SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required] for the fiscal year ended July 31, 1996 or
[_] Transition report pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the transition period from
to
Commission file number 0-8485
Grip Technologies, Inc.
(formerly Harvest Recreation Vehicles, Inc.)
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(Exact name of Registrant as specified in its charter)
California 95-1980894
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(State or other jurisdiction (I.R.S Employer
of incorporation or organization) Identification No.)
10 Corporate Park, Suite 130
Irvine, California 92714-5140
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(Address of principal executive offices) (Zip Code)
(714) 252-8500
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Without Par Value
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(Title of Class)
Indicate by check mark whether Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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1
State the aggregate market value of the voting stock held by non-
affiliates of Registrant: $3,773,808. The aggregate market value was calculated
on the basis of $1 7/16 per share, the last trading price of such Common Stock
prior to October 28, 1996.
Indicate the number of shares outstanding of Registrant's Common
Stock, as of October 28, 1996: 5,581,925
Documents incorporated by reference: Not applicable.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. [ ]
2
PART I.
ITEM 1. BUSINESS
Forward-Looking Statements
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From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. Such statements are
subject to certain risks and uncertainties which could cause actual results to
differ materially from those projected. Readers are cautioned not to place
undue reliance on these forward-looking statements which speak only as of the
date hereof. The Company undertakes no obligation to republish revised forward-
looking statements to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events. Readers are also urged to
carefully review and consider the various disclosures made by the Company in
this Report, as well as the Company's other periodic reports on Forms 10-K, 10-Q
and 8-K filed with the Securities and Exchange Commission. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include, but are not limited to, those factors set forth under the captions
"Certain Factors Affecting the Golf Industry" and "Liquidity and Capital
Resources" appearing in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of this Report.
Company
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The Company designs and markets golf grips for sale to original
equipment manufacturers ("OEMs"), mail order houses, golf pro shops and
specialty golf retailers. Prior to the commencement of fiscal 1996, the Company
decided to outsource all manufacturing and, subsequently during fiscal 1996
ceased all in-house manufacturing operations. The Company is currently
utilizing three outside contractors to manufacture its golf grips, using the
Company's tooling and proprietary manufacturing techniques.
Management believes that the Company's grips are superior to natural
and other synthetic rubber grips based on their feel, high surface friction,
material consistency and controlled weight tolerances. The Company utilizes a
combination of premium materials, custom designs, proprietary tooling and
manufacturing techniques, and a proprietary painting process, which allows
GRIPTEC(TM) to offer distinctive grips in a wide variety of sizes, pattern
designs, weights, softness and textures.
The Company's objective is to lead in the design, development and
merchandising of premium sport grips with superior quality and performance.
The Company commenced initial operations on August 1, 1993 utilizing
certain specified tangible and intangible assets it acquired from Poulin
Progrip, Inc. The Company became a "public company" as a result of its
acquisition on January 15, 1994 by a pre-existing public company,
3
Harvest Recreation Vehicles, Inc. ("Harvest"), that for several years prior to
such date had no business, assets or operations - a so-called shell company. For
financial statement purposes, as well as most other relevant purposes, the
transaction was characterized as an acquisition of the shell company by the
operating entity. As of July 31, 1994, the Company merged with and into Harvest.
In September 1995, the Company completed the acquisition of USGRIPS(TM),
Inc. ("USG") of Vista, California. USG was engaged in the business of designing
and producing golf grips made from EPDM, a synthetic rubber compound that has
wide acceptance by OEMs. The acquisition has added a full line of quality EPDM
grips to the Company's product line which has helped the Company penetrate the
OEM market. See "USGRIPS Merger."
During fiscal 1996, the Company entered into a joint venture agreement
with Talaurian Technologies, Inc. pursuant to which the Company agreed to
license or sublicense, as the case may be, to Talaurian, its proprietary
technology for industrial applications, and Talaurian agreed to cross-license
its proprietary technology for sport grip applications to the Company. See
"Talaurian Joint Venture."
USGRIPS Merger
--------------
On September 22, 1995, the Company acquired USG, a closely-held
Florida corporation. The transaction was structured as a merger of USG into
USG Acquisition Corporation, a California corporation ("GTI Sub"), a newly-
formed wholly-owned subsidiary of the Company. In connection with the
merger, the Company issued 600,000 shares of its Common Stock to the two
shareholders of USG and agreed to issue up to an additional 400,000 shares
over a three year period pursuant to an earn-out formula based on the gross
margins to be achieved by the acquired USG business. All shares of the
Company issued or to be issued in connection with the merger are
"restricted securities" under federal securities laws. The merger was
consistent with the Company's strategy to expand its product line to
include quality EPDM grips to gain a greater foothold in the OEM market.
The assets acquired included property and equipment consisting of
machinery and equipment, molds, furniture and fixtures and leasehold
improvements, and accounts receivable, inventories and prepaid expenses.
The Company intends to continue to use the assets in a manner consistent
with the business conducted by USG prior to the merger.
Concurrent with the USG acquisition, the Company entered into a
contract with USG's former supplier, ARC Equipment, Inc. of Chandler,
Arizona for the manufacture and supply of golf grips made from EPDM, a
synthetic rubber material which has become the material of choice for
premium grips of many OEMs.
USG and its two shareholders were not affiliated, nor did they have
any material relationship with the Company prior to the merger. Subsequent
to the merger, J. Barrie Ogilvie, USG's former majority shareholder, was
appointed a director of the Company and Paul J. Herber, USG's former
president, was appointed Vice President of OEM Sales of the Company.
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Talaurian Joint Venture
-----------------------
During fiscal 1996, the Company entered into a joint venture
agreement (the "Talaurian Agreement") with Talaurian Technologies, Inc.
("Talaurian"), pursuant to which the Company agreed to license or
sublicense, as the case may be, to Talaurian, its proprietary technology
for industrial applications, and Talaurian agreed to cross-license its
proprietary technology for sport grip applications to the Company. The term
of the Talaurian Agreement is five years, and may be extended another five
years should certain conditions be met. The Talaurian Agreement gives the
Company the right to purchase 50% of the Common Stock of Talaurian for
$1,000, and grants the Company a royalty of 5% of all revenues of
Talaurian, whether derived from use of the Company's technology or not. The
Company did not accrue or receive any amounts under the Talaurian Agreement
during the year ended July 31, 1996.
Products
--------
Current Lines. The Company produces premium golf grips made from each
of the materials that currently have wide use in the golf grip market:
Ethylene Propylene Diene Monomer ("EPDM"), Thermoplastic Rubber ("TPR"),
and EPDM with strands of embedded cord fibers ("cord"). These categories
are represented by over fifty different models in various colors. Certain
of the Company's grips are painted by filling molded logos with decorative
paints. The paint used for the Company's TPR grips is based upon
proprietary formulas. The Company also produces customized EPDM grips by
using laser technology to engrave logos and names, which can then be
painted.
Each of the grip materials has characteristics which set it apart
from the other, resulting in demand for each in the marketplace.
Substantially all of the grips manufactured and sold by the Company
during fiscal 1995 were made from advanced proprietary TPR compounds.
Management believes that TPR offers many advantages over rubber and other
synthetic rubber, including EPDM. However, in dealing with major OEMs, the
Company has been told that TPR is viewed by some as an inexpensive, lower
quality material because of the positioning of the several companies who
are currently making TPR grips. Although the Company spent considerable
time and money to develop high quality TPR compounds for its grips, there
remains a TPR image problem. In addition, those OEMs that are interested in
quality TPR grips have expressed concerns regarding the lack of a quality
secondary source. As a result, by the end of fiscal 1995, the Company
changed its strategy to focus primarily on EPDM grip sales to OEMs,
although it sells, and intends to continue to sell, TPR grips to OEMs. The
acquisition of USG in September 1995 implements this new strategy. The
Company views TPR as the material of the future and is already working with
OEMs on TPR grip projects, particularly where light weight grips are
required.
EPDM is the material of choice for most manufacturers of premium golf
clubs. In addition to its inherently tacky feel, EPDM provides a
consistent finish and can be manufactured to strict tolerances, thus
meeting the quality standards of many OEMs. In addition, several producers
provide high-quality EPDM grips, enabling OEMs to qualify alternative
suppliers.
5
Cord grips have woven cotton threads embedded in the grip material
much like the fiber materials embedded in belted automobile tires. Many
high caliber and professional golfers believe cord grips give the player
better control of the golf club, particularly in humid or wet weather.
Products in Development. The Company's proprietary and patented
painting processes can be used to apply various coatings to many surfaces,
including gloves. When a coated glove is worn while using a TPR grip or a
surface coated with TPR or certain other polymers, the coefficient of
friction (i.e., resistance to slipping) between these two surfaces is
substantially increased. This grip system technology has application in
many sports, including golf, racquet sports, softball, baseball, cycling,
hockey, and skiing. As an example, if the coating is applied to a golf
glove that is used in conjunction with a golf grip made of TPR, the
increased bond allows the golfer to swing the club with a minimum of hand
pressure without fear of losing his or her grip on the club. A very thin
coat of TPR can also be applied directly to wooden baseball bats by dipping
the bat handle. In the case of metal bats, a TPR grip can be slipped over
the bat handle in place of standard grips. This coating is impervious to
water, which could be an advantage in some sports. The grip system
technology is still in development and, to date, no sales have been made.
Research and Development. The Company utilizes both in-house staff
and independent consultants to conduct research and development of new
products and to refine existing products. The Company has a consulting
agreement with an independent consultant who obtained the original patent
for the painting process, to provide certain consulting services for the
Company. There can be no assurance that new products will be introduced as
a result of such efforts, or that any new products will be successful,
although the Company has been encouraged by the new compounds and painting
techniques developed to date by this consultant.
The Company continues its research and development in new compounds
and with respect to a grip system. The Company's ongoing research and
development effort is anticipated to generate new product applications
covering grips and grip systems for future products.
Adjunct Products. From time to time, the Company identifies
opportunities to develop and /or market new products which, while not
directly related to the Company's current golf grip line, represent
potential line extensions or are salable into the same or similar markets.
This is an area of potential growth that the Company is continually
exploring.
