-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G9pYreWGh0ivVfgoyNYBb7UNKWIR/Cg1y6kuUgSfmLd77QVu1GJa7EUWghOp2STl R502fzoC7VBfSAddLKmfng== 0000725260-99-000002.txt : 19990416 0000725260-99-000002.hdr.sgml : 19990416 ACCESSION NUMBER: 0000725260-99-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROCKIES FUND INC CENTRAL INDEX KEY: 0000725260 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 840928022 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-12444 FILM NUMBER: 99594682 BUSINESS ADDRESS: STREET 1: 4465 NORTHPARK DRIVE STREET 2: SUITE 100 CITY: COLORADO SPRINGS STATE: CO ZIP: 80907 BUSINESS PHONE: 7195904900 MAIL ADDRESS: STREET 1: 4465 NORTHPARK DRIVE STREET 2: SUITE 100 CITY: COLORADO SPRINGS STATE: CO ZIP: 80907 10-K 1 2 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ________ to______________ Commission file number 0-12444-D THE ROCKIES FUND, INC. (Exact Name of Registrant as Specified in its Charter) Nevada 84-0928022 (State or other jurisdiction I.R.S. Employer of incorporation or organization) Identification number 5373 North Union, Colorado Springs, Colorado 80918 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code:(719) 590-4900 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: Title of Each Class $.01 Par Value Common Stock Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 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 [ ] As of December 31, 1998, the aggregate market value of the Common Stock of the Registrant based upon the average of the closing bid and asked prices of the Common Stock as quoted on the internet via AOL held by non-affiliates of the Registrant was $1,762,058. As of December 31, 1998, 640,256 shares of Common Stock of the Registrant were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Registrant hereby incorporates herein by reference the following documents: Part IV - Exhibits 1. Incorporated by reference from the Fund's final Registration Statement on Form N-2, No. 2-86057, as filed with the Securities and Exchange Commission. 2. Incorporated by reference from the Fund's Notification Pursuant to Rule 14f-1 under the Securities Exchange Act of 1934, as filed with the Commission on January 15, 1991. 3. Incorporated by reference from the Fund's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. Forward-Looking Statements In addition to historical information, this Annual Report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, and are thus prospective. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, competitive pressures, changing economic conditions, those discussed in the Section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," and other factors, some of which will be outside the control of the Fund. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Fund undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should refer to and carefully review the information in future documents the Fund files with the Securities and Exchange Commission. PART I ITEM 1. BUSINESS History and Background The Rockies Fund, Inc. (the "Fund") was incorporated on August 2, 1983, under the laws of the State of Nevada, for the principal purposes of making venture capital investments in developing companies throughout the United States. The Fund's initial capitalization consisted of a purchase of 12,500 shares of the Fund's Common Stock for a total of $100,000 by Galbreath Financial Investment Corporation, an affiliate of the Fund's former Advisor, Galbreath Financial Services Corporation, on August 5, 1983. On November 16, 1983, the Fund completed a public offering of its stock, whereby the Fund sold a total of 425,000 shares of its $.01 par value Common Stock at a price of $8.00 per share. The Fund received net proceeds from the offering of $2,890,000. Effective January 29, 1991, the Fund entered into an Agreement Concerning the Change in Management ("Agreement"), which provided for the termination of the Fund's management and advisor agreements and the resignation of the then existing Board of Directors and executive officers of the Fund. Prior to January 29, 1991, Galbreath Financial Services Corporation ("Advisor") had provided management and administrative services to the Fund pursuant to a Management Agreement between the parties and had provided investment services pursuant to an Investment Advisory Agreement between the parties. Under the terms of the Agreement, and with the approval of the Fund's majority and controlling stockholder, D.A. Davidson & Company, the former five (5) members of the Fund's Board of Directors, resigned in sequence and the vacancies created by those resignations were filled by the Fund's current Board of Directors, to serve until the next regular annual meeting of the Fund's stockholders. (See Part III - "Directors and Executive Officers") The Fund has elected treatment as a "business development company" under the Investment Company Act of 1940, as amended (the "Act"), and is therefore subject to the provisions of the Act which apply to such companies. As a "business development company", the Fund is relieved from compliance with a number of provisions of the Act which otherwise would significantly affect its operations, but remains subject to other regulations affecting investment companies. In order to maintain its status as a business development company, approximately 70% of the Fund's assets must be comprised of venture capital investments. As a business development company, the Fund invests in, and makes managerial assistance available to, new and developing companies. Prior to making an investment in a company eligible for the Fund's venture capital portfolio, the Fund's management conducts a review of the portfolio company's operations to determine whether it is appropriate for investment by the Fund. This review may include familiarization with the portfolio company's business plan, a tour of the proposed portfolio company's facilities, credit and reference checks and a careful review of the portfolio company's product, its markets and growth prospects. Consistent with the Fund's offer to provide managerial assistance to its portfolio companies, the Fund attempts to arrange for its officers and directors to serve as directors of such companies. Also, the Fund assists portfolio companies in their efforts to recruit management, to define their product planning and marketing strategies, to form financial plans and to develop corporate goals. The Fund also assists such companies in establishing professional relationships, in obtaining additional financing, in evaluating merger opportunities and in conducting private and public offerings of their securities. Financial Information About Industry Segments. Since inception, the Fund has operated primarily in the venture capital industry and plans to continue to devote a majority of its resources to operations within this arena. However, during the third quarter of fiscal 1993, the Fund acquired a 26,500 square foot office building which was sold effective March 31, 1998 for a net gain of approximately $388,000. In a concurrent transaction structured to qualify as a tax free exchange for income tax purposes, the Fund, on April 1, 1998, consummated the purchase of 5 acres of undeveloped commercial real estate, and on September 4, 1998, consummated the purchase of a commercial building to lease as a source of income. The following table sets forth for each of the Fund's last three fiscal years, the amounts of revenue, operating profit or loss and identifiable assets, attributable to the Fund's investment activities and to the operation of the Fund's office building as of March 31, 1998, undeveloped and developed commercial real estate purchased on April 1 and September 4, 1998, respectively. The following information should be read in conjunction with the Financial Statements and related Notes contained elsewhere in this report and Management's Discussion and Analysis of Financial Condition and Results of Operations. As of or For the Years Ended December 31 1998 1997 1996 Investment Income: Venture Capital Industry $ 88,145 $ 63,777 36,057 Real Estate 94,833 57,890 170,434 Net Investment Income/(Loss): Realized Investment Income (after tax) 465,180 (51,374) 1,549,196 Venture Capital Industry (594,979) (11,276) (488,522) Real Estate 24,774 (14,520) 59,833 Identifiable Assets: Venture Capital Industry 4,742,527 3,322,424 2,733,821 Real Estate (land and construction in progress) 504,058 491,242 736,271 Narrative Description of Business. Venture Capital Operations The Fund's primary business remains investing in, and making managerial assistance available to, new and developing companies. To this end, effective July 19, 1994, the Fund changed and expanded its Investment Objective. As amended, the Fund's Investment Objective is capital appreciation by making venture capital investments primarily in developing companies located throughout the United States and its territories which the Fund's management believes offer significant growth opportunities. The Fund also invests in more established companies which are experiencing financial difficulties if such companies present special opportunities for growth. Thus, the Fund invests in companies involving a high degree of risk and possessing the potential for significant capital appreciation. The Fund seeks to follow certain guidelines when identifying potential portfolio companies, and attempts to invest in those companies which are unique with regard to their products or their production or marketing techniques. The Fund also looks for investment opportunities in companies that produce products for which there is a discernible demand, at competitive costs. Strong growth potential, a reasonable opportunity for liquidity, increases in gross revenues in excess of industry averages and a lack of dependence upon governmental contracts or any one sector of the economy, are important factors which the Fund generally considers prior to making an investment. The Fund presently has three full time and one part time employee. The Fund's executive officers and directors screen, evaluate and structure investments and provide managerial assistance to portfolio companies. The Fund's officers and directors provide guidance regarding the propriety and structuring of investments and establish periodically the valuation of securities held by the Fund. The venture capital business is highly competitive. A recent dramatic increase in the number of businesses engaged in venture capital investment activities has meant that a larger number of firms are competing for a limited number of attractive investment opportunities. Notwithstanding these developments, however, no single firm or group of firms dominates the industry. Where possible, the Fund seeks to participate with other venture capitalists in their investment activities. The following descriptions of certain companies in which the Fund has invested contain information which has been obtained from officers and directors of the respective companies, and from documents furnished to the Fund by such companies. The description of the Fund's investments includes valuation information which is based upon certain basic valuation methods which are, the Public Market Method (used when there is an established public market for the portfolio company's securities), the Private Market Method (based upon private transactions), the Appraisal Method (reflecting a comparison between the portfolio company and other public or private companies engaged in the same or similar business activities), and the Cost Method (based upon the cost of the Fund's investments as adjusted to reflect significant developments affecting the investment). In order to be as accurate as possible, the valuation process undertaken by the Fund's Board of Directors attempts to take into account all known information about a particular investment company including but not limited to: - Fundamental business performance of an investee company and that of its competitors - Market valuation of companies in the same or similar industries - Market liquidity of an investee company and its competitors - The estimated value in a private sale including the value of intangibles The valuations of the portfolio companies are to represent a potential transaction between a willing buyer and a willing seller in an orderly market. The valuations are not intended to be for liquidation purposes with a time constraint. Accordingly, the portfolio valuations as determined in good faith by the Board of Directors should be viewed as an indication of reasonable value and not as a representation of a final sales price. PORTFOLIO COMPANIES ALTA CALIFORNIA BROADCASTING The Fund, at December 31, 1998, held 255,000 shares of Alta California Broadcasting ("Alta") common stock, which is the result of a dividend declaration on December 21, 1998. The dividend shares are subject to registration with the SEC; however, there is