ITEM 1. BUSINESS
HISTORY AND BACKGROUND
The Rockies Fund, Inc. (the "Fund") was incorporated on August 2, 1983, under the laws of the State of Nevada, for the principal purposes of making venture capital investments in developing companies throughout the United States. The Fund's initial capitalization consisted of a purchase of 12,500 shares of the Fund's Common Stock for a total of $100,000 by Galbreath Financial Investment Corporation, an affiliate of the Fund's former Advisor, Galbreath Financial Services Corporation, on August 5, 1983. On November 16, 1983, the Fund completed a public offering of its stock, whereby the Fund sold a total of 425,000 shares of its $.01 par value Common Stock at a price of $8.00 per share. The Fund received net proceeds from the offering of $2,890,000.
Effective January 29, 1991, the Fund entered into an Agreement Concerning the Change in Management ("Agreement"), which provided for the termination of the Fund's management and advisor agreements and the resignation of the then existing Board of Directors and executive officers of the Fund. Prior to January 29, 1991, Galbreath Financial Services Corporation ("Advisor") had provided management and administrative services to the Fund pursuant to a Management Agreement between the parties and had provided investment services pursuant to an Investment Advisory Agreement between the parties. Under the terms of the Agreement, and with the approval of the Fund's majority and controlling stockholder, D.A. Davidson & Company, the former five (5) members of the Fund's Board of Directors, resigned in sequence and the vacancies created by those resignations were filled by the Fund's current Board of Directors, to serve until the next regular annual meeting of the Fund's stockholders. (See Part III - "Directors and Executive Officers")
The Fund has elected treatment as a "business development company" under the Investment Company Act of 1940, as amended (the "Act"), and is therefore subject to the provisions of the Act which apply to such companies. As a "business development company", the Fund is relieved from compliance with a number of provisions of the Act which otherwise would significantly affect its operations, but remains subject to other regulations affecting investment companies. In order to maintain its status as a business development company, approximately 70% of the Fund's assets must be comprised of venture capital investments.
As a business development company, the Fund invests in, and makes managerial assistance available to, new and developing companies. Prior to making an investment in a company which is eligible for the Fund's venture capital portfolio, the Fund's management conducts a review of the portfolio company's operations to determine whether it is appropriate for investment by the Fund. This review may include familiarization with the portfolio company's business plan, a tour of the proposed portfolio company's facilities, credit and reference checks and a careful review of the portfolio company's product, its markets and growth prospects.
Consistent with the Fund's offer to provide managerial assistance to its portfolio companies, the Fund attempts to arrange for its officers and directors to serve as directors of such companies. Also, the Fund assists portfolio companies in their efforts to recruit management, to define their product planning and marketing strategies, to form financial plans and to develop corporate goals. The Fund also assists such companies in establishing professional relationships, in obtaining additional financing, in evaluating merger opportunities and in conducting private and public offerings of their securities.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
Since inception, the Fund has operated primarily in the venture capital industry and plans to continue to devote a majority of its resources to operations within this arena. However, during the third quarter of fiscal 1993, the Fund acquired a 26,500 square foot office building. The building was purchased primarily to provide office space for the Fund and as a potential source of income.
The following table sets forth for each of the Fund's last three fiscal years, the amounts of revenue, operating profit or loss and identifiable assets, attributable to the Fund's investment activities and to the operation of the Fund's office building. The following information should be read in conjunction with the Financial Statements and related Notes contained elsewhere in this report and Management's Discussion and Analysis of Financial Condition and Results of Operations.
NARRATIVE DESCRIPTION OF BUSINESS.
VENTURE CAPITAL OPERATIONS --------------------------
The Fund's primary business remains investing in, and making managerial assistance available to, new and developing companies. To this end, effective July 19, 1994, the Fund changed and expanded its Investment Objective. As amended, the Fund's Investment Objective is capital appreciation by making venture capital investments primarily in developing companies located throughout the United States and its territories which the Fund's management believes offer significant growth opportunities. The Fund also invests in more established companies which are experiencing financial difficulties if such companies present special opportunities for growth. Thus, the Fund invests in companies involving a high degree of risk and possessing the potential for significant capital appreciation.
The Fund seeks to follow certain guidelines when identifying potential portfolio companies, and attempts to invest in those companies which are unique with regard to their products or their production or marketing techniques. The Fund also looks for investment opportunities in companies that produce products for which there is a discernible demand, at competitive costs. Strong growth potential, a reasonable opportunity for liquidity, increases in gross revenues in excess of industry averages and a lack of dependence upon governmental contracts or any one sector of the economy, are important factors which the Fund generally considers prior to making an investment.
The Fund presently has four employees. The Fund's executive officers and directors screen, evaluate and structure investments and provide managerial assistance to portfolio companies. The Fund's officers and directors provide guidance regarding the propriety and structuring of investments and establish periodically the valuation of securities held by the Fund.
The venture capital business is highly competitive. A recent dramatic increase in the number of businesses engaged in venture capital investment activities has meant that a larger number of firms are competing for a limited number of attractive investment opportunities. Notwithstanding these developments, however, no single firm or group of firms dominates the industry. Where possible, the Fund seeks to participate with other venture capitalists in their investment activities.
The following descriptions of certain companies in which the Fund has invested contain information which has been obtained from officers and directors of the respective companies, and from documents furnished to the Fund by such companies. The description of the Fund's investments includes valuation information which is based upon certain valuation methods which are, in order of preference, the Public Market Method (used when there is an established public market for the portfolio company's securities), the Private Market Method (based upon private transactions), the Appraisal Method (reflecting a comparison between the portfolio company and other public or private companies engaged in the same or similar business activities), and the Cost Method (based upon the cost of the Fund's investments as adjusted to reflect significant developments affecting the investment).
PORTFOLIO COMPANIES
ALOUETTE COSMETICS, INC -----------------------
The Fund, at December 31, 1996 held 2,500 shares of Alouette Cosmetics common stock, which shares are unrestricted as to sale, non-income producing and have been valued at their quoted market price of $3.00 per share or $7,500.
AMERICAN EDUCATIONAL PRODUCTS, INC. -----------------------------------
The Fund, at December 31, 1996, held 200,000 shares of American Educational Products, Inc. common stock, which shares are restricted as to sale, non-income producing and have been valued by the Board of Directors at their quoted market value of $.9375 per share or $187,500. The Company also held at December 31, 1996 common stock purchase warrants exercisable to purchase an additional 200,000 shares of common stock of American Educational Products, Inc. at an exercise price of $1.00 per share. The Company valued these warrants at $0. The Fund does have certain registration rights relating to these shares and warrants.
ASTEA INTERNATIONAL -------------------
The Fund, at December 31, 1996, held 10,000 shares of Astea International common stock, which shares are unrestricted as to sale, non-income producing, and have been valued at their quoted market price of $5.6875 per share or $56,875.
BEAR STAR (fka COLUMBINE HOME SALES, LLC.) ------------------------------------------
The Fund has invested in Bear Star, which investment is restricted as to sale, non-income producing, and has been valued by the Board of Directors at $0.00. The Fund also holds a note receivable from Columbine Homes with remaining amounts due of $5,814. The note accrues interest at the rate of 10% per year, and is due on demand.
