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, 1997 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 of incorporation) (I.R.S Employer 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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The aggregate market value of the voting stock held by non-affiliates
of Registrant was $1,106,597 calculated on the basis of $0.375 per share, the
last trading price of such Common Stock as of October 31, 1997. The number of
shares outstanding of Registrant's Common Stock on October 31, 1997 was
6,187,592.
Documents incorporated by reference: None
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. [_]
1
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 below and 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, distributors, golf pro
shops and specialty golf retailers. Since fiscal 1996, the Company has
outsourced all manufacturing and 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, in some cases, technology.
Management believes 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.
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."
2
Since fiscal 1996, the Company has been party to a joint venture
agreement with Talaurian Technologies, Inc. ("Talaurian") under which the
Company agrees to license or sublicense, as the case may be, to Talaurian, its
proprietary technology for industrial applications, and Talaurian agrees to
cross-license its proprietary technology for sport grip applications to the
Company. Under the agreement as amended in October 1997, the term of the
agreement was extended through September 30, 2007. The Company is entitled to
receive a 5% royalty on all Talaurian revenues, whether or not derived from use
of the Company's technology. Beginning January 15, 2001, the Company is entitled
to receive a quarterly minimum royalty of $25,000.
The Company commenced initial operations on August 1, 1993 utilizing
certain specified tangible and intangible assets 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, 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.
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. To date, no
shares have been earned under the earn-out formula. 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. During fiscal 1997, Mr. Herber resigned from this position to
become an independent sales representative for the Company. Subsequent to
July 31, 1997, he left the Company to pursue other interests.
3
Products
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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 200 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.
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.
The Company continues to sell TPR grips although EPDM accounts
for the majority of net sales today. 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, Management 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. This change in focus resulted in the
acquisition of USG in September 1995. The Company continues to view TPR as
a material of the future and to work with OEMs on TPR grip projects,
particularly light weight grips.
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
pressure without fear of losing his or her grip on the club. A very thin
coat of TPR can also be applied directly to
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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. The Company has experienced delays in bringing this
grip system to market. Management anticipates a grip system can be
perfected and developed into a saleable product when additional time and
money is committed to research.
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 TPR 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.
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 can be sold 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 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.
5
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)."
Current Customers
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A list of the Company's OEM customers during the most recently
completed fiscal year includes: Cobra Golf, Nicklaus Golf, Zevo, La Jolla
Club (which is partially owned by Paul Herber, who served as the Company's
Vice President of OEM Sales until November 1996), 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 such as Golfsmith International, Dynacraft, The Golf
Works and Sportek. Sales to Cobra Golf and Golfsmith International
amounted to 39% and 11% of sales, respectively, for fiscal 1997. The
Company is presently negotiating with several additional OEMs for future
business and continues to expand its business with existing customers.
Management anticipates finalizing a new distributor agreement in
the near future with Josec International ("Josec"), a Japanese golf
distributor. Under the agreement, Josec will sell the Company's golf grips
in Japan. Management anticipates the agreement will become effective in
December 1997. The Company's current distributor agreement with Yanase of
America, Inc. will end on December 1, 1997. Management believes Josec will
be able to increase sales of the Company's products in Japan.
Marketing and Sales
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Staff. The Company's marketing program relies on its sales
staff, selected distributors and independent sales representatives to
achieve its marketing objectives. In October 1997, the Company hired
Victor Afable as Vice President of Sales and Marketing. Mr. Afable was
previously a Regional Sales Manager for Golf Pride, the Golf Grip Division
of Eaton Corporation ("Golf Pride"). Mr. Afable will have primary
responsibility over all sales and marketing efforts especially including
contact with the Company's existing customers and others the Company has
been working with to develop certain customer defined projects.
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 to
customers contacted at the shows.
Endorsements. The Company has endorsement agreements with Jack
Nicklaus and Phil Mickelson, world-famous PGA Tour players, and Michelle
McGann, a well-known LPGA Tour player. 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. During fiscal 1997, the Company
significantly reduced usage of its advertising and public relations firm
as a result of prioritizing expenditures due to
6
financial constraints. OEMs are serviced directly by the Company's sales
staff who work with OEMs to develop new products and to qualify the Company
as an approved vendor.
The Company has historically focused its advertising and
promotional efforts on using celebrity endorsers to promote the GRIPTEC(TM)
brand as a credible, high-quality alternative to Golf Pride, Lamkin, Royal
Grip and others. 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.
Since fiscal 1996, the Company's customer base has included
several major catalog resellers and retail chains, an important market
niche, who effectively service pro shops, small retailers and other
replacement market customers. The Company has seen significant sales
increases, as well as a marked decrease in credit problems as a result of
selling to the major catalog resellers and retail chains instead of
directly to pro shops, small retailers and other replacement market
customers. The Company has consequently shifted a portion of its
advertising activities to co-op advertising with the catalogs and retail
chains, a strategy it plans to continue in fiscal 1998. The Company was
also a sponsor of the North American Long Drive Championship held in
October in Mesquite, Nevada. Both the Open and Senior Champions used
GRIPTEC(TM) grips along with the majority of the finalists. This event will
be televised on ESPN on Christmas Day.
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.
The Company does not intend to compete on the basis of price
sensitivity, but will concentrate its efforts on developing premium quality
product emphasizing the Company's capabilities in delivering custom
features, including feel, color, weight, etc. and responsive customer
service. The Company is working on developing new products that should
command higher prices due to superior grip properties. Management's focus
on customer service and relationships should contribute to this strategy.
However, the Company's research and development activities continue to
include pursuing alternative and less expensive products for the lower
priced market.
7
Manufacturing
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Facilities and Equipment. Prior to the USG 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. Today, the Company subcontracts all manufacture and production of
its golf grips. 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 of management's efforts to increase
efficiencies. During fiscal 1997, the Company continued to make
significant investments in management, equipment and procedures to automate
and otherwise further improve processing speed and quality. The Company
believes these improvements will ultimately reduce processing costs.
As part of the USG 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.
The Company works with OEM customers to design custom grips 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 and
the number of cavities involved. 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 Management's major challenges. 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 since the September 1995
acquisition of USG. 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 with the supplier who
produces the EPDM grips which comprised the majority of sales for fiscal
1997 and 1996. This arrangement requires the Company to purchase a certain
minimum number of grips per year, increasing each year throughout its ten-
year term, which expires in September 2005. Should the Company fail to
meet certain terms of this arrangement, including the purchase of the
required minimum number of grips, the supplier has the right to cancel the
arrangement and to produce EPDM grips for other customers. To date, the
Company has complied with the terms of the
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arrangement. There can be no assurances that the Company will have
sufficient demand for EPDM grips to fulfill its obligations under this
arrangement. Also, if the Company's EPDM sales increase significantly,
there can be no 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 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 required by its customers. Management believes that the basic
raw materials to make 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.
Certain Factors Affecting the Golf Industry
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Management believes the growth rate in the golf equipment industry in
the United States has been modest for the past several years, measured in the
number of clubs sold, and this trend is likely to continue through fiscal 1998.
However, management has also noted the increased awareness the general public
has developed for golf. The recent successes of Tiger Woods apparently has
contributed to the interest. While Management is hopeful the recent increase in
the interest in golf by women and younger golfers, including children, will
ultimately lead to a significant growth rate in the sport, there are no
assurances this will occur. Management believes golf is growing around the
world, particularly in Europe and Asia, however the United States and Japan are
still the largest markets for golf products. Management believes that sales of
golf clubs in Japan have been declining the last several years. Management
believes this trend has leveled off and will remain stable during 1998, however
the recent volatility in certain Asian financial markets may also adversely
affect growth. Management anticipates having a new distributor, Josec, for
Japan and certain other Asian countries starting in December 1997. Sales to key
OEM and catalog customers have continued to be strong during fiscal 1997.
During fiscal 1998, Management intends to focus on expanding its OEM customer
base minimizing the Company's concentration and dependence on a few customers
while also increasing sales and market penetration.
In the golf industry, sales to retailers are generally seasonal due to
lower demand in the retail market in the cold weather months generally occurring
during 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 others. Most major OEMs demand high standards of quality and service from
all suppliers and require 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.
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Competition
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The sports grip business is highly competitive. The Company's principal
competitors in the golf grip business are Golf Pride, Lamkin and Royal Grip.
