amount of approximately
$75,000. As part of the same transaction, the Company granted options to Mr.
Thompson, Clipper Industries, Inc., and Richard Carthew, a shareholder of the
Company, to purchase shares of the Company's Common Stock in the event the
Company issues shares of Common Stock to a third-party vendor within a two-year
period immediately following the closing of the transactions provided for in the
agreement. The exercise price of the options shall be equal to the price per
share assigned in any transaction pursuant to which the Company issues shares of
Common Stock to a third-party vendor in exchange for assets of the third-party
vendor. The number of shares subject to such options shall be a sufficient
number to enable optionees to retain the same percentage of ownership in the
Company as they owned immediately following the transactions contemplated by the
agreement. These options expire in May, 1998.
Additionally, Mr. Thompson and his affiliate, Clipper Industries, Inc.,
and the Company's new management have entered into a Voting Trust Agreement
pursuant to which Mr. Thompson has deposited the 4,000,000 shares of the
Company's Common Stock owned by him and his affiliate into a voting trust. The
trustee of the trust is directed to vote the shares in the trust in favor of the
slate of directors proposed by the new directors, which was done at the annual
meeting of the shareholders held on September 20, 1996, and which extends for a
period of nine months following the closing of the transactions contemplated by
the referenced agreement. The Voting Trust Agreement also provides that the
proposed slate of directors include Mr. Thompson.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K (Footnotes on following page)
(a) Exhibits
The following exhibits will be filed by amendment:
Number Description
------ -----------
(a)(1) Financial Statements. Reference is made the
Index to Financial Statements of the
Company on Page _____ of this report.
[NEED SEPARATE INDEX FOR THE FINANCIAL
STATEMENTS]
2 Agreement and Plan of Reorganization dated
September 23, 1991.(1)
3.1 Articles of Incorporation of the Company.(3)
3.2 Amendment to Articles of Incorporation
(Article I) as approved by shareholders at
Annual Shareholders' Meeting on September 20, 1996
changing the name of the corporation to
Sierra-Rockies Corporation.
3.3 By-Laws of the Company. (2)
9.1 Voting Trust Agreement dated March 29, 1996 between
the Company, Stephen M. Thompson, Clipper
Industries, Inc., Kenneth Cahill, Timothy
Morrissey, Ray Bouchard, Darel Tiegs and J. Royce
Renfrow, as amended.(4)
<PAGE>
10.1 Agreement dated April 16, 1991, between Donald
Tilson, Elizabeth Tilson and Steven Thompson and
assignees.(3)
10.2 Sublease dated June 15, 1988 between T. R. Rogers,
Inc., and Gallery Rodeo of Beverly Hills, Inc.(3)
10.3 Lease Agreement dated March 29, 1990 between
Wade Stockhouse and Gallery Rodeo ofTaos, Inc.(3)
10.4 Shopping Center Lease Agreement dated November 11,
1987 between lake Arrowhead Associates Limited
Partnership and the Company.(3)
10.5 Agreement between the Company and Red Star
Corporation.(6)
10.6 Purchase Agreement and related documents between
the Company and MAXPRO Corporation.(6)
10.7 Agreement between the Company and Red Star
Corporation.(6)
10.8 Lease dated October 15, 1992 between the Company
and Rodeo Collection, Ltd.(7)
10.9 Assignment of Lease dated October 30, 1992 between
the Company and Barney Goldberg, d/b/a Golden West
Galleries.(7)
10.10 Non-Qualified Stock Option Agreement dated
January 1, 1993 between the Company and
Gary D. Kucher.(7)
10.11 Demand Note dated January 23, 1993 in the
principal amount of $143,750 by Gary D.
Kucher in favor of the Company.(7)
10.12 Shopping Center Lease Agreement dated March 31,
1993 between the Company and The Arrowhead Joint
Venture.(7)
10.13 Option Agreement dated November 2, 1993 and First
Addendum to Option Agreement dated November 2,
1993, among the Company, The D&L Jordan Trust,
Walter-Laughlin Partnership and The Walter
Company.(7)
10.14 Agreement dated November 2, 1993 and First Addendum
to Option Agreement dated November 2, 1993, among
the Company, Walter-Laughlin Partnership and The
Walter Company.(7)
10.15 Promissory Note of the Company dated December 15,
1993 in the principal amount of $200,000 in favor
of Sterling Bank, and related loan documents.(7)
10.16 Purchase Agreement dated June 30, 1995 by and
between the Company and Arcadia
International, Inc., as amended.
10.17 Agreement, dated effective as of March 29, 1996 by
and between the Company, Stephen M. Thompson,
Clipper Industries, Inc., and Kenneth Cahill,
Timothy Morrissey, Ray Bouchard, Darel Tiegs and J.
Royce Renfrow a/or Nominees.(4)
10.18 Pledge Agreement dated April 26, 1996 between the
Company and Stephen M. Thompson.
10.19 Security and Escrow Agreement dated April 26,
1996 between the Company and Stephen M. Thompson
and Clipper Industries, inc., and J. Royce Renfrow.