Patents, Technology and Trademarks. The Company uses and is
developing technology that is protected by three United States patents
which are very similar to each other. The Company acquired its patented
technology by licensing from the inventor certain rights in and to the
patented sport grip technology. The Company's license agreement provides
for a payment of $2,000 per month for the worldwide exclusive rights to the
patents and technology, including the exclusive rights under all issued,
pending and future domestic and foreign patents related to the methods of
coating surfaces with soft elastomeric polymers. United States patents have
been issued for both the method claims of the original patent application
made by the Company's licensor and the article claims under a divisional
patent
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application. Both patents are under the title "Soft, Elastomeric, Polymer
Coated Contact Surface and Method of Preparing Same."
A continuation-in-part application was filed with the United States
Patent Office adding additional materials and specifications to the
original application, and a new patent was issued by the United States
Patent Office in February 1994. The coating of gloves with elastomeric
polymers is included in the patent protection. An application for patent
protection of the technology has also been filed in Japan, but no foreign
patents have been issued.
The Company relies extensively on trade secrets and non-disclosure
agreements with its key employees and subcontractors to protect its
proprietary processes related to the manufacture of seamless grips, the
manufacture of tooling and the painting process. No assurances can be
given that others, including competitors, might not design or develop a
similar, non-infringing technology or be able to manufacture golf or other
sport grips and grip systems with equal or better efficacy.
The Company has also applied for United States trademark protection
of its stylized "G" logo and the name GRIPTEC(TM). A California fictitious
name application has been filed for the name "GRIPTEC(TM)." The Company's
stylized "G" logo is not available in Japan and there the Company must use
the name "Griptech" on its products.
Current Customers
-----------------
A list of the Company's OEM customers during the most recently
completed fiscal year includes: Cobra Golf, Nicklaus Golf, Pinseeker, Ray
Cook, Teardrop, Matzie, Pro Group, Mizuno, Titleist and Bullet Golf, among
others. The replacement market was served primarily through sales to
catalog resellers Golfsmith International, Dynacraft, The Golf Works and
Austad's. Sales to Cobra Golf and Golfsmith International amounted to 23%
and 13% of sales, respectively, for the year ended July 31, 1996. The
Company is presently negotiating with several additional OEMs for future
business and continues to expand its business with existing customers.
Although the Company has an exclusive distributor contract with
Yanase of America, Inc. for the sale of golf grips in Japan and certain
other Asian countries, this agreement has resulted in few sales to date.
The agreement is currently under review by the Company and Yanase.
Marketing and Sales
-------------------
Staff. The Company's marketing program relies on its sales staff,
selected distributors and independent sales representatives to achieve its
marketing objectives.
The Company's product lines have been shown (and will continue to be
shown) at the annual Professional Golf Association ("PGA") trade shows in
Orlando, Florida and Las Vegas, Nevada. Information obtained at the shows
has been used to pare the product line down to those samples that received
favorable responses from members of the golf trade. Sales orders are not
normally taken at the trade shows, but by follow-up calls on customers
contacted at the shows.
7
Endorsements. The Company has endorsement agreements with Jack
Nicklaus and Phil Mickelson, well-known PGA Tour players. The Company
believes that the endorsement of players of this caliber enhances the
Company's credibility with OEMs and promotes brand awareness within the
replacement market.
Advertising and Promotion. The Company utilizes a full service
advertising and public relations firm to develop and coordinate an
integrated promotional, marketing and advertising program aimed primarily
at the replacement market. OEMs are serviced directly by the Company's
sales management and staff, who work directly with OEMs to develop new
products and qualify the Company as an approved source on existing
products.
The Company has historically focused its advertising and promotional
efforts at using celebrity endorsers to promote the GRIPTEC(TM) brand as a
credible, high-quality alternative to Golf Pride, Lamkin and Royal Grips.
Advertising placed in consumer and trade magazines has resulted in high
brand awareness within the industry, and has helped to generate demand in
the replacement market.
During fiscal 1996, the Company added as customers several major
catalog resellers and retail chains, who effectively service pro shops,
small retailers and other replacement market customers, an important market
niche. The Company has seen significant sales increases, as well as a
marked decrease in credit problems as a result of this change in strategy.
The Company has consequently shifted a portion of its advertising to co-op
advertising with the catalogs and retail chains, a strategy it plans to
continue in fiscal 1997.
The Company is also a sponsor of the developing Professional Long
Drive Golf Association tour by offering additional prize money to the top
three contestants using the Company's grips in the competition.
Pricing Policies. The Company believes that it is viewed as
moderately aggressive in terms of its pricing strategy, although some
competitors have more aggressive pricing policies. See "Business -
Products."
The Company does not intend to compete on the basis of price
sensitivity, but will concentrate its efforts on a premium quality product
emphasizing the Company's capabilities in delivering custom features,
including feel, color, weight, etc. The Company's focus is on developing
products that should command higher prices due to their superior
attributes. However, the Company's research and development department is
concurrently pursuing alternative and less expensive products for the lower
priced market.
Manufacturing
-------------
Facilities and Equipment. Prior to the USGRIPS merger in September
1995, the Company operated a full service facility with capability to
design, manufacture and package golf and other sport grips made of TPR. In
August 1995, the Company discontinued production at its Irvine, California
facility, and in March 1996, subleased that facility, sold its injection
molding equipment, and relocated into smaller space housing its executive
offices. The Company subcontracts all manufacture and production of its
golf grips.
8
The Company paints EPDM grips at its Vista, California facility and
ships from that facility. The Company has subcontracted an outside facility
to paint its TPR grips utilizing the Company's proprietary paint. The
painting process is a significant component of a grip's processing cost,
and has been the focus on management efforts to increase efficiencies.
During fiscal 1996, the Company made significant investments in equipment
and procedures to automate and otherwise further improve processing speed
and quality. The Company believes the improvements will ultimately reduce
processing costs.
As part of the USGRIPS acquisition, the Company acquired certain
equipment and software which allows it to engrave golf grips with logos and
names using laser technology. The laser technology enables the Company to
customize its grips without purchasing new tooling and adds to the
Company's product lines. The laser operation is conducted by the Company
at its Vista, California facility.
For the OEM market, the Company works with each customer to custom
design each grip with exacting specifications. Upon acceptance of a design
by a customer, the Company then develops the appropriate tooling, known as
a cavity. Costs for the tooling will vary, depending on the method used to
build the cavity. The Company attempts to match tooling purchased to the
expected sales of each grip model. Where expected sales quantities are
large, multiple cavities will be purchased, in order to take advantage of
manufacturing efficiencies. Conversely, some products will not sell enough
units to justify significant tooling expenditures. Balancing the cost of
tooling with the expected sales volume of any particular grip is one of the
major challenges of the business.
Further, the life cycle of a grip model is often shorter than the
life of the tooling. Accordingly, the Company makes periodic reviews of its
tooling, in order to identify any cavities related to discontinued
products.
Contract Manufacturing. The Company relies entirely on contract
manufacturing for production of its grips. With the September 1995,
acquisition of USG, the Company completed its transition to outsourced
production. The Company uses three contract manufacturers who use the
Company's tooling and in some cases, technology. The Company is dependent
on a single supplier for each type of grip (EPDM, TPR and cord) in its
product line.
The Company has an exclusive arrangement (the "Arrangement") with the
supplier who produces the EPDM grips which comprised the majority of sales
for fiscal 1996. The Arrangement requires the Company to purchase a
certain minimum number of grips per year, increasing each year throughout
its ten-year term. Should the Company fail to meet certain terms of the
Arrangement, including the purchase of the minimum number of grips required
under the Arrangement, the supplier will have the right to cancel the
Arrangement, and produce EPDM grips for other customers. To date, the
Company has complied with the terms of the Arrangement. However, there can
be no assurances that the Company will have sufficient demand for EPDM
grips to fulfill its obligations under the Arrangement, nor can there be
assurances that this supplier will increase capacity sufficiently to meet
anticipated sales growth. Currently, the Company is working with this
supplier to add new golf grip
9
products and capacity, including a grip that will enable the Company to
enter the rapidly-growing market for large-butt shafts.
Should any significant delay, disruption or decrease in quality occur
at any of the key suppliers, it may have a material adverse effect on the
Company's business.
Sources of Raw Materials. The Company has worked with its consultants
and suppliers to develop special formulations of EPDM and TPR to produce
custom grips with desired specifications established by the Company or
demanded by its customers. Management believes that EPDM and TPR are
readily available in quantities and at acceptable prices from multiple
suppliers, although any disruption in supply or significant increase in
price may have a material adverse effect on the Company's business.
Competition
-----------
The sports grip business is highly competitive. The Company's
principal competitors in the golf grip business are: Golf Pride (a division
of Eaton Corporation), Lamkin and Royal Grip, Inc. Golf Pride, which has
the greatest market share, and Lamkin, produce mostly rubber grips. Golf
Pride, Lamkin and Royal also produce EPDM grips. Lamkin also manufactures
seamless grips, which management believes are made from a TPR blend, but,
to date, TPR grips have not been a significant part of Lamkin's product
lines. To the best knowledge of the Company, none of its competitors can
paint TPR grips.
The market in which the Company does business is highly competitive,
and is served by a number of well-established and well-financed companies
with recognized brand names. Several companies have introduced new products
in 1996 that have generated increased market competition. Others increased
their marketing activities with respect to existing products in 1996. While
the Company believes that its products and its marketing efforts continue
to be competitive, there can be no assurance that these actions by others
will not negatively impact the Company's future sales. A manufacturer's
ability to compete is in part dependent upon its ability to satisfy various
subjective requirements of golfers, including the product's look and feel,
and the level of acceptance the product has among professional and other
golfers. The subjective preferences of golf club purchasers may also be
subject to rapid and unanticipated changes. There can be no assurance as to
how long the Company's grips will maintain market acceptance.
Government Regulations
----------------------
Prior to fiscal 1996, the Company outsourced all painting of grips.
During fiscal 1996, the Company began painting EPDM grips at its Vista
facility. The application of paint to golf grips requires compliance with
applicable federal, state and local laws relative to hazardous materials,
air pollution and health and safety. The imposition of more stringent
regulations on the use of such chemicals or the ban of their use could
increase the Company's product costs significantly.
The Company presently has a single source which formulates and
manufactures paint for the Company's TPR grips. No assurances can be given
that, if necessary, the Company
10
would be able to find an acceptable outside source to provide such TPR
paint. The Company has multiple sources for the paint used on its EPDM
grips.