no assurance that such registration will ever become affective. The evidence of ownership is based upon notification of the dividend declaration by Alta. The Fund has been advised by Alta that the Net Tangible Book Value per share at December 31, 1998 was $1.39. However, in light of the above circumstances, the Board of Directors has determined the Fair Value of Alta to be $1.00 per share or $255,000. AMERICAN EDUCATIONAL PRODUCTS, INC. The Fund, at December 31, 1998, held 16,500 shares of American Educational Products, Inc. common stock. The stock is restricted as to sale due to the company being an affiliate, non- income producing and has been valued by the Board of Directors at its quoted market value of $9.50 per share or $156,750. ASTEA INTERNATIONAL The Fund, at December 31, 1998, held 5,000 shares of Astea International common stock, which stock is unrestricted as to sale, non-income producing, and has been valued at its quoted market price of $1.6875 per share or $8,437.50. BIOSOURCE INTERNATIONAL The Fund, at December 31, 1998, held 90,000 shares of Biosource International common stock which stock is unrestricted as to sale, non-income producing, and has been valued at its quoted market price of $2.9375 per share or $264,375. ECLIPSE fka BEAR STAR, L.L.C. fka COLUMBINE HOME SALES,L.L.C. The Fund at December 31, 1998, held 305,000 common shares of Eclipse kfa Bear Star, L.L.C., which investment is restricted as to sale, non-income producing, and has been valued by the Board of Directors at $0.00. The Fund also holds a note receivable from Eclipse with remaining amounts due of $5,814. The note accrues interest at the rate of 10% per year, and is due on demand. COVA TECHNOLOGIES The Fund, at December 31, 1998, held 917 shares of COVA Technologies common stock, which stock is restricted as to sale, non-income producing, and has been valued by the Board of Directors at its cost of $20,035. DAMACH, INC. The Fund, at December 31, 1998, held a note receivable from Damach in the amount of $32,500, which accrues interest at the rate of 12% per year and was originally due on March 31, 1997. An agreement was signed on March 4, 1997; to extend the promissory note on a month to month basis or until the Fund makes a written request for payment. EXPLORATION COMPANY, THE The Fund, at December 31, 1998, held 30,600 shares of The Exploration Company common stock, which stock is unrestricted as to sale, non-income producing, and has been valued at its quoted market price of $.9375 per share or $28,687.50. GEORGESON, PHIL During 1998, notes owed by Mr. Georgeson were reclassed as uncollectible and expenses as bad debt. GLOBAL CASINOS, INC. The Fund, at December 31, 1998, held 17,680 shares of Global Casinos, Inc. common stock valued at its quoted market price of $1.1875 per share, or $20,995. The Fund, at December 31, 1998, also held 291,667 shares of Global Casinos, Inc. Class C preferred stock. The Fund accepted the Class C preferred stock when it agreed to exchange $287,220 principal and $62,780 in accrued interest due to the Fund on various note receivables. The stock has been valued at its conversion market price of $1.1875 per share, or $346,355 which is below cost. Both positions are restricted as to sale due to the company being an affiliate, non-income producing. The Fund, at December 31, 1998, also held a note receivable from Global Casinos, Inc. in the amount of $163,343, which note is unsecured, accrues interest at the rate of 12% per year, and is due on demand. Said note is convertible into shares of Global Casinos, Inc. common stock at a conversion price of $5.00 per share. The Fund holds a second note receivable from Global Casinos in the amount of $11,246, which note is unsecured, accrues interest at the rate of 9% per year, is due on demand, and is convertible into Global Casinos common stock at $5.00 per share. GLOBEX MINING ENTERPRISES The Fund, at December 31, 1998, held 33,000 shares of Globex Mining Enterprises common stock, which stock is unrestricted as to sale, non-income producing and has been valued at its quoted market price of $.09 per share or $2,970. HAMPTON COURT RESOURCES The Fund, at December 31, 1998, held 12,500 shares of Hampton Court Resources common stock, which stock is restricted as to sale, non-income producing and has been valued at its quoted market price of $.91 per share or $11,375. HAWKS INDUSTRIES The Fund, at December 31, 1998, held 3,000 shares of Hawks Industries common stock, which stock is unrestricted as to sale, non-income producing and has been valued at its quoted market price of $1.125 per share or $3,375. INTERNATIONAL REMOTE IMAGING At December 31, 1998, the Fund held 10,000 shares of International Remote Imaging common stock, which stock is unrestricted as to sale, non-income producing and has been valued at its quoted market price of $.75 per share or $7,500. J2 COMMUNICATIONS The Fund, at December 31, 1998, held 56,134 shares of J2 Communications common stock, after giving effect to a 1-for-3 reverse split. The stock is unrestricted as to sale, non-income producing and has been valued at its quoted market price of $2.00 per share or $112,268. KINETIKS.COM The Fund, at December 31, 1998, held 400,000 shares of Kinetiks.com common stock, which stock is restricted as to sale and non-income producing. Because Kinetiks is in the process of negotiating a favorable settlement with creditors and is in the process of filing its past due Forms 10KSB and 10QSB, the stock has been valued by the Board of Directors at 2/3 its quoted market price of $.17 per share which is $.11 per share or $44,000. The Fund also held warrants to purchase an additional 1,150,000 shares of Kinetiks.com common stock at an exercise price of $.25 per share. The Board of Directors has valued the warrants at $0. The Fund also held a note receivable in the amount of $25,000 which note is unsecured, accrues interest at the rate of 10% per year, and was due on March 30, 1997. The note provides for a default interest rate of 18% and additional 50,000 warrants for each 30-day period that it remains unpaid. The Fund holds a second note receivable from Kinetiks.com in the amount of $61,476 which note is unsecured, accrues interest at the rate of 8% per year and is due on demand. LAND RESOURCE CORPORATION The Fund, at December 31, 1998, held 10,000 shares of Land Resource Corporation common stock, which stock is restricted as to sale, non-income producing, and has been valued by the Board of Directors at its cost of $1.00 per share or $10,000. MARCO FOODS, INC. The Fund, at December 31, 1998, held a note receivable from Marco Foods in the amount of $181,526, which note is unsecured, accrues interest at the rate of 12% per year and is due on demand. MORROW SNOWBOARDS The Fund, at December 31, 1998, held 7,000 shares of Morrow Snowboards common stock, which stock is unrestricted as to sale, non-income producing and has been valued at its quoted market price of $.8125 per share or $5,687.50. MULTI-LINK TELECOMMUNICATIONS The Fund, at December 31, 1998, held 25,000 shares of Multi- Link Telecommunications common stock, which stock is restricted as to sale, non-income producing and has been valued at its cost of $1.00 per share or $25,000. ONLINE SYSTEM SERVICES At December 31, 1998, the Fund held 8,000 shares of Online System Services common stock, which stock is unrestricted as to sale, non-income producing and has been valued at its quoted market price of $13.00 per share or $104,000. PREMIER CONCEPTS The Fund, at December 31, 1998, held 35,000 shares of Premier Concepts common stock, which stock is unrestricted as to sale, non-income producing and has been valued at its quoted market price of $.6875 per share or $24,062.50. REDWOOD BROADCASTING, INC. The Fund, at December 31, 1998, held 30,000 shares of Redwood Broadcasting common stock, which stock is partially restricted as to sale, non-income producing, and has been valued at its quoted market price of $4.00 per share or $120,000. REDWOOD ENERGY At December 31, 1998, the Fund held 20,000 shares of Redwood Energy common stock, which stock is unrestricted as to sale, non- income producing and has been valued at its quoted market price of $.46 per share or $9,200. SOUTHSHORE CORPORATION At December 31, 1998, the Fund held 15,000 shares of Southshore Corporation common stock, which stock is unrestricted as to sale, non-income producing, and has been valued at its quoted market price of $.03125 per share or $468.75. TRAINING DEVICES, INC. The Fund, at December 31, 1998, held 20,000 shares of Training Devices common stock. The stock is restricted as to sale, non-income producing, and has been valued by the Board of Directors at $2.00 per share or $40,000, based on the price of the Company's most recent financing in October of 1997. USASURANCE GROUP The Fund, at December 31, 1998, held 41,250 shares of Usasurance Group common stock, which stock is unrestricted as to sale, non-income producing, and has been valued at its quoted market price of $4.125 or $170,156. WEBQUEST The Fund, at December 31, 1998, held a note receivable from Webquest in the amount of $104,676, which is unsecures, accrued interest at the rate of 8% per year and is due on demand. WHITEWING LABS The Fund, at December 31, 1998, held 23,500 shares of Whitewing Labs common stock, which stock is unrestricted as to sale, non-income producing, and has been valued at its quoted market price of $.625 per share or $14,687.50. WORLD CYBERLINK The Fund, at December 31, 1998, held 8,750 shares of World Cyberlink common stock, which stock is unrestricted as to sale, non-income producing, and has been valued at its quoted market price of $2.875 per share or $25,156. ITEM 2. PROPERTIES Real Estate Operations During the year ended December 31, 1993 the Fund purchased a 26,500 square foot office building located in Colorado Springs, Colorado (the "Northpark Building"). The Building was acquired primarily to provide office space for the Fund and as a potential source of income. The Fund sold its Northpark Building Effective March 31, 1997. The sale was structured as a tax-free exchange under Section 1031 of the Internal Revenue Code of 1986, as amended. The proceeds received were utilized to pay approximately $452,000 of mortgage, line of credit and other debt resulting in a net gain of $388,000. In a concurrent transaction structured to qualify as a tax- free exchange under Section 1031 of the Internal Revenue Code of 1986, as amended, the Fund, on April 1, 1998, consummated the purchase of 5 acres of undeveloped commercial real estate located at 3210 Woodman Road, Colorado Springs, CO (the "Property"). The Fund plans to undertake a phased development of two commercial office buildings on the Property which will, upon completion, consist of an aggregate of 55,000 square feet of commercial office space. The purchase price for the Property was $390,000 and was paid in cash at the time of closing, utilizing a portion of the proceeds realized by the Fund from the sale of the Northpark Building. Real Estate Investment Effective September 4, 1997, The Fund purchased commercial real estate located at 3515 North Chestnut, Colorado Springs, (the "Chestnut Building") for a purchase price of $621,358. The Fund utilized $100,000 from the Northpark Building sale proceeds towards the purchase of the new Chestnut Building as a tax-free exchange under Section 1031 to avoid paying current taxes on the Northpark Building gain. The Fund borrowed the remaining $500,000 from State Bank and Trust at an initial interest rate of 9.75% with the assignment of all rents as collateral. The Fund has signed a business lease agreement to lease the new Chestnut Building for 8 months and 9 days expiring on September 1, 1998 for $35,000. Gerald L. Wiebe and Weebee Properties the "tenant" agreed to pay for all property taxes, utilities, insurance and maintenance associated with the building during the term of the lease. In addition, the Fund agreed to sell and the tenant agreed to buy the Chestnut Building for $775,000 upon the completion of the lease, September 1, 1998, for an approximate net gain of $155,000. As of December 31, 1998, the tenant was in default of the Chestnut Building purchase agreement and therefore paid to the Fund the sum of $45,000 on January 27, 1999 for rent and fees in addition to extending the purchase agreement to February 28, 1999. On February 26, 1999, the tenant paid to the Fund an additional $15,000 to extend the closing to March 31, 1999 and on April 9, 1999 the tenant paid to the Fund $12,000 to extend the closing to April 30, 1999. On March 17, 1998, the Fund sold its 20% investment in the Plaza Hotel & Apartments in Thermopolis, Wyoming (the "Hotel Investment"). The hotel, which was purchased on September 24, 1997, was sold for its original purchase price of $200,000, of that $50,000 was paid in cash and the purchaser assumed a $150,000 note to Wyoming Resorts, LLC. Office