These companies produce grips made from synthetic rubber, including EPDM. Lamkin
also manufactures seamless grips, which management believes are made from a TPR
blend. To date, TPR grips have not been a significant part of Lamkin's product
lines.
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 competitors have introduced new products over
the last several years. Others increased their marketing activities with respect
to existing products during the same period. While Management 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.
Government Regulations
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Since fiscal 1996, the Company has been 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 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.
Employees
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The Company presently has thirty-four full-time employees: five in Irvine,
California and twenty-nine in Vista, California. The employees currently located
in Irvine include the President and Chief Executive Officer, the Chief
Operations and Financial Officer, the Controller and two administrative staff.
The employees currently located in Vista include the Vice President of Sales and
Marketing and two salespeople, two in operations management, and twenty-four
production and warehouse employees.
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.
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Since the acquisition of USGRIPS, Inc. in September 1995, the Company has
occupied approximately 6,600 square feet in a free-standing industrial building
in Vista, California under a lease expiring September 1999.
During fiscal 1996, the Company ceased manufacturing operations in its 14,600
square foot manufacturing facility, subleased it and subsequently assigned its
lease and sublease interests to its former landlord.
Item 3. Legal Proceedings
The Company is not presently a party to any material pending legal proceedings
other than in the ordinary course of business.
Item 4. Submission of Matters to Vote of Security Holders
No matters were submitted during the fourth quarter of fiscal 1997 to a vote
of security holders through the solicitation of proxies or otherwise.
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 55 President, Chief Executive Officer and Director
Robert W. Taylor 39 Chief Operations and Financial Officer
Victor Afable 36 Vice President of Sales and Marketing
James E. McCormick III 49 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.
11
Robert W. Taylor is, and has been, Chief Operations and Financial
Officer for the Company since April 1, 1997. Prior to joining the Company,
Mr. Taylor was Vice President of Finance and Administration for Datatech, a
high-tech data communications distribution and service company. Between
1991 and 1996 Mr. Taylor practiced public accounting and served as Chief
Financial Officer of Banc Commercial, A National Real Estate Company. From
1984 to 1991, Mr. Taylor served as a Manager, and other positions, with
Arthur Andersen LLP. Mr. Taylor began his professional career in 1981 with
the Halliburton Company where he served as an internal auditor both in the
United States and internationally. He is a Certified Public Accountant.
Victor Afable is, and has been, Vice President of Sales and Marketing
for the Company since October 6, 1997. From January 1992 to September 1997,
he served as a Regional Sales Manager for the Golf Grip Division of Eaton
Corporation ("Golf Pride"). From March 1990 through December 1991, Mr.
Afable was the Southern Regional Sales Manager with Aldila, Inc., a
designer, manufacturer and marketer of graphite golf club shafts.
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-owed 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.
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. Management believes that there is a limited public trading
market, particularly because of the sporadic trading and limited demand for the
shares. There are approximately 5,677,384 unregistered shares of the Company's
Common Stock which can be sold in the public market in compliance with the
provisions of rule 144 under the General Regulations of the Securities Act of
1933.
12
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 1997 ---- ---
-----------
First Quarter $ 1/1//8 $/7//16
Second Quarter $ 1/3//4 $11//16
Third Quarter $1/7//16 $13//16
Fourth Quarter $ 1/3//8 $ /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 31, 1997, there were approximately 1,071 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.
Recent Sales of Unregistered Securities
---------------------------------------
Between August 1, 1994 and July 31, 1997, the Company granted stock options
to three officers, directors and contractors covering an aggregate of 170,000
shares of its Common Stock at exercise prices ranging from $1.375 to $1.50 per
share. As of July 31, 1997, there were outstanding options covering 165,000
shares of Common Stock of the Company held by four persons. During such three-
year period, one option covering 10,000 shares was exercised as to 4,000 shares
and forfeited the balance. As of July 31, 1997, options granted to nine persons
covering 493,500 shares have expired or been exercised.
13
At various times during the period from August 1, 1994 through July 31, 1997,
four holders of the Company's Series A Convertible Preferred Stock converted
their preferred shares, on a one for one basis, into an aggregate of 462,500
shares of Common Stock. These shares were issued and sold in reliance upon the
exemptions under Section 4(2) and 4(6) of the Securities Act and the
representations of the investors as to their "accredited investor" status.
Between September and November 1994, the Company issued an aggregate of
840,000 shares of its Common Stock in a private placement to 30 investors in
consideration for $1.50 per share or an aggregate of $1,260,000. Schneider
Securities, Inc. acted as the placement agent and in consideration for such
services was paid a cash fee of approximately $110,000 and was granted a three-
year Stock Purchase Warrant to purchase 84,000 shares at an exercise price of
$1.80 per share. In addition, Schneider purchased 82,402 shares in the private
placement in cancellation of a short-term loan it had made to the Company in the
amount of $123,604.
As of October 15, 1994, the Company granted to a PGA Tour player a five-year
stock option covering 200,000 shares of its Common Stock at an exercise price of
$1.50 per share as partial consideration for his agreement to endorse the
Company's products. These options were issued and sold in reliance upon the
exemptions under Section 4(2) and 4(6) of the Securities Act and the
representation of the PGA Tour player as to his "accredited investor" status.
As of November 17, 1994, the Company granted to the corporation of a PGA Tour
player a five-year stock option covering 250,000 shares of its Common Stock at
an exercise price of $1.50 per share as partial consideration for the PGA Tour
player's agreement to endorse the Company's products. The options were issued
and sold in reliance upon the exemptions under Section 4(2) and 4(6) of the
Securities Act and the representation of the corporation as to its "accredited
investor" status.
As of May 5, 1995, the Company sold 360,000 Units in a private placement to
two institutional investors at $2.25 per Unit in cash, or an aggregate of
$810,000. Each Unit consisted of one share of Common Stock and one three-year
Stock Purchase Warrant to purchase one share of Common Stock at an exercise
price of $3.00 per share. The Units were issued and sold in reliance upon the
exemptions under Section 4(2) and 4(6) of the Securities Act and the
representations of the investors as to their "accredited investor" status.
Schneider Securities, Inc. acted as the placement agent and in consideration for
such services was paid a cash fee of $32,400 and was granted a three-year
warrant to purchase 36,000 Units at $2.75 per Unit.
In August and November 1995, the Company sold 148,200 Units in a private
placement to 14 investors at $2.25 per Unit in cash, or an aggregate of
$333,450. Each Unit consisted of one share of Common Stock and one five-year
Stock Purchase Warrant to purchase one share of Common Stock at an exercise
price of $5.00 per share. The Units were issued and sold in reliance upon the
exemptions under Section 4(2) and 4(6) of the Securities Act and the
representations of the investors as to their "accredited investor" status.
Schneider Securities, Inc. acted as the placement agent and in consideration for
such services was paid a cash fee of $17,582.
14
As of September 8, 1995, the Company sold 444,500 Units in a private placement
to three institutional investors at $2.25 per Unit in cash, or an aggregate of
$1,000,125. Each Unit consisted of one share of Common Stock and one three-year
Stock Purchase Warrant to purchase one share of Common Stock at an exercise
price of $2.50 per share. The Units were issued and sold in reliance upon the
exemptions under Section 4(2) and 4(6) of the Securities Act and the
representations of the investors as to their "accredited investor" status.
Schneider Securities, Inc. acted as the placement agent and in consideration for
such services was paid a cash fee of $40,005 and was granted a three-year
warrant to purchase 44,450 Units at $2.475 per Unit.
As of September 22, 1995, US GRIPS, Inc., a Florida corporation, was merged
with and into a wholly-owned subsidiary of the Company, and in connection
therewith, the Company issued to the two shareholders of US GRIPS 600,000 shares
of its Common Stock. In addition, the Company agreed to issue to such
shareholders up to an additional 400,000 shares of its Common Stock pursuant to
the terms of an earn-out formula. The shares were issued and sold in reliance
upon the exemptions under Section 4(2) and 4(6) of the Securities Act and the
representations of the two investors as to their "accredited investor" status.
As of October 25, 1995, the Company issued 50,000 shares of its Common Stock
to one institutional investor in consideration for $2.00 per share, or an
aggregate of $100,000. In addition, the Company sold and issued to this
investor for $12,500 a five-year Stock Purchase Warrant to purchase 50,000
shares at an exercise price of $5.00 per share. The shares and warrant were
issued and sold in reliance upon the exemptions under Section 4(2) and 4(6) of
the Securities Act and the representations of the investor as to its "accredited
investor" status.
