UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarterly Period Ended September 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 0-28007
GOLFGEAR INTERNATIONAL, INC.
---------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 43-1627555
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5285 Industrial Drive, Huntington Beach, California 92649
--------------------------------------------------------------
(Address of principal executive offices)
(714) 899-4274
--------------------------
(Issuer's telephone number)
Not applicable
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
As of September 30, 2002, the Company had 34,586,454 shares of common stock
issued and outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Documents incorporated by reference: None.
1
GOLFGEAR INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2002
(Unaudited)and December 31, 2001
Consolidated Statements of Operations (Unaudited) - Three
Months and Nine Months Ended September 30, 2002 and 2001
Consolidated Statements of Cash Flows (Unaudited) - Nine
Months Ended September 30, 2002 and 2001
Notes to Consolidated Financial Statements (Unaudited) -
Nine Months Ended September 30, 2002 and 2001
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1 - Legal proceedings
Item 2 - Recent sales of unregistered securitites
Item 6 - Exhibits and reports on form 8-K
SIGNATURES
EXHIBIT
2
GolfGear International, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, December 31,
2002 2001
--------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash $ 390,664 $ 120,135
Accounts receivable, net of
allowance for doubtful
accounts of $76,754, and
$78,337 at September 30, 2002,
and December 31, 2001,
respectively 150,694 335,755
Inventories 489,902 691,265
Prepaid expenses 155,032 22,450
--------------- -------------
Total current assets 1,186,292 1,169,605
--------------- -------------
Property and equipment, net
of accumulated depreciation 102,209 128,754
--------------- -------------
Other assets:
Patents and trademarks, net
of accumulated amortization 68,780 83,922
Deferred financing costs, net 401,375 ---
Deposits and other assets 246,384 12,400
--------------- -------------
716,539 96,322
--------------- -------------
Total assets $ 2,005,040 $ 1,394,681
=============== =============
(continued)
3
GolfGear International, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
September 30, December 31,
2002 2001
--------------- -------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued
expenses $ 599,161 $ 1,127,427
Income tax payable 1,600 8,000
Accrued product warranties 113,194 101,593
Accrued interest payable 50,154 8,438
Accrued officers' compensation 10,000 90,961
Bank credit line payable 47,921 57,100
Notes payable to stockholders --- 97,166
Notes payable, current portion 83,177 69,091
--------------- -------------
Total current liabilities 905,207 1,559,776
--------------- -------------
Non-current liabilities:
Note payable --- 50,000
Convertible debentures 2,100,000 ---
Stockholders' deficit:
Common stock, $0.001 par value;
Authorized - 50,000,000 shares
Issued and outstanding -
34,586,454 shares and 17,989,454
shares at September 30, 2002 and
December 31, 2001, respectively 34,586 17,989
Additional paid-in capital 10,522,296 8,901,273
Accumulated deficit (10,618,674) (9,134,357)
--------------- -------------
Total stockholders' deficit (61,792) (215,095)
--------------- -------------
Common stock purchase
receivable note (938,375) ---
--------------- -------------
(1,000,167) (215,095)
--------------- -------------
Total liabilities and
stockholders' deficit $ 2,005,040 $ 1,394,681
=============== ==============
See accompanying notes to consolidated financial statements.
4
GolfGear International, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
Three Months Ended
September 30,
--------------------------------
2002 2001
-------------- ----------------
Sales $ 371,785 $ 417,362
Cost of goods sold 301,771 253,697
-------------- ----------------
Gross profit 70,014 163,665
Expenses:
Selling and marketing 258,385 67,948
Tour and pro contracts 46,138 31,848
Provision for bad debts 8,877 90,234
General and administrative 404,810 314,507
Depreciation and amortization 13,960 27,664
-------------- ----------------
Total expenses 732,170 532,201
-------------- ----------------
Loss from operations (662,155) (368,536)
Other income (expense):
Gain on settlement of
accounts payable 12,380 ---
Interest income 15,553 --
Interest expense (124,227) 1,308
Other expense --- ---
-------------- ----------------
Net loss $ (758,449) $ (367,228)
-------------- ----------------
Net loss applicable to common
stockholders:
Net loss $ (758,449) $ (367,228)
Less dividends on Series A
Senior Convertible
Preferred Stock --- (34,494)
-------------- ----------------
Net loss applicable to common
stockholders $ (758,449) $ (401,722)
============== ================
Net loss per common share -
Basic and diluted $ (0.02) $ (0.03)
============== ================
Weighted average number of
common shares outstanding -
basic and diluted 34,586,154 15,539,154
============== ================
See accompanying notes to consolidated financial statements.
5
GolfGear International, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
Nine Months Ended
September 30,
-------------------------------
2002 2001
Sales $ 1,135,631 $ 1,728,887
Cost of goods sold 865,993 970,336
-------------- ----------------
Gross profit 269,638 758,551
-------------- ----------------
Expenses:
Selling and marketing 512,342 284,728
Tour and pro contracts 64,804 86,911
Provision for bad debts 31,792 149,945
General and administrative 998,419 897,960
Depreciation and amortization 43,844 82,919
-------------- ----------------
Total expenses 1,651,201 ,502,463
-------------- ----------------
Loss from operations (1,381,563) (743,912)
Other income (expense):
Gain settlement of
accounts payable 69,654 ---
Interest income 22,265 930
Interest expense (167,904) (12,651)
Other expenses (26,769) ---
-------------- ----------------
Net loss $ (1,484,317) $ (755,633)
============== ================
Net loss applicable to common
stockholders:
Net loss $ (1,484,317) $ (755,633)
Less dividends on Series A
Senior Convertible
Preferred Stock --- (99,667)
-------------- ----------------
Net loss applicable to common
stockholders $ (1,484,317) $ (855,300)
============== ================
Net loss per common share -
Basic and diluted $ (0.05) $ (0.06)
============== ================
Weighted average number of
common shares outstanding -
basic and diluted 25,888,071 15,315,080
============== ================
See accompanying notes to consolidated financial statements.
6
GolfGear International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
September 30,
-------------------------
2002 2001
------------ -----------
Cash flows from operating activities:
Net loss $(1,484,317) $ (755,633)
Adjustments to reconcile net loss
to net cash provided by (used
in) operating activities:
Accrued interest income (13,400)
Depreciation and amortization 43,842 82,919
Provision for obsolete inventory 193,763 ---
Amortization of deferred
financing costs 114,679 ---
Provision for bad debts 31,792 149,945
Gain on settlement of
accounts payable (69,654) ---
Fair value of stock options and
warrants issued to non-employees 19,250 66,872
Loss on disposal of assets 26,769 ---
Changes in operating assets and
liabilities:
(Increase) decrease in:
Accounts receivable 153,269 46,799
Inventories 7,600 142,843
Prepaid expenses (151,830) 34,162
Deposits (233,984) (21,877)
Increase (decrease) in:
Accounts payable and
accrued expenses (465,013) 237,357
Accrued product warranties 11,601 12,996
Accrued interest payable 41,716 7,743
Accrued officer's compensation (80,961) 24,000
------------ -----------
Net cash provided by (used
in) operating activities (1,854,878) 28,126
------------ -----------
Cash flows from investing activities:
Purchase of property and equipment (28,925) (90,881)
------------ -----------
Net cash used in investing activities (28,925) (90,881)
------------ -----------
(continued)
7
GolfGear International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited) (continued)
Nine Months Ended
September 30,
------------------------
2002 2001
----------- -----------
Cash flows from financing activities:
Increase (decrease) in notes
payable to stockholders $ (97,166) $ 26,666
Decrease in bank credit line (9,179) ---
Proceeds from sale of
convertible debentures 2,100,000 ---
Deferred financing costs (3,434) ---
Proceeds from short-term borrowings --- 29,000
Repayments of short-term borrowings (35,914) (6,220)
Proceeds from sale of common stock 200,025 ---
----------- -----------
Net cash provided by (used in)
financing activities 2,154,332 49,446
----------- -----------
Cash:
Net increase 270,529 (13,309)
At beginning of period 120,135 39,754
----------- -----------
At end of period $ 390,664 $ 26,445
=========== ===========
Non-cash Transactions:
Deferred financial costs $ (516,054) ---
=========== ===========
Settlement of accounts payable $ 183,524 ---
New note issued 100,000 ---
Value of stock issued 26,250 ---
----------- -----------
Gain on settlement of
accounts payable $ 69,654 ---
=========== ===========
Other Cash Information:
Interest paid $ 11,509 ---
=========== ===========
See accompanying notes to consolidated financial statements.