Facilities The Fund, during September of 1998 moved its executive office space to 5373 North Union, Suite 100, Colorado Springs, CO., 80918, with a three year contract through September, 2001 at $9.50 per square foot lease and $4.774 square foot for common area maintenance ("CAM") charge per year. The CAM charge will escalate depending on the actual building maintenance usage determined for the year. The commercial real estate market in Colorado Springs, Colorado, although steadily improving over the last several years, still remains very competitive. While the Board does not believe that a single firm or group dominates the commercial real estate industry in Colorado Springs, many of the participants are well-established and possess far greater financial and market resources than the Fund. Income Taxes During the year ended December 31, 1997, The Fund utilized the remaining net operating loss carryforward. ITEM 3. LEGAL PROCEEDINGS Starting in 1994, the Fund received requests for information from the United States Securities and Exchange Commission ("SEC") related to investigations begun by the SEC during 1994 into various matters, including the administrative and record keeping practices of the Fund, its securities trading activities and those of its officers and directors. In September 1996, the Fund was notified by the Commission's Staff that it intended to request that the Commission commence an administrative proceeding against the Fund, its President and its directors based upon certain transactions in securities then included in the Fund's securities portfolio. In July 1997, the SEC informed us that the Staff was planning to recommend an enforcement action against the Fund's President for certain additional alleged violations of the federal securities laws. On June 1998, the Commission issued an order instituting public administrative proceedings. From November 2 through November 6, 1998, an administrative trial was held at which the Fund, its President and its directors contested the Staff's allegations, which they believe to be substantially without merit, and put on extensive defensive evidence. The parties are in process of exchanging proposed findings of fact and conclusions of law and legal briefs. As its exclusive relief against the Fund, the Commissions Staff has requested the entry of an order directing the Fund to cease and desist from committing the securities law violations alleged by the Staff in the enforcement proceeding. In addition, the Staff has requested entry of such an order against the Fund's President and its directors along with certain other relief. No decision has been rendered and there is no timetable by which a decision must be made. Under the circumstances, the Fund cannot predict with any certainty the outcome of the action or whether the matter will have a material impact upon the Fund or its President or directors. Other than the foregoing, the Fund is not a party to any material pending legal proceeding. ITEM 4. MATTERS SUBMITTED TO VOTE OF SECURITY HOLDERS The Fund did not submit any matters to a vote of its security holders during the fourth quarter of its fiscal year ending December 31, 1998. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Price Range of Common Stock The outstanding shares of common stock, are traded over-the- counter and quoted in the OTC Electronic Bulletin Board under the symbol "ROCE." The reported high and low bid prices for the common stock are shown below for the period from January 1, 1997 through March 31, 1999: Bid Low High ________________________________________________________________ 1997 First Quarter 4.00 4.125 Second Quarter 3.50 4.125 Third Quarter 4.00 4.375 Fourth Quarter 4.375 4.375 _________________________________________________________________ 1998 First Quarter 4.375 4.375 Second Quarter 4.375 4.375 Third Quarter 4.25 4.375 Fourth Quarter 4.375 4.375 ________________________________________________________________ 1999 First Quarter 4.6875 4.6875 (through March 31, 1999) The high bid price of the Fund's common stock as of March 31, 1999 was $4.375. The prices presented are bid prices which represent prices between broker-dealers and do not include retail mark-ups and mark-downs or any commissions to the broker-dealer. The prices do not reflect prices in actual transactions. As of December 31, 1998, there were approximately 106 holders of record of the Fund's common stock. The closing bid price of the stock on that date was $ 4.375. Dividends No cash dividends were paid by the Fund in 1997 or 1998. ITEM 6. SELECTED FINANCIAL DATA The selected financial data presented below is derived from audited financial statements of the Fund. The following information should be read in conjunction with the Financial Statements and related Notes contained elsewhere in this report and Management's Discussion and Analysis of Financial Condition and Results of Operations. Balance Sheet Data at December 31 ___________________________________________________________________________ 1998 1997 1996 1995 1994 ___________________________________________________________________________ Assets Investments $ 3,150,123 $ 3,148,989 $ 2,154,497 $ 1,400,374 $ 1,699,582 Cash 241,806 21,890 499,404 1,193 37,081 Property and equipment, net 517,088 509,669 764,521 714,918 655,556 Other 1,337,568 133,118 51,670 70,302 30,858 Total assets __________ _________ __________ __________ __________ 5,246,585 3,813,666 3,470,092 2,186,787 2,423,077 Liabilities Long-term debt,current 885,551 899,106 262,821 191,627 195,444 Payables 1,111,103 164,268 342,107 165,542 65,114 Accrued Interest payable 1,175 8,565 7,428 19,588 14,628 Other accrued liabilities 14,552 23,011 33,901 39,697 12,500 Cashover draft -0- 8,049 -0- 8,653 -0- Deposits, deferred rent and deferred taxes 191,021 54,334 -0- -0- -0- Long-term liabilities 393,681 351,531 375,103 454,116 428,352 Accrued income taxes 91,121 -0- 118,000 -0- -0- Total liabilities 2,668,204 1,508,864 1,139,360 879,223 716,038 Net assets 2,558,381 2,304,802 2,330,732 1,307,564 1,707,039 Net assets per share (shares issued and outstanding: 640,256 in 1992 - 1998) $ 4.00 $ 3.60 $ 3.64 $ 2.04 $ 2.67 Statement of Operations Data for Years Ended December 31 _____________________________________________________________________________ 1998 1997 1996 1995 1994 _____________________________________________________________________________ Investment Income $ 182,978 $ 121,667 $ 206,491 $177,536 $166,575 Gain on sale of land and building -0- 388,476 -0- -0- -0- Less expenses 753,183 535,934 635,180 436,478 531,724 _________ _________ ________ ________ _______ Net Investment loss (570,205) (25,796) (428,689) (258,942) (365,149) Net realized gain (loss) from sales and permanent write-downs of securities 465,180 (51,374) 1,549,196 31,889 192,577 Unrealized net appreciation (depreciation) of investments 358,604 51,240 (97,339) (172,422) 228,025 _________ _________ _________ _________ _________ Net increase (decrease) in net assets from investment activities $ 253,579 $(25,930) $ 1,023,168 $(399,475) $ 55,453 Per share amounts: Net investment loss $ (0.89) $ (0.4) $ (0.67) $ (0.40) $ (0.56) Net realized gains from investments 0.73 (0.08) 2.42 0.05 0.30 Net unrealized appreciation (depreciation )of net investments 0.56 0.08 (0.15) (0.27) 0.35 _________ _________ __________ _________ _________ Net increase (decrease) in net assets per common share from investment activities $ 0.40 $ (0.4) $ 1.60 $ (.62) $ 0.09 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following discussion and analysis should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this report. Liquidity and Capital Resources - December 31, 1998. During the year ended December 31, 1998, the Fund incurred realized gains from sales of securities which were offset by unrealized depreciation of investments. Total assets increased accordingly: Investments increased from $3,148,989 on December 31, 1997 to $3,150,123 on December 31, 1998, an increase of $1,134 or approximately .04%, primarily due to the sale of Guardian Technologies, Lone Oak Vineyards, Cusa, Tels, and portions of American Education Products, Redwood Broadcasting and Usassurance. Notes receivable, net of allowances, increased from $458,158 on December 31, 1997 to $554,582 on December 31, 1998, an increase of $96,424 or 21.1%. Global Casinos converted $350,000 of their note, for 291,667 shares of preferred stock at $1.20 per share. Global Casinos as of December 31, 1998, had a remaining note receivable for $174,589 or 32% of total note receivables. Marco Foods comprised 33%, Webquest 19% and Kinetiks.com 16% of total notes receivable. The commercial real estate (Chestnut Building) is under contract for sale, representing an increase in value of approximately $144,000 as of December 31, 1998. The hotel investment was sold during 1998 for its equal $200,000 which was the Fund's cost. Cash increased significantly from $21,890 at December 31, 1997 to $241,806 as of December 31, 1998, an increase of 219,916 or 1,005%, primarily due to security sale proceeds. Property and Equipment increased from $509,669 as of December 31, 1997, to $517,088 as of December 31, 1998, an increase of 7,419 or 1.5%. Other assets increased significantly from $133,118 as of December 31, 1997 to 1,337,568 as of December 31, 1998, an increase of $1,204,450 or 905%, primarily due to securities sold yet awaiting proceeds as of December 31, 1998. Based on the foregoing, total assets increased from $3,813,666 as of December 31, 1997, to $5,246,585 as of December 31, 1998, an increase of 1,432,919 or 37.6%. Current maturities of long-term debt decreased from $899,106 as of December 31, 1997, to $885,551 as of December 31, 1998 a decrease of $13,555 or 1.51%. Payables increased significantly from $164,268 at December 31, 1997 to $1,111,103, an increase of $946,835 or 576%, due to investment securities purchased as of December 31, 1998 and funds not settling in accounts by the end of the year. The Fund, as of December 31, 1998 paid off a line of credit for $74,500. The Fund, as December 31, 1998 incurred approximately $329,900 in deferred tax liability due to the gain on the sale of the Northpark building, utilized in a 1031 tax exchange, and largely due to the Funds unrealized gain for 1998 of $358,604. The Fund utilized all of its net operating loss carryforwards in previous tax years and, therefore, accrued $91,121 of current taxes. As a result, total liabilities increased from $1,508,864 at December 31, 1997 to $2,668,204 on December 31, 1998 an increase of $1,159,340 or 76.8%. Net assets increased from $2,304,802 at December 31, 1997 to $2,558,381 at December 31, 1998 and from $3.60 per share to $4.00 per share, respectively, an increase of $.40 per share or approximately 11%. Other than the 1999 anticipated sale of the Fund's Chestnut building, Management knows of no trends or demands, commitments, events or uncertainties which will result in the Fund's liquidity or capital resources materially increasing or decreasing. Results of Operations - 1998 Compared to 1997 and 1996 As a direct result of the Fund's acquisition of the Northpark building in Colorado Springs, Colorado, during the third quarter of 1993, in addition to the Northpark building being fully leased in 1997, and sold as of March 31, 1997, and the Funds purchase of the Chestnut building as of September, 4, 1997, rental income has varied from $170,434 in 1996, to $57,890 in 1997, to $94,833 in 1998. Interest and dividend income increased significantly from $30,248 in 1996, to $63,777 in 1997, to $88,145 in 1998, mainly attributable to the increase in security investments and notes receivable. Therefore, total investment income changed form $206,491 in 1996, to $121,667 in 1997, to $182,978 as of December 31, 1998. Total expenses changed from $635,180 in 1996, to $535,939 in 1997 to $753,183 in 1998. Contributing to the change in expenses from 1997 to 1998 was an increase in professional fees of 321%, due to an increase in legal fees. Interest expense increased 27% due to a full years mortgage on the Chestnut Building and investment expense increased 72% associated with the Funds increase in investment gains. As a result, net investment loss increased to $(570,205) in 1998, compared to $(414,267) in 1997, and $(428,689) in 1996. Net realized gain from sale of investments increased significantly in 1998 to $465,180 after taxes from $(51,374) in 1997 and $1,549,196 in 1996. The net gain in sales for 1998 are mainly attributable to the sales of American Education Products, Global Casinos, Lone Oaks Vineyards, Redwood Broadcasting and Usassurance. The net realized gain for 1996 is mainly attributable to the sale of Shiva Corp. (fka Airsoft) which increased $1,846,098 in value during 1996. Net unrealized depreciation of investments increased in 1998 to $358,604 and to $51,240 in 1997 from $(97,339) in 1996. As of December 31, 1998 the Fund had a net gain from