-----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, BY+iBgjgvSLq1Zkp9aForFfIz4Kv42RtZm5JgG/TF3RAciBYeug+zo6vAsC3FMtz 117IPAafbZBymUEEAvefNw== 0001011034-98-000046.txt : 19980527 0001011034-98-000046.hdr.sgml : 19980527 ACCESSION NUMBER: 0001011034-98-000046 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980415 DATE AS OF CHANGE: 19980526 SROS: NASD 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: 98595115 BUSINESS ADDRESS: STREET 1: 4465 NORTHPARK DR CITY: COLORADO SPRINGS STATE: CO ZIP: 80907 BUSINESS PHONE: 7195904900 MAIL ADDRESS: STREET 1: 4465 NORTHPARK DR CITY: COLORADO SPRINGS STATE: CO ZIP: 80907 10-K 1 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, 1997 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 4465 Northpark Drive, Colorado Springs, Colorado 80907 -------------------------------------------------------- (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, 1997, 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 National Quotation Bureau, LLC held by non-affiliates of the Registrant was $765,574. As of December 31, 1997, 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 which is eligible for the Fund's venture capital portfolio, the Fund's management conducts a review of the portfolio company's operations to determine whether it is appropriate for investment by the Fund. This review may include familiarization with the portfolio company's business plan, a tour of the proposed portfolio company's facilities, credit and reference checks and a careful review of the portfolio company's product, its markets and growth prospects. Consistent with the Fund's offer to provide managerial assistance to its portfolio companies, the Fund attempts to arrange for its officers and directors to serve as directors of such companies. Also, the Fund assists portfolio companies in their efforts to recruit management, to define their product planning and marketing strategies, to form financial plans and to develop corporate goals. The Fund also assists such companies in establishing professional relationships, in obtaining additional financing, in evaluating merger opportunities and in conducting private and public offerings of their securities. Financial Information About Industry Segments - - - --------------------------------------------- Since inception, the Fund has operated primarily in the venture capital industry and plans to continue to devote a majority of its resources to operations within this arena. However, during the third quarter of fiscal 1993, the Fund acquired a 26,500 square foot office building which was sold effective March 31, 1997 for a net gain of approximately $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, 1997, consummated the purchase of 5 acres of undeveloped commercial real estate, and on September 4, 1997, 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, 1997, and undeveloped and developed commercial real estate purchased on April 1 and September 4, 1997, 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 1997 1996 1995 Investment Income: Venture Capital Industry $ 63,777 $36,057 $ 19,971 Real Estate 57,890 170,434 157,565 Net Investment Income (Loss): Realized Investment Income (51,374) 1,549,196 31,889 Venture Capital Industry (11,276) (488,522) (289,512) Real Estate (14,520) 59,833 30,570 Identifiable Assets: Venture Capital Industry 3,322,424 2,733,821 1,525,053 Real Estate (land, building, and construction in progress at cost) 491,242 736,271 661,734 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. In 1997, the Fund purchased certain real estate which management believes represents investments consistent with the Fund's investment objectives. The Fund seeks to follow certain guidelines when identifying potential portfolio companies, and attempts to invest in those companies which are unique with regard to their products or their production or marketing techniques. The Fund also looks for investment opportunities in companies that produce products for which there is a discernible demand, at competitive costs. Strong growth potential, a reasonable opportunity for liquidity, increases in gross revenues in excess of industry averages and a lack of dependence upon governmental contracts or any one sector of the economy, are important factors which the Fund generally considers prior to making an investment. The Fund presently has four employees. The Fund's executive officers and directors screen, evaluate and structure investments and provide managerial assistance to portfolio companies. The Fund's officers and directors provide guidance regarding the propriety and structuring of investments and establish periodically the valuation of securities held by the Fund. The venture capital business is highly competitive. A recent dramatic increase in the number of businesses engaged in venture capital investment activities has meant that a larger number of firms are competing for a limited number of attractive investment opportunities. Notwithstanding these developments, however, no single firm or group of firms dominates the industry. Where possible, the Fund seeks to participate with other venture capitalists in their investment activities. The following descriptions of certain companies in which the Fund has invested contain information which has been obtained from officers and directors of the respective companies, and from documents furnished to the Fund by such companies. The description of the Fund's investments includes valuation information which is based upon certain valuation methods which are, in order of preference, the Public Market Method (used when there is an established public market for the portfolio company's securities), the Private Market Method (based upon private transactions), the Appraisal Method (reflecting a comparison between the portfolio company and other public or private companies engaged in the same or similar business activities), and the Cost Method (based upon the cost of the Fund's investments as adjusted to reflect significant developments affecting the investment). PORTFOLIO COMPANIES AMERICAN EDUCATIONAL PRODUCTS, INC. ----------------------------------- The Fund, at December 31, 1997, held 31,000 shares of American Educational Products, Inc. common stock, after giving effect to a one-for-five (1:5) reverse stock split. 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 $5.875 per share or $182,125. These shares are pledged as collateral, at December 31, 1997, on a $300,000 promissory note payable (See Redwood Broadcasting, Inc.). The Fund also held, at December 31, 1997, common stock purchase warrants to purchase an additional 40,000 shares of common stock of American Educational Products, Inc. at an exercise price of $4.50 per share. The Board of Directors valued these warrants at $1.375 each or $55,000, representing the difference between their exercise price and the market value of the common stock. The Fund also held at December 31, 1997 common stock purchase warrants to purchase an additional 31,000 shares at an exercise price of $10.00 per share. These warrants were valued at their quoted market price of $0.25 each or $7,750, and are also pledged as collateral on the aforementioned $300,000 promissory note payable. ASTEA INTERNATIONAL ------------------- The Fund, at December 31, 1997, held 15,000 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 $1.875 per share or $28,125. BEAR STAR (fka COLUMBINE HOME SALES, LLC.) ------------------------------------------ The Fund has invested in Bear Star, which investment is restricted as to sale, non-income producing, and has been valued by the Board of Directors at $0. The Fund also holds a note receivable from Bear Star with remaining amounts due of $5,814. The note accrues interest at the rate of 10% per year, and is due on demand. CABLE AND COMPANY WORLDWIDE --------------------------- The Fund, at December 31, 1997, held 50,000 shares of Cable and Company Worldwide common stock, which stock is unrestricted as to sale, non-income producing, and has been valued at its quoted market price of $.125 per share or $6,250. COVA TECHNOLOGIES ----------------- The Fund, at December 31, 1997, 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. CUSA TECHNOLOGIES, INC. ----------------------- The Fund, at December 31, 1997, held 30,000 shares of Cusa Technologies, Inc. common stock, which stock is unrestricted as to sale, non-income producing and has been valued at its quoted market price of $1.031 per share or $30,938. These shares are pledged as collateral, at December 31, 1997, on a $300,000 promissory note payable (See Redwood Broadcasting, Inc.). DAMACH, INC. ------------ The Fund, at December 31, 1997, 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 December 31, 1996. An agreement was signed on March 4, 1997 to extend this 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, 1997, held 36,000 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 $2.00 per share or $72,000. GEORGESON, PHIL --------------- The Fund, at December 31, 1997, held a note receivable