8
GolfGear International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Nine Months Ended September 30, 2002 and 2001
1. Basis of Presentation
The accompanying consolidated financial statements have been prepared
by GolfGear International, Inc. and subsidiaries (collectively, "GolfGear" or
the "Company") pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC")for interim financial reporting. These
consolidated financial statements are unaudited and, in the opinion of
management, include all adjustments (consisting of normal recurring adjustments
and accruals) necessary for a fair presentation of the balance sheets, operating
results, and cash flows for the periods presented. Operating results for the
three and nine months ended September 30, 2002 are not necessarily indicative of
the results that may be expected for the fiscal year ending December 31, 2002.
Certain financial information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been omitted in accordance with the rules and
regulations of the SEC. These consolidated financial statements should be read
in conjunction with the audited consolidated financial statements, and
accompanying notes, included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001. The consolidated balance sheet at December
31, 2001 has been derived from the audited consolidated financial statements at
that date.
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, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
9
Organization and Description of Business - The Company designs, develops and
markets premium golf clubs and related golf products utilizing its proprietary
forged face insert technology.
The golf club industry is highly seasonal, with most companies experiencing up
to 60% of their annual sales between February and June, with an additional 20%
of their annual sales occurring between October and December for the Christmas
buying season.
The Company is attempting to increase revenues through various means, including
expanding brands and product offerings, new marketing programs, and the
production of an infomercial, which it hopes will air in early December. These
types of programs take time to develop and the results of any successful program
may not be apparent in the Company's revenues for 2002.
The Company has raised $2,300,025 in new capital, and is currently attempting to
raise additional capital but there can be no assurances that the Company will be
successful in this regard. To the extent that the Company is unable to secure
the capital necessary to fund its future cash requirements on a timely basis
and/or under acceptable terms and conditions, the Company may have to reduce its
operations to a level consistent with its available working capital resources.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, GearFit Golf Company,
Pacific Golf Holdings, Inc., Bel Air - Players Group, Inc. and Leading Edge
Acquisition, Inc. All significant intercompany transactions and balances have
been eliminated in consolidation.
Loss Per Share - Basic earnings per share are calculated by dividing net loss
applicable to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share reflects the
potential dilution that would occur if stock options, and warrants were
exercised. These potentially dilutive securities were anti-dilutive for all
periods presented, and accordingly, basic and diluted earnings per share are the
same for all periods presented. As of September 30, 2002 and 2001, potentially
dilutive securities consisted of outstanding stock options and warrants to
acquire 3,179,721 shares and 2,622,789 shares of common stock, respectively.
2. Convertible Debentures
On June 6, 2002, GolfGear International, Inc. (the "Company") completed the sale
of $2,000,000 of convertible debentures. The debentures are convertible into
common stock at $0.25 per share for a period of twelve (12) months commencing
six (6) months after the initial sale of the debentures. The debentures are
secured by the Company's patents. For each share of common stock issued upon
conversion of the debentures, one (1) common stock purchase warrant will be
issued, which will be exercisable for a period of eighteen (18) months at $0.10
per share. The costs associated with the issuance of the Debentures have been
capitalized and are being amortized over the 18 months. If the Debentures
convert to equity prior to the 18 month term the unamortized portion will be
debited to additional paid in capital. The Company has not recognized any
10
expense for the warrants at this time because the warrants are only issued when
and if the debentures convert to stock. At that point the company will treat
the value of the warrants as a cost of equity.
Pursuant to the terms of this financing, on June 11, 2002 Wyngate's President,
Peter H. Pocklington, was appointed as Chairman of the Board of Directors and
Chief Executive Officer. The financing also provides for Wyngate to appoint a
majority of the Board of Directors of the Company. To this end Wyngate has
appointed Roger Miller, Dean Rienmuth Michael Piraino, the Company's president,
COO and CFO.
3. Stockholders' Equity
For the three months ended September 30, 2001, 3,633 shares of Series A Senior
Convertible Preferred Stock were issued as payment of dividends of $34,494.
For the nine months ended September 30, 2001, 10,625 shares of Series A Senior
Convertible Preferred Stock were issued as payment of dividends of $99,667.
During the nine months ended September 30, 2002 the Company canceled 105,000
shares issued to a former employee and issued 5,000 shares in consideration for
an extension granted on a certain note payable.
On March 23, 2002 the Company entered into an agreement for the sale of
15,000,000 shares of its common stock, for $1,125,000, at which time $200,025
was received in cash and $924,975 in a promissory note with interest at 2.88%
per annum. Pursuant to the promissory note, the balance is due and payable
October 8, 2003. The promissory note is secured by a stock pledge agreement
which pledges 12,333,000 shares of the common stock, which shall be held by the
Company as security for payment of the promissory note. For a period of eighteen
(18) months from closing, Peter H. Pocklington shall have the right to have the
Company acquire Meditron Medical, Inc., a Canadian corporation engaged in the
medical manufacturing and sales business controlled by him, in a reverse merger
transaction through the issuance of shares of common stock of the Company only,
with an agreed value of Twenty Five Cents ($0.25) per share. The value of the
medical products company shall be determined by obtaining a fairness opinion
from a reputable investment-banking firm.
On May 30, 2002, the Company entered into a settlement agreement and mutual
general release (the "Settlement Agreement") with MC Corporation. The Settlement
Agreement provided that the Company issue a total of 3,000,000 shares of common
stock to MC Corporation, of which 2,450,330 shares have already been reflected
as issued and outstanding in the Company's financial statements at December 31,
2001 and March 31, 2002. The additional 549,700 shares of common stock are
reflected as issued and outstanding in the June 30 2002.
On June 6, 2002 the Company completed the sale of $2,000,000 of convertible
debentures. The debentures are convertible into common stock at $0.25 per share
for a period of twelve (12) months commencing six (6) months after the initial
sale of the debentures. As part of this financing, the Company issued 1,072,000
shares of its common stock as a finders fee.
11
Effective June 30, 2002 the Company issued 75,000 shares of common stock as part
of accounts payable settlement on a debt of $183,524. The Company recorded note
payable of $100,000 and a gain of $69,654. The Stock was valued at the current
market price of $26,250.
On September 13, 2002 the Company, and ThinkTank Holdings LLC, mutually agreed
to terminate ThinkTank's pending $3 million equity investment in GolfGear. The
Company paid ThinkTank Holdings LLC, a $25,000 termination fee and executed a
mutual release.