BRASSIE GOLF CORPORATION ------------------------
The Fund, at December 31, 1996, held 215,000 shares of Brassie Golf Corporation common stock, which shares are unrestricted as to sale, non-income producing, and have been valued at their quoted market price of $.25 per share or $53,750.
CABLE AND COMPANY WORLDWIDE ---------------------------
The Fund, at December 31, 1996, held 78,000 shares of Cable and Company Worldwide common stock, which stock is unrestricted as to sale, non-income producing, and has been valued at its quoted market price of $.8125 per share or $63,375.
CELL ROBOTICS INTERNATIONAL, INC. ---------------------------------
The Fund, at December 31, 1996 held 35,000 shares of Cell Robotics International, Inc. common stock, which shares are unrestricted as to sale, non-income producing, and have been valued at their quoted market price of $2.00 per share or $70,000.
CORFACTS, INC. --------------
The Fund, at December 31, 1996, held 200,000 shares of Corfacts, Inc. common stock, which shares are unrestricted as to sale, non-income producing, and has been valued by the Board of Directors at $.05 per share or $10,000.
COVA TECHNOLOGIES -----------------
The Fund at December 31, 1996 held 917 shares of Cova Technologies common stock, which stock is restricted as to sale, non-income producing, and has been valued by the Board of Directors at its cost of $20,035.
DAMACH ------
The Fund, at December 31, 1996 held a note receivable from Damach in the amount of $32,500 which accrues interest at the rate of 12% per year and was originally due on March 31, 1997. An extension agreement was signed on March 4, 1997 to extend this promissory note receivable to a month to month basis or until the Fund makes a written request for payment.
ENHANCED SERVICES, INC. -----------------------
The Fund, at December 31, 1996, held 2,500 shares of Enhanced Services, Inc. common stock which shares are unrestricted as to sale, non-income producing and have been valued at their quoted market price of $3.25 per share or $8,125.
EXPLORATION COMPANY, THE ------------------------
The Fund, at December 31, 1996, held 18,000 shares of The Exploration Company common stock, which shares are unrestricted as to sale, non-income producing, and have been valued at their quoted market price of $5.50 per share or $99,000.
GEORGESON, PHIL ---------------
The Fund, at December 31, 1996 held a note receivable from Phil Georgeson in the amount of $15,090. The note is secured by 15,000 shares of National Equities Holdings, Inc. common stock, accrues interest at the rate of 12% per year and is due on demand.
GLOBAL CASINOS, INC. --------------------
The Fund, at December 31, 1996, held 17,680 shares of Global Casinos, Inc. common stock, after giving effect to a 1-for-10 reverse split. The shares are restricted as to sale due to the company being an affiliate, non-income producing, and have been valued by the Board of Directors at their quoted market price of $4.25 per share, or $75,140. The Fund, at December 31, 1996, also held a note receivable from Global Casinos, Inc. in the amount of $175,000, which note is unsecured, accrues interest at the rate of 8% per year, and is due November 1, 1998. Said note is convertible into shares of Global Casinos, Inc. common stock at a conversion price of $5.00 per share anytime after November 1, 1997. The Fund also owns 35,000 Global warrants excercisable at $6.00, 35,000 warrants excercisable at $7.00 and 35,000 warrants excercisable at $8.00 per share, all of which expire as of February 1, 1998 and are valued at $0.
HEALTHWATCH, INC. -----------------
The Fund, at December 31, 1996, held 79,400 shares of Healthwatch, Inc. common stock, which shares are unrestricted as to sale, non-income producing, and have been valued at their quoted market price of $2.00 per share or $158,800.
IMAGE MATRIX CORPORATION ------------------------
The Fund, at December 31, 1996 held 10,000 units of Image Matrix Corporation, which units are unrestricted as to sale, non-income producing, and have been valued at their quoted market price of $3.375 per unit or $33,750.
J T'S RESTAURANTS, INC. -----------------------
The Fund, at December 31, 1996, held 1,500 shares of J T's Restaurants, Inc. common stock, which shares are unrestricted as to sale, non-income producing and have been valued at their quoted market price of $2.125 or $3,188.
KINETIKS.COM ------------
The Fund, at December 31, 1996 held 103,500 shares of freely traded Kinetiks.com common stock, which shares are restricted as to sale due to the Company being an affiliate, non-income producing, and have been valued at their quoted market price of $.625 per share or $64,688.
LASER RECORDING SYSTEMS, INC. -----------------------------
The Fund, at December 31, 1996, held 100,000 shares of Laser Recording Systems, Inc. common stock, which shares are unrestricted as to sale, non- income producing and have been valued at their quoted market price of $.02 per share or $2,000.
NAVIDEC, INC. -------------
The Fund, at December 31, 1996, held a note receivable from Navidec, Inc. in the amount of $25,000, which note is unsecured, accrues interest at the rate of 10% and is due December 30, 1997.
NECO LAND RESOURCES, LLC. -------------------------
The Fund, at December 31, 1996. held a note receivable from NECO Land Resources, LLC in the amount of $10,000. The note is unsecured, accrues interest at the rate of 8% per year and is due on August 29, 1997.
OPTIMAX INDUSTRIES, INC. (fka PLANTS FOR TOMORROW, INC.) --------------------------------------------------------
At December 31, 1996, the Fund held 135,191 shares of Optimax Industries, Inc. common stock, which shares are restricted as to sale, are non-income producing, and have been valued at their quoted market price of $2.50 per share or $337,978. The Fund also holds warrants to purchase an additional 12,500 shares of Optimax Industries, Inc. common stock, which warrants are valued at their quoted market price of $.75 each or $9,375.
PACIFIC BIOMETRICS, INC. ------------------------
The Fund, at December 31, 1996, held 7,500 shares of Pacific Biometrics, Inc. common stock, which shares are unrestricted as to sale, non-income producing and have been valued at the quoted market price of $3.125 or $23,438. Additionally, the Fund held 7,500 common stock purchase warrants which are also unrestricted as to sale, non-income producing and have been valued at their quoted market price of $.1875 or $1,406.
POORE BROTHERS, INC. --------------------
The Fund, at December 31, 1996, held 4,000 shares of Poore Brothers, Inc. common stock, which shares are unrestricted as to sale, non-income producing and have been valued at their quoted market price of $3.5625 or $14,250.
PROGRESS SOFTWARE, INC. -----------------------
The Fund, at December 31, 1996, held 1,000 shares of Progress Software, Inc. common stock, which shares are unrestricted as to sale, non-income producing and have been valued at their quoted market price of $19.75 per share or $19,750.
S2 GOLF, INC. -------------
The Fund, at December 31, 1996 held 20,825 shares of S2 Golf, Inc. (Square Two Golf, Inc.), which shares are unrestricted as to sale, non-income producing and have been valued at their quoted market price of $.9375 per share or $19,523.