from Phil Georgeson in the amount of $4,602. The note is unsecured, accrues interest at the rate of 12% per year and is due on demand. GLOBAL CASINOS, INC. -------------------- The Fund, at December 31, 1997, held 17,680 shares of Global Casinos, Inc. common stock, after giving effect to a 1-for-10 reverse split. The stock is restricted as to sale due to the company being an affiliate, non-income producing, and has been valued at its quoted market price of $3.50 per share, or $61,880. The Fund, at December 31, 1997, also held a note receivable from Global Casinos, Inc. in the amount of $175,000, which note is unsecured, accrues interest at 8% per year, and is due November 1, 1998. This 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 $43,904, which is unsecured, accrues interest at 9% per year, is due on demand, and is convertible into Global Casinos, Inc. common stock at $5.00 per share. The Fund holds a third note receivable from Global Casinos, Inc. in the amount of $75,000, which is secured, accrues interest at 12% per year plus an additional 12% fee per year and is due April 15, 1998. The Fund also owns 35,000 Global warrants exercisable at $6.00, 35,000 warrants exercisable at $7.00 and 35,000 warrants exercisable at $8.00 per share, all of which expire as of February 1, 1999 and have been valued at $0 by the Board of Directors. GUARDIAN TECHNOLOGIES, INC. --------------------------- The Fund, at December 31, 1997, held 126,366 shares of Guardian Technologies common stock, after giving effect to a one-for-three (1:3) reverse split. The Fund has pledged 22,500 shares as collateral, at December 31, 1997, on a $300,000 promissory note payable (See Redwood Broadcasting, Inc.). The stock is restricted due to the company being an affiliate, non- income producing, and has been valued at its quoted market price of $2.75 per share or $347,506. The Fund also held warrants to purchase an additional 137,000 shares of Guardian Technologies common stock, which warrants are also restricted due to the company being an affiliate, non-income producing, and have been valued at their quoted market price of $.3125 each or $42,813. The Fund has pledged 67,000 warrants as collateral, at December 31, 1997, on a promissory note payable to Redwood Microcap, Inc. HAMPTON COURT RESOURCES ----------------------- The Fund, at December 31, 1997, 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 $1.29 per share or $16,162. These shares are pledged as collateral, at December 31, 1997, on a $300,000 promissory note payable (See Redwood Broadcasting, Inc.). KINETIKS.COM ------------ The Fund, at December 31, 1997, held 113,500 shares of Kinetiks.com common stock, which stock is unrestricted as to sale, non-income producing, and has been valued at $0. The Fund also held warrants to purchase and additional 400,000 shares of Kinetiks.com common stock at an exercise price of $.25 per share. The warrants have been valued by the Board of Directors at $0. The Fund also held a note receivable in the amount of $25,000 which is unsecured, accrues interest at the rate of 10% per year, and is due on demand. The note provides for a default interest rate of 18% and an additional 50,000 warrants for each 30-day period that it goes unpaid. LAND RESOURCE CORPORATION ------------------------- The fund, at December 31, 1997, 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 each or $10,000. LONE OAK VINEYARDS, INC. ------------------------ The Fund, at December 31, 1997, held 49,000 shares of Loan Oak Vineyards, Inc. common stock, which stock is restricted as to sale, non-income producing, and has been valued by the Board of Directors at $2.66 per share or $130,536 which represents an estimate of the underlying fair value of the Fund's interest in Lone Oak Vineyards, Inc. equity. MARCO FOODS, INC. ----------------- The Fund, at December 31, 1997, held a note receivable from Marco Foods, an affiliate of the Fund, in the amount of $127,338, which is unsecured, accrues interest at 12% per year and is due on demand. OPTIMAX INDUSTRIES, INC. (fka PLANTS FOR TOMORROW, INC.) -------------------------------------------------------- At December 31, 1997, the Fund held 115,191 shares of Optimax Industries, Inc. common stock, which stock is unrestricted as to sale, non-income producing and has been valued at its quoted market price of $.156 per share or $18,004. The shares of Optimax are pledged as collateral securing the Fund's line of credit with a bank. PREMIUM CIGARS, INC. -------------------- The Fund, at December 31, 1997, held 5,000 shares of Premium Cigars common stock, which stock is unrestricted as to sale, non-income producing and has been valued at its quoted market price of $1.5625 per share or $12,813. These shares are pledged as collateral, at December 31, 1997, on a $300,000 promissory note payable (See Redwood Broadcasting, Inc.). REDWOOD BROADCASTING, INC. -------------------------- The Fund, at December 31, 1997, held 255,000 shares of Redwood Broadcasting, Inc. common stock, which stock is restricted as to sale, non- income producing, and has been valued at its quoted market price of $1.75 per share or $446,250. The shares were purchased in exchange for a $300,000, 10 year, 8% promissory note. SHIVA CORPORATION ----------------- The Fund, at December 31, 1997, held 2,630 shares of Shiva Corporation common stock, which is unrestricted as to sale, non-income producing and has been valued at its quoted market price of $8.5625 per share or $22,519. SOUTHSHORE CORPORATION ---------------------- At December 31, 1997, 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 $.25 per share or $3,750. These shares are pledged as collateral, at December 31, 1997, on a $300,000 promissory note payable (See Redwood Broadcasting, Inc.). TELS CORPORATION ---------------- The Fund, at December 31, 1997, held 30,000 shares of TELS Corporation common stock, which stock is unrestricted as to sale, non-income producing, and has been valued at its quoted market price of $.3125 per share or $9,375. TRAINING DEVICES, INC. ---------------------- The Fund, at December 31, 1997, held 20,000 shares of Training Devices, Inc. common stock, which 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, 1997, held 73,500 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 $2.00 per share or $147,000. WHITEWING LABS -------------- The Fund, at December 31, 1997, held 20,000 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 $.75 per share or $15,000. WILSHIRE TECHNOLOGIES, INC. --------------------------- The Fund, at December 31, 1997, held 247 Wilshire Technologies, Inc. warrants, which warrants are restricted as to sale, non-income producing, and have been valued by the Board of Directors at $0 based on their exercise price being greater than the market price of Wilshire Technologies common stock. ITEM 2. PROPERTIES Real Estate Operations ---------------------- During the third quarter of fiscal 1993 the Fund purchased a 26,500 square foot office building located in Colorado Springs, Colorado (the "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 "Code"). The proceeds received were utilized to pay approximately $478,000 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 Code, the Fund, on April 1, 1997, consummated the purchase of 5 acres of undeveloped commercial real estate located at 3210 Woodmen Road, Colorado Springs, Colorado (the "Woodmen Property"). The Fund plans to undertake a phased development of two commercial office buildings on the Woodmen 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. The Fund intends to hold this new real estate in a wholly owned subsidiary called Strategic Properties, Inc. Real Estate Investments ----------------------- 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 $600,000 and incurred approximately $20,000 of improvements as of December 31, 1997. 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 of the Code and 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 as of December 31, 1997, has signed an agreement to lease the Chestnut Building for 8 months and 9 days expiring on September 1, 1998 for $35,000. The tenant agreeing 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. The tenant as of December 23, 1997, paid the Fund $35,000 prepaid rent through September 1, 1998. The tenant as of January 1998 paid the Fund $7,500 earnest and partial payment of the Chestnut purchase price. In addition, effective September 24, 1997, $50,000 of the Northpark Building sale proceeds were utilized to purchase a 20% investment in Plaza Hotel & Apartments, a 40 room hotel, located at 116 East Park Street, Hot Springs Park, Thermopolis, Wyoming, (the "Hotel Investment"), as a tax free exchange under section 1031 of the Code for a total investment of $200,000. The Fund owes $150,000 to Wyoming Resorts, LLC at an 8% per annum interest rate. The Fund is currently under contract to sell the Hotel Investment for $200,000. Office Facilities ----------------- The Fund is currently leasing executive office space in the Northpark Building under a lease with the new owners, Northpark, L.L.C., for $900 a month. 