10.20 Bill of Sale, Personal Property, dated April 26,
1996 between the Company and Stephen M. Thompson.
10.21 Agreement dated April 26, 1996 between the Company
and Stephen M. Thompson, Gallery Rodeo of Lake
Arrowhead, Inc., and Gallery Rodeo of Beverly
Hills, Inc.
10.22 Lease Assignment dated April 22, 1996 between the
Company and Stephen M. Thompson,
Clipper Industries, Inc., and/or Assigns.
10.23 Management Agreement between the Company and
InnerCircle Group, Incorporated, dated the 9th day
of May, 1996, as amended.
10.24 Promissory Note dated May 9, 1996 in the
principal amount of $60,000 executed by
Colorado Escrow, Inc., in favor of the Company.
10.25 Amendment to Loan Documents dated May 9, 1996
between the Company and Colorado Escrow, Inc.
10.26 Amendment to Loan Documents dated May 9, 1996
between the Company and Colorado Escrow, Inc.
10.27 Amendment to Loan Documents dated May 9, 1996
between the Company and Colorado Escrow, Inc.
10.28 Second Amendment to Purchase Agreement dated
May 9, 1996 between the Company and
Arcadia International and Colorado Escrow, Inc.
10.29 Stock Option Agreement dated June 26, 1996 between
the Company and Kenneth M. Cahill.
10.30 Assumption and Assignment Agreement dated June 28,
1996 between the Company, Kenneth M. Cahill and
` InnerCircle Group Incorporated.
10.31 Stock Option Agreement dated June 30, 1996
between the Company and Silver Fox Investment
Company LLC.
10.32 Stock Option Agreement dated June 30, 1996 between
the Company and MAXPRO Corporation.
10.33 Promissory Note Purchase Agreement between the
Company and Microtech Medical Systems, Inc.,
dated the 1st day of July, 1996.
10.34 Promissory Note of the Company dated July 15, 1996
in the principal amount of $165,427.70 in favor of
Mid-Western Properties, Inc.(10)
10.35 Amendment to Loan Documents dated July 15, 1996
between the Company and Stephen M. Thompson.(10)
10.36 Management Agreement dated August 1, 1996
between Sierra-Rockies Development
Corporation and Superior Home Development, Inc.
<PAGE>
10.37 Promissory Note Purchase Agreement between the
Company and Microtech Medical Systems, Inc., dated
August 1, 1996.
10.38 Purchase Agreement dated November 1, 1996
between Sierra-Rockies Development
Corporation and Superior Home Development, Inc..
10.39 Promissory Note Extension Agreement dated
December 1, 1996 between the Company and
InnerCircle Group Incorporated.
10.40 Promissory Note Extension Agreement dated
December 9, 1996 between the Company and
Cahill's U.S. Casinos, Inc.
10.41 Amendment to Loan Documents dated December 15, 1996
between the Company and Stephen M. Thompson.
11 Statement re: Computation of Per Share Earnings
16.1 Letter dated September 3, 1996 from Grant Thornton
LLP.(8)
16.2 Engagement letter dated March 25, 1997 from
Cordovano and Company, P.C.
19 Proxy Statement.(9)
21 Subsidiaries of the Registrant
23 Consent of Accountants
27 Financial Data Schedule
Reports on Form 8-K
(b) Reports on Form 8-K filed during the last quarter of 1996.
Reference is made to the Company's current reports on Form 8-K:
Date Item Disclosed
---- --------------
5/9/96 Acquisition or Disposition of Assets
8/22/96 Changes in Registrant's Certifying Accountant
Footnotes to Exhibits:
(1) Previously filed with the Securities and Exchange Commission as an exhibit
to Current Report on Form 8-K of the Company, as filed September 23, 1991.
(2) Previously filed with the Securities and Exchange Commission as an exhibit
to Amendment No. 2 to the Registration Statement on Form 10 of the Company, as
filed April 6, 1992.
(3) Previously filed with the Securities and Exchange Commission as an exhibit
to the Registration Statement on Form 10 of the Company, as filed November 8,
1991.
(4) Previously filed with the Securities and Exchange Commission as an exhibit
to Current Report on Form 8-K of the Company, as filed May 9, 1996.
(5) Previously filed with the Securities and Exchange Commission as an exhibit
to Current Report on Form 8-K of the Company, as filed May 28, 1993.
(6) Previously filed with the Securities and Exchange Commission as an exhibit
to Current Report on Form 8-K of the Company, as filed June 18, 1993.
(7) Previously filed with the Securities and Exchange Commission as an exhibit
to the 1993 Annual Report on Form 10-KSB, as filed August 2, 1994.
(8) Previously filed with the Securities and Exchange Commission as an exhibit
to Current Report on Form 8-K/A of the Company, as filed August 22, 1996.
(9) Previously filed with the Securities and Exchange Commission on September 6,
1996.
(10) Attached as an exhibit to Exhibit 10.60 hereto.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
(Registrant): SIERRA-ROCKIES CORPORATION
By: /s/ Kenneth M. Cahill Date: 8/22/97
---------------------
Kenneth M. Cahill
President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
date indicated.