S&P 500 -------
The Fund, at December 31, 1996, held 4,000 puts against the S&P 500 at 550. The puts are unrestricted as to sale and expire on December 20,1997. They have been valued at their quoted market value of $5.875 or $23,500. The Fund, at December 31, 1996, also held 4,000 puts against the S&P 500 at 600. The puts are unrestricted as to sale and expire on December 20,1997. They have been valued at their quoted market value of $8.25 or $33,000.
SHIVA CORPORATION -----------------
The Fund, at December 31, 1996, held 2,631 shares of Shiva Corporation common stock, which shares are unrestricted as to sale, non-income producing and have been valued at their quoted market price of $34.625 per share or $91,098. The shares had previously been held in escrow pending the completion of certain performance requirements by Airsoft, Inc.
SHOPSMITH ---------
The Fund, at December 31, 1996, held 20,000 shares of Shopsmith common stock, which shares are unrestricted as to sale, non-income producing, and have been valued at their quoted market price of $2.50 per share or $50,000.
SOUTHSHORE CORPORATION ----------------------
At December 31, 1996, the Fund held 17,400 shares of Southshore Corporation common stock, which shares are restricted as to sale, non-income producing, and have been valued at their quoted market price of $.50 per share or $8,700.
TAMPA BAY CORPORATION ---------------------
The Fund, at December 31, 1996, held 15,000 shares of Tampa Bay Corporation common stock, which shares are unrestricted as to sale, non-income producing, and have been valued at their quoted market price of $1.369 per share or $20,535.
TELS CORPORATION ----------------
The Fund, at December 31, 1996, held 30,000 shares of TELS Corporation common stock, which shares are unrestricted as to sale, non-income producing, and have been valued at their quoted market price of $.4688 per share or $14,064.
TOPRO, INC. -----------
The Fund, at December 31, 1996, held 7,500 shares of Topro, Inc. common stock, which shares are restricted as to sale, non-income producing, and have been valued at their quoted market price of $2.50 per share or $18,750. The Fund also held a $50,000 note receivable from Topro, Inc., which note accrues interest at 12% per year and was paid in 1997.
USASURANCE GROUP ----------------
The Fund, at December 31, 1996, held 60,500 shares of Usasurance Group common stock, which shares are restricted as to sale, non-income producing, and have been valued at their quoted market price of $4.00 or $242,000.
REAL ESTATE OPERATIONS
During the third quarter of fiscal 1993 the Fund purchased a 26,500 square foot office building located in Colorado Springs, Colorado (the "Building"). The Building was acquired primarily to provide office space for the Fund and as a potential source of income. The Fund currently occupies approximately eight percent (8%) of the Building and leases the remaining space to thirteen (13) other unrelated parties under varying, noncancellable, operating leases expiring in various years through 2002. The Building is currently 110% occupied, including a one year lease for the Building roof for placement of Antenna Facilities, effective September 16, 1996.
The Fund's Building Consultant is currently responsible for management and leasing of the Building and has signed a Consultant Agreement with the Fund to manage the Building as long as the Fund owns the Building and is subject to a 30 day cancellation by either party in writing.
At December 31, 1996, the Company was engaged in discussions calculated to lead toward the future sale of the Building. Subsequent to December 31, 1996, the Company executed a contract for and consummated the sale of the Building for a price of $1,080,000. The sale was structured as a tax-free exchange under Section 1031 of the Internal Revenue Code. In connection with that transaction, the Company on April 1, 1997 consummated the purchase of five acres of undeveloped commercial property located in Colorado Springs, Colorado. The Company intends to build and develop a commercial office building on the property during 1997. The Company will continue to occupy the Building which it sold effective March 31, 1997 until its new building has been constructed and completed. Additional investments in rental real estate must be made in compliance with the provisions of the Act and must not jeopardize the Fund's status as a business development company under the Act.
The commercial real estate market in Colorado Springs, Colorado, although steadily improving over the last several years, still remains very competitive. While the Board does not believe that a single firm or group dominates the commercial real estate industry in Colorado Springs, many of the participants are well-established and possess far greater financial and market resources than the Fund.
INCOME TAXES
For federal income tax purposes, the Fund will utilize all of its net operating loss and capital loss carryforwards for the 1996 tax return.
ITEM 2.
ITEM 2. PROPERTIES
Office Facilities. ------------------
The Fund's principal executive offices are maintained in the office Building located at 4465 Northpark Drive, Colorado Springs, Colorado 80907. The Fund's telephone number at that address is (719) 590-4900.
In conjunction with the Fund's acquisition of the Building, the Fund executed and delivered its promissory note payable in monthly installments of $5,806, including interest at 8% per annum, due August 1, 2003, and secured by the Building. As of December 31, 1996, the principal amount outstanding under this note was $358,436. The Fund also executed and delivered a second, unsecured, promissory note, due on demand, with interest equal to 50% of the net cash flows of the Building. During 1996, the Fund paid off the face amount on this second, unsecured, promissory note. The transaction resulted in termination of the noteholder's right to convert the note into equity in the building. The resultant cost to terminate the noteholder's right of $74,537 was allocated to the Fund's building. Finally, the Fund had obtained a variable rate $100,000 line of credit with interest at prime rate plus 2.0%. The line of credit is secured by the Building, and is fully utilized as of December 31, 1996. Subsequent to December 31, 1996, the Company sold the Building and consummated the purchase of five acres of undeveloped commercial property in Colorado Springs, Colorado. The Company will continue to occupy its current offices in the Building until it has completed the construction and development of a new office building on the newly purchased commercial property.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
During the beginning of 1996, the Fund received requests for information from the United States Securities and Exchange Commission ("SEC") related to an investigation begun by the SEC during 1994 into various matters, including the administrative and record keeping practices of the Fund, its securities trading activities and those of its officers and directors. In September 1996, the Company was notified by the Commission's Staff that it intends to request that the Commission commence an administrative proceeding against the Company and its directors based upon certain transactions in securities formerly included in the Company's securities portfolio. The Company has responded to the Commission with a written submission which sets forth why there exists no basis in fact or law for such a proceeding. It is impossible to predict whether the Staff will recommend a proceeding against the Company or any of its directors, and if such a recommendation is made, whether the Commission will authorize the institution of a proceeding. There can be no assurance of the outcome of this matter or the ultimate effect on the Fund's financial position.
Other than the foregoing, the Fund is not a party to any material pending legal proceeding.
ITEM 4.
ITEM 4. MATTERS SUBMITTED TO VOTE OF SECURITY HOLDERS
The Fund did not submit any matters to a vote of its security holders during the fourth quarter of its fiscal year ending December 31, 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The outstanding shares of common stock, are traded over-the-counter and quoted in the OTC Electronic Bulletin Board under the symbol "ROCE." The reported high and low bid prices for the common stock are shown below for the period from January 1, 1995 through April 03, 1997:
The bid price of the Fund's common stock as of April 03, 1997 was $4.125. The prices presented are bid prices which represent prices between broker- dealers and do not include retail mark-ups and mark-downs or any commissions to the broker-dealer. The prices do not reflect prices in actual transactions.