On February 8, 1996, the Company borrowed $90,000 from two private lenders.
These loans matured on June 30, 1996 and bore interest at the rate of 6% per
annum. As partial consideration for such loans, the Company granted to the
private lenders Stock Purchase Warrants expiring on December 31, 1998 to
purchase an aggregate of 18,000 shares of Common Stock at an exercise price of
$2.50 per share. The notes and warrants were issued and sold in reliance upon
the exemptions under Section 4(2) and 4(6) of the Securities Act and the
representations of the investors as to their "accredited investor" status.
In February 1996, four institutional investors which purchased Units during
May and September 1995, agreed to exercise a portion of their outstanding Stock
Purchase Warrants covering 400,000 shares at a reduced exercise price of $1.50
per share, or an aggregate of $600,000. The shares were issued and sold in
reliance upon the exemptions under Section 4(2) and 4(6) of the Securities Act
and the representations of the investors as to their "accredited investor"
status. Schneider Securities, Inc. acted as the placement agent and in
consideration for such services was paid a cash fee of $20,000.
15
In or about May 1996, the Company borrowed $250,000 from two private lenders.
These loans matured on May 31, 1997 and bore interest at the rate of 8% per
annum. As partial consideration for such loans, the Company granted to the
private lenders Stock Purchase Warrants expiring on May 31, 1998 to purchase an
aggregate of 50,000 shares of Common Stock at an exercise price of $2.50 per
share. The notes and warrants were issued and sold in reliance upon the
exemptions under Section 4(2) and 4(6) of the Securities Act and the
representations of the investors as to their "accredited investor" status.
Schneider Securities, Inc. acted as the placement agent and in consideration for
such services was granted a Stock Purchase Warrant expiring on May 31, 1998 to
purchase an aggregate of 25,000 shares at an exercise price of $2.50 per share.
As of July 31, 1996, the Company issued to Sam G. Lindsay, its President and a
director, 356,667 shares of its Common Stock at $1.50 per share in consideration
for the cancellation by Mr. Lindsay of $535,000 of loans and advances he had
made to the Company. These shares were issued and sold to Mr. Lindsay in
reliance upon the exemptions under Section 4(2) and 4(6) of the Securities Act
and his representation as to his "accredited investor" status.
As of August 1, 1996, the Company issued to its public relations firm a three-
year Stock Purchase Warrant covering 35,000 shares of its Common Stock at an
exercise price of $1.50 per share. The warrant was issued and sold in reliance
upon the exemptions under Section 4(2) and 4(6) of the Securities Act and the
representation of the firm as to its "accredited investor" status.
In October 1996, the two private lenders who loaned $90,000 to the Company in
February 1996 agreed to extend the maturity of their respective loans which
became due and payable on June 30, 1996 in consideration for an increase in the
interest rate payable thereon and the grant by the Company of Stock Purchase
Warrants expiring on December 31, 1998 covering an aggregate of 24,000 shares of
Common Stock with an exercise price of $2.50 per share. These note extensions
and warrants were issued and sold in reliance upon the exemptions under Section
4(2) and 4(6) of the Securities Act and the representations by the private
lenders as to their "accredited investor" status.
In March 1997, one private lender loaned the Company an additional $87,500 and
consolidated and extended the maturity of a previous $50,000 loan to February
28, 1999. The extended and consolidated loan was represented by a convertible
promissory note which is convertible into shares of Common Stock of the Company
at the rate of $1.50 per share. The convertible promissory note was issued and
sold in reliance upon the exemptions under Section 4(2) and 4(6) of the
Securities Act and the representations by the private lender as to its
"accredited investor" status.
In April 1997, the Company offered to the holders of all of its outstanding
Stock Purchase Warrants the right to reduce the exercise price to $.75 per share
if they would exercise their Stock Purchase Warrants on or prior to June 15,
1997. In May 1997, two holders of Stock Purchase Warrants covering an aggregate
of 72,500 shares accepted the offer and paid the Company an aggregate of $54,375
in connection with the exercise of their warrants. These shares were issued and
sold in reliance upon the exemptions under Section 4(2) and 4(6) of the
Securities Act and the representations by the private lender as to its
"accredited investor" status.
16
In March 1997, one private lender loaned the Company $21,000 and in May 1997
loaned the Company an additional $250,000. These amounts, combined with the
$229,000 previously loaned by this private lender to the Company and another
$21,000 previously loaned to the Company by an affiliated entity which matured
on May 31, 1997, were consolidated and extended into two convertible promissory
notes, each bearing interest at the rate of 8% per annum, one in the principal
sum of $500,000 and the other in the principal sum of $21,000. The notes are
convertible into shares of Common Stock of the Company at the rate of $1.00 per
share. These convertible promissory notes were issued and sold in reliance upon
the exemptions under Section 4(2) and 4(6) of the Securities Act and the
representations by the private lenders as to their "accredited investor" status.
As of July 31, 1997, the Company issued 6,667 shares of its Common Stock, at
$.75 per share, to the corporation of a PGA Tour player in consideration for the
cancellation of $5,000 of indebtedness owed by the Company to that corporation
for endorsement fees.
Subsequent to July 31, 1997:
(1) The Company issued $14,000 shares of $.75 per share to a private investor
on or about September 12, 1997 in connection with the exercise of a Stock
Purchase Warrant and the cancellation of $10,500 of indebtedness owed by the
Company to the private investor. These shares were issued and sold in reliance
upon the exemptions under Section 4(2) and 4(6) of the Securities Act and the
representation by the private investor as to his "accredited investor" status.
(2) On August 27, 1997, the Company issued 12,500 shares of its Common Stock
upon the conversion by one holder of 12,500 shares of the Company's Series A
Convertible Preferred Stock. These shares were issued and sold in reliance upon
the exemptions under Section 4(2) and 4(6) of the Securities Act and the
representation of the investor as to her "accredited investor" status.
(3) On October 10, 1997, the Company granted stock options under its 1994
Stock Option Plan to two officers and two key employees covering an aggregate of
320,000 shares, at an exercise price of $.4375 per share. These options have a
five-year term and vest in equal amounts over a three-year period.
(4) On October 29, 1997, the Company issued 100,000 shares of its Common Stock
at $.50 per share, or an aggregate of $50,000, in cancellation of certain
minimum endorsement fees payable to a PGA Tour player due April 15, 1997 and
October 15, 1997. These shares were issued and sold in reliance upon the
exemptions under Section 4(2) and 4(6) of the Securities Act and the PGA Tour
player's representation of his "accredited investor" status.
Item 6. Selected Financial Data
The following selected financial data is derived from the consolidated
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" in this Report.
17
Statement of Operations Data
- ---------------------------------
For the Years Ended July 31,
1997 1996 1995 1994
------------ ------------ ------------ ------------
Net sales $ 3,796,432 $ 3,062,948 $ 1,104,049 $ 895,878
Cost of sales 3,064,863 2,411,017 1,267,255 707,553
----------- ----------- ----------- -----------
Gross profit (loss) 731,569 651,931 (163,206) 188,325
Operating expenses 1,928,959 2,078,425 3,145,977 1,488,011
----------- ----------- ----------- -----------
Loss from operations (1,197,390) (1,426,494) (3,309,183) (1,299,686)
Interest expense 192,551 146,887 134,762 88,286
----------- ----------- ----------- -----------
Loss before income taxes (1,389,941) (1,573,381) (3,443,945) (1,387,972)
Provision for income taxes 1,600 1,600 800 800
----------- ----------- ----------- -----------
Net loss $(1,391,541) $(1,574,981) $(3,444,745) $(1,388,772)
=========== =========== =========== ===========
Net loss per share $(0.24) $(0.33) $(1.11) $(0.64)
=========== =========== =========== ===========
Shares used in computing
net loss per share 5,380,165 4,832,107 3,102,497 2,171,167
=========== =========== =========== ===========
Balance Sheet Data
- ------------------
As of July 31,
1997 1996 1995 1994
----------- ----------- ----------- -----------
Current assets $ 996,623 $ 1,093,040 $ 702,472 $ 511,826
Total assets 2,742,488 3,203,702 973,838 1,989,236
Current liabilities 2,778,067 2,533,588 732,886 1,259,487
Total liabilities 3,741,612 2,870,660 2,570,500 1,928,008
Stockholders' equity (deficit) (999,124) 333,042 (1,596,662) 61,228
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.