investments of $823,784 and a net increase in net assets of $253,579 resulting from operations. Other than the 1999 anticipated sale of the Funds Chestnut building , Management knows of no trends or uncertainties that will have any material impact on the income or expenses of the Fund. Recently issued accounting pronouncements The Financial Accounting Standard's Board recently issued Statement of Financial Accounting Standard (SFAS) No's 130 and 131, "Reporting Comprehensive Income" and "Disclosures about Segments of an Enterprise and Related Information," respectively. Both of these statements are effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes requirements for disclosure of comprehensive income which includes certain items previously not included on the statement of income including minimum pension liability adjustments and foreign currency translation adjustments, among others. Reclassification of earlier financial statements for comparative purposes is required. SFAS No. 131 revises existing standards for reporting information about operating segments and requires the reporting of selected information in interim financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. Management believes that implementation of SFAS No. 130 and No. 131 will not materially impact the Fund's financial statements. Year 2000 issues The Company recognized the need to ensure its operations will not be adversely impacted by Year 2000 software failures. Software failures due to processing errors potentially arising from calculations using the Year 2000 date are a known risk. The Company is addressing this risk to the availability and integrity of financial systems and the reliability of the operational systems. The Company is evaluating and managing the risks and cost associated with this problem, including communicating with brokers, custodians and trust companies, and others with which it does business to coordinate Year 2000 conversion. The total cost of compliance and its effect on the Fund's future results of operations is being determined as part of the detailed conversion planning process. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Item 14(a) below for a list of the Financial Statements and Financial Statement Schedules included in this report following the signature page. The supplementary financial information required by Item 302 of Regulation S-K does not apply to the Fund. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On February 1, 1999, the client-auditor relationship between the Company and its principal accountants, Gelfond Hochstadt, Pangburn & Co., ceased. The dismissal of Gelfond Hoschstadt Pangburn & Co., was effective February 1, 1999. In connection with the audits of the Company's financials statements for each of the fiscal years ended December 31, 1997 and 1996, there were no disagreements with Gelfond Hochstadt Pangburn & Co. on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of Gelfond Hochstadt Pangburn & Co., would have caused Gelfond Hoschstadt Pangburn & Co. to make reference to the matter in their report. The Fund has retained the accounting firm of Gerald R. Hendricks & Co., P.C. to serve as the Fund's independent accountant to audit the Fund's financial statements. This engagement was effective February 12, 1999. Prior to its engagement as the Fund's principal independent accountant, Gerald R. Hendricks & Co., P.C.. had not been consulted by the Fund either with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Fund's financial statements or on any matter which was the subject of any prior disagreement between the Fund and its previous certifying accountant. THE ROCKIES FUND, INC. YEARS ENDED DECEMBER 31, 1998 AND 1997 TABLE OF CONTENTS _________________________________________________________________ Independent auditor's report Independent auditors' report Financial statements: Statements of assets and liabilities Schedules of investments Statements of operations Statements of shareholders' equity Statements of cash flows Statements of changes in net assets Notes to financial statements To the Shareholders The Rockies Fund, Inc. Independent Auditor's Report I have audited the accompanying statement of assets and liabilities of The Rockies Fund, Inc. (the "Fund") including the schedule of investments as of December 31, 1998 and the related statement of operations, stockholders' equity, cash flow, and changes in net assets for the year then ended. These financial statements are the responsibility of the Fund's management. My responsibility is to express an opinion on these financial statements and schedule based on my audit. The financial statements of the Fund as of December 31, 1997, were audited by other auditors whose report dated March 30, 1998, included an explanatory paragraph that described the dollar amount and percentage to net assets of securities that were valued by the Board of Directors without a readily ascertainable market value as discussed in Note 1 to the financial statements. I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedules. My procedures included confirmation of securities owned as of December 31, 1998, by correspondence with custodian and brokers or verification by examination. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion. In my opinion, the financial statements and schedule referred to above present fairly, in all material respects, the financial position of The Rockies Fund, Inc. as of December 31, 1998 and the results of its operations, its cash flows, and changes in net assets for the years then ended in conformity with generally accepted accounting principles. As explained in Note 1, the financial statements include securities valued at $696,000 (28% of net assets) at December 31, 1998, whose values have been estimated by the Board of Directors in the absence of readily ascertainable market values. I have reviewed the procedures used by the Board of directors in arriving at its estimate of value of such securities and have inspected underlying documentation, and, in the circumstances, I believe the procedures are reasonable and the documentation appropriate. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. Gerald R. Hendricks & Company, P.C. Westminster, Colorado March 30, 1999 Independent Auditors' Report The Shareholders and Directors The Rockies Fund, Inc. We have audited the accompanying statement of assets and liabilities of The Rockies Fund, Inc. (the "Fund") including the schedule of investments as of December 31, 1997 and the related statements of operations, shareholders' equity, cash flows, and changes in net assets for the year then ended. These financial statements and schedule are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1997, by correspondence with the brokers or verification by examination. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements and schedule referred to above present fairly, in all material respects, the financial position of The Rockies Fund, Inc. as of December 31, 1997 and the results of its operations, its cash flows, and changes in net assets for the year then ended in conformity with generally accepted accounting principles. As explained in Note 1, the financial statements include securities valued at $256,000 (12% of net assets) at December 31, 1997, whose values have been estimated by the Board of Directors in the absence of readily ascertainable market values. We have reviewed the procedures used by the Board of Directors in arriving at its estimate of value of such securities and have inspected underlying documentation, and, in the circumstances, we believe the procedures are reasonable and the documentation appropriate. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. GELFOND HOCHSTADT PANGBURN & CO. Denver, Colorado March 30, 1998 THE ROCKIES FUND, INC. Statements of Assets and Liabilities December 31, 1998 and 1997 ASSETS 1998 1997 _________________________________________________________________ Investments, at value (cost of $2,760,600 1998 and $3,118,071, 1997): Restricted and $ 1,830,541 $ 1,725,831 unrestricted securities Notes receivable 554,582 458,158 Real estate 765,000 965,000 _________ __________ 3,150,123 3,148,989 Cash: Held by related party (Note 6) 232,351 - Held by others 9,455 21,890 Investment securities sold (Note 6) 1,204,587 72,011 Accounts receivable 31,934 7,500 Accrued interest receivable 52,969 53,045 Prepaid loan payments 43,678 - Receivables from investees (Note 6) - 562 _________ __________ Total current assets 4,725,097 3,303,997 Property and equipment(Notes 2 and 3): Land 390,000 390,000 Automobile 15,162 15,162 Furniture and fixtures 7,939 8,739 Construction in progress 114,058 101,242 527,159 515,143 Less accumulated depreciation: 10,071 5,474 _______ _______ 517,088 509,669 Deposits 4,400 - Total assets 5,246,585 3,813,666 THE ROCKIES FUND, INC. Statements of Assets and Liabilities (Continued) December 31, 1998 and 1997 LIABILITIES 1998 1997 _____________________________________________________________________ Cash overdraft Payables: $ - $ 8,049 Trade 258,394 108,506 Construction (Note 2) - 55,762 Investment securities purchased (Note 6) 852,709 - Accrued liabilities: Property taxes and other 14,552 23,011 Income taxes (Note 4) 91,121 - Interest payable 1,175 8,565 Current maturities of long-term debt (Note 3): Related parties 231,576 172,374 Others 653,975 726,732 Deposits and deferred rent(Note 2) 12,616 41,334 Deferred tax liability (Note 4) 178,405 13,000 Total current liabilities 2,294,523 1,157,333 Long term debt, net of current maturities (Note 3) 242,176 259,531 Deferred tax liability (Note 4) 151,505 92,000 Total liabilities 2,688,204 1,508,864 Commitments and contingencies (Notes 2 and 5) - - Net assets and shareholders equity (equivalent to $4.00 per share for 1998 and $3.60 per share for 1997) $ 2,558,381 $ 2,304,802 COMPONENTS OF NET ASSETS Common stock, .01 par value. Authorized 5,000,000 shares; 640,256 shares issued and outstanding $ 6,403 $ 6,403 Additional paid-in capital 2,901,243 2,901,243 Accumulated deficit: Accumulated net investment loss (2,489,304) (1,919,099) Accumulated net realized gain from sales of securities 1,750,517 1,285,337 Unrealized net appreciation of investments 389,522 30,918 Total accumulated deficit (349,265) (602,844) Net assets $ 2,558,381 $ 2,304,802 THE ROCKIES FUND, INC. Schedule of Investments December 31, 1998 and 1997
Fair Fair Initial **Cost at value at value at investment Dec 31, Dec 31, December 31, Company Position date 1998 1998 1997 Restricted Securities: Alta California Broadcasting 255,000 common stock Dec-98 - 255,000.00 - American Educational 16,500 common stock Sep-96 82,500.00 156,750.00 96,937.50 Products, Inc. (1) 3,000 common stock Sep-96 - - 17,625.00 9,500 common stock Sep-96 - - 55,812.50 2,000 common stock Sep-96 - - 11,750.00 5,000 warrants (ex. @ $4.50) Sep-96 - - 6,875.00 15,000 warrants (ex. @ $4.50) Sep-96 - - 20,625.00 20,000 warrants (ex. @ $4.50) Sep-96 - - 27,500.00 5,000 warrants (ex. @ $10.00) Jun-97 - - 1,250.00 4,000 warrants (ex. @ $10.00) Jun-97 - - 1,000.00 7,000 warrants (ex. @ $10.00) Jun-97 - - 1,750.00 15,000 warrants (ex. @ $10.00) Jun-97 - - 3,750.00 82,500.00 156,750.00 244,875.00 Eclipse(fka)Bear Star,LLC 5% partnership interest Nov-94 0.00 0.00 0.00 305,000 common stock Jun-96 500.00 0.00 - 500.00 0.00 0.00 COVA Technologies 917 common stock Jul-96 20,035.00 20,035.00 20,035.00 Global Casinos, Inc. 3,800 common stock Nov-93 76,000.00 4,512.50 13,300.00 (2) 4,331 common stock Jan-94 50,068.21 5,143.06 15,158.50 1,724 common stock Jan-94 19,931.79 2,047.25 6,034.00 1,250 common stock Feb-94 25,000.00 1,484.38 4,375.00 75 common stock Mar-94 0.00 89.06 262.50 500 common stock Oct-94 10,000.00 593.75 1,750.00 5,000 common stock Feb-96 17,207.50 5,937.50 17,500.00 1,000 common stock Mar-96 3,125.00 1,187.50 3,500.00 291,667 preferred stock 350,000.00 346,354.56 - 551,332.50 367,349.56 61,880.00 Guardian Technologies, Inc. (3) 8,333 common stock Feb-97 - - 22,915.75 90,533 common stock Mar-97 - - 248,965.75 5,000 common stock Jun-97 - - 13,750.00 20,000 common stock Aug-97 - - 55,000.00 2,500 common stock Sep-97 - - 6,875.00 137,000 warrants Mar-97 - - 42,812.50 0.00 0.00 390,319.00 Hampton Court Resources 12,500 common stock Sep-97 11,542.00 11,375.00 16,162.50 Kinetiks.com 100,000 common stock Feb-98 5,000.00 11,000.00 - 100,000 common stock Jul-98 5,000.00 11,000.00 100,000 common stock Sep-98 5,000.00 11,000.00 100,000 common stock Sep-98 5,000.00 11,000.00 2/97 - 1,150,000 warrants 12/98 0.00 0.00 0.00 20,000.00 44,000.00 0.00 Land Resource Corporation 10,000 common stock Mar-97 10,000.00 10,000.00 10,000.00 Lone Oak Vineyards, Inc. 35,000 common stock Feb-97 - - 93,240.00 7,000 common stock Oct-97 - - 18,648.00 7,000 common stock Nov-97 - - 18,648.00 0.00 0.00 130,536.00 Multi-Link Telecommunications 25,000 common stock Nov-98 25,000.00 25,000.00 - Redwood Broadcasting, Inc. 5,000 common