As of December 31, 1996, there were approximately 116 holders of record of the Fund's common stock. The closing bid price of the stock on that date was $4.00.
DIVIDENDS
No cash dividends were paid by the Fund in 1995 or 1996.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below is derived from audited financial statements of the Fund. The following information should be read in conjunction with the Financial Statements and related Notes contained elsewhere in this report and Management's Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion and analysis should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this report.
LIQUIDITY AND CAPITAL RESOURCES - DECEMBER 31, 1996.
During the year ended December 31, 1996, the Fund incurred substantial realized gains from sales of securities which were partially offset by unrealized depreciation of investments. Current assets and net assets increased accordingly:
Primarily due to the proceeds from the sale of 23,679 shares of Shiva Corp. (fka Airsoft) common stock during fiscal year ending December 31, 1996, the Fund has added 24 new investments to its portfolio since December 31, 1995 contributing to the increased value of its investments from $1,400,374 on December 31, 1995, to $2,154,497 on December 31, 1996, an increase of $754,123 or 53.9%. In addition to the increase in securities, was an increase in notes receivable from a value of $6,175 on December 31, 1995 to $313,404 on December 31, 1996, an increase of $307,229 or approximately 4,975%. Global Casinos, Inc., an international gaming Company, comprises approximately 55% of total notes receivable. The Fund believes that all notes receivable are fully collectible.
Cash increased significantly from $1,193 at December 31, 1995 to $499,404 at December 31, 1996, an increase of $498,211 primarily due to the proceeds from the sale of Shiva Corp. Accrued interest receivable increased from $2,130 at December 31, 1995 to $12,789 at December 31, 1996, an increase of $10,659 or approximately 500%, attributable to the increase in notes receivable. Receivables from investees decreased at December 31, 1996 from $61,518 at December 31, 1995 to $23,072, or 62.5%, as the Fund received payments on these receivables during the year. As a result, current assets increased in 1996 from $1,471,869 at December 31, 1995 to $2,705,571 at December 31, 1996, an increase of $1,233,702 or approximately 83.8%.
During 1996, the Fund sold a promissory note to a party entitled to a one- half interest in the Fund's Colorado Springs office building and to certain real property and improvements of the Fund's building, which subsequently increased the cost of the Fund's Office Building by $74,537, to $633,496 as of December 31, 1996. Leasehold Improvements increased by $3,414, or 4% at December 31, 1996 to accommodate improvements for a new lease tenant. As a result, total fixed assets increased by $49,603 or 6.9%, less accumulated depreciation.
Based on the foregoing, total assets increased significantly from $2,186,785 at December 31, 1995 to $3,470,092 at December 31, 1996, in increase of $1,283,307 or 58.7%.
Current liabilities increased during 1996 by $305,827, or by approximately 66%, due specifically to investment securities purchased, accounts payable, accrued liabilities, accrued income taxes and borrowings under lines of credit. Investment securities purchases accounted for $116,882 of the increase in current liabilities and had a zero balance as of December 31, 1995, these trades were purchased at the end of 1996, however did not settle until 1997 and therefore are required to be recorded as a liability for the Fund. Accounts payable increased by $120,724 or approximately 216%, due to trades purchased and payment still outstanding as of December 31, 1996 . Accrued liabilities increased $42,711 or 107%, due primarily to legal fees incurred as of December 31, 1996. The Fund accrued income taxes of an estimated $118,000 as of December 31, 1996, due to the significant increase in realized gains incurred from the Shiva Corp. sale proceeds. Borrowings under lines of credit increased $71,414 or 69.3% as the Fund had two lines of credit as of December 31, 1996, which include a fully drawn $100,000 line that accrued interest at prime plus 2% secured by the Fund's Building; and a $75,000 line with an outstanding balance of $74,500 as of December 31, 1996 that accrued interest at 9.5% secured by the Fund's Optimax Industries, Inc. holdings. The Fund had no cash overdrafts as of December 31, 1996 and had paid $146,393 on notes payables to related and other parties for a decrease of approximately 76.4% from December 31, 1995 to December 31, 1996.
As a result, total liabilities increased from $879,223 at December 31, 1995 to $1,139,360 at December 31, 1996 an increase of $260,137 or 29.5%
Due to the increase in total assets and liabilities, net assets increased from $1,307,564 at December 31, 1995 to $2,330,732 at December 31, 1996 and from $2.04 per share to $3.64 per share, respectively, an increase of $1.60 per share or 78%.
Any additional investments in rental real estate must be made in compliance with the provisions of the Investment Fund Act of 1940 (the "Act"), and cannot jeopardize the Fund's status as a business development company registered under the Act.
Other than the sale of the Fund's office building, Management knows of no trends or demands, commitments, events or uncertainties which will result in the Fund's liquidity or capital resources materially increasing or decreasing.
RESULTS OF OPERATIONS - 1996 COMPARED TO 1995 AND 1994
As a direct result of the Fund's acquisition of the office building in Colorado Springs, Colorado, during the third quarter of 1993, in addition to the office building being fully leased in 1996, rental income has increased from $142,921 in 1994, to $157,565 in 1995, to $170,434 in 1996. Interest and dividend income increased significantly in 1996 due to sale proceeds from Shiva Corp. from $5,392 in 1994, to $614 in 1995, to $30,248 in 1996. Total investment income increased 16% from $166,575 in 1994, to $177,536 in 1995, to $206,491 as of December 31, 1996.
Total expenses decreased from $531,724 at 1994, to $436,478 at 1995, and increased 45.5% to $635,180 in 1996. Contributing to the increase in expenses were increases in wages and salaries of 10.8%, professional fees of 126%, office expenses of 57.9%, building expenses of 17.4%, and investment expenses of 4,178%. The expense increases are mainly attributable to increases in wages, legal services, purchase of tangible personal property, building maintenance to accommodate new tenant improvements, and broker fees from investment purchases and sales.
As a result of increased investment income and expenses in 1996, net investment loss increased 65.6% to $(428,689) in 1996, compared to $(258,942) in 1995, and $(365,149) in 1994.
Net realized gain from sale of investments increased significantly in 1996 to $1,549,196 from $31,889 in 1995 and $192,577 in 1994, an increase of $1,517,307. This increase is mainly attributable to the sale of Shiva Corp. (fka Airsoft) which increased $1,846,098 in value during 1996. Dignity Partners also contributed to the increase in sale of investments by $42,283 and Optimax, Redwood Broadcasting and Tampa Bay increasing approximately $25,000 each. These increases were offset primarily by income tax expense of $118,000 that was not required in 1994 or 1995; Newport FirstFax by $133,333 and BMPI by $114,924 which have been producing an unrealized loss for the Fund and provided a realized tax advantage for 1996. Unrealized net depreciation of investments decreased 143% since 1994, however increased 43.5% from 1995, many of the Fund's open positions were purchased at the very end of 1996 and any depreciation/appreciation of unrealized investments were for a short period of time.