4. Segment and Geographic Information;
The Company operates in one business segment. The Company sells to customers in
the United States, and internationally. During the three months ended September
30, 2002, sales to customers in the United States, and the rest of the world
were $262,799, and $33,088, respectively. During the three months ended
September 30, 2001, sales to customers in the United States, and the rest of the
world were $360,331, and $57,031 respectively. The three months ended September
30, 2002 Sales included $75,898 in royalties. There were no royalties in 2001.
During the nine months ended September 30, 2002, sales to customers in the
United States, and the rest of the world were $981,785, and $77,948,
respectively. During the nine months ended September 30, 2001, sales to
customers in the United States, and the rest of the world were $1,360,493, and
$368,394 respectively. The nine months ended September 30, 2002 Sales included
$75,898 in royalties. There were no royalties in 2001.
5. Inventories
At September 30, 2002 and December 31, 2001, inventories consist of the
following:
2002 2001
---------- ---------
Components parts $ 261,146 $482,024
Finished goods 374,503 254,905
---------- ---------
635,649 736,929
Reserve for obsolescence (145,747) (45,664)
---------- ---------
$ 489,902 $691,265
========== =========
12
6. Legal Proceedings
On November 17, 2001, MC Corporation, a Japanese corporation, filed an action
against the Company in the United States District Court, Central District of
California. MC Corporation had purchased 210,526 shares of Series A Senior
Convertible Preferred Stock in October 1999 for $2,000,000 which, combined with
the 34,504 shares of preferred stock received as dividends and pursuant to an
anti-dilution provision, automatically converted into 2,450,300 shares of common
stock in October 2001 pursuant to a subscription agreement dated September 1,
1999 (the "Subscription Agreement"). MC Corporation contended that it was
entitled to approximately an additional 8,500,000 shares of common stock based
on its interpretation of the reset provision contained in the Subscription
Agreement. The Company filed a cross-complaint against MC Corporation for
reformation of the Subscription Agreement to conform it to the mutual
understanding of the parties at the time it was executed.
MC Corporation had also been the exclusive distributor of the Company's products
in Japan since September 1999. Effective March 5, 2002, the Company terminated
its distribution agreement with MC Corporation as a result of MC Corporation's
failure to comply with the terms of the distribution agreement.
On May 30, 2002, the Company entered into a settlement agreement and mutual
general release (the "Settlement Agreement") with MC Corporation, John Kura and
Keizaikai USA, Inc. (hereinafter collectively referred to as the "MC Corporation
parties"). The Settlement Agreement provides that the Company issue a total of
3,000,000 shares of common stock to MC Corporation, consisting of 2,450,300
shares of common stock for the conversion at (the specified ten to one
conversion rate) of 245,030 shares of convertible preferred stock previously
issued to MC Corporation, and an additional 549,700 shares of common stock for
other consideration. The 2,450,330 shares have already been reflected as issued
and outstanding in the Company's financial statements at December 31, 2001 and
March 31, 2002. The additional 549,700 shares of common stock are reflected as
issued and outstanding in the June 30 2002. The Company was given the right of
first refusal to repurchase any shares of common stock owned by MC Corporation
it may desire to sell in a private transaction for a period of eighteen (18)
months from the date of execution of the Settlement Agreement. All stock options
and warrants owned by the MC Corporation parties were cancelled and MC
Corporation's anti-dilution rights arising under the Settlement Agreement were
terminated. The Settlement Agreement also provides that MC Corporation's
representative on the Company's Board of Directors will resign, and the
Company's distribution agreement with MC Corporation was formally terminated.
The MC Corporation parties agreed to restrict the sale of their shares of common
stock in a public transaction for a period of eighteen (18) months as follows:
no sale of shares shall be made during the first six (6)months; during the
second six (6) months, the MC Corporation parties agreed to sell no more than
fifty percent (50%) of the limitation on volume restrictions contained in Rule
144(e) of the Securities Act of 1933, as amended; during the third six (6) month
period, all sales must be made in compliance with the volume limitations
contained in Rule 144(e).
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERARTIONS
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Quarterly Report on Form 10-QSB for the quarterly period ended September
30, 2002 contains "forward-looking" statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, including statements that include the
words "believes", "expects", "anticipates", or similar expressions. These
forward-looking statements include, among others, statements concerning the
Company's expectations regarding its working capital requirements, gross margin,
results of operations, business, growth prospects, competition and other
statements of expectations, beliefs, future plans and strategies, anticipated
events or trends, and similar expressions concerning matters that are not
historical facts. The forward-looking statements included in this Quarterly
Report on Form 10-QSB for the quarterly period ended September 30, 2002 involve
known and unknown risks, uncertainties and other factors that could cause the
actual results, performance or achievements of the Company to differ materially
from those expressed in or implied by the forward-looking statements contained
herein.
Overview:
The Company designs, develops and markets premium golf clubs and related golf
products. The Company utilizes its proprietary forged face insert technology to
offer a full line of golf equipment. The Company's patent portfolio with respect
to insert technology is the largest and most comprehensive in the golf industry,
with nine domestic and foreign patents issued related to forged face insert
technology. These patents incorporate a wide variety of forged face insert
materials, including titanium, beryllium copper, stainless steel, carbon steel,
aluminum, and related alloys thereof, and include technology relating to varying
the face thickness of the insert.
The Company operates in one business segment. The Company sells to customers in
the United States, the Far East and Europe.
The golf club industry is highly seasonal, with most companies experiencing up
to 60% of their annual sales between February and June, with an additional 20%
of their annual sales occurring between October and December for the Christmas
buying season.
The consolidated financial statements include the accounts of the Company and
its direct and indirect wholly-owned subsidiaries, Gear Fit Golf Company,
Pacific Golf Holdings, Inc., Bel Air-Players Group, Inc. and Leading Edge
Acquisition, Inc. All significant inter-company transactions and balances have
been eliminated in consolidation.
The Company is attempting to increase revenues through various means, including
expanding brands and product offerings, new marketing programs, and the
production of on an infomercial, which it hopes will air in late November or
early December. These types of programs take time to develop and the results of
any successful program may not be apparent in the Company's revenues for 2002.
14
The Company has raised $2,300,025 in new capital, and is currently attempting to
raise additional capital but there can be no assurances that the Company will be
successful in this regard. To the extent that the Company is unable to secure
the capital necessary to fund its future cash requirements on a timely basis
and/or under acceptable terms and conditions, the Company may have to
substantially reduce its operations to a level consistent with its available
working capital resources.
Results of Operations
Three Months ended September 30, 2002 and 2001 -
Net sales decreased to $371,785 in 2002 from $417,362 in 2001, a decrease of
$45,577 or 12.3%. The Company's sales in the second and third quarter are
generally re-orders. The lack of working capital in the first quarter delayed
the production of inventory resulting in the loss of the initial sell-in. These
initially lost sales result in the loss of re-orders significantly affecting the
Company's second and third quarter sales. The Company also believes that the
decline in sales to its major customers has been caused be the general economic
slowdown and the softness in the equipment industry. The in 2002 Sales number
included $75,898 in royalties. There were no royalties in 2001.
Gross profit decreased to $70,014 in 2002 from $163,665 in 2001, and decreased
as a percentage of net sales to 18.8% in 2002 from 39.2% in 2001. As the Company
continues to redesign its product line it has chosen to write down older
inventory - a total of $100,083 or 27% of the gross profit. This was done in
anticipation of the introduction of new product preventing the Company from
recovering its cost on the older inventory. As the retail price of the Company's
competitors continue to decline the Company may be forced to reduce it's pricing
to remain competitive. Historically the Company has had gross margins in or
about 45% of sales to maintain these margins the Company will have to reengineer
its processes and negotiate better pricing from its suppliers. To this end the
Company has begun this process.