stock Feb-97 - - 8,750.00 200,000 common stock Dec-97 - - 350,000.00 20,000 common stock Dec-97 - - 35,000.00 30,000 common stock Dec-97 36,000.00 120,000.00 52,500.00 36,000.00 120,000.00 446,250.00 Training Devices, Inc. 20,000 common stock Feb-97 25,000.00 40,000.00 40,000.00 Total Restricted Securities 781,909.50 1,049,509.56 1,360,057.50 Unrestricted Securities: Astea International 10,000 common stock Feb-97 - - 18,750.00 5,000 common stock Jun-97 16,354.41 8,437.50 9,375.00 16,354.41 8,437.50 28,125.00 Biosource International 7,500 common stock Sep-98 23,891.05 22,031.25 - 25,000 common stock Oct-98 72,764.20 73,437.50 - 20,000 common stock Dec-98 54,582.10 58,750.00 - 37,500 common stock Dec-98 107,915.95 110,156.25 - 259,153.30 264,375.00 0.00 Cable & Company Worldwide 10,000 common stock Mar-97 - - 1,250.00 40,000 common stock Nov-97 - - 5,000.00 0.00 0.00 6,250.00 Cusa Technologies, Inc. 30,000 common stock Nov-97 - - 30,937.50 Exploration Company, The 30,600 common stock Oct-97 92,718.00 28,687.50 61,200.00 400 common stock Oct-97 - - 800.00 5,000 common stock Oct-97 - - 10,000.00 92,718.00 28,687.50 72,000.00 Globex Minining Enterprises 33,000 common stock Sep-98 6,535.00 2,970.00 - Hawks Industries 1,000 common stock Nov-98 1,312.50 1,125.00 - 2,000 common stock Dec-98 2,687.50 2,250.00 - 4,000.00 3,375.00 0.00 International Remote Imaging 10,0000 common stock Nov-98 10,828.45 7,500.00 - J2 Communications (3) 6,668 common stock May-98 20,312.50 13,336.00 - 3,333 common stock Sep-98 6,425.00 6,666.00 - 3,333 common stock Oct-98 6,250.00 6,666.00 - 3,333 common stock Oct-98 6,250.00 6,666.00 - 1,667 common stock Oct-98 2,925.00 3,334.00 - 25,500 common stock Nov-98 35,849.70 51,000.00 - 12,300 common stock Dec-98 21,528.45 24,600.00 - 99,540.65 112,268.00 0.00 Morrow Snowboards 7,000 common stock Nov-98 8,097.20 5,687.50 - Online System Services 8,000 common stock Dec-98 99,203.45 104,000.00 - 99,203.45 104,000.00 0.00 Optimax Industries, Inc. 115,191 common stock Jun-94 - - 18,004.35 Premier Concepts 35,000 common stock Oct-98 18,593.75 24,062.50 - Premium Cigars International, Inc. 5,000 common stock Aug-97 - - 12,812.50 Redwood Energy 20,000 common stock Dec-98 8,377.52 9,200.00 - Shiva Corporation 2,630 common stock Dec-96 0.00 - 22,519.38 Southshore Corporation 15,000 common stock Sep-97 7,715.00 468.75 3,750.00 TELS Corporation 20,000 common stock Aug-96 - - 6,250.00 10,000 common stock Sep-96 - - 3,125.00 0.00 0.00 9,375.00 Usasurance Group 12,000 common stock Jul-96 - - 24,000.00 3,000 common stock Jul-96 - - 6,000.00 10,000 common stock Sep-96 - - 20,000.00 2,500 common stock Oct-96 - - 5,000.00 6,250 common stock Dec-96 - - 12,500.00 3,750 common stock Dec-96 - - 7,500.00 5,750 common stock Dec-96 - - 11,500.00 14,250 common stock Dec-96 33,203.50 58,781.25 28,500.00 1,500 common stock Dec-96 3,850.00 6,187.50 3,000.00 2,500 common stock Jan-97 8,750.00 10,312.50 5,000.00 4,500 common stock Jun-97 6,106.25 18,562.50 9,000.00 7,500 common stock Dec-97 7,875.00 30,937.50 15,000.00 3,500 common stock Oct-98 27,619.50 14,437.50 - 7,500 common stock Nov-98 21,256.90 30,937.50 - 108,661.15 170,156.25 147,000.00 Whitewing Labs 15,000 common stock Jan-97 23,175.00 9,375.00 11,250.00 5,000 common stock Jan-97 - - 3,750.00 8,500 common stock Dec-98 5,861.50 5,312.50 - 29,036.50 14,687.50 15,000.00 World Cyberlink 8,750 common stock Jun-98 8,750.00 25,156.25 - Total Unrestricted Securities 777,564.38 781,031.75 365,773.73 Notes Receivable: Eclipse fka Bear Star L.L.C. Note Receivable, 10% Dec-95 0.00 5,814.06 5,814.06 Damach Note Receivable,12%, due on demand Oct-96 32,500.00 32,500.00 32,500.00 Phil Georgeson Note Receivable,12%, on demand Aug-96 0.00 0.00 4,602.13 Note Receivable,12%, on demand Mar-98 0.00 0.00 - 0.00 0.00 4,602.13 Global Casinos, Inc. Note Receivable, 8%, due 11/1/98 Nov-96 163,343.13 163,343.13 175,000.00 Note Receivable, 9% due on demand Mar-97 11,245.99 11,245.99 43,904.02 Note Receivable, 24% due 4/15/98 Aug-97 0.00 0.00 75,000.00 Note Receivable, 12% due on demand Mar-98 0.00 0.00 - 174,589.12 174,589.12 293,904.02 Kinetiks.com Note Receivable, 10%, (default rate 18%) due 3/30/97 Feb-97 25,000.00 25,000.00 25,000.00 Note Receivable, 8%, due on demand 61,476.26 61,476.26 - 86,476.26 86,476.26 25,000.00 Marco Foods, Inc. Note Receivable, 12% due on demand Jan-97 181,525.88 181,525.88 127,337.50 Webquest Note Receivable, 8% due on demand Dec-98 104,676.21 104,676.21 - Subtotal Notes Receivable 579,767.47 585,581.53 489,157.71 Allowance for Doubtful Notes 0.00 (31,000.00) (31,000.00) Net Notes Receivable 579,767.47 554,581.53 458,157.71 Investments in Real Estate: Chestnut Property Land & Building at 3515 N. Chestnut Sep-97 621,358.38 765,000.00 765,000.00 Thermopolis Property Building at 116 E. Park St. Sep-97 - - 200,000.00 Total Real Estate Investments 621,358.38 765,000.00 965,000.00 Total Investments $ 2,760,599.73 $ 3,150,122.84 $ 3,148,988.94 These entities are considered to be affiliated companies as a result of the Company's investment and/or position on the entity's Board of Directors during the last 90 days. **After permanent write-downs. (1) After giving effect to a 1:5 reverse split (2) After giving effect to a 1:10 reverse split (3) After giving effect to a 1:3 reverse split See accompanying notes to financial statements. Restricted Unrestricted and Real Estate 2,180,832.26 2,595,541.31 2,690,831.23
THE ROCKIES FUND, INC. Statements of Operations Years Ended December 31, 1998 and 1997 1998 1997 ___________________________ Investment income: Rental (Note 2) $ 94,833 $ 57,890 Consulting and other services - 10,822 Interest and dividends (Note 6) 88,145 52,955 182,978 121,667 Expenses: Wages and salaries 133,037 141,817 Professional fees 334,705 79,579 Directors fees 4,000 7,000 Interest 80,133 62,907 Travel and entertainment 45,624 45,959 Office 76,406 112,449 Building expenses 20,526 46,072 Investment expenses (Note 6) 43,019 25,076 Donations 15,733 15,080 753,183 535,939 Investment loss (570,205) (414,272) Gain on sale of land and building (Note 2) - 388,476 Net investment loss $ (570,205) $ (25,796) Realized and unrealized gain (loss) from investments: Net realized gain (loss) from investments $ 793,299 $ (51,374) Income tax expense (Note 4) (328,119) - 465,180 (51,374) Net unrealized appreciation (depreciation) of investments Beginning of year 30,918 (20,322) End of year 389,522 30,918 Net unrealized appreciation of investments 358,604 51,240 Net gain (loss) from investments 823,784 (134) Net increase (decrease) in net assets resulting from operations $ 253,579 $ (25,930) Per share amounts: Net investment loss $ (0.89) $ (0.04) Net realized gain (loss) from investment 0.73 (0.08) Net unrealized appreciation of investments 0.56 0.08 $ 0.40 $ (0.04) Weighted average common shares outstanding 640,256 640,256 THE ROCKIES FUND, INC. Statements of Shareholders' Equity Years Ended December 31,1998 and 1997 Accumulated deficit ________________________________________________________________
Accumulated net realized gains from Accumulated sales and Unrealized net Additional net permanent appreciation Common paid-in investment write-downs (depreciation) Net stock capital loss Of securities of investments assets Balances at January 1, 1997 $ 6,403 $ 2,901,243 $(1,893,303) $ 1,336,711 $ (20,322) $ 2,330,732 Net investment loss (25,796) (25,796) Net realized gain on investments (51,374) (51,374) Unrealized net appreciation (depreciation) of investments 51,240 51,240 _______ __________ ___________ __________ __________ __________ Balances at December 31, 1997 6,403 2,901,243 (1,919,099) 1,285,337 30,918 2,304,802 Net investment loss (570,205) (570,205) Net realized gain on investments 465,180 465,180 Unrealized net appreciation (depreciation) of investments 358,604 358,604 _______ __________ __________ __________ __________ __________ Balances at December 31, 1998 $ 6,403 $ 2,901,243 $ (2,489,304) $ 1,750,517 $ 389,522 $ 2,558,381
THE ROCKIES FUND, INC. Statements of Cash Flows Years Ended December 31, 1998 and 1997 1998 1997 ______________________________ Cash flows from operating activities: Net investment loss $ (570,205) $ (25,796) Net realized gain (loss) from investments 465,180 (51,374) (105,025) (77,170) Adjustments to reconcile net investment loss and net realized gain from investments to net cash used in operating activities: Net realized gain from investments (465,180) 51,374 Gain on sale of land and building - (388,476) Deferred income tax 224,910 - Depreciation expense 4,597 10,030 Bad debts 7,882 - Decrease (increase) in operating assets: Accounts receivable (24,434) - Accrued interest receivable 76 (40,256) Receivable from investees 562 22,510 Investment securities sold and other assets (1,132,576) (63,702) Prepaid loan payments (43,678) - Increase (decrease) in operating liabilities: Payables 946,835 (177,839) Accrued liabilities 75,272 (127,753) Deposits and deferred rent (28,718) 34,080 (434,452) (680,032) Net cash used in operating activities (539,477) (757,202) Cash flows from investing activities: Proceeds from sales of investments 7,013,708 2,313,477 Purchases of investments (6,348,140) (2,188,031) Proceeds from sale of property and equipment - 1,080,000 Purchases of property - (390,000) Capital expenditures - construction in progress (12,816) (101,242) Increase in deposits (4,400) - Net cash provided by investing activities 648,352 714,204 Cash flows from financing activities: Increase (decrease) in cash overdraft (8,049) 8,049 Proceeds from long-term debt 393,122 - Repayment of long-term debt (274,032) (442,565) Net cash (used in) provided by financing activities 111,041 (434,516) THE ROCKIES FUND, INC. Statements of Cash Flows (Continued) Years Ended December 31, 1998 and 1997 1998 1997 ______________________________ Net increase (decrease) in cash 219,916 (477,514) Cash at beginning of year 21,890 499,404 Cash at end of year $ 241,806 $ 21,890 Supplemental disclosure of cash flows information, cash paid for interest $ 78,958 $ 61,770 Supplemental disclosures of noncash investing and financing activities: During 1997, the Fund purchased a 20% interest in a Hotel Investment property in exchange for a $150,000 promissory note payable and $50,000 cash, the Fund purchased 250,000 shares of Redwood Broadcasting, Inc. in exchange for a $300,000 note payable, and the Fund purchased the Chestnut Building investment in exchange for a $500,000 mortgage note payable and $100,000 cash. During 1998, the Fund sold its 20% interest in a Hotel Investment property for $50,000 cash and the assignment of a $150,000 promissory note payable. During 1998, the Fund exchanged notes receivable with $287,220 in principal and $62,780 in accrued interest for 291,667 shares of Global Casinos, Inc., an affiliate company, Class C preferred shares. THE ROCKIES FUND, INC. Statements of Changes in Net Assets Years Ended December 31, 1998 and 1997 1998 1997 ______________________________ Increase (decrease) in net assets from investment activities: Net investment loss $ (570,205) $ (25,796) Net realized gain (loss) from investments(net of income tax expense of $328,119 in 1998) 465,180 (51,374) Net unrealized appreciation of investments 358,604 51,240 Net increase (decrease) in net assets from investment activities 253,579 (25,930) Net assets at beginning of year 2,304,802 2,330,732 Net assets at end of year $ 2,558,381 $ 2,304,802 THE ROCKIES FUND, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998 AND 1997 1. Organization and summary of significant accounting policies: Organization: The Rockies Fund, Inc. (the "Fund") was incorporated in Nevada on August 2, 1983 for the principal purpose of making venture capital investments in developing companies throughout the United States. The Fund is registered under the Investment Company Act of 1940, as amended, as a business development company. In order to maintain its status as a business development company, approximately seventy percent of the Fund's assets must be comprised of venture capital investments. The Fund currently makes investments in small public and private companies, some of which are in the early stages of development with little or no operating history, or more developed companies that operate at losses or which experience substantial fluctuations in operating results. These companies may also need substantial capital to support expansion or to achieve or maintain a competitive position. Such companies may face intense competition and risks of product and technological obsolescence or rapidly changing regulatory environments which could adversely affect such companies' operations. These companies may have insufficient cash flow to service their debt obligations, including bridge loans made by the Fund. As a result, no assurance can be provided that the fund's investments will not result in substantial or complete losses. The Fund's management serves on the boards of directors of a number of