Other than the sale of the Fund's office building described above, Management knows of no trends or uncertainties that will have any material impact on the income or expenses of the Fund.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) below for a list of the Financial Statements and Financial Statement Schedules included in this report following the signature page. The supplementary financial information required by Item 302 of Regulation S-K does not apply to the Fund.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company retained the accounting firm of GELFOND HOCHSTADT PANGBURN & CO. to serve as the Company's principal accountant to audit the Company's financial statements. This engagement was effective July 30, 1996. Prior to its engagement as the Company's principal independent accountant, GELFOND HOCHSTADT PANGBURN & CO. had not been consulted by the Company either with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements or on any matter which was the subject of any prior disagreement between the Company and its previous certifying accountant.
THE ROCKIES FUND, INC.
YEARS ENDED DECEMBER 31, 1996 AND 1995
REPORT OF INDEPENDENT AUDITORS
The Shareholders and Directors The Rockies Fund, Inc.
We have audited the accompanying statement of assets and liabilities of The Rockies Fund, Inc. (the "Fund"), including the schedule of investments, as of December 31, 1996, and the related statements of operations, shareholders' equity, cash flows, and changes in net assets for the year then ended. These financial statements and schedule are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. The 1995 financial statements, including the 1995 schedule of investments, were audited by other auditors, whose report dated March 15, 1996, expressed an unqualified opinion on those statements and schedule.
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 and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1996, by correspondence with the custodian and brokers or verification by examination. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and schedule referred to above present fairly, in all material respects, the financial position of The Rockies Fund, Inc. as of December 31, 1996, and the results of its operations, its cash flows, and the changes in its net assets for the year then ended in conformity with generally accepted accounting principles.
GELFOND HOCHSTADT PANGBURN & CO.
Denver, Colorado February 28, 1997, except for Note 7, as to which the date is April 1, 1997
INDEPENDENT AUDITORS' REPORT ----------------------------
THE SHAREHOLDERS AND DIRECTORS THE ROCKIES FUND, INC.:
We have audited the accompanying statement of assets and liabilities and schedule of investments of The Rockies Fund, Inc. as of December 31, 1995 and the related statements of operations, stockholders' equity, cash flows, and changes in net assets for the year then ended. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 and schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedules. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement and schedule presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and schedule referred to above present fairly, in all material respects, the financial position of The Rockies Fund, Inc. as of December 31, 1995 and the results of its operations, its cash flows, and changes in net assets for the year then ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Denver, Colorado March 15, 1996
- ---------- * These entities are considered to be affiliated companies as a result of the Fund's investment and/or position on the entity's Board of Directors at December 31, 1996. Securities may be subject to some resale restrictions due to the company being an affiliate. ** After permanent write-downs. *** Certain shares are free trading either under rule 144 of the Securities Act of 1933 or as a result of demand registration rights held by the Company at December 31, 1996.
THE ROCKIES FUND, INC. STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996 AND 1995
Supplemental disclosures of noncash investing and financing activities:
During 1996, the Fund settled an $85,944 note payable, which entitled the holder to convert the note to 50% equity in the Fund's building. To cancel the note, the Fund gave the note holder 40,321 shares of Redwood Broadcasting, Inc. common stock, 7,000 shares of Palo Verde Group, Inc. common stock, and a $93,000 promissory note payable. The transaction resulted in termination of the note holder's right to convert the note into equity in the building. The resultant cost to terminate the note holder's right of $74,537 was allocated to the Fund's building. The Fund subsequently reduced the $93,000 promissory note by $35,876, in exchange for 20,500 shares of Discovery Technologies, Inc. common stock.
During 1995, an $18,409 note receivable and accrued interest receivable were converted to 14,072 shares of Redwood Broadcasting, Inc. (formerly Intelligent Financial Corporation). In addition, 3,577 shares of EMC common stock were received as a distribution from Colorado Venture Management Equity Fund I, Ltd.
During 1995, the Fund acquired $80,000 of leasehold improvements previously purchased by a tenant in the Fund's building in exchange for a non-interest bearing liability due to the tenant.
THE ROCKIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION:
The Rockies Fund, Inc. (the "Fund") was incorporated in Nevada on August 2, 1983 for the principal purpose of making venture capital investments in developing companies throughout the United States. The Fund is registered under the Investment Company Act of 1940, as amended, as a business development company. In order to maintain its status as a business development company, approximately seventy percent of the Fund's assets must be comprised of venture capital investments.
The Fund currently makes investments in small public and private companies, some of which are in the early stages of development with little or no operating history, or more developed companies that operate at losses or which experience substantial fluctuations in operating results. These companies may also need substantial capital to support expansion or to achieve or maintain a competitive position. Such companies may face intense competition and risks of product and technological obsolescence or rapidly changing regulatory environments which could adversely affect such companies' operations. These companies may have insufficient cash flow to service their debt obligations, including bridge loans made by the Fund. As a result, no assurance can be provided that the fund's investments will not result in substantial or complete losses. The Fund's management serves on the boards of directors of a number of its portfolio companies.
A significant portion of the Fund's investments consists of securities that are subject to restrictions on sale. Restricted securities cannot be sold publicly without prior agreement with the issuer to register these securities under the Securities Act of 1933, as amended (the "Act"), or by selling such securities under Rule 144 of the Act, or other rules under the Act which permit only limited sales under specified conditions. The Fund's ability to sell its investments in restricted securities may be limited by, and subject to, the lack or limited nature of a trading market for such securities. These limitations could prevent or delay any sale of the Fund's securities or reduce the amount of proceeds that might otherwise be realized. Restricted securities generally sell at a price lower than similar securities that are not subject to restrictions on sale. When restricted securities are sold to the public, the Fund, under certain circumstances, may be deemed an "underwriter" or a "controlling person" for the purposes of the Act, and be subject to liabilities as such under the Act.
As shown in the accompanying financial statements, the fund incurred net investment losses in 1996 and 1995. The Fund may be required to liquidate investments or obtain debt or equity financing to fund operations in the future.
INVESTMENT VALUATION AND TRANSACTIONS:
Securities listed or traded on an exchange are valued at their last sales price on the exchange where the securities are principally traded. Securities reported on the NASDAQ National Market System are valued at the last sales price on the valuation date or, absent a last sales price, at the closing bid price on the valuation date. Securities traded in the over-the-counter market are valued at the last bid price, based upon quotes furnished by independent market makers for such securities. Investments in notes receivable are valued at net realizable value. The Fund performs on-going evaluations regarding collectibility of receivables and provides allowances for potential losses.
In the absence of readily ascertainable market values, investments in restricted securities without quoted market prices are carried at estimated fair value as determined by the Fund's Board of Directors (the "Board"). Due to the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and the differences could be material. The estimated fair value of restricted securities at December 31, 1996 and 1995 total approximately $964,000 and $1,216,000, respectively.
Securities transactions are accounted for on a trade date basis. Where possible, realized gains and losses on the sales of investments are determined using the specific identification method. If the specific identification method cannot be utilized, realized gains and losses are determined using the first-in, first-out method. Substantially all of the Fund's investments are non-income producing.