18
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
consolidated financial statements set forth in Item 8., "Financial Statements
and Supplementary Data" in this Report.
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 below and in Item 1.,
"Business" of this Report.
Results of Operations
- ---------------------
Years Ended July 31, 1997, 1996 and 1995
----------------------------------------
Fiscal 1997 was the first full year of consolidated operations with USG
which the Company acquired in fiscal 1996. With the USG acquisition, the
Company obtained a full product line, relationships with key OEM customers and
catalog resellers and exclusive relationships with three manufacturers of
quality grips made from EPDM, TPR and Cord. This has permitted the Company to
outsource all of its production, which eliminated many of the production
difficulties and inefficiencies that resulted in poor gross margins in the past.
It has further enabled the Company to focus on product development and
marketing.
The fiscal 1997 net loss of $1,391,541 was $183,440 lower than the fiscal
1996 loss of $1,574,981 while net sales increased $733,484. The net cash used
in operating activities declined $913,669 from $1,430,667 in fiscal 1996 to
$517,008 in 1997. The net cash used in operating activities declined $440,355
from $1,871,032 in fiscal 1995 to $1,430,667 in 1996. The decrease in the net
loss is not as significantly affected by the increased sales levels as the
decrease in net cash used in operating activities due to the net loss containing
significant non cash charges for depreciation and amortization related to
investments made in prior years.
Net sales for fiscal 1997 were $3,796,432, an increase of $733,484, or 24%
compared to fiscal 1996. The increase was primarily due to a full year of
consolidated operations with USG and
19
increased sales volumes to new and existing OEM customers, including the
Company's largest customer, Cobra Golf ("Cobra"). Net sales to Cobra and
Golfsmith International ("Golfsmith") during fiscal 1997 accounted for 39% and
11% of net sales, respectively. The Company continues to work with other
customers to increase sales to these other customers in order to reduce the
concentration and dependence on any one customer.
Net sales for 1996 were $3,062,948, an increase of $1,958,899, or 177%
compared to fiscal 1995. The increase was related to ten months of consolidated
operations with USG. The net sales increase represents a 28% increase over
unaudited pro forma combined net sales of the Company and USG for fiscal 1995.
Net sales to Cobra and Golfsmith during fiscal 1996 accounted for 23% and 13% of
net sales, respectively.
Since fiscal 1995, the Company has secured endorsement agreements with two
world-famous PGA Tour players, Jack Nicklaus and Phil Mickelson. During fiscal
1997, the Company entered into an endorsement agreement with Michelle McGann, a
prominent LPGA Tour player. 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 1997 was $3,064,863, or 81% of sales, as compared
to $2,411,017, or 79% of sales for fiscal 1996. The increase in amount was
primarily attributable to the increased sales volume for the year. During
fiscal 1997, the Company hired a new operations manager for the Vista facility
and incurred other costs attempting to streamline future production processes.
Additionally, the Company incurred increased temporary production labor costs to
meet increased sales volume and tight delivery schedules required by Cobra and
other customers. Throughout the year, but particularly during the early part of
the third quarter of fiscal 1997, management had difficulties adjusting the size
of the labor force as necessary, due to the sporadically inconsistent sales
levels experienced by the Company. These factors contributed to the increase in
cost of sales as a percentage of sales compared to fiscal 1996.
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 improved 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.
During fiscal 1997, the Company was able to reduce the amount invested in
new tooling to $260,691, down from $674,056 in fiscal 1996. The 1996 amount
includes tooling acquired in the USG acquisition. The Company reduced the
average cost per tool in 1997 approximately 50% compared to fiscal 1996.
Management identified and began using a new tool maker who is able to make the
tooling at a much lower cost.
During fiscal 1996, the Company invested heavily in tooling to complete a
full line of product 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 USG acquisition. The Company
invested $370,640 in tooling during fiscal 1995.
Selling expenses for fiscal 1997 decreased 22% over fiscal 1996, from
$818,436 to $638,925. The decrease was primarily attributable to the reduction
of advertising activities and sales staff. During fiscal 1997, Management
prioritized its expenditures from advertising to more critical areas
20
due to cash flow constraints. Also, the number of salespeople was reduced as
the Company redirected its sales and marketing efforts to the replacement
market. The Company has focused more on its marketing partnerships with catalog
resellers such as Golfsmith, the world's largest reseller of golf club
components. During the third quarter of fiscal 1997, the Company also initiated
a new distributor program to increase replacement market sales to retailers and
other non-OEM customers. Management believes that these programs will enable the
Company to ultimately increase sales to the replacement market while incurring
less expense and risk related to servicing the replacement market directly.
Significant benefits from these programs are not expected until fiscal 1998.
Selling expenses increased only 3%, from $790,888 to $818,436 during fiscal
1996. During the year, the Company discontinued its telemarketing activities.
Customers that responded to the telemarketing effort were typically too small
for the Company to serve efficiently and resulted in many credit problems. The
Company 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 USG sales force, product lines and customers during fiscal 1996,
while maintaining service levels and eliminating redundant functions.
Also during fiscal 1996, 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, continued to be
disproportionately high compared to sales levels, but decreased as a percentage
of net sales from 72% in fiscal 1995 to 27% in fiscal 1996. Management believed
these costs were necessary in order to position the Company and its products in
appropriate markets.
General and administrative expenses in fiscal 1997 decreased 21% compared
to fiscal 1996 or $164,524. During the year, the Company completed the
integration of USG, eliminated duplicate functions and otherwise aggressively
reduced expenses. As a result in the shift in the Company's customer base, bad
debt expense in fiscal 1997 was approximately $120,000 less than in fiscal 1996.
General and administrative expenses increased 15%, from $688,935 in fiscal
1995 to $793,348 in fiscal 1996, as the Company integrated the USG operation.
Accordingly, the Company continued to eliminate certain duplicate functions
during the year.
Liquidity and Capital Resources
- -------------------------------
The Company had a significant working capital deficit of $1,781,444 at July
31, 1997. The working capital deficit at July 31, 1996 was $1,440,548. In
addition, the stockholders' deficit at July 31, 1997 was $999,124 compared to
stockholders' equity of $333,042 at July 31, 1996. The $340,896 increase in
working capital deficit is directly attributable to net cash of $777,699 used in
operating activities and investments in property and equipment (primarily
tooling). During the year, the Company increased its borrowings $863,226 to
fund these expenditures. In the three years since the beginning of fiscal 1995,
the Company has borrowed, from various sources, approximately $1,800,000 in
short-term borrowings, notes payable and long-term obligations. During this
same period, the Company received approximately $3,700,000 in proceeds from the
issuance of Common Stock through private placements and approximately $716,000
of loans to the Company were converted to common stock. On July 31, 1997, the
Company's President, and
21
major stockholder, loaned the Company $100,000 for operating funds. Since July
31, 1997, the President has loaned the Company an additional $350,000 for
operating funds.
Included in current liabilities at July 31, 1997 is approximately
$1,511,000 of long-term obligations due in fiscal 1998 which are personally
guaranteed and/or collateralized by the personal assets of the Company's
President. Also, at July 31, 1997, $716,960 of the Company's liabilities were
notes payable to the Company's President and another officer, who is also a
stockholder. Of the $1,326,019 current portion of long-term obligations,
$1,180,000 is owed to a bank and matures on December 15, 1997. Historically,
the Company has been able to extend this obligation; however, to date, the
Company has not obtained any written commitment from the bank to extend these
loans and no assurance can be given that the obligations will be extended past
December 15, 1997, or that the Company will be able to obtain new loan
commitments from another lender to repay the $1,180,000 obligation due on
December 15, 1997. The notes payable to the stockholders permit the
stockholders to demand repayment at any time. Historically, the stockholders
have obliged the Company in deferring any amounts owed to them. However,
Management cannot ensure the stockholders will continue to accept deferral of
any amounts owed to them. Additionally, the notes payable to stockholders bear
interest at 10%. Previously, the amounts owed to the stockholders, which were
included in amounts due stockholder and accrued liabilities, did not bear
interest. The Company is not expected to generate sufficient cash from
operations necessary to repay these obligations unless they are extended or
otherwise deferred until such time as cash from operations, if ever, is
sufficient to repay these obligations. It will be necessary to either extend
the maturities, sell additional Common Stock or obtain alternative financing to
repay them.