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. The Fund's principal executive offices are maintained in the office Building located at 4465 Northpark Drive, Colorado Springs, Colorado 80907. The Fund's telephone number at that address is (719) 590-4900. ITEM 3. LEGAL PROCEEDINGS In early 1996, the Fund received requests for information from the United States Securities and Exchange Commission ("SEC") related to an investigation begun by the SEC in 1994 into various matters, including the administrative and record keeping practices of the Fund, its securities trading activities and those of its officers and directors. In September 1996, the Company was notified by the Commission's Staff that it intends to request that the Commission commence an administrative proceeding against the Company and its directors based upon certain transactions in securities formerly included in the Company's securities portfolio. The Company has responded to the Commission with a written submission which sets forth why there exists no basis in fact or law for such a proceeding. It is impossible to predict whether the Staff will recommend a proceeding against the Company or any of its directors, and if such a recommendation is made, whether the Commission will authorize the institution of a proceeding. There can be no assurance of the outcome of this matter or the ultimate effect on the Fund's financial position. Other than the foregoing, the Fund is not a party to any material pending legal proceeding. ITEM 4. 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, 1997. 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, 1996 through March 31, 1998: Bid 1996 Low High -------------------------------------------------- First Quarter 1.75 2.00 Second Quarter 2.00 2.50 Third Quarter 2.50 3.75 Fourth Quarter 3.50 4.00 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 4.43 (through 03/31/98) The high bid price of the Fund's common stock as of March 31, 1998 was $4.43. 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, 1997, 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 1996 or 1997. 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 - - - --------------------------------------------------------------------------- 1997 1996 1995 1994 1993 - - - --------------------------------------------------------------------------- Assets Investments $3,148,989 $2,154,497 $1,400,374 $ 1,699,582 $1,830,719 Cash 21,890 499,404 1,193 37,081 9,072 Property and equipment, net 509,669 764,521 714,918 655,556 660,982 Other 133,118 51,670 70,302 30,858 3,323 ----------- ----------- ----------- ----------- ---------- Total assets 3,813,666 3,470,092 2,186,787 2,423,077 2,504,096 ----------- ----------- ----------- ----------- ---------- Liabilities Long-term debt, current 899,106 262,821 191,627 195,444 165,444 Payables 164,268 342,107 165,542 65,114 115,879 Accrued interest payable 8,565 7,428 19,588 14,628 14,268 Other accrued liabilities 23,011 33,901 39,697 12,500 70,123 Cash overdraft 8,049 -0- 8,653 -0- 24,522 Deposits, deferred rent and taxes 54,334 -0- -0- -0- -0- Long-term liabilities 351,531 375,103 454,116 428,352 462,274 Accrued income taxes -0- 118,000 -0- -0- -0- ----------- ----------- ----------- ----------- ---------- Total liabilities 1,508,864 1,139,360 879,223 716,038 852,510 ----------- ----------- ----------- ----------- ---------- Net assets $2,304,802 $2,330,732 $1,307,564 $1,707,039 $1,651,586 =========== =========== =========== =========== ========== Net assets per share (shares issued and outstanding: 640,256 in 1992 - 1997) $ 3.60 $ 3.64 $ 2.04 $ 2.67 $ 2.58 Statement of Operations Data for Years Ended December 31 - - - --------------------------------------------------------------------------- 1997 1996 1995 1994 1993 - - - --------------------------------------------------------------------------- Investment Income $ 121,667 $ 206,491 $177,536 $166,575 $ 67,795 Gain on sale of land and building 388,476 Less expenses 535,939 635,180 436,478 531,724 304,139 ---------------------------------------------- Net Investment loss (25,796) (428,689) (258,942) (365,149) (236,344) Net realized gain (loss) from sales and permanent write- downs of securities (51,374) 1,549,196 31,889 192,577 642,478 Unrealized net appreciation (depreciation) of investments 51,240 (97,339) (172,422) 228,025 188,444 - - - --------- --------- ---------------------------- Net increase (decrease) in net assets from investment activities $ (25,930) $1,023,168 $(399,475) $ 55,453 $594,578 Per share amounts: Net investment loss $ (0.04) $ (0.67) $ (0.40) $ (0.56) $ (0.36) Net realized (losses) gains from investments (0.08) 2.42 0.05 0.30 1.00 Net unrealized appreciation (depreciation) of investments 0.08 (0.15) (0.27) 0.35 0.29 Net increase(decrease) in net assets per common share from investment activities $ (0.04) $ 1.60 $ (.62) $ 0.09 $ 0.93 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, 1997 During the year ended December 31, 1997, the Fund incurred realized gains from sales of securities (before income tax) and unrealized appreciation of investments. Total assets increased accordingly: Investments increased from $2,154,497 on December 31, 1996 to $3,148,989 on December 31, 1997, an increase of $994,492 or 46.2%, primarily due to increases of approximately 7% in the value of the Fund's holdings of American Education Products, 12% in the value of the FunD's holdings of Guardian Technologies, 14% in the value of the Fund's holdings of Redwood Broadcasting and 5% in the value of the Fund's holdings of Usasurance Group. Notes receivable, net of allowances, increased from $313,404 on December 31, 1996 to $458,158 on December 31, 1997, an increase of $144,754 or 46%, attributable to new notes from Global Casinos and Marco Foods. Global Casinos, Inc., an international gaming company and affiliate, comprises approximately 64%, and Marco Foods, Inc., also an affiliate, comprises approximately 28% of total notes receivable. Also contributing to the increase in investments was the purchase of commercial real estate for $621,358, including improvements, and a $200,000 hotel investment. The commercial real estate and hotel investment are under contracts for sale for a total of $975,000, representing an increase in value of approximately $145,000 as of December 31, 1997. Cash decreased significantly from $499,404 at December 31, 1996 to $21,890 at December 31, 1997, primarily due to the purchase of property and improvements during 1997. Property and equipment decreased from $764,521 at December 31, 1996 to $509,669 at December 31, 1997, a decrease of 254,852 or 33.3% as a result of the Northpark building sale, which had a carrying value of $775,356 and the purchase of 5 acres of undeveloped commercial real estate and subsequent improvements for $491,2442. Other assets increased from $51,670 as of December 31, 1996 to $133,118 as of December 31, 1997 an increase of $81,448 or 158%, due to an increase in accrued interest receivable in conjunction with notes receivable and investment securities sold for those securities sold yet awaiting proceeds as of December 31, 1997. Based on the foregoing, total assets increased from $3,470,092 at December 31, 1996, to $3,813,667 as of December 31, 1997, an increase of 343,575 or 10%. Long-term debt increased significantly from $262,821 as of December 31, 1996 to $899,106 as of December 31, 1997, an increase of $636,285 or 242%. The increase in long-term debt is mainly attributable to the commercial real estate "Chestnut Building" loan with a balance of $497,528, an increase in margin account balances of $96,885, a $150,000 balance for the Thermopolis Hotel Investment, and a note payable of $281,348 at December 31, 1997, incurred in connection with the purchase of Redwood Broadcasting, Inc. shares. As of December 31, 1997, the Fund had a line of credit for $75,000 with an outstanding balance of $74,500, that accrues interest at 10.5%, collateralized by the Fund's security holdings. As of December 31, 1996, The Fund had an additional line of credit for $100,000 with State Bank & Trust which was paid with the Northpark building sale proceeds on March 31, 1997. Payables decreased significantly from $342,107 at December 31, 1996 to $164,268 at December 31, 1997, mainly attributable to a decrease in trades pending during 1996. The Fund, as of December 31, 1997 had an overdrawn cash account of $8,049. As a result, total liabilities increased from $1,139,360 at December 31, 1996 to $1,508,864 on December 31, 1997 an increase of $369,504 or 32.4% Due to the increase in liabilities, net assets decreased from $2,330,732 at December 31, 1996 to $2,304,802 at December 31, 1997 and from $3.64 per share to $3.60 per share, respectively, a decrease of $.04 per share or 1.1%. Other than the 1998 anticipated sale of the Fund's Chestnut building and Hotel investment, 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 - 1997 Compared to 1996 and 1995 As a direct result of the sale of the Northpark