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 amount 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 periods. Actual results could differ form those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In 1996, the Fund adopted the provisions of Statement of Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG- LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF ("SFAS NO. 121"). SFAS No. 121 establishes recognition and measurement standards for the impairment of long-lived assets expected to be held and used and long-lived assets to be disposed of. Generally, assets to be held and used in operations are considered impaired if the sum of expected undiscounted future cash flows is less than the assets' carrying values. If an impairment is indicated, the loss is measured based on the amounts by which the assets' carrying values exceed their fair values. Assets to be disposed of are reported at the lower of their carrying values or fair values less estimated selling costs. There was no material financial statement impact from the adoption of SFAS No. 121, as prior to the adoption of SFAS No. 121, the Fund assessed impairment based on the expected future cash flows from operations of its long-lived assets.
FINANCIAL INSTRUMENTS:
The carrying values of the Fund's financial instruments (other than investments), including cash, receivables, payables, accruals and non-related party debt approximates fair values primarily due to the short maturities of these instruments and based on borrowing rates that management believes are currently available to the Fund for instruments with similar terms. The fair values of the related party debt are not practicable to estimate, due to the related party nature of the underlying transactions.
PROPERTY AND EQUIPMENT:
Property and equipment is recorded at cost. Deprecation is provided over the estimated useful lives of the assets using the straight-line method as follows: furniture, fixtures, and equipment, 6 to 10 years; leasehold improvements, 6 to 8 years; building, 40 years.
ACCOUNTING FOR INCOME TAXES:
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of operations in the period that includes the enactment date.
PER SHARE AMOUNTS:
Per share amounts are computed using the weighted average number of shares outstanding each year.
RECLASSIFICATIONS:
Certain 1995 amounts have been reclassified to conform to the 1996 presentation.
2. INCOME TAXES:
The provision for income taxes in 1996 consists of approximately $100,000 of federal and $18,000 of state taxes and primarily relates to the net realized gain from sales of investments. The reconciliation between the statutory federal tax rate and the effective tax rate as a percent is as follows:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are as follows:
3. DEBT:
NOTES PAYABLE, RELATED PARTIES:
NOTES PAYABLE, OTHER:
LINES OF CREDIT:
MORTGAGE NOTE PAYABLE:
The Fund has a mortgage note payable in monthly installments of $5,806, including interest at 8%, due August 1, 2003, which is collateralized by land and building. The mortgage loan agreement includes certain covenants, which require the Fund to comply with various administrative and reporting requirements.
Future principal payments under the mortgage for years after December 31, 1996 are as follows:
The weighted average interest rates on all debt for 1996 and 1995 were 8.86% and 8.55%, respectively. Interest expense incurred on related party debt was $3,567 and $5,600 in 1996 and 1995, respectively.
OTHER:
During 1995, the Fund acquired leasehold improvements previously purchased by a tenant in the Fund's building. In consideration for the acquired leasehold improvements, the Fund has agreed to reduce the tenant's future monthly rentals. The total amount was recorded as a non-interest bearing liability due to the tenant, to be reduced over the term of the lease. Amounts due for years after December 31, 1996, which are included in accrued liabilities and non-current other liabilities in the accompanying financial statements, are as follows:
4. RENTAL INCOME:
The Fund leases space in its building as lessor under various noncancelable operating leases expiring through 2002. Minimum future rental receipts under noncancelable operating leases are as follows:
5. COMMITMENTS AND CONTINGENCIES:
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION:
During 1996 and 1995, the Fund received requests for information from the United States Securities and Exchange Commission ("SEC") related to an investigation by the SEC which began in 1994 into various matters, including the administrative and record keeping practices of the Fund, its securities trading activities and those of one of its officers.
In September 1996, the Fund received notification from the SEC that the SEC staff was planning to recommend that an enforcement action be brought against the Fund, its president, and each of its directors due to certain alleged violations of federal securities laws.
The SEC invited the Fund to make a submission setting forth the Fund's position and arguments regarding the SEC staff's planned recommendation. The Fund did so in October 1996, and at the SEC's request, the Fund supplemented its submission in December 1996. The SEC has not responded to the Fund's submissions and has not advised the Fund of any timetable for the SEC staff to make its final determination about whether to recommend an enforcement action.
Management is unable to predict, with any certainty, the outcome of the investigation, or the ultimate effect on the Fund.
EMPLOYEE BENEFITS:
The Fund maintains a salary-deferred, simplified employee pension plan. Employer contributions are discretionary, and there were no employer contributions in 1996 and 1995.
BUILDING MANAGEMENT AGREEMENT:
In October 1996, the Fund entered into an agreement with a former officer of the Fund, whereby the former officer provides building management and consulting services for $1,000 a month. The agreement may be terminated with 30-day notification by either party. Building management expense for 1996 was $2,000.
6. TRANSACTIONS WITH INVESTEES AND AFFILIATES:
Receivables from investees represent reimbursable expenses totaling $23,072 and $61,518 at December 1996 and 1995, respectively.
At December 31, 1996, the Fund has a $175,000, 8% note receivable from a related party, which is due November 1998, and is convertible into shares of the affiliate's common stock after November 1, 1997. During 1996, the Fund also entered into a 12%, $250,000 revolving loan agreement with this affiliate. Loans of $170,000 were made to this affiliate during the year and were repaid by December 31, 1996. Interest income on the note and line of credit was $9,235 in 1996. The revolving loan agreement was terminated in December 1996.
The Fund utilizes the services of a brokerage company which is a significant shareholder of the Fund. In 1996 and 1995, the Fund incurred $43,679 and $871 in commissions and other expenses. At December 31, 1996, $391,698 of the Fund's cash was held with this affiliate under a verbal arrangement to maintain a cash balance of $350,000 with the affiliate.
The Fund utilizes a trust company as primary custodian of its securities. This company is an affiliate, through its relationship with the brokerage company. Custodial fees incurred in 1996 and 1995 were $9,109 and $8,900, respectively, and at December 31, 1996, the Fund has a payable due to this affiliate, for investment securities purchased, of approximately $153,566.
7. SUBSEQUENT EVENT:
Effective March 31, 1997, the Fund sold its building for $1,080,000, and paid approximately $452,000 of mortgage and other debt. This transaction resulted in a net gain of approximately $390,000. On April 1, 1997, the Fund purchased five acres of undeveloped commercial property located in Colorado Springs, Colorado for $390,000. These real estate transactions were structured to qualify as a tax-free exchange, pursuant to applicable Internal Revenue Code sections. The Fund intends to build and develop a commercial office building on the property in 1997, and the Fund intends to occupy the existing building on a month-to-month basis until the new building has been completed, for rent of $900 per month.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The present term of office of each director will expire at the next annual meeting of shareholders. The name, position with the Fund, and age of each director and officer are as follows:
Stephen G. Calandrella, President and Director. ---------------------- Mr. Calandrella has been President and a Director of The Rockies Fund, Inc. since February, 1991, and Chief Executive Officer since January 30, 1994. Mr. Calandrella has previously served as a Director of Kelly Motors, Ltd., Good Times Restaurants, Inc., Southshore Corp., and Cogenco International, Inc. Mr. Calandrella also served as a Director for Combined Penny Stock Fund, Inc. and Redwood MicroCap Fund, Inc., both of which are closed-end investment companies registered under the Investment Fund Act of 1940. Mr. Calandrella currently serves as Interim President and a member of the Board of Directors of Global Casinos, Inc., a publicly-held company engaged in the ownership and operation of domestic and international casinos and limited stakes gaming properties; and as a Director of Optimax Industries, Inc., a NASDAQ listed holding company; American Educational Products, a NASDAQ listed supplier of childrens learning tools; and Guardian Technologies, a NASDAQ listed maker of bullet proof vests. Mr. Calandrella has also engaged in financing and consulting activities for development stage companies, which consist of advising public and private companies on capital formation methods, enhancing shareholder valuations, mergers, acquisitions and corporate restructurings, as well as arranging for bridge loans and equity purchases.