As a result of cash flow constraints, compounded by the increased operating
cash flow deficit during fiscal 1997, the Company had to prioritize its payments
to vendors, debt holders and others. Management has identified payroll, rent,
utilities and certain office expenses, suppliers, tooling and certain debt
holders as the most critical obligations to be met. While Management tries to
maximize credit opportunities through trade payables, its major vendors (i.e.
the grip manufacturers) have stringent payment requirements. Since June of 1997,
the Company has agreed to formalized payment arrangements with certain vendors
for amounts owed to them in the normal course of business, totaling
approximately $100,000. Management has been able to significantly reduce the
cash spent on tooling, a trend Management believes will continue. During fiscal
1997, Management was able to reduce the amount invested in new tooling to
$260,691, down from $674,056 in fiscal 1996. The Company reduced the average
cost per tool in fiscal 1997 approximately 50% compared to fiscal 1996.
Management identified and began using a new tool maker who is able to make the
tools at a much lower cost.
To reduce cash flow pressures, Management has reduced inventory levels by
3% during 1997, even though sales increased 24% during the year. With the
reduced inventory levels, Management believes the Company was still able to
satisfy its customers needs on a reasonable timely basis. Management will
continue to closely monitor inventory levels.
Historically, the Company's fiscal third and fourth quarters have resulted
in higher net sales compared to the first two quarters, corresponding with the
golf industry's selling season. This seasonality places additional strains on
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.
22
Management anticipates the Company will require additional funding of
approximately $300,000 through January 31, 1998 in addition to the $350,000
loaned to the Company since July 31, 1997 by the President and an additional
$500,000 through the remainder of fiscal 1998, to fund operating losses and
projected tooling requirements. In addition, if existing debt obligations can
not be extended or otherwise deferred, additional funding of approximately
$1,200,000 and $126,019 will be necessary by January 31, 1998, and the remainder
of fiscal 1998, respectively. Furthermore, Management estimates that the Company
would require an additional $500,000 through fiscal 1998 and beyond to make the
appropriate investments in machinery, marketing and advertising, research and
development it deems necessary to effectively compete with the Company's key
competitors.
Management is pursuing an existing private placement opportunity and is
negotiating an agreement with an investment banking firm for the firm to provide
financial advisory services to the Company. The Company will continue to
identify and pursue other opportunities to meet these requirements. The Company
is also seeking to obtain concessions and/or deferred payment plans from vendors
on amounts owed. Additional bank financing is not expected to be an option
unless credit enhancements, such as guarantees, are available, or until such
time the Company has at least one fiscal quarter of profitability. None of these
sources or alternatives may be available to the Company and, if they become
available, may not occur within the time frame required by the Company or may
require terms which Management finds unacceptable. The continued losses, the
existing debt obligations due in fiscal 1998 and the need for additional capital
raises substantial doubt about the Company's ability to continue operating as a
going concern.
23
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, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for the years ended July 31, 1997, 1996 and
1995. 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, 1997 and 1996 and the
consolidated results of its operations and its cash flows for the years ended
July 31, 1997, 1996 and 1995, 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
November 3, 1997
24
GRIP TECHNOLOGIES, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
JULY 31, 1997 AND 1996
----------------------
ASSETS
------
1997 1996
----------- -----------
CURRENT ASSETS:
Cash $ 107,531 $ 16,975
Accounts receivable, net of allowance for
doubtful accounts of $70,070 and $190,669
at July 31, 1997 and 1996, respectively 357,395 537,445
Inventories 493,466 506,995
Other current assets 38,231 31,625
---------- ----------
Total current assets 996,623 1,093,040
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $800,501 and
$373,589 as of July 31, 1997 and 1996, respectively 721,021 887,242
INTANGIBLES, net of accumulated amortization
of $1,123,066 and $924,490 as of July 31, 1997
and 1996, respectively 1,024,844 1,223,420
---------- ----------
Total assets $2,742,488 $3,203,702
========== ==========
The accompanying notes are an integral part
of these consolidated balance sheets.
25
GRIP TECHNOLOGIES, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
JULY 31, 1997 AND 1996
----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
1997 1996
------------ ------------
CURRENT LIABILITIES:
Current portion of long-term obligations $ 1,326,019 $ 976,412
Notes payable to stockholders 716,960 -
Short-term borrowings 10,000 340,000
Accounts payable 515,262 528,392
Accrued liabilities 209,826 329,905
Amounts due stockholder - 358,879
----------- -----------
Total current liabilities 2,778,067 2,533,588
----------- -----------
LONG-TERM OBLIGATIONS, NET OF CURRENT PORTION 963,545 337,072
----------- -----------
Total liabilities 3,741,612 2,870,660
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Series A Convertible Preferred Stock
Authorized -- 3,000,000 shares
Issued and outstanding -- 887,500 and
1,287,500 shares, respectively 887,500 1,287,500
Common Stock
Authorized -- 25,000,000 shares
Issued and outstanding -- 6,061,092 and
5,581,925 shares, respectively 5,913,415 5,454,040
Accumulated deficit (7,800,039) (6,408,498)
----------- -----------
Total stockholders' equity (deficit) (999,124) 333,042
----------- -----------
$ 2,742,488 $ 3,203,702
=========== ===========
The accompanying notes are an integral part
of these consolidated balance sheets.
26
GRIP TECHNOLOGIES, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED JULY 31, 1997, 1996 AND 1995
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
NET SALES $ 3,796,432 $ 3,062,948 $ 1,104,049
COST OF SALES 3,064,863 2,411,017 1,267,255
----------- ----------- -----------
Gross profit (loss) 731,569 651,931 (163,206)
----------- ----------- -----------
OPERATING EXPENSES:
Selling 638,935 818,436 790,888
General and administrative 628,824 793,348 688,935
Research and development 35,712 39,616 87,360
Depreciation 426,912 256,795 266,323
Intangible amortization and write-off 198,576 170,230 623,534
Provision for abandonment and disposition
of property and equipment and other - - 688,937
----------- ----------- -----------
1,928,959 2,078,425 3,145,977
----------- ----------- -----------
Loss from operations (1,197,390) (1,426,494) (3,309,183)
INTEREST EXPENSE 192,551 146,887 134,762
----------- ----------- -----------
Loss before income taxes (1,389,941) (1,573,381) (3,443,945)
PROVISION FOR INCOME TAXES 1,600 1,600 800
----------- ----------- -----------
Net loss $(1,391,541) $(1,574,981) $(3,444,745)
=========== =========== ===========
NET LOSS PER COMMON AND EQUIVALENT SHARE $ (0.24) $ (0.33) $ (1.11)
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,830,165 4,832,107 3,102,497
=========== =========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
27
GRIP TECHNOLOGIES, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1997, 1996 AND 1995
------------------------------------------------
Series A
Convertible
Preferred Stock Common Stock
------------------- ------------------ Accumulated
Shares Amount Shares Amount Deficit Total
------------ ----------- --------- ----------- ------------- -----------
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 - 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) 333,042
Sale of Common Stock - - 79,167 59,375 - 59,375
Conversion of Preferred
Stock to
Common Stock (400,000) (400,000) 400,000 400,000 - -
Net loss - - - - (1,391,541) (1,391,541)
----------- ---------- ---------- ----------- ----------- -----------
BALANCE, JULY 31, 1997 887,500 $ 887,500 6,061,092 $5,913,415 $(7,800,039) $ (999,124)
=========== ========== ========== =========== =========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
28
GRIP TECHNOLOGIES, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED JULY 31, 1997, 1996 AND 1995
------------------------------------------------
1997 1996 1995
-------------- ------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,391,541) $(1,574,981) $(3,444,745)
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 426,912 256,795 266,323
Intangible amortization and write-off 198,576 170,230 623,534
(Increase) decrease in accounts receivable 180,050 (77,650) (71,813)
(Increase) decrease in inventories 13,529 (86,447) 41,956
Increase in other current assets (6,606) (6,925) (5,534)
Decrease in accounts payable (13,130) (135,333) (45,763)
Increase in accrued liabilities 75,202 34,334 65,373
Increase (decrease) in other liabilities - (10,700) 10,700
----------- ----------- -----------
Net cash used in operating activities (517,008) (1,430,677) (1,871,032)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (260,691) (572,296) (386,048)
Proceeds on disposal of property and
equipment - 9,500 -
Increase in note receivable - - (50,000)
Purchases of intangibles - (2,900) -
----------- ----------- -----------
Net cash used in investing activities (260,691) (565,696) (436,048)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term obligations 763,226 180,000 600,000
Principal payments on long-term obligations (87,146) (105,472) (90,210)
Issuance of note payable to stockholder 100,000 - -
Proceeds from short-term borrowings - 136,225 -
Payments on short-term borrowings (30,000) - (165,000)
Increase in amounts due stockholder 62,800 156,083 347,617
Issuance of Common Stock 59,375 1,919,685 1,719,928
Payments on amounts due stockholder - (400,000) -
----------- ----------- -----------
Net cash provided by financing
activities 868,255 1,886,521 2,412,335
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 90,556 (109,852) 105,255
CASH, beginning of period 16,975 126,827 21,572
----------- ----------- -----------
CASH, end of period $ 107,531 $ 16,975 $ 126,827
=========== =========== ===========
29
1997 1996 1995
--------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $139,047 $93,613 $91,101
======== ======= =======
Cash paid for taxes $ 2,400 $ 1,600 $ 800
======== ======= =======
As of July 31, 1997, certain amounts owed to the President and major stockholder
(the President)and another officer of the Company were converted into promissory
notes totaling $716,960. Prior to 1997 the amounts owed to these individuals
were included in amounts due stockholder and accrued liabilities, respectively.