building as of March 31, 1997, rental income decreased to $57,890 in 1997. This compares with rental income of $170,434 in 1996 and$157,565 in 1995. Interest and dividend income on the other hand increased significantly from $614 in 1995 to $30,248 in 1996 and $63,777 in 1997. This increase is mainly attributable to an increase in notes receivable. As a result of the foregoing, total investment income changed from $177,536 in 1995, to $206,491 in 1996, and $121,667 as of December 31, 1997. Total expenses changed from $436,478 at 1995, to $635,180 at 1996, and $535,939 in 1997. Contributing to the change in expenses from 1996 to 1997 was a decrease in wages and salaries of 16.9%, as one employee became part- time on August 1, 1997; a significant decrease in professional fees of 42.8% due to a decrease in legal fees; travel and entertainment increased 197.1%, as some investments required travel in 1997; building expenses decreased significantly, 58.3% due to the sale of the Northpark building and minimal expenses incurred on the Chestnut building; investment expense decreased 40% as the Fund experienced lower trading activity in 1997; and donations increased 667.1% as the Fund donates approximately $1,000 per month to The Good News Foundation. As a result of decreased investment income and expenses in 1997, investment loss decreased to $(414,267) in 1997, compared to $(428,689) in 1996, and $(258,942) in 1995. Net realized gain (loss) from sale of investments decreased significantly in 1997 to $(51,374) from $1,549,196 in 1996 and $31,889 in 1995, a decrease of $1,600,570. This decrease is mainly attributable to the sale of Shiva Corp. (fka Airsoft) which increased $1,846,098 in value during 1996. Net unrealized appreciation (depreciation) of investments increased in 1997 to $51,240 from $(97,339) in 1996 and (172,422) in 1995. Net loss from investments was ($134) for 1997. Other than the 1998 anticipated sale of the Fund's Chestnut building and Hotel Investment, 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 recognizes 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 None. THE ROCKIES FUND, INC. YEARS ENDED DECEMBER 31, 1997 AND 1996 THE ROCKIES FUND, INC. YEARS ENDED DECEMBER 31, 1997 AND 1996 TABLE OF CONTENTS Page Independent auditors' report F-3 Financial statements: Statements of assets and liabilities F-4 - F-5 Schedule of investments F-6 - F-11 Statements of operations F-12 - F-13 Statements of shareholders' equity F-14 Statements of cash flows F-15 - F-16 Statements of changes in net assets F-17 Notes to financial statements F-18 - F-28 INDEPENDENT AUDITORS' REPORT The Shareholders and Directors The Rockies Fund, Inc. We have audited the accompanying statements of assets and liabilities of The Rockies Fund, Inc. (the "Fund"), including the schedule of investments as of December 31, 1997 and 1996 and the related statements of operations, shareholders' equity, cash flows, and changes in net assets for the years 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 audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements 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 and 1996, 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 audits provide 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 1996 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 $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, 1997 and 1996 - - - --------------------------------------------------------------------------- ASSETS 1997 1996 - - - --------------------------------------------------------------------------- Investments, at value (cost of $3,118,071, 1997 and $1,999,819, 1996) (Note 3): Restricted and unrestricted securities $ 1,725,831 $1,841,093 Notes receivable 458,158 138,404 Real estate 965,000 - ------------ ------------ 3,148,989 1,979,497 Cash: Held by related party (Note 6) - 391,698 Held by others 21,890 107,706 Investment securities sold (Note 6) 79,511 15,809 Accrued interest receivable 53,045 12,789 Receivables from investees (Note 6) 562 23,072 ------------- ------------ Total current assets 3,303,997 2,530,571 ------------- ------------ Property and equipment (Notes 2 and 3): Land 390,000 102,775 Building - 633,496 Leasehold improvements - 86,614 Automobile 15,162 - Furniture and fixtures 8,739 12,461 Equipment - 1,484 Construction in progress 101,242 - ------------- ------------ 515,143 836,830 Less accumulated depreciation 5,474 72,309 ------------- ------------ 509,669 764,521 ------------- ------------ Investment in long-term note receivable, related party (cost of $175,000) - 175,000 ------------- ------------ Total assets $ 3,813,666 $ 3,470,092 ------------- ------------ (continued) See Notes to Financial Statements THE ROCKIES FUND, INC. Statements of Assets and Liabilities (Continued) December 31, 1997 and 1996 - - - --------------------------------------------------------------------------- LIABILITIES AND NET ASSETS 1997 1996 - - - --------------------------------------------------------------------------- Cash overdraft $ 8,049 $ - Payables: Trade 108,506 71,659 Construction (Note 2) 55,762 - Related party (Note 6) - 153,566 Investment securities purchased (Note 6) - 116,882 Accrued liabilities: Property taxes and other 23,011 33,901 Income taxes (Note 4) - 118,000 Interest payable 8,565 7,428 Current maturities of long-term debt (Note 3): Related parties 172,374 6,500 Others 726,732 256,321 Deposits and deferred rent (Note 2) 41,334 - Deferred tax liability (Note 4) 13,000 ------------------------------- Total current liabilities 1,157,333 764,257 Security deposits and other liabilities - 59,754 Long term debt, net of current maturities (Note 3) 259,531 315,349 Deferred tax liability (Note 4) 92,000 - ---------- - ----------- Total liabilities 1,508,864 1,139,360 Commitments and contingencies (Notes 2 and 5) ----------- ------------ Net assets and shareholders' equity (equivalent to $3.60 per share for 1997 and $3.64 per share for 1996) $ 2,304,802 $ 2,330,732 ============ =========== 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 (1,919,099) (1,893,303) Accumulated net realized gains from sales of securities 1,285,337 1,336,711 Unrealized net appreciation (depreciation) of investments 30,918 (20,322) ----------- ----------- Total accumulated deficit (602,844) (576,914) Net assets $ 2,304,802 $ 2,330,732 =========== =========== THE ROCKIES FUND, INC. Schedule of Investments December 31, 1997 and December 31, 1996 Initial **Cost at Fair value at Fair value at Investment December 31, December 31, December 31, Company Position date 1997 1997 1996 Restricted Securities: American Educational31,000 common shares *** September 1996 $155,000 $182,125$ 145,313 Products, Inc.* (1) 9,000 common shares September 1996 - - 42,188 40,000 warrants (exercisable @ $4.50) September 1996 - 55,000 - 31,000 warrants (exercisable @ $10.00)*** June 1997 - 7,750 - 155,000 244,875 187,500 Bear Star, LLC* 5% partnership interest November 1994 - - - COVA Technologies* 917 common shares July 1996 20,035 20,035 20,035 Global Casinos, Inc.* (2)3,800 common shares November 1993 76,000 13,300 16,150 4,331 common shares January 1994 50,068 15,159 18,407 1,724 common shares January 1994 19,932 6,034 7,327 1,250 common shares February 1994 25,000 4,375 5,313 75 common shares March 1994 - 263 319 500 common shares October 1994 10,000 1,750 2,125 5,000 common shares February 1996 17,208 17,500 21,250 1,000 common shares March 1996 3,125 3,500 4,250 105,000 warrants November 1996 - - - 201,333 61,880 75,140 Guardian Technologies, Inc.* (3)8,333 common sharesFebruary 1997 8,750 22,916 - 90,533 common shares March 1997 126,450 248,966 - 5,000 common shares June 1997 6,260 13,750 - 20,000 common shares *** August 1997 29,005 55,000 - 2,500 common shares *** September 1997 8,061 6,875 - 70,000 warrants March 1997 13,440 21,910 - 67,000 warrants *** March 1997 12,815 20,903 - 204,781 390,319 - Hampton Court Resources12,500 common shares ***September 1997 11,542 16,162 - Land Resource Corporation*10,000 common shares March 1997 10,000 10,000 - Lone Oak Vineyards, Inc.*35,000 common shares February 1997 35,000 93,240 - 7,000 common shares October 1997 7,000 18,648 - 7,000 common shares November 1997 7,000 18,648 - 49,000 130,536 - Redwood Broadcasting, Inc.5,000 common shares February 1997 - 8,750 - 200,000 common shares December 1997 240,000 350,000 - 50,000 common shares December 1997 60,000 87,500 - 300,000 446,250 - Training Devices, Inc.20,000 common shares February 1997 25,000 40,000 - Wilshire Technologies, Inc. 247 warrants December 1997 - - - Total Restricted Securities 976,691 1,360,057 282,675 Unrestricted Securities: Alouette Cosmetics 2,500 common shares November 1996 - - 7,500 Astea International 5,000 common shares September 1996 - - 28,438 5,000 common shares November 1996 - - 28,438 10,000 common shares February 1997 54,875 18,750 - 5,000 common shares June 1997 16,354 9,375 - 71,229 28,125 56,875 Corfacts, Inc. 200,000 common shares July 1996 - - 10,000 Cusa Technologies, Inc.