Selling and marketing expenses increased to $258,385 in 2002 (69.5% of sales)
from $67,948 in 2001 (16.3% of sales), an increase of $190,437 or 73.7%. Selling
and marketing expenses increased in 2002 as compared to 2001 as a result of the
Company's continued efforts to increase sales in 2002.
Tour and pro contract expenses decreased to $46,138 in 2002 (12.4% of sales)
from $31,848 in 2001 (7.6% of sales), an increase of $14,290 or 31.0%. Tour and
pro contract expenses increased in 2002 as compared to 2001 as the Company has
begun sponsoring select professional athletes.
General and administrative expenses increased to $404,810 in 2002 (108.9% of
sales) from $314,507 in 2001 (75.4% of sales), an increase of $90,303 (22.3%).
The increases are chiefly due to increased legal expenses associated with
raising new capital including the $25,000 paid to ThinkTank, LLC as a
cancellation expense.
Depreciation and amortization decreased to $13,980 in 2002 from $27,664 in 2001,
a decrease of $13,705 or 98.2%. The decrease is a result of the write off of
Goodwill and certain other tangible assets at December 31, 2001.
15
Interest expense increased to $124,227 in 2002, an increase of $124,227.
Interest expense increased in 2002 as compared to 2001 due to the sale of the
convertible debenture. The debenture bears interest at seven percent (7%). The
sales of the debenture resulted in $516,054 in capitalized financing costs.
These costs are being amortized over the 18-month life of the debenture.
Bad debt expense decreased to $8,877 in 2002 from $90,234 in 2001, a decrease of
$81,357. The allowance in 2002 is being calculated at 3% of sales exclusive of
royalties where as in 2001 specific accounts were being reserved.
Net loss was $758,449 for the three months ended September 30, 2002, as compared
to a net loss of $367,228 for the three months ended September 30, 2001. An
increased loss of $391,221 or 51.6%. The main factors in the increased loss were
the decrease in sales, the inventory write down, the increased marketing
expenses and the increased legal fees.
Net Loss Applicable to Common Stockholders. During the three months ended
September 30, 2001, the Company recorded preferred stock dividends of $34,494,
which were reflected as a return to the preferred stockholder and as an increase
in the loss to common stockholders. The Company did not have preferred stock in
2002.
Nine Months ended September 30, 2002 and 2001 -
Net sales decreased to $1,135,631 in 2002 from $1,728,887 in 2001, a decrease of
$593,256 or 52.2%. The Company's sales in the second and third quarter are
generally re-orders. The lack of working capital in the first quarter delayed
the production of inventory resulting in the loss of the initial sell-in. These
initially lost sales resulted in the loss of re-orders significantly affecting
the Company's second and third quarter sales The Company believes that the
decline in sales to its major customers is a result of the general economic
slowdown and the softness in the equipment industry. The in 2002 Sales number
included $75,898 in royalties. There were no royalties in 2001.
Gross profit decreased to $269,638 in 2002 from $758,551 in 2001, 23.7% in 2002
from 43.9% in 2001. The gross profit would have been $463,402 or 41% the Company
chose to write-down older inventory in the second and third quarter for a total
of $193,764. This was done in anticipation of the introduction of new product
preventing the Company from recovering its cost on the older inventory. As the
retail price of the Company's competitors continue to decline the Company may be
forced to reduce it's pricing to remain competitive. Historically the Company
has had gross margins in or about 45% of sales to maintain these margins the
Company will have to reengineer its processes and negotiate better pricing from
its suppliers. To this end the Company has begun this process.
Selling and marketing expenses increased to $512,342 in 2002 (45.1% of sales)
from $284,728 in 2001 (16.5% of sales), an increase of $227,614 or 44.4%.
Selling and marketing expenses increased in 2002 as compared to 2001 as a result
of the Company's continued efforts to increase sales in 2002.
16
Tour and pro contract expenses decreased to $64,804 in 2002 (5.7% of sales) from
$86,911 in 2001 (5.0% of sales), a decrease of $22,107 or 34.1%. Tour and pro
contract expenses decreased in 2002 as compared to 2001 as previous obligations
have expired and have not been renewed.
General and administrative expenses increased to $998,419 in 2002 (87.9% of
sales) from $897,960 in 2001 (51.9% of sales), an increase of $100,460 (10.1%).
The increases are chiefly due to increased legal expenses associated with
raising new capital including the $25,000 paid to ThinkTank, LLC as a
cancellation expense.
Depreciation and amortization decreased to $43,844 in 2002 from $82,919 in 2001,
a decrease of $39,075 or 89.1%. The decrease is a result of the write off of
Goodwill and certain other tangible assets at December 31, 2001.
Interest expense increased to $167,904 in 2002 from $12,651 in 2001, an increase
of $155,253. Interest expense increased in 2002 as compared to 2001 due to the
sale of the convertible debenture. The debenture bears interest at seven
percent (7%). The sales of the debenture resulted in $516,054 in capitalized
financing costs. These costs are being amortized over the 18-month life of the
debenture.
Bad debt expense decreased to $31,792 in 2002 from $149,945 in 2001, an decrease
of $118,153. The allowance in 2002 is being calculated at 3% of sales exclusive
of royalties where as in 2001 specific accounts were being reserved.
Net loss was $1,484,317 for the nine months ended September 30, 2002, as
compared to a net loss of $755,633 for the nine months ended September 30, 2001.
An increased loss of $728,684 or 49.1%. The main factors in the increased loss
were the decrease in sales, the inventory write down, the increased marketing
expenses and the increased legal fees.
Net Loss Applicable to Common Stockholders. During the nine months ended
September 30, 2001, the Company recorded preferred stock dividends of $99,667,
which were reflected as a return to the preferred stockholder and as an increase
in the loss to common stockholders. The Company did not have preferred stock in
2002.
Liquidity and Capital Resources - September 30, 2002:
The Company has financed its working capital requirements during the past few
years principally from the private placement of securities. Such funds have
periodically been supplemented with short-term borrowings under the Company's
bank line of credit and other private sources. The bank line of credit is
unsecured, has a maximum borrowing level of $70,000, and carries a personal
guaranteed. The Company is also seeking some asset based financing and the
private infusion of funds. If adequate funds are not available on acceptable
terms, the Company may be unable to continue operations, develop, enhance and
market products; retain qualified personnel, take advantage of future
opportunities; or respond to competitive pressures, any of which could have a
material adverse effect on the Company's business, operating results, financial
condition or liquidity.
17
Operating Activities. The Company's operations utilized cash of $1,618,208
during the nine months ended September 30, 2002, as compared to cash of $28,126
provided by the nine months ended September 30, 2001. The increase in cash
utilized in operating activities in 2002 as compared to 2001 was primarily a
result of a much greater loss. At September 30, 2002, cash had increased by
$270,529, to $390,664, as compared to $120,135 at December 31, 2001. The
Company had working capital of $381,168 at September 30, 2002, as compared to
working capital deficit of $390,171 at December 31, 2001, reflecting current
ratios of 1.42:1 and 0.75:1 at September 30, 2002 and December 31, 2001,
respectively.
Investing Activities. During the nine months ended September 30, 2002 and 2001,
net cash used in investing activities was $265,595 and $90,881, respectively.