Also during 1997, the Company converted certain short-term borrowings totaling
$310,000 to long-term obligations.
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 were:
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
==========
During 1996 and 1995, the Company converted certain notes payable with principal
amounts totaling $535,000 and $181,225, respectively, into Common Stock.
During 1995, net proceeds from the issuance of Common Stock was reduced by
$114,298 of amortization of deferred private placement costs incurred during
1994.
The accompanying notes are an integral part
of these consolidated financial statements.
30
GRIP TECHNOLOGIES, INC. AND SUBSIDIARY
--------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
JULY 31, 1997
-------------
1. Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
a. Organization and Acquisition of USGRIPS, Inc.
---------------------------------------------
The accompanying consolidated financial statements reflect the accounts of
Grip Technologies, Inc., a California corporation, 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, distributors, golf pro shops and specialty golf retailers. The
majority of the Company's sales are made to organizations in the United
States, however, the Company does sell to organizations all over the world.
Since 1996, after the Company ceased all in-house manufacturing, the
Company has utilized three outside contractors to manufacture its golf
grips, using the Company's tooling and in certain cases its technology.
Certain grips are then processed in the Company's Vista, California
facility, where the grips are engraved with custom logos and/or painted, in
accordance with customer specifications. Certain other grips are painted by
an outside contractor. 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).
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. To date, no shares have been earned under the earn-out formula.
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 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 Company's 1996 year, the
unaudited consolidated results of operations on a pro forma basis as though
USG had been acquired as of the beginning of 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 1995 are:
Net sales $ 2,392,895
Gross profit 66,363
Net loss (3,934,911)
Net loss per weighted average common share $ (1.06)
31
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 been
consummated as of the above dates, nor are they necessarily indicative of
future operating results.
b. Inventories
-----------
Inventories are valued at the lower of cost (determined by the first-in,
first-out method) or market value and consist primarily of purchased
unpainted golf grips, processing labor and factory overhead.
c. 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.
The Company adopted SFAS No. 121 effective August 1, 1995, the effect of
which had no material impact on the results of operations or financial
condition at the time of adoption.
Property and Equipment
----------------------
Property and equipment, at cost, consisted of the following at July 31,:
1997 1996
----------- -----------
Furniture and fixtures $ 117,251 $ 115,979
Leasehold improvements 1,758 1,758
Manufacturing equipment 138,802 138,802
Tooling 1,263,711 1,004,292
---------- ----------
1,521,522 1,260,831
Less accumulated depreciation
and amortization (800,501) (373,589)
---------- ----------
$ 721,021 $ 887,242
========== ==========
Depreciation and amortization is 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 2.5 to 3.5 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.
32
In connection with the acquisition of USG and discontinuation of
manufacturing in the Company's Irvine, California facility during 1996, the
Company identified certain production equipment, leasehold improvements and
tooling having no significant further value. These assets with a net book
value of $587,937 were expensed in 1995. The Company also identified all
costs related to the closing of the Irvine facility and recorded the amount
as a one-time charge to operations during 1995.
Intangibles
-----------
Included in Intangibles on the accompanying consolidated balance sheets is
goodwill of $1,390,750 arising from the USG acquisition. The amount is
being amortized over seven years.
During 1995, the Company charged $491,167 to operations representing the
unamortized amount of certain intangibles related to the 1994 acquisition
of Poulin Progrip, Inc. Management determined the intangibles had no
further value after the Company significantly changed the design and
manufacturing methods of its products.
Talaurian Technologies
----------------------
During 1997, the Company acquired a 50% interest in Talaurian Technologies,
Inc. (Talaurian), a company in the development stage, for $1,000 pursuant
to a joint venture agreement (the Agreement) entered into during 1996.
Under the Agreement, 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 Company, may,
but is not required to make any additional investments in Talaurian. As
amended in October 1997, the term of the Agreement was extended through
September 30, 2007. Under the Agreement, as amended, the Company is
entitled to receive a 5% royalty on all Talaurian revenues, whether derived
or not derived from use of the Company's technology. Beginning January 15,
2001, the Company is entitled to receive a quarterly minimum royalty of
$25,000. No royalties were received nor accrued during 1997 and 1996.
d. Stock-Based Compensation
------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation" was issued by the
Financial Accounting Standards Board in 1995 and,if fully adopted, changes
the methods for recognition of compensation expense on plans similar to
those of the Company. Companies may continue to account for stock options
issued to employees under APB Opinion No. 25 as full adoption of this
statement is optional for stock options granted to employees. However, pro
forma disclosures, as if the Company had fully adopted this statement are
required. Adoption of the provisions of this statement is required for
stock options and warrants granted to non-employees for services. During
1997, the Company adopted the statement for stock options and warrants
issued to non-employees and continued to account for stock options granted
under the Company's 1994 Stock Option Plan in accordance with APB Opinion
No. 25.
e. Research and Development
------------------------
Research and development costs are charged to operations as incurred.
33
f. Income Taxes
------------
The Company accounts for income taxes under the liability method as
prescribed by SFAS No. 109, "Accounting for Income Taxes."
g. Net Loss Per Share Information
------------------------------
The net loss per share information included in the consolidated statements
of operations is presented in accordance with APB Opinion No. 15.
Accordingly, the weighted average number of shares does not include the
outstanding common stock equivalents such as preferred stock, stock options
and warrants as they are anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings per Share", which will require a basic earnings-per-share
(EPS) disclosure, rather than the primary EPS currently disclosed. The
significant difference between the two calculations is the inclusion, if
dilutive, of common stock equivalents in the calculation of primary EPS.
This statement will be effective during 1998. The Company believes the
adoption of the statement will not have a material effect on its earnings
per share information.
h. 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 amounts
determined using these estimates.
i. Fiscal Year
-----------
The Company's fiscal year ends July 31. References to a year are to the
Company's respective fiscal year.
2. Going Concern
-------------
The Company has incurred significant net losses since its inception (August 1,
1993). As of July 31, 1997 the accumulated deficit was $7,800,039 and the
stockholders' deficit was $999,124. For the three years ended July 31, 1997,
1996 and 1995 the net loss was $1,391,541, $1,574,981 and $3,444,745,
respectively. While the net cash used in operating and investing activities
decreased significantly in 1997 compared to 1996 and 1995, the Company used
$777,699 for operating and investing activities during the year. The net cash
used for operating and investing activities during 1996 and 1995 was $1,996,373
and $2,307,080, respectively. Also during 1997, the working capital deficit
increased $340,896 to $1,781,444. 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 trade credit, stock issuances and additional borrowings, including loans
from the President.
The ability of the Company to meet its existing and ongoing obligations is
dependent upon raising additional capital from sources of funding, such as
private placements,
34
public offerings, a merger or banks and other lenders. The Company is currently
pursuing all possible avenues it can identify to obtain additional funding.