Governmental regulations may restrict or eventually ban the use of
various solvents and chlorinated hydrocarbons that are ingredients in the
paint and used by the Company in the painting process. Although
alternatives to the paint and painting process presently exist, certain
characteristics may or may not be as good as the current paint
formulations.
Employees
---------
The Company presently has 46 full-time employees: seven in Irvine,
California and 39 in Vista, California. The Vista facility was occupied by
USG prior to its acquisition by the Company. The employees currently
located at Irvine include the President and Chief Executive Officer, three
in sales management and support, and three in financial services. The staff
in Vista includes two in sales management, three in operations management,
one in administrative support and 33 in production.
ITEM 2. PROPERTIES
The Company leases 2,500 square feet of space at 10 Corporate Park, Suite
130, Irvine, California, for its corporate offices under a lease expiring in
March 2000.
During fiscal 1996, the Company ceased manufacturing in its 14,600 square
foot manufacturing facility, and subleased it for the remaining term of the
lease, which expires in October 1998.
In September 1995, in connection with the acquisition of USG, the Company
commenced occupation of approximately 6,600 square feet in a free-standing
industrial building in Vista, California, pursuant to a lease which expired in
September 1996, and was extended through September 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently a party to any material pending legal
proceedings. In 1988, prior to the exchange reorganization, certain then-
existing major shareholders of the Company agreed to indemnify and hold the
Company harmless from any creditor claims arising from activities prior to
September 30, 1988. To date, no claims have been asserted against the Company
which would trigger this indemnification obligation.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of fiscal 1996 to
a vote of security holders through the solicitation of proxies or otherwise.
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Executive Officers of the Company
---------------------------------
The names and ages of all executive officers of the Company, and
positions held by each for the last five years, are as follows:
Name Age Position
---- --- --------
Sam G. Lindsay 54 President, Chief Executive Offier and Director
Greg Hopkins 41 Vice President of Sales and Marketing
Paul J. Herber 38 Vice President of OEM Sales
Michael R. Friedl 33 Treasurer/Chief Financial Office
James E. McCormick III 48 Secretary and Director
SAM G. LINDSAY is, and has been, President, Chief Executive Officer
and a director of the Company since its incorporation and served as Chief
Financial Officer from January 1995 to February 1996. He is, and since
September 1995 has been, the President, Chief Executive Officer and a
director of USGRIPS, Inc., a wholly-owned subsidiary of the Company. From
February 1993 through July 1994, he was also the President, Chief Executive
Officer and a director of GTI Manufacturing, Inc., a wholly-owed subsidiary
of the Company, which was merged into the Company on July 31, 1994. In
January 1975, Mr. Lindsay co-founded The Sammis Company, a real estate
development and management firm. He initially served as Executive Vice
President of the firm and later became President, in which capacity he
remained until his departure in January 1991 to form the S. G. Lindsay
Company, a real estate investment and consulting firm. Mr. Lindsay served
as President and Chief Executive Officer of the S. G. Lindsay Company until
December 31, 1993.
GREG HOPKINS is, and has been, Vice President of Sales and Marketing
for the Company since September 15, 1993. Prior to joining the Company, Mr.
Hopkins was employed by Taylor Made Golf Company for eight years. While at
Taylor Made, Mr. Hopkins served as National Sales Manager and was an
integral part of the executive decision making team. Prior to becoming
National Sales Manager, Mr. Hopkins received numerous awards as a Sales
Representative and Regional Sales Manager at Taylor Made.
PAUL J. HERBER is, and has been, Vice President of OEM Sales for the
Company since September 22, 1995. Prior to joining the Company, from 1992
until September 1995, Mr. Herber was President and Chief Operating Officer
of USGRIPS, Inc., a designer and marketer of golf grips. He was Vice
President of Sales and Marketing of Langert Golf Company from 1988 to 1992,
and held various positions in sales and marketing for Taylor Made Golf
Company from 1981 to 1988. Mr. Herber also is the majority owner of La
Jolla Club, a company engaged in the assembly and marketing of children's
golf equipment and the sale of lower to mid-priced golf grips.
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MICHAEL R. FRIEDL is, and has been, the Treasurer/Chief Financial
Officer of the Company since February 1, 1996, and prior thereto from
October 1995 served as the Company's Director of Finance. From 1993 to
1995, Mr. Friedl served as controller for New Media Corporation, a high-
tech manufacturing company. From 1990 to 1993, he worked for Arthur
Andersen & Co. where he served as Audit Manager. He is a certified public
accountant and is a graduate of Kent State University.
JAMES E. MCCORMICK III is, and has been, the Corporate Secretary and
a director of the Company since its incorporation. He is, and since
September 1995 has been, the Corporate Secretary and a director of USGRIPS,
Inc., a wholly-owned subsidiary of the Company. From February 1993 through
July 1994, he was also the Corporate Secretary and a director of GTI
Manufacturing, Inc., a subsidiary of the Company which was merged into the
Company on July 31, 1994. Mr. McCormick has been engaged in the private
practice of law for more than 20 years, specializing in corporate,
securities and real estate matters.
The officers are elected annually by the Board of Directors at the
organizational meeting following the Annual Meeting of Shareholders. There
is no family relationship between any of the officers, directors or persons
nominated to become an officer or director.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
------------------
The Company's Common Stock is traded on the over-the-counter
electronic bulletin board. The Company believes that there is a limited
public trading market, particularly because of the small number of shares
available in the public float.
The following table sets forth the range of high and low bid prices
for each quarterly period during the two most recent fiscal years:
High Low
----- -----
Fiscal 1995
First Quarter $3 $2 1/4
Second Quarter $3 $2 3/8
Third Quarter $2 7/8 $2 1/4
Fourth Quarter $2 3/4 $2 1/4
Fiscal 1996
First Quarter $2 5/8 $1 7/8
Second Quarter $2 5/8 $1 7/8
Third Quarter $2 3/8 $1 3/8
Fourth Quarter $2 5/8 $1 1/4
The above information was compiled by J. Alexander Securities, Los Angeles.
Holders
-------
As of October 28, 1996, there were approximately 1,075 shareholders
of record.
Dividends
---------
The Company has not paid any dividends of any kind on its issued and
outstanding shares of Common Stock since inception. Payment of dividends is
within the discretion of the Company's Board of Directors and will depend,
among other factors, on earnings, capital requirements and the operating
and financial condition of the Company. At the present time, the Company
has incurred losses and is unable to pay dividends. It is anticipated that
the Company will follow a policy of retaining earnings in order to finance
the development of its business.
14
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is derived from the financial
statements of the Company. It is qualified in its entirety by, and should be
read in conjunction with, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 8, "Financial Statements
and Supplementary Data" and related notes included elsewhere herein.
For the Years Ended July 31,
1994 1995 1996
------------- ------------- -------------
Statement of Operations Data
- - ----------------------------
Net sales $ 895,878 $ 1,104,049 $ 3,062,948
Cost of sales 707,553 1,267,255 2,411,017
------------ ------------ ------------
Gross profit (loss) 188,325 (163,206) 651,931
Operating expenses 1,488,011 3,145,977 2,078,425
------------ ------------ ------------
Loss from operations (1,299,686) (3,309,183) (1,426,494)
Interest expense 88,286 134,762 146,887
------------ ------------ ------------
Loss before income taxes (1,387,972) (3,443,945) (1,573,381)
Provision for income taxes 800 800 1,600
------------ ------------ ------------
Net loss ($1,388,772) ($3,444,745) ($1,574,981)
============ ============ ============
Net loss per share ($0.64) ($1.11) ($0.33)
============ ============ ============
Shares used in computing net loss per share 2,171,167 3,102,497 4,832,107
============ ============ ============
As of July 31,
1994 1995 1996
------------ ------------ ------------
Balance Sheet Data
- - ---------------------
Current assets $ 511,826 $ 702,472 $ 1,093,040
Total assets 1,989,236 973,838 3,203,702
Current liabilities 1,259,487 732,886 2,533,588
Total liabilities 1,928,008 2,570,500 2,870,660
Stockholders' equity (deficit) 61,228 (1,596,662) 333,042
Grip Technologies, Inc. was incorporated in February 1993, but had no
significant activity until August 1993. The Company became a "public company"
as a result of its acquisition on January 15, 1994 by a pre-existing public
company, Harvest Recreation Vehicles, Inc., that for several years prior to such
date had no business, assets or operations - a so-called shell company. For
financial statement purposes, as well as most other relevant purposes, the
transaction was characterized as an acquisition of the shell company by the
operating company. Accordingly, no financial information or data is provided for
any period prior to August 1, 1993.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read together with
the financial statements and notes thereto elsewhere herein.
Forward-Looking Statements
- - --------------------------
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. Such statements are
subject to certain risks and uncertainties which could cause actual results to
differ materially from those projected. Readers are cautioned not to place
undue reliance on these forward-looking statements which speak only as of the
date hereof. The Company undertakes no obligation to republish revised forward-
looking statements to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events. Readers are also urged to
carefully review and consider the various disclosures made by the Company in
this Report, as well as the Company's other periodic reports on Forms 10-K, 10-Q
and 8-K filed with the Securities and Exchange Commission. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include, but are not limited to, those factors set forth under the captions
"Certain Factors Affecting the Golf Industry" and "Liquidity and Capital
Resources" appearing below.
Results of Operations
- - ---------------------
Years Ended July 31, 1996, 1995 and 1994
----------------------------------------
During fiscal 1996, the Company acquired USGRIPS, Inc., of Vista,
California, which had a full product line and exclusive relationships with
manufacturers of quality grips made of TPR, EPDM and cord. This acquisition has
enabled the Company to outsource all of its production, which eliminated many of
the production difficulties that resulted in poor gross margins in the past. It
has further enabled the Company to focus on product development and marketing.
Net sales for the year were $3,062,948, an increase of $1,958,899 or
177% over fiscal 1995. The increase was related to the acquired USGRIPS
business, which provided a fuller product line, and the development of
relationships with key OEMs and catalog resellers. Sales levels were in line
with management expectations. The net sales increase represents a 28% increase
over unaudited pro forma combined net sales of the Company and USGRIPS for the
prior year.