By: /s/ Kenneth M. Cahill Date: 8/22/97
----------------------
Kenneth M. Cahill
President
Director
By: /s/ Darel A. Tiegs Date: 8/22/97
------------------
Darel A. Tiegs
Vice President
Director
By: /s/ James A. Humpal Date: 8/22/97
-------------------
James A. Humpal
Treasurer
Director
By: /s/ J. Royce Renfrow Date: 8/22/97
--------------------
J. Royce Renfrow
Corporate Sect'y/Gen. Counsel
Director
<PAGE>
Sierra Rockies Corporation and Subsidiaries
-------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants F-1
Audited Consolidated Financial Statements:
Consolidated Balance Sheet at December 31, 1996 F-2
Consolidated Statement of Operations
for the year ended December 31, 1996 F-4
Consolidated Statement of Shareholders' Equity
for the year ended December 31, 1996 F-5
Consolidated Statement of Cash Flows
for the year ended December 31, 1996 F-6
Notes to Consolidated Financial Statements F-8
<PAGE>
To the Board of Directors
Sierra Rockies Corporation and Subsidiaries
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheet of Sierra Rockies
Corporation and Subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year ended December 31, 1996. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated 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
misstatements. An audit also 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sierra Rockies
Corporation and Subsidiaries as of December 31, 1996, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note J to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a net working capital deficiency that raises substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note J. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Cordovano and Company, P.C.
Denver, Colorado
June 19, 1997
F-1
<PAGE>
Sierra Rockies Corporation and Subsidiaries
-------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
December 31, 1996
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents ................................ $ --
Accounts receivable - affiliate .......................... 91,178
Accounts receivable - related party ...................... 3,584
Costs in excess of billings-uncompleted contracts ........ 3,026
----------
Total current assets .................... 97,788
LAND HELD FOR DEVELOPMENT ...................................... 2,150,000
PROPERTY & EQUIPMENT, net of
accumulated depreciation of $267 ........................ 5,733
CONSTRUCTION IN PROGRESS ....................................... 12,616
NOTES RECEIVABLE
Director and former officer .................................. 1,000,000
Related party ................................................ 476,266
Allowance for doubtful notes ................................. (1,476,266)
----------
TOTAL ASSETS ............................ $2,266,137
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
December 31, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES Accounts payable:
Trade ............................................. $ 200,772
Employee .......................................... 5,178
Due to related party ....................................... 174,596
Accrued expenses ........................................... 6,559
Notes payable - related party .............................. 462,000
-----------
Total current liabilities ................ 849,105
LONG TERM DEBT
Notes - related party ..................................... 691,839
Convertible debentures .................................... 20,000
Total liabilities ....................... 1,560,944
---------
STOCKHOLDERS' EQUITY
Common stock, 100,000,000 shares authorized; $.001
par value; 17,145,848 shares issued and outstanding ....... 17,146
Additional capital paid in excess of par .................. 5,404,010
Deferred gain on transaction with parties under
common control, net of $1,476,266 allowance for
doubtful notes receivable ................................. 784,232
Cost in excess of net assets acquired from party under
common control ............................................ (116,533)
Retained deficit, inclusive of $1,468,444 retained deficit
of consolidated subsidiaries disposed of during 1996 ...... (3,885,976)
Current loss, inclusive of $73,106 current loss of
consolidated subsidiaries disposed of during 1996 .......... (1,497,686)
-----------
TOTAL STOCKHOLDERS' EQUITY .............................. 705,193
-------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .............. $ 2,266,137
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
Sierra Rockies Corporation and Subsidiaries
-------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS
Year ended December 31, 1996
<S> <C>
REVENUES & COST OF REVENUES
Construction contract revenues earned .......................... $ 95,000
Cost of construction revenues earned ........................... 84,836
-----------
Gross profit ................... 10,164
OPERATING EXPENSES
Management fees - related party ................................ 300,000
General and administrative expenses ............................ 260,154
-------
Income (loss) from operations .. (549,990)
OTHER INCOME (EXPENSE)
Interest income ............................................... 32,958
Rental income ................................................. 2,371
Interest expense .............................................. (306,259)
Buy-out of former president's management contract ............. (350,000)
Write-off of notes receivable from shareholders ............... (215,500)
Loss from investment in subsidiaries - disposed of
during year, accounted for under equity method ........... (73,106)
Loss from sale of notes to affiliate at discount ............ (58,333)
Other, net .................................................... 20,173
-----------
Total other income (expense) .... (947,696)
Income (loss) before income taxes (1,497,686)
----------
INCOME TAXES
Current benefit ............................................... 509,213
Deferred charge ............................................... (509,213)
NET INCOME (LOSS) ............... $(1,497,686)
===========
EARNINGS (LOSS) PER SHARE ....... $ (.08)
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
Sierra Rockies Corporation and Subsidiaries
-------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Year ended December 31, 1996
Shares Amount Additional Accumulated Stkhlders' Total
paid-in deficit Transfers &