Charles M. Powell, Director. ----------------- Mr. Powell is currently President and Director of Antalys Corporation, a wholly owned subsidiary of Baan Company. From 1992 to 1996, Mr. Powell was Vice-President of Finance for KaPre Software. From March 1992 to June 1993, Mr. Powell was CEO of Generation 5 Technologies, Inc. From January 1989 to March 1992, he was Director of International Operations at J.D. Edwards & Company, a software company that develops and distributes general business application financial software. From September to December, 1988, Mr. Powell was employed by the company to provide assistance in financial and operation areas. From April 1988 to June 1989, Mr. Powell was President of Sheridan Securities, Inc., an investment banking firm. From January 1987 to March 1988 he was international sales manager for Columbine Systems, a software development Fund for the broadcast industry. From January 1985 to December 1986, he was employed by Aweida Systems engaged in the business of distributing company products, first as Chief Financial Officer and subsequently as Vice President of Marketing. From February 1979 to December 1985, he was employed by Storage Technology, Inc., engaged in the business of manufacturing computer storage devices in a variety of capacities, with his last position being that of Vice President of Financial Marketing. Mr. Powell graduated from the University of Colorado with a Bachelor of Science degree in accounting and finance in 1976 and he received his license as a Certified Public Accountant in 1976. Mr. Powell currently serves as a Director for The Rockies Fund, Kinetics.com, and International Nursing.
Clifford C. Thygesen, Director. -------------------- Mr. Thygesen has been a director of the Fund since February, 1991. Mr. Thygesen has also been a Director of American Educational Products, Inc. since 1986, and President since January, 1996. American Education Products is a publicly traded company involved in the manufacture and distribution of educational products, with principal offices in Boulder, Colorado. Mr. Thygesen is also a current Director of Wall Street Racing Stables, a publicly- traded company involved in the ownership, racing and breeding of thoroughbred horses. Mr. Thygesen is also a partner in two land development firms located on Colorado Springs and Fleming, Colorado and a Board of Director for Unasurance Group. From 1971 to 1973, Mr. Thygesen was Vice-President of Operations for the Ithaca Gun Company of Ithaca, New York, a manufacturer of high quality firearms. From 1973 to 1976, Mr. Thygesen served as President of Alpine Designs Corporation, a company which produces backpacking equipment, ski wear and hunting apparel. From 1977 to 1981, he served as Vice-President of Manufacturing for Pure Cycle Corporation, a company that designed water recycling systems for residential use. From 1981 until February, 1988, Mr. Thygesen was President, Chief Operating Officer and a Director of Tri Coast Environmental Corporation, formerly Colorado Venture Capital Corporation. He received his B.S. degree in Industrial Administration from the University of Illinois in 1961.
Barbara A. Hamstad, ------------------ Mrs. Hamstad has served as Internal Accountant for The Rockies Fund, Inc. since September of 1993 and as Chief Accounting Officer and Treasurer since September, 1996. Mrs. Hamstad also serves as Secretary and Director for Marco Foods, Inc., a small public shell actively trading in the stock market. Prior to Mrs. Hamstad's accounting positions she worked as a Vendor Cost Analyst for Raytheon in Santa Barbara, California. From January, 1989, through June, 1992, she analyzed vendor cost proposals for subcontracted components, conducted on-site evaluations of subcontractors, and developed price recommendations based on detailed analyses of cost structure. From June 1987 through August 1988, she worked as a Financial Assistant at IDS Financial Services in San Luis Opisbo, California. Mrs. Hamstad graduated from California Polytechnic State University, San Luis Obispo, CA, with a bachelor's degree in Business Administration, concentrating in Financial Management.
Windy D. Haddad, --------------- has worked for The Rockies Fund, Inc. since August 9, 1993 and has served as Chief Administrative Officer since October 1, 1995 and as Corporate Secretary since September 1, 1996. Ms. Haddad also serves as Vice President, Secretary and Director of Land Resources Corporation, a real estate development Fund with operations in Flemming, Colorado. Ms. Haddad graduated from Colorado College in 1993, earning her Bachelor of Arts Degree in Economics.
There are no material proceedings to which any director, officer or affiliate of the Fund, or any owner of record or beneficially of more than five percent (5%) of any class of voting securities of the Fund, or any associate of any such director, officer, affiliate of the Fund, or security holder is a party adverse to the Fund or any of its subsidiaries or has a material interest adverse to the Fund or any of its subsidiaries.
During the last five (5) years except as set forth herein no director or officer of the Fund has:
(1) had any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) been convicted in a criminal proceeding or subject to a pending criminal proceeding;
(3) been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
(4) been found by a court of competent jurisdiction in a civil action, the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Mr. Calandrella serves as Interim President of Global Casinos, Inc., a portfolio and affiliated company. During 1995, Global Casinos, Inc. caused one of its wholly-owned subsidiaries, Casinos USA, Inc. to file a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. In December 1996, the United States Bankruptcy Court for the District of Colorado entered an order confirming a plan of the organization for Casinos USA, Inc.
There currently exists no arrangement or understanding between any executive officer and between any other person pursuant to which any person is to be selected as an executive officer. No family relationships exist between any current or prospective executive officer or director.
Each director of the Fund who is not also an officer is paid the sum of $1,000 for each director's meeting attended by such director. All directors are reimbursed for expenses associated with attendance at Board of Directors meetings of the Fund. Other than the foregoing, no director receives any additional compensation or remuneration as a member of the Fund's Board of Directors.
Each Director is elected to serve a term of one (1) year and is elected annually at the regular annual meeting of the Fund's stockholders. Each executive officer is elected annually at the first meeting of the Fund's Board of Directors held immediately following each annual meeting of shareholders. Each executive officer holds office until his successor is duly elected and qualified or until his resignation or until he has been removed in the manner provided by Fund's By-laws.
No Director has resigned or declined to stand for reelection to the Board of Directors since the date of the last annual meeting of the Fund's stockholders due to any disagreement with the Fund on any matter relating to the Fund's operations, policies or practices.