Net sales for fiscal 1995 were $1,104,049, an increase of $208,171 or
23% over fiscal 1994. During fiscal 1995, the Company was not able to achieve
projected sales to OEMs due to their reluctance to commit to a TPR product line,
especially with no viable second source.
16
During fiscal 1996, the Company invested heavily in tooling to fill out
its product lines as it entered the EPDM and cord markets and to supply
increased OEM demand. The Company's investment in tooling was $516,405 for
fiscal 1996, plus $173,651 acquired in the USGRIPS acquisition. The Company
invested $370,640 in tooling during fiscal 1995.
During fiscal 1995, the Company entered into endorsement agreements
with two world-famous PGA Tour players, Jack Nicklaus and Phil Mickelson.
Management expects these endorsement agreements to continue to raise brand
awareness within the golf community, and, particularly, the replacement grip
market.
Cost of sales for fiscal 1996 was $2,411,017, or 79% of sales, as
compared to $1,267,255, or 115% of sales for fiscal 1995. The improvement in
gross margin was largely due to improved efficiencies arising from the
outsourcing of production. Further, improved inventory controls reduced
inventory write-offs during the year.
Cost of sales for fiscal 1995 was $1,267,255, or 115% of sales, as
compared to $707,553 or 79% of sales for fiscal 1994. The decline in gross
margin resulted primarily from production problems experienced by the Company.
Since its inception, the Company has invested significantly in new tooling and
machinery designs in order to manufacture a higher quality and more consistent
product. Simultaneously, the Company conducted research and development to
enhance the qualities of its raw materials, including new proprietary
formulations of TPR and the introduction of a new cord grip made from a
proprietary EPDM formulation. In spite of the substantial investment in the new
tooling, problems associated with the introduction of these new formulations
resulted in an abnormally high rejection rate and slower production cycles.
Selling expenses increased only 3%, from $790,888 to $818,436 during
fiscal 1996, as the Company's investment in sales and marketing began to result
in sales increases. During the year, the Company discontinued telemarketing.
Customers that responded to the telemarketing effort were typically too small
for the Company to serve efficiently, and many credit problems arose. The
Company has developed relationships with large catalog resellers, who better
serve the needs of smaller customers, while significantly reducing the number of
accounts to manage and the Company's credit risk.
The Company successfully integrated the USGRIPS sales force, product
lines and customers during fiscal 1996, while maintaining service levels and
eliminating redundant functions.
In addition, the Company continued to invest heavily in advertising and
promotion, continuing to focus on the endorsements of PGA Tour players Jack
Nicklaus and Phil Mickelson. Selling expenses, which continue to be
disproportionately high, as compared to current sales levels, decreased from 72%
of revenues in fiscal 1995 to 27% of revenues in fiscal 1996. Management
believes that these costs were necessary in order to position the Company and
its products in appropriate markets. Management believes that selling costs will
decline as a percentage of sales as sales increase.
Selling expenses for fiscal 1995 increased 40% over fiscal 1994, from $564,882
to $790,888, primarily as a result of the expansion of the Company's sales focus
to include the replacement grip market. During this period, the Company added a
telemarketing sales force, as well as additional sales support staff. However,
the type of customers that typically responded to the telemarketing
17
effort were too small for the company to serve efficiently, and many credit
problems arose. As a result, the telemarketing effort was discontinued in
November 1995.
General and administrative expenses increased 15%, from $688,935 in
fiscal 1995 to $793,348 in fiscal 1996, as the Company integrated the USGRIPS'
operation. Certain duplicate functions were eliminated during the year.
General and administrative expenses for fiscal 1995 increased 39% over
fiscal 1994, from $496,304 to $688,935, as a result of the addition of support
personnel and additional legal and professional expenses.
Intangible amortization during fiscal 1996 relates to the goodwill
arising from the USGRIPS acquisition, which is being amortized over seven years.
For fiscal 1995, intangibles amortization included the $491,166 write-
off of intangible assets acquired from Poulin Progrip. Because of significant
changes in the design and manufacturing of the products, it was management's
opinion that these assets no longer had any significant value to the Company.
The Company continues its research and development efforts, which are
primarily aimed at developing new products for the golf markets. However, the
Company has also focused efforts on grips for other sport applications, and
glove-grip systems for baseball, tennis and racquetball.
As part of management's overall plan to expand sales, the Company has
investigated the possibility of marketing other golf products for vertical
integration while utilizing its existing sales and marketing network. During the
first quarter of fiscal 1995, the Company entered into an agreement with
Dynalaser, Inc. to sell and distribute the "Stabilaser", a patented, laser-
guided golf headwear training aid endorsed by PGA Tour player Nick Price. In
management's opinion, sales were far less than forecasted because of Dynalaser's
failure to provide committed advertising and marketing dollars and support
required for such a product launch. As a result, the Company terminated its
distribution of the Stabilaser in June 1995.
Certain Factors Affecting the Golf Industry
-------------------------------------------
The Company believes that the growth rate in the golf equipment
industry in the United States has been modest for the past several years, and
this trend is likely to continue through 1996. The Company also believes that
the sales of all golf clubs in Japan, the world's second largest market for golf
clubs next to the United States, have been declining during this same period,
but should stabilize during 1996 and 1997. Sales to key OEM and catalog
customers have been strong during fiscal 1996 and early fiscal 1997, but there
can be no assurances that the demand for the Company's existing products or the
introduction of new products will permit the Company to continue the revenue
growth experienced in fiscal 1996.
In the golf industry, sales to retailers are generally seasonal due to
lower demand in the retail market in the cold weather months covered by the
Company's first and second fiscal quarters. Sales to OEMs generally mirror the
seasonal trends of retailers. The Company has become a supplier to several major
golf club OEMs, and continues to seek to develop relationships with many others.
Most major OEMs demand high standards of quality and service from all suppliers,
and require
18
reliable second sources for most components, including grips. The Company's
success with OEMs will be dependent upon its ability to supply high quality
grips and provide a high level of service.
Since it outsourced production, the Company is dependent on a single
supplier for each type of grip (EPDM, TPR and cord) in its product line. The
Company has an exclusive arrangement (the "Arrangement") with the supplier who
produces EPDM grips which make up the majority of its sales. The Arrangement
requires the Company to purchase a certain minimum number of grips per year,
increasing each year throughout its ten-year term. Should the Company fail to
meet certain terms of the Arrangement including the purchase of the minimum
number of grips required under the Arrangement, the supplier will have the right
to cancel the Arrangement and produce EPDM grips for other customers. To date,
the Company has complied with the terms of the Arrangement. However, there can
be no assurances that the Company will have sufficient demand for EPDM grips to
fulfill its obligations under the Arrangement.
Further, any significant delay or disruption at any of the key
suppliers may have a material adverse effect on the Company's business.
Liquidity and Capital Resources
- - -------------------------------
Equity and Other Capital Resources
----------------------------------
During fiscal 1996, the Company raised $1,919,685, net of offering
expenses, in private placements of 1,046,700 shares of Common Stock. In
addition, the Company converted $535,000 of debt due to a stockholder in
exchange for 356,667 shares of Common Stock. As of July 31, 1996, there were
1,287,500 shares of Series A Convertible Preferred Stock and 5,581,925 shares of
Common Stock issued and outstanding. The Series A Convertible Preferred Stock
entitles the holder to receive non-cumulative dividends at an annual rate of
$0.10 per share, when and as declared by the Board of Directors. There were no
accrued or unpaid dividends at July 31, 1996, 1995 or 1994. Each share of
Preferred Stock is convertible into one share of Common Stock, subject to
various anti-dilution adjustments. During the year ended July 31, 1996, 62,500
shares of Series A Convertible Preferred Stock were converted to Common Stock.
In the event the Company elects to redeem the preferred shares, or upon
liquidation of the Company, the preferred shareholders are entitled to receive
$1.00 per share plus 10% per annum from the date of original issue.
During fiscal 1995, the Company raised $1,605,630, net of expenses and
commissions, in private placements of 1,077,598 shares of Common Stock. In
addition, the Company converted $181,225 of debt in exchange for 122,402 shares
of Common Stock.
The Company raised $1,450,000 through the private sale of equity
securities during fiscal 1994.
During fiscal 1996, the Company increased its term loans from $600,000
to $780,000. The effective interest rate on these notes is 10% per annum; 4%
payable monthly to the bank, and 6% payable to the stockholder whose assets are
pledged as security for the loans. In June 1995, the bank extended the maturity
dates to December 31, 1996, at which time the notes will be due.
In September 1996, the Company entered into a revolving line of credit
agreement with a bank in the amount of $400,000, all of which has been drawn
down by the Company. The line of credit
19
bears interest at the bank's prime rate plus 2.5%, is partially secured by
personal assets of a stockholder and is due on September 15, 1997.
The Company obtained short-term borrowings from a trust and a
corporation. The notes total $90,000, originally bore interest at 6% per annum,
and were due on June 30, 1996. As further consideration for these loans,
warrants to purchase 27,000 shares of Common Stock, with an exercise price of
$2.50 per share, exercisable prior to May 31, 1998, were issued. In
consideration for extending the maturities of these notes to October 31, 1996
and January 31, 1996, the interest rates were increased to 10%, and 2,250 stock
purchase warrants with the same terms described above will be issued for each
month that the balances remain unpaid after June 30, 1996.
In addition, the Company obtained short-term loans from two
partnerships. The notes total $250,000, bear interest at 8% per annum and are
due through May 31, 1997. As further consideration for these loans, warrants to
purchase 75,000 shares of Common Stock, with an exercise price of $2.50 per
share, exercisable prior to May 31, 1998, were issued.
During fiscal 1995, the Company obtained short-term borrowings through
private individuals as follows: the selling agent for a private placement and an
affiliate of the selling agent each loaned the Company $125,000. During the
first quarter of fiscal 1995 the selling agent canceled $121,255 of its $125,000
loan plus $2,379 of interest in exchange for 82,402 shares issued as part of the
pending private placement. The affiliate of the placement agent converted
$60,000 of his loan into 40,000 shares of the Company in the same private
placement.
The remaining $65,000 due the placement agent's affiliate was paid in
full during fiscal 1995. The loan from the placement agent's affiliate included
a warrant to purchase 10,000 shares of the Company's Common Stock at $1.65 per
share, exercisable between April 8, 1995 and April 8, 1997.