During the nine months ended September 30, 2002 the Company invested $238,614 in
the production of an infomercial. The Company also invested $28,925 in other
fixed assets. During the nine months ended 2001 the Company invested $90,881 in
fixed assets.
Financing Activities. During the nine months ended September 30, 2002, the
Company repaid certain shareholders and directors $97,166. During the nine
months ended September 30, 2001, the Company borrowed $26,666 net of payments on
short-term notes from its shareholders and directors. During the nine months
ended September 30, 2002 and 2001, the Company reduced its bank line of credit
by $9,179 and $6,220, respectively.
During the nine months ended September 30, 2002, The Company sold $2,100,000 in
the form of a convertible debenture. The debentures are convertible into common
stock at $0.25 per share for a period of twelve (12) months commencing six (6)
months after the initial sale of the debentures. The debentures are secured by
the Company's patents. For each share of common stock issued upon conversion of
the debentures, one (1) common stock purchase warrant will be issued, which will
be exercisable for a period of eighteen (18) months at $0.10 per share. The
costs associated with the issuance of the Debentures have been capitalized and
are being amortized over the 18 months. If the Debentures convert to equity
prior to the 18 month term the unamortized portion will be debited to additional
paid in capital.
Pursuant to the terms of this financing, on June 11, 2002 Wyngate's President,
Peter H. Pocklington, was appointed as Chairman of the Board of Directors and
Chief Executive Officer. The financing also provides for Wyngate to appoint a
majority of the Board of Directors of the Company. To this end Wyngate has only
appointed Roger Miller and Dean Rienmuth. With the resignation of Frank Mc
Garvey the new appointees is only equal to the current number of sitting board
members. Don Anderson, the Company's founder, remained with the Company as
President and Chief Operating Officer.
During the nine months ended September 30, 2001 the Company borrowed $40,000
under a short-term note from a related party. During the nine months ended June
30, 2002, the Company repaid $35,914 of short-term notes to unrelated parties.
On April 8, 2002, the Company entered into a stock purchase agreement (the
"Agreement") with Wyngate Limited, a Jersey Limited Company ("Wyngate"), whereby
Wyngate agreed to purchase 15,000,000 shares of the Company's common stock at
18
$0.075 per share for an aggregate purchase price of $1,125,000. Of the purchase
price, $200,025 was paid upon execution of the Agreement and Wyngate executed a
promissory note with interest at 2.88% per annum in favor of the Company for the
balance of $924,975. Pursuant to the promissory note, the balance is due and
payable October 8, 2003. The promissory note is secured pursuant to a stock
pledge agreement which pledges 12,333,000 shares of the common stock, which
shall be held by the Company as security for payment of the promissory note.
Funds from this transaction will be used for working capital, sales and
marketing, tour promotion, inventory purchases, accounts payable, patent
development and general operating expenses.
On June 6, 2002, GolfGear International, Inc. (the "Company") completed the sale
of $2,000,000 of convertible debentures. The debentures are convertible into
common stock at $0.25 per share for a period of twelve (12) months commencing
six (6) months after the initial sale of the debentures. The Company may sell up
to an additional $2,000,000 of convertible debentures in the near future. As
part of this financing, the Company issued 532,000 shares of its common stock as
a finders fee.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, the disclosure of
contingent assets and liabilities, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. We believe the following critical accounting policies affect our more
significant estimates and assumptions used in the preparation of our financial
statements. Our significant estimates and assumptions are reviewed and any
required adjustments are recorded on a quarterly basis.
The Company has an infomercial in production. The costs associated with the
infomercial are being capitalized and will be amortized over the estimated
useful life of the Infomercial.
The Company has obtained $2,040,000 financing through a convertible debentures
(Debentures). The costs associated with the issuance of the Debentures have
been capitalized and are being amortized over the 18 months. If the Debentures
convert to equity prior to the 18 month term the unamortized portion will be
debited to additional paid in capital.
New Accounting Pronouncements:
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which is effective January 1, 2002. SFAS No. 142 requires, among other
things, the discontinuance of goodwill amortization. In addition, SFAS No. 142
includes provisions for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of the existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
19
purposes of assessing potential future impairments of goodwill. SFAS No. 142
also requires the Company to complete a transitional goodwill impairment test
six months from the date of adoption. The Company adopted SFAS No. 142 in
December of 2001. It did not have any effect, its financial statement
presentation or disclosures for this period.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 addresses the diverse accounting practices for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company will be required to adopt SFAS
No. 143 effective January 1, 2003. The Company is reviewing SFAS No. 143 to
determine what effect, if any, it will have on its financial statement
presentation or disclosures. There was no effect on the financial statements or
disclosures for this period.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which is effective January 1, 2002. SFAS No. 144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of", and a portion of APB Opinion No. 30,
"Reporting the Results of Operations". SFAS No. 144 provides a single accounting
model for long-lived assets to be disposed of and significantly changes the
criteria that would have to be met to classify an asset as held-for-sale.
Classification as held-for-sale is an important distinction since such assets
are not depreciated and are stated at the lower of fair value or carrying
amount. SFAS No. 144 also requires expected future operating losses from
discontinued operations to be displayed in the period(s) in which the losses are
incurred, rather than as of the measurement date as presently required. The
Company does not anticipate that the adoption of SFAS No. 144 will have a
material effect on the Company's financial statement presentation or
disclosures.
Business Risks
History of Losses; Accumulated Deficit; Working Capital Deficiency.
The Company has incurred losses of $999,877, $2,730,170, $1,360,999, $912,256
and $1,016,981 for the years ended December 31, 1997, 1998, 1999, 2000 and 2001,
respectively and $1,484,317 for the nine months ended September 30, 2002. The
likelihood of the success of the Company must be considered in light of the
problems, expenses, difficulties, complications, and delays frequently
encountered in connection with the expansion of a business and the competitive
environment in which the Company operates. Unanticipated delays, expenses and
other problems such as setbacks in product development, and market acceptance
are frequently encountered in connection with the expansion of a business. (See
"Significant Working Capital Requirements" below.) As a result of the fixed
nature of many of the Company's expenses, the Company may be unable to adjust
spending in a timely manner to compensate for any unexpected delays in the
development and marketing of the Company's products or any capital raising or
revenue shortfall. Any such delays or shortfalls will have an immediate adverse
impact on the Company's business, operations and financial condition.
20
Significant Working Capital Requirements.
The working capital requirements associated with the manufacture and sale of the
Company's golf clubs have been and will continue to be significant. The Company
is currently not generating sufficient cash flow to fund its operations and
growth is dependent on the proceeds from the sale of its shares to continue its
operations and implement its sales and marketing strategy. The Company will
require substantial additional operating capital during the balance of 2002 and
2003 to establish a comprehensive marketing plan, to maintain operations and to
finance the expansion of its business. In the event that the Company's plans
change or its assumptions change or prove to be inaccurate or if the proceeds
from the sale of its shares or cash flow from operations proves to be
insufficient to fund operations (due to unanticipated expenses, technical
difficulties, problem or otherwise), the Company would be required to seek
additional financing sooner than currently anticipated or may be required to
significantly curtail or cease its operations.
The Company has no current arrangements with respect to, or sources of,
financing. There can be no assurance that any financing will be available to the
Company on a timely basis and on acceptable terms or at all. Any such financing
may involve substantial dilution to the interests of the Company's shareholders.
If the Company is not successful in raising any additional financing necessary
to fund future working capital needs, then the Company might be forced to
curtail some of Company operations, the exact nature of which cannot be
predicted at this time.