its portfolio companies. A significant portion of the Fund's investments consists of securities that are subject to restrictions on sale. Restricted securities cannot be sold publicly without prior agreement with the issuer to register these securities under the Securities Act of 1933, as amended (the "Act"), or by selling such securities under Rule 144 of the Act, or other rules under the Act which permit only limited sales under specified conditions. The Fund's ability to sell its investments in restricted securities may be limited by, and subject to, the lack or limited nature of a trading market for such securities. These limitations could prevent or delay any sale of the Fund's securities or reduce the amount of proceeds that might otherwise be realized. Restricted securities generally sell at a price lower than similar securities that are not subject to restrictions on sale. When restricted securities are sold to the public, the Fund, under certain circumstances, may be deemed an Underwriter or a Controlling Person for the purposes of the Act, and be subject to liabilities as such under the Act. As shown in the accompanying financial statements, the Fund incurred net investment losses for the years ended December 31, 1998 and 1997. The Fund may be required to liquidate investments or obtain debt or equity financing to fund operations in the future. Investment valuation and transactions: Securities listed or traded on an exchange are valued at their last sales price on the exchange where the securities are principally traded. Securities reported on the NASDAQ National Market System are valued at the last sales price on the valuation date or, absent at last sales price, at the closing bid price on the valuation date. Securities traded in the over-the-counter market are valued at the last bid price, based upon quotes furnished by independent market makers for such securities. Investments in notes receivable are valued at net realizable value. The Fund performs on- going evaluations regarding collectibility of receivables and provides allowances for potential losses. In the absence of readily ascertainable market values, investments in restricted securities without quoted market prices are carried at estimated fair value as determined by the Fund's Board of Directors (the "Board"). Due to the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and the differences could be material. The estimated fair value of restricted securities at December 31, 1998 and 1997 total approximately $1,049,500 and $1,360,000, respectively. The estimated fair value of restricted securities whose values have been evaluated by the Board of Directors in the absence of readily attainable market value is approximately $696,000 and $256,000 at December 31, 1998 and 1997, respectively. There estimated fair value of restricted securities comprises 28% and 12% of total net assets at December 31, 1998 and 1997, respectively. Securities transactions are accounted for on a trade date basis. Where possible, realized gains and losses on the sales of investments are determined using the specific identification method. If the specific identification method cannot be utilized, realized gains and losses are determined using the first-in, first-out method. Substantially all of the Fund's investments are non-income producing. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ form those estimates. Recently issued accounting pronouncements: The Financial Accounting Standard's Board recently issued SFAS No.'s 130 and 131, "Reporting Comprehensive Income" and "Disclosures about Segments of an Enterprise and Related Information," respectively. Both of these statements are effective for fiscal years beginning after December 15, 1998. SFAS No. 130 establishes requirements for disclosure of comprehensive income which includes certain items previously not included on the statement of income including minimum pension liability adjustments and foreign currency translation adjustments, among others. Reclassification of earlier financial statements for comparative purposes is required. SFAS No. 131 revises existing standards for reporting information about operating segments and requires the reporting of selected information in interim financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. Management believes that implementation of SFAS No. 130 and No. 131 will not materially impact the Fund's financial statements. Financial instruments: The carrying values of the Fund's financial instruments (other than investments), including cash, receivables, payables, accruals and non-related party debt approximates fair values primarily due to the short maturities of these instruments and based on borrowing rates that management believes are currently available to the Fund for instruments with similar terms. The fair values of the related party debt are not practicable to estimate, due to the related party nature of the underlying transactions. Property and equipment: Property and equipment is recorded at cost. Deprecation is provided over the estimated useful lives of the assets using the straight-line method as follows: furniture, fixtures, and automobile, 5 to 10 years. Management assesses the carrying value of long-lived assets for impairment when circumstances warrant such a review, primarily by considering available appraisal information and current and projected income and annual cash flows on an undiscounted basis. If management determines that an impairment has occurred, and impairment loss is recognized, based on the difference between the assets' carrying values over the estimated fair values. Based on management's annual review, the Fund does not believe that any impairments have occurred in 1998. Accounting for income taxes: Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of operations in the period that includes the enactment date. Earnings (loss) per share: The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128 during 1997. This statement requires dual presentation of basic and diluted earnings per share (EPS) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS amounts are based on the weighted average shares of common stock outstanding. Diluted EPS reflects the potential dilution that could occur if securities other than contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The Company had no potential common stock instruments which would result in diluted EPS in 1998 and 1997. The adoption of SFAS No. 128 did not impact previously reported EPS. Reclassifications: Certain 1997 amounts have been reclassified to conform to the 1998 presentation. 2. Real estate transactions: Through March 31, 1997, the Fund owned a building and land located in Colorado Springs, Colorado (the "Northpark Building"). The Fund occupied certain office space in this building and leased the remaining space to other parties under leases expiring through 2002. Effective March 31, 1997, the Fund sold the Northpark Building, as well as building improvements net of certain liabilities for $1,080,000. The Fund paid the related mortgage and other liabilities of approximately $478,000 and transferred the existing leases to the new building owner. The Fund recognized a $388,000 gain on the transaction. On April 1, 1997, the Fund purchases five acres of undeveloped commercial property located on Colorado Springs, Colorado for $390,000. Through December 31, 1998, the Fund incurred approximately $114,000 of land development and building design costs. Real estate investments: During 1997, the Fund purchased two real estate investments located in Colorado and Wyoming. In September 1997, the Fund purchased a 49,000 square foot commercial office building located in Colorado Springs, Colorado (the "Chestnut Building") for $100,000 cash and a $500,000 mortgage note payable. In December 1997, the Fund entered into an agreement to lease the Chestnut Building to an unrelated party for $35,000 through August 1998, at which time the party has agreed to purchase the building for $775,000. The Fund has extended the closing of the purchase of this building to April 30, 1999 in order for the purchaser to establish a market for a development product. In connection with the various extensions granted, the Fund received extension and rental fees of approximately $107,000 for the year ended December 31, 1998. In September 1997, the Fund also purchased a 20% interest in a 40-room hotel located in Thermopolis, Wyoming (the "Hotel investment"), for $50,000 cash and $150,000 promissory note payable. The hotel Investment was purchased from a party who is a shareholder and board member of certain Fund investee companies. In March 1998, the Fund entered into a contract to sell the 20% interest back to this party for $200,000, of which $50,000 was received in cash and the assumption of the Fund's $150,000 promissory note payable. Office lease: Effective September 1998, the Fund leases office space from an unaffiliated third party. The lease is for a three year contract through August, 2001 and requires the Fund to pay escalating amounts over the life of the lease. In addition, the Fund is required to pay its portion of common area maintenance. The future minimum lease payments are approximately as follows: 1999 57,000 2000 55,000 2001 37,000 $ 149,000 Rent expense for the years ended December 31, 1998 and 1997 was $28,423 and $8,100, respectively. 3. Long-term debt: 1998 1997 ______________________________ Related Parties: Note payable, non-interest bearing,paid in January 1999, unsecured $ 150,000 $ - Other, non-interest bearing, unsecured 1,000 - Notes payable, interest at 8%, due through September 1998, collateralized by the Hotel Investment - 150,000 Notes payable, interest at 7%-12% unsecured, due on demand 6,500 9,244 Note payable, non-interest bearing, paid in March 1998, collateralized by certain Fund investments in securities - 13,130 Total related parties 157,500 172,374 3. Long-term debt (continued): Others: Line of credit, interest at prime plus 2%, due May 1998, collateralized by certain Fund investments in securities - 74,500 Note payable, interest at 8%, principal and interest due in monthly installments of $3,640, due January 2007, collateralized bycertain Fund investments 260,824 281,348 Mortgage note payable, interest at prime plus 1.25% (9.75% at December 31, 1998), principal and interest due in monthly installmentsof $4,790, remaining principal and interest due in August 2002,collateralized by the Chestnut building and an assignment of rents 488,880 497,528 Note payable, interest at 8.75% interest and principal due in monthly installments of $322, due by 2001 collateralized by automobile 8,401 11,393 Borrowings on margin accounts, variable interest rates (8% and 9.5% at December 31, 1998) due on demand 212,122 121,494 Total others 970,227 986,263 Total long-term debt 1,127,727 1,158,636 Less current maturities (885,551) (899,106) $ 242,176 $ 259,531 Aggregate long-term debt maturities are as follows: 1999 $ 885,551 2000 40,695 2001 42,012 2002 6,307 2003 32,723 Thereafter 120,439 $ 1,127,727 The weighted average interest rates on all debt was 8% and 8.8% in 1998 and 1997, respectively. Interest expense incurred on related party debt was $3,115 and $5,362 in 1998 and 1997, respectively. 4. Income taxes: Income tax expense (benefit) consists of the following: Current: 1997 1998 ______________________________ Federal $ 79,440 $(94,000) State 11,681 (11,000) 91,121 (105,000) Deferred: Federal 207,388 94,000 State 29,610 11,000 236,998 105,000 $328,119 $ _ The reconciliation between the statutory federal expense (benefit) and the effective tax is as follows: 1998 1997 ______________________________ Statutory federal income tax expense (benefit 34%) $ 197,777 $ (9,000) State taxes, net of federal income tax benefit 19,196 (1,000) Tax on unrealized appreciation of investment 111,146 - Net operating losses not utilized - 10,000 Income tax expense $ 328,119 $ - The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are as follows: 1998 1997 ________________________________ Deferred tax assets: Net operating loss carryforwards $ - $ (58,000) Net deferred tax assets - (58,000) Deferred tax liabilities: Investments, unrealized net gains 178,405 13,000 Property and equipment deferred gain 151,505 150,000 Gross deferred tax liabilities 329,910 163,000 Net deferred tax liabilities $ 329,910 $ 105,000 Less current portion 178,405 13,000 $ 151,505 $ 92,000 5. Commitments and contingencies: Securities and Exchange Commission investigation: Beginning in 1994, the United States Securities and Exchange Commission (the "SEC") began an investigation into certain matters, including the administrative and record keeping practices of the Fund, its securities trading activities and those of one of its officers. In September 1996, the Fund received notification from the SEC that the SEC staff was planning to recommend that an enforcement action be brought against the Fund, its president, and each of its directors due to certain alleged violations of federal securities laws. The SEC invited the Fund to make a submission setting forth the Fund's position and arguments regarding the SEC staff's planned recommendation. The Fund did so in October 1996, and at the SEC's request, the Fund supplemented its submission in December 1996. In July 1997, the SEC informed the Fund that the Staff was planning to recommend an enforcement action against the Fund's President for certain additional alleged violations of the federal securities laws. In June 1998, the Commission issued an order instituting public administrative proceedings and in November 1998, an administrative trial was held at which the Fund, its President and its directors vigorously contested the Staff's allegations and put on extensive defensive evidence. The parties are in process of exchanging proposed findings of fact and conclusions of law and legal briefs. Management will continue to vigorously defend itself, however management is unable to predict, with any certainty, the outcome of the investigation, or the ultimate effect on the Fund. Employee benefits: The Fund maintains a salary-deferred, simplified employee pension plan. Employer contributions are discretionary, and there were no employer contributions in 1998 and 1997. 