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 Company plans to continue to develop and implement cost effective strategies
it believes will increase sales and gross margins, reduce other operating
expenses and eventually lead to profitability. However, the Company is
continuing to incur losses. The ability of the Company to continue as a going
concern is dependent on obtaining adequate financing and ultimately achieving
profitable operations. 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. Short-Term Borrowings
---------------------
Short-term borrowings consisted of the following at July 31:
1997 1996
-------- --------
Short-term note payable to a trust,
bearing interest at 10%. $10,000 $ 40,000
Short-term notes payable to two
partnerships, bearing interest at 8%,
convertible to Common Stock, converted
into a long-term obligation during
1997. - 250,000
Short-term note payable to a corporation,
bearing interest at 10%, converted into
a long-term obligation during 1997. - 50,000
-------- --------
$10,000 $340,000
======== ========
4. Long-Term Obligations
----------------------
Long-term obligations consisted of the following at July 31:
1997 1996
---------- ----------
Bank Borrowings-
Term notes with a bank with interest
rates ranging from prime (8.5% at
July 31, 1997)to prime plus 2.5%,
interest is paid monthly and the
principal repayment date has been
extended until December 15, 1997,
secured by the personal assets of
the President. $1,180,000 $ 780,000
Note payable to bank, bearing
interest at 12.5%, principal and
interest is payable at $4,446
per month through November 2000,
secured by property and equipment
and guaranteed by the President. 145,687 179,023
35
1997 1996
---------- ---------
Convertible Notes-
Payable to two partnerships, bearing
interest at 8%, interest is
payable semi-annually and the
principal is due on May 31, 1999,
the note holder may convert any
amounts owed under the notes to
Common Stock at $1.00 per share, a
portion was converted from short-term. 521,000 -
Payable to a corporation, bearing
interest at 8%, principal
and interest are due on February 28,
1999, the note holder may convert
any amounts owed under the note to
Common Stock at $1.50 per share a
portion was converted from short-term. 142,226 -
Covenant Not-to-Compete and
Consulting/Licensing Agreements-
Covenant not-to-compete and consulting
agreements payable in quarterly
installments of $12,500, continuing
through January 2000, less interest
imputed at 10%. 279,701 303,572
Licensing agreement, payable in
monthly payments of $2,000
through August 1997, less
interest imputed at 10%. 1,983 24,545
Other-
Note payable to lessor for leasehold
improvements, bearing interest at 7%
and principal payable monthly
through December 31, 1998. 18,967 26,344
----------- ----------
2,289,564 1,313,484
Less current portion (1,326,019) (976,412)
----------- ----------
$ 963,545 $ 337,072
=========== ==========
The future annual minimum principal payments on long-term obligations are:
1998 $1,326,019
1999 798,275
2000 165,270
----------
$2,289,564
==========
36
5. Notes Payable to Stockholders
-----------------------------
The Company issued a promissory note, dated July 31, 1997 and bearing 10%
interest, to the President in the amount of $421,679 for interest on previous
loans made to the Company, interest on cash assets being used as collateral for
certain of the Company's notes payable to a bank, deferred salary and certain
reimbursable business expenses. As of July 31, 1996, similar amounts owed to the
President totaled $358,879 and were included in amounts due stockholder in the
accompanying consolidated balance sheets.
In addition, on July 31, 1997, the President loaned the Company $100,000 for
operating funds in exchange for a promissory note bearing 10% interest. The
terms of both promissory notes entitle the President to demand repayment of the
principal and accrued interest at any time. All amounts owed to the President
are secured by the Company's accounts receivable, contract rights, inventory,
general intangibles and technology.
As of July 31, 1997, the Company issued a promissory note to another officer of
the Company, who is also a stockholder, in the amount of $195,281 for providing
legal services to the Company over the last several years. The terms of the
promissory note include an interest rate of 10% and entitle the officer to
demand repayment of the principal and accrued interest at any time. Amounts owed
to him as of July 31, 1996, totaling $145,604 were included in accrued
liabilities in the accompanying consolidated balance sheets.
6. Capital Stock, 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, 1997 and 1996. Each share of preferred stock is
convertible into one share of Common Stock. The Company has the option to
redeem these shares 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.
b. Common Stock
------------
During 1995, the Company received $1,719,928 in cash, 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.
Also during 1995, notes payable to promoters totaling $181,225 were
exchanged for 122,402 shares of Common Stock.
c. Stock Options to Employees
--------------------------
Under the 1994 Stock Option Plan (the Plan), 900,000 shares of Common Stock
have been set aside for grants to key employees, officers, directors and
consultants. The Plan will terminate in 2004 unless terminated sooner by the
Board of Directors. During 1997, the number of shares of Common Stock set
aside for the plan was increased from 600,000 to 900,000.
Through July 31, 1997, the Company had granted 662,500 options under the
Plan. Options are granted at fair market value of the stock's market price
at the grant date. Options vest cumulatively over various periods
(determined at the
37
discretion of the Board of Directors) of up to five years from the grant
date, are exercisable in whole or in installments, and expire five years from
the date of grant. No stock options were granted during 1997. Accordingly, no
pro forma amounts have been presented.
Below is a summary of the status of the Plan at July 31, 1995, 1996 and 1997,
as well as changes during the years then ended:
1995 1996 1997
----------------------------- ------------------------------- --------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------- --------------- ------------ ------------- ------------ --------------
Outstanding at beginning of
year 382,500 $1.21 395,000 $1.22 435,000 $1.20
Granted 20,000 1.50 150,000 1.38 - -
Exercised - - 4,000 1.50 - -
Forfeited/Expired 7,500 1.50 106,000 1.50 270,000 1.25
Outstanding at end of year 395,000 1.22 435,000 1.20 165,000 1.14
Exercisable at end of year 212,982 1.08 265,000 1.08 165,000 1.14
Weighted average fair
value of options granted 1.14 1.04 -
Options outstanding at July 31, 1997, have exercise prices ranging from $1.00
to $1.50 with a weighted average exercise price of $1.14 and a weighted
average remaining contractual life of 1.11 years. All outstanding options are
exercisable.
The fair value of the option grants were estimated on the date of grant using
the Black-Scholes pricing model with the following assumptions used for the
grants during 1996 and 1995: weighted average risk-free interest rate of
6.25%; expected dividend yields of 0.00 percent; and an expected life of 3
years.
d. Warrants and Stock Options to Non-Employees
-------------------------------------------
As of July 31, 1997, warrants to purchase 961,740 shares of Common Stock
were outstanding. Warrants for 801,220 shares had exercise prices ranging
from $1.50 to $3.00 with a weighted average exercise price of $1.902 and a
weighted average remaining contractual life of 0.97 years. Warrants for
160,520 shares had an exercise price of $5.00 and a weighted average
remaining contractual life of 3.08 years. During 1997 and 1996, warrants for
10,000 and 120,000 shares, respectively, expired unexercised. During 1997, a
warrant for 35,000 shares was issued. No compensation expense was recorded
as the fair value of the warrant, as determined in accordance with SFAS No.
123, was not material.
During 1997, the Company issued 72,500 shares of Common Stock as a result of
the early exercise of warrants resulting in proceeds to the Company of
$54,375. The warrants originally had exercise prices ranging from $1.50 to
$5.00 per share. As an inducement to encourage the early exercise of these
warrants, the Company lowered the exercise price to $0.75 per share, the
approximate fair market value of the Common Stock at the time.
38
During 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 ranging from $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, the approximate fair market value of the Common Stock at
the time.
The Company has endorsement agreements with two PGA Tour players which
include stock options to purchase 450,000 shares of Common Stock. The
options, which were granted during 1994 and outside the Plan, have a weighted
average exercise price of $1.50. The weighted average expected life of these
options is 3.38 years. Both options are exercisable.
7. Income Taxes
------------
The components of the Company's deferred tax benefit are as follows as of
July 31:
1997 1996
------------ ------------
Allowance for doubtful accounts $ 28,028 $ 76,268
Inventory 10,000 -
Other non-deductible accruals 245,995 201,794
Depreciation 79,372 51,372
Net operating loss carryforwards 2,375,920 1,936,616
----------- -----------
2,739,315 2,266,050
Valuation allowance (2,739,315) (2,266,050)
----------- -----------
$ - $ -
=========== ===========
As of July 31, 1997, the Company had approximately $5,950,000 and $2,950,000 of
net operating loss carryforwards for federal income tax and California franchise
tax purposes, respectively. 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.
8. Major Customers and Suppliers
-----------------------------
During 1997 and 1996 net sales to one customer comprised 39% and 23% of net
sales, respectively, and net sales to another customer comprised 11% and 13% of
net sales, respectively. No customer comprised more than 10% of net sales during
fiscal 1995.