Seasonal Business; Quarterly Fluctuations.
Golf is primarily a warm weather sport and the purchasing decisions of most
customers are typically made in the fall and a vast majority of sales are
expected to occur during the first six months of the year. In addition,
quarterly results may vary from year to year due to the timing of new product
introductions, orders and sales, advertising expenditures, promotional periods
and shipments. Accordingly, comparisons of quarterly information of the
Company's results of operations may not be indicative of the Company's overall
annual performance.
Competition.
The market for the manufacture, distribution and sale of premium quality golf
clubs, accessories and other related products is intensely competitive. The
Company faces strong existing competition for similar products and expects to
face significant competition from new companies or existing companies with new
products. Many of these companies may be better financed, have better name
recognition and consumer goodwill, have more marketing expertise and
capabilities, have a large and loyal customer base, along with other attributes
that may enable them to compete more effectively. The golf equipment industry is
currently dominated by four companies, Callaway Golf Company, Fortune Brands
(Titleist/Cobra), Karsten Manufacturing (Ping) and Taylor Made, which in the
aggregate, account for approximately one half of the golf clubs sold in the
United States. Many purchasers of premium clubs desire golf clubs that feature
the most recent technology, innovative designs and recognized brand names.
Recently, Adams Golf Co. and Orlimar Golf Company have become competitive
factors in fairway woods and drivers.
21
Additionally, purchases are often made based upon highly subjective decisions
that may be influenced by numerous factors, many of which are out of the
Company's control. Golfers' subjective preferences are subject to rapid and
unanticipated changes. As a result, the Company expects to face substantial
competition from existing and new companies that market golf clubs, which are
perceived to enhance performance, are visually appealing or appeal to other
consumer preferences. Further, the golf club industry is subject to rapid and
widespread imitation of golf club designs that, notwithstanding the existence of
any proprietary rights, could further hamper the Company's ability to compete.
The Company faces competition on the basis of price, reputation and qualitative
distinctions among available products. There can be no assurances as to the
market acceptance of the Company's golf clubs in relation to its competition.
Uncertainty of Market Penetration.
Several companies that have strong brand name recognition currently dominate the
golf equipment industry. As a result, the market demand for new products from
new companies is subject to a high level of uncertainty. Achieving significant
market penetration and consumer recognition for the Company's products will
require significant efforts and expenditures by the Company to inform potential
customers about the Company's products. Although the Company intends to use a
substantial portion of its working capital for marketing and advertising, there
can be no assurance that the Company will be able to penetrate existing markets
for golf equipment and related accessories on a broad basis, position its
products to appeal to a broad base of customers, or that any marketing efforts
undertaken by the Company will result in any increased demand for or greater
market acceptance of the Company's products.
Consumer Preferences and Industry Trends.
The golf equipment industry is characterized by frequent introductions of new
products and innovations and is subject to rapidly changing consumer preferences
and industry trends such as the introduction of titanium clubs and oversized
club heads, which may adversely affect the Company's ability to plan for future
design, development and marketing of its products. Because of rapidly changing
consumer preferences and industry trends, most golf club models and designs have
short product life cycles. In addition, new club models and basic designs are
frequently introduced and often rejected by customers. The Company's success
will depend on its ability to anticipate and respond to these factors and
introduce products that meet or exceed consumer expectations. There can be no
assurance that the Company will be able to anticipate and respond to changing
consumer preferences and industry trends or that competitors will not develop
and commercialize new innovations that render the Company's proprietary
technology or its golf clubs obsolete.
The Company's future operating results are also likely to be dependent upon the
continuing popularity of golf as a sport and leisure activity. Although golf has
gained increasing popularity over the last several years, there can be no
assurance that its popularity as a sport and leisure activity will continue. Any
22
significant decline in the popularity of golf could materially adversely affect
the Company. Moreover, golf, as a leisure activity, is affected by a number of
factors relating to discretionary consumer spending, including general economic
conditions affecting disposable consumer income, such as employment and business
conditions, interest rates and taxation. Any significant change in general
economic conditions or uncertainties regarding future economic prospects that
adversely affect discretionary consumer spending generally, and golfers
specifically, could have a material adverse effect on the Company.
Dependence on a Limited Number of Suppliers.
The Company does not manufacture the components required to assemble its golf
clubs. The Company relies on several suppliers for club heads and graphite
shafts. The Company does not have binding long-term supply contracts with any of
its suppliers. Therefore, the Company's success will depend on maintaining its
relationships with these suppliers and developing relationships with new
suppliers. Any significant delay or disruption in the supply of club heads or
graphite shafts caused by manufacturers' production limitations, material
shortages, quality control problems, labor interruptions, shipping problems or
other reasons would materially adversely effect the Company's business. The
delays in receiving such supplies from alternative sources would cause the
Company to sustain at least temporary shortages of materials to assemble its
clubs, which could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company currently purchases its club heads from two sources, its shafts from
two sources and its grips from three sources. The Company purchases its
components pursuant to purchase orders placed from time to time and, except for
those purchase orders, none of its suppliers is obligated to deliver specified
quantities of components or to deliver components for any specified period.
Accordingly, the Company is substantially dependent on the ability of its
suppliers to provide adequate inventories of golf club components on a timely
basis and on acceptable terms. The Company's suppliers also produce components
for certain of the Company's competitors, as well as other large customers, and
there can be no assurance that any such supplier will have sufficient production
capacity to satisfy the Company's inventory or scheduling requirements during
any period of sustained demand or that the Company will not be subject to the
risk of price fluctuations and periodic delays. Although the Company believes
that its relationships with its suppliers are satisfactory and that alternative
sources of each of the components are currently available, the loss of the
services of a supplier or substantial price increases imposed by a supplier
could result in production delays, thereby causing cancellation of orders by
customers and/or price increases resulting in reduced revenues and margins,
respectively.
Dependence on Certain Suppliers; Foreign Suppliers.
The Company imports most of its club heads from companies in Asia. As a result,
the supply of the materials required to assemble the Company's clubs is subject
to additional cost and risk factors, many of which are out of the Company's
control, including political instability, import duties, trade restrictions,
work stoppages and foreign currency fluctuations. An interruption or material
increase in the cost of supply would materially adversely affect the Company's
business, operating results and financial condition.
23
Uncertainty Regarding Patents and Proprietary Rights.
The Company seeks patent protection for its proprietary products and
technologies where appropriate. The Company currently has eight (8) United
States patents and two (2) international patents relating to its forged face
technology and three (3) patents relating to the Company's putter technology.
The Company also has several foreign patents pending. Corresponding foreign
patent applications with respect to the Company's pending United States
applications have been filed in the appropriate foreign jurisdictions. However,
there can be no assurance that the Company's pending patents will be awarded or
will provide the Company with significant protection against competitors.
Litigation has been necessary and may be necessary in the future to protect the
Company's patents, and there can be no assurance that the Company will have the
financial or managerial resources necessary to pursue such litigation or
otherwise to protect its patent rights. The Company has recently put various
manufacturers on notice that the Company believes the manufacturers are
infringing on Company patents. There is no guarantee that the Company will have
adequate resources to pursue litigation against these manufacturers or that the
Company would succeed in any ensuing litigation. In addition to pursuing patent
protection in appropriate cases, the Company also relies on trade secret
protection for its un-patented proprietary technology. However, trade secrets
are difficult to protect. There can be no assurance that other companies will
not independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets, that such
trade secrets will not be disclosed or that the Company can effectively protect
its rights to un-patented trade secrets. The Company pursues a policy of having
its employees and consultants execute non-disclosure agreements upon
commencement of employment or consulting relationships with the Company, which
agreements provide that all confidential information developed or made known to
the individual during the course of employment shall be kept confidential except
in specified circumstances. There can be no assurance, however, that these
agreements will provide meaningful protection for the Company's trade secrets or
other proprietary information.