The majority stockholder loaned the Company $310,000 during fiscal 1994
and an additional $225,000 during fiscal 1995. Each of these loans were
represented by promissory notes, which were combined into one note in July 1995.
The note bore interest at 10% per annum, with interest due at maturity. On July
31, 1996, the principal amount of the note was converted into 356,667 shares of
Common Stock.
Beginning in fiscal 1994, an officer who is also the major stockholder
agreed to defer his salary and certain reimbursable business expenses until the
Company becomes profitable. Beginning January 1, 1996, the officer elected to
discontinue deferring his salary, but agreed to continue deferring reimbursement
of expenses. At July 31, 1996 and 1995, the Company owed the majority
stockholder $358,879 and $202,796 in salary and expenses.
As of July 31, 1996 and 1995, the Company owed a stockholder $145,604
and $86,222, respectively, for providing legal services to the Company.
In connection with the purchase of certain assets from Poulin Progrip,
Inc. ("Poulin"), the Company agreed to assume $349,230 in notes payable to a
bank. At July 31, 1996, one note, in the amount of $179,023, remained
outstanding. This note payable bears interest at 12.5% per annum, is payable in
principal and interest payments of $4,446 per month through November 2000. This
note is secured by the property and equipment purchased by the Company from
Poulin and certain assets of the principal shareholder.
20
Also in connection with the purchase of certain assets from Poulin, the
Company agreed to pay to the majority shareholder of Poulin consulting fees of
$12,500 per quarter from August 1, 1995 through July 31, 1999 and to pay for a
covenant not to compete, in 26 quarterly payments of $12,500 each, commencing
August 1, 1993. The consulting fees and covenant consideration liabilities have
been recorded on the balance sheet of the Company, discounted to include
interest imputed at 10% per annum. In exchange for an early payment, the payee
has agreed to accept as full payment of the obligations $200,000 plus interest
at 8% from July 31, 1996, if payment in full is made by December 31, 1996.
In December 1993, the Company borrowed $50,000 from its landlord for
leasehold improvements at its Irvine, California manufacturing facility. This
loan is represented by a promissory note which bears interest at 7% per annum,
with principal and interest payable monthly until December 1998.
Liquidity
---------
The Company continues to struggle with liquidity issues, primarily due
to the significant operating losses it has sustained since inception. However,
many factors that impact liquidity improved during fiscal 1996, and management
anticipates this trend to continue in fiscal 1997.
In management's opinion, the most significant development in fiscal
1996 was the improvement of gross margins, from -15% in fiscal 1995 to 21%. This
improvement, together with increased revenues, is critical to achieving
profitability. Management projects both revenues and gross margins to continue
to improve in fiscal 1997, as improved inventory management procedures and
economies of scale begin to take effect. Historically, the Company's fiscal
third and fourth quarter have been the largest in terms of revenues,
corresponding with the golf industry's selling season. This seasonality strains
liquidity, as the Company is required to invest in tooling and build inventories
during its first two quarters in order to meet spring delivery schedules. The
Company must also support the corresponding increase in receivables during the
initial portion of the prime selling season.
The Company anticipates funding a portion of the cost associated with
increased inventory and receivables through trade credit, but its supply
contracts with grip manufacturers typically contain strict payment schedules,
which limit its flexibility with its largest suppliers.
The Company has implemented improved credit policies that have reduced
the number of days sales in net receivables from 100 to 45, as well as reduced
bad debt expense by 33% in fiscal 1996.
Inventory management has improved as well, with a reduction in write-
offs due to inventory obsolescence. However, due to the Company's broader
product line, inventory balances have increased in fiscal 1996 relative to
sales. Increasing inventory turns is an important component in the Company's
plan for meeting liquidity goals for fiscal 1997.
Due primarily to the broadening of the Company's product lines, and the
addition of new OEM customers, the Company invested heavily in additional
tooling. Total investment in new property and equipment amounted to $572,296 in
fiscal 1996, compared to $386,048 in fiscal 1995. In addition, property and
equipment of $315,406 was acquired in the USGRIPS acquisition. The
21
Company anticipates investing an additional $300,000 in tooling for fiscal 1997,
and, to date, has expended approximately $100,000 of that amount.
The Company intends to continue research and development efforts
necessary to enter markets for other sport grips and introduce the Company's
glove/grip system.
The Company had a working capital deficit of $1,440,548 at July 31,
1996, as compared to a deficit of $30,414 at July 31, 1995. The increase in the
deficit was due primarily to the net loss and the reclassification of certain
liabilities to current. Included in current liabilities at July 31, 1996, are
$504,483 due to two shareholders who are also officers of the Company, short-
term borrowings of $90,000 that are due through January 31, 1997, and the
Company's term loans with a bank in the amount of $780,000. Repayment of the
amounts due the shareholders have historically been deferred, but further
deferral is not assured. Subsequent to July 31, 1996, $25,000 due to Poulin was
repaid, and $20,000 of the short-term borrowings were repaid. The Company has
negotiated a discount of $103,572 with regard to the remaining obligation to
Poulin if it can be repaid on or prior to December 31, 1996. The Company is not
expected to generate sufficient cash from operations necessary to repay the
remaining obligations as they come due. It will be required to either extend the
maturities, sell additional equity to generate funds to repay them, or seek
alternative financing.
The Company funded a portion of projected cash needs in September 1996,
by entering into a $400,000 revolving line of credit arrangement with a bank.
Interest is payable monthly at the bank's prime rate plus 2.5%, and is partially
secured by assets of a shareholder, who is the co-maker on this line of credit.
The Company anticipates it will require an additional $2,000,000 to fund
operating losses, as well as the expected continued sales growth and tooling
purchases and to meet certain obligations as they come due. The Company intends
to pursue all available options, including, the initiation of another private
placement of its equity securities, a secondary offering by the Company of its
Common Stock, or a private placement of a convertible or other debt instrument;
seeking loans from other sources not yet identified; or pursuing a merger,
consolidation or other similar corporate transaction. None of these sources or
alternatives may be available to the Company and, if they become available, they
may not occur within the timeframe required by the Company or they may require
terms which management finds unacceptable. The inability of the Company to
locate additional capital prior to the end of the second quarter of fiscal 1997
raises substantial doubt about the Company's ability to continue operating as a
going concern.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors of
Grip Technologies, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of GRIP
TECHNOLOGIES, INC. (a California corporation) and subsidiary as of July 31, 1996
and 1995, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for the years ended July 31, 1996, 1995 and
1994. The 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Grip
Technologies, Inc. and subsidiary as of July 31, 1996 and 1995 and the
consolidated results of its operations and its cash flows for the years ended
July 31, 1996, 1995 and 1994, 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 2 to
the consolidated financial statements, the Company has suffered recurring
losses, and has negative working capital. These factors raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Orange County, California
October 21, 1996
23
GRIP TECHNOLOGIES, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
JULY 31, 1996 AND 1995
----------------------
ASSETS
------
1996 1995
---------- --------
CURRENT ASSETS:
Cash $ 16,975 $126,827
Accounts receivable, net of allowance for
doubtful accounts of $190,669 and $174,099
at July 31, 1996 and 1995, respectively 537,445 279,304
Inventories 506,995 226,471
Note receivable - 50,000
Prepaids and other assets 31,625 19,870
---------- --------
Total current assets 1,093,040 702,472
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $373,589 and
$123,175 as of July 31, 1996 and 1995, respectively 887,242 271,366
INTANGIBLES, net of accumulated amortization
of $924,490 and $754,260 as of July 31, 1996
and 1995, respectively 1,223,420 -
---------- --------
Total assets $3,203,702 $973,838
========== ========
The accompanying notes are an integral part
of these consolidated balance sheets.
24
GRIP TECHNOLOGIES, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
JULY 31, 1996 AND 1995
----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
1996 1995
------------ ------------
CURRENT LIABILITIES:
Short-term borrowings $ 340,000 $ 3,775
Current portion of long-term obligations 976,412 139,138
Current portion of amounts due stockholder 358,879 -
Accounts payable 528,392 412,900
Accrued liabilities 329,905 166,373
Other liabilities - 10,700
----------- -----------
Total current liabilities 2,533,588 732,886
----------- -----------
LONG-TERM LIABILITIES:
Long-term obligations, net of
current portion 337,072 1,099,818
Amounts due stockholder, net of
current portion - 737,796
----------- -----------
337,072 1,837,614
----------- -----------
Total liabilities 2,870,660 2,570,500
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Series A Convertible Preferred Stock
Authorized -- 3,000,000 shares
Issued and outstanding -- 1,287,500 and
1,350,000 shares, respectively 1,287,500 1,350,000
Common Stock
Authorized -- 25,000,000 and
10,000,000 shares, respectively
Issued and outstanding -- 5,581,925 and
3,516,058 shares, respectively 5,454,040 1,886,855
Accumulated deficit (6,408,498) (4,833,517)
----------- -----------
Total stockholders' equity (deficit) 333,042 (1,596,662)
----------- -----------
$ 3,203,702 $ 973,838
=========== ===========
The accompanying notes are an integral part
of these consolidated balance sheets.