***30,000 common sharesNovember 1997 33,360 30,938 - Enhanced Services 2,500 common shares December 1996 - - 8,125 Exploration Company, The7,500 common shares August 1996 - - 41,250 3,000 common shares September 1996 - - 16,500 7,500 common shares October 1996 - - 41,250 36,000 common shares October 1997 109,080 72,000 - 109,080 72,000 99,000 Healthwatch, Inc. 34,400 common shares October 1996 - - 68,800 45,000 common shares December 1996 - - 90,000 - - 158,800 Image Matrix 10,000 units (1com/1wrnt) June 1996 - - 33,750 J T's Restaurants 1,500 common shares December 1996 - - 3,188 Kinetiks.com 10,000 common shares September 1996 38,125 - 6,250 11,000 common shares October 1996 24,313 - 6,875 20,000 common shares November 1996 12,188 - 12,500 62,500 common shares December 1996 44,852 - 39,063 10,000 common shares July 1997 3,281 - - 400,000 warrantsFebruary 97-September 97 - - - 122,758 - 64,688 Laser Recording Systems, Inc.100,000 common sharesJune 1995 - - 2,000 Optimax Industries, Inc.115,191 common shares ***June 1994 138,229 18,004 287,978 20,000 common shares *** June 1994 - - 50,000 12,500 warrants September 1993 - - 9,375 138,229 18,004 347,353 Pacific Biometrics, Inc.7,500 common shares October 1996 - - 23,438 7,500 warrants October 1996 - - 1,406 - - 24,844 Poore Brothers 4,000 common shares December 1996 - - 14,250 Progress Software 1,000 common shares December 1996 - - 19,750 Premium Cigars International, Inc.5,000 common shares ***August 199723,893 12,813 - S&P 500 10 puts December 1997 550 July 1996 - - 5,875 10 puts December 1997 550 August 1996 - - 5,875 20 puts December 1997 550 September 1996 - - 11,750 40 puts December 1997 600 December 1996 - - 33,000 - - 56,500 S2 Golf, Inc. 20,825 common shares July 1996 - - 19,523 Shiva Corporation 2,630 common shares December 1996 - 22,519 91,098 Shopsmith 10,000 common shares September 1996 - - 25,000 10,000 common shares October 1996 - - 25,000 - - 50,000 Southshore Corporation 7,400 common shares March 1994 - - 3,700 10,000 common shares December 1995 - - 5,000 15,000 common shares *** September 1997 7,715 3,750 - 7,715 3,750 8,700 Tampa Bay Corporation 10,000 common shares September 1996 - - 13,750 5,000 common shares December 1996 - - 6,785 - - 20,535 TELS Corporation 20,000 common shares August 1996 12,813 6,250 9,376 10,000 common shares September 1996 5,938 3,125 4,688 18,750 9,375 14,064 Topro, Inc. 2,500 common shares September 1996 - - 6,250 2,500 common shares November 1996 - - 6,250 2,500 common shares December 1996 - - 6,250 - - 18,750 Usasurance Group 15,000 common shares July 1996 94,550 30,000 60,000 10,000 common shares September 1996 62,750 20,000 40,000 2,500 common shares October 1996 12,375 5,000 10,000 31,500 common shares December 1996 73,777 63,000 126,000 1,500 common shares December 1996 - - 6,000 2,500 common shares January 1997 8,750 5,000 - 4,500 common shares June 1997 6,106 9,000 - 7,500 common shares December 1997 7,875 15,000 - 266,183 147,000 242,000 Whitewing Labs 20,000 common shares January 1997 31,350 15,000 - Total Unrestricted Securities 836,678 365,774 1,558,418 Total Restricted and Unrestricted 1,813,369 1,725,831 1,841,093 Notes Receivable: Columbine Home Sales, LLC*Note Receivable, 10% due on demand December 1995 - 5,814 5,814 Damach Note Receivable, 12% due on demand October 1996 32,500 32,500 32,500 Phil Georgeson Note Receivable, 12% due on demand August 1996 4,602 4,602 15,090 Global Casinos, Inc.* Note Receivable, 8% due 11/1/98 November 1996 175,000 175,000 175,000 Note Receivable, 9% due on demand March 1997 43,904 43,904 - Note Receivable, 24% due 4/15/98 August 1997 75,000 75,000 - 293,904 293,904 175,000 Kinetiks.com Note Receivable, 10% due on demand February 1997 25,000 25,000 - Marchco Foods, Inc.* Note Receivable, 12% due on demand January 1997 127,338 127,338 - Navidec, Inc. Note Receivable, 10% October 1996 - - 25,000 NECO Land Resources, LLC*Note Receivable, 8% due on demand August 1996 - - 10,000 Topro, Inc. Note Receivable, 12% September 1997 - - 50,000 Subtotal Notes Receivable 483,344 489,158 313,404 Allowance for Doubtful Notes - (31,000) - Net Notes Receivable 483,344 458,158 313,404 Investments in Real Estate: Chestnut Building Land & Building at 3515 N. Chestnut Colorado Springs, Colorado September 1997 621,358 765,000 - Hotel Investment Building at 116 E. Park St. Thermopolis, Wyoming September 1997 200,000 200,000 - Total Real Estate Investments 821,358 965,000 - TOTAL INVESTMENTS $3,118,071 $3,148,989 $2,154,497 * These entities are considered to be affiliated companies as a result of the Company's investment and/or position on the entities' Board of Directors. ** After permanent write-downs. *** These securities have been pledged as collateral on certain long-term debt obligations. (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 (4) Restricted and unrestricted securities at December 31, 1996, have been reclassified to conform to the 1997 presentation. The total value of the securities classified as restricted and unrestricted at December 31, 1996 were as follows: Restricted $964,166 Unrestricted 876,927 $1,841,093 See Notes to Financial Statements THE ROCKIES FUND, INC. Statements of Operations Years Ended December 31, 1997 and 1996 1997 1996 Investment income: Rental (Note 2) $ 57,890 $ 170,434 Consulting and other services 10,822 5,809 Interest and dividends (Note 6) 52,955 30,248 121,667 206,491 Expenses: Wages and salaries 141,817 170,762 Professional fees 79,579 139,207 Custodian fees (Note 6) - 9,109 Directors' fees 7,000 6,000 Interest 62,907 57,519 Travel and entertainment 45,959 15,365 Office 112,449 80,973 Building expenses 46,072 110,601 Investment expenses (Note 6) 25,076 43,679 Donations 15,080 1,965 535,939 635,180 Investment loss (414,272) (428,689) Gain on sale of land and building (Note 2) 388,476 - Net investment loss $ (25,796) $(428,689) Realized and unrealized gain (loss) from investments: Net realized gain (loss) from investments $ (51,374) $1,667,196 Income tax expense (Note 4) - 118,000) (51,374) 1,549,196 Net unrealized appreciation (depreciation) of investments Beginning of year (20,322) 77,017 End of year 30,918 (20,322) Net unrealized appreciation (depreciation) of investments 51,240 (97,339) Net gain (loss)from investments $ (134) $1,451,857 Net increase (decrease) in net assets resulting from operations $ (25,930) $ 1,023,168 Basic per share amounts: Net investment loss $ (0.04) $ (0.67) Net realized gain (loss) from investments (0.08) 2.42 Net unrealized appreciation (deprecation) of investments 0.08 (0.15) $ (0.04) $ 1 .60 Weighted average common shares outstanding 640,256 640,256 THE ROCKIES FUND, INC. Statements of Shareholders' Equity Years Ended December 31, 1997 and 1996 Accumulated deficit Accumulated net realized gains (losses) Accumulated from sales Unrealized net Additional net and permanent appreciation Common paid-in investment write- downs (depreciation) Net stock capital loss of securities of investments assets Balances at January 1, 1996 $ 6,403 $2,901,243 $(1,464,614) $(212,485) $ 77,017 $ 1,307,564 Net investment loss (428,689) (428,689) Net realized gain on investments 1,549,196 1,549,196 Unrealized net depreciation of investments (97,339) (97,339) Balances at December 31, 1996 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 loss on investments (51,374) (51,374) Unrealized net appreciation 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 THE ROCKIES FUND, INC. Statements of Cash Flows Years Ended December 31, 1997 and 1996 1997 1996 Cash flows from operating activities: Net investment loss $(25,796) $(428,689) Net realized (loss) gain from investments (51,374)1,549,196 (77,170) 1,120,507 Adjustments to reconcile net investment loss and net realized (loss) gain from investments to net cash used in operating activities: Net realized (loss) gain from investments 51,374 (1,667,196) Gain on sale of land and building (388,476) - Depreciation expense 10,030 27,348 Decrease (increase) in operating assets: Accrued interest receivable (40,256) (10,659) Receivable from investees 22,510 38,446 Investment securities sold and other assets (63,702)(9,155) Increase (decrease) in operating liabilities: Payables (177,839) 237,606 Accrued liabilities (127,753) 138,551 Deposits and deferred rent 34,080 792 Net cash used in operating activities (757,202)(123,760) Cash flows from investing activities: Proceeds from sales of investments 2,313,477 4,567,702 Purchases of investments (2,188,031) (3,855,325) Proceeds from sale of land and building1,080,000 1,000 Purchase of property (390,000) (3,414) Capital expenditures - construction in progress (101,242)- Net cash provided by investing activities 714,204 709,963 (continued) THE ROCKIES FUND, INC. Statements of Cash Flows (Continued) Years Ended December 31, 1997 and 1996 1997 1996 Cash flows from financing activities: Increase (decrease) in cash overdraft 8,049 (8,653) Proceeds from long-term debt - 96,022 Repayment of long-term debt (442,565) (175,361) Net cash used in financing activities (434,516)(87,992) Net increase (decrease) in cash (477,514) 498,211 