6. Transactions with investees and affiliates: Receivables from investees represent reimbursable expenses totaling $562 and $-0- at December 1997 and 1998, respectively. The Fund utilizes a brokerage and trust company as primary custodian of its securities. This company is also a majority shareholder in the Fund. Custodial fees incurred in 1998 and 1997 were $8,900 and $13,234, respectively, and at December 31, 1998, the Fund has a payable due to this affiliate, for investment securities purchased, of approximately $852,709. As of December 31, 1998, the Fund has a receivable due from this affiliate for investment securities sold of $1,184,337. Also at December 31, 1998, this affiliate held cash on behalf of the Fund in the account of $232,251. During the year ended December 31, 1998, the Fund pledged as collateral, for borrowings by Global Casinos, Inc., ("Global") an affiliated company, its Woodman Property. The Fund received no compensation from Global for this transaction. In December 1998, the Fund entered into an agreement with Global whereby the Fund exchanged various notes receivable with $287,220 in principal and $62,780 in accrued interest for 291,667 Global Class C Preferred Stock. The Class C Preferred Stock is entitled to receive dividends at the rate of 7%. Any outstanding unpaid dividends bear interest at 10%. The Class C Preferred Stock is convertible into common shares at the rate of $1.20 per share. Additionally, during the year ended December 31, 1998, the Fund and Marco Foods, Inc. ("Marco") entered into an agreement whereby Marco would reimburse the Fund for rent and certain other general and administrative costs that the Fund personnel provides to Marco. The agreement is on a year to-year basis and the Fund charged Marco $48,000 for rent and services during the year ended December 31, 1998. 7. Subsequent event: On March 30, 1999, the Fund entered into a non-binding letter of intent with two unaffiliated third parties to form a limited liability company (the "LLC") that would sell bulk food in connection with year 2000 readiness. The non- binding agreement calls for the Fund to provide up to $200,000 to the LLC. The non-binding letter of intent is subject due diligence by all parties and the execution of a definitive agreement. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The present term of office of each director will expire at the next annual meeting of shareholders. The name, position with the Fund, and age of each director and officer are as follows: Name Age Title Officer/ Director Since ____________________________________________________________________ Stephen G. Calandrella President, Chief Executive 38 Officer, and Director 1991 Charles C. Powell 45 Director 1991 Clifford C. Thygesen 64 Director 1991 Barbara A. Hamstad Chief Accounting Officer 33 and Treasurer 1996 Gina Garcia-Shaw Chief Administrative 32 Officer and Secretary 1998 ________________________ Stephen G. Calandrella, President and Director. Mr. Calandrella has been President and a Director of The Rockies Fund, Inc., a Colorado-based business development company, since February 1991, and Chief Executive Officer since January 30, 1994. Mr. Calandrella has served as an officer or director of several public companies. He currently serves as President and a member of the Board of Directors of Global Casinos, Inc. a publicly-held company engaged in the ownership and operation of domestic and international casinos and limited stakes gaming properties; and American Educational Products, a NASDAQ listed supplier of children's learning tools. Mr. Calandrella has also engaged in financing and consulting activities for development stage companies, which consist of advising public and private companies on capital formation methods, enhancing shareholder valuations, mergers, acquisitions and corporate restructuring, as well as arranging for bridge loans and equity purchases. Charles M. Powell, Director. Mr. Powell as served as a Director for the Rockies Fund, Inc. since February, 1991. Mr. Powell is currently Vice Presidnet of Sales for The Baan Company, a large internet software company providing general business application software to future 1000 companies. From 1992 to 1998, Mr. Powell was Vice-President of Finance for KaPre Software. From March 1992 to June 1993, Mr. Powell was CEO of Generation 5 Technologies, Inc. From January 1989 to March 1992, he was Director of International Operations at J.D. Edwards & Company, a software company that develops and distributes general business application financial software. From September to December, 1988, Mr. Powell was employed by the company to provide assistance in financial and operation areas. From April 1988 to June 1989, Mr. Powell was President of Sheridan Securities, Inc., an investment banking firm. From January 1987 to March 1988 he was international sales manager for Columbine Systems, a software development Fund for the broadcast industry. From January 1985 to December 1986, he was employed by Aweida Systems engaged in the business of distributing company products, first as Chief Financial Officer and subsequently as Vice President of Marketing. From February 1979 to December 1985, he was employed by Storage Technology, Inc., engaged in the business of manufacturing computer storage devices in a variety of capacities, with his last position being that of Vice President of Financial Marketing. Mr. Powell graduated from the University of Colorado with a Bachelor of Science degree in accounting and finance in 1976 and he received his license as a Certified Public Accountant in 1976. Mr. Powell currently serves as a Director for The Rockies Fund, Kinetics.com and Medix Resources. Clifford C. Thygesen, Director. Mr. Thygesen has served as a Director of the The Rockies Fund Inc. since February, 1991. Mr. Thygesen has also been a Director of American Educational Products, Inc. since 1986, and President since January, 1998. American Education Products is a publicly traded company involved in the manufacture and distribution of educational products, with principal offices in Boulder, Colorado. Mr. Thygesen is also a current Director of Wall Street Racing Stables, a publicly-traded company involved in the ownership, racing and breeding of thoroughbred horses. Mr. Thygesen is also a partner in two land development firms located on Colorado Springs and Fleming, Colorado and a Board of Director for Unasurance Group. From 1971 to 1973, Mr. Thygesen was Vice-President of Operations for the Ithaca Gun Company of Ithaca, New York, a manufacturer of high quality firearms. From 1973 to 1976, Mr. Thygesen served as President of Alpine Designs Corporation, a company which produces backpacking equipment, ski wear and hunting apparel. From 1977 to 1981, he served as Vice-President of Manufacturing for Pure Cycle Corporation, a company that designed water recycling systems for residential use. From 1981 until February, 1988, Mr. Thygesen was President, Chief Operating Officer and a Director of Tri Coast Environmental Corporation, formerly Colorado Venture Capital Corporation. He received his B.S. degree in Industrial Administration from the University of Illinois in 1961. Barbara A. Hamstad, Mrs. Hamstad has served as Internal Accountant for The Rockies Fund, Inc. since September of 1993 and as Chief Accounting Officer and Treasurer since September, 1998. Mrs. Hamstad also serves as Secretary and Treasurer for Marco Foods, Inc., a small public shell actively trading in the stock market. Prior to Mrs. Hamstad's accounting positions she worked as a Vendor Cost Analyst for Raytheon in Santa Barbara, California. From January, 1989, through June, 1992, she analyzed vendor cost proposals for subcontracted components, conducted on- site evaluations of subcontractors, and developed price recommendations based on detailed analyses of cost structure. From June 1987 through August 1988, she worked as a Financial Assistant at IDS Financial Services in San Luis Opisbo, California. Mrs. Hamstad graduated from California Polytechnic State University, San Luis Obispo, CA, with a bachelor's degree in Business Administration, concentrating in Financial Management. Gina Garcia-Shaw, Mrs. Garcia-Shaw joined the Fund on June 1, 1998, as Chief Administrative Officer and Corporate Secretary. Prior to her arrival, Mrs. Garcia-Shaw worked for Pikes Peak Regional Development, a division of the SBA, as Administrative Manager, from April 1996 through April 1998. Her more specific skills included monthly financial statement preparation and reviewing Business Plans for potential SBA loans. Mrs. Garcia- Shaw also brings ten years of experience in banking. October 1988 through April 1996, she was employed by Bank One, which position began as the Secretary to the Vice President. The last year of her tenure Mrs. Garcia-Shaw became an Indirect Lender approving car loans for the local dealership. March 1986, through October 1988, she worked as a Loan Operations Assistant for Colorado National Bank, formerly known as Central Bank. There are no material proceedings to which any director, officer or affiliate of the Fund, or any owner of record or beneficially of more than five percent (5%) of any class of voting securities of the Fund, or any associate of any such director, officer, affiliate of the Fund, or security holder is a party adverse to the Fund or any of its subsidiaries or has a material interest adverse to the Fund or any of its subsidiaries. During the last five (5) years except as set forth herein no director or officer of the Fund has: (4) had any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (4) been convicted in a criminal proceeding or subject to a pending criminal proceeding; (4) been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or (4) been found by a court of competent jurisdiction in a civil action, the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated. Mr. Calandrella serves as President of Global Casinos, Inc., a portfolio and affiliated company. During 1995, Global Casinos, Inc. caused one of its wholly-owned subsidiaries, Casinos USA, Inc. to file a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. In December 1998, the United States Bankruptcy Court for the District of Colorado entered an order confirming a plan of the organization for Casinos USA, Inc. There currently exists no arrangement or understanding between any executive officer and between any other person pursuant to which any person is to be selected as an executive officer. No family relationships exist between any current or prospective executive officer or director. Each director of the Fund who is not also an officer is paid the sum of $1,000 for each quarter. All directors are reimbursed for expenses associated with attendance at Board of Directors meetings of the Fund. Other than the foregoing, no director receives any additional compensation or remuneration as a member of the Fund's Board of Directors. Each Director is elected to serve a term of one (1) year and is elected annually at the regular annual meeting of the Fund's stockholders. Each executive officer is elected annually at the first meeting of the Fund's Board of Directors held immediately following each annual meeting of shareholders. Each executive officer holds office until his successor is duly elected and qualified or until his resignation or until he has been removed in the manner provided by Fund's By-laws. No Director has resigned or declined to stand for reelection to the Board of Directors since the date of the last annual meeting of the Fund's stockholders due to any disagreement with the Fund on any matter relating to the Fund's operations, policies or practices. During the fiscal year ended December 31, 1998, the Fund had four (4) directors meetings which were attended in person by all of the Fund's directors. The Fund does not have a standing audit, nominating or compensation committee of the Board of Directors, or committees performing similar functions. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Under the Securities Laws of the United States, the Fund's Directors, its Executive (and certain other) officers, and any persons holding more than ten percent (10%) of the Fund's common stock are required to report their ownership of the Fund's common stock and any changes in that ownership to the Securities and Exchange Commission and the NASDAQ stock market. Specific due dates for these reports have been established and the Fund is required to report in this Report any failure to file. Based upon information provided to the Company, all of these filing requirements were satisfied by its Officers and Directors and ten percent holders as of December 31, 1998. See ITEM 13 "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS". ITEM 11. EXECUTIVE COMPENSATION The following tables and discussion set forth information with respect to all plan and non-plan compensation awarded to, earned by or paid to the Chief Executive Officer ("CEO"), and the Fund's three (3) most highly compensated executive officers other than the CEO, for all services rendered in all capacities to the Fund and its subsidiaries for each of the Fund's last three (3) completed fiscal years; provided, however, that no disclosure has been made for any executive officer, other than the CEO, whose total annual salary and bonus does not exceed $100,000. ____________________________________________________________________________ SUMMARY COMPENSATION TABLE _____________________________________________________________________________ Long Term Compensation Awards Payouts Annual Compensation _____________________________________________________________________________ Other Name Annual Restricted and Compen- Stock LTIP All Other Principal Salary Bonus sation Award(s) Options/ Payouts Compensa- Position Year ($) ($) ($) ($) SARs(#) ($) Tion ($) ___________________________________________________________________________ 1998 $48,000-0- -0- $-0- -0- -0- -0- -0- -0- Stephen G. Calandrella, 1997 $48,000-0- -0- $-0- -0- -0- -0- -0- -0- President 1996 $48,000-0- -0- $-0- -0- -0- -0- -0- -0- ____________________________________________________________________________ No other executive officer of the Fund received compensation during the years ended December 31, 1998, 1997 or 1996, in excess of $100,000. Only Mr. Calandrella and Ms. Garcia-Shaw participate in the Fund's group health and dental insurance plan. The Fund also provides a Salary Deferred Simplified Employee Pension Plan (SAR- SEP) adopted since September, 1994. There has been no employer contribution made to the SAR-SEP Plan since inception, nor does the Fund incur any administrative fees associated with this Plan. Effective June 30, 1998 Ms. Windy Haddad resigned her position as Chief Administrative Officer and Secretary of the Fund and was therefore resided by Ms. Gina Garcia-Shaw. Ms. Barbara Hamstad, Chief Accounting Officer continued to work part- time throughout fiscal year 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of December 31, 1998, the number of shares of the Fund's common stock owned by each person who owned of record, or was known to own beneficially, more than five percent (5%) of the Fund's outstanding shares of common stock, sets forth the number of shares of the Fund's outstanding common stock beneficially owned by each of the Fund's current directors and officers and sets forth the number of shares of the Fund's common stock beneficially owned by all of the Fund's current directors and officers as a group: Title of Name and Address Amount and Nature Percent Class of Beneficial of Beneficial of Class Owner Ownership(1) _________________________________________________________________ Common D.A Davidson & Co.(2) Stock 8 Third Street, North Great Falls, Montana 59401 257,310 40.2% " Stephen G. Calandrella 234,000 36.5% " Charles C. Powell -0- 0.0% " Clifford C. Thygesen 2,000 0.3% " Barbara A. Hamstad 1,500 0.2% " Gina Garcia-Shaw -0- 0.0% " All Officers and Directors as a Group (5 Persons) 237,500 37.1% 1. Beneficial Owners listed have sole voting and investment power with respect to the shares unless otherwise indicated. 2. Voting and investment power with respect to securities held by D.A. Davidson & Company is exercised by its Board of Directors. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Notes payable to related parties at December 31, 1998 include $6,500 payable to a related party of the Fund's President, which note is unsecured, carries interest at the rate of twelve percent (12%) per annum, and is due upon demand. The Fund currently holds a 5% ownership interest in Eclipse, formerly a wholly owned subsidiary of Bear Star, LLC., and therefore, Eclipse would be considered to be an affiliated company as a result of the Fund's ownership during 1998. As a result of the Fund's investment during 1998 and/or position on the entity's Board of Directors, the Fund would, at various times during fiscal 1998, be considered to have been an affiliate of American Educational Products, Guardian Technologies, Inc., Global Casinos, Inc., and Kinetiks.com. On October 1, 1995, Mr. Calandrella, the Fund's President and Director, was elected to serve as President of Global Casinos, Inc., a portfolio company and affiliate of the Fund. In consideration of his services as President of Global Casinos, Inc., Mr. Calandrella received 9,000 shares in 1998 and has also been granted Incentive Stock Options under the Global Casinos, Inc. Stock Incentive Plan, exercisable to purchase, in the aggregate, 15,000 shares of common stock at an exercise price of $5.00 per share. Of those Incentive Stock Options, 5,000 are fully vested, and the remaining 10,000 Incentive Stock Options vest ratably over two (2) years, subject to Mr. Calandrella's continuing to serve as an executive officer or key employee of Global Casinos, Inc. Mr. Calandrella also serves as a member of the Board of Directors of Global Casinos, Inc. In consideration of his services as a director of Global Casinos, Inc., Mr. Calandrella has been granted Non-Qualified Stock Options exercisable to purchase, in the aggregate, an additional 15,000 shares of common stock at an exercise price of $5.00 per share, of which 5,000 Non- Qualified Stock Options are fully vested, and the remaining 10,000 Non-Qualified Stock Options vest ratably over two (2) years, subject to Mr. Calandrella's continuing to serve as a director of Global Mr. Calandrella and the Rockies Fund combined own shares, options, warrants and convertible notes that if exercised, would represent 331,027 shares of Global Casinos, or approximately 21% of Global's outstanding stock. The Fund in December 1998, converted $350,000 of its notes receivable from Global for 291,667 shares of Global Class C Preferred Stock. The Fund also pledged as collateral without compensation, for the borrowing of Global, its Woodman Property. There exists no arrangement or agreement whereby the Fund has any direct or indirect beneficial interest or pecuniary interest in any of the securities or other compensation issued to Mr. Calandrella in consideration of his services as an executive officer or director of Global Casinos, Inc. As of April 13, 1999, Mr. Calandrella, certain of his family members, The Rockies Fund, Inc. and other entities that are controlled by Mr. Calandrella and his wife, own shares and warrants that represent 1,073,500 and 1,300,000, respectively of Kinetiks.com, Inc. The shares owned represent approximately 32% of the outstanding shares of Kinetiks.com, Inc. Of the shares owned, 900,000 shares were purchased at $.05 per share directly from the former president and vice president of Kinetiks.com, Inc. in private transactions. The remaining shares owned were purchased in open market transactions. The warrants were issued pursuant to a promissory note executed by Kinetiks.com, Inc. whereby the Fund receives 50,000 warrants for each month that the promissory note remains in default. The warrants are exercisable at the rate of $.25 per share. During the year ended December 31, 1998, the Rockies Fund, Inc. and Marco Foods, Inc. ("Marco") entered into an agreement whereby Marco would reimburse the Fund for rent and certain other general and administrative costs that the Fund personnel provides to Marco. The agreement is on a year-to year basis. The Rockies Fund, Inc. charged Marco $48,000 for rent and services during the year ended December 31, 1998. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K. a. 1. Financial Statements. Independent Auditors' Reports; Statements of Assets and Liabilities - December 31, 1998 and 1997; Schedules of Investments - December 31, 1998 and 1997; Statements of Operations - Years Ended December 31, 1998 and 1997; Statements of Stockholders' Equity - Years Ended December 31, 1998 and 1997; Statements of Cash Flows - Years Ended December 31, 1998 and 1997; Statements of Changes in Net Assets - Years Ended December 31, 1998 and 1997; Notes to Financial Statements - December 31, 1998 and 1997 2. Financial Statement Schedules. All schedules for which provision is made in the applicable accounting regulations of Article 12 of Regulation S-X of the Securities and Exchange commission have been omitted because either (i) such schedules are not required under the related instructions, (ii) the required information is not present or is not in amounts sufficient to require submission of the schedule, or (iii) the information required is included in the Financial Statements and Notes thereto. b. Current Reports on Form 8-K. No current reports on Form 8-K were filed during the quarter ended December 31, 1998. On February 1, 1999, the Fund, filed a Form 8-K for a change in registrant's certifying accountant. The dismissal of Gelfond Hochstadt Pangurn & Co. was effective February 12, 1999 and the Fund retained the accounting firm of Gerald R. Hendricks & Co., P.C. to service as the Fund's independent accountant and to audit the Company's financial Statements including December 31, 1998. c. Exhibits. The following Exhibits are filed pursuant to Item 601 of Regulation S-K: Exhibit No. Title _________________________________________________________________ 3 Articles of Incorporation incorporated by reference to Registration Statement on Form N-2, No. 2-86057. 3(a) Certificate of Amendment to Articles of Incorporation dated June 2, 1988, incorporated by reference to Form 10-K for the fiscal year ended December 31, 1988. 3(b) Bylaws, as amended March 16, 1988, incorporated by reference to Form 10-K for the fiscal year ended December 31, 1987. 10(a) Investment Advisory Agreement dated August 23, 1983, between Registrant and Galbreath Financial Services Corporation incorporated by reference to Registration Statement on Form N-2, No. 2-86057. 10(b) Management Agreement dated August 23, 1983, between Registrant and Galbreath Financial Services corporation incorporated by reference to Registration Statement on Form N-2, No. 2-86057. 10(c) Agreement Concerning the Change in Management incorporated by reference to Exhibit A to the Fund's Notification Pursuant to Rule 14f-1. 10(d) Subscription Agreement incorporated by reference to Exhibit A to the Fund's Notification Pursuant to Rule 14f-1. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. ROCKIES FUND, INC. Date: _______________ By: __________________________________ Stephen G. Calandrella, President Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Position Date President, Director Stephen G. Calandrella Chief Executive Officer ___________ Charles M. Powell Director ___________ Clifford C. Thygesen Director ___________ SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. ROCKIES FUND, INC. Date: 4/15/98 By: /s/ Stephen G. Calendrella Stephen G. Calandrella, President Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Position Date /s/ Stephen G. Calandrella President, Director 4/15/98 Stephen G. Calandrella Chief Executive Officer /s/ Charles M. Powell Director 4/15/98 Charles M. Powell /s/ Clifford C. Thygesen Director 4/15/98 Clifford C. Thygesen EX-27 2 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 0000725260 THE ROCKIES FUND, INC. 1000 US 12-MOS DEC-31-1998 JAN-1-1998 DEC-31-1998 2,760,560 3,150,123 554,582 0 1,541,880 5,246,585 258,394 0 2,429,810 2,688,204 2,558,381 2,901,243 640,256 640,256 (2,489,304) 0 1,750,517 0 389,522 2,558,381 0 88,145 0 753,183 (570,205) 465,180 358,604 253,579 0 0 0 0 0 0 0 253,579 (596,001) 413,806 0 0 0 80,133 753,183 2,558,381 3.60 (0.89) .73 0 0 0 4.00 .29 644,561 1.01
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