25
GRIP TECHNOLOGIES, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED JULY 31, 1996, 1995 AND 1994
------------------------------------------------
1996 1995 1994
----------- ----------- -----------
NET SALES $ 3,062,948 $ 1,104,049 $ 895,878
COST OF SALES 2,411,017 1,267,255 707,553
----------- ----------- -----------
Gross profit (loss) 651,931 (163,206) 188,325
----------- ----------- -----------
OPERATING EXPENSES:
Selling 818,436 790,888 564,882
General and administrative 793,348 688,935 496,304
Research and development 39,616 87,360 128,945
Depreciation 256,795 266,323 167,154
Intangible amortization and
write-off 170,230 623,534 130,726
Provision for abandonment and disposition
of property and equipment and other - 688,937 -
----------- ----------- -----------
2,078,425 3,145,977 1,488,011
----------- ----------- -----------
Loss from operations (1,426,494) (3,309,183) (1,299,686)
INTEREST EXPENSE 146,887 134,762 88,286
----------- ----------- -----------
Loss before income taxes (1,573,381) (3,443,945) (1,387,972)
PROVISION FOR INCOME TAXES 1,600 800 800
----------- ----------- -----------
Net loss $(1,574,981) $(3,444,745) $(1,388,772)
=========== =========== ===========
NET LOSS PER COMMON AND EQUIVALENT SHARE $ (0.33) $ (1.11) $ (0.64)
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,832,107 3,102,497 2,171,167
=========== =========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
26
GRIP TECHNOLOGIES, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------
Series A
Convertible
Preferred Stock Common Stock
--------------- --------------- Accumulated
Shares Amount Shares Amount Deficit Total
--------- ---------- --------- ---------- ----------- -----------
BALANCE, AUGUST 1, 1993 (inception) - $ - - $ - $ - $ -
Initial sale of Common Stock - - 2,000,000 100,000 - 100,000
Initial sale of Preferred Stock 1,350,000 1,350,000 - - - 1,350,000
Net effect of reverse acquisition - - 316,058 - - -
Net loss - - - - (1,388,772) (1,388,772)
--------- ---------- --------- ---------- ----------- -----------
BALANCE, JULY 31, 1994 1,350,000 1,350,000 2,316,058 100,000 (1,388,772) 61,228
Sale of Common Stock, net of offering
costs - - 1,077,598 1,605,630 - 1,605,630
Conversion of loans to Common Stock - - 122,402 181,225 - 181,225
Net loss - - - - (3,444,745) (3,444,745)
--------- ---------- --------- ---------- ----------- -----------
BALANCE, JULY 31, 1995 1,350,000 1,350,000 3,516,058 1,886,855 (4,833,517) (1,596,662)
Sale of Common Stock, net of offering
costs - - 1,046,700 1,919,685 - 1,919,685
Conversion of loans to Common Stock - - 356,667 535,000 - -
Conversion of Preferred Stock to
Common Stock (62,500) (62,500) 62,500 62,500 - -
Common Stock issued in acquisition of
USGRIPS, Inc. - - 600,000 1,050,000 - 1,050,000
Net loss - - - - (1,574,981) (1,574,981)
--------- ---------- --------- ---------- ----------- -----------
BALANCE, JULY 31, 1996 1,287,500 $1,287,500 5,581,925 $5,454,040 $(6,408,498) $ 333,402
========= ========== ========= ========== =========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
27
GRIP TECHNOLOGIES, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED JULY 31, 1996, 1995 AND 1994
------------------------------------------------
1996 1995 1994
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,574,981) $(3,444,745) $(1,388,772)
Adjustments to reconcile net loss to net
cash used in operating activities:
Provision for abandonment and disposition
of property and equipment and other - 688,937 -
Depreciation 256,795 266,323 167,154
Intangible amortization and write-off 170,230 623,534 130,726
Increase in accounts receivable (77,650) (71,813) (207,491)
(Increase) decrease in inventories (86,447) 41,956 (268,427)
Increase in prepaids and other assets (6,925) (5,534) (14,336)
Increase (decrease) in accounts payable (135,333) (45,763) 430,263
Increase in accrued liabilities 34,334 65,373 -
Increase (decrease) in other liabilities (10,700) 10,700 -
----------- ----------- -----------
Net cash used in operating activities (1,430,677) (1,871,032) (1,150,883)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (572,296) (386,048) (461,732)
Proceeds on disposal of property and
equipment 9,500 - -
Increase in note receivable - (50,000) -
Purchases of intangibles (2,900) - (250,770)
----------- ----------- -----------
Net cash used in investing activities (565,696) (436,048) (712,502)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deferred private placement costs - - (114,298)
Proceeds from (payment of) short-term
borrowings 136,225 (165,000) 350,000
Net increase in amounts due stockholder 156,083 347,617 390,179
Payments on amounts due former stockholder (400,000) - -
Net proceeds from long-term obligations 180,000 600,000 -
Principal payments on long-term obligations (105,472) (90,210) (90,924)
Proceeds from issuance of preferred stock - - 1,350,000
Net proceeds from issuance of Common Stock 1,919,685 1,719,928 -
----------- ----------- -----------
Net cash provided by financing
activities 1,886,521 2,412,335 1,884,957
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (109,852) 105,255 21,572
CASH, beginning of period 126,827 21,572 -
----------- ----------- -----------
CASH, end of period $ 16,975 $ 126,827 $ 21,572
=========== =========== ===========
28
-2-
1996 1995 1994
------- ------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $93,613 $91,101 $53,893
======= ======= =======
Cash paid for taxes $ 1,600 $ 800 $ 800
======= ======= =======
On September 22, 1995, the Company completed the acquisition of USGRIPS, Inc.,
in exchange for 600,000 shares of Common Stock. The fair values of the assets
acquired and the liabilities assumed are as follows:
Fair values of assets acquired:
Accounts receivable $ 180,491
Inventories 194,077
Prepaids and other assets 4,830
Property and equipment 315,406
Goodwill 1,390,750
----------
2,085,554
----------
Liabilities assumed:
Short-term borrowings 200,000
Amounts due former stockholder 400,000
Accounts payable 250,825
Accrued liabilities 184,729
----------
1,035,554
----------
Fair market value of Common Stock issued $1,050,000
==========
The Company converted certain notes payable into Common Stock during fiscal
1996 and 1995, with principal amounts totaling $535,000 and $181,225,
respectively.
For fiscal 1995, net proceeds from issuance of Common Stock was reduced by the
amortization of deferred private placement costs of $114,298 that were
incurred in fiscal 1994.
Effective August 1, 1993, the Company purchased certain assets of Poulin
Progrip, Inc. for $250,770. In conjunction with the acquisition, liabilities
were assumed as follows:
Fair value of assets acquired $600,000
Cash paid 250,770
--------
Liabilities assumed $349,230
========
Recognition of consulting services and
covenant not-to-compete payable $370,930
========
The accompanying notes are an integral part
of these consolidated financial statements.
29
GRIP TECHNOLOGIES, INC. AND SUBSIDIARY
--------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
JULY 31, 1996
-------------
1. Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
a. Organization
------------
The accompanying consolidated financial statements reflect the accounts of
Grip Technologies, Inc. and subsidiary (the Company). Located in Southern
California, the Company designs and markets golf grips for sale to original
equipment manufacturers ("OEMs"), mail order houses, golf pro shops and
specialty golf retailers. Prior to the commencement of fiscal 1996, the
Company decided to outsource all manufacturing and, subsequently during
fiscal 1996 ceased all in-house manufacturing operations. The Company is
currently utilizing three outside contractors to manufacture its golf
grips, using the Company's tooling and proprietary manufacturing
techniques. The Company's current product line includes grips made from
each of the materials that currently have wide use in the golf grip market;
Ethylene Propylene Diene Monomer (EPDM), Thermoplastic Rubber (TPR), and
EPDM with strands of embedded cord fibers (cord).
The Company, formerly Progrip Inc., a California corporation, commenced
business on August 1, 1993 and acquired certain tangible and intangible
assets from Poulin Progrip, Inc. (see Note 3).
Effective January 15, 1994, the Company exchanged 100 percent of its issued
and outstanding stock for 2,000,000 new shares of Common Stock and
1,350,000 new shares of Series A Convertible Preferred Stock with Harvest
Recreational Vehicles, Inc. (HRV). The Company obtained a controlling
interest in HRV and, as such, this transaction was accounted for as a
reverse acquisition. All of the outstanding stock options and stock
purchase warrants of the Company were replaced with identical securities of
HRV, with the number of shares and exercise prices appropriately adjusted.
In February 1994, HRV changed its name to Grip Technologies, Inc. Prior to
the reverse acquisition, HRV had 316,058 shares of Common Stock
outstanding.
b. Acquisition
-----------
On September 22, 1995, the Company acquired USGRIPS, Inc. (USG). In
connection therewith, the Company issued 600,000 shares of Common Stock,
valued at $1,050,000, to the two stockholders of USG, and agreed to issue
up to an additional 400,000 shares over a three-year period pursuant to an
earn-out formula based on the gross margins achieved by the acquired USG
business. The acquisition has been accounted for as a purchase, and the
results of USG have been included in the accompanying consolidated
financial statements since the date of acquisition. The cost of the
acquisition has been allocated on the basis of the estimated fair market
value of the assets acquired and the
30
liabilities assumed. This allocation resulted in goodwill of $1,390,750,
which is being amortized over seven years.
Because USG was acquired near the beginning of the fiscal year, the
unaudited consolidated results of operations on a pro forma basis as though
USG had been acquired as of the beginning of fiscal 1996 would not be
materially different than the actual consolidated results of operations.
The unaudited pro forma consolidated results of operations as though USG
had been acquired as of the beginning of fiscal 1995 are as follows:
Net sales $ 2,392,895
Gross profit 66,363
Net loss (3,934,911)
Net loss per weighted average common share $(1.06)
The unaudited pro forma financial information is presented for
informational purposes only and is not necessarily indicative of the
operating results that would have occurred had the USG acquisition had been
consummated as of the above dates, nor are they necessarily indicative of
future operating results.
In connection with the acquisition of USG, the Company elected to outsource
production and discontinue all manufacturing in its Irvine, California,
facility. Subsequent to the outsourcing of production, the Company began
purchasing sport grips from contract manufacturers who use the Company's
tooling, and in some cases, technology. Certain grips are then processed
in the Company's Vista, California facility, where the grips are painted or
engraved with custom logos, in accordance with customer requirements.
c. Use of Estimates in Preparation of Financial Statements
-------------------------------------------------------
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.
d. Long-lived Assets
-----------------
The Company accounts for long-lived assets in accordance with Statement of
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This
pronouncement requires that long-lived assets and certain identifiable
intangible assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss is to be recognized when the sum of
undiscounted cash flows is less than the carrying value of the asset.
Measurement of the loss for assets that the entity expects to hold and use
are to be based on the fair market value of the asset. The Company adopted
SFAS No. 121 effective August 1, 1995, and determined that the adoption of
this pronouncement had no material impact on the results of operations or
financial condition as of August 1, 1995.
31
Provision for Abandonment and Disposition of Property and Equipment
-------------------------------------------------------------------
In connection with the acquisition of USG and discontinuation of
manufacturing in the Company's Irvine, California facility, the Company
identified certain production equipment, leasehold improvements and
tooling to be disposed of. These assets of $587,937 were written off as
of July 31, 1995. In addition, the Company identified all costs related
to the closing of the Irvine facility and recorded them as a one-time
charge as of July 31, 1995. Substantially all costs provided for as of
that date have been incurred as of July 31, 1996.