capital Notes
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 15,511,681 $15,511 $5,348,210 $(3,885,976) $(165,500) $1,312,245
Shares issued to officer for note 50,000 50 49,950 (50,000) -
Write-off of shareholder notes 215,500 215,500
Acquisition of construction assets 150,000 150 5,850 (116,533) (110,533)
Transfer of art subsidiaries to
former Chairman of Board, net of
allowance for notes $1,000,000 1,434,167 1,435 470,498 471,933
Transfer of assets to entity
controlled
by President, net of allowance
for notes $476,266 313,734 313,734
Net loss for the year (1,497,686) (1,497,686)
---------------- ---------- -------------- ----------------- ------------- --------------
Balance at December 31, 1996 17,145,848 $17,146 $5,404,010 $(5,383,662) $667,699 $705,193
================ ========== ============== ================= ============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
Sierra Rockies Corporation and Subsidiaries
-------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31, 1996
<S> <C>
Cash flow from operating activities:
Cash paid to related party for management fees .................... $ (300,000)
Cash paid to suppliers ............................................ (120,600)
Cash paid to employees ............................................ (27,897)
Cash paid to former president for buy-out of management contract .. (200,000)
Working capital advance from related party ........................ 157,114
-------
Cash used in operations .............................. (491,383)
--------
Cash flow from investing activities:
Sale of notes receivable to affiliate ............................ 650,000
Acquisition of construction assets from related party ............ (112,321)
--------
Cash provided by investing activities ................. 537,679
-------
Cash flow from financing activities:
Debt refinancing costs ........................................... (46,600)
-------
Cash used in financing activities .................... (46,600)
-------
Net increase (decrease) in cash ....................................... (304)
Cash beginning of year ................................................ 304
---
Cash end of year ...................................................... $ --
==========
Cash paid during the year for interest ................................ $ 207,148
Cash paid during the year for income taxes ............................ $ --
Non-cash investing and financing activities:
Purchase of construction assets, issued common stock ............ $ 6,000
Transfer of $471,933 net investment in art subsidiaries to former
president for note .............................................. $ 1,000,000
Buyout of management contract and receipt of non-compete agreement
from former president, issuance of common stock ................. $ 1,435
Buyout of management contract and receipt of non-compete agreement
from former president, issuance of debt ......................... $ 150,000
Shares issued to stockholder in exchange for note receivable .... $ 50,000
Receipt of notes receivable from president of company in exchange
for property .................................................... $ 684,400
Debt assumed by president of company in exchange for property ... $ 325,600
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
Sierra Rockies Corporation and Subsidiaries
-------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED
Year ended December 31, 1996
Reconciliation of net income to cash flows from operating activities:
Net income (loss) ................................................... $(1,497,686)
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization .............................. 45,812
Provision for bad debts .................................... 215,500
Loss on sale of notes at discount .......................... 58,833
Loss on equity in subsidiaries ............................. 73,106
Increase in other assets ................................... (12,616)
Increase in accounts receivable ............................ (97,788)
Increase in accounts payable ............................... 80,301
Increase in accrued expenses and other liabilities ......... 643,155
-----------
Cash flows used in operating activities ............................. $ (491,383)
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
Sierra Rockies Corporation and Subsidiaries
-------------------------------------------
Notes to Consolidated Financial Statements
NOTE A - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
- --------
Sierra Rockies Corporation ("Company"), formerly Gallery Rodeo International
("GRI"), was organized in 1988 in the state of California, under the name, TJB
Enterprises, Inc. ("TJB") as a blind pool/blank check company formed for the
purposes of seeking a merger with a private company. TJB, in 1991, acquired 100%
of the outstanding stock of three art galleries, and concurrent with the
acquisition changed its name to GRI.
GRI, in 1993, with the intent to enter the hotel and gaming business, acquired
land in Cripple Creek, Colorado for the purpose of developing and operating a
206 room hotel and gambling casino. Since 1993, the Company has purchased and
sold other properties designated for the hotel and gaming business.
May 9, 1996, concurrent with the change in management, the Company sold its
interest in two of the the art galleries. In November 1996, the Company changed
its name to Sierra Rockies Corporation. The Company reorganized a wholly-owned
subsidiary, Gallery Rodeo of Scottsdale, Inc., which had no assets or
operations, as Sierra Rockies Development Company ("SRDC"). SRDC purchased
certain assets of a construction business, specializing in manufactured housing
installation.
At December 31, 1996, and reflected in the financial statements, the Company's
primary business is construction related to manufactured housing, and
development of its hotel and gaming assets.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Sierra Rockies
Corporation and its wholly-owned subsidiary, Sierra Rockies Development Company.
Prior to May 9, 1996, the Company consolidated the accounts of its art gallery
subsidiaries. Upon disposal of the art gallery subsidiaries, the Company
recorded its investment in the art gallery subsidiaries under the equity method.
All material intercompany transactions have been eliminated.