Cash at beginning of year 499,404 1,193 Cash at end of year $21,890 $499,404 Supplemental disclosure of cash flows information: Cash paid for interest $61,770 $ 69,671 Supplemental disclosures of noncash investing and financing activities: During 1996, the Fund settled an $85,944 note payable, which entitled the holder to convert the note to 50% equity in the Fund's building. To cancel the note, the Fund gave the note holder 40,321 shares of Redwood Broadcasting, Inc. common stock, 7,000 shares of Palo Verde Group, Inc. common stock, and a $93,000 promissory note payable. The transaction resulted in termination of the note holder's right to convert the note into equity in the building. The resultant cost to terminate the note holder's right of $74,537 was allocated to the Fund's building. The Fund subsequently reduced the $93,000 promissory note by $35,876, in exchange for 20,500 shares of Discovery Technologies, Inc. common stock. During 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. THE ROCKIES FUND, INC. Statements of Changes in Net Assets Years Ended December 31, 1997 and 1996 1997 1996 Increase (decrease) in net assets from investment activities: Net investment loss $(25,796) $(428,689) Net realized (loss) gain from investments (net of income tax expense of $118,000 in 1996) (51,374) 1,549,196 Net unrealized appreciation (depreciation) of investments 51,240 (97,339) Net increase (decrease) in net assets from investment activities (25,930) 1,023,168 Net assets at beginning of year 2,330,732 1,307,564 Net assets at end of year $2,304,802 $2,330,732 THE ROCKIES FUND, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997 AND 1996 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 risk 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. In 1997, the Fund also invested in commercial real estate ventures located in Colorado and Wyoming. A significant portion of the Fund's investments consists of securities that are subject to restrictions on sale. Restricted securities cannot be sold publicly without prior agreement with the issuer to register these securities under the Securities Act of 1933, as amended (the "Act"), or by selling such securities under Rule 144 of the Act, or other rules under the Act which permit only limited sales under specified conditions. The Fund's ability to sell its investments in restricted securities may be limited by, and subject to, the lack or limited nature of a trading market for such securities. These limitations could prevent or delay any sale of the Fund's securities or reduce the amount of proceeds that might otherwise be realized. Restricted securities generally sell at a price lower than similar securities that are not subject to restrictions on sale. When restricted securities are sold to the public, the Fund, under certain circumstances, may be deemed an Underwriter or a Controlling Person for the purposes of the Act, and be subject to liabilities as such under the Act. As shown in the accompanying financial statements, the Fund incurred net investment losses in 1997 and 1996. 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 bid price on the exchange where the securities are principally traded. Securities reported on the NASDAQ National Market System are valued 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 unsecured and 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, 1997 and 1996 total approximately $1,360,000 and $964,000, respectively. The estimated fair value of restricted securities whose values have been estimated by the Board in the absence of readily attainable market values is approximately $256,000 and $30,000 at December 31, 1997 and December 31, 1996, 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. In September 1997, the Fund purchased two commercial real estate investments located in Colorado and Wyoming. At December 31, 1997, these investments are under contract for sale in 1998, and are recorded at their estimated fair values, which is based on the agreed-upon, respective sales prices of these properties (Note 2). Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. 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 operations 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, automobile and equipment, 3 to 10 years; leasehold improvements, 6 to 8 years; building, 40 years. Assets under construction are not depreciated until placed into service. 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, an impairment loss is recognized based on the difference between the assets' carrying values over the estimated fair values. Based on management's review, the Fund does not believe that any long- lived asset impairments occurred in 1997. Earnings (loss) per share: The Company adopted 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 1997 and 1996. The adoption of SFAS No. 128 did not impact previously reported EPS. Reclassifications: Certain 1996 amounts have been reclassified to conform to the 1997 presentation. 2. Real estate transactions: Real estate operations: 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. The Fund is currently leasing office space in the Northpark Building from the new owner on a month-to-month basis. Lease expense for 1997 was approximately $8,100. On April 1, 1997, the Fund purchased five acres of undeveloped commercial land, also located in Colorado Springs, Colorado (the "Woodmen Property"), for $390,000. The Fund intends to develop and build a commercial office building on this property. Through December 31, 1997, the Fund incurred approximately $101,000 of land development and building design costs, which are recorded as construction in progress. 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 received the $35,000 rent in 1997, which has been recorded as deferred rent. 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 a $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. 3. Long-term debt: 1997 1996 Related parties: Note payable, interest at 8%, default interest at 12%, due through September 1998, collateralized by the Hotel Investment $150,000 $- Notes payable, interest at 7%-12%, unsecured, due on demand 9,244 6,500 Note payable, non-interest bearing, paid in March 1998, collateralized by certain Fund investments in securities 13,130 - Total related parties 172,374 6,500 3. Long-term debt (continued): 1997 1996 Others: Line of credit, interest at prime plus 2% (10.5% at December 31, 1997), due May 1998, collateralized by certain Fund investments in securities, $500 remaining credit available at December 31, 1997 74,500 74,500 Line of credit, interest at prime plus 2% (10.25% at December 31, 1996), collateralized by the Northpark Building, paid March 31, 1997 in connection with the sale of Northpark Building - 100,000 Note payable, interest at 8%, principal and interest due in monthly installments of $3,640, due January 2007, collateralized by certain Fund investments in securities 281,348 - Mortgage note payable, interest at prime plus 1.25% (9.75% at December 31, 1997), principal and interest due in monthly installments of $4,790, remaining principal and interest due August 2002, collateralized by the Chestnut Building and an assignment of rents 497,528 - Mortgage note payable, interest at 8%, collateralized by Northpark Building, paid March 31, 1997 in connection with the sale of Northpark Building - 358,436 Note payable, interest at 8%, unsecured, paid in March 1997 - 14,125 3. Long-term debt (continued): Others (continued): Borrowings on margin accounts, variable interest rates (8% and 9.5% at December 31, 1997), due on demand 121,494 24,609 Other long-term obligation 11,393 - Total others 986,263 571,670 Total long-term debt 1,158,637 578,170 Less current maturities (899,106) (262,821) $ 259,531 $ 315,349 Aggregate long-term debt maturities are as follows: 1998 $899,106 1999 23,629 2000 25,590 2001 27,715 2002 30,015 Thereafter 152,581 $ 1,158,636 The weighted average interest rate on all debt for 1997 and 1996 was 8.8%. Interest expense incurred on related party debt was $5,362 and $3,567 in 1997 and 1996, respectively. 4. 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. Income tax expense (benefit) consists of the following: 1997 1996 Current: Federal $(94,000) $100,000 State (11,000) 18,000 (105,000) 118,000 Deferred Federal 94,000 - State 11,000 - 105,000 - $ - $118,000 The reconciliation between the statutory federal expense (benefit) and the effective tax is as follows: 1997 1996 Statutory federal income tax expense (benefit) (34%) $ (9,000) $388,000 State taxes, net of federal income tax benefit (1,000) 37,000 Net operating losses not utilized (utilized) 10,000 (315,000) Alternative minimum tax - 8,000 Income tax expense $ - $118,000 4. Income taxes (continued): The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996 are as follows: 1997 1996 Deferred tax assets: Net operating loss carryforwards $58,000 $ - Investments, unrealized net losses 9,575 Less valuation allowance (9,575) Net deferred tax assets 58,000 - Deferred tax liabilities: Investments, unrealized net gains (13,000) - Property and equipment, deferred gain (150,000) - Gross deferred tax liabilities (163,000) - Net deferred tax liabilities $(105,000) $ - At December 31, 1997, the Fund has approximately $150,000 of net operating loss carry forwards which expire through 2012. 