Intangibles
-----------
Included in Intangibles on the accompanying consolidated balance sheets
is goodwill of $1,390,750 arising from the USG acquisition, which is
being amortized over seven years.
In addition, Intangibles consist of covenants not-to-compete, consulting
service agreements and certain proprietary rights arising from the asset
sale and purchase agreement between the Company and Poulin Progrip, Inc.
As required under generally accepted accounting principles, the Company
reviewed the intangibles and determined that they hold no further value
because of the significant change in the design and manufacturing of the
Company's products, and therefore the unamortized balance of $491,167 was
written off as of July 31, 1995 (see Note 3). The amount written off has
been included in intangible amortization and write-off in the
accompanying consolidated statements of operations.
Depreciation and Amortization
-----------------------------
Depreciation and amortization on property and equipment and intangibles
are provided using the straight-line method over the following estimated
useful lives:
Furniture and fixtures 5 to 7 years
Leasehold improvements Life of lease
Manufacturing equipment 7 years
Tooling 3.5 years
Intangibles 2 to 6 years
Maintenance, repairs and minor renewals are charged directly to expense
as incurred. Additions and betterments are capitalized. When assets are
disposed of, the applicable costs and accumulated depreciation thereon
are removed from the accounts and any resulting gain or loss is included
in operations.
e. Inventories
-----------
Inventories are valued at the lower of cost (determined by the first-in,
first-out method) or market value and during fiscal 1996, consist of
purchased products, processing labor and factory overhead. During fiscal
1995, the Company manufactured all products, and inventory accordingly
consisted of raw materials, work in process and factory overhead.
32
Inventories consisted of the following components as of July 31:
1996 1995
-------- --------
Raw materials $ - $ 84,179
Work in process - 32,803
Finished goods 506,995 109,489
-------- --------
$506,995 $226,471
======== ========
f. Income Taxes
------------
The Company accounts for income taxes under the liability method as
prescribed by SFAS No. 109, "Accounting for Income Taxes."
g. Research and Development
------------------------
Research and development costs are charged to operations as incurred.
h. Earnings Per Share
------------------
The earnings per share calculation for the year ended July 31, 1994
includes 316,058 shares of Common Stock of HRV from the date of
acquisition.
The weighted average number of shares does not include the outstanding
common stock equivalents such as preferred stock, options and warrants as
they are anti-dilutive.
i. Stock-Based Compensation
------------------------
In October, 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" The disclosure requirements
of SFAS No. 123 are effective for the Company's 1997 fiscal year. The new
pronouncement did not have an impact on the Company's consolidated results
of operations since the intrinsic value-based method prescribed by
Accounting Principles Board Opinion No. 25 and also allowed by SFAS No. 123
will continue to be used by the Company to account for its stock-based
compensation plans.
2. Going Concern
-------------
The Company has incurred net losses since its inception (August 1, 1993) in the
amounts of $1,574,981, $3,444,745 and $1,388,772 for the years ended July 31,
1996, 1995 and 1994, respectively, and used $4,452,592 of cash in operating
activities during that time. These factors, among others, raise substantial
doubt about the Company's ability to continue as a going concern. In order to
provide working capital to support its operations, the Company has raised funds
through private placements and is in the process of obtaining additional funding
through additional private placements. In addition, the Company completed a
strategic acquisition during fiscal 1996 which allowed for the outsourcing of
all production. Management believes this outsourcing is critical to its efforts
to improve the Company's gross margins.
The ability of the Company to meet its existing and ongoing obligations is
dependent upon raising additional capital from sources of funding, such as,
banks and other lenders, additional private offerings, public offerings or
through a merger.
33
However, there can be no assurances that any of these transactions may be
consummated in a timely manner or on terms reasonably acceptable to the Company.
The ability of the Company to continue as a going concern is ultimately
dependent, in part, on achieving profitable operations and obtaining adequate
financing. The accompanying consolidated financial statements do not include any
adjustments that might be necessary should the Company be unable to continue as
a going concern.
3. Poulin Acquisition
------------------
Effective August 1, 1993, the Company acquired various assets of Poulin Progrip,
Inc. (PPG), including certain property and equipment, patents, patent
applications, inventions, technology and trade secrets. The purchase price for
the acquisition totaled $600,000, of which $250,770 was paid in cash with the
balance consisting of the assumption of bank notes of $349,230. The Company
also entered into certain covenants not-to-compete (see Note 6). The purchase
price was allocated to assets acquired based on their estimated fair market
values at the date of acquisition as follows:
Property and equipment $445,000
Intangibles 155,000
--------
$600,000
========
4. Property and Equipment
----------------------
Property and equipment, at cost, consisted of the following as of July 31,:
Furniture and fixtures $ 115,979 $ 58,893
Leasehold improvements 1,758 4,265
Manufacturing equipment 138,802 17,148
Tooling 1,004,292 314,235
---------- ---------
1,260,831 394,541
Less accumulated depreciation
and amortization (373,589) (123,175)
---------- ---------
$ 887,242 $ 271,366
========== =========
5. Short-Term Borrowings
----------------------
Included in the Company's short-term borrowings at July 31, 1996 and 1995, are
the following:
1996 1995
------- --------
Notes payable to selling agent and
promoter of private placement. $ - $ 3,775
Short-term note payable to a corporation,
bearing interest at 10%, subsequently
extended through January 31, 1997. 50,000 -
Short-term note payable to an trust,
bearing interest at 10%, subsequently
extended through October 31, 1996. 40,000 -
34
1996 1995
-------- ------
Short-term note payable to a general
partnership, bearing interest at 8%,
convertible to Common Stock, principal
and interest due May 31, 1997. $229,000 $ -
Short-term note payable to a limited
partnership, bearing interest at 8%,
convertible to Common Stock, principal
and interest due May 31, 1997. 21,000 -
-------- ------
$340,000 $3,775
======== ======
6. Long-Term Obligations
---------------------
Long-term obligations consisted of the following as of July 31, 1996 and 1995:
1996 1995
---------- ---------
Bank Borrowings-
Note payable to bank, bearing
interest at 12.5 percent, principal
and interest payable at $4,446 per
month through November 2000.
Secured by property and equipment
and guaranteed by a stockholder. $ 179,023 $ 215,375
Term notes with a bank, bearing
effective interest of 10 percent
per annum; 4 percent payable monthly
to a bank, and 6 percent payable
quarterly to the stockholder whose
assets are securing the notes.
Principal due and payable on
December 31, 1996; Secured by
personal assets of a stockholder. 780,000 600,000
Covenant Not-to-Compete and
Consulting/Licensing Agreements-
Covenant not-to-compete and consulting
agreements originally payable
in quarterly installments of
$12,500 each, continuing through
January 2000, less interest
imputed at 10 percent. Balance
to be reduced to $200,000 if paid
by December 31, 1996. 303,572 342,604
Licensing agreement, payable in
monthly payments of $2,000
through August 1997, less
interest imputed at 10 percent. 24,545 44,967
35
1996 1995
---------- ----------
Other-
Note payable to lessor for leasehold
improvements, interest (7 percent
per annum) and principal payable
monthly through December 31, 1998. $ 26,344 $ 36,010
---------- ----------
1,313,484 1,238,956
Less current portion (976,412) (139,138)
---------- ----------
$ 337,072 $1,099,818
========== ==========
The following schedule summarizes the future annual minimum principal payments
on long-term obligations:
Fiscal year ending July 31:
1997 $ 976,412
1998 138,568
1999 131,087
2000 62,340
2001 5,077
----------
$1,313,484
==========
7. Amounts Due Stockholders
------------------------
As of July 31, 1995, the Company was indebted to an officer who is also a
stockholder, for loans made to the Company in the amount of $535,000. In July
1996, the principal portion of the note was converted into 356,667 shares of
Common Stock. Payment of interest at 10% has been deferred until January 1,
1997. As of July 31, 1996 and 1995, interest payable to this stockholder was
$106,520 and $45,712, respectively. In addition, in July 1995, the officer
agreed to defer his salary and certain reimbursable business expenses until
January 1, 1997. The amount payable for such expenses was $252,359 and $157,084
as of July 31, 1996 and 1995, respectively. These amounts are included in
amounts due stockholder in the accompanying consolidated balance sheets.
As of July 31, 1996 and 1995, the Company owed a stockholder $145,604 and
$86,222, respectively, for providing legal services to the Company. These
amounts are included in accrued liabilities in the accompanying consolidated
balance sheets.
36
8. Income Taxes
------------
The components of the Company's deferred tax benefit as of July 31, 1996 and
1995, are as follows:
1996 1995
----------- -----------
Allowance for doubtful accounts $ 76,268 $ 69,640
Inventory - 46,705
Accrued disposition costs - 270,839
Other non-deductible accruals 201,794 115,608
Depreciation 51,372 23,372
Net operating loss carryforwards 1,936,616 1,156,926
----------- -----------
2,266,050 1,683,090
Valuation allowance (2,266,050) (1,683,090)
----------- -----------
$ - $ -
=========== ===========
As of July 31, 1996, the Company had approximately $4,900,000 of net operating
loss carryforwards for federal income tax purposes, and $2,450,000 for
California franchise tax purposes. The federal and California loss
carryforwards begin to expire in 2009 and 1999, respectively, and may be subject
to utilization limits resulting from ownership changes.
9. Capital Stock, Options and Warrants
-----------------------------------
a. Series A Convertible Preferred Stock
------------------------------------
The Series A Convertible Preferred Stock entitles the holder to receive non-
cumulative dividends at an annual rate of $.10 per share, when and as declared
by the Board of Directors. There were no accrued and unpaid dividends at July
31, 1996 and 1995. Each share of preferred stock is convertible into one share
of Common Stock. The Company has the option to redeem these shares after August
31, 1995 at a price of $1.00 per share plus 10% per annum from the date of
original issuance. Upon liquidation of the Company, the preferred stockholders
are entitled to receive the same price established for redemption.
During the year ended July 31, 1996, holders of 62,500 shares of the Series A
Convertible Preferred Stock converted their shares into 62,500 shares of Common
Stock.
b. Common Stock
------------
During fiscal 1996, the Company received $1,919,685, net of commissions, fees
and offering expenses, in exchange for 1,046,700 shares of Common Stock.