Revenue and Cost Recognition
- ----------------------------
Revenues are recognized on the completed-contract method. That method is used
because the typical contract is completed in three months or less, and financial
position and results of operations do not vary significantly from those that
would result using the percentage-of-completion method. A contract is considered
complete when the work has been accepted by the customer.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools,
repairs, and depreciation costs. General and administrative costs are charged to
expense as incurred.
F-8
<PAGE>
Sierra Rockies Corporation and Subsidiaries
-------------------------------------------
Notes to Consolidated Financial Statements
Note A - Business and summary of significant accounting policies continued
- --------------------------------------------------------------------------
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined.
Costs in excess of amounts billed are classified as current assets under costs
in excess of billings on uncompleted contracts. Billings in excess of costs are
classified under current liabilities as billings in excess of costs on
uncompleted contracts. Contract retentions are included in contract receivables.
Income Taxes
- ------------
The Company adopted the Statement of Financial Accounting Standards No. 109
(SFAS 109) "Accounting for Income Taxes" which requires an asset and liability
method of accounting for income taxes. Under SFAS No. 109, deferred tax assets
are recognized and measured based on the likelihood of realization of the
related tax benefits in the future.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and cash equivalents
- -------------------------
The Company considers all highly liquid investments with maturities of three
months or less to be cash equivalents.
Property and equipment
- ----------------------
Property and equipment are stated at cost. Depreciation is provided principally
on the straight-line method over the estimated useful lives of the assets, which
range from three to five years.
Impact of recently issued accounting standards
- ----------------------------------------------
In March 1995, the Financial Accounting Standards Board (FASB) established an
accounting standard for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used for long-lived assets and certain identifiable intangibles to be disposed
of. This standard requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be
F-9
<PAGE>
Sierra Rockies Corporation and Subsidiaries
-------------------------------------------
Notes to Consolidated Financial Statements
Note A - Business and summary of significant accounting policies continued
- --------------------------------------------------------------------------
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. This standard is
effective for financial statements beginning after December 15, 1995. Management
implemented this standard during 1996. The standard did not have a material
impact on its financial statements.
During 1995, the FASB established Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation". This Statement established financial
accounting and reporting standards for stock-based employee compensation plans.
This Statement defines a fair value based method of accounting for an employee
stock option or similar equity instrument and encourages all entities to adopt
that method of accounting for all of their employee stock compensation plans.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees". Entities
electing to remain with the accounting in Opinion 25 must make proforma
disclosures of net income, and if presented, earnings per share, as if the fair
value based method of accounting defined in this Statement has been applied.
This standard is effective for financial statements beginning after December 15,
1995. Management implemented this standard during 1996. The standard did not
have a material impact on its financial statements.
NOTE B - RELATED PARTY TRANSACTIONS
- -----------------------------------
During 1996, the company consummated several transactions with related parties
and/or affiliates. Those parties include:
InnerCircle Group, Inc. ("IGI"), an affiliate that provides management services
to both the Company, SRDC, and Eclipse. IGI's shareholders, officers and
directors are officers and directors of the Company;
Eclipse Corporation ("Eclipse"), an affiliate whose officers and directors serve
also as officers and directors of the Company;
Colorado Escrow, Inc. ("CEI"), an affiliate owned and contolled by the President
and director of the Company;
Superior Home Construction ("Superior"), a company owned by an officer, director
and shareholder of the Company;
Clipper Industries, Inc. ("Clipper"), a company owned and controlled by a
significant (approximately 25%) shareholder of the Company and former president;
and several other entities that are partially owned and/or controlled by an
officer and shareholder of the Company.
(See note F -Notes Payable.)
F-10
<PAGE>
Sierra Rockies Corporation and Subsidiaries
-------------------------------------------
Notes to Consolidated Financial Statements
Note B - Related party transactions continued
- ---------------------------------------------
Change in management control
- ----------------------------
May 9, 1996, the Company entered into an agreement with the former president and
significant shareholder to terminate the president's employment and consulting
agreements in exchange for 1,434,157 shares of the Company, $350,000, and the
former president's agreement to not compete for a period of one year with the
Company in the gaming business. The Company has recorded a charge to income of
$350,000 as consideration to the former president for cancellation of his
employment contract.
Concurrent with the cancellation of the former president's management contract,
the Company entered into a management services agreement with IGI. The
management agreement with IGI provided for the Company to receive certain
management services. The fee for such services during 1996 was $50,000 per
month, of which $80,000 was rebated by IGI at December 31, 1996. The total
charge for management services paid to IGI by the Company during 1996 was
$300,000. Effective January 1, 1997, the fee for management services was amended
to $40,000 per month. Certain advances for operating expenses on behalf of the
Company and SRDC totalling $174,596 are due to IGI at December 31, 1996, and
have been recorded as a current liability in the Company's balance sheet.