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 for certain alleged violations of federal securities laws. In July 1997, the Fund received notification that the SEC was planning to recommend an enforcement action against the Fund's President for certain additional alleged violations of SEC laws. The SEC invited the Fund and the Fund's president to make submissions setting forth the position and arguments of the Fund and the Fund's president regarding the SEC staff's planned recommendation. The Fund did so in October 1996, and at the SEC's request, the Fund supplemented its submission in December 1996. The Fund's president also did so in August 1997. The Fund has not received a response to the submissions and has not been advised of any timetable for the SEC staff to make its final determination about whether to recommend an enforcement action. Management is unable to predict, with any certainty, the outcome of the investigation, or the ultimate effect on the Fund. Employee benefits: The Fund maintains a salary-deferred, simplified employee pension plan. Employer contributions are discretionary, and there were no employer contributions in 1997 and 1996. Consulting agreement: In October 1996, the Fund entered into an agreement with a former officer of the Fund, whereby the former officer provided consulting services for $1,000 a month. The agreement was terminated in 1997. Consulting expense for 1997 and 1996 was $12,000 and $2,000, respectively. 6. Transactions with investees and related parties: Receivables from investees represent reimbursable expenses totaling $562 and $23,072 at December 1997 and 1996, respectively. The Fund utilizes a brokerage and trust company as primary custodian of its securities. This company is also the majority shareholder of the Fund. Custodial fees incurred in 1997 and 1996 were $13,234 and $8,900, respectively, and at December 31, 1996, the Fund has a payable due to this affiliate, for investment securities purchased, of approximately $153,566. As of December 31, 1997, the Fund has a receivable due from this affiliate for investment securities sold of $4,959. 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: Officer/ Director Name Age TitleSince Stephen G. Calandrella 37 President,1991 Chief Executive Officer, and Director Charles C. Powell 44 Director1991 Clifford C. Thygesen 63 Director1991 Barbara A. Hamstad 32 Chief Accounting Officer1996 and Treasurer Windy D. Haddad 25 Chief Administrative Officer1996 and Secretary Stephen G. Calandrella, President and Director. Mr. Calandrella has been President and a Director of The Rockies Fund, Inc. since February, 1991, and Chief Executive Officer since January 30, 1994. Mr. Calandrella has previously served as a Director of Kelly Motors, Ltd., Good Times Restaurants, Inc., Southshore Corp., and Cogenco International, Inc. Mr. Calandrella also served as a Director for Combined Penny Stock Fund, Inc. and Redwood MicroCap Fund, Inc., both of which are closed-end investment companies registered under the Investment Company Act of 1940. Mr. Calandrella currently serves as Interim President and a member of the Board of Directors of Global Casinos, Inc., a publicly-held company engaged in the ownership and operation of domestic and international casinos and limited stakes gaming properties; and as a Director of Optimax Industries, Inc., a NASDAQ listed holding company; American Educational Products, a NASDAQ listed supplier of childrens' learning tools; and Guardian Technologies, a NASDAQ listed maker of bullet proof vests; and Gold Capital Corporation, a publicly traded mining company. 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 is currently President and Director of Antalys Corporation, a wholly owned subsidiary of Baan Company. From 1992 to 1996, Mr. Powell was Vice-President of Finance for KaPre Software. From March 1992 to June 1993, Mr. Powell was CEO of Generation 5 Technologies, Inc. From January 1989 to March 1992, he was Director of International Operations at J.D. Edwards & Company, a software company that develops and distributes general business application financial software. From September to December, 1988, Mr. Powell was employed by the company to provide assistance in financial and operation areas. From April 1988 to June 1989, Mr. Powell was President of Sheridan Securities, Inc., an investment banking firm. From January 1987 to March 1988 he was international sales manager for Columbine Systems, a software development Fund for the broadcast industry. From January 1985 to December 1986, he was employed by Aweida Systems engaged in the business of distributing company products, first as Chief Financial Officer and subsequently as Vice President of Marketing. From February 1979 to December 1985, he was employed by Storage Technology, Inc., engaged in the business of manufacturing computer storage devices in a variety of capacities, with his last position being that of Vice President of Financial Marketing. Mr. Powell graduated from the University of Colorado with a Bachelor of Science degree in accounting and finance in 1976 and he received his license as a Certified Public Accountant in 1976. Mr. Powell currently serves as a Director for The Rockies Fund, Kinetics.com, and International Nursing. Clifford C. Thygesen, Director. Mr. Thygesen has been a director of the Fund since February, 1991. Mr. Thygesen has also been a Director of American Educational Products, Inc. since 1986, and President since January, 1996. American Education Products is a publicly traded company involved in the manufacture and distribution of educational products, with principal offices in Boulder, Colorado. Mr. Thygesen is also a current Director of Wall Street Racing Stables, a publicly-traded company involved in the ownership, racing and breeding of thoroughbred horses. Mr. Thygesen is also a partner in two land development firms located on Colorado Springs and Fleming, Colorado and a Director of Usasurance Group. From 1971 to 1973, Mr. Thygesen was Vice-President of Operations for the Ithaca Gun Company of Ithaca, New York, a manufacturer of high quality firearms. From 1973 to 1976, Mr. Thygesen served as President of Alpine Designs Corporation, a company which produces backpacking equipment, ski wear and hunting apparel. From 1977 to 1981, he served as Vice-President of Manufacturing for Pure Cycle Corporation, a company that designed water recycling systems for residential use. From 1981 until February, 1988, Mr. Thygesen was President, Chief Operating Officer and a Director of Tri Coast Environmental Corporation, formerly Colorado Venture Capital Corporation. He received his B.S. degree in Industrial Administration from the University of Illinois in 1961. Barbara A. Hamstad, Mrs. Hamstad has served as Internal Accountant for The Rockies Fund, Inc. since September of 1993 and as Chief Accounting Officer and Treasurer since September, 1996. Mrs. Hamstad also serves as Secretary and Director for Marco Foods, Inc., a small public shell actively trading in the stock market. Prior to Mrs. Hamstad's accounting positions she worked as a Vendor Cost Analyst for Raytheon in Santa Barbara, California. From January, 1989, through June, 1992, she analyzed vendor cost proposals for subcontracted components, conducted on-site evaluations of subcontractors, and developed price recommendations based on detailed analyses of cost structure. From June 1987 through August 1988, she worked as a Financial Assistant at IDS Financial Services in San Luis Opisbo, California. Mrs. Hamstad graduated from California Polytechnic State University, San Luis Obispo, CA, with a bachelor's degree in Business Administration, concentrating in Financial Management. Windy D. Haddad, has worked for The Rockies Fund, Inc. since August 9, 1993 and has served as Chief Administrative Officer since October 1, 1995 and as Corporate Secretary since September 1, 1996. Ms. Haddad currently serves as Corporate Secretary of Global Casinos, Inc., a NASDAQ listed gambling company. She also serves as Vice President, Secretary and Director of Land Resources Corporation, a real estate development Fund with operations in Flemming, Colorado, and as a Director of Lone Oak Vineyards a 40 acre vineyard property in Napa Valley, California. Ms. Haddad graduated from Colorado College in 1993, earning her Bachelor of Arts Degree in Economics. There are no material proceedings to which any director, officer or affiliate of the Fund, or any owner of record or beneficially of more than five percent (5%) of any class of voting securities of the Fund, or any associate of any such director, officer, affiliate of the Fund, or security holder is a party adverse to the Fund or any of its subsidiaries or has a material interest adverse to the Fund or any of its