During the fiscal year ended December 31, 1996, the Fund had four (4) directors meetings which were attended in person by all of the Fund's directors. The Fund does not have a standing audit, nominating or compensation committee of the Board of Directors, or committees performing similar functions.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Under the Securities Laws of the United States, the Fund's Directors, its Executive (and certain other) officers, and any persons holding more than ten percent (10%) of the Fund's common stock are required to report their ownership of the Fund's common stock and any changes in that ownership to the Securities and Exchange Commission and the NASDAQ stock market. Specific due dates for these reports have been established and the Fund is required to report in this Report any failure to file. Based upon information provided to the Company, all of these filing requirements were satisfied by its Officers and Directors and ten percent holders as of December 31, 1996.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following tables and discussion set forth information with respect to all plan and non-plan compensation awarded to, earned by or paid to the Chief Executive Officer ("CEO"), and the Fund's three (3) most highly compensated executive officers other than the CEO, for all services rendered in all capacities to the Fund and its subsidiaries for each of the Fund's last three (3) completed fiscal years; provided, however, that no disclosure has been made for any executive officer, other than the CEO, whose total annual salary and bonus does not exceed $100,000.
No other executive officer of the Fund received compensation during the years ended December 31, 1996, 1995 or 1994, in excess of $100,000.
All officers and employees of the Fund are eligible to participate in the Fund's group health and dental insurance plan. The Fund also provides a Salary Deferred Simplified Employee Pension Plan (SAR-SEP) adopted since September, 1994. There has been no employer contribution made to the Plan since inception, nor does the Fund incur any administrative fees associated with this Plan. The Fund currently has one (3 year) employment agreement written to an executive officer, Ms. Windy D. Haddad, effective October 1, 1995. In 1996, the Fund issued two cash bonuses to its employees, Mrs. Barbara Hamstad and Ms. Windy Haddad.
Mr. John R. Overturf, Jr. resigned as Vice President of The Rockies Fund Inc, effective August 28, 1996 and he signed a Consultant Agreement with The Rockies Fund, Inc., effective October 1, 1996, as a consultant for the Fund's Office Building located at 4465 Northpark Drive at $1,000 per month and subject to a 30 day cancellation by either party in writing. Mr. Craig T. Rogers resigned as Chief Operating Officer and Secretary, effective October 1, 1996.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 1996, the number of shares of the Fund's common stock owned by each person who owned of record, or was known to own beneficially, more than five percent (5%) of the Fund's outstanding shares of common stock, sets forth the number of shares of the Fund's outstanding common stock beneficially owned by each of the Fund's current directors and officers and sets forth the number of shares of the Fund's common stock beneficially owned by all of the Fund's current directors and officers as a group:
1. Beneficial Owners listed have sole voting and investment power with respect to the shares unless otherwise indicated.
2. Voting and investment power with respect to securities held by D.A. Davidson & Company is exercised by its Board of Directors.
3. Includes 12,500 shares of common stock held by Aztec Capital Corp. of which Mr. Calandrella is officer, director and majority shareholder.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Notes payable to related parties at December 31, 1996 include $6,500 payable to a related party of the Fund's President, which note is unsecured, carries interest at the rate of twelve percent (12%) per annum, and is due upon demand.
The Fund currently holds a 5% ownership interest in Bear Star, LLC., formerly a wholly owned subsidiary of Columbine Home Sales, LLC., and therefore Bear Star, LLC. would be considered to be an affiliated company as a result of the Fund's ownership during 1996.
As a result of the Fund's investment during 1996 and/or position on the entity's Board of Directors, the Fund would, at various times during fiscal 1996, be considered to have been an affiliate of Global Casinos, Inc., Optimax Industries, Inc., Southshore Corporation, Cova Technologies, Kinetiks.com and Neco Land Resources.
On October 1, 1995, Mr. Calandrella, the Fund's President and Director, was elected to serve as Interim President of Global Casinos, Inc., a portfolio company and affiliate of the Fund. In consideration of his services as Interim President of Global Casinos, Inc., Mr. Calandrella received 9,000 shares in 1996 and has also been granted Incentive Stock Options under the Global Casinos, Inc. Stock Incentive Plan, exercisable to purchase, in the aggregate, 15,000 shares of common stock at an exercise price of $5.00 per share. Of those Incentive Stock Options, 5,000 are fully vested, and the remaining 10,000 Incentive Stock Options vest ratably over two (2) years, subject to Mr. Calandrella's continuing to serve as an executive officer or key employee of Global Casinos, Inc. As of March 15, 1997, Mr. Calandrella has continued to serve as Interim President of Global Casinos.
Mr. Calandrella also serves as a member of the Board of Directors of Global Casinos, Inc. In consideration of his services as a director of Global Casinos, Inc., Mr. Calandrella has been granted Non-Qualified Stock Options exercisable to purchase, in the aggregate, an additional 15,000 shares of common stock at an exercise price of $5.00 per share, of which 5,000 Non- Qualified Stock Options are fully vested, and the remaining 10,000 Non- Qualified Stock Options vest ratably over two (2) years, subject to Mr. Calandrella's continuing to serve as a director of that Fund.
There exists no arrangement or agreement whereby the Fund has any direct or indirect beneficial interest or pecuniary interest in any of the securities or other compensation issued to Mr. Calandrella in consideration of his services as an executive officer or director of Global Casinos, Inc.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K. - -----------------------------------------------------------------
a. 1. FINANCIAL STATEMENTS. --------------------
Independent Auditors' Reports;
Statements of Assets and Liabilities - December 31, 1996 and 1995;
Schedules of Investments - December 31, 1996 and 1995;
Statements of Operations - Years Ended December 31, 1996 and 1995;
Statements of Stockholders' Equity - Years Ended December 31, 1996 and 1995;
Statements of Cash Flows - Years Ended December 31, 1996 and 1995;
Statements of Changes in Net Assets - Years Ended December 31, 1996 and 1995;
Notes to Financial Statements - December 31, 1996 and 1995
2. FINANCIAL STATEMENT SCHEDULES. -----------------------------
All schedules for which provision is made in the applicable accounting regulations of Article 12 of Regulation S-X of the Securities and Exchange commission have been omitted because either (i) such schedules are not required under the related instructions, (ii) the required information is not present or is not in amounts sufficient to require submission of the schedule, or (iii) the information required is included in the Financial Statements and Notes thereto.
b. CURRENT REPORTS ON FORM 8-K. ----------------------------
No current reports on Form 8-K were filed during the quarter ended December 31, 1996.
c. EXHIBITS. ---------
The following Exhibits are filed pursuant to Item 601 of Regulation S-K:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.
ROCKIES FUND, INC.
Date: 4/11/97 By: /s/Stephen G. Calendrella,President --------------------- ----------------------------------- Stephen G. Calandrella, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Position Date - --------- -------- ----
/s/ Stephen G. Calendrella President, Director 4/11/97 - -------------------------- Chief Executive Officer ------- Stephen G. Calendrella
/s/ Charles M. Powell Director 4/11/97 - -------------------------- ------- Charles M. Powell
/s/ Clifford C. Thygesen Director 4/11/97 - -------------------------- ------- Clifford C. Thygesen