Sale of art business subsidiaries
- ---------------------------------
May 9, 1996, the Company sold all the outstanding stock of its wholly-owned
subsidiaries, Gallery Rodeo Beverly Hills, Inc. ("GRBH"), and Gallery Rodeo of
Lake Arrowhead ("GRAH") to the former president. Both subsidiaries had been
involved in the fine art business. As of the date of closing, the Company's
investment in the subsidiaries included:
<TABLE>
<CAPTION>
<S> <C>
Initial capital investment $ 30,000
Property & Equipment 3,201
Intercompany receivable due from GRBH 1,036,416
Retained deficit (1,468,444)
1996 Year-to-date loss from operations (73,106)
--------
Total $ (471,933)
=================
</TABLE>
Consideration for the sale, was a $1,000,000 note receivable due from the former
president. GRBH and GRAH have not historically generated sufficient cash flows
to service a $1,000,000 note receivable, nor has the former president performed
on the note. Therefore, the Company has recorded an allowance for the full
amount of the note against the gain on the sale of the business. It is the
intent of management to pursue all legal recourse in the collection of the note
receivable.
At December 31, 1996, the net gain of $471,933, after recording the $1,000,000
allowance for the doubtful note receivable, resulting from this transfer of
assets between parties under common control has been recorded as a component of
shareholders' equity.
F-11
<PAGE>
Sierra Rockies Corporation and Subsidiaries
-------------------------------------------
Notes to Consolidated Financial Statements
Note B - Related party transactions continued
- ---------------------------------------------
Sale of gaming property
- -----------------------
June 30, 1995 the Company entered into an agreement, which closed in May 1996,
to transfer its 90% ownership interest in 13 contiguous lots located in Cripple
Creek, Colorado to CEI. The property consisted of two lots which are located
within the town's legalized gaming district. The Company had acquired this
property in 1994 for $370,000, and sold it to CEI for $1,160,000.
Consideration totalling $1,160,000 was comprised of $150,000 cash, $325,600
assumption by buyer of a note payable secured by the property, and four notes
receivable (three for $208,133 and one for $60,000) totalling $684,400 due from
CEI. The Company remains a guarantor on the $325,000 note payable. On August 1,
1996, the Company sold one of the CEI notes, face value of $208,133, at a
discount to Eclipse for $200,000 cash. The remaining notes receivable due from
CEI are not performing and the Company has recorded an allowance of $476,266
against the gain on the transfer of the property.
At December 31, 1996, the net gain of $313,734, after recording the $476,266
allowance for the doubtful notes receivable, resulting from this transfer of
assets between parties under common control has been recorded as a component of
shareholders' equity. The $8,333 loss on discount of note receivable has been
charged to income.
Acquisition of construction assets
- ----------------------------------
August 1, 1996, the Company's wholly-owned subsidiary, SRDC, entered into a
management agreement with Superior, a construction company specializing in the
installation of manufactured homes, to operate the construction company in
consideration of a fee equal to two percent of the construction company's gross
sales during the contract period. The contract also granted the Company an
option to purchase certain assets of the construction company, which the Company
exercised in September 1996, and closed on November 1, 1996.
The sales price included, forgiveness of accrued management fees totalling
$4,211, 150,000 shares of the Company's common stock, and $112,321 of costs that
SRDC had paid on behalf of Superior during the period that the Company was
providing management services to and operating Superior. The net book value of
the assets acquired were valued at $6,000 which included, vehicles, construction
equipment, tools and a three-year construction contract with Eclipse, a company
engaged in the manufactured home sales business. The excess of the purchase
price over the net book value of assets acquired, has been recorded as a
reduction of shareholders' equity at December 31, 1996.
Accounts receivable and revenue
Total sales to Eclipse, as a result of the acquired construction contract from
Superior, totalled $91,178, of which 100% is recorded in accounts receivable at
December 31,
F-12
<PAGE>
Sierra Rockies Corporation and Subsidiaries
-------------------------------------------
Notes to Consolidated Financial Statements
Note B - Related party transactions continued
- ---------------------------------------------
1996. Subsequent to December 31, 1996, the Company has received full payment of
the accounts receivable.
During 1996, completed construction contracts with employees totalled $3,563,
all of which was collected by December 31, 1996.
Costs in excess of billings-uncompleted contracts totalling $3,026 were related
to construction work on behalf of an officer and director. Subsequent to
December 31, 1996, the amounts were billed and collected. Overhead and other
indirect costs totalling $2,962, not allocated to this contract, have been
charged to income in 1996.
Certain expenses related to Superior, were paid on behalf of Superior subsequent
to November 1, 1996. These expenses totalling $3,584 were recorded in accounts
receivable at December 31, 1996 and have been subsequently collected in 1997.
Other transactions with shareholders
- ------------------------------------
In January 1993, the Company issued 1,150,000 shares of its restricted Common
Stock to a then officer of the Company, in consideration of a promissory note in
the principal amount of $143,750. This note has not performed, and the Company
is seeking return of the shares or payment of the note. Accordingly, at December
31, 1996, the Company has written off the note and recorded a charge to income
in the amount of $143,750.