Dependence on Relationships with Retailers.
The Company principally relies upon its relationships with its retailers to
market the Company's products. The Company's account base consists of select
golf shops throughout the United States. The Company maintains its relationship
with such retailers both directly and through its independent sales
representatives. International sales are generally conducted through the use of
foreign distributors in specific countries. Although the Company intends to
market its products competitively and to develop business relationships with new
retailers, there can be no assurances that the Company can successfully expend
its retailer base to a level sufficient to reach profitable operations.
Technological Innovation; New Products; USGA Regulation.
24
The technology utilized in the Company's golf clubs is relatively new, compared
to the majority of golf clubs currently being marketed. The Company believes it
has extensive patent protection for most of its golf club heads, but there can
be no assurance that it will be successful in defending and/or exploiting such
patents. Efforts to develop new technology and new products similar to or better
than the Company's clubs are continuing to evolve at a rapid pace. It is
expected that competitors will attempt to develop alternative golf clubs that
apply existing and/or new technology. Such new technological innovations could
have an adverse impact on the Company's business, operating results and
financial condition. There is no assurance that the Company will be able to
design technologically innovative golf clubs or golf products that achieve
market acceptance. Further, the Company's existing clubs that have been designed
and marketed may be rendered obsolete within a relatively short period of time.
The design and sales of golf clubs are also greatly influenced by the rules and
regulations of the United States Golf Association ("USGA"). Although the USGA's
equipment standards only apply to USGA sanctioned events, it is critical for new
clubs and existing clubs to comply with USGA standards. To the extent that the
Company's clubs are ruled ineligible by the USGA, the Company's business,
operating results and financial condition would be materially adversely
affected. Although the Company believes that all of its current clubs comply
with USGA standards and its proprietary technology is not inconsistent with USGA
standards, there is no assurance that any newly developed clubs will be deemed
to comply with USGA standards or that existing USGA standards and regulations
will not be amended to make the Company's existing clubs ineligible for use in
USGA sanctioned events.
The Company has designed, and is currently finalizing its plan to sell, certain
clubs outside of North America that comply with the rules and regulations of the
Royal and Ancient Golf Club of St. Andrews, Scotland. These clubs may not comply
with USGA rules and regulations and will not be sold in North America.
Influence of Other External Factors.
The golf hardware industry in general is a speculative venture necessarily
involving some substantial risk. There is no certainty that the expenditures to
be made by the Company will result in commercially profitable business. The
marketability of its products will be affected by numerous factors beyond the
control of the Company. These factors include market fluctuations, and the
general state of the economy (including the rate of inflation, and local
economic conditions), which can affect peoples' discretionary spending. Factors
that leave less money in the hands of potential customers of the Company will
likely have an adverse effect on the Company. The exact effect of these factors
cannot be accurately predicted, but the combination of these factors may result
in the Company not receiving an adequate return on invested capital.
Reliance on Management.
The Company's success is dependent on its key management, especially Peter
Pocklington, Michael Piraino and Donald A. Anderson, the loss of whose services
could significantly impede the achievement of the Company's planned development
objectives. The Company currently does not maintain key man life insurance on
any of these individuals. In addition, none of the officers or directors, or any
25
of the other key personnel, except for Mr. Piraino and Mr. Anderson, has any
employment agreement with the Company. Therefore, there can be no assurance that
these personnel will remain employed by the Company. The success of the
Company's business objectives will require substantial additional expertise in
such areas as finance, manufacturing and marketing, among others. Competition
for qualified personnel among golf companies is intense, and the loss of key
personnel, or the inability to attract and retain the additional, highly skilled
personnel required for the expansion of the Company's activities, could have a
material adverse effect on the Company's business and results of operations.
In addition, all decisions with respect to the management of the Company will be
made exclusively by the officers and directors of the Company. Investors will
only have rights associated with minority ownership interest to make decisions
that affect the Company. The success of the Company, to a large extent, will
depend on the quality of the directors and officers of the Company.
Control of the Company by Officers and Directors.
The Company's officers and directors beneficially own approximately sixty
percent (60%) of the outstanding shares of the Common Stock. As a result, such
persons, acting together, have the ability to exercise significant influence
over all matters requiring stockholder approval. Accordingly, it could be
difficult for the investors hereunder to effectuate control over the affairs of
the Company. Therefore, it should be assumed that the officers, directors, and
principal common shareholders who control the majority of voting rights will be
able, by virtue of their stock holdings, to control the affairs and policies of
the Company.
Limitations on Liability, and Indemnification, of Directors and Officers.
The Company's Articles of Incorporation include provisions to eliminate, to the
fullest extent permitted by the Nevada Revised Statutes as in effect from time
to time, the personal liability of directors of the Company for monetary damages
arising from a breach of their fiduciary duties as directors. The Bylaws include
provisions to the effect that the Company may, to the maximum extent permitted
from time to time under applicable law, indemnify any director, officer, or
employee to the extent that such indemnification and advancement of expense is
permitted under such law, as it may from time to time be in effect. Any
limitation on the liability of any director, or indemnification of directors,
officer, or employees, could result in substantial expenditures being made by
the Company in covering any liability of such persons or in indemnifying them.
Conflicts of Interest.
The officers and directors have other interests to which they devote time,
either individually or through partnerships and corporations in which they have
an interest, hold an office, or serve on boards of directors, and each will
continue to do so notwithstanding the fact that management time may be necessary
to the business of the Company. As a result, certain conflicts of interest may
exist between the Company and its officers and/or directors that may not be
susceptible to resolution.
26
In addition, conflicts of interest may arise in the area of corporate
opportunities that cannot be resolved through arm's length negotiations. All of
the potential conflicts of interest will be resolved only through exercise by
the directors of such judgment as is consistent with their fiduciary duties to
the Company. It is the intention of management, so as to minimize any potential
conflicts of interest, to present first to the Board of Directors to the
Company, any proposed investments for its evaluation.
No Assurance of Continued Public Trading Market; Risk of Low Priced Securities.
Since December 9, 1997, there has been only a limited public market for the
common stock of the Company. The common stock of the Company is currently quoted
on the Over the Counter Bulletin Board. As a result, an investor may find it
difficult to dispose of, or to obtain accurate quotations as to the market value
of the Company's securities. In addition, the common stock is subject to the
low-priced security or so called "penny stock" rules that impose additional
sales practice requirements on broker-dealers who sell such securities. The
Securities Enforcement and Penny Stock Reform Act of 1990 ("Reform Act")
requires additional disclosure in connection with any trades involving a stock
defined as a penny stock (generally, according to recent regulations adopted by
the U.S. Securities and Exchange Commission, any equity security that has a
market price of less than $5.00 per share, subject to certain exceptions),
including the delivery, prior to any penny stock transaction, of a disclosure
schedule explaining the penny stock market and the risks associated therewith.
The regulations governing low-priced or penny stocks sometimes limit the ability
of broker-dealers to sell the Company's common stock and thus, ultimately, the
ability of the investors to sell their securities in the secondary market.
Effects of Failure to Maintain Market Makers.