subsidiaries. During the last five (5) years except as set forth herein no director or officer of the Fund has: (1) had any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) been convicted in a criminal proceeding or subject to a pending criminal proceeding; (3) been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or (4) been found by a court of competent jurisdiction in a civil action, the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated. Mr. Calandrella serves as Interim President of Global Casinos, Inc., a portfolio and affiliated company. During 1995, Global Casinos, Inc. caused one of its wholly-owned subsidiaries, Casinos USA, Inc. to file a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. In December 1996, the United States Bankruptcy Court for the District of Colorado entered an order confirming a plan of the organization for Casinos USA, Inc. There currently exists no arrangement or understanding between any executive officer and between any other person pursuant to which any person is to be selected as an executive officer. No family relationships exist between any current or prospective executive officer or director. Each director of the Fund who is not also an officer is paid the sum of $1,000 for each director's meeting attended by such director. All directors are reimbursed for expenses associated with attendance at Board of Directors meetings of the Fund. Other than the foregoing, no director receives any additional compensation or remuneration as a member of the Fund's Board of Directors. Each Director is elected to serve a term of one (1) year and is elected annually at the regular annual meeting of the Fund's stockholders. Each executive officer is elected annually at the first meeting of the Fund's Board of Directors held immediately following each annual meeting of shareholders. Each executive officer holds office until his successor is duly elected and qualified or until his resignation or until he has been removed in the manner provided by Fund's By-laws. No Director has resigned or declined to stand for reelection to the Board of Directors since the date of the last annual meeting of the Fund's stockholders due to any disagreement with the Fund on any matter relating to the Fund's operations, policies or practices. During the fiscal year ended December 31, 1997, 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, 1997. 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 $100,000. SUMMARY COMPENSATION TABLE Long Term Compensation Annual Compensation Awards Payouts Other Name Annual Restricted and Compen- Stock LTIP All Other Principal Salary Bonus sationAward(s) Options/Payouts Compensa- Position Year ($) ($) ($) ($) SARs(#) ($) tion ($) 1997 $48,000 -0- -0- $-0- -0- -0- -0- Stephen G. Calandrella, 1996 $48,000 -0- -0-$-0- -0- -0- -0- President 1995 $48,000 -0- -0- $-0- -0- -0- -0- No other executive officer of the Fund received compensation during the years ended December 31, 1997, 1996 or 1995, in excess of $100,000. All officers and employees of the Fund are eligible to participate in the Fund's group health and dental insurance plan. The Fund also provides a Salary Deferred Simplified Employee Pension Plan (SAR-SEP) adopted since September, 1994. There has been no employer contribution made to the Plan since inception, nor does the Fund incur any administrative fees associated with this Plan. The Fund currently has one (3 year) employment agreement written to an executive officer, Ms. Windy D. Haddad, effective October 1, 1995. In 1996, the Fund issued two cash bonuses to its employees, Mrs. Barbara Hamstad and Ms. Windy Haddad. Mr. John R. Overturf, Jr. resigned as Vice President of The Rockies Fund Inc, effective August 28, 1996 and he signed a Consultant Agreement with The Rockies Fund, Inc., effective October 1, 1996, as a consultant for the Fund's Chestnut Building and other real estate transactions at $1,000 per month and subject to a 30 day cancellation by either party in writing. Mr. Craig T. Rogers resigned as Chief Operating Officer and Secretary, effective October 1, 1996. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of December 31, 1997, 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 Owner of Beneficial Ownership(1) of Class ______________________________________________________________________ ___________ Common D.A Davidson & Co.(2) 233,367 36.4% Stock 8 Third Street, North Great Falls, Montana 59401 Common Stephen G. Calandrella(3) 234,000 36.5% Stock Common Charles C. Powell -0- 0.0% Stock Common Clifford C. Thygesen 2,000 0.3% Stock Common Barbara A. Hamstad 1,500 0.2% Stock Common Windy D. Haddad 1,500 0.2% Stock Common All Officers and 239,000 37.3% Stock Directors as a Group (5 Persons) 1. Beneficial Owners listed have sole voting and investment power with respect to the shares unless otherwise indicated. 2. Voting and investment power with respect to securities held by D.A. Davidson & Company is exercised by its Board of Directors. 3. Includes 12,500 shares of common stock held by Aztec Capital Corp. of which Mr. Calandrella is officer, director and majority shareholder. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Notes payable to related parties at December 31, 1997 include $6,500 payable to a related party of the Fund's President, which note is unsecured, carries interest at the rate of twelve percent (12%) per annum, and is due upon demand. The Fund currently holds a 5% ownership interest in Bear Star, LLC., formerly a wholly owned subsidiary of Columbine Home Sales, LLC., and therefore Bear Star, LLC. would be considered to be an affiliated company as a result of the Fund's ownership during 1996. As a result of the Fund's investment during 1997 and/or position on the entity's Board of Directors, the Fund would, at various times during fiscal 1997, be considered to have been an affiliate of American Educational Products, Inc., Guardian Technologies, Inc., Global Casinos, Inc., Optimax Industries, Inc., Southshore Corporation, Cova Technologies, Kinetiks.com and Neco Land Resources, LLC. On October 1, 1995, Mr. Calandrella, the Fund's President and Director, was elected to serve as Interim President of Global Casinos, Inc., a portfolio company and affiliate of the Fund. In consideration of his services as Interim President of Global Casinos, Inc., Mr. Calandrella received 9,000 shares in 1996 and has also been granted Incentive Stock Options under the Global Casinos, Inc. Stock Incentive Plan, exercisable to purchase, in the aggregate, 15,000 shares of common stock at an exercise price of $5.00 per share. Of those Incentive Stock Options, 5,000 are fully vested, and the remaining 10,000 Incentive Stock Options vest ratably over two (2) years, subject to Mr. Calandrella's continuing to serve as an executive officer or key employee of Global Casinos, Inc. As of March 15, 1997, Mr. Calandrella has continued to serve as Interim President of Global Casinos. Mr. Calandrella also serves as a member of the Board of Directors of Global Casinos, Inc. In consideration of his services as a director of Global Casinos, Inc., Mr. Calandrella has been granted Non-Qualified Stock Options exercisable to purchase, in the aggregate, an additional 15,000 shares of common stock at an exercise price of $5.00 per share, of which 5,000 Non-Qualified Stock Options are fully vested, and the remaining 10,000 Non-Qualified Stock Options vest ratably over two (2) years, subject to Mr. Calandrella's continuing to serve as a director of that Fund. There exists no arrangement or agreement whereby the Fund has any direct or indirect beneficial interest or pecuniary interest in any of the securities or other compensation issued to Mr. Calandrella in consideration of his services as an executive officer or director of Global Casinos, Inc. PART IV ITEM 14. 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' Report; Statements of Assets and Liabilities - December 31, 1997 and 1996; Schedules of Investments - December 31, 1997 and 1996; Statements of Operations - Years Ended December 31, 1997 and 1996; Statements of Stockholders' Equity - Years Ended December 31, 1997 and 1996; Statements of Cash Flows - Years Ended December 31, 1997 and 1996; Statements of Changes in Net Assets - Years Ended December 31, 1997 and 1996; Notes to Financial Statements - December 31, 1997 and 1996 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, 1997. 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 Director Charles M. Powell Director Clifford C. Thygesen 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. Calandrella 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
6 YEAR DEC-31-1997 DEC-31-1997 3,118,071 3,148,989 53,607 15,809 595,261 3,813,666 125,120 1,158,687 225,057 1,508,864 0 2,907,646 640,256 640,256 (1,919,099) 0 1,285,337 0 30,918 2,304,802 19 52,936 10,822 535,939 (414,272) (51,374) 51,240 (25,930) 0 0 0 0 0 0 0 (25,930) (1,893,303) 1,336,711 0 0 0 62,907 535,939 2,317,767 3.640 (.04) 0 0 0 0 3.60 .231 1,158,637 1.81
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