In November 1994, the Company accepted a promissory note for $50,000 in
exchange for issuance of 50,000 shares of its restricted Common Stock pursuant
to the terms of a consulting agreement the Company had entered into with a
shareholder. This note has not performed, and the Company is seeking return of
the shares or payment of the note. Accordingly, at December 31, 1996, the
Company has written off the note and recorded a charge to income in the amount
of $50,000.
During 1995, the Company's Board of Directors approved transactions in which two
shareholders had notes payable to the Company totalling $21,750, payable over
five years at an interest rate of 2%. The Company has determined that these
notes are not collectible and have recorded a charge to income in 1996 totalling
$21,750 for the write-off of the notes.
Other transactions with affiliates
- ----------------------------------
On May 5, 1994, the Company acquired real property known as the Elk Creek Gaming
Hall in the gaming district of Cripple Creek, Colorado for a total purchase
price of $1,285,000. In June 1995, the Company entered into an agreement for the
sale of the property for $1,515,000, to a non-affiliate, of which part of the
consideration was a promissory note payable to the Company for $500,000.
Subsequently, on July1, 1996, the Company sold the promissory note and its
accompanying deed of trust to Eclipse at a discount for $450,000 cash. The
$50,000 loss on discount of note receivable has been charged to income in 1996.
F-13
<PAGE>
Sierra Rockies Corporation and Subsidiaries
-------------------------------------------
Notes to Consolidated Financial Statements
NOTE C - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment as of December 31, 1996 consist of the following:
<S> <C>
Construction equipment and tools $3,000
Vehicles 3,000
6,000
Less accumulated depreciation 267
$5,733
=========================
</TABLE>
Depreciation expense for the year ended December 31, 1996, was $267.
NOTE D - LAND HELD FOR DEVELOPMENT
- ----------------------------------
In May 1993, the Company acquired a total of ten contiguous lots in Cripple
Creek, Colorado for a total purchase price of $2,150,000 on which it intends to
develop and operate a 206 room hotel and gambling casino, referred to as the
Wandering Star Hotel Casino. Seven of the lots were acquired for 1,750,000
restricted shares of the Company's common stock valued at an average per share
price of $.82 and options to acquire an additional 500,000 shares at $2 per
share which expired in May 1995, plus approximately $150,000 in cash and the
Company's assumption of $162,000 in debt. The remaining three lots were acquired
for a purchase price of $400,000 which was paid using a combination of seller
and private financing (see Note F - Notes Payable). The property is classified
as land held for future development at December 31, 1996.
F-14
<PAGE>
Sierra Rockies Corporation and Subsidiaries
-------------------------------------------
Notes to Consolidated Financial Statements
NOTE E - NOTES RECEIVABLE
- -------------------------
<TABLE>
<S> <C>
Notes receivable at December 31, 1996 consisted of the following:
Note receivable from director, shareholder and former president, interest at 8%
due in quarterly installments of $20,000, balance due April 26,2001,
collateralized by 4,000,000 shares of the Company's Common Stock held in voting
trust. $ 1,000,000
Note receivable from an affiliate controlled by president, interest at 7.50% due in
monthly installments of $1,301, balance due November 27, 1997, collateralized by 208,133
real estate.
Note receivable from an affiliate controlled by president, interest at 7.50% due in 208,133
monthly installments of $1,301, balance due November 27, 1997, collateralized by
real estate.
Note receivable from an affiliate controlled by president, non-interest bearing,
monthly principal payments of $5,000 each, due by May 9,1997, collateralized by 60,000
------
real estate.
$ 1,476,266
Less: Allowance for doubtful notes $(1,476,266)
-----------
Balance at December 31, 1996 $ -0-
==============
</TABLE>
(See Note B - Related Party Transactions)
F-15
<PAGE>
Sierra Rockies Corporation and Subsidiaries
-------------------------------------------
Notes to Consolidated Financial Statements
NOTE F - NOTES PAYABLE
- ----------------------
<TABLE>
<S> <C>
Current notes payable consists of the following at December 31, 1996:
Note payable to stockholder, bearing interest at 16%, interest only payable
monthly with final principal and interest due January 1997. Note collateralized
by a first deed of trust on the Wandering Star property. Refinanced in
1997, see below ................................................................... $162,000
Note payable to stockholder, bearing interest at 15%, interest only payable monthly
with final principal and interest due December 1996. Note collateralized by a
second deed of trust on the Wandering Star property. Refinanced in 1997, see
below ............................................................................ 100,000
Note payable to stockholder, bearing interest at 15%, interest only payable
monthly with final principal and interest due December 1996. Note collateralized
by a 200,000 second deed of trust on the Wandering Star property. Refinanced in
1997, see below ...................................................................
$462,000
========
Long term debt consists of the following at December 31, 1996:
Note payable to stockholder, bearing interest at 12%, interest only payable
monthly with final principal and interest due February 1998. Note collateralized
by a first deed of trust on the Wandering Star property. Refinanced in
1997, see below ................................................................... $200,000
Note payable to stockholder, bearing interest at 15%, interest only payable monthly
with final principal and interest due February 1998. Note collateralized by a ... 150,000
first deed of trust on the Wandering Star property ................................