Since 1996, the Company has been purchasing golf 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 golf
grips. The Company is dependent on a single supplier for each type of grip in
its product line (EPDM, TPR and Cord). 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.
The Company has an exclusive arrangement (the Arrangement) with the supplier who
produces EPDM grips. EPDM grips make up the majority of the Company's purchases
and sales. The Arrangement requires the Company to purchase a certain minimum
number of grips per year, increasing each year throughout its ten-year term,
which expires in September 2005. Should the Company fail to meet certain terms
of the Arrangement, including the purchase of the
39
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.
9. Commitments
-----------
The Company has endorsement agreements with two PGA Tour players and a LPGA Tour
player. The specific terms of each agreement vary. The agreements include annual
minimum endorsement fees to be paid to each player. Endorsement fees for 1997,
1996 and 1995 were approximately $131,000 $72,000 and $61,000, respectively. The
future annual minimum endorsement fees under the agreements are approximately
$88,000 for 1998 and 1999 and approximately $44,000 for 2000.
The Company has employment agreements with certain of its officers and key
employees that include, among other things, specified payments for compensation
to be made to the employees. The future annual minimum payments under these
agreements are $248,000, $265,000, $265,000, $265,000, $217,000 and $17,000 for
each of the five years ending 2002 and thereafter, respectively.
The Company leases its facilities and certain equipment under various
noncancellable operating leases, with terms extending through June 2000. The net
rental expense under these leases was $86,879, $89,412 and $76,342 for each of
the three years ended July 31,1997, respectively. For the two most recent years
just ended, net rent expense includes $67,500 and $39,200, respectively, of
sublease income. The future annual minimum payments under operating leases
total $208,762 and are $86,314, $87,175 and $35,273 for each of the three years
ending 2000, respectively.
10. Subsequent Events
-----------------
Since July 31, 1997, the President has loaned the Company $350,000 for operating
funds. In exchange, the Company issued promissory notes to the President. Under
the terms of the promissory notes, the President is currently entitled to demand
repayment of $150,000. Beginning on November 20, 1997, the President is
entitled to demand repayment of the remaining $200,000. The promissory notes
bear interest at 10% and the interest is being accrued.
In September 1997, 12,500 shares of Preferred Stock were converted to Common
Stock. In addition, 14,000 shares of Common Stock were issued as a result of the
early exercise of warrants to purchase Common Stock. In exchange, the warrant
holder cancelled $10,000 of short-term borrowings and $500 accrued interest.
In October 1997, 100,000 shares of Common Stock were issued to one of the PGA
tour players who endorses the Company's grips in exchange for the cancellation
of certain minimum endorsement fees totaling $50,000.
In October 1997, the Company granted to certain officers and employees stock
options to purchase a total of 320,000 shares of Common Stock. The exercise
price of the options is $0.4375 per share. The options vest over three years
and expire in October 2002.
40
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 28, 1997 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 28, 1997 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 28, 1997 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 28, 1997 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, 1997 and 1996 (See Item
8 to this Form 10-K)
41
Consolidated Statements of Operations for the years ended July 31,
1997, 1996 and 1995 (See Item 8 to this Form 10-K)
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended July 31, 1997, 1996 and 1995 (See Item 8 to this Form
10-K)
Consolidated Statements of Cash Flows for the years ended July 31,
1997, 1996 and 1995 (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 - incorporated by reference from
Exhibit 2.1 to Registrant's Form 10-K for its fiscal year
ended July 31, 1996
3.1(i) Restated Articles of Incorporation of Registrant -
incorporated by reference from Exhibit 3.1(i) to Registrant's
Form 10-K for its fiscal year ended July 31, 1996
3.1(ii) Amended and Restated Bylaws of Registrant -incorporated by
reference from Exhibit 3.1(ii) to Registrant's Form 10-K for
its fiscal year ended July 31, 1996
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 - incorporated by reference from
Exhibit 4.1 to Registrant's Form 10-K for its fiscal year
ended July 31, 1996
4.2 Loan documents for $780,000 loan from Wells Fargo Bank,
including Loan Commitment Note, dated January 14, 1997;
Addendum to Promissory Note, dated February 12, 1997; Third
Party Security Agreement: Securities Account, dated January
14, 1997; Addendum to Third Party Security Agreement:
Securities Account, dated February 12, 1997; and Securities
Account Control Agreement, dated February 12, 1997; and
Securities Account Control Agreement, dated February 14,
1997 - incorporated by reference from Exhibit 4.1 to
Registrant's Form 10-Q for its fiscal quarter ended April 30,
1997
4.3 Loan extension letter, dated September 15, 1997, to Registrant
from Wells Fargo Bank extending that certain $780,000
Promissory Note included in Item 4.2 above
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
42
$400,000 - incorporated by reference from Exhibit 4.4 to
Registrant's Form 10-K for its fiscal year ended July 31, 1996
4.5 Loan extension letter, dated September 15, 1997, to Registrant
from Wells Fargo Bank extending that certain $400,000
Revolving Line of Credit Note included in Item 4.4 above
4.6 The attached form of Secured Promissory Note, made payable by
Registrant to Sam G. Lindsay in the following amounts on the
following dates:
$100,000 July 31, 1997 or thereafter on demand
$100,000 September 19, 1997, or thereafter on demand
$ 50,000 October 16, 1997, or thereafter on demand
$200,000 October 20, 1997, or thereafter on demand
4.7 Promissory Note, dated July 31, 1997, made payable by
Registrant to Sam G. Lindsay in the principal amount of
$421,679
4.8 Convertible Promissory Note, dated March 12, 1997, made
payable by Registrant to the Caroline Companies LLC in the
principal amount of $137,500 and accrued interest of $4,726
4.9 The attached form of Convertible Note issued by Registrant in
May 1997 to the following lenders in the following amounts:
$ 21,000 Z-Fund, a Maryland limited partnership
$ 500,000 Third Century II, a Colorado general
partnership
4.10 Promissory Note, dated July 31, 1997, made payable by
Registrant to James E. McCormick III in the principal amount
of $195,281.02
10.1 1994 Stock Option Plan - incorporated by reference from
Exhibit 10.1 to Registrant's Form 10-K for its fiscal year
ended July 31, 1996
10.2 Amendment No. 1 to Stock Option Plan - incorporated by
reference from Exhibit 10.8 to Registrant's Form 10-Q for its
fiscal quarter ended January 31, 1997
10.3 Noncompetition Agreement, dated September 22, 1995, between
Registrant and J. Barrie Ogilvie -incorporated by reference
from Exhibit 10.3 to Registrant's Form 10-K for its fiscal
year ended July 31, 1996
10.4 Security Agreement, dated July 31, 1995, between Registrant
and Sam G. Lindsay - incorporated by reference from Exhibit
10.4 to Registrant's Form 10-K for its fiscal year ended July
31, 1996
43
10.5 Amendment No. 1 to Security Agreement, dated July 31, 1997,
between Registrant and Sam G. Lindsay
10.6 Request to Convert and Investment Letter, dated July 31, 1996,
between Registrant and Sam G. Lindsay - incorporated by
reference to Exhibit 10.6 to Registrant's Form 10-K for the
fiscal year ended July 31, 1996
10.7 Agreement, dated September 22, 1995, between Registrant and
ARC Equipment, Inc. - incorporated by reference from Exhibit
10.7 to Registrant's Form 10-K for its fiscal year ended July
31, 1996
10.8 Employment Agreement, dated September 26, 1997, between
Registrant and Victor Afable
21.1 Subsidiaries of Registrant - incorporated by reference from
Exhibit 21.1 to Registrant's Form 10-K for its fiscal year
ended July 31, 1996
27 Financial data schedule
44
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 13, 1997 /s/ Sam G. Lindsay
--------------------------
Sam G. Lindsay
President and
Chief Executive Officer
Date: November 13, 1997 /s/ Robert W. Taylor
--------------------------
Robert W. Taylor
Chief Operations and
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 13, 1997 /s/ Sam G. Lindsay
--------------------------
Sam G. Lindsay
Director
Date: November 13, 1997 /s/ James E. McCormick III
--------------------------
James E. McCormick III
Director and Secretary
Date: November 13, 1997 /s/ David W. Hardee
--------------------------
David W. Hardee
Director
Date: November 13, 1997
--------------------------
J. Barrie Ogilvie
Director
45