If the Company is unable to maintain a National Association of Securities
Dealers, Inc. member broker/dealers as market makers, the liquidity of the
common stock could be impaired, not only in the number of shares of common stock
which could be bought and sold, but also through possible delays in the timing
of transactions, and lower prices for the common stock than might otherwise
prevail. Furthermore, the lack of market makers could result in persons being
unable to buy or sell shares of the common stock on any secondary market. There
can be no assurance the Company will be able to maintain such market makers.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On November 17, 2001, MC Corporation, a Japanese corporation, filed an action
against the Company in the United States District Court, Central District of
California. MC Corporation had purchased 210,526 shares of Series A Senior
Convertible Preferred Stock in October 1999 for $2,000,000 which, combined with
the 34,504 shares of preferred stock received as dividends and pursuant to an
anti-dilution provision, automatically converted into 2,450,300 shares of common
stock in October 2001 pursuant to a subscription agreement dated September 1,
1999 (the "Subscription Agreement"). MC Corporation contended that it was
entitled to approximately an additional 8,500,000 shares of common stock based
on its interpretation of the reset provision contained in the Subscription
Agreement. The Company filed a cross-complaint against MC Corporation for
reformation of the Subscription Agreement to conform it to the mutual
understanding of the parties at the time it was executed.
27
MC Corporation had also been the exclusive distributor of the Company's
products in Japan since September 1999. Effective March 5, 2002, the Company
terminated its distribution agreement with MC Corporation as a result of MC
Corporation's failure to comply with the terms of the distribution agreement.
On May 30, 2002, the Company entered into a settlement agreement and mutual
general release (the "Settlement Agreement") with MC Corporation, John Kura and
Keizaikai USA, Inc. (hereinafter collectively referred to as the "MC Corporation
parties"). The Settlement Agreement provides that the Company issue a total of
3,000,000 shares of common stock to MC Corporation, consisting of 2,450,300
shares of common stock for the conversion at (the specified ten to one
conversion rate) of 245,030 shares of convertible preferred stock previously
issued to MC Corporation, and an additional 549,700 shares of common stock for
other consideration. The 2,450,330 shares have already been reflected as issued
and outstanding in the Company's financial statements at December 31, 2001 and
March 31, 2002. The additional 549,700 shares of common stock are reflected as
issued and outstanding in the June 30 2002. The Company was given the right of
first refusal to repurchase any shares of common stock owned by MC Corporation
it may desire to sell in a private transaction for a period of eighteen (18)
months from the date of execution of the Settlement Agreement. All stock options
and warrants owned by the MC Corporation parties were cancelled and MC
Corporation's anti-dilution rights arising under the Settlement Agreement were
terminated. The Settlement Agreement also provides that MC Corporation's
representative on the Company's Board of Directors will resign, and the
Company's distribution agreement with MC Corporation was formally terminated.
The MC Corporation parties agreed to restrict the sale of their shares of common
stock in a public transaction for a period of eighteen (18) months as follows:
no sale of shares shall be made during the first six (6)months; during the
second six (6) months, the MC Corporation parties agreed to sell no more than
fifty percent (50%) of the limitation on volume restrictions contained in Rule
144(e) of the Securities Act of 1933, as amended; during the third six (6) month
period, all sales must be made in compliance with the volume limitations
contained in Rule 144(e).
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent sales of unregistered securities
During the nine months ended September 30, 2002 the Company canceled 105,000 and
issued 16,702 shares of its common stock. The 105,000 shares had been granted to
but never issued to former employees. 15,000,000 shares of common stock was sold
and issued to Wyngate Limited - details found else where in this document. In
connection with that sale of stock 1,072,000 shares were issued as a finders
fee. 550,000 shares of stock have been issued to MC Corporation as part of a
28
settlement agremment - see legal proceedings. Effective June 30, 2002 75,000
shares were issued as part of a settlement of a certain debt and 5,000 shares in
consideration for the extension granted on a certain note payable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Articles of Incorporation(1)
3.2 Certificate of Amendment of Articles of Incorporation(1)
3.3 Certificate of Amendment of Articles of Incorporation(1)
3.4 Articles of Merger(1)
3.5 Bylaws(1)
4.3 Binding Subscription Agreement for Purchase of Equity Securities
(M.C. Corporation)(1)
4.4 Certificate of Determination(1)
10.1 Distribution Agreement (M.C. Corporation)(1)
10.2 Distribution Agreement (GolfGear Korea, Ltd.)(1)
10.6 License Agreement (Wilson Sporting Goods Company)(1)
10.10 Employment Agreement (Donald A. Anderson)(1)(C)
10.11 GolfGear International, Inc. 1997 Stock Incent Plan(1)(C)
10.12 License Agreement (PowerBilt Golf)(1)
10.13 Property Lease Agreement(2)
10.14 Amended and Restated Agreement for Sale and Purchase of Assets
between Bel Air Golf Company and GolfGear International, Inc.(2)
10.15 Agreement for Sale and Purchase of Assets - Leading Edge(3)
10.16 Personal Services Agreement - Peter Alliss(3)
10.17 Exclusive Distribution Agreement (4)
10.18 Subscription Agreement dated March 7, 2002(5)
10.19 Stock Purchase Agreement dated April 8, 2002(5)
10.20 Promissory Note dated April 8, 2002(5)
10.21 Stock Pledge Agreement dated April 8, 2002(5)
21 Subsidiaries of the Registrant(1)
99.1 Patents(1)
99.2 Trademarks (1)
99.3 Certification pursuant to 18 U.S.C Section 1350, as
adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of
2002(contained within this document)
(b) Reports on Form 8-K - Nine Months Ended September 30, 2002:
On April 8, 2002, GolfGear International, Inc. (the "Company") entered
into a stock purchase agreement with Wyngate Limited, a Jersey Limited
Company ("Wyngate"), whereby Wyngate agreed to purchase 15,000,000
shares of the Company's common stock.
On May 30, 2002, the Company entered into a settlement agreement and
mutual general release (the "Settlement Agreement") with MC
Corporation, John Kura and Keizaikai USA, Inc. (hereinafter
collectively referred to as the "MC Corporation parties").
29
On June 6, 2002, GolfGear International, Inc. (the "Company")
completed the sale of $2,000,000 of convertible debentures. The
debentures are convertible into common stock at $0.25 per share for a
period of twelve (12) months commencing six (6) months after the
initial sale of the debentures. The debentures are secured by the
Company's patents. For each share of common stock issued upon
conversion of the debentures, one (1) common stock purchase warrant
will be issued, which will be exercisable for a period of eighteen
(18) months at $0.10 per share.
Effective August 21, 2002, GolfGear International, Inc. has granted
Nike Golf a non-exclusive, long-term, Worldwide license to manufacture
and sell golf clubs under GolfGear's patents covering its proprietary
forged-face insert technology. The license agreement grants Nike Golf
the right to institute litigation against third parties for
infringement of GolfGear's patents
30
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GOLFGEAR INTERNATIONAL, INC.
----------------------------
(Registrant)
/s/ PETER H POCKLINGTON
Date: November 19, 2002 By:
----------------------------
PETER H POCKLINGTON
Chief Executive Officer
(Duly Authorized Officer)
31
Date: November 19, 2002 /s/MICHAEL A. PIRAINO
By:
----------------------------
MICHAEL A. PIRAINO
Chief Financial Officer, President,
Chief Operating Officer
(Principal Financial
Officer
/s/DANIEL C. WRIGHT
Date: November 19, 2002 By:
----------------------------
DANIEL C. WRIGHT
Chief Accounting Officer
(Principal Financial
Officer)
32