Note payable to director, stockholder and former president, bearing interest at
12%, interest only payable monthly with final principal and interest due January . 341,839
1998. Note collateralized by a subordinated deed of trust on the Wandering Star
property ..........................................................................
10% debenture due November 1999, convertible to the Company's common stock at an .. 20,000
--------
exercise price of $1.50 per share .................................................
$711,839
========
</TABLE>
In order to meet its obligation at maturity with respect to the outstanding
principal and interest on their notes payable, the Company entered into a
long-term promissory note, face value of $690,960 with an unrelated party,
bearing interest at 15.5%, with interest payments of $8,924.90, commencing
February 14, 1997, due monthly, and principal
F-16
<PAGE>
Sierra Rockies Corporation and Subsidiaries
-------------------------------------------
Notes to Consolidated Financial Statements
Note F - Notes payable continued
- --------------------------------
and any unpaid interest due February 14, 1998. This note replaces all of the
current notes payable at December 31, 1996 totalling $$462,000 and the $200,000
note due February 1998. The note is collateralized by second deed of trust on
the Wandering Star property.
NOTE G - INCOME TAXES
- ---------------------
<TABLE>
<CAPTION>
A reconciliation of the U.S. statutory federal income tax rate to the effective
tax rate follows for the year ended December 31, 1996:
<S> <C>
U.S. federal statutory rate 34.0%
State income taxes 10.0%
Net operating loss for which no tax benefit is
currently available (44.0%)
- %
===========
</TABLE>
As of December 31, 1996, the Company has total deferred tax assets of
$2,877,213. The Company has recorded a valuation allowance for the entire amount
of the deferred tax asset. Substantially all of the deferred tax asset consists
of net operating loss carryforwards which begin to expire through 2009 for
federal purposes and 2000 for state purposes. The net change in the valuation
allowance was an increase of $405,213.
NOTE H - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
The Company is involved in various litigation which has arisen out of the
ordinary course of business. Management believes that the disposition of all
litigation will not have a material effect on the Company's consolidated
financial position and results of operations.
Unasserted claims
- -----------------
As a result of the change in management, amounts due to certain vendors
contracted by the former management are disputed by the current management.
Management believes that the disposition of these claims will not have a
material effect on the Company's financial statements as presented herein.
F-17
<PAGE>
Sierra Rockies Corporation and Subsidiaries
-------------------------------------------
NOTE I - FOURTH QUARTER ADJUSTMENTS
- -----------------------------------
<TABLE>
<S> <C>
Recorded allowance for related party notes receivable .......................... $1,476,667
Reclassifed deferred gain on transaction between parties under common control to
shareholders' equity
$ 690,500
Note I - Fourth quarter adjustments continued ..................................
Reclassified recognized gain of transaction between parties under common control
from statement of operations to shareholders' equity
$ 99,500
Reclassified gain on disposition of subsidiaries between parties under common
control from statement of operations to shareholders' equity
$1,031,182
Reclassified investment in art subsidiaries from discontinued operations to
disposal of previously consolidated subsidiaries accounted for under equity
method .........................................................................
$ 267,520
</TABLE>
NOTE J - GOING CONCERN
- ----------------------
As shown in the accompanying financial statements, the Company has incurred
recurring losses from operations and has a deficit in working capital. As a
result, the Company has experienced severe liquidity problems and has been
forced to restructure a portion of its long-term debt. These factors raise
substantial doubt about its ability to continue as a going concern.
Management is working with its primary lenders to monitor the status of its
indebtedness and further restructuring of its long-term debt is expected. In
addition, management has commenced operations in the hospitality segment and is
currently evaluating plans to reduce staffing and other costs. Management is
also planning to commence collection efforts on certain related party notes
receivable.
There can be no assurance that management will be successful in its efforts to
restructure debt, reduce costs, operate profitably or collect amounts due. If
the Company is unsuccessful in its efforts, it may be necessary to undertake
such other actions as may be appropriate to preserve asset value. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
NOTE K - SUBSEQUENT EVENTS
- --------------------------
On November 25, 1996, the Company formed a new subsidiary, Sierra Hospitality
Corporation ("SHS"), a Colorado corporation, in order to provide hotel and
hospitality management services. SHS entered into its first management contracts
in June 1997. No significant transactions related to SHS are recorded in the
December 31, 1996 financial statements.
F-18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 94,762
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 97,788
<PP&E> 6,000
<DEPRECIATION> 267
<TOTAL-ASSETS> 2,266,137
<CURRENT-LIABILITIES> 849,105
<BONDS> 0
0
0
<COMMON> 17,146
<OTHER-SE> 688,047
<TOTAL-LIABILITY-AND-EQUITY> 2,266,137
<SALES> 95,000
<TOTAL-REVENUES> 95,000
<CGS> 84,836
<TOTAL-COSTS> 644,990
<OTHER-EXPENSES> 947,696
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 306,259
<INCOME-PRETAX> (1,497,686)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,497,686)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,497,686)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> .00
</TABLE>