In July 1996, a note payable to a stockholder in the amount of $535,000 was
converted to 356,667 shares of Common Stock.
In addition, 600,000 shares were issued in connection with the USG acquisition
(see note 1).
During fiscal year 1995, the Company received $1,719,928, net of commissions,
fees and offering expenses in exchange for 1,077,598 shares of Common Stock.
These proceeds were reduced by deferred private placement costs of $114,298
which were previously capitalized during fiscal 1994. Also during the year,
$181,225 in notes payable to promoters were exchanged for 122,402 shares of
Common Stock.
37
c. Stock Options and Warrants
--------------------------
In January 1994, the Board of Directors approved the 1994 Stock Option Plan (the
Plan) which sets aside 600,000 shares of Common Stock for grant to key
employees, officers, directors and consultants. The Plan will terminate in 2004
unless terminated sooner by the Board of Directors. At July 31, 1996 and 1995,
options to purchase 435,000 and 395,000 shares of Common Stock have been granted
under the Plan. The exercise price varies from $1.00 to $1.50 per share with
various vesting periods. At July 31, 1996, options to purchase 225,000 shares
were vested, and 4,000 shares had been issued under the Plan.
In addition, the Company granted options to purchase 450,000 shares of Common
Stock to certain celebrity endorsers. The exercise price of these options is
$1.50 and they expire at various dates through 2001. As of July 31, 1996, none
of the options had been exercised.
In February 1996, the Company issued 400,000 shares of Common Stock as a result
of the exercise of warrants by existing stockholders. Proceeds totaled
$576,167, net of fees and expenses. The warrants originally had exercise prices
of $2.50 to $3.00 per share. As an inducement to encourage the early exercise
of these warrants, the Company lowered the exercise price to $1.50 per share.
During the year ended July 31, 1996, 120,000 stock purchase warrants expired
unexercised.
As of July 31, 1996, 985,240 stock purchase warrants were outstanding. The
exercise prices of these warrants range from $1.00 to $5.00 and they expire at
various dates through 2000. Management estimated that the fair value of these
warrants was immaterial and therefore no amount was assigned to these warrants.
10. Operating Leases
----------------
The Company leases its facilities and certain equipment under various
noncancellable operating leases, with terms extending through June 2000. Rent
expense amounted to $128,612, less sublease income of $39,200 for the year ended
July 31, 1996. Rent expense for the years ended July 31, 1995 and 1994 amounted
to $76,342 and $65,248, respectively.
The future annual minimum payments under operating leases, as well as minimum
sublease income, are as follows for the fiscal years ending July 31:
Less:
Payments Sublease Net
-------- -------- --------
1997 $138,079 $ 90,000 $ 48,079
1998 133,402 90,000 43,402
1999 68,041 22,500 45,541
2000 28,405 - 28,405
-------- -------- --------
$367,927 $202,500 $165,427
======== ======== ========
38
11. Major Customers and Suppliers
-----------------------------
For the year ended July 31, 1996, the Company made sales to two customers which
comprised 23% and 13% of sales, respectively. No customer comprised more than
10% of net sales during fiscal 1995. During fiscal 1994, sales to one customer
comprised approximately 11% of net sales.
Subsequent to the outsourcing of production, the Company began purchasing sport
grips from three contract manufacturers who use the Company's tooling and in
some cases, technology. Together the three contract manufacturers supply 100%
of the Company's sport grips. The Company is dependent on a single supplier for
each type of grip (EPDM, TPR and cord) in its product line.
The Company has an exclusive arrangement (the Arrangement) with the supplier who
produces EPDM grips which make up the majority of the Company's sales. The
Arrangement requires the Company to purchase a certain minimum number of grips
per year, increasing each year throughout its ten-year term. Should the Company
fail to meet certain terms of the Arrangement, including the purchase of the
minimum number of grips required under the Arrangement, the supplier will have
the right to cancel the Arrangement, and produce EPDM grips for other customers.
To date, the Company has complied with the terms of the Arrangement. However,
there can be no assurances that the Company will have sufficient demand for EPDM
grips to fulfill its obligations under the Arrangement.
Further, should any significant delay or disruption occur at any of the key
suppliers, it may have a material adverse effect on the Company's business.
12. Talaurian Technologies
----------------------
During the year ended July 31, 1996, the Company entered into a joint venture
agreement (the Agreement) with Talaurian Technologies, Inc. (Talaurian),
pursuant to which the Company agreed to license or sublicense, as the case may
be, to Talaurian, its proprietary technology for industrial applications, and
Talaurian agreed to cross-license its proprietary technology for sport grip
applications to the Company. The term of the Agreement is five years, and may be
extended another five years should certain conditions be met. The Agreement
gives the Company the right to purchase 50% of the Common Stock of Talaurian for
$1,000, and grants the Company a royalty of 5% of all revenues of Talaurian,
whether derived from use of the Company's technology or not. The Company did
not accrue or receive any amounts under the Agreement during the year ended July
31, 1996.
13. Subsequent Events
-----------------
In August, 1996, the Company extended the maturity of its $40,000 short-term
note payable to a trust until October 31, 1996. The terms of the extension
provide for issuance of 1,000 stock purchase warrants for each month that the
balance is outstanding past June 30, 1996.
In September 1996, the Company entered into a revolving line of credit agreement
with a bank in the amount of $400,000. The line of credit bears interest at the
bank's prime rate plus 2.5%, is partially secured by personal assets of a
stockholder and matures on September 15, 1997.
In October, 1996, the Company extended the maturity of its $50,000 short-term
note payable to a corporation until January 31, 1997. The terms of the
extension provide for issuance of 1,250 stock purchase warrants for each month
that the balance is outstanding past June 30, 1996.
39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the Company's definitive proxy statement to
be filed with the Securities and Exchange Commission ("Commission") on or prior
to November 18, 1996 pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Company's definitive proxy statement to
be filed with the Commission on or prior to November 18, 1996 pursuant to
Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Company's definitive proxy statement to
be filed with the Commission on or prior to November 18, 1996 pursuant to
Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Company's definitive proxy statement to
be filed with the Commission on or prior to November 18, 1996 pursuant to
Regulation 14A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements.
---------------------
Report of Independent Certified Public Accountants (See Item 8 to
this Form 10-K)
Consolidated Balance Sheets as of July 31, 1996 and 1995 (See Item 8
to this Form 10-K)
Consolidated Statements of Operations for the years ended July 31,
1996, 1995 and 1994 (See Item 8 to this Form 10-K)
40
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended July 31, 1996, 1995 and 1994 (See Item 8 to this Form
10-K)
Consolidated Statements of Cash Flows for the years ended July 31,
1996, 1995 and 1994 (See Item 8 to this Form 10-K)
Notes to Consolidated Financial Statements (See Item 8 to this Form
10-K)
(b) Reports on Form 8-K.
--------------------
None.
(c). Exhibits.
---------
2.1 Agreement and Plan of Reorganization, dated September 20,
1995, by and among Registrant, USG Acquisition Corporation
and USGRIPS, Inc., as amended
3.1(i) Restated Articles of Incorporation of Registrant
3.1(ii) Amended and Restated Bylaws of Registrant
4.1 Promissory Note, dated December 10, 1993, made payable by
Registrant to Kwang Soo Kim and In Ho Kim in the original
principal sum of $50,000
4.2 Fixed Rate Note, dated January 24, 1995, made payable by
Registrant to First Interstate Bank in the original
principal sum of $300,000, as amended by Modification of
Note Agreement, dated February 8, 1995 (increasing principal
amount of note to $400,000), Modification of Note Agreement,
dated February 22, 1995 (increasing principal amount of note
to $500,000), Modification of Note Agreement, dated March
22, 1995 (increasing principal amount of note to $600,000
and extending maturity date to December 31, 1995), and
Change in Terms Agreement, dated July 31, 1995 (extending
maturity date to December 31, 1996)
4.3 Promissory Note, dated January 11, 1996, made payable by
Registrant to First Interstate Bank in the original
principal sum of $100,000, as amended in Change in Terms
Agreement, dated May 20, 1996 (increasing principal amount
of note to $180,000 and extending maturity date to July 8,
1996) and Letter Agreement, dated July 17, 1996 (extending
maturity date to December 31, 1996)
4.4 Revolving Line of Credit Note, dated September 23, 1996,
made payable by Registrant to Wells Fargo Bank N.A. in the
original principal sum of $400,000
41
4.5 The attached form of Convertible Note was issued by
Registrant in May 1996 to the following lenders in the
following amounts:
$ 21,000 Z-Fund, a Maryland limited partnership
229,000 Third Century II, a Colorado general partnership
10.1 1994 Stock Option Plan
10.2 Employment Agreement, dated as of September 22, 1995,
between Registrant and Paul Herber
10.3 Noncompetition Agreement, dated September 22, 1995, between
Registrant and J. Barrie Ogilvie
10.4 Security Agreement, dated July 31, 1995, between Registrant
and Sam G. Lindsay
10.5 Letter Agreement, dated August 1, 1995, between Registrant
and Sam G. Lindsay re: deferral of compensation
10.6 Request to Convert and Investment Letter, dated July 31,
1996, between Registrant and Sam G. Lindsay
10.7 Agreement, dated September 22, 1995, between Registrant and
ARC Equipment, Inc.
21.1 Subsidiaries of Registrant
27 Financial Data Schedule
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Grip Technologies, Inc.
(Registrant)
Date: November 8, 1996 /s/ Sam G. Lindsay
-----------------------
Sam G. Lindsay
President and
Chief Executive Officer
Date: November 8, 1996 /s/ Michael R. Friedl
--------------------------------
Michael R. Friedl
Chief Financial Officer
and Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Registrant and in
the capacities and on the dates indicated.
Date: November 8, 1996 /s/ Sam G. Lindsay
----------------------
Sam G. Lindsay
Director and President
Date: November 8, 1996 /s/ James E. McCormick III
--------------------------
James E. McCormick III
Director and Secretary
Date: November 8, 1996 /s/ David W. Hardee
-------------------
David W. Hardee
Director
Date: November 8, 1996 /s/ J. Barrie Ogilvie
---------------------
J. Barrie Ogilvie
Director
43